Chapter 1 Financial Accounting and Business Decisions Learning Objectives – Coverage by question True / False LO1 – Explain business organization and its three forms.
Multiple Choice
Exercises
1-3
1
LO2 – Describe business activities.
6-8
4-10
3
LO3 – Indicate who uses accounting information.
1-5
11-17
1, 2
LO4 – Explain the accounting process and generally accepted accounting principles.
9-12
18-23
LO5 – Describe the accounting equation and each financial statement.
13-24
24-105
4-17
106-110
18
111-125
19, 20
LO6 – Explain additional disclosures that accompany financial statements.
Problems
1-3
LO7 – Describe careers in accounting. LO8 – Appendix 1A: Discuss FASB’s conceptual framework.
25-30
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-1
Chapter 1: Financial Accounting and Business Decisions
True / False Topic: Managerial Accounting LO: 3 1. A major function of managerial accounting is to provide general purpose financial statements for parties outside the organization. Answer: False Rationale: A major function of managerial accounting is to provide management with accounting data for decisions related to a firm’s operations. Providing general purpose financial statements for parties outside an organization is a function of financial accounting. Topic: Ethics LO: 3 2. It is unusual for U.S. businesses to develop written codes of ethics to guide their employees. Answer: False Rationale: It is now commonplace for businesses to develop written codes of ethics to help guide the behavior of their employees. Topic: Ethics LO: 3 3. An emphasis on short-term profits may contribute to ethical breakdowns within a business. Answer: True Rationale: A criticism of U.S. business practices is that they are too “bottom-line” (that is, short-term profit) oriented. This orientation can lead to unethical actions by management to increase reported short-term profits. Topic: Accounting Information Users LO: 3 4. Financial accounting is designed primarily for decision makers within a company. Answer: False Rationale: Financial accounting is designed primarily to provide information to decision makers outside of a company, while managerial accounting is designed primarily to provide accounting information for decision makers within a company. Topic: Ethics and Accounting LO: 3 5. The goal of the Sarbanes-Oxley Act of 2002 was to increase the level of confidence that external users have in a company’s financial statements. Answer: True Rationale: In the wake of various business scandals, like that involving Enron Corporation, the U.S. Congress passed the Sarbanes-Oxley Act to improve external user confidence in financial statement reporting. ©Cambridge Business Publishers, 2020 1-2
Financial Accounting for Undergraduates, 4th Edition
Topic: Investing Activities LO: 2 6. Investing activities involve the acquiring and disposing of liabilities that a company needs in order to finance its operating activities. Answer: False Rationale: Investing activities are the acquiring and disposing of assets that a company needs for the production and sale of a company’s products and services. Topic: Financing Activities LO: 2 7. Other than operating profit, there are three main sources of external financing. Answer: False Rationale: There are two main sources of financing: equity (also called shareholder or owner) financing and debt (also called creditor or lender) financing. Topic: Financing and Investing Activities LO: 2 8. Financing activities are defined as the acquiring and disposing of resources for the purpose of selling products and services. Answer: False Rationale: Financing activities are defined as methods a company uses to raise funds to pay for resources. Investing activities are defined as the acquiring and disposing of resources for the purpose of selling products and services. Topic: Purpose of Accounting LO: 4 9. The basic purpose of accounting is to provide useful financial information. Answer: True Rationale: The purpose of accounting is to provide useful financial information. Accordingly, the accounting process (1) prepared financial reports to meet the needs of the user and (2) helps interpret the financial results for the user. Topic: GAAP LO: 4 10. Generally accepted accounting principles apply to the general-purpose financial statements prepared primarily for parties outside of an organization. Answer: True Rationale: Financial statement users who rely on accounting data expect that all companies will follow the same standards and procedures when preparing their statements. These standards and procedures are called generally accepted accounting principles.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-3
Topic: Sources of GAAP LO: 4 11. Federal income tax regulations constitute a primary source of generally accepted accounting principles. Answer: False Rationale: FASB, AICPA, and SEC have been instrumental in the development of GAAP in the United States. Topic: Sources of GAAP LO: 4 12. Currently, the organization in the private sector with the primary responsibility for formulating accounting principles is the Financial Accounting Standards Board. Answer: True Rationale: The Financial Accounting Standards Board has been instrumental in the development of generally accepted accounting principles in the United States. Topic: Accounting Equation LO: 5 13. Assets must always equal the sum of liabilities plus stockholders’ equity. Answer: True Rationale: The accounting equation is Assets = Liabilities + Stockholders’ Equity. This relation must always exist. Topic: Balance Sheet LO: 5 14. If a company reports retained earnings of $22.4 million on its balance sheet, it will also report $22.4 million in cash. Answer: False Rationale: The accounting equation requires total assets to equal the sum of total liabilities plus stockholders’ equity. That does not imply, however, that liability and stockholders’ equity accounts relate directly to specific assets. Topic: Accounting Equation LO: 5 15. The accounting equation states that the economic resources of an entity are equal to the claims on those resources. Answer: True Rationale: The accounting equation: Assets = Liabilities + Stockholder’s equity, states that a firm’s assets equal the sum of its liabilities plus its stockholders’ equity. Throughout the accounting process, the accounting equation must always remain in balance.
©Cambridge Business Publishers, 2020 1-4
Financial Accounting for Undergraduates, 4th Edition
Topic: Assets LO: 5 16. The key characteristic of an asset is that it represents a probable future economic benefit owned or controlled by an entity. Answer: True Rationale: Assets are the economic resources of a business that can be expressed in monetary form. Assets take many forms, but the key characteristic is that an asset represents a probable future economic benefit owned or controlled by an entity. Topic: Net Assets LO: 5 17. The net assets of an entity are equal to the assets minus the stockholders’ equity. Answer: False Rationale: The net assets of an entity are equal to its stockholders’ equity. Topic: Statement of Cash Flows LO: 5 18. A statement of cash flows reports on the cash flows for operating, investing and financing activities at a point in time. Answer: False Rationale: A statement of cash flows reports on the cash flows for operating, investing, and financing activities over a period of time. Topic: Retained Earnings LO: 5 19. Retained earnings are reported on both the income statement and the statement of stockholders’ equity. Answer: False Rationale: Retained earnings are reported on the statement of retained earnings and the balance sheet. The income statement represents current period earnings. Topic: Income Statement LO: 5 20. The income statement is also called the earnings statement. Answer: True Rationale: The income statement reports the results of operations for a business for a given time period usually a quarter or a year. The income statement lists the revenues and expenses of the business. The income statement is also called the statement of operations, the statement of income, and the earnings statement.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-5
Topic: Preparing Financial Statements LO: 5 21. The income statement, statement of stockholders’ equity, and statement of cash flows are referred to as period-in-time statements. Answer: True Rationale: Specific periods of time are reported on all financial statements, except the balance sheet. The balance sheet is referred to as a point-in-time statement. Topic: Income Statement LO: 5 22. The income statement is also known as the statement of financial position. Answer: False Rationale: The income statement is also known as the statement of operations, the statement of income, and the earnings statement. The balance sheet is sometimes referred to as the statement of financial position. Topic: Statement of Cash Flows LO: 5 23. The statement of cash flows reports information about cash flows in two categories: cash received and cash disbursed. Answer: False Rationale: The cash flows are grouped into the three business activities of operating, investing, and financing. Topic: Relations Among the Financial Statements LO: 5 24. When financial statements are prepared, the balance sheet is usually prepared first. Answer: False Rationale: The income statement is prepared first, followed by the statement of stockholders’ equity, the balance sheet, and finally the statement of cash flows. Topic: Conceptual Framework for Financial Reporting LO: 8 25. The conceptual framework developed by the FASB includes a statement of the objectives of financial reporting and a discussion about the qualitative characteristics of accounting information. Answer: True Rationale: The conceptual framework includes, among other things, a statement of the objectives of financial reporting along with a discussion about the qualitative characteristics of accounting information that are important to users.
©Cambridge Business Publishers, 2020 1-6
Financial Accounting for Undergraduates, 4th Edition
Topic: Accrual Accounting LO: 8 26. Accrual accounting recognizes revenues only when cash is received and expenses only when cash is paid. Answer: False Rationale: Accrual accounting refers to the recognition of revenue when earned and the matching of expenses when incurred. The recognition of revenues and expenses does not always relate to the receipt or payment of cash. Topic: Comparability and Consistency LO: 8 27. The qualitative characteristic of accounting information known as comparability means that the same accounting methods should be used from one period to the next, whenever possible. Answer: False Rationale: The statement describes consistency. Comparability speaks to firms in the same industry using similar reporting techniques. Topic: Cost Principle LO: 8 28. The cost principle states that assets are initially recorded at the amounts paid or obligated to pay to acquire the assets. Answer: True Rationale: The cost principle means that assets and liabilities are initially recorded at the amount paid or obligated to pay. Historically, acquisition cost is considered the proper initial measurement because, at the time the asset is acquired, it represents the fair value of the asset as agreed by both the buyer and the seller. Topic: Going Concern Concept LO: 8 29. The going concern concept assumes that an entity will be going out of business within the next several years. Answer: False Rationale: The going concern concept presumes that an entity will continue to operate indefinitely and will not be sold or otherwise liquidated. Topic: Accrual Basis of Accounting LO: 8 30. Under the accrual basis of accounting, revenue may be recorded even though cash has not yet been received from a customer or client. Answer: True Rationale: Under the accrual basis of accounting, sales revenue is recognized when it is both earned and realized (revenue recognition principle) and expenses are recorded tin the period in which they generate the earned revenue (expense recognition principle). Recording revenues and expenses does not depend upon the receipt or payment of cash.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-7
Multiple Choice Topic: Business Organizations LO: 1 Level of Difficulty: EASY 1. Which of the following forms of business organizations exists as a legal entity for tax purposes? A) A sole proprietorship B) A partnership C) A corporation D) A labor union Answer: C Rationale: A corporation is a form of business organization that exists as a legal entity, subject to taxes, that issues shares of stock to its owners or shareholders in exchange for cash or other resources. Topic: Business Organizations LO: 1 Level of Difficulty: EASY 2. The three principal forms of business organization are: A) A sole proprietorship, a stockholder, and a corporation B) A partnership, a sub-S corporation, and a labor union C) A corporation, a partnership, and a sole proprietorship D) A labor union, a stockholder, and a partnership Answer: C Rationale: The three principal forms of business organization are the sole proprietorship, the partnership, and the corporation. Topic: Business Organizations LO: 1 Level of Difficulty: EASY 3. Which of the following is not an advantage of the corporate form of business organization? A) The ease with which capital can be raised B) The protection afforded stockholders against personal liability C) Both the business and the owners are taxed D) The relative ease of selling ownership shares Answer: C Rationale: The advantage of the corporate form of business organization include the ease of raising capital, stockholder protection against personal liability, and the ease of selling ownership shares.
©Cambridge Business Publishers, 2020 1-8
Financial Accounting for Undergraduates, 4th Edition
Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 4. The three types of business activities in which every business, regardless of organizational form, its industry or its size, is involved are: A) Financing activities, banking activities, financial accounting activities B) Operating activities, banking activities, financing activities C) Financing activities, investing activities, financial accounting activities D) Financing activities, operating activities, investing activities Answer: D Rationale: The three types of business activities are financing activities, operating activities, and investing activities. Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 5. Financing activities are generally categorized as: A) Debt financing B) Bond financing C) Equity financing D) Either debt or equity financing Answer: D Rationale: Financing activities are generally categorized as either debt or equity financing. Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 6. Equity financing involves: A) Selling shares of stock to investors B) Borrowing money from a bank C) Issuing bonds payable D) Repayment of principal and interest to a creditor Answer: A Rationale: Equity financing involves selling shares of stock to investors. Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 7. Which of the following statements about operating activities is not correct? A) Operating activities refers to the day-to-day activities of producing and selling a product or providing a service. B) Creditors and stockholders beliefs about a company’s ability to generate a profit are unimportant. C) Operating activities are critical for a business. D) If a company is unable to generate income from its operations it is very likely that it will fail. Answer: B Rationale: If creditors and stockholders do not believe that a company will be able to generate a profit, they are unlikely to provide the financing needed to start, or maintain its operations.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-9
Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 8. Which of the following activities is an example of an operating activity? A) Receiving a loan from a bank B) Selling merchandise online C) Purchasing a delivery truck D) Issuing shares of stock in exchange for cash Answer: B Rationale: Selling merchandise online is an example of an operating activity. Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 9. Which of the following activities is an example of an investing activity? A) Receiving a loan from a bank B) Selling merchandise online C) Purchasing a delivery truck D) Issuing shares of stock in exchange for cash Answer: C Rationale: Purchasing a delivery truck is an example of an investing activity. Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 10. Which of the following activities is an example of a financing activity? A) Receiving a loan from a bank B) Selling merchandise online C) Purchasing a delivery truck D) Paying employee salaries Answer: A Rationale: Receiving a loan from a bank is an example of a financing activity. Topic: Financial Accounting Information Users LO: 3 Level of Difficulty: EASY 11. Which one of the following is not an external user of financial information? A) Stockholders B) Creditors C) Internal Revenue Service D) Senior company management Answer: D Rationale: Decision makers outside the company include stockholders, creditors, and tax agencies such as the Internal Revenue Service.
©Cambridge Business Publishers, 2020 1-10
Financial Accounting for Undergraduates, 4th Edition
Topic: Financial Accounting Information Users LO: 3 Level of Difficulty: EASY 12. Which one of the following is not an internal user of financial information? A) The Marketing Department B) Creditors C) The Finance Department D) Senior company management Answer: B Rationale: Decision makers inside the company include various departments, such as marketing or finance, and members of the company’s senior management team. Topic: Managerial Accounting LO: 3 Level of Difficulty: EASY 13. The accounting activities carried out by a firm’s accounting staff primarily to provide management with accounting data for decisions related to a firm’s operations is referred to as: A) Financial accounting B) Managerial accounting C) Tax accounting D) Regulatory accounting E) None of the above Answer: B Rationale: The process of generating and analyzing data needed by the internal management of a company for decision making and the efficient management of the business is referred to as managerial accounting. Financial Accounting LO: 3 Level of Difficulty: EASY 14. The area of accounting dealing with the preparation of financial statements showing a business’s results of operations, financial position, and cash flow is referred to as: A) Financial accounting B) Managerial accounting C) Tax accounting D) Regulatory accounting E) None of the above Answer: A Rationale: The process of accumulating and reporting accounting information that details a business’s results of operations, cash flows, and financial position is referred to as financial accounting.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-11
Topic: Ethics LO: 3 Level of Difficulty: MEDIUM 15. Which of the following represents an aspect of the accounting environment that may create ethical pressures on an accountant? A) Accountants have access to confidential and sensitive information. B) The output produced by accountants may have significant financial implications for one or more persons. C) Management may emphasize short-run profits. D) All of the above E) None of the above Answer: D Rationale: Accountants face several unique ethical dimensions as a result of their work, These include: access to confidential and sensitive information, output produced by accountants may have significant financial implications for individuals as well as businesses, and that management may emphasize short-run (“bottom line”) profits. Topic: Ethics LO: 3 Level of Difficulty: MEDIUM 16. Which of the following situations has the potential to create ethical pressure on an accountant? A) Preparing an individual’s income tax return when much of the supporting documentation is missing. B) Informing a sales manager that the travel and entertainment expenses turned in by the top performing sales representative exceed company allowances. C) Discovering that the company has made a mistake in computing refunds granted to customers, causing the refunds to be too small. D) All of the above E) None of the above Answer: D Rationale: Accountants face several unique ethical dimensions as a result of their work. All of the situations noted would present the accountant with ethical pressure when deciding the correct action to take when dealing with each situation. Topic: Ethics LO: 3 Level of Difficulty: EASY 17. The branch of accounting which is involved in criminal investigations related to areas such as financial statement fraud, money laundering, or investment fraud is called: A) Internal auditing B) Cost accounting. C) Forensic accounting. D) All of the above E) None of the above Answer: C Rationale: Forensic accounting is the branch of accounting which is involved in criminal investigations related to areas such as financial statement fraud, money laundering, or investment fraud. Forensic accountants are involved both before and after the commission of a crime.
©Cambridge Business Publishers, 2020 1-12
Financial Accounting for Undergraduates, 4th Edition
Topic: The Accounting Process LO: 4 Level of Difficulty: MEDIUM 18. The measurement activity of the accounting process must do all of the following except: A) Identify the relevant economic activities of a business B) Prepare financial reports to meet the needs of the user C) Quantify the economic activities of a business D) Record the resulting measures in a systematic manner Answer: B Rationale: The measurement process identifies, measures, and records the economic activity of an entity. Preparation of the financial reports is part of the communication activity of the accounting process. Topic: The Accounting Process LO: 4 Level of Difficulty: MEDIUM 19. The communication activity of the accounting process must: A) Identify the relevant economic activities of a business B) Record the resulting measures in a systematic manner C) Quantify the economic activities of a business D) Prepare financial reports and help interpret financial results to meet users’ needs Answer: D Rationale: The communication activity of the accounting process provides useful financial reports to users and provides various techniques, such as formatting of reports, charts and graphs, and ratios, to users to help them interpret the content of the reports. Topic: Generally Accepted Accounting Principles LO: 4 Level of Difficulty: MEDIUM 20. Which of the following statements is true regarding generally accepted accounting principles (GAAP)? A) GAAP is a set of laws. B) GAAP is subject to change as conditions warrant. C) Under GAAP, if two companies engage in the same transactions, they must choose the same accounting methods. D) U.S. GAAP is the same as GAAP in other countries. Answer: B Rationale: Specific rules under GAAP are altered or new practices are formulated to fit changes in underlying economic circumstances of business transactions.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-13
Topic: GAAP LO: 4 Level of Difficulty: EASY 21. Currently, the organization with the primary responsibility for formulating U.S. generally accepted accounting principles is the: A) American Institute of Certified Public Accountants B) Securities and Exchange Commission C) Financial Accounting Standards Board D) Internal Revenue Service E) None of the above Answer: C Rationale: Currently, the organization in the private sector with the primary responsibility for formulating accounting principles is the Financial Accounting Standards Board. The Financial Accounting Standards Board has been instrumental in the development of generally accepted accounting principles in the United States. Topic: GAAP LO: 4 Level of Difficulty: EASY 22. Generally accepted accounting principles are: A) Guides to action that apply primarily to the process of managerial accounting. B) Accounting standards enforced by the Internal Revenue Service. C) Accounting standards that never change. D) Guides to action that apply primarily to the process of financial accounting. E) None of the above Answer: D Rationale: Financial statement users who rely on accounting data expect that all companies will follow the same standards and procedures when preparing their statements. These standards and procedures are called generally accepted accounting principles. Generally accepted accounting principles apply to the general-purpose financial statements prepared primarily for parties outside of an organization. Topic: Financial Accounting Oversight LO: 4 Level of Difficulty: MEDIUM 23. Financial accounting oversight in the United States is provided by all of the following organizations except the: A) International Accounting Standards Board (IASB) B) Financial Accounting Standards Board (FASB) C) Public Company Accounting Oversight Board (PCAOB) D) U.S. Securities Exchange Commission (SEC) Answer: A Rationale: While the United States is working to converge national standards with those standards set by the IASB, no final decision requiring the adoption of the IASB’s standards has been made.
©Cambridge Business Publishers, 2020 1-14
Financial Accounting for Undergraduates, 4th Edition
Topic: Accounting Equation LO: 5 Level of Difficulty: EASY 24. Which of the following is a correct statement of the accounting equation in economic terms? A) Economic resources = operating assets + financial assets B) Economic resources = creditor financing + owner financing C) Economic resources = creditor financing – owner financing D) Creditor financing = investing + operating Answer: B Rationale: The accounting equation is assets = liabilities + stockholders’ equity. Another way of viewing this equation is Economic resources = Creditor Financing + Owner Financing Topic: Liabilities LO: 5 Level of Difficulty: MEDIUM 25. What are the obligations or debts that a business must pay in cash or in goods and services at some future time because of past transactions or events called and how are they reported? A) Assets on the balance sheet B) Stockholders’ equity on the balance sheet C) Dividends on the statement of retained earnings D) Liabilities on the balance sheet Answer: D Rationale: Liabilities are probable future economic sacrifices resulting from a current or past event. They are obligations that must be satisfied with a future cash payment or delivery of goods or services. Topic: Assets LO: 5 Level of Difficulty: MEDIUM 26. What are the economics resources of a business that can be expressed in monetary and how are they reported? A) Assets on the balance sheet B) Stockholders’ equity on the balance sheet C) Dividends on the statement of retained earnings D) Liabilities on the balance sheet Answer: A Rationale: Assets are economic resources of a business that can be represented in monetary terms and that represent a probable future economic benefit to a business.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-15
Topic: Accounting Equation LO: 5 Level of Difficulty: EASY 27. The accounting equation states: A) Assets + Liabilities = Stockholders’ Equity B) Assets = Liabilities - Stockholders’ Equity C) Assets = Liabilities + Stockholders’ Equity D) Assets + Stockholders’ Equity = Liabilities E) None of the above Answer: C Rationale: The accounting equation: Assets = Liabilities + Stockholder’s equity, states that a firm’s assets equal the sum of its liabilities plus its stockholders’ equity. Assets refer to a company’s resources, liabilities refer to creditor claims on those resources, and stockholders’ equity refers to claims on those resources. Throughout the accounting process, the accounting equation must always remain in balance. Topic: Assets LO: 5 Level of Difficulty: EASY 28. The economic resources of an entity that can be usually expressed in monetary terms are called? A) Stockholders’ equity B) Revenues C) Liabilities D) Assets E) None of the above Answer: D Rationale: Assets refer to the economic resources of a business that can be expressed in monetary terms. Assets take many forms. The key characteristic of any asset is that it represents a probable future economic benefit to a business. Topic: Assets LO: 5 Level of Difficulty: EASY 29. Which of the following is correct? A) Ownership is an essential test for an asset. B) An example of an asset is notes payable. C) The key characteristic of an asset is that it represents a probable future economic benefit owned or controlled by the entity. D) Liabilities represent the interest of the owners in the assets of an entity. E) None of the above Answer: C Rationale: Assets refer to the economic resources of a business that can be expressed in monetary terms. Assets take many forms. The key characteristic of any asset is that it represents a probable future economic benefit to a business.
©Cambridge Business Publishers, 2020 1-16
Financial Accounting for Undergraduates, 4th Edition
Topic: Liabilities LO: 5 Level of Difficulty: EASY 30. The obligations that an entity must pay in money or services at some time in the future because of past transactions or events are called? A) Liabilities B) Expenses C) Stockholders’ equity D) Cost principle E) None of the above Answer: A Rationale: Liabilities are the obligations or debts that a business must pay in cash or goods and services at some future time as a consequence of past transactions or events. Topic: Liabilities LO: 5 Level of Difficulty: EASY 31. Which of the following is an example of a liability? A) Supplies B) Accounts receivable C) Wages owed to employees for work already performed D) Prepaid advertising E) None of the above Answer: C Rationale: Liabilities are the obligations or debts that a business must pay in cash or goods and services at some future time as a consequence of past transactions or events. Since employees have already performed the work, there is an obligation on the part of the business to pay the employees. This obligation (liability) is called wages payable. The business reports this obligation on the balance sheet. Supplies, accounts receivable, and prepaid advertising are all examples of assets. Topic: Accounting Equation LO: 5 Level of Difficulty: EASY 32. Which of the following is not a component of the accounting equation? A) Stockholders’ equity B) Income statement C) Liabilities D) Assets E) None of the above Answer: B Rationale: The accounting equation: Assets = Liabilities + Stockholder’s equity, states that a firm’s assets equal the sum of its liabilities plus its stockholders’ equity. Assets refer to a company’s resources, liabilities refer to creditor claims on those resources, and stockholders’ equity refers to owner claims on those resources.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-17
Topic: Liabilities LO: 5 Level of Difficulty: MEDIUM 33. Which of the following is incorrect? A) To qualify as a liability, an obligation must be payable in cash or in goods and services. B) A copyright is an example of a liability. C) To qualify as a liability, an obligation must be scheduled for settlement at some future time. D) All of the above E) None of the above Answer: B Rationale: Liabilities are the obligations or debts that a business must pay in cash or goods and services at some future time as a consequence of past transactions or events. A copyright is an exclusive right that protects an owner against the unauthorized reproduction of a specific written work or artwork. A copyright is an example of an asset, not a liability. Topic: Stockholders’ Equity LO: 5 Level of Difficulty: EASY 34. Stockholders’ equity: A) Is equal to assets minus liabilities B) Represents the interest of the owners in the assets of an entity C) Is equal to the net assets of an entity D) All of the above E) None of the above Answer: D Rationale: Stockholders’ equity refers to the ownership (stockholder) claims on the assets of the business. Stockholders’ equity represents a residual claim on the business’s assets, that is, it is a claim on the assets of a business that remain after all the liabilities to creditors have been satisfied (net assets). Topic: Liabilities LO: 5 Level of Difficulty: MEDIUM 35. Which of the following is correct? A) Some liabilities may involve the performance of services. B) Liabilities are claims on an entity’s assets that remain after the claims of owners have been settled. C) To qualify as an asset, a resource must have a physical existence. D) Accounts receivable and Wages payable are examples of liabilities. E) None of the above Answer: A Rationale: Liabilities are the obligations or debts that a business must pay in cash or goods and services at some future time as a consequence of past transactions or events. Liabilities refer to creditor claims on a business’s resources (assets). An asset take many forms, it must not have a physical existence. The key characteristic of any asset is that it represents a probably future economic benefit to a business. Wages payable is an example of a liability, but accounts receivable is an example of an asset.
©Cambridge Business Publishers, 2020 1-18
Financial Accounting for Undergraduates, 4th Edition
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 36. On which statement are assets, liabilities and stockholders’ equity reported? A) Balance sheet B) Income statement C) Statement of retained earnings D) Statement of cash flows Answer: A Rationale: A balance sheet lists amounts for assets, liabilities, and stockholders’ equity at a point in time. Topic: Balance Sheet and Income Statement LO: 5 Level of Difficulty: MEDIUM 37. Which of the following items are disclosed on the balance sheet? A) Inventory, accounts receivable, equipment B) Operating expenses, equipment C) Account receivable, cash payments D) Equipment, cash payment, inventory E) Cash payments Answer: A Rationale: Operating expenses are found in the income statement, not the balance sheet. Cash payments are found on the statement of cash flows, not the balance sheet. Inventory, accounts receivable and equipment are all assets which are found on the balance sheet. Topic Financial Statement Format LO: 5 Level of Difficulty: MEDIUM 38. Which of the following is not part of the standard heading of a financial statement? A) The company name B) The statement title C) The date or time period of the statement D) The company’s industry Answer: D Rationale: Each financial statement identifies the company, the statement title, and the date or time period of the statement. Topic: Expenses LO: 5 Level of Difficulty: EASY 39. Which of the four basic financial statements would contain a line item for expenses? A) Balance sheet B) Income statement C) Statement of retained earnings D) Statement of cash flows Answer: B Rationale: The income statement reports on the revenues less the expenses over a reporting period. Expenses only appear on the income statement. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-19
Topic: Account Classification LO: 5 Level of Difficulty: MEDIUM 40. Which of the following would be reported on a statement of retained earnings? A) Cash B) Total expenses C) Dividends D) Financing cash flow Answer: C Rationale: Dividends are a return of capital to stockholders and are reported on the statement of retained earnings. Cash is disclosed on the balance sheet. Total expenses is an income statement amount. Financing cash flow is found on the statement of cash flows. Topic: Articulation of Financial Statements LO: 5 Level of Difficulty: MEDIUM 41. How are the balance sheet and the statement of cash flows linked? A) By the cash balance B) By the amount of total retained earnings C) By the total shareholder equity D) By the amount of net income Answer: A Rationale: The balance sheet and the statement of cash flows are linked by the cash balance. The statement of cash flows shows the inflows and outflows of cash during the period. The ending cash balance is disclosed on the balance sheet. Topic: Financial Statement Linkages LO: 5 Level of Difficulty: MEDIUM 42. Which one of the following is not a key linkage among the four primary financial statements? A) The expenses in the income statement link to the total liability balance. B) The statement of cash flows links to ending cash balance reported on the balance sheet. C) The income statement links to the ending retained earnings in the statement of retained earnings. D) The statement of retained earnings links to ending retained earnings on the balance sheet. Answer: A Rationale: The expenses in the income statement are not linked to the total liability balance. An unpaid expense might at one point in time be listed as a liability; however, the total of liabilities and expenses is rarely the same.
©Cambridge Business Publishers, 2020 1-20
Financial Accounting for Undergraduates, 4th Edition
Topic: Sales Revenue LO: 5 Level of Difficulty: MEDIUM 43. The increases to a company’s resources that result when goods or services are provided to customers are called? A) Assets B) Liabilities C) Expenses D) Revenues E) None of the above Answer: D Rationale: Sales revenues are increases to a company’s resources that result when goods or services are provided to customers. The amount of sales revenue earned is measured by the value of the assets received in exchange for good and services delivered. Topic: Sales Revenue LO: 5 Level of Difficulty: EASY 44. What is the definition of sales revenue? A) Increases to a company’s resources that result when goods or services are provided to customers B) The obligations that an entity must pay at some time in the future because of past transactions or events C) Decreases in stockholders’ equity that a firm incurs in the process of earning revenues D) The economic resources of an entity that can be usefully expressed in monetary terms E) None of the above Answer: A Rationale: Sales revenues are increases to a company’s resources that result when goods or services are provided to customers. The amount of sales revenue earned is measured by the value of the assets received in exchange for good and services delivered. Topic: Expenses LO: 5 Level of Difficulty: EASY 45. What is the definition of expenses? A) Increases in stockholders’ equity that a firm earns by providing goods or services for its customers B) The obligations that an entity must pay at some time in the future because of past transactions or events C) Decreases in a company’s resources that a firm incurs in the process of earning revenues D) The economic resources of an entity that can be usefully expressed in money terms E) None of the above Answer: C Rationale: Expenses are decreases in a company’s resources that a firm incurs from generating revenues. Expenses are usually measured by the value of assets used up or exchanged as a result of a business’s operating activities. Increases in stockholders’ equity that a firm earns by providing goods or services for its customers are sales revenues. The obligations that an entity must pay at some time in the future because of past transactions or events are liabilities.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-21
Topic: Financial Statements LO: 5 Level of Difficulty: EASY 46. Which of the following is not a basic financial statement? A) Income statement B) Statement of cash flows C) Statement of common stock D) Balance sheet E) None of the above Answer: C Rationale: There are four basic financial statements: the balance sheet, the income statement, the statement of stockholders’ equity, and the statement of cash flows. A statement of common stock does not exist. Topic: Income Statement LO: 5 Level of Difficulty: EASY 47. An income statement: A) Reports the results of operations for a period B) Reports on the events causing a change in stockholders’ equity during a period C) Presents a firm’s assets, liabilities, and stockholders’ equity on a given date D) Reports cash inflows and outflows during a period E) None of the above Answer: A Rationale: The income statement reports the results of operations for a business of a given time period, usually a quarter or a year. The income statement lists the revenues and expenses of the business. A statement of stockholders’ equity reports on the events causing a change in stockholders’ equity during a period. A balance sheet presents a firm’s assets, liabilities, and stockholders’ equity on a given date. A statement of cash flows reports cash inflows and outflows during a period. Topic: Balance Sheet LO: 5 Level of Difficulty: EASY 48. A balance sheet: A) Reports the results of operations for a period B) Reports on the events causing a change in stockholders’ equity during a period C) Presents a firm’s assets, liabilities, and stockholders’ equity as of a given date D) Reports cash inflows and outflows during a period E) None of the above Answer: C Rationale: A balance sheet presents a firm’s assets, liabilities, and stockholders’ equity on a given date. The income statement reports the results of operations for a business of a given time period, usually a quarter or a year. The income statement lists the revenues and expenses of the business. A statement of stockholders’ equity reports on the events causing a change in stockholders’ equity during a period. A statement of cash flows reports cash inflows and outflows during a period.
©Cambridge Business Publishers, 2020 1-22
Financial Accounting for Undergraduates, 4th Edition
Topic: Statement of Cash Flows LO: 5 Level of Difficulty: MEDIUM 49. What categories of cash flows are presented in a statement of cash flows? A) Operating and non-operating B) Receipts and disbursements C) Financial and non-financial D) Operating, investing, and financing E) None of the above Answer: D Rationale: The statement of cash flows groups cash flows into the three business activities of operating, investing, and financing. Topic: Balance Sheet LO: 5 Level of Difficulty: MEDIUM 50. Which of the following financial statements is a position statement? A) Income statement B) Statement of retained earnings C) Balance sheet D) Statement of cash flows E) None of the above Answer: C Rationale: The balance sheet presents a firm’s assets, liabilities, and stockholders’ equity on a given date. The balance sheet is also referred to as the statement of financial position. Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 51. Which of the following financial statements is a period statement? A) Income statement B) Statement of retained earnings C) Statement of cash flows D) All of the above E) None of the above Answer: D Rationale: The income statement, the statement of retained earnings, and the statement of cash flows all report financial information for a given period of time.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-23
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 52. A financial statement either presents information covering a period of time (for example, a month, a quarter, or a year) or it presents information as of a particular date (for example, as of December 31, 2016). Which of the following financial statements presents information as of a particular date? A) Balance sheet B) Income statement C) Statement of retained earnings D) Both the balance sheet and the income statement E) None of the above Answer: A Rationale: The balance sheet presents a firm’s assets, liabilities, and stockholders’ equity on a given date. Topic: Balance Sheet LO: 5 Level of Difficulty: MEDIUM 53. Which of the following is not contained in the heading for a balance sheet? A) The name of the company B) The time period (for example, a month, quarter, or year) covered by the balance sheet C) The title of the financial statement (that is, balance sheet) D) The date (a single day) of the balance sheet E) None of the above Answer: B Rationale: The heading for a balance sheet contains the name of the company, the title of the financial statement (that is, balance sheet), and the date (a single day) of the balance sheet. It does not contain the time period (for example, a month, quarter, or year) covered by the balance sheet. Topic: Income Statement LO: 5 Level of Difficulty: MEDIUM 54. Which of the following is not contained in the heading for an income statement? A) The name of the company B) The time period (for example, a month, quarter, or year) covered by the income statement C) The title of the financial statement (that is, income statement) D) The date (a single day) of the income statement E) None of the above Answer: D Rationale: The heading for an income statement contains the name of the company, the title of the financial statement (that is, income statement), and the time period (for example, a month, quarter, or year) covered by the income statement. It does not contain the date (a single day) of the income statement.
©Cambridge Business Publishers, 2020 1-24
Financial Accounting for Undergraduates, 4th Edition
Topic: Statement of Stockholders’ Equity LO: 5 Level of Difficulty: MEDIUM 55. Which of the following is not contained in the heading for a statement of stockholders’ equity? A) The name of the company B) The time period (for example, a month, quarter, or year) covered by the statement of stockholders’ equity C) The title of the financial statement (that is, statement of stockholders’ equity) D) The date (a single day) of the statement of stockholders’ equity E) None of the above Answer: D Rationale: The heading for the statement of stockholders’ equity contains the name of the company, the title of the financial statement (that is, statement of stockholders’ equity), and the time period (for example, a month, quarter, or year) covered by the statement of stockholders’ equity. It does not contain the date (a single day) of the statement of stockholders’ equity. Topic: Statement of Stockholders’ Equity LO: 5 Level of Difficulty: EASY 56. Which of the following is presented in a statement of stockholders’ equity? A) Revenues B) Expenses C) Net income D) Assets E) None of the above Answer: C Rationale: The statement of stockholders’ equity reports the events causing an increase or decrease in a business’s stockholders’ equity during a given time period, including both changes in a company’s common stock and changes in retained earnings. Retained earnings is increased when operations produce net income and reduced when operations produce a net loss. Net income is reported on the statement, but not revenues, expenses, or assets. Topic: Statement of Stockholders’ Equity LO: 5 Level of Difficulty: EASY 57. Which of the following is not presented in a statement of stockholders’ equity? A) Stockholders’ equity at the beginning of the year B) Revenues C) Net income D) Dividends E) None of the above Answer: B Rationale: The statement of stockholders’ equity reports the events causing an increase or decrease in a business’s stockholders’ equity during a given time period, including both changes in a company’s common stock and changes in retained earnings. Retained earnings is increased when operations produce net income and reduced when operations produce a net loss or dividends are paid. Net income, dividends, and stockholders’ equity at the beginning of the year are reported on the statement, but not revenues.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-25
Topic: Income Statement LO: 5 Level of Difficulty: MEDIUM 58. An income statement does not include which of the following? A) Operating expenses B) Cost of goods sold C) Retained earnings D) Sales Answer: C Rationale: Retained earnings represent accumulated earnings from previous accounting periods that has not been distributed to stockholders as dividends. USE THE FOLLOWING INFORMATION FOR QUESTIONS 59-62: Marvin’s Mechanical Repair Shop started the year with total assets of $60,000, total liabilities of $40,000, and retained earnings of $18,000. During the year, the business recorded $100,000 in auto repair revenues, $70,000 in expenses, and the company paid dividends of $15,000. Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 59. The net income reported by Marvin’s Mechanical Repair Shop for the year was: A) $180,000 B) $ 40,000 C) $ 50,000 D) $ 30,000 E) None of the above Answer: D Rationale: $100,000 - $70,000 = $30,000 Topic: Financial Statements LO: 5 Level of Difficulty: EASY 60. Marvin’s balance of stockholders’ equity at the start of the year was: A) $ 2,000 B) $ 20,000 C) $100,000 D) $ 15,000 E) None of the above Answer: B Rationale: $60,000 - $40,000 = $20,000
©Cambridge Business Publishers, 2020 1-26
Financial Accounting for Undergraduates, 4th Edition
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 61. Marvin’s balance of retained earnings at the end of the year was: A) $50,000 B) $42,000 C) $33,000 D) $70,000 E) None of the above Answer: C Rationale: $18,000 + ($100,000 - $70,000) - $15,000 = $33,000 Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 62. If Marvin’s Mechanical Repair Shop ends the year with total assets of $80,000, and total liabilities of $35,000, what must be the amount of common stock issued during the year? A) $ 10,000 B) $ 14,000 C) $ 5,000 D) $ 3,000 E) None of the above Answer: A Rationale: End of year stockholders’ equity = Total assets – Total liabilities = ($80,000 - $35,000 = $45,000) End of year retained earnings = Start of year retained earnings + Net income – Dividends = ($18,000 + ($100,000 - $70,000) – $15,000 = $33,000.) End of the year common stock = Year-end stockholders’ equity – Year-end retained earnings = ($45,000 – $33,000 = $12,000) Start of year common stock = Start of year stockholders’ equity – Start of year retained earnings = (($60,000 - $40,000) – $18,000 = $2,000). Common stock issued during the year = End of year common stock – Start of year common stock = ($12,000 – $2,000 = $10,000)
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-27
USE THE FOLLOWING INFORMATION FOR QUESTIONS 63-66 The Williams Model Aircraft Repair Shop started the year with total assets of $180,000, total liabilities of $120,000, and retained earnings of $54,000. During the year, the business recorded $300,000 in repair revenues, $210,000 in expenses, and the company paid dividends of $45,000. Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 63. The net income reported by The Williams Model Aircraft Repair Shop for the year was: A) $ 90,000 B) $ 540,000 C) $ 120,000 D) $ 150,000 E) None of the above Answer: A Rationale: $300,000 - $210,000 = $90,000 Topic: Financial Statements LO: 5 Level of Difficulty: EASY 64. The Williams’ balance of stockholders’ equity at the start of the year was: A) $ 45,000 B) $ 6,000 C) $ 60,000 D) $300,000 E) None of the above Answer: C Rationale: $180,000 - $120,000 = $60,000 Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 65. The Williams’ balance of retained earnings at the end of the year was: A) $210,000 B) $150,000 C) $126,000 D) $ 99,000 E) None of the above Answer: D Rationale: $54,000 + ($300,000 - $210,000) - $45,000 = $99,000
©Cambridge Business Publishers, 2020 1-28
Financial Accounting for Undergraduates, 4th Edition
Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 66. If The Williams Model Aircraft Repair Shop ends the year with total assets of $240,000, and total liabilities of $105,000, what must be the amount of common stock issued during the year? A) $ 9,000 B) $30,000 C) $42,000 D) $15,000 E) None of the above Answer: B Rationale: End of year stockholders’ equity = Total assets – Total liabilities = ($240,000 - $105,000 = $135,000) End of year retained earnings = Start of year retained earnings + Net income – Dividends = ($54,000 + ($300,000 - $210,000) - $45,000 = $99,000.) End of the year common stock = Year-end stockholders’ equity – Year-end retained earnings = ($135,000 - $99,000 = $36,000) Start of year common stock = Start of year stockholders’ equity – Start of year retained earnings = (($180,000 - $120,000) - $54,000 = $6,000). Common stock issued during the year = End of year common stock – Start of year common stock = ($36,000 - $6,000 = $30,000) Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 67. The transactions carried out by Melon Corporation during the year caused an increase in total assets of $50,000 and a decrease in total liabilities of $20,000. If no additional investment was made by the investors during the year and dividends of $14,000 were paid, what was the net income for the year? A) $106,000 B) $ 42,000 C) $ 84,000 D) $ 60,000 E) None of the above Answer: C Rationale: Change in assets = change in liabilities + change in stockholders’ equity. (Stockholders’ equity includes the change in retained earnings resulting from net income for the year and the payment of dividends.) [$50,000 = (-$20,000) + (X - $14,000)]. X = $84,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-29
Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 68. The transactions carried out by Papaya Corporation during the year caused an increase in total assets of $150,000 and a decrease in total liabilities of $60,000. If no additional investment was made by the investors during the year and dividends of $42,000 were paid, what was the net income for the year? A) $180,000 B) $318,000 C) $126,000 D) $252,000 E) None of the above Answer: D Rationale: Change in assets = change in liabilities + change in stockholders’ equity. (Stockholders’ equity includes the change in retained earnings resulting from net income for the year and the payment of dividends.) [$150,000 = (-$60,000) + (X - $42,000)] X = $252,000 USE THE FOLLOWING INFORMATION FOR QUESTIONS 69-70: The following information was taken from the records of Easter Corporation for the year ended December 31, 2019. Advertising expense Income tax expense Accounts payable Dividends paid Retained earnings (Jan 1, 2016) Consulting fees revenue Rent expense Supplies expense
$40,000 26,000 26,900 30,000 115,720 200,000 23,400 33,800
Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 69. The retained earnings reported by Easter Corporation as of December 31, 2019 is: A) $158,490 B) $158,090 C) $111,590 D) $162,520 Answer: D Rationale: Year-end retained earnings = Beginning retained earnings + Net income (loss) – dividends. Net income = Revenue – Expenses ($200,000 – ($40,000 + $26,000 + $23,400 +$33,800) = $76,800) Year-end retained earnings = $115,720 + $76,800 - $30,000 = $162,520
©Cambridge Business Publishers, 2020 1-30
Financial Accounting for Undergraduates, 4th Edition
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 70. The net income reported by Easter Corporation for the year ended December 31, 2019 was: A) $ 76,800 B) $102,800 C) $ 72,800 D) $ 49,900 Answer: A Rationale: Net income = Revenue – Expenses ($200,000 – ($40,000 + $26,000 + $23,400 +$33,800) = $76,800) USE THE FOLLOWING INFORMATION FOR QUESTIONS 71-72 The following information was taken from the records of Rectangle Corporation for the year ended December 31, 2019. Advertising expense Income tax expense Accounts payable Dividends paid Retained earnings (Jan 1, 2016) Consulting fees revenue Rent expense Supplies expense
$120,000 78,000 80,700 90,000 347,160 600,000 70,200 101,400
Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 71. The retained earnings reported by Rectangle Corporation as of December 31, 2019 is: A) $487,560 B) $457,470 C) $474,270 D) $324,770 Answer: A Rationale: Year-end retained earnings = Beginning retained earnings + Net income (loss) – Dividends. Net income = Revenue – Expenses ($600,000 – ($120,000 + $78,000 + $70,200 + $101,400) = $230,400) Year-end retained earnings = $347,160 + $230,400 - $90,000 = $487,560
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-31
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 72. The net income reported by Rectangle Corporation for the year ended December 31, 2019 was: A) $149,700 B) $230,400 C) $308,400 D) $218,400 Answer: B Rationale: Net income = Revenue – Expenses ($600,000 – ($120,000 + $78,000 + $70,200 +$101,400) = $230,400) Topic: Financial statements LO: 5 Level of Difficulty: MEDIUM 73. The following information was taken from the records of J. Weasley Corporation for the month ended December 31, 2019. Advertising expense Income tax expense Accounts payable Dividends paid Retained earnings (January 1, 2016) Consulting fees revenue Rent expense Supplies expense
$39,200 28,000 24,800 28,250 114,820 200,000 22,500 34,700
Given the above information, net income for the year is: A) $75,600 B) $34,120 C) $88,560 D) $70,620 Answer: A Rationale: Net income = Revenue – Expenses ($200,000 – ($39,200 + $28,000 + $22,500 + $34,700) = $75,600)
©Cambridge Business Publishers, 2020 1-32
Financial Accounting for Undergraduates, 4th Edition
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 74. The following information was taken from the records of H. Granger Corporation for the month ended December 31, 2019. Advertising expense Income tax expense Accounts payable Dividends paid Retained earnings (January 1, 2019) Consulting fees revenue Rent expense Supplies expense
$124,500 76,500 81,900 84,750 482,325 600,000 71,700 100,500
Given the above information, net income for the year is: A) $211,860 B) $226,800 C) $102,360 D) $265,680 Answer: B Rationale: Net income = Revenue – Expenses ($600,000 – ($124,500 + $76,500 + $71,700 + $100,500) = $226,800) USE THE FOLLOWING INFORMATION FOR QUESTIONS 75-79: Competitive Landscaping Company has compiled the following list of account balances of various assets, liabilities, revenues and expenses on December 31, 2019, the end of its first year of operations. Common stock Accounts payable Salary expense Repairs expense Dividends Truck Equipment Notes payable Cash Supplies expense Service revenue Gasoline expense
$25,200 5,000 9,000 1,600 10,000 17,000 12,600 16,400 35,200 3,200 43,600 1,600
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-33
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 75. The net income for Competitive Landscaping for the year was: A) $11,400 B) $11,800 C) $28,200 D) $25,600 Answer: C Rationale: Net income = Revenue – Expenses ($43,600 – ($9,000 + $1,600 + $3,200 +$1,600) = $28,200) Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 76. The total liabilities for Competitive Landscaping on December 31, 2019 are: A) $37,800 B) $23,400 C) $21,400 D) $73,000 Answer: C Rationale: Total liabilities = Accounts payable + Notes payable ($5,000 + $16,400 = $21,400) Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 77. The total assets for Competitive Landscaping on December 31, 2019 are: A) $56,200 B) $63,200 C) $43,200 D) $64,800 Answer: D Rationale: Total assets = Tash + truck + Equipment ($35,200 + $17,000 + $12,600 = $64,800) Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 78. The retained earnings for Competitive Landscaping on December 31, 2019 are: A) $1,400 B) $18,200 C) $28,200 D) $6,300 Answer: B Rationale: Retained earnings = Net income – Dividends [($43,600 – ($9,000 + $1,600 + $3,200 +$1,600)) - $10,000] = ($28,200 - $10,000 = $18,200)
©Cambridge Business Publishers, 2020 1-34
Financial Accounting for Undergraduates, 4th Edition
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 79. The stockholders’ equity for Competitive Landscaping on December 31, 2019 is: A) $55,400 B) $43,400 C) $45,200 D) $45,000 Answer: B Rationale: Stockholder’s equity = Assets – Liabilities [($35,200 + $17,000 + $12,600) - ($5,000 + $16,400)] = ($64,800 - $21,400 = $43,400)
USE THE FOLLOWING INFORMATION FOR QUESTIONS 80-84 Susie Lane’s Landscaping Company has compiled the following list of account balances of various assets, liabilities, revenues and expenses on December 31, 2019, the end of its first year of operations. Common stock Accounts payable Salary expense Repairs expense Dividends Truck Equipment Notes payable Cash Supplies expense Service revenue Gasoline expense
75,600 15,000 27,000 4,800 30,000 51,000 37,800 49,200 105,600 9,600 130,800 4,800
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 80. The net income for Susie Lane’s Landscaping for the year was: A) $76,800 B) $34,200 C) $34,400 D) $84,600 Answer: D Rationale: Net income = Revenue – Expenses ($130,800 – ($27,000 + $4,800 + $9,600 + $4,800) = $84,600)
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-35
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 81. The total liabilities for Susie Lane’s Landscaping on December 31, 2019 are: A) $219,000 B) $113,400 C) $ 70,200 D) $ 64,200 Answer: D Rationale: Total liabilities = Accounts payable + Notes payable ($15,000 + $49,200 = $64,200) Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 82. The total assets for Susie Lane’s Landscaping on December 31, 2019 are: A) $194,400 B) $168,600 C) $189,600 D) $129,600 Answer: A Rationale: Total assets = Cash + Truck + Equipment ($105,600 + $51,000 + $37,800 = $194,400) Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 83. The retained earnings for Susie Lane’s Landscaping on December 31, 2019 are: A) $18,900 B) $ 4,200 C) $54,600 D) $84,600 Answer: C Rationale: Retained earnings = Net income – Dividends [($130,800 – ($27,000 + $4,800 + $9,600 + $4,800) - $30,000] = [$84,600 - $30,000 = $54,600] Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 84. The stockholders’ equity for Susie Lane’s Landscaping on December 31, 2019 is: A) $135,000 B) $166,200 C) $130,200 D) $135,600 Answer: C Rationale: Stockholder’s equity = Assets – Liabilities [($105,600 + $51,000 + $37,800) - ($15,000 + $49,200)] = ($194,400 - $64,200 = $130,200)
©Cambridge Business Publishers, 2020 1-36
Financial Accounting for Undergraduates, 4th Edition
Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 85. Stockholders’ equity and total assets were $64,000 and $158,000 respectively at the beginning of the period. Assets increased 50% and liabilities decreased 60% during the period. What is stockholders’ equity at the end of the period? A) $ 90,000 B) $ 94,000 C) $199,400 D) $223,400 Answer: C Rationale: Liabilities = Assets – Stockholders equity ($158,000 - $64,000 = $94,000) Stockholders’ equity = Assets – Liabilities X = [($158,000 x 150%) – ($94,000 – ($94,000 x 60%))] X = $199,400 Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 86. Stockholders’ equity and total assets were $192,000 and $474,000 respectively at the beginning of the period. Assets increased 50% and liabilities decreased 60% during the period. What is stockholders’ equity at the end of the period? A) $670,200 B) $270,000 C) $282,000 D) $598,200 Answer: D Rationale: Liabilities = Assets – Stockholders equity ($474,000 - $192,000 = $282,000) Stockholders’ equity = Assets – Liabilities X = [($474,000 x 150%) – ($282,000 – ($282,000 x 60%))] X = $598,200
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-37
USE THE FOLLOWING INFORMATION FOR QUESTIONS 87-88. TOTALS Current assets All other assets Liabilities Common stock Retained earnings
January 1, 2019 $ 10,000 300,000 50,000 100,000 160,000
December 31, 2019 $ 20,000 300,000 60,000 130,000 ?
Additional data: Total expenses for the year were $70,000; Dividends paid during the year were $16,000. Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 87. Using the above table, determine the retained earnings as of December 31, 2019? A) $150,000 B) $170,000 C) $110.000 D) $130,000 Answer: D Rationale: Assets – Liabilities - Common stock = Retained earnings ($20,000 + $300,000) - $60,000 - $130,000 = $130,000 Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 88. Using the above table, determine the revenues for the year ending on December 31, 2019? A) $56,000 B) $44,000 C) $32,000 D) $74,000 Answer: A Rationale: Assets – Liabilities - Common Stock = Retained earnings (($20,000 + $300,000) - $60,000 - $130,000 = $130,000) Ending retained earnings + Dividends – Beginning retained earnings = Net income (loss) ($130,000 + $16,000 - $160,000 = $(14,000)) Revenue – Expense = Net income (X - $70,000 = $(14,000)) (X = $56,000)
©Cambridge Business Publishers, 2020 1-38
Financial Accounting for Undergraduates, 4th Edition
USE THE FOLLOWING INFORMATION FOR QUESTIONS 89-90. TOTALS Current assets All other assets
January 1, 2019 $30,000 900,000
December 31, 2019 $ 60,000 900,000
Liabilities
150,000
180,000
Common stock Retained earnings
300,000 480,000
390,000 ?
Additional data: $48,000.
Total expenses for the year were $210,000; Dividends paid during the year were
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 89. Using the above table, determine the retained earnings as of December 31, 2019? A) $390,000 B) $450,000 C) $510,000 D) $330,000 Answer: A Rationale: Assets – Liabilities - Common stock = Retained earnings ($60,000 + $900,000) - $180,000 - $390,000 = $390,000 Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 90. Using the above table, determine the revenues for the year ending on December 31, 2019? A) $222,000 B) $168,000 C) $132,000 D) $ 96,000 Answer: B Rationale: Assets – Liabilities - Common Stock = Retained earnings (($60,000 + $900,000) - $180,000 - $390,000 = $390,000) Ending retained earnings + Dividends – Beginning retained earnings = Net income (loss) (390,000 + $48,000 - $480,000 = $(42,000)) Revenue – Expense = Net income (X - $210,000 = $(42,000)) (X = $168,000)
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-39
Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 91. Chelsea Corporation reported the following information at the end of its first year of operations: Common stock: Sales revenue: Total assets: Total liabilities: Dividends:
$40,000 $210,000 $170,000 $70,000 $30,000
What must have been the expenses for the year? A) $120,000 B) $130,000 C) $ 32,000 D) $150,000 Answer: A Rationale: Assets – Liabilities - Common Stock = Retained earnings ($170,000 - $70,000 - $40,000 = $60,000) Ending retained earnings + Dividends – Beginning retained earnings = Net income (loss) ($60,000 + $30,000 - $0 = $90,000) Expense = Revenue - Net income (X = $210,000 - $90,000) (X = $120,000) Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 92. Kimick Corporation reported the following information at the end of its first year of operations: Common stock: Sales revenue: Total assets: Total liabilities: Dividends:
$120,000 $630,000 $510,000 $210,000 $ 90,000
What must have been the expenses for the year? A) $450,000 B) $360,000 C) $390,000 D) $ 51,000
©Cambridge Business Publishers, 2020 1-40
Financial Accounting for Undergraduates, 4th Edition
Answer: B Rationale: Assets – Liabilities - Common Stock = Retained earnings ($510,000 - $210,000 - $120,000 = $180,000) Ending retained earnings + Dividends – Beginning retained earnings = Net income (loss) ($180,000 + $90,000 - $0 = $270,000) Expense = Revenue - Net income (x = $630,000 - $270,000) (x = $360,000) Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 93. On January 1, 2019, Little Robot invested $300,000 to start Bot Corporation. During the year, Bot Corporation had total revenues of $60,000 and total expenses of $16,000. Cash dividends paid totaled $12,000. What was the balance in Bot Corporation's retained earnings account at the end of the year? A) $314,000 B) $ 32,000 C) $302,000 D) $ 14,000 Answer: B Rationale: Ending retained earnings = Beginning retained earnings - Dividends + Net income X = ($0 - $12,000 + ($60,000 - $16,000)) X = $32,000 Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 94. On January 1, 2019, Les Holt invested $900,000 to start Holt Corporation. During the year, Holt Corporation had total revenues of $180,000 and total expenses of $48,000. Cash dividends paid totaled $36,000. What was the balance in Holt Corporation's retained earnings account at the end of the year? A) $ 42,000 B) $942,000 C) $ 96,000 D) $906,000 Answer: C Rationale: Ending retained earnings = Beginning retained earnings - Dividends + Net income X = ($0 - $36,000 + ($180,000 - $48,000)) X = $96,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-41
Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 95. On January 1, 2019, Little Robot invested $300,000 to start Bot Corporation. During the year, Bot Corporation had total revenues of $60,000 and total expenses of $16,000. Cash dividends paid totaled $12,000. What must have been the balance in Bot Corporation's total assets at the end of the year, assuming no liabilities? A) $300,000 B) $ 32,000 C) $332,000 D) $268,000 Answer: C Rationale: Ending retained earnings = Beginning retained earnings - Dividends + Net income X = ($0 - $12,000 + ($60,000 - $16,000)) X = $32,000 Assets = Liabilities + Retained earnings + Contributed capital Y = $0 + $32,000 + $300,000 Y = $332,000 Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 96. On January 1, 2019, Les Holt invested $900,000 to start Holt Corporation. During the year, Holt Corporation had total revenues of $180,000 and total expenses of $48,000. Cash dividends paid totaled $36,000. What must have been the balance in Holt Corporation's total assets at the end of the year, assuming no liabilities? A) $804,000 B) $900,000 C) $ 96,000 D) $996,000 Answer: D Rationale: Ending retained earnings = Beginning retained earnings - Dividends + Net income X = ($0 - $36,000 + ($180,000 - $48,000)) X = $96,000 Assets = Liabilities + Retained earnings + Contributed capital Y = $0 + $96,000 + $900,000 Y = $996,000
©Cambridge Business Publishers, 2020 1-42
Financial Accounting for Undergraduates, 4th Edition
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 97. On January 1, 2019, R. Lupin Corporation's retained earnings account had a balance of $1,570,000. During 2019 the company had revenues of $270,000 and expenses of $186,000. On December 31, the company’s retained earnings had a balance of $1,601,000. Determine the amount of dividends paid during 2019. A) $53,000 B) $26,500 C) $85,000 D) $61,500 Answer: A Rationale: Dividends = Beginning retained earnings + Net income – Ending retained earnings (X = $1,570,000 + ($270,000 - $186,000) – $1,601,000) (X = $53,000) Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 98. On January 1, 2019, Pigwidgeon Corporation's retained earnings account had a balance of $4,710,000. During 2019 the company had revenues of $810,000 and expenses of $558,000. On December 31, the company’s retained earnings had a balance of $4,803,000. Determine the amount of dividends paid during 2019. A) $184,500 B) $159,000 C) $ 79,500 D) $255,000 Answer: B Rationale: Dividends = Beginning retained earnings + Net income – Ending retained earnings (X = $4,710,000 + ($810,000 - $558,000) - $4,803,000) (X = $159,000)
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-43
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 99. Nichole Company’s balance sheet as of December 31, 2019 showed total assets of $170,000, and total liabilities of $70,000, and common stock of $64,000. During 2020, the company reported revenues of $64,000, expenses of $50,000, and paid dividends of $16,000. What was the balance in the Retained Earnings account on January 1, 2021? A) $34,000 B) $56,000 C) $36,000 D) $28,000 Answer: A Rationale: 2019 Ending retained earnings = Assets - Liabilities - Common stock (X = $170,000 - $70,000 - $64,000 = $36,000) 2020 Beginning retained earnings = 2019 Ending retained earnings = $36,000 2020 Beginning retained earnings + Net income – Dividends = 2020 Ending retained earnings ($36,000 + ($64,000 - $50,000) - $16,000 = $34,000) 2021 Beginning retained earnings = 2020 Ending retained earnings = $34,000 Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 100. CN Company’s balance sheet as of December 31, 2019 showed total assets of $510,000, and total liabilities of $210,000, and common stock of $192,000. During 2020, the company reported revenues of $192,000, expenses of $150,000, and paid dividends of $48,000. What was the balance in the Retained Earnings account on January 1, 2021? A) $ 84,000 B) $102,000 C) $168,000 D) $108,000 Answer: B Rationale: 2019 Ending retained earnings = Assets - Liabilities - Common stock (X = $510,000 - $210,000 - $192,000 = $108,000) 2020 Beginning retained earnings = 2019 Ending retained earnings = $108,000 2020 Beginning retained earnings + Net income – Dividends = 2020 Ending retained earnings ($108,000 + ($192,000 - $150,000) - $48,000 = $102,000) 2021 Beginning retained earnings = 2020 Ending retained earnings = $102,000
©Cambridge Business Publishers, 2020 1-44
Financial Accounting for Undergraduates, 4th Edition
Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 101. Assuming no other changes except a decrease in assets of $100,000, increase in liabilities of $20,000, and expenses of $120,000, by how much did stockholders' equity increase or decrease and what were revenues for the period? A) Stockholders' equity increased $80,000; revenues were $200,000 B) Stockholders' equity decreased $80,000; revenues were $200,000 C) Stockholders' equity increased $120,000; revenues were $240,000 D) Stockholders' equity decreased $120,000; revenues were $0 Answer: D Rationale: Change in Assets = Change in Liabilities + Change in Stockholders’ equity [(100,000) = $20,000 + X] [(120,000) = X = decrease in Stockholder’s equity] Change in Stockholder’s equity = Revenues – Expenses [($120,000) = X - $120,000] [($120,000) + $120,000 = $0 X = Revenues] Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 102. Assuming no other changes except a decrease in assets of $300,000, increase in liabilities of $60,000, and expenses of $360,000, by how much did stockholders' equity increase or decrease and what were revenues for the period? A) Stockholders' equity decreased $360,000; revenues were $0 B) Stockholders' equity increased $240,000; revenues were $600,000 C) Stockholders' equity decreased $240,000; revenues were $600,000 D) Stockholders' equity increased $360,000; revenues were $360,000 Answer: A Rationale: Change in Assets = Change in Liabilities + Change in Stockholders’ equity [($300,000) = $60,000 + X] [($360,000) = X = Decrease in Stockholder’s equity] Change in Stockholder’s equity = Revenues – Expenses [($360,000) = X - $360,000] [($360,000) + $360,000 = $0 X = Revenues]
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-45
Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 103. At the beginning of the year, the Stephen Company had total assets of $1,800,000 and total stockholders’ equity of $690,000. During the year, total assets increased by $270,000, and total liabilities increased by $126,000. The company also paid $21,000 in dividends. How much was the net income for the year? A) $144,000 B) $195,000 C) $ 93,000 D) $165,000 Answer: D Rationale: Assets – Stockholder’s equity = Liabilities ($1,800,000 - $690,000 = $1,110,000) Year-end Assets – Year-end Liabilities = year-end Stockholders’ equity [($1,800,000 + $270,000) – ($1,110,000 + $126,000) = X = $834,000] Net income = Ending Stockholders’ equity + Dividends – Beginning Stockholders’ equity (X = $834,000 + $21,000 - $690,000) (X= $165,000) Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 104. Takahashi Company reported the following the following statement of cash flows: Cash flows from operating activities ………….......…. $ 169,120 Cash flows from investing activities ……….……........ (84,700) Cash flows from financing activities…………........... ? Cash balance at the beginning of year ………….....… 25,700 Cash balance at the end of year……………….....…… 160,020 Determine the missing amount (cash flows from financing activities)? A) $232,740 B) $158,320 C) $ 49,900 D) $ 84,420 Answer: C Rationale: Cash flows from financing activities = Change in Cash balance – Cash flows from operations – Cash flows from investing activities (X = [($160,020 – $25,700) – $169,120 – $(84,700)] = $49,900)
©Cambridge Business Publishers, 2020 1-46
Financial Accounting for Undergraduates, 4th Edition
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 105. Tomato Company reported the following the following statement of cash flows: Cash flows from operating activities ………….......…. $ 507,360 Cash flows from investing activities ……….……........ (254,100) Cash flows from financing activities…………........... ? Cash balance at the beginning of year ………….....… 77,100 Cash balance at the end of year……………….....…… 480,060 Determine the missing amount (cash flows from financing activities)? A) $253,260 B) $698,220 C) $474,960 D) $149,700 Answer: D Rationale: Cash flows from financing activities = Change in Cash balance – Cash flows from operations – Cash flows from investing activities (X = [($480,060 – $77,100) – $507,360 – $(254,100)] = $149,700 Topic: Additional Financial Statement Disclosures LO: 6 Level of Difficulty: EASY 106. Which of the following is the name of the annual report which all publically traded companies in the United States must file with the Securities and Exchange Commission? A) Auditor’s report B) Form 10-K C) Management Discussion and Analysis D) Notes to the Financial Statements Answer: B Rationale: A publicly traded companies in the United States must file an annual report called a Form 10-K with the Securities and Exchange Commission. Topic: Additional Financial Statement Disclosures LO: 6 Level of Difficulty: DIFFICULT 107. In which of the following would information regarding the procedures followed to value a company’s assets appear? A) Auditor’s report B) Form 10-K C) Management Discussion and Analysis D) Notes to the Financial Statements Answer: D Rationale: The notes to the financial statements would include information regarding the procedures followed to value a company’s assets.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-47
Topic: Additional Financial Statement Disclosures LO: 6 Level of Difficulty: MEDIUM 108. In which of the following would an opinion regarding the fair presentation of financial statements appear? A) Auditor’s report B) Form 10-K C) Management Discussion and Analysis D) Notes to the Financial Statements Answer: A Rationale: The auditor’s report would include information regarding the fair presentation of financial statements. Topic: Additional Financial Statement Disclosures LO: 6 Level of Difficulty: MEDIUM 109. In which of the following would a discussion of new markets that a company plans to enter appear? A) Auditor’s report B) Form 10-K C) Management Discussion and Analysis D) Notes to the Financial Statements Answer: C Rationale: The Management Discussion and Analysis would include a discussion of any new markets that a company plans to enter. Topic: Additional Financial Statement Disclosures LO: 6 Level of Difficulty: MEDIUM 110. Which of the following is not a component of the annual report which some companies provide to their shareholders? A) Auditor’s report B) Statement of SEC Compliance C) Management Discussion and Analysis D) Notes to the Financial Statements Answer: B Rationale: In addition to the four financial statements, components in the annual report to shareholders include the Management Discussion and Analysis, the auditor’s report and the notes to the financial statements.
©Cambridge Business Publishers, 2020 1-48
Financial Accounting for Undergraduates, 4th Edition
Topic: Assumptions for the Preparation of Financial Statements LO: 8 Level of Difficulty: EASY 111. Which of the following assumptions that underlie the preparation of financial statements assumes that companies will continue their operations over time? A) Separate economic entity B) Going concern C) Accounting period D) Measuring unit Answer: B Rationale: Under the going concern assumption, companies are assumed to have continuity in that they can be expected to continue in operations over time. Topic: Qualitative Characteristics of Accounting Information LO: 8 Level of Difficulty: MEDIUM 112. Which one of the following is not a quality of relevant accounting information? A) Timeliness B) Predictive value C) Confirmatory value D) Understandability Answer: D Rationale: Accounting information is relevant when it is timely, predictive about future performance (predictive value) and evaluative about decisions made by investors and creditors in the past (confirmatory value). Accounting information can still be relevant, even though it may not be understandable to all users. Topic: Qualitative Characteristics of Accounting Information LO: 8 Level of Difficulty: MEDIUM 113. Which one of the following is not a quality of faithful representation of accounting information? A) Timeliness B) Free from error C) Verifiable D) Complete Answer: A Rationale: The faithful representation qualitative characteristic of accounting information has the characteristics of being complete, neutral, free from error, and verifiable. Timeliness is a characteristic of the relevance of accounting information.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-49
Topic: Going Concern Concept LO: 8 Level of Difficulty: EASY 114. The assumption that an entity will continue to operate indefinitely and will not be sold or liquidated is called: A) Objectivity principle B) Going concern concept C) Cost principle D) Accounting entity concept E) None of the above Answer: B Rationale: The going concern concept presumes that an entity will continue to operate indefinitely and will not be sold or liquidated. Topic: Accounting Entity Concept LO: 8 Level of Difficulty: EASY 115. The accounting entity: A) Is a fundamental concept in accounting B) May be a sole proprietorship, a partnership, or a corporation C) Is an economic unit with identifiable boundaries for which financial information is accumulated and reported D) Maintains a record of activities separate from the economic and personal activities of its owners E) All of the above Answer: E Rationale: The accounting entity, a fundamental concept in accounting, is an economic unit with identifiable boundaries for which financial information is accumulated and reported. An entity may be a sole proprietorship, a partnership, or a corporation. In accumulating financial information, we maintain a record of activities separate from the economic and personal activities of its owners. Topic: Revenue Recognition Principle LO: 8 Level of Difficulty: EASY 116. The revenue recognition principle: A) States that the recording of revenue should be based on reliable and verifiable evidence. B) Only requires that sales revenue must be earned before it is recorded on the income statement. C) Only requires that sales revenue must be realized or realizable before it is recorded on the income statement. D) States that sales revenue should be recorded when services are performed or goods are sold. E) None of the above Answer: D Rationale: The revenue recognition principle states that sales revenue should be recorded when services are performed or goods are sold. The revenue recognition principle requires two conditions to exist before sales revenue is recorded on the income statement: (1) the revenue must be earned and (2) it must be realized or realizable.
©Cambridge Business Publishers, 2020 1-50
Financial Accounting for Undergraduates, 4th Edition
Topic: Full disclosure Principle LO: 8 Level of Difficulty: EASY 117. The full disclosure principle: A) States that personal contact and financial information for each member of senior management for the company be disclosed. B) Requires that company maintain a record of activities separate from the economic and personal activities of its owners. C) Requires that a business disclose all significant financial facts and circumstances in a company’s annual report. D) States that sales revenue should be recorded when services are performed or goods are sold. E) None of the above Answer: C Rationale: The information necessary for a user’s understanding of financial statement should be disclosed in a company’s annual report. Topic: Cost Principle LO: 8 Level of Difficulty: EASY 118. Which basic principle of accounting states that assets are initially recorded at the amounts paid to acquire the assets? A) Objectivity principle B) Cost principle C) Measuring unit concept D) Going concern concept E) None of the above Answer: B Rationale: The cost principle states that assets and liabilities are initially recorded at the amount paid or obligated to pay. Historically, acquisition cost is considered the proper initial measurement because, at the time the asset is acquired, it represents the fair value of the asset as agreed by both the buyer and the seller. Topic: Qualitative Characteristics of Accounting Information LO: 8 Level of Difficulty: MEDIUM 119. The qualitative characteristics of accounting information: A) Include relevance which means that information must be timely and contribute to the predictive and evaluative decisions made by investors and creditors. B) Are intended to contribute to the usefulness of financial reporting for investment and credit decisions. C) Include faithful representation which has the characteristic of being complete, neutral, free from error (reliable), and verifiable. D) Include comparability and understandability. E) All of the above Answer: E Rationale: The qualitative characteristics of accounting information are intended to contribute to the usefulness of financial reporting for investment and credit decisions. They include relevance, faithful representation, comparability and understandability.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-51
Topic: Monetary Unit Concept LO: 8 Level of Difficulty: EASY 120. Implementation of the monetary unit concept: A) Permits all economic resources and obligations to be brought into the accounting information system B) Permits all assets, liabilities, and stockholders’ equity to be easily added or subtracted, as necessary, when preparing financial statements C) Means that high rates of inflation cannot cause any distortion in a firm’s financial statements D) All of the above E) None of the above Answer: B Rationale: The monetary unit concept specifies that a monetary unit is to be used to measure and record an entity’s economic activity. Only items that are expressed in these monetary units are included in the financial statements. When all assets, liabilities, and stockholders’ equity are stated in monetary terms, they can be added or subtracted to prepare financial statements. Topic: Going Concern Concept LO: 8 Level of Difficulty: EASY 121. The going concern concept: A) Applies to entities that are bankrupt and in the process of liquidating B) Dictates that the recording of transactions should be based on reliable and verifiable evidence C) Presumes that an entity will continue to operate indefinitely and will not be sold or liquidated D) Establishes the boundaries of the unit to be accounted for E) None of the above Answer: C Rationale: The going concern concept presumes that an entity will continue to operate indefinitely and will not be sold or liquidated. In the absence of evidence to the contrary, a business is assumed to have an indefinite life. Topic: Monetary Unit Concept LO: 8 Level of Difficulty: EASY 122. The monetary unit concept: A) Specifies that a monetary unit be used to measure and record an entity’s economic activity B) States that assets are initially measured and recorded at the amounts paid to acquire the assets C) Dictates that the measurement and recording of transactions should be based on reliable and verifiable evidence D) All of the above E) None of the above Answer: A Rationale: The monetary unit concept specifies that a monetary unit is to be used to measure and record an entity’s economic activity. Only items that are expressed in these monetary units are included in the financial statements.
©Cambridge Business Publishers, 2020 1-52
Financial Accounting for Undergraduates, 4th Edition
Topic: Monetary Unit Concept LO: 8 Level of Difficulty: EASY 123. Which basic principle of accounting states that a monetary unit is to be used to measure and record an entity’s economic activity? A) Reliability principle B) Cost principle C) Monetary unit concept D) Going concern concept E) None of the above Answer: C Rationale: The monetary unit concept specifies that a monetary unit is to be used to measure and record an entity’s economic activity. Only items that are expressed in these monetary units are included in the financial statements. Topic: Expense Recognition (Matching) Principle LO: 8 Level of Difficulty: MEDIUM 124. The expense recognition (matching) principle states that: A) Net income is determined by linking operating cash receipts with operating cash payments. B) Assets are linked with liabilities and stockholders’ equity in the balance sheet. C) Net income is determined by linking expenses incurred with related earned sales revenue. D) Owner contributions and owner withdrawals are linked in the statement of stockholders’ equity. E) None of the above Answer: C Rationale: The expense recognition (matching) principle states that net income is determined by linking expenses incurred with related earned sales revenue. Thus, expenses are recorded in the period in which they can help generate the revenues. Topic: Constraints LO: 8 Level of Difficulty: MEDIUM 125. Which of the following statements is correct? A) Applying accounting procedures requires effort and costs money. B) Two factors constrain the qualitative characteristics of accounting information: materiality and cost-benefit. C) The cost-benefit constraint requires that the benefit derived from the information outweighs the cost of providing it. D) The concept of materiality permits a firm to expense the cost of some assets because their cost is immaterial in amount. E) All of the above Answer: E
Rationale: Two factors constrain the qualitative characteristics of accounting information: materiality and cost-benefit. Applying accounting procedures requires effort and costs money. The concept of materiality permits a firm to expense the cost of some assets, such as small tools, office equipment, or furniture, because their cost is immaterial in amount, that is they are too small to affect the financial picture. The cost-benefit constraint requires that the benefit derived from the information outweighs the cost of providing it.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-53
Exercises Topic: Financial Accounting Information LO: 1, 3 1. Match each of the following terms (1-8) on the left with related explanations (A – H) on the right. 1.
Stockholders
A.
Exists to enable stockholders to readily buy and sell their ownership shares of a corporation.
2.
Sole proprietorship
B.
3.
Managerial accounting
C.
4.
Corporation
D.
5.
Certified public accountants
E.
A voluntary association of two or more persons for the purpose of conducting a business. Independent auditors licensed by the state in which they do their auditing work. Designed primarily for decision makers outside of the company. A business owned by one person.
6.
Partnership
F.
Owners of a corporation.
7.
Financial accounting
G.
8.
New York Stock Exchange
H.
A legal entity created under the laws of a state or the federal government. Designed primarily for decision makers within the company.
F
1.
Stockholders
A.
Exists to enable stockholders to readily buy and sell their ownership shares of a corporation.
E
2.
Sole proprietorship
B.
H
3.
Managerial accounting
C.
G
4.
Corporation
D.
C
5.
Certified public accountants
E.
A voluntary association of two or more persons for the purpose of conducting a business. Independent auditors licensed by the state in which they do their auditing work. Designed primarily for decision makers outside of the company. A business owned by one person.
B
6.
Partnership
F.
Owners of a corporation.
D
7.
Financial accounting
G.
A
8.
New York Stock Exchange
H.
A legal entity created under the laws of a state or the federal government. Designed primarily for decision makers within the company.
Answer:
©Cambridge Business Publishers, 2020 1-54
Financial Accounting for Undergraduates, 4th Edition
Topic: The Effect of the Sarbanes-Oxley Act LO: 3 2. Accounting debacles, such as in the case of Enron, brought to light the necessity of accuracy in financial reporting and accountability of management. Describe how the introduction of the Sarbanes-Oxley Act has changed the requirements of financial reporting. Answer: Congress introduced the Sarbanes-Oxley act with the goal of restoring investor trust by reducing the likelihood of future accounting scandals. Among the many changes required by this legislation is that a company’s top management must certify in writing the accuracy of its reported financial statement information. Also, companies must now report on the internal controls put into place to help deter errors in the financial reporting process and to detect them should they occur. Topic: Business Activities LO: 2 3. Describe the three basic business activities conducted by a company in the production and sale of its products and services. Answer: The three activities are financing, operating and investing. Financing activities include all activities to acquire the capital used to pay for resources such as property, equipment and buildings. This financing can be either equity financing (i.e., selling shares of stock to investors), or debt financing (i.e., borrowing money from creditors). Operating activities refer to the day-to-day activities of producing and selling a product or providing a service. Investing activities encompass the steps involved in deciding which assets the company should acquire or sell with the money that was made available as a result of the financing and operating activities. These assets are ultimately used in the operating activities to generate sales and revenues. Topic: Applying the Accounting Equation LO: 5 4. Compute the missing financial amounts (a) and (b): ($ millions)
Assets
Liabilities
Company A
$64,800
(a)
Company B
$121,500
Stockholders’ Equity $31,500
$76,800
(b)
Answer: (a) Liabilities = Assets – Stockholders’ Equity = $64,800 - $231,500 = $33,300 (b) Stockholders’ Equity = Assets – Liabilities = $121,500 - $76,800 = $44,700
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-55
Topic: Retained Earnings LO: 5 5. The following information appears in Henrietta Corporation’s records at the end of 2019: Accounts receivable Accounts payable Cash Common stock
$60,000 22,000 26,000 220,000
Land Notes payable Retained earnings Supplies
$160,000 30,000 ? 58,000
a. What is the amount of retained earnings at the end of 2019? b. If the amount of retained earnings at the beginning of 2019 was $36,000, and $16,000 of dividends were declared and paid during 2019, what was the net income (loss) for 2016? Answer: a. $26,000 cash + $60,000 accounts receivable + $58,000 supplies + $160,000 land = $304,000 total assets $304,000 total assets – $30,000 notes payable – $22,000 accounts payable – $220,000 common stock = $32,000 retained earnings b. $32,000 – $36,000 = $4,000 decrease in retained earnings; $4,000 decrease in retained earnings + $16,000 dividends = $12,000 net income Topic: Constructing a Balance Sheet LO: 5 6. Construct a balance sheet from the financial statements components listed below. Cash Noncash assets Other expenses Retained earnings Liabilities Common stock Operating cash flow Revenues Cost of goods sold
$43,800 85,200 22,800 34,500 62,100 32,400 15,000 38,400 10,800
Answer: Assets Cash Noncash assets
$43,800 85,200
Balance Sheet Liabilities and Stockholders’ Equity Liabilities Stockholders’ Equity Common stock Retained earnings Stockholders’ equity
Total Assets
$129,00 0
Total Liabilities & Stockholders’ Equity
$62,100
32,400 34,500 66,900 $129,000
©Cambridge Business Publishers, 2020 1-56
Financial Accounting for Undergraduates, 4th Edition
Topic: Prepare a Balance Sheet LO: 5 7. Prepare a balance sheet for Carl’s Toy Shop as of July 31, 2019. balances for the month ending July 31, 2019 are: Cash Accounts receivable Office supplies Office equipment Land Sales Cash dividends
$18,800 37,000 6,200 58,300 140,000 110,000 5,300
Carl’s Toy Shop’s account
Rent expense Utilities expense Salaries expense Misc. expenses Retained earnings, July 1 Common stock Accounts payable
$16,600 1,060 32,000 290 24,300 152,250 29,000
Answer: CARL’S TOY SHOP Balance Sheet July 31, 2019 Assets Cash Accounts receivable Office supplies Office equipment Land Total Assets Liabilities Accounts payable Stockholders’ Equity Common stock Retained earnings* Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity
$18,800 37,000 6,200 58,300 140,000 $260,300
$29,000 152,250 79,050 231,300 $260,300
*Retained earnings computation: Retained earnings July 1, 2019 Net Income: Sales – Expenses (salaries, rent, utilities, and misc.) ($110,000 – ($32,000 + $16,600 + $1,060 + $290) = Less: Cash dividends Retained Earnings July 31, 2019
$24,300 60,050 (5,300) $79,050
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-57
Topic: Preparing a Balance Sheet LO: 5 8. The following items and amounts are taken from the 2019 financial records of Minerva, Inc.: Prepaid rent…………...…….... $9,600 Equipment……………............. 87,000 Salaries expense……………… 126,000 Utilities expense…………….... 3,300 Dividends……………..……...... 22,800 Accounts payable……………… 30,600 Cash……………………….…... 28,500 Accounts receivable……..……. 28,500
Salaries payable….....................…. $16,800 Common stock…........................… 31,500 Supplies expense ……................... 14,100 Retained earnings, Jan. 1, 2019..... 36,000 Insurance expense……................... 6,600 Service revenue………................... 225,000 Repair expense……….................... 13,500
Prepare a balance sheet for Minerva, Inc. as of December 31, 2019. Answer: Net Income: $225,000 – $126,000 – $3,300 – $14,100 – $13,500 – $6,600 = $61,500 Retained earnings, December 31, 2019: $36,000 + $61,500 – $22,800 = $74,700 MINERVA, INC. Balance Sheet December 31, 2019 Assets
Liabilities
Cash Accounts receivable Prepaid rent Equipment
$28,500 28,500 9,600 87,000
Total Assets
$153,600
Accounts payable Salaries payable Stockholders’ Equity
$30,600 16,800
Common stock Retained earnings Total Liabilities & Stockholders’ Equity
31,500 74,700 $153,600
©Cambridge Business Publishers, 2020 1-58
Financial Accounting for Undergraduates, 4th Edition
Topic: Financial Statements and Financial Statement Components LO: 5 9. Listed below are definitions of financial statement components and financial statements. From this list, find the definition of each of the nine terms numbered 1-9. Place the letter of the term’s definition in the space provided. a. The ownership claims on the assets of the business. b. A listing of a firm’s assets, liabilities, and stockholders’ equity on a given date. c.
The decreases in stockholders’ equity that a firm incurs in the process of generating its sales revenues.
d. The obligations, or debts, that an entity must pay in money or services at some time in the future because of past transactions or events. e. Reports information about cash inflows and cash outflows for a specific time period, classified into operating, investing, and financing activities. f.
The economic resources of an entity that can be expressed in money terms.
g. The increases in stockholders’ equity that results when a firm provides goods and services to its customers. h. Presents information on the events causing a change in stockholders’ equity during a period. i.
Reports a business’s sales revenue and expenses for a given period of time.
1.
Liabilities
6.
Sales revenues
2.
Expenses
7.
Statement of cash flows
3.
Income statement
8.
Assets
4.
Balance sheet
9.
Stockholders’ equity
5.
Statement of stockholders’ equity
Answer: 1. d
Liabilities
6.
g
Sales revenues
2.
c
Expenses
7.
e
Statement of cash flows
3.
i
Income statement
8.
f
Assets
4.
b
Balance sheet
9.
a
Stockholders’ equity
5.
h
Statement of stockholders’ equity
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-59
Topic: Links Between Financial Statements LO: 5 10. To which financial statements are each of the following financial values linked and how are they linked? a. Retained earnings b. Net income c. Cash Answer: a. Retained earnings is linked to the income statement, the statement of stockholders’ equity, and the balance sheet. Net income on the income statement appears as an amount added to beginning retained earnings on the statement of stockholders’ equity. Ending retained earnings on the statement of stockholders’ equity is an amount in the stockholders’ equity section of the balance sheet. b. Net income is linked to the income statement and the statement of stockholders’ equity. Net income on the income statement appears as an amount added to beginning retained earnings on the statement of stockholders’ equity. c.
Cash is linked to the statement of cash flows and the balance sheet. The ending balance is on the balance sheet and the changes in cash are shown on the statement of cash flows.
Topic: Compute Retained Earnings LO: 5 11. At January 31, 2019, Taylor Fast, Inc.’s retained earnings were $50,220 million. During the year, Taylor reported net income of $28,666 million and paid a dividend of $2,690 million. Determine Taylor’s retained earnings as of January 31, 2020. Answer: $50,220 + $28,666 - $2,690 = $76,196 million Topic: Identifying Sources of Key Financial Data LO: 5 12. Match each item with the financial statement in which each item would most likely appear: Use (I) for Income Statement, (B) for Balance Sheet and (CF) for Statement of Cash Flow.
Answer: (B) (I) (B) (B)
a. b. c. d.
Retained earnings Revenue Liabilities Common stock
a. b. c. d.
Retained earnings Revenue Liabilities Common stock
(I) (CF) (CF)
e. f. g.
Cost of goods sold Cash from investing activities Net change in cash
e. f. g.
Cost of goods sold Cash from investing activities Net change in cash
©Cambridge Business Publishers, 2020 1-60
Financial Accounting for Undergraduates, 4th Edition
Topic: Statement of Cash Flows LO: 5 13. Prepare a statement of cash flows for Taylor Fast, Inc. for 2019 given its information below (amounts in millions): Net income Operating cash flow Cash at beginning of year Cash at end of year Investing cash flow Net increase in cash Financing cash flow
$16,299 23,718 28,056 34,905 (14,427) 6,849 ?
Answer: Operating cash flow + Investing cash flow + Financing cash flow = Net increase in cash [$23,718 + ($14,427) + X = $6,849] [X = $6,849 - $23,718 – ($14,427)] [X = ($2,442)] MINERVA, INC. Statement of Cash Flows For Year Ended December 31, 2019 (in millions) Operating cash flow $23,718 Investing cash flow (14,427) Financing cash flow (2,442) Net increase in cash $6,849 Cash at beginning of year 28,056 Cash at end of year $34,905 Topic: Financial Statement Relationships LO: 5 14. At the beginning of 2019, Holiday Hotel, Inc. had $17,806 million in assets and $2,760 million in equity. During 2019, Holiday’s assets decreased by $1,940 million while its equity decreased by $476 million. How much were Holiday’s liabilities at the beginning and end of 2019? Answer: Beginning liabilities = $17,806 million – $2,760 million = $15,046 million. Ending liabilities = ($17,806 million – $1,940 million) – ($2,760 million – $476 million) = $13,582 million.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-61
Topic: Retained Earnings LO: 5 15. In 2019, Luscious Lemons reported net income of $16,335 thousand, retained earnings at the beginning of 2019 of $31,368 thousand, and dividends of $3,240 thousand. What is the amount of Luscious Lemons’ retained earnings at the end of 2019? Answer: Retained earnings beginning + Net income – Dividends = Retained earnings ending = $31,368 + $16,335 - $3,240 = $44,463 thousand. Topic: Preparing an Income Statement LO: 5 16. The following items and amounts are taken from the 2019 financial records of Shining Light, Inc. Prepare an income statement for the year ending December 31, 2019: Prepaid rent…………................... Equipment………………..........…. Salaries expense……….......…… Utilities expense…….........……… Dividends..................................... Accounts payable………….......… Cash…………………………......... Accounts receivable………..........
$ 6,400 81,000 84,000 2,200 15,200 20,400 19,800 24,000
Salaries payable……........................ $ 12,000 Common stock…….......................… 21,000 Supplies expense.............................. 9,400 Retained earnings, Jan. 1, 2016......... 24,000 Insurance expense……….................. 16,400 Service revenue………..................... 190,000 Repair expense………...................... 9,000
Answer: SHINING LIGHT, INC. Income Statement For Year Ended December 31, 2019 Revenues Service revenue Expenses Salaries expense Utilities expense Supplies expense Repair expense Insurance expense Total expense Net Income
$190,000 $84,000 2,200 9,400 9,000 16,400 121,000 $ 69,000
©Cambridge Business Publishers, 2020 1-62
Financial Accounting for Undergraduates, 4th Edition
Topic: Preparing an Income Statement from Account Balances LO: 5 17. On December 31, 2019, Ilse & Hildegard Corporation’s records show the following selected amounts. Cash...................................................... $ 73,500 Accounts receivable.............................. 6,000 Office supplies....................................... 18,000 Office equipment..................................... 60,000 Accounts payable................................... 24,000 Common stock........................................ 3,000 Retained earnings, January 1, 2019....... 108,000
Cash dividends................................... Sales.................................................. Rent expense..................................... Salaries expense................................ Telephone expense............................. Miscellaneous expense......................
$ 3,000 150,000 15,000 78,000 4,500 12,000
Prepare an income statement for Ilse & Hildegard for the year ending December 31, 2019. Answer: ILSE & HILDEGARD CORPORATION Income Statement For Year Ended December 31, 2019 Revenues Sales Expenses Salaries expense Rent expense Telephone expense Miscellaneous expense Total expense Net Income
$150,000 $78,000 15,000 4,500 12,000 109,500 $40,500
Topic: Additional Financial Statement Disclosures LO: 6 18. In addition to the financial statements, list 3 other sources of information reported to external stakeholders? Answer: • Management Discussion and Analysis (MD&A) • Auditor’s report • Notes to financial statements
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-63
Topic: Conceptual Framework for Financial Reporting LO: 8 19. Match each of the following statements to the best qualitative characteristic of accounting information situation that should be considered. Each situation is used only once. 1.
Going concern concept
A.
Although several accounting methods are acceptable, company management chooses a single method and follows that each year.
2.
Relevance
B.
The company’s accountant ignores a $1.60 error in recording an invoice, discovered after the final financial statements were prepared.
3.
Cost-benefit constraint
C.
The accountant estimates the value of accounts receivable, based on recent information about economic forecasts and prior collection trends applicable to the company.
4.
Consistency
D.
Before each board meeting, the company prepares a number of reports that are timeconsuming and expensive that are never used.
5.
Accounting entity concept
E.
In estimating the life of a new piece of equipment, the accounting department assumes that the business will last indefinitely.
6.
Materiality constraint
F.
George Bush, a stockholder of Halliburton, owes a debt to Union Bank for $3,000. This $3,000 is not a debt of Halliburton.
Going concern concept
A.
Although several accounting methods are acceptable, company management chooses a single method and follows that each year.
Answer: E 1.
C
2.
Relevance
B.
The company’s accountant ignores a $1.60 error in recording an invoice, discovered after the final financial statements were prepared.
D
3.
Cost-benefit constraint
C.
The accountant estimates the value of accounts receivable, based on recent information about economic forecasts and prior collection trends applicable to the company.
A
4.
Consistency
D.
Before each board meeting, the company prepares a number of reports that are timeconsuming and expensive that are never used.
F
5.
Accounting entity concept
E.
In estimating the life of a new piece of equipment, the accounting department assumes that the business will last indefinitely.
B
6.
Materiality constraint
F.
George Bush, a stockholder of Halliburton, owes a debt to Union Bank for $3,000. This $3,000 is not a debt of Halliburton.
