CHAPTER 1 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Creditors are owners of a corporation. ⊚ true ⊚ false
2)
All corporations acquire financing by issuing stock for sale on public stock exchanges. ⊚ true ⊚ false
3) You paid $10,000 to buy 1% of the stock in a corporation that is now bankrupt. The company owes $10 million dollars to its creditors. As a result of the bankruptcy, you are responsible for paying $100,000 (or $10 million × 1%) of the amount owed to the creditors. ⊚ true ⊚ false
4) Cash paid for wages is an example of an operating activity on the statement of cash flows. ⊚ true ⊚ false
5)
Borrowing money from a bank is a financing activity on the statement of cash flows. ⊚ true ⊚ false
6) The daily business activities involved in running a business, such as buying supplies and paying salaries and wages, are classified as operating activities on the statement of cash flows. ⊚ true ⊚ false
7)
Stockholders' equity is the difference between a company's assets and its liabilities. ⊚ true ⊚ false
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8) A company owes $200,000 on a bank loan. It will be reported by the company as Accounts Payable. ⊚ true ⊚ false
9) The amounts reported on financial statements are sometimes rounded to the nearest million. ⊚ true ⊚ false
10) Accounts Payable, Notes Payable, and Salaries and Wages Payable are examples of liabilities. ⊚ true ⊚ false
11)
Dividends are subtracted from revenues on the income statement. ⊚ true ⊚ false
12) If a company reports net income on the income statement, then the statement of cash flows will report the same amount as cash flows from operating activities for the period. ⊚ true ⊚ false
13) sale.
Revenue is reported on the income statement only if cash was received at the point of ⊚ ⊚
true false
14) Generally Accepted Accounting Principles (GAAP) require profitable companies to distribute some of their earnings to their stockholders.
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⊚ ⊚
true false
15)
Common Stock is reported as an asset on the balance sheet. ⊚ true ⊚ false
16)
Investors are mainly interested in the profitability of a company. ⊚ true ⊚ false
17)
A stock that does not pay a dividend is an undesirable investment. ⊚ true ⊚ false
18) In order to be considered useful, information must have two fundamental characteristics: reliability and understandability. ⊚ true ⊚ false
19) The Securities and Exchange Commission (SEC) is the government agency that has primary responsibility for setting accounting standards in the U.S. ⊚ true ⊚ false
20) The Sarbanes-Oxley Act (SOX) requires top management of companies to sign a report certifying that the financial statements are free of error. ⊚ true ⊚ false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 21) Public corporations are businesses:
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A) owned by two or more people, each of whom is personally liable for the debts of the business. B) whose stock is bought and sold on a stock exchange. C) whose stock is bought and sold privately. D) where stock is not used as evidence of ownership.
22)
The owner(s) of a business are not taxed on the profits of the business if the business is a: A) sole proprietorship. B) partnership. C) corporation. D) public partnership.
23)
Which of the following is typically considered a disadvantage of sole proprietorships? A) Income taxes are paid by both the business and its owner. B) The business is considered a separate legal entity from its owner. C) Establishing the business usually requires legal assistance. D) Owner is personally liable for all debts of the business.
24) Considering the targeted audience for financial accounting reports, which of the following parties below is not an external user? A) Customers of the company issuing the reports B) Creditors of the company issuing the reports C) Managers of the company issuing the reports D) Stockholders of the company issuing the reports
25)
Accounting systems:
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A) are summarized in publicly published reports. B) analyze, record, and summarize the activities affecting its financial condition and performance. C) monitor business activities only in financial terms. D) capture only the information that is needed by the owners of the company.
26)
People or organizations to whom a business owes money are considered: A) owners of a business. B) creditors of a business. C) stockholders of a business. D) customers of a business.
27) a(n):
The owner is not responsible for the entity's taxes and debts if the entity is organized as
A) corporation B) sole proprietorship. C) unlimited liability corporation. D) limited liability corporation.
28)
Which of the following is a characteristic of a partnership?
A) The profits, taxes, and legal liability are the responsibility of two or more owners. B) It is a legal entity separate from its owners. C) Its income is taxed twice—once on the partnership's income tax return and again on the partners' individual income tax returns. D) It is the only organizational form appropriate for service businesses.
29)
Managerial accounting reports prepared for internal use are used by the company's:
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A) suppliers. B) bank. C) employees. D) stockholders.
30)
Directors of a corporation:
A) want to ensure they will be paid for the goods and services they deliver. B) oversee managers to ensure their decisions are in the best interests of its stockholders. C) assess the financial strength of a business and attempt to estimate its value. D) are responsible for the functioning of stock markets and ensuring that taxes are correctly computed.
31)
The main goal of an accounting system is to: A) capture information about a business so that it can be reported to decision makers. B) earn a profit for the company's stockholders. C) prove that assets equal liabilities plus stockholders' equity. D) provide initial financing for a new startup.
32)
Financing that individuals or institutions have provided to a corporation is:
A) always classified as a liability. B) classified as a liability when provided by creditors and as stockholders' equity when provided by owners. C) always classified as equity. D) classified as a stockholders' equity when provided by creditors and a liability when provided by owners.
33) the:
An investor who is looking at a company's financial statements cannot determine whether
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A) company's earnings are rising or falling. B) company pays a dividend. C) company has positive cash flow. D) company's owners are financially sound.
34)
A sole proprietorship is: A) a separate legal and accounting entity from its owner(s). B) owned and operated by one individual. C) considered a public company. D) can easily raise large amounts of capital for growth.
35)
Internal users of financial data include: A) investors. B) creditors. C) management. D) regulatory authorities.
36)
Which of the following statements about financial accounting reports is correct?
A) Financial accounting reports are used primarily by employees to make business decisions related to production. B) Financial accounting reports are used primarily by management to understand whether a product line should be discontinued. C) Financial accounting reports are primarily prepared to provide information for external decision makers. D) Financial accounting reports primarily contain detailed internal records of the company.
37) Which of the following statements about organizational forms of a business is not correct?
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A) In a sole proprietorship form of business or in a partnership form, the owner(s) are personally responsible for the debts of the business. B) The partnership agreement states how profits are to be shared between partners and what happens when a new partner is to be admitted or an existing partner is retiring. C) A corporation is a separate entity from both a legal and accounting perspective. D) The owners of a corporation are legally responsible for the corporation's debts and taxes.
38)
A legal document called a stock certificate is used to indicate ownership in a: A) corporation. B) sole proprietorship. C) partnership. D) both sole proprietorship and partnership.
39) Which of the following statements below is correct about a corporation and a partnership? A) A partnership is comprised of two or more owners, whereas a corporation must have only one owner. B) A corporation is legally responsible for its own taxes and debts, whereas the owners of the partnership are responsible for its taxes and debts. C) Owners of both entities are legally responsible for the taxes and debts of the business. D) Both entities issue shares of stock to owners.
40)
Which of the following expressions of the accounting equation is correct? A) Liabilities + Assets = Stockholders' Equity B) Stockholders' Equity + Assets = Liabilities C) Assets = Liabilities− Stockholders' Equity D) Stockholders' Equity = Assets− Liabilities
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41)
Net income is the amount: A) the company earned after subtracting expenses and dividends from revenue. B) by which assets exceed expenses. C) by which assets exceed liabilities. D) by which revenues exceed expenses.
42)
Expenses are reported on the: A) income statement in the time period in which they are paid. B) income statement in the time period in which they are incurred. C) balance sheet in the time period in which they are paid. D) balance sheet in the time period in which they are incurred.
43) The financial reports of a business include only the activities of the business and not the personal dealings of its stockholders. This is: A) required only for large corporations. B) the cost principle. C) the accounting equation. D) the separate entity assumption.
44)
The separate entity assumption assumes:
A) the financial reports of a business include only the results of that business's activities. B) assets equal liabilities plus stockholder's equity. C) revenues and expenses are reported in separate sections of a company's income statement. D) assets are reported in a separate financial statement from liabilities.
45) has:
Mauricio invested $30,000 in Pizza Aroma in exchange for its stock. Pizza Aroma now
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A) a liability. B) retained earnings. C) common stock. D) net income.
46)
Amounts earned by selling goods or services to customers are called: A) revenues. B) expenses. C) dividends. D) common stocks.
47)
Profit is equal to: A) revenues minus expenses. B) assets minus liabilities. C) the amount of cash that a company has. D) the amount of cash that owners have contributed to the business.
48)
If revenues are less than expenses, the company's Retained Earnings: A) decrease. B) increase. C) must be replenished by stockholders. D) are paid to stockholders.
49) A cost of doing business is referred to as a(n) ______ and is considered necessary to earn ______.
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A) revenue; assets B) expense; revenue C) liability; expenses D) dividend; revenue
50)
Expenses are: A) equal to a company's liabilities. B) always less than revenues. C) the costs of doing business that are necessary to earn revenue. D) always less than the amount of cash a company has available.
51) An economic resource that is owned by a company and will provide future benefits is referred to as: A) revenue. B) an asset. C) retained earnings. D) net income.
52) Alpha sold $2,000 of services to Beta on credit. Beta promised to pay for it next month. Alpha will report a $2,000: A) Accounts Receivable. B) Accounts Payable. C) increase in Cash, since Beta is sure to pay next month. D) net loss.
53) Alpha sold $2,000 of services to Beta on credit. Beta promised to pay for it next month. Beta will report a $2,000:
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A) Accounts Payable. B) Accounts Receivable. C) decrease in Cash, since it plans to pay next month. D) net income.
54) TreeTop Nursery sold $7,500 of goods to customers of which $4,500 has been collected. TreeTop should report revenues of: A) $7,500. B) $4,500. C) $3,000. D) $0.
55)
Cash flows from (used in) investing activities include amounts: A) received from a company's stockholders for the sale of stock. B) received from the sale of the company's office building. C) paid for dividends to the company's stockholders. D) paid for salaries of employees.
56)
Which of the following would not represent a financing activity? A) Paying dividends to stockholders. B) Cash received from owners in exchange for company stock. C) Borrowing money from a bank to purchase new equipment. D) Buying supplies.
57)
Operating activities include:
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A) interest paid on a bank loan. B) the buying or selling of land, buildings, equipment, and other long-term investments. C) the repayment of loan proceeds to the bank. D) obtaining a bank loan to cover the payment of wages, rent and other operating costs.
58)
The separate entity assumption means:
A) a company's financial statements reflect only the business activities of that company. B) each separate owner's finances must be revealed in the financial statements. C) each separate entity that has a claim on a company's assets must be shown in the financial statements. D) if the business is a sole proprietorship, the owners' personal activities are included in the company's financial statements.
59)
Operating activities, investing activities, and financing activities are presented on the: A) balance sheet. B) statement of cash flows. C) statement of retained earnings. D) income statement.
60)
Financial statements are most commonly prepared: A) daily. B) monthly, quarterly, and annually. C) as needed. D) weekly.
61)
Which of the following statements about a fiscal year is correct?
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A) Companies can choose to end their fiscal year on any date they feel is most relevant. B) Companies must end their fiscal year on March 31, June 30, September 30, or December 31. C) Companies can select any date except a holiday to end their fiscal year. D) Companies must end their fiscal year on December 31.
62)
Assets: A) represent the amounts earned by a company. B) must equal the liabilities of a company. C) must equal the stockholders' equity of the company. D) represent the resources presently controlled by a company.
63)
A net loss for a period arises when: A) assets are greater than liabilities. B) revenues are less than expenses. C) liabilities are greater than stockholders’ equity. D) revenues are greater than expenses.
64) Net income that has been paid out to the company's stockholders for their own personal use is referred to as: A) dividends. B) equities. C) revenues. D) retained earnings.
65) Crystal Lodging recorded $330,000 in revenues, $247,500 in expenses, and $45,000 of dividends for the year. The company began the year with total assets of $285,000 and stockholders’ equity of $130,500. What was the net income (loss) reported by Crystal Lodging for the year? Version 1
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A) $37,500 B) $94,500 C) $82,500 D) $49,500
66) Crystal Lodging recorded $330,000 in revenues, $247,500 in expenses, and $45,000 of dividends for the year. The company began the year with total assets of $285,000 and stockholders’ equity of $130,500. Suppose that liabilities increased by $90,000 and stockholders' equity increased by $37,500. What would be the change in Crystal Lodging's assets? A) $168,000 increase B) $127,500 increase C) $154,500 increase D) $52,500 increase
67)
The obligations and debts of a business are referred to as: A) equities. B) assets. C) dividends. D) liabilities.
68)
Which of the following are the three basic elements of the balance sheet? A) Assets, liabilities, and retained earnings. B) Assets, liabilities, and common stock. C) Assets, liabilities, and revenues. D) Assets, liabilities, and stockholders' equity.
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69) Coast Company has 11,000 items of building supplies on hand that cost $330,000; a bill related to these supplies totaling $200,000 from a vendor has not yet been paid. The company expects to earn $810,000 for its services when it uses the building supplies. The company’s balance sheet would include an asset, Supplies, in the amount of: A) $810,000. B) $130,000. C) $330,000. D) $11,000.
70) Coast Company has 5,000 items of building supplies on hand that cost $150,000; a bill related to these supplies totaling $50,000 from a vendor has not yet been paid. The company expects to earn $400,000 for its services when it uses the building supplies. The company's balance sheet would include an asset, Supplies, in the amount of: A) $5,000. B) $100,000. C) $150,000. D) $400,000.
71) The Publish or Perish Printing Company paid a dividend to stockholders. This will be reported on the: A) audit report. B) income statement. C) balance sheet. D) statement of retained earnings.
72)
Which of the following is not correct? A) Assets = Liabilities + Stockholders' Equity B) Liabilities = Assets − Stockholders' Equity C) Stockholders' Equity + Liabilities− Assets = 0 D) Assets = Liabilities− Stockholders' Equity
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73) At the end of last year, the company's assets totaled $866,000 and its liabilities totaled $743,000. During the current year, the company's total assets increased by $58,600 and its total liabilities increased by $24,300. At the end of the current year, stockholders' equity was: A) $34,300. B) $157,300. C) $123,000. D) $181,600.
74) At the end of last year, the company's assets totaled $430,000 and its liabilities totaled $370,000. During the current year, the company's total assets increased by $29,000 and its total liabilities increased by $12,000. At the end of the current year, stockholders' equity was: A) $77,000. B) $60,000. C) $17,000. D) $89,000.
75) 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 time period? A) $40,000 increase B) $40,000 decrease C) $60,000 increase D) $60,000 decrease
76)
A company's balance sheet contained the following information:
Common Stock Accounts Payable
$ 12,500 64,500
Total Assets Retained Earnings
$ 181,000 28,500
Notes Payable is the only other item on the balance sheet. Notes Payable must equal:
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A) $77,400. B) $11,000. C) $75,500. D) $13,300.
77)
A company's balance sheet contained the following information:
Common Stock Accounts Payable
$ 24,000 128,000
Total Assets Retained Earnings
$ 352,000 56,000
Notes Payable is the only other item on the balance sheet. Notes Payable must equal: A) $400,000. B) $16,000. C) $144,000. D) $688,000.
78) During Year 5, a company's assets increase by $112,000 and its liabilities increase by $76,000. If no dividends were paid and there were no changes in the amount of common stock issued during the year, net income for Year 5 was: A) $112,000. B) $36,000. C) $188,000. D) $76,000.
79) A company began the year with assets of $100,000, liabilities of $20,000, and stockholders' equity of $80,000. During the year assets increased $55,000 and stockholders' equity increased $20,000. What was the change in liabilities for the year? A) Increase of $75,000 B) Increase of $35,000 C) Decrease of $75,000 D) Decrease of $35,000
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80) A company began the year with assets of $200,000, liabilities of $40,000, and stockholders' equity of $160,000. During the year assets increased $110,000 and stockholders' equity increased $40,000. What was the change in liabilities for the year? A) Increase of $150,000 B) Increase of $70,000 C) Decrease of $150,000 D) Decrease of $70,000
81) During its first year of operations, Puffin, Incorporated reported Sales Revenue of $387,800 but only collected $306,000 in cash from customers. At the end of the year, Accounts Receivable equals: A) $81,800. B) $693,800. C) $387,800. D) $306,000.
82) During its first year of operations, Puffin, Incorporated reported Sales Revenue of $772,000 but only collected $606,000 in cash from customers. At the end of the year, Accounts Receivable equals: A) $1,378,000. B) $772,000. C) $606,000. D) $166,000.
83)
If Blair Industries had $16 million in revenue and net income of $11 million, then its: A) expenses must have been $27 million. B) expenses must have been $5 million. C) assets must have been $16 million. D) assets must have been $11 million.
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84)
If Blair Industries had $24 million in revenue and net income of $6 million, then its: A) expenses must have been $30 million. B) expenses must have been $18 million. C) assets must have been $24 million. D) assets must have been $6 million.
85) If Boward Company has Common Stock of $40,000, total assets of $85,000, and total liabilities of $35,000, its Retained Earnings equals: A) $10,000. B) $45,000. C) $50,000. D) $55,000.
86) The WeBuild Construction Company sold $12 million of buildings in its first year of operations. The company received payments of $8.00 million for these buildings. The company's income statement would report: A) Expenses of $4.00 million. B) Sales Revenue of $8.00 million. C) Sales Revenue of $12 million. D) Accounts Receivable of $8.00 million.
87) The WeBuild Construction Company sold $16.5 million of buildings in its first year of operations. The company received payments of $11.25 million for these buildings. The company's income statement would report: A) Accounts Receivable of $5.25 million. B) Expenses of $5.25 million. C) Sales Revenue of $11.25 million. D) Sales Revenue of $16.5 million.
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88) Which of the following financial statements shows how net income (loss) and dividends impacted a stockholders' equity account? A) Statement of Retained Earnings B) Balance Sheet C) Statement of Cash Flows D) Income Statement
89)
Dividends are reported on the: A) income statement. B) balance sheet. C) statement of retained earnings. D) income statement and balance sheet.
90)
Dividends paid to stockholders: A) are a reduction to Retained Earnings. B) appear in the cash flows from operating activities section of the statement of cash
flows. C) appear on the income statement. D) are subtracted from Common Stock.
91)
Which of the following would not affect a company's net income? A) A change in the company's income taxes B) Changing the selling price of a company's product C) Paying a dividend to stockholders D) Advertising a new product
92) 2?
Which of the following transactions would be reported on the income statement for Year
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A) Supplies that were purchased and used in Year 1 but paid for in Year 2. B) Supplies that were purchased in Year 1, but used in Year 2. C) Dividends that were paid in Year 2. D) Accounts Receivable as of December 31, Year 2.
93)
Solve for the missing data. CINNAMON AND SPICE, INCORPORATED Income Statement For the Year Ended December 31, Year 3
Revenues Sales Revenue Service Revenue Total Revenues Expenses Salaries and Wages Expense Advertising and Promotion Expenses Other Selling and Administrative Expenses Interest Expense Income Tax Expense Other Expenses Total Expenses Net Income
$ 3,000,000 810,200 Unknown
1,314,900 482,200 Unknown 225,600 117,700 253,700 3,445,600 Unknown
A) Total revenues are $3,810,200, other selling and administrative expenses are $1,051,500, and net income is $364,600. B) Total revenues are $2,495,300, other selling and administrative expenses are $1,051,500, and net income is ($950,300). C) Total revenues are $364,600, other selling and administrative expenses are $3,081,000, and net income is $7,255,800. D) Total revenues are $3,810,200, other selling and administrative expenses are $364,600, and net income is $7,255,800.
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94) Which of the following statements about this Statement of Retained Earnings is not correct? Carly Q’s Statement of Retained Earnings For the Year Ended December 31, Year 4 Retained Earnings, January 1, Year 4 Add: Net Income Subtract: Dividends Retained Earnings, December 31, Year 4
$ 251,700 328,650 (54,600) $ 525,750
A) Retained earnings of $525,750 will appear on the balance sheet as of December 31, Year 4. B) The net income in the above statement came from the income statement for the year ending December 31, Year 4. C) Dividends are shown in parentheses because they are distributions of earnings to the stockholders. D) The ending retained earnings amount represents the amount of cash at the end of Year 4.
95) Universal Corporation has beginning Retained Earnings of $80,000, cash flows from operating activities during the current year of $35,000, dividends paid during the year of $5,000, net income for the current year of $50,000, and Common Stock at the end of the year of $15,000. What is the amount of its Retained Earnings at the end of the year? A) $125,000 B) $140,000 C) $160,000 D) $175,000
96)
Which of the following is correct about the financial statements?
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A) The "change in cash" reported on the statement of cash flows is also reported on the statement of retained earnings. B) Both the income statement and the statement of cash flows show the result of a company's operating activities. C) The statement of cash flows is for a period of time while the income statement is for a point in time. D) The statement of cash flows is for a point of time while the income statement is for a period of time.
97)
The purpose of a statement of retained earnings is to:
A) estimate the current value of a company's assets. B) report the way that net income and dividends affected the financial position of the company during the period. C) show where the cash is flowing into and out of a company. D) report the specific revenues and expenses arising during the period.
98)
Which of the following statements about the format of financial statements is correct? A) A double underline is drawn below the subtotal for Total Liabilities on the balance
sheet. B) Dollar signs are omitted if the heading states that amounts are reported in U.S. dollars. C) Dividends are shown in parentheses on the statement of retained earnings. D) The order of the items included in the heading of each financial statement is as follows: the name of the business, the time period covered by the financial statement, and the title of the report.
99)
Which of the following is not an expense? A) Wages of employees B) Interest incurred on a note payable C) Dividends D) Corporate income tax
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100)
Which of the following statements about a company's fiscal year is correct? A) All companies have a December 31 year-end. B) It usually corresponds to a company's slow period. C) It always corresponds to the calendar year. D) The Financial Accounting Standards Board assigns a year-end to each company.
101) Every financial statement should have "who, what, and when" in its heading. These include the: A) name of the person preparing the statement, the type of financial statement, and when the financial statement was reported to the SEC. B) name of the person preparing the statement, the name of the company, and the date the statement was prepared. C) name of the company, the type of financial statement, and the time period or date from which the data were taken. D) name of the company, the purpose of the statement, and when the financial statement was reported to the IRS.
102)
Which of the following descriptions about a notes payable is correct? A) A written promise to repay a loan B) A type of long-term asset C) Generally informal in nature D) Reported as part of stockholders' equity on the balance sheet
103) The WC Company borrowed $26,500 from a bank during the year. This borrowing would be reported on the statement of cash flows as a(n): A) investing activity in the amount of ($26,500). B) financing activity in the amount of ($26,500). C) investing activity in the amount of $26,500. D) financing activity in the amount of $26,500.
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104) Which of the following would be an acceptable alternative name for the income statement? A) Statement of Profit and Loss B) Statement of Financial Position C) Statement of Retained Earnings D) Statement of Revenues and Expenses
105)
Which of the following statements is prepared as of a point in time? A) Income Statement B) Statement of Retained Earnings C) Balance Sheet D) Statement of Cash Flows
106)
Which of the following would not be reported on the balance sheet? A) Accounts Receivable B) Accounts Payable C) Advertising Expense D) Cash
107) A company incurred $5,000 for rent for the last month of Year 5. The company paid the bill during the first month of Year 6. Which of the following statements is correct? A) The related $5,000 should be reported on the income statement for Year 5 as Rent Expense. B) Since it has not been paid, this bill would not be reported in the financial statements for Year 5. C) The related $5,000 should be included in Accounts Receivable on the balance sheet at the end of Year 5. D) The related $5,000 should be included in Rent Expense on the balance sheet at the end Year 5.
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108) During the first year of operations, a company sold $101,000 of goods to customers and received $90,500 in cash from customers. The remainder is owed to the company at the end of the year. The company incurred $70,100 in expenses for the year and paid $65,100 in cash for these expenses. The remainder is owed by the company at the end of the year. Based on this information, what is the amount of net income for the year? A) $30,900 B) $35,900 C) $20,400 D) $25,400
109) During the first year of operations, a company sold $80,000 of goods to customers and received $72,000 in cash from customers. The remainder is owed to the company at the end of the year. The company incurred $56,000 in expenses for the year and paid $52,000 in cash for these expenses. The remainder is owed by the company at the end of the year. Based on this information, what is the amount of net income for the year? A) $20,000 B) $28,000 C) $16,000 D) $24,000
110)
Which of the following items appear on more than one financial statement? A) Ending Cash and ending Retained Earnings B) Ending Cash and beginning Retained Earnings C) Sales Revenue and ending Retained Earnings D) Beginning Cash and Sales Revenue
111) A company incurred $10,000 in wages for employees during the year. Of these wages, $9,000 was paid by the end of the year. Which of the following statements is correct?
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A) Salaries and Wages Payable on the income statement will be $9,000. B) Salaries and Wages Expense on the income statement will be $1,000. C) Salaries and Wages Expense on the balance sheet will be $10,000. D) Salaries and Wages Payable on the balance sheet will be $1,000.
112)
Net income appears on which of the following financial statements? A) Balance sheet and income statement B) Balance sheet and statement of retained earnings C) Balance sheet and statement of cash flows D) Income statement and statement of retained earnings
113)
Stockholders' equity is: A) a liability of the business. B) an economic resource controlled by the business. C) the owners' claims on the business. D) the profit generated by the business.
114)
The income statement reports: A) the assets, liabilities, and stockholders' equity of a company. B) cumulative earnings that have not been distributed to stockholders. C) the amount of profit distributed to owners during the period. D) the amount of revenues earned and expenses incurred during the period.
115) The statement of cash flows shows the following information: Cash provided by operating activities of $17,600 Cash used by investing activities of $7,300 Cash used by financing activities of $1,800 The beginning cash was $15,900. What is the amount of cash at the end of the period?
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A) $24,400. B) $33,500. C) $42,600. D) $7,400.
116) The statement of cash flows shows the following information: Cash provided by operating activities of $33,000 Cash used by investing activities of $16,800 Cash used by financing activities of $5,800 The beginning cash was $28,000. What is the amount of cash at the end of the period? A) $83,600. B) $61,000. C) $17,600. D) $38,400.
117)
Which of the following would not be reported as an asset on the balance sheet? A) Accounts Receivable B) Supplies C) Retained Earnings D) Cash
118)
Which of the following would not be reported as a liability on the balance sheet? A) Accounts Payable B) Common Stock C) Notes Payable D) Salaries and Wages Payable
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119) Robin Hood's statement of cash flows contained the following information: Cash flows from operating activities in the amount of $30,200 Cash flows from investing activities in the amount of $31,200 Cash flows from (used by) financing activities in the amount of ($43,800) What was Robin Hood's change in cash for the period? A) $17,600 decrease B) $17,600 increase C) $12,600 decrease D) $12,600 increase
120) Robin Hood's statement of cash flows contained the following information: Cash flows from operating activities in the amount of $34,800 Cash flows from investing activities in the amount of $36,000 Cash flows from (used by) financing activities in the amount of ($54,000) What was Robin Hood's change in cash for the period? A) $16,800 increase B) $18,000 increase C) $16,800 decrease D) $18,000 decrease
121) In the current period, Andrew, Incorporated recorded Sales Revenue of $100,000 from sales of goods to customers who agreed to pay later. In the next period, Andrew received payment from customers of $90,000. Which of the following statements is correct? A) Revenue for the current period is $90,000. B) Accounts Receivable at the end of the current period is $100,000. C) Accounts Payable at the end of the current period is $10,000. D) Expenses for next period will increase by $10,000.
122)
Investing activities on the statement of cash flows arise from transactions:
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A) with lenders, borrowing and repaying cash. B) with stockholders, selling company stock and paying dividends. C) directly related to running the business to earn profits. D) related to buying or selling productive resources with long lives.
123)
The separate entity assumption requires that:
A) financial information depicts the economic substance of the business activities. B) financial reports of a business are assumed to include the results of only that business's activities. C) the results of business activities are reported in an appropriate monetary unit. D) financial information can be compared across businesses because similar accounting methods have been applied.
124)
Assets reported on the balance sheet include: A) Accounts Receivable, Sales Revenue, and Cash. B) Equipment, Supplies Expense, and Cash. C) Accounts Payable, Retained Earnings, and Cash. D) Accounts Receivable, Equipment, and Cash.
125)
Liabilities reported on the balance sheet include: A) Accounts Payable, Notes Payable, and Common Stock. B) Accounts Receivable, Supplies Expense, and Retained Earnings. C) Accounts Payable, Notes Payable, and Salaries and Wages Payable. D) Common Stock, Retained Earnings, and Notes Payable.
126)
Which of the following statements about financial statements is not correct?
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A) Cash flows from financing activities would appear on the Statement of Cash Flows. B) Dividends would appear on the Statement of Retained Earnings. C) Assets would appear on the Income Statement. D) Revenues would appear on the Income Statement.
127)
Which of the following statements about financial statement information is correct?
A) If a company has total revenues of $80,000, total expenses of $50,000 and dividends of $10,000, they will have net income of $20,000. B) A company with total stockholders' equity of $45,000 and total assets of $75,000 must have total liabilities of $120,000. C) A company with liabilities of $80,000 and stockholders' equity of $50,000 will have assets of $30,000. D) A company with total stockholders' equity of $120,000 and common stock of $75,000 must have total retained earnings of $45,000.
128)
The income statement would report the amount of: A) cash at the end of the year. B) supplies used up during the current year. C) dividends distributed to owners during the current year. D) unpaid employee wages at the end of the year.
129)
Which transaction would be reported on the income statement for the current year?
A) The revenue earned from selling goods in the current year to customers who have not yet paid for those goods (that is, they have promised to pay for those goods next year). B) The amount of cash received from customers this year as payment for goods that were sold to those customers last year. C) The proceeds from a borrowing from the bank that was to be used to finance business activities during the current year. D) The proceeds from the issuance of common stock to owners that was to be used to finance business activities during the current year.
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130)
The amount of beginning retained earnings is equal to the: A) beginning retained earnings of the prior year. B) ending retained earnings of the prior year. C) beginning retained earnings of the next year. D) ending retained earnings of the next year.
131) Cape Company started its business this year. For this year, it had revenues of $240,000, expenses of $180,000 and cash flows from operating activities of $48,000, and paid dividends of $6,000. What is the amount of Retained Earnings at the end of Cape's first year of operations? A) $42,000 B) $48,000 C) $54,000 D) $114,000
132) Which of the following would appear in the cash flows from operating activities section of the statement of cash flows? A) Cash paid to suppliers and employees B) Cash paid to purchase equipment C) Cash paid on notes payable D) Cash paid for dividends
133) LARRY’S LOGGING EQUIPMENT, INCORPORATED Statement of Cash Flows For the Year Ended December 31, Year 3 Cash flows from operating activities Cash collected from customers
A
$ 24,000
Cash paid to suppliers and employees
B
(14,000)
Cash paid for other operating activities
C
Unknown
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Net cash flow from operating activities
D
$ 10,000
Cash paid to purchase equipment and other assets
E
(90,000)
Cash received from selling equipment and other assets
F
Unknown
G
Unknown
Cash paid on notes payable
H
(64,000)
Cash paid for dividends
I
(20,000)
J
Unknown
Net change in cash during the year
K
74,000
Beginning cash, January 1, Year 3
L
Unknown
Ending cash, December 31, Year 3
M
244,000
Cash collected from customers
A
$ 24,000
Cash paid to suppliers and employees
B
(14,000)
Cash paid for other operating activities
C
Unknown
Net cash flow from operating activities
D
$ 10,000
Cash paid to purchase equipment and other assets
E
(90,000)
Cash received from selling equipment and other assets
F
Unknown
Cash flows from investing activities
Net cash flow from (used by) investing activities Cash flows from financing activities
Net cash flow from (used by) financing activities
What amount is represented by letter C in the statement of cash flows? A) $28,000 B) $20,000 C) ($28,000) D) $0
134) LARRY’S LOGGING EQUIPMENT, INCORPORATED Statement of Cash Flows For the Year Ended December 31, Year 3 Cash flows from operating activities
Cash flows from investing activities
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Net cash flow from (used by) investing activities
G
Unknown
Cash paid on notes payable
H
(64,000)
Cash paid for dividends
I
(20,000)
J
Unknown
Net change in cash during the year
K
74,000
Beginning cash, January 1, Year 3
L
Unknown
Ending cash, December 31, Year 3
M
244,000
Cash collected from customers
A
$ 24,000
Cash paid to suppliers and employees
B
(14,000)
Cash paid for other operating activities
C
Unknown
Net cash flow from operating activities
D
$ 10,000
Cash paid to purchase equipment and other assets
E
(90,000)
Cash received from selling equipment and other assets
F
Unknown
G
Unknown
Cash paid on notes payable
H
(64,000)
Cash paid for dividends
I
(20,000)
Cash flows from financing activities
Net cash flow from (used by) financing activities
What amount is represented by letter J in the statement of cash flows? A) ($84,000) B) $84,000 C) ($4,000) D) $44,000
135) LARRY’S LOGGING EQUIPMENT, INCORPORATED Statement of Cash Flows For the Year Ended December 31, Year 3 Cash flows from operating activities
Cash flows from investing activities
Net cash flow from (used by) investing activities Cash flows from financing activities
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Net cash flow from (used by) financing activities
J
Unknown
Net change in cash during the year
K
74,000
Beginning cash, January 1, Year 3
L
Unknown
Ending cash, December 31, Year 3
M
244,000
What amount is represented by letter L in the statement of cash flows? A) $318,000 B) $170,000 C) ($170,000) D) ($318,000)
136) Golden Enterprises started the year with the following: Assets $125,000; Liabilities $42,500; Common Stock $72,500; Retained Earnings $10,000. During the year, the company earned revenue of $6,600, all of which was received in cash, and incurred expenses of $3,800, all of which were unpaid as of the end of the year. In addition, the company paid dividends of $2,600 to owners. Assume no other activities occurred during the year. The amount of Golden's net income for the year is: A) $2,600 B) $2,800 C) $6,600 D) $3,800
137) Golden Enterprises started the year with the following: Assets $50,000; Liabilities $15,000; Common Stock $30,000; Retained Earnings $5,000. During the year, the company earned revenue of $2,500, all of which was received in cash, and incurred expenses of $1,500, all of which were unpaid as of the end of the year. In addition, the company paid dividends of $500 to owners. Assume no other activities occurred during the year. The amount of Golden's net income for the year is:
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A) $1,000 B) $500 C) $1,500 D) $2,500
138) Golden Enterprises started the year with the following: Assets $103,000; Liabilities $33,000; Common Stock $63,000; Retained Earnings $7,000. During the year, the company earned revenue of $5,300, all of which was received in cash, and incurred expenses of $3,150, all of which were unpaid as of the end of the year. In addition, the company paid dividends of $1,300 to owners. Assume no other activities occurred during the year. The amount of Golden's retained earnings at the end of the year is: A) $9,150. B) $1,300. C) $12,300. D) $7,850.
139) Golden Enterprises started the year with the following: Assets $50,000; Liabilities $15,000; Common Stock $30,000; Retained Earnings $5,000. During the year, the company earned revenue of $2,500, all of which was received in cash, and incurred expenses of $1,500, all of which were unpaid as of the end of the year. In addition, the company paid dividends of $500 to owners. Assume no other activities occurred during the year. The amount of Golden's retained earnings at the end of the year is: A) $7,500. B) $5,500. C) $6,000. D) $500.
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140) Golden Enterprises started the year with the following: Assets $102,000; Liabilities $32,000; Common Stock $62,000; Retained Earnings $8,000. During the year, the company earned revenue of $5,200, all of which was received in cash, and incurred expenses of $3,100, all of which were unpaid as of the end of the year. In addition, the company paid dividends of $1,200 to owners. Assume no other activities occurred during the year. The amount of Golden's liabilities at the end of the year is: A) $35,100. B) $32,000. C) $29,900. D) $34,100.
141) Golden Enterprises started the year with the following: Assets $50,000; Liabilities $15,000; Common Stock $30,000; Retained Earnings $5,000. During the year, the company earned revenue of $2,500, all of which was received in cash, and incurred expenses of $1,500, all of which were unpaid as of the end of the year. In addition, the company paid dividends of $500 to owners. Assume no other activities occurred during the year. The amount of Golden's liabilities at the end of the year is: A) $15,000. B) $16,500. C) $14,000. D) $16,000.
142) Golden Enterprises started the year with the following: Assets $115,000; Liabilities $40,000; Common Stock $70,000; Retained Earnings $5,000. During the year, the company earned revenue of $6,100, all of which was received in cash, and incurred expenses of $3,550, all of which were unpaid as of the end of the year. In addition, the company paid dividends of $2,100 to owners. Assume no other activities occurred during the year. The amount of Golden's assets at the end of the year is:
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A) $119,000. B) $121,100. C) $123,650. D) $124,650.
143) Golden Enterprises started the year with the following: Assets $50,000; Liabilities $15,000; Common Stock $30,000; Retained Earnings $5,000. During the year, the company earned revenue of $2,500, all of which was received in cash, and incurred expenses of $1,500, all of which were unpaid as of the end of the year. In addition, the company paid dividends of $500 to owners. Assume no other activities occurred during the year. The amount of Golden's assets at the end of the year is: A) $52,500. B) $54,000. C) $52,000. D) $53,500.
144)
A company’s financial records at the end of the year included the following amounts:
Cash Accounts Receivable Supplies Accounts Payable Notes Payable Retained Earnings, beginning of year Common Stock Service Revenue Wages Expense Advertising Expense Rent Expense
$ 70,100 28,100 4,100 10,100 5,050 17,100 41,000 52,350 8,100 5,100 10,100
What is the amount of net income on the Income Statement for the year?
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A) $29,050 B) $46,150 C) $37,150 D) $88,250
145)
A company’s financial records at the end of the year included the following amounts:
Cash Accounts Receivable Supplies Accounts Payable Notes Payable Retained Earnings, beginning of year Common Stock Service Revenue Wages Expense Advertising Expense Rent Expense
$ 70,000 28,000 4,000 10,000 5,000 17,000 40,000 53,000 8,000 5,000 10,000
What is the amount of net income on the Income Statement for the year? A) $30,000 B) $38,000 C) $88,000 D) $47,000
146)
A company’s financial records at the end of the year included the following amounts:
Cash Accounts Receivable Supplies Accounts Payable Notes Payable Retained Earnings, beginning of year Common Stock Service Revenue Wages Expense
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$ 71,700 29,700 5,700 11,700 5,850 18,700 57,000 41,950 9,700
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Advertising Expense Rent Expense
6,700 11,700
What is the amount of total assets to be reported on the Balance Sheet at the end of the year? A) $149,050 B) $107,100 C) $118,800 D) $125,800
147)
A company’s financial records at the end of the year included the following amounts:
Cash Accounts Receivable Supplies Accounts Payable Notes Payable Retained Earnings, beginning of year Common Stock Service Revenue Wages Expense Advertising Expense Rent Expense
$ 70,000 28,000 4,000 10,000 5,000 17,000 40,000 53,000 8,000 5,000 10,000
What is the amount of total assets to be reported on the Balance Sheet at the end of the year? A) $112,000 B) $102,000 C) $119,000 D) $155,000
148)
A company’s financial records at the end of the year included the following amounts:
Cash Accounts Receivable Supplies Accounts Payable Notes Payable
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$ 71,100 29,100 5,100 11,100 5,550
41
Common Stock Retained Earnings, beginning of year Service Revenue Wages Expense Advertising Expense Rent Expense
51,000 18,100 45,850 9,100 6,100 11,100
What is the amount of total stockholders' equity that would be reported on the Balance Sheet at the end of the year? A) $19,550 B) $105,300 C) $69,100 D) $88,650
149)
A company’s financial records at the end of the year included the following amounts:
Cash Accounts Receivable Supplies Accounts Payable Notes Payable Common Stock Retained Earnings, beginning of year Service Revenue Wages Expense Advertising Expense Rent Expense
$ 70,000 28,000 4,000 10,000 5,000 40,000 17,000 53,000 8,000 5,000 10,000
What is the amount of total stockholders' equity that would be reported on the Balance Sheet at the end of the year? A) $30,000 B) $57,000 C) $87,000 D) $102,000
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150) Puffin Company began the year with assets of $100,000 and liabilities of $75,000. During the year assets increased by $12,000 and liabilities decreased by $9,000. What is the amount of Puffin's stockholders' equity at the beginning of the year? A) $25,000 B) $96,000 C) $88,000 D) $100,000
151) Puffin Company began the year with assets of $120,000 and liabilities of $90,000. During the year assets increased by $14,400 and liabilities decreased by $10,800. What is the amount of Puffin's stockholders' equity at the beginning of the year? A) $0 B) $30,000 C) $210,000 D) $120,000
152) Puffin Company began the year with assets of $118,000 and liabilities of $84,000. During the year assets increased by $15,600 and liabilities decreased by $10,800. What is the amount of the change in Puffin's stockholders' equity during the year? A) $4,800 increase B) $26,400 increase C) $4,800 decrease D) $26,400 decrease
153) Puffin Company began the year with assets of $120,000 and liabilities of $90,000. During the year assets increased by $14,400 and liabilities decreased by $10,800. What is the amount of the change in Puffin's stockholders' equity during the year?
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A) $3,600 increase B) $25,200 increase C) $25,200 decrease D) $3,600 decrease
154) The net income for Year 1 (the first year of operations for the company) was $20,600 and dividends of $12,300 were paid. In Year 2, the company reported net income of $34,600 and paid dividends of $5,300. At the end of Year 1, the company had total assets of $156,000. At the end of Year 2, the company had total assets of $246,000. What was the amount of retained earnings at the end of Year 1? A) $20,600 B) $18,400 C) $8,300 D) $17,000
155) The net income for Year 1 (the first year of operations for the company) was $20,000 and dividends of $12,000 were paid. In Year 2, the company reported net income of $34,000 and paid dividends of $5,000. At the end of Year 1, the company had total assets of $150,000. At the end of Year 2, the company had total assets of $240,000. What was the amount of retained earnings at the end of Year 1? A) $20,000 B) $8,000 C) $150,000 D) $155,000
156) The net income for Year 1 (the first year of operations for the company) was $20,400 and dividends of $12,200 were paid. In Year 2, the company reported net income of $34,400 and paid dividends of $5,200. At the end of Year 1, the company had total assets of $154,000. At the end of Year 2, the company had total assets of $244,000. What is the amount of retained earnings at the end of Year 2?
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A) $37,400 B) $134,150 C) $29,200 D) $124,150
157) The net income for Year 1 (the first year of operations for the company) was $20,000 and dividends of $12,000 were paid. In Year 2, the company reported net income of $34,000 and paid dividends of $5,000. At the end of Year 1, the company had total assets of $150,000. At the end of Year 2, the company had total assets of $240,000. What is the amount of retained earnings at the end of Year 2? A) $37,000 B) $240,000 C) $29,000 D) $269,000
158) The following accounts are taken from the December 31, Year 4 financial statements of a company. Accounts Payable Accounts Receivable Selling & Administrative Expenses Cash Common Stock Dividends Income Tax Expense Interest Expense Other Expenses Notes Payable Other Assets Other Liabilities Other Operating Expenses Other Revenue Property and Equipment Retained Earnings, December 31, Year 3
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$ 2,075 800 2,500 2,200 2,000 1,900 400 75 500 5,000 2,500 3,000 2,000 300 11,000 4,800
45
Salaries and Wages Expense Supplies Service Revenue
3,000 300 10,000
What is the amount of net income for Year 4? A) $3,825 B) $1,825 C) $10,300 D) $5,625
159) The following accounts are taken from the December 31, Year 4 financial statements of a company. Accounts Payable Accounts Receivable Selling & Administrative Expenses Cash Common Stock Dividends Income Tax Expense Interest Expense Other Expenses Notes Payable Other Assets Other Liabilities Other Operating Expenses Other Revenue Property and Equipment Retained Earnings, December 31, Year 3 Salaries and Wages Expense Supplies Service Revenue
$ 2,075 800 2,500 2,200 2,000 1,900 400 75 500 5,000 2,500 3,000 2,000 300 11,000 4,800 3,000 300 10,000
What is the amount of total assets at the end of Year 4? A) $16,800 B) $16,500 C) $21,600 D) $23,500
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160) The following accounts are taken from the December 31, Year 4 financial statements of a company. Accounts Payable Accounts Receivable Selling & Administrative Expenses Cash Common Stock Dividends Income Tax Expense Interest Expense Other Expenses Notes Payable Other Assets Other Liabilities Other Operating Expenses Other Revenue Property and Equipment Retained Earnings, December 31, Year 3 Salaries and Wages Expense Supplies Service Revenue
$ 2,075 800 2,500 2,200 2,000 1,900 400 75 500 5,000 2,500 3,000 2,000 300 11,000 4,800 3,000 300 10,000
What is the amount of total liabilities at the end of Year? A) $7,075 B) $10,075 C) $9,075 D) $12,975
161) The following accounts are taken from the December 31, Year 4 financial statements of a company. Accounts Payable Accounts Receivable Selling & Administrative Expenses Cash Common Stock Dividends
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$ 2,075 800 2,500 2,200 2,000 1,900
47
Income Tax Expense Interest Expense Other Expenses Notes Payable Other Assets Other Liabilities Other Operating Expenses Other Revenue Property and Equipment Retained Earnings, December 31, Year 3 Salaries and Wages Expense Supplies Service Revenue
400 75 500 5,000 2,500 3,000 2,000 300 11,000 4,800 3,000 300 10,000
What is the amount of retained earnings on the Balance Sheet at the end of Year 4? A) $7,725 B) $6,725 C) $4,800 D) $4,725
162) Blue Fin started the current year with assets of $705,000, liabilities of $352,500 and common stock of $205,000. During the current year, assets increased by $405,000, liabilities decreased by $52,500 and common stock increased by $280,000. There was no payment of dividends to owners during the year. Based on this information, what was the amount of Blue Fin's retained earnings at the beginning of the year? A) $72,500 B) $147,500 C) $457,500 D) $557,500
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163) Blue Fin started the current year with assets of $840,000, liabilities of $420,000 and common stock of $240,000. During the current year, assets increased by $480,000, liabilities decreased by $60,000 and common stock increased by $330,000. There was no payment of dividends to owners during the year. Based on this information, what was the amount of Blue Fin's retained earnings at the beginning of the year? A) $180,000 B) $1,020,000 C) $660,000 D) $420,000
164) Blue Fin started the current year with assets of $718,000, liabilities of $359,000 and common stock of $218,000. During the current year, assets increased by $418,000, liabilities decreased by $59,000 and common stock increased by $293,000. There was no payment of dividends to owners during the year. What was the amount of Blue Fin's change in total stockholders' equity during the year? A) $359,000 increase B) $477,000 increase C) $259,000 increase D) $218,000 increase
165) Blue Fin started the current year with assets of $840,000, liabilities of $420,000 and common stock of $240,000. During the current year, assets increased by $480,000, liabilities decreased by $60,000 and common stock increased by $330,000. There was no payment of dividends to owners during the year. What was the amount of Blue Fin's change in total stockholders' equity during the year? A) $420,000 increase B) $540,000 increase C) $300,000 increase D) $240,000 increase
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166) Blue Fin started the current year with assets of $703,000, liabilities of $351,500 and common stock of $203,000. During the current year, assets increased by $403,000, liabilities decreased by $51,500 and common stock increased by $278,000. There was no payment of dividends to owners during the year. What was the amount of Blue Fin's net income for the year? A) $226,500 B) $176,500 C) $278,000 D) $454,500
167) Blue Fin started the current year with assets of $840,000, liabilities of $420,000 and common stock of $240,000. During the current year, assets increased by $480,000, liabilities decreased by $60,000 and common stock increased by $330,000. There was no payment of dividends to owners during the year. What was the amount of Blue Fin's net income for the year? A) $270,000 B) $330,000 C) $210,000 D) $540,000
168)
The Statement of Cash Flows for the current year contained the following:
Cash received from customers Cash used for purchase of equipment Cash received for stock issuance Cash used for payments to suppliers & employees Cash dividends paid to stockholders Cash borrowed from bank
$ 10,000 40,000 30,000 5,000 1,000 20,000
The change in cash for the current year was an increase of $14,000. What was the amount of cash flows from (used in) operating activities?
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A) $5,000 B) $35,000 C) $25,000 D) $4,000
169)
The Statement of Cash Flows for the current year contained the following:
Cash received from customers Cash used for purchase of equipment Cash received for stock issuance Cash used for payments to suppliers & employees Cash dividends paid to stockholders Cash borrowed from bank
$ 10,000 40,000 30,000 5,000 1,000 20,000
The change in cash for the current year was an increase of $14,000. What was the amount of cash flows from (used in) investing activities? A) ($1,000) B) ($40,000) C) ($10,000) D) $10,000
170)
The Statement of Cash Flows for the current year contained the following:
Cash received from customers Cash used for purchase of equipment Cash received for stock issuance Cash used for payments to suppliers & employees Cash dividends paid to stockholders Cash borrowed from bank
$ 10,000 40,000 30,000 5,000 1,000 20,000
The change in cash for the current year was an increase of $14,000. What is the amount of cash flows from (used in) financing activities?
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A) ($40,000) B) $5,000 C) $49,000 D) $10,000
171) ANONYMOUS, INCORPORATED Balance Sheet September 30, Year 3 Assets Cash Accounts Receivable Inventories Property, Plant & Equipment Other Assets Total Assets
$ 1,568,000 310,500 208,200 391,600 869,400 $ 3,347,700
Liabilities Accounts Payable Notes Payable Total Liabilities Stockholders' Equity
$ 1,439,200 Unknown Unknown
Common Stock Retained Earnings Total Stockholders' Equity Total Liabilities & Stockholders' Equity
1,263,600 207,100 1,470,700 $ 3,347,700
What is the missing amount for Total Liabilities? A) $3,347,700 B) $1,439,200 C) $1,470,700 D) $1,877,000
172)
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ANONYMOUS, INCORPORATED Balance Sheet September 30, Year 3 Assets Cash Accounts Receivable Inventories Property, Plant & Equipment Other Assets Total Assets
$ 1,568,000 310,500 208,200 391,600 869,400 $ 3,347,700
Liabilities Accounts Payable Notes Payable Total Liabilities Stockholders' Equity
$ 1,439,200 Unknown Unknown
Common Stock Retained Earnings Total Stockholders' Equity Total Liabilities & Stockholders' Equity
1,263,600 207,100 1,470,700 $ 3,347,700
What is the missing amount for Notes Payable? A) $207,100 B) $437,800 C) $1,439,200 D) $3,347,700
173) ANONYMOUS, INCORPORATED Balance Sheet September 30, Year 3 Assets Cash Accounts Receivable Inventories Property, Plant & Equipment
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$ 1,568,000 310,500 208,200 391,600
53
Other Assets Total Assets
869,400 $ 3,347,700
Liabilities Accounts Payable Notes Payable Total Liabilities Stockholders' Equity
$ 1,439,200 Unknown Unknown
Common Stock Retained Earnings Total Stockholders' Equity Total Liabilities & Stockholders' Equity
1,263,600 207,100 1,470,700 $ 3,347,700
Which one of the following statements regarding the balance sheet for Anonymous Incorporated is correct? A) Retained Earnings is misclassified; it should be reported in the Assets section of the balance sheet. B) The $207,100 shown as Retained Earnings on the balance sheet represents the cumulative amount of dividends distributed. C) Anonymous, Incorporated is owed $310,500 from customers who have purchased goods or services from the company but have not yet paid for them. D) The amount of retained earnings reported on this balance sheet represents the retained earnings at the beginning of the year.
174) Karen's Bakery received $480 of sugar and flour from its supplier and promised to pay for it next month. Karen’s Bakery should report: A) Accounts Payable of $480 on its balance sheet. B) Accounts Payable of $480 on its income statement. C) Accounts Receivable of $480 on its balance sheet. D) nothing, because cash hasn't been paid yet.
175) Which of these appears on both the income statement and the statement of retained earnings?
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A) Cash B) Revenues C) Expenses D) Net income
176) Lolly’s Sparkling Waters delivered $380 of drinks to the local high school but hasn't received payment yet. Lolly’s Sparkling Waters will report: A) nothing, because payment hasn't been received yet. B) Cash of $380, because the school will pay for the drinks eventually. C) Accounts payable of $380. D) Accounts receivable of $380.
177)
Accounts receivable are: A) amounts the company expects to pay for previous credit sales. B) amounts the company expects to collect for previous credit sales. C) reported in the liabilities section of the balance sheet. D) reported on the income statement.
178) If a company reports a negative dollar amount under cash flows from investing activities, a possible explanation is that: A) it has purchased a significant amount of equipment. B) its expenses are greater than its revenues. C) the market value of its stock has gone down. D) it has paid a large cash dividend to its stockholders.
179)
A company might report negative cash flows from financing activities when:
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A) it has purchased a significant amount of equipment. B) the market value of its stock has gone down. C) it has paid a cash dividend to its stockholders. D) it has borrowed money from a bank during the year.
180)
Borrowing from a bank is a(n): A) operating activity. B) investing activity. C) financing activity. D) expense.
181)
Paying a cash dividend to stockholders is a(n): A) operating activity. B) investing activity. C) financing activity. D) expense.
182) Cash activity with stockholders and creditors, such as banks, are reported as cash flows from ______ activities on the statement of cash flows. A) financing B) investing C) operating D) managing
183) Cash activity from the buying and selling of productive resources, such as land, buildings and equipment, are reported as cash flows from _________ activities on the statement of cash flows.
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A) investing B) operating C) financing D) managing
184) Ace Electronics employees have earned $10,000 during the current period but Ace has paid only $8,000 to date. Ace Electronics should report Salaries and Wages Expense of ______ on the income statement, Salaries and Wages Payable of ______ on the balance sheet, and a reduction in Cash of ______. A) $0; $10,000; $0 B) $8,000; $2,000; $0 C) $2,000; $2,000; $0 D) $10,000; $2,000; $8,000
185)
Expenses appear on the: A) Statement of Retained Earnings. B) Balance Sheet. C) Income Statement. D) Statement of Cash Flows.
186)
The unit of measure assumption states that: A) results of business activities should be reported in an appropriate monetary unit. B) assets should be recorded at cost. C) a business's financial reports include only the activities of the business. D) assets equal liabilities plus stockholders’ equity.
187) ANONYMOUS, INCORPORATED Balance Sheet
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September 30, Year 3 Assets Cash Accounts Receivable Inventories Property, Plant & Equipment Other Assets Total Assets
$ 1,568,000 310,500 208,200 391,600 869,400 $ 3,347,700
Liabilities Accounts Payable Notes Payable Total Liabilities Stockholders' Equity
$ 1,439,200 Unknown Unknown
Common Stock Retained Earnings Total Stockholders' Equity Total Liabilities & Stockholders' Equity
1,263,600 207,100 1,470,700 $ 3,347,700
As of September 30, Year 3, who provided more financing for Anonymous, Incorporated? A) Owners B) Creditors C) Both provided equal financing D) Neither provided any financing
188)
Investors of a company increase their wealth by receiving dividends and by: A) receiving interest. B) an increase in the market value of their stock. C) studying the company's annual financial statements. D) insider trading.
189)
A creditor might look at a company's financial statements to determine if the:
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A) company is likely to have the resources to repay its debts. B) company's stock price is likely to fall, signaling a good time to sell. C) company's stock price is likely to rise, signaling a good time to buy. D) company pays a dividend.
190) Certain aspects of the financial statements may have different relevance to investors and creditors. Which of the following types of information are each of these two parties most concerned with? A) Investors: Dividends; Creditors: Sufficient cash to make loan payments B) Investors: Cash flows from investing activities; Creditors: Dividends C) Investors: Sufficient cash to make loan payments; Creditors: Cash flows from investing activities D) Investors: Sufficient cash to make loan payments; Creditors: Stock prices
191)
Investors and creditors look at the balance sheet to see whether the company: A) is profitable. B) can maintain its existing product line. C) owns enough assets to pay all that it owes to creditors. D) has had positive cash flows from operating activities.
192) A company's quarterly income statements show that in the last three quarters both Sales Revenue and Net Income have been falling. Given this information, which of the following conclusions drawn by users are valid? A) Creditors are likely to conclude that the risk of lending to the company is declining and might be willing to accept a lower interest rate on loans. B) Investors are likely to conclude that the stock price is likely to rise, making the company more attractive as a potential investment. C) Customers are likely to conclude that the company is struggling; therefore, it is permissible to take longer to pay amounts they owe to the company. D) Owners may conclude that the company will be less likely to distribute dividends.
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193)
Which of the following statements about the use of financial statements is not correct?
A) When choosing between a company that pays steady dividends and one that retains its earnings to support future growth, investors will always choose the company that pays steady dividends. B) Companies can develop reputations for honest financial reporting even when conveying bad news. C) Trends in a company's net income from year to year can provide clues about its future earnings, which can help investors to decide whether to buy stock in the company. D) Information in the notes to the financial statements can influence a user's interpretation of balance sheet and income statement information.
194) Investors are often interested in the amount of net income distributed as dividends. Where would investors look for this information in the company's annual report? A) Statement of Retained Earnings B) Balance Sheet C) Notes to the financial statements D) Income Statement
195)
Creditors look at the balance sheet to see whether the company: A) is profitable. B) owns enough assets to pay what it owes to creditors. C) has had a positive cash flow from operations. D) is paying sufficient dividends to stockholders.
196) Which of the following is not likely to be a consequence of fraudulent financial reporting? A) The company's stock price drops once the fraud is discovered. B) Innocent accountants who work for the company's CPA firm lose their jobs. C) Creditors recover 100% of amounts owed to them. D) Employees lose their retirement savings.
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197) When several parties or individuals can reach similar values in financial statements by using similar methods, the information is said to be: A) comparable. B) understandable. C) verifiable. D) timely.
198) Which of the following requires that its members adhere to a Code of Professional Conduct? A) SEC B) FASB C) PCAOB D) AICPA
199)
In the U.S., Generally Accepted Accounting Principles (GAAP) are established by the: A) International Accounting Standards Board (IASB). B) Public Company Accounting Oversight Board (PCAOB). C) Financial Accounting Standards Board (FASB). D) American Institute of Certified Public Accountants (AICPA).
200) In the U.S., public companies must be audited by independent auditors using rules approved by the: A) International Accounting Standards Board (IASB). B) Public Company Accounting Oversight Board (PCAOB). C) Financial Accounting Standards Board (FASB). D) American Institute of Certified Public Accountants (AICPA).
201)
Which of the following actions would be considered unethical?
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A) A company does not distribute any of its profits back to the stockholders. B) A company rounds the revenues and expenses that it reports on the income statement. C) A new accountant makes an unintentional mistake. D) An employee receives a paycheck for double the amount due and does not report it to their employer.
202)
What would a user of financial statements learn from reading the auditors' report?
A) Whether the financial statements present a fair picture of the company's financial results and are prepared in accordance with GAAP. B) Whether or not it is a good time to purchase the stock. C) How much the company plans to distribute as dividends. D) Whether or not the company has plans for future expansion.
203) To determine whether generally accepted accounting principles (GAAP) were followed in the preparation of financial statements, an examination of: A) tax documents would be performed by the IRS. B) the company's accounting records would be performed by the SEC. C) the financial statements and related documents would be performed by an independent auditor. D) the financial statements and related documents would be performed by the FASB.
204)
Generally accepted accounting principles (GAAP) were (are) established by: A) an Italian monk in 1494. B) the U.S. Congress and the SEC. C) the PCAOB. D) the FASB on an ongoing basis.
205)
Which of the following statements concerning financial reporting is not correct?
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A) Accounting rules in the U.S. are called GAAP. B) Accounting rules developed by the IASB are called IFRS. C) Both GAAP and IFRS share the same goal, which is to ensure useful information to users of financial statements. D) There are no differences between the accounting rules developed by FASB and those developed by IASB.
206)
What is the main goal of GAAP?
A) To help ensure that financial decisions are made in a professional and ethical manner. B) To establish standards that help to prevent and detect fraudulent acts by management. C) To ensure that the financial information produced by companies is useful to existing and potential investors and other parties in decision making. D) To oversee the stock exchanges and financial reporting by public companies in the United States.
207)
Which of the following statements concerning financial reporting is correct?
A) The FASB requires all financial decision makers to adhere to a code of professional conduct. B) The Sarbanes-Oxley Act does not require businesses to maintain an audited system of internal control. C) A fundamental characteristic of useful financial information is that it fully depicts the economic substance of business activities. D) There is no attempt to eliminate the difference in accounting rules in the U.S. and elsewhere as this would prevent investors from comparing financial statements of companies from different countries.
208)
Faithful representation is a characteristic of external financial reporting that means:
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A) the financial reports of a business are assumed to include the results of only that business's activities. B) financial information can be compared across businesses because similar accounting methods are applied. C) the results of business activities are reported using an appropriate monetary unit. D) financial information depicts the economic substance of business activities.
209)
Relevance is an objective of external financial reporting that means:
A) the financial reports of a business are assumed to include the results of only that business's activities. B) financial information can be compared across businesses because similar accounting methods have been applied. C) the financial information possesses a feature that allows it to influence a decision. D) the financial information depicts the economic substance of business activities.
210) Financial statements are a key source of information useful to external users. The quality of relevance in financial information contributes to its usefulness. Along with relevance which of the following attributes is a primary element of useful financial information? A) Eloquence B) Assets C) Ethicality D) Faithful representation
211) According to Generally Accepted Accounting Principles, which of the following is not a characteristic of useful financial information? A) Comparable B) Verifiable C) Timely D) Ethical
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212) Which of the following statements about the accounting standards used in other countries is correct? A) U.S. GAAP is used worldwide. B) IFRS are used by all countries. C) More and more countries are using IFRS. D) There are no plans to converge U.S. GAAP with IFRS.
213) In a sense, __________ is to accountants and auditors what the criminal code is to lawyers and the public. A) the SEC B) faithful representation C) U.S. GAAP D) the basic accounting equation
214)
When faced with an ethical dilemma, an accountant should:
A) identify who will be affected by the situation, identify and evaluate the alternative courses of action, and choose the alternative that is the most ethical. B) report the matter to the SEC. C) report the matter to the IRS. D) resign.
215)
The Sarbanes-Oxley Act is a set of laws established to:
A) limit the amount of compensation received by executives in publicly traded companies. B) strengthen corporate reporting in the United States. C) enhance the conceptual framework of GAAP. D) redefine the display of financial statements.
216)
Characteristics that make information useful do not include:
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A) relevance. B) detail. C) consistency. D) understandability.
217)
Information that always makes a difference in a decision is: A) cash based. B) audited. C) provided by GAAP. D) relevant.
218) Who has primary responsibility for making sure that a company's financial statements follow GAAP? A) Management B) Independent auditors (CPAs) C) The Securities and Exchange Commission (SEC) D) The Public Company Accounting Oversight Board (PCAOB)
219)
What do independent auditors provide for companies who hire them?
A) Assurance that this year's financial statements are perfect B) A guarantee that next year's operations will be profitable C) Assurance that the financial statements follow Generally Accepted Accounting Principles D) Assurance that the company's stock is a good investment
220)
The main goal of both U.S. GAAP and IFRS is to:
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A) ensure that companies produce useful information for external users. B) reduce the number of required financial statements. C) prevent all fraud and ensure the amounts reported are 100% accurate. D) ensure that companies become more profitable.
221)
U.S. GAAP: A) is another term for IFRS. B) are the accounting rules developed by the IASB for use in the United States. C) is the oversight board that supervises auditors. D) are the accounting rules developed by the FASB for use in the United States.
222) Which of the following is the set of laws enacted by the government to strengthen corporate reporting in response to the Enron, WorldCom and other frauds? A) Sarbanes-Oxley Act B) Professional Code of Ethics C) Internal Revenue Code D) Securities and Exchange Commission Act
223)
The Sarbanes-Oxley Act (SOX): A) outlines the code of professional ethics for accountants. B) is a set of laws established to strengthen corporate reporting. C) requires all publicly traded corporations to pay annual dividends. D) is a set of laws auditors must follow.
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Answer Key Test name: Chap 01_7e 1) FALSE Stockholders are the owners of a corporation. 2) FALSE Most corporations start out as private companies and will apply to become public companies ("go public") if they need a lot of financing. Financing can also be acquired by borrowing from banks. 3) FALSE Unlike sole proprietorships and partnerships, a corporation is a separate entity from both legal and accounting perspectives. This means that a corporation, not its owners, is legally responsible for its own taxes and debts. 4) TRUE Cash flows from running the business, including cash paid for wages, are operating activities on the statement of cash flows. 5) TRUE On the statement of cash flows, borrowing and repaying bank loans are financing activities. 6) TRUE Buying supplies and paying salaries and wages are normal operating costs on the statement of cash flows. 7) TRUE Assets = Liabilities + Stockholders' Equity; therefore, Assets − Liabilities = Stockholders' Equity 8) FALSE Formal debt, evidenced by a written contract or note, is reported as Notes Payable. Version 1
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9) TRUE Large businesses often round the numbers on their financial statements to the nearest thousand or million. 10) TRUE An account with the word "payable" in its title is a liability. 11) FALSE The income statement reports revenues and expenses. Dividends are not expenses. Rather, dividends are an optional distribution of earnings to stockholders, approved by the company's board of directors, and are presented on the statement of retained earnings. 12) FALSE Net income is not the same as cash flows from operating activities. Net income is not necessarily equal to cash because revenues are recorded when the goods or services are provided to customers and expenses when incurred regardless of when cash is received or paid. 13) FALSE Revenues are reported on the income statement when goods or services are provided to customers. It's quite common for a business to provide goods or services to customers, but not collect cash from them until a later time period. 14) FALSE There is no GAAP requirement that companies must pay dividends. Dividends are an optional distribution of earnings to stockholders, approved by the company's board of directors. 15) FALSE Common Stock is a component of stockholders' equity. 16) TRUE Investors expect a return on their investment in the company, and as a result, investors look closely at the company’s ability to generate profits. 17) FALSE Version 1
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There are two sources of potential return on an investment in stock: the dividend and an increase in the stock price. 18) FALSE In order to be judged useful, financial information must have two fundamental characteristics: relevance and faithful representation. 19) FALSE Currently, the Financial Accounting Standards Board (FASB) has the primary responsibility for setting the underlying rules of accounting in the United States. The Securities and Exchange Commission (SEC) is responsible for the functioning of stock markets. 20) FALSE SOX requires top managers of public companies to sign a report certifying their responsibilities for the financial statements, maintain an audited system of internal controls to ensure accuracy in the accounting reports, and maintain an independent committee to oversee top management and ensure that they cooperate with auditors. SOX does not require a certification that states the financial statements are free from error. 21) B The owners of a company's stock (stockholders) can buy and sell stock privately or publicly on a stock exchange if the company has legally registered to do so. Most corporations start out as private companies and will apply to become public companies ("go public"). 22) C
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A corporation, not its owners, is legally responsible for its own taxes and debts. In sole proprietorships and partnerships, the owners are taxed on the profits of the business. A sole proprietorship is considered a part of the owner's life, with all profits becoming part of the taxable income of the owner. A partnership is similar to a sole proprietorship in this regard, except that the taxes are the responsibility of two or more owners instead of just one. 23) D Sole proprietorships are easy to establish, and the business is considered a part of the owner’s life with all profits and losses becoming part of the taxable income of the owner. However, a sole proprietor is personally liable for all debts of the business. 24) C External users of financial accounting reports include creditors, investors, directors, and government. Managers are considered internal users. 25) B Accounting is an information system designed by an organization to capture (analyze, record, and summarize) the activities affecting its financial condition and performance and then report the results to decision makers, both inside and outside the organization. 26) B Creditors include suppliers, banks, and anyone to whom money is owed. 27) A Unlike sole proprietorships and partnerships, a corporation is a separate entity from both legal and accounting perspectives. This means that a corporation, not its owners, is legally responsible for its own taxes and debts. 28) A
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A partnership is similar to a sole proprietorship, except that profits, taxes, and legal liability are the responsibility of two or more owners instead of just one. 29) C Managerial accounting reports are made available only to the company’s employees (internal users) so that they can make business decisions related to production, marketing, human resources, and finance. 30) B Directors are elected to oversee a company’s managers and ensure their decisions are in the best financial interest of stockholders. 31) A The main goal of an accounting system is to capture information about a business so that it can be reported to decision makers. Having an accounting system does not guarantee that the company will earn a profit, nor does it provide financing for a company. 32) B Financing can be provided by creditors (classified as liabilities) or owners (classified as stockholders' equity). 33) D As set forth in the separate entity assumption, the financial reports of a business are assumed to include the results of only that business's activities. A company's financial statements do not contain information about the company's owners. 34) B A sole proprietorship is the form of business owned (and usually operated) by one individual. 35) C Internal users include managers, supervisors, etc. External users include creditors, investors, etc. 36) C Version 1
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Financial accounting reports, called financial statements, are prepared periodically to provide information to people not employed by the business. 37) D Unlike sole proprietorships and partnerships, a corporation is a separate entity from both legal and accounting perspectives. This means that a corporation, not its owners, is legally responsible for its own taxes and debts. 38) A A share of the corporation's ownership is indicated on a legal document called a stock certificate. 39) B A key difference between a corporation and a partnership is that the corporation is a separate entity from both a legal and accounting perspective. This means that a corporation (not its shareholders) is legally responsible for its own taxes and debts; the owners of a partnership have this responsibility. 40) D Assets = Liabilities + Stockholders' Equity Stockholders' Equity = Assets− Liabilities 41) D Net income is calculated as revenues minus expenses. Dividends are not an expense of doing business and are not involved in determining the amount of net income on the income statement. Assets and liabilities are reported on the balance sheet. 42) B Expenses are reported on the income statement when incurred (that is, when the related goods or services are used) regardless of when the cash is paid. 43) D Version 1
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The business itself, not the stockholders who own the business, is viewed as owning the assets and owing the liabilities. This is called the separate entity assumption, which requires that a business's financial reports include only the activities of the business and not the personal dealings of its stockholders. 44) A The business itself, not the stockholders who own the business, is viewed as owning the assets and owing the liabilities. This is called the separate entity assumption, which requires that a business's financial reports include only the activities of the business and not the personal dealings of its stockholders. 45) C The owners have a claim on amounts they contributed directly to the company in exchange for its stock (Common Stock). 46) A Revenues are earned by selling goods or services to customers. 47) A Although profit is used in casual conversation, the preferred term in accounting is net income. Net income is calculated as revenues minus expenses. 48) A If revenues are less than expenses, the company would have a net loss which would decrease Retained Earnings. 49) B Expenses are all costs of doing business that are necessary to earn revenues. 50) C Expenses are all costs of doing business that are necessary to earn revenues. 51) B Version 1
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An asset is an economic resource presently controlled by the company; it has measurable value and is expected to benefit the company by producing cash inflows or reducing cash outflows in the future. 52) A Alpha is the seller and thus will report accounts receivable, which is a right to collect for sales/services provided on account. 53) A The buyer, Beta, will report accounts payable, which is the amount owed to suppliers for prior credit purchases on account. 54) A Revenues equal the amount earned, regardless of whether the cash has been collected. 55) B Investing activities involve buying and selling productive resources with long lives (such as buildings, land, equipment, and software), purchasing investments, and lending to others. 56) D Financing activities include any borrowing from banks, repaying bank loans, receiving cash from stockholders for company stock, or paying dividends to stockholders. Operating activities are directly related to running the business to earn profit and would include buying supplies. 57) A Operating activities are directly related to running the business to earn profit and would include paying interest on a loan. Investing activities involve buying and selling productive resources with long lives (such as buildings, land, equipment, and software), purchasing investments, and lending to others. Financing activities include any borrowing from banks, repaying bank loans, receiving cash from stockholders for company stock, or paying dividends to stockholders. 58) A Version 1
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The separate entity assumption means that the financial reports of a business are assumed to include the results of only that business's activities. 59) B The statement of cash flows includes operating activities (which are directly related to running the business to earn profit), investing activities (which involve buying and selling productive resources with long lives), and financing activities (which include any borrowing from banks, repaying bank loans, receiving cash from stockholders for company stock, or paying dividends to stockholders). 60) B Financial statements can be prepared at any time during the year, although they are most commonly prepared monthly, every three months (quarterly reports), and at the end of the year (annual reports). 61) A Companies are allowed to choose a calendar or fiscal year-end. A calendar year is a 12-month period ending on December 31, and a fiscal year is a 12-month period ending on a day other than December 31. 62) D An asset is an economic resource presently controlled by the company; it has measurable value and is expected to benefit the company by producing cash inflows or reducing cash outflows in the future. 63) B The determination of net income or loss is made from revenues and expenses for a period. A net loss results when revenues are less than expenses. 64) A Net income can be left in the company to accumulate (with earnings that have been retained from prior years) or it can be paid out to the company's stockholders for their own personal use (called dividends). Version 1
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65) C Net income = Revenues− Expenses = $330,000 − $247,500 = $82,500 66) B Assets = Liabilities + Stockholders' Equity Change in Assets = Change in Liabilities + Change in Stockholders' Equity = $90,000 in Liabilities + $37,500 = $127,500 67) D Liabilities are measurable amounts that the company owes to creditors. From a legal perspective, creditors have priority over stockholders. Thus, if a company goes out of business, liabilities must be paid before any amounts are paid to stockholders. 68) D The balance sheet reports the amount of a business's assets, liabilities, and stockholders' equity at a specific point in time. 69) C An asset is an economic resource presently controlled by the company; it has measurable value and is expected to benefit the company by producing cash inflows or reducing cash outflows in the future. The building supplies on hand that cost $330,000 would be reported as an asset on the balance sheet. 70) C An asset is an economic resource presently controlled by the company; it has measurable value and is expected to benefit the company by producing cash inflows or reducing cash outflows in the future. The building supplies on hand that cost $150,000 would be reported as an asset on the balance sheet. 71) D
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The company's profits are accumulated in Retained Earnings until a decision is made to distribute them to stockholders in what is called a dividend. Dividends are not an expense incurred to generate earnings and, as a result, are not reported on the income statement. Rather, a dividend is an optional distribution of earnings to stockholders, approved by the company's board of directors. Dividends are reported as a reduction in Retained Earnings on the statement of retained earnings. 72) D The basic accounting equation is: Assets = Liabilities + Stockholders' Equity. It can be rearranged algebraically as Liabilities = Assets − Stockholders' Equity or as Assets = Liabilities − Stockholders' Equity. 73) B Stockholders’ equity = Assets − Liabilities Beginning stockholders’ equity = $866,000 − $743,000 = $123,000 Change in stockholders’ equity = Change in assets − Change in liabilities = $58,600 − $24,300 = $34,300 Ending stockholders’ equity = Beginning stockholders’ equity + Change in stockholders’ equity = $123,000 + $34,300 = $157,300 74) A Stockholders' equity = Assets − Liabilities Beginning stockholders' equity = $430,000 − $370,000 = $60,000 Change in stockholders' equity = Change in assets − Change in liabilities = $29,000 − $12,000 = $17,000 Ending stockholders' equity = Beginning stockholders' equity + Change in stockholders' equity = $60,000 + $17,000 = $77,000 75) B Version 1
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Assets = Liabilities + Stockholders' Equity Change in Assets = Change in Liabilities + Change in Stockholders' Equity = ($50,000) + $10,000 = ($40,000) 76) C Total assets = Total liabilities + Total stockholders’ equity $181,000 = ($64,500 + Notes Payable) + ($12,500 + $28,500) Notes Payable = $181,000 − $64,500 − $12,500 − $28,500 = $75,500 77) C Total assets = Total liabilities + Total stockholders' equity $352,000 = ($128,000 + Notes Payable) + ($24,000 + $56,000) Notes Payable = $352,000 − $128,000 − $24,000 − $56,000 = $144,000 78) B The basic accounting equation can also be thought of as follows: Change in Assets = Change in Liabilities + Change in Stockholders' Equity Change in Stockholders' Equity = Change in Assets − Change in Liabilities = $112,000 − $76,000 = $36,000 Since there were no dividends and no changes in the common stock, the change in stockholders' equity must equal net income. 79) B Assets = Liabilities + Stockholders’ equity Liabilities = Assets − Stockholders’ equity Change in liabilities = Change in assets − Change in stockholders’ equity = $55,000 − $20,000 = $35,000 80) B
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Assets = Liabilities + Stockholders' equity Liabilities = Assets − Stockholders' equity Change in liabilities = Change in assets − Change in stockholders' equity = $110,000 − $40,000 = $70,000 81) A Of the $387,800 of Sales Revenue, customers have paid the company only $306,000, which leaves a balance of Accounts Receivable of $81,800. 82) D Of the $772,000 of Sales Revenue, customers have paid the company only $606,000, which leaves a balance of Accounts Receivable of $166,000. 83) B Net income = Revenues − Expenses Expenses = Net income − Revenues $16 million − $11 million = $5 million 84) B Net income = Revenues − Expenses Expenses = Net income − Revenues $24 million − $6 million = $18 million 85) A Assets = Liabilities + Stockholders' Equity Assets = Liabilities + (Common Stock + Retained Earnings) Retained Earnings = Assets − Liabilities − Common Stock = $85,000 − $35,000 − $40,000 = $10,000 86) C
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The income statement would report the Sales Revenue earned of $12 million. The amount still owed by customers of $4.00 million (or $12 million − $8.00 million) would be reported as Accounts Receivable, an asset, on the balance sheet. 87) D The income statement would report the Sales Revenue earned of $16.5 million. The amount still owed by customers of $5.25 million (or $16.5 million − $11.25 million) would be reported as Accounts Receivable, an asset, on the balance sheet. 88) A The statement of retained earnings sets for the following equation: Beginning Retained Earnings + Net Income − Dividends = Ending Retained Earnings 89) C The statement of retained earnings reports the changes in retained earnings during the period; these changes consist of net income and dividends. 90) A Retained earnings is increased by net income and decreased by dividends. Dividends paid to shareholders appear in the cash flow from financing activities on the statement of cash flows. Only revenues and expenses appear on the income statement. 91) C
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Net income equals the difference between revenues and expenses. Dividends are not expenses. Rather, dividends are an optional distribution of earnings to stockholders and, as such, they are reported on the statement of retained earnings. Income tax expense is reported on the income statement; a change in the company's income taxes would affect net income. Sales of a company's product are revenue on the income statement; and a change in the selling price would affect net income. Advertising expense is reported on the income statement; the expense incurred to advertise a new product would affect net income. Since dividends are not reported on the income statement, paying a dividend to stockholders would not affect net income. 92) B Supplies that have been used in Year 2 are reported as an expense on the income statement for Year 2 (even though they were purchased in Year 1). Supplies used in Year 1 would be reported as an expense on the income statement for Year 1 (rather than Year 2). Dividends are reported on the statement of retained earnings rather than on the income statement. Accounts Receivable are reported on the balance sheet rather than on the income statement. 93) A Total revenues = Sales Revenues + Service Revenue = $3,000,000 + $810,200 = $3,810,200 Other selling and administrative expenses = Total expenses − All other expenses = $3,445,600 − $1,314,900 − $482,200 − $225,600 − $117,700 − $253,700 = $1,051,500 Net Income = Revenues − Expenses = $3,810,200 − $3,445,600 = $364,600 94) D
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The account, Retained Earnings, is a component of stockholders' equity. It does not represent the amount of cash that a company has at a point in time. 95) A Although Common Stock is part of stockholders' equity; it is not part of Retained Earnings. Ending Retained Earnings = Beginning Retained Earnings + Net Income − Dividends = $80,000 + $50,000 − $5,000 = $125,000 96) B The change in cash is reported on the statement of cash flows. The change in retained earnings (rather than the change in cash) is reported on the statement of retained earnings. Both the statement of cash flows and the income statement cover a specified period of time. The income statement reports the results of operations and the statement of cash flows reports the cash flows from operating activities. 97) B The statement of retained earnings reports the way that net income (profits) and distributions to stockholders (dividends) affect the financial position of the company during the period. Retained earnings are not an estimate of the value of the company's assets. The statement of cash flows shows cash inflows and outflows. Revenues and expenses are reported on the income statement. 98) C
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Since dividends are subtracted in arriving at the ending amount of retained earnings, they are shown in parentheses. A double underline is used for the final totals on the balance sheet, which include "Total Assets" and "Total Liabilities and Stockholders' Equity." Dollar signs appear at the top and bottom of each column of numbers on a financial statement. The order of items in the heading of each financial statement is as follows: the name of the business, the title of the report, and the time period covered by, or the point of time of the financial statement. 99) C Dividends are not expenses. Rather, dividends are an optional distribution of earnings to stockholders, approved by the company's board of directors. 100) B Companies are allowed to choose a calendar or fiscal year-end. A calendar year is a 12-month period ending on December 31, and a fiscal year is a 12-month period ending on a day other than December 31. 101) C The heading of a financial statement identifies who, what, and when: the name of the business, the title of the report, and the time period covered by, or the point of time of, the financial statement. 102) A If a company borrows from a bank, it would owe a liability called a Notes Payable. This particular name is used because banks require borrowers to sign a legal document called a note that describes details about the company's promise to repay the bank. 103) D
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Any borrowing from banks, repaying bank loans, receiving cash from stockholders for company stock, or paying dividends to stockholders is considered a financing activity. Since the company would receive cash as a result of the borrowing, the amount would be reported as a cash inflow. 104) A Statement of Profit and Loss is an alternative term for the income statement. 105) C The Income Statement, Statement of Retained Earnings, and the Statement of Cash Flows are prepared for a period of time. The Balance Sheet is prepared as of a point in time. 106) C The balance sheet reports assets (such as Cash and Accounts Receivable), liabilities (such as Accounts Payable) and stockholders' equity. Advertising Expense is an expense reported on the income statement. 107) A Since the expense was incurred (that is, the rent/building was used), the related $5,000 should be included in the amount of Rent Expense reported on the income statement for Year 5. (Note that the unpaid amount of $5,000 should be included in Accounts Payable in the liabilities section of the balance sheet at the end of Year 5.) 108) A Revenue is reported on the income statement when the goods or services are provided (when it is earned) and expenses are reported when they are incurred. Net Income = Revenue − Expenses = $101,000 − $70,100 = $30,900 109) D Version 1
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Revenue is reported on the income statement when the goods or services are provided (when it is earned) and expenses are reported when they are incurred. Net Income = Revenue − Expenses = $80,000 − $56,000 = $24,000 110) A Ending Cash appears on the balance sheet and the statement of cash flows. Ending Retained Earnings appears on the balance sheet and the statement of retained earnings. 111) D The unpaid wages of $1,000 are reported as a liability, called Salaries and Wages Payable, on the balance sheet. (Note that Salaries and Wages Expense of $10,000 will be reported on the income statement.) 112) D Net income is the bottom line on the income statement. Net income is also added to beginning retained earnings on the statement of retained earnings. 113) C Stockholders' equity represents the owners' claims on the business. These claims arise for two reasons. First, the owners have a claim on amounts they contributed directly to the company in exchange for its stock (Common Stock). Second, the owners have a claim on amounts the company has earned through profitable business operations (Retained Earnings). A company's profits are accumulated in Retained Earnings until a decision is made to distribute them to stockholders in what is called a dividend. 114) D The income statement reports revenues earned, expenses incurred, and net income (the difference). 115) A Version 1
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Ending Cash = Beginning cash + Cash provided by (used in) operating activities + Cash provided by (used in) investing activities + Cash provided by (used in) financing activities = $15,900 + $17,600 − $7,300 − $1,800 = $24,400 116) D Ending Cash = Beginning cash + Cash provided by (used in) operating activities + Cash provided by (used in) investing activities + Cash provided by (used in) financing activities = $28,000 + $33,000 − $16,800 − $5,800 = $38,400 117) C Accounts Receivable, Supplies, and Cash are assets. Retained Earnings is not an asset; it is a component of stockholders' equity on the balance sheet. 118) B Accounts Payable, Notes Payable, and Salaries and Wages Payable are liabilities. Common Stock is not a liability; it is a component of stockholders' equity on the balance sheet. 119) B Change in Cash = Cash provided by (used in) operating activities + Cash provided by (used in) investing activities + Cash provided by (used in) financing activities = $30,200 + $31,200 − $43,800 = $17,600. 120) A Change in Cash = Cash provided by (used in) operating activities + Cash provided by (used in) investing activities + Cash provided by (used in) financing activities = $34,800 + $36,000 − $54,000 = $16,800 121) B
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Revenue is $100,000. Accounts Receivable at the end of the current period is $100,000 since customers did not pay until the next period. Accounts Payable is not affected. 122) D Investing activities are transactions of buying or selling productive assets with long lives. Transactions with lenders and stockholders are financing activities. Operating activities are directly related to running the business to earn profit. 123) B The separate entity assumption requires that a business's financial reports include only the activities of the business and not the personal dealings of its stockholders. 124) D Accounts Receivable, Equipment, and Cash are assets reported on the balance sheet. Accounts Payable is a liability, while Retained Earnings is a component of stockholders' equity on the balance sheet. Sales Revenue and Supplies Expense are reported on the income statement. 125) C Accounts Payable, Notes Payable, and Salaries and Wages Payable are liabilities reported on the balance sheet. Common Stock and Retained Earnings are component of stockholders' equity on the balance sheet. Supplies Expense is an expense reported on the income statement. Accounts Receivable is an asset reported on the balance sheet. 126) C Assets are reported on the balance sheet; the income statement reports revenues and expenses. 127) D
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Net Income = Revenues − Expenses Assets = Liabilities + Stockholders' Equity Total stockholders' equity = Common Stock + Retained Earnings = $75,000 + $45,000 = $120,000 128) B Expenses on the income statement would include the amount of Supplies Expense that was incurred by using supplies. Cash is reported as an asset on the balance sheet. Dividends are reported on the statement of retained earnings, not on the income statement. The amount of unpaid wages would be a liability called Salaries and Wages Payable on the balance sheet. 129) A Revenue earned this year from the sale of goods is reported on the income statement for the current year, even if customers have not yet paid for the goods. The revenue earned from selling goods to customers last year would have been reported as revenue on last year's income statement. Borrowing money from the bank and issuing common stock are not transactions that are reported on the income statement. 130) B The ending retained earnings of the prior year becomes the beginning retained earnings of the current year. 131) C
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First, calculate net income: Net income = Revenues − Expenses = $240,000 − $180,000 = $60,000 Then, use the statement of retained earnings equation to determine ending Retained Earnings: Ending Retained Earnings = Beginning Retained Earnings + Net Income − Dividends = $0 + $60,000− $6,000 = $54,000 132) A Cash paid to suppliers and employees appears in the cash flows from operating activities section of the statement of cash flows. Cash paid to purchase equipment appears in the cash flow from investing activities section of the statement of cash flows. Both cash paid for notes payable and dividends appears in the cash flow from financing activities section of the statement of cash flows. 133) D Net cash flow from operating activities = Cash collected from customers − Cash paid to suppliers and employees − Cash paid for other operating activities Cash paid for other operating activities = Net cash flow from operating activities − Cash collected from customers + Cash paid to suppliers and employees = $10,000 − $24,000 + $14,000 = $0 134) A Net cash flow from (used by) financing activities = Cash paid on notes payable + Cash paid for dividends = ($64,000) + ($20,000) = ($84,000) 135) B
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Ending Cash = Beginning cash + Increase (Decrease) in Cash Beginning cash = Ending Cash − Increase (Decrease) in cash = $244,000 − $74,000 = $170,000 136) B Net Income = Revenue − Expenses = $6,600 − $3,800 = $2,800 137) A Net Income = Revenue − Expenses = $2,500 − $1,500 = $1,000 138) D Net Income = Revenue − Expenses = $5,300 − $3,150 = $2,150 Ending retained earnings = Beginning retained earnings + Net income − Dividends = $7,000 + $2,150 − $1,300 = $7,850 139) B Net Income = Revenue − Expenses = $2,500 − $1,500 = $1,000 Ending retained earnings = Beginning retained earnings + Net income − Dividends = $5,000 + $1,000 − $500 = $5,500 140) A Ending liabilities = Beginning liabilities + Increase (Decrease) in liabilities = $32,000 + $3,100 = $35,100 141) B
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Ending liabilities = Beginning liabilities + Increase (Decrease) in liabilities = $15,000 + $1,500 = $16,500 142) A Assets increased during the year by $6,100 (revenues paid in cash) and decreased by $2,100 (dividends paid in cash). Ending assets = Beginning assets + Increase (Decrease) in assets = $115,000 + $6,100 − $2,100 = $119,000 143) C Assets increased during the year by $2,500 (revenues paid in cash) and decreased by $500 (dividends paid in cash). Ending assets = Beginning assets + Increase (Decrease) in assets = $50,000 + $2,500 − $500 = $52,000 144) A Expenses are comprised of Wages Expense, Advertising Expense, and Rent Expense Net income = Revenue − Expenses = $52,350 − ($8,100 + $5,100 + $10,100) = $29,050 145) A Expenses are comprised of Wages Expense, Advertising Expense, and Rent Expense Net income = Revenue − Expenses = $53,000 − ($8,000 + $5,000 + $10,000) = $30,000 146) B Total Assets = Cash + Accounts Receivable + Supplies = $71,700 + $29,700 + $5,700 = $107,100 147) B Total Assets = Cash + Accounts Receivable + Supplies = $70,000 + $28,000 + $4,000 = $102,000 148) D Version 1
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Expenses are comprised of Wages Expense, Advertising Expense, and Rent Expense Net income = Revenue − Expenses = $45,850 − ($9,100 + $6,100 + $11,100) = $19,550 Ending retained earnings = Beginning retained earnings + Net income − Dividends = $18,100 + $19,550 − $0 = $37,650 Ending stockholders’ equity = Common stock + Ending retained earnings = $51,000 + $37,650 = $88,650 149) C Expenses are comprised of Wages Expense, Advertising Expense, and Rent Expense Net income = Revenue − Expenses = $53,000 − ($8,000 + $5,000 + $10,000) = $30,000 Ending retained earnings = Beginning retained earnings + Net income − Dividends = $17,000 + $30,000 − $0 = $47,000 Ending stockholders' equity = Common stock + Ending retained earnings = $40,000 + $47,000 = $87,000 150) A Assets = Liabilities + Stockholders’ Equity Stockholders’ Equity = Assets − Liabilities = $100,000 − $75,000 = $25,000 151) B Assets = Liabilities + Stockholders' Equity Stockholders' Equity = Assets − Liabilities = $120,000 − $90,000 = $30,000 152) B Version 1
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Beginning of year: Change in Assets = Change in Liabilities + Change in Stockholders’ Equity Change in Stockholders’ Equity = Change in Assets − Change in Liabilities = $15,600 − ($10,800) = $15,600 + $10,800 = $26,400 153) B Beginning of year: Change in Assets = Change in Liabilities + Change in Stockholders' Equity Change in Stockholders' Equity = Change in Assets − Change in Liabilities = $14,400 − ($10,800) = $14,400 + $10,800 = $25,200 154) C Ending retained earnings = Beginning retained earnings + Net income − Dividends = $0 + $20,600 − $12,300 = $8,300 155) B Ending retained earnings = Beginning retained earnings + Net income − Dividends = $0 + $20,000 − $12,000 = $8,000 156) A Ending retained earnings = Beginning retained earnings + Net income − Dividends Year 1: = $0 + $20,400 − $12,200 = $8,200 Year 2: = $8,200 + $34,400 − $5,200 = $37,400 157) A
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Ending retained earnings = Beginning retained earnings + Net income − Dividends Year 1: = $0 + $20,000 − $12,000 = $8,000 Year 2: = $8,000 + $34,000 − $5,000 = $37,000 158) B Total revenues = Service Revenue + Other Revenue = $10,000 + $300 = $10,300 Total expenses = Salaries Expense + Interest Expense + Income Tax Expense + Selling & Administrative Expenses + Other Expenses + Other Operating Expenses = $3,000 + $75 + $400 + $2,500 + $500 + $2,000 = $8,475 Net income = Revenue − Expenses = $10,300 − $8,475 = $1,825 159) A Total Assets = Cash + Accounts Receivable + Other assets + Property and Equipment + Supplies = $2,200 + $800 + $2,500 + $11,000 + $300 = $16,800 160) B Total liabilities = Accounts Payable + Notes Payable + Other Liabilities = $2,075 + $5,000 + $3,000 = $10,075 161) D
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Total revenues = Service Revenue + Other Revenue = $10,000 + $300 = $10,300 Total expenses = Salaries Expense + Interest Expense + Income Tax Expense + Selling & Administrative Expenses + Other Expenses + Other Operating Expenses = $3,000 + $75 + $400 + $2,500 + $500 + $2,000 = $8,475 Net income = Revenue − Expenses = $10,300 − $8,475 = $1,825 Ending Retained Earnings = Beginning Retained Earnings + Net income − Dividends = $4,800 + $1,825 − $1,900 = $4,725 162) B Assets = Liabilities + Stockholders’ Equity Stockholders’ Equity = Assets − Liabilities = $705,000 − $352,500 = $352,500 Stockholders’ Equity = Common Stock + Retained earnings. Retained Earnings = Stockholders’ Equity − Common Stock = $352,500 − $205,000 = $147,500 163) A Assets = Liabilities + Stockholders' Equity Stockholders' Equity = Assets − Liabilities = $840,000 − $420,000 = $420,000 Stockholders' Equity = Common Stock + Retained earnings. Retained Earnings = Stockholders' Equity − Common Stock = $420,000 − $240,000 = $180,000 164) B
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Change in Assets = Change in Liabilities + Change in Stockholders’ Equity Change in Stockholders’ Equity = Change in Assets − Change in Liabilities = $418,000 − ($59,000) = $418,000 + $59,000 = $477,000 165) B Change in Assets = Change in Liabilities + Change in Stockholders' Equity Change in Stockholders' Equity = Change in Assets − Change in Liabilities = $480,000 − ($60,000) = $480,000 + $60,000 = $540,000 166) B Change in Assets = Change in Liabilities + Change in Stockholders’ Equity Change in Stockholders’ Equity = Change in Assets − Change in Liabilities = $403,000 − ($51,500) = $403,000 + $51,500 = $454,500 Change in Stockholders’ Equity = Change in Common Stock + Change in Retained Earnings Change in Retained Earnings = Change in Stockholders’ Equity − Change in Common Stock = $454,500 − $278,000 = $176,500 Change in Retained Earnings = Net income = Dividends Net income = Change in Retained Earnings − Dividends = $176,500 − $0 = $176,500 167) C
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Change in Assets = Change in Liabilities + Change in Stockholders' Equity Change in Stockholders' Equity = Change in Assets − Change in Liabilities = $480,000− ($60,000) = $480,000 + $60,000 = $540,000 Change in Stockholders' Equity = Change in Common Stock + Change in Retained Earnings Change in Retained Earnings = Change in Stockholders' Equity − Change in Common Stock = $540,000 − $330,000 = $210,000 Change in Retained Earnings = Net income = Dividends Net income = Change in Retained Earnings − Dividends = $210,000 − $0 = $210,000 168) A Cash flows from operating activities = Cash received from customers − Cash paid to suppliers and employees = $10,000 − $5,000 = $5,000 169) B Cash flows from (used in) investing activities = Cash used to purchase equipment = ($40,000) 170) C Cash flows from (used in) financing activities = Cash received for stock issuance + Cash borrowed from bank − Cash dividends paid to stockholders = $30,000 + $20,000 − $1,000 = $49,000 171) D Total Assets = Total Liabilities + Total Stockholders' Equity Total Liabilities = Total Stockholders' Equity − Total Assets = $3,347,700 − $1,470,700 = $1,877,000 Version 1
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172) B Total Assets = Total Liabilities + Total Stockholders' Equity Total Liabilities = Total Stockholders' Equity − Total Assets = $3,347,700 − $1,470,700 = $1,877,000 Total Liabilities = Accounts Payable + Notes Payable Notes Payable = Total Liabilities − Accounts Payable = $1,877,000 − $1,439,200 = $437,800 173) C The Accounts Receivable of $310,500 represents the amounts owed by customers. Retained Earnings is properly classified as a component of Stockholders' Equity. Retained Earnings represents the cumulative amount of a company's profits (or net income) less the cumulative amount of dividends that have been distributed to stockholders. The amount of retained earnings reported on a balance sheet represents the retained earnings at the end (rather than the beginning) of the year. 174) A Karen’s Bakery will report Accounts Payable, which is the amount owed to suppliers for prior credit purchases (on account), as a liability on its balance sheet. 175) D Net income is reported on both the income statement and the statement of retained earnings. Cash is reported on the balance sheet and statement of cash flows. Revenues and expenses are reported only on the income statement. 176) D Lolly’s Sparkling Waters is the seller and thus will report $380 of Accounts Receivable, which is a right to collect for sales/services provided on account. 177) B
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Accounts Receivable represent the seller's right to collect from customers for sales and services provided on credit. 178) A Investing activities involve buying and selling productive resources with long lives (such as buildings, land, equipment, and software), purchasing investments, and lending to others. A cash purchase of a long-lived asset would be reported as a negative number representing an outflow of cash. 179) C Any borrowing from banks, repaying bank loans, receiving cash from stockholders for company stock, or paying dividends to stockholders is considered a financing activity. A cash payment to banks or stockholders would be reported as a negative number representing an outflow of cash. 180) C Any borrowing from banks, repaying bank loans, receiving cash from stockholders for company stock, or paying dividends to stockholders is considered a financing activity. 181) C Any borrowing from banks, repaying bank loans, receiving cash from stockholders for company stock, or paying dividends to stockholders is considered a financing activity. 182) A Any borrowing from banks, repaying bank loans, receiving cash from stockholders for company stock, or paying dividends to stockholders is considered a financing activity. 183) A
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Investing activities involve buying and selling productive resources with long lives (such as buildings, land, equipment, and software), purchasing investments, and lending to others. Operating activities are directly related to running the business to earn profit. They include selling apps and services, paying employee wages, buying advertising, renting a building, obtaining insurance coverage, and so on. Any borrowing from banks, repaying bank loans, receiving cash from stockholders for company stock, or paying dividends to stockholders is considered a financing activity. 184) D Expenses equal the amount incurred, regardless of whether the cash has been paid. As such, Salaries and Wages Expense, which is reported on the income statement, equals $10,000. The amount owed to employees of $2,000 will be reported as Salaries and Wages Payable, a liability, on the balance sheet. The cash payment of $8,000 would have decreased the company's cash account. 185) C The body of an income statement has three major captions—revenues, expenses, and net income—corresponding to the equation for the income statement (Revenues − Expenses = Net Income). Individual types of revenues and expenses are reported under the revenue and expense headings. 186) A The unit of measure assumption states that results of business activities should be reported in an appropriate monetary unit, which in the United States is the U.S. dollar. 187) B Total liabilities of $1,877,000 are greater than $1,470,700 of total stockholders' equity. As a result, creditors provided more financing than owners. Version 1
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188) B Investors expect a return on their contributions to a company. The return may be immediate (through dividends) or long-term (through selling stock certificates at a price higher than their original cost). 189) A Creditors are mainly interested in assessing whether the company generating enough cash to make payments on its loan and is the company has enough assets to cover its liabilities. 190) A Creditors are interested in whether the company's cash flows from operating activities are sufficient to make payments on loans and other liabilities. Investors look for intermediate and long-term returns on their contributions to the company, through dividends and stock price increases. 191) C Investors and creditors look at the balance sheet to see whether the company owns enough assets to pay all that it owes to creditors. The income statement is used to determine its profitability. The statement of cash flows indicates the cash flows from operating activities. 192) D Given the downward trend in sales and net income, owners may conclude that the company will be less likely to distribute dividends. Creditors are likely to conclude that the risk of lending to the company is increasing (rather than declining) and might demand a higher (rather than be willing to accept a lower) interest rate on loans. Investors are likely to conclude that the stock price is likely to decline (rather than rise), making the company less (rather than more) attractive as a potential investment. Customers are legally required to pay amounts they owe to the company when they are due; customers do not have the options of changing those terms. Version 1
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193) A The return to investors may be immediate (through dividends) or longterm (through selling stock certificates at a price higher than their original cost). As a result, when choosing between a company that pays steady dividends and one that retains its earnings to support future growth, investors won't always choose the company that pays steady dividends. They might be interested in longer-term returns. 194) A The Statement of Retained Earnings reports the amount of cash dividends paid to stockholders. 195) B Creditors are mainly interested in assessing whether the company is generating enough cash to make payments on its loan and if the company has enough assets to cover its liabilities. The balance sheet reports the amount of assets, liabilities and stockholders' equity and could be used to evaluate the amount of cash and the amount of liabilities to see whether the company's resources are sufficient to pay creditors. 196) C In the long run, fraud harms most individuals and organizations. When it is uncovered, the corporation's stock price drops dramatically. 197) C The usefulness of financial information is enhanced when it is timely, verifiable, comparable, and understandable. Information is verifiable if others, such as external auditors, reach similar values using similar methods. Information is timely if it is available in time to influence decision makers. It is comparable if the same accounting principles are used over time and across companies. It is understandable if reasonably informed users can comprehend and interpret it. 198) D Version 1
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The AICPA (American Institute of Certified Public Accountants) requires its members to adhere to a Code of Professional Conduct. 199) C Currently, the Financial Accounting Standards Board (FASB) has the primary responsibility for setting the underlying rules of accounting in the United States. As a group, these rules are called Generally Accepted Accounting Principles, or GAAP for short. 200) B Following rules approved by the Public Company Accounting Oversight Board (PCAOB) and other accounting bodies, these auditors report whether, beyond reasonable doubt, the financial statements represent what they claim to represent and whether they comply with GAAP. 201) D It would be unethical to not report an overpayment of wages to your employer. Companies may retain profits, which help the company grow, which may cause the stock price to increase, benefiting stockholders. Rounding amounts reported on the financial statements is a common practice and does not lead to material misstatement. An unintentional mistake is not considered unethical. 202) A Auditors report whether, beyond reasonable doubt, the financial statements represent what they claim to represent and whether they comply with GAAP. The auditors' report does not include recommendations about stock purchases. The company's dividend policy and future plans are not part of the auditors' report. 203) C
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A company's managers have primary responsibility for following GAAP. To provide additional assurance, some private companies and all public companies hire independent auditors to scrutinize their financial records. Auditors report whether, beyond reasonable doubt, the financial statements represent what they claim to represent and whether they comply with GAAP. The IRS, the SEC, and the FASB do not perform examinations to determine whether a company's financial statements have been prepared in accordance with GAAP. 204) D Currently, the Financial Accounting Standards Board (FASB) has the primary responsibility for setting the underlying rules of accounting in the United States. As a group, these rules are called Generally Accepted Accounting Principles, or GAAP for short. 205) D The accounting rules in the United States are similar, for the most part, to those used elsewhere in the world, but some important differences exist. The FASB is working alongside the International Accounting Standards Board (IASB) to eliminate these differences so that investors can more easily compare the financial statements of companies from different countries. 206) C Generally Accepted Accounting Principles (GAAP) are rules of financial accounting created by the Financial Accounting Standards Board for use in the United States. The main goal of GAAP is to ensure companies produce financial information that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the companies. 207) C
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Information is a faithful representation if it fully depicts the economic substance of business activities. The AICPA (rather than the FASB) requires its members to adhere to a code of professional conduct. The Sarbanes-Oxley Act does require companies to maintain an audited system of internal controls. The FASB is working alongside the International Accounting Standards Board (IASB) to eliminate these differences so that investors can more easily compare the financial statements of companies from different countries. 208) D Financial information possesses the characteristic of representation faithfulness if it depicts the economic substance of business activities. The separate entity assumption means that only the activities of the business are included in its financial reports. Comparability refers to the ability of financial information to be compared across businesses because similar accounting methods have been applied. The unit of measure assumption states that the results of business activities are reported in an appropriate monetary unit. 209) C Information is relevant if it makes a difference in decision making and it is a faithful representation if it fully depicts the economic substance of business activities. 210) D For financial information to be judged useful, it must possess two fundamental characteristics: relevance and faithful representation. 211) D Useful financial information is comparable, verifiable, timely, and understandable. 212) C
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GAAP are used in the U.S, while other countries have their own national set of accounting standards. Many countries permit or require the use of IFRS. The FASB is working alongside the International Accounting Standards Board (IASB) to eliminate these differences so that investors can more easily compare the financial statements of companies from different countries. 213) C U.S. GAAP is to accountants and auditors what the criminal code is to lawyers and the public. 214) A When faced with an ethical dilemma, an accountant should identify who will be affected by the situation, identify and evaluate the alternative courses of action, and choose the alternative that is the most ethical. 215) B The Sarbanes-Oxley Act is a set of laws established to strengthen corporate reporting in the United States. 216) B For financial information to be judged useful, it must possess two fundamental characteristics: relevance and faithful representation. Information is relevant if it makes a difference in decision making and it is a faithful representation if it fully depicts the economic substance of business activities. The usefulness of financial information is enhanced when it is timely, verifiable, comparable, and understandable. Detailed information is not necessarily useful. 217) D Information is relevant if it makes a difference in decision making and it is a faithful representation if it fully depicts the economic substance of business activities. 218) A
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A company's managers have primary responsibility for following GAAP. To provide additional assurance, some private companies and all public companies hire independent auditors to scrutinize their financial records. 219) C A company's managers have primary responsibility for following Generally Accepted Accounting Principles (GAAP). To provide additional assurance, some private companies and all public companies hire independent auditors to scrutinize their financial records. 220) A The main goal of GAAP and IFRS is to ensure companies produce financial information that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the companies. 221) D Currently, the Financial Accounting Standards Board (FASB) has the primary responsibility for setting the underlying rules of accounting in the United States. As a group, these rules are called Generally Accepted Accounting Principles, or GAAP for short. 222) A In response to frauds, the government introduced new laws through the Sarbanes-Oxley Act. 223) B Sarbanes-Oxley Act (SOX) is a set of laws established to strengthen corporate reporting in the United States.
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CHAPTER 1: PROBLEM MATERIAL SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 1) Choose the appropriate letter to match the characteristics with the type of company. A given characteristic may match more than one type of company. CHARACTERISTIC 1. ________ Issues shares of stock that are traded on a stock exchange such as the NYSE 2. ________ The owner(s) of the business are personally liable for the debts of the company 3. ________ Shares of stock must be purchased directly from current owners and not sold on an exchange 4. ________ Can raise more financial capital by selling stock to the greatest number of investors 5. ________ The easiest form of business to start 6. ________ The business ceases to exist upon the departure of one of the owners 7. ________ The owner(s) pay taxes on the profits of the business TYPE OF COMPANY A. Partnership B. Publicly traded corporation C. Privately traded corporation D. Sole Proprietorship
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2) Match the business activity to the appropriate category. The purchase of a new line of assembly equipment Company payment of a dividend The purchase of office supplies The purchase of an online advertising slot time by the company The building of a new factory facility Company repayment of the principal amount of a bank loan A) Financing activity B) Operating activity C) Investing activity
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3) Choose the appropriate letter to match the terms to the blanks below to complete the relevant equation for each financial statement. FINANCIAL STATEMENT EQUATION Balance Sheet _____ = _____ + _____ Income Statement _____ = _____ − _____ Statement of Retained Earnings _____ = _____ + _____ − _____ Statement of Cash Flows _____ = _____ + _____ + ____ + _____ TERM A. Cash at beginning of year B. Net cash flow from operating activities C. Balance of retained earnings from previous year D. Net cash flow from investing activities E. Liabilities F. Net cash flow from financing activities G. Balance of retained earnings at end of year H. Net income I. Revenue J. Assets K. Stockholders' equity L. Expenses M. Cash at end of year N. Dividends paid
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4) Each line item in the statement of retained earnings can appear on another financial statement. Choose the appropriate letter to match the item in the statement of retained earnings with the related financial statement. ITEM ON STATEMENT OF RETAINED EARNINGS 1. ________ Retained earnings, January 1, Year 3 2. ________ Net income for Year 3 3. ________ Cash dividends paid for Year 3 4. ________ Retained earnings, December 31, Year 3 FINANCIAL STATEMENT A. Balance Sheet at end of Year 3 B. Statement of Cash Flows for Year 3 C. Income Statement for Year 2 D. Balance Sheet at end of Year 2 E. Income Statement for Year 3
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5) Match the term to the appropriate definition. (There are more definitions than terms.) Investors Audit Balance Sheet Operating Activities Unit of Measure Assumption Retained Earnings Investing Activities Income Statement A) A procedure by which independent evaluators assess the accounting procedures and financial reports of a company. B) An example of external users of financial statements. C) Activities directly related to running the business to earn a profit. D) When a company acquires money from investors. E) A financial statement that summarizes a company's past and current cash situation. F) Transactions with lenders (borrowing and repaying cash) and stockholders (selling company stock and paying dividends). G) The total amount of profits that are kept by the company. H) The idea that the financial statements of a company include the results of only that company's business activities. I) The idea that a company should report its financial data in the relevant currency. J) Borrowing money from lenders. K) A financial statement showing a company's assets, liabilities and stockholders' equity. L) A financial statement that shows a company's revenues and expenses. M) An example of an internal user of financial statements.
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6) Match the acronym with the description that best reflects it. (There are more descriptions than acronyms.) SEC GAAP PCAOB FASB IASB SOX AICPA A) The U.S. agency that must approve mergers between very large publicly owned corporations. B) The U.S. Board that approves the rules for auditing publicly owned companies. C) The organization that establishes business laws in the U.S. D) The Board that establishes the accounting rules that govern American owned corporations. E) This organization regulates activities associated with the stock market such as the reporting of financial data by publicly owned companies. F) The national professional organization of accountants. G) Rules of financial accounting created by the FASB for use in the United States. H) A set of laws established to strengthen corporate reporting in the United States. I) The Board that establishes international accounting standards. J) The U.S. agency that certifies foreign accounting firms to practice in the U.S.
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 7) The table shows financial data for Purrfect Pets, Incorporated as of June 30, Year 3. Accounts Receivable Retained Earnings Inventories Other Assets Accounts Payable Equipment Cash Common Stock Notes Payable
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$ 419,200 117,900 58,400 69,400 349,200 118,500 732,600 662,100 268,900
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Required: Prepare a balance sheet using these data.
8)
The following partially completed balance sheet is missing numerical data. Purrfect Pets, Incorporated Balance Sheet September 30, Year 3 Assets Cash Accounts Receivable Inventories Equipment Other Assets Total Assets Liabilities
$ 743,800 Unknown 54,900 119,300 71,400 Unknown
Accounts Payable Notes Payable Total Liabilities Stockholders' Equity
$ 342,500 Unknown 607,600
Common Stock Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity
662,100 Unknown 789,400 Unknown
Required: Fill in the missing items in the balance sheet.
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9) A list of Year 3 revenues and expenses for Green Thumb, Incorporated is provided below. Advertising and Promotion Expenses Income Tax Expense Interest Expense Other Expenses Other Selling & Administrative Expenses Sales Revenue Salaries and Wages Expense
$ 262,500 56,500 43,900 122,400 350,800 1,865,300 724,800
Required: a. Calculate the net income for Green Thumb, Incorporated for Year 3. b. Prepare a statement of retained earnings for Green Thumb, Incorporated for Year 3. Assume the company had retained earnings of $162,000 as of January 1, Year 3, and paid out $46,000 in dividends during Year 3.
10)
Each of the following independent companies is missing numerical data.
Required: Use your knowledge of the financial statement equations and their interrelationships to fill in the missing amounts.
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Company
Total Total Net Income Total Revenue Expenses (Loss) Assets s Vanilla $ $ Company 84,00 28,000 0 Chocolate, 140,00 (42,000 182,00 Incorporat 0 ) 0 ed Strawberry 42,00 14,000 84,000 Company 0
11)
Total Stockholders Liabilitie ’ Equity s $ $ 92,400 46,200 53,200
56,000
Use the following Year 3 data:
Other Selling and Administrative Expenses Other Expenses Sales Revenue Advertising and Promotion Expenses Salaries and Wages Expense Income Tax Expense Interest Expense
$ 1,050,300 247,600 4,885,300 552,500 2,524,400 166,500 113,900
Required: Prepare the annual income statement for Kvass, Incorporated
12) Following is a list of financial statement items and amounts for Vantage Service as of 12/31/Year 1, the end of its first year in operation. Accounts Receivable Accounts Payable
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$ 40,000 30,000
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Cash Common Stock Notes Payable Equipment Sales Revenue Fuel Expense Rent Expense Advertising Expense Salaries and Wages Expense Retained Earnings Dividends
10,000 20,000 20,000 50,000 100,000 15,000 20,000 5,000 20,000 ? 10,000
Required: 1.Prepare the income statement for the year ended December 31, Year 1. 2.Prepare the statement of retained earnings for the year ended December 31, Year 1. 3.Prepare the balance sheet for the year ended December 31, Year 1.
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Answer Key Test name: Chap 01_7e_Problems 1) 1. B, 2. A and D, 3. C, 4. B, 5. D, 6. A, 7. A and D 2) C) Investing activity A) Financing activity B) Operating activity B) Operating activity C) Investing activity A) Financing activity 3) Balance Sheet: J = E + K, Income Statement: H = I − L, Statement of Retained Earnings: G = C + H − N, Statement of Cash Flows: M = B + D+F+A 4) 1. D, 2. E and/or B, 3. B, 4. A
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5) Investors: B) An example of external users of financial statements. Audit: A) A procedure by which independent evaluators assess the accounting procedures and financial reports of a company. Balance Sheet: K) A financial statement showing a company's assets, liabilities and stockholders' equity. Operating Activities: C) Activities directly related to running the business to earn a profit. Unit of Measure Assumption: I) The idea that a company should report its financial data in the relevant currency. Retained Earnings G) The total amount of profits that are kept by the company. Investing Activities: F) Transactions with lenders (borrowing and repaying cash) and stockholders (selling company stock and paying dividends). Income Statement: L) A financial statement that shows a company's revenues and expenses. 6) SEC: E) This organization regulates activities associated with the stock market such as the reporting of financial data by publicly owned companies. GAAP: G) Rules of financial accounting created by the FASB for use in the United States. PCAOB: B) The U.S. Board that approves the rules for auditing publicly owned companies. FASB: D) The Board that establishes the accounting rules that govern American owned corporations. IASB: I) The Board that establishes international accounting standards. SOX: H) A set of laws established to strengthen corporate reporting in the United States. AICPA: F) The national professional organization of accountants. 7) Version 1
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Purrfect Pets, Incorporated Balance Sheet June 30, Year 3 Assets Cash Accounts Receivable Inventories Equipment Other Assets Total Assets
$ 732,600 419,200 58,400 118,500 69,400 $ 1,398,100
Liabilities Accounts Payable Notes Payable Total Liabilities Stockholders' Equity
$ 349,200 268,900 618,100
Common Stock Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders’ Equity
662,100 117,900 780,000 $ 1,398,100
8) Purrfect Pets, Incorporated Balance Sheet September 30, Year 3 Assets Cash Accounts Receivable Inventories Property, Plant and Equipment Other Assets Total Assets
$ 743,800 407,600 54,900 119,300 71,400 $ 1,397,000
Liabilities Accounts Payable Notes Payable Total Liabilities Stockholders' Equity
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$ 342,500 265,100 607,600
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Common Stock Retained Earnings Total Stockholders’ Equity
662,100 127,300 789,400
Total Liabilities and Stockholders’ Equity
$ 1,397,000
9) a. Net income = Revenues − Expenses = $1,865,300 − $262,500 − $56,500 − $43,900 − $122,400 − $350,800 − $724,800 = $304,400 b. GREEN THUMB, INCOPORATED Statement of Retained Earnings For the Year Ended December 31, Year 3 Retained Earnings, January 1, Year 3 Add: Net Income Subtract: Dividends Retained Earnings, December 31, Year 3
$ 162,000 304,400 (46,000) $ 420,400
10) Company
Total Total Net Income Total Revenue Expenses (Loss) Assets s Vanilla $ $ $ $ Company 84,00 56,000 28,000 138,60 0 0 Chocolate, 98,00 140,00 (42,000 182,00 Incorporat 0 0 ) 0 ed Strawberry 42,00 14,000 28,000 84,000 Company 0
Total Stockholders Liabilitie ’ Equity s $ $ 92,400 46,200 128,800
53,200
56,000
28,000
11) KVASS, INCORPORATED Income Statement For the Year Ended December 31, Year 3 Revenues Sales Revenue Expenses Salaries and Wages Expense
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$ 4,885,300
2,524,400 14
Advertising and Promotion Expenses Other Selling & Administrative Expenses Interest Expense Income Tax Expense Other Expenses Total Expenses Net Income
552,500 1,050,300 113,900 166,500 247,600 4,655,200 $ 230,100
12) 1. Vantage Service Income Statement For the Year Ended December 31, Year 1 Revenues Sales Revenue Expenses
$ 100,000
Fuel Expense Rent Expense Advertising Expense Wage Expense Total Expenses Net Income
15,000 20,000 5,000 20,000 60,000 $ 40,000
2. Vantage Service Statement of Retained Earnings For the Year Ended December 31, Year 1 Retained Earnings, January 1, Year 1 Add: Net Income Subtract: Dividends Retained Earnings, December 31, Year 1
$ 0 40,000 (10,000) $ 30,000
3. Vantage Service Balance Sheet December 31, Year 1 Assets Cash Accounts Receivable Equipment Total Assets
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$ 10,000 40,000 50,000 $ 100,000
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Liabilities Accounts Payable Notes Payable Total Liabilities Stockholders' Equity
$ 30,000 20,000 50,000
Common Stock Retained Earnings Total Equity Total Liabilities and Stockholders’ Equity
20,000 30,000 50,000 $ 100,000
Total Liabilities and Stockholders’ Equity = Total Assets Total Assets $100,000 − Liabilities $50,000 = Stockholders’ Equity $50,000 Stockholders’ Equity $50,000 = Common stock $20,000 + Retained Earnings Retained Earnings = $30,000 (which also matches the Statement of Retained Earnings)
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CHAPTER 2 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) A transaction is an exchange or event that directly affects the assets, liabilities, or stockholders' equity of a company. ⊚ true ⊚ false
2) General Motors (GM) signs a new labor agreement that its workers will receive a 5% wage increase next year. This transaction affects GM's financial statements in the current year. ⊚ true ⊚ false
3) If total assets decrease, then either total liabilities or total stockholders' equity must also decrease. ⊚ true ⊚ false
4) Goodrich, Incorporated signed an agreement to rent a warehouse from Ellie Company This is an example of a transaction that should not be recorded in the accounting system. ⊚ true ⊚ false
5)
A business is obligated to repay both debt and equity financing. ⊚ true ⊚ false
6) You are pleasantly surprised to discover that a popular actress appears on The Tonight Show wearing your company's jeans. As a result, your company's sales increase by $500,000 in the following weeks. When the actress first appeared on TV, you would have recorded an asset because the TV appearance was expected to bring future economic benefits to your company. ⊚ true ⊚ false
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7) Eagle Company used $50,000,000 of its cash to pay off debt, as a result, Eagle’s stockholders' equity will decrease $50,000,000. ⊚ true ⊚ false
8) Puffin, Incorporated issues $1,000,000 of new stock for cash. Puffin’s stockholders' equity does not change because as new shares are sold, the value of its existing shares falls. ⊚ true ⊚ false
9) The analyze-record-summarize process is applied only to daily transactions, month-end adjustments do not need to be analyzed and summarized. ⊚ true ⊚ false
10) The list of account names and reference numbers that the company will use when accounting for transactions is called the chart of accounts. ⊚ true ⊚ false
11)
A debit may increase or decrease an account, depending on the type of account. ⊚ true ⊚ false
12)
The normal balance of an account is on the same side that decreases the account. ⊚ true ⊚ false
13) If the total dollar value of debits in accounts receivable exceeds the total dollar value of credits in the same account , the ending balance will be a debit balance. ⊚ true ⊚ false
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14)
Every transaction increases at least one account and decreases at least one account. ⊚ true ⊚ false
15) SE.
An account increases on the same side as they appear in the accounting equation: A = L + ⊚ ⊚
true false
16) Journal entries show the effects of transactions on the elements of the accounting equation, as well as the account balances. ⊚ true ⊚ false
17) The general ledger is an internal report that lists all the accounts and their balances and is used to check that total debits equal total credits. ⊚ true ⊚ false
18)
A trial balance shows a subtotal for current assets and current liabilities. ⊚ true ⊚ false
19) When a company prepares a classified balance sheet, liability accounts must be shown in subcategories of current and noncurrent. ⊚ true ⊚ false
20) The trial balance is a financial statement that reports the assets, liabilities, and equity of a business at a point in time. ⊚ true ⊚ false
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21) The acquisition of inventory in an exchange for a company's stock would increase the current ratio of the company. ⊚ true ⊚ false
22) The current ratio can be used to evaluate a company's ability to pay liabilities in the short term, and in general, a higher ratio means better ability to pay. ⊚ true ⊚ false
23) If the debits equal the credits in the trial balance, it verifies that all transactions are accurate. ⊚ true ⊚ false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 24) Owners of a company: A) hold promissory notes as evidence of their ownership claim. B) are entitled to repayment of their investment. C) have a claim that is secondary to creditor's claims. D) have a claim equal to the amount of liabilities a company owes.
25) If a company borrows money from a bank and signs an agreement to repay the loan several years from now, in which account would the company report the amount borrowed? A) Common Stock B) Accounts Payable C) Notes Payable (long-term) D) Retained Earnings
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26) The Sweet Smell of Success Fragrance Company borrowed $60,000 from the bank to be paid back in five years and used all of the money to purchase land for a new store. Sweet Smell's balance sheet would show this as: A) $60,000 under Land and $60,000 under Notes Payable (long-term). B) $60,000 under Depreciation Expense and $60,000 under Notes Payable (long-term). C) $60,000 under Land and $60,000 under Notes Receivable (long-term). D) $60,000 under Other Assets and $60,000 under Other Liabilities.
27) Typical business activities needed before a business can start selling goods and/or services to customers include: A) financing and investing activities. B) only financing activities. C) only investing activities. D) only operating activities.
28)
Who has first claim to a business's assets should the company go out of business? A) Creditors B) Stockholders C) Customers D) Management
29)
The creditors' claims to a company's resources are represented by: A) common stock. B) total stockholder's equity. C) total liabilities. D) retained earnings.
30)
A difference between debt financing and equity financing is that:
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A) debt financing must be repaid, while repayment of equity financing is not required. B) equity financing must be repaid, while repayment of debt financing is not required. C) only debt financing can be used to purchase assets. D) only equity financing can be used to purchase assets.
31)
Debt financing is financing obtained from: A) stockholders. B) creditors. C) selling goods or services on credit. D) both creditors and stockholders.
32)
Equity financing is financing obtained from: A) creditors. B) stockholders. C) selling goods or services on credit. D) both creditors and stockholders.
33)
The cost principle is used: A) to refer to the two sources of financing available to businesses. B) to measure the amount used to record assets on the date of the transaction. C) by small businesses, but not by large businesses. D) to measure internal events, but not external exchanges.
34)
Transactions include which two types of events? A) Direct events, indirect events B) Monetary events, production events C) External exchanges, internal events D) Past events, future events
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35)
Which of the following is an accounting transaction? A) A manager hires an employee. B) A manager orders supplies. C) A manager signs a promissory note and receives cash. D) A manager agrees to deliver their product in three weeks.
36) Your company places an order for inventory with a supplier to be delivered in two weeks. Which of the following statements is true? A) This is an internal event and it does not affect the balance sheet. B) This is an activity that does not affect the balance sheet. C) This is an internal event that affects the balance sheet. D) This is an external exchange and it affects the balance sheet.
37)
The characteristic shared by all liabilities is that they: A) provide a future economic benefit. B) result in an inflow of resources to the company. C) always end in the word "payable." D) obligate the company to do something in the future.
38)
Which of the following is a financing activity? A) The business receives land and gives a check for $1,000. B) The business receives $1,000 cash and in exchange gives a promissory note. C) The business promises to hire an employee on the 15th of the month. D) The business orders supplies and promises to pay for them at the end of the month.
39)
Which of the following would not be recorded as an accounting transaction?
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A) Issuing stock to owners in exchange for cash B) Ordering supplies to be delivered next month C) Selling inventory to customers in exchange for cash to be received next month D) Paying the bank for a portion of a notes payable
40) The Flynn Company started business by obtaining financing through debt financing and equity financing. Which of the following statements is not correct? A) Equity financing refers to the money obtained through owners' contributions and reinvestments of profit. B) Debt financing refers to the money obtained through loans. C) The business is obligated to repay debt financing. D) The business is obligated to repay equity financing.
41)
Which of the following is an asset? A) Common Stock B) Retained Earnings C) Notes Receivable D) Notes Payable
42) Which of the following transactions for Bill's Fish 'n Chips restaurant would be treated as an accounting transaction? A) Bill distributed coupons to local hotels for 10% off and requested that the coupons be distributed to hotel guests. B) Bill spoke to a local high school about the rewards and challenges of being an entrepreneur. C) Bill signed an agreement with a local fisherman to purchase 20 pounds of halibut each month. D) Bill purchased a fryer and a dishwasher, which will be paid for next month.
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43) _________________ are of special importance because they are the only activities that enter the financial accounting system. A) External exchanges B) Internal events C) Documents D) Transactions
44)
Which account is affected by recording the buying of goods on credit? A) Cash B) Retained Earnings C) Common Stock D) Accounts Payable
45)
Which of the following is not true regarding the double-entry system? A) Transactions must be recorded twice to ensure accuracy. B) Debits must equal credits. C) Assets must equal liabilities plus stockholders' equity. D) Both what is received and what is given in exchange must be recorded.
46)
Every transaction involves a(n): A) receiving and giving something of value. B) increase in assets. C) increase in stockholder's equity. D) exchange of promises.
47)
Which events are recorded in the accounting system?
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A) External exchanges only B) Internal events only C) Both external exchanges and internal events D) Transactions are not recorded in the accounting system
48) Doug's Doodle Shop, specializing in dog supplies, signs a contract with a pet groomer. Next month, the groomer will begin leasing a portion of Doug's store and provide grooming services. The signing of the contract: A) has no effect on the accounting equation. B) increases assets. C) increases liabilities. D) decreases stockholders' equity.
49) Spin Company has $52,000 in its Cash account, $20,000 in its Inventory account, and $12,000 in its Notes Payable (short-term) account. If Spin's only other account is Common Stock, what is the balance of that account? A) $20,000. B) $84,000. C) $60,000. D) $44,000.
50)
Amounts invested and reinvested by a company's owners is called:
A) stockholders' equity in a corporation. B) assets, or the resources presently owned by a business that generate future economic benefits. C) a trial balance, proving that all amounts are accounted for. D) liabilities, or the amounts presently owed by a business.
51)
Typical cash flows from investing activities include:
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A) payments to purchase property and equipment. B) repayment of loans. C) proceeds from issuing notes payable. D) receipts from cash sales.
52) The requirement that transactions be recorded at their exchange price at the transaction date is called the: A) conservatism exception. B) separate entity assumption. C) cost principle. D) unit of measure assumption.
53) Candy Cane opened an ice cream store on June 1 and hired an accounting intern to help her establish the business. The intern has identified the following transactions. Which of these transactions is not an accounting transaction? A) Purchased $3,400 of milk and cream from a local dairy B) Signed a contract to deliver $1,200 of ice cream for a July 4th party C) Paid June rent of $2,300 D) Borrowed money from the bank by signing a promissory note for $5,000
54) Candy Cane's ice cream shop, which opened in June, is a local hit. In July, Candy Cane hired a new employee at a rate of $1,200 per month to start work at the beginning of August. In July, Candy Cane should record: A) nothing, because an exchange of promises is not a transaction. B) a $1,200 increase to Prepaid Wages and a $1,200 decrease to Cash. C) a $1,200 increase to Wage Expense and a $1,200 decrease to Cash. D) a $1,200 increase in Wages Payable and a $1,200 increase in Wages Expense.
55) A ____________ is a list of account titles with corresponding reference numbers used by companies so that transaction items are consistently named. Version 1
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A) chart of accounts B) trial balance C) classified balance sheet D) ledger
56)
What does a business typically receive when it issues stock to owners? A) Promissory note B) Stock certificate C) Equipment D) Cash
57)
When a business issues stock, what does it give to its owners? A) Notes Payable B) Common Stock C) Retained Earnings D) Cash
58)
Transactions are entered into a ____________ each day they occur. A) journal B) ledger C) trial balance D) classified balance sheet
59) A ___________ is a collection of records that summarizes the effects of multiple transactions whereas a ___________ is a record of each day's transactions.
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A) ledger; journal B) journal; ledger C) trial balance; journal D) trial balance; ledger
60)
Account titles in the chart of accounts are: A) general purpose and do not indicate the nature of the account. B) consistent with those used by other companies. C) linked to account numbers. D) the names mandated for use by the FASB.
61)
Every transaction: A) increases one account and decreases another account. B) has at least two effects on the basic accounting equation. C) affects only balance sheet accounts or only income statement accounts. D) is analyzed from the standpoint of the business owners.
62) Charlie Company buys its inventory from Tilly, Incorporated and owes $800,000 to Tilly, Incorporated. Which account would Charlie Company use to report the amount owed? A) Cash B) Accounts Payable C) Notes Payable D) Accounts Receivable
63) Bolt Enterprises receives $100,000 cash from its customers on account. Bolt uses the cash to pay off $100,000 on a bank loan, the net result is that:
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A) assets would increase by $100,000 while liabilities would decrease by $100,000. B) liabilities would decrease by $100,000 while stockholders' equity would increase by $100,000. C) assets would decrease by $100,000 and liabilities would decrease by $100,000. D) liabilities would decrease by $100,000 and stockholders' equity would decrease by $100,000.
64)
What is the minimum number of accounts that must be involved in any transaction? A) One B) Two C) Three D) There is no minimum.
65)
Amounts owed to suppliers for goods purchased on credit are called: A) Common Stock. B) Retained Earnings. C) Accounts Payable. D) Inventory.
66) Assuming a transaction affects the accounting equation by decreasing a liability and has no effect on assets, which of the following statements is correct with regards to this transaction? A) If other liabilities are unchanged, stockholders' equity must be decreasing. B) If other liabilities are unchanged, stockholders' equity must be increasing. C) If stockholders' equity is unchanged, another liability must be decreasing. D) If stockholders' equity is unchanged, other liabilities must be unchanged.
67) Sue Shells, Incorporated pays back $200,000 on a loan it had obtained earlier from a bank. What is the effect of this transaction?
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A) Assets decrease by $200,000; liabilities and stockholders' equity are both unchanged. B) Assets decrease by $200,000, liabilities decrease by $200,000, and stockholders' equity is unchanged. C) Assets decrease by $200,000 and liabilities increase by $200,000. D) Assets decrease by $200,000, liabilities are unchanged, and stockholders' equity decreases by $200,000.
68) Sue Shells, Incorporated issues $400,000 in new stock. It later uses the cash received to purchase land. What accounts are affected by these two transactions? A) Common Stock, Cash, and Land. B) Common Stock, Cash, and Investments. C) Cash, Common Stock, Investments, and Land. D) Common Stock and Land.
69) A business can obtain financing by issuing stock or borrowing from third parties, such as banks. What is the balance sheet effect of issuing stock to obtain cash? A) No effect on assets; Decrease liabilities; Increase stockholders' equity B) Increase assets; Increase liabilities; Increase stockholders' equity C) Increase assets; No effect on liabilities; Increase stockholders' equity D) Increase assets; Increase liabilities; No effect on stockholders' equity
70) What will be the effect on the balance sheet of issuing shares of common stock in exchange for cash? A) An increase in Retained Earnings B) A decrease in Common Stock C) A decrease in Retained Earnings D) An increase in Common Stock
71) Kirby, Incorporated borrows $16 million from its bank. It then uses this money to buy equipment. How do these two transactions affect the company's accounting equation? Version 1
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A) Assets and liabilities both increase by $16 million. B) Assets increase by $8 million and liabilities decrease by $8 million. C) Assets increase by $16 million, liabilities increase by $8 million, and stockholders' equity increases by $8 million. D) Assets remain unchanged and liabilities increase by $16 million.
72) A company receives $100,000 cash from investors in exchange for stock. Several weeks later, the company buys a $250,000 machine using all of the cash from the stock issue and signing a promissory note for the remainder. The accounts involved in these two transactions are: A) Cash; Equipment; Noncurrent Investments; and Accounts Payable. B) Cash; Noncurrent Investments; Common Stock; and Notes Payable. C) Cash; Equipment; Common Stock; and Notes Payable. D) Equipment; Notes Payable; and Retained Earnings.
73) During the current year, Sue Shells, Incorporated’s total liabilities decreased by $25,700 and stockholders' equity increased by $4,650. By what amount and in what direction did Sue’s total assets change during the same time period? A) $21,050 decrease. B) $30,350 increase. C) $30,350 decrease. D) $21,050 increase.
74) During the current year, Sue Shells, Incorporated’s total liabilities decreased by $50,000 and stockholders' equity increased by $10,000. By what amount and in what direction did Sue’s total assets change during the same time period? A) $40,000 increase B) $40,000 decrease C) $60,000 increase D) $60,000 decrease
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75) A company issues $20 million in new stock. The company later uses this money to acquire a building. What is the overall effect of these two transactions on the company's accounts? A) Buildings increases and Common Stock increases. B) Buildings increases and Common Stock decreases. C) Cash increases, Buildings increases, and Common Stock increases. D) Cash decreases, Buildings increases, and Common Stock decreases.
76) Park & Company was recently formed with a $6,900 investment in the company by stockholders in exchange for common stock. The company then borrowed $3,900 from a local bank, purchased $1,190 of supplies on account, and also purchased $6,900 of equipment by paying $2,190 in cash and signing a promissory note for the balance. Based on these transactions, the company's total assets are: A) $10,800. B) $16,700. C) $12,990. D) $13,800.
77) Park & Company was recently formed with a $25,000 investment in the company by stockholders in exchange for common stock. The company then borrowed $10,000 from a local bank, purchased $5,000 of supplies on account, and also purchased $25,000 of equipment by paying $10,000 in cash and signing a promissory note for the balance. Based on these transactions, the company's total assets are: A) $35,000. B) $45,000. C) $50,000. D) $55,000.
78) Danny Company purchased supplies using cash. What is the effect on Danny’s balance sheet?
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A) No effect on total assets; decrease total liabilities; increase total stockholders' equity B) Increase total assets; increase total liabilities; increase total stockholders' equity C) Decrease total assets; no effect on total liabilities; increase total stockholders' equity D) No effect on total assets; no effect on total liabilities; no effect on total stockholders' equity
79) The Noble Corporation installs $75,000 of equipment, paying $25,000 cash and promising to pay the remaining $50,000 in 6 months. What is the impact to this transaction on the accounting equation? A) Total assets are increased by $50,000. B) Current assets are increased by $50,000. C) Total assets are increased by $75,000. D) Current assets are increased by $75,000.
80)
If land is purchased using cash: A) total assets will increase. B) total assets will decrease. C) total assets will remain the same. D) stockholders' equity will increase.
81) What is the effect on the balance sheet if a company purchases $100 of supplies using cash? A) Total assets will remain the same. B) Total assets will decrease. C) Liabilities will decrease. D) Total assets will increase.
82) Puffin, Incorporated purchased land costing $54,000 by paying cash of $13,500 and signing a 90-day note for the balance. The entry to record this transaction would:
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A) increase total assets. B) decrease total liabilities. C) decrease Common Stock. D) increase total assets and decrease total liabilities.
83) On January 1, Kirk Corporation had total assets of $862,000. During the month, the following activities occurred: ● Kirk Corporation acquired equipment costing $7,200, promising to pay cash for it in 60 days. ● Kirk Corporation purchased $3,620 of supplies for cash. ● Kirk Corporation sold land, which it had acquired 2 years ago. The land had cost $16,200 and it was sold for $16,200 cash. ● Kirk Corporation signed an agreement to rent additional storage space next month at a charge of $1,120 per month. What is the amount of total assets of Kirk Corporation at the end of the month? A) $833,000 B) $816,800 C) $872,820 D) $869,200
84) On January 1, Kirk Corporation had total assets of $425,000. During the month, the following activities occurred: ● Kirk Corporation acquired equipment costing $3,000, promising to pay cash for it in 60 days. ● Kirk Corporation purchased $1,750 of supplies for cash. ● Kirk Corporation sold land, which it had acquired 2 years ago. The land had cost $7,500 and it was sold for $7,500 cash. ● Kirk Corporation signed an agreement to rent additional storage space next month at a charge of $500 per month. What is the amount of total assets of Kirk Corporation at the end of the month?
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A) $429,750 B) $428,000 C) $418,750 D) $420,000
85)
When accounts receivable are collected: A) stockholders' equity increases. B) total assets increase. C) total assets decrease. D) the amount of total assets is unchanged.
86) A company was formed with $61,200 cash contributed by its owners in exchange for common stock. The company borrowed $31,200 from a bank. The company purchased $11,200 of inventory and paid cash for it. The company also purchased $71,200 of equipment by paying $10,000 in cash and issuing a note for the remainder. What is the amount of the total assets to be reported on the balance sheet? A) $81,200 B) $92,400 C) $153,600 D) $163,600
87) A company was formed with $300,000 cash contributed by its owners in exchange for common stock. The company borrowed $150,000 from a bank. The company purchased $50,000 of inventory and paid cash for it. The company also purchased $350,000 of equipment by paying $50,000 in cash and issuing a note for the remainder. What is the amount of the total assets to be reported on the balance sheet?
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A) $750,000 B) $800,000 C) $450,000 D) $400,000
88) A company was formed with $60,500 cash contributed by its owners in exchange for common stock. The company borrowed $30,500 from a bank. The company purchased $10,500 of inventory and paid cash for it. The company also purchased $70,500 of equipment by paying $10,000 in cash and issuing a note for the remainder. What is the amount of the total liabilities to be reported on the balance sheet? A) $80,500 B) $0 C) $60,500 D) $91,000
89) A company was formed with $300,000 cash contributed by its owners in exchange for common stock. The company borrowed $150,000 from a bank. The company purchased $50,000 of inventory and paid cash for it. The company also purchased $350,000 of equipment by paying $50,000 in cash and issuing a note for the remainder. What is the amount of the total liabilities to be reported on the balance sheet? A) $300,000 B) $0 C) $450,000 D) $400,000
90) Assets totaled $25,250 and liabilities totaled $8,600 at the beginning of the year. During the year, assets decreased by $3,600 and liabilities increased by $2,900. What is the amount of the change in stockholders' equity during the year?
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A) $700 decrease B) $5,950 increase C) $6,500 decrease D) $750 increase
91) Assets totaled $24,250 and liabilities totaled $8,500 at the beginning of the year. During the year, assets decreased by $3,500 and liabilities increased by $2,800. What is the amount of the change in stockholders' equity during the year? A) $5,750 increase B) $700 decrease C) $6,300 decrease D) $550 increase
92) Assets totaled $24,950 and liabilities totaled $8,570 at the beginning of the year. During the year, assets decreased by $3,570 and liabilities increased by $2,870. What is the amount of stockholders’ equity at the end of the year? A) $14,940 B) $15,680 C) $9,940 D) $16,380
93) Assets totaled $24,250 and liabilities totaled $8,500 at the beginning of the year. During the year, assets decreased by $3,500 and liabilities increased by $2,800. What is the amount of stockholders' equity at the end of the year? A) $9,450 B) $15,750 C) $15,050 D) $14,450
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94) During its first year of operations, a company entered into the following transactions: ● Borrowed $5,180 from the bank by signing a promissory note. ● Issued stock to owners for $11,800. ● Purchased $1,180 of supplies on account. ● Paid $580 to suppliers as payment on account for the supplies purchased. What is the amount of total assets at the end of the year? A) $16,980 B) $17,580 C) $18,160 D) $5,780
95)
During its first year of operations, a company entered into the following transactions:
● Borrowed $20,000 from the bank by signing a promissory note. ● Issued stock to owners for $40,000. ● Purchased $4,000 of supplies on account. ● Paid $1,600 to suppliers as payment on account for the supplies purchased. What is the amount of total assets at the end of the year? A) $64,000 B) $22,400 C) $60,000 D) $62,400
96) During its first year of operations, a company entered into the following transactions: ● Borrowed $5,090 from the bank by signing a promissory note. ● Issued stock to owners for $10,900. ● Purchased $1,090 of supplies on account. ● Paid $490 to suppliers as payment on account for the supplies purchased. What is the amount of total liabilities at the end of the year?
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A) $5,690 B) $17,080 C) $16,590 D) $6,180
97)
During its first year of operations, a company entered into the following transactions:
● Borrowed $20,000 from the bank by signing a promissory note. ● Issued stock to owners for $40,000. ● Purchased $4,000 of supplies on account. ● Paid $1,600 to suppliers as payment on account for the supplies purchased. What is the amount of total liabilities at the end of the year? A) $24,000 B) $62,400 C) $64,000 D) $22,400
98) The Smith Corporation began business this year and entered into the following transactions during the year. The company issued common stock in exchange for cash of $80,000 from stockholders, borrowed $40,000 from a bank, bought $12,000 of inventory on account, and purchased $32,000 of equipment by paying $12,000 in cash and issuing a note for the remainder. What is the amount of total assets to be reported on the balance sheet at the end of the year? A) $104,000 B) $120,000 C) $128,000 D) $152,000
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99) The Smith Corporation began business this year and entered into the following transactions during the year. The company issued common stock in exchange for cash of $80,000 from stockholders, borrowed $40,000 from a bank, bought $12,000 of inventory on account, and purchased $32,000 of equipment by paying $12,000 in cash and issuing a note for the remainder. What is the amount of total liabilities to be reported on the balance sheet at the end of the year? A) $40,000 B) $72,000 C) $60,000 D) $132,000
100)
Meridian Furniture had the transactions for the month that are summarized below.
● Purchased $3,600 in supplies with cash. ● Issued 400 shares of stock for $45 per share. ● Ordered supplies at a cost of $8,000. ● Paid a utility bill for $1,000. If the Cash account had a beginning balance of $20,000, what was the balance at the end of the month? A) $22,600 B) $25,400 C) $33,400 D) $40,600
101)
Which of the following requires a credit? A) Decreases in liabilities B) Decreases in stockholders' equity C) Increases to assets D) Increases to liabilities
102) In addition to requiring that the accounting equation remain in balance, the double-entry system also requires that:
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A) the number of asset accounts must equal the number of liability and stockholder's equity accounts. B) for any transaction, only two accounts are affected. C) for any transaction, both sides of the accounting equation are affected. D) the total dollar amount of debits must equal the total dollar amount of credits.
103)
Which of the following statements regarding debits and credits is always correct?
A) Debits decrease accounts while credits increase them. B) The total value of all debits recorded in the ledger must equal the total value of all credits recorded in the ledger. C) The total value of all debits to a particular account must equal the total value of all credits to that account. D) The normal balance for an account is the side on which it decreases.
104) Accounts Payable had a balance of $18,300 at the beginning of the month. During the month, three debits in the amounts of $4,600, $11,200, and $14,700 were posted to Accounts Payable, and three credits in the amounts of $3,700, $9,600, and $12,800 were posted to Accounts Payable. What is the ending balance of the Accounts Payable account? A) $48,800. B) $4,400. C) $22,700. D) $13,900.
105) Accounts Payable had a balance of $9,100 at the beginning of the month. During the month, three debits in the amounts of $2,350, $5,650, and $7,400 were posted to Accounts Payable, and three credits in the amounts of $1,800, $4,750, and $6,350 were posted to Accounts Payable. What is the ending balance of the Accounts Payable account?
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A) $6,600 B) $2,500 C) $11,600 D) $24,500
106)
How do debits appear in a T-account?
A) They are listed on the left side for asset accounts, but listed on the right side for liabilities and stockholders' equity accounts. B) They are always listed on the right side of the account. C) They are always listed on the left side of the account. D) They are listed on the right side for asset accounts, but listed on the left side for liabilities and stockholders' equity accounts.
107)
How do credits appear in a T-account?
A) They are listed on the left side for asset accounts, but listed on the right side for liabilities and stockholders' equity accounts. B) They are always listed on the right side of the account. C) They are always listed on the left side of the account. D) They are listed on the right side for asset accounts, but listed on the left side for liabilities and stockholders' equity accounts.
108)
Within the debit/credit framework, the best interpretation of the word "credit" is: A) left side of an account. B) increase side of an account. C) right side of an account. D) decrease side of an account.
109)
The Accounts Payable account:
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A) has a normal credit balance. B) is increased by a debit. C) is an asset. D) is increased when a company receives cash from customers.
110)
The Accounts Receivable account: A) has a normal credit balance. B) is increased by a debit. C) is a liability. D) is increased when a company receives cash from its customers.
111) Cash Debit
Credit
Beginning Balance
124,000
(a) (b)
14,710 38,310
(c) (d) (e)
6,010 5,810 7,410
(f)
12,010
(g)
11,210
What is the ending balance of the Cash account? A) $28,530 B) $134,570 C) $219,470 D) $113,430
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112) Cash Credit 371,700
Debit Beginning Balance (a) (b)
44,100 114,900
(c) (d) (e)
18,000 17,400 22,200
(f)
36,000
(g)
33,600
</div> What is the ending balance of the Cash account? A) $657,900 B) $339,900 C) $85,500 D) $403,500
113)
Debit Beginning Balance (a) (b)
Cash Credit 371,700 44,100 114,900
(c) (d) (e)
18,000 17,400 22,200
(f)
36,000
(g)
33,600
</div> In the T-account above:
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A) (a) and (b) are credits. B) (c) through (g) are debits. C) if the sum of (a) and (b) is less than the sum of (c) through (g), the Cash account balance will increase. D) (a) and (b) are increases.
114)
A debit would make which of the following accounts increase? A) Common Stock B) Inventory C) Notes Payable D) Retained Earnings
115) Cash had a beginning balance of $70,400. During the month, Cash was credited for $16,150 and debited for $18,770. At the end of the month, the balance is: A) $73,020 credit. B) $73,020 debit. C) $2,620 debit. D) $2,620 credit.
116) Cash had a beginning balance of $206,700. During the month, Cash was credited for $48,000 and debited for $54,900. At the end of the month, the balance is: A) $213,600 credit. B) $213,600 debit. C) $199,800 debit. D) $199,800 credit.
117)
Which of the following statements about normal account balances is correct?
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A) Assets have debit balances and liabilities have credit balances. B) Assets and liabilities have credit balances. C) Assets have credit balances and liabilities have debit balances. D) Assets and liabilities have debit balances.
118)
For both accounts and amounts, the standard formatting for a journal entry lists: A) credits first and then debits, both aligned to the left. B) credits first and then debits, with debits indented to the right underneath. C) debits first and then credits, both aligned to the right. D) debits first and then credits, with credits indented to the right underneath.
119)
The standard formatting for a journal entry lists the dollar amounts for: A) credits underneath and to the right of the dollar amounts for debits. B) debits and credits aligned equally to the right. C) debits underneath and to the right of the dollar amounts for credits. D) debits and credits aligned equally to the left.
120)
Which of the following statements about the debit/credit framework is correct?
A) Stockholders' Equity = Assets + Liabilities. B) The total value of credits in all accounts must always equal the total value of debits in all accounts. C) The normal balance for an account is the side on which it decreases. D) A decrease in Common Stock would be recorded with a credit.
121)
The normal balance of any account is the:
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A) left side. B) right side. C) side which increases that account. D) side which decreases that account.
122) A company started the year with a normal balance of $83,000 in the Inventory account. During the year, debits totaling $52,500 and credits totaling $70,000 were posted to the Inventory account. Which of the following statements about the Inventory account is correct? A) After these amounts are posted, the balance in the Inventory account is a credit balance of $65,500. B) The debits and credits posted to the Inventory account caused it to decrease by $17,500. C) The normal balance of the Inventory account is a credit balance. D) The Inventory account is decreased by debits.
123) A company started the year with a normal balance of $136,000 in the Inventory account. During the year, debits totaling $90,000 and credits totaling $110,000 were posted to the Inventory account. Which of the following statements about the Inventory account is correct? A) The normal balance of the Inventory account is a credit balance. B) After these amounts are posted, the balance in the Inventory account is a credit balance of $116,000. C) The Inventory account is decreased by debits. D) The debits and credits posted to the Inventory account caused it to decrease by $20,000.
124)
Which of the following statements about the debit/credit framework is correct?
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A) All asset accounts have a normal debit balance with the exception of cash, which has a normal credit balance. B) The Common Stock account is increased by debits. C) When payment is made on a liability such as accounts payable, the liability account is decreased with a debit. D) The total amount of asset accounts must equal the total amount of liability accounts minus the total amount of stockholders' equity accounts.
125) A company purchased equipment for use in the business at a cost of $17,000, one-fourth was paid in cash, and the company signed a note for the balance. The journal entry to record this transaction will include a: A) debit to Equipment of $4,250. B) debit to Cash of $17,000. C) debit to Notes Payable of $12,750. D) credit to Notes Payable of $12,750.
126) A company purchased equipment for use in the business at a cost of $36,000, one-fourth was paid in cash, and the company signed a note for the balance. The journal entry to record this transaction will include a: A) debit to Notes Payable of $27,000. B) debit to Cash of $36,000. C) credit to Notes Payable of $27,000. D) debit to Equipment of $9,000.
127)
Which account would be decreased with a credit? A) Retained Earnings B) Accounts Receivable C) Common Stock D) Notes Payable
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128)
Which account would be increased with a debit? A) Supplies B) Accounts Payable C) Common Stock D) Retained Earnings
129) Shaylee, Incorporated borrowed $62,000 from a bank, depositing those funds in its bank account and signing a formal agreement to repay the loan in two years. What is the correct journal entry for this transaction? A) Debit notes payable and credit cash for $62,000 B) Debit notes payable and debit cash for $62,000 C) Credit notes payable and credit cash for $62,000 D) Debit cash and credit notes payable for $62,000
130) A company borrows money from a bank. The journal entry to record the transaction would include a: A) credit to Notes Payable and debit to Common Stock. B) debit to Cash and a credit to Notes Payable. C) debit to Cash and a credit to Common Stock. D) credit to Cash and a debit to Notes Payable.
131) If a company pays back money borrowed from a bank, which of the following would be included in the journal entry to record this transaction? A) Credit Notes Payable and debit Common Stock B) Debit Cash and credit Notes Payable C) Debit Cash and credit Common Stock D) Credit Cash and debit Notes Payable
132) Carol Company has total debits in its Cash T-account of $155,000 and total credits of $120,000. The balance in the Cash T-account is a: Version 1
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A) debit of $155,000. B) debit of $35,000. C) credit of $120,000. D) credit of $35,000.
133) Forrest Industries has the following information regarding its Cash account for the month of August. The account had a normal balance of $62,500 on August 1. During August, it had three debit entries totaling $250,000. The balance in the Cash account on August 31 was $112,500. What was the total of the credit entries to the Cash account during the month of August? A) $50,000 B) $112,500 C) $200,000 D) $300,000
134)
Which of the following statements about the debit/credit framework is correct? A) Asset and liability accounts have a normal debit balance. B) To debit an account means to increase it. C) Common Stock has a normal credit balance. D) To credit an account means to decrease it.
135)
Which of the following statements about transaction analysis is correct?
A) Transactions are analyzed from the standpoint of the owners. B) All business activities are considered to be accounting transactions. C) The transaction amount is determined for each exchange based on the cost of the items given and received. D) A business needs journal entries only to show how transactions affect the balance sheet.
136)
Which of the following statements about liabilities is not correct?
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A) Liabilities are amounts owed by a business. B) Liability accounts have a normal credit balance. C) Financing activities may affect the amount of liabilities. D) Examples of liabilities include Notes Payable, Common Stock, and Income Tax Payable.
137)
Each account is assigned a number; this listing of all accounts is called a: A) trial balance. B) journal. C) ledger. D) chart of accounts.
138) Baldwin Company purchased equipment for $420,000 and planned to use it when the company expanded one of its product lines. However, six months later, the company changed its plans and sold the equipment to Stick, Inc. for $420,000. Stick signed a note for $420,000 that is due in 60 days. The journal entry prepared by Baldwin Company to record the sale of the equipment would include which of the following? A) Credit to Notes Receivable B) Debit to Cash C) Credit to Equipment D) Debit to Accounts Payable
139) B. Darin Company issued common stock to investors and received $50,000. Which of the following statements about this transaction is correct? A) This is an example of a cash inflow from an investing activity. B) The journal entry to record this transaction will include a credit to Cash. C) This is an example of a cash outflow from a financing activity. D) The journal entry to record this transaction will include a credit to Common Stock.
140)
Transactions are first entered in the:
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A) ledger. B) journal. C) T-accounts. D) chart of accounts.
141)
T-accounts represent a simplified version of the: A) ledger. B) journal. C) trial balance. D) financial statements.
142)
A ledger is used to:
A) summarize the increases and decreases in individual accounts, as well as the ending balance. B) report the results of operations to stockholders, creditors, and managers. C) prove that debits equal credits. D) make a balance sheet unnecessary.
143) When a company purchases an asset but only pays for a portion of it and owes the remainder, which of the following is true? A) The asset is debited for the amount paid plus the amount owed. B) The asset is debited for the amount paid. The amount owed will be debited to the asset once paid. C) The asset is credited for the amount paid plus the amount owed. D) The asset is credited for the amount paid. The amount owed will be debited to the asset once paid.
144)
The journal entry to record the purchase of supplies on account includes a credit to:
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A) Cash. B) Accounts Payable. C) Supplies. D) Accounts Receivable.
145) On September 5, Heidi Company, purchases $87,000 of supplies; payment is not required until October 4. What action should be taken by Heidi on September 5? A) No journal entry is required; this transaction should not be recorded until the payment is made. B) A journal entry that includes a credit to Accounts Payable should be prepared. C) A journal entry that includes a debit to Accounts Payable should be prepared. D) A journal entry that includes a debit to Prepaid Expenses should be prepared.
146) A company uses $100,000 in cash to pay off $100,000 in notes payable. This would result in a: A) $100,000 debit to Notes Payable and a $100,000 credit to Cash. B) $100,000 credit to Cash and a $100,000 credit to Notes Payable. C) $100,000 debit to Cash and a $100,000 credit to Notes Payable. D) $100,000 debit to Cash and a $100,000 debit to Notes Payable.
147)
Pick-A-Pet, Incorporated, makes a $10,000 payment on account. This would result in a: A) $10,000 credit to Cash and a $10,000 credit to Accounts Payable. B) $10,000 debit to Cash and a $10,000 debit to Accounts Payable. C) $10,000 debit to Accounts Payable and a $10,000 credit to Cash. D) $10,000 debit to Cash and a $10,000 credit to Accounts Payable.
148) Slug, Incorporated purchases equipment for $1,200,000 million paying $180,000 in cash and issuing $1,020,000 in promissory notes. When the journal entry is posted to the related accounts:
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A) $1,200,000 will be credited and $180,000 will be debited to asset accounts; $1,020,000 will be debited to liability accounts. B) $1,200,000 will be debited to asset accounts; $1,020,000 will be credited to liability accounts. C) $1,200,000 will be debited and $180,000 will be credited to asset accounts; $1,020,000 will be credited to liability accounts. D) $1,200,000 will be credited to asset accounts; $1,200,000 will be debited to liability accounts.
149)
Consider the following journal entry:
debit Software
18,000
credit Cash
7,200
credit Notes Payable
10,800
Which of the following explanations best describes this journal entry? A) The company buys $18,000 of software, pays cash of $7,200, and signs a note for $10,800. B) The company receives $7,200 in cash and $10,800 in notes payable in exchange for selling $18,000 of software. C) The company buys $18,000 of software, pays $7,200 cash, and promises to cancel a debt owed to the company in the amount of $10,800. D) The company sells $18,000 of software, receives $7,200 in cash, and pays off $10,800 it owes on the software.
150)
Which of the following is a report for internal use only? A) Balance sheet B) Statement of financial position C) Trial balance D) Classified balance sheet
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151)
Which of the following would cause a trial balance to be out of balance? A) A transaction was recorded twice. B) A transaction was not recorded. C) A transaction was posted to the wrong accounts. D) Only the credit portion of a transaction was recorded.
152) Assume a company completed various financing and investing activities, has prepared its journal entries and posted them to T-accounts. How would the related account balances be listed on its trial balance? A) Credits first, followed by debits B) Debits first, followed by credits C) Alphabetically D) In descending order by dollar amount
153) Assume a company completed various financing and investing activities, has prepared its journal entries and posted them to T-accounts. How would the related account balances be listed on its trial balance? A) Alphabetically B) In descending order by dollar amount C) Asset accounts first, followed by liability accounts and then stockholders’ equity accounts D) Liability accounts first, followed by stockholders’ equity accounts and then asset accounts
154)
All of the following would be classified as current on a classified balance sheet except: A) Common Stock. B) Cash. C) Accounts Payable. D) Supplies.
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155) All of the following would be classified as noncurrent on a classified balance sheet except: A) Notes payable (long-term) B) Equipment. C) Land. D) Accounts Receivable.
156) Broadway, Incorporated’s trial balance was in balance at the end of the period and showed the following accounts: Account Accounts Payable Cash Common Stock Equipment Land Notes Payable
Balance $ 26,400 44,400 21,500 10,500 40,500 47,500
What is the balance of the credit column on Broadway's trial balance? rev: 03_16_2018_QC_CS-121922 A) $95,400. B) $69,000. C) $195,300. D) $73,900.
157) Broadway, Incorporated's trial balance was in balance at the end of the period and showed the following accounts: Account Accounts Payable Cash Common Stock Equipment Land
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Balance $30,600 62,100 30,000 13,500 45,000
41
Notes Payable
60,000
What is the balance of the credit column on Broadway's trial balance? A) $241,200 B) $120,600 C) $90,600 D) $90,000
158) The following account balances were listed on the trial balance of Edgar Company at the end of the period: Account Accounts Payable Cash Common Stock Equipment Land Notes Payable
Balance $ 31,800 50,100 36,000 16,500 48,000 63,000
The company’s trial balance is not in balance and the company’s accountant has determined that the error is in the cash account. What is the correct balance in the cash account? A) $34,500. B) $68,700. C) $3,300. D) $66,300.
159) The following account balances were listed on the trial balance of Edgar Company at the end of the period: Account Accounts Payable Cash Common Stock Equipment
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Balance $30,600 48,900 30,000 13,500
42
Land Notes Payable
45,000 60,000
The company's trial balance is not in balance and the company's accountant has determined that the error is in the cash account. What is the correct balance in the cash account? A) $57,900 B) $31,500 C) $2,100 D) $62,100
160) In a classified balance sheet, assets and liabilities are classified according to whether they are current or noncurrent. Which of the following statements is not correct about current assets? A) They will be acquired within one year. B) They will be converted to cash within one year. C) They will be sold within one year. D) They will be used up within one year.
161)
In a classified balance sheet, current assets are usually listed: A) in alphabetical order. B) in the order of when the assets were acquired. C) from the largest to smallest dollar amount. D) in the order of liquidity.
162)
Which one of the following is not a current asset? A) Cash B) Supplies C) Equipment D) Prepaid Insurance
163)
Which of the following would be listed as a current liability?
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A) Cash B) Notes Payable (due in two years) C) Supplies D) Accounts Payable
164)
A noncurrent liability is one that the company: A) has owed for over one year. B) has owed for over five years. C) will not pay within 12 months. D) will not pay within five years.
165)
A current asset is one that the company: A) has owned for over one year. B) has owned for over five years. C) will use up or convert into cash in less than 12 months. D) has updated to reflect its current value.
166)
At the start of the first year of operations, Retained Earnings would be: A) equal to zero. B) equal to Common Stock. C) equal to stockholders' equity. D) equal to the Net Income.
167)
Current liabilities are expected to be: A) converted to cash within one year. B) fulfilled within one year. C) used in the business within one year. D) acquired within one year.
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168)
Assets are listed on a classified balance sheet: A) in alphabetical order. B) from the largest dollar amount to the lowest dollar amount. C) beginning with noncurrent assets and ending with current assets. D) beginning with current assets and starting with Cash.
169)
Which of the following would not be classified as a current asset? A) Cash B) Accounts Payable C) Supplies D) Inventory
170) Which of the following would be classified as a noncurrent liability on the balance sheet at December 31, Year 1? A) An accounts payable due on January 30, Year 2 B) A notes payable due November 30, Year 2 C) A note receivable that matures on April 30, Year 3 D) A notes payable due January 15, Year 3
171)
Constable Company reported the following information at December 31, Year 1:
Accounts Payable Accounts Receivable Cash Common Stock Equipment Inventory Notes Payable due December 31, Year 3 Retained Earnings, December 31, Year 1 Wages Payable
$ 4,670 9,520 25,190 91,700 51,200 32,900 2,670 14,260 5,510
What is the amount of current assets on the classified balance sheet? Version 1
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A) $67,610 B) $118,810 C) $39,450 D) $25,190
172)
Constable Company reported the following information at December 31, Year 1:
Accounts Payable Accounts Receivable Cash Common Stock Equipment Inventory Notes Payable due December 31, Year 3 Retained Earnings, December 31, Year 1 Wages Payable
$ 6,750 14,025 35,235 135,000 74,250 46,800 3,750 21,135 3,675
What is the amount of current assets on the classified balance sheet? A) $170,310 B) $96,060 C) $49,260 D) $123,255
173)
Constable Company reported the following information at December 31, Year 1:
Accounts Payable Accounts Receivable Cash Common Stock Equipment Inventory Notes Payable due December 31, Year 3 Retained Earnings, December 31, Year 1 Wages Payable
$ 4,650 9,500 24,990 91,500 51,000 32,700 2,650 14,240 5,150
What is the amount of current liabilities on the classified balance sheet?
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A) $9,800 B) $7,300 C) $12,450 D) $4,650
174)
Constable Company reported the following information at December 31, Year 1:
Accounts Payable Accounts Receivable Cash Common Stock Equipment Inventory Notes Payable due December 31, Year 3 Retained Earnings, December 31, Year 1 Wages Payable
$ 6,750 14,025 35,235 135,000 74,250 46,800 3,750 21,135 3,675
What is the amount of current liabilities on the classified balance sheet? A) $14,175 B) $10,425 C) $170,310 D) $6,750
175)
Constable Company reported the following information at December 31, Year 1:
Accounts Payable Accounts Receivable Cash Common Stock Equipment Inventory Notes Payable due December 31, Year 3 Retained Earnings, December 31, Year 1 Wages Payable
$ 4,640 9,490 24,890 91,400 50,900 32,600 2,640 14,230 4,970
What is the total of the credit balance accounts?
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A) $117,880 B) $110,270 C) $105,630 D) $115,240
176)
Constable Company reported the following information at December 31, Year 1:
Accounts Payable Accounts Receivable Cash Common Stock Equipment Inventory Notes Payable due December 31, Year 3 Retained Earnings, December 31, Year 1 Wages Payable
$ 6,750 14,025 35,235 135,000 74,250 46,800 3,750 21,135 3,675
What is the total of the credit balance accounts? A) $166,560 B) $156,135 C) $170,310 D) $162,885
177)
Which of the following statements about the balance sheet is correct?
A) A classified balance sheet is one that contains privileged information. B) Current liabilities are debts and other obligations that will be paid or fulfilled within 12 months of the balance sheet date. C) All companies use the chart of account names defined by the Financial Accounting Standards Board (FASB). D) A balance sheet is prepared for a period of time.
178)
Which of the following statements about the balance sheet is correct?
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A) An item on a balance sheet that is labeled as "payable" is a liability of that company. B) Assets are listed on the balance sheet in alphabetical order. C) The balance sheet balances when assets plus liabilities equal stockholders' equity. D) The balance sheet proves that asset debits = liability credits.
179)
Which of the following statements regarding posting and classification is correct?
A) Posting journal entries involves copying the dollar amounts from the ledger into the journal. B) If a $100 debit is erroneously posted to an account as a $100 credit, the accounts will be out of balance by $100. C) If a $5,000 credit to a stockholders' equity account is misclassified as a $5,000 credit to a liability, the accounting equation will still balance. D) If a purchase of supplies on account for $100 is recorded with a debit to Supplies of $10 and a credit to Accounts Payable for $10, the accounting equation will not balance.
180)
Assets
PICK-A-PET, INCORPORATED Balance Sheet at June 30, Year 1 Liabilities
Cash Accounts Receivable Supplies Equipment
$732,600 419,200
Other Assets
69,400
58,400 118,500
Accounts Payable Notes Payable due June 30, Year 3 Total Liabilities Stockholders' Equity Common Stock Retained Earnings Total Stockholders' Equity
Total Assets
$1,398,100
Total Liabilities & Stockholders’ Equity
$349,200 268,900 618,100
662,100 117,900 780,000 $1,398,100
Which line items would be classified as noncurrent on a classified balance sheet?
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A) Cash; Supplies; Accounts Payable B) Equipment; Other Assets; Notes Payable C) Supplies; Equipment; Notes Payable D) Accounts Receivable; Equipment; Other Assets
181)
Assets Cash Accounts Receivable Supplies Equipment Other Assets
Total Assets
PICK-A-PET, INCORPORATED Balance Sheet at June 30, Year 1 Liabilities $ 733,200 419,800 58,460 119,100 69,460
$ 1,400,020
Accounts Payable Notes Payable due June 30, Year 3 Total Liabilities Stockholders' Equity
$ 348,600 268,900 617,500
Common Stock Retained Earnings
661,500 121,020
Total Stockholders' Equity Total Liabilities & Stockholders’ Equity
782,520 $1,400,020
How much financing did the stockholders of Pick-A-Pet, Incorporated, directly contribute to the company? A) $782,520 B) $661,500 C) $1,400,020 D) $121,020
182) PICK-A-PET, INCORPORATED Balance Sheet
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Assets
at June 30, Year 1 Liabilities
Cash Accounts Receivable Supplies Equipment
$732,600 419,200
Other Assets
69,400
58,400 118,500
Accounts Payable Notes Payable due June 30, Year 3 Total Liabilities Stockholders' Equity Common Stock Retained Earnings Total Stockholders' Equity
Total Assets
$1,398,100
Total Liabilities & Stockholders’ Equity
$349,200 268,900 618,100
662,100 117,900 780,000 $1,398,100
How much financing did the stockholders of Pick-A-Pet, Incorporated, directly contribute to the company? A) $117,900 B) $662,100 C) $780,000 D) $1,398,100
183) Which of the following sequences indicates the correct order of steps in the accounting cycle? A) Post to ledger, prepare journal entries, prepare trial balance, and prepare financial statements. B) Post to ledger, prepare journal entries, prepare financial statements, and prepare trial balance. C) Prepare journal entries, post to ledger, prepare trial balance, and prepare financial statements. D) Prepare journal entries, post to ledger, prepare financial statements, and prepare trial balance.
184)
Below is the T-account for Accounts Receivable:
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Accounts Receivable Debit Beginning Balance
Credit 187,800 105,200
18,030
63,930
5,430 14,730 19,230
Below is also a partial list of account balances at the end of the year: Cash Accounts Receivable Equipment Accounts Payable
$ 28,030 Unknown 35,630 5,930
The amount of total current assets that will be reported on the company's balance sheet at the end of the year is: A) $257,840. B) $139,540. C) $327,540. D) $145,880.
185)
Below is the T-account for Accounts Receivable:
Accounts Receivable Credit
Debit Beginning Balance
187,500 104,900
18,000
63,900
5,400 14,700
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19,200
Below is also a partial list of account balances at the end of the year: Cash Accounts Receivable Equipment Accounts Payable
$28,000 Unknown 35,600 5,900
The amount of total current assets that will be reported on the company's balance sheet at the end of the year is: A) $362,600. B) $368,500. C) $139,500. D) $327,000.
186)
Below is the T-account for Accounts Receivable:
Accounts Receivable Credit
Debit Beginning Balance
187,500 104,900
18,000
63,900
5,400 14,700 19,200
Below is also a partial list of account balances at the end of the year: Cash Accounts Receivable Equipment Accounts Payable
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$28,000 Unknown 35,600 5,900
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Which of the following is an accurate description of the economic events involving Accounts Receivable as documented in the T-account above? A) Sales to customers on account exceeded the payments received from customers on account. B) Payments received from customers on account exceeded the sales made to customers on account. C) The company paid off its debt more than it incurred new debt. D) The company incurred more debt than it paid off.
187)
Which of the following statements about transaction analysis is not correct? A) A transaction is an exchange or event that has a direct and measurable financial
effect. B) Every transaction has at least two effects. C) Cash is the account credited when a bank loan is repaid. D) Notes Payable is the account debited when money is borrowed from a bank using a promissory note.
188)
What does the current ratio measure? A) The relative proportion of current versus noncurrent assets B) Whether current assets are sufficient to pay current liabilities C) The speed which current assets can be converted to cash D) Whether cash is sufficient to pay current liabilities
189)
The current ratio: A) is a measure of a firm's ability to pay its current liabilities. B) equals current liabilities divided by current assets. C) equals total assets divided by total liabilities. D) is a measure of profitability.
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190) Which of the following statements about the concepts underlying the balance sheet is correct? A) A company bought land for $5 million dollars 10 years ago. The land is now worth $15 million. The company should increase the book value of this asset on its balance sheet to reflect its current value. B) All events affecting the current value of a company are reported on the balance sheet. C) According to the cost principle, assets are valued at their replacement cost. D) If an asset's value increases, the increase in value is generally not recorded under GAAP.
191) In Year 2, the Denim Company bought an acre of land that cost $16,500. In Year 5, another company purchased a nearby acre of land for $29,500 and a different company purchased another nearby acre of land for $27,500. As a result, an appraiser estimated that the acre owned by Denim had increased in value to $28,500. If Denim prepares a balance sheet at the end of Year 5, the acre of land that it owns should be reported at: A) $16,500. B) $29,500. C) $27,500. D) The average of all of the amounts.
192) In Year 2, the Denim Company bought an acre of land that cost $15,000. In Year 5, another company purchased a nearby acre of land for $28,000 and a different company purchased another nearby acre of land for $26,000. As a result, an appraiser estimated that the acre owned by Denim had increased in value to $27,000. If Denim prepares a balance sheet at the end of Year 5, the acre of land that it owns should be reported at: A) $15,000. B) $28,000. C) $27,000. D) the average of all of the amounts.
193)
How will a company's current ratio be affected by the purchase of equipment for cash?
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A) The current ratio will increase because current assets increase. B) The current ratio will decrease because current liabilities increase. C) The current ratio will decrease because current assets decrease. D) The current ratio will remain unchanged.
194) How will a company's current ratio be affected when the company receives $20,000 from owners and issues common stock to them? A) The current ratio will increase because current assets increase. B) The current ratio will increase because current liabilities decrease. C) There will be no change in the company's current ratio. D) The current ratio will decrease because current liabilities increase.
195) Your company's president donates a large amount of her own money to charity and receives significant publicity that includes the company's name. How would the benefits of this publicity appear on the balance sheet? A) It would appear as a current asset. B) It would appear as Common Stock. C) It would appear as a noncurrent asset. D) It would not appear on the balance sheet.
196) Which of the following would a company be most likely to overstate if the company was trying to mislead potential creditors as to its ability to pay debts as they become due? A) Accounts Receivable B) Notes Payable C) Salaries Expense D) Accounts Payable
197) Which concept should be applied when reporting a piece of land that was bought for $50,000 five years ago, and which would probably now sell for $80,000?
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A) The cost principle B) The accounting equation C) The separate entity concept D) The monetary concept
198) The classified balance sheet for a company reported current assets of $1,948,770, total liabilities of $804,540, Common Stock of $1,050,000, and Retained Earnings of $135,260. The current ratio was 3. What is the total amount of noncurrent assets? A) $1,144,230 B) $763,510 C) $41,030 D) $649,590
199) The classified balance sheet for a company reported current assets of $811,925, total liabilities of $399,770, Common Stock of $500,000, and Retained Earnings of $65,130. The current ratio was 2.5. What is the total amount of noncurrent assets? A) $246,795 B) $412,155 C) $324,770 D) $152,975
200) The classified balance sheet for a company reported current assets of $1,819,104, total liabilities of $813,540, Common Stock of $1,140,000, and Retained Earnings of $144,260. The current ratio was 2.8. What is the total amount of current liabilities?
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A) $649,680 B) $813,540 C) $278,696 D) $1,005,564
201) The classified balance sheet for a company reported current assets of $811,925, total liabilities of $399,770, Common Stock of $500,000, and Retained Earnings of $65,130. The current ratio was 2.5. What is the total amount of current liabilities? A) $324,770 B) $2,029,813 C) $385,960 D) $399,770
202) The classified balance sheet for a company reported current assets of $1,753,812, total liabilities of $801,540, Common Stock of $1,020,000, and Retained Earnings of $132,260. The current ratio was 2.7. Which of the following statements is not correct? A) The amount of current assets is 2.7 times the amount of current liabilities. B) Total Assets are $1,953,800. C) Noncurrent liabilities are $132,260. D) Total Stockholders’ equity is $1,152,260.
203) The classified balance sheet for a company reported current assets of $811,925, total liabilities of $399,770, Common Stock of $500,000, and Retained Earnings of $65,130. The current ratio was 2.5. Which of the following statements is not correct?
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A) Total Assets are $964,900. B) Total Stockholders' equity is $565,130. C) Noncurrent liabilities are $65,130. D) The amount of current assets is 2.5 times the amount of current liabilities.
204)
Which of the following statements about the current ratio is not correct?
A) When making comparisons across companies, it's far easier to express the relationship as a ratio. B) The current ratio is used to evaluate a company's ability to pay current obligations. C) Having more current assets than current liabilities will yield a current ratio less than 1.0. D) A high current ratio suggests good liquidity.
205)
A company's trial balance included the following account balances:
Accounts Payable Accounts Receivable Cash Income Tax Payable Inventory Notes Payable, due in two years Equipment Stockholders’ Equity Supplies Wages Payable
$ 19,247 81,376 73,364 3,552 25,856 1,749 54,528 203,208 5,552 12,920
What is the amount of Total Assets on the Balance Sheet? A) $443,884 B) $259,923 C) $240,676 D) $235,124
206)
A company’s trial balance included the following account balances:
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Accounts Payable Accounts Receivable Cash Income Tax Payable Inventory Notes Payable, due in two years Equipment Stockholders’ Equity Supplies Wages Payable
$ 19,207 81,336 73,324 3,512 25,816 1,709 54,128 202,808 5,512 12,880
What is the amount of Total Assets on the Balance Sheet? A) $240,116 B) $214,300 C) $442,924 D) $480,232
207)
A company's trial balance included the following account balances:
Accounts Payable Accounts Receivable Cash Income Tax Payable Inventory Notes Payable, due in two years Equipment Stockholders’ Equity Supplies Wages Payable
$ 19,217 81,346 73,334 3,522 25,826 1,719 54,228 202,908 5,522 12,890
What is the amount of Total Liabilities on the Balance Sheet? A) $63,174 B) $240,256 C) $37,348 D) $118,694
208)
A company’s trial balance included the following account balances:
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Accounts Payable Accounts Receivable Cash Income Tax Payable Inventory Notes Payable, due in two years Equipment Stockholders’ Equity Supplies Wages Payable
$ 19,207 81,336 73,324 3,512 25,816 1,709 54,128 202,808 5,512 12,880
What is the amount of Total Liabilities on the Balance Sheet? A) $240,116 B) $37,308 C) $35,599 D) $20,916
209)
A company's trial balance included the following account balances:
Accounts Payable Accounts Receivable Cash Income Tax Payable Inventory Notes Payable, due in two years Equipment Stockholders’ Equity Supplies Wages Payable
$ 19,317 81,446 73,434 3,622 25,926 1,819 55,228 203,908 5,622 12,990
What is the amount of the current ratio? A) 1.00 B) 5.19 C) 1.99 D) 4.97
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210)
A company’s trial balance included the following account balances:
Accounts Payable Accounts Receivable Cash Income Tax Payable Inventory Notes Payable, due in two years Equipment Stockholders’ Equity Supplies Wages Payable
$ 19,207 81,336 73,324 3,512 25,816 1,709 54,128 202,808 5,512 12,880
What is the amount of the current ratio? A) 8.05 B) 6.44 C) 5.22 D) 1.00
211) Oats, Incorporated, has $14,000 in Cash, $37,000 in Accounts Receivable, $2,500 in Supplies, $52,000 in Accounts Payable and $12,400 in Wages Payable. If Oats uses Cash to pay off $8,000 of the Wages Payable, which of the following statements is correct? A) The company's current ratio will not change since current assets decreased by the same amount that current liabilities decreased. B) The company will look more favorable to creditors. C) The company has a greater ability to pay current liabilities. D) The company's current ratio will decrease.
212)
Which of the following statements is correct?
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A) A current ratio of 1.60 means the company's current assets are probably not sufficient to pay its current liabilities. B) The separate entity assumption requires that the financial activities of the owners of a company be reported on the company's balance sheet. C) The cost principle states that recording activities at cost will result in the balance sheet representing the true value of the company. D) A transaction is recorded if it has a measurable financial effect on the assets, liabilities or stockholders' equity of a business.
213) Which of the following is an example of proper accounting when it comes to reporting amounts on a company's balance sheet? A) X Company reported its land at the amount it could be sold for on the balance sheet date, which is higher than the original cost of the land. B) X Company reported its damaged equipment at an amount lower than it originally cost. C) X Company reported its inventory at its current market value, which is higher than its original cost. D) X Company included the amount owed to suppliers in its notes receivable at the amount owed on the balance sheet date.
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Answer Key Test name: Chap 02_7e 1) TRUE A transaction is an event or activity that has a direct and measurable financial effect on the assets, liabilities, or stockholders' equity of a business. 2) FALSE A promise to pay has been exchanged for a promise to work next year. This activity is not a transaction because no assets or services were exchanged at the time the new labor agreement is signed. This event does not affect GM's financial statements in the current year. 3) TRUE The accounting equation (Assets = Liabilities + Stockholders' Equity) must balance. If one side of the equation decreases, the other side must decrease. 4) TRUE This activity is not a transaction because no assets or services were exchanged at the time the agreement was signed. 5) FALSE There is no requirement to pay back equity contributions to stockholders. There is a legal requirement to pay back debt financing to creditors. 6) FALSE
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This activity is not a transaction because no assets or services were exchanged at the time the actress appeared on television. No asset would be recorded. In addition, recall that an asset is an economic resource presently controlled by the company; has measurable value and is expected to benefit the company by producing cash inflows or reducing cash outflows in the future. This situation does not meet the definition of an asset. 7) FALSE Assets and liabilities would each decrease by $50,000,000; there is no impact on stockholders' equity. 8) FALSE When new stock is issued for cash, the company has more cash and common stock. Assets and stockholders' equity both increase. 9) FALSE The three-step analyze-record-summarize process is applied to daily transactions, as well as adjustments at the end of each month, before preparing a trial balance and the financial statements. 10) TRUE The chart of accounts is a summary of all account names (and corresponding account numbers) used to record financial results in the accounting system. 11) TRUE Whether a debit or credit increases or decreases an account depends upon the type of account. Debits increase assets, expenses, and dividends, but decrease liabilities, revenues, and equity. Credits increase liabilities, revenue, and equity, but decrease assets, expenses and dividends. 12) FALSE
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The balance in an account is determined by the excess of increases over decreases. It is normal to have more increases in an account than decreases; therefore, the normal balance of an account is on the same side that increases the account. 13) TRUE If debits exceed credits, the account will have an overall debit balance. 14) FALSE A transaction may have any combination of increases and decreases. For example, a purchase of equipment on account increases both equipment and accounts payable. What is true is that every transaction is recorded with at least one debit and at least one credit. 15) TRUE Accounts on the left side of the accounting equation (that is, assets) increase on the left side and accounts on the right side of the equation (that is, liabilities and stockholders' equity) increase on the right side. 16) FALSE Journal entries are entered into the journal using a debit/credit format. By themselves, journal entries show the effect of transactions, but they do not provide account balances. The entries are "posted" to the ledger accounts, which then show the balance of each of the accounts. 17) FALSE The trial balance is an internal report that lists all the accounts and their balances and is used to check that total debits equals total credits. 18) FALSE A classified balance sheet contains subcategories and subtotals for current assets and current liabilities. 19) TRUE Assets and liabilities are classified as current and noncurrent. Stockholders' equity accounts are not classified as current or noncurrent. 20) FALSE Version 1
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The trial balance is an internal accounting report that lists the balances in all the ledger accounts at a point in time. It shows whether debit balance accounts equal the credit balance accounts. A balance sheet is a financial statement that reports the assets, liabilities, and equity of a business at a point in time. 21) TRUE The current ratio is current assets divided by current liabilities. Inventory is classified as a current asset and since it increases in this transaction, it would increase the current ratio. 22) TRUE The current ratio is current assets divided by current liabilities. A higher ratio means better ability to pay. 23) FALSE The trial balance is an internal accounting report that lists the balances in all the ledger accounts at a point in time. It shows whether debit balance accounts equal the credit balance accounts. It does not verify the accuracy of the transactions posted. 24) C Owners have a claim on company assets that is secondary to creditor's claims. Promissory notes are the legal documents that describe the details of a loan; stock certificates are evidence of ownership claims. A business is obligated to repay debt financing but is not obligated to repay equity financing. Creditors have a claim on company assets equal to the amount of liabilities that the company owes. 25) C Debt financing refers to money obtained through loans. A formal loan with the bank is reported as Notes Payable (long-term). 26) A The purchase of land is recorded in the Land account and a noncurrent bank loan is recorded as Notes Payable (long-term). Version 1
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27) A After obtaining initial financing, a company will start investing in assets that will be used after the business opens. 28) A Creditors have a claim to a company's assets equal to the amount of liabilities that the company owes. 29) C Creditors have a claim to a company's assets equal to the amount of liabilities that the company owes. 30) A Two sources of financing are available to businesses: equity and debt. Equity refers to financing a business through owners' contributions and reinvestments of profit. Debt refers to financing the business through loans. A business is obligated to repay debt financing, but it is not obligated to repay its equity financing. 31) B Two sources of financing are available to businesses: equity and debt. Equity refers to financing a business through owners' contributions and reinvestments of profit. Debt refers to financing the business through loans. A business is obligated to repay debt financing, but it is not obligated to repay its equity financing. 32) B Two sources of financing are available to businesses: equity and debt. Equity refers to financing a business through owners' contributions and reinvestments of profit. Debt refers to financing the business through loans. A business is obligated to repay debt financing, but it is not obligated to repay its equity financing. 33) B The cost principle states that assets and liabilities should be initially recorded at their original cost to the company. Version 1
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34) C Transactions include two types of events: external exchanges and internal events. 35) C An accounting transaction occurs when there is an exchange involving assets, liabilities and/or stockholders' equity. An exchange of a promissory note for cash qualifies as an exchange. An exchange of only promises is not an accounting transaction. 36) B External exchanges are exchanges involving assets, liabilities, and/or stockholders' equity between the company and someone else. An order has been placed; but the promise to pay will not occur until the supplies are delivered. An exchange of only promises is not an accounting transaction. Since no exchange has occurred, this activity would not be recorded as a transaction. 37) D Liabilities are debts and other obligations that must be paid or settled in the future. Not all liabilities have the word "payable" in their names. 38) B Financing activities involve debt transactions with lenders (e.g., Notes Payable) or equity transactions with investors (e.g., Common Stock). Receiving cash in exchange for a promissory note is a financing activity. 39) B A transaction is an event or activity that has a direct and measurable financial effect on the assets, liabilities, or stockholders' equity of a business. Ordering supplies is an activity that is not a transaction because no assets or services were exchanged at the time the order was placed. 40) D
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Equity refers to financing a business through owners' contributions and reinvestments of profit. Debt refers to financing the business through loans. A business is obligated to repay debt financing, but it is not obligated to repay its equity financing. 41) C Assets are resources presently owned by a business that generate future economic benefits. Notes Receivable is an example of an asset. Common Stock and Retained Earnings are examples of equity accounts and Notes Payable is a liability. 42) D A transaction is an event or activity that has a direct and measurable financial effect on the assets, liabilities, or stockholders' equity of a business. A liability (Bill's promise to pay) was exchanged for assets (fryer and dishwasher) and, so, the purchase is a transaction. No exchange took place with regards to the coupons, the speech, or the agreement with the fisherman. 43) D Business activities that affect the basic accounting equation (A = L + SE) are called transactions. Transactions are of special importance because they are the only activities that enter the financial accounting system. 44) D A businesses typically buy goods or services from others on credit, by promising to pay within 30 days of the purchase. Accounts Payable represents the amount owed to suppliers for prior credit purchases (on account). 45) A Because the accounting system captures both what is received and what is given, it is often referred to as a "double-entry" system. The doubleentry system requires that debits = credits and that A = L + SE Version 1
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46) A The company always receives something and gives something. This is a basic feature of all business activities. A business enters into an exchange either to earn a profit immediately or to obtain resources that will allow it to earn a profit later. This is the fundamental idea of business: to create value through exchange. Any exchange that affects the company's assets, liabilities, or stockholders' equity must be captured in and reported by the accounting system. 47) C Transactions include two types of events. External exchanges are exchanges involving assets, liabilities, and/or stockholders' equity between the company and someone else. Internal events do not involve exchanges with others outside the business, but rather occur within the company itself. Both are recoded in the accounting system. Some important activities that occur will not be captured by the accounting system because they are not transactions. 48) A An exchange of only promises is not an accounting transaction. 49) C Assets = Liabilities + Stockholders' Equity Stockholders' Equity = Assets − Liabilities = ($52,000 + $20,000) − $12,000 = $60,000 50) A Stockholders' equity is the amount invested and reinvested in a company by its stockholders. 51) A Investing activities include buying or selling noncurrent assets, such as property and equipment. 52) C
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The cost principle states that assets and liabilities should be initially recorded at their original cost to the company. Following the cost principle, assets and liabilities are first recorded at cost, which is their cash-equivalent value on the date of the transaction. 53) B External exchanges are exchanges involving assets, liabilities, and/or stockholders' equity between the company and someone else. An exchange of only promises is not an accounting transaction. Since no exchange has occurred when the contract is signed, this activity would not be recorded as a transaction. 54) A An exchange of only promises is not an accounting transaction. 55) A A chart of accounts is a summary of all account names (and corresponding account numbers) used to record financial results in the accounting system. 56) D Remember to answer from the company's point of view, not the investor's perspective. The company typically receives cash when it issues stock to owners. (The owners, not the company, receive stock certificates.) 57) B The company typically receives cash when it issues Common Stock (represented by stock certificates) to owners. 58) A Transactions are analyzed and their financial statement effects are entered into journals each day they occur. 59) A A journal is a record of each day's transactions. A ledger summarizes the effect of transactions that affect one account. Version 1
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60) C As part of transaction analysis, a name is given to each item exchanged. Accountants refer to these names as account titles. To ensure account titles are used consistently, every company establishes a chart of accounts—a list that designates a name and reference number that the company will use when accounting for each item it exchanges. The chart of accounts is tailored to each company's business, so although some account titles are common across all companies, others may be unique to a particular company. 61) B Every transaction has at least two effects on the basic accounting equation (at least one debit and one credit). A transaction can result in two accounts increasing, two accounts decreasing, or one account increasing and one account decreasing. A transaction may affect two balance sheet accounts, two income statement accounts, or one of each. Every transaction is analyzed from the standpoint of the business, not the owners. 62) B Accounts Payable is used to report amounts owed to suppliers for goods or services bought on credit (or on account). 63) C Receiving cash of $100,000 from customers in payment of their accounts will cause one asset (Cash) to increase and another asset (Accounts Receivable) to decrease. There is no change in the amount of total assets. Using the $100,000 of cash received to pay off a bank loan will cause an asset (Cash) to decrease and a liability (Notes Payable) to decrease. Considering both transactions, assets (Accounts Receivable) decrease by $100,000 and liabilities (Notes Payable) decrease by $100,000. 64) B Version 1
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Every transaction has at least two effects on the basic accounting equation. 65) C Accounts Payable is used to report amounts owed to suppliers for goods or services bought on credit (or on account). 66) B Change in assets = change in liabilities + change in stockholders' equity. If liabilities decrease and there is no change in assets, then either another liability must increase or stockholders' equity must increase. 67) B This transaction will cause assets (Cash) to decrease and liabilities (Notes Payable) to decrease. 68) A Issuing stock for cash means that Cash and Common Stock are affected. Using the cash to purchase land means that Cash and Land are affected. 69) C Issuing stock in exchange for cash increases assets (Cash) and increases stockholders' equity (Common Stock). 70) D Issuing shares of common stock in exchange for cash will increase Cash, an asset account, and increase Common Stock, a stockholders' equity account. 71) A The first transaction increases assets (Cash) and liabilities (Notes Payable). The second transaction increases assets (Equipment) and decreases an asset (Cash). The Cash account is increased and decreased by equal amounts. As such, taken together, these two transactions increase assets (Equipment) and increase liabilities (Notes Payable). 72) C
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Receiving cash in exchange for common stock affects the Cash and Common Stock accounts. Buying a machine using cash for part of the purchase amount and borrowing the rest affects the Equipment, Cash, and Notes Payable accounts. 73) A Change in assets = Change in liabilities + Change in stockholders’ equity = ($25,700) + $4,650 = ($21,050) 74) B Change in assets = Change in liabilities + Change in stockholders' equity = ($50,000) + $10,000 = ($40,000) 75) A Receiving cash from the issuance of stock increases both Cash and Common Stock. Using the cash to acquire a building causes the Cash account to decrease and the Buildings account to increase. The Cash account is increased and decreased by equal amounts. As such, taken together, these two transactions increase the Buildings account and increase the Common Stock account. 76) B Cash of $6,900 from stock issuance + Cash of $3,900 borrowed from bank + Supplies purchased in the amount of $1,190 + Equipment purchased in the amount of $6,900 − Cash paid for equipment of $2,190 = $16,700 77) D Cash of $25,000 from stock issuance + Cash of $10,000 borrowed from bank + Supplies purchased in the amount of $5,000 + Equipment purchased in the amount of $25,000 − Cash paid for equipment of $10,000 = $55,000 78) D
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The purchase of supplies using cash decreases Cash, an asset account, and increases Supplies, another asset account; as a result, total assets are unchanged. This transaction does not affect liabilities or stockholders' equity. 79) A The payment of cash of $25,000 reduces current assets by $25,000. The acquisition of equipment of $75,000 increases noncurrent assets by $75,000. Thus, total assets are increased by $50,000. 80) C If land is purchased using cash, land will increase by the same amount that cash will decrease. Thus, total assets will remain the same. 81) A Supplies increases and Cash decreases. Both are asset accounts, so total assets remain the same. 82) A The entry to record this transaction would increase Land by $54,000, decrease Cash by $13,500, and increase Notes Payable by $40,500 (or $54,000 − $13,500). 83) D Beginning total assets of $862,000 + Equipment purchased of $7,200 + Supplies purchased of $3,620 − Cash paid for supplies $3,620 + Cash received from sale of land of $16,200 − Land sold of $16,200 = $869,200 Signing a rental agreement is not an accounting transaction since there was no exchange involving assets, liabilities, and/or stockholders’ equity between the company and someone else. 84) B
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Beginning total assets of $425,000 + Equipment purchased of $3,000 + Supplies purchased of $1,750 − Cash paid for supplies $1,750 + Cash received from sale of land of $7,500 − Land sold of $7,500 = $428,000 Signing a rental agreement is not an accounting transaction since there was no exchange involving assets, liabilities, and/or stockholders' equity between the company and someone else. 85) D Collecting from customers on account increases the asset, Cash, and decreases the asset, Accounts Receivable; as such, the transaction does not change total assets. 86) C Cash from owners of $61,200 + Cash from borrowing of $31,200 + Inventory purchased for $11,200 − Cash paid for inventory of $11,200 + Equipment purchased for $71,200 − Cash paid for equipment of $10,000 = $153,600 87) A Cash from owners of $300,000 + Cash from borrowing of $150,000 + Inventory purchased for $50,000 − Cash paid for inventory of $50,000 + Equipment purchased for $350,000 − Cash paid for equipment of $50,000 = $750,000 88) D Note issued from borrowing of $30,500 + Note issued to purchase equipment of $60,500 = $91,000 89) C Note issued from borrowing of $150,000 + Note issued to purchase equipment of $300,000 = $450,000 90) C
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Change in assets = Change in liabilities + Change in stockholders’ equity Change in stockholders’ equity = Change in assets − Change in liabilities = ($3,600) − $2,900 = ($6,500) 91) C Change in assets = Change in liabilities + Change in stockholders' equity Change in stockholders' equity = Change in assets − Change in liabilities = ($3,500) − $2,800 = ($6,300) 92) C Assets = Liabilities + Stockholders’ Equity Stockholders’ Equity = Assets − Liabilities Beginning of year: = $24,950 − $8,570 = $16,380 Change in assets = Change in liabilities + Change in stockholders’ equity Change in stockholders’ equity = Change in assets − Change in liabilities = ($3,570) − $2,870 = ($6,440) Ending stockholders’ equity = $16,380 − $6,440 = $9,940 93) A
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Assets = Liabilities + Stockholders' Equity Stockholders' Equity = Assets − Liabilities Beginning of year: = $24,250 − $8,500 = $15,750 Change in assets = Change in liabilities + Change in stockholders' equity Change in stockholders' equity = Change in assets − Change in liabilities = ($3,500) − $2,800 = ($6,300) Ending stockholders' equity = $15,750 − $6,300 = $9,450 94) B Total assets = Cash from borrowing of $5,180 + Cash from issuing stock of $11,800 + Supplies purchased $1,180 − Cash paid to suppliers of $580 = $17,580 95) D Total assets = Cash from borrowing of $20,000 + Cash from issuing stock of $40,000 + Supplies purchased $4,000 − Cash paid to suppliers of $1,600 = $62,400 96) A Total liabilities = Notes payable to the bank of $5,090 + Accounts payable to supplier of $1,090 − $490 paid to supplier = $5,690 97) D Total liabilities = Notes payable to the bank of $20,000 + Accounts payable to supplier of $4,000 − $1,600 paid to supplier = $22,400 98) D
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This company's assets include Cash, Inventory, and Equipment. (These transactions also affect its liabilities, including Notes Payable and Accounts Payable, and its stockholders' equity, including Common Stock. The impact of these transactions on its liabilities and stockholders' equity is not set forth below.) Total assets = Cash received from stockholders of $80,000 + Inventory purchase of $12,000 + Equipment purchase of $32,000 + Cash received from bank borrowing of $40,000 − Cash used to purchase equipment of $12,000 = $152,000 99) B This company's liabilities include Notes Payable and Accounts Payable. (These transactions also affect its assets, including Cash, Inventory, and Equipment, and its stockholders' equity, including Common Stock. The impact of these transactions on its assets and stockholders' equity is not set forth below.) Total liabilities = Notes Payable from bank borrowing of $40,000 + Accounts Payable to purchase inventory of $12,000 + Note payable to purchase equipment of $20,000 = $72,000 100) C The impact of the transactions on the Cash account is as follows: ● Purchased $3,600 in supplies with cash − decrease Cash by $3,600 ● Issued 400 shares of stock for $45 per share − increase Cash by $18,000 ● Ordered supplies at a cost of $8,000 − not a transaction (nothing was exchanged) ● Paid a utility bill for $1,000 − decrease Cash by $1,000 Ending Cash balance = Beginning Cash balance + Total increases − Total decreases = $20,000 − $3,600 + $18,000 − $1,000 = $33,400
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101) D Assets are increased by debits and decreased by credits. Liabilities and Stockholders' equity are increased by credits and decreased by debits. 102) D The double-entry system also requires that debits equal credits. 103) B The total value of all debits recorded in the ledger must equal the total value of all credits recorded in the ledger. Debits may increase or decrease an account, depending on the type of account. If an account has equal amounts of debits and credits, the account would then have a zero balance. The normal balance for an account is the side on which it increases. 104) D Accounts Payable, a liability account, has a normal credit balance. The beginning credit balance of $18,300 − Debits of ($4,600 + $11,200 + $14,700) + Credits of ($3,700 + $9,600 + $12,800) = Ending credit balance of $13,900. 105) A Accounts Payable, a liability account, has a normal credit balance. The beginning credit balance of $9,100 − Debits of ($2,350 + $5,650 + $7,400) + Credits of ($1,800 + $4,750 + $6,350) = Ending credit balance of $6,600. 106) C The terms (and abbreviations) debit (dr) and credit (cr) just mean left and right. 107) B The terms (and abbreviations) debit (dr) and credit (cr) just mean left and right. 108) C
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The terms (and abbreviations) debit (dr) and credit (cr) just mean left and right. 109) A Accounts Payable is a liability account. All liability accounts have a normal credit balance and are increased by credits. 110) B Accounts Receivable is an asset account. All asset accounts have a normal debit balance and are increased by debits. 111) B Beginning debit balance of $124,000 + $14,710 + $38,310 − $6,010 − $5,810 − $7,410 − $12,010 − $11,210 = Ending balance of $134,570 112) D Beginning debit balance of $371,700 + $44,100 + $114,900 − $18,000 − $17,400 − $22,200 − $36,000 − $33,600 = Ending balance of $403,500 113) D Cash is an asset account and assets are increased by debits (on the leftside of the account) and decreased by credits (on the right-side of the account). Entries (a) and (b) are debits; the rest are credits. If the sum of (a) and (b) is more than the sum of (c) through (g), the Cash account balance will increase. 114) B Use debits for increases in assets (and for decreases in liabilities and stockholders' equity accounts). Use credits for increases in liabilities and stockholders' equity accounts (and for decreases in assets). Inventory is an asset account and, as such, it increases with a debit. The other accounts are on the right side of the accounting equation and increase with credits. 115) B
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Cash, an asset account, has a normal debit balance. Beginning debit balance of $70,400 + Debit of $18,770 − Credit of $16,150 = Ending debit balance of $73,020 116) B Cash, an asset account, has a normal debit balance. Beginning debit balance of $206,700 + debit of $54,900 − credit of $48,000 = Ending debit balance of $213,600 117) A Assets normally end with a debit balance (because debits to assets normally exceed credits) and liabilities and stockholders' equity accounts normally end with credit balances (credits exceed debits). 118) D Debits appear first (on top). Credits are shown below the debits and are indented to the right (both the words and the amounts). 119) A Debits appear first (on top). Credits are shown below the debits and are indented to the right (both the words and the amounts). 120) B The double-entry system requires that debits = credits. The accounting equation is: Assets = Liabilities + Stockholders' Equity (or Stockholders' Equity = Assets − Liabilities). Assets normally end with a debit balance (because debits to assets normally exceed credits) and liabilities and stockholders' equity accounts normally end with credit balances (credits exceed debits). An increase (rather than a decrease) in Common Stock would be recorded with a credit. 121) C The side that increases an account is the normal balance of the account. 122) B
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Inventory is an asset account and, as such, it has a normal debit balance. The Inventory account is increased with debits and decreased with credits. Beginning debit balance of $83,000 + Debits totaling $52,500 − Credits totaling $70,000 = Ending debit balance of $65,500. As a result, the Inventory account balance decreased by $17,500 during the year. 123) D Inventory is an asset account and, as such, it has a normal debit balance. The Inventory account is increased with debits and decreased with credits. Beginning debit balance of $136,000 + debits totaling $90,000 − credits totaling $110,000 = Ending debit balance of $116,000. As a result, the Inventory account balance decreased by $20,000 during the year. 124) C Accounts Payable, a liability account, is decreased with a debit. All asset accounts, including cash, have a normal debit balance. Common Stock is a stockholders' equity account and, as such, is increased by credits. The accounting equation is assets equal liabilities plus (rather than minus) stockholders' equity. 125) D The journal entry will debit Equipment for $17,000, credit Cash for $4,250, and credit Notes Payable for $12,750. 126) C The journal entry will debit Equipment for $36,000, credit Cash for $9,000, and credit Notes Payable for $27,000. 127) B
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Use debits for increases in assets (and for decreases in liabilities and stockholders' equity accounts). Use credits for increases in liabilities and stockholders' equity accounts (and for decreases in assets). Accounts Receivable is an asset and, as such, would be decreased with a credit. Retained Earnings and Common Stock are stockholders' equity accounts and Notes Payable is a liability account. Liabilities and stockholders' equity accounts are increased with credits. 128) A Use debits for increases in assets (and for decreases in liabilities and stockholders' equity accounts). Use credits for increases in liabilities and stockholders' equity accounts (and for decreases in assets). Supplies is an asset and, as such, would be increased with a debit. Retained Earnings and Common Stock are stockholders' equity accounts and Accounts Payable is a liability account. Liabilities and stockholders' equity accounts are decreased with debits. 129) D Since cash (asset) is increased, it must be debited. Since notes payable (liability) is being increased, it must be credited. 130) B The asset, Cash, is increased with a debit and the liability, Notes Payable, is increased with a credit. 131) D Notes Payable, a liability account, decreases with a debit and Cash, an asset account, decreases with a credit. 132) B In this case, since the debits exceed the credits by $35,000, there is a debit balance of $35,000. 133) C
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The equation for the Cash account, which normally has a debit balance, is as follows. Ending debit balance = Beginning debit balance + Total debit entries − Total credit entries Total credit entries = Beginning debit balance + Total debit entries − Ending debit balance = $62,500 + $250,000− $112,500 = $200,000 134) C Use debits for increases in assets (and for decreases in liabilities and stockholders' equity accounts). Use credits for increases in liabilities and stockholders' equity accounts (and for decreases in assets). The normal balance for an account is the side on which it increases. Common Stock is a stockholders' equity account and has a normal credit balance. 135) C Each exchange is analyzed to determine a dollar amount that represents the value of items given and received. Transactions are analyzed from the standpoint of the business (rather than its owners). Business activities that do not include the exchange of assets or services at the time of the activity are not considered transactions. Journal entries indicate the effects of each day's transactions in a debits-equal-credits format on all of the accounts affected (not just the balance sheet accounts). 136) D Notes Payable and Income Tax Payable are liability accounts; however, Common Stock is a component of stockholders' equity; it is not a liability account. 137) D A chart of accounts is a summary of all account names (and corresponding account numbers) used to record financial results in the accounting system. Version 1
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138) C The journal entry to record the sale of the equipment would include a debit to Notes Receivable and a credit to Equipment for $420,000. 139) D The journal entry to record this transaction would include a debit to Cash and a credit to Common Stock. This transaction is an example of a cash inflow from a financing activity. 140) B Transactions are analyzed and their financial effects are entered into journals each day they occur. Later, these journal entries are summarized in ledger accounts that keep track of the financial effects on each account. The simplified version of a ledger account is called a Taccount. 141) A Transactions are analyzed and their financial effects are entered into journals each day they occur. Later, these journal entries are summarized in ledger accounts that keep track of the financial effects on each account. The simplified version of a ledger account is called a Taccount. 142) A Transactions are analyzed and their financial effects are entered into journals each day they occur. Later, these journal entries are summarized in ledger accounts that keep track of the financial effects on each account. 143) A
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A businesses typically buy goods or services from others on credit, by promising to pay within 30 days of the purchase. Accounts Payable represents the amount owed to suppliers for prior credit purchases (on account). In this transaction, the asset that is purchased, which increases, would be debited. Cash, an asset account, which decreases for the amount paid, would be credited, and Accounts Payable, a liability account, which increases for the amount owed, would be credited. 144) B In this transaction, Supplies, an asset account, which increases, would be debited and Accounts Payable, a liability account, which also increases, would be credited. 145) B A transaction has taken place; supplies were received in exchange for a promise to pay. On September 5, the date of the transaction, a journal entry should be prepared that includes a debit to Supplies and a credit to Accounts Payable for $87,000. 146) A Both accounts decrease. Cash is an asset account and Notes Payable is a liability account. The journal entry would include a debit to Notes Payable and a credit to Cash for $100,000. 147) C Both accounts decrease. Cash is an asset account and Accounts Payable is a liability account. The journal entry would include a debit to Accounts Payable and a credit to Cash and for $10,000. 148) C Equipment, an asset, will increase with a debit for $1,200,000. Cash, an asset, will decrease with a credit for $180,000. Notes Payable, a liability, will increase with a credit for $1,020,000. 149) A
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The debit to the Software account increases that asset account, so $18,000 of software was purchased. The credit to the Cash account decreases that asset account, so $7,200 cash was paid. The credit to Notes Payable increases that liability account, so a note for $10,800 was signed. 150) C A trial balance is an internal report only. A trial balance checks on the equality of debits and credits. It is not a way to ensure that all journal entries have been posted since if a journal entry is not posted, debits could still equal credits. It is also not a way to ensure that no mistakes have been made. If a mistake was made, but was posted using equal debits and credits, the trial balance would still be in balance. A balance sheet (or classified balance sheet if subcategories are used) is also called a statement of financial position and is used by investors and creditors. 151) D A trial balance is an internal report that lists all accounts and their balances to check on the equality of total recorded debits and total recorded credits. If only the credit of a transaction was recorded, the trial balance would not be in balance. The other errors listed (recording a transaction twice, not recording a transaction, or posting the transaction to the wrong accounts) would result in a trial balance that would still be in balance even though various account balances would be misstated. 152) B This company's trial balance would list its asset accounts, which have debit balances, and then its liability and stockholders' equity accounts, which have credit balances. 153) C This company's trial balance would list its asset accounts, which have debit balances, and then its liability and stockholders' equity accounts, which have credit balances. Version 1
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154) A Common Stock is a stockholders' equity account and is not classified as current or noncurrent. Cash and Supplies are current assets. Accounts Payable is a current liability. 155) D Accounts receivable is not classified as noncurrent. It is a current asset. Notes payable (long-term) is a noncurrent liability. Land and equipment are noncurrent assets. 156) A Total credits = Accounts Payable $26,400 + Common Stock $21,500 + Notes Payable $47,500 = $95,400 157) B Total credits = Accounts Payable $30,600 + Common Stock $30,000 + Notes Payable $60,000 = $120,600 158) D Total credits = Accounts Payable $31,800 + Common Stock $36,000 + Notes Payable $63,000 = $130,800 Total debits = Cash (unknown) + Equipment $16,500 + Land $48,000 Total debits must also equal $130,800 $130,800 = Cash (unknown) + Equipment $16,500 + Land $48,000 Cash = $130,800 − Equipment $16,500 − Land $48,000 = $66,300 159) D
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Total credits = Accounts Payable $30,600 + Common Stock $30,000 + Notes Payable $60,000 = $120,600 Total debits = Cash (unknown) + Equipment $13,500 + Land $45,000 Total debits must also equal $120,600 $120,600 = Cash (unknown) + Equipment $13,500 + Land $45,000 Cash = $120,600 − Equipment $13,500 − Land $45,000 = $62,100 160) A Current assets will be used up or converted into cash within 12 months of the balance sheet date. 161) D Companies list assets in order of liquidity (how soon they will be used up or turned into cash). 162) C Cash, Supplies, and Prepaid Insurance are current assets because they will be used up or converted to cash within 12 months of the date of the balance sheet. Equipment is classified as a noncurrent asset because it will be used over a number of years. 163) D Current liabilities are debts and other obligations that will be paid or fulfilled within 12 months of the balance sheet date. Accounts Payable is the only current liability. Cash and Supplies are assets. Since the Notes Payable are due in two years, they are a noncurrent liability. 164) C Current liabilities are debts and obligations that will be paid, settled, or fulfilled within 12 months of the balance sheet date. Noncurrent (or long-term) liabilities are those that do not meet the definition of current. 165) C Current assets are assets that will be used up or converted into cash within 12 months of the balance sheet date. 166) A Version 1
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Retained Earnings is the amount of earnings accumulated from prior years that have not been distributed as dividends. At the start of the first year of operations, there would be a zero balance in Retained Earnings. 167) B Current liabilities are debts and obligations that will be paid, settled, or fulfilled within 12 months of the balance sheet date. 168) D Companies list assets in order of liquidity (how soon they will be used up or turned into cash) and liabilities in order of maturity (how soon they will be paid in cash or fulfilled by providing a service). A classified balance sheet lists current assets first starting with Cash. 169) B Current assets are assets that will be used up or converted into cash within 12 months of the balance sheet date. Examples include Cash, Supplies and Inventory. Accounts Payable is a current liability. 170) D Current liabilities are debts and obligations that will be paid, settled, or fulfilled within 12 months of the balance sheet date. Noncurrent (or long-term) liabilities do not meet the definition of current liabilities. A notes payable that is due January 15, Year 3 would be classified as a noncurrent liability on the balance sheet at December 31, Year 1 since it is due after 12 months of the balance sheet date. 171) A Current assets = Cash + Accounts receivable + Inventory = $25,190 + $9,520 + $32,900 = $67,610 172) B Current assets = Cash + Accounts Receivable + Inventory = $35,235 + $14,025 + $46,800 = $96,060 173) A
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Current liabilities = Accounts payable + Wages payable = $4,650 + $5,150 = $9,800 174) B Current liabilities = Accounts Payable + Wages Payable = $6,750 + $3,675 = $10,425 175) A Liabilities and stockholders’ equity are the credit balance accounts. Liabilities = Accounts Payable + Wages Payable + Notes Payable = $4,640 + $4,970 + $2,640 = $12,250 Stockholders’ equity = Common Stock + Retained Earnings = $91,400 + 14,230 = $105,630 Liabilities + Stockholders’ equity = $12,250 + $105,630 = $117,880 176) C Liabilities and stockholders' equity are the credit balance accounts. Liabilities = Accounts Payable + Wages Payable + Notes Payable = $6,750 + $3,675 + $3,750 = $14,175 Stockholders' equity = Common Stock + Retained Earnings = $135,000 + 21,135 = $156,135 Liabilities + Stockholders' equity = $14,175 + $156,135 = $170,310 177) B A classified balance sheet is a balance sheet that shows a subtotal for current assets and current liabilities. Current liabilities are debts and obligations that will be paid, settled, or fulfilled within 12 months of the balance sheet date. Although some account titles are common across all companies, each chart of accounts is tailored to each company's business. A balance sheet is prepared as of a specific date (rather than for a period of time). 178) A Version 1
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Payables are liabilities or obligations of the company. Companies list assets in order of liquidity (how soon they will be used up or turned into cash). The balance sheet balances when assets equal liabilities plus stockholders' equity (rather than assets plus liabilities equal stockholders' equity or asset debits equal liability credits). 179) C If a $5,000 credit to a stockholders' equity account is misclassified as a $5,000 credit to a liability, the accounting equation will still balance because liabilities and stockholders' equity are on the same side of the accounting equation. After journal entries have been recorded, their dollar amounts are copied ("posted") to each ledger account affected by the transaction (rather than from the ledger to the journal). If an error in posting is made so that a $100 debit is entered as a credit to an account, the accounts will be out of balance by $200 (rather than $100). If a transaction is recorded with a debit to Supplies of $10 and a credit to Accounts Payable for $10, the accounting equation will still balance. 180) B Current assets are assets that will be used up or converted into cash within 12 months of the balance sheet date. Current liabilities are debts and obligations that will be paid, settled, or fulfilled within 12 months of the balance sheet date. Noncurrent (or long-term) assets and liabilities do not meet the definition of current. Noncurrent assets include Equipment and Other Assets. Noncurrent liabilities include Notes Payable due in two years. 181) B Stockholders’ equity includes Common Stock, which is the amount contributed by owners of $661,500. 182) B Stockholders' equity includes Common Stock, which is the amount contributed by owners of $662,100. Version 1
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183) C After transactions are analyzed, journal entries are prepared to record those transactions in the journal. Then, they are posted to the ledger. After a trial balance is prepared using the ledger balances, the financial statements are prepared. 184) C Total current assets = Cash + Accounts Receivable Accounts Receivable is an asset; it is increased with debits (left-side of T-account) and decreased with credits (right-side of T-account) Ending Accounts Receivable balance = Beginning debit balance of $187,800 + $105,200 + $63,930 − $18,030 − $5,430 − $14,730 − $19,230 = $299,510 Total Current Assets = $28,030 + $299,510 = $327,540 185) D Total current assets = Cash + Accounts Receivable Accounts Receivable is an asset; it is increased with debits (left-side of T-account) and decreased with credits (right-side of T-account) Ending Accounts Receivable balance = Beginning debit balance of $187,500 + $104,900 + $63,900 − $18,000 − $5,400 − $14,700 − $19,200 = $299,000 Total Current Assets = $28,000 + $299,000 = $327,000. 186) A
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Accounts Receivable is an asset; it is increased with debits (left-side of T-account) and decreased with credits (right-side of T-account) Ending Accounts Receivable balance = Beginning debit balance of $187,500 + $104,900 + $63,900 − $18,000 − $5,400 − $14,700 − $19,200 = $299,000 The debits represent increases as a result of sales to customers on account. The credits represent decreases as a result of customer payments on account. The account balance increased from $187,500 to $299,000, which means the debits exceeded the credits. Sales to customers on account (the debits) exceeded the payments received from customers on account (the credits). 187) D When money is borrowed from a bank using a promissory note, the related journal entry includes a debit to Cash and a credit to Notes Payable. 188) B The current ratio, which is calculated by dividing current assets by current liabilities, tells you whether current assets are sufficient to pay current liabilities. A higher ratio means better ability to pay. 189) A The current ratio equals current assets divided by current liabilities. It is used to determine whether a firm has sufficient cash or other current assets on hand to pay the liabilities that are due in the near future. 190) D Following the cost principle, assets and liabilities are first recorded at cost, which is their cash-equivalent value on the date of the transaction. Later, if an asset's value increases, the increase is generally not recorded under GAAP (unless it is a particular type of financial investment). 191) A
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Following the cost principle, assets and liabilities are first recorded at cost, which is their cash-equivalent value on the date of the transaction. Later, if an asset’s value increases, the increase is generally not recorded under GAAP (unless it is a particular type of financial investment). Denim’s balance sheet should report its land at the original cost of $16,500. 192) A Following the cost principle, assets and liabilities are first recorded at cost, which is their cash-equivalent value on the date of the transaction. Later, if an asset's value increases, the increase is generally not recorded under GAAP (unless it is a particular type of financial investment). Denim's balance sheet should report its land at the original cost of $15,000. 193) C The transaction will increase Equipment, a noncurrent asset, and decrease Cash, a current asset. The current ratio is computed by dividing current assets by current liabilities. Since the numerator will decrease, the current ratio will decrease. 194) A The transaction will increase Cash, a current asset, and increase, Common Stock, a stockholders' equity account. The current ratio is computed by dividing current assets by current liabilities. Since the numerator will increase, the current ratio will increase. 195) D This activity is not a transaction because no assets or services were exchanged by the business. No asset would be recorded. In addition, recall that an asset is an economic resource presently controlled by the company; it has measurable value and is expected to benefit the company by producing cash inflows or reducing cash outflows in the future. This situation does not meet the definition of an asset. Version 1
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196) A If the company is trying to mislead creditors, it would want to overstate its current ratio. A higher current ratio means better ability to pay. The current ratio is computed by dividing current assets by current liabilities. A higher current ratio would result if the company overstated its current assets, which include Accounts Receivable. 197) A Following the cost principle, assets and liabilities are first recorded at cost, which is their cash-equivalent value on the date of the transaction. Later, if an asset's value increases, the increase is generally not recorded under GAAP (unless it is a particular type of financial investment). 198) C Total Assets = Total Liabilities + Total Stockholders’ Equity = $804,540 + ($1,050,000 + $135,260) = $1,989,800 Total Assets = Total current assets + Total noncurrent assets Total noncurrent assets = Total Assets − Total current assets = $1,989,800 − $1,948,770 = $41,030 199) D Total Assets = Total Liabilities + Total Stockholders' Equity = $399,770 + ($500,000 + $65,130) = $964,900 Total Assets = Total current assets + Total noncurrent assets Total noncurrent assets = Total Assets − Total current assets = $964,900 − $811,925 = $152,975 200) A Current ratio = Current assets ÷ Current liabilities Current liabilities = Current assets ÷ Current ratio = $1,819,104 ÷ 2.8 = $649,680 Version 1
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201) A Current ratio = Current assets ÷ Current liabilities Current liabilities = Current assets ÷ Current ratio = $811,925 ÷ 2.5 = $324,770 202) C Total assets = Total liabilities + Total stockholders’ equity = $801,540 + $1,020,000 + $132,260 = $1,953,800 (correct) Total stockholders’ equity = Common Stock + Retained Earnings = $1,020,000 + $132,260 = $1,152,260 (correct) Noncurrent liabilities = Total liabilities − Current liabilities = $801,540 − $649,560 = $151,980 Current ratio = Current assets ÷ Current liabilities Current liabilities = Current assets ÷ Current ratio = $1,753,812 ÷ 2.7 = $649,560 (correct) 203) C Total assets = Total liabilities + Total stockholders' equity = $399,770 + $500,000 + $65,130 = $964,900 (correct) Total stockholders' equity = Common Stock + Retained Earnings = $500,000 + $65,130 = $565,130. (correct) Noncurrent liabilities = Total liabilities – Current liabilities = $399,770– $324,770 = $75,000 Current ratio = Current assets ÷ Current liabilities Current liabilities = Current assets ÷ Current ratio = $811,925 ÷ 2.5 = $324,770 (correct) 204) C
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The current ratio is calculated by dividing current assets by current liabilities. If current assets exceed current liabilities, the ratio will be greater than (rather than less) than 1.0. 205) C Total Assets = Cash + Accounts Receivable + Inventory + Supplies + Equipment = $73,364 + $81,376 + $25,856 + $5,552 + $54,528 = $240,676 206) A Total Assets = Cash + Accounts Receivable + Inventory + Supplies + Equipment = $73,324+ $81,336 + $25,816 + $5,512 + $54,128 = $240,116 207) C Total Liabilities = Accounts Payable + Wages Payable + Income Tax Payable + Notes Payable, due in two years = $19,217 + $12,890 + $3,522 + $1,719 = $37,348 208) B Total Liabilities = Accounts Payable + Wages Payable + Income Tax Payable + Notes Payable, due in two years = $19,207 + $12,880 + $3,512 + $1,709 = $37,308 209) B Current Assets = Cash + Accounts Receivable + Inventory + Supplies = $73,434 + $81,446 + $25,926 + $5,622 = $186,428 Current Liabilities = Accounts Payable + Wages Payable + Income Tax Payable = $19,317 + $12,990 + $3,622 = $35,929 Current ratio = Current Assets ÷ Current Liabilities = $186,428 ÷ $35,929 = 5.19 Version 1
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210) C Current Assets = Cash + Accounts Receivable + Inventory + Supplies = $73,324 + $81,336 + $25,816 + $5,512 = $185,988 Current Liabilities = Accounts Payable + Wages Payable + Income Tax Payable = $19,207 + $12,880 + $3,512 = $35,599 Current ratio = Current Assets ÷ Current Liabilities = $185,988 ÷ $35,599 = 5.22 211) D Current ratio = Current assets ÷ Current liabilities Before the transaction: ($14,000 + $37,000 + $2,500) ÷ ($52,000 + $12,400) = $53,500 ÷ $64,400 = 0.83 After the transaction: ($6,000 + $37,000 + $2,500) ÷ ($52,000 + $4,400) = 0.81 The current ratio decreased. A higher ratio means better ability to pay; a lower ratio means lesser ability to pay. In this case, the company would look less (rather than more) favorable to creditors. 212) D A transaction is recorded if it has a measurable financial effect on the assets, liabilities or stockholders' equity of a business. A current ratio of 1.60 means the company has $1.60 in current assets for every $1.00 of current liabilities; therefore, current assets are (rather than are not) probably sufficient to pay current liabilities. The separate entity assumption (from Chapter 1) states that transactions of the owners are separate from transactions of the business; as such, the financial activities of the owners of a company would not be reported on the company's balance sheet. Following the cost principle, assets and liabilities are first recorded at cost, which is their cash-equivalent value on the date of the transaction; cost does not approximate true value. Version 1
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213) B Following the cost principle, assets and liabilities are first recorded at cost, which is their cash-equivalent value on the date of the transaction. Later, if an asset's value increases, the increase is generally not recorded under GAAP unless it is a particular type of financial investment (not discussed in this chapter). However, if an asset's value falls, it is generally reported at that lower value. Thus, the amount reported on the balance sheet may not be the asset's current value.
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CHAPTER 2: PROBLEM MATERIAL SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 1) Selected accounts for Moonbills Corporation appear below. Required: For each account, indicate the following: a. In the first column, indicate the nature of each account, using the following abbreviations: Asset – A, Liability – L, Stockholders' Equity – SE. b. In the second column, indicate the normal balance by inserting dr (for debit) or cr (for credit). (Part a) Type of Account
(Part b) Normal Balance
1. Supplies 2. Notes Payable 3. Income Tax Payable 4. Equipment 5. Accounts Payable 6. Accounts Receivable 7. Common Stock 8. Cash 9. Retained Earnings 10. Land
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2) Listed below are components of several transactions. Indicate whether a debit (dr) or credit (cr) would be required to record the component of the transaction. Increase in Cash. Increase in Accounts Payable. Decrease in Notes Payable. Increase in Inventory. Increase in Common Stock. Decrease in Equipment.
3) Match each account name with the category that it would be included under in a classified balance sheet. A) NCA — Noncurrent Asset B) CL — Current Liability C) SE — Stockholders' Equity D) CA — Current Asset
Equipment Common Stock Supplies Retained Earnings Accounts Receivable Accounts Payable
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4)
For each of the following, indicate how the event would most likely be categorized.
A) NT — No Transaction B) EE — External Exchange C) IE — Internal Event
A company sells $2 million in goods for immediate payment. The company uses up office supplies. The stock market rises 10% and the value of a company's stock increases. A company pays cash to an inventor for the legal rights to produce a new product. Management promises to pay workers an overtime bonus as required by their union contract. A company uses up supplies to manufacture a product. A company receives $1 million in orders but no down payments.
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5)
Match the term with its definition.
Term dr cr Classified Balance Sheet Common Stock Accounting Equation Transaction Accounts Payable Journal Entry Definition A) The abbreviation for an item posted on the left side of a T-account. B) A balance sheet that has not yet been publicly released. C) A transaction that is triggered automatically merely by the passage of time. D) When a company becomes included in the Fortune 500. E) The account credited when cash is received in exchange for stock issued. F) The value of a company's public relations campaign. G) An event that has no effect on the balance sheet and is not recorded in the financial statements. H) A balance sheet that has assets and liabilities categorized as current vs. noncurrent. I) Amounts owed to suppliers for goods or services bought on credit. J) The abbreviation for an item posted on the right side of a T-account. K) An exchange or event that has a direct impact on a company's financial statements. L) Liabilities divided by assets. M) Another name for stockholders' equity or shareholders' equity. N) A method of recording a transaction in debit/credit format. O) The expression that assets must equal liabilities plus stockholders' equity
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6)
Match the term with its definition.
Term Duality of Effects Journal Entry Posting Debit Chart of Accounts T-Account Credit Cost Principle Definition A) A summary of account names and numbers. B) A simplified version of an account in the General Ledger. C) Compares balance sheet items from two different time periods. D) When a dollar value is assigned to an item recorded in the accounting system. E) A journal entry that lowers the balance of the account. F) An amount that is posted on the left side of a T-account or ledger. G) The concept that a company must keep separate accounts by time period. H) An amount that is posted on the right side of a T-account or ledger. I) Assets are initially recorded at the amount paid to acquire them. J) When journal entries are recorded in the appropriate T-account or ledger. K) When a company's balance sheet has been verified by an outside auditor. L) The principle that a company should use the least optimistic measure, when uncertainty exists. M) The concept that any transaction must have at least two effects on the accounting equation. N) The mechanism used to record each transaction in the General Journal.
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 7) Consider the following account balances of Evan McGruder, Incorporated, as of December 31, Year 3: Accounts Payable Equipment Common Stock Income Tax Payable
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$ 298,500 1,054,000 500,000 9,750
Retained Earnings Notes Payable, due Year 5 Accounts Receivable Cash
$ 136,750 858,000 506,250 242,750
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Required: Prepare a classified balance sheet at December 31, Year 3.
8)
Grizzly Company enters into the following transactions:
1.Stockholders contribute $25,000 cash to a company in exchange for common stock. 2.The company purchases $12,500 of new equipment in exchange for its promise to pay $12,500 at the end of next month. 3.The company pays $7,500 to suppliers on account. Required: a. Show the effect of these transactions on the basic accounting equation. b. Prepare the journal entries that would be used to record the transactions.
9) The following is a list of account balances for Pick-A-Pet, Incorporated, as of June 30, Year 3: Accounts Payable Accounts Receivable Cash Common Stock Equipment Logo and Trademarks
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$ 349,200 419,200 732,600 662,100 58,400 421,600
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Long-term Notes Payable Retained Earnings Software
268,900 470,100 118,500
The company entered into the following transactions during July, Year 3. Stockholders contribute $300,000 cash for additional ownership shares and the company borrows $150,000 in cash from a bank to buy new equipment at a later date. No other transactions took place during July, Year 3. Required: a. Prepare a classified balance sheet for the company at June 30, Year 3. b. Show the effects of the July transactions on the basic accounting equation. c. Prepare the journal entries that would be used to record the transactions.
10)
During the month, a company enters into the following transactions:
1.Borrows $3,200 of cash from the bank by signing a formal agreement to repay the loan in 2 years. 2.Buys $4,000 of new equipment on account. 3.Pays off $2,400 of accounts payable. 4.Pays off $1,200 of notes payable. Required: a. Show the effect of these transactions on the basic accounting equation. b. Prepare the journal entries that would be used to record the transactions.
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11) O'Brien Construction had the following business activities: 1.Stockholders invest $50,000 cash in the corporation. 2.O'Brien purchased $800 of office supplies on credit. 3.O'Brien purchased office equipment for $14,000, paying $5,000 in cash and signing a 30day note payable for the remainder. 4.O'Brien paid $400 cash on account for office supplies purchased in transaction 2. 5.O'Brien purchased two acres of land for $20,000, signing a 2-year note payable. 6.O'Brien sold one acre of land at one-half of the total cost of the two acres, receiving the full amount or $10,000 in cash. 7.O'Brien made a payment of $10,000 on its 2-year note. Required: Prepare journal entries for the above transaction.
12) The company's total assets are $36,000. The following is a listing of the company’s accounts and account balances as of December 31, Year 3. This company doesn't have any other accounts. Accounts Payable Accounts Receivable Supplies Equipment Common Stock Cash Retained Earnings
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$ 7,000 8,000 1,000 22,000 10,000 Unknown Unknown
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Required: a. Determine the balance of the Cash account. b. Determine the balance of the Retained Earnings account.
13) On January 1, Year 3, Wayfarer Company's assets were $240,000 and its stockholders' equity was $112,000. During the year, assets increased $12,000 and liabilities decreased $8,000. Required: Determine the amount of stockholders' equity at December 31, Year 3.
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Answer Key Test name: Chap 02_7e_Problems 1)
1. Supplies 2. Notes Payable 3. Income Tax Payable 4. Equipment 5. Accounts Payable 6. Accounts Receivable 7. Common Stock 8. Cash 9. Retained Earnings 10. Land
(Part a) Type of Account A L L A L A SE A SE A
(Part b) Normal Balance dr cr cr dr cr dr cr dr cr dr
2) dr Increase in Cash cr Increase in Accounts Payable dr Decrease in Notes Payable dr Increase in Inventory cr Increase in Common Stock cr Decrease in Equipment 3) A) Equipment C) Common Stock D) Supplies C) Retained Earnings D) Accounts Receivable B) Accounts Payable
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4) B) A company sells $2 million in goods for immediate payment. C) The company uses up office supplies. A) The stock market rises 10% and the value of a company's stock increases. B) A company pays cash to an inventor for the legal rights to produce a new product. A) Management promises to pay workers an overtime bonus as required by their union contract. C) A company uses up supplies to manufacture a product. A) A company receives $1 million in orders but no down payments. 5) A) dr J) cr H) Classified Balance Sheet E) Common Stock O) Accounting Equation K) Transaction I) Accounts Payable N) Journal Entry 6) M) Duality of Effects N) Journal Entry J) Posting F) Debit A) Chart of Accounts B) T-Account H) Credit I) Cost Principle 7) EVAN MCGRUDER, INCORPORATED Balance Sheet at December 31, Year 3
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Assets Current Assets Cash Accounts Receivable Total Current Assets Equipment
$ 242,750 506,250 749,000 1,054,000
Total Assets
$ 1,803,000
Liabilities and Stockholders’ Equity Current Liabilities Accounts Payable Income Tax Payable Total Current Liabilities Notes Payable Total Liabilities Stockholders' Equity
$ 298,500 9,750 308,250 858,000 1,166,250
Common Stock Retained Earnings Total Stockholders' Equity
500,000 136,750 636,750
Total Liabilities and Stockholders' Equity
$ 1,803,000
8) a. Transaction Analysis = Liabilities
Assets 1
Cash
+ 25,000
2
Equipment
+ 12,500
3
Cash
− 7,500
Accounts Payable Accounts Payable
+
Stockholders’ Equity Common + 25,000 Stock
+ 12,500 − 7,500
b. Transaction 1
General Journal Cash
Debit 25,000
Common Stock 2
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Equipment
Credit
25,000 12,500
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Accounts Payable 3
12,500
Accounts Payable
7,500
Cash
7,500
9) a. PICK-A-PET, INCORPORATED Balance Sheet at June 30, Year 3 Assets Current Assets Cash Accounts Receivable Total Current Assets Equipment Software Logo and Trademarks
$ 732,600 419,200 1,151,800 58,400 118,500 421,600
Total Assets
$ 1,750,300
Liabilities and Stockholders’ Equity Current Liabilities Accounts Payable Total Current Liabilities Notes Payable
$ 349,200 349,200 268,900
Total Liabilities
618,100
Stockholders' Equity Common Stock Retained Earnings Total Stockholders' Equity
662,100 470,100 1,132,200
Total Liabilities and Stockholders' Equity
$ 1,750,300
b. Cash
Assets + 300,000
Equipment
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+ 150,000
Transaction Analysis = Liabilities
Notes
+ Stockholders’ Equity Common + 300,000 Stock
+ 150,000
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Payable
c. Transaction 1
General Journal
Debit 300,000
Cash Common Stock
2
Credit
300,000
Cash
150,000
Notes Payable
150,000
10) a. Transaction Analysis = Liabilities
Assets 1
Cash
+ 3,200
2
Equipment
+ 4,000
3
Cash
− 2,400
4
Cash
− 1,200
Notes Payable Accounts Payable Accounts Payable Notes Payable
+
Stockholders’ Equity
+ 3,200 + 4,000 − 2,400 − 1,200
b. Transaction 1
General Journal Cash
Debit 3,200
Notes Payable 2
Equipment
3,200 4,000
Accounts Payable 3
Accounts Payable
4,000 2,400
Cash 4
Notes Payable Cash
Credit
2,400 1,200 1,200
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Transaction 1
General Journal Cash
Debit 50,000
Common Stock 2
Supplies
50,000 800
Accounts Payable 3
4
Equipment
800 14,000
Cash
5,000
Notes Payable
9,000
Accounts Payable
400
Cash 5
Land
400 20,000
Notes Payable 6
Cash
20,000 10,000
Land 7
Notes Payable Cash
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Credit
10,000 10,000 10,000
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12) a. Total Assets = Accounts Receivable + Supplies + Equipment + Cash Cash = Total Assets − Accounts Receivable − Supplies − Equipment = $36,000 − $8,000 − $1,000 − $22,000 = $5,000 b. Assets = Liabilities + Stockholders' Equity Assets = Accounts Payable + (Common Stock + Retained Earnings) $36,000 = $7,000 + ($10,000 + Retained Earnings) Retained Earnings = $36,000 − $7,000 − $10,000 = $19,000 13) Beginning of the year: Assets = Liabilities + Stockholders’ Equity Liabilities = Assets − Stockholders’ Equity = $240,000 − $112,000 = $128,000 End of year: Assets = Liabilities + Stockholders’ Equity Stockholders’ Equity = Assets − Liabilities = ($240,000 + $12,000) − ($128,000 − $8,000) = $132,000
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CHAPTER 3 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) The period of time between buying goods to be sold to customers and collecting cash from customers is the operating cycle. ⊚ true ⊚ false
2) Expenses are the costs of operating a business that are paid for in the period covered by the income statement. ⊚ true ⊚ false
3) If a company records an expenditure made this period as an expense, when it should have been recorded as an asset, net income will be overstated in the current period as a result. ⊚ true ⊚ false
4)
If revenues are not growing faster than expenses, then net income will decrease. ⊚ true ⊚ false
5)
When revenues exceed expenses in a period, stockholders' equity will increase. ⊚ true ⊚ false
6) Dividing up the continuing life of a company into shorter periods is called the time period assumption. ⊚ true ⊚ false
7)
GAAP does not allow cash basis accounting to be used in external financial reports. ⊚ true ⊚ false
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8)
Deferred Revenue is reported on the balance sheet as a liability. ⊚ true ⊚ false
9) In the fifth step of the revenue recognition model, “when” refers to “over a period of time” (e.g., monthly) whereas “as” refers to “a point in time” (e.g., at delivery). ⊚ true ⊚ false
10) A performance obligation is any agreement between a seller and a customer that creates legal rights and obligations. ⊚ true ⊚ false
11) A company does not need to record the receipt of a bill for utilities used during this year if the company will not pay the bill until next year. ⊚ true ⊚ false
12) Under the five-step revenue recognition model, a contract can be written, verbal, or implied. ⊚ true ⊚ false
13) If the total debit balance equals the total credit balance on the trial balance, the accounting records may still contain errors. ⊚ true ⊚ false
14) A net profit margin of 18.2% means that the company used 81.8 cents of each sales dollar to cover costs and expenses.
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⊚ ⊚
true false
15) In general, the lower a company's net profit margin, the better the performance of the company. ⊚ true ⊚ false
16) When accrual basis accounting is used, net income equals the amount of cash generated by the business. ⊚ true ⊚ false
17) It is possible for a company to be profitable, however it may not have enough cash to pay its bills. ⊚ true ⊚ false
18)
Net income may be based on estimates. ⊚ true ⊚ false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 19) Which of the following would not be considered an operating activity? A) Pay employees for work completed B) Purchase supplies on account C) Purchase equipment for cash D) Sell goods to customers
20)
Which of the following is an operating activity?
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A) Billing customers for services rendered but not yet paid for B) Paying off a loan to the bank C) Purchasing equipment for cash D) Receiving cash investments from owners
21)
Which of the following is an operating activity? A) Repaying a bank loan B) Paying a dividend to owners C) Purchasing a new building D) Purchasing goods to be offered for sale
22)
Which activity is not part of the operating cycle? A) Repaying a bank loan used to purchase manufacturing equipment B) Purchasing goods from suppliers for resale to customers C) Paying employees for hours worked D) Collecting cash from sales on account made last month
23)
The primary source of revenues and expenses comes from: A) financing activities. B) investing activities. C) operating activities. D) other activities.
24)
Which of the following will result in an increase in revenue? A) Borrowing $10,000 from a bank B) Stockholders investing $10,000 in a company C) Selling concert tickets for $10,000 four months before the performance D) Selling $10,000 of groceries to customers
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25)
Which of the following items is reported on the income statement as an expense? A) This month's cash sales B) The purchase of supplies C) This month's utility bill D) The purchase of land
26) Which of the following September transactions would impact the September income statement? A) Collecting cash related to an account receivable B) Providing services to new customers C) Purchasing supplies D) Issuing stock to new shareholders
27)
Which of the following represents an account rather than a subtotal? A) Net Income B) Total Revenues C) Total Expenses D) Service Revenue
28)
Which of the following is not a specific account in a company's chart of accounts? A) Income Tax Expense B) Sales Revenue C) Deferred Revenue D) Net Income
29)
Which of the following line items appear on an income statement?
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A) Inventory B) Revenues C) Accounts Receivable D) Salaries and Wages Payable
30)
Income Tax Expense appears on the _________, while Income Tax Payable is a(n): A) income statement; liability on the balance sheet. B) balance sheet; liability on the income statement. C) income statement; expense on the income statement. D) balance sheet; expense on the balance sheet.
31)
The financial statement that reports revenues and expenses is the: A) statement of retained earnings. B) income statement. C) balance sheet. D) statement of cash flows.
32)
Which of the following line items appear on an income statement? A) Accounts Payable B) Equipment C) Utilities Expense D) Retained Earnings
33) If a company incorrectly records cash received for services to be provided in the future with a debit to Cash and credit to Sales Revenue, how will this error affect net income for the current period?
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A) Net income will be too high. B) Net income will be too low. C) Net income will not be affected by this error. D) Net income will be too high in the following period.
34) During the year, Sand, Incorporated had $120,000 in revenues, $48,000 in expenses, and paid $3,600 in dividends. Net income equals: A) $75,600. B) $68,400. C) $120,000. D) $72,000.
35) If a company incorrectly records a payment as an asset instead of an expense, how will this error affect net income in the current period? A) Net income will be too high. B) Net income will be too low. C) Net income will not be affected by this error in the current period but will be too low in a later period. D) Net income will never be affected by this error because assets are reported on the balance sheet.
36) Cobalt Company’s income statement shows Service Revenue of $64,000, Salaries and Wages Expense of $40,000 and net income of $1,600. The other expenses on Cobalt's income statement must equal: A) $22,400. B) $24,000. C) $105,600. D) $25,600.
37)
A net loss will result when:
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A) assets are greater than liabilities. B) revenues are less than expenses. C) revenues are greater than expenses. D) cash paid is less than cash received.
38) Dividing the long life of a company into shorter periods such as months, quarters, or years for reporting purposes is called the: A) time period assumption. B) expense recognition principle ("matching"). C) revenue recognition principle. D) separation principle.
39) Which of the following statements about the income statement and income statement accounts is correct? A) The income statement reports the financial position of a company at a point in time. B) Income statement accounts are permanent accounts, while balance sheet accounts are temporary accounts. C) Income statement accounts are temporary accounts, while balance sheet accounts are permanent accounts. D) The income statement reports the cash received and paid during the period.
40) The __________ takes a snapshot of what exists at a point in time whereas the __________ depicts a flow of what happened over a period of time. A) income statement; balance sheet B) balance sheet; income statement C) statement of cash flows; balance sheet D) statement of retained earnings; income statement
41)
Which of the following would not be reported on the income statement?
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A) Utilities expense in the amount of a bill received for utilities used during the current period but unpaid as of the end of the period. B) Rent expense in the amount of rent paid during the period for use of a storage facility in the current period. C) Revenue for services provided to customers who promise to pay in the next period. D) Cost of land purchased with cash for future use.
42) Which of the following statements about the income statement of a company that was formed 10 years ago is correct? A) It will report a Net Loss for the year if expenses are more than revenues. B) It will report the financial effects of activities that have occurred since the company's inception. C) It will report the amount of the increase in stockholders' equity this year as a result of the company's operations. D) It will report Net Income, which is an account in the ledger.
43) During 2022, a company provided services for cash of $33,600 and services on credit of $24,000. The company collected accounts receivable of $12,800 and incurred operating expenses of $36,320, $22,400 of which were paid during the year. The amount of net income (loss) for the year is: A) $21,280. B) $2,720. C) $36,320. D) $10,080.
44)
Which of the following statements about accrual basis accounting is correct?
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A) If a company uses accrual basis accounting, the company should not record revenue until payments are actually received. B) If a company uses accrual basis accounting, the company should record expenses in the same period as the revenues they generate. C) IFRS does not allow accrual basis accounting for external reporting of income. D) The items reported on the income statement continue to have an impact beyond the current period, whereas the items reported on the balance sheet impact just the current period.
45) Which of the following identifies, in the correct order, steps in the five-step model for reporting revenue? A) Determine the transaction price; identify the seller’s performance obligation(s); identify the contract. B) Allocate the transaction price to the performance obligation(s); determine the transaction price; recognize revenue when (or as) each performance obligation is satisfied. C) Identify the contract; determine the transaction price; identify the seller’s performance obligation(s). D) Identify the seller’s performance obligation(s); determine the transaction price; recognize revenue when (or as) each performance obligation is satisfied.
46) The fact that any problems a seller has in collecting amounts due from customers is accounted for separately is implied in the language of: A) step 3 “entitled to.” B) step 5 “when (or as) each performance obligation is satisfied.” C) step 1 “it can be written, verbal, or merely implied.” D) step 2 “transferring control of goods or services to a customer.”
47) The Fastbank Motorcycle Service Company wins a $10 million bid to provide the repair services for a recall on a popular brand of motorcycles. No money is exchanged. The repair services are expected to be performed early next year. Which of the steps of the five-step model for revenue recognition is not yet complete?
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A) Determine the transaction price. B) Identify the seller’s performance obligation(s). C) Identify the contract. D) Recognize revenue when (or as) each performance obligation is satisfied.
48) The Rainbow House Painting Company has been contracted to paint a house for $3,600. One-half of that amount will be paid up front; the rest will be paid upon satisfactory completion. Rainbow should recognize the revenue when: A) the performance obligation is identified. B) the first payment is received. C) the contract is identified. D) the performance obligation is satisfied.
49) Which of the following statements about cash basis accounting and accrual basis accounting is correct? A) Net income is always larger under accrual basis accounting than cash basis accounting. B) GAAP does not require the use of accrual basis accounting for external reporting. C) Accrual basis accounting and cash basis accounting will always produce the same amount of net income. D) Accrual basis accounting provides a better measure of operating performance than cash basis accounting.
50)
A company's revenue recognition policy:
A) affects the income statement but not the balance sheet. B) defines when its revenue should be collected. C) is usually described in the notes to a company's financial statements. D) states that revenues should not be recorded until payments are received from customers.
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51) During June, the Grass Is Greener Company mows 100 lawns a week; the company bills customers and full payment is due by July 15. The company uses the accrual basis of accounting. How will these events affect the company's financial statements? A) In June, an asset and a liability account will both increase. B) In June, an asset and a revenue account will both increase. C) In July, an asset account will increase and a liability account will decrease. D) In July, a liability account will decrease and a revenue account will increase.
52) If an apartment leasing company receives the rent for January 2022 from a tenant in December 2021, this will be reported by the leasing company as: A) revenue in 2021. B) an expense in 2021. C) a liability in 2021. D) stockholders' equity in 2021.
53)
Which of the following situations results in deferred revenue? A) Collected $100 from a customer who purchased goods a month ago. B) Received an order from a customer who will purchase and pay for goods in two
weeks. C) Sold goods for $100 today with payment due from the customer in 30 days. D) Received $100 cash from a customer for an order of goods to be shipped next month.
54) In its first year of business, Declan Industries earned $175,000 of revenues of which $140,000 was collected. It also incurred $157,500 in expenses for which $140,000 was paid. Which of the following statements are correct? A) Declan should use cash basis accounting for external reporting purposes as required under GAAP and IFRS. B) Declan should report net income of $17,500 for external reporting purposes. C) Declan should report $0 net income for external reporting purposes. D) Declan should report net income of $35,000 for external reporting purposes.
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55) Reporting revenues when they are earned and expenses when they are incurred is called __________ basis accounting. A) accrual B) cash C) expense recognition D) cost
56)
Revenues are recognized when: A) a contract is identified. B) a seller’s performance obligations are identified. C) a seller’s performance obligations are satisfied. D) a transaction price has been determined and allocated.
57)
If more than one performance obligation exists, the total contract price:
A) is split by referring to the stand-alone price of each part sold separately. B) is recognized as revenue once one of the performance obligations is satisfied. C) is recognized as Deferred Revenue and later recognized as Revenue when the performance obligations are satisfied. D) is allocated by contract, first to written contracts, then to verbal contracts, and finally to implied contracts.
58) During September, By the Book Company collected $1,800 cash from a customer for services to be provided during November. Which of the following statements about this transaction is correct? A) $1,800 of revenue should be recorded in September. B) $900 of revenue should be recorded in September and $900 in November. C) $1,800 of revenue should be recorded in November. D) No revenue should be recorded for these events because they relate only to the balance sheet.
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59) During February, Blake Building Company billed a customer $4,500 for services performed during February. During March, Blake collected the $4,500. Which of the following statements about this transaction is correct? A) $4,500 of revenue should be recorded in February. B) $2,250 of revenue should be recorded in February and $2,250 in March. C) $4,500 of revenue should be recorded in March. D) No revenue should be recorded for these events because they relate only to the balance sheet.
60) When cash is received in advance of a performance obligation being satisfied, a(n) __________ called __________ is recorded. A) liability; Deferred Revenue B) asset; Deferred Revenue C) liability; Accounts Receivable D) asset; Accounts Receivable
61)
Deferred Revenue is a(n): A) expense. B) asset. C) revenue. D) liability.
62)
What type of account is Accounts Receivable? A) Asset B) Liability C) Expense D) Revenue
63)
Which of the following will have no effect on total assets?
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A) Billing a customer for work performed during the current month B) Receiving cash from a customer to pay for a previously recorded account receivable C) Receiving cash from a customer for work to be performed next month D) Receiving cash from a customer for work performed today
64) Under the accrual basis of accounting, the __________ recognition ("matching") principle requires that expenses be recognized in the same period as the related revenues. A) expense B) revenue C) cost D) separate
65)
The expense recognition principle ("matching") indicates: A) where on the income statement expenses should be presented. B) when revenues are recognized on the income statement. C) the ordering of current assets and current liabilities on the balance sheet. D) when costs are recognized as expenses on the income statement.
66) In accordance with the expense recognition principle, expenses are recorded in the period when the: A) related revenues are recorded. B) cash is paid. C) related assets are recorded. D) contract and performance obligations are identified.
67) Murphy, Incorporated paid $9,600 cash for insurance in June that provides coverage for six months, from July through December. How much expense should be recognized in June to be in accordance with generally accepted accounting principles?
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A) No expense should be recognized in June. B) $9,600 C) $1,600 ($9,600 × 1/6 for the month of June) D) $4,800
68) In its first year of operations, Jetway Airlines incurred and paid Salaries Expense of $40 million. On December 31, it accrued an additional Salaries Expense of $2 million. What should Jetway report in the income statement and balance sheet for its first year ended December 31? A) Income statement: Salaries and Wages Expense $42 million; Balance sheet: Salaries and Wages Payable $2 million B) Income statement: Salaries and Wages Expense $40 million; Balance sheet: Salaries and Wages Payable $2 million C) Income statement: Salaries and Wages Expense $40 million; Balance sheet: Salaries and Wages Payable $0 D) Income statement: Salaries and Wages Payable $2 million; Balance sheet: Salaries and Wages Expense $42 million
69) In November, Ellie Company bought supplies on account for $480, with payment due to the supplier in 90 days. The supplies were used for products made and delivered in November. In which month should Ellie Company record the cost of the supplies as an expense? A) One-third should be expensed in each month from November through the January payment date. B) January. C) November. D) December.
70)
Supplies are expensed when: A) purchased. B) paid for. C) used. D) purchased on account.
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71)
A business purchased supplies for cash. The business will decrease its Cash account and:
A) increase its Supplies account. B) decrease its Supplies account. C) increase its Supplies Payable account. D) decrease stockholders' equity by recording Supplies Expense for the amount of the payment.
72)
The entry to record the payment of accounts payable: A) decreases assets. B) increases expenses. C) increases liabilities. D) increases stockholders' equity.
73) When employees work for a company in June but are not paid until July, the June financial statements will include __________ on the__________. A) Salaries and Wages Payable; balance sheet B) Prepaid Salaries and Wages; income statement C) Salaries and Wages Payable; income statement D) Prepaid Salaries and Wages; balance sheet
74) Fireside, Incorporated uses accrual basis accounting. Its balance sheets reported Accounts Receivable of $12,000 at the end of its first year and $18,000 at the end of its second year. Its income statement reported Sales Revenue of $120,000 in its second year. What would Fireside's revenues have been if it had used cash basis accounting? A) $120,000 B) $114,000 C) $126,000 D) $12,000
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75) During April, Ballarat, Incorporated earned $1,680, of which $1,200 was collected, and had expenses of $960, of which $840 was paid. Its net income equals: A) $720 using accrual accounting; $360 using cash basis. B) $360 using accrual accounting; $720 using cash basis. C) $840 using accrual accounting; $240 using cash basis. D) $240 using accrual accounting; $840 using bash basis.
76) If the cash is received before the related goods or services are delivered, which of the following will be recorded? A) Deferred Revenue, a liability. B) Accounts Receivable, an asset. C) Pre-earned Revenue, which increases Retained Earnings. D) Service Revenue, which increases Retained Earnings.
77) Time Warner is a publishing and communications company, specializing in magazines, cable television operations, television program development, and other telecommunication services. Its financial statements show $37,666 in an account called Deferred Revenue, which represents amounts that customers have paid in advance of receiving magazines, cable television, and internet services. What type of account is this and on what statement is it reported? A) Asset; Balance Sheet B) Liability; Balance Sheet C) Revenue; Balance Sheet D) Revenue; Income Statement
78) Which of the following statements about cash basis accounting and accrual basis accounting is correct?
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A) Using the accrual basis of accounting, if payment is received before delivery of goods or a service, revenue is recorded at the time the payment is received. B) Using the accrual basis of accounting, if payment is received after delivery of goods or a service, an asset is recorded at the time the good or service was delivered. C) Using the cash basis of accounting, if payment is received before delivery of goods or a service, net income is affected when goods or services are delivered. D) Using the cash basis, if payment is received after delivery of goods or a service, deferred revenue is recorded.
79) Which of the following statements about cash basis accounting and accrual basis accounting is correct? A) If payment is received at the same time a service is provided, it does not matter whether cash basis accounting or accrual basis accounting is used; both would record the transaction with the same journal entry. B) The cash basis of accounting works best when a lengthy delay exists between the timing of cash flows and the underlying business activities to which they relate. C) If a company receives a bill for rent for the period and decides to delay payment, the rent will not be recorded as an expense if accrual basis accounting is used. D) If the cash basis of accounting is used, the Deferred Revenue account is increased when a company receives a deposit in advance of services to be performed by the company.
80) During May, 2022, Sugar, Incorporated performs consulting services. The client does not pay Sugar until June, 2022. A) Using the accrual basis of accounting, the revenue is reported in June 2022. B) Using the cash basis of accounting, the revenue is reported in May 2022. C) Using the accrual basis of accounting, the revenue is reported in May 2022. D) Using the accrual basis of accounting, the revenue is reported when Sugar's expenses are paid.
81) During June, Parker’s Lawn Service mows 100 lawns a week. Parker received payment in advance, during May, for these services. The company uses the accrual basis of accounting. Which financial statement is impacted by these transactions? Version 1
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A) The income statement shows the effects of the transactions in June. B) The income statement shows the effects of the transactions in May. C) The revenue should be recognized equally in May and in June. D) The transactions have no effect on the balance sheet.
82) Somerdale Corporation received an order from a customer on November 10. It manufactured the ordered items on November 15, shipped the goods on November 17, and received payment on December 2. Under the accrual basis of accounting, Somerdale should record revenue on: A) November 10. B) November 15. C) November 17. D) December 2.
83) On Time Computer Repair uses accrual basis accounting. A computer was repaired on July 15. The customer picked up the computer on August 1 and mailed the payment on August 5. On Time Computer Repair received the check in the mail on August 10. The revenue should be recognized on which date? A) July 15 B) August 1 C) August 5 D) August 10
84) Sparkling Pools performed $2,400 of pool maintenance services during July for customers that had paid in advance for these services in June. The company performedan additional $1,500 of pool maintenance services during July and collected payment from those customers in August. Also, during July, the company accepted an order to perform $750 of pool maintenance services in August; the customers will pay for these services in August. The company uses accrual basis accounting. The Service Revenue account should be credited for:
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A) $2,400 in June, $1,500 in July, and $750 in August. B) $2,400 in June, $0 in July, and $2,250 in August. C) $0 in June, $2,400 in July, and $2,250 in August. D) $0 in June, $3,900 in July, and $750 in August.
85) This month, a company performed $520,000 of services and incurred total expenses of $438,300. The company was paid in cash for all its services and paid cash for all its expenses. These transactions would cause: A) cash to increase by $520,000, expenses to increase by $438,300, and common stock to increase by $81,700. B) revenues to increase by $520,000, expenses to increase by $438,300, and retained earnings to decrease by $81,700. C) revenues to increase by $81,700, expenses to increase by $438,300, and cash to increase by $520,000. D) revenues to increase by $520,000, expenses to increase by $438,300, and cash to increase by $81,700.
86) This month, a company performed $517,000 of services and incurred total expenses of $438,000. The company was paid in cash for all its services and paid cash for all its expenses. These transactions would cause: A) revenues to increase by $517,000, expenses to increase by $438,000, and retained earnings to decrease by $79,000. B) cash to increase by $517,000, expenses to increase by $438,000, and common stock to increase by $79,000. C) revenues to increase by $517,000, expenses to increase by $438,000, and cash to increase by $79,000. D) revenues to increase by $79,000, expenses to increase by $438,000, and cash to increase by $517,000.
87)
Which of the following statements about accrual basis accounting is not correct?
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A) It uses the revenue recognition principle. B) It uses the expense recognition principle. C) It is required for external accounting reports. D) It requires the timing of cash receipts be in the same period as revenues are recognized.
88) Your company receives advance payment in October for services that are provided during November. Which of the following statements is correct? A) A liability is recorded in October and revenue will be recorded in November. B) Revenue is recorded in October and an expense will be recorded in November. C) An expense is recorded in October and revenue will be recorded in November. D) Revenue and expenses are recorded in October.
89) The following are the operational transactions related to Melody's Piano School for the month of May: ● Provided $500 of piano lessons to students who paid in cash. ● Provided $380 of piano lessons on account. ● Collected $285 from students who took piano lessons during April. ● Paid April’s piano rental bill of $175. ● Received May’s piano rental bill of $225 and set it aside for payment in June. Assuming that the company uses cash basis accounting, what is net income for May? A) $285 B) $655 C) $610 D) $840
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90) The following are the operational transactions related to Melody's Piano School for the month of May: ● Provided $800 of piano lessons to students who paid in cash. ● Provided $200 of piano lessons on account. ● Collected $600 from students who took piano lessons during April. ● Paid April's piano rental bill of $200. ● Received May's piano rental bill of $300 and set it aside for payment in June. Assuming that the company uses cash basis accounting, what is net income for May? A) $1,600 B) $600 C) $750 D) $1,200
91) The following are the operational transactions related to Melody's Piano School for the month of May: ● Provided $400 of piano lessons to students who paid in cash. ● Provided $300 of piano lessons on account. ● Collected $225 from students who took piano lessons during April. ● Paid April’s piano rental bill of $125. ● Received May’s piano rental bill of $175 and set it aside for payment in June. Assuming the company uses accrual basis accounting, what is net income for May? A) $230 B) $525 C) $650 D) $500
92) The following are the operational transactions related to Melody's Piano School for the month of May: ● Provided $800 of piano lessons to students who paid in cash. ● Provided $200 of piano lessons on account. ● Collected $600 from students who took piano lessons during April. ● Paid April's piano rental bill of $200. ● Received May's piano rental bill of $300 and set it aside for payment in June. Assuming the company uses accrual basis accounting, what is net income for May?
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A) $800 B) $600 C) $700 D) $1,200
93)
Expenses include all of the following transactions except: A) using supplies. B) making a payment on account. C) paying for electricity used during the current period. D) paying wages for production workers for work performed during the current period.
94)
Which of the following is an example of an expense of this period? A) Costs of items used up this period but paid for next period B) Costs of items paid for in this period but used up next period C) Cost of land purchased and paid for this period D) Repayment of debt from a loan in a prior period
95) A dance studio accepts $1,500 to provide a series of dance lessons to a youth group during the month of July. The studio decides to record the revenue in July. The studio incurs rent, utilities, and salaries expenses in July. The studio decides to record those expenses in August, when it pays for them. One or both of these decisions: A) violate the expense recognition principle. B) are an example of accrual accounting. C) violate the revenue recognition principle. D) violate both the expense recognition and revenue recognition principles.
96)
The expense recognition principle indicates:
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A) where expenses should be presented on the income statement. B) how expenses should be split between the income statement and the balance sheet. C) the ordering of current assets and current liabilities on the balance sheet. D) when costs are recognized as expenses on the income statement.
97)
The expense recognition principle ("matching") matches: A) cash receipts with cash disbursements. B) expenses with the revenues to which they relate. C) assets with liabilities. D) prepaid expenses with deferred revenues.
98) Assume that accrual basis accounting is used. Which of the following errors would most likely lead to an overstatement of net income in the current year? A) Recording revenue when the cash is collected next year although the performance obligation is satisfied in the current year. B) Recording an expense when it is paid next year although it is incurred this year. C) Failing to adjust the Deferred Revenue account for the portion of rent earned this year. D) Recording revenue earned in the current year when cash is collected this year.
99) Assume accrual basis accounting is used. Which of the following statements about income statement accounts is correct? A) Costs incurred to help generate revenue are only reported as expenses on the income statement if they are paid in cash in the same period as the revenue received. B) Revenue accounts are shown after the expense accounts on the income statement. C) Revenue accounts include Cash, Accounts Receivable, and Deferred Revenue. D) Net Incomeis not an account.
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100) During September, the Bug-B-Gone Company buys and pays for a six-month supply of pesticides in order to receive a bulk discount. The company uses accrual basis accounting. The cost of the pesticides is recorded: A) immediately as an expense. B) as a liability, which will later be reduced as the pesticides are used. C) partially as an expense and partially as a liability. D) as an asset, which will later be reduced as the pesticides are used.
101)
When cash is paid for something that provides benefits only in future periods: A) a liability must be recorded. B) a journal entry does not need to be recorded at the time of the payment. C) an asset must be recorded at the time of the payment. D) an unearned expense must be recorded at the time of the payment.
102)
The prepayment of rent for the next three months (not including this month): A) reduces total assets. B) has no effect on total assets. C) increases expenses. D) decreases stockholders' equity.
103)
Which of the following statements about the income statement is not correct?
A) Amounts received from customers for services performed in the current month would be revenues on the income statement. B) Costs incurred in the current month but not paid as of the end of the month would be expenses on the income statement for the current month. C) Amounts received from customers in payment of their accounts arising from service in the prior month would be revenues in the income statement for the current month. D) Amounts received from customer as deposits for services to be rendered next month will not be recorded as revenues on the income statement for the current month.
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104) Your company orders and receives supplies in January, pays for them in February, provides services to customers that use those supplies in March, and is paid by its customers for the services in April. Using the accrual basis of accounting: A) expenses are recorded in February and revenues are recorded in April. B) expenses are recorded in February and revenues are recorded in March. C) expenses and revenues are recorded in March. D) expenses are recorded in January and revenues are recorded in April.
105) On June 30,Sugar Company received a bill for $1,750 for running a newspaper ad in June. The bill will be paid in July. Which of the following statements is correct for June? A) Expenses are increased by $1,750. B) Revenues are decreased by $1,750. C) Assets are increased by $1,750. D) Liabilities are decreased by $1,750.
106) On June 30, Sugar Company received a bill for $4,200 for running a newspaper ad in June. The bill will be paid in July. Which of the following statements is correct for June? A) Liabilities are decreased by $4,200. B) Assets are increased by $4,200. C) Expenses are increased by $4,200. D) Revenues are decreased by $4,200.
107) The employees of Pinnacle, Incorporated worked during July but are not paid their wages totaling $800 until August. Which of the following best indicates how to account for this transaction in July?
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A) No journal entry needs to be made because payment has not yet been made. B) A journal entry with a debit to Salaries and Wages Expense and a credit to Deferred Expense for $800 should be recorded. C) A journal entry with a debit to Salaries and Wages Payable and a credit to Salaries and Wages Expense for $800 should be recorded. D) A journal entry with a debit to Salaries and Wages Expense and a credit to Salaries and Wages Payable for $800 should be recorded.
108) In September, a customer signed a contract to have his house painted and paid for the job in October. The painting company bought the paint in August on account and paid for it in September. The painting company painted the house in November. Assuming accrual basis accounting is used, the painting company should record the: A) revenues in November and the expenses in September. B) revenues and the expenses in September. C) revenues and the expenses in November. D) revenues in September and the expenses in August.
109) Which of the following expressions correctly describes when revenues and expenses are recognized under accrual basis accounting? A) Revenues when cash is received; expenses when cash is paid. B) Revenues when cash is received; expenses when the expense is incurred. C) Revenues when the performance obligation is satisfied; expenses when the expense is incurred. D) Revenues when the performance obligation is satisfied; expenses when cash is paid.
110) year:
A company had the following assets and liabilities at the beginning and end of the current Assets
Beginning of year End of the year
$ 214,000 245,000
Liabilities $ 88,000 75,000
Common stock in the amount of $15,000 was issued and dividends of $5,000 were paid during the year. What is the amount of net income for the year? Version 1
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A) $44,000 B) $34,000 C) $54,000 D) $24,000
111) year:
A company had the following assets and liabilities at the beginning and end of the current Assets
Beginning of year End of the year
$ 428,000 490,000
Liabilities $ 176,000 150,000
Common stock in the amount of $30,000 was issued and dividends of $10,000 were paid during the year. What is the amount of net income for the year? A) $88,000 B) $68,000 C) $48,000 D) $108,000
112)
Which of the following statements about revenue and expense accounts is correct?
A) Revenue accounts are a subset of assets, and expense accounts are subcategories of liabilities. B) Both revenue accounts and expense accounts are subcategories of assets. C) Both revenue accounts and expense accounts are subcategories of Retained Earnings. D) Revenue accounts are a subcategory of Cash and expense accounts are a subcategory of Accounts Payable.
113) Which of the following groups of accounts contains only those that normally have credit balances?
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A) Accounts Payable, Service Revenue, and Retained Earnings B) Cash, Equipment, and Common Stock C) Notes Payable, Salaries and Wages Payable, and Rent Expense D) Cash, Accounts Receivable, and Retained Earnings
114) Your company contracted for a 30-second commercial (an advertisement) that aired during the Super Bowl at a cost of $1.2 million. The company is legally obligated to pay for the commercial, but has not yet done so. How is your company's balance sheet affected on the day the commercial aired? A) It increases both assets and liabilities by $1.2 million. B) It increases assets and decreases stockholders' equity by $1.2 million each. C) It does not affect the balance sheet. D) It increases liabilities and decreases stockholders' equity by $1.2 million each.
115)
Revenues: A) decrease assets. B) increase stockholders' equity. C) increase liabilities. D) decrease expenses.
116)
An increase in revenue always: A) increases stockholders' equity. B) increases assets. C) decreases stockholders' equity. D) decreases assets.
117)
Which of the following would eventually cause Retained Earnings to increase?
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A) Receiving cash for services provided in a prior month B) Incurring utilities that will be paid for next month C) Receiving cash for services to be provided next month D) Performing services for which cash will be received next month
118) The basic accounting equation may be expanded to include the income statement effects of operating activities. Which of the statements below is correct regarding the expanded accounting equation? A) Expenses are increased by credits and revenues are increased by debits. B) Net Income increases the Common Stock account. C) Expenses are increased by debits and revenues are increased by credits. D) Retained Earnings is reduced by net income.
119) Which of the following statements regarding the expanded accounting equation is correct? A) Debits reduce expenses. B) The total credits recorded in revenue accounts must equal the total debits recorded in expense accounts. C) Across all revenue accounts, the total value of all debits must equal the total value of all credits. D) Credits increase revenues.
120)
Which of the following statements about revenues and expenses is correct? A) Both revenues and expenses typically have credit balances. B) Revenues and expenses are considered assets and liabilities, respectively. C) Revenue is the same as cash. D) Expenses decrease the amount of stockholders' equity.
121)
Which of the following statements about revenues and expenses is correct?
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A) Credits increase both revenues and expenses. B) Credits increase expenses and decrease revenues. C) Credits increase revenues and decrease expenses. D) Credits decrease both revenues and expenses.
122)
Which of the following journal entries would decrease stockholders' equity? A) Debit Prepaid Insurance and credit Cash. B) Debit Deferred Revenue and credit Service Revenue. C) Debit Supplies and credit Accounts Payable. D) Debit Insurance Expense and credit Cash.
123)
An expense: A) will decrease the amount of net income on the income statement. B) will decrease the amount of Common Stock on the balance sheet. C) will be increased with a credit to the account. D) normally has a credit balance.
124) Shaun, Incorporated received payment from a customer in June for a service that was provided during July. For the month of July, how will this be reflected in the basic accounting equation? A) Assets will not change, liabilities will decrease, and stockholders' equity will increase. B) Assets will increase, liabilities will increase, and stockholders' equity will not change. C) Assets will increase, liabilities will not change, and stockholders' equity will increase. D) Assets will decrease, liabilities will not change, and stockholders' equity will increase.
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125)
Which of the following accounts has a normal credit balance? A) Accounts Receivable B) Equipment C) Utilities Expense D) Deferred Revenue
126)
Which of the following accounts does not have a normal credit balance? A) Deferred Revenue B) Prepaid Rent C) Accounts Payable D) Service Revenue
127)
Which of the following accounts does not have a normal credit balance? A) Common Stock B) Notes Payable C) Deferred Revenue D) Equipment
128) If a company provides a service but receives the payment two months after it provided the service, which of the following is correct? A) Only one journal entry will be needed. B) Cash will be credited. C) A revenue account will be increased with a debit. D) Stockholders' equity will increase.
129) If a company is paid in full for services provided this month, how will the basic accounting equation be affected?
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A) Liabilities will decrease. B) Stockholders' equity will increase as revenue is recorded. C) Liabilities will increase. D) Assets will decrease.
130) Crest Company receives and immediately pays a $5,250 utility bill from the Public Service Utility Company. Public Service Utility Company will record the receipt of this payment with a journal entry that includes a: A) credit to Accounts Payable. B) debit to Utilities Expense. C) debit to Utilities Revenue. D) debit to Cash.
131) Wave Company receives $18,000 in advance this month for work to be performed next month. This month, the company should record a journal entry that includes a debit to: A) Cash and a credit to Service Revenue for $18,000. B) Cash and a credit to Deferred Revenue for $18,000. C) Cash and a credit to Accounts Receivable for $18,000. D) Prepaid Services and a credit to Cash for $18,000.
132) West Corporation issued a $100 gift card to a customer. What journal entry will West Corporation record? A) Debit Cash and credit Sales Revenue for $100. B) Debit Cash and credit Deferred Revenue for $100. C) Debit Deferred Revenue and credit Cash for $100. D) Debit Accounts Receivable and credit Cash for $100.
133) In April, the Surf and Sand Hotel books and accepts a cash payment for $25,600 for vacation services to be provided during in July. The journal entry recorded in April will include a debit to: Version 1
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A) Cash and a credit to Deferred Revenue. B) Accounts Payable and a credit to Service Revenue. C) Accounts Receivable and a credit to Service Revenue. D) Prepaid Expenses and a credit to Service Revenue.
134) In January, the Huntington Beach Resort (HBR) accepts your reservation and receives your $2,000 payment for a week of sun and fun in California during spring break. In January, HBR will record a journal entry that includes a debit to: A) Cash and a credit to Deferred Revenue. B) Accounts Payable and a credit to Service Revenue. C) Cash and a credit to Service Revenue. D) Service Revenue and a credit to Cash.
135) When Blendtek Company performs $980 of services on account for a customer, Blendtek will record a journal entry with a debit to: A) Cash and a credit to Accounts Receivable. B) Accounts Receivable and a credit to Service Revenue. C) Service Revenue and a credit to Deferred Revenue. D) Cash and a credit to Accounts Payable.
136) Wave Studios provided $1,640 worth of DJ services for a wedding, billing the customer on credit. Which of the following records this transaction? A) Debit Accounts Payable and credit Service Revenue for $1,640. B) Debit Service Revenue and credit Deferred Service Revenue for $1,640. C) Credit Accounts Receivable and debit Service Revenue for $1,640. D) Debit Accounts Receivable and credit Service Revenue for $1,640.
137) A company neglected to record services provided on credit. What would be the effect of this omission?
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A) Liabilities would be overstated and revenues would be understated. B) Assets and revenues would be understated. C) Assets would be overstated and revenues would be understated. D) Liabilities and revenues would be understated.
138) During March, Perpetual Envy Incorporated provides $38,000 in consulting services for a customer. The customer paid $19,000; the other $19,000 was on account. Which of the following statements about these transactions is correct? A) Cash increases by $19,000, Accounts Receivable increases by $19,000, and Consulting Revenue increases by $38,000. B) Revenues increase by $19,000, liabilities decrease by $19,000, and stockholders' equity is unchanged. C) Cash increases by $19,000, Consulting Revenue increases by $19,000, and Accounts Receivable increases by $38,000. D) Accounts Receivable increases by $19,000, Liabilities decrease by $19,000, and Stockholders' Equity increases by $38,000.
139) During March, Perpetual Envy Incorporated provides $46,000 in consulting services for a customer. The customer paid $24,000; the other $22,000 was on account. Which of the following statements about these transactions is correct? A) Cash increases by $24,000, Consulting Revenue increases by $22,000, and Accounts Receivable increases by $46,000. B) Cash increases by $24,000, Accounts Receivable increases by $22,000, and Consulting Revenue increases by $46,000. C) Accounts Receivable increases by $22,000, Liabilities decrease by $24,000, and Stockholders' Equity increases by $2,000. D) Revenues increase by $24,000, liabilities decrease by $24,000, and Stockholders' Equity is unchanged.
140) During January, services totaling $1,500 were performed on account for a customer. The company collected that $1,500 from the customer in March. The journal entry to record the receipt of cash from the customer is recorded with a debit to:
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A) Cash and a credit to Accounts Receivable. B) Cash and a credit to Accounts Payable. C) Cash and a credit to Revenue. D) Purchases and a credit to Cash.
141) Broadmor Industries collected $7,500 from a customer on account. What journal entry will be prepared by Broadmor to record this transaction? A) Debit Cash and credit Accounts Receivable. B) Debit Cash and credit Service Revenue. C) Debit Accounts Receivable and credit Service Revenue. D) Debit Accounts Receivable and credit Cash.
142) Breezy Refunds Company provides tax services on April 14th. They receive payment for their services on May 9. Which of the following is an appropriate journal entry for April 14th? A) No journal entry is made until payment is received. B) Debit Deferred Revenue and credit Tax Preparation Revenue. C) Debit Cash and credit Tax Revenue. D) Debit Accounts Receivable and credit Tax Preparation Revenue.
143) Quail Company’s customers made payments totaling $6,400 on their accounts. Which accounts are affected by this transaction? A) Service Revenue and Retained Earnings increase by $6,400. B) Cash and Service Revenue increase by $6,400. Liabilities and Customer Expense increase by $6,400. C) Cash increases by $6,400 and Accounts Receivable decreases by $6,400. D) Cash and liabilities decrease by $6,400.
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144) On the last day in the month of April, a company receives $24,000 of cash from customers. Of that amount, $3,000 was for services performed in April and $21,000 represented payments on account. The journal entry to record the $24,000 cash receipt would include a debit to: A) Accounts Receivable for $21,000, a debit to Service Revenue for $3,000, and a credit for $24,000 to Cash. B) Cash for $24,000, a credit to Accounts Receivable for $21,000, and a credit to Service Revenue for $3,000. C) Accounts Receivable for $21,000, a debit to Deferred Revenue for $3,000, and a credit to Cash for $24,000. D) Cash for $24,000, a debit to Service Revenue for $3,000, and a credit to Accounts Receivable for $21,000.
145) Power Enterprises uses accrual basis accounting. During October, the company recorded sales revenue of $150,000 from sales of goods to customers who promised to pay in November. During November, the company received payment from these customers of $135,000. No other transactions with customers took place during these two months. Which of the following statements is correct? A) The Sales Revenue account will have a $135,000 balance at October 31. B) The Accounts Receivable account has a balance of $15,000 at November 30. C) The Accounts Payable account has a balance of $15,000 at October 31. D) The Sales Revenue account will have a $135,000 balance at November 30.
146) Accounts Receivable had a beginning balance of $8,420 and an ending balance of $6,990. Collections on account were $19,200. What was the amount of services that were performed on account? A) $17,770. B) $34,610. C) $20,630. D) $3,790.
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147) A company reported sales revenue, all of which arose from credit sales, of $48,000 on the income statement. Balance sheet information includes the following: Accounts Receivable, beginning of year Accounts Receivable, end of year Deferred Revenue, beginning of year Deferred Revenue, end of year
$ 5,400 960 0 9,300
How much cash was collected from customers during the year? A) $13,740. B) $61,740. C) $52,440. D) $45,840.
148) During 2021, Ocean Consulting had the following transactions with its clients (customers): ● On February 1, 2021, the company received cash of $6,900 from clients in payment of their account balances as of December 31, 2020. ● On November 1, 2021, the company received $3,900 cash as payments in advance for services to be performed in 2022. ● The company received a total of $22,500 in cash for services that were performed during 2021. ● The company sent bills totaling $5,900 to clients for services performed during 2021; this amount was unpaid as December 31, 2021. What is the amount of Service Revenue that will be reported on the income statement for the year 2021? A) $32,300 B) $28,400 C) $35,300 D) $39,200
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149) During 2021, Ocean Consulting had the following transactions with its clients (customers): ● On February 1, 2021, the company received cash of $10,000 from clients in payment of their account balances as of December 31, 2020. ● On November 1, 2021, the company received $4,000 cash as payments in advance for services to be performed in 2022. ● The company received a total of $26,000 in cash for services that were performed during 2021. ● The company sent bills totaling $8,000 to clients for services performed during 2021; this amount was unpaid as December 31, 2021. What is the amount of Service Revenue that will be reported on the income statement for the year 2021? A) $38,000 B) $44,000 C) $48,000 D) $34,000
150) During 2021, Ocean Consulting had the following transactions with its clients (customers): ● On February 1, 2021, the company received cash of $6,200 from clients in payment of their account balances as of December 31, 2020. ● On November 1, 2021, the company received $3,200 cash as payments in advance for services to be performed in 2022. ● The company received a total of $19,000 in cash for services that were performed during 2021. ● The company sent bills totaling $5,200 to clients for services performed during 2021; this amount was unpaid as December 31, 2021. As a result of these transactions during 2021, the firm’s stockholders’ equity will: A) decrease by $30,400. B) increase by $24,200. C) increase by $33,600. D) decrease by $27,400.
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151) During 2021, Ocean Consulting had the following transactions with its clients (customers): ● On February 1, 2021, the company received cash of $10,000 from clients in payment of their account balances as of December 31, 2020. ● On November 1, 2021, the company received $4,000 cash as payments in advance for services to be performed in 2022. ● The company received a total of $26,000 in cash for services that were performed during 2021. ● The company sent bills totaling $8,000 to clients for services performed during 2021; this amount was unpaid as December 31, 2021. As a result of these transactions during 2021, the firm's stockholders' equity will: A) increase by $40,000. B) decrease by $10,000. C) increase by $34,000. D) decrease by $4,000.
152) During 2021, Ocean Consulting had the following transactions with its clients (customers): ● On February 1, 2021, the company received cash of $10,000 from clients in payment of their account balances as of December 31, 2020. ● On November 1, 2021, the company received $4,000 cash as payments in advance for services to be performed in 2022. ● The company received a total of $26,000 in cash for services that were performed during 2021. ● The company sent bills totaling $8,000 to clients for services performed during 2021; this amount was unpaid as December 31, 2021. Which of the following statements about the activities for Ocean Consulting for 2021 is correct?
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A) If Accounts Receivable at December 31, 2020 totaled $50,000, the amount of Accounts Receivable to be reported on the Balance Sheet at December 31, 2021 will be $48,000. B) The $4,000 received from clients for services to be performed next year will be reported as revenue on the 2021 income statement. C) The $8,000 owed by clients for services performed this year will be reported as Accounts Payable on the balance sheet at December 31, 2021. D) The $10,000 received this year from clients in payment of their accounts will be reported as Service Revenue on the 2021 income statement.
153) During March, Seconds Best Company had cash sales of $35,000 and sales on account of $210,000. In April, paymentsreceived on account totaled $175,000. The journal entry prepared by Seconds Best to record the March sales would include a debit to: A) Cash for $35,000, debit to Accounts Receivable for $210,000, and credit to Sales Revenue for $245,000. B) Cash for $35,000, debit to Deferred Revenue for $210,000, and credit to Sales Revenue for $245,000. C) Cash for $35,000, debit to Accounts Payable for $210,000, and credit to Sales Revenue for $245,000. D) Cash and credit to Sales Revenue for $35,000.
154) During March, Seconds Best Company had cash sales of $35,000 and sales on account of $210,000. In April, paymentsreceived on account totaled $175,000. The journal entry prepared by Seconds Best Company to record customer payments on account during April would include a debit to: A) Cash and a credit to Deferred Revenue for $175,000. B) Cash and a credit to Sales Revenue for $175,000. C) Cash and a credit to Accounts Receivable for $175,000. D) Cash and a credit to Accounts Payable for $175,000.
155) Trudy's Café paid employees $4,680 in September for work performed during that month. What journal entry will Trudy's prepare to record that transaction?
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A) Debit Cash and credit Salaries and Wages Revenue for $4,680. B) Debit Cash and credit Salaries and Wages Payable for $4,680. C) Debit Salaries and Wages Revenue and credit Cash for $4,680. D) Debit Salaries and Wages Expense and credit Cash for $4,680.
156) A company received a bill of $2,110 for utilities used in the current month. The journal entry to record this event: A) will include a debit to Accounts Receivable for $2,110. B) will include a credit to Accounts Payable for $2,110. C) will include a credit to Utilities Expense. D) is not required; no journal entry should be prepared until the utilities bill is paid.
157) On January 31, your company prepays rent of $13,250 for February and March. Which of the following describes the effects of this transaction on your company's accounting equation? A) Assets decrease $13,250 and liabilities decrease $13,250. B) Assets increase $13,250 and stockholders' equity increases $13,250. C) There is no change to total assets, liabilities or stockholders' equity. D) Liabilities decrease $13,250 and stockholders' equity increases $13,250.
158) Swift Company paid $11,500 in advance for six months of rent. What journal entry will Swift prepare to record this transaction? A) Debit Prepaid Rent and credit Cash for $11,500 B) Debit Cash and credit Deferred Rent for $11,500 C) Debit Cash and credit Prepaid Rent for $11,500 D) Debit Rent Expense and credit Cash for $11,500
159) Swift Company paid $18,650 in advance for six months of rent. What journal entry will Swift prepare to record this transaction?
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A) Debit Cash and credit Deferred Rent for $18,650. B) Debit Prepaid Rent and credit Cash for $18,650. C) Debit Cash and credit Prepaid Rent for $18,650. D) Debit Rent Expense and credit Cash for $18,650.
160) This month, Weeds B Gone Lawn Service pays cash for $6,200 of grass fertilizer to be used two months from now. What journal entry will Weeds B Gone record this month? A) Debit Cash and credit Supplies Expense for $6,200. B) Debit Supplies Expense and credit Accounts Payable for $6,200. C) Debit Supplies and credit Cash for $6,200. D) Debit Retained Earnings and credit Accounts Payable for $6,200.
161) On October 10, a company paid $36,000 to a supplier. Of that amount, $6,000 was for supplies received on October 10, and $30,000 was for supplies that were purchased on account during September. The journal entry to record the $36,000 payment would include a debit to: A) Supplies for $30,000, a debit to Accounts Payable for $6,000, and a credit to Cash for $36,000. B) Supplies and a credit to Cash for $36,000. C) Supplies Expense and a credit to Cash for $36,000. D) Supplies for $6,000, a debit to Accounts Payable for $30,000, and a credit to Cash for $36,000.
162) In January, a company pays for advertising space in the local paper for ads to be run during the months of January, February, and March at $1,630 a month. The journal entry to record the payment would debit: A) Advertising Expense for $1,630, debit Prepaid Advertising for $3,260, and credit Cash for $4,890. B) Cash for $4,890, credit Advertising Expense for $1,630, and credit Prepaid Advertising for $3,260. C) Accounts Payable and credit Cash for $4,890. D) Accounts Payable and credit Stockholders' Equity for $4,890.
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163) In January, a company pays for advertising space in the local paper for ads to be run during the months of January, February, and March at $1,500 a month. The journal entry to record the payment would debit: A) Cash for $4,500, credit Advertising Expense for $1,500, and credit Prepaid Advertising for $3,000. B) Accounts Payable and credit Cash for $4,500. C) Accounts Payable and credit Stockholders' Equity for $4,500. D) Advertising Expense for $1,500, debit Prepaid Advertising for $3,000, and credit Cash for $4,500.
164) On June 30, a company paid a premium of $2,400 for one year of insurance coverage, which started on July 1. The company has a calendar year-end. Which of the following statements about this situation is correct? A) On June 30, Cash would be debited for $2,400. B) Insurance Expense of $1,200 will be reported on the income statement for the year ending December 31. C) Prepaid Insurance of $200 will be reported on the balance sheet at December 31. D) Prepaid Insurance of $2,400 will be reported on the balance sheet at December 31.
165) On December 31, 2020, Prince, Incorporated paid $9,800 to rent a storage facility from July 1, 2021 to July 1, 2022. Which of the following statements about the effect of this transaction on Prince's financial statements is correct? A) Prepaid Rent in the amount of $9,800 will be reported as a liability on the balance sheet at December 31, 2020. B) Rent Expense in the amount of $9,800 should be reported on the income statement for the year ended December 31, 2020. C) The income statement for the year ended December 31, 2020 is unaffected by this transaction. D) The balance sheet at December 31, 2021 will not report any assets relating to this transaction.
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166) Sparkling Pools received a bill for $1,200 for running newspaper ads during the last two weeks of July; the bill will be paid on August 1. Advertising Expense should be: A) credited for $1,200 in July. B) credited for $1,200 in August. C) debited for $1,200 in July. D) debited for $1,200 in August.
167) Crane Incorporated had a beginning balance in accounts receivable of $19,200. During the year, it had credit sales of $240,000. Crane received payments on account of $224,000. At the end of the year, accounts receivable has a: A) debit balance of $35,200. B) credit balance of $35,200. C) debit balance of $3,200. D) credit balance of $3,200.
168)
Which account is least likely to be credited when an expense is recorded? A) Cash B) Accounts Payable C) An account with the word "Prepaid" in its title D) Accounts Receivable
169) The following account balances are taken from the December 31, 2020, financial statements of ABZ Advertising Company. The company uses accrual basis accounting. Advertising Revenue Cash Accounts Receivable Interest Expense Accounts Payable Operating Expenses Deferred Revenue Equipment Income Tax Expense
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$ 53,586 47,692 7,974 2,438 5,300 43,405 1,356 20,899 2,679 46
The following activities occurred in 2021: 1. Performed advertising services on account, $63,400. 2. Received cash payments on account, $12,200. 3. Received deposits from customers for advertising services to be performed in 2022, $3,700. 4. Made payments to suppliers on account, $5,300. 5. Incurred $51,900 of operating expenses; $45,000 was paid in cash and $6,900 was on account and unpaid as of the end of the year. What is the balance in the Cash account at December 31, 2021? A) $54,592 B) $52,784 C) $47,692 D) $13,292
170) The following account balances are taken from the December 31, 2020, financial statements of ABZ Advertising Company. The company uses accrual basis accounting. Advertising Revenue Cash Accounts Receivable Interest Expense Accounts Payable Operating Expenses Deferred Revenue Equipment Income Tax Expense
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$ 46,482 41,516 7,296 2,299 5,000 37,460 1,178 18,048 2,326
47
The following activities occurred in 2021: 1.Performed advertising services on account, $55,000. 2.Received cash payments on account, $10,400. 3.Received deposits from customers for advertising services to be performed in 2022, $2,500. 4.Made payments to suppliers on account, $5,000. 5.Incurred $45,000 of operating expenses; $39,000 was paid in cash and $6,000 was on account and unpaid as of the end of the year. What is the balance in the Cash account at December 31, 2021? A) $46,116. B) $41,516. C) $10,416. D) $46,916.
171) The following account balances are taken from the December 31, 2020, financial statements of ABZ Advertising Company. The company uses accrual basis accounting. Advertising Revenue Cash Accounts Receivable Interest Expense Accounts Payable Operating Expenses Deferred Revenue Equipment Income Tax Expense
$ 50,596 45,030 7,697 2,378 5,170 40,983 1,280 19,732 2,530
The following activities occurred in 2021: 1. Performed advertising services on account, $59,850. 2. Received cash payments on account, $11,400. 3. Received deposits from customers for advertising services to be performed in 2022, $3,200. 4. Made payments to suppliers on account, $5,170. 5. Incurred $49,000 of operating expenses; $42,500 was paid in cash and $6,500 was on account and unpaid as of the end of the year. What is the balance of Accounts Receivable at December 31, 2021? Version 1
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A) $48,450 B) $56,147 C) $59,347 D) $59,850
172) The following account balances are taken from the December 31, 2020, financial statements of ABZ Advertising Company. The company uses accrual basis accounting. Advertising Revenue Cash Accounts Receivable Interest Expense Accounts Payable Operating Expenses Deferred Revenue Equipment Income Tax Expense
$ 46,482 41,516 7,296 2,299 5,000 37,460 1,178 18,048 2,326
The following activities occurred in 2021: 1.Performed advertising services on account, $55,000. 2.Received cash payments on account, $10,400. 3.Received deposits from customers for advertising services to be performed in 2022, $2,500. 4.Made payments to suppliers on account, $5,000. 5.Incurred $45,000 of operating expenses; $39,000 was paid in cash and $6,000 was on account and unpaid as of the end of the year. What is the balance of Accounts Receivable at December 31, 2021? A) $51,896. B) $55,000. C) $44,600. D) $54,396.
173) The following account balances are taken from the December 31, 2020, financial statements of ABZ Advertising Company. The company uses accrual basis accounting. Advertising Revenue Cash
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$ 56,516 50,299
49
Accounts Receivable Interest Expense Accounts Payable Operating Expenses Deferred Revenue Equipment Income Tax Expense
8,262 2,493 5,420 45,778 1,430 22,041 2,826
The following activities occurred in 2021: 1. Performed advertising services on account, $66,850. 2. Received cash payments on account, $12,900. 3. Received deposits from customers for advertising services to be performed in 2022, $4,200. 4. Made payments to suppliers on account, $5,420. 5. Incurred $54,700 of operating expenses; $47,400 was paid in cash and $7,300 was on account and unpaid as of the end of the year. What is the amount of revenue that will be reported on the income statement for the year ended December 31, 2021? A) $66,850 B) $61,430 C) $71,050 D) $47,400
174) The following account balances are taken from the December 31, 2020 financial statements of ABZ Advertising Company. The company uses accrual basis accounting. Advertising Revenue Cash Accounts Receivable Interest Expense Accounts Payable Operating Expenses Deferred Revenue Equipment
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$ 46,482 41,516 7,296 2,299 5,000 37,460 1,178 18,048
50
Income Tax Expense
2,326
The following activities occurred in 2021: 1.Performed advertising services on account, $55,000. 2.Received cash payments on account, $10,400. 3.Received deposits from customers for advertising services to be performed in 2022, $2,500. 4.Made payments to suppliers on account, $5,000. 5.Incurred $45,000 of operating expenses; $39,000 was paid in cash and $6,000 was on account and unpaid as of the end of the year. What is the amount of revenue that will be reported on the income statement for the year ended December 31, 2021? A) $57,500 B) $39,000 C) $55,000 D) $50,000
175) The following account balances are taken from the December 31, 2020, financial statements of ABZ Advertising Company. The company uses accrual basis accounting. Advertising Revenue Cash Accounts Receivable Interest Expense Accounts Payable Operating Expenses Deferred Revenue Equipment Income Tax Expense
$ 46,482 41,516 7,296 2,299 5,000 37,460 1,178 18,048 2,326
The following activities occurred in 2021: 1.Performed advertising services on account, $55,000. 2.Received cash payments on account, $10,400. 3.Received deposits from customers for advertising services to be performed in 2022, $2,500. 4.Made payments to suppliers on account, $5,000. 5.Incurred $45,000 of operating expenses; $39,000 was paid in cash and $6,000 was on account and unpaid as of the end of the year. Which of the following is the journal entry that will be used to record activity #1?
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A) Debit Advertising Revenue and credit Accounts Receivable for $55,000 B) Debit Accounts Receivable and credit Cash for $55,000 C) Debit Accounts Receivable and credit Advertising Revenue for $55,000 D) Debit Cash and credit Advertising Revenue for $55,000
176) The following account balances are taken from the December 31, 2020, financial statements of ABZ Advertising Company. The company uses accrual basis accounting. Advertising Revenue Cash Accounts Receivable Interest Expense Accounts Payable Operating Expenses Deferred Revenue Equipment Income Tax Expense
$ 46,482 41,516 7,296 2,299 5,000 37,460 1,178 18,048 2,326
The following activities occurred in 2021: 1.Performed advertising services on account, $55,000. 2.Received cash payments on account, $10,400. 3.Received deposits from customers for advertising services to be performed in 2022, $2,500. 4.Made payments to suppliers on account, $5,000. 5.Incurred $45,000 of operating expenses; $39,000 was paid in cash and $6,000 was on account and unpaid as of the end of the year. Which of the following is the journal entry that will be used to record activity #3? A) Debit Cash and credit Deferred Revenue for $2,500 B) Debit Deferred Revenue and credit Advertising Revenue for $2,500 C) Debit Cash and credit Accounts Receivable for $2,500 D) Debit Deferred Revenue and credit Receivable for $2,500
177) The following account balances are taken from the December 31, 2020, financial statements of ABZ Advertising Company. The company uses accrual basis accounting. Advertising Revenue
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$ 46,482
52
Cash Accounts Receivable Interest Expense Accounts Payable Operating Expenses Deferred Revenue Equipment Income Tax Expense
41,516 7,296 2,299 5,000 37,460 1,178 18,048 2,326
The following activities occurred in 2021: 1.Performed advertising services on account, $55,000. 2.Received cash payments on account, $10,400. 3.Received deposits from customers for advertising services to be performed in 2022, $2,500. 4.Made payments to suppliers on account, $5,000. 5.Incurred $45,000 of operating expenses; $39,000 was paid in cash and $6,000 was on account and unpaid as of the end of the year. Which of the following is the journal entry that will be used to record activity #4? A) Debit Operating Expense and credit Cash for $5,000 B) Debit Accounts Payable and credit Cash for $5,000 C) Debit Accounts Payable and credit Operating Expense for $5,000 D) Debit Cash and credit Accounts Payable for $5,000
178) The following transactions occurred during July: 1. Received $1,050 cash for services performed during July. 2. Received $5,900 cash from the issuance of common stock to owners. 3. Received $525 from a customer as payment for services performed during June. 4. Billed $3,950 to customers for services performed on account in July. 5. Borrowed $2,700 from the bank and signed a promissory note. 6. Received $1,375 from a customer for services to be performed during August. What is the amount of revenue that will be reported on the income statement for the month ended July 31? Version 1
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A) $6,375 B) $5,000 C) $6,900 D) $8,225
179) The following transactions occurred during July: 1.Received $1,600 cash for services performed during July. 2.Received $10,000 cash from the issuance of common stock to owners. 3.Received $800 from a customer as payment for services performed during June. 4.Billed $7,000 to customers for services performed on account in July. 5.Borrowed $5,000 from the bank and signed a promissory note. 6.Received $2,000 from a customer for services to be performed during August. What is the amount of revenue that will be reported on the income statement for the month ended July 31? A) $10,600. B) $11,400. C) $8,600. D) $14,400.
180)
The following transactions occurred during July:
1. Received $900 cash for services performed during July. 2. Received $5,350 cash from the issuance of common stock to owners. 3. Received $450 from a customer as payment for services performed during June. 4. Billed $3,650 to customers for services performed on account in July. 5. Borrowed $2,600 from the bank and signed a promissory note. 6. Received $1,150 from a customer for services to be performed during August. As a result of these transactions, what is the amount of the increase to the Cash account?
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A) $14,100 B) $7,600 C) $10,450 D) $2,500
181) The following transactions occurred during July: 1.Received $1,600 cash for services performed during July. 2.Received $10,000 cash from the issuance of common stock to owners. 3.Received $800 from a customer as payment for services performed during June. 4.Billed $7,000 to customers for services performed on account in July. 5.Borrowed $5,000 from the bank and signed a promissory note. 6.Received $2,000 from a customer for services to be performed during August. As a result of these transactions, what is the amount of the increase to the Cash account? A) $19,400. B) $26,400. C) $4,400. D) $14,400.
182) The following transactions occurred during July: 1.Received $1,600 cash for services performed during July. 2.Received $10,000 cash from the issuance of common stock to owners. 3.Received $800 from a customer as payment for services performed during June. 4.Billed $7,000 to customers for services performed on account in July. 5.Borrowed $5,000 from the bank and signed a promissory note. 6.Received $2,000 from a customer for services to be performed during August. Which of the following statements about the recording of these transactions is correct? A) Transaction #1 would include a debit to Service Revenue. B) Transaction #3 would include a debit to Accounts Receivable. C) Transaction #4 would include a debit to Accounts Receivable. D) Transaction #6 would include a debit to Deferred Revenue.
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183) During January 2020, the first month of operations, a consulting firm had the following transactions: 1. Issued common stock to owners in exchange for $32,000 cash. 2. Purchased $8,000 of equipment, paying $1,600 cash and signing a promissory note for $6,400. 3. Received $14,400 in cash for consulting services performed in January. 4. Purchased $2,400 of supplies on account; all of the supplies were used in January. 5. Provided consulting services on account in the amount of $25,600. 6. Paid $1,200 on account. 7. Paid $4,800 to employees for work performed during January. 8. Received a bill for utilities for January of $5,450; the bill remains unpaid. What is the amount of total revenue to be reported on the income statement for the month of January? A) $14,400 B) $72,000 C) $40,000 D) $46,400
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184) During January 2020, the first month of operations, a consulting firm had the following transactions: 1.Issued common stock to owners in exchange for $20,000 cash. 2.Purchased $5,000 of equipment, paying $1,000 cash and signing a promissory note for $4,000. 3.Received $9,000 in cash for consulting services performed in January. 4.Purchased $1,500 of supplies on account; all of the supplies were used in January. 5.Provided consulting services on account in the amount of $16,000. 6.Paid $750 on account. 7.Paid $3,000 to employees for work performed during January. 8.Received a bill for utilities for January of $3,400; the bill remains unpaid. What is the amount of total revenue to be reported on the income statement for the month of January? A) $45,000. B) $9,000. C) $29,000. D) $25,000.
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185) During January 2020, the first month of operations, a consulting firm had the following transactions: 1. Issued common stock to owners in exchange for $46,000 cash. 2. Purchased $11,500 of equipment, paying $3,450 cash and signing a promissory note for $8,050. 3. Received $20,700 in cash for consulting services performed in January. 4. Purchased $3,450 of supplies on account; all of the supplies were used in January. 5. Provided consulting services on account in the amount of $36,800. 6. Paid $1,725 on account. 7. Paid $6,900 to employees for work performed during January. 8. Received a bill for utilities for January of $7,800; the bill remains unpaid. What are the total expenses that will be reported on the income statement for the month ended January 31? A) $19,875. B) $10,350. C) $18,150. D) $8,625.
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186) During January 2020, the first month of operations, a consulting firm had the following transactions: 1.Issued common stock to owners in exchange for $20,000 cash. 2.Purchased $5,000 of equipment, paying $1,000 cash and signing a promissory note for $4,000. 3.Received $9,000 in cash for consulting services performed in January. 4.Purchased $1,500 of supplies on account; all of the supplies were used in January. 5.Provided consulting services on account in the amount of $16,000. 6.Paid $750 on account. 7.Paid $3,000 to employees for work performed during January. 8.Received a bill for utilities for January of $3,400; the bill remains unpaid. What are the total expenses that will be reported on the income statement for the month ended January 31? A) $3,750. B) $7,900. C) $8,150. D) $4,500.
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187) During January 2020, the first month of operations, a consulting firm had the following transactions: 1. Issued common stock to owners in exchange for $12,000 cash. 2. Purchased $3,000 of equipment, paying $600 cash and signing a promissory note for $2,400. 3. Received $5,400 in cash for consulting services performed in January. 4. Purchased $900 of supplies on account; all of the supplies were used in January. 5. Provided consulting services on account in the amount of $9,600. 6. Paid $450 on account. 7. Paid $1,800 to employees for work performed during January. 8. Received a bill for utilities for January of $2,050; the bill remains unpaid. What is the amount to be reported as total liabilities on the balance sheet at the end of January? A) $4,900. B) $2,850. C) $5,100. D) $2,500.
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188) During January 2020, the first month of operations, a consulting firm had the following transactions: 1.Issued common stock to owners in exchange for $20,000 cash. 2.Purchased $5,000 of equipment, paying $1,000 cash and signing a promissory note for $4,000. 3.Received $9,000 in cash for consulting services performed in January. 4.Purchased $1,500 of supplies on account; all of the supplies were used in January. 5.Provided consulting services on account in the amount of $16,000. 6.Paid $750 on account. 7.Paid $3,000 to employees for work performed during January. 8.Received a bill for utilities for January of $3,400; the bill remains unpaid. What is the amount to be reported as total liabilities on the balance sheet at the end of January? A) $4,750 B) $4,150 C) $8,150 D) $8,500
189)
In an expanded accounting equation, revenues and expenses are an expanded part of: A) Retained Earnings. B) Common Stock. C) Liabilities. D) Assets.
190) Quartz Instruments had Retained Earnings of $146,000 at December 31, 2020. Net income for 2021 was $91,000, and dividends for 2021 were $31,000. What amount of Retained Earnings should be reported at December 31, 2021? A) $237,000 B) $177,000 C) $206,000 D) $146,000
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191) Quartz Instruments had Retained Earnings of $145,000 at December 31, 2020. Net income for 2021 was $90,000, and dividends for 2021 were $30,000. What amount of Retained Earnings should be reported at December 31, 2021? A) $205,000 B) $235,000 C) $140,000 D) $175,000
192)
Expenses are increased with: A) debits because they decrease stockholders' equity. B) credits because they decrease stockholders' equity. C) credits because they increase stockholders' equity. D) debits because they increase stockholders' equity.
193)
Revenues are increased with: A) debits because they decrease stockholders’ equity. B) credits because they decrease stockholders’ equity. C) credits because they increase stockholders’ equity. D) debits because they increase stockholders’ equity.
194) The entry recorded by a law firm after providing services previously recorded as Deferred Revenue includes a: A) credit to Service Revenue. B) debit to Cash. C) credit to Accounts Receivable. D) credit to Deferred Revenue.
195) When ProBuild Company sells three $1,000 gift cards at the beginning of the month, it should record a $3,000 debit to ______ and a $3,000 credit to ______.
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A) Cash; Deferred Revenue B) Cash; Sales Revenue C) Accounts Receivable; Sales Revenue D) Deferred Revenue; Cash
196) When Tulip Company delivers flowers to customers and bills its customer accounts, it should record a debit to ______ and a credit to ______. A) Accounts Payable; Sales Revenue B) Cash; Sales Revenue C) Accounts Receivable; Deferred Revenue D) Accounts Receivable; Sales Revenue
197) will:
Receiving cash from a customer for payment on account for a previously recorded sale
A) have no effect on total assets. B) increase total assets. C) decrease total liabilities. D) increase stockholders’ equity.
198) A service company receives a check from a customer as partial payment of his account balance. This transaction does not involve the sale of additional services. How should the entry be recorded? A) Debit Cash and credit Accounts Receivable. B) Debit Cash and credit Sales Revenue. C) Debit Accounts Receivable and credit Cash. D) Debit Cash and credit Deferred Revenue.
199) The journal entry that records the collection of cash from a customer for payment on account for a sale that was recorded previously includes a debit to:
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A) Cash and credit to Accounts Receivable. B) Accounts Receivable and credit to Cash. C) Cash and credit to Accounts Payable. D) Accounts Payable and credit to Cash.
200) During the month of February, Castle Company wrote checks to employees totaling $38,450 for wages earned in February. Which of the following is the correct entry? A) Debit Salaries and Wages Expense for $38,450 and credit Salaries and Wages Payable for $38,450. B) Debit Cash for $38,450 and credit Salaries and Wages Expense for $38,450. C) Debit Salaries and Wages Expense for $38,450 and credit Cash for $38,450. D) Debit Cash for $38,450 and credit Salaries and Wages Payable for $38,450.
201) Blake, Incorporated pays its employees once a month and records the expense at the time of payment. On September 30, Blake paid its employees $12,210 for work performed in September. The entry to record the payment includes a: A) credit to Salaries and Wages Expense for $12,210. B) credit to Cash for $12,210. C) debit to Cash for $12,210. D) credit to Salaries and Wages Payable for $12,210.
202) If a company has no Salaries and Wages Payable on its balance sheet, then one may conclude that: A) there are salaries and wages to be paid in next period. B) no salaries and wages are owed for the current period. C) Salaries and Wages Expense was greater than the cash paid for wages during the period. D) the salaries and wages were paid in advance.
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203) When a company pays cash in advance for rent that is to be used over the next two years, the company records a debit to ______ and a credit to ______. A) Prepaid Rent; Cash B) Expense; Cash C) Cash; Prepaid Rent D) Prepaid Rent; Accounts Receivable
204) On March 31, Blake paid for a one-year insurance policy that begins on April 1. Blake's entry to record this transaction includes a: A) debit to Prepaid Insurance. B) debit to Cash. C) debit to Insurance Expense. D) credit to Insurance Payable.
205)
The journal entry to record the purchase of supplies on account includes a debit to: A) Supplies and a credit to Accounts Payable. B) Supplies and a credit to Cash. C) Supplies Expense and a credit to Accounts Payable. D) Supplies Expense and a credit to Cash.
206) On July 15, Monk, Incorporated received a $820 bill for an advertising run in July. The bill will be paid in August. The entry to record in July includes a $820: A) debit to Prepaid Advertising. B) credit to Prepaid Advertising. C) credit to Accounts Payable. D) credit to Cash.
207) When a company makes a payment for amounts owed from prior purchases, it will record a debit to ______ and a credit to ______.
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A) Accounts Payable; Cash B) an expense; Cash C) Accounts Payable; Retained Earnings D) Cash; an expense
208)
If the purchase of supplies on account is not recorded then: A) liabilities will be overstated. B) expenses will be overstated. C) cash will be understated. D) assets will be understated.
209) When a company postpones reporting revenue until it fulfills its promise represented by a gift card, it will record: A) Accounts Receivable. B) Prepaid Revenue. C) Deferred Revenue. D) Accounts Payable.
210)
Which of the following statements about the unadjusted trial balance is correct?
A) A trial balance is an external report used to determine whether total assets equal total liabilities. B) You can assume that no errors were made in the recording of transactions if total debits equal total credits on the unadjusted trial balance. C) A trial balance shows the ending balances obtained from the ledger listed in either the asset or liability column. D) A trial balance lists every account name in one column, usually in the order of assets, liabilities, stockholders' equity, revenues and expenses.
211) Consider the following information from a company’s unadjusted trial balance at December 31, 2020. All accounts have normal balances. Version 1
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Accounts Receivable Accounts Payable Cash Service Revenue Common Stock Equipment Insurance Expense Land Notes Payable, Due 2023 Notes Receivable, Matures 2021 Prepaid Insurance Rent Expense Retained Earnings, January 1, 2020 Salaries and Wages Expense
$ 4,800 665 1,730 5,890 4,300 5,200 415 4,100 4,300 1,230 415 1,415 7,880 3,730
What is the total of the debit side of the unadjusted trial balance? A) $18,735 B) $18,070 C) $23,035 D) $14,535
212) Consider the following information from a company's unadjusted trial balance at December 31, 2020. All accounts have normal balances. Accounts Receivable Accounts Payable Cash Service Revenue Common Stock Equipment Insurance Expense Land Notes Payable, Due 2023 Notes Receivable, Matures 2021 Prepaid Insurance Rent Expense Retained Earnings, January 1, 2020 Salaries and Wages Expense
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$ 4,500 650 1,700 5,500 4,000 4,900 400 3,800 4,000 1,200 400 1,400 7,850 3,700
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What is the total of the debit side of the unadjusted trial balance? A) $22,000 B) $17,350 C) $16,500 D) $13,500
213)
An unadjusted trial balance: A) cannot be used to prepare financial statements that conform to GAAP. B) is prepared after end-of-period adjustments have been made. C) will not reflect up-to-date information for income taxes. D) contains final amounts for assets and liabilities, but not for revenues and expenses.
214)
Which of the following practices would not be considered ethical? A) Failing to record an expense even though cash has been paid. B) Recording 31 days of sales in April. C) Using the cash basis of accounting. D) Adjusting the accounts after a trial balance has been prepared.
215)
Which of the following statements about the unadjusted trial balance is correct?
A) It generally includes final amounts for all expenses, but preliminary amounts for all revenues. B) It will not balance if there is a mistake. C) It includes end-of-the-accounting period adjustments. D) It is an internal report and not part of the financial statements issued to external decision makers.
216)
The unadjusted trial balance:
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A) is a preliminary financial statement for external and internal users. B) generally lists account names in alphabetical order. C) is created to determine that total debits equal total credits. D) indicates whether or not errors were made in recording transactions.
217)
Which of the following would appear in the debit column on the unadjusted trial balance? A) Retained Earnings B) Deferred Revenue C) Prepaid Rent D) Note Payable
218)
Which of the following statements is correct about the unadjusted trial balance?
A) Only balance sheet accounts are listed. B) Typically, accounts are listed in order of all debit balance accounts first and all credit balance accounts next. C) When it balances, transactions have been properly recorded. D) Total debits should equal total credits.
219) Which of the following is an example of an error that would cause the trial balance to be out of balance? A) A journal entry was posted as a debit to Cash for $225 and a credit to Accounts Receivable for $522. B) A journal entry was posted as a debit to Cash and a credit to Sales Revenue when the company received a $360 payment from a customer on account. C) A purchase of supplies on account for $800 was posted as a debit to Supplies for $80 and a credit to Accounts Payable for $80. D) A $630 transaction was not recorded at all.
220)
The ending balance of Accounts Receivable in the ledger is calculated by adding the:
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A) beginning debit balance to the debits and subtracting the credits recorded during the period. B) beginning credit balance to the debits and subtracting the credits recorded during the period. C) beginning credit balance to the credits and subtracting the debits recorded during the period. D) beginning debit balance to the credits and subtracting the debits recorded during the period.
221) Beginning Accounts Payable is $10,000. The purchases on account are $100,000 and payments made on account were $80,000 during the period. The ending Accounts Payable balance is: A) $30,000 credit B) $20,000 credit C) $20,000 debit D) $30,000 debit
222)
Which statement about the unadjusted trial balance is not correct? A) An unadjusted trial balance is the same as a balance sheet. B) An unadjusted trial balance lists all the accounts with their current balances. C) An unadjusted trial balance can verify the equality of debits and credits. D) An unadjusted trial balance can be prepared at any point in time.
223) A company has sales revenues of $260,000 and expenses of $65,000. What is its net profit margin? A) 4 B) 25% C) 75% D) $195,000
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224)
Which of the following statements about net profit margin is not correct?
A) If a company's net profit margin increases from 12% to 18% this would be considered an improvement in profitability. B) A company with a net profit margin of 15% is using 85% of each dollar of revenue to cover costs and expenses. C) Net profit margin indicates how much net income is earned for each dollar of revenue. D) All of these statements are correct.
225) A decrease in operating expenses would have which of the following effects on a company's profit margin? A) Net profit margin would decrease. B) Net profit margin would increase. C) Net profit margin would remain unchanged. D) There is not enough information given to determine the effect.
226) A company has total revenue of $759,000 and total expenses of $445,500. If the company understates sales by $13,500, what is the effect on the company's net profit margin? A) Net profit margin would be understated. B) Net profit margin would be overstated. C) Net profit margin would be unaffected. D) Net profit margin cannot be computed because overstating sales is unethical.
227) Selected financial information presented below was obtained from the financial statements of the Napa Valley Brewery: Current Assets Property and Equipment, net Current Liabilities Noncurrent Liabilities Stockholders’ Equity Sales Revenue Net Income
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$ 55,000 75,000 52,500 42,500 22,000 45,000 24,300
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What was the net profit margin? A) 54.00% B) 90.53% C) 44.00% D) 18.69%
228) Selected financial information presented below was obtained from the financial statements of the Napa Valley Brewery: Current Assets Property and Equipment, net Current Liabilities Noncurrent Liabilities Stockholders’ Equity Sales Revenue Net Income
$ 80,000 120,000 90,000 70,000 40,000 100,000 36,000
What was the net profit margin? A) 45.00% B) 277.78% C) 36.00% D) 18.00%
229) The following information is available from the most recent financial statements of the Carolyn Company:
Total assets Net income Average total liabilities Sales revenue Total liabilities Average total assets
$ 400,000 60,000 200,000 750,000 250,000 350,000
What is the company's net profit margin?
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A) 8% B) 12.5% C) 15% D) 17.1%
230)
The net profit margin: A) measures how much profit from each dollar of revenue. B) means improved performance if it decreases. C) means weaker performance if it increases. D) measures the percentage of assets financed by debt.
231)
Which of the following would increase the net profit margin in the current year? A) Postpone routine maintenance work that was to be done this year. B) Increase the amount of research and development in the last month of the year. C) Postpone the purchase of supplies to the first month of the following year. D) Postpone dividends to stockholders.
232)
Net income refers to the: A) difference between what was earned and the costs incurred during a period. B) difference between the cash received and the cash paid out during a period. C) difference between what is owned and what is owed at a point in time. D) change in the value of the company during a period.
233)
The income statement measures the: A) amount of revenue earned during the current period. B) the change in value of a company. C) true values of revenues and expenses without using estimates. D) amount of cash generated by the business.
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234)
Which of the following is always true? A) Net income is the amount of cash generated by a business. B) Net income represents the change in the company's value during the period. C) The measurement of income involves only counting. D) Net income results when revenues exceed expenses.
235)
Which of the following statements about net income is correct? A) Net income equals the amount of cash generated by the business during the reporting
period. B) Net income represents the change in the market value of the company's stock during the period. C) Measurement of net income involves only counting. D) Measurement of net income involves estimations.
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Answer Key Test name: Chap 03_7e 1) TRUE The time between buying goods to be sold to customers and collecting cash from customers is the operating cycle of the business. 2) FALSE Expenses are costs of operating the business, incurred to generate revenues in the period covered by the income statement. Basically, whenever a business uses up its resources to generate revenues during the period, it reports an expense, regardless of when the company pays for the resources. 3) FALSE Erroneously recording an asset as an expense would overstate total expenses, which would understate net income. 4) TRUE If revenues are increasing, but expenses are increasing even faster, then the amount of Net Income (Revenues − Expenses) will decrease. 5) TRUE When revenues exceed expenses, net income results. Net income increases stockholders' equity. 6) TRUE The ongoing life of a company is divided up into shorter periods according to the time period assumption so that financial reports can be issued for specific periods of time and at a specific point in time. 7) TRUE
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According to GAAP, the accrual basis is the only acceptable method for external reporting of income. The cash basis can be used internally by some small companies, but GAAP does not allow it for external reporting. 8) TRUE Deferred Revenue is a liability representing a company's obligation to provide goods or services to customers in the future. Liability accounts are reported on the balance sheet. 9) FALSE In the fifth step of the revenue recognition model, “as” refers to “over a period of time” (e.g., monthly) whereas “when” refers to “a point in time” (e.g., at delivery). 10) FALSE A performance obligation is the work the seller promises to do for the customer. A contract is any agreement between a seller and a customer that creates legal rights and obligations. 11) FALSE The expense recognition principle states that expenses should be recorded in the same period as the revenues they generate, not necessarily the period in which cash is paid for them. As such, an expense would be recorded this year since the utilities were used this year. 12) TRUE A contract does not require legal paperwork, or any paperwork at all. Starbucks establishes a contract when it agrees to sell you a Frappuccino. 13) TRUE Even if debits equal credits on the trial balance, it is still possible that the wrong account was used, an entry was omitted or recorded twice, and/or the wrong amount was entered as both a debit and a credit. Version 1
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14) TRUE A net profit margin of 18.2% means that the company earned 18.2 cents of net income for each dollar of revenue, which means that 81.8 cents (or $1.00 − $0.182) went to cover costs and expenses. 15) FALSE Net profit margin measures how much profit is generated from each dollar of revenue; therefore, a higher ratio means better performance. 16) FALSE Accrual basis net income is the excess of revenues earned over expenses incurred. Revenues do not necessarily equal cash receipts and expenses that do not necessarily equal cash disbursements. 17) TRUE Accrual basis net income is the excess of revenues earned over expenses incurred. Revenues do not necessarily equal cash receipts and expenses do not necessarily equal cash disbursements. A profitable company may not be able to pay its bills if it does not collect cash from customers quickly enough. 18) TRUE Proper counting is critical to income measurement, but estimation also plays a role. For example, equipment will not last forever. Instead, it will be "used up" over time to generate the company's revenue. It should therefore be expensed over the period in which it is used. Doing so requires an estimate of the period over which each category of equipment will be used. 19) C Paying employees, purchasing supplies, and selling goods to customers are all operating activities. The purchase of equipment is an investing activity. 20) A
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Paying off loans and receiving cash investments from owners are financing activities. Purchasing equipment for cash is an investing activity. Billing customers for services rendered is an operating activity. 21) D Operating transactions include the purchase of inventory (that is, goods to be sold to customers). Repaying a bank loan and paying dividends are financing activities. Purchasing a new building is an investing activity. 22) A Operating activities are the day-to-day functions involved in running a business. Operating activities include buying goods and services from suppliers, paying employees, and selling goods and services to customers and collecting cash from them. Repayment of a bank loan is a financing activity. 23) C Operating activities are the day-to-day functions involved in running a business. Operating activities include buying goods and services from suppliers, paying employees, and selling goods and services to customers and collecting cash from them. 24) D Revenues are increases in a company's resources created by providing goods or services to customers during the accounting period. Therefore, selling $10,000 of groceries results in an increase in revenue. When a company borrows money or stockholders invest in the company, the company is not providing goods or services so no revenue is recorded. The "sales" of concert tickets for a performance four months in advance is not revenue, but a liability since services (the concert) will be provided in the future. 25) C
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An expense is recorded in the same period as the revenues to which it relates or, if it cannot be directly associated with revenues, it is recorded in the period that the underlying business activity occurs. Payment of this month's utility bill would be shown on the income statement as an expense since the underlying business activity occurred during this time. Cash sales are reported as revenues. Purchases of land or supplies would be reported on the balance sheet as increases in assets. 26) B Providing services in the current period is reflected in the income statement, which captures activity for the current period. 27) D Total Revenues, Total Expenses and Net Income are subtotals reported on the income statement. Service Revenue is an account representing amounts a business charges its customers. 28) D Net income is not an account; it is the final amount shown on the income statement when revenues are greater than expenses. 29) B Revenues appear on the income statement. The other accounts listed appear on the balance sheet, which reports assets, liabilities, and stockholders’ equity. 30) A Income Tax Expense is reported on the income statement, while Income Tax Payable, a liability, is reported on the balance sheet. 31) B The income statement reports revenues and expenses. 32) C The income statement reports revenues and expenses. The other accounts listed appear on the balance sheet, which reports assets, liabilities, and stockholders’ equity. Version 1
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33) A This transaction includes an obligation to provide services in the future. This obligation is a liability called Deferred Revenue. Service Revenue will be reported later, when the services are provided. Because the company recorded the revenue now instead of later, it overstated its revenues and, as a result, overstated its net income. 34) D Net income = Revenues − Expenses = $120,000 − $48,000 = $72,000 Dividend payments do not affect net income. 35) A Because the company recorded an asset instead of an expense, it understated its expenses and, as a result, overstated its net income. 36) A Net Income = Revenues − Expenses Expenses = Revenues − Net Income = $64,000 − $1,600 = $62,400 Total Expenses = Salaries and Wages Expense + Other expenses Other expenses = Total Expenses − Salaries and Wages Expense = $62,400 − $40,000 = $22,400 37) B It is called a net loss if expenses are greater than revenues (or net income if revenues are greater than expenses). 38) A The time period assumption states that the long life of a company can be divided into shorter periods, such as months, quarters, and years. 39) C
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Balance sheet accounts are considered permanent, whereas income statement accounts are considered temporary. Another way people describe this difference is that the balance sheet takes stock of what exists at a point in time whereas the income statement depicts a flow of what happened over a period of time. The balance sheet (rather than the income statement) reports the financial position of a company at a point in time. The income statement (rather than the balance sheet) reports financial activities only for the current accounting period. The income statement reports revenues earned and expenses incurred (rather than the cash received and paid) during the period. 40) B The balance sheet reports the financial position of a company at a point in time. The income statement covers a period of time. 41) D The purchase of land is an investing activity (rather than an operating activity) and, as such, it would not be reported on the income statement. 42) A The income statement reports the results of operations for a period of time, not since the inception of the company. If revenues are less than expenses then the net income is a negative amount and is called net loss. Stockholders' equity increases by the amount of net income or decreases by the amount of net loss for a period. 43) A Net Income = Revenues (Services performed for cash + Services performed on account) − Expenses = ($33,600 + $24,000) − $36,320 = $21,280 44) B
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The expense recognition principle ("matching") requires the recording of expenses in the same period as the revenues they generate, not necessarily the period in which cash is paid for them. According to GAAP and IFRS, the accrual basis is the only acceptable method for external reporting of income. The revenue recognition principle requires a seller to record revenue when the seller provides the goods or services to customers, in the amount the seller expects to be entitled to receive. Balance sheet items (ratherthan the income statement items) continue to have an impact beyond the current period; whereas items reported on the income statement (rather than the balance sheet items) impact just the current period. 45) D The steps in the five-step model for reporting revenue are (1) identify the contract; (2) identify the seller’s performance obligation(s); (3) determine the transaction price; (4) allocate the transaction price to the performance obligation(s); (5) recognize revenue when (or as) each performance obligation is satisfied. 46) A The words “entitled to” in step 3 of the model imply any problems in later collecting amounts due from customers are accounted for separately. 47) D No services have yet been provided. Revenue will only be recognized when goods are delivered, or services are provided. 48) D Under the five-step model for revenue recognition, revenue is recognized when (or as) each performance obligation is satisfied. 49) D
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Accrual basis accounting reports revenues when they are earned and expenses when they are incurred, regardless of the timing of cash receipts or payments. Accrual basis accounting produces a better measure of the profits arising from the company's activities. It is required for external reporting under GAAP. Since cash basis accounting records revenues and expenses when cash is received and paid and accrual basis accounting reports revenues when they are earned and expenses when they are incurred, differences in net income reported under the two methods cannot be predicted. 50) C Every company reports its revenue recognition policy in the notes to the financial statements. 51) B When a sale occurs or a service is provided before cash is received, an asset account (Accounts Receivable) increases and a revenue account (Service Revenue) increases at the time the sale occurs or the service is provided. At a later date, when cash is received, an asset account (Cash) will increase and another asset account (Accounts Receivable) will decrease. 52) C When the rent check is received in December 2021, the leasing company will debit Cash and credit Deferred Revenue, a liability. That liability will be reported on the balance sheet at the end of December 2021. The requirement under accrual basis accounting is to record revenues when the performance obligation is satisfied. Since the performance obligation will be satisfied in January, rent revenue will be recorded on the income statement during January 2022. 53) D
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Deferred revenue is a liability representing a company's obligation to provide goods or services to customers in the future. Accordingly, the receipt of $100 cash from a customer for an order of goods to be shipped next month is deferred revenue. 54) B Using the accrual basis, which is required by GAAP and IFRS for external reporting purposes: Net income = Revenues − Expenses = $175,000 − $157,500 = $17,500 55) A Accrual basis accounting reports revenues when they are earned and expenses when they are incurred, regardless of the timing of cash receipts or payments. 56) C The five-step model for recognizing revenue calls for revenue to be recognized when (or as) each performance obligation is satisfied. 57) A If more than one performance obligation exists, the total contract price is split between the performance obligations by referring to their standalone prices. 58) C The revenue recognition principle is the requirement under accrual basis accounting to record revenues when the performance obligations are satisfied, not necessarily when cash is received for them. The company should record the $1,800 of revenue in November when the services are performed. 59) A
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The revenue recognition principle is the requirement under accrual basis accounting to record revenues when the performance obligations are satisfied, not necessarily when cash is received for them. The company should record the $4,500 of revenue in February when the services are performed. 60) A Deferred Revenue is a liability representing a company's obligation to provide goods or services to customers in the future. 61) D Deferred Revenue is a liability representing a company's obligation to provide goods or services to customers in the future. 62) A Selling on account means that the company provides goods or services to a customer not for cash, but instead for the right to collect cash in the future. This right is an asset called Accounts Receivable. 63) B When a company receives payment on a previously recorded account receivable, the company will increase its Cash account and decrease its Accounts Receivable account. One asset increases while another asset decreases, thus there is no effect on total assets. 64) A The expense recognition principle ("matching") is the practice under accrual basis accounting to record expenses in the same period as the revenues they generate, not necessarily the period in which cash is paid for them. 65) D The expense recognition principle ("matching") is the practice under accrual basis accounting to record expenses in the same period as the revenues they generate, not necessarily the period in which cash is paid for them. Version 1
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66) A The expense recognition principle ("matching") is the practice under accrual basis accounting to record expenses in the same period as the revenues they generate, not necessarily the period in which cash is paid for them. 67) A The expense recognition principle ("matching") is the practice under accrual basis accounting to record expenses in the same period as the revenues they generate, not necessarily the period in which cash is paid for them. Since the payment in June covers the period from July through December, no expense should be recognized in June. 68) A The expense recognition principle ("matching") is the practice under accrual basis accounting to record expenses in the same period as the revenues they generate, not necessarily the period in which cash is paid for them. Salaries and Wages Expense equals $42 million which includes the $40 million paid and the $2 million owed to employees. 69) C The expense recognition principle ("matching") is the practice under accrual basis accounting to record expenses in the same period as the revenues they generate, not necessarily the period in which cash is paid for them. The cost of the supplies should be expensed in November when the supplies are used. 70) C The expense recognition principle ("matching") is the practice under accrual basis accounting to record expenses in the same period as the revenues they generate, not necessarily the period in which cash is paid for them. Supplies are expensed when used. 71) A
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The company purchased supplies now but will not use them until later. Under the expense recognition principle, the expense from using these supplies (Supplies Expense) is reported when the supplies are used to earn revenue, not in the current month, when the supplies were purchased. This month, the supplies represent an asset (Supplies). 72) A When payment is made on account, the company will decrease Cash, an asset, and decrease Accounts Payable, a liability. 73) A When employees work in the current period but are not paid their wages until the following period, this period's wages are reported as Salaries and Wages Expense on the income statement and any unpaid wages are reported as Salaries and Wages Payable on the balance sheet. 74) B Increase (Decrease) in Accounts Receivable = Ending balance − Beginning balance = $18,000 − $12,000 = $6,000 Cash basis revenues = Sales revenue− (Increase (Decrease) in Accounts Receivable) = $120,000 − $6,000 = $114,000 75) A Accrual basis: Net Income = Revenues − Expenses = $1,680 − $960 = $720 Cash basis: Net Income = Revenues − Expenses = $1,200 − $840 = $360 76) A
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When cash is received before the related goods or services are delivered, the company is obligated to provide goods or services to customers in the future. That obligation is a liability called Deferred Revenue. 77) B Deferred Revenue is a liability representing a company's obligation to provide goods or services to customers in the future. Liabilities are reported on the balance sheet. 78) B Accrual basis accounting reports revenues when they are earned and expenses when they are incurred. Under accrual basis accounting, if payment is received after delivery of goods or a service, an entry is made to increase Accounts Receivable, an asset, and increase the related revenue account. Cash basis accounting records revenues and expenses when cash is received and paid. 79) A Cash basis accounting records revenues and expenses when cash is received and paid. Accrual basis accounting reports revenues when the performance obligations are satisfied and expenses when they are incurred. As a result, if payment is received at the same time a service is provided, it does not matter whether cash basis accounting or accrual basis accounting is used; both would record the transaction with the same journal entry. 80) C Accrual basis accounting reports revenues when the performance obligation is satisfied; the revenue would be recorded during May 2022. Cash basis accounting records revenues and expenses when cash is received and paid; the revenue would be recorded during June 2022. 81) A
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The requirement under accrual basis accounting is to record revenues when the performance obligation is satisfied. This means the company has done what it promised to do (mow lawns) in the month of June. The related revenues will be reported on the June income statement. Since the customers paid for these services in May, an asset, Cash, would be increased and a liability, Deferred Revenue, would be increased. In June, a liability, Deferred Revenue would be reduced and Service Revenue would be increased. 82) C Under the accrual basis of accounting, revenues are recorded when the performance obligation is satisfied. Typically, that occurs when goods are shipped to a customer, which in this case would be November 17. 83) A Revenues are recognized when the performance obligation is satisfied. In this case the company performed the act promised to the customer when the computer was repaired, on July 15. 84) D The requirement under accrual basis accounting is to record revenues when the performance obligation is satisfied. This means the company has done what it promised to do. No services were performed during June and, as a result, no revenue is recorded in that month. Services totaling $3,900 (or $1,500 + $2,400) would be credited to the Service Revenue account in July and $750 would be credited to the Service Revenue account in August. 85) D
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The summary entries to record these transactions would (1) increase the Cash account and increase the company’s revenue accounts by $520,000 and (2) increase the company’s expense accounts and decrease its Cash account by $438,300. As a result, the Cash account would increase by $81,700 (or increases of $520,000 − decreases of $438,300). Since revenues are greater than expenses, the resulting net income would increase (rather than decrease) Retained Earnings. 86) C The summary entries to record these transactions would (1) increase the Cash account and increase the company's revenue accounts by $517,000 and (2) increase the company's expense accounts and decrease its Cash account by $438,000. As a result, the Cash account would increase by $79,000 (or increases of $517,000 − decreases of $438,000). Since revenues are greater than expenses, the resulting net income would increase (rather than decrease) Retained Earnings. 87) D The two basic accounting principles that determine when revenues and expenses are recognized under accrual basis accounting are called the revenue recognition and expense recognition principles. According to GAAP, the accrual basis is the only acceptable method for external reporting of income. All companies expect to receive cash in exchange for providing goods and services, but the timing of cash receipts does not dictate when revenues are recognized. 88) A When cash is received before the related services are provided, a liability, called Deferred Revenue, is recorded. That liability will be recorded in October when the cash is received. Revenue will be reported in November, when the services are provided. 89) C
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Cash basis accounting net income = Cash receipts − Cash payments = ($500 + $285)− $175 = $610 90) D Cash basis accounting net income = Cash receipts − Cash payments = ($800 + $600) − $200 = $1,200 91) B Net income = Revenues − Expenses = ($400 + $300) − $175 = $525 92) C Net Income = Revenues − Expenses = ($800 + $200) − $300 = $700 93) B Expenses are costs of operating the business, incurred to generate revenues in the period covered by the income statement. Expenses are reported when the company uses something. Making a payment on account has no impact on expenses; it decreases Cash and Accounts Payable. 94) A Expenses are costs of operating the business, incurred to generate revenues in the period covered by the income statement. Expenses are reported when the company uses something in the current period. Expenses do not include the purchase of land (an asset) or the repayment of debt (a liability), both of which affect only the balance sheet. 95) A
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Under accrual basis accounting, expenses are recognized in the same period as the revenues to which they relate. Expenses are reported when the company uses something in the current period. Recording the July rent, utilities, and salaries expenses in August violates the expense recognition principle. According to the revenue recognition principle, revenues should be recognized when the performance obligation is satisfied. Since the dance lessons will be provided in July, the related revenue should be recorded in July. 96) D The expense recognition principle states that expenses should be recorded in the same period as the revenues they generate, not necessarily the period in which cash is paid for them. As a result, it indicates when costs are recognized as expenses on the income statement. 97) B The expense recognition principle ("matching") is the practice under accrual basis accounting to record expenses in the same period as the revenues they generate, not necessarily the period in which cash is paid for them. 98) B The expense recognition principle states that expenses should be recorded in the same period as the revenues they generate, not necessarily the period in which cash is paid for them. As a result, not recording an expense even though it was incurred this year would understate expenses and overstate net income for the current year. Not recording revenue even though it was earned would understate net income in the current year. Failing to adjust the Deferred Revenue account for the portion earned this year would also understate net income in the current year. Recording revenue earned in the current year would result in correctly stating net income. Version 1
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99) D Net income, the excess of revenues over expenses, is a total on the income statement; it is not an account. 100) D It is common for businesses to pay for something that provides benefits only in future periods. Those costs are reported as assets because they benefit future periods; assets are reported on the balance sheet. For example, a company might buy pesticides now but not use them until the following six months. The pesticides are reported as an asset when purchased. The expense from using the pesticides will be reported as they are used. 101) C It is common for businesses to pay for something that provides benefits only in future periods. Under the expense recognition principle, the expense from using these benefits is reported as an expense when the benefit is used to earn revenue, not in the current month, when the payment was made. Instead, an asset (such as Supplies, Prepaid Rent, or Prepaid Insurance) is recorded when the payment is made. 102) B An expense is recorded in the same period as the revenues to which it relates or, if it cannot be directly associated with revenues, it is recorded in the period that the underlying business activity occurs. Since this rent is not associated with generating revenue or any other business activity for this month, it is not this month's expense but rather an exchange of one asset (Cash) for another asset (Prepaid Rent). 103) C
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The revenue recognition principle states that revenue is recorded when the performance obligation is satisfied and the expense recognition principle says expenses are reported in the same period as the revenues they helped to generate. Amounts received from customers in payment of their accounts arising from service in the prior month would be revenues in the income statement for the prior month when the services were performed, rather than in the current month, when payment was received. 104) C The expense recognition principle states that expenses should be recorded in the same period as the revenues they generate, not necessarily the period in which cash is paid for them. As such, an expense would be recorded in March when the supplies are used. According to the revenue recognition principle, revenues should be recognized when the performance obligation is satisfied. As such, revenue would be recorded in March when the services are performed. 105) A In the accounting period that an expense is incurred, a company has to record the expense, which increases expenses. Since this expense is not going to be paid until the following month, a liability must also be recorded, which increases liabilities. 106) C In the accounting period that an expense is incurred, a company has to record the expense, which increases expenses. Since this expense is not going to be paid until the following month, a liability must also be recorded, which increases liabilities. 107) D
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This period's wages are reported as Salaries and Wages Expense on the income statement and any unpaid wages are reported as Salaries and Wages Payable on the balance sheet. The related entry would include a debit to Salaries and Wages Expense and a credit to Salaries and Wages Payable for $800. 108) C The revenue recognition principle states that revenue is recorded when the performance obligation is satisfied, and the expense recognition principle says expenses are reported in the same period as the revenues they helped to generate. As a result, the revenues and expenses will be recorded in November. 109) C Under the accrual basis of accounting, revenues are recognized when the performance obligation is satisfied and expenses are recognized in the same period as the revenues with which they can be reasonably associated. 110) B
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Assets = Liabilities + Stockholders’ Equity Stockholders' Equity = Assets − Liabilities Beginning: = $214,000 − $88,000 = $126,000 Ending: = $245,000 − $75,000 = $170,000 Change in stockholders’ equity = Ending stockholders’ equity − Beginning stockholders’ equity = $170,000 − $126,000 = Increase of $44,000 Change in stockholders’ equity = Issuance of common stock + Net income − Dividends Net income = Change in stockholders’ equity − Issuance of common stock + Dividends = $44,000 − $15,000 + $5,000 = $34,000 111) B Assets = Liabilities + Stockholders' Equity Stockholders' Equity = Assets − Liabilities Beginning: = $428,000 − $176,000 = $252,000 Ending: = $490,000 − $150,000 = $340,000 Change in stockholders' equity = Ending stockholders' equity − Beginning stockholders' equity = $340,000 − $252,000 = Increase of $88,000 Change in stockholders' equity = Issuance of common stock + Net income − Dividends Net income = Change in stockholders' equity − Issuance of common stock + Dividends = $88,000 − $30,000 + $10,000 = $68,000 112) C Version 1
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Revenue and expense accounts are subcategories of Retained Earnings. 113) A Assets (Cash, Equipment, and Accounts Receivable) and expenses (Rent Expense) normally have debit balances. Liabilities (Accounts Payable, Notes Payable, and Salaries and Wages Payable), Revenues (Service Revenue) and Stockholders' Equity (Common Stock and Retained Earnings) normally have credit balances. 114) D Most businesses acquire goods or services on credit, so it is common for them to incur the expense of using up the benefits of goods or services in the current month, before paying for them in a later month. Because the commercial aired, your company is obligated to pay the $1.2 million; that amount will be reported as a liability on the balance sheet. Because the commercial aired, the $1.2 million is an expense that will be reported on this month's income statement; expenses decrease net income, which decrease stockholders' equity. 115) B Revenue is a subcategory of Retained Earnings, which is a component of stockholders' equity. Net income increases Retained Earnings. Since net income equals the excess of revenues over expenses, eventually, revenues increase Retained Earnings. 116) A Revenue is a subcategory of Retained Earnings, which is a stockholders' equity account. Net income increases Retained Earnings. Since net income equals the excess of revenues over expenses, eventually, revenues increase Retained Earnings. 117) D
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Revenue and expense accounts are subcategories of Retained Earnings, which is a stockholders' equity account. Net income increases Retained Earnings. Since net income equals the excess of revenues over expenses, eventually, revenues will increase Retained Earnings and expenses will decrease Retained Earnings. Receiving cash for services provided in a prior month, or to be provided in a later month, does not impact Retained Earnings. Providing services in the current month which will be received in cash at a later date increases Retained Earnings. 118) C Expenses are recorded just like all decreases in Stockholders' Equity, with debits. Revenues are recorded just like all increases in Stockholders' Equity, with credits. 119) D Revenues increase net income, which increases the stockholders' equity account Retained Earnings. Since stockholders' equity, which is on the right side of the accounting equation, is increased with credits, revenues are increased with credits. Expenses decrease net income, which decreases the stockholders' equity account Retained Earnings. As a result, expenses are increased with debits. For any given transaction, the debit(s) must equal the credit(s). The total credits recorded in revenue accounts would only equal the total debits recorded in expense accounts when the company's net income is zero. If the total debits recorded in revenue accounts equaled the total credits recorded in those accounts, all of the revenue accounts combined would have a zero balance (and, so, this answer choice does not make any sense). 120) D
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Revenues and expenses are subcategories of Retained Earnings, which is a stockholders' equity account. Revenues increase net income. Since stockholders' equity, which is on the right side of the accounting equation, is increased with credits, revenues are increased with credits. Expenses decrease net income, which decreases the stockholders' equity account Retained Earnings. As a result, expenses are increased with debits. 121) C Revenues increase net income, which increases the stockholders' equity account Retained Earnings. Since stockholders' equity, which is on the right side of the accounting equation, is increased with credits, revenues are increased with credits. Expenses decrease net income, which decreases the stockholders' equity account Retained Earnings. As a result, expenses are increased with debits. 122) D Revenues increase net income, which increases the stockholders' equity account Retained Earnings. Expenses decrease net income, which decreases the stockholders' equity account Retained Earnings. As a result, expenses are increased with debits. An entry that includes a debit to an expense account would decrease stockholders' equity. 123) A Revenues increase net income, which increases the stockholders' equity account Retained Earnings. Since stockholders' equity, which is on the right side of the accounting equation, is increased with credits, revenues are increased with credits. Expenses decrease net income, which decreases the stockholders' equity account Retained Earnings. As a result, expenses are increased with debits. 124) A
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In June, when the payment from the customer was received, the company would increase assets (Cash) and increase liabilities (Deferred Revenue). In July, revenues increase, which increases net income and the stockholders' equity account Retained Earnings. In addition, since the company fulfilled its obligation to perform the service, the related liability (Deferred Revenue) decreases. 125) D Recall the accounting equation (Assets = Liabilities + Stockholders' Equity) and that debits increase accounts on the left-side of the equation and credits increase accounts on the right-side of the equation. Liability accounts (Deferred Revenue) have normal credit balances. Asset accounts (Accounts Receivable and Equipment) and expense accounts (Utilities Expense) have normal debit balances. 126) B Recall the accounting equation (Assets = Liabilities + Stockholders' Equity) and that debits increase accounts on the left-side of the equation and credits increase accounts on the right-side of the equation. Asset accounts (Prepaid Rent) and Expense accounts have normal debit balances. Liability and revenue accounts (Deferred Revenue, Accounts Payable, and Service Revenue) have normal credit balances. 127) D Recall the accounting equation (Assets = Liabilities + Stockholders' Equity) and that debits increase accounts on the left-side of the equation and credits increase accounts on the right-side of the equation. Asset accounts (Equipment) and expense accounts have normal debit balances. Liability accounts (Notes Payable and Deferred Revenue), stockholders' equity accounts (Common Stock), and revenue accounts have normal credit balances. 128) D
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The journal entry prepared when a company provides service and receives payment two months later includes a debit to Accounts Receivable and a credit to Service Revenue. Revenues increase net income, which increases the stockholders' equity account Retained Earnings. 129) B The receipt of cash for services provided increases assets and revenues. Revenues increase net income, which increases the stockholders' equity account Retained Earnings. 130) D Since Public Service Utility provided the utilities services, the journal entry will include a debit to Cash and a credit to Utilities Revenue. 131) B The receipt of cash in exchange for a promise to provide services in the future creates an obligation to perform those services; this obligation is recorded as a liability called Deferred Revenue. The journal entry will include a debit to Cash and a credit to Deferred Revenue for $18,000. 132) B The receipt of cash in exchange for a gift card creates an obligation to accept that gift card in the future when the services are performed; this obligation is recorded as a liability called Deferred Revenue. The journal entry will include a debit to Cash and a credit to Deferred Revenue for $100. 133) A The receipt of cash in exchange for a promise to provide vacation services in the future creates an obligation to perform those services; this obligation is recorded as a liability called Deferred Revenue. The journal entry will include a debit to Cash and a credit to Deferred Revenue for $25,600. 134) A Version 1
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The receipt of cash in exchange for a promise to provide services in the future creates an obligation to perform those services; this obligation is recorded as a liability called Deferred Revenue. The journal entry will include a debit to Cash and a credit to Deferred Revenue for $2,000. 135) B The company has satisfied its performance obligation and now has the right to collect $980 from its customer; that right is an asset called Accounts Receivable. The journal entry will include a debit to Accounts Receivable and a credit to Services Revenue for $980. 136) D When goods or services are provided on credit, Accounts Receivable, an asset account, should be debited and Service Revenue, a revenue account, should be credited. 137) B The transaction increased Accounts Receivable and Service Revenues. The failure to the transaction would then understate Accounts Receivable (an asset account) and understate Service Revenues (a revenue account). 138) A Perpetual Envy performed $38,000 of services and has earned the related revenue. It has the right to collect $19,000 from its customer; that right is an asset called Accounts Receivable. Cash increases by $19,000, Accounts Receivable increases by $19,000, and a credit to Consulting Revenue increases by $38,000. 139) B Perpetual Envy performed $46,000 of services and has earned the related revenue. It has the right to collect $22,000 from its customer; that right is an asset called Accounts Receivable. Cash increases by $24,000, Accounts Receivable increases by $22,000, and a credit to Consulting Revenue increases by $46,000. Version 1
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140) A In January, the revenue was recognized when the services were performed and the right to collect the $1,500 from its customer was recorded as an increase to an asset called Accounts Receivable. In March, the journal entry to record the receipt of cash from the customer is recorded with a debit to Cash and a credit to Accounts Receivable. 141) A The revenue was recognized when the services were performed and the right to collect the $7,500 from its customer was recorded as an increase to an asset called Accounts Receivable. The journal entry to record the receipt of a customer payment on account includes a debit to Cash and a credit to Accounts Receivable. 142) D Revenue is recorded when the performance obligation is satisfied, not when cash is received. If cash is not received at the time the services are provided (revenue is earned), the asset Accounts Receivable is increased. The Cash account will be increased when cash is received. 143) C The revenue was recognized when the services were performed and the right to collect the $6,400 from its customer was recorded as an increase to an asset called Accounts Receivable. The journal entry to record the receipt of customer payments on account includes a debit to Cash and a credit to Accounts Receivable. This transaction only affects asset accounts. 144) B
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The revenue was recognized when the services were performed and the right to collect the $21,000 from customers was recorded as an increase to an asset called Accounts Receivable. A compound journal entry is required for this situation. It includes a debit to Cash for $24,000 (the amount collected), a credit to Accounts Receivable for $21,000 (the amount collected on account), and a credit to Service Revenue for $3,000 (the amount of services performed). 145) B The requirement under accrual basis accounting is to record revenues when the performance obligation is satisfied. This basically means the company has done what it promised to do. The sales to customers during October will be recorded with debits to Accounts Receivable and credits to Sales Revenue totaling $150,000. The collection of cash during November will be recorded with a debit to Cash and a credit to Accounts Receivable totaling $135,000. The Accounts Receivable account has a balance of $15,000 at the end of November (computed as debits of $150,000 − credits of $135,000). 146) A Beginning Accounts Receivable + Services performed on account − Collections from customers = Ending Accounts Receivable Services performed on account = Ending Accounts Receivable − Beginning Accounts Receivable + Collections from customers = $6,990 − $8,420 + $19,200 = $17,770 147) B
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Cash received from customers = Cash collected on account + Payments in advance Ending Accounts Receivable = Beginning Accounts Receivable + Sales on account − Cash collected on account Cash collected on account = Beginning Accounts Receivable + Sales on account − Ending Accounts Receivable = $5,400 + $48,000 − $960 = $52,440 Ending Deferred Revenue = Beginning Deferred Revenue + Payments in advance − Related services provided to customers Payments in advance = Ending Deferred Revenue − Related services provided to customers − Beginning Deferred Revenue = $9,300 − $0 (since all sales were on account) − $0 = $9,300 Cash received from customers = Cash collected on account + Payments in advance = $52,440 + $9,300 = $61,740 148) B The requirement under accrual basis accounting is to record revenues whenthe performance obligation is satisfied. This basically means the company has done what it promised to do. Total revenue earned in 2021 = $22,500 + $5,900 = $28,400. 149) D The requirement under accrual basis accounting is to record revenues when the performance obligation is satisfied. This basically means the company has done what it promised to do. Total revenue earned in 2021 = $26,000 + $8,000 = $34,000. 150) B
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Revenues increase net income, which increases stockholders’ equity. The requirement under accrual basis accounting is to record revenues when the performance obligation is satisfied. Total revenue earned in 2021 = $19,000 + $5,200 = $24,200, which also equals the increase in stockholders’ equity from those revenues. 151) C Revenues increase net income, which increases stockholders' equity. The requirement under accrual basis accounting is to record revenues when the performance obligation is satisfied. Total revenue earned in 2021 = $26,000 + $8,000 = $34,000, which also equals the increase in stockholders' equity from those revenues. 152) A Ending Accounts Receivable = Beginning Accounts Receivable + Services performed on account − Collection from customers on account = $50,000 + $8,000 − $10,000 = $48,000 The $4,000 received from clients for services to be performed next year will be reported as a liability (called Deferred Revenue) on the balance sheet at December 31, 2021 (rather than as revenue on the 2021 income statement). The $8,000 owed by clients for services performed this year will be reported as Accounts Receivable (rather than Accounts Payable) on the balance sheet at December 31, 2021. The $10,000 received this year from clients in payment of their accounts was Service Revenue on the 2020 income statement when it was earned (rather than on the 2021 income statement). 153) A The compound entry to record cash sales of $35,000 and sales on account of $210,000 would include a debit to Cash for $35,000, a debit to Accounts Receivable for $210,000, and a credit to Sales Revenue for $245,000. 154) C Version 1
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The collection of customer payments on account during April will be recorded with a debit to Cash and a credit to Accounts Receivable for $175,000. 155) D The journal entry will include a debit to Salaries and Wages Expense and a credit to Cash for $4,680. 156) B Expenses are recorded when they are incurred. The obligation to the utility company should be recorded as a liability. The entry to record this transaction will include a debit to Utilities Expense and a credit to Accounts Payable for $2,110. 157) C This transaction involves paying for the right to use the rented building for the two months following the payment. This payment provides an economic resource to the company (building space for two months), so it will be initially reported as an asset called Prepaid Rent. Prepaid Rent, an asset, increases, while Cash, another asset, decreases. There is no effect on the total amounts of assets, liabilities, or stockholders' equity reported on January 31. 158) A This transaction involves paying for the right to use the rented building for six months following the payment. This payment provides an economic resource to Swift (building space for six months), so it will be initially reported as an asset called Prepaid Rent. Prepaid Rent, an asset, increases, while Cash, another asset, decreases. The entry includes a debit to Prepaid Rent and a credit to Cash for $11,500 159) B
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This transaction involves paying for the right to use the rented building for six months following the payment. This payment provides an economic resource to Swift (building space for six months), so it will be initially reported as an asset called Prepaid Rent. Prepaid Rent, an asset, increases, while Cash, another asset, decreases. The entry includes a debit to Prepaid Rent and a credit to Cash for $18,650. 160) C When a company pays for something that provides benefits in future periods, the cost is reported as an asset. The fertilizer is reported as an asset when purchased. The journal entry includes a debit to Supplies and a credit to Cash for $6,200. 161) D When a company pays for something that provides benefits in future periods, the cost is reported as an asset. The supplies are reported as an asset when purchased. The compound journal entry includes a debit to Supplies for $6,000 (the amount purchased), a debit to Accounts Payable for $30,000 (for the payment on account), and a credit to Cash for $36,000 (the total amount paid). 162) A When a company pays for something that provides benefits in future periods, the cost is reported as an asset. The prepayment is reported as an asset when purchased. The journal entry includes a debit to Advertising Expense for $1,630 (the $1,630 paid for January), a debit to Prepaid Advertising for $3,260 (the amount paid in advance for February and March at $1,630 per month), and a credit to Cash for $4,890 (the total amount paid). 163) D
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When a company pays for something that provides benefits in future periods, the cost is reported as an asset. The prepayment is reported as an asset when purchased. The journal entry includes a debit to Advertising Expense for $1,500 (the $1,500 paid for January), a debit to Prepaid Advertising for $3,000 (the amount paid in advance for February and March at $1,500 per month), and a credit to Cash for $4,500 (the total amount paid). 164) B When a company pays for something that provides benefits in future periods, the cost is reported as an asset. This prepayment would be recorded as an asset called Prepaid Insurance. Insurance Expense in the amount of $200 per month (or $2,400÷ 12) will be recorded as the premiums are used. Insurance Expense of $1,200 (or $200× 6 months) will be reported on the income statement for the year ending December 31. Prepaid Insurance of $1,200 (or the prepayment of $2,400 − the amount used of $1,200) will be reported on the balance sheet. 165) C When a company pays for something that provides benefits in future periods, the cost is reported as an asset. This prepayment would be recorded as an asset called Prepaid Rent. Since the prepayment covers the period from July 1, 2021 to July 1, 2022, the income statement for the year ended December 31, 2020 is unaffected by this transaction. Prepaid Rent in the amount of $9,800 (the amount of the prepayment) will be reported as an asset (rather than a liability) on the balance sheet at December 31, 2020. Further, since six months of the prepayment remain unused, Prepaid Rent in the amount of $4,900 (one-half of the amount of the prepayment) will be reported as an asset on the balance sheet at December 31, 2021. 166) C
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The expense recognition principle states that expenses should be recorded in the same period as the revenues they generate, not necessarily the period in which cash is paid for them. During July, a journal entry should be prepared with a debit to Advertising Expense (since the ads ran during July) and a credit to Accounts Payable (since the bill is unpaid) for $1,200. 167) A Ending A/R balance = Beginning A/R balance + Credit sales − Payments on account = $19,200 + $240,000 − $224,000 = $35,200 168) D Accounts Receivable would be credited when customers pay on account (rather than when an expense is recorded). An expense paid in cash would be recorded as a debit to an expense account and a credit to Cash. An expense which is unpaid would be recorded as a debit to an expense account and a credit to Accounts Payable. When cash was paid before goods or services are used, an asset with the word "Prepaid" might be in its account title. Later, when the related expense is incurred, the related journal entry would include a debit to an expense account and a credit to that "Prepaid" asset account. 169) D Ending Cash balance = Beginning Cash balance + Receipts of payments on account + Receipts of deposits − Payments on account − Cash paid for operating expenses incurred = $47,692 + $12,200 + $3,700 − $5,300 − $45,000 = $13,292 170) C Ending Cash balance = Beginning Cash balance + Receipts of payments on account + Receipts of deposits − Payments on account − Cash paid for operating expenses incurred = $41,516 + $10,400 + $2,500 − $5,000 − $39,000 = $10,416 Version 1
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171) B Ending Accounts Receivable = Beginning Accounts Receivable + Sales on account − Cash collected on account = $7,697 + $59,850 − $11,400 = $56,147 172) A Ending Accounts Receivable = Beginning Accounts Receivable + Sales on account − Cash collected on account = $7,296 + $55,000 − $10,400 = $51,896 173) A The income statement would report the revenues earned of $66,850. 174) C The income statement would report the revenues earned of $55,000. 175) C The company has earned revenue and has the right to collect $55,000 from its customer; that right is an asset called Accounts Receivable. The journal entry will include a debit to Accounts Receivable and a credit to Advertising Revenue for $55,000. 176) A The receipt of cash in exchange for a promise to provide services in the future creates an obligation to perform those services; this obligation is recorded as a liability called Deferred Revenue. The journal entry will include a debit to Cash and a credit to Deferred Revenue for $2,500. 177) B The payment to suppliers on account decreases Accounts Payable, a liability, and Cash, an asset. It would be recorded with a debit to Accounts Payable and a credit to Cash for $5,000. 178) B The income statement would report the revenues earned of $5,000 ($3,950 + $1,050). 179) C Version 1
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The income statement would report the revenues earned of $8,600 ($1,600 + $7,000). 180) C Increase in Cash = Receipt of cash for services performed + Receipt from issuance of common stock + Receipt from customer on account + Proceeds from bank borrowing + Receipt for services to be performed during August =$900 + $5,350 + $450 + $2,600 + $1,150 = $10,450. 181) A Increase in Cash = Receipt of cash for services performed + Receipt from issuance of common stock + Receipt from customer on account + Proceeds from bank borrowing + Receipt for services to be performed during August = $1,600 + $10,000 + $800 + $5,000 + $2,000 = $19,400 182) C Transaction #4 would be recorded with a debit to Accounts Receivable and a credit to Service Revenue. Transaction #1 would be recorded with a debit to Cash and a credit to Service Revenue. Transaction #3 would be recorded with a debit to Cash and a credit to Accounts Receivable. Transaction #6 would be recorded with a debit to Cash and a credit to Deferred Revenue. 183) C The income statement would report the revenues earned of $40,000 ($14,400 + $25,600). 184) D The income statement would report the revenues earned of $25,000 ($9,000 + $16,000). 185) C
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Expenses are costs of operating the business, incurred to generate revenues in the period covered by the income statement. Expenses are reported when the company uses something. Total expenses = Supplies Expense + Salaries and Wages Expense + Utilities Expense = $3,450 + $6,900 + $7,800 = $18,150. 186) B Expenses are costs of operating the business, incurred to generate revenues in the period covered by the income statement. Expenses are reported when the company uses something. Total expenses = Supplies Expense + Salaries and Wages Expense + Utilities Expense = $1,500 + $3,000 + $3,400 = $7,900 187) A Liabilities are obligations or debts of the business. Accounts Payable = (Purchases on account − Payments on account) + Unpaid utility bill = ($900 − $450) + $2,050 = $2,500 Total liabilities = Accounts Payable + Notes payable = $2,500 + $2,400 = $4,900 188) C Liabilities are obligations or debts of the business. Accounts Payable = (Purchases on account − Payments on account) + Unpaid utility bill = ($1,500 − $750) + $3,400 = $4,150 Total liabilities = Accounts Payable + Notes payable = $4,150 + $4,000 = $8,150 189) A
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Think of revenues and expenses as subcategories within retained earnings. They are shown this way because revenues and expenses eventually flow into Retained Earnings, but they aren't initially recorded there. 190) C Ending Retained Earnings = Beginning Retained Earnings + Net income − Dividends = $146,000 + $91,000 − $31,000 = $206,000 191) A Ending Retained Earnings = Beginning Retained Earnings + Net income − Dividends = $145,000 + $90,000 − $30,000 = $205,000 192) A Decreases in stockholders' equity are recorded on the left side, expenses decrease stockholders’ equity, expenses are recorded on the left (debit). 193) C Increases in stockholders' equity are on the right side, revenues increase stockholders' equity, so revenues are recorded on the right (credit). 194) A The entry includes a debit to Deferred Revenue (to decrease this liability account) and a credit to Service Revenue. 195) A The entry includes a debit to Cash (to increase this asset account) and credit to Deferred Revenue (to increase this liability account). 196) D The entry includes a debit to Accounts Receivable (to increase this asset account) and a credit to Sales Revenue (to increase this stockholders' equity account). 197) A
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This transaction increases Cash and decreases Accounts Receivable. Cash and Accounts Receivable are both assets and the debit and credit offset one another causing total assets to remain the same. 198) A The entry includes a debit to Cash (to increase this asset account) and a credit to Accounts Receivable (to decrease this asset account). 199) A The entry includes a debit to Cash (to increase this asset account) and a credit to Accounts Receivable (to decrease this asset account). 200) C The entry includes a debit to Salaries and Wages Expense (to decrease this stockholders’ equity account) and a credit to Cash (to decrease this asset account) for $38,450. 201) B The entry includes a debit to Salaries and Wages Expense (to decrease this stockholders' equity account) and a credit to Cash (to decrease this asset account) for $12,210. 202) B If a company has no Salaries and Wages Payable on its balance sheet, then one may conclude that no salaries and wages are owed to employees at the balance sheet date. 203) A The entry includes a debit to Prepaid Rent (to increase this asset account) and credit to Cash (to decrease this asset account). 204) A The entry includes a debit to Prepaid Insurance (to increase this asset account) and credit to Cash (to decrease this asset account). 205) A
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The entry includes a debit to Supplies (to increase this asset account) and a credit to Accounts Payable (to increase this liability account). Supplies Expense will be recorded when the supplies are used. 206) C The entry includes a debit to Advertising Expense (to increase this expense account) and a credit to Accounts Payable (to increase this liability account). 207) A The entry includes a debit to Accounts Payable (to decrease this liability account) and a credit to Cash (to decrease this asset account). 208) D The entry that should be recorded includes a debit to Supplies (to increase this asset account) and credit to Accounts Payable (to increase this liability account). If that entry is not recorded, assets and liabilities will both be understated. 209) C A company postpones or defers reporting revenue until it fulfills the promise represented by a gift card by recording Deferred Revenue. Once the product or service is delivered, the company records Revenue and decreases Deferred Revenue. 210) D Even if debits equal credits on the trial balance, it is still possible that the wrong account was used, an entry was omitted or recorded twice, and/or the wrong amount was entered as both a debit and a credit. A trial balance is an internal report prepared using ending balances and is used to determine whether total debits equal total credits. 211) C
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Total debit balances (listed in the order in which they appear above) = Accounts Receivable + Cash + Equipment + Insurance Expense + Land + Notes Receivable + Prepaid Insurance + Rent Expense + Salaries and Wages Expense = $4,800 + $1,730 + $5,200 + $415 + $4,100 + $1,230 + $415 + $1,415 + $3,730 = $23,035 212) A Total debit balances (listed in the order in which they appear above) = Accounts Receivable + Cash + Equipment + Insurance Expense + Land + Notes Receivable + Prepaid Insurance + Rent Expense + Salaries and Wages Expense = $4,500 + $1,700 + $4,900 + $400 + $3,800 + $1,200 + $400 + $1,400 + $3,700 = $22,000 213) C The unadjusted trial balance is prepared before end-of-period adjustments are made (such as income taxes). While it can be used to prepare preliminary financial statements, those financial statements will not conform to GAAP or IFRS. When adjustments are made to update revenues and expenses, some asset and liability accounts (such as income taxes payable) will also be updated. 214) B Since April only has 30 days, recording 31 days of sales would overstate revenue and net income for the month ended April 30; the sales earned on the 31st day would not have been earned during this time period. Expenses are recorded when goods/services are used, not necessarily when cash is paid. GAAP requires companies to use the accrual basis of accounting for external reporting, but small companies may use the cash basis, and the cash basis may be used for internal reporting. After the unadjusted trial balance is prepared, various accounts need to be adjusted to update the accounts. Version 1
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215) D The unadjusted trial balance is an internal report; it is not issued to external decision makers. It is prepared before end-of-period adjustments and lists the unadjusted balances of each account to check the equality of total debits and credits. If a mistake has been made, the unadjusted trial balance may still balance. 216) C The unadjusted trial balance is an internal report; it is not issued to external decision makers. It is prepared before end-of-period adjustments and lists the unadjusted balances of each account (in ledger order) to check the equality of total debits and credits. Even if total debits equal total credits, it is possible that errors in recording transactions were made. 217) C Assets and expenses have debit balance while liabilities, revenues, and stockholders' equity have credit balances. Since Prepaid Rent is an asset, it has a debit balance. 218) D Total debits should equal total credits in the unadjusted trial balance, which lists all of the accounts and their balances. The balance sheet accounts are followed by the income statement accounts. Even if total debits equal total credits, it is possible that errors in recording transactions were made. 219) A The unadjusted trial balance would not balance if the total debit(s) used to record a transaction does not equal the total credit(s). 220) A Ending Accounts Receivable (normal debit balance) = Beginning Accounts Receivable (normal debit balance) + Sales on account (debited) − Collections from customers (credited). Version 1
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221) A Ending Accounts Payable (normal credit balance) = Beginning Accounts Payable (normal credit balance) + Purchases on account (credited)− Payments on account (debited). 222) A After all journal entries are summarized in the various accounts and ending balances are calculated for each account, all of the account balances are listed on the unadjusted trial balance. It can be prepared at any time (but is typically prepared at the end of the accounting period). After the columns are totaled, total debits should equal total credits. The unadjusted trial balance lists all of the account balances while the balance sheet would list only the ending balances of the asset, liability, and stockholders' equity accounts. 223) C Net profit margin = Net income ÷ Revenues = ($260,000 − 65,000) ÷ $260,000 = 0.75 = 75% 224) D Net profit margin indicates how much profit is earned from each dollar of revenue. 225) B Net profit margin = Net income ÷ Revenues A decrease in operating expenses would increase net income. An increase in the numerator of this formula would increase the net profit margin. 226) A
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Net profit margin = Net income ÷ Revenues An understatement of sales would decrease total revenues and net income by the same dollar amount. The effect on net income is more significant than the effect on revenues because net income is a smaller number than total revenue. Therefore, net profit margin would be understated. 227) A Net profit margin = Net Income ÷ Sales Revenue = $24,300 ÷ $45,000 = 0.54 = 54.0% 228) C Net profit margin = Net Income ÷ Sales Revenue = $36,000 ÷ $100,000 = 0.36 = 36.0% 229) A Net profit margin ratio = Net Income ÷ Sales Revenue = $60,000 ÷ $750,000 = 8% 230) A The net profit margin tells you how much profit from each dollar of revenue. A higher net profit margin means better performance. 231) A Net profit margin = Net income ÷ Revenues Postponing routine maintenance work that was to be done this year would decrease expenses and, as a result, net income would increase as would the net profit margin ratio. Increasing the amount of research and development in the last month of the year would increase expenses and, as a result, net income would decrease as would the net profit margin ratio. Postponing the purchase of supplies to the first month of the following year would have no effect on the net profit margin ratio since that transaction does not affect revenues or expenses. Postponing dividends to stockholders would have no effect on the net profit margin ratio since that transaction does not affect revenues or expenses. Version 1
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232) A Net income is the excess of revenues earned over expenses incurred during a period. Revenues do not necessarily equal cash receipts and expenses do not necessarily equal cash disbursements. Net income does not represent the change in the company's value during the period. Assets are what the company owns and liabilities are what it owes; the difference between the two is stockholders' equity. While a company's net income is one source of value to the company, many other determinants of its value are not included in the income statement. 233) A The income statement summarizes the financial impact of operating activities undertaken by the company during the accounting period. It includes three main sections: revenues, expenses, and net income. The other answer choices describe common misconceptions about the income statement. 234) D Net income results when revenues exceed expenses. The other answer choices describe common misconceptions about the income statement. 235) D One of the most common misconceptions is that some people think net income equals the amount of cash generated by the business during the period. Net income equals revenue (not cash collected) minus expenses (not cash paid). A second, related misconception is that a company's net income represents the change in the company's value during the period. While a company's net income is one source of value to the company, many other determinants of its value are not included in the income statement. A third common misconception is that the measurement of income involves only counting. Proper counting is critical to income measurement, but estimation also plays a role. Version 1
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CHAPTER 3: PROBLEM MATERIAL SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 1) Match the term and the definition. There are more definitions than terms.
Term Cash Basis Net Profit Margin Unadjusted Trial Balance Prepaid Expense Deferred Revenue Revenue Recognition Principle Expense Recognition Principle Definition A) The concept that expenses should be reported in the same period as the related revenue. B) Reported when a company sells goods or services in the ordinary course of business for more than it costs to produce. C) A company's policy on when to report revenue in the financial statements. D) A ratio that indicates the percent of each revenue dollar that is left over after covering costs and expenses. E) Reporting expenses and revenue according to the time the underlying activities occur. F) A liability account indicating customers have already paid for services not yet rendered. G) The principle that changes in assets must be matched by changes in liabilities and equity. H) An account that indicates a prepayment of a cost that has not yet been incurred. I) A list of account balances when the accounts do not yet include all revenues and expenses. J) Also known as net assets, this is the value of assets minus liabilities. K) Reporting expenses and revenues according to the inflows of cash received and outflow of cash paid.
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2)
Match the term and the definition. There are more definitions than terms.
Term Deferred Revenue Revenue Recognition Principle Accrual Basis Time Period Assumption Expense Net Income Definition A) To reduce the recorded value of an asset to better reflect its true market value. B) Any outlay of money by a company for any purpose. C) Total revenues minus total expenses. D) The concept that revenue should be recorded when earned, not necessarily when payment is received. E) The increase in value of financial assets held by a company. F) The practice of dividing the life of the business into months, quarters and years. G) The concept that a company should record revenue during the same period as expenses. H) The concept that revenue and expenses should be recorded at the time received or paid. I) Payments received from customers for goods that have not yet been delivered or services that have not yet been performed. J) Revenues should be recorded when they are earned and expenses when they are incurred. K) Any use or sacrifice of a company's resources to generate revenue.
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ESSAY. Write your answer in the space provided or on a separate sheet of paper. 3) Daube Industries’ operations for the month of July are summarized as follows: A.Provided $10,000 of services in July on account. B.Received $8,000 cash from customers for services provided in July. C.Received $2,000 cash for services to be provided in August. D.Received $6,000 cash from customers on account for services provided in June. E.Paid June’s warehouse rental bill on account in the amount of $2,000. F.Received July’s warehouse rental bill of $3,000; set it aside to be paid at a later date. Required: a.Determine the net income for July using the cash basis of accounting. b.Determine the net income for July using the accrual basis of accounting.
4) Pandey Incorporated had the following activities during the month: A.Borrowed $7,000,000 cash, signing a promissory note. B.Bought a building for $800,000, paying $200,000 in cash and signing a promissory note for $600,000. C.Rented equipment at a cost of $10,000 per month and issued a check covering rent for six months. D.Provided $104,000 of services and billed customers. E.Purchased $30,000 of supplies on account. F.Received a utility bill for the current period in the amount of $1,200. G.Raised sales prices on 200 units from $400 per unit to $440 per unit. H.Received a 50% deposit from a customer on a $20,000 order to be filled next month. Required: Analyze each of the activities (A) through (H) above with the goal of indicating their effects on the basic accounting equation in a table using the appropriate equation headings. Indicate the accounts and amounts involved. Include a plus (+) or minus (−) sign before each number to show its effect on the accounting equation. If the activity should not be recorded as a transaction, enter the word “None” in the first column for that activity.
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5) Arthur Industries entered into the following transactions during the month of June. A.Purchased supplies for $8,000 cash. B.Paid $7,168 for salaries and wages for the month of June. C.Paid $768 in advance for July rent. D.Provided $19,200 in services on account. E.Paid $1,280 on accounts payable. F.Received $336 from customers as deposits for future services. G.Received a bill for $2,400 from the plumber who repaired a broken pipe in the restrooms but will not pay the bill until July. H.Purchased equipment for cash of $1,248. Required: For each of the transactions, prepare journal entries.
6)
Daube Industries’ operations for the month of October are summarized as follows:
A.Provided $2,500 of services in October on account. B.Received $2,000 cash from customers for services provided in October. C.Received $500 cash for services to be provided in November. D.Received $1,500 cash from customers on account for services provided in September. E.Paid September’s warehouse rental bill on account in the amount of $500. F.Received October’s warehouse rental bill of $750; set it aside to be paid at a later date. Required: a.Prepare journal entries to record the transactions identified among activities (A) through (F). b.Calculate the Net Income.
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7)
Geo Incorporated had the following account balances on January 1, Year 2:
Accounts Payable Accounts Receivable Cash Common Stock Equipment Notes Payable Retained Earnings Salaries and Wages Expense Supplies
$ 689 1,000 15,000 10,000 500 3,000 2,911 0 100
During January, Year 2, Geo entered into the following transactions: A.Paid $689 on account for utilities that were used during December, Year 1. B.Purchased $423 of supplies for cash. C.Signed a rental agreement for office space and paid $3,500 in advance for six months of rent beginning February 1, Year 2. D.Purchased $15,000 of new equipment, signing a promissory note. E.Provided $26,000 of services. $17,000 was received in cash and $9,000 was provided on credit. F.Paid workers $8,300 for work done in January. Required: Prepare journal entries for each of the January activities, and post results to the relevant Taccounts. Enter the beginning T-account balances and compute the ending balances.
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8) At September 30, Balance Corporation reported the following unadjusted amounts for its accounts, each of which is considered to be a normal account balance. Prepare an unadjusted trial balance. Accounts Payable Accounts Receivable Advertising Expense Cash Common Stock Equipment Notes Payable Rent Revenue Retained Earnings Supplies Supplies Expense Utilities Expense Salaries and Wages Expense
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$ 12,000 1,000 400 85,000 64,000 60,000 36,000 42,000 24,800 1,400 600 2,000 28,400
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Answer Key Test name: Chap 03_7e_Problems 1) K) Cash Basis D) Net Profit Margin I) Unadjusted Trial Balance H) Prepaid Expense F) Deferred Revenue C) Revenue Recognition Principle A) Expense Recognition Principle 2) I) Deferred Revenue D) Revenue Recognition Principle J) Accrual Basis F) Time Period Assumption K) Expense C) Net Income 3) a. Net income = Cash received − Cash paid $8,000 + $2,000 + $6,000 − 2,000 = $14,000 b. Net income = Revenues − Expenses ($10,000 + $8,000) − 3,000 = $15,000 4)
A B
Assets Liabilities Account(s) Amount Account(s) Amount Cash +7,000,000 Notes +7,000,000 Payable Buildings +800,000 Notes +600,000 Cash −200,000 Payable
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Stockholders’ Equity Account(s) Amount
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C
Cash Prepaid Rent Accounts Receivable Supplies
D E
−60,000 +60,000 +104,000 +30,000
F G
None
H
Cash
+10,000
Accounts Payable Accounts Payable
+30,000
Deferred Revenue
+10,000
+1,200
Service Revenue
+104,000
Utilities Expense
+1,200
Debit 8,000
Credit
5) Transaction A.
General Journal Supplies Cash
B.
Salaries and Wages Expense
8,000 7,168
Cash C.
Prepaid Rent
7,168 768
Cash D.
Accounts Receivable
768 19,200
Service Revenue E.
Accounts Payable
19,200 1,280
Cash F.
Cash
1,280 336
Deferred Revenue G.
Repairs and Maintenance Expense
336 2,400
Accounts Payable H.
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Equipment
2,400 1,248
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Cash
1,248
6) a. Transaction A
General Journal Accounts Receivable
Debit 2,500
Service Revenue B
Cash
2,500 2,000
Service Revenue C
Cash
2,000 500
Deferred Revenue D
Cash
500 1,500
Accounts Receivable E
Accounts Payable
1,500 500
Cash F
Rent Expense
Credit
500 750
Accounts Payable
750
b. Total Revenues = 2,500 (transaction A) + 2,000 (transaction B) = $4,500 Total Expense = Rent Expense $750 Net Income = Total Revenues − Total Expenses = $4,500 − $750 = $3,750 7) Transaction A.
General Journal Accounts Payable
Debit 689
Cash B.
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Supplies
Credit
689 423
9
Cash C.
423
Prepaid Rent
3,500
Cash D.
3,500
Equipment
15,000
Notes Payable E.
15,000
Cash
17,000
Accounts Receivable
9,000
Service Revenue F.
26,000
Salaries and Wages Expense
8,300
Cash
8,300 Cash
Debit Beginning Balance
15,000
(E)
17,000
Ending Balance
Debit Beginning Balance
Credit
(A) (B)
3,500
(C)
8,300
(D)
19,088 Accounts Receivable Credit 1,000
(E)
9,000
Ending Balance
10,000
Debit Beginning Balance
Supplies Credit 100
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689 423
10
(B)
423
Ending Balance
523
Debit Beginning Balance
Prepaid Rent Credit 0
(C)
3,500
Ending Balance
3,500
Debit Beginning Balance
Equipment Credit 500
(D)
15,000
Ending Balance
15,500
Debit
(A)
Debit
Debit
Debit
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Accounts Payable Credit 689
Beginning Balance
0
Ending Balance
3,000
Beginning Balance
15,000
(D)
18,000
Ending Balance
10,000
Beginning Balance
10,000
Ending Balance
2,911
Beginning Balance
689
Notes Payable Credit
Common Stock Credit
Retained Earnings Credit
11
Debit
Debit Beginning Balance
2,911
Ending Balance
0
Beginning Balance
26,000
(E)
26,000
Ending Balance
Service Revenue Credit
Salaries and Wages Expense Credit 0
(F)
8,300
Ending Balance
8,300
8) BALANCE CORPORATION Unadjusted Trial Balance At September 30 Debit Cash
Credit
$ 85,000
Accounts Receivable
1,000
Supplies
1,400
Equipment
60,000
Accounts Payable
$ 12,000
Note Payable
36,000
Common Stock
64,000
Retained Earnings
24,800
Rent Revenue
42,000
Advertising Expense
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400
12
Supplies Expense
600
Utilities Expense
2,000
Salaries and Wages Expense
28,400
Totals
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$ 178,800
$ 178,800
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CHAPTER 4 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) The purpose of adjusting entries is to transfer net income and dividends to Retained Earnings. ⊚ ⊚
true false
2)
A deferral adjustment may involve one asset and one liability account. ⊚ true ⊚ false
3)
When a company pays its rent in advance, an asset is reported on the balance sheet. ⊚ true ⊚ false
4) As a company uses supplies, an adjustment should be made to decrease an expense account and increase an asset account. ⊚ true ⊚ false
5)
A contra-account is added to the account it offsets. ⊚ true ⊚ false
6)
Depreciation is a measure of the decline in market value of an asset. ⊚ true ⊚ false
7)
The carrying value of an asset is an approximation of the asset's market value. ⊚ true ⊚ false
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8) The amount charged for a good or service provided to a customer on account is recordedas revenue only after the payment is received. ⊚ true ⊚ false
9)
The adjustment for corporate income taxes is generally the first adjustment prepared. ⊚ true ⊚ false
10)
Adjusting entries often involve cash. ⊚ true ⊚ false
11) If a contra-account of $20,000 is mistakenly included in the same column of the trial balance as the account it offsets, the error will cause the debit and credit column totals to differ by $40,000. ⊚ true ⊚ false
12) An adjusted trial balance is completed to check that debits still equal credits after the income statement is prepared. ⊚ true ⊚ false
13) The amounts of all the accounts reported on the balance sheet can be taken from the adjusted trial balance. ⊚ true ⊚ false
14) One of the purposes of the closing entries is to bring the balances in all asset, liability, revenue, and expense accounts down to zero to start the next accounting period.
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⊚ ⊚
15)
true false
Permanent accounts include all asset, liability, and stockholders' equity accounts. ⊚ true ⊚ false
16) If the closing entry for revenues and expenses results in a credit to Retained Earnings for $3,600, the company had a net income of $3,600. ⊚ true ⊚ false
17) The closing process includes a transfer of the Dividends account balance to the Retained Earnings account. ⊚ true ⊚ false
18)
The temporary accounts will have zero balances in a post-closing trial balance. ⊚ true ⊚ false
19) If a company forgot to record depreciation on equipment for a period, Total Assets would be overstated, and Total Stockholders' Equity would be overstated on the Balance Sheet. ⊚ true ⊚ false
20) If a company forgot to prepare an adjusting entry to record salaries and wages incurred but not yet paid at the end of the period, Total Liabilities would be understated, and Retained Earnings would be understated on the Balance Sheet. ⊚ true ⊚ false
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MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 21) Which of the following statements about the need for adjustments is not correct? A) Without adjustments, the financial statements present an incomplete and misleading picture of the company. B) Adjusting entries are intended to change the operating results to reflect management's objectives for operating performance. C) Adjustments help the financial statements present the best picture of whether the company's activities were profitable for the period. D) Adjustments help the financial statements present the economic resources that the company owns and owes at the end of the period.
22) One of the major advantages of adjustments to help improve the quality of financial statements is that they: A) ensure that revenues and expenses are recognized during the period they are earned and incurred. B) ensure that all estimates of future activities are eliminated from consideration. C) ensure that revenues and expenses are recognized conservatively during the period in which they are paid. D) provide an opportunity to manipulate the numbers to the best advantage of the reporting company.
23)
Adjusting entries are typically prepared: A) at the beginning of the accounting period. B) at the end of the accounting period. C) on a daily basis. D) on a weekly basis.
24)
If certain assets are partially used up during the accounting period, then:
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A) nothing is recorded on the financial statements until they are completely used up. B) a liability account is decreased and an expense is recorded. C) an asset account is decreased and an expense is recorded. D) nothing is recorded on the financial statements until they are replaced or replenished.
25) A company uses up $5,000 of an existing asset and the company adjusts its accounts accordingly. This is an example of a(n): A) accrual adjustment. B) closing adjustment. C) deferral adjustment. D) unethical adjustment.
26) A company makes a deferral adjustment that increased a revenue account. This must mean that a(n): A) expense account was decreased by the same amount. B) expense account was increased by the same amount. C) liability account was decreased by the same amount. D) asset account was decreased by the same amount.
27)
When existing assets are used up in the ordinary course of business: A) an expense is increased. B) deferred revenue is increased. C) an accrual is recorded. D) a prepaid expense is increased.
28)
When a deferral adjustment is made to a liability account, that liability becomes a(n):
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A) asset. B) other liability. C) expense. D) revenue.
29)
The term deferral best describes a situation in which: A) cash is paid in advance of recognizing an expense. B) an expense is recognized before it is paid for with cash. C) an expense is recognized after cash has been received. D) a liability is established at the time an expense is recognized.
30)
At the end of the year, accrual adjustments could include a: A) debit to an expense and a credit to an asset. B) credit to revenue and a debit to an expense. C) debit to cash and a credit to Common Stock. D) debit to an asset and a credit to a revenue.
31)
Accrual adjustments involve increasing: A) assets and revenues or increasing liabilities and expenses. B) assets and expensesor increasing liabilities and revenues. C) assets anddecreasing revenues or increasing liabilities and decreasing expenses. D) assets anddecreasing expenses or increasing liabilities and decreasing revenues.
32)
Accrued revenues recorded at the end of the current year: A) often result in cash receipts from customers in the next period. B) often result in cash payments in the next period. C) are also called Deferred Revenues. D) are recorded in the current year when cash is received.
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33) An example of an account that could be included in an accrual adjustment related to revenue is: A) Rent Receivable. B) Interest Payable. C) Deferred Revenue. D) Cash.
34) A company owes rent at a rate of $6,000 per month. The company pays the rent owed on the tenth of each month for the previous month. At the end of each month, what kind of adjustment is required? A) An accrual adjustment. B) A closing adjustment. C) A deferral adjustment. D) No adjustment.
35) An example of an account that could be included in an accrual adjustment related to an expense is: A) Accounts Receivable. B) Income Tax Payable. C) Prepaid Insurance. D) Accumulated Depreciation.
36)
If an expense has been incurred but will be paid later, then: A) nothing is recorded on the financial statements. B) a liability account is created or increased and an expense is recorded. C) an asset account is decreased or eliminated and an expense is recorded. D) a revenue and an expense are increased.
37)
Which of the following best describes when an accrual adjustment is required?
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A) An expense has been incurred and paid in cash. B) An expense has been incurred but not yet paid in cash. C) An expense has not been incurred, but cash has been paid. D) An expense has not been incurred nor has it been paid in cash.
38)
Which of the following statements about adjustments is correct? A) An accrual adjustment that increases an asset will include an increase in an expense. B) A deferral adjustment that decreases an asset will include an increase in an expense. C) An accrual adjustment that increases an expense will include a decrease in a liability. D) A deferral adjustment that increases a contra-account will include an increase in an
asset.
39)
What is the main difference between accrual and deferral adjustments?
A) Deferral adjustments are required to update previously recorded items whereas accrual adjustments are required to include items not previously recorded. B) Deferral adjustments are required under the cash basis of accounting whereas accrual adjustments are required under the accrual basis of accounting. C) Deferral adjustments are required to include items not previously recorded whereas accrual adjustments are required to update previously recorded items. D) Deferral adjustments are used for expenses whereas accrual adjustments are used for revenues.
40) One major difference between deferral and accrual adjustments is that deferral adjustments: A) involve previously recorded assets and liabilities, and accrual adjustments involve no previously recorded assets and liabilities. B) are made after financial statements are prepared, and accrual adjustments are made before financial statements are prepared. C) are made annually, and accrual adjustments are made monthly. D) are influenced by estimates of future events, and accrual adjustments are not.
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41)
One major difference between deferral and accrual adjustments is that:
A) accrual adjustments affect income statement accounts, and deferral adjustments affect balance sheet accounts. B) deferral adjustments increase net income, and accrual adjustments decrease net income. C) deferral adjustments are made under the cash basis of accounting, and accrual adjustments are made under the accrual basis of accounting. D) accounts affected by an accrual adjustment always go in the same direction (i.e., both accounts are increased or both accounts are decreased), and accounts affected by a deferral adjustment always go in opposite directions (one account is increased and one account is decreased).
42)
Adjusting entries affect: A) only balance sheet accounts. B) only income statement accounts. C) only statement of cash flow accounts. D) both income statement and balance sheet accounts.
43) Adjustments help to ensure that all __________ are recorded in the period in which they are earned. A) revenues B) cash transactions C) closing entries D) journal entries
44) Adjustments help to ensure that __________ balances are reported at amounts representing the economic benefits used during the period.
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A) expense B) revenue C) asset D) account
45) Adjustments to expense accounts at the end of the accounting period are made to adhere to accrual accounting principles, specifically the __________ principle. A) expense recognition ("matching") B) revenue recognition C) cost D) contra-account
46) Which of the following statements about the need to make accrual adjustments at the end of the accounting period is not correct? A) Certain events occur over time that would be too tedious and time-consuming to record on a daily basis. B) Since financial statements are prepared at the end of the period, the asset and liability account balances should be brought up to date. C) The Cash account should be adjusted for the effects of accrued revenues and expenses during the accounting period. D) Revenues and expenses should be recorded in the period in which they occur, even though the cash will be paid or received in a future period.
47)
To accrue a revenue or an expense in accounting means that the amount: A) will not be reported in the accounting records. B) will be reported as a revenue or an expense in the current period. C) will be reported as a revenue or an expense in a later period. D) was reported as a revenue or an expense in a prior period.
48)
A deferral adjusting entry that adjusts assets, such as prepaids and supplies:
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A) decreases total assets because cash is paid at the time of the adjustment. B) increases an expense in the amount used during the period. C) increases total assets because costs are incurred. D) increases total assets because cash will be received in the future.
49)
In a deferral adjustment for revenues collected in advance that are now earned:
A) a liability decreases because cash is being paid for an expense incurred at the time of the adjustment. B) the initial liability recorded when cash was received is increased by the amount for the revenue being earned. C) the initial liability recorded when cash was received is decreased by the amount for revenue being earned. D) a liability increases because cash will be paid for an expense in the future.
50) The adjusting entry to record the amount earned that had been previously collected in advance will: A) increase liabilities and increase revenues. B) increase liabilities and decrease revenues. C) decrease liabilities and increase revenue. D) decrease liabilities and decrease revenues.
51) The deferral adjustment to record the amount of Deferred Revenue that is now earned includes a: A) debit to Deferred Revenue. B) credit to Deferred Revenue. C) debit to Service Revenue. D) credit to Accounts Receivable.
52)
In an accrual adjustment for expenses incurred but not yet paid:
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A) a liability is decreasing since cash is being paid for an expense incurred at the time of the adjustment. B) the liability recorded when cash was received is increasing as the expense is incurred. C) the liability recorded when cash was received is decreasing as the expense is incurred. D) a liability is increasing since cash will be paid in the future due to the expense incurred.
53) How do deferral adjustments for prepaids that were initially recorded as an asset, such as prepaid rent, affect the assets on the balance sheet and the expenses on the income statement? A) Deferral adjustments increase assets and increase expenses. B) Deferral adjustments increase assets and decrease expenses. C) Deferral adjustments decrease assets and decrease expenses. D) Deferral adjustments decrease assets and increase expenses.
54) One type of deferral adjustment reduces the balance in a(n) __________ account on the balance sheet and increases the balance in a(n) __________ account on the income statement. A) asset; expense B) asset; revenue C) liability; expense D) liability; asset
55)
Which of the following types of transactions could be an accrual adjustment? A) An increase to an asset account and an increase to a liability account. B) An increase to a revenue account and an increase to an expense account. C) An increase to a liability account and an increase to a revenue account. D) An increase to a liability account and an increase to an expense account.
56)
In recording an accrual adjustment to account for revenues earned but not yet collected:
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A) an asset is decreased since cash is being paid at the time of the adjustment. B) an asset recorded when cash was paid is decreased as the revenue is earned. C) an asset recorded when cash was paid is increased as the revenue is earned. D) an asset is increased since cash will be collected at a later date.
57) The accrual adjustment recorded to adjust for expenses incurred but not yet paid will cause: A) liabilities to increase. B) assets to decrease. C) assets to increase. D) liabilities to decrease.
58)
How do accrual adjustments affect liabilities and expenses? A) Accrual adjustments can increase liabilities and increase expenses. B) Accrual adjustments can increase liabilities and decrease expenses. C) Accrual adjustments can decrease liabilities and decrease expenses. D) Accrual adjustments can decrease liabilities and increase expenses.
59) How can accrual adjustments for interest incurred but not yet paid affect the balance sheet and the income statement? A) Accrual adjustments can increase liabilities and increase expenses. B) Accrual adjustments can increase assets and decrease revenues. C) Accrual adjustments can decrease liabilities and increase revenues. D) Accrual adjustments can increase assets and increase expenses.
60) The accrual adjustment recorded to adjust for revenues earned but not yet collected will cause:
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A) liabilities to increase. B) assets to decrease. C) assets to increase. D) liabilities to decrease.
61) At the end of the month, the adjusting journal entry to record the use of supplies would include a debit to: A) Supplies and a credit to Supplies Expense. B) Supplies Expense and a credit to Supplies. C) Supplies and a credit to Service Revenue. D) Supplies and a credit to Cash.
62) During the month, a company uses up $4,000 of supplies. At the end of the month, the related adjusting journal entry would result in a(n): A) decrease in an asset and an equal decrease in expenses. B) increase in an asset and an equal increase in expenses. C) decrease in an asset and an equal increase in expenses. D) increase in an asset and a decrease in expenses.
63) A company started the year with $3,750 of supplies on hand. During the year the company purchased additional supplies of $2,000 and recorded them as an increase to the Supplies asset. At the end of the year the company determined that only $750 of supplies are still on hand. What is the adjusting journal entry to be made at the end of the period? A) Debit Supplies Expense and credit Supplies for $5,000 B) Debit Supplies and credit Supplies Expense for $750 C) Debit Supplies Expense and credit Supplies for $3,000 D) Debit Supplies and credit Supplies Expense for $2,500
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64) The asset account Office Supplies has a balance of $820 at the beginning of the year. The amount on hand at the end of the year is $540. The company has calculated the Supplies Expense for the year to be $3,900. Based on this information, what amount of office supplies was purchased during the year? A) $3,620 B) $0 C) $3,360 D) $4,440
65) The asset account Office Supplies has a balance of $2,000 at the beginning of the year. The amount on hand at the end of the year is $1,250. The company has calculated the Supplies Expense for the year to be $8,750. Based on this information, what amount of office supplies was purchased during the year? A) $0 B) $10,000 C) $8,000 D) $7,500
66) At the beginning of its first year of operations, Bumper Corporation purchased $4,000 of supplies, which were debited to the Supplies account. They did not purchase any other supplies during the year. At the end of the year, it has $800 of supplies left. The appropriate adjusting journal entry is: A) Debit Supplies Expense $3,200 and credit Supplies $3,200. B) Debit Supplies $3,200 and credit Supplies Expense $3,200. C) Debit Supplies $800 and credit Supplies Expense $800. D) Debit Supplies Expense $800 and credit Supplies $800.
67) During the company's first year of operations, supplies costing $8,700 were purchased and recorded in the Supplies account. At the end of the period, supplies costing $4,500 were left. What adjusting entry must be made?
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A) Debit Cash and credit Supplies for $4,500. B) Debit Supplies Expense and credit Supplies for $8,700. C) Debit Supplies and credit Supplies Expense for $4,200. D) Debit Supplies Expense and credit Supplies for $4,200.
68) Three months of rent were prepaid on September 1 for $10,800, but two months have now expired, leaving only one month prepaid at October 31. What is the amount of rent expense that will be recorded in the related adjusting entry dated October 31? A) $0 B) $3,600 C) $7,200 D) $10,800
69) Angela is a tenant of Bruce. On March 1, Angela paid Bruce $2,400 for 3 months of rent. On March 31, Angela's adjusting entries will include a debit to: A) Rent Expense for $2,400 and a credit to Prepaid Rent for $2,400. B) Prepaid Rent for $2,400 and a credit to Cash for $2,400. C) Rent Expense for $800 and a credit to Prepaid Rent for $800. D) Prepaid Rent for $800 and a credit to Rent Expense for $800.
70) If the Prepaid Rent account is not adjusted at the end of the period, what effect will this have on the financial statements? A) Liabilities will be overstated and net income will be understated. B) Assets will be understated and net income will be understated. C) Assets will be overstated and net income will be overstated. D) Cash will be overstated and net income will be overstated.
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71) On January 1, the Sleepy Monk Coffee Shop paid $18,000 for a full year of rent beginning on January 1. The rent payment was appropriately recorded in the Cash and Prepaid Rent accounts. If financial statements are prepared on January 31, the journal entry to record the adjustment would be: A) Debit Rent Expense and credit Prepaid Rent for $1,500. B) Debit Rent Expense and credit Prepaid Rent for $18,000. C) Debit Prepaid Rent and credit Rent Expense for $18,000. D) Debit Prepaid Rent and credit Rent Expense for $1,500.
72) On January 1, the Sleepy Monk Coffee Shop paid $24,000 for a full year of rent beginning on January 1. The rent payment was appropriately recorded in the Cash and Prepaid Rent accounts. If financial statements are prepared on January 31, the journal entry to record the adjustment would be: A) Debit Rent Expense and credit Prepaid Rent for $2,000. B) Debit Rent Expense and credit Prepaid Rent for $24,000. C) Debit Prepaid Rent and credit Rent Expense for $24,000. D) Debit Prepaid Rent and credit Rent Expense for $2,000.
73) The Prepaid Insurance account has a normal balance of $5,625 at the beginning of the month. The company used $1,470 of insurance coverage during the month. Which of the following statements is correct? A) The company should credit Insurance Expense for $1,470 and debit Prepaid Insurance for $1,470. B) Retained earnings will decrease and stockholders' equity will increase. C) The company should debit Insurance Expense for $1,470 and credit Prepaid Insurance for $1,470. D) Retained earnings and stockholders' equity will both increase.
74) On July 31, 2022, a company purchased a two-year insurance policy for $27,000, paying cash and debiting Prepaid Insurance for the entire two-year premium amount. The adjusting entry on December 31, 2022 includes a:
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A) credit to Prepaid Insurance $5,625. B) credit to Insurance Expense $5,625. C) debit to Prepaid Insurance $6,750. D) debit to Insurance Expense $6,750.
75)
Which of the following is a correct statement about the nature of equipment? A) While equipment is an asset, its use is recorded as an expense. B) While equipment is an asset, its use is recorded as a liability. C) While equipment is an asset, its use is recorded as affects Common Stock. D) Equipment and its use both affect liabilities.
76) The process of allocating the cost of buildings, vehicles, and equipment to the accounting periods in which they are used is called: A) accumulated allocation. B) deferred revenue. C) depreciation. D) prepaid expense.
77)
A contra-account: A) increases the original value of the account to which it relates. B) always appears in the same column of the trial balance as the account to which it
relates. C) offsets, or reduces, another account. D) reduce the asset to its fair value.
78)
The book value of equipment is equal to which of the following?
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A) Cost of equipment plus the related accumulated depreciation. B) Accumulated depreciation less the related depreciation expense. C) Cost of equipment less the related accumulated depreciation. D) Accumulated depreciation plus the related depreciation expense.
79) Which of the following is a term for the value at which an asset is reported on a financial statement? A) Accrual value B) Adjusted value C) Equipment, as adjusted D) Carrying value
80)
Accumulated Depreciation appears on the: A) balance sheet in the stockholders' equity section. B) income statement as an expense. C) balance sheet as a liability account. D) balance sheet as a contra-asset account.
81)
The Accumulated Depreciation account is a(n): A) expense account. B) liability account. C) asset account. D) contra-asset account.
82)
What is the effect of the adjusting entry for depreciation on the accounting equation?
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A) No effect on assets; Decrease liabilities; Increase stockholders' equity B) Decrease assets; No effect on liabilities; Decrease stockholders' equity C) Increase assets; No effect on liabilities; Increase stockholders' equity D) Decrease assets; Decrease liabilities; No effect on stockholders' equity
83) Recording an adjusting journal entry to recognize depreciation would cause which of the following? A) An increase in assets, an increase in liabilities, and a decrease in expenses. B) A decrease in assets, an increase in liabilities, and an increase in expenses. C) An increase in liabilities, an increase in expenses, and a decrease in stockholders' equity. D) A decrease in assets, a decrease in stockholders' equity, and an increase in expenses.
84) A company purchases software; it has an estimated useful life of three years. The adjustment to recognize amortization for the use of software would cause which of the following? A) An increase in liabilities, an increase in expenses, and a decrease in stockholders' equity. B) A decrease in assets, a decrease in stockholders' equity, and an increase in expenses. C) A decrease in assets, an increase in liabilities, and an increase in expenses. D) An increase in assets, an increase in liabilities, and a decrease in expenses.
85) An adjusting journal entry that includes an increase to anexpense account might also include an increase in a(n): A) asset account. B) related expense account. C) revenue account. D) contra-asset account.
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86) Board Building Company redeemed $3,850 of gift cards previously purchased that customers now used to pay for services that were performed by the company. The related adjusting entry would include a debit to: A) Accounts Receivable and a credit to Service Revenue. B) Deferred Revenue and a credit to Service Revenue. C) Cash and a credit to Deferred Revenue. D) Cash and a credit to Service Revenue.
87) Deferred Revenue, which represents the company’s obligation to honor gift cards previously issued to customers, totaled $7,200 at the beginning of the year and $10,900 at the end of the year. Customers purchased gift cards amounting to $59,000 during the year. What was the amount of gift cards redeemed by customers during the year? A) $55,300 B) $62,700 C) $77,100 D) $40,900
88) Deferred Revenue, which represents the company's obligation to honor gift cards previously issued to customers, totaled $6,600 at the beginning of the year and $9,000 at the end of the year. Customers purchased gift cards amounting to $50,400 during the year. What was the amount of gift cards redeemed by customers during the year? A) $48,000 B) $52,800 C) $66,000 D) $34,800
89) On December 1, 2022, Shamrock Company received $7,800 from Destiny, Incorporated for rent of an office owned by Shamrock Company. The payment covers the period from December 1, 2022 through February 28, 2023. Shamrock Company recorded this as Deferred Rent Revenue when it was received on December 1. The adjusting entry on December 31 would include a:
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A) credit to Rent Revenue of $2,600. B) credit to Deferred Rent Revenue of $2,600. C) debit to Rent Revenue of $3,900. D) debit to Deferred Rent Revenue of $3,900.
90) On December 1, 2022, Shamrock Company received $3,600 from Destiny, Incorporated for rent of an office owned by Shamrock Company. The payment covers the period from December 1, 2022 through February 28, 2023. Shamrock Company recorded this as Deferred Rent Revenue when it was received on December 1. The adjusting entry on December 31 would include a: A) credit to Rent Revenue of $1,200. B) credit to Deferred Rent Revenue of $1,200. C) debit to Rent Revenue of $1,800. D) debit to Deferred Rent Revenue of $1,800.
91) Angela is a tenant of Bruce. On July 1, Angela paid Bruce $3,600 for 3 months of rent. On July 31, Bruce's adjusting entries will include a debit to: A) Deferred Revenue for $3,600 and a credit to Rent Revenue for $3,600. B) Cash for $3,600 and a credit to Deferred Revenue for $3,600. C) Deferred Revenue for $1,200 and a credit to Rent Revenue for $1,200. D) Rent Expense for $1,200 and a credit to Prepaid Rent for $1,200.
92) Coaster Brothers, Incorporated billed a client for services performed on March 12. The customer paid one-half of the amount owed on March 22 and the other one-half on April 24. When should the company record the related Service Revenue? A) On March 12. B) On March 22. C) One-half on March 22 and the other half on April 24. D) At year-end in an adjusting entry.
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93) Freshly Company purchased an investment security on September 1 that will pay $1,200 interest on November 30. Which of the following adjusting entries would be made on September 30? A) Debit Interest Receivable and credit Interest Revenue for $1,200. B) Debit Interest Revenue and credit Interest Receivable for $400. C) Debit Interest Receivable and credit Interest Revenue for $400. D) Debit Interest Revenue and credit Interest Receivable for $1,200.
94) The interest earned and interest receivable on a note equals $75 for the month of March. What adjusting entry, if any, should be recorded as of March 31? A) Debit Cash $75 and credit Interest Revenue $75. B) Debit Interest Receivable $75 and credit Interest Revenue $75. C) Debit Interest Revenue $75 and credit Interest Receivable $75. D) No journal entry is needed at this time.
95) Fare Industries pays salaries and wages every two weeks. Salaries and wages amount to $180 a day and the company has a seven-day work week. On July 31, the company pays wages for the two weeks ending July 24 and recorded the related journal entry. The adjusting journal entry, dated July 31, to record unpaid wages and salaries owed since July 25 through the end of the month will include a debit to: A) Salaries and Wages Payable and a credit to Salaries and Wages Expense for $2,520. B) Salaries and Wages Expense and a credit to Salaries and Wages Payable for $1,260. C) Salaries and Wages Payable and a credit to Cash for $1,260. D) Salaries and Wages Expense and a credit to Salaries and Wages Payable for $2,520.
96) Sail, Incorporated pays its workforce on Fridays for a five-day workweek ending on that day. The payroll for a week is $165,000. If the accounting year-end falls on a Tuesday, the adjusting journal entry to record this will include a
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A) debit to Salaries and Wages Expense $165,000. B) debit to Salaries and Wages Expense $66,000. C) credit to Salaries and Wages Payable $99,000. D) credit to Salaries and Wages Payable $165,000.
97) Eagle Company reported Salaries and Wages Payable of $845 at the beginning of the year and $2,690 at the end of the year. The income statement for the year reported Salaries and Wages Expense of $58,100. How much cash was paid for salaries and wages during the year? A) $55,410 B) $58,100 C) $54,565 D) $56,255
98) Eagle Company reported Salaries and Wages Payable of $1,500 at the beginning of the year and $5,000 at the end of the year. The income statement for the year reported Salaries and Wages Expense of $112,400. How much cash was paid for salaries and wages during the year? A) $105,900 B) $112,400 C) $108,900 D) $107,400
99) Bird Company incurred $10,000 in salaries and wages for employees for the year; $9,000 of these salaries and wages had been paid by the end of the year. Which of the following statements about this situation is correct? A) Salaries and Wages Payable on the income statement will be $9,000. B) Salaries and Wages Expense on the income statement will be $1,000. C) Salaries and Wages Expense on the balance sheet will be $10,000. D) Salaries and Wages Payable on the balance sheet will be $1,000.
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100) An adjustment to accrue the amount of salaries and wages owed was recorded on December 31. These salaries and wages were paid on the following January 5. The entry on January 5 would include a debit to: A) Salaries and Wages Expense and Credit to Cash. B) Salaries and Wages Payable and Credit to Cash. C) Cash and Credit to Salaries and Wages Payable. D) Cash and Credit to Salaries and Wages Expense.
101) Hourly employees at Gilbert Manufacturing have worked 1,200 hours for the week at an average pay rate of $32.50 per hour. Which of the following is the required adjusting entry? A) Debit Salaries and Wages Expense and credit Cash for $39,000. B) Debit Salaries and Wages Expense and credit Salaries and Wages Payable for $39,000. C) Debit Salaries and Wages Payable and credit Salaries and Wages Expense for $39,000. D) Debit Salaries and Wages Payable and credit Cash for $39,000.
102) Chandler Company has a loan that accrues interest at a rate of $28 a day. The company pays the interest once a quarter. Which of the following adjustments would be made at the end of a month in which no payment for interest was made? A) Debit Interest Payable and credit Interest Expense. B) Debit Notes Payable and credit Cash. C) Debit Interest Expense and credit Interest Payable. D) Debit Cash and credit Notes Payable.
103) On December 31, 2022, interest of $700 is owed on a bank loan that will not be paid until June 30, 2023. What is the necessary adjusting journal entry on December 31, 2022? A) Debit Interest Expense and credit Cash for $700. B) Debit Interest Expense and credit Interest Payable for $700. C) Debit Interest Payable and credit Interest Expense for $700. D) Debit Interest Receivable and credit Interest Revenue for $700.
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104) To calculate the company's income tax expense for the current period, it is necessary to know the company's: A) operating revenue and tax bill from prior periods. B) adjusted income (before income taxes) and the company's tax rate. C) operating expenses and revenue. D) revenues, expenses, and dividends.
105) Litt, Incorporated had income before income tax of $165,200 last quarter and a 34% tax rate. What is the company's net income for last quarter? A) $56,168 B) $109,032 C) $485,882 D) $221,368
106) Litt, Incorporated had income before income tax of $229,600 last quarter and a 34% tax rate. What is the company's net income for last quarter? A) $78,064 B) $151,536 C) $307,664 D) $675,294
107) Bakersfield Corporation pays income tax at an average rate of 30 percent. This year its revenue is $130,000 and its expenses are $85,000. The adjusting entry to record the income tax expense will: A) decrease net income by $45,000. B) increase stockholders' equity by $13,500. C) decrease stockholders' equity by $13,500. D) decrease liabilities by $13,500.
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108) Bakersfield Corporation pays income tax at an average rate of 30 percent. This year its revenue is $145,000 and its expenses are $101,500. The adjusting entry to record the income tax expense will: A) decrease net income by $43,500. B) increase stockholders' equity by $13,050. C) decrease stockholders' equity by $13,050. D) decrease liabilities by $13,050.
109) How does the timing of adjusting entries differ from the accounting for daily transactions? A) Adjustments are made at the discretion of management and are not necessary for each accounting period. B) Adjustments are made at the beginning of the accounting period to ensure accuracy is maintained during the cycle. C) Adjustments are made throughout the accounting period as information becomes available. D) Adjustments are made at the end of the accounting period because making them on a daily basis would be inefficient.
110)
When should supplies be recorded as an expense?
A) In the period the supplies are purchased, regardless of when cash is paid. B) In the period cash is paid for the supplies, regardless of when the supplies were received. C) In the period the supplies are used, regardless of when they were purchased. D) In the period the supplies are sold, regardless of when they were received.
111) Prepaid Rent should be __________ and Rent Expense should be __________ for rent incurred during the period.
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A) increased; increased B) increased; decreased C) decreased; decreased D) decreased; increased
112) After the adjustments have been completed, the adjusted balance in the Supplies Expense account represents the cost of supplies: A) on hand at the end of the accounting period. B) purchased during the accounting period. C) used during the accounting period. D) purchased, but not yet paid for, at the end of the accounting period.
113) Which of the following account balances will typically be decreased as a result of adjusting entries? A) Supplies B) Cash C) Interest Payable D) Accumulated Depreciation
114) The adjustment for supplies used during the period will result in a debit to the __________ account and a credit to the __________ account. A) Supplies Expense; Supplies B) Inventory; Cost of Goods Sold C) Supplies; Supplies Expense D) Cost of Goods Sold; Revenue
115)
The adjusting entry to record the supplies used during the period will result in a(n):
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A) increase to Supplies and a decrease to Supplies Expense. B) increase to Supplies and an increase to Supplies Expense. C) decrease to Supplies and an increase to Supplies Expense. D) decrease to Supplies and a decrease to Supplies Expense.
116) The receipt of a prepayment of cash from a customer is originally recorded as a liability. Later, at the end of the accounting period, an adjustment is recorded causing a(n) __________ in the liability account and a(n) __________ in the revenue account. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease, increase
117) After the adjustments have been completed, the balance in the Rent Expense account represents the: A) amount of rent owed at the end of the accounting period. B) amount of the future benefit remaining in the account. C) cost of rent incurred for the accounting period. D) amount of cash paid this period for rent relating to any current or future period.
118) The balance in the Prepaid Insurance account after the adjusting entries have been recorded represents the: A) amount of the insurance prepayment that remains to benefit future periods. B) cost of the insurance expired during the period. C) amount owed for insurance at the end of the accounting period. D) cash paid for insurance of current and future periods.
119) After the adjustments have been completed, the adjusted balance in the Supplies account represents the cost of supplies:
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A) on hand at the end of the accounting period. B) purchased during the accounting period. C) used during the accounting period. D) purchased, but not yet paid for, at the end of the accounting period.
120)
How does the adjustment for depreciation differ from other deferral adjustments?
A) The depreciation adjustment results in an increase to a long-lived asset account, while the other deferral adjustments reduce asset accounts. B) The depreciation adjustment uses a contra-asset account rather than reducing the asset account directly. C) The depreciation adjustment increases a liability account rather than reducing an asset account directly. D) The depreciation adjustment is not a deferral adjustment, but rather an accrual adjustment.
121) When recording an adjustment for the use of equipment during the current accounting period, which two accounts are affected? A) Accumulated Depreciation and Depreciation Expense B) Equipment and Depreciation Expense C) Accumulated Depreciation and Equipment D) Revenue and Equipment
122) To recognize the use of and benefit received from long-lived assets, such as equipment, during the accounting period, __________ Expense should be recorded. A) Depreciation B) Supplies C) Accumulated Depreciation D) Interest
123)
What are the effects on the accounting equation from the adjustment for depreciation?
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A) Total assets will increase and total stockholders' equity will increase. B) Total assets will increase and total stockholders' equity will decrease. C) Total assets will decrease and total stockholders' equity will decrease. D) Total assets will decrease and total stockholders' equity will increase.
124) Why is the balance in the Depreciation Expense account generally different from the balance in the Accumulated Depreciation account? A) The adjusting entry contains a different amount for Depreciation Expense and Accumulated Depreciation. B) The Accumulated Depreciation account contains the value of the long-lived asset as well as the depreciation. C) Depreciation expense only reflects the current period depreciation. Accumulated Depreciation contains depreciation since the asset was purchased. D) The balances in the two accounts should be the same amount.
125) The annual depreciation taken on a vehicle totals $4,100. The vehicle has been in service for two full years and the adjusting entries have been completed for the year. At the end of the second year, the balance in the Depreciation Expense account is $__________ and the balance in the Accumulated Depreciation account is $__________. A) $4,100; $4,100 B) $4,100; $8,200 C) $8,200; $4,100 D) $8,200; $8,200
126) The annual depreciation taken on a vehicle totals $4,350. The vehicle has been in service for three full years and the adjusting entries have been completed for the year. At the end of the third year, the balance in the Depreciation Expense account is $__________ and the balance in the Accumulated Depreciation account is $__________.
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A) $4,350; $4,350 B) $4,350; $13,050 C) $13,050; $4,350 D) $13,050; $13,050
127) After the adjustments have been completed, the adjusted balance in the Depreciation Expense account represents the: A) total depreciation that has accrued on the long-lived assets since the purchase of the assets. B) decline in the market value of the long-lived assets. C) cash paid for the long-lived assets in the accounting period. D) depreciation for the current period.
128) After the adjustments have been completed, the adjusted balance in the Accumulated Depreciation account represents the: A) depreciation for the current period. B) total depreciation that has been recorded on the long-lived assets since the purchase of the assets. C) carrying value of the long-lived assets. D) decline in the market value of the long-lived assets.
129) Long-lived assets, such as equipment, are reported at their __________ value on the balance sheet. A) fair market B) insurable C) carrying D) expected
130)
Amortization is the concept that applies to the:
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A) expensing of long-term assets that lack physical substance over their useful lives. B) depreciation of prepaids and supplies as they are used. C) recording of amounts collected in advance that have not yet been earned. D) recording of Deferred revenue in the period cash is collected in advance of being earned.
131)
Amortization is the expensing of: A) long-term assets that lack physical substance. B) equipment and buildings. C) supplies. D) land.
132) Panda Partners purchased $1,450 of app software that is estimated to have four years of usefulness. The adjusting entry to record the amortization includes a debit to __________ and a credit to __________. A) Amortization Expense; Accumulated Amortization B) Accumulated Amortization; Amortization Expense C) Depreciation Expense; Accumulated Depreciation D) Software; Amortization Expense
133) What are the effects on the accounting equation from the adjustment for revenue earned during the accounting period that had previously been recorded as a liability? A) Total liabilities will increase and total stockholders' equity will decrease. B) Total liabilities will increase and total stockholders' equity will increase. C) Total liabilities will decrease and total stockholders' equity will increase. D) Total liabilities will decrease and total stockholders' equity will decrease.
134) After the adjustments have been completed, the adjusted balance in Deferred Revenue represents the:
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A) amount of the sales or services still owed to the customer. B) amount of revenues earned during the current period. C) amount of revenues that have been earned, but not collected during the period. D) total cash received during the period from the sale of goods or services.
135)
Accounts Receivable should be increased for: A) revenues earned during the period but not yet collected. B) inventory purchased during the period but not yet paid. C) cash collected from customers in advance of being earned. D) cash collected from customers for revenues earned during the period.
136)
When will Accounts Receivable be involved in an adjusting entry? A) Revenues are earned but have not been collected or recorded at the end of the period. B) Cash is collected in advance of the revenue earned at the end of the period. C) Revenue from cash collected earlier in the period has been earned at the end of the
period. D) Accounts Receivable will never be used in an adjusting entry. It is only used in daily transactions.
137) What are the effects on the financial condition of the business from the adjustment for revenues earned, but not yet collected, during the accounting period? A) Total assets will increase and total stockholders' equity will decrease. B) Total assets will decrease and total stockholders' equity will decrease. C) Total assets will increase and total stockholders' equity will increase. D) Total assets will decrease and total stockholders' equity will increase.
138) After posting the adjusting entry to record revenues earned but not yet collected, which account will be increased?
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A) Service Revenue B) Deferred Revenue C) Prepaid Revenue D) Accounts Payable
139)
The adjusting entry to record services earned but not yet billed requires: A) a debit to Accounts Receivable and credit to Service Revenue. B) a debit to Service Revenue and credit to Accounts Receivable. C) a debit to Accounts Payable and credit to Service Revenue. D) no entry since revenues should not be recorded until collected.
140) Which of the following transactions constitutes an accrual adjustment involving a revenue account? A) Revenue earned, but not yet collected, on investments. B) Cash collected in advance of the revenue being earned. C) Wages incurred, but not yet paid to employees, at the end of the accounting period. D) Interest owed, but not yet paid, on a note payable.
141) Which of the following entries records the adjustment for revenue earned, but not yet collected? A) Debit Accounts Receivable and credit Sales Revenue. B) Debit Sales Revenue and credit Accounts Receivable. C) Debit Deferred Revenue and credit Sales Revenue. D) Debit Accounts Receivable and credit Deferred Revenue.
142) Sugar, Incorporated made an adjusting entry on December 31 to record $580 of revenues earned but not yet collected. Which of the following describes the adjusting entry?
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A) Cash should be decreased by $580 and Sales Revenue should be increased by $580. B) Deferred Revenue should be increased by $580 and Sales Revenue should be decreased by $580. C) Accounts Receivable should be increased by $580 and Sales Revenue should be increased by $580. D) Accounts Receivable should be increased by $580 and Deferred Revenue should be increased by $580.
143)
The purpose of recording an adjusting entry for salaries and wages is to record wages: A) incurred but not yet paid. B) paid during the accounting period. C) paid in the prior accounting period. D) to be incurred in the next accounting period.
144) Salaries and Wages Payable was recorded as a result of the adjustments made at the end of the accounting period and will be paid in a future period. What is the effect on the accounts when salaries and wages are paid? A) Salaries and Wages Expense will increase and Cash will decrease. B) Salaries and Wages Payable will decrease and Cash will decrease. C) Salaries and Wages Expense will increase and Salaries and Wages Payable will decrease. D) Salaries and Wages Expense will decrease and Cash will decrease.
145) Which of the following statements is correct regarding the adjustment for salaries and wages accrued but not paid at the end of the accounting period?
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A) Salaries and Wages Payable will decrease by the amount of the unpaid wages. B) Salaries and Wages Expense will be recorded as a credit for the amount of the unpaid salaries and wages. C) Salaries and Wages Payable will be recorded as a debit for the amount of the unpaid salaries and wages. D) Salaries and Wages Expense will increase by the amount of the unpaid salaries and wages.
146) What are the effects on the accounting equation from the adjustment for salaries and wages incurred, but not yet paid, during the accounting period? A) Total liabilities will increase and total stockholders' equity will increase. B) Total liabilities will decrease and total stockholders' equity will increase. C) Total liabilities will decrease and total stockholders' equity will decrease. D) Total liabilities will increase and total stockholders' equity will decrease.
147) Boatsman Enterprises has a $72,500 note payable at December 31. Interest in the amount of $3,625 has accrued but has not yet been paid. Both the note payable and the accrued interest will become due next year. How will the interest affect the adjustments at the end of the period? A) Interest Expense does not affect this period since it will not be paid. The expense will be recorded when the note and interest are paid in full. B) Interest Expense should be increased, because the cost of interest relates to the current period. C) Note Payable should be increased to reflect the additional interest that will be due when the note is paid off next year. D) Interest Receivable should be increased to reflect the accrued interest on the note payable.
148) The adjusting entry to record interest owed on obligations at the end of the accounting period includes a debit to:
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A) Interest Payable and credit to Interest Expense. B) Interest Expense and credit to Interest Payable. C) Interest Receivable and credit to Interest Receivable. D) Interest Expense and credit to Notes Payable.
149) Which of the following statements is correct regarding the adjustment to record interest accrued on a note payable? A) Interest on the note payable is classified as an expense since it is a cost of borrowing. B) Interest on a note payable should be credited to Notes Payable because it increases the amount of principal to be repaid at the maturity of the note. C) Interest on the note payable is classified as revenue since it is an amount that can be earned on investments. D) Interest on the note payable will not accumulate because it is paid at the end of each year.
150) After the adjustments have been completed, the adjusted balance in the Interest Payable account represents: A) total interest that has been paid or accrued during the period. B) interest on notes receivable owed to the company. C) interest that has accrued, but has not been paid, at the end of the period. D) interest that has been prepaid on existing debt at the end of the period.
151) The purpose of adjusting entries for income taxes is to record income taxes __________ the accounting period. A) earned, but not yet collected, at the end of B) accrued, but not yet paid, at the end of C) paid during D) deducted from employee's pay, at the end of
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152) What are the effects on the accounting equation from the adjustment for income tax expense accrued, but not paid, at the end of the accounting period? A) Total liabilities will decrease and total stockholders' equity will decrease. B) Total liabilities will increase and total stockholders' equity will decrease. C) Total liabilities will decrease and total stockholders' equity will increase. D) Total liabilities will increase and total stockholders' equity will increase.
153)
Which of the following is incorrect regarding the Income Tax Payable account?
A) The account represents income tax incurred, but not yet paid by the company. B) This is a liability account. C) The adjusting entry involving this account also requires an entry to Income Tax Expense. D) The account represents tax refunds due to the company.
154) Which of the following statements is correct regarding the use of the Cash account in deferral and accrual adjustments at the end of the accounting period? A) The Cash account can only be used in an accrual adjustment, but not in a deferral adjustment. B) The Cash account can only be used in a deferral adjustment, but not in an accrual adjustment. C) Transactions involving cash are often included in both accrual and deferral adjustments at the end of the accounting period. D) Cash is never involved in end-of-period deferral or accrual adjustments.
155)
Which of the following statements about adjustments is correct?
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A) If accrued wages are wages owed, but not yet paid, to employees, the accrued wages will need to be recorded with an adjusting entry that increases expenses. B) When making an adjustment to recognize supplies used in a period, total assets will not change. C) Deferral adjustments are used to update amounts that have been previously deferred on the income statement. D) Depreciation is an example of an accrual adjustment.
156)
Which of the following statements about adjusting entries is not correct?
A) Adjustments are needed to ensure that the accounting system includes all of the revenues and expenses of the period. B) Adjustments help to ensure the related accounts on the balance sheet and income statement are up to date and complete. C) Adjusting entries often affect the cash account. D) Adjusting entries always include one balance sheet and one income statement account.
157)
Which of these accounts would normally be affected by an adjustment? A) Notes Payable. B) Equipment. C) Cash. D) Deferred Revenue.
158) The unadjusted trial balance is a key starting point for the adjustment process. Which of the following accounts is likely to be affected by an adjusting entry? A) Cash B) Common Stock C) Retained Earnings D) Deferred Revenue
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159)
Which of the following statements about adjustments is not correct?
A) Adjusting entries affect the Cash account. B) Adjustments to prepaid expenses and deferred revenues are deferral adjustments. C) Adjustments for wages and income taxes are normally accrual adjustments. D) Adjusting entries always involve one income statement account and one balance sheet account.
160)
Which of the following statements about the presentation of a trial balance is correct?
A) The adjusted trial balance shows the end-of-year balance for Retained Earnings. B) An adjusted trial balance presents account balances in the same level of detail as in the presentation of the financial statements. C) The order of accounts on a trial balance is as follows: assets, liabilities, stockholders' equity, dividends, revenues, and expenses. D) The adjusted trial balance shows all the debit and credit postings to all the ledger accounts.
161) After preparing adjusting entries, the equality of recorded debits and credits is checked by preparing a(n): A) post-closing trial balance. B) adjusted trial balance. C) income statement. D) balance sheet.
162) If total debits are not equal to total credits in an adjusted trial balance, which of the following errors may have occurred? A) Posting an entry to Salaries and Wage Expense to Administrative Expenses. B) Not recording a transaction. C) Recording a transaction twice. D) Posting a credit to Salaries and Wages Payable as a debit to that account.
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163)
An adjusted trial balance should be prepared immediately: A) afterpreparing the financial statements, but before closing entries. B) before posting adjusting entries. C) after posting adjusting entries. D) after posting closing entries.
164)
Which of the following statements about an adjusted trial balance is correct?
A) Debits should equal credits both before and after adjustments are made. B) Debits will equal credits after adjustments are made but not necessarily before. C) Debits will equal credits before adjustments are made but not necessarily after. D) Debits do not have to equal credits in the adjusted trial balance, but they must be equal in the post-closing trial balance.
165)
Which of the following statements about an adjusted trial balance is correct? A) It is used to prepare financial statements. B) It is prepared to ensure assets equal liabilities. C) It is prepared at the beginning of the year. D) It is prepared before the adjusting journal entries have been made.
166)
When a trial balance is prepared, a contra-account appears immediately: A) before the account it offsets but in the opposite column. B) after the account it offsets and in the same column. C) after the account it offsets but in the opposite column. D) before the account it offsets and in the same column.
167) The balance of which of the following accounts would appear in the credit column of an adjusted trial balance?
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A) Dividends B) Deferred Revenue C) Depreciation Expense D) Cash
168) The balance of which of the following accounts appears in the credit column of an adjusted trial balance? A) Common Stock B) Equipment C) Dividends D) Accounts Receivable
169)
Which of the following appears on an adjusted trial balance? A) The ending balance of Retained Earnings B) Dividends C) Gross profit D) Net income
170) Before the closing entries are prepared, the Retained Earnings balance in the adjusted trial balance is equal to the balance of that account: A) at the beginning of the period. B) after adding revenues and subtracting expenses but before subtracting dividends. C) at the end of the period. D) at the beginning of the next period.
171)
If no errors have been made, when a company prepares its adjusted trial balance:
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A) assets will equal liabilities plus Retained Earnings. B) stockholders' equity will include the current period's net income. C) the debit column and the credit column will be equal. D) income statement accounts will have been closed.
172) Which of the following is constructed immediately prior to preparing the financial statements with the purpose of demonstrating that the accounts balance? A) Unadjusted trial balance B) Adjusted trial balance C) Closing entries D) Post-closing trial balance
173)
What is the purpose of the adjusted trial balance?
A) To ensure that all transactions have been recorded. B) To ensure that total debits equal total credits after the adjustments have been recorded. C) To ensure that the correct accounts have been adjusted. D) To ensure that there have been no errors in recording the transactions.
174) The adjusted trial balance should be prepared before the __________ are prepared in order to prove the equality of __________. A) financial statements; debits and credits B) adjusting entries; debits and credits C) adjusting entries; assets and liabilities D) financial statements; assets and liabilities
175) Which is the first financial statement that should be prepared after the adjusted trial balance has been prepared?
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A) Balance Sheet B) Income Statement C) Statement of Cash Flows D) Statement of Retained Earnings
176)
Which of the following statements about the income statement is correct? A) Expenses are listed before revenues on the income statement. B) Revenues are listed before expenses on the income statement. C) The income statement is prepared after the balance sheet. D) Dividends are listed on the income statement.
177) Parker, Incorpoated had a beginning balance in its Retained Earnings account of $386,200. During the year, the company declared and paid a $4,820 dividend and, at the end of the year, it reported Retained Earnings of $401,060. The company's net income for the year was: A) $19,680. B) $0. C) $10,040. D) $14,860.
178) Parker, Incorporated had a beginning balance in its Retained Earnings account of $192,800. During the year, the company declared and paid a $2,350 dividend and, at the end of the year, it reported Retained Earnings of $199,930. The company's net income for the year was: A) $7,130. B) $9,480. C) $4,780. D) $0.
179) Ridge Crest Company has beginning Retained Earnings of $35,000, ending Retained Earnings of $39,500, and net income of $21,500. What was the amount of dividends declared during the year? Version 1
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A) $17,000 B) $13,500 C) $4,500 D) $21,500
180) Ridge Crest Company has beginning Retained Earnings of $11,000, ending Retained Earnings of $16,000, and net income of $7,500. What was the amount of dividends declared during the year? A) $2,500 B) $3,500 C) $5,000 D) $7,500
181)
After net income has been determined, it is then transferred to the: A) balance sheet. B) income statement. C) statement of cash flows. D) statement of retained earnings.
182)
Which of the following statements about the statement of retained earnings is correct?
A) Dividends increase net income and are added to calculate the ending balance of Retained Earnings. B) Dividends are subtracted to calculate the ending balance of Retained Earnings. C) Dividends are not used to calculate the ending balance of Retained Earnings. D) Dividends are not reported on the statement of retained earnings.
183) First Corporation had Retained Earnings at the end of December 31, 2022 of $459,000. During 2022, the company had net income of $179,000 and declared dividends of $20,900. The amount of Retained Earnings reported on the balance sheet as of December 31, 2023 will be:
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A) $617,100. B) $438,100. C) $638,000. D) $658,900.
184) First Corporation had Retained Earnings at the end of December 31, 2022 of $900,000. During 2023, the company had net income of $340,000 and declared dividends of $40,000. The amount of Retained Earnings reported on the balance sheet as of December 31, 2023 will be: A) $860,000. B) $1,200,000. C) $1,240,000. D) $1,280,000.
185) Grizzly Company had Retained Earnings at December 31, 2022 of $201,000. During 2023, the company had revenues of $401,000 and expenses of $350,500, and the company declared and paid dividends of $11,100. Retained earnings on the balance sheet as of December 31, 2023 will be: A) $240,400. B) $39,400. C) $251,500. D) $290,900.
186) Grizzly Company had Retained Earnings at December 31, 2022 of $300,000. During 2023, the company had revenues of $600,000 and expenses of $525,000, and the company declared and paid dividends of $16,500. Retained earnings on the balance sheet as of December 31, 2023 will be: A) $58,500. B) $358,500. C) $375,000. D) $433,500.
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187)
Which of the following statements about revenues and expenses is correct?
A) If revenues are less than expenses, the company has a net loss and Retained Earnings decreases. B) If revenues are greater than expenses, the company has net income and Common Stock increases. C) If revenues are less than expenses, the company has a net loss and Common Stock increases to balance off the loss. D) If revenues are greater than expenses, the company has net income and Retained Earnings decreases.
188) On December 31, 2022, the balance in Retained Earnings is $40,000. On December 31, 2023, the balance in Retained Earnings is $38,200. During 2023, dividends of $8,000 were declared and paid. What is the amount of net income for 2023? A) $9,800 B) $6,200 C) $1,800 D) ($1,800)
189) Maya Company had $12,000 of supplies at the end of October. During November, the company bought $4,000 of supplies. At the end of November, the company had $2,000 of supplies remaining. Which of the following statements is not correct? A) During November, the company used $14,000 of supplies. B) Supplies should be reported at $2,000 on the balance sheet. C) An expense should be debited for $14,000 in November. D) An asset should be debited for $2,000 in November.
190) Which of the following accounts would be classified as a current liability on a classified balance sheet?
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A) Dividends B) Deferred Revenue C) Wages Expense D) Accounts Receivable
191) Which of the following accounts would be classified as a current asset on a classified balance sheet? A) Accumulated Depreciation B) Equipment C) Dividends D) Supplies
192) A company reports Equipment on its classified balance sheet. The balance of the Accumulated Depreciation account appears on a classified balance sheet as: A) an addition to arrive at the amount of Equipment, Net. B) a subtraction to arrive at the amount of Equipment, Net. C) part of the Total Liabilities section. D) a subtraction in the Total Liabilities section.
193)
Which of the following statements is correct?
A) Financial statements are prepared before adjustments to ensure that debits equal credits before beginning the adjustment process. B) Financial statements are prepared after adjustments to ensure that all accounts have been brought to their correct balance. C) Financial statements are prepared before adjustments to ensure that all accounts have been brought to their correct balance. D) Financial statements are prepared before adjustments to ensure that debits equal credits before concluding the adjustment process.
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194) Which line item is reported on both the income statement and statement of retained earnings? A) Net Income B) Revenues C) Expenses D) Dividends
195)
Which financial statement reports the dividends during the current accounting period? A) Dividends are reported on the Income Statement. B) Dividends are reported on the Statement of Retained Earnings. C) Dividends are reported on the Balance Sheet. D) Dividends are not reported on any of the financial statements.
196)
Which of the following statements about the closing process is correct?
A) Closing entries are recorded at the end of each reporting period, which could be monthly, quarterly, or annually. B) After closing entries are posted, the balances of the income statement accounts will be zero. C) Closing entries are made to zero out the balances of the permanent accounts on the balance sheet. D) After closing entries are posted, the only temporary account with a balance is the Dividends account.
197)
At the end of the accounting period: A) all accounts are closed. B) temporary accounts are closed; permanent accounts are not. C) permanent accounts are closed; temporary accounts are not. D) only accounts with a credit balance are closed.
198)
What is the purpose of the closing process?
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A) To record transactions for the period. B) To set all account balances to zero. C) To prepare the accounting records so they are ready to track results for the following year. D) To adjust for accrual and deferral transactions.
199)
Temporary accounts are closed at what stage of the accounting process?
A) At the time that adjustments are made. B) After adjustments are made and before the income statement is prepared. C) After the income statement and the statement of retained earnings are prepared, but before the balance sheet is prepared. D) As the last journal entries at the end of each accounting year.
200)
Closing entries: A) are prepared before financial statements are prepared. 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.
201)
Permanent accounts: A) are not permitted under GAAP. B) have their balances zeroed-out at the end of each accounting year. C) do not have their year-end balances carried into the next year. D) are Balance Sheet accounts.
202)
Which account below is a permanent account?
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A) Service Revenue B) Depreciation Expense C) Dividends D) Deferred Revenue
203)
Which of the following statements about the Retained Earnings account is correct?
A) Retained Earnings is a permanent account; income statement accounts are temporary. B) Retained Earnings and income statement accounts are all temporary accounts. C) Retained Earnings and income statement accounts are all permanent accounts. D) Retained Earnings is a temporary account, while income statement accounts are permanent accounts.
204) After adjusting entries are prepared and posted, but before closing entries are prepared and posted, the balance in Retained Earnings is equal to: A) zero. B) the difference between total assets and total liabilities. C) the amount that is to be reported in the current year's balance sheet. D) the amount that was reported on the previous year's balance sheet.
205) Assume that no dividends were declared during the current year. Which of the following statements about the effect of a net loss on the closing process is correct? A) If a company has a net loss during the current accounting period, then the ending Retained Earnings will be smaller than the beginning Retained Earnings. B) When closing entries are prepared, Common Stock is debited if a company has a net loss. C) If a company has a net loss, the closing entry will include debits to the revenue accounts, credits to the expense accounts, and a credit to Retained Earnings. D) If a company has a net loss, the amount of revenues to be closed will be greater than the amount of expenses to be closed in the closing process.