©Cambridge Business Publishers, 2020 1-64
Financial Accounting for Undergraduates, 4th Edition
Topic: Qualitative Characteristics of Accounting Information LO: 8 20. Listed below are definitions of qualitative characteristics, concepts, constraints and principles of accounting information. From this list, find the definition of each of the nine terms numbered 1-9. Place the letter of the term’s definition in the space provided. a. b.
An economic unit with identifiable boundaries for which we accumulate and report financial information. Assets are initially recorded at the amounts paid to acquire the assets.
c.
Net income is determined by linking expenses incurred with the related revenues earned.
d.
The division of the total life of a business into segments based on annual periods.
e.
The recording of transactions should be based on reliable and verifiable evidence.
f.
A monetary unit is to be used to measure and record an entity’s economic activity.
g.
An entity will continue to operate indefinitely and will not be sold or liquidated.
h.
Sales revenue should be recorded when services are performed or goods are sold.
i.
All information necessary for a user’s understanding of financial statements should be disclosed in a company’s annual report.
1. 2. 3. 4. 5. 6. 7. 8. 9.
Expense recognition (matching) principle Monetary unit concept Cost principle Going concern concept Accounting entity concept Revenue recognition principle Full disclosure principle Accounting period concept Reliability
Answer: 1. c 2. f 3. b 4. g 5. a 6. h 7. i 8. d 9. e
Expense recognition (matching) principle Monetary unit concept Cost principle Going concern concept Accounting entity concept Revenue recognition principle Full disclosure principle Accounting period concept Reliability
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-65
Problems Topic: Preparation of Financial Statements LO: 5 1. The following is selected financial information of Marietta, Inc. for the year ended December 31, 2019 ($ thousands): Cash assets Operating cash flow Sales Stockholders’ equity Financing cash flow Total liabilities Noncash assets Investing cash flow Expenses Net income Cash at beginning of the year
$63,000 54,000 272,400 191,100 (16,200) 93,900 222,000 (7,200) 214,500 57,900 32,400
Prepare an income statement, balance sheet and statement of cash flows for Marietta, Inc. at December 31, 2019. Answer: MARIETTA, INC. Income Statement For Year Ended December 31, 2019 Sales Expenses Net income
$272,400 214,500 $57,900 MARIETTA, INC. Balance Sheet December 31, 2019 Liabilities and Stockholders’ Equity
Assets Cash assets Noncash assets
$63,000 222,000
Total assets
$285,000
Total liabilities Stockholders’ equity Total liabilities and stockholders’ equity
$93,900 191,100 $285,000
MARIETTA, INC. Statement of Cash Flows For Year Ended December 31, 2019 Operating cash flow Investing cash flow Financing cash flow Net change in cash Cash, January 1 Cash, December 31
$54,000 (7,200) (16,200) 30,600 32,400 $63,000
©Cambridge Business Publishers, 2020 1-66
Financial Accounting for Undergraduates, 4th Edition
Topic: Preparation of Balance Sheet and Statement of Cash Flows LO: 5 2. The following is selected financial information ($ in millions) from International Investment Services, Inc. for 2019. Cash assets Operating cash flow Sales Stockholders’ equity Financing cash flow Total liabilities Noncash assets Investing cash flow Expenses
$826 1,648 11,140 28 (852) 17,040 16,242 (344) 4,774
Construct a balance sheet and statement of cash flows for International Investment Services, Inc. for 2019. Answer:
Assets
International Investment Services, Inc. Balance Sheet December 31, 2019 Liabilities and Stockholders’ Equity
Cash assets Noncash assets
$ 826 16,242
Total Assets
$17,068
Total liabilities Stockholders’ equity Total liabilities and stockholders’ equity
$17,040 28 $17,068
International Investment Services, Inc. Statement of Cash Flows For Year Ended December 31, 2019 Operating cash flow Investing cash flow Financing cash flow Net change in cash Cash, January 1 Cash, December 31
$1,648 (344) (852) 452 374 $826
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-67
Topic: Preparation of the Financial Statements LO: 5 3. The following is selected financial information for the Schweinfurt Company for the year ended August 5, 2019 (in millions): Cash assets Operating cash flow Sales Stockholders’ equity Financing cash flow Total liabilities Noncash assets Investing cash flow Expenses
$
153 3,498 24,000 2,184 (2,442) 15,984 18,015 (1,134) 20,550
Prepare each of the following financial statements for the Schweinfurt Company in proper form: • Income statement • Balance sheet • Statement of cash flows Answer: SCHWEINFURT COMPANY Income Statement For Year Ended August 5, 2019 Sales Expenses Net income
$24,000 20,550 $ 3,450
Assets
SCHWEINFURT COMPANY Balance Sheet August 5, 2019 Liabilities and Stockholders’ Equity
Cash assets Noncash assets
$ 153 18,015
Total assets
$18,168
Total liabilities Stockholders’ equity Total liabilities and stockholders’ equity
$15,984 2,184 $18,168
SCHWEINFURT COMPANY Statement of Cash Flows For Year Ended August 5, 2019 Operating cash flow Investing cash flow Financing cash flow Net change in cash Cash, August 6, 2018* Cash, August 5, 2019
$3,498 (1,134) (2,442) (78) 231 $ 153
* Cash, August 6, 2018, Computation: Cash (year-end) - Net change in cash = Cash (beginning year) [$153 - ($78) = $231]
©Cambridge Business Publishers, 2020 1-68
Financial Accounting for Undergraduates, 4th Edition
Chapter 1 Financial Accounting and Business Decisions Learning Objectives – Coverage by question True / False LO1 – Explain business organization and its three forms.
Multiple Choice 1-3
Exercises
1
LO2 – Describe business activities.
6-8
4-10
3
LO3 – Indicate who uses accounting information.
1-5
11-17
1, 2
LO4 – Explain the accounting process and generally accepted accounting principles.
9-12
18-23
LO5 – Describe the accounting equation and each financial statement.
13-24
24-105
4-17
106-110
18
111-125
19, 20
LO6 – Explain additional disclosures that accompany financial statements.
Problems
1-3
LO7 – Describe careers in accounting. LO8 – Appendix 1A: Discuss FASB’s conceptual framework.
25-30
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-1
Chapter 1: Financial Accounting and Business Decisions
True / False Topic: Managerial Accounting LO: 3 1. A major function of managerial accounting is to provide general purpose financial statements for parties outside the organization. Answer: False Rationale: A major function of managerial accounting is to provide management with accounting data for decisions related to a firm’s operations. Providing general purpose financial statements for parties outside an organization is a function of financial accounting.
Topic: Ethics LO: 3 2. It is unusual for U.S. businesses to develop written codes of ethics to guide their employees. Answer: False Rationale: It is now commonplace for businesses to develop written codes of ethics to help guide the behavior of their employees.
Topic: Ethics LO: 3 3. An emphasis on short-term profits may contribute to ethical breakdowns within a business. Answer: True Rationale: A criticism of U.S. business practices is that they are too “bottom-line” (that is, short-term profit) oriented. This orientation can lead to unethical actions by management to increase reported short-term profits.
Topic: Accounting Information Users LO: 3 4. Financial accounting is designed primarily for decision makers within a company. Answer: False Rationale: Financial accounting is designed primarily to provide information to decision makers outside of a company, while managerial accounting is designed primarily to provide accounting information for decision makers within a company.
Topic: Ethics and Accounting LO: 3 5. The goal of the Sarbanes-Oxley Act of 2002 was to increase the level of confidence that external users have in a company’s financial statements. Answer: True Rationale: In the wake of various business scandals, like that involving Enron Corporation, the U.S. Congress passed the Sarbanes-Oxley Act to improve external user confidence in financial statement reporting. ©Cambridge Business Publishers, 2020 1-2
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Investing Activities LO: 2 6. Investing activities involve the acquiring and disposing of liabilities that a company needs in order to finance its operating activities. Answer: False Rationale: Investing activities are the acquiring and disposing of assets that a company needs for the production and sale of a company’s products and services.
Topic: Financing Activities LO: 2 7. Other than operating profit, there are three main sources of external financing. Answer: False Rationale: There are two main sources of financing: equity (also called shareholder or owner) financing and debt (also called creditor or lender) financing.
Topic: Financing and Investing Activities LO: 2 8. Financing activities are defined as the acquiring and disposing of resources for the purpose of selling products and services. Answer: False Rationale: Financing activities are defined as methods a company uses to raise funds to pay for resources. Investing activities are defined as the acquiring and disposing of resources for the purpose of selling products and services.
Topic: Purpose of Accounting LO: 4 9. The basic purpose of accounting is to provide useful financial information. Answer: True Rationale: The purpose of accounting is to provide useful financial information. Accordingly, the accounting process (1) prepared financial reports to meet the needs of the user and (2) helps interpret the financial results for the user.
Topic: GAAP LO: 4 10. Generally accepted accounting principles apply to the general-purpose financial statements prepared primarily for parties outside of an organization. Answer: True Rationale: Financial statement users who rely on accounting data expect that all companies will follow the same standards and procedures when preparing their statements. These standards and procedures are called generally accepted accounting principles.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-3
Topic: Sources of GAAP LO: 4 11. Federal income tax regulations constitute a primary source of generally accepted accounting principles. Answer: False Rationale: FASB, AICPA, and SEC have been instrumental in the development of GAAP in the United States.
Topic: Sources of GAAP LO: 4 12. Currently, the organization in the private sector with the primary responsibility for formulating accounting principles is the Financial Accounting Standards Board. Answer: True Rationale: The Financial Accounting Standards Board has been instrumental in the development of generally accepted accounting principles in the United States.
Topic: Accounting Equation LO: 5 13. Assets must always equal the sum of liabilities plus stockholders’ equity. Answer: True Rationale: The accounting equation is Assets = Liabilities + Stockholders’ Equity. This relation must always exist.
Topic: Balance Sheet LO: 5 14. If a company reports retained earnings of $22.4 million on its balance sheet, it will also report $22.4 million in cash. Answer: False Rationale: The accounting equation requires total assets to equal the sum of total liabilities plus stockholders’ equity. That does not imply, however, that liability and stockholders’ equity accounts relate directly to specific assets.
Topic: Accounting Equation LO: 5 15. The accounting equation states that the economic resources of an entity are equal to the claims on those resources. Answer: True Rationale: The accounting equation: Assets = Liabilities + Stockholder’s equity, states that a firm’s assets equal the sum of its liabilities plus its stockholders’ equity. Throughout the accounting process, the accounting equation must always remain in balance.
©Cambridge Business Publishers, 2020 1-4
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Assets LO: 5 16. The key characteristic of an asset is that it represents a probable future economic benefit owned or controlled by an entity. Answer: True Rationale: Assets are the economic resources of a business that can be expressed in monetary form. Assets take many forms, but the key characteristic is that an asset represents a probable future economic benefit owned or controlled by an entity.
Topic: Net Assets LO: 5 17. The net assets of an entity are equal to the assets minus the stockholders’ equity. Answer: False Rationale: The net assets of an entity are equal to its stockholders’ equity.
Topic: Statement of Cash Flows LO: 5 18. A statement of cash flows reports on the cash flows for operating, investing and financing activities at a point in time. Answer: False Rationale: A statement of cash flows reports on the cash flows for operating, investing, and financing activities over a period of time.
Topic: Retained Earnings LO: 5 19. Retained earnings are reported on both the income statement and the statement of stockholders’ equity. Answer: False Rationale: Retained earnings are reported on the statement of retained earnings and the balance sheet. The income statement represents current period earnings.
Topic: Income Statement LO: 5 20. The income statement is also called the earnings statement. Answer: True Rationale: The income statement reports the results of operations for a business for a given time period usually a quarter or a year. The income statement lists the revenues and expenses of the business. The income statement is also called the statement of operations, the statement of income, and the earnings statement.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-5
Topic: Preparing Financial Statements LO: 5 21. The income statement, statement of stockholders’ equity, and statement of cash flows are referred to as period-in-time statements. Answer: True Rationale: Specific periods of time are reported on all financial statements, except the balance sheet. The balance sheet is referred to as a point-in-time statement.
Topic: Income Statement LO: 5 22. The income statement is also known as the statement of financial position. Answer: False Rationale: The income statement is also known as the statement of operations, the statement of income, and the earnings statement. The balance sheet is sometimes referred to as the statement of financial position.
Topic: Statement of Cash Flows LO: 5 23. The statement of cash flows reports information about cash flows in two categories: cash received and cash disbursed. Answer: False Rationale: The cash flows are grouped into the three business activities of operating, investing, and financing.
Topic: Relations Among the Financial Statements LO: 5 24. When financial statements are prepared, the balance sheet is usually prepared first. Answer: False Rationale: The income statement is prepared first, followed by the statement of stockholders’ equity, the balance sheet, and finally the statement of cash flows.
Topic: Conceptual Framework for Financial Reporting LO: 8 25. The conceptual framework developed by the FASB includes a statement of the objectives of financial reporting and a discussion about the qualitative characteristics of accounting information. Answer: True Rationale: The conceptual framework includes, among other things, a statement of the objectives of financial reporting along with a discussion about the qualitative characteristics of accounting information that are important to users.
©Cambridge Business Publishers, 2020 1-6
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Accrual Accounting LO: 8 26. Accrual accounting recognizes revenues only when cash is received and expenses only when cash is paid. Answer: False Rationale: Accrual accounting refers to the recognition of revenue when earned and the matching of expenses when incurred. The recognition of revenues and expenses does not always relate to the receipt or payment of cash.
Topic: Comparability and Consistency LO: 8 27. The qualitative characteristic of accounting information known as comparability means that the same accounting methods should be used from one period to the next, whenever possible. Answer: False Rationale: The statement describes consistency. Comparability speaks to firms in the same industry using similar reporting techniques.
Topic: Cost Principle LO: 8 28. The cost principle states that assets are initially recorded at the amounts paid or obligated to pay to acquire the assets. Answer: True Rationale: The cost principle means that assets and liabilities are initially recorded at the amount paid or obligated to pay. Historically, acquisition cost is considered the proper initial measurement because, at the time the asset is acquired, it represents the fair value of the asset as agreed by both the buyer and the seller.
Topic: Going Concern Concept LO: 8 29. The going concern concept assumes that an entity will be going out of business within the next several years. Answer: False Rationale: The going concern concept presumes that an entity will continue to operate indefinitely and will not be sold or otherwise liquidated.
Topic: Accrual Basis of Accounting LO: 8 30. Under the accrual basis of accounting, revenue may be recorded even though cash has not yet been received from a customer or client. Answer: True Rationale: Under the accrual basis of accounting, sales revenue is recognized when it is both earned and realized (revenue recognition principle) and expenses are recorded tin the period in which they generate the earned revenue (expense recognition principle). Recording revenues and expenses does not depend upon the receipt or payment of cash.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-7
Multiple Choice Topic: Business Organizations LO: 1 Level of Difficulty: EASY 1. Which of the following forms of business organizations exists as a legal entity for tax purposes? A) A sole proprietorship B) A partnership C) A corporation D) A labor union Answer: C Rationale: A corporation is a form of business organization that exists as a legal entity, subject to taxes, that issues shares of stock to its owners or shareholders in exchange for cash or other resources.
Topic: Business Organizations LO: 1 Level of Difficulty: EASY 2. The three principal forms of business organization are: A) A sole proprietorship, a stockholder, and a corporation B) A partnership, a sub-S corporation, and a labor union C) A corporation, a partnership, and a sole proprietorship D) A labor union, a stockholder, and a partnership Answer: C Rationale: The three principal forms of business organization are the sole proprietorship, the partnership, and the corporation.
Topic: Business Organizations LO: 1 Level of Difficulty: EASY 3. Which of the following is not an advantage of the corporate form of business organization? A) The ease with which capital can be raised B) The protection afforded stockholders against personal liability C) Both the business and the owners are taxed D) The relative ease of selling ownership shares Answer: C Rationale: The advantage of the corporate form of business organization include the ease of raising capital, stockholder protection against personal liability, and the ease of selling ownership shares.
©Cambridge Business Publishers, 2020 1-8
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 4. The three types of business activities in which every business, regardless of organizational form, its industry or its size, is involved are: A) Financing activities, banking activities, financial accounting activities B) Operating activities, banking activities, financing activities C) Financing activities, investing activities, financial accounting activities D) Financing activities, operating activities, investing activities Answer: D Rationale: The three types of business activities are financing activities, operating activities, and investing activities.
Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 5. Financing activities are generally categorized as: A) Debt financing B) Bond financing C) Equity financing D) Either debt or equity financing Answer: D Rationale: Financing activities are generally categorized as either debt or equity financing.
Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 6. Equity financing involves: A) Selling shares of stock to investors B) Borrowing money from a bank C) Issuing bonds payable D) Repayment of principal and interest to a creditor Answer: A Rationale: Equity financing involves selling shares of stock to investors.
Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 7. Which of the following statements about operating activities is not correct? A) Operating activities refers to the day-to-day activities of producing and selling a product or providing a service. B) Creditors and stockholders beliefs about a company’s ability to generate a profit are unimportant. C) Operating activities are critical for a business. D) If a company is unable to generate income from its operations it is very likely that it will fail. Answer: B Rationale: If creditors and stockholders do not believe that a company will be able to generate a profit, they are unlikely to provide the financing needed to start, or maintain its operations.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-9
Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 8. Which of the following activities is an example of an operating activity? A) Receiving a loan from a bank B) Selling merchandise online C) Purchasing a delivery truck D) Issuing shares of stock in exchange for cash Answer: B Rationale: Selling merchandise online is an example of an operating activity.
Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 9. Which of the following activities is an example of an investing activity? A) Receiving a loan from a bank B) Selling merchandise online C) Purchasing a delivery truck D) Issuing shares of stock in exchange for cash Answer: C Rationale: Purchasing a delivery truck is an example of an investing activity.
Topic: Activities of a Business LO: 2 Level of Difficulty: EASY 10. Which of the following activities is an example of a financing activity? A) Receiving a loan from a bank B) Selling merchandise online C) Purchasing a delivery truck D) Paying employee salaries Answer: A Rationale: Receiving a loan from a bank is an example of a financing activity.
Topic: Financial Accounting Information Users LO: 3 Level of Difficulty: EASY 11. Which one of the following is not an external user of financial information? A) Stockholders B) Creditors C) Internal Revenue Service D) Senior company management Answer: D Rationale: Decision makers outside the company include stockholders, creditors, and tax agencies such as the Internal Revenue Service.
©Cambridge Business Publishers, 2020 1-10
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Financial Accounting Information Users LO: 3 Level of Difficulty: EASY 12. Which one of the following is not an internal user of financial information? A) The Marketing Department B) Creditors C) The Finance Department D) Senior company management Answer: B Rationale: Decision makers inside the company include various departments, such as marketing or finance, and members of the company’s senior management team.
Topic: Managerial Accounting LO: 3 Level of Difficulty: EASY 13. The accounting activities carried out by a firm’s accounting staff primarily to provide management with accounting data for decisions related to a firm’s operations is referred to as: A) Financial accounting B) Managerial accounting C) Tax accounting D) Regulatory accounting E) None of the above Answer: B Rationale: The process of generating and analyzing data needed by the internal management of a company for decision making and the efficient management of the business is referred to as managerial accounting.
Financial Accounting LO: 3 Level of Difficulty: EASY 14. The area of accounting dealing with the preparation of financial statements showing a business’s results of operations, financial position, and cash flow is referred to as: A) Financial accounting B) Managerial accounting C) Tax accounting D) Regulatory accounting E) None of the above Answer: A Rationale: The process of accumulating and reporting accounting information that details a business’s results of operations, cash flows, and financial position is referred to as financial accounting.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-11
Topic: Ethics LO: 3 Level of Difficulty: MEDIUM 15. Which of the following represents an aspect of the accounting environment that may create ethical pressures on an accountant? A) Accountants have access to confidential and sensitive information. B) The output produced by accountants may have significant financial implications for one or more persons. C) Management may emphasize short-run profits. D) All of the above E) None of the above Answer: D Rationale: Accountants face several unique ethical dimensions as a result of their work, These include: access to confidential and sensitive information, output produced by accountants may have significant financial implications for individuals as well as businesses, and that management may emphasize short-run (“bottom line”) profits.
Topic: Ethics LO: 3 Level of Difficulty: MEDIUM 16. Which of the following situations has the potential to create ethical pressure on an accountant? A) Preparing an individual’s income tax return when much of the supporting documentation is missing. B) Informing a sales manager that the travel and entertainment expenses turned in by the top performing sales representative exceed company allowances. C) Discovering that the company has made a mistake in computing refunds granted to customers, causing the refunds to be too small. D) All of the above E) None of the above Answer: D Rationale: Accountants face several unique ethical dimensions as a result of their work. All of the situations noted would present the accountant with ethical pressure when deciding the correct action to take when dealing with each situation.
Topic: Ethics LO: 3 Level of Difficulty: EASY 17. The branch of accounting which is involved in criminal investigations related to areas such as financial statement fraud, money laundering, or investment fraud is called: A) Internal auditing B) Cost accounting. C) Forensic accounting. D) All of the above E) None of the above Answer: C Rationale: Forensic accounting is the branch of accounting which is involved in criminal investigations related to areas such as financial statement fraud, money laundering, or investment fraud. Forensic accountants are involved both before and after the commission of a crime.
©Cambridge Business Publishers, 2020 1-12
th
Financial Accounting for Undergraduates, 4 Edition
Topic: The Accounting Process LO: 4 Level of Difficulty: MEDIUM 18. The measurement activity of the accounting process must do all of the following except: A) Identify the relevant economic activities of a business B) Prepare financial reports to meet the needs of the user C) Quantify the economic activities of a business D) Record the resulting measures in a systematic manner Answer: B Rationale: The measurement process identifies, measures, and records the economic activity of an entity. Preparation of the financial reports is part of the communication activity of the accounting process.
Topic: The Accounting Process LO: 4 Level of Difficulty: MEDIUM 19. The communication activity of the accounting process must: A) Identify the relevant economic activities of a business B) Record the resulting measures in a systematic manner C) Quantify the economic activities of a business D) Prepare financial reports and help interpret financial results to meet users’ needs Answer: D Rationale: The communication activity of the accounting process provides useful financial reports to users and provides various techniques, such as formatting of reports, charts and graphs, and ratios, to users to help them interpret the content of the reports.
Topic: Generally Accepted Accounting Principles LO: 4 Level of Difficulty: MEDIUM 20. Which of the following statements is true regarding generally accepted accounting principles (GAAP)? A) GAAP is a set of laws. B) GAAP is subject to change as conditions warrant. C) Under GAAP, if two companies engage in the same transactions, they must choose the same accounting methods. D) U.S. GAAP is the same as GAAP in other countries. Answer: B Rationale: Specific rules under GAAP are altered or new practices are formulated to fit changes in underlying economic circumstances of business transactions.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-13
Topic: GAAP LO: 4 Level of Difficulty: EASY 21. Currently, the organization with the primary responsibility for formulating U.S. generally accepted accounting principles is the: A) American Institute of Certified Public Accountants B) Securities and Exchange Commission C) Financial Accounting Standards Board D) Internal Revenue Service E) None of the above Answer: C Rationale: Currently, the organization in the private sector with the primary responsibility for formulating accounting principles is the Financial Accounting Standards Board. The Financial Accounting Standards Board has been instrumental in the development of generally accepted accounting principles in the United States.
Topic: GAAP LO: 4 Level of Difficulty: EASY 22. Generally accepted accounting principles are: A) Guides to action that apply primarily to the process of managerial accounting. B) Accounting standards enforced by the Internal Revenue Service. C) Accounting standards that never change. D) Guides to action that apply primarily to the process of financial accounting. E) None of the above Answer: D Rationale: Financial statement users who rely on accounting data expect that all companies will follow the same standards and procedures when preparing their statements. These standards and procedures are called generally accepted accounting principles. Generally accepted accounting principles apply to the general-purpose financial statements prepared primarily for parties outside of an organization.
Topic: Financial Accounting Oversight LO: 4 Level of Difficulty: MEDIUM 23. Financial accounting oversight in the United States is provided by all of the following organizations except the: A) International Accounting Standards Board (IASB) B) Financial Accounting Standards Board (FASB) C) Public Company Accounting Oversight Board (PCAOB) D) U.S. Securities Exchange Commission (SEC) Answer: A Rationale: While the United States is working to converge national standards with those standards set by the IASB, no final decision requiring the adoption of the IASB’s standards has been made.
©Cambridge Business Publishers, 2020 1-14
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Accounting Equation LO: 5 Level of Difficulty: EASY 24. Which of the following is a correct statement of the accounting equation in economic terms? A) Economic resources = operating assets + financial assets B) Economic resources = creditor financing + owner financing C) Economic resources = creditor financing – owner financing D) Creditor financing = investing + operating Answer: B Rationale: The accounting equation is assets = liabilities + stockholders’ equity. Another way of viewing this equation is Economic resources = Creditor Financing + Owner Financing
Topic: Liabilities LO: 5 Level of Difficulty: MEDIUM 25. What are the obligations or debts that a business must pay in cash or in goods and services at some future time because of past transactions or events called and how are they reported? A) Assets on the balance sheet B) Stockholders’ equity on the balance sheet C) Dividends on the statement of retained earnings D) Liabilities on the balance sheet Answer: D Rationale: Liabilities are probable future economic sacrifices resulting from a current or past event. They are obligations that must be satisfied with a future cash payment or delivery of goods or services.
Topic: Assets LO: 5 Level of Difficulty: MEDIUM 26. What are the economics resources of a business that can be expressed in monetary and how are they reported? A) Assets on the balance sheet B) Stockholders’ equity on the balance sheet C) Dividends on the statement of retained earnings D) Liabilities on the balance sheet Answer: A Rationale: Assets are economic resources of a business that can be represented in monetary terms and that represent a probable future economic benefit to a business.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-15
Topic: Accounting Equation LO: 5 Level of Difficulty: EASY 27. The accounting equation states: A) Assets + Liabilities = Stockholders’ Equity B) Assets = Liabilities - Stockholders’ Equity C) Assets = Liabilities + Stockholders’ Equity D) Assets + Stockholders’ Equity = Liabilities E) None of the above Answer: C Rationale: The accounting equation: Assets = Liabilities + Stockholder’s equity, states that a firm’s assets equal the sum of its liabilities plus its stockholders’ equity. Assets refer to a company’s resources, liabilities refer to creditor claims on those resources, and stockholders’ equity refers to claims on those resources. Throughout the accounting process, the accounting equation must always remain in balance.
Topic: Assets LO: 5 Level of Difficulty: EASY 28. The economic resources of an entity that can be usually expressed in monetary terms are called? A) Stockholders’ equity B) Revenues C) Liabilities D) Assets E) None of the above Answer: D Rationale: Assets refer to the economic resources of a business that can be expressed in monetary terms. Assets take many forms. The key characteristic of any asset is that it represents a probable future economic benefit to a business.
Topic: Assets LO: 5 Level of Difficulty: EASY 29. Which of the following is correct? A) Ownership is an essential test for an asset. B) An example of an asset is notes payable. C) The key characteristic of an asset is that it represents a probable future economic benefit owned or controlled by the entity. D) Liabilities represent the interest of the owners in the assets of an entity. E) None of the above Answer: C Rationale: Assets refer to the economic resources of a business that can be expressed in monetary terms. Assets take many forms. The key characteristic of any asset is that it represents a probable future economic benefit to a business.
©Cambridge Business Publishers, 2020 1-16
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Liabilities LO: 5 Level of Difficulty: EASY 30. The obligations that an entity must pay in money or services at some time in the future because of past transactions or events are called? A) Liabilities B) Expenses C) Stockholders’ equity D) Cost principle E) None of the above Answer: A Rationale: Liabilities are the obligations or debts that a business must pay in cash or goods and services at some future time as a consequence of past transactions or events.
Topic: Liabilities LO: 5 Level of Difficulty: EASY 31. Which of the following is an example of a liability? A) Supplies B) Accounts receivable C) Wages owed to employees for work already performed D) Prepaid advertising E) None of the above Answer: C Rationale: Liabilities are the obligations or debts that a business must pay in cash or goods and services at some future time as a consequence of past transactions or events. Since employees have already performed the work, there is an obligation on the part of the business to pay the employees. This obligation (liability) is called wages payable. The business reports this obligation on the balance sheet. Supplies, accounts receivable, and prepaid advertising are all examples of assets.
Topic: Accounting Equation LO: 5 Level of Difficulty: EASY 32. Which of the following is not a component of the accounting equation? A) Stockholders’ equity B) Income statement C) Liabilities D) Assets E) None of the above Answer: B Rationale: The accounting equation: Assets = Liabilities + Stockholder’s equity, states that a firm’s assets equal the sum of its liabilities plus its stockholders’ equity. Assets refer to a company’s resources, liabilities refer to creditor claims on those resources, and stockholders’ equity refers to owner claims on those resources.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-17
Topic: Liabilities LO: 5 Level of Difficulty: MEDIUM 33. Which of the following is incorrect? A) To qualify as a liability, an obligation must be payable in cash or in goods and services. B) A copyright is an example of a liability. C) To qualify as a liability, an obligation must be scheduled for settlement at some future time. D) All of the above E) None of the above Answer: B Rationale: Liabilities are the obligations or debts that a business must pay in cash or goods and services at some future time as a consequence of past transactions or events. A copyright is an exclusive right that protects an owner against the unauthorized reproduction of a specific written work or artwork. A copyright is an example of an asset, not a liability.
Topic: Stockholders’ Equity LO: 5 Level of Difficulty: EASY 34. Stockholders’ equity: A) Is equal to assets minus liabilities B) Represents the interest of the owners in the assets of an entity C) Is equal to the net assets of an entity D) All of the above E) None of the above Answer: D Rationale: Stockholders’ equity refers to the ownership (stockholder) claims on the assets of the business. Stockholders’ equity represents a residual claim on the business’s assets, that is, it is a claim on the assets of a business that remain after all the liabilities to creditors have been satisfied (net assets).
Topic: Liabilities LO: 5 Level of Difficulty: MEDIUM 35. Which of the following is correct? A) Some liabilities may involve the performance of services. B) Liabilities are claims on an entity’s assets that remain after the claims of owners have been settled. C) To qualify as an asset, a resource must have a physical existence. D) Accounts receivable and Wages payable are examples of liabilities. E) None of the above Answer: A Rationale: Liabilities are the obligations or debts that a business must pay in cash or goods and services at some future time as a consequence of past transactions or events. Liabilities refer to creditor claims on a business’s resources (assets). An asset take many forms, it must not have a physical existence. The key characteristic of any asset is that it represents a probably future economic benefit to a business. Wages payable is an example of a liability, but accounts receivable is an example of an asset.
©Cambridge Business Publishers, 2020 1-18
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 36. On which statement are assets, liabilities and stockholders’ equity reported? A) Balance sheet B) Income statement C) Statement of retained earnings D) Statement of cash flows Answer: A Rationale: A balance sheet lists amounts for assets, liabilities, and stockholders’ equity at a point in time.
Topic: Balance Sheet and Income Statement LO: 5 Level of Difficulty: MEDIUM 37. Which of the following items are disclosed on the balance sheet? A) Inventory, accounts receivable, equipment B) Operating expenses, equipment C) Account receivable, cash payments D) Equipment, cash payment, inventory E) Cash payments Answer: A Rationale: Operating expenses are found in the income statement, not the balance sheet. Cash payments are found on the statement of cash flows, not the balance sheet. Inventory, accounts receivable and equipment are all assets which are found on the balance sheet.
Topic Financial Statement Format LO: 5 Level of Difficulty: MEDIUM 38. Which of the following is not part of the standard heading of a financial statement? A) The company name B) The statement title C) The date or time period of the statement D) The company’s industry Answer: D Rationale: Each financial statement identifies the company, the statement title, and the date or time period of the statement.
Topic: Expenses LO: 5 Level of Difficulty: EASY 39. Which of the four basic financial statements would contain a line item for expenses? A) Balance sheet B) Income statement C) Statement of retained earnings D) Statement of cash flows Answer: B Rationale: The income statement reports on the revenues less the expenses over a reporting period. Expenses only appear on the income statement. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-19
Topic: Account Classification LO: 5 Level of Difficulty: MEDIUM 40. Which of the following would be reported on a statement of retained earnings? A) Cash B) Total expenses C) Dividends D) Financing cash flow Answer: C Rationale: Dividends are a return of capital to stockholders and are reported on the statement of retained earnings. Cash is disclosed on the balance sheet. Total expenses is an income statement amount. Financing cash flow is found on the statement of cash flows.
Topic: Articulation of Financial Statements LO: 5 Level of Difficulty: MEDIUM 41. How are the balance sheet and the statement of cash flows linked? A) By the cash balance B) By the amount of total retained earnings C) By the total shareholder equity D) By the amount of net income Answer: A Rationale: The balance sheet and the statement of cash flows are linked by the cash balance. The statement of cash flows shows the inflows and outflows of cash during the period. The ending cash balance is disclosed on the balance sheet.
Topic: Financial Statement Linkages LO: 5 Level of Difficulty: MEDIUM 42. Which one of the following is not a key linkage among the four primary financial statements? A) The expenses in the income statement link to the total liability balance. B) The statement of cash flows links to ending cash balance reported on the balance sheet. C) The income statement links to the ending retained earnings in the statement of retained earnings. D) The statement of retained earnings links to ending retained earnings on the balance sheet. Answer: A Rationale: The expenses in the income statement are not linked to the total liability balance. An unpaid expense might at one point in time be listed as a liability; however, the total of liabilities and expenses is rarely the same.
©Cambridge Business Publishers, 2020 1-20
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Sales Revenue LO: 5 Level of Difficulty: MEDIUM 43. The increases to a company’s resources that result when goods or services are provided to customers are called? A) Assets B) Liabilities C) Expenses D) Revenues E) None of the above Answer: D Rationale: Sales revenues are increases to a company’s resources that result when goods or services are provided to customers. The amount of sales revenue earned is measured by the value of the assets received in exchange for good and services delivered.
Topic: Sales Revenue LO: 5 Level of Difficulty: EASY 44. What is the definition of sales revenue? A) Increases to a company’s resources that result when goods or services are provided to customers B) The obligations that an entity must pay at some time in the future because of past transactions or events C) Decreases in stockholders’ equity that a firm incurs in the process of earning revenues D) The economic resources of an entity that can be usefully expressed in monetary terms E) None of the above Answer: A Rationale: Sales revenues are increases to a company’s resources that result when goods or services are provided to customers. The amount of sales revenue earned is measured by the value of the assets received in exchange for good and services delivered.
Topic: Expenses LO: 5 Level of Difficulty: EASY 45. What is the definition of expenses? A) Increases in stockholders’ equity that a firm earns by providing goods or services for its customers B) The obligations that an entity must pay at some time in the future because of past transactions or events C) Decreases in a company’s resources that a firm incurs in the process of earning revenues D) The economic resources of an entity that can be usefully expressed in money terms E) None of the above Answer: C Rationale: Expenses are decreases in a company’s resources that a firm incurs from generating revenues. Expenses are usually measured by the value of assets used up or exchanged as a result of a business’s operating activities. Increases in stockholders’ equity that a firm earns by providing goods or services for its customers are sales revenues. The obligations that an entity must pay at some time in the future because of past transactions or events are liabilities.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-21
Topic: Financial Statements LO: 5 Level of Difficulty: EASY 46. Which of the following is not a basic financial statement? A) Income statement B) Statement of cash flows C) Statement of common stock D) Balance sheet E) None of the above Answer: C Rationale: There are four basic financial statements: the balance sheet, the income statement, the statement of stockholders’ equity, and the statement of cash flows. A statement of common stock does not exist.
Topic: Income Statement LO: 5 Level of Difficulty: EASY 47. An income statement: A) Reports the results of operations for a period B) Reports on the events causing a change in stockholders’ equity during a period C) Presents a firm’s assets, liabilities, and stockholders’ equity on a given date D) Reports cash inflows and outflows during a period E) None of the above Answer: A Rationale: The income statement reports the results of operations for a business of a given time period, usually a quarter or a year. The income statement lists the revenues and expenses of the business. A statement of stockholders’ equity reports on the events causing a change in stockholders’ equity during a period. A balance sheet presents a firm’s assets, liabilities, and stockholders’ equity on a given date. A statement of cash flows reports cash inflows and outflows during a period.
Topic: Balance Sheet LO: 5 Level of Difficulty: EASY 48. A balance sheet: A) Reports the results of operations for a period B) Reports on the events causing a change in stockholders’ equity during a period C) Presents a firm’s assets, liabilities, and stockholders’ equity as of a given date D) Reports cash inflows and outflows during a period E) None of the above Answer: C Rationale: A balance sheet presents a firm’s assets, liabilities, and stockholders’ equity on a given date. The income statement reports the results of operations for a business of a given time period, usually a quarter or a year. The income statement lists the revenues and expenses of the business. A statement of stockholders’ equity reports on the events causing a change in stockholders’ equity during a period. A statement of cash flows reports cash inflows and outflows during a period.
©Cambridge Business Publishers, 2020 1-22
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Statement of Cash Flows LO: 5 Level of Difficulty: MEDIUM 49. What categories of cash flows are presented in a statement of cash flows? A) Operating and non-operating B) Receipts and disbursements C) Financial and non-financial D) Operating, investing, and financing E) None of the above Answer: D Rationale: The statement of cash flows groups cash flows into the three business activities of operating, investing, and financing.
Topic: Balance Sheet LO: 5 Level of Difficulty: MEDIUM 50. Which of the following financial statements is a position statement? A) Income statement B) Statement of retained earnings C) Balance sheet D) Statement of cash flows E) None of the above Answer: C Rationale: The balance sheet presents a firm’s assets, liabilities, and stockholders’ equity on a given date. The balance sheet is also referred to as the statement of financial position.
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 51. Which of the following financial statements is a period statement? A) Income statement B) Statement of retained earnings C) Statement of cash flows D) All of the above E) None of the above Answer: D Rationale: The income statement, the statement of retained earnings, and the statement of cash flows all report financial information for a given period of time.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-23
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 52. A financial statement either presents information covering a period of time (for example, a month, a quarter, or a year) or it presents information as of a particular date (for example, as of December 31, 2016). Which of the following financial statements presents information as of a particular date? A) Balance sheet B) Income statement C) Statement of retained earnings D) Both the balance sheet and the income statement E) None of the above Answer: A Rationale: The balance sheet presents a firm’s assets, liabilities, and stockholders’ equity on a given date.
Topic: Balance Sheet LO: 5 Level of Difficulty: MEDIUM 53. Which of the following is not contained in the heading for a balance sheet? A) The name of the company B) The time period (for example, a month, quarter, or year) covered by the balance sheet C) The title of the financial statement (that is, balance sheet) D) The date (a single day) of the balance sheet E) None of the above Answer: B Rationale: The heading for a balance sheet contains the name of the company, the title of the financial statement (that is, balance sheet), and the date (a single day) of the balance sheet. It does not contain the time period (for example, a month, quarter, or year) covered by the balance sheet.
Topic: Income Statement LO: 5 Level of Difficulty: MEDIUM 54. Which of the following is not contained in the heading for an income statement? A) The name of the company B) The time period (for example, a month, quarter, or year) covered by the income statement C) The title of the financial statement (that is, income statement) D) The date (a single day) of the income statement E) None of the above Answer: D Rationale: The heading for an income statement contains the name of the company, the title of the financial statement (that is, income statement), and the time period (for example, a month, quarter, or year) covered by the income statement. It does not contain the date (a single day) of the income statement.
©Cambridge Business Publishers, 2020 1-24
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Statement of Stockholders’ Equity LO: 5 Level of Difficulty: MEDIUM 55. Which of the following is not contained in the heading for a statement of stockholders’ equity? A) The name of the company B) The time period (for example, a month, quarter, or year) covered by the statement of stockholders’ equity C) The title of the financial statement (that is, statement of stockholders’ equity) D) The date (a single day) of the statement of stockholders’ equity E) None of the above Answer: D Rationale: The heading for the statement of stockholders’ equity contains the name of the company, the title of the financial statement (that is, statement of stockholders’ equity), and the time period (for example, a month, quarter, or year) covered by the statement of stockholders’ equity. It does not contain the date (a single day) of the statement of stockholders’ equity.
Topic: Statement of Stockholders’ Equity LO: 5 Level of Difficulty: EASY 56. Which of the following is presented in a statement of stockholders’ equity? A) Revenues B) Expenses C) Net income D) Assets E) None of the above Answer: C Rationale: The statement of stockholders’ equity reports the events causing an increase or decrease in a business’s stockholders’ equity during a given time period, including both changes in a company’s common stock and changes in retained earnings. Retained earnings is increased when operations produce net income and reduced when operations produce a net loss. Net income is reported on the statement, but not revenues, expenses, or assets.
Topic: Statement of Stockholders’ Equity LO: 5 Level of Difficulty: EASY 57. Which of the following is not presented in a statement of stockholders’ equity? A) Stockholders’ equity at the beginning of the year B) Revenues C) Net income D) Dividends E) None of the above Answer: B Rationale: The statement of stockholders’ equity reports the events causing an increase or decrease in a business’s stockholders’ equity during a given time period, including both changes in a company’s common stock and changes in retained earnings. Retained earnings is increased when operations produce net income and reduced when operations produce a net loss or dividends are paid. Net income, dividends, and stockholders’ equity at the beginning of the year are reported on the statement, but not revenues.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-25
Topic: Income Statement LO: 5 Level of Difficulty: MEDIUM 58. An income statement does not include which of the following? A) Operating expenses B) Cost of goods sold C) Retained earnings D) Sales Answer: C Rationale: Retained earnings represent accumulated earnings from previous accounting periods that has not been distributed to stockholders as dividends.
USE THE FOLLOWING INFORMATION FOR QUESTIONS 59-62: Marvin’s Mechanical Repair Shop started the year with total assets of $60,000, total liabilities of $40,000, and retained earnings of $18,000. During the year, the business recorded $100,000 in auto repair revenues, $70,000 in expenses, and the company paid dividends of $15,000.
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 59. The net income reported by Marvin’s Mechanical Repair Shop for the year was: A) $180,000 B) $ 40,000 C) $ 50,000 D) $ 30,000 E) None of the above Answer: D Rationale: $100,000 - $70,000 = $30,000
Topic: Financial Statements LO: 5 Level of Difficulty: EASY 60. Marvin’s balance of stockholders’ equity at the start of the year was: A) $ 2,000 B) $ 20,000 C) $100,000 D) $ 15,000 E) None of the above Answer: B Rationale: $60,000 - $40,000 = $20,000
©Cambridge Business Publishers, 2020 1-26
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 61. Marvin’s balance of retained earnings at the end of the year was: A) $50,000 B) $42,000 C) $33,000 D) $70,000 E) None of the above Answer: C Rationale: $18,000 + ($100,000 - $70,000) - $15,000 = $33,000
Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 62. If Marvin’s Mechanical Repair Shop ends the year with total assets of $80,000, and total liabilities of $35,000, what must be the amount of common stock issued during the year? A) $ 10,000 B) $ 14,000 C) $ 5,000 D) $ 3,000 E) None of the above Answer: A Rationale: End of year stockholders’ equity = Total assets – Total liabilities = ($80,000 - $35,000 = $45,000) End of year retained earnings = Start of year retained earnings + Net income – Dividends = ($18,000 + ($100,000 - $70,000) – $15,000 = $33,000.) End of the year common stock = Year-end stockholders’ equity – Year-end retained earnings = ($45,000 – $33,000 = $12,000) Start of year common stock = Start of year stockholders’ equity – Start of year retained earnings = (($60,000 - $40,000) – $18,000 = $2,000). Common stock issued during the year = End of year common stock – Start of year common stock = ($12,000 – $2,000 = $10,000)
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-27
USE THE FOLLOWING INFORMATION FOR QUESTIONS 63-66 The Williams Model Aircraft Repair Shop started the year with total assets of $180,000, total liabilities of $120,000, and retained earnings of $54,000. During the year, the business recorded $300,000 in repair revenues, $210,000 in expenses, and the company paid dividends of $45,000.
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 63. The net income reported by The Williams Model Aircraft Repair Shop for the year was: A) $ 90,000 B) $ 540,000 C) $ 120,000 D) $ 150,000 E) None of the above Answer: A Rationale: $300,000 - $210,000 = $90,000
Topic: Financial Statements LO: 5 Level of Difficulty: EASY 64. The Williams’ balance of stockholders’ equity at the start of the year was: A) $ 45,000 B) $ 6,000 C) $ 60,000 D) $300,000 E) None of the above Answer: C Rationale: $180,000 - $120,000 = $60,000
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 65. The Williams’ balance of retained earnings at the end of the year was: A) $210,000 B) $150,000 C) $126,000 D) $ 99,000 E) None of the above Answer: D Rationale: $54,000 + ($300,000 - $210,000) - $45,000 = $99,000
©Cambridge Business Publishers, 2020 1-28
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 66. If The Williams Model Aircraft Repair Shop ends the year with total assets of $240,000, and total liabilities of $105,000, what must be the amount of common stock issued during the year? A) $ 9,000 B) $30,000 C) $42,000 D) $15,000 E) None of the above Answer: B Rationale: End of year stockholders’ equity = Total assets – Total liabilities = ($240,000 - $105,000 = $135,000) End of year retained earnings = Start of year retained earnings + Net income – Dividends = ($54,000 + ($300,000 - $210,000) - $45,000 = $99,000.) End of the year common stock = Year-end stockholders’ equity – Year-end retained earnings = ($135,000 - $99,000 = $36,000) Start of year common stock = Start of year stockholders’ equity – Start of year retained earnings = (($180,000 - $120,000) - $54,000 = $6,000). Common stock issued during the year = End of year common stock – Start of year common stock = ($36,000 - $6,000 = $30,000)
Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 67. The transactions carried out by Melon Corporation during the year caused an increase in total assets of $50,000 and a decrease in total liabilities of $20,000. If no additional investment was made by the investors during the year and dividends of $14,000 were paid, what was the net income for the year? A) $106,000 B) $ 42,000 C) $ 84,000 D) $ 60,000 E) None of the above Answer: C Rationale: Change in assets = change in liabilities + change in stockholders’ equity. (Stockholders’ equity includes the change in retained earnings resulting from net income for the year and the payment of dividends.) [$50,000 = (-$20,000) + (X - $14,000)]. X = $84,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-29
Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 68. The transactions carried out by Papaya Corporation during the year caused an increase in total assets of $150,000 and a decrease in total liabilities of $60,000. If no additional investment was made by the investors during the year and dividends of $42,000 were paid, what was the net income for the year? A) $180,000 B) $318,000 C) $126,000 D) $252,000 E) None of the above Answer: D Rationale: Change in assets = change in liabilities + change in stockholders’ equity. (Stockholders’ equity includes the change in retained earnings resulting from net income for the year and the payment of dividends.) [$150,000 = (-$60,000) + (X - $42,000)] X = $252,000
USE THE FOLLOWING INFORMATION FOR QUESTIONS 69-70: The following information was taken from the records of Easter Corporation for the year ended December 31, 2019. Advertising expense Income tax expense Accounts payable Dividends paid Retained earnings (Jan 1, 2016) Consulting fees revenue Rent expense Supplies expense
$40,000 26,000 26,900 30,000 115,720 200,000 23,400 33,800
Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 69. The retained earnings reported by Easter Corporation as of December 31, 2019 is: A) $158,490 B) $158,090 C) $111,590 D) $162,520 Answer: D Rationale: Year-end retained earnings = Beginning retained earnings + Net income (loss) – dividends. Net income = Revenue – Expenses ($200,000 – ($40,000 + $26,000 + $23,400 +$33,800) = $76,800) Year-end retained earnings = $115,720 + $76,800 - $30,000 = $162,520
©Cambridge Business Publishers, 2020 1-30
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 70. The net income reported by Easter Corporation for the year ended December 31, 2019 was: A) $ 76,800 B) $102,800 C) $ 72,800 D) $ 49,900 Answer: A Rationale: Net income = Revenue – Expenses ($200,000 – ($40,000 + $26,000 + $23,400 +$33,800) = $76,800)
USE THE FOLLOWING INFORMATION FOR QUESTIONS 71-72 The following information was taken from the records of Rectangle Corporation for the year ended December 31, 2019. Advertising expense Income tax expense Accounts payable Dividends paid Retained earnings (Jan 1, 2016) Consulting fees revenue Rent expense Supplies expense
$120,000 78,000 80,700 90,000 347,160 600,000 70,200 101,400
Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 71. The retained earnings reported by Rectangle Corporation as of December 31, 2019 is: A) $487,560 B) $457,470 C) $474,270 D) $324,770 Answer: A Rationale: Year-end retained earnings = Beginning retained earnings + Net income (loss) – Dividends. Net income = Revenue – Expenses ($600,000 – ($120,000 + $78,000 + $70,200 + $101,400) = $230,400) Year-end retained earnings = $347,160 + $230,400 - $90,000 = $487,560
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-31
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 72. The net income reported by Rectangle Corporation for the year ended December 31, 2019 was: A) $149,700 B) $230,400 C) $308,400 D) $218,400 Answer: B Rationale: Net income = Revenue – Expenses ($600,000 – ($120,000 + $78,000 + $70,200 +$101,400) = $230,400)
Topic: Financial statements LO: 5 Level of Difficulty: MEDIUM 73. The following information was taken from the records of J. Weasley Corporation for the month ended December 31, 2019. Advertising expense Income tax expense Accounts payable Dividends paid Retained earnings (January 1, 2016) Consulting fees revenue Rent expense Supplies expense
$39,200 28,000 24,800 28,250 114,820 200,000 22,500 34,700
Given the above information, net income for the year is: A) $75,600 B) $34,120 C) $88,560 D) $70,620 Answer: A Rationale: Net income = Revenue – Expenses ($200,000 – ($39,200 + $28,000 + $22,500 + $34,700) = $75,600)
©Cambridge Business Publishers, 2020 1-32
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 74. The following information was taken from the records of H. Granger Corporation for the month ended December 31, 2019. Advertising expense Income tax expense Accounts payable Dividends paid Retained earnings (January 1, 2019) Consulting fees revenue Rent expense Supplies expense
$124,500 76,500 81,900 84,750 482,325 600,000 71,700 100,500
Given the above information, net income for the year is: A) $211,860 B) $226,800 C) $102,360 D) $265,680 Answer: B Rationale: Net income = Revenue – Expenses ($600,000 – ($124,500 + $76,500 + $71,700 + $100,500) = $226,800)
USE THE FOLLOWING INFORMATION FOR QUESTIONS 75-79: Competitive Landscaping Company has compiled the following list of account balances of various assets, liabilities, revenues and expenses on December 31, 2019, the end of its first year of operations. Common stock Accounts payable Salary expense Repairs expense Dividends Truck Equipment Notes payable Cash Supplies expense Service revenue Gasoline expense
$25,200 5,000 9,000 1,600 10,000 17,000 12,600 16,400 35,200 3,200 43,600 1,600
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-33
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 75. The net income for Competitive Landscaping for the year was: A) $11,400 B) $11,800 C) $28,200 D) $25,600 Answer: C Rationale: Net income = Revenue – Expenses ($43,600 – ($9,000 + $1,600 + $3,200 +$1,600) = $28,200)
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 76. The total liabilities for Competitive Landscaping on December 31, 2019 are: A) $37,800 B) $23,400 C) $21,400 D) $73,000 Answer: C Rationale: Total liabilities = Accounts payable + Notes payable ($5,000 + $16,400 = $21,400)
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 77. The total assets for Competitive Landscaping on December 31, 2019 are: A) $56,200 B) $63,200 C) $43,200 D) $64,800 Answer: D Rationale: Total assets = Tash + truck + Equipment ($35,200 + $17,000 + $12,600 = $64,800)
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 78. The retained earnings for Competitive Landscaping on December 31, 2019 are: A) $1,400 B) $18,200 C) $28,200 D) $6,300 Answer: B Rationale: Retained earnings = Net income – Dividends [($43,600 – ($9,000 + $1,600 + $3,200 +$1,600)) - $10,000] = ($28,200 - $10,000 = $18,200)
©Cambridge Business Publishers, 2020 1-34
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 79. The stockholders’ equity for Competitive Landscaping on December 31, 2019 is: A) $55,400 B) $43,400 C) $45,200 D) $45,000 Answer: B Rationale: Stockholder’s equity = Assets – Liabilities [($35,200 + $17,000 + $12,600) - ($5,000 + $16,400)] = ($64,800 - $21,400 = $43,400)
USE THE FOLLOWING INFORMATION FOR QUESTIONS 80-84 Susie Lane’s Landscaping Company has compiled the following list of account balances of various assets, liabilities, revenues and expenses on December 31, 2019, the end of its first year of operations. Common stock Accounts payable Salary expense Repairs expense Dividends Truck Equipment Notes payable Cash Supplies expense Service revenue Gasoline expense
75,600 15,000 27,000 4,800 30,000 51,000 37,800 49,200 105,600 9,600 130,800 4,800
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 80. The net income for Susie Lane’s Landscaping for the year was: A) $76,800 B) $34,200 C) $34,400 D) $84,600 Answer: D Rationale: Net income = Revenue – Expenses ($130,800 – ($27,000 + $4,800 + $9,600 + $4,800) = $84,600)
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-35
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 81. The total liabilities for Susie Lane’s Landscaping on December 31, 2019 are: A) $219,000 B) $113,400 C) $ 70,200 D) $ 64,200 Answer: D Rationale: Total liabilities = Accounts payable + Notes payable ($15,000 + $49,200 = $64,200)
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 82. The total assets for Susie Lane’s Landscaping on December 31, 2019 are: A) $194,400 B) $168,600 C) $189,600 D) $129,600 Answer: A Rationale: Total assets = Cash + Truck + Equipment ($105,600 + $51,000 + $37,800 = $194,400)
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 83. The retained earnings for Susie Lane’s Landscaping on December 31, 2019 are: A) $18,900 B) $ 4,200 C) $54,600 D) $84,600 Answer: C Rationale: Retained earnings = Net income – Dividends [($130,800 – ($27,000 + $4,800 + $9,600 + $4,800) - $30,000] = [$84,600 - $30,000 = $54,600]
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 84. The stockholders’ equity for Susie Lane’s Landscaping on December 31, 2019 is: A) $135,000 B) $166,200 C) $130,200 D) $135,600 Answer: C Rationale: Stockholder’s equity = Assets – Liabilities [($105,600 + $51,000 + $37,800) - ($15,000 + $49,200)] = ($194,400 - $64,200 = $130,200)
©Cambridge Business Publishers, 2020 1-36
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 85. Stockholders’ equity and total assets were $64,000 and $158,000 respectively at the beginning of the period. Assets increased 50% and liabilities decreased 60% during the period. What is stockholders’ equity at the end of the period? A) $ 90,000 B) $ 94,000 C) $199,400 D) $223,400 Answer: C Rationale: Liabilities = Assets – Stockholders equity ($158,000 - $64,000 = $94,000) Stockholders’ equity = Assets – Liabilities X = [($158,000 x 150%) – ($94,000 – ($94,000 x 60%))] X = $199,400
Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 86. Stockholders’ equity and total assets were $192,000 and $474,000 respectively at the beginning of the period. Assets increased 50% and liabilities decreased 60% during the period. What is stockholders’ equity at the end of the period? A) $670,200 B) $270,000 C) $282,000 D) $598,200 Answer: D Rationale: Liabilities = Assets – Stockholders equity ($474,000 - $192,000 = $282,000) Stockholders’ equity = Assets – Liabilities X = [($474,000 x 150%) – ($282,000 – ($282,000 x 60%))] X = $598,200
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-37
USE THE FOLLOWING INFORMATION FOR QUESTIONS 87-88. TOTALS Current assets All other assets Liabilities Common stock Retained earnings
January 1, 2019 $ 10,000 300,000 50,000 100,000 160,000
December 31, 2019 $ 20,000 300,000 60,000 130,000 ?
Additional data: Total expenses for the year were $70,000; Dividends paid during the year were $16,000.
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 87. Using the above table, determine the retained earnings as of December 31, 2019? A) $150,000 B) $170,000 C) $110.000 D) $130,000 Answer: D Rationale: Assets – Liabilities - Common stock = Retained earnings ($20,000 + $300,000) - $60,000 - $130,000 = $130,000
Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 88. Using the above table, determine the revenues for the year ending on December 31, 2019? A) $56,000 B) $44,000 C) $32,000 D) $74,000 Answer: A Rationale: Assets – Liabilities - Common Stock = Retained earnings (($20,000 + $300,000) - $60,000 - $130,000 = $130,000) Ending retained earnings + Dividends – Beginning retained earnings = Net income (loss) ($130,000 + $16,000 - $160,000 = $(14,000)) Revenue – Expense = Net income (X - $70,000 = $(14,000)) (X = $56,000)
©Cambridge Business Publishers, 2020 1-38
th
Financial Accounting for Undergraduates, 4 Edition
USE THE FOLLOWING INFORMATION FOR QUESTIONS 89-90. TOTALS
January 1, 2019
December 31, 2019
Current assets All other assets
$30,000 900,000
$ 60,000 900,000
Liabilities
150,000
180,000
Common stock Retained earnings
300,000 480,000
390,000 ?
Additional data: $48,000.
Total expenses for the year were $210,000; Dividends paid during the year were
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 89. Using the above table, determine the retained earnings as of December 31, 2019? A) $390,000 B) $450,000 C) $510,000 D) $330,000 Answer: A Rationale: Assets – Liabilities - Common stock = Retained earnings ($60,000 + $900,000) - $180,000 - $390,000 = $390,000
Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 90. Using the above table, determine the revenues for the year ending on December 31, 2019? A) $222,000 B) $168,000 C) $132,000 D) $ 96,000 Answer: B Rationale: Assets – Liabilities - Common Stock = Retained earnings (($60,000 + $900,000) - $180,000 - $390,000 = $390,000) Ending retained earnings + Dividends – Beginning retained earnings = Net income (loss) (390,000 + $48,000 - $480,000 = $(42,000)) Revenue – Expense = Net income (X - $210,000 = $(42,000)) (X = $168,000)
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-39
Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 91. Chelsea Corporation reported the following information at the end of its first year of operations: Common stock: Sales revenue: Total assets: Total liabilities: Dividends:
$40,000 $210,000 $170,000 $70,000 $30,000
What must have been the expenses for the year? A) $120,000 B) $130,000 C) $ 32,000 D) $150,000 Answer: A Rationale: Assets – Liabilities - Common Stock = Retained earnings ($170,000 - $70,000 - $40,000 = $60,000) Ending retained earnings + Dividends – Beginning retained earnings = Net income (loss) ($60,000 + $30,000 - $0 = $90,000) Expense = Revenue - Net income (X = $210,000 - $90,000) (X = $120,000)
Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 92. Kimick Corporation reported the following information at the end of its first year of operations: Common stock: Sales revenue: Total assets: Total liabilities: Dividends:
$120,000 $630,000 $510,000 $210,000 $ 90,000
What must have been the expenses for the year? A) $450,000 B) $360,000 C) $390,000 D) $ 51,000
©Cambridge Business Publishers, 2020 1-40
th
Financial Accounting for Undergraduates, 4 Edition
Answer: B Rationale: Assets – Liabilities - Common Stock = Retained earnings ($510,000 - $210,000 - $120,000 = $180,000) Ending retained earnings + Dividends – Beginning retained earnings = Net income (loss) ($180,000 + $90,000 - $0 = $270,000) Expense = Revenue - Net income (x = $630,000 - $270,000) (x = $360,000)
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 93. On January 1, 2019, Little Robot invested $300,000 to start Bot Corporation. During the year, Bot Corporation had total revenues of $60,000 and total expenses of $16,000. Cash dividends paid totaled $12,000. What was the balance in Bot Corporation's retained earnings account at the end of the year? A) $314,000 B) $ 32,000 C) $302,000 D) $ 14,000 Answer: B Rationale: Ending retained earnings = Beginning retained earnings - Dividends + Net income X = ($0 - $12,000 + ($60,000 - $16,000)) X = $32,000
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 94. On January 1, 2019, Les Holt invested $900,000 to start Holt Corporation. During the year, Holt Corporation had total revenues of $180,000 and total expenses of $48,000. Cash dividends paid totaled $36,000. What was the balance in Holt Corporation's retained earnings account at the end of the year? A) $ 42,000 B) $942,000 C) $ 96,000 D) $906,000 Answer: C Rationale: Ending retained earnings = Beginning retained earnings - Dividends + Net income X = ($0 - $36,000 + ($180,000 - $48,000)) X = $96,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-41
Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 95. On January 1, 2019, Little Robot invested $300,000 to start Bot Corporation. During the year, Bot Corporation had total revenues of $60,000 and total expenses of $16,000. Cash dividends paid totaled $12,000. What must have been the balance in Bot Corporation's total assets at the end of the year, assuming no liabilities? A) $300,000 B) $ 32,000 C) $332,000 D) $268,000 Answer: C Rationale: Ending retained earnings = Beginning retained earnings - Dividends + Net income X = ($0 - $12,000 + ($60,000 - $16,000)) X = $32,000 Assets = Liabilities + Retained earnings + Contributed capital Y = $0 + $32,000 + $300,000 Y = $332,000
Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 96. On January 1, 2019, Les Holt invested $900,000 to start Holt Corporation. During the year, Holt Corporation had total revenues of $180,000 and total expenses of $48,000. Cash dividends paid totaled $36,000. What must have been the balance in Holt Corporation's total assets at the end of the year, assuming no liabilities? A) $804,000 B) $900,000 C) $ 96,000 D) $996,000 Answer: D Rationale: Ending retained earnings = Beginning retained earnings - Dividends + Net income X = ($0 - $36,000 + ($180,000 - $48,000)) X = $96,000 Assets = Liabilities + Retained earnings + Contributed capital Y = $0 + $96,000 + $900,000 Y = $996,000
©Cambridge Business Publishers, 2020 1-42
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 97. On January 1, 2019, R. Lupin Corporation's retained earnings account had a balance of $1,570,000. During 2019 the company had revenues of $270,000 and expenses of $186,000. On December 31, the company’s retained earnings had a balance of $1,601,000. Determine the amount of dividends paid during 2019. A) $53,000 B) $26,500 C) $85,000 D) $61,500 Answer: A Rationale: Dividends = Beginning retained earnings + Net income – Ending retained earnings (X = $1,570,000 + ($270,000 - $186,000) – $1,601,000) (X = $53,000)
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 98. On January 1, 2019, Pigwidgeon Corporation's retained earnings account had a balance of $4,710,000. During 2019 the company had revenues of $810,000 and expenses of $558,000. On December 31, the company’s retained earnings had a balance of $4,803,000. Determine the amount of dividends paid during 2019. A) $184,500 B) $159,000 C) $ 79,500 D) $255,000 Answer: B Rationale: Dividends = Beginning retained earnings + Net income – Ending retained earnings (X = $4,710,000 + ($810,000 - $558,000) - $4,803,000) (X = $159,000)
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-43
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 99. Nichole Company’s balance sheet as of December 31, 2019 showed total assets of $170,000, and total liabilities of $70,000, and common stock of $64,000. During 2020, the company reported revenues of $64,000, expenses of $50,000, and paid dividends of $16,000. What was the balance in the Retained Earnings account on January 1, 2021? A) $34,000 B) $56,000 C) $36,000 D) $28,000 Answer: A Rationale: 2019 Ending retained earnings = Assets - Liabilities - Common stock (X = $170,000 - $70,000 - $64,000 = $36,000) 2020 Beginning retained earnings = 2019 Ending retained earnings = $36,000 2020 Beginning retained earnings + Net income – Dividends = 2020 Ending retained earnings ($36,000 + ($64,000 - $50,000) - $16,000 = $34,000) 2021 Beginning retained earnings = 2020 Ending retained earnings = $34,000
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 100. CN Company’s balance sheet as of December 31, 2019 showed total assets of $510,000, and total liabilities of $210,000, and common stock of $192,000. During 2020, the company reported revenues of $192,000, expenses of $150,000, and paid dividends of $48,000. What was the balance in the Retained Earnings account on January 1, 2021? A) $ 84,000 B) $102,000 C) $168,000 D) $108,000 Answer: B Rationale: 2019 Ending retained earnings = Assets - Liabilities - Common stock (X = $510,000 - $210,000 - $192,000 = $108,000) 2020 Beginning retained earnings = 2019 Ending retained earnings = $108,000 2020 Beginning retained earnings + Net income – Dividends = 2020 Ending retained earnings ($108,000 + ($192,000 - $150,000) - $48,000 = $102,000) 2021 Beginning retained earnings = 2020 Ending retained earnings = $102,000
©Cambridge Business Publishers, 2020 1-44
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 101. Assuming no other changes except a decrease in assets of $100,000, increase in liabilities of $20,000, and expenses of $120,000, by how much did stockholders' equity increase or decrease and what were revenues for the period? A) Stockholders' equity increased $80,000; revenues were $200,000 B) Stockholders' equity decreased $80,000; revenues were $200,000 C) Stockholders' equity increased $120,000; revenues were $240,000 D) Stockholders' equity decreased $120,000; revenues were $0 Answer: D Rationale: Change in Assets = Change in Liabilities + Change in Stockholders’ equity [(100,000) = $20,000 + X] [(120,000) = X = decrease in Stockholder’s equity] Change in Stockholder’s equity = Revenues – Expenses [($120,000) = X - $120,000] [($120,000) + $120,000 = $0 X = Revenues]
Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 102. Assuming no other changes except a decrease in assets of $300,000, increase in liabilities of $60,000, and expenses of $360,000, by how much did stockholders' equity increase or decrease and what were revenues for the period? A) Stockholders' equity decreased $360,000; revenues were $0 B) Stockholders' equity increased $240,000; revenues were $600,000 C) Stockholders' equity decreased $240,000; revenues were $600,000 D) Stockholders' equity increased $360,000; revenues were $360,000 Answer: A Rationale: Change in Assets = Change in Liabilities + Change in Stockholders’ equity [($300,000) = $60,000 + X] [($360,000) = X = Decrease in Stockholder’s equity] Change in Stockholder’s equity = Revenues – Expenses [($360,000) = X - $360,000] [($360,000) + $360,000 = $0 X = Revenues]
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-45
Topic: Financial Statements LO: 5 Level of Difficulty: DIFFICULT 103. At the beginning of the year, the Stephen Company had total assets of $1,800,000 and total stockholders’ equity of $690,000. During the year, total assets increased by $270,000, and total liabilities increased by $126,000. The company also paid $21,000 in dividends. How much was the net income for the year? A) $144,000 B) $195,000 C) $ 93,000 D) $165,000 Answer: D Rationale: Assets – Stockholder’s equity = Liabilities ($1,800,000 - $690,000 = $1,110,000) Year-end Assets – Year-end Liabilities = year-end Stockholders’ equity [($1,800,000 + $270,000) – ($1,110,000 + $126,000) = X = $834,000] Net income = Ending Stockholders’ equity + Dividends – Beginning Stockholders’ equity (X = $834,000 + $21,000 - $690,000) (X= $165,000)
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 104. Takahashi Company reported the following the following statement of cash flows: Cash flows from operating activities ………….......…. $ 169,120 Cash flows from investing activities ……….……........ (84,700) Cash flows from financing activities…………........... ? Cash balance at the beginning of year ………….....… 25,700 Cash balance at the end of year……………….....…… 160,020 Determine the missing amount (cash flows from financing activities)? A) $232,740 B) $158,320 C) $ 49,900 D) $ 84,420 Answer: C Rationale: Cash flows from financing activities = Change in Cash balance – Cash flows from operations – Cash flows from investing activities (X = [($160,020 – $25,700) – $169,120 – $(84,700)] = $49,900)
©Cambridge Business Publishers, 2020 1-46
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Financial Statements LO: 5 Level of Difficulty: MEDIUM 105. Tomato Company reported the following the following statement of cash flows: Cash flows from operating activities ………….......…. $ 507,360 Cash flows from investing activities ……….……........ (254,100) Cash flows from financing activities…………........... ? Cash balance at the beginning of year ………….....… 77,100 Cash balance at the end of year……………….....…… 480,060 Determine the missing amount (cash flows from financing activities)? A) $253,260 B) $698,220 C) $474,960 D) $149,700 Answer: D Rationale: Cash flows from financing activities = Change in Cash balance – Cash flows from operations – Cash flows from investing activities (X = [($480,060 – $77,100) – $507,360 – $(254,100)] = $149,700
Topic: Additional Financial Statement Disclosures LO: 6 Level of Difficulty: EASY 106. Which of the following is the name of the annual report which all publically traded companies in the United States must file with the Securities and Exchange Commission? A) Auditor’s report B) Form 10-K C) Management Discussion and Analysis D) Notes to the Financial Statements Answer: B Rationale: A publicly traded companies in the United States must file an annual report called a Form 10-K with the Securities and Exchange Commission.
Topic: Additional Financial Statement Disclosures LO: 6 Level of Difficulty: DIFFICULT 107. In which of the following would information regarding the procedures followed to value a company’s assets appear? A) Auditor’s report B) Form 10-K C) Management Discussion and Analysis D) Notes to the Financial Statements Answer: D Rationale: The notes to the financial statements would include information regarding the procedures followed to value a company’s assets.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-47
Topic: Additional Financial Statement Disclosures LO: 6 Level of Difficulty: MEDIUM 108. In which of the following would an opinion regarding the fair presentation of financial statements appear? A) Auditor’s report B) Form 10-K C) Management Discussion and Analysis D) Notes to the Financial Statements Answer: A Rationale: The auditor’s report would include information regarding the fair presentation of financial statements.
Topic: Additional Financial Statement Disclosures LO: 6 Level of Difficulty: MEDIUM 109. In which of the following would a discussion of new markets that a company plans to enter appear? A) Auditor’s report B) Form 10-K C) Management Discussion and Analysis D) Notes to the Financial Statements Answer: C Rationale: The Management Discussion and Analysis would include a discussion of any new markets that a company plans to enter.
Topic: Additional Financial Statement Disclosures LO: 6 Level of Difficulty: MEDIUM 110. Which of the following is not a component of the annual report which some companies provide to their shareholders? A) Auditor’s report B) Statement of SEC Compliance C) Management Discussion and Analysis D) Notes to the Financial Statements Answer: B Rationale: In addition to the four financial statements, components in the annual report to shareholders include the Management Discussion and Analysis, the auditor’s report and the notes to the financial statements.
©Cambridge Business Publishers, 2020 1-48
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Assumptions for the Preparation of Financial Statements LO: 8 Level of Difficulty: EASY 111. Which of the following assumptions that underlie the preparation of financial statements assumes that companies will continue their operations over time? A) Separate economic entity B) Going concern C) Accounting period D) Measuring unit Answer: B Rationale: Under the going concern assumption, companies are assumed to have continuity in that they can be expected to continue in operations over time.
Topic: Qualitative Characteristics of Accounting Information LO: 8 Level of Difficulty: MEDIUM 112. Which one of the following is not a quality of relevant accounting information? A) Timeliness B) Predictive value C) Confirmatory value D) Understandability Answer: D Rationale: Accounting information is relevant when it is timely, predictive about future performance (predictive value) and evaluative about decisions made by investors and creditors in the past (confirmatory value). Accounting information can still be relevant, even though it may not be understandable to all users.
Topic: Qualitative Characteristics of Accounting Information LO: 8 Level of Difficulty: MEDIUM 113. Which one of the following is not a quality of faithful representation of accounting information? A) Timeliness B) Free from error C) Verifiable D) Complete Answer: A Rationale: The faithful representation qualitative characteristic of accounting information has the characteristics of being complete, neutral, free from error, and verifiable. Timeliness is a characteristic of the relevance of accounting information.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-49
Topic: Going Concern Concept LO: 8 Level of Difficulty: EASY 114. The assumption that an entity will continue to operate indefinitely and will not be sold or liquidated is called: A) Objectivity principle B) Going concern concept C) Cost principle D) Accounting entity concept E) None of the above Answer: B Rationale: The going concern concept presumes that an entity will continue to operate indefinitely and will not be sold or liquidated.
Topic: Accounting Entity Concept LO: 8 Level of Difficulty: EASY 115. The accounting entity: A) Is a fundamental concept in accounting B) May be a sole proprietorship, a partnership, or a corporation C) Is an economic unit with identifiable boundaries for which financial information is accumulated and reported D) Maintains a record of activities separate from the economic and personal activities of its owners E) All of the above Answer: E Rationale: The accounting entity, a fundamental concept in accounting, is an economic unit with identifiable boundaries for which financial information is accumulated and reported. An entity may be a sole proprietorship, a partnership, or a corporation. In accumulating financial information, we maintain a record of activities separate from the economic and personal activities of its owners.
Topic: Revenue Recognition Principle LO: 8 Level of Difficulty: EASY 116. The revenue recognition principle: A) States that the recording of revenue should be based on reliable and verifiable evidence. B) Only requires that sales revenue must be earned before it is recorded on the income statement. C) Only requires that sales revenue must be realized or realizable before it is recorded on the income statement. D) States that sales revenue should be recorded when services are performed or goods are sold. E) None of the above Answer: D Rationale: The revenue recognition principle states that sales revenue should be recorded when services are performed or goods are sold. The revenue recognition principle requires two conditions to exist before sales revenue is recorded on the income statement: (1) the revenue must be earned and (2) it must be realized or realizable.
©Cambridge Business Publishers, 2020 1-50
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Full disclosure Principle LO: 8 Level of Difficulty: EASY 117. The full disclosure principle: A) States that personal contact and financial information for each member of senior management for the company be disclosed. B) Requires that company maintain a record of activities separate from the economic and personal activities of its owners. C) Requires that a business disclose all significant financial facts and circumstances in a company’s annual report. D) States that sales revenue should be recorded when services are performed or goods are sold. E) None of the above Answer: C Rationale: The information necessary for a user’s understanding of financial statement should be disclosed in a company’s annual report.
Topic: Cost Principle LO: 8 Level of Difficulty: EASY 118. Which basic principle of accounting states that assets are initially recorded at the amounts paid to acquire the assets? A) Objectivity principle B) Cost principle C) Measuring unit concept D) Going concern concept E) None of the above Answer: B Rationale: The cost principle states that assets and liabilities are initially recorded at the amount paid or obligated to pay. Historically, acquisition cost is considered the proper initial measurement because, at the time the asset is acquired, it represents the fair value of the asset as agreed by both the buyer and the seller.
Topic: Qualitative Characteristics of Accounting Information LO: 8 Level of Difficulty: MEDIUM 119. The qualitative characteristics of accounting information: A) Include relevance which means that information must be timely and contribute to the predictive and evaluative decisions made by investors and creditors. B) Are intended to contribute to the usefulness of financial reporting for investment and credit decisions. C) Include faithful representation which has the characteristic of being complete, neutral, free from error (reliable), and verifiable. D) Include comparability and understandability. E) All of the above Answer: E Rationale: The qualitative characteristics of accounting information are intended to contribute to the usefulness of financial reporting for investment and credit decisions. They include relevance, faithful representation, comparability and understandability.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-51
Topic: Monetary Unit Concept LO: 8 Level of Difficulty: EASY 120. Implementation of the monetary unit concept: A) Permits all economic resources and obligations to be brought into the accounting information system B) Permits all assets, liabilities, and stockholders’ equity to be easily added or subtracted, as necessary, when preparing financial statements C) Means that high rates of inflation cannot cause any distortion in a firm’s financial statements D) All of the above E) None of the above Answer: B Rationale: The monetary unit concept specifies that a monetary unit is to be used to measure and record an entity’s economic activity. Only items that are expressed in these monetary units are included in the financial statements. When all assets, liabilities, and stockholders’ equity are stated in monetary terms, they can be added or subtracted to prepare financial statements.
Topic: Going Concern Concept LO: 8 Level of Difficulty: EASY 121. The going concern concept: A) Applies to entities that are bankrupt and in the process of liquidating B) Dictates that the recording of transactions should be based on reliable and verifiable evidence C) Presumes that an entity will continue to operate indefinitely and will not be sold or liquidated D) Establishes the boundaries of the unit to be accounted for E) None of the above Answer: C Rationale: The going concern concept presumes that an entity will continue to operate indefinitely and will not be sold or liquidated. In the absence of evidence to the contrary, a business is assumed to have an indefinite life.
Topic: Monetary Unit Concept LO: 8 Level of Difficulty: EASY 122. The monetary unit concept: A) Specifies that a monetary unit be used to measure and record an entity’s economic activity B) States that assets are initially measured and recorded at the amounts paid to acquire the assets C) Dictates that the measurement and recording of transactions should be based on reliable and verifiable evidence D) All of the above E) None of the above Answer: A Rationale: The monetary unit concept specifies that a monetary unit is to be used to measure and record an entity’s economic activity. Only items that are expressed in these monetary units are included in the financial statements.
©Cambridge Business Publishers, 2020 1-52
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Monetary Unit Concept LO: 8 Level of Difficulty: EASY 123. Which basic principle of accounting states that a monetary unit is to be used to measure and record an entity’s economic activity? A) Reliability principle B) Cost principle C) Monetary unit concept D) Going concern concept E) None of the above Answer: C Rationale: The monetary unit concept specifies that a monetary unit is to be used to measure and record an entity’s economic activity. Only items that are expressed in these monetary units are included in the financial statements.
Topic: Expense Recognition (Matching) Principle LO: 8 Level of Difficulty: MEDIUM 124. The expense recognition (matching) principle states that: A) Net income is determined by linking operating cash receipts with operating cash payments. B) Assets are linked with liabilities and stockholders’ equity in the balance sheet. C) Net income is determined by linking expenses incurred with related earned sales revenue. D) Owner contributions and owner withdrawals are linked in the statement of stockholders’ equity. E) None of the above Answer: C Rationale: The expense recognition (matching) principle states that net income is determined by linking expenses incurred with related earned sales revenue. Thus, expenses are recorded in the period in which they can help generate the revenues.
Topic: Constraints LO: 8 Level of Difficulty: MEDIUM 125. Which of the following statements is correct? A) Applying accounting procedures requires effort and costs money. B) Two factors constrain the qualitative characteristics of accounting information: materiality and cost-benefit. C) The cost-benefit constraint requires that the benefit derived from the information outweighs the cost of providing it. D) The concept of materiality permits a firm to expense the cost of some assets because their cost is immaterial in amount. E) All of the above Answer: E
Rationale: Two factors constrain the qualitative characteristics of accounting information: materiality and cost-benefit. Applying accounting procedures requires effort and costs money. The concept of materiality permits a firm to expense the cost of some assets, such as small tools, office equipment, or furniture, because their cost is immaterial in amount, that is they are too small to affect the financial picture. The cost-benefit constraint requires that the benefit derived from the information outweighs the cost of providing it.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-53
Exercises Topic: Financial Accounting Information LO: 1, 3 1. Match each of the following terms (1-8) on the left with related explanations (A – H) on the right. 1.
Stockholders
A.
Exists to enable stockholders to readily buy and sell their ownership shares of a corporation.
2.
Sole proprietorship
B.
3.
Managerial accounting
C.
4.
Corporation
D.
5.
Certified public accountants
E.
A voluntary association of two or more persons for the purpose of conducting a business. Independent auditors licensed by the state in which they do their auditing work. Designed primarily for decision makers outside of the company. A business owned by one person.
6.
Partnership
F.
Owners of a corporation.
7.
Financial accounting
G.
8.
New York Stock Exchange
H.
A legal entity created under the laws of a state or the federal government. Designed primarily for decision makers within the company.
F
1.
Stockholders
A.
Exists to enable stockholders to readily buy and sell their ownership shares of a corporation.
E
2.
Sole proprietorship
B.
H
3.
Managerial accounting
C.
G
4.
Corporation
D.
C
5.
Certified public accountants
E.
A voluntary association of two or more persons for the purpose of conducting a business. Independent auditors licensed by the state in which they do their auditing work. Designed primarily for decision makers outside of the company. A business owned by one person.
B
6.
Partnership
F.
Owners of a corporation.
D
7.
Financial accounting
G.
A
8.
New York Stock Exchange
H.
A legal entity created under the laws of a state or the federal government. Designed primarily for decision makers within the company.
Answer:
©Cambridge Business Publishers, 2020 1-54
th
Financial Accounting for Undergraduates, 4 Edition
Topic: The Effect of the Sarbanes-Oxley Act LO: 3 2. Accounting debacles, such as in the case of Enron, brought to light the necessity of accuracy in financial reporting and accountability of management. Describe how the introduction of the Sarbanes-Oxley Act has changed the requirements of financial reporting. Answer: Congress introduced the Sarbanes-Oxley act with the goal of restoring investor trust by reducing the likelihood of future accounting scandals. Among the many changes required by this legislation is that a company’s top management must certify in writing the accuracy of its reported financial statement information. Also, companies must now report on the internal controls put into place to help deter errors in the financial reporting process and to detect them should they occur.
Topic: Business Activities LO: 2 3. Describe the three basic business activities conducted by a company in the production and sale of its products and services. Answer: The three activities are financing, operating and investing. Financing activities include all activities to acquire the capital used to pay for resources such as property, equipment and buildings. This financing can be either equity financing (i.e., selling shares of stock to investors), or debt financing (i.e., borrowing money from creditors). Operating activities refer to the day-to-day activities of producing and selling a product or providing a service. Investing activities encompass the steps involved in deciding which assets the company should acquire or sell with the money that was made available as a result of the financing and operating activities. These assets are ultimately used in the operating activities to generate sales and revenues.
Topic: Applying the Accounting Equation LO: 5 4. Compute the missing financial amounts (a) and (b): ($ millions)
Assets
Liabilities
Company A
$64,800
(a)
Company B
$121,500
Stockholders’ Equity $31,500
$76,800
(b)
Answer: (a) Liabilities = Assets – Stockholders’ Equity = $64,800 - $231,500 = $33,300 (b) Stockholders’ Equity = Assets – Liabilities = $121,500 - $76,800 = $44,700
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-55
Topic: Retained Earnings LO: 5 5. The following information appears in Henrietta Corporation’s records at the end of 2019: Accounts receivable Accounts payable Cash Common stock
$60,000 22,000 26,000 220,000
Land Notes payable Retained earnings Supplies
$160,000 30,000 ? 58,000
a. What is the amount of retained earnings at the end of 2019? b. If the amount of retained earnings at the beginning of 2019 was $36,000, and $16,000 of dividends were declared and paid during 2019, what was the net income (loss) for 2016? Answer: a. $26,000 cash + $60,000 accounts receivable + $58,000 supplies + $160,000 land = $304,000 total assets $304,000 total assets – $30,000 notes payable – $22,000 accounts payable – $220,000 common stock = $32,000 retained earnings b. $32,000 – $36,000 = $4,000 decrease in retained earnings; $4,000 decrease in retained earnings + $16,000 dividends = $12,000 net income
Topic: Constructing a Balance Sheet LO: 5 6. Construct a balance sheet from the financial statements components listed below. Cash Noncash assets Other expenses Retained earnings Liabilities Common stock Operating cash flow Revenues Cost of goods sold
$43,800 85,200 22,800 34,500 62,100 32,400 15,000 38,400 10,800
Answer: Balance Sheet Assets Cash Noncash assets
Total Assets
$43,800 85,200
$129,00 0
Liabilities and Stockholders’ Equity Liabilities
$62,100
Stockholders’ Equity Common stock Retained earnings Stockholders’ equity
32,400 34,500 66,900
Total Liabilities & Stockholders’ Equity
$129,000
©Cambridge Business Publishers, 2020 1-56
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Prepare a Balance Sheet LO: 5 7. Prepare a balance sheet for Carl’s Toy Shop as of July 31, 2019. balances for the month ending July 31, 2019 are: Cash Accounts receivable Office supplies Office equipment Land Sales Cash dividends
$18,800 37,000 6,200 58,300 140,000 110,000 5,300
Carl’s Toy Shop’s account
Rent expense Utilities expense Salaries expense Misc. expenses Retained earnings, July 1 Common stock Accounts payable
$16,600 1,060 32,000 290 24,300 152,250 29,000
Answer: CARL’S TOY SHOP Balance Sheet July 31, 2019 Assets Cash Accounts receivable Office supplies Office equipment Land Total Assets Liabilities Accounts payable Stockholders’ Equity Common stock Retained earnings* Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity
$18,800 37,000 6,200 58,300 140,000 $260,300
$29,000 152,250 79,050 231,300 $260,300
*Retained earnings computation: Retained earnings July 1, 2019 Net Income: Sales – Expenses (salaries, rent, utilities, and misc.) ($110,000 – ($32,000 + $16,600 + $1,060 + $290) = Less: Cash dividends Retained Earnings July 31, 2019
$24,300 60,050 (5,300) $79,050
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-57
Topic: Preparing a Balance Sheet LO: 5 8. The following items and amounts are taken from the 2019 financial records of Minerva, Inc.: Prepaid rent…………...…….... $9,600 Equipment……………............. 87,000 Salaries expense……………… 126,000 Utilities expense…………….... 3,300 Dividends……………..……...... 22,800 Accounts payable……………… 30,600 Cash……………………….…... 28,500 Accounts receivable……..……. 28,500
Salaries payable….....................…. $16,800 Common stock…........................… 31,500 Supplies expense ……................... 14,100 Retained earnings, Jan. 1, 2019..... 36,000 Insurance expense……................... 6,600 Service revenue………................... 225,000 Repair expense……….................... 13,500
Prepare a balance sheet for Minerva, Inc. as of December 31, 2019. Answer: Net Income: $225,000 – $126,000 – $3,300 – $14,100 – $13,500 – $6,600 = $61,500 Retained earnings, December 31, 2019: $36,000 + $61,500 – $22,800 = $74,700 MINERVA, INC. Balance Sheet December 31, 2019 Assets
Liabilities
Cash Accounts receivable Prepaid rent Equipment
$28,500 28,500 9,600 87,000
Total Assets
$153,600
Accounts payable Salaries payable Stockholders’ Equity
$30,600 16,800
Common stock Retained earnings Total Liabilities & Stockholders’ Equity
31,500 74,700 $153,600
©Cambridge Business Publishers, 2020 1-58
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Financial Statements and Financial Statement Components LO: 5 9. Listed below are definitions of financial statement components and financial statements. From this list, find the definition of each of the nine terms numbered 1-9. Place the letter of the term’s definition in the space provided. a. The ownership claims on the assets of the business. b. A listing of a firm’s assets, liabilities, and stockholders’ equity on a given date. c.
The decreases in stockholders’ equity that a firm incurs in the process of generating its sales revenues.
d. The obligations, or debts, that an entity must pay in money or services at some time in the future because of past transactions or events. e. Reports information about cash inflows and cash outflows for a specific time period, classified into operating, investing, and financing activities. f.
The economic resources of an entity that can be expressed in money terms.
g. The increases in stockholders’ equity that results when a firm provides goods and services to its customers. h. Presents information on the events causing a change in stockholders’ equity during a period. i.
Reports a business’s sales revenue and expenses for a given period of time.
1.
Liabilities
6.
Sales revenues
2.
Expenses
7.
Statement of cash flows
3.
Income statement
8.
Assets
4.
Balance sheet
9.
Stockholders’ equity
5.
Statement of stockholders’ equity
Answer: 1. d
Liabilities
6.
g
Sales revenues
2.
c
Expenses
7.
e
Statement of cash flows
3.
i
Income statement
8.
f
Assets
4.
b
Balance sheet
9.
a
Stockholders’ equity
5.
h
Statement of stockholders’ equity
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-59
Topic: Links Between Financial Statements LO: 5 10. To which financial statements are each of the following financial values linked and how are they linked? a. Retained earnings b. Net income c. Cash Answer: a. Retained earnings is linked to the income statement, the statement of stockholders’ equity, and the balance sheet. Net income on the income statement appears as an amount added to beginning retained earnings on the statement of stockholders’ equity. Ending retained earnings on the statement of stockholders’ equity is an amount in the stockholders’ equity section of the balance sheet. b. Net income is linked to the income statement and the statement of stockholders’ equity. Net income on the income statement appears as an amount added to beginning retained earnings on the statement of stockholders’ equity. c.
Cash is linked to the statement of cash flows and the balance sheet. The ending balance is on the balance sheet and the changes in cash are shown on the statement of cash flows.
Topic: Compute Retained Earnings LO: 5 11. At January 31, 2019, Taylor Fast, Inc.’s retained earnings were $50,220 million. During the year, Taylor reported net income of $28,666 million and paid a dividend of $2,690 million. Determine Taylor’s retained earnings as of January 31, 2020. Answer: $50,220 + $28,666 - $2,690 = $76,196 million
Topic: Identifying Sources of Key Financial Data LO: 5 12. Match each item with the financial statement in which each item would most likely appear: Use (I) for Income Statement, (B) for Balance Sheet and (CF) for Statement of Cash Flow. a.
Retained earnings
e.
Cost of goods sold
b.
Revenue
f.
Cash from investing activities
c.
Liabilities
g.
Net change in cash
d.
Common stock
Answer: (B)
a.
Retained earnings
(I)
e.
Cost of goods sold
(I)
b.
Revenue
(CF)
f.
Cash from investing activities
(B)
c.
Liabilities
(CF)
g.
Net change in cash
(B)
d.
Common stock
©Cambridge Business Publishers, 2020 1-60
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Statement of Cash Flows LO: 5 13. Prepare a statement of cash flows for Taylor Fast, Inc. for 2019 given its information below (amounts in millions): Net income Operating cash flow Cash at beginning of year Cash at end of year Investing cash flow Net increase in cash Financing cash flow
$16,299 23,718 28,056 34,905 (14,427) 6,849 ?
Answer: Operating cash flow + Investing cash flow + Financing cash flow = Net increase in cash [$23,718 + ($14,427) + X = $6,849] [X = $6,849 - $23,718 – ($14,427)] [X = ($2,442)] MINERVA, INC. Statement of Cash Flows For Year Ended December 31, 2019 (in millions) Operating cash flow Investing cash flow Financing cash flow Net increase in cash Cash at beginning of year Cash at end of year
$23,718 (14,427) (2,442) $6,849 28,056 $34,905
Topic: Financial Statement Relationships LO: 5 14. At the beginning of 2019, Holiday Hotel, Inc. had $17,806 million in assets and $2,760 million in equity. During 2019, Holiday’s assets decreased by $1,940 million while its equity decreased by $476 million. How much were Holiday’s liabilities at the beginning and end of 2019? Answer: Beginning liabilities = $17,806 million – $2,760 million = $15,046 million. Ending liabilities = ($17,806 million – $1,940 million) – ($2,760 million – $476 million) = $13,582 million.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-61
Topic: Retained Earnings LO: 5 15. In 2019, Luscious Lemons reported net income of $16,335 thousand, retained earnings at the beginning of 2019 of $31,368 thousand, and dividends of $3,240 thousand. What is the amount of Luscious Lemons’ retained earnings at the end of 2019? Answer: Retained earnings beginning + Net income – Dividends = Retained earnings ending = $31,368 + $16,335 - $3,240 = $44,463 thousand.