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206)
Which of the following statements about net income and net losses is not correct? A) Net income implies that revenues are greater than expenses. B) A net loss causes Retained Earnings to decrease. C) Net income causes stockholders' equity to increase. D) A net loss increases the balance in Retained Earnings.
207)
Closing journal entries: A) transfer revenues and expenses to asset and liability accounts. B) transfer assets and liabilities to Retained Earnings. C) transfer net income (or loss) and Dividends to Retained Earnings. D) close permanent and temporary accounts.
208) Assuming that expenses exceed revenues, which of the following correctly indicates the structure of the journal entry that is used to close revenue and expense accounts? A) Debit Retained Earnings, debit Expenses, and credit Revenues. B) Debit Revenues, debit Retained Earnings, and credit Expenses. C) Debit Revenues, debit Expenses, and credit Retained Earnings. D) Debit Expenses, credit Revenues, and credit Retained Earnings.
209)
Which of the following accounts will have a zero balance on a post-closing trial balance? A) Accumulated Depreciation. B) Dividends. C) Deferred Revenue. D) Cash.
210) Bald Eagle Company has recorded all the year-end adjustments. Its revenue accounts total $275,500 and its expense accounts total $188,500. The closing entry to close the income statement accounts for the year will debit the various:
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A) expense accounts for a total of $188,500, debit Retained Earnings for $87,000, and credit the various revenue accounts for a total of $275,500. B) revenue accounts for a total of $275,500, credit the various expense accounts for a total of $188,500, and credit Retained Earnings for $87,000. C) expense accounts for a total of $188,500, credit the various revenue accounts for a total of $275,500, and credit Retained Earnings for $87,000. D) revenue accounts for a total of $275,500, debit Retained Earnings for $87,000, and credit the various expense accounts for a total of $188,500.
211) For the current year, the Sales Revenue account of Hamilton, Incorporated has a credit balance of $532,440 at year-end. After the closing entries have been posted, the account will: A) have a debit balance of $532,440. B) have a zero balance. C) still have a credit balance of $532,440. D) be removed entirely from the general ledger.
212)
Which of the following is not a correct statement? A) Expense accounts are closed with credits. B) Revenue accounts are closed with debits. C) The Dividends account is closed with a credit. D) The Retained Earnings account is closed with a debit.
213)
Dividends: A) are an expense of doing business. B) are a legal obligation that a company must pay annually. C) are reported only on the statement of retained earnings. D) are reported on the balance sheet.
214)
Which of the following statements about the Dividends account is correct?
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A) It has a credit balance. B) It is an expense. C) It reduces Retained Earnings. D) It is an account that is reported only on the income statement.
215) Boston Enterprises declared and paid a dividend of $11,600 this year. The entry to close the Dividend at the end of the year will include a debit to: A) Dividends and a credit to Cash for $11,600. B) Retained Earnings and a credit to Dividends for $11,600. C) Dividends and a credit to Retained Earnings for $11,600. D) Dividends and a credit to Dividends Payable for $11,600.
216) Boston Enterprises declared and paid a dividend of $11,600 this year. The entry to close the Dividend at the end of the year will include a debit to: A) Dividends and a credit to Cash for $11,600. B) Retained Earnings and a credit to Dividends for $11,600. C) Dividends and a credit to Retained Earnings for $11,600. D) Dividends and a credit to Dividends Payable for $11,600.
217)
How do temporary accounts differ from permanent accounts? A) Only temporary accounts are used in the adjustments at the end of the accounting
period. B) Only permanent accounts are found on the financial statements. C) Only temporary accounts are closed at the end of the accounting period. D) Only permanent accounts are transferred to Retained Earnings during the closing process.
218) In the closing process, expenses and dividends are zeroed out by __________ each account and revenues are zeroed out by __________ each account.
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A) crediting; debiting B) crediting; crediting C) debiting; crediting D) debiting or crediting (depending on the account); crediting
219)
Permanent accounts are found on: A) the balance sheet. B) the income statement. C) both the balance sheet and the income statement. D) none of the financial statements.
220)
A closing entry includes a: A) debit to Sales Revenue. B) credit to Cash. C) credit to Accounts Receivable. D) debit to Interest Expense.
221)
A closing entry may include a: A) debit to Deferred Revenue. B) credit to Interest Revenue. C) credit to Wages Expense. D) debit to Prepaid Insurance.
222) The closing entry for dividends involves a debit to __________ and a credit to __________.
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A) Retained Earnings; Dividends B) Dividends; Retained Earnings C) Dividends; Dividends Payable D) Dividends Payable; Dividends
223)
The balance in retained earnings prior to the closing process equals:
A) the balance at the end of the previous accounting period. B) beginning retained earnings plus the current period's net income. C) beginning retained earnings plus the current period's net income minus the current period's dividends declared. D) the cash balance on the balance sheet.
224)
Which of the following statements about the post-closing trial balance is correct?
A) The post-closing trial balance will be distributed to investors and other stakeholders along with the financial statements. B) The post-closing trial balance is an internal report prepared at the end of the accounting cycle. C) The post-closing trial balance is a report prepared before the adjustments and the financial statements to prove that debits equal credits. D) The post-closing trial balance proves that all entries have been made correctly and accurately during the accounting period.
225) Which of the following statements about the adjusted and post-closing trial balances is correct?
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A) The adjusted trial balance is prepared after the financial statements to verify that the numbers are accurate. B) The primary purpose of the post-closing trial balance is to see whether revenues are greater than expenses. C) The post-closing trial balance is a check that the accounting records are still in balance after posting all closing entries to the accounts. D) The adjusted trial balance debit column total is the amount to be shown as Total Assets on the Balance Sheet.
226) An error must have been made if which of the following accounts appears on the postclosing trial balance with a balance other than zero? A) Equipment B) Common Stock C) Accumulated Depreciation D) Depreciation Expense
227) Which of the following statements about the financial statements and the trial balance is correct? A) Financial statements are prepared only after the adjusted trial balance has shown that debits equal credits. B) A post-closing trial balance should be prepared before temporary accounts are closed. C) An adjusted trial balance reflects the amount of Retained Earnings to be shown on the Balance Sheet. D) A post-closing trial balance lists the account balances of the accounts that are reported on the income statement.
228)
Which of the following steps is performed first at the end of each accounting period?
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A) Prepare adjusting entries. B) Prepare a post-closing trial balance. C) Prepare closing journal entries. D) Prepare the statement of retained earnings.
229)
Which of the following steps is performed last at the end of the year? A) Prepare adjusting entries. B) Prepare an adjusted trial balance. C) Prepare closing journal entries. D) Prepare a post-closing trial balance.
230)
Which of the following is the usual last step in the accounting cycle? A) Preparing the adjusted trial balance. B) Preparing the financial statements. C) Preparing a post-closing trial balance. D) Preparing an unadjusted trial balance.
231) Which of the following trial balances is used as a source for preparing the income statement? A) Unadjusted trial balance B) Pre-adjusted trial balance C) Adjusted trial balance D) Post-closing trial balance
232) If adjustments to the financial statements were not made, what would be the effect on the financial results?
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A) The financial statements would present an incomplete and misleading picture of the company's financial performance. B) There would be little effect because any items not recognized in the reporting period would be recognized in the next reporting period. C) No effect would result because adjustments do not reflect cash paid or received. D) There would be no effect because some adjustments increase net income and others decrease it, cancelling each other out.
233)
Which of the following would understate net income?
A) Failing to post an adjusting entry to accrue revenue. B) Understating the amount of Depreciation Expense recorded. C) Failing to prepare an adjusting entry to recognize the portion of prepaid rent that has expired. D) Overstating the year-end balance of the Supplies account.
234) Which of the following will happen if the accrual adjusting entry is not made for revenue earned but not yet recorded? A) Assets will be understated and revenues will be overstated. B) Revenues will be understated and assets will be overstated. C) Both revenues and assets will be overstated. D) Both revenues and assets will be understated.
235) Which of the following will happen if the accrual adjusting entry is not made to record an expense incurred but not yet recorded? A) Both expenses and liabilities will be overstated. B) Both expenses and liabilities will be understated. C) Expenses will be understated and liabilities will be overstated. D) Expenses will be overstated and liabilities will be understated.
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236) When a company paid its insurance in advance, the company recorded Prepaid Insurance. As of the end of the accounting year, the prepayment had expired. If no adjustment is made to record this expiration, which of the following will occur? A) Assets will be understated and expenses will be overstated. B) Assets will be overstated and expenses will be understated. C) Assets and expenses will be overstated. D) Assets and expenses will be understated.
237) If the total amount that should have been debited to Rent Expense is mistakenly debited instead to Prepaid Rent, what will be the effect on the financial statements for the year? A) Revenues will be overstated. B) Assets will be overstated. C) Stockholders' equity will be understated. D) Expenses will be overstated.
238)
Which of the following errors causes net income to be understated? A) Employee wages that have not been paid are not recorded. B) Depreciation Expense is not recorded. C) Collection of an Accounts Receivable is not recorded. D) Revenue that has been earned but not yet collected has not been recorded.
239) The failure to record an accrual adjustment relating to salaries and wages would not affect the: A) balance sheet. B) income statement. C) statement of retained earnings. D) statement of cash flows.
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Answer Key Test name: Chap 04_7e 1) FALSE Adjustments need to be made at the end of an accounting period to ensure assets and liabilities are reported at appropriate amounts. Adjustments also ensure the related revenues and expenses are reported in the proper period, as required by the revenue and expense recognition principles. 2) FALSE Deferrals commonly involve (1) one asset and one expense account or (2) one liability and one revenue account. 3) TRUE When a company pays its rent in advance, the expense is initially deferred as an asset on the balance sheet in an account called Prepaid Rent. 4) FALSE When a company purchases supplies, the expense is initially deferred as an asset on the balance sheet in an account called Supplies. The adjustment part comes later when the supplies are used up. The adjustment to record supplies used decreases the Supplies account and increases the Supplies Expense account. 5) FALSE A contra-account is an account that is an offset to, or reduction of, another account. 6) FALSE Depreciation is the process of allocating the cost of buildings, vehicles, and equipment to the accounting periods in which they are used. 7) FALSE Version 1
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Carrying value is simply the amount at which an asset or liability is reported ("carried") in the financial statements. 8) FALSE The amount charged for a good or service provided to a customer on account is debited to Accounts Receivable and credited to the related revenue account at the time the good or service is provided. 9) FALSE Income tax is calculated by multiplying the company's adjusted income (before income tax expense) by the company's tax rate. Therefore, the adjustment for income taxes cannot be calculated until all other adjustments are made. 10) FALSE Adjusting entries never involve the Cash account. Transactions involving cash are recorded as regular journal entries. 11) TRUE A contra-account is an account that is an offset to, or reduction of, another account. Including a contra-account in the same column as the account it offsets will make the columns differ by twice the amount of the contra-account balance. 12) FALSE An adjusted trial balance is prepared before the financial statements are prepared, and after the adjusting entries are made to check on the equality of recorded debits and credits. 13) FALSE The adjusted trial balance includes the beginning balance for the Retained Earnings account; the balance sheet reports the ending balance of Retained Earnings. The ending balance of Retained Earnings comes from the statement of retained earnings. 14) FALSE
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At the end of each year, after all transactions and adjustments are recorded, all temporary accounts (revenue, expense, and dividends accounts) are closed by moving their balances to their permanent home in Retained Earnings. Asset and liability accounts (permanent accounts) are not closed. 15) TRUE The permanent accounts are the accounts that track financial results from year to year by carrying their ending balances into the next year. The permanent accounts include all asset, liability, and stockholders' equity accounts. 16) TRUE The closing entries include a debit to each revenue account for the amount of its credit balance, a credit to each expense account for the amount of its debit balance and the difference is recorded in Retained Earnings. The amount credited to Retained Earnings should equal Net Income on the Income Statement. (If the company has a net loss, Retained Earnings will be debited.) 17) TRUE At the end of each year, after all the year's transactions and adjustments are recorded, the Dividends account is closed by transferring its balance to its permanent home in Retained Earnings. 18) TRUE All temporary accounts are reduced to zero in the closing process, which means they would have zero balances in the post-closing trial balance. 19) TRUE
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If the adjusting entry to record depreciation for the period is not made, the Accumulated Depreciation account will be understated (a contraequity account), which means that Total Assets will be overstated. Depreciation Expense would also be understated, which means that expenses in total would be understated and net income will be overstated. This overstatement of net income causes stockholders' equity to be overstated. 20) FALSE If the adjusting entry to accrue unpaid salaries and wages is not made (Salaries and Wages Payable) a liability account will be understated, which means that Total Liabilities will be understated. Salaries and Wages Expense would also be understated, which means that expensesin total would be understated and net income will be overstated. This overstatement of net income would cause Retained Earnings to be overstated. 21) B Adjustments need to be made at the end of an accounting period to ensure assets and liabilities are reported at appropriate amounts. Adjustments also ensure the related revenues and expenses are reported in the proper period, as required by the revenue and expense recognition principles. Without these adjustments, the financial statements present an incomplete and misleading picture of the company's financial performance. 22) A
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Adjustments need to be made at the end of an accounting period to ensure assets and liabilities are reported at appropriate amounts. Adjustments also ensure the related revenues and expenses are reported in the proper period, as required by the revenue and expense recognition principles. Without these adjustments, the financial statements present an incomplete and misleading picture of the company's financial performance. Proper accounting is critical to income measurement, but estimation also plays a role. 23) B Companies wait until the end of the accounting period to adjust their accounts because daily adjustments would be costly and timeconsuming. 24) C When the company pays cash before incurring the expense, the prepayment is recorded in an asset account on the balance sheet. When an asset is partially used up during the accounting period, the expense is incurred and recorded with a debit and the asset account is decreased with a credit. 25) C When the company pays cash before incurring the expense, the prepayment is recorded in an asset account on the balance sheet. A deferral adjustment occurs when the asset is partially used up during the accounting period. The expense is incurred and recorded, and the asset account is decreased. 26) C
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Previously deferred amounts exist on the balance sheet because the company paid cash before incurring the expense or received cash before earning revenue. When a company receives cash from customers before delivering the goods or services, this revenue is initially deferred as a liability on the balance sheet (in an account called Deferred Revenue). Later, when the company delivers the goods or services, thereby meeting its obligation and earning the revenue, a deferral adjustment is made to decrease the liability and increase the related revenue account. 27) A When the company pays cash before incurring the expense, the prepayment is recorded in an asset account on the balance sheet (by increasing the asset account). A deferral adjustment occurs when the asset is partially used up during the accounting period. The expense is incurred and recorded (by increasing the expense account), and the asset account is decreased. 28) D Deferral adjustments are used to update amounts that have been previously deferred on the balance sheet. When a company receives cash from customers before delivering the goods or services, this revenue is initially deferred as a liability on the balance sheet (in an account called Deferred Revenue). Later, when the company delivers the goods or services, thereby meeting its obligation and earning the revenue, a deferral adjustment is made to decrease the liability and increase the related revenue account. 29) A The term defer means to postpone until later. In accounting, we say an expense or revenue has been deferred if we have postponed reporting it on the income statement until a later period. A deferral exists when cash is paid in advance of recognizing an expense or when cash is received in advance of recognizing revenue. Version 1
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30) D Accrual adjustments are needed when a company has earned revenue or incurred an expense in the current period but has not yet recorded it because the related cash will not be received or paid until a later period. As a result, accrual adjustments would include a debit to an expense account and a credit to a liability account or a debit to an asset account and a credit to a revenue account. 31) A Accrual adjustments are needed when a company has earned revenue or incurred an expense in the current period but has not yet recorded it because the related cash will not be received or paid until a later period. As a result, accrual adjustments would include a debit to increase an expense account and a credit to increase a liability account or a debit to increase an asset account and a credit to increase a revenue account. 32) A An accrual adjustment is needed when a company has earned revenue in the current period but has not yet received the related cash. Cash will not be received until a later period. 33) A An accrual adjustment is needed when a company has earned revenue in the current period but has not yet received the related cash. Cash will not be received until a later period. As a result, the asset involved usually has the word "Receivable" in the account name. If Rent Revenue is earned this month but not received in cash until a later month, an accrual adjustment is needed at the end of the current month to record increases in the company's Rent Revenue and Rent Receivable accounts. 34) A
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Accrual adjustments are needed when a company has earned revenue or incurred an expense in the current period but has not yet received or paid the related cash. The related cash will not be received or paid until a later period. In this case, at the end of each month, rent expense has been incurred but is not paid until the tenth of the following month. 35) B An accrual adjustment is needed when a company has incurred an expense in the current period but has not yetreceived or paid the related cash. The related cash will not be paid until a later period. As a result, the liability involved usually has the word "Payable" in the account name. If income tax is owed but not paid in cash until later, an accrual adjustment is needed at the end of the current month to record increases in the company's Income Tax Expense and Income Tax Payable accounts. 36) B An accrual adjustment is needed when a company has incurred an expense in the current period but has not yetpaid the related cash. The related cash will not be paid until a later period. The accrual adjustment record increases in an expense account and a liability account. 37) B Accrual adjustments are needed when a company has earned revenue or incurred an expense in the current period but has not yetreceived or paid the related cash. The related cash will not be received or paid until a later period. 38) B Each deferral adjustment involves one asset and one expense account, or one liability and one revenue account. Each accrual adjustment involves one asset and one revenue account, or one liability and one expense account. 39) A Version 1
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Deferral adjustments are needed when an asset (or liability) has already been recorded and it needs to be updated to show that some of its benefits have been used up (or its obligations have been fulfilled). Accrual adjustments are needed when revenue has been earned (but not yet recorded) or expenses have been incurred (but not yet recorded). 40) A Adjustments need to be made at the end of an accounting period to (1) update amounts already recorded in the accounting records and (2) include events that occurred but had not yet been recorded. The first type includes deferral adjustments and the second type includes accrual adjustments. Both types of adjustments may be influenced by estimates of future events and are made before financial statements are prepared. 41) D Accrual adjustment increase balance sheet accounts and increase corresponding income statement accounts. Deferral adjustments are used to decrease balance sheet accounts and increase corresponding income statement accounts. 42) D Adjusting entries always include one balance sheet account and one income statement account. 43) A Adjustments, which are journal entries, ensure that all revenues are recorded in the period earned. 44) A Asset accounts are reported at amounts representing economic benefits that remain at the end of the period. Revenues represent amounts earned during the period. Expenses represent the economic benefits used during the period. 45) A
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Revenues are recorded when earned (the revenue recognition principle). Expenses are recorded in the same period as the revenue to which they relate (expense recognition, or matching principle). 46) C As cash is received or paid, it is recorded in the accounting system. Adjusting journal entries never involve cash. 47) B Deferring means the revenue or expense will be recorded in a later period, whereas accruing means the revenue or expense will be recorded in the current period. 48) B This type of deferral adjustment involves reducing an asset on the balance sheet and increasing an expense account on the income statement. 49) C "Revenues collected in advance" means cash was collected before the revenue was earned. That transaction is recorded with a debit to Cash and a credit to Deferred Revenue, a liability. Later, the deferral adjustment is an adjusting entry that decreases the liability, Deferred Revenue, for the amount earned during the period and increases the related revenue account. 50) C An amount collected in advance means cash was collected before the revenue was earned. That transaction is recorded with a debit to Cash and a credit to Deferred Revenue, a liability. Later, the deferral adjustment is an adjusting entry that decreases the liability, Deferred Revenue, for the amount earned during the period and increases the related revenue account. 51) A
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The revenue that was collected in advance is now earned. The adjusting entry includes a debit to Deferred Revenue (to decrease that liability account) and a credit to Service Revenue. 52) D This type of accrual adjustment involves increasing an expense account on the income statement and increasing a liability account on the balance sheet. 53) D This type of deferral adjustment involves increasing an expense account on the income statement and decreasing an asset on the balance sheet. 54) A This type of deferral adjustment involves reducing an asset on the balance sheet and increasing an expense account on the income statement. 55) D Each accrual adjustment involves one asset and one revenue account or one liability and one expense account. An accrual adjustment that increased a liability would also increase an expense account. 56) D The adjusting entry to record revenues earned but not yet collected includes a debit to a receivable account (an increase to an asset) and a credit to a revenue account (an increase to stockholders' equity). 57) A The adjusting entry to record an expense incurred but not yet paid includes a debit to an expense account and a credit to a liability account. 58) A Each accrual adjustment involves one asset and one revenue account or one liability and one expense account. An accrual adjustment that increased a liability would also increase an expense account. 59) A Version 1
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The adjusting entry to record interest incurred but not yet paid includes a debit to an expense account (Interest Expense) and a credit to a liability account (Interest Payable). 60) C Each accrual adjustment involves one asset and one revenue account or one liability and one expense account. An accrual adjustment that increases a revenue account will also increase an asset account. 61) B The adjusting journal entry to record the use of supplies would include a debit to Supplies Expense (to increase that account) and a credit to Supplies (to decrease that account). 62) C The adjusting journal entry to record the use of supplies would include a debit to Supplies Expense of $4,000 (to increase that expense account) and a credit to Supplies of $4,000 (to decrease that asset account). 63) A Supplies expense (used) = Beginning balance + Supplies purchased − Supplies on hand at end of period = $3,750 + $2,000 − $750 = $5,000 The adjusting journal entry to record the use of supplies would include a debit to Supplies Expense and a credit to Supplies for $5,000, which is the amount of supplies used during the period. 64) A Supplies expense (used) = Beginning balance + Supplies purchased − Supplies on hand at end of period Supplies purchased = Supplies expense (used) − Beginning balance + Supplies on hand at end of period = $3,900 − $820 + $540 = $3,620 65) C
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Supplies expense (used) = Beginning balance + Supplies purchased − Supplies on hand at end of period Supplies purchased = Supplies expense (used) − Beginning balance + Supplies on hand at end of period = $8,750 − $2,000 + $1,250 = $8,000 66) A Supplies used = Beginning balance + Supplies purchased − Supplies on hand = $0 + $4,000 − $800 = $3,200 The adjusting entry includes a debit to Supplies Expense $3,200 (for the amount used) and a credit to Supplies $3,200 (to decrease the Supplies account to the amount on hand at the end of the year). 67) D Supplies used = Beginning balance + Supplies purchased − Supplies on hand = $0 + $8,700 − $4,500 = $4,200 The adjusting entry includes a debit to Supplies Expense for $4,200 (for the amount used) and a credit to Supplies $4,200 (to decrease the Supplies account to the amount on hand at the end of the year). 68) C The $10,800 prepayment covered three months of rent, which means that the rent for each month is $3,600 (or $10,800÷ 3 months). If two of the three months have expired, the rent expense recorded in the adjustment will be $7,200 (or $3,600 per month × 2 months). 69) C
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When Angela first made the payment, it provided an economic resource to the company (building space for three months), so it was initially recorded as an asset called Prepaid Rent. At March 31, one month has passed. The adjusting entry will include a debit to Rent Expense (to increase this expense account) and a credit to Prepaid Rent (to decrease this asset account) for $800 [or ($2,400 ÷ 3 months) × 1 month]. 70) C When a company first makes a payment in advance for rent, the payment provides an economic resource to the company, so it is initially recorded as an asset called Prepaid Rent. As time passes, an entry should be made to increase Rent Expense and decreased Prepaid Rent. If that entry is not made, assets will be overstated and expenses will be understated (causing net income to be overstated). 71) A When the company first made the payment, it provided an economic resource to the company (building space for twelve months), so it was initially recorded as an asset called Prepaid Rent. At January 31, one month has passed. The adjusting entry will include a debit to Rent Expense (to increase this expense account) and a credit to Prepaid Rent (to decrease this asset account) for $1,500 [or ($18,000 ÷ 12 months) × 1 month]. 72) A When the company first made the payment, it provided an economic resource to the company (building space for twelve months), so it was initially recorded as an asset called Prepaid Rent. At January 31, one month has passed. The adjusting entry will include a debit to Rent Expense (to increase this expense account) and a credit to Prepaid Rent (to decrease this asset account) for $2,000 [or ($24,000 ÷ 12 months) × 1 month]. 73) C Version 1
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The adjusting entry will include a debit to Insurance Expense and a credit to Prepaid Insurance for $1,470, the amount of insurance coverage used. Insurance Expense will increase as a result of this adjusting entry, which means that net income will decrease and, as a result, Retained Earnings will decrease. Retained Earnings is a component of stockholders' equity, so stockholders' equity will also decrease. 74) A Five of the 24 months of insurance coverage has expired (or been used). The adjusting entry will include a debit to Insurance Expense and a credit to Prepaid Insurance for $5,625 (or $27,000 × 5/24). 75) A Equipment is an asset. When equipment is used to generate revenues in the current period, part of its cost should be transferred to an expense account in that period. 76) C Depreciation is the process of allocating the cost of buildings, vehicles, and equipment to the accounting periods in which they are used. 77) C A contra-account is an account that is an offset to, or reduction of, another account. For example, the contra-account, named Accumulated Depreciation, is like a negative asset account that is subtracted from the Equipment account in the assets section of the balance sheet. As such, in a trial balance, a contra-account appears in the opposite column as the account it offsets. 78) C Carrying value is the amount at which an asset or liability is reported ("carried") in the financial statements. It is also known as "net book value" or simply "book value." As such, the book value of equipment equals its cost minus the related accumulated depreciation. 79) D Version 1
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Carrying value is the amount at which an asset or liability is reported ("carried") in the financial statements. It is also known as "book value." 80) D Accumulated depreciation is a contra-asset account that appears on the balance sheet below the account Property and Equipment. Depreciation Expense is the account that appears on an income statement. 81) D Accumulated Depreciation is a contra-account. Accumulated Depreciation is like a negative asset account that is subtracted from the Equipment account in the assets section of the balance sheet. 82) B The adjusting entry to record depreciation includes a debit to Depreciation Expense (to increase that expense account) and a credit to Accumulated Depreciation (to increase that contra-asset account). The increase to the contra-asset account decreases assets. The increase in expenses decreases net income, which decreases stockholders' equity. There is no effect on liabilities. 83) D The adjusting entry to recognize depreciation includes a debit to Depreciation Expense, which increases expenses. The increase in expenses would decrease net income and decrease Retained Earnings, a component of stockholders' equity. The adjustment also includes a credit to Accumulated Depreciation, a contra-asset account, which is like a negative asset account that is subtracted from the Equipment account in the assets section of the balance sheet. As such, the increase in this contra-asset account decreases assets. 84) B
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The adjusting entry to record amortization relating to the use of software would include a debit to Amortization Expense, which increases expenses. The increase in expenses would decrease net income and decrease Retained Earnings, a component of stockholders' equity. The adjustment also includes a credit to Accumulated Amortization, a contra-asset account, which is like a negative asset account that is subtracted from the Software account in the assets section of the balance sheet. As such, the increase in this contra-asset account decreases assets. 85) D The adjusting entries to record depreciation and amortization include a credit to a contra-account. They also include a debit to an expense (Depreciation Expense or Amortization Expense), which would increase expenses. 86) B Board has fulfilled its obligation to honor gift cards previously issued to customers. The related adjusting entry would include a debit to Deferred Revenue (to decrease that liability account) and a credit to Service Revenue (to recognize the revenue earned). 87) A Ending Deferred Revenue = Beginning Deferred Revenue + Gift cards sold − Gift cards redeemed Gift cards redeemed = Beginning Deferred Revenue + Gift cards sold − Ending Deferred Revenue = $7,200 + $59,000 − $10,900 = $55,300 88) A Ending Deferred Revenue = Beginning Deferred Revenue + Gift cards sold − Gift cards redeemed Gift cards redeemed = Beginning Deferred Revenue + Gift cards sold − Ending Deferred Revenue = $6,600 + $50,400 − $9,000 = $48,000 Version 1
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89) A One month of the three months covered by the rent payment has elapsed. The adjusting entry will include a debit to Deferred Revenue and a credit to Rent Revenue for $2,600 [($7,800 ÷ 3 months). 90) A One month of the three months covered by the rent payment has elapsed. The adjusting entry will include a debit to Deferred Revenue and a credit to Rent Revenue for $1,200 ($3,600 ÷3 months). 91) C When Bruce received the payment, an obligation arose (to provide building space for three months), so it was initially recorded as a liability (called Deferred Revenue). At July 31, one month has passed. The adjusting entry will include a debit to Deferred Revenue (to decrease this liability account) and a credit to Rent Revenue (to increase this revenue account) for $1,200 [or ($3,600 ÷3 months) × 1 month]. 92) A Revenues are recorded when earned (the revenue recognition principle). The entry should be dated March 12, which is the date the services were provided to the customer and would include a debit to Accounts Receivable and a credit to Service Revenue. 93) C The investment security will earn interest over a three-month period, beginning September 1. The adjusting entry on September 30 would include a debit to Interest Receivable and a credit to Interest Revenue for $400 (or $1,200 × 1/3). 94) B On March 31, the company should record an adjusting entry with a debit to Interest Receivable (to increase this asset account) and a credit to Interest Revenue for $75 (to increase this revenue account). 95) B Version 1
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Salaries and wages are owed for a total of seven days (July 25 – July 31). The related adjusting entry includes a debit to Salaries and Wages Expense and credit to Salaries and Wages Payable for $1,260 (or $180 per day × 7 days). 96) B The adjusting entry would include a debit to Salaries and Wages Expense and a credit to Salaries and Wages Payable for $66,000 [or ($165,000 ÷ 5 days) × 2 days]. 97) D Ending Salaries and Wages Payable = Beginning Salaries and Wages Payable + Salaries and Wages Expense during the year − Salaries and wages paid during the year Salaries and wages paid during the year = Beginning Salaries and Wages Payable + Salaries and Wages Expense during the year − Ending Salaries and Wages Payable = $845 + $58,100 − $2,690 = $56,255 98) C Ending Salaries and Wages Payable = Beginning Salaries and Wages Payable + Salaries and Wages Expense during the year − Salaries and wages paid during the year Salaries and wages paid during the year = Beginning Salaries and Wages Payable + Salaries and Wages Expense during the year − Ending Salaries and Wages Payable = $1,500 + $112,400 − $5,000 = $108,900 99) D The unpaid salaries and wages of $1,000 (or salaries and wages incurred of $10,000 − salaries and wages paid of $9,000) are reported as Salaries and Wages Payable, a liability on the balance sheet. Salaries and Wages Expense of $10,000, the amount incurred, is reported on the income statement. Version 1
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100) B The related Salaries and Wages Expense was already recorded on December 31. As such, the entry on January 5 would simply include a debit to Salaries and Wages Payable and a credit to Cash. 101) B Wages expenses have been incurred, but not yet recorded. The adjusting entry includes a debit to Salaries and Wages Expense (to increase that expense account) and a credit to Salaries and Wages Payable (to increase that liability account) for $39,000 (or 1,200 hours × $32.50 per hour). 102) C An expense has been incurred but not yet paid. The adjusting entry includes a debit to Interest Expense and a credit to Interest Payable. 103) B An expense has been incurred but not yet paid. The adjusting entry includes a debit to Interest Expense and a credit to Interest Payable for $700. 104) B Income tax is calculated by multiplying (1) the company's adjusted income (before income tax expense) by (2) the company's tax rate. 105) B Net Income = Income before income tax − Income tax expense = $165,200 − ($165,200 × 0.34) = $109,032 106) B Net Income = Income before income tax − Income tax expense = $229,600 − ($229,600 × 0.34) = $151,536 107) C The related adjusting entry will increase liabilities (Income Tax Payable) and also increase expenses (Income Tax Expense) by $13,500 [or ($130,000 − $85,000) × 30%]. The increase to expenses will decrease net income and, as a result, stockholders’ equity. Version 1
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108) C The related adjusting entry will increase liabilities (Income Tax Payable) and also increase expenses (Income Tax Expense) by $13,050 [or ($145,000 − $101,500) × 30%]. The increase to expenses will decrease net income and, as a result, stockholders' equity. 109) D Adjustments are entries made at the end of every accounting period to report revenues and expenses in the proper period and assets and liabilities at appropriate amounts. Companies wait until the end of the accounting period to adjust their accounts because daily adjustments would be costly and time-consuming. 110) C Expenses are recorded in the same period as the revenues to which they relate (the expense recognition or "matching" principle). Supplies expense is recorded when supplies are used. 111) D Prepaid Rent is decreased and Rent Expense is increased when rent is incurred for a period of time. 112) C Supplies are decreased and Supplies Expense is increased when supplies are used. 113) A Interest Payable would be increased if interest has been incurred but not paid at the end of an accounting period. As cash is received or paid, it is recorded in the accounting system; adjusting journal entries never involve cash. Accumulated Depreciation is increased for the amount of Depreciation Expense recorded for the period. Supplies is an asset that is created when cash is paid in advance; the account is reduced when the related expense is recorded in adjusting entries. 114) A Version 1
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The Supplies account is decreased with a credit and Supplies Expense is increased with a debit when supplies are used. 115) C The Supplies account is decreased with a credit and Supplies Expense is increased with a debit when supplies are used. 116) D This type of deferral adjustment involves increasing a revenue account on the income statement and decreasing a liability on the balance sheet. 117) C Expenses are recorded in the same period as the revenues to which they relate (the expense recognition or "matching" principle). The balance in the Rent Expense account represents the cost of rent used during the period to generate revenue. 118) A Prepaid Insurance reports the amount of insurance paid for in advance that has not yet expired. 119) A The adjusted balance in the Supplies account represents the cost of supplies on hand at the end of the accounting period. 120) B The depreciation adjustment uses a contra-asset account rather than reducing the asset accounts directly. 121) A This adjustment affects Accumulated Depreciation, a contra-asset account, and Depreciation Expense. 122) A This adjustment affects Accumulated Depreciation, a contra-asset account, and Depreciation Expense. 123) C
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This adjustment increases Accumulated Depreciation, a contra-asset account, and also increases Depreciation Expense. The increase in the contra-asset account decreases total assets. The increase to the expense account decreases net income and, as a result, it also decreases total stockholders' equity. 124) C Accumulated Depreciation is a balance sheet account and Depreciation Expense is an income statement account. As a balance sheet account, Accumulated Depreciation will increase over time as it accumulates the depreciation of each period since the asset was purchased. As an income statement account, Depreciation Expense will include only the depreciation of the current accounting year. 125) B Accumulated Depreciation is a balance sheet account and Depreciation Expense is an income statement account. As a balance sheet account, Accumulated Depreciation will increase over time as it accumulates the depreciation of each period since the asset was purchased. At the end of the second year, that account balance will equal $8,200 (or $4,100 × 2 years). As an income statement account, Depreciation Expense will include only the depreciation of the current accounting year, which is $4,100. 126) B Accumulated Depreciation is a balance sheet account and Depreciation Expense is an income statement account. As a balance sheet account, Accumulated Depreciation will increase over time as it accumulates the depreciation of each period since the asset was purchased. At the end of the third year, that account balance will equal $13,050 (or $4,350 × 3 years). As an income statement account, Depreciation Expense will include only the depreciation of the current accounting year, which is $4,350. Version 1
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127) D As an income statement account, Depreciation Expense will include only the depreciation of the current accounting year. 128) B As a balance sheet account, Accumulated Depreciation will increase over time as it accumulates the depreciation of each period since the assets were purchased. 129) C Carrying value is the amount at which an asset or liability is reported ("carried") in the financial statements. The carrying value is the difference between the cost and accumulated depreciation. It is also known as "book value." 130) A Similar to depreciation, amortization is the concept that applies to using up long-term assets that lack physical substance (intangible assets) and have a limited period of usefulness. 131) A Similar to depreciation, amortization is the concept that applies to using up long-term assets that lack physical substance(intangible assets) and have a limited period of usefulness. 132) A The entry includes a debit to Amortization Expense and a credit to Accumulated Amortization (to increase that contra-asset account). 133) C The revenue earned during the current period from an amount that was received in advance is transferred out of the Deferred Revenue account and into the Revenue account. This will cause liabilities to decrease and revenues to increase. An increase in a revenue account increases net income and, as a result, also increases total stockholders' equity. 134) A Version 1
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The adjusted balance in Deferred Revenue, a liability account, represents the amount of the sales or services still owed to the customer. 135) A Companies that provide accounting, legal, or promotional services that span more than one month are unlikely to receive cash or bill customers until the services have been provided in full. The revenue recognition principle indicates revenues should be recorded during the period earned. Thus, an accrual adjustment is needed to increase Accounts Receivable on the balance sheet and increase the related revenue account on the income statement. 136) A Companies that provide accounting, legal, or promotional services that span more than one month are unlikely to receive cash or bill customers until the services have been provided in full. The revenue recognition principle indicates they should be recorded during the period earned. Thus, an accrual adjustment is needed to increase Accounts Receivable on the balance sheet and increase the related revenue account on the income statement. 137) C Companies that provide accounting, legal, or promotional services that span more than one month are unlikely to receive cash or bill customers until the services have been provided in full. The revenue recognition principle indicates they should be recorded during the period earned. Thus, an accrual adjustment is needed to increase Accounts Receivable on the balance sheet and increase the related revenue account on the income statement. An increase in a revenue account increases net income and, as a result, it also increases total stockholders' equity. 138) A
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Companies that provide accounting, legal, or promotional services that span more than one month are unlikely to receive cash or bill customers until the services have been provided in full. The revenue recognition principle indicates they should be recorded during the period earned. Thus, an accrual adjustment is needed to increase Accounts Receivable on the balance sheet and increase Sales or Service Revenue on the income statement. 139) A Companies that provide accounting, legal, or promotional services that span more than one month are unlikely to receive cash or bill customers until the services have been provided in full. The revenue recognition principle indicates they should be recorded during the period earned. Thus, an accrual adjustment is needed to increase Accounts Receivable (with a debit) and increase the related revenue account (with a credit). 140) A Interest on investments is earned daily but typically is received in cash on a yearly basis, so each month an accrual adjustment is made to increase Interest Receivable and Interest Revenue for amounts earned but not yet recorded. 141) A Companies that provide accounting, legal, or promotional services that span more than one month are unlikely to receive cash or bill customers until the services have been provided in full. The revenue recognition principle indicates they should be recorded during the period earned. Thus, an accrual adjustment is needed to increase Accounts Receivable (with a debit) and increase the related revenue account (with a credit). 142) C
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Companies that provide accounting, legal, or promotional services that span more than one month are unlikely to receive cash or bill customers until the services have been provided in full. The revenue recognition principle indicates they should be recorded during the period earned. Thus, an accrual adjustment is needed to increase Accounts Receivable by $580 (with a debit) and increase the related revenue account by $580 (with a credit). 143) A Although the amount due to employees will not be paid until after the accounting period ends, the expense relates to work done (and revenues generated) during the accounting period, so the expense recognition principle ("matching") requires an adjustment be made to accrue the wages incurred and owed by the company. 144) B When the salaries and wages are paid in cash the following month, the company will decrease Salaries and Wages Payable (with a debit) and decrease Cash (with a credit). 145) D Although the amount due to employees will not be paid until after the accounting period ends, the expense relates to work done (and revenues generated) during the accounting period, so the expense recognition principle ("matching") requires an adjustment be made to accrue the wages incurred and owed by the company. Salaries and Wages Expense will increase (with a debit) and Salaries and Wages Payable, a liability, will increase (with a credit). 146) D
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Although the amount due to employees will not be paid until after the accounting period ends, the expense relates to work done (and revenues generated) during the accounting period, so the expense recognition principle ("matching") requires an adjustment be made to accrue the wages incurred and owed by the company. Salaries and Wages Expense will increase and Salaries and Wages Payable, a liability, will increase. The increase to Salaries and Wages Expense will decrease net income and, as a result, it will also decrease total stockholders' equity. 147) B A company incurs interest each month on its unpaid note payable. An adjustment is needed to record the Interest Expense relating to the current accounting period and, because this interest has not yet been paid, the adjustment also must record a liability called Interest Payable. 148) B A company incurs interest each month on its unpaid note payable. An adjustment is needed to record the Interest Expense relating to the current accounting period and, because this interest has not yet been paid, the adjustment also must record a liability called Interest Payable. The entry includes a debit to Interest Expense and a credit to Interest Payable. 149) A A company incurs interest each month on its unpaid note payable. An adjustment is needed to record the Interest Expense relating to the current accounting period and, because this interest has not yet been paid, the adjustment also must record a liability called Interest Payable. 150) C Interest Payable represents the amount of interest that has accrued, but has not been paid. 151) B
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The adjustment records income taxes incurred but not yet recorded. The expense recognition principle requires that we record the tax expense for the current accounting period and, because the tax hasn't been paid yet, a liability also is recorded. 152) B The amount of income tax accrued, but not paid, during the current period should be recorded as an increase to the liability, Income Tax Payable, and an increase to Income Tax Expense. An increase in an expense account results in a decrease to stockholders' equity. 153) D The amount of income tax accrued, but not paid, during the current period should be recorded as an increase to the liability, Income Tax Payable, and an increase to Income Tax Expense. The adjusted balance in the Income Tax Payable account represents the amount owed at the end of the accounting period. 154) D As cash is received or paid, it is recorded in the accounting system. Adjusting journal entries never involve cash. 155) A
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Although the amount due to employees will not be paid until after the accounting period ends, the expense relates to work done (and revenues generated) during the accounting period, so the expense recognition principle ("matching") requires an adjustment be made to accrue the wages incurred and owed by the company. Salaries and Wages Expense will increase and Salaries and Wages Payable, a liability, will increase. The adjustment to record the use of supplies includes a debit to Supplies Expense and a credit to Supplies for the amount of supplies used during the period. That credit decreases the Supplies account, which is an asset account. Total assets also decrease. Deferral adjustments update amounts previously recorded on the balance sheet. Depreciation is an example of a deferral adjustment. 156) C Adjusting entries always include one balance sheet and one income statement account. Adjusting entries never involve the Cash account. Transactions involving cash are recorded as regular journal entries. 157) D Adjusting entries always include one balance sheet (asset or liability) account and one income statement (revenue or expense) account. Adjusting entries never involve the Cash account. Transactions affecting the Cash account are recorded as regular journal entries. Adjusting entries do not impact the Notes Payable and Equipment accounts directly; Accumulated Depreciation account is used to record Depreciation Expense. 158) D Adjusting entries do not affect the Cash, Common Stock, and Retained Earnings accounts. 159) A Adjusting entries never involve the Cash account. Transactions involving cash are recorded as regular journal entries. Version 1
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160) C The trial balance lists the balance sheet permanent accounts first in the order of assets, liabilities, and stockholders' equity, and then the temporary accounts, dividends, revenues, and expenses. The adjusted trial balance shows the beginning (rather than ending) balance in Retained Earnings. Accounts are aggregated for financial statement reporting. The trial balance shows account balances only (rather than individual debit and credit postings). 161) B The adjusted trial balance is a check on the equality of the debits and credits that have been recorded as part of the adjustment process. 162) D Posting a credit to Salaries and Wages Payable as a debit would cause the adjusted trial balance to be out-of-balance. A trial balance will balance if a transaction is recorded twice, not recorded, or an entry is posted to the wrong account. 163) C An adjusted trial balance is prepared to check that the accounting records are still in balance, after having posted all adjusting entries to the T-accounts. Financial statements are prepared once the adjusted trial balance has been prepared. 164) A An adjusted trial balance is prepared to check that the accounting records are still in balance, after having posted all adjusting entries to the T-accounts. 165) A An adjusted trial balance is prepared after all the adjusting journal entries have been made to assure that the debits and the credits are equal. The adjusted trial balance typically is used to prepare the financial statements. Version 1
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166) C A contra-account is shown on the trial balance immediately after the account it offsets. The balance is recorded in the opposite column because a contra-account is subtracted from the account to which it is a contra-account. 167) B The Dividends account, Depreciation Expense, and Cash have debit balances and would appear in the debit column. Deferred Revenue, a liability account, has a credit balance and appears in the credit column. 168) A Common Stock is a stockholders’ equity account and has a normal credit balance. It appears in the credit column. Equipment, Dividends, and Accounts Receivable have debit balances and appear in the debit column. 169) B The Dividends account appears on the adjusted trial balance. Only beginning retained earnings appears on the adjusted trial balance; since the closing entries have not yet been recorded, the Retained Earnings account does not yet reflect the ending balance. Gross profit and net income are computed amounts (rather than accounts) and, as such, do not appear on any trial balance. 170) A The amount of Retained Earnings on the adjusted trial balance is the beginning-of-year balance. This account balance does not yet include revenues, expenses, and dividends for the current period because they have been recorded in their own separate accounts. 171) C The adjusted trial balance is a check on the equality of debits and credits recorded in the accounting process. As a result, if no errors have been made, the debit and credit column totals will be equal. Version 1
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172) B An adjusted trial balance is prepared to check that the accounting records are still in balance, after having posted all adjusting entries to the T-accounts. 173) B An adjusted trial balance is prepared to check that the accounting records are still in balance, after having posted all adjusting entries to the T-accounts. 174) A An adjusted trial balance is prepared to check that the accounting records are still in balance, after having posted all adjusting entries to the T-accounts. At that point, financial statements can be prepared. 175) B The first financial statement prepared is the income statement. The amount of net income (or loss) from that statement is then transferred to the statement of retained earnings. The ending amount of Retained Earnings from that statement is then transferred to the balance sheet. 176) B The first financial statement prepared is the income statement. Revenues are listed before expenses on the income statement. The amount of net income (or loss) from that statement is then transferred to the statement of retained earnings (which includes Dividends). The ending amount of Retained Earnings from that statement is then transferred to the balance sheet. As a result, the income statement is prepared before (rather than after) the balance sheet. 177) A
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Ending retained earnings = Beginning retained earnings + Net income − Dividends Net income = Ending retained earnings + Dividends − Beginning retained earnings = $401,060+ $4,820 − $386,200= $19,680 178) B Ending retained earnings = Beginning retained earnings + Net income − Dividends Net income = Ending retained earnings + Dividends − Beginning retained earnings = $199,930 + $2,350 − $192,800 = $9,480 179) A Ending Retained Earnings = Beginning Retained Earnings + Net income − Dividends Dividends = Beginning Retained Earnings + Net income − Ending Retained Earnings = $35,000 + $21,500 − $39,500 = $17,000 180) A Ending Retained Earnings = Beginning Retained Earnings + Net income − Dividends Dividends = Beginning Retained Earnings + Net income − Ending Retained Earnings = $11,000 + $7,500 − $16,000 = $2,500 181) D Net income is reported on the income statement. The amount of net income from that statement is then transferred to the statement of retained earnings. 182) B
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Equation for the statement of retained earnings: Beginning retained earnings + Net income − Dividends = Ending retained earnings 183) A Ending retained earnings = Beginning retained earnings + Net income − Dividends = $459,000 + $179,000 − $20,900 = $617,100 184) B Ending retained earnings = Beginning retained earnings + Net income− Dividends = $900,000 + $340,000− $40,000 = $1,200,000 185) A Net income = Revenues − Expenses = $401,000 − $350,500 = $50,500 Ending retained earnings = Beginning retained earnings + Net income − Dividends = $201,000 + $50,500 − $11,100 = $240,400 186) B Net income = Revenues − Expenses = $600,000 − $525,000 = $75,000 Ending retained earnings = Beginning retained earnings + Net income − Dividends = $300,000 + $75,000 − $16,500 = $358,500 187) A Net income, the excess of revenues over expenses, increases Retained Earnings. On the other hand, if revenues are less than expenses, a net loss results, which decreases Retained Earnings. 188) B
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Ending retained earnings = Beginning retained earnings + Net income − Dividends Net income = Ending retained earnings − Beginning retained earnings + Dividends = $38,200 − $40,000 + $8,000 = $6,200 189) D Supplies used = Beginning supplies + Supplies purchased − Supplies on hand = $12,000 + $4,000 − $2,000 = $14,000 The adjustment to record the use of supplies includes a debit to Supplies Expense and a credit to Supplies $14,000, the amount of supplies used during the period. Supplies of $2,000 will be reported on the balance sheet and Supplies Expense of $14,000 will be reported on the income statement. 190) B When a company receives cash in advance of providing goods or services to customers, this revenue is initially deferred as a liability on the balance sheet (in an account called Deferred Revenue). 191) D Supplies is reported as a current asset on a classified balance sheet. 192) B Accumulated Depreciation is a contra-asset account. It is subtracted from Equipment to arrive at the Equipment, Net amount that is reported on the balance sheet. 193) B An adjusted trial balance is prepared to check that the accounting records are still in balance, after having posted all adjusting entries to the T-accounts. Financial statements are prepared using the account balances from the adjusted trial balance. 194) A Version 1
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The income statement lists the amounts for each revenue and expense account and computes net income (or loss). The amount for net income is transferred from the income statement to the statement of retained earnings. The Dividends number comes from the adjusted trial balance. 195) B Dividends are reported only on the Statement of Retained Earnings. 196) B At the end of each year, after all the year's transactions and adjustments are recorded, all revenue, expense, and dividends accounts are closed by moving their balances to their permanent home in Retained Earnings. The revenue and expense accounts are income statement accounts; their balances will be zero after the closing entries are posted. 197) B At the end of each year, after all the year's transactions and adjustments are recorded, all revenue, expense, and dividends accounts (referred to as the temporary accounts) are closed by moving their balances to their permanent home in Retained Earnings. Permanent accounts, which include the balance sheet accounts, are not closed. 198) C The closing process serves two purposes: (1) transfer net income (or loss) and dividends to Retained Earnings and (2) establish zero balances in all income statement and dividend accounts. The revenue and expense accounts and the Dividends accounts are considered temporary accounts because they are used to track only the current year's results and then are closed before the next year's activities are recorded. As a result, in part, closing entries prepare the accounting records so they are ready to track results for the following year. 199) D
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At the end of each year, after all the year's transactions and adjustments are recorded, all revenue, expense, and dividends accounts (referred to as the temporary accounts) are closed by moving their balances to their permanent home in Retained Earnings. 200) C At the end of each year, after all the year's transactions and adjustments are recorded, all revenue, expense, and dividends accounts (referred to as the temporary accounts) are closed by moving their balances to their permanent home in Retained Earnings. The temporary accounts, which include the revenue, expense, and Dividends accounts, have zero balances after the closing entries are posted. 201) D The permanent accounts are the balance sheet accounts. They are not closed at the end of the accounting period; their balances are carried to the next year. 202) D The revenue account and expense accounts (including Depreciation Expense) and the Dividends accounts are considered temporary accounts because they are used to track only the current year's results and then are closed before the next year's activities are recorded. Deferred Revenue, a liability account, is a permanent account. 203) A The Retained Earnings account, like all other balance sheet accounts, is considered a permanent account because its ending balance from one year becomes its beginning balance for the following year. In contrast, the income statement accounts (revenues and expenses) and the Dividends account are temporary accounts because they are used to track only the current year's results and then are closed before the next year's activities are recorded. 204) D Version 1
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The adjusted trial balance shows the beginning balance in Retained Earnings, that is, the amount of Retained Earnings reported on the previous year's balance sheet. 205) A If a company has a net loss, the closing entry will include debits to the revenue accounts, credits to the expense accounts, and a debit (rather than a credit) to the Retained Earnings account for the amount of the net loss. That debit (which equals the amount of the net loss) will reduce the balance in the Retained Earnings account. As a result, the ending balance in the Retained Earnings account will be less than its beginning balance. 206) D A net loss decreases (rather than increases) the balance in the Retained Earnings account. 207) C The closing process transfers the balances in the temporary accounts (revenue, expenses, and the Dividends accounts) to Retained Earnings. 208) B Assuming that expenses exceed revenues, the closing journal entry involves: debiting revenue accounts for the amounts of their credit balances, debiting Retained Earnings for the amount of net loss (excess of expenses over revenues), and crediting expense accounts for the amounts of their debit balances. 209) B Since the temporary accounts have been closed, the post-closing trial balance will include zero balances for the revenue, expense, and Dividends accounts. Cash, Accumulated Depreciation, and Deferred Revenue are permanent accounts and are not closed; therefore, their balances will appear on the post-closing trial balance. 210) B Version 1
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This closing entry will debit the various revenue accounts (which have credit balances) for a total of $275,500, credit the various expense accounts (which have debit balances) for a total of $188,500, and credit Retained Earnings for $87,000, which is the amount of the company's net income ($275,500 − $188,500). 211) B After the closing journal entries are prepared and posted, the balances in the temporary accounts are reset to zero to start accumulating next year's results. As a result, the Sales Revenue account, a temporary account, will have a zero balance after the closing entries have been posted. It will not be removed from the general ledger. 212) D The first closing entry includes a debit to each revenue account for the amount of its credit balance, a credit to each expense account for the amount of its debit balance, and the difference is recorded in Retained Earnings. The second closing entry includes a credit to the Dividends account for the amount of its debit balance and a debit to Retained Earnings for the same amount. The Retained Earnings is a permanent account; as such, it is not closed. 213) C Dividends are reported on the statement of retained earnings. The Dividends account is used to track dividends declared during the current year. Dividends are not an expense. 214) C The Dividends account has a debit balance. It is reported only on the statement of retained earnings. The second closing entry includes a credit to the Dividends account for the amount of its debit balance and a debit to Retained Earnings, which reduces that account. Dividends are not an expense. 215) B Version 1
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The closing entry includes a credit to the Dividends account for the amount of its $11,600 debit balance and a debit to Retained Earnings for the same amount. 216) B The closing entry includes a credit to the Dividends account for the amount of its $11,600 debit balance and a debit to Retained Earnings for the same amount. 217) C Permanent accounts are accounts that track financial results from year to year by carrying their ending balances into the next year. Temporary accounts are accounts that track financial results for a limited period of time by having their balances zeroed out at the end of each accounting year. 218) A The first closing entry debits each revenue account for the amount of its credit balance, credits each expense account for the amount of its debit balance, and records the difference in Retained Earnings. The second closing entry includes a credit to the Dividends account for the amount of its debit balance and a debit to Retained Earnings. 219) A Permanent accounts are accounts that track financial results from year to year by carrying their ending balances into the next year. These accounts are reported on the balance sheet. 220) A
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The first closing entry debits each revenue account for the amount of its credit balance, credits each expense account for the amount of its debit balance, and records the difference in Retained Earnings. The second closing entry credits the Dividends account for the amount of its debit balance and debits Retained Earnings for the same amount. Assets (such as Cash and Accounts Receivable) and liabilities are not closed at the end of the period. 221) C The first closing entry debits each revenue account for the amount of its credit balance, credits each expense account for the amount of its debit balance, and records the difference in Retained Earnings. The second closing entry credits the Dividends account for the amount of its debit balance and debits Retained Earnings for the same amount. Assets (such as Prepaid Insurance) and liabilities (such as Deferred Revenue) are not closed at the end of the period. 222) A The second closing entry credits the Dividends account for the amount of its debit balance and debits Retained Earnings for the same amount. 223) A Until the closing entries are posted, the Retained Earnings account on the adjusted trial balance provides the opening amount on the statement of retained earnings. 224) B In this context, post means "after," so a post-closing trial balance is an "after-closing" trial balance prepared as a final check that total debits still equal total credits and that all temporary accounts have been closed. It is an internal report; it is not a financial statement. 225) C The post-closing trial balance is a check that the accounting records are still in balance after posting all closing entries to the accounts. Version 1
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226) D Temporary accounts are closed in the closing process which means that they have zero balances and therefore do not appear on the post-closing trial balance. Depreciation Expense is a temporary account and, as such, should have a zero balance on the post-closing trial balance. 227) A The adjusted trial balance is a check that the accounting records are still in balance after posting all adjusting entries to the accounts. The financial statements cannot be prepared if the accounting records do not balance. A post-closing trial balance should be prepared after (rather than before) temporary accounts are closed. Because the income statement accounts are temporary accounts that have been closed, a postclosing trial balance will list zero balances for all of the accounts that are reported onthe income statement. 228) A After adjusting journal entries are prepared, an adjusted trial balance is prepared, the financial statements are prepared (including the statement of retained earnings), the closing process is performed, and a postclosing trial balance is prepared. 229) D The post-closing trial balance is the final step in the accounting process. 230) C The correct sequence of steps in the accounting cycle is to prepare an unadjusted trial balance, prepare adjusting entries, prepare an adjusted trial balance, prepare the financial statements, make closing entries, and prepare a post-closing trial balance. 231) C
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The adjusted trial balance is used in the preparation of financial statements because the accounts must be adjusted before financial statements can be prepared. The post-closing trial balance cannot be used to prepare the income statement since it will list zero balances for all the income statement accounts (which have already been closed). 232) A The adjustments are made to help ensure that all revenues and expenses are reported in the period in which they are earned or incurred. As a result of these adjustments, the financial statements present the best picture of whether the company's business activities were profitable that period and what economic resources the company owns and owes at the end of that period. Without these adjustments, the financial statements present an incomplete and misleading picture of the company's financial performance. 233) A Omitting an adjusting entry to accrue revenue will understate revenue and net income. Understating Depreciation Expense will understate expenses and overstate net income. Failure to record the portion of prepaid rent that has expired will understate expenses and overstate net income. Overstating the year-end balance of the Supplies account will understate supplies expense and overstate net income. 234) D The related accrual adjustment would include a debit to Accounts Receivable, an asset, and a credit to a Revenue account. If that entry is not prepared, assets and revenues will both be understated. 235) B The related accrual adjustment would include a debit to an expense account and a credit to a liability account. If that entry is not prepared, liabilities and expenses will both be understated. 236) B Version 1
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The related adjusting entry would include a debit to Insurance Expense and a credit to a Prepaid Insurance, an asset. If that entry is not prepared, assets will be overstated and expenses will be understated. 237) B If the debit is not posted to Rent Expense, expenses will be understated. Posting the debit instead to Prepaid Rent will cause that asset account to increase and, as a result, assets will be overstated. 238) D Revenue that has been earned but not recorded will understate net income. The failure to record an expense, such as Salaries and Wages Expense or Depreciation Expense, will understate expenses and, as a result, overstate net income. The collection of an accounts receivable that is not recorded will understate Cash and overstate Accounts Receivable; as such, it would have no impact on net income. 239) D The statement of cash flows is not affected since adjusting entries do not involve the Cash account. The accrual of wages affects Salaries and Wages Expense (reported on the income statement) and Salaries and Wages Payable (reported on the balance sheet). Since Salaries and Wages Expense is affected, net income is also affected, and, in turn, Retained Earnings (reported on the statement of retained earnings) is affected.
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CHAPTER 4: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) The unadjusted trial balance of Sketch Star Makers Incorporated, prepared as of December 31, 2022, includes the following account balances. All of the accounts listed have normal balances. Cash Accounts Receivable Supplies Prepaid Insurance Equipment Accumulated Depreciation Notes Payable (long-term) Deferred Revenue Service Revenue Salaries and Wages Expense
$ 15,000 3,000 1,500 7,200 15,000 3,000 30,000 7,500 45,000 45,000
The following information is also available: 1.A) After a count of supplies, there were $600 worth of supplies remaining on hand at December 31, 2022. 2.B) An insurance policy, purchased on January 1, 2022, covers four years. 3.C) The equipment depreciates at a rate of $1,500 per year; no depreciation has been recorded for 2022. 4.D) Three-fifths (or 60%) of the amount recorded as Deferred Revenue remains deferred as of December 31, 2022. 5.E) The accrued amount of salaries and wages at December 31, 2022 is $3,000. Required: Prepare the required adjustments for the company as of December 31, 2022.
2) Garvey Company’s unadjusted trial balance includes the following account balances as of December 31, 2022: Debits Cash
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Credits
$ 68,900
1
Accounts Receivable
116,300
Interest Receivable
1,300
Supplies
138,600
Prepaid Insurance
8,700
Notes Receivable (short-term)
50,000
Equipment
277,800
Accumulated Depreciation
$ 64,500
Accounts Payable
104,100
Salaries and Wages Payable
21,600
Deferred Revenue
9,200
Notes Payable (long-term)
87,400
Common Stock
216,100
Retained Earnings
143,500
Service Revenue
40,500
Interest Revenue
21,900
Supplies Expense Repairs and Maintenance Expense
26,400
Rent Expense
17,800
Depreciation Expense Insurance Expense Salaries and Wages Expense Totals
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3,000 $ 708,800
$ 708,800
2
The following data are available to determine adjusting entries: 1.A) Insurance purchased at the beginning of July for $8,700 provided coverage for twelve months (July 2022 through June 2023). The insurance coverage for July through December totaling $4,350 has now been used. 2.B) The company estimates $8,150 in depreciation each year. 3.C) A count showed $85,700 of supplies on hand at the end of the year. 4.D) An additional $260 of interest has been earned but has not yet been uncollected on the outstanding notes receivable. 5.E) Services in the amount of $5,600 were performed for customers who had previously paid in advance. 6.F) Services in the amount of $2,000 were performed; these services have not yet been billed or recorded. Required: a.Prepare the adjusting entries that are required at the end of the period. b.Prepare an adjusted trial balance by completing the related columns in the table below.
Garvey Company Adjusted Trial Balance December 31, 2022 Debits
Credits
Cash Accounts Receivable Interest Receivable Supplies Prepaid Insurance Notes Receivable (short-term) Equipment Accumulated Depreciation Accounts Payable Salaries and Wages Payable
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Deferred Revenue Notes Payable (long-term) Common Stock Retained Earnings Service Revenue Interest Revenue Supplies Expense Repairs and Maintenance Expense Rent Expense Depreciation Expense Insurance Expense Salaries and Wages Expense Totals
3) On April 30, 2022, Hawes Company purchased a three-year insurance policy with a cash payment of $25,200. Coverage began immediately. Required: a.What is the amount of Insurance Expense relating to this insurance policy that will be reported for the year ended December 31, 2022? b.What is the balance of the Prepaid Insurance account at December 31, 2022?
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4) All of the accounts of the Grass is Greener Company have been adjusted as of December 31, 2022, with the exception of income taxes incurred but not yet recorded. Those account balances appear below. All have normal balances. The estimated income tax rate for the company is 40%. Cash Accounts Receivable Interest Receivable Prepaid Insurance Prepaid Rent Supplies Equipment Accumulated Depreciation Accounts Payable Deferred Revenue Income Tax Payable Salaries and Wages Payable Notes Payable (long-term) Long–Term Debt Common Stock Retained Earnings Dividends Service Revenue Interest Revenue Supplies Expense Repairs and Maintenance Expense Depreciation Expense Rent Expense Income Tax Expense
$ 351,340 753,950 4,300 6,800 11,200 216,900 672,500 128,900 281,700 83,600 0 23,400 356,040 229,600 380,600 207,400 20,000 904,000 114,100 336,200 247,900 57,750 30,500 Unknown
Required: a.Calculate the income before income tax. b.Calculate the income tax expense. c.Calculate the net income.
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5) All of the transactions of Harding Trading Company for the year have been journalized and posted. The following information has been gathered for the adjustment process as of December 31, 2022: A.The Supplies account shows a balance of $900. A count of supplies revealed $400 on hand. B.The $1,200 premium relating to a one–year insurance policy was paid on December 1, 2022. C.The company’s equipment, which was purchased last year, depreciates at a rate of $1,000 per year. D.On September 30, 2022, a customer paid $10,000 in advance for services; as of December 31, 2022, services in the amount of $3,000 had been performed for this customer. E.Employees are paid $5,000 on Fridays for the 5-day workweek, which ends on that Friday. However, December 31, 2022 falls on a Thursday. F.The company has completed $500 of work for customers; the customers have not yet been billed and the related revenue has not been recorded. Required: a.Prepare the adjusting entries required at December 31, 2022. b.For each of the adjusting items, indicate the amount and the direction of effects of the adjusting journal entry on the elements of the balance sheet and income statement. Complete the following table by entering the amount and the direction (+ for increase, − for decrease) or leave blank for no effect.
Transaction Total Assets
Balance Sheet Income Statement Total Stockholders’ Revenues Expenses Net Liabilities Equity Income
A B C D E
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F
6) Bantam Company calculated its net income to be $38,775 based on the unadjusted trial balance. The following adjusting entries were then made for: ● Salaries and wages owed but not yet paid of $395. ● Interest earned but not received from investments of $375. ● Prepaid insurance premiums amounting to $275 have expired. ● Deferred revenue in the amount of $375 has now been earned. Required: Determine the amount of net income (loss) that will be reported after the adjustments are recorded
7) On December 31, 2022, Ditka Incorporated had Retained Earnings of $267,800 before its closing entries were prepared and posted. During 2022, the company had service revenue of $168,100 and interest revenue of $81,300. The company used supplies in the amount of $87,900, advertising expenses were $16,400, salaries and wages totaled $18,300, and income tax expense was calculated as $13,700. During the year, the company declared and paid dividends of $6,000. Required: a.Prepare the closing entries dated December 31, 2022. b.Prepare a T-account for the Retained Earnings account. Enter the beginning balance into the T-account, post the closing entries, and then determine the ending balance.
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8) The alphabetical listing below includes all of the adjusted account balances of Battle Creek, Incorporated as of December 31, 2022. All account balances are normal. Accounts Payable Accounts Receivable Accumulated Depreciation Common Stock Cash Depreciation Expense Dividends Equipment Income Tax Expense Income Taxes Payable Rent Expense Retained Earnings Salaries and Wages Expense Service Revenue Deferred Revenue
$ 6,000 16,000 6,000 4,000 10,000 2,000 2,000 18,000 2,000 2,000 4,000 6,000 8,000 36,000 2,000
Required: a.Prepare the closing entries. b.Prepare the post-closing trial balance as of December 31, 2022. c.Prepare the classified balance sheet at December 31, 2022.
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9) Match each transaction with the type of entry that will be required at April 30, the company's year-end. Transaction 1.___The company has $8,300 in Prepaid Rent at the beginning of April and uses $3,600 of that for its April rent. 2.___The company provides lawn care in April for customers who will be billed and make payment in May. 3.___The company owes interest on loans for the month of April and will not pay this interest until May. 4.___The company uses $1,600 worth of fertilizer from its stock of supplies. 5.___The company provides lawn care in April for customers who paid in March. 6.___The company transfers revenues of $50,000 and expenses of $32,000 to Retained Earnings. 7.___The company makes an entry to allocate the use of equipment during the current account period. 8.___The company transfers the balance in the Dividends account of $1,200 to Retained Earnings. 9.___The company records income taxes incurred but not yet paid. 10.___The weekly payroll of $5,000 to be paid next week is recorded. Type of Entry 1.A) Closing entry 2.B) Deferral adjusting entry 3.C) Accrual adjusting entry
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10)
Match the term and its definition. There are more definitions than terms.
Term 1.___Contra-Account 2.___Carrying Value 3.___Deferral Adjustment 4.___Closing Journal Entry 5.___Net Loss 6.___Adjusted Trial Balance 7.___Temporary Account 8.___Accrual Adjustment 9.___Income Before Income Taxes Definition 1.A) Also known as balance sheet accounts. 2.B) Lists the balances of all temporary and permanent accounts to provide a check on the equality of the debits and credits after adjustments are made. 3.C) Lists the balances of all accounts to check that revenues equal expenses. 4.D) The amount of profit prior to considering income tax. 5.E) An account that is paired with another account and reduces its book value. 6.F) Converts some of an asset's or a liability's book value into an expense or a revenue at the end of a period. 7.G) An account that must have a zero balance after closing entries have been made. 8.H) Used to record revenue or expenses when they occur prior to receiving or paying cash. 9.I) The amount at which an asset or liability is reported in the financial statements. 10.J) Lists the balances of all permanent accounts to check that debits equal credits. 11.K) A journal entry that transfers net income or loss to the Retained Earnings account. 12.L) When expenses exceed revenues. 13.M) Entries made to update existing accounts and record new events.
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Answer Key Test name: Chap 04_7e_Problems 1) Transaction A.
General Journal Supplies Expense
Debit 900
Supplies B.
Insurance Expense
900 1,800
Prepaid Insurance C.
Depreciation Expense
1,800 1,500
Accumulated Depreciation D.
Deferred Revenue
1,500 3,000
Service Revenue E.
Salaries and Wages Expense
Credit
3,000 3,000
Salaries and Wages Payable
3,000
A. Supplies ($1,500 − $600) = $900 B. Insurance Expense ($7,200 ÷ 4) = $1,800 D. Service Revenue ($7,200 × 0.40) = $3,000 2) a. Transaction A.
General Journal Insurance Expense
Debit 4,350
Prepaid Insurance B.
Depreciation Expense
4,350 8,150
Accumulated Depreciation C.
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Supplies Expense
Credit
8,150 52,900
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Supplies D.
52,900
Interest Receivable
260
Interest Revenue E.
Deferred Revenue
260 5,600
Service Revenue F.
Accounts Receivable
5,600 2,000
Service Revenue
2,000
Supplies ($138,600 − $85,700) = $52,900 b. Garvey Company Adjusted Trial Balance December 31, 2022 Debits Cash
$ 68,900
Accounts Receivable
118,300
Interest Receivable
1,560
Supplies
85,700
Prepaid Insurance
4,350
Notes Receivable (short-term)
50,000
Equipment
277,800
Credits
Accumulated Depreciation
$ 72,650
Accounts Payable
104,100
Salaries and Wages Payable
21,600
Deferred Revenue
3,600
Notes Payable (long-term)
87,400
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Common Stock
216,100
Retained Earnings
143,500
Service Revenue
48,100
Interest Revenue
22,160
Supplies Expense
52,900
Repairs and Maintenance Expense
26,400
Rent Expense
17,800
Depreciation Expense
8,150
Insurance Expense
4,350
Salaries and Wages Expense
3,000
Totals
$ 719,210
$ 719,210
Accounts Receivable ($116,300 + $2,000) = $118,300 Interest Receivable ($1,300 + $260) = $1,560 Supplies ($138,600 − $52,900) = $85,700 Prepaid Insurance ($8,700 − $4,350) = $4,350 Accumulated Depreciation ($64,500 + $8,150) = $72,650 Deferred Revenue ($9,200 − $5,600) = $3,600 Service Revenue ($40,500 + $5,600 + $2,000) = $48,100 Interest Revenue ($21,900 + $260) = $22,160 Supplies Expense ($0 + $52,900) = $52,900 Depreciation Expense ($0 + $8,150) = $8,150 Insurance Expense ($0 + $4,350) = $4,350
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3) a. Monthly insurance cost = $25,200 ÷ 36 months = $700 per month Eight months of coverage (May through December) occurred during 2022 Insurance Expense for 2022 = $700 × 8 = $5,600 b. Ending Prepaid Insurance = Beginning Prepaid Insurance + Prepayment − Expired portion = $0 + $25,200 − $5,600 (from part a) = $19,600 4) a, b, and c. Revenues Service Revenue
$ 904,000
Interest Revenue Expenses
114,100
Supplies Expense
336,200
Repairs and Maintenance Expense
247,900
Depreciation Expense
57,750
Rent Expense Adjusted Income before Income Tax
$ 1,018,100
30,500
672,350 345,750
Income Tax Expense ($345,750× 0.40)
138,300
Net Income
$ 207,450
5) a. Transaction A.
General Journal Supplies Expense
Debit 500
Supplies B.
Insurance Expense Prepaid Insurance
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Credit
500 100 100
14
C.
Depreciation Expense
1,000
Accumulated Depreciation D.
Deferred Revenue
1,000 3,000
Service Revenue E.
Salaries and Wages Expense
3,000 4,000
Salaries and Wages Payable F.
Accounts Receivable
4,000 500
Service Revenue
500
Supplies Expense ($900 − $400) = $500 Insurance Expense ($1,200 × 1/12) = $100 Salaries and Wages Expense [$5,000 ÷ 5 days × 4 days (Monday − Thursday)] = $4,000 b. Transactio n
Total Assets
D
−500 −100 −1,00 0 NE
E
NE
F
+500
A B C
Balance Sheet Income Statement Total Stockholders Revenues Expense Net Liabilitie ’ Equity s Income s NE −500 NE +500 −500 NE −100 NE +100 −100 NE −1,00 NE +1,00 −1,00 0 0 0 −3,000 +3,00 +3,00 NE +3,00 0 0 0 +4,000 −4,00 NE +4,00 −4,00 0 0 0 NE +500 +500 NE +500
6) Unadjusted net income − Increase in salaries and wages expense + Increase in interest earned − Increase in insurance expense + Increase in revenues earned = $38,775 − $395 + $375 − $275 + $375 = $38,855. 7) a. Transaction
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General Journal
Debit
Credit
15
1
2
Service Revenue
168,100
Interest Revenue
81,300
Supplies Expense
87,900
Advertising Expense
16,400
Salaries and Wages Expense
18,300
Income Tax Expense
13,700
Retained Earnings
113,100
Retained Earnings
6,000
Dividends
6,000
b.
Debit
12/31/22
Retained Earnings Credit 267,800 6,000
113,100 374,900
12/31/22 12/31/22 12/31/22
8) a. Transaction 1
2
General Journal Service Revenue
Credit
Salaries and Wages Expense
8,000
Rent Expense
4,000
Depreciation Expense
2,000
Income Tax Expense
2,000
Retained Earnings
20,000
Retained Earnings Dividends
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Debit 36,000
2,000 2,000
16
b.
Account Name Cash
BATTLE CREEK, INCORPORATED Post-Closing Trial Balance At December 31, 2022 Debits $ 10,000
Accounts Receivable
16,000
Equipment
18,000
Accumulated Depreciation
Credits
$ 6,000
Accounts Payable
6,000
Income Tax Payable
2,000
Deferred Revenue
2,000
Common Stock
4,000
Retained Earnings
24,000
Service Revenue
0
Salaries and Wages Expense
0
Rent Expense
0
Depreciation Expense
0
Income Tax Expense
0
Totals
$ 44,000
$ 44,000
c.
Asset Current assets: Cash
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BATTLE CREEK, INCORPORATED Balance Sheet At December 31, 2022 Liabilities and Stockholders’ Equity Current Liabilities: $ 10,000
Accounts Payable
$ 6,000
17
Accounts Receivable Total Current Assets Equipment Accumulated Depreciation— Equipment Equipment, Net
16,000
Deferred Revenue
2,000
26,000
Income Tax Payable
2,000
18,000
Total Liabilities
10,000
6,000
12,000
Stockholders' Equity
Total Assets
$ 38,000
Common Stock
4,000
Retained Earnings
24,000
Total Stockholders' Equity Total Liabilities and Stockholders' Equity
28,000 $ 38,000
*Retained Earnings: Beginning balance of $6,000 + Net income of $20,000 − Dividends of $2,000
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9) 1._B_The company has $8,300 in Prepaid Rent at the beginning of April and uses $3,600 of that for its April rent. 2._C_The company provides lawn care in April for customers who will be billed and make payment in May. 3._C_The company owes interest on loans for the month of April and will not pay this interest until May. 4._B_The company uses $1,600 worth of fertilizer from its stock of supplies. 5._B_The company provides lawn care in April for customers who paid in March. 6._A_The company transfers revenues of $50,000 and expenses of $32,000 to Retained Earnings. 7._B_The company makes an entry to allocate the use of equipment during the current account period. 8._A_The company transfers the balance in the Dividends account of $1,200 to Retained Earnings. 9._C_The company records income taxes incurred but not yet paid. 10._C_The weekly payroll of $5,000 to be paid next week is recorded. 10) 1._E_Contra-Account 2._I_Carrying Value 3._F_Deferral Adjustment 4._K_Closing Journal Entry 5._L_Net Loss 6._B_Adjusted Trial Balance 7._G_Temporary Account 8._H_Accrual Adjustment 9._D_Income Before Income Taxes
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CHAPTER 5 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Employee fraud is often grouped into three categories, including corruption, asset misappropriation, and embezzlement. ⊚ true ⊚ false
2) The fraud triangle identifies incentive, opportunity, and benchmarks as the requirements for a fraud to occur. ⊚ true ⊚ false
3) The Sarbanes-Oxley Act (SOX) requires external auditors to test the company's internal control system. ⊚ true ⊚ false
4) Internal control consists of the actions taken by people at every level of an organization to achieve its objectives relating to operations, reporting, and compliance. ⊚ true ⊚ false
5) The incentive element of the fraud triangle relates to an employee’s means of committing fraud such as weaknesses in internal control. ⊚ true ⊚ false
6)
The Sarbanes-Oxley Act (SOX) grants legal protection to ‘whistle-blowers.' ⊚ true ⊚ false
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7) Internal controls include the policies and procedures a company implements to promote efficient and effective operations, protect assets, enhance accounting information, and adhere to laws and regulations. ⊚ true ⊚ false
8) The components of an internal control system include control environment, risk assessment, control activities, information and communication, and monitoring activities. ⊚ true ⊚ false
9) A highly effective internal control should be implemented even if the cost is greater than the benefit. ⊚ true ⊚ false
10) The use of internal controls cannot guarantee protection against losses due to fraud, errors, and inefficiencies. ⊚ true ⊚ false
11) When duties are properly segregated, the accounting department should compare the cash in the register with the cash count sheet. ⊚ true ⊚ false
12) A good voucher system includes procedures and approvals designed to control cash payments. ⊚ true ⊚ false
13) A petty cash fund is a separate checking account used to reimburse employees for expenditures they have made on behalf of the organization.
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⊚ ⊚
14)
true false
On a bank statement, deposits are listed as credits and cleared checks are listed as debits. ⊚ true ⊚ false
15) Cash equivalents are short-term, highly liquid investments purchased within one year of maturity. ⊚ true ⊚ false
16) The entry recorded when the petty cash fund is replenished includes a debit to Petty Cash and a credit to Cash. ⊚ true ⊚ false
17) Cash that is legally or contractually required to be set aside for a specific purpose cannot be reported with Cash and Cash Equivalents on the balance sheet. ⊚ true ⊚ false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 18) The Grass is Greener Company borrows money from a bank. Part of the loan agreement requires Grass is Greener to maintain stockholders' equity of at least 40% of assets or otherwise to pay a higher interest rate. This requirement is referred to as a: A) loan covenant. B) credit rating. C) bond rating. D) call feature.
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19)
Employee fraud includes which of the following categories? A) Covenants B) Incentive C) Corruption D) Rationalization
20) From the creditor's perspective, which of the following help to ensure a company will be able to repay a loan? A) Control environment B) Loan covenants C) Control activities D) Monitoring activities
21) Research has found that three factors exist when fraud occurs. Which of the following is one of the three factors of the fraud triangle? A) Assessments B) Covenants C) Monitoring D) Rationalization
22) The fraud triangle contains three elements that must exist for accounting fraud to occur. The elements are: A) fear, greed, and satisfaction. B) greed, larceny, and access. C) motive, opportunity, and means. D) incentive, opportunity, and rationalization.
23)
Which of the following would overstate a company's net income?
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A) Counting shipments of customers' orders as revenue before payment has been received. B) Shipping goods to customers without receiving orders from those customers, and recording the transactions as revenue. C) Accruing liabilities for marketing expenses before they are incurred. D) Making an accrual adjusting entry for interest earned on a bond investment.
24)
An attempt to deceive others for personal gain is known as: A) fraud. B) larceny. C) opportunity. D) incentive.
25)
Which of the following is not a category of employee fraud? A) Corruption B) Asset misappropriation C) Financial statement fraud D) Internal controls
26)
Which element is part of the fraud triangle? A) Incentive B) Misappropriation C) Corruption D) Sustainability
27)
A strong system of internal ______ reduces the ______ to commit fraud.
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A) controls; opportunity B) audits; rationalization C) financial statements; opportunity D) loan covenants; incentive
28) Which of the following was passed by Congress in response to financial statement frauds that occurred in the early 2000s? A) Federal Accounting Standards Board Act B) Securities and Exchange Act C) Sarbanes-Oxley Act D) Clayton Act
29) Which of the following is a set of regulations passed by Congress in 2002 in an attempt to improve financial reporting and restore investor confidence? A) Enron Act B) Federal Accounting Standards Board Act C) Sarbanes-Oxley Act D) Securities and Exchange Act
30)
Why was the Sarbanes-Oxley Act (SOX) enacted?
A) To bring GAAP closer to global financial reporting standards. B) The lack of significant corporate frauds during the late 1990s and early 2000s warranted less monitoring for external stakeholders. C) To improve financial reporting and restore investor confidence. D) Accounting rules had become so complex that investors could no longer understand them.
31) Which of the following key requirements of the Sarbanes-Oxley Act (SOX) is correctly paired with the correct action?
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A) Counteract incentives – independent audit committee. B) Encourage honesty – ethics code. C) Reduce opportunities – stiff prison terms. D) Counteract incentives – internal control evaluation.
32)
All of the following are requirements of the Sarbanes-Oxley Act (SOX) except:
A) tip lines that allow employees to secretly submit concerns about questionable accounting or auditing practices. B) fines of up to $5 million plus repayment of any fraud proceeds. C) evaluation and reporting on the effectiveness of internal control over financial reporting for large public companies by external auditors. D) evaluation and reporting on the effectiveness of internal control over financial reporting for all public companies by management with disclosure that management is not responsible for the internal control system.
33) Considering current laws that deal with misstatements of financial results, which of the following statements is correct? A) Managers found guilty can escape paying fines if they declare bankruptcy. B) Managers can be sentenced to maximum jail terms of up to 20 years for each violation. C) Managers found guilty may keep any bonuses or profits from the misrepresentation if their fines are less than such bonuses or profits. D) Whistleblowers who secretly submit concerns about questionable accounting practices will be fired.
34)
All of the following are requirements of the Sarbanes-Oxley Act (SOX) except:
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A) evaluation and reporting on the effectiveness of internal control over financial reporting by management for all public companies. B) evaluation and reporting on the effectiveness of internal control over financial reporting by external auditors only for large public companies. C) establishment of an audit committee of independent directors to ensure the company's accounting, internal control, and audit functions are effective. D) adoption of a code of ethics covering all employees.
35) The Sarbanes-Oxley Act (SOX) requires the establishment of an audit committee that includes: A) the president of the company. B) the chief financial officer of the company. C) independent directors. D) the company's external auditors.
36)
Which of the following is not a change introduced by the Sarbanes-Oxley Act?
A) Management evaluates and reports on the effectiveness of internal control over financial reporting. B) Publicly traded companies must have their financial statements audited. C) The company's board of directors is required to establish an audit committee comprised of independent directors. D) Public companies must have tip lines that allow employees to secretly submit concerns about questionable accounting or auditing practices.
37)
Which of the following was not a change introduced by the Sarbanes-Oxley Act? A) Limits on executive compensation for most companies. B) Stiffer fines and maximum jail sentences for willful misrepresentation of financial
results. C) An external audit of the effectiveness of internal controls. D) Anonymous tip lines and legal protection to whistle-blowers.
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38)
Which of the following is a significant objective of the Sarbanes-Oxley (SOX) Act? A) Counteract incentives B) Increase opportunities C) Discourage honesty D) Reduce internal controls
39) of:
Protecting against theft of assets and enhancing accounting information is the objective
A) loan covenants. B) government regulations. C) internal controls. D) the external auditors.
40)
The objectives of a company's system of internal control include which of the following? A) Providing innovative products. B) Retaining position as market leader. C) Adhering to laws and regulations. D) Ensuring the company's stock price provides a reasonable return to investors.
41)
The main purposes of internal controls include all of the following except: A) prevention of error, theft, and fraud. B) promotion of operational efficiency. C) ensuring compliance with laws and regulations. D) providing more favorable financial information.
42)
All of the following are goals of internal control except:
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A) reducing the risk of fraud. B) producing reliable and timely accounting information for use by people internal and external to the organization. C) minimizing the amount of income taxes that must be paid. D) adhering to laws and regulations.
43) Which of the following is not a reason that a business needs an effective internal control system? A) Ensure that work is completed efficiently and effectively. B) Produce reliable and timely accounting information for use by people external to the organization. C) Protect assets by reducing the risk of fraud. D) Identify ways to evade applicable laws and regulations.
44)
The control environment:
A) is the attitude that people in the organization hold regarding internal control. B) requires managers to continuously assess the potential for fraud and other risks. C) generates and communicates information about activities affecting the organization. D) includes the various work responsibilities and duties completed by employees to reduce risks.
45) The control components used by companies as a framework when analyzing their internal control systems include: A) compliance. B) control environment. C) covenants. D) corruption.
46) The continuous assessment by management to assess the potential for fraud and other risks is referred to as: Version 1
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A) the control environment. B) information and communication. C) monitoring activities. D) risk assessment.
47)
Which of the following statements about internal control is correct? A) It promotes efficient and effective operations. B) It eliminates the theft of assets. C) It results in completely reliable accounting information. D) It guarantees that management will behave ethically.
48) Which of the following is not one of the control components that are part of the framework used when analyzing an internal control system? A) control environment B) monitoring activities C) information and communication D) independent verifications
49)
The purpose of internal controls includes all of the following except: A) improving efficiency. B) producing timely accounting information. C) minimizing errors. D) completely eliminating fraud.
50)
The principles of internal control include which of the following?
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A) Monitor activities B) Segregate duties C) Assess risk D) Control the environment
51) Assigning responsibilities so that related activities are assigned to two or more people is the goal of: A) restricting access. B) segregating duties. C) independently verifying. D) documenting procedures.
52) Which principle of internal control states that you should assign each task to only one employee? A) Segregation of duties B) Establishing responsibility C) Restricting access D) Independently verifying
53) If a company hires an auditor to check that the work done by others within the company is supported by documentation, it is doing so under the principle of control activities referred to as: A) independent verification. B) segregation of duties. C) restrict access. D) document procedures.
54) The internal control principle related to assigning responsibilities so that one employee cannot make a mistake or commit a dishonest act without someone else discovering it is referred to as: Version 1
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A) duplication of responsibility. B) mandatory vacations. C) segregation of duties. D) rotation of duties.
55)
Which of the following is an example of restricting access? A) Using prenumbered checks. B) Using passcodes. C) Giving a separate cash register to each cashier. D) Comparing the company’s cash balance to the balance per the bank.
56)
Which of the following is not a commonly used internal control? A) Mandatory vacations B) Anonymous hotlines C) Bonding employees D) Consolidating duties
57)
Common control principles include all of the following, except: A) outsource work to third parties. B) segregate of duties. C) independently verify. D) restrict access to assets and information.
58) A small company would have the most difficulty in implementing which of the following internal control principles?
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A) Segregating duties. B) Restricting access to cash or information. C) Establishing responsibilities. D) Documenting procedures.
59)
Which of the following is not an example of internal control? A) Use of passwords to restrict access to computer systems. B) Bonding employees. C) Periodic bank reconciliations. D) Customer satisfaction surveys.
60)
Collusion occurs when: A) employees work together to get around internal controls. B) an outside party completes an independent verification. C) a company assigns sequential numbers to their documents. D) passcodes are required to open cash registers.
61)
The volume of transactions is enormous and the risk of handling errors is significant for: A) cash. B) inventory. C) accounts receivable. D) computer software.
62) On June 4, Marie Company had cash sales rung up by cashiers totaling $122,000. Cash in the drawer was counted and found to be $129,000. The journal entry to record the sales for June 4, would include a:
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A) debit to Cash for $122,000. B) credit to Cash Overage for $7,000. C) credit to Sales Revenue for $129,000. D) debit to Sales Revenue for $122,000.
63) On June 4, Marie Company had cash sales rung up by cashiers totaling $163,800. Cash in the drawer was counted and found to be $165,000. The journal entry to record the sales for June 4, would include a: A) debit to Cash for $163,800. B) credit to Cash Overage for $1,200. C) credit to Sales Revenue for $165,000. D) debit to Sales Revenue for $163,800.
64) A company's cash receipts procedures include the following. ● Cashiers collect cash and issue a receipt at the point of sale. ● Supervisors take custody of the cash at the end of each cashier's shift and deposit it in the bank. ● Accounting staff then ensure the receipts from cash sales are properly recorded in the accounting system. Which internal control principle is most evident with these procedures? A) Restrict access B) Segregate duties C) Document procedures D) Independently verify
65) Which of the following is one of the internal control functions performed by a cash register?
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A) To compare the cash in the register with the cash count sheet. B) To document the amount charged for each item sold. C) To ensure sales are properly recorded in the accounting system. D) To perform the bank reconciliation.
66) The cashier uses the cash register and its accompanying point-of-sale accounting system to perform three important functions. Which of the following is one of those functions? A) To complete bank deposit B) To prepare journal entry C) To restrict access D) To segregate duties
67)
The cash count sheet determines all of the following except the: A) cash shortage or overage, if any. B) amount of cash available for deposit in the bank. C) amount of cash to be reported on the balance sheet. D) amount of cash received.
68)
Which of the following is a correct statement regarding the Cash Shortage account? A) The account normally has a credit balance. B) If the recorded cash exceeds the cash counted, a shortage exists. C) It is reported as a miscellaneous revenue. D) It is reported on the balance sheet.
69)
The account Cash Overage is which type of account?
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A) An asset account B) A liability account C) A miscellaneous revenue account D) A miscellaneous expense account
70)
A remittance advice: A) explains the purpose of a customer’s payment. B) ensures cash sales are properly recorded in the accounting records. C) enhances the safe deposit of cash in the bank. D) reduces the risk of cash-handling errors.
71) When cash is received from a remote source, the accounting department then compares the total on the cash receipts list with the stamped deposit slip received from the bank. Which internal control principle is being met with this procedure? A) Document procedures B) Independently verify C) Restrict access D) Segregate duties
72)
Which of the following statements concerning electronic funds transfers is not correct?
A) Businesses sometimes receive payments from customers via EFT. B) An EFT occurs when a customer electronically transfers funds from his or her bank account to the company's bank account. C) Because electronic funds transfers are deposited directly into the company's bank account, they require additional internal control procedures. D) To process an EFT, the accounting department merely records journal entries to debit Cash and credit Accounts Receivable from each customer.
73)
An example of the internal control principle of establishing responsibility is:
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A) assigning each cash drawer to only one employee establishing responsibility. B) accepting only EFT payment because they are directly deposited into a company’s bank account. C) comparing the total on the cash receipts list with the stamped deposit slip received from the bank. D) bonding employees.
74) Cashiers at a supermarket must talk to a manager before approving price changes at the register. Which internal control principle is being followed? A) Segregate duties B) Establish responsibilities C) Independently verify D) Restrict access
75) Comparing the cash in the register with the cash count sheet is required by the internal control principle of: A) independently verifying. B) establishing responsibilities. C) segregation of duties. D) documenting procedures.
76) Assigning sequential numbers to cash sales, so that the accounting staff can ensure that every sale has been recorded is required by the internal control principle of: A) documenting procedures. B) segregating duties. C) establishing responsibilities. D) restricting access.
77)
A cash register does not:
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A) restrict access to cash. B) document the amount of cash received for items sold. C) summarize the cash register's total cash sales. D) reconcile accrual accounting with cash accounting.
78) The cashier for Bell Buoy rang up sales totaling $5,136, but had $5,200 to deposit, which journal entry would be recorded? A) A debit to Cash for $5,200, a credit to Cash Overage for $64, and a credit to Sales Revenue for $5,136. B) A debit to Sales for $5,200, a debit to Cash Overage for $64, and a credit to Cash for $5,136. C) A debit to Cash for $5,136, a debit to Cash Shortage for $64, and a credit to Sales Revenue for $5,200. D) A debit to Cash for $5,136, a debit to Cash Shortage for $64, and a credit to Unearned Revenue for $5,200.
79) The cashier for Bell Buoy rang up sales totaling $7,644, but had $7,650 to deposit, which journal entry would be recorded? A) A debit to Cash for $7,650, a credit to Cash Overage for $6, and a credit to Sales Revenue for $7,644. B) A debit to Sales for $7,650, a debit to Cash Overage for $6, and a credit to Cash for $7,644. C) A debit to Cash for $7,644, a debit to Cash Shortage for $6, and a credit to Sales Revenue for $7,650. D) A debit to Cash for $7,644, a debit to Cash Shortage for $6, and a credit to Unearned Revenue for $7,650.
80) When the cash count sheets for the day equal $14,140 and the cash register reports $14,280, the journal entry to record the sales will include a:
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A) credit to Cash Overage B) credit to Cash Shortage C) debit to Cash Shortage D) debit to Cash Overage
81) A cashier for Seaside Electronics rang up sales totaling $8,000, but had only $7,994 to deposit, which journal entry would be recorded? A debit to: A) Cash of $7,994 and Cash Shortage of $6 and a credit to Sales Revenue of $8,000. B) Sales Revenue of $7,994 and Cash Shortage of $6 and a credit to Cash of $8,000. C) Cash of $7,994 and a credit to Cash Shortage of $6 and Sales Revenue of $8,000. D) Cash of $7,994 and Cash Shortage of $6 and a credit to Unearned Revenue of $8,000.
82) Which of the following is not related to the segregation of duties for cash received in person? A) Cashiers are responsible for the collection of cash and issuing a receipt at the point of sale. B) A supervisor is responsible for collecting the cash at the end of each cashier's shift and depositing it in the bank. C) Members of the accounting department are responsible for ensuring that the receipts from cash sales are properly recorded in the accounting system. D) Members of the accounting department count the cash collected and deposit it in the bank.
83)
Which of the following is an internal control for checks received through the mail?
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A) The cashier prepares a journal entry to record price, quantity sold, and cash received. B) The accounting department counts the cash, prepares the deposit slip and deposits the cash in the bank. C) The accounting department compares the cash in the register with the cash count sheet. D) The mail clerk gives checks and money orders to the person who makes the bank deposit.
84)
Which of the following is the primary goal of internal controls for cash payments?
A) Ensure that the business pays only for properly authorized transactions. B) Confirm that the request for payments is made by someone who is approved to order goods or services of the type and amount requested. C) Ensure that the supplier charges only for items received at approved prices. D) Make payments only when a purchase is supported by complete voucher documentation.
85)
What is the primary goal of internal controls for cash payments? A) To ensure the lowest prices possible are paid. B) To make payments as quickly as possible. C) To ensure that payments are made only for properly authorized transactions. D) To independently verify cash payments.
86)
Which of the following is an internal control procedure relating to cash payments? A) Completing a bank deposit. B) The use of cash count sheets. C) Comparing cash register records with the bank deposit. D) Using an imprest system.
87)
A process for approving and documenting all purchases and payments on account is:
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A) the remittance process. B) an imprest system. C) a voucher system. D) the bank reconciliation.
88) Assume a voucher system is in use. When the bill for goods or services is obtained, which control principle(s) must be met when the related control procedures are designed? A) Establish responsibility B) Segregate duties C) Segregate duties and restrict access D) Document procedures and independently verify
89)
Which of the following statements is correct regarding a voucher system?
A) The journal entry to record the asset purchased and liability owed should be recorded when the bill for goods or services is received. B) A voucher system is most commonly used in very small companies to make up for the lack of other internal controls. C) A well-designed voucher system will allow employees requiring office supplies to place orders directly with suppliers for control purposes. D) A well-designed voucher system will eliminate fraud and errors.
90)
Which of the following statements concerning a voucher is not correct?
A) The voucher consists of the purchase requisition, the purchase order, the receiving report, and the invoice. B) The voucher is marked "paid" so that it cannot be accidentally or intentionally resubmitted for duplicate payment. C) The voucher must be prepared before the goods or services are ordered. D) After the voucher is prepared, the company processes a check or electronic funds transfer to pay for the items purchased and received.
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91)
The preparation of a list of goods received is an example of: A) establishment of responsibility. B) segregation of duties. C) document procedures. D) independent verification.
92) A voucher system employs various forms of documentation related to steps in the control over cash. Which of the following is not a document in the voucher system? A) Company check B) Purchase requisition C) Supplier invoice D) Cash count sheet
93) Most companies pay salaries and wages to employees through EFTs, which are known by employees as: A) direct deposits. B) vouchers. C) remittance advices. D) checks.
94)
Which of the following statements incorrectly describes an imprest system?
A) An imprest system is an internal control procedure relating to cash payments. B) An imprest system helps eliminate the risk that the bank might overpay or underpay an employee. C) The use of an imprest system eliminates the need for bank reconciliations. D) If the transfers from the payroll account to the employees' checking accounts occur without error, the imprest payroll bank account will equal zero after all employees have been paid.
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95) A system used to reimburse employees for expenditures they have made on behalf of the organization is referred to as a(n): A) voucher system. B) electronic funds transfer. C) petty cash system. D) internal control system.
96)
Which of the following statements concerning a petty cash fund is not correct?
A) A petty cash fund acts as a control by establishing a limited amount of cash to use for specific types of expenses. B) A petty cash fund is similar to an imprest payroll account in acting as a control of a limited amount of cash. C) The company's petty cash custodian is responsible for operating the petty cash fund. D) To avoid the administrative costs of the use of purchasing cards, or Pcards, many organizations have started using petty cash funds.
97) A process for approving and documenting all purchases and payments on account is referred to as a(n): A) voucher system. B) imprest system. C) reconciliation procedure. D) cash receipts process.
98) A collection of documents prepared in the process of approving, processing and documenting all purchases and payments made on account is referred to as a(n): A) voucher. B) imprest. C) EFT. D) reconciliation.
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99)
A difference between an imprest payroll account and a petty cash fund, is petty cash is: A) not held at the bank. B) a special account at the company's bank. C) used for payroll. D) better controlled.
100) The services provided by banks help businesses to control cash by meeting which of the following control objectives? A) Establish responsibility B) Segregate duties C) Restrict access D) Imprest the system
101)
A check that you have written has cleared the bank when: A) funds have been withdrawn from your bank account to cover the check. B) the bank notifies you that you have insufficient funds to cover the check (NSF). C) the supplier to whom you gave the check records the payment received. D) the supplier to whom you gave the check deposits it in his bank account.
102)
The amount of cash at the bank is determined from the: A) income statement. B) bank reconciliation. C) bank statement. D) unadjusted trial balance.
103)
The bank will show a customer's deposit on the bank statement as a:
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A) credit, because a deposit is a liability from the bank's point of view. B) debit, because cash is an asset. C) debit, because a deposit is a liability from the bank's point of view. D) credit, because cash is an asset.
104)
The bank will show a customer's withdrawal as a: A) debit, because cash is an asset. B) credit, because a withdrawal increases its liability from the bank's point of view. C) debit, because a withdrawal decreases its liability from the bank's point of view. D) credit, because cash is an asset.
105) An internal report prepared to verify the accuracy of both the bank statement and the cash accounts of a business or individual is a(n): A) internal audit. B) bank reconciliation. C) bank audit. D) trial reconciliation.
106)
A check is said to have cleared the bank when: A) it is returned NSF. B) it bounces. C) the bank withdraws the amount of the check from the check writer's account. D) it is presented to a financial institution for deposit or cash.
107)
Which one of the statements appearing below is incorrect regarding bank reconciliations?
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A) A bank reconciliation is an internal report prepared to compare the company’s cash records with the bank’s cash balance. B) If a company's records show a different cash balance from that shown on the company's bank statement, either the company or the bank has made an error. C) After preparing a bank reconciliation, no journal entries need to be made for outstanding checks or deposits in transit. D) The up-to-date ending cash balance on the bank statement side will equal the up-todate ending cash balance on the book side.
108)
A bank reconciliation item that a company's bank may not know about would be: A) electronic fund transfers. B) deposits in transit. C) NSF checks. D) service charges.
109)
Outstanding checks refer to checks that have been: A) written, recorded, sent to payees, and received and paid by the bank. B) written and not yet recorded in the company books. C) written, recorded, sent to the payees, but not yet paid by the bank. D) paid by the bank.
110) Which of the following situations would cause the balance per the bank to be more than the balance per the books? A) Deposits in transit B) Service charges C) Outstanding checks D) Checks from customers returned as NSF
111)
Outstanding checks have:
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A) been recorded by the company but not yet by the bank. B) been recorded by the bank but not yet by the company. C) not been recorded by the bank or the company. D) been recorded by both the bank and the company.
112) A company made a bank deposit on September 30 that did not appear on the bank statement dated September 30. In preparing the September 30 bank reconciliation, the company should: A) deduct the deposit from the bank statement balance. B) send the bank a debit memorandum. C) deduct the deposit from the September 30 book balance and add it to the October 1 book balance. D) add the deposit to the ending cash balance per bank statement.
113)
When you identify outstanding checks in performing a bank reconciliation, you must: A) deduct the amount of the outstanding checks from the balance per books. B) deduct the amount of the outstanding checks from the balance per bank. C) add the amount of the outstanding checks to the balance per books. D) add the amount of the outstanding checks to the balance per bank.
114) McKeel Publishing had outstanding checks totaling $5,470 on its June bank reconciliation. In July, McKeel issued checks totaling $39,600. The July bank statement shows that $27,350 in checks cleared the bank in July. The amount of outstanding checks on McKeel's July bank reconciliation should be: A) $5,470. B) $12,250. C) $17,720. D) $6,780.
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115) McKeel Publishing had outstanding checks totaling $7,560 on its June bank reconciliation. In July, McKeel issued checks totaling $54,460. The July bank statement shows that $36,820 in checks cleared the bank in July. The amount of outstanding checks on McKeel's July bank reconciliation should be: A) $17,640. B) $25,200. C) $7,560. D) $10,080.
116) Which of the following would be added to the ending cash balance per bank when performing a bank reconciliation? A) Electronic fund transfers B) Service charges C) NSF checks D) Deposits in transit
117)
On a bank reconciliation, the amount of an NSF check is: A) added to the bank balance of cash. B) added to the company's balance of cash. C) deducted from the bank balance of cash. D) deducted from the company's balance of cash.
118) A deposit in transit on last month's bank reconciliation is shown as a deposit on the bank statement this month. As a result, in preparing this period's reconciliation, the amount of this deposit should: A) be added to the book balance of cash. B) be deducted from the book balance of cash. C) be added to the bank balance of cash. D) not be included as a reconciling item.
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119) A check that was outstanding on last period's bank reconciliation was not among the cancelled checks returned by the bank this period. In preparing the bank reconciliation for this period, the amount of this check should be: A) added to the bank balance of cash. B) ignored in preparing this period's bank reconciliation. C) deducted from the bank balance of cash. D) deducted from the company's balance of cash.
120) Which of the following would not cause the bank balance to differ from the cash balance in the accounting records? A) The company wrote checks that have cleared the bank. B) Deposits outstanding that have been recorded on the company's records, but not on the bank statement. C) The company made an error in recording a deposit. D) The bank made an error in recording a deposit made by the company.
121) Urban Bloom, Incorporated's books show an ending cash balance of $19,000 before preparing the bank reconciliation. Given the bank reconciliation shows outstanding checks of $4,800, deposits in transit of $3,800, NSF check of $280, and interest earned on the bank account of $190, the company's up-to-date ending cash balance equals: A) $18,910. B) $14,110. C) $17,910. D) $19,470.
122) Urban Bloom, Incorporated's books show an ending cash balance of $18,000 before preparing the bank reconciliation. Given the bank reconciliation shows outstanding checks of $5,400, deposits in transit of $3,600, NSF check of $180, and interest earned on the bank account of $18, the company's up-to-date ending cash balance equals:
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A) $17,838. B) $12,438. C) $16,038. D) $18,198.
123)
Outstanding checks are ______ on a bank reconciliation. A) added to the book balance B) added to the bank balance C) deducted from the bank balance D) deducted from the book balance
124) A $6,000 bank deposit made on the last day of the month did not appear on this month's bank statement. How would this item be treated on the bank reconciliation? A) It would be deducted from the book balance. B) It would be added to the bank balance. C) It would be deducted from the bank balance. D) It would be added to the book balance.
125)
Which of the following is added to the bank balance on a bank reconciliation? A) Deposits in transit B) Outstanding checks C) EFT received from customers D) Bank service charge
126) Outstanding checks written by the company should be a(n) ______ on the company's bank reconciliation.
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A) deduction from the book balance B) deduction from the bank balance C) addition to the book balance D) addition to the bank balance
127)
In a bank reconciliation, an outstanding check is: A) deducted from the bank balance. B) added to the book balance. C) deducted from the book balance. D) added to the bank balance.
128)
In a bank reconciliation, a deposit in transit is: A) deducted from the bank balance. B) added to the book balance. C) deducted from the book balance. D) added to the bank balance.
129)
Which of the following is deducted from the bank balance on a bank reconciliation? A) Deposits in transit B) Outstanding checks C) EFT received from customers D) Bank service charge
130)
Which of the following is added to the bank balance on a bank reconciliation? A) Deposits in transit B) Outstanding checks C) EFT received from customers D) Bank service charge
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131)
In a bank reconciliation, an EFT received from a customer is: A) added to the book balance. B) deducted from the book balance. C) added to the bank balance. D) deducted from the bank balance.
132) This month's bank statement includes a check from a customer that was marked NSF. How would this item be treated on the bank reconciliation? A) It would be deducted from the book balance. B) It would be added to the bank balance. C) It would be deducted from the bank balance. D) It would be added to the book balance.
133)
NSF checks from customers should be a(n) ______ on a bank reconciliation. A) addition to the bank balance B) subtraction from the bank balance C) addition to the book balance D) subtraction from the book balance
134)
A bank service charge should be a(n) ______ on a bank reconciliation. A) addition to the bank balance B) deduction from the bank balance C) addition to the book balance D) deduction from the book balance
135) The bank credited your account for a deposit made by another bank customer. This bank error should be a(n) ______ on a bank reconciliation.
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A) addition to the bank balance B) deduction from the bank balance C) addition to the book balance D) deduction from the book balance
136) If the company's accountant mistakenly recorded an $101 deposit as $66, the error would be shown on the bank reconciliation as a(n): A) $35 deduction from the book balance. B) $101 deduction from the book balance. C) $35 addition to the book balance. D) $101 addition to the book balance.
137) If the company's accountant mistakenly recorded an $85 deposit as $58, the error would be shown on the bank reconciliation as a(n): A) $27 deduction from the book balance. B) $85 deduction from the book balance. C) $27 addition to the book balance. D) $85 addition to the book balance.
138) If a bank reconciliation included a deposit in transit of $690, the company's journal entry for this reconciling item would include: A) nothing, because the deposit has already been recorded. B) a debit to Cash of $690. C) a credit to Cash of $690. D) a credit to Accounts Receivable for $690.
139) If a bank reconciliation included a deposit in transit of $1,240, the company's journal entry for this reconciling item would include:
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A) nothing, because the deposit has already been recorded. B) a debit to Cash of $1,240. C) a credit to Cash of $1,240. D) a credit to Accounts Receivable for $1,240.
140) While preparing the bank reconciliation for March, the accountant for Bertran Industries discovered that a $649 check in payment of an account payable had been entered incorrectly in the journal as $694. Which of the following is true? A) An adjusting entry must be made to debit Cash and credit Accounts Payable for $45. B) An adjusting entry must be made to debit Accounts Payable and credit Cash for $45. C) The bank should be notified, and the bank should correct its records by adding $45 to the company's account. D) No entry is needed for the reconciling item because it appears on the bank's side of the reconciliation.
141) Which of the following would be deducted from the ending cash balance per books when performing a bank reconciliation? A) Interest earned B) Service charges C) Deposits in transit D) Outstanding checks
142) When preparing this month's bank reconciliation, you find that you failed to record a $1,240 deposit for a payment you received from a customer. You immediately prepare a journal entry to record the deposit. Which of the following describes the actions to be taken when preparing next month's bank reconciliation? A) You must decrease the balance per bank by $1,240. B) You must increase the balance per bank by $1,240. C) You must increase the balance per books by $1,240. D) No further action is necessary.
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143) In comparing the canceled checks on the bank statement with the entries in the accounting records, it is found that check number 2889 for December's utilities was correctly written and drawn for $970 but was erroneously entered into the accounting records as $790. The journal entry to adjust the books for the bank reconciliation would include a debit to: A) Cash and a credit to Utility Expense for $180. B) Utility Expense and a credit to Cash for $180. C) Utility Expense and a credit to Cash for $790. D) Cash and a credit to Utility Expense for $790.
144) Before reconciling its bank statement, Rollin Corporation's general ledger had a monthend balance in the cash account of $7,500. The bank reconciliation for the month contained the following items: Deposits in transit Outstanding checks Interest earned NSF check returned to bank Bank service charge
$ 840 600 20 190 55
Given the above information, what is the up-to-date ending cash balance Rollin should report at month-end? A) $7,795. B) $6,660. C) $7,275. D) $6,980.
145) Before reconciling its bank statement, Rollin Corporation's general ledger had a monthend balance in the cash account of $9,450. The bank reconciliation for the month contained the following items: Deposits in transit Outstanding checks Interest earned NSF check returned to bank Bank service charge
$ 1,350 837 36 180 18
Given the above information, what is the up-to-date ending cash balance Rollin should report at month-end? Version 1
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A) $8,100 B) $8,676 C) $9,288 D) $10,062
146) The following information was available to the accountant of Scarlet Company when preparing the monthly bank reconciliation: Cash balance per bank statement Cash balance per books (prior to reconciliation) Outstanding check #643 Outstanding check #651 Bank service charges Customer check returned by bank as NSF Deposits in transit Interest received from bank
$ 1,035 738 562 49 31 50 250 17
After the completion of the reconciliation and adjustments to the accounting records, what amount of cash should appear on the balance sheet? A) $738 B) $724 C) $263 D) $674
147) The following information was available to the accountant of Scarlet Company when preparing the monthly bank reconciliation: Cash balance per bank statement Cash balance per books (prior to reconciliation) Outstanding check #643 Outstanding check #651 Bank service charges Customer check returned by bank as NSF Deposits in transit Interest received from bank
$ 1,950 1,320 1,004 86 50 40 380 10
After the completion of the reconciliation and adjustments to the accounting records, what amount of cash should appear on the balance sheet?
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A) $1,320 B) $1,280 C) $1,240 D) $610
148) Lenore, Incorporated gathered the following information from its accounting records and the October bank statement to prepare the October bank reconciliation: Ending cash balance per books, 10/31 Deposits in transit Interest received from bank Bank service charge for check printing Outstanding checks NSF check of T. Owens
$ 4,400 330 1,300 120 2,900 220
The up-to-date ending cash balance on October 31 is: A) $5,360 B) $5,140 C) $3,860 D) $3,330
149) Lenore, Incorporated gathered the following information from its accounting records and the October bank statement to prepare the October bank reconciliation: Ending cash balance per books, 10/31 Deposits in transit Interest received from bank Bank service charge for check printing Outstanding checks NSF check of T. Owens
$ 7,000 300 1,700 60 4,000 350
The up-to-date ending cash balance on October 31 is:
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A) $7,940 B) $8,290 C) $5,290 D) $4,590
150) Lenore, Incorporated gathered the following information from its accounting records and the October bank statement to prepare the October bank reconciliation: Ending cash balance per books, 10/31 Deposits in transit Interest received from bank Bank service charge for check printing Outstanding checks NSF check of T. Owens
$ 7,000 300 1,700 60 4,000 350
What journal entry would Lenore, Incorporated be required to record for the interest received from the bank? A) Debit Interest Revenue and credit Cash for $1,700. B) No journal entry is required because the bank is aware of the interest payment. C) Debit Interest Receivable and credit Interest Revenue for $1,700. D) Debit Cash and credit Interest Revenue for $1,700.
151) On October 31, your company's records say that the company has $20,419.93 in its checking account. A review of the bank statement shows you have three outstanding checks totaling $8,912.25, and the bank has paid you interest of $27.14 and charged you $22.00 in service charges. The bank statement dated October 31, would report a balance of: (Round your answer to 2 decimal places.) A) $29,337.32. B) $11,502.54. C) $29,327.04. D) $11,512.82.
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152) On October 31, your company's records say that the company has $16,451.03 in its checking account. A review of the bank statement shows you have three outstanding checks totaling $5,643.01, and the bank has paid you interest of $12.19 and charged you $9.00 in service charges. The bank statement dated October 31, would report a balance of: A) $22,090.85. B) $16,454.22. C) $22,097.23. D) $10,804.83.
153) On October 31, the bank statement shows that your company has $13,756.73 in its checking account. You are aware of three outstanding checks that total $3,312.19. During October, the bank rejected two deposited checks from customers totaling $ 854.19 because of insufficient funds and charged you $28.00 in service fees. You had not yet received notice about the bad checks, but you were aware of and have recorded the $28.00 of service fees. Prior to adjustment on October 31, your Cash account would have a balance of: (Round your answer to 2 decimal places.) A) $9,618.35. B) $17,895.11. C) $11,298.73. D) $16,186.73.
154) On October 31, the bank statement shows that your company has $12,956.73 in its checking account. You are aware of three outstanding checks that total $2,112.19. During October, the bank rejected two deposited checks from customers totaling $654.19 because of insufficient funds and charged you $12.00 in service fees. You had not yet received notice about the bad checks, but you were aware of and have recorded the $12.00 of service fees. Prior to adjustment on October 31, your Cash account would have a balance of: A) $14,402.73. B) $15,711.11. C) $11,498.73. D) $10,202.35.
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155) All of the following bank reconciliation items would result in a journal entry on the company's books except: A) interest earned. B) outstanding checks. C) service charge. D) EFT received from a customer.
156) Which of the following items will require an adjusting journal entry on a company's books? A) Outstanding checks B) Deposits in transit C) Error made by the bank D) EFT received from a customer
157) What journal entry must be prepared when the company is notified by the bank that a customer's check that had been deposited in the amount of $776 was returned NSF? A) Debit Accounts Receivable and credit Cash in the amount of $776. B) Debit Cash and credit Accounts Receivable in the amount of $776. C) Debit NSF Check Expense and credit Accounts Receivable in the amount of $776. D) No journal entry is necessary.
158) Which of the following items on a bank reconciliation would not require a journal entry on a company’s books? A) Service charge B) Outstanding checks C) A customer's check returned NSF D) Interest earned on deposits
159) Which of the following items on a bank reconciliation would require a journal entry on a company’s books? Version 1
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A) An error by the bank B) Outstanding checks C) A bank service charge D) A deposit in transit
160) Which of the following items appearing on a bank reconciliation require a journal entry to bring the Cash account up-to-date? A) Deposit in transit B) Check from customers returned as NSF C) Outstanding checks D) An error made by the bank in recording a deposit
161) Egrane, Incorporated's monthly bank statement showed the ending balance of cash of $18,900. The bank reconciliation for the period showed an adjustment for a deposit in transit of $1,700, outstanding checks of $2,400, an NSF check of $1,100, bank service charges of $50 and the EFT from a customer in payment of the customer's account of $1,900. What is the up-to-date ending Cash balance? A) $18,200 B) $17,450 C) $19,600 D) $21,150
162) Egrane, Incorporated's monthly bank statement showed the ending balance of cash of $14,800. The bank reconciliation for the period showed an adjustment for a deposit in transit of $1,200, outstanding checks of $1,600, an NSF check of $560, bank service charges of $24 and the EFT from a customer in payment of the customer's account of $1,200. What is the up-to-date ending Cash balance?
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A) $14,400 B) $13,784 C) $15,200 D) $15,416
163) Egrane, Incorporated's monthly bank statement showed the ending balance of cash of $18,600. The bank reconciliation for the period showed an adjustment for a deposit in transit of $1,550, outstanding checks of $2,100, an NSF check of $800, bank service charges of $35 and the EFT from a customer in payment of the customer's account of $1,600. What was the cash balance on the Egrane's books (before the adjustments for items on the bank reconciliation)? A) $18,050 B) $17,285 C) $19,150 D) $20,415
164) Egrane, Incorporated's monthly bank statement showed the ending balance of cash of $14,800. The bank reconciliation for the period showed an adjustment for a deposit in transit of $1,200, outstanding checks of $1,600, an NSF check of $560, bank service charges of $24 and the EFT from a customer in payment of the customer's account of $1,200. What was the cash balance on the Egrane's books (before the adjustments for items on the bank reconciliation)? A) $14,400 B) $13,784 C) $15,200 D) $16,216
165) Egrane, Incorporated's monthly bank statement showed the ending balance of cash of $14,800. The bank reconciliation for the period showed an adjustment for a deposit in transit of $1,200, outstanding checks of $1,600, an NSF check of $560, bank service charges of $24 and the EFT from a customer in payment of the customer's account of $1,200. What journal entry should be recorded by Egrane for the NSF check returned? Version 1
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A) Debit Accounts Receivable and credit Cash for $560. B) Debit Cash and credit Accounts Receivable for $560. C) Debit Cash and credit Accounts Payable for $560. D) No journal entry is necessary for this item.
166) Egrane, Incorporated's monthly bank statement showed the ending balance of cash of $14,800. The bank reconciliation for the period showed an adjustment for a deposit in transit of $1,200, outstanding checks of $1,600, an NSF check of $560, bank service charges of $24 and the EFT from a customer in payment of the customer's account of $1,200. What journal entry should be recorded by Egrane for the EFT? A) Debit Cash and credit Accounts Receivable for $1,200. B) Debit Accounts Receivable and credit Cash for $1,200. C) Debit Cash and credit Sales Revenue for $1,200. D) No journal entry is necessary for this item.
167)
The journal entry to establish a petty cash fund should include a debit to: A) Cash and a credit to Petty Cash. B) Petty Cash and a credit to Cash. C) Petty Cash and a credit to Accounts Receivable. D) Cash and a credit to Petty Cash Shortage.
168) The petty cash fund was used to reimburse employees for office expenses during the month. The cash and receipts in the locked box equaled the Petty Cash account balance. When the petty cash fund is replenished, the related journal entry will include a debit to: A) Office Expenses. B) Petty Cash. C) Cash. D) Cash Shortage.
169)
When the petty cash fund is replenished:
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A) Cash is debited. B) Petty Cash is credited. C) Petty Cash is debited. D) Appropriate expense and/or asset accounts are debited.
170) Assume that the custodian of a $540 petty cash fund has $75 in currency and coins plus $465 in receipts at the end of the month. The entry to replenish the petty cash fund will include a: A) debit to Cash for $465. B) debit to Petty Cash for $465. C) credit to Petty Cash for $465. D) credit to Cash for $465.
171)
When a petty cash fund is in use: A) expenses paid with petty cash are recorded when the fund is replenished. B) Petty Cash is debited when funds are replenished. C) Petty Cash is credited when funds are replenished. D) expenses are not recorded.
172) Brown Industries plans to decrease a $390 petty cash fund to $170. The current balance in the account includes $35 in receipts and $355 in currency. The entry to reimburse and reduce the size of the petty cash fund will include a: A) credit to Cash for $185. B) debit to Cash for $185. C) debit to Petty Cash for $130. D) debit to Petty Cash for $170.
173) Brown Industries plans to decrease a $294 petty cash fund to $108. The current balance in the account includes $60 in receipts and $234 in currency. The entry to reimburse and reduce the size of the petty cash fund will include a:
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A) credit to Cash for $126. B) debit to Cash for $126. C) debit to Petty Cash for $60. D) debit to Petty Cash for $108.
174)
Which amount should be reported as cash on the balance sheet? A) The ending cash balance per the bank statement. B) The beginning cash balance per the bank statement. C) The up-to-date ending cash balance per the bank reconciliation. D) The ending cash balance per the books.
175)
Cash equivalents would include: A) a 30-day bank certificate of deposit. B) the amount in the petty cash fund. C) a 6-month U.S. treasury bill. D) the balance in the company's savings account.
176)
Which of the following statements relating to restricted cash is not correct?
A) Restricted cash is not available for general use but rather restricted for a specific purpose. B) Restricted cash must be reported separately on the balance sheet. C) By including restricted cash as part of the amount reported as cash and cash equivalents, the company more clearly conveys to financial statement users the actual amount of cash available to pay liabilities. D) Companies are sometimes legally or contractually required to set aside cash for a specific purpose and are not allowed to use it for day-to-day operations.
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177) The company has $8,000 in its checking account, $16,000 in its savings account, $800 in petty cash, $20,000 in one-year Treasury bills, and $12,000 in a money market fund. What amount should be reported as cash and cash equivalents on the balance sheet? A) $24,000 B) $24,800 C) $36,800 D) $56,800
178)
Restricted cash is reported: A) separately as an asset on the balance sheet. B) together with cash and cash equivalents on the balance sheet. C) separately under stockholders' equity on the balance sheet. D) together with cash and cash equivalents on the income statement.
179)
The entry to establish a petty cash fund is a ______ to Cash and a ______ to Petty Cash. A) debit; debit B) credit; credit C) credit; debit D) debit; credit
180)
Petty cash payments are recorded in the accounting system when: A) the petty cash fund needs to be replenished. B) a payment is made out of petty cash. C) a bank reconciliation is prepared for the petty cash fund. D) cash is received from returns of merchandise.
181) The entry to replenish the petty cash fund involves debiting ______ and crediting________.
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A) expense accounts; Cash B) Petty Cash; Petty Cash Expense C) Petty Cash; Cash D) Petty Cash Expense; expense accounts
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Answer Key Test name: Chap 05_7e 1) FALSE Employee fraud is often grouped into three categories, including corruption, asset misappropriation, and financial statement fraud. Embezzlement (or theft) is considered asset misappropriation. 2) FALSE The elements of the fraud triangle necessary for fraud to occur are: incentive, opportunity, and rationalization. 3) TRUE SOX requires external auditors to test the effectiveness of the company's internal controls and issue a report. 4) TRUE Internal control consists of the actions taken by people at every level of an organization to achieve its objectives relating to operations, reporting, and compliance. 5) FALSE The incentive element of the fraud triangle relates to an employee’s reason for committing fraud, such as personal financial pressure. 6) TRUE SOX does provide that a ‘whistle-blower' cannot be fired and grants legal protection so they are not retaliated against by those charged with fraud. 7) TRUE Internal control consists of the actions taken to promote efficient and effective operations, protect assets, enhance accounting information, and adhere to laws and regulations. 8) TRUE Version 1
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The components of an internal control system include control environment, risk assessment, control activities, information and communication, and monitoring activities. 9) FALSE Cost-benefit analysis is employed by an organization to determine whether internal control procedures should be implemented. Only those internal controls whose benefits exceed their costs should be implemented. 10) TRUE An adequate internal control system does not guarantee that losses will not occur. 11) TRUE Segregation of duties relating to cash receipts ensures that those who handle the cash (cashiers and supervisors) do not have access to those who record it (the accounting staff). As such, the supervisor should compare the cash in the register with the cash count sheet. 12) TRUE The voucher system is part of the internal control system to provide control over cash disbursement (payment) transactions. 13) FALSE A petty cash fund is a system used to reimburse employees for expenditures they have made on behalf of the organization. The company removes cash from its general bank account to hold at its premises in a locked cash box. The petty cash fund is comprised of the contents of that locked box. 14) TRUE From the bank's point of view, deposits are liabilities and are recorded as credits, and cleared checks are listed as debits because they reduce the bank's liability to the depositor. 15) FALSE Version 1
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Cash equivalents are highly liquid investments purchased within three months of maturity. 16) FALSE The entry recorded when the petty cash fund is established includes a debit to Petty Cash and a credit to Cash. The entry recorded when the petty cash fund is replenished includes a debit (or debits) to the asset or expense account(s) relating to the items that were paid from the petty cash fund (i.e., Supplies, Travel Expense, Office Expense, etc.) and a credit to Cash. 17) TRUE Companies are sometimes legally or contractually required to set aside cash for a specific purpose and are not allowed to use it for day-to-day operations. This restricted cash must be reported separately on the balance sheet. 18) A Many lending agreements include loan covenants, which require the company to achieve financial targets, such as maintaining specific levels of assets or stockholders' equity. Loan covenants are terms of a loan agreement that if broken, entitle the lender to renegotiate loan terms or force repayment. 19) C A fraud is an attempt to deceive others for personal gain. Employee fraud is often grouped into three categories: corruption, asset misappropriation, and financial statement fraud. 20) B Loan covenants are terms of the loan agreement that, if broken, entitle the lender to renegotiate the loan terms or force repayment. Many lending agreements include loan covenants, which require the company to achieve financial targets, such as maintaining specific levels of assets or stockholders' equity. Version 1
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21) D The three factors in the fraud triangle include incentive, opportunity, and rationalization. 22) D For accounting fraud to occur, there must first be an incentive for someone to commit the fraud. Second, the opportunity to commit the fraud must exist. Lastly, fraudsters rationalize their actions through a feeling of personal entitlement, which outweighs moral principles, such as honesty and concern for others. 23) B Shipping goods to customers without receiving orders from those customers and recording the transactions as revenue would cause revenues to increase and overstate net income. Reporting revenue before cash is received and accruing interest earned would increase net income and is in accordance with GAAP. Accruing liabilities before they are incurred would decrease net income and is not in accordance with GAAP. 24) A A fraud is generally defined as an attempt to deceive others for personal gain. 25) D Employee fraud is often grouped into three categories: corruption, asset misappropriation, and financial statement fraud. 26) A The fraud triangle includes incentive, opportunity, and rationalization. 27) A Internal controls systems help ensure that information is properly recorded and reported. A strong system of internal controls reduces the opportunity to commit fraud.
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28) C The Sarbanes-Oxley Act is a set of regulations passed by Congress in 2002 which attempts to improve financial reporting. 29) C The Sarbanes-Oxley Act is a set of regulations passed by Congress in 2002 in an attempt to improve financial reporting and restore investor confidence. 30) C SOX was created in response to financial statement frauds that occurred in the early 2000s. Confidence in the stock markets had been shaken by frauds involving Enron and WorldCom, so the U.S. Congress passed the act in an attempt to improve financial reporting and restore investor confidence. 31) B To encourage honesty, SOX requires tip lines, whistleblower protections, and ethics codes. 32) D SOX requires management of all public companies to report on effectiveness of internal controls over financial reporting, which establishes their primary responsibility for the internal control system. 33) B The Sarbanes-Oxley Act (SOX) increased maximum jail sentences to 20 years, which can quickly add up because federal sentencing guidelines allow judges to declare consecutive jail terms for each violation. 34) D SOX requires public companies to adopt a code of ethics for their senior financial officers. 35) C SOX requires all public companies to establish an audit committee of independent directors. Version 1
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36) B Publicly traded companies have been required by the SEC to have their financial statements audited long before the Sarbanes-Oxley Act. 37) A The Sarbanes-Oxley Act enacted changes broadly designed to: counteract incentives by imposing stiff penalties and maximum jail sentences; reducing opportunities for fraud by requiring audit committees of independent directors and requiring an evaluation of the effectiveness of internal control over financial reporting by management and, for large public companies, by external auditors; and encouraging honesty by requiring public companies to have anonymous tip lines and granting legal protection to whistleblowers. SOX did not include provisions that set limits on executive compensation. 38) A The objectives of the Sarbanes-Oxley Act (SOX) include measures to counteract incentives to commit fraud, reduce fraud opportunities and improve companies' internal control over financial reporting, and encourage honesty. 39) C Internal control consists of the actions taken to promote efficient and effective operations, protect assets, enhance accounting information, and adhere to laws and regulations. 40) C
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Internal control consists of the actions taken by people at every level of an organization to achieve its objectives relating to operations, reporting, and compliance. Internal controls are actions taken to promote efficient and effective operations, protect assets, enhance accounting information, and adhere to laws and regulations. Ensuring a reasonable return to investors through the stock price, retaining position as a market leader, and providing innovative products are not objectives of a company's system of internal control. 41) D Reporting objectives include producing reliable and timely accounting information for use by people internal and external to the organization. Providing more favorable financial information is not one of the main purposes of internal controls. 42) C Internal control consists of the actions taken by people at every level of an organization to achieve its objectives. Those objectives include: operational objectives, which focus on completing work efficiently and effectively and protecting assets by reducing the risk of fraud; reporting objectives, which include producing reliable and timely accounting information for use by people internal and external to the organization; and compliance objectives, which focus on adhering to laws and regulations. 43) D The compliance objectives of internal control focus on adhering to (rather than evading) laws and regulations. 44) A The control environment refers to the attitude that people in the organization hold regarding internal control. 45) B
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The control components used by companies as a framework when analyzing their internal control systems include control environment, risk assessment, control activities, information and communication, and monitoring activities. 46) D The continuous assessment by management to assess the potential for fraud and other risks is referred to as risk assessment. 47) A Internal control includes actions taken to promote efficient and effective operations, protect assets, enhance accounting information, and adhere to laws and regulations. Internal control doesn't eliminate fraud or any other unethical behavior. 48) D Most organizations use the following control components as a framework when analyzing their internal control systems: control environment, risk assessment, control activities, information and communication, and monitoring activities. 49) D Internal controls can never completely prevent and detect errors and fraud for two reasons. First, an organization will implement internal controls only to the extent that their benefits exceed their costs. A second limitation is that internal controls can fail as a result of human error or fraud. 50) B The five key principles of control activities are to establish responsibility, segregate duties, restrict access, document procedures, and independently verify. 51) B
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Segregation of duties is an internal control designed into the accounting system to prevent an employee from making a mistake or committing a dishonest act as part of one assigned duty and then also covering it up through another assigned duty. Segregation of duties involves assigning responsibilities so that one employee cannot make a mistake or commit a dishonest act without someone else discovering it. 52) B Establishing responsibility states that each task is assigned to only one employee. 53) A A business can perform independent verification in various ways. A common procedure is to hire someone (an auditor) to check that the work done by others within the company is appropriate and supported by documentation. 54) C Segregation of duties refers to assigning responsibilities so that one employee cannot make a mistake or commit a dishonest act without someone else discovering it. 55) B Companies restrict access to check-signing equipment, require a passcode to open cash registers, and protect computer systems with firewalls. 56) D Mandatory vacations, anonymous hotlines, bonding employees, and segregating duties are commonly used internal controls. 57) A
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Effective systems of internal control are based on five common principles: 1) establishing responsibility, 2) segregating duties, 3) restricting access to assets or information, 4) documenting procedures, and 5) independently verifying. Outsourcing work to third parties is not an internal control procedure. 58) A For smaller companies, the cost of hiring additional employees to fully segregate duties exceeds the benefits. 59) D The five principles of internal control include: establish responsibility, segregate duties, restrict access (including the use of passwords), document procedures, and independently verify (including periodic bank reconciliations). The five principles covered in this section do not represent all possible forms of internal control. Many other policies and procedures exist, such as bonding employees. Customer satisfaction surveys are not an example of an internal control procedure. 60) A Criminally minded employees have been known to override (disarm) internal controls or collude (work together) to get around them. 61) A Internal control for cash is important for two main reasons. First, because the volume of cash transactions is enormous, the risk of cashhandling errors is significant. Second, because cash is valuable, portable, and "owned" by the person who possesses it, it poses a high risk of theft. 62) B Cash would be debited for $129,000, Sales Revenue credited for $122,000, and Cash Overage credited for $7,000. 63) B Cash would be debited for $165,000, Sales Revenue credited for $163,800, and Cash Overage credited for $1,200. Version 1
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64) B Segregating these duties ensures that those who handle the cash (cashiers and supervisors) do not have access to those who record it (the accounting staff). 65) B The use of a cash register and its accompanying point-of-sale accounting system performs three important functions: (1) to document the amount charged for each item sold, (2) to restrict access to cash, and (3) to document the total cash sales. 66) C The cashier uses the cash register and its accompanying point-of-sale accounting system to perform three important functions: (1) to document the amount charged for each item sold, (2) to restrict access to cash, and (3) to document the total cash sales. 67) C By documenting the total cash sales, the cash register provides an independent record of the amount of cash the cashier should have collected and passed on for deposit at the bank. The cashier uses this information when completing a cash count sheet at the end of each shift. The cash count sheet documents the amount of cash the cashier received and determines any cash shortage or overage that occurred during the shift. A cash count sheet does not document the amount of cash reported on the balance sheet. 68) B Cash Shortage is reported on the income statement as a miscellaneous expense. A cash shortage occurs when the recorded cash exceeds the cash counted. 69) C
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The Cash Shortage account is reported on the income statement as a miscellaneous expense; the Cash Overage account is reported as a miscellaneous revenue. 70) A The customer typically explains the purpose of the payment using a remittance advice, which the customer includes with the payment. 71) B This comparison serves to independently verify that all cash received by mail was deposited in the bank. 72) C Because these payments are deposited directly into the company's bank account, EFTs eliminate the need for some internal controls. 73) A Whenever possible, establish responsibility by assigning each task to only one employee. Doing so will allow you to determine who caused any errors or thefts that occur. That's why retail companies assign a separate cash register drawer to each employee at the beginning of a shift. If two cashiers were to use the same drawer, it would be impossible to know which cashier caused the drawer to be short on cash. With only one person responsible for adding and removing money from the drawer, there's no doubt about who is responsible for a cash shortage. 74) A Segregation of duties is an internal control designed into the accounting system to prevent an employee from making a mistake or committing a dishonest act as part of one assigned duty and then also covering it up through another assigned duty. One employee should not initiate, approve, record, and have access to the items involved in the same transaction. 75) A Version 1
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Independent verification involves an independent person checking the work of others. 76) A To enhance the documentation procedures control, most companies assign sequential numbers to their documents and check that they are used in numerical sequence. This check occurs frequently, sometimes daily, to ensure that every transaction is recorded and that each document number corresponds to one and only one accounting entry. 77) D A cash register restricts access to cash, documents the amount of cash received for items sold, and summarizes the cash register's total cash sales. It is not used to reconcile accrual accounting with cash accounting. 78) A The entry includes a debit to Cash for $5,200, a credit to Cash Overage for $64 (or $5,200 − $5,136), and a credit to Sales Revenue for $5,136. 79) A The entry includes a debit to Cash for $7,650, a credit to Cash Overage for $6 (or $7,650− $7,644), and a credit to Sales Revenue for $7,644. 80) C The entry includes a debit to Cash for $14,280, a debit to Cash Shortage for $140 (or $14,280 − $14,140), and a credit to Sales Revenue for $14,140. 81) A The entry includes a debit to Cash for $7,994, a debit to Cash Shortage for $6 (or $8,000 − $7,994), and a credit to Sales Revenue for $8,000. 82) D
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To properly segregate duties involving cash receipts, specific responsibilities are assigned to employees. Cashiers collect cash and issue a receipt at the point of sale. Supervisors take custody of the cash at the end of each cashier's shift and deposit it in the bank. Accounting staff then ensure the receipts from cash sales are properly recorded in the accounting system. Segregating these duties ensures that those who handle the cash (cashiers and supervisors) do not have access to those who record it (the accounting staff). If this segregation of duties did not exist, employees could steal the cash and cover up the theft by changing the accounting records. 83) D The mail clerk lists all amounts received on a cash receipt list, which also includes the customers' names and the purpose of each payment. Ideally, someone supervises the clerk who opens the mail to ensure that he or she takes no cash that may have been remitted by a customer. The clerk stamps each check "For Deposit Only." After these steps have been completed, the cash received is separated from the record of cash received. Checks and money orders are given to the person who prepares the bank deposit whereas the cash receipts list and remittance advices are sent to the accounting department. The accounting department then compares the total on the cash receipts list with the stamped deposit slip received from the bank. 84) A The primary goal of internal controls for all cash payments is to ensure that the business pays only for properly authorized transactions. The other answer choices are controls that are used in a voucher system. 85) C The primary goal of internal controls for all cash payments is to ensure that the business pays only for properly authorized transactions. 86) D Version 1
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The use of a cash count sheet, completing a bank deposit and comparing cash register receipts with the bank deposit are internal control procedures relating to cash receipts. The voucher system and imprest system are controls for cash payments. The bank reconciliation is a control for both cash receipts and cash payments. 87) C A voucher system is a process for approving and documenting all purchases and payments on account. 88) D When the bill for goods or services is obtained, the company must (1) independently verify that the supplier charges only for items received at approved prices and (2) document procedures by preparing a journal entry to record the asset purchased and liability owed. 89) A The journal entry to record the asset purchased and liability owed should be recorded when the bill for goods or services is received (step 4). Most companies rely on a voucher system to control transactions relating to cash payments. Employees requiring office supplies should complete a purchase requisition that must be approved by a supervisor before the order is place with the supplier. Internal controls, which include voucher systems, can never completely prevent and detect errors and fraud. 90) C The voucher is the collection of documents prepared at each step in the system. It is completed when the purchase requisition, the purchase order, the receiving report, and the invoice have been matched. Only the purchase requisition and purchase order are prepared before the goods or services are ordered. 91) C
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The principles of control activities include document procedures, which include preparing a list of all goods received which helps ensure the supplier charges only for item received. 92) D A voucher system is a process for approving and documenting all purchases and payments made on account. Documentation includes purchase requisitions, purchase orders, receiving reports, supplier invoice, and company check or EFT transaction number. The cash count sheet documents the amount of cash the cashier received and determines any cash short or over that occurred during the shift. As such, it relates to controls over cash receipts. 93) A Most companies pay salaries and wages to employees through EFTs, which are known by employees as direct deposits. 94) C An imprest system is a process that controls the amount paid to others by limiting the total amount of money available for making payments to others. Using an imprest payroll system, the company instructs the bank to transfer the total net pay of all employees for the pay period out of the company's general bank account and into a special payroll account established for that purpose. Then the bank transfers the individual amounts from the payroll account to the employees' checking accounts. If the transfers occur without error, the special payroll account equals zero after all employees have been paid. If the account is overdrawn or a balance remains, the company knows that an error has occurred. 95) C A petty cash fund is a system used to reimburse employees for expenditures they have made on behalf of the organization. 96) D
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When using a petty cash system, administrative costs of processing small-dollar purchases can exceed the cost of the items themselves. To avoid the administrative costs of operating a petty cash fund and implement tighter controls over small dollar purchases, many organizations have turned to purchasing cards, or Pcards. 97) A A voucher system is a process for approving and documenting all purchases and payments on account. 98) A A voucher is simply a collection of documents prepared at each step in the voucher system. 99) A An imprest system is a process that controls the amount paid to others by limiting the total amount of money available for making payments to others. A petty cash fund is a system used to reimburse employees for expenditures they have made on behalf of the organization. Like an imprest bank account, a petty cash fund acts as a control by establishing a limited amount of cash to use for specific types of expenses. The main difference between the two is that rather than transfer funds from a general bank account to another special account at the bank, the company removes cash from its general bank account to hold at its premises in a locked cash box. 100) C The services provided by banks help businesses to control cash by restricting access, documenting procedures, and independently verifying. 101) A
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After a check is written, the payee (to whom the check is written) usually presents the check to a financial institution for deposit or cash. That financial institution contacts the check writer's bank, which in turn withdraws the amount of the check from the check writer's account and reports it as a deduction on the bank statement. The check is then said to have cleared the bank. 102) C A bank statement provides an overall summary of the account. The summary is followed by a list of specific transactions posted to the account and a running balance in the account. 103) A The bank statement is presented from the bank's point of view. The amounts in a company's bank account are liabilities to the bank because they will eventually be used by or returned to the account holder. As with all liabilities, increases are reported as credits on the bank statement. Amounts that are removed from a bank account reduce the bank's liability, so they are reported as debits on the bank statement. Banks typically explain the reasons for these increases (credits) and decreases (debits) with symbols or in a short memo, appropriately called a credit memo or debit memo. 104) C The bank statement is presented from the bank's point of view. The amounts in a company's bank account are liabilities to the bank because they will eventually be used by or returned to the account holder. As with all liabilities, increases are reported as credits on the bank statement. Amounts that are removed from a bank account reduce the bank's liability, so they are reported as debits on the bank statement. Banks typically explain the reasons for these increases (credits) and decreases (debits) with symbols or in a short memo, appropriately called a credit memo or debit memo. Version 1
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105) B A bank reconciliation is an internal report prepared to verify the accuracy of both the bank statement and the cash accounts of a business or individual. 106) C After a check is written, the payee usually presents the check to a financial institution for deposit or cash. That financial institution contacts the check writer's bank, which in turn withdraws the amount of the check from the check writer's account and reports it as a deduction on the bank statement. The check is then said to have cleared the bank. 107) B Since the company has already recorded outstanding checks or deposits in transit in its records, no journal entries are needed for these items. A bank reconciliation is an internal report prepared to verify the accuracy of the cash account. The up-to-date ending cash balance on both sides should always equal. A difference between the company's cash balance and the bank's balance can result from either errors or timing differences. 108) B There is a time lag between deposits made recently that are recorded on a company's records, but not yet recognized by the bank. These are deposits in transit. 109) C An outstanding check occurs when you write a check and send it to a company, but your bank does not find out about it until that company deposits the check in its own bank, which then notifies your bank. 110) C
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The balance per the bank would be greater than the balance per the books if the books did not reflect cash receipts that were reflected by the bank, or if the balance per the books reflected deductions such as outstanding checks that were not yet recorded by the bank. 111) A Outstanding checks have been recorded by the company but have not yet been recorded by the bank. 112) D Deposits in transit should be added to the ending cash balance per bank statement to arrive at the up-to-date ending cash balance. 113) B The balance per the bank does not reflect outstanding checks because they are not aware of them yet, so the outstanding checks must be deducted from the balance per the bank. 114) C Remaining outstanding checks = Outstanding checks + Additional checks issued− Checks cleared = $5,470 + $39,600 − $27,350 = $17,720. 115) B Remaining outstanding checks = Outstanding checks + Additional checks issued − Checks cleared = $7,560 + $54,460 − $36,820 = $25,200 116) D Deposits in transit were not known to the bank at the time the bank statement was prepared. Therefore, they are added in updating the ending cash balance per bank statement. Electronic fund transfers, NSF checks, and service charges would already have been processed by the bank. 117) D
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An NSF check is deducted from the company's book balance because it has already been deducted from the bank balance but not yet removed from the company's balance. 118) D A deposit in transit on last month's bank reconciliation that is listed as a deposit on this month's bank statement has been processed by the bank. As a result, it should not be shown on this month's bank reconciliation. There is no longer a timing difference; the deposit has been recorded on the company's books and processed by the bank. 119) C All outstanding checks are deducted from the bank balance. Whether the check was written during the current period or written in a prior period is irrelevant. There is still a timing difference; the check is recorded on the company's books but has not yet been processed by the bank. 120) A The company's records can differ from the bank's records for two basic reasons: (1) the company has recorded some items that the bank doesn't know about at the time it prepares the statement of account or (2) the bank has recorded some items that the company doesn't know about until the bank statement is examined. Both the company and the bank will know about company checks that have cleared the bank. 121) A In this situation: Up-to-date ending cash balance = Ending cash balance per books + Interest received from bank − NSF check The outstanding checks and deposits in transit would be adjusted on the bank side of the reconciliation and not affect the company cash balance. = $19,000 + $190 − $280 = $18,910 122) A
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In this situation: Up-to-date ending cash balance = Ending cash balance per books + Interest received from bank − NSF check The outstanding checks and deposits in transit would be adjusted on the bank side of the reconciliation and not affect the company cash balance. = $18,000 + $18− $180 = $17,838 123) C The bank balance is adjusted since the bank does not yet know about this item. Think about what the bank will do when it processes the item. Outstanding checks are deducted from the bank balance. 124) B The bank balance is adjusted since the bank does not yet know about this item. Think about what the bank will do when it processes the item. Deposits in transit are added to the bank balance. 125) A The bank balance is adjusted since the bank does not yet know about this item. Think about what the bank will do when it processes the items. Deposits in transit are added to the bank balance. 126) B The bank balance is adjusted since the bank does not yet know about this item. Think about what the bank will do when it processes the items. Outstanding checks will be deducted from the bank balance. 127) A The bank balance is adjusted since the bank does not yet know about this item. Think about what the bank will do when it processes the items. Outstanding checks will be deducted from the bank balance. 128) D
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The bank balance is adjusted since the bank does not yet know about this item. Think about what the bank will do when it processes the items. Deposit in transit will be added to the bank balance. 129) B The bank balance is adjusted since the bank does not yet know about this item. Think about what the bank will do when it processes the items. Outstanding checks will be deducted from the bank balance. 130) A The bank balance is adjusted since the bank does not yet know about this item. Think about what the bank will do when it processes the items. Deposit in transit will be added to the bank balance. 131) A The book balance is adjusted since the company may not yet know about this item. Think about what the bank did when it processed the item. An EFT from a customer will be added to the book balance. 132) A The book balance is adjusted since the company may not yet know about this item. Think about what the bank did when it processed the item. The NSF check must be deducted from the book balance. 133) D The book balance is adjusted since the company may not yet know about this item. Think about what the bank did when it processed the item. The NSF check must be deducted from the book balance. 134) D The book balance is adjusted since the company may not yet know about this item. Think about what the bank did when it processed the item. The bank service charge must be deducted from the book balance. 135) B The erroneous deposit on the bank statement should be deducted from the bank balance. Version 1
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136) C The book balance is adjusted since the company did not know about this item until the bank reconciliation was preparedand it was a company (book) error. Think about how the item was recorded and how it should have been recorded. Recorded as deposit (check) Adjustment needed
$ 66 35
Actual amount of deposit (check)
$ 101
137) C The book balance is adjusted since the company did not know about this item until the bank reconciliation was prepared and it was a company (book) error. Think about how the item was recorded and how it should have been recorded. Recorded as deposit (check) Adjustment needed
$ 58 27
Actual amount of deposit (check)
$ 85
138) A Journal entries are not needed for the reconciling items on the bank's side because the items have already been recorded by the company. 139) A Journal entries are not needed for the reconciling items on the bank's side because the items have already been recorded by the company. 140) A The book balance is adjusted since the company did not know about this item until the bank reconciliation was prepared and it was a company (book) error. Think about how the item was recorded and how it should have been recorded. Recorded as deposit (check) Adjustment needed
$ (694) 45
Actual amount of deposit (check)
$ (649)
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The related entry includes a debit to Cash for $45 (since the adjustment needed is positive) and a credit to Accounts Payable, the account involved in the original entry. 141) B Service charges are an expense to the company that was not known until the bank statement was received. Therefore, it is a deduction in updating the company's books. 142) D The journal entry made to adjust the current month's balance will not affect next month's reconciliation. 143) B When this check was originally recorded, the Cash account was decreased by $790 rather than $970 and, as such, the Cash account is overstated by $180 (or $970− $790 = $180). To correct the error, the journal entry must include a debit to Utilities Expense and a credit to Cash for $180. 144) C Up-to-Date Ending cash balance per books = Ending cash balance per books + Interest earned − NSF check − Bank service charge $7,500 + $20 − $190 − $55 = $7,275. The outstanding checks and deposits in transit would be adjusted on the bank side of the reconciliation and not affect the company cash balance. 145) C
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Up-to-Date Ending cash balance per books = Ending cash balance per books + Interest earned − NSF check− Bank service charge = $9,450 + $36 − $180 − $18 = $9,288. The outstanding checks and deposits in transit would be adjusted on the bank side of the reconciliation and not affect the company cash balance. 146) D Up-to-date ending cash balance = Ending cash balance per bank statement + Deposits in transit − Outstanding checks =$1,035 + $250 − ($562 + $49) = $674 Or, Up-to-date ending cash balance = Ending cash balance per books + Interest received from bank − NSF check − Bank service charge =$738 + $17 − $50 − $31 = $674 147) C Up-to-date ending cash balance = Ending cash balance per bank statement + Deposits in transit − Outstanding checks = $1,950 + $380 − ($1,004 + $86) = $1,240 Or, Up-to-date ending cash balance = Ending cash balance per books + Interest received from bank − NSF check − Bank service charge = $1,320 + $10 − $40 − $50 = $1,240 148) A
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The ending cash balance per books does not reflect the interest received from the bank, the bank service charge, or the NSF check that would be included in the October bank statement. As such, the up-to-date ending cash balance on October 31 is computed as follows: Up-to-date ending cash balance = Ending cash balance per books + Interest received from the bank − Bank service charge − NSF check of T. Owens = $4,400 + $1,300 −$120 − $220 = $5,360 The outstanding checks and deposits in transit would be adjusted on the bank side of the reconciliation and not affect the company cash balance. 149) B The ending cash balance per books does not reflect the interest received from the bank, the bank service charge, or the NSF check that would be included in the October bank statement. As such, the up-to-date ending cash balance on October 31 is computed as follows: Up-to-date ending cash balance = Ending cash balance per books + Interest received from the bank − Bank service charge − NSF check of T. Owens = $7,000 + $1,700 − $60 − $350 = $8,290 The outstanding checks and deposits in transit would be adjusted on the bank side of the reconciliation and not affect the company cash balance. 150) D
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The interest earned, and received from the bank, would be included in the October bank statement but not the company's accounting records. Therefore, a journal entry to recognize the interest earned and cash received would be needed. 151) A Start with updates to cash balance per books and back into ending cash balance per bank statement. Up-to-date ending cash balance = Balance per books + Interest received from bank − Bank service charges = $20,419.93 + $27.14 − $22 = $20,425.07 Up-to-date ending cash balance = Ending cash balance per bank statement − Outstanding checks Ending cash balance per bank statement = Up-to-date ending cash balance + Outstanding checks = $20,425.07 + $8,912.25 = $29,337.32 152) C Start with updates to cash balance per books and back into ending cash balance per bank statement. Up-to-date ending cash balance = Balance per books + Interest received from bank − Bank service charges = $16,451.03 + $12.19 − $9 = $16,454.22 Up-to-date ending cash balance = Ending cash balance per bank statement − Outstanding checks Ending cash balance per bank statement = Up-to-date ending cash balance + Outstanding checks = $16,454.22 + $5,643.01 = $22,097.23 Version 1
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153) C The bank balance does not reflect the outstanding checks, and the unadjusted cash account per the company does not reflect the NSF check. Up-to-date ending cash balance = Ending cash balance per the bank statement − Outstanding checks = $13,756.73 − $3,312.19 = $10,444.54 Up-to-date ending cash balance = Unadjusted balance per books − NSF checks Unadjusted balance per books = Up-to-date ending cash balance + NSF checks Unadjusted balance per books = $10,444.54+ $854.19 = $11,298.73 154) C The bank balance does not reflect the outstanding checks, and the unadjusted cash account per the company does not reflect the NSF check. Up-to-date ending cash balance = Ending cash balance per the bank statement − Outstanding checks = $12,956.73− $2,112.19 = $10,844.54 Up-to-date ending cash balance = Unadjusted balance per books − NSF checks Unadjusted balance per books = Up-to-date ending cash balance + NSF checks Unadjusted balance per books = $10,844.54 + $654.19 = $11,498.73 155) B
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Journal entries are necessary for the adjustments made to the cash balance per the books. Outstanding checks are reconciling items for the cash balance per bank. 156) D An adjusting journal entry is required only for those adjustments that affect the ending cash balance per books. The adjustments that affect the ending cash balance per the bank statement do not require an adjusting journal entry on the books of the company. 157) A NSF checks returned require a decrease in the Cash account and an increase in Accounts Receivable. 158) B Journal entries are necessary for all adjustments made to the balance per the books. Outstanding checks were already deducted on the company's books when the checks were issued and do not require an adjustment. 159) C Journal entries are required for any adjustment to the cash balance per the company. Outstanding checks and deposits in transit are already reflected on the company's books. If you discover a bank error, you should ask the bank to correct its records, but you should not change yours. 160) B Journal entries are required for all adjustments made to the balance per the books. Outstanding checks and deposits in transit have already been reflected on the company's books. If you discover a bank error, you should ask the bank to correct its records, but you should not change yours. 161) A
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Up-to-date ending cash balance = Balance per the bank + Deposits in transit − Outstanding checks = $18,900 + $1,700 − $2,400 = $18,200 The NSF check, bank service charges, and EFT deposit would be adjusted on the book side of the reconciliation and not affect the bank balance. 162) A Up-to-date ending cash balance = Balance per the bank + Deposits in transit − Outstanding checks = $14,800 + $1,200− $1,600 = $14,400 The NSF check, bank service charges, and EFT deposit would be adjusted on the book side of the reconciliation and not affect the bank balance. 163) B Start with updates to bank statement and back into ending cash balance per books. Up-to-date ending cash balance = Balance per the bank + Deposits in transit − Outstanding checks = $18,600 + $1,550 − $2,100 = $18,050 Up-to-date ending cash balance = Ending cash balance per book − NSF check − Bank service charges + EFT Ending cash balance per books = Up-to-date ending cash balance + NSF check + Bank service charges − EFT = $18,050 + $800 + $35 − $1,600 = $17,285 164) B
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Start with updates to bank statement and back into ending cash balance per books. Up-to-date ending cash balance = Balance per the bank + Deposits in transit − Outstanding checks = $14,800 + $1,200 − $1,600 = $14,400 Up-to-date ending cash balance = Ending cash balance per book − NSF check − Bank service charges + EFT Ending cash balance per books = Up-to-date ending cash balance + NSF check + Bank service charges − EFT = $14,400 + $560 + $24 − $1,200 = $13,784 165) A Since the amount was rejected by the bank and is still owed by the customer, the company must debit Accounts Receivable and credit Cash for $560, the amount of the NSF check. 166) A An EFT occurs when a customer electronically transfers funds from his or her bank account to the company's bank account. To process this EFT, the accounting department debits Cash and credits Account Receivable for $1,200. 167) B The journal entry to establish a petty cash fund should include a debit to Petty Cash and a credit to Cash. 168) A The amount of the check required to replenish the fund is recorded as a reduction in Cash (with a credit), and the various items that were paid are recorded in their corresponding accounts (with debits). 169) D The amount of the check required to replenish the fund is recorded as a reduction in Cash (with a credit), and the various items that were paid are recorded in their corresponding accounts (with debits). Version 1
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170) D The various items that were paid are recorded in their corresponding accounts (with debits). The amount of the check required to replenish the fund is $465.00 (or $540 − $75). That amount is recorded as a reduction in Cash (with a credit). 171) A Because the petty cash fund receipts involve such small amounts, payments out of petty cash are not recorded in the accounting system until the fund is replenished. 172) B The petty cash fund currently has $355 in currency; only $170 is needed for the new, smaller balance. As a result, $185 (or $355 − $170) will be deposited in the company's bank (Cash) account. The journal entry to record that transaction will include a debit to Cash for $185. The various items that were paid are recorded in their corresponding accounts (with debits totaling $35). And, finally, the Petty Cash account will be reduced with a credit of $220 (or $390 − $170). 173) B The petty cash fund currently has $234 in currency; only $108 is needed for the new, smaller balance. As a result, $126 (or $234− $108) will be deposited in the company's bank (Cash) account. The journal entry to record that transaction will include a debit to Cash for $126. The various items that were paid are recorded in their corresponding accounts (with debits totaling $60). And, finally, the Petty Cash account will be reduced with a credit of $186 (or $294− $108). 174) C The up-to-date ending cash balance per the bank reconciliation is the amount reported as cash on the balance sheet. 175) A
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Cash, as reported on the balance sheet, includes cash deposited with banks, petty cash on hand, and cash equivalents. Cash equivalents are short-term, highly liquid investments purchased within three months of maturity. 176) C By reporting restricted cash separately on the balance sheet (rather than as part of cash and cash equivalents), the company more clearly conveys to financial statement users the actual amount of cash available to pay liabilities. 177) C Cash, as reported on the balance sheet, includes cash deposited with banks, petty cash on hand, and cash equivalents. Cash equivalents are short-term, highly liquid investments purchased within three months of maturity. Cash equivalents include money market funds, government Treasury bills, and other highly liquid investments. Cash and cash equivalents = $8,000 + $16,000 + $800 + $12,000 178) A Companies are sometimes legally or contractually required to set aside cash for a specific purpose and are not allowed to use it for day-to-day operations. This restricted cash must be reported separately on the balance sheet. 179) C The entry to establish a petty cash fund includes a debit to Petty Cash and a credit to Cash. 180) A When the petty cash fund is replenished, the amount of the check needed to replenish the fund is recorded as a reduction in Cash (with a credit), and the various items that were paid are recorded in their corresponding accounts (with debits). Version 1
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181) A When the petty cash fund is replenished, the amount of the check needed to replenish the fund is recorded as a reduction in Cash (with a credit), and the various items that were paid are recorded in their corresponding accounts (with debits).
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CHAPTER 5: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) You are the accountant for Georgia Company, and you have recently received the bank statement for your company's account and need to reconcile it with your general ledger cash account. Georgia's records show an ending balance for the month of $25,444.80 while the bank's records show an ending balance of $24,734.32. The bank charged $16 in service fees and paid $52.10 in interest. All but three checks written during the month were processed by the bank without incident during the month. The three exceptions were: ● Check #841 was correctly processed by the bank as $1,962.54 but was mistakenly recorded by you as $1,562.54. ● Check #853 for $129.14 had not yet been processed by the bank. ● Check #855 for $1,366.92 had not yet been processed by the bank. All but two of the deposits made during the month were processed by the bank without incident. The two exceptions were: ● A customer check for $615.90, which had been deposited during the month, was returned NSF. ● A deposit totaling $1,226.74 had not yet been processed by the bank. Required: Using the information provided above, prepare a bank reconciliation. (Round your answers to 2 decimal places.)
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2) The following information is available for the Tierney Company for the month of November. ● On November 30, after all transactions have been recorded, the balance in the company's Cash account has a balance of $27,202. ● The company's bank statement shows a balance on November 30 of $29,279. ● Outstanding checks at November 30 include check #3030 in the amount of $1,525 and check #3556 in the amount of $1,459. ● Included with the bank statement was a credit memo in the amount of $770 for an EFT in payment of a customer’s account. ● The bank deducted $67 for an NSF check from a customer deposited on November 22. ● A deposit placed in the bank's night depository on November 30 totaled $1,675 and did not appear on the bank statement. ● Examination of the checks on the bank statement with the entries in the accounting records reveals that check #3445 for the payment of an account payable was correctly written for $2,450 but was recorded in the accounting records as $2,540. ● Included with the bank statement was a debit memorandum in the amount of $25 for bank service charges. Required: Prepare a bank reconciliation for Tierney Company as of November 30.
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3) The following information is available for the Tierney Company for the month of November. ● On November 30, after all transactions have been recorded, the balance in the company's Cash account has a balance of $27,202. ● The company's bank statement shows a balance on November 30 of $29,279. ● Outstanding checks at November 30 include check #3030 in the amount of $1,525 and check #3556 in the amount of $1,459. ● Included with the bank statement was a credit memo in the amount of $770 for an EFT in payment of a customer’s account. ● The bank deducted $67 for an NSF check from a customer deposited on November 22. ● A deposit placed in the bank's night depository on November 30 totaled $1,675 and did not appear on the bank statement. ● Examination of the checks on the bank statement with the entries in the accounting records reveals that check #3445 for the payment of an account payable was correctly written for $2,450 but was recorded in the accounting records as $2,540. ● Included with the bank statement was a debit memorandum in the amount of $25 for bank service charges. Required: Prepare the journal entries for the items that would appear on the company’s bank reconciliation as of November 30.
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4) McDermott Company's bank statement for September 30 showed an ending cash balance of $1,350. The company's Cash account in its general ledger showed a $995 debit balance. The following information was also available as of September 30. ● The bank deducted $125 for an NSF check from a customer deposited on September 15. ● The September 30 cash receipts, $1,250, were placed in the bank's night depository after banking hours on that date and this amount did not appear on the September 30 bank statement. ● A $15 debit memorandum for checks printed by the bank was included with the canceled checks. ● Outstanding checks amounted to $1,145. ● Included with the bank statement was a credit memo in the amount of $875 for an EFT in payment of a customer’s account. ● Included with the canceled checks was a check for $275, drawn on the account of another company. Required: a. Prepare a bank reconciliation as of September 30. b. Prepare the journal entries for the items on the company’s bank reconciliation as of September 30.
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5) Cottage Company deposits all cash receipts on the day they are received, and it makes all cash payments by check. At the close of business on December 31, its Cash account shows a debit balance of $36,606. The company's bank statement as of December 31 shows an ending cash balance of $31,842. The following information was also available. ● Outstanding checks as of December 31 total $4,522. ● Included with the bank statement was a debit memo in the amount of $70 for service charges. ● Check Number 2519, listed with the canceled checks, was correctly drawn for $805 in payment of a utility bill on December 16. The company mistakenly recorded it with a debit to Utilities Expense and a credit to Cash in the amount of $895. ● The December 31 cash receipts of $6,850 were placed in the bank’s night depository after banking hours and were not recorded on the December 31 bank statement. ● The bank deducted $2,456 for an NSF check from a customer deposited on December 10. Required: Prepare the bank reconciliation as of December 31.
6) Cottage Company deposits all cash receipts on the day they are received, and it makes all cash payments by check. At the close of business on December 31, its Cash account shows a debit balance of $36,606. The company’s bank statement as of December 31 shows an ending cash balance of $31,842. The following information was also available. ● Outstanding checks as of December 31 total $4,522. ● Included with the bank statement was a debit memo in the amount of $70 for bank service charges. ● Check Number 2519, listed with the canceled checks, was correctly drawn for $805 in payment of a utility bill on December 16. The company mistakenly recorded it with a debit to Utilities Expense and a credit to Cash in the amount of $895. ● The December 31 cash receipts of $6,850 were placed in the bank’s night depository after banking hours and were not recorded on the December 31 bank statement. ● The bank deducted $2,456 for an NSF check from a customer deposited on December 10. Required: Prepare the journal entries for the items that would appear on the company’s bank reconciliation as of December 31. Version 1
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7)
On April 1, a company established a petty cash fund of $1,000. Required:
Prepare the journal entry, if any, required on April 1.
8) A petty cash fund was originally established with a check for $180. On December 31, the petty cash fund was replenished when there was $5.10 remaining and there were petty cash receipts for postage, $52.20; supplies, $62.22; and equipment repair, $58.80. Required: Prepare the journal entry, if any, required, to record the replenishment of the petty cash fund on December 31.
9) On September 1, a company established a petty cash fund of $200. On September 10, the petty cash fund was replenished when there was $32 remaining and there were petty cash receipts for supplies, $54, and postage, $108. On September 15, the petty cash fund was increased to $250. Required: Prepare the journal entries, if any, required on September 1, September 10, and September 15.
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10) A company established a $400 petty cash fund. On October 15, there was $16 remaining in the petty cash fund and there were petty cash receipts for travel expense, $39, delivery expense, $138, and office expenses, $214. The petty cash fund was replenished and increased to $1,000 in total. Required: Prepare the journal entry, if any, required, to record the replenishment of the petty cash fund and the increase in its amount on October 15.
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11) Match the term to the appropriate definition. There are more definitions than terms. Term 1.___Fraud 2.___Imprest System 3.___Internal Controls 4.___Loan Covenants 5.___Sarbanes-Oxley Act (SOX) 6.___Segregation of Duties 7.___Voucher System 8. Definition 1.A) A set of regulations passed by Congress in 2002 in an attempt to improve financial reporting and restore investor confidence. 2.B) A process for approving and documenting all purchases and payments on account. 3.C) An attempt to deceive others for personal gain. 4.D) Terms of a loan agreement that if broken, entitle the lender to renegotiate loan terms or force repayment. 5.E) Short-term, highly liquid investments purchased within three months of maturity. 6.F) Another name for bounced checks. They arise when the check writer (your customer) does not have sufficient funds to cover the amount of the check. 7.G) An internal report prepared to verify the accuracy of both the bank statement and the cash accounts of a business or individual. 8.H) Actions taken to promote efficient and effective operations, protect assets, enhance accounting information, and adhere to laws and regulations. 9.I) An internal control designed into the accounting system to prevent an employee from making a mistake or committing a dishonest act as part of one assigned duty and then also covering it up through another assigned duty. 10.J) Not available for general use but rather restricted for a specific purpose. 11.K) A process that controls the amount paid to others by limiting the total amount of money available for making payments to others. 12.L) Money or any instrument that banks will accept for deposit and immediately credit to a company's account.
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12) Match the term to the appropriate definition. There are more definitions than terms. Term 1.___Bank Reconciliation 2.___Cash 3.___Cash Equivalents 4.___ NSF (Not Sufficient Funds) Check 5.___Restricted Cash 6. Definition 1.A) Money or any instrument that banks will accept for deposit and immediately credit to a company's account. 2.B) A process for approving and documenting all purchases and payments on account. 3.C) Short-term, highly liquid investments purchased within three months of maturity. 4.D) Actions taken to promote efficient and effective operations, protect assets, enhance accounting information, and adhere to laws and regulations. 5.E) Not available for general use but rather restricted for a specific purpose. 6.F) An internal control designed into the accounting system to prevent an employee from making a mistake or committing a dishonest act as part of one assigned duty and then also covering it up through another assigned duty. 7.G) Another name for bounced checks. They arise when the check writer (your customer) does not have sufficient funds to cover the amount of the check. 8.H) An attempt to deceive others for personal gain. 9.I) A set of regulations passed by Congress in 2002 in an attempt to improve financial reporting and restore investor confidence. 10.J) An internal report prepared to verify the accuracy of both the bank statement and the cash accounts of a business or individual. 11.K) A process that controls the amount paid to others by limiting the total amount of money available for making payments to others. 12.L) Terms of a loan agreement that if broken, entitle the lender to renegotiate loan terms or force repayment.
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Answer Key Test name: Chap 05_7e_Problems 1) Updates to Bank Statement Ending Cash Balance per Bank Statement Additions: Deposit in Transit
Bank Reconciliation Updates to Company's Books $ Ending Cash Balance 24,734.32 per Books Additions: 1,226.74
Interest Received from Bank
25,961.06 Deductions: Outstanding Checks (#853) Outstanding Checks (#855)
Up-to-date ending cash balance
$ 25,444.80
52.10 25,496.90
Deductions: 129.14 1,399.92
$ 24,465.00
NSF Check
615.90
Bank Service Fees
16.00
Error Correction
400.00
Up-to-date ending cash balance
$ 24,465.00
2) Tierney Company Bank Reconciliation At November 30 Updates to Bank Statement Updates to Company's Books Ending Cash Balance per $ Ending Cash Balance per $ 27,202 Bank Statement 29,279 Books Additions: Additions: Deposit in Transit
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1,675
EFT Received Customer
770
10
Error Correction 30,954 Deductions:
90 28,062
Deductions:
Outstanding Checks (#3030) Outstanding Checks (#3556)
1,525
NSF Check
67
1,459
Bank Service Charges
25
Up-to-date ending cash balance
$ 27,970
Up-to-date ending cash balance
$ 27,970
3) Date November 30
General Journal
Debit 770
Cash Accounts Receivable
November 30
770
Cash
90
Accounts Payable November 30
90
Accounts Receivable
67
Cash November 30
Credit
67
Office Expenses
25
Cash
25
4) McDermott Company Bank Reconciliation At September 30 Updates to Bank Statement Ending Cash Balance per Bank Statement Additions:
$ 1,350
Deposit in Transit
1,250
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Updates to Company's Books Ending Cash Balance per Books Additions: EFT Received Customer
$ 995
875
11
Bank Error
275 $ 2,875
Deductions:
$ 1,870 Deductions:
Outstanding Checks
1,145
Up-to-date ending cash balance
$ 1,730
Date September 30
General Journal Cash
September 30
Accounts Receivable Accounts Receivable
NSF Check Bank Service charges Up-to-date ending cash balance
$ 1,730
Debit
Credit 875 875 125
Cash September 30
125 15
125
Office Expenses
15
Cash
15
5) Cottage Company Bank Reconciliation At December 31 Updates to Bank Statement Updates to Company's Books Ending Cash Balance per $ 31,842 Ending Cash Balance per $ 36,606 Bank Statement Books Additions: Additions: Deposit in Transit
6,850 $ 38,692
Deductions: Outstanding Checks
Up-to-date ending cash
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Error Correction
90 $ 36,696
Deductions: 4,522
NSF Check Bank Service charges
2,456 70
$ 34,170
Up-to-date ending cash
$ 34,170
12
balance
balance
6) Date December 31
General Journal Cash
Debit 90
Utilities Expense December 31
Accounts Receivable
90 2,456
Cash December 31
Office Expenses
Credit
2,456 70
Cash
70
7) Date April 1
General Journal Petty Cash
Debit 1,000
Credit
Cash
1,000
8) Date December 31
General Journal Office Expenses
Debit 52.20
Supplies
62.22
Repairs and Maintenance Expense
58.80
Cash Shortage
1.68
Cash
Credit
174.90
9) Date September 1
General Journal Petty Cash
Debit 200
Cash September 10
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Supplies
Credit
200 54
13
Office Expenses
108
Cash Shortage
6
Cash September 15
Petty Cash
168 50
Cash
50
10) Date October 15
General Journal Travel Expense
Debit 39
Delivery Expense
138
Office Expenses
214
Petty Cash
600
Credit
Cash Overage Cash
7 984
11) 1._C_Fraud 2._K_Imprest System 3._H_Internal Controls 4._D_Loan Covenants 5._A_Sarbanes-Oxley Act (SOX) 6._I_Segregation of Duties 7._B_Voucher System 12) 1._J_Bank Reconciliation 2._A_Cash 3._C_Cash Equivalents 4._G_NSF (Not Sufficient Funds) Check 5._E_Restricted Cash
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CHAPTER 6 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) A company either performs a service, sells inventory that it purchases from others, or manufacturers a product; it cannot serve more than one of these functions. ⊚ true ⊚ false
2) A retailer is a company that buys products from manufacturers and sells them to wholesalers. ⊚ true ⊚ false
3) A merchandising company's operating cycle begins with the acquisition of inventory and ends with the cash collection from sales. ⊚ true ⊚ false
4) Inventory shrinkage is the difference between inventory in the warehouse and inventory counted. ⊚ true ⊚ false
5) Generally, a physical count of inventory is performed annually in both a perpetual inventory system and a periodic inventory system. ⊚ true ⊚ false
6) FOB shipping point means that ownership of goods passes to the buyer when the goods leave the seller’s place of business. ⊚ true ⊚ false
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7) If a merchandiser offers a sales discount of 2/10, net/30 on a sale of $2,000, the amount due in 10 days is the net amount of $1,960. ⊚ true ⊚ false
8) Sales discounts are discounts that consumers get from buying clearance items at a reduced price. ⊚ true ⊚ false
9) In a periodic inventory system, only one journal entry is required to record the sale of inventory. ⊚ true ⊚ false
10) Companies make a month-end adjustment for expected returns by increasing the Refund Liability account and increasing Inventory–Estimated Returns account. ⊚ true ⊚ false
11) Most companies report sales revenue, sales returns and allowances, and sales discounts, as well as net sales on their externally reported income statements. ⊚ true ⊚ false
12)
Gross profit is a ledger account name included with other income statement accounts. ⊚ true ⊚ false
13)
The gross profit percentage is computed by dividing operating income by net sales. ⊚ true ⊚ false
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14) The perpetual inventory system uses the Inventory account to keep track of the amount of inventory that is purchased. ⊚ ⊚
true false
15) The periodic inventory system uses the Inventory account to keep track of the amount of inventory that is purchased. ⊚ true ⊚ false
16) The periodic inventory system uses the Purchases account to keep track of the amount of inventory that is purchased. ⊚ true ⊚ false
17)
In a perpetual inventory system, the cost of goods sold is recorded as each sale occurs. ⊚ ⊚
true false
18) When a periodic inventory system is in use, at the end of each period a “book-tophysical” adjustment will be made to reduce inventory for shrinkage. ⊚ true ⊚ false
19) When a periodic inventory system is in use, the Inventory account is updated only at the end of the period. ⊚ true ⊚ false
20) When goods and services are sold together for a single price, the price is allocated to the goods and services based on their stand-alone selling prices.
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⊚ ⊚
true false
21) When goods and services are sold together for a single “bundled” price, the price is allocated to the goods and services based on their stand-alone selling prices. The revenue is then recognized when the cash is received for each performance obligation. ⊚ ⊚
true false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 22) Intel makes microchips from raw materials acquired from suppliers. Intel is a: A) service company. B) retail company. C) manufacturer. D) merchandising company.
23) BetterBuy purchases computers from companies like Hewlett Packard and IBM and sells them to consumers. BetterBuy is a: A) merchandising company at the retail level. B) service company. C) merchandising company at the wholesale level. D) manufacturer.
24)
Which of the following is a merchandising company? A) General Motors B) H&R Block C) The Gap D) Proctor & Gamble
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25)
Which of the following is a service company? A) General Motors B) H&R Block C) The Gap D) Proctor & Gamble
26) Which of the following is an activity common to the operations of merchandising, manufacturing, and service companies? A) Producing the product B) Incurring operating expenses C) Buying goods or raw materials D) Selling a physical product
27) Which of the following is an activity in the operations of a manufacturer, but not in the operations of a merchandising or service company? A) Selling goods to consumers B) Receiving cash C) Selling goods to other firms D) Buying raw materials
28) A company buys footwear and clothing from manufacturers, which it resells to discount stores in a large urban area. This company is an example of a: A) wholesale merchandising company. B) service company. C) retail merchandising company. D) secondary service company.
29)
The receipt of cash is one of the operating activities of:
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A) companies that sell goods but not companies that sell services. B) companies that sell to consumers but do not sell to other companies. C) merchandising, manufacturing, and service companies. D) companies that sell goods they bought from others but not of companies that make the goods they sell.
30)
A series of activities that generates revenues and collects cash from customers is called: A) the operating cycle. B) the financing cycle. C) the accounting cycle. D) the perpetual cycle.
31) Sleepy Head Coffee Shop buys coffee, mugs, and pastries from Morning Show Company for sale to consumers. What type of company is Sleepy Head Coffee Shop? A) Retail merchandiser B) Wholesale merchandiser C) Manufacturer D) Service business
32) Which line item would be found on a merchandiser's balance sheet and not on a service firm's? A) Supplies B) Cost of Goods Sold C) Inventory D) Sales Revenue
33) Which line item would be found on a merchandiser's income statement and not on a service firm's?
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A) Net Income B) Service Revenue C) Depreciation Expense D) Cost of Goods Sold
34)
________ sell their inventory to ________ for resale to consumers. A) Wholesalers; retailers B) Retailers; wholesalers C) Manufacturers; wholesalers D) Manufacturers; service companies
35)
Inventory is reported as a(n) ________ on the ________. A) current asset; balance sheet B) current asset; balance sheet and income statement C) expense; income statement D) expense; balance sheet
36)
Which of the following would be considered inventory? A) Goods held for sale in the normal course of business. B) Office supplies that a company plans to use in the next few months. C) Equipment used to manufacture products which will be sold later. D) A vehicle used to deliver goods to a customer.
37)
Inventory reports the:
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A) cost of goods available for sale. B) cost of merchandise purchased and sold. C) cost of goods that have been delivered to customers. D) selling price times the quantity of goods sold.
38)
Sales Revenue reports the: A) cost of merchandise available to sell. B) cost of merchandise purchased. C) cost times the quantity of goods sold. D) selling price times the quantity of goods sold.
39)
Cost of goods sold reports the: A) cost of merchandise available to sell. B) cost of merchandise purchased. C) cost times the quantity of goods sold. D) selling price times the quantity of goods sold.
40) Orbit, Incorporated has sales of $28,000, beginning inventory of $3,500, purchases of $17,500, and ending inventory of $4,900. The cost of goods sold is: A) $16,100. B) $21,000. C) $28,000. D) $11,900.
41) Seasons has sales of $59,000, beginning inventory of $7,500, purchases of $34,000, and ending inventory of $3,000. The cost of goods sold is:
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A) $41,500. B) $38,500. C) $23,500. D) $34,500.
42) Seasons has sales of $42,000, beginning inventory of $4,900, purchases of $24,500, and ending inventory of $3,500. The cost of goods sold is: A) $29,400. B) $25,900. C) $16,100. D) $23,100.
43) Broad, Incorporated had a beginning inventory of $50,000 and an ending inventory of $80,000. Its cost of goods sold for the year was $970,000. What was the amount of purchases that it made for the year? A) $940,000 B) $1,000,000 C) $1,050,000 D) $1,060,000
44) Elm Corporation is a merchandising company. The year began with inventory of $19,000, Purchases for the year were $44,000, and the Ending Inventory was $6,000. What is the Cost of Goods Sold that would be reported on the income statement? A) $69,000 B) $31,000 C) $19,000 D) $57,000
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45) Elm Corporation is a merchandising company. The year began with Inventory of $35,100, Purchases for the year were $67,600, and the Ending Inventory was $18,200. What is the Cost of Goods Sold that would be reported on the income statement? A) $120,900 B) $50,700 C) $14,300 D) $84,500
46) Madison Manufacturing’s ending inventory count was $65,000, cost of goods sold was $35,100, and purchases were $72,800, its beginning inventory must have been: A) $42,900. B) $172,900. C) $102,700. D) $27,300.
47)
Which of the following is the equation for cost of goods sold? A) Beginning inventory + Purchases− Ending inventory B) Beginning inventory + Purchases + Ending inventory C) Net purchases− Ending inventory D) Ending inventory + Purchases− Beginning inventory
48)
Beginning inventory plus purchases equals: A) ending inventory. B) cost of goods sold. C) goods available for sale. D) net purchases.
49)
Beginning inventory plus purchases minus ending inventory equals:
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A) net sales. B) cost of goods sold. C) goods available for sale. D) net purchases.
50) Jackson Manufacturing Company had a beginning inventory of $17,500. During the year, the company recorded inventory purchases of $70,000 and cost of goods sold of $55,000. The ending inventory must equal: A) $32,500. B) $27,500. C) $28,500. D) $29,500.
51) Jackson Manufacturing Company had a beginning inventory of $30,000. During the year, the company recorded inventory purchases of $90,000 and cost of goods sold of $100,000. The ending inventory must equal: A) $20,000. B) $50,000. C) $52,000. D) $54,000.
52) Buckeye Company had beginning inventory of $18,000, cost of goods sold of $42,000, and ending inventory of $24,000. Purchases were: A) $36,000. B) $30,000. C) $27,000. D) $48,000.
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53) Sheridan’s beginning inventory is $480,400, goods purchased during the period cost $140,400, and the cost of goods sold for the period is $560,400. What is the amount of its ending inventory? A) $180,400 B) $80,400 C) $100,400 D) $60,400
54) Sheridan’s beginning inventory is $140,000, goods purchased during the period cost $480,000, and the cost of goods sold for the period is $560,000. What is the amount of its ending inventory? A) $180,000 B) $80,000 C) $100,000 D) $60,000
55)
A ________ inventory system will always give updated balances for ________. A) perpetual; Cost of Goods Sold B) periodic; Inventory C) perpetual; Goods Available for Sale D) periodic; Cost of Goods Sold
56)
Under the periodic inventory system: A) inventory records are updated immediately after each purchase. B) inventory must be counted at the end of each accounting period. C) inventory does not have to be counted. (It can be taken from the accounting records.) D) inventory levels must be counted every day.
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57) A company starts the period with 300 computers in inventory, purchases 90 more, returns 12 of them to suppliers, and has 249 in inventory at the end of the period. If there is no shrinkage, how many computers were sold? A) 141 B) 129 C) 51 D) 249
58)
In a retail business that uses a perpetual inventory system, scanning a bar code does not: A) calculate the amount owed by the customer. B) identify the item sold to be removed from the Inventory account. C) identify the item sold to be recorded in the Cost of Goods Sold account. D) calculate the gross profit.
59) The perpetual inventory method of tracking inventory is considered superior to the periodic method because the perpetual method: A) makes calculations easier and less technology can be deployed. B) tells what inventory a company should have on hand at any point in time. C) saves a company from ever having to count the goods in inventory. D) is more consistent with how companies calculated inventory in the past.
60) On December 31, 2020 , you count 600 backpacks in inventory. During the next quarter, you carefully record the effect of each purchase and sale transaction on inventory. You buy 256 backpacks during the next quarter. On March 31, 2021, you count 576 backpacks in inventory. Which of the following is not correct? A) Ending inventory on March 31, 2021 should be 576 backpacks. B) Your company uses the perpetual inventory method. C) Your company's records would show that 280 backpacks were sold during the quarter. D) The amount of shrinkage cannot be determined with this type of inventory system.
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61)
Which of the following statements regarding shrinkage is not correct?
A) Perpetual inventory systems can help managers detect shrinkage. B) Shrinkage is another term for inventory loss due to theft, error, or fraud. C) Shrinkage is detected by comparing the balance in the inventory ledger account with the results of the physical inventory count. D) It is easier to detect shrinkage in a periodic inventory system than in a perpetual inventory system.
62)
In order to calculate shrinkage: A) both periodic and perpetual inventory systems are needed. B) a periodic inventory system is more effective. C) a perpetual inventory system requires an occasional count of actual inventory. D) it does not matter which system one uses.
63) Alvarado Company began the current month with inventory costing $36,000, then purchased inventory at a cost of $81,000. The perpetual inventory system indicates that inventory costing $72,000 was sold during the month for $90,000. If an inventory count shows that inventory costing $44,015 is actually on hand at month-end, what amount of shrinkage occurred during the month? A) $985 B) $45,000 C) $9,850 D) $44,005
64) Alvarado Company began the current month with inventory costing $18,000, then purchased inventory at a cost of $63,000. The perpetual inventory system indicates that inventory costing $54,000 was sold during the month for $72,000. If an inventory count shows that inventory costing $26,100 is actually on hand at month-end, what amount of shrinkage occurred during the month?
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A) $900 B) $9,000 C) $26,091 D) $27,000
65) Windsor, Incorporated uses a perpetual inventory system and reported $548,000 of inventory at the beginning of the month based on a physical count of inventory. During the month, the company bought $50,000 of inventory and sold inventory that had cost $35,250. At the end of the month, the physical count of inventory shows $560,000 on hand. How much shrinkage occurred during the month? A) $38,000 B) $2,750 C) $32,500 D) $12,000
66) Windsor, Incorporated uses a perpetual inventory system and reported $250,000 of inventory at the beginning of the month based on a physical count of inventory. During the month, the company bought $22,500 of inventory and sold inventory that had cost $15,000. At the end of the month, the physical count of inventory shows $255,000 on hand. How much shrinkage occurred during the month? A) $17,500 B) $12,500 C) $2,500 D) $5,000
67) Which of the following statements regarding periodic and perpetual inventory systems is correct?
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A) Perpetual inventory systems are inferior for determining optimal times to reorder inventory. B) Periodic inventory systems require a greater investment in technology. C) Perpetual inventory systems may assist in determining inventory lost due to shrinkage. D) Periodic inventory systems allow sales personnel to provide more immediate information regarding availability of inventory.
68)
Which of the following statements regarding inventory counts is not correct?
A) Companies need to perform a physical count of their inventory at least yearly regardless of which inventory system is being used. B) A perpetual inventory system does not require a physical count during the accounting period to determine cost of goods sold. C) In a perpetual inventory system, the inventory count is compared to the inventory account balance to reveal shrinkage. D) If a company uses a perpetual inventory system and the inventory count at the end of the accounting period is greater than the balance in the inventory ledger account, there must have been shrinkage.
69)
Companies using a perpetual inventory system: A) never physically count their inventory. B) must count their inventory at least once a week. C) still need to count their inventory at least once a year. D) never know the amount of inventory shrinkage.
70) Palm Industries had cost of goods sold of $26,000. If purchases were $28,000 and ending inventory was $8,500, Ace's beginning inventory must have been: A) $6,500. B) $10,500. C) $34,500. D) $19,500.
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71) Palm Industries had cost of goods sold of $40,000. If purchases were $46,000 and ending inventory was $12,000, Ace's beginning inventory must have been: A) $6,000. B) $18,000. C) $52,000. D) $34,000.
72)
Goods available for sale can: A) be sold and then become Cost of Goods Sold on the income statement. B) not be sold and thus are not reported as Cost of Goods Sold on the balance sheet. C) not be sold and thus are reported as Inventory on the income statement. D) be sold and thus reported as Cost of Goods Sold on the balance sheet.
73) Berkley Company had beginning inventory of $4,000 and purchases of $20,000. If half of its inventory was sold, Berkley's goods available for sale will: A) be split between cost of goods sold and ending inventory. B) appear only as an expense on the income statement. C) appear only as an expense on the balance sheet. D) appear only as an asset on the income statement.
74) Broadmor’s beginning inventory was $9,000. During the month, the company purchased an additional $45,000 of inventory and sold goods that cost $36,000. Ending inventory was: A) $9,000 B) $90,000 C) $18,000 D) $0
75)
To determine cost of goods sold for the period requires:
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A) subtracting ending inventory from the goods available for sale. B) adding ending inventory to the goods available for sale. C) subtracting beginning inventory from the goods available for sale. D) adding beginning inventory to the goods available for sale.
76) Which inventory system updates the inventory account only at the end of the accounting period? A) LIFO B) Perpetual C) FIFO D) Periodic
77) Which inventory system records a change in the Inventory account every time goods are bought, sold or returned? A) Periodic B) Perpetual C) FOB Shipping Point D) FOB Destination
78) Sheridan Company uses a perpetual inventory system. On May 1, beginning inventory was $350,000. During May, Sheridan purchased $122,500 of inventory and sold $248,500 of inventory. After the store closed on May 31, employees counted the inventory in the store and found that $210,000 of inventory remained unsold. What was Sheridan's inventory shrinkage? A) $14,000 B) $224,000 C) $262,500 D) $161,000
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79) After performing a physical count of inventory at the end of the accounting period, it was discovered that the amount of inventory on hand was less than the accounting records reported. The entry to record this inventory shrinkage includes: A) credit to Cost of Goods Sold. B) debit to Inventory. C) credit to Purchase Discounts. D) credit to Inventory.
80) Coranado Company purchases $70,000 of inventory from a wholesaler who allows 45 days to pay. In addition, the wholesaler offers a 3% discount if payment is made within 12 days. These payment terms would be expressed as: A) 0.03/12, n/45. B) n/45, 3/12. C) n/45, 0.03/12. D) 3/12, n/45.
81) Monte Vista uses the perpetual inventory system. At the beginning of the quarter, Monte Vista has $36,000 in inventory. During the quarter the company purchases $8,800 of new inventory from a vendor, returned $1,300 of inventory to the vendor, and took advantage of discounts from the vendor of $260. At the end of the quarter the balance in inventory is $29,500. What is the cost of goods sold? A) $13,740 B) $15,800 C) $6,500 D) $15,300
82) Monte Vista uses the perpetual inventory system. At the beginning of the quarter, Monte Vista has $60,000 in inventory. During the quarter the company purchases $15,800 of new inventory from a vendor, returned $1,400 of inventory to the vendor, and took advantage of discounts from the vendor of $400. At the end of the quarter the balance in inventory is $53,000. What is the cost of goods sold?
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A) $21,000 B) $22,800 C) $7,000 D) $23,800
83) When a perpetual system is used and transportation cost is incurred to obtain inventory, the transportation cost is: A) added to Inventory. B) reported as Selling, General & Administrative Expense on the income statement. C) reported as a contra-account that is subtracted from sales revenue when determining net sales. D) deducted from the Cost of Goods Sold when determining gross profit.
84) Assume that a perpetual inventory system is in use. Which of the following statements regarding the journal entries prepared is correct? A) "Freight-out" or delivery costs associated with sales should be included in Cost of Goods Sold. B) When a company receives payment from a customer for a sale, Cash is debited and Accounts Payable is credited. C) When a company grants an allowance to a customer, Inventory is credited when using a perpetual inventory system. D) When a customer returns inventory, the seller debits Sales Returns & Allowances under a perpetual inventory system.
85) Verde Company returned $500 of merchandise that was purchased on account. As a result of this transaction, assets will: A) decrease and liabilities will decrease. B) decrease and net income will decrease. C) stay the same and net income will decrease. D) stay the same and liabilities will decrease.
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86) If merchandise purchased on credit is returned to the seller for a full refund, what would be the effect on the accounts listed below? A) Increase Inventory; No effect on Cost of Goods Sold; Decrease Accounts Payable. B) Decrease Inventory; Decrease Cost of Goods Sold; No effect on Accounts Payable. C) No effect on Inventory; Decrease Cost of Goods Sold; Decrease Accounts Payable. D) Decrease Inventory; No effect on Cost of Goods Sold; Decrease Accounts Payable.
87) On April 6, Portland purchased $25,000 of inventory, terms 1/15, n/30. Portland uses a perpetual inventory system. The company paid for the purchase on April 26. The entry to record the payment on April 26 includes which of the following? A) A credit to Inventory for $250. B) A debit to Accounts Payable for $24,500. C) A credit to Accounts Payable for $25,000. D) A credit to Cash for $25,000.
88) Purple Corporation purchased $10,000 of merchandise on June 3, subject to the terms, 2/10, n/30. On June 9, it pays for all the merchandise purchased on June 3. Purple Corporation records discounts using the gross method in a perpetual inventory system. The entry on June 9 will reduce: A) Accounts Payable by $9,800. B) net income by $200. C) stockholders' equity by $200. D) Inventory by $200.
89) Moreland Moldings purchased goods on credit costing $85,000 with terms of 3/10, n/30. Payment is made to the seller 7 days after the purchase. How would the payment be recorded?
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A) Debit Inventory for $2,550, debit Cash for $82,450, and credit Accounts Payable for $85,000. B) Debit Accounts Payable for $85,000, credit Cash for $82,450, and credit Cost of Goods Sold for $2,550. C) Debit Accounts Payable for $85,000 credit Cash for $82,450, and credit Inventory for $2,550. D) Debit Accounts Payable and credit Cash for $85,000.
90) Willetta Company purchases inventory for $28,000 with terms 2/10, n/30. It then returns $3,800 of the inventory purchased to the supplier and also receives an allowance for defective inventory of $280. The company pays the amount due within the discount period. What is the amount of the discount that will be taken?(Round your answer to the nearest dollar amount.) A) $484 B) $554 C) $478 D) $380
91) Willetta Company purchases inventory for $10,000 with terms 3/10, n/30. It then returns $2,000 of the inventory purchased to the supplier and also receives an allowance for defective inventory of $100. The company pays the amount due within the discount period. What is the amount of the discount that will be taken? A) $300 B) $237 C) $240 D) $297
92) Polk Company uses a perpetual inventory system under the gross method and had the following transactions during November: November 6—Purchased $8,700 of inventory on account, terms 2/10, n/30. November 8—Returned $1,200 of defective units and received full credit. November 15—Paid the amount due. What journal entry will be recorded by Polk Company on November 6?
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A) Debit Inventory and credit Accounts Payable for $8,700. B) Debit Cost of Goods Sold and credit Accounts Payable for $8,526. C) Debit Purchases and credit Accounts Payable for $8,700. D) Debit Inventory and credit Accounts Payable for $8,526.
93) Polk Company uses a perpetual inventory system under the gross method and had the following transactions during November: November 6—Purchased $8,700 of inventory on account, terms 2/10, n/30. November 8—Returned $1,200 of defective units and received full credit. November 15—Paid the amount due. What journal entry will be recorded by Polk Company on November 8? A) Debit Inventory and credit Cost of Goods Sold for $1,200. B) Debit Accounts Payable and credit Inventory for $1,200. C) Debit Inventory and credit Accounts Payable for $1,200. D) Debit Accounts Payable and credit Purchase Returns for $1,200.
94) Polk Company uses a perpetual inventory system under the gross method and had the following transactions during November: November 6—Purchased $8,700 of inventory on account, terms 2/10, n/30. November 8—Returned $1,200 of defective units and received full credit. November 15—Paid the amount due. What journal entry will be recorded by Polk Company on November 15? A) Debit Accounts Payable and credit Cash for $7,350 B) Debit Accounts Payable for $7,500, credit Purchase Discount for $150, and credit Cash for $7,350 C) Debit Accounts Payable for $7,500, credit Inventory for $150, and credit Cash for $7,350 D) Debit Accounts Payable for $7,350, credit Inventory for $150, and credit Cash for $7,200
95)
A company using a perpetual inventory system made the following entry:
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Debit Accounts Payable
Credit
3,000
Inventory Cash
60 2,940
What transaction does this entry represent? A) A purchase of inventory at a discount. B) A return of inventory for credit. C) A sale of inventory on account. D) A payment within the discount period for inventory previously purchased on credit.
96) On July 1, Darin Company sold inventory costing $5,000 to Dee Company for $6,000, with terms of 3/10, n/30. Both companies use a perpetual inventory system. What journal entry will be recorded by Dee Company on July 1? A) Debit Purchases and credit Accounts Payable for $6,000. B) Debit Inventory and credit Accounts Receivable for $6,000. C) Debit Inventory and credit Accounts Payable for $6,000. D) Debit Cost of Goods Sold and credit Inventory for $4,500.
97) On July 1, Darin Company sold inventory costing $5,000 to Dee Company for $6,000, with terms of 3/10, n/30. Both companies use the perpetual inventory system. Dee Company pays the invoice on July 8 and takes the appropriate discount. What journal entry will be recorded by Dee Company on July 8? A) Debit Accounts Payable and credit Cash for $6,000 B) Debit Accounts Payable for $5,820, credit Inventory for $180, and credit Cash for $6,000 C) Debit Accounts Payable for $6,000, credit Cash for $5,820, and credit Inventory for $180 D) Debit Cost of Goods Sold and credit Cash for $5,000
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98) In a perpetual inventory system, paying transportation charges on goods purchased FOB shipping point would have which of the following effects? A) Decrease in Operating Expenses B) Increase in Selling, General, and Administrative Expenses C) Decrease in Cost of Goods Sold D) Increase in Inventory
99) The purchase of merchandise on account in a perpetual system is recorded with a debit to ________ and a credit to ________. A) Inventory; Accounts Payable B) Accounts Payable; Inventory C) Inventory; Accounts Receivable D) Accounts Receivable; Inventory
100) Glenrosa Company bought inventory FOB shipping point from Monterosa Company for $8,200 cash, including shipping charges. On December 31, the last day of the accounting year, the goods were on a truck owned by Common Carrier, Incorporated, and not expected to arrive until January 3. Which company should include these goods in its December 31 inventory? A) Glenrosa should include the $8,200 in its inventory. B) Glenrosa owns the inventory, but Common Carrier has possession of it. Each of them should include half of the inventory, $4,100 each. C) Common Carrier should include the $8,200 in its inventory, since the inventory is on its truck. D) Glenrosa owns the inventory, but Common Carrier has possession of it. Neither of them can include the $8,200 in its December 31 inventory.
101) Glenrosa Company bought inventory from Monterosa Company, FOB destination. On December 31, the last day of the accounting year, the goods were on a truck owned by Common Carrier, Incorporated, and not expected to arrive until January 2. Which company should include these goods in its December 31 inventory?
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A) Monterosa Company B) Glenrosa Company C) Common Carrier, Incorporated D) None of them should include these goods in inventory.
102) Alpha Company bought inventory from Omega Company, FOB shipping point. On December 31, the last day of the accounting year, the goods were on a truck owned by Theta, Incorporated, exactly halfway between Alpha and Omega. Which company should include these goods in its December 31 inventory? A) Omega Company B) Alpha Company C) Theta, Incorporated D) Alpha and Omega should each include half of the goods in inventory.
103)
Which of the following costs should be added to the buyer's Inventory account? A) Freight-in costs with terms FOB shipping point B) Freight-out costs with terms FOB destination C) Freight-in costs with terms FOB destination D) Freight-out costs with terms FOB shipping point
104)
Inventory cost consists of purchase price: A) plus freight-in. B) plus freight-out. C) less freight-in. D) less freight-out.
105) Assume that a company uses a perpetual inventory system and records the return of inventory previously purchased on account with a debit to Accounts Payable and a credit to Inventory. This entry is:
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A) incorrect and will cause assets to be overstated. B) incorrect and will cause assets to be understated. C) incorrect and will cause liabilities to be overstated. D) correct.
106) Harvard, Incorporated paid an invoice for $1,000, with discount terms of 2/7, n/30, within the discount period and will write a check in the amount of: A) $1,000. B) $980. C) $1,020. D) $998.
107) The journal entry to record taking a discount when paying for goods previously purchased on account includes a: A) credit to two asset accounts. B) credit to a liability account. C) debit to an asset account. D) debit to an expense account.
108) The journal entry to record the payment within the discount period for goods previously purchased on account causes: A) equity to decrease. B) total stockholders' equity to increase. C) total assets to decrease. D) total assets to increase.
109) The journal entry to record taking a discount when paying for goods previously purchased on account:
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A) decreases assets and liabilities. B) increases assets and stockholders' equity. C) decreases liabilities and increases in stockholders' equity. D) decreases assets and stockholders' equity.
110) A sale is recorded when goods leave the seller's shipping department when the merchandise is shipped: A) Goods in transit, shipped collect. B) FOB destination. C) FOB shipping point. D) Freight-out, seller shipped.
111)
When using a perpetual inventory system, the Cost of Goods Sold is recorded: A) each time a sale is made. B) at the end of each month. C) at the end of the accounting period. D) at the end of each day.
112)
In a perpetual inventory system, when inventory is sold on account:
A) Sales Revenue is increased and Accounts Receivable is decreased. B) Sales Revenue, Cost of Goods Sold, and Accounts Receivable are increased while Inventory is decreased. C) Sales Revenue and Accounts Receivable are increased, and Cost of Goods Sold and Inventory are decreased. D) Sales Revenue is increased and Inventory is decreased.
113) If merchandise costing $500 is sold on account for $620, how is this transaction recorded when using a perpetual inventory system?
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A) Debit Accounts Receivable and credit Sales Revenue for $620; debit Cost of Goods Sold and credit Inventory for $500. B) Debit Accounts Receivable and credit Sales Revenue for $620. C) Debit Cash and credit Sales Revenue for $620; debit Cost of Goods Sold and credit Inventory for $500. D) Debit Accounts Receivable and credit Sales Revenue for $620; debit Inventory and credit Cost of Goods Sold for $500.
114)
The five-step revenue model requires:
A) sales revenue to be reported at the amount the seller expects to be entitled to receive from customers. B) recording sales returns and allowances at the time of the sale. C) a sales return that results in issuing store credit to be accounted for with a credit to Cash. D) only actual sales allowances to be accounted for with an adjustment.
115) When a customer returns a defective product it had purchased for credit, the seller would record the transaction by: A) debiting Cash. B) debiting Sales Returns and Allowances. C) crediting Sales Returns and Allowances. D) debiting Cost of Goods Sold.
116) Holly uses a perpetual inventory system. Holly sells $3,500 of blue jeans for cash. The customer later brings $420 of blue jeans back to Holly because they are defective. Those blue jeans had a cost of $140. The customer agrees to keep the blue jeans and Holly agrees to a $140 allowance. Which of the following is one of the entries that Holly will use to record the return?
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A) Debit Cash for $140 and credit Inventory for $140. B) Debit Inventory for $140 and credit Cash for $140. C) Debit Cash for $140 and credit Sales Returns and Allowances for $140. D) Debit Sales Returns and Allowances for $140 and credit Cash for $140.
117) Cypress, Incorporated sold merchandise for cash to a customer. The customer returned some of that merchandise because it was not satisfactory. What journal entry will Cypress use to record the return? A) Debit Sales Returns and Allowances and credit Inventory. B) Debit Cash and credit Sales Returns and Allowances. C) Debit Cost of Goods Sold and credit Inventory. D) Debit Sales Returns and Allowances and credit Cash.
118) If merchandise costing $500 that was sold for cash at a price of $620 is returned by the customer, how would this transaction be recorded when using a perpetual inventory system? A) Debit Cash and credit Sales Returns and Allowances for $620. B) Debit Inventory and credit Cost of Goods Sold for $620. C) Debit Sales Returns and Allowances and credit Cash for $620; debit Cost of Goods Sold and credit Inventory for $500. D) Debit Sales Returns and Allowances and credit Cash for $620; debit Inventory and credit Cost of Goods Sold for $500.
119)
If a company returns an item to a supplier, the supplier will record the return as: A) a sales return. B) shrinkage. C) a sales discount. D) a purchase return.
120)
Which of the following statements is correct about accounting for expected sales returns?
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A) Expected returns are disclosed in the notes to the financial statements, but journal entries are not required. B) Since no inventory has yet been received, a liability called Inventory—Estimated Returns is credited for the cost of the expected returned items. C) Since no cash has yet been paid, a liability called Refund Liability is credited for the sales price of expected returns. D) Sales Returns and Allowances will be debited and Cost of Goods Sold will be credited for the sales price of expected returns.
121)
Which one of the following statements regarding sales discounts is correct?
A) If a company offers a discount to encourage prompt payment and the discount is taken, the discount reduces the amount of net sales. B) Credit terms of "2/10, n/30" means that if payment is made in two days, a 10% discount may be taken; if not paid within two days, the full invoice price will be due in thirty days. C) The terms "sales discounts" and "purchase discounts" are used interchangeably by a company. D) A sales discount is subtracted from Sales Revenue whereas a purchase discount is added to Cost of Goods Sold.
122) When goods are sold to a customer with credit terms of 2/15, n/30, the customer will receive a: A) 15% discount if they pay within 2 days. B) 2% discount if they pay 15% of the amount due within 30 days. C) 15% discount if they pay within 30 days. D) 2% discount if they pay within 15 days.
123) Devonshire, Incorporated sold merchandise inventory on account at a price of $15,000 with payment terms of 2/10, n/30. The merchandise cost Devonshire $10,000. If the customer paid for the merchandise 5 days after receiving the invoice, how much cash was collected by Devonshire?
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A) $10,000 B) $14,700 C) $9,800 D) $15,000
124) Devonshire, Incorporated sold merchandise inventory on account at a price of $16,000 with payment terms of 1/10, n/30. The merchandise cost Devonshire $11,000. If the customer paid for the merchandise 5 days after receiving the invoice, how much cash was collected by Devonshire? A) $11,000 B) $15,840 C) $10,890 D) $16,000
125) A company sells goods at a selling price of $20,000. The cost of the goods is $15,000. Under a perpetual inventory system, the journal entries prepared to record the credit sale will include a debit to: A) Inventory and a credit to Sales Revenue for $15,000. B) Cost of Goods Sold and a credit to Inventory for $15,000. C) Inventory and credit to Sales Revenue for $20,000. D) Cost of Goods Sold and a credit to Sales Revenue for $15,000.
126) Clarendon Corporation sold $1,000 of merchandise to a customer on terms of 1/10, n/30. Its customer paid within the discount period. As a result of its customer making the payment within the discount period, Clarendon's total assets will: A) increase by $990. B) increase by $1,000. C) decrease by $10. D) remain the same.
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127) Mitchell uses a perpetual inventory system. Mitchell sells a computer from inventory for $1,198 on credit. Mitchell originally bought the computer from IBM for $790. What journal entry (entries) will Mitchell prepare to record the sale? A) Debit Cash and credit Sales Revenue for $1,198; debit Cost of Goods Sold and credit Inventory for $790. B) Debit Accounts Receivable for $1,198, credit Inventory for $790, and credit Gross Profit for $408. C) Debit Accounts Receivable and credit Sales Revenue for $1,198; debit Cost of Goods Sold and credit Inventory for $790. D) Debit Inventory for $790, debit Cost of Goods Sold for $408, and credit Accounts Receivable for $1,198.
128) Missouri Company uses a perpetual inventory system. On October 1, Missouri Company sold inventory on account in the amount of $6,500 to Montebello Company, terms 1/10, n/30. The items cost Missouri $4,200. On October 4, Montebello returns some of the inventory. This inventory had a selling price of $500 and a cost of $200. On October 8, Montebello Company paid Missouri Company the amount due on that date. What journal entry (entries) will Missouri prepare on October 1 to record this sale? A) Debit Accounts Receivable and credit Sales Revenue for $6,500; debit Inventory and credit Cost of Goods Sold for $4,200. B) Debit Sales Revenue for $6,500 and credit Accounts Receivable and credit for $6,500; debit Cost of Goods Sold and credit Inventory for $4,200. C) Debit Cost of Goods Sold for $4,200, debit Gross Profit for $2,300, and credit Sales Revenue for $6,500. D) Debit Accounts Receivable and credit Sales Revenue for $6,500; debit Cost of Goods Sold and credit Inventory for $4,200.
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129) Missouri Company uses a perpetual inventory system. On October 1, Missouri Company sold inventory on account in the amount of $6,500 to Montebello Company, terms 1/10, n/30. The items cost Missouri $4,200. On October 4, Montebello returns some of the inventory. This inventory had a selling price of $500 and a cost of $200. On October 8, Montebello Company paid Missouri Company the amount due on that date. What journal entry (entries) will Missouri Company make on October 4 to record the sales return? A) Debit Sales Returns and Allowances and credit Accounts Receivable for $500; debit Inventory and credit Cost of Goods Sold for $200. B) Debit Sales Returns and Allowances for $200 and credit Accounts Receivable for $200. C) Debit Sales Returns and Allowances for $500 and credit Inventory for $500. D) Debit Accounts Receivable and credit Sales Revenue for $500; debit Cost of Goods Sold and credit Inventory for $200.
130) Missouri Company uses a perpetual inventory system. On October 1, Missouri Company sold inventory on account in the amount of $6,500 to Montebello Company, terms 1/10, n/30. The items cost Missouri $4,200. On October 4, Montebello returns some of the inventory. This inventory had a selling price of $500 and a cost of $200. On October 8, Montebello Company paid Missouri Company the amount due on that date. What is the amount of cash received by Missouri Company on October 8 for the receipt of payment from Montebello? A) $6,500 B) $5,940 C) $6,435 D) $6,300
131) Juan sells $75,000 of TVs to a customer. The credit terms state a 2% discount if paid in 7 days and a 1% discount if paid in 8 to14 days. The customer pays in 12 days. How much cash does Juan receive?
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A) $75,000 B) $73,500 C) $74,250 D) $1,500
132) If a company that uses a perpetual inventory system sold inventory which cost $1,000 for a selling price of $3,000, the accounting equation would show a net: A) increase in assets and net increase in stockholders' equity. B) increase in assets and net decrease in liabilities. C) decrease in assets and net increase in liabilities. D) decrease in assets and net decrease in stockholders' equity.
133) On June 15, Oakley Incorporated sells inventory on account to Sunglass Hut (SH) for $7,000, terms 2/10, n/30. On June 20, SH returns to Oakley inventory that SH had purchased for $1,500. On June 24, SH completely fulfills its obligation to Oakley by making a cash payment. What is the amount of cash paid by SH to Oakley? A) $5,360 B) $7,000 C) $5,390 D) $5,500
134) On June 15, Oakley Incorporated sells inventory on account to Sunglass Hut (SH) for $1,000, terms 2/10, n/30. On June 20, SH returns to Oakley inventory that SH had purchased for $300. On June 24, SH completely fulfills its obligation to Oakley by making a cash payment. What is the amount of cash paid by SH to Oakley? A) $680 B) $686 C) $700 D) $1,000
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135)
Which of the following is a correct statement? A) Sales discounts are offered to compensate customers for unsatisfactory merchandise. B) Sales discounts are offered to encourage prompt payment by customers. C) Sales discounts may result in creating a liability Deferred Revenue. D) Sales discounts may result in creating an account Inventory—Estimated Returns.
136) When a company collects from a customer who pays within the discount period, the discount: A) is a reduction in the initial sales revenue. B) is an addition to the cost of goods sold. C) is a reduction to the inventory account. D) is an addition to the sales returns and allowances account.
137) Medlock Company sold inventory on credit for $3,000, terms 2/10, n/30. The cost of the merchandise to Medlock was $2,400. How much cash will Medlock receive if payment is received within the discount period? A) $3,000 B) $2,352 C) $2,400 D) $2,940
138) On March 12, Pierson Company sold goods that cost $3,500 to Colonade Company for $6,000 on credit. Terms of the sale were 1/10, n/30.Colonade paid the balance due on March 21. What amount of cash did Pierson receive? A) $5,940 B) $6,000 C) $3,500 D) $3,465
139)
Sales returns and allowances:
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A) are not included on most externally reported income statements. B) are offered as a way to encourage customers to make prompt payment. C) would include terms “2/15, n/60” which allows the customer to take a 15% discount if paid in 2 days. D) are included on external financial statements to allow investors to compare the company’s results with industry standards.
140) Neakanie Industries sells specialized mountain bikes. Each specialized bike purchased includes free maintenance service for 12 months. The price of the specialized bike is $700. When sold separately, a maintenance contract is $200, and a comparable but non-specialized bike is $600. Which of the following is correct? A) Neakanie fulfills its performance obligation at the time of delivery of the bike. B) Neakanie will recognize $700 of revenue at the end of 12 months. C) Neakanie must allocate the purchase price based on the stand-alone selling prices of the bike and the service. D) Neakanie will recognize $350 of revenue at the date of sale and the remaining $350 at the end of 12 months.
141) Neakanie Industries sells specialized mountain bikes. Each specialized bike purchased includes free maintenance service for 12 months. The price of the specialized bike is $1,050. When sold separately, a maintenance contract is $500, and a comparable but non-specialized bike is $900. What amount of revenue will Neakanie recognize at the date of sale for each bike? A) $400. B) $900. C) $675. D) $2,100.
142) Neakanie Industries sells specialized mountain bikes. Each specialized bike purchased includes free maintenance service for 12 months. The price of the specialized bike is $700. When sold separately, a maintenance contract is $200, and a comparable but non-specialized bike is $600. What amount of revenue will Neakanie recognize at the date of sale for each bike?
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A) $400. B) $600. C) $525. D) $700.
143) Neakanie Industries sells specialized mountain bikes. Each specialized bike purchased includes free maintenance service for 12 months. The price of the specialized bike is $700. When sold separately, a maintenance contract is $200, and a comparable but non-specialized bike is $600. If Neakanie sold 3 bikes on December 1, how much total revenue would the company recognize on December 31? A) $2,937.50. B) $2,250.00. C) $1,618.75. D) $250.00.
144) Inventory costing $3,800 is sold for $4,600 with terms 2/10, n/30. If the buyer pays within the discount period, what amount will be reported on the income statement as net sales? A) $4,600 B) $800 C) $4,030 D) $4,508
145) Inventory costing $3,000 is sold for $4,000 with terms 2/10, n/30. If the buyer pays within the discount period, what amount will be reported on the income statement as net sales? A) $3,920 B) $4,000 C) $1,000 D) $3,200
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146) Which of the following line items below is present in both the multistep income statement and an income statement in which expenses are simply subtracted from revenues to arrive at net income? A) Income before income tax expense B) Income from operations C) Net income D) Gross profit
147)
Merchandisers record revenue when they:
A) fulfill their performance obligations by transferring control of the goods to customers. B) deliver the goods and collect the cash from their customers. C) receive cash in advance from their customers. D) receive the order to deliver goods to customers.
148) Eugene Company has inventory it purchased for $6,000. It sells the inventory to a customer for $10,000, including installation. Installation sold separately costs $1,000 and the inventory sold separately costs $10,000. What amount of Service Revenue is recognized by Eugene for the installation once it has been completed? A) $909. B) $1,000. C) $10,000. D) $0, all the revenue is recorded as Sales Revenue since the installation was included in the contract.
149) Eugene Company has inventory it purchased for $6,000. It sells the inventory to a customer for $10,000, including installation. Installation sold separately costs $1,000 and the inventory sold separately costs $10,000. What amount of Sales Revenue is recognized by Eugene when delivery of the inventory has been made to the customer, but the installation has not been completed?
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A) $10,000 B) $9,091 C) $9,000 D) $909
150)
Which of the following would not be considered a bundled product offering? A) Sale of a $50 pair of jeans B) $5 meal deal at Happy Jack that includes two menu meals C) $200 flight on an airline providing two free checked bags D) $30,000 new car with scheduled maintenance included
151)
Sales Revenue is a(n) ________ account and ________ is an expense account. A) asset; Sales Discounts B) revenue; Sales Returns and Allowances C) revenue; Cost of Goods Sold D) liability; Gross Profit
152)
Sales discounts should appear in the financial statements as a(n): A) addition to inventory. B) addition to sales. C) operating expense. D) deduction from sales.
153) XYZ Company sold merchandise for $5,000, with payment terms of 2/10, n/30. If the customer pays within the discount period and takes the discount, XYZ will receive:
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A) $4,900. B) $5,000. C) $3,500. D) $100.
154)
Sales Discounts is a ________ account with a normal ________ balance. A) contra-asset; debit B) contra-revenue; credit C) contra-asset; credit D) contra-revenue; debit
155)
Sales Returns and Allowances are reported on the: A) income statement only. B) balance sheet only. C) both the income statement and the balance sheet. D) statement of cash flows only.
156)
Multistep income statements: A) are required for merchandising companies. B) contain more detail than just listing revenues and expenses. C) are required when the perpetual inventory method is used. D) classify Cost of Goods Sold as a selling expense.
157) Which of the following is the most common wording for a measure of the company's income from regular operating activities, before considering the effects of interest, income taxes, and any nonrecurring items?
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A) Income from operations B) Income from core operations C) Income from peripheral operations D) Income before interest, taxes, and nonrecurring items
158) Assuming the perpetual inventory system is used, which of the following statements about the multistep income statement is correct? A) Sales discounts affect the calculation of Gross Profit. B) Contra-accounts affect the Cost of Goods Sold. C) Contra-revenue accounts increase Other Expenses. D) Sales discounts are a Selling, General, and Administrative Expense.
159) When inventory is sold, the cost of the inventory is removed from the Inventory account and reported on a multistep the income statement as: A) inventory expense. B) cost of goods sold. C) selling, general, and administrative expenses. D) operating expenses.
160)
Multiple-step income statements: A) separate core results from peripheral results. B) includes one subtotal for revenues and one for expenses. C) exclude certain significant items from net income. D) only report core results.
161)
Which of the following statements about a multistep income statement is correct?
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A) It groups all revenues together. B) It reports a different amount of net income than a single-step income statement. C) It includes expenses that would not appear on a single-step income statement. D) A key measure available on a multistep income statement is the amount of profit earned over the cost of goods sold.
162)
Which of the following would generally be considered an operating revenue or expense? A) Income from renting out extra warehouse space B) Interest on a note payable C) Dividends earned on an investment is another company's stock D) Depreciation
163)
Which of the following statements about a multistep income statement is not correct?
A) Income before income taxes = Net income + Income tax expense B) Depreciation is subtracted in the calculation of core operating results. C) Income from operations = Income before income tax expense + Other revenues (expenses), net D) Income from operations = Net income + Income tax expense− Other revenues (expenses), net
164)
Which of the following statements about the multistep income statement is not correct?
A) The multistep income statement provides a subtotal of Income before Income Tax Expense. B) Income from Operations is the amount of revenues minus expenses from the company's main business activities. C) Any revenues and/or expenses from activities other than the company's main business are peripheral results and are included in Income from Operations. D) Income before Income Tax Expense and Income from Operations are different if there are any peripheral revenues and expenses.
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165) McQueen, Incorporated buys premium ice cream at a cost of $6.00 a gallon and sells it for $13.00 a gallon. Selling, general, and administrative expenses are $2.55 per gallon. Which of the following statements is correct? A) The difference between the selling price and the cost is recorded in the Net Profit account. B) The difference between the selling price and the cost is recorded in the gross profit account. C) Gross profit per gallon is $4.45. D) Gross profit per gallon is $7.00.
166) McQueen, Incorporated buys premium ice cream at a cost of $3.00 a gallon and sells it for $8 a gallon. Selling, general, and administrative expenses are $1.50 per gallon. Which of the following statements is correct? A) Gross profit per gallon is $5.00. B) Gross profit per gallon is $3.50. C) The difference between the selling price and the cost is recorded in the gross profit account. D) The difference between the selling price and the cost is recorded in the Net Profit account.
167) Sales revenue equals $367,810, sales returns and allowances are $10,000, and sales discounts total $14,180. The cost of goods sold is $216,490, operating expenses are $28,500, and the company incurs $31,640 of income tax expense. Which of the following statements is correct? A) Net sales equal $343,630 and gross profit is $98,640. B) Net sales equal $67,000 and gross profit is $98,640. C) Net sales equal $343,630 and gross profit is $127,140. D) Net sales equal $367,810 and gross profit is $67,000.
168)
The gross profit equation is:
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A) (Sales Revenue + Sales Returns & Allowances)− Cost of Goods Sold. B) (Sales + Sales Discounts)− Cost of Goods Sold. C) (Sales Revenue − Sales Returns & Allowances− Sales Discounts) − Cost of Goods Sold. D) (Sales Revenue− Sales Returns & Allowances− Sales Discounts) + Cost of Goods Sold.
169) To make it easier for financial statement users to compare account balances from one period to the next, companies report: A) comprehensive financial statements. B) comparative financial statements. C) consistent financial statements. D) consolidated financial statements.
170)
The gross profit percentage is an indication of how: A) well management is controlling expenses. B) much profit is earned as a percentage of each dollar of sales. C) much cash is generated per dollar of sales. D) efficient management is in utilizing assets.
171)
The accounting records of the Meadowbrook Company reported the following:
Cost of Goods Sold Income Tax Interest and Other Expenses Sales Discounts Sales Revenue Selling and Administrative Expense
$ 140,000 10,000 14,000 2,000 200,000 20,000
What is the gross profit?
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A) $36,000. B) $38,000. C) $58,000. D) $60,000.
172) The gross profit percentage for Elk Roofing Products is 20%. If the company has Net Sales of $850,000 for the year, what was the amount of Cost of Goods Sold? A) $750,000 B) $170,000 C) $680,000 D) $250,000
173)
A company reported the following:
Cost of Goods Sold General, Selling, and Administrative Expenses Income Tax Expense Inventory Net Income Sales Revenue Sales Discounts Sales Returns & Allowances
$202,800 53,080 3,880 15,500 25,640 291,000 3,000 2,600
What is the amount of gross profit? A) $86,000 B) $65,700 C) $71,150 D) $82,600
174)
A company reported the following:
Cost of Goods Sold General, Selling, and Administrative Expenses Income Tax Expense Inventory Net Income
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$ 200,000 52,800 3,600 12,000 22,560 46
Sales Revenue Sales Discounts Sales Returns & Allowances
284,000 2,720 2,320
What is the amount of gross profit? A) $75,360 B) $78,960 C) $84,000 D) $26,160
175)
A company reported the following:
Cost of Goods Sold General, Selling, and Administrative Expenses Income Tax Expense Inventory Net Income Sales Revenue Sales Discounts Sales Returns & Allowances
$202,000 53,000 3,800 32,000 24,760 289,000 2,920 2,520
What is the amount of income before income taxes? A) $28,560 B) $120,000 C) $94,450 D) $99,500
176)
A company reported the following:
Cost of Goods Sold General, Selling, and Administrative Expenses Income Tax Expense Inventory Net Income Sales Revenue Sales Discounts Sales Returns & Allowances
$ 200,000 52,800 3,600 12,000 22,560 284,000 2,720 2,320
What is the amount of income before income taxes?
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A) $7,600 B) $26,160 C) $10,400 D) $14,000
177)
Which of the following statements about gross profit is correct?
A) Gross profit = Net sales- Cost of goods sold. B) Gross profit is recorded by a credit to the Gross Profit account. C) A company sells $10,000 of goods. If the gross profit percentage is 32%, net income would be $3,200. D) If net sales are $100 and cost of goods sold is $50 then the gross profit percentage is 100%.
178)
Which of the following statements regarding gross profit percentage is not correct?
A) It is possible for a company to increase both its gross profit percentage and net income without increasing the dollar amount of sales. B) A decreasing gross profit percentage means that the company is selling products for a greater markup over its cost. C) The gross profit percentage measures the percentage of profit earned on each dollar of sales. D) Gross profit percentages vary across industries.
179) A company has net sales of $643,100 and cost of goods sold of $501,618. The company's gross profit percentage is: A) 22%. B) 78%. C) 4.54%. D) 0.49%.
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180) A company has net sales of $612,850 and cost of goods sold of $441,252. The company's gross profit percentage is: A) 72%. B) 0.28%. C) 38.9%. D) 28%.
181) A company has gross profit of $60,400 and a gross profit percentage of 20%. What were the company's net sales? A) $302,000. B) $12,080. C) $72,480. D) $586,510.
182) A company has gross profit of $58,300 and a gross profit percentage of 25%. What were the company's net sales? A) $233,200. B) $14,575. C) $72,825. D) $711,260.
183) A company reported a gross profit percentage of 34% with net sales of $2,720,000. What is the amount of cost of goods sold? A) $1,795,200 B) $946,538 C) $924,800 D) $2,698,263
184) A company reported a gross profit percentage of 20% with net sales of $347,800. What is the amount of cost of goods sold? Version 1
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A) $69,560 B) $278,240 C) $260,850 D) $86,950
185) A retail store that increases all of its product prices by 25% will experience a(n) ________ in its overall gross profit percentage but may experience a(n) ________ in sales volume. A) increase, increase B) decrease, decrease C) decrease, increase D) increase, decrease
186)
Gross profit equals: A) Net sales minus cost of goods sold. B) Revenues minus expenses. C) Revenues minus inventory. D) Beginning inventory plus purchases minus ending inventory.
187)
Under the gross method, purchase and sales discounts are recorded: A) when the cash is paid or received. B) at the time of initial purchase or sale. C) as an increase to the purchase or sales price. D) as an increase to Cost of Goods Sold or to Inventory.
188)
Assuming that all else is equal, which of the following companies is most profitable?
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A) A company with low gross profit percentage and low sales volume B) A company with high gross profit percentage and high sales volume C) A company with low gross profit percentage and high cost of goods sold D) A company with low sales volume and high cost of goods sold
189) Hazelwood Company had beginning inventory of $54,000. During the period the company purchased $109,800 of merchandise. At the end of the period, Hazelwood’s inventory was $39,600. If the gross profit percentage was 40%, what was Hazelwood’s sales revenue? A) $82,800 B) $32,400 C) $135,000 D) $207,000
190) The gross profit percentage is the ratio to watch if you are worried about increased competition. If the company lowers its prices to retain market share without lowering its cost of goods sold, its gross profit percentage will: A) increase. B) decrease. C) stay the same. D) equal zero.
191) Belmont Industries announces that its gross profit rose 5% but its income before income taxes fell. Which of the following statements is correct? A) This is not possible given that net income is determined by gross profit. B) This must mean that selling, general, and administrative expenses increased by more than 5%. C) This must mean that sales revenue rose more than expenses. D) This must mean that cost of goods sold decreased.
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192) If a company achieves a small increase in its gross profit percentage from one year to the next, the company: A) will have a higher net income. B) must have had a sales volume increase. C) must have decreased its operating expenses. D) might be obtaining products at a lower cost per unit.
193) Over a two-year period, Orchid Company’s gross profit percentage went from 70.4% to 69.7%. Which of the following could not have been the cause of this change? A) Reduced selling prices B) Rising product cost as a percentage of sales C) Increased competition from a competitor D) An increase in selling price
194) Hayward Company reported net sales revenues of $22.0 billion and cost of goods sold of $8.6 billion. Its gross profit percentage was: A) 39.1%. B) 49.3%. C) 60.9%. D) 9.0%.
195) Hayward Company reported net sales revenue of $23.76 billion and cost of goods sold of $7.2 billion. Its gross profit percentage was: A) 30.3%. B) 69.7%. C) 3.3%. D) 2.3%.
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196) Pixie Products reported net sales revenue of $18.8 billion and cost of goods sold of $5.6 billion, while Stardust Incorporated reported net sales revenue of $22.3 billion and cost of goods sold of $9.3 billion. Which of the following statements is correct? A) While Stardust Incorporated generated more revenue than Pixie Incorporated, Stardust Incorporated generated a lower gross profit percentage. B) Pixie Incorporated generated a lower gross profit percentage because its sales revenue was lower. C) Stardust Incorporated did a better job of controlling product costs as a percentage of sales than did Pixie Incorporated. D) The selling price of the products sold by Pixie Incorporated must have been higher than the price of products sold by Stardust Incorporated.
197) Lansing Company has a gross profit percentage of 61%, while Arbor Company has a gross profit percentage of 37%. Which of the following statements is correct? A) Lansing Company will report a higher net income than Arbor Company. B) Arbor Company must have a greater sales volume than Lansing Company. C) Lansing Company is more efficient at controlling selling, general, and administrative expenses than Arbor Company. D) Lansing Company and Arbor Company both earn enough on each sale to make a contribution to their operating costs.
198)
Which of the following statements about gross profit percentages is correct?
A) Because gross profit percentages are so consistent from period to period, they are not very useful for analyzing one company over time. B) Because gross profit percentages are so variable across industries, they are most useful in comparing companies from different industries. C) Because gross profit percentages are so variable across industries, they are more useful in analyzing one company over time. D) Because gross profit percentages are so consistent across industries, they are most useful in comparing companies from different industries.
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199) The following is a listing of some of the balance sheet accounts and all of the income statement accounts for Northview Company as they appear on the company’s adjusted trial balance. Accounts Payable Accounts Receivable Inventory Advertising Expense Cost of Goods Sold Delivery Expense Income Tax Expense Insurance Expense Rent Expense Sales Revenue Sales Discounts Sales Returns & Allowances
$11,000 12,000 20,200 12,500 93,000 6,100 2,250 1,000 12,400 170,000 10,900 20,500
Net sales would be: A) $138,600. B) $170,000. C) $31,400. D) $132,500.
200) The following is a listing of some of the balance sheet accounts and all of the income statement accounts for Northview Company as they appear on the company’s adjusted trial balance. Accounts Payable Accounts Receivable Inventory Advertising Expense Cost of Goods Sold Delivery Expense Income Tax Expense Insurance Expense Rent Expense Sales Revenue Sales Discounts Sales Returns & Allowances
$ 30,000 33,000 60,000 36,000 267,000 18,000 6,000 3,000 36,000 480,000 33,000 57,000
Net sales would be:
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A) $90,000. B) $372,000. C) $390,000. D) $480,000.
201) The following is a listing of some of the balance sheet accounts and all of the income statement accounts for Northview Company as they appear on the company’s adjusted trial balance. Accounts Payable Accounts Receivable Inventory Advertising Expense Cost of Goods Sold Delivery Expense Income Tax Expense Insurance Expense Rent Expense Sales Revenue Sales Discounts Sales Returns & Allowances
$11,000 21,000 22,000 17,000 129,000 7,000 3,900 1,000 16,000 260,000 10,000 34,000
Gross profit would be: A) $83,900. B) $80,000. C) $120,000. D) $87,000.
202) The following is a listing of some of the balance sheet accounts and all of the income statement accounts for Northview Company as they appear on the company’s adjusted trial balance. Accounts Payable Accounts Receivable Inventory Advertising Expense Cost of Goods Sold Delivery Expense
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$ 30,000 33,000 60,000 36,000 267,000 18,000
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Income Tax Expense Insurance Expense Rent Expense Sales Revenue Sales Discounts Sales Returns & Allowances
6,000 3,000 36,000 480,000 33,000 57,000
Gross profit would be: A) $105,000. B) $111,000. C) $123,000. D) $213,000.
203) The following is a listing of some of the balance sheet accounts and all of the income statement accounts for Northview Company as they appear on the company’s adjusted trial balance. Accounts Payable Accounts Receivable Inventory Advertising Expense Cost of Goods Sold Delivery Expense Income Tax Expense Insurance Expense Rent Expense Sales Revenue Sales Discounts Sales Returns & Allowances
$12,000 13,000 20,400 13,000 97,000 6,200 3,700 1,000 12,800 180,000 10,800 22,000
Income from Operations would be: A) $17,200. B) $20,900. C) $11,000. D) $18,200.
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204) The following is a listing of some of the balance sheet accounts and all of the income statement accounts for Northview Company as they appear on the company’s adjusted trial balance. Accounts Payable Accounts Receivable Inventory Advertising Expense Cost of Goods Sold Delivery Expense Income Tax Expense Insurance Expense Rent Expense Sales Revenue Sales Discounts Sales Returns & Allowances
$ 30,000 33,000 60,000 36,000 267,000 18,000 6,000 3,000 36,000 480,000 33,000 57,000
Income from operations would be: A) $18,000. B) $30,000. C) $33,000. D) $36,000.
205) The following is a listing of some of the balance sheet accounts and all of the income statement accounts for Northview Company as they appear on the company’s adjusted trial balance. Accounts Payable Accounts Receivable Inventory Advertising Expense Cost of Goods Sold Delivery Expense Income Tax Expense Insurance Expense Rent Expense Sales Revenue Sales Discounts Sales Returns & Allowances
$17,000 29,000 23,600 21,000 161,000 7,800 2,250 1,000 19,200 340,000 9,200 46,000
Net income would be:
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A) $73,800. B) $74,800. C) $72,550. D) $83,550.
206) The following is a listing of some of the balance sheet accounts and all of the income statement accounts for Northview Company as they appear on the company’s adjusted trial balance. Accounts Payable Accounts Receivable Inventory Advertising Expense Cost of Goods Sold Delivery Expense Income Tax Expense Insurance Expense Rent Expense Sales Revenue Sales Discounts Sales Returns & Allowances
$ 30,000 33,000 60,000 36,000 267,000 18,000 6,000 3,000 36,000 480,000 33,000 57,000
Net income would be: A) $24,000. B) $27,000. C) $30,000. D) $42,000.
207) The following is a listing of some of the balance sheet accounts and all of the income statement accounts for Northview Company as they appear on the company’s adjusted trial balance. Accounts Payable Accounts Receivable Inventory Advertising Expense Cost of Goods Sold Delivery Expense
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$13,000 14,000 20,600 13,500 101,000 6,300
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Income Tax Expense Insurance Expense Rent Expense Sales Revenue Sales Discounts Sales Returns & Allowances
2,800 1,000 13,200 190,000 10,700 23,500
The gross profit percentage would be closest to: A) 29.3%. B) 63.0%. C) 75.9%. D) 35.2%.
208) The following is a listing of some of the balance sheet accounts and all of the income statement accounts for Northview Company as they appear on the company’s adjusted trial balance. Accounts Payable Accounts Receivable Inventory Advertising Expense Cost of Goods Sold Delivery Expense Income Tax Expense Insurance Expense Rent Expense Sales Revenue Sales Discounts Sales Returns & Allowances
$ 30,000 33,000 60,000 36,000 267,000 18,000 6,000 3,000 36,000 480,000 33,000 57,000
The gross profit percentage would be closest to: A) 25.6%. B) 31.5%. C) 55.6%. D) 68.5%.
209) An account used in the periodic inventory system that is not used in the perpetual inventory system is:
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A) Inventory B) Sales Revenue C) Sales Returns & Allowances D) Purchases
210) On October 1, Robertson Company sold inventory in the amount of $5,800 to Alberta, Incorporated with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Robertson uses a periodic inventory system. The journal entry (or entries) prepared by Robertson on October 1 is(are): A) Debit Sales Revenue and credit Accounts Receivable for $5,800. B) Debit Sales Revenue and credit Accounts Receivable for $5,800; debit Cost of Goods Sold and credit Inventory for $4,000. C) Debit Accounts Receivable and credit Sales Revenue for $5,800. D) Debit Accounts Receivable and credit Sales Revenue for $5,800; Debit Cost of Goods Sold and credit Inventory for $4,000.
211) On October 1, Robertson Company sold inventory in the amount of $5,800 to Alberta, Incorporated with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Robertson uses a periodic inventory system. Alberta pays the invoice on October 8 and takes the appropriate discount. What journal entry will be recorded by Robertson on October 8? A) Debit Cash and credit Accounts Receivable for $5,800. B) Debit Cash and credit Accounts Receivable for $4,000. C) Debit Cash for $3,920, debit Sales Discounts for $80, and credit Accounts Receivable for $4,000. D) Debit Cash for $5,684, debit Sales Discounts for $116, and credit Accounts Receivable for $5,800.
212) On October 1, Robertson Company sold inventory in the amount of $5,800 to Alberta, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Robertson uses the periodic inventory system. On October 4, Alberta returns some of the inventory. The selling price of the inventory is $500, and the cost of the inventory returned is $350. What journal entry (entries) will be recorded by Robertson October 4?
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A) Debit Sales Returns & Allowances and credit Accounts Receivable for $500; debit Inventory and credit Cost of Goods Sold for $350 B) Debit Sales Returns & Allowances and credit Accounts Receivable for $500 C) Debit Accounts Receivable and credit Sales Returns & Allowances for $500 D) Debit Accounts Receivable and credit Sales Returns & Allowances for $500; debit Cost of Goods Sold and credit Inventory for $350
213) On July 1, Ruth Company sold inventory costing $9,000 to Diana, Incorporated for $12,000, terms 2/10, n/30. Both companies use the net method to account for sales discounts. If Diana pays within the discount period, what journal entry will be recorded by Ruth Company when payment is received? A) Debit Cash for $11,760 and credit Accounts Receivable for $11,760. B) Debit Cash for $11,760, debit Sales Discounts for $240 and credit Accounts Receivable for $12,000. C) Debit Cash for $12,000 and credit Accounts Receivable for $12,000. D) Debit Accounts Payable for $12,000, credit Cash for $11,760 and credit Inventory for $240.
214)
Which of the following statements is incorrect regarding sales discounts?
A) If a customer pays within the discount period, the selling price of the merchandise is reduced. B) Sales Discounts is a contra-revenue account and is subtracted from Sales Revenue. C) The net and gross methods have identical journal entries, just made at different points in time. D) If a company takes advantage of sales discounts on its purchases, the cost of the inventory is ultimately reduced as a result of the discount.
215) FAD Company uses a periodic inventory system and its inventory records for the period contain the following information: Beginning inventory (80 units @ $51/unit) Purchases (155 units @ $51/unit) Ending inventory (130 units @ $51/unit)
$4,080 7,905 6,630
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A) $5,355 B) $18,615 C) $11,985 D) $14,535
216) FAD Company uses a periodic inventory system and its inventory records for the period contain the following information: Beginning inventory (75 units @ $50/unit) Purchases (150 units @ $50/unit) Ending inventory (125 units @ $50/unit)
$ 3,750 7,500 6,250
What is the amount of cost of goods available for sale? A) $11,250 B) $17,500 C) $5,000 D) $13,750
217) FAD Company uses a periodic inventory system and its inventory records for the period contain the following information: Beginning inventory (75 units @ $50/unit) Purchases (150 units @ $50/unit) Ending inventory (125 units @ $50/unit)
$ 3,750 7,500 6,250
The journal entry necessary at the end of the period to transfer beginning inventory and net purchases to cost of goods sold will include which of the following? A) Credit Inventory for $6,250. B) Debit Purchases for $11,250. C) Debit Inventory for $6,250. D) Debit Cost of Goods Sold for $11,250.
218) FAD Company uses a periodic inventory system and its inventory records for the period contain the following information: Beginning inventory (75 units @ $50/unit) Purchases (150 units @ $50/unit)
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Ending inventory (125 units @ $50/unit)
6,250
What is the amount of cost of goods sold that would be recorded as part of the end-of-period adjustment? A) $11,250 B) $7,500 C) $5,000 D) $6,250
219) When goods and services are sold together for a single “bundled” price, the price is allocated to the goods and services based on their: A) book value. B) stand-alone selling prices. C) bundled price divided by the number of performance obligations. D) residual value.
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Answer Key Test name: Chap 06_7e 1) FALSE Some companies may operate as a service, merchandising and/or manufacturing company. 2) FALSE A retailer sells products to the final consumer. 3) TRUE A merchandising operating cycle begins with the acquisition of inventory for resale and ends when the cash from the sale is collected. 4) FALSE Any discrepancy that exists between inventory recorded in the accounting records and inventory counted is known as shrinkage. 5) TRUE An annual physical inventory count is required in a periodic system to adjust the inventory account and determine the cost of goods sold. Annual physical inventory counts are performed when a perpetual system is in use to ensure the accuracy of the accounting records and estimate shrinkage. 6) TRUE FOB shipping point means that title transfers when the goods leave the seller's place of business. 7) TRUE If the sales discount of 2% is taken by payment within 10 days, $1,960 is due [$2,000− ($2,000× 0.02)]; if not, the invoice amount of $2,000 is due in 30 days. 8) FALSE Version 1
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Sales discounts are deductions from the selling price, which are offered to customers to encourage them to make payments promptly. 9) TRUE In a periodic system, only one journal entry is required when inventory is sold. However, in a perpetual system, two journal entries are made when inventory is sold. 10) TRUE Companies make a month-end adjustment for expected returns by increasing the Refund Liability account and increasing the Inventory– Estimated Returns account. 11) FALSE Externally reported income statements typically begin with net sales. Sales revenue, sales returns and allowances, and sales discounts would be disclosed on internal reports. 12) FALSE Gross profit is a subtotal on the multistep income statement. It is not the name of an account. 13) FALSE Gross profit percentage = [(Net sales− Cost of goods sold) ÷ Net sales] × 100 14) TRUE The perpetual inventory system uses the Inventory account to record all inventory-related transactions. 15) FALSE The periodic inventory system uses the Purchases account to keep track of the amount of inventory that is purchased. 16) TRUE The periodic inventory system uses the Purchases account to keep track of the amount of inventory that is purchased. Version 1
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17) TRUE When a Perpetual inventory system is in use, Inventory records are updated "perpetually," every time inventory is bought, sold, or returned. 18) FALSE Since a periodic inventory system doesn't provide an up-to-date record of inventory on hand, it's almost impossible to determine shrinkage. 19) TRUE Unlike a perpetual inventory system, a periodic system does not track the cost of goods sold during the accounting period. Purchases of inventory are recorded in the Purchases account. Then, an entry is made at year-end to adjust the Inventory account to reflect the quantity and cost of the inventory that is on hand. 20) TRUE When goods and services are sold together for a single “bundled” price, the price is allocated to the goods and services based on their standalone selling prices. 21) FALSE When goods and services are sold together for a single “bundled” price, the price is allocated to the goods and services based on their standalone selling prices. Revenue is then recognized when (as) each performance obligation is satisfied by delivering goods (providing services), not when the cash is received. 22) C A manufacturer processes raw materials into a finished product to sell to customers. 23) A BetterBuy sells products to the final consumer at the retail level. 24) C Version 1
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Merchandising companies, such as The Gap, are called retailers when they sell directly to individual consumers and wholesalers when they sell their inventory to retail businesses for resale to consumers. General Motors and Proctor and Gamble are manufacturers and H&R Block is a service provider. 25) B Merchandising companies, such as The Gap, are called retailers when they sell directly to individual consumers and wholesalers when they sell their inventory to retail businesses for resale to consumers. General Motors and Proctor and Gamble are manufacturers and H&R Block is a service provider. 26) B Regardless of the type of business, all businesses incur operating expenses. 27) D Manufacturers process raw materials into a finished product. 28) A This is a wholesaler because the company does not sell products to the final consumer. 29) C All types of businesses have operating activities that involve cash receipts. 30) A The operating cycle is a series of activities that a company undertakes to generate revenues and, ultimately, cash. 31) A
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Merchandising companies differ in that their cycle begins with buying products, which are sold to customers, which leads to collecting cash that can be used to pay operating expenses and buy more inventory. Merchandising companies are called retailers when they sell directly to individual consumers and wholesalers when they sell their inventory to retail businesses for resale to consumers. Manufacturers make products rather than buy the products they sell. Service companies sell services to customers. 32) C Service companies sell services to customers. Merchandising companies differ in that their cycle begins with buying products, which are sold to customers, which leads to collecting cash that can be used to pay operating expenses and buy more inventory. Merchandisers report Inventory on their balance sheets. 33) D Merchandisers report an expense called Cost of Goods Sold, which represents the total cost of all goods sold to customers during the period. Service companies do not incur this expense because they do not sell goods. 34) A Wholesalers sell their inventory to retail businesses who then sell it to consumers. 35) A A merchandiser reports inventory as a current asset on its balance sheet because it expects to sell the inventory within the next twelve months or their operating cycle, whichever is shorter. 36) A Inventory consists of goods acquired for resale to customers. 37) A
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Inventory reports the merchandiser's total cost of acquiring goods that it has not yet sold. Or, in other words, Inventory reports the cost of the goods that are available for sale to customers. 38) D Sales Revenue and Cost of Goods Sold indicate the total selling price and cost of all goods that the merchandiser did sell to customers during the period. 39) C Sales Revenue and Cost of Goods Sold indicate the total selling price and cost of all goods that the merchandiser did sell to customers during the period. 40) A Cost of goods sold = Beginning inventory + Purchases− Ending inventory = $3,500 + $17,500− $4,900 = $16,100 41) B Cost of goods sold = Beginning inventory + Purchases − Ending inventory = $7,500 + $34,000 − $3,000 = $38,500 42) B Cost of goods sold = Beginning inventory + Purchases− Ending inventory = $4,900 + $24,500− $3,500 = $25,900 43) B Ending inventory = Beginning inventory + Purchases− Cost of goods sold Purchases = Ending inventory− Beginning inventory + Cost of goods sold = $80,000− $50,000 + $970,000 = $1,000,000 44) D Version 1
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Ending inventory = Beginning inventory + Purchases − Cost of goods sold Cost of goods sold = Beginning inventory + Purchases − Ending inventory = $19,000 + $44,000 − $6,000 = $57,000 45) D Ending inventory = Beginning inventory + Purchases− Cost of goods sold Cost of goods sold = Beginning inventory + Purchases − Ending inventory = $35,100 + $67,600− $18,200 = $84,500 46) D Cost of goods sold = Beginning inventory + Purchases− Ending inventory Beginning inventory = Cost of goods sold− Purchases + Ending inventory = $35,100− $72,800 + $65,000 = $27,300 47) A Cost of goods sold = Beginning inventory + Purchases− Ending inventory 48) C Goods available for sale = Beginning inventory + Purchases 49) B Cost of goods sold = Beginning inventory + Purchases− Ending inventory 50) A
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Cost of goods sold = Beginning inventory + Purchases − Ending inventory Ending inventory = Beginning inventory + Purchases − Cost of goods sold = $17,500 + $70,000 − $55,000 = $32,500 51) A Cost of goods sold = Beginning inventory + Purchases− Ending inventory Ending inventory = Beginning inventory + Purchases− Cost of goods sold = $30,000 + $90,000− $100,000 = $20,000 52) D Cost of goods sold = Beginning inventory + Purchases− Ending inventory Purchases = Cost of goods sold− Beginning inventory + Ending inventory = $42,000− $18,000 + $24,000 = $48,000 53) D Cost of goods sold = Beginning inventory + Purchases − Ending inventory Ending inventory = Beginning inventory + Purchases − Cost of goods sold = $480,400 + $140,400 − $560,400 = $60,400 54) D Cost of goods sold = Beginning inventory + Purchases− Ending inventory Ending inventory = Beginning inventory + Purchases− Cost of goods sold = $140,000 + $480,000− $560,000 = $60,000 55) A Version 1
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A perpetual inventory system will always give updated balances for Inventory and Cost of Goods Sold. Goods available for sale is the subtotal of beginning and purchases; it is not an account. 56) B In a periodic inventory system, inventory records are not updated during the accounting period. An inventory count is required at the end of the period in order to adjust the balance in the inventory account and to determine cost of goods sold. 57) B Units sold = Units in beginning inventory + Units purchased− Units returned− Ending inventory = 300 + 90− 12− 249 = 129 58) D Scanning identifies the item sold so the inventory account is adjusted and the amount charged to the customer is recorded. The gross profit is not calculated by scanning the bar code. 59) B The perpetual inventory method is considered superior to the periodic method because it provides an updated inventory account balance after every purchase, sale and return of inventory during the period. 60) D Units in beginning inventory + Units purchased− Units sold = Units in ending inventory = 600 + 256− 280 = 576 Since the effect of each purchase and sale is recorded, a perpetual inventory system is in use. Shrinkage can be determined in a perpetual inventory system by comparing recorded inventory to the physical count. 61) D
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Shrinkage is another term for inventory loss due to theft, fraud, or error. One of the benefits of a perpetual inventory system is that it allows managers to estimate shrinkage. It cannot be detected in a periodic system because it does not provide an up-to-date record of the inventory that should be on hand when you count it. 62) C Calculating shrinkage using a perpetual inventory system requires a physical count to compare to the ledger balance which has been perpetually updated for purchases, sales, and returns. Shrinkage cannot be calculated using a periodic inventory system. 63) A The difference between the ending balance in the inventory account and the physical inventory count is the amount of possible shrinkage. $36,000 + $81,000 − $72,000 = $45,000 ending inventory. $45,000 − $44,015 (actual count) = $985 shrinkage. 64) A The difference between the ending balance in the inventory account and the physical inventory count is the amount of possible shrinkage. $18,000 + $63,000− $54,000 = $27,000 ending inventory. $27,000− $26,100 (actual count) = $900 shrinkage. 65) B A difference between the physical inventory count and the inventory account balance is considered shrinkage. $548,000 + $50,000 − $35,250 = $562,750 inventory account balance. A physical count of $560,000 reveals a difference of $2,750. 66) C A difference between the physical inventory count and the inventory account balance is considered shrinkage. $250,000 + $22,500− $15,000 = $257,500 inventory account balance. A physical count of $255,000 reveals a difference of $2,500. Version 1
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67) C A benefit of a perpetual inventory system is that it allows managers to estimate shrinkage. 68) D Inventory counts are necessary in both periodic and perpetual inventory systems. Shrinkage is indicated if the inventory count is less than the inventory ledger account balance. In a perpetual inventory system, cost of goods sold is determined at the time of each sale, so a physical count is not necessary during the period. 69) C A physical inventory count is necessary even if a perpetual inventory system is used. 70) A Cost of goods sold = Beginning inventory + Purchases − Ending inventory Beginning inventory = Cost of goods sold − Purchases + Ending inventory = $26,000 − $28,000 + $8,500 = $6,500 71) A Cost of goods sold = Beginning inventory + Purchases− Ending inventory Beginning inventory = Cost of goods sold− Purchases + Ending inventory = $40,000− $46,000 + $12,000 = $6,000 72) A Sales Revenue and Cost of Goods Sold indicate the total selling price and cost of all goods that the merchandiser did sell to customers during the period. Both are reported on the income statement. 73) A
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The sum of beginning inventory and purchases represents the cost of goods available for sale. If half of the inventory was sold, it would be reported as Cost of Goods Sold, an expense on the income statement. The other half still on hand would be reported as Inventory, an asset, on the balance sheet. 74) C Cost of goods sold = Beginning inventory + Purchases− Ending inventory Ending inventory = Beginning inventory + Purchases− Cost of goods sold = $9,000 + $45,000− $36,000 = $18,000 75) A Beginning inventory + purchases = goods available for sale. Goods available for sale− ending inventory = cost of goods sold. 76) D When a periodic inventory system is in use, inventory records are updated "periodically," at the end of the accounting period. To determine how much merchandise has been sold, periodic systems require that inventory be physically counted at the end of the period. 77) B When a Perpetual inventory system is in use, Inventory records are updated "perpetually," every time inventory is bought, sold, or returned. 78) A Ending inventory = Beginning inventory + Purchases− Cost of goods sold = $350,000 + $122,500− $248,500 = $224,000 Shrinkage = Recorded amount− Actual count = $224,000− $210,000 = $14,000 79) D
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The entry to record shrinkage includes a debit to Cost of Goods Sold (to increase this expense account) and credit Inventory (to decrease this asset account). 80) D Credit terms that offer 3% off for payment within 12 days, or the full amount due in 45 days if payment is not made within the 12-day discount period, are expressed 3/12, n/45. 81) A Net Purchases = Purchases − Purchase returns − Purchase discounts = $8,800 − $1,300 − $260 = $7,240 Cost of goods sold = Beginning inventory + Net purchases − Ending inventory = $36,000 + $7,240 − $29,500 = $13,740 82) A Net Purchases = Purchases− Purchase returns− Purchase discounts = $15,800− $1,400− $400 = $14,000 Cost of goods sold = Beginning inventory + Net purchases− Ending inventory = $60,000 + $14,000− $53,000 = $21,000 83) A Under the perpetual system, all inventory-related transactions, including transportation cost (also called freight-in), are recorded in the Inventory account. 84) D
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Freight-out is a selling expense on the income statement. When a company receives payment for a sale, Cash is debited and Accounts Receivable is credited. When a company grants an allowance, Sales Revenue & Allowances is debited and Accounts Receivable is credited. If the inventory is returned, there are two entries. First, Sales Returns & Allowances is debited and Accounts Receivable is credited. Second, Inventory is debited and Cost of Goods Sold is credited. 85) A When merchandise that was purchased on account is returned, Inventory, an asset account, will decrease and Accounts Payable, a liability account, will decrease. When merchandise is returned, there is no effect on revenue or expenses and, as a result, there is no effect on net income. 86) D When merchandise purchased on credit is returned to the seller for a full refund, the Inventory account decreases and Accounts Payable account deceases. 87) D Payment on April 26 would not qualify for the discount, so the entry would be debit Accounts Payable and credit Cash for $25,000. 88) D Since payment was made within the discount period, the related entry will decrease Accounts Payable, a liability account, by $10,000 (the entire amount owed), decrease Cash, an asset account, by $9,800 [or ($10,000− ($10,000 × 0.02)], and decrease Inventory, an asset account, by $200 (or $10,000 × 0.02). Since revenues and expenses are not included in this entry, there is no effect on net income or stockholders' equity. 89) C
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Since payment was made within the discount period, the related entry will debit Accounts Payable (to decrease this liability account) for $85,000 (the entire amount owed), credit Cash (to decrease this asset account) for $82,450 [or ($85,000− ($85,000× 0.03)], and credit Inventory (to decrease this asset account) for $2,550 (or $85,000× 0.03). 90) C Purchase discount = (Purchase − Purchase return − Purchase allowance) × Discount percentage = [($28,000 − $3,800 − $280) × 0.02] = $478 91) B Purchase discount = (Purchase− Purchase return− Purchase allowance) × Discount percentage = [($10,000− $2,000− $100) × 0.03] = $237 92) A When inventory is purchased on credit in a perpetual inventory system under the gross method, the Inventory account is increased (debited) and Accounts Payable is increased (credited) for the cost of the inventory purchased. 93) B When inventory is returned using a perpetual inventory system under the gross method, the Inventory account is decreased (credited) and Accounts Payable is decreased (debited). 94) C Debit Accounts Payable for $7,500, credit Inventory for $150 (or $7,500 × 0.02), and credit Cash for $7,350 (or $7,500− $150). 95) D
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When a perpetual inventory system is used, a purchase discount taken is recorded as a deduction to the Inventory account. Accounts Payable is debited for the full amount owed and cash is credited for the actual amount paid. 96) C Using a perpetual inventory system, the purchaser records purchases on credit by debiting Inventory and crediting Accounts Payable. 97) C Debit Accounts Payable for $6,000, credit Inventory for $180 (or $6,000 × 0.03), and credit Cash for $5,820 (or $6,000− $180). 98) D Payment of the transportation charges would be a debit to Inventory (assets increase) and a credit to Cash (assets decrease). 99) A The entry to record a purchase of inventory on account includes a debit to Inventory (to decrease this asset account) and a credit to Accounts Payable (to increase this liability account). 100) A Glenrosa owns and should report the inventory as an asset on its balance sheet. 101) A Since the goods were in transit, title has not passed to Glenrosa and thus they are Monterosa's inventory on its balance sheet. 102) B Since the goods were shipped FOB shipping point, title has passed to Alpha, therefore it is Alpha's inventory and should be on Alpha’s balance sheet. 103) A
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If the terms of sale are FOB shipping point, ownership of the goods transfers to the purchaser at the shipping point, so the purchaser would pay the transportation cost. This transportation cost (also called freightin) is recorded as an addition to the purchaser's Inventory account because it is a cost the purchaser incurs to obtain the inventory. In general, a purchaser should include in the Inventory account any costs needed to get the inventory into a condition and location ready for sale. Costs that are incurred after the inventory has been made ready for sale, such as freight-out to deliver goods to customers, should be treated as selling expenses. 104) A If the terms of sale are FOB shipping point, ownership of the goods transfers to the purchaser at the shipping point, so the purchaser would pay the transportation cost. This transportation cost (also called freightin) is recorded as an addition to the purchaser's Inventory account because it is a cost the purchaser incurs to obtain the inventory. In general, a purchaser should include in the Inventory account any costs needed to get the inventory into a condition and location ready for sale. Costs that are incurred after the inventory has been made ready for sale, such as freight-out to deliver goods to customers, should be treated as selling expenses. 105) D This entry is correct. 106) B Payment = Amount owed− Discount = $1,000− ($1,000 × 0.02) = $1,000− $20 = $980 107) A
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The journal entry includes a debit to Accounts Payable for the original cost (to decrease this liability account), a credit to Cash for the amount due less the discount (to decrease this asset account) and a credit to Inventory for the amount of the discount (to decrease this asset account). 108) C The journal entry includes a debit to Accounts Payable for the original cost (to decrease this liability account), a credit to Cash for the amount due less the discount (to decrease this asset account) and a credit to Inventory for the amount of the discount (to decrease this asset account). 109) A The journal entry includes a debit to Accounts Payable for the original cost (to decrease this liability account), a credit to Cash for the amount due less the discount (to decrease this asset account) and a credit to Inventory for the amount of the discount (to decrease this asset account). 110) C When the sales agreement specifies FOB shipping point, the sale is recorded when the goods leave the seller's shipping department. 111) A Inventory records are updated each time an item is sold, returned or bought when using a perpetual inventory system. 112) B When a company makes a sale on account under the perpetual system, it will increase Accounts Receivable, an asset account, and increase Sales Revenue, a revenue account. In addition, because a perpetual inventory system updates these accounts, it will increase Cost of Goods Sold, an expense account, and decrease Inventory, an asset account. 113) A
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The company will debit Accounts Receivable (to increase that asset account) and credit Sales Revenue (to increase that revenue account) for $620. In addition, because a perpetual inventory system updates these accounts, it will debit Cost of Goods Sold (to increase that expense account) and credit Inventory (to decrease that asset account) for $500. 114) A The five-step revenue model requires revenue to be reported at the amount the seller expects to be entitled to receive. It’s impractical to record sales returns and allowances at the time of sale. When a return is issued for store credit, Deferred Revenue is credited rather than Cash. Expected returns and allowances are accounted for through an adjustment at the end of the period (month). 115) B A sales return is recorded by debiting Sales Returns & Allowances (or Sales Revenue) and crediting Accounts Receivable. 116) D The allowance granted to the customer will be recorded by a debit to Sales Returns & Allowances (or Sales Revenue) and a credit to Cash for $140, the amount of the allowance granted. 117) D The company will debit Sales Returns and Allowances (or Sales Revenue) and credit Cash for the selling price of the merchandise. In addition, because a perpetual inventory system updates these accounts, it will debit Inventory and credit Cost of Goods Sold for the cost of the merchandise. 118) D
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The company will debit Sales Returns and Allowances (or Sales Revenue) and credit Cash for $620. In addition, because a perpetual inventory system updates these accounts, it will debit Inventory and credit Cost of Goods Sold for $500. 119) A The supplier, who is the seller in this situation, would account for this transaction as a sales return. 120) C For month-end adjustments for expected returns, cash has not been received so a liability called Refund Liability is credited. Also, inventory has not yet been returned, it is only expected to be returned. An account called Inventory—Estimated Returns is used. Cost of Goods Sold will be credited for the cost of items expected to be returned. 121) A Sales discounts are subtracted in calculating net sales. Credit terms of "2/10, n/30" mean that a 2% discount is offered if payment is made within 10 days; otherwise the full amount is due in 30 days. Sales discounts are from a seller's perspective; purchase discounts are from a purchaser's perspective. 122) D The credit terms, 2/15, n/30, mean that 2% of the invoice amount may be deducted if the invoice is paid in 15 days. Otherwise, the full amount is due in 30 days. 123) B The customer paid within the 10-day discount period and, as such, will take advantage of the 2% discount. The amount of cash paid by the customer and received by Devonshire is $14,700 [$15,000 − ($15,000 × 0.02)]. 124) B
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The customer paid within the 10-day discount period and, as such, will take advantage of the 1% discount. The amount of cash paid by the customer and received by Devonshire is $15,840 [$16,000− ($16,000 × 0.01)]. 125) B Two entries are required to record a sale when a perpetual inventory system is in use. The first entry includes a debit to Accounts Receivable and a credit to Sales Revenue for $20,000, the selling price of the goods sold. The second entry includes a debit to Cost of Goods Sold and a credit to Inventory for $15,000, the cost of the goods that were sold. 126) C As a result of the customer's making payment within the discount period, Clarendon's cash will increase by $990 (or $1,000 × 0.99) and its accounts receivable will decrease by $1,000. Thus, total assets will decrease by $10 (or increase of $1,000− decrease of $990). 127) C Two entries are required to record a sale when a perpetual inventory system is in use. The first entry includes a debit to Accounts Receivable and a credit to Sales Revenue for $1,198, the selling price of the goods sold. The second entry includes a debit to Cost of Goods Sold and a credit to Inventory for $790, the cost of the goods that were sold. 128) D Two entries are required to record a sale when the perpetual inventory method is used; one to record the sales revenue and one to record the cost of goods sold. 129) A
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To account for this transaction, Missouri would make two entries to basically reverse the entries recorded when the goods were sold. The first entry includes a debit to Sales Returns and Allowances (or Sales Revenue) and a credit to Accounts Receivable for $500. The second entry includes a debit to Inventory and a credit to Cost of Goods Sold for $200. 130) B The customer paid within the discount period, so the amount due is 99% of the net amount purchased of $6,000 ($6,500 original sale− $500 returns). The cash received is $6,000 × 0.99 = $5,940 [or $6,000− ($6,000× 0.01)]. 131) C The customer paid in the 8 to 14 days discount period and, as such, is entitled to a 1% discount in the amount of $750 (or $75,000 × 0.01). The debit to Cash equals $74,250 (or $75,000− $750). 132) A Net assets would increase by $2,000 because Accounts Receivable increases by $3,000 and Inventory decreases by $1,000. Sales Revenue increases by $3,000, which increases stockholders' equity by $3,000, and Cost of Goods Sold increases by $1,000, which decreases stockholders' equity by $1,000. As a result, stockholders' equity would increase by $2,000. 133) C Sales discount = (Sale − Sales return) × Discount % = ($7,000 − $1,500) × 2% = $110 Cash paid by customer = Sales revenue − Sales return − Sales discount = $7,000 − $1,500 − $110 = $5,390 134) B
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Sales discount = (Sale− Sales return) × Discount % = ($1,000− $300) × 2% = $14 Cash paid by customer = Sales revenue− Sales return− Sales discount = $1,000− $300− $14 = $686 135) B A company offers its customers a discount to promote early collection of its accounts receivable. The Deferred Revenue and Inventory— Estimated Returns accounts are used in accounting for expected returns, not sales discounts. 136) A When a company collects from a customer who pays within the discount period, the discount is a reduction in the initial sales price. 137) D When payment is received within the discount period, Cash is debited for $2,940, the amount received [$3,000− ($3,000× 0.02)]. 138) A When payment is received within the discount period, the amount received is the sales price less the discount $5,940 (or $6,000− $60). 139) A Sales returns and allowances are tracked internally to inform management decisions; this information is not generally included on external financial statements. Sales discounts encourage customers to make prompt payment. 140) C When a company sells a bundled product, the transaction price is allocated to the performance obligations based on stand-alone selling prices. 141) C $1,050 × [$900/($900 + $500)] = $675 142) C Version 1
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$700 × [$600/($600 + $200)] = $525 143) C $700 × [$600/($600 + $200)] = $525; $525 × 3 = $1,575; $700 × [$200/($600 + $200)] = $175; $175 × 3 × 1/12 = $43.75; $1,575 + $43.75 = $1,618.75. 144) D Sales discounts = Sales revenue × Discount percentage = $4,600 × 0.02 = $92 Net Sales = Sales revenue − Sales discounts = $4,600 − $92 = $4,508 145) A Sales discounts = Sales revenue × Discount percentage = $4,000 × 0.02 = $80 Net Sales = Sales revenue− Sales discounts = $4,000− $80 = $3,920 146) C Both income statements report net income. The multistep income statement also includes subtotals for gross profit, income from operations, and income before income tax expense. 147) A As required by the revenue recognition principle, merchandisers record revenue when they fulfill their performance obligations by transferring control of the goods to customers. 148) A There are two performance obligations so the sales price is allocated to each performance obligation. $1,000/($1,000 + $10,000) = 0.0909; $10,000 × 0.0909 = $909. 149) B
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There are two performance obligations so the sales price is allocated to each performance obligation. $10,000/($1,000 + $10,000) = 0.9091; $10,000 × 0.9091 = $9,091. 150) A The jeans are not a bundled product; the other choices are bundles. 151) C Sales Revenue is a revenue account whereas Cost of Goods Sold is an expense account. 152) D Net sales = Sales revenue− Sales returns and allowances− Sales discounts 153) A Payment = Amount owed − Discount = $5,000− ($5,000 × 0.02) = $5,000− $100 = $4,900 154) D Sales Discounts is a contra-revenue account and, as such, it has a normal debit balance. 155) A When used, the Sales Returns and Allowances account is reported on the income statement. 156) B Multistep income statements provide subtotals for gross margin, income from operations, and income before income taxes. To show how much profit is earned from product sales, without being clouded by other operating costs, merchandising companies often present their income statement using a multistep format. 157) A
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Income from operations is a measure of the company's income from regular operating activities, before considering the effects of interest, income taxes, and any nonrecurring items. 158) A Net sales = Sales revenue− Sales discounts− Sales returns & allowances Gross profit = Net sales− Cost of goods sold As shown above, sales discounts affect the calculation of cost of goods sold and both contra-revenue accounts are included in the calculation of net sales. When a perpetual inventory system is used, Cost of Goods Sold is an account (rather than an amount that is calculated). 159) B The cost of inventory sold during the period is reported on the income statement as cost of goods sold. 160) A The multi-step income statement separates the revenues and expenses that relate to core operations from all the other (peripheral) items that affect net income. It also presents important subtotals, such as gross profit, to help distinguish core operating results from other, less significant items that affect net income. 161) D A key measure available on a multistep income statement is the amount of profit earned over the cost of goods sold. The multistep format separates the revenues and expenses that relate to core operations from all the other (peripheral) items that affect net income. Multiple-step and single-step statements report all the same revenues and expenses and, so, the net income is the same. 162) D
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Operating expenses include salaries and wages, utilities, advertising, rent, and the costs of delivering inventory to customers. These expenses are subtracted from gross profit to yield income from operations, which is a measure of the company's income from regular operating activities, before considering the effects of interest, income taxes, and any nonrecurring items. 163) C Net income = Income from operations + Other revenues (expenses), net− Income tax expense or, in other words, Income from operations = Income before income tax expense− Other revenues (expenses), net. 164) C Revenues and expenses from activities other than the company's main business are peripheral results and are shown as separate items after the subtotal Income from Operations. 165) D Gross profit = Net sales − Cost of goods sold = $13.00 − $6.00 = $7.00 The difference between selling price and cost is the company's gross profit (also called gross margin), which is a subtotal on the multistep income statement, but is not an account. 166) A Gross profit = Net sales− Cost of goods sold = $8.00− $3.00 = $5.00 The difference between selling price and cost is the company's gross profit (also called gross margin), which is a subtotal on the multistep income statement, but is not an account. 167) C
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Net Sales = Sales revenue − Sales returns & allowances − Sales discounts = $367,810 − $10,000 − $14,180 = $343,630 Gross profit = Net sales − Cost of goods sold = $343,630 − $216,490 = $127,140 168) C Gross Profit = (Sales Revenue− Sales Returns & Allowances− Sales Discounts)− Cost of Goods Sold 169) B Comparative financial statements contain two or more columns of numbers, with each column representing the financial results for different time periods. This makes it easy for financial statement users to compare account balances from one period to the next. 170) B The gross profit percentage tells you the percentage of profit earned on each dollar of sales, after considering the cost of products sold. 171) C Gross profit = Net sales− Cost of goods sold Gross profit = (Sales Revenue− Sales discounts)− Cost of goods sold = ($200,000− $2,000)− $140,000 = $58,000 172) C Gross profit percentage = [(Net sales− Cost of goods sold) ÷ Net sales] × 100 Gross profit percentage = (Gross profit ÷ Net sales) × 100 Gross profit percentage ÷ 100 = Gross profit ÷ Net sales Gross profit = (Gross profit percentage ÷ 100) × Net sales = (20% ÷ 100) × $850,000 = $170,000 Gross profit = Net sales− Cost of goods sold Cost of goods sold = Net sales− Gross profit = $850,000− $170,000 = $680,000 Version 1
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173) D Gross profit = Sales revenue − Sales discounts − Sales returns & allowances − Cost of goods sold = $291,000 − $3,000 − $2,600 − $202,800 = $82,600 174) B Gross profit = Sales revenue− Sales discounts− Sales returns & allowances− Cost of goods sold = $284,000− $2,720− $2,320− $200,000 = $78,960 175) A Net sales − Cost of Goods Sold − Operating expenses = Income before taxes $283,560 − $202,000 − $53,000 = $28,560 176) B Net sales− Cost of Goods Sold− Operating expenses = Income before taxes $278,960− $200,000− $52,800 = $26,160 177) A Gross profit is a subtotal on the multistep income statement; it is not the name of an account. Gross Profit = Net sales− Cost of goods sold Gross profit percentage = [(Net sales− Cost of goods sold ÷ Net sales)] × 100 = [($100− $50) ÷ $100] × 100 = 50% (rather than 100%). 178) B An increasing gross profit percentage means that the company is selling products for a greater markup over its cost. 179) A Gross Profit Percentage = [(Net Sales − Cost of Goods Sold) ÷ Net Sales] × 100 = [($643,100 − $501,618) ÷ $643,100] × 100 = 22% Version 1
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180) D Gross Profit Percentage = [(Net Sales− Cost of Goods Sold) ÷ Net Sales] × 100 = [($612,850− $441,252) ÷ $612,850] × 100 = 28% 181) A Gross profit percentage = [(Net sales − Cost of goods sold)÷ Net sales]× 100 Gross profit percentage = (Gross profit ÷ Net sales) × 100 Net sales = (Gross profit ÷ Gross profit percentage) × 100 = $60,400 ÷ 20% = $302,000 182) A Gross profit percentage = [(Net sales− Cost of goods sold) ÷ Net sales] × 100 Gross profit percentage = (Gross profit ÷ Net sales) × 100 Net sales = (Gross profit ÷ Gross profit percentage) × 100 = $58,300 ÷ 25% = $233,200 183) A Gross profit = Net sales × Gross profit percentage = $2,720,000 × 0.34 = $924,800 Net sales − Cost of goods sold = Gross profit Cost of goods sold = Net sales − Gross profit = $2,720,000 − $924,800 = $1,795,200 184) B Gross profit = Net sales × Gross profit percentage = $347,800 × 0.20 = $69,560 Net sales− Cost of goods sold = Gross profit Cost of goods sold = Net sales− Gross profit = $347,800− $69,560 = $278,240 185) D
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All else being equal, a higher sales price will experience an increase in its overall gross profit percentage but may result in a decrease in sales volume. 186) A Gross profit = Net sales− Cost of goods sold 187) A Purchase and sales discounts are recorded when the cash is paid or received when the "gross method" is used. 188) B A higher gross profit ratio means that greater profit is available to cover operating and other expenses. A higher sales volume would increase the amount of gross profit. 189) D Cost of goods sold = Beginning inventory + Purchases− Ending inventory = $54,000 + $109,800− $39,600 = $124,200 Net sales percentage = Cost of goods sold percentage + Gross profit percentage Cost of goods sold percentage = 100%− Gross profit percentage = 100%− 40% = 60% (or 0.60) Cost of goods sold ÷ Net sales = Cost of goods sold percentage Net sales = Cost of goods sold ÷ Cost of goods sold percentage = $124,200 ÷ 0.60 = $207,000 190) B Gross profit percentage = ((Net sales− Cost of goods sold) ÷ Net sales) × 100 If the selling price per unit decreases and cost of goods sold per unit stays the same, the gross profit percentage will decrease. 191) B
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Income before income taxes = Net sales− Cost of goods sold− Operating expenses Income before income taxes = Gross profit− Operating expenses If gross profit increases, income before income taxes will decrease if operating expenses increase by a greater amount 192) D The gross profit percentage is not tied to sales volume. An increase in the gross profit percentage would result from an increase in the selling price and/or a decrease in the cost of the product. An increase in the gross profit percentage will not necessarily result in a higher net income. Other factors, such as an increase in operating expenses, could cause net income to remain unchanged or decrease. 193) D Gross profit percentage = [(Net sales− Cost of goods sold) ÷ Net sales] × 100 If gross profit percentage decreases, there must have been a decrease in the selling price, an increase in the cost of the product, or some combination of the two. 194) C Gross profit percentage = [(Net sales − Cost of goods sold) ÷ Net sales] × 100 = [($22.0 − $8.6) ÷ $22.0] × 100 = 60.9% 195) B Gross profit percentage = [(Net sales− Cost of goods sold) ÷ Net sales] × 100 = [($23.76− $7.2) ÷ $23.76] × 100 = 69.7% 196) A
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Gross profit percentage = [(Net sales− Cost of goods sold) ÷ Net sales] × 100 Pixie: = [($18.8− $5.6) ÷ $18.8] × 100 = 70.2% Stardust: = [($22.3− $9.3) ÷ $22.3] × 100 = 58.3% While Stardust Incorporated generated more revenue than Pixie Incorporated, Stardust Incorporated generated a lower gross profit percentage. Differences in gross profit percentages are due to differences in the selling prices and/or differences in product costs. 197) D The gross profit percentage is the amount of profit generated by a dollar of sales to cover operating expenses of the company. Both companies have a positive amount of gross profit or contribution toward covering the operating expenses of the company. A higher gross profit percentage does not necessarily mean higher net income, because Arbor Company could have more gross profit and/or lower operating expenses. Selling, general, and administrative expenses do not affect gross profit. 198) C Gross profit percentages can be compared for a single company over time or to other companies within the same industry. 199) A Net sales = Sales revenue − Sales discounts − Sales returns and allowances = $170,000 − $10,900 − $20,500 = $138,600 200) C Net sales = Sales revenue− Sales discounts− Sales returns and allowances = $480,000− $33,000− $57,000 = $390,000 201) D Version 1
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Net sales = Sales revenue − Sales discounts − Sales returns and allowances = $260,000 − $10,000 − $34,000 = $216,000 Gross profit = Net sales − Cost of goods sold = $216,000 − $129,000 = $87,000 202) C Net sales = Sales revenue− Sales discounts− Sales returns and allowances = $480,000− $33,000− $57,000 = $390,000 Gross profit = Net sales− Cost of goods sold = $390,000− $267,000 = $123,000 203) A Net sales = Sales revenue − Sales discounts − Sales returns and allowances = $180,000 − $10,800 − $22,000 = $147,200 Income from operations = Net sales − Cost of goods sold − Selling, general, and administrative expenses = $147,200 − $97,000 − ($13,000 + $6,200 + $1,000 + $12,800) = $17,200 204) B Net sales = Sales revenue− Sales discounts− Sales returns and allowances = $480,000− $33,000− $57,000 = $390,000 Income from operations = Net sales− Cost of goods sold− Selling, general, and administrative expenses = $390,000− $267,000− ($36,000 + $18,000 + $3,000 + $36,000) = $30,000 205) C
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Net sales = Sales revenue − Sales discounts − Sales returns and allowances = $340,000 − $9,200 − $46,000 = $284,800 Net income = Net sales − Cost of goods sold − Selling, general, and administrative expenses − Income tax expense = $284,800 − $161,000 − ($21,000 + $7,800 + $1,000 + $19,200) − $2,250 = $72,550 206) A Net sales = Sales revenue− Sales discounts− Sales returns and allowances = $480,000− $33,000− $57,000 = $390,000 Net income = Net sales− Cost of goods sold− Selling, general, and administrative expenses− Income tax expense = $390,000− $267,000− ($36,000 + $18,000 + $3,000 + $36,000)− $6,000 = $24,000 207) D Gross profit percentage = [(Net sales − Cost of goods sold) ÷ Net sales] × 100 = [($155,800 − $101,000) ÷ $155,800] × 100 = 35.2% (rounded) Net sales = Sales revenue − Sales discounts − Sales returns and allowances = $190,000 − $10,700 − $23,500 = $155,800 208) B Gross profit percentage = [(Net sales− Cost of goods sold) ÷ Net sales] × 100 = [($390,000− $267,000) ÷ $390,000] × 100 = 31.5% (rounded) Net sales = Sales revenue− Sales discounts− Sales returns and allowances = $480,000− $33,000− $57,000 = $390,000 Version 1
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209) D When inventory is purchased, it is debited to Purchases when a periodic inventory system is in use. It would be debited to Inventory when a perpetual system is in use. 210) C When a periodic inventory system is in use, the entry to record a sale includes a debit to Accounts Receivable and a credit to Sales Revenue. Unlike a perpetual inventory system, a periodic system does not track the cost of goods sold during the accounting period. 211) D Debit Cash for $5,684 [or $5,800− ($5,800 x 0.02)], debit Sales Discounts (or Sales Revenue) for $116 (or $5,800 × 0.02), and credit Accounts Receivable for $5,800. 212) B When a periodic inventory system is in use, the entry to record a sales return includes a debit to Sales Returns & Allowances (or Sales Revenue ) and a credit to Accounts Receivable. Unlike a perpetual inventory system, a periodic system does not track the cost of goods sold during the accounting period. 213) A At the time of sale, Ruth would have made a debit to Accounts Receivable and a credit to Sales Revenue for the net amount, $11,760. Since payment is made within the discount period, Cash is debited and Accounts Receivable is credited for $11,760. 214) C The end result of the net and gross methods is identical; however, the journal entries are different. 215) C
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Cost of goods available for sale = Beginning inventory + Purchases = $4,080 + $7,905 = $11,985. 216) A Cost of goods available for sale = Beginning inventory + Purchases = $3,750 + $7,500 = $11,250 217) C The end-of-period adjustment to transfer beginning inventory and net purchases to cost of goods sold includes a debit to Cost of goods sold, a debit to Inventory (ending), a credit to Inventory (beginning) and a credit to Purchases. 218) C Cost of goods sold = Beginning inventory + Purchases − Ending inventory = $3,750 + $7,500 − $6,250 = $5,000 219) B When goods and services are sold together for a single “bundled” price, the price is allocated to the goods and services based on their standalone selling prices.
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CHAPTER 6: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Turquoise, Incorporated is trying to decide whether to purchase identical inventory from one of the following suppliers:
Cost Invoice terms Shipping terms Shipping cost
Supplier A
Supplier B
$ 200 1/10, n/30 FOB shipping point $ 20
$ 220 2/10, n/30 FOB destination $ 24
Required: Assume the company will pay within the discount period. What is the actual cost of the inventory if purchased from each supplier?
2) Two different companies, Vogel Corporation and Hatcher Corporation, entered into the following inventory transactions during December. Both companies use a perpetual inventory system using the gross method of recording sales discounts. ● December 3 – Vogel Corporation sold inventory on account to Hatcher Corporation for $240,000, terms 2/10, n/30. This inventory originally cost Vogel $160,000. ● December 8 – Hatcher Corporation returned inventory to Vogel Corporation for a credit of $15,000. Vogel returned this inventory to inventory at its original cost of $10,000. ● December 12 – Hatcher Corporation paid Vogel Corporation for the amount owed. Required: a. Prepare the journal entries to record these transactions on the books of Vogel Corporation. b. What is the amount of net sales to be reported on Vogel Corporation's income statement? c. What is the Vogel Corporation's gross profit percentage?
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3) During its first month of operations, Purrfect Pets purchased 6,000 bags of dog food at a cost of $5 a bag and sold all 6,000 bags of dog food on account with payment terms of 3/10, n/30 for $10 each. A total of 2,600 of these bags were sold to customers who paid within the discount period; the other customers paid after the discount period had ended. Sales allowances totaling $200 were granted to customers whose dogs did not like the dog food. Required: a. Calculate the gross profit for the month. b. Calculate the gross profit percentage for the month.
4) The following is a listing of the income statement accounts for Mulberry Street Sportswear as they appear on the adjusted trial balance as of December 31. Advertising Expense Cost of Goods Sold Delivery Expense Insurance Expense Income Tax Expense Rent Expense Interest Expense Sales Revenue Sales Discounts Sales Returns & Allowances
$ 12,000 89,000 6,000 1,000 2,000 12,000 5,000 160,000 11,000 19,000
Required: a. Prepare a multistep income statement. Include all operating expenses in one line item called “Selling, General and Administrative Expenses” and all non-operating revenues(expenses) in one line item called “Other Revenue (Expenses), net”. b. Compute the gross profit percentage.
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5)
Match the term to the appropriate definition. There are more definitions than terms.
Term Cost of Goods Sold Equation Goods Available for Sale Gross Profit (or Gross Margin) Gross Profit Percentage Multistep Income Statement
Definition A) A ratio indicating the percentage of profit earned on each dollar of sales, after considering the cost of products sold. B) A sales price reduction given to customers for prompt payment of their account balance. C) Presents important subtotals, such as gross profit, to help distinguish core operating results from other, less significant items that affect net income. D) Expresses the relationship between inventory on hand, purchased, and sold; shown as either BI + P – EI = CGS or BI + P – CGS = EI. E) Refunds and price reductions given to customers after goods have been sold and found unsatisfactory. F) A cash discount received for prompt payment of a purchase on account. G) The cost of inventory lost to theft, fraud, and error. H) Net sales minus cost of goods sold. It is a subtotal, not an account. I) A reduction in the cost of inventory purchases associated with unsatisfactory goods. J) The sum of beginning inventory and purchases for the period.
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6)
Match the term to the appropriate definition. There are more definitions than terms.
Term FOB Destination FOB Shipping Point Merchandising Company Periodic Inventory System Perpetual Inventory System Service Company Definition A) The sum of beginning inventory and purchases for the period. B) Presents important subtotals, such as gross profit, to help distinguish core operating results from other, less significant items that affect net income. C) A term of sale indicating that goods are owned by the seller until they are delivered to the buyer. D) A company that sells goods that have been obtained from a supplier. E) Inventory records are updated every time inventory is bought, sold, or returned. F) A sales price reduction given to customers for prompt payment of their account balance. G) Inventory records are updated at the end of the accounting period. To determine how much merchandise has been sold, inventory must be physically counted at the end of the period. H) A term of sale indicating that goods are owned by the buyer the moment they leave the seller's premises. I) A company that sells services rather than physical goods. J) Assets acquired for resale to customers.
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7)
Match the term to the appropriate definition. There are more definitions than terms.
Term Inventory Purchase Discount Purchase Returns and Allowances Sales Discount Sales Returns & Allowances Shrinkage
Definition A) Presents important subtotals, such as gross profit, to help distinguish core operating results from other, less significant items that affect net income. B) A reduction in the cost of inventory purchases associated with unsatisfactory goods. C) Refunds and price reductions given to customers after goods have been sold and found unsatisfactory. D) A ratio indicating the percentage of profit earned on each dollar of sales, after considering the cost of products sold. E) Net sales minus cost of goods sold. It is a subtotal, not an account. F) A sales price reduction given to customers for prompt payment of their account balance. G) The sum of beginning inventory and purchases for the period. H) A cash discount received for prompt payment of a purchase on account. I) Assets acquired for resale to customers. J) The cost of inventory lost to theft, fraud, and error.
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Answer Key Test name: Chap 06_7e_Problems 1) Supplier A Cost Shipping cost Purchase discount Total cost
Supplier B
$ 200.00 20.00 (2.00) $ 218.00
$ 220.00 0.00* (4.40) $ 215.60
*The terms are FOB destination, so the supplier incurs the transportation cost. Calculation of purchase discount: Purchase discount = Invoice price × Discount percentage Supplier A: $200 × 0.01 = $2.00 Supplier B: $220 × 0.02 = $4.40 2) a. Date December 03
General Journal Accounts receivable
Debit 240,000
Sales revenue December 03
Cost of goods sold
240,000 160,000
Inventory December 08
Sales returns and allowances Accounts receivable
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160,000 15,000 15,000
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December 08
Inventory
10,000
Cost of goods sold December 12
Cash Sales discounts Accounts receivable
10,000 220,500 4,500 225,000
Cash ($225,000− $4,500) = $220,500 Sales Discounts = ($240,000− $15,000) × 0.02 = $4,500 b. Net sales = Sales revenue− Sales returns and allowances− Sales discounts = $240,000− $15,000− $4,500 = $220,500 c. Gross profit percentage = [(Net sales− Cost of goods sold) ÷ Net sales] × 100 = [($220,500− $150,000) ÷ $220,500] × 100 = 32% (rounded)
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3) a. Sales revenue = 6,000 bags × $10 per bag = $60,000 Sales discount = Sales revenue− (Sales revenue × Discount percentage) = (2,600 bags × $10 × 0.03) = $780 Net sales = Sales revenue− Sales discount− Sales returns and allowances = $60,000− $780− $200 = $59,020 Cost of goods sold = 6,000 bags × $5 = $30,000 Gross profit = Net sales− Cost of goods sold = $59,020− $30,000 = $29,020 b. Gross profit percentage = [(Net sales− Cost of goods sold) ÷ Net sales] × 100 = [($59,020− $30,000) ÷ $59,020] × 100 = 49.2% (rounded) 4) a. Mulberry Street Sportswear Income Statement For the year ended December 31 Sales Revenue Sales Discounts Sales Returns and Allowances Net Sales Cost of Goods Sold Gross Profit Selling, General, and Administrative Expenses Income from Operations Other Revenue (Expenses), net Income before Income Tax Expense Income Tax Expense Net Income
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$ 160,000 11,000 19,000 $ 130,000 89,000 $ 41,000 31,000 $ 10,000 (5,000) 5,000 2,000 $ 3,000
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Selling, General, and Administrative Expenses = Advertising Expense $12,000 + Delivery Expense $6,000 + Insurance Expense $1,000 + Rent Expense $12,000 = $31,000 Other Revenue (Expenses), net is made up of Interest Expense $5,000 b. Gross profit percentage = [(Net sales − Cost of goods sold) ÷ Net sales] × 100 = [($130,000 − $89,000) ÷ $130,000] × 100 = 31.5% (rounded) 5) D Cost of Goods Sold Equation J Goods Available for Sale H Gross Profit (or Gross Margin) A Gross Profit Percentage C Multistep Income Statement 6) C FOB Destination H FOB Shipping Point D Merchandising Company G Periodic Inventory System E Perpetual Inventory System I Service Company 7) I Inventory H Purchase Discount B Purchase Returns and Allowances F Sales Discount C Sales Returns & Allowances J Shrinkage
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CHAPTER 7 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) The primary goals of inventory managers are to maintain a sufficient quantity of inventory to meet customers' needs, ensure inventory quality meets customers' expectations and company standards, and minimize the cost of acquiring and carrying inventory. ⊚ ⊚
true false
2) If inventory is sold with terms of FOB shipping point, the goods belong to the seller while in transit. ⊚ ⊚
true false
3) If inventory is sold with terms of FOB shipping point, the goods belong to the customer while in transit. ⊚ ⊚
true false
4) Manufacturers have three types of inventory, which include raw materials, work in process, and finished goods, whereas merchandisers have only raw materials inventory. ⊚ ⊚
true false
5) Goods on consignment are goods shipped by the owner to another company that holds the goods and sells them on behalf of the owner. ⊚ ⊚
true false
6) Consignment inventory is reported on the balance sheet of the company holding the inventory.
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⊚ ⊚
7)
true false
Goods placed in inventory are initially recorded at market value. ⊚ ⊚
true false
8) When a company sells goods, it removes their cost from the Inventory account and reports the cost on the income statement as Cost of Goods Sold. ⊚ ⊚
9)
Inventory is reported on the balance sheet as a current asset. ⊚ ⊚
10)
true false
Cost of goods sold = Beginning inventory + Purchases − Ending inventory ⊚ ⊚
11)
true false
true false
Ending inventory = Beginning inventory + Purchases − Cost of goods sold ⊚ ⊚
true false
12) Underthe periodic inventory method, when LIFO is used, costs are assigned to cost of goods sold using the most recent purchase at the time of the sale. ⊚ ⊚
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true false
2
13) When costs per unit are increasing, the inventory costing method that results in the lower income tax expense is the LIFO method. ⊚ ⊚
true false
14) In each accounting period, a manager can select the inventory costing method that yields the highest net income. ⊚ ⊚
15)
true false
A company can use different methods for inventories that differ in nature or use. ⊚ ⊚
true false
16) If a company uses LIFO to prepare its U.S. tax return, then it must use LIFO to prepare its financial statements. ⊚ ⊚
true false
17) When the periodic inventory system is in use, the choice of an inventory costing method usually has no impact on gross profit or cost of goods sold. ⊚ ⊚
true false
18) A lower of cost or market write-down would be recorded with a debit to Cost of Goods Sold. ⊚ ⊚
19)
true false
Lower of cost or market can be applied on an item or total inventory basis.
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⊚ ⊚
true false
20) LIFO and weighted average results will be the same using either a perpetual or periodic system. ⊚ ⊚
true false
21) The cost assigned to cost of goods sold and to inventory under the FIFO method will be the same whether the perpetual or the periodic inventory system is used. ⊚ ⊚
true false
22) The assignment of costs to cost of goods sold and to inventory using the weighted average method usually yields different results depending on whether a perpetual or a periodic system is used. ⊚ ⊚
true false
23) An overstatement of ending inventory will cause an overstatement of assets and an understatement of stockholders' equity on the balance sheet. ⊚ ⊚
24)
true false
An overstatement of beginning inventory causes net income to be overstated. ⊚ ⊚
true false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 25) Which of the following is not a primary goal of inventory management? Version 1
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A) Obtaining the lowest cost of inventory. B) Ensuring sufficient quantities of inventory are available to meet customers' needs. C) Ensuring inventory quality meets customers' expectations and company standards. D) Minimizing the costs of acquiring and carrying inventory.
26)
Carrying insufficient quantities of inventory on hand: A) would not affect the company's profitability. B) may result in lost sales. C) has little effect on customer satisfaction. D) will increase the costs of carrying inventory.
27)
Which of the following is not one of the primary goals of inventory management?
A) Maintain a sufficient quantity of inventory to meet customer needs. B) Ensure inventory quality meets customers' expectations and company standards. C) Minimize the cost of acquiring and carrying inventory (including costs related to purchasing, production, storage, spoilage, theft, obsolescence, and financing). D) Minimize the quantity of ending inventory.
28) Inventory levels increase by 10% at your company during the fourth quarter. Based on this increase, which of the following statements must be correct? A) This must be good news because inventories are an asset to the company. B) This could be good news if the company is ordering more goods because sales appear to be rising. C) This could be bad news if the company is ordering more goods because unit costs are falling. D) This must be bad news because higher inventories mean higher costs.
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29) Which of the following would beincluded in the raw materials inventory of a company making ice cream? A) Milk and cream used to make the ice cream. B) Ice cream that has been made but is freezing to the level required for shipping. C) Frozen ice cream that is waiting to be shipped to retailers. D) Ice cream in process awaiting the addition of nuts.
30) Which of the following would be in the work in process inventory of a company making ice cream? A) Milk and cream used to make the ice cream. B) Ice cream in process awaiting the addition of nuts. C) Frozen ice cream that is waiting to be shipped to retailers. D) Ice cream that is in the freezers of retailers awaiting sale to consumers.
31) Which of the following would be in the finished goods inventory of a company making ice cream? A) Milk and cream used to make the ice cream. B) Ice cream that has been made but is freezing to the level required for shipping. C) Frozen ice cream that is waiting to be shipped to retailers. D) Ice cream in process awaiting the addition of nuts.
32)
Which of the following statements about an auto manufacturer's inventory is not correct?
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A) Tires, batteries, glass, paint, headlamp bulbs, and electric wiring would be included in raw materials inventory. B) Incomplete cars that are still being processed would be included in work in process inventory. C) Finished cars ready to be shipped to dealers would be included in finished goods inventory. D) Cars that have been sold to dealers would be included in finished goods inventory.
33) Goods that a company holds on behalf of another company that are not reported on the company's balance sheet are called: A) finished goods. B) consignment inventory. C) raw materials. D) work in process.
34) Inventory shipped FOB shipping point and in transit on the last day of the year should be included in: A) the inventory balance of the seller. B) the inventory balance of the buyer. C) neither the inventory balance of the buyer or the seller. D) both the inventory balance of the buyer and the seller.
35) Inventory shipped FOB destination and in transit on the last day of the year should be included in: A) the inventory balance of the seller. B) the inventory balance of the buyer. C) neither the inventory balance of the buyer or the seller. D) both the inventory balance of the buyer and the seller.
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36)
Which of the following is merchandise inventory? A) Goods held for sale in the normal course of business B) Office supplies that a company plans to use in the next few months C) Equipment used to manufacture products which will be sold later D) Raw materials and work in process
37)
Which of the following would be considered merchandise inventory? A) Work in progress B) Raw materials C) Purchased finished goods D) Cost of goods sold
38) Acme Company's balance sheet shows three inventory accounts—raw materials, work in process, and finished goods. Acme Company must be a: A) manufacturer. B) merchandiser. C) service business. D) wholesale distributor.
39) Angus Company agreed to sell goods for Longhorn Company on consignment, but wasn't willing to take ownership of the goods in case they were difficult to sell. Which of the following statements is true?
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A) Angus owns the inventory and should report it on its balance sheet. B) Longhorn owns the inventory, but should not report it on its balance sheet because Angus actually holds the inventory. C) Angus owns the inventory, since possession is nine tenths of the law, but should not report it on its balance sheet. D) Longhorn owns the inventory and should report it on its balance sheet.
40) Sleepy Monk offers roasted coffee beans for sale on consignment from Sea Level Roasters. Which company should report the inventory of unsold coffee beans on its balance sheet? A) Sea Level Roasters B) Sleepy Monk C) Both companies D) Neither company
41)
Goods placed in inventory are initially recorded at: A) market value. B) the amount paid to acquire the asset. C) the amount paid to prepare the asset for sale to customers. D) the amount paid to acquire the asset and prepare it for sale.
42) When a company sells goods, it removes their cost from the balance sheet and reports the cost on the income statement as: A) Selling Expenses. B) Cost of Goods Sold. C) Finished Goods Inventory. D) Inventory.
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43)
Which of the following statements about inventory classifications is not correct?
A) Inventory may include materials used in producing goods for sale. B) Manufacturers hold three types of inventory that are referred to as raw materials inventory, work in process inventory, and finished goods inventory. C) Inventory is classified as a long-term asset on the balance sheet. D) Merchandisers buy inventory in finished form ready for resale.
44) A fire destroyed some of Cholla, Incorporated’s records. Information from the documents found related to inventory is listed below. Ending Inventory Cost of Goods Sold Consigned Goods Beginning Inventory
$ 136,800 801,000 156,600 77,400
What was the amount of inventory that was purchased during the year? A) $860,400 B) $1,017,000 C) $741,600 D) $898,200
45)
If inventory is updated periodically, which of the equations is correct? A) Cost of goods sold = Beginning inventory + Purchases − Ending inventory B) Cost of goods sold = Beginning inventory + Purchases + Ending inventory C) Beginning inventory + Purchases = Ending inventory D) Ending inventory = Beginning inventory + Purchases + Cost of goods sold
46) Yucca Company updates its inventory periodically. The company's beginning inventory was $4,860 and purchases were $10,080 during the year. The company's ending inventory count was $9,000. What was the amount of its cost of goods sold?
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A) $5,940 B) $14,940 C) $23,940 D) $3,780
47) Lexington Company updates its inventory periodically. The company's beginning inventory was $1,000 and purchases were $5,000 during the year. The company's ending inventory count was $2,000. What was the amount of its cost of goods sold? A) $6,000 B) $4,000 C) $8,000 D) $2,000
48) Langston Company updates its inventory periodically. The company's cost of goods sold was $2,700 and purchases were $5,600 during the year. The company's ending inventory count was $5,000. What was the amount of beginning inventory? A) $3,300 B) $13,300 C) $7,900 D) $2,100
49)
If inventory is updated perpetually, which of the equations is correct? A) Cost of goods sold = Beginning inventory − Purchases − Ending inventory B) Cost of goods sold = Beginning inventory + Purchases + Ending inventory C) Ending inventory = Beginning inventory + Purchases − Cost of goods sold D) Ending inventory = Beginning inventory + Purchases + Cost of goods sold
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50) Saguaro Company updates its inventory perpetually. Its beginning inventory is $70,000, goods purchased during the period cost $240,000, and the cost of goods sold for the period is $280,000. What is the amount of the ending inventory? A) $90,000 B) $40,000 C) $50,000 D) $30,000
51) Sweetwater Company updates its inventory perpetually. The company reported a beginning inventory of $3,000. During the year, the company recorded inventory purchases of $9,000 and cost of goods sold of $10,000. What was the amount of its ending inventory? A) $2,000 B) $5,000 C) $5,200 D) $5,400
52) Cortez Company updates its inventory records perpetually. The company's records showed a beginning inventory of $24,000, cost of goods sold of $32,000, and ending inventory of $26,000. How much inventory was purchased during the year? A) $34,000. B) $30,000. C) $28,000. D) $18,000.
53) Cortez Company updates its inventory records perpetually. The company's records showed a beginning inventory of $1,800, cost of goods sold of $4,200, and ending inventory of $2,400. How much inventory was purchased during the year?
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A) $3,600 B) $3,000 C) $2,700 D) $4,800
54)
Goods available for sale equals: A) Cost of Goods Sold plus ending inventory. B) Cost of Goods Sold minus ending inventory. C) Beginning inventory plus Cost of Goods Sold. D) Beginning inventory plus Purchases minus Cost of Goods Sold.
55)
Goods in transit are: A) inventory items being transported from a seller to a buyer. B) always included in the transportation company's inventory. C) always included in the selling company's inventory. D) always included in the buying company's inventory.
56) Larkspur Company had cost of goods sold of $2,100. If beginning inventory was $2,200 and ending inventory was $550, Larkspur's purchases must have been: A) $450. B) $650. C) $1,650. D) $3,750.
57) Larkspur Company had cost of goods sold of $3,600. If beginning inventory was $3,780 and ending inventory was $900, Larkspur's purchases must have been:
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A) $720. B) $1,080. C) $2,880. D) $6,480.
58) Which of the following types of inventory would be the best suited for the specific identification method? A) Ice cream B) Business jets C) Biking helmets D) Potato chips
59) The specific identification method would probably be most appropriate for which of the following goods? A) Boxes of brass 4-inch drywall screws at Home Depot. B) Bottles of suntan lotion in Wal-Mart's central warehouse. C) Sets of tires at the Goodyear plant. D) Diamond necklaces at a Tiffany & Company jewelry store.
60) The LIFO inventory cost flow method assumes that the cost of the newest goods purchased are: A) assumed to be the last ones to be sold. B) not included in cost of goods sold or ending inventory. C) assumed to be the first ones included ending inventory. D) assumed to be the first ones sold.
61) Under a periodic inventory system, which inventory costing method generally results in the cost of the first (the oldest) goods purchased being assigned to ending inventory? Version 1
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A) FIFO B) LIFO C) Weighted average cost D) Simple average cost
62) Under a periodic inventory system, the LIFO inventory costing method assumes that the cost of the units most recently purchased is the: A) last to be assigned to cost of goods sold. B) first to be assigned to ending inventory. C) first to be assigned to cost of goods sold. D) last to be assigned to units available for sale.
63) AAA Company uses a periodic inventory system and has the following information regarding its inventory: Beginning inventory Purchase on January 25 Purchase on March 15 Purchase on October 2
300 units @ 13 400 units @ 14 300 units @ 15 500 units @ 16
Goods available for sale
$ 3,900 5,600 4,500 8,000 $ 22,000
There are 750 units in ending inventory. What is the amount of the ending inventory using the FIFO method? A) $3,900 B) $9,500 C) $8,000 D) $11,750
64) AAA Company uses a periodic inventory system and has the following information regarding its inventory: Beginning inventory
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200 units @ $15
$ 3,000
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Purchase on January 25 Purchase on March 15 Purchase on October 2 Goods available for sale
300 units @ $16 200 units @ $17 400 units @ $18
4,800 3,400 7,200 $ 18,400
There are 500 units in ending inventory. What is the amount of the ending inventory using the FIFO method? A) $3,000 B) $7,200 C) $7,800 D) $8,900
65) The Laurel Corporation starts the year with a beginning inventory of 470 units at $22 per unit. The company purchases 585 units at $38 each in February and 540 units at $23 each in October. Laurel sells 235 units during the year. Laurel uses a periodic inventory system and the FIFO inventory costing method. What is the amount of cost of goods sold? A) $8,930 B) $5,439 C) $5,170 D) $5,405
66) The Laurel Corporation starts the year with a beginning inventory of 600 units at $5 per unit. The company purchases 1,000 units at $4 each in February and 400 units at $6 each in October. Laurel sells 300 units during the year. Laurel uses a periodic inventory system and the FIFO inventory costing method. What is the amount of cost of goods sold? A) $1,200 B) $1,868 C) $1,500 D) $1,800
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67) Maxell Company uses the FIFO method to assign costs to inventory and cost of goods sold. The company uses a periodic inventory system. Consider the following information: Date
Description
# of units
Cost per unit
January 1
Beginning inventory
270
$ 5
June 2
Purchase
70
$ 4
November 5
Sales
300
What amounts would be reported as the cost of goods sold and ending inventory balances for the year? A) Cost of goods sold $1,500; Ending inventory $190 B) Cost of goods sold $1,620; Ending inventory $180 C) Cost of goods sold $1,430; Ending inventory $200 D) Cost of goods sold $1,470; Ending inventory $160
68) Maxell Company uses the FIFO method to assign costs to inventory and cost of goods sold. The company uses a periodic inventory system. Consider the following information: Date
Description
# of units
Cost per unit
January 1
Beginning inventory
100
$ 5
June 2
Purchase
75
$ 4
November 5
Sales
125
What amounts would be reported as the cost of goods sold and ending inventory balances for the year? A) Cost of goods sold $625; Ending inventory $175 B) Cost of goods sold $755; Ending inventory $225 C) Cost of goods sold $550; Ending inventory $250 D) Cost of goods sold $600; Ending inventory $200
69) Beryl Company uses a periodic inventory system and has the following informationregarding its inventory:
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Beginning inventory Purchase on January 25 Purchase on March 15 Purchase on October 2 Goods available for sale
400 units @ $15 600 units @ $16 400 units @ $17 800 units @ $18
$ 6,000 9,600 6,800 14,400 $ 36,800
There are 1,000 units in ending inventory. What is the amount of the ending inventory using the LIFO method? A) $6,000 B) $14,400 C) $15,600 D) $17,800
70) Willow Company had no beginning inventory. The company purchases 900 units of inventory in January at $5 each, 1,500 units at $4 each in August, and 600 units at $6 each in November. The company sells 450 units during the year. Willow uses a periodic inventory system and the LIFO inventory costing method. What is the cost of goods sold? A) $1,800 B) $2,802 C) $2,250 D) $2,700
71) Mansfield Company has a periodic inventory system and the LIFO method to assign costs to inventory and cost of goods sold. Consider the following information: Date
Description
# of units
Cost per unit
January 1
Beginning inventory
100
$ 5
October 2
Purchase
75
$ 4
December 5
Sales
125
What amounts would be reported as the cost of goods sold and ending inventory balances for the period? Version 1
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A) Cost of goods sold $625; Ending inventory $175 B) Cost of goods sold $755; Ending inventory $225 C) Cost of goods sold $550; Ending inventory $250 D) Cost of goods sold $600; Ending inventory $200
72) Coachlight Incorporated uses a periodic inventory system. The company purchased 200 units of inventory at $11.00 per unit and 300 units at $12.00 per unit. What is the weighted average unit cost for these purchases of inventory? (Round your final answer to two decimal places.) A) $11.00 B) $11.50 C) $11.60 D) $12.00
73) Coachlight Incorporated uses a periodic inventory system. The company purchased 200 units of inventory at $9 per unit and 300 units at $10 per unit. What is the weighted average unit cost for these purchases of inventory? A) $9.00 B) $9.50 C) $9.60 D) $10.00
74) HardwareIncorporated uses a periodic inventory system and the weighted average method. The company began the year with 150 large brass switch plates on hand at a cost of $4.00 each. Purchases of switch plates during the year were as follows: Date of Transaction May 7 June 11 November 22
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Quantity Received 200 200 250
Unit Cost $ 4.20 $ 4.40 $ 4.80
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The switch plates sell for $7.00 each. If Hardware sells 570 switch plates during the year, what is the company's cost of goods sold? A) $3,990 B) $2,508 C) $2,480 D) $2,560
75)
Eaton Electronics uses a periodic inventory system.
On March 31, Eaton has two plasma TVs on hand at a cost of $2,500 each (serial numbers 11534892 and 11534894). In April, the company purchases four more identical TVs from Toshiba for $1,950 each (serial numbers 11542631 through 11542634). In May, the company purchases five more identical TVs for $2,600 each (serial numbers 11550964 through 11550968). In June, Eaton sells two of these TVs (serial numbers 11534894 and 11542631). There were no additional purchases or sales during the remainder of the year. Eaton Electronics uses the specific identification method. What is its cost of goods sold? A) $5,000 B) $4,450 C) $5,200 D) $4,700
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76)
Eaton Electronics uses a periodic inventory system.
On March 31, Eaton has two plasma TVs on hand at a cost of $1,500 each (serial numbers 11534892 and 11534894). In April, the company purchases four more identical TVs from Toshiba for $1,450 each (serial numbers 11542631 through 11542634). In May, the company purchases five more identical TVs for $1,600 each (serial numbers 11550964 through 11550968). In June, Eaton sells two of these TVs (serial numbers 11534894 and 11542631). There were no additional purchases or sales during the remainder of the year. Eaton Electronics uses the specific identification method. What is its cost of goods sold? A) $3,000 B) $2,950 C) $3,200 D) $3,033
77)
Eaton Electronics uses a periodic inventory system.
On March 31, Eaton has two plasma TVs on hand at a cost of $1,500 each (serial numbers 11534892 and 11534894). In April, the company purchases four more identical TVs from Toshiba for $1,450 each (serial numbers 11542631 through 11542634). In May, the company purchases five more identical TVs for $1,600 each (serial numbers 11550964 through 11550968). In June, Eaton sells two of these TVs (serial numbers 11534894 and 11542631). There were no additional purchases or sales during the remainder of the year. Eaton Electronics reports $3,000 as the cost of goods sold. Eaton Electronics is using the: A) specific identification method. B) LIFO method. C) FIFO method. D) weighted average cost method.
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78)
Eaton Electronics uses a periodic inventory system.
On March 31, Eaton has two plasma TVs on hand at a cost of $1,500 each (serial numbers 11534892 and 11534894). In April, the company purchases four more identical TVs from Toshiba for $1,450 each (serial numbers 11542631 through 11542634). In May, the company purchases five more identical TVs for $1,600 each (serial numbers 11550964 through 11550968). In June, Eaton sells two of these TVs (serial numbers 11534894 and 11542631). There were no additional purchases or sales during the remainder of the year. Eaton Electronics uses the FIFO method. What is the cost of its ending inventory? A) $13,850 B) $13,800 C) $13,760 D) $13,600
79)
Eaton Electronics uses a periodic inventory system.
On March 31, Eaton has two plasma TVs on hand at a cost of $1,500 each (serial numbers 11534892 and 11534894). In April, the company purchases four more identical TVs from Toshiba for $1,450 each (serial numbers 11542631 through 11542634). In May, the company purchases five more identical TVs for $1,600 each (serial numbers 11550964 through 11550968). In June, Eaton sells two of these TVs (serial numbers 11534894 and 11542631). There were no additional purchases or sales during the remainder of the year. Eaton Electronics uses the LIFO method. What is the cost of its ending inventory?
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A) $13,850 B) $13,800 C) $13,760 D) $13,600
80)
Eaton Electronics uses a periodic inventory system.
On March 31, Eaton has two plasma TVs on hand at a cost of $1,500 each (serial numbers 11534892 and 11534894). In April, the company purchases four more identical TVs from Toshiba for $1,450 each (serial numbers 11542631 through 11542634). In May, the company purchases five more identical TVs for $1,600 each (serial numbers 11550964 through 11550968). In June, Eaton sells two of these TVs (serial numbers 11534894 and 11542631). There were no additional purchases or sales during the remainder of the year. Eaton Electronics uses the weighted average method. What is the company's weighted average cost per unit? (Round the per unit cost to the nearest dollar.) A) $1,500 B) $1,517 C) $1,527 D) $1,600
81) Alphabet Company, which uses the periodic inventory method, purchases different letters for resale. Alphabet had no beginning inventory. It purchased A thru G in January at $9.50 per letter. In February, it purchased H thru L at $11.50 per letter. It purchased M thru R in March at $12.50 per letter. It sold A, D, E, H, J and N in October. There were no additional purchases or sales during the remainder of the year. If Alphabet Company uses the specific identification method, what is the cost of its ending inventory?
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A) $135 B) $199 C) $58 D) $158
82) Alphabet Company, which uses the periodic inventory method, purchases different letters for resale. Alphabet had no beginning inventory. It purchased A thru G in January at $4 per letter. In February, it purchased H thru L at $6 per letter. It purchased M thru R in March at $7 per letter. It sold A, D, E, H, J and N in October. There were no additional purchases or sales during the remainder of the year. If Alphabet Company uses the specific identification method, what is the cost of its ending inventory? A) $31 B) $69 C) $76 D) $100
83) Alphabet Company, which uses the periodic inventory method, purchases different letters for resale. Alphabet had no beginning inventory. It purchased A thru G in January at $10.00 per letter. In February, it purchased H thru L at $12.00 per letter. It purchased M thru R in March at $13.00 per letter. It sold A, D, E, H, J and N in October. There were no additional purchases or sales during the remainder of the year. If Alphabet Company uses the FIFO method, what is the cost of its ending inventory? A) $78 B) $60 C) $130 D) $148
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84) Alphabet Company, which uses the periodic inventory method, purchases different letters for resale. Alphabet had no beginning inventory. It purchased A thru G in January at $4 per letter. In February, it purchased H thru L at $6 per letter. It purchased M thru R in March at $7 per letter. It sold A, D, E, H, J and N in October. There were no additional purchases or sales during the remainder of the year. If Alphabet Company uses the FIFO method, what is the cost of its ending inventory? A) $24 B) $42 C) $58 D) $76
85) Alphabet Company, which uses the periodic inventory method, purchases different letters for resale. Alphabet had no beginning inventory. It purchased A thru G in January at $2.00 per letter. In February, it purchased H thru L at $4.00 per letter. It purchased M thru R in March at $5.00 per letter. It sold A, D, E, H, J and N in October. There were no additional purchases or sales during the remainder of the year. If Alphabet Company uses the LIFO method, what is the cost of its ending inventory? A) $34.00 B) $12.00 C) $30.00 D) $46.00
86) Alphabet Company, which uses the periodic inventory method, purchases different letters for resale. Alphabet had no beginning inventory. It purchased A thru G in January at $4 per letter. In February, it purchased H thru L at $6 per letter. It purchased M thru R in March at $7 per letter. It sold A, D, E, H, J and N in October. There were no additional purchases or sales during the remainder of the year. If Alphabet Company uses the LIFO method, what is the cost of its ending inventory?
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A) $24 B) $42 C) $58 D) $76
87) Alphabet Company, which uses the periodic inventory method, purchases different letters for resale. Alphabet had no beginning inventory. It purchased A thru G in January at $4.00 per letter. In February, it purchased H thru L at $6.00 per letter. It purchased M thru R in March at $7.00 per letter. It sold A, D, E, H, J and N in October. There were no additional purchases or sales during the remainder of the year. If Alphabet Company uses the weighted average method, what is the cost of its ending inventory? (Round the per unit cost to two decimal places and then round your answer to the nearest whole dollar.) A) $48 B) $38 C) $67 D) $75
88) Alphabet Company, which uses the periodic inventory method, purchases different letters for resale. Alphabet had no beginning inventory. It purchased A thru G in January at $4 per letter. In February, it purchased H thru L at $6 per letter. It purchased M thru R in March at $7 per letter. It sold A, D, E, H, J and N in October. There were no additional purchases or sales during the remainder of the year. If Alphabet Company uses the weighted average method, what is the cost of its ending inventory? (Round the per unit cost to two decimal places and then round your answer to the nearest whole dollar.) A) $38 B) $48 C) $67 D) $75
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89) Windrose, Incorporated uses a periodic inventory system and its inventory records contain the following information: Units Beginning inventory: Purchased on May 10 Purchased on June 15 Purchased on August 28
Total Cost
600 800 1,000 600
$ 1,560 2,340 2,520 1,980
3,000
$ 8,400
The company sold 2,000 units during June. There were no additional purchases or sales during the remainder of the year. The company had 1,000 units in its ending inventory at the end of the year. If Windrose uses the FIFO costing method, what is the cost of its ending inventory? (Do not round cost per unit calculations.) A) $2,988 B) $4,580 C) $5,160 D) $5,412
90) Windrose, Incorporated uses a periodic inventory system and its inventory records contain the following information:
Beginning inventory: Purchased on May 10 Purchased on June 15 Purchased on August 28
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Units
Total Cost
600 800 1,000 600
$ 1,560 2,340 2,520 1,980
3,000
$ 8,400
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The company sold 2,000 units during June. There were no additional purchases or sales during the remainder of the year. The company had 1,000 units in its ending inventory at the end of the year. If Windrose uses the LIFO costing method, what is the cost of its ending inventory? (Do not round cost per unit calculations.) A) $2,730 B) $2,988 C) $3,240 D) $5,670
91) Windrose, Incorporated uses a periodic inventory system and its inventory records contain the following information: Units Beginning inventory: Purchased on May 10 Purchased on June 15 Purchased on August 28
600 800 1,000 600 3,000
Total Cost $ 1,560 2,340 2,520 1,980 $ 8,400
The company sold 2,000 units during June. There were no additional purchases or sales during the remainder of the year. The company had 1,000 units in its ending inventory at the end of the year. If Windrose uses the weighted average inventory costing method, what is the cost of its ending inventory? (Round the per unit cost to 2 decimal places and then round your answer to the nearest whole dollar.) A) $8,400 B) $5,400 C) $2,800 D) $2,730
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92) The Xu Corporation uses a periodic inventory system. The company has a beginning inventory of 310 units at $5 each on January 1. Xu purchases 510 units at $4 each in February and 210 units at $6 each in March. There were no additional purchases or sales during the remainder of the quarter. Xu sells 310 units during the quarter. If Xu uses the LIFO method, what is its cost of goods sold for the first quarter? (Do not round intermediate calculations. Round your final answer to the nearest dollar amount.) A) $1,660 B) $1,450 C) $1,560 D) $1,870.
93) The Xu Corporation uses a periodic inventory system. The company has a beginning inventory of 300 units at $5 each on January 1. Xu purchases 500 units at $4 each in February and 200 units at $6 each in March. There were no additional purchases or sales during the remainder of the quarter. Xu sells 300 units during the quarter. If Xu uses the LIFO method, what is its cost of goods sold for the first quarter? A) $1,600 B) $1,400 C) $1,500 D) $1,800
94) The Xu Corporation uses a periodic inventory system. The company has a beginning inventory of 480 units at $5 each on January 1. Xu purchases 410 units at $4 each in February and 110 units at $6 each in March. There were no additional purchases or sales during the remainder of the quarter. Xu sells 330 units during the quarter. If Xu uses the weighted average method, what is its cost of goods sold for the first quarter? (Do not round intermediate calculations. Round your final answer to the nearest dollar amount.)
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A) $1,320 B) $1,551 C) $1,650 D) $1,980
95) The Xu Corporation uses a periodic inventory system. The company has a beginning inventory of 300 units at $5 each on January 1. Xu purchases 500 units at $4 each in February and 200 units at $6 each in March. There were no additional purchases or sales during the remainder of the quarter. Xu sells 150 units during the quarter. If Xu uses the weighted average method, what is its cost of goods sold for the first quarter? A) $600 B) $705 C) $750 D) $900
96) Nordic Industries uses a periodic inventory system. During its first month of operations, Nordic Industries purchased inventory as follows: Units January 3 January 12 January 20 January 25
150 200 250 300 900
Unit Cost
Total Cost
$ 15 20 20 30
$ 2,250 4,000 5,000 9,000 $ 20,250
There were 100 units in ending inventory on January 31. Under the weighted average cost method, what is the cost of goods sold for January?
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A) $18,000 B) $20,250 C) $3,150 D) $2,250
97) Nordic Industries uses a periodic inventory system. During its first month of operations, Nordic Industries purchased inventory as follows: Units January 3 January 12 January 20 January 25
150 200 250 300
Unit Cost
Total Cost
$ 15 20 20 30
$ 2,250 4,000 5,000 9,000
900
$ 20,250
There were 100 units in ending inventory on January 31. Under the LIFO cost method, what is the cost of goods sold for January? A) $17,250 B) $19,500 C) $18,750 D) $18,000
98) Nordic Industries uses a periodic inventory system. During its first month of operations, Nordic Industries purchased inventory as follows: Units January 3 January 12 January 20 January 25
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150 200 250 300
Unit Cost
Total Cost
$ 15 20 20 30
$ 2,250 4,000 5,000 9,000
31
900
$ 20,250
There were 100 units in ending inventory on January 31. Under the FIFO cost method, what is the cost of goods sold for January? A) $17,250 B) $16,500 C) $18,750 D) $18,000
99) Which of the following would not be affected by the choice of an inventory costing method (that is, choosing between FIFO, LIFO, weighted average, and specific identification)? A) Sales revenue B) Cost of goods sold C) Gross profit D) Net income
100)
Which of the following statements is correct?
A) Specific identification is the most practical, but least accurate, measure of cost and net income. B) When unit costs are increasing, the weighted average cost method yields a cost of goods sold between that of FIFO and LIFO. C) FIFO will lead to the highest net income if unit costs are falling. D) LIFO will always yield a smaller net income than FIFO.
101)
Which of the following statements is correct?
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A) FIFO results in a lower net income than LIFO when costs are rising. B) LIFO results in a higher net income than FIFO when costs are rising. C) LIFO results in a higher net income than FIFO when costs are falling. D) LIFO results in the same net income as FIFO when costs are rising.
102) When a company has inventory, which is subject to gradually increasing prices, the use of the LIFO method of valuing inventory will result in the: A) highest amount of assets and the lowest amount of net income. B) highest amount of assets and the highest amount of net income. C) lowest amount of assets and the highest amount of net income. D) lowest amount of assets and the lowest amount of net income.
103) If inventory costs have been falling during the year, which cost method results in the highest gross profit for the year? A) Specific identification B) Weighted average cost C) LIFO D) FIFO
104)
Which of the following will occur when inventory costs are decreasing? A) FIFO will result in a lower net income but a higher ending inventory than will LIFO. B) FIFO will result in a higher net income but a lower ending inventory than will LIFO. C) FIFO will result in a lower net income and a lower ending inventory than will LIFO. D) FIFO will result in a higher net income and a higher ending inventory than will
LIFO.
105) In a period of rising prices, the inventory costing method that will cause the company to have the highest cost of goods sold is: Version 1
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A) FIFO. B) LIFO. C) Weighted average. D) Specific identification.
106) In a period of falling prices, the inventory costing method that will cause the company to have the highest cost of goods sold is: A) FIFO. B) LIFO. C) Weighted average. D) Specific identification.
107) In a period of rising prices, the inventory costing method that assigns a value to inventory that approximates current cost is: A) LIFO. B) FIFO. C) Weighted average. D) Specific identification.
108) In a period of falling prices, the inventory costing method that assigns a value to inventory that approximates current cost is: A) FIFO. B) LIFO. C) Specific identification. D) Weighted average.
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109) For each of the following accounts, generally, which inventory costing method most closely approximates the current cost Ending Inventory
Cost of Goods Sold
FIFO LIFO FIFO LIFO
LIFO LIFO FIFO FIFO
A) B) C) D)
A) Option A B) Option B C) Option C D) Option D
110) In a period of rising prices, the inventory costing method that will cause the company to have the lowest income tax expense is: A) LIFO. B) FIFO. C) Weighted average. D) Specific identification.
111) Of the four companies listed below, which company is more likely to use specific identification to value their inventory and cost of goods sold? A) Wedding cake baker B) Dog biscuit manufacturer C) Grocery store D) Bulk candy merchandiser
112)
Specific identification is:
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A) the classification of an account as an asset, liability, or stockholders' equity account. B) an inventory method that individually identifies and records the cost of each item as cost of goods sold. C) a detailed list of all of a corporation's stockholders. D) a high-tech security technique for identifying key employees.
113) Which inventory method is typically used when accounting for expensive and unique inventory items? A) Specific identification B) FIFO C) LIFO D) Weighted Average Cost
114) Delta Diamonds uses a periodic inventory system. The company had five one-carat diamonds available for sale this year: one was purchased on June 1 for $750, two were purchased on July 9 for $850 each, and two were purchased on September 23 for $900 each. On December 24, it sold one of the diamonds that was purchased on July 9. Using the specific identification method, its ending inventory (after the December 24 sale) equals: A) $3,400. B) $3,500. C) $2,450. D) $850.
115) Delta Diamonds uses a periodic inventory system. The company had five one-carat diamonds available for sale this year: one was purchased on June 1 for $500, two were purchased on July 9 for $550 each, and two were purchased on September 23 for $600 each. On December 24, it sold one of the diamonds that was purchased on July 9. Using the specific identification method, its ending inventory (after the December 24 sale) equals:
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A) $2,250. B) $1,650. C) $2,200. D) $550.
116)
FIFO, LIFO, and weighted average inventory costing methods are based on: A) assumptions that accountants make about the flow of inventory costs. B) the actual physical flow of goods purchased and sold by a business. C) surveys taken that ask real companies how they value their inventories. D) the accounting equation (assets = liabilities + stockholders' equity).
117) FIFO uses the ________ cost for cost of goods sold on the income statement and the ________ cost for inventory on the balance sheet. A) newest; newest B) newest; oldest C) oldest; oldest D) oldest; newest
118) Which inventory costing method uses the oldest cost for cost of goods sold on the income statement and the newest cost for inventory on the balance sheet? A) LIFO B) Specific identification C) FIFO D) Weighted average
119) LIFO uses the ________ unit costs for cost of goods sold on the income statement and the ________ unit costs for inventory on the balance sheet.
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A) newest; oldest B) oldest; oldest C) oldest; newest D) newest; newest
120) Which inventory costing method assumes that inventory costs flow out in the opposite order from which the goods were purchased? A) FIFO B) LIFO C) Weighted average D) Specific identification
121) The weighted average cost method uses the ________ cost for cost of goods sold on the income statement and the ________ cost for inventory on the balance sheet. A) average; average B) average; newest C) newest; average D) average; oldest
122) What is the inventory costing method that adds together the total cost of all goods available for sale during the period, and then divides that by the number of units available for sale to get a value to assign to all goods sold and all goods remaining in inventory? A) Weighted average B) Cost C) FIFO D) LIFO E) Specific identification
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123) Delta Diamonds uses a periodic inventory system. The company had five one-carat diamonds available for sale this year: one was purchased on June 1 for $1,500, two were purchased on July 9 for $2,050 each, and two were purchased on September 23 for $2,150 each. On December 24, it sold one of the diamonds that was purchased on July 9. Using the FIFO method, its cost of goods sold for the year ended is: A) $4,100. B) $2,150. C) $4,300. D) $1,500.
124) Delta Diamonds uses a periodic inventory system. The company had five one-carat diamonds available for sale this year: one was purchased on June 1 for $500, two were purchased on July 9 for $550 each, and two were purchased on September 23 for $600 each. On December 24, it sold one of the diamonds that was purchased on July 9. Using the FIFO method, its cost of goods sold for the year ended is: A) $1,100. B) $600. C) $1,200. D) $500.
125) Delta Diamonds uses a periodic inventory system. The company had five one-carat diamonds available for sale this year: one was purchased on June 1 for $500, two were purchased on July 9 for $550 each, and two were purchased on September 23 for $600 each. On December 24, it sold one of the diamonds that was purchased on July 9. Using the FIFO method, its ending inventory (after the December 24 sale) equals: A) $2,300. B) $2,800. C) $2,200. D) $2,250.
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126) Delta Diamonds uses a periodic inventory system. The company had five one-carat diamonds available for sale this year: one was purchased on June 1 for $500, two were purchased on July 9 for $550 each, and two were purchased on September 23 for $600 each. On December 24, it sold one of the diamonds that was purchased on July 9. Using the LIFO method, its cost of goods sold equals: A) $1,200. B) $1,100. C) $600. D) $500.
127) Delta Diamonds uses a periodic inventory system. The company had five one-carat diamonds available for sale this year: one was purchased on June 1 for $500, two were purchased on July 9 for $550 each, and two were purchased on September 23 for $600 each. On December 24, it sold one of the diamonds that was purchased on July 9. Using the LIFO method, its ending inventory (after the December 24 sale) equals: A) $2,300. B) $2,250. C) $600. D) $2,200.
128) King Costume uses a periodic inventory system. The company started the month with 8 masks in its beginning inventory that cost $10 each. During the month, King Costume purchased 43 additional masks for $12 each. At the end of the month, King counted its inventory and found that 5 masks remained unsold. Using the LIFO method, its cost of goods sold for the month is: A) $546. B) $552. C) $50. D) $536.
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129) King Costume uses a periodic inventory system. The company started the month with 8 masks in its beginning inventory that cost $10 each. During the month, King Costume purchased 40 additional masks for $12 each. At the end of the month, King counted its inventory and found that 5 masks remained unsold. Using the LIFO method, its cost of goods sold for the month is: A) $510. B) $516. C) $50. D) $500.
130) Mountain Made uses a periodic inventory system. The company started the month with 3 quilts in its beginning inventory that cost $200 each. During the month, Mountain Made purchased 20 additional quilts for $210 each. At the end of the month, Mountain Made counted its inventory and found that 5 quilts remained unsold. If Mountain Made uses LIFO periodic, its cost of goods sold for the month is: A) $1,020. B) $3,780. C) $3,750. D) $1,050.
131) Evans Company uses a periodic inventory system. The company bought 150 units of inventory for $8 each and 50 units of inventory for $10 each. Evans’ weighted average cost per unit is: A) $8.50. B) $9.00. C) $8.00. D) $10.00.
132) Beta Company uses a periodic inventory system. The company bought 80 units of inventory for $12 each and 20 units of inventory for $12.50 each. It sold 90 units for $25 each. Beta's weighted average cost is:
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A) $12.10. B) $12.25. C) $16.50. D) $12.
133) Lux Company uses a periodic inventory system. The company started the month with 20 lamps in its beginning inventory that cost $30 each. During the month, Lux purchased 80 additional lamps for $31 each. At the end of the month, Lux counted its inventory and found that 25 lamps remained unsold. If Lux uses the weighted average cost method, its cost of goods sold for the month is: A) $2,287.50. B) $770.00. C) $2,305.00. D) $2,310.00.
134) The assumption that a company makes about its inventory cost flow can affect cost of goods sold on its ________ and inventory on its ________. A) income statement; balance sheet B) balance sheet; income statement C) income statement; income statement D) balance sheet; balance sheet
135)
FIFO, an inventory costing method, actually describes how to calculate the: A) cost of goods sold. B) cost of goods available for sale. C) beginning inventory. D) purchases.
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136) A company uses a periodic inventory system. The company had beginning inventory of 3 units that cost $5 each. During the month, 17 units were purchased for $6 each. The company sold 15 units during the month and had 5 remaining in ending inventory. If the company uses FIFO instead of LIFO to calculate cost of goods sold, then cost of goods sold will be: A) higher using FIFO, leading to higher gross profit and higher income taxes. B) lower using FIFO, leading to higher gross profit and higher income taxes. C) lower using FIFO, leading to lower gross profit and lower income taxes. D) higher using FIFO, leading to lower gross profit and lower income taxes.
137) When costs to purchase inventory are decreasing, using LIFO leads to reporting ________ cost of goods sold and ________ net income than FIFO. A) lower; higher B) higher; higher C) lower; lower D) higher, lower
138) When costs to purchase inventory are rising, using LIFO leads to reporting a ________ than FIFO. A) lower value for inventory on the balance sheet B) higher value for inventory on the balance sheet C) lower value for inventory on the income statement D) higher value for inventory on the income statement
139) When costs to purchase inventory are increasing over time, using FIFO leads to reporting ________ cost of goods sold and ________ net income than LIFO.
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A) lower, lower B) higher; higher C) lower; higher D) higher; lower
140)
If companies are required to adopt IFRS, companies will: A) no longer be able to use FIFO. B) have to switch to FIFO. C) have to switch to weighted average cost. D) no longer be able to use LIFO.
141)
The LIFO Conformity Rule requires that LIFO be used: A) for financial reporting if it is used on the company's income tax return. B) for both IFRS and GAAP. C) every accounting period even when prices are rising. D) by all companies in the same industry.
142)
Which of the following statements about inventory costing methods is correct?
A) A change in inventory method is allowed only if it improves the accuracy of the company's financial results. B) During a period of rising prices, LIFO results in a higher income tax expense than does FIFO. C) International Financial Reporting Standards (IFRS) allow the use of LIFO but not FIFO. D) In the U.S., if a company uses LIFO on the income tax return, it may use a different method for financial reporting.
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143) at:
Generally accepted accounting principles (GAAP) require that the inventory be reported
A) market value. B) historical cost. C) lower of cost or market/net realizable value. D) retail value.
144) An adjustment to ending inventory under the lower of cost or market/net realizable value (LCM/NRV) rule would be least likely to be recorded by a company that sells: A) a household staple like laundry detergent. B) a fad product like Slap Wraps bracelets. C) seasonal items like snow blowers. D) high-tech goods like cell phones.
145) Merle Industries had been selling its product for $52 per unit, but recently lowered the selling price to $31 per unit. The company's current inventory consists of 280 units purchased at $48 per unit. The market value of this inventory is currently $29 per unit. At what amount should the company’s inventory be reported on the balance sheet? A) $8,120 B) $13,440 C) $8,680 D) $14,560
146) Merle Industries had been selling its product for $40 per unit, but recently lowered the selling price to $30 per unit. The company's current inventory consists of 200 units purchased at $32 per unit. The market value of this inventory is currently $26 per unit. At what amount should the company's inventory be reported on the balance sheet?
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A) $5,200 B) $6,400 C) $6,000 D) $8,000
147) When the market value of inventory drops below the cost recorded in the financial records, applying the lower of cost or market/net realizable value (LCM/NRV) rule causes: A) a decrease in cost of goods sold. B) no change in net income, other things being equal. C) a decrease in total assets. D) an increase in net income.
148) Brandon, Incorporated has 500 units in inventory that were purchased for $24 each. These units have a current market value of $30 each. Brandon’s supplier has just announced a price increase to $33 that will go into effect at the beginning of next year. Management should: A) make no adjustments to the inventory account. B) adjust the inventory account using the lower of the recent market values, which is $30.00. C) adjust the inventory account using the cost, which is $24.00. D) adjust the inventory account using the average of the recent market values, which is $33.00.
149) Sparks Furniture Company carries three lines of sofas. Information about the sofa inventory as of the end of its most recent fiscal year follows. If LCM/NRV is applied to each separate product line, what is the amount of the adjustment that must be made to the company's inventory? Product Line Rustic Mediterranean
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Cost per Unit $ 795 695
Market Value per Unit $ 915 795
Quantity 380 490
46
Contemporary
1,125
700
370
A) $94,600 B) ($157,250) C) ($17,050) D) ($62,650)
150) Sparks Furniture Company carries three lines of sofas. Information about the sofa inventory as of the end of its most recent fiscal year follows. If LCM/NRV is applied to each separate product line, what is the amount of the adjustment that must be made to the company's inventory? Product Line Rustic Mediterranean Contemporary
Cost per Unit $ 700 600 950
Market Value per Unit $ 725 605 820
Quantity 190 300 275
A) $6,250 B) ($35,750) C) ($25,500) D) ($29,500)
151)
If the BallCorporation writes down its inventory, its: A) cost of goods sold will decrease. B) net income will increase. C) current assets will decrease. D) stockholders' equity will increase.
152) Schoop, Incorporated has 100 units in inventory, purchased at $8 per unit. These units have a current market value of $7. The entry to write-down the inventory will include a:
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A) credit to Cost of Goods Sold for $100. B) debit to Cost of Goods Sold for $700. C) credit to Inventory for $100. D) debit to Inventory for $700.
153) Recording a Lower of Cost or Market/Net Realizable Value (LCM/NRV) adjustment involves which of the following generic journal entries? A) Debit Sales Revenue and credit Inventory. B) Debit Cost of Goods Sold and credit Inventory. C) Debit Loss on Goods Sold and credit Inventory. D) Debit Retained Earnings and credit Inventory.
154)
If the market value of goods in inventory is $26,000 below its cost, the company should:
A) do nothing, because assets are reported at their original purchase price. B) credit Inventory for $26,000. C) debit Inventory for $26,000. D) use the weighted average cost method since that method provides a more accurate indicator of current value.
155)
One of the most common sources of misstatement in financial statements is the: A) use of alternating inventory costing methods. B) failure to write down inventory when the market value is below cost. C) failure to report stock issues appropriately. D) incorrectly calculating the inventory turnover ratio.
156) Which of the following statements about the lower of cost or market rule/net realizable value is not correct?
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A) The lower of cost or market/net realizable value rule sometimes causes the value of inventory to be written down below cost, but will never cause the value of inventory to be increased above cost. B) The amount of inventory write-down is an expense which most companies report as cost of goods sold. C) Lower of cost or market is an inventory cost method used to determine cost of goods sold and ending inventory. D) The lower of cost or market/net realizable value (LCM/NRV) rule results in reporting inventory conservatively, at an amount that does not exceed its actual value.
157) When the lower of cost or market rule/net realizable value requires an inventory adjustment, the: A) adjustment usually, but not always, reduces the book value of inventory. B) write-down is usually reported as a part of cost of goods sold. C) inventory adjustment is recorded in a contra-account called Inventory Allowances. D) write-down does not affect any of the financial statements.
158) At year end, CurlZ, Incorporated's inventory consists of 230 bottles of CleanZ at $1 per bottle and 130 boxes of DyeZ at $10 per box. Market values are $1.30 per bottle for CleanZ and $8 per box for DyeZ. CurlZ should report its inventory at: A) $1,270. B) $1,530. C) $1,339. D) $1,599.
159) At year end, CurlZ, Incorporated's inventory consists of 200 bottles of CleanZ at $1 per bottle and 100 boxes of DyeZ at $10 per box. Market values are $1.20 per bottle for CleanZ and $8 per box for DyeZ. CurlZ should report its inventory at:
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A) $1,000. B) $1,200. C) $1,040. D) $1,240.
160) The journal entry to record a write-down of inventory from cost to its lower market value includes a: A) debit to Inventory. B) credit to Inventory. C) credit to Sales Revenue. D) debit to Sales Revenue.
161) Probes, Incorporated wrote down its inventory to the lower replacement value. The effect on Probes' accounting equation includes a(n): A) increase in assets. B) decrease in assets. C) increase in liabilities. D) increase in stockholders' equity.
162) Most companies report their lower of cost or market write-down expense as a ______ expense even if the goods haven't been sold, because it's a necessary cost of carrying and (eventually) selling the goods. A) Cost of Goods Sold B) Discount C) Marketing D) Lower of Cost or Market
163)
The process of buying and selling inventory is known as:
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A) inventory circulation. B) inventory management. C) inventory turnover. D) inventory allocation.
164)
Which of the following is not associated with a high inventory turnover ratio? A) A reduction in storage and obsolescence costs. B) Relatively short time periods between inventory purchases and sales. C) A drop in the demand for the company's products. D) A reduction in borrowing to finance inventory purchases.
165) Which of the following actions would most likely cause the inventory turnover ratio to increase? A) Increasing the average inventory kept on hand. B) Maintaining the same average inventory kept on hand and increasing the volume of sales. C) Increasing the average inventory kept on hand and increasing the volume of sales. D) Maintaining the same average inventory kept on hand and decreasing the volume of sales.
166)
A decreasing inventory turnover ratio indicates: A) a longer time span between the ordering and receiving of inventory. B) a shorter time span between the ordering and receiving of inventory. C) a longer time span between the purchase and sale of inventory. D) a shorter time span between the purchase and sale of inventory.
167)
A declining inventory turnover ratio may mean that:
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A) goods are not selling as fast as they were in the past. B) the company is expecting to sell more in the future. C) goods are selling, but it is taking longer to collect payment. D) goods cannot be shipped fast enough.
168) An increasing balance in the Inventory account accompanied by an increase in the inventory turnover ratio would imply that the inventory build-up is occurring because: A) inventory is not selling as fast as anticipated. B) the company is expecting to sell more inventory in the future. C) inventory is selling, but it is taking longer to collect payment from customers. D) the economy is slowing down.
169)
The inventory turnover ratio is calculated as: A) cost of goods sold divided by sales. B) cost of goods sold divided by average inventory. C) ending inventory divided by cost of goods sold. D) average inventory divided by cost of goods sold.
170)
The number of days to sell is calculated as: A) 365 divided by Ending inventory. B) Cost of goods sold divided by Ending inventory. C) 365 divided by Inventory turnover ratio. D) Cost of goods sold divided by Average inventory.
171)
Barron Industries has the following information:
Sales Revenue Ending inventory
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52
Cost of Goods Sold Beginning inventory
420,000 52,000
What is Barron’s number of days to sell? (Round intermediate calculations to 2 decimal places. Assume 365 days a year.) A) 34.1 days B) 37.1 days C) 49.5 days D) 53.9 days
172)
Barron Industries has the following information:
Sales Revenue Ending inventory Cost of Goods Sold Beginning inventory
$ 300,000 30,000 200,000 25,000
What is Barron’s number of days to sell? (Round intermediate calculations to two decimal places. Assume 365 days a year.) A) 33.5 days B) 36.5 days C) 50.2 days D) 54.8 days
173) Sugar, Incorporated sells $649,300 of goods during the year that have a cost of $488,600. Inventory was $30,683 at the beginning of the year and $34,938 at the end of the year. What is the inventory turnover ratio? (Round your final answer to 1 decimal place.) A) 14.9 times B) 15.9 times C) 19.8 times D) 4.9 times
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174) Sugar, Incorporated sells $938,600 of goods during the year that have a cost of $797,200. Inventory was $59,566 at the beginning of the year and $68,076 at the end of the year. What is the inventory turnover ratio? A) 12.5 times B) 13.4 times C) 14.7 times D) 2.2 times
175) Sugar, Incorporated sells $489,300 of goods during the year that have a cost of $408,600. Inventory was $29,883 at the beginning of the year and $34,138 at the end of the year. How long on average(how many days) does it take to sell something from inventory after it is purchased? (Assume 365 days in a year. Do not round your intermediate calculations. Round your final answer to one decimal place.) A) 23.9 days B) 12.8 days C) 28.6 days D) 146.0 days
176) Sugar, Incorporated sells $938,600 of goods during the year that have a cost of $797,200. Inventory was $59,566 at the beginning of the year and $68,076 at the end of the year. How long on average(how many days) does it take to sell something from inventory after it is purchased? (Assume 365 days in a year. Do not round your intermediate calculations. Round your final answer to one decimal place.) A) 12.5 days B) 24.8 days C) 29.2 days D) 165.9 days
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177)
The records of Alberta Incorporated included the following information:
Cost of goods sold Beginning inventory Ending inventory
$ 2,100,000 465,000 525,000
What is the inventory turnover ratio? (Round your answer to two decimal places.) A) 4.24 times B) 4.52 times C) 2.10 times D) 4.00 times
178)
The records of Alberta Incorporated included the following information:
Cost of goods sold Beginning inventory Ending inventory
$ 1,800,000 435,000 465,000
What is the inventory turnover ratio? A) 3.87 times B) 4.00 times C) 4.14 times D) 2.00 times
179)
The records of Alberta Incorporated included the following information:
Cost of goods sold Beginning inventory Ending inventory
$ 2,200,000 475,000 545,000
What is the number of days to sell? (Round your intermediate calculations andfinalanswer to 2 decimal places. Assume 365 days a year.) Version 1
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A) 84.69 days B) 90.40 days C) 78.83 days D) 182.50 days
180)
The records of Alberta Incorporated included the following information:
Cost of goods sold Beginning inventory Ending inventory
$ 1,800,000 435,000 465,000
What is the number of days to sell? A) 91.25 days B) 94.30 days C) 88.16 days D) 182.50 days
181) Sun Concepts sells and installs solar energy products. Information from the financial statements for the last two years revealed the following: Beginning Inventory
Ending Inventory
Cost of Goods Sold
$ 90,000 130,000
$ 130,000 110,000
$ 605,000 720,000
Year 1 Year 2
The inventory turnover ratio in Year 1 was: A) 0.18 times B) 6.37 times C) 4.84 times D) 5.50 times
182) Sun Concepts sells and installs solar energy products. Information from the financial statements for the last two years revealed the following:
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Beginning Inventory
Ending Inventory
Cost of Goods Sold
$ 90,000 130,000
$ 130,000 110,000
$ 605,000 720,000
Year 1 Year 2
The number of days to sell in Year 2 was approximately: A) 75 days B) 66 days C) 61 days D) 73 days
183) Sun Concepts sells and installs solar energy products. Information from the financial statements for the last two years revealed the following:
Year 1 Year 2
Beginning Inventory
Ending Inventory
Cost of Goods Sold
$ 90,000 130,000
$ 130,000 110,000
$ 605,000 720,000
Compared with Year 1, Sun Concept's number of days to sell in Year 2 was: A) shorter. B) longer. C) unchanged. D) unable to be determined.
184)
For a merchandiser, inventory turnover refers to how many times: A) during the period the company replaces its raw materials inventory. B) the company purchases and sells its inventory of goods. C) the company produces and delivers its inventory of goods to customers. D) the company orders merchandise.
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185)
For a manufacturer, inventory turnover refers to how many times: A) during the period the company replaces the raw materials inventory. B) the company purchases and sells its inventory of finished goods. C) the company produces its goods and delivers the inventory to customers. D) the company orders raw materials.
186) Which of the following companies would be least concerned about a low inventory turnover ratio? A) A fish market selling fresh fish. B) A hardware company selling drywall screws. C) A dairy company selling butter and milk. D) A semiconductor company selling microchips.
187) Which of the following would cause the greatest increase in a company's inventory turnover ratio? A) Keeping the same amount of inventory on hand while unit sales are increasing. B) Increasing the amount of inventory on hand while unit sales are increasing. C) Keeping the same amount of inventory on hand while unit sales are decreasing. D) Decreasing the amount of inventory on hand while unit sales are increasing.
188)
Which of the following statements about inventory turnover analysis is not correct?
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A) In making comparisons of financial statements, it is desirable to compare data calculated using the same inventory costing methods. B) The inventory turnover ratio and days to sell measure will be affected by the cost flow assumptions used, which causes problems for financial statements users. C) Inventory turnover also can vary significantly between companies within the same industry. D) The inventory turnover and days to sell ratios are consistent among companies in different industries.
189)
Which of the following statements about inventory measures is not correct?
A) If the inventory turnover ratio increases, the days to sell measure decreases. B) The days to sell measure can help managers make ordering decisions for inventory. C) A higher inventory turnover ratio indicates that inventory is moving more quickly from purchase to sale. D) It is rare for a company with a lower gross profit percentage to have a faster inventory turnover.
190)
The inventory turnover ratio directly measures: A) the days it takes to sell its average inventory balance. B) the times per period the average inventory balance is sold. C) how many days it takes to collect. D) its sales of inventory sold on account.
191) If Cherry Company has an inventory turnover ratio of 8 times, its days to sell must be approximately: A) 46 days. B) 46 times per year. C) 22 days. D) 22%.
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192)
Which company will have the lower number of days to sell? A) Company A whose cost of goods sold equals $8,000 and whose average inventory is
$500. B) Company B whose cost of goods sold equals $4,000 and whose average inventory is $200. C) Company C whose cost of goods sold equals $2,000 and whose average inventory is $200. D) There is not enough information to answer this question.
193)
Days to sell measures the average number of: A) times per year inventory is purchased. B) days' sales in accounts payable. C) times per year receivables are collected. D) days from the time inventory is purchased to the time it is sold.
194)
Which of these would you expect to have the highest inventory turnover ratio? A) Ford Motor Company - automobile manufacturer. B) The Boeing Company - aircraft manufacturer. C) McDonald's Corporation - quick service hamburger restaurants. D) Macy's, Incorporated - clothing and home furnishings retailer.
195) It is more useful to compare a company's inventory turnover with its own results from prior periods than with the results of other companies:
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A) because companies may use different accounting methods which may cause the turnovers to vary significantly. B) because larger companies' ratios are not comparable with smaller companies' ratios. C) on extremely rare occasions. Little information can be gleaned from comparing a company's current and prior period results. D) because knowing the results of other companies does not help you manage or evaluate the company in which you are interested.
196) Which company is most likely to have a higher inventory turnover than its competitors within the same industry? A) A company with lower-priced goods and lower gross profit. B) A company with higher-priced goods and lower gross profit. C) A company with higher-priced goods and higher gross profit. D) A company that reports lower cost of goods sold and higher inventory values.
197)
Which one of the following statements about inventory is not correct?
A) An increase in inventory levels is always a sign of inefficiency in inventory management. B) The measurement of inventory affects both the balance sheet and the income statement within an accounting period. C) The ending inventory of one accounting period becomes the beginning inventory of the next accounting period. D) The cost of inventory can vary over time and may be affected by technological innovation.
198)
Because LIFO uses older costs for ending inventory, in times of rising unit cost:
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A) LIFO results in a higher book value of inventory and lower inventory turnover ratio than FIFO. B) LIFO results in a lower book value of inventory and lower inventory turnover ratio than FIFO. C) LIFO results in a higher book value of inventory and higher inventory turnover ratio than FIFO. D) LIFO results in a lower book value of inventory and higher inventory turnover ratio than FIFO.
199)
Which of the following statements is correct?
A) Valuing inventory under LIFO may produce different results depending on whether a perpetual or periodic inventory system is used. B) Valuing inventory under the weighted average cost method always produces the same results using either a perpetual or periodic inventory system. C) Valuing inventory under FIFO may produce different results depending on whether a perpetual or periodic inventory system is used. D) Using the specific identification method will produce different results depending on whether perpetual or periodic inventory system is used.
200)
The most commonly used inventory costing method in the U.S. is: A) FIFO. B) specific identification. C) LIFO. D) weighted average.
201) Pacific Company starts the year with a beginning inventory of 4,900 units at $7 per unit. The company purchases 6,900 units at $6 each in February and 3,900 units at $8 each in March. Pacific sells 1,900 units during this quarter. Pacific has a perpetual inventory system and uses the FIFO inventory costing method. What is the cost of goods sold for the quarter?
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A) $11,400 B) $15,200 C) $13,300 D) $14,250
202) Pacific Company starts the year with a beginning inventory of 6,000 units at $5 per unit. The company purchases 10,000 units at $4 each in February and 4,000 units at $6 each in March. Pacific sells 3,000 units during this quarter. Pacific has a perpetual inventory system and uses the FIFO inventory costing method. What is the cost of goods sold for the quarter? A) $12,000. B) $18,680. C) $15,000. D) $18,000.
203) Pearl Company has a perpetual inventory system. The company uses the FIFO method to assign costs to inventory and cost of goods sold. Consider the following information: Date April 1 April 2 April 5
Description Beginning inventory Purchase Sales
Units 1,000 750 1,250
Cost per unit $ 5 $ 4
What amounts would be reported as cost of goods sold and ending inventory for April? A) Cost of goods sold $6,250; Ending inventory $1,750. B) Cost of goods sold $7,550; Ending inventory $2,250. C) Cost of goods sold $5,500; Ending inventory $2,500. D) Cost of goods sold $6,000; Ending inventory $2,000.
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204) Character Company, which uses the perpetual inventory method, purchases different letters for resale. Character had a beginning inventory comprised of six units at $6 per unit. The company purchased three units at $8 per unit in February, sold seven units in October, and purchased three units at $9 per unit in December. If Character Company uses the LIFO method, what is the cost of its ending inventory? A) $48 B) $39 C) $57 D) $87
205) CharacterCompany, which uses the perpetual inventory method, purchases different letters for resale. Character had a beginning inventory comprised of seven units at $4 per unit. The company purchased five units at $6 per unit in February, sold seven units in October, and purchased two units at $7 per unit in December. IfCharacter Company uses the LIFO method, what is the cost of its ending inventory? A) $38 B) $34 C) $44 D) $72
206) Character Company, which uses the perpetual inventory method, purchases different letters for resale. Character had a beginning inventory comprised of nine units at $5 per unit. The company purchased six units at $7 per unit in February, sold nine units in October, and purchased three units at $8 per unit in December. If Character Company uses the LIFO method, what is the cost of goods sold for the year? A) $57 B) $54 C) $66 D) $111
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207) CharacterCompany, which uses the perpetual inventory method, purchases different letters for resale. Character had a beginning inventory comprised of seven units at $4 per unit. The company purchased five units at $6 per unit in February, sold seven units in October, and purchased two units at $7 per unit in December. IfCharacter Company uses the LIFO method, what is the cost of goods sold for the year? A) $38 B) $34 C) $44 D) $72
208) Amiable Incorporated uses a perpetual inventory system. The following transactions took place during the month of August: August 2 August 5 August 15 August 18
25 units were purchased at $12 per unit 10 units were purchased at $13 per unit 12 units were sold at $25 per unit 15 units were purchased at $14 per unit
If Amiable uses the LIFO method, what is the ending inventory at August 31? A) $496.00 B) $486.00 C) $492.57 D) $300.00 E) $510.00
209) Which of the following statements about the calculations used for the weighted average inventory costing method is correct?
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A) Under the weighted average cost method, if the goods in inventory were purchased at three different prices, the three different prices would be added and then divided by three to find the weighted average cost per unit. B) When the weighted average inventory costing method is used, ending inventory and cost of goods sold are calculated using different costs per unit. C) There is no difference in the calculations under the weighted average method whether a perpetual or periodic inventory system is used. D) The weighted-average method will produce an inventory cost which is between the results of FIFO and LIFO inventory costing methods.
210) A company had inventory on November 1 of 5 units at a cost of $20 each. On November 2, the company purchased 10 units at $22 each. On November 5, the company sold 8 units for $55 each. On November 6, the company purchased 6 units at $25 each. The company uses a perpetual inventory system. Using the weighted average method, what is the value of the ending inventory on November 30? (Round each per unit cost to 2 decimal places and then round your answer to the nearest whole dollar.) A) $304 B) $404 C) $299 D) $280
211) A company uses a weighted-average perpetual inventory system. The following transactions took place during the month of August: August 2 August 18 August 29 August 31
10 units were purchased at $12 per unit 15 units were purchased at $15 per unit 20 units were sold 14 units were purchased at $16 per unit
What is the per-unit value of ending inventory on August 31? (Round each per unit cost to 2 decimal places.) A) $12.00 B) $13.80 C) $15.42 D) $16.00
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212) A company uses a weighted-average perpetual inventory system. The following transactions took place during the month of November: November 1 November 12 November 14 November 24
5 units were purchased at $6.00 per unit 10 units were purchased at $7.50 per unit 7 units were sold for $14.00 per unit 12 units were purchased at $10.00 per unit
What is the per-unit value of ending inventory on November 30 if this company uses a weightedaverage perpetual inventory system? (Round each per unit cost to 2 decimal places.) A) $6.00 B) $7.00 C) $8.80 D) $13.00
213) Which method will result in the same cost of goods sold amount whether it is computed using the periodic inventory system or the perpetual inventory system? A) LIFO B) Weighted average cost C) FIFO D) None of the above because periodic and perpetual inventory systems always produce different amounts.
214) A company uses a perpetual inventory system. On May 1, beginning inventory consists of 10 items at a cost of $10 each. On May 3, 10 items are purchased at $12 each. On May 8, 12 items are sold. On May 15, 10 items are purchased at $14 each. Using the weighted average cost method, cost of goods sold for the month ended May 31 is: A) $230.40. B) $132.00. C) $228.00. D) $144.00.
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215) A $15,000 understatement of the current year's ending inventory was discovered after the financial statements for the year were prepared. How would that inventory error impact the current year's financial statements? A) Current assets are overstated, and net income is understated. B) Current assets are overstated, and net income is overstated. C) Current assets are understated, and net income is understated. D) Current assets are understated, and net income is overstated.
216)
An understatement of the beginning inventory balance causes cost of goods sold to be: A) understated and net income to be understated. B) understated and net income to be overstated. C) overstated and net income to be understated. D) overstated and net income to be correct.
217) If the ending inventory is incorrectly calculated at the end of Year 1 but it is calculated accurately at the end of Year 2, what is the effect of this error by the end of Year 2? A) It affects only income statement accounts. B) It affects only balance sheet accounts. C) There is no affect on any financial statement accounts. D) It will self-correct by the end of Year 2.
218)
An understatement of the ending inventory balance will cause: A) Cost of goods sold to be overstated and net income to be understated. B) Cost of goods sold to be overstated and net income to be overstated. C) Cost of goods sold to be understated and net income to be overstated. D) Cost of goods sold to be overstated and net income to be correct.
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219) A one-time error in the application of the lower of cost or market/net realizable value (LCM/NRV) rule in the current period distorts financial results for the current accounting period: A) only. B) and the period before. C) and the period after. D) and all periods after.
220) Which of the following financial statement line items will be affected in Year 1 if the ending inventory is overstated at the end of Year 1? A) Cost of goods sold will be overstated. B) Current assets will be overstated. C) Current liabilities will be overstated. D) Net income will be understated.
221) Which financial statements will be properly stated if the Year 1 ending inventory balance is understated and Year 2 ending inventory is calculated correctly? A) Year 1 balance sheet. B) Year 2 balance sheet. C) Year 1 income statement. D) Year 2 income statement.
222) If ending inventory in Year 1 is misstated, then Year 1's ________ also must be misstated. A) purchases B) cost of goods sold C) goods available for sale D) beginning inventory
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Answer Key Test name: Chap 07_7e 1) TRUE The primary goals of inventory managers are to maintain a sufficient quantity of inventory to meet customers' needs, ensure inventory quality meets customers' expectations and company standards, and minimize the cost of acquiring and carrying inventory. 2) FALSE If a sale is madeFOB destination, goods in transit belong to the seller until they reach their destination (the customer). If a sale is made FOB shipping point, goods in transit belong to the customer at the point of shipping (from the seller's premises). 3) TRUE If a sale is made FOB shipping point, goods in transit belong to the customer at the point of shipping (from the seller's premises). As a result, the goods belong to the customer while in transit. 4) FALSE Manufacturers have inventories of raw materials, work in process, and finished goods. Merchandisers have only merchandise inventory. 5) TRUE Consignment inventory refers to goods a company is holding on behalf of the goods' owner. Typically, this arises when a company is willing to sell the goods for the owner (for a fee) but does not want to take ownership of the goods in the event the goods are difficult to sell. 6) FALSE
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Consignment inventory refers to goods a company is holding on behalf of the goods' owner. Consignment inventory is reported on the balance sheet of the owner, not the company holding the inventory. 7) FALSE Goods placed in inventory are initially recorded at cost, which is the amount paid to acquire the asset and prepare it for sale. 8) TRUE When a company sells goods, it removes their cost from the Inventory account and reports the cost on the income statement as an expense called Cost of Goods Sold. 9) TRUE Because inventory will be used or converted into cash within one year, it is reported on the balance sheet as a current asset. 10) TRUE Cost of goods sold = Beginning inventory + Purchases − Ending inventory 11) TRUE Ending inventory = Beginning inventory + Purchases − Cost of goods sold 12) FALSE Last-in, first-out (LIFO) assumes that the newest goods (the last into inventory) are the first ones sold (the first out of inventory). So, the most recent purchases are used to determine the cost of goods sold. When the periodic inventory system is used, that means that cost of goods sold is determined at the end of the period (rather than the time of the sale). 13) TRUE
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When faced with increasing costs per unit, a company that uses LIFO will have a lower income tax expense than a company using FIFO. 14) FALSE Because switching would make it difficult to compare financial results across periods, accounting rules discourage it. A change in method is allowed only if it improves the accuracy of the company's financial results. 15) TRUE A company can use different methods for inventories that differ in nature or use, provided that the methods are used consistently over time. 16) TRUE In the United States, the LIFO Conformity Rule requires that if LIFO is used on the income tax return, it also must be used in financial statement reporting. 17) FALSE Cost of goods sold is directly affected by the inventory costing method chosen. As a result, gross profit would also be affected. 18) TRUE A lower of cost or market write-down would be recorded with a debit to Cost of Goods Sold and a credit to Inventory. 19) TRUE The text applies lower of cost or market on an item basis. As noted in a footnote, it also may be applied to entire inventory totals. 20) FALSE The LIFO and weighted average calculations differ between periodic and perpetual inventory systems. FIFO and specific identification results will be the same using either a perpetual or periodic system. Version 1
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21) TRUE FIFO calculations do not differ between periodic and perpetual systems. Since FIFO assigns the oldest costs to cost of goods sold, it makes no difference whether the cost assignment is done at each point of sale during the period or if it is done for all sales at the end of the period. 22) TRUE When the perpetual inventory system is used, cost of goods sold is determined at each point of sale using the weighted average cost at that point. When the periodic inventory system is used, the weighted average is calculated at the end of the period and is used to determine cost of goods sold at that point. 23) FALSE If ending inventory is overstated, then assets will be overstated. Cost of goods sold will be understated, so net income will be overstated and stockholders' equity will be overstated. 24) FALSE Beginning inventory is added in the equation to determine cost of goods sold, so if it is overstated, then cost of goods sold is overstated. If the cost of goods sold expense on the Income Statement is overstated, then net income will be understated. 25) A Obtaining the lowest cost of inventory is frequently counterproductive. It may mean having lower quality than customer expectations. In addition, it may result from having extremely large production runs which requires unusually large quantities of items to be warehoused at a large expense to a company. 26) B
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One of the primary goals of inventory managers is to maintain a sufficient quantity of inventory to meet customers' needs. Insufficient quantities may result in lost sales. 27) D The primary goals of inventory managers are to maintain a sufficient quantity of inventory to meet customers' needs, ensure inventory quality meets customers' expectations and company standards, and minimize the cost of acquiring and carrying inventory (including costs related to purchasing, production, storage, spoilage, theft, obsolescence, and financing). If the quantity of inventory on hand is minimized, it may not be sufficient to meet customer needs. 28) B Ultimately, inventory management often comes down to purchasing goods that can be sold soon after they are acquired. As such, an increase in inventory levels could be good news if the company is ordering more goods because sales appear to be rising. 29) A Manufacturers often hold three types of inventory, with each representing a different stage in the manufacturing process. A company making ice cream would start with raw materials inventory such as milk and cream. 30) B When the raw materials enter the production process, they become part of work in process inventory, which includes goods that are in the process of being manufactured. In this case, the work in process inventory would include the ice cream in process awaiting the addition of nuts – that is, it is still in the manufacturing process. 31) C Version 1
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When completed, work in process inventory becomes finished goods inventory, which is ready for sale just like merchandise inventory. In this case, the finished goods inventory would include the frozen ice cream that is waiting to be shipped to retailers. 32) D The generic term inventory means goods that are held for sale in the normal course of business or are used to produce other goods for sale. The finished goods inventory, which is ready for sale, would not include cars that have been sold. 33) B Consignment goods are held by a company on behalf of the owner of those goods. They do not belong to the company, and are not reported on its balance sheet. Consignment inventory is reported on the balance sheet of the owner. 34) B If a sale is made FOB shipping point, goods in transit belong to the customer at the point of shipping (from the seller's premises). 35) A If a sale is made FOB destination, goods in transit belong to the seller until they reach their destination (the customer). 36) A Merchandisers hold merchandise inventory, which consists of products acquired in a finished condition, ready for sale without further processing. 37) C
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Merchandisers hold merchandise inventory, which consists of products acquired in a finished condition, ready for sale without further processing. 38) A Manufacturers often hold three types of inventory, with each representing a different stage in the manufacturing process. They start with raw materials inventory such as plastic, steel, or fabrics. When these raw materials enter the production process, they become part of work in process inventory, which includes goods that are in the process of being manufactured but not yet completed. When completed, work in process inventory becomes finished goods inventory, which is ready for sale just like merchandise inventory. 39) D Consignment inventory refers to goods a company is holding on behalf of the goods' owner. Typically, this arises when a company is willing to sell the goods for the owner (for a fee) but does not want to take ownership of the goods in the event the goods are difficult to sell. This consignment inventory is reported on the balance sheet of Longhorn, the owner. 40) A Consignment inventory refers to goods a company is holding on behalf of the goods' owner. Typically, this arises when a company is willing to sell the goods for the owner (for a fee) but does not want to take ownership of the goods in the event the goods are difficult to sell. This consignment inventory is reported on the balance sheet of Sea Level Roasters, the owner. 41) D
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Goods placed in inventory are initially recorded at cost, which is the amount paid to acquire the asset and prepare it for sale. 42) B When a company sells goods, it removes their cost from the Inventory account on the balance sheet and reports the cost on the income statement as the expense Cost of Goods Sold. 43) C Because inventory will be used or converted into cash within one year, it is reported on the balance sheet as a current asset. 44) A Cost of goods sold = Beginning inventory + Purchases − Ending inventory Purchases = Cost of Goods Sold − Beginning Inventory + Ending Inventory = $801,000 − $77,400 + $136,800 = $860,400 Consignment inventory is not owned by the company and is not considered in the Cost of Goods Sold equation. 45) A Cost of goods sold = Beginning inventory + Purchases − Ending inventory 46) A Cost of goods sold = Beginning inventory + Purchases − Ending inventory = $4,860 + $10,080 − $9,000 = $5,940 47) B Cost of goods sold = Beginning inventory + Purchases − Ending inventory = $1,000 + $5,000 − $2,000 = $4,000 Version 1
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48) D Cost of goods sold = Beginning inventory + Purchases − Ending inventory Beginning inventory = Cost of goods sold − Purchases + Ending inventory = $2,700 − $5,600 + $5,000 = $2,100 49) C Ending inventory = Beginning inventory + Purchases − Cost of goods sold 50) D Ending inventory = Beginning inventory + Purchases − Cost of goods sold = $70,000 + $240,000 − $280,000 = $30,000 51) A Ending inventory = Beginning inventory + Purchases − Cost of goods sold = $3,000 + $9,000 − $10,000 = $2,000 52) A Ending inventory = Beginning inventory + Purchases − Cost of goods sold Purchases= Ending inventory + Cost of goods sold − Beginning inventory = $26,000 + $32,000 − $24,000 = $34,000 53) D
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Ending inventory = Beginning inventory + Purchases − Cost of goods sold Purchases = Ending inventory + Cost of goods sold − Beginning inventory = $2,400 + $4,200 − $1,800 = $4,800 54) A Cost of Goods Sold and ending inventory are complementary. That is, of all the goods available for sale, they either have to be sold (Cost of Goods Sold) or unsold (ending inventory). Goods available for sale is also equal to beginning inventory plus Purchases. 55) A Goods in transit are inventory items being transported. This type of inventory is reported on the balance sheet of the owner, not the company transporting it. 56) A Cost of goods sold= Beginning inventory + Purchases − Ending inventory Purchases= Cost of goods sold − Beginning inventory + Ending inventory = $2,100 − $2,200 + $550 = $450 57) A Cost of goods sold = Beginning inventory + Purchases − Ending inventory Purchases = Cost of goods sold − Beginning inventory + Ending inventory = $3,600 − $3,780 + $900 = $720 58) B
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The specific identification method is generally used when accounting for individually expensive and unique inventory items. Business jets best fits that description. 59) D Individually expensive and unique items are the most appropriate types of inventory accounted for using the specific identification method. 60) D The LIFO method assumes that the newest goods purchased (last-in) are the first ones sold (first-out). 61) B Last-in, first-out (LIFO) assumes that the costs of the first goods purchased are the costs assigned to ending inventory. The most recent costs (last in) are the costs assigned to cost of goods sold (first out). 62) C Last-in, first-out (LIFO) assumes that the inventory costs flow out in the opposite of the order the goods are received. Or, in other words, LIFO assumes that the newest goods (last in) are the first ones sold (first out). 63) D When the FIFO method is used, the latest costs are assigned to the ending inventory as follows: (500 units @ $16) + (250 units @ $15) = $11,750 64) D When the FIFO method is used, the latest costs are assigned to the ending inventory as follows: (400 units @ $18) + (100 units @ $17) = $8,900 65) C
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First-in, first-out (FIFO) assumes that the costs of the first goods purchased (first in) are the costs of the first goods sold (first out). As such, since 470 units were in the beginning inventory and the company only sold 235 units during the period, we use the $22 per unit cost of the beginning inventory units to calculate cost of goods sold. Cost of goods sold = 235 units× $22 per unit = $5,170 66) C First-in, first-out (FIFO) assumes that the costs of the first goods purchased (first in) are the costs of the first goods sold (first out). As such, since 600 units were in the beginning inventory and the company only sold 300 units during the period, we use the $5 per unit cost of the beginning inventory units to calculate cost of goods sold. Cost of goods sold = 300 units × $5 per unit = $1,500 67) D Ending inventory (in units) = Beginning inventory + Purchases − Units sold = 270 + 70 − 300 = 40 FIFO − Periodic Beginning inventory + June 2 purchase = Goods available for sale − Ending inventory = Cost of goods sold
270 units × $5 70 units × $4
$ 1,350 280 1,630
40 units × $4 (270 units × $5) + (30 units × $4)
160 $ 1,470
68) D Ending inventory (in units) = Beginning inventory + Purchases − Units sold = 100 + 75 − 125 = 50 FIFO − Periodic Beginning inventory
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100 units × $5
$ 500 82
+ June 2 purchase = Goods available for sale − Ending inventory = Cost of goods sold
75 units × $4
300 $ 800
50 units × $4 (100 units × $5) + (25 units × $4)
200 $ 600
69) C When the LIFO method is used, the earliest costs are assigned to the ending inventory as follows: (400 units @ $15) + (600 units @ $16) = $15,600 70) D Last-in, first-out (LIFO) assumes that the inventory costs flow out in the opposite of the order the goods are received. Or, in other words, LIFO assumes that the newest goods (the last into inventory) are the first ones sold (the first out of inventory). As such, since 600 units were purchased in November and we only sold 450 during the year, we use the $6 per unit cost of the November units to calculate cost of goods sold. Cost of goods sold = 450 units× $6 per unit = $2,700 71) C Ending inventory (in units) = Beginning inventory + Purchases − Units sold = 100 + 75 − 125 = 50 LIFO − Periodic Beginning inventory + October 2 purchase = Goods available for sale − Ending inventory = Cost of goods sold
100 units × $5 75 units × $4
$ 500 300 $ 800
50 units × $5 (75 × $4) + (50 × $5)
250 $ 550
72) C
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Weighted average cost= Cost of goods available for sale ÷ Number of units available for sale = [(200 units × $11.00 per unit) + (300 units × $12.00 per unit)] ÷ (200 units + 300 units) = $11.60 per unit 73) C Weighted average cost = Cost of goods available for sale ÷ Number of units available for sale = [(200 units × $9 per unit) + (300units × $10 per unit)] ÷ (200 units + 300 units) = $9.60 per unit 74) B Weighted Average − Periodic Beginning inventory May 7 purchase June 11 purchase November 22 purchase Goods available for sale
150 units × $4.00 200 units × $4.20 200 units × $4.40 250 units × $4.80 800 Units
$ 600 840 880 1,200 $ 3,520
Weighted average cost = Cost of goods available for sale ÷ Number of units available for sale = $3,520 ÷ 800 units = $4.40 per unit Cost of goods sold = Units sold × Weighted average cost per unit = 570 units × $4.40 = $2,508 75) B Cost of goods sold = Cost of serial number 11534894 and Cost of serial number 11542631 = $2,500 + $1,950 = $4,450 76) B Cost of goods sold = Cost of serial number 11534894 and Cost of serial number 11542631 = $1,500 + $1,450 = $2,950 Version 1
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77) C FIFO − Periodic 2 units × $1,500 4 units × $1,450 5 units × $1,600
$ 3,000 5,800 8,000 $ 16,800
(4 units × $1,450) + (5 units × $1,600) 2 units × $1,500
13,800
Beginning inventory + April purchase + May purchase = Goods available for sale − Ending inventory = Cost of goods sold
$ 3,000
78) B FIFO − Periodic Beginning inventory + April purchase + May purchase = Goods available for sale − Ending inventory = Cost of goods sold
2 units × $1,500 4 units × $1,450 5 units × $1,600
$ 3,000 5,800 8,000 $ 16,800
(4 units × $1,450) + (5 units × $1,600) 2 units × $1,500
13,800 $ 3,000
79) D LIFO − Periodic Beginning inventory + April purchase + May purchase = Goods available for sale − Ending inventory = Cost of goods sold
2 units × $1,500
$ 3,000
4 units × $1,450 5 units × $1,600
5,800 8,000 $ 16,800
(2 units × $1,500) + (4 units × $1,450) +(3 units × $1,600) 2 × $1,600
13,600 $ 3,200
80) C Weighted Average − Periodic Beginning inventory + April purchase
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2 units × $1,500 4 units × $1,450
$ 3,000 5,800
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+ May purchase = Goods available for sale
5 units × $1,600 11 units
8,000 $ 16,800
Weighted average cost = Cost of goods available for sale ÷ Number of units available for sale = $16,800÷ 11 units = $1,527.27 per unit (rounded to $1,527) 81) A Of the 7 letters (A through G) purchased in January @ $9.50 per letter, 4 are left Of the 5 letters (H through L) purchased in February @ $11.50 per letter, 3 are left Of the 6 letters (M through R) purchased in March @ $12.50 per letter, 5 are left Ending inventory = (4 letters × $9.50) + (3 letters × $11.50) + (5 letters × $12.50) = $135.00 82) B Of the 7 letters (A through G) purchased in January @ $4 per letter, 4 are left Of the 5 letters (H through L) purchased in February @ $6 per letter, 3 are left Of the 6 letters (M through R) purchased in March @ $7 per letter, 5 are left Ending inventory = (4 letters × $4) + (3 letters × $6) + (5 letters × $7) = $69 83) D FIFO − Periodic January purchase + February purchase + March purchase = Goods available for sale − Ending inventory
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7 units × $10.00 5 units × $12.00 6 units × $13.00
$ 70 60 78 $ 208
(1 unit × $10.00) + (5 units × $12.00) +
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(6 units × $13.00) 6 × $10.00
= Cost of goods sold
$ 60
84) D FIFO − Periodic January purchase + February purchase + March purchase = Goods available for sale − Ending inventory = Cost of goods sold
7 units × $4 5 units × $6 6 units × $7
$ 28 30 42 $ 100
(1 unit × $4) + (5 units × $6) + (6 units × $7) 6 × $4
76 $ 24
85) A LIFO − Periodic January purchase + February purchase + March purchase = Goods available for sale − Ending inventory = Cost of goods sold
7 units × $2.00 5 units × $4.00 6 units × $5.00
$ 14.00 20.00 30.00 $ 64.00
(7 units × $2.00) + (5 units × $4.00) 6 × $5.00
34.00 $ 30.00
86) C LIFO − Periodic January purchase + February purchase + March purchase = Goods available for sale − Ending inventory = Cost of goods sold
7 units × $4 5 units × $6 6 units × $7
$ 28 30 42 $ 100
(7 units × $4) + (5 units × $6) 6 × $7
58 $ 42
87) C Weighted Average − Periodic January purchase + February purchase
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7 units × $4.00 5 units × $6.00
$ 28 30
87
+ March purchase = Goods available for sale − Ending inventory = Cost of goods sold
6 units × $7.00 18 units 12 units × ($100 ÷ 18) 6 units × $5.56
42 $ 100 67 $ 33
88) C Weighted Average − Periodic 7 units × $4 5 units × $6 6 units × $7 18 units
$ 28 30 42 $ 100
12 units × ($100 ÷ 18) 6 units × $5.56
67 $ 33
Beginning inventory 600 units × $2.60 + May 10 purchase 800 units × $2.925 + June 15 purchase 1,000 units × $2.52 + August 28 purchase 600 units×$3.30 = Goods available for sale − Ending inventory (400 units × $2.52) + (600 × $3.30) = Cost of goods sold (600 units × $2.60) + (800 × $2.925) + (600 × $2.52)
$ 1,560 2,340 2,520 1,980 $ 8,400
January purchase + February purchase + March purchase = Goods available for sale − Ending inventory = Cost of goods sold
89) A FIFO
2,988 $ 5,412
90) A LIFO − Periodic Beginning inventory + May 10 purchase + June 15 purchase + August 28 purchase = Goods available for sale − Ending inventory = Cost of goods sold
Version 1
600 units × $2.60 800 units × $2.925 1,000 units × $2.52 600 units×$3.30
$ 1,560 2,340 2,520 1,980 $ 8,400
(600 units × $2.60) + (400 × $2.925) (600 units × $3.30) + (1,000 × $2.52) + (400 × $2.925)
2,730 $ 5,670
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91) C Weighted Average − Periodic Beginning inventory + May 10 purchase + June 15 purchase + August 28 purchase = Goods available for sale − Ending inventory = Cost of goods sold
600 units × $2.60 800 units × $2.925 1,000 units × $2.52 600 units×$3.30 3,000 units
$ 1,560 2,340 2,520 1,980 $ 8,400
1,000 units × ($8,400 ÷ 3,000) 2,000 units × $2.80
2,800 $ 5,600
92) A LIFO − Periodic 310 units × $5 510 units × $4 210 units × $6 1,030 units
$ 1,550 2,040 1,260 $ 4,850
(310 units × $5) + (410 × $4) (210 units × $6 per unit) + (100 units × $4 per unit)
3,190 $ 1,660
300 units × $5 500 units × $4 200 units × $6 1,000 units
$ 1,500 2,000 1,200 $ 4,700
(300 units × $5) + (400 × $4) (200 units × $6 per unit) + (100 units × $4 per unit)
3,100 $ 1,600
Beginning inventory + February purchase + March purchase = Goods available for sale − Ending inventory = Cost of goods sold
93) A LIFO − Periodic Beginning inventory + February purchase + March purchase = Goods available for sale − Ending inventory = Cost of goods sold
94) B Weighted Average − Periodic Beginning inventory + February purchase + March purchase = Goods available for sale
Version 1
480 units × $5 410 units × $4 110 units × $6 1,000 units
$ 2,400 1,640 660 $ 4,700
89
− Ending inventory = Cost of goods sold
670 × $4.70 330 units × $4.70
3,149 $ 1,551
Weighted average cost per unit = Cost of goods available for sale ÷ Number of units available for sale $4,700 ÷ 1,000 units = $4.70 per unit 95) B Weighted Average − Periodic Beginning inventory + February purchase + March purchase = Goods available for sale − Ending inventory = Cost of goods sold
300 units × $5 500 units × $4 200 units × $6 1,000 units 850 × $4.70 150 units × $4.70
$ 1,500 2,000 1,200 $ 4,700 3,995 $ 705
Weighted average cost per unit = Cost of goods available for sale ÷ Number of units available for sale = $4,700 ÷ 1,000 units = $4.70 per unit 96) A Weighted average cost method: Weighted average cost per unit = Cost of goods available for sale ÷ Number of units available for sale = $20,250 ÷ 900 units = $22.50 per unit Units sold = Units available for sale − Units in ending inventory = 900 units − 100 units = 800 units Cost of Goods Sold = Units in ending inventory × Weighted average cost per unit = 800 units × $22.50 per unit = $18,000 97) C
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Under the LIFO cost method, the last goods purchased are assumed to be the first sold. Cost of Goods Sold = Cost of Goods Available for Sale − Ending Inventory = $20,250 − (100 units × $15 per unit) = $18,750 98) A Under the FIFO cost method, the first goods purchased are the first sold. Cost of Goods Sold = Cost of Goods Available for Sale − Ending Inventory = $20,250 − (100 units × $30 per unit) = $17,250 99) A Sales revenue is determined by the number of units sold and the selling price per unit; the revenue earned from a sale is not impacted by the inventory costing method chosen. On the other hand, cost of goods sold is directly affected by the inventory costing method chosen and, as a result, gross profit and net income would also be affected. 100) B Specific identification assigns costs to ending inventory and cost of goods sold by tracking and identifying each specific item of inventory. Weighted average is a middle-of-the-road method. When unit costs are falling, FIFO produces a higher cost of goods sold (resulting in a lower gross profit and a lower net income) when compared to LIFO. On the other hand, when unit costs are rising, FIFO produces a lower cost of goods sold (resulting in a higher gross profit and a higher net income) when compared to LIFO. 101) C
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When unit costs are falling, FIFO produces a higher cost of goods sold (resulting in a lower gross profit and a lower net income) when compared to LIFO. On the other hand, when unit costs are rising, FIFO produces a lower cost of goods sold (resulting in a higher gross profit and a higher net income) when compared to LIFO. 102) D When prices are rising, the LIFO method assigns higher costs to Cost of Goods Sold and lower costs to Inventory than other inventory costing methods. If Costs of Goods Sold is higher, net income is lower. 103) C The inventory costing method that assigns the highest cost to ending inventory will assign the lowest cost to cost of goods sold, which results in the highest gross profit. If inventory costs have been falling during the year, the LIFO method will result in the highest cost of ending inventory and, therefore, the highest gross profit. 104) C When unit costs are falling, FIFO produces a lower ending inventory value and a higher cost of goods sold (resulting in a lower gross profit and a lower net income) when compared to LIFO. 105) B When unit costs are rising, LIFO produces a higher cost of goods sold (resulting in a lower gross profit and a lower net income) when compared to FIFO. Weighted average is a middle-of-the-road method. Specific identification assigns costs to ending inventory and cost of goods sold by tracking and identifying each specific item of inventory. 106) A
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When unit costs are falling, FIFO produces higher cost of goods sold when compared to LIFO. Weighted average is a middle-of-the-road method. Specific identification assigns costs to ending inventory and cost of goods sold by tracking and identifying each specific item of inventory. 107) B When FIFO is used, the costs of the newer goods are included in the cost of the ending inventory. When LIFO is used, the costs of the older goods, including those in beginning inventory, are included in the cost of the ending inventory. Weighted average is a middle-of-the-road method. Specific identification assigns costs to ending inventory and cost of goods sold by tracking and identifying each specific item of inventory. 108) A When FIFO is used, the costs of the newer goods are included in the cost of the ending inventory. When LIFO is used, the costs of the older goods, including those in beginning inventory, are included in the cost of the ending inventory. Weighted average is a middle-of-the-road method. Specific identification assigns costs to ending inventory and cost of goods sold by tracking and identifying each specific item of inventory. 109) A When FIFO is used, the costs of the newer goods are included in the cost of the ending inventory. When LIFO is used, the costs of the last goods purchased (last in) are the costs of the first goods sold (first out) to calculate cost of goods sold. 110) A
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When faced with increasing costs per unit, a company that uses LIFO will have a lower income tax expense and a company that uses FIFO will have a higher income tax expense. When LIFO is used, the costs of the last goods purchased (last in) are the costs of the first goods sold (first out) to calculate cost of goods sold, which will cause a higher expense and lowers the taxable income. Weighted average is a middle-of-the-road method. Specific identification tracks and identifies each specific item of inventory; as such, its impact on income tax expense cannot otherwise be predicted. 111) A The specific identification method individually identifies and records the cost of each item sold as Cost of Goods Sold. This method requires accountants to keep track of the purchase cost of each item. Companies tend to use the specific identification method when accounting for individually expensive and unique items. Of the company's listed, the wedding cake baker would most likely use specific identification. 112) B The specific identification method individually identifies and records the cost of each item sold as cost of goods sold. This method requires accountants to keep track of the purchase cost of each item. Companies tend to use the specific identification method when accounting for individually expensive and unique items. 113) A The specific identification method individually identifies and records the cost of each item sold as Cost of Goods Sold. This method requires accountants to keep track of the purchase cost of each item. Companies tend to use the specific identification method when accounting for individually expensive and unique items. 114) A Version 1
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Ending inventory = Cost of one purchased June 1 + Cost of one purchased July 9 + Cost of two purchased September 23 = ($750 × 1) + ($850 × 1) + ($900 × 2) = $3,400 115) A Ending inventory = Cost of one purchased June 1 + Cost of one purchased July 9 + Cost of two purchased September 23 = ($500 × 1) + ($550 × 1) + ($600 × 2) = $2,250 116) A Four generally accepted inventory costing methods are available for determining the cost of goods sold and the cost of goods remaining in ending inventory, regardless of whether a company uses a perpetual or periodic inventory system. The method chosen does not have to correspond to the physical flow of goods, so any one of these four methods is acceptable under GAAP in the United States. 117) D First-in, first-out (FIFO) assumes that the inventory costs flow out in the order the goods are received. Or, in other words, FIFO assumes that the costs of the first goods purchased (first in) are the costs of the first goods sold (first out) to calculate the cost of goods sold. 118) C First-in, first-out (FIFO) assumes that the inventory costs flow out in the order the goods are received. Or, in other words, FIFO assumes that the costs of the first goods purchased (first in) are the costs of the first goods sold (first out) to calculate the cost of goods sold. 119) A
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Last-in, first-out (LIFO) assumes that the inventory costs flow out in the opposite of the order the goods are received. Or, in other words, LIFO assumes last goods purchased (last in) are the costs of the first goods sold (first out) to calculate the cost of goods sold. 120) B Last-in, first-out (LIFO) assumes that the inventory costs flow out in the opposite of the order the goods are received. Or, in other words, LIFO assumes last goods purchased (last in) are the costs of the first goods sold (first out) to calculate the cost of goods sold. 121) A Weighted average cost uses the weighted average of the costs of goods available for sale for both the cost of each item sold and those remaining in inventory. 122) A Weighted average cost uses the weighted average of the costs of goods available for sale for both the cost of each item sold and those remaining in inventory. 123) D FIFO − Periodic June purchase July purchase September purchase = Goods available for sale − Ending inventory = Cost of goods sold
1 unit × $1,500 2 units × $2,050 2 units × $2,150 5 units
$ 1,500 4,100 4,300 $ 9,900
(2 units × $2,050) + (2 units × $2,150) 1 unit × $1,500
8,400 $ 1,500
1 unit × $500 2 units × $550
$ 500 1,100
124) D FIFO − Periodic June purchase July purchase
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September purchase = Goods available for sale − Ending inventory = Cost of goods sold
2 units × $600 5 units
1,200 $ 2,800
(2 units × $550) + (2 units × $600) 1 unit × $500
2,300
1 unit × $500 2 units × $550 2 units × $600 5 units
$ 500 1,100 1,200 $ 2,800
(2 units × $550) + (2 units × $600) 1 unit × $500
2,300
$ 500
125) A FIFO − Periodic June purchase July purchase September purchase = Goods available for sale − Ending inventory = Cost of goods sold
$ 500
126) C LIFO − Periodic June purchase July purchase September purchase = Goods available for sale − Ending inventory = Cost of goods sold
1 unit × $500 2 units × $550 2 units × $600 5 units
$ 500 1,100 1,200 $ 2,800
(1 unit × $500) + (2 units × $550) + (1 unit× $600) 1 unit × $600
2,200
1 unit × $500 2 units × $550 2 units × $600 5 units
$ 500 1,100 1,200 $ 2,800
(1 unit × $500) + (2 units × $550) + (1 unit× $600) 1 unit × $600
2,200
$ 600
127) D LIFO − Periodic June purchase July purchase September purchase = Goods available for sale − Ending inventory = Cost of goods sold
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$ 600
97
128) A LIFO − Periodic Beginning inventory Purchase = Goods available for sale − Ending inventory = Cost of goods sold
8 units × $10 43 units × $12 51units 5 units × $10 (3 units × $10) + (43 units × $12)
$ 80 516 $ 596 50 $ 546
8 units × $10 40 units × $12 48 units 5 units × $10 (3 units × $10) + (40 units × $12)
$ 80 480 $ 560 50 $ 510
129) A LIFO − Periodic Beginning inventory Purchase = Goods available for sale − Ending inventory = Cost of goods sold
130) B LIFO − Periodic Beginning inventory Purchase = Goods available for sale − Ending inventory = Cost of goods sold
3 units × $200 20 units × $210 23 units
$ 600 4,200 $ 4,800
(3 units× $200) + (2 units × $210) (18 units × $210)
1,020 $ 3,780
131) A Weighted Average − Periodic 1st purchase 2nd purchase = Goods available for sale
150 units × $8 50 units × $10 200 units
$ 1,200 500 $ 1,700
Weighted average cost per unit = Cost of goods available for sale ÷ Number of units available for sale = $1,700 ÷ 200 = $8.50 132) A Weighted Average − Periodic Version 1
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1st purchase 2nd purchase = Goods available for sale
80 units × $12.00 20 units × $12.50 100 units
$ 960 250 $ 1,210
Weighted average cost per unit = Cost of goods available for sale ÷ Number of units available for sale = $1,210÷ 100 = $12.10 133) D Weighted Average − Periodic Beginning inventory Purchase = Goods available for sale
20 units × $30 80 units × $31 100 units
$ 600 2,480 $ 3,080
Weighted average cost = Cost of goods available for sale ÷ Number of units available for sale = $3,080 ÷ 100 units = $30.80 per unit Cost of goods sold = Units sold × Weighted average cost per unit = (100 units available for sale − 25 units in ending inventory) × $30.80 = $2,310 134) A Cost of goods sold is reported on the income statement and inventory is reported on the balance sheet, therefore, any assumptions a company would make about its inventory cost flow would affect those accounts and subsequently those financial statements. 135) A First-in, first-out (FIFO) assumes that the inventory costs flow out in the order the goods are received. Or, in other words, FIFO assumes that the costs of the first goods purchased (first in) are the costs of the first goods sold (first out) to calculate cost of goods sold. 136) B Version 1
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When costs are rising, as they are here, FIFO produces a higher inventory value and a lower cost of goods sold (resulting in a higher gross profit and higher income taxes). 137) A When costs are decreasing, LIFO produces a higher ending inventory value and a lower cost of goods sold (resulting in a higher gross profit and higher income taxes). 138) A When costs are rising, LIFO produces a lower inventory value and a higher cost of goods sold (resulting in a lower gross profit and lower income taxes). 139) C When costs are rising, FIFO produces a higher ending inventory value and a lower cost of goods sold (resulting in a higher gross profit and higher income taxes). 140) D U.S. GAAP allows companies to use any of the four inventory costing methods presented in this chapter, but LIFO is not allowed under International Financial Reporting Standards (IFRS). 141) A In the United States, the LIFO Conformity Rule requires that if LIFO is used on the income tax return, it also must be used in financial statement reporting. 142) A
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Because switching methods would make it difficult to compare financial results across periods, a change in method is allowed only if it improves the accuracy of the company's financial results. During a period of rising prices, LIFO results in a lower income tax expense than does FIFO. LIFO is not allowed under International Financial Reporting Standards (IFRS). In the United States, the LIFO Conformity Rule requires that if LIFO is used on the income tax return, it also must be used in financial statement reporting. 143) C When the value of inventory falls below its recorded cost, GAAP require that the inventory be written down to its lower market value. 144) A The value of inventory can fall below its recorded cost for two reasons: (1) It is easily replaced by identical goods at a lower cost or (2) It becomes outdated or damaged. Write-downs under LCM/NRV are the least likely to be recorded by a company that sells a staple such as laundry detergent. Fad products, seasonal items, and rapidly changing high-tech products are more likely to experience a decline in market value. 145) A Total lower of cost or market= Lower of cost or market per unit × Number of units in inventory = $29 × 280 units = $8,120 146) A Total lower of cost or market = Lower of cost or market per unit × Number of units in inventory = $26 × 200 units = $5,200 147) C Version 1
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The effect of a write-down on the accounting equation is a decrease in Inventory, an asset, and an increase in Cost of Goods Sold, an expense. An increase in Cost of Goods Sold results in a decrease in gross profit and a decrease in net income. 148) A Since the $24 cost of the units is lower than the $30 market value of the units, no adjustment is necessary. 149) B The LCM/NRV write-down is calculated as follows: Product Line
Cost per Unit
Rustic
$ 795
Mediterra nean Contempor ary
695 1,1 25
Market Quantit Total Cost Total Value per y (a) LCM (b) Unit $ 38 $ $ 91 0 302,10 302,1 5 0 00 79 49 340,55 340,5 5 0 0 50 70 37 416,25 259,0 0 0 0 00 $ 1,058, 900
$ 901,6 50
Writedown (a) − (b)
$ 157,2 50
150) B The LCM/NRV write-down is calculated as follows: Product Line Cost per Market Quantity Total Total Unit Value per Cost (a) LCM (b) Unit Rustic $ $ 19 $ $ 70 72 0 133,00 133,00 0 5 0 0 Mediterrane 60 60 30 180,00 180,00 an 0 5 0 0 0 Contemporar 95 82 27 261,25 225,50 y 0 0 5 0 0
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$ 574,25 0
$ 538,50 0
$ 35,75 0
151) C When inventory is written down as a result of the lower of cost or market rule, Inventory, a current asset, decreases, and Cost of Goods Sold, an expense, increases. The increase in expenses will decrease net income and, as a result, stockholders' equity will decrease. 152) C Total cost of inventory = Cost per unit × Number of units in inventory = $8 × 100 units = $800 Total market value of inventory = Market value per unit × Number of units in inventory = $7 × 100 units = $700 Write-down = Total cost of inventory cost − Total market value of inventory = $800 − $700 = $100 The entry to record the write-down includes a debit to Cost of Goods Sold and a credit to Inventory for $100. 153) B The write-down of inventory results in a decrease to the Inventory account (with a credit) and an increase to the Cost of Goods Sold account (with a debit). 154) B The entry to record the write-down includes a debit to Cost of Goods Sold and a credit to Inventory for $26,000. 155) B The failure to follow inventory lower of cost of market (LCM) rules is one of the most common types of financial statement misstatements.
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156) C Lower of Cost or Market/Net Realizable Value is a valuation method applied at the balance sheet date, not an inventory costing method like FIFO, LIFO, and Weighted Average Cost. 157) B The entry to record the write-down includes a debit to Cost of Goods Sold and a credit to Inventory. 158) A Total lower of cost or market = Lower of cost or market per unit × Number of units in inventory = ($1 × 230 units) + ($8 × 130 units) = $1,270 159) A Total lower of cost or market = Lower of cost or market per unit × Number of units in inventory = ($1 × 200 units) + ($8 × 100 units) = $1,000 160) B The entry to record the write-down includes a debit to Cost of Goods Sold (to increase that expense account) and a credit to Inventory (to decrease that asset account). 161) B The entry to record the write-down includes a debit to Cost of Goods Sold (to increase that expense account). The increase in expenses decreases net income, which, in turn, decreases total stockholders' equity. The entry also includes and a credit to Inventory (to decrease that asset account). 162) A
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Most companies report their inventory write-down expense as Cost of Goods Sold, even though the written-down goods may not have been sold. This reporting is appropriate because writing down goods that haven't yet sold is a necessary cost of carrying the goods that did sell. By recording the write-down in the period in which a loss in value occurs, companies better match their revenues and expenses of that period. 163) C The process of buying and selling inventory, which is called inventory turnover, is repeated over and over during each accounting period for each line of products. 164) C The inventory turnover ratio measures the average number of times inventory purchased is sold during the period. High inventory turnover ratios indicate that goods are sold relatively quickly, resulting in lower storage and obsolescence costs along with less funds borrowed to finance inventory purchases. 165) B The inventory turnover ratio equals cost of goods sold divided by average inventory. The inventory turnover ratio could be increased by increasing cost of goods sold through increased sales volume, reducing the average inventory, or both actions. 166) C A lower ratio indicates that inventory moves less quickly from purchase to sale. 167) A
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The inventory turnover is calculated by dividing cost of goods sold by average inventory. A decrease in the inventory turnover ratio may signal an unexpected drop in demand for the company's products or sloppy inventory management. 168) B The inventory turnover is calculated by dividing cost of goods sold by average inventory. A higher inventory turnover ratio indicates that inventory moves more quickly from purchase to sale. If inventory levels are rising and the inventory turnover is increasing, a company might be increasing the amount of inventory on hand in order to have sufficient levels to satisfy an expected increase in demand. 169) B Inventory turnover = Cost of goods sold ÷ Average inventory 170) C Days to sell = 365 ÷ Inventory turnover 171) C Inventory turnover ratio = Cost of goods sold ÷ Average inventory = $420,000 ÷ [($52,000 + $62,000) ÷ 2] = 7.37 times Days to sell = 365 ÷ Inventory turnover ratio = 365 ÷ 7.37 = 49.5 days 172) C Inventory turnover ratio = Cost of goods sold ÷ Average inventory = $200,000 ÷ [($25,000 + $30,000) ÷ 2] = 7.27 times Days to sell = 365 ÷ Inventory turnover ratio = 365 ÷ 7.27 = 50.2 days 173) A Inventory turnover= Cost of goods sold ÷ Average inventory. = $488,600 ÷ [($30,683 + $34,938) ÷ 2] = 14.9 times (rounded) Version 1
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174) A Inventory turnover = Cost of goods sold ÷ Average inventory. = $797,200 ÷ [($59,566 + $68,076) ÷ 2] = 12.5 times (rounded) 175) C Days to Sell = 365 ÷ Inventory turnover ratio = 365 ÷ 12.76456 = 28.6 days Inventory turnover = Cost of goods sold ÷ Average inventory. = $408,600 ÷ [($29,883 + $34,138) ÷ 2] = 12.76456 times (rounded) 176) C Days to Sell = 365 ÷ Inventory turnover ratio = 365 ÷ 12.5 = 29.2 days Inventory turnover = Cost of goods sold ÷ Average inventory. = $797,200 ÷ [($59,566 + $68,076) ÷ 2] = 12.5 times (rounded) 177) A Inventory Turnover = Cost of goods sold ÷ Average inventory = $2,100,000 ÷ [($465,000 + $525,000) ÷ 2] = 4.24 times 178) B Inventory Turnover = Cost of goods sold ÷ Average inventory = $1,800,000 ÷ [($435,000 + $465,000) ÷ 2] = 4 times 179) A Days to sell= 365÷ Inventory turnover = 365÷ 4.31 = 84.69 days 180) A Days to sell = 365 ÷ Inventory turnover = 365 ÷ 4 = 91.25 days 181) D Inventory turnover ratio = Cost of Goods Sold ÷ Average Inventory $605,000 ÷ [($95,000 + $125,000) ÷ 2] = 5.50 times
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182) C Inventory turnover ratio = Cost of Goods Sold ÷ Average Inventory $720,000 ÷ [($130,000 + $110,000) ÷ 2] = 6.00 Number of days to sell = 365 ÷ Inventory turnover ratio = 365 ÷ 6.00 = 60.83 days 183) A Inventory turnover ratio = Cost of Goods Sold ÷ Average Inventory Number of days to sell = 365 ÷ Inventory turnover ratio For Year 1: = $605,000 ÷ [($95,000 + $125,000) ÷ 2] = 5.50 times = 365 ÷ 5.50 = 66.36 days For Year 2: $720,000 ÷ [($130,000 + $110,000) ÷ 2] = 6.00 times = 365 ÷ 6.00 = 60.83 days The number of days to sell was shorter in Year 2 compared to Year 1. 184) B For merchandisers, inventory turnover refers to buying and selling goods. 185) C Inventory turnover for manufacturers refers to producing inventory and delivering it customers. 186) B Companies with inventories that are perishable (such as fish or butter and milk) or may quickly become obsolete (such as microchips) would be more concerned about a low inventory turnover ratio. 187) D
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The inventory turnover ratio is calculated by dividing cost of goods sold by average inventory. Generally, an increase in sales would cause an increase in cost of goods sold. If the numerator increases (as a result of increased sales) and the denominator decreases (as a result of a decrease in the amount of inventory on hand), the turnover ratio will increase by the greatest amount. 188) D Inventory turnover also can vary significantly between companies within the same industry, particularly if they take different approaches to pricing their inventories. 189) D Companies that lower selling prices and have a lower gross profit percentage often have a faster inventory turnover. 190) B Analysts can assess how many times, on average, inventory has been bought and sold during the period by calculating the inventory turnover ratio. A higher ratio indicates that inventory moves more quickly from purchase to sale, reducing storage and obsolescence costs. 191) A Days to sell = 365 ÷ Inventory turnover ratio = 365 ÷ 8 = 46 days (rounded) 192) B
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Inventory turnover ratio = Cost of goods sold ÷ Average inventory Company A: = $8,000 ÷ $500 = 16 Company B: = $4,000 ÷ $200 = 20 Company C: = $2,000 ÷ $200 = 10 Days to sell = 365 ÷ Inventory turnover ratio Company A: = 365 ÷ 16 = 22.8 days Company B: = 365 ÷ 20 = 18.3 days Company C: = 365 ÷ 10 = 36.5 days 193) D Days to sell tells you the average number of days from purchase to sale. A higher number means a longer time to sell. 194) C Analysts can assess how many times, on average, inventory has been bought and sold during the period by calculating the inventory turnover ratio. A higher ratio indicates that inventory moves more quickly from purchase to sale, reducing storage and obsolescence costs. Since McDonald's sells food in its restaurants, it would be reasonable to expect that company to have the highest inventory turnover ratio. 195) A With inventory turnover ratios varying between industries and companies, it's most useful to compare a company's turnover with its own results from prior periods. 196) A Version 1
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Inventory turnover can vary significantly between companies within the same industry, particularly if they take different approaches to pricing their inventories. Walmart follows a low-cost pricing policy, which means setting its sales prices only slightly above cost. This policy led Walmart to earn about 24.3 cents of gross profit on each dollar of sales, whereas Macy's earned 40.1 cents of gross profit. But when you consider the inventory turnover measures, you can see the full implications of this pricing policy. Walmart turns its inventory over about 8.1 times a year (45 days), whereas Macy's turns inventory over 3.1 times a year (118 days). Often, the company with a lower gross profit percentage has a faster inventory turnover. 197) A The primary goals of inventory managers include maintaining a sufficient quantity of inventory to meet customers' needs. An increase in inventory levels could correspond to an expected increase in sales. As such, an increase in inventory levels is not always a sign of inefficiency in inventory management. 198) D When unit costs are rising, FIFO produces a higher ending inventory value (when compared to LIFO). The inventory turnover is calculated by dividing cost of goods sold by average inventory. Since LIFO produces a lower ending inventory value when unit costs are rising (which means the denominator would be lower), LIFO would result in a result in a higher inventory turnover ratio. 199) A
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Only the LIFO and weighted average calculations differ between periodic and perpetual inventory systems. FIFO and specific identification results will be the same using either a perpetual or periodic system. 200) A Nearly half of all U.S. companies use FIFO. 201) C First-in, first-out (FIFO) assumes that the costs of the first goods purchased (first in) are the costs of the first goods sold (first out) to calculate cost of goods sold. As such, since 4,900 units were in the beginning inventory and we only sold 1,900 during the quarter, we use the $7 per unit cost of the beginning inventory units to calculate cost of goods sold. Cost of goods sold = 1,900 units × $7 per unit = $13,300 202) C First-in, first-out (FIFO) assumes that the costs of the first goods purchased (first in) are the costs of the first goods sold (first out) to calculate cost of goods sold. As such, since 6,000 units were in the beginning inventory and we only sold 3,000 during the quarter, we use the $5 per unit cost of the beginning inventory units to calculate cost of goods sold. Cost of goods sold = 3,000 units × $5 per unit = $15,000 203) D Ending inventory (in units) = Beginning inventory + Purchases − Units sold = 1,000 + 750 − 1,250 = 500 FIFO − Perpetual Beginning inventory April 2 purchase
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1,000 units × $5 750 units × $4
$ 5,000 3,000
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Goods available for sale Ending inventory Cost of goods sold
1,750 units 500 units× $4 (1,000 units × $5) + (250 units × $4)
$ 8,000 2,000 $ 6,000
6 units × $6 3 units × $8 9 units (3 units × $8) + (4 units × $6) 2 units 3 units × $9 (2 units × $6) + (3 units × $9)
$ 36 24 $ 60 48
7 units × $4 5 units × $6 12 units (5 units × $6) + (2 units × $4) 5 units 2 units × $7 (5 units × $4) + (2 units × $7)
$ 28 30 $ 58 38 20 14 $ 34
204) B LIFO − Perpetual Beginning inventory February purchase Goods available for sale Cost of goods sold Goods available for sale December purchase Ending inventory
$ 12 27 $ 39
205) B LIFO − Perpetual Beginning inventory February purchase Goods available for sale Cost of goods sold Goods available for sale December purchase Ending inventory
206) A LIFO – Perpetual Beginning inventory February purchase Goods available for sale Cost of goods sold Goods available for sale December purchase Ending inventory
9 units × $5 6 units × $7 15 units (6 units × $7) + (3 units × $5) 6 units 3 units × $8 (6 units × $5) + (3 units × $8)
$ 45 42 $ 87 57 30 24 $ 54
207) A LIFO − Perpetual Beginning inventory
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7 units × $4
$ 28
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5 units × $6 12 units (5 units × $6) + (2 units × $4) 5 units 2 units × $7 (5 units × $4) + (2 units × $7)
February purchase Goods available for sale Cost of goods sold Goods available for sale December purchase Ending inventory
30 $ 58 38 20 14 $ 34
208) B LIFO − Perpetual August 1 purchase August 5 purchase Goods available for sale Cost of goods sold Goods available for sale August 15 purchase Ending inventory
25 units × $12 10 units × $13 35 units (10 units × $13) + (2 units × $12) 23 units× $12 15 units × $14 (23 units × $12) + (15 units × $14)
$ 300 130 $ 430 154 $ 276 210 $ 486
209) D Weighted average is a middle-of-the-road method (that is, the results fall between the FIFO and LIFO results). It is not a simple average; the weighted average cost per unit is found by dividing the cost of goods available for sale by the number of units available for sale. This weighted average cost per unit is used to get both the cost of goods sold and ending inventory. The periodic and perpetual inventory systems will produce different amounts for cost of goods sold and ending inventory when the weighted average method is used. 210) C Weighted Average − Perpetual Beginning inventory November 2 purchase = Goods available for sale − Cost of goods sold = Goods available for sale November 6 purchase Ending inventory
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5 units × $20 10 units × $22 15 units 8 units × ($320 ÷ 15 units) 7 units× ($320÷ 15 units) 6 units × $25 13 units × $23
$ 100 220 $ 320 171 $ 149 150 $ 299
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211) C Weighted Average − Perpetual August 2 purchase August 18 purchase = Goods available for sale − Cost of goods sold = Goods available for sale + August 13 purchase = Ending inventory
10 units × $12 15 units × $15 25 units 20 units × ($345 ÷ 25 units) 5 units× ($345 ÷ 25 units) 14 units × $16 19 units × $15.42
$ 120 225 $ 345 276 $ 69 224 $ 293
5 units × $6.00 10 units × $7.50 15 units
$ 30 75 $ 105
7 units × ($105 ÷ 15 units) 8 units× ($105 ÷ 15 units)
49 $ 56
12 units × $10.00 20 units × $8.80
120 $ 176
212) C Weighted Average − Perpetual November 1 purchase November 12 purchase = Goods available for sale − Cost of goods sold = Goods available for sale November 24 purchase = Ending inventory
213) C Only the LIFO and weighted average calculations differ between periodic and perpetual inventory systems. FIFO and specific identification results will be the same using either a perpetual or periodic system. 214) B Weighted Average − Perpetual Beginning inventory + May 3 purchase = Goods available for sale − Cost of goods sold = Goods available for sale
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10 units × $10 10 units × $12 20 units
$ 100 120 $ 220
12 units × ($220 ÷ 20 units) 8 units
132 $ 88
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May 15 purchase = Ending inventory
10 units × $14
140 $ 228
215) C If the inventory account is understated, then current assets will be understated, and cost of goods sold will be overstated. This will cause net income to be understated. 216) B Cost of goods sold equals beginning inventory plus purchases minus ending inventory. As a result, if beginning inventory is understated, then cost of goods sold will be understated. If cost of goods sold (which is an expense) is understated, then net income will be overstated. 217) D An error in ending inventory impacts the inventory reported on the balance sheet and the cost of goods sold and net income reported on the income statement. The ending inventory for the current period becomes the beginning inventory for the next period. Over the two years, these errors offset one another. As a result, inventory errors will "self-correct" (but only if ending inventory is accurately calculated at the end of the following year and adjusted to that correct balance). 218) A If ending inventory is understated, then cost of goods sold is overstated which results in net income being understated. 219) C The ending inventory for the current period becomes the beginning inventory for the next period. As a result, an error in ending inventory of the current period result in an error in the beginning inventory of the next period and distorts the financial results of both accounting periods. 220) B Version 1
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Any errors in ending inventory in will affect the balance sheet (current assets) and the income statement (Cost of Goods Sold, Gross Profit, and Net Income). In terms of the balance sheet, an overstatement in ending inventory overstates current assets. In terms of the income statement, if ending inventory was overstated in Year 1, Cost of Goods Sold was understated, Gross Profit and Income before Income Tax Expense would be overstated in Year 1. (Net Income would be overstated as well, although the effects would be offset somewhat by overstated Income Tax Expense.) 221) B In terms of the balance sheet, an understatement in ending inventory at the end of Year 1 understates current assets, total asset, and total stockholders' equity at the end of Year 1. In terms of the income statement, if ending inventory was understated in Year 1, Cost of Goods Sold was overstated and Gross Profit and Income before Income Tax Expense would be understated in Year 1. (Net Income would be understated as well, although the effects would be offset somewhat by understated Income Tax Expense.) The Year 1 ending inventory becomes the Year 2 beginning inventory, so even if Year 2 ending inventory is calculated correctly, the error in Year 1 creates an error in Year 2. Ending inventory and current assets, total assets, and stockholders' equity will be properly stated on the balance sheet at the end of Year 2. However, in terms of the income statement, if beginning inventory was understated in Year 2, Cost of Goods Sold was overstated and Gross Profit and Income before Income Tax Expense would be understated in Year 2. 222) B
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In terms of the balance sheet, an overstatement in ending inventory at the end of Year 1 overstates current assets, total asset, and total stockholders' equity at the end of Year 1. In terms of the income statement, if ending inventory was overstated in Year 1, Cost of Goods Sold was understated and Gross Profit and Income before Income Tax Expense would be overstated in Year 1. (Net Income would be overstated as well, although the effects would be offset somewhat by overstated Income Tax Expense.)
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CHAPTER 7: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Consider the following information for Maynor Company, which uses a periodic inventory system:
January 1 March 28 August 22 October 14 Goods Available for Sale
Transaction
Units
Beginning Inventory Purchase Purchase Purchase
10
$ 60
$ 600
20 20 25
66 70 76
1,320 1,400 1,900
75
Unit Cost
Total Cost
$ 5,220
The company sold 25 units on May 1 and 20 units on October 28. Required: Calculate the company's ending inventory and cost of goods sold using the each of following inventory costing methods. (Round the per unit cost to 2 decimal places and then round your answers to the nearest whole dollar.) a.FIFO b.LIFO c.Weighted Average
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2) Zippy Shoe Company uses a periodic inventory system. Zippy purchased 800 pairs of shoes at $70 each in June, 2,000 pairs in August at $72 each, and 1,200 pairs in December at $75 each. Zippy sold 3,800 pairs of shoes during the year. Required: Calculate the company's ending inventory and cost of goods sold using the each of following inventory costing methods. a.FIFO b.LIFO c.Weighted Average
3) Consider the following information for Maynor Company, which uses a perpetual inventory system:
January 1 March 28 August 22 October 14 Goods Available for Sale
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Transaction
Units
Beginning Inventory Purchase Purchase Purchase
10
$ 60
$ 600
20 20 25
66 70 76
1,320 1,400 1,900
75
Unit Cost
Total Cost
$ 5,220
2
The company sold 25 units on May 1 and 20 units on October 28. Required: Calculate the company's ending inventory and cost of goods sold using the each of following inventory costing methods. a.FIFO b.LIFO c.Weighted Average
4) Bonnie Denim Company sells blue jeans. Last year, skinny jeans were fashionable; this year, relaxed-fit jeans are in style. The company has 940 units of skinny jeans with a cost of $38 per unit and a market value of $34 per unit. The inventory also includes 2,360 units of relaxed-fit jeans with a cost of $33 per unit and a market value of $39 per unit. Required: Prepare the journal entry, if any, that is required to adjust the Inventory account, or note "No journal entry required".
5) The following information is for Fair Trader Company for the month of May. Fair Trader uses a perpetual inventory system: May 1 May 5 May 6 May 12
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10 units were purchased at $30 per unit 20 units were purchased at $32 per unit 25 units were sold for $50 per unit 20 units were purchased at $40 per unit
3
May 23 May 28
25 units were purchased at $44 per unit 20 units were sold for $50 per unit
Required: Calculate the company's ending inventory and cost of goods sold using the each of following inventory costing methods. (Round the per unit cost to 2 decimal places and then round your answers to the nearest whole dollar.) a. FIFO b. LIFO c. Weighted Average
6)
Match the term to the appropriate definition. There are more definitions than terms.
Term Consignment Inventory Cost of Goods Sold
Cost of Goods Sold Equation Ending Inventory Equation Finished Goods Inventory Goods in Transit
Gross Profit
Inventory
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Definition A) Inventory costing method that identifies the cost of the specific item that was sold. B) Inventory costing method that assumes that the costs of the first goods purchased are the costs of the first goods sold. C) The difference between net sales and cost of goods sold. D) The inventory that starts the manufacturing process. E) Inventory items being transported. F) Consists of products acquired in a finished condition, ready for sale without further processing. G) A valuation rule that requires Inventory to be written down when its market value falls below its cost. H) The expense that follows directly after Net Sales on a multiple step income statement. 4
Merchandise Inventory Raw Materials Inventory Work in Process Inventory
7)
I) Beginning Inventory + Purchases – Cost of Goods Sold J) Goods a company is holding on behalf of the goods' owner. K) Inventory costing method that assumes that the costs of the last goods purchased are the costs of the first goods sold. L) Requires that if LIFO is used on the income tax return, it also must be used in financial statement reporting. M) Beginning Inventory + Purchases – Ending Inventory N) Goods that are in the process of being manufactured. O) Inventory costing method that uses the weighted average unit cost of the goods available for sale for both cost of goods sold and ending inventory. P) Goods that are held for sale in the normal course of business or are used to produce other goods for sale. Q) The number of times (on average) inventory turns over (the process of buying and selling inventory) during the period. R) Inventory that was in process and now is completed and ready for sale. S) A measure of the average number of days from the time inventory is bought to the time it is sold.
Match the term to the appropriate definition. There are more definitions than terms. Term Days to Sell
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Definition A) Inventory costing method that uses the weighted average unit cost of the goods available for sale for both cost of goods 5
sold and ending inventory. FIFO Inventory Turnover
LIFO LIFO Conformity Rule Lower of Cost or Market/Net Realizable Value Rule
Specific Identification Weighted Average Cost
B) The inventory that starts the manufacturing process. C) Inventory costing method that assumes that the costs of the last goods purchased are the costs of the first goods sold. D) Beginning Inventory + Purchases — Ending Inventory E) Inventory costing method that identifies the cost of the specific item that was sold. F) A valuation rule that requires Inventory to be written down when its market value falls below its cost. G) Goods that are held for sale in the normal course of business or are used to produce other goods for sale. H) The difference between net sales and cost of goods sold. I) Inventory that was in process and now is completed and ready for sale. J) Beginning Inventory + Purchases – Cost of Goods Sold K) Requires that if LIFO is used on the income tax return, it also must be used in financial statement reporting. L) Goods that are in the process of being manufactured. M) The expense that follows directly after Net Sales on a multiple step income statement. N) Consists of products acquired in a finished condition, ready for sale without further processing. O) Inventory costing method that assumes that the costs of the first goods purchased are the costs of the first goods sold. P) A measure of the average number of days from the time inventory is bought to the time it is sold. Q) Inventory items being transported. R) Goods a company is holding on behalf of the goods' owner.
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S) The number of times (on average) inventory turns over (the process of buying and selling inventory) during the period.
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Answer Key Test name: Chap 07_7e_Problems 1) a. FIFO – Periodic Beginning inventory + March 28 purchase + August 22 purchase + October 14 purchase = Goods available for sale − May 1 cost of goods sold − October 28 cost of goods sold
10 units × $60 20 units × $66 20 units × $70 25 units × $76 75 units (10 units × $60) + (15 units × $66) (5 units × $66) + (15 units × $70)
$ 600 1,320 1,400 1,900 $ 5,220 1,590
(5 units × $70) + (25 units × $76)
$ 2,250
= Ending inventory
1,380
Cost of Goods Sold: $1,590 + $1,380 = $2,970 b. LIFO – Periodic 10 units × $60 20 units × $66 20 units × $70 25 units × $76 75 units 25 units × $76 20 units × $70
$ 600 1,320 1,400 1,900 $ 5,220 1,900 1,400
(10 units × $60) + (20 units × $66)
$ 1,920
Beginning inventory + March 28 purchase + August 22 purchase + October 14 purchase = Goods available for sale − May 1 cost of goods sold − October 28 cost of goods sold = Ending inventory
Cost of Goods Sold: $1,900 + $1,400 = $3,300 c. Weighted Average – Periodic
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Beginning inventory 10 units × $60 + March 28 purchase 20 units × $66 + August 22 purchase 20 units × $70 + October 14 purchase 25 units × $76 = Goods available for sale 75 units − Cost of goods sold (25 units + 20 units) × ($5,220 ÷ 75 units)
$ 600 1,320 1,400 1,900 $ 5,220 3,132
30 units × $69.60
$ 2,088
800 units × $70 2,000 units × $72 1,200 units × $75 4,000 units
$ 56,000 144,000 90,000 $ 290,000
(800 units × $70) + (2,000 units × $72) + (1,000 units × $75)
275,000
200 units × $75
$ 15,000
800 units × $70 2,000 units × $72 1,200 units × $75 4,000 units
$ 56,000 144,000 90,000 $ 290,000
(1,200 units × $75) + (2,000 units × $72) + (600 units × $70)
276,000
200 units × $70
$ 14,000
= Ending inventory
Cost of Goods Sold = $3,132 2) a. FIFO – Periodic June Purchase + August Purchase + December Purchase = Goods available for sale − Cost of goods sold = Ending inventory
b. LIFO – Periodic June Purchase + August Purchase + December Purchase = Goods available for sale − Cost of goods sold = Ending inventory
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June Purchase + August Purchase + December purchase = Goods available for sale − Cost of goods sold = Ending inventory
800 units × $70 2,000 units × $72 1,200 units × $75 4,000 units
$ 56,000 144,000 90,000 $ 290,000
3,800 units × ($290,000 ÷ 4,000 units)
275,500
200 units × $72.50
$ 14,500
10 units × $60 20 units × $66 30 units
$ 600 1,320 $ 1,920
(10 units × $60) + (15 units × $66)
1,590
20 units × $70 25 units × $76
1,400 1,900 $ 3,630
(5 units × $66) + (15 units × $70)
1,380
(5 units × $70) + (25 units × $76)
$ 2,250
3) a. FIFO – Perpetual Beginning inventory + March 28 purchase = Goods available for sale − May 1 cost of goods sold + August 22 purchase + October 14 purchase = Goods available for sale − October 28 cost of goods sold = Ending inventory
Cost of Goods Sold: $1,590 + $1,380 = $2,970 b. LIFO – Perpetual Beginning inventory + March 28 purchase = Goods available for sale − May 1 cost of goods sold + August 22 purchase + October 14 purchase = Goods available for sale
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10 units × $60 20 units × $66 30 units
$ 600 1,320 $ 1,920
(20 units × $66) + (5 units × $60)
1,620
20 units × $70 25 units × $76
1,400 1,900 $ 3,600
10
− October 28 cost of goods sold = Ending inventory
20 units × $76
1,520
(5 units × $60) + (20 units × $70) + (5 units × $76)
$ 2,080
Cost of Goods Sold: $1,620 + $1,520 = $3,140 c. Weighted Average – Perpetual Beginning inventory + March 28 purchase = Goods available for sale − May 1 cost of goods sold + August 22 purchase + October 14 purchase = Goods available for sale − October 28 cost of goods sold
10 units × $60 20 units × $66 30 units
$ 600 1,320 $ 1,920
25 units × ($1,920 ÷ 30 units)
1,600
20 units × $70 25 units × $76 50 units
1,400 1,900 $ 3,620
20 units × ($3,620 ÷ 50 units)
1,448
30 units × $72.40
$ 2,172
= Ending inventory
Cost of Goods Sold: $1,600 + $1,448 = $3,048 4) No A
Transaction General Journal 1 Cost of Goods Sold
Debit 3,760
Inventory
Credit
3,760
Cost of goods sold [940 units × ($38 − $34)] = $3,760 5) a. FIFO – Perpetual Beginning inventory + May 5 purchase = Goods available for sale − May 6 cost of goods sold + May12 purchase + May 23 purchase
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10 units × $30 20 units × $32 30 units (10 units × $30) + (15 units × $32) 20 units × $40 25 units × $44
$ 300 640 $ 940 780 800 1,100
11
= Goods available for sale
$ 2,060
− May 28 cost of goods sold
(5 units × $32) + (15 units × $40)
760
= Ending inventory
(5 units × $40) + (25 units × $44)
$ 1,300
Cost of Goods Sold: $780 + $760 = $1,540 b. LIFO – Perpetual Beginning inventory + May 5 purchase = Goods available for sale − May 6 cost of goods sold + May 12 purchase + May 23 purchase = Goods available for sale
10 units × $30 20 units × $32 30 units (20 units × $32) + (5 units × $30) 20 units × $40 25 units × $44
$ 300 640 $ 940 790 800 1,100 $ 2,050
− May 28 cost of goods sold
(20 units × $44)
880
(5 units × $30) + (20 units x $40) + (5 units × $44)
$ 1,170
= Ending inventory
Cost of Goods Sold: $790 + $880 = $1,170 c. Weighted Average – Perpetual Beginning inventory + May 5 purchase = Goods available for sale − May 6 cost of goods sold + May 12 purchase + May 23 purchase = Goods available for sale − May 28 cost of goods sold
10 units × $30 20 units × $32 30 units 25 units × ($940 ÷ 30 units) 20 units × $40 25 units × $44 50 units 20 units × ($2,057 ÷ 50 units)
$ 300 640 $940 783 800 1,100 $ 2,057 823
30 units × $41.14
$ 1,234
= Ending inventory
Cost of Goods Sold: $783 + $823 = $1,606
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6) J) Consignment Inventory H) Cost of Goods Sold M) Cost of Goods Sold Equation I) Ending Inventory Equation R) Finished Goods Inventory E) Goods in Transit C) Gross Profit P) Inventory F) Merchandise Inventory D) Raw Materials Inventory N) Work in Process Inventory 7) P) Days to Sell O) FIFO S) Inventory Turnover C) LIFO K) LIFO Conformity Rule F) Lower of Cost or Market/Net Realizable Value Rule E) Specific Identification A) Weighted Average Cost
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CHAPTER 8 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) When a company routinely sells on credit, it is inevitable that some of its customers will not pay the amount owed. ⊚ ⊚
2)
true false
The decision to extend credit to customers will decrease wage costs. ⊚ ⊚
true false
3) Notes receivable are typically only used when a company sells large dollar value items (such as cars). ⊚ ⊚
true false
4) The allowance method for uncollectible accounts conforms to the expense recognition principle. ⊚ ⊚
true false
5) The Allowance for Doubtful Accounts account is a temporary account, which is closed to Retained Earnings at the end of the accounting period. ⊚ ⊚
6)
true false
The accounts receivable account for each customer is called a subsidiary account. ⊚ ⊚
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true false
1
7) Under the allowance method for uncollectible accounts, the write-off of a specific account will not affect total assets. ⊚ ⊚
true false
8) The aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts, whereas the percentage of credit sales method focuses on estimating Bad Debt Expense for the period. ⊚ ⊚
true false
9) The aging of accounts receivable method is based upon the principle that the longer an account is overdue, the higher the risk of nonpayment. ⊚ ⊚
true false
10) Because it is easier to use, the direct write-off method for uncollectible accounts is typically used instead of the allowance method. ⊚ ⊚
true false
11) The direct write-off method for uncollectible accounts is not allowed by GAAP because it understates the net accounts receivable and violates the expense recognition principle. ⊚ ⊚
true false
12) The direct write-off method for uncollectible accounts is not allowed by either GAAP or IFRS but is required by the Internal Revenue Service (IRS) for tax purposes.
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⊚ ⊚
13)
true false
Interest on a two-month, 7%, $1,000 note would be calculated as $1,000 × 0.07 × 2/12. ⊚ ⊚
true false
14) Interest revenue from notes receivable is typically reported on a multiple step income statement as a part of Income from Operations. ⊚ ⊚
true false
15) The allowance method for uncollectible accounts is used for both accounts receivable and notes receivable. ⊚ ⊚
true false
16) The receivables turnover ratio is calculated as: Average net receivables divided by Net sales. ⊚ ⊚
true false
17) If the receivables turnover ratio rises significantly, the increase may be a signal that the company is extending credit to high-risk borrowers or allowing an overly generous repayment schedule. ⊚ ⊚
true false
18) Factoring refers to an arrangement in which a company sells its receivables to another company and receives cash immediately.
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⊚ ⊚
true false
19) If a company factors its receivables, its receivables turnover ratio will be higher than it would have been if the receivables had not been factored. ⊚ ⊚
true false
20) When credit card sales occur, the seller may receive cash immediately, or within a few days, depending upon the specific credit card program being used. ⊚ ⊚
true false
21) Credit card companies charge a fee to the seller that accepts the credit cards. This fee is recorded by the seller as a selling expense on its income statement. ⊚ ⊚
true false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 22) The potential advantages of extending credit to customers include all of the following except: A) increased wage expenses. B) increased profits. C) increased customer satisfaction. D) increased revenues.
23) There are advantages and disadvantages to extending credit to customers. Which of the following statements below expresses the general reason for extending credit?
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A) Lower sales revenues exceed bad debt savings. B) Wage cost savings exceed delayed receipt of cash. C) Gross profits exceed bad debt costs. D) The speed of cash receipts exceeds bad debt costs.
24)
Which of the following statements about the trade-offs of extending credit is not correct?
A) Extending credit to at least some customers is necessary in a competitive market to avoid losing sales to competitors. B) Even if a company were to collect in full from customers, there would be other additional costs introduced by extending credit to customers. C) Even though additional costs are incurred if credit is extended, a company expects that the additional revenue will be more than sufficient to offset the additional costs. D) Even if there are no bad debts from credit sales, the delayed receipt of cash will always increase additional costs beyond the increased revenue from the credit sales.
25)
Extending credit to customers will introduce all of the following additional costs except:
A) increased wage costs will be incurred to hire people to evaluate whether each customer is creditworthy, track how much each customer owes, and follow up to collect the receivable from each customer. B) bad debt costs will result when amounts cannot be collected from customers. C) delayed receipt of cash may result in requiring the company to take out short-term loans and incur interest costs. D) decreased gross profit from reduced sales.
26)
All of the following will likely be incurred by a company that extends credit except: A) increased revenues. B) increased wage costs. C) increased advertising expenses. D) a delay in the receipt of cash.
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27) Companies are concerned about the cost of extending credit for all the following reasons except for: A) the time delay in receiving payment. B) the expense of the extra goods that must be produced or purchased for resale. C) the risk of nonpayment. D) the administrative costs associated with extending credit.
28)
The potential disadvantages of extending credit include all the following except: A) increased bad debt costs. B) customers buying too much. C) the need to hire employees to undertake collection efforts. D) higher wage costs in the accounting department.
29)
Which of the following statements about extending credit is not correct?
A) It is common for companies to sell on account to other companies. B) Some companies extend credit to individual consumers. C) Bad debts arise from credit sales to individual consumers, but not from credit sales to other companies. D) When credit is available, customers often buy more products and services.
30)
If a company did not extend credit to customers: A) gross revenue would be expected to increase. B) costs and sales revenue would be expected to increase. C) costs and sales revenue would be expected to decrease. D) gross profit would be expected to increase.
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31) Although there are some clear disadvantages associated with extending credit to customers, such as bad debt costs, most managers believe there is a primary advantage that outweighs the costs. Which of the following is the primary advantage referred to? A) Increased labor costs B) Increased bad debt expense C) Delayed receipt of cash D) Additional sales revenue
32) The advantage of extending credit to customers is that it helps customers to buy products and services, thereby increasing the seller's revenue. The disadvantages of extending credit are costs related to: A) increased sales. B) bad debt expense. C) increased notes receivable. D) marketing.
33) Countryside Corporation is owed $11,890 from a customer for landscaping. The account is overdue, and the customer is having difficulty paying. Countryside might ask the customer to sign a note for the unpaid amount to: A) decrease its net income for tax reporting purposes. B) strengthen Countryside Corporation's legal right to be repaid with interest. C) reduce its tax liability. D) eliminate any doubts of collection of the amount due.
34) IBM signs an agreement to lend $200,000 to one of its customers to be repaid in one year at 5% interest. IBM would record this loan as:
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A) Notes Payable. B) Accounts Receivable. C) Notes Receivable. D) Unearned Revenue.
35)
Accounts receivable: A) arise from the purchase of goods or services on credit. B) are amounts owed to a business by its customers. C) will be collected within the discount period or when due. D) are reported on the income statement.
36)
Notes Receivable differ from Accounts Receivable in that Notes Receivable:
A) generally charge interest from the day they are signed to the day they are collected. B) are noncurrent assets. C) do not have to be created for every new transaction, so they are used more frequently. D) are generally considered a weaker legal claim.
37) Which of the following are similarities between a six-month note receivable and an account receivable? They both are: A) formal written contracts. B) interest bearing. C) current liabilities. D) current assets.
38) Why are estimates of bad debts used to record uncollectible amounts of accounts receivable?
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A) Doing so avoids violating the expense recognition ("matching") principle. B) It is an easier method than waiting for accounts to actually become uncollectible. C) Because the actual amount of uncollectible accounts can never be known. D) It is the most conservative approach.
39) Countryside Corporation provides $6,000 worth of lawn care on account during the month. Experience suggests that about 2% of net credit sales will not be collected. In conformity with the expense recognition principle, the company should: A) record an estimate of Bad Debt Expense in the same period as the lawn care is provided. B) not report the sales revenue until it collects payment. C) increase the value of its liabilities with an adjustment. D) wait until the accounts are determined to be uncollectible before making an entry to record the related Bad Debt Expense.
40)
The Allowance for Doubtful Accounts account is a contra-account that offsets: A) Bad Debt Expense. B) Cash. C) Net Income. D) Accounts Receivable.
41)
Recording the estimate of bad debt expense: A) increases assets. B) increases net income. C) is done at the same time the credit sale is recorded. D) follows the expense recognition ("matching") principle.
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42) The adjusting entry to record the estimated bad debts in the period credit sales occur includes a debit to an: A) asset account and a credit to a liability account. B) expense account and a credit to an asset account. C) expense account and a credit to a revenue account. D) expense account and a credit to a contra-asset account.
43) The adjusting entry to record the estimated bad debts in the period credit sales occur would normally include a debit to: A) Accounts Receivable and a credit to Allowance for Doubtful Accounts. B) Bad Debt Expense and a credit to Allowance for Doubtful Accounts. C) Allowance for Doubtful Accounts and a credit to Accounts Receivable. D) Bad Debt Expense and a credit to Accounts Receivable.
44) The adjusting entry used to record the estimated bad debts in the period credit sales occur decreases: A) both net income and net accounts receivable. B) net income and increases liabilities. C) assets and increases liabilities. D) both selling expenses and net income.
45)
Assume Zap industries reported the following adjusted account balances at year-end.
Accounts Receivable Allowance for Doubtful Accounts Accounts Receivable, Net
2021
2020
$ 1,710,200 (94,000) $ 1,616,200
$ 1,360,920 (78,100) $ 1,282,820
Assume the company recorded no write-offs or recoveries during 2021. What was the amount of Bad Debt Expense reported in 2021?
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A) $15,900 B) $31,800 C) $94,000 D) $78,100
46)
Assume Zap Industries reported the following adjusted account balances at year-end.
Accounts Receivable Allowance for Doubtful Accounts Accounts Receivable, Net
2021
2020
$ 2,496,320 (126,400) $ 2,369,920
$ 1,937,472 (103,360) $ 1,834,112
Assume the company recorded no write-offs or recoveries during 2021. What was the amount of Bad Debt Expense reported in 2021? A) $126,400 B) $103,360 C) $46,080 D) $23,040
47) Accounts Receivable, Net (or Net Accounts Receivable) equals Accounts Receivable (gross) minus: A) Cost of Goods Sold. B) Bad Debt Expense. C) Allowance for Doubtful Accounts. D) Current Liabilities.
48)
On the balance sheet, the Allowance for Doubtful Accounts: A) is included in current liabilities. B) increases the reported Accounts Receivable, Net. C) is reported under the heading "Other Assets." D) is subtracted from Accounts Receivable.
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49) The accounting principle that governs the recording of bad debt expense in the same period as sales revenue is called the: A) expense recognition principle ("matching"). B) time period assumption. C) revenue recognition principle. D) separate entity assumption.
50) An objective of the expense recognition principle ("matching") is to have bad debt expense recorded in: A) the same period that the related accounts receivable is determined to be uncollectible. B) the same period the related credit sales are recorded. C) a later period after the related credit sales are recorded. D) the period that a customer eventually becomes bankrupt.
51) Failing to record bad debt expense in the same period as the related revenue violates which principle? A) Expense recognition principle ("matching") B) Revenue recognition principle C) Lower-of-cost-or-market value principle D) Cost principle
52) The challenge businesses face when estimating the allowance for previously recorded sales is that:
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A) at the time of the sale, it is not known which customer(s) will not make their payment. B) past default rates are not a good predictor of future default rates. C) in bad economic times, fewer customers will have problems with their payments. D) those sales have been closed into retained earnings.
53) A contra-asset account, such as Allowance for Doubtful Accounts or Accumulated Depreciation, has a normal balance of a ________ and causes total assets to ________. A) credit; decrease B) debit; increase C) debit; decrease D) credit; increase
54) Using the allowance method, which is the correct adjusting journal entry to record bad debt expense? A) Debit Bad Debt Expense and credit Allowance for Doubtful Accounts. B) Debit Allowance for Bad Debt Expense and credit Bad Debt Expense. C) Debit Bad Debt Expense and credit Sales Revenue. D) Debit Bad Debt Expense and credit Accounts Receivable.
55)
The adjusting entry to record the allowance for doubtful accounts includes a: A) debit to Bad Debt Expense. B) debit to Allowance for Doubtful Accounts. C) debit to Sales Revenue. D) credit to Accounts Receivable.