Topic: Preparing an Income Statement LO: 5 16. The following items and amounts are taken from the 2019 financial records of Shining Light, Inc. Prepare an income statement for the year ending December 31, 2019: Prepaid rent…………................... Equipment………………..........…. Salaries expense……….......…… Utilities expense…….........……… Dividends..................................... Accounts payable………….......… Cash…………………………......... Accounts receivable………..........
$ 6,400 81,000 84,000 2,200 15,200 20,400 19,800 24,000
Salaries payable……........................ $ 12,000 Common stock…….......................… 21,000 Supplies expense.............................. 9,400 Retained earnings, Jan. 1, 2016......... 24,000 Insurance expense……….................. 16,400 Service revenue………..................... 190,000 Repair expense………...................... 9,000
Answer: SHINING LIGHT, INC. Income Statement For Year Ended December 31, 2019 Revenues Service revenue Expenses Salaries expense Utilities expense Supplies expense Repair expense Insurance expense Total expense Net Income
$190,000 $84,000 2,200 9,400 9,000 16,400 121,000 $ 69,000
©Cambridge Business Publishers, 2020 1-62
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Preparing an Income Statement from Account Balances LO: 5 17. On December 31, 2019, Ilse & Hildegard Corporation’s records show the following selected amounts. Cash...................................................... $ 73,500 Accounts receivable.............................. 6,000 Office supplies....................................... 18,000 Office equipment..................................... 60,000 Accounts payable................................... 24,000 Common stock........................................ 3,000 Retained earnings, January 1, 2019....... 108,000
Cash dividends................................... Sales.................................................. Rent expense..................................... Salaries expense................................ Telephone expense............................. Miscellaneous expense......................
$ 3,000 150,000 15,000 78,000 4,500 12,000
Prepare an income statement for Ilse & Hildegard for the year ending December 31, 2019. Answer: ILSE & HILDEGARD CORPORATION Income Statement For Year Ended December 31, 2019 Revenues Sales Expenses Salaries expense Rent expense Telephone expense Miscellaneous expense Total expense Net Income
$150,000 $78,000 15,000 4,500 12,000 109,500 $40,500
Topic: Additional Financial Statement Disclosures LO: 6 18. In addition to the financial statements, list 3 other sources of information reported to external stakeholders? Answer: • Management Discussion and Analysis (MD&A) • Auditor’s report • Notes to financial statements
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-63
Topic: Conceptual Framework for Financial Reporting LO: 8 19. Match each of the following statements to the best qualitative characteristic of accounting information situation that should be considered. Each situation is used only once. 1.
Going concern concept
A.
Although several accounting methods are acceptable, company management chooses a single method and follows that each year.
2.
Relevance
B.
The company’s accountant ignores a $1.60 error in recording an invoice, discovered after the final financial statements were prepared.
3.
Cost-benefit constraint
C.
The accountant estimates the value of accounts receivable, based on recent information about economic forecasts and prior collection trends applicable to the company.
4.
Consistency
D.
Before each board meeting, the company prepares a number of reports that are timeconsuming and expensive that are never used.
5.
Accounting entity concept
E.
In estimating the life of a new piece of equipment, the accounting department assumes that the business will last indefinitely.
6.
Materiality constraint
F.
George Bush, a stockholder of Halliburton, owes a debt to Union Bank for $3,000. This $3,000 is not a debt of Halliburton.
Going concern concept
A.
Although several accounting methods are acceptable, company management chooses a single method and follows that each year.
Answer: E 1.
C
2.
Relevance
B.
The company’s accountant ignores a $1.60 error in recording an invoice, discovered after the final financial statements were prepared.
D
3.
Cost-benefit constraint
C.
The accountant estimates the value of accounts receivable, based on recent information about economic forecasts and prior collection trends applicable to the company.
A
4.
Consistency
D.
Before each board meeting, the company prepares a number of reports that are timeconsuming and expensive that are never used.
F
5.
Accounting entity concept
E.
In estimating the life of a new piece of equipment, the accounting department assumes that the business will last indefinitely.
B
6.
Materiality constraint
F.
George Bush, a stockholder of Halliburton, owes a debt to Union Bank for $3,000. This $3,000 is not a debt of Halliburton.
©Cambridge Business Publishers, 2020 1-64
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Qualitative Characteristics of Accounting Information LO: 8 20. Listed below are definitions of qualitative characteristics, concepts, constraints and principles of accounting information. From this list, find the definition of each of the nine terms numbered 1-9. Place the letter of the term’s definition in the space provided. a. b.
An economic unit with identifiable boundaries for which we accumulate and report financial information. Assets are initially recorded at the amounts paid to acquire the assets.
c.
Net income is determined by linking expenses incurred with the related revenues earned.
d.
The division of the total life of a business into segments based on annual periods.
e.
The recording of transactions should be based on reliable and verifiable evidence.
f.
A monetary unit is to be used to measure and record an entity’s economic activity.
g.
An entity will continue to operate indefinitely and will not be sold or liquidated.
h.
Sales revenue should be recorded when services are performed or goods are sold.
i.
All information necessary for a user’s understanding of financial statements should be disclosed in a company’s annual report.
1.
Expense recognition (matching) principle
2.
Monetary unit concept
3.
Cost principle
4.
Going concern concept
5.
Accounting entity concept
6.
Revenue recognition principle
7.
Full disclosure principle
8.
Accounting period concept
9.
Reliability
Answer: 1.
c
Expense recognition (matching) principle
2.
f
Monetary unit concept
3.
b
Cost principle
4.
g
Going concern concept
5.
a
Accounting entity concept
6.
h
Revenue recognition principle
7.
i
Full disclosure principle
8.
d
Accounting period concept
9.
e
Reliability
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-65
Problems Topic: Preparation of Financial Statements LO: 5 1. The following is selected financial information of Marietta, Inc. for the year ended December 31, 2019 ($ thousands): Cash assets Operating cash flow Sales Stockholders’ equity Financing cash flow Total liabilities Noncash assets Investing cash flow Expenses Net income Cash at beginning of the year
$63,000 54,000 272,400 191,100 (16,200) 93,900 222,000 (7,200) 214,500 57,900 32,400
Prepare an income statement, balance sheet and statement of cash flows for Marietta, Inc. at December 31, 2019. Answer: MARIETTA, INC. Income Statement For Year Ended December 31, 2019 Sales Expenses Net income
$272,400 214,500 $57,900 MARIETTA, INC. Balance Sheet December 31, 2019 Liabilities and Stockholders’ Equity
Assets Cash assets Noncash assets
$63,000 222,000
Total assets
$285,000
Total liabilities Stockholders’ equity Total liabilities and stockholders’ equity
$93,900 191,100 $285,000
MARIETTA, INC. Statement of Cash Flows For Year Ended December 31, 2019 Operating cash flow Investing cash flow Financing cash flow Net change in cash Cash, January 1 Cash, December 31
$54,000 (7,200) (16,200) 30,600 32,400 $63,000
©Cambridge Business Publishers, 2020 1-66
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Preparation of Balance Sheet and Statement of Cash Flows LO: 5 2. The following is selected financial information ($ in millions) from International Investment Services, Inc. for 2019. Cash assets Operating cash flow Sales Stockholders’ equity Financing cash flow Total liabilities Noncash assets Investing cash flow Expenses
$826 1,648 11,140 28 (852) 17,040 16,242 (344) 4,774
Construct a balance sheet and statement of cash flows for International Investment Services, Inc. for 2019. Answer:
Assets
International Investment Services, Inc. Balance Sheet December 31, 2019 Liabilities and Stockholders’ Equity
Cash assets Noncash assets
$ 826 16,242
Total Assets
$17,068
Total liabilities Stockholders’ equity Total liabilities and stockholders’ equity
$17,040 28 $17,068
International Investment Services, Inc. Statement of Cash Flows For Year Ended December 31, 2019 Operating cash flow Investing cash flow Financing cash flow Net change in cash Cash, January 1 Cash, December 31
$1,648 (344) (852) 452 374 $826
©Cambridge Business Publishers, 2020 Test Bank, Chapter 1
1-67
Topic: Preparation of the Financial Statements LO: 5 3. The following is selected financial information for the Schweinfurt Company for the year ended August 5, 2019 (in millions): Cash assets Operating cash flow Sales Stockholders’ equity Financing cash flow Total liabilities Noncash assets Investing cash flow Expenses
$
153 3,498 24,000 2,184 (2,442) 15,984 18,015 (1,134) 20,550
Prepare each of the following financial statements for the Schweinfurt Company in proper form: • Income statement • Balance sheet • Statement of cash flows Answer: SCHWEINFURT COMPANY Income Statement For Year Ended August 5, 2019 Sales Expenses Net income
$24,000 20,550 $ 3,450
Assets
SCHWEINFURT COMPANY Balance Sheet August 5, 2019 Liabilities and Stockholders’ Equity
Cash assets Noncash assets
$ 153 18,015
Total assets
$18,168
Total liabilities Stockholders’ equity Total liabilities and stockholders’ equity
$15,984 2,184 $18,168
SCHWEINFURT COMPANY Statement of Cash Flows For Year Ended August 5, 2019 Operating cash flow Investing cash flow Financing cash flow Net change in cash Cash, August 6, 2018* Cash, August 5, 2019
$3,498 (1,134) (2,442) (78) 231 $ 153
* Cash, August 6, 2018, Computation: Cash (year-end) - Net change in cash = Cash (beginning year) [$153 - ($78) = $231]
©Cambridge Business Publishers, 2020 1-68
th
Financial Accounting for Undergraduates, 4 Edition
Chapter 2 Processing Accounting Information Learning Objectives – Coverage by question True / False
Multiple Choice
Exercises
Problems
LO1 – Identify the five major steps in the accounting cycle.
1-6
1-4
1, 2
LO2 – Analyze and record transactions using the accounting equation.
7-11, 24
5-14, 56-127
3, 4
LO3 – Explain the nature, format, and purpose of an account.
12, 20, 21, 32
15, 35, 48, 128-157
4
1
LO4 – Describe the system of debits and credits and its use in recording transactions.
13-19
16-22
5
1
LO5 – Explain the process of journalizing and posting transactions.
22, 23, 25-31, 33-36
23-34, 36-47, 49, 50
5-7
1-3
LO6 – Describe the trial balance.
37-39
51-55, 158-165
4
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-1
Chapter 2: Processing Accounting Information
True / False Topic: Accounting Cycle LO: 1 1. The first step in the accounting cycle is to record transactions in a journal. Answer: False Rationale: The first step in the accounting cycle is to analyze transactions from source documents. Topic: Accounting Cycle LO: 1 2. The first step in the accounting cycle is to analyze transactions from source documents. Answer: True Rationale: There are five major steps in the accounting cycle. In order, they are: 1) Analyze - analyze transactions for source documents, 2) Record - journalize transactions and prepare unadjusted trail balance, 3) Adjust – journalize adjusting entries and prepare adjusted trial balance, 4) Report – prepare financial statements, and 5) Close – journalize closing entries and prepare post-closing trial balance. Topic: Accounting Cycle LO: 1 3. The first five steps in the accounting cycle occur with equal frequency. Answer: False Rationale: The five steps in the accounting cycle do not occur with equal frequency. Topic: Accounting Cycle LO: 1 4. The accounting cycle step that occurs most frequently is to adjust the general ledger accounts. Answer: False Rationale: A business analyzes and records financial transactions daily during the accounting period, but adjusts general ledger accounts less frequently. Topic: Fiscal Year LO: 1 5. A company’s fiscal year cannot coincide with the calendar year. Answer: False Rationale: A company’s fiscal year often coincides with the calendar year, but it need not.
©Cambridge Business Publishers, 2020 2-2
Financial Accounting for Undergraduates, 4th Edition
Topic: Fiscal Year LO: 1 6. All companies have a fiscal year ending on December 31. Answer: False Rationale: Only about 60% of companies have fiscal year ends that correspond to the calendar year end. Topic: Transaction Analysis LO: 2 7. If Nathan, Inc. purchased equipment on credit from John Company, then the transaction recorded by Nathan would include an increase in a liability and an increase in asset. Answer: True Rationale: The transaction recorded by Nathan would include an increase to an asset (equipment) and an increase to a liability (accounts payable). Topic: Deferred Revenue LO: 2 8. Deferred revenue and unearned revenue both refer to cash that has been received but not yet earned. Answer: True Rationale: Both unearned revenue and deferred revenue refer to fees received before services are performed to earn those fees. Topic: The Double-Entry Accounting System LO: 2 9. Under the double-entry accounting system, no more than two accounts can be affected by each transaction. Answer: False Rationale: Each transaction recorded under the double-entry accounting system must affect at least two accounts. It can affect more than two. Topic: Analyzing Transactions LO: 2 10. When a firm purchases equipment for cash, both assets and stockholders’ equity increase. Answer: False Rationale: The asset equipment will increase, and the asset cash will decrease, with no effect on stockholders’ equity. Topic: Transaction Analysis LO: 2 11. When money is borrowed, both an asset account and a revenue account are increased. Answer: False Rationale: Both an asset account and a liability account are increased when money is borrowed.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-3
Topic: Accounts LO: 3 12. An account is an individual record of increases and decreases in a specific asset, liability, or stockholders’ equity item. Answer: True Rationale: The account is the basic component of an accounting system. An account is created for each individual, asset, liability, and stockholders’ equity item on a company’s financial statements. Topic: Debits and Credits LO: 4 13. Regardless of the business activity recorded, the left side of an account is the debit side and the right side is the credit side. Answer: True Rationale: The terms debit and credit are used to refer to the left side and the right side, respectively. Topic: Normal Balances LO: 4 14. All accounts have normal balances on the debit side. Answer: False Rationale: Asset, dividend, and expense accounts normally have debit balances, while liabilities, common stock, and revenue accounts normally have credit balances. Topic: Normal Balances LO: 4 15. The normal balance in a revenue account is a credit balance. Answer: True Rationale: The normal balance of an account is the side on which increases are recorded. This is because increases in an account are usually greater than, or equal to, the decreases to an account. Assets, dividend, and expense accounts normally have debit balances, whereas liabilities, common stock, and revenue accounts normally have credit balances. Topic: Debits and Credits LO: 4 16. Asset accounts are increased with debit entries. Answer: True Rationale: The normal balance of an account is the side on which increases are recorded. Assets, dividend, and expense accounts normally have debit balances, whereas liabilities, common stock, and revenue accounts normally have credit balances.
©Cambridge Business Publishers, 2020 2-4
Financial Accounting for Undergraduates, 4th Edition
Topic: Debits and Credits LO: 4 17. Expense accounts are increased with credit entries. Answer: False Rationale: Expense accounts are increased with debit entries and decreased with credit entries. Topic: Normal Balances LO: 4 18. The normal balance for an account is the side in which increases are recorded. Answer: True Rationale: The normal balance of an account is the side on which increases are recorded. This is because increases in an account are usually greater than, or equal to, the decreases to an account. Assets, dividend, and expense accounts normally have debit balances, whereas liabilities, common stock, and revenue accounts normally have credit balances. Topic: T-Account LO: 4 19. The typical form of a T-account shows debits on the right and credits on the left. Answer: False Rationale: A T-account tracks debits on the left and credits on the right. Topic: Chart of Accounts LO: 3 20. The chart of accounts is a tabular record in which business activities are analyzed in terms of debits and credits and recorded in chronological order. Answer: False Rationale: The chart of accounts lists the titles and numbers of all accounts found in the general ledger. Topic: Chart of Accounts LO: 3 21. The chart of accounts is also known as the book of original entry. Answer: False Rationale: The general journal is also known as the book of original entry. Topic: Posting LO: 5 22. The process of transferring debit and credit entries from the journal to their related general ledger accounts is called “posting.” Answer: True Rationale: Posting results when debits and credits are entered into the general ledger from the journal.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-5
Topic: Debit and Credit System and Compound Entry LO: 5 23. A compound entry does not necessarily have to maintain total debits equal to total credits. Answer: False Rationale: A compound entry must adhere to the rule: total debits equal total credits. Topic: Transaction Analysis LO: 2 24. The analysis of each transaction must result in equal amounts being recorded as debits and as credits. Answer: True Rationale: Data entries are recorded following a simple set of rules, (convention). The accounting equation (assets = liabilities + stockholders’ equity) must always remain in balance and at least two elements of the equation are always affected. Total debits must equal total credits. Topic: General Ledger LO: 5 25. A general ledger is a grouping of a firm’s permanent accounts. Answer: False Rationale: A general ledger is a listing of each account of a company, including permanent and temporary accounts, and the amounts making up each account. Topic: Journalizing and Posting LO: 5 26. Transactions are first recorded in a journal and then posted to the general ledger. Answer: True Rationale: After an accounting transaction is journalized in the general journal, the debits and credits of each journal entry are immediately transferred (posted) to the general ledger. Topic: Journalizing and Posting LO: 5 27. Transactions are first recorded in the general ledger and then posted to a journal. Answer: False Rationale: Transactions are first recorded in a journal and then posted to the general ledger.
©Cambridge Business Publishers, 2020 2-6
Financial Accounting for Undergraduates, 4th Edition
Topic: Source Documents LO: 5 28. The most important source documents used in analyzing transactions are a firm’s general journal and general ledger. Answer: False Rationale: The general journal and general ledger are not source documents. Source documents are printed forms or computer records that are generated when a firm engages in a business transaction. The source document usually specifies the dollar amount involved, the date of the transaction, and possibly the party dealing with the firm. The source document serves as the basis of analysis for an underlying business event. Topic: Source Documents LO: 5 29. Two examples of source documents are a seller’s invoice and a bank deposit slip. Answer: True Rationale: Source documents are printed forms or computer records that are generated when a firm engages in a business transaction. The source document usually specifies the dollar amount involved, the date of the transaction, and possibly the party dealing with the firm. The source document serves as the basis of analysis for an underlying business event. A seller’s invoice and a bank deposit slip are source documents. Topic: Debits and Credits LO: 5 30. Each transaction entered in a general journal must have equal dollar amounts of debits and credits. Answer: True Rationale: Data entries are recorded following a simple set of rules, (convention). The accounting equation (assets = liabilities + stockholders’ equity) must always remain in balance and at least two elements of the equation are always affected. Total debits must equal total credits. Topic: General Journal LO: 5 31. A general journal has three amount columns: a debit column, a credit column, and a balance column. Answer: False Rationale: A general journal just has two amount columns: a debit column and a credit column. Topic: Chart of Accounts LO: 3 32. A chart of accounts is a list of the title and numerical code of all accounts in the general ledger. Answer: True Rationale: A chart of accounts is a list of the titles of all the accounts in a business’s accounting system. Account titles are grouped by, and in order of, assets, liabilities, stockholders’ equity, revenue, and expenses.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-7
Topic: Journal LO: 5 33. A journal is a record of original entry which presents chronologically, and in one place, the total effect of a business transaction. Answer: True Rationale: A journal, or book of original entry, is a tabular record in which a business’s activities are reflected in terms of debits and credits and recorded in chronological order. A journal organizes information by date. Topic: Compound Journal Entry LO: 5 34. A compound journal entry involves at least three accounts. Answer: True Rationale: A journal entry that involves more than two accounts is called a compound journal entry. Topic: Posting LO: 5 35. Posting is the process of transferring the debits and credits of each journal entry to the appropriate general ledger accounts. Answer: True Rationale: After an accounting transaction is journalized in the general journal, the debits and credits of each journal entry are immediately transferred (posted) to the general ledger. Topic: Posting LO: 5 36. Posting is the process of formally recording a business transaction in the appropriate journal. Answer: False Rationale: Posting is the process of transferring the debits and credits of each journal entry to the appropriate general ledger accounts. Topic: Trial Balance LO: 6 37. A trial balance is a list of the account titles in the general ledger with their respective debit and credit balances. Answer: True Rationale: The trial balance is a listing of all accounts from, the general ledger with their respective debit or credit balance. A trial balance is prepared at the end of an accounting period after all transactions have been recorded. The trial balance shows all general ledger account balances in one location, which facilitates the preparation of financial statements. The trial balance, however, is not a financial statement.
©Cambridge Business Publishers, 2020 2-8
Financial Accounting for Undergraduates, 4th Edition
Topic: Trial Balance LO: 6 38. One reason for taking a trial balance is to determine if the debits and credits in the general ledger are equal. Answer: True Rationale: The trial balance serves as an interim check on whether the sum of the debit balances and the sum of the credit balances from the general ledger accounts are equal. If the totals are not equal, it would indicate the presence of some type of recording error. Topic: Trial Balance LO: 6 39. One reason for preparing a trial balance is to make sure that all of the period’s transactions have been recorded. Answer: False Rationale: A trial balance cannot assure you that all the period’s transactions have been recorded.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-9
Multiple Choice Topic: Accounting Cycle LO: 1 Level of Difficulty: EASY 1. Which of the following is the correct order of the steps in the accounting cycle? A) Adjust, report, analyze, record, and close B) Record, report, analyze, adjust, and close C) Report, analyze, close, record, and adjust D) Analyze, record, adjust, report, and close Answer: D Rationale: The steps in the cycle are to first analyze the transaction, the record it, then make any necessary adjustments, report the results, and finally to close the temporary accounts to ready them for the next period’s activity. Topic: Fiscal Year LO: 1 Level of Difficulty: EASY 2. A company’s fiscal year may: A) Be any portion of a year including a month or quarter B) Be for a period either greater or less than 12 months C) Be the same as the calendar year D) All of the above are true of a company’s fiscal year Answer: C Rationale: A company’s fiscal year must be a complete year, may not be for a period greater or less than 12 months, and may be the same as the calendar year. Topic: Accounting Cycle LO: 1 Level of Difficulty: EASY 3. The first two steps of the accounting cycle, in proper sequence, are: A) Record transactions in a journal and prepare a trial balance. B) Analyze transactions from source documents and post journal entries to general ledger accounts. C) Analyze transactions from source documents and record transactions in a journal. D) Record transactions in a journal and post journal entries to general ledger accounts. Answer: C Rationale: There are five major steps in the accounting cycle. In order, they are: 1) Analyze - analyze transactions for source documents, 2) Record - journalize transactions and prepare unadjusted trail balance, 3) Adjust – journalize adjusting entries and prepare adjusted trial balance, 4) Report – prepare financial statements, and 5) Close – journalize closing entries and prepare post-closing trial balance.
©Cambridge Business Publishers, 2020 2-10
Financial Accounting for Undergraduates, 4th Edition
Topic: Accounting Cycle LO: 1 Level of Difficulty: EASY 4. Which of the following is not among the five major steps in the accounting cycle? A) Record transactions in a journal B) Prepare a chart of accounts C) Adjust the general ledger accounts and prepare an adjusted trial balance D) Analyze transactions from source documents Answer: B Rationale: There are five major steps in the accounting cycle. In order, they are: 1) Analyze—analyze transactions for source documents, 2) Record - journalize transactions and prepare unadjusted trail balance, 3) Adjust—journalize adjusting entries and prepare adjusted trial balance, 4) Report— prepare financial statements, and 5) Close—journalize closing entries and prepare post-closing trial balance. Preparing a chart of accounts is not one of the major steps. Topic: Collection of a Receivable LO: 2 Level of Difficulty: EASY 5. Cash collected on accounts receivable would produce what effect on the balance sheet? A) Increase liabilities and decrease equity B) Decrease liabilities and increase equity C) Increase assets and decrease assets D) Decrease assets and decrease liabilities Answer: C Rationale: Cash collected on accounts receivable produces an increase in cash and a decrease in accounts receivable, both asset accounts. There is no impact on profit and on equity. Topic: Accounting Equation LO: 2 Level of Difficulty: EASY 6. Which of the following is one effect of a purchase of $600 of supplies on credit? A) It would decrease liabilities by $600 B) It would decrease cash assets by $600 C) It would increase liabilities by $600 D) It would decrease retained earnings $600 Answer: C Rationale: The purchase on credit creates an account payable. It would increase liabilities by $600. In addition, the supplies account in the asset section of the balance sheet would also increase. Topic: Analyzing and Recording Transactions LO: 2 Level of Difficulty: MEDIUM 7. Which of the following will properly record the payment of a two-year insurance policy? A) Increase assets and increase retained earnings B) Increase liabilities and decrease retained earnings C) Increase and decrease assets D) Decrease assets and decrease liabilities Answer: C Rationale: Prepaid insurance in increased and cash is decreased, both of which are assets. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-11
Topic: Accounting Transaction LO: 2 Level of Difficulty: EASY 8. An economic event that requires accounting recognition defines: A) An income statement B) An accounting transaction C) The cost principle D) An asset Answer: B Rationale: An accounting transaction is an economic event that must be recorded in the company’s accounting records. Topic: Stockholders’ Equity LO: 2 Level of Difficulty: MEDIUM 9. Which of the following does not affect stockholders’ equity? A) Paying wages to employees B) Receiving an investment of cash from an owner C) Selling goods to customers with payment due in 30 days D) Purchasing equipment with payment due in 30 days Answer: D Rationale: The purchase of equipment (asset) with a payment due in 30 days (liability) does not affect stockholders’ equity. All of the other transactions do. Topic: Stockholders’ Equity LO: 2 Level of Difficulty: MEDIUM 10. Which of the following increases stockholders’ equity? A) Providing services to clients with payment received immediately B) Purchasing supplies for cash C) Receiving payment in advance from a client for service to be performed in the future D) Collecting an amount owed by a client on account Answer: A Rationale: Providing services to clients (service revenue) increases stockholders’ equity. All of the other transactions do not. Topic: Stockholders’ Equity LO: 2 Level of Difficulty: MEDIUM 11. Which of the following decreases stockholders’ equity? A) Purchasing equipment for cash B) Paying monthly rent in cash C) Issuing shares of stock D) Paying cash to settle an account payable Answer: B Rationale: Paying monthly rent (rent expense) decreases stockholders’ equity. transactions do not.
All of the other
©Cambridge Business Publishers, 2020 2-12
Financial Accounting for Undergraduates, 4th Edition
Topic: Stockholders Equity LO: 2 Level of Difficulty: MEDIUM 12. Which of the following has no effect on stockholders’ equity? A) Issuing shares of stock B) Expenses and revenues C) Paying dividends D) None of the above Answer: D Rationale: All of the transactions impact stockholders’ equity. Topic: Dividends LO: 2 Level of Difficulty: EASY 13. The declaration and payment of a dividend by a corporation causes: A) A decrease in assets and a decrease in liabilities. B) A decrease in assets and a decrease in retained earnings C) A decrease in assets and a decrease in common stock D) A decrease in assets and an increase in retained earnings Answer: B Rationale: Declaring dividends decreases retained earnings and payment of dividends decreases assets (cash). Topic: Double-Entry Accounting LO: 2 Level of Difficulty: EASY 14. The double-entry system of debits and credits means that: A) Two pieces of information must be recorded for each transaction--the date and the dollar amount. B) Debits will be recorded twice as often as credits. C) At least two entries, a debit and a credit, must be made for each transaction. D) Each debit and credit will be recorded two times, once in the general ledger and once in the trial balance. Answer: C Rationale: The accounting equation always remains in balance and at least two elements of the equation are always affected. Topic: Accounts LO: 3 Level of Difficulty: EASY 15. An individual record of increases and decreases in specific assets, liabilities, and stockholders’ equity is called: A) An account B) A normal balance C) A general ledger D) A trial balance Answer: A Rationale: The account is the basic component of an accounting system. An account is created for each individual, asset, liability, and stockholders’ equity item on a company’s financial statements.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-13
Topic: Debits and Credits LO: 4 Level of Difficulty: EASY 16. The term debit refers to: A) The left side of an account B) The right side of an account C) The side of an account on which increases are recorded D) Both A and C Answer: A Rationale: The terms debit and credit are used to refer to the left side and the right side, respectively, of an account. Topic: Debits and Credits LO: 4 Level of Difficulty: EASY 17. The term credit refers to: A) The left side of an account B) The right side of an account C) The side of an account on which decreases are recorded D) Both B and C Answer: B Rationale: The terms debit and credit are used to refer to the left side and the right side, respectively, of an account. Topic: Normal Balance LO: 4 Level of Difficulty: EASY 18. The normal balance of an account is: A) The debit side B) The credit side C) The side on which increases are recorded D) The side on which decreases are recorded Answer: C Rationale: The normal balance of an account is the side on which increases are recorded. This is because increases in an account are usually greater than, or equal to, the decreases to an account. Topic: Normal Balance LO: 4 Level of Difficulty: EASY 19. Which of the following accounts normally has a credit balance? A) Accounts Receivable B) Dividends C) Notes Payable D) Rent Expense Answer: C Rationale: Assets, dividend, and expense accounts normally have debit balances, whereas liabilities, common stock, and revenue accounts normally have credit balances. Notes payable is a liability account, so the normal balance would be a credit balance.
©Cambridge Business Publishers, 2020 2-14
Financial Accounting for Undergraduates, 4th Edition
Topic: Normal Balance LO: 4 Level of Difficulty: EASY 20. Which of the following accounts normally has a debit balance? A) Accounts Payable B) Common Stock C) Dividends D) Service Fees Earned Answer: C Rationale: Assets, dividend, and expense accounts normally have debit balances, whereas liabilities, common stock, and revenue accounts normally have credit balances. So, dividends would have a normal debit balance. Topic: Debits and Credits LO: 4 Level of Difficulty: EASY 21. Debits to which accounts result in an increased balance? A) Assets and common stock B) Revenues and assets C) Common stock and expenses D) Assets and expenses Answer: D Rationale: The normal balance of an account is the side on which increases are recorded. Assets, dividend, and expense accounts normally have debit balances. Topic: Debits and Credits LO: 4 Level of Difficulty: MEDIUM 22. In a double-entry accounting system: A) All accounts have normal debit balances B) A debit entry is recorded on the left side of an account C) Liabilities, common stock, and expense accounts all have normal credit balances D) A credit entry records a decrease in an account Answer: B Rationale: The terms debit and credit are used to refer to the left side and the right side, respectively, of an account. Topic: Journalizing and Posting Transactions LO: 5 Level of Difficulty: MEDIUM 23. The Cash T-account of Rainbow, Inc. has a beginning balance of $52,000. During the year, $244,000 was debited and $241,000 was credited to the account. What is the ending balance of cash? A) $55,000 B) $37,000 C) ($ 5,000) D) Cannot be determined from the information given Answer: A Rationale: Beginning cash + Cash receipts – Cash payments = Ending Cash ($52,000 + $244,000 - $241,000) = $55,000 ©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-15
Topic: Journalizing and Posting Transactions LO: 5 Level of Difficulty: MEDIUM 24. The Cash T-account of Firefly, Inc. has a beginning balance of $156,000. During the year, $732,000 was debited and $723,000 was credited to the account. What is the ending balance of cash? A) $111,000 B) ($ 15,000) C) $165,000 D) Cannot be determined from the information given Answer: C Rationale: Beginning cash + Cash receipts – Cash payments = Ending Cash ($156,000 + $732,000 - $723,000) = $165,000 Topic: Analyzing an Account LO: 5 Level of Difficulty: MEDIUM 25. If the beginning Cash account balance of Crossbow, Inc. was $36,800, the ending balance was $20,400, and total cash received during the period was $88,000, what amount of cash was paid out during the period? A) $ 3,600 B) $ 84,800 C) $104,400 D) $ 71,600 Answer: C Rationale: Beginning cash + Cash receipts – Cash payments = Ending Cash ($36,800 + $88,000 - X = $20,400) (X = $ 36,800 + $88,000 – $20,400) = $104,400 Topic: Analyzing an Account LO: 5 Level of Difficulty: MEDIUM 26. If the beginning Cash account balance of Firefly, Inc. was $110,400, the ending balance was $61,200, and total cash received during the period was $264,000, what amount of cash was paid out during the period? A) $ 313,200 B) $ 214,800 C) $ 25,800 D) $ 254,850 Answer: A Rationale: Beginning cash + Cash receipts – Cash payments = Ending Cash ($110,400 + $264,000 - X = $61,200) (X = $110,400 + $264,000 – $61,200) = $313,200
©Cambridge Business Publishers, 2020 2-16
Financial Accounting for Undergraduates, 4th Edition
Topic: Analyzing an Account LO: 5 Level of Difficulty: MEDIUM 27. If the beginning Cash account balance of Crossbow, Inc. was $20,000, the ending balance was $33,600, and the total cash paid out during the period was $64,000, what amount of cash was received during the period? A) $ 74,400 B) $ 77,600 C) $ 9,600 D) $ 93,600 Answer: B Rationale: Beginning cash + Cash receipts – Cash payments = Ending Cash ($20,000 + X - $64,000 = $33,600) (X = $33,600 + $64,000 – $20,000) = $77,600 Topic: Analyzing an Account LO: 5 Level of Difficulty: MEDIUM 28. If the beginning Cash account balance of Firefly, Inc. was $60,000, the ending balance was $100,800, and the total cash paid out during the period was $192,000, what amount of cash was received during the period? A) $280,800 B) $223,200 C) $232,800 D) $ 28,800 Answer: C Rationale: Beginning cash + Cash receipts – Cash payments = Ending Cash ($60,000 + X - $192,000 = $100,800) (X = $100,800 + $192,000 – $60,000) = $232,800 Topic: Analyzing an Account LO: 5 Level of Difficulty: MEDIUM 29. Beginning and ending Cash account balances of Crossbow, Inc. were $19,000 and $8,000, respectively. If total cash received during the period was $37,000, what amount of cash was paid out during the period? A) $ 48,000 B) $ 30,000 C) $ 46,000 D) $ 53,000 Answer: A Rationale: Beginning cash + Cash receipts – Cash payments = Ending Cash ($19,000 + $37,000 - X = $8,000) (X = $19,000 + $37,000 – $8,000) = $48,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-17
Topic: Analyzing an Account LO: 5 Level of Difficulty: MEDIUM 30. Beginning and ending Cash account balances of Firefly, Inc. were $57,000 and 24,000, respectively. If total cash received during the period was $111,000, what amount of cash was paid out during the period? A) $159,000 B) $144,000 C) $ 90,000 D) $138,000 Answer: B Rationale: Beginning cash + Cash receipts – Cash payments = Ending Cash ($57,000 + $111,000 - X = 24,000) (X = 57,000 + $111,000 – $24,000) = $144,000 Topic: Analyzing an Account LO: 5 Level of Difficulty: MEDIUM 31. Beginning and ending Cash account balances of Crossbow, Inc. were $14,000 and $32,000 respectively. If total cash paid out during the period was $30,000, what amount of cash was received during the period? A) $ 24,000 B) $ 48,000 C) $ 40,000 D) $ 36,000 Answer: B Rationale: Beginning cash + Cash receipts – Cash payments = Ending Cash ($14,000 + X - $30,000 = $32,000) (X = $32,000 + $30,000 – $14,000) = $48,000 Topic: Analyzing an Account LO: 5 Level of Difficulty: MEDIUM 32. Beginning and ending Cash account balances of Firefly, Inc. were $42,000 and $96,000 respectively. If total cash paid out during the period was $90,000, what amount of cash was received during the period? A) $ 108,000 B) $ 72,000 C) $ 144,000 D) $ 120,000 Answer: C Rationale: Beginning cash + Cash receipts – Cash payments = Ending Cash ($42,000 + X - $90,000 = $96,000) (X = $96,000 + $90,000 – $42,000) = $144,000
©Cambridge Business Publishers, 2020 2-18
Financial Accounting for Undergraduates, 4th Edition
Topic: Recording Transactions LO: 5 Level of Difficulty: EASY 33. Which of the following journal entries will record the payment of a $2,550 accounts payable originally incurred for Office Supplies? A) Debit Cash; credit Accounts Payable B) Debit Accounts Payable; credit Cash C) Debit Office Supplies; credit Cash D) Debit Office Supplies; credit Accounts Payable Answer: B Rationale: The original entry was: Office supplies Accounts payable
2,550 2,550
The entry to record the payment of cash reduces the liability and reduces cash. Accounts payable 2,550 Cash 2,550 Topic: Recording Transactions LO: 5 Level of Difficulty: EASY 34. A company bills customers for services rendered on account. Which of the following is one part of recording this transaction? A) Debit Service Revenue B) Credit Cash C) Debit Accounts Receivable D) Credit Unearned Revenue Answer: C Rationale: The journal entry includes a debit to Accounts Receivable and a credit to Service Revenue. Topic: Chart of Accounts LO: 3 Level of Difficulty: EASY 35. Account titles are commonly grouped into what five categories in the chart of accounts? A) Current assets, Current liabilities, Noncurrent assets, Noncurrent liabilities, Stockholders’ equity B) Assets, Liabilities, Equity, Revenue, Expenses C) Common stock, Additional paid-in capital, Treasury stock, Retained earnings, Accumulated other comprehensive income or loss D) Cash, Marketable securities, Accounts payable, Long-term debt, Common stock Answer: B Rationale: In the chart of accounts, account titles are commonly grouped into the five categories of: Assets, Liabilities, Equity, Revenues, and Expenses.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-19
Topic: Recording Transactions LO: 5 Level of Difficulty: MEDIUM 36. Maxwell Industries recorded and paid $1,400 advertising for the current month. Which occurred? A) Current assets increase B) Current liabilities decrease C) Net income decreases D) Retained earnings increases Answer: C Rationale: Assets (cash) decrease and Advertising Expense (an operating expense) increases, causing operating income to decrease. Topic: Recording Transactions LO: 5 Level of Difficulty: EASY 37. When invoices are sent to customers billing them for services that have been performed, the correct transaction analysis is: A) Debit Accounts Receivable and credit Service Fees Earned B) Debit Accounts Payable and credit Service Fees Earned C) Debit Service Fees Earned and credit Accounts Receivable D) Debit Cash and credit Service Fees Earned Answer: A Rationale: Service Fees Earned is credited because the work (services) has been performed and the revenue is earned. Accounts Receivable is debited because the customer has not paid for the services performed yet, but will pay sometime in the future. Topic: Recording Transactions LO: 5 Level of Difficulty: EASY 38. Recording the collection of accounts receivable from customers involves: A) Debiting Accounts Receivable and crediting Cash B) Debiting Cash and crediting Service Fees Earned C) Debiting Cash and crediting Accounts Payable D) Debiting Cash and crediting Accounts Receivable Answer: D Rationale: Cash is debited because a cash payment has been received. Accounts Receivable is credited to reflect a reduction (settlement) of the amount owed by customers for services (work) already provided (performed) to (for) them.
©Cambridge Business Publishers, 2020 2-20
Financial Accounting for Undergraduates, 4th Edition
Topic: Recording Transactions LO: 5 Level of Difficulty: EASY 39. Recording a stock issuance in exchange for cash involves: A) Debiting Cash and crediting Notes Payable B) Debiting Cash and crediting Dividends C) Debiting Cash and crediting Common Stock D) Debiting Common Stock and crediting Cash Answer: C Rationale: Cash is debited because a cash payment has been received. Common stock is credited to reflect an increase in the amount of common stock outstanding, due to the issuance of common stock. Topic: Recording Transactions LO: 5 Level of Difficulty: EASY 40. Recording the borrowing of money for which a note is signed involves: A) Debiting Cash and crediting Notes Receivable B) Debiting Cash and crediting Accounts Payable C) Debiting Cash and crediting Service Fees Earned D) Debiting Cash and crediting Notes Payable Answer: D Rationale: Cash is debited because cash payment has been received as a result of borrowing money. Notes Payable is credited to reflect an increase in liabilities, due to the borrowing of money. Topic: Recording Transactions LO: 5 Level of Difficulty: EASY 41. Paying a previously recorded invoice from a supplier (of supplies) involves: A) Debiting Supplies and crediting Cash B) Debiting Accounts Payable and crediting Cash C) Debiting Supplies and crediting Accounts Payable D) Debiting Cash and crediting Supplies Answer: B Rationale: Accounts Payable is debited because an outstanding liability for the purchase of supplies on account has been reduced. Cash is credited to reflect a decrease in cash, due to the payment of money to settle the payable. Topic: Recording Transactions LO: 5 Level of Difficulty: EASY 42. Recording the payment of dividends to shareholders involves: A) Debiting Dividends and crediting Cash B) Debiting Cash and Common Stock C) Debiting Withdrawal Expense and crediting Cash D) Debiting Notes Payable and crediting Cash Answer: A Rationale: Dividends are debited to reflect the cost of paying dividends. Cash is credited to reflect a decrease in cash, due to the payment of dividends. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-21
Topic: General Ledger LO: 5 Level of Difficulty: EASY 43. The general ledger can be described as: A) A list of account titles and balances at a certain date B) A grouping of the accounts used by an organization to prepare its basic financial statements C) A record on which are recorded the increases and decreases of a particular financial statement component, such as cash D) One of the basic financial statements of an organization Answer: B Rationale: The general ledger can be described as a grouping of the accounts used by an organization to prepare its basic financial statements. The general ledger is a listing of each account of a company and the amounts making up each account. Topic: Source Documents LO: 5 Level of Difficulty: EASY 44. Which of the following is a source document? A) Posting reference B) General ledger C) Chart of accounts and a compound journal entry D) Invoice received from seller Answer: D Rationale: Source documents are printed forms or computer records that are generated when a firm engages in a business transaction. The source document usually specifies the dollar amount involved, the date of the transaction, and possibly the party dealing with the firm. The source document serves as the basis of analysis for an underlying business event. A posting reference, general ledger, chart of accounts, and a journal entry all related to the recording of the business event. Topic: Source Documents LO: 5 Level of Difficulty: EASY 45. A printed or written form that is generated when a firm engages in a business transaction defines a: A) Special journal B) Posting reference C) General journal D) Source document Answer: D Rationale: Source documents are printed forms or computer records that are generated when a firm engages in a business transaction. The source document usually specifies the dollar amount involved, the date of the transaction, and possibly the party dealing with the firm. The source document serves as the basis of analysis for an underlying business event.
©Cambridge Business Publishers, 2020 2-22
Financial Accounting for Undergraduates, 4th Edition
Topic: Source Documents LO: 5 Level of Difficulty: EASY 46. Which of the following is not a source document? A) Bank check B) Account in general ledger C) Lease contract D) Invoice sent to customer Answer: B Rationale: Source documents are printed forms or computer records that are generated when a firm engages in a business transaction. The source document usually specifies the dollar amount involved, the date of the transaction, and possibly the party dealing with the firm. The source document serves as the basis of analysis for an underlying business event. A bank check, a lease contract, and an invoice sent to a customer, are all examples of source documents. An account in the general ledger is related to the recording of the business event. Topic: General Journal LO: 5 Level of Difficulty: MEDIUM 47. Which of the following is not true of the general journal? A) It is a record of original entry B) It reflects the entire effect of a transaction in one place C) It receives postings of dollar amounts from the general ledger D) It shows transactions recorded in chronological order Answer: C Rationale: After an accounting transaction is journalized in the general journal, the debits and credits of each journal entry are immediately transferred (posted) to the general ledger, not vice versa. Topic: Chart of Accounts LO: 3 Level of Difficulty: MEDIUM 48. Which of the following is true of a chart of accounts? A) It is the same thing as a trial balance B) It shows the account title and numerical code of all general ledger accounts C) It lists accounts in alphabetical order D) The first accounts listed are the revenue accounts Answer: B Rationale: A chart of accounts is a list of the titles of all the accounts in a business’s accounting system. Account titles are grouped by, and in order of, assets, liabilities, stockholders’ equity, revenue, and expenses.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-23
Topic: Compound Journal Entries LO: 5 Level of Difficulty: MEDIUM 49. Which of the following transactions should be recorded using a compound journal entry? A) Common stock is issued for cash. B) The company receives payment on account from a customer. C) The company pays a two-year insurance premium. D) The company purchases a desk, paying 10% in cash with the balance due in 60 days. Answer: D Rationale: A journal entry that involves more than two accounts is called a compound journal entry. The entry to record the purchase of a desk, paying 10% in cash with the balance due in 60 days is: Desk
XXX Cash Accounts Payable
XXX XXX
Issuing common stock for cash, receiving payment from a customer, and paying a two-year insurance premium all involve only two accounts. Topic: General Journal LO: 5 Level of Difficulty: MEDIUM 50. Which of the following is a correct statement? A) Any type of business transaction may be recorded in the general journal. B) Only compound journal entries are recorded in the general journal. C) The word “journalize” means to transfer information from the general journal to the general ledger. D) The use of a general journal eliminates the need for a general ledger. Answer: A Rationale: The general journal is a record with enough flexibility that any type of business transaction can be recorded in it. Topic: Trial Balance LO: 6 Level of Difficulty: EASY 51. A trial balance that balances is useful because it indicates with certainty that: A) All entries into accounts during the period were made correctly. B) All accounts have normal balances. C) Total debits in the general ledger equal total credits. D) All of the above Answer: C Rationale: The trial balance serves as an interim check on whether the sum of the debit balances and the sum of the credit balances from the general ledger accounts are equal. If the totals are not equal, it would indicate the presence of some type of recording error. The trial balance also shows all general ledger account balances in one location, which facilitates the preparation of financial statements. The trial balance, however, is not a financial statement.
©Cambridge Business Publishers, 2020 2-24
Financial Accounting for Undergraduates, 4th Edition
Topic: Trial Balance LO: 6 Level of Difficulty: EASY 52. A trial balance can be described as: A) A list of general ledger account titles and balances at a certain date B) A grouping of the accounts used by an organization to prepare its basic financial statements C) A record on which are recorded the increases and decreases of a particular financial statement component, such as cash D) One of the basic financial statements of an organization Answer: A Rationale: The trial balance is a listing of all accounts from, the general ledger with their respective debit or credit balance. A trial balance is prepared at the end of an accounting period after all transactions have been recorded. Topic: Trial Balance LO: 6 Level of Difficulty: MEDIUM 53. A trial balance: A) Must balance when it is first prepared B) Will balance only if there are no errors in the general ledger accounts C) Will balance only if the total debits and total credits in the general ledger are equal D) Both B) and C) Answer: C Rationale: The trial balance serves as an interim check on whether the sum of the debit balances and the sum of the credit balances from the general ledger accounts are equal. If the totals are not equal, it would indicate the presence of some type of recording error. However, it is possible for errors to exist in a trial balance where total debits equal total credits. Topic: Trial Balance LO: 6 Level of Difficulty: MEDIUM 54. Which of the following errors may escape detection when a trial balance is taken? A) Failing to record or enter a particular transaction B) Entering a transaction more than once or entering one or more amounts in the wrong accounts C) Making an error that exactly offsets the effect of another error D) All of the above Answer: D Rationale: If any of these errors occurred, the debits and credits of the trial balance would still be equal; therefore the errors may go undetected.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-25
Topic: Trial Balance LO: 6 Level of Difficulty: EASY 55. Which of the following shows all the general ledger account balances in one place? A) Chart of accounts B) Special journal C) Trial balance D) General journal Answer: C Rationale: The trial balance shows all general ledger account balances in one location, which facilitates the preparation of financial statements. The trial balance, however, is not a financial Topic: Analyzing Transactions LO: 2 Level of Difficulty: EASY 56. If a company paid off $200,000 of its accounts payable, the effect of this transaction as reflected in the accounting equation are: A) Total assets and total liabilities decrease B) Total assets and total liabilities increase C) Total assets, total liabilities and stockholders’ equity are all unchanged D) Total assets decrease and total liabilities increase Answer: A Rationale: Accounts Payable Cash
200,000 200,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: EASY 57. Lumos Consulting performed consulting services during June on account, and collections for these services were not received until August. What effect did performing these services have on the accounting equation during June? A) Increase in assets and decrease in stockholder’s equity B) Increase in assets and increase in stockholder’s equity C) Decrease in assets and decrease in stockholder’s equity D) Decrease in assets and increase in stockholder’s equity Answer: B Rationale: Consulting services revenue Accounts Payable
XXX XXX
©Cambridge Business Publishers, 2020 2-26
Financial Accounting for Undergraduates, 4th Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 58. A company incurred $60,000 (to be paid next year) for the current year's advertising activities. What would the effect of this transaction on the current year’s accounting equation? A) No effect on Assets; $60,000 decrease in Liabilities; $60,000 increase in Stockholders’ Equity B) $60,000 increase in Assets; $60,000 increase in Liabilities; No effect on Stockholders’ Equity C) $60,000 increase in Assets; No effect on Liabilities; $60,000 increase in Stockholders’ Equity D) No effect on Assets; $60,000 increase in Liabilities; $60,000 decrease in Stockholders’ Equity Answer: D Rationale: Advertising expense Advertising expense payable
60,000 60,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 59. A company incurred $180,000 (to be paid next year) for the current year's advertising activities. What would the effect of this transaction on the current year’s accounting equation? A) No effect on Assets; $180,000 decrease in Liabilities; $180,000 increase in Stockholders’ Equity B) $180,000 increase in Assets; $180,000 increase in Liabilities; No effect on Stockholders’ Equity C) $180,000 increase in Assets; No effect on Liabilities; $180,000 increase in Stockholders’ Equity D) No effect on Assets; $180,000 increase in Liabilities; $180,000 decrease in Stockholders’ Equity Answer: D Rationale: Advertising expense Advertising expense payable
180,000 180,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 60. A company incurred $40,000 (to be paid next year) for the current year's insurance coverage. What would the effect of this transaction on the current year’s accounting equation? A) No effect on Assets; $40,000 decrease in Liabilities; $40,000 increase in Stockholders’ Equity B) $40,000 increase in Assets; $40,000 increase in Liabilities; No effect on Stockholders’ Equity C) $40,000 increase in Assets; No effect on Liabilities; $40,000 increase in Stockholders’ Equity D) No effect on Assets; $40,000 increase in Liabilities; $40,000 decrease in Stockholders’ Equity Answer: D Rationale: Insurance expense Insurance expense payable
40,000 40,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-27
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 61. A company incurred $120,000 (to be paid next year) for the current year's insurance coverage. What would the effect of this transaction on the current year’s accounting equation? A) No effect on Assets; $120,000 decrease in Liabilities; $120,000 increase in Stockholders’ Equity B) $120,000 increase in Assets; $120,000 increase in Liabilities; No effect on Stockholders’ Equity C) $120,000 increase in Assets; No effect on Liabilities; $120,000 increase in Stockholders’ Equity D) No effect on Assets; $120,000 increase in Liabilities; $120,000 decrease in Stockholders’ Equity Answer: D Rationale: Insurance expense Insurance expense payable
120,000 120,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 62. To take advantage of a zero percent rent increase for the coming year, a company paid, at year-end, $150,000 rent for the first three months of the next year. What would the effect of this transaction on the company’s year-end accounting equation? A) No effect on Assets; $150,000 decrease in Liabilities; $150,000 increase in Stockholders’ Equity B) $150,000 increase in Assets; $150,000 increase in Liabilities; No effect on Stockholders’ Equity C) $150,000 increase in Assets; No effect on Liabilities; $150,000 increase in Stockholders’ Equity D) No effect on Assets; No effect on Liabilities; No effect on Stockholders’ Equity Answer: D Rationale: Prepaid rent Cash
150,000 150,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 63. To take advantage of a zero percent rent increase for the coming year, a company paid, at year-end, $450,000 rent for the first three months of the next year. What would the effect of this transaction on the company’s year-end accounting equation? A) No effect on Assets; $450,000 decrease in Liabilities; $450,000 increase in Stockholders’ Equity B) $450,000 increase in Assets; $450,000 increase in Liabilities; No effect on Stockholders’ Equity C) $450,000 increase in Assets; No effect on Liabilities; $450,000 increase in Stockholders’ Equity D) No effect on Assets; No effect on Liabilities; No effect on Stockholders’ Equity Answer: D Rationale: Prepaid rent Cash
450,000 450,000
©Cambridge Business Publishers, 2020 2-28
Financial Accounting for Undergraduates, 4th Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 64. A company received a $24,000 payment for services to be performed over the next few months. What would the effect of this transaction on the current year’s accounting equation? A) No effect on Assets; $24,000 decrease in Liabilities; $24,000 increase in Stockholders’ Equity B) $24,000 increase in Assets; $24,000 increase in Liabilities; No effect on Stockholders’ Equity C) $24,000 increase in Assets; No effect on Liabilities; $24,000 increase in Stockholders’ Equity D) No effect on Assets; $24,000 increase in Liabilities; $24,000 decrease in Stockholders’ Equity Answer: B Rationale: Cash
24,000 Unearned revenue
24,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 65. A company received a $72,000 payment for services to be performed over the next few months. What would the effect of this transaction on the current year’s accounting equation? A) No effect on Assets; $72,000 decrease in Liabilities; 72,000 increase in Stockholders’ Equity B) $72,000 increase in Assets; $72,000 increase in Liabilities; No effect on Stockholders’ Equity C) $72,000 increase in Assets; No effect on Liabilities; $72,000 increase in Stockholders’ Equity D) No effect on Assets; $72,000 increase in Liabilities; $72,000 decrease in Stockholders’ Equity Answer: B Rationale: Cash
72,000 Unearned revenue
72,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 66. A company received $11,000 cash in exchange for 200 shares of the company’s common stock. What would the effect of this transaction on the current year’s accounting equation? A) No effect on Assets; $11,000 decrease in Liabilities; $11,000 increase in Stockholders’ Equity B) $11,000 increase in Assets; $11,000 increase in Liabilities; No effect on Stockholders’ Equity C) $11,000 increase in Assets; No effect on Liabilities; $11,000 increase in Stockholders’ Equity D) No effect on Assets; $11,000 increase in Liabilities; $11,000 decrease in Stockholders’ Equity Answer: C Rationale: Cash
11,000 Common stock
11,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-29
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 67. A company received $33,000 cash in exchange for 200 shares of the company’s common stock. What would the effect of this transaction on the current year’s accounting equation? A) No effect on Assets; $33,000 decrease in Liabilities; $33,000 increase in Stockholders’ Equity B) $33,000 increase in Assets; $33,000 increase in Liabilities; No effect on Stockholders’ Equity C) $33,000 increase in Assets; No effect on Liabilities; $33,000 increase in Stockholders’ Equity D) No effect on Assets; $33,000 increase in Liabilities; $33,000 decrease in Stockholders’ Equity Answer: C Rationale: Cash
33,000 Common stock
33,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 68. To meet its cash flow needs, a company obtained a 6 month bank loan in the amount of $10,000. Annual interest on the loan (note payable) is 10%, payable when the note is due. What would the effect of this transaction on the company’s current month accounting equation? A) No effect on Assets; $10,000 decrease in Liabilities; $10,000 increase in Stockholders’ Equity B) $10,000 increase in Assets; $10,000 increase in Liabilities; No effect on Stockholders’ Equity C) $10,000 increase in Assets; No effect on Liabilities; $10,000 increase in Stockholders’ Equity D) No effect on Assets; $10,000 increase in Liabilities; $10,000 decrease in Stockholders’ Equity Answer: B Rationale: Cash
10,000 Notes payable
10,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 69. To meet its cash flow needs, a company obtained a 6 month bank loan in the amount of $30,000. Annual interest on the loan (note payable) is 10%, payable when the note is due. What would the effect of this transaction on the company’s current month accounting equation? A) No effect on Assets; $30,000 decrease in Liabilities; $30,000 increase in Stockholders’ Equity B) $30,000 increase in Assets; $30,000 increase in Liabilities; No effect on Stockholders’ Equity C) $30,000 increase in Assets; No effect on Liabilities; $30,000 increase in Stockholders’ Equity D) No effect on Assets; 30,000 increase in Liabilities; $30,000 decrease in Stockholders’ Equity Answer: B Rationale: Cash
30,000 Notes payable
30,000
©Cambridge Business Publishers, 2020 2-30
Financial Accounting for Undergraduates, 4th Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 70. At the beginning of the month, a company purchased a new truck for $45,000, paying $21,000 cash and agreeing to pay the balance over 12 months through a no-interest financing offer provided by the car dealer. The entry to record the purchase of the truck is recorded at month-end. What would the effect of this transaction on the company’s current month-end accounting equation? (Hint: First financing payment was made before current month-end.) A) No effect on Assets; $45,000 decrease in Liabilities; $45,000 increase in Stockholders’ Equity B) $22,000 increase in Assets; $22,000 increase in Liabilities; No effect on Stockholders’ Equity C) $45,000 increase in Assets; No effect on Liabilities; $45,000 increase in Stockholders’ Equity D) No effect on Assets; $24,000 increase in Liabilities; $24,000 decrease in Stockholders’ Equity Answer: B Rationale: Truck
45,000 Cash Accounts payable
Cost of Truck Less cash paid Balance financed by car dealer
23,000* 22,000** $45,000 (21,000) $24,000 / 12 months = $2,000 per month
*Total cash paid, at the end of month 1: Initial payment 1st month’s financing payment Total
$21,000 2,000 $23,000*
**Total accounts payable, at the end of month 1: Initial payable amount Less: 1st month’s financing payment Total
$24,000 (2,000) $22,000**
Total change in assets = $45,000 + ($23,000) = $22,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-31
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 71. At the beginning of the month, a company purchased a new truck for $135,000, paying $63,000 cash and agreeing to pay the balance over 12 months through a no-interest financing offer provided by the car dealer. The entry to record the purchase of the truck is recorded at month-end. What would the effect of this transaction on the company’s current month-end accounting equation? (Hint: First financing payment was made before current month-end.) A) No effect on Assets; $135,000 decrease in Liabilities; $135,000 increase in Stockholders’ Equity B) $66,000 increase in Assets; $66,000 increase in Liabilities; No effect on Stockholders’ Equity C) $135,000 increase in Assets; No effect on Liabilities; $135,000 increase in Stockholders’ Equity D) No effect on Assets; $72,000 increase in Liabilities; $72,000 decrease in Stockholders’ Equity Answer: B Rationale: Truck
135,000 Cash Accounts payable
Cost of Truck Less cash paid Balance financed by car dealer
69,000* 66,000** $135,000 (63,000) $72,000 / 12 months = $6,000 per month
*Total cash paid, at the end of month 1: Initial payment 1st month’s financing payment Total
$63,000 6,000 $69,000*
**Total accounts payable, at the end of month 1: Initial payable amount Less: 1st month’s financing payment Total
$72,000 (6,000) $66,000**
Total change in assets = $135,000 + ($69,000) = $66,000 Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 72. A company performed $8,635 of services and received $3,000 in cash with the remaining amount to be paid in 60 days with no interest. What would the effect of this transaction on the company’s current month-end accounting equation? A) $3,000 increase in Assets; $5,635 decrease in Liabilities; $8,635 increase in Stockholders’ Equity B) $8,635 increase in Assets; $8,635 increase in Liabilities; No effect on Stockholders’ Equity C) $5,635 increase in Assets; No effect on Liabilities; $5,635 increase in Stockholders’ Equity D) $8,635 increase in Assets; No effect on Liabilities; $8,635 increase in Stockholders’ Equity Answer: D Rationale: Cash Accounts Receivable Fee Revenue
3,000 5,635 8,635
Total change in assets = $3,000 + $5,635 = $8,635
©Cambridge Business Publishers, 2020 2-32
Financial Accounting for Undergraduates, 4th Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 73. A company performed $25,905 of services and received $9,000 in cash with the remaining amount to be paid in 60 days with no interest. What would the effect of this transaction on the company’s current month-end accounting equation? A) $9,000 increase in Assets; $16,905 decrease in Liabilities; $25,905 increase in Stockholders’ Equity B) $25,905 increase in Assets; $25,905 increase in Liabilities; No effect on Stockholders’ Equity C) $16,905 increase in Assets; No effect on Liabilities; $16,905 increase in Stockholders’ Equity D) $25,905 increase in Assets; No effect on Liabilities; $25,905 increase in Stockholders’ Equity Answer: D Rationale: Cash Accounts receivable Fee revenue
9,000 16,905 25,905
Total change in assets = $9,000 + $16,905 = $25,905 Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 74. A company paid employee wages of $24,000 for the month. What would the effect of this transaction on the current month’s accounting equation? A) No effect on Assets; $24,000 decrease in Liabilities; $24,000 increase in Stockholders’ Equity B) $24,000 increase in Assets; $24,000 increase in Liabilities; No effect on Stockholders’ Equity C) $24,000 decrease in Assets; No effect on Liabilities; $24,000 decrease in Stockholders’ Equity D) $24,000 decrease in Assets; $24,000 decrease in Liabilities; No effect on Stockholders’ Equity Answer: C Rationale: Wage expense Cash
24,000 24,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 75. A company paid employee wages of $72,000 for the month. What would the effect of this transaction on the current month’s accounting equation? A) No effect on Assets; $72,000 decrease in Liabilities; $72,000 increase in Stockholders’ Equity B) $72,000 increase in Assets; $72,000 increase in Liabilities; No effect on Stockholders’ Equity C) $72,000 decrease in Assets; No effect on Liabilities; $72,000 decrease in Stockholders’ Equity D) $72,000 decrease in Assets; $72,000 decrease in Liabilities; No effect on Stockholders’ Equity Answer: C Rationale: Wage expense Cash
72,000 72,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-33
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 76. A company received payment of $10,000 from a customer that had previously received services performed on account. What would the effect of this transaction on the company’s current month accounting equation? A) No effect on Assets; No effect on Liabilities; No effect on Stockholders’ Equity B) $10,000 increase in Assets; $10,000 increase in Liabilities; No effect on Stockholders’ Equity C) $10,000 increase in Assets; No effect on Liabilities; $10,000 increase in Stockholders’ Equity D) No effect on Assets; $10,000 increase in Liabilities; $10,000 decrease in Stockholders’ Equity Answer: A Rationale: Cash
10,000 Accounts receivable
10,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 77. A company received payment of $30,000 from a customer that had previously received services performed on account. What would the effect of this transaction on the company’s current month accounting equation? A) No effect on Assets; No effect on Liabilities; No effect on Stockholders’ Equity B) $30,000 increase in Assets; $30,000 increase in Liabilities; No effect on Stockholders’ Equity C) $30,000 increase in Assets; No effect on Liabilities; $30,000 increase in Stockholders’ Equity D) No effect on Assets; $30,000 increase in Liabilities; $30,000 decrease in Stockholders’ Equity Answer: A Rationale: Cash
30,000 Accounts receivable
30,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 78. A company paid a cash dividend of $24,000 to stockholders. What would the effect of this transaction on the current month’s accounting equation? A) No effect on Assets; $24,000 decrease in Liabilities; $24,000 increase in Stockholders’ Equity B) $24,000 increase in Assets; $24,000 increase in Liabilities; No effect on Stockholders’ Equity C) $24,000 decrease in Assets; No effect on Liabilities; $24,000 decrease in Stockholders’ Equity D) $24,000 decrease in Assets; $24,000 decrease in Liabilities; No effect on Stockholders’ Equity Answer: C Rationale: Dividends
24,000 Cash
24,000
©Cambridge Business Publishers, 2020 2-34
Financial Accounting for Undergraduates, 4th Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 79. A company paid a cash dividend of $72,000 to stockholders. What would the effect of this transaction on the current month’s accounting equation? A) No effect on Assets; $72,000 decrease in Liabilities; $72,000 increase in Stockholders’ Equity B) $72,000 increase in Assets; $72,000 increase in Liabilities; No effect on Stockholders’ Equity C) $72,000 decrease in Assets; No effect on Liabilities; $72,000 decrease in Stockholders’ Equity D) $72,000 decrease in Assets; $72,000 decrease in Liabilities; No effect on Stockholders’ Equity Answer: C Rationale: Dividends
72,000 Cash
72,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 80. Anisha Company had a transaction that caused a $30,000 increase in both assets and liabilities. This transaction could have been a(n): A) Purchase of office equipment for $44,000, paying $14,000 cash and issuing a note payable for the balance B) Investment of $30,000 cash in the business by the stockholders C) Purchase of office equipment for $30,000 cash D) Repayment of a $30,000 bank loan Answer: A Rationale: The purchase of office equipment for $44,000 paying $14,000 cash and issuing a note payable for the balance is the only transaction that increases both assets and liabilities by $30,000. Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 81. Li Company had a transaction that caused a $90,000 increase in both assets and liabilities. This transaction could have been a(n): A) Purchase of office equipment for $132,000, paying $42,000 cash and issuing a note payable for the balance B) Investment of $90,000 cash in the business by the stockholders C) Purchase of office equipment for $90,000 cash D) Repayment of a $90,000 bank loan Answer: A Rationale: The purchase of office equipment for $132,000 paying $42,000 cash and issuing a note payable for the balance is the only transaction that increases both assets and liabilities by $90,000.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-35
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 82. Didwania Company had a transaction that caused a $40,000 decrease in both assets and liabilities. This transaction could have been a(n): A) Purchase of office equipment for $54,000, paying $14,000 cash and issuing a note payable for the balance B) Investment of $40,000 cash in the business by the stockholders C) Purchase of office equipment for $40,000 cash D) Repayment of a $40,000 bank loan Answer: D Rationale: The repayment of a $40,000 bank loan is the only transaction that decreases both assets and liabilities by $40,000. Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 83. Aashish Company had a transaction that caused a $120,000 decrease in both assets and liabilities. This transaction could have been a(n): A) Purchase of office equipment for $162,000, paying $42,000 cash and issuing a note payable for the balance B) Investment of $120,000 cash in the business by the stockholders C) Purchase of office equipment for $120,000 cash D) Repayment of a $120,000 bank loan Answer: D Rationale: The repayment of a $120,000 bank loan is the only transaction that decreases both assets and liabilities by $120,000. Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 84. Sayali Company had a transaction that caused a $50,000 increase in both assets and stockholders’ equity. This transaction could have been a(n): A) Purchase of office equipment for $64,000, paying $14,000 cash and issuing a note payable for the balance B) Investment of $50,000 cash in the business by the stockholders C) Purchase of office equipment for $50,000 cash D) Repayment of a $50,000 bank loan Answer: B Rationale: The investment of $50,000 cash in the business by stockholders is the only transaction that increases both assets and stockholders’ equity by $50,000.
©Cambridge Business Publishers, 2020 2-36
Financial Accounting for Undergraduates, 4th Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 85. Xia Company had a transaction that caused a $150,000 increase in both assets and stockholders’ equity. This transaction could have been a(n): A) Purchase of office equipment for $192,000, paying $42,000 cash and issuing a note payable for the balance B) Investment of $150,000 cash in the business by the stockholders C) Purchase of office equipment for $150,000 cash D) Repayment of a $150,000 bank loan Answer: B Rationale: The investment of $150,000 cash in the business by stockholders is the only transaction that increases both assets and stockholders’ equity by $150,000. Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 86. Howie Company had a transaction that had no effect on assets, liabilities, or on stockholders’ equity. This transaction could have been a(n): A) Purchase of office equipment for $74,000, paying $14,000 cash and issuing a note payable for the balance B) Investment of $60,000 cash in the business by the stockholders C) Purchase of office equipment for $60,000 cash D) Repayment of a $60,000 bank loan Answer: C Rationale: The purchase of office equipment for $60,000 cash, is the only transaction that has no effect on assets, liabilities, or on stockholders’ equity. Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 87. Fernando Company had a transaction that had no effect on assets, liabilities, or on stockholders’ equity. This transaction could have been a(n): A) Purchase of office equipment for $222,000, paying $42,000 cash and issuing a note payable for the balance B) Investment of $180,000 cash in the business by the stockholders C) Purchase of office equipment for $180,000 cash D) Repayment of a $180,000 bank loan Answer: C Rationale: The purchase of office equipment for $180,000 cash, is the only transaction that has no effect on assets, liabilities, or on stockholders’ equity.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-37
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 88. A transaction caused a $200,000 increase in both assets and total liabilities. This transaction could have been: A) Purchase for office equipment for $200,000 cash B) Repayment of a $200,000 bank loan C) Investment of $200,000 cash in the business by the owner D) Purchase of office equipment for $240,000, paying $40,000 cash and issuing a note payable for the balance Answer: D Rationale: The purchase of office equipment for $240,000, paying $40,000 cash and issuing a note payable for the balance, is the only transaction that increases both assets and liabilities by $200,000. Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 89. A transaction caused a $600,000 increase in both assets and total liabilities. This transaction could have been: A) Purchase for office equipment for $600,000 cash B) Repayment of a $600,000 bank loan C) Investment of $600,000 cash in the business by the owner D) Purchase of office equipment for $720,000, paying $120,000 cash and issuing a note payable for the balance Answer: D Rationale: The purchase of office equipment for $720,000, paying $120,000 cash and issuing a note payable for the balance is the only transaction that increases both assets and liabilities by $600,000. Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 90. Suzanne Mi, starting her own business, made an investment of a building to the company. The building is valued at $400,000 with a $360,000 outstanding mortgage payable. The effect of this transaction on the accounting equation of the business would be to: A) Increase assets by $40,000 B) Increase assets by $360,000 C) Increase stockholders’ equity by $40,000 D) Increase stockholders’ equity by $400,000 Answer: C Rationale: Investment of building
Assets $400,000
= =
Liabilities $360,000
+ +
Stockholders' Equity $40,000
©Cambridge Business Publishers, 2020 2-38
Financial Accounting for Undergraduates, 4th Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 91. Bob Smith, starting his own business, made an investment of a building to the company. The building is valued at $1,200,000 with a $1,080,000 outstanding mortgage payable. The effect of this transaction on the accounting equation of the business would be to: A) Increase assets by $120,000 B) Increase assets by $1,080,000 C) Increase stockholders’ equity by $120,000 D) Increase stockholders’ equity by $1,200,000 Answer: C Rationale: Investment of building
Assets $1,200,000
= =
Liabilities $1,080,000
+ +
Stockholders' Equity $120,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 92. The accounting equation for Kangaroo Enterprises is as follows: Assets $240,000
= =
Liabilities $120,000
+ +
Stockholders' Equity $120,000
If the company now purchases office equipment on account for $20,000, the accounting equation will change to: Assets Liabilities Stockholders' Equity A) $260,000 = $132,000 + $128,000 B) $260,000 = $140,000 + $120,000 C) $240,000 = $120,000 + $120,000 D) $260,000 = $120,000 + $140,000 Answer: B Rationale: Original Balance Purchase Equipment Total
Assets $240,000 $20,000 $260,000
= = = =
Liabilities $120,000 $20,000 $140,000
+ + + +
Stockholders' Equity $120,000 _________ $120,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-39
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 93. The accounting equation for Goel Enterprises is as follows: = =
Assets $720,000
Liabilities $360,000
+ +
Stockholders' Equity $360,000
If the company now purchases office equipment on account for $60,000, the accounting equation will change to: A) B) C) D)
Assets Liabilities $780,000 = $396,000 $780,000 = $420,000 $720,000 = $360,000 $780,000 = $360,000
Stockholders' Equity + $384,000 + $360,000 + $360,000 + $420,000
Answer: B Rationale: = = = =
Assets $720,000 $60,000 $780,000
Original Balance Purchase Equipment Total
+ + + +
Liabilities $360,000 $60,000 $420,000
Stockholders' Equity $360,000 _________ $360,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 94. The accounting equation for Mickey Enterprises is as follows: = =
Assets $360,000
Liabilities $180,000
+ +
Stockholders' Equity $180,000
If the company now purchases a truck on account for $30,000, the accounting equation will change to: A) B) C) D)
Assets Liabilities $390,000 = $180,000 $390,000 = $198,000 $390,000 = $210,000 $360,000 = $180,000
Stockholders' Equity + $210,000 + $192,000 + $180,000 + $180,000
Answer: C Rationale: Original Balance Purchase Truck Total
Assets $360,000 $30,000 $390,000
= = = =
Liabilities $180,000 $30,000 $210,000
+ + + +
Stockholders' Equity $180,000 _________ $180,000
©Cambridge Business Publishers, 2020 2-40
Financial Accounting for Undergraduates, 4th Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 95. The accounting equation for Minnie Enterprises is as follows: = =
Assets $1,080,000
+ +
Liabilities $540,000
Stockholders' Equity $540,000
If the company now purchases a truck on account for $90,000, the accounting equation will change to: A) B) C) D)
Assets $1,170,000 $1,170,000 $1,170,000 $1,080,000
Liabilities = = = =
Stockholders' Equity $540,000 + $630,000 $594,000 + $576,000 $630,000 + $540,000 $540,000 + $540,000
Answer: C Rationale: Assets $1,080,000 $90,000 $1,170,000
Original Balance Purchase Truck Total
= = = =
+ + + +
Liabilities $540,000 $90,000 $630,000
Stockholders' Equity $540,000 _________ $540,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 96. The accounting equation for Goofy Enterprises is as follows: = =
Assets $240,000
+ +
Liabilities $120,000
Stockholders' Equity $120,000
If the company now issues stock for $30,000, the accounting equation will change to: A) B) C) D)
Assets $240,000 $270,000 $240,000 $270,000
= = = =
Liabilities $ 90,000 $150,000 $150,000 $120,000
+ + + +
Stockholders' Equity $150,000 $120,000 $ 90,000 $150,000
Answer: D Rationale: Original Balance Issue Stock Total
Assets $240,000 $ 30,000 $270,000
= = = =
Liabilities $120,000 ________ $120,000
+ + + +
Stockholders' Equity $120,000 $ 30,000 $150,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-41
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 97. The accounting equation for Pinto Company is as follows: = =
Assets $720,000
+ +
Liabilities $360,000
Stockholders' Equity $360,000
If the company now issues stock for $90,000, the accounting equation will change to: A) B) C) D)
Assets $720,000 $810,000 $720,000 $810,000
= = = =
Liabilities $270,000 $450,000 $450,000 $360,000
+ + + +
Stockholders' Equity $450,000 $360,000 $270,000 $450,000
Answer: D Rationale: Assets $720,000 $90,000 $810,000
Original Balance Issue Stock Total
= = = =
Liabilities $360,000 ________ $360,000
+ + + +
Stockholders' Equity $360,000 $ 90,000 $450,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 98. The accounting equation for Snake Enterprises is as follows: = =
Assets $240,000
+ +
Liabilities $120,000
Stockholders' Equity $120,000
If the company now prepays rent of $18,000 for the next six months, the accounting equation will change to: A) B) C) D)
Assets $240,000 $276,000 $240,000 $258,000
= = = =
Liabilities $138,000 $138,000 $120,000 $138,000
+ + + +
Stockholders' Equity $102,000 $138,000 $120,000 $120,000
Answer: C Rationale: Original Balance Prepaid rent Cash Total
Assets $240,000 $18,000 ($18,000) $240,000
= = = =
Liabilities $120,000 _________ $120,000
+ + + +
Stockholders' Equity $120,000 _________ $120,000
©Cambridge Business Publishers, 2020 2-42
Financial Accounting for Undergraduates, 4th Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 99. The accounting equation for Henry Enterprises is as follows: = =
Assets $720,000
+ +
Liabilities $360,000
Stockholders' Equity $360,000
If the company now prepays rent of $54,000 for the next six months, the accounting equation will change to: A) B) C) D)
Assets $720,000 $828,000 $720,000 $774,000
= = = =
Liabilities $414,000 $414,000 $360,000 $414,000
+ + + +
Stockholders' Equity $306,000 $414,000 $360,000 $360,000
Answer: C Rationale: Assets $720,000 $54,000 ($54,000) $720,000
Original Balance Prepaid rent Cash Total
= = =
Liabilities $360,000 _________ $360,000
=
+ + +
Stockholders' Equity $360,000 _________ $360,000
+
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 100. The accounting equation for Wolf Enterprises is as follows: Assets $240,000
= =
+ +
Liabilities $120,000
Stockholders' Equity $120,000
If the company now signs a bank note payable in exchange for $30,000, the accounting equation will change to: A) B) C) D)
Assets $240,000 $270,000 $240,000 $270,000
= = = =
Liabilities $ 90,000 $150,000 $150,000 $120,000
+ + + +
Stockholders' Equity $150,000 $120,000 $ 90,000 $150,000
Answer: B Rationale: Original Balance Obtain Cash for Note payable Total
Assets
=
Liabilities
+
Stockholders' Equity
$240,000
=
$120,000
+
$120,000
$30,000 $270,000
= =
$30,000 $150,000
+ +
______0 $120,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-43
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 101. The accounting equation for Nibbles Enterprises is as follows: = =
Assets $720,000
+ +
Liabilities $360,000
Stockholders' Equity $360,000
If the company now signs a bank note payable in exchange for $90,000, the accounting equation will change to: A) B) C) D)
Assets $720,000 $810,000 $720,000 $810,000
= = = =
Liabilities $270,000 $450,000 $450,000 $360,000
+ + + +
Stockholders' Equity $450,000 $360,000 $270,000 $450,000
Answer: B Rationale: = = = =
Assets $720,000 $90,000 $810,000
Original Balance Obtain Cash for Note payable Total
Liabilities $360,000 $90,000 $450,000
+ + + +
Stockholders' Equity $360,000 ______0 $360,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 102. The accounting equation for Lion Enterprises is as follows: Assets $240,000
= =
+ +
Liabilities $120,000
Stockholders' Equity $120,000
If the company now purchases office supplies for $10,000 cash, the accounting equation will change to: A) B) C) D)
Assets $240,000 $250,000 $240,000 $250,000
= = = =
Liabilities $110,000 $130,000 $120,000 $120,000
+ + + +
Stockholders' Equity $130,000 $120,000 $120,000 $130,000
Answer: C Rationale: Assets
=
Liabilities
+
Stockholders' Equity
Original Balance
$240,000
=
$120,000
+
$120,000
Office Supplies Cash Total
$10,000 ($10,000) $240,000
= =
+ _______ $120,000
+
_______ $120,000
©Cambridge Business Publishers, 2020 2-44
Financial Accounting for Undergraduates, 4th Edition
Topic: Analyzing Transactions 7 LO: 2 Level of Difficulty: MEDIUM 103. The accounting equation for Woodstock Enterprises is as follows: Assets $720,000
= =
+ +
Liabilities $360,000
Stockholders' Equity $360,000
If the company now purchases office supplies for $20,000 cash, the accounting equation will change to: A) B) C) D)
Assets Liabilities $720,000 = $330,000 $750,000 = $390,000 $720,000 = $360,000 $750,000 = $360,000
+ + + +
Stockholders' Equity $390,000 $360,000 $360,000 $390,000
Answer: C Rationale: Assets
=
Original Balance
$720,000
=
Office Supplies Cash Total
$30,000 ($30,000) $720,000
= =
Liabilities $360,000
+
Stockholders' Equity
+
$360,000
+ ________ $360,000
+
________ $360,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 104. The accounting equation for Elephant Enterprises is as follows: Assets $240,000
= =
Liabilities $120,000
+ +
Stockholders' Equity $120,000
If the company now receives a prepayment in the amount of $30,000, for services to be performed over the next few months, the accounting equation will change to: A) B) C) D)
Assets $240,000 $270,000 $240,000 $270,000
= = = =
Liabilities $ 90,000 $120,000 $150,000 $150,000
+ + + +
Stockholders' Equity $150,000 $150,000 $ 90,000 $120,000
Answer: D Rationale: Original Balance Prepayment Total
Assets $240,000 $30,000 $270,000
= = = =
Liabilities $120,000 $30,000 $150,000
+ + + +
Stockholders' Equity $120,000 _______0 $120,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-45
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 105. The accounting equation for Striped Zebra Enterprises is as follows: Assets $720,000
= =
+ +
Liabilities $360,000
Stockholders' Equity $360,000
If the company now receives a prepayment in the amount of $90,000, for services to be performed over the next few months, the accounting equation will change to: A) B) C) D)
Assets $720,000 $810,000 $720,000 $810,000
Liabilities = $ 270,000 = $360,000 = $450,000 = $450,000
+ + + +
Stockholders' Equity $450,000 $450,000 $270,000 $360,000
Answer: D Rationale: Assets $720,000 $90,000 $810,000
Original Balance Prepayment Total
= = = =
Liabilities $360,000 $90,000 $450,000
+ + + +
Stockholders' Equity $360,000 _______0 $360,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 106. The accounting equation for Meow Enterprises is as follows: Assets $240,000
= =
+ +
Liabilities $120,000
Stockholders' Equity $120,000
If the company now receives a payment in the amount of $30,000 cash, for services performed for several customers, the accounting equation will change to: A) B) C) D)
Assets $270,000 $270,000 $240,000 $270,000
= = = =
Liabilities $120,000 $ 90,000 $150,000 $150,000
+ + + +
Stockholders' Equity $150,000 $180,000 $ 90,000 $120,000
Answer: A Rationale:
Original Balance Payment for services performed Total
Assets $240,000 $30,000 $270,000
= = = =
Liabilities $120,000 0 $120,000
+ + + +
Stockholders' Equity $120,000 $30,000 $150,000
©Cambridge Business Publishers, 2020 2-46
Financial Accounting for Undergraduates, 4th Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 107. The accounting equation for Mip Enterprises is as follows: Assets $720,000
= =
+ +
Liabilities $360,000
Stockholders' Equity $360,000
If the company now receives a payment in the amount of $90,000 cash, for services performed for several customers, the accounting equation will change to: A) B) C) D)
Assets $810,000 $810,000 $720,000 $810,000
= = = =
Liabilities $360,000 $270,000 $450,000 $450,000
+ + + +
Stockholders' Equity $450,000 $540,000 $270,000 $360,000
Answer: A Rationale:
Original Balance
Assets $720,000
Payment for services performed
$90,000
Total
$810,000
= = =
Liabilities $360,000
=
$360,000
0
+ + +
Stockholders' Equity $360,000
+
$450,000
_ $90,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 108. The accounting equation for Lupin Dog Enterprises is as follows: Assets $240,000
= =
+ +
Liabilities $120,000
Stockholders' Equity $120,000
If the company now performed $30,000 of services and received a payment in the amount of $20,000 cash with the remaining $10,000 to be paid by customers within 60 days, the accounting equation will change to: A) B) C) D)
Assets $240,000 $270,000 $240,000 $270,000
= = = =
Liabilities $ 90,000 $120,000 $150,000 $150,000
+ + + +
Stockholders' Equity $150,000 $150,000 $ 90,000 $120,000
Answer: B Rationale: Original Balance Payment for services performed Accounts Receivable Total
Assets $240,000 $20,000 $10,000 $270,000
= = = = =
Liabilities $120,000 0 $120,000
+ + + + +
Stockholders' Equity $120,000 $30,000 _______ $150,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-47
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 109. The accounting equation for Luna Enterprises is as follows: Assets $720,000
= =
+ +
Liabilities $360,000
Stockholders' Equity $360,000
If the company now performed $90,000 of services and received a payment in the amount of $60,000 cash with the remaining $30,000 to be paid by customers within 60 days, the accounting equation will change to: A) B) C) D)
Assets $720,000 $810,000 $720,000 $810,000
= = = =
Liabilities $270,000 $360,000 $450,000 $450,000
+ + + +
Stockholders' Equity $450,000 $450,000 $270,000 $360,000
Answer: B Rationale: Original Balance Payment for services performed Accounts Receivable Total
= = = = =
Assets $720,000 $60,000 $30,000 $810,000
Liabilities $360,000 0 $360,000
+ + + + +
Stockholders' Equity $360,000 $90,000 _______ $450,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 110. The accounting equation for Eagle Enterprises is as follows: Assets $360,000
= =
+ +
Liabilities $180,000
Stockholders' Equity $180,000
If the company now pays employee wages for $30,000, the accounting equation will change to: A) B) C) D)
Assets $330,000 $330,000 $390,000 $360,000
= = = =
Liabilities $180,000 $150,000 $210,000 $180,000
+ + + +
Stockholders' Equity $150,000 $180,000 $180,000 $180,000
Answer: A Rationale: Original Balance Payment of Wages Total
Assets $360,000 ($30,000) $330,000
= = = =
Liabilities $180,000 0 $180,000
+ + + +
Stockholders' Equity $180,000 ($30,000) $150,000
©Cambridge Business Publishers, 2020 2-48
Financial Accounting for Undergraduates, 4th Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 111. The accounting equation for Landscape Enterprises is as follows: = =
Assets $1,080,000
+ +
Liabilities $540,000
Stockholders' Equity $540,000
If the company now pays employee wages for $90,000, the accounting equation will change to: A) B) C) D)
Assets $ 990,000 $ 990,000 $1,170,000 $1,170,000
Liabilities = = = =
Stockholders' Equity $540,000 + $450,000 $450,000 + $540,000 $630,000 + $540,000 $540,000 + $630,000
Answer: A Rationale: Original Balance Payment of Wages Total
Assets $1,080,000 ($90,000) $990,000
= = = =
Liabilities $540,000 0 $540,000
+ + + +
Stockholders' Equity $540,000 ($90,000) $450,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 112. The accounting equation for Chance Enterprises is as follows: Assets $360,000
= =
Liabilities $180,000
+ +
Stockholders' Equity $180,000
If the company now receives a payment of $30,000 on account from a customer, the accounting equation will change to: A) B) C) D)
Assets $390,000 $390,000 $390,000 $360,000
= = = =
Liabilities $180,000 $210,000 $150,000 $180,000
+ + + +
Stockholders' Equity $210,000 $180,000 $240,000 $180,000
Answer: D Rationale: Original Balance Receipt of customer payment on account Total
Assets $360,000 $ 30,000 ($30,000) $360,000
= = = =
Liabilities $180,000 ________ $180,000
+ + + +
Stockholders' Equity $180,000 _______ $180,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-49
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 113. The accounting equation for Giraffe Enterprises is as follows: Assets $1,080,000
= =
+ +
Liabilities $540,000
Stockholders' Equity $540,000
If the company now receives a payment of $90,000 on account from a customer, the accounting equation will change to: A) B) C) D)
Assets $1,170,000 $1,170,000 $1.170,000 $1,080,000
Liabilities = = = =
Stockholders' Equity $540,000 + $630,000 $630,000 + $540,000 $450,000 + $720,000 $540,000 + $540,000
Answer: D Rationale: Original Balance Receipt of customer payment on account Total
= = =
Assets $1,080,000 $ 90,000 ($ 90,000) $1,080,000
Liabilities $540,000 _______ $540,000
=
+ + +
Stockholders' Equity $540,000 _______ $540,000
+
Topic: Analyzing Transactions LO: 2 114. The accounting equation for Narvy Enterprises is as follows: Assets $360,000
= =
+ +
Liabilities $180,000
Stockholders' Equity $180,000
If the company now pays a $30,000 cash dividend to stockholders, the accounting equation will change to: A) B) C) D)
Assets $330,000 $360,000 $390,000 $360,000
= = = =
Liabilities $180,000 $210,000 $210,000 $180,000
+ + + +
Stockholders' Equity $150,000 $150,000 $180,000 $180,000
Answer: A Rationale: Original Balance Payment of Dividend Total
Assets $360,000 ($30,000) $330,000
= = =
Liabilities $180,000
=
$180,000
_______
+ + +
Stockholders' Equity $180,000
+
$150,000
($30,000)
©Cambridge Business Publishers, 2020 2-50
Financial Accounting for Undergraduates, 4th Edition
Topic: Analyzing Transactions LO: 2 115. The accounting equation for Hamilton Enterprises is as follows: = =
Assets $1,080,000
+ +
Liabilities $540,000
Stockholders' Equity $540,000
If the company now pays a $90,000 cash dividend to stockholders, the accounting equation will change to: A) B) C) D)
Assets $ 990,000 $1,080,000 $1,170,000 $1,080,000
Liabilities = = = =
Stockholders' Equity $540,000 + $450,000 $630,000 + $450,000 $630,000 + $540,000 $540,000 + $540,000
Answer: A Rationale: Original Balance Payment of Dividend Total
Assets $1,080,000 ($90,000) $990,000
= = = =
Liabilities $540,000 _______ $540,000
+ + + +
Stockholders' Equity $540,000 ($90,000) $450,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 116. During its first month of operations, Neptune Company (1) borrowed $200,000 from a bank, and then (2) purchased an equipment costing $80,000 by paying cash of $40,000 and signing a long term note for the remaining amount. During the month, the company also (3) purchased inventory for $60,000 on credit, (4) performed services for clients for $120,000 on account, (5) paid $30,000 cash for accounts payable, and (6) paid $60,000 cash for utilities. What is the amount of total assets at the end of the month? A) B) C) D)
$190,000 $270,000 $250,000 $330,000
Answer: D Rationale: Transaction (1) (2) (2) (3) (4) (5) (6)
Asset Account Cash Equipment Cash Inventory A/R Cash Cash
Assets $200,000 80,000 (40,000) 60,000 120,000 (30,000) (60,000) $330,000
=
Liabilities $200,000
+
Stockholders’ Equity
40,000 60,000 $120,000 (30,000) =
$270,000
+
(60,000) $60,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-51
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 117. During its first month of operations, Lavender Company (1) borrowed $600,000 from a bank, and then (2) purchased an equipment costing $240,000 by paying cash of $120,000 and signing a long term note for the remaining amount. During the month, the company also (3) purchased inventory for $180,000 on credit, (4) performed services for clients for $360,000 on account, (5) paid $90,000 cash for accounts payable, and (6) paid $180,000 cash for utilities. What is the amount of total assets at the end of the month? A) B) C) D)
$990,000 $570,000 $810,000 $750,000
Answer: A Rationale: Transaction (1) (2) (2) (3) (4) (5) (6)
Account Cash Equipment Cash Inventory A/R Cash Cash
Assets $600,000 240,000 (120,000) 180,000 360,000 (90,000) (180,000) $990,000
=
Liabilities $600,000
+
Stockholders’ Equity
120,000 180,000 360,000 (90,000) =
$810,000
+
(180,000) $180,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 118. During its first month of operations, Saturn Company (1) borrowed $200,000 from a bank, and then (2) purchased an equipment costing $80,000 by paying cash of $40,000 and signing a long term note for the remaining amount. During the month, the company also (3) purchased inventory for $60,000 on credit, (4) performed services for clients for $120,000 on account, (5) paid $30,000 cash for accounts payable, and (6) paid $60,000 cash for utilities. What is the amount of total liabilities at the end of the month? A) B) C) D)
$190,000 $270,000 $250,000 $330,000
Answer: B Rationale: Transaction (1) (2) (2) (3) (4) (5) (6)
Account Cash Equipment Cash Inventory A/R Cash Cash
Assets $200,000 80,000 (40,000) 60,000 120,000 (30,000) (60,000) $330,000
=
Liabilities $200,000
+
Stockholders’ Equity
40,000 60,000 120,000 (30,000) =
$270,000
+
(60,000) $60,000
©Cambridge Business Publishers, 2020 2-52
Financial Accounting for Undergraduates, 4th Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 119. During its first month of operations, Lavender Company (1) borrowed $600,000 from a bank, and then (2) purchased an equipment costing $240,000 by paying cash of $120,000 and signing a long term note for the remaining amount. During the month, the company also (3) purchased inventory for $180,000 on credit, (4) performed services for clients for $360,000 on account, (5) paid $90,000 cash for accounts payable, and (6) paid $180,000 cash for utilities. What is the amount of total liabilities at the end of the month? A) B) C) D)
$990,000 $570,000 $810,000 $750,000
Answer: C Rationale: Transaction (1) (2) (2) (3) (4) (5) (6)
Account Cash Equipment Cash Inventory A/R Cash Cash
Assets $600,000 240,000 (120,000) 180,000 360,000 (90,000) (180,000) $990,000
=
Liabilities $600,000
+
Stockholders’ Equity
120,000 180,000 360,000 (90,000) =
$810,000
+
(180,000) $180,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 120. During its first month of operations, Neptune Company (1) borrowed $200,000 from a bank, and then (2) purchased an equipment costing $80,000 by paying cash of $40,000 and signing a long term note for the remaining amount. During the month, the company also (3) purchased inventory for $60,000 on credit, (4) performed services for clients for $120,000 on account, (5) paid $30,000 cash for accounts payable, and (6) paid $60,000 cash for utilities. What is the amount of Stockholders’ equity at the end of the month? A) B) C) D)
($ 60,000) $ 90,000 $ 60,000 $180,000
Answer: C Rationale: Transaction (1) (2) (2) (3) (4) (5) (6)
Account Cash Equipment Cash Inventory A/R Cash Cash
Assets $200,000 80,000 (40,000) 60,000 120,000 (30,000) (60,000) $330,000
=
Liabilities $200,000
+
Stockholders’ Equity
40,000 60,000 120,000 (30,000) =
$270,000
+
(60,000) $60,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-53
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 121. During its first month of operations, Lavender Company (1) borrowed $600,000 from a bank, and then (2) purchased an equipment costing $240,000 by paying cash of $120,000 and signing a long term note for the remaining amount. During the month, the company also (3) purchased inventory for $180,000 on credit, (4) performed services for clients for $360,000 on account, (5) paid $90,000 cash for accounts payable, and (6) paid $180,000 cash for utilities. What is the amount of Stockholders’ equity at the end of the month? A) B) C) D)
$240,000 $180,000 $210,000 $360,000
Answer: B Rationale: Transaction (1) (2) (2) (3) (4) (5) (6)
Account Cash Equipment Cash Inventory A/R Cash Cash
Assets $600,000 240,000 (120,000) 180,000 360,000 (90,000) (180,000) $990,000
=
Liabilities $600,000
+
Stockholders’ Equity
120,000 180,000 360,000 (90,000) =
$810,000
(180,000) $180,000
+
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 122. Mr. Montana started a company (Montana Company) by contributing $100,000 cash, and a building valued at $800,000. The company then purchased a machine by making a $100,000 down payment (which accounted for half its purchase price), and signed a note payable to the bank. After recording the above transactions, Montana Company's balance sheet will show: A) B) C) D)
Assets $ 920,000 $ 900,000 $1,000,000 $1,000,000
Answer: D Rationale: Transaction (1) (2) (3) (3) (3)
Liabilities $ 60,000 $100,000 $900,000 $100,000
Stockholders' Equity $860,000 $800,000 $100,000 $900,000
Account Cash Building Machine Note Payable Cash
Assets $100,000 800,000 200,000
=
Liabilities
+ Stockholders’ Equity $100,000 800,000
$100,000 (100,000) $1,000,000
=
$100,000
+
$900,000
©Cambridge Business Publishers, 2020 2-54
Financial Accounting for Undergraduates, 4th Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 123. Ken Baar started a company (Baar Company) by contributing $300,000 cash, and a building valued at $2,400,000. The company then purchased a machine by making a $300,000 down payment (which accounted for half its purchase price), and signed a note payable to the bank. After recording the above transactions, Larson Company's balance sheet will show: A) B) C) D)
Assets $2,760,000 $2,700,000 $3,000,000 $3,000,000
Liabilities $ 180,000 $ 300,000 $2,700,000 $ 300,000
Stockholders' Equity $2,580,000 $2,400,000 $ 300,000 $2,700,000
Answer: D Rationale: Transaction (1) (2) (3) (3) (3)
Account Cash Building Machine Note Payable Cash
Assets $ 300,000 2,400,000 600,000
=
Liabilities
+
Stockholders’ Equity $ 300,000 2,400,000
$300,000 (300,000) $3,000,000
=
$300,000
+
$2,700,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-55
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 124. On December 31, 2019, the end of the first month of operation, the balance sheet of Drake’s Driving School reported total assets of $400,000. The following transactions occurred during the month of January 2020: (1) (2) (3) (4)
The business purchased land for $500,000, paying $200,000 cash and issuing a note payable for the balance. The business collected accounts receivable totaling $90,000. The business sold land (which had cost $100,000) for $120,000 cash. The business paid off $100,000 of Notes Payable.