56)
The entry to adjust the Allowance for Doubtful Accounts causes total:
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A) assets to increase. B) liabilities to increase. C) stockholders' equity to increase. D) stockholders' equity to decrease.
57)
Allowance for Doubtful Accounts is a: A) permanent account so its balance carries forward to the next accounting period. B) permanent account so its balance is closed (zeroed out) at the end of the accounting
period. C) temporary account so its balance is closed (zeroed out) at the end of the accounting period. D) temporary account so its balance carries forward to the next accounting period.
58)
Bad Debt Expense is a: A) permanent account so its balance carries forward to the next accounting period. B) permanent account so its balance is closed (zeroed out) at the end of the accounting
period. C) temporary account so its balance is closed (zeroed out) at the end of the accounting period. D) temporary account so its balance carries forward to the next accounting period.
59) For billing and collection purposes, companies keep a separate accounts receivable account for each customer called a: A) subsidized account. B) temporary account. C) subsidiary account. D) temporal account.
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60)
A subsidiary account is: A) prohibited by GAAP. B) a separate account maintained internally for billing purposes. C) used for tax purposes to enable calculation of taxable income. D) used only for computing the accounts receivable turnover.
61) Assume the Hart Company uses the allowance method. When the company writes off a customer's account balance that has no chance of collection: A) total assets will decrease. B) total liabilities will increase. C) expenses and revenues will both increase. D) total assets do not change.
62) Cambridge Company uses the allowance method. During January 2021, Cambridge writes off a $640 customer account balance when it becomes clear that the customer will never pay. The entry to record the write-off will: A) decrease total assets by $640. B) decrease net income in 2021 by $640. C) decrease net accounts receivable by $640. D) not affect expenses in 2021.
63) When the allowance method is used, the entry to record the write-off of specific uncollectible accounts would decrease: A) the Allowance for Doubtful Accounts account. B) Net Income. C) Accounts Receivable, Net. D) Bad Debt Expense.
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64) Marilyn Corporation uses the allowance method. Marilyn writes off a $560 customer account balance when it becomes clear that the customer will never pay. Marilyn should debit: A) Bad Debt Expense and credit Accounts Receivable for $560. B) Allowance for Doubtful Accounts and credit Accounts Receivable for $560. C) Bad Debt Expense and credit Cash for $560. D) Accounts Receivable and credit Bad Debt Expense for $560.
65) The write-off of a specific customer account receivable involves decreasing an asset account and: A) increasing an expense account. B) decreasing a liability account. C) decreasing a revenue account. D) decreasing a contra-asset account.
66) Charleston, Incorporated has Accounts Receivable of $290,000 and an Allowance for Doubtful Accounts of $19,000. If it writes-off a customer account balance of $1,900, what is the amount of its net accounts receivable? A) $288,100 B) $290,000 C) $271,000 D) $269,100
67) Charleston, Incorporated has Accounts Receivable of $320,000 and an Allowance for Doubtful Accounts of $16,000. If it writes-off a customer account balance of $1,600, what is the amount of its net accounts receivable?
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A) $318,400 B) $320,000 C) $304,000 D) $302,400
68) Kata Company uses the allowance method. On May 1, Kata wrote off a $22,000 customer account balance when it becomes clear that the specific customer will never pay. The journal entry to record the write-off on May 1 would include which of the following? A) Debit to Bad Debt Expense and credit to Allowance for Doubtful Accounts. B) Debit to Accounts Receivable and credit to Allowance for Doubtful Accounts. C) Debit to Allowance for Doubtful Accounts and credit to Bad Debt Expense. D) Debit to Allowance for Doubtful Accounts and credit to Accounts Receivable.
69) Lakeview Incorporated uses the allowance method. During the year, Lakeview concludes that specific customers will never pay their account balances, which total $6,844. The entry to record the write-off of accounts receivable would debit: A) Accounts Receivable and credit Allowance for Doubtful Accounts for $6,844. B) Accounts Receivable and credit Bad Debt Expense for $6,844. C) Bad Debt Expense and credit Accounts Receivable for $6,844. D) Allowance for Doubtful Accounts and credit Accounts Receivable for $6,844.
70) Grandview, Incorporated uses the allowance method. At December 31, 2021, the company’s balance sheet reports Accounts Receivable, Net in the amount of $20,500. On January 2, 2022,Grandview writes off a $2,200 customer account balance when it becomes clear that the customer will never pay. What is the amount of Accounts Receivable, Net after the write-off?
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A) $2,200 B) $18,300 C) $22,700 D) $20,500
71) Grandview, Incorporated uses the allowance method. At December 31, 2021, the company's balance sheet reports Accounts Receivable, Net in the amount of $27,200. On January 2, 2022, Grandview writes off a $2,400 customer account balance when it becomes clear that the customer will never pay. What is the amount of Accounts Receivable, Net after the write-off? A) $27,200 B) $2,400 C) $29,600 D) $24,800
72)
Marconi Company has the following information available for the current year:
Net Sales Bad Debt Expense Accounts Receivable, Beginning of Year Accounts Receivable, End of Year Allowance for Doubtful Accounts, Beginning of Year Allowance for Doubtful Accounts, End of Year
$ 1,146,000 91,680 366,720 183,360 64,176 94,736
What was the amount of write-offs during the year? A) $94,736 B) $61,120 C) $183,360 D) $0
73)
Marconi Company has the following information available for the current year:
Net Sales Bad Debt Expense Accounts Receivable, Beginning of Year Accounts Receivable, End of Year
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$ 1,125,000 90,000 360,000 180,000
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Allowance for Doubtful Accounts, Beginning of Year Allowance for Doubtful Accounts, End of Year
63,000 93,000
What was the amount of write-offs during the year? A) $93,000 B) $67,500 C) $82,500 D) $60,000
74) Removing an uncollectible account and its corresponding allowance from the accounting records is called: A) a write-off. B) a write-up. C) double entry accounting. D) elimination accounting.
75) The entry that includes a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable is a(n): A) write-off of a specific customer's account. B) adjusting entry for the estimated bad debts. C) subsidiary entry to increase a customer's account for credit sales. D) net realizable entry to report the amount expected to be collected.
76) Accounts Receivable has a $3,450 balance, and the Allowance for Doubtful Accounts has a $300 credit balance. A $120 account receivable is written-off. Net accounts receivable after the write-off equals: A) $3,030. B) $3,150. C) $3,270. D) $3,330.
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77)
Which method for estimating bad debts is generally considered to be the most accurate? A) Percentage of credit sales B) Allowance method C) Specific account method D) Aging of accounts receivable method
78) Kelton Incorporated reported net credit sales of $552,000 for the current year. The unadjusted credit balance in its Allowance for Doubtful Accounts is $920. The company has experienced bad debt losses of 1% of credit sales in prior periods. Using the percentage of credit sales method, what amount should the company record as the estimated Bad Debt Expense? A) $6,440 B) $3,680 C) $2,760 D) $5,520
79) Kelton Incorporated reported net credit sales of $450,000 for the current year. The unadjusted credit balance in its Allowance for Doubtful Accounts is $750. The company has experienced bad debt losses of 1% of credit sales in prior periods. Using the percentage of credit sales method, what amount should the company record as the estimated Bad Debt Expense? A) $3,750 B) $4,500 C) $4,470 D) $4,800
80) Creek Company uses the percentage of credit sales method in determining its bad debt expense. The following information comes from the accounting records of Creek Company: Cash sales Credit sales Total sales Credit balance in the Allowance for Doubtful Accounts
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$ 190,000 810,000 1,000,000 4,500 20
Bad debt loss rate
3%
What is the estimated bad debt expense? A) $24,300 B) $25,500 C) $28,800 D) $30,000
81) Creek Company uses the percentage of credit sales method in determining its bad debt expense. The following information comes from the accounting records of Creek Company: Cash sales Credit sales Total sales Credit balance in the Allowance for Doubtful Accounts Bad debt loss rate
$ 300,000 1,200,000 1,500,000 7,500 3%
What is the estimated bad debt expense? A) $36,000 B) $37,500 C) $43,500 D) $45,000
82) Libre, Incorporated has experienced bad debt losses of 5% of credit sales in prior periods. At the end of the year, the balance of Accounts Receivable is $121,000 and the Allowance for Doubtful Accounts has an unadjusted credit balance of $1,550. Net credit sales during the year were $192,000. Using the percentage of credit sales method, what is the estimated Bad Debt Expense for the year? A) $10,100 B) $6,050 C) $9,100 D) $9,600
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83) Libre, Incorporated has experienced bad debt losses of 4% of credit sales in prior periods. At the end of the year, the balance of Accounts Receivable is $100,000 and the Allowance for Doubtful Accounts has an unadjusted credit balance of $500. Net credit sales during the year were $150,000. Using the percentage of credit sales method, what is the estimated Bad Debt Expense for the year? A) $4,000 B) $5,600 C) $6,000 D) $6,400
84) Libby Company uses the percentage of credit sales method for calculating Bad Debt Expense. The company reported $237,000 in total sales during the year; $192,000 of which were on credit. Libby has experienced bad debt losses of 5% of credit sales in prior periods. What is the estimated amount of Bad Debt Expense for the year? A) $11,850 B) $45,000 C) $10,000 D) $9,600
85) Libby Company uses the percentage of credit sales method for calculating Bad Debt Expense. The company reported $216,000 in total sales during the year; $178,000 of which were on credit. Libby has experienced bad debt losses of 5% of credit sales in prior periods. What is the estimated amount of Bad Debt Expense for the year? A) $10,800 B) $8,900 C) $38,000 D) $1,900
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86) Saint John Industries uses the percentage of credit sales method to estimate Bad Debt Expense. The company reported net credit sales of $550,000 during the year. Saint John has experienced bad debt losses of 2% of credit sales in prior periods. At the beginning of the year, Saint John has a credit balance in its Allowance for Doubtful Accounts of $4,500. No write-offs or recoveries were recorded during the year. What amount of Bad Debt Expense should Saint John recognize for the year? A) $11,000 B) $15,500 C) $6,500 D) $4,500
87) Saint John Industries uses the percentage of credit sales method to estimate Bad Debt Expense. The company reported net credit sales of $500,000 during the year. Saint John has experienced bad debt losses of 3% of credit sales in prior periods. At the beginning of the year, Saint John has a credit balance in its Allowance for Doubtful Accounts of $4,000. No write-offs or recoveries were recorded during the year. What amount of Bad Debt Expense should Saint John recognize for the year? A) $6,000 B) $9,000 C) $15,000 D) $21,000
88) Wrangler Incorporated uses the percentage of credit sales method to estimate Bad Debt Expense. At the end of the year, the company’s unadjusted trial balance includes the following: Accounts Receivable Allowance for Doubtful Accounts (credit balance) Net Credit Sales
$ 354,000 700 905,000
Wrangler has experienced bad debt losses of 0.5% of credit sales in prior periods. What is the Bad Debt Expense to be recorded for the year?
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A) $5,925 B) $3,825 C) $4,525 D) $5,225
89) Wrangler Incorporated uses the percentage of credit sales method to estimate Bad Debt Expense. At the end of the year, the company's unadjusted trial balance includes the following: Accounts Receivable Allowance for Doubtful Accounts (credit balance) Net Credit Sales
$ 349,000 200 900,000
Wrangler has experienced bad debt losses of 0.5% of credit sales in prior periods. What is the Bad Debt Expense to be recorded for the year? A) $4,500 B) $4,300 C) $4,700 D) $45,000
90) Utopia Corporation provides $6,000 worth of lawn care on account during the month. Experience suggests that about 3% of net credit sales will not be collected. To record the potential bad debts, Utopia Corporation would debit: A) Accounts Receivable and credit Allowance for Doubtful Accounts for $180. B) Allowance for Doubtful Accounts and credit Bad Debt Expense for $180. C) Bad Debt Expense and credit Allowance for Doubtful Accounts for $180. D) Bad Debt Expense and credit Accounts Receivable for $180.
91) Morrow Incorporated uses the percentage of credit sales method of estimating doubtful accounts. The Allowance for Doubtful Accounts has an unadjusted credit balance of $5,300 and the company had $270,000 of net credit sales during the period. Morrow has experienced bad debt losses of 3% of credit sales in prior periods. After making the adjusting entry for estimated bad debts, what is the ending balance in the Allowance for Doubtful Accounts account?
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A) $13,400 B) $10,600 C) $8,100 D) $2,800
92) Morrow Incorporated uses the percentage of credit sales method of estimating doubtful accounts. The Allowance for Doubtful Accounts has an unadjusted credit balance of $2,700 and the company had $140,000 of net credit sales during the period. Morrow has experienced bad debt losses of 6% of credit sales in prior periods. After making the adjusting entry for estimated bad debts, what is the ending balance in the Allowance for Doubtful Accounts account? A) $11,100 B) $8,400 C) $8,238 D) $5,700
93) Phantom Incorporated has an unadjusted debit balance of $5,250 in its Allowance for Doubtful Accounts. The company has experienced bad debt losses of 2% of credit sales in prior periods. Phantom reported net credit sales of $2,250,000 for the current period. To record the adjustment for bad debts, Phantom would debit: A) Allowance for Doubtful Accounts for $45,000. B) Allowance for Doubtful Accounts for $50,250. C) Bad Debt Expense for $50,250. D) Bad Debt Expense for $45,000.
94) Grayhawk Company reported net credit sales of $588,000 for the year ending December 31, 2022. On January 1, 2022, the Allowance for Doubtful Accounts had a beginning credit balance of $14,400. During 2022, $24,000 of uncollectible accounts receivable were written off. Grayhawk has experienced bad debt losses of 3% of credit sales in prior periods. Using the percentage of credit sales method, what is the adjusted balance in the Allowance for Doubtful Accounts at December 31, 2022?
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A) $8,040 B) $8,400 C) $17,640 D) $27,600
95) Which of the following statements about the Allowance for Doubtful Accounts is correct? A) The Allowance for Doubtful Accounts is credited when a specific write-off is recorded. B) Under the aging of accounts receivable method, Bad Debt Expense is calculated and then added to the beginning balance in the Allowance for Doubtful Accounts. C) The Allowance for Doubtful Accounts is a contra-revenue account. D) The Allowance for Doubtful Accounts has a normal credit balance.
96) The amount of uncollectible accounts at the end of the year is estimated to be $31,500, using the aging of accounts receivable method. The balance in the Allowance of Doubtful Accounts account is an $10,600 credit before adjustment. What is the adjusted balance of the Allowance for Doubtful Accounts at the end of the year? A) $31,500 B) $42,100 C) $10,600 D) $20,900
97) The amount of uncollectible accounts at the end of the year is estimated to be $25,000, using the aging of accounts receivable method. The balance in the Allowance of Doubtful Accounts account is an $8,000 credit before adjustment. What is the adjusted balance of the Allowance for Doubtful Accounts at the end of the year?
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A) $8,000 B) $17,000 C) $25,000 D) $33,000
98) Using the aging method of accounts receivable method, $5,100 of the company’s Accounts Receivable are estimated to be uncollectible. At the end of the year, the balance of Accounts Receivable is $101,000 and the unadjusted credit balance of the Allowance for Doubtful Accounts is $520. Credit sales during the year totaled $152,000. What is the current year’s Bad Debt Expense? A) $7,620 B) $7,100 C) $4,580 D) $5,100
99) Using the aging method of accounts receivable method, $5,000 of the company's Accounts Receivable are estimated to be uncollectible. At the end of the year, the balance of Accounts Receivable is $100,000 and the unadjusted credit balance of the Allowance for Doubtful Accounts is $500. Credit sales during the year totaled $150,000. What is the current year's Bad Debt Expense? A) $4,500 B) $5,000 C) $7,000 D) $7,500
100) Wheeling Incorporated uses the aging of accounts receivable method. Its estimate of uncollectible receivables resulting from the aging analysis equals $6,900. At the end of the year, the balance of Accounts Receivable is $119,000 and the unadjusted debit balance of the Allowance for Doubtful Accounts is $880. Credit sales during the year totaled $188,000. What is the estimated Bad Debt Expense for the current year?
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A) $7,780 B) $6,020 C) $9,280 D) $6,900
101) Wheeling Incorporated uses the aging of accounts receivable method. Its estimate of uncollectible receivables resulting from the aging analysis equals $5,000. At the end of the year, the balance of Accounts Receivable is $100,000 and the unadjusted debit balance of the Allowance for Doubtful Accounts is $500. Credit sales during the year totaled $150,000. What is the estimated Bad Debt Expense for the current year? A) $4,500 B) $5,000 C) $5,500 D) $7,000
102) Quill Industries uses the aging of accounts receivable method. Its estimate of uncollectible receivables resulting from the aging analysis equals $26,500. The unadjusted credit balance in the Allowance for Doubtful Accounts account is $8,600 What is the estimated Bad Debt Expense for the period? A) $17,900 B) $8,600 C) $26,500 D) $35,100
103) Quill Industries uses the aging of accounts receivable method. Its estimate of uncollectible receivables resulting from the aging analysis equals $20,000. The unadjusted credit balance in the Allowance for Doubtful Accounts account is $6,400. What is the estimated Bad Debt Expense for the period?
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A) $6,400 B) $13,600 C) $20,000 D) $26,400
104) As of December 31, Frappe Company has a balance of $21,000 in accounts receivable. Of this amount, $2,100 is past due and the remainder is not yet due. Frappe has a credit balance of $205 in the Allowance for Doubtful Accounts. Frappe Company estimates its bad debt losses using the aging of receivables method, with estimated bad debt loss rates equal to 1% of accounts not yet due and 10% of past due accounts. How will the Bad Debt Expense account be included in the required adjusting journal entry at year-end? A) Credit Bad Debt Expense $399 B) Debit Bad Debt Expense $205 C) Debit Bad Debt Expense $199 D) Debit Bad Debt Expense $194
105) As of December 31, Frappe Company has a balance of $5,000 in accounts receivable. Of this amount, $500 is past due and the remainder is not yet due. Frappe has a credit balance of $45 in the Allowance for Doubtful Accounts. Frappe Company estimates its bad debt losses using the aging of receivables method, with estimated bad debt loss rates equal to 1% of accounts not yet due and 10% of past due accounts. How will the Bad Debt Expense account be included in the required adjusting journal entry at year-end? A) Debit Bad Debt Expense $95 B) Credit Bad Debt Expense $95 C) Debit Bad Debt Expense $50 D) Credit Bad Debt Expense $50
106)
The unadjusted trial balance at the end of the year includes the following:
Accounts Receivable Allowance for Doubtful Accounts
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$ 98,000 1,000
29
Both accounts have normal balances. The company uses the aging of accounts receivable method. Its estimate of uncollectible receivables resulting from the aging analysis equals $5,800. What is the amount of Bad Debt Expense to be recorded for the year? A) $4,800 B) $7,800 C) $5,800 D) $6,800
107)
The unadjusted trial balance at the end of the year includes the following:
Accounts Receivable Allowance for Doubtful Accounts
$ 196,000 2,000
Both accounts have normal balances. The company uses the aging of accounts receivable method. Its estimate of uncollectible receivables resulting from the aging analysis equals $11,600. What is the amount of Bad Debt Expense to be recorded for the year? A) $11,600 B) $9,600 C) $13,600 D) $15,600
108) Legacy Company uses the aging of accounts receivable method. The company performed an aging of accounts receivable on December 31 and gathered the following information: Accounts Receivable Unadjusted Credit balance in Allowance for Doubtful Accounts Estimated Uncollectible Accounts Receivable
$ 545,000 36,000 45,000
What is the amount of Accounts Receivable, Net that will be reported on the balance sheet at December 31?
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A) $536,000 B) $500,000 C) $455,000 D) $509,000
109) Legacy Company uses the aging of accounts receivable method. The company performed an aging of accounts receivable on December 31 and gathered the following information:
Accounts Receivable Unadjusted Credit balance in Allowance for Doubtful Accounts Estimated Uncollectible Accounts Receivable
$ 420,000 16,000 23,200
What is the amount of Accounts Receivable, Net that will be reported on the balance sheet at December 31? A) $404,000 B) $396,800 C) $373,600 D) $412,800
110) Rimrock, Incorporated used the aging of accounts receivable method. At December 31, management determined that the net accounts receivable was $608,000. The balance in Accounts Receivable was $768,000 and the unadjusted credit balance in Allowance for Doubtful Accounts was $32,000. What was the amount of Bad Debt Expense for the year? A) $192,000 B) $128,000 C) $160,000 D) $32,000
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111) Your company uses the aging of accounts receivable method. Net credit sales are unchanged from last year, the year-end balance in Accounts Receivable is unchanged from the previous year's ending balance, and there were no write-offs during the current year. The company previously averaged about 20% of its total accounts receivable in the "over 90 days past due" category and now has 35% in this category at the end of the current year. The dollar amount of the adjustment to record Bad Debt Expense in the current year: A) declines, thus increasing the ending balance of the Allowance for Doubtful Accounts account. B) increases, thus increasing the ending balance of the Allowance for Doubtful Accounts account. C) declines, thus reducing the ending balance of the Allowance for Doubtful Accounts account. D) increases, thus reducing the ending balance of the Allowance for Doubtful Accounts account.
112) Cedar Mill, Incorporated uses the Aging of Accounts Receivable method for estimating uncollectible accounts. The accounting records show the following information at the end of the year:
Accounts Receivable Estimated % Uncollectible
0 to 30 $ 740,000 5%
Number of Days Unpaid 31 to 60 61 to 90 $ 480,000 $ 220,000 10% 15%
Over 90 $ 160,000 25%
If the unadjusted credit balance in the Allowance for Doubtful Accounts account before is $30,000, what would be the amount of the adjustment for bad debts? A) $128,000 B) $158,000 C) $90,000 D) $69,000
113) Star Enterprises uses the aging of accounts receivable method. The following information comes from its accounting records: Cash sales Credit sales Total sales
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$ 400,000 1,600,000 2,000,000 32
Credit balance in the Allowance for Doubtful Accounts Estimated uncollectible accounts receivables
10,000 38,000
What is the estimate of bad debt expense? A) $10,000 B) $18,000 C) $28,000 D) $38,000
114) Nevada Wolf, Incorporated determined at the end of the year that estimated uncollectible accounts was $50,000. If the Allowance for Doubtful Accounts currently has an unadjusted debit balance of $10,000, what is the amount of bad debts to be recorded at the end of the year? A) $55,000 B) $50,000 C) $40,000 D) $60,000
115) At the end of the period, the manager of Olive Company estimated that $80,000 of its accounts receivable were uncollectible. If the Allowance for Doubtful Accounts has a credit balance of $22,400, which of the following sets forth the adjusting entry to record bad debts for the period? Assume the allowance method is used. A) Debit Bad Debt Expense and credit Accounts Receivable for $80,000. B) Debit Bad Debt Expense and credit Allowance for Doubtful Accounts for $57,600. C) Debit Bad Debt Expense and credit Allowance for Doubtful Accounts for $80,000. D) Debit Bad Debt Expense and credit Accounts Receivable for $57,600.
116) Your company has previously averaged about 16% of its accounts receivable in the "over 90 days past due" category. This year management forecasts that 20% of its accounts receivable will be in this category at the end of the current year. The company uses the aging of accounts receivable method of estimating Bad Debt Expense. If the total of credit sales and year-end balance in accounts receivable remain unchanged from the previous year and no write offs were made during the current year, this year's bad expense will:
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A) decrease over the estimate for previous months. B) increase over the estimate for previous months. C) not change. D) will depend on the percentage of credit sales deemed uncollectible.
117) The Allowance for Doubtful Accounts will have a debit balance before adjustments when: A) the company increased its collection efforts. B) the company recovered some accounts previously written off. C) bad debts were underestimated at the end of the prior period. D) bad debts were overestimated at the end of the prior period.
118) Total doubtful accounts at the end of the year are estimated to be $34,500 based on an aging of accounts receivable. If the balance in the Allowance for Doubtful Accounts is a $12,700 debit before adjustment, what is current year’s Bad Debt Expense? A) $21,800. B) $34,500. C) $12,700. D) $47,200.
119) Total doubtful accounts at the end of the year are estimated to be $12,500 based on an aging of accounts receivable. If the balance in the Allowance for Doubtful Accounts is a $3,500 debit before adjustment, what is current year's Bad Debt Expense? A) $3,500 B) $9,000 C) $12,500 D) $16,000
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120)
A company’s unadjusted trial balance at the end of the year includes the following:
Accounts Receivable Unadjusted debit balance in Allowance for Doubtful Accounts
$ 104,000 1,600
The company uses the aging of accounts receivable method. Its estimate of uncollectible receivables resulting from the aging analysis equals $6,700. What is the amount of Bad Debt Expense to be recorded for the year? A) $6,700 B) $5,100 C) $9,900 D) $8,300
121)
A company's unadjusted trial balance at the end of the year includes the following:
Accounts Receivable Unadjusted debit balance in Allowance for Doubtful Accounts
$ 98,000 1,000
The company uses the aging of accounts receivable method. Its estimate of uncollectible receivables resulting from the aging analysis equals $5,800. What is the amount of Bad Debt Expense to be recorded for the year? A) $5,800 B) $4,800 C) $6,800 D) $7,800
122)
Cachet Company has the following information:
Adjusted balance in Allowance for Doubtful Accounts Bad debts estimated for the current year Unadjusted credit balance in Allowance for Doubtful Accounts
$ 3,000 8,000 4,000
No recoveries were recorded during the year. What was the amount of accounts written off during the year?
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A) $15,000 B) $9,000 C) $8,000 D) $4,000
123)
Mills Corporation's balance sheet included the following information:
Accounts Receivable Less: Allowance for Doubtful Accounts Accounts Receivable, Net of Allowance
$ 580,000 73,000 $ 507,000
If the Allowance account had a credit balance of $31,500 immediately before the year-end adjustment for bad debts and no accounts were written-off or allowed for during the year, what was the amount of Bad Debt Expense recognized during the year? A) $73,000 B) $31,500 C) $36,500 D) $41,500
124)
Mills Corporation's balance sheet included the following information:
Accounts Receivable Less: Allowance for Doubtful Accounts Accounts Receivable, Net of Allowance
$ 500,000 65,000 $ 435,000
If the Allowance account had a credit balance of $27,500 immediately before the year-end adjustment for bad debts and no accounts were written-off or allowed for during the year, what was the amount of Bad Debt Expense recognized during the year? A) $65,000 B) $27,500 C) $32,500 D) $37,500
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125) To ensure that the Allowance for Doubtful Accounts account does not become materially misstated over time, companies revise overestimates of prior periods by: A) recording a retroactive correcting entry. B) lowering estimates in the current period. C) increasing estimates in the current period. D) notifying the users of its financial statements of the error.
126) On June 12, because management knew with near certainty that it had no chance of collection, Sheave Company wrote off a customer's account balance in the amount of $350. On November 3, the customer mailed a payment for $350 to Sheave. To record the receipt of this payment from the customer, the company would debit: A) Bad Debt Expense and credit Cash. B) Accounts Receivable and credit Bad Debt Expense, and then debit Cash and credit Allowance for Doubtful Accounts. C) Cash and credit Accounts Receivable. D) Accounts Receivable and credit Allowance for Doubtful Accounts, and then debit Cash and credit Accounts Receivable.
127) Carrington Company uses the allowance method for recording bad debts. On February 1, Carrington wrote off a $3,500 customer account balance when it became clear that the specific customer would never pay. On May 29, Carrington unexpectedly received a check for $3,500 from the customer. On May 29, Carrington will: A) Debit Cash and credit Bad Debt Expense for $3,500; debit Accounts Receivable and credit Allowance for Doubtful Accounts for $3,500. B) Debit Allowance for Doubtful Accounts and credit Accounts Receivable for $3,500; debit Cash and credit Bad Debt Expense for $3,500. C) Debit Accounts Receivable and credit Allowance for Doubtful Accounts for $3,500; debit Cash and credit Accounts Receivable for $3,500. D) Debit Allowance for Doubtful Accounts and credit Bad Debt Expense for $3,500; debit Cash and credit Accounts Receivable for $3,500.
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128)
The entry to record a recovery will cause: A) an increase in net accounts receivable. B) a decrease in net accounts receivable. C) net accounts receivable to stay the same. D) an increase in total revenues.
129) Adams Company uses the allowance method of determining bad debt expense. It collects $250 from a customer that Adams had previously written-off. As a result of collecting this $250, its: A) total assets increase by $250. B) net income increases by $250. C) total assets remain the same. D) stockholders' equity increases by $250.
130) A customer of Halifax Manufacturing recently filed for bankruptcy protection, leading Halifax's credit manager to conclude that the company would never collect the balance of $15,600 owed by the customer. Which of the following journal entries would be made by Halifax to record the write-off of the customer's Accounts Receivable balance? A) Debit Allowance for Doubtful Accounts and credit Accounts Receivable for $15,600. B) Debit Bad Debt Expense and credit Allowance for Doubtful Accounts for $15,600. C) Debit Bad Debt Expense and credit Accounts Receivable for $15,600. D) Debit Sales and credit Accounts Receivable for $15,600.
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131) A customer of Halifax Manufacturing recently filed for bankruptcy protection two months ago, leading Halifax's credit manager to conclude that the company would never collect the balance of $15,600 owed by the customer. The appropriate entry was recorded to record the write-off of the customer's Accounts Receivable balance. Suppose that three months after filing bankruptcy, Halifax's customer paid its outstanding account balance. Which of the following journal entries would be made to record this transaction? A) Debit Cash and credit Bad Debt Expense for $15,600. B) Debit Cash and credit Accounts Receivable for $15,600. C) Debit Accounts Receivable and credit Allowance for Doubtful Accounts for $15,600; debit Cash and credit Accounts Receivable for $15,600. D) Debit Cash and credit Sales for $15,600.
132) The balance of the Allowance for Doubtful Accounts was $12,656 at the beginning of the year and $14,348 at the end of the year. Bad Debt Expense was $3,879 for the year. Recoveries in the amount of $100 were recorded during the year. Which of the following statements is correct? A) The Allowance for Doubtful Accounts account was retroactively debited for $2,187 to record additional bad debts that became apparent in a future time period. B) The Allowance for Doubtful Accounts account was debited for $2,287 to record write-offs during the year. C) The Allowance for Doubtful Accounts account was credited $2,287 for payments from customer whose account balances were previously written off. D) The Allowance for Doubtful Accounts account was credited $2,187 for the difference between the percent of credit sales method and the aging of accounts receivable method.
133)
Which of the following statements about accounting methods for bad debts is correct?
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A) When the allowance method is used, the journal entry to write-off an uncollectible account does not change the amount reported as Accounts Receivable, Net on the balance sheet. B) The two methods of accounting for bad debts that are acceptable under GAAP are the allowance method and the direct write-off method. C) When the allowance method is used, Bad Debt Expense is equal to the write-offs that occurred during the period. D) When the allowance method is used, if actual results differ from the estimates, the prior year financial statements must be corrected.
134) Which method requires first estimating the desired amount for the Allowance for Doubtful Accounts and then determining the amount of the expense required to get to this desired balance given the amount of the unadjusted balance? A) Aging of accounts receivable method B) Percentage of credit sales method C) Direct write-off method D) Percentage of bad debts method
135) Delectable, Incorporated's unadjusted trial balance includes Accounts Receivable of $10,000, a credit balance in its Allowance for Doubtful Accounts of $50, and Sales Revenue of $100,000. Based on an aging of its receivables, management estimates that $1,000 of receivables will be uncollectible. Delectable's financial statements will show: A) Bad Debt Expense of $1,000. B) Allowance for Doubtful Accounts of $(1,050). C) Allowance for Doubtful Accounts of $(950). D) Bad Debt Expense of $950.
136) Using the aging approach, management estimates that 10% of the $30,000 of Accounts Receivable will be uncollectible. The Allowance for Doubtful Accounts has a $300 unadjusted debit balance. The adjusting entry to record estimated bad debts includes a:
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A) debit to Bad Debt Expense of $3,300. B) debit to Bad Debt Expense of $2,700. C) debit to Bad Debt Expense of $3,000. D) credit to Allowance for Doubtful Accounts of $3,000.
137) Using the aging approach, management estimates that 10% of the $10,000 of Accounts Receivable will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted debit balance. After the bad debt adjusting entry is recorded, Bad Debt Expense on the income statement will be ________ the Allowance for Doubtful Accounts on the balance sheet. A) $100 less than B) $100 more than C) the same amount as D) $9,900 more than
138) Using its aging of accounts receivable, Age Old, Incorporated estimates that $90,000 of its $4,000,000 of accounts receivable will be uncollectible. Prior to making its adjusting entry, the unadjusted Allowance for Doubtful Accounts has a credit balance of $1,000. After the adjustment, the: A) Allowance for Doubtful Accounts will have a $90,000 credit balance. B) Allowance for Doubtful Accounts will have an $89,000 credit balance. C) Allowance for Doubtful Accounts will have a $91,000 credit balance. D) Bad Debt Expense will equal $90,000.
139) Using its aging of accounts receivable, Age Old, Incorporated estimates that $90,000 of its $4,000,000 of accounts receivable will be uncollectible. Prior to making its adjusting entry, the unadjusted Allowance for Doubtful Accounts has a debit balance of $1,000. After the adjustment, the:
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A) Allowance for Doubtful Accounts will have a $90,000 credit balance. B) Allowance for Doubtful Accounts will have an $89,000 credit balance. C) Allowance for Doubtful Accounts will have a $91,000 credit balance. D) Bad Debt Expense will equal $90,000.
140) If the Allowance for Doubtful Accounts on January 1 equals $10,000 and during the year $9,000 of specific customers' accounts were written off, then its Allowance for Doubtful Accounts will have an unadjusted balance of: A) $1,000 credit. B) $1,000 debit. C) $10,000 credit. D) $9,000 debit.
141) If the Allowance for Doubtful Accounts on January 1 equals $10,000 and during the year $11,000 of specific customers' accounts were written off, then its Allowance for Doubtful Accounts will have an unadjusted balance of: A) $1,000 credit. B) $1,000 debit. C) $10,000 credit. D) $9,000 debit.
142) If the unadjusted Allowance for Doubtful Accounts has a $50 debit balance, the amount of receivables written off was ________ than the amount estimated in the prior period. Thus, bad debt expense will be ________ in the current period than had the unadjusted balance been a credit balance. A) less; less B) greater; greater C) greater; less D) less; greater
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143) If the Allowance for Doubtful Accounts has a $1,000 debit balance prior to making the end-of-period adjusting entry for bad debts, then it must mean that: A) $1,000 more accounts receivables were written off than were estimated back when the prior period's adjusting entry for bad debts was recorded. B) $1,000 fewer accounts receivables were written off than were estimated back when the prior period's adjusting entry for bad debts was recorded. C) the direct write-off method was used. D) the aging method was used.
144) If the Allowance for Doubtful Accounts has a $1,000 debit balance prior to making the end-of-period adjusting entry for bad debts using the aging of accounts receivable method, then it must mean that the: A) debit to Bad Debt Expense will be $1,000 more than the desired ending balance in the Allowance for Doubtful Accounts. B) debit to Bad Debt Expense will be $1,000 less than if the Allowance balance had been $0. C) direct write-off method was used. D) percentage of sales method was used.
145) A customer paid $9,600 after its accounts receivable had been previously written off. The entry to record the collection of the previously written-off account will include a: A) debit to Allowance for Doubtful Accounts of $9,600. B) debit to Bad Debt Expense of $9,600. C) credit to Bad Debt Expense of $9,600. D) credit to Allowance for Doubtful Accounts of $9,600.
146)
The direct write-off method is not allowed under GAAP because it violates the:
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A) cost principle. B) revenue recognition principle. C) sales method. D) expense recognition principle ("matching").
147)
The direct write-off method for uncollectible accounts: A) violates the expense recognition principle. B) is an acceptable alternative method of recognizing Bad Debt Expense under GAAP. C) results in higher Bad Debt Expense for most companies. D) may only be used by companies that do not extend credit to their customers.
148)
The Allowance for Doubtful Accounts:
A) is a contra-revenue account. B) has a normal debit balance. C) is not listed on the chart of accounts of a company that uses the direct write-off method. D) is reported on the Income Statement.
149)
Company A lends $100,000 to Company B. The interest on the loan is reported as: A) an expense to Company A and a revenue to Company B. B) an asset to Company A and a revenue to Company B. C) a liability to Company A and an asset to Company B. D) a revenue to Company A and an expense to Company B.
150) In the interest formula, the interest rate is on a(n) ________ basis; therefore, the time variable must reflect how many ________ out of ________ in the interest period.
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A) monthly; months; 6 B) annual; years; 1 C) monthly; months; 12 D) annual; months; 12
151) When interest is calculated for periods shorter than a year, the formula to calculate interest is: A) I = P × R × T, where I = interest calculated, P = principal, R = annual interest rate, and T = number of months. B) I = P × R × T, where I = interest calculated, P = principal, R = annual interest rate, and T = (number of months ÷ 12). C) I = P × R × T, where I = interest calculated, P = principal, R = monthly interest rate, and T = (number of months ÷ 12). D) I = (MV− P)/T, where I = interest calculated, MV = maturity value, P = principal and T = number of months.
152) On January 1, Portillo, Incorporated lends a corporate customer $102,000 at 4% interest. The amount of interest revenue that should be recorded for the quarter ending March 31 equals: A) $4,080. B) $1,020. C) $1,360. D) $340.
153) On January 1, Portillo, Incorporated lends a corporate customer $240,000 at 6% interest. The amount of interest revenue that should be recorded for the quarter ending March 31 equals:
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A) $14,400. B) $3,600. C) $1,200. D) $4,800.
154) Knoll Manufacturing lends its supplier $163,000 for 3 years at a 7% annual interest rate. Interest payments are to be made twice a year. Each interest payment will be for: A) $5,705. B) $17,115. C) $34,230. D) $11,410.
155) Knoll Manufacturing lends its supplier $300,000 for 3 years at a 6% annual interest rate. Interest payments are to be made twice a year. Each interest payment will be for: A) $18,000. B) $27,000. C) $9,000. D) $54,000.
156) A note receivable was created on November 1, 2021. Its maturity date is October 31, 2022. What is the time fraction needed to compute the interest revenue for the year ended December 31, 2021? A) 2/12 B) 2/10 C) 12/12 D) 22/12
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157) What is the annual rate of interest being charged on a 9-month note receivable of $59,000 if the total interest is $3,540? A) 12% B) 6% C) 10% D) 8%
158) What is the annual rate of interest being charged on a 9-month note receivable of $150,000 if the total interest is $9,000? A) 6% B) 8% C) 12% D) 10%
159) A company lends $10,000 to an employee who signed a 9%, 6-month promissory note. The entry made by the company to record the establishment of the loan to the employee will include a: A) debit to Accounts Receivable for $10,000. B) credit to Sales for $10,000. C) debit to Notes Receivable for $10,000. D) credit to Notes Payable for $10,000.
160) A company lends its supplier $168,000 for 3 years at a 6% annual interest rate. Interest payments are to be made twice a year. The entry to record the establishment of the loan includes a debit to:
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A) Cash and a credit to Interest Revenue for $10,080. B) Interest Receivable and a credit to Interest Revenue for $5,040. C) Cash and a credit to Notes Payable for $168,000. D) Notes Receivable and a credit to Cash for $168,000.
161) A company lends its supplier $150,000 for 3 years at a 6% annual interest rate. Interest payments are to be made twice a year. The entry to record the establishment of the loan includes a debit to: A) Notes Receivable and a credit to Cash for $150,000. B) Cash and a credit to Notes Payable for $150,000. C) Cash and a credit to Interest Revenue for $9,000. D) Interest Receivable and a credit to Interest Revenue for $4,500.
162) Establishing a note receivable by loaning cash to another company will have which of the following net effects on the accounting equation? A) Increase assets; No effect on liabilities; Increase stockholders' equity B) Increase assets; No effect on liabilities; No effect on stockholders' equity C) No effect on assets; No effect on liabilities; Decrease stockholders' equity D) No effect on assets; No effect on liabilities; No effect on stockholders' equity
163) Specialty Incorporated converts an existing account receivable to a note receivable to allow an extended payment period. Specialty receives a $2,000, 3-month, 12% promissory note from its customer. What entry will Specialty make upon issuance of the note? A) Debit Notes Receivable and credit Accounts Receivable for $2,060. B) Debit Accounts Receivable and credit Notes Receivable for $2,000. C) Debit Notes Receivable for $2,000, debit Interest Receivable for $60, credit Accounts Receivable for $2,000, and credit Interest Revenue for $60. D) Debit Notes Receivable and credit Accounts Receivable for $2,000.
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164)
When a company lends cash to a customer who signs a promissory note:
A) total assets decrease when the lending transaction occurs but increase when the amount borrowed by the customer is repaid. B) total assets increase when the lending transaction occurs, and revenues increase when the amount borrowed by the customer is repaid. C) total assets increase, and liabilities increase when the lending transaction occurs. D) total assets and net income do not change when the lending transaction occurs.
165) Maple Broadcasting Company lends $20,000 to an employee who signs a 9%, 6-month promissory note. What is the total amount of interest on this note? A) $1,800 B) $900 C) $20,900 D) $5,400
166) On July 1, 2021, Empire Incorporated lends $9,600 to a customer and receives a 8% note due in two years. Interest is due in full on July 1, 2023, the due date of the note. What is the amount of Interest Revenue that will be reported on Empire’s income statement for the year ended December 31, 2021? A) $1,536 B) $384 C) $448 D) $768
167) On July 1, 2021, Empire Incorporated lends $8,000 to a customer and receives a 9% note due in two years. Interest is due in full on July 1, 2023, the due date of the note. What is the amount of Interest Revenue that will be reported on Empire's income statement for the year ended December 31, 2021?
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A) $0 B) $720 C) $420 D) $360
168) If a $40,000, 6%, note receivable with a two-year maturity date was signed three months ago, how much interest has been earned? A) $2,400 B) $600 C) $4,800 D) $300
169) Best, Incorporated loaned $100,000 for three months on November 1 to one of its customers at the rate of 6%. The principal amount of the loan plus interest is due on the following February 1. Which of the following is the adjusting journal entry that will be recorded on December 31? A) Debit Cash and credit Interest Revenue for $4,000. B) Debit Interest Receivable and credit Interest Revenue for $4,000. C) Debit Interest Receivable and credit Interest Revenue for $1,000. D) Debit Interest Receivable and credit Interest Revenue for $500.
170) Which of the following statements about the recording of interest on notes receivable is correct?
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A) Interest on notes receivable is recorded as revenue only when the cash is received. B) When a company makes an interest payment on a note, the payment is debited to Interest Receivable. C) Interest on notes receivable is recognized when it is earned, which is not necessarily when the interest is received in cash. D) Interest earned but not yet received must be recorded in an adjusting entry which includes a debit to Interest Revenue.
171) On January 1, a company lends $90,000 to a customer for one year at a 7% annual interest rate. The note requires the payment of interest twice each year on June 30 and December 31. The company records adjusting entries on a monthly basis. At the end of each month in which the company does not receive any interest payments, the company: A) records an entry with a debit to Cash of $525 and a credit to Interest Revenue of $525. B) records an entry with a debit to Notes Receivable of $525 and a credit to Cash of $525. C) records an entry with a debit to Interest Receivable of $525 and a credit to Interest Revenue of $525. D) does not record an adjusting entry, since no transaction has occurred.
172) Best, Incorporated loaned $100,000 for three months on November 1 to one of its customers at the rate of 6%. The principal amount of the loan plus interest is due on the following February 1. The related adjusting entry was recorded on December 31. What is the amount of interest revenue that should be included in the entry dated February 1? A) $0 B) $2,000 C) $1,000 D) $500
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173) On August 1, Jackson Radiology signed a one-year, 15% note receivable of $60,000 with interest payable every six months. Jackson properly accrued interest on the note on December 31. What journal entry would Jackson make on the following February 1 to record the interest payment received on that date? A) Debit Cash and credit Interest Revenue for $4,500. B) Debit Cash and credit Interest Revenue for $750. C) Debit Cash for $4,500, credit Interest Receivable for $3,750, and credit Interest Revenue for $750. D) Debit Cash for $750, debit Interest Receivable for $3,750, and credit Interest Revenue for $4,500.
174) On March 1, Preston Corporation loans $3,000 to an employee and receives a 5%, threemonth note. Interest will be paid when the note matures on May 31. Assuming that interest on the note has not been previously accrued, what entry will Preston make on fiscal year end April 30? A) Debit Interest Revenue and credit Interest Receivable $25. B) Debit Interest Receivable and credit Interest Revenue $25. C) Debit Interest Receivable and credit Interest Revenue $50. D) Debit Cash and credit Interest Revenue for $50.
175) Generous Incorporated lends Blue Incorporated $40,000 on April 1 and receives a fourmonth, 4.5% interest-bearing note. Generous Incorporated prepares financial statements on April 30. What adjusting entry should be made by Generous Incorporated before its financial statements are prepared? A) Debit Note Receivable and credit Cash for $40,000. B) Debit Interest Receivable and credit Interest Revenue for $150. C) Debit Cash and credit Interest Revenue for $150. D) Debit Interest Receivable and credit Interest Revenue for $600.
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176) On October 1, a company lends $10,000 to an employee who signs a 9%, 6-month promissory note. The company is preparing its year-end financial statements on December 31. No adjusting entries have been recorded in connection with this note. What adjusting entry should be recorded before the financial statements are prepared? A) Debit Interest Revenue and credit Interest Receivable for $225. B) Debit Interest Receivable and credit Interest Revenue for $450. C) Debit Interest Revenue and credit Interest Receivable for $450. D) Debit Interest Receivable and credit Interest Revenue for $225.
177) On December 1, a company lends a new employee $20,000 to assist with her relocation expenses. The employee signs a 6-month note, with interest of 9%. The company prepares yearend financial statements at December 31. What is the required adjusting entry at December 31 as a result of this note transaction? A) Debit Interest Revenue and credit Interest Receivable for $900. B) Debit Interest Receivable and credit Interest Revenue for $900. C) Debit Interest Revenue and credit Interest Receivable for $150. D) Debit Interest Receivable and credit Interest Revenue for $150.
178)
Interest Receivable: A) is an asset reported on the balance sheet. B) is a temporary account reported on the income statement. C) is a permanent account reported on the income statement. D) represents the amount of interest the company has received on promissory notes.
179) On January 1, a company lends a customer $90,000 for one year at a 7% annual interest rate. The note requires the payment of interest twice each year on June 30 and December 31. An adjusting entry to accrue interest is recorded at the end of every month. On July 2, a check for the interest payment for January through June comes in the mail. What journal entry will the company record on July 2?
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A) Debit Interest Receivable for $3,150 and credit Interest Revenue for $3,150. B) Debit Cash for $3,150 and credit Notes Receivable for $3,150. C) Debit Interest Revenue for $3,150 and credit Cash for $3,150. D) Debit Cash for $3,150 and credit Interest Receivable for $3,150.
180) On December 31, 2021, Infinity Incorporated records an adjusting entry to accrue interest on a note. On January 31, 2022, Infinity receives a check for $4,680, which represents two months of accumulated interest on the note. Upon receipt of this interest payment, Infinity should debit: A) Interest Receivable for $2,340, debit Cash $2,340, and credit Interest Revenue for $4,680. B) Cash for $4,680, credit Interest Receivable for $2,340, and credit Interest Revenue for $2,340. C) Cash for $4,680 and credit Interest Receivable for $4,680. D) Cash for $4,680 and credit Interest Revenue for $4,680.
181) On December 1, 2021, a company converted an existing account receivable in the amount of $6,000 to a note receivable to allow an extended payment period. The note is due in three months and includes an annual interest rate of 9%. The company prepares year-end financial statements on December 31 and recorded adjusting entries at that time. What entry should the company make on March 1, 2022, when the interest is paid at maturity? A) Debit Cash and credit Notes Receivable for $6,135. B) Debit Cash for $6,135, credit Notes Receivable for $6,000, and credit Interest Revenue for $135. C) Debit Cash for $135 and credit Interest Revenue for $135. D) Debit Cash for $135, credit Interest Receivable for $45, and credit Interest Revenue for $90.
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182) Your company converted an existing account receivable in the amount of $5,000 to a note receivable to allow an extended payment period. The note is due in one year and includes an annual interest rate of 5%. The customer repays the principal at the maturity date. The entry to record the receipt of the principal includes a debit to: A) Cash and credit to Notes Receivable. B) Notes Receivable and credit to Accounts Receivable. C) Cash and credit to Interest Receivable. D) Notes Receivable and credit to Cash.
183) On the maturity date of a $10,200, 3-month, 10% note, the borrower sends a check that includes the principal and all the interest due on the note. What is the amount of the borrower’s check? A) $13,260 B) $11,220 C) $10,200 D) $10,455
184) On the maturity date of a $10,000, 3-month, 8% note, the borrower sends a check that includes the principal and all the interest due on the note. What is the amount of the borrower's check? A) $10,200 B) $10,600 C) $10,800 D) $10,000
185)
Which of the following is recorded with a debit to Cash and a credit to Notes Receivable?
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A) The adjusting entry to record interest owed. B) The receipt of an interest payment. C) The receipt of the principal payment. D) The issuance of a note.
186) Which of the following is recorded with a debit to Cash and a credit to Interest Receivable? A) The receipt of the principal payment. B) The adjusting entry to record interest owed. C) The receipt of an interest payment. D) The issuance of a note.
187) On March 1, Cents, Incorporated lent $1,000 to an employee at a rate of 6% for 3 months. The entry to record the establishment of the loan of $1,000 to its employee includes a: A) credit to Cash of $1,000. B) debit to Cash of $1,000. C) credit to Notes Receivable of $1,000. D) credit to Interest Revenue of $15.
188)
If the adjusting entry to accrue interest of $1,000 on a note receivable is omitted, then:
A) assets, net income, and stockholders' equity are overstated by $1,000. B) assets, net income, and stockholders' equity are understated by $1,000. C) liabilities are understated by $1,000, net income is overstated by $1000, and stockholders' equity is overstated by $1,000. D) assets are overstated, net income is understated, and stockholders' equity is understated.
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189) When a company has earned interest in the current period but has not yet recorded the interest, what type of adjustment is the company required to make? A) Make an adjusting entry at the end of the current period to accrue the interest earned. B) Make no adjusting entry at the end of the period because interest has not been earned yet. C) Make an adjusting entry at the end of the next period to accrue interest earned. D) No adjustment is necessary until the cash is collected.
190) What effect does the adjusting entry for interest earned but not yet received have on the accounting equation? A) It results in an increase in assets and stockholders' equity. B) It results in a decrease in assets and stockholders' equity. C) It results in an increase in assets and liabilities. D) It results in an increase in assets and decrease in stockholders' equity.
191) ABC Corporation received a 3-month, 8%, $1,500 note receivable on November 1. The adjusting entry on December 31 will include a: A) debit to Interest Revenue of $20. B) credit to Interest Receivable of $10. C) credit to Interest Revenue of $120. D) credit to Interest Revenue of $20.
192) ABC Corporation received a 3-month, 8%, $1,500 note receivable on December 1. The adjusting entry on December 31 will include a: A) debit to Interest Revenue of $10. B) credit to Interest Receivable of $20. C) credit to Interest Revenue of $30. D) debit to Interest Receivable of $10.
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193) On November 1, 2021, Lendem, Incorporated loaned an employee $100,000 at 6% with both the interest and principal due in one year. No adjusting entries have been recorded in connection with this note. The adjusting entry to record the interest earned but not received as of December 31, 2021 includes a: A) debit to Interest Receivable of $6,000. B) debit to Cash of $5,000. C) debit to Interest Receivable of $1,000. D) debit to Interest Revenue of $1,000.
194) What effect does the collection of a note receivable, excluding interest, have on the accounting equation? A) Total assets remain the same. B) Assets are reduced, and stockholders' equity is reduced. C) Assets are increased, and stockholders' equity is increased. D) Assets are reduced, and liabilities are reduced.
195)
The receivables turnover ratio:
A) is calculated as the average number of days from the time a sale is made on account to the time cash is collected. B) is calculated as the average number of days from the time a sale is made on account to the time payment is due. C) measures how many times a year, on average, receivables go uncollected. D) measures how many times, on average, the process of selling and collecting is repeated during the period.
196) Inglewood Industries has net sales of $936,600 and average net receivables of $223,000 for the year. Which of the following statements is correct? (Round all calculations to one decimal place.)
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A) The receivables turnover ratio is 4.2 and the days-to-collect is 0.01. B) The receivables turnover ratio is 0.2 and the days-to-collect is 1,520. C) The receivables turnover ratio is 4.2 and the days-to-collect is 86.9. D) The receivables turnover ratio is 0.2 and the days-to-collect is 87.6.
197) Grandview Grinding, Incorporated had net accounts receivable of $66,500 at the beginning of the year and $73,100 at the end of the year. If the company's net sales revenue during the year was $890,875, what is the receivables turnover ratio? A) 0.0783 B) 12.19 C) 0.0074 D) 12.76
198) Grandview Grinding, Incorporated had net accounts receivable of $135,800 at the beginning of the year and $144,800 at the end of the year. If the company's net sales revenue during the year was $1,753,750, what is the receivables turnover ratio? A) 12.5 B) 29.2 C) 0.08 D) 0.034
199)
The following information is available:
Net accounts receivable, December 31, 2021 Net accounts receivable, December 31, 2022 Net credit sales for 2021 Net credit sales for 2022
$ 394,200 435,900 3,521,400 3,795,300
The receivables turnover ratio for 2022 is closest to:
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A) 8.93 times B) 8.48 times C) 8.71 times D) 9.14 times
200)
A low 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 slowly. D) the company is taking longer to sell inventory.
201) Legacy, Incorporated’s receivables turnover ratio increased from 11.8 last year to 14.1 this year. Which of the following statements is correct? A) This could be an indication that the company is using more efficient collection methods. B) This is an indication that the company is experiencing declining credit costs. C) This indicates that the company is taking longer to collect credit payments. D) This is an indication that the company is buying and selling financial assets less rapidly.
202) Norwood Company reported a receivables turnover ratio of 9.0. Cost of goods sold was $400,000 and net sales revenue was $630,000. The average net receivables must have been: A) $70,000. B) $52,500. C) $140,000. D) $105,000.
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203) Norwood Company reported a receivables turnover ratio of 8.0. Cost of goods sold was $700,000 and net sales revenue was $960,000. The average net receivables must have been: A) $90,000. B) $240,000. C) $120,000. D) $180,000.
204)
The days-to-collect measures the:
A) number of days it takes to collect accounts receivable. B) average number of times the firm completes the selling and collecting cycle during the year. C) average number of days for a customer's payment to clear the banking system. D) average number of days before the company receives a customer's payment and uses the cash to re-order merchandise.
205)
The following information is available:
Net accounts receivable, December 31, 2021 Net accounts receivable, December 31, 2022 Net credit sales for 2021 Net credit sales for 2022
$ 394,200 435,900 3,521,400 3,795,300
The days to collect for 2022 is closest to: (Round intermediate calculations to 2 decimal points.) A) 40 days. B) 41 days. C) 43 days. D) 42 days.
206)
The financial statements of Pomegranate Produce contained the following information:
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Net Sales Revenue Net Accounts Receivable, beginning of year Net Accounts Receivable, end of year
$ 1,000,000 200,000 120,000
What is the receivables turnover ratio? A) 5.00 times B) 6.25 times C) 12.50 times D) 8.34 times
207)
The financial statements of Pomegranate Produce contained the following information:
Net Sales Revenue Net Accounts Receivable, beginning of year Net Accounts Receivable, end of year
$ 1,000,000 200,000 120,000
The average length of time it takes for Pomegranate Produce to collect accounts receivable is approximately: (Round intermediate calculations to 2 decimal places.) A) 120 days. B) 72 days. C) 84 days. D) 58 days.
208) The days to collect receivables increased from 32 days last year to 48 days this year. Which of the following statements is correct? A) The company is likely to see its Bad Debt Expense decrease. B) The company is becoming more efficient at collecting payment. C) The receivables turnover rate must have increased from last year to this year. D) The receivables turnover rate decreased from approximately 11.4 to 7.6 from last year to this year.
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209) The Perry Company reported Accounts Receivable, Net of $65,800 at the beginning of the year and $73,000 at the end of the year. If the company's net sales revenue during the fourth year was $884,000, what are the days to collect during year? (Round all calculations to 1 decimal place.) A) 28.7 B) 8.3 C) 30.1 D) 12.1
210) The Perry Company reported Accounts Receivable, Net of $66,600 at the beginning of the year and $72,600 at the end of the year. If the company's net sales revenue during the fourth year was $876,000, what are the days to collect during year? (Round all calculations to 1 decimal place.) A) 12.6 B) 29.0 C) 8.0 D) 34.0
211)
Which of the following statements about the receivables turnover analysis is correct? A) Accounts receivable decline as companies sell on credit. B) Accounts receivable increase as companies receive payment. C) Receivables turnover refers to how fast receivables are collected. D) The days to collect will increase as the receivables turnover increases.
212)
All other things being equal, a company is better off when its receivable turnover ratio:
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A) and its days-to-collect measure are both low. B) is high and its days-to-collect measure is low. C) and its days-to-collect measure are both high. D) is low and its days-to-collect measure is high.
213) Bolster Soda had an accounts receivable turnover ratio of 9.9 this year and 11.0 last year. Castor Soda had a turnover ratio of 9.3 this year and 9.3 last year. This implies: A) Castor's receivables turnover ratios were better than Bolster's for both years. B) Bolster's receivables turnover ratios were better than Castor's for both years. C) Castor has credit policies that need to be tightened. D) Castor collected receivables more quickly than Bolster in both years.
214) Katy Company uses the allowance method. Katy writes off a customer account balance when it becomes clear that the specific customer will never pay. How will this write-off affect the company's net income and accounts receivable turnover ratio? A) Net income and the account receivable turnover ratio will both decrease. B) Net income will decrease; the account receivable turnover ratio will not change. C) Net income will not change; the account receivable turnover ratio will decrease. D) Net income will not change; the account receivable turnover ratio will not change.
215) Momentum Products Incorporated just recorded an adjusting journal entry for the current year's estimate of bad debts. Assuming all else is equal, this adjusting journal entry will cause: A) the accounts receivable turnover ratio to increase. B) net income to increase. C) total assets to remain unchanged. D) net accounts receivable to increase.
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216) Foothill Construction uses the allowance method for bad debts. If management is overly pessimistic about its ability to collect customer accounts, the company will overstate Bad Debt Expense and: A) understate net income and days to collect will increase. B) understate net income and days to collect will decline. C) overstate net income and days to collect will increase. D) overstate net income and days to collect will decline.
217)
Which of the following situations depicts the best receivables management? A) Receivables turnover ratio increases and the days to collect decreases. B) Receivables turnover ratio increases and the days to collect increases. C) Receivables turnover ratio decreases and the days to collect increases. D) Receivables turnover ratio decreases and the days to collect decreases.
218)
What does a low receivable turnover ratio indicate? A) Cash collections are sluggish, taking longer to collect. B) Sales are growing. C) Credit sales are much greater than cash sales. D) Customer payments are collected relatively soon after the sale has been made.
219) Which of the following statements about the interpretation of the receivables turnover ratio is not correct?
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A) Analysts often interpret a sudden increase in the receivables turnover ratio as a signal of a developing problem. B) The smaller the receivables turnover ratio the larger the days to collect. C) A change in the receivables turnover ratio may indicate a change in the company's credit granting policies. D) A change in the receivables turnover ratio may indicate a change in economic conditions.
220)
Which of the following statements about receivables turnover analysis is correct?
A) The receivables turnover ratio indicates how many times, on average, the process of selling to and collecting from customers occurs during the accounting period. B) Companies of similar size in different industries tend to have similar receivables turnover ratios. C) A high turnover ratio may suggest the company is allowing too much time for customers to pay. D) The days to collect ratio is found by dividing the receivables turnover ratio by 365 days.
221) Companies A and B both report net income growth of 12% per year. Company A has a receivables turnover ratio of 5.6, which is lower than last year. Company B has a receivables turnover ratio of 11.3, which is higher than last year. All other things being equal: A) Company A is more effectively managing its receivables. B) Company B is more effectively managing its receivables. C) Company A's days to collect is lower than Company B's in both years. D) Company B's days to collect increased.
222) A company's number of days to collect is higher than the length of credit period. Analysts might conclude:
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A) customers are dissatisfied with the product or service they bought. B) the company is effectively managing its receivables. C) the company has begun estimating the amount of uncollectible using percentage of net sales rather than aging the receivables. D) the company's payment terms have been tightened and customers are paying within the payment period granted.
223)
A high receivables turnover ratio is a sign of a company's: A) effectiveness in granting and collecting credit. B) weakness in granting and collecting credit. C) profitability. D) ability to sell goods quickly.
224)
The receivables turnover ratio gives information on: A) how many times inventory is turned over per year. B) how many times the company sells and collects amounts on account per year. C) how many customers default per year. D) the profitability of a company.
225) A scenario under which a company's credit sales are increasing and its accounts receivable turnover is decreasing might suggest: A) channel stuffing. B) cookie jar accounting. C) an investment opportunity. D) improved receivables monitoring.
226)
Receivables might be sold ("factored") to:
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A) lengthen the time to collect from customers. B) reduce the receivables turnover ratio. C) generate cash immediately. D) generate a gain on sale.
227)
If your company factors its accounts receivable, it: A) will focus its collection activities on only the largest Accounts Receivable balances. B) sells outstanding receivables to another company. C) will use major national credit cards to allow its customers to pay for goods. D) will engage in aggressive hounding of its clients to pay their bills.
228) An arrangement where receivables are sold to another company for immediate cash is called: A) factoring. B) leasing. C) depreciating. D) renting.
229) Assume ABC sells its receivables to another company for immediate cash on a regular basis. How should the factoring fee be reported in the income statement? A) Selling expense. B) Non-operating expense. C) Sales returns. D) Not at all.
230) A company decides to start allowing its customers to pay with national credit cards and PayPal. This decision would:
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A) slow down its cash collection. B) speeds up its cash collection but increase losses from customers writing bad checks. C) speeds up its cash collection and reduces losses from customers writing bad checks. D) slow down its cash collection but decrease losses from customers writing bad checks.
231) PayPal and national credit card companies charge Abbigail Company a 3% fee for their services. Abbigail Company's net sales revenue was $10,000 on the last weekend of November. How much cash will be deposited into Abbigail's bank account as a result of these sales? A) $30 B) $9,700 C) $10,000 D) $10,030
232) PayPal and national credit card companies charge a fee for their services. How do sellers report these transaction fees on their financial statements? A) As current assets on the balance sheet. B) As a deduction from net sales revenue on the income statement. C) As selling expenses on the income statement. D) As cost of goods sold on the income statement.
233) Santiago Cleaners allows customers make purchases using VISA credit cards. If customers purchase from Santiago using VISA credit cards, which of the following statements is correct? A) VISA pays Santiago the full amount of purchase, without charging a fee. B) VISA will wait until the customer makes payment to the credit card company until forwarding payment to Santiago. C) Santiago does not have to collect directly from customers. D) Santiago must bear any losses from uncollectible accounts.
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234)
The direct write-off method for uncollectible accounts is required: A) by the IRS. B) by GAAP. C) by IFRS. D) for external financial reporting.
235) Why is the direct write-off method not allowed under GAAP to account for doubtful accounts? A) It is too difficult to implement. B) It is allowed in certain circumstances. C) It violates the expense recognition principle ("matching"). D) It is only allowed under IFRS.
236) A company uses the direct write-off method. The company writes off a $3,000 customer account balance when it becomes clear that the specific customer will never pay. What is the journal entry that would be prepared to record this write-off? A) Debit Bad Debt Expense and credit Accounts Receivable for $3,000. B) Debit Allowance for Doubtful Accounts and credit Bad Debt Expense for $3,000. C) Debit Bad Debt Expense and credit Allowance for Doubtful Accounts for $3,000. D) Debit Accounts Receivable and credit Bad Debt Expense for $3,000.
237) When the direct write-off method is used to account for uncollectible accounts, which of the following accounts would not be used? A) Bad Debt Expense B) Accounts Receivable C) Allowance for Doubtful Accounts D) Notes Receivable
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238)
The direct write-off method:
A) results in better matching of costs with revenues than the allowance method. B) is an acceptable method under generally accepted accounting principles (GAAP). C) requires that losses from bad debts be recorded in the period in which sales are made. D) reports accounts receivable at the total amount owed by customers rather than what is estimated to be collectible.
239)
When the direct write-off method is used, the entry to write-off a specific account would: A) increase net income. B) have no effect on net income. C) increase Accounts Receivable and increase net income. D) decrease Accounts Receivable and decrease net income.
240) Under the direct write-off method, the entry to write off a customer's account would include a debit to: A) Bad Debt Expense and a credit to Allowance for Doubtful Accounts. B) Bad Debt Expense and a credit to Accounts Receivable. C) Write-off Expense and a credit to Accounts Receivable. D) Sales and a credit to Accounts Receivable.
241)
When the direct write-off method is used: A) the estimated amount of bad debts is debited to Bad Debt Expense. B) the estimated amount of bad debts is debited to Allowance for Doubtful Accounts. C) the estimated amount of bad debts is debited to which account Accounts Receivable. D) bad debts are not estimated.
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Answer Key Test name: Chap 08_7e 1) TRUE Some customers will not pay because they dispute the price or quality of the products or services or the customers are having financial difficulties. 2) FALSE The disadvantages of extending credit include increased (rather than decreased) wage costs. If credit is extended, the company will have to hire people to evaluate whether each customer is creditworthy, track how much each customer owes, and follow up to collect the receivable from each customer. 3) FALSE Notes receivable are typically used when a company sells large dollar value items (e.g., cars), offers extended payment periods, or lends money to individuals or businesses. 4) TRUE The allowance method for uncollectible accounts conforms to the expense recognition principle. The allowance method records the Bad Debt Expense in the same period as the credit sale. 5) FALSE The Allowance for Doubtful Accounts is a permanent account found on the balance sheet, so its balance carries forward from one accounting period to the next. 6) TRUE
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For billing and collection purposes, a company will keep a separate accounts receivable account (called a subsidiary account) for each customer. 7) TRUE A write-off decreases both the total Accounts Receivable and Allowance for Doubtful Accounts by the same amount. Consequently, since the Allowance for Doubtful Accounts is a contra-asset account, the write-off of a specific account does not affect total assets. 8) TRUE The percentage of credit sales method is referred to as the income statement approach, while the aging of accounts receivable method is called the balance sheet approach. While the percentage of credit sales method focuses on estimating the Bad Debt Expense for the period, the aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts. 9) TRUE The aging method gets its name because it is based on the "age" of each amount in Accounts Receivable. The older and more overdue an accounts receivable becomes, the less likely it is to be collectible. 10) FALSE The allowance method for uncollectible accounts conforms to the expense recognition principle and, as such, it is required by GAAP. Although the direct write-off method is easier to use, it overstates the value of Accounts Receivable and it violates the expense recognition principle. Thus, it is not considered a generally accepted accounting method. 11) FALSE
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The direct write-off method for uncollectible accounts is not allowed by GAAP because it overstates the net accounts receivable and violates the expense recognition principle. 12) TRUE GAAP and IFRS do not allow the use of the direct write-off method, but the IRS requires it. 13) TRUE The time period covered in the interest calculation is based on the number of months out of 12. Because the note will be outstanding for only two months, interest would be calculated as $1,000 × 0.07 × 2/12. 14) FALSE Except for banks, interest is considered a peripheral source of revenue; as such, it is reported on the income statement immediately following (rather than being part of) the Income from Operations subtotal. 15) TRUE The allowance method is used for both accounts receivable and notes receivable. 16) FALSE Receivable turnover ratio = Net sales ÷ Average net receivables 17) FALSE The receivables turnover ratio measures the number of times receivables turn over during the period. A higher ratio means faster (better) turnover. Extending credit to high-risk borrowers or allowing an overly generous repayment schedule would most likely slow down collections, which would increase Accounts Receivable, and cause the receivables turnover ratio to decrease. 18) TRUE Version 1
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Factoring is an arrangement where receivables are sold to another company (called a factor) for immediate cash (minus a factoring fee). 19) TRUE The accounts receivable turnover ratio equals net sales divided by average net accounts receivable. If a company factors its receivables, the average net accounts receivable will decrease, and the receivables turnover ratio would increase. 20) TRUE Credit card companies may make immediate cash payments to the seller or it may take several days before the seller receives the cash. 21) TRUE The credit card fees are included with selling expenses on the income statement. 22) A The advantage of extending credit is that it helps business customers buy products and services, thereby increasing the seller's revenues and profits. A disadvantage (rather than an advantage) of selling on credit is increased wage costs. If credit is extended, the company will have to hire people to evaluate whether each customer is creditworthy, track how much each customer owes, and follow up to collect the receivable from each customer. 23) C Generally, managers find that the incremental gross profit obtained by increasing sales on account is greater than the additional costs of extending credit (increased wage costs, bad debt costs, and delayed receipt of cash). 24) D Version 1
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The disadvantages of selling on credit are increased wage costs, bad debt costs, and delayed receipt of cash. The advantage of extending credit is that it helps business customers buy products and services, thereby increasing the seller's revenues. (If the additional costs are expected to exceed the increased revenue, the company would not choose to extend credit to customers.) 25) D The disadvantages of selling on credit are increased wage costs, bad debt costs, and delayed receipt of cash. The advantage of extending credit is that it helps business customers buy products and services, thereby increasing the seller's revenues and profits. 26) C Advertising expenses are unrelated to the decision to extend credit to customers. Extending credit helps business customers buy products and services, thereby increasing the seller's revenues. However, there are disadvantages. If credit is extended, the company will have to hire people to evaluate whether each customer is creditworthy, track how much each customer owes, and follow up to collect the receivable from each customer. The advantage of extending credit is that it helps business customers buy products and services, thereby increasing the seller's revenues. "Bad debts" that arise when customers do not pay their account balances can be a significant additional cost of extending credit. Even if the company collects in full from customers, it would likely have to wait 30-60 days before receiving the cash. 27) B The disadvantages of selling on credit are increased wage costs, bad debt costs, and delayed receipt of cash. The cost of extra goods that must be produced or purchased for resale is not a concern related to extending credit. Version 1
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28) B The disadvantages of selling on credit are increased wage costs, bad debt costs, and delayed receipt of cash. If credit is extended, the company will have to hire people to evaluate whether each customer is creditworthy, track how much each customer owes, and follow up to collect the receivable from each customer. Some of these costs will be incurred in the accounting department. The fact that customers might buy too much is certainly not a concern related to extending credit. 29) C Bad debts may arise from credit sales to individual consumers as well as from other companies. 30) C The advantage of extending credit is that it helps business customers buy products and services, thereby increasing the seller's revenues. However, extending credit introduces additional costs such as increased wage costs, bad debt costs, and delayed receipt of cash. As a result, if a company chooses not to extend credit to customers, its revenues and costs would be expected to decrease. 31) D The advantage of extending credit is that it helps business customers buy products and services, thereby increasing the seller's revenues. 32) B Generally, managers find that the incremental gross profit obtained by increasing sales on account is greater than the additional costs of extending credit (increased wage costs, bad debt costs, and delayed receipt of cash). 33) B
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Notes receivable are viewed as a stronger legal claim than accounts receivable, but a note does not guarantee payment. This transaction only affects the balance sheet; one asset is exchanged for another. 34) C A note receivable is a promise that requires another party to pay the business according to a written agreement. 35) B Accounts receivable are amounts owed to a business by its customers; they arise from the sale of goods or services on credit. Some accounts receivable is never collected. 36) A A note receivable is created when a formal written contract ("note") is established outlining the terms by which a company will receive amounts it is owed. Notes receivable differ from accounts receivable in that notes generally charge interest from the day they are signed to the day they are collected. Notes receivable are viewed as a stronger legal claim than accounts receivable, but a new note needs to be created for every transaction, so they are used less frequently. 37) D Notes receivable differ from accounts receivable in that notes generally charge interest from the day they are signed to the day they are collected. This note receivable, which is due in six months, is similar to an accounts receivable in that both will be classified as current assets on the balance sheet. 38) A
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To comply with the expense recognition ("matching") principle, a company needs to record bad debts in the same period as the sale. The only way to do this is to record an estimate of the amount of bad debts that are likely to arise. Later, the accounting records can be adjusted when uncollectible amounts become known with certainty. 39) A In conformity with the expense recognition principle, an estimate of bad debts must be recorded in the same period in which the goods or services are provided. 40) D The Allowance for Doubtful Accounts is a contra-account that is subtracted from Accounts Receivable on the balance sheet. 41) D Recording an estimate of Bad Debt Expense matches the cost of bad debts to the accounting period in which the related credit sales are made. The related adjusting entry increases the Allowance for Doubtful Accounts account, a contra-asset, and increases Bad Debt Expense, an expense account. As a result, it decreases total assets and net income. The entry is recorded at the same time as the other adjusting entries at the end of the accounting period. 42) D The entry to record the estimated bad debts in the period credit sales occur includes a debit to Bad Debt Expense, an expense account, and a credit to the Allowance for Doubtful Accounts, a contra-asset account. 43) B The entry to record the estimated bad debts in the period credit sales occur includes a debit to Bad Debt Expense, an expense account, and a credit to the Allowance for Doubtful Accounts, a contra-asset account. Version 1
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44) A The entry to record the estimated bad debts in the period credit sales occur includes a debit to Bad Debt Expense and a credit to the Allowance for Doubtful Accounts. The debit increases an expense account and decreases net income. Since the credit is to a contra-asset account, the entry decreases net Accounts Receivable and total assets. 45) A Ending balance in Allowance for Doubtful Accounts = Beginning credit balance in Allowance for Doubtful Accounts − Write-offs + Bad Debt Expense Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts − Beginning balance in Allowance for Doubtful Accounts + Write-offs = $94,000 − $78,100 + $0 = $15,900 46) D Ending balance in Allowance for Doubtful Accounts = Beginning credit balance in Allowance for Doubtful Accounts − Write-offs + Bad Debt Expense Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts − Beginning balance in Allowance for Doubtful Accounts + Write-offs = $126,400 − $103,360 + $0 = $23,040 47) C Accounts Receivable, Net (or Net Accounts Receivable) equals Accounts Receivable (gross) minus Allowance for Doubtful Accounts. 48) D The current assets section of the balance sheet reports Accounts Receivable minus Allowance for Doubtful Accounts to arrive at the subtotal, Accounts Receivable, Net. Version 1
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49) A The expense recognition principle, or "matching" principle governs the recording of expenses and the related revenues so they both are reported in the same period on the income statement. This principle will lead to less distorted views of net income in the period of the sale as well as the period of the bad debt expense. 50) B To comply with the expense recognition ("matching") principle, a company needs to record bad debts in the same period as the sale. The only way to do this is to record an estimate of the amount of bad debts that are likely to arise. Later, the accounting records can be adjusted when uncollectible amounts become known with certainty. 51) A To comply with the expense recognition ("matching") principle, a company needs to record bad debts in the same period as the sale. The only way to do this is to record an estimate of the amount of bad debts that are likely to arise. Later, the accounting records can be adjusted when uncollectible amounts become known with certainty. 52) A To comply with the expense recognition ("matching") principle, a company needs to record bad debts in the same period as the sale. The problem is that time will pass before the company discovers which specific credit sales and customer balances aren't going to be collected. These bad debts will likely be discovered in an accounting period following the sale, rather than in the same period as the sale. 53) A
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To account for any bad credit sales that have been included in Sales Revenue and Accounts Receivable, we record offsetting amounts in both the balance sheet and income statement. This adjustment is made at the end of each accounting period to reduce Accounts Receivable (using a contra-asset account called Allowance for Doubtful Accounts) and reduce Net Income (using an expense account called Bad Debt Expense). Since it is a contra-asset account, the Allowance for Doubtful Accounts normally has a credit balance. The adjustment described, which causes this contra-account to increase, results in a decrease in total assets. 54) A The adjusting entry includes a debit to Bad Debt Expense (to increase this expense account) and a credit to Allowance for Doubtful Accounts (to increase this contra-asset account). 55) A The adjusting entry includes a debit to Bad Debt Expense (to increase this expense account) and a credit to Allowance for Doubtful Accounts (to increase this contra-asset account). 56) D The adjusting entry increases Bad Debt Expense (which causes net income to decrease and stockholders' equity to decrease) and increases the Allowance for Doubtful Accounts (a contra-asset account- which causes total assets to decrease). 57) A
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Like all contra-asset accounts, such as Accumulated Depreciation, the Allowance for Doubtful Accounts is a permanent account, so its balance carries forward from one accounting period to the next. Bad Debt Expense, which is a temporary account, will have its balance closed (zeroed out) at the end of each year. 58) C Like all contra-asset accounts, such as Accumulated Depreciation, the Allowance for Doubtful Accounts is a permanent account, so its balance carries forward from one accounting period to the next. Bad Debt Expense, which is a temporary account, will have its balance closed (zeroed out) at the end of each year. 59) C For billing and collection purposes, a company internally keeps a separate accounts receivable account (called a subsidiary account) for each customer. The total of these accounts is reported as Accounts Receivable on the balance sheet. 60) B For billing and collection purposes, a company will keep a separate accounts receivable account (called a subsidiary account) for each customer. 61) D When the allowance method is used and a customer account is written off, a decrease is recorded in Accounts Receivable, which is offset by a decrease in the contra-account, Allowance for Doubtful Accounts. The decrease in Accounts Receivable decreases total assets, while the decrease in the Allowance for Doubtful Accounts increases total assets. As a result, total assets do not change. A write-off does not affect liabilities, revenues, or expenses. Version 1
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62) D When the allowance method is used and a customer account is written off, a decrease is recorded in Accounts Receivable, which is offset by a decrease in the contra-account, Allowance for Doubtful Accounts. The decrease in Accounts Receivable decreases total assets, while the decrease in the Allowance for Doubtful Accounts increases total assets. As a result, total assets do not change. A write-off does not affect liabilities, revenues, or expenses. 63) A When the allowance method is used and a customer account is written off, a decrease is recorded in Accounts Receivable, which is offset by a decrease in the contra-account, Allowance for Doubtful Accounts. The decrease in Accounts Receivable decreases total assets, while the decrease in the Allowance for Doubtful Accounts increases total assets. As a result, total assets do not change. A write-off does not affect liabilities, revenues, or expenses. 64) B Using the allowance method, the entry to record a write-off includes a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable. 65) D Writing-off a specific customer's account receivable balance after it has been determined to be uncollectible involves decreasing the Allowance for Doubtful Accounts, a contra-asset account, and decreasing Accounts Receivable, an asset account. 66) C
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Before the write-off, the balance in the Accounts Receivable account is $271,000 (or $290,000 − $19,000). After the write-off, the balance in Allowance for Doubtful Accounts account is $17,100 (or $19,000 − $1,900) and the balance in Accounts Receivable is $288,100 (or $290,000 − $1,900). As a result, net accounts receivable equals $271,000 (or $288,100 − $17,100). Notice that the net accounts receivable after a write-off is the same as the net amount before the write-off. 67) C Before the write-off, the balance in the Accounts Receivable account is $304,000 (or $320,000 − $16,000). After the write-off, the balance in Allowance for Doubtful Accounts account is $14,400 (or $16,000 − $1,600) and the balance in Accounts Receivable is $318,400 (or $320,000 − $1,600). As a result, net accounts receivable equals $304,000 (or $318,400 − $14,400). Notice that the net accounts receivable after a write-off is the same as the net amount before the write-off. 68) D Using the allowance method, the entry to record a write-off includes a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable. 69) D Using the allowance method, the entry to record a write-off includes a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable. 70) D
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When the allowance method is used and a customer account is written off, a decrease is recorded in Accounts Receivable, which is offset by a decrease in the contra-account, Allowance for Doubtful Accounts. The decrease in Accounts Receivable decreases total assets, while the decrease in the Allowance for Doubtful Accounts increases total assets. As a result, the amount reported as Accounts Receivable, Net does not change. 71) A When the allowance method is used and a customer account is written off, a decrease is recorded in Accounts Receivable, which is offset by a decrease in the contra-account, Allowance for Doubtful Accounts. The decrease in Accounts Receivable decreases total assets, while the decrease in the Allowance for Doubtful Accounts increases total assets. As a result, the amount reported as Accounts Receivable, Net does not change. 72) B Ending balance in Allowance for Doubtful Accounts = Beginning balance in Allowance for Doubtful Accounts − Write-offs + Bad Debt Expense Write-offs = Beginning balance in Allowance for Doubtful Accounts + Bad Debt Expense − Ending credit balance in Allowance for Doubtful Accounts = $64,176 + $91,680 − $94,736 = $61,120 73) D
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Ending balance in Allowance for Doubtful Accounts = Beginning balance in Allowance for Doubtful Accounts − Write-offs + Bad Debt Expense Write-offs = Beginning balance in Allowance for Doubtful Accounts + Bad Debt Expense − Ending credit balance in Allowance for Doubtful Accounts = $63,000 + $90,000 − $93,000 = $60,000 74) A A write-off is the act of removing an uncollectible account and its corresponding allowance from the accounting records. 75) A A write-off is the act of removing an uncollectible account and its corresponding allowance from the accounting records. The entry includes a debit to Allowance for Doubtful Accounts (to decrease that contra-asset account) and a credit to Accounts Receivable (to decrease that asset account). 76) B A write-off is the act of removing an uncollectible account and its corresponding allowance from the accounting records. The entry includes a debit to Allowance for Doubtful Accounts (to decrease that contra-asset account) and a credit to Accounts Receivable (to decrease that asset account). Notice that the write-off decreased both the total Accounts Receivable and Allowance for Doubtful Accounts by the same amount ($120). Consequently, the net receivable balance after the writeoff ($3,330 − $180 = $3,150) is unchanged from the net receivable balance before the write-off ($3,450 − $300 = $3,150). 77) D
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The allowance method is the general idea of estimating uncollectible accounts, using either the percentage of credit sales method or the aging of accounts receivable method. Of these two estimation methods, the aging of accounts receivable method is generally considered to be more accurate than the percentage of credit sales method. The aging of accounts receivable method takes into consideration that, generally, the longer a receivable goes unpaid the less likely it is to be paid. 78) D The percentage of credit sales method estimates Bad Debt Expense by multiplying the historical percentage of bad debt losses by the current period’s credit sales. Bad Debt Expense = Net credit sales × Bad debt loss rate = $552,000 × 0.01 = $5,520 79) B The percentage of credit sales method estimates Bad Debt Expense by multiplying the historical percentage of bad debt losses by the current period's credit sales. Bad Debt Expense = Net credit sales× Bad debt loss rate = $450,000 × 0.01 = $4,500 80) A Bad debt expense = Credit sales × Bad debt loss rate = $810,000 × 0.03 = $24,300 81) A Bad debt expense = Credit sales× Bad debt loss rate = $1,200,000 × 0.03 = $36,000 82) D
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The percentage of credit sales method estimates Bad Debt Expense by multiplying the historical percentage of bad debt losses by the current period’s credit sales. Bad Debt Expense = Net credit sales × Bad debt loss rate = $192,000 × 0.05 = $9,600 83) C The percentage of credit sales method estimates Bad Debt Expense by multiplying the historical percentage of bad debt losses by the current period's credit sales. Bad Debt Expense = Net credit sales× Bad debt loss rate = $150,000 × 0.04 = $6,000 84) D The percentage of credit sales method estimates Bad Debt Expense by multiplying the historical percentage of bad debt losses by the current period’s credit sales. Bad Debt Expense = Net credit sales × Bad debt loss rate = $192,000 × 0.05 = $9,600 85) B The percentage of credit sales method estimates Bad Debt Expense by multiplying the historical percentage of bad debt losses by the current period's credit sales. Bad Debt Expense = Net credit sales× Bad debt loss rate = $178,000 × 0.05 = $8,900 86) A The percentage of credit sales method estimates Bad Debt Expense by multiplying the historical percentage of bad debt losses by the current period’s credit sales. Bad Debt Expense = Net credit sales × Bad debt loss rate = $550,000 × 0.02 = $11,000 87) C Version 1
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The percentage of credit sales method estimates Bad Debt Expense by multiplying the historical percentage of bad debt losses by the current period's credit sales. Bad Debt Expense = Net credit sales× Bad debt loss rate = $500,000 × 0.03 = $15,000 88) C The percentage of credit sales method estimates Bad Debt Expense by multiplying the historical percentage of bad debt losses by the current period’s credit sales. Bad Debt Expense = Net credit sales × Bad debt loss rate = $905,000 × 0.005 = $4,525 89) A The percentage of credit sales method estimates Bad Debt Expense by multiplying the historical percentage of bad debt losses by the current period's credit sales. Bad Debt Expense = Net credit sales× Bad debt loss rate = $900,000 × 0.005 = $4,500 90) C The percentage of credit sales method estimates Bad Debt Expense by multiplying the historical percentage of bad debt losses by the current period's credit sales. Bad Debt Expense = Net credit sales× Bad debt loss rate = $6,000 × 0.03 = $180 Debit Bad Debt Expense and credit Allowance for Doubtful Accounts for $180. 91) A
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The percentage of credit sales method estimates Bad Debt Expense by multiplying the historical percentage of bad debt losses by the current period’s credit sales. Bad Debt Expense = Net credit sales × Bad debt loss rate = $270,000 × 0.03 = $8,100 Ending balance in Allowance for Doubtful Accounts = Unadjusted credit balance in Allowance for Doubtful Accounts + Bad Debt Expense = $5,300 + $8,100 = $13,400 92) A The percentage of credit sales method estimates Bad Debt Expense by multiplying the historical percentage of bad debt losses by the current period's credit sales. Bad Debt Expense = Net credit sales × Bad debt loss rate = $140,000 × 0.06 = $8,400 Ending balance in Allowance for Doubtful Accounts = Unadjusted credit balance in Allowance for Doubtful Accounts + Bad Debt Expense = $2,700 + $8,400 = $11,100 93) D The percentage of credit sales method estimates Bad Debt Expense by multiplying the historical percentage of bad debt losses by the current period's credit sales. Bad Debt Expense = Net credit sales × Bad debt loss rate = $2,250,000 × 0.02 = $45,000 94) A
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The percentage of credit sales method estimates Bad Debt Expense by multiplying the historical percentage of bad debt losses by the current period's credit sales. Bad Debt Expense = Net credit sales × Bad debt loss rate = $588,000 × 0.03 = $17,640 Ending balance in Allowance for Doubtful Accounts = Beginning credit balance in Allowance for Doubtful Accounts − Write-offs + Bad Debt Expense = $14,400 − $24,000 + $17,640 = $8,040 95) D The Allowance for Doubtful Accounts is a contra-asset account; as such, it has a normal credit balance. Specific write-offs are recorded with a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable. Under the aging of accounts receivable method, the desired ending balance of the Allowance for Doubtful Accounts is determined, and then an entry is made to adjust the Allowance for Doubtful Accounts account to the desired balance. 96) A The aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts. To compute the amount of the adjustment, you must determine how much to increase (credit) the Allowance for Doubtful Accounts to reach the desired adjusted balance. Ending balance in Allowance for Doubtful Accounts = Unadjusted credit (debit) balance in Allowance for Doubtful Accounts + Bad Debt Expense 97) C
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The aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts. To compute the amount of the adjustment, you must determine how much to increase (credit) the Allowance for Doubtful Accounts to reach the desired adjusted balance. Ending balance in Allowance for Doubtful Accounts = Unadjusted credit (debit) balance in Allowance for Doubtful Accounts + Bad Debt Expense 98) C The aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts. To compute the amount of the adjustment, you must determine how much to increase (credit) the Allowance for Doubtful Accounts to reach the desired adjusted balance. Ending balance in Allowance for Doubtful Accounts = Unadjusted credit (debit) balance in Allowance for Doubtful Accounts + Bad Debt Expense Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts − Unadjusted ending credit (debit) balance in Allowance for Doubtful Accounts = $5,100 − $520 = $4,580 99) A
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The aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts. To compute the amount of the adjustment, you must determine how much to increase (credit) the Allowance for Doubtful Accounts to reach the desired adjusted balance. Ending balance in Allowance for Doubtful Accounts = Unadjusted credit (debit) balance in Allowance for Doubtful Accounts + Bad Debt Expense Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts− Unadjusted ending credit (debit) balance in Allowance for Doubtful Accounts = $5,000− $500 = $4,500 100) A The aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts. To compute the amount of the adjustment, you must determine how much to increase (credit) the Allowance for Doubtful Accounts to reach the desired adjusted balance. Ending balance in Allowance for Doubtful Accounts = Unadjusted credit (debit) balance in Allowance for Doubtful Accounts + Bad Debt Expense Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts − Unadjusted ending credit (debit) balance in Allowance for Doubtful Accounts = $6,900 − ($880) = $7,780 101) C
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The aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts. To compute the amount of the adjustment, you must determine how much to increase (credit) the Allowance for Doubtful Accounts to reach the desired adjusted balance. Ending balance in Allowance for Doubtful Accounts = Unadjusted credit (debit) balance in Allowance for Doubtful Accounts + Bad Debt Expense Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts− Unadjusted ending credit (debit) balance in Allowance for Doubtful Accounts = $5,000− ($500) = $5,500 102) A The aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts. To compute the amount of the adjustment, you must determine how much to increase (credit) the Allowance for Doubtful Accounts to reach the desired adjusted balance. Ending balance in Allowance for Doubtful Accounts = Unadjusted credit (debit) balance in Allowance for Doubtful Accounts + Bad Debt Expense Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts − Unadjusted ending credit (debit) balance in Allowance for Doubtful Accounts = $26,500 − $8,600 = $17,900 103) B
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The aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts. To compute the amount of the adjustment, you must determine how much to increase (credit) the Allowance for Doubtful Accounts to reach the desired adjusted balance. Ending balance in Allowance for Doubtful Accounts = Unadjusted credit (debit) balance in Allowance for Doubtful Accounts + Bad Debt Expense Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts− Unadjusted ending credit (debit) balance in Allowance for Doubtful Accounts = $20,000− $6,400 = $13,600 104) D The aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts. To compute the amount of the adjustment, you must determine how much to increase (credit) the Allowance for Doubtful Accounts to reach the desired adjusted balance. Adjusted balance of Allowance for Doubtful Accounts = ($18,900 × 1%) + ($2,100 × 10%) = $399 Ending balance in Allowance for Doubtful Accounts = Unadjusted credit (debit) balance in Allowance for Doubtful Accounts + Bad Debt Expense Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts − Unadjusted ending credit (debit) balance in Allowance for Doubtful Accounts = $399 − $205 = $194 The entry will include a debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts for $194. 105) C Version 1
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The aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts. To compute the amount of the adjustment, you must determine how much to increase (credit) the Allowance for Doubtful Accounts to reach the desired adjusted balance. Adjusted balance of Allowance for Doubtful Accounts = ($4,500 × 1%) + ($500 × 10%) = $95 Ending balance in Allowance for Doubtful Accounts = Unadjusted credit (debit) balance in Allowance for Doubtful Accounts + Bad Debt Expense Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts− Unadjusted ending credit (debit) balance in Allowance for Doubtful Accounts = $95− $45 = $50 The entry will include a debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts for $50. 106) A The aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts. To compute the amount of the adjustment, you must determine how much to increase (credit) the Allowance for Doubtful Accounts to reach the desired adjusted balance. Ending balance in Allowance for Doubtful Accounts = Unadjusted credit (debit) balance in Allowance for Doubtful Accounts + Bad Debt Expense Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts − Unadjusted ending credit (debit) balance in Allowance for Doubtful Accounts = $5,800 − $1,000 = $4,800 107) B Version 1
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The aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts. To compute the amount of the adjustment, you must determine how much to increase (credit) the Allowance for Doubtful Accounts to reach the desired adjusted balance. Ending balance in Allowance for Doubtful Accounts = Unadjusted credit (debit) balance in Allowance for Doubtful Accounts + Bad Debt Expense Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts− Unadjusted ending credit (debit) balance in Allowance for Doubtful Accounts = $11,600− $2,000 = $9,600 108) B The adjusted balance of the Allowance for Doubtful Accounts will equal the estimated uncollectible accounts. Net Accounts Receivable = Accounts Receivable − Adjusted balance of Allowance for Doubtful Accounts = $545,000 − $45,000 = $500,000 109) B The adjusted balance of the Allowance for Doubtful Accounts will equal the estimated uncollectible accounts. Net Accounts Receivable = Accounts Receivable− Adjusted balance of Allowance for Doubtful Accounts = $420,000− $23,200 = $396,800 110) B
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First, you need to determine the estimated uncollectible accounts, which becomes the adjusted balance of the Allowance for Doubtful Accounts Net Accounts Receivable = Accounts Receivable− Adjusted balance in Allowance for Doubtful Accounts Adjusted balance in Allowance for Doubtful Accounts = Accounts Receivable− Net accounts receivable = $768,000− $608,000 = $160,000 Ending balance in Allowance for Doubtful Accounts = Unadjusted credit (debit) balance in Allowance for Doubtful Accounts + Bad Debt Expense Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts− Unadjusted ending credit (debit) balance in Allowance for Doubtful Accounts = $160,000− $32,000 = $128,000 111) B History has shown that the older the accounts, the higher the percentage uncollectible. So, with a higher percentage of accounts receivable in the older category, the estimate of uncollectible amounts will be higher and this will result in an increase in the allowance account. 112) A Accounts Receivable Estimated % Uncollectible Estimated Uncollectible
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Number of Days Unpaid 0 to 30 31 to 60 61 to 90 $ $ $ 740,000 480,000 220,000 5% 10% 15%
Over 90 $ 160,000 25%
Total
$ 37,000
$ 40,000
$ 158,000
$ 48,000
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The Allowance for Doubtful Accounts had an unadjusted credit balance of $30,000; an adjustment is required to increase the balance to $158,000. The related adjusting entry includes a debit Bad Debt Expense and credit Allowance for Doubtful Accounts for $128,000 (or desired credit balance of $158,000 − unadjusted credit balance of $30,000). 113) C The estimated uncollectible accounts receivable is the desired balance in the Allowance for Doubtful Accounts. The entry for bad debt expense equals $28,000, which is the difference between the current credit balance of $10,000 and the desired credit balance of $38,000. 114) D The Allowance for Doubtful Accounts had an unadjusted debit balance of $10,000; an adjustment is required to increase the balance to a credit of $50,000. The related adjusting entry includes a debit Bad Debt Expense and credit Allowance for Doubtful Accounts for $60,000 (or desired credit balance of $50,000 + unadjusted debit balance of $10,000). 115) B The Allowance for Doubtful Accounts had an unadjusted credit balance of $22,400; an adjustment is required to increase the balance to $80,000. The related adjusting entry includes a debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts for $57,600 (or desired credit balance of $80,000− unadjusted credit balance of $22,400). 116) B
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The older and more overdue an account receivable becomes, the less likely it is to be collectible. If the percentage of accounts in the "over 90 days" category increases, then the percentages in the "under 90 days" categories will decrease. Overall, the company's accounts receivable balances will be more overdue, which will result in higher Bad Debt Expense for the current year. 117) C Although the Allowance for Doubtful Accounts normally has a credit balance, it may have a debit balance before it is adjusted. This happens when a company has recorded write-offs that exceed previous estimates of uncollectible accounts. Increased collection efforts, recovery of previously written off accounts, and overestimated bad debts are more likely associated with credit balances in the Allowance for Doubtful Accounts. 118) D The aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts. To compute the amount of the adjustment, you must determine how much to increase (credit) the Allowance for Doubtful Accounts to reach the desired adjusted balance. Ending balance in Allowance for Doubtful Accounts = Unadjusted credit (debit) balance in Allowance for Doubtful Accounts + Bad Debt Expense Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts − Unadjusted ending credit (debit) balance in Allowance for Doubtful Accounts = $34,500 − ($12,700) = $47,200 119) D
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The aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts. To compute the amount of the adjustment, you must determine how much to increase (credit) the Allowance for Doubtful Accounts to reach the desired adjusted balance. Ending balance in Allowance for Doubtful Accounts = Unadjusted credit (debit) balance in Allowance for Doubtful Accounts + Bad Debt Expense Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts− Unadjusted ending credit (debit) balance in Allowance for Doubtful Accounts = $12,500− ($3,500) = $16,000 120) D The aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts. To compute the amount of the adjustment, you must determine how much to increase (credit) the Allowance for Doubtful Accounts to reach the desired adjusted balance. Ending balance in Allowance for Doubtful Accounts = Unadjusted credit (debit) balance in Allowance for Doubtful Accounts + Bad Debt Expense Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts − Unadjusted ending credit (debit) balance in Allowance for Doubtful Accounts = $6,700 − ($1,600) = $8,300 121) C
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The aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts. To compute the amount of the adjustment, you must determine how much to increase (credit) the Allowance for Doubtful Accounts to reach the desired adjusted balance. Ending balance in Allowance for Doubtful Accounts = Unadjusted credit (debit) balance in Allowance for Doubtful Accounts + Bad Debt Expense Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts− Unadjusted ending credit (debit) balance in Allowance for Doubtful Accounts = $5,800− ($1,000) = $6,800 122) B Ending balance in Allowance for Doubtful Accounts = Beginning credit balance in Allowance for Doubtful Accounts + Bad debt expense− Write-offs + Recoveries Write-offs = Beginning credit balance in Allowance for Doubtful Accounts + Bad debt expense + Recoveries− Ending balance in Allowance for Doubtful Accounts = $4,000 + $8,000 + $0− $3,000 = $9,000 123) D Ending balance in Allowance for Doubtful Accounts = Beginning credit balance in Allowance for Doubtful Accounts + Bad debt expense − Write-offs + Recoveries Bad debt expense = Ending balance in Allowance for Doubtful Accounts − Beginning credit balance in Allowance for Doubtful Accounts + Write-offs − Recoveries = $73,000 − $31,500 + $0 − $0 = $41,500 124) D
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Ending balance in Allowance for Doubtful Accounts = Beginning credit balance in Allowance for Doubtful Accounts + Bad debt expense− Write-offs + Recoveries Bad debt expense = Ending balance in Allowance for Doubtful Accounts− Beginning credit balance in Allowance for Doubtful Accounts + Write-offs− Recoveries = $65,000− $27,500 + $0− $0 = $37,500 125) B Bad debt estimates always differ somewhat from the amounts that are later written off. To ensure that the Allowance for Doubtful Accounts account does not become materially misstated over time, companies revise overestimates of prior periods by lowering estimates in the current period. Alternatively, they would raise estimates in the current period to correct underestimates of prior periods. 126) D Collection of a previously written off account is called a recovery and it is accounted for in two parts. First, the receivable is put back on the books by recording a journal entry that is the opposite of the entry used to record the write-off; this entry includes a debit to Accounts Receivable and a credit to Allowance for Doubtful Accounts. Second, the collection of the account receivable is recorded with a debit to Cash and a credit to Accounts Receivable. 127) C
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Collection of a previously written off account is called a recovery and it is accounted for in two parts. First, the receivable is put back on the books by recording a journal entry that is the opposite of the entry used to record the write-off; this entry includes a debit to Accounts Receivable and a credit to Allowance for Doubtful Accounts. Second, the collection of the account receivable is recorded with a debit to Cash and a credit to Accounts Receivable. 128) B When a previously written-off account is collected, two entries are recorded—one to reverse the entry that was recorded when the account was written off and the second entry to record the cash payment. Total accounts receivable is not impacted as the first entry increases Accounts Receivable and the second entry decreases it by the same amount, but the Allowance for Doubtful Accounts increases as a result of the first entry. Therefore, net accounts receivable decreases. 129) C When Adams Company collects an amount that was previously writtenoff, it must record two journal entries: (1) debit Accounts Receivable $250 and credit Allowance for Doubtful Accounts $250 and (2) debit Cash $250 and credit Accounts Receivable $250. The first entry increases an asset account and increases a contra-asset account. The second entry increases one asset account and decreases another asset account. Overall, there is no change in total assets. Neither entry includes a revenue or expense; as such, there is no effect on net income of total stockholders' equity. 130) A
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Writing-off a specific customer's account receivable balance after it has been determined to be uncollectible involves debiting the Allowance for Doubtful Accounts (to increase this contra-asset account) and crediting Accounts Receivable (to decrease that asset account) for $15,600, the account balance. 131) C Two entries are required: (1) debit Accounts Receivable (to increase that asset account) and credit Allowance for Doubtful Accounts (to increase that contra-asset account) for $15,600 and (2) debit Cash (to increase that asset account) and credit Accounts Receivable (to decrease that asset account) for $15,600. 132) B We have all of the information about the changes in the account except for the write-offs. Ending balance in Allowance for Doubtful Accounts = Beginning credit balance in Allowance for Doubtful Accounts− Write-offs + Recoveries + Bad Debt Expense Write-offs = Beginning credit balance in Allowance for Doubtful Accounts + Recoveries + Bad Debt Expense− Ending balance in Allowance for Doubtful Accounts = $12,656 + $100 + $3,879− $14,348 = $2,287 133) A
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When the allowance method is used, the entry to record a write-off includes a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable. The decrease in Accounts Receivable is offset by the decrease in the Allowance for Doubtful Accounts. As a result, the amount reported as Accounts Receivable, Net on the balance sheet does not change. Only the allowance method of accounting for bad debts is acceptable under GAAP. When the direct write-off method is used, Bad Debt Expense is equal to the write-offs that occurred during the period. To ensure bad debts and the allowance for doubtful accounts do not become materially misstated over time, companies revise overestimates of prior periods by lowering estimates in the current period, or they raise estimates in the current period to correct underestimates of prior periods. 134) A Allowance method is a method of accounting that reduces accounts receivable (as well as net income) for an estimate of uncollectible accounts (bad debts). The aging of accounts receivable method requires first estimating the desired amount for the Allowance for Doubtful Accounts and then determining the amount of the expense required to get to this desired balance given the amount of the unadjusted balance. 135) D
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The aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts. To compute the amount of the adjustment, you must determine how much to increase (credit) the Allowance for Doubtful Accounts to reach the desired adjusted balance. Ending balance in Allowance for Doubtful Accounts = Unadjusted credit (debit) balance in Allowance for Doubtful Accounts + Bad Debt Expense Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts− Unadjusted ending credit (debit) balance in Allowance for Doubtful Accounts = $1,000− $50 = $950 136) A The aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts. To compute the amount of the adjustment, you must determine how much to increase (credit) the Allowance for Doubtful Accounts to reach the desired adjusted balance. Ending balance in Allowance for Doubtful Accounts = Unadjusted credit (debit) balance in Allowance for Doubtful Accounts + Bad Debt Expense Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts− Unadjusted ending credit (debit) balance in Allowance for Doubtful Accounts = ($30,000 × 0.10)− ($300) = $3,000− ($300) = $3,300 The entry includes a debit to Bad Debt Expense for $3,300 and a credit to Allowance for Doubtful Accounts for $3,300. 137) B
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The aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts. To compute the amount of the adjustment, you must determine how much to increase (credit) the Allowance for Doubtful Accounts to reach the desired adjusted balance. Ending balance in Allowance for Doubtful Accounts = Unadjusted credit (debit) balance in Allowance for Doubtful Accounts + Bad Debt Expense Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts− Unadjusted ending credit (debit) balance in Allowance for Doubtful Accounts = ($10,000 × 0.10)− ($100) = $1,000− ($100) = $1,100 The entry includes a debit to Bad Debt Expense for $1,100 (which becomes its adjusted balance) and a credit to Allowance for Doubtful Accounts for $1,100 (which ends up with an adjusted balance of $1,000). 138) A The aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts. To compute the amount of the adjustment, you must determine how much to increase (credit) the Allowance for Doubtful Accounts to reach the desired adjusted balance. Ending balance in Allowance for Doubtful Accounts = Unadjusted credit (debit) balance in Allowance for Doubtful Accounts + Bad Debt Expense Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts− Unadjusted ending credit (debit) balance in Allowance for Doubtful Accounts = $90,000− $1,000 = $89,000 139) A Version 1
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The aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts. To compute the amount of the adjustment, you must determine how much to increase (credit) the Allowance for Doubtful Accounts to reach the desired adjusted balance. Ending balance in Allowance for Doubtful Accounts = Unadjusted credit (debit) balance in Allowance for Doubtful Accounts + Bad Debt Expense Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts− Unadjusted ending credit (debit) balance in Allowance for Doubtful Accounts = $90,000− ($1,000) = $91,000 140) A Unadjusted ending balance in Allowance for Doubtful Accounts = Beginning balance in Allowance for Doubtful Accounts− Write-offs + Recoveries = $10,000 credit balance− debit of $9,000 + credit of $0 = $1,000 credit balance 141) B Unadjusted ending balance in Allowance for Doubtful Accounts = Beginning balance in Allowance for Doubtful Accounts− Write-offs + Recoveries = $10,000 credit balance− debit of $11,000 + credit of $0 = $1,000 debit balance 142) B Although the Allowance for Doubtful Accounts normally has a credit balance, it may have a debit balance before it is adjusted. This happens when a company has recorded write-offs that exceed previous estimates of uncollectible accounts. 143) A Version 1
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Although the Allowance for Doubtful Accounts normally has a credit balance, it may have a debit balance before it is adjusted. This happens when a company has recorded write-offs that exceed previous estimates of uncollectible accounts. 144) A Although the Allowance for Doubtful Accounts normally has a credit balance, it may have a debit balance before it is adjusted. This happens when a company has recorded write-offs that exceed previous estimates of uncollectible accounts. 145) D Collection of a previously written off account is called a recovery, and it is accounted for in two parts. First, put the receivable back on the books by recording the opposite of the write-off. Second, record the collection of the account. The entries include (1) a debit to Accounts Receivable and a credit to Allowance for Doubtful Accounts for $9,600 and (2) a debit to Cash and a credit to Accounts Receivable for $9,600. 146) D GAAP does not allow the use of the direct write-off method because it violates the expense recognition principle. 147) A GAAP does not allow the use of the direct write-off method because it violates the expense recognition principle. 148) C When the direct write-off method is used, the company records Bad Debt Expense only when a company writes off specific accounts. As a result, since an estimate of uncollectible accounts is not recorded, a company using the direct write-off method would not have an Allowance for Doubtful Accounts account. Version 1
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149) D Company A, the lender, earns the interest (Interest Revenue) and Company B, the borrower, incurs the cost (Interest Expense). 150) D Because interest rates are always stated as an annual percentage even if the note is for less than a year, the time period is the portion of a year for which interest is calculated. Ask yourself how many months out of 12 or how many days out of 365 the interest period covers. 151) B Because interest rates are always stated as an annual percentage even if the note is for less than a year, the time period is the portion of a year for which interest is calculated. Ask yourself how many months out of 12 or how many days out of 365 the interest period covers. As such, in the interest equation, T equals the number of months ÷ 12. 152) B Interest = Principal × Interest Rate × Time = $102,000 × 0.04 × 3/12 (January through March) = $1,020 153) B Interest = Principal × Interest Rate × Time = $240,000 × 0.06 × 3/12 (January through March) = $3,600 154) A Interest payments are made twice per year; six months are covered by each interest payment. Interest = Principal × Interest Rate × Time = $163,000 × 0.07 × 6/12 = $5,705 155) C
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Interest payments are made twice per year; six months are covered by each interest payment. Interest = Principal × Interest Rate × Time = $300,000 × 0.06 × 6/12 = $9,000 156) A Recall that: Interest = Principal × Interest Rate × Time. For the computation of interest earned through December 31, the time component of this equation will be 2/12 (or the two months from November 1 through December 31 divided by the twelve months covered by the interest rate). 157) D Interest = Principal × Interest Rate × Time Interest Rate = Interest ÷ (Principal × Time) = $3,540 ÷ ($59,000 × 9/12) = 0.08 or 8% 158) B Interest = Principal × Interest Rate × Time Interest Rate = Interest ÷ (Principal × Time) = $9,000 ÷ ($150,000 × 9/12) = 0.08 or 8% 159) C The entry to establish a note includes a debit to Notes Receivable and a credit to Cash for $10,000. 160) D The entry to establish a note includes a debit to Notes Receivable and a credit to Cash for $168,000. No interest is recorded on the day the note is established. Interest is earned over time. 161) A The entry to establish a note includes a debit to Notes Receivable and a credit to Cash for $150,000. No interest is recorded on the day the note is established. Interest is earned over time. Version 1
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162) D Establishing a note receivable for a loan increases Note Receivable, an asset account, and decreases Cash, another asset account by the same amount; as a result, it has no effect on total assets, liabilities, or stockholders’ equity. 163) D The entry to establish a note includes a debit to Notes Receivable and a credit to Accounts Receivable for $2,000. No interest is recorded on the day the note is established. Interest is earned over time. 164) D When a company issues a loan, Cash decreases and Notes Receivable increases. One asset is being exchanged for another; there is no change in total assets. No interest is recorded on the day the note is established. Interest is earned over time. As such, net income is not affected. 165) B Interest = Principal × Interest rate × Time = $20,000 × .09 × 6/12 = $900 166) B Interest = Principal × Interest rate × Time = $9,600 × 0.08 × 6/12 (July 1 through December 31) = $384 167) D Interest = Principal × Interest rate × Time = $8,000 × 0.09 × 6/12 (July 1 through December 31) = $360 168) B Interest revenue = Principal × Interest rate × Time = $40,000 × 0.06 × 3/12 = $600 169) C
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Interest was earned during November and December. The adjusting journal entry includes a debit to Interest Receivable and a credit to Interest Revenue for $1,000 (or $100,000 × 6% × 2/12). 170) C Under accrual basis accounting, interest revenue is recorded when it is earned. The adjusting entry to accrue interest includes a debit to Interest Receivable and a credit to Interest Revenue. 171) C Monthly Interest Revenue = Principal × Interest rate × Time = $90,000 × 0.07 × 1/12 = $525 The monthly adjusting entry to accrue interest includes a debit to Interest Receivable and a credit to Interest Revenue for $525. 172) D Interest was earned during January in the amount of $500 (or 100,000 × 6% × 1/12). 173) C The time period from August 1 through December 31 included five months; the related amount was accrued at December 31 by debiting Interest Receivable and crediting Interest Revenue for $3,750 (or $60,000 × 0.15 × 5/12). The final month of interest was earned during January. Debit Cash (to increase this asset account) for $4,500 (or $60,000 × 0.15 × 6/12), credit Interest Receivable (to decrease this asset account) for $3,750 (or $60,000 × 0.15 × 1/12), and credit Interest Revenue (to increase this revenue account) for $750 (or $60,000 × 0.15 × 1/12). 174) B
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Interest = Principal × Interest rate × Time = $3,000 × 0.05 × 2/12 (March and April) = $25 The adjusting entry includes a debit to Interest Receivable and a credit to Interest Revenue for $25. 175) B Interest = Principal × Interest rate × Time = $40,000 × 0.045 × 1/12 (April 1 through April 30) = $150 The adjusting entry includes a debit to Interest Receivable and a credit to Interest Revenue for $150. 176) D Interest = Principal × Interest rate × Time = $10,000 × 0.09 × 3/12 (October 1 through December 31) = $225 The entry includes a debit to Interest Receivable and a credit to Interest Revenue for $225. 177) D Interest = Principal × Interest rate × Time = $20,000 × 0.09 × 1/12 (December 1 through 31) = $150 The entry includes a debit to Interest Receivable and a credit to Interest Revenue for $150. 178) A Interest Receivable is an asset account. It is a permanent account and it’s reported on the balance sheet (rather than the income statement). It represents the amount of interest to be received on promissory notes. 179) D
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Interest = Principal × Interest rate × Time = $90,000 × 0.07 × 6/12 (January through June) = $3,150 Adjusting entries have been recorded at the end of each month to accrue the interest earned. Accordingly, at June 30, the Interest Receivable and Interest Revenue accounts include six months (January through June) of accrued interest. As a result, the entry to record the receipt of the semiannual interest payment includes a debit to Cash and a credit to Interest Receivable for $3,150. 180) B The entry includes a debit to Cash for $4,680 (the amount of the payment), a credit to Interest Receivable for $2,340 (the one month of interest accrued at December 31, 2021), and credit Interest Revenue for $2,340 (the second month of interest earned during January 2022). 181) D Interest = Principal × Interest rate × Time Accrued at December 31: = $6,000 × 0.09 × 1/12 = $45 Earned from January 1 through March 1: = $6,000 × 0.09 × 2/12 = $90 The entry includes a debit to Cash for $135, a credit to Interest Receivable for $45 (the amount accrued at December 31, 2021), and credit Interest Revenue for $90 (the amount of interest earned from January 1 through March 1, 2022). 182) A The entry includes a debit to Cash and a credit to Notes Receivable. 183) D
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Interest = Principal × Interest rate × Time = $10,200 × 0.10 × 3/12 = $255 Payment = Principal + Interest = $10,200 + $255 = $10,455 184) A Interest = Principal × Interest rate × Time = $10,000 × 0.08 × 3/12 = $200 Payment = Principal + Interest = $10,000 + $200 = $10,200 185) C The debit to Cash increases that asset account and the credit to Notes Receivable decreases that asset account. This entry would be made when a principal payment is received. 186) C The debit to Cash increases that asset account and the credit to Interest Receivable decreases that asset account. This entry would be made when an interest payment is received. 187) A The entry to establish this note receivable includes a debit to Notes Receivable (to increase that asset account) and a credit to Cash (to decrease that asset account) for $1,000. 188) B The adjusting entry to accrue the interest earned includes a debit to Interest Receivable (to increase that asset account) and a credit to Interest Revenue (to increase that revenue account) for $1,000. If that entry is not made, assets will be understated, and net income will be understated. As a result, stockholders' equity will also be understated. 189) A Version 1
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An adjusting entry must be recorded at the end of the accounting period to accrue the interest earned but not yet received. The entry includes a debit to Interest Receivable (to increase that asset account) and a credit to Interest Revenue (to increase that revenue account). 190) A An adjusting entry must be recorded at the end of the accounting period to accrue the interest earned but not yet received. This entry includes a debit to Interest Receivable (to increase that asset account) and a credit to Interest Revenue (to increase that revenue account). When that entry is made, assets will increase, and net income will also increase. As a result, stockholders' equity will also increase. 191) D Interest = Principal × Interest rate × Time = $1,500 × 0.08 × 2/12 (for November and December) = $20 An adjusting entry must be recorded at the end of the accounting period to accrue the interest earned but not yet received. This entry includes a debit to Interest Receivable (to increase that asset account) and a credit to Interest Revenue (to increase that revenue account) for $20. 192) D Interest = Principal × Interest rate × Time = $1,500 × 0.08 × 1/12 (for December) = $10 An adjusting entry must be recorded at the end of the accounting period to accrue the interest earned but not yet received. This entry includes a debit to Interest Receivable (to increase that asset account) and a credit to Interest Revenue (to increase that revenue account) for $10. 193) C
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Interest = Principal × Interest rate × Time = $100,000 × 0.06 × 2/12 (for November and December) = $1,000 An adjusting entry must be recorded at the end of the accounting period to accrue the interest earned but not yet received. This entry includes a debit to Interest Receivable (to increase that asset account) and a credit to Interest Revenue (to increase that revenue account) for $1,000. 194) A The entry includes a debit to Cash (to increase that asset account) and a credit to Notes Receivable (to decrease that asset account). Total assets remain the same. Liabilities and stockholders' equity are not affected. 195) D The receivables turnover ratio indicates how many times, on average, the process of selling and collecting is repeated during the period. It is calculated by dividing net sales revenue by average net receivables. 196) C Receivables turnover ratio = Net sales revenue ÷ Average net receivables = $936,600 ÷ $223,000 = 4.2 times Days to collect = 365 ÷ Receivables turnover ratio = 365 ÷ 4.2 = 86.9 days 197) D Receivables turnover ratio = Net sales revenue ÷ Average net receivables = $890,875 ÷ [($66,500 + $73,100) ÷ 2] = 12.76 times 198) A Receivables turnover ratio = Net sales revenue ÷ Average net receivables = $1,753,750 ÷ [($135,800 + $144,800) ÷ 2] = 12.5 times Version 1
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199) D Receivables turnover ratio = Net sales ÷ Average net receivables $3,795,300 ÷ [($394,200 + $435,900) ÷ 2] = 9.14 times 200) C The lower the receivables turnover ratio, the slower the collection of receivables. 201) A The higher the receivables turnover ratio, the faster the collection of receivables. 202) A Receivables turnover ratio = Net sales ÷ Average net receivables Average net receivables = Net sales ÷ Receivables turnover ratio = $630,000 ÷ 9.0 = $70,000 203) C Receivables turnover ratio = Net sales ÷ Average net receivables Average net receivables = Net sales ÷ Receivables turnover ratio = $960,000 ÷ 8.0 = $120,000 204) A The days to collect ratio measures the length of time (in days) it takes to collect accounts receivable. 205) A Receivables turnover ratio = Net sales ÷ Average net receivables $3,795,300 ÷ [($394,200 + $435,900) ÷ 2] = 9.14 times Days to collect = 365 ÷ Receivables turnover ratio = 365 ÷ 9.14 = 40 days (rounded) 206) B Receivables turnover ratio = Net Sales Revenue ÷ Average Accounts Receivable = $1,000,000 ÷ [($200,000 + $120,000) ÷ 2] = 6.25 times Version 1
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207) D Receivables turnover ratio = Net Sales Revenue ÷ Average Accounts Receivable = $1,000,000 ÷ [($200,000 + $120,000) ÷ 2] = 6.25 times Days to collect = 365 ÷ Receivables turnover ratio = 365 ÷ 6.25 = 58.4 days 208) D Days to collect = 365 ÷ Receivables turnover ratio Receivables turnover ratio = 365 ÷ Days to Collect Last year: = 365 ÷ 32 = 11.4 times This year: = 365 ÷ 48 = 7.6 times An increase in the days to collect means a longer (worse) time to collect, which would cause an increase (rather than a decrease) in Bad Debt Expense. The receivables turnover increased (rather than decreased) from last year to this year. 209) A Receivables turnover ratio = Net sales ÷ Average net accounts receivable = $884,000 ÷ [($65,800 + $73,000) ÷ 2] = 12.7 times (rounded) Days to Collect = 365 ÷ Receivables turnover ratio = 365 ÷ 12.7 = 28.7 days 210) B Receivables turnover ratio = Net sales ÷ Average net accounts receivable = $876,000 ÷ [($66,600 + $72,600) ÷ 2] = 12.6 times (rounded) Days to Collect = 365 ÷ Receivables turnover ratio = 365 ÷ 12.6 = 29.0 days 211) C Version 1
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The receivables turnover ratio measures the number of times receivables turn over during the period. The higher the ratio, the faster the collection of receivables. Accounts receivable would increase (rather than decrease) as companies sell on credit and decrease when (rather than increase) when payments are collected. The days to collect ratio is calculated by dividing 365 by the receivables turnover ratio; as a result, the days to collect ratio would decrease (rather than increase) when the receivables turnover increases. 212) B It is better to have a higher receivables turnover ratio (which means faster the collection of receivables) and a lower number of days to collect (which means a shorter time to collect). 213) B It is better to have a higher receivables turnover ratio (which means faster the collection of receivables.) Bolster's receivables turnover ratios were better than Castor's for both years. 214) D When the allowance method is used and a customer account is written off, a decrease is recorded in Accounts Receivable, which would be offset by a decrease in the contra-account, Allowance for Doubtful Accounts. A write-off does not affect revenues, expenses, or net income. The accounts receivable turnover ratio is calculated by dividing net sales revenue by average net receivables. Since net receivables are not affected by a write-off, this ratio would not be impacted. 215) A
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The journal entry includes a debit to Bad Debt Expense, which increases expenses and decreases (rather than increases) net income. The entry also includes a credit to Allowance for Doubtful Accounts, a contraasset account, which decreases net accounts receivable. The accounts receivable turnover ratio is calculated by dividing net sales revenue by average net receivables. Since this entry decreases average net receivables, the receivables turnover ratio will increase. 216) B If Bad Debt Expense is overstated, then net income will be understated. The days to collect ratio measures the average number of days from sale on account to collection. If the company is overly pessimistic about its ability to collect, it follows that the number of days to collect will decrease (since it will take shorter than expected to collect receivables). 217) A Good receivables management occurs when the receivables turnover is increasing and the number of days to collect is decreasing. The more frequently that receivables are turning over, the more frequently the receivables are being collected. A lower days to collect means that a company is collecting its receivables more quickly. 218) A A low receivables turnover ratio indicates that the process of selling and collecting cash from credit sales is being made less frequently, resulting in more time between the credit sale and its collection. This generally means that less cash is available for business operations. 219) A
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Analysts watch for changes in the receivables turnover ratio because a sudden decline (rather than a sudden increase) may mean that a company is recording sales of merchandise that customers are likely to return later. 220) A The receivable turnover ratio determines the average number of times the process of selling and collecting occurs during the period. This ratio often varies across industries. A low (rather than not high) turnover ratio may suggest the company is allowing too much time for customers to pay. The days to collect ratio is calculated by dividing 365 by the receivables turnover ratio. 221) B It is better to have a higher receivables turnover ratio (which means faster the collection of receivables). Company B has the better turnover ratio when compared to Company A, so this suggests that Company B is more effectively managing its receivables. 222) A By comparing the number of days to collect to the length of credit period, analysts can gain a sense of whether customers are complying with the stated policy. Managers inside a company watch this closely, and so do investors and creditors on the outside. If customers appear to be disregarding the stated credit period, it may be a sign they are dissatisfied with the product or service they bought. If the company's payment terms have been relaxed, the length of the credit period and the number of days to collect would both increase. If the company's payment terms have been tightened, the length of the credit period and the number of days to collect would both decrease. The method used to estimate uncollectible will not impact the length of the credit period nor the number of days to collect. Version 1
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223) A A higher receivables turnover ratio means faster (better) turnover. 224) B The receivables turnover ratio indicates how many times, on average, this process of selling and collecting is repeated during the period. The higher the ratio, the faster the collection of receivables. 225) A Analysts watch for changes in the receivables turnover ratio because a sudden decline may mean that a company is recording sales of merchandise that customers are likely to return later. It also may mean that the company is selling to less financially secure customers or is allowing customers more time to pay their accounts to entice them to buy as much as possible—a practice known as channel stuffing. 226) C Factoring is an arrangement where receivables are sold to another company (called a factor) for immediate cash (minus a factoring fee). 227) B The way this factoring arrangement works is that your company receives cash for the receivables it sells to the factor (minus a factoring fee) and the factor then has the right to collect the outstanding amounts owed by your customers. 228) A Factoring is an arrangement where receivables are sold to another company (called a factor) for immediate cash (minus a factoring fee). 229) A Companies that regularly sell receivables report the cost of factoring on the income statement as a selling expense. Version 1
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230) C National credit card companies and PayPal pay the seller within one to three days of the sale, which speeds up cash collection. If customers can pay by credit card or use PayPal instead of writing checks, losses from customers' bad checks would be reduced. 231) B Cash = Net sales revenue − Transaction fee charged = $10,000− ($10,000 × 0.03) = $9,700 232) C These transaction fees are included with selling expenses on the income statement. 233) C Unlike private credit card programs, where the seller pursues collection from customers, national credit card companies, such as VISA, pay the seller within one to three days of the sale. Most banks accept credit card receipts as overnight deposits into the company's bank account as if they're cash. This not only speeds up the seller's cash collection, but also reduces losses from customers writing bad checks. The credit card companies charge a fee for their services, often around 3% of the total sales price. 234) A The direct write-off method is required for tax purposes but is not allowed under GAAP or IFRS and, so, it is generally not used for external financial reporting. 235) C
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The reason the direct write-off method isn't considered a GAAP method is that it reports Accounts Receivable at the total amount owed by customers (an overly optimistic point of view) rather than what is estimated to be collectible (a more realistic viewpoint). The direct writeoff method also violates the expense recognition ("matching") principle by recording Bad Debt Expense in the period customer accounts are determined to be bad rather than the period when the credit sales are actually made. 236) A When the direct write-off method is used, the entry to record a write-off includes a debit to Bad Debt Expense and a credit to Accounts Receivable. 237) C When the direct write-off method is used, the company records Bad Debt Expense only when a company writes off specific accounts. As a result, since an estimate of uncollectible accounts is not recorded, a company using the direct write-off method would not have the account, Allowance for Doubtful Accounts. 238) D The reason the direct write-off method isn't considered a GAAP method is that it reports Accounts Receivable at the total amount owed by customers rather than what is estimated to be collectible (the net accounts receivable). The direct write-off method also violates the expense recognition ("matching") principle by recording Bad Debt Expense in the period customer accounts are determined to be bad rather than the period when the credit sales are actually made. 239) D
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When the direct write-off method is used, the entry to record a write-off includes a debit to Bad Debt Expense, which increases expenses and decreases net income, and a credit to Accounts Receivable, which decreases Accounts Receivable. 240) B When the direct write-off method is used, the entry to record a write-off includes a debit to Bad Debt Expense, which increases expenses and decreases net income, and a credit to Accounts Receivable, which decreases Accounts Receivable. 241) D When the direct write-off method is used, the company records Bad Debt Expense only when a company writes off specific accounts. As a result, an estimate of uncollectible accounts is not recorded and the company would not have an Allowance for Doubtful Accounts account.
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CHAPTER 8: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Twilight Company uses the aging of accounts receivable method to estimate Bad Debt Expense. The balance of each account receivable is aged on the basis of three categories as follows: (1) 1 to 30 days old, (2) 31 to 90 days old, and (3) more than 90 days old. Based on experience, management has estimated what portion of receivables of a specific age will not be paid as follows: (1) 1%, (2) 15%, and (3) 40%, respectively. At December 31, 2022, the unadjusted credit balance in the Allowance for Doubtful Accounts was $80. The total Accounts Receivable in each age category were: (1) 1 to 30 days old, $52,000, (2) 31 to 90 days old, $8,000, and (3) more than 90 days old, $3,200. Required: a. Calculate the estimate of uncollectible accounts at December 31, 2022. b. Prepare the appropriate adjusting entry dated December 31, 2022.
2)
Samberg Incorporated had the following transactions.
October 1 – Sold $10,000 of merchandise on account, 1/10, n/30 to McCormick Industries. November 1 – Received a $10,000, 90-day, 10% note from McCormick Industries to settle its $10,000 unpaid balance. December 31 – Accrued interest on the note. (Round your answer to the nearest whole dollar amount.) January 31 – Received the interest on the note's maturity date. January 31 – Received the principal on the note's maturity date. (Round your answer to the nearest whole dollar amount.) Required: Prepare the required journal entries.
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3) The following summarizes the aging of accounts receivable for Johnston Supplies, Incorporated as of July 31, 2022: Number of Days Unpaid
Total Accounts Receivable $ 126,500 89,200 53,600 31,800
Not yet due 1 to 30 days past due 31 to 60 days past due Over 60 days past due
Historical % Uncollectible 2% 12% 18% 35%
Required: a. The unadjusted balance of the Allowance for Doubtful Accounts of Johnston Supplies, Incorporated is a credit balance in the amount of $28,947 on July 31, 2022. Prepare the required adjusting entry to record Bad Debt Expense for the year. b. Johnston Supplies, Incorporated writes off $3,081 of uncollectible accounts on August 15, 2022. Prepare the required adjusting entry to record the write-off. c. Use a T-account to determine the account balance in the Allowance for Doubtful Accounts on August 15, 2022.
4) The Dubious Company operates in an industry where all sales are made on account. The company has experienced bad debt losses of 1% of credit sales in prior periods. Presented below is the company's forecast of sales and expenses over the next three years.
Sales Revenue Bad Debt Expense Other Expenses Net Income
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Year 1
Year 2
Year 3
$ 368,000 Unknown 340,000 Unknown
$ 374,000 Unknown 342,000 Unknown
$ 373,000 Unknown 342,750 Unknown
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Required: a.Calculate Bad Debt Expense and net income for each of the three years, assuming uncollectible accounts are estimated as 1.0% of sales. b.Assume that the company changes its estimate of uncollectible credit sales to 1.0% in Year 1, 2.0% in Year 2, and 1.5% in Year 3. Calculate the Bad Debt Expense and net income for each of the three years under this alternative scenario.
5) Geisel, Incorporated reported net sales revenue of $600,000 in 2021 and $500,000 in 2022. The company’s ending net receivables were $120,000 at December 31, 2020 and $130,000 at December 31, 2021. At December 31, 2022, the company had Accounts Receivable of $148,000 and an unadjusted debit balance in its Allowance for Doubtful Accounts account of $1,000. The company reported Bad Debt Expense of $6,000 during 2022. Required: a.Determine the net receivables at December 31, 2022. b.Calculate the receivables turnover ratio for 2021 and 2022. c.Calculate the days to collect for 2021 and 2022.
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6) Match the term and its definition. There are more definitions than terms. Term Net Accounts Receivable Percentage of Credit Sales Method Allowance for Doubtful Accounts Principal Write-Off Aging of Accounts Receivable Credit Terms Factoring Definition A) The process of removing specific customer’s accounts deemed uncollectible. B) When a company increases the amount of accounts receivable by adding the interest earned as accounts age without being collected. C) How much money you can expect to earn over a period of time selling your goods. D) Selling accounts receivable to another company for immediate cash. E) Credit that a company receives when one good is exchanged for another. F) Gross accounts receivable minus allowance for doubtful accounts. G) The length of the credit period and any discounts offered for prompt payment. H) The initial amount of money lent. I) A method of estimating uncollectible debts known as the balance sheet approach. J) The interest earned by money over a period of time. K) A method of estimating uncollectible debts known as the income statement approach. L) An account used in recording the estimated amount of accounts receivable expected to be uncollectible.
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7) Match the term and its definition. There are more definitions than terms. Term: Promissory Note Net Accounts Receivable Bad Debt Expense Maturity Date Days to Collect Accounts Receivable Allowance for Doubtful Accounts Receivables Turnover Definition: A) The portion of Accounts Receivable that the company expects to collect. B) The due date when a note must be repaid. C) An agreement by a borrower to repay the lending company with interest during a specified time period. D) The days of the year divided by the net sales revenue. E) A financial statement that shows the calculation of Bad Debt Expense for a company. F) Total money owed the company for sales made on credit. G) An account that is debited for the amount of credit sales estimated as uncollectible. H) A contra-asset account used in the Allowance Method. I) The time at which a borrower must make annual interest payments. J) Net credit sales revenue divided by the average net receivables. K) Net credit sales revenue divided by the net income. L) The days of the year divided by the receivables turnover ratio.
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8) Match the term and its definition. There are more definitions than terms. Term Net Sales Revenue Allowance Method Notes Receivable Accounts Receivable Average Net Receivables Subsidiary Account Historical Percentage of Bad Debt Losses Interest Formula Definition A) When a formal written contract is established outlining the terms by which a company will receive amounts it is owed and generally charge interest from the day they are signed to the day they are collected. B) A system used by companies to allocate their budgets over the different operating expenses. C) Principal (P) × Interest Rate (R) × Time (T) D) Another name for a company's total revenue, which is calculated by multiplying the quantity sold by the average price. E) The denominator of the receivables turnover ratio. F) The amount of interest a lender receives during a year. G) The costs of maintaining accounts with customers who have not made recent purchases. H) A separate accounts receivable account for each customer. I) Used by the percentage of credit sales method to estimate bad debts. J) The rate at which a company pays off its liabilities or debts. K) The numerator of the receivables turnover ratio. L) The amount of past credit sales that have not yet been collected. M) An accounting method which involves estimating bad debts. N) The average level of net sales revenue the firm earns each month.
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Answer Key Test name: Chap 08_7e_Problems 1) a. Estimated uncollectible accounts = ($52,000 × 1%) + ($8,000 × 15%) + ($3,200 × 40%) = $3,000 b. Debit December 31, 2022
Bad debt expense
Credit
2,920
Allowance for doubtful accounts
2,920
The aging of accounts receivable method focuses on estimating the ending balance to be reported in the Allowance for Doubtful Accounts. To compute the amount of the adjustment, you must determine how much to increase (credit) the Allowance for Doubtful Accounts to reach the desired adjusted balance. Ending balance in Allowance for Doubtful Accounts (or estimated uncollectible accounts) = Unadjusted credit balance in Allowance for Doubtful Accounts + Bad Debt Expense Bad Debt Expense = Ending balance in Allowance for Doubtful Accounts− Unadjusted ending credit balance in Allowance for Doubtful Accounts = $3,000 – $80 = $2,920 2) Date October 1
Account Title Accounts Receivable Sales revenue
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Debit 10,000
Credit
10,000
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November 1
Notes receivable
10,000
Accounts receivable December 31
10,000
Interest Receivable
167
Interest Revenue January 31
January 31
167
Cash
250
Interest Receivable
167
Interest Revenue
83
Cash
10,000
Notes receivable
10,000
December 31 Interest Revenue: $10,000 × 0.10 × 2/12 = $167 January 31 Interest Revenue: $10,000 × 0.10 × 1/12 = $83 3) a. Estimated amount uncollectible is calculated as follows: Number of Days Unpaid
Total Accounts Receivable
Not yet due 1 to 30 days past due 31 to 60 days past due Over 60 days past due
$ 126,500 89,200 53,600
2% 12% 18%
Estimated Amount Uncollectible $ 2,530 10,704 9,648
31,800
35%
11,130
Estimated Uncollectible
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Historical % Uncollectible
$ 34,012
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Adjusted balance in Allowance for Doubtful Accounts (or estimated uncollectible) = Unadjusted balance in Allowance for Doubtful Accounts + Bad Debt Expense Bad Debt Expense = Adjusted balance in Allowance for Doubtful Accounts− Unadjusted balance in Allowance for Doubtful Accounts = $34,012− $28,947 = $5,065 Date July 31
Account Title Bad debt expense
Debit 5,065
Allowance for doubtful accounts
Credit
5,065
b. Date August 15
Account Title Allowance for doubtful accounts
Debit 3,081
Accounts Receivable
Credit
3,081
c. Allowance for Doubtful Accounts Debit
Write-off on 8/15/22
Credit 28,947
Unadjusted Balance7/31/22
5,065
Adustment at 7/31/22
34,012
Adjusted Balance at 7/31/22
30,931
Unadjusted Balance at 8/15/22
3,081
4) a. Year 1
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Year 2
Year 3
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Sales Revenue Bad Debt Expense (Net Sales Revenue × 0.01) Other Expenses Net Income
$ 368,000 3,680
$ 374,000 3,740
$ 373,000 3,730
340,000 $ 24,320
342,000 $ 28,260
342,750 26,520
Year 1
Year 2
Year 3
$ 368,000 3,680
$ 374,000 7,480
$ 373,000 5,595
340,000 $ 24,320
342,000 $ 24,520
342,750 $ 24,655
b. Sales Revenue Bad Debt Expense (Net Sales Revenue × 0.01, 0.02 and 0.015, respectively) Other Expenses Net Income
5) a. Accounts Receivable
$ 148,000
Less Allowance for Doubtful Accounts: Unadjusted balance (debit)
$ 1,000
Adjustment (Bad Debt Expense)
(6,000)
Adjusted balance
(5,000)
Net receivables
$ 143,000
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b. Receivable Turnover = Net credit sales ÷ Average net receivables Receivable Turnover = Net credit sales ÷ (Beginning net receivables + Ending net receivables) ÷ 2 2021 = $600,000 ÷ [($120,000 + $130,000) ÷ 2] = $600,000 ÷ $125,000 = 4.8 times 2022 = $500,000 ÷ [(130,000 + $143,000) ÷ 2] = $500,000 ÷ $136,500 = 3.7 times c. Days to collect = 365 ÷ Receivables turnover ratio 2021 365 ÷ 4.8 (from above) = 76.0 days 2022 365 ÷ 3.7 (from above) = 98.6 days 6) F Net Accounts Receivable K Percentage of Credit Sales Method L Allowance for Doubtful Accounts H Principal A Write-Off I Aging of Accounts Receivable G Credit Terms D Factoring
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7) C Promissory Note A Net Accounts Receivable G Bad Debt Expense B Maturity Date L Days to Collect F Accounts Receivable H Allowance for Doubtful Accounts J Receivables Turnover 8) K Net Sales Revenue M Allowance Method A Notes Receivable L Accounts Receivable E Average Net Receivables H Subsidiary Account I Historical Percentage of Bad Debt Losses C Interest Formula
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CHAPTER 9 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Long-lived assets found on a company's balance sheet may include some assets that have no physical substance. ⊚ ⊚
true false
2) When assets are purchased as a group, the total cost must be divided up and allocated to each asset in proportion to the market value of the assets as a whole. ⊚ ⊚
true false
3) Extraordinary repairs, replacements, and additions are added to the appropriate asset accounts rather than being recorded as expenses. ⊚ ⊚
4)
Depreciation is an allocation method, not a valuation method. ⊚ ⊚
5)
true false
Accumulated Depreciation is classified as a contra-asset account on the balance sheet. ⊚ ⊚
6)
true false
true false
The useful life of an asset is always measured in units of time, such as years or months. ⊚ ⊚
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7) Assuming no additions, replacements, or extraordinary repairs, the book value of a longlived asset declines over time. ⊚ ⊚
true false
8) If a company produces the same number of units per period over an asset's useful life, each period's depreciation expense using the straight-line method will be the same as that recorded using the units-of-production method. ⊚ ⊚
true false
9) Tax accounting and financial accounting use the same depreciation calculations and there are no differences in the results between the two accounting systems. ⊚ ⊚
true false
10) Impairment occurs when the estimated future cash flows from a long-lived asset are greater than the asset’s book value. ⊚ ⊚
true false
11) When an asset is sold and the selling price exceeds the asset’s book value, net income will increase. ⊚ ⊚
true false
12) Intangible assets with limited lives are usually amortized using the straight-line method with no residual value. ⊚ ⊚
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13)
Trademarks and goodwill are intangible assets that are not amortized. ⊚ ⊚
true false
14) There are no significant differences between GAAP and IFRS with regards to the accounting for tangible and intangible assets. ⊚ ⊚
true false
15) Assuming nothing else changes, an increase in average net fixed assets will cause the fixed asset turnover ratio to decrease. ⊚ ⊚
true false
16) A declining fixed asset turnover ratio can be caused by acquiring additional assets in the current period in anticipation of increased revenue in the future. ⊚ ⊚
true false
17) Companies within the same industry do not always use the same depreciation method, but will use the same expected useful life for the same piece of equipment. ⊚ ⊚
true false
18) Some analysts compare companies by focusing on earnings before interest, taxes, depreciation, and amortization (EBITDA), rather than net income. ⊚ ⊚
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19) The calculation for depletion of natural resources is similar to the calculation for depreciation when the units-of-production method is used. ⊚ ⊚
true false
20) When the amount of annual depreciation is revised because of a change in the estimated useful life of an asset, prior year’s financial statements should be restated. ⊚ ⊚
true false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 21) Which of the following is not a characteristic of tangible long-lived assets? A) Productive B) Used over one or more years C) Not intended for resale D) Amortized over their useful lives
22)
Which of the following terms does not mean the same as the others? A) Tangible assets B) Fixed assets C) Property, plant, and equipment D) Long-lived assets
23)
Which of the following items would not be considered a long-lived asset?
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A) Buildings B) Land improvements C) Inventory D) Land
24)
Which of the following would be properly classified as a long-lived asset? A) A car held for resale by an automobile dealership B) Accounts receivable C) Merchandise inventory held for resale D) A warehouse used to store inventory
25) The MegaHit Film Studio owns a production lot and related equipment. How would MegaHit Company categorize these assets? A) Tangible assets B) Natural resources C) Intangible assets D) Goodwill
26)
Which of the following would be classified as a long-lived asset? A) Land on which a new store is located B) Land purchased for resale next month C) Cash D) Retained earnings
27)
A productive asset:
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A) will be used up within 1 year from the balance sheet date. B) is the same as stockholders' equity. C) is part of inventory. D) is used to produce goods or services that will be sold to customers.
28)
A category of long-lived assets that are depleted over time is: A) delivery equipment. B) natural resources. C) machinery. D) cash.
29)
Which of the following is a natural resource that is depleted over time? A) Timber B) Mining equipment C) Cash D) Inventory
30)
Fixed assets are ________ and are found on the ________. A) long-lived tangible assets; balance sheet B) long-lived intangible assets; balance sheet C) current tangible assets; balance sheet D) current intangible assets; income statement
31)
Intangible assets are:
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A) long-lived assets with no physical substance. B) unnecessary for most major companies. C) all current assets. D) any assets acquired without using cash.
32)
Which of the following statements about capitalizing costs is correct? A) Capitalizing costs refers to the process of converting assets to expenses. B) All costs incurred to acquire an asset may be capitalized. C) Capitalizing a cost means to record it as an asset. D) Capitalizing costs results in an immediate decrease in net income.
33) Buckeye Industries purchased a truck and trailer for $81,000. The appraised values of the truck and trailer are $57,000 and $28,500, respectively. What is the amount of the cost that should be assigned to the trailer? A) $28,500 B) $27,000 C) $24,000 D) $40,500
34) If a company records a cost as an expense that should have been capitalized, how is its income statement for the current period impacted? A) Net income is overstated. B) Revenues are understated. C) Expenses are overstated. D) Assets are overstated.
35)
Under the cost principle, a company capitalizes:
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A) all ordinary repair expenditures incurred in the use of an asset. B) any interest incurred in borrowing money to help pay for asset acquisitions. C) all reasonable and necessary costs of acquiring an asset and preparing it for use. D) the total market value of individual assets acquired in a ‘basket purchase.'
36) Durango, Incorporated purchased a parcel of land for $450,000. It paid attorney fees of $3,000 to verify title to the land. In addition, it paid a broker's fee of $7,500 to help find a suitable parcel of land. This parcel of land should be recorded in the accounting records for: A) $450,000. B) $453,000. C) $457,500. D) $460,500.
37) Wilshire Company purchased land for $120,000. The cost to demolish the existing building and prepare the land for a new building was $16,000. The real estate commission paid to buy the land was $7,200. What amount should be recorded in Wilshire's accounting records for the cost of the land? A) $143,200 B) $120,000 C) $127,200 D) $136,000
38) Hacienda Realty, a real estate management company, buys land that contains an abandoned apartment building for $9,000,000. It pays a construction company $1,000,000 to demolish the apartment building. Which of the following is correct? A) The company would record $10,000,000 million as the cost of the land. B) The company would record $9,000,000 as the cost of the land. C) The company would record $8,000,000 as the cost of the land. D) The company would record $1,000,000 as demolition expense.
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39) Tolleson Enterprises buys a computer system for $2,400,000 and pays the vendor $160,000 to install the computer system. Tolleson should record: A) $2,400,000 as equipment and $160,000 as expenses. B) $2,560,000 as expenses. C) $2,240,000 as equipment and the rest as expenses. D) $2,560,000 as equipment.
40)
Generally, freight costs incurred when a long-lived asset is purchased should be: A) expensed in the period incurred. B) deducted from the Accumulated Depreciation account. C) added to the cost of the asset. D) not recorded in the accounts.
41) The costs assigned to the individual assets acquired in a basket purchase are based on their relative: A) historical costs. B) market values. C) book values. D) depreciable costs.
42) Tonto Company purchased property for $105,000. The property included a building, equipment and land. The building was appraised at $64,000, the land at $46,000, and the equipment at $19,000. What is the amount of cost to be allocated to the building in the accounting records? (Round your intermediate calculations to 3 decimal places.)
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A) $0 B) $105,000 C) $52,080 D) $64,000
43) Tonto Company purchased property for $280,000. The property included a building, equipment and land. The building was appraised at $173,600, the land at $126,000, and the equipment at $50,400. What is the amount of cost to be allocated to the building in the accounting records? A) $93,333 B) $138,880 C) $173,600 D) $280,000
44) A company acquired property that included land, building and equipment for a total cost of $163,000. The land was appraised at $87,500, the building at $35,000, and the equipment at $52,500. What should be the allocation of the total cost in the accounting records? A) Land $75,000; Building $30,000; Equipment $45,000 B) Land $75,000; Building $30,800; Equipment $46,200 C) Land $87,500; Building $35,000; Equipment $52,500 D) Land $81,500; Building $32,600; Equipment $48,900
45) Why should a company divide up the cost of a "basket purchase" among the different assets purchased? A) A company with a longer list of assets will appear to be stronger. B) Some of the assets might be paid for more quickly than others. C) The different assets might be depreciated over different useful lives. D) Baskets are not long-lived assets.
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46) A company bought land and a building for $128,000. The building has a useful life of 20 years. Why should the company split the $128,000 cost between the land and the building? A) Land is not depreciated, while the building will be depreciated over its 20-year useful life. B) The cost should not be split between the land and building. C) The land will be depreciated over 40 years and the building will be depreciated over 20 years. D) Both the land and the building will be depreciated over 20 years.
47) Olivia Taylor Company built three houses for a total cost of $192,000. Appraisal values for the three completed houses were: white house, $48,000, blue house $72,000, and green house $120,000. Using the basket purchase allocation, the recorded value of the green house should be: A) $96,000. B) $120,000. C) $64,000. D) $80,000.
48) Sheridan Manufacturing purchased a new building with the surrounding land. The price paid was $2,400,000, including the commission charged on the sale. An appraisal of the land and building at the time of purchase indicated that the market value of the land was $2,000,000 and the market value of the building was $1,000,000. What amounts would be recorded for the purchase of the two assets? A) Land $1,600,000, Building $800,000 B) Land $2,000,000, Building $1,000,000 C) Land $2,000,000, Building $400,000 D) Land $1,400,000, Building $1,000,000
49) Crown King Burgers purchased new soda machines for $900,000 and pays $100,000 for installation costs. One-half of the total cost or $500,000 is paid in cash; a note in the amount of $500,000 is signed. How should the company record this transaction? Version 1
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A) Debit Cash for $500,000, debit Notes Payable for $500,000, and credit Equipment for $1,000,000. B) Debit Equipment for $1,000,000, credit Cash for $500,000, and credit Notes Payable for $500,000. C) Debit cash for $500,000, debit Notes Payable for $500,000, credit Equipment for $900,000, and credit Operating Expenses for $100,000. D) Debit Equipment for $900,000, debit Operating Expenses for $100,000, credit cash for $500,000, and credit Notes Payable for $500,000.
50) A company purchased office equipment for $24,500 and paid $1,470 in sales tax, $550 for installation, $3,200 for a needed adjustment to the equipment, and $2,600 for supplies that will be used for periodic routine maintenance. How should the company record this transaction? A) Debit Equipment for $24,500, debit Repairs and Maintenance Expense for $5,220, debit Supplies for $2,600, and credit Cash for $32,320. B) Debit Equipment for $29,720, debit Supplies for $2,600, and credit Cash for $32,320. C) Debit Equipment for $25,970, debit Repairs and Maintenance Expense for $3,750, debit Supplies for $2,600, and credit Cash for $32,320. D) Debit Equipment and credit Cash for $32,320.
51)
Ordinary repairs and maintenance: A) are part of the asset cost of equipment and facilities. B) are recorded as expenses. C) are always recorded as liabilities. D) improve the asset beyond the current accounting period.
52)
Extraordinary repairs:
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A) are revenue expenditures. B) extend an asset's life beyond the original estimate. C) are expensed as incurred. D) are credited to Accumulated Depreciation.
53) Which of the following accurately describes the treatment of ordinary and extraordinary repairs? A) Ordinary repairs are expensed as incurred; extraordinary repairs are expensed as incurred. B) Ordinary repairs are treated as a capital expenditure; extraordinary repairs are expensed as incurred. C) Ordinary repairs are expensed as incurred; extraordinary repairs are treated as a capital expenditure. D) Ordinary repairs are treated as a capital expenditure; extraordinary repairs are treated as a capital expenditure.
54) If a truck's engine is overhauled for $8,000, the journal entry would normally include a debit to: A) Vehicles. B) Accounts Payable. C) Depreciation Expense. D) Cash.
55)
The primary difference between ordinary repairs and extraordinary repairs is:
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A) ordinary repairs cost less. B) ordinary repairs are expenditures for routine maintenance and upkeep, whereas extraordinary repairs increase an assets economic usefulness in the future through increased efficiency, capacity, or longer life. C) extraordinary repairs only maintain the asset for a short time, whereas ordinary repairs increase the usefulness of assets beyond their original condition. D) extraordinary repairs are expenditures, not expenses.
56) Which of the following statements most appropriately describes the purpose of depreciating a long-lived tangible asset? A) To indicate how the asset has physically deteriorated. B) To show that the asset will eventually and gradually become obsolete. C) To record that the asset's market value declines over time. D) To match the cost of the asset to the period in which it generates revenue.
57)
Accumulated Depreciation is classified as a(n): A) expense account. B) contra-asset account. C) liability account. D) stockholders' equity account.
58)
Accumulated Depreciation: A) appears in the asset section of a balance sheet. B) appears on the income statement. C) is a liability on the balance sheet. D) is a contra-stockholders' equity item.
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59) Riley, Incorporated began the year with Property and Equipment costing $1,020,000 and accumulated depreciation of $180,000. The only change affecting the long-lived assets account during the year is the $82,500 of depreciation expense that must be recorded for the year. What is the amount of Property and Equipment, net, to be reported on the balance sheet at the end of the year? A) $1,020,000 B) $937,500 C) $757,500 D) $840,000
60)
When a company records depreciation, it debits: A) a liability account and credits Depreciation Expense. B) Depreciation Expense and credits Cash. C) Depreciation Expense and credits a contra-asset account. D) a long-lived tangible asset account and credits Depreciation Expense.
61)
The carrying value of a long-lived asset is referred to as its: A) residual value. B) book value. C) market value. D) sales value.
62)
The book value of a long-lived tangible asset is equal to:
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A) its acquisition cost less the accumulated depreciation from the acquisition date to the balance sheet date. B) its acquisition cost plus accumulated depreciation from the acquisition date to the balance sheet date. C) the amount that could be obtained for the asset on the balance sheet date if it were sold. D) the annual cost of carrying the asset in inventory.
63)
Which of the following is not the same as book value? A) Carrying value B) Cost less accumulated depreciation C) Unused cost D) Market value
64) Forest Grove Industries has long-lived tangible assets with a cost of $350,000; its Accumulated Depreciation account has a balance of $110,000. Which of the following statements is correct? A) The carrying value of long-lived assets is $240,000. B) The market value of long-lived assets is $350,000. C) The carrying value of long-lived assets is $350,000. D) The market value of long-lived assets is $460,000.
65) The cost of a new building that is currently under construction, not for sale but for a company's own use, is reported on the balance sheet: A) as an asset called Work in Process. B) after construction is complete. C) as an asset called Construction in Progress. D) as a liability until construction is complete.
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66) Larkspur, Incorporated paid $82,000 cash for piece of land to be used for a new corporate headquarters building. What is the effect of this transaction on the accounting equation? A) One asset increases, while another asset decreases. B) Total assets increase, and total liabilities increase. C) Total assets increase, and total stockholders' equity increases. D) Total assets decrease, and total liabilities decrease.
67)
Tangible assets are initially recorded at: A) all costs to acquire them and prepare them for use. B) current market value or resale value. C) the amount of cash paid for them. D) cost minus residual (or salvage) value.
68)
All costs to get an asset in place and ready for use should be: A) expensed. B) capitalized. C) recorded as construction in progress. D) recorded only when they are paid in cash.
69) Larkspur, Incorporated bought an abandoned hunting lodge, which it tore down at a cost of $78,000 and replaced with a new lodge. The demolition cost should be: A) expensed. B) capitalized. C) a liability. D) an addition to contributed capital.
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70) Ms. Gardenia, the company bookkeeper, recorded the annual repair costs on the company's machinery as an increase to the Machinery account. As a result, which of the following statements correctly describes this situation? A) Assets will be overstated. B) Stockholders' equity will be understated. C) Expenses will be overstated. D) Liabilities will be overstated.
71) Executives at WorldCom committed an $11 billion fraud by capitalizing costs that should have been expensed. This fraud had many effects on WorldCom's balance sheet. Which of the following does not describe one of the misstatements that resulted on the company's balance sheet? A) Total assets were too high. B) Retained earnings were too high. C) The balance sheet was in balance. D) Total liabilities were too low.
72)
When a company capitalizes a cost, its ________ increase. A) assets B) liabilities C) expenses D) revenues
73)
Which of the following statements about capitalized costs and expenses is correct? A) Capitalized costs decrease stockholders' equity. B) Expenses increase stockholders' equity. C) Capitalized costs increase long-lived assets. D) Expenses increase assets.
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74) Luxton Limited signed a $378,000, 5-year note payable to buy a new machine. Luxton paid $6,000 cash for transportation of the machine and $900 cash for installation costs. What is the overall effect of this transaction on the accounting equation? A) Total liabilities increase by $384,900. B) Machinery, an asset, increases by $378,000. C) Total assets increase by $378,000. D) Total liabilities increase by $371,100.
75) Which of the following costs associated with long-lived assets are expensed (rather than capitalized)? A) Extraordinary repairs and maintenance B) Delivery costs C) Interest on loans to purchase the assets D) Installation costs
76) Shenandoah Skies bought land to be used for a new ski resort. Which of the following costs should not be capitalized? A) $5,000,000 paid to purchase the land B) $5,000 paid to Jack Mogul for a title search C) $50,000 paid to cut down timber to make way for ski runs D) $7,500 paid for a party to celebrate the grand opening
77) Superior, Incorporated just bought a new machine to be used on its production line. Which of these costs should not be capitalized?
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A) The $600,000 invoice price of the machine. B) The $18,000 freight bill to deliver the machine to Superior's factory. C) The $9,600 cost of tearing down Superior's factory wall to get the machine inside. D) The $520 increase in annual insurance costs for the machine.
78)
Which of the following items does not affect the calculation of depreciation expense? A) Economic benefits generated by the asset. B) Useful life of the asset. C) Residual value of the asset. D) Capitalized cost of the asset.
79) Your company buys a computer server that it expects to use for eight years and then intends to sell it to upgrade to a more powerful model. The server would probably be used by the business that buys it at that time for another three years. The useful life of the server for your company is: A) eight years. B) eleven years. C) five years. D) three years.
80) Holly, Incorporated has a building that originally cost $450,000. Holly expects to be able to sell the facility for $109,000 at the end of its useful life. The balance of the related Accumulated Depreciation account is $302,000. The residual value of the facility is: A) $341,000. B) $109,000. C) $193,000. D) $148,000.
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81) Holly, Incorporated has a building that originally cost $562,500. Holly expects to be able to sell the facility for $160,500 at the end of its useful life. The balance of the related Accumulated Depreciation account is $387,000. The residual value of the facility is: A) $175,500. B) $226,500. C) $402,000. D) $160,500.
82)
The book value of a depreciable asset can never be less than its: A) historical cost. B) market value. C) capitalized cost. D) residual value.
83) Holly, Incorporated has a building that originally cost $470,000. Holly expects to be able to sell the facility for $117,000 at the end of its useful life. The balance of the related Accumulated Depreciation account is $310,000. The depreciable cost of the facility is: A) $160,000. B) $193,000. C) $353,000. D) $117,000.
84) Holly, Incorporated has a building that originally cost $562,500. Holly expects to be able to sell the facility for $160,500 at the end of its useful life. The balance of the related Accumulated Depreciation account is $387,000. The depreciable cost of the facility is:
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A) $175,500. B) $226,500. C) $402,000. D) $160,500.
85)
Which of the following statements about the end of an asset's life is correct? A) At the end of an asset's life, its book value should equal its depreciable cost. B) At the end of an asset's life, the Accumulated Depreciation should equal the residual
value. C) Assets are depreciated below residual value only when the double-declining balance method is used. D) At the end of an asset’s life, the book value would equal zero if there is no residual value.
86) Which of the following is not an amount that is needed to calculate straight-line depreciation? A) The cost of the asset. B) An estimate of the asset's useful economic life to the company. C) The estimated amount that the company will receive when it disposes of the asset. D) The cost the company will be required to incur to replace the asset.
87)
Which of the following statements about straight-line depreciation is correct?
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A) Straight-line depreciation is the most common method of depreciation used in the U.S. for financial reporting but is not commonly used for taxes. B) When the straight-line method is used to compute depreciation, an asset's carrying value remains constant over the life of the asset. C) Straight-line depreciation is an approved method to allocate the cost of an asset to expense and it serves as a measure of the physical decline in the asset. D) The straight-line method of depreciation results in a straight-line increase of depreciation expense over the life of an asset.
88) Avalon Industries buys equipment for $122,000, expects to use it for ten years, and then sell it for $12,200. Using the straight-line method, the company should report annual depreciation for the equipment of: A) $12,200. B) $10,980. C) $21,960. D) $25,010.
89) Avalon Industries buys equipment for $24,000, expects to use it for ten years, and then sell it for $3,000. Using the straight-line method, the company should report annual depreciation for the equipment of: A) $2,100. B) $4,200. C) $2,400. D) $4,800.
90) On January 1, Weldon Weston Company purchased equipment for $250,000. It has an estimated useful life of five years and its residual value is $25,000. The company has a calendar year-end. Using the straight-line method, depreciation expense for the first year of its life equals:
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A) $45,000. B) $50,000. C) $90,000. D) $100,000.
91) MacKenzie Manufacturing purchased equipment for $160,000. In addition, shipping charges of $2,000 were incurred to obtain the equipment. The company paid $12,500 to construct a foundation and install the equipment. The equipment is estimated to have a residual value of $15,000 at the end of its 5-year useful life. Using the straight-line method, what is the amount of depreciation expense each year? A) $34,900 B) $34,500 C) $31,900 D) $29,900
92) MacKenzie Manufacturing purchased equipment for $160,000. In addition, shipping charges of $2,000 were incurred to obtain the equipment. The company paid $12,500 to construct a foundation and install the equipment. The equipment is estimated to have a residual value of $15,000 at the end of its 5-year useful life. Using the straight-line method, what is the book value of the equipment at the end of the third full year of use? A) $78,800 B) $55,300 C) $71,000 D) $63,800
93) Which of the following statements is correct when the straight-line method is used to compute depreciation?
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A) The carrying value of an asset is a constant amount during the asset's useful life. B) Accumulated depreciation is a constant amount during the asset's estimated useful life. C) Depreciation Expense is a constant amount each period. D) The book value of an asset is an increasing amount during the asset's useful life.
94) Hearth Company uses the units-of-production method to estimate depreciation. The company purchased a new machine for $56,000 that will produce an estimated 410,000 units over its useful life. The estimated residual value of the machine is $4,000. What is the depreciation rate per unit? A) $0.13 B) $0.14 C) $1.14 D) $1.13
95) Hearth Company uses the units-of-production method to estimate depreciation. The company purchased a new machine for $45,000 that will produce an estimated 100,000 units over its useful life. The estimated residual value of the machine is $5,000. What is the depreciation rate per unit? A) $4.00 B) $4.50 C) $0.40 D) $0.45
96) Marshall Company purchases a machine for $860,000. The machine has an estimated residual value of $60,000. The company expects the machine to produce four million units. The machine is used to make 740,000 units during the current period. If the units-of-production method is used, the depreciation rate is:
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A) $0.20 per unit. B) $1.16 per unit. C) $1.08 per unit. D) $0.08 per unit.
97) Marshall Company purchases a machine for $800,000. The machine has an estimated residual value of $40,000. The company expects the machine to produce two million units. The machine is used to make 400,000 units during the current period. If the units-of-production method is used, the depreciation rate is: A) $1.90 per unit. B) $0.38 per unit. C) $0.10 per unit. D) $2.00 per unit.
98) Marshall Company purchases a machine for $640,000. The machine has an estimated residual value of $100,000. The company expects the machine to produce two million units. The machine is used to make 660,000 units during the current period. If the units-of-production method is used, the depreciation expense for this period is: A) $178,200. B) $211,200. C) $660,000. D) $560,000.
99) Marshall Company purchases a machine for $800,000. The machine has an estimated residual value of $40,000. The company expects the machine to produce two million units. The machine is used to make 400,000 units during the current period. If the units-of-production method is used, the depreciation expense for this period is:
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A) $160,000. B) $800,000. C) $152,000. D) $760,000.
100) Transport Incorporated has a fleet of 10 large trucks that cost a total of $1,410,000. The fleet is expected to be driven a total of 1,000,000 miles during its estimated 10-year life and be sold for $141,000 at the end of its useful life. If the fleet was driven 125,000 miles during the current year, what is the amount of depreciation that would be calculated using the straight-line and units-of-production methods, respectively? A) $158,625 and $141,000 B) $141,000 and $158,625 C) $126,900 and $176,250 D) $126,900 and $158,625
101) On January 1, Luke Denton Company purchased a truck for $125,000 which has an estimated productive life of 100,000 miles. Its residual value is $12,500. During the first full year of its useful life, the company drove the truck 25,000 miles. Its depreciation expense for the year using the units of production method is: A) $22,500. B) $25,000. C) $28,125. D) $31,250.
102) City View Limousine depreciates its stretch Hummer using the units-of-production depreciation method and bases usage on the miles driven per year. The estimated useful life of the vehicle is 250,000 miles. The vehicle was purchased for $115,000 and is not expected to have any residual value at the end of its life. It was driven a total of 40,000 miles during the first year of its useful life and 25,000 miles during the second year. What is the amount of Accumulated Depreciation recorded on the vehicle at the end of those two years?
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A) $70,769 B) $29,900 C) $46,000 D) $18,400
103) A company paid $507,000 to purchase equipment and $15,700 to have the equipment delivered to and installed in the company's production facilities. The equipment is expected to be used a total of 28,700 hours throughout its estimated useful life of seven years. The estimated residual value of the equipment is $5,700. The company began using the equipment on May 1, 2021. The company has an October 31, 2021 year-end. It used the equipment for a total of 11,900 hours between May 1 and October 31, 2021. Using the units-of-production method, what amount of depreciation expense would the company report in the income statement prepared for the year-ended October 31, 2021? A) $107,183 B) $208,366 C) $214,366 D) $517,000
104) A company paid $500,000 to purchase equipment and $15,000 to have the equipment delivered to and installed in the company's production facilities. The equipment is expected to be used a total of 28,000 hours throughout its estimated useful life of six years. The estimated residual value of the equipment is $5,000. The company began using the equipment on May 1, 2021. The company has an October 31, 2021 year-end. It used the equipment for a total of 11,200 hours between May 1 and October 31, 2021. Using the units-of-production method, what amount of depreciation expense would the company report in the income statement prepared for the year-ended October 31, 2021? A) $102,000 B) $198,000 C) $204,000 D) $206,000
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105)
At the end of the first year of an asset's life, the declining-balance depreciation method:
A) causes an asset to be carried at a higher book value than that computed using the straight-line method. B) causes an asset to be carried at a lower book value than that computed using the straight-line method. C) causes an asset to be carried at the same book value as that computed using the straight-line method. D) cannot be used if the resulting book value will be significantly different from that which would result from using the straight-line method.
106) A company would most likely choose the double-declining balance depreciation method for which of the following long-lived tangible assets? A) Vehicles B) Office buildings C) Warehouses D) Land improvements
107) One difference between the double-declining-balance method and the straight-line method is that the double-declining-balance method: A) reduces book value below residual value. B) does not consider the useful life of the asset in the calculation of depreciation. C) cannot be used for tax purposes. D) uses book value instead of depreciable cost in the calculation of depreciation.
108) Martin Company’s building has a 20-year useful life and a residual value equal to 20% of the building's original cost. If the double-declining balance method is used, what depreciation rate would be used?
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A) 4.5% B) 5% C) 9% D) 10%
109) Pebble Beach Company buys a piece of equipment for $54,000. The equipment has a useful life of three years. No residual value is expected at the end of the useful life. Using the double-declining-balance method, what is the company's depreciation expense in the first year of the equipment’s useful life? (Do not round intermediate calculations.) A) $36,000 B) $13,500 C) $18,000 D) $27,000
110) Pebble Beach Company buys a piece of equipment for $24,000. The equipment has a useful life of ten years. No residual value is expected at the end of the useful life. Using the double-declining-balance method, what is the company's depreciation expense in the first year of the equipment's useful life? A) $4,800 B) $6,000 C) $2,400 D) $12,000
111) On January 1, 2021, Lamar, Incorporated purchased equipment for $250,000. It has an estimated useful life of five years, and its residual value is $25,000. If it uses the double declining balance method, what is the amount of accumulated depreciation as of December 31, 2022?
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A) $90,000 B) $100,000 C) $160,000 D) $200,000
112) The formula for calculating depreciation expense using the double declining-balance method involves which of the following? A) Multiplying a declining percentage by a constant book value B) Multiplying a constant percentage by the previous year's depreciation expense C) An increasing amount of depreciation expense each period D) Not utilizing the residual value in calculating each year's depreciation expense
113) Morten Company, which uses the double-declining-balance method of depreciation, purchased a new machine on January 1, 2021. The machine cost $160,000, had an estimated useful life of 8 years and $20,000 residual value at the end of its useful life. What is the depreciation expense for 2021? A) $20,000 B) $40,000 C) $10,000 D) $30,000
114) Morten Company, which uses the double-declining-balance method of depreciation, purchased a new machine on January 1, 2021. The machine cost $160,000, had an estimated useful life of 8 years and $20,000 residual value at the end of its useful life. What is the balance of the Accumulated Depreciation account at the end of 2022? A) $30,000 B) $90,000 C) $40,000 D) $70,000
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115) A machine is purchased on January 1, 2021, for $114,000. It is expected to have a useful life of five years and a residual value of $17,000. The company closes its books on December 31. Under the double-declining balance method, what is the total amount of depreciation to be expensed during the 2022? A) $27,360 B) $51,000 C) $45,600 D) $68,400
116) A machine is purchased on January 1, 2021, for $90,000. It is expected to have a useful life of five years and a residual value of $5,000. The company closes its books on December 31. Under the double-declining balance method, what is the total amount of depreciation to be expensed during the 2022? A) $21,600 B) $22,000 C) $22,400 D) $34,000
117) A piece of equipment was acquired on January 1, 2021, at a cost of $36,000, with an estimated residual value of $4,000 and an estimated useful life of four years. The company uses the double-declining-balance method. What is its book value at December 31, 2022? A) $9,000 B) $16,000 C) $18,000 D) $20,000
118) A piece of equipment was acquired on January 1, 2021, at a cost of $22,000, with an estimated residual value of $2,000 and an estimated useful life of four years. The company uses the double-declining-balance method. What is its book value at December 31, 2022?
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A) $5,500 B) $10,000 C) $11,000 D) $12,000
119) Tidy Limited purchased a new van on January 1, 2021. The van cost $32,000. It has an estimated life of eight years and the estimated residual value is $4,000. Tidy uses the doubledeclining-balance method to compute depreciation. What is the depreciation expense for 2021? A) $4,000 B) $3,500 C) $7,000 D) $8,000
120) Tidy Limited purchased a new van on January 1, 2021. The van cost $20,000. It has an estimated life of five years and the estimated residual value is $5,000. Tidy uses the doubledeclining-balance method to compute depreciation. What is the depreciation expense for 2021? A) $4,000 B) $3,000 C) $6,000 D) $8,000
121) Tidy Limited purchased a new van on January 1, 2021. The van cost $30,000. It has an estimated life of eight years and the estimated residual value is $6,000. Tidy uses the doubledeclining-balance method to compute depreciation. What is the adjusted balance in the Accumulated Depreciation account at the end of 2022?
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A) $1,875 B) $3,750 C) $11,250 D) $13,125
122) Tidy Limited purchased a new van on January 1, 2021. The van cost $20,000. It has an estimated life of five years and the estimated residual value is $5,000. Tidy uses the doubledeclining-balance method to compute depreciation. What is the adjusted balance in the Accumulated Depreciation account at the end of 2022? A) $3,200 B) $4,800 C) $9,600 D) $12,800
123) A company bought a piece of equipment for $49,200 and expects to use it for eight years. The company then plans to sell it for $5,400. The company has already recorded depreciation of $42,632.60. Using the double-declining-balance method, what is the company's annual depreciation expense for the upcoming year? (Round your answer to the nearest whole dollar amount.) A) $1,642. B) $11,300. C) $1,167. D) $19,200.
124) A company bought a piece of equipment for $40,000 and expects to use it for eight years. The company then plans to sell it for $3,500. The company has already recorded depreciation of $35,995. Using the double-declining-balance method, what is the company's annual depreciation expense for the upcoming year?
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A) $1,001 B) $9,125 C) $505 D) $10,000
125) The straight-line depreciation method and the double-declining-balance depreciation method: A) produce the same total depreciation over the asset's useful life. B) produce the same amount of depreciation expense each year. C) produce the same book value each year. D) are the only acceptable methods of depreciation for financial reporting.
126)
Which of the following statements about depreciation methods is not correct?
A) The amount of depreciation expense recorded in each year of an asset's life depends on the method that is used. B) Different depreciation methods can be used for different classes of assets provided the methods are used consistently over time so that financial statement users can compare results across periods. C) At the end of an asset's life, after it has been fully depreciated, the total amount of depreciation will equal the asset's depreciable cost. D) The amount of net income reported each year will be the same regardless of the depreciation method used.
127) The units-of-production method provides the closest matching of a long-lived asset's depreciation expense to the revenues generated by using that asset when the:
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A) amount of production is the highest in the early years of an asset's life and lower in later years. B) long-lived asset is used by a merchandising operation. C) amount of production remains fairly constant from one period to the next. D) amount of asset production varies significantly from one period to the next.
128) On September 1, Emil Rovey purchased a vehicle for $108,000 with a residual value of $9,000. The estimated useful life is 9 years and the company uses the straight-line method. What is the depreciation expense for the year ended December 31? (Round your answer to the nearest whole dollar amount.) A) $3,667 B) $2,750 C) $11,000 D) $4,000
129) On September 1, Emil Rovey purchased a vehicle for $57,500 with a residual value of $7,500. The estimated useful life is 5 years and the company uses the straight-line method. What is the depreciation expense for the year ended December 31? A) $3,333 B) $2,500 C) $10,000 D) $3,833
130) Chuck Daniels Auto acquired a hydraulic lift on August 1, 2021. The lift cost $165,000, had an estimated useful life of 10 years and a residual value of $16,500 at the end of its useful life. What amount of depreciation expense would be recognized under the double-decliningbalance method for the year ending December 31, 2021?
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A) $13,750 B) $16,500 C) $33,000 D) $19,250
131)
Many companies use accelerated depreciation in computing taxable income because:
A) it reports higher net income in the early years as compared to other methods. B) it is required by IFRS. C) it is easier than straight-line deprecation. D) it postpones tax payments until later years because it lowers taxable income in the early years.
132) Which of the following depreciation methods is used by most corporations to calculate depreciation expense for their tax returns? A) MACRS B) Straight-line C) Units-of-production D) Double-declining balance
133)
A company should depreciate a long-lived tangible asset to: A) match part of the cost of the asset with the revenues generated by the asset. B) record the decrease in the market value of the asset as it gets older. C) report less income and pay less income tax. D) decrease the total value of its assets, so that it can justify buying new ones.
134)
Matching part of the cost of a long-lived asset with the revenues generated by the asset is:
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A) a basket purchase. B) not required by GAAP. C) not required by IFRS. D) depreciation.
135)
Recording depreciation is an application of the: A) expense recognition principle ("matching"). B) cost principle. C) separate entity assumption. D) unit-of-measure assumption.
136) Xit Company bought a new delivery truck. The manufacturer says that the truck should last for ten years or 120,000 miles. Xit plans to use the truck for 4 years, during which it will be driven 50,000 miles. What is the useful life of the truck for straight-line depreciation purposes? A) 50,000 miles B) 10 years C) 4 years D) 120,000 miles
137)
Depreciable cost equals an asset's cost: A) divided by its useful life. B) minus its residual (or salvage) value. C) minus accumulated depreciation. D) plus its residual (or salvage) value.
138) Orangewood Industries bought a new cash register for $7,500. Orangewood plans to use the cash register for 4 years and then sell it for $600. The cash register's depreciable cost equals:
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A) $7,500. B) $600. C) $1,725. D) $6,900.
139) Orangewood Industries bought a new cash register for $7,500. Orangewood originally planned to use the cash register for 4 years and then sell it for $600. After 4 years, Orangewood had recorded $6,900 of depreciation. If the company continues to use the cash register, still planning to sell it eventually for $600, then Orangewood should record: A) no additional depreciation. B) $600 of additional depreciation. C) $1,725 of additional depreciation. D) the removal of the cash register from its books because it is fully depreciated.
140)
An asset's residual value is: A) the estimated amount it can be sold for at the end of its useful life. B) its cost minus its accumulated depreciation. C) its cost plus any costs to install it and place it in service. D) equal to its accumulated depreciation.
141)
Which account is credited in a journal entry to record depreciation on machinery? A) Depreciation Expense B) Accumulated Depreciation C) Machinery D) Cash
142) Ms. Gardenia, the bookkeeper, made a mistake and recorded depreciation expense for the year twice. This error will cause: Version 1
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A) assets to be overstated. B) liabilities to be understated. C) stockholders' equity to be understated. D) stockholders' equity to be overstated.
143)
An asset's book value or carrying value is its: A) cost minus accumulated depreciation. B) cost minus salvage or residual value. C) cost minus salvage or residual value and accumulated depreciation. D) accumulated depreciation.
144)
An asset's cost minus accumulated depreciation is its ________ value. A) book B) market C) residual D) salvage
145) Which of the following is a reason why all companies do not use the same deprecation method? A) US income tax regulations require that a company use the same depreciation method for both financial reporting and income taxes. B) Different depreciation methods might better reflect the pattern in which the asset’s economic benefits are used. C) All companies do use the same depreciation method. D) Only large companies are allowed to use some of the more complicated depreciation methods.
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146) On January 1, 2021, Orangewood Industries bought a new cash register for $7,500. Orangewood plans to use the cash register for 4 years and then sell it for $600. If Orangewood uses straight-line depreciation, depreciation expense for the year ended December 31, 2021 equals: A) $1,725. B) $5,625. C) $1,875. D) $5,775.
147) On January 1, 2021, Busy Beaver, Incorporated signed a $315,000, 5 year note payable to buy a new industrial veneer cutter. Busy Beaver plans to use the machine for 10 years and then sell it for its scrap value of $5,000. Using straight-line depreciation, depreciation expense for the year ended December 31, 2021 equals: A) $31,000. B) $31,500. C) $284,000. D) $283,500.
148)
The straight-line depreciation method:
A) reports an equal amount of depreciation expense each year. B) reports a higher amount of depreciation expense in the early years of an asset's use. C) reports more depreciation expense in a year when an asset is heavily used and less in a year when the asset is hardly used at all. D) can be used only by small companies.
149)
At the end of a depreciable asset's useful life, its book value equals its:
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A) accumulated depreciation. B) depreciation expense. C) depreciable cost. D) residual value.
150)
An asset's useful life is based on the: A) asset's depreciable cost. B) useful economic life to the company. C) asset's residual value. D) schedule required by the IRS.
151) On January 1, 2021, Xit Company bought a new delivery truck for $30,000. Xit plans to use the truck for 4 years, during which it will be driven 50,000 miles. The truck will be worthless at the end of the 4 years. If the truck was driven 15,000 miles in 2021, Depreciation Expense using units-of-production is: A) $9,000. B) $3,750. C) $7,500. D) $15,000.
152) On January 1, 2021, Busy Beaver bought a new industrial lathe for $210,000. It expects to use the lathe for 10,000 hours over the next 5 years and then sell it for $10,000. Busy Beaver used the lathe for 2,000 hours in 2021 and 2,500 hours in 2022. Accumulated Depreciation at December 31, 2022, using units-of-production, equals: A) $50,000. B) $120,000. C) $90,000. D) $80,000.
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153) Why can depreciation expense be a different amount each year using the units-ofproduction method? A) The method calculates expense based on the relationship between each year's output and total estimated output. B) The method calculates expense based on cost divided by the expected useful life. C) The units-of-production method is an accelerated depreciation method. D) The units-of-production method is based on the difference in the appraisal value of the asset from one year to the next.
154) On January 1, 2020, Xit Company bought a new delivery truck for $30,000. Xit plans to use the truck for 4 years, after which it will be sold for $6,000. Depreciation expense for 2023, the fourth year of use, using double-declining-balance equals: A) $1,500. B) $3,750. C) $6,000. D) $0.
155)
Which of the following statements about depreciation is correct?
A) A company must use the same depreciation method for all classes of assets consistently over time. B) A company may use different methods of depreciation for any class of asset and may change methods as it sees fit. C) A company must use straight-line depreciation for tax reporting. D) A company may use different depreciation methods for different classes of assets from one year to the next.
156) On January 11, 2021, Orangewood Industries bought a new cash register for $7,500. In calculating depreciation expense for the year ended December 31, 2021, Orangewood's accountant will assume that the cash register was purchased on:
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A) January 1, 2021 B) January 11, 2021 C) January 31, 2021 D) February 1, 2021
157) On October 21, 2021, Xit Company bought a new delivery truck for $30,000. In calculating depreciation expense for the year ended December 31, 2021, Xit's accountant will assume that the truck was purchased on: A) November 1, 2021. B) October 1, 2021. C) October 21, 2021. D) January 1, 2021.
158) On September 1, 2021, Acme, Incorporated, sold its sales manager's company car. The car was purchased in 2014 and was not yet fully depreciated. How many months of depreciation expense should Acme record on the car for the year ended December 31, 2021? A) 9 B) 12 C) 8 D) 0
159) On June 22, 2021, Ace Electronics sold an office building, which was not yet fully depreciated. How many months of depreciation expense should Ace record on the building for the year ended December 31, 2021? A) 6 B) 7 C) 12 D) 0
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160)
Why does the IRS allow larger depreciation amounts in the early years of an asset's life?
A) The calculations are easier if you allow more depreciation in the early years of an asset's life. B) The government wants to encourage companies to invest in assets to promote economic renewal and growth. C) So that most income taxes are paid by average taxpayers, rather than by big corporations. D) The calculations are more complicated, so it provides more jobs for accountants and thus stimulates the economy.
161)
The "least and latest rule" is:
A) that a taxpayer should pay the least tax legally permitted at the latest date allowed. B) an inventory management system similar to LIFO, where the least amount of inventory on hand is from the latest purchases from suppliers. C) the latest information technology is the least commonly used in accounting practice. D) the least competent employees are always the latest to show up for work.
162)
Under what circumstances should a company record an asset impairment loss?
A) When residual value is greater than the repairs and maintenance expenses needed to keep up the asset. B) When book value is less than the residual value of the asset. C) When Accumulated Depreciation equals the purchase cost of the asset. D) When book value is greater than the fair value of the asset.
163)
How does an asset impairment loss impact a company's financial statements?
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A) It increases expenses and decreases both revenue and net income. B) It decreases assets, stockholders' equity, and net income. C) It increases expenses and decreases net income with no effect on any other items. D) It increases liabilities and decreases stockholders' equity.
164) Beta Company recorded a loss due to impairment of some of its assets. As a result of this journal entry: A) liabilities are increased. B) revenues are decreased. C) stockholders' equity is increased. D) assets are decreased.
165)
Which of the following statements about asset impairment is correct?
A) Asset impairment losses appear on a company's income statement every year. B) When a company records an asset impairment loss, it will increase net income for that period. C) Impairment occurs when an asset's book value is less than its current value. D) Asset impairment losses are reported on the income statement as an operating expense.
166) Your company rents computers to local businesses and schools. You have 4,400 computers with a book value of $199,000. As a result of changing technology, your computers are more difficult to rent so you must drastically reduce your rental price, which causes a decrease in estimated future cash flows. The fair value of the computers is estimated to be $143,000 because of their outdated technology. Your company should report an asset impairment loss of:
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A) $199,000. B) $143,000. C) $56,000. D) $0.
167) Your company rents computers to local businesses and schools. You have 1,000 computers with a book value of $160,000. As a result of changing technology, your computers are more difficult to rent so you must drastically reduce your rental price, which causes a decrease in estimated future cash flows. The fair value of the computers is estimated to be $125,000 because of their outdated technology. Your company should report an asset impairment loss of: A) $160,000. B) $125,000. C) $35,000. D) $0.
168) Augusta Hayward Company purchased a building for $800,000. At the end of the current year, the book value of the building is $440,000 and its fair value is $360,000. Assuming the building is rented to a tenant, the sum of future cash flows from the rental of the building is expected to be $320,000. What is the amount of impairment loss? A) $360,000 B) $40,000 C) $80,000 D) $240,000
169)
Loss on Impairment is a(n):
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A) operating expense that appears on the balance sheet. B) reduction to depreciation expense for the year. C) contra-revenue account. D) operating expense that appears on the income statement.
170)
What is the effect of an impairment loss on the accounting equation? A) It increases total assets. B) It has no effect. C) It increases total stockholders' equity. D) It decreases total stockholders' equity.
171)
The write-down of goodwill due to impairment will cause: A) net income to increase. B) intangible assets to decrease. C) property and equipment to decrease. D) long-term liabilities to increase.
172)
Depreciation and impairment are different in that: A) only depreciation results in a decrease in net income. B) only impairment represents the decline in the current value of the related asset. C) only depreciation results in a decrease to total assets. D) only impairment results in a decrease to total assets.
173) A company sells a piece of equipment half-way through the accounting period. The straight-line rate of depreciation on the equipment is $40,000 per year. Before preparing the entry to record the sale of the equipment, the company should first debit:
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A) Depreciation Expense for $40,000 and credit Accumulated Depreciation for $40,000. B) Accumulated Depreciation for $40,000 and credit Cash for $40,000. C) Depreciation Expense for $20,000 and credit Accumulated Depreciation for $20,000. D) Cash for $20,000 and credit Depreciation Expense for $20,000.
174) California Spas recently learned that the value of its building required a write-down because of the discovery that it was on an earthquake fault line. The building cost $2,000,000 and has a book value of $1,570,000 before the discovery and the fair value was $975,000 after the discovery. Which of the following journal entries will be used to record the asset impairment? A) Debit Impairment Loss and credit Accumulated Depreciation for $595,000 B) Debit Depreciation Expense and credit Building for $595,000 C) Debit Accumulated Depreciation and credit Building for $430,000 D) Debit Impairment Loss and credit Accumulated Depreciation for $430,000
175) When a company sells equipment for cash on a date other than the last day of the accounting period, it must: A) record Depreciation Expense for the entire accounting period during which the equipment is sold. B) record the disposal by reducing the Equipment account and increasing a revenue account; a gain or loss is reported if the decrease and increase are not equal. C) first record Depreciation Expense for the period up to the date of sale, and then record the disposal by increasing Cash and decreasing both Equipment and Accumulated Depreciation; a gain or loss is reported if the proceeds from the sale do not equal the asset's book value. D) record Accumulated Depreciation for the entire current accounting period.
176)
A loss on disposal of an asset would be reported:
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A) in the Operating Revenues section of the income statement. B) in the Operating Expenses section of the income statement. C) as a direct increase to the asset account on the balance sheet. D) as a direct decrease to the asset account on the balance sheet.
177)
When a company sells a long-lived asset, stockholders' equity will change by the: A) amount of the sale. B) amount of the asset's book value. C) amount of the asset's Accumulated Depreciation. D) difference between the sales price and the asset's book value.
178) If a fully depreciated asset with no residual value is "retired" to a junk yard without receiving any cash: A) a gain on disposal will be recorded. B) depreciation must be recorded 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.
179) A trucking company sold its fleet of trucks for $56,400. The trucks originally cost $1,476,000 and had Accumulated Depreciation of $1,283,000 recorded through the date of disposal. What gain or loss did the trucking company record when it sold the fleet of trucks? A) Gain of $136,600. B) Gain of $56,400. C) Loss of $56,400. D) Loss of $136,600.
180) A trucking company sold its fleet of trucks for $55,000. The trucks originally cost $1,410,000 and had Accumulated Depreciation of $1,269,000 recorded through the date of disposal. What gain or loss did the trucking company record when it sold the fleet of trucks? Version 1
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A) Gain of $86,000. B) Gain of $55,000. C) Loss of $55,000. D) Loss of $86,000.
181) A company sells equipment for $450,000 when the book value of the equipment is $400,000. The company would record the extra $50,000 as: A) a gain, increasing net income and stockholders' equity. B) revenue, increasing net income and stockholders' equity. C) expenses, decreasing net income and stockholders' equity. D) a loss, decreasing net income and stockholders' equity.
182) Loma Linda, Incorporated sells a long-lived asset that originally cost $216,000 for $66,000 on December 31, 2021. The Accumulated Depreciation account had a balance of $118,000 after the current year's depreciation of $46,600 had been recorded. The company should recognize a: A) $96,800 loss on sale. B) $32,000 gain on sale. C) $32,000 loss on sale. D) $18,600 loss on sale.
183) Loma Linda, Incorporated sells a long-lived asset that originally cost $400,000 for $100,000 on December 31, 2021. The Accumulated Depreciation account had a balance of $220,000 after the current year's depreciation of $90,000 had been recorded. The company should recognize a: A) $200,000 loss on sale. B) $80,000 gain on sale. C) $80,000 loss on sale. D) $50,000 loss on sale.
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184) Morris Lest, Incorporated sold its delivery truck for $500 more than its book value. The sale will result in a(n): A) increase in net income on the income statement. B) increase in Cost of Goods Sold on the income statement. C) decrease in gross profit on the income statement. D) decrease in Accounts Payable on the balance sheet.
185)
A gain on the disposal of an asset occurs when the: A) asset's book value is greater than the selling price. B) asset's cost is greater than the asset's accumulated depreciation. C) selling price is greater than the asset's book value. D) accumulated depreciation is greater than the asset's book value.
186)
Mia Hero Shop sold its table with a book value of $1,000 for $800. Mia Hero will record: A) a loss on the sale of $200. B) a gain on the sale of $200. C) depreciation expense of $200. D) cash received of $1,000.
187) Vango, Incorporated sold its van for $6,000 cash. The van's original cost was $40,000, and its accumulated depreciation was $32,000. When recording the sale, Vango should record a: A) gain of $2,000. B) loss of $2,000. C) loss of $8,000. D) gain of $6,000.
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188) Morris Lest, Incorporated sold its truck and received less cash than the truck's book value. The net effect of this sale on the accounting equation is a(n): A) increase to total assets. B) increase to stockholders' equity. C) decrease to total liabilities. D) decrease to stockholders' equity.
189) An asset is purchased on January 1 for $42,700. It is expected to have a useful life of five years after which it will have an expected residual value of $5,600. The company uses the straight-line method. If it is sold for $31,200 exactly two years after it is purchased, the company will record a: A) gain of $8,160. B) gain of $3,340. C) loss of $3,340. D) loss of $8,160.
190) An asset is purchased on January 1 for $40,000. It is expected to have a useful life of five years after which it will have an expected residual value of $5,000. The company uses the straight-line method. If it is sold for $30,000 exactly two years after it is purchased, the company will record a: A) gain of $6,000. B) gain of $4,000. C) loss of $4,000. D) loss of $6,000.
191) On January 1, 2021, Dunbar Echo Company sells a machine for $23,400. The machine was originally purchased on January 1, 2019 for $40,700. The machine was estimated to have a useful life of 5 years and a residual value of $0. Dunbar Echo uses straight-line depreciation. In recording this transaction:
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A) a loss of $1,020 would be recorded. B) a gain of $1,020 would be recorded. C) a loss of $17,300 would be recorded. D) a gain of $23,400 would be recorded.
192) On January 1, 2021, Dunbar Echo Company sells a machine for $46,000. The machine was originally purchased on January 1, 2019 for $80,000. The machine was estimated to have a useful life of 5 years and a residual value of $0. Dunbar Echo uses straight-line depreciation. In recording this transaction: A) a loss of $2,000 would be recorded. B) a gain of $2,000 would be recorded. C) a loss of $34,000 would be recorded. D) a gain of $46,000 would be recorded.
193) A company purchased a computer system on January 2, 2021 for $1,600,000. The company used the straight-line depreciation method with an estimated useful life of 6 years and a residual value of $130,000. The company prepares financial statements at December 31. Which of the following is correct about the depreciation recorded? A) Accumulated Depreciation will be debited for $266,667. B) The book value of the computer system at December 31, 2021 will be $1,225,000. C) Depreciation expense will be debited for $245,000. D) The depreciable cost of the computer system is $1,600,000.
194) A company purchased a computer system on January 2, 2021 for $1,600,000. The company used the straight-line depreciation method with an estimated useful life of 6 years and a residual value of $130,000. The company prepares financial statements at December 31. Assume the company decides to sell the computer system on July 1, 2023 for $1,000,000. Which of the following statements about the journal entry (or entries) required on July 1 is not correct?
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A) The depreciation expense must be recorded for 6 months, January 1 to July 1. B) The Equipment asset account must be credited for $1,600,000 to record the sale. C) Accumulated Depreciation is debited for $612,500 in the entry to record the sale. D) The loss on the sale is $12,500.
195) Universal Corporation sold a used piece of machinery for $11,000 that it had purchased for $15,000. At the time of the sale, accumulated depreciation relating to the machinery was $6,000. As a result of this sale: A) assets increase by $11,000. B) expenses increase by $2,000. C) net income increases by $2,000. D) assets decrease by $4,000.
196) On December 31, 2021, Far Niente Winery sold a wine press for $545,000; the wine press had originally cost $900,000. Cash was paid by the buyer of the press. Accumulated Depreciation on the press, updated to the date of disposal, was $450,000. What is the journal entry to record the disposal of the asset? A) Debit Cash and credit Gain on Disposal for $95,000. B) Debit Cash for $545,000, debit Accumulated Depreciation for $450,000, credit Gain on Disposal for $95,000, and credit Equipment for $900,000. C) Debit Cash and credit Equipment for $545,000. D) Debit Cash for $545,000, debit Accumulated Depreciation for $260,000, debit Loss on Disposal for $95,000, and credit Equipment for $900,000.
197) On December 31, 2021, Far Niente Winery sold a wine press for $545,000; the wine press had originally cost $900,000. Cash was paid by the buyer of the press. Accumulated Depreciation on the press, updated to the date of disposal, was $450,000. What is the effect of the sale on the balance sheet and income statement of Far Niente reported as of and for the year ended December 31, 2021?
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A) No effect on assets; increase net income. B) Decrease assets; Increase net income. C) Increase assets; Increase net income. D) Decrease assets; Decrease net income.
198) A truck costing $13,400, which has Accumulated Depreciation of $9,140, was sold for $2,140 cash. The entry to record this event would include a: A) gain of $2,120. B) loss of $2,120. C) credit to the Vehicles account for $4,260. D) credit to Accumulated Depreciation for $9,140.
199) A truck costing $12,000, which has Accumulated Depreciation of $9,000, was sold for $2,000 cash. The entry to record this event would include a: A) gain of $1,000. B) loss of $1,000. C) credit to the Vehicles account for $3,000. D) credit to Accumulated Depreciation for $9,000.
200) On January 1, 2021, Manzanita Manufacturing purchased a machine for $345,000 with an expected life of 5 years and a residual value of $37,500. In addition, the company paid delivery costs of $3,000 and $12,000 to have the machine installed. Manzanita uses the doubledeclining-balance method of depreciation. What is the depreciation expense for the first year using the double-declining-balance method? A) $132,000 B) $144,000 C) $132,500 D) $138,000
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201) On January 1, 2021, Manzanita Manufacturing purchased a machine for $345,000 with an expected life of 5 years and a residual value of $37,500. In addition, the company paid delivery costs of $3,000 and $12,000 to have the machine installed. Manzanita uses the doubledeclining-balance method of depreciation. If the company sells the machine at the end of 5 years and receives $28,750, the journal entry to record the sale will include which of the following? A) Debit to Accumulated Depreciation for $345,000 B) Credit to Machine for $345,000 C) Debit to Loss on Sale for $8,750 D) Credit to Residual Value for $30,000
202)
Which of the following statements about disposal of long-lived assets is not correct?
A) The gain or loss resulting from the disposal of a long-lived asset always appears below the "Income from Operations" line on the income statement. B) A journal entry is usually needed to update depreciation expense on a long-lived asset at the time of disposal. C) A company may dispose of long-lived assets by selling them, trading them in on new assets, or by scrapping them. D) The amount of the gain or loss on disposal of a long-lived asset before the end of its useful life will be influenced by the depreciation method that had been used.
203)
Which of the following characteristics is not associated with intangible assets? A) Lack physical substance. B) Those with an unlimited life are not amortized. C) Usually have a residual value. D) Amortization expense is reported each period for those with finite lives.
204)
The balance sheet category "Intangible Assets" includes:
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A) patents, trademarks, and franchises. B) equipment, land, and buildings. C) investments, receivables, and cash. D) goodwill, inventory, and vehicles.
205)
Which of the following intangible assets has an unlimited life? A) Copyrights B) Licensing rights C) Goodwill D) Franchises
206) Which of McGraw-Hill's intangible assets gives it the legal right to prevent you from borrowing a textbook from a friend and photocopying several chapters from the book? A) Patent B) Trademark C) Franchise agreement D) Copyright
207)
The right to exclude others from making or using an invention is a: A) patent. B) copyright. C) franchise. D) licensing right.
208) The MegaHit Film Studio has a licensing right (or agreement) to distribute films produced by the Artsy Film Company. How would the MegaHit Company classify this licensing right?
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A) Tangible asset B) Research and development C) Intangible asset D) Fixed asset
209)
Goodwill may be attributable to all of the following except: A) a significant amount of charitable contributions. B) a great reputation. C) an established customer base. D) successful business operations.
210)
Goodwill:
A) should be treated like most other intangible assets and amortized over a useful life of not more than 40 years. B) is an accounting measurement of how well a company's employees behave towards the company's customers. C) should be recorded as a negative value if a company is purchased for less than the net carrying value of its assets. D) is recorded when one company purchases another and the buyers pay more than the fair value of the assets purchased.
211)
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.
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212)
Goodwill: A) is not amortized but is tested annually for impairment. B) is amortized using the straight-line method. C) is amortized using the units-of-production method. D) is not amortized and is not tested for impairment.
213)
Which of the following statements regarding goodwill is not correct? A) Goodwill is not amortized. B) Goodwill is tested annually for impairment. C) Goodwill is written down if its value is found to be impaired. D) Private companies amortize goodwill using the straight-line method over 20 years or
less.
214) The net amount shown on a balance sheet for an intangible asset with an unlimited life should be: A) the price for which it could be sold. B) its book value or impaired fair value, whichever is lower. C) its purchase price minus accumulated amortization. D) its purchase price adjusted for inflation.
215)
Which of the following assets would be amortized? A) Land improvements B) Trademarks C) Goodwill D) Franchise
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216) a:
If a company wants exclusive rights to a special name, image or slogan, it should obtain
A) trademark. B) copyright. C) license. D) patent.
217)
If a company wants exclusive rights to artistic material, it should obtain: A) a copyright. B) a patent. C) goodwill. D) a license.
218) If a company wants to receive exclusive rights to a manufacturing process, it should obtain a: A) license. B) copyright. C) patent. D) trademark.
219)
Permission to use something in accordance with specific terms and conditions are called: A) licensing rights. B) trademarks. C) patents. D) copyrights.
220) If Company A has a contractual right to sell certain products or services, use certain trademarks, or perform activities in a certain geographical region, then Company A has: Version 1
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A) a trademark. B) a copyright. C) goodwill. D) a franchise.
221)
Amortization is an adjusting entry that records the amount of a(n): A) intangible assets usefulness used during the accounting period. B) tangible assets remaining usefulness as of the end of the accounting period. C) the increase in value of intangible assets during the accounting period. D) the increase in value of tangible assets during the accounting period.
222)
Which of the following will result in the recording of goodwill?
A) Company A purchases Company B and pays less than the net assets of Company B. B) Company A purchases Company B and pays more than the fair value of Company B's assets and liabilities. C) Company A discovers a new product or production process. D) Company A sells its patents at a gain.
223) Seldon Industries amortizes its copyright of $65,000 over 40 years. Ms. Alice, the bookkeeper, mistakenly recorded the amortization twice in the current year. The effect of this mistake causes: A) assets to be understated. B) cash to be overstated. C) retained earnings to be overstated. D) liabilities to be understated.
224)
The journal entry to record the amortization of an intangible asset includes a:
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A) debit to Depreciation Expense. B) debit to Amortization Expense. C) credit to Equipment. D) debit to Goodwill.
225) Sony, Incorporated spent $1,000,000 of development cost for commercially feasible prototypes. If Sony follows IFRS not GAAP, then the $1,000,000 would: A) be recorded as an asset. B) be recorded as an expense. C) be recorded as revenue. D) not be recorded.
226)
Which of the following statements about tangible long-lived assets is not correct?
A) Depreciation and maintenance are expenses associated with the use of tangible longlived assets. B) Assuming no additions, replacements, or extraordinary repairs, the carrying value of a long-lived asset is never more than its original cost. C) The cost of a long-lived asset minus the Accumulated Depreciation is called the carrying value of the asset. D) All long-lived assets are depreciated as they are used in the business.
227)
Which of the following statements is correct?
A) Amortization of intangible assets is always recorded in a contra asset account. B) Items in a company's inventory that are not expected to be sold in the next year are considered long-lived assets. C) All long-lived intangible assets must be amortized over a period of 40 years or less. D) Intangible assets with unlimited or indefinite lives are not amortized.
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228)
Which of the following statements is correct?
A) Depreciation allocates the cost of tangible assets over their useful lives. B) Depreciation allocates the cost of intangible assets over their useful lives. C) Amortization allocates the cost of tangible assets over their useful lives. D) The term "depreciation" relates to all long-lived assets whereas "amortization" relates only to intangible assets.
229) Your company pays $620,000 for a patent that has 10 years remaining. Each year, your company should: A) debit Accumulated Amortization for $62,000 and credit Amortization Expense for $62,000. B) debit Intangible Assets and credit Accumulated Amortization for an amount equal to 20% of book value. C) debit Amortization Expense for $62,000 and credit Patent for $62,000. D) report no Amortization Expense because patents are not subject to amortization.
230) When S. Dee Company bought B. Darin Company, the purchase price included a patent valued at $15,000. The patent has 10 years remaining of its legal life, but its estimated useful life to S. Dee Company was only 8 years. The journal entry to record the annual patent amortization would include a: A) debit to Patent, $1,875. B) debit to Amortization expense, $1,875. C) credit to Patent, $1,500. D) credit to Amortization expense, $1,500.
231) The fair value of land owned by a company has increased this year. The journal entry to record this increase in fair value would include:
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A) a credit to Gain on Asset Value Increase. B) a debit to Land. C) a credit to Non-Impairment of Asset. D) nothing; no entry would be made according to GAAP.
232) Which of the following companies (all U.S. companies except for Lego, which is a Danish company) would most likely capitalize the costs of developing a prototype? A) Lego B) Southwest Airlines C) Walmart D) Cedar Fair
233) Your company has net sales revenue of $42 million during the year. At the beginning of the year, fixed assets are $14 million. At the end of the year, fixed assets are $16 million. What is the fixed asset turnover ratio? A) 3.00 B) 2.80 C) 1.40 D) 2.63
234) Your company has net sales revenue of $36 million during the year. At the beginning of the year, fixed assets are $8 million. At the end of the year, fixed assets are $10 million. What is the fixed asset turnover ratio? A) 4.5 B) 4.0 C) 2.0 D) 3.6
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235) The company has net sales revenue of $7.2 million during 2021. The company's records also included the following information: Assets Property, plant and equipment Licensing agreements Goodwill Investments
12/31/20 $ 4.1 million $ 2.3 million $ 2.1 million $ 2.2 million
12/31/21 $ 6.1 million $ 2.2 million $ 2.1 million $ 2.3 million
What is the company's fixed asset turnover ratio for 2021? A) 16.94 B) 2.54 C) 1.00 D) 1.41
236) The company has net sales revenue of $3.6 million during 2021. The company's records also included the following information:
Assets Property, plant and equipment Licensing agreements Goodwill Investments
12/31/20 $ 2.3 million $ 0.5 million $ 0.3 million $ 0.4 million
12/31/21 $ 2.5 million $ 0.4 million $ 0.3 million $ 0.5 million
What is the company's fixed asset turnover ratio for 2021? A) 18.00 B) 1.33 C) 1.00 D) 1.50
237) Peppertree Company’s financial statements on December 31, 2021, showed the following: Net Sales
$ 550,000
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Fixed Assets, January 1 Fixed Assets, December 31 Total Assets, January 1 Total Assets, December 31
$ 146,000 $ 134,000 $ 194,000 $ 200,000
What is the fixed asset turnover for 2021? A) 3.93 B) 2.60 C) 4.10 D) 2.79
238) The following information is available from the accounting records of the Bright Company: Beginning balance of fixed assets Net sales revenue Ending balance of fixed assets Net income
$ 100,000 360,000 120,000 36,000
What is the fixed asset turnover ratio? A) 0.10 times B) 3 times C) 3.27 times D) 10 times
239) Sierra Nevada Corporation reported Sales Revenue of $500,000,000 and Sales Discounts of $4,000,000 for the year. The beginning balance of Net Plant and Equipment was $23,000,000, and the ending balance was $27,000,000. What is the fixed asset turnover ratio? A) 18.37 B) 18.52 C) 20.00 D) 19.84
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240)
The fixed asset turnover ratio measures the: A) useful life of long-lived assets. B) the average difference between book value and disposal value of fixed assets. C) useful life of intangible assets. D) efficiency with which the investment in fixed assets produces revenue.
241)
The fixed asset turnover is the: A) number of sales dollars generated by each dollar of total assets. B) rate at which inventories are being rotated. C) number of dollars in notes payable generated by each dollar in fixed assets. D) number of sales dollars generated by each dollar of fixed assets.
242) Which of the following phrases best describes the interpretation of the fixed asset turnover ratio? A) It measures how efficiently sales are generated with a given amount of fixed assets. B) It measures return on total assets. C) It measures the speed of cash collected on fixed assets. D) It measures how quickly fixed assets are bought and sold.
243)
A declining fixed asset turnover ratio suggests that a:
A) company is not as efficient in using its fixed assets as it was in previous periods. B) company's net sales must be increasing. C) company must have purchased some intangible assets. D) company's beginning fixed asset balance must be greater than its ending fixed asset balance.
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244) Assume that, prior to preparing adjusting entries at the end of the year, Caterpillar Corporation has a fixed asset turnover ratio of 3.4 based on average net fixed assets of $500,000,000. Which of the following year-end adjustments would cause Caterpillar's fixed asset turnover ratio to increase? A) Caterpillar accrues and capitalizes $50,000 for self-constructed assets. B) Caterpillar accrues a liability for ordinary repair costs in the amount of $50,000. C) Caterpillar writes down an impaired piece of equipment by $50,000. D) Caterpillar increases the sales returns& allowances by $50,000.
245)
If net sales revenue and the average book value of fixed assets both rise 5%:
A) the fixed asset turnover ratio will rise. B) the fixed asset turnover ratio will fall. C) the fixed asset turnover ratio will stay the same. D) the impact on the fixed asset turnover ratio cannot be determined since the beginning values are unknown.
246)
A fixed asset turnover ratio of 4.3 indicates that for every: A) $1 in sales revenue, the firm acquired $4.30 of assets. B) $1 in fixed assets, the firm earned $4.30 of net income. C) $1 in assets, the firm paid $4.30 of expenses. D) $1 in fixed assets, the firm generated $4.30 of net sales.
247)
The fixed asset turnover ratio is used to evaluate: A) how well management uses long-lived tangible assets to generate revenues. B) whether there are enough fixed assets to pay its current liabilities. C) the frequency in which fixed assets are sold. D) the proportion of fixed assets relative to total assets.
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248) Assuming two companies use the same accounting methods, other things being equal, the company with a higher fixed asset turnover ratio: A) has a greater amount invested in fixed assets than a company with a lower fixed asset turnover ratio. B) has less invested in fixed assets than a company with a lower fixed asset turnover ratio. C) generates less sales revenue than a company with a lower fixed asset turnover ratio. D) makes better use of its fixed assets to generate revenues than a company with a lower fixed asset turnover ratio.
249) Company A uses an accelerated depreciation method while Company B uses the straightline method. All other things being equal, during the first few years of the asset's use, Company A will show which of the following compared to Company B? A) Higher asset values and higher net income. B) Lower asset values and higher net income. C) Higher asset values and lower net income. D) Lower asset values and lower net income.
250) Company A uses an accelerated depreciation method while Company B uses the straightline method for an asset of the same cost and useful life. Which of the following statements is correct? A) Company A will have higher depreciation expense in the early years, but Company B will have the higher depreciation expense towards the end of the asset's useful life. B) Company A will consistently have higher depreciation expense until residual value is reached. C) Company B will have higher depreciation expense in the early years, but Company A will have the higher depreciation expense towards the end of the asset's useful life. D) Company B will consistently have higher depreciation expense until residual value is reached.
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251) Company A uses an accelerated depreciation method while Company B uses the straightline method for an asset of the same cost and useful life. Other things being equal, which of the following is correct? A) Company A will have higher net income in the early years, but Company B will have higher net income towards the end of the asset's useful life. B) Company A will consistently have the larger net income until residual value is reached. C) Company B will have higher net income in the early years, but Company A will have higher net income towards the end of the asset's useful life. D) Company B will consistently have the larger net income until residual value is reached.
252) Companies with the same asset may report different amounts of depreciation in a given year for all of the following reasons, except: A) They use different residual values. B) They use different estimated useful lives. C) They use different depreciation methods. D) They are in different industries.
253) Company A uses an accelerated depreciation method while Company B uses the straightline method. All other things being equal, during the first few years of the asset's use, Company B will show which of the following compared to Company A? A) A smaller fixed asset turnover ratio and a smaller gain on asset disposal. B) A larger fixed asset turnover ratio and a larger gain on asset disposal. C) A smaller fixed asset turnover ratio and a larger gain on asset disposal. D) A larger fixed asset turnover ratio and a smaller gain on asset disposal.
254)
EBITDA is equal to which of the following?
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A) Net income − Interest expense − Income tax expense − Depreciation expense − Amortization expense B) Net income + Interest expense + Income tax expense + Depreciation expense + Amortization Expense C) Operating income − Interest expense − Income tax expense D) Operating income + Depreciation expense + Amortization expense
255) A company purchased land for its natural resources at a cost of $1,540,000. It expects to mine 2,100,000 tons of ore from this land. The residual value of the land is estimated to be $310,000. What is the amount of depletion per ton of ore? A) $0.733 B) $0.880 C) $1.135 D) $0.586
256) A company purchased land for its natural resources at a cost of $1,500,000. It expects to mine 2,000,000 tons of ore from this land. The residual value of the land is estimated to be $250,000. What is the amount of depletion per ton of ore? A) $0.75 B) $0.875 C) $1.14 D) $0.625
257) The allocation method used for natural resources is similar to which of the following depreciation methods? A) Straight-line B) Units-of-production C) Double-declining balance D) MACRS
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258) When a company records depletion on natural resources, it will have which of the following effects? A) Expenses increase. B) Net income decreases. C) Inventory increases. D) Cash flow decreases.
259) On January 1, 2020, Whittle, Incorporated purchased timber rights for $1,500,000, which are expected to produce a total of 2,000,000 cords of wood over 4 years. The cords of wood cut were 200,000 in 2020 and 280,000 in 2021. Depletion for 2020 equals: A) $150,000. B) $200,000. C) $400,000. D) $275,000.
260)
Which method should be used to calculate depletion for a natural resource company? A) Accelerated B) Declining-balance C) Units-of-production D) Straight-line
261)
Depletion is different from depreciation and amortization in that depletion is: A) added to inventory. B) used for intangible assets. C) no different from depreciation and amortization. D) an accelerated method.
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262) On January 1, 2020, Whittle, Incorporated purchased timber rights for $1,500,000. It is expected to produce a total of 2,000,000 cords of wood over 4 years. The cords of wood cut were 200,000 in 2020. The effect of recording the 2020 depletion (not the sale of the wood) on the accounting equation is: A) total assets remain unchanged. B) total stockholders' equity decreases. C) total assets decrease. D) total liabilities increase.
263) Natural resources are first recorded as ________, then recorded as ________ when extracted, and lastly recorded as ________ when sold. A) fixed assets; inventory; cost of goods sold B) goods available to sell; inventory; a loss C) inventory; revenue; cost of goods sold D) fixed assets; revenue; cost of goods sold
264)
The proper accounting for natural resources is to record the original cost as an:
A) asset, then later transfer amounts to Inventory as the resource is depleted, and finally expense the cost as the resources are sold. B) asset, then expense the cost over its useful life. C) expense in the period purchased. D) asset, and then expense the cost over its useful life using straight-line depreciation.
265)
If net sales revenue rises 5% while the average book value of fixed assets falls 5%, the:
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A) fixed asset turnover ratio will rise. B) fixed asset turnover ratio will fall. C) fixed asset turnover ratio will stay the same. D) impact on the fixed asset turnover ratio cannot be determined since the beginning values are unknown.
266)
Once the depreciation expense for a long-lived asset is calculated: A) it cannot be changed because of the cost principle. B) it may be revised based on new information. C) any changes are not recognized until the date the asset is sold. D) it cannot be changed due to the consistency principle.
267)
When the estimated useful life of an asset is revised:
A) depreciation will continue at the current rate. B) depreciation expense reported in previous years would be changed retroactively. C) the depreciation expense in subsequent years will be changed but previous calculations will not be changed. D) generally accepted accounting principles have been violated.
268) A machine had an estimated useful life of 5 years, but after 3 years, it was decided that the original estimate of useful life should have been 10 years. At that point, the remaining cost to be depreciated should be allocated over the remaining: A) 2 years. B) 5 years. C) 7 years. D) 10 years.
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269) When originally purchased, a vehicle had an estimated useful life of 10 years. The vehicle cost $45,000 and its estimated residual value is $4,000. After 3 years of straight-line depreciation, the asset’s total estimated useful life was revised from 10 years to 7 years and there was no change in the estimated residual value. The Depreciation Expense in year 4 is: A) $7,175. B) $5,857. C) $5,582. D) $1,300.
270) When originally purchased, a vehicle had an estimated useful life of 8 years. The vehicle cost $25,000 and its estimated residual value is $3,000. After 3 years of straight-line depreciation, the asset's total estimated useful life was revised from 8 years to 5 years and there was no change in the estimated residual value. The Depreciation Expense in year 4 is: A) $6,875. B) $4,400. C) $4,125. D) $1,650.
271) Maxim, Incorporated changed its depreciation method from units-of-production to straight-line. Maxim is: A) only allowed to make this change if it gets permission from the IRS. B) only allowed to make this change if it can show the change results in a lower net income. C) not allowed to change depreciation methods. D) only allowed to make this change if it can show the change results in a better measure of the business’s income.
272) Which of the following is the depreciation formula for the revision of an estimate for the straight-line method?
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A) (Book value − New residual value) × (1 ÷ Remaining life) B) (Cost − residual value) × (1 ÷ Life) C) (Book value − new residual value) × (1 ÷ Life) D) (Cost − residual value) × (1 ÷ Remaining life)
273) Which of the following does not lead to a revision of an estimate of a company's depreciation expense? A) A change in the estimated useful life. B) A change in the estimated residual value. C) Extraordinary repairs that significantly extend the asset's usefulness. D) A change in the estimated maintenance costs.
274) Squid Roe, Incorporated's $48,000 sushi bar was originally expected to be used for eight years with no residual value. Depreciation on the bar was $6,000 per year for the past two years. In the third year, management changed the estimated life of the bar to be a total of only six years instead of eight. What should Squid Roe do? A) Go back and revise all previous years' depreciation expense to be $8,000 per year. B) Revise the depreciation expense to be $9,000 for years three through six. C) Continue to depreciate the bar at $6,000 per year and then show a loss when it removes the bar at the end of year six. D) Disclose the new information in the notes to the financial statements, but do not change anything else.