What is the amount of the company’s total assets on January 31, 2020? A) $920,000 B) $620,000 C) $910,000 D) $730,000 Answer: B Rationale: Transaction Bal. 12/31/19 (1) (1) (1) (2) (2) (3) (3) (3) (4) (4) Bal. 1/31/20
Account Land Cash Note Payable Cash A/R Cash Land Gain on Sale Cash Note Payable
Assets $400,000 500,000 (200,000)
=
Liabilities
+
Stockholders’ Equity $400,000
$300,000 90,000 (90,000) 120,000 (100,000) 20,000 (100,000) $620,000
=
(100,000) $200,000
+
$420,000
©Cambridge Business Publishers, 2020 2-56
Financial Accounting for Undergraduates, 4th Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 125. On December 31, 2019, the end of the first month of operation, the balance sheet of Michaelene’s Real Estate Training School reported total assets of $1,200,000. The following transactions occurred during the month of January 2020: (1) The business purchased land for $1,500,000, paying $600,000 cash and issuing a note payable for the balance. (2) The business collected accounts receivable totaling $270,000. (3) The business sold land (which had cost $300,000) for $360,000 cash. (4) The business paid off $300,000 of Notes Payable. What is the amount of the company’s total assets on January 31, 2020? A) $2,190,000 B) $2,760,000 C) $1,860,000 D) $2,730,000 Answer: C Rationale: Transaction Bal. 12/31/19 (1) (1) (1) (2) (2) (3) (3) (3) (4) (4) Bal. 1/31/20
Account Land Cash Note Payable Cash A/R Cash Land Gain on Sale Cash Note Payable
Assets $1,200,000 1,500,000 (600,000)
=
Liabilities
+
Stockholders’ Equity $1,200,000
$900,000 270,000 (270,000) 360,000 (300,000) 60,000 (300,000) $1,860,000
=
(300,000) $600,000
+
$1,260,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-57
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 126. On February 1 2019 Cibula’s Accounting Services had a cash balance of $10,000, and completed the following transactions during February 2019: 1. 2. 3. 4. 5. 6.
Purchased office supplies on account, $600. Completed work for a client on credit, $1,000. Paid cash for the office supplies purchased in (1). Completed work for a client and received $1,600 cash. Received $1,000 cash for the work described in (2). Received $2,000 from a client for accounting services to be performed in March.
What was the balance of the company’s cash account after these transactions? A) $ 4,000 B) $ 5,000 C) $14,000 D) $ 3,400 Answer: C Rationale: Transaction Bal. 2/1/19 (1) (1) (2) (2) (3) (3) (4) (4) (5) (5) (6) (6) Bal. 2/29/19
Account Cash Office Supplies A/P Fee Revenue A/R Cash A/P Cash Fee Revenue Cash A/R Cash Unearned Revenue
Assets = $10,000 600
Liabilities
+
Stockholders’ Equity $10,000
$600 1,000 1,000 (600) (600) 1,600 1,600 1,000 (1,000) 2,000 $14,600 =
2,000 $2,000
+
$12,600
Cash Account = $10,000 + ($600) + $1,600 + $1,000 + $2,000 = $14,000
©Cambridge Business Publishers, 2020 2-58
Financial Accounting for Undergraduates, 4th Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 127. On February 1 2019, Zultner’s Accounting Services had a cash balance of $30,000, and completed the following transactions during February 2019: 1. 2. 3. 4. 5. 6.
Purchased office supplies on account, $1,800. Completed work for a client on credit, $3,000. Paid cash for the office supplies purchased in (1). Completed work for a client and received $4,800 cash. Received $3,000 cash for the work described in (2). Received $6,000 from a client for accounting services to be performed in March.
What was the balance of the company’s cash account after these transactions? A) $10,200 B) $12,000 C) $15,000 D) $42,000 Answer: D Rationale: Transaction Bal. 2/1/19 (1) (1) (2) (2) (3) (3) (4) (4) (5) (5) (6) (6) Bal. 2/29/19
Account Cash Office Supplies A/P Fee Revenue A/R Cash A/P Cash Fee Revenue Cash A/R Cash Unearned Revenue
Assets = $30,000 1,800
Liabilities
+
Stockholders’ Equity $30,000
1,800 3,000 3,000 (1,800) (1,800) 4,800 4,800 3,000 (3,000) 6,000 $43,800 =
6,000 $6,000
+
$37,800
Cash Account = $30,000 + ($1,800) + $4,800 + $3,000 + $6,000 = $42,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-59
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 128. When Holly received her paycheck, she realized that her employer made an error in computing her wages, and overpaid her by $2,600. So, Holly promptly returned the excess amount. When the employer receives a check from her for the amount of the overpayment, which of the following journal entries will be made by the employer? A) Debit Cash $2,600 and credit Wages Expense $2,600 B) Debit Wages Expense $2,600 and credit Cash $2,600 C) Debit Cash $2,600 and credit Wages Payable $2,600 D) Debit Wages Payable $2,600 and credit Wages Expense $2,600 Answer: A Rationale: Original Entry Wage Expense Cash
XXX + 2,600 XXX + 2,600
Correct Entry Wage Expense Cash
XXX
Correcting Entry Cash Wage Expense
2,600
XXX
2,600
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 129. When Trina received her paycheck, she realized that her employer made an error in computing her wages, and overpaid her by $7,800. So, Trina promptly returned the excess amount. When the employer receives a check from her for the amount of the overpayment, which of the following journal entries will be made by the employer? A) Debit Wages Payable $7,800 and Credit Wages Expense $7,800 B) Debit Cash $7,800 and Credit Wages Expense $7,800 C) Debit Wages Expense $7,800 and Credit Cash $7,800 D) Debit Cash $7,800 and Credit Wages Payable $7,800 Answer: B Rationale: Original Entry Wage Expense Cash
XXX + 7,800 XXX + 7,800
Correct Entry Wage Expense Cash
XXX
Correcting Entry Cash Wage Expense
7,800
XXX
7,800
©Cambridge Business Publishers, 2020 2-60
Financial Accounting for Undergraduates, 4th Edition
Topic: The “Account” System LO: 3 Level of Difficulty: MEDIUM 130. Lambchop Company purchased supplies for $14,000 on credit on January 1, 2019. On January 15, the company made a cash payment of $4,000 to the supplier and signed a one-year note for the remaining amount to settle the account. Lambchop Company’s journal entry on January 15 will include: A) Debit Notes Payable for $10,000 B) Credit Accounts Payable for $10,000 C) Credit Notes Payable for $10,000 D) Debit Cash for $10,000 Answer: C Rationale: Cash 4,000 (2)
Accounts Payable (2) 4,000 14,000 (1) (3) 10,000
Notes Payable 10,000 (3)
Supplies (1) 14,000
Topic: The “Account” System LO: 3 Level of Difficulty: MEDIUM 131. Xia Company purchased supplies for $42,000 on credit on January 1, 2019. On January 15, the company made a cash payment of $12,000 to the supplier, and signed a one-year note for the remaining amount to settle the account. Xia Company’s journal entry on January 15 will include: A) Debit Cash for $30,000 B) Debit Notes Payable for $30,000 C) Credit Accounts Payable for $30,000 D) Credit Notes Payable for $30,000 Answer: D Rationale: Cash 12,000 (2)
Accounts Payable (2) 12,000 42,000 (1) (3) 30,000
Notes Payable 30,000 (3)
Supplies (1) 42,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-61
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 132. Lumos Pet Supplies had the following transactions during December 2019: • •
•
Paid a note of $34,000, owed since March, plus $850 for interest. Sold $73,050 of merchandise to customers on account. Cost of goods sold was $42,500. [Hint: Cost of goods sold is an expense related to the reduction of inventory (merchandise sold).] Paid accounts payable of $4,100.
As a result of these transactions, at year-end, liabilities and stockholders' equity would show a combined total: A) Decrease by $ 9,600 B) Increase by $ 26,850 C) Decrease by $ 9,150 D) Decrease by $ 8,400 Answer: D Rationale: Transaction (1) (1) (1) (2) (2) (2) (2) (3) (3) Bal. 12/31/16
Account Interest Expense Note Payable Cash A/R Fee Revenue Inventory Cost of Goods Sold Cash A/P
Assets
=
Liabilities
+
Stockholders’ Equity (850)
(34,000) (34,850) 73,050 73,050 (42,500) (42,500) (4,100) ($8,400)
=
(4,100) ($38,100)
+
$29,700
12/31/16 Liabilities + Stockholders’ Equity = ($38,100) + $29,700 = ($8,400)
©Cambridge Business Publishers, 2020 2-62
Financial Accounting for Undergraduates, 4th Edition
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 133. Mouser Pet Supplies had the following transactions during December 2019: • •
•
Paid a note of $102,000, owed since March, plus $2,550 for interest. Sold $219,150 of merchandise to customers on account. Cost of goods sold was $127,500. [Hint: Cost of goods sold is an expense related to the reduction of inventory (merchandise sold).] Paid accounts payable of $12,300.
As a result of these transactions, at year-end, liabilities and stockholders' equity would show a combined total: A) Decrease by $ 25,200 B) Increase by $ 28,800 C) Decrease by $ 80,550 D) Decrease by $ 27,450 Answer: A Rationale: Transaction (1) (1) (1) (2) (2) (2) (2) (3) (3) Bal. 12/31/19
Account Interest Expense Note Payable Cash A/R Fee Revenue Inventory Cost of Goods Sold Cash A/P
Assets
=
Liabilities
+
Stockholders’ Equity (2,550)
(102,000) (104,550) 219,150 219,150 (127,500) (127,500) (12,300) ($25,200)
=
(12,300) ($114,300)
+
$89,100
12/31/19 Liabilities + Stockholders’ Equity = ($114,300) + $89,100 = ($25,200)
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-63
Topic: The “Account” System LO: 3 Level of Difficulty: MEDIUM 134. During January 2019, Randolph Corporation purchased $200,000 of inventory; they paid one-fourth in cash, and signed a note for the remaining balance. This transaction will be recorded as: A) Inventory Cash Notes Payable B) Inventory Cash Accounts Payable C) Inventory Cash Accounts Payable D) Inventory Cash Notes Payable
200,000 150,000 50,000 200,000 50,000 150,000 200,000 150,000 50,000 200,000 50,000 150,000
Answer: D Rationale: $200,000 x 0.25 = $50,000 = Cash $200,000 - $50,000 = $150,000 = Notes Payable Topic: The “Account” System LO: 3 Level of Difficulty: MEDIUM 135. During January 2019, Dakota Corporation purchased $600,000 of inventory; they paid one-fourth in cash, and signed a note for the remaining balance. This transaction will be recorded as: A) Inventory Cash Notes Payable B) Inventory Cash Notes Payable C) Inventory Cash Accounts Payable D) Inventory Cash Accounts Payable
600,000 150,000 450,000 600,000 450,000 150,000 600,000 150,000 450,000 600,000 450,000 150,000
Answer: A Rationale: $600,000 x .25 = $150,000 = Cash $600,000 - $150,000 = $450,000 = Notes Payable ©Cambridge Business Publishers, 2020 2-64
Financial Accounting for Undergraduates, 4th Edition
Topic: The “Account” System LO: 3 Level of Difficulty: MEDIUM 136. Horizon Company, an internet service provider, has 2,000,000 customers. The customers make electronic payments of $140 each for that month’s service on the last day of each month. Horizon Company does not send any bills to their customers. The company’s journal entry on the day they receive the payment will include: A) A credit to Internet Service Revenue for $280,000,000 B) A debit to Accounts Receivable for $280,000,000 C) A credit to Accounts Receivable for $280,000,000 D) A debit to Internet Service Expense for $280,000,000 Answer: A Rationale: 2,000,000 customers x $140 monthly service fee = $280,000,000 Cash
280,000,000 Internet Service Revenue
280,000,000
Topic: The “Account” System LO: 3 Level of Difficulty: MEDIUM 137. Vista Company, an internet service provider, has 2,000,000 customers. The customers make electronic payments of $420 each for that month’s service on the last day of each month. Buena Company does not send any bills to their customers. The company’s journal entry on the day they receive the payment will include: A) A debit to Internet Service Expense for $840,000,000 B) A credit to Internet Service Revenue for $840,000,000 C) A debit to Accounts Receivable for $840,000,000 D) A credit to Accounts Receivable for $840,000,000 Answer: B Rationale: 2,000,000 customers x $420 monthly service fee = $840,000,000 Cash
840,000,000 Internet Service Revenue
840,000,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-65
Topic: The “Account” System LO: 3 Level of Difficulty: MEDIUM 138. A customer received and then paid an $18,000 utility bill from West Haven Natural Gas Company. The journal entry by West Haven Natural Gas Company to record receipt of the payment would include: A) A credit to Accounts Payable B) A credit to Accounts Receivable C) A credit to Utilities Revenue D) A debit to Accounts Receivable Answer: B Rationale: Entry when revenue earned and bill sent Accounts Receivable Utility Revenue Entry when payment received Cash Accounts Receivable
18,000 18,000 18,000 18,000
Topic: The “Account” System LO: 3 Level of Difficulty: MEDIUM 139. Ringstar Company purchased a new car for $60,000 by paying $24,000 cash, and trading in an old car with a recorded net cost and market value of $20,000. They also signed a Note for $16,000. The required journal entry will not: A) Debit New Car for $60,000 B) Debit Notes Payable for $16,000 C) Credit Old Car for $20,000 D) Credit Notes Payable for $16,000 Answer: B Rationale: Entry when new car is purchased: New Car Cash Old Car Note Payable
60,000 24,000 20,000 16,000
©Cambridge Business Publishers, 2020 2-66
Financial Accounting for Undergraduates, 4th Edition
Topic: The “Account” System LO: 3 Level of Difficulty: MEDIUM 140. Stone Circle Company purchased a new car for $135,000 by paying $54,000 cash, and trading in an old car with a recorded net cost and market value of $45,000. They also signed a Note for $36,000. The required journal entry will not: A) Credit Notes Payable for $36,000 B) Debit New Car for $135,000 C) Debit Notes Payable for $36,000 D) Credit Old Car for $45,000 Answer: C Rationale: Entry when new car is purchased: New Car Cash Old Car Note Payable
135,000 54,000 45,000 36,000
Topic: The “Account” System LO: 3 Level of Difficulty: MEDIUM 141. During the current week, Julissa, (1) received a cash payment for services previously billed to one of her clients. Also, she (2) paid her telephone bill, and (3) bought equipment on credit. For the three separate transactions, at least one of the journal entries will include a: A) Credit to Retained Earnings B) Debit to Notes Payable C) Debit to Accounts Receivable D) Credit to Accounts Receivable Answer: D Rationale: The first current transaction includes a credit to accounts receivable. Entry when revenue earned and bill sent: - pre-transaction (1) Accounts Receivable XXX Service Revenue
XXX
Entry when payment received: - transaction (1) Cash Accounts Receivable
XXX XXX
Entry when telephone bill is paid: - transaction (2) Telephone Expense Cash
XXX
Entry when equipment on credit purchased: - transaction (3) Equipment XXX Accounts Payable
XXX
XXX
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-67
Topic: The “Account” System LO: 3 Level of Difficulty: MEDIUM 142. Koala Company provided consulting service to a client on January 1, and billed them for $30,000. On February 1, the client made cash payment of $16,000 and signed a note for $14,000 to settle the account. What is Koala Company’s journal entry on February 1? A) Cash 16,000 Accounts Receivable 14,000 Notes Payable B) Accounts Payable 30,000 Notes Payable Cash C) Cash 16,000 Notes Receivable 14,000 Consulting Revenue D) Cash 16,000 Notes Receivable 14,000 Accounts Receivable
30,000 14,000 16,000
30,000
30,000
Answer: D Rationale: January entry to record consulting revenue earned and billed to client: Accounts Receivable 30,000 Consulting Revenue 30,000 February entry to record settlement of the account receivable: Cash 16,000 Notes Receivable 14,000 Accounts Receivable
30,000
©Cambridge Business Publishers, 2020 2-68
Financial Accounting for Undergraduates, 4th Edition
Topic: The “Account” System LO: 3 Level of Difficulty: MEDIUM 143. Hannibal Company provided consulting service to a client on January 1, and billed them for $90,000. On February 1, the client made cash payment of $48,000 and signed a note for $42,000 to settle the account. What is Hannibal Company’s journal entry on February 1? A) Cash 48,000 Notes Receivable 42,000 Accounts Receivable B) Cash 48,000 Accounts Receivable 42,000 Notes Receivable C) Accounts Payable 90,000 Notes Payable Cash D) Cash 48,000 Notes Receivable 42,000 Consulting Revenue
90,000
90,000 42,000 48,000
90,000
Answer: A Rationale: January entry to record consulting revenue earned and billed to client: Accounts Receivable 90,000 Consulting Revenue 90,000 February entry to record settlement of the account receivable: Cash 48,000 Notes Receivable 42,000 Accounts Receivable
90,000
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 144. Hannibal Company’s Accounts Payable account had a balance of $7,400 on September 1, 2019, and a balance of $9,000 on September 30, 2019. During September 2019, the company made total payments of $65,600 on accounts payables. What must have been their total purchases on account during September 2019. A) $74,600 B) $58,200 C) $67,200 D) $64,000 Answer: C Rationale: Beginning A/P balance + Sales on account – Customer payments = Ending A/P balance $7,400 + X - $65,600 = $9,000 X = $9,000 - $7,400 + $65,600 X = $67,200
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-69
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 145. Rabbit Company’s Accounts Payable account had a balance of $22,200 on September 1, 2019, and a balance of $27,000 on September 30, 2019. During September 2019, the company made total payments of $196,800 on accounts payables. What must have been their total purchases on account during September 2019. A) $192,000 B) $223,800 C) $174,600 D) $201,600 Answer: D Rationale: Beginning A/P balance + Purchases – Payments = Ending A/P balance $22,200 + X - $196,800 = $27,000 X = $27,000 - $22,200 + $196,800 X = $201,600 Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 146. Baker Company’s Accounts Receivable account had a balance of $15,000 on September 1, 2019, and a balance of $21,400 on September 30, 2019. During September 2019, the company received cash of $39,400 from credit customers. Determine the amount of sales on account that occurred in September 2019. A) $45,800 B) $41,000 C) $52,800 D) $26,000 Answer: A Rationale: Beginning A/R balance + Sales on account – Cash receipts = Ending A/R balance $15,000 + X - $39,400 = $21,400 X = $21,400 - $15,000 + $39,400 X = $45,800
©Cambridge Business Publishers, 2020 2-70
Financial Accounting for Undergraduates, 4th Edition
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 147. Patrick’s Show Choir Company’s Accounts Receivable account had a balance of $45,000 on September 1, 2016, and a balance of $64,200 on September 30, 2019. During September 2019, the company received cash of $118,200 from credit customers. Determine the amount of sales on account that occurred in September 2019. A) $ 78,000 B) $137,400 C) $126,000 D) $158,400 Answer: B Rationale: Beginning A/R balance + Sales on account – Cash receipts = Ending A/R balance $45,000 + X - $118,200 = $64,200 X = $64,200 - $45,000 + $118,200 X = $137,400 Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 148. Martin Company had $113,500 of Accounts Payable on March 31, 2019. During March, the company made total purchases on account of $193,740, and paid a total of $210,460 cash on accounts payable. Determine the balance of Accounts Payable on March 1, 2019. A) $130,400 B) $130,220 C) $ 6,780 D) $290,700 Answer: B Rationale: Beginning A/P balance + Purchases – Payments = Ending A/P balance X + $193,740 - $210,460 = $113,500 X = $113,500 - $193,740 + $210,460 X = $130,220
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-71
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 149. Morgan Company had $340,500 of Accounts Payable on March 31, 2019. During March, the company made total purchases on account of $581,220, and paid a total of $631,380 cash on accounts payable. Determine the balance of Accounts Payable on March 1, 2019. A) $871,100 B) $391,200 C) $390,660 D) $ 20,340 Answer: C Rationale: Beginning A/P balance + Purchases – Payments = Ending A/P balance X + $581,220 - $631,380 = $340,500 X = $340,500 - $581,220 + $631,380 X = $390,660 Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 150. On December 31, 2019, KatoffelSak Company had a $122,550 balance in Accounts Receivable. During the year 2020, the company collected $200,000 from its credit customers. The December 31, 2020 balance of the Accounts Receivable was $170,650. Determine the amount of sales on accounts for 2020. A) $248,100 B) $156,900 C) $253,100 D) $156,000 Answer: A Rationale: Beginning A/R balance + Sales on account – Cash receipts = Ending A/R balance $122,550 + X - $200,000 = $170,650 X = $170,650 - $122,550 + $200,000 X = $248,100
©Cambridge Business Publishers, 2020 2-72
Financial Accounting for Undergraduates, 4th Edition
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 151. On December 31, 2019, Munchkin Company had a $367,650 balance in Accounts Receivable. During the year 2020, the company collected $600,000 from its credit customers. The December 31, 2020 balance of the Accounts Receivable was $511,950. Determine the amount of sales on accounts for 2020. A) $468,000 B) $744,300 C) $470,700 D) $759,300 Answer: B Rationale: Beginning A/R balance + Sales on account – Cash receipts = Ending A/R balance $367,650 + X - $600,000 = $511,950 X = $511,950 - $367,650 + $600,000 X = $744,300 Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 152. Bousfield Company had $28,460 of Accounts Payable on September 1 and $25,520 on September 30. During September, the company paid total cash of $26,550 on accounts payable. Determine the total purchases on account during September. A) $86,410 B) $80,530 C) $23,610 D) $29,490 Answer: C Rationale: Beginning A/P balance + Purchases – Payments = Ending A/P balance $28,460 + X - $26,550 = $25,520 X = $25,520 - $28,460 + $26,550 X = $23,610 Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 153. MoveLo Company had $85,380 of accounts payable on September 1 and $76,560 on September 30. During September, the company paid total cash of $79,650 on accounts payable. Determine the total purchases on account during September. A) $ 88,470 B) $259,230 C) $241,590 D) $ 70,830 Answer: D Rationale: Beginning A/P balance + Purchases – Payments = Ending A/P balance $85,380 + X - $79,650 = $76,560 X = $76,560 - $85,380 + $79,650 X = $70,830 ©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-73
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 154. On November 30, Sydney Company had Accounts Receivable of $130,280. During the month of December, the company received total payments of $160,000 from credit customers. The Accounts Receivable on December 31 was $86,320. What was the amount of credit sales during December? A) $373,360 B) $116,040 C) $196,720 D) $63,840 Answer: B Rationale: Beginning A/R balance + Sales on account – Cash receipts = Ending A/R balance $130,280 + X - $160,000 = $86,320 X = $86,320 - $130,280 + $160,000 X = $116,040 Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 155. On November 30, Brisbane Company had Accounts Receivable of $390,840. During the month of December, the company received total payments of $480,000 from credit customers. The Accounts Receivable on December 31 was $258,960. What was the amount of credit sales during December? A) $ 191,520 B) $1,120,080 C) $ 348,120 D) $ 590,160 Answer: C Rationale: Beginning A/R balance + Sales on account – Cash receipts = Ending A/R balance $390,840 + X - $480,000 = $258,960 X = $258,960 - $390,840 + $480,000 X = $348,120
©Cambridge Business Publishers, 2020 2-74
Financial Accounting for Undergraduates, 4th Edition
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 156. The accountant at Fog Company recorded the purchase of $600 of supplies for cash as a debit to Supplies for $600 and a credit to Accounts Payable for $600. Determine the effect of this error on the accounting equation of Fog Company. A) Total Equity would be overstated by $600 B) Total Liabilities will be understated by $600 C) Total Assets would be overstated by $600 D) Total Equity would be understated by $600 Answer: C Rationale: Assets Correct entry: Supplies Cash
Liabilities
Equity
600 (600) 0
Entry made: Supplies A/P
600 ____
600
Difference:
600
600
Both Assets and Liabilities are overstated. Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 157. The accountant at Befuddled Company recorded the purchase of $1,800 of supplies for cash as a debit to Supplies for $1,800 and a credit to Accounts Payable for $1,800. Determine the effect of this error on the accounting equation of Befuddled Company. A) Total Equity would be understated by $1,800 B) Total Equity would be overstated by $1,800 C) Total Liabilities would be understated by $1,800 D) Total Assets would be overstated by $1,800 Answer: D Rationale: Assets Correct entry: Supplies Cash
Liabilities
Equity
1,800 (1,800) 0
Entry made: Supplies A/P
1,800 ____
1,800
Difference:
1,800
1,800
Both Assets and Liabilities are overstated.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-75
Topic: Trial Balance LO: 6 Level of Difficulty: DIFFICULT 158. Which of the following errors, each considered individually, would cause the trial balance totals to be unequal? A) A transaction was not posted B) A payment of $112 for insurance was posted as a debit of $112 to Prepaid Insurance and a credit of $112 to Cash C) A payment of $422 to a creditor was posted as a debit of $4,222 to Accounts Payable and a credit of $422 to Cash D) Cash received from customers on account was posted as a debit of $200 to Cash and a credit of $200 to Accounts Payable Answer: C Rationale: An error in which the debit and credit portion of the entry are not equal will cause the trial balance totals to be unequal. Topic: Trial Balance LO: 6 Level of Difficulty: DIFFICULT 159. Which of the following errors, each considered individually, would cause the trial balance totals to be unequal? A) Cash received from customers on account was posted as a debit of $600 to Cash and a credit of $600 to Accounts Payable B) A transaction was not posted C) A payment of $446 for insurance was posted as a debit of $446 to Prepaid Insurance and a credit of $446 to Cash D) A payment of $1,266 to a creditor was posted as a debit of $12,666 to Accounts Payable and a credit of $1,266 to Cash Answer: D Rationale: An error in which the debit and credit portion of the entry are not equal will cause the trial balance totals to be unequal.
©Cambridge Business Publishers, 2020 2-76
Financial Accounting for Undergraduates, 4th Edition
Topic: Trial Balance LO: 6 Level of Difficulty: DIFFICULT 160. The purchase of a delivery truck for $19,000 (on credit) was posted as debit to Delivery Trucks for $19,000, and a debit to Notes Payable for $19,000. What effect would this error have on the trial balance? A) The total of the Debit column of the trial balance will exceed the total of the Credit column by $19,000. B) The total of the Credit column of the trial balance will exceed the total of the Debit column by $19,000. C) The total of the Credit column of the trial balance will exceed the total of the Debit column by $38,000. D) The total of the Debit column of the trial balance will exceed the total of the Credit column by $38,000. Answer: D Rationale: Entry made: Delivery Trucks Notes Payable Balance
Trial Balance Debit Credit $19,000 19,000 $38,000 $0
The entry made will result in the Debit column of the trial balance exceeding the total of the Credit column by $38,000. The entry to record the purchase of the delivery truck should have been: Correct entry: Delivery Trucks Notes Payable Balance
Trial Balance Debit Credit $19,000 $19,000 $19,000 $19,000
which would have resulted in the debit and credit columns of the trial balance being equal.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-77
Topic: Trial Balance LO: 6 Level of Difficulty: DIFFICULT 161. The purchase of a delivery truck for $57,000 (on credit) was posted as debit to Delivery Trucks for $57,000, and a debit to Notes Payable for $57,000. What effect would this error have on the trial balance? A) The total of the Debit column of the trial balance will exceed the total of the Credit column by $114,000. B) The total of the Debit column of the trial balance will exceed the total of the Credit column by $57,000. C) The total of the Credit column of the trial balance will exceed the total of the Debit column by $57,000. D) The total of the Credit column of the trial balance will exceed the total of the Debit column by $114,000. Answer: A Rationale: Entry made: Delivery Trucks Notes Payable Balance
Trial Balance Debit Credit $57,000 57,000 $114,000 $0
The entry made will result in the Debit column of the trial balance exceeding the total of the Credit column by $114,000. The entry to record the purchase of the delivery truck should have been: Correct entry: Delivery Trucks Notes Payable Balance
Trial Balance Debit Credit $57,000 $57,000 $57,000 $57,000
which would have resulted in the debit and credit columns of the trial balance being equal.
©Cambridge Business Publishers, 2020 2-78
Financial Accounting for Undergraduates, 4th Edition
Topic: Trial Balance LO: 6 Level of Difficulty: MEDIUM 162. The unadjusted Trial Balance for Ann Z. Company shows the following accounts (in alphabetical order) on December 31, 2019. Each account shown has a normal balance. Accounts Receivable Building Cash Common Stock Dividends Land Rent Expense Retained Earnings, Jan 1, 2019 Service Revenue
26,400 107,800 11,200 146,000 5,000 41,600 4,800 43,200 22,600
Utilities Expense
?
Assuming the Trial Balance is in balance, determine Ann Z, Company’s Utilities Expense for 2019: A) $19,000 B) $15,000 C) $ 7,800 D) $ 5,800 Answer: B Rationale: (in alphabetical order): Ann Z. Company Trail Balance December 31, 2019 Debit $ 26,400 107,800 11,200
Accounts Receivable Building Cash Common Stock Dividends Land Rent Expense Retained Earnings, Jan 1, 2019 Service Revenue Utilities Expense Totals Difference
Credit
$146,000 5,000 41,600 4,800
____?___ $196,800 $ 15,000
43,200 22,600 _______ $211,800
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-79
Topic: Trial Balance LO: 6 Level of Difficulty: MEDIUM 163. The unadjusted Trial Balance for N. Gaffney Company shows the following accounts (in alphabetical order) on December 31, 2019. Each account shown has a normal balance. Accounts Receivable Building Cash Common Stock Dividends Land Rent Expense Retained Earnings, Jan 1, 2019 Service Revenue
79,200 323,400 33,600 438,000 15,000 124,800 14,400 129,600 67,800
Utilities Expense
?
Assuming the Trial Balance is in balance, determine N. Gaffney Company’s Utilities Expense for 2019: A) $17,400 B) $57,000 C) $45,000 D) $23,400 Answer: C Rationale: (in alphabetical order): N. Gaffney Company Trail Balance December 31, 2019 Debit $ 79,200 323,400 33,600
Accounts Receivable Building Cash Common Stock Dividends Land Rent Expense Retained Earnings, Jan 1, 2019 Service Revenue Utilities Expense Totals Difference
Credit
$438,000 15,000 124,800 14,400
____?____ $590,400 $ 45,000
129,600 67,800 _______ $635,400
©Cambridge Business Publishers, 2020 2-80
Financial Accounting for Undergraduates, 4th Edition
Topic: Trial Balance LO: 6 Level of Difficulty: MEDIUM 164. As of December 31, 2019, the Balance Sheet of Potawatomi Products, Inc. contains the following items (in random order): $12,000 90,000 250,000 135,000 30,000 7,000 110,000 188,000
Accounts Payable Land Building Notes Payable Accounts Receivable Cash Retained Earnings Common Stock Equipment
?
Determine the amount of Equipment. A) $ 43,500 B) $345,000 C) $ 42,000 D) $ 68,000 Answer: D Rationale: (in random order): Potawatomi Products, Inc. Trail Balance December 31, 2019 Debit Accounts Payable Land Building Notes Payable Accounts Receivable Cash Retained Earnings Common Stock Equipment Total Difference
Credit $ 12,000
$ 90,000 250,000 135,000 30,000 7,000
___?___ $377,000 $68,000
110,000 188,000 _______ $445,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-81
Topic: Trial Balance LO: 6 Level of Difficulty: MEDIUM 165. As of December 31, 2019, the Balance Sheet of Pokagon Products, Inc. contains the following items (in random order): $36,000 270,000 750,000 405,000 90,000 21,000 330,000 564,000
Accounts Payable Land Building Notes Payable Accounts Receivable Cash Retained Earnings Common Stock Equipment
?
Determine the amount of Equipment. A) $ 204,000 B) $ 130,500 C) $1,035,000 D) $ 126,000 Answer: A Rationale: (in random order): Pokagon Products, Inc. Trail Balance December 31, 2019 Debit Accounts Payable Land Building Notes Payable Accounts Receivable Cash Retained Earnings Common Stock Equipment Total Difference
Credit $36,000
$ 270,000 750,000 405,000 90,000 21,000
___?____ $1,131,000 $204,000
330,000 564,000 _______ $1,335,000
©Cambridge Business Publishers, 2020 2-82
Financial Accounting for Undergraduates, 4th Edition
Exercises Topic: Fiscal Year-End LO: 1 1. Why would a company want to have a fiscal year-end that does not match the calendar year-end? Answer: A company might set a fiscal year-end that is different from its calendar year-end to allow them to prepare closing accounting records that does not coincide with the busiest shopping season of the year or busiest production time. Thus, the decision about a fiscal year may minimize workload compression and move it to the slowest part of the business year. As such, the fiscal year serves as a period of accounting cycle reference, with the decision allowing a better match for submission of accounting documents to regulatory agencies and inspection by auditors. Topic: Accounting Cycle LO: 1 2. Do the steps in the accounting cycle occur with equal frequency? Why or why not? Answer: No, the steps in the accounting cycle do not occur with equal frequency because companies analyze and record daily transactions throughout the accounting period. However, they only adjust and report when management requires financial statements, often monthly or quarterly, but at least annually. The last step in the accounting cycle is closing, which only occurs once during the accounting cycle, at the period-end. Topic: Transaction Analysis LO: 2 3. The following balance sheet information is given for Minerva, Inc., at June 30, 2019: Supplies Accounts Payable Cash Equipment
$ 42,000 30,000 30,000 468,000
Accounts Receivable Common Stock Retained Earnings Notes Payable
$ 102,000 375,000 ? 84,000
Assume that, during the next three days, the following transactions occurred: July 1 2 3
Paid $15,000 on accounts payable. Purchased equipment for $75,000 and gave a note payable for the amount due. Declared and paid a cash dividend, $12,000.
a. What was the amount of retained earnings on June 30, 2019? b. Assume a balance sheet is prepared on July 3, 2019, after the three transactions have occurred: (1) What amount of total assets would appear? (2) What amount of total liabilities would appear? (3) What amount of stockholders’ equity would appear?
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-83
Answer: a. $30,000 Cash + $102,000 Accounts Receivable + $42,000 Supplies + $468,000 Equipment = $642,000 Total Assets $642,000 Total Assets – $30,000 Accounts Payable – $84,000 Notes Payable – $375,000 Common Stock = $153,000 Retained Earnings. b.
Assets Beginning July 1 2 3 Ending
Liabilities
$642,000 – 15,000 + 75,000 – 12,000 (1) $690,000
Stockholders’ Equity
$114,000 – 15,000 + 75,000 (2) $174,000
$528,000 – 12,000 (3) $516,000
Topic: Analyzing Accounts LO: 2, 3 4. Compute the unknown amount required in each of the following four independent situations. Beginning Balance
Ending Balance
Other Information
(1) Cash
$19,200
$25,000
Total cash disbursed, $30,000
(2) Accounts Receivable
11,200
16,000
Services rendered on account, $40,000
(3) Accounts Payable
11,000
11,800
Supplies acquired on account, $20,000
0
74,000
Service rendered on account, $40,000
Account
(4) Service Fees Earned a.
Total cash received
$
b.
Total amount received from credit customers
$
c.
Payments on account during the period
$
d.
Services rendered for cash
$
Answer: a. Ending cash + cash disbursed – Beginning cash = $25,000 + $30,000 – $19,200 = $35,800 b. Beginning A/R + Services rendered on account – Ending A/R = $ 11,200 + $40,000 – $16,000 = $35,200 c.
Beginning A/P + Supplies purchased on account – Ending A/P = $ 11,000 + $20,000 – $11,800 = $19,200
d. Service fees earned – Service rendered on account = $74,000 – $40,000 = $34,000
©Cambridge Business Publishers, 2020 2-84
Financial Accounting for Undergraduates, 4th Edition
Topic: Debits and Credits LO: 4, 5 5. Match each of the numbered transactions of a corporation with the appropriate letters, indicating the debits and credits to be made (give the debit first). The correct answer for transaction (1) is provided. (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
A shareholder purchased stock. Paid rent for the current month Received and immediately paid repair bill. Purchased equipment on account. Billed customers for services rendered. Made partial payment for equipment purchased in transaction (4). Collected amounts due from customers billed in transaction (5). Borrowed money from bank, giving a note. Paid cash dividends. Paid employees’ salaries.
a, f
Effect of Transaction a. b. c. d. e. f.
Debit an asset Credit an asset Debit a liability Credit a liability Debit common stock Credit common stock
g. h. i. j. k. l.
Debit dividends Credit dividends Debit revenue Credit revenue Debit expense Credit expense
Answer: (1) A shareholder purchased stock. (2) Paid rent for the current month (3) Received and immediately paid repair bill. (4) Purchased equipment on account. (5) Billed customers for services rendered. (6) Made partial payment for equipment purchased in transaction (4). (7) Collected amounts due from customers billed in transaction (5). (8) Borrowed money from bank, giving a note. (9) Paid cash dividends. (10) Paid employees’ salaries.
a, f k, b k, b a, d a, j c, b a, b a, d g, b k, b
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-85
Topic: Recording Transactions LO: 5 6. The following T-accounts contain numbered entries for the July transactions of NCN, Inc., which opened on July 1 of this year. (1) (7) (9)
(5)
Cash 90,000 27,000 15,000 12,000 24,300 2,700 1,500
(2) (4) (6) (8)
Accounts Receivable 31,200 24,300
(9)
(3)
Supplies 7,200
(2)
Office Equipment 27,000
(6)
Accounts Payable 2,700 7,200
(8)
Notes Payable 15,000
(7)
Common Stock 90,000
(1)
Dividends 1,500 Professional Fees Earned 31,200 (5)
(3)
(4)
Rent Expense 12,000
Give a reasonable description of each of the nine numbered transactions entered in the above accounts. Example: (1) Shareholders invested $90,000 cash in the business. Answer: (1) Provided. (2) Purchased office equipment for cash, $27,000. (3) Purchased supplies on account, $7,200. (4) Paid rent expense, $12,000. (5) Billed clients $31,200 for professional services. (6) Paid $2,700 on accounts payable. (7) Borrowed $15,000 cash, giving a note payable. (8) Paid $1,500 cash dividends to shareholders. (9) Collected $24,300 on account from clients.
©Cambridge Business Publishers, 2020 2-86
Financial Accounting for Undergraduates, 4th Edition
Topic: Analyzing Transactions with T-Accounts LO: 5 7. Use the T-account below, to answer the following questions. 1/1 4/1 12/31
Accounts Receivable (A) 320,000 4,800,400 3,013,000 ?
9/1
a. What journal entry is most likely represented by $4,800,400 in the T-account? What business event caused this? b. What journal entry is most likely represented by the $3,013,000 in the T-account? What business event caused this? c.
What is the balance of Accounts Receivable on December 31?
Answer: a. 4/1
b.
9/1
Accounts receivable Sales revenue The company sold merchandise (or services) on account.
4,800,400
Cash
3,013,000
Accounts receivable The company collected cash from customers. c.
4,800,400
3,013,000
$320,000 + $4,800,400 – $3,013,000 = $2,107,400
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-87
Problems Topic: Recording Transactions LO: 3, 4, 5 1. Make T-accounts for the following general ledger accounts of Mighty Movers, which began business on January 1, 2019: Cash; Accounts Receivable; Supplies; Equipment; Accounts Payable; Notes Payable; Common Stock; Dividends; Moving Fees Earned; Salaries Expense; Rent Expense; and Utilities Expense. Record the following January 2019 transactions in the accounts and key each entry with the transaction number. (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
Shareholders purchased $270,000 in stock. Paid rent for the month, $3,300. Purchased equipment for $90,000, giving a note payable for $90,000. Purchased supplies on account, $15,000. Billed clients for services rendered, $57,000. Paid salaries for the month, $23,400. Paid $12,000 on account for supplies purchased in transaction (4). Collected $26,100 from clients previously billed. Paid utilities for the month, $1,470. Paid $17,400 cash dividends.
Answer: Cash 270,000 3,300 26,100 23,400 12,000 1,470 17,400
(2) (6) (7) (9) (10)
(5)
Accounts Receivable 57,000 26,100
(8)
(4)
Supplies 15,000
(3)
Equipment 90,000
(7)
Accounts Payable 12,000 15,000 Notes Payable 90,000
(1) (8)
Common Stock 270,000
(10)
(1)
Dividends 17,400 Moving Fees Earned 57,000
(6)
Salary Expense 23,400
(4)
(2)
Rent Expense 3,300
(3)
(9)
Utilities Expense 1,470
(5)
©Cambridge Business Publishers, 2020 2-88
Financial Accounting for Undergraduates, 4th Edition
Topic: Journal Entries LO: 5 2. Andes Transport, Inc. has the following accounts (among others) in its general ledger: Cash; Accounts Receivable; Prepaid Rent; Supplies; Delivery Trucks; Accounts Payable; Unearned Delivery Fees; Common Stock; Dividends; Delivery Fees Earned; Rent Expense; and Salaries Expense. Prepare general journal entries to record the following transactions: June 1 2 3 9 14 17 20 29 30 Answer: June 1
2
3
Shareholders contributed $60,000 cash and a delivery truck worth $34,000 in exchange for stock. Paid $12,000 as rent for June, July, and August. Purchased supplies on account, $5,600. Billed customers for deliveries made, $6,200. Received $2,000 cash from a customer as advance payment for deliveries scheduled throughout July. Paid $3,000 on account to suppliers. Collected $4,600 on account from customers. Paid $1,500 cash dividends to shareholders Paid salaries for June, $4,000. Cash Delivery Trucks Common Stock Contributed cash and delivery truck in exchange for stock.
60,000 34,000
Prepaid Rent Cash Paid rent for June, July, and August.
12,000
Supplies
5,600
94,000
12,000
Accounts Payable Purchased supplies on account. 9
14
5,600
Accounts Receivable Delivery Fees Earned Billed customers for deliveries made.
6,200
Cash
2,000
6,200
Unearned Delivery Fees Received advance payment from customer. 17
20
2,000
Accounts Payable Cash Paid suppliers on account.
3,000
Cash
4,600
3,000
Accounts Receivable Received payments from customers on account. 29
Dividends
4,600 1,500
Cash Paid cash dividends. 30
Salaries Expense Cash Paid salaries for June.
1,500 4,000 4,000 ©Cambridge Business Publishers, 2020
Test Bank, Chapter 2
2-89
Topic: Journal Entries LO: 5 3. Helen H. Designs has the following accounts in its general ledger: Cash; Accounts Receivable; Supplies; Office Equipment; Accounts Payable; Common Stock; Dividends; Service Fees Earned; Rent Expense; and Salaries Expense. Prepare general journal entries to record the following transactions: May 1 2 4 5 12 18 19 26 31 Answer: May 1
Shareholders invested $330,000 cash in exchange for stock. Paid May rent, $15,900. Purchased office equipment for $27,000, paying $9,000 cash, with the balance due on account in 60 days. Purchased supplies on account, $6,900. Billed clients for services, $17,400. Collected $11,400 on account from clients. Paid $4,500 on account to suppliers. Paid $27,000 cash dividends. Paid salaries for May, $9,600.
Cash
330,000
Common Stock Cash received for stock. 2
4
5
330,000
Rent Expense Cash Paid May rent.
15,900
Office Equipment Cash Accounts Payable Purchased office equipment for $18,000. Terms: $6,000 down, remainder due in 60 days.
27,000
Supplies
6,900
15,900
9,000 18,000
Accounts Payable Purchased supplies on account. 12
18
6,900
Accounts Receivable Service Fees Earned Billed clients for services.
17,400
Cash
11,400
17,400
Accounts Receivable Received payments from clients on account. 19
Accounts Payable Cash Paid suppliers on account.
11,400 4,500 4,500
Continued next page
©Cambridge Business Publishers, 2020 2-90
Financial Accounting for Undergraduates, 4th Edition
May
26
Dividends
27,000
Cash Paid cash dividends. 31
27,000
Salaries Expense Cash Paid salaries for May.
9,600 9,600
Topic: Trial Balance LO: 6 4. The following accounts, in alphabetical order, are from the general ledger of Oma Bean’s Advice Service, Inc. at January 31, 2019. The firm’s accounting year began on January 1. All accounts have normal balances. Accounts payable Accounts receivable Advertising expense Common stock Dividends Cash Equipment
$ 6,900 36,400 1,680 53,200 5,400 17,000 19,080
Insurance expense Rent expense Salaries expense Service fees earned Supplies expense Supplies inventory Utilities expense
$
1,120 1,700 10,800 38,300 960 3,120 1,140
Prepare a trial balance at January 31, 2019, from the given data. Answer: OMA BEAN’S ADVICE SERVICE, INC. Trial Balance January 31, 2019 Cash Accounts receivable Supplies inventory Equipment Accounts payable Common stock Dividends Service fees earned Advertising expense Insurance expense Rent expense Salaries expense Supplies expense Utilities expense
Debit $ 17,000 36,400 3,120 19,080
Credit
$ 6,900 53,200 5,400 38,300 1,680 1,120 1,700 10,800 960 1,140 $98,400
$98,400
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-91
Chapter 2 Processing Accounting Information Learning Objectives – Coverage by question True / False
Multiple Choice
Exercises
Problems
LO1 – Identify the five major steps in the accounting cycle.
1-6
1-4
1, 2
LO2 – Analyze and record transactions using the accounting equation.
7-11, 24
5-14, 56-127
3, 4
LO3 – Explain the nature, format, and purpose of an account.
12, 20, 21, 32
15, 35, 48, 128-157
4
1
LO4 – Describe the system of debits and credits and its use in recording transactions.
13-19
16-22
5
1
LO5 – Explain the process of journalizing and posting transactions.
22, 23, 25-31, 33-36
23-34, 36-47, 49, 50
5-7
1-3
LO6 – Describe the trial balance.
37-39
51-55, 158-165
4
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-1
Chapter 2: Processing Accounting Information
True / False Topic: Accounting Cycle LO: 1 1. The first step in the accounting cycle is to record transactions in a journal. Answer: False Rationale: The first step in the accounting cycle is to analyze transactions from source documents.
Topic: Accounting Cycle LO: 1 2. The first step in the accounting cycle is to analyze transactions from source documents. Answer: True Rationale: There are five major steps in the accounting cycle. In order, they are: 1) Analyze - analyze transactions for source documents, 2) Record - journalize transactions and prepare unadjusted trail balance, 3) Adjust – journalize adjusting entries and prepare adjusted trial balance, 4) Report – prepare financial statements, and 5) Close – journalize closing entries and prepare post-closing trial balance.
Topic: Accounting Cycle LO: 1 3. The first five steps in the accounting cycle occur with equal frequency. Answer: False Rationale: The five steps in the accounting cycle do not occur with equal frequency.
Topic: Accounting Cycle LO: 1 4. The accounting cycle step that occurs most frequently is to adjust the general ledger accounts. Answer: False Rationale: A business analyzes and records financial transactions daily during the accounting period, but adjusts general ledger accounts less frequently.
Topic: Fiscal Year LO: 1 5. A company’s fiscal year cannot coincide with the calendar year. Answer: False Rationale: A company’s fiscal year often coincides with the calendar year, but it need not.
©Cambridge Business Publishers, 2020 2-2
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Fiscal Year LO: 1 6. All companies have a fiscal year ending on December 31. Answer: False Rationale: Only about 60% of companies have fiscal year ends that correspond to the calendar year end.
Topic: Transaction Analysis LO: 2 7. If Nathan, Inc. purchased equipment on credit from John Company, then the transaction recorded by Nathan would include an increase in a liability and an increase in asset. Answer: True Rationale: The transaction recorded by Nathan would include an increase to an asset (equipment) and an increase to a liability (accounts payable).
Topic: Deferred Revenue LO: 2 8. Deferred revenue and unearned revenue both refer to cash that has been received but not yet earned. Answer: True Rationale: Both unearned revenue and deferred revenue refer to fees received before services are performed to earn those fees.
Topic: The Double-Entry Accounting System LO: 2 9. Under the double-entry accounting system, no more than two accounts can be affected by each transaction. Answer: False Rationale: Each transaction recorded under the double-entry accounting system must affect at least two accounts. It can affect more than two.
Topic: Analyzing Transactions LO: 2 10. When a firm purchases equipment for cash, both assets and stockholders’ equity increase. Answer: False Rationale: The asset equipment will increase, and the asset cash will decrease, with no effect on stockholders’ equity.
Topic: Transaction Analysis LO: 2 11. When money is borrowed, both an asset account and a revenue account are increased. Answer: False Rationale: Both an asset account and a liability account are increased when money is borrowed.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-3
Topic: Accounts LO: 3 12. An account is an individual record of increases and decreases in a specific asset, liability, or stockholders’ equity item. Answer: True Rationale: The account is the basic component of an accounting system. An account is created for each individual, asset, liability, and stockholders’ equity item on a company’s financial statements.
Topic: Debits and Credits LO: 4 13. Regardless of the business activity recorded, the left side of an account is the debit side and the right side is the credit side. Answer: True Rationale: The terms debit and credit are used to refer to the left side and the right side, respectively.
Topic: Normal Balances LO: 4 14. All accounts have normal balances on the debit side. Answer: False Rationale: Asset, dividend, and expense accounts normally have debit balances, while liabilities, common stock, and revenue accounts normally have credit balances.
Topic: Normal Balances LO: 4 15. The normal balance in a revenue account is a credit balance. Answer: True Rationale: The normal balance of an account is the side on which increases are recorded. This is because increases in an account are usually greater than, or equal to, the decreases to an account. Assets, dividend, and expense accounts normally have debit balances, whereas liabilities, common stock, and revenue accounts normally have credit balances.
Topic: Debits and Credits LO: 4 16. Asset accounts are increased with debit entries. Answer: True Rationale: The normal balance of an account is the side on which increases are recorded. Assets, dividend, and expense accounts normally have debit balances, whereas liabilities, common stock, and revenue accounts normally have credit balances.
©Cambridge Business Publishers, 2020 2-4
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Debits and Credits LO: 4 17. Expense accounts are increased with credit entries. Answer: False Rationale: Expense accounts are increased with debit entries and decreased with credit entries.
Topic: Normal Balances LO: 4 18. The normal balance for an account is the side in which increases are recorded. Answer: True Rationale: The normal balance of an account is the side on which increases are recorded. This is because increases in an account are usually greater than, or equal to, the decreases to an account. Assets, dividend, and expense accounts normally have debit balances, whereas liabilities, common stock, and revenue accounts normally have credit balances.
Topic: T-Account LO: 4 19. The typical form of a T-account shows debits on the right and credits on the left. Answer: False Rationale: A T-account tracks debits on the left and credits on the right.
Topic: Chart of Accounts LO: 3 20. The chart of accounts is a tabular record in which business activities are analyzed in terms of debits and credits and recorded in chronological order. Answer: False Rationale: The chart of accounts lists the titles and numbers of all accounts found in the general ledger.
Topic: Chart of Accounts LO: 3 21. The chart of accounts is also known as the book of original entry. Answer: False Rationale: The general journal is also known as the book of original entry.
Topic: Posting LO: 5 22. The process of transferring debit and credit entries from the journal to their related general ledger accounts is called “posting.” Answer: True Rationale: Posting results when debits and credits are entered into the general ledger from the journal.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-5
Topic: Debit and Credit System and Compound Entry LO: 5 23. A compound entry does not necessarily have to maintain total debits equal to total credits. Answer: False Rationale: A compound entry must adhere to the rule: total debits equal total credits.
Topic: Transaction Analysis LO: 2 24. The analysis of each transaction must result in equal amounts being recorded as debits and as credits. Answer: True Rationale: Data entries are recorded following a simple set of rules, (convention). The accounting equation (assets = liabilities + stockholders’ equity) must always remain in balance and at least two elements of the equation are always affected. Total debits must equal total credits.
Topic: General Ledger LO: 5 25. A general ledger is a grouping of a firm’s permanent accounts. Answer: False Rationale: A general ledger is a listing of each account of a company, including permanent and temporary accounts, and the amounts making up each account.
Topic: Journalizing and Posting LO: 5 26. Transactions are first recorded in a journal and then posted to the general ledger. Answer: True Rationale: After an accounting transaction is journalized in the general journal, the debits and credits of each journal entry are immediately transferred (posted) to the general ledger.
Topic: Journalizing and Posting LO: 5 27. Transactions are first recorded in the general ledger and then posted to a journal. Answer: False Rationale: Transactions are first recorded in a journal and then posted to the general ledger.
©Cambridge Business Publishers, 2020 2-6
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Source Documents LO: 5 28. The most important source documents used in analyzing transactions are a firm’s general journal and general ledger. Answer: False Rationale: The general journal and general ledger are not source documents. Source documents are printed forms or computer records that are generated when a firm engages in a business transaction. The source document usually specifies the dollar amount involved, the date of the transaction, and possibly the party dealing with the firm. The source document serves as the basis of analysis for an underlying business event.
Topic: Source Documents LO: 5 29. Two examples of source documents are a seller’s invoice and a bank deposit slip. Answer: True Rationale: Source documents are printed forms or computer records that are generated when a firm engages in a business transaction. The source document usually specifies the dollar amount involved, the date of the transaction, and possibly the party dealing with the firm. The source document serves as the basis of analysis for an underlying business event. A seller’s invoice and a bank deposit slip are source documents.
Topic: Debits and Credits LO: 5 30. Each transaction entered in a general journal must have equal dollar amounts of debits and credits. Answer: True Rationale: Data entries are recorded following a simple set of rules, (convention). The accounting equation (assets = liabilities + stockholders’ equity) must always remain in balance and at least two elements of the equation are always affected. Total debits must equal total credits.
Topic: General Journal LO: 5 31. A general journal has three amount columns: a debit column, a credit column, and a balance column. Answer: False Rationale: A general journal just has two amount columns: a debit column and a credit column.
Topic: Chart of Accounts LO: 3 32. A chart of accounts is a list of the title and numerical code of all accounts in the general ledger. Answer: True Rationale: A chart of accounts is a list of the titles of all the accounts in a business’s accounting system. Account titles are grouped by, and in order of, assets, liabilities, stockholders’ equity, revenue, and expenses.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-7
Topic: Journal LO: 5 33. A journal is a record of original entry which presents chronologically, and in one place, the total effect of a business transaction. Answer: True Rationale: A journal, or book of original entry, is a tabular record in which a business’s activities are reflected in terms of debits and credits and recorded in chronological order. A journal organizes information by date.
Topic: Compound Journal Entry LO: 5 34. A compound journal entry involves at least three accounts. Answer: True Rationale: A journal entry that involves more than two accounts is called a compound journal entry.
Topic: Posting LO: 5 35. Posting is the process of transferring the debits and credits of each journal entry to the appropriate general ledger accounts. Answer: True Rationale: After an accounting transaction is journalized in the general journal, the debits and credits of each journal entry are immediately transferred (posted) to the general ledger.
Topic: Posting LO: 5 36. Posting is the process of formally recording a business transaction in the appropriate journal. Answer: False Rationale: Posting is the process of transferring the debits and credits of each journal entry to the appropriate general ledger accounts.
Topic: Trial Balance LO: 6 37. A trial balance is a list of the account titles in the general ledger with their respective debit and credit balances. Answer: True Rationale: The trial balance is a listing of all accounts from, the general ledger with their respective debit or credit balance. A trial balance is prepared at the end of an accounting period after all transactions have been recorded. The trial balance shows all general ledger account balances in one location, which facilitates the preparation of financial statements. The trial balance, however, is not a financial statement.
©Cambridge Business Publishers, 2020 2-8
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Trial Balance LO: 6 38. One reason for taking a trial balance is to determine if the debits and credits in the general ledger are equal. Answer: True Rationale: The trial balance serves as an interim check on whether the sum of the debit balances and the sum of the credit balances from the general ledger accounts are equal. If the totals are not equal, it would indicate the presence of some type of recording error.
Topic: Trial Balance LO: 6 39. One reason for preparing a trial balance is to make sure that all of the period’s transactions have been recorded. Answer: False Rationale: A trial balance cannot assure you that all the period’s transactions have been recorded.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-9
Multiple Choice Topic: Accounting Cycle LO: 1 Level of Difficulty: EASY 1. Which of the following is the correct order of the steps in the accounting cycle? A) Adjust, report, analyze, record, and close B) Record, report, analyze, adjust, and close C) Report, analyze, close, record, and adjust D) Analyze, record, adjust, report, and close Answer: D Rationale: The steps in the cycle are to first analyze the transaction, the record it, then make any necessary adjustments, report the results, and finally to close the temporary accounts to ready them for the next period’s activity.
Topic: Fiscal Year LO: 1 Level of Difficulty: EASY 2. A company’s fiscal year may: A) Be any portion of a year including a month or quarter B) Be for a period either greater or less than 12 months C) Be the same as the calendar year D) All of the above are true of a company’s fiscal year Answer: C Rationale: A company’s fiscal year must be a complete year, may not be for a period greater or less than 12 months, and may be the same as the calendar year.
Topic: Accounting Cycle LO: 1 Level of Difficulty: EASY 3. The first two steps of the accounting cycle, in proper sequence, are: A) Record transactions in a journal and prepare a trial balance. B) Analyze transactions from source documents and post journal entries to general ledger accounts. C) Analyze transactions from source documents and record transactions in a journal. D) Record transactions in a journal and post journal entries to general ledger accounts. Answer: C Rationale: There are five major steps in the accounting cycle. In order, they are: 1) Analyze - analyze transactions for source documents, 2) Record - journalize transactions and prepare unadjusted trail balance, 3) Adjust – journalize adjusting entries and prepare adjusted trial balance, 4) Report – prepare financial statements, and 5) Close – journalize closing entries and prepare post-closing trial balance.
©Cambridge Business Publishers, 2020 2-10
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Accounting Cycle LO: 1 Level of Difficulty: EASY 4. Which of the following is not among the five major steps in the accounting cycle? A) Record transactions in a journal B) Prepare a chart of accounts C) Adjust the general ledger accounts and prepare an adjusted trial balance D) Analyze transactions from source documents Answer: B Rationale: There are five major steps in the accounting cycle. In order, they are: 1) Analyze—analyze transactions for source documents, 2) Record - journalize transactions and prepare unadjusted trail balance, 3) Adjust—journalize adjusting entries and prepare adjusted trial balance, 4) Report— prepare financial statements, and 5) Close—journalize closing entries and prepare post-closing trial balance. Preparing a chart of accounts is not one of the major steps.
Topic: Collection of a Receivable LO: 2 Level of Difficulty: EASY 5. Cash collected on accounts receivable would produce what effect on the balance sheet? A) Increase liabilities and decrease equity B) Decrease liabilities and increase equity C) Increase assets and decrease assets D) Decrease assets and decrease liabilities Answer: C Rationale: Cash collected on accounts receivable produces an increase in cash and a decrease in accounts receivable, both asset accounts. There is no impact on profit and on equity.
Topic: Accounting Equation LO: 2 Level of Difficulty: EASY 6. Which of the following is one effect of a purchase of $600 of supplies on credit? A) It would decrease liabilities by $600 B) It would decrease cash assets by $600 C) It would increase liabilities by $600 D) It would decrease retained earnings $600 Answer: C Rationale: The purchase on credit creates an account payable. It would increase liabilities by $600. In addition, the supplies account in the asset section of the balance sheet would also increase.
Topic: Analyzing and Recording Transactions LO: 2 Level of Difficulty: MEDIUM 7. Which of the following will properly record the payment of a two-year insurance policy? A) Increase assets and increase retained earnings B) Increase liabilities and decrease retained earnings C) Increase and decrease assets D) Decrease assets and decrease liabilities Answer: C Rationale: Prepaid insurance in increased and cash is decreased, both of which are assets. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-11
Topic: Accounting Transaction LO: 2 Level of Difficulty: EASY 8. An economic event that requires accounting recognition defines: A) An income statement B) An accounting transaction C) The cost principle D) An asset Answer: B Rationale: An accounting transaction is an economic event that must be recorded in the company’s accounting records.
Topic: Stockholders’ Equity LO: 2 Level of Difficulty: MEDIUM 9. Which of the following does not affect stockholders’ equity? A) Paying wages to employees B) Receiving an investment of cash from an owner C) Selling goods to customers with payment due in 30 days D) Purchasing equipment with payment due in 30 days Answer: D Rationale: The purchase of equipment (asset) with a payment due in 30 days (liability) does not affect stockholders’ equity. All of the other transactions do.
Topic: Stockholders’ Equity LO: 2 Level of Difficulty: MEDIUM 10. Which of the following increases stockholders’ equity? A) Providing services to clients with payment received immediately B) Purchasing supplies for cash C) Receiving payment in advance from a client for service to be performed in the future D) Collecting an amount owed by a client on account Answer: A Rationale: Providing services to clients (service revenue) increases stockholders’ equity. All of the other transactions do not.
Topic: Stockholders’ Equity LO: 2 Level of Difficulty: MEDIUM 11. Which of the following decreases stockholders’ equity? A) Purchasing equipment for cash B) Paying monthly rent in cash C) Issuing shares of stock D) Paying cash to settle an account payable Answer: B Rationale: Paying monthly rent (rent expense) decreases stockholders’ equity. transactions do not.
All of the other
©Cambridge Business Publishers, 2020 2-12
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Stockholders Equity LO: 2 Level of Difficulty: MEDIUM 12. Which of the following has no effect on stockholders’ equity? A) Issuing shares of stock B) Expenses and revenues C) Paying dividends D) None of the above Answer: D Rationale: All of the transactions impact stockholders’ equity.
Topic: Dividends LO: 2 Level of Difficulty: EASY 13. The declaration and payment of a dividend by a corporation causes: A) A decrease in assets and a decrease in liabilities. B) A decrease in assets and a decrease in retained earnings C) A decrease in assets and a decrease in common stock D) A decrease in assets and an increase in retained earnings Answer: B Rationale: Declaring dividends decreases retained earnings and payment of dividends decreases assets (cash).
Topic: Double-Entry Accounting LO: 2 Level of Difficulty: EASY 14. The double-entry system of debits and credits means that: A) Two pieces of information must be recorded for each transaction--the date and the dollar amount. B) Debits will be recorded twice as often as credits. C) At least two entries, a debit and a credit, must be made for each transaction. D) Each debit and credit will be recorded two times, once in the general ledger and once in the trial balance. Answer: C Rationale: The accounting equation always remains in balance and at least two elements of the equation are always affected.
Topic: Accounts LO: 3 Level of Difficulty: EASY 15. An individual record of increases and decreases in specific assets, liabilities, and stockholders’ equity is called: A) An account B) A normal balance C) A general ledger D) A trial balance Answer: A Rationale: The account is the basic component of an accounting system. An account is created for each individual, asset, liability, and stockholders’ equity item on a company’s financial statements.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-13
Topic: Debits and Credits LO: 4 Level of Difficulty: EASY 16. The term debit refers to: A) The left side of an account B) The right side of an account C) The side of an account on which increases are recorded D) Both A and C Answer: A Rationale: The terms debit and credit are used to refer to the left side and the right side, respectively, of an account.
Topic: Debits and Credits LO: 4 Level of Difficulty: EASY 17. The term credit refers to: A) The left side of an account B) The right side of an account C) The side of an account on which decreases are recorded D) Both B and C Answer: B Rationale: The terms debit and credit are used to refer to the left side and the right side, respectively, of an account.
Topic: Normal Balance LO: 4 Level of Difficulty: EASY 18. The normal balance of an account is: A) The debit side B) The credit side C) The side on which increases are recorded D) The side on which decreases are recorded Answer: C Rationale: The normal balance of an account is the side on which increases are recorded. This is because increases in an account are usually greater than, or equal to, the decreases to an account.
Topic: Normal Balance LO: 4 Level of Difficulty: EASY 19. Which of the following accounts normally has a credit balance? A) Accounts Receivable B) Dividends C) Notes Payable D) Rent Expense Answer: C Rationale: Assets, dividend, and expense accounts normally have debit balances, whereas liabilities, common stock, and revenue accounts normally have credit balances. Notes payable is a liability account, so the normal balance would be a credit balance.
©Cambridge Business Publishers, 2020 2-14
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Normal Balance LO: 4 Level of Difficulty: EASY 20. Which of the following accounts normally has a debit balance? A) Accounts Payable B) Common Stock C) Dividends D) Service Fees Earned Answer: C Rationale: Assets, dividend, and expense accounts normally have debit balances, whereas liabilities, common stock, and revenue accounts normally have credit balances. So, dividends would have a normal debit balance.
Topic: Debits and Credits LO: 4 Level of Difficulty: EASY 21. Debits to which accounts result in an increased balance? A) Assets and common stock B) Revenues and assets C) Common stock and expenses D) Assets and expenses Answer: D Rationale: The normal balance of an account is the side on which increases are recorded. Assets, dividend, and expense accounts normally have debit balances.
Topic: Debits and Credits LO: 4 Level of Difficulty: MEDIUM 22. In a double-entry accounting system: A) All accounts have normal debit balances B) A debit entry is recorded on the left side of an account C) Liabilities, common stock, and expense accounts all have normal credit balances D) A credit entry records a decrease in an account Answer: B Rationale: The terms debit and credit are used to refer to the left side and the right side, respectively, of an account.
Topic: Journalizing and Posting Transactions LO: 5 Level of Difficulty: MEDIUM 23. The Cash T-account of Rainbow, Inc. has a beginning balance of $52,000. During the year, $244,000 was debited and $241,000 was credited to the account. What is the ending balance of cash? A) $55,000 B) $37,000 C) ($ 5,000) D) Cannot be determined from the information given Answer: A Rationale: Beginning cash + Cash receipts – Cash payments = Ending Cash ($52,000 + $244,000 - $241,000) = $55,000 ©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-15
Topic: Journalizing and Posting Transactions LO: 5 Level of Difficulty: MEDIUM 24. The Cash T-account of Firefly, Inc. has a beginning balance of $156,000. During the year, $732,000 was debited and $723,000 was credited to the account. What is the ending balance of cash? A) $111,000 B) ($ 15,000) C) $165,000 D) Cannot be determined from the information given Answer: C Rationale: Beginning cash + Cash receipts – Cash payments = Ending Cash ($156,000 + $732,000 - $723,000) = $165,000
Topic: Analyzing an Account LO: 5 Level of Difficulty: MEDIUM 25. If the beginning Cash account balance of Crossbow, Inc. was $36,800, the ending balance was $20,400, and total cash received during the period was $88,000, what amount of cash was paid out during the period? A) $ 3,600 B) $ 84,800 C) $104,400 D) $ 71,600 Answer: C Rationale: Beginning cash + Cash receipts – Cash payments = Ending Cash ($36,800 + $88,000 - X = $20,400) (X = $ 36,800 + $88,000 – $20,400) = $104,400
Topic: Analyzing an Account LO: 5 Level of Difficulty: MEDIUM 26. If the beginning Cash account balance of Firefly, Inc. was $110,400, the ending balance was $61,200, and total cash received during the period was $264,000, what amount of cash was paid out during the period? A) $ 313,200 B) $ 214,800 C) $ 25,800 D) $ 254,850 Answer: A Rationale: Beginning cash + Cash receipts – Cash payments = Ending Cash ($110,400 + $264,000 - X = $61,200) (X = $110,400 + $264,000 – $61,200) = $313,200
©Cambridge Business Publishers, 2020 2-16
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Analyzing an Account LO: 5 Level of Difficulty: MEDIUM 27. If the beginning Cash account balance of Crossbow, Inc. was $20,000, the ending balance was $33,600, and the total cash paid out during the period was $64,000, what amount of cash was received during the period? A) $ 74,400 B) $ 77,600 C) $ 9,600 D) $ 93,600 Answer: B Rationale: Beginning cash + Cash receipts – Cash payments = Ending Cash ($20,000 + X - $64,000 = $33,600) (X = $33,600 + $64,000 – $20,000) = $77,600
Topic: Analyzing an Account LO: 5 Level of Difficulty: MEDIUM 28. If the beginning Cash account balance of Firefly, Inc. was $60,000, the ending balance was $100,800, and the total cash paid out during the period was $192,000, what amount of cash was received during the period? A) $280,800 B) $223,200 C) $232,800 D) $ 28,800 Answer: C Rationale: Beginning cash + Cash receipts – Cash payments = Ending Cash ($60,000 + X - $192,000 = $100,800) (X = $100,800 + $192,000 – $60,000) = $232,800
Topic: Analyzing an Account LO: 5 Level of Difficulty: MEDIUM 29. Beginning and ending Cash account balances of Crossbow, Inc. were $19,000 and $8,000, respectively. If total cash received during the period was $37,000, what amount of cash was paid out during the period? A) $ 48,000 B) $ 30,000 C) $ 46,000 D) $ 53,000 Answer: A Rationale: Beginning cash + Cash receipts – Cash payments = Ending Cash ($19,000 + $37,000 - X = $8,000) (X = $19,000 + $37,000 – $8,000) = $48,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-17
Topic: Analyzing an Account LO: 5 Level of Difficulty: MEDIUM 30. Beginning and ending Cash account balances of Firefly, Inc. were $57,000 and 24,000, respectively. If total cash received during the period was $111,000, what amount of cash was paid out during the period? A) $159,000 B) $144,000 C) $ 90,000 D) $138,000 Answer: B Rationale: Beginning cash + Cash receipts – Cash payments = Ending Cash ($57,000 + $111,000 - X = 24,000) (X = 57,000 + $111,000 – $24,000) = $144,000
Topic: Analyzing an Account LO: 5 Level of Difficulty: MEDIUM 31. Beginning and ending Cash account balances of Crossbow, Inc. were $14,000 and $32,000 respectively. If total cash paid out during the period was $30,000, what amount of cash was received during the period? A) $ 24,000 B) $ 48,000 C) $ 40,000 D) $ 36,000 Answer: B Rationale: Beginning cash + Cash receipts – Cash payments = Ending Cash ($14,000 + X - $30,000 = $32,000) (X = $32,000 + $30,000 – $14,000) = $48,000
Topic: Analyzing an Account LO: 5 Level of Difficulty: MEDIUM 32. Beginning and ending Cash account balances of Firefly, Inc. were $42,000 and $96,000 respectively. If total cash paid out during the period was $90,000, what amount of cash was received during the period? A) $ 108,000 B) $ 72,000 C) $ 144,000 D) $ 120,000 Answer: C Rationale: Beginning cash + Cash receipts – Cash payments = Ending Cash ($42,000 + X - $90,000 = $96,000) (X = $96,000 + $90,000 – $42,000) = $144,000
©Cambridge Business Publishers, 2020 2-18
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Recording Transactions LO: 5 Level of Difficulty: EASY 33. Which of the following journal entries will record the payment of a $2,550 accounts payable originally incurred for Office Supplies? A) Debit Cash; credit Accounts Payable B) Debit Accounts Payable; credit Cash C) Debit Office Supplies; credit Cash D) Debit Office Supplies; credit Accounts Payable Answer: B Rationale: The original entry was: Office supplies Accounts payable
2,550 2,550
The entry to record the payment of cash reduces the liability and reduces cash. Accounts payable 2,550 Cash 2,550
Topic: Recording Transactions LO: 5 Level of Difficulty: EASY 34. A company bills customers for services rendered on account. Which of the following is one part of recording this transaction? A) Debit Service Revenue B) Credit Cash C) Debit Accounts Receivable D) Credit Unearned Revenue Answer: C Rationale: The journal entry includes a debit to Accounts Receivable and a credit to Service Revenue.
Topic: Chart of Accounts LO: 3 Level of Difficulty: EASY 35. Account titles are commonly grouped into what five categories in the chart of accounts? A) Current assets, Current liabilities, Noncurrent assets, Noncurrent liabilities, Stockholders’ equity B) Assets, Liabilities, Equity, Revenue, Expenses C) Common stock, Additional paid-in capital, Treasury stock, Retained earnings, Accumulated other comprehensive income or loss D) Cash, Marketable securities, Accounts payable, Long-term debt, Common stock Answer: B Rationale: In the chart of accounts, account titles are commonly grouped into the five categories of: Assets, Liabilities, Equity, Revenues, and Expenses.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-19
Topic: Recording Transactions LO: 5 Level of Difficulty: MEDIUM 36. Maxwell Industries recorded and paid $1,400 advertising for the current month. Which occurred? A) Current assets increase B) Current liabilities decrease C) Net income decreases D) Retained earnings increases Answer: C Rationale: Assets (cash) decrease and Advertising Expense (an operating expense) increases, causing operating income to decrease.
Topic: Recording Transactions LO: 5 Level of Difficulty: EASY 37. When invoices are sent to customers billing them for services that have been performed, the correct transaction analysis is: A) Debit Accounts Receivable and credit Service Fees Earned B) Debit Accounts Payable and credit Service Fees Earned C) Debit Service Fees Earned and credit Accounts Receivable D) Debit Cash and credit Service Fees Earned Answer: A Rationale: Service Fees Earned is credited because the work (services) has been performed and the revenue is earned. Accounts Receivable is debited because the customer has not paid for the services performed yet, but will pay sometime in the future.
Topic: Recording Transactions LO: 5 Level of Difficulty: EASY 38. Recording the collection of accounts receivable from customers involves: A) Debiting Accounts Receivable and crediting Cash B) Debiting Cash and crediting Service Fees Earned C) Debiting Cash and crediting Accounts Payable D) Debiting Cash and crediting Accounts Receivable Answer: D Rationale: Cash is debited because a cash payment has been received. Accounts Receivable is credited to reflect a reduction (settlement) of the amount owed by customers for services (work) already provided (performed) to (for) them.
©Cambridge Business Publishers, 2020 2-20
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Recording Transactions LO: 5 Level of Difficulty: EASY 39. Recording a stock issuance in exchange for cash involves: A) Debiting Cash and crediting Notes Payable B) Debiting Cash and crediting Dividends C) Debiting Cash and crediting Common Stock D) Debiting Common Stock and crediting Cash Answer: C Rationale: Cash is debited because a cash payment has been received. Common stock is credited to reflect an increase in the amount of common stock outstanding, due to the issuance of common stock.
Topic: Recording Transactions LO: 5 Level of Difficulty: EASY 40. Recording the borrowing of money for which a note is signed involves: A) Debiting Cash and crediting Notes Receivable B) Debiting Cash and crediting Accounts Payable C) Debiting Cash and crediting Service Fees Earned D) Debiting Cash and crediting Notes Payable Answer: D Rationale: Cash is debited because cash payment has been received as a result of borrowing money. Notes Payable is credited to reflect an increase in liabilities, due to the borrowing of money.
Topic: Recording Transactions LO: 5 Level of Difficulty: EASY 41. Paying a previously recorded invoice from a supplier (of supplies) involves: A) Debiting Supplies and crediting Cash B) Debiting Accounts Payable and crediting Cash C) Debiting Supplies and crediting Accounts Payable D) Debiting Cash and crediting Supplies Answer: B Rationale: Accounts Payable is debited because an outstanding liability for the purchase of supplies on account has been reduced. Cash is credited to reflect a decrease in cash, due to the payment of money to settle the payable.
Topic: Recording Transactions LO: 5 Level of Difficulty: EASY 42. Recording the payment of dividends to shareholders involves: A) Debiting Dividends and crediting Cash B) Debiting Cash and Common Stock C) Debiting Withdrawal Expense and crediting Cash D) Debiting Notes Payable and crediting Cash Answer: A Rationale: Dividends are debited to reflect the cost of paying dividends. Cash is credited to reflect a decrease in cash, due to the payment of dividends. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-21
Topic: General Ledger LO: 5 Level of Difficulty: EASY 43. The general ledger can be described as: A) A list of account titles and balances at a certain date B) A grouping of the accounts used by an organization to prepare its basic financial statements C) A record on which are recorded the increases and decreases of a particular financial statement component, such as cash D) One of the basic financial statements of an organization Answer: B Rationale: The general ledger can be described as a grouping of the accounts used by an organization to prepare its basic financial statements. The general ledger is a listing of each account of a company and the amounts making up each account.
Topic: Source Documents LO: 5 Level of Difficulty: EASY 44. Which of the following is a source document? A) Posting reference B) General ledger C) Chart of accounts and a compound journal entry D) Invoice received from seller Answer: D Rationale: Source documents are printed forms or computer records that are generated when a firm engages in a business transaction. The source document usually specifies the dollar amount involved, the date of the transaction, and possibly the party dealing with the firm. The source document serves as the basis of analysis for an underlying business event. A posting reference, general ledger, chart of accounts, and a journal entry all related to the recording of the business event.
Topic: Source Documents LO: 5 Level of Difficulty: EASY 45. A printed or written form that is generated when a firm engages in a business transaction defines a: A) Special journal B) Posting reference C) General journal D) Source document Answer: D Rationale: Source documents are printed forms or computer records that are generated when a firm engages in a business transaction. The source document usually specifies the dollar amount involved, the date of the transaction, and possibly the party dealing with the firm. The source document serves as the basis of analysis for an underlying business event.
©Cambridge Business Publishers, 2020 2-22
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Source Documents LO: 5 Level of Difficulty: EASY 46. Which of the following is not a source document? A) Bank check B) Account in general ledger C) Lease contract D) Invoice sent to customer Answer: B Rationale: Source documents are printed forms or computer records that are generated when a firm engages in a business transaction. The source document usually specifies the dollar amount involved, the date of the transaction, and possibly the party dealing with the firm. The source document serves as the basis of analysis for an underlying business event. A bank check, a lease contract, and an invoice sent to a customer, are all examples of source documents. An account in the general ledger is related to the recording of the business event.
Topic: General Journal LO: 5 Level of Difficulty: MEDIUM 47. Which of the following is not true of the general journal? A) It is a record of original entry B) It reflects the entire effect of a transaction in one place C) It receives postings of dollar amounts from the general ledger D) It shows transactions recorded in chronological order Answer: C Rationale: After an accounting transaction is journalized in the general journal, the debits and credits of each journal entry are immediately transferred (posted) to the general ledger, not vice versa.
Topic: Chart of Accounts LO: 3 Level of Difficulty: MEDIUM 48. Which of the following is true of a chart of accounts? A) It is the same thing as a trial balance B) It shows the account title and numerical code of all general ledger accounts C) It lists accounts in alphabetical order D) The first accounts listed are the revenue accounts Answer: B Rationale: A chart of accounts is a list of the titles of all the accounts in a business’s accounting system. Account titles are grouped by, and in order of, assets, liabilities, stockholders’ equity, revenue, and expenses.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-23
Topic: Compound Journal Entries LO: 5 Level of Difficulty: MEDIUM 49. Which of the following transactions should be recorded using a compound journal entry? A) Common stock is issued for cash. B) The company receives payment on account from a customer. C) The company pays a two-year insurance premium. D) The company purchases a desk, paying 10% in cash with the balance due in 60 days. Answer: D Rationale: A journal entry that involves more than two accounts is called a compound journal entry. The entry to record the purchase of a desk, paying 10% in cash with the balance due in 60 days is: Desk
XXX Cash Accounts Payable
XXX XXX
Issuing common stock for cash, receiving payment from a customer, and paying a two-year insurance premium all involve only two accounts.
Topic: General Journal LO: 5 Level of Difficulty: MEDIUM 50. Which of the following is a correct statement? A) Any type of business transaction may be recorded in the general journal. B) Only compound journal entries are recorded in the general journal. C) The word “journalize” means to transfer information from the general journal to the general ledger. D) The use of a general journal eliminates the need for a general ledger. Answer: A Rationale: The general journal is a record with enough flexibility that any type of business transaction can be recorded in it.
Topic: Trial Balance LO: 6 Level of Difficulty: EASY 51. A trial balance that balances is useful because it indicates with certainty that: A) All entries into accounts during the period were made correctly. B) All accounts have normal balances. C) Total debits in the general ledger equal total credits. D) All of the above Answer: C Rationale: The trial balance serves as an interim check on whether the sum of the debit balances and the sum of the credit balances from the general ledger accounts are equal. If the totals are not equal, it would indicate the presence of some type of recording error. The trial balance also shows all general ledger account balances in one location, which facilitates the preparation of financial statements. The trial balance, however, is not a financial statement.
©Cambridge Business Publishers, 2020 2-24
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Trial Balance LO: 6 Level of Difficulty: EASY 52. A trial balance can be described as: A) A list of general ledger account titles and balances at a certain date B) A grouping of the accounts used by an organization to prepare its basic financial statements C) A record on which are recorded the increases and decreases of a particular financial statement component, such as cash D) One of the basic financial statements of an organization Answer: A Rationale: The trial balance is a listing of all accounts from, the general ledger with their respective debit or credit balance. A trial balance is prepared at the end of an accounting period after all transactions have been recorded.
Topic: Trial Balance LO: 6 Level of Difficulty: MEDIUM 53. A trial balance: A) Must balance when it is first prepared B) Will balance only if there are no errors in the general ledger accounts C) Will balance only if the total debits and total credits in the general ledger are equal D) Both B) and C) Answer: C Rationale: The trial balance serves as an interim check on whether the sum of the debit balances and the sum of the credit balances from the general ledger accounts are equal. If the totals are not equal, it would indicate the presence of some type of recording error. However, it is possible for errors to exist in a trial balance where total debits equal total credits.