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Answer Key Test name: Chap 09_7e 1) TRUE Long-lived assets reported on the balance sheet may include both tangible assets (e.g., equipment, land, building) that have physical substance, and intangible assets (e.g., patent, trademark, goodwill) that have no physical substance. 2) TRUE The asset cost is divided up among the individual assets acquired in the group based on their relative market values. 3) TRUE Extraordinary repairs, replacements, and additions extend the useful life of a tangible asset or improve its output in the future; they are recorded as increases in asset accounts, not as expenses. 4) TRUE Depreciation is the allocation of existing costs that were already recorded as a long-lived asset. 5) TRUE Accumulated Depreciation is a contra-asset account. 6) FALSE Although the useful life of an asset is often measured in years, it can also be measured in units of output, hours of operation, etc. 7) TRUE Book value equals cost minus accumulated depreciation. As a result of recording depreciation, an asset's book value declines as it ages. Version 1
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8) TRUE Straight-line depreciation allocates the same amount of depreciation each period over the asset's useful life. Under the units-of-production method, the depreciation expense, accumulated depreciation, and book value vary from period to period, depending upon the number of units produced. If the number of units produced is constant each period, each period's depreciation expense using the straight-line method will be the same as that recorded using the units-of-production method. 9) FALSE Most companies use one method of depreciation for reporting to stockholders and a different method for determining income taxes. Keeping two sets of accounting records like this is both ethical and legal because the primary objective of financial reporting differs from that of income tax reporting. 10) FALSE Impairment occurs when the cash to be generated by an asset is estimated to be less than the carrying value of that asset. 11) TRUE A gain on disposal equals the excess of the proceeds from selling the asset over the asset's book value. A loss results when the asset's book value exceeds the proceeds from selling the asset. Gains increase net income while losses decrease net income. 12) TRUE The cost of intangible assets with a limited life is spread on a straightline basis over each period of useful life in a process called amortization. Most companies do not estimate a residual value for their intangible assets because, unlike tangible assets that can be sold as scrap, intangibles usually have no value at the end of their useful lives. Version 1
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13) TRUE Intangibles with unlimited or indefinite lives (trademarks and most goodwill) are not amortized. 14) FALSE IFRS differ from GAAP somewhat in accounting for tangible and intangible assets. GAAP requires tangible and intangible assets to be recorded at cost and not revalued for later increases in asset values. In contrast, IFRS allow companies the option of reporting these assets at fair values (e.g., appraisals), provided they use the fair value method consistently each year. IFRS also require companies to capitalize costs of developing intangible assets, such as prototypes for making new products or tools. GAAP generally requires that such development costs be expensed because of the uncertainty of their value. 15) TRUE Fixed asset turnover ratio = Net revenue ÷ Average net fixed assets The denominator uses the value of average net fixed assets (property and equipment) over the same period as the revenue in the numerator. If average net fixed assets increase, the fixed asset turnover ratio will decrease. 16) TRUE Fixed asset turnover ratio = Net revenue ÷ Average net fixed assets The denominator uses the value of average net fixed assets (property and equipment) over the same period as the revenue in the numerator. If additional assets are acquired, the denominator will increase causing the ratio to decrease. 17) FALSE
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Depreciation varies from one company to the next as a result of differences in depreciation methods, estimated useful lives, and estimated residual values. 18) TRUE EBITDA is an abbreviation for "earnings before interest, taxes, depreciation, and amortization." It is a measure of operating performance that some managers and analysts use in place of net income. Analysts calculate EBITDA by starting with net income and then adding back depreciation and amortization expense (as well as nonoperating expenses such as interest and taxes). The idea is that this measure allows analysts to conduct financial analyses without having to deal with possible differences in depreciation and amortization. 19) TRUE Depletion is calculated based on units extracted, which is comparable to the units-of-production method, which allocates the depreciable cost of an asset over its useful life based on the relationship of its output during the period to its total estimated output. 20) FALSE Prior year’s financial statements are not restated when the estimated useful life of a long-lived asset changes. Instead, a new amount of depreciation expense is determined as follows: The book value less the revised residual value of the asset is depreciated over the remaining useful life using the new estimate. 21) D
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Long-lived assets are business assets acquired for use over one or more years. These assets are not intended for resale. Instead, they are considered "productive" assets in the sense that they enable the business to produce the goods or services that the business then sells to customers. Tangible long-lived assets are depreciated over their useful lives; intangible long-lived assets are amortized over their useful lives. 22) D Long-lived assets include both tangible assets and intangible assets. Tangible assets are also referred to as property, plant, and equipment or fixed assets. 23) C Long-lived assets are acquired for use over one or more years and are not intended for resale. Inventory is usually used up or sold to customers within a year. Thus, inventory does not qualify as a long-lived asset. 24) D Long-lived assets are business assets acquired for use over one or more years. These assets are not intended for resale. Instead, they are considered "productive" assets in the sense that they enable the business to produce the goods or services that the business then sells to customers. A warehouse is a tangible long-lived asset. 25) A Long-lived assets with physical substance are classified as tangible assets. 26) A
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Long-lived assets are business assets acquired for use over one or more years. These assets are not intended for resale. Instead, they are considered "productive" assets in the sense that they enable the business to produce the goods or services that the business then sells to customers. Land on which a new store is located would be an example of a long-lived asset. 27) D Long-lived assets are business assets acquired for use over one or more years. These assets are not intended for resale. Instead, they are considered "productive" assets in the sense that they enable the business to produce the goods or services that the business then sells to customers. 28) B Long-lived assets that are depleted over time include oil wells or gold mines and are common in natural resource industries. 29) A Long-lived assets that are depleted over time are common in natural resource industries like the timber industry. 30) A Tangible assets are long-lived assets that have physical substance, which simply means that you can see, touch, or kick them. These assets are typically grouped into a single line item on the balance sheet called Property, Plant, and Equipment. They are also known as fixed assets because they are often fixed in place. 31) A Intangible assets are long-lived assets have special rights but no physical substance. The existence of most intangible assets is indicated only by legal documents that describe their rights. Version 1
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32) C Accountants say costs have been capitalized when they are recorded as assets (rather than as expenses). 33) B Cost assigned to trailer = $81,000 × [$28,500 ÷ ($57,000 + $28,500)] = $27,000 34) C To capitalize a cost means to record it as an asset instead of expensing it. If costs are expensed that should have been capitalized, then expenses are overstated and net income is understated. Assets would also be understated. 35) C The general rule for tangible assets under the cost principle is that all reasonable and necessary costs to acquire and prepare an asset for use should be recorded as a cost of the asset. Interest on loans to purchase fixed assets is expensed as incurred. Because ordinary repairs occur frequently to maintain the asset's productive capacity for a short time, they are recorded as expenses in the current period. When a "basket purchase" occurs, the total cost (rather than the total market value) is split among the assets in proportion to the market value of the assets as a whole. 36) D Long-lived assets are recorded for all of the costs that are reasonable and necessary to place them in service for their intended use. In this case, the attorney fees and brokerage fees are reasonable and necessary costs incurred in order to acquire the land and place it in service for its intended use. 37) A Version 1
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All reasonable and necessary costs to acquire a tangible asset and prepare it for use are included in the cost of the asset. For Wilshire Company, this amount is equal to the cost of the land of $120,000 plus the cost to demolish the existing building of $16,000 plus the real estate commission on the purchase of $7,200 = $143,200. 38) A Cost of land = $9,000,000 + $1,000,000 = $10,000,000 If a company buys land and incurs demolition costs before the land can be used, these additional costs would be capitalized as a cost of the land. 39) D Equipment cost = $2,400,000 + $160,000 = $2,560,000 The general rule for tangible assets under the cost principle is that all reasonable and necessary costs to acquire and prepare an asset for use should be recorded as a cost of the asset. As a result, the installation costs should be recorded as part of the cost of the equipment rather than as an expense. 40) C The general rule for tangible assets under the cost principle is that all reasonable and necessary costs to acquire and prepare an asset for use should be recorded as a cost of the asset. Freight costs are a necessary and reasonable cost of acquiring an asset and should be added to the cost of the asset. 41) B When a "basket purchase" occurs, the total cost is split among the assets in proportion to the market value of the assets as a whole. 42) C
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Total market value = $64,000 + $46,000 + $19,000 = $129,000 Building’s contribution towards property’s value = Building’s market value ÷ Total market value = $64,000 ÷ $129,000 = 49.6% Building cost = Property cost × Building’s contribution towards property’s value = $105,000 × 0.496 = $52,080 43) B Total market value = $173,600 + $126,000 + $50,400 = $350,000 Building's contribution towards property's value = Building's market value ÷ Total market value = $173,600 ÷ $350,000 = 49.6% Building cost = Property cost × Building's contribution towards property's value = $280,000 × 0.496 = $138,880 44) D Land
Appraised Value
Calculation
Cost
$ 87,500
($87,500÷ $175,000)×$163,000 = ($35,000÷ $175,000)×$163,000 = ($52,500÷ $175,000)×$163,000 =
$ 81,500
Building
35,000
Equipment
52,500 $ 175,000
32,600 48,900 $ 163,000
45) C
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When a "basket purchase" occurs, the total cost is split among the assets in proportion to the market value of the assets as a whole. Splitting the total purchase price among individual assets is necessary because they may be used over different periods. Land is never used up, so any costs assigned to Land will remain in that account until the company sells the land. 46) A When a "basket purchase" occurs, the total cost is split among the assets in proportion to the market value of the assets as a whole. Splitting the total purchase price among individual assets is necessary because they may be used over different periods. Land is never used up, so any costs assigned to Land will remain in that account until the company sells the land. 47) A Total market value = $48,000 + $72,000 + $120,000 = $240,000 Green house's percentage value = Green's market value ÷ Total market value = $120,000 ÷ $240,000 = 50% Green house’s cost = Total cost × Green house's percentage value = $192,000 × 0.50 = $96,000 48) A
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Jointly purchasing land and building requires the $2,400,000 total cost to be split among the assets in proportion to the market value of assets as a whole as follows: Land: = $2,400,000 × [$2,000,000 ÷ ($2,000,000 + $1,000,000)] = $1,600,000 Building: = $2,400,000 × [$1,000,000 ÷ ($2,000,000 + $1,000,000)] = $800,000 49) B The general rule for tangible assets under the cost principle is that all reasonable and necessary costs to acquire and prepare an asset for use should be recorded as a cost of the asset. Installation costs are a necessary and reasonable cost of preparing an asset for use and should be added to the cost of the asset. Debit Equipment for $1,000,000 (or $900,000 + $100,000), credit Cash for $500,000, and credit Notes Payable for $500,000. 50) B The general rule for tangible assets under the cost principle is that all reasonable and necessary costs to acquire and prepare an asset for use should be recorded as a cost of the asset. Those costs would include the sales tax, the installation costs, and the needed adjustment. The supplies that will be used for maintenance should not be included in the cost of the equipment but rather as an expense. Debit Equipment for $29,720 (or $24,500 + $1,470 + $550 + $3,200), debit Supplies for $2,600, and credit Cash for $32,320. 51) B Ordinary repairs and maintenance are expenditures for routine operating upkeep of long-lived assets; they are recorded as expenses. 52) B Version 1
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Extraordinary repairs are expenditures that extend the useful life of a tangible asset or improve its output in the future; they are recorded as increases in asset accounts, not as expenses. 53) C Ordinary repairs and maintenance are expensed as incurred while extraordinary repairs are capitalized (treated as capital expenditures). 54) A In contrast to ordinary repairs and maintenance, extraordinary repairs occur infrequently, involve large expenditures, and increase an asset's usefulness through enhanced efficiency, capacity, or lifespan. Examples include additions, major overhauls, complete reconditioning, and major replacements and improvements. The overhaul would be debited to the Vehicles account. 55) B Ordinary repairs and maintenance are expenditures for routine operating upkeep of long-lived assets; they are recorded as expenses. In contrast to ordinary repairs and maintenance, extraordinary repairs occur infrequently, involve large expenditures, and increase an asset's usefulness through enhanced efficiency, capacity, or lifespan. 56) D Think of the cost of a long-lived asset as a big prepayment for future benefits. As that asset is used, those prepaid benefits are used up, so the asset needs to be decreased each period. This decrease in the asset creates an expense, which is reported on the income statement and matched against the revenue generated by the asset, as required by accrual accounting. 57) B
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Accumulated Depreciation is a contra-asset account that is related to a long-lived tangible asset account. 58) A Accumulated depreciation is a contra-asset account. It is subtracted from long-lived assets to determine the book (or carrying) value of the longlived assets. 59) C Property and Equipment, net = Cost − Accumulated depreciation Ending accumulated depreciation = Beginning accumulated depreciation + Depreciation expense − Accumulated depreciation on asset disposals = $1,020,000 − ($180,000 + $82,500 − $0) = $757,500 60) C Depreciation is recorded as a debit to Depreciation Expense and credit to Accumulated Depreciation (a contra-asset account). 61) B Carrying value is the amount at which an asset or liability is reported ("carried") in the financial statements. It is also known as "net book value" or simply "book value." 62) A Book value equals cost minus accumulated depreciation. 63) D Carrying value is the amount at which an asset or liability is reported ("carried") in the financial statements. It is also known as "net book value" or simply "book value." As such, the book value of a long-lived tangible asset equals its cost minus the related accumulated depreciation. Since depreciation is an allocation method rather than a valuation method, book value is not the same as market value. Version 1
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64) A Book value = Cost − Accumulated depreciation = $350,000 − $110,000 = $240,000 Carrying value is the amount at which an asset or liability is reported ("carried") in the financial statements. It is also known as "net book value" or simply "book value." Since depreciation is an allocation method rather than a valuation method, book value is not the same as market or resale value. 65) C Construction in progress includes the costs of constructing new buildings and equipment. When construction is finished, these costs are moved from this account into the building or equipment account to which they relate. 66) A This transaction would be recorded by increasing Land, an asset account, and decreasing Cash, another asset account. 67) A The general rule for tangible assets under the cost principle is that all reasonable and necessary costs to acquire and prepare an asset for use should be recorded as a cost of the asset. 68) B The general rule for tangible assets under the cost principle is that all reasonable and necessary costs to acquire and prepare an asset for use should be recorded as a cost of the asset. Accountants say costs have been capitalized when they are recorded as assets (rather than as expenses). 69) B
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The general rule for tangible assets under the cost principle is that all reasonable and necessary costs to acquire and prepare an asset for use should be recorded as a cost of the asset. Accountants say costs have been capitalized when they are recorded as assets (rather than as expenses). 70) A The transaction should have been recorded as an increase to the Repairs and Maintenance Expense instead of as an increase to the asset account, Machinery. As a result, assets are overstated, and expenses are understated. That understatement of expenses causes an overstatement of net income and, as a result, an overstatement of stockholders' equity. 71) D The transaction should have been recorded as an increase to an expense account instead of an increase to asset accounts. As a result, assets are overstated and expenses are understated. That understatement of expenses causes an overstatement of net income and, as a result, an overstatement of stockholders' equity. Liabilities are not impacted by this misstatement. 72) A Accountants say costs have been capitalized when they are recorded as assets (rather than as expenses). 73) C Accountants say costs have been capitalized when they are recorded as assets (rather than as expenses). Capitalized costs therefore increase assets, while expenses decrease net income, and as a result, decrease stockholders’ equity. 74) C
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Assets are increased by the cost of the machine, $384,900, but are decreased by the cash payments of $6,900. Thus, total assets increased by $378,000. 75) C The general rule for tangible assets under the cost principle is that all reasonable and necessary costs to acquire and prepare an asset for use (including installation costs) should be recorded as a cost of the asset. Interest on loans would be expensed. 76) D The general rule for tangible assets under the cost principle is that all reasonable and necessary costs to acquire and prepare an asset for use should be recorded as a cost of the asset. The costs of the party do not fit the criteria. 77) D The general rule for tangible assets under the cost principle is that all reasonable and necessary costs to acquire and prepare an asset for use should be recorded as a cost of the asset. The increase in annual insurance costs does not fit the criteria. 78) A Depreciation attempts to match an asset's cost to the economic benefits generated by that asset. The items required to calculate depreciation expense are the asset's cost, residual value, and useful life. 79) A The useful life of the asset for your company is the time that it will be used by your company, which, in this instance, is eight years. 80) B
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Residual (or salvage) value is the estimated amount to be recovered at the end of the company’s estimated useful life of an asset. In this case, the residual value is $109,000. 81) D Residual (or salvage) value is the estimated amount to be recovered at the end of the company's estimated useful life of an asset. In this case, the residual value is $160,500. 82) D The amount to be depreciated over the asset's life is the difference between its cost and residual value, an amount called the depreciable cost. A company should record depreciation each year of an asset's useful life until its total accumulated depreciation equals its depreciable cost. As a result, book value can never be less than residual value. 83) C Depreciable Cost = Cost − Residual Value = $470,000 − $117,000 = $353,000 84) C Depreciable Cost = Cost − Residual Value = $562,500 − $160,500 = $402,000 85) D The amount to be depreciated over the asset's life is the difference between its cost and residual value, an amount called the depreciable cost. A company should record depreciation each year of an asset's useful life until its total accumulated depreciation equals its depreciable cost. As a result, book value can never be less than residual value. 86) D
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To calculate straight-line depreciation, the cost of the asset, its useful life, and the residual value must be known. 87) A The straight-line method is the preferred choice because it is the easiest to use and understand, and it does a good job of matching depreciation expense to revenues when assets are used evenly over their useful lives. Most corporations use the IRS-approved Modified Accelerated Cost Recovery System (MACRS) to calculate depreciation expense for their tax returns. MACRS is similar to the declining-balance method and is applied over relatively short asset lives set by the IRS to yield high tax deductions for depreciation expense in the early years. 88) B Depreciation expense per year = (Cost − Residual value) × (1 ÷ Useful life) = ($122,000 − $12,200) × 1 / 10 = $10,980 89) A Depreciation expense per year = (Cost − Residual value) × (1 ÷ Useful life) = ($24,000 − $3,000) × 1 / 10 = $2,100 90) A Depreciation expense = (Cost − Residual value) × (1 ÷ Useful life) = ($250,000 − $25,000) × (1 ÷ 5) = $45,000 91) C Depreciation expense = (Cost − Residual value) × (1 ÷ Useful Life) = [($160,000 + $2,000 + $12,500) − $15,000] × (1 ÷ 5) = $31,900 per year 92) A Version 1
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Depreciation expense = (Cost − Residual value) × (1 ÷ Useful life) = [($160,000 + $2,000 + $12,500) − $15,000] ÷ 5 years = $31,900 per year Net book value = Cost − Accumulated depreciation = ($160,000 + $2,000 + $12,500) − ($31,900 per year × 3 years) = $78,800 93) C The straight-line method of depreciation provides a constant amount of Depreciation Expense each period. As a result, the carrying value or book value decreases by the same amount each period. 94) A Depreciation rate per unit = (Cost − Residual value) ÷ Estimated total production = ($56,000 − $4,000) ÷ 410,000 units = $0.13 per unit 95) C Depreciation rate per unit = (Cost − Residual value) ÷ Estimated total production = ($45,000 − $5,000) ÷ 100,000 units = $0.40 per unit 96) A Depreciation rate = (Cost − Residual value) ÷ Estimated total production = ($860,000 − $60,000) ÷ 4,000,000 units = $0.20 per unit 97) B Depreciation rate = (Cost − Residual value) ÷ Estimated total production = ($800,000 − $40,000) ÷ 2,000,000 units = $0.38 per unit 98) A
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Depreciation expense = (Cost − Residual value) × (Actual production this period ÷ Estimated total production) = ($640,000 − $100,000) × (660,000 units ÷ 2,000,000 units) = $178,200 99) C Depreciation expense = (Cost − Residual value) × (Actual production this period ÷ Estimated total production) = ($800,000 − $40,000) × (400,000 units ÷ 2,000,000 units) = $152,000 100) D Straight-Line Method: Depreciation expense per year = (Cost − Residual value) × (1 ÷ Useful life) = ($1,410,000 − $141,000) × 1 / 10 = $126,900 Units-of-Production Method: Depreciation expense = (Cost − Residual value) × (Actual production this period ÷ Estimated total production) = ($1,410,000 − $141,000) × (125,000 units ÷ 1,000,000 units) = $158,625 101) C Depreciation expense = (Cost − Residual value) × (Actual production this period ÷ Estimated total production) = ($125,000 − $12,500) × (25,000 ÷ 100,000) = $28,125 102) B Depreciation expense (for both years) = (Cost − Residual value) × (Actual production this period ÷ Estimated total production) = ($115,000 − $0) × [(25,000 miles + 40,000 miles) ÷ 250,000 miles] = $29,900 Version 1
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103) C Cost includes all necessary and reasonable expenditures to acquire the asset and prepare it for its intended use. Cost = Purchase price + Delivery and installation costs = $507,000 + $15,700 = $522,700 Depreciation expense this period = (Cost − Residual value) × (Actual production this period ÷ Estimated total production) = ($522,700 − $5,700) × (11,900 ÷ 28,700) = $214,365.85 104) C Cost includes all necessary and reasonable expenditures to acquire the asset and prepare it for its intended use. Cost = Purchase price + Delivery and installation costs = $500,000 + $15,000 = $515,000 Depreciation expense this period = (Cost − Residual value) × (Actual production this period ÷ Estimated total production) = ($515,000 − $5,000) × (11,200 ÷ 28,000) = $204,000 105) B The straight-line depreciation method allocates the depreciable cost of an asset in equal periodic amounts over its useful life. The decliningbalance depreciation method is used to report more depreciation expense in the early years of an asset's life when the asset is more efficient and less in later years as the asset becomes less efficient. As a result, at the end of the first year of an asset's life, the declining-balance depreciation method causes an asset to be carried at a lower book value than that computed using the straight-line method.
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106) A Declining-balance methods apply best to assets that are most productive when they are new but quickly lose their usefulness as they get older. 107) D The double-declining-balance method ignores residual value and calculates the period's depreciation at twice the straight-line rate applied to the declining book value of the asset. Because residual value is not included in the formula for the declining-balance method of computing depreciation expense, you must take extra care to ensure that an asset's book value is not depreciated beyond its residual value. Both methods can be used for tax purposes. 108) D Double-declining-balance rate = 2 ÷ Useful life = 2 ÷ 20 = 10% 109) A Depreciation expense = Book value × (2 ÷ Useful life) Depreciation expense = (Cost − Accumulated depreciation) × (2 ÷ Useful life) = ($54,000 − $0) × 2 / 3 = $36,000 110) A Depreciation expense = Book value × (2 ÷ Useful life) Depreciation expense = (Cost − Accumulated depreciation) × (2 ÷ Useful life) = ($24,000 − $0) × 2 / 10 = $4,800 111) C
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Depreciation expense = (Cost − Accumulated depreciation) × (2 ÷ Useful life) For 2021: = ($250,000 − $0) × (2 ÷ 5) = $100,000 For 2022: = ($250,000 − $100,000) × (2 ÷ 5) = $60,000 Accumulated depreciation as of December 31, 2022 = $100,000 + $60,000 = $160,000 112) D Under the double declining-balance method, depreciation expense = (Cost − Accumulated depreciation) × (2 ÷ Useful life) Because residual value is not included in the formula for the decliningbalance method of computing depreciation expense, you must take extra care to ensure that an asset's book value is not depreciated beyond its residual value. 113) B Depreciation expense = (Cost − Accumulated depreciation) × (2 ÷ Useful Life) = ($160,000 − $0) × (2 ÷ 8) = $40,000 114) D Depreciation expense = (Cost − Accumulated depreciation) × (2 ÷ Useful Life) For 2021: = ($160,000 − $0) × (2 ÷ 8) = $40,000 For 2022: = ($160,000 − $40,000) × (2 ÷ 8) = $30,000 Accumulated depreciation at end of 2022 = Depreciation expense for 2021 + Depreciation expense for 2022 = $40,000 + $30,000 = $70,000 Version 1
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115) A Depreciation expense = Book value × (2 ÷ Useful life) Depreciation expense = (Cost − Accumulated depreciation) × (2 ÷ Useful life) 2021: = ($114,000 − $0) × 2 / 5 = $45,600 2022: = ($114,000 − $45,600) × 2 / 5 = $27,360 Book value at end of 2022 = $114,000 − ($45,600 + $27,360) = $41,040 The book value at the end of 2022 is greater than the residual value of $17,000. As such, the amount calculated above is the amount of depreciation that can be taken. 116) A
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Depreciation expense = Book value × (2 ÷ Useful life) Depreciation expense = (Cost − Accumulated depreciation) × (2 ÷ Useful life) 2021: = ($90,000 − $0) × 2 / 5 = $36,000 2022: = ($90,000 − $36,000) × 2 / 5 = $21,600 Book value at end of 2022 = $90,000 − ($36,000 + $21,600) = $32,400 The book value at the end of 2022 is greater than the residual value of $5,000. As such, the amount calculated above is the amount of depreciation that can be taken. 117) A
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Keep the estimated residual value of $4,000 in mind; book value cannot drop below residual value Depreciation expense = Book value × (2 ÷ Useful life) Depreciation expense = (Cost − Accumulated depreciation) × (2 ÷ Useful life) 2021: = ($36,000 − $0) × 2 / 4 = $18,000 2022: = ($36,000 − $18,000) × 2 / 4 = $9,000 Book value at end of 2022 = Cost − Accumulated depreciation = $36,000 − ($18,000 + $9,000) = $9,000 The book value at end of 2022 is greater than the residual value of $4,000. As such, the amount calculated is the amount of depreciation that can be taken. 118) A
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Keep the estimated residual value of $2,000 in mind; book value cannot drop below residual value Depreciation expense = Book value × (2 ÷ Useful life) Depreciation expense = (Cost − Accumulated depreciation) × (2 ÷ Useful life) 2021: = ($22,000 − $0) × 2 / 4 = $11,000 2022: = ($22,000 − $11,000) × 2 / 4 = $5,500 Book value at end of 2022 = Cost − Accumulated depreciation = $22,000 − ($11,000 + $5,500) = $5,500 The book value at end of 2022 is greater than the residual value of $2,000. As such, the amount calculated is the amount of depreciation that can be taken. 119) D Depreciation expense = Book value × (2 ÷ Useful life) Depreciation expense = (Cost − Accumulated depreciation) × (2 ÷ Useful life) = ($32,000 − $0) × 2 / 8 = $8,000 Book value at end of 2021 = Cost − Accumulated depreciation = $32,000 − $8,000 = $24,000 The book value at end of 2021 is greater than the residual value of $4,000. As such, the amount calculated is the amount of depreciation that can be taken. 120) D
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Depreciation expense = Book value × (2 ÷ Useful life) Depreciation expense = (Cost − Accumulated depreciation) × (2 ÷ Useful life) = ($20,000 − $0) × 2 / 5 = $8,000 Book value at end of 2021 = Cost − Accumulated depreciation = $20,000 − $8,000 = $12,000 The book value at end of 2021 is greater than the residual value of $5,000. As such, the amount calculated is the amount of depreciation that can be taken. 121) D
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Keep the estimated residual value of $6,000 in mind; book value cannot drop below residual value. . Depreciation expense = Book value × (2 ÷ Useful life) Depreciation expense = (Cost − Accumulated depreciation) × (2 ÷ Useful life) 2021: = ($30,000 − $0) × 2 / 8 = $7,500 2022: = ($30,000 − $7,500) × 2 / 8 = $5,625 Book value at end of 2022 = $30,000 − ($7,500 + $5,625) = $16,875, which is greater than the $6,000 residual value. As such, the amount calculated is the amount of depreciation that can be taken. Accumulated Depreciation at end of 2022 = 2021 Depreciation + 2022 Depreciation = $7,500 + $5,625 = $13,125 122) D
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Keep the estimated residual value of $5,000 in mind; book value cannot drop below residual value. Depreciation expense = Book value × (2 ÷ Useful life) Depreciation expense = (Cost − Accumulated depreciation) × (2 ÷ Useful life) 2021: = ($20,000 − $0) × 2 / 5 = $8,000 2022: = ($20,000 − $8,000) × 2 / 5 = $4,800 Book value at end of 2022 = $20,000 − ($8,000 + $4,800) = $7,200, which is greater than the $5,000 residual value. As such, the amount calculated is the amount of depreciation that can be taken. Accumulated Depreciation at end of 2022 = 2021 Depreciation + 2022 Depreciation = $8,000 + $4,800 = $12,800 123) C
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Depreciation expense = Book value × (2 ÷ Useful life) Initial calculation: Depreciation expense = (Cost − Accumulated depreciation) × (2 ÷ Useful life) = ($49,200 − $42,632.60) × 2 / 8 = $1,641.85 (rounded to $1,642) Book value at end of the upcoming year = ($49,200 − $42,632.60 − $1,642.00) = $4,925.40, which is less than the residual value of $5,400. Recording this amount of depreciation expense in the upcoming year would cause the book value to drop below the residual value. Revised calculation: Depreciation expense = Beginning book value of $6,567.40 (or Cost of $49,200 − Accumulated depreciation of $42,632.60) − residual value of $5,400 = $1,167.40 124) C
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Depreciation expense = Book value × (2 ÷ Useful life) Initial calculation: Depreciation expense = (Cost − Accumulated depreciation) × (2 ÷ Useful life) = ($40,000 − $35,995) × 2 / 8 = $1,001.25 (rounded to $1,001) Book value at end of the upcoming year = ($40,000 − $35,995 − $1,000) = $3,005, which is less than the residual value of $3,500. Recording this amount of depreciation expense in the upcoming year would cause the book value to drop below the residual value. Revised calculation: Depreciation expense = Beginning book value of $4,005 (or Cost of $40,000 − Accumulated depreciation of $35,995) − residual value of $3,500 = $505 125) A The straight-line, units-of-production, and declining-balance methods are acceptable methods of depreciation. They will produce the same total depreciation over the asset's useful life, but the annual amount of depreciation expense and book value will differ from year-to-year. 126) D The straight-line, units-of-production, and declining-balance methods are acceptable methods of depreciation. They will produce the same total depreciation over the asset's useful life, but the amount of depreciation expense and book value will differ from year-to-year. As a result, the amount of net income reported in a given year can vary depending on the depreciation method used. 127) D
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The units-of-production depreciation method is chosen when the amount of asset production varies significantly from period to period. Under these circumstances, it offers the best matching between depreciation expense and asset usage. 128) A Partial-year depreciation = (Cost − Residual value) × (1 ÷ Useful life) × Time period in use = ($108,000 − $9,000) × (1 ÷ 9) × (4 months (September 1 - through December 31) ÷ 12 months) = $3,667 129) A Partial-year depreciation = (Cost − Residual value) × (1 ÷ Useful life) × Time period in use = ($57,500 − $7,500) × (1 ÷ 5) × (4 months (September 1 - through December 31) ÷ 12 months) = $3,333 130) A The hydraulic lift was owned for five months during the year (August through December). Depreciation = [(Cost − Accumulated Depreciation) × (2 ÷ Useful Life)] × Portion of year owned = [($165,000 − $0) × (2 ÷ 10)] × (5 ÷ 12) = $13,750 131) D The use of accelerated depreciation methods for tax purposes allows a company to delay or defer income taxes to later years because it lowers taxable income in the early years of an asset's life. 132) A
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Most corporations use the IRS-approved Modified Accelerated Cost Recovery System (MACRS) to calculate depreciation expense for their tax returns. MACRS is similar to the declining-balance method and is applied over relatively short asset lives set by the IRS to yield high tax deductions for depreciation expense in the early years. 133) A Depreciation is the allocation of existing costs that were already recorded as a long-lived asset. Think of the cost of a long-lived asset as a big prepayment for future benefits. As that asset is used, those prepaid benefits are used up, so the asset needs to be decreased each period. This decrease in the asset creates an expense, which is reported on the income statement and matched against the revenue generated by the asset, as required by GAAP. 134) D Depreciation is the allocation of existing costs that were already recorded as a long-lived asset. Think of the cost of a long-lived asset as a big prepayment for future benefits. As that asset is used, those prepaid benefits are used up, so the asset needs to be decreased each period. This decrease in the asset creates an expense, which is reported on the income statement and matched against the revenue generated by the asset, as required by GAAP. 135) A Depreciation is the allocation of existing costs that were already recorded as a long-lived asset. Think of the cost of a long-lived asset as a big prepayment for future benefits. As that asset is used, those prepaid benefits are used up, so the asset needs to be decreased each period. This decrease in the asset creates an expense, which is reported on the income statement and matched against the revenue generated by the asset, as required by GAAP. Version 1
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136) C Despite that the asset may last 10 years, the truck should be depreciated over the time that the company plans to use and benefit from the asset, which is 4 years. 137) B Depreciable cost is the portion of the asset's cost that will be used in generating revenue; it is calculated as asset cost minus residual value. 138) D Depreciable cost = Asset cost − Residual value = $7,500 − $600 = $6,900 139) A The asset should not be depreciated below its residual value. Since this asset's book value is $600, then no additional depreciation should be recorded. The asset should not be removed from the company's books until it is actually disposed of. 140) A Residual (or salvage) value is the estimated amount to be recovered at the end of the company's estimated useful life of an asset. 141) B Depreciation is recorded with a debit to Depreciation Expense and a credit to Accumulated Depreciation. 142) C
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Depreciation is recorded with a debit to Depreciation Expense (to increase that expense account) and a credit to Accumulated Depreciation (to increase that contra-asset account). If the entry is recorded twice, total assets will be understated and expenses will be overstated. The overstatement of expenses will cause net income to be understated and, as a result, stockholders' equity will also be understated. 143) A The book (or carrying) value is the difference between the cost of a long-lived asset and the asset's Accumulated Depreciation. 144) A The book (or carrying) value is the difference between the cost of a long-lived asset and the asset's Accumulated Depreciation. 145) B Different depreciation methods can be used for different classes of assets provided the methods are used consistently over time so that financial statement users can compare results across periods. 146) A Depreciation expense = (Cost − Residual value) × (1 ÷ Useful life) = ($7,500 − $600) × (1 ÷ 4) = $1,725 147) A Depreciation expense = (Cost − Residual value) × (1 ÷ Useful life) = ($315,000 − $5,000) × (1 ÷ 10) = $31,000 148) A As the name straight-line suggests, Depreciation Expense is a constant amount each year, Accumulated Depreciation increases by an equal amount each year, and book value decreases by the same equal amount each year. Version 1
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149) D At the end of the asset's life, accumulated depreciation equals the asset's depreciable cost, and book value equals residual value. 150) B Useful life is an estimate of the asset's useful economic life to the company (not its economic life to all potential users). It may be expressed in terms of years or units of capacity, such as the number of units it can produce or the number of miles it will travel. 151) A Depreciation expense = (Cost − Residual value) × (Actual production this period ÷ Estimated total production) = ($30,000 − $0) × (15,000 units ÷ 50,000 units) = $9,000 152) C Depreciation expense = (Cost − Residual value) × (Actual production this period ÷ Estimated total production) = ($210,000 − $10,000) × [(2,000 units + 2,500 units) ÷ 10,000 units] = $90,000 153) A Under the units-of-production method, the depreciation expense, accumulated depreciation, and book value vary from period to period, depending on the number of units produced. 154) D
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Depreciation expense = Book value × (2 ÷ Useful life) Depreciation expense = (Cost − Accumulated depreciation) × (2 ÷ Useful life) 2020: = ($30,000 − $0) × 2 / 4 = $15,000 2021: = ($30,000 − $15,000) × 2 / 4 = $7,500 Book value at end of 2018 = $30,000 − ($15,000 + $7,500) = $7,500 The book value at the end of 2021 is greater than the residual value of $5,000. As such, the amount calculated above is the amount of depreciation that can be taken. 2022: = [$30,000 − ($15,000 + $7,500)] × 2 / 4 = $3,750 Book value at end of 2022 would be $3,750 [or $30,000 − ($15,000 + $7,500 + $3,750)], which is less than the residual value of $6,000. Recording the calculated amount of depreciation expense in 2022 would cause the book value to drop below the residual value. Revised calculation: Depreciation expense = Beginning book value of $7,500 (calculated above) − Residual value of $6,000 = $1,500 2023: No depreciation will be taken since book value equals residual value. 155) B Different depreciation methods can be used for different classes of assets provided the methods are used consistently over time so that financial statement users can compare results across periods. 156) A Accountants typically assume the assets were purchased at the beginning of the month nearest to the actual purchase, which, in this case, is January 1. Version 1
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157) A Accountants typically assume the assets were purchased at the beginning of the month nearest to the actual purchase, which, in this case, is November 1. 158) C Depreciation should be recorded for eight (8) months so that it covers January 2021 through August 2021. 159) A Accountants typically assume the assets were purchased at the beginning of the month nearest to the actual sale, which, in this case, is July 1. Depreciation should be recorded for six (6) months so that it covers January 2021 through June 2021. 160) B One of the behaviors the government wants to encourage is economic renewal and growth. Thus, the IRS allows companies to deduct larger amounts of tax depreciation in the early years of an asset's life than what GAAP allows. 161) A All taxpayers want to pay the least tax that is legally permitted, and at the latest possible date. This is referred to as the least and latest rule. 162) D Impairment occurs when events or changed circumstances interfere with a company's ability to recover the value of the asset through future operations. If this occurs, the book value should be written down to what the asset is worth (called fair value) with the amount of the write-down reported as an impairment loss. 163) B Version 1
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When an impairment occurs, the book value is written down to what the asset is worth (called fair value) with the amount of the write-down reported as an impairment loss. Impairment losses are classified as an operating expense on the income statement. As a result, recording an asset impairment loss will decrease assets and increase expenses. The increase in expenses decreases both net income and stockholders' equity. 164) D A loss due to impairment is recorded as a debit to Impairment Loss and a credit to the asset. Thus, as a result of recording a loss, assets are decreased. Impairment Loss is classified as an operating expense and does decrease net income which decreases stockholders' equity. 165) D Impairment occurs when events or changed circumstances interfere with a company's ability to recover the value of the asset through future operations. If this occurs, the book value should be written down to what the asset is worth (called fair value) with the amount of the write-down reported as an impairment loss. Impairment losses are classified as an operating expense on the income statement and reported above the Income from Operations subtotal. 166) C Impairment Loss = Book Value − Fair Value = $199,000 − $143,000 = $56,000 167) C Impairment Loss = Book Value − Fair Value = $160,000 − $125,000 = $35,000 168) C
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Impairment occurs when events or changed circumstances interfere with a company's ability to recover the value of the asset through future operations. If this occurs, the book value should be written down to what the asset is worth (called fair value) with the amount of the write-down reported as an impairment loss. Impairment Loss = Book Value − Fair Value = $440,000 − $360,000 = $80,000 169) D Impairment losses are classified as an operating expense on the income statement and reported above the Income from Operations subtotal. 170) D An impairment loss is recorded with a debit to Loss on Impairment (which increases expenses and, as such, decreases net income and stockholders' equity) and a credit to the impaired asset's account (which decreases assets). 171) B An impairment loss is recorded with a debit to Loss on Impairment (which increases expenses and, as such, decreases net income and stockholders' equity) and a credit to Goodwill (which decreases intangible assets). 172) B
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As a result of recording depreciation, an asset's book value declines as it ages. However, because depreciation is not intended to report an asset at its current value, an asset's book value could exceed its current value, particularly if the asset becomes impaired. Impairment occurs when events or changed circumstances interfere with a company's ability to recover the value of the asset through future operations. If this occurs, the book value should be written down to what the asset is worth (called fair value) with the amount of the write-down reported as an impairment loss. 173) C Before a disposal is recorded, depreciation must be brought up to the date of the sale. Debit Depreciation Expense and credit Accumulated Depreciation for $20,000 (or full year depreciation of $40,000 × 6 months (sold half-way through the year) ÷ 12 months) 174) C Impairment occurs when events or changed circumstances interfere with a company's ability to recover the value of the asset through future operations. If this occurs, the book value should be written down to what the asset is worth (called fair value) with the amount of the write-down reported as an impairment loss. The entry includes a debit to Accumulated Depreciation and a credit to Building to eliminate the asset’s accumulated depreciation and a debit to Impairment Loss and a credit to Building to write the asset down to its fair value. In this case, debit Accumulated Depreciation and credit Building $430,000 ($2,000,000 − $1,570,000) and debit Impairment Loss and a credit to Building for $595,000 ($1,570,000 − $975,000). 175) C
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The disposal of a depreciable asset usually requires two accounting adjustments. First, the Depreciation Expense and Accumulated Depreciation accounts must be updated. If a long-lived asset is disposed of during the year, it should be depreciated to the date of disposal using a partial-year calculation. Then, the company records the disposal by increasing Cash and decreasing both Equipment and Accumulated Depreciation; a gain or loss is reported if the proceeds from the sale do not equal the asset's book value. 176) B A loss on disposal is reported in the Operating Expenses section of the income statement. 177) D A gain results if the proceeds are greater than the book value; a loss results if the proceeds are less than the book value. That gain (loss) will increase (decrease) stockholders' equity. 178) D A gain on disposal results if the proceeds are greater than the book value; a loss on disposal results if the proceeds are less than the book value. Here the proceeds are zero and, since the asset is fully depreciated with no residual value, the book value is also zero. No gain or loss on disposal will be recorded. 179) D Book value = $1,476,000 − $1,283,000 = $193,000 Gain (loss) on disposal = Proceeds − Book Value = $56,400 − $193,000 = ($136,600) 180) D
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Book value = $1,410,000 − $1,269,000 = $141,000 Gain (loss) on disposal = Proceeds − Book Value = $55,000 − $141,000 = ($86,000) 181) A Gain (loss) on disposal = Proceeds − Book Value = $450,000 − $400,000 = $50,000 Gains on disposal are included in revenues in the income statement and, as such, increase net income and stockholders’ equity. 182) C Gain (loss) on disposal = Proceeds from sale − Book value at time of sale Gain (loss) on disposal = Proceeds from sale − (Cost − Accumulated depreciation at time of sale) = $66,000 − ($216,000 − $118,000) = ($32,000) 183) C Gain (loss) on disposal = Proceeds from sale − Book value at time of sale Gain (loss) on disposal = Proceeds from sale − (Cost − Accumulated depreciation at time of sale) = $100,000 − ($400,000 − $220,000) = ($80,000) 184) A A gain on disposal means that the proceeds from sale were greater than the asset’s book value at time of sale. That gain, like revenues, will increase net income. 185) C A gain on disposal means that the proceeds from sale were greater than the asset’s book value at time of sale. Version 1
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186) A Gain (loss) on disposal = Proceeds from sale − Book value at time of sale = $800 − $1,000 = ($200) 187) B Gain (loss) on disposal = Proceeds from sale − Book value at time of sale Gain (loss) on disposal = Proceeds from sale − (Cost − Accumulated depreciation at time of sale) = $6,000 − ($40,000 − $32,000) = ($2,000) 188) D When a long-lived asset is sold at a loss, the proceeds (which increase total assets) are less than the book value of the asset. The net effect is a decrease to total assets. Since the long-lived asset was sold at a loss, net income will be decreased as will stockholders' equity. 189) B
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Annual depreciation expense = (Cost − Residual value) × (1 ÷ Useful life) = ($42,700 − $5,600) × (1 ÷ 5) = $7,420 Accumulated depreciation = Year 1 depreciation expense + Year 2 depreciation expense = $7,420 + $7,420 = $14,840 Gain (loss) on disposal = Proceeds from sale − Book value at time of sale Gain (loss) on disposal = Proceeds from sale − (Cost − Accumulated Depreciation at time of sale) = $31,200 − ($42,700 − $14,840) = $3,340 190) B Annual depreciation expense = (Cost − Residual value) × (1 ÷ Useful life) = ($40,000 − $5,000) × (1 ÷ 5) = $7,000 Accumulated depreciation = Year 1 depreciation expense + Year 2 depreciation expense = $7,000 + $7,000 = $14,000 Gain (loss) on disposal = Proceeds from sale − Book value at time of sale Gain (loss) on disposal = Proceeds from sale − (Cost − Accumulated Depreciation at time of sale) = $30,000 − ($40,000 − $14,000) = $4,000
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191) A Annual depreciation expense = (Cost − Residual value) × (1 ÷ Useful life) = ($40,700 − $0) × (1 ÷ 5) = $8,140 Accumulated depreciation = 2019 depreciation expense + 2020 depreciation expense = $8,140 + $8,140 = $16,280 Gain (loss) on disposal = Proceeds from sale − Book value at time of sale Gain (loss) on disposal = Proceeds from sale − (Cost − Accumulated depreciation at time of sale) = $23,400 − ($40,700 − $16,280) = ($1,020) 192) A Annual depreciation expense = (Cost − Residual value) × (1 ÷ Useful life) = ($80,000 − $0) × (1 ÷ 5) = $16,000 Accumulated depreciation = 2019 depreciation expense + 2020 depreciation expense = $16,000 + $16,000 = $32,000 Gain (loss) on disposal = Proceeds from sale − Book value at time of sale Gain (loss) on disposal = Proceeds from sale − (Cost − Accumulated depreciation at time of sale) = $46,000 − ($80,000 − $32,000) = ($2,000) Version 1
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193) C Annual depreciation expense = (Cost − Residual value) × (1 ÷ Useful life) = ($1,600,000 − $130,000) × (1 ÷ 6) = $245,000 Debit Depreciation Expense and credit Accumulated Depreciation for $245,000 Depreciable cost = Cost − Residual value = $1,600,000 − $130,000 = $1,470,000 Book value at December 31, 2021 = Cost − Accumulated Depreciation = $1,600,000 − $245,000 = $1,355,000 194) D First, update the Deprecation Expense and Accumulated Depreciation accounts. Depreciation expense for 6 months (January through July) = (Cost − Residual value) × (1 ÷ Useful life) × 6 / 12 = ($1,600,000 − $130,000) × (1 ÷ 6) × 6 / 12 = $122,500 Accumulated depreciation at July 1, 2023 = $245,000 + $245,000 + $122,500 = $612,500 Gain (loss) on disposal = Proceeds from sale − Book value at time of sale Gain (loss) on disposal = Proceeds from sale − (Cost − Accumulated depreciation at time of sale) = $1,000,000 − ($1,600,000 − $612,500) = $12,500 Then, record the disposal. Debit Cash $1,000,000, debit Accumulated Depreciation $612,500, credit Equipment $1,600,000, credit Gain on Disposal of PPE $12,500
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195) C The journal entry to record the sale is as follows: Debit Cash (to increase this asset account) for $11,000, debit Accumulated Depreciation (to decrease this contra-asset account) for $6,000, credit Truck (to decrease this asset account) for $15,000, and credit Gain on Sale (to increase this revenue account) for $2,000. The net effect on assets is an increase of $2,000 (or $11,000 + $6,000 − $15,000); net income increases by $2,000. Gains increase net income. 196) B Gain (loss) = Proceeds from sale − Book value of equipment = $545,000 − ($900,000 − $450,000) = $95,000 Entry to record sale: Debit Cash (to increase that asset account) for $545,000, debit Accumulated Depreciation (to decrease that contra-asset account) for $450,000, credit Gain on Disposal for $95,000 (calculated above), and credit Equipment (to decrease that asset account) for $900,000 197) C Gain (loss) = Proceeds from sale − Book value of equipment = $545,000 − ($900,000 − $450,000) = $95,000 Entry to record sale: Debit Cash (to increase that asset account) for $450,000, debit Accumulated Depreciation (to decrease that contra-asset account) for $545,000, credit Gain on Disposal for $95,000 (calculated above), and credit Equipment (to decrease that asset account) for $900,000 Assets increase by $95,000 (or $450,000 + $545,000 − $900,000) and the gain on the sale increases net income by $95,000. 198) B Version 1
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Gain (loss) on disposal = Proceeds from sale − Book value at time of sale Gain (loss) on disposal = Proceeds from sale − (Cost − Accumulated depreciation at time of sale) = $2,140 − ($13,400 − $9,140) = ($2,120) Debit Cash $2,140, debit Accumulated Depreciation $9,140, debit Loss on Disposal of PPE $2,120, credit Vehicles $13,400 199) B Gain (loss) on disposal = Proceeds from sale − Book value at time of sale Gain (loss) on disposal = Proceeds from sale − (Cost − Accumulated depreciation at time of sale) = $2,000 − ($12,000 − $9,000) = ($1,000) Debit Cash $2,000, debit Accumulated Depreciation $9,000, debit Loss on Disposal of PPE $1,000, credit Vehicles $12,000 200) B Depreciation expense = (Cost − Accumulated depreciation) × (2 ÷ Useful life) = ($345,000 + $3,000 + $12,000) × 2 / 5 = $144,000 201) C
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The machine is fully depreciated, so its book value equals the residual value. Gain (loss) on disposal = Proceeds from sale − Book value at time of sale = $28,750 − $37,500 = ($8,750) Total cost of machine = $345,000 + $3,000 + $12,000 = $360,000 Debit Cash $28,750, debit Accumulated Depreciation $322,500 (or Cost of $360,000 − Residual Value of $37,500), debit Loss on Disposal of PPE $8,750, credit Machine $360,000 (or ($345,000 + $3,000 + $12,000) 202) A Disposal of a long-lived asset usually requires two entries - one to update the Depreciation Expense and Accumulated Depreciation account to the date of the disposal, and another entry to record the disposal. Any gain or loss (difference between the value of any items received and the book value of the items given up) is often reported as an operating expense above the "Income from Operations" line on the income statement. 203) C Unlike tangible assets, intangible assets usually have no residual value at the end of their useful lives. 204) A Intangible assets are long-lived assets with no physical substance such as patents, trademarks, franchises, copyrights, licensing rights, and goodwill. 205) C Goodwill and trademarks are two intangible assets with an unlimited life. Copyrights, licensing rights, and franchises all have a limited life.
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206) D A copyright gives the owner the exclusive right to publish, use, and sell a literary, musical, artistic, or dramatic work for a period not exceeding 70 years after the author's death. The book you are reading is copyrighted. It is illegal, therefore, for someone to photocopy several chapters from this book without first obtaining permission from the copyright owner. 207) A A patent is an exclusive right granted by the federal government to the patent owner that prevents others from using, manufacturing, or selling the patented item for 20 years. 208) C Intangible assets are long-lived assets that lack physical substance. They include licensing rights, which are limited permissions to use something according to specific terms and conditions. 209) A Goodwill is the premium a company pays to obtain the favorable features associated with another company. It includes lots of good features like a favorable location, an established customer base, a great reputation, and successful business operations. 210) D
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Goodwill is the premium a company pays to obtain the favorable features associated with another company. Although many companies have probably built up their own goodwill, GAAP do not allow it to be reported as an intangible asset on the balance sheet unless it has been purchased from another company. For most companies, goodwill is not amortized but instead is tested annually for impairment and written down if its value is found to be impaired. Private companies are allowed to forgo annual impairment testing and instead amortize goodwill using the straight-line method over 10 years or less. 211) A Goodwill is the excess of cost over the fair value of the net assets acquired. Goodwill is only recorded on the balance sheet if it is purchased from another company. 212) A Goodwill is not amortized because it has an indefinite or unlimited life, but it is tested annually for impairment. 213) D For most companies, goodwill is not amortized but instead is tested annually for impairment and written down if its value is found to be impaired. Beginning in 2014, private companies are allowed to forgo annual impairment testing and instead amortize goodwill using the straight-line method over 10 years or less. 214) B First the asset is tested for impairment to determine if future cash flows are less than book value. The test for goodwill impairment is more complex than this test for impairment of other intangible assets. However, if any intangible asset is deemed impaired, it will be written down to fair value. Version 1
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215) D A franchise is a contractual right to sell certain products or services, use certain trademarks, or perform activities in a geographical region. Because a franchise is an intangible asset, the amount paid for a franchise is amortized over the contractual life. Land improvements are tangible assets that deteriorate over time and, as a result, are depreciated. Trademarks and goodwill are intangible assets with indefinite lives so they are not amortized. 216) A Trademarks provide exclusive rights to a special name, image or slogan. Copyrights provide exclusive rights to artistic materials. A patent provides exclusive rights to a manufacturing process. 217) A A patent provides exclusive rights to a manufacturing process. A copyright provides exclusive rights to artistic material. 218) C A patent provides exclusive rights to a manufacturing process. A copyright provides exclusive rights to artistic material. Trademarks provide exclusive rights to a special name, image or slogan. 219) A Licensing rights are limited permissions to use something according to specific terms and conditions, for example, your university or college likely has obtained the licensing right to make computer programs available for use on your campus network. 220) D A franchise is a contractual right to sell certain products or services, use certain trademarks, or perform activities in a certain geographical region.
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221) A Amortization is the process of allocating the cost of intangible assets over their limited useful lives. 222) B Goodwill is the premium a company pays to obtain the favorable features associated with another company. 223) A Amortization is recorded with a debit to Amortization Expense (to increase that expense account) and a credit to Accumulated Amortization (to increase that contra-asset account). If the entry is recorded twice, total assets will be understated and expenses will be overstated. The overstatement of expenses will cause net income to be understated and, as a result, stockholders' equity will also be understated. 224) B Amortization is recorded with a debit to Amortization Expense (to increase that expense account) and a credit to Accumulated Amortization (to increase that contra-asset account) or a credit to the intangible asset account. 225) A IFRS require companies to capitalize costs of developing intangible assets, such as prototypes for making new products or tools. GAAP generally expense such development costs because of the uncertainty of their value. 226) D Long-lived assets include both tangible and intangible assets. Tangible long-lived assets are depreciated; intangible long-lived assets are amortized. Version 1
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227) D Long-lived assets are assets that are acquired for use in the business and are not intended for resale. Amortization is usually credited directly to the intangible asset account—no contra account is used. There is no requirement that all long-lived intangible assets be amortized over a period of 40 years or less. Intangible assets with unlimited lives (trademarks and goodwill) are not amortized. 228) A Depreciation is recorded for tangible assets; amortization is recorded for intangible assets. 229) C Amortization is credited directly to the Patent account; a contra account is not necessary. Amortization Expense = Cost ÷ Useful Life Amortization Expense = $620,000 ÷ 10 Amortization Expense = $62,000 230) B Intangible long-lived assets are amortized over their useful life using the straight-line method. $15,000 ÷ 8 = $1,875. 231) D GAAP does not allow write-ups for increases in the value of long-lived assets. 232) A
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Lego is a Danish company. IFRS requires companies to capitalize costs of developing intangible assets, such as prototypes for making new products or tools. Southwest Airlines, Walmart, and Cedar Fair are U.S. companies. U.S. GAAP generally requires that such development costs be expensed because of the uncertainty of their value. 233) B Average Net Fixed Assets =(Prior EB Fixed Assets + Current EB fixed Assets) ÷ 2 $15,000,000 = (14,000,000 + $16,000,000) ÷ 2 Fixed Asset Turnover Ratio = Net Sales Revenue ÷ Average Net Fixed Assets 2.80 = $42,000,000 ÷ $15,000,000 234) B Average Net Fixed Assets =(Prior EB Fixed Assets + Current EB fixed Assets) ÷ 2 $9,000,000 = ($8,000,000 + $10,000,000) ÷ 2 Fixed Asset Turnover Ratio = Net Sales Revenue ÷ Average Net Fixed Assets 4.0 = $36,000,000 ÷ $9,000,000 235) D Avgerage Net Fixed Assets = (Prior Ending Balance Fixed Assets + Current Ending Balance Fixed Assets)÷ 2 $5,100,000 = ($4,100,000 + $6,100,000) ÷ 2 Fixed Asset Turnover Ratio = Net Sales Revenue ÷ Avgerage Net Fixed Assets 1.41 = 7,200,000 ÷ 5,100,000 236) D Version 1
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Average Net Fixed Assets =(Prior Ending Balance Fixed Assets + Current Ending Balance fixed Assets) ÷ 2 $2,400,000=($2,300,000 + $2,500,000) ÷ 2 Fixed Asset Turnover Ratio = Net Sales Revenue ÷ Average Net Fixed Assets 1.5 =$3,600,000 ÷ $2,400,000 237) A Fixed asset turnover = Net Sales ÷ Average net fixed assets. $550,000 ÷ [($146,000 + $134,000) ÷ 2] = 3.93 238) C Fixed asset turnover ratio = Net revenue ÷ Average net fixed assets = $360,000 ÷ [($100,000 + $120,000) ÷ 2] = 3.27 times 239) D Fixed asset turnover ratio = Net revenue ÷ Average net fixed assets = ($500,000,000 − $4,000,000) ÷ [($23,000,000 + $27,000,000) ÷ 2] = 19.84 times 240) D The fixed asset turnover ratio measures the amount of net sales generated per dollar of net fixed assets. 241) D Fixed asset turnover ratio = Net Sales ÷ Average net fixed assets. This ratio indicates number of dollars of sales generated for each dollar of average fixed assets. 242) A The fixed asset turnover ratio measures the efficiency of fixed assets to generate sales revenue. Generally, higher turnover ratios suggest better utilization of fixed assets.
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243) A The fixed asset turnover ratio will fall if average net fixed assets increase or if net sales decrease. This suggests the company is not as efficient in using its fixed assets to generate sales as it was in previous periods. 244) C Writing down impaired equipment would decrease net fixed assets resulting in a higher turnover ratio. 245) C Fixed Asset Turnover Ratio = Net sales ÷ Average net fixed assets. If both the numerator and the denominator rise by the same %, the ratio will not change. 246) D The fixed asset turnover ratio is calculated by dividing Net Sales by Average Net Fixed Assets, so a ratio of 4.3 means that for every $1 of fixed assets, the company generated $4.30 of net sales. 247) A The fixed asset turnover ratio indicates dollars of revenue generated for each dollar invested in fixed assets (long-lived tangible assets). A higher ratio implies greater efficiency. 248) D A higher fixed asset ratio indicates greater efficiency in the use of fixed assets to generate sales revenue. 249) D Using an accelerated depreciation method, Company A would report higher expenses, lower net income, and a lower carrying value of the asset than Company B. Version 1
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250) A Accelerated depreciation will be higher than straight-line depreciation in the early years and this will reverse in the later years. 251) C Company A will have higher depreciation expense in the earlier years and lower net income when compared to Company B using the straightline method. This will reverse in the later years. 252) D Depreciation calculations do not differ due to the industry. 253) A During the first few years of an asset's life, an accelerated depreciation method will result in a higher accumulated depreciation and a lower net fixed asset amount as compared to the straight-line method. Since Company B is using the straight-line method, it will have a smaller fixed asset turnover. Company B's carrying value of the asset would be higher than Company A, so Company B would show a smaller gain on asset disposal. 254) B EBITDA is earnings before interest, taxes, depreciation, and amortization. Or, put another way, EBITDA = Net income + Interest expense + Income tax expense + Depreciation expense + Amortization Expense. 255) D Depletion per ton = (Cost − Residual value) ÷ Estimated number of tons = ($1,540,000 − $310,000) ÷ 2,100,000 = $0.586 256) D
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Depletion per ton = (Cost − Residual value) ÷ Estimated number of tons = ($1,500,000 − $250,000) ÷ 2,000,000 = $0.625 257) B Depletion of natural resources is similar to the units of production method of depreciation since they are both based on number of units. 258) C Depletion is added to the cost of inventory because it is necessary to obtain it. 259) A Depletion expense = Cost × (Actual production ÷ Estimated production) = $1,500,000 × (200,000 ÷ 2,000,000) = $150,000 260) C In effect, the units-of-production method is used to calculate depletion. 261) A Because depletion of the natural resource is necessary to obtain the inventory, the depletion computed during a period is added to the cost of the inventory, not expensed in the period. 262) A Because depletion of the natural resource is necessary to obtain the inventory, the depletion computed during a period is added to the cost of the inventory, not expensed in the period. Depletion is recorded with a debit to Inventory (to increase that asset account) and a credit to Accumulated Depletion (to increase that contra-asset account). The net effect is that there is no effect on total assets. 263) A
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Because depletion of the natural resource is necessary to obtain the inventory, the depletion computed during a period is added to the cost of the inventory, not expensed in the period. The Inventory remains as an asset on the balance sheet until it is sold, at which time its cost is removed from the balance sheet and reported on the income statement as an expense called Cost of Goods Sold. 264) A Because depletion of the natural resource is necessary to obtain the inventory, the depletion computed during a period is added to the cost of the inventory, not expensed in the period. The Inventory remains as an asset on the balance sheet until it is sold, at which time its cost is removed from the balance sheet and reported on the income statement as an expense called Cost of Goods Sold. 265) A If sales revenue (the numerator) rises and average net fixed assets falls (the denominator), the ratio will rise. 266) B The depreciation expense calculation uses estimates for useful life and residual value. If these estimates are revised, the change is reported prospectively. 267) C Depreciation is based on estimates, and as time passes, the estimates may be revised. Past financial statements are not changed; changes in estimates are handled prospectively. 268) C The change is recorded prospectively which means that the remaining cost to be depreciated will be allocated over the remaining 7 years (10 years – 3 years) of the asset's useful life. Version 1
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269) A The amount of depreciable cost as of the end of year 3 is: ($45,000 − $4,000) − [($41,000 ÷ 10) × 3] = $28,700. The remaining depreciation will be recorded over the remaining 4-year useful life: $28,700 ÷ 4 = $7,175 270) A The amount of depreciable cost as of the end of year 3 is: ($25,000 − $3,000) − [($22,000 ÷ 8) × 3] = $13,750. The remaining depreciation will be recorded over the remaining 2-year useful life: $13,750 ÷ 2 = $6,875 271) D Companies may change depreciation methods although such a change requires more disclosure. Under GAAP, changes in accounting estimates and depreciation methods should be made only when a new estimate or accounting method "better measures" the periodic income of the business. 272) A Depreciation = (Book value − New residual value) × (1 ÷ Remaining life) 273) D The amount of depreciation and amortization depends on three items: an asset's recorded cost, its estimated useful life, and its estimated residual value. When any one of these items change, the amount of depreciation and amortization needs to change. 274) B
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The amount of depreciation and amortization depends on three items: an asset's recorded cost, its estimated useful life, and its estimated residual value. When any one of these items change, the amount of depreciation and amortization needs to change. At this point, the remaining useful life is 4 years (or revised estimate of 6 years − 2 years that have passed). Revised depreciation = (Book value − New residual value) × (1 ÷ Remaining life) = [$48,000 − ($6,000 per year × 2 years) − $0] × (1 ÷ 4) = $9,000 per year
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CHAPTER 9: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Reno Recycling made the following expenditures in connection with the construction of its new building: Architect's fees for the new building Cash paid for land and run-down building on the land Removal of old building Salvage from sale of old building materials Construction survey to site the new building Legal fees for title search Excavation for basement construction Machinery purchased for operations Freight on machinery purchased Construction costs of new building Landscaping Installation of machinery
$ 24,000 600,000 36,000 8,000 3,000 6,000 50,000 200,000 3,200 2,000,000 40,000 5,000
Required: Prepare a schedule showing the amounts to be recorded as land, buildings, and machinery.
2) Complete the table below by placing "X's" in the correct columns to identify the: (1) type of asset and (2) appropriate method of allocating the existing costs that were already recorded. Long-Lived Asset
Type of Asset Tangible Intangible
Method of Allocating Cost Depreciate Amortize Neither
Transportation equipment Copyright Licensing rights Office equipment
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Goodwill Patents Selfconstructed buildings Land Production equipment Trademark
3) On January 1, 2021, Ventura Company bought a parcel of land for use in its operations by paying the seller $320,000 in cash and signing a five year, 12% note payable in the amount of $80,000. In connection with the purchase of the land, Ventura incurred legal fees of $15,200, a real estate agent sales commission of $20,000, surveying fees of $800, and an appraisal fee of $4,000. Required: a. Compute the total acquisition cost of the parcel of land. b. Prepare the journal entry to record the purchase of the parcel of the land.
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4) Greer Manufacturing purchases property that includes land, buildings and equipment for $8,250,000. In addition, the company pays $270,000 in legal fees, $330,000 in commissions, and $150,000 in appraisal fees. The land is estimated at 25%, the buildings are at 40%, and the equipment at 35% of the property value. Required: a. Determine the total acquisition cost of this "basket purchase." b. Allocate the total acquisition cost to the individual assets acquired. c. Prepare the journal entry to record the purchase assuming that the company paid 50% of the amounts using cash and signed a note (due in five years) for the remainder.
5) At the beginning of 2020, your company buys a $30,000 piece of equipment that it expects to use for 4 years. The equipment has an estimated residual value of $2,000. The company expects to produce a total of 200,000 units. Actual production is as follows: 44,000 units in 2020, 53,000 units in 2021, 51,000 units in 2022, and 52,000 units in 2023. Required: a. Determine the depreciable cost. b. Calculate the depreciation expense per year under the straight-line method. c. Use the straight-line method to prepare a depreciation schedule (that shows the Depreciation Expense, Accumulated Depreciation, and Net Book Value by year). d. Calculate the depreciation rate per unit under the units-of-production method. e. Use the units-of-production method to prepare a depreciation schedule (that shows the Depreciation Expense, Accumulated Depreciation, and Net Book Value by year).
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6) Duluth Ranch, Incorporated purchased a machine on January 1, 2021. The cost of the machine was $34,000. Its estimated residual value was $10,000 at the end of an estimated 5-year life. The company expects to produce a total of 20,000 units. The company produced 2,500 units in 2021 and 3,200 units in 2022. Required: a. Calculate depreciation expense for 2021 and 2022 using the straight-line method. b. Calculate the depreciation expense for 2021 and 2022 using the units-of-production method. c. Calculate depreciation expense for 2021 through 2025 using the double-declining balance method.
7) A company paid $17,000 for a vehicle that had an estimated useful life of 4 years, total capacity of 100,000 miles, and a residual value of $1,000. After 2 full years of using the vehicle (20,000 miles in Year 1 and 27,000 miles in Year 2), the company sold the vehicle for $6,000 and reported a loss on disposal of $3,480. Required: Determine the method of depreciation that was used by the company. (Show your work using all three methods.)
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8) During 2016, a company paid $1,200,000 to acquire a roller coaster. The estimated useful life of the roller coaster was estimated at ten years and its residual value was expected to be $200,000. As of December 31, 2021, Accumulated Depreciation in the amount of $500,000 had been recorded on the roller coaster. Management estimates that other amusement parks and scrap dealers would currently pay $600,000 for the roller coaster. Required: a. Determine the asset impairment loss, if any, on the roller coaster at December 31, 2021. b. Prepare the journal entry to record the asset impairment loss on this roller coaster as of December 31, 2021.
9) The machine was originally purchased on January 1, 2020 for $40,000. The machine was estimated to have a useful life of 5 years and no residual value. The company uses straight-line depreciation. On December 31, 2021, the machine was sold for $25,000. Required: a. Determine the gain (loss) on disposal, if any. b. Prepare the journal entry to record the sale. c. Assuming that the company had used the double-declining balance method instead of the straight-line method, explain how this would have affected the gain (or loss) on the sale. (Do not include any calculations.)
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10) Martinez, Incorporated acquired a patent on January 1, 2020 for $40,000 cash. The patent was estimated to have a useful life of 10 years with no residual value. On December 31, 2021, before any adjustments were recorded for the year, management determined that the remaining useful life was 6 years (with that new estimate being effective as of January 1, 2021). On June 30, 2022, the patent was sold for $25,000. Required: a. Prepare the journal entry to record the acquisition of the patent on January 1, 2020. b. Prepare the journal entry to record the annual amortization for 2020. c. Compute the amount of amortization that would be recorded in 2021. d. Determine the gain (loss) on sale on June 30, 2022. e. Prepare the journal entry to record the sale of the patent on June 30, 2022.
11) During 2021, Ambiance Company reported net revenue of $3,600,000. The company reported net fixed assets of $710,000 on January 1, 2021 and net fixed assets of $890,000 on December 31, 2021. Required: a. Calculate the fixed asset turnover ratio. b. Assume the 2021 fixed asset turnover ratio was lower than the 2020 ratio. Explain how an analyst might interpret this change. c. Describe at least one circumstance that might have caused the fixed asset turnover ratio to decline and be consistent with bad news. d. Describe at least one circumstance that might have caused the fixed asset turnover ratio to decline and yet be consistent with good news.
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12) At December 31, 2021 and 2020, respectively, Tyler Industries reported land, buildings, and equipment totaling $5,655,000 and $2,152,000 along with Accumulated Depreciation of $1,000,000 and $600,000 on its balance sheets. Revenues amounted to $38,227,000 and $12,113,000 for 2021 and 2020, respectively. Required: a. Compute Tyler's fixed asset turnover ratio for the year ended December 31, 2021. b. Assume that Tyler's fixed asset turnover ratio increased from 2020 to 2021. How might an analyst interpret an increasing ratio? c. Alternatively, assume that Tyler's fixed asset turnover rate decreased. Does a declining ratio always indicate a negative trend?
13) On January 1, 2021, Superior Mining Company paid $750,000 for a mineral deposit in Superior, Arizona, and then spent $112,500 to develop the deposit for exploitation. It was estimated that 690,000 total cubic yards could be extracted economically. During 2021, 69,000 cubic yards of minerals were extracted; the minerals have not yet been sold. Required: a. Compute the amount of depletion expense for 2021. b. Prepare the journal entry to record the 2021 depletion.
14) On January 1, 2021, Trueblood, Incorporated purchased a piece of machinery for use in operations. The total acquisition cost was $33,000. The machine has an estimated useful life of three years and a residual value of $3,000. Assume that units produced by the machine will total 16,000 during 2021, 23,000 during 2022, and 21,000 during 2023. Required: a. Use this information to complete the following table.
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Method
Depreciation Expense 2021
2022
2023
Book Value at End of Year 2021 2022 2023
Straight-line Units-of-production Double- decliningbalance
b. On January 1, 2022, the machine was rebuilt at a cost of $7,000. After it was rebuilt, the total estimated life of the machine was increased to five years (from the original estimate of three years) and the residual value to $6,000 (from $3,000). Assume that the company chose the straight-line method for depreciation. Compute the annual depreciation expense after the change in estimates. Use the information provided in Part b. to answer Part c, d, and e. c. Prepare the adjusting entry to record the depreciation expense for the year ended December 31, 2022. d. On December 31, 2023, the machine was sold for $7,500. Compute the book value on that date. e. Prepare the journal entry to record the sale.
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15)
Match each asset with the appropriate category.
Asset Warehouse Licensing rights Supplies Patents Production equipment Goodwill Land Office computer Category A) I – Intangible long-lived asset B) N – Not a long-lived asset C) T – Tangible long-lived asset
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16)
Match each term with the appropriate definition. Not all definitions will be used.
Term: Accelerated depreciation Goodwill Patent EBITDA Net book value Fixed assets Straight-line depreciation Residual value Trademark Definition: A) When a company expenses the entire cost of a long-lived asset in the first year of use. B) When a company receives free publicity in return for charitable contributions. C) A tax law dealing with how companies can depreciate their assets. D) The acquisition cost of an asset minus its accumulated depreciation. E) When a company expenses the cost of a long-lived asset by a constant annual amount. F) The exclusive right to sell or use a product or process that is granted to encourage innovation. G) Net income plus interest, taxes, depreciation and amortization expenses. H) Tangible long-lived assets. I) An intangible asset that represents the value of unidentifiable assets acquired. J) Names or images that appear with a ® or TM. K) What a company expects to receive when an asset is disposed of at the end of its useful life. L) Assets whose values do not change over time. M) When a company allocates the cost of a long-lived asset at a higher rate in the first years of use. N) The estimated total use a company expects to receive from an asset.
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17)
Match each term with the appropriate definition. Not all definitions will be used.
Term: Amortization Useful life Licensing right Least and latest rule Component allocation Fixed asset turnover ratio Depreciable cost Copyright Depreciation schedule Revenue expenditures Definition: A) Net sales revenue divided by average net fixed assets. B) Another name for ordinary repairs and maintenance expenditures. C) A contractual agreement that allows limited permission for use of a property. D) Net income divided by average total assets. E) An estimate of how long a tangible asset will last before it physically wears out. F) Asset cost minus residual value. G) Costs that are recorded as revenues. H) An estimate of how long a company will use a particular asset. I) Allocating the cost of tangible assets over their limited useful life. J) A cumulative record of depreciation expense, accumulated depreciation and book value. K) Asset cost minus accumulated depreciation. L) Grants the exclusive right to sell or use a creative work. M) The method whereby different parts of an asset may be depreciated over different useful lives under IFRS. N) The principle that companies wish to pay the lowest possible tax at the latest possible date. O) Allocating the cost of intangible assets over their limited useful life.
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18)
Match each term with the appropriate definition. Not all definitions will be used.
Term: Long-lived assets Average net fixed assets Capitalization of cost Units-of-production method Carrying value Asset impairment loss Depreciation Net sales revenue Declining-balance method Definition: A) Assets that will be used for more than a year. B) When a company writes down the value of an asset when estimated future cash flows fall below the original level estimated. C) The numerator of the fixed asset turnover ratio. D) The cost of financing an asset. E) When costs are recorded as assets rather than expenses. F) How expenses are reported in the income statement. G) The denominator of the fixed asset turnover ratio. H) The average proportion of a company's total assets that is long-lived. I) A depreciation method that produces higher amounts of depreciation expense in the early years of an asset's life and lower amounts in the later years. J) When a company writes down the value of an asset because estimated future cash flows fall below the book value. K) Assets that have physical substance. L) A depreciation method that spreads asset cost by use rather than time. M) The process of transferring the cost of long-lived tangible assets to expenses. N) Also known as book value.
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Answer Key Test name: Chap 09_7e_Problems 1) Land
Building
Architect's fees
Machinery
$ 24,000
Cash paid for land and old building Removal of old building
$ 600,000
Salvage from old building materials Building site survey
(8,000)
Title search legal fees
6,000
36,000
3,000
Building excavation
50,000
Machinery
$ 200,000
Freight on machinery
3,200
New building
2,000,000
Land improvements
40,000
Machinery installation Totals
5,000 $ 674,000
$ 2,077,000
$ 208,200
2) Long-Lived Asset Transportation equipment Copyright Licensing
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Type of Asset Tangible Intangible X
Method of Allocating Cost Depreciate Amortize Neither X
X
X
X
X
13
rights Office equipment Goodwill
X
X X
Patents
X
X
Selfconstructed buildings Land
X
Production equipment Trademark
X
X X
X
X X X
X
3) a. Purchase price: Cash
$ 320,000
Note payable
80,000
Incidental costs paid by purchaser: Legal fees
$ 15,200
Commission
20,000
Surveying fees
800
Appraisal fee
4,000
Total acquisition cost
40,000 $ 440,000
b. Debit Land
Credit
440,000
Cash
360,000
Note Payable
80,000
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4) a. Acquisition cost = $8,250,000 + $270,000 + $330,000 + $150,000 = $9,000,000 b. Allocation of cost = Total acquisition cost × Percentage contribution towards property's value Land: = $9,000,000 × 25% = $2,250,000 Buildings: = $9,000,000 × 40% = $3,600,000 Equipment: = $9,000,000 × 35% = $3,150,000 c. Debit Land
2,250,000
Buildings
3,600,000
Equipment
3,150,000
Credit
Cash
4,500,000
Notes Payable (long-term)
4,500,000
5) a. Depreciable cost = Cost − Residual value = $30,000 − $2,000 = $28,000 b. Depreciation expense per year = (Cost − Residual value) × (1 ÷ Useful life) = ($30,000 − $2,000) × 1/4 = $7,000 c. Depreciation schedule under the straight-line method: Year
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Depreciation
Accumulated
Net Book Value
15
Expense
Depreciation
Acquisition cost 2020 2021 2022 2023
$ 30,000 $ 7,000 7,000 7,000 7,000
$ 7,000 14,000 21,000 28,000
23,000 16,000 9,000 2,000
d. Depreciation rate per unit = (Cost − Residual value) ÷ Estimated total production = ($30,000 − $2,000) ÷ 200,000 units = $0.14 or 14¢ per unit e. Year
Depreciation Expense
Accumulated Depreciation
Acquisition cost 2020 2021 2022 2023
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Net Book value $ 30,000
$ 6,160(14¢ × 44,000) 7,420(14¢ × 53,000) 7,140(14¢ × 51,000) 7,280(14¢ × 52,000)
$ 6,160
23,840
13,580
16,420
20,720
9,280
28,000
2,000
16
6) a. Depreciation expense per year = (Cost − Residual value) × (1 ÷ Useful life) 2021: = ($34,000 − 10,000) × 1/5 = $4,800 2022: = ($34,000 − 10,000) × 1/5 = $4,800 b. Depreciation expense = (Cost − Residual value) × (Actual production ÷ Estimated total production) 2021: = ($34,000 − $10,000) × (2,500 ÷ 20,000) = $3,000 2022: = ($34,000 − $10,000) × (3,200 ÷ 20,000) = $3,840 c. Keep the estimated residual value of $10,000 in mind; book value cannot drop below residual value Depreciation expense = Book value × (2 ÷ Useful life) Depreciation expense = (Cost − Accumulated depreciation) × (2 ÷ Useful life) 2021: Depreciation expense = ($34,000 − $0) × 2/5 = $13,600 Book value at end of 2021 = $34,000 − $13,600 = $20,400, which is greater than the residual value of $10,000, so amount calculated is amount recorded. 2022: Version 1
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Depreciation expense = ($34,000 − $13,600) × 2/5 = $8,160 Book value at end of 2022 = $34,000 − ($13,600 + $8,160) = $12,240, which is greater than the residual value of $10,000, so amount calculated is amount recorded. 2023: Initial calculation: Depreciation expense = [$34,000 − ($13,600 + $8,160)] × 2/5 = $4,896 Book value at end of 2023 = $34,000 − ($13,600 + $8,160 + $4,896) = $7,344, which is less than the residual value of $10,000. Since the calculated amount of depreciation for 2023 would reduce the book value below the asset's residual value, a lower amount of depreciation is recorded so that the book value will equal the residual value. Revised calculation: Depreciation expense = Book value at end of 2022 − Residual value = $12,240 − $10,000 = $2,240 2024: Since book value equals residual value; depreciation expense = $0 2025: Since book value equals residual value; depreciation expense = $0
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7) The company used the units-of-production method. First, determine the book value at the time of the sale (end of Year 2). Gain (Loss) on disposal = Proceeds from sale − Book value at time of sale Book value at time of sale = Proceeds from sale − Gain (Loss) on disposal = $6,000 − ($3,480) = $9,480 Then, determine the accumulated depreciation at the time of the sale (end of Year 2). Accumulated depreciation at time of sale (Year 2) = Cost − Book value at time of sale = $17,000 − $9,480 = $7,520 Finally, determine which method produces Accumulated Depreciation in the amount of $7,520. Straight-line method: Annual depreciation expense = (Cost − Residual value) × (1 ÷ Useful life) = ($17,000 − $1,000) × (1 ÷4) = $4,000 Accumulated depreciation = Year 1 depreciation expense + Year 2 depreciation expense = $4,000 + $4,000 = $8,000 Units of production: Annual depreciation expense = (Cost − Residual Value) × (Actual miles during the year ÷ Estimated total miles) = ($17,000 − $1,000) × (20,000 miles ÷ 100,000 miles) = $3,200 = ($17,000 − $1,000) × (27,000 miles ÷ 100,000 miles) = $4,320 Accumulated depreciation = Year 1 depreciation expense + Year 2 depreciation expense = $3,200 + $4,320 = $7,520 Double-declining balance: Version 1
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Depreciation expense = Book value × (2 ÷ Useful life) Depreciation expense = (Cost − Accumulated depreciation) × (2 ÷ Useful life) Year 1: = ($17,000 − $0) × 2/4 = $8,500 Year 2: = ($17,000 − $8,500) × 2/4 = $4,250 Accumulated depreciation = Year 1 depreciation expense + Year 2 depreciation expense = $8,500 + $4,250 = $12,750 8) a. Asset impairment loss = Book value − Fair value Asset impairment loss = (Cost − Accumulated depreciation) − Fair value = ($1,200,000 − $500,000) − $600,000 = $100,000 b. Debit Accumulated Depreciation
500,000
Equipment Loss on Impairment Equipment
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Credit
500,000 100,000 100,000
20
9) a. Annual depreciation expense = (Cost − Residual value) × (1 ÷ Useful life) = ($40,000 − $0) × (1 ÷ 5) = $8,000 Accumulated depreciation = Year 1 depreciation expense + Year 2 depreciation expense = $8,000 + $8,000 = $16,000 Gain (loss) on disposal = Proceeds from sale − Book value at time of sale Gain (loss) on disposal = Proceeds from sale − (Cost − Accumulated depreciation at time of sale) = $25,000 − ($40,000 − $16,000) = $1,000 gain b. Debit Cash
25,000
Accumulated Depreciation
16,000
Credit
Equipment
40,000
Gain on Disposal
1,000
c. Use of an accelerated depreciation method such as double-declining balance would have resulted in a lower book value since more depreciation would have been recorded in the first two years of the asset's life. Since the gain (or loss) on disposal equals the proceeds from sale less the book value at time of sale, a lower book value would have increased the gain recognized on the sale. 10) a. Debit Patents
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Credit
40,000
21
Cash
40,000
b. Debit Amortization Expense ($40,000 × 1/10)
Credit
4,000
Accumulated Amortization (or Patent)
4,000
c. 2018 Revised amortization = Book value × (1 ÷ Remaining useful life) 2018 Revised amortization = (Cost − Accumulated Amortization) × (1 ÷ Remaining useful life) = ($40,000 − $4,000) × 1/6 = $6,000 d. 2019 Amortization = $6,000 × 6/12 (January 1 through June 30) = $3,000 Gain (loss) on disposal = Proceeds from sale − Book value at time of sale Gain (loss) on disposal = Proceeds from sale − (Cost − Accumulated amortization at time of sale) = $25,000 − [$40,000 − ($4,000 + $6,000 + $3,000)] = ($2,000) e. Debit Cash
25,000
Accumulated Amortization ($4,000 + $6,000 + $3,000) Loss on Disposal
13,000
Patents
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Credit
2,000 40,000
22
OR: Debit Cash Loss on Disposal Patent
Credit
$ 25,000 2,000 27,000
11) a. Fixed asset turnover ratio = Net revenue ÷ Average net fixed assets = $3,600,000 ÷ [($710,000 + $890,000) ÷ 2] = 4.5 b. The fixed asset turnover ratio indicates how many dollars of revenue are generated for each dollar invested in fixed assets. A lower or declining ratio implies less efficient use of net fixed assets to generate revenue. c. On the negative side, the company may be experiencing a long-term decline in net revenue or a temporary drop in net revenue due to conditions beyond its control, such as the weather. d. On the positive side, the company may have just replaced older, lowvalued equipment with expensive new equipment that is more efficient and will boost its revenues in the long-term. Or, the company may have recently acquired additional equipment in anticipation of greater future revenue or because of changes in the tax law.
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12) a. Average net fixed assets = (Beginning fixed assets balance + Ending fixed asset balance) ÷ 2 = [($5,655,000 − $1,000,000) + ($2,152,000 − $600,000)] ÷ 2 = $3,103,500 Fixed asset turnover = Sales revenues ÷ Average net fixed assets = $38,227,000 ÷ $3,103,500 = 12.3 b. The fixed asset turnover ratio indicates how many dollars of revenue are generated for each dollar invested in fixed assets. The company generated $12.30 of net revenues for each dollar invested in average net fixed assets. An increasing fixed asset turnover rate suggests more efficient fixed asset use. c. The decline in the fixed asset turnover ratio can be consistent with either bad news or good news. A bad news scenario would exist if the declining fixed asset ratio was consistent with a long-term decline in net revenue or a temporary drop in net revenue due to conditions beyond a company's control, such as the weather. A good news scenario would exist if the declining fixed asset turnover ratio indicated that the company was expanding production that required the acquisition of additional expensive and more efficient productive assets required for higher net revenue opportunities in the future or possibly to take advantage of changes in the tax law.
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13) a. Depletion expense = Cost × (Actual cubic yards ÷ Estimated total cubic yards) = ($750,000 + $112,500) × (69,000 ÷ 690,000) = $86,250 b. Debit Mineral Inventory
Credit
86,250
Accumulated Depletion
86,250
14) a. Method Straightline Units-ofproduction Doubledecliningbalance
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Depreciation Expense 2021 2022 2023 $ $ $ 10,000 10,000 10,000 (1) (1) (1) 8,000 11,500 10,500 (2) (3) (4) 22,500 7,333 667 (5) (6) (7)
Book Value at End of Year 2021 2022 2023 $ $ $ 23,000 13,000 3,000 25,000
13,500
3,000
11,000
3,667
3,000
25
Calculations: (1) ($33,000 − $3,000) ÷ 3 = $10,000 (2) 16,000 ÷ (16,000 + 23,000 + 21,000) × ($33,000 − $3,000) = $8,000 (3) 23,000 ÷ (16,000 + 23,000 + 21,000) × ($33,000 − $3,000) = $11,500 (4) 21,000 ÷ (16,000 + 23,000 + 21,000) × ($33,000 − $3,000) = $10,500 (5) ($33,000 − $0) × 2/3 = $22,000 (6) ($33,000 − $22,000) × 2/3 = $7,333 (7) ($33,000 − $22,000 − $7,333) × 2/3 = $2,445; however, recording this amount of depreciation expense in 2023 would cause the book value to drop below the residual value, so record only $667 (or beginning book value of $3,667 − residual value of $3,000) of depreciation expense. b. Acquisition cost Less accumulated depreciation at December 31, 2021 Add extraordinary repair (considered to be an addition) Book value at January 1, 2022 Less residual value Revised depreciable cost Divided by remaining useful life (5 years — 1 year) Revised amount of annual depreciation
$ 33,000 (10,000) 7,000 30,000 (6,000) 24,000 ÷ 4 $ 6,000
c. Debit Depreciation Expense Accumulated Depreciation
Credit
6,000 6,000
d.
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Acquisition cost
$ 33,000
Add extraordinary repair:
7,000
Balance in Machinery account
40,000
Accumulated Depreciation: 2021 2022 through 2020 ($6,000 × 2)
$ 10,000 12,000
Book value at December 31, 2023
22,000 $ 18,000
e. Debit Cash
7,500
Accumulated Depreciation
22,000
Loss on Disposal of PPE
10,500
Machinery
Credit
40,000
15) Warehouse C Licensing rights A Supplies B Patents A Production equipment C Goodwill A Land C Office computer C
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16) Accelerated depreciation M Goodwill I Patent F EBITDA G Net book value D Fixed assets H Straight-line depreciation E Residual value K Trademark J 17) Amortization O Useful life H Licensing right C Least and latest rule N Component allocation M Fixed asset turnover ratio A Depreciable cost F Copyright L Depreciation schedule J Revenue expenditures B 18) Long-lived assets A Average net fixed assets G Capitalization of cost E Units-of-production method L Carrying value N Asset impairment loss J Depreciation M Net sales revenue C Declining-balance method I
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CHAPTER 10 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Operating cycles are generally longer than a year. ⊚ ⊚
2)
true false
The principal of a loan does not include any interest charges. ⊚ ⊚
true false
3) An entertainment company received $6 million in cash for advance season ticket sales. Prior to the beginning of the season, these sales should be recorded as a liability. ⊚ ⊚
4)
Bonds allow a company to borrow large sums of money from many different investors. ⊚ ⊚
5)
true false
true false
If the stated interest rate exceeds the market interest rate, a bond will sell at a premium. ⊚ ⊚
true false
6) At the maturity date, the carrying value of a bond should always be equal to the face value. ⊚ ⊚
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true false
1
7) The net amount of a bond liability that appears on the balance sheet is equal to the face value of the bond minus any related discount or plus any related premium. ⊚ ⊚
8) loss.
The entry to record a bond retirement at maturity usually involves recording a gain or ⊚ ⊚
9)
true false
Bonds that are not backed by collateral are referred to as "debentures." ⊚ ⊚
11)
true false
Bonds that are backed by a company's assets are referred to as "secured" bonds. ⊚ ⊚
10)
true false
true false
Callable bonds can be converted to stock. ⊚ ⊚
true false
12) When a company issues bonds that include no periodic interest payments, the bonds are referred to as "zero-coupon" bonds. ⊚ ⊚
13)
true false
The gross earnings for all employees is credited to Salaries and Wages Payable. ⊚ ⊚
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true false 2
14)
FICA payments consist of Social Security taxes and Medicare taxes. ⊚ ⊚
15)
true false
Contingent liabilities arise from past transactions, but depend on future events. ⊚ ⊚
true false
16) If the likelihood of a loss is reasonably possible, a contingent liability is recorded by making an appropriate journal entry. ⊚ ⊚
true false
17) The threshold for recording contingent liabilities under IFRS is higher than that under GAAP. ⊚ ⊚
true false
18) The debt-to-assets ratio indicates financing risk by computing the proportion of total assets financed by debt. ⊚ ⊚
true false
19) When the times interest earned ratio decreases, the likelihood of default on liabilities increases. ⊚ ⊚
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true false
3
20) The straight-line method of amortization allocates the amount of bond premium or discount over each period of a bond's life in amounts corresponding to the bond's carrying value. ⊚ ⊚
true false
21) The effective-interest method of amortization is considered a conceptually superior method of accounting for bonds. ⊚ ⊚
true false
22) An amortization schedule related to an installment note shows the payment of interest and repayment of principal on balances owed. ⊚ ⊚
true false
23) The payment made on an installment note is constant each period, but the interest paid on an installment note increases over the period while the proportion of principal decreases. ⊚ ⊚
true false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 24) Current liabilities could include all of the following except: A) an accounts payable due in 30 days. B) a notes payable due in 9 months. C) a bank loan due in 18 months. D) any part of long-term debt due during the current period.
25) When preparing the balance sheet for Papago Company for December 31, 2021, which item would not be classified as a current liability?
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A) Note payable due March 1, 2023 B) Accounts payable C) Income taxes due on September 15, 2022 D) The current portion of a 30-year mortgage
26)
Current liabilities are due: A) but not receivable for more than one year or the current operating cycle, whichever is
longer. B) but not payable for more than one year or the current operating cycle, whichever is longer. C) and receivable within the current operating cycle or one year, whichever is longer. D) and payable within the current operating cycle or one year, whichever is longer.
27) Obligations due to be paid within one year or the company's operating cycle, whichever is longer, are classified as: A) current assets. B) current liabilities. C) earned revenues. D) noncurrent liabilities.
28) A typical classified balance sheet provides no information about which of the following items? A) To whom the company owes money B) For what the company owes money C) How much the company owes D) The proportion of the company's debts that will be paid in the short-term
29)
Liabilities are classified as current if they:
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A) will be paid within the company's operating cycle or within 1 year, whichever is longer. B) will be paid using current assets. C) are less than the current assets. D) are greater than the current assets.
30)
Which of the following events does not create a liability? A) Buying goods and services on credit B) Obtaining a short-term loan C) Issuing long-term debt D) Remitting sales tax to the government
31)
For the employee, net pay is equal to gross earnings minus: A) only Federal income tax withholdings. B) all payroll deductions. C) only Social Security withholdings. D) only medical insurance premiums.
32)
A company typically records the amount owed to suppliers for goods or services when: A) they are ordered. B) a verbal commitment to purchase the goods or services has first been made. C) payment is made. D) the goods or services are received. <b></b>
33)
Which of the following statements about payroll liabilities is correct?
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A) Accrued payroll includes liabilities required by law or voluntarily requested by employees that have not yet been paid (or remitted). B) Only employees are required to pay FICA taxes. C) Both employers and employees are required to pay unemployment taxes. D) Accrued payroll liabilities do not include any voluntary deductions by employees for charitable contributions or union dues.
34) During one pay period, Star Valley Company distributes $234,900 to employees as net pay. The income tax withholdings were $34,200 and the FICA withholdings were $9,000. Total payroll costs to the company for this pay period, excluding any unemployment taxes, was: A) $269,100. B) $234,900. C) $278,100. D) $287,100.
35) During one pay period, Star Valley Company distributes $136,000 to employees as net pay. The income tax withholdings were $20,100 and the FICA withholdings were $9,016. Total payroll costs to the company for this pay period, excluding any unemployment taxes, was: A) $136,000. B) $174,132. C) $156,100. D) $165,116.
36)
Red Mountain, Incorporated has the following information from its payroll records:
Salaries and wages earned by employees Less: income taxes withheld from employees Less: FICA taxes withheld from employees Net pay to employees
$ 180,000 27,000 9,000 $ 144,000
The employer amount of FICA taxes that Red Mountain is required to pay is equal to the amount that it withholds from its employees. Assume no other payroll taxes are incurred at this time. What is Red Mountain's total payroll expense?
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A) $144,000 B) $153,000 C) $180,000 D) $189,000
37) Redmont Company's gross salaries and wages are $22,000, and it withholds $3,300 for income taxes and $1,683 for FICA taxes, the journal entry to record the employees' pay should include a: A) debit to Salaries and Wages Payable for $17,017. B) credit to Salaries and Wages Payable for $22,000. C) credit to Salaries and Wages Payable for $17,017. D) debit to Salaries and Wages Expense for $17,017.
38) Redmont Company's gross salaries and wages are $30,000, and it withholds $4,500 for income taxes and $2,000 for FICA taxes, the journal entry to record the employees' pay should include a: A) debit to Salaries and Wages Expense for $23,500. B) debit to Salaries and Wages Payable for $23,500. C) credit to Salaries and Wages Payable for $30,000. D) credit to Salaries and Wages Payable for $23,500.
39) Thomas Longbow is the only employee of Presido, Incorporated During the first week of January, Longbow earned $2,400.00 and had federal and state income tax withholdings of $120.00 and $45.00, respectively. FICA taxes are 7.65% on earnings up to $132,900. State and federal unemployment taxes for the period are $150.00 and $24.00, respectively. What would be the amount of Longbow’s payroll check for the first week of January?
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A) $2,051.40 B) $1,877.40 C) $2,400.00 D) $2,216.40
40) Thomas Longbow is the only employee of Presido, Incorporated. During the first week of January, Longbow earned $1,600 and had federal and state income tax withholdings of $80 and $30, respectively. FICA taxes are 7.65% on earnings up to $132,900. State and federal unemployment taxes for the period are $100 and $16, respectively. What would be the amount of Longbow's payroll check for the first week of January? A) $1,367.60 B) $1,483.60 C) $1,257.60 D) $1,251.60
41) Thomas Longbow is the only employee of Presido, Incorporated During the first week of January, Longbow earned $4,400.00 and had federal and state income tax withholdings of $220.00 and $82.50, respectively. FICA taxes are 7.65% on earnings up to $132,900. State and federal unemployment taxes for the period are $275.00 and $44.00, respectively. What is Presido's payroll tax expense for the week? A) $655.60 B) $1,294.70 C) $621.50 D) $958.10
42) Thomas Longbow is the only employee of Presido, Incorporated. During the first week of January, Longbow earned $1,600 and had federal and state income tax withholdings of $80 and $30, respectively. FICA taxes are 7.65% on earnings up to $132,900. State and federal unemployment taxes for the period are $100 and $16, respectively. What is Presido's payroll tax expense for the week?
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A) $226.00 B) $238.40 C) $348.40 D) $470.80
43)
Payroll taxes paid by employees include which of the following? A) Federal income tax, federal unemployment tax, and Medicare B) Social security, federal unemployment tax, and state unemployment tax C) Social security, federal income tax, and federal unemployment tax D) Federal income tax withheld, state income tax withheld, and Medicare
44)
Which of the following statements about payroll is correct?
A) Payroll deductions are an expense of the company. B) When recording the payroll, Salaries and Wages Expense equals the sum of all the deductions. C) The net pay is debited to Salaries and Wages Expense when the payroll is recorded. D) Gross earnings are computed by multiplying the time worked by the pay rate promised by the employer.
45)
Which of the following must be paid by both the employee and the employer? A) FICA taxes B) State unemployment tax C) State withholding tax D) Federal unemployment tax
46)
Employer payroll taxes:
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A) represent the federal taxes withheld from the employees' paychecks. B) are the amounts paid by the employee. C) are an added payroll expense beyond the wages and salaries earned by employees. D) represent the FICA taxes withheld from employees' paychecks.
47) The payroll records of Oregon Mist contained the following information for the month of November: Salaries FICA Taxes – Employee FICA Taxes – Employer Federal Unemployment Taxes State Unemployment Taxes
$ 350,000 21,700 21,700 3,500 1,750
The journal entry to record the monthly Payroll Tax Expense would include a: A) debit to Payroll Tax Expense of $25,200. B) credit to FICA Taxes Payable of $43,400. C) debit to Payroll Tax Expense of $48,650. D) debit to Payroll Tax Expense of $26,950.
48) Viewmont Manufacturing began the year owing its suppliers $4,800 for merchandise purchased last year. Viewmont then sold half of this merchandise for $8,000 on account. Two weeks later, Viewmont paid its suppliers $1,600 and bought another $6,400 of merchandise on account. Viewmont now has an Accounts Payable balance of: A) $17,600. B) $9,600. C) $1,600. D) $7,200.
49) If a company forgets to record the journal entry to accrue interest expense, then its net income is too ________ and its liabilities are too ________.
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A) high; high B) low; high C) low; low D) high; low
50)
Accruing a liability always involves ________ expenses and ________ liabilities. A) increasing; increasing B) increasing; decreasing C) decreasing; increasing D) decreasing; decreasing
51) Gross earnings for the pay period are $138,000. Required payroll deductions are: Social Security $9,246; Medicare $2,001; Federal Income tax $24,840 and State income tax $5,313. What is the net pay to employees? A) $96,600 B) $138,000 C) $179,400 D) $107,847
52)
Payroll deductions: A) are amounts added to employees' gross earnings to determine their net pay. B) all voluntarily increase the amount of cash an employee receives. C) are amounts subtracted from employees' gross earnings to determine their net pay. D) are all accounted for as expenses.
53)
Employees' gross earnings differ from their net pay because of:
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A) unemployment taxes. B) payroll deductions. C) accounts payable. D) corporate income taxes.
54)
The law requires ________ to pay FICA taxes. A) both employee and employer B) the employee C) the employer D) only retailers
55) Diana Olympic works 40 hours for Quartz, Incorporated for $27 per hour. Required payroll deductions are: Social Security $66.96; Medicare $15.66; Federal income tax $104.40; and State income tax $18.00. The entry to record her net pay would cause which of the following to change as described? A) Salaries and Wages Expense increases by $1,080. B) Salaries and Wages Expense decreases by $1,080. C) Salaries and Wages Payable increases by $1,080. D) Salaries and Wages Payable decreases by $1,080.
56) Gross earnings for the pay period are $100,000. Required payroll deductions are: Social Security $6,700; Medicare $1,450; Federal Income tax $18,000 and State income tax $3,850. The journal entry to record wages paid includes a: A) $100,000 credit to Salaries and Wages Payable. B) $6,700 debit to FICA Payable. C) $100,000 debit to Salaries and Wages Expense. D) $70,000 debit to Salaries and Wages Expense.
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57)
The journal entry to record employer payroll taxes affects: A) assets only. B) liabilities only. C) liabilities and stockholders' equity. D) assets and liabilities.
58) Sierra Blanca Company is required to match $82,620 for its portion of FICA and $8,460 for federal and state unemployment taxes. The entry to record Sierra Blanca's payroll taxes includes: A) debit to Payroll Tax Expense for $91,080. B) credit to Payroll Tax Expense for $91,080. C) debit to FICA Payable for $82,620. D) debit to Unemployment Tax Payable of $8,460.
59) a(n):
The entry to record the initial borrowing of cash by issuing a promissory note causes
A) increase in stockholders' equity. B) decrease in assets. C) decrease in stockholders' equity. D) increase in liabilities.
60)
Issuing a note payable for cash immediately results in a(n): A) increase in assets and an increase in liabilities. B) decrease in assets and an increase in liabilities. C) decrease in assets and a decrease in liabilities. D) increase in liabilities and a decrease in stockholders' equity.
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61) The entry to record the initial borrowing of cash by issuing a promissory note will include a debit to ________ and a credit to ________. A) Cash; Notes Payable B) Notes Payable; Cash C) Interest Expense; Cash D) Cash; Interest Expense
62) The entry to record the borrowing of cash by issuing a note was recorded with a debit to Cash and a credit to Notes Receivable. The effect of recording this entry causes: A) assets to be understated. B) liabilities to be overstated. C) stockholders' equity to be understated. D) stockholders' equity to be overstated.
63) On November 1, 2021, Sky Mountain Company borrowed $200,000 cash on a 1-year, 6% note payable that requires Sky Mountain to pay both principal and interest on October 31, 2022. Given no prior adjusting entries have been recorded, the adjusting journal entry on December 31, 2021, Sky Mountain's year-end, would include a: A) credit to Cash of $2,000. B) debit to Interest Expense of $12,000. C) credit to Interest Payable of $2,000. D) credit to Note Payable of $2,000.
64) A note was issued on November 1 for $1,000 at 6%. Which of the following is the correct method of calculation for the interest accrued as of December 31 of the same year on each of the notes described?
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A) Interest on a 4-month note is calculated as: $1,000 × 6% × 2 / 12. B) Interest on a 3-month note is calculated as: $1,000 × 6% × 2 / 3. C) Interest on a 4-month note is calculated as: $1,000 × 6% × 2 / 4. D) Interest on a 2-year note is calculated as: $1,000 × 6% × 2 / 24.
65) On November 1, 2021, Sky Mountain Company borrowed $200,000 cash on a 1-year note payable with a 6% annual rate that requires Sky Mountain to pay all the interest as well as the principal on October 31, 2022. Assuming the November 1 transaction was properly recorded, how would the December 31, 2021, year-end adjusting entry affect the accounting equation? A) Liabilities decrease and stockholders' equity increases. B) Both assets and stockholders' equity increase. C) Liabilities increase and stockholders' equity decreases. D) Liabilities increase and stockholders' equity increases.
66) On September 1, Sky Mountain Company borrowed $66,000 on a 6%, 9-month note payable to Coast National Bank. Given no previous adjusting entries have been recorded, Sky Mountain's adjusting entry four months later at December 31 would include a: A) debit to Interest Expense of $990. B) debit to Interest Expense of $1,320. C) debit to Interest Expense of $3,960. D) debit to Interest Expense of $2,970.
67) On September 1, Sky Mountain Company borrowed $200,000 on a 6%, 9-month note payable to Coast National Bank. Given no previous adjusting entries have been recorded, Sky Mountain's adjusting entry four months later at December 31 would include a: A) debit to Interest Expense of $3,000. B) debit to Interest Expense of $4,000. C) debit to Interest Expense of $12,000. D) debit to Interest Expense of $9,000.
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68)
Sales taxes are recorded by the retailer as: A) Sales Tax Expense. B) Sales Tax Payable. C) Sales Revenue. D) Sales Returns and Allowances.
69)
What kind of account is Deferred Revenue? A) Asset B) Liability C) Revenue D) Expense
70) Teton Tax Service collects $440 for preparation of a tax return. The tax return will not be complete until the next accounting period. How does Teton record the $440 collected in advance? A) A debit to Cash of $440 and a credit to Deferred Revenue of $440. B) A debit to Deferred Revenue of $440 and a credit to Cash of $440. C) A debit to Cash of $440 and a credit to Revenue of $440. D) A debit to Revenue of $440 and a credit to Cash of $440.
71) In October, the CEO of Saguaro, Incorporated signs a note for $90,000 in order to buy new equipment. The note is due in five years, at 8% annual interest. Semiannual interest payments are due each April and October. Assuming no other long-term debt, what is the initial balance in the related long-term debt account?
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A) $82,800 B) $90,000 C) $93,600 D) $97,200
72) A company purchased equipment by issuing a $200,000, one-year, 8% note payable. The transaction would be recorded in the accounting records with a credit to Notes Payable for: A) $200,000. B) $216,000. C) $184,000. D) $208,000.
73) On October 1, Pinnacle Company signs a note for $360,000 to provide the funds needed to build a new facility. The note is due in 10 years, includes an annual interest rate at 7%, and requires semiannual interest payments each April and October. The journal entry to record the issuance of the promissory note should debit: A) Notes Payable for $360,000, debit Interest Expense for $25,200, credit Cash for $360,000, and credit Interest Payable for $25,200. B) Accrued Interest and credit Cash for $25,200. C) Cash and credit Notes Payable for $360,000. D) Cash for $360,000, debit Interest Expense for $25,200, credit Notes Payable for $360,000, and credit Interest Payable $25,200.
74)
Interest on an obligation is recorded: A) as time passes. B) when goods are purchased on account. C) at maturity. D) when a bank loan is obtained.
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75) A one-year, $15,600, 14% note is signed on April 1. If the note is repaid on October 1 of the same year, how much interest expense is incurred? (Do not round intermediate calculations.) A) $1,092 B) $910 C) $1,274 D) $2,184
76) A one-year, $15,000, 6% note is signed on April 1. If the note is repaid on September 1 of the same year, how much interest expense is incurred? A) $900 B) $450 C) $375 D) $300
77) The total amount of interest that will be paid on a three-month, $7,800, 8% note payable equals: A) $156.00. B) $624.00. C) $260.00. D) $104.00.
78) The total amount of interest that will be paid on a four-month, $6,500, 9% note payable equals:
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A) $585. B) $292. C) $146. D) $195.
79) A 6-month note is issued on October 1. If no previous accruals have been made, how many months of interest should be accrued at December 31? A) Six B) Three C) Four D) Two
80) On October 1, 2021, Allen Emig borrowed $306,000 from the West Coast Bank on a 6month, 6% note. Assuming no interest has been recorded yet, what is the amount of accrued interest as of December 31, 2021? A) $9,180 B) $4,590 C) $18,360 D) $13,770
81)
When interest is accrued on a note payable, but not paid, the A) Interest Expense account is increased; the Interest Payable account is increased. B) Interest Expense account is decreased; the Interest Payable account is increased. C) Notes Payable account is increased; the Interest Payable account is increased. D) Interest Expense account is increased; the Interest Payable account is decreased.
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82) On October 1, 2021, Saddleback, Incorporated negotiates with its bank to borrow $18,000 cash on a one-year note. The bank charges 5% interest. Interest payments are to be made in two installments, on March 31 and September 30. The principal is to be repaid on September 30, 2022, the maturity date. What adjusting entry needs to be recorded of December 31, 2021? A) Debit Interest Expense and credit Interest Payable for $450. B) Debit Interest Expense and credit Interest Payable for $225. C) Debit Interest Expense and credit Interest Payable for $900. D) Debit Interest Payable and credit Interest Expense for $900.
83) On October 1, 2021, Highview Company borrows $205,000 on a three-year note that requires the company to pay 8% interest on March 31 and September 30. On December 31, 2021, the adjusting entry to accrue interest on the note should debit: A) Interest Expense and credit Interest Payable for $4,100. B) Interest Expense and credit Interest Payable for $8,200. C) Interest Payable and credit Interest Expense for $4,100. D) Interest Expense and credit Cash for $8,200.
84) On October 1, 2021, Highview Company borrows $360,000 on a three-year note that requires the company to pay 6% interest on March 31 and September 30. On December 31, 2021, the adjusting entry to accrue interest on the note should debit: A) Interest Expense and credit Interest Payable for $5,400. B) Interest Payable and credit Interest Expense for $5,400. C) Interest Expense and credit Cash for $10,800. D) Interest Expense and credit Interest Payable for $10,800.
85) A company pays $9,000 in interest on notes consisting of $6,000 of interest that was accrued during the last accounting period and $3,000 of interest that accumulated during the current accounting period but has not yet been accrued on the books. The journal entry for the interest payment should include a:
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A) debit to Interest Expense for $9,000 and a credit to Cash for $9,000. B) debit to Cash for $9,000 and a credit to Interest Payable for $9,000. C) debit to Interest Expense for $3,000, a debit to Interest Payable for $6,000, and a credit to Cash for $9,000. D) debit to Interest Payable for $6,000, a debit to Accrued Interest for $3,000, and a credit to Cash for $9,000.
86) A company pays $18,000 in interest on notes, consisting of $12,000 interest that was accrued during the last accounting period and $6,000 of interest that accumulated during the current accounting period but has not yet been accrued on the books. The journal entry for the interest payment should: A) debit Interest Expense for $18,000 and credit Cash for $18,000. B) debit Cash for $18,000 and credit Interest Payable for $18,000. C) debit Interest Expense for $6,000, debit Interest Payable $12,000 and credit Cash for $18,000. D) debit Interest Payable for $12,000, debit Accrued Interest $6,000 and credit Cash for $18,000.
87) On October 1, 2021, Teton Industries negotiates with its bank to borrow $20,000 cash on a one-year note. The bank charges 5% interest. Interest payments are to be made in two installments, on March 31 and September 30. The principal is to be repaid on September 30, 2022, the maturity date. What journal entry needs to be recorded as of March 31, 2022? A) Debit Interest Payable $250, debit Interest Expense $250, and credit Cash $500. B) Debit Interest Expense $500 and credit Cash $500. C) Debit Interest Expense $500 and credit Interest Payable for $500. D) Debit Interest Expense $250 and credit Cash for $250.
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88) Travis County Bank agrees to lend Brickyard Corporation $200,000 on January 1. Brickyard signs a $200,000, 4%, 9-month note. Interest is due at maturity on September 30. The company's fiscal year ends June 30 and adjusting entries are recorded only at year end. On January 1, which of the following journal entries will be made by Brickyard to record the issuance of the note? A) Debit Interest Expense for $6,000, debit Cash $194,000, and credit Notes Payable for $200,000. B) Debit Cash and credit Notes Payable for $200,000. C) Debit Cash for $200,000, debit Interest Expense for $6,000, and credit Notes Payable for $206,000. D) Debit Cash for $200,000, debit Interest Expense for $6,000, credit Notes Payable for $200,000, and credit Interest Payable for $6,000.
89) Travis County Bank agrees to lend Brickyard Corporation $200,000 on January 1. Brickyard signs a $200,000, 4%, 9-month note. Interest is due at maturity on September 30. The company's fiscal year ends June 30 and adjusting entries are recorded at that time only. What adjusting entry should Brickyard make on June 30 before preparing its annual financial statements? A) Debit Interest Expense and credit Interest Payable for $4,000. B) Debit Cash and credit Interest Payable for $4,000. C) Debit Cash and credit Interest Expense for $4,000. D) Debit Interest Payable and credit Interest Expense for $4,000.
90) Travis County Bank agrees to lend Brickyard Corporation $200,000 on January 1. Brickyard signs a $200,000, 4%, 9-month note. Interest is due at maturity on September 30. The company's fiscal year ends June 30 and adjusting entries are recorded at that time only. What journal entry will Brickyard make when paying the interest at maturity?
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A) Debit Notes Payable and credit Cash for $206,000. B) Debit Interest Expense for $4,000, and credit Cash for $4,000. C) Debit Interest Expense for $6,000 and Cash for $206,000. D) Debit Interest Payable for $4,000, debit Interest Expense for $2,000, and credit Cash for $6,000.
91) Travis County Bank agrees to lend Brickyard Corporation $200,000 on January 1. Brickyard signs a $200,000, 4%, 9-month note. Interest is due at maturity on September 30. The company's fiscal year ends June 30 and adjusting entries are recorded at that time only. What journal entry will Brickyard make when paying the note at maturity? A) Debit Cash and credit Notes Payable for $200,000. B) Debit Cash and credit Notes Payable for $206,000. C) Debit Notes Payable and credit Cash for $206,000. D) Debit Notes Payable and credit Cash for $200,000. <b></b>
92) On September 1, 2022, Rowen Manufacturing issued a $90,000, 6-month, 9% note payable to purchase equipment. At December 31, 2022, the company records an adjusting entry to accrue interest incurred by not paid. The company pays the note with interest at the maturity date. What is the adjusting journal entry at December 31 to record the accrued interest on the note payable? A) Debit Interest Expense and credit Interest Payable for $2,700. B) Debit Interest Expense and credit Interest Payable for $3,600. C) Debit Interest Expense and credit Interest Payable for $8,100. D) Debit Interest Payable and credit Cash for $3,600.
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93) On September 1, 2022, Rowen Manufacturing issued a $90,000, 6-month, 9% note payable to purchase equipment. At December 31, 2022, the company records an adjusting entry to accrue interest incurred by not paid. The company pays the note with interest at the maturity date. What is the entry to record the payment of interest at the maturity date of the note? A) Debit Notes Payable for $90,000, debit Interest Expense for $8,100, and credit Cash for $98,100. B) Debit Interest Payable for $2,700, debit Interest Expense for $1,350, and credit Cash for $4,050. C) Debit Interest Expense for $4,050 and credit Cash for $4,050. D) Debit Interest Expense for $3,600, debit Interest Payable for $4,500, and credit Cash for $8,100.
94)
Sales tax collected by a company is normally reported as: A) a current liability. B) income tax expense. C) an asset. D) an operating expense.
95) A company receives $95 for merchandise sold to a consumer of which $5 is for sales tax. The $5 of sales tax: A) increases sales revenue. B) increases current liabilities. C) increases selling expenses. D) is not recorded until it is forwarded to the state government.
96) Zorn Incorporated makes a sale for $380. The company is required to collect sales tax of 5%. What is the amount that will be credited to the Sales Tax Payable account?
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A) $19 B) $20 C) $18 D) $190
97) Zorn Incorporated makes a sale for $300. The company is required to collectsales tax of 9%. What is the amount that will be credited to the Sales Tax Payable account? A) $27 B) $273 C) $300 D) $327
98) Wool Company makes a sale and collects a total of $501.40, which includes an 9% sales tax. What is the amount that will be credited to the Sales Revenue account? A) $501.40 B) $546.53 C) $460.00 D) $458.00
99) Wool Company makes a sale and collects a total of $756, which includes an 8% sales tax. What is the amount that will be credited to the Sales Revenue account? A) $756 B) $700 C) $812 D) $696
100)
Deferred Revenue is a liability because:
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A) no cash has changed hands. B) goods or services have been paid for, but not yet provided to the customer. C) the company is transferring them to another period for tax reasons. D) the customer may someday return items purchased for a refund.
101) On January 2, 2021, AAA Publishing, Incorporated received a one-year subscription for $100 to one of the magazines that it publishes. At that time, it debited cash for $100 and credited Deferred Revenue for $100. After all the magazines have been delivered through December 31, 2021, what journal entry needs to be recorded? A) Debit Cash for $100 and credit Deferred Revenue for $100 B) Debit Accounts Receivable for $100 and credit Subscription Revenue for $100 C) Debit Accounts Receivable for $100 and credit Deferred Revenue for $100 D) Debit Deferred Revenue for $100 and credit Subscription Revenue for $100
102) Disco World began its business on November 1 and sold contracts to twelve students for dance lessons that day. The lessons cost $375 per person for a three-month period and the students are required to pay in advance. The journal entry to record this transaction would includea debit for the receipt of cash on November 1 and a credit to: A) Accounts Receivable. B) Deferred Revenue. C) Dance Lessons Revenue. D) Dance Lessons Payable.
103) Disco World began its business on November 1 and sold contracts to twelve students for dance lessons that day. The lessons cost $375 per person for a three-month period and the students are required to pay in advance. Assuming Disco World recorded the receipt of cash appropriately and adjusts its accounts only at its December 31 year-end, what entry must Disco World make to account for the services provided through that date? Version 1
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A) Debit Cash and credit Dance Lessons Revenue for $3,000. B) Debit Deferred Revenue and credit Dance Lessons Revenue for $4,500. C) Debit Deferred Revenue and credit Dance Lessons Revenue for $3,000. D) Debit Dance Lessons Revenue and credit Deferred Revenue for $3,000.
104) At the beginning of the year, your company borrows $38,400 by signing a six-year promissory note that states an annual interest rate of 6% plus principal repayments of $6,400 each year. Interest is paid at the end of the second and fourth quarters, whereas principal payments are due at the end of each year. How does this new promissory note affect the current and non-current liability amounts reported on the classified balance sheet prepared at the end of the first quarter? A) Increase current liabilities by $576.00; increase non-current liabilities by $38,400 B) Increase current liabilities by $2,304; increase non-current liabilities by $38,400 C) Increase current liabilities by $6,976.00; increase non-current liabilities by $38,400 D) Increase current liabilities by $6,976.00; increase non-current liabilities by $32,000
105) At the beginning of the year, your company borrows $20,000 by signing a four-year promissory note that states an annual interest rate of 8% plus principal repayments of $5,000 each year. Interest is paid at the end of the second and fourth quarters, whereas principal payments are due at the end of each year. How does this new promissory note affect the current and non-current liability amounts reported on the classified balance sheet prepared at the end of the first quarter? A) Increase current liabilities by $400; increase non-current liabilities by $20,000. B) Increase current liabilities by $1,600; increase non-current liabilities by $20,000. C) Increase current liabilities by $5,400; increase non-current liabilities by $20,000. D) Increase current liabilities by $5,400; increase non-current liabilities by $15,000.
106)
Which of the following statements is not correct?
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A) An "A" rating is the best credit rating a company can earn. B) Credit ratings below BB are called "junk." C) A credit rating agency indicates a company's ability to pay its debts on a timely basis. D) Standard and Poor's, Fitch, and Moody's are the names of credit rating agencies.
107)
Accrued liabilities could include all of the following except: A) Wages and Salaries Payable. B) Current Portion of Long-Term Debt. C) Income Tax Payable. D) Interest Payable.
108)
Which of the following statements about bonds and notes is not correct?
A) A company can borrow the funds necessary to finance its activities using bonds or promissory notes. B) Borrowings using bonds or notes are initially recorded with a journal entry that debits Cash and credits the relevant liability account. C) The journal entry that records interest owed on bonds and notes includes a debit to Interest Expense and a credit to Interest Payable. D) Bonds Payable and Notes Payable are always classified as noncurrent liability accounts.
109)
Which of the following statements about bond terminology is correct?
A) The face value of a bond is what it is currently worth in the market. B) The stated interest rate is expressed as an annual interest rate even if the bonds pay semiannual interest payments. C) The stated rate of interest always presents the amount that investors are willing to pay for the bond on the issue date. D) The carrying value of the bond is always equal to the face value of the bond.
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110)
The three key pieces of information that are stated on a bond certificate are the: A) interest payment, the face value of the bond, and the credit rating of the company. B) market interest rate, the price of the bond, and the maturity date. C) stated interest rate, the face value of the bond, and the maturity date. <b></b> D) interest payment, the issue price of the bond, and the credit rating of the company.
111)
ABC Corporation issued $100,000 of bonds at a premium; as a result, the company:
A) received more than $100,000. B) received less than $100,000. C) received $100,000. D) will pay the bondholders more money on the maturity date than it received on the issue date.
112)
When a bond is issued at more than its face value, it is issued at: A) a surplus. B) par value. C) a discount. D) a premium. <b></b>
113) Your company issues a 5-year bond with a face value of $10,000 and a stated interest rate of 7%. The market interest rate is 5%. The issue price of the bond is calculated as the: A) present value of $10,000 to be received in 5 years plus the present value of $700 per year for 5 years. B) face value of the bonds, $10,000. C) amount investors would have to pay to earn 7% interest. D) amount investors would have to pay to earn an average of the stated interest rate and the market interest rate.
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114) Your company issues $50,000 of one-year, 10% bonds at face value. The journal entry to recordthe issuance of the bond will include a debit to: A) Cash and a credit to Bonds Payable for $50,000. B) Cash and a credit to Bonds Payable for $55,000. C) Cash for $55,000, a credit to Bonds Payable for $50,000, and a credit to Interest Payable for $5,000. D) Cash for $50,000, a debit to Interest Expense for $5,000, and a credit to Bonds Payable for $55,000.
115) Your company sells $230,000 of bonds for an issue price of $243,800. Which of the following statements is correct? A) The bond sold at a price of 53.00, implying a premium of $13,800. B) The bond sold at a price of 106.00, implying a discount of $13,800. C) The bond sold at a price of 106.00, implying a premium of $13,800. D) The bond sold at a price of 53.00, implying a discount of $13,800.
116) Your company sells $50,000 of bonds for an issue price of $52,000. Which of the following statements is correct? A) The bond sold at a price of 52, implying a premium of $2,000. B) The bond sold at a price of 104, implying a discount of $2,000. C) The bond sold at a price of 52, implying a discount of $2,000. D) The bond sold at a price of 104, implying a premium of $2,000.
117) Your company sells $230,000 of bonds for an issue price of $217,350. Which of the following statements is correct?
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A) The bond sold at a price of 94.50, implying a discount of $25,300. B) The bond sold at a price of 94.50, implying a discount of $12,650. C) The bond sold at a price of 47.25, implying a premium of $25,300. D) The bond sold at a price of 47.25, implying a premium of $12,650.
118) Your company sells $50,000 of bonds for an issue price of $48,000. Which of the following statements is correct? A) The bond sold at a price of 96, implying a discount of $4,000. B) The bond sold at a price of 48, implying a premium of $2,000. C) The bond sold at a price of 48, implying a premium of $4,000. D) The bond sold at a price of 96, implying a discount of $2,000. <b></b>
119) Your company sells $50,000 of one-year, 10% bonds for an issue price of $52,000. The journal entry to recordthe issuance of the bond will include a credit to Bonds Payable in the amount of: A) $50,000. B) $52,000. C) $55,000. D) $57,000.
120) A corporate bond with a face value of $1,000 is issued at 107. This means that the bond actually sold for: A) $107 and the stated interest rate was higher than the market interest rate. B) $1,070 and the stated interest rate was higher than the market interest rate. C) $107 and the stated interest rate was lower than the market interest rate. D) $1,070 and the stated interest rate was lower than the market interest rate.
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121) If the market rate of interest is 6%, a $10,000, 10-year bond with a stated annual interest rate of 8% would be issued at an amount: A) less than face value. B) equal to the face value. C) greater than face value. <b></b> D) equal to the face value minus a discount.
122) Your company is planning to issue $1,000 bonds with a stated interest rate of 7% and a maturity date of July 15, 2025. If interest rates fall in the economy so that similar financial investments pay 5%, your company will: A) not be able to issue the bonds because no one will buy them. B) receive a higher issue price as buyers compete for the bonds. C) have to accept a lower issue price to attract buyers. D) have to reprint the bond certificates to change stated interest rate to 5%.
123) Sayan, Incorporated sold $200,000 of bonds for an issue price of 97. As a result of selling these bonds, its total assets increase by: A) $194,000 and its total liabilities increase by $194,000. B) $200,000 and its total liabilities increase by $200,000. C) $194,000 and its total liabilities increase by $200,000. D) $200,000 and its total liabilities increase by $194,000.
124) Your company sells $59,000 of one-year, 12% bonds for an issue price of $48,500. The journal entry to record this transaction will include a credit to Bonds Payable in the amount of: A) $48,500. B) $59,000. C) $55,580. D) $66,080.
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125) Your company sells $40,000 of one-year, 10% bonds for an issue price of $39,000. The journal entry to record this transaction will include a credit to Bonds Payable in the amount of: A) $39,000. B) $40,000. C) $43,000. D) $44,000.
126) Oasis Company received $391,800 for bonds having a total face value of $400,000. What journal entry would be made to record this bond issuance? A) Debit Cash for $391,800, debit Discount on Bonds Payable for $8,200, and credit Bonds Payable for $400,000 B) Debit Cash for $400,000, credit Discount on Bonds Payable for $8,200, and credit Bonds Payable for $391,800 C) Debit Cash for $400,000 and credit Bonds Payable for $400,000 D) Debit Cash for $400,000, credit Bonds Payable for $391,800, and credit Interest Payable for $8,200
127) Oasis Company received $391,800 for bonds having a total face value of $400,000. If the balance sheet date corresponded with the date of the bond issue, what carrying value would be reported on the balance sheet? A) $395,900 B) $408,200 C) $391,800 <b></b> D) $400,000
128) Your company issues $500,000 in bonds at a price of 98. The journal entry used to record the issuance will include a debit to:
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A) Cash for $490,000, a debit to Discount on Bonds Payable for $10,000, and a credit to Bonds Payable for $500,000. B) Cash for $490,000, a credit to Discount on Bonds Payable for $10,000, and a credit to Bonds Payable for $500,000. C) Bonds Payable for $500,000, a credit to Discount on Bonds Payable for $10,000, and a credit to Cash for $490,000. D) Bonds Payable for $490,000, a debit to Discount on Bonds Payable for $10,000, and a credit to Cash for $500,000.
129) Your company is planning to issue $1,000 bonds with a stated interest rate of 7% and a maturity date of July 15, 2025. If interest rates rise in the economy so that similar financial investments pay 9%, your company will: A) not be able to issue the bonds because no one will buy them. B) receive a higher issue price to compensate buyers for the lower stated interest rate. C) have to accept a lower issue price to attract buyers. <b></b> D) have to reprint the bond certificates to change the stated interest rate to 9%.
130) A company receives $102,000 when it issues a bond with a face value of $100,000 and a stated interest rate of 7%. Which of the following statements is correct? A) The entry to record the issuance will include a credit to Bonds Payable for $102,000. B) The market interest rate is 7%. C) The annual interest expense is $7,000. D) The carrying value of the bonds will be $100,000 at maturity.
131) Which of the following accounts could have a non-zero balance on a post-closing trial balance?
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A) Salaries and Wages Expense B) Premium on Bonds Payable C) Income Tax Expense D) Interest Expense
132)
The Discount on Bonds Payable account is reported in the financial statements as: A) a reduction from the Bond Payable account on the balance sheet. B) an expense on the income statement. C) an asset on the balance sheet. D) revenue on the income statement.
133)
The annual interest payment on bonds:
A) increases over the life of the bonds when bonds are issued at a discount. B) decreases over the life of the bonds when bonds are issued at a discount. C) stays constant over the life of the bonds, regardless of whether bonds are issued at par, a discount, or a premium. D) increases over the life of the bonds under the effective-interest method, but stays constant under the straight-line method of amortization.
134) A company issued 10-year, 8% bonds with a face value of $200,000. Interest is paid annually. The market rate on the issue date was 7.5% and the company received $206,948 in cash proceeds. Which of the following statements is correct?
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A) The company must pay $184,000 at maturity plus $16,000 in interest each year for 10 years. B) The company must pay $206,948 at maturity plus $15,000 in interest each year for 10 years. C) The company must pay $200,000 at maturity plus $16,000 in interest each year for 10 years. D) The company must pay $200,000 at maturity plus $15,000 in interest each year for 10 years.
135) Maxwell Manufacturing issued $340,000, 10-year, 9% bonds at 106.00. What is the issue price of these bonds? A) $370,600 B) $360,400 C) $319,600 D) $340,000
136) Maxwell Manufacturing issued $750,000, 10-year, 10% bonds at 105. What is the issue price of these bonds? A) $750,000 B) $712,500 C) $787,500 <b></b> D) $825,000
137) Maxwell Manufacturing issued $480,000, 12-year, 8% bonds at 107.00. What is the total amount of interest expense that will be recorded over the life of these bonds? A) $513,600 B) $480,000 C) $518,400 D) $427,200
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138) Maxwell Manufacturing issued $750,000, 10-year, 10% bonds at 105. What is the total amount of interest expense that will be recorded over the life of these bonds? A) $750,000 B) $712,500 C) $787,500 D) $825,000
139)
Which of the following statements about bond premiums/discounts is correct?
A) A discount on a bond reduces the amount that the issuer has to repay to the lenders. B) A premium on a bond increases the interest expense of the loan to the issuer. C) A premium on a bond increases the amount that the issuer has to repay to the lenders. D) A discount on a bond increases the interest expense of the loan to the issuer. <b></b>
140)
The account called Premium on Bonds Payable:
A) increases when amortization entries are made. B) appears on the balance sheet of the issuer as a deduction from bonds payable. C) decreases when amortization entries are made and its balance is equal to zero at the maturity date of the bond. D) is a contra account with a normal debit balance.
141) Which of the following statements about the issuance of bonds at a premium is not correct?
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A) The Premium on Bonds Payable account is amortized each year and reduces the company's annual Interest Expense. B) On the date of issuance, the stated interest rate was greater than the market interest rate. C) As the current date approaches the maturity date, the carrying value of the bond approaches the face value of the bond. D) The account used to record the premium has a normal debit balance.
142) Which of the following statements about the issuance of bonds at a discount is not correct? A) The contra liability account, Discount on Bonds Payable, is amortized each year by shifting part of its balance to interest expense. B) As the current date approaches the maturity date, the carrying value of the bond approaches the face value of the bond. C) At the date of issuance, the market interest rate was higher than the stated interest rate. D) The account used to record the discount is a normal credit balance account.
143)
When bonds are issued at a discount, the bond issued at a discount is not correct?
A) At the end of ten years, the balance in the Discount on Bonds Payable account will equal zero. B) At the end of ten years, the carrying value will equal the face value. C) At the end of ten years, the total interest expense will reflect the market rate of interest. D) At the end of ten years, the total interest expense will equal the total interest paid.
144) When bonds are retired at their maturity date, the balance in the Bonds Payable account is equal to the bond's:
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A) face value minus any premium amortized. B) face value plus interest to be paid. C) face value plus any discount amortized. D) face value. <b></b>
145) Because interest rates have fallen, a company retires bonds which had been issued at their face value of $250,000. The company bought the bonds back at 95.75. The journal entry to record this retirement includes a debit of: A) $239,375 to Bonds Payable, a debit to Gain on Bond Retirement of $10,625 and a credit of $250,000 to Cash. B) $250,000 to Bonds Payable, a credit of $10,625 to Interest Expense, and a credit of $239,375 to Cash. C) $250,000 to Bonds Payable, a credit of $10,625 to Gain on Bond Retirement, and a credit of $239,375 to Cash. D) $239,375 to Bonds Payable and a credit of $239,375 to Cash.
146) Because interest rates have fallen, a company retires bonds which had been issued at their face value of $200,000. The company bought the bonds back at 97. The journal entry to record this retirement includes a debit of: A) $200,000 to Bonds Payable, a credit of $6,000 to Gain on Bond Retirement, and a credit of $194,000 to Cash. B) $194,000 to Bonds Payable, a debit to Gain on Bond Retirement of $6,000, and a credit of $200,000 to Cash. C) $200,000 to Bonds Payable, a credit of $6,000 to Interest Expense, and a credit of $194,000 to Cash. D) $194,000 to Bonds Payable and a credit of $194,000 to Cash.
147) The Big Company issued $100,000 of bonds for their face value six years ago. This year, it retires the bonds for $105,000. As a result of retiring these bonds, it:
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A) reduces its liabilities by $105,000. B) reduces its assets by $100,000. C) reports a gain of $5,000. D) reports a loss of $5,000. <b></b>
148) Acme Manufacturing retired an issue of bonds before they matured. The bonds had been issued at their face value of $500,000, and the cash paid for the retirement amounted to $503,250. What journal entry was made to record the bond retirement? A) Debit Bonds Payable for $500,000, debit Loss on Bond Retirement for $3,250, and credit Cash for $503,250 B) Debit Bonds Payable for $503,250, credit Gain on Bond Retirement for $3,250, and credit Cash for $500,000 C) Debit Bonds Payable and credit Cash for $503,250 D) Debit Bonds Payable for $500,000, debit Gain on Bond Retirement for $3,250, and credit Cash for $503,250
149)
The entry to record a bond retirement at maturity usually involves: A) no gain or loss. B) a credit to Gain on Bond Retirement. C) a debit to Loss on Bond Retirement. D) a credit to Bonds Payable.
150) A company retires its bonds with a face value of $100,000 at 105. The carrying value of the bonds at the retirement date is $103,745. The journal entry to record this retirement will include a: A) debit to Premium on Bonds Payable. B) credit to Gain on Bond Retirement. C) credit to Bonds Payable. D) debit to Discount on Bonds Payable.
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151) A company has bonds outstanding with a face value of $100,000. The unamortized premium on these bonds is $2,700. If the company retired these bonds at a call price of 99, the journal entry to record this retirement includes a debit to: A) Bonds Payable for $100,000, a debit to Premium on Bonds Payable for $2,700, a credit to Cash for $99,000, and a credit to Gain on Bond Retirement for $3,700. B) Bonds Payable for $100,000, a debit to Loss on Bond Retirement for $1,700, a credit to Cash for $99,000, and a credit to Premium on Bonds Payable for $2,700. C) Bonds Payable for $100,000, credit to Cash for $99,000, and a credit to Gain on Bond Retirement for $1,000. D) Bonds Payable for $100,000, a debit to Loss on Bond Retirement for $1,673, and a credit to Cash for $101,673.
152) Some bonds allow the issuing company to retire the bond with cash at any time. These bonds are known as: A) convertible bonds. B) debenture bonds. C) callable bonds. <b></b> D) coupon bonds.
153) Some bonds allow the borrower to repay the bond by issuing stock. These bonds are known as: A) convertible bonds. B) debenture bonds. C) callable bonds. D) coupon bonds.
154) Some bonds mature in installments. If a bond issue contains this feature, the bonds are known as:
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A) secured bonds. B) convertible bonds. C) callable bonds. D) serial bonds.
155)
Debentures are: A) unsecured bonds. B) secured bonds. C) serial bonds. D) callable bonds.
156)
Bonds that are backed with a pledge of the company's assets are called: A) debenture bonds. B) convertible bonds. C) secured bonds. <b></b> D) registered bonds.
157)
When a company issues bonds that do not pay periodic interest, the bonds are called: A) convertible bonds. B) debenture bonds. C) serial bonds. D) zero-coupon bonds. <b></b>
158) A company would record an entry with a debit to Bonds Payable and a credit to Cash on a bond's:
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A) issuance date. B) stated date. C) market date. D) maturity date.
159)
The stated rate is the rate used to determine the: A) interest expense. B) face value. C) present value. D) interest payment. <b></b>
160)
The stated rate: A) remains the same throughout the life of the bonds. B) fluctuates depending on the perceived risk of the bonds. C) equals the present value of the future interest payments. D) depends on the price at which the bonds are issued.
161) A bond's issue price is the amount of money that a lender pays (and the company receives) when a bond is: A) repaid. B) in default. C) issued. <b></b> D) sold from one investor to another investor.
162)
The issue price of a bond is:
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A) always equal to $1,000. B) based on a present value calculation. C) determined by the company issuing the bonds. D) determined by the financial advisers.
163) The issue price of each $1,000 bond that pays interest at 5% and has a bond price of 102.10 equals: A) $1,021. B) $1,050. C) $950. D) $1,000.
164) If ABC Company receives $100,000 cash in exchange for issuing 100 bonds at their $1,000 face value, the transaction will be recorded with a: A) debit to Cash of $100,000 and a credit to Bonds Payable of $100,000. B) debit to Bonds Payable of $100,000 and a credit to Cash of $100,000. C) debit to Cash of $100,000 and a credit to Bonds Payable of $99,000 and to Premium on Bonds Payable of $1,000. D) debit to Bonds Payable of $100,000 and a credit to Cash of $99,000 and to Premium on Bonds Payable of $1,000.
165) The journal entry to record the issuing of 100 bonds at their $1,000 face value will include a debit to ________ and a credit to ________. A) Cash; Bonds Payable B) Notes Payable; Cash C) Cash; Bonds Receivable D) Bonds Payable; Cash
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166) If ABC Company issues 100 of its $1,000 bonds at a price of 110, the journal entry to record the transaction includes a: A) debit to Cash of $100,000. B) credit to Premium on Bonds Payable of $10,000. C) debit to Cash of $90,000. D) debit to Discount on Bonds Payable of $10,000.
167) ABC Company is in the process of issuing bonds. The bonds have a stated interest rate of 6%, which is 2% above the current market rate. What effect will the two interest rates have on the bond issue price? A) The issue price will be above the bond's face value. B) The issue price will be below the bond's face value. C) The issue price will equal the bond's face value. D) Cannot determine without knowing the face value.
168)
Bondholders are willing to pay a premium to acquire a bond because the: A) company has a low credit rating. B) bond's stated interest rate is higher than the market interest rate. C) bond's stated interest rate is lower than the market interest rate. D) bond's stated interest rate is equal to the market interest rate.
169)
The Discount on Bonds Payable account is classified as a(n): A) asset. B) contra-liability. C) expense. D) contra-asset.
170)
The Discount on Bonds Payable account is:
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A) a contra account to Bonds Payable. B) a miscellaneous revenue account. C) an expense account. D) expensed only at the bond's maturity.
171)
The discount on a bonds payable becomes: A) additional interest expense in only the year the bonds are issued. B) additional interest expense over the life of the bonds. C) a reduction in interest expense in only the year the bonds mature. D) a reduction in interest expense over the life of the bonds.
172)
The carrying value of bonds payable equals: A) bonds payable minus any premium on bonds payable. B) bonds payable minus any discount on bonds payable. C) bonds payable plus any discount on bonds payable. D) bonds payable plus accrued interest payable.
173) When bonds are issued at a premium, the bond issuer receives more cash on the issue date than it repays at maturity. The difference, a premium, is a reduction in the cost of borrowing, which has to be: A) amortized. B) depreciated. C) ignored. D) capitalized.
174)
A bond premium:
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A) arises when interest payments are higher than the cost of borrowing. B) is essentially free money. C) arises when the interest payments are less than the cost of borrowing. D) is reported on the income statement as a gain on the issuance of a bond.
175)
The premium on a bond is ________ and ________ each period. A) depreciated; increases B) expensed; increases C) increased; credited D) amortized; decreases
176) Amortizing a bond premium will ________ the premium balance and ________ the carrying value of the bond so that when the bond matures the carrying value will ________ the face value. A) decrease; increase; be greater than B) increase; decrease; be greater than C) decrease; increase; equal D) decrease; decrease; equal
177) On January 1, ABC, Incorporated, issued $100,000 of 10%, 5-year bonds on January 1, 2021, for $92,280. Interest is due semiannually. When ABC records the first interest payment, which will be greater—the debit to Interest Expense or the credit to Cash?
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A) The debit to Interest Expense will be greater than the credit to Cash because the market rate is greater than the stated interest rate. B) The credit to Cash will be greater than the debit to Interest Expense because the market rate is greater than the stated interest rate. C) The debit to Interest Expense will be greater than the credit to Cash because the market rate is less than the stated interest rate. D) The credit to Cash will be greater than the debit to Interest Expense because the market rate is less than the stated interest rate.
178)
A bond discount is: A) a result of the interest payments being less than the cost of borrowing. B) essentially free money. C) a result of the interest payments being more than the cost of borrowing. D) reported on the income statement as a loss on the issuance of a bond.
179)
The discount on a bond is ________ and ________ the discount each period. A) depreciated; increases B) expensed; increases C) amortized; decreases <b></b> D) increased; credited to
180) Amortizing a bond discount will ________ the discount balance and ________ the carrying value of the bond so that when the bond matures the carrying value will ________ the face value. A) decrease; increase; equal B) decrease; increase; be greater than C) increase; decrease; be greater than D) decrease; decrease; equal
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181) In 2011, Morena Manufacturing issued $180,000 of 20-year bonds at face value. Ten years later, in 2021, the company retired the bonds early by purchasing them in the open market at $181,800. The entry to record this transaction includes a: A) credit to Gain on Bond Retirement of $1,800. B) debit to Loss on Bond Retirement of $1,800. C) debit to Bonds Payable of $181,800. D) credit to Cash of $180,000.
182)
Bonds that are backed by collateral are referred to as: A) debentures. B) secured. C) callable. D) convertible.
183) Which one of the following accounts would not necessarily be classified as a current liability? A) Accounts payable B) Accrued liabilities C) Contingent liabilities D) Current portion of long-term debt
184)
A contingent liability is: A) always a specific amount. B) an obligation arising from the purchase of goods or services on credit. C) an obligation not requiring a future payment. D) a potential obligation that depends on a future event.
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185)
Which of the following items results in a contingent liability? A) Income tax expense B) A lawsuit filed against a company C) Interest expense D) Advertising expense
186)
Which of the following statements best describes a contingent liability?
A) The amount of a contingent liability is known and will definitely have to be paid in the future. B) A contingent liability is a potential liability that has arisen because of a past transaction or event, but its ultimate outcome will not be known until a future event occurs or fails to occur. C) A contingent liability will only be incurred if a particular future event takes place. D) A contingent liability is a potential liability that will be incurred if a natural disaster happens.
187)
Which of the following would not be considered a contingent liability? A) Products sold with a warranty B) Pending lawsuits C) Frequent flyer miles earned by passengers D) Cash received from advance ticket sales
188) Which of the following circumstances would require a contingent liability to be recorded under generally accepted accounting principles?
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A) The liability is probable and not estimable. B) The liability is remote. C) The liability is possible. D) The liability is probable and estimable.
189) When the amount of a contingent liability can be reasonably estimated and its likelihood is probable, the company should: A) include a description in the notes to the financial statements. B) record the estimated amount of the liability times the probability of its occurrence. C) record the estimated amount of the liability on the balance sheet. <b></b> D) exclude the information about the contingent liability from its financial statements and notes.
190) Which of the following are generally recorded as liabilities on the balance sheet if the loss can be reasonably estimated? A) Remote likelihood liabilities B) Possible contingent liabilities C) Probable contingent liabilities <b></b> D) Immaterial contingent liabilities
191)
Contingent liabilities must be recorded if the: A) future event is reasonably possible. B) amount owed cannot be reasonably estimated. C) future event is probable and the amount owed can be reasonably estimated. D) future event is remote.
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192) LalaGurl, Incorporated soldleggings made from a fabric that gave many of its customers a serious rash. The customers are suing the company in a class action suit. Although the verdict is not yet in,LalaGurl’s attorneys think it is probable that the case will cost the company $2 million. The company should: A) not include this information in its annual report. B) record a liability and a gain for $2 million. C) only explain the situation in the notes to the financial statements. D) record a liability and a loss for $2 million. <b></b>
193) When the amount of a contingent liability cannot be reasonably estimated but its likelihood is probable, the company should: A) include a description in the notes to the financial statements. B) record the amount of the liability times the probability of its occurrence. C) record the amount of the liability as a long-term liability on the balance sheet. D) exclude the information about the contingent liability from its financial statements and footnotes.
194) When the amount of a contingent liability can be reasonably estimated and its likelihood is possible but not probable, the company should: A) include a description in the notes to the financial statements. B) record the amount of the liability times the probability of its occurrence. C) accrue the amount of the liability as a long-term liability. D) exclude any information about the contingent liability from its financial statements and notes.
195) When a company has a contingent liability that is remote in likelihood, the company should:
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A) include a description in the notes to the financial statements. B) record the amount of the liability times the probability of its occurrence. C) record the amount of the liability as a long-term liability on the balance sheet. D) exclude the information about the contingent liability from its financial statements and notes. <b></b>
196)
No mention is required in the financial statements for contingent liabilities that are: A) probable. B) remote. C) possible. D) likely.
197) Which type of contingent liability would most likely be reported on a balance sheet prepared in accordance with GAAP? A) Remote contingent liability B) Reasonably possible contingent liability C) Probable contingent liability that can be estimated D) Quite likely contingent liability
198) During the year, a $1,000,000 lawsuit was filed against a US company for unsafe working conditions. Management and the attorneys feel that it is not likely that the company will lose the case. The plaintiff who filed the lawsuit has offered to settle for $600,000. Management estimates that lawsuits for unsafe working conditions are generally settled for $300,000. What amount of contingent liability would be recorded for this lawsuit on the current balance sheet? A) $100,000 B) $600,000 C) $300,000 D) $0 <b></b>
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199) On December 31, 2021, a company had assets of $16 billion and stockholders' equity of $12 billion. That same company had assets of $20 billion and stockholders' equity of $13 billion as of December 31, 2022. During 2022, the company reported total sales revenue of $23 billion and total expenses of $21 billion. What is the company's debt-to-assets ratio on December 31, 2022? A) 0.35 B) 0.25 C) 0.06 D) 0.03
200) On December 31, 2021, a company had assets of $16 billion and stockholders' equity of $8 billion. That same company had assets of $20 billion and stockholders' equity of $9 billion as of December 31, 2022. During 2022, the company reported total sales revenue of $9 billion and total expenses of $7 billion. What is the company's debt-to-assets ratio on December 31, 2022? A) 0.55 B) 0.45 C) 0.035 D) 0.01
201) Which of the following misstatements would cause the debt-to-assets ratio to be overstated? A) Capitalizing costs that should have been expensed as assets. B) Failing to adjust for depreciation in the current period. C) Failing to accrue income taxes of the current period. D) Failing to accrue interest earned of the current period.
202)
Brighton Company has a debt-to-assets ratio of 0.45. This means that:
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A) stockholders' equity is 45% of total assets. B) stockholders' equity is 55% of total assets. C) investors provide 55% of the company's financing. D) liabilities are 55% of equity.
203) If Company A has a debt-to-assets ratio of 0.73 while Company B has a debt-to-assets ratio of 0.45, which of the following statements is correct? A) The company stockholders own a smaller proportion of Company A than Company B. B) Company A must make less profit than Company B. C) Creditors own a smaller proportion of Company A than Company B. D) Company A must have fewer assets than Company B.
204) A company had total assets of $400,000 and a debt-to-assets ratio was 0.35. Which of the following statements is not true? A) Total liabilities are $140,000. B) The debt-to-assets ratio of 0.35 indicates that the company relies less on equity financing than on debt financing. C) If other companies in the same industry are used as benchmarks and report a lower debt-to-assets ratio, this indicates that this company has a more risky financing strategy. D) If the ratio this year is lower than it was last year for this company, it indicates that the company is relying less on debt financing this year.
205) If total assets decrease but total liabilities remain the same, what is the impact on the debt-to-assets ratio? A) It decreases. B) It remains the same. C) It cannot be determined without additional information. D) It increases.
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206) At the beginning of the year, Norwood Pass Industries had $240,000 in total assets and a debt-to-assets ratio of 0.5 or 50%. During the year, Norwood's assets increased by $80,000, and its liabilities increased by $72,000. What is the debt-to-assets ratio at the end of the year? A) 0.6 or 60% B) 0.4 or 40% C) 0.9 or 90% D) 1.7 or 170%
207) Odessa Company has current assets of $9.18 million and net income of $11.1 million. Current liabilities total $3.6 million, interest expense is $3.1 million, and income tax expense is $4.1 million. What is the times interest earned ratio for this company? (Round your finalanswer to 2 decimal places.) A) 0.37. B) 0.39. C) 2.55. D) 5.90.
208) Odessa Company has current assets of $10 million and net income of $20 million. Current liabilities total $5 million, interest expense is $4 million, and income tax expense is $6 million. What is the times interest earned ratio for this company? A) 0.5 B) 7.5 C) 0.3 D) 2.0
209)
Which of the following is not used to calculate the times interest earned ratio?
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A) Net income. B) Income tax expense. C) Interest earned on investments. D) Interest expense.
210)
The following information was obtained from Quayle Company’s income statement:
Income before Interest and Income Tax Expense Interest Expense Income before Income Tax Expense Income Tax Expense Net Income
$ 705,000 85,000 620,000 243,500 $ 376,500
What is the times interest earned ratio? A) 4.43 B) 7.29 C) 8.29 D) 1.87
211)
The following information was obtained from Quayle Company's income statement:
Income before Interest and Income Tax Expense Interest Expense Income before Income Tax Expense Income Tax Expense Net Income
$ 685,000 75,000 610,000 213,500 $ 396,500
What is the times interest earned ratio? A) 5.29 B) 8.13 C) 9.13 D) 1.73
212) The times interest earned ratio for Bodhaine's Orchard was 8.52 in 2019, 6.63 in 2020, and 2.74 in 2021. What is the most likely interpretation of this ratio?
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A) The ability to cover interest costs with resources from operations is decreasing. B) The amount of debt has been decreasing each year. C) Current liabilities are growing faster than current assets. D) Income taxes have reduced an increasing amount of operating income.
213)
A negative times interest earned ratio suggests that the company: A) is using resources very efficiently. B) has a serious financial problem. C) has a very high interest expense. D) has a high level of sales revenue.
214)
The following data came from the financial statements of Sawyer Company:
Total Assets Total Liabilities Total Stockholders’ Equity Income Tax Expense Interest Expense Net Income
$ 213,000 99,000 114,000 4,640 580 80,040
What is the Sawyer's times interest earned ratio? A) 138 B) 147 C) 130 D) 137
215)
The following data came from the financial statements of Sawyer Company:
Total Assets Total Liabilities Total Stockholders’ Equity Income Tax Expense Interest Expense Net Income
$ 369,000 171,000 198,000 7,200 900 117,000
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A) 130 B) 129 C) 122 D) 139
216) The following information is available from the most recent financial statements of the Attaché Corporation: Total Assets Net Income Average total liabilities Sales revenue Total liabilities Average total assets
$ 800,000 120,000 400,000 1,500,000 500,000 700,000
What is the debt-to-asset ratio? A) 57.1% B) 62.5% C) 160% D) 175%
217) Selected financial information presented below was obtained from the financial statements of Terripin Industries: Current Assets Property and Equipment, net Current Liabilities Noncurrent Liabilities Stockholders’Equity Sales Revenue Net Income
$ 80,000 120,000 90,000 70,000 40,000 100,000 36,000
What is the debt-to-assets ratio? A) 0.35 B) 0.80 C) 0.20 D) 1.00
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218) During the year, the company recorded services provided to customers on account. What effect will this transaction have on the debt-to-assets and times interest earned ratios? A) The debt-to-assets ratio will decrease and the times interest earned will increase. B) The debt-to-assets ratio will increase and the times interest earned will not change. C) Both ratios will decrease. D) Both ratios will increase.
219)
Which of the following statements about loan terminology is correct? A) Loan covenants are the collateral provided by a borrower to a lender as security on a
loan. B) A secured loan means that the borrower has a pre-approved line of credit backing the debt. C) Lenders can revise loan terms if a borrower violates a loan covenant. <b></b> D) All companies are able to establish lines of credit which will allow them to borrow money as needed, up to a prearranged limit.
220) Many lending agreements require the borrowing company to maintain certain financial standards as demonstrated by its financial statements. This is known as a: A) bond certificate. B) loan covenant. C) renegotiation. D) contingent liability.
221)
The issuance price of a bond does not depend on the:
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A) face value of the bond. B) market rate of interest. C) perceived risk associated with the bond. D) method used to amortize the discount or premium.
222)
Using straight-line amortization, when a bond is sold at a premium:
A) the amortized premium is added to the interest payable to calculate interest expense. B) Bonds Payable rises by a constant amount each year. C) interest expense is calculated by subtracting the amortized premium from the interest payment that is to be made. <b></b> D) interest expense rises each year.
223)
Using straight-line amortization, when a bond is sold at a discount: A) Bonds Payable declines by a constant amount each year. B) Interest Expense declines by a constant amount each year. C) the carrying value of the bonds declines by a constant amount each year. D) Interest Expense is a constant amount each year.
224) A company issued 10-year, 5.75% bonds with a face value of $100,000. The company received $97,857 for the bonds. Using the straight-line method of amortization, the amount of interest expense for the first annual interest period is: A) $5,535.70. B) $2,143.00. C) $5,964.30. D) $5,750.00.
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225) A company issued 10-year, 7% bonds with a face value of $100,000. The company received $97,947 for the bonds. Using the straight-line method of amortization, the amount of interest expense for the first annual interest period is: A) $7,000.00. B) $7,205.30. C) $6,794.70. D) $2,053.00.
226) A company issues a 5-year bond with a $7,500 discount. Using straight-line amortization, the company should: A) debit Discount on Bonds Payable for $1,500 per year. B) credit Discount on Bonds Payable for $1,500 per year. C) debit Interest Payable for $1,500 per year. D) credit Interest Expense for $1,500 per year.
227) A 10-year bond that pays interest annually was issued at a $5,000 premium. The entry to record the payment of interest using straight-line amortization will include a ________ to Premium on Bonds Payable for ________ each period. A) credit; $500 B) debit; $500 C) debit; a greater amount each period D) credit; a lower amount each period
228) On January 1, Melrose Manufacturing issues a 5-year bond with a face value of $10,000 and a stated interest rate of 8%. The market interest rate is 6%. The issue price of the bond was $10,876. Using the effective-interest method of amortization, the interest expense for the first year ended December 31 would be:
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A) $870.08. B) $652.56. C) $800.00. D) $600.00.
229) On January 1, Melrose Manufacturing issues a 5-year bond with a face value of $15,000 and a stated interest rate of 7%. The market interest rate is 5%. The issue price of the bond was $16,299. Using the effective-interest method of amortization, the interest expense for the first year ended December 31 would be: A) $750. B) $814.95. C) $1,050. D) $1,140.93.
230) When interest expense is calculated using the effective-interest amortization method, interest expense on a bond that pays interest annually is equal to the: A) actual amount of interest paid. B) carrying value of the bonds payable multiplied by the effective interest rate. C) maturity value of the bonds payable multiplied by the effective interest rate. D) carrying value of the bonds payable multiplied by the stated interest rate.
231) On January 1, your company issues a 5-year bond with a face value of $10,000 and a stated interest rate of 9%. The market interest rate is 7%. The issue price of the bond was $10,820. Your company used the effective-interest method of amortization. At the end of the first year, your company should:
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A) debit Interest Expense for $757.00, debit Premium on Bonds Payable for $143.00, and credit Cash for $900. B) debit Interest Expense for $900, debit Premium on Bonds Payable for $143.00, and credit Interest Payable for $757.00. C) debit Interest Expense for $900, credit Premium on Bonds Payable for $143.00, and credit Interest Payable for $757.00. D) debit Interest Expense for $757.00 and credit Interest Payable for $757.00.
232) On January 1, your company issues a 5-year bond with a face value of $10,000 and a stated interest rate of 7%. The market interest rate is 5%. The issue price of the bond was $10,866. Your company used the effective-interest method of amortization. At the end of the first year, your company should: A) debit Interest Expense for $543.30, debit Premium on Bonds Payable for $156.70, and credit Interest Payable for $700. B) debit Interest Expense for $700, credit Premium on Bonds Payable for $156.70, and credit Interest Payable for $543.30. C) debit Interest Expense for $700, debit Premium on Bonds Payable for $156.70, and credit Interest Payable for $543.30. D) debit Interest Expense for $543.30 and credit Interest Payable for $543.30.
233) When the effective-interest method of amortization is used, what happens to interest expense as a bond moves toward maturity? A) Interest expense falls for bonds sold at either a discount or a premium. B) Interest expense rises for bonds sold at a discount and falls for bonds sold at a premium. C) Interest expense rises for bonds sold at either a discount or a premium. D) Interest expense falls for bonds sold at a discount and rises for bonds sold at a premium.
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234) On January 1, Mallory Company issued $400,000 of 8%, 5-year bonds when the market rate of interest was 6%. The bonds were issued for $433,698 and interest will be paid annually on December 31. How much premium amortization will Mallory record on the first interest payment date using the effective-interest method? A) $0 B) $26,021.88 C) $32,000 D) $5,978.12 <b></b>
235) ABC Company received $9,631 for its 5-year, 10% bonds with a total face value of $10,000. The market rate of interest was 11%. The bonds pay interest annually on December 31. How much interest expense will ABC Corporation record on the first annual interest payment date using the effective-interest method? A) $1,059.41 B) $1,000 C) $1,100 D) $963.10
236) Which one of the following statements about amortization of discounts and premiums is not correct? A) Under straight-line amortization, when a bond is sold at a premium, the annual premium amortization is the total premium divided by the number of years until bond maturity. B) When a bond is sold at a discount, interest expense recorded using the effectiveinterest method is less than the interest paid on the bond. C) The effective-interest method of amortization is considered to be conceptually superior to straight-line amortization. D) When a bond discount is amortized using the effective-interest method, the promised interest payment is less than the interest expense, so the bond liability will increase as a result of the contra-liability account decreasing.
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237) A company sells a bond with a face value of $10,000 and receives a premium of $800. Using simplified effective-interest amortization, what journal entry is used to record the issuance of the bonds? A) Debit Cash for $10,800 and credit Bonds Payable, Net for $10,800. B) Debit Cash for $10,800, credit Bonds Payable, Net for $10,000, and credit Premium on Bond Payable for $800. C) Debit Cash for $10,000, debit Interest Expense for $800, credit Bonds Payable, Net for $10,000, and credit Premium on Bonds Payable for $800. D) Debit Cash for $10,000, debit Interest Expense for $800, credit Bonds Payable for $10,000, and credit Premium on Bonds Payable for $800.
238) Which of the following statements about bonds payable net of a discount or premium is not correct? A) If a company records a discount or premium with the bonds payable in a single account called Bonds Payable, Net, it is using simplified effective-interest amortization. B) When bonds payable are accounted for net of a discount, the initial amount recorded in the Bonds Payable, Net account is the issue price of the bond. C) When simplified effective-interest amortization is used for bonds issued at a premium, the balance in the Bonds Payable, Net account will increase as the bond approaches the maturity date. <b></b> D) If a company issued bonds at their face value, the balance of Bonds Payable, Net account will always be equal to the face value of the bonds as long as the bonds are outstanding.
239) Hermosa Vista Company issued $170,000 5-year, 6.25% bonds and received $173,605 in cash. The market rate of interest when the bonds were issued was 5.75%. What is the amount of interest expense to be recorded for the first annual interest period if the company uses simplified effective-interest amortization? A) $10,850.31 B) $9,775.00 C) $9,982.29 D) $10,625.00
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240) Hermosa Vista Company issued $200,000 5-year, 7% bonds and received $204,155 in cash. The market rate of interest when the bonds were issued was 6.5%. What is the amount of interest expense to be recorded for the first annual interest period if the company uses simplified effective-interest amortization? A) $13,270.08 B) $14,000.00 C) $13,000.00 D) $14,290.85
241)
Using the simplified effective-interest amortization, interest expense is calculated as: A) Bonds Payable, Net × Market Interest Rate × Time. B) Bonds Payable, Net × Stated Interest Rate × Time. C) Face Value × Stated Interest Rate × Time. D) Face Value × Market Interest Rate × Time.
242) Using the simplified effective-interest amortization, the credit to Cash each interest payment is calculated as: A) Bonds Payable, Net × Market Interest Rate × Time. B) Bonds Payable, Net × Stated Interest Rate × Time. C) Face Value × Stated Interest Rate × Time. D) Face Value × Market Interest Rate × Time.
243) Burlingame Company is purchasing a new forklift to be used in its warehousing operations. Burlingame borrowed $120,000 from its bank in return for an installment note with 8% interest. Burlingame will make 6 equal annual payments of $25,958. Which of the following is correct regarding this note?
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A) There is a balloon payment of principal due to the lender at the end of the 6 th period. B) The payments will decrease each year as a portion of the principal is paid. C) Each payment includes both principal and interest. D) Interest expense will increase each year.
244) Burlingame Company is purchasing a new forklift to be used in its warehousing operations. Burlingame borrowed $120,000 from its bank in return for an installment note with 8% interest. Burlingame will make 6 equal annual payments of $25,958. Interest expense for the first period equals: A) $16,358. B) $7,523. C) $9,600. D) $25,958.
245) Burlingame Company is purchasing a new forklift to be used in its warehousing operations. Burlingame borrowed $120,000 from its bank in return for an installment note with 8% interest. Burlingame will make 6 equal annual payments of $25,958. Interest expense for the second period equals: A) $17,667. B) $9,600. C) $8,291.36. D) $25,958.
246) Hardtack Industries borrowed $336,000 from its bank in return for an installment note with 8% interest. Hardtack will make 6 annual payments of $72,682. At the end of the first period, Hardtack will report a note payable on its balance sheet of:
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A) $336,000. B) $263,318. C) $290,198. D) $240,732.
247) Hardtack Industries borrowed $336,000 from its bank in return for an installment note with 8% interest. Hardtack will make 6 annual payments of $72,682. How much total interest will Hardtack Industries recognize over the life of the note? A) $100,092 B) $161,280 C) $72,682 D) $56,000
248) As an installment loan approaches maturity, the portion of each cash payment that is applied to the repayment (principal) of the loan: A) gets larger. B) gets smaller. C) stays the same. D) cannot be determined.
249) As an installment loan approaches maturity, the portion of each cash payment that is applied to the interest of the loan: A) gets larger. B) gets smaller. C) stays the same. D) cannot be determined.
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Answer Key Test name: Chap 10_7e 1) FALSE Most companies have operating cycles shorter than one year. 2) TRUE The principal amount of a loan is the amount of the note payable; the amount owed as of the day the note is established. A liability is first recorded at the amount initially owed, which excludes interest charges. Interest arises only when time passes, so no interest is recorded on the day the company purchases an item on account or the day the company receives a loan. 3) TRUE When a company receives cash before it provides goods or services to customers, a liability called Deferred Revenue is created. 4) TRUE Occasionally, governments and very large companies need to borrow more money than any single lender can provide. Because issuing a promissory note for a very large amount of money is impractical, the company instead issues bonds to thousands of different investors. 5) TRUE If the bonds pay interest (stated rate) at a higher rate of interest than the market demands (market rate), the bonds will sell at a premium. 6) TRUE At maturity, the carrying value of a bond equals its face value. 7) TRUE Version 1
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The total face value of a bond plus any related premium or minus any related discount is reported in the liabilities section of the balance sheet. 8) FALSE If bonds are retired at maturity, the carrying value of a bond equals its face value and no gain or loss would be recorded. 9) TRUE Bonds that are backed by collateral are referred to as "secured" bonds. 10) TRUE Bonds that are not backed by collateral are referred to as "debentures." 11) FALSE A bond that an issuing corporation can call in and exchange for cash is referred to as a "callable" bond. A bond that can be converted into shares of its stock is referred to as a "convertible" bond. 12) TRUE Bonds that include no periodic interest payments are called "strips" or "zero-coupon" bonds. 13) FALSE Gross earnings is debited to Salaries and Wages Expense; net pay is credited to Salaries and Wages Payable. 14) TRUE Federal Insurance Contributions Act (FICA) requires that each employee support Medicare and Social Security through employee payroll deductions called FICA taxes. Like their employees, all employers are required to pay FICA taxes. 15) TRUE
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Contingent liabilities are potential liabilities that have arisen as a result of a past transaction or event; their ultimate outcome will not be known until a future event occurs or fails to occur. 16) FALSE If the likelihood of loss is only reasonably possible, no journal entry is recorded; the contingent liability is disclosed in the notes to the financial statements. If the loss is probable and can be reasonably estimated, the liability and estimated loss is recorded in a journal entry. 17) FALSE Under GAAP, contingent liabilities (and corresponding losses) are recorded if the estimated loss is probable. Under IFRS, contingent liabilities (and corresponding losses) are recorded if the estimated loss is "more likely than not" to occur. The threshold under IFRS is lower than that under GAAP, causing more contingent liabilities to be reported under IFRS than under GAAP. 18) TRUE The debt-to-assets ratio indicates financing risk by computing the proportion of total assets financed by debt. 19) TRUE The times interest earned ratio measures whether sufficient resources are generated from operations to cover interest costs. In general, a low times interest earned ratio is viewed less favorably than a high one. A low ratio indicates less margin of protection should the company's profitability decline in the future. 20) FALSE
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The straight-line method of amortization evenly allocates the amount of bond premium or discount over each period of a bond's life to adjust interest expense for differences between its stated interest rate and market interest rate. The effective-interest method of amortization allocates the amount of bond premium or discount over each period of a bond's life in amounts corresponding to the bond's carrying value. 21) TRUE The effective-interest method of amortization is considered a conceptually superior method of accounting for bonds because it correctly calculates interest expense by multiplying the TRUE cost of borrowing times the amount of money actually owed to investors. 22) TRUE In the context of loans and notes, an amortization schedule shows the payment of interest and repayment of principal on balances owed. 23) FALSE Each year’s installment payment is the same, but the proportion of interest decreases over the period while the proportion of principal increases. This pattern occurs because the borrower repays some of the principal as part of each installment payment, so multiplying the fixed interest rate by the remaining principal balance results in a smaller dollar amount of interest expense in each following year. 24) C Current liabilities are defined as short-term obligations that will be paid or fulfilled within the company's current operating cycle or within one year of the balance sheet date, whichever is longer. A bank loan due in 18 months would be classified as a noncurrent or long-term liability. 25) A
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Current liabilities are short-term obligations that will be paid with current assets within the current operating cycle or one year, whichever is longer. The accounts payable, the current portion of a 30-year mortgage, and income taxes are all current liabilities. Only the note payable, which is not due within the year, will be paid outside of the current operating cycle or one year. 26) D Current liabilities are defined as short-term obligations that will be paid or fulfilled within the company's current operating cycle or within one year of the balance sheet date, whichever is longer. 27) B Current liabilities are defined as short-term obligations that will be paid or fulfilled within the company's current operating cycle or within one year of the balance sheet date, whichever is longer. 28) A Liabilities on the balance sheet are reported as either current (short-term) or noncurrent (long-term) at the amount owed. The account names provide information as to the reason for the liability, (e.g., Notes Payable, Accounts Payable, Salaries and Wages Payable, etc.), but there is generally no indication as to whom the amount is owed. 29) A Technically, current liabilities are defined as short-term obligations that will be paid or fulfilled within the company's current operating cycle or within one year of the balance sheet date, whichever is longer. Practically, this definition can be simplified as liabilities that are due within one year (because most companies have operating cycles that are shorter than a year). 30) D Version 1
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Initially, the company records each liability at the amount of cash a creditor would accept to settle the liability immediately after a transaction or event creates the liability. The sales tax collected by the company is reported as a current liability until it is forwarded (or remitted) to the government. 31) B Net earnings to the employee are equal to gross earnings less payroll deductions either required by law (e.g., FICA, Medicare) or voluntarily requested (e.g., medical insurance premiums, parking, charitable contributions, etc.). 32) D Initially, the company records each liability at the amount of cash a creditor would accept to settle the liability immediately after a transaction or event creates the liability. The liability is created in this situation when the goods or services are received. 33) A Accrued Payroll includes Salaries and Wages Payable, payroll deductions, and employer payroll taxes. Payroll deductions are either required by law (including federal, state, county, and city income tax and FICA taxes) or voluntarily requested by employees (including voluntary deductions for charitable donations, parking, union dues, retirement savings, etc.). Like their employees, all employers are required to pay FICA taxes. Only employers are required to pay unemployment taxes. 34) D
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Payroll costs = Net pay to employees + Income taxes withheld from employees + FICA taxes withheld from employees + FICA taxes (matching contributions) = $234,900 + $34,200 + $9,000 + $9,000 = $287,100 35) B Payroll costs = Net pay to employees + Income taxes withheld from employees + FICA taxes withheld from employees + FICA taxes (matching contributions) = $136,000 + $20,100 + $9,016 + $9,016 = $174,132 36) D The employee income taxes and FICA taxes withheld are not an expense of the employer. Total payroll expense (relating to this transaction only) = Salaries and wages earned by employees of $180,000 + Employer amount of FICA of $9,000 = $189,000. 37) C The journal entry would include a debit to Salaries and Wages Expense for $22,000 (gross salaries and wages), a credit to Withheld Income Taxes Payable for $3,300, a credit to FICA Payable for $1,683, and a credit to Salaries and Wages Payable for $17,017 (net pay to employees). 38) D The journal entry would include a debit to Salaries and Wages Expense for $30,000 (gross salaries and wages), a credit to Withheld Income Taxes Payable for $4,500, a credit to FICA Payable for $2,000, and a credit to Salaries and Wages Payable for $23,500 (net pay to employees). 39) A
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Net pay = Gross earnings − Withheld income taxes payable − FICA payable − Voluntary deductions = $2,400.00 − [($2,400.00 × 0.0765) + ($120.00 + $45.00)] − $0 = $2,051.40. 40) A Net pay = Gross earnings − Withheld income taxes payable − FICA payable − Voluntary deductions = $1,600 − [($1,600 × 0.0765) + ($80 + $30)] − $0 = $1,367.60. 41) A Payroll tax expense = Employer's FICA match + Federal unemployment tax + State unemployment tax = ($4,400.00 × 0.0765) + $275.00 + $44.00 = $655.60 42) B Payroll tax expense = Employer's FICA match + Federal unemployment tax + State unemployment tax = ($1,600 × 0.0765) + $100 + $16 = $238.40 43) D Employees pay federal and state income taxes withheld and FICA taxes (Social security and Medicare). Like their employees, all employers are required to pay FICA taxes. The required contribution is 100% of total employee contributions (called a "matching" contribution). In addition, employers are required by the Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA) to pay unemployment taxes. 44) D Gross earnings are computed by multiplying the time worked by the pay rate promised by the employer. Payroll deductions are amounts subtracted from employees' gross earnings to determine their net pay. When recording the payroll, Salaries and Wages Expense is debited for the gross earnings and Salaries and Wages Payable is credited for the net pay. Version 1
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45) A Employees & their employers are required to pay FICA taxes (Social security and Medicare). The required contribution is 100% of total employee contributions (called a "matching" contribution). 46) C Employees & their employers are required to pay FICA taxes. The required contribution is 100% of total employee contributions (called a "matching" contribution). In addition, employers are required by the Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA) to pay unemployment taxes. As a result, employer payroll taxes are the additional payroll costs to the employer over and beyond the wages and salaries earned by employees. 47) D The entry to record the payroll taxes includes a debit to Payroll Tax Expense of $26,950 (or Federal unemployment taxes of $3,500 + State unemployment taxes of $1,750 + FICA taxes − employer of $21,700), a credit to FICA Payable of $21,700, and a credit to Unemployment Tax Payable for $5,250 (or $3,500 + $1,750). 48) B Ending Accounts Payable balance = Beginning Accounts Payable balance + Purchases on account − Payments on account = $4,800 + $6,400 − $1,600 = $9,600 The sales on account do not affect Accounts Payable. 49) D The entry to accrue interest on a note is a debit to Interest Expense (which increases an expense) and a credit to Interest Payable (which increases a liability). If that entry is not made, liabilities are understated (too low) and expenses are also understated (too low) and, as a result, net income is overstated (too high). Version 1
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50) A Since these types of entries relate to an expense that has been incurred but not paid, the related entries increase "Payable" accounts (liabilities) and increase the related expense accounts. 51) A Net pay = Gross pay to employees − Federal & State Income taxes − FICA (Social Security and Medicare) taxes = $138,000 − $9,246 − $2,001 − $24,840 − $5,313 = $96,600 52) C Payroll deductions are amounts subtracted from employees’ gross earnings to determine their net pay. Payroll deductions are either required by law (including federal, state, county, and city income tax and FICA taxes) or voluntarily requested by employees (including voluntary deductions for charitable donations, parking, union dues, retirement savings, etc.) and decrease the amount of cash an employee receives. 53) B Net earnings to the employee are equal to gross earnings less payroll deductions either required by law (e.g., FICA, Medicare) or voluntarily requested (e.g., medical insurance premiums, parking, charitable contributions, etc.). 54) A Employees and their employers are required to pay FICA taxes. 55) A
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The journal entry would include a debit to Salaries and Wages Expense for $1,080 (or 40 hours × $27 per hour), a credit to Withheld Income Taxes Payable for $122.40 (or $104.40 + $18.00), a credit to FICA Payable for $82.62 (or $66.96 + $15.66), and a credit to Salaries and Wages Payable for $874.98 (her net pay). The debit to Salaries and Wages Expense causes that account to increase. 56) C The journal entry would include a debit to Salaries and Wages Expense for $100,000 (gross pay), a credit to Withheld Income Taxes Payable for $21,850 (or $18,000 + $3,850), a credit to FICA Payable for $8,150 (or $6,700 + $1,450), and a credit to Salaries and Wages Payable for $70,000 (net pay). 57) C The entry to record employer payroll taxes increases Payroll Tax Expense and increases two liability accounts, FICA Payable and Unemployment Tax Payable. The increase to Payroll Tax Expense decreases net income and, as a result, total stockholders' equity. 58) A The entry to record employer payroll taxes includes a debit to Payroll Tax Expense for $91,080, a credit to FICA Payable for $82,620, and a credit to Unemployment Tax Payable for $8,460. 59) D The entry increases Cash, an asset, and increases Notes Payable, a liability. 60) A The entry increases Cash, an asset, and increases Notes Payable, a liability.
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61) A The entry increases Cash, an asset, and increases Notes Payable, a liability. 62) A The entry should have included a debit to Cash, an asset, and a credit to Notes Payable, a liability. The correction would include a debit to Notes Receivable (to reverse the increase to this account) and a credit to Notes Payable (to correctly increase this account). If the original entry is not corrected, assets are understated and liabilities are understated. 63) C The amount of interest expense that has accrued for the months of November and December 2021 is computed as follows: $200,000 × 0.06 × 2 / 12 = $2,000. Since interest has accrued but has not yet been paid, Interest Expense must be debited and Interest Payable must be credited for $2,000. 64) A As of December 31, two months have passed since each of the notes was signed. As a result, each of the calculations should include a time factor of 2 / 12. That factor is correctly set forth for the 4-month note. 65) C Since interest has accrued but has not yet been paid, Interest Payable, a liability, must also be increased. In addition, Interest Expense must be increased, which will decrease net income and stockholders' equity. 66) B The amount of interest expense that has accrued as of December 31 is computed as follows: $66,000 × 0.06 × 4 / 12 = $1,320. Since interest has accrued but has not yet been paid, Interest Expense must be debited and Interest Payable must be credited for $1,320. Version 1
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67) B The amount of interest expense that has accrued as of December 31 is computed as follows: $200,000 × 0.06 × 4 / 12 = $4,000. Since interest has accrued but has not yet been paid, Interest Expense must be debited and Interest Payable must be credited for $4,000. 68) B Sales tax collected by a company is reported as a current liability until it is remitted (paid) to the taxing authorities. 69) B Deferred revenues represent a liability because goods or services have been paid for, but not yet provided to the customer. 70) A When the $440 is collected, the company will record a debit to Cash (to increase that asset account) and a credit to Deferred Revenue (to increase that liability account). 71) B The note payable is recorded at the amount borrowed of $90,000. 72) A Initially, the company records each liability at the amount of cash a creditor would accept to settle the liability immediately after a transaction or event creates the liability. The journal entry to establish this note would include a credit to Notes Payable for $200,000. 73) C
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The journal entry to record the issuance of the promissory note includes a debit to Cash and a credit to Notes Payable for $360,000. Interest arises only when time passes, so no interest is recorded on the day the company purchases an item on account or the day the company receives a loan. 74) A Interest arises only when time passes, so no interest is recorded on the day the company purchases an item on account or the day the company receives a loan. 75) A Interest = Principal × Interest rate × Time = $15,600 × 0.14 × 6 / 12 (April through October) = $1,092 76) C Interest = Principal × Interest rate × Time = $15,000 × 0.06 × 5 / 12 (April through September) = $375 77) A Interest = Principal × Interest rate × Time = $7,800 × 0.08 × 3 / 12 = $156.00 78) D Interest = Principal × Interest rate × Time = $6,500 × 0.09 × 4 / 12 = $195 79) B Interest for three months (October, November and December) should be accrued at December 31. 80) B Interest expense is calculated for October through December as follows: Interest = Principal (P) × Interest Rate (R) × Time (T) = $306,000 × 0.06 × 3 / 12 = $4,590 81) A Version 1
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Interest is accrued by increasing a liability account (Interest Payable) and recording the cost of interest as an expense (Interest Expense). 82) B The amount of interest expense that has accrued as of December 31, 2021, is computed as follows: $18,000 × 0.05 × 3 / 12 = $225. Since interest has accrued but has not yet been paid, Interest Expense must be debited and Interest Payable must be credited for $225. 83) A The adjusting entry includes a debit to Interest Expense and a credit to Interest Payable for $4,100 [or Principal of $205,000 × Interest rate of 8% × Time of 3 / 12 (October 1 through December 31)]. 84) A The adjusting entry includes a debit to Interest Expense and a credit to Interest Payable for $5,400 [or Principal of $360,000 × Interest rate of 6% × Time of 3 / 12 (October 1 through December 31)]. 85) C The journal entry includes a debit to Interest Expense for $3,000 (the amount accumulated during the current accounting period to increase the expense), a debit to Interest Payable for $6,000 (the amount that accrued during the last accounting period to decrease the liability), and a credit to Cash for $9,000 (the total amount paid to decrease the cash). 86) C The journal entry includes a debit to Interest Expense for $6,000 (the amount accumulated during the current accounting period to increase the expense), a debit to Interest Payable for $12,000 (the amount that accrued during the last accounting period to decrease the liability), and a credit to Cash for $18,000 (the total amount paid to decrease the cash).
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87) A Debit Interest Payable for the amount that was accrued on December 1, 2021 of $250 (or $20,000 × 0.05 × 3 / 12), debit Interest Expense for interest incurred in January through March of $250 (or $10,000 × 0.05 × 3 / 12), and credit Cash for the full interest payment due of $500 (or $20,000 × 0.05 × 6 / 12). 88) B The journal entry to record the issuance of the promissory note includes a debit to Cash and a credit to Notes Payable for $200,000. 89) A The adjusting entry should include a debit to Interest Expense and a credit to Interest Payable for $4,000 [or Principal of $200,000 × Interest rate of 0.04 × Time of 6 / 12 (January through June)]. 90) D Recall that the company records adjusting entries at year-end on June 30. The journal entry to record the payment of the interest at maturity includes a debit to Interest Payable for $4,000 [or Principal of $200,000 × Interest rate of 0.04 × Time of 6 / 12 (January through June)], a debit to Interest Expense for $2,000 [or Principal of $200,000 × Interest rate of 0.04 × Time of 3 / 12 (July through September)], and a credit to Cash for $6,000 [or Principal of $200,000 × Interest rate of 0.04 × Time of 9 / 12 (January through September)]. 91) D The journal entry to record the payment of the note at maturity includes a debit to Notes Payable and a credit to Cash for $200,000. 92) A
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The adjusting entry should include a debit to Interest Expense and a credit to Interest Payable for $2,700 [or Principal of $90,000 × Interest rate of 0.09 × Time of 4 / 12 (September 1 through December 31)]. 93) B Recall that the company records adjusting entries at year-end on December 31. The journal entry to record the payment of the interest at maturity includes a debit to Interest Payable for $2,700 [or Principal of $90,000 × Interest rate of 0.09 × Time of 4 / 12 (September through December)], a debit to Interest Expense for $1,350 [or Principal of $90,000 × Interest rate of 0.09 × Time of 2 / 12 (January and February)], and a credit to Cash for $4,050 [or Principal of $90,000 × Interest rate of 0.09 × Time of 6 / 12 (September 1 through March 1)]. 94) A Sales tax collected by a company is reported as a current liability until it is remitted (paid) to the taxing authorities. 95) B The $5 of sales tax collected is recorded as an increase (credit) to Sales Tax Payable and, as a result, is reported as a current liability until it is forwarded to the state government. 96) A Sales tax collected (payable) = Sales revenue × Sales tax rate = $380 × 0.05 = $19 97) A Sales tax collected (payable) = Sales revenue × Sales tax rate = $300 × 0.09 = $27 98) C
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Sales tax = Sales revenue × Sales tax rate Sales revenue = Sales tax ÷ Sales tax rate = $501.40 ÷ 1.09 = $460.00 99) B Sales tax = Sales revenue × Sales tax rate Sales revenue = Sales tax ÷ Sales tax rate = $756 ÷ 1.08 = $700 100) B Deferred Revenues represent a liability because goods or services have been paid for, but not yet provided to the customer. 101) D As of the end of the year, the $100 subscription has been earned. Therefore, AAA needs to debit Deferred Revenue (to decrease that liability account) and credit Subscription Revenue (to increase that revenue account for the amount of revenue earned). 102) B Receiving cash before providing services would be recorded as a debit to Cash and credit to Deferred Revenue. 103) C Debit Deferred Revenue (to decrease that liability account) and credit Dance Lessons Revenue for $3,000 (or 12 students × $375 student × (2 months ÷ 3 months)). 104) D
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Interest Payable = Principal × Interest rate × Time = $38,400 × 0.06 × 3 / 12 = $576.00 Current liabilities = Interest payable + Current portion of long-term debt = $576.00 + $6,400 = $6,976.00 Long-term debt = Amount of promissory note − Current portion of long-term debt = $38,400 − $6,400 = $32,000 105) D Interest Payable = Principal × Interest rate × Time = $20,000 × 0.08 × 3 / 12 = $400 Current liabilities = Interest payable + Current portion of long-term debt = $400 + $5,000 = $5,400 Long-term debt = Amount of promissory note − Current portion of long-term debt = $20,000 − $5,000 = $15,000 106) A The grades for bonds can range from AAA to D. The AAA rating is given to companies in rock-solid financial condition and the D goes to those likely to pay less than half of what they owe. 107) B Accrued liabilities include expenses that have been incurred but not paid at the end of the accounting period. When a loan becomes a current liability, the borrower must report the loan in the Current Liabilities section of the balance sheet. Rather than create a different account for this, accountants simply remove the amount of principal to be repaid in the upcoming year from the total long-term debt and report it as a current liability, Current Portion of Long-Term Debt.
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108) D Current liabilities are defined as short-term obligations that will be paid or fulfilled within the company's current operating cycle or within one year of the balance sheet date, whichever is longer. Depending on the time remaining to maturity, Bonds Payable and Notes Payable should be classified as current or noncurrent (or long-term) liabilities. 109) B The stated interest rate is always expressed as an annual rate although many bonds require interest payments every six months (that is, semiannually). The face value (or principal) of the bond is printed on the bond certificate; it is not necessarily what the bond is worth since the current rate changes daily. After a bond has issued, the market's desired rate fluctuates frequently, which affects the bond price in the market. The carrying value is equal to the face value plus any related premium or less any related discount. 110) C A bond certificate contains the stated interest rate, the amount payable on the maturity date (often called the face value), and the maturity date. 111) A When a company issues a bond at a premium, the price received when the bond is issued is greater than the face value. Therefore, the company received more than the $100,000 face value. 112) D A bond premium is the excess of its issue price over its face value. Buyers are willing to pay a premium for bonds because the features of the bond (e.g., stated interest rate) are attractive to the buyers. 113) A
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The bond issue price represents the amount that investors are willing to pay on the issue date in exchange for the cash payments that the company promises to make over the life of the bond. The cash payments include interest of $700 per year (or $10,000 × 0.07 × 12 / 12) and the amount paid at maturity, which is the face value of $10,000. Theoretically, the issue price is based on a mathematical calculation (called a present value) of both amounts. 114) A The journal entry to record the issuance includes a debit to Cash and a credit to Bonds Payable for $50,000, which is the face value of the bonds. Interest arises only when time passes, so no interest is recorded on the day the company issues the bonds. 115) C Price = Issue price ÷ Face value = $243,800 ÷ $230,000 = 1.060 or 106.00% (which is referred to as a price of 106.00) Premium = Issue price − Face value = $243,800 − $230,000 = $13,800 116) D Price = Issue price ÷ Face value = $52,000 ÷ $50,000 = 1.04 or 104% (which is referred to as a price of 104) Premium = Issue price − Face value = $52,000 − $50,000 = $2,000 117) B
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Price = Issue price ÷ Face value = $217,350 ÷ $230,000 = 0.945 or 94.50% (which is referred to as a price of 94.50) Discount = Face value − Issue price = $230,000 − $217,350 = $12,650 118) D Price = Issue price ÷ Face value = $48,000 ÷ $50,000 = 0.96 or 96% (which is referred to as a price of 96) Discount = Face value − Issue price = $50,000 − $48,000 = $2,000 119) A The journal entry to record the issuance includes a debit to Cash for $52,000, a credit to Bonds Payable for $50,000 (the face value of the bonds), and a credit to Premium on Bonds Payable for $2,000 (or $52,000 − $50,000). 120) B Bond Issue Price = Face value × Bond price = $1,000 × 1.07 = $1,070 Since the issue price is greater than the face value, the bonds sold at a premium. Bonds sell at a premium when the stated interest rate is higher than the market interest rate. 121) C If a bond offers something attractive, such as a high interest rate, bondholders may be willing to pay a premium to acquire it. As a result, if the market rate of interest is lower than the stated rate of interest, then the bonds will be issued at an amount greater than face value. 122) B
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If a bond offers something attractive, such as a high interest rate, bondholders may be willing to pay a premium to acquire it. As a result, if the market rate of interest is lower than the stated rate of interest, then the bonds will be issued at an amount greater than face value. 123) A Cash, an asset, increases by $194,000 (or $200,000 × 0.97). Bonds Payable, a liability, increases by the par value of the bonds of $200,000. Since the issue price is less than the face value, there is a discount of $6,000 (or par value of $200,000 − issue price of $194,000), which increases Discounts on Bonds Payable, a contra-liability account. Overall, liabilities increase by $194,000 (or $200,000 − $6,000). 124) B The journal entry to record the issuance includes a debit to Cash for $48,500, a debit to Discount on Bonds Payable for $10,500 (or $59,000 − $48,500), and a credit to Bonds Payable for $59,000 (the face value of the bonds). 125) B The journal entry to record the issuance includes a debit to Cash for $39,000, a debit to Discount on Bonds Payable for $1,000 (or $40,000 − $39,000), and a credit to Bonds Payable for $40,000 (the face value of the bonds). 126) A The bonds were issued at a discount because the proceeds were less than the face value. The amount of the discount $8,200 ($400,000 − $391,800) is recorded in a contra-account to the Bonds Payable liability. 127) C The carrying value would be $391,800 (or the face value of the bonds of $400,000 less the discount of $8,200). Version 1
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128) A The journal entry used to record the issuance will include a debit to Cash for $490,000 (or the face value of $500,000 × the bond price of 0.98), a debit to Discount on Bonds Payable for $10,000 (the face value of $500,000 − the issue price of $490,000), and a credit to Bonds Payable for $500,000 (the face value). 129) C If a bond promises to pay interest at a stated rate of 7% when other financial instruments offer 9%, no one will be willing to acquire the bond unless the company discounts it. The discount reduces the initial bond price for investors without changing the stated interest payments and the face value paid to them at maturity. In effect, a discount increases the return that bondholders earn on their initial investment. 130) D The entry to record the issuance will include a debit to Cash for $102,000, a credit to Bonds Payable for $100,000, and a credit to Premium on Bonds Payable for $2,000. Bonds are issued at a premium when the market rate of interest is lower than (rather than equal to) the stated rate of interest. The bond amortization makes the Interest Expense smaller than (rather than equal to) the actual interest payment of $7,000 (or $100,000 × 0.07 × 12 / 12) and, at the same time, causes the balance in Premium on Bonds Payable to decline each period. At maturity, the carrying value of a bond will equal its face value. 131) B Salaries and Wages Expense, Income Tax Expense, and Interest Expense are temporary accounts that are closed to zero at year-end. Premium on Bonds Payable is a balance sheet account; balance sheet accounts are not closed at year-end.
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132) A Discount on Bonds Payable is a contra account to Bonds Payable. As a result, the balance in the Discount on Bonds Payable is subtracted from Bonds Payable to arrive at the carrying value of the bonds, which is reported on the balance sheet. 133) C The annual interest payment equals the face value times the stated interest rate times the time period. It is constant. The amortization method used affects the amount of Interest Expense, but not the interest payment. 134) C Annual interest payments = Face value × Stated interest rate × Time = $200,000 × 0.08 × 12 / 12 = $16,000 The company would pay the face value of the bond at maturity of $200,000 plus ten annual interest payments of $16,000. 135) B Issue price = Face value × Bond price = $340,000 × 1.0600 = $360,400 136) C Issue price = Face value × Bond price = $750,000 × 1.05 = $787,500 137) D Total interest payments = Face value × Stated interest rate × Time = $480,000 × 0.08 × 12 years = $460,800 Since the bonds were sold at a premium of $33,600, the interest expense to be recorded over the life of the bonds is $427,200 (or total interest payments of $460,800 − premium of $33,600). 138) B
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Total interest payments = Face value × Stated interest rate × Time = $750,000 × 0.10 × 10 years = $750,000 Since the bonds were sold at a premium of $37,500, the interest expense to be recorded over the life of the bonds is $712,500 (or total interest payments of $750,000 − premium of $37,500). 139) D If a bond is sold at a discount, the interest expense to the issuer is higher than the amount of periodic interest paid; it equals the cash interest payments plus the amount of the discount. If a bond is sold at a premium, the interest expense to the issuer is lower than the amount of periodic interest paid; it equals the cash interest payments minus the amount of the discount. 140) C The Premium on Bonds Payable is a liability account with a normal credit balance. When bonds issue at a premium, the bond issuer receives more cash on the issue date than it repays on the maturity date. The premium is a reduction in the company's cost of borrowing. The bond amortization process makes the Interest Expense smaller than the actual interest payment and, at the same time, causes the balance in Premium on Bonds Payable to decline each period over the life of the bonds until it is equal to zero at the maturity date. 141) D The Premium on Bonds Payable has a normal credit balance. 142) D Discount on Bonds Payable is a contra-liability account and, as such, has a normal debit balance. 143) D
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When bonds issue at a discount, the bond issuer receives less cash on the issue date than it repays on the maturity date. The discount represents an extra cost of borrowing, over and above each interest payment. For accounting purposes, we match the extra borrowing cost to the periods in which interest is recorded. This amortization causes the Interest Expense to be more than the interest payment and, at the same time, causes Discount on Bonds Payable to decrease each period. 144) D At the maturity date, the bonds payable carrying value is equal to the face value of the bonds. 145) C Since the bonds were issued at face value, there was no premium or discount. Since the cash paid of $239,375 (or face value of $250,000 × call price of 0.9575) is less than the carrying value of the bonds of $250,000 (face value), there is a gain of $10,625 (or $250,000− $239,375). The journal entry to record this retirement includes a debit to Bonds Payable for $250,000 (the face value), a credit to Gain on Bond Retirement of $10,625, and a credit of $239,375 to Cash of $239,375. 146) A Since the bonds were issued at face value, there was no premium or discount. Since the cash paid of $194,000 (or face value of $200,000 × call price of 0.97) is less than the carrying value of the bonds of $200,000 (face value), there is a gain of $6,000 (or $200,000 − $194,000). The journal entry to record this retirement includes a debit to Bonds Payable for $200,000 (the face value), a credit to Gain on Bond Retirement of $6,000, and a credit of $194,000 to Cash of $194,000. 147) D
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When The Big Company retires these bonds, Cash, an asset, decreases by $105,000 and Bonds Payable, a liability, decreases by $100,000. As a result, it must report a loss of $5,000 (or amount paid to retire bonds of $105,000 − carrying value of $100,000). 148) A Debit Bonds Payable for $500,000 (the face value), debit Loss on Bond Retirement for $3,250 (or cash paid to retire bonds of $503,250 − carrying value of $500,000), and credit Cash for $503,250 (the amount paid). 149) A The entry to record a bond retirement always includes a debit to Bonds Payable for the face value of the bonds. 150) A The journal entry to record this retirement includes a debit to Bonds Payable for $100,000 (face value of bond), a debit to Premium on Bonds Payable for $3,745 (carrying value of $103,745 − face value of $100,000), a debit to Loss on Bond Retirement for $1,255 (carrying value $103,745 − cash paid of $105,000), and a credit to Cash for $105,000 (or face value of $100,000 × call price of 1.05). 151) A The carrying value of the bonds is $102,700 (or the face amount of $100,000 plus the unamortized premium of $2,700). The journal entry to record this retirement includes a debit to Bonds Payable for $100,000 (the face value), a debit to Premium on Bonds Payable for $2,700 (the unamortized premium), a credit to Cash for $99,000 (the face value of $100,000 × call price of 0.99), and a credit to Gain on Bond Retirement for $3,700 (or the carrying value of $102,700 − the cash paid of $99,000). Version 1
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152) C A callable bond has a specific feature where the issuing company can retire the bond with cash at any time. 153) A A convertible bond has a specific feature where the issuing company can convert the bond into shares of its stock. 154) D Serial bonds have a specific feature whereby they mature in a series of installments. 155) A A bond that is unsecured is called a debenture. 156) C Secured bonds are backed with collateral, which is often a pledge of the company's assets. 157) D Zero-coupon bonds do not pay periodic interest. 158) D An entry with a debit to Bonds Payable (which decreases that liability account) and a credit to Cash (which decreases that asset account) would be recorded on a bond's maturity date. 159) D The stated interest rate is the rate stated on the face of the bond that is used to compute interest payments. 160) A The stated interest rate is the rate stated on the face of the bond that is used to compute interest payments. It does not change. Version 1
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161) C The bond issue price represents the amount that investors are willing to pay on the issue date in exchange for the cash payments that the company promises to make over the life of the bond. 162) B The bond issue price represents the amount that investors are willing to pay on the issue date in exchange for the cash payments that the company promises to make over the life of the bond. Theoretically, the issue price is based on a mathematical calculation (called a present value) of both amounts. 163) A The bond price is quoted as a percentage of face value. In this case, investors were willing to pay 102.1% of face value, or $1,021 for each $1,000 bond (or $1,000 × 1.021). The stated interest rate does not enter into this calculation. 164) A The journal entry to record the issuance includes a debit to Cash for $100,000 and a credit to Bonds Payable for $100,000 (or the total face value of the bonds of $1,000 × 100 bonds). 165) A The journal entry to record the issuance includes a debit to Cash for $100,000 and a credit to Bonds Payable for $100,000 (or the total face value of the bonds of $1,000 × 100 bonds). 166) B The journal entry to record the issuance includes a debit to Cash for $110,000 (or $1,000 × 100 × 110%), a credit to Bonds Payable for $100,000 (the face value of the bonds or $1,000 × 100), and a credit to Premium on Bonds Payable for $10,000 (or $110,000 − $100,000). Version 1
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167) A The 6% interest rate makes the bond more attractive and investors are willing to pay more than face value. 168) B A bond premium is the excess of its issue price over its face value. Buyers are willing to pay a premium for bonds because the features of the bond (e.g., a stated interest rate in excess of the market interest rate) are attractive to the buyers. 169) B Discount on Bonds Payable is a contra account to Bonds Payable. As a result, the balance in the Discount on Bonds Payable is subtracted from Bonds Payable to arrive at the carrying value of the bonds, which is reported on the balance sheet. 170) A Discount on Bonds Payable is a contra account to Bonds Payable. As a result, the balance in the Discount on Bonds Payable is subtracted from Bonds Payable to arrive at the carrying value of the bonds, which is reported on the balance sheet. 171) B If a bond promises to pay interest at a stated rate that is less than the market rate, no one will be willing to acquire the bond unless the company discounts it. The discount reduces the initial bond price for investors without changing the stated interest payments and the face value paid to them at maturity. In effect, a discount increases the return that bondholders earn on their initial investment. Or, in other words, the discount results in additional interest expense over the life of the bonds. 172) B
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The carrying value of a bond equals its face value plus any premium or minus any discount. 173) A The premium is amortized over the life of the bond. The premium represents the additional cash over the face value that was received at the time the bond was issued. It represents a reduced cost of borrowing, so it is amortized each period, resulting in interest expense that is less than the interest paid each period. 174) A A premium represents the additional cash over the face value that was received at the time the bond was issued. It represents a reduced cost of borrowing, so it is amortized each period, resulting in interest expense that is less than the interestpaid each period. 175) D A premium represents the additional cash over the face value that was received at the time the bond was issued. It represents a reduced cost of borrowing, so it is amortized each period, resulting in interest expense that is less than the interest paid each period. This causes the premium to decrease each period until it reaches zero at the maturity date of the bonds. 176) D
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A premium represents the additional cash over the face value that was received at the time the bond was issued. It represents a reduced cost of borrowing, so it is amortized each period, resulting in interest expense that is less than the interest paid each period. This causes the premium to decrease each period until it reaches zero at the maturity date of the bonds. As a result, amortizing a bond premium will decrease the premium balance and decrease the carrying value of the bond so that when the bond matures the carrying value will equal the face value. 177) A The bond sold at a discount because the stated rate is lower than the market rate of interest. The discount represents an extra cost of borrowing, over and above each interest payment. For accounting purposes, we match the extra borrowing cost to the periods in which interest is recorded. This amortization causes the Interest Expense to be more than the interest payment and, at the same time, causes Discount on Bonds Payable to decrease each period. (As a result, the debit to Interest Expense will be greater because it is based on the market rate.) As the Discount on Bonds Payable decreases, the carrying value of the liability increases until it reaches the face value of the bonds on the maturity date. 178) A
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The bond sold at a discount because the stated rate is lower than the market rate of interest. The discount represents an extra cost of borrowing, over and above each interest payment. For accounting purposes, we match the extra borrowing cost to the periods in which interest is recorded. This amortization causes the Interest Expense to be more than the interest payment and, at the same time, causes Discount on Bonds Payable to decrease each period. As the Discount on Bonds Payable decreases, the carrying value of the liability increases until it reaches the face value of the bonds on the maturity date. 179) C The bond sold at a discount because the stated rate is lower than the market rate of interest. The discount represents an extra cost of borrowing, over and above each interest payment. For accounting purposes, we match the extra borrowing cost to the periods in which interest is recorded. This amortization causes the Interest Expense to be more than the interest payment and, at the same time, causes Discount on Bonds Payable to decrease each period. As the Discount on Bonds Payable decreases, the carrying value of the liability increases until it reaches the face value of the bonds on the maturity date. 180) A
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The bond sold at a discount because the stated rate is lower than the market rate of interest. The discount represents an extra cost of borrowing, over and above each interest payment. For accounting purposes, we match the extra borrowing cost to the periods in which interest is recorded. This amortization causes the Interest Expense to be more than the interest payment and, at the same time, causes Discount on Bonds Payable to decrease each period. As the Discount on Bonds Payable decreases, the carrying value of the liability increases until it reaches the face value of the bonds on the maturity date. Or, in other words, amortizing a bond discount will decrease the discount balance and increase the carrying value of the bond so that when the bond matures the carrying value will equal the face value. 181) B When the company retires these bonds, Cash, an asset, decreases by $181,800 and Bonds Payable, a liability, decreases by $180,000. As a result, it must report a loss of $1,800 (or amount paid to retire bonds of $181,800 − carrying value of $180,000). 182) B Bonds that are backed by collateral are referred to as secured bonds. 183) C Current liabilities are defined as short-term obligations that will be paid or fulfilled within the company's current operating cycle or within one year of the balance sheet date, whichever is longer. A contingent liability may be short-term (current) or long-term depending on when it must be paid. 184) D
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A contingent liability is a potential liability that has arisen as a result of a past transaction or event; its ultimate outcome will not be known until a future event occurs or fails to occur. 185) B A contingent liability is a potential liability that has arisen as a result of a past transaction or event. Its ultimate outcome will not be known until a future event occurs or fails to occur. When a lawsuit is filed against a company, it isn't certain if the company is liable or if the company is later found to be liable, or what the extent of the liability will be. 186) B A contingent liability is a potential liability that has arisen as a result of a past transaction or event; its ultimate outcome will not be known until a future event occurs or fails to occur. 187) D A contingent liability is a potential liability that has arisen as a result of a past transaction or event; its ultimate outcome will not be known until a future event occurs or fails to occur. Advance ticket sales would be classified as Deferred Revenue, a known liability. 188) D When a potential liability is probable and the amount may be estimated, the estimated amount of the liability should be recorded (along with a corresponding loss to be reported on the income statement). 189) C If a contingent liability is probable and it can be reasonably estimated, the liability is recorded on the balance sheet. 190) C
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Under GAAP, contingent liabilities (and corresponding losses) are recorded if the estimated loss is probable. 191) C A journal entry to record a contingent liability is necessary if the estimated loss is probable and can be reasonably estimated. 192) D Since the contingent liability can be reasonably estimated and is considered probable, the company is required to record a liability and a loss for $2 million. 193) A A contingent liability that cannot be reasonably estimated cannot be recorded. However, if the contingent liability is probable, the company must disclose information about the potential liability in the notes. 194) A According to GAAP, when an estimated loss can be reasonably estimated and is considered possible but not probable, the company should not record a liability on the balance sheet, but instead, should describe the potential liability in a note to the financial statements. 195) D A contingent liability that is remote in likelihood does not need to be mentioned in the financial statements. 196) B No mention is made in the financial statements about a contingent liability that is considered remote. 197) C
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If the loss is probable and can be reasonably estimated, the liability and estimated loss is recorded in a journal entry. If the likelihood of loss is only reasonably possible, no journal entry is recorded; the contingent liability is disclosed in the notes to the financial statements. 198) D If the loss is probable and can be reasonably estimated, the liability and estimated loss is recorded in a journal entry. If the likelihood of loss is only reasonably possible, no journal entry is recorded; the contingent liability is disclosed in the notes to the financial statements. If the likelihood of loss is remote, which is the case here, no journal entry is recorded; the contingent liability is not disclosed in the notes to the financial statements. 199) A Liabilities = Assets − Stockholders’ equity = $20 billion − $13 billion = $7 billion Debt-to-assets ratio = Total liabilities ÷ Total assets = $7 billion ÷ $20 billion = 0.35 200) A Liabilities = Assets − Stockholders' equity = $20 billion − $9 billion = $11 billion Debt-to-assets ratio = Total liabilities ÷ Total assets = $11 billion ÷ $20 billion = 0.55 201) D
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The debt-to-assets ratio is calculated by dividing total liabilities by total assets. Overstating assets by recording costs as assets that should have been expensed or by failing to increase accumulated depreciation will understate the debt-to-assets ratio. Understating liabilities by failing to accrue income taxes will also understate the debt-to-assets ratio. Failing to accrue interest earned will understate assets and will overstate the debt-to-assets ratio. 202) B The debt-to-assets ratio measures the percentage of assets financed by creditors. A debt-to-assets ratio of 0.45 means that liabilities are 45% of its assets and stockholders' equity is then 55% (or 100% − 45%) of assets. 203) A The debt-to-assets ratio indicates the percentage of assets financed by debt. Since Company A has a higher ratio than Company B, that means more of Company A's assets are financed with debt than Company B. This ratio says nothing about profit. The amount of Company A's assets could be higher than Company B, but not necessarily. It is the relationship of debt-to-assets that is measured in the ratio, not the absolute dollar amount. 204) B A debt-to-assets ratio of 0.35 means that 35% of assets are financed with debt; the remaining 65% are financed with equity. As such, a debt-toassets ratio of 0.35 indicates more (rather than less) reliance on equity financing than on debt financing. 205) D The debt-to-assets ratio equals total liabilities divided by total assets. If total liabilities remain the same while total assets decrease, the ratio will increase. Version 1
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206) A Debt-to-assets ratio = Total liabilities ÷ Total assets Total liabilities = Debt-to-assets ratio × Total assets Beginning of year: = 0.50 × $240,000 = $120,000 Debt-to-assets ratio = Total liabilities ÷ Total assets = ($120,000 + $72,000) ÷ ($240,000 + $80,000) = 0.60 = 60% 207) D Times Interest Earned = (Net Income + Interest Expense + Income Tax Expense) ÷ Interest Expense = ($11,100,000 + $3,100,000 + $4,100,000) ÷ $3,100,000 = 5.90 208) B Times Interest Earned = (Net Income + Interest Expense + Income Tax Expense) ÷ Interest Expense = ($20,000,000 + $4,000,000 + $6,000,000) ÷ $4,000,000 = 7.5 209) C Times interest earned = (Net income + Interest expense + Income Tax Expense) ÷ Interest expense 210) C Times interest earned ratio = (Net Income + Interest Expense + Income Tax Expense) ÷ Interest Expense = ($376,500 + $85,000 + $243,500) ÷ $85,000 = 8.29 211) C Times interest earned ratio = (Net Income + Interest Expense + Income Tax Expense) ÷ Interest Expense = ($396,500 + $75,000 + $213,500) ÷ $75,000 = 9.13 212) A
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The decreasing times interest earned ratio over the three-year period suggests that the company's ability to pay interest expense with resources generated is decreasing. Though the ratio is still well over 1.00, the erosion of the ratio is cause for concern. 213) B If the times interest earned ratio is less than one, the company has not earned enough to cover its interest expense. This indicates a serious financial problem. 214) B Times interest earned = (Net income + Interest expense + Income tax expense) ÷ Interest expense = ($80,040 + $580 + $4,640) ÷ $580 = 147 times 215) D Times interest earned = (Net income + Interest expense + Income tax expense) ÷ Interest expense = ($117,000 + $900 + $7,200) ÷ $900 = 139 times 216) B Debt-to-assets ratio = Total liabilities ÷ Total assets = $500,000 ÷ $800,000 = 62.5% 217) B Debt-to-assets ratio = Total Liabilities ÷ Total Assets = ($90,000 + $70,000) ÷ ($40,000 + $120,000) = 0.8 218) A
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Debt-to-assets ratio = Total liabilities ÷ Total assets Times interest earned = (Net income + Interest expense + Income tax expense) ÷ Income tax expense This transaction will cause Accounts Receivable, an asset, to increase and, since total assets are in the denominator, the debt-to-assets ratio will decrease. This transaction will also cause Service Revenue and net income to increase and, since net income is in the numerator, the times interest earned ratio will increase. 219) C A loan covenant is a provision in a loan agreement that requires the borrower to operate within certain limits. Breach of a loan covenant often allows the lender to renegotiate the terms of the loan including its due date. A secured loan is backed with collateral, not a line of credit. A line of credit, that allows a company to borrow money at any time, up to a pre-arranged limit, is not necessarily available to all companies. 220) B A loan covenant is a debt feature which requires the borrower to maintain certain financial ratios or restrict certain activities the borrower may engage in. 221) D The method used to amortize a discount or premium has no effect on the amount the issuer receives for the bonds. Amortization involves allocating a discount or premium over the life of the bond. 222) C Using straight-line amortization, the bond premium is allocated evenly over the bond's life and is subtracted from the interest payment to calculate the interest expense. The interest expense is a constant amount each year.
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223) D Using the straight-line method of amortization, interest expense is a constant amount each year. 224) C Discount on bonds payable = Face value− Issue price = $100,000 − $97,857 = $2,143 Straight-line amortization = Discount ÷ Number of years = $2,143 ÷ 10 = $214.30 per year Interest payment = Face value × Stated interest rate × Time = $100,000 × 0.0575 = $5,750 Interest expense = Interest Payment + Amortization of discount = $5,750 + $214.30 = $5,964.30 225) B Discount on bonds payable = Face value − Issue price = $100,000 − $97,947 = $2,053 Straight-line amortization = Discount ÷ Number of years = $2,053 ÷ 10 = $205.30 per year Interest payment = Face value × Stated interest rate × Time = $100,000 × 0.07 = $7,000 Interest expense = Interest Payment + Amortization of discount = $7,000 + $205.30 = $7,205.30 226) B Using straight-line amortization, the amount of the discount is evenly allocated over the bond's life. The Discount on Bonds Payable account is a contra-liability account and, as such, it normally has a debit balance. Each year, the company should credit Discount on Bonds Payable for $1,500 (or discount of $7,500 ÷ 5 years). 227) B
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Straight-line amortization = Premium ÷ Number of years = $5,000 ÷ 10 years = $500 per year The entry includes a debit to Interest Expense (for the interest payment amount minus the amortization), a debit to Premium on Bonds Payable for $500, and a credit to Cash (for the par value times the stated interest rate). 228) B Interest expense = Carrying value of bonds × Market interest rate = $10,876 × 0.06 = $652.56 229) B Interest expense = Carrying value of bonds × Market interest rate = $16,299 × 0.05 = $814.95 230) B The effective-interest method of amortization applies a constant percentage, the effective interest rate, to the carrying value of bonds payable to calculate interest expense each year. 231) A Interest expense = Carrying value × Market interest rate = $10,820 × 0.07 = $757.40 Interest Payment = Bonds Payable × Stated Interest Rate = $10,000 × 0.09 = $900.00 Amortization of premium = Interest payment − Interest expense = $900.00 − $757.40 = $142.60 The entry includes a debit to Interest Expense for $757.40, a debit to Premium on Bonds Payable for $142.60, and a credit to Cash for $900.00. 232) A
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Interest expense = Carrying value × Market interest rate = $10,866 × 0.05 = $543.30 Interest Payment = Bonds Payable × Stated Interest Rate = $10,000 × 0.07 = $700.00 Amortization of premium = Interest payment − Interest expense = $700.00 − $543.30 = $156.70 The entry includes a debit to Interest Expense for $543.30, a debit to Premium on Bonds Payable for $156.70, and a credit to Cash for $700. 233) B Using the effective-interest method of amortization, bonds issued at a discount have an increasing carrying value as they approach maturity, whereas bonds issued at a premium have a decreasing carrying value. As a result, interest expense rises for bonds sold at a discount and falls for bonds sold at a premium as the bond moves toward maturity. 234) D Interest expense = Carrying value × Market interest rate = $433,698 × 0.06 = $26,021.88 Interest payment = Bonds payable × Stated interest rate = $400,000 × 0.08 = $32,000 Amortization of premium = Interest payment − Interest expense = $32,000 − $26,021.88 = $5,978.12 235) A Interest expense = Carrying value × Market interest rate = $9,631 × 0.11 = $1,059.41 236) B
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Straight-line amortization results in equal amounts of amortization each period, the effective-interest method is preferred to the straight-line method, and the bond liability does increase (by reducing the contraliability) when a discount is amortized using the effective-interest method. The effective interest method of amortization allocates a discount based on the carrying value of the bonds, so a bond issued at a discount would result in a higher interest expense than the amount of interest paid. 237) A When simplified effective-interest amortization is used, the proceeds from the issuance are recorded in the Cash and Bonds Payable, Net accounts. 238) C When simplified effective-interest amortization is used, the issue price of the bond is initially credited to an account called Bonds Payable, Net. If the bonds are sold at a premium, the amount of Bonds Payable, Net, will decrease over the life of the bonds and will be equal to face value at the maturity date. If the bonds are sold at a discount, the Bonds Payable, Net account will increase over the life of the bonds. If the bonds are sold at face value, the balance in the Bonds Payable, Net account will not change over the life of the bonds. 239) C Interest expense = Carrying value of bonds × Market interest rate = $173,605 × 0.0575 = $9,982.29 240) A Interest expense = Carrying value of bonds × Market interest rate = $204,155 × 0.065 = $13,270.08 241) A
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Using the simplified effective-interest amortization, interest expense is calculated as: Bonds Payable, Net × Market Interest Rate × Time. 242) C Using the simplified effective-interest amortization, the credit to Cash is calculated as: Face Value × Stated Interest Rate × Time. 243) C Under an installment note, each payment is split between principal and interest so that no "balloon" payment of principal is required at maturity. Each payment consists of principal and interest. Each period the portion of the payment for interest decreases and the portion of the payment for principal increases. 244) C $120,000 × 8% = $9,600. 245) C Interest expense (first period): $120,000 × 8% = $9,600; Interest expense (second period): $120,000 − ($25,958− $9,600) = $103,642; $103,642 × 8% = $8,291.36. 246) C Interest expense: $336,000 × 8% = $26,880; Note payable balance: $336,000 − ($72,682 − $26,880) = $290,198. 247) A Total amount paid $436,092 ($72,682 per year× 6 years)− Principal (amount borrowed) $336,000 = Total interest paid over the life of the loan $100,092. 248) A
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Each installment payment is the same, but the proportion of interest decreases over the period while the proportion of principal increases. This pattern occurs because the borrower repays some of the principal as part of each installment payment, so multiplying the fixed interest rate by the remaining principal balance results in a smaller dollar amount of interest expense in each following period. 249) B Each installment payment is the same, but the proportion of interest decreases over the period while the proportion of principal increases. This pattern occurs because the borrower repays some of the principal as part of each installment payment, so multiplying the fixed interest rate by the remaining principal balance results in a smaller dollar amount of interest expense in each following period.
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CHAPTER 10: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Hubbard Street Dance Company sells subscriptions for its monthly dance performances. The company received annual subscription payments on November 15, 2021 for performances that will take place during the 2022 dance season in the amount of $120,000. The subscription payments will be earned equally throughout each month. Required: a. Describe how the subscription payments should be reported in the balance sheet and income statement on December 31, 2021. b. Describe how the subscription payments should be reported in the balance sheet and income statement on January 31, 2022. c. Prepare the journal entry for the receipt of annual subscription payments on November 15, 2021. d. Prepare the required adjusting entry for the subscription payments on January 31, 2022.
2) Sun Ridge, Incorporated reported the following information in its accounting records on December 31, 2021: Gross salaries earned by employees (December 29 to 31) Income taxes withheld from employees (December 29 to 31) FICA taxes withheld from employees (December 29 to 31)
$ 12,960 1,980 756
Net payment to employees (made on December 31)
$ 10,224
The employees were paid $10,224 on December 31, 2021, but the withholdings have not yet been remitted nor have the matching employer FICA contributions. Required: a. Compute the total payroll costs relating to the period from December 29 to 31. (Assume $1,008 in total unemployment taxes.) b. Provide the journal entries on December 31 to adjust for salaries and wages relating to December 29 to 31, 2021. c. Provide the journal entries on December 31 to adjust for payroll taxes relating to December 29 to 31, 2021.
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3) On December 1, 2021, Foggy Bottom Company borrowed $360,000 from Atlantic National Bank, and signed a 9% note payable due in one year. Interest on the note is due at maturity. Required: a. Prepare the journal entry to record the issuance of the note. b. Prepare the required adjusting entry on December 31, 2021. c. Prepare the journal entry to record the payment of the interest on December 1, 2022. d. Prepare the journal entry to record the payment of the note on December 1, 2022.
4) On December 31, 2021, Foggy Bottom Company borrowed $360,000 from Atlantic National Bank, and signed a 12% note payable due in two years. Interest on the note is due at maturity. Required: a. Prepare the journal entry to record the issuance of the note. b. Describe how the note should be reported on Foggy Bottom's classified balance sheets at December 31, 2021 and December 31, 2022. c. Prepare the required adjusting entry on December 31, 2022 assuming no adjusting entries have been made in 2022. d. Prepare the journal entry to record the payment of the interest on December 31, 2023. e. Prepare the journal entry to record the payment of the note on December 31, 2023.
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5)
Culver, Incorporated issues $250,000 of 10-year, 10% bonds on January 1, 2021.
Required: Determine the amounts (bonds payable, unamortized premium or discount, and bonds payable, net) that will be reported on a balance sheet prepared as of the date of issuance of January 1, 2021 under each of the following assumptions: a. The bonds are sold at 100. b. The bonds are sold at 104. c. The bonds are sold at 98.
6)
Worthington Company issues $500,000 of 5-year, 6% bonds on January 1, 2021.
Required: Prepare the journal entry to record the issuance of the bonds under each of the following assumptions: a. The bonds are sold at 100. b. The bonds are sold at 102. c. The bonds are sold at 96.