Topic: Trial Balance LO: 6 Level of Difficulty: MEDIUM 54. Which of the following errors may escape detection when a trial balance is taken? A) Failing to record or enter a particular transaction B) Entering a transaction more than once or entering one or more amounts in the wrong accounts C) Making an error that exactly offsets the effect of another error D) All of the above Answer: D Rationale: If any of these errors occurred, the debits and credits of the trial balance would still be equal; therefore the errors may go undetected.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-25
Topic: Trial Balance LO: 6 Level of Difficulty: EASY 55. Which of the following shows all the general ledger account balances in one place? A) Chart of accounts B) Special journal C) Trial balance D) General journal Answer: C Rationale: The trial balance shows all general ledger account balances in one location, which facilitates the preparation of financial statements. The trial balance, however, is not a financial
Topic: Analyzing Transactions LO: 2 Level of Difficulty: EASY 56. If a company paid off $200,000 of its accounts payable, the effect of this transaction as reflected in the accounting equation are: A) Total assets and total liabilities decrease B) Total assets and total liabilities increase C) Total assets, total liabilities and stockholders’ equity are all unchanged D) Total assets decrease and total liabilities increase Answer: A Rationale: Accounts Payable Cash
200,000 200,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: EASY 57. Lumos Consulting performed consulting services during June on account, and collections for these services were not received until August. What effect did performing these services have on the accounting equation during June? A) Increase in assets and decrease in stockholder’s equity B) Increase in assets and increase in stockholder’s equity C) Decrease in assets and decrease in stockholder’s equity D) Decrease in assets and increase in stockholder’s equity Answer: B Rationale: Consulting services revenue Accounts Payable
XXX XXX
©Cambridge Business Publishers, 2020 2-26
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 58. A company incurred $60,000 (to be paid next year) for the current year's advertising activities. What would the effect of this transaction on the current year’s accounting equation? A) No effect on Assets; $60,000 decrease in Liabilities; $60,000 increase in Stockholders’ Equity B) $60,000 increase in Assets; $60,000 increase in Liabilities; No effect on Stockholders’ Equity C) $60,000 increase in Assets; No effect on Liabilities; $60,000 increase in Stockholders’ Equity D) No effect on Assets; $60,000 increase in Liabilities; $60,000 decrease in Stockholders’ Equity Answer: D Rationale: Advertising expense Advertising expense payable
60,000 60,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 59. A company incurred $180,000 (to be paid next year) for the current year's advertising activities. What would the effect of this transaction on the current year’s accounting equation? A) No effect on Assets; $180,000 decrease in Liabilities; $180,000 increase in Stockholders’ Equity B) $180,000 increase in Assets; $180,000 increase in Liabilities; No effect on Stockholders’ Equity C) $180,000 increase in Assets; No effect on Liabilities; $180,000 increase in Stockholders’ Equity D) No effect on Assets; $180,000 increase in Liabilities; $180,000 decrease in Stockholders’ Equity Answer: D Rationale: Advertising expense Advertising expense payable
180,000 180,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 60. A company incurred $40,000 (to be paid next year) for the current year's insurance coverage. What would the effect of this transaction on the current year’s accounting equation? A) No effect on Assets; $40,000 decrease in Liabilities; $40,000 increase in Stockholders’ Equity B) $40,000 increase in Assets; $40,000 increase in Liabilities; No effect on Stockholders’ Equity C) $40,000 increase in Assets; No effect on Liabilities; $40,000 increase in Stockholders’ Equity D) No effect on Assets; $40,000 increase in Liabilities; $40,000 decrease in Stockholders’ Equity Answer: D Rationale: Insurance expense Insurance expense payable
40,000 40,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-27
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 61. A company incurred $120,000 (to be paid next year) for the current year's insurance coverage. What would the effect of this transaction on the current year’s accounting equation? A) No effect on Assets; $120,000 decrease in Liabilities; $120,000 increase in Stockholders’ Equity B) $120,000 increase in Assets; $120,000 increase in Liabilities; No effect on Stockholders’ Equity C) $120,000 increase in Assets; No effect on Liabilities; $120,000 increase in Stockholders’ Equity D) No effect on Assets; $120,000 increase in Liabilities; $120,000 decrease in Stockholders’ Equity Answer: D Rationale: Insurance expense Insurance expense payable
120,000 120,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 62. To take advantage of a zero percent rent increase for the coming year, a company paid, at year-end, $150,000 rent for the first three months of the next year. What would the effect of this transaction on the company’s year-end accounting equation? A) No effect on Assets; $150,000 decrease in Liabilities; $150,000 increase in Stockholders’ Equity B) $150,000 increase in Assets; $150,000 increase in Liabilities; No effect on Stockholders’ Equity C) $150,000 increase in Assets; No effect on Liabilities; $150,000 increase in Stockholders’ Equity D) No effect on Assets; No effect on Liabilities; No effect on Stockholders’ Equity Answer: D Rationale: Prepaid rent Cash
150,000 150,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 63. To take advantage of a zero percent rent increase for the coming year, a company paid, at year-end, $450,000 rent for the first three months of the next year. What would the effect of this transaction on the company’s year-end accounting equation? A) No effect on Assets; $450,000 decrease in Liabilities; $450,000 increase in Stockholders’ Equity B) $450,000 increase in Assets; $450,000 increase in Liabilities; No effect on Stockholders’ Equity C) $450,000 increase in Assets; No effect on Liabilities; $450,000 increase in Stockholders’ Equity D) No effect on Assets; No effect on Liabilities; No effect on Stockholders’ Equity Answer: D Rationale: Prepaid rent Cash
450,000 450,000
©Cambridge Business Publishers, 2020 2-28
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 64. A company received a $24,000 payment for services to be performed over the next few months. What would the effect of this transaction on the current year’s accounting equation? A) No effect on Assets; $24,000 decrease in Liabilities; $24,000 increase in Stockholders’ Equity B) $24,000 increase in Assets; $24,000 increase in Liabilities; No effect on Stockholders’ Equity C) $24,000 increase in Assets; No effect on Liabilities; $24,000 increase in Stockholders’ Equity D) No effect on Assets; $24,000 increase in Liabilities; $24,000 decrease in Stockholders’ Equity Answer: B Rationale: Cash
24,000 Unearned revenue
24,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 65. A company received a $72,000 payment for services to be performed over the next few months. What would the effect of this transaction on the current year’s accounting equation? A) No effect on Assets; $72,000 decrease in Liabilities; 72,000 increase in Stockholders’ Equity B) $72,000 increase in Assets; $72,000 increase in Liabilities; No effect on Stockholders’ Equity C) $72,000 increase in Assets; No effect on Liabilities; $72,000 increase in Stockholders’ Equity D) No effect on Assets; $72,000 increase in Liabilities; $72,000 decrease in Stockholders’ Equity Answer: B Rationale: Cash
72,000 Unearned revenue
72,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 66. A company received $11,000 cash in exchange for 200 shares of the company’s common stock. What would the effect of this transaction on the current year’s accounting equation? A) No effect on Assets; $11,000 decrease in Liabilities; $11,000 increase in Stockholders’ Equity B) $11,000 increase in Assets; $11,000 increase in Liabilities; No effect on Stockholders’ Equity C) $11,000 increase in Assets; No effect on Liabilities; $11,000 increase in Stockholders’ Equity D) No effect on Assets; $11,000 increase in Liabilities; $11,000 decrease in Stockholders’ Equity Answer: C Rationale: Cash
11,000 Common stock
11,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-29
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 67. A company received $33,000 cash in exchange for 200 shares of the company’s common stock. What would the effect of this transaction on the current year’s accounting equation? A) No effect on Assets; $33,000 decrease in Liabilities; $33,000 increase in Stockholders’ Equity B) $33,000 increase in Assets; $33,000 increase in Liabilities; No effect on Stockholders’ Equity C) $33,000 increase in Assets; No effect on Liabilities; $33,000 increase in Stockholders’ Equity D) No effect on Assets; $33,000 increase in Liabilities; $33,000 decrease in Stockholders’ Equity Answer: C Rationale: Cash
33,000 Common stock
33,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 68. To meet its cash flow needs, a company obtained a 6 month bank loan in the amount of $10,000. Annual interest on the loan (note payable) is 10%, payable when the note is due. What would the effect of this transaction on the company’s current month accounting equation? A) No effect on Assets; $10,000 decrease in Liabilities; $10,000 increase in Stockholders’ Equity B) $10,000 increase in Assets; $10,000 increase in Liabilities; No effect on Stockholders’ Equity C) $10,000 increase in Assets; No effect on Liabilities; $10,000 increase in Stockholders’ Equity D) No effect on Assets; $10,000 increase in Liabilities; $10,000 decrease in Stockholders’ Equity Answer: B Rationale: Cash
10,000 Notes payable
10,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 69. To meet its cash flow needs, a company obtained a 6 month bank loan in the amount of $30,000. Annual interest on the loan (note payable) is 10%, payable when the note is due. What would the effect of this transaction on the company’s current month accounting equation? A) No effect on Assets; $30,000 decrease in Liabilities; $30,000 increase in Stockholders’ Equity B) $30,000 increase in Assets; $30,000 increase in Liabilities; No effect on Stockholders’ Equity C) $30,000 increase in Assets; No effect on Liabilities; $30,000 increase in Stockholders’ Equity D) No effect on Assets; 30,000 increase in Liabilities; $30,000 decrease in Stockholders’ Equity Answer: B Rationale: Cash
30,000 Notes payable
30,000
©Cambridge Business Publishers, 2020 2-30
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 70. At the beginning of the month, a company purchased a new truck for $45,000, paying $21,000 cash and agreeing to pay the balance over 12 months through a no-interest financing offer provided by the car dealer. The entry to record the purchase of the truck is recorded at month-end. What would the effect of this transaction on the company’s current month-end accounting equation? (Hint: First financing payment was made before current month-end.) A) No effect on Assets; $45,000 decrease in Liabilities; $45,000 increase in Stockholders’ Equity B) $22,000 increase in Assets; $22,000 increase in Liabilities; No effect on Stockholders’ Equity C) $45,000 increase in Assets; No effect on Liabilities; $45,000 increase in Stockholders’ Equity D) No effect on Assets; $24,000 increase in Liabilities; $24,000 decrease in Stockholders’ Equity Answer: B Rationale: Truck
45,000 Cash Accounts payable
Cost of Truck Less cash paid Balance financed by car dealer
23,000* 22,000** $45,000 (21,000) $24,000 / 12 months = $2,000 per month
*Total cash paid, at the end of month 1: Initial payment 1st month’s financing payment Total
$21,000 2,000 $23,000*
**Total accounts payable, at the end of month 1: Initial payable amount Less: 1st month’s financing payment Total
$24,000 (2,000) $22,000**
Total change in assets = $45,000 + ($23,000) = $22,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-31
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 71. At the beginning of the month, a company purchased a new truck for $135,000, paying $63,000 cash and agreeing to pay the balance over 12 months through a no-interest financing offer provided by the car dealer. The entry to record the purchase of the truck is recorded at month-end. What would the effect of this transaction on the company’s current month-end accounting equation? (Hint: First financing payment was made before current month-end.) A) No effect on Assets; $135,000 decrease in Liabilities; $135,000 increase in Stockholders’ Equity B) $66,000 increase in Assets; $66,000 increase in Liabilities; No effect on Stockholders’ Equity C) $135,000 increase in Assets; No effect on Liabilities; $135,000 increase in Stockholders’ Equity D) No effect on Assets; $72,000 increase in Liabilities; $72,000 decrease in Stockholders’ Equity Answer: B Rationale: Truck
135,000 Cash Accounts payable
Cost of Truck Less cash paid Balance financed by car dealer
69,000* 66,000** $135,000 (63,000) $72,000 / 12 months = $6,000 per month
*Total cash paid, at the end of month 1: Initial payment 1st month’s financing payment Total
$63,000 6,000 $69,000*
**Total accounts payable, at the end of month 1: Initial payable amount Less: 1st month’s financing payment Total
$72,000 (6,000) $66,000**
Total change in assets = $135,000 + ($69,000) = $66,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 72. A company performed $8,635 of services and received $3,000 in cash with the remaining amount to be paid in 60 days with no interest. What would the effect of this transaction on the company’s current month-end accounting equation? A) $3,000 increase in Assets; $5,635 decrease in Liabilities; $8,635 increase in Stockholders’ Equity B) $8,635 increase in Assets; $8,635 increase in Liabilities; No effect on Stockholders’ Equity C) $5,635 increase in Assets; No effect on Liabilities; $5,635 increase in Stockholders’ Equity D) $8,635 increase in Assets; No effect on Liabilities; $8,635 increase in Stockholders’ Equity Answer: D Rationale: Cash Accounts Receivable Fee Revenue
3,000 5,635 8,635
Total change in assets = $3,000 + $5,635 = $8,635
©Cambridge Business Publishers, 2020 2-32
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 73. A company performed $25,905 of services and received $9,000 in cash with the remaining amount to be paid in 60 days with no interest. What would the effect of this transaction on the company’s current month-end accounting equation? A) $9,000 increase in Assets; $16,905 decrease in Liabilities; $25,905 increase in Stockholders’ Equity B) $25,905 increase in Assets; $25,905 increase in Liabilities; No effect on Stockholders’ Equity C) $16,905 increase in Assets; No effect on Liabilities; $16,905 increase in Stockholders’ Equity D) $25,905 increase in Assets; No effect on Liabilities; $25,905 increase in Stockholders’ Equity Answer: D Rationale: Cash Accounts receivable Fee revenue
9,000 16,905 25,905
Total change in assets = $9,000 + $16,905 = $25,905
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 74. A company paid employee wages of $24,000 for the month. What would the effect of this transaction on the current month’s accounting equation? A) No effect on Assets; $24,000 decrease in Liabilities; $24,000 increase in Stockholders’ Equity B) $24,000 increase in Assets; $24,000 increase in Liabilities; No effect on Stockholders’ Equity C) $24,000 decrease in Assets; No effect on Liabilities; $24,000 decrease in Stockholders’ Equity D) $24,000 decrease in Assets; $24,000 decrease in Liabilities; No effect on Stockholders’ Equity Answer: C Rationale: Wage expense Cash
24,000 24,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 75. A company paid employee wages of $72,000 for the month. What would the effect of this transaction on the current month’s accounting equation? A) No effect on Assets; $72,000 decrease in Liabilities; $72,000 increase in Stockholders’ Equity B) $72,000 increase in Assets; $72,000 increase in Liabilities; No effect on Stockholders’ Equity C) $72,000 decrease in Assets; No effect on Liabilities; $72,000 decrease in Stockholders’ Equity D) $72,000 decrease in Assets; $72,000 decrease in Liabilities; No effect on Stockholders’ Equity Answer: C Rationale: Wage expense Cash
72,000 72,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-33
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 76. A company received payment of $10,000 from a customer that had previously received services performed on account. What would the effect of this transaction on the company’s current month accounting equation? A) No effect on Assets; No effect on Liabilities; No effect on Stockholders’ Equity B) $10,000 increase in Assets; $10,000 increase in Liabilities; No effect on Stockholders’ Equity C) $10,000 increase in Assets; No effect on Liabilities; $10,000 increase in Stockholders’ Equity D) No effect on Assets; $10,000 increase in Liabilities; $10,000 decrease in Stockholders’ Equity Answer: A Rationale: Cash
10,000 Accounts receivable
10,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 77. A company received payment of $30,000 from a customer that had previously received services performed on account. What would the effect of this transaction on the company’s current month accounting equation? A) No effect on Assets; No effect on Liabilities; No effect on Stockholders’ Equity B) $30,000 increase in Assets; $30,000 increase in Liabilities; No effect on Stockholders’ Equity C) $30,000 increase in Assets; No effect on Liabilities; $30,000 increase in Stockholders’ Equity D) No effect on Assets; $30,000 increase in Liabilities; $30,000 decrease in Stockholders’ Equity Answer: A Rationale: Cash
30,000 Accounts receivable
30,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 78. A company paid a cash dividend of $24,000 to stockholders. What would the effect of this transaction on the current month’s accounting equation? A) No effect on Assets; $24,000 decrease in Liabilities; $24,000 increase in Stockholders’ Equity B) $24,000 increase in Assets; $24,000 increase in Liabilities; No effect on Stockholders’ Equity C) $24,000 decrease in Assets; No effect on Liabilities; $24,000 decrease in Stockholders’ Equity D) $24,000 decrease in Assets; $24,000 decrease in Liabilities; No effect on Stockholders’ Equity Answer: C Rationale: Dividends
24,000 Cash
24,000
©Cambridge Business Publishers, 2020 2-34
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 79. A company paid a cash dividend of $72,000 to stockholders. What would the effect of this transaction on the current month’s accounting equation? A) No effect on Assets; $72,000 decrease in Liabilities; $72,000 increase in Stockholders’ Equity B) $72,000 increase in Assets; $72,000 increase in Liabilities; No effect on Stockholders’ Equity C) $72,000 decrease in Assets; No effect on Liabilities; $72,000 decrease in Stockholders’ Equity D) $72,000 decrease in Assets; $72,000 decrease in Liabilities; No effect on Stockholders’ Equity Answer: C Rationale: Dividends
72,000 Cash
72,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 80. Anisha Company had a transaction that caused a $30,000 increase in both assets and liabilities. This transaction could have been a(n): A) Purchase of office equipment for $44,000, paying $14,000 cash and issuing a note payable for the balance B) Investment of $30,000 cash in the business by the stockholders C) Purchase of office equipment for $30,000 cash D) Repayment of a $30,000 bank loan Answer: A Rationale: The purchase of office equipment for $44,000 paying $14,000 cash and issuing a note payable for the balance is the only transaction that increases both assets and liabilities by $30,000.
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 81. Li Company had a transaction that caused a $90,000 increase in both assets and liabilities. This transaction could have been a(n): A) Purchase of office equipment for $132,000, paying $42,000 cash and issuing a note payable for the balance B) Investment of $90,000 cash in the business by the stockholders C) Purchase of office equipment for $90,000 cash D) Repayment of a $90,000 bank loan Answer: A Rationale: The purchase of office equipment for $132,000 paying $42,000 cash and issuing a note payable for the balance is the only transaction that increases both assets and liabilities by $90,000.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-35
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 82. Didwania Company had a transaction that caused a $40,000 decrease in both assets and liabilities. This transaction could have been a(n): A) Purchase of office equipment for $54,000, paying $14,000 cash and issuing a note payable for the balance B) Investment of $40,000 cash in the business by the stockholders C) Purchase of office equipment for $40,000 cash D) Repayment of a $40,000 bank loan Answer: D Rationale: The repayment of a $40,000 bank loan is the only transaction that decreases both assets and liabilities by $40,000.
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 83. Aashish Company had a transaction that caused a $120,000 decrease in both assets and liabilities. This transaction could have been a(n): A) Purchase of office equipment for $162,000, paying $42,000 cash and issuing a note payable for the balance B) Investment of $120,000 cash in the business by the stockholders C) Purchase of office equipment for $120,000 cash D) Repayment of a $120,000 bank loan Answer: D Rationale: The repayment of a $120,000 bank loan is the only transaction that decreases both assets and liabilities by $120,000.
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 84. Sayali Company had a transaction that caused a $50,000 increase in both assets and stockholders’ equity. This transaction could have been a(n): A) Purchase of office equipment for $64,000, paying $14,000 cash and issuing a note payable for the balance B) Investment of $50,000 cash in the business by the stockholders C) Purchase of office equipment for $50,000 cash D) Repayment of a $50,000 bank loan Answer: B Rationale: The investment of $50,000 cash in the business by stockholders is the only transaction that increases both assets and stockholders’ equity by $50,000.
©Cambridge Business Publishers, 2020 2-36
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 85. Xia Company had a transaction that caused a $150,000 increase in both assets and stockholders’ equity. This transaction could have been a(n): A) Purchase of office equipment for $192,000, paying $42,000 cash and issuing a note payable for the balance B) Investment of $150,000 cash in the business by the stockholders C) Purchase of office equipment for $150,000 cash D) Repayment of a $150,000 bank loan Answer: B Rationale: The investment of $150,000 cash in the business by stockholders is the only transaction that increases both assets and stockholders’ equity by $150,000.
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 86. Howie Company had a transaction that had no effect on assets, liabilities, or on stockholders’ equity. This transaction could have been a(n): A) Purchase of office equipment for $74,000, paying $14,000 cash and issuing a note payable for the balance B) Investment of $60,000 cash in the business by the stockholders C) Purchase of office equipment for $60,000 cash D) Repayment of a $60,000 bank loan Answer: C Rationale: The purchase of office equipment for $60,000 cash, is the only transaction that has no effect on assets, liabilities, or on stockholders’ equity.
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 87. Fernando Company had a transaction that had no effect on assets, liabilities, or on stockholders’ equity. This transaction could have been a(n): A) Purchase of office equipment for $222,000, paying $42,000 cash and issuing a note payable for the balance B) Investment of $180,000 cash in the business by the stockholders C) Purchase of office equipment for $180,000 cash D) Repayment of a $180,000 bank loan Answer: C Rationale: The purchase of office equipment for $180,000 cash, is the only transaction that has no effect on assets, liabilities, or on stockholders’ equity.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-37
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 88. A transaction caused a $200,000 increase in both assets and total liabilities. This transaction could have been: A) Purchase for office equipment for $200,000 cash B) Repayment of a $200,000 bank loan C) Investment of $200,000 cash in the business by the owner D) Purchase of office equipment for $240,000, paying $40,000 cash and issuing a note payable for the balance Answer: D Rationale: The purchase of office equipment for $240,000, paying $40,000 cash and issuing a note payable for the balance, is the only transaction that increases both assets and liabilities by $200,000.
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 89. A transaction caused a $600,000 increase in both assets and total liabilities. This transaction could have been: A) Purchase for office equipment for $600,000 cash B) Repayment of a $600,000 bank loan C) Investment of $600,000 cash in the business by the owner D) Purchase of office equipment for $720,000, paying $120,000 cash and issuing a note payable for the balance Answer: D Rationale: The purchase of office equipment for $720,000, paying $120,000 cash and issuing a note payable for the balance is the only transaction that increases both assets and liabilities by $600,000.
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 90. Suzanne Mi, starting her own business, made an investment of a building to the company. The building is valued at $400,000 with a $360,000 outstanding mortgage payable. The effect of this transaction on the accounting equation of the business would be to: A) Increase assets by $40,000 B) Increase assets by $360,000 C) Increase stockholders’ equity by $40,000 D) Increase stockholders’ equity by $400,000 Answer: C Rationale: Investment of building
Assets $400,000
= =
Liabilities $360,000
+ +
Stockholders' Equity $40,000
©Cambridge Business Publishers, 2020 2-38
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 91. Bob Smith, starting his own business, made an investment of a building to the company. The building is valued at $1,200,000 with a $1,080,000 outstanding mortgage payable. The effect of this transaction on the accounting equation of the business would be to: A) Increase assets by $120,000 B) Increase assets by $1,080,000 C) Increase stockholders’ equity by $120,000 D) Increase stockholders’ equity by $1,200,000 Answer: C Rationale: Investment of building
Assets $1,200,000
= =
Liabilities $1,080,000
+ +
Stockholders' Equity $120,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 92. The accounting equation for Kangaroo Enterprises is as follows: Assets $240,000
= =
Liabilities $120,000
+ +
Stockholders' Equity $120,000
If the company now purchases office equipment on account for $20,000, the accounting equation will change to: Assets Liabilities Stockholders' Equity A) $260,000 = $132,000 + $128,000 B) $260,000 = $140,000 + $120,000 C) $240,000 = $120,000 + $120,000 D) $260,000 = $120,000 + $140,000 Answer: B Rationale: Original Balance Purchase Equipment Total
Assets $240,000 $20,000 $260,000
= = = =
Liabilities $120,000 $20,000 $140,000
+ + + +
Stockholders' Equity $120,000 _________ $120,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-39
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 93. The accounting equation for Goel Enterprises is as follows: = =
Assets $720,000
Liabilities $360,000
+ +
Stockholders' Equity $360,000
If the company now purchases office equipment on account for $60,000, the accounting equation will change to:
A) B) C) D)
Assets Liabilities $780,000 = $396,000 $780,000 = $420,000 $720,000 = $360,000 $780,000 = $360,000
Stockholders' Equity + $384,000 + $360,000 + $360,000 + $420,000
Answer: B Rationale: = = = =
Assets $720,000 $60,000 $780,000
Original Balance Purchase Equipment Total
+ + + +
Liabilities $360,000 $60,000 $420,000
Stockholders' Equity $360,000 _________ $360,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 94. The accounting equation for Mickey Enterprises is as follows: = =
Assets $360,000
Liabilities $180,000
+ +
Stockholders' Equity $180,000
If the company now purchases a truck on account for $30,000, the accounting equation will change to:
A) B) C) D)
Assets Liabilities $390,000 = $180,000 $390,000 = $198,000 $390,000 = $210,000 $360,000 = $180,000
Stockholders' Equity + $210,000 + $192,000 + $180,000 + $180,000
Answer: C Rationale: Original Balance Purchase Truck Total
Assets $360,000 $30,000 $390,000
= = = =
Liabilities $180,000 $30,000 $210,000
+ + + +
Stockholders' Equity $180,000 _________ $180,000
©Cambridge Business Publishers, 2020 2-40
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 95. The accounting equation for Minnie Enterprises is as follows: = =
Assets $1,080,000
+ +
Liabilities $540,000
Stockholders' Equity $540,000
If the company now purchases a truck on account for $90,000, the accounting equation will change to:
A) B) C) D)
Assets $1,170,000 $1,170,000 $1,170,000 $1,080,000
Liabilities = = = =
Stockholders' Equity $540,000 + $630,000 $594,000 + $576,000 $630,000 + $540,000 $540,000 + $540,000
Answer: C Rationale: Assets $1,080,000 $90,000 $1,170,000
Original Balance Purchase Truck Total
= = = =
+ + + +
Liabilities $540,000 $90,000 $630,000
Stockholders' Equity $540,000 _________ $540,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 96. The accounting equation for Goofy Enterprises is as follows: = =
Assets $240,000
+ +
Liabilities $120,000
Stockholders' Equity $120,000
If the company now issues stock for $30,000, the accounting equation will change to:
A) B) C) D)
Assets $240,000 $270,000 $240,000 $270,000
= = = =
Liabilities $ 90,000 $150,000 $150,000 $120,000
+ + + +
Stockholders' Equity $150,000 $120,000 $ 90,000 $150,000
Answer: D Rationale: Original Balance Issue Stock Total
Assets $240,000 $ 30,000 $270,000
= = = =
Liabilities $120,000 ________ $120,000
+ + + +
Stockholders' Equity $120,000 $ 30,000 $150,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-41
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 97. The accounting equation for Pinto Company is as follows: = =
Assets $720,000
+ +
Liabilities $360,000
Stockholders' Equity $360,000
If the company now issues stock for $90,000, the accounting equation will change to:
A) B) C) D)
Assets $720,000 $810,000 $720,000 $810,000
= = = =
Liabilities $270,000 $450,000 $450,000 $360,000
+ + + +
Stockholders' Equity $450,000 $360,000 $270,000 $450,000
Answer: D Rationale: Assets $720,000 $90,000 $810,000
Original Balance Issue Stock Total
= = = =
Liabilities $360,000 ________ $360,000
+ + + +
Stockholders' Equity $360,000 $ 90,000 $450,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 98. The accounting equation for Snake Enterprises is as follows: = =
Assets $240,000
+ +
Liabilities $120,000
Stockholders' Equity $120,000
If the company now prepays rent of $18,000 for the next six months, the accounting equation will change to:
A) B) C) D)
Assets $240,000 $276,000 $240,000 $258,000
= = = =
Liabilities $138,000 $138,000 $120,000 $138,000
+ + + +
Stockholders' Equity $102,000 $138,000 $120,000 $120,000
Answer: C Rationale: Original Balance Prepaid rent Cash Total
Assets $240,000 $18,000 ($18,000) $240,000
= = = =
Liabilities $120,000 _________ $120,000
+ + + +
Stockholders' Equity $120,000 _________ $120,000
©Cambridge Business Publishers, 2020 2-42
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 99. The accounting equation for Henry Enterprises is as follows: = =
Assets $720,000
+ +
Liabilities $360,000
Stockholders' Equity $360,000
If the company now prepays rent of $54,000 for the next six months, the accounting equation will change to:
A) B) C) D)
Assets $720,000 $828,000 $720,000 $774,000
= = = =
Liabilities $414,000 $414,000 $360,000 $414,000
+ + + +
Stockholders' Equity $306,000 $414,000 $360,000 $360,000
Answer: C Rationale: Assets $720,000 $54,000 ($54,000) $720,000
Original Balance Prepaid rent Cash Total
= = =
Liabilities $360,000 _________ $360,000
=
+ + +
Stockholders' Equity $360,000 _________ $360,000
+
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 100. The accounting equation for Wolf Enterprises is as follows: Assets $240,000
= =
+ +
Liabilities $120,000
Stockholders' Equity $120,000
If the company now signs a bank note payable in exchange for $30,000, the accounting equation will change to:
A) B) C) D)
Assets $240,000 $270,000 $240,000 $270,000
= = = =
Liabilities $ 90,000 $150,000 $150,000 $120,000
+ + + +
Stockholders' Equity $150,000 $120,000 $ 90,000 $150,000
Answer: B Rationale: Original Balance Obtain Cash for Note payable Total
Assets
=
Liabilities
+
Stockholders' Equity
$240,000
=
$120,000
+
$120,000
$30,000 $270,000
= =
$30,000 $150,000
+ +
______0 $120,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-43
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 101. The accounting equation for Nibbles Enterprises is as follows: = =
Assets $720,000
+ +
Liabilities $360,000
Stockholders' Equity $360,000
If the company now signs a bank note payable in exchange for $90,000, the accounting equation will change to:
A) B) C) D)
Assets $720,000 $810,000 $720,000 $810,000
= = = =
Liabilities $270,000 $450,000 $450,000 $360,000
+ + + +
Stockholders' Equity $450,000 $360,000 $270,000 $450,000
Answer: B Rationale: = = = =
Assets $720,000 $90,000 $810,000
Original Balance Obtain Cash for Note payable Total
Liabilities $360,000 $90,000 $450,000
+ + + +
Stockholders' Equity $360,000 ______0 $360,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 102. The accounting equation for Lion Enterprises is as follows: Assets $240,000
= =
+ +
Liabilities $120,000
Stockholders' Equity $120,000
If the company now purchases office supplies for $10,000 cash, the accounting equation will change to:
A) B) C) D)
Assets $240,000 $250,000 $240,000 $250,000
= = = =
Liabilities $110,000 $130,000 $120,000 $120,000
+ + + +
Stockholders' Equity $130,000 $120,000 $120,000 $130,000
Answer: C Rationale: Assets
=
Liabilities
+
Stockholders' Equity
Original Balance
$240,000
=
$120,000
+
$120,000
Office Supplies Cash Total
$10,000 ($10,000) $240,000
= =
+ _______ $120,000
+
_______ $120,000
©Cambridge Business Publishers, 2020 2-44
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Analyzing Transactions 7 LO: 2 Level of Difficulty: MEDIUM 103. The accounting equation for Woodstock Enterprises is as follows: Assets $720,000
= =
+ +
Liabilities $360,000
Stockholders' Equity $360,000
If the company now purchases office supplies for $20,000 cash, the accounting equation will change to:
A) B) C) D)
Assets Liabilities $720,000 = $330,000 $750,000 = $390,000 $720,000 = $360,000 $750,000 = $360,000
+ + + +
Stockholders' Equity $390,000 $360,000 $360,000 $390,000
Answer: C Rationale: Assets
=
Original Balance
$720,000
=
Office Supplies Cash Total
$30,000 ($30,000) $720,000
= =
Liabilities $360,000
+
Stockholders' Equity
+
$360,000
+ ________ $360,000
+
________ $360,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 104. The accounting equation for Elephant Enterprises is as follows: Assets $240,000
= =
Liabilities $120,000
+ +
Stockholders' Equity $120,000
If the company now receives a prepayment in the amount of $30,000, for services to be performed over the next few months, the accounting equation will change to:
A) B) C) D)
Assets $240,000 $270,000 $240,000 $270,000
= = = =
Liabilities $ 90,000 $120,000 $150,000 $150,000
+ + + +
Stockholders' Equity $150,000 $150,000 $ 90,000 $120,000
Answer: D Rationale: Original Balance Prepayment Total
Assets $240,000 $30,000 $270,000
= = = =
Liabilities $120,000 $30,000 $150,000
+ + + +
Stockholders' Equity $120,000 _______0 $120,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-45
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 105. The accounting equation for Striped Zebra Enterprises is as follows: Assets $720,000
= =
+ +
Liabilities $360,000
Stockholders' Equity $360,000
If the company now receives a prepayment in the amount of $90,000, for services to be performed over the next few months, the accounting equation will change to:
A) B) C) D)
Assets $720,000 $810,000 $720,000 $810,000
Liabilities = $ 270,000 = $360,000 = $450,000 = $450,000
+ + + +
Stockholders' Equity $450,000 $450,000 $270,000 $360,000
Answer: D Rationale: Assets $720,000 $90,000 $810,000
Original Balance Prepayment Total
= = = =
Liabilities $360,000 $90,000 $450,000
+ + + +
Stockholders' Equity $360,000 _______0 $360,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 106. The accounting equation for Meow Enterprises is as follows: Assets $240,000
= =
+ +
Liabilities $120,000
Stockholders' Equity $120,000
If the company now receives a payment in the amount of $30,000 cash, for services performed for several customers, the accounting equation will change to:
A) B) C) D)
Assets $270,000 $270,000 $240,000 $270,000
= = = =
Liabilities $120,000 $ 90,000 $150,000 $150,000
+ + + +
Stockholders' Equity $150,000 $180,000 $ 90,000 $120,000
Answer: A Rationale:
Original Balance Payment for services performed Total
Assets $240,000 $30,000 $270,000
= = = =
Liabilities $120,000 0 $120,000
+ + + +
Stockholders' Equity $120,000 $30,000 $150,000
©Cambridge Business Publishers, 2020 2-46
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 107. The accounting equation for Mip Enterprises is as follows: Assets $720,000
= =
+ +
Liabilities $360,000
Stockholders' Equity $360,000
If the company now receives a payment in the amount of $90,000 cash, for services performed for several customers, the accounting equation will change to:
A) B) C) D)
Assets $810,000 $810,000 $720,000 $810,000
= = = =
Liabilities $360,000 $270,000 $450,000 $450,000
+ + + +
Stockholders' Equity $450,000 $540,000 $270,000 $360,000
Answer: A Rationale:
Original Balance
Assets $720,000
Payment for services performed
$90,000
Total
$810,000
= = =
Liabilities $360,000
=
$360,000
0
+ + +
Stockholders' Equity $360,000
+
$450,000
_ $90,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 108. The accounting equation for Lupin Dog Enterprises is as follows: Assets $240,000
= =
+ +
Liabilities $120,000
Stockholders' Equity $120,000
If the company now performed $30,000 of services and received a payment in the amount of $20,000 cash with the remaining $10,000 to be paid by customers within 60 days, the accounting equation will change to:
A) B) C) D)
Assets $240,000 $270,000 $240,000 $270,000
= = = =
Liabilities $ 90,000 $120,000 $150,000 $150,000
+ + + +
Stockholders' Equity $150,000 $150,000 $ 90,000 $120,000
Answer: B Rationale: Original Balance Payment for services performed Accounts Receivable Total
Assets $240,000 $20,000 $10,000 $270,000
= = = = =
Liabilities $120,000 0 $120,000
+ + + + +
Stockholders' Equity $120,000 $30,000 _______ $150,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-47
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 109. The accounting equation for Luna Enterprises is as follows: Assets $720,000
= =
+ +
Liabilities $360,000
Stockholders' Equity $360,000
If the company now performed $90,000 of services and received a payment in the amount of $60,000 cash with the remaining $30,000 to be paid by customers within 60 days, the accounting equation will change to:
A) B) C) D)
Assets $720,000 $810,000 $720,000 $810,000
= = = =
Liabilities $270,000 $360,000 $450,000 $450,000
+ + + +
Stockholders' Equity $450,000 $450,000 $270,000 $360,000
Answer: B Rationale: Original Balance Payment for services performed Accounts Receivable Total
= = = = =
Assets $720,000 $60,000 $30,000 $810,000
Liabilities $360,000 0 $360,000
+ + + + +
Stockholders' Equity $360,000 $90,000 _______ $450,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 110. The accounting equation for Eagle Enterprises is as follows: Assets $360,000
= =
+ +
Liabilities $180,000
Stockholders' Equity $180,000
If the company now pays employee wages for $30,000, the accounting equation will change to:
A) B) C) D)
Assets $330,000 $330,000 $390,000 $360,000
= = = =
Liabilities $180,000 $150,000 $210,000 $180,000
+ + + +
Stockholders' Equity $150,000 $180,000 $180,000 $180,000
Answer: A Rationale: Original Balance Payment of Wages Total
Assets $360,000 ($30,000) $330,000
= = = =
Liabilities $180,000 0 $180,000
+ + + +
Stockholders' Equity $180,000 ($30,000) $150,000
©Cambridge Business Publishers, 2020 2-48
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 111. The accounting equation for Landscape Enterprises is as follows: = =
Assets $1,080,000
+ +
Liabilities $540,000
Stockholders' Equity $540,000
If the company now pays employee wages for $90,000, the accounting equation will change to:
A) B) C) D)
Assets $ 990,000 $ 990,000 $1,170,000 $1,170,000
Liabilities = = = =
Stockholders' Equity $540,000 + $450,000 $450,000 + $540,000 $630,000 + $540,000 $540,000 + $630,000
Answer: A Rationale: Original Balance Payment of Wages Total
Assets $1,080,000 ($90,000) $990,000
= = = =
Liabilities $540,000 0 $540,000
+ + + +
Stockholders' Equity $540,000 ($90,000) $450,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 112. The accounting equation for Chance Enterprises is as follows: Assets $360,000
= =
Liabilities $180,000
+ +
Stockholders' Equity $180,000
If the company now receives a payment of $30,000 on account from a customer, the accounting equation will change to:
A) B) C) D)
Assets $390,000 $390,000 $390,000 $360,000
= = = =
Liabilities $180,000 $210,000 $150,000 $180,000
+ + + +
Stockholders' Equity $210,000 $180,000 $240,000 $180,000
Answer: D Rationale: Original Balance Receipt of customer payment on account Total
Assets $360,000 $ 30,000 ($30,000) $360,000
= = = =
Liabilities $180,000 ________ $180,000
+ + + +
Stockholders' Equity $180,000 _______ $180,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-49
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 113. The accounting equation for Giraffe Enterprises is as follows: Assets $1,080,000
= =
+ +
Liabilities $540,000
Stockholders' Equity $540,000
If the company now receives a payment of $90,000 on account from a customer, the accounting equation will change to:
A) B) C) D)
Assets $1,170,000 $1,170,000 $1.170,000 $1,080,000
Liabilities = = = =
Stockholders' Equity $540,000 + $630,000 $630,000 + $540,000 $450,000 + $720,000 $540,000 + $540,000
Answer: D Rationale: Original Balance Receipt of customer payment on account Total
= = =
Assets $1,080,000 $ 90,000 ($ 90,000) $1,080,000
Liabilities $540,000 _______ $540,000
=
+ + +
Stockholders' Equity $540,000 _______ $540,000
+
Topic: Analyzing Transactions LO: 2 114. The accounting equation for Narvy Enterprises is as follows: Assets $360,000
= =
+ +
Liabilities $180,000
Stockholders' Equity $180,000
If the company now pays a $30,000 cash dividend to stockholders, the accounting equation will change to:
A) B) C) D)
Assets $330,000 $360,000 $390,000 $360,000
= = = =
Liabilities $180,000 $210,000 $210,000 $180,000
+ + + +
Stockholders' Equity $150,000 $150,000 $180,000 $180,000
Answer: A Rationale: Original Balance Payment of Dividend Total
Assets $360,000 ($30,000) $330,000
= = =
Liabilities $180,000
=
$180,000
_______
+ + +
Stockholders' Equity $180,000
+
$150,000
($30,000)
©Cambridge Business Publishers, 2020 2-50
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Analyzing Transactions LO: 2 115. The accounting equation for Hamilton Enterprises is as follows: Assets $1,080,000
= =
+ +
Liabilities $540,000
Stockholders' Equity $540,000
If the company now pays a $90,000 cash dividend to stockholders, the accounting equation will change to:
A) B) C) D)
Assets $ 990,000 $1,080,000 $1,170,000 $1,080,000
Liabilities = = = =
Stockholders' Equity $540,000 + $450,000 $630,000 + $450,000 $630,000 + $540,000 $540,000 + $540,000
Answer: A Rationale: Original Balance Payment of Dividend Total
Assets $1,080,000 ($90,000) $990,000
= = = =
Liabilities $540,000 _______ $540,000
+ + + +
Stockholders' Equity $540,000 ($90,000) $450,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 116. During its first month of operations, Neptune Company (1) borrowed $200,000 from a bank, and then (2) purchased an equipment costing $80,000 by paying cash of $40,000 and signing a long term note for the remaining amount. During the month, the company also (3) purchased inventory for $60,000 on credit, (4) performed services for clients for $120,000 on account, (5) paid $30,000 cash for accounts payable, and (6) paid $60,000 cash for utilities. What is the amount of total assets at the end of the month? A) B) C) D)
$190,000 $270,000 $250,000 $330,000
Answer: D Rationale: Transaction
Asset Account
Assets
(1) (2) (2) (3) (4) (5) (6)
Cash Equipment Cash Inventory A/R Cash Cash
$200,000 80,000 (40,000) 60,000 120,000 (30,000) (60,000) $330,000
=
Liabilities
+
Stockholders’ Equity
$200,000 40,000 60,000 $120,000 (30,000) (60,000) =
$270,000
+
$60,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-51
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 117. During its first month of operations, Lavender Company (1) borrowed $600,000 from a bank, and then (2) purchased an equipment costing $240,000 by paying cash of $120,000 and signing a long term note for the remaining amount. During the month, the company also (3) purchased inventory for $180,000 on credit, (4) performed services for clients for $360,000 on account, (5) paid $90,000 cash for accounts payable, and (6) paid $180,000 cash for utilities. What is the amount of total assets at the end of the month? A) B) C) D)
$990,000 $570,000 $810,000 $750,000
Answer: A Rationale: Transaction (1) (2) (2) (3) (4) (5) (6)
Account Cash Equipment Cash Inventory A/R Cash Cash
Assets $600,000 240,000 (120,000) 180,000 360,000 (90,000) (180,000) $990,000
=
Liabilities $600,000
+
Stockholders’ Equity
120,000 180,000 360,000 (90,000) =
$810,000
+
(180,000) $180,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 118. During its first month of operations, Saturn Company (1) borrowed $200,000 from a bank, and then (2) purchased an equipment costing $80,000 by paying cash of $40,000 and signing a long term note for the remaining amount. During the month, the company also (3) purchased inventory for $60,000 on credit, (4) performed services for clients for $120,000 on account, (5) paid $30,000 cash for accounts payable, and (6) paid $60,000 cash for utilities. What is the amount of total liabilities at the end of the month? A) B) C) D)
$190,000 $270,000 $250,000 $330,000
Answer: B Rationale: Transaction (1) (2) (2) (3) (4) (5) (6)
Account Cash Equipment Cash Inventory A/R Cash Cash
Assets $200,000 80,000 (40,000) 60,000 120,000 (30,000) (60,000) $330,000
=
Liabilities $200,000
+
Stockholders’ Equity
40,000 60,000 120,000 (30,000) =
$270,000
+
(60,000) $60,000
©Cambridge Business Publishers, 2020 2-52
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 119. During its first month of operations, Lavender Company (1) borrowed $600,000 from a bank, and then (2) purchased an equipment costing $240,000 by paying cash of $120,000 and signing a long term note for the remaining amount. During the month, the company also (3) purchased inventory for $180,000 on credit, (4) performed services for clients for $360,000 on account, (5) paid $90,000 cash for accounts payable, and (6) paid $180,000 cash for utilities. What is the amount of total liabilities at the end of the month? A) B) C) D)
$990,000 $570,000 $810,000 $750,000
Answer: C Rationale: Transaction (1) (2) (2) (3) (4) (5) (6)
Account Cash Equipment Cash Inventory A/R Cash Cash
Assets $600,000 240,000 (120,000) 180,000 360,000 (90,000) (180,000) $990,000
=
Liabilities $600,000
+
Stockholders’ Equity
120,000 180,000 360,000 (90,000) =
$810,000
+
(180,000) $180,000
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 120. During its first month of operations, Neptune Company (1) borrowed $200,000 from a bank, and then (2) purchased an equipment costing $80,000 by paying cash of $40,000 and signing a long term note for the remaining amount. During the month, the company also (3) purchased inventory for $60,000 on credit, (4) performed services for clients for $120,000 on account, (5) paid $30,000 cash for accounts payable, and (6) paid $60,000 cash for utilities. What is the amount of Stockholders’ equity at the end of the month? A) B) C) D)
($ 60,000) $ 90,000 $ 60,000 $180,000
Answer: C Rationale: Transaction (1) (2) (2) (3) (4) (5) (6)
Account Cash Equipment Cash Inventory A/R Cash Cash
Assets $200,000 80,000 (40,000) 60,000 120,000 (30,000) (60,000) $330,000
=
Liabilities $200,000
+
Stockholders’ Equity
40,000 60,000 120,000 (30,000) =
$270,000
+
(60,000) $60,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-53
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 121. During its first month of operations, Lavender Company (1) borrowed $600,000 from a bank, and then (2) purchased an equipment costing $240,000 by paying cash of $120,000 and signing a long term note for the remaining amount. During the month, the company also (3) purchased inventory for $180,000 on credit, (4) performed services for clients for $360,000 on account, (5) paid $90,000 cash for accounts payable, and (6) paid $180,000 cash for utilities. What is the amount of Stockholders’ equity at the end of the month? A) B) C) D)
$240,000 $180,000 $210,000 $360,000
Answer: B Rationale: Transaction (1) (2) (2) (3) (4) (5) (6)
Account Cash Equipment Cash Inventory A/R Cash Cash
Assets $600,000 240,000 (120,000) 180,000 360,000 (90,000) (180,000) $990,000
=
Liabilities $600,000
+
Stockholders’ Equity
120,000 180,000 360,000 (90,000) =
$810,000
(180,000) $180,000
+
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 122. Mr. Montana started a company (Montana Company) by contributing $100,000 cash, and a building valued at $800,000. The company then purchased a machine by making a $100,000 down payment (which accounted for half its purchase price), and signed a note payable to the bank. After recording the above transactions, Montana Company's balance sheet will show:
A) B) C) D)
Assets $ 920,000 $ 900,000 $1,000,000 $1,000,000
Liabilities $ 60,000 $100,000 $900,000 $100,000
Stockholders' Equity $860,000 $800,000 $100,000 $900,000
Answer: D Rationale: Transaction
Account
Assets
(1) (2) (3) (3) (3)
Cash Building Machine Note Payable Cash
$100,000 800,000 200,000
=
Liabilities
+ Stockholders’ Equity $100,000 800,000
$100,000 (100,000) $1,000,000
=
$100,000
+
$900,000
©Cambridge Business Publishers, 2020 2-54
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 123. Ken Baar started a company (Baar Company) by contributing $300,000 cash, and a building valued at $2,400,000. The company then purchased a machine by making a $300,000 down payment (which accounted for half its purchase price), and signed a note payable to the bank. After recording the above transactions, Larson Company's balance sheet will show:
A) B) C) D)
Assets $2,760,000 $2,700,000 $3,000,000 $3,000,000
Liabilities $ 180,000 $ 300,000 $2,700,000 $ 300,000
Stockholders' Equity $2,580,000 $2,400,000 $ 300,000 $2,700,000
Answer: D Rationale: Transaction
Account
Assets
(1) (2) (3) (3) (3)
Cash Building Machine Note Payable Cash
$ 300,000 2,400,000 600,000
=
Liabilities
+
Stockholders’ Equity $ 300,000 2,400,000
$300,000 (300,000) $3,000,000
=
$300,000
+
$2,700,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-55
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 124. On December 31, 2019, the end of the first month of operation, the balance sheet of Drake’s Driving School reported total assets of $400,000. The following transactions occurred during the month of January 2020: (1) (2) (3) (4)
The business purchased land for $500,000, paying $200,000 cash and issuing a note payable for the balance. The business collected accounts receivable totaling $90,000. The business sold land (which had cost $100,000) for $120,000 cash. The business paid off $100,000 of Notes Payable.
What is the amount of the company’s total assets on January 31, 2020? A) $920,000 B) $620,000 C) $910,000 D) $730,000 Answer: B Rationale: Transaction Bal. 12/31/19 (1) (1) (1) (2) (2) (3) (3) (3) (4) (4)
Account Land Cash Note Payable Cash A/R Cash Land Gain on Sale Cash Note Payable
Bal. 1/31/20
Assets
=
Liabilities
+
$400,000 500,000 (200,000)
Stockholders’ Equity $400,000
$300,000 90,000 (90,000) 120,000 (100,000) 20,000 (100,000) (100,000) $620,000
=
$200,000
+
$420,000
©Cambridge Business Publishers, 2020 2-56
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: DIFFICULT 125. On December 31, 2019, the end of the first month of operation, the balance sheet of Michaelene’s Real Estate Training School reported total assets of $1,200,000. The following transactions occurred during the month of January 2020: (1) The business purchased land for $1,500,000, paying $600,000 cash and issuing a note payable for the balance. (2) The business collected accounts receivable totaling $270,000. (3) The business sold land (which had cost $300,000) for $360,000 cash. (4) The business paid off $300,000 of Notes Payable. What is the amount of the company’s total assets on January 31, 2020? A) $2,190,000 B) $2,760,000 C) $1,860,000 D) $2,730,000 Answer: C Rationale: Transaction Bal. 12/31/19 (1) (1) (1) (2) (2) (3) (3) (3) (4) (4) Bal. 1/31/20
Account Land Cash Note Payable Cash A/R Cash Land Gain on Sale Cash Note Payable
Assets
=
Liabilities
+
$1,200,000 1,500,000 (600,000)
Stockholders’ Equity $1,200,000
$900,000 270,000 (270,000) 360,000 (300,000) 60,000 (300,000) (300,000) $1,860,000
=
$600,000
+
$1,260,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-57
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 126. On February 1 2019 Cibula’s Accounting Services had a cash balance of $10,000, and completed the following transactions during February 2019: 1. 2. 3. 4. 5. 6.
Purchased office supplies on account, $600. Completed work for a client on credit, $1,000. Paid cash for the office supplies purchased in (1). Completed work for a client and received $1,600 cash. Received $1,000 cash for the work described in (2). Received $2,000 from a client for accounting services to be performed in March.
What was the balance of the company’s cash account after these transactions? A) $ 4,000 B) $ 5,000 C) $14,000 D) $ 3,400 Answer: C Rationale: Transaction
Account
Bal. 2/1/19 (1) (1) (2) (2) (3) (3) (4) (4) (5) (5) (6) (6)
Cash Office Supplies A/P Fee Revenue A/R Cash A/P Cash Fee Revenue Cash A/R Cash Unearned Revenue
Bal. 2/29/19
Assets
=
Liabilities
+
$10,000 600
Stockholders’ Equity $10,000
$600 1,000 1,000 (600) (600) 1,600 1,600 1,000 (1,000) 2,000 2,000 $14,600 =
$2,000
+
$12,600
Cash Account = $10,000 + ($600) + $1,600 + $1,000 + $2,000 = $14,000
©Cambridge Business Publishers, 2020 2-58
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Analyzing Transactions LO: 2 Level of Difficulty: MEDIUM 127. On February 1 2019, Zultner’s Accounting Services had a cash balance of $30,000, and completed the following transactions during February 2019: 1. 2. 3. 4. 5. 6.
Purchased office supplies on account, $1,800. Completed work for a client on credit, $3,000. Paid cash for the office supplies purchased in (1). Completed work for a client and received $4,800 cash. Received $3,000 cash for the work described in (2). Received $6,000 from a client for accounting services to be performed in March.
What was the balance of the company’s cash account after these transactions? A) $10,200 B) $12,000 C) $15,000 D) $42,000 Answer: D Rationale: Transaction
Account
Bal. 2/1/19 (1) (1) (2) (2) (3) (3) (4) (4) (5) (5) (6) (6)
Cash Office Supplies A/P Fee Revenue A/R Cash A/P Cash Fee Revenue Cash A/R Cash Unearned Revenue
Bal. 2/29/19
Assets
=
Liabilities
+
$30,000 1,800
Stockholders’ Equity $30,000
1,800 3,000 3,000 (1,800) (1,800) 4,800 4,800 3,000 (3,000) 6,000 6,000 $43,800 =
$6,000
+
$37,800
Cash Account = $30,000 + ($1,800) + $4,800 + $3,000 + $6,000 = $42,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-59
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 128. When Holly received her paycheck, she realized that her employer made an error in computing her wages, and overpaid her by $2,600. So, Holly promptly returned the excess amount. When the employer receives a check from her for the amount of the overpayment, which of the following journal entries will be made by the employer? A) Debit Cash $2,600 and credit Wages Expense $2,600 B) Debit Wages Expense $2,600 and credit Cash $2,600 C) Debit Cash $2,600 and credit Wages Payable $2,600 D) Debit Wages Payable $2,600 and credit Wages Expense $2,600 Answer: A Rationale: Original Entry Wage Expense Cash
XXX + 2,600 XXX + 2,600
Correct Entry Wage Expense Cash
XXX
Correcting Entry Cash Wage Expense
2,600
XXX
2,600
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 129. When Trina received her paycheck, she realized that her employer made an error in computing her wages, and overpaid her by $7,800. So, Trina promptly returned the excess amount. When the employer receives a check from her for the amount of the overpayment, which of the following journal entries will be made by the employer? A) Debit Wages Payable $7,800 and Credit Wages Expense $7,800 B) Debit Cash $7,800 and Credit Wages Expense $7,800 C) Debit Wages Expense $7,800 and Credit Cash $7,800 D) Debit Cash $7,800 and Credit Wages Payable $7,800 Answer: B Rationale: Original Entry Wage Expense Cash
XXX + 7,800 XXX + 7,800
Correct Entry Wage Expense Cash
XXX
Correcting Entry Cash Wage Expense
7,800
XXX
7,800
©Cambridge Business Publishers, 2020 2-60
th
Financial Accounting for Undergraduates, 4 Edition
Topic: The “Account” System LO: 3 Level of Difficulty: MEDIUM 130. Lambchop Company purchased supplies for $14,000 on credit on January 1, 2019. On January 15, the company made a cash payment of $4,000 to the supplier and signed a one-year note for the remaining amount to settle the account. Lambchop Company’s journal entry on January 15 will include: A) Debit Notes Payable for $10,000 B) Credit Accounts Payable for $10,000 C) Credit Notes Payable for $10,000 D) Debit Cash for $10,000 Answer: C Rationale: Cash 4,000 (2)
Accounts Payable (2) 4,000 14,000 (1) (3) 10,000
Notes Payable 10,000 (3)
Supplies (1) 14,000
Topic: The “Account” System LO: 3 Level of Difficulty: MEDIUM 131. Xia Company purchased supplies for $42,000 on credit on January 1, 2019. On January 15, the company made a cash payment of $12,000 to the supplier, and signed a one-year note for the remaining amount to settle the account. Xia Company’s journal entry on January 15 will include: A) Debit Cash for $30,000 B) Debit Notes Payable for $30,000 C) Credit Accounts Payable for $30,000 D) Credit Notes Payable for $30,000 Answer: D Rationale: Cash 12,000 (2)
Accounts Payable (2) 12,000 42,000 (1) (3) 30,000
Notes Payable 30,000 (3)
Supplies (1) 42,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-61
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 132. Lumos Pet Supplies had the following transactions during December 2019: • •
•
Paid a note of $34,000, owed since March, plus $850 for interest. Sold $73,050 of merchandise to customers on account. Cost of goods sold was $42,500. [Hint: Cost of goods sold is an expense related to the reduction of inventory (merchandise sold).] Paid accounts payable of $4,100.
As a result of these transactions, at year-end, liabilities and stockholders' equity would show a combined total: A) Decrease by $ 9,600 B) Increase by $ 26,850 C) Decrease by $ 9,150 D) Decrease by $ 8,400 Answer: D Rationale: Transaction
Account
(1) (1) (1) (2) (2) (2) (2) (3) (3)
Interest Expense Note Payable Cash A/R Fee Revenue Inventory Cost of Goods Sold Cash A/P
Bal. 12/31/16
Assets
=
Liabilities
+
Stockholders’ Equity (850)
(34,000) (34,850) 73,050 73,050 (42,500) (42,500) (4,100) (4,100) ($8,400)
=
($38,100)
+
$29,700
12/31/16 Liabilities + Stockholders’ Equity = ($38,100) + $29,700 = ($8,400)
©Cambridge Business Publishers, 2020 2-62
th
Financial Accounting for Undergraduates, 4 Edition
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 133. Mouser Pet Supplies had the following transactions during December 2019: • •
•
Paid a note of $102,000, owed since March, plus $2,550 for interest. Sold $219,150 of merchandise to customers on account. Cost of goods sold was $127,500. [Hint: Cost of goods sold is an expense related to the reduction of inventory (merchandise sold).] Paid accounts payable of $12,300.
As a result of these transactions, at year-end, liabilities and stockholders' equity would show a combined total: A) Decrease by $ 25,200 B) Increase by $ 28,800 C) Decrease by $ 80,550 D) Decrease by $ 27,450 Answer: A Rationale: Transaction
Account
(1) (1) (1) (2) (2) (2) (2) (3) (3)
Interest Expense Note Payable Cash A/R Fee Revenue Inventory Cost of Goods Sold Cash A/P
Bal. 12/31/19
Assets
=
Liabilities
+
Stockholders’ Equity (2,550)
(102,000) (104,550) 219,150 219,150 (127,500) (127,500) (12,300) (12,300) ($25,200)
=
($114,300)
+
$89,100
12/31/19 Liabilities + Stockholders’ Equity = ($114,300) + $89,100 = ($25,200)
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-63
Topic: The “Account” System LO: 3 Level of Difficulty: MEDIUM 134. During January 2019, Randolph Corporation purchased $200,000 of inventory; they paid one-fourth in cash, and signed a note for the remaining balance. This transaction will be recorded as: A) Inventory Cash Notes Payable B) Inventory Cash Accounts Payable C) Inventory Cash Accounts Payable D) Inventory Cash Notes Payable
200,000 150,000 50,000 200,000 50,000 150,000 200,000 150,000 50,000 200,000 50,000 150,000
Answer: D Rationale: $200,000 x 0.25 = $50,000 = Cash $200,000 - $50,000 = $150,000 = Notes Payable
Topic: The “Account” System LO: 3 Level of Difficulty: MEDIUM 135. During January 2019, Dakota Corporation purchased $600,000 of inventory; they paid one-fourth in cash, and signed a note for the remaining balance. This transaction will be recorded as: A) Inventory Cash Notes Payable B) Inventory Cash Notes Payable C) Inventory Cash Accounts Payable D) Inventory Cash Accounts Payable
600,000 150,000 450,000 600,000 450,000 150,000 600,000 150,000 450,000 600,000 450,000 150,000
Answer: A Rationale: $600,000 x .25 = $150,000 = Cash $600,000 - $150,000 = $450,000 = Notes Payable ©Cambridge Business Publishers, 2020 2-64
th
Financial Accounting for Undergraduates, 4 Edition
Topic: The “Account” System LO: 3 Level of Difficulty: MEDIUM 136. Horizon Company, an internet service provider, has 2,000,000 customers. The customers make electronic payments of $140 each for that month’s service on the last day of each month. Horizon Company does not send any bills to their customers. The company’s journal entry on the day they receive the payment will include: A) A credit to Internet Service Revenue for $280,000,000 B) A debit to Accounts Receivable for $280,000,000 C) A credit to Accounts Receivable for $280,000,000 D) A debit to Internet Service Expense for $280,000,000 Answer: A Rationale: 2,000,000 customers x $140 monthly service fee = $280,000,000 Cash
280,000,000 Internet Service Revenue
280,000,000
Topic: The “Account” System LO: 3 Level of Difficulty: MEDIUM 137. Vista Company, an internet service provider, has 2,000,000 customers. The customers make electronic payments of $420 each for that month’s service on the last day of each month. Buena Company does not send any bills to their customers. The company’s journal entry on the day they receive the payment will include: A) A debit to Internet Service Expense for $840,000,000 B) A credit to Internet Service Revenue for $840,000,000 C) A debit to Accounts Receivable for $840,000,000 D) A credit to Accounts Receivable for $840,000,000 Answer: B Rationale: 2,000,000 customers x $420 monthly service fee = $840,000,000 Cash
840,000,000 Internet Service Revenue
840,000,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-65
Topic: The “Account” System LO: 3 Level of Difficulty: MEDIUM 138. A customer received and then paid an $18,000 utility bill from West Haven Natural Gas Company. The journal entry by West Haven Natural Gas Company to record receipt of the payment would include: A) A credit to Accounts Payable B) A credit to Accounts Receivable C) A credit to Utilities Revenue D) A debit to Accounts Receivable Answer: B Rationale: Entry when revenue earned and bill sent Accounts Receivable Utility Revenue Entry when payment received Cash Accounts Receivable
18,000 18,000
18,000 18,000
Topic: The “Account” System LO: 3 Level of Difficulty: MEDIUM 139. Ringstar Company purchased a new car for $60,000 by paying $24,000 cash, and trading in an old car with a recorded net cost and market value of $20,000. They also signed a Note for $16,000. The required journal entry will not: A) Debit New Car for $60,000 B) Debit Notes Payable for $16,000 C) Credit Old Car for $20,000 D) Credit Notes Payable for $16,000 Answer: B Rationale: Entry when new car is purchased: New Car Cash Old Car Note Payable
60,000 24,000 20,000 16,000
©Cambridge Business Publishers, 2020 2-66
th
Financial Accounting for Undergraduates, 4 Edition
Topic: The “Account” System LO: 3 Level of Difficulty: MEDIUM 140. Stone Circle Company purchased a new car for $135,000 by paying $54,000 cash, and trading in an old car with a recorded net cost and market value of $45,000. They also signed a Note for $36,000. The required journal entry will not: A) Credit Notes Payable for $36,000 B) Debit New Car for $135,000 C) Debit Notes Payable for $36,000 D) Credit Old Car for $45,000 Answer: C Rationale: Entry when new car is purchased: New Car Cash Old Car Note Payable
135,000 54,000 45,000 36,000
Topic: The “Account” System LO: 3 Level of Difficulty: MEDIUM 141. During the current week, Julissa, (1) received a cash payment for services previously billed to one of her clients. Also, she (2) paid her telephone bill, and (3) bought equipment on credit. For the three separate transactions, at least one of the journal entries will include a: A) Credit to Retained Earnings B) Debit to Notes Payable C) Debit to Accounts Receivable D) Credit to Accounts Receivable Answer: D Rationale: The first current transaction includes a credit to accounts receivable. Entry when revenue earned and bill sent: - pre-transaction (1) Accounts Receivable XXX Service Revenue
XXX
Entry when payment received: - transaction (1) Cash Accounts Receivable
XXX XXX
Entry when telephone bill is paid: - transaction (2) Telephone Expense Cash
XXX
Entry when equipment on credit purchased: - transaction (3) Equipment XXX Accounts Payable
XXX
XXX
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-67
Topic: The “Account” System LO: 3 Level of Difficulty: MEDIUM 142. Koala Company provided consulting service to a client on January 1, and billed them for $30,000. On February 1, the client made cash payment of $16,000 and signed a note for $14,000 to settle the account. What is Koala Company’s journal entry on February 1? A) Cash 16,000 Accounts Receivable 14,000 Notes Payable B) Accounts Payable 30,000 Notes Payable Cash C) Cash 16,000 Notes Receivable 14,000 Consulting Revenue D) Cash 16,000 Notes Receivable 14,000 Accounts Receivable
30,000
14,000 16,000
30,000
30,000
Answer: D Rationale: January entry to record consulting revenue earned and billed to client: Accounts Receivable 30,000 Consulting Revenue 30,000 February entry to record settlement of the account receivable: Cash 16,000 Notes Receivable 14,000 Accounts Receivable
30,000
©Cambridge Business Publishers, 2020 2-68
th
Financial Accounting for Undergraduates, 4 Edition
Topic: The “Account” System LO: 3 Level of Difficulty: MEDIUM 143. Hannibal Company provided consulting service to a client on January 1, and billed them for $90,000. On February 1, the client made cash payment of $48,000 and signed a note for $42,000 to settle the account. What is Hannibal Company’s journal entry on February 1? A) Cash 48,000 Notes Receivable 42,000 Accounts Receivable B) Cash 48,000 Accounts Receivable 42,000 Notes Receivable C) Accounts Payable 90,000 Notes Payable Cash D) Cash 48,000 Notes Receivable 42,000 Consulting Revenue
90,000
90,000
42,000 48,000
90,000
Answer: A Rationale: January entry to record consulting revenue earned and billed to client: Accounts Receivable 90,000 Consulting Revenue 90,000 February entry to record settlement of the account receivable: Cash 48,000 Notes Receivable 42,000 Accounts Receivable
90,000
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 144. Hannibal Company’s Accounts Payable account had a balance of $7,400 on September 1, 2019, and a balance of $9,000 on September 30, 2019. During September 2019, the company made total payments of $65,600 on accounts payables. What must have been their total purchases on account during September 2019. A) $74,600 B) $58,200 C) $67,200 D) $64,000 Answer: C Rationale: Beginning A/P balance + Sales on account – Customer payments = Ending A/P balance $7,400 + X - $65,600 = $9,000 X = $9,000 - $7,400 + $65,600 X = $67,200
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-69
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 145. Rabbit Company’s Accounts Payable account had a balance of $22,200 on September 1, 2019, and a balance of $27,000 on September 30, 2019. During September 2019, the company made total payments of $196,800 on accounts payables. What must have been their total purchases on account during September 2019. A) $192,000 B) $223,800 C) $174,600 D) $201,600 Answer: D Rationale: Beginning A/P balance + Purchases – Payments = Ending A/P balance $22,200 + X - $196,800 = $27,000 X = $27,000 - $22,200 + $196,800 X = $201,600
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 146. Baker Company’s Accounts Receivable account had a balance of $15,000 on September 1, 2019, and a balance of $21,400 on September 30, 2019. During September 2019, the company received cash of $39,400 from credit customers. Determine the amount of sales on account that occurred in September 2019. A) $45,800 B) $41,000 C) $52,800 D) $26,000 Answer: A Rationale: Beginning A/R balance + Sales on account – Cash receipts = Ending A/R balance $15,000 + X - $39,400 = $21,400 X = $21,400 - $15,000 + $39,400 X = $45,800
©Cambridge Business Publishers, 2020 2-70
th
Financial Accounting for Undergraduates, 4 Edition
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 147. Patrick’s Show Choir Company’s Accounts Receivable account had a balance of $45,000 on September 1, 2016, and a balance of $64,200 on September 30, 2019. During September 2019, the company received cash of $118,200 from credit customers. Determine the amount of sales on account that occurred in September 2019. A) $ 78,000 B) $137,400 C) $126,000 D) $158,400 Answer: B Rationale: Beginning A/R balance + Sales on account – Cash receipts = Ending A/R balance $45,000 + X - $118,200 = $64,200 X = $64,200 - $45,000 + $118,200 X = $137,400
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 148. Martin Company had $113,500 of Accounts Payable on March 31, 2019. During March, the company made total purchases on account of $193,740, and paid a total of $210,460 cash on accounts payable. Determine the balance of Accounts Payable on March 1, 2019. A) $130,400 B) $130,220 C) $ 6,780 D) $290,700 Answer: B Rationale: Beginning A/P balance + Purchases – Payments = Ending A/P balance X + $193,740 - $210,460 = $113,500 X = $113,500 - $193,740 + $210,460 X = $130,220
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-71
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 149. Morgan Company had $340,500 of Accounts Payable on March 31, 2019. During March, the company made total purchases on account of $581,220, and paid a total of $631,380 cash on accounts payable. Determine the balance of Accounts Payable on March 1, 2019. A) $871,100 B) $391,200 C) $390,660 D) $ 20,340 Answer: C Rationale: Beginning A/P balance + Purchases – Payments = Ending A/P balance X + $581,220 - $631,380 = $340,500 X = $340,500 - $581,220 + $631,380 X = $390,660
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 150. On December 31, 2019, KatoffelSak Company had a $122,550 balance in Accounts Receivable. During the year 2020, the company collected $200,000 from its credit customers. The December 31, 2020 balance of the Accounts Receivable was $170,650. Determine the amount of sales on accounts for 2020. A) $248,100 B) $156,900 C) $253,100 D) $156,000 Answer: A Rationale: Beginning A/R balance + Sales on account – Cash receipts = Ending A/R balance $122,550 + X - $200,000 = $170,650 X = $170,650 - $122,550 + $200,000 X = $248,100
©Cambridge Business Publishers, 2020 2-72
th
Financial Accounting for Undergraduates, 4 Edition
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 151. On December 31, 2019, Munchkin Company had a $367,650 balance in Accounts Receivable. During the year 2020, the company collected $600,000 from its credit customers. The December 31, 2020 balance of the Accounts Receivable was $511,950. Determine the amount of sales on accounts for 2020. A) $468,000 B) $744,300 C) $470,700 D) $759,300 Answer: B Rationale: Beginning A/R balance + Sales on account – Cash receipts = Ending A/R balance $367,650 + X - $600,000 = $511,950 X = $511,950 - $367,650 + $600,000 X = $744,300
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 152. Bousfield Company had $28,460 of Accounts Payable on September 1 and $25,520 on September 30. During September, the company paid total cash of $26,550 on accounts payable. Determine the total purchases on account during September. A) $86,410 B) $80,530 C) $23,610 D) $29,490 Answer: C Rationale: Beginning A/P balance + Purchases – Payments = Ending A/P balance $28,460 + X - $26,550 = $25,520 X = $25,520 - $28,460 + $26,550 X = $23,610
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 153. MoveLo Company had $85,380 of accounts payable on September 1 and $76,560 on September 30. During September, the company paid total cash of $79,650 on accounts payable. Determine the total purchases on account during September. A) $ 88,470 B) $259,230 C) $241,590 D) $ 70,830 Answer: D Rationale: Beginning A/P balance + Purchases – Payments = Ending A/P balance $85,380 + X - $79,650 = $76,560 X = $76,560 - $85,380 + $79,650 X = $70,830 ©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-73
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 154. On November 30, Sydney Company had Accounts Receivable of $130,280. During the month of December, the company received total payments of $160,000 from credit customers. The Accounts Receivable on December 31 was $86,320. What was the amount of credit sales during December? A) $373,360 B) $116,040 C) $196,720 D) $63,840 Answer: B Rationale: Beginning A/R balance + Sales on account – Cash receipts = Ending A/R balance $130,280 + X - $160,000 = $86,320 X = $86,320 - $130,280 + $160,000 X = $116,040
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 155. On November 30, Brisbane Company had Accounts Receivable of $390,840. During the month of December, the company received total payments of $480,000 from credit customers. The Accounts Receivable on December 31 was $258,960. What was the amount of credit sales during December? A) $ 191,520 B) $1,120,080 C) $ 348,120 D) $ 590,160 Answer: C Rationale: Beginning A/R balance + Sales on account – Cash receipts = Ending A/R balance $390,840 + X - $480,000 = $258,960 X = $258,960 - $390,840 + $480,000 X = $348,120
©Cambridge Business Publishers, 2020 2-74
th
Financial Accounting for Undergraduates, 4 Edition
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 156. The accountant at Fog Company recorded the purchase of $600 of supplies for cash as a debit to Supplies for $600 and a credit to Accounts Payable for $600. Determine the effect of this error on the accounting equation of Fog Company. A) Total Equity would be overstated by $600 B) Total Liabilities will be understated by $600 C) Total Assets would be overstated by $600 D) Total Equity would be understated by $600 Answer: C Rationale: Assets Correct entry: Supplies Cash
Liabilities
Equity
600 (600) 0
Entry made: Supplies A/P
600 ____
600
Difference:
600
600
Both Assets and Liabilities are overstated.
Topic: The “Account” System LO: 3 Level of Difficulty: DIFFICULT 157. The accountant at Befuddled Company recorded the purchase of $1,800 of supplies for cash as a debit to Supplies for $1,800 and a credit to Accounts Payable for $1,800. Determine the effect of this error on the accounting equation of Befuddled Company. A) Total Equity would be understated by $1,800 B) Total Equity would be overstated by $1,800 C) Total Liabilities would be understated by $1,800 D) Total Assets would be overstated by $1,800 Answer: D Rationale: Assets Correct entry: Supplies Cash
Liabilities
Equity
1,800 (1,800) 0
Entry made: Supplies A/P
1,800 ____
1,800
Difference:
1,800
1,800
Both Assets and Liabilities are overstated.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-75
Topic: Trial Balance LO: 6 Level of Difficulty: DIFFICULT 158. Which of the following errors, each considered individually, would cause the trial balance totals to be unequal? A) A transaction was not posted B) A payment of $112 for insurance was posted as a debit of $112 to Prepaid Insurance and a credit of $112 to Cash C) A payment of $422 to a creditor was posted as a debit of $4,222 to Accounts Payable and a credit of $422 to Cash D) Cash received from customers on account was posted as a debit of $200 to Cash and a credit of $200 to Accounts Payable Answer: C Rationale: An error in which the debit and credit portion of the entry are not equal will cause the trial balance totals to be unequal.
Topic: Trial Balance LO: 6 Level of Difficulty: DIFFICULT 159. Which of the following errors, each considered individually, would cause the trial balance totals to be unequal? A) Cash received from customers on account was posted as a debit of $600 to Cash and a credit of $600 to Accounts Payable B) A transaction was not posted C) A payment of $446 for insurance was posted as a debit of $446 to Prepaid Insurance and a credit of $446 to Cash D) A payment of $1,266 to a creditor was posted as a debit of $12,666 to Accounts Payable and a credit of $1,266 to Cash Answer: D Rationale: An error in which the debit and credit portion of the entry are not equal will cause the trial balance totals to be unequal.
©Cambridge Business Publishers, 2020 2-76
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Trial Balance LO: 6 Level of Difficulty: DIFFICULT 160. The purchase of a delivery truck for $19,000 (on credit) was posted as debit to Delivery Trucks for $19,000, and a debit to Notes Payable for $19,000. What effect would this error have on the trial balance? A) The total of the Debit column of the trial balance will exceed the total of the Credit column by $19,000. B) The total of the Credit column of the trial balance will exceed the total of the Debit column by $19,000. C) The total of the Credit column of the trial balance will exceed the total of the Debit column by $38,000. D) The total of the Debit column of the trial balance will exceed the total of the Credit column by $38,000. Answer: D Rationale: Entry made:
Delivery Trucks Notes Payable Balance
Trial Balance Debit Credit $19,000 19,000 $38,000 $0
The entry made will result in the Debit column of the trial balance exceeding the total of the Credit column by $38,000. The entry to record the purchase of the delivery truck should have been: Correct entry:
Delivery Trucks Notes Payable Balance
Trial Balance Debit Credit $19,000 $19,000 $19,000 $19,000
which would have resulted in the debit and credit columns of the trial balance being equal.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-77
Topic: Trial Balance LO: 6 Level of Difficulty: DIFFICULT 161. The purchase of a delivery truck for $57,000 (on credit) was posted as debit to Delivery Trucks for $57,000, and a debit to Notes Payable for $57,000. What effect would this error have on the trial balance? A) The total of the Debit column of the trial balance will exceed the total of the Credit column by $114,000. B) The total of the Debit column of the trial balance will exceed the total of the Credit column by $57,000. C) The total of the Credit column of the trial balance will exceed the total of the Debit column by $57,000. D) The total of the Credit column of the trial balance will exceed the total of the Debit column by $114,000. Answer: A Rationale: Entry made:
Delivery Trucks Notes Payable Balance
Trial Balance Debit Credit $57,000 57,000 $114,000 $0
The entry made will result in the Debit column of the trial balance exceeding the total of the Credit column by $114,000. The entry to record the purchase of the delivery truck should have been: Correct entry:
Delivery Trucks Notes Payable Balance
Trial Balance Debit Credit $57,000 $57,000 $57,000 $57,000
which would have resulted in the debit and credit columns of the trial balance being equal.
©Cambridge Business Publishers, 2020 2-78
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Trial Balance LO: 6 Level of Difficulty: MEDIUM 162. The unadjusted Trial Balance for Ann Z. Company shows the following accounts (in alphabetical order) on December 31, 2019. Each account shown has a normal balance. Accounts Receivable Building Cash Common Stock Dividends Land Rent Expense Retained Earnings, Jan 1, 2019 Service Revenue
26,400 107,800 11,200 146,000 5,000 41,600 4,800 43,200 22,600
Utilities Expense
?
Assuming the Trial Balance is in balance, determine Ann Z, Company’s Utilities Expense for 2019: A) $19,000 B) $15,000 C) $ 7,800 D) $ 5,800 Answer: B Rationale: (in alphabetical order): Ann Z. Company Trail Balance December 31, 2019 Debit Accounts Receivable Building Cash Common Stock Dividends Land Rent Expense Retained Earnings, Jan 1, 2019 Service Revenue Utilities Expense Totals Difference
Credit
$ 26,400 107,800 11,200 $146,000 5,000 41,600 4,800
____?___ $196,800 $ 15,000
43,200 22,600 _______ $211,800
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-79
Topic: Trial Balance LO: 6 Level of Difficulty: MEDIUM 163. The unadjusted Trial Balance for N. Gaffney Company shows the following accounts (in alphabetical order) on December 31, 2019. Each account shown has a normal balance. Accounts Receivable Building Cash Common Stock Dividends Land Rent Expense Retained Earnings, Jan 1, 2019 Service Revenue
79,200 323,400 33,600 438,000 15,000 124,800 14,400 129,600 67,800
Utilities Expense
?
Assuming the Trial Balance is in balance, determine N. Gaffney Company’s Utilities Expense for 2019: A) $17,400 B) $57,000 C) $45,000 D) $23,400 Answer: C Rationale: (in alphabetical order): N. Gaffney Company Trail Balance December 31, 2019 Debit Accounts Receivable Building Cash Common Stock Dividends Land Rent Expense Retained Earnings, Jan 1, 2019 Service Revenue Utilities Expense Totals Difference
Credit
$ 79,200 323,400 33,600 $438,000 15,000 124,800 14,400
____?____ $590,400 $ 45,000
129,600 67,800 _______ $635,400
©Cambridge Business Publishers, 2020 2-80
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Trial Balance LO: 6 Level of Difficulty: MEDIUM 164. As of December 31, 2019, the Balance Sheet of Potawatomi Products, Inc. contains the following items (in random order): $12,000 90,000 250,000 135,000 30,000 7,000 110,000 188,000
Accounts Payable Land Building Notes Payable Accounts Receivable Cash Retained Earnings Common Stock Equipment
?
Determine the amount of Equipment. A) $ 43,500 B) $345,000 C) $ 42,000 D) $ 68,000 Answer: D Rationale: (in random order): Potawatomi Products, Inc. Trail Balance December 31, 2019 Debit Accounts Payable Land Building Notes Payable Accounts Receivable Cash Retained Earnings Common Stock Equipment Total Difference
Credit $ 12,000
$ 90,000 250,000 135,000 30,000 7,000
___?___ $377,000 $68,000
110,000 188,000 _______ $445,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-81
Topic: Trial Balance LO: 6 Level of Difficulty: MEDIUM 165. As of December 31, 2019, the Balance Sheet of Pokagon Products, Inc. contains the following items (in random order): $36,000 270,000 750,000 405,000 90,000 21,000 330,000 564,000
Accounts Payable Land Building Notes Payable Accounts Receivable Cash Retained Earnings Common Stock Equipment
?
Determine the amount of Equipment. A) $ 204,000 B) $ 130,500 C) $1,035,000 D) $ 126,000 Answer: A Rationale: (in random order): Pokagon Products, Inc. Trail Balance December 31, 2019 Debit Accounts Payable Land Building Notes Payable Accounts Receivable Cash Retained Earnings Common Stock Equipment Total Difference
Credit $36,000
$ 270,000 750,000 405,000 90,000 21,000
___?____ $1,131,000 $204,000
330,000 564,000 _______ $1,335,000
©Cambridge Business Publishers, 2020 2-82
th
Financial Accounting for Undergraduates, 4 Edition
Exercises Topic: Fiscal Year-End LO: 1 1. Why would a company want to have a fiscal year-end that does not match the calendar year-end? Answer: A company might set a fiscal year-end that is different from its calendar year-end to allow them to prepare closing accounting records that does not coincide with the busiest shopping season of the year or busiest production time. Thus, the decision about a fiscal year may minimize workload compression and move it to the slowest part of the business year. As such, the fiscal year serves as a period of accounting cycle reference, with the decision allowing a better match for submission of accounting documents to regulatory agencies and inspection by auditors.
Topic: Accounting Cycle LO: 1 2. Do the steps in the accounting cycle occur with equal frequency? Why or why not? Answer: No, the steps in the accounting cycle do not occur with equal frequency because companies analyze and record daily transactions throughout the accounting period. However, they only adjust and report when management requires financial statements, often monthly or quarterly, but at least annually. The last step in the accounting cycle is closing, which only occurs once during the accounting cycle, at the period-end.
Topic: Transaction Analysis LO: 2 3. The following balance sheet information is given for Minerva, Inc., at June 30, 2019: Supplies Accounts Payable Cash Equipment
$ 42,000 30,000 30,000 468,000
Accounts Receivable Common Stock Retained Earnings Notes Payable
$ 102,000 375,000 ? 84,000
Assume that, during the next three days, the following transactions occurred: July 1 2 3
Paid $15,000 on accounts payable. Purchased equipment for $75,000 and gave a note payable for the amount due. Declared and paid a cash dividend, $12,000.
a. What was the amount of retained earnings on June 30, 2019? b. Assume a balance sheet is prepared on July 3, 2019, after the three transactions have occurred: (1) What amount of total assets would appear? (2) What amount of total liabilities would appear? (3) What amount of stockholders’ equity would appear?
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-83
Answer: a. $30,000 Cash + $102,000 Accounts Receivable + $42,000 Supplies + $468,000 Equipment = $642,000 Total Assets $642,000 Total Assets – $30,000 Accounts Payable – $84,000 Notes Payable – $375,000 Common Stock = $153,000 Retained Earnings. b.
Assets Beginning July 1 2 3 Ending
Liabilities
$642,000 – 15,000 + 75,000 – 12,000 (1) $690,000
Stockholders’ Equity
$114,000 – 15,000 + 75,000 (2) $174,000
$528,000
– 12,000 (3) $516,000
Topic: Analyzing Accounts LO: 2, 3 4. Compute the unknown amount required in each of the following four independent situations. Beginning Balance
Ending Balance
Other Information
(1) Cash
$19,200
$25,000
Total cash disbursed, $30,000
(2) Accounts Receivable
11,200
16,000
Services rendered on account, $40,000
(3) Accounts Payable
11,000
11,800
Supplies acquired on account, $20,000
0
74,000
Service rendered on account, $40,000
Account
(4) Service Fees Earned a.
Total cash received
$
b.
Total amount received from credit customers
$
c.
Payments on account during the period
$
d.
Services rendered for cash
$
Answer: a. Ending cash + cash disbursed – Beginning cash = $25,000 + $30,000 – $19,200 = $35,800 b. Beginning A/R + Services rendered on account – Ending A/R = $ 11,200 + $40,000 – $16,000 = $35,200 c.
Beginning A/P + Supplies purchased on account – Ending A/P = $ 11,000 + $20,000 – $11,800 = $19,200
d. Service fees earned – Service rendered on account = $74,000 – $40,000 = $34,000
©Cambridge Business Publishers, 2020 2-84
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Debits and Credits LO: 4, 5 5. Match each of the numbered transactions of a corporation with the appropriate letters, indicating the debits and credits to be made (give the debit first). The correct answer for transaction (1) is provided. (1)
A shareholder purchased stock.
(2)
Paid rent for the current month
a, f
(3)
Received and immediately paid repair bill.
(4)
Purchased equipment on account.
(5)
Billed customers for services rendered.
(6)
Made partial payment for equipment purchased in transaction (4).
(7)
Collected amounts due from customers billed in transaction (5).
(8)
Borrowed money from bank, giving a note.
(9)
Paid cash dividends.
(10)
Paid employees’ salaries.
Effect of Transaction a. b. c. d. e. f.
Debit an asset Credit an asset Debit a liability Credit a liability Debit common stock Credit common stock
g. h. i. j. k. l.
Debit dividends Credit dividends Debit revenue Credit revenue Debit expense Credit expense
Answer: (1) A shareholder purchased stock.
a, f
(2)
Paid rent for the current month
k, b
(3)
Received and immediately paid repair bill.
k, b
(4)
Purchased equipment on account.
a, d
(5)
Billed customers for services rendered.
a, j
(6)
Made partial payment for equipment purchased in transaction (4).
c, b
(7)
Collected amounts due from customers billed in transaction (5).
a, b
(8)
Borrowed money from bank, giving a note.
a, d
(9)
Paid cash dividends.
g, b
(10)
Paid employees’ salaries.
k, b
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-85
Topic: Recording Transactions LO: 5 6. The following T-accounts contain numbered entries for the July transactions of NCN, Inc., which opened on July 1 of this year.
(1) (7) (9)
(5)
Cash 90,000 27,000 15,000 12,000 24,300 2,700 1,500
(2) (4) (6) (8)
Accounts Receivable 31,200 24,300
(9)
(3)
Supplies 7,200
(2)
Office Equipment 27,000
(6)
Accounts Payable 2,700 7,200
(8)
Notes Payable 15,000
(7)
Common Stock 90,000
(1)
Dividends 1,500
Professional Fees Earned 31,200 (5)
(3)
(4)
Rent Expense 12,000
Give a reasonable description of each of the nine numbered transactions entered in the above accounts. Example: (1) Shareholders invested $90,000 cash in the business. Answer: (1) Provided. (2) Purchased office equipment for cash, $27,000. (3) Purchased supplies on account, $7,200. (4) Paid rent expense, $12,000. (5) Billed clients $31,200 for professional services. (6) Paid $2,700 on accounts payable. (7) Borrowed $15,000 cash, giving a note payable. (8) Paid $1,500 cash dividends to shareholders. (9) Collected $24,300 on account from clients.
©Cambridge Business Publishers, 2020 2-86
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Analyzing Transactions with T-Accounts LO: 5 7. Use the T-account below, to answer the following questions.
1/1 4/1 12/31
Accounts Receivable (A) 320,000 4,800,400 3,013,000 ?
9/1
a. What journal entry is most likely represented by $4,800,400 in the T-account? What business event caused this? b. What journal entry is most likely represented by the $3,013,000 in the T-account? What business event caused this? c.
What is the balance of Accounts Receivable on December 31?
Answer: a. 4/1
b.
9/1
Accounts receivable Sales revenue The company sold merchandise (or services) on account.
4,800,400
Cash
3,013,000
Accounts receivable The company collected cash from customers. c.
4,800,400
3,013,000
$320,000 + $4,800,400 – $3,013,000 = $2,107,400
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-87
Problems Topic: Recording Transactions LO: 3, 4, 5 1. Make T-accounts for the following general ledger accounts of Mighty Movers, which began business on January 1, 2019: Cash; Accounts Receivable; Supplies; Equipment; Accounts Payable; Notes Payable; Common Stock; Dividends; Moving Fees Earned; Salaries Expense; Rent Expense; and Utilities Expense. Record the following January 2019 transactions in the accounts and key each entry with the transaction number. (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
Shareholders purchased $270,000 in stock. Paid rent for the month, $3,300. Purchased equipment for $90,000, giving a note payable for $90,000. Purchased supplies on account, $15,000. Billed clients for services rendered, $57,000. Paid salaries for the month, $23,400. Paid $12,000 on account for supplies purchased in transaction (4). Collected $26,100 from clients previously billed. Paid utilities for the month, $1,470. Paid $17,400 cash dividends.
Answer: Cash 270,000 3,300 26,100 23,400 12,000 1,470 17,400
(2) (6) (7) (9) (10)
(5)
Accounts Receivable 57,000 26,100
(8)
(4)
Supplies 15,000
(3)
Equipment 90,000
(7)
Accounts Payable 12,000 15,000
Notes Payable 90,000
(1) (8)
Common Stock 270,000
(10)
(1)
Dividends 17,400
Moving Fees Earned 57,000
(6)
Salary Expense 23,400
(4)
(2)
Rent Expense 3,300
(3)
(9)
Utilities Expense 1,470
(5)
©Cambridge Business Publishers, 2020 2-88
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Journal Entries LO: 5 2. Andes Transport, Inc. has the following accounts (among others) in its general ledger: Cash; Accounts Receivable; Prepaid Rent; Supplies; Delivery Trucks; Accounts Payable; Unearned Delivery Fees; Common Stock; Dividends; Delivery Fees Earned; Rent Expense; and Salaries Expense. Prepare general journal entries to record the following transactions: June 1 2 3 9 14 17 20 29 30 Answer: June 1
2
3
Shareholders contributed $60,000 cash and a delivery truck worth $34,000 in exchange for stock. Paid $12,000 as rent for June, July, and August. Purchased supplies on account, $5,600. Billed customers for deliveries made, $6,200. Received $2,000 cash from a customer as advance payment for deliveries scheduled throughout July. Paid $3,000 on account to suppliers. Collected $4,600 on account from customers. Paid $1,500 cash dividends to shareholders Paid salaries for June, $4,000.
Cash Delivery Trucks Common Stock Contributed cash and delivery truck in exchange for stock.
60,000 34,000
Prepaid Rent Cash Paid rent for June, July, and August.
12,000
Supplies
5,600
94,000
12,000
Accounts Payable Purchased supplies on account. 9
14
5,600
Accounts Receivable Delivery Fees Earned Billed customers for deliveries made.
6,200
Cash
2,000
6,200
Unearned Delivery Fees Received advance payment from customer. 17
20
2,000
Accounts Payable Cash Paid suppliers on account.
3,000
Cash
4,600
3,000
Accounts Receivable Received payments from customers on account. 29
Dividends
4,600 1,500
Cash Paid cash dividends. 30
Salaries Expense Cash Paid salaries for June.
1,500 4,000 4,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-89
Topic: Journal Entries LO: 5 3. Helen H. Designs has the following accounts in its general ledger: Cash; Accounts Receivable; Supplies; Office Equipment; Accounts Payable; Common Stock; Dividends; Service Fees Earned; Rent Expense; and Salaries Expense. Prepare general journal entries to record the following transactions: May 1 2 4 5 12 18 19 26 31 Answer: May 1
Shareholders invested $330,000 cash in exchange for stock. Paid May rent, $15,900. Purchased office equipment for $27,000, paying $9,000 cash, with the balance due on account in 60 days. Purchased supplies on account, $6,900. Billed clients for services, $17,400. Collected $11,400 on account from clients. Paid $4,500 on account to suppliers. Paid $27,000 cash dividends. Paid salaries for May, $9,600.
Cash
330,000
Common Stock Cash received for stock. 2
4
5
330,000
Rent Expense Cash Paid May rent.
15,900
Office Equipment Cash Accounts Payable Purchased office equipment for $18,000. Terms: $6,000 down, remainder due in 60 days.
27,000
Supplies
6,900
15,900
9,000 18,000
Accounts Payable Purchased supplies on account. 12
18
6,900
Accounts Receivable Service Fees Earned Billed clients for services.
17,400
Cash
11,400
17,400
Accounts Receivable Received payments from clients on account. 19
Accounts Payable Cash Paid suppliers on account.
11,400 4,500 4,500
Continued next page
©Cambridge Business Publishers, 2020 2-90
th
Financial Accounting for Undergraduates, 4 Edition
May
26
Dividends
27,000
Cash Paid cash dividends. 31
27,000
Salaries Expense Cash Paid salaries for May.
9,600 9,600
Topic: Trial Balance LO: 6 4. The following accounts, in alphabetical order, are from the general ledger of Oma Bean’s Advice Service, Inc. at January 31, 2019. The firm’s accounting year began on January 1. All accounts have normal balances. Accounts payable Accounts receivable Advertising expense Common stock Dividends Cash Equipment
$ 6,900 36,400 1,680 53,200 5,400 17,000 19,080
Insurance expense Rent expense Salaries expense Service fees earned Supplies expense Supplies inventory Utilities expense
$
1,120 1,700 10,800 38,300 960 3,120 1,140
Prepare a trial balance at January 31, 2019, from the given data. Answer: OMA BEAN’S ADVICE SERVICE, INC. Trial Balance January 31, 2019 Cash Accounts receivable Supplies inventory Equipment Accounts payable Common stock Dividends Service fees earned Advertising expense Insurance expense Rent expense Salaries expense Supplies expense Utilities expense
Debit $ 17,000 36,400 3,120 19,080
Credit
$ 6,900 53,200 5,400 38,300 1,680 1,120 1,700 10,800 960 1,140 $98,400
$98,400
©Cambridge Business Publishers, 2020 Test Bank, Chapter 2
2-91
Chapter 3 Accrual Basis of Accounting Learning Objectives – Coverage by question True / False LO1 – Explain the accrual basis of accounting and contrast it with the cash basis with reference to revenue and expense recognition. LO2 – Describe the adjusting process.
Multiple Choice
Exercises
Problems
116-118
3, 4, 6-10
1, 7-10, 119-128, 159, 160, 162-166, 169-175
2, 5, 6
2, 4, 5, 9, 11-16, 21-36, 45-51, 56, 57, 60, 63-72, 119-144, 167, 168, 173, 174
2-4, 6
1-12
1
3, 6, 10, 17-20, 37-44, 52-55, 58, 59, 61, 62, 73-78, 145-166, 169-171, 175
1, 2, 5, 19
1-12
LO5 – Explain the adjusted trial balance and use it to prepare financial statements.
11, 12
63-78
5-10
LO6 – Describe the closing process and summarize the accounting cycle.
13-17, 20-23
79-91,97, 98, 102-107, 176, 177
11-13,16, 19
14
LO7 – Appendix3A: Describe the process of closing to the Income Summary account and summarize the accounting cycle.
15-23
89-107, 176, 177
14, 15, 17, 18
13
LO8 – Appendix3B: Explain how to use a worksheet in the adjusting and closing process.
24-29
108-115
17, 18, 20-22
LO3 – Illustrate deferral adjustments.
LO4 – Illustrate accrual adjustments.
1-12
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-1
Chapter 3: Accrual Basis of Accounting
True / False Topic: Accrued Expense LO: 4 1. An accrued expense is one that has been incurred but not yet paid. Answer: True Rationale: An expense is accrued when it becomes owed if it has not yet been paid. Topic: Prepaid Asset and Contra Account LO: 3 2. Prepaid rent is an example of a contra account, and is used to record a reduction to its related account, rent expense. Answer: False Rationale: Prepaid rent is an asset account reflecting the benefit owed the company from paying cash in advance for rent. Rent expense is used to accumulate costs associated with using property rented from others. Topic: Unadjusted Trial Balance LO: 2 3. The purpose of an unadjusted trial balance is to be sure the general ledger is in balance. Answer: True Rationale: The primary purpose of the unadjusted trial balance is to ensure the general ledger is in balance before management posts adjusting entries. Topic: Adjusting Entries LO: 2 4. Adjusting entries always impact the income statement and the cash account. Answer: False Rationale: Adjusting entries affect a balance sheet account and an income statement account, but never the cash account. Topic: Asset Book Value LO: 3 5. The book value of a building is equivalent to its historical cost. Answer: False Rationale: A building’s book value is its historical cost minus the accumulated depreciation associated with the building.