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7) On January 1, 2021, Effron Incorporated sells $2 million of 8% bonds at face value with interest to be paid at the end of each year. Effron accrues interest at the end of each quarter during the year. Required: a. Prepare the journal entry to record the bond issuance. b. Prepare the required adjusting journal entry as of March 31, 2021. c. Assume the required adjusting journal entries were recorded on June 30 and September 30, 2021. Prepare the journal entry to record the payment of interest to bondholders on December 31, 2021.
8) On January 1, 2021, Diana Industries issues 3-year bonds with a face value of $560,000 and a stated interest rate of 8%. Because the market interest rate is lower than the stated interest rate, the company receives $585,200 for the bonds.
Required: Fill in the table assuming the company uses the straight-line bond amortization. Period Ended
Cash Paid
Amortized Premium
Interest Expense
Bonds Premium on Payable Bonds Payable
Carrying Value
01/01/21 12/31/21 12/31/22 12/31/23
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9) On January 1, 2021, a company issues 3-year bonds with a face value of $560,000 and a stated interest rate of 8%. Because the market interest rate is lower than the stated interest rate, the company receives $585,200 for the bonds. The company uses straight-line bond amortization. Required: a. Determine the amount of the premium that will be amortized during the year ending December 31, 2021. b. Prepare the journal entry to record the first interest payment on December 31, 2021.
10) On January 1, 2021, a company issues 3-year bonds with a face value of $560,000 and a stated interest rate of 8%. Because the market interest rate is higher than the stated interest rate, the company receives $543,200 for the bonds. Required: Fill in the table assuming the company uses the straight-line bond amortization. Period Ended
Cash Paid
Amortized Discount
Interest Expense
Bonds Discount on Payable Bonds Payable
Carrying Value
01/01/21 12/31/21 12/31/22 12/31/23
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11) On January 1, 2021, a company issues 3-year bonds with a face value of $560,000 and a stated interest rate of 8%. Because the market interest rate is higher than the stated interest rate, the company receives $543,200 for the bonds. Required: a. Determine the amount of the discount that will be amortized during the year ending December 31, 2021 using the straight-line method of amortization. b. Prepare the journal entry to record the first interest payment on December 31, 2021.
12) Bonds with a stated interest rate of 9% and a face value totaling $600,000 were issued for $624,000 on January 1, 2021, when the market interest rate was 8%. The company uses effective-interest bond amortization. Required: Determine the carrying value of the bonds at December 31, 2022.
13) On January 1, 2021, a company issues 3-year bonds with a face value of $50,000 and a stated interest rate of 7%. Because the market interest rate is 5%, the company receives $52,723 for the bonds.
Required: Fill in the table assuming the company uses effective-interest bond amortization. Period Ended
Cash Paid
Interest Expense
Amortized Premium
Bonds Payable
Premium on Bonds Payable
Carrying Value
01/01/21
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12/31/21 12/31/22 12/31/23
14) On January 1, 2021, a company issues 3-year bonds with a face value of $50,000 and a stated interest rate of 7%. Because the market interest rate is 5%, the company receives $52,723 for the bonds. The company uses effective-interest bond amortization. Required: a. Determine the interest expense, the cash payment for interest, and the amount of the premium that will be amortized during the year ending December 31, 2021. b. Prepare the journal entry to record the first interest payment on December 31, 2021.
15) On January 1, 2021, a company issues 3-year bonds with a face value of $50,000 and a stated interest rate of 7%. Because the market interest rate is 9%, the company receives $47,469 for the bonds. Required: Fill in the table assuming the company uses effective-interest bond amortization. Period Ended
Cash Paid
Interest Expense
Amortized Discount
Bonds Discount on Payable Bonds Payable
Carrying Value
01/01/21 12/31/21
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12/31/22 12/31/23
16) On January 1, 2021, a company issues 3-year bonds with a face value of $50,000 and a stated interest rate of 7%. Because the market interest rate is 9%, the company receives $47,469 for the bonds. The company uses effective-interest bond amortization. Required: a. Determine the interest expense, the cash payment for interest, and the amount of the premium that will be amortized during the year ending December 31, 2021. b. Prepare the journal entry to record the first interest payment on December 31, 2021.
17) Company A has liabilities of $6,773,000 and stockholders' equity of $3,647,000 at the end of the current year, and sales revenue of $9,800,000 and net income of $899,080 for the year. Company B has assets of $1,680,000 and stockholders' equity of $978,750 at the end of the current year, and sales revenue of $1,950,000 and net income of $351,000 for the year. Required: a. Calculate the debt-to-assets ratio for each company. b. Identify the company that has greater financing risk and explain why.
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18)
Consider the following information: Gil's Fish and Tackle, Incorporated Balance Sheet At December 31, 2021
Assets Cash Accounts Receivable (less allowance) Inventories Property, Plant and Equipment Long-term Investments Total Assets
$ 22,200 169,100 68,300 102,800 30,000 $ 392,400
Liabilities Accounts Payable Current Portion of Long-Term Debt Long-Term Notes Payable Total Liabilities Stockholders' Equity
$ 49,200 68,800 100,000 218,000
Contributed Capital Retained Earnings Total Stockholders’ Equity
100,000 74,400 174,400
Total Liabilities and Stockholders’ Equity
$ 392,400
Gil's Fish and Tackle, Incorporated Income Statement For the year ending December 31, 2021 Sales Revenue Operating Expenses Salaries and Wages Expense Operating and Administrative Expenses Depreciation Expense Operating Expenses Operating Income Other Expenses Interest Expense Income Before Income Tax Expense Income Tax Expense
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$ 2,765,000
1,850,500 286,700 335,400 2,472,600 292,400
17,000 275,400 103,800
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Net Income
$ 171,600
Required: a. Calculate the debt-to-assets ratio. b. Describe what the debt-to-assets ratio tells you and how to interpret it. c. Calculate the times interest earned. d. Comment on the results of your times interest earned analysis.
19) Match each term with the appropriate definition. Not all definitions will be used. Term: Accrued liability Loan covenant Issue price Face value Contingent liability Debt-to-assets ratio Definition: A) The total amount of money that a company owes in debt. B) This item is reported as a contra asset account. C) A bond feature that allows a creditor to seize assets if debt is not properly repaid. D) A prearranged agreement that allows a company to borrow at will up to a limit. E) The amount that the lender actually pays for a bond. F) The amount a company must repay creditors when a bond matures. G) When a company borrows money by issuing bonds in the financial markets. H) Debt features that, if violated, allow the lender to revise loan terms. I) The cost of issuing a bond. J) Total liabilities divided by total assets. K) Bond features that allow the issuer to repay the loan early. L) These are liabilities that have been incurred during the period but not yet paid. M) This type of liability is uncertain; it exists only if some other condition occurs.
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20) Match each term with the appropriate definition. Not all definitions will be used. Term: Current liabilities Effective interest method of amortization Straight-line method of amortization Times interest earned ratio Long-term liabilities Present value Definition: A) Liquid assets divided by current liabilities. B) A calculation that determines what some future payments are worth today. C) The ability to pay current obligations. D) These are liabilities that have to be paid in one year or less. E) A bond feature that puts a creditor ahead of other creditors in order of payment. F) Net income before taxes and interest expense divided by interest expense. G) Where interest expense is the market interest rate times the bond's carrying value. H) Current liabilities divided by current assets. I) These are liabilities that do not have to be paid within the upcoming year. J) Net income after taxes and interest expense divided by interest expense. K) Spreads a bond discount or premium evenly over the lifetime of the bond. L) The amount of all the liabilities currently on the balance sheet at the close of the period.
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21) Match each term with the appropriate definition. Not all definitions will be used. Term: Convertible Carrying value Discount Callable Maturity Market interest rate Stated interest rate Premium Definition: A) When a bond is issued for a price greater than its face value. B) Also known as the face value or par value of a bond. C) Rate of interest that investors demand from a bond. D) A bond with the feature that allows creditors to exchange the bond for company stock. E) The amount a company receives when it sells a bond; also known as issue price. F) The interest rate printed on the bond certificate. G) The time at which the face value of a bond must be paid to the lender. H) Is multiplied by the market interest rate to calculate the (effective) interest expense on a bond. I) A bond feature that changes the interest rate on the bond with market conditions. J) When a bond is issued for a price less than its face value. K) A bond with the feature that allows the borrowing company to pay off a bond whenever it wishes. L) A bond with the feature that lets creditors examine financial data and demand new loan conditions.
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Answer Key Test name: Chap 10_7e_Problems 1) a. On December 31, 2021, the $120,000 of advance subscription payments would be reported on the balance sheet as a current liability called Deferred Revenue. No amounts relating to the following year's subscription services would be reported in the December 2021 income statement as the performances have not taken place (will be performed in 2022). b. On January 31, 2022, one month of subscription services would be earned, so Deferred Revenue on the balance sheet would be reduced by $10,000 (or $120,000 × 1/12) and Subscription Revenue on the income statement would be increased by $10,000. c. Date 11/15/21
General Journal Cash
Debit 120,000
Deferred Revenue
Credit
120,000
d. Date 1/01/22
General Journal Deferred Revenue Subscription Revenue
Debit 10,000
Credit
10,000
2) a. Salaries and wages:
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Net pay to employees Income taxes withheld from employees FICA taxes withheld from employees Total cost of salaries and wages Employer payroll taxes:
$ 10,224 1,980 756 12,960
Employer payroll taxes: FICA taxes (matching contribution) Unemployment taxes
756 1,008
Total payroll costs
$ 14,724
b.
Date 12/31/21
General Journal Salaries and Wages Expense
Debit 12,960
Withheld Income Taxes Payable
Credit
1,980
FICA Payable
756
Cash
10,224
c. Date 12/31/21
General Journal Payroll Tax Expense
Debit 1,764
FICA Payable
Credit
756
Unemployment Tax Payable
1,008
3) a.
Date 12/01/21
General Journal Cash Note Payable
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Debit 360,000
Credit
360,000
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b. Date 12/31/21
General Journal Interest Expense ($360,000 × 0.09 × 1/12) Interest Payable
Debit 2,700
General Journal Interest Payable
Debit 2,700
Credit
2,700
c. Date 12/01/22
Interest Expense ($360,000 × 0.09 × 11/12) Cash
Credit
29,700 32,400
d. Date 12/01/22
General Journal Note Payable
Debit 360,000
Cash
Credit
360,000
4) a. Date 12/31/21
General Journal Cash Note Payable
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Debit 360,000
Credit
360,000
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b. The note should be classified as a long-term (noncurrent) liability on the balance sheet at December 31, 2021, since it is due two years from the balance sheet date. The note should be classified as a current liability on the balance sheet at December 31, 2022, since, at that point, it is due in one year from the balance sheet date. c. Date 12/31/22
General Journal Interest Expense ($360,000 × 0.12 × 12/12) Interest Payable
Debit 43,200
General Journal Interest Payable
Debit 43,200
Interest Expense ($360,000 × 0.12 × 12/12) Cash
43,200
Credit
43,200
d. Date 12/31/23
Credit
86,400
e. Date 12/31/23
General Journal Note Payable
Debit 360,000
Cash
Credit
360,000
5) a, b, and c
Bonds Payable Unamortized Premium
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Sold at 100
Sold at 104
Sold at 98
$ 250,000 0
$ 250,000 10,000
$ 250,000 (5,000)
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(Discount) Bonds Payable, Net
$ 250,000
$ 260,000 (1)
$ 245,000 (2)
(1) $250,000 × 1.04 = $260,000 (2) $250,000 × 0.98 = $245,000 6) a. Date 12/31/22
General Journal Cash
Debit 500,000
Bonds Payable
Credit
500,000
b. Date 12/31/22
General Journal Cash ($500,000 × 1.02)
Debit 510,000
Credit
Bonds Payable
500,000
Premium on Bonds Payable
10,000
c. Date 12/31/22
General Journal Cash ($500,000 × 0.96)
Debit 480,000
Discount on Bonds Payable
20,000
Bonds Payable
Credit
500,000
7) a. Date 1/1/21
Debit Cash Bonds Payable
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Credit
2,000,000 2,000,000
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b. Date
Debit Interest Expense ($2,000,000 × .08 × 1/4) Interest Payable
3/31/21
Credit
40,000 40,000
c. Date
Debit
12/31/21
Interest Expense
40,000
Interest Payable ($40,000 × 3 quarters) Cash
120,000
Credit
160,000
8) Period Ended
(A) Cash Paid
01/01/2 1
−
12/31/2 1
$ 44,80 0 44,80 0 44,80 0
12/31/2 2 12/31/2 3
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(B) Amortize d Premium −
$ 8,400 8,400 8,400
(C) = (A− B) Interest Expense
(D) Bonds Payable
(E) (F) = (D + Premium on E) Bonds Carrying Payable Value
−
$ 560,00 0 560,00 0
$ 25,20 0 16,80 0
$ 585,20 0 576,80 0
560,00 0 560,00 0
8,400
568,40 0 560,00 0
$ 36,40 0 36,40 0 36,40 0
0
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9) a. Premium on bonds payable = Issue price− Face value = $585,200 − $560,000 = $25,200 Annual amortization of premium = Premium ÷ Number of years = $25,200 ÷ 3 − $8,400 b. Date
Debit
12/31/21
Interest Expense
36,400
Premium on Bonds Payable
8,400
Credit
Cash
44,800
10) Period Ended
(A) Cash Paid
01/01/2 1
−
12/31/2 1
$ 44,80 0 44,80 0 44,80 0
12/31/2 2 12/31/2 3
(B)
(C) = (A + (D) B) Bonds Amortize Interest Payable d Expense Discount − − $ 560,00 0 $ $ 560,00 5,600 50,40 0 0 5,600 50,40 560,00 0 0 5,600 50,40 560,00 0 0
(E) (F) = (D− E) Discount Carrying on Bonds Value Payable $ 16,80 0 11,20 0
$ 543,20 0 548,80 0
5,600
554,40 0 560,00 0
0
11) a. Discount on bonds payable = Face value− Issue price = $560,000 − $543,200 = $16,800 Annual amortization of discount = Premium ÷ Number of years = $16,800 ÷ 3 = $5,600 b. Version 1
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Date
Debit
12/31/21
Interest Expense
Credit
50,400
Discount on Bonds Payable
5,600
Cash
44,800
12) Period Ended
(A) Cash (B) (C) = (A− (D) Bonds (E) Premium (F) = (D + Paid Interest B) Payable on Bonds E) Carrying Expense Amortized Payable Value Premium 01/01/21 − − − $ $ $ 600,000 24,000 624,000 12/31/21 $ $ $ 600,000 19,920 619,920 54,000 49,920 4,080 12/31/22 54,000 49,594 4,406 600,000 15,514 615,514
13) Period Ended
(A) Cash Paid
01/01/21
−
12/31/21
$ 3,500 12/31/22 3,500 12/31/23 3,500
(B) (C) = (D) (E) Premium Interest (A−B) Bonds on Bonds Expense Amortized Payable Payable Premium − − $ $ 50,000 2,723 $ $ 50,000 1,859 2,636 864 2,593 907 50,000 952 2,548 952 50,000 0
(F) = (D + E) Carrying Value $ 52,723 51,859 50,952 50,000
Interest Expense =Carrying value × Market interest rate × Time
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14) a. Interest expense = Carrying value × Market interest rate × Time = $52,723 × 0.05 = $2,636.15 Cash payment for interest = Face value × Stated interest rate × Time = $50,000 × 0.07 = $3,500 Amortization of premium = Cash payment for interest− Interest expense = $3,500 − $2,636.15 = $863.85 b. Date 12/31/21
Debit Interest Expense Premium on Bonds Payable
Credit
2,636.15 863.85
Cash
3,500
15) Period Ended
(A) Cash Paid
01/01/21 12/31/21
$ 3,500 12/31/22 3,500 12/31/23 3,500
(B) (C) = (B− (D) (E) (F) = (D− E) Interest A) Bonds Discount on Carrying Expense Amortized Payable Bonds Value Discount Payable $ $ $ 50,000 2,531 47,469 $ $ 772 50,000 1,759 48,241 4,272 4,342 842 50,000 917 49,083 4,417 917 50,000 0 50,000
Interest Expense = Carrying value × Market interest rate × Time
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16) a. Interest expense = Carrying value × Market interest rate × Time = $47,469 × 0.09 = $4,272.21 Cash payment for interest = Face value × Stated interest rate × Time = $50,000 × 0.07 = $3,500 Amortization of discount = Interest expense− Cash payment for interest = $4,272.21 − $3,500 = $772.21 b. Date 12/31/21
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Debit Interest Expense
Credit
4,272.21
Discount on Bonds Payable
772.21
Cash
3,500
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17) a. Debt-to-assets ratio = Total Liabilities ÷ Total Assets Company A: Assets = Liabilities + Stockholders' Equity = $6,773,000 + $3,647,000 = $10,420,000 Debt-to-assets ratio = $6,773,000 ÷ $10,420,000 = 0.650 or 65.0% Company B: Liabilities = Assets − Stockholders' Equity Liabilities = $1,680,000 − $978,750 = $701,250 Debt-to-assets ratio = $701,250 ÷ $1,680,000 = 0.417 or 41.7% b. The debt-to-assets ratio indicates the proportion of total assets that are financed by liabilities. It's important to know the proportion of assets financed by liabilities because liabilities have to be repaid whether or not a company is doing well financially. If assets are financed mainly by debt, rather than equity, then this ratio will be high, which would suggest the company has adopted a risky financing strategy. With a debt-toassets ratio of 65.0%, Company A has greater financing risk than Company B, which has a debt-to-assets ratio of 41.7%.
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18) a. Debt-to-assets ratio = Total liabilities ÷ Total assets = $218,000 ÷$392,400 = 0.555 = 55.6% b. The debt-to-assets ratio compares total liabilities to total assets. This ratio indicates the proportion of total assets that are financed by liabilities. It's important to know the proportion of assets financed by liabilities because liabilities have to be repaid whether or not a company is doing well financially. If assets are financed mainly by debt, rather than equity, then this ratio will be high, which would suggest the company has adopted a risky financing strategy. c. Times interest earned = (Net income + Interest expense + Income tax expense) ÷ Interest expense = ($171,600 + $17,000 + $103,800) ÷ $17,000 = 17.2 d. When the times interest earned ratio is less than 1.0, a company is not generating enough operating income to cover its interest expense. Gil's Fish and Tackle generates $17.20 of income (before the costs of financing and taxes) for each dollar of interest expense. In general, a high times interest earned ratio is viewed more favorably than a low one. A high ratio indicates an extra margin of protection should the company's profitability decline in the future.
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19) Accrued liability L Loan covenant H Issue price E Face value F Contingent liability M Debt-to-assets ratio J 20) Current liabilities D Effective interest method of amortization G Straight-line method of amortization K Times interest earned ratio F Long-term liabilities I Present value B 21) Convertible D Carrying value H Discount J Callable K Maturity G Market interest rate C Stated interest rate F Premium A
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CHAPTER 11 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Corporations are governed by federal law. ⊚ ⊚
2)
A major advantage of debt financing is that interest expense is tax deductible. ⊚ ⊚
3)
true false
true false
Issuing stock to obtain financing is called equity financing. ⊚ ⊚
true false
4) Treasury stock is a corporation's own stock that has been issued and subsequently repurchased by the corporation. ⊚ ⊚
true false
5) A corporation's charter establishes the number of shares of stock that will be issued in an initial public offering (IPO). ⊚ ⊚
6)
true false
The par value of stock indicates what the stock is worth. ⊚ ⊚
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true false
1
7) When a company reissues (or sells) shares of its treasury stock at an amount different than its cost, it reports a gain or a loss on the sale. ⊚ ⊚
8)
A corporation has a legal obligation to pay dividends. ⊚ ⊚
9)
true false
A stock dividend increases the market price of the company's stock. ⊚ ⊚
13)
true false
A liability for dividends is recorded on the declaration date. ⊚ ⊚
12)
true false
State laws often restrict dividends to the amount of Retained Earnings. ⊚ ⊚
11)
true false
A company that pays no dividends is always a poor investment. ⊚ ⊚
10)
true false
true false
A stock split increases total stockholders' equity. ⊚ ⊚
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true false
2
14)
Unpaid dividends on cumulative preferred stock are called dividends payable. ⊚ ⊚
true false
15) Preferred stock is generally classified as stockholders' equity under both GAAP and IFRS. ⊚ ⊚
16)
true false
Dividends in arrears are reported as current liabilities on the balance sheet. ⊚ ⊚
true false
17) One reason why a company may choose a stock split over a stock dividend is that the stock split does not reduce Retained Earnings. ⊚ ⊚
true false
18) All other things being equal, the higher the return on equity ratio, the better the financial performance of the company. ⊚ ⊚
true false
19) Earnings per share (EPS) reports how much revenue is earned for each share of common stock outstanding. ⊚ ⊚
true false
20) The price-earnings ratio reveals information about the stock market's expectations for a company's future growth in earnings.
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⊚ ⊚
true false
21) Income tax expense would be found on the income statement of a sole proprietorship, but not on the income statement of a corporation. ⊚ ⊚
true false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 22) For a business to be considered a corporation: A) its stock must be sold in very large amounts. B) it must be organized as a separate legal entity. C) it must issue both common and preferred stock. D) it must pay dividends.
23)
Advantages of the corporate form include all of the following except: A) easy to raise capital. B) shares can be purchased in small amounts. C) ownership interests are transferrable. D) legal liability of its owners is unlimited.
24)
Which of the following statements about a corporation is not correct? A) A corporation is a separate legal entity. B) A corporation has easy transferability of ownership. C) A corporation may have the ability to raise large amounts of capital. D) A corporation's owners have unlimited liability.
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25)
Which of the following is not a characteristic of corporate ownership? A) Stockholders have no liability for the debts of the corporation. B) Ownership interests are easily transferable. C) Shares of stock can be purchased in small increments. D) Corporate earnings are distributed as interest payments.
26)
Holders of common stock receive certain benefits, such as a residual claim, which is the:
A) right of stockholders to be paid back for their investment before anyone else if the company ceases operation. B) right to oversee management of the company. C) right to share in any remaining assets after creditors have been paid off, should the company cease operations. D) continuing right to receive a share of the company's profits in the form of dividends.
27) Which of the following statements about the benefits enjoyed by the owners of common stock is not correct? A) Some classes of common stock can carry more votes than others. B) To retain their ownership percentages, existing stockholders may be given the first chance to buy newly issued stock before it is offered to others. C) Stockholders receive a share of the corporation's profits when distributed as dividends. D) If the company ceases operations, stockholders share in any assets remaining before creditors have been paid.
28) The rights of current stockholders to purchase additional shares of newly issued stock in order to maintain the same percentage ownership is called:
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A) liquidation. B) preemptive rights. C) cumulative preference. D) voting rights.
29)
Corporations can raise large amounts of money because: A) shares of stock in public companies can easily be bought and sold by investors. B) the unlimited liability feature makes corporate ownership attractive to investors. C) corporate earnings are not taxed. D) all investments in corporate stock earn money for investors.
30)
Corporations can raise large amounts of money because:
A) shares of stock can be purchased in small amounts, so even small investors can participate. B) investors always prefer to invest in stock so they can receive dividends. C) stocks are always a good investment. D) investing in the stock market is the surest way to get rich quick.
31) Harry owns 1,000 shares of stock in Xit Corporation. What is the effect on Xit Corporation if Harry dies? A) Xit must reorganize to reflect the change in ownership. B) Xit will cancel Harry's shares of stock. C) Xit will have 3 months to resell the stock. D) A stockholder's death has no effect on a corporation.
32)
The laws governing corporations:
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A) require that a company be incorporated in the state in which it does most of its business. B) require that all companies in Delaware be incorporated. C) allow a company to be incorporated in a different state from the one in which it operates. D) require that all companies be incorporated in Delaware.
33)
The creation and oversight of all corporations are regulated by: A) city councils. B) state laws. C) stockholders. D) corporate officers.
34)
At what governmental level are corporate charters issued? A) State B) Local C) Federal D) International
35)
A major advantage of the corporate form of ownership is: A) limited legal liability. B) unlimited legal liability. C) ease of formation. D) that corporate earnings aren't taxed until they are distributed to owners as dividends.
36) Ownership structure can vary from one company to another, but the most basic form of corporation offers:
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A) preferred stock. B) net income. C) treasury stock. D) common stock.
37)
Features of common stock usually include all of the following except: A) voting rights. B) dividends. C) primary claim to the company's assets in case of liquidation. D) preemptive rights.
38)
Which of the following is an advantage of debt financing? A) It does not have to be repaid. B) Interest is discretionary. C) Interest is tax deductible. D) It reduces stockholder control.
39)
Which of the following statements about equity and debt financing is correct? A) Equity financing is always better than debt financing. B) Equity financing requires dividends to be paid. C) Dividends are tax deductible. D) Equity financing can change stockholder control.
40) Equity and debt financing both have their advantages and disadvantages. Which of the following pairs of phrases below accurately reflect the advantages of both types of financing?
A)
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Debt Financing
Equity Financing
Changes stockholder control
Dividends are optional
8
B)
Does not have to be repaid
C) D)
Interest is tax deductible Dividends are optional
Does not change stockholder control Does not have to be repaid Interest is tax deductible
A) Option A B) Option B C) Option C D) Option D
41)
Advantages of debt financing over equity financing are that: A) repayment of debt principal is optional. B) interest payments on debt are not tax deductible. C) control is not diluted. D) more money is available.
42)
Advantages of equity financing over debt financing include that: A) dividends are mandatory. B) equity financing does not require repayment. C) dividends are tax deductible. D) stockholders' control will increase.
43)
Advantages of debt financing over equity financing include that: A) interest payments are optional. B) debt financing does not require repayments. C) interest payments are tax not deductible. D) stockholders' control will not be diluted.
44)
The stockholders' equity section of the balance sheet includes all of the following except:
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A) Retained Earnings. B) Contributed Capital. C) Treasury Stock. D) Dividends.
45) Several years ago, Knox Industries issued 200,000 of its $2 par value stock for a total of $1,600,000. This is the only time that it has sold stock. This year it purchased 2,000 shares of its own stock for $20 a share. As a result of acquiring treasury stock: A) its stockholders' equity decreases by $40,000. B) it will recognize a loss of $40,000. C) its common stock account decreases by $40,000. D) its retained earnings decrease by $40,000.
46) A corporate charter specifies that the company may issue up to 34 million shares of stock. The company sells 26 million shares to investors and later buys back 10.0 million shares. The current number of shares of treasury stock after these transactions have been accounted for is: A) 10.0 million shares. B) 8.0 million shares. C) 16.0 million shares. D) 24.0 million shares.
47) A corporate charter specifies that the company may issue up to 20 million shares of stock. The company sells 12 million shares to investors and later buys back 3 million shares. The current number of shares of treasury stock after these transactions have been accounted for is: A) 3 million shares. B) 8 million shares. C) 9 million shares. D) 17 million shares.
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48) Which of the following statements about Accumulated Other Comprehensive Income (Loss) is not correct? A) Accumulated Other Comprehensive Income (Loss) reports unrealized gains and losses, which are temporary changes in the value of certain assets and liabilities the company holds. B) Accumulated Other Comprehensive Income (Loss) can relate to pensions, foreign currencies, and financial investments. C) Accumulated Other Comprehensive Income (Loss) is a component of stockholders' equity. D) Accumulated Other Comprehensive Income (Loss) is reported on the income statement.
49) If a company does not have any accumulated other comprehensive income (loss), stockholders' equity is the: A) amount the company received in exchange for all stock issued plus the amount of Retained Earnings minus the cost of treasury stock. B) amount the company received for all stock authorized plus the amount of Retained Earnings and treasury stock. C) par value the company received for all stock issued plus the amount of Retained Earnings minus treasury stock. D) amount the company received for all stock when issued minus the amount of Retained Earnings and treasury stock.
50)
All of the following are a part of contributed capital except: A) Common Stock. B) Additional Paid-in Capital. C) Preferred Stock. D) Retained Earnings.
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51) Flint Corporation’s Contributed Capital totals $54,000, Retained Earnings equals $117,000, Treasury Stock equals $32,400, and Common Stock equals $18,000. If the company does not have any Accumulated Other Comprehensive Income (Loss), what is the total amount of stockholders' equity? A) $203,400 B) $138,600 C) $221,400 D) $156,600
52) A corporate charter specifies that the company may sell up to 39 million shares of stock. The company sells 31 million shares to investors and later buys back 12.5 million shares. The number of authorized shares after these transactions are accounted for is: A) 31 million shares. B) 39 million shares. C) 19 million shares. D) 27 million shares.
53) A corporate charter specifies that the company may sell up to 20 million shares of stock. The company sells 12 million shares to investors and later buys back 3 million shares. The number of authorized shares after these transactions are accounted for is: A) 12 million shares. B) 20 million shares. C) 9 million shares. D) 17 million shares.
54) A corporate charter specifies that the company may sell up to 35 million shares of stock. The company issues 27 million shares to investors and later repurchases 10.5 million shares. The number of issued shares after these transactions have been accounted for is:
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A) 27 million shares. B) 18 million shares. C) 17 million shares. D) 25 million shares.
55) A corporate charter specifies that the company may sell up to 20 million shares of stock. The company issues 12 million shares to investors and later repurchases 3 million shares. The number of issued shares after these transactions have been accounted for is: A) 12 million shares. B) 11 million shares. C) 9 million shares. D) 5 million shares.
56) A corporate charter specifies that the company may sell up to 24 million shares of stock. The company sells 16 million shares to investors and later buys back 5.0 million shares. The current number of outstanding shares after these transactions have been accounted for is: A) 8.0 million shares. B) 12.0 million shares. C) 24.0 million shares. D) 11.0 million shares.
57) A corporate charter specifies that the company may sell up to 20 million shares of stock. The company sells 12 million shares to investors and later buys back 3 million shares. The current number of outstanding shares after these transactions have been accounted for is: A) 8 million shares. B) 20 million shares. C) 10 million shares. D) 9 million shares.
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58) Galleria Company has 280,000 shares authorized, 196,000 shares issued and 14,000 shares of treasury stock. How many shares does Galleria Company have outstanding? A) 14,000 B) 182,000 C) 210,000 D) 266,000
59) Galveston, Incorporated has 308,000 shares authorized, 140,000 shares issued, and 14,000 shares of treasury stock. How many shares are outstanding? A) 126,000 B) 434,000 C) 154,000 D) 406,000
60)
Which of the following statements about issued and outstanding stock is correct?
A) Outstanding stock includes all stock issued by a corporation. B) Issued stock equals the sum of outstanding stock and treasury stock. C) Issued stock is equal to authorized stock. D) Outstanding stock includes stock in the hands of investors, as well as treasury stock in the hands of the corporation.
61)
Which number is potentially the largest? A) The number of shares authorized. B) The number of shares issued. C) The number of shares outstanding. D) The number of shares certified.
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62) If you own 200,000 shares of stock in a company with 8 million shares outstanding and the company issues an additional 2 million shares to its employees through a stock purchase plan, your ownership percentage: A) remains the same because the company now has more assets. B) falls from 2.5% to 2%. C) remains the same because the company now has fewer liabilities. D) increases because the company now has more stock outstanding.
63)
Par value of a stock refers to the: A) issue price of the stock. B) value assigned to a share of stock in the corporate charter. C) market value of the stock. D) maximum selling price of the stock.
64)
What does the par value of a stock represent? A) The average market value of a stock for the year to date. B) It is a legal concept not related to the market value of a stock. C) The amount that would be paid if a stock was purchased by the issuing company. D) The current market value of a stock.
65)
When a company issues stock to the public for the first time, the issuance is called a(n): A) initial public offering (IPO). B) first time issue (FTI). C) seasoned new issue (SNI). D) initial stock offering (ISO).
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66) Seville Company issued 700 shares of $52 par value stock for $52,500. What is the total amount of contributed capital? A) $36,400 B) $16,100 C) $52,500 D) $52
67) Seville Company issued 1,680 shares of $50 par value stock for $126,000. What is the total amount of contributed capital? A) $84,000 B) $42,000 C) $126,000 D) $50
68) The following data are taken from the stockholders' equity section of the balance sheet of Driftwood Company: Common Stock, $10 Par Value, 60,000 Shares Authorized, 33,600 Shares Issued, 31, 600 Shares Outstanding Additional Paid-in Capital Retained Earnings Treasury Stock, 2,000 Shares
$ 336,000 168,000 140,000 72,800
What was the average issue price per share of the common stock? A) $36.40 B) $10.00 C) $15.00 D) $50.40
69) If shares of common stock are issued at a market price greater than par value, the amount in excess of par should be credited to:
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A) Common Stock. B) Treasury Stock. C) Retained Earnings. D) Additional Paid-in Capital.
70) A company issues 1 million shares of common stock with a par value of $0.18 for $16.60 a share. The entry to record this transaction includes a debit to Cash for: A) $180,000 and a credit to Common Stock for $180,000. B) $16,600,000 and a credit to Common Stock for $16,600,000. C) $16,600,000, a credit to Common Stock for $180,000, and a credit to Additional Paid-in Capital for $16,420,000. D) $180,000, a debit to Capital Receivable for $16,420,000, a credit to Common Stock for $180,000, and a credit to Additional Paid-in Capital for $16,420,000.
71) A company issues 1 million shares of common stock with a par value of $0.02 for $15 a share. The entry to record this transaction includes a debit to Cash for: A) $20,000 and a credit to Common Stock for $20,000. B) $15,000,000 and a credit to Common Stock for $15,000,000. C) $15,000,000, a credit to Common Stock for $20,000, and a credit to Additional Paidin Capital for $14,980,000. D) $20,000, a debit to Capital Receivable for $14,980,000, a credit to Common Stock for $20,000, and a credit to Additional Paid-in Capital for $14,980,000.
72) A company sells 1 million shares of common stock with no par value for $16.00 a share. In recording the transaction, it would debit: A) Cash and credit Additional Paid-in Capital for $16.00 million. B) Cash and credit Common Stock for $16.00 million. C) Common Stock and credit Cash for $16.00 million. D) Common Stock and credit Additional Paid-in Capital for $16.00 million.
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73) A company sells 1 million shares of common stock with no par value for $15 a share. In recording the transaction, it would debit: A) Cash and credit Additional Paid-in Capital for $15 million. B) Cash and credit Common Stock for $15 million. C) Common Stock and credit Cash for $15 million. D) Common Stock and credit Additional Paid-in Capital for $15 million.
74) Ms. Jessica Duffy purchased 1 share of $10 par value common stock from Ohio Corporation for $50 per share. Ms. Duffy sold that share to Mike Truesdale for $60 per share. As a result of the sale by Duffy to Truesdale sale, Ohio Corporation would: A) debit Cash and credit Additional Paid-in Capital for $10. B) debit Cash and credit Common Stock for $10. C) debit Common Stock and credit Additional Paid-in Capital for $10. D) not record this transaction.
75)
Which of the following statements about stock options is not correct?
A) Stock options are intended to give upper management the same goals as stockholders. B) When stock options are exercised by upper management, the number of shares outstanding increases. C) Stock options give employees the option of acquiring the company’s stock at a predetermined price. D) An expense is reported by the company when stock options are exercised.
76) Which of the following statements would not explain why a company may want to repurchase its stock?
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A) To demonstrate to investors that it believes its own stock is worth purchasing. B) To obtain shares to reissue to employees as part of an employee stock plan. C) To obtain shares that can be reissued as payment for purchase of another company. D) To increase the number of shares of outstanding stock.
77)
Treasury stock: A) does not appear on the balance sheet. B) is a contra-equity account. C) is an asset account. D) is recorded as additional paid-in capital.
78)
Which of the following statements about the par value of common stock is not correct? A) The par value is not the same as the market value of the stock. B) The par value is a nominal amount identified in the corporate charter. C) The par value is the amount credited to the common stock account when the stock is
issued. D) The par value is the amount credited to common stock when treasury stock is reissued.
79) Mountain View Company buys back 3,000 shares of its $10 par value common stock from investors at $126 per share. This stock repurchase would be recorded with a debit to: A) Cash and a credit to Treasury Stock for $378,000. B) Treasury Stock and a credit to Cash for $30,000. C) Treasury Stock and a credit to Cash for $378,000. D) Treasury Stock for $30,000, a debit to Additional Paid-in Capital for $348,000, and a credit to Cash for $378,000.
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80)
What effect does the purchase of treasury stock have on the balance sheet?
Total Assets A) B) C) D)
Total Liabilities
No effect Decrease Increase Decrease
Stockholders’ Equity
No effect No effect No effect Decrease
No effect Decrease Increase Increase
A) Option A B) Option B C) Option C D) Option D
81)
The following information is available from the accounting records of Pecos Company:
Treasury Stock Common Stock Additional Paid-in Capital Retained Earnings
$ 56,000 840,000 196,000 420,000
What is the amount of Stockholders' Equity for Pecos Company? A) $980,000 B) $1,204,000 C) $1,400,000 D) $1,456,000
82) Anthem Incorporated issues 200,000 shares of stock with a par value of $0.06 for $155 per share. Three years later, it repurchases these shares for $85 per share.How would Anthem record the repurchase?
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A) Debit Common Stock for $12,000, debit Additional Paid-in Capital for $30,988,000 and credit Cash for $31.00 million. B) Debit Treasury Stock for $17.00 million and credit Cash for $17.00 million. C) Debit Common Stock for $12,000, debit Additional Paid-in Capital for $16,988,000 and credit Cash for $17.00 million. D) Debit Stockholders' Equity for $31.00 million, credit Additional Paid-in Capital for $17.00 million and credit Cash for $17.00 million.
83) Anthem Incorporated issues 200,000 shares of stock with a par value of $0.01 for $150 per share. Three years later, it repurchases these shares for $80 per share. How would Anthem record the repurchase? A) Debit Common Stock for $2,000, debit Additional Paid-in Capital for $29,998,000 and credit Cash for $30 million. B) Debit Treasury Stock for $16 million and credit Cash for $16 million. C) Debit Common Stock for $2,000, debit Additional Paid-in Capital for $15,998,000 and credit Cash for $16 million. D) Debit Stockholders' Equity for $30 million, credit Additional Paid-in Capital for $14 million and credit Cash for $16 million.
84)
Which of the following statements about treasury stock is correct?
A) When a company reissues treasury stock for more or less than it originally paid for the stock, it does not report a gain or loss. B) When a company purchases treasury stock, it increases total stockholders' equity. C) Treasury stock is reported as an asset on the balance sheet. D) Treasury stock is reported as issued and outstanding stock.
85)
Which of the following is correct about reissuing treasury stock?
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A) If treasury stock is sold at a higher price than the stock's cost when the company reacquired it, a gain will be recognized. B) If treasury stock is sold at a higher price than the stock's par value, a gain will be recognized. C) If the treasury stock is sold at a lower price than the amount of the original issuance, a loss will be recognized. D) A gain or loss on the reissuance of treasury stock is never recognized.
86) An Additional Paid-in Capital account could be used with all of the following transactions except: A) The issuance of par value stock at a price greater than the par value. B) The reissuance of treasury stock at a price less than the price paid when the stock was reacquired. C) The reissuance of treasury stock at a price greater than the price paid when the stock was reacquired. D) The issuance of no-par stock.
87) Galaxy Industries buys back 316,000 shares of its stock from investors at $61 a share. Two years later it reissues this stock for $81 a share. The stock reissue would be recorded with a debit to Cash for: A) $25.60 million and a credit to Treasury Stock for $25.60 million. B) $19.28 million, a debit to Additional Paid-in Capital for $6.32 million, a credit to Treasury Stock for $19.28 million, and a credit to Stockholders' Equity for $6.32 million. C) $25.60 million, a credit to Treasury Stock for $19.28 million, and a credit to Additional Paid-in Capital for $6.32 million. D) $25.60 million, a credit to Treasury Stock for $19.28 million, and a credit to Gain on Sale of Treasury Stock for $6.32 million.
88) Galaxy Industries buys back 600,000 shares of its stock from investors at $45 a share. Two years later it reissues this stock for $65 a share. The stock reissue would be recorded with a debit to Cash for:
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A) $39 million and a credit to Treasury Stock for $39 million. B) $27 million, a debit to Additional Paid-in Capital for $12 million, a credit to Treasury Stock for $27 million, and a credit to Stockholders' Equity for $12 million. C) $39 million, a credit to Treasury Stock for $27 million, and a credit to Additional Paid-in Capital for $12 million. D) $39 million, a credit to Treasury Stock for $27 million, and a credit to Gain on Sale of Treasury Stock for $12 million.
89) Buffalo Butter Company had 40,000 shares of $4 par value common stock outstanding on January 1. On January 20, the company purchased 4,000shares of its stock for $16 per share. On July 3, the company reissued 2,000 of the shares at $20 per share. Buffalo Butter uses the cost method to account for its treasury stock. What journal entry will record the purchase of the stock on January 20? A) Debit Treasury Stock for $16,000, debit Additional Paid-in Capital for $48,000, and credit Cash for $64,000. B) Debit Treasury Stock and credit Cash for $64,000. C) Debit Treasury Stock for $16,000, debit Common Stock for $48,000, and credit Cash for $64,000. D) Debit Common Stock and credit Cash for $64,000.
90) Buffalo Butter Company had 40,000 shares of $4 par value common stock outstanding on January 1. On January 20, the company purchased 4,000shares of its stock for $16 per share. On July 3, the company reissued 2,000 of the shares at $20 per share. Buffalo Butter uses the cost method to account for its treasury stock. What journal entry will record the reissuance on July 3?
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A) Debit Cash and credit Treasury Stock for $40,000 B) Debit Cash for $40,000, credit Treasury Stock for $32,000, and credit Additional Paid-in Capital for $8,000 C) Debit Cash for $40,000, credit Common Stock for $12,000, and credit Additional Paid-in Capital for $28,000 D) Debit Cash for $40,000, credit Common Stock for $32,000, and credit Gain on Reissuance of Stock for $8,000
91) Carla Vista Enterprises buys back 320,000 shares of its stock from investors at $16.50 a share. Two years later, it reissues this stock for $16 a share. Thejournal entry to record the stockreissuance would debit Cash for: A) $5,120,000, a debit to Additional Paid-in Capital for $160,000, and a credit to Treasury Stock for $5,280,000. B) $5,120,000, a credit to Treasury Stock for $5,120,000, and a credit to Additional Paid-in Capital for $160,000. C) $5,280,000 and a credit to Treasury Stock for $5,280,000. D) $5,120,000 and a credit to Treasury Stock for $5,120,000.
92) Carla Vista Enterprises buys back 600,000 shares of its stock from investors at $6.50 a share. Two years later, it reissues this stock for $6.00 a share. The journal entry to record the stock reissuance would debit Cash for: A) $3,600,000, a debit to Additional Paid-in Capital for $300,000, and a credit to Treasury Stock for $3,900,000. B) $3,900,000, a credit to Treasury Stock for $3,600,000, and a credit to Additional Paid-in Capital for $300,000. C) $3,900,000 and a credit to Treasury Stock for $3,900,000. D) $3,600,000 and a credit to Treasury Stock for $3,600,000.
93)
At the end of the prior year, Atoka Industries reported the following account balances:
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Common Stock ($0.01 par value) Additional Paid-in Capital Retained Earnings Treasury Stock
$ 2,000 1,000,000 1,400,000 780,000
The treasury stock arose from a purchase of 10,000 shares of common stock for $78 per share. If the 10,000 treasury shares are reissued for $50 per share in the current year, what journal entry must be prepared to record the transaction? A) Debit Cash for $500,000, debit Other Losses for $280,000, and credit Treasury Stock for 780,000. B) Debit Cash for $500,000, credit Common Stock for $100, and credit Additional Paidin Capital for $499,900. C) Debit Cash for $500,000, debit Additional Paid-in Capital for $280,000, and credit Treasury Stock for $780,000. D) Debit Cash and credit Treasury Stock for $500,000.
94)
A corporation does not record a journal entry when: A) a shareholder exchanges the shares for cash with a different investor. B) shares are repurchased by the corporation at a price greater than their issue price. C) shares are repurchased by the corporation at a price less than their issue price. D) the corporation sells its treasury stock for cash to an investor.
95)
Contributed capital is found in the ________ section of the ________. A) operating income; income statement B) stockholders' equity; balance sheet C) retained earnings; balance sheet D) retained earnings; income statement
96)
Treasury stock is reported in the:
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A) financing section of the income statement. B) stockholders' equity section of the balance sheet. C) liability section of the balance sheet. D) operating section of the income statement.
97) Items such as unrealized gains and losses from pensions, foreign currencies or financial investments are reported as: A) accumulated other comprehensive income. B) treasury stock. C) contributed capital. D) financing activities.
98)
The number of shares outstanding equals the number of shares: A) issued minus the number of shares in treasury. B) authorized minus the number of shares issued. C) issued plus the number of shares in treasury. D) authorized plus the number of shares issued.
99)
The number of shares issued represents the number of shares: A) sold. B) repurchased. C) the company is allowed to sell. D) sold less repurchased.
100)
Common stock's par value is:
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A) the same as a bond's par value. B) the same as the common stock's market price. C) the common stock's average price. D) an insignificant amount specified in the corporate charter.
101) Cholla Company issued 20,000 shares of no-par value common stock at $10 per share. Mr. Ivanhoe, the bookkeeper, recorded the transaction with a $200,000 debit to Cash and $200,000 credit to Common Stock. Which of the following statements about this situation is correct? A) Total assets will be overstated. B) This entry is correct. C) Total stockholders' equity will be overstated. D) Total liabilities will be understated.
102)
Seasoned new issues are: A) the selling of additional new shares. B) the repurchase of previously issued shares. C) the shares issued in an IPO. D) required before a corporation goes public.
103) Geronimo Company issued 20,000 shares of $1 par value common stock at $10 per share. Ms. Elgin, the bookkeeper, recorded this transaction with a $200,000 debit to Cash and a $200,000 credit to Common Stock. As a result of this entry: A) total assets will be overstated. B) Additional Paid-In Capital will be understated. C) total stockholders' equity will be understated. D) equity will be overstated.
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104) On April 30, 2021, Marie Claire sold 1,000 shares of her Spectrum Company's common stock to Fountain of the Sun for $16,000. The stock cost Marie Claire $10,000. Spectrum Company's accounting equation: A) is not affected because the corporation is separate from its owners. B) is not affected because of the cost principle. C) will show an increase in total assets and total stockholders' equity. D) will show a decrease in total assets and total stockholders' equity.
105) In an IPO on May 1, 2015, Timmy Hilfigure purchased 1,000 shares of Abner Crummie, Incorporated for $5,000. On April 30, 2021, Timmy Hilfigure sold the 1,000 shares for $8,000 to Ralph Loring. What is the effect of the sale on April 30, 2021? A) Abner Crummie, Incorporated will record a $3,000 loss. B) Abner Crummie, Incorporated will record a $3,000 gain. C) Abner Crummie, Incorporated will not be directly affected by this transaction. D) Abner Crummie, Incorporated will record a decrease in Cash of $8,000.
106)
Stock options:
A) provide the holder with the option to purchase stock at a specified price during a specified period of time. B) are stock dividends in which additional shares equal more than 20 to 25%. C) provide a shareholder the option to authorize and receive dividends. D) are a corporation's option to issue both preferred and common stock.
107)
Stock options are given in order to: A) increase Retained Earnings. B) increase a corporation's liquidity. C) provide a corporation with the choice of issuing additional stock. D) provide incentives for employees to work harder.
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108)
Which of the following is not a reason a company would repurchase stock? A) To reduce the number of outstanding shares. B) To give the impression that the stock is worth buying. C) To have shares of stock to issue when stock options are exercised. D) To increase the total stockholders' equity balance and improve the ROE.
109) Queen Creek Company had total assets of $280,000, total liabilities of $168,000 and stockholders' equity of $112,000 before repurchasing 1,000 shares of its $1 par value common stock for $14 per share. After this repurchase, total assets equal ________, total liabilities equal ________ and stockholders' equity equals ________. A) $266,000; $168,000; $98,000 B) $280,000; $154,000; $126,000 C) $280,000; $182,000; $98,000 D) $294,000; $168,000; $126,000
110) Edgewater Company has the following December 31, 2021 equity balances: Common stock of $56,000; Additional paid-in capital of $84,000; and Retained earnings of $140,000. If Edgewater repurchases shares of its stock for $28,000, the total stockholders' equity balance would equal: A) $168,000. B) $252,000. C) $308,000. D) $112,000.
111) Palomino Enterprises purchased 2,000 shares of its own stock at $8 a share. Later, it reissued the 2,000 shares for $20,000. The effect of the entry to record the sale of treasury stock on the accounting equation includes a(n):
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A) $20,000 increase in stockholders' equity. B) $20,000 decrease in stockholders' equity. C) $16,000 increase in stockholders' equity. D) $16,000 decrease in stockholders' equity.
112) Palomino Enterprises reissued 2,000 shares of its treasury stock for $20,000. Prior to the reissuance, the Treasury Stock balance was $24,000, which included the $16,000 cost of the 2,000 shares reissued. After recording this transaction: A) Treasury Stock will equal $8,000. B) Treasury Stock will equal $4,000. C) Additional Paid-in Capital will be increased by $24,000. D) Cash will be decreased by $20,000.
113)
Which of the following would be the best investment?
A) A company that pays no dividends, but has substantial net income. B) A company that pays substantial dividends, but whose earnings per share has been declining over the past several years. C) A company whose stock price has increased steadily, but pays no dividends. D) It depends on the investor’s investment objectives.
114)
Typically, a profitable company that pays little or no dividends: A) is a bad investment. B) will reinvest profits which can lead to greater growth potential. C) will experience relatively stable stock prices over time. D) will appeal to investors who desire distributions of profit.
115)
Typically, a profitable company that pays relatively high dividends:
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A) is an attractive investment for those seeking a steady income, like retired people. B) will reinvest more profit which can lead to smaller growth potential. C) will experience more growth in stock price over time. D) is a bad investment.
116)
Which of the following statements about when cash dividends can be paid is not correct?
A) The Retained Earnings account must have an accumulated balance sufficient to cover the amount of the dividends to be paid. B) The Cash account must have a balance sufficient to pay the dividends. C) The board of directors must have declared the dividend before it can be paid. D) Loan covenants cannot include the restriction of the payment of dividends.
117) Hazelnut Corporation had 40,000 shares of $4 par value common stock outstanding on January 1. On January 20, the company purchased 4,000 of its stock for $16 per share. On July 3, the company reissued 2,000 of the shares at $20 per share. Hazelnut uses the cost method to account for its treasury stock. Assume the company paid a dividend of $5 per share on August 3. What is the total amount of the dividends that would be paid to the common stockholders? A) $190,000 B) $200,000 C) $180,000 D) $152,000
118) Which of the following below correctly states the sequence of dates related to dividends on common stock? A) Board of directors date, Date of declaration, Date of payment B) Declaration date, Date of record, Date of payment C) Date of record, Declaration date, Date of payment D) Declaration date, Date of Payment, Date of distribution
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119)
Walter Company declared a cash dividend. On the payment date of the dividend, its: A) assets decreased and its stockholders' equity decreased. B) assets decreased and its liabilities decreased. C) assets decreased and its stockholders' equity increased. D) liabilities decreased and its common stock decreased.
120) Mapleleaf Industries declared a $0.90 per share cash dividend. The company has 300,000 shares authorized, 85,000 shares issued, and 82,000 shares of common stock outstanding. What is the journal entry to record the dividend declaration? A) Debit Dividends and credit Dividends Payable for $76,500. B) Debit Dividends and credit Dividends Payable for $73,800. C) Debit Dividends Payable and credit Cash for $76,500. D) Debit Dividends Payable and credit Cash for $270,000.
121) Mapleleaf Industries declared a $0.80 per share cash dividend. The company has 200,000 shares authorized, 90,000 shares issued, and 84,000 shares of common stock outstanding. What is the journal entry to record the dividend declaration? A) Debit Dividends and credit Dividends Payable for $72,000. B) Debit Dividends and credit Dividends Payable for $67,200. C) Debit Dividends Payable and credit Cash for $72,000. D) Debit Dividends Payable and credit Cash for $160,000.
122)
On the declaration date, the company: A) debits Dividends and credits Dividends Payable for the amount of the dividend. B) debits Dividend Expense and credits Cash for the dividend amount. C) debits Dividends Payable and credits Cash for the dividend amount. D) establishes who will receive the dividend payment.
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123) On February 16, Hawthorne Company declares a $0.51 dividend to be paid on April 5. Hawthorne has 2,170,000 shares of common stock issued and outstanding. The entry recorded by the company on February 16 includes a debit to: A) Dividends Payable and a credit to Cash for $1,106,700. B) Dividends and a credit to Dividends Payable for $1,106,700. C) Dividends Payable and a credit to Cash for $1,047,030. D) Dividends and a credit to Dividends Payable for $1,047,030
124) On February 16, Hawthorne Company declares a $0.68 dividend to be paid on April 5. Hawthorne has 1,900,000 shares of common stock issued and outstanding. The entry recorded by the company on February 16 includes a debit to: A) Dividends Payable and a credit to Cash for $1,360,000. B) Dividends and a credit to Dividends Payable for $1,292,000. C) Dividends Payable and a credit to Cash for $1,292,000. D) Dividends and a credit to Dividends Payable for $1,360,000.
125)
On the date of record for a dividend, the company: A) debits Dividends and credits Dividends Payable for the amount of the dividend. B) debits Dividend Expense and credits Cash for the dividend amount. C) debits Dividends Payable and credits Cash for the dividend amount. D) establishes who will receive the dividend payment.
126) On February 16, Hawthorne Company declares a $1.36 dividend to be paid on April 5. There are 1,900,000 shares of common stock issued and outstanding. The entry recorded by the company on April 5 includes a debit to:
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A) A debit to Dividends Payable and a credit to Cash for $2,720,000. B) A debit to Dividends and a credit to Dividends Payable for $2,584,000. C) A debit to Dividends Payable and a credit to Cash for $2,584,000. D) A debit to Dividends and a credit to Dividends Payable for $2,720,000.
127)
On the payment date for a cash dividend, the company: A) debits Dividends and credits Dividends Payable for the amount of the dividend. B) debits Dividend Expense and credits Cash for the dividend amount. C) debits Dividends Payable and credits Cash for the dividend amount. D) establishes who will receive the dividend payment.
128) The combined effect of the declaration and payment of a cash dividend on a company's financial statements is to: A) increase total liabilities and decrease stockholders' equity. B) increase total expenses and decrease assets. C) increase total assets and increase stockholders' equity. D) decrease total assets and decrease stockholders' equity.
129) Which of the following statements about the declaration and payment of cash dividends is correct? A) Declaration and payment of cash dividends will reduce the amount of net income. B) Declaration and payment of cash dividends will not reduce the Retained Earnings balance. C) Declaration and payment of cash dividends will reduce the amount of cash available to invest in assets. D) Declaration and payment of cash dividends is calculated on the amount of shares of stock issued, not the amount of shares outstanding.
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130) Nova, Incorporated is considering declaring a $100,000 cash dividend. Nova has a cash balance of $20,000 and Retained Earnings balance of $100,000. Nova should: A) declare a cash dividend because it has enough Retained Earnings and cash. B) declare a cash dividend because it has enough Retained Earnings. C) not declare a cash dividend because it does not have enough Retained Earnings. D) not declare a cash dividend because it does not have enough cash.
131)
Lenders will sometimes impose dividend restrictions to: A) prevent the corporation from paying out too much to stockholders. B) try to limit available dividends. C) prevent the corporation from paying out too much to other creditors. D) ensure the lenders will receive more dividends than the stockholders.
132)
When does a corporation record an increase in Dividends Payable? A) On the date of record. B) On the date of payment. C) On the declaration date. D) On the date of issuance.
133)
Dividends Payable is recorded as a credit on the: A) declaration date. B) date of record. C) date of payment. D) last day of the fiscal year.
134)
A dividend date of record is the date on which the corporation:
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A) makes no journal entry. B) records an increase in Dividends Payable. C) records a decrease in Dividends Payable. D) records an increase in Dividends.
135) With regards to the Dividends Payable and the Dividends accounts, one of the closing entries required at year end, includes a: A) credit to Retained Earnings. B) credit to Dividends Payable. C) debit to Retained Earnings. D) debit to Dividends Payable.
136)
Which of the following statements about dividends is not correct? A) Dividends represent a sharing of corporate profits with owners. B) Both stock dividends and cash dividends reduce Retained Earnings. C) Cash dividends paid to stockholders reduce net income. D) Dividends are declared at the discretion of the board of directors.
137)
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 market value per share of common shares.
138)
A stock dividend transfers:
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A) contributed capital to Retained Earnings. B) Retained Earnings to assets. C) contributed capital to assets. D) Retained Earnings to contributed capital.
139)
If a corporation declares and distributes a stock dividend on its common shares: A) the amount of total assets increases. B) stockholders' equity decreases. C) contributed capital decreases. D) the account Retained Earnings is decreased.
140) Sullivan Gulch Corporation declared a stock dividend on November 1 and issued 18,000 shares of stock to its stockholders. Prior to the dividend, the balance in Retained Earnings was $1,700,000, the number of shares of $5 par value stock issued and outstanding was 120,000, and the market value of the stock was $12. This stock dividend will cause total stockholders' equity to: A) remain unchanged. B) increase by $90,000. C) decrease by $216,000. D) decrease by $126,000.
141)
Which of the following statements about dividends is correct? A) Companies sometimes issue stock dividends to lower the market price per share of
stock. B) Stock dividends immediately increase the total value of the stockholders' investment. C) Cash dividends and stock dividends both decrease total stockholders' equity. D) A corporation has a legal obligation to pay dividends each year.
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142)
A stock dividend: A) is accounted for like a stock split. B) will reduce stockholders' equity similar to a cash dividend. C) will not change any of the accounts within stockholders' equity. D) will reduce Retained Earnings similar to a cash dividend.
143) 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
144) On September 1, Primrose Industries with 100,000 shares of $5 par value common stock and $2,000,000 of Retained Earnings issues a 2-for-1 stock split. The market price of the stock on that date is $24 per share. Which of the following statements is correct concerning this stock split? A) Contributed capital will increase by $500,000. B) Retained Earnings will decrease by $2,400,000. C) Dividends payable will increase by $500,000. D) No entry will be made for this transaction.
145) Pettygrove Company had 500,000 shares of $10 par value common stock outstanding. The amount of additional paid-in capital is $2,500,000, and Retained Earnings is $750,000. The company issues a 2-for-1 stock split. The market price of the stock is $11. What is the balance in the Common Stock account after this issuance?
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A) $10,000,000 B) $10,500,000 C) $5,000,000 D) $7,500,000
146) Pettygrove Company had 600,000 shares of $10 par value common stock outstanding. The amount of additional paid-in capital is $3,000,000, and Retained Earnings is $900,000. The company issues a 2-for-1 stock split. The market price of the stock is $26. What is the balance in the Common Stock account after this issuance? A) $12,000,000 B) $13,800,000 C) $6,000,000 D) $9,000,000
147)
Which of the following statements about a stock split is correct? A) A stock split decreases Retained Earnings. B) Stock splits do not require a journal entry. C) Stock splits are the same as stock dividends. D) Stock splits increase the par value per share.
148)
Stock dividends and stock splits are similar in all of the following ways except: A) they both involve a pro rata distribution of shares to existing stockholders. B) they both reduce the stock price. C) they both decrease Retained Earnings. D) they both have no effect on cash.
149)
Which of the following statements is correct?
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A) Stock splits and stock dividends both reduce the market price of a share, but only stock splits reduce the par value of a share. B) Stock splits and stock dividends both reduce the market price of a share and the par value of a share. C) Stock splits and stock dividends both reduce the market price of a share, but only stock dividends reduce the par value of a share. D) Stock splits and stock dividends both reduce the market price of a share and reduce Retained Earnings.
150) Which of the following statements accurately explains why the board of directors of a company whose financial future contains some uncertainties might issue a 2-for-1 stock split rather than declare a 100% stock dividend? A) A stock split would not reduce the market price per share, whereas a stock dividend would. B) A stock split would reduce the market price per share, whereas a stock dividend would not. C) A stock split would increase total stockholders' equity, whereas a stock dividend would not. D) A stock split would not reduce Retained Earnings, whereas a stock dividend would.
151)
How do stock splits and stock dividends impact Retained Earnings?
A) Stock splits increase Retained Earnings and stock dividends have no effect on Retained Earnings. B) Stock splits have no effect on Retained Earnings and stock dividends decrease Retained Earnings. C) Stock splits and stock dividends both decrease Retained Earnings. D) Stock splits and stock dividends have no effect on Retained Earnings.
152) Stock splits and large stock dividends have which of the following similarities or differences in their effects and requirements for a journal entry?
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A) B) C)
D)
Effect on Number of Shares Both change the number of shares outstanding Both change the number of shares outstanding Both change the number of shares outstanding Neither change the number of shares outstanding
Effect on Par Value per Share Changes only for a stock split Changes only for a stock split Neither affect par value per share Changes only for a stock dividend
Requirement for Journal Entry Required only for a stock dividend Neither require a journal entry Both require journal entry Required only for a stock dividend
A) Option A B) Option B C) Option C D) Option D
153)
Par value is used to record ________ and market value is used to record ________. A) small stock dividends; stock splits B) large stock dividends; small stock dividends C) stock splits; small stock dividends D) large stock dividends; stock splits
154)
Corporations will declare stock dividends in order to:
A) reduce the market price of a share of stock and make it more attractive to some investors. B) increase the market price of a share of stock to help maximize the stockholders' wealth. C) increase a stockholders' ownership percentage in the corporation. D) increase the corporation's Retained Earnings.
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155) A corporation's board of directors could prefer a stock split to a stock dividend because a stock split: A) increases the market price of the stock. B) reduces Retained Earnings, so the company pays less taxes. C) does not reduce Retained Earnings, so it does not reduce the ability to declare a cash dividend in the future. D) increases total stockholders' equity and allows the corporation more flexibility.
156) Council Crest, Incorporated had 20,000 shares issued and outstanding of its $.50 par value common stock. At December 31, Common Stock equaled $10,000, Retained Earnings equaled $20,000 and Total stockholders' equity equaled $50,000 prior to a 2-for-1 stock split. As a result of a 2-for-1 stock split: A) par value equals $0.25. B) the number of shares outstanding equals 10,000. C) Common Stock equals $20,000. D) Retained Earnings equals $40,000.
157) A stock dividend is considered a large stock dividend if it is ________ than 25% of the outstanding shares, and it is recorded at the ________ value of the additional shares. A) more; par B) less; par C) more; market D) less; market
158)
Preferred stock differs from common stock in that:
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A) preferred stock has more voting power and, as such, greater control over the management of the company. B) preferred stockholders are paid dividends before common stockholders. C) preferred stock pays tax-free dividends. D) preferred stock has no preemptive rights or residual claims.
159) Preferred stock has some distinctly different characteristics from common stock. Which of the characteristics below is not related to preferred stock? A) Its dividends may be paid at a fixed rate. B) It has a higher priority for the distribution of assets than common stock. C) It has a higher priority for the payment of dividends than common stock. D) It generally has voting rights.
160) Columbia Clay, Incorporated issues 1.13 million shares of preferred stock with a par value of $8.50 at its market price of $32.50 per share. The issuance should be recorded with a debit to Cash for: A) $36.73 million and a credit to Preferred Stock for $36.73 million. B) $9.61 million and a credit to Preferred Stock for $9.61 million. C) $27.12 million, a credit to Additional Paid-in Capital for $9.61 million, and a credit to Preferred Stock for $36.73 million. D) $36.73 million, a credit to Preferred Stock for $9.61 million, and a credit to Additional Paid-in Capital for $27.12 million.
161) Columbia Clay, Incorporated issues 2 million shares of preferred stock with a par value of $2 at its market price of $26 per share. The issuance should be recorded with a debit to Cash for:
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A) $52 million and a credit to Preferred Stock for $52 million. B) $4 million and a credit to Preferred Stock for $4 million. C) $52 million, a credit to Additional Paid-in Capital for $4 million, and a credit to Preferred Stock for $48 million. D) $52 million, a credit to Preferred Stock for $4 million, and a credit to Additional Paid-in Capital for $48 million.
162) Sylvan Heights Company issues 115,000 shares of preferred stock for $39 per share. The stock has a fixed dividend rate of 5% and a par value of $8 per share. The company records the issuance with a debit to Cash for: A) $4,485,000 and a credit to Preferred Stock for $4,485,000. B) $920,000 and a credit to Preferred Stock for $920,000. C) $4,485,000, a credit to Preferred Stock for $920,000, and a credit to Additional Paidin Capital for 3,565,000. D) $920,000, a debit for $3,565,000 to Long-term Investments, a credit to Preferred Stock for $920,000, and a credit to Additional Paid-in Capital for $3,565,000.
163) Sylvan Heights Company issues 200,000 shares of preferred stock for $40 per share. The stock has a fixed dividend rate of 5% and a par value of $3 per share. The company records the issuance with a debit to Cash for: A) $8,000,000 and a credit to Preferred Stock for $8,000,000. B) $600,000 and a credit to Preferred Stock for $600,000. C) $8,000,000, a credit to Preferred Stock for $600,000, and a credit to Additional Paidin Capital for $7,400,000. D) $600,000, a debit for $7,400,000 to Long-term Investments, a credit to Preferred Stock for $600,000, and a credit to Additional Paid-in Capital for $7,400,000.
164)
A current dividend preference means that:
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A) preferred stockholders are paid current dividends before common stockholders are paid dividends. B) unpaid dividends to preferred stockholders accumulate and must be paid before common stockholders receive dividends. C) preferred stockholders are paid their full fixed dividend rate each period as long as the company is in operation. D) unpaid cash dividends to preferred stockholders must be replaced with stock dividends during the current period.
165)
A company issued 8% preferred stock with a $100 par value. This means: A) Preferred stockholders are entitled to 8% of the annual net income. B) Only 8% of total contributed capital can be preferred stock. C) Preferred stockholders are guaranteed a dividend. D) The potential dividend to preferred stockholders is $8 per share per year.
166) At the end of its first year of operations, Alder Company had 150,000 shares of preferred stock, 5% cumulative, $100 par value. It also has 1,000,000 shares of common stock $0.01 par value. (The share information represents the numbers of shares issued and outstanding for both types of stock.) If sufficient dividends are declared, what is the per share dividend that will be paid on the preferred stock? A) $0.01 per share. B) $100.00 per share. C) $5.00 per share. D) $7.50 per share.
167) Gladstone Company issues 104,000 shares of preferred stock for $44 a share. The stock has fixed annual dividend rate of 9% and a par value of $7 per share. If sufficient dividends are declared, preferred stockholders can anticipate receiving dividends of:
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A) $411,840 each year. B) $65,520 each year. C) 9% of net income each year. D) $7 per share.
168) Gladstone Company issues 200,000 shares of preferred stock for $40 a share. The stock has fixed annual dividend rate of 5% and a par value of $3 per share. If sufficient dividends are declared, preferred stockholders can anticipate receiving dividends of: A) $10,000 each year. B) $30,000 each year. C) 5% of net income each year. D) $3 per share.
169) Salmon, Incorporated issues 503,000 shares of preferred stock for $33 a share. The stock has a fixed annual dividend rate of 8% and a par value of $12 per share. The current price of the preferred stock is $35 a share. If sufficient dividends are declared, preferred stockholders can anticipate receiving annual dividends of: A) $0.96 per share. B) $2.64 per share. C) $2.80 per share. D) $1.68 per share.
170) Salmon, Incorporated issues 500,000 shares of preferred stock for $60 a share. The stock has a fixed annual dividend rate of 5% and a par value of $18 per share. The current price of the preferred stock is $64 a share. If sufficient dividends are declared, preferred stockholders can anticipate receiving annual dividends of:
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A) $0.90 per share. B) $3.00 per share. C) $3.20 per share. D) $2.10 per share.
171) A company has 12.00 million shares of $4.00 par common stock and 1.4 million shares of $4.40 par preferred stock outstanding. The preferred stock has an 10% dividend rate. The company declares $340,000 in total dividends for the year. Which of the following is correct if the preferred stockholders only have a current dividend preference? A) Preferred stockholders will receive the entire $340,000, and they must also be paid $100,000 before the end of the current accounting period. Common stockholders will receive nothing. B) Preferred stockholders will receive $34,000 or 10% of the total dividends. Common stockholders will receive the remaining $306,000. C) Preferred stockholders will receive the entire $340,000, and they must also be paid $100,000 sometime in the future before common stockholders will receive anything. D) Preferred stockholders will receive the entire $340,000, but will receive nothing more relating to this dividend declaration. Common stockholders will receive nothing.
172) A company has 10 million shares of $2 par common stock and 1 million shares of $4 par preferred stock outstanding. The preferred stock has an 8% dividend rate. The company declares $300,000 in total dividends for the year. Which of the following is correct if the preferred stockholders only have a current dividend preference? A) Preferred stockholders will receive the entire $300,000, and they must also be paid $20,000 before the end of the current accounting period. Common stockholders will receive nothing. B) Preferred stockholders will receive $24,000 or 8% of the total dividends. Common stockholders will receive the remaining $276,000. C) Preferred stockholders will receive the entire $300,000, and they must also be paid $20,000 sometime in the future before common stockholders will receive anything. D) Preferred stockholders will receive the entire $300,000, but will receive nothing more relating to this dividend declaration. Common stockholders will receive nothing.
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173) Ross Island Company issues 22,000 shares of no-par value preferred stock for cash at $66.00 per share. The journal entry to record the transaction will consist of a debit to Cash for $1,452,000 and a credit (or credits) to: A) Preferred Stock for $1,452,000. B) Preferred Stock for $1,232,000 and Additional Paid-in Capital for $352,000. C) Preferred Stock for $1,232,000 and Retained Earnings for $352,000. D) Retained Earnings for $1,452,000.
174) Ross Island Company issues 10,000 shares of no-par value preferred stock for cash at $120 per share. The journal entry to record the transaction will consist of a debit to Cash for $1,200,000 and a credit (or credits) to: A) Preferred Stock for $1,200,000. B) Preferred Stock for $40,000 and Additional Paid-in Capital for $1,160,000. C) Preferred Stock for $40,000 and Retained Earnings for $1,160,000. D) Retained Earnings for $1,200,000.
175)
A cumulative dividend preference means that:
A) preferred stockholders are paid dividends before common stockholders are paid dividends for the current year only. B) unpaid dividends to preferred stockholders accumulate and must be paid before common stockholders receive dividends. C) preferred stockholders are paid their full fixed dividend rate each period as long as the company is in operation. D) unpaid cash dividends to preferred stockholders must be replaced with stock dividends during the current period.
176)
Which of the following statements about dividends in arrears is correct?
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A) Dividends in arrears do not appear on the balance sheet or require a journal entry. B) Dividends in arrears are not disclosed to stockholders. C) Dividends in arrears applies to common stock. D) Dividends in arrears are legal liabilities.
177) A company has 10 million shares of $2 par common stock and 1 million shares of $4 par preferred stock outstanding. The preferred stock has an 8% dividend rate. The board of directors declares $300,000 in total dividends for the year. Which of the following is correct if the preferred stockholders have a cumulative dividend preference? A) Preferred stockholders will receive the entire $300,000 and they must also be paid $20,000 before the end of the current accounting period; common stockholders will receive nothing. B) Preferred stockholders will receive $24,000 (or 8% of the total dividends); common stockholders will receive the remaining $276,000 (or $300,000 − $24,000). C) Preferred stockholders will receive the entire $300,000 and they must also be paid the remaining $20,000 sometime in the future before common stockholders will receive any dividends. D) Preferred stockholders will receive the entire $300,000, but will receive nothing more in the future relating to this dividend declaration; common stockholders will receive nothing.
178) Flanders Company has 18 million shares of $2 par value common stock and 2 million shares of $4 par value preferred stock outstanding. The preferred stock has an 8% dividend rate. The company declares $1,200,000 in total dividends for the year. Which of the following is correct if dividends in arrears are $60,000?
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A) Preferred stockholders will receive $700,000; common stockholders will receive $500,000. B) Preferred stockholders will receive $120,000; common stockholders will receive $1,080,000. C) Preferred stockholders will receive $640,000; common stockholders will receive $560,000. D) Preferred stockholders will receive $180,000; common stockholders will receive $1,020,000.
179) Hopkins, Incorporated has 1,000 shares of common stock and 1,000 shares of preferred stock outstanding. The preferred stock has a cumulative dividend preference. Both classes of stock have a par value of $10. The preferred stock has a dividend rate of 6 percent. Hopkins failed to pay a dividend during the prior year. During the current year, the board of directors declares dividends totaling $2,000. Accordingly, the company will distribute dividends in the amount of: A) $2,000 to the preferred shareholders. B) $1,000 to each class of shareholders. C) $1,200 to the preferred shareholders and $800 to the common shareholders. D) $1,600 to the preferred shareholders and $400 to the common shareholders.
180) Laurelhurst Company has 240,000 shares of preferred stock, 8% cumulative, $100 par value. It also has 2,800,000 shares of common stock, $0.01 par value. (The share information represents the numbers of shares issued and outstanding for both types of stock.) Dividends in arrears at the beginning of the year totaled $960,000. If Laurelhurst's board of directors declares a total dividend of $3,300,000 to be distributed to preferred and common stockholders, how much will be paid to the common stockholders? A) $2,880,000 B) $420,000 C) $2,340,000 D) $1,380,000
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181)
Brazee Company has the following paid-in capital:
Preferred stock, 6%, $5 par value, 100,000 shares authorized, 40,000 shares issued and outstanding Common stock, $9 par value, 300,000 shares authorized, 220,000 sharesissued and outstanding
$ 2,000,000 $ 1,980,000
If the company pays a $30,000 dividend and the preferred stock is noncumulative, what is the amount the common stockholders will receive? A) $30,000 B) $18,000 C) $19,800 D) $0
182)
Brazee Company has the following paid-in capital:
Preferred stock, 6%, $5 par value, 100,000 shares authorized, 40,000 shares issued and outstanding Common stock, $9 par value, 300,000 shares authorized, 220,000 sharesissued and outstanding
$ 2,000,000 $ 1,980,000
If the company pays a $70,000 dividend, and the preferred stock is cumulative and two years' dividends are in arrears, what is the amount the common stockholders will receive? A) $34,000 B) $46,000 C) $58,000 D) $70,000
183)
Brazee Company has the following paid-in capital:
Preferred stock, 6%, $5 par value, 100,000 shares authorized, 40,000 shares issued and outstanding Common stock, $9 par value, 300,000 shares authorized,
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220,000 sharesissued and outstanding
If the company pays a $200,000 dividend, and the preferred stock is cumulative and three years' dividends are in arrears, what is the amount the preferred stockholders will receive? A) $36,000 B) $48,000 C) $12,000 D) $108,000
184)
Preferred stockholders:
A) must receive dividends every year. B) have the right to receive dividends only in the years the board of directors declares dividends. C) have the right to receive dividends only if there are enough dividends to pay the common stockholders too. D) must receive more dividends per share than the common stockholders.
185) Before dividends can be paid to common stockholders, if the preferred stock is ________, any ________ must be paid to the preferred stockholders. A) cumulative; dividends in arrears B) current; interest owed C) cumulative; interest owed D) managing; dividends
186) Stockit Incorporated has 1,000 shares of 5%, $100 par value, cumulative preferred stock outstanding. In its first two years of business, Stockit did not declare a dividend. As a result, Stockit's balance sheets at the end of its first two years of business should:
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A) report Dividends Payable. B) report Dividends Arrears Payable. C) not report any Dividends Payable. D) report Dividends Expense.
187) When should a corporation record a liability for dividends in arrears on its cumulative preferred stock? A) When the dividends have been declared. B) When the corporation knows it will not be paying dividends. C) When recording year-end adjusting entries. D) Never.
188) Bank, Rupp & Baroque, Incorporated began on January 1, 2020 by issuing 100,000 shares of $1 par value common stock and 1,000 shares of $50 par value, 6% cumulative preferred stock. No dividends were declared in 2020 or 2021. Which of the following statements about this situation is correct? A) Dividends Payable should be reported on the December 31, 2020 balance sheet. B) Dividends Payable should be reported on the December 31, 2021 balance sheet. C) Dividends in arrears should be disclosed in the notes to the 2020 and 2021 financial statements. D) Dividends expense should be reported on the income statement for the year ended December 31, 2020.
189) Yamhill, Incorporated began on January 1, 2019 by issuing 200,000 shares of $1 par value common stock and 2,000 shares of $100 par value, 5%, cumulative preferred stock. No dividends were declared in 2019 or 2020. In 2021, Yamhill declared and paid the preferred stockholders and a $0.50 dividend to its common stockholders. Assuming all shares originally issued are outstanding, the total dividend declared and paid in 2021 equals:
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A) $130,000. B) $101,000. C) $110,000. D) $100,000.
190) On January 1, 2020, Bank & Rupp, Incorporated issued 100,000 shares of $1 par value common stock and 1,000 shares of $50 par value, 6%, cumulative preferred stock. No dividends were declared in 2020. In 2021, Bank & Rupp declared and paid the preferred stockholders and a $1 per share dividend to its common stockholders. Assuming all shares originally issued are outstanding, the total dividend paid to the preferred stockholders equals: A) $2,000. B) $6,000. C) $3,000. D) $1,000.
191) The Retained Earnings balance was $23,700 on January 1. Net income for the year was $19,300. If Retained Earnings had a credit balance of $25,400 after closing entries were made for the year, and if additional stock of $6,000 was issued during the year, what was the amount of dividends declared during the year? A) $17,600 B) $27,000 C) $25,300 D) $11,600
192) The Retained Earnings balance was $64,120 on January 1. Net income for the year was $50,680. If Retained Earnings had a credit balance of $66,640 after closing entries were made for the year, and if additional stock of $14,560 was issued during the year, what was the amount of dividends declared during the year?
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A) $48,160 B) $66,360 C) $65,240 D) $36,400
193)
A debit balance in Retained Earnings is: A) an indication of a contra-equity account. B) called an Accumulated Deficit. C) called a net loss. D) impossible.
194)
Which of the following statements about Retained Earnings is correct?
A) Retained Earnings represents cash available to pay dividends to stockholders. B) Retained Earnings cannot be restricted by loan covenants. C) Retained Earnings generally consists of cumulative net income less any net losses and dividends since inception. D) Retained Earnings is reduced by the par value of the common stock that is issued.
195)
Which of the following statements about stock dividends is correct? A) Stock dividends are reported on the income statement. B) Stock dividends are reported on the Statement of Stockholders' Equity. C) Stock dividends increase total stockholders' equity. D) Stock dividends decrease total stockholders' equity.
196) Which of the following line item amounts would be under the Retained Earnings column of a Statement of Stockholders' Equity?
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A) Net Income B) Stock Issuances C) Additional Paid-in Capital D) Treasury Stock
197) Creston Enterprises has common stock with a par value of $5. During the current year, it declared and paid dividends of $20,000. It sold an additional 2,000 shares of stock that had not been previously issued at $20 per share. In addition, it had net income of $100,000 for the year. What is the amount of change to its stockholders' equity for the year? A) $140,000 B) $90,000 C) $110,000 D) $120,000
198) Ferris Company reported the following on its balance sheet: total contributed capital of $186,000, treasury stock of $19,500 and totalstockholders’ equity of $237,500. Ferris had 1,000,000 authorized shares of its $0.01 par value common stock of which 200,000 were issued. What was the amount of additional paid-in capital reported in the balance sheet? A) $184,000 B) $2,000 C) $71,000 D) $51,500
199) Ferris Company reported the following on its balance sheet: total contributed capital of $186,000, treasury stock of $19,500 and totalstockholders’ equity of $237,500. Ferris had 1,000,000 authorized shares of its $0.01 par value common stock of which 200,000 were outstanding. What was the amount of Retained Earnings reported in the balance sheet?
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A) $184,000 B) $2,000 C) $71,000 D) $51,500
200) Ferris Company reported the following on its balance sheet: total contributed capital of $186,000, treasury stock of $19,500 and totalstockholders’ equity of $237,500. Ferris had 1,000,000 authorized shares of its $0.01 par value common stock of which 200,000 were outstanding. During the following year, Ferris Company earned net income of $75,000, issued 5,000 shares of $1 par common stock at an average market price of $44 per share, and declared dividends of $20,500. What amount was the totalstockholders’ equity reported on the balance sheet at the end of that year? A) $512,000 B) $406,000 C) $297,000 D) $532,500
201) The statement ofstockholders’ equity differs from the statement of retained earnings in that the statement of stockholders' equity: A) shows the effect of dividends declared. B) contains net income. C) contains the changes in contributed capital. D) contains a liability section.
202)
In its most basic form, the earnings per share ratio is calculated as:
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A) dividends paid on common stock divided by the average number of outstanding common shares. B) the difference between net income and preferred dividends divided by the average number of outstanding common shares. C) total dividends paid divided by the average number of total stock shares. D) net income divided by average stockholders' equity.
203) Which of the following reasons best explains why earnings per share (EPS) is such a popular measure to evaluate a company? A) EPS is an excellent measure of how efficiently long-lived assets are being utilized. B) EPS provides specific information about the ability of a company to repay its longterm debts. C) EPS makes it easy to compare one company with another. D) EPS provides information that investors can factor into their expectations about future dividends and stock prices.
204) Brandies, Incorporated reported net income of $11 million. At the beginning of the year, 4.3 million shares of common stock were outstanding and at the end of the year, 4.5 million shares were outstanding. No dividends were declared. The EPS is: A) $2.50. B) $2.44. C) $2.56. D) $1.25.
205) Brandies, Incorporated reported net income of $5.6 million. At the beginning of the year, 6.8 million shares of common stock were outstanding and at the end of the year, 7.2 million shares were outstanding. No dividends were declared. The EPS is:
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A) $0.80. B) $0.78. C) $0.83. D) $0.70.
206)
Corbett Company has the following information available from its accounting records:
Shares outstanding throughout the year Net income for current year Stockholders’ equity at beginning of year Stockholders’ equity at end of year
12,000 $ 112,000 $ 230,000 $ 280,000
The company has no preferred stock. What is the earnings per share? A) $0.80 B) $8.00 C) $9.33 D) $11.20
207)
Which one of the following statements about earnings per share (EPS) is correct?
A) The EPS ratio is important because it signals the ability of the company to pay future dividends, which investors factor into the stock price. B) Earnings per share (EPS) is generally reported in the balance sheet under stockholders' equity. C) Earnings per share (EPS) is the best way to compare the performance of different companies. D) EPS, in its basic form, is calculated by dividing net income by the average number of preferred shares issued.
208)
Comparing EPS across companies is not advised because:
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A) the number of shares outstanding may vary. B) EPS is not a meaningful measure. C) Retained Earnings may vary. D) the price per share may vary.
209)
EPS is a good predictor of: A) future interest costs. B) financial leverage. C) future cash receipts. D) future stock prices.
210)
An increase in EPS is an indicator of: A) higher profitability. B) lower profitability. C) lower financial leverage. D) lower return on equity.
211)
The return on equity ratio is calculated as: A) dividends paid divided by the average book value of stockholders' equity. B) net income divided by the average number of outstanding common shares. C) dividends divided by the average number of total shares. D) (net income less preferred dividends) divided by average common stockholders'
equity.
212) A company has net income of $8.95 million. Stockholders' equity at the beginning of the year is $32.30 million and, at the end of the year, it is $41.25 million. The only change to stockholders' equity came from net income. The return on equity ratio is approximately:
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A) 0.23. B) 0.24. C) 0.95. D) 6.39.
213) A company has net income of $5.6 million. Stockholders' equity at the beginning of the year is $32.55 million and, at the end of the year, it is $38.15 million. The only change to stockholders' equity came from net income. The return on equity ratio is approximately: A) 0.15. B) 0.16. C) 0.87. D) 6.31.
214) Sugar Snap Manufacturing has the following information available from its accounting records: Shares outstanding throughout the year Net income for current year Stockholders’ equity at beginning of year Stockholders’ equity at end of year
12,000 $ 56,000 $ 230,000 $ 280,000
The company has no preferred stock. What is the approximate return on equity? A) 20% B) 22% C) 25% D) 234%
215)
The return on equity ratio measures the:
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A) return stockholders receive in dividends for each dollar of their investment. B) return stockholders receive in dividends and stock price growth for each dollar of their investment. C) amount of income earned for each dollar of common stockholders' equity. D) amount earned by the company on each dollar obtained from equity and debt financing.
216)
Generally, a relatively high P/E ratio indicates: A) improvements in future profitability. B) diminished future profitability. C) a high level of debt financing. D) a high current return for shareholders of a company.
217)
ROE relates:
A) net income after subtracting preferred dividends to the average common stockholders' equity. B) total assets to the average common stockholders' equity. C) EPS to the average common stockholders' equity. D) net income after subtracting preferred dividends to the price per share.
218)
If a company's earnings per share and return on equity both increase:
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A) it could mean that net income is rising or it could mean that the number of outstanding shares is falling. The first is sustainable; the second cannot be continued indefinitely. B) it means that the company is becoming more profitable and stockholders will see greater returns. C) it means that the company's tax liability will rise in the future and cause a decline in profitability. D) it could mean that net income is rising or it could mean that the number of outstanding shares is falling. In either case, stockholders can expect greater future returns indefinitely.
219)
All else being equal, if net income decreases: A) EPS decreases and ROE increases. B) EPS and ROE both decrease. C) EPS increases and ROE decreases. D) EPS and ROE both increase.
220) A company has net income of $5.6 million and earnings per share of $2.00. Average common stockholders' equity is $32 million. The company's current stock price is $10 per share. What is its Price/Earnings (P/E) ratio? A) 0.2 B) 5.0 C) 0.175 D) 5.7
221) Taggart Company has a P/E ratio of 13 in year 2019 and 12.5 in 2020. In 2021, its P/E ratio is 19.5. The best way to interpret these data is to conclude that:
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A) the stock is overpriced and should be sold. B) the stock has great growth capacity and should be bought. C) other financial results and news should be examined to determine the cause of the P/E ratio change. D) the stock is underpriced and should be bought.
222)
If a company's P/E ratio suddenly decreases:
A) you should sell the stock as soon as possible. B) you should buy more of the stock to increase your average gain. C) the company probably announced higher earnings forecasts. D) the market must have reacted to some bad news that is expected to affect the company in the future.
223) If Capital, Incorporated’s P/E ratio is 12.5 and the company's stock price is $35.00 per share then the company's EPS is: A) $1.42. B) $2.80. C) $10.00. D) $0.80.
224) If Crystal Spring Company’s P/E ratio is 24 and the company's EPS is $.75, then the company's stock price is: A) $18.00. B) $12.75. C) $8.00. D) $3.13.
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225) A company originally issues 180,000 shares of stock at a price of $22; one year later the stock price is $40 per share, the number of outstanding shares is unchanged, and the company's net income for the year is $230,400. The P/E ratio at the end of the recent year is: A) 17.19. B) 24.22. C) 31.25. D) 1.28.
226) Barbur, Incorporated reported net income of $10.5625 million. During the year the average number of common shares outstanding was 3.25 million. The price of a share of common stock at the end of the year was $5. There were 500,000 shares of preferred stock outstanding on average and no dividends were declared and the preferred stock is noncumulative. The EPS is: A) $0.31. B) $3.01. C) $3.11. D) $3.25.
227) Barbur, Incorporated reported net income of $12 million. During the year the average number of common shares outstanding was 3 million. The price of a share of common stock at the end of the year was $5. There were 400,000 shares of preferred stock outstanding on average and no dividends were declared and the preferred stock is noncumulative. The EPS is: A) $0.80. B) $3.52. C) $3.72. D) $4.00.
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228) Barbur, Incorporated reported net income of $12 million. During the year the average number of common shares outstanding was 3 million. The price of a share of common stock at the end of the year was $6. There were 400,000 shares of preferred stock outstanding on average and no dividends were declared and the preferred stock is noncumulative. The Price/Earnings ratio is: A) 4.00. B) 1.50. C) 1.67. D) 6.50.
229) Barbur, Incorporated reported net income of $12 million. During the year the average number of common shares outstanding was 3 million. The price of a share of common stock at the end of the year was $5. There were 400,000 shares of preferred stock outstanding on average and no dividends were declared and the preferred stock is noncumulative. The Price/Earnings ratio is: A) 1.00. B) 1.25. C) 1.42. D) 6.25.
230) The information below was extracted from the most recent financial statements of Milton Technologies (in millions, except for stock price): Prior Year Total Assets Total Liabilities Net Income Common shares outstanding Market price of common stock
$ 347,000 112,000 65,000 30,000 $ 38.00
Current Year $ 411,000 166,000 89,000 35,000 $ 42.00
What is the EPS for the company's stock for the current year?
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A) $2.74 B) $2.37 C) $2.54 D) $2.97
231) The information below was extracted from the most recent financial statements of Milton Technologies (in millions, except for stock price): Prior Year Total Assets Total Liabilities Net Income Common shares outstanding Market price of common stock
$ 347,000 112,000 65,000 30,000 $ 38.00
Current Year $ 411,000 166,000 89,000 35,000 $ 42.00
What is the company's return on equity (ROE) for the current year? A) 39.3% B) 21.7% C) 37.1% D) 36.3%
232) The information below was extracted from the most recent financial statements of Milton Technologies (in millions, except for stock price): Prior Year Total Assets Total Liabilities Net Income Common shares outstanding Market price of common stock
$ 347,000 112,000 65,000 30,000 $ 38.00
Current Year $ 411,000 166,000 89,000 35,000 $ 42.00
What is the P/E ratio for the company's stock for the current year?
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A) 17.7 B) 15.3 C) 14.2 D) 13.9
233)
If Squid Roe Company's P/E ratio is 12, which of the following statements is correct? A) Investors are willing to pay 12 times the current year's earnings per share of stock. B) Squid Roe's stockholders earned 12 times the owners' average investment. C) Squid Roe's average stockholders' equity is 12 times its earnings. D) Squid Roe's net income was 12 times its stockholders' equity.
234)
Earnings per share (EPS) can be affected by all of the following except: A) how the company chose to finance its operations. B) the method of depreciation. C) the inventory costing method. D) classification of debt as current or long-term.
235) As of November 29, it appears that Notel will report earnings per share (EPS) of $1.15 for the quarter ended November 30. Which of the following events would cause this EPS number to decrease, assuming the event occurs the morning of November 30? A) The company pays a supplier for inventory bought on account. B) The company declares, but does not pay, a cash dividend. C) The company purchases 10 shares of common stock in another company. D) The company reissues the treasury stock it holds.
236)
All other things being equal, when a company repurchases its common stock:
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A) EPS decreases and ROE increases. B) EPS increases and ROE stays the same. C) EPS increases and ROE decreases. D) EPS and ROE both increase.
237) When a company uses excess cash to buy back some of its outstanding common stock, which of the following ratios will be affected directly in the manner described below? A) Return on equity (ROE) will decrease. B) Earnings per share (EPS) will increase. C) The Price Earnings (PE) ratio will increase. D) There will not be any effect on the three ratios.
238)
Which of the following statements about business forms is correct? A) A sole proprietorship is an unincorporated business owned by one person. B) All partnerships are owned by only two people. C) A corporation is not a legal entity. D) An LLC (or limited liability company) has the same tax treatment as a corporation.
239) At the end of the accounting period, but before closing entries are made, Doug, the proprietor of Pepper’s Cafe, has a debit balance of $12,250 in his drawing account and a credit balance of $36,150 in his capital account. Which of the following statements is correct? A) Doug's net income was $23,900. B) During the closing process, Doug will debit the drawing account for $12,250 and credit the capital account for $12,250. C) During the closing process, Doug will debit the capital account for $12,250 and credit the drawing account for $12,250. D) Doug's Retained Earnings account was $23,900.
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240) At the end of the accounting period, but before the closing entries have been recorded, Doug, the proprietor of Pepper's Cafe, has a debit of $25,750 in his drawing account and a credit of $133,100 in his capital account. If his capital account has a credit balance of $144,900 after the closing, what was his net income? A) $11,800 B) $37,550 C) $119,150 D) $13,950
241) At the end of the accounting period, but before the closing entries have been recorded, Doug, the proprietor of Pepper’s Cafe, has a debit of $12,250 in his drawing account and a credit of $63,400 in his capital account. If his capital account has a credit balance of $68,950 after the closing, what was his net income? A) $5,550 B) $17,800 C) $56,700 D) $6,700
242)
Limited liability companies (LLCs): A) are like corporations in that the owners have limited liability. B) are like partnerships in that the owners have unlimited liability. C) have the tax treatment of corporations. D) have the tax treatment of sole proprietorships.
243) You form a partnership with your best friend. You have contributed 65% of the capital and can claim 65% of the net income. At the end of the first year, you discover that your partner has run up $40,000 in debt using the business' credit card. The maximum you could be liable for is:
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A) $0. B) $40,000. C) $20,000. D) $26,000.
244)
One of the advantages of a partnership is: A) limited liability. B) the salaries of the partners can be written off as an expense. C) ease of formation. D) income tax is paid by the business.
245) Jackson and O'Neill form a partnership that produces gates. Jackson provides $30,000 of capital while O'Neill contributes $90,000 of capital; they agree to split net income by the same proportion. The partnership's net income is $80,000 for the first year. They did not draw any income out of the business or add any additional capital during the first year. At the end of the year, the partners' equity is: A) $70,000 for Jackson and $130,000 for O'Neill for a total of $200,000. B) $200,000 minus income tax expense for the partnership. C) $200,000 minus the income tax paid by each partner. D) $50,000 for Jackson and $150,000 for O'Neill for a total of $200,000.
246) MacDowell Corporation has 100,000 shares outstanding with a par value of $2. On March 3, it declared a 100% stock dividend, when its stock price was $15. As a result of this stock dividend, retained earnings: A) decreased by $1,500,000. B) decreased by $200,000. C) increased by $1,500,000. D) increased by $100,000.
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247) Morris Lest recorded the closing entries for his sole proprietorship. The entry to close the M. Lest, Drawings account requires a: A) debit to M. Lest, Capital. B) debit to M. Lest, Drawings. C) debit to M. Lest, Retained Earnings. D) credit to M. Lest, Capital.
248) Which of the following line items are not found on a sole proprietorship's statement of owner's equity? A) Withdrawals B) Retained Earnings C) Capital D) Net income
249) Mr. Big received a $5,000 payment from his sole proprietorship, Buy & Large, for work performed by Mr. Big. The payment should be recorded with a $5,000: A) debit to M. Big, Drawings. B) debit to Salary Expense. C) debit to M. Big, Capital. D) credit to Salary Expense.
250)
An increase to Rich's Farm's account called Barry Rich, Capital would occur when: A) Barry Rich receives cash from Rich's Farm. B) Barry Rich invests cash in Rich's Farm. C) Rich's Farm pays Barry Rich a dividend. D) Rich's Farm issues common stock to Barry Rich.
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251)
A partnership: A) has two or more co-owners. B) is a not-for-profit business. C) is incorporated. D) is a separate legal entity.
252)
Which of the following organizations is required by law to apply for a charter? A) Sole proprietorship B) Partnership C) Any for-profit business D) Corporation
253) The Dewie, Cheatum, and Howe partnership paid each of the partners $100,000 for the work they performed during the year. As a result of these payments, the closing process will include a: A) credit to Salary Expense. B) credit to each partner's Capital account. C) credit to each partner's Drawing account. D) debit to Salary Expense.
254)
An LLC is different from a corporation in that an LLC has: A) a "distribution of net income" section in its financial statements. B) Retained Earnings in its financial statements. C) Income Tax Expense in its financial statements. D) Dividends in its financial statements.
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255) A corporation had 50,000 shares of $20 par value common stock outstanding. The board of directors declared and issued a 50% stock dividend. The market value of the stock was $27 per share. What is the journal entry to record this stock dividend? A) Debit Retained Earnings and credit Common Stock for $675,000. B) Debit Retained Earnings and credit Common Stock for $500,000. C) Debit Retained Earnings and credit Cash for $675,000. D) No entry is made to record the stock dividend.
256) King Corporation has one million shares outstanding with a par value of $5. On August 24 of this year, it issued a 10% stock dividend when its stock price was $25. As a result of this stock dividend, retained earnings: A) increased by $500,000. B) increased by $2,500,000. C) decreased by $500,000. D) decreased by $2,500,000.
257) A corporation had 10,000 shares of $10 par value common stock outstanding. The board of directors declared and issued a 10% stock dividend. The market value of the stock was $20 per share. What is the journal entry to record this stock dividend? A) Debit Retained Earnings and credit Common Stock for $20,000. B) Debit Retained Earnings and credit Common Stock for $10,000. C) Debit Retained Earnings for $20,000, credit Common Stock for $10,000, and credit Additional Paid-in Capital for $10,000. D) No entry is made to record the stock dividend.
258)
The term "capitalizing retained earnings" refers to:
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A) transferring from Retained Earnings to Common Stock the amount of a stock dividend. B) the recording of all costs to get an asset in place and ready for its intended use. C) the issuance of common stock at a price in excess of par value. D) stockholders contributing additional capital to a corporation.
259) The journal entry to record a large stock dividend includes a debit to Retained earnings and a credit to: A) Retained Earnings. B) Common Stock. C) Cash. D) Additional Paid-in Capital.
260)
The journal entry to record a large stock dividend includes a: A) debit to Retained Earnings. B) credit to Cash. C) debit to Common Stock. D) credit to Additional Paid-in Capital.
261) Which of the following accounts is used to record a small stock dividend on common stock but is not used to record a large stock dividend on common stock? A) Retained Earnings B) Common Stock C) Additional Paid-In Capital D) Cash
262)
Why is Additional Paid-In Capital recorded for a small stock dividend?
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A) Because small stock dividends are recorded at market value. B) Because large stock dividends are recorded at par value. C) Because small stock dividends are recorded at par value. D) Because large stock dividends are recorded at market value.
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Answer Key Test name: Chap 11_7e 1) FALSE To protect everyone's rights, the creation and oversight of corporations are tightly regulated by law. Corporations are created by submitting an application to a state government (not the federal government). 2) TRUE Interest on debt is tax deductible; whereas, dividends on stock are not tax deductible. 3) TRUE The two main ways that corporations finance their operations are by issuing stock (equity financing), or by borrowing (debt financing). 4) TRUE Treasury Stock reports shares that were previously issued to and owned by stockholders but have been reacquired and are now held by the corporation. 5) FALSE The very first issuance of a company's stock to the public is called an initial public offering, or IPO; some companies remain private. A corporation's charter indicates the maximum number of shares of stock that the corporation is allowed to issue (also referred to as the number of authorized shares). 6) FALSE The par value is an insignificant value per share of capital stock specified in the charter. Par value is a legal concept and is not related in any way to the market value of the company's stock. Version 1
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7) FALSE When a company reissues shares previously reported as treasury stock, it does not report a gain or loss on sale, even if it issues the shares for more or less than they cost when the company reacquired them. GAAP does not permit a corporation to report income or losses from investments in its own stock because transactions with the owners are not considered profit-making activities. 8) FALSE Dividends are not an obligation of the corporation and become a liability only when the board of directors formally declares a dividend. 9) FALSE Investors acquire common stock because they expect a return on their investment. This return can come in two forms: dividends and increases in stock price. Some investors prefer to buy stocks that pay little or no dividends (called a growth investment) because companies that reinvest the majority of their earnings tend to increase their future earnings potential, along with their stock price. 10) TRUE The corporation must have accumulated a sufficient amount of Retained Earnings to cover the amount of the dividend. State laws often restrict dividends to the balance in Retained Earnings. 11) TRUE On the declaration date, the company's board of directors formally approves the dividend, thereby creating a legal liability for the corporation. 12) FALSE A stock dividend, which results in additional shares of stock issued, will result in a market reaction which will lower the market price per share. Version 1
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13) FALSE A stock split does not require a journal entry, so total stockholders' equity does not change. A stock split involves a change in the par value per share and a proportionate change in the number of shares authorized; the total par value across all shares does not change. 14) FALSE Dividends payable represent dividends which have been declared by the board of directors but have not yet been paid. Dividends in arrears represent the cumulative unpaid dividends on cumulative preferred stock. These dividends must be paid before any common dividends can be paid. 15) TRUE Under GAAP, preferred stock is always included in stockholders' equity. Under IFRS, preferred stock is generally included in stockholders' equity unless the issuing company is contractually obligated to pay dividends or redeem the stock at a future date. In this case, the preferred stock is classified as a liability. 16) FALSE Dividends are not liabilities until they are declared by the board of directors. 17) TRUE A stock dividend reduces Retained Earnings. A stock split is an increase in the total number of authorized shares with a pro rata decrease in the par value of the shares. No journal entry is needed as there is no change in stockholders' equity. 18) TRUE A higher return on equity ratio means that stockholders are likely to enjoy greater returns. Version 1
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19) FALSE Earnings per share (EPS) reports how much profit is earned for each share of common stock outstanding. A higher ratio means greater profitability. 20) TRUE The Price/Earnings (P/E) ratio measures how many times more than the current year's earnings investors are willing to pay for a company's common stock. A higher number means investors anticipate an improvement in the company's future results. 21) FALSE Corporations are taxed on their net income, whereas the profits of a sole proprietorship are taxed to the owner. 22) B The law recognizes a corporation as a separate legal entity. Its stock can be purchased in large or small amounts, it only has to issue one type of stock, and it may or may not pay dividends. 23) D Creditors have no legal claim on the personal assets of stockholders like they do on the personal assets belonging to owners of sole proprietorships and partnerships. In other words, the corporate form limits the legal liability of its owners. 24) D
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The law recognizes a corporation as a separate legal entity. Ownership in a corporation can be easily transferred, and a corporation can raise large amounts of money because investors can easily participate in the ownership of a corporation. Creditors have no legal claim on the personal assets of stockholders like they do on the personal assets belonging to owners of sole proprietorships and partnerships. In other words, the corporate form limits the legal liability of its owners. 25) D Corporate earnings are distributed as dividends, while bonds and other interest-bearing liabilities return interest to investors. 26) C Residual claim means that, if the company ceases operations, stockholders share in any assets remaining after creditors have been paid. 27) D Residual claim means that, if the company ceases operations, stockholders share in any assets remaining after (rather than before) creditors have been paid. 28) B Preemptive rights mean that, to retain their ownership percentages, existing stockholders may be given the first chance to buy newly issued stock before it is offered to others. 29) A The law recognizes a corporation as a separate legal entity. Ownership in a corporation can be easily transferred, and a corporation can raise large amounts of money because investors can easily participate in the ownership of a corporation.
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30) A The law recognizes a corporation as a separate legal entity. Ownership in a corporation can be easily transferred, and a corporation can raise large amounts of money because investors can easily participate in the ownership of a corporation. 31) D A corporation exists separate and apart from its owners, which means it doesn't die when its owners die. 32) C Because laws vary from state to state, you might decide to create a corporation in a state other than the one in which it operates. 33) B Corporate law is dictated by the state in which the corporation is established. Corporate law varies from state to state. More than half of the largest corporations in America are incorporated in Delaware because it has some of the most favorable laws for establishing corporations. 34) A Corporate law is dictated by the state in which the corporation is established. If the application to create a corporation is approved, the state issues a charter, also called the articles of incorporation, which spells out information about the corporation such as its name, address, nature of business, and ownership structure. 35) A The corporate form is so popular, in part, because it limits the legal liability of its owners. 36) D Version 1
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In the most basic form, a corporation must have one type of stock, appropriately called common stock. 37) C Common stockholders have a residual (rather than primary) claim. If the company ceases operations, stockholders share in any assets remaining after (rather than before) creditors have been paid. 38) C Interest on debt is tax deductible. Debt must be repaid or refinanced. Interest must be paid on debt. Debt does not change stockholder control. 39) D Debt does not change stockholder control. In contrast, a stock issue gives new stockholders the right to vote and share in the earnings, diluting existing stockholders' control. The decision to pursue additional equity or debt financing depends on the circumstances. Equity does not have to be repaid; dividends are optional. Interest on debt is tax deductible. Dividends on stock are not tax deductible. 40) C Equity does not have to be repaid. Debt must be repaid or refinanced. Dividends are optional. Interest must be paid on debt. 41) C Debt does not change stockholder control. Interest on debt is tax deductible. Debt must be repaid or refinanced. Interest must be paid on debt. 42) B Equity does not have to be repaid. Debt must be repaid or refinanced. Dividends are optional. Interest must be paid on debt. 43) D Version 1
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Debt does not change stockholder control. Interest on debt is tax deductible. 44) D The stockholders' equity section of the balance sheet includes Contributed Capital, Retained Earnings, Treasury Stock, and Accumulated Other Comprehensive Income (Loss). Dividends are reported on the statement of retained earnings or on the statement of stockholders' equity. 45) A When a company reacquires its own stock, Treasury Stock, a contrastockholders' equity account, increases and Cash, an asset account, decreases for the cost of the treasury stock, which in this case is $40,000 (or 2,000 shares × $20 per share). The increase in the contrastockholders' equity account decreases stockholders' equity. The Common Stock and Retained Earnings accounts are not affected. Equity transactions never result in a gain or loss. 46) A Treasury Stock reports shares that were previously issued to and owned by stockholders but have been reacquired and are now held by the corporation. The current number of shares of treasury stock equals the 10.0 million that were bought back. 47) A Treasury Stock reports shares that were previously issued to and owned by stockholders but have been reacquired and are now held by the corporation. The current number of shares of treasury stock equals the 3 million that were bought back. 48) D
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Accumulated Other Comprehensive Income (Loss) is a component of stockholders' equity on the balance sheet. 49) A Stockholders' equity = Contributed capital (that is, the amount of capital the company received from investors' contributions, in exchange for the company's common stock and preferred stock) + Retained earnings − Treasury stock (at cost). 50) D Contributed capital reports the amount of capital the company received from investors' contributions, in exchange for the company's common stock and preferred stock. For this reason, contributed capital represents paid-in capital. Retained Earnings reports the cumulative amount of net income earned by the company less the cumulative amount of dividends since the corporation was first organized. Retained Earnings represents earned (rather than contributed) capital. 51) B Total Stockholders' Equity = Contributed Capital + Retained Earnings − Treasury Stock = $54,000 + $117,000 − $32,400 = $138,600 Note that Common stock is part of contributed capital. 52) B Authorized shares are the maximum number of shares of capital stock of a corporation that can be issued, as specified in the charter. This corporation has 39 million shares authorized. 53) B
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Authorized shares are the maximum number of shares of capital stock of a corporation that can be issued, as specified in the charter. This corporation has 20 million shares authorized. 54) A Issued shares are the shares of stock that have been distributed by the corporation. This corporation has 27 million shares issued. 55) A Issued shares are the shares of stock that have been distributed by the corporation. This corporation has 12 million shares issued. 56) D Outstanding shares are issued shares that are currently held by stockholders and not the corporation itself. This corporation has 11.0 million shares outstanding (or 16 million shares issued − 5.0 million shares of treasury stock). 57) D Outstanding shares are issued shares that are currently held by stockholders and not the corporation itself. This corporation has 9 million shares outstanding (or 12 million shares issued − 3 million shares of treasury stock). 58) B Outstanding shares = Shares issued − Shares held in treasury = 196,000 − 14,000 = 182,000 59) A Shares outstanding = Shares issued − Treasury shares = 140,000 − 14,000 = 126,000 60) B
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Issued shares are the shares of stock that have been distributed by the corporation. Outstanding shares are shares that are currently held by stockholders (not the corporation itself). Treasury shares are issued shares that have been reacquired by the company. As such, issued stock includes outstanding stock and treasury stock. 61) A Authorized shares are the maximum number of shares of capital stock of a corporation that can be issued, as specified in the charter. As a result, the number of shares authorized must be greater than or equal to the number of shares issued and/or outstanding. 62) B Prior to this issuance, an investor with 200,000 of the 8 million shares outstanding has an ownership percentage of 2.5% (or 200,000 ÷ 8,000,000). After the issuance, an investor with 200,000 of the 10 million shares outstanding has an ownership percentage of only 2% (or 200,000 ÷ 10,000,000). 63) B The par value is an insignificant value per share of capital stock specified in the charter. 64) B The concept of par value originated at a time when it was needed to prevent stockholders from removing the contributed capital of a business. Current laws and regulations prevent this from occurring, so par value no longer has a business purpose. 65) A The first issuance of a company's stock to the public is called an initial public offering, or IPO.
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66) C Contributed capital is the amount of capital the company received from investors’ contributions, in exchange for the company’s common stock and preferred stock. This corporation has $52,500 of contributed capital. 67) C Contributed capital is the amount of capital the company received from investors' contributions, in exchange for the company's common stock and preferred stock. This corporation has $126,000 of contributed capital. 68) C Contributed capital is the amount of capital the company received from investors' contributions, in exchange for the company's common stock and preferred stock. The average issue price of this company's common stock is $15 per share [or (par value of $336,000 + additional paid-in capital of $168,000) divided by the 33,600 shares issued]. 69) D Proceeds from stock issuance that exceed par are credited to Additional Paid-in Capital. The amount representing par value is credited to the Common Stock account. 70) C The entry to record the issuance of 1 million shares of common stock with a par value of $0.18 for $16.60 a share includes a debit to Cash for $16,600,000 (or 1,000,000 shares × issue price of $16.60 per share), a credit to Common Stock for $180,000 (or 1,000,000 shares × par value of $0.18 per share), and a credit to Additional Paid-in Capital for $16,420,000 [or 1,000,000 shares × (issue price of $16.60 per share − par value of $0.18 per share)]. 71) C
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The entry to record the issuance of 1 million shares of common stock with a par value of $0.02 for $15 a share includes a debit to Cash for $15,000,000 (or 1,000,000 shares × issue price of $15.00 per share), a credit to Common Stock for $20,000 (or 1,000,000 shares × par value of $0.02 per share), and a credit to Additional Paid-in Capital for $14,980,000 [or 1,000,000 shares × (issue price of $15 per share − par value of $0.02 per share)]. 72) B Since the common stock does not have a par or stated value, the entry includes a debit to Cash and a credit to Common Stock for $16.00 million (or 1 million shares × issue price of $16.00 per share). 73) B Since the common stock does not have a par or stated value, the entry includes a debit to Cash and a credit to Common Stock for $15 million (or 1 million shares × issue price of $15.00 per share). 74) D Ohio Corporation would not record a journal entry on its books. Ms. Duffy received cash for the shares and Mr. Truesdale received stock for the cash he paid. Ohio Corporation did not receive or pay anything. These transactions involve only the owners of the company and not the corporation itself. (Remember the separate entity assumption, which states that owners' transactions are recorded only if they directly involve the corporation.) 75) D
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To encourage employees to work hard for a corporation, employee pay packages often include a combination of base pay, cash bonuses, and stock options. Stock options give employees the option of acquiring the company's stock at a predetermined price, often equal to the then-current market price. Accounting rules require that, at the time the company grants stock options (rather than when the stock options are exercised), an expense must be reported for the estimated cost associated with stock options, even if the option price equals the current stock price. 76) D A corporation may want to repurchase its stock from existing stockholders to send a signal to investors that the company itself believes its own stock is worth acquiring, obtain shares that can be reissued as payment for purchases of other companies, obtain shares to reissue to employees as part of employee stock purchase plans, and reduce the number of outstanding shares to increase per-share measures of earnings and stock value. The repurchase of stock decreases (rather than increases) the number of shares outstanding. 77) B Treasury stock is not an asset. It is a permanent account that is reported as a contra-equity account, subtracted from total stockholders' equity on the balance sheet. 78) D The entry to record the reissuance of treasury stock is not impacted by the par value of the stock. 79) C The stock repurchase would be recorded with a debit to Treasury Stock and a credit to Cash for $378,000 (or 3,000 shares × cost of $126 per share). Version 1
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80) B Purchasing treasury stock increases the account Treasury Stock, a contra-stockholders' equity account, and decreases the account Cash, an asset account. An increase in a contra-stockholders' equity account decreases stockholders' equity. There is no effect on total liabilities. 81) C Common Stock Additional Paid-in Capital Retained Earnings
$ 840,000 196,000 420,000 1,456,000
Less: Treasury Stock Total Stockholders’ Equity
56,000 $ 1,400,000
82) B The repurchase of stock is recorded with a debit to Treasury Stock and a credit to Cash for $17,000,000 (or 200,000 shares × cost of $85 per share). 83) B The repurchase of stock is recorded with a debit to Treasury Stock and a credit to Cash for $16,000,000 (or 200,000 shares × cost of $80 per share). 84) A When a company reissues shares previously reported as treasury stock, it does not report a gain or loss on sale, even if it issues the shares for more or less than they cost when the company reacquired them. Treasury stock is not an asset. It is a permanent account that is reported as contraequity, subtracted from total stockholders' equity. Outstanding shares are issued shares that are currently held by stockholders and not the corporation itself. Treasury stock is issued, but is not outstanding. 85) D Version 1
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When a company reissues shares previously reported as treasury stock, it does not report a gain or loss on sale, even if it issues the shares for more or less than they cost when the company reacquired them. 86) D If the corporate charter does not specify a par value for the stock, the total proceeds from the stock issuance will be entered in the Common Stock account; that transaction would not include an Additional Paid-in Capital account. The entries to record the issuance of par value stock at a price greater than the par value, the reissuance of treasury stock at a price less than the price paid when the stock was reacquired, and the reissuance of treasury stock at a price greater than the price paid when the stock was reacquired all include an Additional Paid-in Capital account. 87) C The stock reissue would be recorded with a debit to Cash for $25.60 million (or 316,000 shares × $81 per share), a credit to Treasury Stock for $19.28 million (or 316,000 shares × $61 per share), and a credit to Additional Paid-in Capital for $6.32 million [or 316,000 shares × ($81 per share − $61 per share)]. 88) C The stock reissue would be recorded with a debit to Cash for $39 million (or 600,000 shares × $65 per share), a credit to Treasury Stock for $27 million (or 600,000 shares × $45 per share), and a credit to Additional Paid-in Capital for $12 million [or 600,000 shares × ($65 per share − $45 per share)]. 89) B The entry to record the repurchase includes a debit to Treasury Stock and a credit to Cash for $64,000, the amount paid to reacquire the stock.
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90) B The reissuance of stock is recorded with a debit to Cash for $40,000 (or 2,000 shares × selling price of $20 per share), a credit to Treasury Stock for $32,000 (or 2,000 shares × the cost of $16 per share), and a credit to Additional Paid-in Capital for $8,000 [or 2,000 shares × (selling price of $20 per share − cost of $16 per share)]. 91) A The stock reissue would be recorded with a debit to Cash for $5,120,000 (or 320,000 shares × selling price of $16 per share), a debit to Additional Paid-in Capital for $160,000 [or 320,000 shares × (selling price of $16 per share − cost of $16.50 per share)], and a credit to Treasury Stock for $5,280,000 (or 320,000 shares × cost of $16.50 per share). 92) A The stock reissue would be recorded with a debit to Cash for $3,600,000 (or 600,000 shares × selling price of $6 per share), a debit to Additional Paid-in Capital for $300,000 [or 600,000 shares × (selling price of $6 per share − cost of $6.50 per share)], and a credit to Treasury Stock for $3,900,000 (or 600,000 shares × cost of $6.50 per share). 93) C Debit Cash for $500,000 (or 10,000 shares × $50 per share), debit Additional Paid-in Capital for $280,000 [or 10,000 shares × (cost of $78 per share − sales price of $50 per share)], and credit Treasury Stock for $780,000 (or 10,000 shares × cost of $78 per share). 94) A
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When a company issues stock to the public, repurchases its stock, or reissues the purchased shares, the transaction is between the issuing corporation and an investor. As such, the transactions are recorded in the accounting records of the corporation. However, when an investor exchanges shares for cash provided by other investors, the corporation is not directly affected. These transactions involve only the owners of the company and not the corporation itself and do not affect the corporation’s accounting records. 95) B Contributed capital reports the amount of capital the company received from investors' contributions, in exchange for the company's common stock and preferred stock. For this reason, contributed capital represents paid-in capital. It is reported in the stockholders' equity section of the balance sheet. 96) B Treasury stock is a contra-equity account and is reported in the stockholders' equity section of the balance sheet. 97) A Accumulated Other Comprehensive Income (Loss) reports unrealized gains and losses, which are temporary changes in the value of certain assets and liabilities the company holds. They can relate to pensions, foreign currencies, and financial investments. 98) A The number of shares outstanding equals the number of shares issued minus the number of shares bought back by the company. The number of shares authorized is the maximum number of shares the company is allowed to sell. 99) A Version 1
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The number of shares issued is the number given by the company to its stockholders in exchange for cash (or other resources) contributed by stockholders to the company. 100) D Par value is an insignificant value per share of capital stock specified in the charter. 101) B Since this was no-par value common stock, the entry should have included a debit to Cash and a credit to Common Stock for $200,000. The correct entry was recorded. 102) A If a company has issued stock previously, additional issuances of new stock by the company are called seasoned new issues. 103) B The entry should have included a debit to Cash for $200,000, a credit to Common Stock for $20,000 (or 20,000 shares × par value of $1 per share), and a credit to Additional Paid-In Capital for $180,000 [or 20,000 shares × (issue price of $10 − par value of $1 per share)]. As a result of the entry that was recorded, the Common Stock account is overstated and the Additional Paid-In Capital was understated. 104) A When a company issues stock to the public, the transaction is between the issuing corporation and an investor. After this initial stock issuance, an investor can exchange shares for cash provided by other investors without directly affecting the corporation. These transactions involve only the owners of the company and not the corporation itself. 105) C Version 1
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When a company issues stock to the public, the transaction is between the issuing corporation and an investor. After this initial stock issuance, an investor can exchange shares for cash provided by other investors without directly affecting the corporation. These transactions involve only the owners of the company and not the corporation itself. 106) A To encourage employees to work hard for a corporation, employee pay packages often include a combination of base pay, cash bonuses, and stock options. Stock options give employees the option of acquiring the company's stock at a predetermined price, often equal to the then-current market price. 107) D To encourage employees to work hard for a corporation, employee pay packages often include a combination of base pay, cash bonuses, and stock options. Stock options give employees the option of acquiring the company's stock at a predetermined price, often equal to the then-current market price. 108) D A corporation may want to repurchase its stock from existing stockholders to (1) send a signal to investors that the company itself believes its own stock is worth acquiring, (2) obtain shares that can be reissued as payment for purchases of other companies, (3) obtain shares to reissue to employees as part of employee stock purchase plans, and (4) reduce the number of outstanding shares to increase per-share measures of earnings and stock value. 109) A
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The purchase of treasury stock would increase Treasury Stock, a contraequity account, and decrease Cash, an asset. Assets = Liabilities + Stockholders' Equity [$280,000 − (1,000 shares × $14 per share)] = $168,000 + [$112,000 − (1,000 shares × $14 per share)] $266,000 = $168,000 + $98,000 110) B The purchase of treasury stock would increase Treasury Stock, a contraequity account, and decrease Cash, an asset. The increase in the contraequity account, Treasury Stock, would decrease stockholders’ equity. Stockholders' Equity = Common stock + Additional paid-in capital − Treasury stock + Retained earnings = $56,000 + $84,000 − $28,000 + $140,000 = $252,000 111) A The stock reissue would be recorded with a debit to Cash for $20,000, a credit to Treasury Stock for $16,000 (or 2,000 shares × cost of $8 per share), and a credit to Additional Paid-in Capital for $4,000 (or $20,000 − $16,000). Total stockholders’ equity would increase by $20,000 (or $16,000 + $4,000). 112) A The stock reissue would be recorded with a debit to Cash for $20,000, a credit to Treasury Stock for $16,000 (or 2,000 shares × cost of $8 per share), and a credit to Additional Paid-in Capital for $4,000 (or $20,000 − $16,000). Ending balance of treasury stock = Beginning balance − Cost of shares reissued = $24,000 − $16,000 = $8,000 113) D Version 1
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Investors acquire common stock because they expect a return on their investment. This return can come in two forms: dividends and increases in stock price. Some investors prefer to buy stocks that pay little or no dividends (called a growth investment) because companies that reinvest the majority of their earnings tend to increase their future earnings potential, along with their stock price. Rather than wait for growth in stock value, other investors, such as retired people who need a steady income, prefer to receive their return in the form of dividends. These people often seek stocks that consistently pay dividends (called an income investment). 114) B Some investors prefer to buy stocks that pay little or no dividends (called a growth investment) because companies that reinvest the majority of their earnings tend to increase their future earnings potential, along with their stock price. 115) A Rather than wait for growth in stock value, other investors, such as retired people who need a steady income, prefer to receive their return in the form of dividends. These people often seek stocks that consistently pay dividends (called an income investment). 116) D State laws often restrict dividends to the balance in Retained Earnings. A company may be further restricted by clauses in its loan agreements that require an even larger minimum balance in Retained Earnings. If the company were to violate such a loan covenant, a lender could require renegotiation of the loan and possibly demand its immediate repayment. 117) A
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Dividends are paid only on outstanding shares. There are 38,000 shares outstanding on August 3 (40,000 − 4,000 + 2,000), so the amount of dividends paid equals $190,000 (or $5 per share × 38,000 outstanding shares). 118) B The declaration date marks the official approval of the dividend by the board of directors and the date the company becomes liable for paying the dividend to shareholders. This date precedes the date of record, at which time the corporation finalizes its list of shareholders. The date of record is followed by the date of payment where dividends are disbursed to shareholders. 119) B The payment of a dividend will decrease Cash, an asset, and Dividends Payable, a liability. 120) B The journal entry to record the dividend declaration includes a debit to Dividends and credit Dividends Payable for $73,800 (or 82,000 shares outstanding × dividend rate of $0.90 per share). 121) B The journal entry to record the dividend declaration includes a debit to Dividends and credit Dividends Payable for $67,200 (or 84,000 shares outstanding × dividend rate of $0.80 per share). 122) A On the declaration date, the company's board of directors formally approves the dividend, thereby creating a legal liability for the corporation. That liability is recorded with a debit to Dividends and a credit to Dividends Payable.
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123) B The entry to record the declaration of the dividend on February 16 includes a debit to Dividends and a credit to Dividends Payable for $1,106,700 (2,170,000 shares × $0.51 per share). 124) B The entry to record the declaration of the dividend on February 16 includes a debit to Dividends and a credit to Dividends Payable for $1,292,000 (1,900,000 shares × $0.68 per share). 125) D The record date (or date of record) is the cut-off date for determining the specific stockholders to be paid the dividend. No journal entry is recorded on this date. 126) C The entry to record the payment of the dividend on April 5 includes a debit to Dividends Payable and a credit to Cash for $2,584,000 (1,900,000 shares × $1.36 per share). 127) C The payment date is the date on which cash is disbursed to pay the dividend liability owed to each stockholder. The payment of dividends is recorded with a debit to Dividends Payable and a credit to Cash. 128) D When the dividend is declared, the stockholders' equity account, Dividends, is debited and the liability account, Dividends Payable, is credited. When the dividend is paid, the liability account, Dividends Payable, is debited and the asset account, Cash, is credited. The net effect of these entries is a decrease in assets and a decrease in stockholders' equity. There is no effect on the liability account since it cancels out between the two transactions. Version 1
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129) C When the dividend is declared, the stockholders' equity account, Dividends, is debited and the liability account, Dividends Payable, is credited. When the dividend is paid, the liability account, Dividends Payable, is debited and the asset account, Cash, is credited. As a result, the declaration and payment of dividends reduce the amount of cash available to invest in assets. Dividends, a temporary account, is closed into (and decreases) Retained Earnings at each accounting yearend. Dividends are paid only on outstanding shares. 130) D Although Nova has accumulated a sufficient amount of Retained Earnings to cover the amount of the dividend, it does not have sufficient cash to pay the dividend. Nova only has $20,000 of cash and should not declare a cash dividend of $100,000. 131) A A lender imposes dividend restrictions because it doesn't want to lend money to a corporation and then have the corporation pay it out in dividends to stockholders. 132) C On the declaration date, the company's board of directors formally approves the dividend, thereby creating a legal liability for the corporation. The dividend is accounted for by increasing Dividends Payable and increasing a temporary account called Dividends. 133) A
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On the declaration date, the company's board of directors formally approves the dividend, thereby creating a legal liability for the corporation. The dividend is accounted for by increasing Dividends Payable with a credit and increasing a temporary account called Dividends with a debit. 134) A The record date is the cut-off date for determining the specific stockholders to be paid the dividend. No journal entry is recorded on this date. 135) C The dividend is accounted for by increasing Dividends Payable with a credit and increasing a temporary account called Dividends with a debit. The Dividends account is closed at year-end by crediting the Dividend account and debiting Retained Earnings. 136) C Dividends are not an expense and do not affect net income on the income statement. Instead, dividends are a distribution of the company's prior earnings. The Dividends account is deducted from Retained Earnings when it is closed at year-end. Stock dividends are recorded by transferring an amount from Retained Earnings to contributed capital accounts. 137) B Stock dividends are recorded by transferring an amount from Retained Earnings to contributed capital accounts. This changes the composition of stockholders' equity, not the total amount, and has no effect on assets or liabilities. 138) D
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Stock dividends are recorded by transferring an amount from Retained Earnings to contributed capital accounts. This changes the composition of stockholders' equity, not the total amount, and has no effect on the company's total assets. 139) D Stock dividends are recorded by transferring an amount from Retained Earnings to contributed capital accounts. This changes the composition of stockholders' equity, not the total amount. 140) A Stock dividends are recorded by transferring an amount from Retained Earnings to contributed capital accounts. This changes the composition of stockholders' equity, not the total amount. 141) A Companies sometimes issue stock dividends to lower the market price per share of stock. Stock dividends are recorded by transferring an amount from Retained Earnings to contributed capital accounts. This changes the composition of stockholders' equity, not the total amount. 142) D Both a stock dividend and a cash dividend reduce Retained Earnings. However, stock dividends are recorded by transferring an amount from Retained Earnings to contributed capital accounts. This changes the composition of stockholders' equity, not the total amount. A stock split is not the same as a stock dividend; no journal entry is recorded for a stock split. 143) A
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Typically, a stock split involves revising the corporate charter (rather than recording a journal entry) to reduce the per-share par value of all authorized shares, so that the total par value across all shares is unchanged. 144) D Stock splits do not change any component of stockholders' equity, so no journal entry is required. 145) C Stock splits involve a decrease in the par value per share offset by an increase in the number of shares outstanding. Before the stock split, the company has 500,000 shares of $10 par value stock which is $5,000,000. After the stock split, the company has 1,000,000 shares of $5 par value common stock which is still $5,000,000. 146) C Stock splits involve a decrease in the par value per share offset by an increase in the number of shares outstanding. Before the stock split, the company has 600,000 shares of $10 par value stock which is $6,000,000. After the stock split, the company has 1,200,000 shares of $5 par value common stock which is still $6,000,000. 147) B Stock splits are not dividends. A stock split involves a decrease in the par value of the stock and an offsetting increase in the number of authorized shares. Retained Earnings is not affected. The company's financial position does not change and, as a result, no journal entry is needed. 148) C
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Both stock dividends and stock splits increase the number of shares outstanding and decrease the per-share market price. A key difference between them is that a stock dividend causes a reduction in Retained Earnings, whereas a stock split doesn't. 149) A Both stock dividends and stock splits increase the number of shares outstanding and decrease the per-share market price. Stock dividends are recorded by transferring an amount from Retained Earnings to contributed capital accounts. Typically, a stock split involves revising the corporate charter to reduce the per-share par value of all authorized shares, so that the total par value across all shares is unchanged. 150) D Both stock dividends and stock splits increase the number of shares outstanding and decrease the per-share market price. Stock dividends are recorded by transferring an amount from Retained Earnings to contributed capital accounts. If the board of directors expects that the company will struggle financially in the future, it will prefer a stock split because it doesn't reduce Retained Earnings, so it doesn't reduce the company's ability to declare cash dividends in the future. 151) B Typically, a stock split involves revising the corporate charter to reduce the per-share par value of all authorized shares, so that the total par value across all shares is unchanged. Stock dividends are recorded by transferring an amount from Retained Earnings to contributed capital accounts. 152) A
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Both stock splits and large stock dividends increase the number of shares outstanding. Only stock splits affect the par value per share. Only stock dividends require a journal entry to record the event. 153) B A large stock dividend (more than 25 percent of the company's outstanding stock) is recorded at par value; thus, the decrease in Retained Earnings equals the increase in the Common Stock account. A small stock dividend (less than 25 percent of the company's outstanding stock) is recorded at market value. 154) A Company executives give three possible explanations for stock dividends: (1) to lower the market price per share of stock, (2) to demonstrate commitment to stockholders while conserving cash during difficult times, and (3) to signal an expectation of significant future earnings. 155) C A company's board of directors may declare a stock dividend rather than a stock split to signal to financial statement users that the company expects significant future earnings (which will replenish the reduction in Retained Earnings caused by the stock dividend). 156) A If a company with 20,000 shares outstanding executes a 2-for-1 stock split, it reduces the per-share par value of its stock from $.50 to $0.25 and doubles the number of shares outstanding from 20,000 to 40,000. The decrease in par value per share offsets the increase in the number of shares, so the financial position of the company is not affected, and no journal entry is needed. 157) A Version 1
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The value used to record a stock dividend varies depending on the size of the stock dividend. A large stock dividend (more than 25% of the company's outstanding stock) is recorded at par value; thus, the decrease in Retained Earnings equals the increase in the Common Stock account. A small stock dividend (less than 25% of the company's outstanding stock) is recorded at market value. 158) B Preferred stockholders have higher priority than common stockholders if a corporation distributes assets to its owners through dividends or at liquidation. That is, any dividends the corporation declares must be paid to preferred stockholders before they can be paid to common stockholders. 159) D Preferred stock generally has no voting rights, in contrast to common stock which usually does. Its dividends are typically paid at a fixed rate and preferred stock carries a priority over common stock for the payment of dividends and distribution of assets at liquidation. 160) D The entry to record the issuance of 1.13 million shares of $8.50 par value preferred stock at its market price of $32.50 per share includes a debit to Cash for $36.73 million (or 1,130,000 shares × issue price of $32.50 per share), a credit to Preferred Stock for $8.50 million (or 1,130,000 shares × par value of $8.50 per share), and a credit to Additional Paid-in Capital for $27.12 million [or 1,130,000 shares × (issue price of $32.50 – par value of $8.50 per share)]. 161) D
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The entry to record the issuance of 2 million shares of $2 par value preferred stock at its market price of $26 per share includes a debit to Cash for $52 million (or 2,000,000 shares × issue price of $26 per share), a credit to Preferred Stock for $4 million (or 2,000,000 shares × par value of $2 per share), and a credit to Additional Paid-in Capital for $48 million [or 2,000,000 shares × (issue price of $26 − par value of $2 per share)]. 162) C The entry to record the issuance of 115,000 shares of $8 par value preferred stock for $39 per share is recorded with a debit to Cash for $4,485,000 (or 115,000 shares × issue price $39 per share), a credit to Preferred Stock for $920,000 (or 115,000 shares × par value of $8 per share), and a credit to Additional Paid-in Capital for $3,565,000 [or 115,000 shares × (issue price of $39 per share − par value of $8 per share)]. 163) C The entry to record the issuance of 200,000 shares of $3 par value preferred stock for $40 per share is recorded with a debit to Cash for $8,000,000 (or 200,000 shares × issue price $40 per share), a credit to Preferred Stock for $600,000 (or 200,000 shares × par value of $3 per share), and a credit to Additional Paid-in Capital for $7,400,000 [or 200,000 shares × (issue price of $40 per share− par value of $3 per share)]. 164) A A current dividend preference is the feature of preferred stock that grants priority on preferred dividends over common dividends. 165) D
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Dividends per share on preferred stock = Par value × Annual dividend rate = $100 × 0.08 = $8 per share (if declared) 166) C Dividends per share on preferred stock = Par value × Annual dividend rate = $100 × 0.05 = $5 per share (if declared) 167) B Preferred dividend = Number of shares outstanding × Par value × Annual dividend rate = 104,000 shares × $7 per share × 0.09 = $65,520 (if declared) 168) B Preferred dividend = Number of shares outstanding × Par value × Annual dividend rate = 200,000 shares × $3 per share × 0.05 = $30,000 (if declared) 169) A Dividends per share on preferred stock = Par value × Annual dividend rate = $12 per share × 0.08 = $0.96 (if declared) 170) A Dividends per share on preferred stock = Par value × Annual dividend rate = $18 per share × 0.05 = $0.90 (if declared) 171) D
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Preferred dividend = Number of shares outstanding × Par value × Annual dividend rate = 1,400,000 shares × $4.40 per share × 0.10 = $616,000 (but only if fully declared) Preferred stockholders receive the entire $340,000 and nothing more relative to this declaration. 172) D Preferred dividend = Number of shares outstanding × Par value × Annual dividend rate = 1,000,000 shares × $4 per share × 0.08 = $320,000 (but only if fully declared) Preferred stockholders receive the entire $300,000 and nothing more relative to this declaration. 173) A The journal entry to record the issuance of 22,000 shares of no-par value preferred stock for cash at $66.00 per share includes a debit to Cash and a credit to Preferred Stock for $1,452,000 (or 22,000 shares × issue price of $66.00 per share). 174) A The journal entry to record the issuance of 10,000 shares of no-par value preferred stock for cash at $120 per share includes a debit to Cash and a credit to Preferred Stock for $1,200,000 (or 10,000 shares × issue price of $120 per share). 175) B
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A cumulative dividend preference is the preferred stock feature that requires current dividends not paid in full to accumulate for every year in which they are not paid. These cumulative unpaid amounts (called dividends in arrears) must be paid before any common dividends can be paid. 176) A Dividends in arrears relate to preferred stock only. They are not reported as liabilities because dividends are not actual liabilities unless they are declared. Instead, they are disclosed in the notes to the financial statements. 177) C Preferred dividend = Number of shares outstanding × Par value × Annual dividend rate = 1,000,000 shares × $4 per share × 0.08 = $320,000 (if fully declared) Current preferred dividend − Dividends paid to preferred stockholders = Dividends in arrears = $320,000 − $300,000 = $20,000 178) A
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Since there are dividends in arrears, the preferred stock must have a cumulative dividend preference. Preferred dividend = Number of shares outstanding × Par value × Annual dividend rate = 2,000,000 shares × $4 per share × 0.08 = $640,000 Total preferred dividends = Current preferred dividend + Dividends in arrears = $60,000 + $640,000 = $700,000 Common dividend = Total dividend declared − Total preferred dividends = $1,200,000 − $700,000 = $500,000 179) C Current preferred dividend per share = Number of shares outstanding × Par value per share × Dividend rate = 1,000 shares × $10 per share × 0.06 = $600 Total dividends = Common dividends + Preferred dividends Preferred dividends = Preferred dividends in arrears + Current preferred dividend = $600 + $600 = $1,200 Common dividends = Total dividends − Preferred dividends = $2,000 − $1,200 = $800 180) B
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Current preferred dividend per share = Number of shares outstanding × Par value per share × Dividend rate = (240,000 shares × $100 per share × 0.08) = $1,920,000 Total dividends = Common dividends + Preferred dividends Common dividend = Total dividends − Preferred dividends $3,300,000 − (Preferred dividends in arrears of $960,000 + Current preferred dividend of $1,920,000) = $420,000 181) B Current preferred dividend = Number of shares outstanding × Par value × Annual dividend rate = 40,000 shares × $5 per share × 0.06 = $12,000 Amount paid to common stockholders = Total dividends declared − Amount paid to preferred stockholders = $30,000 − $12,000 = $18,000 182) A Current preferred dividend = Number of shares outstanding × Par value × Annual dividend rate = 40,000 shares × $5 per share × 0.06 = $12,000 Amount paid to common stockholders = Total dividends declared − Current dividend paid to preferred stockholders − Payment of dividends in arrears = $70,000 − $12,000 − ($12,000 × 2 years) = $34,000 183) B
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Current preferred dividend = Number of shares outstanding × Par value × Annual dividend rate = 40,000 shares × $5 per share × 0.06 = $12,000 Amount paid to preferred stockholders = Current dividend paid to preferred stockholders + Payment of dividends in arrears = $12,000 + ($12,000 × 3 years) = $48,000 184) B Preferred stockholders have higher priority than common stockholders if a corporation distributes assets to its owners through dividends or at liquidation. That is, any dividends the corporation declares must be paid to preferred stockholders before they can be paid to common stockholders. 185) A A cumulative dividend preference states that if all or a part of the current dividend is not paid in full, the cumulative unpaid amount, known as dividends in arrears, must be paid before any future common dividends can be paid. Of course, if the preferred stock is noncumulative, dividends can never be in arrears; any preferred dividends that are not declared are permanently lost. 186) C Dividends are not an actual liability until the board of directors declares them. 187) A Dividends are not an actual liability until the board of directors declares them. As soon as a dividend is declared the company becomes obligated to pay any dividends in arrears. Prior to this, the company does not record a liability for dividends in arrears.
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188) C Dividends are not an actual liability until the board of directors declares them. As such, no Dividends Payable would be reported on the balance sheet as of December 31, 2020 or 2021. However, since the preferred stock is cumulative, the amount of the dividends in arrears must be disclosed in the notes to the 2020 and 2021 financial statements. Dividends are not an expense. 189) A Preferred dividend = Number of shares outstanding × Par value × Annual dividend rate = 2,000 shares × $100 × 0.05 = $10,000 (if declared) 2019: Dividends in arrears = $10,000 2020: Dividends in arrears = $20,000 (or $10,000 for 2019 and $10,000 for 2020) 2021: Total dividends = Preferred dividends + Common dividends = ($10,000 for 2019 + $10,000 for 2020 + $10,000 for 2021) + (200,000 shares × $0.50) = $30,000 + $100,000 = $130,000 190) B Preferred dividend = Number of shares outstanding × Par value × Annual dividend rate = 1,000 shares × $50 × 0.06 = $3,000 (if declared) 2020: Dividends in arrears = $3,000 2021: Preferred dividends = ($3,000 for 2020 + $3,000 for 2021) = $6,000 191) A Version 1
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Ending Retained Earnings = Beginning Retained Earnings + Net income − Dividends; Dividends = Beginning Retained Earnings + Net income − Ending Retained Earnings = $23,700 + $19,300 − $25,400 = $17,600 The additional stock of $6,000 issued during the year has no bearing on the calculation. 192) A Ending Retained Earnings = Beginning Retained Earnings + Net income − Dividends Dividends = Beginning Retained Earnings + Net income − Ending Retained Earnings = $64,120 + $50,680 − $66,640 = $48,160 The additional stock of $14,560 issued during the year has no bearing on the calculation. 193) B Should a company ever accumulate more net losses than net income over its life, it will report a negative (debit) balance in the Retained Earnings account. This amount is typically called an Accumulated Deficit. 194) C
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Retained Earnings reports the cumulative amount of net income earned by the company less the cumulative amount of dividends since the corporation was first organized. Retained Earnings represents earned capital (rather than cash). A company may be restricted by clauses in its loan agreements (called loan covenants) that require a minimum balance in Retained Earnings. Transactions involving the issuance of common stock do not affect Retained Earnings. 195) B Stock dividends are recorded by a debit to Retained Earnings and a credit to Common Stock, so there is no change to total stockholders' equity. Stock dividends are reported on the Statement of Stockholders' Equity. 196) A Net income increases Retained Earnings. 197) D Stockholders' equity increases by $120,000 [or proceeds from stock issuance of $40,000 (or 2,000 shares × $20 per share) + net income of $100,000 − dividends of $20,000]. 198) A Total contributed capital = Par value of common stock issued + Additional paid-in capital Additional paid-in capital = Total contributed capital − Par value of common stock issued = $186,000 − (200,000 shares × 0.01 per share) = $184,000 199) C
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Total stockholders’ equity = Total contributed capital + Retained earnings − Treasury stock Retained earnings = Total stockholders’ equity − Total contributed capital + Treasury stock = $237,500 − $186,000 + $19,500 = $71,000 200) A During the year: Change in totalstockholders’ equity = Change in total contributed capital + Change in retained earnings − Change in Treasury stock = (5,000 shares × issue price of $44 per share) + ($75,000 of net income − $20,500 of dividends) − $0 = $274,500 End of year: Total stockholders' equity at end of year = Total stockholders' equity at beginning of year + Change in total stockholders’ equity = $237,500 + $274,500 = $512,000 201) C The statement ofstockholders’ equity contains information found in the statement of retained earnings, plus information about how contributed capital changed during the period. 202) B EPS = (Net income − Preferred dividends) ÷ Average Common Shares Outstanding 203) D Earnings per share is a measure that assists investors with their expectations about the ability of a firm to pay higher dividends in the future, which affect valuations of a company's stock. The EPS allows for a relatively easy way to compare the financial results of a company over time.
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204) A Average number of common shares = (Beginning shares + Ending shares) / 2 = (4,300,000 + 4,500,0000) / 2 = 4,400,000 EPS = (Net income − Preferred dividends) ÷ Average number of common shares outstanding = ($11,000,000 − $0) ÷ 4,400,000 shares = $2.50 per share 205) A Average number of common shares = (Beginning shares + Ending shares) / 2 = (6,800,000 + 7,200,000) / 2 = 7,000,000 EPS = (Net income − Preferred dividends) ÷ Average number of common shares outstanding = ($5,600,000 − $0) ÷ 7,000,000 shares = $0.80 per share 206) C EPS = (Net income − Preferred dividends) ÷ Average number of common shares outstanding = ($112,000 − $0) ÷ 12,000 = $9.33 207) A Current earnings can predict future dividends and stock prices. If a company generates increased earnings in the current year, it will be able to pay higher dividends in future years. In other words, current EPS influences expectations about future dividends, which investors factor into the current stock price. EPS = (Net income − Preferred dividends) ÷ Average number of common shares outstanding. 208) A
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The number of shares outstanding for one company can differ dramatically from the number outstanding for a different company, simply because one chooses to issue more shares of stock than the other. Also, as you have seen in earlier chapters, net income can be affected by differences in how two companies cost inventory, estimate bad debts, depreciate long-lived tangible assets, and estimate losses from contingent liabilities. 209) D Current earnings can predict future dividends and stock prices. If a company generates increased earnings in the current year, it will be able to pay higher dividends in future years. In other words, current EPS influences expectations about future dividends, which investors factor into the current stock price. 210) A Current earnings can predict future dividends and stock prices. If a company generates increased earnings in the current year, it will be able to pay higher dividends in future years. In other words, current EPS influences expectations about future dividends, which investors factor into the current stock price. 211) D Return on equity = (Net income − Preferred dividends) ÷ Average common stockholders' equity 212) B Return on equity (ROE) = (Net income − Preferred dividends) ÷ Average common stockholders’ equity = ($8,950,000 − $0) ÷ [($32,300,000 + $41,250,000) ÷ 2] = 0.24 (rounded) 213) B Version 1
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Return on equity (ROE) = (Net income − Preferred dividends) ÷ Average common stockholders' equity = ($5,600,000 − $0) ÷ [($32,550,000 + $38,150,000) ÷ 2] = 0.16 (rounded) 214) B Return on equity = (Net income − Preferred dividends) ÷ Average stockholders' equity = $56,000 ÷ [($230,000 + $280,000) ÷ 2] = 22% 215) C Return on equity measures the amount of income earned for each dollar of common stockholders' equity. 216) A A relatively high P/E ratio is an indication that investors feel a company will improve performance in the future, translating to increased profits. Since P/E ratios can vary across industries, the relative magnitude of a particular P/E ratio is best determined by comparing a firm's P/E to its own in the past or to peer companies in the same industry. 217) A ROE = (Net income − Preferred dividends) ÷ Average common stockholders' equity 218) A
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EPS = (Net income − Preferred dividends) ÷ Average number of common shares outstanding Return on equity (ROE) = (Net income − Preferred dividends) ÷ Average common stockholders' equity EPS and ROE will rise if net income is rising or if the number of outstanding shares is falling. A rise in net income can be sustained, but a constant fall in the number of shares outstanding cannot continue indefinitely. 219) B EPS = (Net income − Preferred dividends) ÷ Average number of common shares outstanding Return on equity (ROE) = (Net income − Preferred dividends) ÷ Average common stockholders' equity Since net income is in the numerator of the calculations for both EPS and ROE, a decline in net income will cause both of these ratios to decrease. 220) B Price/Earnings (P/E) ratio = Current stock price (per share) ÷ Earnings per share = $10 ÷ $2.00 = 5 221) C The P/E ratio measures how many times more than current year's earnings investors are willing to pay for a company's stock. It does not explain the reasons for the change. Other financial information should be gathered to make that judgment. 222) D
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The Price/Earnings (P/E) ratio measures how many times more than the current year's earnings investors are willing to pay for a company's common stock. A relatively low P/E ratio typically means that they don't expect strong future performance. 223) B P/E ratio = Current stock price (per share) ÷ Earnings per share (annual) Earnings per share (annual) = Current stock price (per share) ÷ P/E ratio = $35.00 per share ÷ 12.5 = $2.80 per share 224) A P/E ratio = Current stock price (per share) ÷ Earnings per share (annual) Current stock price (per share) = P/E ratio × Earnings per share (annual) = 24 × $0.75 per share = $18.00 per share 225) C EPS = (Net income − Preferred dividends) ÷ Average number of common shares outstanding = $230,400 ÷ 180,000 shares = $1.28 per share P/E ratio = Current stock price (per share) ÷ Earnings per share (annual) = $40.00 per share ÷ $1.28 per share = 31.25 226) D EPS = (Net income − Preferred dividends) ÷ Average number of common shares outstanding = ($10,562,500 − $0) ÷ 3,250,000 shares = $3.25 per share 227) D EPS = (Net income − Preferred dividends) ÷ Average number of common shares outstanding = ($12,000,000 − $0) ÷ 3,000,000 shares = $4.00 per share 228) B Version 1
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EPS = (Net income − Preferred dividends) ÷ Average number of common shares outstanding = ($12,000,000 − $0) ÷3,000,000 shares = $4 per share Price/Earnings (P/E) ratio = Current stock price (per share) ÷ EPS = $6 ÷ $4 = 1.50 229) B EPS = (Net income − Preferred dividends) ÷ Average number of common shares outstanding = ($12,000,000 − $0) ÷ 3,000,000 shares = $4.00 per share Price/Earnings (P/E) ratio = Current stock price (per share) ÷ EPS = $5.00 ÷ $4.00 = 1.25 230) A EPS = (Net income − Preferred dividends) ÷ Average number of common shares outstanding = $89,000 ÷ [(30,000 + 35,000) ÷ 2] = $2.74 (rounded) 231) C Total Assets = Total Liabilities + Stockholders’ Equity Therefore, Total Assets − Total Liabilities = Stockholders' equity Beginning of Current Year: = $347,000 − $112,000 = $235,000 End of Current Year: = $411,000 − $166,000 = $245,000 ROE = (Net income − Preferred dividends) ÷ Average Stockholder's Equity = ($89,000 − $0) ÷ [($235,000 + $245,000) ÷ 2] = 37.1% (rounded) 232) B
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EPS = (Net income − Preferred dividends) ÷ Average number of common shares outstanding = $89,000 ÷ [(30,000 + 35,000) ÷ 2] = $2.74 (rounded) P/E ratio = Market price ÷ EPS = $42.00 ÷ $2.74 = 15.3 (rounded) 233) A The P/E ratio measures how many times more than current year's earnings investors are willing to pay for a company's stock. Since its P/E ratio is 12, investors are willing to pay 12 times the current year's earnings per share of stock. 234) D EPS = (Net income − Preferred dividends) ÷ Average number of common shares outstanding Since debt includes interest expense, the extent to which a company uses debt or equity financing, as well as its depreciation and inventory costing methods, affect net income and, as a result, earnings per share. The classification of debt as current or long-term does not affect EPS. 235) D EPS = (Net income − Preferred dividends) ÷ Average number of common shares outstanding. Reissuing treasury stock will cause the average common shares outstanding to increase and, as a result, EPS will decrease. 236) D
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When a company repurchases its common stock, the number of shares outstanding decreases and it becomes Treasury stock, which will decrease total stockholders’ equity. EPS = (Net income − Preferred dividends) ÷ Average number of common shares outstanding. Therefore, a decrease in the outstanding shares will increase EPS. Return on equity (ROE) = (Net income − Preferred dividends) ÷ Average common stockholders' equity. Therefore, a decrease in the outstanding shares will increase ROE. 237) B When a company repurchases its common stock, the number of shares outstanding decreases and it becomes Treasury stock, which will decrease total stockholders’ equity. EPS = (Net income − Preferred dividends) ÷ Average number of common shares outstanding. Therefore, a decrease in the outstanding shares will increase EPS. P/E ratio = Current stock price (per share) ÷ Earnings per share (annual). Therefore, since EPS increases, the PE ratio will decrease. Return on equity (ROE) = (Net income − Preferred dividends) ÷ Average common stockholders' equity. Therefore, a decrease in the outstanding shares will increase ROE. 238) A A partnership is a business owned by two or more persons. A sole proprietorship is a business owned by one person; a corporation is a legal entity; an LLC has the same tax treatment as a partnership. 239) C
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A sole proprietorship uses a drawing account to record distributions to the owner during a year. At the end of the year, the balance in the account is transferred to the capital account of the owner. The entry includes a debit to the capital account and a credit to the drawing account for $12,250, the balance in the drawing account. 240) B A sole proprietorship uses a drawing account to record distributions to the owner during a year. At the end of the year the balance in the account is transferred to the capital account of the owner. The net income of the proprietorship is also closed to the capital account of the owner. Ending capital = Beginning capital + Net Income − Drawings Net income = Ending capital − Beginning capital + Drawings = $144,900 − $133,100 + $25,750 = $37,550 241) B A sole proprietorship uses a drawing account to record distributions to the owner during a year. At the end of the year the balance in the account is transferred to the capital account of the owner. The net income of the proprietorship is also closed to the capital account of the owner. Ending capital = Beginning capital + Net Income − Drawings Net income = Ending capital − Beginning capital + Drawings = $68,950 − $63,400 + $12,250 = $17,800 242) A
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The LLC combines legal characteristics of corporations (such as a separate legal identity and limited liability) with the tax treatment of partnerships (where tax is paid by the individual owners rather than by the business entity itself). 243) B In the partnership form of business, each owner has unlimited liability. So, you can be held liable for the entire $40,000. 244) C An advantage of the partnership form of business is the ease of formation. The partners have unlimited liability for the partnership's debts, the amounts paid to the partners are drawings (not expenses of the business), and income tax is paid by the owners (not the partnership). 245) D Jackson's Capital = $30,000 + [($30,000 ÷ ($30,000 + $90,000)) × $80,000] = $50,000 O'Neill's Capital = $90,000 + [($90,000 ÷ ($30,000 + $90,000)) × $80,000] = $150,000 Total Capital = $50,000 + $150,000 = $200,000 246) B MacDowell Corporation declared a "large stock dividend" (one that is greater than 25% of the outstanding stock). Accordingly, it must reduce its Retained Earnings account by $200,000 [or the number of shares subject to the dividend of 100,000 shares (or 100,000 outstanding shares × stock dividend of 100%) multiplied by the par value of the stock of $2]. 247) A The closing entry includes a debit to M. Lest, Capital and a credit to M. Lest, Drawings. Version 1
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248) B A sole proprietorship's statement of owner's equity would report the beginning balance of the owner's Capital account, the amount of net income (or loss), withdrawals, and the ending balance of the owner's Capital account. 249) A Any withdrawals by the owner, should be recorded with a debit to the owner's Drawings account. 250) B Capital contributions by the owner increase the owner's Capital account. 251) A A partnership is formed by two or more persons reaching mutual agreement about the terms of the relationship. 252) D Corporate law is dictated by the state in which the corporation is established. If the application to create a corporation is approved, the state issues a charter, also called the articles of incorporation, which spells out information about the corporation such as its name, address, nature of business, and ownership structure. 253) C Payments to partners are recorded as drawings, not salaries. The closing entry includes a debit to each partner's Capital account and a credit to each partner's Drawings account. 254) A
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The LLC in particular is an increasingly common form of business that combines legal characteristics of corporations (such as a separate legal identity and limited liability) with the tax treatment of partnerships (where tax is paid by the individual owners rather than by the business entity itself). 255) B Since this is a large stock dividend, the journal entry to record this stock dividend includes a debit to Retained Earnings and a credit to Common Stock for $500,000 (or 50,000 shares × 0.50 × par value of the shares issued of $20). 256) D King Corporation declared a "small stock dividend" (one that is less than 25% of the outstanding stock). Accordingly, it must reduce its Retained Earnings account by $2,500,000 [or the number of shares subject to the dividend of 100,000 (or 1,000,000 outstanding shares × stock dividend of 10%) multiplied by the fair market value of the stock of $25]. 257) C Since this is a small stock dividend, the journal entry to record this stock dividend includes a debit to Retained Earnings for $20,000 (or 10,000 shares × 0.10 × $20 market value per share), a credit to Common Stock for $10,000 (or 10,000 shares × 0.10 × $10 par value per share), and a credit to Additional Paid-in Capital for $10,000 [or 10,000 shares × 0.10 × ($20 market value per share − $10 par value per share)]. 258) A Stock dividends are recorded by transferring an amount from Retained Earnings to Common Stock (and possibly other contributed capital accounts). This transfer is called "capitalizing retained earnings." 259) B Version 1
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Since this is a large stock dividend, the journal entry to record this stock dividend includes a debit to Retained Earnings and a credit to Common Stock for the par value of the stock issued. 260) A Since this is a large stock dividend, the journal entry to record this stock dividend includes a debit to Retained Earnings and a credit to Common Stock for the par value of the stock issued. 261) C Retained Earnings and Common Stock are used for both small and large stock dividends, which do not include any cash. Because a small stock dividend is recorded at market value, Additional Paid-In Capital is used for a small stock dividend (for the excess of the market value over the par value of the stock issued). Large stock dividends are recorded at the par value of the stock issued, so there is no need to use the Additional Paid-In Capital account. 262) A Because a small stock dividend is recorded at market value, Additional Paid-In Capital is used to report the amount by which the market value of the stock issued exceeds its par value.
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CHAPTER 11: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Knapp Industries began business on January 1, 2021 by issuing all of its 1,000,000 authorized shares of its $1 par value common stock for $40 per share. On June 30, Knapp declared a cash dividend of $2 per share to stockholders of record on July 31. Knapp paid the cash dividend on August 30. On November 1, Knapp reacquired 200,000 of its own shares of stock for $50 per share. On December 22, Knapp resold 100,000 of these shares for $60 per share. Required: a. Prepare all of the necessary journal entries to record the events described above. b. Prepare the stockholders' equity section of the balance sheet as of December 31, 2021 assuming that the net income for the year was $6,000,000.
2) Delta Incorporated had 1,000,000 shares of $4 par value common stock authorized. On December 31, 2021, there were 400,000 shares issued and outstanding. The market value of its common stock on that date was $100 per share. On January 5, 2022, the board of directors declared a stock dividend. Required: a. Assume that you have 100 shares of Delta Incorporated common stock. Determine how many shares will you have after a 100% stock dividend. b. Briefly explain the how a 100% stock dividend affects the stockholders' equity accounts and the total resources of the company. (Do not quantify the impacts or prepare a journal entry.) c. Assume instead that the board declared a 10% stock dividend. Briefly explain how that 10% stock dividend affects the stockholders' equity accounts and the total resources of the company. (Do not quantify the impacts or prepare a journal entry.) d. Identify three possible explanations for the declaration of a stock dividend.
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3) Core Corporation had 400,000 shares of $2 par value common stock authorized. On December 31, 2021, there were 200,000 shares issued and outstanding. The market value of its common stock on that date was $100 per share. On January 5, 2022, the board of directors declared a five-to-four stock split (i.e., a 25% increase in the number of shares). Required: a. Briefly explain how a stock split affects the stockholders' equity accounts and the total resources of the company. b. Assume that you have 100 shares of Core Corporation common stock. Determine how many shares will you have after the stock split. c. Determine how the stock split will impact the number of authorized shares, the number of issued and outstanding shares, and the par value per share. d. Determine the total par value of the company's issued and outstanding shares (that is, the balance of the Common Stock account) before the stock split and after the stock split.
4) The market price of a share of common stock at the time of issuance was $19.50, while the market price of a preferred share of stock at the time of issuance was $32. The company paid $12.50 per share for its treasury stock. Required: Determine the missing amount in the stockholders' equity section of the balance sheet set forth below. Stockholders’ Equity
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Contributed Capital: Preferred Stock, $2.00 par value, authorized 1,000,000 shares; issued 300,000 shares Additional Paid-in Capital – Preferred Stock Common Stock, $3.00 par value, authorized 40,000,000 shares; issued 25,600,000 shares Additional Paid-in Capital – Common Stock Total Contributed Capital Retained Earnings Treasury Stock (10,000 shares, at cost) Total Stockholders' Equity
$ ________
(a)
________ ________
(b) (c)
________ ________ 305,683,000
(d) (e)
________ (f) $ ________
(g)
5) Tyler Corporation was organized in 2021. Its corporate charter authorized the issuance of 50,000 shares of common stock, par value $5 per share, and 10,000 shares of 8% preferred stock, par value $25 per share. The following transactions took place during 2021:
January 1 February 1 June 1 August 1 October 1 December 1 December 31
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Sold and issued 45,000 shares of common stock for cash at $25 per share. Sold and issued 5,000 shares of preferred stock for cash of $75 per share. Repurchased 7,500 shares of common stock at $24 per share. Sold 1,000 shares of the treasury stock at $26 per share. Sold another 1,500 shares of the treasury stock at $23 per share. Declared cash dividends totaling $100,000. Paid the cash dividends that were declared.
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Required: a. Prepare journal entries for each of the following transactions: b. Compute the number of shares of common stock issued and outstanding at December 31, 2021.
6) McEwan Company has outstanding 10 million shares of $2 par value common stock and 1 million shares of $4 par value preferred stock. The preferred stock is noncumulative and has a 7% current dividend preference. The company declares total dividends amounting to $50,000, $250,000, and $600,000 during 2020, 2021, and 2022, respectively. Required: a. Compute the amount of dividends to be distributed to preferred and common shareholders during 2020. b. Compute the amount of dividends to be distributed to preferred and common shareholders during 2021. c. Compute the amount of dividends to be distributed to preferred and common shareholders during 2022.
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7) McEnroe Incorporated has outstanding 10 million shares of $2 par value common stock and 1 million shares of $4 par value preferred stock. The preferred stock has a 7% cumulative dividend preference. The company declares total dividends amounting to $50,000, $250,000, and $600,000 during 2020, 2021, and 2022, respectively. Required: a. Compute the amount of dividends to be distributed to preferred and common shareholders during 2020. b. Compute the amount of dividends to be distributed to preferred and common shareholders during 2021. c. Compute the amount of dividends to be distributed to preferred and common shareholders during 2022.
8) Tacoma Company had the following balances in its stockholders' equity accounts at December 31, 2021: Common Stock, $10 par, 100,000 shares authorized, 40,000 shares issued Contributed Additional Paid-in Capital Value, Common Retained Earnings Treasury Stock, 2,000 shares Total stockholders' equity
$ 400,000 500,000 1,000,000 (40,000) $ 1,860,000
The following transactions occurred during 2022: February 3 May 10 October 12 December 31
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Sold and issued 6,000 shares of common stock for $22 per share. Declared dividends in the amount of $22,000. Sold 1,000 shares of the treasury stock for $20 per share. Net income for the year was determined to be $150,000
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Required: Based on the above information, prepare a statement of stockholders' equity for 2022.
9) Phelps, Incorporated had assets of $67,646, liabilities of $15,466, and 10,718 shares of outstanding common stock at December 31, 2020. Net income for 2020 was $7,829. The company had assets of $79,571, liabilities of $18,551, 10,771 shares of outstanding common stock, and its stock was trading at a price of $10 per share at December 31, 2021. Net income for 2021 was $9,993. Required: a. Calculate EPS for 2021. b. Calculate ROE for 2021. c. Calculate the Price/Earnings ratio for 2021.
10) Complete the table below by filling in the Formula blank with the letter that corresponds to the correct formula for each ratio and filling in the Interpretation blank with the letter that corresponds to the interpretation provided. Not all ratio formulas and interpretations will be used. Ratio 1.Price Earnings Ratio
Formula
Interpretation
2.Earnings per Share 3.Return on Equity
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Ratio Formulas A. 365 ÷ Inventory Turnover B. (Sales – Cost of Goods Sold) ÷ Sales C. Net Income ÷ Sales D. Net Operating Income ÷ Interest Expense E. (Net income – Preferred dividends) ÷ Average number of common shares outstanding F. Total Liabilities ÷ Total Assets G. Current stock price (per share) ÷ Earnings per Share H. (Net income – Preferred dividends) ÷ Average common stockholders' equity Ratio Interpretations A. The portion of sales that is attributable to merchandise profit. B. Ability of a company to pay its short-term debts as they come due. C. The percent of each sales dollar that is left over after covering costs and expenses. D. How many times more than the current year's earnings investors are willing to pay for a company's common stock. E. Ability of a company to quickly pay its short-term debts as they come due. F. The portion of a company's total financing that comes from debt. G. The amount of income generated for each share of common stock owned by stockholders. H. How effectively a company is using its assets to generate revenue. I. The amount of income earned for each dollar of common stockholders' equity.
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11) Nancy O'Rode, doing business as O'Rode Consulting, performs consulting services for companies that create online learning games for children. On January 1, 2021, she started a sole proprietorship by placing $15,000 cash in a bank account opened for the business. Each month during the year, O'Rode withdrew $500 cash from the business for personal use. At December 31, 2021, after the last withdrawal, the Drawings account reflected a debit balance of $6,000. During the year, the usual journal entries for the year, including adjusting and closing entries for the revenue and expense accounts, resulted in total revenue of $60,000, total expenses of $12,000, and net income of $48,000. (For purposes of the related journal entry, use the accounts "Consulting Revenue" and "Operating Expenses.") Required: a. Prepare the journal entry to record the initial capital contribution. b. Prepare the journal entry to record one of the monthly withdrawals. c. Prepare the journal entry to close the net income to the N. O'Rode, Capital account. d. Prepare the journal entry to close the N. O'Rode, Drawings account at the end of the year. e. Prepare a Statement of Owner's Equity for the year ending December 31, 2021.
12) Groucho, Harpo, and Chico form a partnership on January 1, 2021. Groucho contributes $90,000, Harpo $70,000, and Chico $40,000 to a business called Marx Brothers' Partnership. On a monthly basis, each partner is allocated income and is allowed to receive cash from the business in proportion to the capital they provided. Assume that Groucho receives $2,700 cash per month. Required: a. Prepare the journal entry for the initial investment. b. Determine the monthly distribution amounts for each of the three partners. c. Prepare the journal entry that would be made in one month for the monthly distribution. d. Prepare the journal entry for the allocation of an annual net income of $84,000. For purposes of this journal entry, assume Sales Revenue totaled $116,000 and that all expenses, totaling $32,000, were recorded in a single account called Operating Expenses. e. Prepare the journal entry to close the Drawings accounts at the end of the year. f. Prepare a Statement of Partners' Equity (assume no additional investments made).
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13) Company Z has 8 million shares of common stock authorized with a par value of $1 and a market price of $72. There are 4 million outstanding shares and 1 million shares held in treasury stock. Required: a. Prepare the journal entry if the company declares and distributes a 10% stock dividend. b. Show the effect of the 10% stock dividend on assets, liabilities, and stockholders' equity. c. Prepare the journal entry if the company declares and distributes a 100% stock dividend. d. Show the effect of the 100% stock dividend on assets, liabilities, and stockholders' equity.
14) Choose the appropriate letter to match the description with the purpose and accounting effect of the type of stock transaction. Some letters will appear in more than one column and not all letters will necessarily be used. Some blanks will require more than one letter. Stock Split
Large Stock Dividend
Stock Repurchase
Purpose Accounting Effect
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A. To obtain shares to reissue to employees as part of employee stock purchase plans. B. To increase the number of shares outstanding and decrease the per-share market price while managing a company that you expect will struggle financially in the future. C. To reduce the number of outstanding shares to increase per-share measures of earnings. D. To increase the number of shares outstanding and decrease the per-share market price while signaling to financial statement users that the company expects significant future earnings. E. To obtain shares that can be reissued as payment for purchases of other companies. F. To send a signal to investors that the company itself believes its own stock is worth acquiring. G. Reduces stockholders' equity. H. Changes par value per share. I. Changes Additional Paid-in Capital account balance. J. Reduces Retained Earnings. K. Does not affect any of the account balances that comprise stockholders’ equity.
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15)
Match each term with the appropriate definition. Not all definitions will be used.
Term: Treasury Stock Cash Dividend Initial Public Offering (IPO) Preferred Stock Outstanding Shares Earnings Per Share (EPS) Stock Dividend Residual Claim Return on Equity (ROE) Definition: A) Stock shares that pay a fixed dividend rate but have no voting rights. B) The shares of stock held by stockholders. C) Stock that allows owners to be listed among creditors. D) This payment raises stockholders' equity. E) This type of dividend decreases stockholders' equity. F) The shares of stock held by the issuing company. G) Earnings per share that reflects treasury and preferred stock. H) (Net income less preferred dividends) divided by average stockholders' equity. I) This type of dividend does not reduce stockholders' equity. J) Stockholders' entitlement to remaining assets after creditors are repaid if the company ceases operations. K) The additional shares of stock a company can issue beyond what are already issued. L) (Net income less preferred dividends) divided by the average number of outstanding common shares. M) When a company first starts selling stock to the public.
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16)
Match each term with the appropriate definition. Not all definitions will be used.
Term: Corporation Par Value Growth Investment LLC Current Dividend Preference Partnership Market Value Income Investment Cumulative Dividend Preference Sole Proprietorship Definition: A) A company that is like a partnership in nature except that it has limited liability. B) A company that has a separate legal identity from its owners. C) A company that issues stock on one of the major stock exchanges. D) When companies are obligated to pay preferred stockholders past dividends not yet distributed before paying dividends to owners of common stock. E) An insignificant value per share of capital stock specified in the charter. F) The current stock price. G) A stock that is currently selling for its original issue price. H) Stock of companies that tend to pay relatively high dividends compared to the stock price. I) Stock of companies that tend to reinvest earnings to provide for greater future sales and profits. J) When stockholders prefer to receive dividends at the end of the year rather than each quarter. K) An unincorporated business that is owned by a single individual. L) When preferred stockholders are paid dividends before other stockholders. M) An unincorporated business owned by two or more individuals.
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17)
Match each term with the appropriate definition. Not all definitions will be used.
Term: Date of Declaration Issued Shares Seasoned New Issues Pro Rata Basis Date of Record Additional Paid-in Capital Outstanding Shares Stock Options Payment Date Definition: A) The total number of shares currently owned by stockholders. B) The amount above the par value of the stock that owners paid the issuer for the stock. C) When employees of a company have the opportunity to buy a company's stock in the future at a fixed price. D) The date on which a company determines who receives a dividend. E) The date on which a liability is recorded for a dividend. F) When a company sells issues of new stock after its IPO. G) When owners of the company contribute additional capital beyond what they paid for their stock. H) When cash or stock dividends are issued according to the proportion of stock owned. I) The date on which a company authorizes a dividend payment. J) The date on which a company debits dividends payable and credits cash. K) Dividends that have not had income tax withheld from them. L) The total number of shares the company has sold, whether held by stockholders or by the company. M) The accumulation of all the past dividends the company has not paid. N) When cash or stock dividends are issued in an equal dollar or share amount per stockholder.
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Answer Key Test name: Chap 11_7e_Problems 1) a. Date
Debit
1/1/21
Cash (1,000,000 × $40)
6/30/21
Common Stock (1,000,000 × $1) Additional Paid-in Capital (1,000,000 × $39) Dividends (1,000,000 × $2)
40,000,000 1,000,000 39,000,000 2,000,000
Dividends Payable 8/30/21
2,000,000
Dividends Payable
2,000,000
Cash 11/1/21
Treasury Stock (200,000 × $50)
2,000,000 10,000,000
Cash 12/22/21
Credit
Cash (100,000 × $60)
10,000,000 6,000,000
Treasury Stock (100,000 × $50) Additional Paid-in Capital (100,000 × $10)
5,000,000 1,000,000
b. Stockholders' equity: Common Stock, $1 par value, 1,000,000 shares authorized; 1,000,000 shares issued, 900,000 shares outstanding Additional Paid-in Capital Retained Earnings ($0 + $6,000,000 – $2,000,000)
$ 1,000,000
Less: Treasury Stock (100,000 shares, at cost)
(5,000,000)
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40,000,000 4,000,000 45,000,000
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Total Stockholders' Equity
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$ 40,000,000
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2) a. A 100% stock dividend means that each stockholder will receive two shares of common stock in place of the one share currently owned. A stockholder with 100 shares will receive another 100 shares (or 100 existing shares × 100%) and, as a result, will have 200 shares after the 100% stock dividend. b. Stock dividends are recorded by transferring an amount from Retained Earnings to contributed capital accounts. The value used to record a stock dividend varies depending on the size of the stock dividend. A large stock dividend (more than 25 percent of the company's outstanding stock) is recorded at par value, which is, in this case, $4 per share. The decrease in Retained Earnings will equal the increase in the Common Stock account. c. A small stock dividend (less than 25 percent of the company's outstanding stock) is recorded at market value, which, in this case, is $100 per share. The decrease in Retained Earnings will equal the combined increase in the Common Stock and Additional Paid-In Capital accounts. d. The three possible explanations for declaring a stock dividend are as follows: • To lower the market price per share of stock – If you increase the number of shares without changing the company in any other way, the stock price per share will fall proportionately: 100 shares at $100 per share become 200 shares at $50 per share after a 100 percent stock Version 1
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dividend. • To demonstrate commitment to stockholders while conserving cash during difficult times – Unlike a cash dividend, a stock dividend does not involve cash payments or any distribution of assets. • To signal an expectation of significant future earnings – Companies can declare future cash dividends only when they maintain an adequate balance in Retained Earnings through profitable operations. Because stock dividends cause a reduction in Retained Earnings, companies will declare stock dividends only if they expect sufficient future earnings to replenish the balance in Retained Earnings after a stock dividend.
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3) a. Stock splits are not dividends. While they are similar to a stock dividend, they are quite different in terms of how they occur and how they affect the stockholders' equity accounts. In a stock split, the total number of authorized shares is increased by a specified amount. Each issued share is called in and new shares are issued in its place. The account balances of each of the stockholders’ equity accounts do not change. Cash is not affected when the company splits its stock, so the total resources of the company do not change. b. Each stockholder will receive five shares of common stock in place of the four shares that will be turned in because of the 5-for-4 stock split. A stockholder with 100 shares will receive 125 shares (or (100 existing shares ÷ 4 old shares) × 5 new shares) in exchange for those shares. c. After the split: Total number of authorized shares = 400,000 + (400,000 × 0.25) = 500,000 Total number of issued and outstanding shares = 200,000 + (200,000 × 0.25) = 250,000 Par value per share = $1.60 ($2.00 ÷ 1.25) d. Before the stock split: Total par value of the issued and outstanding shares = 200,000 shares × $2 par value per share = $400,000 After the stock split: Total par value of the issued and outstanding shares = 250,000 shares × Version 1
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$1.60 par value per share = $400,000 4) Stockholders’ Equity Contributed Capital: Preferred Stock, $2.00 par value, authorized 1,000,000 shares; issued 300,000 shares Additional Paid-in Capital – Preferred Stock Common Stock, $3.00 par value, authorized 40,000,000 shares; issued 25,600,000 shares Additional Paid-in Capital – Common Stock Total Contributed Capital Retained Earnings Treasury Stock (10,000 shares, at cost) Total Stockholders' Equity
$ 600,000
(a)
9,000,000 76,800,000
(b) (c)
422,400,000 508,800,000 305,683,000
(d) (e)
(125,000) (f) $ 814,358,000
(g)
Supporting calculations: (a) $2.00 Par value per share × 300,000 Shares = $600,000 (b) ($32 Issue price per share – $2.00 Par value per share) × 300,000 Outstanding shares = $9,000,000 (c) $3 Par value per share × 25,600,000 Shares = $76,800,000 (d) ($19.50 Issue price per share – $3.00 Par value per share) × 25,600,000 Outstanding shares = $422,400,000 (e) $600,000 + $9,000,000 + $76,800,000 + $422,400,000 = $508,800,000 (f) Cost of $12.50 × 10,000 Shares = $125,000 (g) $508,800,000 + $305,683,000 – $125,000 = $814,358,000 5) a. Date January 1
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General Journal Cash (45,000 × $25)
Debit 1,125,000
Credit
19
February 1
Common Stock (45,000 × $5)
225,000
Additional Paid-in Capital (45,000 × $20) Cash (5,000 × $75)
900,000 375,000
Preferred Stock (5,000 × $25)
June 1
Additional Paid-in Capital [5,000 × ($75 – $25)] Treasury Stock (7,500 × $24)
125,000 250,000 180,000
Cash August 1
Cash (1,000 × $26)
180,000 26,000
Treasury Stock (1,000 × $24)
October 1
Additional Paid-in Capital (1,000 × $2) Cash (1,500 × $23) Additional Paid-in Capital [1,500 × ($24 – $23)] Treasury Stock (1,500 × $24)
24,000 2,000 34,500 1,500 36,000
December 1
Retained Earnings
December 31
Dividends Payable – Preferred (5,000 × $25 × 0.08) Dividends Payable – Common ($100,000 – $10,000) Dividends Payable – Preferred
10,000
Dividends Payable – Common
90,000
Cash
100,000 10,000 90,000
100,000
b. Issued: January 1
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45,000
20
Less shares in treasury: Purchased: June 1
(7,500)
Sold: August 1
1,000
October 1
1,500
Issued and outstanding
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2,500
(5,000) 40,000
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6) a. Current preferred dividend = 1,000,000 shares × $4 per share × 0.07 = $280,000 Amount paid to preferred stockholders = $50,000 (the lower of the amount declared or the current dividend preference amount) Amount paid to common stockholders = Total dividend of $50,000 – Amount paid to preferred stockholders of $50,000 = $0 b. Current preferred dividend = 1,000,000 shares × $4 per share × 0.07 = $280,000 Amount paid to preferred stockholders = $250,000 (the lower of the amount declared or the current dividend preference amount) Amount paid to common stockholders = Total dividend of $250,000 – Amount paid to preferred stockholders of $250,000 = $0 c. Current preferred dividend = 1,000,000 shares × $4 per share × 0.07 = $280,000 Amount paid to preferred stockholders = $280,000 (the lower of the amount declared or the current dividend preference amount) Amount paid to common stockholders = Total dividend of $600,000 – Amount paid to preferred stockholders of $280,000 = $320,000
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7) a. Current preferred dividend = 1,000,000 shares × $4 per share × 0.07 = $280,000 Amount paid to preferred stockholders = $50,000 (the lower of the amount declared or the current dividend preference amount + dividends in arrears) Dividends in arrears (2020) = Current preferred dividend of $280,000 – Amount paid of $50,000 = $230,000 Amount paid to common stockholders = Total dividend of $50,000 – Amount paid to preferred stockholders of $50,000 = $0 b. Current preferred dividend = 1,000,000 shares × $4 per share × 0.07 = $280,000 Amount paid to preferred stockholders = $250,000 (the lower of the amount declared or the current dividend preference amount + dividends in arrears) = $230,000 of dividends in arrears from 2020 + $20,000 of current dividends. Dividends in arrears (2021) = Current preferred dividend of $280,000 – Amount paid of $20,000 = $260,000 Amount paid to common stockholders = Total dividend of $250,000 – Amount paid to preferred stockholders of $250,000 = $0 c. Current preferred dividend = 1,000,000 shares × $4 per share × 0.07 = $280,000 Amount paid to preferred stockholders = $540,000 (the lower of the amount declared or the current dividend preference amount + dividends in arrears) = $260,000 of dividends in arrears from 2021 + $280,000 of current dividends. Amount paid to common stockholders = Total dividend of $600,000 – Version 1
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Amount paid to preferred stockholders of $540,000 = $60,000 8)
Balance, January 31, 2022 Net income
TACOMA COMPANY Statement of Stockholders' Equity For the Year Ended December 31, 2022 Common Additional Retained Treasury Stock Paid-in Earnings Stock Capital $ $ $ $ 400,000 500,000 1,000,000 (40,000) 150,000
Issuance of common stock Reissuance of treasury stock Cash dividend
60,000
Balance, December 31, 2022
$ 460,000
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$ 1,860,000 150,000
72,000
132,000
20,000
$ 572,000
Total
20,000
(22,000)
(22,000)
$ 1,128,000 $ (20,000)
$ 2,140,000
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9) a. 2021 EPS = (Net income – Preferred dividends) ÷ Average number of common shares outstanding = ($9,993 – $0) ÷ [(10,718 + 10,771) ÷ 2] = $0.93 per share b. Assets = Liabilities + Stockholders' Equity Stockholders' Equity = Assets – Liabilities December 31, 2020: = $67,646 – $15,466 = $52,180 December 31, 2021: = $79,571– $18,551 = $61,020 2021 Return on equity = (Net income – Preferred dividends) ÷ Average common stockholders' equity = ($9,993 – $0) ÷ [($52,180 + $61,020) ÷ 2] = 0.177 = 17.7% c. Price/Earnings Ratio = Current stock price (per share) ÷ Earnings per share (annual) = $10 per share ÷ $0.93 per share = 10.75 10) Ratio 1.Price Earnings Ratio 2.Earnings per Share 3.Return on Equity
Formula G E H
Interpretation D G I
Debit
Credit
11) a. Cash
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15,000
25
N. O'Rode, Capital
15,000
b. Debit N. O'Rode, Drawings
Credit
500
Cash
500
c. Debit Consulting Revenue
Credit
60,000
Operating Expenses
12,000
N. O'Rode, Capital
48,000
d. Debit N. O'Rode, Capital
Credit
6,000
N. O'Rode, Drawings ($500 × 12 months)
6,000
e. O'Rode Consulting Statement of Owners' Equity For the Year Ended December 31, 2021 N. O'Rode, Capital, January 1 Add: Capital contribution Add: Net income Total Less: Withdrawals
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$ 0 15,000 48,000 63,000 (6,000)
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N. O'Rode, Capital, December 31
$ 57,000
12) a. Debit Cash
Credit
200,000
Groucho, Capital
90,000
Harpo, Capital
70,000
Chico, Capital
40,000
b. Partners'proportion of capital invested: Groucho: Harpo: Chico:
$ 90,000 ÷ $200,000 = 45% $ 70,000 ÷ $200,000 = 35% $ 40,000 ÷ $200,000 = 20%
If Groucho receives 45% of the total drawings disbursed, or $2,700, the total drawings disbursement is $6,000 (or $2,700 ÷ 0.45). Harpo receives $2,100 (or $6,000 × 0.35) and Chico receives $1,200 ($6,000 × 0.2) c. Debit Groucho, Drawings
2,700
Harpo, Drawings
2,100
Chico, Drawings
1,200
Cash
Credit
6,000
d. Debit
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Credit
27
Sales Revenue
116,000
Groucho, Capital (0.45 × $84,000)
37,800
Harpo, Capital (0.35 × $84,000 )
29,400
Chico, Capital (0.2 × $84,000)
16,800
Operating Expenses
32,000
e. Multiply the monthly income disbursements by 12 to determine the balance in the Drawings accounts at the end of the year but before closing. Debit Groucho, Capital
32,400
Harpo, Capital
25,200
Chico, Capital
14,400
Credit
Groucho, Drawings ($2,700 per month × 12)
32,400
Harpo, Drawings ($2,100 per month × 12)
25,200
Chico, Drawings ($1,200 per month × 12)
14,400
f. Marx Brothers' Partnership Statement of Partners' Equity For the Year Ended December 31, 2021 Groucho Harpo Investments, January 1, 2021 Additional Investments during year
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$ 90,000 0
$ 70,000 0
Chico $ 40,000 0
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Net income for the year Totals Less: Drawings during year
37,800 127,800 (32,400)
29,400 99,400 (25,200)
16,800 56,800 (14,400)
Partners' equity, December 31, 2021
$ 95,400
$ 74,200
$ 42,400
13) a. Declaration and distribution of a 10% stock dividend Debit Retained Earnings ($72 Market value per share × 4,000,000 Outstanding shares × 10% Stock dividend) Common Stock ($1 × 4,000,000 Outstanding shares × 10%) Additional Paid-in Capital
Credit
28,800,000
400,000 28,400,000
b. Assets
=
Liabilities
+
Stockholders' Equity Retained Earnings –28,800,000 Additional Paid-in Capital Common Stock
+28,400,000 +400,000
c. Declaration and distribution of a 100% stock dividend Debit
Credit
Retained Earnings ($1 Par value per share × 4,000,000 Outstanding shares × 100% Stock dividend) Common Stock
4,000,000
Assets
Stockholders' Equity
4,000,000
d.
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=
Liabilities
+
29
Retained Earnings Common Stock
–4,000,000 +4,000,000
14) Stock Split Purpose Accounting Effect
B H, K
Large Stock Dividend D J
Stock Repurchase A, C, E, F G
15) Treasury Stock F Cash Dividend E Initial Public Offering (IPO) M Preferred Stock A Outstanding Shares B Earnings Per Share (EPS) L Stock Dividend I Residual Claim J Return on Equity (ROE) H 16) Corporation B Par Value E Growth Investment I LLC A Current Dividend Preference L Partnership M Market Value F Income Investment H Cumulative Dividend Preference D Sole Proprietorship K
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17) Date of Declaration E Issued Shares L Seasoned New Issues F Pro Rata Basis H Date of Record D Additional Paid-in Capital B Outstanding Shares A Stock Options C Payment Date J
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CHAPTER 12 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) The statement of cash flows explains the difference between the beginning and ending balances for the cash and cash equivalents account. ⊚ true ⊚ false
2) The payment of salaries and wages would be reported as an operating activity on the statement of cash flows. ⊚ true ⊚ false
3) Maya Company's purchase of 100 shares of Labrador Incorporated common stock would be reported as a financing activity on its statement of cash flows. ⊚ true ⊚ false
4) The receipt of dividends and interest are both reported as cash inflows from investing activities on the statement of cash flows. ⊚ true ⊚ false
5) The payment of interest on bonds is classified as a cash outflow from operating activities on the statement of cash flows. ⊚ true ⊚ false
6) Treasury stock purchased with cash are classified as cash outflows from financing activities on the statement of cash flows. ⊚ true ⊚ false
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7) The approach to preparing the cash flow statement relies on the following rearrangement of the balance sheet equation: Change in cash = Change in (Liabilities + Stockholders' Equity + Noncash Assets). ⊚ true ⊚ false
8) The reporting of financing activities is identical whether a company uses the indirect method or the direct method for the operating section on the statement of cash flows. ⊚ true ⊚ false
9) Under the indirect method, changes in current assets are used in determining cash flows from operating activities and changes in current liabilities are used in determining cash flows from financing activities. ⊚ true ⊚ false
10) When preparing the operating activities section of the statement of cash flows using the indirect method, Accumulated Depreciation is added to net income in the operating section. ⊚ true ⊚ false
11) When preparing the operating activities section of the statement of cash flows using the indirect method, a decrease in accounts receivable is subtracted from net income. ⊚ true ⊚ false
12) When preparing the operating activities section of the statement of cash flows using the indirect method, an increase in Income Taxes Payable is added to net income. ⊚ true ⊚ false
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13) When the net cash flows from operating, investing, and financing activities are combined to arrive at the overall net change in cash for the year, a net decrease in cash is subtracted from the beginning cash balance to calculate the ending cash balance. ⊚ true ⊚ false
14) Major investing and financing activities that do not involve cash do not have to be reported as part of the statement of cash flows. ⊚ true ⊚ false
15) In general, the cash flow from operating activities is considered by many to be the most important component of the statement of cash flows. ⊚ true ⊚ false
16) A healthy company typically shows positive cash flows in the financing activities section of the statement of cash flows. ⊚ true ⊚ false
17) In the decline phase, the company continues to enjoy positive operating cash flows but stops spending cash on investing activities and instead uses its cash for financing activities such as repaying lenders and returning excess cash to shareholders. ⊚ true ⊚ false
18) Depreciation Expense is not reported on the statement of cash flows when prepared using the direct method. ⊚ true ⊚ false
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19) When preparing the operating activities section of the statement of cash flows using the direct method, net income must be adjusted for gains or losses realized when property, plant, and equipment is sold. ⊚ true ⊚ false
20) When preparing the operating activities section of the statement of cash flows using the direct method, a gain or loss from selling equipment is reported in the operating activities section of the statement of cash flows. ⊚ true ⊚ false
21) Investing activities include receiving cash from the sale of land and also the resulting gain or loss on the sale. ⊚ true ⊚ false
22) Using the T-account approach to preparing the statement of cash flows, an increase in Accounts Payable would appear on the debit side of the Cash account. ⊚ true ⊚ false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 23) The statement of cash flows cannot be used to determine: A) changes in working capital. B) expenditures on long-term assets. C) profitability as measured by specific revenues and expenses. D) reliance on external financing.
24)
Which of the following statements about the statement of cash flows is not correct?
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A) It does not replace the income statement. B) It provides details as to how cash changed during a period. C) It provides information about cash receipts and cash payments over a period of time. D) It measures profitability.
25) Suppose a company generally records revenues and expenses before receiving or making cash payments. Which of the following statements is not correct? A) If revenues are falling, a net loss could result even though the company reports a net cash inflow from operating activities. B) If revenues are rising, net income could result even though the company reports a net cash outflow from operating activities. C) Net income and net cash flows provided by operating activities will always agree. D) The income statement doesn't explain changes in cash because it focuses on just the operating results of the business.
26)
Which of the following statements about the statement of cash flows is not correct?
A) GAAP requires every company to report a statement of cash flows. B) The statement of cash flows is contained in the notes to the financial statements. C) The statement of cash flows is needed because the income statement and balance sheet do not provide adequate information about the changes in cash. D) The statement of cash flows provides information about how each major type of business activity causes a company’s cash to change.
27)
Cash and cash equivalents include assets that:
A) have stable long-term value. B) are short-term, highly liquid, and purchased by the entity within three months of maturity. C) consistently grow in value over the long run. D) are expected to be used up within a year.
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28)
Which of the following items is considered to be a cash equivalent? A) An investment in a U. S. bond due in two years. B) A one-year certificate of deposit due in six months. C) A one-month Treasury bill due in two weeks. D) A promissory note due from a customer in 7 months.
29) Which of the following would not be included in the cash and cash equivalents amount reported on the balance sheet? A) Money market funds B) Checking accounts C) Treasury bills D) Notes receivable due in 90 days
30) A company purchased money market funds with cash during the current year. Which of the following statements is correct? A) This transaction will result in a decrease in cash from operating activities. B) This transaction will result in a decrease in cash from investing activities. C) This transaction will result in a decrease in cash from financing activities. D) This transaction will not cause a change in cash from operating, investing, or financing activities.
31)
Which of the following statements is correct?
A) Accrual-based net income can be manipulated because it is based on estimates. B) Cash flows are easily manipulated because they are based on estimates. C) Accrual-based net income is not easily manipulated because valuation for such items as bad debts and inventory are precise and based on objectively verifiable information. D) Cash flows are not easily manipulated because they are generated by internal transactions and do not involve external parties.
32)
Which of the following statements about the statement of cash flows is not correct?
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A) The statement of cash flows can be used to assess the likelihood of a company paying dividends. B) Net cash flow is the best measure of profitability since it does not rely on estimates. C) A company can have positive net income but at the same time have negative cash flow. D) The statement of cash flows is the only financial statement that reports business activities affecting cash.
33)
Which of the following is the best measure of a company's profitability? A) Cash-based net income B) Accrual-based net income C) Accounts Receivable D) Sales Revenue
34)
Accrual-basis accounting is superior to cash-basis accounting in that: A) it provides a better measure of profitability. B) a statement of cash flows is not needed. C) the cash balance reported will be greater. D) there is only one method of preparing the operating activities of the statement of cash
flows.
35)
What is the purpose of the statement of cash flows?
A) It is intended to provide a cash-based view of a company. B) It illustrates the profitability of a company. C) It reports the financial position of a company at a specific point in time. D) It outlines the changes in stockholders' equity accounts from the beginning of the period to the end of the period.
36)
Which of the following would be included in cash flows from operating activities?
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A) Cash received from customers. B) Cash received from an issuance of bonds. C) Cash dividends paid to stockholders. D) Cash used for purchases of equipment.
37)
Cash flows from operating activities include all of the following except: A) a purchase of land. B) collections from customers on account. C) payments to employees for hours worked. D) receipt of cash dividends.
38)
Cash flows from operating activities include: A) changes in accounts receivable. B) paying principal to lenders. C) purchases of equipment. D) proceeds from stock issuance.
39) The Viviana Company uses the indirect method to determine its cash flow from operations. Which of the following items will be subtracted from net income to find its cash flow from operations? A) Decrease in Supplies. B) Increase in Accounts Payable. C) Depreciation Expense. D) Increase in Accounts Receivable.
40) Which of the following would be classified as an operating activity on the statement of cash flows using the direct method?
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A) Cash dividends paid. B) Cash received from selling equipment. C) Cash paid to retire bonds payable at maturity. D) Cash received from accounts receivable collections.
41) A company provided a loan of $1,000,000 with interest at 7% to another company. The interest revenue from this loan would be reported on the statement of cash flows as a: A) cash inflow from operating activities. B) cash inflow from investing activities. C) cash inflow from financing activities. D) noncash investing and/or financing activity.
42) Which of the following journal entries has an effect on cash provided by (used in) operating activities? A) Bad debts expense. B) Depreciation expense. C) Sale of an investment. D) Payment of interest on long-term notes payable.
43)
Which of the following statements about cash flows from investing activities is correct?
A) The proceeds from sales of investments are reported as cash inflows from investing activities. B) Cash flows from investing activities are calculated by making adjustments to net income. C) Cash paid to acquire long-lived assets is reported as a cash inflow from investing activities. D) Cash received from issuing a long-term note payable is reported as a cash inflow from investing activities.
44)
Which of the following would be included in cash flows from investing activities?
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A) Cash collected from customers. B) Cash received from an issuance of bonds. C) Cash dividends paid. D) Cash used to purchase equipment.
45)
Cash flows from investing activities include cash:
A) inflows and outflows reflecting revenues and expenses reported on the income statement. B) inflows from the issuance of bonds. C) inflows from the sale of long-term investments. D) inflows from the sale of a company's own stock to its stockholders.
46)
Which of the following would be reported as a cash outflow from investing activities? A) Donating an old piece of equipment to charity. B) Repaying the principal of a bond. C) Buying another company's bonds with cash. D) Acquiring an investment security by issuing company stock.
47)
Cash flows from investing activities include all of the following except a(n): A) purchase of an automobile. B) sale of a trademark. C) purchase of stock of another company. D) issuance of bonds.
48) Which of the following would be classified as an investing activity on the statement of cash flows?
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A) Cash received from sale of land. B) Cash paid for interest. C) Cash received from stock issuance. D) Cash dividends paid.
49) A company's cash flows from investing activities include cash transactions relating to the purchase and disposal of which types of assets? A) All of a company's assets. B) All of a company's assets except inventory. C) All of a company's non-current assets. D) Property, plant and equipment.
50)
Cash flows from investing activities include: A) changes in Accounts Receivable. B) sale of land. C) paying principal to lenders. D) cash dividends paid.
51)
Which of the following would be included in cash flows from financing activities? A) Cash proceeds from sales. B) Cash received from a sale of land. C) Cash dividends paid. D) Cash used for purchases of equipment.
52)
Cash flows from financing activities include all of the following except:
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A) payment of long-term debt. B) payment of interest. C) proceeds from stock issuance. D) cash dividends paid.
53) Which of the following would be classified as a financing activity on the statement of cash flows? A) Cash receipts from accounts receivable collections. B) Cash receipts from sale of equipment. C) Cash paid to purchase treasury stock. D) Cash paid for interest on notes payable.
54) The repayment of the principal of a loan which had been used to finance the purchase of equipment should be reported on the statement of cash flows as a: A) cash outflow from investing activities. B) cash outflow from operating activities. C) cash outflow from financing activities. D) noncash investing and financing activities in a supplemental disclosure.
55)
Which of the following statements about financing activities is not correct?
A) Cash dividends paid to a company's stockholders are reported as cash outflows from financing activities. B) When a company issues stock for cash, it reports a cash inflow from financing activities. C) When a company repurchases stock with cash, it reports a cash outflow for financing activities. D) When a company repays a loan, it reports a cash inflow from financing activities.
56)
Which of the following statements about cash flows from financing activities is correct?
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A) When a company borrows from lenders, a cash outflow from financing activities has occurred. B) When a company receives cash dividends, a cash inflow from financing activities has occurred. C) When a company repurchases its own stock, a cash outflow for financing activities has occurred. D) When a company pays cash dividends, a cash inflow from financing activities has occurred.
57) Which of the following is included in the financing activities on a statement of cash flows? A) Changes in accounts payable. B) Purchases of equipment. C) Interest paid to lenders. D) Cash dividends paid.
58)
Cash flows from financing activities can include: A) selling goods on credit. B) acquiring long-lived assets. C) issuing long-term debt. D) purchasing inventory on credit.
59) Which of the following items below will be subtracted in the financing cash flow portion of the statement of cash flows? A) Net income earned. B) Bank loans obtained. C) Payment of dividends. D) Disposal of equipment.
60)
Which of the following statements about classification choices is correct?
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A) GAAP classifies cash dividends paid as a financing activity, but IFRS allows them to be classified as either an operating or financing activity. B) GAAP allows interest paid to be classified as either an operating or financing activity, but IFRS requires that it be classified as a financing activity. C) GAAP classifies cash dividends received as an investing activity, but IFRS allows them to be classified as either an operating or investing activity. D) GAAP classifies interest received as either an operating or investing activity, but IFRS requires it to be classified as an investing activity.
61)
Cash provided by issuing stock to owners should be reported as cash: A) inflows from financing activities. B) outflows from financing activities. C) inflows from investing activities. D) outflows from investing activities.
62) Which of the following items would not be classified as a cash flow from financing activities? A) Payments of amounts owed to owners. B) Borrowing from financial institutions. C) Issuing additional common stock. D) Making a payment on account.
63)
Which of the following classifications is not used on the statement of cash flows? A) Operating B) Investing C) Financing D) Spending
64)
Which of the following is not needed to prepare a statement of cash flows?
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A) Statement of Retained Earnings B) Comparative balance sheets C) Additional data concerning selected accounts that increase and decrease as a result of investing and/or financing activities D) A complete income statement
65)
Which of the following equations is correct?
A) Change in cash = Change in noncash assets B) Change in cash = Change in liabilities + Change in stockholders' equity C) Change in cash = Change in liabilities + Change in stockholders' equity − Change in noncash assets D) Change in cash = Change in liabilities + Change in stockholders' equity + Change in noncash assets
66) The statement of cash flows may be viewed in terms of the balance sheet equation. Which of the following expressions below is correct? A) Change in Cash = Change in (Liabilities + Stockholders’ Equity − Noncash Assets) B) Change in Cash = Change in (Stockholders’ Equity − Liabilities + Noncash Assets) C) Change in Cash = Change in (Liabilities − Noncash Assets) D) Change in Cash = Change in (Stockholders’ Equity − Liabilities)
67) Which of the statements below is correct when comparing the direct and indirect methods of reporting operating cash flows?
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A) The direct method starts with net income and makes adjustments to arrive at the net cash provided by or used in operations. B) The indirect method starts with cash collected from customers and details cash inflows and outflows from operations. C) The indirect method starts with net income and makes adjustments to arrive at the net cash provided by or used in operations. D) The net cash provided by or used in operations will be different depending on whether the direct or indirect method is used.
68) Which of the following variations of the accounting equation describes the preparation of the statement of cash flows? A) Change in cash = Change in (Liabilities + Stockholders' equity − Noncash assets) B) Change in cash = Change in (Liabilities − Stockholders' equity + Noncash assets) C) Change in cash = Change in (Liabilities + Stockholders' equity + Noncash assets) D) Change in cash = Change in (Liabilities − Stockholders' equity − Noncash assets)
69) If the calculation of cash flows from operating activities starts with net income, the company: A) is using the net income method. B) will remove the effects of all noncash items included in the calculation of net income. C) is using the direct method. D) will add all noncash items not included in the calculation of net income.
70) What is the starting point for calculating cash flows from operations when the indirect method is used? A) Net income from the income statement. B) Calculate the net change in the cash account. C) Add the change in accounts receivable to sales revenue. D) Identify the balance sheet accounts that relate to operating activities.
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71)
Which of the following statements is correct?
A) The Accumulated Depreciation account includes cash flows that may be categorized as both operating and investing. B) Inventory includes cash flows that may be categorized as both operating and investing. C) Retained Earnings includes cash flows that may be categorized as both operating and investing. D) Bonds Payable includes cash flows that may be categorized as both operating and financing.
72)
How is the change in cash classified on the statement of cash flows? A) It is found in the investing activities section of the statement. B) It is found in the operating activities section of the statement. C) It is found in the financing activities section of the statement. D) It is the sum of the investing, operating, and financing activities sections.
73) Alton Baker Company's balance sheet indicated that the cash account increased by $15,120 during the past year. Net cash provided by operating activities was $39,200 and net cash used in investing activities was $17,080. What was the net cash flow effect of the company's financing activities? A) Net cash provided of $7,000. B) Net cash used of $7,000. C) Net cash used of $41,160. D) Net cash provided of $41,160.
74) In calculating the net cash provided by or used in operations using the indirect method, which of the following items would be added to net income?
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A) An increase in Accounts Receivable. B) A decrease in Prepaid Rent. C) An increase in long-lived assets. D) A decrease in Salaries and Wages Payable.
75) If operating cash flows are calculated using the indirect method, which of the choices below correctly states the direction of adjustment to convert net income into net cash provided by or used in operations?
A) B) C) D)
Account
Deduct from Net Income
Add to Net Income
Inventory Accounts Payable Accounts Receivable Accrued Liabilities
Decrease Decrease Decrease Increase
Increase Increase Increase Decrease
A) Option A B) Option B C) Option C D) Option D
76) Depreciation is added back to net income in a statement of cash flows prepared using the indirect method because it: A) reduces net income but not cash. B) is a cash inflow. C) is a revenue. D) is a valuation concept.
77) Patterson Company’s Depreciation Expense is $23,200 and the beginning and ending Accumulated Depreciation balances are $151,600 and $156,600, respectively. What is the cash paid for depreciation?
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A) $23,200 B) $5,000 C) $0 D) $28,200
78) Patterson Company’s Depreciation Expense is $56,000 and the beginning and ending Accumulated Depreciation balances are $420,000 and $434,000, respectively. What is the cash paid for depreciation? A) $56,000 B) $14,000 C) $0 D) $70,000
79) Which of the following statements about the calculation of cash flows from operating activities under the indirect method is correct? A) When the indirect method is used, changes in current liabilities are subtracted while changes in current assets are added to convert net income to net cash flow from operating activities. B) When the indirect method is used, depreciation expense is added to net income as a step in the process of calculating net cash flow provided by operating activities. C) When the indirect method is used, changes in long-term assets are added to convert net income to net cash flow provided by operating activities. D) When the indirect method is used, changes in long-term liabilities are subtracted to convert net income to net cash flow provided by operating activities.
80) When the indirect method is used, if accounts payable increases during the accounting period, the change in accounts payable is: A) added to the change in the cash account. B) added to net income. C) subtracted from net income. D) subtracted from the change in the cash account.
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81) When the indirect method is used, if a prepaid expense account increases during the accounting period, the change in the prepaid expense account is: A) added to the change in the cash account. B) added to net income. C) subtracted from net income. D) subtracted from the change in the cash account.
82) Assume a company uses the indirect method to prepare its statement of cash flows. If the Supplies account decreases and Salaries and Wages Payable increases during an accounting period, what does the company do with the changes in these accounts to calculate cash flows from operating activities? A) Both changes are subtracted from net income. B) The change in Salaries and Wages Payable is added to net income; the change in Supplies is subtracted from net income. C) Both changes are added to net income. D) The change in Supplies is added to net income; the change in Salaries and Wages Payable is subtracted from net income.
83) Bailey Hill Company uses the indirect method to determine its net cash flows from operating activities. During the course of the year, the company's Accounts Receivable increased by $28,000 and its Accounts Payable decreased by $14,000. If these are the only two adjustments required to convert net income to net cash provided by operating activities, the combined effect will be a(n): A) subtraction of $14,000. B) addition of $14,000. C) addition of $42,000. D) subtraction of $42,000.
84)
Using the indirect method, which of the following would not be added to net income?
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A) An increase in Equipment. B) A decrease in Prepaid Insurance. C) An increase in Salaries and Wages Payable. D) A decrease in Supplies.
85) Assume a company uses the indirect method to prepare its statement of cash flows. If Accounts Receivable decreases and Deferred Revenue increases during an accounting period, what does the company do with the changes in these accounts to calculate cash flows from operating activities? A) Both are added to net income. B) The change in accounts receivable is added to net income; the change in deferred revenue is subtracted. C) Both are subtracted from net income. D) The change in deferred revenue is added to net income; the change in accounts receivable is subtracted.
86) Harlow Industries reported net income of $27,000 for the current year. During the year, Inventory decreased by $8,300, Accounts Payable decreased by $8,650, Depreciation Expense was $11,300, and Accounts Receivable increased by $7,800. If the indirect method is used, what is the net cash provided by operating activities? A) $47,450 B) $30,150 C) $63,050 D) $11,800
87) Harlow Industries reported net income of $56,000 for the current year. During the year, Inventory decreased by $19,600, Accounts Payable decreased by $22,400, Depreciation Expense was $28,000, and Accounts Receivable increased by $18,200. If the indirect method is used, what is the net cash provided by operating activities?
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A) $29,400 B) $63,000 C) $80,360 D) $144,200
88)
Skinner Butte, Incorporation had the following information:
Net income Depreciation Increase in accounts receivable Decrease in prepaid rent Increase in accrued liabilities Cash paid to purchase office equipment
$ 40,000 6,000 2,000 (800) 1,800 8,000
What is Skinner Butte’s net cash provided by operating activities? A) $35,000 B) $37,000 C) $43,000 D) $46,600
89) The following additional information is available from the financial statements of Garfield Industries: Amortization Expense Purchase of building for cash Depreciation Expense Increase in Accounts Receivable Increase in Bonds Payable Increase in Common Stock Increase in Inventory Decrease in Accounts Payable Increase in Salaries and Wages Payable Cash dividends paid Net income
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$ 36,000 270,000 108,000 30,000 500,000 120,000 86,000 136,000 50,000 200,000 584,000
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What is Garfield’s net cash provided by operating activities? A) $526,000 B) $570,000 C) $792,000 D) $736,000
90) Mill Garden Company's income statement for the year shows a net loss of $135,000. Additional information for the year follows: Depreciation Expense Increase in Accounts Receivable Decrease in Inventory Decrease in Prepaid Rent Decrease in Accounts Payable
$ 60,000 108,000 37,500 13,500 16,500
What is the net cash provided by (used in) operating activities? A) ($148,500) B) $40,500 C) $19,500 D) ($67,500)
91) Wilson Company uses the indirect method to determine its cash flow from operations. During the course of the year, Wilson’s Accounts Receivable increased by $28,000 and its Accounts Payable decreased by $14,000. As a result of these two items, the net addition (or subtraction) to convert net income to cash flow from operations equals: A) $14,000. B) ($14,000). C) $42,000. D) ($42,000).
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92) The information below was obtained from the financial statements of Faraday Corporation. Based on this information, what was the amount of the net cash provided by operating activities during the current year?
Net Income Depreciation Expense Accounts Receivable Inventory Accounts Payable Salaries and Wages Payable
Prior Year
Current Year
$ 500,000 60,000 89,000 116,000 120,000 56,000
$ 655,000 72,000 78,000 142,000 117,000 68,000
A) $713,000 B) $721,000 C) $661,000 D) $637,000
93) is:
The starting point for preparing the operating activities section using the indirect method
A) current assets. B) current liabilities. C) net income. D) ending cash balance.
94) Which of the following statements best describes the reason Depreciation Expense is added to net income when preparing the statement of cash flows? A) Depreciation expense originally reduced net income, but it actually represents a cash inflow for the company. B) Depreciation expense originally reduced net income, but the expense does not involve a cash payment (outflow). C) Depreciation expense originally reduced net income, but it actually represents a cash outflow for the company. D) Depreciation expense is not included in net income,therefore, its cash effect must be accounted for separately.
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95) When preparing the statement of cash flow using the indirect method, Depreciation Expense is: A) added back to net income under the operating activities section. B) subtracted from net income under the operating activities section. C) subtracted from net income under the financing activities section. D) added back to net income under the financing activities section.
96) In arriving at cash from operating activities, adding a decrease in Supplies to net income eliminates the effect of recording expenses that: A) increased net income but has not been paid in cash this period. B) decreased net income but has not been paid in cash this period. C) decreased net income and decreased cash. D) increased net income and increased cash flow this period.
97) When the indirect method is used to determine net cash provided by (used in) operating activities, subtracting an increase in Accounts Receivable from net income eliminates the effect of recording revenue that: A) increased net income but did not impact cash. B) decreased net income but did not impact cash. C) increased net income and increased cash flow. D) decreased net income and decreased cash flow.
98) Subtracting a decrease in Deferred Revenue from net income eliminates the effect of recording revenue that: A) increased net income but did not impact cash this period. B) decreased net income but did not impact cash this period. C) increased net income and increased cash flow this period. D) decreased net income and decreased cash flow this period.
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99) In arriving at cash from operating activities, subtracting a decrease in Salaries and Wages Payable from net income includes the cash effects of transactions that: A) increased cash but did not affect net income. B) increased cash and increased net income. C) decreased cash but did not affect net income. D) decreased cash and decreased net income.
100) When the indirect method is used to determine net cash provided by (used in) operating activities, adding an increase in Interest Payable to net income eliminates the effect of recording expenses that: A) increased net income but did not impact cash. B) decreased net income but did not impact cash. C) increased net income and increased cash flow. D) decreased net income and decreased cash flow.
101) Assume that the indirect method is used to determine net cash provided by (used in) operating activities and that the Accounts Receivable balance decreased by $10 million during the year. That $10 million should be: A) added to net income. B) subtracted from net income. C) added to investing activities. D) subtracted from investing activities.
102) Assume that the indirect method is used to determine net cash provided by (used in) operating activities and that Prepaid Insurance decreased during the year. That decrease is added to net income because:
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A) the company paid additional premiums this period in excess of the Insurance Expense recorded on the income statement. B) a decrease in Prepaid Insurance causes an increase in Insurance Expense and a decrease in net income, but it does not involve cash, so it is added back to net income. C) it includes the impact of increasing cash and increasing net income. D) it accounts for purchasing more insurance during the period than has been expensed.
103) Two years ago, Bethel, Incorporated bought $44,000 in bonds from another company. This month, it sold half of those bonds for $21,340 and purchased the common stock of another company for $1,350. On the statement of cash flows for this accounting period, Bethel would report a net cash: A) inflow of $19,990 from investing activities. B) inflow of $21,340 from investing activities. C) outflow of $21,340 from investing activities. D) outflow of $19,990 from investing activities.
104) Two years ago, Bethel, Incorporated bought $80,000 in bonds from another company. This month, it sold half of those bonds for $41,280 and purchased the common stock of another company for $2,000. On the statement of cash flows for this accounting period, Bethel would report a net cash: A) outflow of $39,280 from investing activities. B) inflow of $39,280 from investing activities. C) inflow of $41,280 from investing activities. D) outflow of $41,280 from investing activities.
105)
In determining cash flows related to investing activities, which accounts are analyzed? A) Inventory and accounts receivable. B) Loans payable and common stock. C) Short-term investments and prepaid expenses. D) Long-lived tangible and intangible assets.
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106) Cleveland Company paid cash to purchase equipment costing $957,600 this year. Also this year, the company sold equipment that originally cost $644,000 five years ago for $196,000 cash. How should these transactions be listed in the statement of cash flows? A) Braden can combine the transactions and show a decrease to cash for $313,600. B) Braden can combine the transactions and show a decrease to cash for $761,600. C) The purchases and the sales of equipment must be shown separately as a decrease to cash for $1,601,600 (purchase) and an increase of $196,000 (sale). D) The purchases and the sales of equipment must be shown separately as a decrease to cash for $957,600 (purchase) and an increase of $196,000 (sale).
107) Sunnyside Company's comparative balance sheet indicated that the Equipment account increased by $112,000. Upon further investigation of the account changes, it is determined that Sunnyside purchased equipment totaling $196,000 for the year. It also sold equipment with an original cost of $84,000 for $22,400 cash. Assuming these are the only transactions affecting the investing activities, Sunnyside will report net cash flows provided by (used in) investing activities of: A) ($112,000). B) ($196,000). C) ($89,600). D) ($173,600).
108)
To determine net cash provided by or used in financing activities, one must analyze the: A) Notes Receivable and Bonds Payable accounts. B) Cash account. C) Common Stock and Retained Earnings accounts. D) Interest Expense and Dividend Income accounts.
109)
Which of the following are used to determine cash flows from financing activities?
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A) Short-term debt, Accrued Liabilities, Common Stock, and Notes Payable B) Long-term debt, Common Stock, and Retained Earnings C) Short-term debt, Accrued Liabilities, Retained Earnings, and Bonds Payable D) Long-term debt, Notes Payable, Interest Expense, and Bonds Payable
110)
Which of the following represent cash outflows from financing activities? A) Distributing a stock dividend. B) Paying a bond's face value at maturity. C) Issuing long-term bonds at a discount. D) Paying interest on promissory notes.
111)
Which of the following represents a cash inflow from financing activities? A) Issuing stock in exchange for another company's stock. B) Paying a bond's face value at maturity. C) Issuing long-term bonds at a discount. D) Receiving interest on promissory notes.
112) Scots Glenn Manufacturing took out $532,000 of new debt this year and repaid $800,000 of older debt in the same year. The company also issued stock for $353,600 cash and paid dividends of $79,200 for the year. Assuming these are the only transactions affecting the financing activities, Scots Glen will report net cash flows provided by (used in) financing activities of: A) Net cash used in financing activities of $347,200. B) Net cash used in financing activities of $268,000. C) Net cash provided by financing activities of $6,400. D) Net cash provided by financing activities of $85,600.
113) Augusta Company reported that its bonds with a face value of $68,000 and a carrying value of $57,500 are retired for $65,000 cash. The amount to be reported under cash flows from financing activities is: Version 1
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A) ($75,500). B) ($7,500). C) ($65,000). D) $0; this is an operating activity.
114) Augusta Company reported that its bonds with a face value of $40,000 and a carrying value of $42,400 are retired for $44,800 cash. The amount to be reported under cash flows from financing activities is: A) ($42,400). B) ($2,400). C) ($44,800). D) $0; this is an operating activity.
115) When the indirect method is used, details from which of the following balance sheet accounts are used in calculating both operating and financing cash flows? A) Bonds Payable B) Taxes Payable C) Retained Earnings D) Common Stock
116) The Retained Earnings account has a beginning balance of $325,475 and an ending balance of $357,013. Net income is $40,551. Which of the following statements is correct? A) $31,538 would be added when determining cash flows from financing activities. B) $40,551 would be added when determining cash flows from financing activities. C) $9,013 would be subtracted when determining cash flows from financing activities. D) $325,475 would be added when determining cash flows from operating activities.
117) The Retained Earnings account has a beginning balance of $321,975 and an ending balance of $356,413. Net income is $40,251. Which of the following statements is correct?
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A) $5,813 would be subtracted when determining cash flows from financing activities. B) $40,251 would be added when determining cash flows from financing activities. C) $34,438 would be added when determining cash flows from financing activities. D) $321,975 would be added when determining cash flows from operating activities.
118) Snowberry Corporation had a net increase in Retained Earnings of $182,000 for the year. The corporation also paid $56,000 of cash dividends that had been declared in the previous year. This year, the corporation declared $50,400 of dividends but has not paid them as of year-end. Given this information, the net income for the current year must have been: A) $176,400 B) $238,000 C) $182,000 D) $232,400
119)
Cash flows from financing activities:
A) includes all cash inflows and outflows associated with a company's lending activities. B) includes all cash inflows and outflows between a company and its stockholders. C) are always negative because of the payments of cash dividends as well as interest and principal on debt. D) are always positive unless the company is experiencing serious financial trouble.
120) The following information is taken from Bardell, Incorporated Statement of Cash Flows for the current year: Net cash provided byoperating activities Net cash provided by investing activities Cash balance, beginning of year Cash balance, end of year
$ 23,500 5,100 6,700 10,900
What is the amount of net cash provided by (used in) financing activities?