©Cambridge Business Publishers, 2020 3-2
Financial Accounting for Undergraduates, 4th Edition
Topic: Adjusting Unearned Revenues LO: 2, 3 6. Adjusting unearned revenues causes a liability to decline. Answer: True Rationale: The adjustment of unearned revenues reduces Unearned Revenue, a liability, and increases Service Revenue or Sales. Topic: Unadjusted Trial Balance LO: 2 7. The trial balance prepared before the general ledger accounts are adjusted is called an adjusted trial balance. Answer: False Rationale: The trial balance prepared before the general ledger accounts are adjusted is called an unadjusted trial balance. Topic: Unadjusted Trial Balance LO: 2 8. An unadjusted trial balance shows the general ledger account balances before any adjustments have been made. Answer: True Rationale: The end of period adjustment process begins with the preparation of a trial balance of all general ledger accounts. The unadjusted trial balance shows the general ledger account balances before any adjustments have been made. The unadjusted trail balance is prepared to ensure that the general ledger is in balance before the end-of-period process begins. Topic: Adjusting Entries LO: 2 9. Each adjusting entry affects a balance sheet account and an income statement account. Answer: True Rationale: Each adjusting entry affects one or more balance sheet accounts (an asset or a liability account) and one or more income statement accounts (an expense or revenue account). Topic: Adjusting Entries LO: 2 10. An adjusting entry to record depreciation expense is an example of an adjustment that accrues an expense to reflect its incurrence during the accounting period even though it is not yet paid or recorded. Answer: False Rationale: An adjusting entry to record depreciation expense is an example of an adjustment that allocates previously recorded assets to expenses.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-3
Topic: Adjusted Trial Balance LO: 5 11. An adjusted trial balance is a listing of all the year-end balance sheet accounts, since all the income statement accounts have been closed to zero. Answer: False Rationale: The adjusted trial balance lists all general ledger accounts after adjustments have been posted. It contains much of the data needed to construct the financial statements, including the income statement. Topic: Adjusted Trial Balance LO: 5 12. The adjusted trial balance includes only accounts whose balances are changed by adjustments. Answer: False Rationale: The adjusted trial balance includes all general ledger account balances, even those that were not affected by an adjustment. Topic: Permanent Accounts LO: 6 13. Permanent accounts are the accounts presented in the balance sheet. Answer: True Rationale: Permanent accounts are accounts presented on the balance sheet. They consist of the asset, liability, and stockholders’ equity accounts. Any balance in a permanent account at the end of the accounting period is carried forward to the following accounting period. Topic: Temporary Accounts LO: 6 14. Temporary accounts for a corporation consist of the revenue, expense, and retained earnings accounts. Answer: False Rationale: Retained earnings is a permanent account. Revenue, expense, and dividend accounts are temporary accounts. Topic: Closing Entries LO: 6, 7 15. Adjusting entries must be journalized and posted before closing entries may be prepared. Answer: True Rationale: The adjusted trial balance lists all general ledger accounts after adjustments have been posted. It contains much of the data needed to construct the financial statements. After this the financial statements are prepared. Then, closing entries are posted.
©Cambridge Business Publishers, 2020 3-4
Financial Accounting for Undergraduates, 4th Edition
Topic: Closing Entries LO: 6, 7 16. An account is closed at year-end when an entry changes its balance to zero. Answer: True Rationale: An account that is closed is said to be closed to the account that receives the offsetting debit or credit. Thus, a closing entry simply transfers the balance of one account to another account. Because closing journal entries bring temporary account balances to zero, the temporary accounts are ready to start accumulating data for the next accounting period. Topic: Closing Entries LO: 6, 7 17. In accounting for a corporation, the Retained Earnings account is closed at the end of each accounting period. Answer: False Rationale: The Income Summary account, not Retained Earnings, is closed at the end of each accounting period Topic: Closing Entries LO: 7 18. At the end of the accounting period, the dividends account is closed to the Income Summary account. Answer: False Rationale: The dividends account is closed to Retained Earnings at the end of the accounting period. Topic: Closing Entries LO: 7 19. A debit balance in the Income Summary account just prior to closing it indicates there is a net loss for the period. Answer: True Rationale: The Income Summary account is closed with a debit to Retained Earnings and a credit to Income Summary in the case of a net loss and with a debit to Income summary and a credit to the Retained Earnings account in the case of net income, as shown below: Retained Earnings Income Summary (to close Income Summary (reflecting a net loss) account)
$XXX
Income Summary Retained Earnings (to close Income Summary (reflecting net income) account)
$XXX
$XXX
$XXX
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-5
Topic: Post-Closing Trial Balance LO: 6, 7 20. The post-closing trial balance includes only balance sheet accounts. Answer: True Rationale: After closing entries are recorded in the general journal and posted to the general ledger, all of the temporary accounts have zero balances. Then, the post-closing trail balance is prepared. Because the temporary accounts have been closed, only the balance sheet (or permanent) accounts appear in the post-closing trial balance. Topic: Accounting Cycle LO: 6, 7 21. The complete accounting cycle begins with the analysis of transactions and ends with the preparation of financial statements. Answer: False Rationale: The complete accounting cycle begins with the analysis of transactions and ends with the preparation of the post-closing trial balance. Topic: Temporary Accounts LO: 6, 7 22. All accounts in the general ledger are closed at a company’s fiscal year end in order to facilitate preparation of the financial statements and to ready the accounts for the activities of the next year. Answer: False Rationale: Only temporary accounts (revenue, expense and dividends) are closed at the end of the period. Balance sheet accounts, also known as permanent accounts, are not closed as the balances are carried over to the next accounting period. Topic: Temporary Accounts LO: 6, 7 23. Corporation revenue and expense accounts are considered temporary subdivisions of the corporation’s common stock. Answer: False Rationale: Revenue and expense accounts are temporary subdivisions of retained earnings. Topic: Worksheets LO: 8 24. When a worksheet is used, all adjustments are first entered on the worksheet. Answer: True Rationale: When a worksheet is used, all adjustments are first entered on the worksheet. This process permits the adjustments to be reviewed for completeness and accuracy.
©Cambridge Business Publishers, 2020 3-6
Financial Accounting for Undergraduates, 4th Edition
Topic: Worksheets LO: 8 25. On a worksheet, net income appears in the income statement columns as a credit and in the balance sheet columns as a debit. Answer: False Rationale: On a worksheet, net income appears in the income statement columns as a debit and in the balance sheet columns as a credit. Topic: Worksheets LO: 8 26. On a worksheet, a net loss appears in the income statement as a credit and in the balance sheet columns as a debit. Answer: True Rationale: The worksheet must be balanced by adding each of the income statement and balance sheet debit and credit columns. The difference between the total debit and credit columns in the income statement is the difference between total revenue and total expense, i.e., the net income or loss for the period. To balance the worksheet, when expenses exceed revenue, the net loss is added to the credit column of the income statement and to the debit column of the balance sheet. Topic: Worksheets LO: 8 27. The total of the balance sheet debit column on the worksheet must equal the total assets presented in the formal balance sheet. Answer: False Rationale: The total of the balance sheet debit column on the worksheet will include all assets accounts with a debit balance, but will also include liability and equity accounts that have a debit balance. Topic: Worksheets LO: 8 28. In the balance sheet columns of the worksheet, the amount shown in the retained earnings account is generally not the same amount that appears as retained earnings on the balance sheet. Answer: True Rationale: In the balance sheet columns of the worksheet, the amount shown in the retained earnings account is generally not the same amount that appears as retained earnings on the balance sheet. This is true because the Retained Earnings account balance as extended does not yet reflect the net income or net loss for the current period. Topic: Worksheets LO: 8 29. A completed worksheet contains sufficient information to prepare an income statement and a balance sheet. Answer: True Rationale: The income statement can be prepared from the data in the income statement columns. Two pieces of information for the statement of stockholders’ equity are available in the worksheet— the net income (or net loss) and dividends. The assets and liabilities needed for the balance sheet are available in the balance sheet columns (the ending Retained Earnings balance for the balance sheet is obtained from the statement of stockholders’ equity). ©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-7
Multiple Choice Topic: Adjusting Entries LO: 2 Level of Difficulty: MEDIUM 1. Which one of the following is not a reason for which adjusting entries are made? A) To close the income statement accounts and prepare them for the following year’s activity B) To allocate used or expired assets to reflect expenses incurred in the period C) To allocate the earned portion of unearned revenue to reflect revenues earned during the period D) To accrue expenses to reflect expenses incurred in the period that are not yet paid or recorded Answer: A Rationale: Adjusting entries are made for all the reasons above except to close out the accounts. Answer A describes closing entries. Topic: Deferral LO: 3 Level of Difficulty: EASY 2. Which of the following is a distinguishing characteristic of a deferral? A) It affects at least one liability account B) It always impacts the cash account C) It includes the adjustment of an amount previously recorded in a balance sheet account D) It increases a balance sheet account and decreases an income statement account Answer: C Rationale: A deferral adjusts an amount previously recorded in a balance sheet account. Topic: Accruals LO: 4 Level of Difficulty: EASY 3. A company provides services to clients during the period that are neither paid for, nor billed to the clients. What must the company do? A) Bill the client prior to year end in order to recognize the revenue B) Record the revenues as a liability at the end of the year C) Accrue revenue by making an adjusting entry at the end of the period D) All of the above are true Answer: C Rationale: Services earned but not yet billed or collected require an accrual to recognize the revenue and the account receivable at the end of the period. The bill does not have to be sent prior to year end and there is no liability at year end since money is owed to the company.
©Cambridge Business Publishers, 2020 3-8
Financial Accounting for Undergraduates, 4th Edition
Topic: Adjusting for Depreciation LO: 3 Level of Difficulty: EASY 4. As of the beginning of 2019, the Logistics Company had equipment totaling $1,800,000 which was depreciated at $150,000 per year. If Let’s Move makes the appropriate adjusting entry at year end, which of the following is one part of the journal entry that will be made? A) Debit Equipment for $150,000 B) Credit Depreciation Expense for $150,000 C) Debit Depreciation Expense for $150,000 D) Debit Accumulated Depreciation for $150,000 Answer: C Rationale: The entry will debit Depreciation Expense for $150,000 and credit Accumulated Depreciation for the same amount. Topic: Adjusting for Depreciation LO: 3 Level of Difficulty: EASY 5. When adjusting for depreciation, which of the following is one effect of the adjustment? A) Accumulated depreciation is debited B) The asset’s book value declines C) The cost of the equipment declines D) The market value of the equipment declines Answer: B Rationale: The adjusting entry creates a credit to accumulated depreciation and a debit to depreciation expense. The credit causes the book value to decline because it increases the contra account that is shown as a deduction from the cost of the equipment on the balance sheet. Topic: Effects of Accrued Wages LO: 4 Level of Difficulty: EASY 6. An accrual of wages expense would produce what effect on the balance sheet? A) Increase liabilities and decrease equity B) Decrease liabilities and increase equity C) Increase assets and increase liabilities D) Decrease assets and decrease liabilities Answer: A Rationale: An accrual of wages expense produces an increase in wages payable (liability) and a decrease in retained earnings (stockholders’ equity), resulting in a decrease of profit. Topic: Recognition of Costs as Expense LO: 2 Level of Difficulty: EASY 7. As supplies and PPE assets on the balance sheet are consumed, they are reflected: A) As a revenue on the income statement B) As an expense on the income statement C) As common stock on the balance sheet D) Assets are never consumed Answer: B Rationale: As assets are consumed (used up), their cost is transferred into the income statement as an expense. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-9
Topic: Adjusting Entries LO: 2 Level of Difficulty: MEDIUM 8. An adjusting entry will not take the format of which one of the following entries? A) A debit to an expense account and a credit to a liability account B) A debit to an asset account and a credit to a revenue account C) A debit to an expense account and a credit to a revenue account D) A debit to a liability account and a credit to a revenue account Answer: C Rationale: An adjusting entry affects one or more balance sheet accounts (an asset or a liability account) and one or more income statement accounts (an expense or revenue account). A debit to an expense account and a credit to a revenue account would not affect the balance sheet and thus would not be an adjusting entry. Topic: Adjusting Entry Errors LO: 2, 3 Level of Difficulty: MEDIUM 9. Which one of the following errors causes an overstatement of net income? A) Failure to accrue revenue earned but not billed B) Failure to record collection of an account receivable C) Failure to record a portion of fees received in advance that is earned by year-end D) Failure to record depreciation expense Answer: D Rationale: Failure to record an expense would overstate net income. Failure to accrue revenue would understate net income. Failure to record collection of accounts receivable or to record a portion of fees received in advance have no impact the income statement. Topic: Adjusting Entry Errors LO: 2, 4 Level of Difficulty: MEDIUM 10. Which one of the following errors causes an understatement of net income? A) Failure to accrue revenue earned but not billed B) Failure to accrue wages earned but not yet paid to employees C) Failure to record depreciation expense D) Failure to record payment of account payable Answer: A Rationale: Only the failure to accrue revenue earned would understate net income. Failure to record wages or to record depreciation expense would overstate net income. Failure to record the payment of an account payable has no income statement effect.
©Cambridge Business Publishers, 2020 3-10
Financial Accounting for Undergraduates, 4th Edition
Topic: Unearned Income Adjusting Entries LO: 3 Level of Difficulty: EASY 11. Sue Baker received $5,000 from a tenant on December 1 for five months’ rent of an office. This rent was for December, January, February, March, and April. If Sue debited Cash and credited Unearned Rental Income for $5,000 on December 1, what necessary adjustment would be made on December 31? A) Unearned Rental Income Rental Income B) Rental Income Unearned Rental Income C) Unearned Rental Income Rental Income D) Rental Income Unearned Rental Income
1,000 1,000 4,000 4,000 4,000 4,000 1,000 1,000
Answer: A Rationale: Transfer 1/5 x $5,000 = $1,000 from Unearned Rental Income to Rental Income Topic: Unearned Income Adjusting Entries LO: 3 Level of Difficulty: EASY 12. Pam Harper received $15,000 from a tenant on December 1 for five months’ rent of an office. This rent was for December, January, February, March, and April. If Pam debited Cash and credited Unearned Rental Income for $15,000 on December 1, what necessary adjustment would be made on December 31? A) Unearned Rental Income Rental Income B) Rental Income Unearned Rental Income C) Unearned Rental Income Rental Income D) Rental Income Unearned Rental Income
3,000 3,000 12,000 12,000 12,000 12,000 3,000 3,000
Answer: A Rationale: Transfer 1/5 x $15,000 = $3,000 from Unearned Rental Income to Rental Income
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-11
Topic: Unearned Income Adjusting Entries LO: 3 Level of Difficulty: EASY 13. Campus Rentals, Inc. received $4,800 from a tenant on December 1 for three months’ rent of an office. This rent was for December, January, and February. If Campus Rentals debited Cash and credited Unearned Rental Income for $4,800 on December 1, what necessary adjustment would be made on December 31? A) Unearned Rental Income Rental Income B) Rental Income Unearned Rental Income C) Unearned Rental Income Rental Income D) Rental Income Unearned Rental Income
3,200 3,200 3,200 3,200 1,600 1,600 1,600 1,600
Answer: C Rationale: Transfer 1/3 x $4,800 = $1,600 from Unearned Rental Income to Rental Income Topic: Unearned Income Adjusting Entries LO: 3 Level of Difficulty: EASY 14. Condo Rental, Inc. received $14,400 from a tenant on December 1 for three months’ rent of an apartment. This rent was for December, January, and February. If Condo Rental debited Cash and credited Unearned Rental Income for $14,400 on December 1, what necessary adjustment would be made on December 31? A) Unearned Rental Income Rental Income B) Rental Income Unearned Rental Income C) Unearned Rental Income Rental Income D) Rental Income Unearned Rental Income
9,600 9,600 9,600 9,600 4,800 4,800 4,800 4,800
Answer: C Rationale: Transfer 1/3 x $14,400 = $4,800 from Unearned Rental Income to Rental Income
©Cambridge Business Publishers, 2020 3-12
Financial Accounting for Undergraduates, 4th Edition
Topic: Unearned Income Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 15. Early in the accounting period, Ms. Client paid $3,000 for services in advance of receiving them; Cash was debited and Unearned Service Fees was credited for $3,000. At the end of the accounting period, two-thirds of the services paid for had yet to be performed. The proper adjusting entry is: A) Unearned Service Fees Service Fees Earned B) Service Fees Earned Unearned Service Fees C) Unearned Service Fees Service Fees Earned D) Service Fees Earned Unearned Service Fees
1,000 1,000 2,000 2,000 2,000 2,000 1,000 1,000
Answer: A Rationale: Transfer 1/3 x $3,000 = $1,000 from Unearned Service Fees to Service Fees Earned Topic: Unearned Income Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 16. Early in the accounting period, Ed Sheer, a client, paid $9,000 for services in advance of receiving them; Cash was debited and Unearned Service Fees was credited for $9,000. At the end of the accounting period, two-thirds of the services paid for had yet to be performed. The proper adjusting entry is: A) Unearned Service Fees Service Fees Earned B) Service Fees Earned Unearned Service Fees C) Unearned Service Fees Service Fees Earned D) Service Fees Earned Unearned Service Fees
3,000 3,000 6,000 6,000 6,000 6,000 3,000 3,000
Answer: A Rationale: Transfer 1/3 x $9,000 = $3,000 from Unearned Service Fees to Service Fees Earned
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-13
Topic: Accrued Revenue Adjusting Entries LO: 4 Level of Difficulty: MEDIUM 17. On September 1, Tree Company began a contract to provide services to Willow Company for six months, with the total $21,600 payment to be made at the end of the six-month period. Equal services are provided each month. The firm uses the account Fees Receivable to reflect amounts due but not yet billed. What proper adjusting entry would Tree Company make on December 31, the end of the accounting period (no previous adjustment has been made)? A) Fees Receivable Service Fees Earned B) Unearned Service Fees Service Fees Earned C) Cash Service Fees Earned D) Fees Receivable Service Fees Earned Unearned Service Fees
14,400 14,400 14,400 14,400 14,400 14,400 21,600 14,400 7,200
Answer: A Rationale: Accrue 4/6 x $21,600 = $14,400 of Service Fees earned Topic: Accrued Revenue Adjusting Entries LO: 4 Level of Difficulty: MEDIUM 18. On September 1, Knowledgeable Company began a contract to provide services to Guidance Required Company for six months, with the total $64,800 payment to be made at the end of the sixmonth period. Equal services are provided each month. The firm uses the account Fees Receivable to reflect amounts due but not yet billed. What proper adjusting entry would Knowledgeable Company make on December 31, the end of the accounting period (no previous adjustment has been made)? A) Fees Receivable Service Fees Earned B) Unearned Service Fees Service Fees Earned C) Cash Service Fees Earned D) Fees Receivable Service Fees Earned Unearned Service Fees
43,200 43,200 43,200 43,200 43,200 43,200 64,800 43,200 21,600
Answer: A Rationale: Accrue 4/6 x $64,800 = $43,200 of Service Fees earned
©Cambridge Business Publishers, 2020 3-14
Financial Accounting for Undergraduates, 4th Edition
Topic: Accrued Revenue Adjusting Entries LO: 4 Level of Difficulty: EASY 19. On December 31, the end of the accounting period, $10,600 in service fees had been earned but not billed or received. The Wilk Company uses the account Fees Receivable to reflect amounts due but not yet billed. The proper adjusting entry would be: A) Fees Receivable Unearned Service Fees B) Unearned Service Fees Service Fees Earned C) Cash Service Fees Earned D) Fees Receivable Service Fees Earned
10,600 10,600 10,600 10,600 10,600 10,600 10,600 10,600
Answer: D Rationale: Revenues must be recognized in the period in which they are earned, a credit to Service Fees Earned. The Fees Receivable account is used by the Wilk Company to reflect amounts due to not yet billed. Topic: Accrued Revenue Adjusting Entries LO: 4 Level of Difficulty: EASY 20. On December 31, the end of the accounting period, $31,800 in service fees had been earned but not billed or received. The Marietta Company uses the account Fees Receivable to reflect amounts due but not yet billed. The proper adjusting entry would be: A) Fees Receivable Unearned Service Fees B) Unearned Service Fees Service Fees Earned C) Cash Service Fees Earned D) Fees Receivable Service Fees Earned
31,800 31,800 31,800 31,800 31,800 31,800 31,800 31,800
Answer: D Rationale: Revenues must be recognized in the period in which they are earned, a credit to Service Fees Earned. The Fees Receivable account is used by the Marietta Company to reflect amounts due to not yet billed.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-15
Topic: Prepaid Insurance Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 21. Huntley Company paid $52,800 for a four-year insurance policy on September 1 and recorded the $52,800 as a debit to Prepaid Insurance and a credit to Cash. What adjusting entry should Huntley make on December 31, the end of the accounting period (no previous adjustment has been made)? A) Prepaid Insurance Insurance Expense B) Insurance Expense Prepaid Insurance C) Prepaid Insurance Insurance Expense D) Insurance Expense Prepaid Insurance
48,400 48,400 13,200 13,200 4,400 4,400 4,400 4,400
Answer: D Rationale: Transfer 4/48 x $52,800 = $4,400 from Prepaid Insurance to Insurance Expense Topic: Prepaid Insurance Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 22. Hot Rod Company paid $158,400 for a four-year insurance policy on September 1 and recorded the $158,400 as a debit to Prepaid Insurance and a credit to Cash. What adjusting entry should Hot Rod Company make on December 31, the end of the accounting period (no previous adjustment has been made)? A) Prepaid Insurance Insurance Expense B) Insurance Expense Prepaid Insurance C) Prepaid Insurance Insurance Expense D) Insurance Expense Prepaid Insurance
145,200 145,200 39,600 39,600 13,200 13,200 13,200 13,200
Answer: D Rationale: Transfer 4/48 x $158,400 = $13,200 from Prepaid Insurance to Insurance Expense
©Cambridge Business Publishers, 2020 3-16
Financial Accounting for Undergraduates, 4th Edition
Topic: Prepaid Insurance Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 23. Williams Company paid $48,000 for a two-year insurance policy on October 1 and recorded the $48,000 as a debit to Prepaid Insurance and a credit to Cash. What adjusting entry should Fred make on December 31, the end of the accounting period (no previous adjustment has been made)? A) Prepaid Insurance Insurance Expense B) Insurance Expense Prepaid Insurance C) Prepaid Insurance Insurance Expense D) Insurance Expense Prepaid Insurance
42,000 42,000 6,000 6,000 6,000 6,000 24,000 24,000
Answer: B Rationale: Transfer 3/24 x $48,000 = $6,000 from Prepaid Insurance to Insurance Expense Topic: Prepaid Insurance Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 24. Nair Company paid $144,000 for a two-year insurance policy on October 1 and recorded the 144,000 as a debit to Prepaid Insurance and a credit to Cash. What adjusting entry should Nair make on December 31, the end of the accounting period (no previous adjustment has been made)? A) Prepaid Insurance Insurance Expense B) Insurance Expense Prepaid Insurance C) Prepaid Insurance Insurance Expense D) Insurance Expense Prepaid Insurance
126,000 126,000 18,000 18,000 18,000 18,000 72,000 72,000
Answer: B Rationale: Transfer 3/24 x $144,000 = $18,000 from Prepaid Insurance to Insurance Expense
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-17
Topic: Supplies Expense Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 25. The Green Grape Company’s Office Supplies account had a beginning balance of $16,000. During the month, purchases of office supplies totaling $4,000 were debited to the Office Supplies account. If $6,000 worth of office supplies is still on hand at month-end, what is the proper adjusting entry? A) Office Supplies Expense Office Supplies B) Office Supplies Office Supplies Expense C) Office Supplies Expense Office Supplies D) Office Supplies Office Supplies Expense
6,000 6,000 6,000 6,000 14,000 14,000 14,000 14,000
Answer: C Rationale: Transfer $16,000 + $4,000 - $6,000 = $14,000 from Office Supplies to Office Supplies Expense Topic: Supplies Expense Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 26. The Yellow Apple Company’s Office Supplies account had a beginning balance of $6,000. During the month, purchases of office supplies totaling $1,500 were debited to the Office Supplies account. If $2,250 worth of office supplies is still on hand at month-end, what is the proper adjusting entry? A) Office Supplies Expense Office Supplies B) Office Supplies Office Supplies Expense C) Office Supplies Expense Office Supplies D) Office Supplies Office Supplies Expense
2,250 2,250 2,250 2,250 5,250 5,250 5,250 5,250
Answer: C Rationale: Transfer $6,000 + $1,500 - $2,250 = $5,250 from Office Supplies to Office Supplies Expense
©Cambridge Business Publishers, 2020 3-18
Financial Accounting for Undergraduates, 4th Edition
Topic: Supplies Expense Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 27. The Green Grape Company’s Printing Supplies account had a beginning balance of $8,000. During the month, purchases of printing supplies totaling $6,000 were debited to the Printing Supplies account. If $4,000 worth of printing supplies is still on hand at month-end, what is the proper adjusting entry? A) Printing Supplies Expense Printing Supplies B) Printing Supplies Printing Supplies Expense C) Printing Supplies Expense Printing Supplies D) Printing Supplies Printing Supplies Expense
10,000 10,000 4,000 4,000 4,000 4,000 10,000 10,000
Answer: A Rationale: Transfer $8,000 + $6,000 - $4,000 = $10,000 from Printing Supplies to Printing Supplies Expense Topic: Supplies Expense Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 28. The Yellow Apple Company’s Printing Supplies account had a beginning balance of $3,000. During the month, purchases of printing supplies totaling $2,250 were debited to the Printing Supplies account. If $1,500 worth of printing supplies is still on hand at month-end, what is the proper adjusting entry? A) Printing Supplies Expense Printing Supplies B) Printing Supplies Printing Supplies Expense C) Printing Supplies Expense Printing Supplies D) Printing Supplies Printing Supplies Expense
3,750 3,750 1,500 1,500 1,500 1,500 3,750 3,750
Answer: A Rationale: Transfer $3,000 + $2,250 - $1,500 = $3,750 from Printing Supplies to Printing Supplies Expense
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-19
Topic: Supplies Expense Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 29. During their first year, Adrian & Associates bought $32,000 worth of supplies for their CPA firm. When purchased, the supplies were debited to Supplies and credited to Accounts Payable. What adjusting entry would Adrian & Associates make if $8,000 worth of supplies were on hand at year-end? A) Supplies Expense Supplies B) Supplies Supplies Expense C) Supplies Expense Supplies D) Supplies Supplies Expense
8,000 8,000 24,000 24,000 24,000 24,000 8,000 8,000
Answer: C Rationale: Transfer $32,000 - $8,000 = $24,000 from Supplies to Supplies Expense Topic: Supplies Expense Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 30. During their first year, Ann Zi & Associates bought $96,000 worth of supplies for their CPA firm. When purchased, the supplies were debited to Supplies and credited to Accounts Payable. What adjusting entry would Ann Zi & Associates make if $24,000 worth of supplies were on hand at year-end? A) Supplies Expense Supplies B) Supplies Supplies Expense C) Supplies Expense Supplies D) Supplies Supplies Expense
24,000 24,000 72,000 72,000 72,000 72,000 24,000 24,000
Answer: C Rationale: Transfer $96,000 - $24,000 = $72,000 from Supplies to Supplies Expense
©Cambridge Business Publishers, 2020 3-20
Financial Accounting for Undergraduates, 4th Edition
Topic: Supplies Expense Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 31. The Boston Company’s Supplies account balance at the end of the period is $44,000. Supplies totaling $37,600 have been purchased during the period and debited to Supplies. A physical count shows $10,000 worth of supplies on hand at the end of the period. The proper adjusting entry is: A) Supplies Expense Supplies B) Supplies Expense Supplies C) Supplies Supplies Expense D) Supplies Expense Supplies
34,000 34,000 37,600 37,600 10,000 10,000 9,400 9,400
Answer: A Rationale: Ending supplies balance – Actual supplies inventory = Supplies used during period Transfer $44,000 - $10,000 = $34,000 from Supplies to Supplies Expense Topic: Supplies Expense Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 32. The Tracey Real Estate Company’s Supplies account balance at the end of the period is $132,000. Supplies totaling $112,800 have been purchased during the period and debited to Supplies. A physical count shows $30,000 worth of supplies on hand at the end of the period. The proper adjusting entry is: A) Supplies Expense Supplies B) Supplies Expense Supplies C) Supplies Supplies Expense D) Supplies Expense Supplies
102,000 102,000 112,800 112,800 30,000 30,000 27,600 27,600
Answer: A Rationale: Ending supplies balance – Actual supplies inventory = Supplies used during period Transfer $132,000 - $30,000 = $102,000 from Supplies to Supplies Expense
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-21
Topic: Prepaid Rent Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 33. Champaign Company signed a one-year lease on April 1, 2019, and paid the $22,800 total year’s rent in advance. Champaign recorded the transaction as a debit to Prepaid Rent and a credit to Cash. What adjusting entry should Champaign make on December 31, 2019 (no previous adjustment has been made)? A) Rent Expense Prepaid Rent B) Rent Expense Prepaid Rent C) Prepaid Rent Rent Expense D) Prepaid Rent Rent Expense
17,100 17,100 5,700 5,700 5,700 5,700 17,100 17,100
Answer: A Rationale: Transfer 9/12 x $22,800 = $17,100 from Prepaid Rent to Rent Expense Topic: Prepaid Rent Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 34. Dennison Company signed a one-year lease on April 1, 2019, and paid the $68,400 total year’s rent in advance. Dennison recorded the transaction as a debit to Prepaid Rent and a credit to Cash. What adjusting entry should Dennison make on December 31, 2019 (no previous adjustment has been made)? A) Rent Expense Prepaid Rent B) Rent Expense Prepaid Rent C) Prepaid Rent Rent Expense D) Prepaid Rent Rent Expense
51,300 51,300 17,100 17,100 17,100 17,100 51,300 51,300
Answer: A Rationale: Transfer 9/12 x $68,400 = $51,300 from Prepaid Rent to Rent Expense
©Cambridge Business Publishers, 2020 3-22
Financial Accounting for Undergraduates, 4th Edition
Topic: Prepaid Rent Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 35. Happy Company signed a two-year lease on July 1, 2019, and paid the $34,800 total rent in advance. Happy recorded the transaction as a debit to Prepaid Rent and a credit to Cash. What adjusting entry should Happy make on December 31, 2019 (no previous adjustment has been made)? A) Rent Expense Prepaid Rent B) Rent Expense Prepaid Rent C) Prepaid Rent Rent Expense D) Prepaid Rent Rent Expense
17,400 17,400 8,700 8,700 26,100 26,100 8,700 8,700
Answer: B Rationale: Transfer 6/24 x $34,800 = $8,700 from Prepaid Rent to Rent Expense Topic: Prepaid Rent Adjusting Entries SET B LO: 3 Level of Difficulty: MEDIUM 36. Subariffic Company signed a two-year lease on July 1, 2019, and paid the $104,400 total rent in advance. Subariffic recorded the transaction as a debit to Prepaid Rent and a credit to Cash. What adjusting entry should Subariffic make on December 31, 2019 (no previous adjustment has been made)? A)
Rent Expense Prepaid Rent B) Rent Expense Prepaid Rent C) Prepaid Rent Rent Expense D) Prepaid Rent Rent Expense
52,200 52,200 26,100 26,100 78,300 78,300 26,100 26,100
Answer: B Rationale: Transfer 6/24 x $104,400 = $26,100 from Prepaid Rent to Rent Expense
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-23
Topic: Interest Expense Accrual LO: 4 Level of Difficulty: EASY 37. Art Company calculates that interest of $1,800 has accrued at December 31 on outstanding notes payable. How should Art record this on December 31? A) Interest Expense Cash B) Interest Payable Interest Expense C) Prepaid Interest Interest Expense D) Interest Expense Interest Payable
1,800 1,800 1,800 1,800 1.800 1,800 1,800 1,800
Answer: D Rationale: Interest expense for the month of December must be recognized as expense. A liability (payable) must be recorded since the amount has not yet been paid. Topic: Interest Expense Accrual LO: 4 Level of Difficulty: EASY 38. Owl Company calculates that interest of $5,400 has accrued at December 31 on outstanding notes payable. How should Owl record this on December 31? A) Interest Expense Cash B) Interest Payable Interest Expense C) Prepaid Interest Interest Expense D) Interest Expense Interest Payable
5,400 5,400 5,400 5,400 5,400 5,400 5,400 5,400
Answer: D Rationale: Interest expense for the month of December must be recognized as expense. A liability (payable) must be recorded since the amount has not yet been paid.
©Cambridge Business Publishers, 2020 3-24
Financial Accounting for Undergraduates, 4th Edition
Topic: Wages Expense Accrual LO: 4 Level of Difficulty: MEDIUM 39. Assume December 31 is a Wednesday. Rite Weld Company’s wages are paid every Friday, and the weekly payroll (for five days) amounts to $6,000. To record the correct amount of expense for December, Rite Weld makes the following entry on December 31: A) Wages Expense Wages Payable B) Wages Expense Wages Payable C) Wages Payable Wages Expense D) Wages Payable Wages Expense
3,360 3,360 3,600 3,600 6,000 6,000 3,600 3,600
Answer: B Rationale: Accrue 3/5 x $6,000 = $3,600 of Wages Expense Topic: Wages Expense Accrual LO: 4 Level of Difficulty: MEDIUM 40. Assume December 31 is a Wednesday. Circlewood Company’s wages are paid every Friday, and the weekly payroll (for five days) amounts to $18,000. To record the correct amount of expense for December, Circlewood makes the following entry on December 31: A) Wages Expense Wages Payable B) Wages Expense Wages Payable C) Wages Payable Wages Expense D) Wages Payable Wages Expense
18,000 18,000 10,080 10,080 18,000 18,000 10,080 10,080
Answer: B Rationale: Accrue 3/5 x $18,000 = $10,080 of Wages Expense
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-25
Topic: Interest Income Accrual LO: 4 Level of Difficulty: MEDIUM 41. Border Company calculates it has earned (but not yet collected or recorded) interest of $1,050 at December 31 on outstanding notes receivable. How should Borders record this on December 31? A) Interest Payable Interest Income B) Interest Income Interest Receivable C) Interest Receivable Interest Payable D) Interest Receivable Interest Income
1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,050
Answer: D Rationale: Interest income for the month of December must be recognized. An asset (receivable) must be recorded since the amount has not yet been received. Topic: Interest Income Accrual LO: 4 Level of Difficulty: MEDIUM 42. Runner Company calculates it has earned (but not yet collected or recorded) interest of $3,150 at December 31 on outstanding notes receivable. How should Runner record this on December 31? A) Interest Payable Interest Income B) Interest Income Interest Receivable C) Interest Receivable Interest Payable D) Interest Receivable Interest Income
3,150 3,150 3,150 3,150 3,150 3,150 3,150 3,150
Answer: D Rationale: Interest income for the month of December must be recognized. An asset (receivable) must be recorded since the amount has not yet been received.
©Cambridge Business Publishers, 2020 3-26
Financial Accounting for Undergraduates, 4th Edition
Topic: Wages Expense Accrual LO: 4 Level of Difficulty: MEDIUM 43. Assume December 31 is a Monday. Rite Weld Company’s wages are paid every Friday, and the weekly payroll (for five days) amounts to $12,000. To record the correct amount of expense for December Rite Weld makes the following entry on December 31: A) Wages Expense Wages Payable B) Wages Expense Wages Payable C) Wages Expense Wages Payable D) Wages Payable Wages Expense
12,000 12,000 9,600 9,600 2,400 2,400 2,400 2,400
Answer: C Rationale: Accrue 1/5 x $12,000 = $2,400 of Wages Expense Topic: Wages Expense Accrual LO: 4 Level of Difficulty: MEDIUM 44. Assume December 31 is a Monday. Circlewood Company’s wages are paid every Friday, and the weekly payroll (for five days) amounts to $36,000. To record the correct amount of expense for December Circlewood makes the following entry on December 31: A) Wages Expense Wages Payable B) Wages Expense Wages Payable C) Wages Expense Wages Payable D) Wages Payable Wages Expense
36,000 36,000 28,800 28,800 7,200 7,200 7,200 7,200
Answer: C Rationale: Accrue 1/5 x $36,000 = $7,200 of Wages Expense
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-27
Topic: Prepaid Insurance Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 45. On July 1, Saboni paid $48,000 for a two-year insurance policy, debiting Prepaid Insurance for the full amount. If the adjusting entry is not made at December 31, the end of the accounting period, how does the error affect this year’s financial statements? A) Overstates assets B) Overstates revenue C) Understates common stock D) Overstates expenses Answer: A Rationale: The adjusting entry would increase expenses and decrease assets, therefore assets are overstated and expenses are understated. Topic: Depreciation Expense Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 46. The Eva’s Flowers company’s failure to record depreciation expense at the end of an accounting period, results in: A) Understated income B) Understated assets C) Overstated expenses D) Overstated assets Answer: D Rationale: The adjusting entry would increase expense and decrease assets, therefore expenses are understated and assets are overstated. Topic: Unearned Revenue Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 47. On December 1, Belmont Company received three months’ rental income in advance and credited a liability account. On December 31, the end of the accounting period, Belmont failed to make an adjusting entry reflecting that a portion of this rent had been earned. This error results in: A) Overstated liabilities B) Understated assets C) Overstated assets D) Overstated revenue Answer: A Rationale: The adjusting entry would increase revenue and decrease liabilities, therefore liabilities are overstated and revenue is understated.
©Cambridge Business Publishers, 2020 3-28
Financial Accounting for Undergraduates, 4th Edition
Topic: Prepaid Expense Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 48. During the current accounting period, Montana Ridge Company paid $2,000 for advertising services in advance of receiving them. Prepaid Advertising was debited and Cash was credited for $2,000. At the end of the accounting period, three-fourths of the services paid for had yet to be received. The proper adjusting entry is: A) Prepaid Advertising Advertising Expense B) Advertising Expense Prepaid Advertising C) Prepaid Advertising Advertising Expense D) Advertising Expense Prepaid Advertising
500 500 1,000 1,000 1,500 1,500 500 500
Answer: D Rationale: Transfer 1/4 x $2,000 = $500 from Prepaid Advertising to Advertising Expense Topic: Prepaid Expense Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 49. During the current accounting period, Cherry Creek Company paid $6,000 for advertising services in advance of receiving them. Prepaid Advertising was debited and Cash was credited for $6,000. At the end of the accounting period, three-fourths of the services paid for had yet to be received. The proper adjusting entry is: A) Prepaid Advertising Advertising Expense B) Advertising Expense Prepaid Advertising C) Prepaid Advertising Advertising Expense D) Advertising Expense Prepaid Advertising
1,500 1,500 3,000 3,000 4,500 4,500 1,500 1,500
Answer: D Rationale: Transfer 1/4 x $6,000 = $1,500 from Prepaid Advertising to Advertising Expense
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-29
Topic: Prepaid Expense Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 50. During the current accounting period, Kenyon Farms Company paid $2,000 for advertising services in advance of receiving them. Prepaid Advertising was debited and Cash was credited for $2,000. At the end of the accounting period, three-fourths of the services paid for had been received. The proper adjusting entry is: A) Prepaid Advertising Advertising Expense B) Advertising Expense Prepaid Advertising C) Advertising Expense Prepaid Advertising D) Prepaid Advertising Advertising Expense
500 500 1,500 1,500 500 500 1,500 1,500
Answer: B Rationale: Transfer 3/4 x $2,000 = $1,500 from Prepaid Advertising to Advertising Expense Topic: Prepaid Expense Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 51. During the current accounting period, Ohio Company paid $6,000 for advertising services in advance of receiving them. Prepaid Advertising was debited and Cash was credited for $6,000. At the end of the accounting period, three-fourths of the services paid for had been received. The proper adjusting entry is: A) Prepaid Advertising Advertising Expense B) Advertising Expense Prepaid Advertising C) Advertising Expense Prepaid Advertising D) Prepaid Advertising Advertising Expense
1,500 1,500 4,500 4,500 1,500 1,500 4,500 4,500
Answer: B Rationale: Transfer 3/4 x $6,000 = $4,500 from Prepaid Advertising to Advertising Expense
©Cambridge Business Publishers, 2020 3-30
Financial Accounting for Undergraduates, 4th Edition
Topic: Revenue Adjusting Entries LO: 4 Level of Difficulty: MEDIUM 52. At the end of the accounting period, the Gardening Advice Company’s Service Fees Earned account has a normal balance of $152,000. The accountant makes two adjustments--one to accrue unbilled service fees of $12,000, and the other to reduce the Unearned Service Fees liability account by $1,800. After the adjustments are posted, the Service Fees Earned account has a balance of: A) $159,800 B) $144,200 C) $150,800 D) $165,800 Answer: D Rationale: Adjusting Entries: (1) Unbilled service fees Service fees earned (2) Unearned service fees Service fees earned
12,000 12,000 1,800 1,800
Service Fees Earned = $152,000 + $12,000 + $1,800 = $165,800 Topic: Revenue Adjusting Entries LO: 3,4 Level of Difficulty: MEDIUM 53. At the end of the accounting period, the Bright Future Company’s Service Fees Earned account has a normal balance of $456,000. The accountant makes two adjustments--one to accrue unbilled service fees of $36,000, and the other to reduce the Unearned Service Fees liability account by $5,400. After the adjustments are posted, the Service Fees Earned account has a balance of: A) $497,400 B) $479,400 C) $432,600 D) $452,400 Answer: A Rationale: Adjusting Entries: (1) Unbilled service fees Service fees earned (2) Unearned service fees Service fees earned
36,000 36,000 5,400 5,400
Service Fees Earned = $456,000 + $36,000 + $5,400 = $497,400
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-31
Topic: Revenue Adjusting Entries LO: 4 Level of Difficulty: MEDIUM 54. At the end of the accounting period, the Lisa Yoke, LLC’s Legal Fees Earned account has a normal balance of $150,000. The accountant makes two adjustments--one to accrue unbilled legal fees earned of $5,000, and the other to reduce the Unearned Legal Fees liability account by $1,000. After the adjustments are posted, the Legal Fees Earned account has a balance of: A) $163,000 B) $165,000 C) $155,000 D) $156,000 Answer: D Rationale: Adjusting Entries: (1) Unbilled legal fees Legal fees earned (2) Unearned legal fees Legal fees earned
5,000 5,000 1,000 1,000
Legal Fees Earned = $150,000 + $5,000 + $1,000 = $156,000 Topic: Revenue Adjusting Entries LO: 3,4 Level of Difficulty: MEDIUM 55. At the end of the accounting period, the MLY, LLC’s Legal Fees Earned account has a normal balance of $450,000. The accountant makes two adjustments--one to accrue unbilled legal fees earned of $15,000, and the other to reduce the Unearned Legal Fees liability account by $3,000. After the adjustments are posted, the Legal Fees Earned account has a balance of: A) $468,000 B) $489,000 C) $495,000 D) $465,000 Answer: A Rationale: Adjusting Entries: (1) Unbilled legal fees Legal fees earned (2) Unearned legal fees Legal fees earned
15,000 15,000 3,000 3,000
Legal Fees Earned = $450,000 + $15,000 + $3,000 = $468,000
©Cambridge Business Publishers, 2020 3-32
Financial Accounting for Undergraduates, 4th Edition
Topic: Adjusting Entry Errors LO: 3 Level of Difficulty: MEDIUM 56. In preparing its adjusting entries at the end of this year, Pine Grove Company neglected to adjust the Prepaid Insurance account for the amount of insurance expired during the year. This error: A) Understates this year’s net income and overstates both retained earnings and assets at year-end B) Overstates this year’s net income and understates both retained earnings and assets at year-end C) Understates this year’s net income and understates both retained earnings and assets at yearend D) Overstates this year’s net income and overstates both retained earnings and assets at year-end Answer: D Rationale: Original entry to record Prepaid Insurance: Prepaid insurance XXX Cash
XXX
Year-end adjusting entry required: Insurance expense Prepaid insurance
XXX
XXX
Failure to record an expense, overstates net income for the year, and thus, retained earnings at yearend. Failure to decrease Prepaid Insurance (an asset) overstates assets at year-end. Topic: Adjusting Entry Errors LO: 3 Level of Difficulty: MEDIUM 57. In preparing its adjusting entries at the end of this year, Krishna Company neglected to adjust the Unearned Service Fees account for the amount of such fees earned during the year. This error A) Understates this year’s net income and retained earnings at year-end and overstates liabilities at year-end B) Overstates this year’s net income and retained earnings at year-end and understates liabilities at year-end C) Understates this year’s net income and understates both retained earnings and liabilities at yearend D) Overstates this year’s net income and overstates both retained earnings and liabilities at year-end Answer: A Rationale: Original entry to record Unearned Service Fees: Cash XXX Unearned service fees
XXX
Year-end adjusting entry required: Unearned service fees Service fees earned
XXX
XXX
Failure to record Service Fees Earned, understates net income for the year, and thus, retained earnings at year-end. Failure to decrease Unearned Service Fees (a liability) overstates liabilities at year-end. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-33
Topic: Adjusting Entry Errors LO: 4 Level of Difficulty: MEDIUM 58. In preparing its adjusting entries at the end of this year, New Dawn Company neglected to accrue employees’ wages earned but not yet paid or recorded. This error: A) Understates this year’s net income and overstates both liabilities and retained earnings at yearend B) Overstates this year’s net income and overstates both liabilities and retained earnings at year-end C) Overstates this year’s net income and liabilities at year-end, and understates retained earnings at year-end D) Overstates this year’s net income, understates liabilities at year-end, and overstates retained earnings at year-end Answer: D Rationale: Year-end adjusting entry required: Wage expense Wages payable
XXX XXX
Failure to record an expense, overstates net income for the year, and thus, retained earnings at year end. Failure to record Wages Payable (a liability) understates liabilities at year-end. Topic: Adjusting Entry Errors LO: 4 Level of Difficulty: MEDIUM 59. In preparing its adjusting entries at the end of this year, Modern Exposure Company neglected to accrue commissions earned but not yet received or recorded. This error: A) Understates this year’s net income and overstates both assets and retained earnings at year-end B) Overstates this year’s net income and overstates both assets and retained earnings at year-end C) Understates this year’s net income and understates both assets and retained earnings at yearend D) Overstates this year’s net income and understates both assets and retained earnings at year-end Answer: C Rationale: Year-end adjusting entry required: Commission receivable Commissions earned
XXX XXX
Failure to record a Commissions Earned, understates net income for the year, and thus, retained earnings at year end. Failure to record commissions Receivable (an asset) understates assets at year-end.
©Cambridge Business Publishers, 2020 3-34
Financial Accounting for Undergraduates, 4th Edition
Topic: Deferral Adjusting Entries LO: 3 Level of Difficulty: EASY 60. Which of the following adjustments is an example of a deferral? A) The recording of wages earned by employees but not yet paid B) The recording of periodic depreciation expense on equipment C) The recording of fees earned but not yet billed or received D) The recording of interest income earned but not yet received Answer: B Rationale: A deferral is an adjustment which deals with an amount that has previously been recorded in a balance sheet account. Topic: Accrual Adjusting Entries LO: 4 Level of Difficulty: EASY 61. Which of the following adjustments is an example of an accrual? A) The recording of wages earned by employees but not yet paid B) The recording of periodic depreciation expense on equipment C) The recording of service fees earned that had been received in cash at an earlier time D) The recording of supplies expense for the period Answer: A Rationale: An accrual is an adjustment which deals with an amount that has not previously been recorded in an account. Topic: Accrual Adjusting Entries LO: 4 Level of Difficulty: EASY 62. The unique characteristic of an accrual adjustment is that the adjusting entry A) Decreases a balance sheet account and increases an income statement account B) Increases both a balance sheet account and an income statement account C) Decreases both a balance sheet account and an income statement account D) Increases a balance sheet account and decreases an income statement account Answer: B Rationale: Since an accrual is an adjustment which deals with an amount that has not previously been recorded in an account, the adjusting entry increases both a balance sheet account and an income statement account.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-35
Topic: Adjusting Entries LO: 3, 5 Level of Difficulty: MEDIUM 63. On the last day of December 2019, Gilgen & Sons entered into a transaction that resulted in a receipt of $108,000 cash in advance related to services that will be provided during January 2020. During December of 2019, the company also performed $64,000 of services which were neither billed nor paid. Prior to December adjustments and before these two transactions were recorded, the company’s trial balance showed service revenue of $1,600,000 at December 31, 2019. There are no other prepaid services yet to be delivered. If Peter & Sons makes the appropriate adjusting entry, how much will service revenue will be reflected on the December 31, 2019 income statement? A) $1,623,000 B) $1,664,000 C) $1,451,000 D) $1,515,000 Answer: B Rationale: Service revenue = $1,600,000 + $64,000 = $1,664,000 Topic: Adjusting Entries LO: 3, 5 Level of Difficulty: MEDIUM 64. On the last day of December 2019, Frischmuth Construction entered into a transaction that resulted in a receipt of $324,000 cash in advance related to services that will be provided during January 2020. During December of 2019, the company also performed $192,000 of services which were neither billed nor paid. Prior to December adjustments and before these two transactions were recorded, the company’s trial balance showed service revenue of $4,800,000 at December 31, 2019. There are no other prepaid services yet to be delivered. If Frischmuth Construction makes the appropriate adjusting entry, how much will service revenue will be reflected on the December 31, 2019 income statement? A) $4,545,000 B) $4.869,000 C) $4,992,000 D) $4,353,000 Answer: C Rationale: Service revenue = $4,800,000 + $192,000 = $4,992,000
©Cambridge Business Publishers, 2020 3-36
Financial Accounting for Undergraduates, 4th Edition
Topic: Adjusting Entries LO: 3, 5 Level of Difficulty: MEDIUM 65. On the last day of December 2019, Dan Matthews Aviators entered into a transaction that resulted in a receipt of $108,000 cash in advance related to services that will be provided during January 2020. During December of 2019, the company also performed $64,000 of services which were neither billed nor paid. Prior to December adjustments and before these two transactions were recorded, the company’s trial balance showed service revenue of $1,600,000 at December 31, 2019. There are no other prepaid services yet to be delivered. If Dan Matthews Aviators makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 balance sheet as unearned revenue? A) $ 64,000 B) $152,000 C) $108,000 D) $ 14,000 Answer: C Rationale: Unearned revenue represents the amount collected in advance that the company has not yet earned. Topic: Adjusting Entries LO: 3, 5 Level of Difficulty: MEDIUM 66. On the last day of December 2019, Frederick Aviators entered into a transaction that resulted in a receipt of $324,000 cash in advance related to services that will be provided during January 2020. During December of 2019, the company also performed $192,000 of services which were neither billed nor paid. Prior to December adjustments and before these two transactions were recorded, the company’s trial balance showed service revenue of $4,800,000 at December 31, 2019. There are no other prepaid services yet to be delivered. If Frederick Aviators makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 balance sheet as unearned revenue? A) $ 42,000 B) $192,000 C) $456,000 D) $324,000 Answer: D Rationale: Unearned revenue represents the amount collected in advance that the company has not yet earned.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-37
Topic: Adjusting Entries LO: 3, 5 Level of Difficulty: MEDIUM 67. On the last day of December 2019, Zion Inc. entered into a transaction that resulted in a receipt of $108,000 cash in advance related to services that will be provided during January 2020. During December of 2019, the company also performed $68,000 of services which were neither billed nor paid. Prior to December adjustments and before these two transactions were recorded, the company’s trial balance showed service revenue of $1,600,000 at December 31, 2019. There are no other prepaid services yet to be delivered, and during the month all outstanding accounts receivable from prior months were collected. If Zion Inc. makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 balance sheet as accounts receivable? A) $ 68,000 B) $152,000 C) $108,000 D) $ 44,000 Answer: A Rationale: Outstanding receivables are the amount earned but not yet received from customers. Topic: Adjusting Entries LO: 3, 5 Level of Difficulty: MEDIUM 68. On the last day of December 2019, Verde Inc. entered into a transaction that resulted in a receipt of $324,000 cash in advance related to services that will be provided during January 2020. During December of 2019, the company also performed $204,000 of services which were neither billed nor paid. Prior to December adjustments and before these two transactions were recorded, the company’s trial balance showed service revenue of $4,800,000 at December 31, 2019. There are no other prepaid services yet to be delivered, and during the month all outstanding accounts receivable from prior months were collected. If Mesa Inc. makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 balance sheet as accounts receivable? A) $132,000 B) $204,000 C) $456,000 D) $324,000 Answer: B Rationale: Outstanding receivables are the amount earned but not yet received from customers.
©Cambridge Business Publishers, 2020 3-38
Financial Accounting for Undergraduates, 4th Edition
Topic: Adjusting Entries LO: 3, 5 Level of Difficulty: MEDIUM 69. On April 1, 2019, China Technologies paid $80,000 for rent on warehouse space one year in advance. If China makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 income statement for rent expense? A) $15,000 B) $50,000 C) $45,000 D) $60,000 Answer: D Rationale: Rent expense = $80,000 × 9/12 = $60,000 Topic: Adjusting Entries LO: 3, 5 Level of Difficulty: MEDIUM 70. On April 1, 2019, Exceed Technologies paid $240,000 for rent on warehouse space one year in advance. If Above and Beyond makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 income statement for rent expense? A) $180,000 B) $ 45,000 C) $150,000 D) $135,000 Answer: A Rationale: Rent expense = $240,000 × 9/12 = $180,000 Topic: Adjusting Entries LO: 3, 5 Level of Difficulty: MEDIUM 71. On April 1, 2019, Gilgen & Sons paid $60,000 for rent on warehouse space one year in advance. If Gilgen & Sons makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 balance sheet as prepaid rent? A) $-0B) $15,000 C) $45,000 D) $60,000 Answer: B Rationale: Prepaid rent remaining = $60,000 × 3/12 = $15,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-39
Topic: Adjusting Entries LO: 3, 5 Level of Difficulty: MEDIUM 72. On April 1, 2019, Cooper paid $180,000 for rent on warehouse space one year in advance. If Justin makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 balance sheet as prepaid rent? A) $180,000 B) $ 0 C) $ 45,000 D) $135,000 Answer: C Rationale: Prepaid rent remaining = $180,000 × 3/12 = $45,000 Topic: Adjusting Entries LO: 4, 5 Level of Difficulty: MEDIUM 73. On October 1, 2019, Feldman entered into a lease agreement to rent out its old warehouse space it was no longer using. This agreement calls for Feldman to receive $6,000 per month from the lessee, due and payable at the end of the 4-month lease term. At December 31, 2019, none of the rental payments from the lessee had yet been received. If Feldman makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 balance sheet as rent receivable? A) $ 8,000 B) $18,000 C) $ 4,000 D) $16,000 Answer: B Rationale: Rent receivable = $6,000 × 3 = $18,000 Topic: Adjusting Entries LO: 4, 5 Level of Difficulty: MEDIUM 74. On October 1, 2019, A. Karikomi entered into a lease agreement to rent out its old warehouse space it was no longer using. This agreement calls for Karikomi to receive $18,000 per month from the lessee, due and payable at the end of the 4-month lease term. At December 31, 2019, none of the rental payments from the lessee had yet been received. If Kushner makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 balance sheet as rent receivable? A) $48,000 B) $24,000 C) $54,000 D) $12,000 Answer: C Rationale: Rent receivable = $18,000 × 3 = $54,000
©Cambridge Business Publishers, 2020 3-40
Financial Accounting for Undergraduates, 4th Edition
Topic: Adjusting Entries LO: 4, 5 Level of Difficulty: MEDIUM 75. Beth’s Bagels has 6 employees who are paid $24 per hour. At December 31, 2019, each of Beth’s employees had worked 18 hours which had not been paid or recorded. Prior to adjustments, the company’s trial balance showed $171,400 in the wages expense account. If Beth makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 income statement as wage expense? A) $ 2,592 B) $173,992 C) $171,400 D) $168,808 Answer: B Rationale: Wage expense = 18 hours x 6 employees x $24 = $2,592 + $171,400 = $173,992 Topic: Adjusting Entries LO: 4, 5 Level of Difficulty: MEDIUM 76. Remi’s Burritos has 6 employees who are paid $27 per hour. At December 31, 2019, each of Remi’s employees had worked 18 hours which had not been paid or recorded. Prior to adjustments, the company’s trial balance showed $192,825 in the wages expense account. If Remi’s Burritos makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 income statement as wage expense? A) $189,909 B) $ 2,916 C) $195,741 D) $192,825 Answer: C Rationale: Wage expense = 18 hours x 6 employees x $27 = $2,916 + $192,825 = $195,741 Topic: Adjusting Entries LO: 4, 5 Level of Difficulty: MEDIUM 77. Beth’s Bagels purchases its inventory, on account, daily. At December 31, 2019, the company had taken receipt of $80,000 of inventory from its suppliers which had not been recorded in the accounts. If Beth makes the appropriate adjusting entry, how much will be reported on the December 31, 2019, balance sheet as accounts payable? A) $64,992 B) $59,808 C) $-0D) $80,000 Answer: D Rationale: Accounts payable = $80,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-41
Topic: Adjusting Entries LO: 4, 5 Level of Difficulty: MEDIUM 78. Remi’s Burritos purchases its inventory, on account, daily. At December 31, 2019, the company had taken receipt of $240,000 of inventory from its suppliers which had not been recorded in the accounts. If Remi’s Burritos makes the appropriate adjusting entry, how much will be reported on the December 31, 2019, balance sheet as accounts payable? A) $240,000 B) $194,976 C) $179,424 D) $-0Answer: A Rationale: Accounts payable = $240,000 Topic: Permanent Accounts LO: 6 Level of Difficulty: EASY 79. Which of the following is a permanent account category? A) Revenues B) Dividends C) Expenses D) Liabilities Answer: D Rationale: Permanent accounts are accounts presented on the balance sheet. Revenues, dividend, and expenses are presented on the income statement. Topic: Temporary Accounts LO: 6 Level of Difficulty: EASY 80. Which of the following is a temporary account category? A) Assets B) Expenses C) Liabilities D) Common stock Answer: B Rationale: Temporary accounts are accounts used to gather information for a particular accounting period. Expenses are a temporary subdivision of stockholders’ equity.
©Cambridge Business Publishers, 2020 3-42
Financial Accounting for Undergraduates, 4th Edition
Topic: Permanent Accounts LO: 6 Level of Difficulty: EASY 81. Which of the following is a permanent account? A) Accounts Receivable B) Professional Fees Earned C) Advertising Expense D) Cash Dividends Answer: A Rationale: Permanent accounts are accounts presented on the balance sheet. Revenues, dividend, and expenses are presented on the income statement. Topic: Permanent Accounts LO: 6 Level of Difficulty: EASY 82. Which of the following is a permanent account? A) Supplies Expense B) Cash Dividends C) Retained Earnings D) Service Fees Earned Answer: C Rationale: Permanent accounts are accounts presented on the balance sheet. Revenues, dividend, and expenses are presented on the income statement. Topic: Temporary Accounts LO: 6 Level of Difficulty: EASY 83. Which of the following is a temporary account? A) Subscriptions Received in Advance B) Cash C) Accounts Payable D) Cash Dividends Answer: D Rationale: Temporary accounts are accounts used to gather information for a particular accounting period. Dividends are a temporary subdivision of stockholders’ equity.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-43
Topic: Temporary Accounts LO: 6 Level of Difficulty: EASY 84. Which of the following is a temporary account? A) Notes Payable B) Land C) Wages Expense D) Common Stock Answer: C Rationale: Temporary accounts are accounts used to gather information for a particular accounting period. Expenses are a temporary subdivision of stockholders’ equity. Topic: Permanent Accounts LO: 6 Level of Difficulty: EASY 85. The distinguishing feature of a permanent account is that any balance in the account at the end of an accounting period is: A) Carried forward to the next accounting period B) Transferred to a temporary account C) Transferred to the Cash account D) Transferred to a permanent stockholders’ equity account Answer: A Rationale: Permanent accounts are accounts presented on the balance sheet. The distinguishing feature of a permanent account is that any balance in the account at the end of an accounting period is carried forward to the next accounting period. Topic: Temporary Accounts LO: 6 Level of Difficulty: EASY 86. The distinguishing feature of a temporary account is that any balance in the account at the end of an accounting period is: A) Carried forward to the next accounting period B) Reported in the balance sheet C) Transferred to the Cash account D) Transferred to a permanent stockholders’ equity account Answer: D Rationale: At the end of the accounting period, temporary account balances are transferred to Retained Earnings, which is a permanent stockholders’ equity account.
©Cambridge Business Publishers, 2020 3-44
Financial Accounting for Undergraduates, 4th Edition
Topic: Closing Entries Using Retained Earnings LO: 6 Level of Difficulty: MEDIUM 87. Bee Corporation has the following normal account balances in its general ledger at the end of a period: Sales revenue Advertising expense
$600,000 90,000
Which of the following gives the correct entry required to close only the accounts above? A) Advertising Expense 90,000 Retained Earnings 510,000 Sales Revenue B) Sales Revenue 600,000 Advertising Expense Retained Earnings C) Retained Earnings 510,000 Net Income D) None of the above. These accounts are not closed.
600,000 90,000 510,000 510,000
Answer: B Rationale: The closing process requires that revenue accounts are debited and retained earnings are credited for the amount equal to the revenue balance. The closing process also requires that expense accounts are credited and retained earnings debited for an amount equal to the expense balance. The net amount of retained earnings credited in this problem is equal to $510,000 (or $600,000 – $90,000), since revenues are greater than expenses. Topic: Closing Entries Using Retained Earnings LO: 6 Level of Difficulty: MEDIUM 88. Sage Corporation has the following normal account balances in its general ledger at the end of a period: Sales revenue Advertising expense
$1,800,000 270,000
Which of the following gives the correct entry required to close only the accounts above? A) Advertising Expense 270,000 Retained Earnings 1,530,000 Sales Revenue 1,800,000 B) Sales Revenue 1,800,000 Advertising Expense 270,000 Retained Earnings 1,530,000 C) Retained Earnings 1,530,000 Net Income 1,530,000 D) None of the above. These accounts are not closed. Answer: B Rationale: The closing process requires that revenue accounts are debited and retained earnings are credited for the amount equal to the revenue balance. The closing process also requires that expense accounts are credited and retained earnings debited for an amount equal to the expense balance. The net amount of retained earnings credited in this problem is equal to $1,530,000 (or $1,800,000 – $270,000), since revenues are greater than expenses. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-45
Topic: Post-Closing Trial Balance LO: 6, 7 Level of Difficulty: EASY 89. Which one of the following will never appear on a post-closing trial balance? A) Unearned revenue B) Retained earnings C) Rent expense D) Common stock Answer: C Rationale: All temporary accounts (revenues and expenses) have zero balance after closing, so only balance sheet accounts appear on the post-closing trial balance. Topic: Temporary Accounts LO: 6, 7 Level of Difficulty: EASY 90. Corporation revenue and expense accounts are considered temporary subdivisions of the corporation’s: A) Common stock B) Cash dividends C) Cash D) Stockholders’ equity Answer: D Rationale: Temporary accounts are accounts used to gather information for a particular accounting period. At the end of the accounting period, temporary account balances are transferred to Retained Earnings, which is a permanent stockholders’ equity account. Thus, revenue and expense accounts are a temporary subdivision of stockholders’ equity. Topic: Closing Entries LO: 6, 7 Level of Difficulty: EASY 91. A series of journal entries at the end of the accounting period to remove the balances from the temporary accounts so that they can accumulate data for the following accounting period are called: A) Adjusting entries B) Closing entries C) Connecting entries D) Reversing entries Answer: B Rationale: An account that is closed is said to be closed to the account that receives the offsetting debit or credit. Thus, a closing entry simply transfers the balance of one account to another account. Because closing journal entries bring temporary account balances to zero, the temporary accounts are ready to start accumulating data for the next accounting period.
©Cambridge Business Publishers, 2020 3-46
Financial Accounting for Undergraduates, 4th Edition
Topic: Closing Entries LO: 7 Level of Difficulty: EASY 92. The following entry closes the Depreciation Expense account at the end of the accounting period: A) Depreciation Expense Accumulated Depreciation B) Depreciation Expense Income Summary C) Accumulated Depreciation Depreciation Expense D) Income Summary Depreciation Expense Answer: D Rationale: The closing process entry to close an expense account is to credit the expense account for the amount equal to its current debit balance and to debit the Income Summary account. Topic: Closing Entries LO: 7 Level of Difficulty: EASY 93. Which of the following accounts is closed to Income Summary at the end of the accounting period? A) Accumulated Depreciation B) Advertising Expense C) Common Stock D) Cash Dividends Answer: B Rationale: The closing process includes entries to close expense accounts by crediting the expense accounts for the amount equal to their current debit balance and debiting the Income Summary account. Topic: Closing Entries LO: 7 Level of Difficulty: EASY 94. Which of the following entries could not be a closing entry? A) Service Fees Earned Income Summary B) Income Summary Salary Expense C) Retained Earnings Dividends D) Dividends Cash Answer: D Rationale: The closing process includes entries to close revenue and expense accounts to the income summary and to close the Income Summary account and the Dividends account to the Retained Earnings account.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-47
Topic: Income Summary Account LO: 7 Level of Difficulty: EASY 95. The Income Summary account: A) Appears in a post-closing trial balance B) Receives entries only at year-end, even though income or loss is assumed to be incurred throughout the year C) Reflects the net balance of all revenues, expenses, and dividends just before the account is closed D) Is closed by a debit entry when there is a loss for the period Answer: B Rationale: The Income Summary account is closed prior to preparing the post-closing trial balance; it does not reflect the net balance of dividends (only income and expense accounts), and it is closed by a credit (not a debit) entry when there is a loss for the period. Topic: Income Summary Account LO: 7 Level of Difficulty: EASY 96. In the closing process for a corporation, the Income Summary account is closed to: A) Retained Earnings B) Common Stock C) Cash Dividends D) Service Revenue Answer: A Rationale: The Income Summary account is closed with a credit to the Retained Earnings account in the case of net income and with a debit in the case of a net loss. Topic: Closing Entries LO: 6, 7 Level of Difficulty: EASY 97. In the closing process for a corporation, the Cash Dividends account is closed to: A) Common Stock B) Income Summary C) Retained Earnings D) Cash Answer: C Rationale: The closing process includes a debit to the Retained Earnings account and a credit to the Dividends account for an amount equal to the balance in the Dividends account.
©Cambridge Business Publishers, 2020 3-48
Financial Accounting for Undergraduates, 4th Edition
Topic: Closing Entries LO: 6, 7 Level of Difficulty: MEDIUM 98. Which of the following accounts is not affected by closing entries? A) Common Stock B) Cash Dividends C) Retained Earnings D) Service Fees Earned Answer: A Rationale: The closing process includes entries to close revenue and expense accounts to the income summary and to close the Income Summary account and the Dividends account to the Retained Earnings account. Common stock is a permanent account and is not closed. Topic: Closing Entries LO: 7 Level of Difficulty: MEDIUM 99. Koontz & Sons Company, Inc., has a net income for the current year. The entry to close the company’s Income Summary account would be: A) Debit Income Summary; Common Stock B) Debit Income Summary; credit Retained Earnings C) Debit Common Stock; credit Income Summary D) Debit Retained Earnings; credit Income Summary Answer: B Rationale: Since the company has net income for the current year, the Income Summary account has a credit balance prior to closing. Thus, the entry to close the Income Summary account is a debit to Income Summary and a credit to Retained Earnings. Topic: Closing Entries LO: 7 Level of Difficulty: EASY 100. Which of the following entries is a closing entry? A) Wages Payable Wages Expense B) Retained Earnings Income Summary C) Fees Receivable Service Fees Revenue D) Depreciation Expense Accumulated Depreciation
960 960 4,530 4,530 1,500 1,500 820 820
Answer: B Rationale: The closing process includes entries to close revenue and expense accounts to the income summary and to close the Income Summary account and the Dividends account to the Retained Earnings account. Balance sheet accounts (wages payable, fees receivable, accumulated depreciation) are permanent accounts and are not closed.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-49
Topic: Closing Entries LO: 7 Level of Difficulty: EASY 101. Which of the following entries is a closing entry? A) Wages Payable 2,880 Wages Expense B) Retained Earnings 13,590 Income Summary C) Fees Receivable 5,250 Service Fees Revenue D) Depreciation Expense 2,460 Accumulated Depreciation
2,880 13,590 5,250 2,460
Answer: B Rationale: The closing process includes entries to close revenue and expense accounts to the income summary and to close the Income Summary account and the Dividends account to the Retained Earnings account. Balance sheet accounts (wages payable, fees receivable, accumulated depreciation) are permanent accounts and are not closed. Topic: Post-Closing Trial Balance LO: 6, 7 Level of Difficulty: EASY 102. Which of the following accounts should not appear in a post-closing trial balance? A) Unearned Service Fees B) Wages Payable C) Retained Earnings D) Depreciation Expense Answer: D Rationale: Depreciation expense is a temporary account which is closed in the closing process. Only permanent (balance sheet) accounts appear in the post-closing trial balance. Topic: Post-Closing Trial Balance LO: 6, 7 Level of Difficulty: EASY 103. The post-closing trial balance shows amounts for: A) Balance sheet accounts only B) Income statement accounts only C) All general ledger accounts D) All accounts that were closed during the closing procedures Answer: A Rationale: Only permanent (balance sheet) accounts appear in the post-closing trial balance. Temporary (income statement) accounts are closed in the closing process, prior to the preparation of the post-closing trial balance.
©Cambridge Business Publishers, 2020 3-50
Financial Accounting for Undergraduates, 4th Edition
Topic: Post-Closing Trial Balance LO: 6, 7 Level of Difficulty: EASY 104. Which of the following accounts should appear in a post-closing trial balance? A) Income Summary B) Accounts Payable C) Service Fees Earned D) Depreciation Expense Answer: B Rationale: Only permanent (balance sheet) accounts appear in the post-closing trial balance. Temporary (income statement) accounts are closed in the closing process, prior to the preparation of the post-closing trial balance. Topic: Post-Closing Trial Balance LO: 6, 7 Level of Difficulty: EASY 105. Which of the following accounts should appear in a post-closing trial balance? A) Prepaid Insurance B) Supplies Expense C) Cash Dividends D) Professional Fees Earned Answer: A Rationale: Only permanent (balance sheet) accounts appear in the post-closing trial balance. Temporary (income statement) accounts are closed in the closing process, prior to the preparation of the post-closing trial balance. Topic: Accounting Cycle LO: 6, 7 Level of Difficulty: EASY 106. A complete accounting cycle occurs once every: A) Week B) Month C) Quarter D) Fiscal period Answer: D Rationale: The sequence of accounting procedures known as the accounting cycle occurs each fiscal period and represents a systematic process for accumulating and reporting the financial data of a business.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-51
Topic: Accounting Cycle LO: 6, 7 Level of Difficulty: EASY 107. Which of the following accounting cycle steps occurs only at the end of the accounting year? A) Analyze transactions from source documents B) Prepare financial statements C) Prepare a post-closing trial balance D) Record transactions in journals Answer: C Rationale: The accounting cycle includes five major steps, in order of occurrence: Analyze (transactions from source documents), Record (transactions in journals), Adjust (journalize adjusting entries and prepare adjusted trial balance), Report (prepare financial statements) and Close (journalize closing entries and a post-closing trial balance). Topic: Worksheets LO: 8 Level of Difficulty: EASY 108. Debit and credit columns are not provided in the worksheet for the following: A) Adjusted trial balance B) Adjustments C) Income statement D) Post-closing trial balance Answer: D Rationale: A worksheet is an informal document that helps accumulate the accounting information needed to prepare the financial statements. It included the Unadjusted Trial Balance, Adjustments, Adjusted Trial Balance Income Statement, and Balance Sheet. Topic: Worksheets LO: 8 Level of Difficulty: EASY 109. Preparation of a worksheet: A) Makes a general ledger unnecessary B) Facilitates the analysis of source documents C) Facilitates the preparation of financial statements D) Makes interim financial statements unnecessary Answer: C Rationale: A worksheet is an informal document that helps accumulate the accounting information needed to prepare the financial statements. It includes the Unadjusted Trial Balance, Adjustments, Adjusted Trial Balance Income Statement, and Balance Sheet.
©Cambridge Business Publishers, 2020 3-52
Financial Accounting for Undergraduates, 4th Edition
Topic: Worksheets LO: 8 Level of Difficulty: MEDIUM 110. In preparing a worksheet, assume you have just extended the adjusted account balances to the income statement and balance sheet columns. If no errors are made, which columns would you expect to have equal debit and credit amounts at this point? A) Income statement debits and credits B) Balance sheet debits and credits C) Income statement debits and balance sheet credits D) None of the above Answer: D Rationale: The difference between the debit and credit columns in the income statement is the difference between total revenues and total expenses (net income or net loss). The net income or net loss must be the amount by which the debit and credit columns in the balance sheet differ. Topic: Worksheets LO: 8 Level of Difficulty: EASY 111. In extending an adjusted trial balance on a worksheet, which of the following is done? A) Expenses are extended to the income statement credit column. B) Assets and dividends are extended to the balance sheet credit column. C) Revenues are extended to the income statement credit column. D) Liabilities are extended to the balance sheet debit column. Answer: C Rationale: In extending an adjusted trail balance on a worksheet, revenues are extended to the income statement credit column. Expenses are extended to the income statement debit (not credit) column. Assets and cash dividends are extended to the balance sheet debit (not credit) column. Liabilities are extended to the balance sheet credit (not debit) column. Topic: Worksheets LO: 8 Level of Difficulty: MEDIUM 112. In preparing a worksheet, the net income amount for the period is first entered as: A) A debit in the income statement columns B) A credit in the income statement columns C) A debit in the balance sheet columns D) A credit in the adjusted trail balance columns Answer: A Rationale: In preparing a worksheet, if net income (revenues exceed expenses) for the period results, it is first entered as a debit in the income statement columns. This will result in the worksheet income statement debit and credit columns balancing.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-53
Topic: Worksheets LO: 8 Level of Difficulty: MEDIUM 113. Preparation of a worksheet for a period during which a net loss was incurred causes which of the following relationships among worksheet column totals (before balancing the worksheet)? A) Balance sheet debits exceed balance sheet credits B) Balance sheet credits exceed balance sheet debits C) Income statement credits exceed income statement debits D) Adjusted trail balance debits exceed adjusted trial balance credits Answer: B Rationale: In preparing a worksheet, if a net loss (expenses exceed revenues) for the period results, it would be entered as a debit in the balance sheet debit column, since balance sheet credits would exceed balance debits. Topic: Worksheets LO: 8 Level of Difficulty: EASY 114. A worksheet: A) Constitutes a formal financial statement of a company B) Eliminates the need for journalizing year-end adjusting entries C) Provides the information needed for journalizing the year-end adjusting and closing entries D) Is useful only if the books are to be closed Answer: C Rationale: A worksheet can be used to facilitate the adjusting and closing processes, and ultimately the preparation of the company’s financial statements. Topic: Worksheet LO: 8 Level of Difficulty: MEDIUM 115. Before the proper closing procedures may be accomplished, the adjusting entries on the year-end worksheet must be: A) Spread to the proper worksheet financial statement columns B) Reversed C) Footed D) Journalized and posted Answer: D Rationale: Once the year-end worksheet has been completed, the last three steps of the accounting cycle – adjust, report, and close may be done. The adjusting entries to be journalized and posted can be taken from the information in the adjustment columns. Because they have first been entered on the worksheet, they can be reviewed for their financial effects before being journalized, thus, the likelihood of incorrect adjustments appearing in the formal accounting records is reduced.
©Cambridge Business Publishers, 2020 3-54
Financial Accounting for Undergraduates, 4th Edition
Topic: Accrual Basis of Accounting LO: 1 Level of Difficulty: EASY 116. On December 15, 2019, Yummy Treats Bakery receives an order from a customer for services to be performed on December 28, 2019. Due to a backlog of orders, the company does not perform the services until January 3, 2020. The customer pays for the services on January 16, 2020. The revenue recognition principle requires the revenue to be recorded by the company on: A) January 3, 2020 B) January 16, 2020 C) December 28, 2019 D) December 15, 2019 Answer: A Rationale: Under the accrual basis of accounting, sales revenue is recognized when it is earned, regardless of when the related cash is collected. For the Yummy Treats Bakery, revenue is earned when the service is performed on January 3, 2020. Topic: Accrual Basis of Accounting LO: 1 Level of Difficulty: EASY 117. Under the accrual basis of accounting: A) Cash must be received before revenue is recognized. B) Net income is calculated by matching cash outflows against cash inflows. C) Events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received. D) The ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles. Answer: C Rationale: Under the accrual basis of accounting, events that change a company’s financial statements (e.g., sales revenue or expenditures) are recognized in the period when they occur, regardless of when the related cash is received or paid. Topic: Accrual Basis of Accounting LO: 1 Level of Difficulty: MEDIUM 118. Which of the following reflect the balances of unearned revenue prior to adjustment? A) Balance sheet accounts are understated and income statement accounts are understated. B) Balance sheet accounts are overstated and income statement accounts are overstated. C) Balance sheet accounts are overstated and income statement accounts are understated. D) Balance sheet accounts are understated and income statement accounts are overstated. Answer: C Rationale: When unearned revenue is received, cash is debited and unearned revenue is credited. The adjustment to record earned revenue would decrease unearned revenue (a balance sheet liability account) and increase earned revenue (an income statement revenue account). Thus, if the adjustment has not yet been made, the unearned revenue balance sheet account would be overstated and the earned revenue income statement account would be understated.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-55
Topic: Adjusting Accounts LO: 2, 3 Level of Difficulty: DIFFICULT 119. On March 1, Schultze and Daughters reported a balance in Supplies of $500. During March, the company purchased supplies (properly recorded) for $1,900 and consumed supplies of $1,600. If no adjusting entry is made for supplies at the end of the month: A) Stockholders' equity will be overstated by $1,600. B) Expenses will be understated by $1,900. C) Assets will be understated by $700. D) Net income will be understated by $1,600. Answer: A Rationale: Required month-end entry: Supplies expense $1,600 Supplies (to record supplies consumed during March)
$1,600
Failure to record Supplies Expense understates expense and thus overstates net income by $1,600 for the month. Failure to record supplies (an asset) consumed, overstates assets on the Balance Sheet. Topic: Adjusting Accounts LO: 2, 3 Level of Difficulty: DIFFICULT 120. On March 1, Maibritt D. reported a balance in Supplies of $1,500. During March, the company purchased supplies (properly recorded) for $5,700 and consumed supplies of $4,800. If no adjusting entry is made for supplies at the end of the month: A) Stockholders' equity will be overstated by $4,800. B) Expenses will be understated by $5,700. C) Assets will be understated by $2,100. D) Net income will be understated by $4,800. Answer: A Rationale: Required month-end entry: Supplies expense $4,800 Supplies (to record supplies consumed during March)
$4,800
Failure to record Supplies Expense understates expense and thus overstates net income by $4,800 for the month. Failure to record supplies (an asset) consumed, overstates assets on the Balance Sheet.
©Cambridge Business Publishers, 2020 3-56
Financial Accounting for Undergraduates, 4th Edition
Topic: Adjusting Accounts LO: 2, 3 Level of Difficulty: MEDIUM 121. Riverboat Company had $4,800 of supplies on hand on January 1. During the year, the company purchased $7,800 of supplies, and on December 31, determined that only $1,600 of supplies were still on hand. The adjusting entry for Riverboat Company on December 31, will include: A) Credit Supplies Expense $11,000 B) Debit Supplies Expense $4,600 C) Debit Supplies $7,800 D) Debit Supplies Expense $11,000 Answer: D Rationale: Beginning supplies + Purchases – Supplies used = Ending supplies $4,800 + $7,800 – X = $1,600 X = $4,800 + $7,800 - $1,600 = $11,000 = Supplies used Required entry: Supplies expense Supplies
$11,000 $11,000
Topic: Adjusting Accounts LO: 2, 3 Level of Difficulty: MEDIUM 122. Rowing Company had $14,400 of supplies on hand on January 1. During the year, the company purchased $23,400 of supplies, and on December 31, determined that only $4,800 of supplies were still on hand. The adjusting entry for Rowing Company on December 31, will include: A) Credit Supplies Expense $33,000 B) Debit Supplies Expense $13,800 C) Debit Supplies $23,400 D) Debit Supplies Expense $33,000 Answer: D Rationale: Beginning supplies + Purchases – Supplies used = Ending supplies $14,400 + $23,400 – X = $4,800 X = $14,400 + $23,400 - $4,800 = $33,000 = Supplies used Required entry: Supplies expense Supplies
$33,000 $33,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-57
Topic: Adjusting Accounts LO: 2, 3 Level of Difficulty: MEDIUM 123. Casden Company paid $48,000 in insurance premiums during 2019. Their financial statements showed $8,000 in prepaid insurance on its Balance Sheet as of December 31, 2018 and $12,000 on its Balance Sheet as of December 31, 2019. The insurance expense to be reported on the income statement for 2019 should be: A) $57,000 B) $40,800 C) $44,000 D) $51,600 Answer: C Rationale: Beg. prepaid insurance + Premiums paid – Insurance expense = End. prepaid insurance $8,000 + $48,000 – X = $12,000 X = $8,000 + $48,000 - $12,000 X = $44,000 Topic: Adjusting Accounts LO: 2, 3 Level of Difficulty: MEDIUM 124. McDougall Company paid $144,000 in insurance premiums during 2019. Their financial statements showed $24,000 in prepaid insurance on its Balance Sheet as of December 31, 2018 and $36,000 on its Balance Sheet as of December 31, 2019. The insurance expense to be reported on the income statement for 2019 should be: A) $154,800 B) $171,000 C) $122,400 D) $132,000 Answer: D Rationale: Beginning prepaid insurance + Premiums paid – Insurance expense = Ending prepaid insurance $24,000 + $144,000 – X = $36,000 X = 24,000 + 144,000 - $36,000 X = $132,000
©Cambridge Business Publishers, 2020 3-58
Financial Accounting for Undergraduates, 4th Edition
Topic: Adjusting Accounts LO: 2, 3 Level of Difficulty: MEDIUM 125. On January 1st, Veronica Company began the year with $400 worth of supplies, and during the year, purchased $1,600 worth of supplies on account. On December 31st, the fiscal year end, it is determined that $1,000 dollars of supplies have been used up. What is the balance in the supplies account after adjustment? A) $1,400 B) $1,000 C) $ 1,200 D) $ 2,400 Answer: B Rationale: Beginning supplies + Purchases – Supplies used = Ending supplies $400 + $1,600 – $1,000 = X X = $1,000 Topic: Adjusting Accounts LO: 2, 3 Level of Difficulty: MEDIUM 126. On January 1st, Andrew Company began the year with $1,200 worth of supplies, and during the year, purchased $4,800 worth of supplies on account. On December 31st, the fiscal year end, it is determined that $3,000 dollars of supplies have been used up. What is the balance in the supplies account after adjustment? A) $7,200 B) $4,200 C) $3,000 D) $3,600 Answer: C Rationale: Beginning supplies + Purchases – Supplies used = Ending supplies $1,200 + $4,800 – $3,000 = X X = $3,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-59
Topic: Adjusting Accounts LO: 2, 3 Level of Difficulty: MEDIUM 127. At the beginning of the period, Polly Parrot Corporation had $800 of supplies on hand. During the period, it purchased $1,800 of supplies and at the end of the period, the company determined that only $1,600 of supplies were still on hand. What adjusting entry should Polly Parrot Corporation make at the end of the period? A) Supplies Expense 2,600 Supplies 2,600 B) Supplies Expense 1,000 Supplies 1,000 C) Supplies 2,600 Supplies Expense 2,600 D) Supplies 1,000 Supplies Expense 1,000 Answer: B Rationale: Beginning supplies + Purchases – Supplies used = Ending supplies $800 + $1,800 – X = $1,600 X = $800 + $1,800 - $1,600 = $1,000 Topic: Adjusting Accounts LO: 2, 3 Level of Difficulty: MEDIUM 128. At the beginning of the period, Kitty Treats Corporation had $2,400 of supplies on hand. During the period, it purchased $5,400 of supplies and at the end of the period, the company determined that only $4,800 of supplies were still on hand. What adjusting entry should Kitty Treats Corporation make at the end of the period? A) Supplies 3,000 Supplies Expense 3,000 B) Supplies Expense 7,800 Supplies 7,800 C) Supplies Expense 3,000 Supplies 3,000 D) Supplies 7,800 Supplies Expense 7,800 Answer: C Rationale: Beginning supplies + Purchases – Supplies used = Ending supplies $2,400 + $5,400 – X = $4,800 X = $2,400 + $5,400 - $4,800 = $3,000
©Cambridge Business Publishers, 2020 3-60
Financial Accounting for Undergraduates, 4th Edition
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 129. Billy Goat Company sent a check for $96 to Munch Digest magazine on May 1, 2019 toward one year subscription. If Billy Goat’s financial year ends on September 30, their financial statements will report: A) Prepaid Subscription of $48, and Subscription Expense of $24 B) Prepaid Subscription of $56, and Subscription Expense of $40 C) Prepaid Subscription of $24, and Subscription Expense of $48 D) Prepaid Subscription of $36, and Subscription Expense of $36 Answer: B Rationale: $96 x 5/12 = $40 = Subscription utilized (expense) in current year. Beginning prepaid subscription – Subscription utilized = Ending Prepaid Subscription $96 - $40 = $56 Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 130. Lupin Lab Company sent a check for $288 to Lab Fancy Digest magazine on May 1, 2019 toward one year subscription. If Lupin Lab’s financial year ends on September 30, their financial statements will report: A) Prepaid Subscription of $108, and Subscription Expense of $108 B) Prepaid Subscription of $144, and Subscription Expense of $72 C) Prepaid Subscription of $168, and Subscription Expense of $120 D) Prepaid Subscription of $72, and Subscription Expense of $144 Answer: C Rationale: $288 x 5/12 = $120 = Subscription utilized (expense) in current year. Beginning prepaid subscription – Subscription utilized = Ending Prepaid Subscription $288 - $120 = $168
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-61
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 131. Hilton Head Realty Company received a check for $60,000 on July 1 which represents a 6 month advance payment of rent on a building it rents to a client. Unearned Rent was credited for the full $60,000. Financial statements will be prepared on July 31. Hilton Head Realty should make the following adjusting entry on July 31: A) Debit Unearned Rent, $60,000; Credit Rental Revenue, $60,000 B) Debit Cash, $60,000; Credit Rental Revenue, $60,000 C) Debit Unearned Rent, $10,000; Credit Rental Revenue, $10,000 D) Debit Rental Revenue, $5,000; Credit Unearned Rent, $5,000 Answer: C Rationale: $60,000 x 1/6 = $10,000 = Rent Revenue in current year. Original entry: Cash $60,000 Unearned Rent (to record receipt of advance rent payment) Year-end entry: Unearned Rent $10,000 Rental Revenue (to record rental income earned during year)
$60,000
$10,000
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 132. Tracey Realty Company received a check for $180,000 on July 1 which represents a 6 month advance payment of rent on a building it rents to a client. Unearned Rent was credited for the full $180,000. Financial statements will be prepared on July 31. Tracey Realty should make the following adjusting entry on July 31: A) Debit Rental Revenue, $15,000; Credit Unearned Rent, $15,000 B) Debit Unearned Rent, $180,000; Credit Rental Revenue, $180,000 C) Debit Cash, $180,000; Credit Rental Revenue, $180,000 D) Debit Unearned Rent, $30,000; Credit Rental Revenue, $30,000 Answer: D Rationale: $180,000 x 1/6 = $30,000 = Rent Revenue in current year. Original Entry: Cash $180,000 Unearned Rent (to record receipt of advance rent payment) Year-end entry: Unearned Rent $30,000 Rental Revenue (to record rental income earned during year)
$180,000
$30,000
©Cambridge Business Publishers, 2020 3-62
Financial Accounting for Undergraduates, 4th Edition
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 133. On January 1, 2019, Super Fit Company received a check from a member for $1,080, which represents dues for the next 18 months. What effect will Super Fit Company’s adjusting journal entry at the end of the accounting period on December 31, 2019 have on their accounting equation? A) Decrease Assets by $720 B) Decrease Liabilities by $720 C) Increase Assets by $720 D) Increase Liabilities by $720 Answer: B Rationale: $1,080 x 12/18 = $720 = Membership Revenue in current year. Original Entry:
Cash
$1,080 Unearned Revenue $1,080 (to record receipt of advance membership dues)
Year-end entry:
Unearned Revenue $720 Membership Revenue $720 (to record membership revenue earned during year)
Unearned revenue is a liability, so liabilities decreased by $720 at the end of the year. Membership revenue is an income statement account, so it does not change assets or liabilities. Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 134. On January 1, 2019, Tennis Club received a check from a member for $3,240, which represents dues for the next 18 months. What effect will Tennis Club’s adjusting journal entry at the end of the accounting period on December 31, 2019 have on their accounting equation? A) Increase Liabilities by $2,160 B) Decrease Assets by $2,160 C) Decrease Liabilities by $2,160 D) Increase Assets by $2,160 Answer: C Rationale: $3,240 x 12/18 = $2,160 = Membership Revenue in current year. Original Entry:
Cash
$3,240 Unearned Revenue $3,240 (to record receipt of advance membership dues)
Year-end entry:
Unearned Revenue $2,160 Membership Revenue $2,160 (to record membership revenue earned during year)
Unearned revenue is a liability, so liabilities decreased by $2,160 at the end of the year. Membership revenue is an income statement account, so it does not change assets or liabilities. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-63
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 135. On October 1, Augustiniak Insurance Company receives the insurance premium, in advance, from a customer for a 12-month insurance policy for $2,400. Assuming that the company closes its books on December 31, what will be the adjusting entry on December 31? A) Unearned Revenue Insurance Premium Revenue B) Insurance Expense Prepaid Insurance C) Insurance Premium Revenue Unearned Revenue D) Unearned Revenue Prepaid Insurance
600 600 600 600 600 600 600 600
Answer: A Rationale: 2,400 x 3/12 = $600 insurance revenue in the current year Original Entry:
Cash
$2,400 Unearned Revenue $2,400 (to record receipt of advance insurance premium)
Year-end entry:
Unearned Revenue $600 Insurance Premium Revenue $600 (to record insurance premium income earned during year)
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 136. On October 1, Tacoma Insurance Company receives the insurance premium, in advance, from a customer for a 12-month insurance policy for $7,200. Assuming that the company closes its books on December 31, what will be the adjusting entry on December 31? A) Unearned Revenue Prepaid Insurance B) Unearned Revenue Insurance Premium Revenue C) Insurance Expense Prepaid Insurance D) Insurance Premium Revenue Unearned Revenue
1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800
Answer: B Rationale: $7,200 x 3/12 = $1,800 insurance revenue in the current year Original Entry:
Cash
$7,200 Unearned Revenue $7,200 (to record receipt of advance insurance premium)
Year-end entry:
Unearned Revenue $1,800 Insurance Premium Revenue $1,800 (to record insurance premium income earned during year)
©Cambridge Business Publishers, 2020 3-64
Financial Accounting for Undergraduates, 4th Edition
Topic: Adjusting Accounts LO: 3 Level of Difficulty: DIFFICULT 137. Great Value Co-Op recognizes membership fee revenues over the term of the membership, which is 12 months. If their Unearned Membership Fee Revenue account had a balance of $1,200 million on January 31, 2019, and $1,100 million on January 31, 2020 and the company received membership fees in cash of $2,200 million during the year, what amount was recognized as Membership Fee Revenue for the fiscal year? A) $2,140 million B) $2,108 million C) $4,280 million D) $2,300 million Answer: D Rationale: $1,200 + $2,200 – X = $1,100 X = $1,200 + $2,200 - $1,100 X = $2,300 Topic: Adjusting Accounts LO: 3 Level of Difficulty: DIFFICULT 138. We Got It All Warehouse Company recognizes membership fee revenues over the term of the membership, which is 12 months. If their Unearned Membership Fee Revenue account had a balance of $3,600 million on January 31, 2019, and $3,300 million on January 31, 2020 and the company received membership fees in cash of $6,600 million during the year, what amount was recognized as Membership Fee Revenue for the fiscal year? A) $ 6,900 million B) $ 6,420 million C) $ 6,324 million D) $12,840 million Answer: A Rationale: $3,600 + $6,600 – X = $3,300 X = $3,600 + $6,600 - $3,300 X = $6,900
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-65
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 139. Gustav Schulze Realtors always collects rent in advance from its customers. The 2019 income statement for Gustav reports rent revenue of $42,000. Assume all rent is paid in cash. The related balance sheet accounts for the beginning and end of the year were:
Unearned Rent
Jan. 1, 2019 $7,000
Dec. 31, 2019 $13,000
Based on this information, the amount of cash collected during 2019 from Gustav's customers was: A) $48,000 B) $15,600 C) $56,500 D) $53,000 Answer: A Rationale: $7,000 + X - $42,000 = $13,000 X = $13,000 - $7,000 + $42,000 X = $48,000 Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 140. Bruder Realtors always collects rent in advance from its customers. The 2019 income statement for Bruder reports rent revenue of $126,000. Assume all rent is paid in cash. The related balance sheet accounts for the beginning and end of the year were:
Unearned Rent
Jan. 1, 2019 $21,000
Dec. 31, 2019 $39,000
Based on this information, the amount of cash collected during 2019 from Bruder's customers was: A) $159,000 B) $144,000 C) $ 46,800 D) $169,500 Answer: B Rationale: $21,000 + X - $126,000 = $39,000 X = $39,000 - $21,000 + $126,000 X = $144,000
©Cambridge Business Publishers, 2020 3-66
Financial Accounting for Undergraduates, 4th Edition
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 141. On June 1, 2019, Emma Schulze Corporation received $3,600 as advance payment for 12 months' advertising. The receipt was recorded as a credit to Unearned Fees. What adjusting entry is required on December 31, 2019? A) Unearned Fees Advertising Revenue B) Unearned Fees Advertising Revenue C) Unearned Fees Advertising Revenue D) Advertising Revenue Unearned Fees
1,800 1,800 1,500 1,500 2,100 2,100 2,100 2,100
Answer: C Rationale: $3,600 x 7/12 = $2,100 advertising revenue in the current year Original Entry: Cash $3,600 Unearned Fees (to record receipt of advance advertising payment)
$3,600
Year-end entry: Unearned Fees $2,100 Advertising Revenue (to record advertising revenue earned during year)
$2,100
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 142. On June 1, 2019, Enne Brahtz Corporation received $10,800 as advance payment for 12 months' advertising. The receipt was recorded as a credit to Unearned Fees. What adjusting entry is required on December 31, 2019? A) Advertising Revenue Unearned Fees B) Unearned Fees Advertising Revenue C) Unearned Fees Advertising Revenue D) Unearned Fees Advertising Revenue
6,300 6,300 5,400 5,400 4,500 4,500 6,300 6,300
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-67
Answer: D Rationale: $10,800 x 7/12 = $6,300 advertising revenue in the current year Original Entry: Cash $10,800 Unearned Fees (to record receipt of advance advertising payment) Year-end entry: Unearned Fees $6,300 Advertising Revenue (to record advertising revenue earned during year)
$10,800
$6,300
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 143. Guinea Pigs R Us magazine company’s Unearned Revenue account had a balance of $25,400 on January 1, 2019. On December 31, 2019, as part of the adjusting entry, they recognized Subscription revenue of $29,600. The December 31, 2019 balance of the Unearned Revenue account was $24,600. What must have been the amount of cash received by the Guinea Pigs R Us magazine company from customers during the year 2019? A) $20,400 B) $28,800 C) $29,600 D) $30,400 Answer: B Rationale: $25,400 - $29,600 + X = $24,600 X = $24,600 - $25,400 + $29,600 X= $28,800 Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 144. YA Magazine company’s Unearned Revenue account had a balance of $76,200 on January 1, 2020. On December 31, 2019, as part of the adjusting entry, they recognized Subscription revenue of $88,800. The December 31, 2019 balance of the Unearned Revenue account was $73,800. What must have been the amount of cash received by the YA Magazine company from customers during the year 2019? A) $91,200 B) $61,200 C) $86,400 D) $88,800 Answer: C Rationale: Unearned Revenue beginning of year + Change in Unearned Membership Fee Revenue = $76,200 - $88,800 + X = $73,800 X = $73,800 - $76,200 + $88,800 X = $86,400 ©Cambridge Business Publishers, 2020 3-68
Financial Accounting for Undergraduates, 4th Edition
Topic: Adjusting Accounts LO: 4 Level of Difficulty: MEDIUM 145. During July, wage expense of $54,000 was reported on the income statement of Caroline Company. If wages payable on July 1st was $4,000, and wages of $40,000 were paid during July, how much was accrued wages payable on July 31st? A) $18,000 B) $ 3,000 C) $ 2,000 D) $ 4,000 Answer: A Rationale: Beginning wages payable + Wage expense – Wages paid = Ending wages payable $4,000 + $54,000 - $40,000 = X X = $18,000 Topic: Adjusting Accounts LO: 4 Level of Difficulty: MEDIUM 146. During July, wage expense of $162,000 was reported on the income statement of Carl Nickolas Company. If wages payable on July 1st was $12,000, and wages of $120,000 were paid during July, how much was accrued wages payable on July 31st? A) $12,000 B) $54,000 C) $ 9,000 D) $ 6,000 Answer: B Rationale: Beginning wages payable + Wage expense – Wages paid = Ending wages payable $12,000 + $162,000 - $120,000 = X X = $54,000 Topic: Adjusting Accounts LO: 4 Level of Difficulty: MEDIUM 147. John Monroe Company borrowed $60,000 from Bank of USA by signing a 6%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares monthly financial statements, the adjusting entry that the company should make for interest on September 30, would be: A) Debit Note Payable , $3,600; Credit Cash, $3,600 B) Debit Interest Expense, $900; Credit Interest Payable, $900 C) Debit Interest Expense, $3,600; Credit Interest Payable, $3,600 D) Debit Interest Expense, $300; Credit Interest Payable, $300 Answer: D Rationale: Total Interest Expense = ($60,000 x 0.06) x 3/12 = $900 Interest Expense for September = $900 / 3 = $300 Entry September 30: Interest Expense Interest Payable
$300 $300 ©Cambridge Business Publishers, 2020
Test Bank, Chapter 3
3-69
Topic: Adjusting Accounts LO: 4 Level of Difficulty: MEDIUM 148. Tommy Company borrowed $180,000 from Bank of USA by signing a 6%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares monthly financial statements, the adjusting entry that the company should make for interest on September 30, would be: A) Debit Interest Expense, $900; Credit Interest Payable, $900 B) Debit Note Payable, $10,800; Credit Cash, $10,800 C) Debit Interest Expense, $2,700; Credit Interest Payable, $2,700 D) Debit Interest Expense, $10,800; Credit Interest Payable, $10,800 Answer: A Rationale: Total Interest Expense = ($180,000 x .06) x 3/12 = $2,700 Interest Expense for September = $2,700 / 3 = $900 Entry September 30: Interest Expense Interest Payable
$900 $900
Topic: Adjusting Accounts LO: 4 Level of Difficulty: MEDIUM 149. Lucky Company obtained a $50,000, one-year, 12 percent bank loan on November 1 of the current year. Interest is payable at the end of the loan term. The company’s adjusting entry needed on December 31 is: A) A debit to Interest Receivable of $1,000 and a credit to Interest Revenue of $1,000 B) A debit to Interest Expense of $500 and a credit to Interest Payable of $500 C) A debit to Interest Expense of $1,000 and a credit to Interest Payable of $1,000 D) A debit to Interest Expense of $6,000 and a credit to Interest Payable of $6,000 Answer: C Rationale: Interest Expense = ($50,000 x 0.12) x 2/12 = $1,000 Entry December 31: Interest Expense Interest Payable
$1,000 $1,000
©Cambridge Business Publishers, 2020 3-70
Financial Accounting for Undergraduates, 4th Edition
Topic: Adjusting Accounts LO: 4 Level of Difficulty: MEDIUM 150. Green Tea Company obtained a $150,000, one-year, 12 percent bank loan on November 1 of the current year. Interest is payable at the end of the loan term. The company’s adjusting entry needed on December 31 is A) A debit to Interest Expense of $18,000 and a credit to Interest Payable of $18,000 B) A debit to Interest Receivable of $3,000 and a credit to Interest Revenue of $3,000 C) A debit to Interest Expense of $1,500 and a credit to Interest Payable of $1,500 D) A debit to Interest Expense of $3,000 and a credit to Interest Payable of $3,000 Answer: D Rationale: Interest Expense = ($150,000 x 0.12) x 2/12 = $3,000 Entry December 31: Interest Expense Interest Payable
$3,000 $3,000
Topic: Adjusting Accounts LO: 4 Level of Difficulty: MEDIUM 151. Weidman Company's weekly payroll of $60,000 is paid every Friday for a 5-day workweek. Assume that the last day of the fiscal year falls on Wednesday. Which of the following journal entries would be made on the first Friday following the year-end? A) Salaries Expense Salaries Payable B) Salaries Expense Cash C) Salaries Expense Salaries Payable Cash D) Salaries Expense Salaries Payable Cash
36,000 36,000 24,000 24,000 36,000 24,000 60,000 24,000 36,000 60,000
Answer: D Rationale: Weekly payroll / 5 days = Daily payroll $60,000 / 5 = $12,000 per day Payroll in old year= $12,000 x 3 days = $36,000 Payroll in new year= $12,000 x 2 days = $24,000 Year-end entry: Salaries Expense Salaries Payable
$36,000
Entry made on the first Friday following the year-end: Salaries Expense $24,000 Salaries Payable $36,000 Cash
$36,000
$60,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-71
Topic: Adjusting Accounts LO: 4 Level of Difficulty: MEDIUM 152. Creations by Brahtz has a weekly payroll of $180,000 is paid every Friday for a 5-day workweek. Assume that the last day of the fiscal year falls on Wednesday. Which of the following journal entries would be made on the first Friday following the year-end? A) Salaries Expense Salaries Payable Cash B) Salaries Expense Salaries Payable C) Salaries Expense Cash D) Salaries Expense Salaries Payable Cash
72,000 108,000 180,000 108,000 108,000 72,000 72,000 108,000 72,000 180,000
Answer: A Rationale: Weekly payroll / 5 days = Daily payroll $180,000 / 5 = $36,000 per day Payroll in old year= $36,000 x 3 days = $108,000 Payroll in new year= $36,000 x 2 days = $72,000 Year-end entry: Salaries Expense Salaries Payable
$108,000 $108,000
Entry made on the first Friday following the year-end: Salaries Expense $72,000 Salaries Payable $108,000 Cash $180,000
©Cambridge Business Publishers, 2020 3-72
Financial Accounting for Undergraduates, 4th Edition
Topic: Adjusting Accounts LO: 4 Level of Difficulty: DIFFICULT 153. Julissa Company pays its employees a total salary of $14,000 every other Friday for 10 days of work (employees do not work or get paid for Saturdays and Sundays). In a given year, the company’s pay days fall on September 26 (Friday) and October 10 (Friday), and they close their books on September 30. Which of the following pairs of journal entries is correct? A) Sept 30 Oct 10 B) Sept 30 Oct 10
C) Sept 30 Oct 10
D) Sept 30 Oct 10
Salaries Expense Salaries Payable
2,800
Salaries Expense Cash
14,000
Salaries Expense Salaries Payable
2,800
Salaries Payable Salaries Expense Cash
2,800 11,200
Salaries Expense Salaries Payable
2,800
Salaries Payable Salaries Expense Cash
5,600 8,400
Salaries Expense Cash
2,800
Salaries Expense Cash
11,200
2,800 14,000 2,800
14,000 2,800
14,000 2,800 11,200
Answer: B Rationale: Every other week payroll / 10 days = Daily payroll $14,000 / 10 = $1,400 per day Payroll in old year = $1,400 x 2 days = $2,800 Payroll in new year = $1,400 x 8 days = $11,200 Sept. 30 year-end entry: Salaries Expense Salaries Payable
$2,800 $2,800
Oct. 10 entry made on the first Friday following the year-end: Salaries Payable $ 2,800 Salaries Expense $11,200 Cash $14,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-73
Topic: Adjusting Accounts LO: 4 Level of Difficulty: DIFFICULT 154. Nunez Company pays its employees a total salary of $42,000 every other Friday for 10 days of work (employees do not work or get paid for Saturdays and Sundays). In a given year, the company’s pay days fall on September 26 (Friday) and October 10 (Friday), and they close their books on September 30. Which of the following pairs of journal entries is correct? A) Sept 30 Oct 10 B) Sept 30 Oct 10 C) Sept 30 Oct 10
D) Sept 30 Oct 10
Salaries Expense Cash
8,400
Salaries Expense Cash
33,600
Salaries Expense Salaries Payable
8,400
Salaries Expense Cash
42,000
Salaries Expense Salaries Payable
8,400
Salaries Payable Salaries Expense Cash
8,400 33,600
Salaries Expense Salaries Payable
8,400
Salaries Payable Salaries Expense Cash
16,800 25,200
8,400 33,600 8,400 42,000 8,400
42,000 8,400
42,000
Answer: C Rationale: Every other week payroll / 10 days = Daily payroll $42,000 / 10 = $4,200 per day Payroll in old year = $4,200 x 2 days = $8,400 Payroll in new year = $4,200 x 8 days = $33,600 Sept. 30 year-end entry: Salaries Expense Salaries Payable
$8,400 $8,400
Oct. 10 entry made on the first Friday following the year-end: Salaries Payable $8,400 Salaries Expense $33,600 Cash $42,000
©Cambridge Business Publishers, 2020 3-74
Financial Accounting for Undergraduates, 4th Edition
Topic: Adjusting Accounts LO: 4 Level of Difficulty: MEDIUM 155. Duke Company received a $50,000, one year, 9 percent bank loan on October 31, 2019. Interest is payable at the end of the loan term. Duke’s adjusting entry at the end of their fiscal year on March 31, 2020 is: A) A debit to Interest Expense of $1,875 and a credit to Interest Payable of $1,875 B) A debit to Interest Receivable of $2,250 and a credit to Interest Payable of $2,250 C) A debit to Interest Expense of $750 and a credit to Interest Payable of $750 D) A debit to Interest Expense of $4,500 and a credit to Interest Revenue of $4,500 Answer: A Rationale: Total Interest Expense = ($50,000 x 0.09) = $4,500 Interest Expense for fiscal year = $4,500 x 5/12 = $1,875 Entry March 31, 2020: Interest Expense Interest Payable
$1,875 $1,875
Topic: Adjusting Accounts LO: 4 Level of Difficulty: MEDIUM 156. Julissa Company received a $150,000, one year, 9 percent bank loan on October 31, 2019. Interest is payable at the end of the loan term. Adelman’s adjusting entry at the end of their fiscal year on March 31, 2020 is: A) A debit to Interest Expense of $5,625 and a credit to Interest Payable of $5,625 B) A debit to Interest Receivable of $6,750 and a credit to Interest Payable of $6,750 C) A debit to Interest Expense of $2,250 and a credit to Interest Payable of $2,250 D) A debit to Interest Expense of $13,500 and a credit to Interest Revenue of $13,500 Answer: A Rationale: Total Interest Expense = ($150,000 x 0.09) = $13,500 Interest Expense for fiscal year = $13,500 x 5/12 = $5,625 Entry March 31, 2020: Interest Expense Interest Payable
$5,625 $5,625
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-75
Topic: Adjusting Accounts LO: 4 Level of Difficulty: MEDIUM 157. Swiss Chocolate Company has a policy of paying for all its utilities one month after they receive the bills. In its Utilities Payable account, Swiss Chocolate reported $94,000 on January 1, 2019, and $112,000 on December 31, 2019. If cash paid for utilities during the year 2019 was $546,000, what was Swiss Chocolate Company’s Utilities Expense for the year 2019? A) $658,000 B) $564,000 C) $640,000 D) $528,000 Answer: B Rationale: Beginning Utilities Payable + Utilities expense - Cash paid = Ending Utilities Payable $94,000 + X - $546,000 = $112,000 X = $112,000 - $94,000 + $546,000 Utilities Expense = $564,000 Topic: Adjusting Accounts LO: 4 Level of Difficulty: MEDIUM 158. Wisconsin Candy Company has a policy of paying for all its utilities one month after they receive the bills. In its Utilities Payable account, Wisconsin Candy Company reported $282,000 on January 1, 2019, and $336,000 on December 31, 2019. If cash paid for utilities during the year 2019 was $1,638,000, what was Wisconsin Candy Company’s Utilities Expense for the year 2019? A) $1,584,000 B) $1,974,000 C) $1,692,000 D) $1,920,000 Answer: C Rationale: Beginning Utilities Payable + Utilities expense - Cash paid = Ending Utilities Payable $282,000 + X - $1,638,000 = $336,000 X = $336,000 - $282,000 + $1,638,000 Utilities Expense = $1,692,000
©Cambridge Business Publishers, 2020 3-76
Financial Accounting for Undergraduates, 4th Edition
Topic: Adjusting Accounts LO: 2, 4 Level of Difficulty: MEDIUM 159. Miller Company reported the following balances in the Wages Payable account:
Wages Payable
Jan. 1, 2019 $3,000
Dec. 31, 2019 $6,000
If cash paid for wages during 2019 was $56,000, what was the wages expense reported on the 2016 income statement? A) $61,600 B) $50,000 C) $52,200 D) $59,000 Answer: D Rationale: Beginning Wages Payable + Wages expense - Cash paid = Ending Wages Payable $3,000 + X - $56,000 = $6,000 X = $6,000 - $3,000 + $56,000 = $59,000 = Wages Expense Topic: Adjusting Accounts LO: 2, 4 Level of Difficulty: MEDIUM 160. Longbottom Company reported the following balances in the Wages Payable account:
Wages Payable
Jan. 1, 2019 $9,000
Dec. 31, 2019 $18,000
If cash paid for wages during 2019 was $168,000, what was the wages expense reported on the 2019 income statement? A) $177,000 B) $184,800 C) $150,000 D) $156,600 Answer: A Rationale: Beginning Wages Payable + Wages expense - Cash paid = Ending Wages Payable $9,000 + X - $168,000 = $18,000 X = $18,000 - $9,000 + $168,000 = $177,000 = Wages Expense
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-77
Topic: Adjusting Accounts LO: 4 Level of Difficulty: EASY 161. What accounts are affected by an adjusting entry that recognizes that services to patients have been earned but not billed? A) Increases in accounts payable and unearned service fees B) Decreases in accounts payable and service revenue C) Decreases in accounts receivable and unearned service fees D) Increases in accounts receivable and service revenue Answer: D Rationale: Revenues from providing a service must be recognized in the period in which the service is performed. Revenues for the period that have been earned but not yet paid or billed, must be accrued, using a period-end adjusting entry. The required entry would be: Accounts receivable Service revenue
XXX XXX
Topic: Adjusting Accounts LO: 2, 4 Level of Difficulty: EASY 162. Nelly Grimm has performed $3,000 of CPA services for a client but has not billed the client as of the end of the accounting period. What adjusting entry must Nellie make? A) Debit Cash and credit Unearned Revenue B) Debit Accounts Receivable and credit Unearned Revenue C) Debit Accounts Receivable and credit Service Revenue D) Debit Unearned Revenue and credit Service Revenue Answer: C Rationale: Revenues from providing a service must be recognized in the period in which the service is performed. Revenues for the period that have been earned but not yet paid or billed, must be accrued, using a period-end adjusting entry. The required entry would be: Accounts receivable Service revenue
XXX XXX
©Cambridge Business Publishers, 2020 3-78
Financial Accounting for Undergraduates, 4th Edition
Topic: Adjusting Accounts LO: 2, 4 Level of Difficulty: DIFFICULT 163. AnnMarie, a bank customer, received a loan for $26,000 in exchange for a 7-month, 9% note on October 1, 2019. The note is due on April 30, 2020. If the bank’s accounting period ends on December 31 each year, how much interest revenue from this note should be recognized by the bank in the years 2019 and 2020? A) B) C) D)
2019 $ 585 $ 780 $ 585 $1,365
2020 $1,365 $ 585 $ 780 $ 0
Answer: C Rationale: Total Interest Expense = ($26,000 x 0.09) x 7/12 = $1,365 Interest Expense for 2019 = $1,365 x 3/7 = $585 Interest Expense for 2020 = $1,365 x 4/7 = $780 Topic: Adjusting Accounts LO: 2, 4 Level of Difficulty: DIFFICULT 164. Baba, a bank customer, received a loan for $78,000 in exchange for a 7-month, 9% note on October 1, 2019. The note is due on April 30, 2020. If the bank’s accounting period ends on December 31 each year, how much interest revenue from this note should be recognized by the bank in the years 2019 and 2020? A) B) C) D)
2019 $4,095 $1,755 $2,340 $1,755
2020 $ 0 $4,095 $1,755 $2,340
Answer: D Rationale: Total Interest Expense = ($78,000 x 0.09) x 7/12 = $4,095 Interest Expense for 2019 = $4,095 x 3/7 = $1,755 Interest Expense for 2020 = $4,095 x 4/7 = $2,340
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-79
Topic: Adjusting Accounts LO: 2, 4 Level of Difficulty: MEDIUM 165. Portland Fitness Centers have 15,000 members whose monthly dues are $200 each. The company does not send individual bills to customers, who have until the 10th day of the month following the month of service to pay their monthly dues. On December 31, 2019, the company’s records show that 7,000 customers have already paid their December dues, and the payments were properly recorded. The adjusting entry to be recorded on December 31 will include: A) A debit to Accounts Receivable of $1,600,000 B) A debit to Accounts Receivable of $1,400,000 C) A credit to Membership Revenue of $1,400,000 D) A credit to Membership Revenue of $3,000,000 Answer: A Rationale: Total Membership Revenue = 15,000 X $200= $3,000,000 December Membership Revenue received in 2019 = $200 x 7,000 = $1,400,000 (already recorded) December Membership Revenue to be received in 2020 = $200 x (15,000 - 7,000) = $1,600,000 December 31, 2019 entry: Accounts Receivable Membership Revenue
$1,600,000 $1,600,000
Topic: Adjusting Accounts LO: 2, 4 Level of Difficulty: MEDIUM 166. Oregon Fitness Centers have 15,000 members whose monthly dues are $225 each. The company does not send individual bills to customers, who have until the 10th day of the month following the month of service to pay their monthly dues. On December 31, 2019, the company’s records show that 7,000 customers have already paid their December dues, and the payments were properly recorded. The adjusting entry to be recorded on December 31 will include: A) A debit to Accounts Receivable of $1,800,000 B) A debit to Accounts Receivable of $1,575,000 C) A credit to Membership Revenue of $1,575,000 D) A credit to Membership Revenue of $3,375,000 Answer: A Rationale: Total Membership Revenue = 15,000 X $225= $3,375,000 December Membership Revenue received in 2019 = $225 x 7,000 = $1,575,000 (already recorded) December Membership Revenue to be received in 2020 = $225 x (15,000 - 7,000) = $1,800,000 December 31, 2019 entry: Accounts Receivable Membership Revenue
$1,800,000 $1,800,000
©Cambridge Business Publishers, 2020 3-80
Financial Accounting for Undergraduates, 4th Edition
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 167. On August 1 of the current year, Hodges Company received $12,000 for legal services to be performed evenly throughout the next six months. The adjusting entry on December 31 of the current year would include a: A) Debit to Service Revenue of $2,000 B) Credit to Unearned Service Revenue of $10,000 C) Credit to Service Revenue of $10,000 D) Debit to Unearned Service Revenue of $2,000 Answer: C Rationale: Service revenue received / 6 months= $12,000 / 6 = $2,000 /month Service revenue current year: $2,000 x 5 months = $10,000 Service revenue next year: $2,000 x 1 month = $2,000 Original entry, August 1: Cash Unearned Service Revenue
$12,000
December 31 adjusting entry: Unearned Service Revenue Service Revenue
$10,000
$12,000
$10,000
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 168. On August 1 of the current year, Kris Company received $36,000 for legal services to be performed evenly throughout the next six months. The adjusting entry on December 31 of the current year would include a: A) Debit to Service Revenue of $6,000 B) Credit to Unearned Service Revenue of $30,000 C) Credit to Service Revenue of $30,000 D) Debit to Unearned Service Revenue of $6,000 Answer: C Rationale: Service revenue received / 6 months= $36,000 / 6 = $6,000 /month Service revenue current year: $6,000 x 5 month = $30,000 Service revenue next year: $6,000 x 1 month = $6,000 Original entry, August 1: Cash Unearned Service Revenue
$36,000
December 31 adjusting entry: Unearned Service Revenue Service Revenue
$30,000
$36,000
$30,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-81
Topic: Adjusting Accounts LO: 2, 4 Level of Difficulty: MEDIUM 169. At the end of the fiscal year, the usual adjusting entry for accrued salaries owed to employees was erroneously omitted. Which of the following statements is true? A) The total of the liabilities at the end of the year was overstated. B) Owner's equity at the end of the year was understated. C) Net income for the year was understated. D) Salary Expense for the year was understated. Answer: D Rationale: The entry which should have been made at fiscal year end to properly accrue salaries owed to employees is: Salary Expense Salaries Payable
$XXX $XXX
Since this entry was not made, salary expense is understated. Liabilities (Salaries Payable) is also understated, not overstated. Since expense is understated, net income and owner’s equity are both overstated, not understated. Topic: Adjusting Accounts LO: 2, 4 Level of Difficulty: MEDIUM 170. The pre-adjustment net income for a company is $200,000. However, adjusting entries have not been made at the end of the period for accrued revenues of $5,400 and accrued expenses of $2,600. The correctly adjusted Net Income should be: A) $188,000 B) $172,000 C) $177,200 D) $202,800 Answer: D Rationale: Pre-adjustment net income + Accrued revenue – Accrued expenses = Adjusted Net Income $200,000 + $5,400 - $2,600 = X X= $202,800
©Cambridge Business Publishers, 2020 3-82
Financial Accounting for Undergraduates, 4th Edition
Topic: Adjusting Accounts LO: 2, 4 Level of Difficulty: MEDIUM 171. The pre-adjustment net income for a company is $600,000. However, adjusting entries have not been made at the end of the period for accrued revenues of $16,200 and accrued expenses of $7,800. The correctly adjusted Net Income should be: A) $608,400 B) $564,000 C) $516,000 D) $531,600 Answer: A Rationale: Pre-adjustment net income + Accrued revenue – Accrued expenses = Adjusted Net Income $600,000 + $16,200 - $7,800 = X X= $608,400 Topic: Adjusting Accounts LO: 2 Level of Difficulty: MEDIUM 172. Which of the following pairs of accounts would not appear in the same adjusting entry? A) Service Revenue and Unearned Revenue B) Interest Revenue and Interest Expense C) Rent Expense and Prepaid Rent D) Salaries Payable and Salaries Expense Answer: B Rationale: Journal entries to record accounting adjustments (adjusting entries) affect one or more balance sheet accounts and one or more income statement accounts. An entry to interest revenue and interest expense would not be an adjusting entry since it affects only income statement accounts. Topic: Adjusting Accounts LO: 2, 3 Level of Difficulty: MEDIUM 173. Which one of the following adjusting entries increases net income for the period? A) Recognition of interest on a note payable B) Recognition of rent that had been received in advance from customers C) Recognition of wages earned, but not paid to employees D) Recognition of supplies consumed during the period Answer: B Rationale: Original entry when rent was received in advance: Cash XXX Unearned rent revenue
XXX
Entry when unearned rent revenue is recognized: Unearned rent revenue XXX Rent Revenue
XXX
A credit to rent revenue increases net income. The recognition of interest expense, wage expense and supplies consumed (supplies expense) all decrease net income.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-83
Topic: Adjusting Accounts LO: 2, 3 Level of Difficulty: MEDIUM 174. The Unearned Revenue account was not adjusted for work performed in the current period. What is the effect of this error? A) The assets will be understated and expenses will be understated. B) The assets will be overstated and liabilities will be overstated. C) The liabilities will be overstated and revenues will be understated. D) The liabilities will be understated and revenues will be understated. Answer: C Rationale: Original entry when payment was received in advance of services being provided: Cash XXX Unearned revenue XXX Entry that should have been made for work performed in the current period (unearned revenue recognized): Unearned revenue XXX Revenue XXX Unearned revenue is a liability account. So, if the entry is not made, liabilities would be overstated and revenues would be understated. Topic: Adjusting Accounts LO: 2, 4 Level of Difficulty: MEDIUM 175. Failure to prepare an adjusting entry at the end of the period to record an accrued expense would cause: A) An understatement of expenses and an overstatement of liabilities B) An overstatement of expenses and an overstatement of liabilities C) An overstatement of assets and an overstatement of liabilities D) An understatement of expenses and an understatement of liabilities Answer: D Rationale: Entry required to accrue an expense: Expense account XXX Accounts payable
XXX
Both expenses and liabilities would be understated.
©Cambridge Business Publishers, 2020 3-84
Financial Accounting for Undergraduates, 4th Edition
Topic: Closing Process LO: 6, 7 Level of Difficulty: MEDIUM 176. Closing entries are: A) Required to bring all permanent accounts to a zero balance at the end of the accounting period B) Not required to be posted C) Required to bring all temporary accounts to a zero balance prior to starting a new accounting cycle D) Generally taken from the financial statements rather than from the worksheet or the accounts themselves Answer: C Rationale: A temporary account is closed when an entry is made that changes the account balance to zero. The temporary (income statement) accounts are then ready to start accumulating data for the next accounting period. Topic: Closing Process LO: 6, 7 Level of Difficulty: MEDIUM 177. Which of the following statements is incorrect? A) Prepaid expense, depreciation, and unearned revenue adjusting entries involve previously recorded assets and liabilities B) Closing entries affect the accumulated depreciation account C) Adjusting entries can be used to record both accrued expenses and accrued revenues D) Prepaid expenses, depreciation, and unearned revenues often require adjusting entries to record the effects of the passage of time Answer: B Rationale: Closing entries involve the process of transferring balances in temporary accounts to retained earnings. Temporary accounts are revenue, expense and dividend accounts, which gather information for a particular accounting period. Accumulated depreciation is a liability account, which is a permanent account, whose balance is carried forward to the following accounting period. It is not closed.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-85
Exercises Topic: Wage Expense Accrual LO: 4 1. Better Brakes pays employees each Friday for the five day work-week ending on that day. The company’s normal gross weekly payroll is $10,800. If the last Friday of the month falls on January 25, what adjusting entry should be made on January 31, the fiscal year end? Answer: Jan. 31 Wages expense Wages payable
8,640 8,640
Friday is January 25 and the next workday is Monday, January 28. The company will accrue Monday, January 28, through Thursday, January 31, or 4 days. $10,800 × 4/5 = $8,640 Topic: Journalizing Transactions and Adjusting Accounts LO: 3, 4 2. Clean & Clear Water offers pool and spa cleaning services to hotels and residential customers. Commercial (hotels) customers pay on a monthly contract basis, while residential customers pay an hourly rate based on services provided. In July 2019, Clean & Clear Water signed a 6-month contract with Travel Holidays to provide pool and spa cleaning services for 3 hotel sites. The contract price of $48,000 was collected on July 1, 2019. The services will be provided evenly over the 6 months. During July 2019, Clean & Clear Water also provided 80 hours of residential pool services at $30 per hour. These services have not yet been billed to residential customers. The company uses the account, Fees Receivable, to reflect amounts due but not yet billed. a. Prepare the entry on July 1, 2019 to record the receipt of $48,000 cash related to the contract with Travel Holidays. b. Prepare the adjusting entry to be made on July 31, 2019 for the contract work performed for Travel Holidays during the month. c.
Prepare the adjusting entry needed on July 31, 2019 to reflect the residential pool services performed during the month.
Answer: a. July 1
Cash
48,000
Unearned Service Fees To record cash received in advance.
48,000
b. July 31 Unearned Service Fees Service Fees Revenue To reflect July service fees earned on contract ($48,000 / 6 = $8,000).
8,000
c.
2,400
July 31 Fees Receivable Service Fees Revenue To record unbilled service fees earned at July 31, 2016: 80 hours x $30/hr
8,000
2,400
©Cambridge Business Publishers, 2020 3-86
Financial Accounting for Undergraduates, 4th Edition
Topic: Recording Transactions and Adjusting Accounts LO: 3 3. On January 18, 2019, Big City Co, paid $36,000 for a two-year insurance premium that covers February 1, 2019 through January 31, 2021. Urban Pro’s year-end is March 31, 2019. a. What entry is made on January 18, 2019? b. What adjusting entry should be made on March 31, 2019 before the financial statements are prepared for the year ending March 31, 2019? Answer: a. Prepaid Insurance Cash
36,000 36,000
b. Insurance Expense 3,000 Prepaid Insurance $36,000 / 24 months = $1,500 per month $1,500 × 2 months = $3,000 for February and March
3,000
Topic: Recording Transactions and Adjusting Accounts LO: 3 4. The publisher of Entrepreneur Today, a monthly business magazine, received $23,400 for three-year subscriptions on January 1, 2019. a. What entry would be made to record the cash receipt on January 1, 2019? b. What entry should be made before the financial statements are prepared for the month ending January 31, 2019? Answer: a. Jan.1
Cash
23,400 Unearned subscription revenue
b. Jan.31
23,400
Unearned subscription revenue Subscription revenue ($23,400 / 36 months = $650 per month)
650 650
Topic: Recording Transactions and Adjusting Accounts LO: 4, 5 5. Gilgen Brothers earns 6% annual interest on its $150,000 of investments. Interest is paid every six months on June 30 and December 31. a. If monthly financial statements are prepared, what adjusting entry should be made on January 31? b. What effect on the January 31 balance sheet does the adjusting entry have? Answer: a. Interest receivable Interest revenue 150,000 × 6% × 1/12 = $750
750 750
b. Interest receivable, an asset, is increased by $750.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-87
Topic: Adjusting Unearned Revenue LO: 3, 5 6. Big Oil Company received an advance payment of $108,000 for a consulting contract during the year. The balance in the Unearned Consulting Fees account at the beginning of the year was $12,000. At the end of the year, $6,000 was still unearned. Create T-accounts for the accounts involved in the adjusting entry needed at year end, and post all amounts to them, including the adjusting entry necessary, and calculate the account balances. How much will Big Oil report as Consulting Revenue on its income statement for the year? Answer: Adjusting entry required: Unearned Consulting Revenue $114,000 Consulting Revenue (to record consulting revenue earned during the year) Unearned Consulting Revenue 12,000 114,000 108,000 6,000
$114,000
Consulting Revenue 114,000 114,000
Marathon will report $114,000 consulting revenue for the year. Topic: Preparing a Statement of Stockholders’ Equity LO: 5 7. The Spotless Cleaning company provides janitorial services for commercial customers. On December 31, 2019, the credit balance of the Common Stock and Retained Earnings accounts were $24,000 and $11,000, respectively. During 2020, the company issued $8,400 of stock, and paid $4,000 in dividends. The income statement resulted in a profit of $42,400. Prepare a 2020 statement of stockholders’ equity for Spotless Cleaning. Answer: SPOTLESS CLEANING Statement of Stockholders’ Equity For Year Ended December 31, 2020 Common Stock Balance at December 31, 2019 ...........................$24,000 Stock issuance .................................................. 8,400 Dividends .......................................................... Net income ........................................................ _______ Balance at December 31, 2020 ...........................$32,400
Retained Earnings $11,000 (4,000) 42,400 $49,400
Total Stockholders’ Equity $35,000 8,400 (4,000) 42,400 $81,800
©Cambridge Business Publishers, 2020 3-88
Financial Accounting for Undergraduates, 4th Edition
Topic: Preparing an Income Statement LO: 5 8. Use Oma Bean Corporation’s adjusted trial balance to prepare the company’s income statement. OMA BEAN CORPORATION Adjusted Trial Balance For Year Ending December 31, 2019 Debit Cash Accounts receivable Equipment Accumulated depreciation Notes payable Common stock Retained earnings Sales Rent expense Salaries expense Depreciation expense Totals
Credit
$ 66,000 42,000 564,000 $ 108,000 90,000 195,000 93,000 489,000 66,000 174,000 63,000 $975,000
0 $975,000
Answer: OMA BEAN CORPORATION Income Statement For Year Ending December 31, 2019 Sales Rent expense Salaries expense Depreciation expense Net income
$489,000 (66,000) (174,000) (63,000) $ 186,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-89
Topic: Preparing the Statement of Stockholders’ Equity LO: 5 9. Use Oma Bean Corporation’s adjusted trial balance to prepare Oma Bean’s statement of stockholders’ equity for 2019. There were no stock issuances or repurchases during 2019. OMA BEAN CORPORATION Adjusted Trial Balance For Year Ending December 31, 2019 Debit Cash Accounts receivable Equipment Accumulated depreciation Notes payable Common stock Retained earnings Service fees earned Rent expense Salaries expense Depreciation expense Totals
Credit
$ 44,000 28,000 376,000 $ 72,000 60,000 130,000 62,000 326,000 44,000 116,000 42,000 $650,000
0 $650,000
Answer: Net income = Service fees earned – (Rent expense + Salaries expense + Depreciation expense) X = $326,000 – ($44,000 + $116,000 + $42,000) X = $124,000 OMA BEAN CORPORATION Statement of Stockholders’ Equity For Year Ended December 31, 2019
Balance at December 31, 2018 Stock issuance Dividends Net income Balance at December 31, 2019
Common Stock $130,000
Retained Earnings $62,000
Total Stockholders’ Equity $ 192,000
_______
124,000
124,000
$130,000
$186,000
$316,000
©Cambridge Business Publishers, 2020 3-90
Financial Accounting for Undergraduates, 4th Edition
Topic: Preparing a Balance Sheet LO: 5 10. Use Oma Bean Corporation’s adjusted trial balance to prepare Oma Bean’s balance sheet for the current year-end.
OMA BEAN CORPORATION Adjusted Trial Balance For Year Ending December 31, 2019 Debit Cash Accounts receivable Equipment Accumulated depreciation Notes payable Common stock Retained earnings Sales Rent expense Salaries expense Depreciation expense Totals
Credit
$ 66,000 42,000 564,000 $ 108,000 90,000 195,000 93,000 489,000 66,000 174,000 63,000 $975,000
0 $975,000
Answer: Net income = Service fees earned – (Rent expense + Salaries expense + Depreciation expense) X = $489,000 – ($66,000 + $174,000 + $63,000) X = $186,000 Ending retained earnings = Retained earnings, per Adjusted Trial Balance + Net income X = $93,000 + $186,000 X = $279,000 OMA BEAN CORPORATION Balance Sheet December 31, 2019 Cash Accounts receivable Equipment Accumulated depreciation Total assets
$ 66,000 42,000 564,000 (108,000) ________ $564,000
Notes payable Total liabilities
$ 90,000 90,000
Common stock Retained earnings Total liabilities and equity
195,000 279,000 $564,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-91
Topic: Preparing Financial Statements and Closing Procedures Using Retained Earnings LO: 6 11. Use Oma Bean Corporation’s adjusted trial balance to prepare entries to close Oma Bean’s temporary accounts (using Retained Earnings), in journal entry form.
OMA BEAN CORPORATION Adjusted Trial Balance For Year Ending December 31, 2019 Debit Cash Accounts receivable Equipment Accumulated depreciation Notes payable Common stock Retained earnings Sales Rent expense Salaries expense Depreciation expense Totals
Credit
$ 66,000 42,000 564,000 $ 108,000 90,000 195,000 93,000 489,000 66,000 174,000 63,000 $975,000
0 $975,000
Answer: Service Fees Earned Retained Earnings
489,000
Retained Earnings Rent Expense Salaries Expense Depreciation Expense
303,000
489,000
66,000 174,000 63,000
©Cambridge Business Publishers, 2020 3-92
Financial Accounting for Undergraduates, 4th Edition
Topic: Permanent and Temporary Accounts, Debits and Credits, and Normal Balances LO: 6 12. Listed below are several accounts of Laura’s Cookies, Inc. Indicate with an X in the proper column whether (1) the account is permanent or temporary, (2) which side of the account increases are recorded on, and (3) which side of the account represents a normal balance. (1) Permanent
Temporary
(2) Side for Increases
(3) Normal Balances
Debit
Debit
Credit
Credit
Cash Catering Fees Earned Accounts Payable Dividends Wages Expense Equipment Common Stock Advertising Expense Supplies
Answer: (1) Permanent Cash
X
Catering Fees Earned Accounts Payable
Temporary
(2) Side for Increases
(3) Normal Balances
Debit
Debit
Credit
X X
X
X X
X
X
X
Dividends
X
X
X
Wages Expense
X
X
X
X
X
Equipment
X
Common Stock
X
Advertising Expense Supplies
X X
X
Credit
X
X
X
X
X
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-93
Topic: Permanent and Temporary Accounts, Debits and Credits, and Normal Balances LO: 6 13. Listed below are several accounts of Brick Mason, Inc., a corporation. Indicate with an X in the proper column whether (1) the account is permanent or temporary, (2) which side of the account increases are recorded on, and (3) which side of the account represents a normal balance. (1) Permanent
Temporary
(2) Side for Increases
(3) Normal Balances
Debit
Debit
Credit
Credit
Cash Dividends Accounts Payable Supplies Expense Notes Payable Common Stock Service Fees Earned Retained Earnings Rent Expense Accounts Receivable
Answer: (1) Permanent Cash Dividends Accounts Payable
(2) Side for Increases
(3) Normal Balances
Temporary
Debit
Debit
X
X
X
Supplies Expense
Credit
X X
X
Credit
X
X X
Notes Payable
X
X
X
Common Stock
X
X
X
X
X
X
X
Service Fees Earned Retained Earnings
X X
Rent Expense Accounts Receivable
X X
X
X
X
X
©Cambridge Business Publishers, 2020 3-94
Financial Accounting for Undergraduates, 4th Edition
Topic: Closing Entries LO: 7 14. Listed below are selected accounts for Benson Company, Inc. Place an X in the proper column to indicate whether, at the end of the accounting period, the account is (1) closed to the Income Summary account; (2) closed to the Retained Earnings; or (3) not closed. Closed to Income Summary
Closed to Retained Earnings
Not Closed
Closed to Income Summary
Closed to Retained Earnings
Not Closed X
Accounts Receivable Depreciation Expense Unearned Service Fees Dividends Salaries Expense Service Fees Earned Income Summary Prepaid Rent Insurance Expense Cash
Answer:
Accounts Receivable Depreciation Expense Unearned Service Fees Dividends Salaries Expense Service Fees Earned Income Summary Prepaid Rent Insurance Expense Cash
X X X X X X X X
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-95
Topic: Closing Entries LO: 7 15. Listed below are selected accounts for Valley Low Corporation. Place an X in the proper column to indicate whether, at the end of the accounting period, the account is (1) closed to the Income Summary account; (2) closed to the Retained Earnings account; or (3) not closed. Closed to Income Summary
Closed to Retained Earnings
Not Closed
Closed to Income Summary
Closed to Retained Earnings
Not Closed
Accumulated Depreciation Accounts Payable Advertising Expense Professional Fees Earned Common Stock Cash Dividends Income Summary Equipment Income Tax Expense Wages Payable
Answer:
X
Accumulated Depreciation
X
Accounts Payable Advertising Expense
X
Professional Fees Earned
X X
Common Stock Cash Dividends
X
Income Summary
X X
Equipment Income Tax Expense Wages Payable
X X
©Cambridge Business Publishers, 2020 3-96
Financial Accounting for Undergraduates, 4th Edition
Topic: Closing Process Using Retained Earnings LO: 6 16. What are the three major steps in the closing process, when closing to Retained Earnings? Why is the closing process necessary? Answer: The first step is to close revenues to retained earnings. The second step is to close expenses to retained earnings. The third step is to close dividends to retained earnings. The closing process has two purposes: 1) to transfer temporary balances to the permanent accounts and 2) to ready the accounts for the next accounting period. Topic: Worksheet and Closing Entries LO: 7, 8 17. The income statement columns of a December 31 worksheet for Alexander Company contain only the following: Debit Professional fees earned
Credit 211,800
Insurance expense
25,500
Salaries expense
21,600
Advertising expense
66,900
Utilities expense
15,000
Depreciation expense
19,200
The balance sheet columns of the worksheet contain Cash Dividends, $61,200 (debit). Prepare journal entries to close the accounts, using the Income Summary account. Answer: Dec.
31
31
31
31
Professional Fees Earned Income Summary To close the revenue account.
211,800
Income Summary Insurance Expense Salaries Expense Advertising Expense Utilities Expense Depreciation Expense To close the expense accounts.
148,200
Income Summary Retained Earnings To close the Income Summary account.
63,600
Retained Earnings Cash Dividends To close the Dividends account.
61,200
211,800
25,500 21,600 66,900 15,000 19,200
63,600
61,200
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-97
Topic: Worksheet and Closing Entries LO: 7, 8 18. The income statement columns of a December 31 worksheet for Creative Crafts Corporation contain only the following: Debit Service revenue
Credit 181,400
Wages expense
72,000
Rent expense
34,000
Supplies expense
13,600
Depreciation expense
5,600
Income tax expense
11,800
The balance sheet columns of the worksheet show Cash Dividends with a debit balance of $24,000. Prepare journal entries to close the accounts, using the Income Summary account. Answer: Dec.
31
31
31
31
Service Revenue Income Summary To close the revenue account.
181,400
Income Summary Wages Expense Rent Expense Supplies Expense Depreciation Expense Income Tax Expense To close the expense accounts.
137,000
Income Summary Retained Earnings To close the Income Summary account.
44,400
Retained Earnings Cash Dividends To close the cash dividends account.
24,000
181,400
72,000 34,000 13,600 5,600 11,800
44,400
24,000
©Cambridge Business Publishers, 2020 3-98
Financial Accounting for Undergraduates, 4th Edition
Topic: Adjusting and Closing Entries Using Retained Earnings LO: 4, 6 19. Navarro’s Kitchen’s restaurant closes its accounts on December 31 each year, using the Retained Earnings account. On December 31, 2019, Navarro’s Kitchen’s accrued interest income total $1,880 that was earned on a $80,000 investment but not yet received or recorded. Prepare journal entries to: a. Accrue the interest earned on December 31, 2019. b. Close the Interest Income account on December 31, 2019. (The Interest Income account has a year-end balance of $5,800 after adjustments). Answer: a. Dec. 31
b. Dec. 31
Interest Receivable Interest Income To record accrued interest income.
1,880
Interest Income Retained Earnings To close the Interest Income account.
5,800
1,880
5,800
Topic: Worksheets LO: 8 20. Assume that the last four columns of a worksheet for a corporation are identified by the numbers 1─4, as follows: 1. 2. 3. 4.
Income Statement Debit Income Statement Credit Balance Sheet Debit Balance Sheet Credit
Indicate the number of the worksheet column in which the adjusted balances of the following accounts should appear (assume all balances are normal). Accounts Payable Equipment Wages Expense Common Stock Advertising Expense
Answer: Accounts Payable Equipment Wages Expense Common Stock Advertising Expense
Accumulated Depreciation Unearned Service Fees Dividends Prepaid Advertising Service Fees Earned
4 3 1 4 1
Accumulated Depreciation Unearned Service Fees Dividends Prepaid Advertising Service Fees Earned
4 4 3 3 2
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-99
Topic: Worksheets LO: 8 21. Assume that the last four columns of a worksheet for a corporation are identified by the numbers 1─4, as follows: 1. 2. 3. 4.
Income Statement Debit Income Statement Credit Balance Sheet Debit Balance Sheet Credit
Indicate the number of the worksheet column in which the adjusted balance of the following accounts should appear (assume all balances are normal). Accounts Receivable Building Retained Earnings Prepaid Insurance Utilities Payable Answer: Accounts Receivable Building Retained Earnings Prepaid Insurance Utilities Payable
Income Tax Expense Common Stock Cash Dividends Legal Fees Earned Depreciation Expense
3 3 4 3 4
Income Tax Expense Common Stock Cash Dividends Legal Fees Earned Depreciation Expense
1 4 3 2 1
Topic: Worksheets LO: 8 22. Listed below are six steps followed in preparing a worksheet. They are not in proper order. Identify the correct sequence of worksheet preparation by placing the appropriate letters in the blanks numbered 1 through 6 (letter of the first step goes in blank 1, etc.). a. b. c. d. e. f.
Enter the adjustments on the worksheet and total the adjustments columns. Extend amounts from the adjusted trial balance to the financial statement columns. Prepare an adjusted trial balance by combining information from the first four money columns. Place a heading on the worksheet. Balance the financial statement columns. Enter the unadjusted trial balance on the worksheet.
Correct sequence:
Answer: Correct sequence:
1. 2. 3. 4. 5. 6. 1. 2. 3. 4. 5. 6.
d f a c b e
©Cambridge Business Publishers, 2020 3-100
Financial Accounting for Undergraduates, 4th Edition
Problems Topic: Journal and Adjusting Entries LO: 2, 3, 4 1. Below are several accounts from Fulbright Company’s accounting records. Columns representing the accounting equation appear to the right of each transaction listed below. Next to each transaction in the column of the respective account classification, write the 1) name of each account, 2) the dollar amount by which each account increases or decreases, and 3) either debit or credit to indicate the effect on the account, for each of the adjustments necessary at the end of May, 2016. Bethany Company records adjustments monthly. Assets
Liabilities
Equity
Revenues
Expenses
a. Provided lawn services to customers in the amount of $15,000. Customers will pay next month. b. Recognized truck depreciation of $1,500 for the current month. c. Delivered magazines totaling $9,000 to customers that had paid for subscriptions in advance. d. Recognized May’s insurance cost. On April 1, the company had paid $14.400 for 4 months coverage from April 1 to July 31. e. Recognized interest owed on a note payable for $270. f. Recognized supplies used during the month. At the beginning of the month, the total of supplies on hand was $2,700, while only $1,950 of supplies were left at the end of the month. During the month, $12,000 of additional supplies were purchased. g. Accrued wages earned by employees for the last 3 days of the month. Employees work 5 days per week and the weekly wages total $22,500. h. Provided lawn services totaling $18,600 for customers that had paid in advance
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-101
Answer: Assets a. Provided lawn services to customers in the amount of $15,000. Customers will pay next month
Accounts Receivable Debit $15,000
b. Recognized truck depreciation of $1,500 for the current month
Accumulated Depreciation Credit $1,500
c. Delivered magazines totaling $9,000 to customers that had paid for subscriptions in advance. d. Recognized May’s insurance cost. On April 1, the company had paid $14,400 for 4 months coverage from April 1 to July 31.
g. Accrued wages earned by employees for the last 3 days of the month. Employees work 5 days per week and the weekly wages total $22,500. h. Provided lawn services totaling $18,600 for customers that had paid in advance
Equity
Revenues
Expenses
Service Revenue Credit $15,000 Depreciation Expense Debit $1,500 Unearned Subscription Revenue Debit $9,000
Subscription Revenue Credit $9,000
Insurance Expense Debit $3,600
Prepaid Insurance Credit $3,600
Interest Payable Credit $270
e. Recognized interest owed on a note payable for $270.
f. Recognized supplies used during the month. At the beginning of the month, the total of supplies on hand was $2,700, while only $1,950 of supplies were left at the end of the month. During the month, $12,000 of additional supplies were purchased.
Liabilities
Interest Expense Debit $270
Supplies Credit $12,750
Supplies Expense Debit $12,750
($2,700 + $12,000 - $1,950 = $12,750)
Wages Payable Credit $13,500
Wages Expense Debit $13,500
($22,500 × 3/5 = $13,500)
Unearned Revenue Debit $18,600
Lawn Service Revenue Credit $18,600
©Cambridge Business Publishers, 2020 3-102
Financial Accounting for Undergraduates, 4th Edition
Topic: Adjusting Entries LO: 2, 3, 4 2. Communications, Inc. had the following separate situations occur during 2019. The company’s accountant is preparing the annual financial statements at December 31, 2019 and has asked you to prepare the adjusting entries for each situation using the journal entry form. a. On June 1, 2019, Communications, Inc. paid the annual lease amount on its warehouse space. The annual lease is $19,800 and was recorded by debiting Prepaid Rent and crediting Cash. No adjusting entries have been prepared since June 1, 2019. b. The Unearned Revenue account has an unadjusted balance of $12,000 consisting of gift cards sold to customers. Redeemed gift cards that have not yet been recorded total $3,600. c. The company has not yet received a bill for utilities nor paid for the month of December. The expense is estimated to be $2,520. d. On December 1, 2019, Communications, Inc., received $4,500 cash from a customer related to a special order. The special order was delivered to the customer on December 29 but no entry has been made to record the delivery. e. At December 31, 2019, employee wages of $6,900 have been incurred but not paid or recorded. f.
At December 31, 2019, $1,320 of interest has been incurred, but not yet paid or recorded.
g. Unrecorded depreciation on equipment is $8,400. Answer: a. Rent Expense Prepaid Rent To record rent expense for the period ($19,800 × 7/12 = $11,550). b.
c.
d.
e.
f.
g.
11,550 11,550
Unearned Revenue Sales Revenue To record redeemed gift cards.
3,600
Utilities Expense Utilities Payable To record accrued utilities expense.
2,520
Unearned Revenue Sales Revenue To record revenue earned.
4,500
Wages Expense Wages Payable To record accrued wages at the end of the year.
6,900
Interest Expense Interest Payable To record accrued interest at the end of the period.
1,320
Depreciation Expense-Equipment Accumulated Depreciation-Equipment To record depreciation for the period.
8,400
3,600
2,520
4,500
6,900
1,320
8,400
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-103
Topic: Financial Analysis Using Adjusted Data LO: 2, 3, 4 3. Auto Supply Co. has been in operation since January, 2008. Selected T-account balances for Auto Supply Co. are shown below as of January 31, 2019. Adjusting entries have already been posted. The firm uses a calendar-year accounting period but prepares monthly adjustments. Supplies Jan 31 Bal.
Jan 31 Bal.
2,200
Jan 31 Bal.
Prepaid Insurance 2,520 Wages Payable 3,200
Jan 31 Bal.
Supplies Expense
Jan 31 Bal.
5,200
Jan 31 Bal.
Insurance Expense 360
Jan 31 Bal.
Wages Expense 52,800
Truck 44,400
Accumulated Depreciation - Truck 9,620 Jan 31 Bal.
a. During January, $4,000 worth of supplies were purchased. If the amount in Supplies Expense represents the January 31 adjustment for the supplies used in January, what was the January 1 beginning balance of Supplies? b. The insurance premium purchased was valid for one year. The amount in the Insurance Expense account represents the adjustment made at January 31 for January insurance expense. What was the amount of the premium and on what date did the insurance policy start? c.
No beginning balance existed in Wages Payable or Wages Expense on January 1. How much cash was paid as wages during January?
d. The truck has a useful life of five years, what is the monthly amount of depreciation expense and how many months has Auto Supply Co. owned the truck? Answer: a. Balance, January 1 = $2,200 - $4,000 + $5,200 = $3,400 b. Amount of premium = $360 ´ 12 = $4,320. Therefore, five months' premium ($4,320 - $2,520 = $1,800) has expired by January 31. The policy term began on September 1 of the previous year. c.
Wages paid in January = $52,800 - $3,200 = $49,600
d. Monthly depreciation expense = $44,400/60 months = $740 per month Auto Supply Co. has owned the truck for 13 months ($9,620 / $740 = 13 months).
©Cambridge Business Publishers, 2020 3-104
Financial Accounting for Undergraduates, 4th Edition
Topic: Preparing an Unadjusted Trial Balance and Adjustments LO: 2, 3, 4 4. Golden Grill, an upscale restaurant on the beach, has just completed its first full year of operations on December 31, 2019. It provides meals both in its restaurant and catering. Selected balances from its general ledger before year-end adjustments follow. (All balances are normal.) Cash Accounts receivable Prepaid advertising Supplies Equipment Notes payable
$64,000 36,000 4,800 3,600 91,200 34,000
Accounts payable Common stock Sales revenue Wages expense Rent expense Utilities expense
$42,400 24,000 196,000 108,000 12,000 5,500
An analysis of the firm’s records reveals the following: a. The balance in Prepaid Advertising represents the amount paid for newspaper advertising for 1 year. The agreement, which calls for the same amount of space each month, covers the period from February 1, 2019, to January 31, 2020. Golden Grill did not advertise during its first month of operations. b. Equipment purchased January 1, 2019, has an estimated life of eight years. c.
Utilities expense does not include the expense for December, estimated at $1,200. The bill will not arrive until January, 2020.
d. At year-end, employees have earned $12,400 in wages that will not be paid until January. e. Supplies available at year-end amounted to $1,300. f.
At year-end, unpaid interest of $400 has accrued on the notes payable.
g. The firm’s lease calls for rent of $1,000 per month payable on the first of each month, plus an amount equal to 1% of annual sales. The rental percentage is payable within 15 days after the end of the year. Prepare adjusting entries in journal entry form.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-105
Answer:
Dec. 31
31
31
31
Dec. 31
31
31
Debit 4,400
Advertising Expense Prepaid Advertising To record 11 months' advertising expense ($4,800 x 11/12 = $4,400).
4,400
Depreciation Expense Accumulated Depreciation To record depreciation for the year ($91,200/8 years = $11,400).
11,400
Utilities Expense Utilities Payable To record estimated December utilities expense.
1,200
Wages Expense Wages Payable To record unpaid wages at December 31.
12,400
Supplies Expense Supplies To record supplies expense for the year ($3,600 - $1,300 = $2,300).
2,300
11,400
1,200
12,400
2,300
Interest Expense Interest Payable To record accrual of interest expense at December 31. Rent Expense Rent Payable To record additional rent owed under lease (1% ´ $196,000 = $1,960).
Credit
400 400
1,960 1,960
©Cambridge Business Publishers, 2020 3-106
Financial Accounting for Undergraduates, 4th Edition
Topic: Journal Entries LO: 2, 3, 4 5. Selected general ledger accounts of Lakeside Company, Inc., are listed below with the identifying account numbers: 11 12 14 15 16 21
Cash Accounts Receivable Prepaid Insurance Equipment Accumulated Depreciation -- Equipment Accounts Payable
22 31 41 51 52 53
Wages Payable Common Stock Service Fees Earned Wages Expense Insurance Expense Depreciation Expense—Equipment
For each of the following transactions or adjustments, indicate the proper accounts to be debited and credited by placing the appropriate account number in the space provided.
a. b. c. d. e. f. g. h.
Transaction or Adjustment Shareholders invested cash in exchange for stock. Purchased equipment on account. Billed customers for services rendered. Paid balance due on account for equipment purchased. Collected payments on account from customers. Made adjustment to record depreciation on equipment. Made adjustment to accrue wages earned but not paid or recorded. Made adjustment to record portion of prepaid insurance that had expired.
Debit
Credit
Debit 11 15 12 21 11 53 51 52
Credit 31 21 41 11 12 16 22 14
Answer:
a. b. c. d. e. f. g. h.
Transaction or Adjustment Shareholders invested cash in exchange for stock. Purchased equipment on account. Billed customers for services rendered. Paid balance due on account for equipment purchased. Collected payments on account from customers. Made adjustment to record depreciation on equipment. Made adjustment to accrue wages earned but not paid or recorded. Made adjustment to record portion of prepaid insurance that had expired.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-107
Topic: Journal Entries LO: 2, 3 ,4 6. Selected general ledger accounts of Nova Company, Inc. are listed below with the identifying account numbers: 11 12 14 15 16 21
Cash Accounts Receivable Prepaid Advertising Equipment Accumulated Depreciation -- Equipment Accounts Payable
22 31 41 51 52 53
Unearned Service Fees Common Stock Service Fees Earned Wages Expense Advertising Expense Depreciation Expense—Equipment
For each of the following transactions or adjustments, indicate the proper accounts to be debited and credited by placing the appropriate account number in the space provided.
a. b. c. d. e. f. g. h.
Transaction or Adjustment Shareholders invested equipment in the business in exchange for stock Paid two months’ advertising in advance. Billed customers for services rendered. Received payment in advance (for future services) from customers. Collected payments on account from customers. Made adjustment to record depreciation on equipment. Made adjustment to record portion of prepaid advertising that had expired. Made adjustment to record portion of service fees received in advance that had been earned.
Debit
Credit
Debit
Credit
15 14 12 11 11 53
31 11 41 22 12 16
52
14
22
41
Answer:
a. b. c. d. e. f. g. h.
Transaction or Adjustment Shareholders invested equipment in the business in exchange for stock Paid two months’ advertising in advance. Billed customers for services rendered. Received payment in advance (for future services) from customers. Collected payments on account from customers. Made adjustment to record depreciation on equipment. Made adjustment to record portion of prepaid advertising that had expired. Made adjustment to record portion of service fees received in advance that had been earned.
©Cambridge Business Publishers, 2020 3-108
Financial Accounting for Undergraduates, 4th Edition
Topic: Adjusting Journal Entries LO: 2, 3, 4 7. Selected accounts of Farm Company are shown below as of January 31 of the current year, before any adjusting entries have been made. Farm Company’s accounting year begins on January 1.
Prepaid rent Supplies Office equipment Unearned service fees Wages expense
Debit $12,600 9,900 25,200
Credit
$18,000 24,000
Use the following information to prepare the necessary January 31 adjusting entries: (1) Prepaid rent represents rent for January, February, March, and April. (2) January 31 supplies on hand total $3,900. (3) Office equipment is expected to last 12 years. (4) Last month the firm received $18,000 of service fees in advance. One-half of these fees were earned during January. (5) Accrued wages not recorded at January 31 are $2,850. Answer: Jan.
31
31
31
31
31
Rent Expense Prepaid Rent To record January rent expense ($12,600/4 = $3,150).
3,150
Supplies Expense Supplies To record supplies used in January ($9,900 - $3,900).
6,000
Depreciation Expense-- Office Equipment Accumulated Depreciation-- Office Equipment To record January depreciation expense ($25,200 / 144 months = $175).
175
Unearned Service Fees Service Fees Earned To record service fees earned ($18,000 / 2 = $9,000).
9,000
Wages Expense Wages Payable To record accrued wages at January 31.
2,850
3,150
6,000
175
9,000
2,850
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-109
Topic: Adjusting Journal Entries LO: 2, 3, 4 8. Selected accounts of The Hogwarts Company are shown below as of January 31 of the current year, before any adjusting entries have been made. Hogwarts’ accounting year begins on January 1.
Prepaid advertising Supplies Test equipment Unearned service fees Salaries expense
Debit $4,200 11,200 18,000
Credit
$10,200 5,800
Use the following information to prepare the necessary January 31 adjusting entries: (1) Prepaid advertising represents advertising for January, February, and March. (2) January 31 supplies on hand total $2,200. (3) Test equipment is expected to last 10 years. (4) Last month the firm received $10,200 of service fees in advance. The firm performed the necessary work during January. (5) Accrued salaries not recorded at January 31 are $2,000. Answer: Jan.
31
31
31
31
31
Advertising Expense Prepaid Advertising To record January advertising expense ($4,200 / 3 months = $1,400).
1,400
Supplies Expense Supplies To record supplies used in January ($11,200 - $2,200 = $9,000).
9,000
1,400
9,000
Depreciation Expense-- Test Equipment Accumulated Depreciation-- Test Equipment To record January depreciation expense ($18,000 / 120 months = $150).
150 150
Unearned Service Fees Service Fees Earned To record service fees earned.
10,200
Salaries Expense Salaries Payable To record accrued salaries at January 31.
2,000
10,200
2,000
©Cambridge Business Publishers, 2020 3-110
Financial Accounting for Undergraduates, 4th Edition
Topic: Adjusting Journal Entries LO: 2, 3, 4 9. Selected accounts of Moonbeam Company are shown below as of October 31 of the current year, before any adjusting entries have been made. Moonbeam’s accounting year begins October 1.
Supplies Prepaid insurance Office furniture Unearned service fees Interest income
Debit $18,000 6,000 15,360
Credit
$6,000 2,600
Use the following information to prepare the necessary October 31 adjusting entries: (1) October 31 supplies on hand total $6,000. (2) Prepaid insurance represents insurance coverage purchased for a two-year period starting October 1 of the current year. (3) The office furniture is expected to last 8 years. (4) Last month the firm received $6,000 of service fees in advance. One-third of these fees were earned in October. (5) Interest earned on investments at October 31 but not yet received is $1,000. Answer: Oct.
31
31
31
31
31
Supplies Expense Supplies To record supplies used in October ($18,000 - $6,000 = $12,000).
12,000
Insurance Expense Prepaid Insurance To record October insurance expense ($6,000 / 24 months = $250).
250
Depreciation Expense-- Office Furniture Accumulated Depreciation-- Office Furniture To record October depreciation expense ($15,360 / 96 months = $160).
160
Unearned Service Fees Service Fees Earned To record service fees earned ($6,000 / 3 = 2,000).
2,000
Interest Receivable Interest Income To record accrued interest income.
1,000
12,000
250
160
2,000
1,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-111
Topic: Adjusting Journal Entries LO: 2, 3, 4 10. The list below shows the current account balances and balances that the accounts should have after adjusting entries have been made and posted for Forward Ho, LLC. For each account, prepare a general journal entry that would most likely be appropriate for each adjustment.
a. b. c. d. e. f. g.
Account Accumulated Depreciation—Truck Supplies Wages Payable Prepaid Rent Unearned Service Fees Interest Payable Insurance Expense
Current Balance $1,800 2,820 -2,880 2,400 ---
Adjusted Balance $3,600 930 2,400 1,440 1,950 750 990
Answer: a. Depreciation Expense --Truck Accumulated Depreciation --Truck
1,800
b. Supplies Expense Supplies
1,890
c. Wages Expenses Wages Payable
2,400
d. Rent Expense Prepaid Rent
1,440
1,800
1,890
2,400
1,440
e. Unearned Service Fees Service Fees Earned
450
f. Interest Expense Interest Payable
750
g. Insurance Expense Prepaid Insurance
990
450
750
990
©Cambridge Business Publishers, 2020 3-112
Financial Accounting for Undergraduates, 4th Edition
Topic: Adjusting Journal Entries LO: 2, 3, 4 11. The list below shows the current account balances and balances that the accounts should have after adjusting entries have been made and posted for Forward Ho, LLC. For each account, prepare a general journal entry that would most likely be appropriate for each adjustment.
a. b. c. d. e. f. g.
Account Accumulated Depreciation -- Equipment Supplies Salaries Payable Prepaid Advertising Unearned Service Fees Interest Receivable Insurance Expense
Current Balance -$1,760 --
Adjusted Balance $1,600 740 600
1,200 1,940 ---
700 940 1,000 1,800
Answer: a. Depreciation Expense -- Equipment Accumulated Depreciation --Equipment
1,600
b. Supplies Expense Supplies
1,020
1,600
1,020
c. Salaries Expense Salaries Payable
600
d. Advertising Expense Prepaid Advertising
500
e. Unearned Service Fees Service Fees Earned
1,000
f.
Interest Receivable Interest Income
1,000
g. Insurance Expense Prepaid Insurance
1,800
600
500
1,000
1,000
1,800
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-113
Topic: Adjusting Journal Entries LO: 2, 3, 4 12. Listed below are four categories of adjusting entries. Insert the words “increase,” “decrease,” or “no effect” in the space under the appropriate column heading to indicate how an adjusting entry in that category affects assets, liabilities, revenues and expenses.
(1)
Category Allocating assets to expense. (example: adjusting insurance payment initially debited to Prepaid Insurance)
(2)
Allocating revenues received in advance to revenue. (example: adjusting fees received in advance initially credited to Unearned Fees)
(3)
Accruing expenses (example: accruing wages earned but not paid)
(4)
Accruing revenues (example: accruing interest earned but not received)
Assets
Liabilities
Revenues
Expenses
Assets
Liabilities
Revenues
Expenses
Decrease
No Effect
No Effect
Increase
No Effect
Decrease
Increase
No Effect
No Effect
Increase
No Effect
Increase
Increase
No Effect
Increase
No Effect
Answer:
(1)
(2)
(3)
(4)
Category Allocating assets to expense. (example: adjusting insurance payment initially debited to Prepaid Insurance) Allocating revenues received in advance to revenue. (example: adjusting fees received in advance initially credited to Unearned Fees) Accruing expenses (example: accruing wages earned but not paid) Accruing revenues (example: accruing interest earned but not received)
©Cambridge Business Publishers, 2020 3-114
Financial Accounting for Undergraduates, 4th Edition
Topic: Preparing Closing Entries and Post-Closing Trial Balance LO: 7 13. Purrfect Cat Condos provides pet grooming and boarding services for domestic cats. The company has been in existence for 12 years. At December 31, 2019, Purrfect Cat Condos’ adjusted trial balance is as follows: PURRECT CAT CONDOS Adjusted Trial Balance December 31, 2019 Cash Accounts receivable Prepaid insurance Equipment Accumulation depreciation Accounts payable Income tax payable Common stock Retained earnings Service fees earned Miscellaneous income Salaries expense Rent expense Insurance expense Depreciation expense Income tax expense
Debit $97,200 48,000 7,800 540,000
Credit
$126,000 43,800 37,200 244,200 103,500 630,000 12,300 342,000 49,200 10,800 25,200 76,800 $1,197,000
$1,197,000
a. Prepare closing entries in journal entry form, using the Income Summary account. b. After Purrfect Cat Condos’ closing entries are posted, what is the balance in the Retained Earnings account? c.
Prepare Purrfect Cat Condos’ post-closing trial balance.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-115
Answer: Debit a.
Dec. 31
31
31
Service Fees Earned Miscellaneous Income Income Summary To close the revenue accounts.
630,000 12,300
Income Summary Salaries Expense Rent Expense Insurance Expense Depreciation Expense Income Tax Expense To close the expense accounts.
504,000
Income Summary Retained Earnings To close the income summary account.
138,300
Credit
642,300
342,000 49,200 10,800 25,200 76,800
138,300
b. Retained Earnings = $103,500 + $138,300 = $241,800 c. PURRFECT CAT CONDOS Post-Closing Trial Balance December 31, 2019 Cash Accounts receivable Prepaid insurance Equipment Accumulation depreciation Accounts payable Income tax payable Common stock Retained earnings
Debit $ 97,200 48,000 7,800 540,000
Credit
_______
$ 126,000 43,800 37,200 244,200 241,800
$693,000
$693,000
©Cambridge Business Publishers, 2020 3-116
Financial Accounting for Undergraduates, 4th Edition
Topic: Preparing Closing Entries and Post-Closing Trial Balance Closing to Retained Earnings LO: 6 14. Purrfect Cat Condos provides pet grooming and boarding services for domestic cats. The company has been in existence for 12 years. At December 31, 2019, Purrfect Cat Condos’ adjusted trial balance is as follows: PURRFECT CAT CONDOS Adjusted Trial Balance December 31, 2019 Cash Accounts receivable Prepaid insurance Equipment Accumulation depreciation Accounts payable Common stock Retained earnings Service fees earned Miscellaneous income Salaries expense Rent expense Insurance expense Depreciation expense Income tax expense Income tax payable
Debit $ 84,800 32,000 5,200 360,000
Credit
$ 84,000 9,200 202,800 69,000 420,000 8,200 228,000 32,800 7,200 16,800 51,200 ________
24,800
$818,000
$818,000
a. Prepare closing entries in journal entry form. Close to Retained Earnings. b. After Purrfect Cat Condos’ closing entries are posted, what is the balance in the Retained Earnings account? c.
Prepare Purrfect Cat Condos’ post-closing trial balance.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-117
Answer: Debit a.
Dec. 31
31
Service Fees Earned Miscellaneous Income Retained Earnings To close the revenue accounts.
420,000 8,200
Retained Earnings Salaries Expense Rent Expense Insurance Expense Depreciation Expense Income Tax Expense To close the expense accounts.
336,000
Credit
428,200
228,000 32,800 7,200 16,800 51,200
b. Retained Earnings = $69,000 + $428,200 - $336,000 = $161,200 c. PURRFECT CAT CONDO Post-Closing Trial Balance December 31, 2019 Debit Cash $ 84,800 Accounts receivable 32,000 Prepaid insurance 5,200 Equipment 360,000 Accumulation depreciation Accounts payable Income tax payable Common stock Retained earnings _______ $482,000
Credit
$ 84,000 9,200 24,800 202,800 161,200 $482,000
©Cambridge Business Publishers, 2020 3-118
Financial Accounting for Undergraduates, 4th Edition
Chapter 3 Accrual Basis of Accounting Learning Objectives – Coverage by question True / False LO1 – Explain the accrual basis of accounting and contrast it with the cash basis with reference to revenue and expense recognition. LO2 – Describe the adjusting process.
Multiple Choice
Exercises
Problems
116-118
3, 4, 6-10
1, 7-10, 119-128, 159, 160, 162-166, 169-175
2, 5, 6
2, 4, 5, 9, 11-16, 21-36, 45-51, 56, 57, 60, 63-72, 119-144, 167, 168, 173, 174
2-4, 6
1-12
1
3, 6, 10, 17-20, 37-44, 52-55, 58, 59, 61, 62, 73-78, 145-166, 169-171, 175
1, 2, 5, 19
1-12
LO5 – Explain the adjusted trial balance and use it to prepare financial statements.
11, 12
63-78
5-10
LO6 – Describe the closing process and summarize the accounting cycle.
13-17, 20-23
79-91,97, 98, 102-107, 176, 177
11-13,16, 19
14
LO7 – Appendix3A: Describe the process of closing to the Income Summary account and summarize the accounting cycle.
15-23
89-107, 176, 177
14, 15, 17, 18
13
LO8 – Appendix3B: Explain how to use a worksheet in the adjusting and closing process.
24-29
108-115
17, 18, 20-22
LO3 – Illustrate deferral adjustments.
LO4 – Illustrate accrual adjustments.
1-12
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-1
Chapter 3: Accrual Basis of Accounting
True / False Topic: Accrued Expense LO: 4 1. An accrued expense is one that has been incurred but not yet paid. Answer: True Rationale: An expense is accrued when it becomes owed if it has not yet been paid.
Topic: Prepaid Asset and Contra Account LO: 3 2. Prepaid rent is an example of a contra account, and is used to record a reduction to its related account, rent expense. Answer: False Rationale: Prepaid rent is an asset account reflecting the benefit owed the company from paying cash in advance for rent. Rent expense is used to accumulate costs associated with using property rented from others.
Topic: Unadjusted Trial Balance LO: 2 3. The purpose of an unadjusted trial balance is to be sure the general ledger is in balance. Answer: True Rationale: The primary purpose of the unadjusted trial balance is to ensure the general ledger is in balance before management posts adjusting entries.
Topic: Adjusting Entries LO: 2 4. Adjusting entries always impact the income statement and the cash account. Answer: False Rationale: Adjusting entries affect a balance sheet account and an income statement account, but never the cash account.
Topic: Asset Book Value LO: 3 5. The book value of a building is equivalent to its historical cost. Answer: False Rationale: A building’s book value is its historical cost minus the accumulated depreciation associated with the building.
©Cambridge Business Publishers, 2020 3-2
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Adjusting Unearned Revenues LO: 2, 3 6. Adjusting unearned revenues causes a liability to decline. Answer: True Rationale: The adjustment of unearned revenues reduces Unearned Revenue, a liability, and increases Service Revenue or Sales.
Topic: Unadjusted Trial Balance LO: 2 7. The trial balance prepared before the general ledger accounts are adjusted is called an adjusted trial balance. Answer: False Rationale: The trial balance prepared before the general ledger accounts are adjusted is called an unadjusted trial balance.
Topic: Unadjusted Trial Balance LO: 2 8. An unadjusted trial balance shows the general ledger account balances before any adjustments have been made. Answer: True Rationale: The end of period adjustment process begins with the preparation of a trial balance of all general ledger accounts. The unadjusted trial balance shows the general ledger account balances before any adjustments have been made. The unadjusted trail balance is prepared to ensure that the general ledger is in balance before the end-of-period process begins.
Topic: Adjusting Entries LO: 2 9. Each adjusting entry affects a balance sheet account and an income statement account. Answer: True Rationale: Each adjusting entry affects one or more balance sheet accounts (an asset or a liability account) and one or more income statement accounts (an expense or revenue account).
Topic: Adjusting Entries LO: 2 10. An adjusting entry to record depreciation expense is an example of an adjustment that accrues an expense to reflect its incurrence during the accounting period even though it is not yet paid or recorded. Answer: False Rationale: An adjusting entry to record depreciation expense is an example of an adjustment that allocates previously recorded assets to expenses.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-3
Topic: Adjusted Trial Balance LO: 5 11. An adjusted trial balance is a listing of all the year-end balance sheet accounts, since all the income statement accounts have been closed to zero. Answer: False Rationale: The adjusted trial balance lists all general ledger accounts after adjustments have been posted. It contains much of the data needed to construct the financial statements, including the income statement.
Topic: Adjusted Trial Balance LO: 5 12. The adjusted trial balance includes only accounts whose balances are changed by adjustments. Answer: False Rationale: The adjusted trial balance includes all general ledger account balances, even those that were not affected by an adjustment.
Topic: Permanent Accounts LO: 6 13. Permanent accounts are the accounts presented in the balance sheet. Answer: True Rationale: Permanent accounts are accounts presented on the balance sheet. They consist of the asset, liability, and stockholders’ equity accounts. Any balance in a permanent account at the end of the accounting period is carried forward to the following accounting period.
Topic: Temporary Accounts LO: 6 14. Temporary accounts for a corporation consist of the revenue, expense, and retained earnings accounts. Answer: False Rationale: Retained earnings is a permanent account. Revenue, expense, and dividend accounts are temporary accounts.
Topic: Closing Entries LO: 6, 7 15. Adjusting entries must be journalized and posted before closing entries may be prepared. Answer: True Rationale: The adjusted trial balance lists all general ledger accounts after adjustments have been posted. It contains much of the data needed to construct the financial statements. After this the financial statements are prepared. Then, closing entries are posted.
©Cambridge Business Publishers, 2020 3-4
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Closing Entries LO: 6, 7 16. An account is closed at year-end when an entry changes its balance to zero. Answer: True Rationale: An account that is closed is said to be closed to the account that receives the offsetting debit or credit. Thus, a closing entry simply transfers the balance of one account to another account. Because closing journal entries bring temporary account balances to zero, the temporary accounts are ready to start accumulating data for the next accounting period.
Topic: Closing Entries LO: 6, 7 17. In accounting for a corporation, the Retained Earnings account is closed at the end of each accounting period. Answer: False Rationale: The Income Summary account, not Retained Earnings, is closed at the end of each accounting period
Topic: Closing Entries LO: 7 18. At the end of the accounting period, the dividends account is closed to the Income Summary account. Answer: False Rationale: The dividends account is closed to Retained Earnings at the end of the accounting period.
Topic: Closing Entries LO: 7 19. A debit balance in the Income Summary account just prior to closing it indicates there is a net loss for the period. Answer: True Rationale: The Income Summary account is closed with a debit to Retained Earnings and a credit to Income Summary in the case of a net loss and with a debit to Income summary and a credit to the Retained Earnings account in the case of net income, as shown below: Retained Earnings Income Summary (to close Income Summary (reflecting a net loss) account)
$XXX
Income Summary Retained Earnings (to close Income Summary (reflecting net income) account)
$XXX
$XXX
$XXX
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-5
Topic: Post-Closing Trial Balance LO: 6, 7 20. The post-closing trial balance includes only balance sheet accounts. Answer: True Rationale: After closing entries are recorded in the general journal and posted to the general ledger, all of the temporary accounts have zero balances. Then, the post-closing trail balance is prepared. Because the temporary accounts have been closed, only the balance sheet (or permanent) accounts appear in the post-closing trial balance.
Topic: Accounting Cycle LO: 6, 7 21. The complete accounting cycle begins with the analysis of transactions and ends with the preparation of financial statements. Answer: False Rationale: The complete accounting cycle begins with the analysis of transactions and ends with the preparation of the post-closing trial balance.
Topic: Temporary Accounts LO: 6, 7 22. All accounts in the general ledger are closed at a company’s fiscal year end in order to facilitate preparation of the financial statements and to ready the accounts for the activities of the next year. Answer: False Rationale: Only temporary accounts (revenue, expense and dividends) are closed at the end of the period. Balance sheet accounts, also known as permanent accounts, are not closed as the balances are carried over to the next accounting period.
Topic: Temporary Accounts LO: 6, 7 23. Corporation revenue and expense accounts are considered temporary subdivisions of the corporation’s common stock. Answer: False Rationale: Revenue and expense accounts are temporary subdivisions of retained earnings.
Topic: Worksheets LO: 8 24. When a worksheet is used, all adjustments are first entered on the worksheet. Answer: True Rationale: When a worksheet is used, all adjustments are first entered on the worksheet. This process permits the adjustments to be reviewed for completeness and accuracy.
©Cambridge Business Publishers, 2020 3-6
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Worksheets LO: 8 25. On a worksheet, net income appears in the income statement columns as a credit and in the balance sheet columns as a debit. Answer: False Rationale: On a worksheet, net income appears in the income statement columns as a debit and in the balance sheet columns as a credit.
Topic: Worksheets LO: 8 26. On a worksheet, a net loss appears in the income statement as a credit and in the balance sheet columns as a debit. Answer: True Rationale: The worksheet must be balanced by adding each of the income statement and balance sheet debit and credit columns. The difference between the total debit and credit columns in the income statement is the difference between total revenue and total expense, i.e., the net income or loss for the period. To balance the worksheet, when expenses exceed revenue, the net loss is added to the credit column of the income statement and to the debit column of the balance sheet. Topic: Worksheets LO: 8 27. The total of the balance sheet debit column on the worksheet must equal the total assets presented in the formal balance sheet. Answer: False Rationale: The total of the balance sheet debit column on the worksheet will include all assets accounts with a debit balance, but will also include liability and equity accounts that have a debit balance.
Topic: Worksheets LO: 8 28. In the balance sheet columns of the worksheet, the amount shown in the retained earnings account is generally not the same amount that appears as retained earnings on the balance sheet. Answer: True Rationale: In the balance sheet columns of the worksheet, the amount shown in the retained earnings account is generally not the same amount that appears as retained earnings on the balance sheet. This is true because the Retained Earnings account balance as extended does not yet reflect the net income or net loss for the current period.
Topic: Worksheets LO: 8 29. A completed worksheet contains sufficient information to prepare an income statement and a balance sheet. Answer: True Rationale: The income statement can be prepared from the data in the income statement columns. Two pieces of information for the statement of stockholders’ equity are available in the worksheet— the net income (or net loss) and dividends. The assets and liabilities needed for the balance sheet are available in the balance sheet columns (the ending Retained Earnings balance for the balance sheet is obtained from the statement of stockholders’ equity). ©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-7
Multiple Choice Topic: Adjusting Entries LO: 2 Level of Difficulty: MEDIUM 1. Which one of the following is not a reason for which adjusting entries are made? A) To close the income statement accounts and prepare them for the following year’s activity B) To allocate used or expired assets to reflect expenses incurred in the period C) To allocate the earned portion of unearned revenue to reflect revenues earned during the period D) To accrue expenses to reflect expenses incurred in the period that are not yet paid or recorded Answer: A Rationale: Adjusting entries are made for all the reasons above except to close out the accounts. Answer A describes closing entries.
Topic: Deferral LO: 3 Level of Difficulty: EASY 2. Which of the following is a distinguishing characteristic of a deferral? A) It affects at least one liability account B) It always impacts the cash account C) It includes the adjustment of an amount previously recorded in a balance sheet account D) It increases a balance sheet account and decreases an income statement account Answer: C Rationale: A deferral adjusts an amount previously recorded in a balance sheet account.
Topic: Accruals LO: 4 Level of Difficulty: EASY 3. A company provides services to clients during the period that are neither paid for, nor billed to the clients. What must the company do? A) Bill the client prior to year end in order to recognize the revenue B) Record the revenues as a liability at the end of the year C) Accrue revenue by making an adjusting entry at the end of the period D) All of the above are true Answer: C Rationale: Services earned but not yet billed or collected require an accrual to recognize the revenue and the account receivable at the end of the period. The bill does not have to be sent prior to year end and there is no liability at year end since money is owed to the company.
©Cambridge Business Publishers, 2020 3-8
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Adjusting for Depreciation LO: 3 Level of Difficulty: EASY 4. As of the beginning of 2019, the Logistics Company had equipment totaling $1,800,000 which was depreciated at $150,000 per year. If Let’s Move makes the appropriate adjusting entry at year end, which of the following is one part of the journal entry that will be made? A) Debit Equipment for $150,000 B) Credit Depreciation Expense for $150,000 C) Debit Depreciation Expense for $150,000 D) Debit Accumulated Depreciation for $150,000 Answer: C Rationale: The entry will debit Depreciation Expense for $150,000 and credit Accumulated Depreciation for the same amount.
Topic: Adjusting for Depreciation LO: 3 Level of Difficulty: EASY 5. When adjusting for depreciation, which of the following is one effect of the adjustment? A) Accumulated depreciation is debited B) The asset’s book value declines C) The cost of the equipment declines D) The market value of the equipment declines Answer: B Rationale: The adjusting entry creates a credit to accumulated depreciation and a debit to depreciation expense. The credit causes the book value to decline because it increases the contra account that is shown as a deduction from the cost of the equipment on the balance sheet.
Topic: Effects of Accrued Wages LO: 4 Level of Difficulty: EASY 6. An accrual of wages expense would produce what effect on the balance sheet? A) Increase liabilities and decrease equity B) Decrease liabilities and increase equity C) Increase assets and increase liabilities D) Decrease assets and decrease liabilities Answer: A Rationale: An accrual of wages expense produces an increase in wages payable (liability) and a decrease in retained earnings (stockholders’ equity), resulting in a decrease of profit.
Topic: Recognition of Costs as Expense LO: 2 Level of Difficulty: EASY 7. As supplies and PPE assets on the balance sheet are consumed, they are reflected: A) As a revenue on the income statement B) As an expense on the income statement C) As common stock on the balance sheet D) Assets are never consumed Answer: B Rationale: As assets are consumed (used up), their cost is transferred into the income statement as an expense. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-9
Topic: Adjusting Entries LO: 2 Level of Difficulty: MEDIUM 8. An adjusting entry will not take the format of which one of the following entries? A) A debit to an expense account and a credit to a liability account B) A debit to an asset account and a credit to a revenue account C) A debit to an expense account and a credit to a revenue account D) A debit to a liability account and a credit to a revenue account Answer: C Rationale: An adjusting entry affects one or more balance sheet accounts (an asset or a liability account) and one or more income statement accounts (an expense or revenue account). A debit to an expense account and a credit to a revenue account would not affect the balance sheet and thus would not be an adjusting entry.
Topic: Adjusting Entry Errors LO: 2, 3 Level of Difficulty: MEDIUM 9. Which one of the following errors causes an overstatement of net income? A) Failure to accrue revenue earned but not billed B) Failure to record collection of an account receivable C) Failure to record a portion of fees received in advance that is earned by year-end D) Failure to record depreciation expense Answer: D Rationale: Failure to record an expense would overstate net income. Failure to accrue revenue would understate net income. Failure to record collection of accounts receivable or to record a portion of fees received in advance have no impact the income statement.
Topic: Adjusting Entry Errors LO: 2, 4 Level of Difficulty: MEDIUM 10. Which one of the following errors causes an understatement of net income? A) Failure to accrue revenue earned but not billed B) Failure to accrue wages earned but not yet paid to employees C) Failure to record depreciation expense D) Failure to record payment of account payable Answer: A Rationale: Only the failure to accrue revenue earned would understate net income. Failure to record wages or to record depreciation expense would overstate net income. Failure to record the payment of an account payable has no income statement effect.