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A) $4,200 B) ($24,400) C) $24,400 D) ($4,200)
121) The following information is taken from Bardell, Incorporated Statement of Cash Flows for the current year: Net cash provided by operating activities Net cash provided by investing activities Cash balance, beginning of year Cash balance, end of year
$ 29,000 8,400 11,600 18,200
What is the amount of net cash provided by (used in) financing activities? A) $30,800 B) ($6,600) C) ($30,800) D) $6,600
122) Blair Madison Company issues $1.6 million of new stock and pays $251,000 in cash dividends during the year. In addition, the company took advantage of falling interest rates to borrow $1.56 million in a new bond issue and paid off existing bonds with a face value of $2.30 million. The company bought 506 of another company's $1,060 bonds at a $106,000 premium. The net cash flow provided by financing activities is: A) An inflow of $609,000. B) An inflow of $740,000. C) An outflow of $106,000. D) An outflow of $251,000.
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123) Blair Madison Company issues $2.8 million of new stock and pays $560,000 in cash dividends during the year. In addition, the company took advantage of falling interest rates to borrow $4.2 million in a new bond issue and paid off existing bonds with a face value of $5.6 million. The company bought 1,400 of another company's $1,000 bonds at a $280,000 premium. The net cash flow provided by financing activities is: A) An inflow of $1,400,000. B) An outflow of $560,000. C) An outflow of $280,000. D) An inflow of $840,000.
124) Company X paid Company Y $1.35 million for a new plant. During the same accounting period, Company X experienced the following changes in its balance sheet: Cash decreased by $350,000, Accounts Receivable increased by $321,300, Inventory increased by $275,800, Property, Plant, and Equipment increased by $752,900, and Bonds Payable increased by $1 million. The net cash flow provided by financing activities is: A) An inflow of $1.35 million. B) An inflow of $752,900. C) An inflow of $1 million. D) An outflow of $350,000.
125) Company X paid Company Y $1.35 million for a new plant. During the same accounting period, Company X experienced the following changes in its balance sheet: Cash decreased by $350,000, Accounts Receivable increased by $321,300, Inventory increased by $275,800, Property, Plant, and Equipment increased by $752,900, and Bonds Payable increased by $1 million. The net cash flow provided by financing activities is: A) An inflow of $1.35 million. B) An outflow of $350,000. C) An inflow of $1 million. D) An inflow of $752,900.
126)
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Net income Cash dividends paid to stockholders Cash proceeds from sale of land Cash proceeds from bank loan Cash payment (principal) on bank loan Cash paid to purchase equipment
$ 8,500 2,200 3,100 5,600 1,300 4,400
The company would report net cash provided by (used in) financing activities of: A) $2,100. B) $5,600. C) $6,900. D) $(3,000).
127) Net income Cash dividends paid to stockholders Cash proceeds from sale of land Cash proceeds from bank loan Cash payment (principal) on bank loan Cash paid to purchase equipment
$ 14,000 4,000 6,000 10,000 2,000 8,000
The company would report net cash provided by (used in) financing activities of: A) $(5,000). B) $4,000. C) $10,000. D) $12,000.
128) Net income Cash dividends paid to stockholders Cash proceeds from sale of land Cash proceeds from bank loan Cash payment (principal) on bank loan Cash paid to purchase equipment
$ 8,000 2,100 3,050 5,300 1,200 4,200
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A) $(1,150). B) $(1,850). C) $5,300. D) $8,000.
129) Net income Cash dividends paid to stockholders Cash proceeds from sale of land Cash proceeds from bank loan Cash payment (principal) on bank loan Cash paid to purchase equipment
$ 14,000 4,000 6,000 10,000 2,000 8,000
The company would report net cash provided by (used in) investing activities of: A) $(2,000). B) $(4,000). C) $10,000. D) $14,000.
130) Oakdale Company borrowed $1,960,000 cash from Eugene National Bank last year. In addition, the company repaid a $1,260,000 note payable to Michigan State Bank. How should these transactions be listed in the Statement of Cash Flows? A) Oakdale can combine the transactions and show an increase to cash of $700,000 in the investing activities section of the statement. B) Oakdale can combine the transactions and show an increase to cash of $700,000 in the financing activities section of the statement. C) A decrease to cash for $1,260,000 is listed in the investing activities section and an increase of $1,960,000 is in the financing activities section. D) Transactions must be shown separately as a decrease to cash for $1,260,000 and an increase of $1,960,000 in the financing activities section.
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131) ABC Company issued 30,000 shares of common stock in January. In August, the company repurchased 5,000 shares for the treasury. When reporting these transactions in the statement of cash flows, ABC Company ______ combine them into one transaction in the ______ activities section. A) can; financing B) cannot; financing C) cannot; investing D) can; investing
132)
Repayments of loans will be reported as a: A) cash outflow under financing activities. B) cash inflow under financing activities. C) cash outflow under investing activities. D) cash inflow under investing activities.
133)
Material noncash investing and financing transactions are: A) reported within the body of the statement of cash flows. B) reported in a supplementary schedule to the statement of cash flows. C) not reported in any part of the financial statement because cash flow is not affected. D) reported in the body of the income statement.
134) The net cash flow provided by operating activities is $43,042, the net cash flow used in investing activities is $19,831, and the net cash flow used in financing activities is $27,597. If the beginning cash account balance is $11,883, what is the ending cash account balance? A) $7,497 B) $35,276 C) ($4,386) D) $47,159
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135) The net cash flow provided by operating activities is $37,042, the net cash flow used in investing activities is $16,831, and the net cash flow used in financing activities is $26,397. If the beginning cash account balance is $11,283, what is the ending cash account balance? A) $5,097 B) ($6,186) C) $38,759 D) $27,476
136) Westmoreland Corporation prepared its statement of cash flows for the year. The following information is taken from that statement: Net cash provided byoperating activities Net cash provided byinvesting activities Net cash flow used infinancing activities Cash balance, end of year
$ 18,100 6,000 (10,600) 18,100
What is the cash balance at the beginning of the year? A) $4,600 B) $13,500 C) $31,600 D) $7,400
137) Westmoreland Corporation prepared its statement of cash flows for the year. The following information is taken from that statement: Net cash provided by operating activities Net cash provided by investing activities Net cash flow used in financing activities Cash balance, end of year
$ 40,600 11,760 (34,720) 25,480
What is the cash balance at the beginning of the year?
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A) $15,680 B) $7,840 C) $17,640 D) $43,120
138)
The direct exchange of debt for equipment would be shown: A) on the statement of cash flows as an operating activity. B) on the statement of cash flows as an investing activity. C) on the statement of cash flows as a financing activity. D) as a supplementary disclosure to the statement of cash flows.
139)
The purchase of $121,000 of equipment by issuing a note would be reported: A) as a $121,000 investing outflow, and a $121,000 financing inflow. B) in a supplementary schedule. C) as a $121,000 operating inflow, and a $121,000 financing outflow. D) as a $121,000 investing inflow, and a $121,000 financing outflow.
140)
The purchase of $100,000 of equipment by issuing a note would be reported: A) as a $100,000 investing inflow, and a $100,000 financing outflow. B) as a $100,000 investing outflow, and a $100,000 financing inflow. C) as a $100,000 operating inflow, and a $100,000 financing outflow. D) in a supplementary schedule.
141) A general rule for the relationship between operating, investing, and financing cash flows and the financial statements is:
A)
Operating Cash Flows Investing Cash Flows Cause Changes in: Affect: Noncurrent Current assets and
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B)
C)
D)
liabilities and stockholders’ equity Noncurrent liabilities and stockholders’ equity Noncurrent assets
current liabilities
Current assets and current liabilities
Noncurrent assets
Noncurrent liabilities and stockholders’ equity Current assets and current liabilities
Current assets and current liabilities Noncurrent liabilities and stockholders’ equity Noncurrent liabilities and stockholders’ equity
A) Option A B) Option B C) Option C D) Option D
142) Strawbale, Incorporated purchases a $323,500 building, paying $222,000 in cash and signing a $101,500 promissory note. What will be reported on the statement of cash flows as a result of this transaction? A) A $323,500 cash outflow from investing activities B) A $222,000 cash outflow from investing activities and a $101,500 cash inflow from financing activities C) A $222,000 cash outflow from investing activities and a $101,500 noncash transaction D) A $323,500 cash outflow from investing activities and a $101,500 cash inflow from financing activities
143) Strawbale, Incorporated purchases a $600,000 building, paying $400,000 in cash and signing a $200,000 promissory note. What will be reported on the statement of cash flows as a result of this transaction?
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A) A $600,000 cash outflow from investing activities B) A $400,000 cash outflow from investing activities and a $200,000 cash inflow from financing activities C) A $400,000 cash outflow from investing activities and a $200,000 noncash transaction D) A $600,000 cash outflow from investing activities and a $200,000 cash inflow from financing activities
144) Supplemental disclosures required by companies using the indirect method include all of the following except: A) cash paid for interest. B) cash paid for income tax. C) cash paid for dividends. D) noncash investing and financing activities.
145)
Free cash flow is a positive cash flow from operating activities:
A) beyond what is needed to replace current property, plant, and equipment and pay cash dividends. B) across all three activity components of the statement of cash flows. C) beyond what has been allotted for future property, plant, and equipment replacement and expansion. D) across both financing and investing activities.
146)
Free cash flow may be used for all of the following except: A) expanding the business. B) paying off debt. C) building up the cash balance. D) paying employees.
147)
Negative operating cash flow may indicate all of the following except:
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A) the company may not be able to replace property, plant and equipment. B) stockholders may not receive a dividend. C) the company may be in the introductory phase of its life cycle. D) the company did not earn a profit from its core business activity.
148)
All of the following might be used to evaluate cash flow performance, except: A) the absolute amount of cash flow. B) whether cash flow is positive or negative. C) the relationship between net income and cash flow. D) the trend in sales and operating expenses.
149)
A ski resort with a calendar year-end is likely to have:
A) unpredictable fluctuations in cash flow from quarter to quarter. B) the largest cash inflow from operating activities in the second and third quarters (April – September). C) a fairly stable cash flow across all four quarters. D) the largest cash inflow from operating activities in the fourth and first quarters (October – March).
150) An outdoor water park that has a calendar year-end and is located in an area of the country that has warmer weather during April through September and colder weather during the rest of the year is likely to have: A) unpredictable fluctuations in cash flow from quarter to quarter. B) the largest cash inflow from operating activities in the second and third quarters (April through September). C) a fairly stable cash flow across all four quarters. D) the largest cash inflow from operating activities in the fourth and first quarters (October through March).
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151) A company has positive cash flow from investing and financing activities, but negative cash flow from operating activities. The likely result is: A) investors may not buy the company's stock because the receipt of dividends is unlikely. B) investors will continue to buy stock since the company's growth prospects are good. C) creditors will continue to lend money to the company. D) creditors will demand immediate repayment of all outstanding debt.
152) The difference between net income and cash flow may be due to all of the following except: A) use of the direct method of presenting cash flows from operating activities. B) the company being brand new. C) fraudulent financial reporting. D) seasonal variations in a company's operating activities.
153) The cash flow statement should be evaluated by examining the cash flow pattern suggested by the: A) subtotals of each of the three main sections. B) operating activities section since this section details the day to day operations of the business. C) change in cash regardless of which section had the biggest impact on the change. D) financing section since this section details how much debt the company has incurred.
154)
The introductory phase of a company's life cycle will most likely have net cash: A) provided by investing activities. B) used in financing activities. C) used in investing activities. D) provided by operating activities.
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155) Almost all U.S. companies have used the indirect method of preparing the statement of cash flows: A) because most users of the financial statements do not understand the direct method. B) in spite of the FASB's stated preference for the direct method. C) because it usually requires less space in the annual report. D) so that stockholders cannot determine how much cash was spent on executives' salaries.
156) Which of the following statements about the reporting of operating cash flows using the direct method is correct? A) Although most U.S. companies use the indirect method, the Financial Accounting Standards Board (FASB) prefers the direct method of accounting for cash flows from operating activities. B) The FASB prefers the indirect method of calculating cash flows from operating activities because it gives a more accurate calculation of cash provided by operating activities. C) The direct method results in a larger amount of cash flow from operating activities than does the indirect method. D) The direct and indirect methods use different presentations for cash flows from investing and financing activities.
157) Which of the following statements about preparation of the statement of cash flows is correct? A) GAAP allows the indirect method only. B) GAAP allows the direct method only. C) GAAP allows either the indirect or direct method. D) Although GAAP allows either method for the preparation of the operating activities section of the statement of cash flows, the indirect method must be used to prepare the investing activities section of the statement of cash flows.
158)
Which phrase below best describes the direct method for reporting operating cash flows?
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A) A method that incorporates financing and investing activities into cash flows from operations. B) A method employing accrual-based accounting to convert cash flows to GAAP Net Income. C) A summary of operating transactions resulting in either a debit or credit to cash. D) A series of adjustments to Net Income to arrive at operating cash flows.
159)
The advantages of the direct method include all of the following except:
A) it allows for more detailed analysis of operating cash flows. B) it provides more information than the indirect method to relate cash inflows and outflows. C) it allows for more reliable prediction of future cash flows. D) comparisons between companies are facilitated since most U.S. companies use the direct method.
160) When a company uses the direct method to determine the net cash flows from operating activities, the net cash flows from operating activities will: A) be identical to the amount reported using the indirect method. B) be larger if there is a net cash inflow and smaller if there is a net cash outflow compared to the amount reported using the indirect method. C) always be larger than the amount reported using the indirect method. D) be larger if there is a net cash outflow and smaller if there is a net cash inflow compared to the amount reported using the indirect method.
161) Which of the following statements about the calculation of cash flows from operating activities under the direct method is correct?
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A) When the direct method is used, each revenue and expense account on the income statement is individually examined to calculate the cash flows from operating activities. B) Noncash revenues and expenses must be included in cash flows from operating activities when preparing a statement of cash flows using the direct method. C) Depreciation is reported as a cash inflow in the cash flows from operating activities when the direct method is used. D) A loss on the sale of a long-term asset is subtracted in the cash flows from operating activities when the direct method is used.
162) Which of the following items would be reported on a statement of cash flows using the indirect method, but not on a statement prepared using the direct method? A) Cash paid for dividends. B) Cash received from stock issuances. C) Depreciation expense. D) Cash paid for purchase of treasury stock.
163) Assume a company uses the direct method to prepare its statement of cash flows. If the company's Accounts Receivable increase during the accounting period, the change in Accounts Receivable is: A) added to the change in the Cash account to calculate cash collected from customers. B) subtracted from Sales Revenue to calculate the cash collected from customers. C) added to Sales Revenue to calculate the cash collected from customers. D) subtracted from the change in the Cash account to calculate cash collected from customers.
164) Castle Company’s sales revenue was $584,696 and cash collected from customers was $587,003, which of the following would be consistent with this difference?
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A) Accounts Receivable could have increased. B) Cash payments could have been larger than the related expense accounts. C) Accounts Receivable could have decreased. D) Cash payments could have been smaller than the related expense accounts.
165) Bracken, Incorporated uses the direct method to determine its cash flow from operations. During the year, it had sales revenue of $480,000. Its beginning Accounts Receivable balance was $48,000, and its ending Accounts Receivable balance was $64,000. Its cash collected from customers for the year was: A) $480,000. B) $464,000. C) $496,000. D) $592,000.
166) During the current year, Kelso Construction had $976,000 in cash sales and $3,552,000 in credit sales. The Accounts Receivable balance was $848,000 at the beginning of the year and $680,000 at the end of the year. What was the total cash collected from customers during the year? A) $4,696,000 B) $4,528,000 C) $4,360,000 D) $3,720,000
167) If sales are $680,000 and the beginning and ending balances of Accounts Receivable are $34,400 and $38,400, respectively, the cash collected from customers is: A) $680,000. B) $641,600. C) $676,000. D) $684,000.
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168) Southview Company’s interest revenue for the period is $17,000 and the beginning and ending interest receivable balances are $2,820 and $7,400, respectively, cash received for interest is: A) $9,600. B) $17,000. C) $21,500. D) $12,420.
169) Southview Company’s interest revenue for the period is $28,000 and the beginning and ending interest receivable balances are $2,640 and $11,800, respectively, cash received for interest is: A) $28,000. B) $18,840. C) $37,000. D) $16,200.
170) Assume a company uses the direct method to prepare its statement of cash flows. If the company's inventory and accounts payable both increase during the accounting period, how would these changes affect cash flow calculations? A) The changes in each account are both added to net income. B) The change in inventory is subtracted from cost of goods sold and the change in accounts payable is added to cost of goods sold to find the cash paid to suppliers. C) The changes in each account are both subtracted from net income. D) The change in inventory is added to cost of goods sold and the change in accounts payable is subtracted from cost of goods sold to find the cash paid to suppliers.
171) If Cost of Goods Sold is $148,200 and the beginning and ending Inventory balances are $19,600 and $14,600, respectively, inventory purchases for cash equal:
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A) $148,200. B) $153,200. C) $133,600. D) $143,200.
172) If Cost of Goods Sold is $72,500 and the beginning and ending Inventory balances are $9,000 and $6,500, respectively, inventory purchases for cash equal: A) $72,500. B) $70,000. C) $75,000. D) $66,000.
173) The accounting records for the Fox Hollow Company show that its cost of goods sold for the year was $300,000. In addition, it had an increase in inventory of $5,000 and a decrease in accounts payable of $6,000. As a result, under the direct method, the amount of cash paid to suppliers for the year was: A) $301,000. B) $305,000. C) $306,000. D) $311,000.
174) If a company's Cost of Goods Sold is $159,200 for the period, beginning and ending Inventory balances are $18,600 and $13,600, respectively, and the beginning and ending Accounts Payable balances are $22,000 and $8,100, respectively, what is the amount of the cash paid to suppliers? A) $155,800 B) $164,700 C) $168,100 D) $150,300
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175) If a company's Cost of Goods Sold is $158,000 for the period, beginning and ending Inventory balances are $18,000 and $13,000, respectively, and the beginning and ending Accounts Payable balances are $19,000 and $7,500, respectively, what is the amount of the cash paid to suppliers? A) $157,000 B) $163,500 C) $164,500 D) $151,500
176) When the direct method is used to determine the cash flows from operating activities, other operating expenses are converted into cash outflows by: A) adding changes in prepaid expenses and accrued liabilities to other expenses. B) subtracting increases in prepaid expenses and subtracting decreases in accrued liabilities from other expenses. C) adding increases in prepaid expenses and adding decreases in accrued liabilities to other expenses. D) subtracting changes in prepaid expenses and accrued liabilities from other expenses.
177) Ashley Company uses the direct method in calculating its cash flow from operations. Which of the following items will not have an effect on cash flow from operating activities? A) Increase in inventory. B) Payment of dividends to stockholders. C) Cash collections from customers. D) Payment of interest to lenders.
178) Blanton Ridge, Incorporated’s Insurance Expense is $14,000 and the beginning and ending balances of Prepaid Insurance are $3,000 and $4,000, respectively, the cash paid for insurance is:
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A) $14,000. B) $13,000. C) $10,000. D) $15,000.
179) Blanton Ridge, Incorporated’s Salaries and Wages Expense is $450,600 during the year and the beginning and ending balances of Salaries and Wages Payable are $18,300 and $16,800, respectively, the cash paid to employees is: A) $450,600. B) $433,800. C) $449,100. D) $452,100.
180) Blanton Ridge, Incorporated’s Salaries and Wages Expense is $900,000 during the year and the beginning and ending balances of Salaries and Wages Payable are $36,000 and $33,000, respectively, the cash paid to employees is: A) $900,000. B) $867,000. C) $897,000. D) $903,000.
181) When the direct method is used to determine the cash flows from operating activities, which of the following adjustments must be made to interest expense to determine total interest payments? A) Add all changes in Interest Payable. B) Add decreases in Interest Payable and subtract increases in Interest Payable. C) Add increases in Interest Payable and subtract decreases in Interest Payable. D) Subtract all changes in Interest Payable.
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182) Which of the following would be reported on the statement of cash flows, using the direct method, as a cash flow from operating activities? A) Payment of income taxes. B) Payment of cash dividends. C) Purchase of a building. D) Purchase of treasury stock.
183) During the current year, Woodson paid $9,000 which it owed from its prior year income tax liability and $60,000 for its current year tax liability. The company still owes $12,000 at the end of the current year. How much should the company report as cash paid for income taxes on its statement of cash flows for the current year? A) $69,000 B) $81,000 C) $60,000 D) $7,000
184)
Saint Pierre Enterprises reported the following information in its financial statements:
Amounts are as of or for the year ended Inventory Accounts Receivable Accounts Payable Sales Revenue Cost of Goods Sold
Prior Year $ 55,000 68,000 34,500 305,000 203,000
Current Year $ 80,000 103,000 40,000 375,000 250,000
What is the amount of cash collected from customers during the current year? A) $350,000 B) $380,500 C) $340,000 D) $410,000
185)
Saint Pierre Enterprises reported the following information in its financial statements:
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Amounts are as of or for the year ended Inventory Accounts Receivable Accounts Payable Sales Revenue Cost of Goods Sold
Prior Year $ 55,000 68,000 34,500 305,000 203,000
Current Year $ 80,000 103,000 40,000 375,000 250,000
What is the amount of cash payments made to suppliers during the current year? A) $280,500 B) $269,500 C) $394,500 D) $230,500
186) Marathon, Incorporated showed Salaries and Wages Expense of $244,000 on its income statement. If the Salaries and Wages Payable account was $27,000 at the beginning of the year and $18,500 at the end of the year, how much cash was paid to employees? A) $217,000 B) $225,500 C) $252,500 D) $235,500
187) When the direct method is used to determine the cash flows from operating activities, which of the following adjustments must be made to income tax expense to determine total income tax payments? A) Add all changes in income taxes and income taxes payable. B) Add decreases in income taxes payable and subtract increases in income taxes payable. C) Add increases in income taxes payable and subtract decreases in income taxes payable. D) Subtract all changes in income taxes payable.
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188) Which method of preparing the operating activities section of the statement of cash flows consists of a summary of each component of operating transactions that result in either a debit or a credit to cash? A) Direct method. B) Indirect method. C) Accrual method. D) Cash method.
189) Assume that the direct method is used to prepare the operating activities section of the statement of cash flows. Which related balance sheet account will explain the difference between revenues on the income statement and cash collected from customers? A) Inventory B) Accounts Payable C) Cost of Goods Sold D) Accounts Receivable
190) Assume that the direct method is used to prepare the operating activities section of the statement of cash flows. Why is a decrease in Accounts Receivable added to sales revenue when computing cash collected from customers? A) There were more cash sales than credit sales during the year. B) There were more collections of Accounts Receivable than sales on account during the year. C) There were more credit sales than cash sales during the year. D) There were more sales on account than collections of Accounts Receivable during the year.
191) Assume that the direct method is used to prepare the operating activities section of the statement of cash flows. Which of the following statements is correct concerning a decrease in Accounts Payable?
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A) Since the cash payments were more than the credit purchases, the decrease must be added to purchases to calculate cash payments to suppliers. B) Since the cash payments were less than credit purchases, the decrease must be added to purchases to calculate cash payments to suppliers. C) Since the cash payments were more than credit purchases, the decrease must be subtracted from purchases to cash payments to suppliers. D) Since the cash payments were less than credit purchases, the decrease must be subtracted from purchases to calculate cash payments to suppliers.
192) Assume that the direct method is used to prepare the operating activities section of the statement of cash flows. When Accrued Liabilities increase, it means that the company: A) paid more cash than it recorded as operating expenses. B) paid less cash than it recorded as operating expenses. C) prepaid the operating expenses before they were incurred or recorded. D) paid for the operating expenses as they were recorded.
193) A company has a net cash inflow from operating activities of $803,000, a net cash outflow of $78,000 from investing activities and a net cash inflow of $101,800 from financing activities. The company paid $138,000 in interest, $193,500 in income taxes, and $214,000 in cash dividends. Which of the following statements about the statement of cash flows is not correct? A) Supplemental disclosures required for a company using the indirect method include the amount of interest and the amount of income taxes paid. B) The statement of cash flows will show a net increase in cash and cash equivalents of $826,800. C) The cash dividends of $214,000 paid will be reported as a cash outflow in the cash flow from investing activities section. D) If the direct method is used, the $138,000 of interest paid and the $193,500 of income taxes paid will be reported in the cash flows from operating activities.
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194) A company has a net cash inflow from operating activities of $789,000, a net cash outflow of $50,000 from investing activities and a net cash inflow of $100,000 from financing activities. The company paid $124,000 in interest, $186,500 in income taxes, and $200,000 in cash dividends. Which of the following statements about the statement of cash flows is not correct? A) The cash dividends of $200,000 paid will be reported as a cash outflow in the cash flow from investing activities section. B) Supplemental disclosures required for a company using the indirect method include the amount of interest and the amount of income taxes paid. C) The statement of cash flows will show a net increase in cash and cash equivalents of $839,000. D) If the direct method is used, the $124,000 of interest paid and the $186,500 of income taxes paid will be reported in the cash flows from operating activities.
195) Marion Manufacturing had the following cash flows for the current year. The company uses the direct method in preparing the statement of cash flows. Cash receipts from issuance of stock Bonds payable issued at face value Cash dividends received from long-term investments Cash paid for wages Cash paid for dividends Cash received from customers Cash paid for other operating expenses Cash paid to purchase equipment
$ 60,000 250,000 4,500 20,000 5,000 42,500 19,500 100,000
What is the net cash provided by (used in) operating activities? A) $7,500 B) $3,000 C) ($2,000) D) ($37,500)
196) Marion Manufacturing had the following cash flows for the current year. The company uses the direct method in preparing the statement of cash flows.
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Cash receipts from issuance of stock Bonds payable issued at face value Cash dividends received from long-term investments Cash paid for wages Cash paid for dividends Cash received from customers Cash paid for other operating expenses Cash paid to purchase equipment
$ 60,000 250,000 4,500 20,000 5,000 42,500 19,500 100,000
What is the net cash provided by (used in) investing activities? A) ($100,000) B) $210,000 C) $205,000 D) ($95,000)
197) Marion Manufacturing had the following cash flows for the current year. The company uses the direct method in preparing the statement of cash flows. Cash receipts from issuance of stock Bonds payable issued at face value Cash dividends received from long-term investments Cash paid for wages Cash paid for dividends Cash received from customers Cash paid for other operating expenses Cash paid to purchase equipment
$ 60,000 250,000 4,500 20,000 5,000 42,500 19,500 100,000
What is the net cash flows provided by (used in) financing activities? A) $310,000 B) $205,000 C) $305,000 D) $245,000
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198) Marion Manufacturing had the following cash flows for the current year. The company uses the direct method in preparing the statement of cash flows. Cash receipts from issuance of stock Bonds payable issued at face value Cash dividends received from long-term investments Cash paid for wages Cash paid for dividends Cash received from customers Cash paid for other operating expenses Cash paid to purchase equipment
$ 60,000 250,000 4,500 20,000 5,000 42,500 19,500 100,000
If the cash balance at the beginning of the current year was $0, what is the amount of cash at the end of the year? A) $56,250 B) $212,500 C) $368,750 D) $155,750
199) If a company uses the indirect method to determine cash flows from operating activities, gains: A) must be added to net income and losses subtracted from net income. B) and losses must be added to net income. C) must be subtracted from net income and losses added to net income. D) and losses must be subtracted from net income.
200) Which of the following would not be added to net income in calculating cash flows from operating activities on a statement of cash flows prepared using the indirect method? A) Amortization Expense. B) A decrease in Accounts Receivable. C) An increase in Salaries and Wages Payable. D) A gain on sale of equipment.
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201) Marvin Industries owns a piece of equipment with a cost of $144,000 and accumulated depreciation of $113,000. The equipment is sold for $51,800 cash. The amount that should be reported as a cash inflow from investing activities is: A) $51,800. B) $20,800. C) $31,000. D) $0; this transaction is a financing activity.
202) Marvin Industries owns a piece of equipment with a cost of $78,000 and accumulated depreciation of $51,000. The equipment is sold for $30,000 cash. The amount that should be reported as a cash inflow from investing activities is: A) $30,000. B) $3,000. C) $27,000. D) $0; this transaction is a financing activity.
203) Emerald Company owned equipment with a book value of $127,500 that was sold during this accounting period for $31,900 in cash, and purchased new equipment for cash of $148,700. Emerald Company would record a debit of: A) $148,700 and a credit of $95,600 to the cash account for a net cash inflow of $53,100. B) $148,700 and a credit of $31,900 to the cash account for a net cash inflow of $116,800. C) $95,600 and a credit of $148,700 to the cash account for a net cash outflow of $53,100. D) $31,900 and a credit of $148,700 to the cash account for a net cash outflow of $116,800.
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204) Emerald Company owned equipment with a book value of $72,000 that was sold during this accounting period for $18,300 in cash, and purchased new equipment for cash of $88,800. Emerald Company would record a debit of: A) $88,800 and a credit of $18,300 to the cash account for a net cash inflow of $70,500. B) $88,800 and a credit of $53,700 to the cash account for a net cash inflow of $35,100. C) $18,300 and a credit of $88,800 to the cash account for a net cash outflow of $70,500. D) $53,700 and a credit of $88,800 to the cash account for a net cash outflow of $35,100.
205) A company bought $450,000 of equipment with an expected life of 14 years and no residual value. After 10 years the company sold the equipment for $100,500. If the company uses straight-line depreciation and the indirect method is used to determine cash flows from operating activities, which of the following reflects how the sale of the equipment would be reported in the statement of cash flows? A) $100,500 is recorded as a cash inflow from investing activities and $28,071 is added to convert net income to net cash flow provided by operating activities. B) $100,500 is recorded as a cash inflow from operating activities. C) $100,500 is recorded as a cash inflow from investing activities and $28,071 is subtracted to convert net income to net cash flow provided by operating activities. D) $100,500 is recorded as a cash inflow from investing activities and no other sections of the statement are affected.
206) A company bought $250,000 of equipment with an expected life of ten years and no residual value. After six years the company sold the equipment for $94,000. If the company uses straight-line depreciation and the indirect method is used to determine cash flows from operating activities, which of the following reflects how the sale of the equipment would be reported in the statement of cash flows?
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A) $94,000 is recorded as a cash inflow from investing activities and no other sections of the statement are affected. B) $94,000 is recorded as a cash inflow from investing activities and $6,000 is added to convert net income to net cash flow provided by operating activities. C) $94,000 is recorded as a cash inflow from investing activities and $6,000 is subtracted to convert net income to net cash flow provided by operating activities. D) $94,000 is recorded as a cash inflow from operating activities.
207) Equipment, beginning of year Equipment, end of year Accumulated depreciation, beginning of year Accumulated depreciation, end of year
$ 340,000 420,000 190,000 184,000
Equipment with a cost of $20,000 and a book value of $6,000 was sold during the year for cash of $18,000. Additional equipment was purchased during the year for cash. What was the amount of cash paid for purchases of equipment during the year? A) $80,000 B) $86,000 C) $100,000 D) $62,000
208) Equipment, beginning of year Equipment, end of year Accumulated depreciation, beginning of year Accumulated depreciation, end of year
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Equipment with a cost of $20,000 and a book value of $6,000 was sold during the year for cash of $18,000. Additional equipment was purchased during the year for cash.
The company uses the indirect method in preparing the statement of cash flows. What is the amount of depreciation expense that will be reported in the operating activities section of the statement? A) $8,000 B) $22,000 C) $14,000 D) $20,000
209)
The following information is taken from the income statement of Olympic, Incorporated:
Depreciation Expense Amortization Expense Loss on Sale of Equipment Gain on Sale of Building Net Income
$ 90,000 15,000 9,000 27,000 315,000
Based on this information, what is the amount of net cash flow provided by operating activities?
A) $447,000 B) $420,000 C) $438,000 D) $402,000
210)
The T-account approach:
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A) may be used with the direct method. B) creates one big T-account for cash that replaces separate schedules to show all the changes in the cash account. C) shows cash provided as credits and cash used as debits. D) does not determine the change in each balance sheet account.
211)
Using the T-account approach:
A) Net income appears on the debit side of the Cash account under operating activities. B) Payment of long-term debt appears on the debit side of the Cash account under financing activities. C) Purchase of equipment appears on the credit side of the Cash account under operating activities. D) An increase in Accounts Receivable appears on the debit side of the Cash account under operating activities.
212) When using the T-account approach to preparing the indirect method of the statement of cash flows, which of the following would be associated with amounts entered on the credit side of the Cash T-account? A) Increase in Inventory B) Decrease in Accounts Receivable C) Decrease in Inventory D) Increase in Accrued Liabilities
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Answer Key Test name: Chap 12_7e 1) TRUE The statement of cash flows shows each major type of business activity that caused a company's cash and cash equivalents to increase or decrease during the accounting period. 2) TRUE Cash flows from operating activities are the cash inflows and outflows related directly to the revenues and expenses reported on the income statement. Operating activities involve day-to-day business activities with customers, suppliers, employees, landlords, and others. 3) FALSE A purchase of another company's common stock is an investment in that company's securities. The purchase of investments in securities is an investing activity. 4) FALSE The cash receipt of dividends and interest are both classified as cash inflows from operating activities because they enter into the determination of net income. 5) TRUE GAAP requires the payment of interest to be classified as cash outflows from operating activities because it enters into the determination of net income. 6) TRUE Repurchases of stock made with cash are classified as cash outflows from financing activities. 7) FALSE
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Assets = Liabilities + Stockholders' Equity Cash + Noncash Assets = Liabilities + Stockholders' Equity Cash = Liabilities + Stockholders' Equity − Noncash Assets Change in cash = Change in (Liabilities + Stockholders' Equity − Noncash Assets) 8) TRUE The two alternative methods (the indirect and direct methods) may be used when presenting the operating activities section of the statement of cash flows; these methods do not affect the reporting of investing or financing activities. 9) FALSE Changes in current assets and changes in current liabilities are used in determining cash flows from operating activities. 10) FALSE To eliminate the effect of having deducted Depreciation Expense in the income statement, we add it back in the statement of cash flows. Accumulated Depreciation is not reported on the income statement. 11) FALSE Accounts Receivable increases when sales are made on account and it decreases when cash is collected from customers. An overall decrease in this account, then, implies that cash collections were more than sales on account. To convert from the lower sales number that is included in net income to the higher cash collected from customers, we add the decrease in Accounts Receivable to convert net income to cash flows from operating activities. 12) TRUE An increase in Income Taxes Payable indicates that more Income Tax Expense was accrued than paid. Consequently, when the indirect method is used, this difference (representing less cash paid) must be added to net income to calculate cash flows from operating activities. Version 1
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13) TRUE The overall net change in cash equals the combined cash flows from operating, investing, and financing activities. If the net change is negative, the amount would be subtracted from the beginning cash balance to arrive at the ending cash balance. 14) TRUE In addition to their cash flows, all companies are required to report material investing and financing transactions that did not have cash flow effects (called noncash investing and financing activities). This important information is normally presented for users in a supplementary schedule to the statement of cash flows or in the financial statement notes. 15) TRUE The operating activities section indicates how well a company is able to generate cash internally through its operations and management of current assets and current liabilities. Most analysts believe this is the most important section of the statement because, in the long run, operations are the only continuing source of cash. 16) FALSE Unlike the operating and investing activities sections, where a healthy company typically shows positive and negative cash flows, respectively, the financing activities section does not have an obvious expected direction for cash flows. A healthy company that is growing rapidly could need financing cash inflows to fund its expansion. Alternatively, a healthy company could use its cash resources to repay existing loans, pay cash dividends, or repurchase shares, all of which would result in negative net cash flows from financing activities. Thus, it's not possible to evaluate the company's financing cash flows by simply determining whether they are positive or negative on an overall basis. 17) FALSE Version 1
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In the maturity phase, the company continues to enjoy positive operating cash flows but no longer has opportunities for expanding the business, so it stops spending cash on investing activities and instead uses its cash for financing activities such as repaying lenders and returning excess cash to shareholders. During the decline phase, a company's operating cash flows again become negative, prompting lenders to demand repayment of loans (i.e., negative financing cash flows). To fund these repayments, the company sells off its long-term assets, resulting in significantly positive investing cash flows. 18) TRUE The direct method converts revenues to cash inflows and expenses to cash outflows. Since depreciation is a noncash expense, it would not appear in the operating activities section of the statement of cash flows prepared using the direct method. 19) FALSE The direct method converts revenues to cash inflows and expenses to cash outflows. Since a gain is a noncash revenue and a loss is a noncash expense, they would not appear in the operating activities section of the statement of cash flows prepared using the direct method. 20) FALSE The direct method converts revenues to cash inflows and expenses to cash outflows. Since a gain is a noncash revenue and a loss is a noncash expense, they would not appear in the operating activities section of the statement of cash flows prepared using the direct method. 21) FALSE
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Whenever a company sells land, it records three things: (1) a decrease in the Land account, (2) an increase in the Cash account for the cash received on disposal, and (3) a gain if the cash received is more than the book value of the assets sold (or a loss if the cash received is less than the book value of the assets sold). The only part of this transaction that qualifies for the statement of cash flows is the cash received on disposal. This cash inflow is classified as an investing activity, just like the original land purchase. 22) TRUE An increase in Accounts Payable indicates that purchases on account exceed payments on account. As a result, the Cash T-account would reflect that increase on the debit side. 23) C The income statement (rather than the statement of cash flows) provides information on the profitability as measured by specific revenues and expenses. 24) D The income statement (rather than the statement of cash flows) measures profitability. 25) C The timing of cash receipts and payments may differ from the accrualbased income statement, which reports revenues when they are earned and expenses when they are incurred. As a result, net income and net cash flow provided by operating activities may differ. 26) B
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The statement of cash flows provides information about the changes in cash from major business activities that is not contained in the balance sheet or income statement. GAAP requires every company to report a statement of cash flows. The statement of cash flow is a separate financial statement and would not be set forth in the notes to the financial statements. 27) B Cash equivalents are short-term, highly liquid investments purchased within three months of maturity. They are considered equivalent to cash because they are both (1) readily convertible to known amounts of cash and (2) so near to maturity that their value is unlikely to change. 28) C A cash equivalent is a short-term, highly liquid investment with an original maturity of less than three months. 29) D Notes receivable would not be included in cash and cash equivalents. Cash and cash equivalents include cash on hand, cash in banks, and short-term, highly liquid investments purchased within three months of maturity. 30) D Money market funds are cash equivalents; therefore, a purchase of money market funds with cash results in no change in cash. 31) A Accrual-based net income is based on estimates such as those made for bad debts, inventory, and depreciation. It is therefore more easily manipulated than cash flow which is a result of transactions with external parties. 32) B
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Accrual-based net income is the best measure of profitability in spite of the estimates made. A company can have positive net income but negative cash flow if it has cash going out for inventory and operating expenses more quickly than it is collecting cash from customers. 33) B Business activities have financial effects even when they don’t involve cash. That’s why accrual accounting exists. When accurately reported, accrual-based net income is the best measure of a company’s profitability during the period. 34) A Business activities have financial effects even when they don’t involve cash. That’s why accrual accounting exists. When accurately reported, accrual-based net income is the best measure of a company’s profitability during the period. 35) A The statement of cash flows shows each major type of business activity that caused a company’s cash to increase or decrease during the accounting period. 36) A Operating activities are cash inflows and outflows related directly to the revenues and expenses reported on the income statement (including cash received from customers). Cash received from bonds and the payment of cash dividends are financing (rather than operating) activities. Cash used to purchase equipment is an investing (rather than an operating) activity. 37) A Buying land is an investing activity. The collections from customers on account, the payments to employees for hours worked and the receipt of cash dividends are all operating activities. 38) A
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Changes in accounts receivable is an operating activity. Purchases of equipment are investing activities. Payments of principal and proceeds from stock issuance are financing activities. 39) D Under the indirect method, decreases in current assets and increases in current liabilities are added to net income while increases in current assets and decreases in current liabilities are subtracted from net income. Accounts Receivable is a current asset. Depreciation expense is added back to net income because it reduces net income, but it does not reduce cash flow. 40) D In the direct method, sales would be converted to cash by adding a decrease in accounts receivable or by subtracting an increase in accounts receivable. Paying cash dividends and paying cash to retire bonds are financing activities. Selling equipment is an investing activity. 41) A Interest revenue received in cash would be reported on the statement of cash flows as a cash inflow from operating activities. 42) D Paying interest is a cash outflow from operating activities. Noncash expenses, such as bad debts expense and depreciation expense, do not provide or use cash. The proceeds from the sale of an investment would be classified as an investing (rather than an operating) activity. 43) A
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Cash flows from investing activities are the cash inflows and outflows related to the purchase and disposal of investments and long-lived assets. Cash flows from operating (rather than investing) activities are calculated by making adjustments to net income. Cash paid to acquire long-lived assets is reported as a cash outflow (rather than an inflow) from investing activities. Cash received from issuing a long-term note payable is reported as a cash inflow from financing (rather than investing) activities. 44) D Cash flows from investing activities are the cash inflows and outflows related to the purchase and disposal of investments and long-lived assets (including cash used to purchase equipment). The cash collected from customers is an operating (rather than an investing) activity. Cash received from an issuance of bonds and cash dividends paid are financing (rather than investing) activities. 45) C Cash flows from investing activities are the cash inflows and outflows related to the purchase and disposal of investments and long-lived assets. Cash inflows and outflows related directly to the revenues and expenses reported on the income statement are classified as operating (rather than investing) activities. Cash inflows from the issuance of bonds and from the sale of a company's own stock to its stockholders are classified as financing (rather than investing) activities. 46) C Cash flows from investing activities are the cash inflows and outflows related to the purchase and disposal of investments, such as another company's bond, and long-lived assets. Repaying the principal of a bond is a financing (rather than an investing) activity. Donating an old piece of equipment to charity and acquiring an investment security by issuing company stock are both noncash investing and financing activities. Version 1
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47) D Cash flows from investing activities are the cash inflows and outflows related to the purchase and disposal of investments and long-lived assets. Borrowing money by issuing bonds is a financing activity. 48) A Investing activities include cash inflows and outflows from purchases and disposals of investments and long-lived assets. The cash paid for interest is an operating activity. The cash received from stock issuance and the cash paid for dividends are both financing activities. 49) C Investing activities include cash inflows and outflows from purchases and disposals of investments and long-lived assets, including property, plant, and equipment. 50) B Sale of land is an investing activity. A change in Accounts Receivable relates to operating activities. Paying principal to lenders and cash dividends paid are financing activities. 51) C Cash flows from financing activities include exchanges of cash with stockholders, including the payment of cash dividends, and cash exchanges with lenders (for principal on loans). 52) B GAAP requires the payment of interest to be classified as a cash outflow from operating activities because it enters into the determination of net income. Cash flows from financing activities include exchanges of cash with stockholders (such as proceeds from stock issuance and payments of cash dividends) and cash exchanges with lenders (such as the payment of long-term debt). 53) C
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Cash flows from financing activities include exchanges of cash with stockholders, including the purchase of treasury stock, and cash exchanges with lenders (for principal on loans). 54) C Cash flows from financing activities include exchanges of cash with stockholders and cash exchanges with lenders (for principal on loans). 55) D Cash flows from financing activities include exchanges of cash with stockholders and cash exchanges with lenders (for principal on loans). When a company repays a loan, it reports a cash outflow (rather than an inflow) from financing activities. 56) C When a company repurchases its own stock, a cash outflow for financing activities has occurred. When a company borrows from lenders, a cash inflow (rather than an outflow) from financing activities has occurred. When a company receives cash dividends, a cash inflow from operating (rather than financing) activities has occurred. When a company pays cash dividends, a cash outflow (rather than an inflow) from financing activities has occurred. 57) D Cash dividends paid is a financing activity. Changes in accounts payable and payments of interest are included in the cash flows from operating activities. Purchases of equipment are included in the investing activities. 58) C Financing activities relate to exchanges of cash between the company and its shareholders and creditors. Issuing long-term debt creates a cash inflow from creditors. 59) C
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Net income appears in the cash flows from operating activities and cash flows from the disposal of equipment are related to investing activities. Bank loans obtained would be added (not subtracted) in the financing cash flows section. 60) A GAAP classifies cash dividends paid as financing activities because they are transactions with stockholders. IFRS allows cash dividends paid to also be classified as operating activities to assist users in determining the company's ability to pay dividends out of operating cash flows. GAAP requires cash payments of interest and the cash receipts of dividends and interest to be classified as operating activities because all three enter into the determination of net income. IFRS allows interest paid to also be classified as a financing activity because it is a cost of obtaining financial resources. IFRS also allows interest and dividends received to be classified as investing activities because they are returns on investments. 61) A Cash flows from financing activities include exchanges of cash with stockholders and cash exchanges with lenders (for principal on loans). 62) D Cash flows from financing activities include exchanges of cash with stockholders and cash exchanges with lenders (for principal on loans). Making a payment on account would be classified as a cash outflow from operating activities, which are the cash inflows and outflows related directly to the revenues and expenses reported on the income statement. 63) D The statement of cash flows requires that all cash inflows and outflows be classified as relating to the company’s operating, investing, or financing activities. Version 1
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64) A To prepare a statement of cash flows, you need a comparative balance sheet (to calculate changes in balance sheet accounts), a complete income statement (used primarily to calculate operating cash flows), and additional information about accounts related to financing and investing activities. 65) C Assets = Liabilities + Stockholders' Equity Cash + Noncash Assets = Liabilities + Stockholders' Equity Cash = Liabilities + Stockholders' Equity − Noncash Assets Change in cash = Change in (Liabilities + Stockholders' Equity − Noncash Assets) 66) A The balance sheet equation can be rearranged to isolate the change in cash as follows: Cash + Noncash Assets = Liabilities + Stockholders’ Equity Cash = Liabilities + Stockholders’ Equity − Noncash Assets Change in Cash = Change in (Liabilities + Stockholders’ Equity − Noncash Assets) 67) C The indirect method starts with net income and makes adjustments, such as adding back depreciation, to arrive at the net cash provided by or used in operations. The direct method starts with cash collected from customers and details cash inflows and outflows from operations to arrive at the net cash provided by or used in operations. Both methods will arrive at the same net cash provided by or used in operations. 68) A
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Assets = Liabilities + Stockholders’ Equity Cash + Noncash Assets = Liabilities + Stockholders’ Equity Cash = Liabilities + Stockholders’ Equity − Noncash Assets Change in cash = Change in (Liabilities + Stockholders' equity − Noncash assets) 69) B Using the indirect method, the calculation of cash flows from operating activities begins with net income and then adjustments are made to eliminate the effects of items that do not involve cash. 70) A The indirect method starts with net income from the income statement and adjusts it by eliminating the effects of items that do not involve cash (for example, depreciation) and including items that do have cash effects. 71) A Accumulated Depreciation can be affected by operating activities (depreciation for using equipment in daily operations) as well as investing activities (disposing of equipment). 72) D The sum of the net cash flows from the three categories (operating, investing, and financing) represents the overall change in cash on the balance sheet between the beginning and end of the period. 73) B Net change in cash = Cash flows provided by (used in) operating activities + Cash flows provided by (used in) investing activities + Cash flows provided by (used in) financing activities Cash flows provided by (used in) investing activities = Net change in cash − Cash flows provided by (used in) operating activities − Cash flows provided by (used in) investing activities = $15,120 − $39,200 − ($17,080) = ($7,000) Version 1
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74) B Decreases in current assets and increases in current liabilities are added to Net Income to arrive at net cash provided by or used in operations. Increases in current assets or decreases in current liabilities are subtracted from Net Income to arrive at net cash provided by or used in operations. 75) B Increases in current assets and decreases in current liabilities are subtracted from Net Income to arrive at net cash provided by or used in operations. Decreases in current assets or increases in current liabilities are added to Net Income to arrive at net cash provided by or used in operations. 76) A When initially recording depreciation in the accounting system, we increase Depreciation Expense (with a debit) and increase Accumulated Depreciation (with a credit). Notice that depreciation does not involve cash. To eliminate the effect of having deducted Depreciation Expense in the income statement, we add it back in the statement of cash flows. 77) C When initially recording depreciation, we increase Depreciation Expense (with a debit) and increase Accumulated Depreciation (with a credit). Notice that depreciation does not involve cash. 78) C When initially recording depreciation, we increase Depreciation Expense (with a debit) and increase Accumulated Depreciation (with a credit). Notice that depreciation does not involve cash. 79) B To eliminate the effect of having deducted Depreciation Expense in the income statement, we add it back to net income in the operating activities section of the statement of cash flows. Version 1
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80) B Accounts Payable increases when purchases are made on account and it decreases when cash is paid on account. An overall increase in this account, then, implies that cash paid on account was less than purchases on account. To convert from the higher credit purchases number to the lower amount of cash paid to creditors, we add the increase in Accounts Payable to net income to calculate cash flows from operating activities. 81) C Cash prepayments increase the balance in prepaid expense accounts, and recording of expenses decreases the balance in prepaid expense accounts. An increase in a prepaid expense account means that cash prepayments this period were greater than expenses. To convert from the higher cash payments number to the lower expense payment number included in net income, we subtract the increase in the prepaid expense accounts from net income to calculate cash flows from operating activities. 82) C Cash purchases of supplies increase and the recording of supplies expense decreases the balance in the Supplies account. A decrease in Supplies means that cash purchases during the period were less than the amount of supplies used (and recorded as Supplies Expense). To convert from the higher expense number that is included in net income to the lower cash outlay, we add the decrease in Supplies to net income to calculate cash flows from operating activities. An increase in Salaries and Wages Payable means that payments to employees during the period were lower than the Salaries and Wages Expense that was subtracted in determining net income on the income statement. Thus, to show the lower cash outflow, the increase in Salaries and Wages Payable must be added to net income to calculate cash flows from operating activities. 83) D Version 1
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An increase in Accounts Receivable implies that cash collections were less than sales on account. To convert from the higher credit sales number that is included in net income to the lower amount of cash collected from customers, we subtract the $28,000 increase in Accounts Receivable from net income to calculate cash flows from operating activities. A decrease in Accounts Payable means that purchases on account were less than the cash payments to suppliers. Thus, to show the higher cash outflow, we also subtract the $14,000 decrease in Accounts Payable from net income to calculate cash flows from operating activities. The combined effect would be a total subtraction of $42,000. 84) A Decreases in current assets (Prepaid Insurance and Supplies) and increases in current liabilities (Salaries and Wages Payable) are added to convert net income to cash flows from operating activities. An increase in the Equipment account would be reflected in the investing activities section. 85) A Decreases in current assets (Accounts Receivable) and increases in current liabilities (Deferred Revenue) are added to convert net income to cash flows from operating activities. 86) B Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Changes in current assets and current liabilities: Increase in Accounts Receivable Decrease in Inventory Decrease in Accounts Payable Net cash provided by operating activities
$ 27,000
11,300
(7,800) 8,300 (8,650) $ 30,150
87) B Net income
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Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Changes in current assets and current liabilities: Increase in Accounts Receivable Decrease in Inventory Decrease in Accounts Payable Net cash provided by operating activities
28,000
(18,200) 19,600 (22,400) $ 63,000
88) D Note that the cash paid to purchase office equipment is not included in the calculation since it is an investing (rather than operating) activity. Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Changes in current assets and current liabilities: Increase in Accounts Receivable Decrease in Prepaid Rent Increase in Accrued Liabilities Net cash provided by operating activities
$ 40,000
6,000
(2,000) 800 1,800 $ 46,600
89) A Note that the purchase of building for cash is not included in the calculation because it is an investing (rather than operating) activity. Also, the increase in Bonds Payable, increase in Common Stock, and cash dividends paid are not included in the calculation because they are financing (rather than operating) activities. Net income Adjustments to reconcile net income to net cash provided by operating activities: Amortization Depreciation Changes in current assets and current liabilities: Increase in Accounts Receivable
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$ 584,000
36,000 108,000
(30,000)
80
Increase in Inventory Decrease in Accounts Payable Increase in Salaries and Wages Payable
(86,000) (136,000) 50,000
Net cash provided by operating activities
$ 526,000
90) A Net loss Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Changes in current assets and current liabilities: Increase in Accounts Receivable Decrease in Inventory Decrease in Prepaid Rent Decrease in Accounts Payable
$ (135,000)
60,000
(108,000) 37,500 13,500 (16,500)
Net cash used in operating activities
$ (148,500)
91) D Under the indirect method, decreases in current assets and increases in current liabilities are added to net income while increases in current assets and decreases in current liabilities are subtracted from net income to find cash flows from operations. Therefore, net income must be decreased by $42,000 (or increase in Accounts Receivable of $28,000 + decrease in Accounts Payable of $14,000) to convert that number to cash flows from operating activities. 92) B First, determine the changes in the account balances:
Accounts Receivable Inventory Accounts Payable Salaries and Wages Payable
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Prior Year
Current Year
89,000 116,000 120,000 56,000
78,000 142,000 117,000 68,000
Increase (Decrease) $ (11,000) 26,000 (3,000) 12,000
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Then, the amount of the cash flows from operating activities during the current year would be determined as follows: Net Income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Changes in current assets and current liabilities: Decrease in Accounts Receivable Increase in Inventory Decrease in Accounts Payable Increase in Salaries and Wages Payable Net cash provided by operating activities
$ 655,000
72,000
11,000 (26,000) (3,000) 12,000 $ 721,000
93) C When preparing a schedule to determine operating cash flows using the indirect method, start with net income as reported on the last line of the company’s income statement. By starting with net income, it’s as if we are assuming all revenues resulted in cash inflows and all expenses resulted in cash outflows. But we know this is not true, however, so we adjust net income to eliminate items that are included in net income but do not involve cash and to include items that were excluded from net income but do involve cash. 94) B When initially recording depreciation in the accounting system, we increase Depreciation Expense (with a debit) and increase Accumulated Depreciation (with a credit). Notice that depreciation does not involve cash. To eliminate the effect of having deducted Depreciation Expense in the income statement, we add it back in the statement of cash flows. 95) A
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When initially recording depreciation in the accounting system, we increase Depreciation Expense (with a debit) and increase Accumulated Depreciation (with a credit). Notice that depreciation does not involve cash. To eliminate the effect of having deducted Depreciation Expense in the income statement, we add it back in the statement of cash flows. 96) B Adding decreases in current assets eliminates the effects of some transactions that decreased net income but did not affect cash in the current period. For example, when Supplies are used, net income decreases but cash is not affected. To eliminate these noncash effects from our cash flow computations, we must add back decreases in Supplies and other current assets. 97) A Subtracting increases in current assets eliminates the effects of transactions that increased net income but did not affect cash in the current period. For example, net income increases when a company provides services on account, but cash is not affected. 98) A Subtracting decreases in current liabilities eliminates the effects of transactions that increased net income but did not affect cash. For example, a company decreases Deferred Revenue and increases net income in the current period when it fulfills its prior obligations to provide services, but cash is not affected. 99) C Subtracting decreases in current liabilities allows us to include the cash effects of other transactions that did not affect net income in the current period but did decrease cash. For example, Cash decreases when a company pays wages that were incurred and expensed in a previous period. These cash outflows are captured by subtracting decreases in current liabilities. Version 1
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100) B Adding increases in current liabilities eliminates the effects of transactions that decreased net income but did not affect cash. For example, when interest is accrued, a company decreases net income but cash is not affected. 101) A Accounts Receivable increases when sales are made on account and it decreases when cash is collected from customers. An overall increase in this account, then, implies that cash collections were less than sales on account. To convert from the higher sales number that is included in net income to the lower cash collected from customers, we subtract the difference ($10 million). 102) B The income statement reports expenses of the period, but cash flow from operating activities must reflect the cash payments. Cash prepayments increase the balance in prepaid expenses and recording of expenses decreases the balance in prepaid expenses. A decrease in Prepaid Expenses means that cash prepayments this period were less than expenses. These extra cash prepayments must be added to net income. 103) A Net cash inflow from investing activities during current period = Proceeds from sale of bonds− Cash paid to purchase common stock = $21,340 − $1,350 = $19,990 104) B Net cash inflow from investing activities during current period = Proceeds from sale of bonds − Cash paid to purchase common stock = $41,280 − $2,000 = $39,280 105) D
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Investing cash flows come from acquisition or disposal of tangible and intangible long-lived assets such as patents, property, plant, and equipment. 106) D Unlike the analysis of operating activities, where we are concerned only with the net change in selected balance sheet accounts, an analysis of investing activities requires that we identify and separately report the causes of both increases and decreases in account balances. 107) D Purchase of equipment Proceeds from sale of equipment Net cash provided by (used in) investing activities
$ (196,000) 22,400 $ (173,600)
108) C The financing activities section of the statement of cash flows includes changes in liabilities owed to owners (Dividends Payable) and financial institutions (Notes Payable and other types of debt), as well as changes in stockholders' equity accounts, such as Common Stock and Retained Earnings. 109) B The financing activities section of the statement of cash flows includes changes in liabilities owed to owners and lenders (long-term debt), as well as changes in stockholders' equity accounts (Common Stock and Retained Earnings). 110) B Paying a bond's face value at maturity is a cash outflow from financing activities. Stock dividends do not require the use of cash and, as such, are noncash financing activities. The cash received from the issuance of long-term bonds is a cash inflow (rather than an outflow) from financing activities. The payment of interest is a cash outflow from operating (rather than financing) activities.
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111) C The cash received from the issuance of long-term bonds (whether at a discount, premium, or at par) is a cash inflow from financing activities. Issuing stock in exchange for another company's stock is classified as a noncash (rather than cash) financing transaction. Paying a bond at maturity is a cash outflow (rather than an inflow) from financing activities. The receipt of interest is a cash inflow from operating (rather than financing) activities. 112) C The new debt and issuance of stock cause cash inflows and the repayment of debt and payment of dividends result in cash outflows. The net cash provided by financing activities reported would be $6,400 (or $532,000 − $800,000 + $353,600 − $79,200). 113) C The cash outflow from financing activities is $65,000, the amount of cash paid to retire the bonds payable. 114) C The cash outflow from financing activities is $44,800, the amount of cash paid to retire the bonds payable. 115) C The details from the Retained Earnings account is used in calculating both operating and financing cash flows. Net income increases Retained Earnings and dividends decrease Retained Earnings. Net income is the starting point for calculating cash flows from operating activities, and the payment of cash dividends is a cash outflow reported in the financing activities section of the statement of cash flows. 116) C
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Cash dividends paid in the amount of $9,013 (see calculation below) would be reported as cash outflows from financing activities. Ending Retained Earnings = Beginning Retained Earnings + Net income − Cash dividends paid Cash dividends paid = Beginning Retained Earnings + Net income − Ending Retained Earnings = $325,475 + $40,551 − $357,013 = $9,013 117) A Cash dividends paid in the amount of $5,813 (see calculation below) would be reported as cash outflows from financing activities. Ending Retained Earnings = Beginning Retained Earnings + Net income − Cash dividends paid Cash dividends paid = Beginning Retained Earnings + Net income − Ending Retained Earnings = $321,975 + $40,251 − $356,413 = $5,813 118) D Ending Retained Earnings = Beginning Retained Earnings + Net income − Cash dividends (declared) Ending Retained Earnings − Beginning Retained Earnings = Net income − Cash dividends (declared) Change in Retained Earnings = Net income − Cash dividends (declared) Net income = Change in Retained Earnings + Cash dividends (declared) = $182,000 + $50,400 = $232,400 119) B Cash flows from financing activities include all exchanges of cash with stockholders and cash exchanges with lenders (but only for principal on loans). Cash flows from financing activities do not include the payment of interest associated with lending activities. Unlike the operating and investing activities sections, where a healthy company typically shows positive and negative cash flows, respectively, the financing activities section does not have an obvious expected direction for cash flows. 120) B Version 1
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Ending cash − Beginning cash = Change in cash $10,900 − $6,700 = $4,200 Change in cash = Net cash provided by (used in) operating activities + Net cash provided by (used in) investing activities + Net cash provided by (used in) financing activities Net cash provided by (used in) financing activities = Change in cash − Net cash provided by (used in) operating activities − Net cash provided by (used in) investing activities = $4,200 − $23,500 − $5,100 = ($24,400) 121) C Ending cash − Beginning cash = Change in cash $18,200 − $11,600 = $6,600 Change in cash = Net cash provided by (used in) operating activities + Net cash provided by (used in) investing activities + Net cash provided by (used in) financing activities Net cash provided by (used in) financing activities = Change in cash − Net cash provided by (used in) operating activities − Net cash provided by (used in) investing activities = $6,600 − $29,000 − $8,400 = ($30,800) 122) A Cash inflows from financing activities = Proceeds from issuance of stock − Payment of cash dividends + Proceeds from issuance of new bonds − Payment of interest on bonds = $1,600,000 − $251,000 + $1,560,000 − $2,300,000 = $609,000 The purchase of another company’s bonds is a cash outflow from investing activities. 123) D
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Cash inflows from financing activities = Proceeds from issuance of stock − Payment of cash dividends + Proceeds from issuance of new bonds − Payment of interest on bonds = $2,800,000 − $560,000 + $4,200,000 − $5,600,000 = $840,000 The purchase of another company's bonds is a cash outflow from investing activities. 124) C The only cash flow from financing activities is the inflow of $1 million from the issuance of bonds. Transactions involving plant, property and equipment are investing activities and changes in current assets are used to determine cash flows from operating activities. 125) C The only cash flow from financing activities is the inflow of $1 million from the issuance of bonds. Transactions involving plant, property and equipment are investing activities and changes in current assets are used to determine cash flows from operating activities. 126) A Cash dividends paid Cash proceeds from bank loan Payment (principal) on bank loan Net cash provided by financing activities
$ (2,200) 5,600 (1,300) $ 2,100
127) B Cash dividends paid Cash proceeds from bank loan Payment (principal) on bank loan
$ (4,000) 10,000 (2,000)
Net cash provided by financing activities
$ 4,000
128) A Cash proceeds from sale of land Cash paid to purchase equipment Net cash flows used in investing activities
$ 3,050 (4,200) $ (1,150)
129) A Cash proceeds from sale of land
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$ 6,000
89
Cash paid to purchase equipment Net cash flows used in investing activities
(8,000) $ (2,000)
130) D Unlike the analysis of operating activities, where we are concerned only with the net change in selected balance sheet accounts, an analysis of investing and financing activities requires that we identify and separately report the causes of both increases and decreases in account balances. 131) B Cash flows from financing activities include exchanges of cash with stockholders (such as the issuance of common stock and repurchase of treasury stock) and cash exchanges with lenders (for principal on loans). Unlike the analysis of operating activities, where we are concerned only with the net change in selected balance sheet accounts, an analysis of financing activities requires that we identify and separately report the causes of both increases and decreases in account balances. 132) A Cash flows from financing activities include exchanges of cash with stockholders and cash exchanges with lenders (for principal on loans). Repaying principal to lenders would be classified as a cash outflow from financing activities. 133) B In addition to their cash flows, all companies are required to report material investing and financing transactions that did not have cash flow effects (called noncash investing and financing activities). This important information is normally presented for users in a supplementary schedule to the statement of cash flows or in the financial statement notes. 134) A
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Ending Cash Balance = Beginning Cash Balance + Cash Inflows (Outflows) from Operating Activities + Cash Inflows (Outflows) from Investing Activities + Cash Inflows (Outflows) from Financing Activities = $11,883 + $43,042 + ($19,831) + ($27,597) = $7,497 135) A Ending Cash Balance = Beginning Cash Balance + Cash Inflows (Outflows) from Operating Activities + Cash Inflows (Outflows) from Investing Activities + Cash Inflows (Outflows) from Financing Activities = $11,283 + $37,042 + ($16,831) + ($26,397) = $5,097 136) A Ending Cash Balance = Beginning Cash Balance + Cash Flows from Operating Activities + Cash Flows from Investing Activities + Cash Flows from Financing Activities Beginning Cash Balance = Ending Cash Balance − Cash Flows from Operating Activities − Cash Flows from Investing Activities − Cash Flows from Financing Activities = $18,100 − $18,100 − $6,000 + $10,600 = $4,600 137) B Ending Cash Balance = Beginning Cash Balance + Cash Flows from Operating Activities + Cash Flows from Investing Activities + Cash Flows from Financing Activities Beginning Cash Balance = Ending Cash Balance − Cash Flows from Operating Activities − Cash Flows from Investing Activities − Cash Flows from Financing Activities = $25,480 − $40,600 − $11,760 + $34,720 = $7,840 138) D
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The direct exchange for equipment is a noncash transaction. All companies are required to report material investing and financing transactions that did not have cash flow effects (called noncash investing and financing activities). 139) B All companies are required to report material investing and financing transactions that did not have cash flow effects (called noncash investing and financing activities). The purchase of equipment by issuing a note is a noncash investing and financing transaction. This information is normally presented for users in a supplementary schedule to the statement of cash flows or in the financial statement notes. 140) D All companies are required to report material investing and financing transactions that did not have cash flow effects (called noncash investing and financing activities). The purchase of equipment by issuing a note is a noncash investing and financing transaction. This information is normally presented for users in a supplementary schedule to the statement of cash flows or in the financial statement notes. 141) D Although exceptions exist, generally the relationship between cash flow categories and the financial statements can be summarized as: operating cash flows cause changes in current assets and liabilities, investing cash flows affect noncurrent assets, and financing cash flows affect noncurrent liabilities or stockholders’ equity accounts. 142) C
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All companies are required to report material investing and financing transactions that did not have cash flow effects (called noncash investing and financing activities). The cash paid in this transaction would be reported as a $222,000 cash outflow from investing activities and a supplementary disclosure would be made for the $101,500 noncash investing and financing activity. 143) C All companies are required to report material investing and financing transactions that did not have cash flow effects (called noncash investing and financing activities). The cash paid in this transaction would be reported as a $400,000 cash outflow from investing activities and a supplementary disclosure would be made for the $200,000 noncash investing and financing activity. 144) C Cash paid for dividends would be reported as a cash outflow from financing activities. All companies are required to report material investing and financing transactions that did not have cash flow effects (called noncash investing and financing activities). Supplemental disclosures for companies using the indirect method include the amount of cash paid for interest and for income taxes. 145) A Free cash flow is a positive cash flow from operating activities beyond what is needed to replace current property, plant, and equipment and pay cash dividends. 146) D
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Free cash flow is a positive cash flow from operating activities beyond what is needed to replace current property, plant, and equipment and pay cash dividends. Or, in other words, free cash flow equals cash flows from operating activities minus payments for property, plant and equipment and payments of cash dividends. Cash paid to employees is included in cash flow from operating activities. 147) D Cash flow is not an indication of profitability. 148) D Sales and operating expenses are accrual-basis amounts and do not directly impact cash flows. 149) D Seasonal variations in sales and inventory levels can cause net cash flows to fluctuate from one quarter to the next, but this usually does not indicate trouble. This would be especially true for a ski resort with seasonal variations during the fourth and first quarters due to guests going skiing during winter months. 150) B Given that the outdoor water park is located in an area of the country that has warmer weather during April through September, it would be reasonable to expect that the largest cash inflows from operating activities would occur in the second and third quarters (April through September when the weather is warmer) rather than in the fourth and first quarters (October through March when the weather is colder). 151) A Positive cash flow from investing and financing activities indicates that the company is selling fixed assets and borrowing funds. If there is not positive cash flow from operating activities, the payment of dividends to stockholders is unlikely. This does not indicate, however, that the company is at risk of immediate default on debt. Version 1
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152) A Net income and net cash flow may differ due to seasonal variations, being at the start of the corporate life cycle, overstating revenues or understating expenses, or changes in working capital management. The cash flows from operating activities calculated using the direct method will be the same as the amount calculated using the indirect method. 153) A Unlike the income statement, which summarizes its detailed information in one number (net income), the statement of cash flows does not provide a summary measure of cash flow performance. Instead, it must be evaluated in terms of the cash flow pattern suggested by the subtotals of each of the three main sections. 154) C Most companies in the introductory (start-up) phase experience negative net operating cash flows (that is, net cash used in operating activities). Also during the introductory phase, these companies are spending significant amounts of cash on long-term assets, resulting in negative investing cash flows (that is, net cash flows used in investing activities). To fund these negative investing and operating cash flows, companies in the introductory phase rely heavily on cash obtained through financing activities (that is, net cash flows provided by financing activities). 155) B The indirect method is currently used by about approximately 99% of large companies in the United States even though the FASB favors the direct method over the indirect method. However, both methods are considered to be acceptable under GAAP. 156) A
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FASB prefers the use of the direct method, but currently permits use of either the direct or the indirect method. Approximately 99% of U.S. companies use the indirect method. The two methods are simply a different way to arrive at the same number for cash flows from operating activities. The investing and financing activities sections are presented the same using either method. 157) C GAAP currently allows both the direct method and the indirect method for the preparation of the operating activities section of the statement of cash flows. 158) C The direct method reports operating cash flows by summarizing all operating transactions that result in changes to cash (debits or credits). It is based on converting accrual-based amounts for revenues and expenses into cash flows received or made by the company. 159) D Most U.S. companies use the indirect method. 160) A The direct method and the indirect method produce the same result for net cash provided by or used in operating activities. 161) A The direct method converts revenues to cash receipts and expenses to cash disbursements in order to determine the net cash flow provided by operating activities. Noncash revenues and expenses, including gains and losses, are not used in the calculation of cash flows from operating activities using the direct method. 162) C
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The indirect method begins with net income and adjusts it by eliminating effects of items that do not involve cash (like depreciation) and including items that do have cash effects. The direct method directly converts revenues to cash receipts and expenses to cash payments and does not include any noncash expenses such as depreciation. 163) B Accounts Receivable increases when sales are made on account and it decreases when cash is collected from customers. An overall increase in this account, then, implies that cash collections were less than sales on account. To convert from the higher sales number that is included in net income to the lower cash collected from customers, we subtract the increase in Accounts Receivable from Sales Revenue to calculate the cash collected from customers. 164) C Accounts Receivable increases when sales are made on account and it decreases when cash is collected from customers. If cash collections were greater than sales on account, Accounts Receivable could have decreased. 165) B Increase in Accounts Receivable = Ending balance − Beginning balance = $64,000 − $48,000 = $16,000 Cash collected from customers = Sales revenue − Increase in Accounts Receivable = $480,000 − $16,000 = $464,000 166) A Decrease in Accounts Receivable = Beginning balance − Ending balance = $848,000 − $680,000 = $168,000 Cash collected from customers = Cash sales + Credit sales + Decrease in Accounts Receivable = $976,000 + $3,552,000 + $168,000 = $4,696,000 Version 1
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167) C Increase in Accounts Receivable = Ending balance − Beginning balance = $38,400 − $34,400 = $4,000 Cash collections = Net Sales − Increase in Accounts Receivable = $680,000 − $4,000 = $676,000 168) D Increase in Interest Receivable = Ending balance − Beginning balance = $7,400 − $2,820 = $4,580 Cash received for interest = Interest revenue − Increase in interest receivable = $17,000 − $4,580 = $12,420 169) B Increase in Interest Receivable = Ending balance − Beginning balance = $11,800 − $2,640 = $9,160 Cash received for interest = Interest revenue − Increase in interest receivable = $28,000 − $9,160 = $18,840 170) D If Inventory increases, this means that more inventory was bought than was sold. If Accounts Payable increases, this means that credit payments were less than credit purchases. Therefore, to convert cost of goods sold to the amount of cash paid to suppliers, the increase in Inventory is added and the increase in Accounts Payable is subtracted. 171) D Ending inventory = Beginning inventory + Purchases − Cost of Goods Sold Purchases = Ending inventory − Beginning inventory + Cost of Goods Sold = $14,600 − $19,600 + $148,200 = $143,200 172) B Version 1
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Ending inventory = Beginning inventory + Purchases − Cost of Goods Sold Purchases = Ending inventory − Beginning inventory + Cost of Goods Sold = $6,500 − $9,000 + $72,500 = $70,000 173) D Cash paid to suppliers is calculated as follows: Cost of Goods Sold + Increase in Inventory + Decrease in Accounts Payable
$ 300,000 5,000 6,000
Cash Payments To Suppliers
$ 311,000
174) C Change in inventory = Ending balance − Beginning balance = $13,600 − $18,600 = ($5,000) Change in accounts payable = Ending balance − Beginning balance = $8,100 − $22,000 = $(13,900) Cash paid to suppliers = Cost of goods sold − Decrease in inventory + Decrease in accounts payable = $159,200 − $5,000 + $13,900 = $168,100 175) C Change in inventory = Ending balance − Beginning balance = $13,000 − $18,000 = ($5,000) Change in accounts payable = Ending balance − Beginning balance = $7,500 − $19,000 = $(11,500) Cash paid to suppliers = Cost of goods sold − Decrease in inventory + Decrease in accounts payable = $158,000 − $5,000 + $11,500 = $164,500 176) C
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Other operating expenses are converted into cash outflows by adding increases (or subtracting decreases) in noncash current assets and adding decreases (or subtracting increases) in current liabilities. 177) B Operating activities are affected by an increase in inventory, cash collections from customers, and payment of interest. The payment of dividends to stockholders is reported as cash outflows from financing activities. 178) D Change in prepaid insurance = Ending balance − Beginning balance = $4,000 ending − $3,000 = $1,000 Cash paid for insurance = Insurance expense + Increase in prepaid insurance = $14,000 + $1,000 = $15,000 179) D Change in salaries & wages payable = Ending balance − Beginning balance = $16,800 − $18,300 = ($1,500) Cash paid to employees = Salaries and wages expense + Decrease in salaries and wages payable = $450,600 + $1,500 = $452,100 180) D Change in salaries & wages payable = Ending balance − Beginning balance = $33,000 − $36,000 = ($3,000) Cash paid to employees = Salaries and wages expense + Decrease in salaries and wages payable = $900,000 + $3,000 = $903,000 181) B
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Interest Expense is directly converted to cash paid for interest by adding decreases in Interest Payable or subtracting increases in Interest Payable. 182) A Cash from operating activities using the direct method is calculated by directly converting revenues to cash receipts and expenses to cash payments. Income tax expense would be converted to cash paid for income taxes. 183) A Total cash paid for income taxes = $9,000 + $60,000 = $69,000 184) C Change in Accounts Receivable = Ending balance − Beginning balance = $103,000 − $68,000 = $35,000 Cash collected from customers = Sales Revenue − Increase in Accounts Receivable = $375,000 −$35,000 = $340,000 185) B Change in Inventory = Ending balance − Beginning balance = $80,000 − $55,000 = $25,000 Change in Accounts Payable = Ending balance − Beginning balance = $40,000 − $34,500 = $5,500 Amount of cash paid to suppliers = Cost of Goods Sold + Increase in Inventory − Increase in Accounts Payable = $250,000 + $25,000 − $5,500 = $269,500 186) C Change in Salaries and Wages Payable = Ending balance − Beginning balance = $18,500 − $27,000 = ($8,500) Cash was paid to employees = Salaries and Wages Expense + decrease in Salaries and Wages Payable. = $244,000 + $8,500 = $252,500 Version 1
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187) B Income Tax Expense is directly converted to cash paid for income tax by adding decreases in Income Tax Payable or subtracting increases in Income Tax Payable. 188) A The direct method presents a summary of all operating transactions that result in either a debit or a credit to cash. 189) D When sales are recorded, Accounts Receivable increases, and when cash is collected, Accounts Receivable decreases. This means that if Accounts Receivable increases, then cash collections were less than sales on account. To convert sales revenue to the cash collected, we need to subtract increase in Accounts Receivable from (or add the decrease in Accounts Receivable to) Sales Revenue to determine the cash collected from customers. 190) B When sales are recorded, Accounts Receivable increases, and when cash is collected, Accounts Receivable decreases. This means that if there is an overall decrease in Accounts Receivable, then cash collections were more than sales on account. To convert sales revenue to the cash collected, we need to add the decrease in Accounts Receivable to Sales Revenue to determine the cash collected from customers. 191) A
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Typically, companies buy inventory on account from suppliers (as indicated by an Accounts Payable balance on the balance sheet). Consequently, we need to consider more than just the change in Inventory to convert Cost of Goods Sold to cash paid to suppliers. The credit purchases and payments that are recorded in Accounts Payable must also be considered. Credit purchases increase Accounts Payable and cash payments decrease it. In summary, to convert Cost of Goods Sold to a cash basis, you must consider changes in both Inventory and Accounts Payable. If Accounts Payable decreases, that means that the cash payments were more than the credit purchases. As a result, the overall decrease must be added to purchases to calculate cash payments to suppliers. 192) B When expenses are recorded, the balance in Accrued Liabilities increases. When payments are made, Accrued Liabilities decreases. When Accrued Liabilities has an overall increase, it means the company paid less cash than it recorded as operating expenses. This amount must be subtracted when computing cash paid to employees and service suppliers for operating expenses. 193) C The payment of cash dividends is reported as cash outflows in the financing (rather than investing) activities section. Note that the net increase in cash and cash equivalents is calculated as follows: Net increase in cash and cash equivalents = Net cash inflow from operating activities − Net cash outflow from investing activities + Net cash inflow from financing activities = $803,000 + ($78,000) + $101,800 = $826,800 194) A
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The payment of cash dividends is reported as cash outflows in the financing (rather than investing) activities section. Note that the net increase in cash and cash equivalents is calculated as follows: Net increase in cash and cash equivalents = Net cash inflow from operating activities − Net cash outflow from investing activities + Net cash inflow from financing activities = $789,000 + ($50,000) + $100,000 = $839,000 195) A Net cash provided by (used in) operating activities = Cash received from customers + Cash dividends received from long-term investments − Cash paid for wages − Cash paid for other operating expenses = $42,500 + $4,500 − $20,000 − $19,500 = $7,500 196) A The net cash flows used in investing activities equals the cash outflow of $100,000 paid (net cash used) to purchase equipment. 197) C Net cash provided by (used in) financing activities = Cash receipts from stock issuances + Bond issue − Cash dividends paid = $60,000 + $250,000 − $5,000 = $305,000 198) B
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Net cash provided by (used in) operating activities = Cash received from customers + Cash dividends received from long-term investments − Cash paid for wages − Cash paid for other operating expenses = $42,500 + $4,500 − $20,000 − $19,500 = $7,500 The net cash flows used in investing activities equals the cash outflow of $100,000 paid (net cash used) to purchase equipment. Net cash provided by (used in) financing activities = Cash receipts from stock issuances + Bond issue − Cash dividends paid = $60,000 + $250,000 − $5,000 = $305,000 Ending cash = Cash flows from operating activities + Cash flows from investing activities + Cash flows from financing activities + Beginning cash = $7,500 − $100,000 + $305,000 + $0 = $212,500 199) C When the indirect method is used, net income is the starting point, and it is converted to cash flows from operating activities by adding back losses and subtracting gains so that these amounts are eliminated. 200) D Gains and losses on disposal are included in the computation of net income, which is the starting point for the operating activities section when prepared using the indirect method. Gains are subtracted and losses are added when reporting disposals of property, plant, and equipment. 201) A The cash inflow from investing activities is the $51,800 cash received from the sale of the equipment. 202) A Version 1
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The cash inflow from investing activities is the $30,000 cash received from the sale of the equipment. 203) D Cash increased from the proceeds of the sale, so the cash account should be debited for $31,900. Cash decreased by the amount paid for the equipment purchase, so the cash account should be credited for $148,700. The net cash outflow would be $116,800 ($148,700 − $31,900). 204) C Cash increased from the proceeds of the sale, so the cash account should be debited for $18,300. Cash decreased by the amount paid for the equipment purchase, so the cash account should be credited for $88,800. The net cash outflow would be $70,500 ($88,800 − $18,300). 205) A The depreciation taken is $450,000 / 14 × 10 = $321,429; the book value at the date of sale is $128,571 ($450,000 − $321,429); the loss on the sale is $28,071 ($128,571 − $100,500). If the indirect method is used, net income will be converted to cash flows from operating activities by adding back the loss on the sale, $28,071. The proceeds from the sale, $100,500, will be reflected as a cash inflow from investing activities. 206) B The depreciation taken is $250,000/10 × 6 = $150,000; the book value at the date of sale is $100,000 ($250,000 − $150,000); the loss on the sale is $6,000 ($100,000 − $94,000). If the indirect method is used, net income will be converted to cash flows from operating activities by adding back the loss on the sale, $6,000. The proceeds from the sale, $94,000, will be reflected as a cash inflow from investing activities. 207) C
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Ending equipment = Beginning equipment + Purchases of equipment − Equipment sold Purchases of equipment = Ending equipment − Beginning equipment + Equipment sold = $420,000 − $340,000 + $20,000 = $100,000 208) A Ending accumulated depreciation = Beginning accumulated depreciation + Depreciation expense − Depreciation on equipment sold Depreciation expense = Ending accumulated depreciation − Beginning accumulated + Depreciation on equipment sold $184,000 − $190,000 + ($20,000 − $6,000) = $8,000 209) D Net cash flow from operating activities = Net income + Depreciation expense + Amortization expense + Loss on sale − Gain on sale = $315,000 + 90,000 + $15,000 + $9,000 − $27,000 = $402,000. 210) B The T-account approach is used with the indirect method and creates one big T-account for cash. Cash provided appears as a debit and cash used as a credit. The first step is to determine the changes in the balance sheet accounts. 211) A Net income is credited to Retained Earnings and debited to Cash under operating activities. The payment of long-term debt decreases Cash and, so, is credited to Cash under financing activities. Cash paid to purchase of equipment decreases Cash and, so, is credited to Cash under investing (rather than financing) activities. An increase in Accounts Receivable indicates there are sales are more than collections from customers; it is debited to Accounts Receivable and credited (rather than debited) to Cash under operating activities. 212) A Version 1
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A decrease in Accounts Receivable would be listed as a credit in that Taccount; the increase would be listed as a debit in the Cash T-account. An increase in Inventory would be listed as a debit in that T-account; the increase would be listed as a credit in the Cash T-account. A decrease in Inventory would be listed as a credit in that T-account; the increase would be listed as a debit in the Cash T-account. An increase in Accrued Liabilities would be listed as a credit in that T-account; the increase would be listed as a debit in the Cash T-account.
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CHAPTER 12: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Identify whether each of the following list of items is an operating activity cash flow (O), an investing activity cash flow (I), a financing activity cash flow (F), or none of these (None). 1. ________ Proceeds from sale of equipment 2. ________ Cash collected from customers 3. ________ Payments to suppliers 4. ________ Stock repurchases 5. ________ Repayment of bond principal 6. ________ Payment of income tax 7. ________ Purchases of bonds from other companies 8. ________ Purchases of equipment financed with a note 9. ________ Interest and cash dividends received 10. ________ Payment of cash dividends
2) Assume that a company chooses the indirect method to determine net cash flows from operating activities. Required: a. Explain why net income is the starting point when the indirect method is used to determine cash flows from operating activities. b. Briefly explain why a company's net income is most likely different in amount than its cash flows from operating activities.
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3) Complete the last two columns in the following table by indicating whether each transaction would be reported: a. In the operating (O), investing (I), or financing (F) activities section of the statement of cash flows or if the transaction would be reported instead as a noncash investing and/or financing transaction (Noncash). b. As a cash inflow (+) or a cash outflow (−) on the statement of cash flows. (Leave this column blank if you entered "Noncash" for part a.) Transaction
Part a − Reporting (O, I, F, or Noncash)
Part b − Type of Cash Flow (+ or −)
Payment of salaries and wages Proceeds from sale of bonds for cash Purchase of equipment for cash Purchase of office supplies for cash Cash interest payments made to bondholders Prepayment of insurance for first six months of year Payment of principal amount due to bondholders upon maturity of bonds Cash sales to customers Purchase of long-term investment for cash Payment of cash dividends Receipt of cash upon signing long-term note payable Issuance of common stock for cash Payment of interest due on note payable Issuance of common stock in exchange for land Purchase of treasury stock for cash Payment of principal amount due on a long-term note payable
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Acquisition of land in exchange for a note payable Receipt of cash dividends Proceeds from the sale of long-term investment
4) Choose the appropriate letter to match the account balance change with the type of adjustment made to net income when using the indirect method to determine net cash flow provided by operating activities. Account Balance Change 1. ________ Decrease in Property, Plant, and Equipment 2. ________ Increase in Accounts Receivable 3. ________ Decrease in Inventory 4. ________ Decrease in Prepaid Expenses 5. ________ Increase in Accounts Payable 6. ________ Decrease in Accrued Liabilities 7. ________ Decrease in Income Tax Payable 8. ________ Increase in Dividends Payable 9. ________ Gain on Sales of Property, Plant and Equipment 10. ________ Depreciation Expense Type of Adjustment A − Add item to net income S − Subtract item from net income N − No adjustment necessary
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5) Indicate whether each of the following would be added to or subtracted from net income when using the indirect method to reconcile net income to cash flows from operating activities. Item Required to Convert Net Income to Cash Flows From Operating Activities Increase in Accounts Receivable
Added to or Subtracted From
Decrease in Accounts Payable Decrease in Inventory Increase in Accrued Expenses Depreciation Expense Increase in Prepaid Expenses
6)
Consider the following information:
Amortization Expense Increase in Accounts Receivable Increase in Accounts Payable Decrease in Accrued Liabilities Decrease in Inventory Decrease in Prepaid Expenses Net income
$ 36,000 42,000 96,000 48,000 105,000 15,000 1,500,000
Required: Use the indirect method to compute the amount of net cash flows provided by (used in) operating activities.
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7) Selected balance sheet information and the income statement for Pioneer Industries for the current year are presented below. Selected Balance Sheet Accounts Prior Year Accounts Receivable Inventory Prepaid Rent Accounts Payable Salaries and Wages Payable Income Statement Sales Revenue Expenses: Cost of Goods Sold Depreciation Expense Salaries and Wages Expense Rent Expense Insurance Expense Interest Expense Utilities Expense Net Income
$ 24,000 32,000 1,600 17,600 3,200
Current Year $ 16,000 35,200 0 22,400 4,800
$ 480,000
288,000 32,000 48,000 19,200 19,200 17,600 16,000 $ 40,000
Required: Prepare the cash flows from operating activities section of the statement of cash flows using the indirect method.
8)
Consider the following information:
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Proceeds from sale of bonds for cash Cash interest payments to bondholders Conversion of bonds into preferred stock Purchase of long-term investment for cash Payment of cash dividends to stockholders Proceeds from long-term note payable Issuance of common stock for cash Payment of interest due on long-term note payable Issuance of common stock for land Repurchase of common stock on open market for cash Payment of principal amount due on long-term note payable Acquisition of land in exchange for note payable Receipt of cash dividend income on long-term investments Proceeds from sale of building Proceeds from sale of long-term investment Purchases of equipment
$ 1,800,000 45,000 1,800,000 540,000 135,000 900,000 9,000,000 90,000 450,000 225,000 450,000 1,620,000 72,000 945,000 4,500,000 225,000
Required: a. Compute the cash provided by (used in) investing activities. b. Compute the cash provided by (used in) financing activities. c. If you did not use any of the items listed in parts a or b, explain why, and indicate, if appropriate, how each item would be reported on the statement of cash flows.
9) The management team of Wickersham Brothers Incorporated is preparing its annual financial statements. The statements are complete except for the statement of cash flows. The completed comparative balance sheets and income statements are summarized. Current Year
Prior Year
$ 50,000 80,000 60,000
$ 72,000 70,000 65,000
Balance Sheet Assets Cash Accounts Receivable Inventory
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Property and Equipment Less: Accumulated Depreciation Total Assets
110,000 (30,000)
60,000 (15,000)
$ 270,000
$ 252,000
$ 10,000 2,000 50,000
$ 12,000 1,000 60,000
100,000 108,000
80,000 99,000
$ 270,000
$ 252,000
Liabilities: Accounts Payable Salaries and Wages Payable Notes Payable, Long-Term Stockholders’ Equity: Common Stock Retained Earnings Total Liabilities and Stockholders’ Equity Income Statement Sales
$ 200,000
Cost of Goods Sold
110,000
Depreciation Expense
15,000
Other Expenses
50,000
Net Income
$ 25,000
Other information from the company's records includes the following: • Bought equipment for cash, $50,000. • Paid $10,000 on long-term note payable. • Issued new shares of common stock for $20,000 cash. • Cash dividends of $16,000 were declared and paid to stockholders. • Accounts Payable arose from inventory purchases on credit. • Income Tax Expense ($4,000) and Interest Expense ($3,000) were paid in full at the end of both years and are included in Other Expenses. Required: a. Prepare the statement of cash flows using the indirect method. Include any supplemental disclosures. b. Interpret the statement of cash flows by explaining the main sources and uses of cash during the year.
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10) Condensed financial data of Monopoly Corporation appear below. A cash dividend was declared and paid in full to stockholders during the year. Required: Solve for the missing numbers labeled A through J. Be sure to indicate in parentheses ( ) if the missing number is negative (that is, a cash outflow). Monopoly Corporation Comparative Balance Sheet December 31 Current Year
Prior Year
Assets Cash Accounts receivable Inventory Prepaid rent Property, plant, and equipment Accumulated depreciation
$ 44,000 A B 2,500 224,000 (55,000)
$ 28,000 32,000 70,000 2,000 200,000 (40,000)
Total assets
$ 341,500
$ 292,000
Accounts payable Accrued liabilities Notes payable (long-term) Contributed capital Retained earnings
$ 38,000 10,000 130,000 50,000 113,500
$ 34,000 12,000 150,000 25,000 71,000
Total liabilities and stockholders' equity
$ 341,500
$ 292,000
Liabilities and Stockholders' Equity
Monopoly Corporation Income Statement Year Ended December 31
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Sales
$ 477,500
Expenses Cost of goods sold
$290,000
Selling, general, and administrative expenses Depreciation expense
94,000
Interest expense
9,000
Income taxes Net income
C
D
425,000
=
$ 52,500
Monopoly Corporation Statement of Cash Flows Year End December 31 Cash Flows from Operating Activities Net Income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Changes in current assets and current liabilities: Accounts Receivable Inventory Prepaid Expenses Accounts Payable Accrued Liabilities Net cash provided by (used in) operating activities Cash Flows from Investing Activities
$ 52,500
Purchase of property, plant, and equipment Net cash provided by (used in) investing activities Cash Flows from Financing Activities
(24,000)
Additional capital contributed by stockholders
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(4,000) (20,000) E 4,000 F G
(24,000)
H
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Payments on long-term debt Payment of cash dividends Net cash provided by (used in) financing activities Increase in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period
(20,000) I J 16,000 28,000 $ 44,000
11) Match each item with the correct letter below to indicate how each revenue or expense account on the income statement is adjusted when using the direct method to determine net cash flow provided by operating activities. Account Balance Change 1. ________ Increase in Accrued Expenses 2. ________ Decrease in Accounts Receivable 3. ________ Decrease in Deferred Income 4. ________ Increase in Prepaid Expenses 5. ________ Decrease in Accounts Payable 6. ________ Increase in Long-Term Notes Payable 7. ________ Decrease in Prepaid Insurance 8. ________ Increase in Inventory 9. ________ Increase in Interest Payable 10. ________ Increase in Accumulated Depreciation Type of Adjustment A − Add item to related revenue or expense account balance S − Subtract item from related revenue or expense account balance N − No adjustment necessary
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12)
Consider the following information:
Income Statementinformation: Net Sales Revenue $ 200,000 Cost of Goods Sold Gross Margin
60,000 140,000
Salaries and Wages Expense Depreciation Expense
60,000
Other Expense
20,000
Net Income Before Tax
30,000
Income Tax Expense
9,000
Net Income
30,000
Other Information: Increase in Accounts $ 200 Receivable Decrease in Inventory 600 Increase in Prepaid 700 Expense Decrease in Accounts 2,200 Payable Decrease in Accrued 800 Liabilities Increase in Income 1,900 Taxes Payable Reduction of Long-Term 13,700 Debt Purchases of Equipment 29,000
$ 21,000
Required: Use the direct method to compute the amount of net cash flows provided by (used in) operating activities.
13) The Extra Surplus Company's Balance Sheet for December 31, 2020 and the Income Statement for 2021 are shown below. Extra Surplus Company Balance Sheet December 31, 2020
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Assets Cash Accounts Receivable Inventory Property and Equipment, Net
$ 10,000 5,000 12,000 20,000 $ 47,000
Liabilities and Stockholders’ Equity Accounts Payable Notes Payable, Long-Term Common Stock Retained Earnings
$ 10,000 5,000 20,000 12,000 $ 47,000
Extra Surplus Company Income Statement For the Year Ended December 31, 2021 Sales Cost of Goods Sold Salaries and Wage Expense Interest Expense Other Expenses
$ 13,000 3,000 3,000 1,000 500
Net Income
$ 5,500
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Additional data: • Sales were $13,000; $8,000 in cash was received from customers. • Bought new land for cash, $10,000. • Sold other land for its book value of $5,000. • Paid $1,000 principal on the long-term note payable and $1,000 in interest. • Issued new shares of stock for $10,000 cash. • Cash dividends of $1,000 were declared and paid to stockholders. • Paid $5,500 on accounts payable. • No inventory purchases were made; other expenses were incurred on account. • All wages were paid in cash. • Other expenses were on account. Required: a. Prepare a comparative balance sheet at December 31, for 2021 and 2020. Include the change from 2020 to 2021. b. Prepare the statement of cash flows using the direct method.
14) Equipment with a cost of $80,000 and accumulated depreciation of $75,000 is sold for $12,000 cash. Required: a. Prepare the journal entry to record this transaction. b. Explain how this transaction would be reported on the statement of cash flows prepared using the indirect method.
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15) A machine with a cost of $234,000 and accumulated depreciation of $153,000 is sold for $63,000 cash. Required: a. Prepare the journal entry to record this transaction. b. Explain how this transaction would be reported on the statement of cash flows prepared using the indirect method.
16) The management team of Wickersham Brothers Incorporated is preparing its annual financial statements. The statements are complete except for the statement of cash flows. The completed comparative balance sheets and income statements are summarized. Current Year
Prior Year
Balance Sheet Assets Cash Accounts Receivable Merchandise Inventory Property and Equipment Less: Accumulated Depreciation Total Assets
$ 50,000 80,000 60,000 110,000 (30,000)
$ 72,000 70,000 65,000 60,000 (15,000)
$ 270,000
$ 252,000
$ 10,000 2,000 50,000
$ 12,000 1,000 60,000
100,000 108,000
80,000 99,000
$ 270,000
$ 252,000
Liabilities: Accounts Payable Salaries and Wages Payable Notes Payable, Long-Term Stockholders’ Equity: Common Stock Retained Earnings Total Liabilities and Stockholders’ Equity Income Statement
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Sales
$ 200,000
Cost of Goods Sold
110,000
Depreciation Expense
15,000
Other Expense
50,000
Net Income
$ 25,000
Other information from the company's records includes the following: • Bought equipment for cash, $50,000. • Paid $10,000 on long-term note payable. • Issued new shares of common stock for $20,000 cash. • Cash dividends of $16,000 were declared and paid to stockholders. • Accounts Payable arose from inventory purchases on credit. • Income Tax Expense ($4,000) and Interest Expense ($3,000) were paid in full at the end of both years and are included in Other Expense. Required: Prepare a schedule summarizing operating, investing, and financing cash flows using the Taccount approach.
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17)
Match each term with the appropriate definition. Not all definitions will be used.
Term: Operating Activities Indirect Method Working Capital Cash Equivalents Investing Activities Supplemental Disclosures Direct Method Financing Activities Definition: A) A measure of the amount by which current assets exceed current liabilities. B) Cash inflows and outflows related to the sale or purchase of investments and long-lived assets. C) Include assets that are highly liquid and are purchased by the entity within three months of maturity. D) These activities include only purchases made with borrowed funds. E) Must disclose cash paid for interest and income tax in this separate schedule. F) Measures the ability of a company to finance its interest payments with its operating cash flow before taxes and interest. G) Cash inflows and outflows related to financing sources external to the company (owners and lenders). H) These activities include money lent by a company as well as money borrowed by a company. I) Reports the components of cash flows from operating activities as gross receipts and gross payments. J) This ratio uses net income instead of operating cash flow to analyze a company's ability to finance the cost of its debt. K) Cash inflows and outflows related to the components of net income. L) Presents the operating activities section of the cash flow statement by adjusting net income to compute cash flows from operating activities.
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18)
Match each term with the appropriate definition. Not all definitions will be used.
Term: Cash Inflow Property, Plant, and Equipment Comparative Balance Sheet Free Cash Flow Noncash Investing and Financing Activities Net Income Statement of Cash Flows Cash Outflow Definition: A) Results from activities such as purchases of goods and assets, payment of debt, payment of cash dividends, and payment of taxes. B) The starting point for calculating operating cash flows with the direct method. C) The percent of a company's net cash flow that comes from investing and financing activities. D) A balance sheet that shows the starting and ending balance of the different accounts; it is used to calculate the net cash flow provided by operating activities. E) Purchases and sales of this are classified as operating activities. F) Reported as supplement disclosures or in the notes section to the financial statements rather than within the body of the statement of cash flows. G) Cash flows from operations in excess of amount paid to replace property, plant and equipment and to pay cash dividends to stockholders. H) Cash flows in excess of net income. I) Purchases and sales of this are classified as investing activities. J) Results from activities such as sales of goods and assets, receipt of cash dividends, and receipts of interest. K) A financial statement that tracks the flow of cash into and out of a company according to the three types of activities that generate the flows. L) An adjustment made when using the indirect method of calculating cash flows from operating activities. M) Cash a company receives that is not subject to income tax. N) The starting point for calculating operating cash flows with the indirect method.
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Answer Key Test name: Chap 12_7e_Problems 1) 1. I 2. O 3. O 4. F 5. F 6. O 7. I 8. None 9. O 10. F
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2) a. The cash flows from operating activities section of the statement of cash flows reports both the cash inflows and outflows that directly relate to income from normal operating activities reported on the income statement. As a result, net income is the starting point when the indirect method is used. b. The income statement, which reports the amount of net income, is prepared using the accrual basis. When the accrual basis is used, cash is not necessarily received when revenues are recorded, and cash is not necessarily disbursed when expenses are recorded. On the other hand, by its very nature, the statement of cash flows is a cash basis statement. As a result, certain adjustments must be made to convert net income from an accrual basis number to a cash basis number when preparing cash flows from operating activities section. In addition, other adjustments must be made to ensure that the amounts reported in this section relate only to "normal" operating activities. 3) Transaction
Payment of salaries and wages Proceeds from sale of bonds for cash Purchase of equipment for cash Purchase of office supplies for cash Cash interest payments made to bondholders Prepayment of insurance for first six months of year Payment of principal amount due to bondholders upon maturity of bonds Cash sales to customers Purchase of long-term investment for cash Payment of cash dividends
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Reporting (O, I, F, or Noncash) O F I O O O
Part 2 (+ or −)
F
−
O I F
+ − −
− + − − − −
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Receipt of cash upon signing long-term note payable Issuance of common stock for cash Payment of interest due on note payable Issuance of common stock in exchange for land Purchase of treasury stock for cash Payment of principal amount due on a longterm note payable Acquisition of land in exchange for a note payable Receipt of cash dividends Proceeds from the sale of long-term investment
F
+
F O Noncash
+ −
F F
− −
Noncash O I
+ +
4) 1. N 2. S 3. A 4. A 5. A 6. S 7. S 8. N 9. S 10. A 5) Item Required to Convert Net Income to Cash Flows From Operating Activities Increase in Accounts Receivable Decrease in Accounts Payable Decrease in Inventory Increase in Accrued Expenses Depreciation Expense Increase in Prepaid Expenses
Added to or Subtracted From Subtract Subtract Add Add Add Subtract
6) Net income
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$ 1,500,000
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Adjustments to reconcile net income to net cash provided by operating activities: Amortization Expense Changes in current assets and current liabilities: Accounts Receivable Inventory Prepaid Expenses Accounts Payable Accrued Liabilities Net cash flow from operating activities
36,000
(42,000) 105,000 15,000 96,000 (48,000) $ 1,662,000
7) Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Changes in current assets and current liabilities: Accounts Receivable Inventory Prepaid Rent Accounts Payable Salaries and Wages Payable Net cash provided by (used in) operating activities
$ 40,000
32,000
8,000 (3,200) 1,600 4,800 1,600 $ 84,800
8) a. Proceeds from sale of building Purchases of equipment Proceeds from sale of long-term investment Purchase of long-term investment
$ 945,000 (225,000) 4,500,000 (540,000)
Net cash flows from investing activities
$ 4,680,000
b. Proceeds from long-term note payable Payment of principal on long-term note payable Proceeds from sale of bonds Proceeds from issuance of common stock
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$ 900,000 (450,000) 1,800,000 9,000,000
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Repurchase of common stock on open market for cash Payment of cash dividends Net cash flows from financing activities
(225,000) (135,000) $ 10,890,000
c. The following would be classified as cash flows from operating activities: cash interest payments to bondholders, payment of interest due on long-term note payable, and receipt of cash dividends on longterm investments. The following would be reported as noncash investing and financing activities: conversion of bonds into preferred stock, $1,800,000; issuance of common stock for land, $450,000; and acquisition of land in exchange for note payable, $1,620,000. 9) a. Wickersham Brothers Incorporated Statement of Cash Flows For the Year Ended December 31 Cash Flows from Operating Activities Net Income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Expense Changes in current assets and current liabilities:
$ 25,000
Increase in Accounts Receivable Decrease in Inventory Decrease in Accounts Payable Increase in Salaries and Wages Payable Net cash provided by (used in) operating activities Cash Flows from Investing Activities
(10,000) 5,000 (2,000) 1,000 34,000
Additions to property, plant, and equipment Net cash provided by (used in) investing activities Cash Flows from Financing Activities
(50,000) (50,000)
Cash payments on long-term debt Cash proceeds from issuance of stock Cash payment of dividends
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15,000
(10,000) 20,000 (16,000) 23
Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of period
(6,000) (22,000) 72,000
Cash and cash equivalents, end of period
$ 50,000
Supplemental Disclosures Cash paid for interest Cash paid for income tax
$ 3,000 4,000
b. Although operating activities provided $34,000, the cash account for Wickersham Brothers, Incorporated decreased by $22,000. This was due to investing activities and financing activities using cash. Investing activities used $50,000 to buy property, plant, and equipment. Financing activities used $6,000 more than they provided. A stock issuance brought in $20,000, which was used to pay cash dividends of $16,000 and repay a portion of long-term debt. 10) A B
$ 36,000 $ 90,000
C D
$ 15,000 $ 17,000
E F
$ (500) $ (2,000)
G H
$ 45,000 $ 25,000
I J
$ (10,000) $ (5,000)
11) 1. S 2. A 3. S 4. A 5. A 6. N 7. S 8. A 9. S 10. N 12) Cash Flows from Operating Activities
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$ 199,800 (60,000)
($200,000 − $200)
Cash paid to suppliers of inventory
(61,600)
Cash paid for other expenses
(21,500)
Cash paid for income tax Net cash flow from operating activities
(7,100) $ 49,600
($60,000 − $600 + $2,200) ($20,000 + $700 + $800) ($9,000 − $1,900)
Cash collected from customers Cash paid to employees
13) a.
2021 Cash Accounts Receivable Inventory Property and Equipment, Net
Accounts Payable
Note Payable, Long-Term Common Stock Retained Earnings
Extra Surplus Company Balance sheet December 31, 2021 2020 Change
Reason for change
$ 11,500 10,000
$ 10,000 5,000
+1,500
Net increase in cash
+5,000
9,000 25,000
12,000 20,000
−3,000 +5,000
$13,000 (sales on account) − $8,000 (collections) Cost of goods sold $10,000 (land bought) − $5,000 (land sold)
$ 55,500
$ 47,000
$ 5,000
$ 10,000
−5,000
4,000
5,000
−1,000
30,000
20,000
+10,000
16,500
12,000
+4,500
$ 55,500
$ 47,000
−$5,500 (accounts payable paid) + $500 (other expenses on account) (principal paid) Issuance of stock for cash $5,500 (net income) − $1,000 cash dividends
b.
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Extra Surplus Company Statement of Cash Flows Year ending December 31, 2021 Cash Flows from Operating Activities Cash collected from customers Cash paid to suppliers of inventory Cash paid to employees Cash paid for interest Net cash used in operating activities Cash Flows from Investing Activities
$ 8,000 (5,500) (3,000) (1,000) (1,500)
Purchase of land Proceeds from sale of land Net cash used in investing activities Cash Flows from Financing Activities
(10,000) 5,000 (5,000)
Payments on long-term debt Payment of cash dividends Proceeds from issuing common stock Net cash provided by financing activities Net increase in cash during the year Cash and cash equivalents, beginning of period
(1,000) (1,000) 10,000 8,000 1,500 10,000
Cash and cash equivalents, end of period
$ 11,500
14) a. Debit Cash
12,000
Accumulated Depreciation–Equipment
75,000
Credit
Equipment
80,000
Gain on Disposal of PPE
7,000
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b. The gain on disposal in the amount of $7,000 would be listed in the operating activities section of the statement of cash flows as an adjustment to reconcile net income to net cash provided by operating activities. It would be subtracted from net income. The proceeds from the sale of $12,000 would be reported as a cash inflow from investing activities in the statement of cash flows. 15) a. Debit Cash
63,000
Accumulated Depreciation–Equipment
153,000
Loss on Disposal of PPE
18,000
Equipment
Credit
234,000
b. The loss on disposal in the amount of $18,000 would be listed in the operating activities section of the statement of cash flows as an adjustment to reconcile net income to net cash provided by operating activities. It would be added back to net income. The proceeds from the sale of $63,000 would be reported as a cash inflow from investing activities in the statement of cash flows. 16) Cash Debit
Credit
Operating (1) Net Income
25,000
(2) Depreciation Expense
15,000
(4) Inventory
5,000
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10,000
(3) Accounts
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(6) Salaries and Wages Payable
1,000
Net cash flow provided by operating activities
34,000
Investing
Financing (9) Issue stock
20,000
Beginning balance
72,000
Ending balance
50,000
2,000
Receivable (5) Accounts Payable
50,000
(7) Purchase equipment
50,000
Net cash flow used in investing activities
10,000
(8) Repay long-term debt (10) Pay cash dividends
16,000 6,000
Net cash flow used by financing activities
22,000
Net decrease in Cash
Accounts Receivable BeginningBalance
70,000
(3) Increase
10,000
Ending Balance
80,000 Inventory
BeginningBalance
65,000 5,000
Ending Balance
(4) Decrease
60,000 Equipment
BeginningBalance
60,000
(7) Purchase
50,000
Ending Balance
110,000 Accumulated Depreciation
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15,000
Beginning Balance
15,000
(2) DepreciationExpense
30,000
Ending Balance
Accounts Payable
(5) Decrease
12,000
Beginning Balance
10,000
Ending Balance
2,000
Salaries and Wages Payable 1,000
Beginning Balance
1,000
(6) Increase
2,000
Ending Balance
Notes Payable – Long-Term
(8) Repayment
60,000
Beginning Balance
50,000
Ending Balance
10,000
Common Stock 80,000
Beginning Balance
20,000
(9) Issue Stock
100,000
Ending Balance
Retained Earnings
(10) Cash dividends
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16,000
99,000
Beginning Balance
25,000
(1) Net Income
108,000
Ending Balance
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17) Operating Activities K Indirect Method L Working Capital A Cash Equivalents C Investing Activities B Supplemental Disclosures E Direct Method I Financing Activities G 18) Cash Inflow J Property, Plant, and Equipment I Comparative Balance Sheet D Free Cash Flow G Noncash Investing and Financing Activities F Net Income N Statement of Cash Flows K Cash Outflow A
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CHAPTER 13 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) The general goal of horizontal analyses is to identify significant trends. ⊚ true ⊚ false
2)
Trend data can be measured in dollar amounts or percentages. ⊚ true ⊚ false
3) Horizontal analysis is the comparison of each financial statement amount to another amount on the same financial statement. ⊚ true ⊚ false
4)
Vertical analysis is the comparison of a company's financial information over time. ⊚ true ⊚ false
5)
Liquidity measures the ability of a company to meet its long-term financial obligations. ⊚ true ⊚ false
6)
The fixed asset turnover ratio is a profitability ratio. ⊚ true ⊚ false
7)
The debt-to-asset ratio is a liquidity ratio. ⊚ ⊚
8)
true false
The current ratio is a solvency ratio.
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⊚ ⊚
true false
9) If earnings per share (EPS) increases, it must mean that the company's net income has increased. ⊚ true ⊚ false
10)
The lower the receivables turnover, the slower accounts receivable are being collected. ⊚ true ⊚ false
11) A company with a high inventory turnover requires a larger investment in inventory than another company of similar sales with a lower inventory turnover. ⊚ true ⊚ false
12) If the debt-to-assets ratio is 0.73, it means that 73% of the company's financing has been provided by stockholders' equity. ⊚ true ⊚ false
13)
The lower the times interest earned ratio, the greater the risk of nonpayment of interest. ⊚ true ⊚ false
14)
Benchmarks are useful when evaluating a company's performance. ⊚ true ⊚ false
15)
The going-concern assumption is also known as the continuity assumption. ⊚ true ⊚ false
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16) According to the full disclosure principle, financial reports should present detailed information about every transaction. ⊚ true ⊚ false
17) Gains or losses from discontinued operations are reported on a separate line on the income statement net of income tax effects. ⊚ true ⊚ false
18) Special items, such as gains or losses relating to changes in the value of certain balance sheet accounts, are reported below the net income line on the income statement. ⊚ true ⊚ false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 19) The primary objective of external financial reporting is to: A) enhance the ability of the company to acquire financial capital from external sources. B) accurately provide financial results for tax purposes. C) comply with external regulations and requirements of government and professional associations. D) provide useful information to decision makers, especially investors and creditors.
20)
Which of the following analysis techniques does not pertain to changes over time? A) Trend analysis B) Horizontal analysis C) Time-series analysis D) Vertical analysis
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21)
Horizontal analysis involves:
A) Comparing individual financial statement line items with each other to understand the relationships between line items. B) Comparing individual financial statement line items to some benchmark, typically similar competitors’ financial statement line items. C) Comparing individual financial statement line items over time. D) Comparing individual financial statement line items that have been arranged horizontally from highest to lowest dollar amounts.
22)
Which of the following statements is not true?
A) Horizontal analyses help financial statement users recognize changes that unfold over time. B) Vertical analyses focus on relationships between items on the same financial statement. C) Ratio analyses focus on relationships between items on one or more of the financial statements. D) Horizontal analyses help financial statement users recognize changes that occur between companies.
23)
Financial statement analysis is useful for: A) evaluating a company's success in meeting the challenges that it faces. B) selecting the most appropriate accounting rules to follow. C) determining the market price of a company's stock. D) comparing US companies with foreign companies.
24) Often loan agreements require the borrower to comply with certain requirements (i.e. loan covenants), such as maintaining a particular current ratio or limiting future borrowing. To decide if a company has complied with its loan covenants, a creditor would look at the company’s:
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A) financial statements. B) chart of accounts. C) bank statements. D) charter.
25)
Vertical analysis:
A) identifies, typically as a percentage, the relative contribution made by each financial statement line item. B) is used to identify trends over time. C) provides an understanding of the relationships among various items on financial statements by expressing the differences in terms of dollars. D) involves comparing amounts across different financial statements.
26)
Horizontal analysis:
A) is used to identify trends over time. B) identifies, typically as a percentage, the relative contribution made by each financial statement line item. C) provides an understanding of the relationships among various items on financial statements. D) involves comparing amounts across different financial statements.
27)
To analyze changes in a company's sales over the last five years, you should perform: A) vertical analysis. B) ratio analysis. C) horizontal analysis. D) cross-sectional analysis.
28) To analyze changes in a company's net income over the last ten years, you should perform:
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A) horizontal analysis. B) vertical analysis. C) cross-section analysis. D) ratio analysis.
29)
Ratio analysis: A) is required by GAAP as part of every company’s income statement and balance
sheet. B) will always identify the best investment decision. C) will tell you how a company will perform in the future. D) allows you to evaluate how well a company has performed relative to other differentsized companies within the same industry.
30)
Which of the following statements about trend analysis is correct? A) Time-series analysis is an example of trend analysis. B) Trend data are always in dollars. C) Trend analysis is also known as vertical analysis. D) Common-size analysis is an example of trend analysis.
31) A trend analysis to determine a year-to-year dollar amount change is calculated by subtracting the: A) previous period amount from the current period amount. B) current period amount from the previous period amount. C) current period amount from the previous period amount and then dividing the result by the previous period amount. D) previous period amount from the current period amount and then dividing the result by the current period amount.
32)
A trend analysis to determine a year-to-year percentage change is calculated as the:
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A) previous period amount minus the current period amount. B) current period amount minus the previous period amount. C) current period amount minus the previous period amount and then dividing the result by the previous period amount. D) previous period amount minus the current period amount and then dividing the result by the current period amount.
33) Net income was $488,600 in the current year and $367,500 in the prior year. The year-toyear percentage change in net income is an increase of: A) 33%. B) 25%. C) 43%. D) 75%.
34) Net income was $753,480 in the current year and $655,200 in the prior year. The year-toyear percentage change in net income is an increase of: A) 15%. B) 55%. C) 87%. D) 13%.
35)
Assume the following sales data for a company:
Year 1 Year 2 Year 3
$ 4,200,000 5,880,000 5,250,000
By what percentage did sales differ between Years 1 and 2 and Years 2 and 3, respectively?
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A) 40.0% and (10.7%) B) 28.6% and (12.0%) C) 40.0% and (15.0%) D) 32.0% and (10.7%)
36) Roscoe company’s comparative balance sheet show total assets of $1,040,000 and $925,000, for the current and prior years, respectively. The percentage change to be reported in the horizontal analysis is an increase of: A) 6%. B) 11%. C) 5%. D) 12%.
37) Roscoe Company's comparative balance sheet show total assets of $693,000 and $630,000, for the current and prior years, respectively. The percentage change to be reported in the horizontal analysis is an increase of: A) 10%. B) 9%. C) 5%. D) 4%.
38) Lyndale, Incorporated's sales are $475,000 and $390,000 during the current and prior years, respectively. The percentage change is: A) 17.9%. B) 21.8%. C) 1.1%. D) 82.0%.
39) Lyndale, Incorporated's sales are $513,000 and $360,000 during the current and prior years, respectively. The percentage change is: Version 1
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A) 42.5%. B) 70%. C) 29.8%. D) 130%.
40) Which balance sheet line item has the highest percentage increase from the prior year to the current year? Current Year Cash Accounts Receivable Inventory Prepaid Insurance
$ 54,000 18,000 108,000 18,000
Prior Year $ 36,000 72,000 54,000 27,000
A) Inventory B) Cash C) Accounts receivable D) Prepaid insurance
41) Which income statement line item had the largest percentage increase from the prior year to the current year?
Current Year Sales Cost of Goods Sold Depreciation Expense Interest Expense
$ 216,000 144,000 54,000 3,600
Prior Year $ 180,000 108,000 36,000 9,000
A) Depreciation Expense B) Cost of Goods Sold C) Interest Expense D) Sales
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42) In a common size balance sheet, each item on the balance sheet is expressed as a percentage of: A) total assets. B) total liabilities. C) net income. D) total stockholders' equity.
43) In a common size income statement, each item on the income statement is expressed as a percentage of: A) net income. B) gross profit. C) total expenses. D) sales revenue.
44) The following information is taken from the financial statements of Clybourn Company for the current year: Current Assets Total Assets Cost of Goods Sold Gross Profit Net Income
$ 402,000 897,000 657,000 207,000 127,000
On a common size income statement for the year, what is the percentage that would be shown next to the dollar amount of sales revenue? A) 100% B) 15% C) 61% D) Cannot be determined
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45) The following information is taken from the financial statements of Clybourn Company for the current year:
Current Assets Total Assets Cost of Goods Sold Gross Profit Net Income
$ 632,000 1,424,000 1,040,000 320,000 192,000
On a common size income statement for the year, what is the percentage that would be shown next to the dollar amount of sales revenue? A) 100% B) 14% C) 60% D) Cannot be determined
46) The following information is taken from the financial statements of Clybourn Company for the current year:
Current Assets Total Assets Cost of Goods Sold Gross Profit Net Income
$ 409,000 904,000 664,000 214,000 134,000
The gross profit percentage for the current year rounded to the nearest whole percent is closest to: A) 76% B) 24% C) 63% D) 30%
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47) The following information is taken from the financial statements of Clybourn Company for the current year: Current Assets Total Assets Cost of Goods Sold Gross Profit Net Income
$ 632,000 1,424,000 1,040,000 320,000 192,000
The gross profit percentage for the current year rounded to the nearest whole percent is closest to: A) 24%. B) 76%. C) 60%. D) 31%.
48) The following information is taken from the financial statements of Clybourn Company for the current year: Current Assets Total Assets Cost of Goods Sold Gross Profit Net Income
$ 413,000 908,000 668,000 218,000 138,000
On a common size income statement for this year, what is the percentage that would be shown next to the dollar amount of cost of goods sold? A) 21% B) 30% C) 25% D) 75%
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49) The following information is taken from the financial statements of Clybourn Company for the current year: Current Assets Total Assets Cost of Goods Sold Gross Profit Net Income
$ 632,000 1,424,000 1,040,000 320,000 192,000
On a common size income statement for this year, what is the percentage that would be shown next to the dollar amount of cost of goods sold? A) 18% B) 76% C) 24% D) 31% E) 18%
50) The following information is taken from the financial statements of Clybourn Company for the current year: Current Assets Total Assets Cost of Goods Sold Gross Profit Net Income
$ 632,000 1,424,000 1,040,000 320,000 192,000
On a common size balance sheet what is the percentage that would be shown next to the dollar amount of current assets? A) 100% B) 44% C) 30% D) 33%
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51)
The following information is from Chestnut, Incorporated's income statement:
Net Sales Revenue Cost of Sales Gross Profit Operating and Other Expenses Interest Expense Income Tax Expense
$ 96,460 63,458 33,002 25,430 560 2,622
Net Income
$ 4,390
What percentage would be reported next to Interest Expense on a common sized income statement? A) 12.7% B) 1.7% C) 0.6% D) 0.9%
52) Stockton Company prepared its income statement containing the information below. Using vertical analysis, what percentages would apply to cost of sales, gross profit, and interest expense, respectively? Net Sales Revenue Cost of Sales Gross Profit Operating and Other Expenses Interest Expense Income Tax Expense
$661,000 449,000 212,000 94,500 38,500 38,500
Net Income
$40,500
A) B) C) D)
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Cost of Sales
Gross Profit
Interest Expense
72.4% 51.4% 100.0% 67.9%
100.0% 64.0% 47.2% 32.1%
18.2% 41.6% 8.6% 5.8%
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A) Option A B) Option B C) Option C D) Option D
53) Stockton Company prepared its income statement containing the information below. Using vertical analysis, what percentages would apply to cost of sales, gross profit, and interest expense, respectively? Net Sales Revenue Cost of Sales Gross Profit Operating and Other Expenses Interest Expense Income Tax Expense
$ 508,000 328,000 180,000 65,200 20,400 25,600
Net Income
$ 68,800
Cost of Sales A) B) C) D)
Gross Profit
182.2% 476.7% 100.0% 64.6%
100.0% 261.6% 54.9% 35.4%
Interest Expense 14.2% 37.2% 7.8% 4.0%
A) Option A B) Option B C) Option C D) Option D
54) To perform a vertical analysis of an income statement, you would divide each line item on the statement by: A) sales. B) cost of goods sold. C) operating expenses. D) net income.
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55) If you wish to examine how one aspect of a business is doing relative to other aspects of the business at the current time, you are most likely to use: A) time-series analysis. B) ratio analysis. C) horizontal analysis. D) cross-sectional analysis.
56) If an analyst wants to examine a company's current ability to generate income, which of the following would best be considered? A) Liquidity ratios B) Market share ratios C) Profitability ratios D) Solvency ratios
57) If an analyst wants to examine a company's short-run ability to survive, which of the following would best be considered? A) Liquidity ratios B) Market share ratios C) Profitability ratios D) Solvency ratios
58)
Solvency ratio data are primarily concerned with the ability of a company to: A) produce profits. B) maintain long-term survival and repay its debt. C) manage its cash flow. D) provide income for stockholders.
59) If an analyst wanted to assess a company's long-run survival, which of the following categories of ratios would most likely be used? Version 1
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A) Liquidity ratios B) Market share ratios C) Profitability ratios D) Solvency ratios
60)
Which of the following statements about liquidity and solvency ratios is correct?
A) Unlike solvency ratios, liquidity ratios relate to the company's long-run survival. B) Both liquidity ratios and solvency ratios measure a company's ability to meet its financial obligations. C) Liquidity ratios include the return on equity ratio and the times interest earned ratio. D) Solvency ratios include the current ratio and the net profit margin ratio.
61) Which of the following measures would assist in assessing the profitability of a company? A) Debt-to-assets ratio B) Fixed asset turnover ratio C) Receivables turnover ratio D) Current ratio
62) Which of the following measures would assist in assessing the profitability of a company? A) Earnings per share B) Times interest earned ratio C) Inventory turnover ratio D) Debt-to-assets ratio
63)
Which of the following is a profitability measure?
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A) Net income ÷ Revenues B) Total assets ÷ Total stockholders' equity C) Total liabilities ÷ Total stockholders' equity D) Cost of goods sold ÷ Average inventory
64)
Which of the following is not a profitability ratio? A) Return on equity (ROE) B) Earnings per share (EPS) C) Fixed asset turnover D) Days to sell
65)
Which of the following is a liquidity ratio? A) Inventory turnover B) Price/Earnings ratio C) Net profit margin D) Times interest earned
66)
Which of the following measures would assist in assessing the liquidity of a company? A) Return on equity B) Fixed asset turnover ratio C) Receivables turnover ratio D) Times interest earned
67)
Which of the following ratios is used to evaluate a company's liquidity? A) Debt-to-assets ratio B) Fixed asset turnover ratio C) Return on equity ratio D) Current ratio
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68)
Which of the following ratios is used to evaluate solvency? A) Earnings per share (EPS) B) Fixed asset turnover C) Debt-to-assets D) Current ratio
69)
Which of the following measures would assist in assessing the solvency of a company? A) Debt-to-assets and times interest earned B) Fixed asset turnover and EPS C) Return on equity and debt-to-assets D) Current ratio and times interest earned
70)
Which of the following ratios is used to evaluate solvency? A) Fixed asset turnover ratio B) Days to sell ratio C) Current ratio D) Times interest earned
71)
Which of the following ratios is a solvency ratio? A) Net profit margin ratio B) Current ratio C) Fixed asset turnover ratio D) Debt-to-assets ratio
72)
Which of the measures below is used to assess profitability?
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A) Current ratio B) Debt-to-assets ratio C) Asset turnover D) Receivables turnover
73)
Which ratio is a test of liquidity? A) Net profit margin B) Inventory turnover C) Times interest earned D) Debt-to-assets
74)
Which of the measures below is used to measure liquidity? A) Current ratio B) Debt-to-assets ratio C) Price/Earnings ratio D) Times interest earned
75) In which of the following company attributes would a long-term bond holder be most interested? A) Quality of earnings B) Solvency C) Profitability D) Liquidity
76)
Which of the following is calculated by dividing net income by revenues?
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A) Gross profit margin B) Current ratio C) Net profit margin D) Asset turnover
77) Kingsbury Manufacturing has net sales revenue of $890,000, cost of goods sold of $345,400, and all other expenses of $328,700. The net profit margin is: A) 0.24 B) 0.63 C) 0.61 D) 0.76
78) Kingsbury Manufacturing has net sales revenue of $624,000, cost of goods sold of $274,560, and all other expenses of $262,080. The net profit margin is: A) 0.32. B) 0.56. C) 0.86. D) 0.14.
79) Which of the following ratios is calculated by dividing current assets by current liabilities? A) Return on equity ratio B) Current ratio C) Net profit margin ratio D) Fixed asset turnover ratio
80) Kingsbury Manufacturing has net sales revenue of $970,000, cost of goods sold of $347,000, and all other expenses of $329,500. The gross profit percentage is closest to:
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A) 64% B) 70% C) 30% D) 85%
81) Kingsbury Manufacturing has net sales revenue of $624,000, cost of goods sold of $274,560, and all other expenses of $262,080. The gross profit percentage is closest to: A) 32%. B) 56%. C) 86%. D) 14%.
82) Net revenue divided by average net fixed assets is the calculation for which of the following ratios? A) Net profit margin B) Fixed asset turnover C) Current ratio D) Return on assets
83)
Which of the following is calculated by dividing net revenue by average net fixed assets? A) Net profit margin B) Fixed asset turnover C) Total asset turnover D) Current ratio
84) Campbell Company has net sales revenue of $1,410,000, cost of goods sold of $761,600, and all other expenses of $306,000. The beginning balance of stockholders' equity is $416,000 and the beginning balance of fixed assets is $377,000. The ending balance of stockholders' equity is $616,000 and the ending balance of fixed assets is $405,000. The fixed asset turnover ratio is closest to: Version 1
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A) 1.31 B) 3.61 C) 1.52 D) 0.54
85) Campbell Company has net sales revenue of $1,000,000, cost of goods sold of $680,000, and all other expenses of $232,000. The beginning balance of stockholders' equity is $320,000 and the beginning balance of fixed assets is $288,800. The ending balance of stockholders' equity is $480,000 and the ending balance of fixed assets is $311,200. The fixed asset turnover ratio is closest to: A) 0.53. B) 2.50. C) 3.33. D) 0.80.
86) Which of the following is calculated by dividing (net income less preferred dividends) by average common stockholders' equity? A) Return on assets (ROA) B) Return on equity (ROE) C) Earnings per share (EPS) D) Net profit margin
87)
Which of the following actions would likely increase the Return on Equity (ROE)? A) An increase in the cost of goods sold B) The purchase of treasury stock C) Issuing shares of preferred stock D) An increase in the income tax rate
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88) Melrose Manufacturing has net sales revenue of $783,000, cost of goods sold of $344,700, net income of $134,200, and preferred dividends of $11,500 during the current year. At the beginning of the year, 497,000 shares of common stock were outstanding, and, at the end of the year, 540,000 shares of common stock were outstanding. A total of 2,500 preferred shares were outstanding throughout the year. The company’s earnings per share for the current year is closest to: A) $1.49. B) $0.85. C) $0.88. D) $0.24.
89) Melrose Manufacturing has net sales revenue of $624,000, cost of goods sold of $274,560, net income of $95,360, and preferred dividends of $8,000 during the current year. At the beginning of the year, 402,400 shares of common stock were outstanding, and, at the end of the year, 429,600 shares of common stock were outstanding. A total of 1,000 preferred shares were outstanding throughout the year. The company's earnings per share for the current year is closest to: A) $1.50. B) $0.84. C) $0.21. D) $0.87.
90)
Which of the following will increase earnings per share?
A) A ten percent increase in net income and a ten percent increase in the average number of shares of common stock outstanding B) A ten percent decrease in net income and a ten percent increase in the average number of shares of common stock outstanding C) A ten percent increase in net income and a ten percent decrease in the average number of shares of common stock outstanding D) A ten percent decrease in net income and a ten percent decrease in the average number of shares of common stock outstanding
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91) Dearborn Company has earnings per share of $3.00, it paid a dividend of $2.30 per share, and the market price of the company's stock is $63 per share. The price/earnings ratio is closest to: (Round your answer to 2 decimal places.) A) 90.00. B) 1.30. C) 21.00. D) 9.20.
92) Dearborn Company has earnings per share of $2.40, it paid a dividend of $1.00 per share, and the market price of the company's stock is $90 per share. The price/earnings ratio is closest to: A) 37.50. B) 64.29. C) 2.40. D) 2.00.
93) Larabee Company’s stock sells for $23 per share. The company has $67 million in earnings and 203 million outstanding shares. The Price/Earnings ratio for the company is closest to:(Do not round intermediate calculations.) A) 69.7 B) 6.6 C) 203.0 D) 0.3
94) Larabee Company's stock sells for $20 per share. The company has $160 million in earnings and 500 million outstanding shares. The Price/Earnings ratio for the company is closest to: A) 62.5. B) 200. C) 0.31. D) 6.4.
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95)
Webster, Incorporated has the following information:
Net income Stock price (per share) Average number of shares outstanding Average amount of stockholders’ equity
$ 30,000 $ 20 10,000 $ 90,000
What is the Price/Earnings ratio? A) 2.2 B) 4.0 C) 6.7 D) 20.0
96) Which of the following is calculated by dividing net sales revenue by average net receivables? A) Days to sell ratio B) Current ratio C) Profit margin D) Receivables turnover ratio
97) During the current accounting period, revenue from credit sales is $791,000. The accounts receivable balance is $52,680 at the beginning of the period and $64,200 at the end of the period. Which of the following statements is correct? A) The receivables turnover ratio is 27.1. B) On average, it takes 13.5 days to collect payment from credit customers. C) The receivables turnover ratio is 13.5. D) On average, the company sells its inventory every 27.1 days.
98) During the current accounting period, revenue from credit sales is $536,800. The accounts receivable balance is $41,184 at the beginning of the period and $41,760 at the end of the period. Which of the following statements is correct?
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A) The receivables turnover ratio is 12.9. B) On average, it takes 12.9 days to collect payment from credit customers. C) The receivables turnover ratio is 28.3. D) On average, the company sells its inventory every 28.3 days.
99) Cost of goods sold divided by average inventory is the calculation for which of the following ratios? A) Net profit margin ratio B) Current ratio C) Inventory turnover ratio D) Fixed asset turnover ratio
100) Sheffield Company has $74,500 of inventory at the beginning of the year and $67,500 at the end of the year. Sales revenue is $1,119,500, cost of goods sold is $693,500, and net income is $139,200 for the year. The inventory turnover ratio is: A) 15.8 B) 10.8 C) 8.8 D) 9.8
101) Sheffield Company has $145,000 of inventory at the beginning of the year and $131,000 at the end of the year. Sales revenue is $1,972,800, cost of goods sold is $1,145,400, and net income is $248,400 for the year. The inventory turnover ratio is: A) 1.8. B) 8.3. C) 6.0. D) 14.3.
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102) Sheffield Company has $74,000 in inventory at the beginning of the year and $67,000 at the end of the year. Sales revenue is $1,103,500, cost of goods sold is $681,500, and net income is $137,700 for the year. On average, the number of days to sell inventory is approximately: (Do not round intermediate calculations.) A) 187 days. B) 23 days. C) 38 days. D) 61 days.
103) Sheffield Company has $145,000 of inventory at the beginning of the year and $131,000 at the end of the year. Sales revenue is $1,972,800, cost of goods sold is $1,145,400, and net income is $248,400 for the year. On average, the number of days to sell inventory is approximately: A) 203 days. B) 44 days. C) 61 days. D) 26 days.
104) Which of the following is calculated by dividing cost of goods sold by average inventory and then dividing this result into 365 days? A) Inventory turnover B) Current ratio C) Days to collect D) Days to sell
105) Which of the following ratios is calculated by dividing current assets by current liabilities? A) Quick ratio B) Solvency ratio C) Debt ratio D) Current ratio
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106) Southport Industries has current assets of $610,000 and a current ratio is 4.10. Assume that the company prepays rent for 9 months in the amount of $36,000. The current ratio after this transaction is closest to: A) 5.41. B) 4.10. C) 4.34. D) 3.86.
107) Southport Industries has current assets of $900,000 and a current ratio is 2.50. Assume that the company prepays rent for 9 months in the amount of $40,000. The current ratio after this transaction is closest to: A) 2.39. B) 2.61. C) 2.50. D) 2.81.
108) A company has a debt-to-assets ratio of 0.45. If the company then borrows cash from the bank to finance a building acquisition, which of the following is a correct statement? A) The debt-to-assets ratio will be unchanged. B) The debt-to-assets ratio will increase. C) The debt-to-assets ratio will decrease. D) The debt-to-assets ratio will increase as a result of the cash received and then decrease as a result of the building acquisition.
109)
Fullerton Company has the following information from its accounting records:
Current assets Total assets Current liabilities Total liabilities
$ 80,000 200,000 40,000 120,000
If Fullerton uses cash of $10,000 to pay a current liability, its: Version 1
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A) current ratio increases and its debt-to-assets ratio increases. B) current ratio increases and its debt-to-assets ratio decreases. C) current ratio decreases and its debt-to-assets ratio increases. D) current ratio decreases and its debt-to-assets ratio decreases.
110) Wayne, Incorporated has net sales revenue of $466,000, cost of goods sold of $346,000, and net income of $28,500. If interest expense is $10,150 and income tax expense is $1,150, the times interest earned ratio is: (Round your final answer to 2 decimal place.) A) 3.92 B) 2.92 C) 0.04 D) 3.81
111) Wayne, Incorporated has net sales revenue of $348,800, cost of goods sold of $274,400, and net income of $2,400. If interest expense is $8,000 and income tax expense is $800, the times interest earned ratio is: A) 1.4. B) 0.33. C) 1.3. D) 0.40.
112)
The following information is taken from the financial statements of Burton Industries:
Total Assets Total Liabilities Total Stockholders’ Equity Net Income Income Tax Expense Interest Expense
$ 340,000 104,000 236,000 84,000 28,000 7,800
The company's times interest earned ratio is:
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A) 15.4. B) 4.4. C) 11.8. D) 14.4.
113)
The following information is taken from the financial statements of Burton Industries:
Total Assets Total Liabilities Total Stockholders’ Equity Net Income Income Tax Expense Interest Expense
$ 360,000 162,000 198,000 126,000 37,800 9,000
The company's times interest earned ratio is: A) 19.2. B) 4.7. C) 15.0. D) 18.2.
114) The following information comes from the balance sheets and income statements of Crosby Company: As of or for the Year ended December 31 Current Year
Prior Year
Cash
$ 12,200
$ 10,400
Accounts receivable Inventory Property and equipment Current liabilities Long-term liabilities Stockholders’ equity Net sales revenues Cost of goods sold
19,200 32,400 114,000 42,800 55,000 80,000 346,000 223,000
22,400 26,000 111,000 39,800 52,000 78,000 317,000 214,000
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Operating expenses Interest expense Income tax expense
82,000 5,500 9,200
77,000 5,000 8,400
What is the times interest earned ratio for the current year? A) 1.9 B) 4.8 C) 5.8 D) 7.5
115) The following information comes from the balance sheets and income statements of Crosby Company: As of or for the Year ended December 31 Current Year Cash Accounts receivable Inventory Property and equipment Current liabilities Long-term liabilities Stockholders’ equity Net sales revenues Cost of goods sold Operating expenses Interest expense Income tax expense
$ 24,000 38,000 64,000 224,000 88,000 106,000 156,000 680,000 440,000 160,000 10,000 18,000
Prior Year $ 20,000 44,000 50,000 218,000 80,000 100,000 152,000 630,000 420,000 150,000 8,000 16,000
What is the times interest earned ratio for the current year? A) 2.2 B) 5.2 C) 6.2 D) 8.0
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116)
Which of the following ratios does not use net income in its calculation? A) Net profit margin B) Earnings per share C) Return on equity D) Fixed asset turnover
117) If a company increases the selling price of the product it sells and all other data on the financial statements remains the same, which of the following ratios will be unaffected? A) Fixed asset turnover B) Net profit margin C) Inventory turnover D) Earnings per share
118) At the end of last year, Ace Company had total assets in the amount of $6,000,000 and total liabilities in the amount of $4,000,000. The company issued shares to new stockholders at the beginning of the current year for $1,000,000. As a direct result of this transaction, the: A) debt-to-assets ratio will increase. B) debt-to-assets ratio will decrease. C) net profit margin ratio will increase. D) net profit margin ratio will decrease.
119)
Which of the following is not a category of ratio analysis? A) Profitability B) Liquidity C) Solvency D) Probability
120) Which type of ratio indicates a company's ability to generate income in the current period?
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A) Profitability ratios B) Liquidity ratios C) Solvency ratios D) Current ratios
121)
Which of the following is a profitability ratio? A) Return on equity B) Times interest earned C) Inventory turnover D) Receivables turnover
122)
Which of the following is a liquidity ratio? A) Net profit margin B) Receivables turnover C) Fixed asset turnover D) Times interest earned
123)
Which of the following ratios measures liquidity? A) Receivables turnover B) Net profit margin C) Debt-to-assets ratio D) Fixed asset turnover
124)
Which of the following is a solvency ratio? A) Debt-to-assets B) Current ratio C) Return on equity D) Net profit margin
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125)
The comparative financial statements of Seward, Incorporated include the following data:
Current Year
Prior Year
$ 142,000 61,000 40,200 4,700 6,200 29,900
$ 112,000 53,000 33,200 4,700 5,200 15,900
127,000 110,000 51,000 49,000 137,000 237,000
107,000 117,000 44,000 49,000 131,000 224,000
Income Statement Net Sales Revenue Cost of Goods Sold Operating Expenses Interest Expense Income Tax Expense Net Income Balance Sheet Current Assets Plant, Property and Equipment, Net Current Liabilities Long-Term Liabilities Stockholders’ Equity Total Liabilities & Stockholders’ Equity
The gross profit percentage for the current year is closest to: A) 57.04% B) 14.20% C) 42.96% D) 21.06%
126)
The comparative financial statements of Seward, Incorporated include the following data: Current Year
Prior Year
$ 234,000 99,000 70,200
$ 180,000 84,600 57,600
Income Statement Net Sales Revenue Cost of Goods Sold Operating Expenses
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Interest Expense Income Tax Expense Net Income Balance Sheet
6,300 9,000 49,500
6,300 7,200 24,300
Current Assets Plant, Property and Equipment, Net Current Liabilities Long-Term Liabilities Stockholders’ Equity Total Liabilities & Stockholders’ Equity
207,000 176,400 81,000 77,400 225,000 383,400
171,000 189,000 68,400 77,400 214,200 360,000
The gross profit percentage for the current year is closest to: A) 42%. B) 13.5%. C) 57.7%. D) 21.15%.
127)
The comparative financial statements of Seward, Incorporated include the following data:
Current Year
Prior Year
$ 133,000 56,500 39,300 3,800 5,300 28,100
$ 103,000 48,500 32,300 3,800 4,300 14,100
118,000 101,000 46,500 44,500
98,000 108,000 39,500 44,500
Income Statement Net Sales Revenue Cost of Goods Sold Operating Expenses Interest Expense Income Tax Expense Net Income Balance Sheet Current Assets Plant, Property and Equipment, Net Current Liabilities Long-Term Liabilities
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Stockholders’ Equity Total Liabilities & Stockholders’ Equity
128,000 219,000
122,000 206,000
Which of the following would be found on Seward's horizontal analysis when calculating percentage changes from the prior year to the current year? A) An increase in gross profit of 40.4%. B) An increase in interest expense of 40.2%. C) An increase in sales revenue of 39.5%. D) An increase in net income of 40.8%.
128)
The comparative financial statements of Seward, Incorporated include the following data: Current Year
Prior Year
$ 234,000 99,000 70,200 6,300 9,000 49,500
$ 180,000 84,600 57,600 6,300 7,200 24,300
207,000 176,400 81,000 77,400 225,000 383,400
171,000 189,000 68,400 77,400 214,200 360,000
Income Statement Net Sales Revenue Cost of Goods Sold Operating Expenses Interest Expense Income Tax Expense Net Income Balance Sheet Current Assets Plant, Property and Equipment, Net Current Liabilities Long-Term Liabilities Stockholders’ Equity Total Liabilities & Stockholders’ Equity
Which of the following would be found on Seward's horizontal analysis when calculating percentage changes from the prior year to the current year?
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A) An increase in sales revenue of 23% B) An increase in gross profit of 41.5% C) An increase in interest expense of 100% D) An increase in net income of 57%
129)
The comparative financial statements of Seward, Incorporated include the following data:
Current Year
Prior Year
$ 146,000 63,000 40,600 5,100 6,600 30,700
$ 116,000 55,000 33,600 5,100 5,600 16,700
131,000 114,000 53,000 51,000 141,000 245,000
111,000 121,000 46,000 51,000 135,000 232,000
Income Statement Net Sales Revenue Cost of Goods Sold Operating Expenses Interest Expense Income Tax Expense Net Income Balance Sheet Current Assets Plant, Property and Equipment, Net Current Liabilities Long-Term Liabilities Stockholders’ Equity Total Liabilities & Stockholders’ Equity
The fixed asset turnover ratio for the current year is closest to: A) 0.78. B) 1.21. C) 1.61. D) 1.24.
130)
The comparative financial statements of Seward, Incorporated include the following data:
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Current Year
Prior Year
$ 234,000 99,000 70,200 6,300 9,000 49,500
$ 180,000 84,600 57,600 6,300 7,200 24,300
207,000 176,400 81,000 77,400 225,000 383,400
171,000 189,000 68,400 77,400 214,200 360,000
Income Statement Net Sales Revenue Cost of Goods Sold Operating Expenses Interest Expense Income Tax Expense Net Income Balance Sheet Current Assets Plant, Property and Equipment, Net Current Liabilities Long-Term Liabilities Stockholders’ Equity Total Liabilities & Stockholders’ Equity
The fixed asset turnover ratio for the current year is closest to: A) 1.28. B) 1.24. C) 0.75. D) 1.64.
131)
Which type of analysis could reveal that a company is relying heavily on debt financing? A) Common size statements B) Horizontal analysis C) The fixed asset turnover ratio D) Trend analysis
132) When evaluating its net profit margin for the current year, Ford Motor would most likely use all of the following benchmarks except:
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A) Anheuser Busch's net profit margin. B) the Fortune 500's net profit margin. C) General Motors net profit margin. D) the average net profit margin for the automotive manufacturing industry.
133) If net income is rising, but net sales revenue and the gross profit percentage remain the same, then: A) operating expenses are falling. B) operating expenses are rising. C) cost of goods sold is falling. D) cost of goods sold is rising.
134)
An increase in the gross profit percentage indicates that: A) cost of goods sold as a percentage of sales has decreased. B) cost of goods sold as a percentage of sales has increased. C) operating expenses as a percentage of sales have increased. D) operating expenses as a percentage of sales have decreased.
135) Which of the following ratios is used to evaluate how efficiently a company is using its fixed assets to generate revenues? A) Current ratio B) Debt-to-assets ratio C) Return on fixed assets ratio D) Fixed asset turnover ratio
136) Which ratio is used to evaluate how well a company is managing its property, plant, and equipment?
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A) Receivables turnover B) Inventory turnover C) Fixed asset turnover D) Debt-to-assets ratio
137) If net sales revenue for a retail chain has been relatively constant for the last four years, but the fixed asset turnover has been decreasing, what would be the most likely cause? A) The number of stores has expanded. B) Cost of Goods sold has been increasing. C) Employee wages have been increasing. D) The company has closed some of its stores.
138)
Which of the following statements about the Price/Earnings ratio is not correct?
A) The Price/Earnings ratio indicates how much investors are willing to pay for a share of a company's stock as a multiple of current earnings. B) A high Price/Earnings ratio may mean that investors have pushed the price of the stock up in anticipation of higher future net income. C) If EPS decreases and there is no change in the market price of the stock, the Price/Earnings ratio will decrease. D) If the market price of the stock increases and there is no change in EPS, the Price/Earnings ratio will increase.
139) Cleveland Company’s price/earnings ratio is 15.3. Its closest competitor, Walt, Incorporated has a Price/Earnings ratio of 9.4. Which of the following would not be a valid conclusion to draw from a comparison of the two companies' Price/Earnings ratios? A) Cleveland Company’s stock is overpriced. B) Investors believe Cleveland Company has a brighter future than Walt, Incorporated. C) Cleveland has been more profitable than Walt, Incorporated. D) The stock price of Cleveland Company has been bid up due to rumors of a merger.
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140)
A decrease in receivables turnover ratio is indicative of: A) an increase in sales revenue. B) slower-selling inventory. C) an increase in accounts receivable. D) a decline in cost of goods sold.
141) Willow Manufacturing had net Accounts Receivable of $760,000 at the beginning of the year and $930,000 at the end of the year. Net SalesRevenue for the year was $6,510,000. What is the days to collect from customers? A) 52.14 B) 47.38 C) 42.61 D) 60.44
142) Willow Manufacturing had net Accounts Receivable of $600,000 at the beginning of the year and $740,000 at the end of the year. Net Sales Revenue for the year was $5,200,000. What is the days to collect from customers? A) 60.00 B) 42.12 C) 51.94 D) 47.03
143) If cost of goods sold remains unchanged, an increase in the inventory turnover ratio is indicative of a(n): A) decrease in cost of goods sold. B) decrease in inventory. C) increase in inventory. D) increase in sales revenue.
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144) the:
The ratio that measures how many times a company replenishes its inventory in a year is
A) days to sell ratio. B) receivables turnover ratio. C) inventory turnover ratio. D) days to collect ratio.
145) Assume that Charmin and Barker are two retailers selling different types of goods. Charmin reports a days to sell ratio of 6 days and Barker reports a days to sell ratio of 64 days. What types of merchandise are Charmin and Barker likely to sell, given their measures of days to sell? A) Charmin sells clothing and Barker sells wine. B) Charmin sells consumer electronics and Barker sells gasoline. C) Charmin sells footwear and Barker sells consumer electronics. D) Charmin sells groceries and Barker sells autos.
146) Judging only from the ratios below, which of the following clothing wholesalers is least likely to be having cash flow problems? A) Company A: Receivable turnover of 5; inventory turnover of 2 B) Company B: Receivable turnover of 2; inventory turnover of 5 C) Company C: Receivable turnover of 10; inventory turnover of 10 D) Company D: Receivable turnover of 1; inventory turnover of 1
147)
A current ratio of 2.5 means that for every dollar of: A) accounts payable, there is $2.50 of cash. B) current liabilities, there is $2.50 of current assets. C) current assets, there is $2.50 of current liabilities. D) total liabilities, there is $2.50 of cash.
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148) Listed below are the current ratios of four different companies. Based on these current ratios, which company is in the most liquid position? A) 2.0 B) 1.8 C) 2.5 D) 2.1
149)
A company that has a current ratio less than one cannot cover: A) current liabilities with its current cash flow. B) current expenses with its current sales revenue. C) expenses with its current revenues. D) current liabilities with its current assets.
150)
A current ratio of less than one is not so much of a concern when the company has a: A) low fixed asset turnover ratio. B) high days to collect number. C) high inventory turnover ratio. D) high debt-to-equity ratio.
151)
The debt-to-assets ratio is the: A) ratio of current liabilities to current assets. B) ratio of long-term liabilities to fixed assets. C) ratio of total liabilities to total assets. D) proportion of short-term liabilities to total liabilities.
152)
The ratio that measures the percentage of financing from creditors is the:
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A) current ratio. B) times interest earned ratio. C) debt-to-assets ratio. D) Price/Earnings ratio.
153)
A debt-to-assets ratio of 0.50 indicates that the company has: A) more liabilities than stockholders' equity. B) equal amounts of liabilities and stockholders' equity. C) more stockholders' equity than liabilities. D) no liabilities.
154)
Which of the following could indicate bad news? A) An increase in fixed asset turnover ratio. B) A decrease in days to sell. C) A decrease in EPS. D) A decrease in the debt-to-assets ratio.
155) A company has a debt-to-assets ratio of 0.45 and a return on equity ratio of 10%. If the company then issues additional shares of common stock for cash, which of the following is a correct statement? A) The debt-to-assets ratio will decrease and the return on equity ratio will decrease. B) The debt-to-assets ratio will increase and the return on equity ratio will increase. C) The debt-to-assets ratio will not change and the return on equity ratio will not change. D) The debt-to-assets ratio will decrease and the return on equity ratio will increase.
156)
A times interest earned ratio of 11 means that the company's:
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A) net income is large enough to pay interest and taxes 11 times. B) net cash flow from operations before taxes and interest is large enough to pay interest and taxes 11 times. C) net cash flow from operations is large enough to pay interest and taxes 11 times. D) income before taxes and interest is large enough to pay interest 11 times.
157)
The ratio that measures the company's ability to meet required interest payments is the: A) Debt-to-equity ratio. B) Current ratio. C) Price/Earnings ratio. D) Times interest earned ratio.
158) The conceptual framework for financial accounting and reporting consists of which three main components? A) Goals, Concepts, and Exceptions. B) Objective, Codes, and Guidelines. C) Objective, Elements, and Concepts. D) Concepts, Principles, and Practices.
159)
Which of the following will not improve a company's gross profit percentage? A) An increase in the sales price. B) A decrease in the cost of inventory. C) A decrease in the shipping cost for merchandise purchased. D) Collecting cash from customers in advance.
160) Puffin Turnovers, Incorporated's fixed asset turnover was 0.9 while Muffin Tops, Incorporated’s fixed asset turnover was 0.6. Which of the following statements about Puffin compared with Muffin is correct?
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A) Puffin generated more sales per dollar of fixed assets. B) Puffin has greater depreciation expense. C) Puffin has more fixed assets. D) Puffin has greater sales.
161) Company A has a receivables turnover of 8.0. Company B has a receivables turnover of 10.0. Which of the following statements is correct? A) Company A collects its receivables faster than Company B. B) Company B collects its receivables faster than Company A. C) Company A makes more sales on account than Company B. D) Company B makes more sales on account than Company A.
162)
Which of the following would improve a current ratio that is now 1.2? A) Selling long-term assets for cash. B) Purchasing land for cash. C) Buying equipment in exchange for a two-year note. D) Purchasing inventory on account.
163) How competitors calculate depreciation is most likely to affect comparisons between competitors if property, plant and equipment: A) makes up a large percentage of assets and average useful lives are fairly different. B) makes up a small percentage of assets and assets are financed in a different way. C) makes up a small percentage of assets and average useful lives are fairly similar. D) is primarily leased in the industry, not purchased.
164) How competitors calculate inventory cost is least likely to affect comparisons between competitors if inventory makes up a:
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A) large percentage of assets and inventory costs are stable. B) large percentage of assets and inventory costs are not stable. C) small percentage of assets and inventory costs are not stable. D) small percentage of assets and inventory costs are stable.
165) Company A uses the FIFO inventory method and Company B uses the LIFO method. If prices are rising and there are no other significant differences between the companies, which of the following is correct? A) Company A will report a higher current ratio and lower earnings per share than Company B. B) Company A will report a higher current ratio and higher earnings per share than Company B. C) Company A will report a lower current ratio and higher earnings per share than Company B. D) Company A will report a lower current ratio and lower earnings per shares than Company B.
166)
The going-concern assumption states that the: A) company will always maximize the profit for stockholders. B) company is not expected to go out of business in the near future. C) company is a separate concern from the stockholders. D) company's results will be reported in a consistent manner from period to period.
167) Which of the following nonfinancial factors is most likely to be a cause of a goingconcern problem? A) Hiring a new CEO. B) Loss of a key patent. C) Announcing a new stock issue. D) Replacing an old product line.
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168) Which of the following factors would cause the least amount of concern about a company's ability to continue as a going-concern? A) Excessive reliance on debt financing. B) Loss of key personnel without comparable replacement. C) Inadequate maintenance of long-lived assets. D) Declining profit margins.
169)
The full disclosure principle refers to:
A) Financial reports should disclose only material transactions related to a company’s business activities. B) Financial reports should disclose every transaction related to a company’s business activities. C) Financial reports should present all information needed to properly interpret results of a company’s business activities. D) Financial reports should disclose all future transactions related to a company’s business activities.
170)
The primary objective of financial accounting and reporting is to provide: A) useful information. B) going concern information. C) ratio analysis. D) solvency.
171)
Which events may indicate going-concern problems? A) An increase in research and development costs. B) A decrease in barriers to expansion. C) Additions of patents. D) Loss of a key supplier or customer.
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172) The assumption that a business is capable of continuing its operations long enough to meet its obligations is called the: A) solvency assumption. B) going-concern assumption. C) profitability assumption. D) liquidity assumption.
173)
The principle that requires companies to include notes to their financial statements is the: A) full disclosure principle. B) going-concern principle. C) cost-benefit principle. D) historical cost principle.
174)
An unqualified opinion: A) means the company’s financial statements are fairly presented. B) is rare because the rules are restrictive. C) describes the elements to be measured and reported in financial statements. D) underlies accounting rules.
175)
Comprehensive income may be shown on:
A) the balance sheet as a contra-asset account and reports the changes in investments' fair value. B) the income statement by adding or subtracting special items, such as changes in foreign currency exchange rates and certain investments. C) IFRS financial statements only. D) non-public companies' financial statements only.
176) Which of the following types of items would you be most likely to see below the income tax expense line on an income statement?
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A) Gain on Sale of Discontinued Operations, Net of Tax B) Gross Profit C) Selling, General, and Administrative Expense D) Salaries Expense
177) Nonrecurring items such as a loss from discontinued operations are reported on the income statement: A) net of income tax. B) before income tax expense. C) below the net income line. D) nonrecurring items are not subject to income taxes; therefore, they are not reported on the income statement.
178) Special items reported as part of comprehensive income, but not included in net income, might include: A) gains or losses on foreign currency exchanges. B) interest expense. C) income and losses from discontinued operations. D) income tax expense.
179)
Which of the following statements about nonrecurring and other special items is correct?
A) Some special items, such as changes in the value of certain balance sheet accounts, are excluded from the calculation of net income. B) Nonrecurring items such as discontinued operations are presented above the income tax expense line on the income statement. C) Discontinued operations are reported net of tax as part of the income from continuing operations. D) Interest Expense is shown net of tax as part of Other Comprehensive Income.
180)
Which of the following is not a similarity of GAAP and IFRS?
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A) They both generally require that an exchange take place before a transaction is recorded. B) They both promote information that is relevant and that faithfully represents the underlying transactions. C) They both include rules about recognition, classification, and measurement of transactions. D) They both allow fixed assets to be reported at fair values.
181)
The objectives of both IFRS and US GAAP objectives are to provide information that is: A) historical and conservative. B) relevant and faithfully represented. C) consistent and conservative. D) reliable and historically based.
182) Generally speaking, IFRS and GAAP are similar. In general, these accounting rules describe all of the following except: A) when an item should be recognized in the accounting system. B) how that item should be classified. C) the amount at which each item should be measured. D) the currency to present in the financial statements.
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Answer Key Test name: Chap 13_7e 1) TRUE Horizontal analyses compare individual financial statement line items horizontally (from one period to the next), with the general goal of identifying significant sustained changes (trends). 2) TRUE Trend data show changes over time. These changes can be measured in dollars or in percentages. 3) FALSE Horizontal analysis involves comparing results across time, often expressing changes in account balances as a percentage of prior year balances. Vertical (common size) analysis involves expressing each financial statement amount as a percentage of another amount on the same financial statement. 4) FALSE Vertical (common size) analysis involves expressing each financial statement amount as a percentage of another amount on the same financial statement. Horizontal analysis involves comparing results across time, often expressing changes in account balances as a percentage of prior year balances. 5) FALSE Solvency measures a company’s ability to meet its long-term financial obligations. Liquidity relates to the company's short-term survival, in particular, the company's ability to use current assets to repay liabilities as they become due. 6) TRUE
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Profitability ratios relate to the company’s performance in the current period—in particular, the company’s ability to generate income. The fixed asset turnover ratio indicates how much revenue the company generates for each dollar invested in fixed assets. 7) FALSE The debt-to-assets ratio is a solvency ratio. Solvency ratios relate to the company’s long-run survival—in particular, the company’s ability to repay lenders when debt matures and to make required interest payments prior to the date of maturity. The debt-to-assets ratio indicates the proportion of total assets that creditors finance. 8) FALSE The current ratio is a liquidity ratio. Liquidity ratios relate to the company’s short-term survival—in particular, the company’s ability to use current assets to repay liabilities as they become due. The current ratio measures the company’s ability to pay its current liabilities. 9) FALSE Earnings per share = (Net income − preferred dividends) ÷ Average number of common shares outstanding An increase in EPS could result from an increase in net income, a decrease in preferred dividends, or a decrease in the average number of shares outstanding. 10) TRUE Receivable turnover = Net sales ÷ Average net receivable The lower the receivables turnover, the slower accounts receivable are being collected. 11) FALSE Inventory turnover = Cost of goods sold ÷ Average inventory A higher inventory turnover suggests a smaller investment in inventory is required. Version 1
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12) FALSE A debt-to-assets ratio of 0.73 indicates that creditors contributed 73% of the company's financing, while stockholders provided only 27% (or 100% − 73%). 13) TRUE The higher the times interest earned ratio, the better able the company is to meet its interest obligations. 14) TRUE Benchmarks help when interpreting a company's financial ratios. These benchmarks may be the company's own results from prior years, the results of competitors, or an average for the industry. 15) TRUE The going-concern (also called the continuity) assumption means that a business is assumed to be capable of continuing its operations long enough to meet its obligations. 16) FALSE Simply put, according to the full disclosure principle, financial reports should present all information that is needed to properly interpret the results of the company's business activities. This doesn't mean that every single transaction needs to be explained in detail, but rather that adequate information needs to be presented to allow financial statement users to fairly interpret reports about the company's income, financial position, and cash flows. 17) TRUE A gain or loss from discontinued operations, net of tax, is reported on the income statement on a separate line below the income tax expense and income from continuing operations lines. 18) TRUE
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While most gains and losses are included in the computation of net income, some (such as gains or losses relating to changes in the value of certain balance sheet accounts) are excluded from net income and included only in comprehensive income. 19) D The primary goal of accounting is to provide information that allows decision makers to evaluate the results of business activities. Financial statements are used in making a variety of decisions. 20) D Vertical analyses focus on important relationships between items on the same financial statement. Horizontal analyses compare individual financial statement line items horizontally (from one period to the next), with the general goal of identifying significant sustained changes (trends). 21) C Horizontal analyses compare individual financial statement line items horizontally (from one period to the next), with the general goal of identifying significant sustained changes (trends). 22) D Horizontal analysis helps financial users recognize changes that unfold over time, not the changes that occur between companies. 23) A Financial statement analysis helps managers, analysts, investors, and creditors assess a company’s success in meeting the challenges that it faces. 24) A Creditors use financial statements to assess compliance with loan covenants. 25) A
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Vertical analyses focus on important relationships between items on the same financial statement. These are compared vertically (one account balance versus another) and are typically expressed as percentages to reveal the relative contributions made by each financial statement item. 26) A Horizontal (trend) analyses are conducted to help financial statement users recognize important financial changes that unfold over time. Horizontal analyses compare individual financial statement line items horizontally (from one period to the next), with the general goal of identifying significant sustained changes (trends). These changes are typically described in terms of dollar amounts and year-over-year percentages. 27) C Horizontal (trend) analyses are conducted to help financial statement users recognize important financial changes that unfold over time. Horizontal analyses compare individual financial statement line items horizontally (from one period to the next), with the general goal of identifying significant sustained changes (trends). These changes are typically described in terms of dollar amounts and year-over-year percentages. 28) A Horizontal (trend) analyses are conducted to help financial statement users recognize important financial changes that unfold over time. Horizontal analyses compare individual financial statement line items horizontally (from one period to the next), with the general goal of identifying significant sustained changes (trends). These changes are typically described in terms of dollar amounts and year-over-year percentages. 29) D
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Ratio analyses are conducted to understand relationships among various items reported in one or more of the financial statements. Ratio analyses allow you to evaluate how well a company has performed given the level of other company resources. 30) A Horizontal analyses compare individual financial statement line items horizontally (from one period to the next), with the general goal of identifying significant sustained changes (trends). Because it compares results over a series of periods, it is sometimes called time-series analysis. 31) A A year-to-year dollar amount change is calculated as current year's total minus prior year's total. 32) C A year-to-year percentage change expresses the current year’s dollar change as a percentage of the prior year’s total by using the following calculation: Year-to-Year Change (%) = Change This Year ÷ Prior Year’s Total = (Current Year’s Total − Prior Year’s Total) ÷ Prior Year’s Total 33) A Year-to-year change (%) = [(Current year’s total – Prior year’s total) ÷ Prior year’s total] × 100 = [($488,600 − $367,500) ÷ $367,500] × 100 = 33% 34) A Year-to-year change (%) = [(Current year's total − Prior year's total) ÷ Prior year's total] × 100 = [($753,480 − $655,200) ÷ $655,200] × 100 = 15% 35) A
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Year-to-year percentage changes = (Change This Year ÷ Prior Year’s Amount) × 100 Years 1 and 2: = ($5,880,000 − $4,200,000) ÷ $4,200,000 × 100 = 40.0%. Years 2 and 3: = ($5,250,000 − $5,880,000) ÷ $5,880,000 × 100 = (10.7%) 36) D Year-to-year change (%) = [(Current year’s total – Prior year’s total) ÷ Prior year’s total] × 100 = [($1,040,000 – $925,000) ÷ $925,000] × 100 = 12% 37) A Year-to-year change (%) = [(Current year's total − Prior year's total) ÷ Prior year's total] × 100 = [($693,000 − $630,000) ÷ $630,000] × 100 = 10% 38) B Year-to-year change (%) = [(Current year’s total – Prior year’s total) ÷ Prior year’s total] × 100 = [($475,000 − $390,000) ÷ $390,000] × 100 = 21.8% 39) A Year-to-year change (%) = [(Current year's total − Prior year's total) ÷ Prior year's total] × 100 = [($513,000 − $360,000) ÷ $360,000] × 100 = 42.5% 40) A Inventory increased by 100% [or ($108,000 − $54,000) ÷ $54,000] which is the highest percentage increase. Cash increased by 50% [or ($54,000 − $36,000) ÷ $36,000]. Accounts Receivable and Prepaid Insurance both decreased during the year. 41) A
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Depreciation Expense increased by 50% [or ($54,000 − $36,000) ÷ $36,000] which is the highest percentage increase. Sales increased by 20% [or ($216,000 − $180,000) ÷ $180,000]. Cost of Goods Sold increased by 33% [or ($144,000 −$108,000) ÷ $108,000]. Interest Expense decreased during the year. 42) A In a common size balance sheet, each asset appears as a percent of total assets, and each liability or stockholders' equity item appears as a percent of total liabilities and stockholders' equity. (Note that total assets equals total liabilities and stockholders' equity.) 43) D The common size income statement reports each income statement item as a percentage of sales. 44) A The common size income statement reports each income statement item as a percentage of sales. So, sales revenue would equal 100%. 45) A The common size income statement reports each income statement item as a percentage of sales. So, sales revenue would equal 100%. 46) B Net Sales Revenue = Gross Profit + Cost of Goods Sold = $214,000 + $664,000 = $878,000. Gross profit percentage = [(Net Sales Revenue – Cost of Goods Sold) ÷ Net Sales Revenue] × 100 = [($878,000 − $664,000) ÷ $878,000)] × 100 = 24 % (rounded) 47) A
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Net Sales Revenue = Gross Profit + Cost of Goods Sold = $320,000 + $1,040,000 = $1,360,000 Gross profit percentage = [(Net Sales Revenue − Cost of Goods Sold) ÷ Net Sales Revenue] × 100 = [($1,360,000 − $1,040,000) ÷ $1,360,000] × 100 = 24% (rounded) 48) D Net sales revenue = Gross profit + Cost of goods sold = $218,000 + $668,000 = $886,000 Cost of goods sold percentage = Cost of goods sold ÷ Net sales revenue = $668,000 ÷ $886,000 = 75 % (rounded) 49) B Net sales revenue = Gross profit + Cost of goods sold = $320,000 + $1,040,000 = $1,360,000 Cost of goods sold percentage = Cost of goods sold ÷ Net sales revenue = $1,040,000 ÷ $1,360,000 = 76% (rounded) 50) B Current assets percentage = Current assets ÷ Total assets = $632,000 ÷ $1,424,000 = 44% (rounded) 51) C The common size income statement reports each income statement item as a percentage of sales. Interest Expense is 0.6% rounded (or $560 ÷ $96,460) of sales. 52) D In vertical analysis, the common size income statement expresses each item as a percentage of sales. Cost of Sales is 67.9% rounded (or $449,000 ÷ $661,000) of sales. Gross Profit is 32.1% rounded (or $212,000 ÷ $661,000) of sales. Interest Expense is 5.8% rounded (or $38,500 ÷ $661,000) of sales. Accordingly, the percentages for Stockton’s Income Statement are: Version 1
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Net Sales Revenue Cost of Sales Gross Profit Operating and Other Expenses Interest Expense Income Tax Expense Net Income
$ 661,000 449,000 212,000 94,500 38,500 38,500 $ 40,500
100.0% 67.9% 32.1% 14.3% 5.8% 5.8% 6.1%
53) D In vertical analysis, the common size income statement expresses each item as a percentage of sales. Cost of Sales is 64.6% rounded (or $328,000 ÷ $508,000) of sales. Gross Profit is 35.4% rounded (or $180,000 ÷ $508,000) of sales. Interest Expense is 4.0% rounded (or $20,400 ÷ $508,000) of sales. Accordingly, the percentages for Stockton’s Income Statement are: Net Sales Revenue Cost of Sales Gross Profit Operating and Other Expenses Interest Expense Income Tax Expense Net Income
$ 508,000 328,000 180,000 65,200 20,400 25,600 $ 68,800
100.0% 64.6% 35.4% 12.8% 4.0% 5.0% 13.5%
54) A The common size income statement reports each income statement item as a percentage of sales. 55) B Ratio analyses help financial statement users to understand relationships among various items reported in the financial statements. Ratio analyses are useful because they consider differences in the size of the amounts being compared, similar to common size statements. 56) C Profitability ratios relate to the company's performance in the current period, in particular, the company's ability to generate income. Version 1
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57) A Liquidity ratios relate to the company's short-term survival, in particular, the company's ability to use current assets to repay liabilities as they become due. 58) B Solvency ratios relate to the company's long-run survival, in particular, the company's ability to repay lenders when debt matures and to make the required interest payments prior to the date of maturity. 59) D Solvency ratios relate to the company's long-run survival, in particular, the company's ability to repay lenders when debt matures and to make the required interest payments prior to the date of maturity. 60) B Liquidity ratios relate to the company's short-term survival, in particular, the company's ability to use current assets to repay liabilities as they become due. Solvency ratios relate to the company's long-run survival, in particular, the company's ability to repay lenders when debt matures and to make the required interest payments prior to the date of maturity. 61) B Profitability ratios relate to the company's performance in the current period, in particular, the company's ability to generate income. Fixed asset turnover is a profitability ratio. Debt to assets is a solvency ratio. The receivables turnover and the current ratio are liquidity ratios. 62) A Profitability ratios relate to the company's performance in the current period, in particular, the company's ability to generate income. Earnings per share is a profitability ratio. The times interest earned and debt-toassets ratios are solvency ratios. Inventory turnover is a liquidity ratio. 63) A
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Profitability ratios relate to the company's performance in the current period, in particular, the company's ability to generate income. Net profit margin ratio, which is a profitability measure, is calculated as net income divided by revenues. 64) D Days to sell is a liquidity ratio. Return on equity, earnings per share, and fixed asset turnover are profitability ratios. 65) A Liquidity ratios measure the company's ability to use current assets to pay its current obligations as they become due. Inventory turnover is a liquidity ratio. Price/Earnings and net profit margin are profitability ratios. Times interest earned is a solvency ratio. 66) C Liquidity ratios measure the company's ability to use current assets to pay its current obligations as they become due. The receivables turnover ratio is a liquidity ratio. Return on equity and fixed asset turnover are profitability ratios. Times interest earned is a solvency ratio. 67) D Liquidity ratios measure the company's ability to use current assets to pay its current obligations as they become due. The current ratio is a liquidity ratio. The debt-to-assets ratio is a solvency ratio. The fixed asset turnover and return on equity ratios are profitability ratios. 68) C Solvency ratios measure the company's ability to survive long enough to repay lenders when debt matures and to make the required interest payments prior to the date of maturity. Debt-to-assets is a solvency ratio. EPS and fixed asset turnover are profitability ratios. The current ratio is a liquidity ratio. 69) A
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Solvency ratios measure the company's ability to survive long enough to repay lenders when debt matures and to make the required interest payments prior to the date of maturity. Debt-to-assets and times interest earned are solvency ratios. Fixed asset turnover and return on equity are profitability ratios. The current ratio is a liquidity ratio. 70) D Solvency ratios measure the company's ability to survive long enough to repay lenders when debt matures and to make the required interest payments prior to the date of maturity. Times interest earned is a solvency ratio. Fixed asset turnover is a profitability ratio. The days to sell and current ratios are liquidity ratios. 71) D Solvency ratios measure the company's ability to survive long enough to repay lenders when debt matures and to make the required interest payments prior to the date of maturity. The debt-to-assets ratio is a solvency ratio. Net profit margin and fixed asset turnover are profitability ratios. The current ratio is a liquidity ratio. 72) C The asset turnover ratio is a profitability measure that helps to gauge the efficiency of assets in generating net sales revenue. It is calculated as: Net Sales Revenue ÷ Average Total Assets. Receivables turnover and the current ratio are used to measure liquidity, and the debt-to-assets ratio is a solvency ratio. 73) B Inventory turnover is a test of liquidity. Net profit margin is a test of profitability. Times interest earned and debt-to-assets are tests of solvency. 74) A
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The current ratio is used to measure liquidity and is calculated as: Current Assets ÷ Current Liabilities. It measures the ability of a company to pay its short-term obligation with current assets. The Price/ Earnings ratio is a profitability measure. The debt-to-assets and the times interest earned ratios are used to measure solvency. 75) B A bond holder would be particularly interested in the company’s ability to make periodic payments over the long-term and to be able to repay the face value of the bonds when they mature. While liquidity and profitability are important, they tend to be more short-term in nature. 76) C Net profit margin = (Net income ÷ Revenues) × 100 77) A Sales – Cost of goods sold – Operating expenses = Net income = $890,000 – $345,400 – $328,700 = $215,900 Net profit margin = (Net income ÷ Revenues) × 100 = $215,900 ÷ $890,000 = 24% 78) D Sales - Cost of goods sold - Operating expenses = Net income = $624,000 − $274,560 − $262,080 = $87,360 Net profit margin = (Net income ÷ Revenues) × 100 = $87,360 ÷ $624,000 = 14% 79) B Current ratio = Current assets ÷ Current liabilities 80) A Gross profit percentage= [(Net Sales – Cost of Goods Sold) ÷ Net Sales] × 100 = [($970,000 – $347,000) ÷ $970,000] × 100 = 64% 81) B
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Gross profit percentage = [(Net Sales − Cost of Goods Sold) ÷ Net Sales] × 100 = [($624,000 − $274,560) ÷ $624,000] × 100 = 56% 82) B Fixed asset turnover = Net revenue ÷ Average net fixed assets 83) B Fixed asset turnover = Net revenue ÷ Average net fixed assets 84) B Fixed asset turnover = Net revenue ÷ Average net fixed assets = $1,410,000 ÷ [($377,000 + $405,000) ÷ 2] = 3.61 85) C Fixed asset turnover = Net revenue ÷ Average net fixed assets = $1,000,000 ÷ [($288,800 + $311,200) ÷ 2] = 3.33 86) B Return on equity (ROE) = (Net income − Preferred dividends) ÷ Average common stockholders' equity 87) B ROE = (Net Income − Preferred Dividends) ÷ Average Stockholders’ Equity) × 100 Purchasing treasury stock decreases stockholders’ equity, which would cause ROE to increase. An increase in cost of goods sold or in the income tax rate would cause net income to decrease, which would cause ROE to decrease. The issuance of preferred stock would increase stockholders’ equity, which would cause ROE to decrease. 88) D Earnings per share (EPS) = (Net income – Preferred dividends) ÷ Average number of common shares outstanding = ($134,200 – $11,500) ÷ [(497,000 + 540,000) ÷ 2] = $0.24 89) C Version 1
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Earnings per share (EPS) = (Net income − Preferred dividends) ÷ Average number of common shares outstanding = ($95,360 − $8,000) ÷ [(402,400 + 429,600) ÷ 2] = $0.21 90) C Earnings per share (EPS) = (Net income − Preferred dividends) ÷ Average number of common shares outstanding. An increase in the numerator and a decrease in the denominator will increase the earnings per share. 91) C Price/Earnings ratio = Stock price ÷ EPS = $63 ÷ $3.00 = 21.00 92) A Price/Earnings ratio = Stock price ÷ EPS = $90 ÷ $2.40 = 37.5 93) A Earnings per share (EPS) = (Net income – Preferred dividends) ÷ Average number of common shares outstanding = ($67,000,000 – $0) ÷ 203,000,000 = $0.33 Price/Earnings ratio= Stock price ÷ EPS = $23.00 ÷ $0.33 = 69.7 94) A Earnings per share (EPS) = (Net income − Preferred dividends) ÷ Average number of common shares outstanding = ($160,000,000 − $0) ÷ 500,000,000 = $0.32 Price/Earnings ratio = Stock price ÷ EPS = $20 ÷ $0.32 = 62.5 95) C
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Earnings per share (EPS) = (Net income − Preferred dividends) ÷ Average number of common shares outstanding = ($30,000 − 0) ÷ 10,000 = $3 Price/Earnings ratio = Stock price (per share) ÷ Earnings per share = $20 ÷ $3 = 6.7 This means that the stock is selling for 6.7 times what the company is earning. 96) D Receivables turnover ratio = Net sales revenue ÷ Average net receivables 97) C Receivables turnover ratio = Net sales revenue ÷ Average net receivables = $791,000 ÷ [($52,680 + $64,200) ÷ 2] = 13.5 Days to collect = 365 ÷ 13.5 = 27.0 98) A Receivables turnover ratio = Net sales revenue ÷ Average net receivables = $536,800 ÷ [($41,184 + $41,760) ÷ 2] = 12.9 Days to collect = 365 ÷ 12.9 = 28.3 99) C Inventory turnover ratio = Cost of goods sold ÷ Average inventory 100) D Inventory turnover ratio = Cost of goods sold ÷ Average Inventory = $693,500 ÷ [($74,500 + $67,500) ÷ 2] = 9.8 101) B Inventory turnover ratio = Cost of goods sold ÷ Average Inventory = $1,145,400 ÷ [(145,000 + $131,000) ÷ 2] = 8.3 102) C
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Inventory turnover ratio = Cost of goods sold ÷ Average Inventory = $681,500 ÷ [($74,000 + $67,000) ÷ 2] = 9.7 Days to sell= 365 ÷ Inventory turnover ratio = 365 ÷ 9.7 = 38 103) B Inventory turnover ratio = Cost of goods sold ÷ Average Inventory = $1,145,400 ÷ [($145,000 + $131,000) ÷ 2] = 8.3 Days to sell = 365 ÷ Inventory turnover ratio = 365 ÷ 8.3 = 44.0 104) D Inventory turnover ratio = Cost of goods sold ÷ Average Inventory Days to sell = 365 ÷ Inventory turnover ratio 105) D Current ratio = Current assets ÷ Current liabilities 106) B Current ratio = Current assets ÷ Current liabilities This transaction increases one asset (Prepaid Rent) and decreases another asset (Cash). There would be no change in current assets or the current ratio.
107) C Current ratio = Current assets ÷ Current liabilities This transaction increases one asset (Prepaid Rent) and decreases another asset (Cash). There would be no change in current assets or the current ratio. 108) B Debt-to-assets ratio = Total liabilities ÷ Total assets Currently, the company's total liabilities are 45% of its total assets; as such, the numerator was less than the denominator when this ratio was calculated. Borrowing cash will increase the company's total liabilities and total assets by the same amount. The effect on the numerator will be greater since it is a smaller number, so the debt-to-assets ratio will increase. Version 1
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109) B Before the payment: Current ratio = Current assets ÷ Current liabilities = $80,000 ÷ $40,000 = 2 Debt-to-assets ratio = Total liabilities ÷ Total assets = $120,000 ÷ $200,000 = 0.60 After the payment: Current ratio = Current assets ÷ Current liabilities = $70,000 ÷ $30,000 = 2.33 (an increase) Debt-to-assets ratio = Total liabilities ÷ Total assets = $110,000 ÷ $190,000 = 0.58 (a decrease) 110) A Times interest earned = (Net income + Interest expense + Income tax) ÷ Interest expense = ($28,500 + $10,150 + $1,150) ÷ $10,150 = 3.92 111) A Times interest earned = (Net income + Interest expense + Income tax) ÷ Interest expense = ($2,400 + $8,000 + $800) ÷ $8,000 = 1.4 112) A Times interest earned = (Net income + Interest expense + Income tax) ÷ Interest expense = ($84,000 + $7,800 + $28,000) ÷ $7,800 = 15.4 113) A Times interest earned = (Net income + Interest expense + Income tax) ÷ Interest expense = ($126,000 + $9,000 + $37,800) ÷ $9,000 = 19.2 114) D
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Net income = Revenue – Expenses = $346,000 – ($223,000 + $82,000 + $5,500 + $9,200) = $26,300 Times interest earned = (Net income + Interest expense + Income tax expense) ÷ Interest expense = ($26,300 + $5,500 + $9,200) ÷ $5,500 = 7.5 115) D Net income = Revenue – Expenses $680,000 − ($440,000 + $160,000 + $10,000 + $18,000) = $52,000 Times interest earned = (Net income + Interest expense + Income tax expense) ÷ Interest expense = ($52,000 + $10,000 + $18,000) ÷ $10,000 = 8.0 116) D Fixed asset turnover = Net revenue ÷ Average net fixed assets 117) C If sales revenue increases and all other data on the financial statements remains the same, there will be an increase in gross profit (sales revenues minus cost of goods sold), an increase in operating income, and an increase in net income. The fixed asset turnover ratio increases because its numerator is net sales revenue which has been increased. The net profit margin and earnings per share increase because both ratios have net income in their numerators. Inventory turnover is not affected by an increase in the selling price since neither cost of goods sold (numerator) nor the average inventory (denominator) is impacted by an increase in the selling price. 118) B Stock issuance causes an increase in total assets and an increase in stockholders’ equity. The increase in total assets would cause a decrease in the debt-to-assets ratio (because the denominator increases), and no change in the net profit margin (because a stock issuance does not affect Sales or Net Income). Version 1
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119) D The three types of ratios include liquidity, profitability, and solvency. 120) A Profitability ratios relate to the company’s performance in the current period, in particular, the company’s ability to generate income. Liquidity ratios relate to the company’s short-term survival, in particular, the company’s ability to use current assets to repay liabilities as they become due. Solvency ratios relate to the company’s long-run survival, in particular, the company’s ability to repay lenders when debt matures and to make the required interest payments prior to the date of maturity. 121) A Return on equity is a profitability ratio. Profitability ratios relate to the company’s performance in the current period, in particular, the company’s ability to generate income. 122) B Receivables turnover is a liquidity ratio. Liquidity ratios relate to the company’s short-term survival, in particular, the company’s ability to use current assets to repay liabilities as they become due. 123) A Receivables turnover is a liquidity ratio. Liquidity ratios relate to the company’s short-term survival, in particular, the company’s ability to use current assets to repay liabilities as they become due. 124) A Debt-to-assets is a solvency ratio.Solvency ratios relate to the company’s long-run survival, in particular, the company’s ability to repay lenders when debt matures and to make the required interest payments prior to the date of maturity. 125) A
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Gross profit percentage = [(Net sales revenue – Cost of goods sold) ÷ Net sales revenue] × 100 = [($142,000 – $61,000) ÷ $142,000] × 100 = 57.04% 126) C Gross profit percentage = [(Net sales revenue − Cost of goods sold) ÷ Net sales revenue] × 100 = [($234,000 − $99,000) ÷ $234,000] × 100 = 57.7% 127) A Gross profit = (Net sales revenue – Cost of goods sold) Current year: = $133,000 − $56,500 = $76,500. Prior year: = $103,000 − $48,500 = $54,500. Percentage change = (Current year’s total – Prior year’s total) ÷ Prior year’s total ($76,500 − $54,500) ÷ $54,500 = 40.4 % increase. 128) B Gross profit = (Net sales revenue − Cost of goods sold) Current year: = $234,000 − $99,000 = $135,000 Prior year: = $180,000 − $84,600 = $95,400 Percentage change = (Current year's total - Prior year's total) ÷ Prior year's total ($135,000 −$95,400) ÷ $95,400 = 41.5% increase 129) D Fixed asset turnover = Net revenue ÷ Average net fixed assets = $146,000 ÷ [($121,000 + $114,000) ÷ 2] = 1.24 130) A
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Fixed asset turnover = Net revenue ÷ Average net fixed assets = $234,000 ÷ [($189,000 + $176,400) ÷ 2] = 1.28 131) A Vertical (common size) analysis, focuses on important relationships within a financial statement. Common size statements (vertical analysis) would show the debt as a percent of total assets. 132) A Benchmarks help when interpreting a company's ratios. These benchmarks can include the company's prior year results, as well as the results of close competitors or the average for the industry. 133) A Gross profit − Operating expenses = Net income If gross profit is unchanged, but net income is rising, then operating expenses must be falling. 134) A Gross profit percentage = [(Net sales revenue − Cost of goods sold) ÷ Net sales revenue] ×100 If the gross profit percentage increases, it means that cost of goods sold has decreased as a percentage of sales. 135) D The fixed asset turnover ratio indicates how much revenue the company generates for each dollar invested in fixed assets. 136) C The fixed asset turnover ratio indicates how much revenue the company generates for each dollar invested in fixed assets. 137) A
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The fixed asset turnover (calculated as net sales revenue ÷ average net fixed assets) measures the ability of a company’s fixed assets to generate net sales revenue. An expanded number of stores would cause average fixed assets (the denominator) to increase while the relatively constant net sales would keep the numerator the same. As a result, the fixed asset turnover measure would be decreasing (or eroding) over time. 138) C Price/Earnings ratio = Stock price per share ÷ Earnings per share If EPS decreases and the price per share does not change, the Price/Earnings ratio will increase. 139) C Price/Earnings ratio = Stock price per share ÷ Earnings per share A company could have lower net income, but a higher Price/Earnings ratio than a competitor if investors are more optimistic about that company's future and are therefore willing to pay more for a dollar of that company's earnings. 140) C Receivable turnover = Net sales ÷ Average net receivables If the receivables turnover decreases, this may be the result of a decrease in net sales or an increase in average net receivables. 141) B Days to collect from customers = 365 ÷ Receivables Turnover Ratio Receivables Turnover Ratio = Net Sales Revenue ÷ Average Net Receivables = 365 ÷ [$6,510,000 ÷ ($760,000 + $930,000) ÷ 2] = 47.38 days 142) D
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Days to collect from customers = 365 ÷ Receivables Turnover Ratio Receivables Turnover Ratio = Net Sales Revenue ÷ Average Net Receivables = 365 ÷ [$5,200,000 ÷ ($600,000 + $740,000) ÷ 2] = 47.03 days 143) B Inventory turnover = Cost of goods sold ÷ Average inventory If cost of goods sold remains unchanged, a decrease in inventory will result in an increase in the inventory turnover ratio. 144) C The inventory turnover ratio indicates how frequently inventory is bought and sold during the year. 145) D The days to sell equals 365 divided by the inventory turnover ratio, where the inventory turnover ratio = cost of goods sold ÷ average inventory. The days to sell ratio indicates on average how long it takes to sell inventory on hand. Given Charmin’s relatively short days to sell, it is likely to sell products with a short shelf life, lower price, or both (for example, groceries). Given Barker’s relatively long days to sell, the company is likely to sell products with a long shelf life, higher price, or both (for example, autos). 146) C The two ratios are liquidity, which focus on the company's ability to survive in the short term, by converting assets to cash that can be used to pay current liabilities as they come due. Company C has the highest receivables turnover and the highest inventory turnover, which means the company is selling its inventory quicker and collecting its receivable more quickly than the other companies. 147) B
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Current ratio = Current assets ÷ Current liabilities A current ratio of 2.5 indicates that there is $2.50 of current assets to cover every $1 of current liabilities. 148) C The current ratio is a company’s current assets divided by its current liabilities. The larger the number, the greater a company’s liquidity. Therefore, for Company C, this means that for every dollar of current debt, the company has $2.50 in current assets with which to pay it off. 149) D Current ratio = Current assets ÷ Current liabilities If this ratio is less than 1, current liabilities are greater than current assets. 150) C A high inventory turnover ratio indicates that inventory moves quickly, so less money is tied up in inventory, and therefore, excess cash can be used to reduce borrowing. This situation would result in a low current ratio. 151) C Debt-to-assets ratio = Total liabilities ÷ Total assets 152) C The debt-to-assets ratio indicates the proportion of total assets that creditors finance. The percent of equity financing can be inferred from that ratio. 153) B A debt-to-assets ratio of 0.50 indicates the proportion of total assets that creditors finance is 0.50; as such, an equal proportion is from equity financing. 154) C
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Earnings per share (EPS) indicates the amount of earnings generated for each share of outstanding common stock; a decrease in EPS could indicate bad news. The fixed asset turnover ratio indicates how much revenue the company generates for each dollar invested in fixed assets; an increase in the fixed asset turnover ratio would be good news. The days to sell indicates how many days, on average, it takes a company to sell its inventory; a decrease in the days to sell would be good news. The debt-to-assets ratio indicates the proportion of total assets that creditors finance; a decreasing debt-to-assets ratio means that the company's financing strategy is less risky. 155) A Debt-to-assets ratio = Total liabilities ÷ Total assets Return on equity (ROE) = [(Net income − Preferred dividends) ÷ Average common stockholders' equity] × 100 If the company issues additional shares of common stock for cash, both assets and stockholders' equity will increase as a result of this transaction. The debt-to-assets ratio will decrease since assets increase. The return on equity ratio will decrease since average common stockholders' equity increases. 156) D Times interest earned = (Net income + Interest expense + Income tax expense) ÷ Interest Expense This ratio indicates how many times the company's interest expense was covered by its operating income. Or, in other words, the company's net income before interest expense and income tax expense is 11 times greater than its interest expense. 157) D The times interest earned ratio indicates how many times the company's interest expense was covered by the operating results. 158) C Version 1
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The conceptual framework for financial accounting and reporting has three main components: objective (of financial reporting), elements (to be measured and reported), and concepts (for measuring and reporting information). Each of these components has subparts specifying more detail. 159) D Gross profit percentage = [(Net Sales − Cost of Goods Sold) ÷ Net Sales] × 100 An increase in increase in the sales price, a decrease in the cost of inventory, and/or a decrease in the shipping cost for merchandise purchased would improve a company’s gross profit percentage. It would not be impacted by the collection of cash from customers. 160) A The fixed asset turnover ratio indicates how much revenue the company generates for each dollar invested in fixed assets, such as store buildings and the property they sit on. Since its fixed asset turnover ratio is higher, Puffin Turnovers generated more sales per dollar of fixed assets than Muffin Tops. 161) B The accounts receivable turnover measures how fast a company collects its receivables. Thus a higher turnover indicates the company is collecting its receivables faster. 162) A The current ratio measures the company’s ability to pay its current liabilities. It is calculated by dividing current assets by current liabilities. Selling long-term assets for cash would increase the numerator and have no effect on the denominator; as such, it would improve the company’s current ratio. 163) A
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Different accounting methods for depreciation are likely to have a major impact on the comparability of financial ratios among competitors if property, plant, and equipment make up a large portion of total assets and the companies use a varying range of estimated useful lives for buildings and equipment. 164) D Different accounting methods for inventory are least likely to affect the comparison of financial ratios among competitors if inventory is a small proportion of assets and inventory levels are stable. 165) B Current ratio = Current assets ÷ Current Liabilities Earnings per share = (Net income − preferred dividends) ÷ Average number of common shares outstanding During a period of rising prices, current assets (inventory) will be higher if FIFO is used, so the current ratio will be higher for Company A. Net income will also be higher when FIFO is used, so Company A's EPS will also be higher. 166) B The going-concern (also called continuity) assumption quietly underlies accounting rules. It is the belief that any business will be capable of continuing its operations long enough to realize the economic benefits of its assets and meet its obligations in the normal course of business. 167) B The going-concern (also called continuity) assumption quietly underlies accounting rules. It is the belief that any business will be capable of continuing its operations long enough to realize the economic benefits of its assets and meet its obligations in the normal course of business. The loss of a key patent could raise the concern that a business may not be capable of continuing its operations and meeting its obligations. 168) D Version 1
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The going-concern (also called continuity) assumption quietly underlies accounting rules. It is the belief that any business will be capable of continuing its operations long enough to realize the economic benefits of its assets and meet its obligations in the normal course of business. A company's profit margins may decrease due to increased competition or higher costs. It means that stockholders will have to accept a lower return on their investment. It does not necessarily mean that the company will go out of business. 169) C Full disclosure requires companies to present all information needed to properly interpret the results of their business activities. This does not require that every single transaction be explained in detail, but that adequate information necessary to allow financial statement users to fairly interpret the financial reports are disclosed. Financial reports must include both material and individually immaterial transactions because individually immaterial amounts may combine to produce a material amount. Future transactions are not disclosed (unless they are material in amount and completed prior to finalizing the financial statements). 170) A The primary goal of accounting is to provide information that allows decision makers to evaluate the results of business activities. Financial statements are used in making a variety of decisions. 171) D The going-concern(also called continuity) assumption quietly underlies accounting rules. It is the belief that any business will be capable of continuing its operations long enough to realize the economic benefits of its assets and meet its obligations in the normal course of business. Of the events listed, the loss of a key supplier or customer is the one that is most likely to cause a going-concern problem. 172) B Version 1
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The going-concern assumption(also called continuity) quietly underlies accounting rules. It is the belief that any business will be capable of continuing its operations long enough to realize the economic benefits of its assets and meet its obligations in the normal course of business. 173) A According to the full disclosure principle, financial reports should present all information that is needed to properly interpret the results of the company’s business activities. This doesn’t mean that every single transaction needs to be explained in detail, but rather that adequate information needs to be presented to allow financial statement users to fairly interpret reports about the company’s income, financial position, and cash flows. 174) A An unqualified opinion means the company’s financial statements can be relied upon because they are fairly presented. The conceptual framework describes elements to be measured and reported in financial statements and the going concern assumption underlies accounting rules. 175) B In some cases, you may see that companies include additional items on their income statements after the net income line. These items may be added to or subtracted from net income to arrive at the amount of comprehensive income, which equals net income plus other comprehensive income (OCI). OCI includes gains and losses arising from changes in the values of certain assets and liabilities. 176) A Gains and losses from discontinued operations are reported net of tax, so they are reported on the income statement after the income tax expense and income from continuing operations lines. 177) A
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Nonrecurring items such as gains or losses from discontinued operations are reported net of income tax on a separate line on the income statement. 178) A While most gains and losses are included in the computation of net income, some (relating to changes in foreign currency exchange rates and the value of certain investments, for example) are excluded from net income and included only in comprehensive income. 179) A Special items such as changes in the value of certain balance sheet accounts are excluded from the calculation of net income, but are included in the determination of comprehensive income. 180) D Only IFRS allows fixed assets to be reported at fair value; GAAP requires historical cost adjusted for depreciation. 181) B Both aim to guide businesses in reporting financial information that is relevant and that faithfully represents the underlying activities of businesses. 182) D Generally speaking, IFRS and GAAP are similar. Both aim to guide businesses in reporting financial information that is relevant and that faithfully represents the underlying activities of businesses. At a basic level, these accounting rules describe (1) when an item should be recognized in the accounting system, (2) how that item should be classified (e.g., asset or expense, revenue or liability), and (3) the amount at which each item should be measured.
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CHAPTER 13: PROBLEM MATERIAL SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 1) Choose the appropriate letter to match each financial performance ratio with the appropriate ratio category. Ratio 1.________ Debt-to-assets ratio 2.________ Receivables turnover ratio 3.________ Fixed asset turnover ratio 4.________ Current ratio 5.________ Return on equity (ROE) 6.________ Price/earnings ratio 7.________ Times interest earned ratio 8.________ Gross profit margin 9.________ Inventory turnover ratio 10.________ Earnings per share (EPS) Ratio Category P – Profitability L – Liquidity S – Solvency
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2) Consider the formula used to calculate each of the following financial performance ratios. From the list of financial statement items below, match its letter with the ratio it is used to calculate. Some financial statement items will be used more than once. Some ratios will use one letter from the list and some ratios will use two letters from the list. Ratio 1.________ Net Profit Margin 2.________ Debt-to-assets ratio 3.________ Earnings per share (EPS) 4.________ Return on equity (ROE) 5.________ Days to collect 6.________ Days to sell 7.________ Price earnings ratio 8.________ Current ratio 9.________ Fixed asset turnover 10.________ Gross profit percentage Financial Statement Item 1.A) Net income 2.B) Interest paid 3.C) Cost of goods sold 4.D) Net sales revenue 5.E) Total liabilities 6.F) Total assets at year end 7.G) Average stockholders' equity 8.H) Current liabilities
3)
A company provided the following information:
Common Stock, end of current year Additional Paid-In Capital, end of current year Retained Earnings, end of current year Sales Revenue, current year Net Income, current year
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$ 700,000 150,000 350,000 900,000 225,000
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There was no change in contributed capital and there were no dividends declared in the current year. Required: Calculate the return on equity (ROE) ratio.
4) Hubbard Company had 8,000 shares of common stock outstanding throughout the year. The following information is also available: Stockholders' equity, end of year Net income for the year Market price per share, end of year
$ 3,200,000 800,000 $112
Required: Calculate the Price/Earnings ratio at the end of the current year.
5)
The following information is taken from the financial statements of B. Darin Company:
Net sales revenue Expenses Net income Net cash from operations Assets, end of current year Liabilities, end of current year Stockholders' equity, end of current year Assets, end of previous year Stockholders' equity, end of previous year
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$ 900,000 600,000 300,000 290,000 600,000 100,000 500,000 590,000 490,000
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Expenses include interest of $10,000 and income tax of $90,000. There was an average of 40,000 shares of common stock outstanding during the year and the market price of the stock is $15 per share at the end of the year. There was no preferred stock outstanding during the year. Required: Calculate the following ratios for the current year: a. Fixed asset turnover b. Return on equity (ROE) c. Earnings per share (EPS) d. Times interest earned e. Price/Earnings ratio f. Debt-to-assets ratio g. Net profit margin
6) Tilden Industries reported net sales revenue of $1,700,000 and paid no dividends during the current year. The following information is also available at the end of the current and prior years: Current Year Total Current Assets Property, Plant, and Equipment, Net Total Current Liabilities Total Long-Term Liabilities Common Stock, $5 Par Paid-In Capital in Excess of Par Retained Earnings
$ 1,000,000 1,700,000 450,000 600,000 1,000,000 200,000 450,000
Prior Year $ 900,000 1,400,000 390,000 500,000 1,000,000 200,000 210,000
There was no preferred stock outstanding during the current year. Required: a. Calculate the return on equity (ROE) for the current year. b. Calculate the debt-to-assets ratio for the current year. c. Calculate the fixed asset turnover ratio for the current year. d. Calculate the current ratio for the current year. (Round all ratios to two decimal places.) Version 1
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7)
The following information is available for a company for the current year:
Net Sales Revenue Cost of Goods Sold Average Accounts Receivable Average Inventory Average Net Fixed Assets Average Total Assets
$ 345,000 205,000 32,500 9,450 81,250 130,000
Required: a. Calculate the receivables turnover ratio for the current year. b. Calculate the days to collect for the current year. c. Calculate the inventory turnover ratio for the current year. d. Calculate the days to sell for the current year. (Round all ratios to two decimal places.)
8) For each of the accounting treatments below, indicate whether it is followed in GAAP, IFRS, or both, by placing an "X" in the appropriate column(s). Accounting Treatment 1. Record the purchase of assets at cost.
GAAP
IFRS
2. Report assets at current value on the balance sheet. 3. May use FIFO for inventory costing. 4. May use LIFO for inventory costing. 5. Contingent liabilities are accrued under specified circumstances. 6. Some preferred stock is classified as a liability. 7. Common stock is classified as stockholders' equity.
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8. Current assets precede noncurrent assets on the balance sheet. 9. Equity precedes liabilities on the balance sheet. 10. Dividends and interest received may be classified as either operating or investing activities. 11. May use either the direct method or the indirect method to prepare the statement of cash flows. 12. Different parts of a piece of equipment may be depreciated over different periods of time (e.g., for a roller coaster, the engine may be depreciated over 5 years, the seats, over 7 years, and the track over 10 years).
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9)
Match each term with the appropriate definition. Not all definitions will be used.
Term: Full Disclosure Principle Ratio Analysis Liquidity Going-Concern Assumption Profitability Solvency Trend Analysis Vertical Analysis
Definition: 1.A) Also known as time-series analysis. 2.B) The ability of a company to meet its short-run financial obligations. 3.C) The principle that companies should present all relevant information needed to interpret a company's financial position and performance. 4.D) A measure of a company’s ability to generate income. 5.E) Measures that relate financial variables reported in one or more of the financial statements from the same year. 6.F) A type of analysis that focuses on relationships within a single financial statement. 7.G) A result from comparing a company's results to other companies in the industry. 8.H) The standard that revenue should be recorded when earned, provided payment is reasonably expected. 9.I) A measure of long-run survivability. 10.J) The standard that expenses should be recognized when incurred. 11.K) The characteristic that financial information needs to be valuable to decision makers. 12.L) An accounting assumption also known as continuity.
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10)
Match each term with the appropriate definition. Not all definitions will be used.
Term: Time-Series Analysis Common-Size Financial Statements Current Ratio Price/Earnings Ratio Earnings Per Share (EPS) Comprehensive Income Discontinued Operations Net Income
Definition: 1.A) The practice of reporting information in percentages rather than monetary amounts. 2.B) A nonrecurring item on the income statement that reflects gains and losses associated with extraordinary events. 3.C) Another name for a trend analysis. 4.D) An increase in an asset or a decrease in a liability that results from peripheral activities. 5.E) A section of the annual report that can be used in interpreting the results of financial statement analysis. 6.F) The ratio calculated by dividing the price of a share of stock by the earnings per share. 7.G) After-tax earnings adjusted for gains and losses that may disappear before they are realized. 8.H) A nonrecurring item associated with abandoning or selling an operation. 9.I) The ratio calculated by current assets divided by current liabilities. 10.J) Also known as ratio analysis. 11.K) The ratio calculated by dividing the net income by the number of common shares outstanding. 12.L) The earnings of a company after taxes.
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 11) The income statements for Urban Outfits, Incorporated are presented below: Urban Outfits, Incorporated
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Income Statements Year Ended December 31 Current Year
Prior Year
Sales Revenue Cost of Goods Sold Gross Profit Operating and Other Expenses Interest Expense Income Tax Expense
$ 731,559 358,719 372,840 122,960 6,600 37,200
$ 683,700 329,100 354,600 114,400 8,500 36,700
Net Income
$ 206,080
$ 195,000
Required: a. Prepare a horizontal analysis of the income statement above. (Round your answers to the nearest whole percent. Enter any decrease with a minus sign.) b. Interpret your analysis. Comment on significant changes.
12)
A condensed balance sheet for Morningstar, Incorporated is presented below:
Current Assets
Morningstar, Incorporated Balance Sheet December 31 (amounts in millions) Current Liabilities
Cash & Cash Equivalents Accounts Receivable Inventory
$ 5,000
Total Current Assets Property & Equipment, Net Long-Term Investments
5,960 2,400
Total Assets
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Accounts Payable
$ 310
Accrued Liabilities Total Current Liabilities Long-Term Liabilities Total Liabilities
1,950 2,260
2,200
Total Stockholders' Equity
7,400
$ 10,560
Total Liabilities &
$ 10,560
510 450
900 3,160
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Stockholders' Equity
Required: a. Prepare a vertical analysis of the balance sheet above. (Round your answers to the nearest whole percent.) b. Interpret your analysis. Identify significant items. Comment on key relationships.
13) Company X has net sales revenue of $1,250,000, cost of goods sold of $760,000, and all other expenses of $290,000. The beginning balance of stockholders' equity is $400,000 and the beginning balance of fixed assets is $361,000. The ending balance of stockholders' equity is $600,000 and the ending balance of fixed assets is $389,000. Required: Compute the return on equity (ROE) ratio. (Round your answer to the nearest whole percent.)
14)
Mercedes, Company has the following quarterly financial information. 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
Sales Revenue $ 901,800 Cost of Goods Sold 304,500 Operating Expenses 247,700 Interest Expense 3,600 Income Tax Expense 84,300 Average Number of 793,030 Common Shares Outstanding Stock price when Q4 EPS $ 24.00 released
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$ 911,300 317,100 259,100 3,600 87,200 788,064
$ 909,600 316,700 257,300 3,600 87,200 789,670
$ 917,400 321,900 261,400 3,500 89,700 803,000
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Required: a.Calculate the gross profit percentage for each quarter. b.Calculate the net profit margin for each quarter. c.Calculate theEarnings per share (EPS) for each quarter. d.Calculate the Price/Earnings ratio at the end of the year. e.Evaluate the company's profitability. (Round all ratios to two decimal places.)
15) The table below presents selected information from the financial statements of Pelican Company. Sales revenue during the current year was $13,700,300 and cost of goods sold was $8,905,195. All of Pelican's sales are made on account and are due within 30 days.
Cash and cash equivalents Accounts receivable Inventory Total current assets Total assets Total current liabilities Total liabilities
Prior Year
Current Year
$ 552,330 4,550,000 920,360 8,700,030 11,100,020 7,200,300 8,449,900
$ 599,780 3,800,000 1,223,440 8,480,100 10,980,000 7,476,000 8,240,700
Required: a.Calculate the current ratio for both the current year and prior year. b.Calculate the receivables turnover ratio for the current year. c.Calculate the days to collect for the current year. d.Calculate the inventory turnover ratio for the current year. e.Calculate the days to sell for the current year. f.Evaluate the company's liquidity position at the end of the current year. Cite any additional information not given in the problem that would be helpful in evaluating the company's liquidity. (Round all ratios to two decimal places.)
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16) Radio Heed, Incorporated's income statement and other financial information for the current year is presented below. Radio Heed, Incorporated Income Statement For the year ended December 31 Sales revenue Cost of goods sold Gross profit Selling,general, and administrative expenses Operating income Interest expense Income before taxes Income tax expense
$ 159,131 64,360 94,771 11,385 83,386 2,847 80,539 3,414
Net income
$ 77,125
Balance sheet information: Current assets Noncurrent assets Current liabilities Long-term debt
$ 250,000 500,000 50,000 100,000
Required: a.Perform vertical analysis of the income statement. (Round to the nearest whole percentage.) b.Calculate the debt-to-assets ratio. (Round to two decimal places.) c.Calculate the times interest earned ratio. (Round to two decimal places.) d.Evaluate the company's solvency.
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Answer Key Test name: Chap 13_7e_Problems 1) 1. S 2. L 3. P 4. L 5. P 6. P 7. S 8. P 9. L 10. P 2) 1. A and D 2. E and F 3. A 4. A and G 5. D 6. C 7. A 8. H 9. D 10. D and C
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3) Ending Retained Earnings = Beginning Retained Earnings + Net income − Dividends Beginning Retained Earnings = Ending Retained Earnings − Net income + Dividends = $350,000 − $225,000 = $125,000 Beginning stockholders' equity = Common Stock + Additional Paid-In Capital + Beginning Retained Earnings = $700,000 + $150,000 + $125,000 = $975,000 Ending stockholders' equity = Common Stock + Additional Paid-In Capital + Ending Retained Earnings = $700,000 + $150,000 + $350,000 = $1,200,000 Average stockholders' equity = ($975,000 + $1,200,000) ÷ 2 = $1,087,500 Return on equity (ROE) = [(Net income − Preferred dividends) ÷ Average common stockholders' equity] × 100 = [($225,000 − $0) ÷ $1,087,500] × 100 = 20.7% 4) Earnings per share (EPS) = Net income/Average common shares outstanding = $800,000 ÷ 8,000 shares = $100 Price/Earnings Ratio = Market price per share/EPS = $112/$100 = 1.12
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5) a. Average total assets = ($600,000 + $590,000) ÷ 2 = $595,000 Fixed asset turnover ratio = Net sales revenue ÷ Average total assets = $900,000 ÷ $595,000 = 1.51 b. Average stockholders' equity is ($500,000 + $490,000) ÷ 2 = $495,000 Return on equity (ROE) = (Net income − preferred dividends) ÷ Average common stockholders' equity × 100 = [($300,000 − $0) ÷ $495,000] × 100 = 60.61% c. Earnings per share (EPS) = (Net income − preferred dividends) ÷ Average number of common shares outstanding = ($300,000 − $0) ÷ 40,000 = $7.50 d. Times interest earned = (Net income + Interest expense + Income tax) ÷ Interest expense = ($300,000 + $10,000 + $90,000) ÷ $10,000 = 40 Price/Earnings ratio = Market price per share ÷ EPS = $15 ÷ $7.50 = 2.0 e. Debt-to-assets ratio = Total liabilities ÷ Total Assets
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= $100,000 ÷ $600,000 = 0.17 g. Net profit margin ratio = (Net income ÷ Net sales revenue) × 100 = ($300,000 ÷ $900,000) × 100 = 33.33% 6) a. Average common stockholders' equity = (Beginning common stockholders' equity + Ending common stockholders' equity) ÷ 2 = [($1,000,000 + $200,000 + $210,000) + ($1,000,000 + $200,000 + $450,000)] ÷ 2 = $1,530,000 Return on equity (ROE) = (Net income − preferred dividends) ÷ Average common stockholders' equity × 100 = [($240,000 − $0) ÷ $1,530,000] × 100 = 15.69% b. Debt-to-assets ratio = Total liabilities ÷ Total assets = ($450,000 + $600,000) ÷ ($1,000,000 + $1,700,000) = 0.39 c. Fixed asset turnover ratio = Net revenue ÷ Average net fixed assets Fixed asset turnover ratio = $1,700,000 ÷ [($1,700,000 + $1,400,000) ÷ 2] = 1.10 d. Current ratio = Current assets ÷ Current liabilities = $1,000,000 ÷ $450,000 = 2.22 Version 1
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7) a. Receivables turnover ratio = Net sales ÷ Average net receivables = $345,000 ÷ $32,500 = 10.62 b. Days to collect = 365 ÷ Receivables turnover ratio = 365 ÷ 10.62 = 34.37 c. Inventory turnover ratio = Cost of goods sold ÷ Average inventory = $205,000 ÷ $9,450 = 21.69 d. Days to sell ratio = 365 ÷ Inventory turnover = 365 ÷ 21.69 = 16.83 8) Accounting Treatment 1. Record the purchase of assets at cost. 2. Report assets at current value on the balance sheet.
GAAP X
IFRS X X
3. May use FIFO for inventory costing. 4. May use LIFO for inventory costing.
X X
X
5. Contingent liabilities are accrued under specified circumstances. 6. Some preferred stock is classified as a liability.
X
X
7. Common stock is classified as stockholders' equity. 8. Current assets precede noncurrent assets on the balance sheet.
X X
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9. Equity precedes liabilities on the balance sheet. 10. Dividends and interest received may be classified as either operating or investing activities. 11. May use either the direct method or the indirect method to prepare the statement of cash flows. 12. Different parts of a piece of equipment may be depreciated over different periods of time (e.g., for a roller coaster, the engine may be depreciated over 5 years, the seats, over 7 years, and the track over 10 years).
X X X
X X
9) Full Disclosure Principle C Ratio Analysis E Liquidity B Going-Concern Assumption L Profitability D Solvency I Trend Analysis A Vertical Analysis F 10) Time-Series Analysis C Common-Size Financial Statements A Current Ratio I Price/Earnings Ratio F Earnings Per Share (EPS) K Comprehensive Income G Discontinued Operations H Net Income L 11) a. Urban Outfits, Incorporated Income Statements Year Ended December 31 Increase (Decrease) Current Year
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Prior Year
Amount
Percent
19
Sales Revenue Cost of Goods Sold Gross Profit Operating and Other Expenses Interest Expense Income Tax Expense
$ 731,559 358,719 372,840 122,960
$ 683,700 329,100 354,600 114,400
$47,859 29,619 18,240 8,560
7 9 5 7
6,600 37,200
8,500 36,700
(1,900) 500
(22) 1
Net Income
$ 206,080
$ 195,000
$ 11,080
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b. Sales increased by 7% but cost of goods sold increased more, resulting in a modest increase (5%) in gross profit. Operating expenses increased by 7%, but interest expense, albeit a small amount, decreased significantly (22%). The end result was a 6% increase in net income. 12) a.
Current Assets
Morningstar, Incorporated Balance Sheet December 31 (amounts in millions) Current Liabilities
Cash & Cash Equivalents Accounts Receivable Inventory
$ 5,000
47
Accounts Payable
$ 310
3
510
5
Accrued Liabilities
1,950
18
450
4
2,260
21
Total Current Assets Property & Equipment, Net Long-Term Investments
5,960
56
900
9
2,400
23
Total Current Liabilities Long-Term Liabilities Total Liabilities
3,160
30
2,200
21
Total Stockholders' Equity
7,400
70
Total Assets
$ 10,560
100
Total Liabilities & Stockholders' Equity
$ 10,560
100
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b. Morningstar, Inc.'s most significant assets are comprised of cash and cash equivalents (47%). The company may be able to earn a higher return by investing some of its cash and cash equivalents in longer term investments. Property and equipment, net is also significant (23%). Equity is a greater source of financing (70%) and debt (30%). 13) Sales Cost of Goods Sold Gross Profit Operating Expenses Net Income
$ 1,250,000 760,000 490,000 290,000 $ 200,000
Average Stockholders' Equity = (Beginning Common Stockholders' Equity + Ending Common Stockholders' Equity) ÷ 2 = ($400,000 + $600,000) ÷ 2 = $500,000 Return on Equity (ROE) = [(Net Income − Preferred Dividends) ÷ Average Common Stockholders' Equity] × 100 = [($200,000 − $0) ÷ $500,000] × 100 = 40% 14) a. Gross profit percentage = [(Net sales revenue − Cost of goods sold) ÷ Net sales revenue] × 100 4th Quarter 66.23%
3rd Quarter 65.20%
2nd Quarter 65.18%
1st Quarter 64.91%
b. Net profit margin = (Net income ÷ Revenues) × 100 4th Quarter
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3rd Quarter
2nd Quarter
1st Quarter
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29.02%
26.81%
26.91%
26.26%
c. Earnings per share (EPS) = (Net income − preferred dividends) ÷ Average number of common shares outstanding 4th Quarter $0.33
3rd Quarter $0.31
2nd Quarter $0.31
1st Quarter $0.30
d. Price/Earnings ratio = Stock price ÷ EPS (for the last four quarters) = $24.00 ÷ ($0.33 + $0.31 + $0.31 + $0.30) = 19.20 e. Mercedes Co.'s profitability improved slowly and steadily over the four quarters, as evidenced by small incremental increases in its gross and net profit margins. Gross profit increased as cost of goods sold declined in most quarters, especially in Quarter 4. Since interest expense was constant and operating expenses decreased over the four quarters, net profit margin and earnings per share increased. With a Price/Earnings ratio of 19.2, it appears that investors are optimistic about the company's future.
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15) a. Current ratio = Current assets ÷ Current Liabilities Current year: = $8,480,100 ÷ $7,476,000 = 1.13 Prior year: = $8,700,030 ÷ $7,200,300 = 1.21 b. Receivables turnover = Net credit sales ÷ Average net receivables = $13,700,300 ÷ [($4,550,000 + $3,800,000) ÷ 2] = 3.28 c. Days to collect = 365 ÷ Receivables turnover = 365 ÷ 3.28 = 111.28 d. Inventory turnover = Cost of goods sold ÷ Average inventory = $8,905,195 ÷ [($920,360 + $1,223,440) ÷ 2] = 8.31 e. Days to sell = 365 ÷ Inventory turnover = 365 ÷ 8.31 = 43.92 f. The current ratio measures the company's ability to pay its current liabilities. The current ratio declined from 1.21 to 1.13; however, a current ratio greater than 1.0 is often considered acceptable. The receivables turnover ratio indicates how frequently sales are made and collected during the year. The measure "days to collect" converts the receivables turnover ratio into the average number of days needed to collect each receivable. Assuming terms of 30 days, the receivables turnover of 3.28 is slow. On average, even though the credit terms are 30 days, on average, it takes the company over 111 days to collect its receivables. The inventory turnover ratio indicates how frequently Version 1
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inventory is bought and sold during the year. The measure "days to sell" converts the inventory turnover ratio into the average number of days needed to sell each purchase of inventory. An inventory turnover of 8.31 and days to sell of 43.9 may be adequate, but it would be helpful to know what industry Pelican operates in and the industry averages for these two ratios. Knowing the company's ability to access credit would be helpful in further evaluating its liquidity. 16) a. Radio Heed, Incorporated Income Statement For the year ended December 31 Amount
Percent
Sales revenue Cost of goods sold Gross profit Selling,general, and administrative expenses Operating income Interest expense Income before taxes Income tax expense
$ 159,131 64,360 94,771 11,385
100.0 40.0 60.0 7.0
83,386 2,847 80,539 3,414
52.0 2.0 51.0 2.0
Net income
$ 77,125
48.0
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b. Debt to Assets = Total liabilities ÷ Total assets = $150,000 ÷ $750,000 = $0.20 c. Times interest earned = (Net income + Interest expense + Income tax) ÷ Interest expense = ($77,125 + $2,847 + $3,414) = 83,386 ÷ $2,847 = $29.29 d. Judging from the analysis above, Radio Heed, Inc. appears to be solvent. It has relatively little debt with a debt-to-assets ratio of 20%, and it is easily able to cover interest payments with a times interest earned ratio of 29.29.
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