©Cambridge Business Publishers, 2020 3-10
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Unearned Income Adjusting Entries LO: 3 Level of Difficulty: EASY 11. Sue Baker received $5,000 from a tenant on December 1 for five months’ rent of an office. This rent was for December, January, February, March, and April. If Sue debited Cash and credited Unearned Rental Income for $5,000 on December 1, what necessary adjustment would be made on December 31? A) Unearned Rental Income Rental Income B) Rental Income Unearned Rental Income C) Unearned Rental Income Rental Income D) Rental Income Unearned Rental Income
1,000 1,000 4,000 4,000 4,000 4,000 1,000 1,000
Answer: A Rationale: Transfer 1/5 x $5,000 = $1,000 from Unearned Rental Income to Rental Income
Topic: Unearned Income Adjusting Entries LO: 3 Level of Difficulty: EASY 12. Pam Harper received $15,000 from a tenant on December 1 for five months’ rent of an office. This rent was for December, January, February, March, and April. If Pam debited Cash and credited Unearned Rental Income for $15,000 on December 1, what necessary adjustment would be made on December 31? A) Unearned Rental Income Rental Income B) Rental Income Unearned Rental Income C) Unearned Rental Income Rental Income D) Rental Income Unearned Rental Income
3,000 3,000 12,000 12,000 12,000 12,000 3,000 3,000
Answer: A Rationale: Transfer 1/5 x $15,000 = $3,000 from Unearned Rental Income to Rental Income
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-11
Topic: Unearned Income Adjusting Entries LO: 3 Level of Difficulty: EASY 13. Campus Rentals, Inc. received $4,800 from a tenant on December 1 for three months’ rent of an office. This rent was for December, January, and February. If Campus Rentals debited Cash and credited Unearned Rental Income for $4,800 on December 1, what necessary adjustment would be made on December 31? A) Unearned Rental Income Rental Income B) Rental Income Unearned Rental Income C) Unearned Rental Income Rental Income D) Rental Income Unearned Rental Income
3,200 3,200 3,200 3,200 1,600 1,600 1,600 1,600
Answer: C Rationale: Transfer 1/3 x $4,800 = $1,600 from Unearned Rental Income to Rental Income
Topic: Unearned Income Adjusting Entries LO: 3 Level of Difficulty: EASY 14. Condo Rental, Inc. received $14,400 from a tenant on December 1 for three months’ rent of an apartment. This rent was for December, January, and February. If Condo Rental debited Cash and credited Unearned Rental Income for $14,400 on December 1, what necessary adjustment would be made on December 31? A) Unearned Rental Income Rental Income B) Rental Income Unearned Rental Income C) Unearned Rental Income Rental Income D) Rental Income Unearned Rental Income
9,600 9,600 9,600 9,600 4,800 4,800 4,800 4,800
Answer: C Rationale: Transfer 1/3 x $14,400 = $4,800 from Unearned Rental Income to Rental Income
©Cambridge Business Publishers, 2020 3-12
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Unearned Income Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 15. Early in the accounting period, Ms. Client paid $3,000 for services in advance of receiving them; Cash was debited and Unearned Service Fees was credited for $3,000. At the end of the accounting period, two-thirds of the services paid for had yet to be performed. The proper adjusting entry is: A) Unearned Service Fees Service Fees Earned B) Service Fees Earned Unearned Service Fees C) Unearned Service Fees Service Fees Earned D) Service Fees Earned Unearned Service Fees
1,000 1,000 2,000 2,000 2,000 2,000 1,000 1,000
Answer: A Rationale: Transfer 1/3 x $3,000 = $1,000 from Unearned Service Fees to Service Fees Earned
Topic: Unearned Income Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 16. Early in the accounting period, Ed Sheer, a client, paid $9,000 for services in advance of receiving them; Cash was debited and Unearned Service Fees was credited for $9,000. At the end of the accounting period, two-thirds of the services paid for had yet to be performed. The proper adjusting entry is: A) Unearned Service Fees Service Fees Earned B) Service Fees Earned Unearned Service Fees C) Unearned Service Fees Service Fees Earned D) Service Fees Earned Unearned Service Fees
3,000 3,000 6,000 6,000 6,000 6,000 3,000 3,000
Answer: A Rationale: Transfer 1/3 x $9,000 = $3,000 from Unearned Service Fees to Service Fees Earned
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-13
Topic: Accrued Revenue Adjusting Entries LO: 4 Level of Difficulty: MEDIUM 17. On September 1, Tree Company began a contract to provide services to Willow Company for six months, with the total $21,600 payment to be made at the end of the six-month period. Equal services are provided each month. The firm uses the account Fees Receivable to reflect amounts due but not yet billed. What proper adjusting entry would Tree Company make on December 31, the end of the accounting period (no previous adjustment has been made)? A) Fees Receivable Service Fees Earned B) Unearned Service Fees Service Fees Earned C) Cash Service Fees Earned D) Fees Receivable Service Fees Earned Unearned Service Fees
14,400 14,400 14,400 14,400 14,400 14,400 21,600 14,400 7,200
Answer: A Rationale: Accrue 4/6 x $21,600 = $14,400 of Service Fees earned
Topic: Accrued Revenue Adjusting Entries LO: 4 Level of Difficulty: MEDIUM 18. On September 1, Knowledgeable Company began a contract to provide services to Guidance Required Company for six months, with the total $64,800 payment to be made at the end of the sixmonth period. Equal services are provided each month. The firm uses the account Fees Receivable to reflect amounts due but not yet billed. What proper adjusting entry would Knowledgeable Company make on December 31, the end of the accounting period (no previous adjustment has been made)? A) Fees Receivable Service Fees Earned B) Unearned Service Fees Service Fees Earned C) Cash Service Fees Earned D) Fees Receivable Service Fees Earned Unearned Service Fees
43,200 43,200 43,200 43,200 43,200 43,200 64,800 43,200 21,600
Answer: A Rationale: Accrue 4/6 x $64,800 = $43,200 of Service Fees earned
©Cambridge Business Publishers, 2020 3-14
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Accrued Revenue Adjusting Entries LO: 4 Level of Difficulty: EASY 19. On December 31, the end of the accounting period, $10,600 in service fees had been earned but not billed or received. The Wilk Company uses the account Fees Receivable to reflect amounts due but not yet billed. The proper adjusting entry would be: A) Fees Receivable Unearned Service Fees B) Unearned Service Fees Service Fees Earned C) Cash Service Fees Earned D) Fees Receivable Service Fees Earned
10,600 10,600 10,600 10,600 10,600 10,600 10,600 10,600
Answer: D Rationale: Revenues must be recognized in the period in which they are earned, a credit to Service Fees Earned. The Fees Receivable account is used by the Wilk Company to reflect amounts due to not yet billed.
Topic: Accrued Revenue Adjusting Entries LO: 4 Level of Difficulty: EASY 20. On December 31, the end of the accounting period, $31,800 in service fees had been earned but not billed or received. The Marietta Company uses the account Fees Receivable to reflect amounts due but not yet billed. The proper adjusting entry would be: A) Fees Receivable Unearned Service Fees B) Unearned Service Fees Service Fees Earned C) Cash Service Fees Earned D) Fees Receivable Service Fees Earned
31,800 31,800 31,800 31,800 31,800 31,800 31,800 31,800
Answer: D Rationale: Revenues must be recognized in the period in which they are earned, a credit to Service Fees Earned. The Fees Receivable account is used by the Marietta Company to reflect amounts due to not yet billed.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-15
Topic: Prepaid Insurance Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 21. Huntley Company paid $52,800 for a four-year insurance policy on September 1 and recorded the $52,800 as a debit to Prepaid Insurance and a credit to Cash. What adjusting entry should Huntley make on December 31, the end of the accounting period (no previous adjustment has been made)? A) Prepaid Insurance Insurance Expense B) Insurance Expense Prepaid Insurance C) Prepaid Insurance Insurance Expense D) Insurance Expense Prepaid Insurance
48,400 48,400 13,200 13,200 4,400 4,400 4,400 4,400
Answer: D Rationale: Transfer 4/48 x $52,800 = $4,400 from Prepaid Insurance to Insurance Expense
Topic: Prepaid Insurance Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 22. Hot Rod Company paid $158,400 for a four-year insurance policy on September 1 and recorded the $158,400 as a debit to Prepaid Insurance and a credit to Cash. What adjusting entry should Hot Rod Company make on December 31, the end of the accounting period (no previous adjustment has been made)? A) Prepaid Insurance Insurance Expense B) Insurance Expense Prepaid Insurance C) Prepaid Insurance Insurance Expense D) Insurance Expense Prepaid Insurance
145,200 145,200 39,600 39,600 13,200 13,200 13,200 13,200
Answer: D Rationale: Transfer 4/48 x $158,400 = $13,200 from Prepaid Insurance to Insurance Expense
©Cambridge Business Publishers, 2020 3-16
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Prepaid Insurance Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 23. Williams Company paid $48,000 for a two-year insurance policy on October 1 and recorded the $48,000 as a debit to Prepaid Insurance and a credit to Cash. What adjusting entry should Fred make on December 31, the end of the accounting period (no previous adjustment has been made)? A) Prepaid Insurance Insurance Expense B) Insurance Expense Prepaid Insurance C) Prepaid Insurance Insurance Expense D) Insurance Expense Prepaid Insurance
42,000 42,000 6,000 6,000 6,000 6,000 24,000 24,000
Answer: B Rationale: Transfer 3/24 x $48,000 = $6,000 from Prepaid Insurance to Insurance Expense
Topic: Prepaid Insurance Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 24. Nair Company paid $144,000 for a two-year insurance policy on October 1 and recorded the 144,000 as a debit to Prepaid Insurance and a credit to Cash. What adjusting entry should Nair make on December 31, the end of the accounting period (no previous adjustment has been made)? A) Prepaid Insurance Insurance Expense B) Insurance Expense Prepaid Insurance C) Prepaid Insurance Insurance Expense D) Insurance Expense Prepaid Insurance
126,000 126,000 18,000 18,000 18,000 18,000 72,000 72,000
Answer: B Rationale: Transfer 3/24 x $144,000 = $18,000 from Prepaid Insurance to Insurance Expense
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-17
Topic: Supplies Expense Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 25. The Green Grape Company’s Office Supplies account had a beginning balance of $16,000. During the month, purchases of office supplies totaling $4,000 were debited to the Office Supplies account. If $6,000 worth of office supplies is still on hand at month-end, what is the proper adjusting entry? A) Office Supplies Expense Office Supplies B) Office Supplies Office Supplies Expense C) Office Supplies Expense Office Supplies D) Office Supplies Office Supplies Expense
6,000 6,000 6,000 6,000 14,000 14,000 14,000 14,000
Answer: C Rationale: Transfer $16,000 + $4,000 - $6,000 = $14,000 from Office Supplies to Office Supplies Expense
Topic: Supplies Expense Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 26. The Yellow Apple Company’s Office Supplies account had a beginning balance of $6,000. During the month, purchases of office supplies totaling $1,500 were debited to the Office Supplies account. If $2,250 worth of office supplies is still on hand at month-end, what is the proper adjusting entry? A) Office Supplies Expense Office Supplies B) Office Supplies Office Supplies Expense C) Office Supplies Expense Office Supplies D) Office Supplies Office Supplies Expense
2,250 2,250 2,250 2,250 5,250 5,250 5,250 5,250
Answer: C Rationale: Transfer $6,000 + $1,500 - $2,250 = $5,250 from Office Supplies to Office Supplies Expense
©Cambridge Business Publishers, 2020 3-18
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Supplies Expense Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 27. The Green Grape Company’s Printing Supplies account had a beginning balance of $8,000. During the month, purchases of printing supplies totaling $6,000 were debited to the Printing Supplies account. If $4,000 worth of printing supplies is still on hand at month-end, what is the proper adjusting entry? A) Printing Supplies Expense Printing Supplies B) Printing Supplies Printing Supplies Expense C) Printing Supplies Expense Printing Supplies D) Printing Supplies Printing Supplies Expense
10,000 10,000 4,000 4,000 4,000 4,000 10,000 10,000
Answer: A Rationale: Transfer $8,000 + $6,000 - $4,000 = $10,000 from Printing Supplies to Printing Supplies Expense
Topic: Supplies Expense Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 28. The Yellow Apple Company’s Printing Supplies account had a beginning balance of $3,000. During the month, purchases of printing supplies totaling $2,250 were debited to the Printing Supplies account. If $1,500 worth of printing supplies is still on hand at month-end, what is the proper adjusting entry? A) Printing Supplies Expense Printing Supplies B) Printing Supplies Printing Supplies Expense C) Printing Supplies Expense Printing Supplies D) Printing Supplies Printing Supplies Expense
3,750 3,750 1,500 1,500 1,500 1,500 3,750 3,750
Answer: A Rationale: Transfer $3,000 + $2,250 - $1,500 = $3,750 from Printing Supplies to Printing Supplies Expense
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-19
Topic: Supplies Expense Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 29. During their first year, Adrian & Associates bought $32,000 worth of supplies for their CPA firm. When purchased, the supplies were debited to Supplies and credited to Accounts Payable. What adjusting entry would Adrian & Associates make if $8,000 worth of supplies were on hand at year-end? A) Supplies Expense Supplies B) Supplies Supplies Expense C) Supplies Expense Supplies D) Supplies Supplies Expense
8,000 8,000 24,000 24,000 24,000 24,000 8,000 8,000
Answer: C Rationale: Transfer $32,000 - $8,000 = $24,000 from Supplies to Supplies Expense
Topic: Supplies Expense Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 30. During their first year, Ann Zi & Associates bought $96,000 worth of supplies for their CPA firm. When purchased, the supplies were debited to Supplies and credited to Accounts Payable. What adjusting entry would Ann Zi & Associates make if $24,000 worth of supplies were on hand at year-end? A) Supplies Expense Supplies B) Supplies Supplies Expense C) Supplies Expense Supplies D) Supplies Supplies Expense
24,000 24,000 72,000 72,000 72,000 72,000 24,000 24,000
Answer: C Rationale: Transfer $96,000 - $24,000 = $72,000 from Supplies to Supplies Expense
©Cambridge Business Publishers, 2020 3-20
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Supplies Expense Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 31. The Boston Company’s Supplies account balance at the end of the period is $44,000. Supplies totaling $37,600 have been purchased during the period and debited to Supplies. A physical count shows $10,000 worth of supplies on hand at the end of the period. The proper adjusting entry is: A) Supplies Expense Supplies B) Supplies Expense Supplies C) Supplies Supplies Expense D) Supplies Expense Supplies
34,000 34,000 37,600 37,600 10,000 10,000 9,400 9,400
Answer: A Rationale: Ending supplies balance – Actual supplies inventory = Supplies used during period Transfer $44,000 - $10,000 = $34,000 from Supplies to Supplies Expense
Topic: Supplies Expense Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 32. The Tracey Real Estate Company’s Supplies account balance at the end of the period is $132,000. Supplies totaling $112,800 have been purchased during the period and debited to Supplies. A physical count shows $30,000 worth of supplies on hand at the end of the period. The proper adjusting entry is: A) Supplies Expense Supplies B) Supplies Expense Supplies C) Supplies Supplies Expense D) Supplies Expense Supplies
102,000 102,000 112,800 112,800 30,000 30,000 27,600 27,600
Answer: A Rationale: Ending supplies balance – Actual supplies inventory = Supplies used during period Transfer $132,000 - $30,000 = $102,000 from Supplies to Supplies Expense
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-21
Topic: Prepaid Rent Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 33. Champaign Company signed a one-year lease on April 1, 2019, and paid the $22,800 total year’s rent in advance. Champaign recorded the transaction as a debit to Prepaid Rent and a credit to Cash. What adjusting entry should Champaign make on December 31, 2019 (no previous adjustment has been made)? A) Rent Expense Prepaid Rent B) Rent Expense Prepaid Rent C) Prepaid Rent Rent Expense D) Prepaid Rent Rent Expense
17,100 17,100 5,700 5,700 5,700 5,700 17,100 17,100
Answer: A Rationale: Transfer 9/12 x $22,800 = $17,100 from Prepaid Rent to Rent Expense
Topic: Prepaid Rent Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 34. Dennison Company signed a one-year lease on April 1, 2019, and paid the $68,400 total year’s rent in advance. Dennison recorded the transaction as a debit to Prepaid Rent and a credit to Cash. What adjusting entry should Dennison make on December 31, 2019 (no previous adjustment has been made)? A) Rent Expense Prepaid Rent B) Rent Expense Prepaid Rent C) Prepaid Rent Rent Expense D) Prepaid Rent Rent Expense
51,300 51,300 17,100 17,100 17,100 17,100 51,300 51,300
Answer: A Rationale: Transfer 9/12 x $68,400 = $51,300 from Prepaid Rent to Rent Expense
©Cambridge Business Publishers, 2020 3-22
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Prepaid Rent Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 35. Happy Company signed a two-year lease on July 1, 2019, and paid the $34,800 total rent in advance. Happy recorded the transaction as a debit to Prepaid Rent and a credit to Cash. What adjusting entry should Happy make on December 31, 2019 (no previous adjustment has been made)? A) Rent Expense Prepaid Rent B) Rent Expense Prepaid Rent C) Prepaid Rent Rent Expense D) Prepaid Rent Rent Expense
17,400 17,400 8,700 8,700 26,100 26,100 8,700 8,700
Answer: B Rationale: Transfer 6/24 x $34,800 = $8,700 from Prepaid Rent to Rent Expense
Topic: Prepaid Rent Adjusting Entries SET B LO: 3 Level of Difficulty: MEDIUM 36. Subariffic Company signed a two-year lease on July 1, 2019, and paid the $104,400 total rent in advance. Subariffic recorded the transaction as a debit to Prepaid Rent and a credit to Cash. What adjusting entry should Subariffic make on December 31, 2019 (no previous adjustment has been made)? A)
Rent Expense Prepaid Rent B) Rent Expense Prepaid Rent C) Prepaid Rent Rent Expense D) Prepaid Rent Rent Expense
52,200 52,200 26,100 26,100 78,300 78,300 26,100 26,100
Answer: B Rationale: Transfer 6/24 x $104,400 = $26,100 from Prepaid Rent to Rent Expense
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-23
Topic: Interest Expense Accrual LO: 4 Level of Difficulty: EASY 37. Art Company calculates that interest of $1,800 has accrued at December 31 on outstanding notes payable. How should Art record this on December 31? A) Interest Expense Cash B) Interest Payable Interest Expense C) Prepaid Interest Interest Expense D) Interest Expense Interest Payable
1,800 1,800 1,800 1,800 1.800 1,800 1,800 1,800
Answer: D Rationale: Interest expense for the month of December must be recognized as expense. A liability (payable) must be recorded since the amount has not yet been paid.
Topic: Interest Expense Accrual LO: 4 Level of Difficulty: EASY 38. Owl Company calculates that interest of $5,400 has accrued at December 31 on outstanding notes payable. How should Owl record this on December 31? A) Interest Expense Cash B) Interest Payable Interest Expense C) Prepaid Interest Interest Expense D) Interest Expense Interest Payable
5,400 5,400 5,400 5,400 5,400 5,400 5,400 5,400
Answer: D Rationale: Interest expense for the month of December must be recognized as expense. A liability (payable) must be recorded since the amount has not yet been paid.
©Cambridge Business Publishers, 2020 3-24
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Wages Expense Accrual LO: 4 Level of Difficulty: MEDIUM 39. Assume December 31 is a Wednesday. Rite Weld Company’s wages are paid every Friday, and the weekly payroll (for five days) amounts to $6,000. To record the correct amount of expense for December, Rite Weld makes the following entry on December 31: A) Wages Expense Wages Payable B) Wages Expense Wages Payable C) Wages Payable Wages Expense D) Wages Payable Wages Expense
3,360 3,360 3,600 3,600 6,000 6,000 3,600 3,600
Answer: B Rationale: Accrue 3/5 x $6,000 = $3,600 of Wages Expense
Topic: Wages Expense Accrual LO: 4 Level of Difficulty: MEDIUM 40. Assume December 31 is a Wednesday. Circlewood Company’s wages are paid every Friday, and the weekly payroll (for five days) amounts to $18,000. To record the correct amount of expense for December, Circlewood makes the following entry on December 31: A) Wages Expense Wages Payable B) Wages Expense Wages Payable C) Wages Payable Wages Expense D) Wages Payable Wages Expense
18,000 18,000 10,080 10,080 18,000 18,000 10,080 10,080
Answer: B Rationale: Accrue 3/5 x $18,000 = $10,080 of Wages Expense
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-25
Topic: Interest Income Accrual LO: 4 Level of Difficulty: MEDIUM 41. Border Company calculates it has earned (but not yet collected or recorded) interest of $1,050 at December 31 on outstanding notes receivable. How should Borders record this on December 31? A) Interest Payable Interest Income B) Interest Income Interest Receivable C) Interest Receivable Interest Payable D) Interest Receivable Interest Income
1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,050
Answer: D Rationale: Interest income for the month of December must be recognized. An asset (receivable) must be recorded since the amount has not yet been received.
Topic: Interest Income Accrual LO: 4 Level of Difficulty: MEDIUM 42. Runner Company calculates it has earned (but not yet collected or recorded) interest of $3,150 at December 31 on outstanding notes receivable. How should Runner record this on December 31? A) Interest Payable Interest Income B) Interest Income Interest Receivable C) Interest Receivable Interest Payable D) Interest Receivable Interest Income
3,150 3,150 3,150 3,150 3,150 3,150 3,150 3,150
Answer: D Rationale: Interest income for the month of December must be recognized. An asset (receivable) must be recorded since the amount has not yet been received.
©Cambridge Business Publishers, 2020 3-26
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Wages Expense Accrual LO: 4 Level of Difficulty: MEDIUM 43. Assume December 31 is a Monday. Rite Weld Company’s wages are paid every Friday, and the weekly payroll (for five days) amounts to $12,000. To record the correct amount of expense for December Rite Weld makes the following entry on December 31: A) Wages Expense Wages Payable B) Wages Expense Wages Payable C) Wages Expense Wages Payable D) Wages Payable Wages Expense
12,000 12,000 9,600 9,600 2,400 2,400 2,400 2,400
Answer: C Rationale: Accrue 1/5 x $12,000 = $2,400 of Wages Expense
Topic: Wages Expense Accrual LO: 4 Level of Difficulty: MEDIUM 44. Assume December 31 is a Monday. Circlewood Company’s wages are paid every Friday, and the weekly payroll (for five days) amounts to $36,000. To record the correct amount of expense for December Circlewood makes the following entry on December 31: A) Wages Expense Wages Payable B) Wages Expense Wages Payable C) Wages Expense Wages Payable D) Wages Payable Wages Expense
36,000 36,000 28,800 28,800 7,200 7,200 7,200 7,200
Answer: C Rationale: Accrue 1/5 x $36,000 = $7,200 of Wages Expense
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-27
Topic: Prepaid Insurance Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 45. On July 1, Saboni paid $48,000 for a two-year insurance policy, debiting Prepaid Insurance for the full amount. If the adjusting entry is not made at December 31, the end of the accounting period, how does the error affect this year’s financial statements? A) Overstates assets B) Overstates revenue C) Understates common stock D) Overstates expenses Answer: A Rationale: The adjusting entry would increase expenses and decrease assets, therefore assets are overstated and expenses are understated.
Topic: Depreciation Expense Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 46. The Eva’s Flowers company’s failure to record depreciation expense at the end of an accounting period, results in: A) Understated income B) Understated assets C) Overstated expenses D) Overstated assets Answer: D Rationale: The adjusting entry would increase expense and decrease assets, therefore expenses are understated and assets are overstated.
Topic: Unearned Revenue Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 47. On December 1, Belmont Company received three months’ rental income in advance and credited a liability account. On December 31, the end of the accounting period, Belmont failed to make an adjusting entry reflecting that a portion of this rent had been earned. This error results in: A) Overstated liabilities B) Understated assets C) Overstated assets D) Overstated revenue Answer: A Rationale: The adjusting entry would increase revenue and decrease liabilities, therefore liabilities are overstated and revenue is understated.
©Cambridge Business Publishers, 2020 3-28
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Prepaid Expense Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 48. During the current accounting period, Montana Ridge Company paid $2,000 for advertising services in advance of receiving them. Prepaid Advertising was debited and Cash was credited for $2,000. At the end of the accounting period, three-fourths of the services paid for had yet to be received. The proper adjusting entry is: A) Prepaid Advertising Advertising Expense B) Advertising Expense Prepaid Advertising C) Prepaid Advertising Advertising Expense D) Advertising Expense Prepaid Advertising
500 500 1,000 1,000 1,500 1,500 500 500
Answer: D Rationale: Transfer 1/4 x $2,000 = $500 from Prepaid Advertising to Advertising Expense
Topic: Prepaid Expense Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 49. During the current accounting period, Cherry Creek Company paid $6,000 for advertising services in advance of receiving them. Prepaid Advertising was debited and Cash was credited for $6,000. At the end of the accounting period, three-fourths of the services paid for had yet to be received. The proper adjusting entry is: A) Prepaid Advertising Advertising Expense B) Advertising Expense Prepaid Advertising C) Prepaid Advertising Advertising Expense D) Advertising Expense Prepaid Advertising
1,500 1,500 3,000 3,000 4,500 4,500 1,500 1,500
Answer: D Rationale: Transfer 1/4 x $6,000 = $1,500 from Prepaid Advertising to Advertising Expense
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-29
Topic: Prepaid Expense Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 50. During the current accounting period, Kenyon Farms Company paid $2,000 for advertising services in advance of receiving them. Prepaid Advertising was debited and Cash was credited for $2,000. At the end of the accounting period, three-fourths of the services paid for had been received. The proper adjusting entry is: A) Prepaid Advertising Advertising Expense B) Advertising Expense Prepaid Advertising C) Advertising Expense Prepaid Advertising D) Prepaid Advertising Advertising Expense
500 500 1,500 1,500 500 500 1,500 1,500
Answer: B Rationale: Transfer 3/4 x $2,000 = $1,500 from Prepaid Advertising to Advertising Expense
Topic: Prepaid Expense Adjusting Entries LO: 3 Level of Difficulty: MEDIUM 51. During the current accounting period, Ohio Company paid $6,000 for advertising services in advance of receiving them. Prepaid Advertising was debited and Cash was credited for $6,000. At the end of the accounting period, three-fourths of the services paid for had been received. The proper adjusting entry is: A) Prepaid Advertising Advertising Expense B) Advertising Expense Prepaid Advertising C) Advertising Expense Prepaid Advertising D) Prepaid Advertising Advertising Expense
1,500 1,500 4,500 4,500 1,500 1,500 4,500 4,500
Answer: B Rationale: Transfer 3/4 x $6,000 = $4,500 from Prepaid Advertising to Advertising Expense
©Cambridge Business Publishers, 2020 3-30
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Revenue Adjusting Entries LO: 4 Level of Difficulty: MEDIUM 52. At the end of the accounting period, the Gardening Advice Company’s Service Fees Earned account has a normal balance of $152,000. The accountant makes two adjustments--one to accrue unbilled service fees of $12,000, and the other to reduce the Unearned Service Fees liability account by $1,800. After the adjustments are posted, the Service Fees Earned account has a balance of: A) $159,800 B) $144,200 C) $150,800 D) $165,800 Answer: D Rationale: Adjusting Entries: (1) Unbilled service fees Service fees earned (2) Unearned service fees Service fees earned
12,000 12,000 1,800 1,800
Service Fees Earned = $152,000 + $12,000 + $1,800 = $165,800
Topic: Revenue Adjusting Entries LO: 3,4 Level of Difficulty: MEDIUM 53. At the end of the accounting period, the Bright Future Company’s Service Fees Earned account has a normal balance of $456,000. The accountant makes two adjustments--one to accrue unbilled service fees of $36,000, and the other to reduce the Unearned Service Fees liability account by $5,400. After the adjustments are posted, the Service Fees Earned account has a balance of: A) $497,400 B) $479,400 C) $432,600 D) $452,400 Answer: A Rationale: Adjusting Entries: (1) Unbilled service fees Service fees earned (2) Unearned service fees Service fees earned
36,000 36,000 5,400 5,400
Service Fees Earned = $456,000 + $36,000 + $5,400 = $497,400
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-31
Topic: Revenue Adjusting Entries LO: 4 Level of Difficulty: MEDIUM 54. At the end of the accounting period, the Lisa Yoke, LLC’s Legal Fees Earned account has a normal balance of $150,000. The accountant makes two adjustments--one to accrue unbilled legal fees earned of $5,000, and the other to reduce the Unearned Legal Fees liability account by $1,000. After the adjustments are posted, the Legal Fees Earned account has a balance of: A) $163,000 B) $165,000 C) $155,000 D) $156,000 Answer: D Rationale: Adjusting Entries: (1) Unbilled legal fees Legal fees earned (2) Unearned legal fees Legal fees earned
5,000 5,000 1,000 1,000
Legal Fees Earned = $150,000 + $5,000 + $1,000 = $156,000
Topic: Revenue Adjusting Entries LO: 3,4 Level of Difficulty: MEDIUM 55. At the end of the accounting period, the MLY, LLC’s Legal Fees Earned account has a normal balance of $450,000. The accountant makes two adjustments--one to accrue unbilled legal fees earned of $15,000, and the other to reduce the Unearned Legal Fees liability account by $3,000. After the adjustments are posted, the Legal Fees Earned account has a balance of: A) $468,000 B) $489,000 C) $495,000 D) $465,000 Answer: A Rationale: Adjusting Entries: (1) Unbilled legal fees Legal fees earned (2) Unearned legal fees Legal fees earned
15,000 15,000 3,000 3,000
Legal Fees Earned = $450,000 + $15,000 + $3,000 = $468,000
©Cambridge Business Publishers, 2020 3-32
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Adjusting Entry Errors LO: 3 Level of Difficulty: MEDIUM 56. In preparing its adjusting entries at the end of this year, Pine Grove Company neglected to adjust the Prepaid Insurance account for the amount of insurance expired during the year. This error: A) Understates this year’s net income and overstates both retained earnings and assets at year-end B) Overstates this year’s net income and understates both retained earnings and assets at year-end C) Understates this year’s net income and understates both retained earnings and assets at yearend D) Overstates this year’s net income and overstates both retained earnings and assets at year-end Answer: D Rationale: Original entry to record Prepaid Insurance: Prepaid insurance XXX Cash
XXX
Year-end adjusting entry required: Insurance expense Prepaid insurance
XXX
XXX
Failure to record an expense, overstates net income for the year, and thus, retained earnings at yearend. Failure to decrease Prepaid Insurance (an asset) overstates assets at year-end.
Topic: Adjusting Entry Errors LO: 3 Level of Difficulty: MEDIUM 57. In preparing its adjusting entries at the end of this year, Krishna Company neglected to adjust the Unearned Service Fees account for the amount of such fees earned during the year. This error A) Understates this year’s net income and retained earnings at year-end and overstates liabilities at year-end B) Overstates this year’s net income and retained earnings at year-end and understates liabilities at year-end C) Understates this year’s net income and understates both retained earnings and liabilities at yearend D) Overstates this year’s net income and overstates both retained earnings and liabilities at year-end Answer: A Rationale: Original entry to record Unearned Service Fees: Cash XXX Unearned service fees
XXX
Year-end adjusting entry required: Unearned service fees Service fees earned
XXX
XXX
Failure to record Service Fees Earned, understates net income for the year, and thus, retained earnings at year-end. Failure to decrease Unearned Service Fees (a liability) overstates liabilities at year-end. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-33
Topic: Adjusting Entry Errors LO: 4 Level of Difficulty: MEDIUM 58. In preparing its adjusting entries at the end of this year, New Dawn Company neglected to accrue employees’ wages earned but not yet paid or recorded. This error: A) Understates this year’s net income and overstates both liabilities and retained earnings at yearend B) Overstates this year’s net income and overstates both liabilities and retained earnings at year-end C) Overstates this year’s net income and liabilities at year-end, and understates retained earnings at year-end D) Overstates this year’s net income, understates liabilities at year-end, and overstates retained earnings at year-end Answer: D Rationale: Year-end adjusting entry required: Wage expense Wages payable
XXX XXX
Failure to record an expense, overstates net income for the year, and thus, retained earnings at year end. Failure to record Wages Payable (a liability) understates liabilities at year-end.
Topic: Adjusting Entry Errors LO: 4 Level of Difficulty: MEDIUM 59. In preparing its adjusting entries at the end of this year, Modern Exposure Company neglected to accrue commissions earned but not yet received or recorded. This error: A) Understates this year’s net income and overstates both assets and retained earnings at year-end B) Overstates this year’s net income and overstates both assets and retained earnings at year-end C) Understates this year’s net income and understates both assets and retained earnings at yearend D) Overstates this year’s net income and understates both assets and retained earnings at year-end Answer: C Rationale: Year-end adjusting entry required: Commission receivable Commissions earned
XXX XXX
Failure to record a Commissions Earned, understates net income for the year, and thus, retained earnings at year end. Failure to record commissions Receivable (an asset) understates assets at year-end.
©Cambridge Business Publishers, 2020 3-34
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Deferral Adjusting Entries LO: 3 Level of Difficulty: EASY 60. Which of the following adjustments is an example of a deferral? A) The recording of wages earned by employees but not yet paid B) The recording of periodic depreciation expense on equipment C) The recording of fees earned but not yet billed or received D) The recording of interest income earned but not yet received Answer: B Rationale: A deferral is an adjustment which deals with an amount that has previously been recorded in a balance sheet account.
Topic: Accrual Adjusting Entries LO: 4 Level of Difficulty: EASY 61. Which of the following adjustments is an example of an accrual? A) The recording of wages earned by employees but not yet paid B) The recording of periodic depreciation expense on equipment C) The recording of service fees earned that had been received in cash at an earlier time D) The recording of supplies expense for the period Answer: A Rationale: An accrual is an adjustment which deals with an amount that has not previously been recorded in an account.
Topic: Accrual Adjusting Entries LO: 4 Level of Difficulty: EASY 62. The unique characteristic of an accrual adjustment is that the adjusting entry A) Decreases a balance sheet account and increases an income statement account B) Increases both a balance sheet account and an income statement account C) Decreases both a balance sheet account and an income statement account D) Increases a balance sheet account and decreases an income statement account Answer: B Rationale: Since an accrual is an adjustment which deals with an amount that has not previously been recorded in an account, the adjusting entry increases both a balance sheet account and an income statement account.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-35
Topic: Adjusting Entries LO: 3, 5 Level of Difficulty: MEDIUM 63. On the last day of December 2019, Gilgen & Sons entered into a transaction that resulted in a receipt of $108,000 cash in advance related to services that will be provided during January 2020. During December of 2019, the company also performed $64,000 of services which were neither billed nor paid. Prior to December adjustments and before these two transactions were recorded, the company’s trial balance showed service revenue of $1,600,000 at December 31, 2019. There are no other prepaid services yet to be delivered. If Peter & Sons makes the appropriate adjusting entry, how much will service revenue will be reflected on the December 31, 2019 income statement? A) $1,623,000 B) $1,664,000 C) $1,451,000 D) $1,515,000 Answer: B Rationale: Service revenue = $1,600,000 + $64,000 = $1,664,000
Topic: Adjusting Entries LO: 3, 5 Level of Difficulty: MEDIUM 64. On the last day of December 2019, Frischmuth Construction entered into a transaction that resulted in a receipt of $324,000 cash in advance related to services that will be provided during January 2020. During December of 2019, the company also performed $192,000 of services which were neither billed nor paid. Prior to December adjustments and before these two transactions were recorded, the company’s trial balance showed service revenue of $4,800,000 at December 31, 2019. There are no other prepaid services yet to be delivered. If Frischmuth Construction makes the appropriate adjusting entry, how much will service revenue will be reflected on the December 31, 2019 income statement? A) $4,545,000 B) $4.869,000 C) $4,992,000 D) $4,353,000 Answer: C Rationale: Service revenue = $4,800,000 + $192,000 = $4,992,000
©Cambridge Business Publishers, 2020 3-36
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Adjusting Entries LO: 3, 5 Level of Difficulty: MEDIUM 65. On the last day of December 2019, Dan Matthews Aviators entered into a transaction that resulted in a receipt of $108,000 cash in advance related to services that will be provided during January 2020. During December of 2019, the company also performed $64,000 of services which were neither billed nor paid. Prior to December adjustments and before these two transactions were recorded, the company’s trial balance showed service revenue of $1,600,000 at December 31, 2019. There are no other prepaid services yet to be delivered. If Dan Matthews Aviators makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 balance sheet as unearned revenue? A) $ 64,000 B) $152,000 C) $108,000 D) $ 14,000 Answer: C Rationale: Unearned revenue represents the amount collected in advance that the company has not yet earned.
Topic: Adjusting Entries LO: 3, 5 Level of Difficulty: MEDIUM 66. On the last day of December 2019, Frederick Aviators entered into a transaction that resulted in a receipt of $324,000 cash in advance related to services that will be provided during January 2020. During December of 2019, the company also performed $192,000 of services which were neither billed nor paid. Prior to December adjustments and before these two transactions were recorded, the company’s trial balance showed service revenue of $4,800,000 at December 31, 2019. There are no other prepaid services yet to be delivered. If Frederick Aviators makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 balance sheet as unearned revenue? A) $ 42,000 B) $192,000 C) $456,000 D) $324,000 Answer: D Rationale: Unearned revenue represents the amount collected in advance that the company has not yet earned.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-37
Topic: Adjusting Entries LO: 3, 5 Level of Difficulty: MEDIUM 67. On the last day of December 2019, Zion Inc. entered into a transaction that resulted in a receipt of $108,000 cash in advance related to services that will be provided during January 2020. During December of 2019, the company also performed $68,000 of services which were neither billed nor paid. Prior to December adjustments and before these two transactions were recorded, the company’s trial balance showed service revenue of $1,600,000 at December 31, 2019. There are no other prepaid services yet to be delivered, and during the month all outstanding accounts receivable from prior months were collected. If Zion Inc. makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 balance sheet as accounts receivable? A) $ 68,000 B) $152,000 C) $108,000 D) $ 44,000 Answer: A Rationale: Outstanding receivables are the amount earned but not yet received from customers.
Topic: Adjusting Entries LO: 3, 5 Level of Difficulty: MEDIUM 68. On the last day of December 2019, Verde Inc. entered into a transaction that resulted in a receipt of $324,000 cash in advance related to services that will be provided during January 2020. During December of 2019, the company also performed $204,000 of services which were neither billed nor paid. Prior to December adjustments and before these two transactions were recorded, the company’s trial balance showed service revenue of $4,800,000 at December 31, 2019. There are no other prepaid services yet to be delivered, and during the month all outstanding accounts receivable from prior months were collected. If Mesa Inc. makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 balance sheet as accounts receivable? A) $132,000 B) $204,000 C) $456,000 D) $324,000 Answer: B Rationale: Outstanding receivables are the amount earned but not yet received from customers.
©Cambridge Business Publishers, 2020 3-38
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Adjusting Entries LO: 3, 5 Level of Difficulty: MEDIUM 69. On April 1, 2019, China Technologies paid $80,000 for rent on warehouse space one year in advance. If China makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 income statement for rent expense? A) $15,000 B) $50,000 C) $45,000 D) $60,000 Answer: D Rationale: Rent expense = $80,000 × 9/12 = $60,000
Topic: Adjusting Entries LO: 3, 5 Level of Difficulty: MEDIUM 70. On April 1, 2019, Exceed Technologies paid $240,000 for rent on warehouse space one year in advance. If Above and Beyond makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 income statement for rent expense? A) $180,000 B) $ 45,000 C) $150,000 D) $135,000 Answer: A Rationale: Rent expense = $240,000 × 9/12 = $180,000
Topic: Adjusting Entries LO: 3, 5 Level of Difficulty: MEDIUM 71. On April 1, 2019, Gilgen & Sons paid $60,000 for rent on warehouse space one year in advance. If Gilgen & Sons makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 balance sheet as prepaid rent? A) $-0B) $15,000 C) $45,000 D) $60,000 Answer: B Rationale: Prepaid rent remaining = $60,000 × 3/12 = $15,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-39
Topic: Adjusting Entries LO: 3, 5 Level of Difficulty: MEDIUM 72. On April 1, 2019, Cooper paid $180,000 for rent on warehouse space one year in advance. If Justin makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 balance sheet as prepaid rent? A) $180,000 B) $ 0 C) $ 45,000 D) $135,000 Answer: C Rationale: Prepaid rent remaining = $180,000 × 3/12 = $45,000
Topic: Adjusting Entries LO: 4, 5 Level of Difficulty: MEDIUM 73. On October 1, 2019, Feldman entered into a lease agreement to rent out its old warehouse space it was no longer using. This agreement calls for Feldman to receive $6,000 per month from the lessee, due and payable at the end of the 4-month lease term. At December 31, 2019, none of the rental payments from the lessee had yet been received. If Feldman makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 balance sheet as rent receivable? A) $ 8,000 B) $18,000 C) $ 4,000 D) $16,000 Answer: B Rationale: Rent receivable = $6,000 × 3 = $18,000
Topic: Adjusting Entries LO: 4, 5 Level of Difficulty: MEDIUM 74. On October 1, 2019, A. Karikomi entered into a lease agreement to rent out its old warehouse space it was no longer using. This agreement calls for Karikomi to receive $18,000 per month from the lessee, due and payable at the end of the 4-month lease term. At December 31, 2019, none of the rental payments from the lessee had yet been received. If Kushner makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 balance sheet as rent receivable? A) $48,000 B) $24,000 C) $54,000 D) $12,000 Answer: C Rationale: Rent receivable = $18,000 × 3 = $54,000
©Cambridge Business Publishers, 2020 3-40
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Adjusting Entries LO: 4, 5 Level of Difficulty: MEDIUM 75. Beth’s Bagels has 6 employees who are paid $24 per hour. At December 31, 2019, each of Beth’s employees had worked 18 hours which had not been paid or recorded. Prior to adjustments, the company’s trial balance showed $171,400 in the wages expense account. If Beth makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 income statement as wage expense? A) $ 2,592 B) $173,992 C) $171,400 D) $168,808 Answer: B Rationale: Wage expense = 18 hours x 6 employees x $24 = $2,592 + $171,400 = $173,992
Topic: Adjusting Entries LO: 4, 5 Level of Difficulty: MEDIUM 76. Remi’s Burritos has 6 employees who are paid $27 per hour. At December 31, 2019, each of Remi’s employees had worked 18 hours which had not been paid or recorded. Prior to adjustments, the company’s trial balance showed $192,825 in the wages expense account. If Remi’s Burritos makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 income statement as wage expense? A) $189,909 B) $ 2,916 C) $195,741 D) $192,825 Answer: C Rationale: Wage expense = 18 hours x 6 employees x $27 = $2,916 + $192,825 = $195,741
Topic: Adjusting Entries LO: 4, 5 Level of Difficulty: MEDIUM 77. Beth’s Bagels purchases its inventory, on account, daily. At December 31, 2019, the company had taken receipt of $80,000 of inventory from its suppliers which had not been recorded in the accounts. If Beth makes the appropriate adjusting entry, how much will be reported on the December 31, 2019, balance sheet as accounts payable? A) $64,992 B) $59,808 C) $-0D) $80,000 Answer: D Rationale: Accounts payable = $80,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-41
Topic: Adjusting Entries LO: 4, 5 Level of Difficulty: MEDIUM 78. Remi’s Burritos purchases its inventory, on account, daily. At December 31, 2019, the company had taken receipt of $240,000 of inventory from its suppliers which had not been recorded in the accounts. If Remi’s Burritos makes the appropriate adjusting entry, how much will be reported on the December 31, 2019, balance sheet as accounts payable? A) $240,000 B) $194,976 C) $179,424 D) $-0Answer: A Rationale: Accounts payable = $240,000
Topic: Permanent Accounts LO: 6 Level of Difficulty: EASY 79. Which of the following is a permanent account category? A) Revenues B) Dividends C) Expenses D) Liabilities Answer: D Rationale: Permanent accounts are accounts presented on the balance sheet. Revenues, dividend, and expenses are presented on the income statement.
Topic: Temporary Accounts LO: 6 Level of Difficulty: EASY 80. Which of the following is a temporary account category? A) Assets B) Expenses C) Liabilities D) Common stock Answer: B Rationale: Temporary accounts are accounts used to gather information for a particular accounting period. Expenses are a temporary subdivision of stockholders’ equity.
©Cambridge Business Publishers, 2020 3-42
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Permanent Accounts LO: 6 Level of Difficulty: EASY 81. Which of the following is a permanent account? A) Accounts Receivable B) Professional Fees Earned C) Advertising Expense D) Cash Dividends Answer: A Rationale: Permanent accounts are accounts presented on the balance sheet. Revenues, dividend, and expenses are presented on the income statement.
Topic: Permanent Accounts LO: 6 Level of Difficulty: EASY 82. Which of the following is a permanent account? A) Supplies Expense B) Cash Dividends C) Retained Earnings D) Service Fees Earned Answer: C Rationale: Permanent accounts are accounts presented on the balance sheet. Revenues, dividend, and expenses are presented on the income statement.
Topic: Temporary Accounts LO: 6 Level of Difficulty: EASY 83. Which of the following is a temporary account? A) Subscriptions Received in Advance B) Cash C) Accounts Payable D) Cash Dividends Answer: D Rationale: Temporary accounts are accounts used to gather information for a particular accounting period. Dividends are a temporary subdivision of stockholders’ equity.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-43
Topic: Temporary Accounts LO: 6 Level of Difficulty: EASY 84. Which of the following is a temporary account? A) Notes Payable B) Land C) Wages Expense D) Common Stock Answer: C Rationale: Temporary accounts are accounts used to gather information for a particular accounting period. Expenses are a temporary subdivision of stockholders’ equity.
Topic: Permanent Accounts LO: 6 Level of Difficulty: EASY 85. The distinguishing feature of a permanent account is that any balance in the account at the end of an accounting period is: A) Carried forward to the next accounting period B) Transferred to a temporary account C) Transferred to the Cash account D) Transferred to a permanent stockholders’ equity account Answer: A Rationale: Permanent accounts are accounts presented on the balance sheet. The distinguishing feature of a permanent account is that any balance in the account at the end of an accounting period is carried forward to the next accounting period.
Topic: Temporary Accounts LO: 6 Level of Difficulty: EASY 86. The distinguishing feature of a temporary account is that any balance in the account at the end of an accounting period is: A) Carried forward to the next accounting period B) Reported in the balance sheet C) Transferred to the Cash account D) Transferred to a permanent stockholders’ equity account Answer: D Rationale: At the end of the accounting period, temporary account balances are transferred to Retained Earnings, which is a permanent stockholders’ equity account.
©Cambridge Business Publishers, 2020 3-44
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Closing Entries Using Retained Earnings LO: 6 Level of Difficulty: MEDIUM 87. Bee Corporation has the following normal account balances in its general ledger at the end of a period: Sales revenue Advertising expense
$600,000 90,000
Which of the following gives the correct entry required to close only the accounts above? A) Advertising Expense 90,000 Retained Earnings 510,000 Sales Revenue B) Sales Revenue 600,000 Advertising Expense Retained Earnings C) Retained Earnings 510,000 Net Income D) None of the above. These accounts are not closed.
600,000 90,000 510,000 510,000
Answer: B Rationale: The closing process requires that revenue accounts are debited and retained earnings are credited for the amount equal to the revenue balance. The closing process also requires that expense accounts are credited and retained earnings debited for an amount equal to the expense balance. The net amount of retained earnings credited in this problem is equal to $510,000 (or $600,000 – $90,000), since revenues are greater than expenses.
Topic: Closing Entries Using Retained Earnings LO: 6 Level of Difficulty: MEDIUM 88. Sage Corporation has the following normal account balances in its general ledger at the end of a period: Sales revenue Advertising expense
$1,800,000 270,000
Which of the following gives the correct entry required to close only the accounts above? A) Advertising Expense 270,000 Retained Earnings 1,530,000 Sales Revenue 1,800,000 B) Sales Revenue 1,800,000 Advertising Expense 270,000 Retained Earnings 1,530,000 C) Retained Earnings 1,530,000 Net Income 1,530,000 D) None of the above. These accounts are not closed. Answer: B Rationale: The closing process requires that revenue accounts are debited and retained earnings are credited for the amount equal to the revenue balance. The closing process also requires that expense accounts are credited and retained earnings debited for an amount equal to the expense balance. The net amount of retained earnings credited in this problem is equal to $1,530,000 (or $1,800,000 – $270,000), since revenues are greater than expenses. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-45
Topic: Post-Closing Trial Balance LO: 6, 7 Level of Difficulty: EASY 89. Which one of the following will never appear on a post-closing trial balance? A) Unearned revenue B) Retained earnings C) Rent expense D) Common stock Answer: C Rationale: All temporary accounts (revenues and expenses) have zero balance after closing, so only balance sheet accounts appear on the post-closing trial balance.
Topic: Temporary Accounts LO: 6, 7 Level of Difficulty: EASY 90. Corporation revenue and expense accounts are considered temporary subdivisions of the corporation’s: A) Common stock B) Cash dividends C) Cash D) Stockholders’ equity Answer: D Rationale: Temporary accounts are accounts used to gather information for a particular accounting period. At the end of the accounting period, temporary account balances are transferred to Retained Earnings, which is a permanent stockholders’ equity account. Thus, revenue and expense accounts are a temporary subdivision of stockholders’ equity.
Topic: Closing Entries LO: 6, 7 Level of Difficulty: EASY 91. A series of journal entries at the end of the accounting period to remove the balances from the temporary accounts so that they can accumulate data for the following accounting period are called: A) Adjusting entries B) Closing entries C) Connecting entries D) Reversing entries Answer: B Rationale: An account that is closed is said to be closed to the account that receives the offsetting debit or credit. Thus, a closing entry simply transfers the balance of one account to another account. Because closing journal entries bring temporary account balances to zero, the temporary accounts are ready to start accumulating data for the next accounting period.
©Cambridge Business Publishers, 2020 3-46
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Closing Entries LO: 7 Level of Difficulty: EASY 92. The following entry closes the Depreciation Expense account at the end of the accounting period: A) Depreciation Expense Accumulated Depreciation B) Depreciation Expense Income Summary C) Accumulated Depreciation Depreciation Expense D) Income Summary Depreciation Expense Answer: D Rationale: The closing process entry to close an expense account is to credit the expense account for the amount equal to its current debit balance and to debit the Income Summary account.
Topic: Closing Entries LO: 7 Level of Difficulty: EASY 93. Which of the following accounts is closed to Income Summary at the end of the accounting period? A) Accumulated Depreciation B) Advertising Expense C) Common Stock D) Cash Dividends Answer: B Rationale: The closing process includes entries to close expense accounts by crediting the expense accounts for the amount equal to their current debit balance and debiting the Income Summary account.
Topic: Closing Entries LO: 7 Level of Difficulty: EASY 94. Which of the following entries could not be a closing entry? A) Service Fees Earned Income Summary B) Income Summary Salary Expense C) Retained Earnings Dividends D) Dividends Cash Answer: D Rationale: The closing process includes entries to close revenue and expense accounts to the income summary and to close the Income Summary account and the Dividends account to the Retained Earnings account.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-47
Topic: Income Summary Account LO: 7 Level of Difficulty: EASY 95. The Income Summary account: A) Appears in a post-closing trial balance B) Receives entries only at year-end, even though income or loss is assumed to be incurred throughout the year C) Reflects the net balance of all revenues, expenses, and dividends just before the account is closed D) Is closed by a debit entry when there is a loss for the period Answer: B Rationale: The Income Summary account is closed prior to preparing the post-closing trial balance; it does not reflect the net balance of dividends (only income and expense accounts), and it is closed by a credit (not a debit) entry when there is a loss for the period.
Topic: Income Summary Account LO: 7 Level of Difficulty: EASY 96. In the closing process for a corporation, the Income Summary account is closed to: A) Retained Earnings B) Common Stock C) Cash Dividends D) Service Revenue Answer: A Rationale: The Income Summary account is closed with a credit to the Retained Earnings account in the case of net income and with a debit in the case of a net loss.
Topic: Closing Entries LO: 6, 7 Level of Difficulty: EASY 97. In the closing process for a corporation, the Cash Dividends account is closed to: A) Common Stock B) Income Summary C) Retained Earnings D) Cash Answer: C Rationale: The closing process includes a debit to the Retained Earnings account and a credit to the Dividends account for an amount equal to the balance in the Dividends account.
©Cambridge Business Publishers, 2020 3-48
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Closing Entries LO: 6, 7 Level of Difficulty: MEDIUM 98. Which of the following accounts is not affected by closing entries? A) Common Stock B) Cash Dividends C) Retained Earnings D) Service Fees Earned Answer: A Rationale: The closing process includes entries to close revenue and expense accounts to the income summary and to close the Income Summary account and the Dividends account to the Retained Earnings account. Common stock is a permanent account and is not closed.
Topic: Closing Entries LO: 7 Level of Difficulty: MEDIUM 99. Koontz & Sons Company, Inc., has a net income for the current year. The entry to close the company’s Income Summary account would be: A) Debit Income Summary; Common Stock B) Debit Income Summary; credit Retained Earnings C) Debit Common Stock; credit Income Summary D) Debit Retained Earnings; credit Income Summary Answer: B Rationale: Since the company has net income for the current year, the Income Summary account has a credit balance prior to closing. Thus, the entry to close the Income Summary account is a debit to Income Summary and a credit to Retained Earnings.
Topic: Closing Entries LO: 7 Level of Difficulty: EASY 100. Which of the following entries is a closing entry? A) Wages Payable Wages Expense B) Retained Earnings Income Summary C) Fees Receivable Service Fees Revenue D) Depreciation Expense Accumulated Depreciation
960 960 4,530 4,530 1,500 1,500 820 820
Answer: B Rationale: The closing process includes entries to close revenue and expense accounts to the income summary and to close the Income Summary account and the Dividends account to the Retained Earnings account. Balance sheet accounts (wages payable, fees receivable, accumulated depreciation) are permanent accounts and are not closed.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-49
Topic: Closing Entries LO: 7 Level of Difficulty: EASY 101. Which of the following entries is a closing entry? A) Wages Payable 2,880 Wages Expense B) Retained Earnings 13,590 Income Summary C) Fees Receivable 5,250 Service Fees Revenue D) Depreciation Expense 2,460 Accumulated Depreciation
2,880 13,590 5,250 2,460
Answer: B Rationale: The closing process includes entries to close revenue and expense accounts to the income summary and to close the Income Summary account and the Dividends account to the Retained Earnings account. Balance sheet accounts (wages payable, fees receivable, accumulated depreciation) are permanent accounts and are not closed.
Topic: Post-Closing Trial Balance LO: 6, 7 Level of Difficulty: EASY 102. Which of the following accounts should not appear in a post-closing trial balance? A) Unearned Service Fees B) Wages Payable C) Retained Earnings D) Depreciation Expense Answer: D Rationale: Depreciation expense is a temporary account which is closed in the closing process. Only permanent (balance sheet) accounts appear in the post-closing trial balance.
Topic: Post-Closing Trial Balance LO: 6, 7 Level of Difficulty: EASY 103. The post-closing trial balance shows amounts for: A) Balance sheet accounts only B) Income statement accounts only C) All general ledger accounts D) All accounts that were closed during the closing procedures Answer: A Rationale: Only permanent (balance sheet) accounts appear in the post-closing trial balance. Temporary (income statement) accounts are closed in the closing process, prior to the preparation of the post-closing trial balance.
©Cambridge Business Publishers, 2020 3-50
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Post-Closing Trial Balance LO: 6, 7 Level of Difficulty: EASY 104. Which of the following accounts should appear in a post-closing trial balance? A) Income Summary B) Accounts Payable C) Service Fees Earned D) Depreciation Expense Answer: B Rationale: Only permanent (balance sheet) accounts appear in the post-closing trial balance. Temporary (income statement) accounts are closed in the closing process, prior to the preparation of the post-closing trial balance.
Topic: Post-Closing Trial Balance LO: 6, 7 Level of Difficulty: EASY 105. Which of the following accounts should appear in a post-closing trial balance? A) Prepaid Insurance B) Supplies Expense C) Cash Dividends D) Professional Fees Earned Answer: A Rationale: Only permanent (balance sheet) accounts appear in the post-closing trial balance. Temporary (income statement) accounts are closed in the closing process, prior to the preparation of the post-closing trial balance.
Topic: Accounting Cycle LO: 6, 7 Level of Difficulty: EASY 106. A complete accounting cycle occurs once every: A) Week B) Month C) Quarter D) Fiscal period Answer: D Rationale: The sequence of accounting procedures known as the accounting cycle occurs each fiscal period and represents a systematic process for accumulating and reporting the financial data of a business.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-51
Topic: Accounting Cycle LO: 6, 7 Level of Difficulty: EASY 107. Which of the following accounting cycle steps occurs only at the end of the accounting year? A) Analyze transactions from source documents B) Prepare financial statements C) Prepare a post-closing trial balance D) Record transactions in journals Answer: C Rationale: The accounting cycle includes five major steps, in order of occurrence: Analyze (transactions from source documents), Record (transactions in journals), Adjust (journalize adjusting entries and prepare adjusted trial balance), Report (prepare financial statements) and Close (journalize closing entries and a post-closing trial balance).
Topic: Worksheets LO: 8 Level of Difficulty: EASY 108. Debit and credit columns are not provided in the worksheet for the following: A) Adjusted trial balance B) Adjustments C) Income statement D) Post-closing trial balance Answer: D Rationale: A worksheet is an informal document that helps accumulate the accounting information needed to prepare the financial statements. It included the Unadjusted Trial Balance, Adjustments, Adjusted Trial Balance Income Statement, and Balance Sheet.
Topic: Worksheets LO: 8 Level of Difficulty: EASY 109. Preparation of a worksheet: A) Makes a general ledger unnecessary B) Facilitates the analysis of source documents C) Facilitates the preparation of financial statements D) Makes interim financial statements unnecessary Answer: C Rationale: A worksheet is an informal document that helps accumulate the accounting information needed to prepare the financial statements. It includes the Unadjusted Trial Balance, Adjustments, Adjusted Trial Balance Income Statement, and Balance Sheet.
©Cambridge Business Publishers, 2020 3-52
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Worksheets LO: 8 Level of Difficulty: MEDIUM 110. In preparing a worksheet, assume you have just extended the adjusted account balances to the income statement and balance sheet columns. If no errors are made, which columns would you expect to have equal debit and credit amounts at this point? A) Income statement debits and credits B) Balance sheet debits and credits C) Income statement debits and balance sheet credits D) None of the above Answer: D Rationale: The difference between the debit and credit columns in the income statement is the difference between total revenues and total expenses (net income or net loss). The net income or net loss must be the amount by which the debit and credit columns in the balance sheet differ.
Topic: Worksheets LO: 8 Level of Difficulty: EASY 111. In extending an adjusted trial balance on a worksheet, which of the following is done? A) Expenses are extended to the income statement credit column. B) Assets and dividends are extended to the balance sheet credit column. C) Revenues are extended to the income statement credit column. D) Liabilities are extended to the balance sheet debit column. Answer: C Rationale: In extending an adjusted trail balance on a worksheet, revenues are extended to the income statement credit column. Expenses are extended to the income statement debit (not credit) column. Assets and cash dividends are extended to the balance sheet debit (not credit) column. Liabilities are extended to the balance sheet credit (not debit) column.
Topic: Worksheets LO: 8 Level of Difficulty: MEDIUM 112. In preparing a worksheet, the net income amount for the period is first entered as: A) A debit in the income statement columns B) A credit in the income statement columns C) A debit in the balance sheet columns D) A credit in the adjusted trail balance columns Answer: A Rationale: In preparing a worksheet, if net income (revenues exceed expenses) for the period results, it is first entered as a debit in the income statement columns. This will result in the worksheet income statement debit and credit columns balancing.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-53
Topic: Worksheets LO: 8 Level of Difficulty: MEDIUM 113. Preparation of a worksheet for a period during which a net loss was incurred causes which of the following relationships among worksheet column totals (before balancing the worksheet)? A) Balance sheet debits exceed balance sheet credits B) Balance sheet credits exceed balance sheet debits C) Income statement credits exceed income statement debits D) Adjusted trail balance debits exceed adjusted trial balance credits Answer: B Rationale: In preparing a worksheet, if a net loss (expenses exceed revenues) for the period results, it would be entered as a debit in the balance sheet debit column, since balance sheet credits would exceed balance debits.
Topic: Worksheets LO: 8 Level of Difficulty: EASY 114. A worksheet: A) Constitutes a formal financial statement of a company B) Eliminates the need for journalizing year-end adjusting entries C) Provides the information needed for journalizing the year-end adjusting and closing entries D) Is useful only if the books are to be closed Answer: C Rationale: A worksheet can be used to facilitate the adjusting and closing processes, and ultimately the preparation of the company’s financial statements.
Topic: Worksheet LO: 8 Level of Difficulty: MEDIUM 115. Before the proper closing procedures may be accomplished, the adjusting entries on the year-end worksheet must be: A) Spread to the proper worksheet financial statement columns B) Reversed C) Footed D) Journalized and posted Answer: D Rationale: Once the year-end worksheet has been completed, the last three steps of the accounting cycle – adjust, report, and close may be done. The adjusting entries to be journalized and posted can be taken from the information in the adjustment columns. Because they have first been entered on the worksheet, they can be reviewed for their financial effects before being journalized, thus, the likelihood of incorrect adjustments appearing in the formal accounting records is reduced.
©Cambridge Business Publishers, 2020 3-54
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Accrual Basis of Accounting LO: 1 Level of Difficulty: EASY 116. On December 15, 2019, Yummy Treats Bakery receives an order from a customer for services to be performed on December 28, 2019. Due to a backlog of orders, the company does not perform the services until January 3, 2020. The customer pays for the services on January 16, 2020. The revenue recognition principle requires the revenue to be recorded by the company on: A) January 3, 2020 B) January 16, 2020 C) December 28, 2019 D) December 15, 2019 Answer: A Rationale: Under the accrual basis of accounting, sales revenue is recognized when it is earned, regardless of when the related cash is collected. For the Yummy Treats Bakery, revenue is earned when the service is performed on January 3, 2020.
Topic: Accrual Basis of Accounting LO: 1 Level of Difficulty: EASY 117. Under the accrual basis of accounting: A) Cash must be received before revenue is recognized. B) Net income is calculated by matching cash outflows against cash inflows. C) Events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received. D) The ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles. Answer: C Rationale: Under the accrual basis of accounting, events that change a company’s financial statements (e.g., sales revenue or expenditures) are recognized in the period when they occur, regardless of when the related cash is received or paid.
Topic: Accrual Basis of Accounting LO: 1 Level of Difficulty: MEDIUM 118. Which of the following reflect the balances of unearned revenue prior to adjustment? A) Balance sheet accounts are understated and income statement accounts are understated. B) Balance sheet accounts are overstated and income statement accounts are overstated. C) Balance sheet accounts are overstated and income statement accounts are understated. D) Balance sheet accounts are understated and income statement accounts are overstated. Answer: C Rationale: When unearned revenue is received, cash is debited and unearned revenue is credited. The adjustment to record earned revenue would decrease unearned revenue (a balance sheet liability account) and increase earned revenue (an income statement revenue account). Thus, if the adjustment has not yet been made, the unearned revenue balance sheet account would be overstated and the earned revenue income statement account would be understated.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-55
Topic: Adjusting Accounts LO: 2, 3 Level of Difficulty: DIFFICULT 119. On March 1, Schultze and Daughters reported a balance in Supplies of $500. During March, the company purchased supplies (properly recorded) for $1,900 and consumed supplies of $1,600. If no adjusting entry is made for supplies at the end of the month: A) Stockholders' equity will be overstated by $1,600. B) Expenses will be understated by $1,900. C) Assets will be understated by $700. D) Net income will be understated by $1,600. Answer: A Rationale: Required month-end entry: Supplies expense $1,600 Supplies (to record supplies consumed during March)
$1,600
Failure to record Supplies Expense understates expense and thus overstates net income by $1,600 for the month. Failure to record supplies (an asset) consumed, overstates assets on the Balance Sheet.
Topic: Adjusting Accounts LO: 2, 3 Level of Difficulty: DIFFICULT 120. On March 1, Maibritt D. reported a balance in Supplies of $1,500. During March, the company purchased supplies (properly recorded) for $5,700 and consumed supplies of $4,800. If no adjusting entry is made for supplies at the end of the month: A) Stockholders' equity will be overstated by $4,800. B) Expenses will be understated by $5,700. C) Assets will be understated by $2,100. D) Net income will be understated by $4,800. Answer: A Rationale: Required month-end entry: Supplies expense $4,800 Supplies (to record supplies consumed during March)
$4,800
Failure to record Supplies Expense understates expense and thus overstates net income by $4,800 for the month. Failure to record supplies (an asset) consumed, overstates assets on the Balance Sheet.
©Cambridge Business Publishers, 2020 3-56
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Adjusting Accounts LO: 2, 3 Level of Difficulty: MEDIUM 121. Riverboat Company had $4,800 of supplies on hand on January 1. During the year, the company purchased $7,800 of supplies, and on December 31, determined that only $1,600 of supplies were still on hand. The adjusting entry for Riverboat Company on December 31, will include: A) Credit Supplies Expense $11,000 B) Debit Supplies Expense $4,600 C) Debit Supplies $7,800 D) Debit Supplies Expense $11,000 Answer: D Rationale: Beginning supplies + Purchases – Supplies used = Ending supplies $4,800 + $7,800 – X = $1,600 X = $4,800 + $7,800 - $1,600 = $11,000 = Supplies used Required entry: Supplies expense Supplies
$11,000 $11,000
Topic: Adjusting Accounts LO: 2, 3 Level of Difficulty: MEDIUM 122. Rowing Company had $14,400 of supplies on hand on January 1. During the year, the company purchased $23,400 of supplies, and on December 31, determined that only $4,800 of supplies were still on hand. The adjusting entry for Rowing Company on December 31, will include: A) Credit Supplies Expense $33,000 B) Debit Supplies Expense $13,800 C) Debit Supplies $23,400 D) Debit Supplies Expense $33,000 Answer: D Rationale: Beginning supplies + Purchases – Supplies used = Ending supplies $14,400 + $23,400 – X = $4,800 X = $14,400 + $23,400 - $4,800 = $33,000 = Supplies used Required entry: Supplies expense Supplies
$33,000 $33,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-57
Topic: Adjusting Accounts LO: 2, 3 Level of Difficulty: MEDIUM 123. Casden Company paid $48,000 in insurance premiums during 2019. Their financial statements showed $8,000 in prepaid insurance on its Balance Sheet as of December 31, 2018 and $12,000 on its Balance Sheet as of December 31, 2019. The insurance expense to be reported on the income statement for 2019 should be: A) $57,000 B) $40,800 C) $44,000 D) $51,600 Answer: C Rationale: Beg. prepaid insurance + Premiums paid – Insurance expense = End. prepaid insurance $8,000 + $48,000 – X = $12,000 X = $8,000 + $48,000 - $12,000 X = $44,000
Topic: Adjusting Accounts LO: 2, 3 Level of Difficulty: MEDIUM 124. McDougall Company paid $144,000 in insurance premiums during 2019. Their financial statements showed $24,000 in prepaid insurance on its Balance Sheet as of December 31, 2018 and $36,000 on its Balance Sheet as of December 31, 2019. The insurance expense to be reported on the income statement for 2019 should be: A) $154,800 B) $171,000 C) $122,400 D) $132,000 Answer: D Rationale: Beginning prepaid insurance + Premiums paid – Insurance expense = Ending prepaid insurance $24,000 + $144,000 – X = $36,000 X = 24,000 + 144,000 - $36,000 X = $132,000
©Cambridge Business Publishers, 2020 3-58
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Adjusting Accounts LO: 2, 3 Level of Difficulty: MEDIUM st 125. On January 1 , Veronica Company began the year with $400 worth of supplies, and during the st year, purchased $1,600 worth of supplies on account. On December 31 , the fiscal year end, it is determined that $1,000 dollars of supplies have been used up. What is the balance in the supplies account after adjustment? A) $1,400 B) $1,000 C) $ 1,200 D) $ 2,400 Answer: B Rationale: Beginning supplies + Purchases – Supplies used = Ending supplies $400 + $1,600 – $1,000 = X X = $1,000
Topic: Adjusting Accounts LO: 2, 3 Level of Difficulty: MEDIUM st 126. On January 1 , Andrew Company began the year with $1,200 worth of supplies, and during the st year, purchased $4,800 worth of supplies on account. On December 31 , the fiscal year end, it is determined that $3,000 dollars of supplies have been used up. What is the balance in the supplies account after adjustment? A) $7,200 B) $4,200 C) $3,000 D) $3,600 Answer: C Rationale: Beginning supplies + Purchases – Supplies used = Ending supplies $1,200 + $4,800 – $3,000 = X X = $3,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-59
Topic: Adjusting Accounts LO: 2, 3 Level of Difficulty: MEDIUM 127. At the beginning of the period, Polly Parrot Corporation had $800 of supplies on hand. During the period, it purchased $1,800 of supplies and at the end of the period, the company determined that only $1,600 of supplies were still on hand. What adjusting entry should Polly Parrot Corporation make at the end of the period? A) Supplies Expense 2,600 Supplies 2,600 B) Supplies Expense 1,000 Supplies 1,000 C) Supplies 2,600 Supplies Expense 2,600 D) Supplies 1,000 Supplies Expense 1,000 Answer: B Rationale: Beginning supplies + Purchases – Supplies used = Ending supplies $800 + $1,800 – X = $1,600 X = $800 + $1,800 - $1,600 = $1,000
Topic: Adjusting Accounts LO: 2, 3 Level of Difficulty: MEDIUM 128. At the beginning of the period, Kitty Treats Corporation had $2,400 of supplies on hand. During the period, it purchased $5,400 of supplies and at the end of the period, the company determined that only $4,800 of supplies were still on hand. What adjusting entry should Kitty Treats Corporation make at the end of the period? A) Supplies 3,000 Supplies Expense 3,000 B) Supplies Expense 7,800 Supplies 7,800 C) Supplies Expense 3,000 Supplies 3,000 D) Supplies 7,800 Supplies Expense 7,800 Answer: C Rationale: Beginning supplies + Purchases – Supplies used = Ending supplies $2,400 + $5,400 – X = $4,800 X = $2,400 + $5,400 - $4,800 = $3,000
©Cambridge Business Publishers, 2020 3-60
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 129. Billy Goat Company sent a check for $96 to Munch Digest magazine on May 1, 2019 toward one year subscription. If Billy Goat’s financial year ends on September 30, their financial statements will report: A) Prepaid Subscription of $48, and Subscription Expense of $24 B) Prepaid Subscription of $56, and Subscription Expense of $40 C) Prepaid Subscription of $24, and Subscription Expense of $48 D) Prepaid Subscription of $36, and Subscription Expense of $36 Answer: B Rationale: $96 x 5/12 = $40 = Subscription utilized (expense) in current year. Beginning prepaid subscription – Subscription utilized = Ending Prepaid Subscription $96 - $40 = $56
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 130. Lupin Lab Company sent a check for $288 to Lab Fancy Digest magazine on May 1, 2019 toward one year subscription. If Lupin Lab’s financial year ends on September 30, their financial statements will report: A) Prepaid Subscription of $108, and Subscription Expense of $108 B) Prepaid Subscription of $144, and Subscription Expense of $72 C) Prepaid Subscription of $168, and Subscription Expense of $120 D) Prepaid Subscription of $72, and Subscription Expense of $144 Answer: C Rationale: $288 x 5/12 = $120 = Subscription utilized (expense) in current year. Beginning prepaid subscription – Subscription utilized = Ending Prepaid Subscription $288 - $120 = $168
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-61
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 131. Hilton Head Realty Company received a check for $60,000 on July 1 which represents a 6 month advance payment of rent on a building it rents to a client. Unearned Rent was credited for the full $60,000. Financial statements will be prepared on July 31. Hilton Head Realty should make the following adjusting entry on July 31: A) Debit Unearned Rent, $60,000; Credit Rental Revenue, $60,000 B) Debit Cash, $60,000; Credit Rental Revenue, $60,000 C) Debit Unearned Rent, $10,000; Credit Rental Revenue, $10,000 D) Debit Rental Revenue, $5,000; Credit Unearned Rent, $5,000 Answer: C Rationale: $60,000 x 1/6 = $10,000 = Rent Revenue in current year. Original entry: Cash $60,000 Unearned Rent (to record receipt of advance rent payment) Year-end entry: Unearned Rent $10,000 Rental Revenue (to record rental income earned during year)
$60,000
$10,000
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 132. Tracey Realty Company received a check for $180,000 on July 1 which represents a 6 month advance payment of rent on a building it rents to a client. Unearned Rent was credited for the full $180,000. Financial statements will be prepared on July 31. Tracey Realty should make the following adjusting entry on July 31: A) Debit Rental Revenue, $15,000; Credit Unearned Rent, $15,000 B) Debit Unearned Rent, $180,000; Credit Rental Revenue, $180,000 C) Debit Cash, $180,000; Credit Rental Revenue, $180,000 D) Debit Unearned Rent, $30,000; Credit Rental Revenue, $30,000 Answer: D Rationale: $180,000 x 1/6 = $30,000 = Rent Revenue in current year. Original Entry: Cash $180,000 Unearned Rent (to record receipt of advance rent payment) Year-end entry: Unearned Rent $30,000 Rental Revenue (to record rental income earned during year)
$180,000
$30,000
©Cambridge Business Publishers, 2020 3-62
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 133. On January 1, 2019, Super Fit Company received a check from a member for $1,080, which represents dues for the next 18 months. What effect will Super Fit Company’s adjusting journal entry at the end of the accounting period on December 31, 2019 have on their accounting equation? A) Decrease Assets by $720 B) Decrease Liabilities by $720 C) Increase Assets by $720 D) Increase Liabilities by $720 Answer: B Rationale: $1,080 x 12/18 = $720 = Membership Revenue in current year. Original Entry:
Cash
$1,080 Unearned Revenue $1,080 (to record receipt of advance membership dues)
Year-end entry:
Unearned Revenue $720 Membership Revenue $720 (to record membership revenue earned during year)
Unearned revenue is a liability, so liabilities decreased by $720 at the end of the year. Membership revenue is an income statement account, so it does not change assets or liabilities.
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 134. On January 1, 2019, Tennis Club received a check from a member for $3,240, which represents dues for the next 18 months. What effect will Tennis Club’s adjusting journal entry at the end of the accounting period on December 31, 2019 have on their accounting equation? A) Increase Liabilities by $2,160 B) Decrease Assets by $2,160 C) Decrease Liabilities by $2,160 D) Increase Assets by $2,160 Answer: C Rationale: $3,240 x 12/18 = $2,160 = Membership Revenue in current year. Original Entry:
Cash
$3,240 Unearned Revenue $3,240 (to record receipt of advance membership dues)
Year-end entry:
Unearned Revenue $2,160 Membership Revenue $2,160 (to record membership revenue earned during year)
Unearned revenue is a liability, so liabilities decreased by $2,160 at the end of the year. Membership revenue is an income statement account, so it does not change assets or liabilities. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-63
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 135. On October 1, Augustiniak Insurance Company receives the insurance premium, in advance, from a customer for a 12-month insurance policy for $2,400. Assuming that the company closes its books on December 31, what will be the adjusting entry on December 31? A) Unearned Revenue Insurance Premium Revenue B) Insurance Expense Prepaid Insurance C) Insurance Premium Revenue Unearned Revenue D) Unearned Revenue Prepaid Insurance
600 600 600 600 600 600 600 600
Answer: A Rationale: 2,400 x 3/12 = $600 insurance revenue in the current year Original Entry:
Cash
$2,400 Unearned Revenue $2,400 (to record receipt of advance insurance premium)
Year-end entry:
Unearned Revenue $600 Insurance Premium Revenue $600 (to record insurance premium income earned during year)
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 136. On October 1, Tacoma Insurance Company receives the insurance premium, in advance, from a customer for a 12-month insurance policy for $7,200. Assuming that the company closes its books on December 31, what will be the adjusting entry on December 31? A) Unearned Revenue Prepaid Insurance B) Unearned Revenue Insurance Premium Revenue C) Insurance Expense Prepaid Insurance D) Insurance Premium Revenue Unearned Revenue
1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800
Answer: B Rationale: $7,200 x 3/12 = $1,800 insurance revenue in the current year Original Entry:
Cash
$7,200 Unearned Revenue $7,200 (to record receipt of advance insurance premium)
Year-end entry:
Unearned Revenue $1,800 Insurance Premium Revenue $1,800 (to record insurance premium income earned during year)
©Cambridge Business Publishers, 2020 3-64
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Adjusting Accounts LO: 3 Level of Difficulty: DIFFICULT 137. Great Value Co-Op recognizes membership fee revenues over the term of the membership, which is 12 months. If their Unearned Membership Fee Revenue account had a balance of $1,200 million on January 31, 2019, and $1,100 million on January 31, 2020 and the company received membership fees in cash of $2,200 million during the year, what amount was recognized as Membership Fee Revenue for the fiscal year? A) $2,140 million B) $2,108 million C) $4,280 million D) $2,300 million Answer: D Rationale: $1,200 + $2,200 – X = $1,100 X = $1,200 + $2,200 - $1,100 X = $2,300
Topic: Adjusting Accounts LO: 3 Level of Difficulty: DIFFICULT 138. We Got It All Warehouse Company recognizes membership fee revenues over the term of the membership, which is 12 months. If their Unearned Membership Fee Revenue account had a balance of $3,600 million on January 31, 2019, and $3,300 million on January 31, 2020 and the company received membership fees in cash of $6,600 million during the year, what amount was recognized as Membership Fee Revenue for the fiscal year? A) $ 6,900 million B) $ 6,420 million C) $ 6,324 million D) $12,840 million Answer: A Rationale: $3,600 + $6,600 – X = $3,300 X = $3,600 + $6,600 - $3,300 X = $6,900
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-65
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 139. Gustav Schulze Realtors always collects rent in advance from its customers. The 2019 income statement for Gustav reports rent revenue of $42,000. Assume all rent is paid in cash. The related balance sheet accounts for the beginning and end of the year were:
Unearned Rent
Jan. 1, 2019 $7,000
Dec. 31, 2019 $13,000
Based on this information, the amount of cash collected during 2019 from Gustav's customers was: A) $48,000 B) $15,600 C) $56,500 D) $53,000 Answer: A Rationale: $7,000 + X - $42,000 = $13,000 X = $13,000 - $7,000 + $42,000 X = $48,000
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 140. Bruder Realtors always collects rent in advance from its customers. The 2019 income statement for Bruder reports rent revenue of $126,000. Assume all rent is paid in cash. The related balance sheet accounts for the beginning and end of the year were:
Unearned Rent
Jan. 1, 2019 $21,000
Dec. 31, 2019 $39,000
Based on this information, the amount of cash collected during 2019 from Bruder's customers was: A) $159,000 B) $144,000 C) $ 46,800 D) $169,500 Answer: B Rationale: $21,000 + X - $126,000 = $39,000 X = $39,000 - $21,000 + $126,000 X = $144,000
©Cambridge Business Publishers, 2020 3-66
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 141. On June 1, 2019, Emma Schulze Corporation received $3,600 as advance payment for 12 months' advertising. The receipt was recorded as a credit to Unearned Fees. What adjusting entry is required on December 31, 2019? A) Unearned Fees Advertising Revenue B) Unearned Fees Advertising Revenue C) Unearned Fees Advertising Revenue D) Advertising Revenue Unearned Fees
1,800 1,800 1,500 1,500 2,100 2,100 2,100 2,100
Answer: C Rationale: $3,600 x 7/12 = $2,100 advertising revenue in the current year Original Entry: Cash $3,600 Unearned Fees (to record receipt of advance advertising payment)
$3,600
Year-end entry: Unearned Fees $2,100 Advertising Revenue (to record advertising revenue earned during year)
$2,100
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 142. On June 1, 2019, Enne Brahtz Corporation received $10,800 as advance payment for 12 months' advertising. The receipt was recorded as a credit to Unearned Fees. What adjusting entry is required on December 31, 2019? A) Advertising Revenue Unearned Fees B) Unearned Fees Advertising Revenue C) Unearned Fees Advertising Revenue D) Unearned Fees Advertising Revenue
6,300 6,300 5,400 5,400 4,500 4,500 6,300 6,300
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-67
Answer: D Rationale: $10,800 x 7/12 = $6,300 advertising revenue in the current year Original Entry: Cash $10,800 Unearned Fees (to record receipt of advance advertising payment) Year-end entry: Unearned Fees $6,300 Advertising Revenue (to record advertising revenue earned during year)
$10,800
$6,300
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 143. Guinea Pigs R Us magazine company’s Unearned Revenue account had a balance of $25,400 on January 1, 2019. On December 31, 2019, as part of the adjusting entry, they recognized Subscription revenue of $29,600. The December 31, 2019 balance of the Unearned Revenue account was $24,600. What must have been the amount of cash received by the Guinea Pigs R Us magazine company from customers during the year 2019? A) $20,400 B) $28,800 C) $29,600 D) $30,400 Answer: B Rationale: $25,400 - $29,600 + X = $24,600 X = $24,600 - $25,400 + $29,600 X= $28,800
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 144. YA Magazine company’s Unearned Revenue account had a balance of $76,200 on January 1, 2020. On December 31, 2019, as part of the adjusting entry, they recognized Subscription revenue of $88,800. The December 31, 2019 balance of the Unearned Revenue account was $73,800. What must have been the amount of cash received by the YA Magazine company from customers during the year 2019? A) $91,200 B) $61,200 C) $86,400 D) $88,800 Answer: C Rationale: Unearned Revenue beginning of year + Change in Unearned Membership Fee Revenue = $76,200 - $88,800 + X = $73,800 X = $73,800 - $76,200 + $88,800 X = $86,400 ©Cambridge Business Publishers, 2020 3-68
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Adjusting Accounts LO: 4 Level of Difficulty: MEDIUM 145. During July, wage expense of $54,000 was reported on the income statement of Caroline Company. If wages payable on July 1st was $4,000, and wages of $40,000 were paid during July, how much was accrued wages payable on July 31st? A) $18,000 B) $ 3,000 C) $ 2,000 D) $ 4,000 Answer: A Rationale: Beginning wages payable + Wage expense – Wages paid = Ending wages payable $4,000 + $54,000 - $40,000 = X X = $18,000
Topic: Adjusting Accounts LO: 4 Level of Difficulty: MEDIUM 146. During July, wage expense of $162,000 was reported on the income statement of Carl Nickolas Company. If wages payable on July 1st was $12,000, and wages of $120,000 were paid during July, how much was accrued wages payable on July 31st? A) $12,000 B) $54,000 C) $ 9,000 D) $ 6,000 Answer: B Rationale: Beginning wages payable + Wage expense – Wages paid = Ending wages payable $12,000 + $162,000 - $120,000 = X X = $54,000
Topic: Adjusting Accounts LO: 4 Level of Difficulty: MEDIUM 147. John Monroe Company borrowed $60,000 from Bank of USA by signing a 6%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares monthly financial statements, the adjusting entry that the company should make for interest on September 30, would be: A) Debit Note Payable , $3,600; Credit Cash, $3,600 B) Debit Interest Expense, $900; Credit Interest Payable, $900 C) Debit Interest Expense, $3,600; Credit Interest Payable, $3,600 D) Debit Interest Expense, $300; Credit Interest Payable, $300 Answer: D Rationale: Total Interest Expense = ($60,000 x 0.06) x 3/12 = $900 Interest Expense for September = $900 / 3 = $300 Entry September 30: Interest Expense Interest Payable
$300 $300 ©Cambridge Business Publishers, 2020
Test Bank, Chapter 3
3-69
Topic: Adjusting Accounts LO: 4 Level of Difficulty: MEDIUM 148. Tommy Company borrowed $180,000 from Bank of USA by signing a 6%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares monthly financial statements, the adjusting entry that the company should make for interest on September 30, would be: A) Debit Interest Expense, $900; Credit Interest Payable, $900 B) Debit Note Payable, $10,800; Credit Cash, $10,800 C) Debit Interest Expense, $2,700; Credit Interest Payable, $2,700 D) Debit Interest Expense, $10,800; Credit Interest Payable, $10,800 Answer: A Rationale: Total Interest Expense = ($180,000 x .06) x 3/12 = $2,700 Interest Expense for September = $2,700 / 3 = $900 Entry September 30: Interest Expense Interest Payable
$900 $900
Topic: Adjusting Accounts LO: 4 Level of Difficulty: MEDIUM 149. Lucky Company obtained a $50,000, one-year, 12 percent bank loan on November 1 of the current year. Interest is payable at the end of the loan term. The company’s adjusting entry needed on December 31 is: A) A debit to Interest Receivable of $1,000 and a credit to Interest Revenue of $1,000 B) A debit to Interest Expense of $500 and a credit to Interest Payable of $500 C) A debit to Interest Expense of $1,000 and a credit to Interest Payable of $1,000 D) A debit to Interest Expense of $6,000 and a credit to Interest Payable of $6,000 Answer: C Rationale: Interest Expense = ($50,000 x 0.12) x 2/12 = $1,000 Entry December 31: Interest Expense Interest Payable
$1,000 $1,000
©Cambridge Business Publishers, 2020 3-70
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Adjusting Accounts LO: 4 Level of Difficulty: MEDIUM 150. Green Tea Company obtained a $150,000, one-year, 12 percent bank loan on November 1 of the current year. Interest is payable at the end of the loan term. The company’s adjusting entry needed on December 31 is A) A debit to Interest Expense of $18,000 and a credit to Interest Payable of $18,000 B) A debit to Interest Receivable of $3,000 and a credit to Interest Revenue of $3,000 C) A debit to Interest Expense of $1,500 and a credit to Interest Payable of $1,500 D) A debit to Interest Expense of $3,000 and a credit to Interest Payable of $3,000 Answer: D Rationale: Interest Expense = ($150,000 x 0.12) x 2/12 = $3,000 Entry December 31: Interest Expense Interest Payable
$3,000 $3,000
Topic: Adjusting Accounts LO: 4 Level of Difficulty: MEDIUM 151. Weidman Company's weekly payroll of $60,000 is paid every Friday for a 5-day workweek. Assume that the last day of the fiscal year falls on Wednesday. Which of the following journal entries would be made on the first Friday following the year-end? A) Salaries Expense Salaries Payable B) Salaries Expense Cash C) Salaries Expense Salaries Payable Cash D) Salaries Expense Salaries Payable Cash
36,000 36,000 24,000 24,000 36,000 24,000 60,000 24,000 36,000 60,000
Answer: D Rationale: Weekly payroll / 5 days = Daily payroll $60,000 / 5 = $12,000 per day Payroll in old year= $12,000 x 3 days = $36,000 Payroll in new year= $12,000 x 2 days = $24,000 Year-end entry: Salaries Expense Salaries Payable
$36,000
Entry made on the first Friday following the year-end: Salaries Expense $24,000 Salaries Payable $36,000 Cash
$36,000
$60,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-71
Topic: Adjusting Accounts LO: 4 Level of Difficulty: MEDIUM 152. Creations by Brahtz has a weekly payroll of $180,000 is paid every Friday for a 5-day workweek. Assume that the last day of the fiscal year falls on Wednesday. Which of the following journal entries would be made on the first Friday following the year-end? A) Salaries Expense Salaries Payable Cash B) Salaries Expense Salaries Payable C) Salaries Expense Cash D) Salaries Expense Salaries Payable Cash
72,000 108,000 180,000 108,000 108,000 72,000 72,000 108,000 72,000 180,000
Answer: A Rationale: Weekly payroll / 5 days = Daily payroll $180,000 / 5 = $36,000 per day Payroll in old year= $36,000 x 3 days = $108,000 Payroll in new year= $36,000 x 2 days = $72,000 Year-end entry: Salaries Expense Salaries Payable
$108,000 $108,000
Entry made on the first Friday following the year-end: Salaries Expense $72,000 Salaries Payable $108,000 Cash $180,000
©Cambridge Business Publishers, 2020 3-72
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Adjusting Accounts LO: 4 Level of Difficulty: DIFFICULT 153. Julissa Company pays its employees a total salary of $14,000 every other Friday for 10 days of work (employees do not work or get paid for Saturdays and Sundays). In a given year, the company’s pay days fall on September 26 (Friday) and October 10 (Friday), and they close their books on September 30. Which of the following pairs of journal entries is correct? A) Sept 30
Oct 10
B) Sept 30
Oct 10
C) Sept 30
Oct 10
D) Sept 30
Oct 10
Salaries Expense Salaries Payable
2,800
Salaries Expense Cash
14,000
Salaries Expense Salaries Payable
2,800
Salaries Payable Salaries Expense Cash
2,800 11,200
Salaries Expense Salaries Payable
2,800
Salaries Payable Salaries Expense Cash
5,600 8,400
Salaries Expense Cash
2,800
Salaries Expense Cash
11,200
2,800
14,000
2,800
14,000
2,800
14,000
2,800
11,200
Answer: B Rationale: Every other week payroll / 10 days = Daily payroll $14,000 / 10 = $1,400 per day Payroll in old year = $1,400 x 2 days = $2,800 Payroll in new year = $1,400 x 8 days = $11,200 Sept. 30 year-end entry: Salaries Expense Salaries Payable
$2,800 $2,800
Oct. 10 entry made on the first Friday following the year-end: Salaries Payable $ 2,800 Salaries Expense $11,200 Cash $14,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-73
Topic: Adjusting Accounts LO: 4 Level of Difficulty: DIFFICULT 154. Nunez Company pays its employees a total salary of $42,000 every other Friday for 10 days of work (employees do not work or get paid for Saturdays and Sundays). In a given year, the company’s pay days fall on September 26 (Friday) and October 10 (Friday), and they close their books on September 30. Which of the following pairs of journal entries is correct? A) Sept 30
Oct 10
B) Sept 30
Oct 10
C) Sept 30
Oct 10
D) Sept 30
Oct 10
Salaries Expense Cash
8,400
Salaries Expense Cash
33,600
Salaries Expense Salaries Payable
8,400
Salaries Expense Cash
42,000
Salaries Expense Salaries Payable
8,400
Salaries Payable Salaries Expense Cash
8,400 33,600
Salaries Expense Salaries Payable
8,400
Salaries Payable Salaries Expense Cash
16,800 25,200
8,400
33,600
8,400
42,000
8,400
42,000
8,400
42,000
Answer: C Rationale: Every other week payroll / 10 days = Daily payroll $42,000 / 10 = $4,200 per day Payroll in old year = $4,200 x 2 days = $8,400 Payroll in new year = $4,200 x 8 days = $33,600 Sept. 30 year-end entry: Salaries Expense Salaries Payable
$8,400 $8,400
Oct. 10 entry made on the first Friday following the year-end: Salaries Payable $8,400 Salaries Expense $33,600 Cash $42,000
©Cambridge Business Publishers, 2020 3-74
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Adjusting Accounts LO: 4 Level of Difficulty: MEDIUM 155. Duke Company received a $50,000, one year, 9 percent bank loan on October 31, 2019. Interest is payable at the end of the loan term. Duke’s adjusting entry at the end of their fiscal year on March 31, 2020 is: A) A debit to Interest Expense of $1,875 and a credit to Interest Payable of $1,875 B) A debit to Interest Receivable of $2,250 and a credit to Interest Payable of $2,250 C) A debit to Interest Expense of $750 and a credit to Interest Payable of $750 D) A debit to Interest Expense of $4,500 and a credit to Interest Revenue of $4,500 Answer: A Rationale: Total Interest Expense = ($50,000 x 0.09) = $4,500 Interest Expense for fiscal year = $4,500 x 5/12 = $1,875 Entry March 31, 2020: Interest Expense Interest Payable
$1,875 $1,875
Topic: Adjusting Accounts LO: 4 Level of Difficulty: MEDIUM 156. Julissa Company received a $150,000, one year, 9 percent bank loan on October 31, 2019. Interest is payable at the end of the loan term. Adelman’s adjusting entry at the end of their fiscal year on March 31, 2020 is: A) A debit to Interest Expense of $5,625 and a credit to Interest Payable of $5,625 B) A debit to Interest Receivable of $6,750 and a credit to Interest Payable of $6,750 C) A debit to Interest Expense of $2,250 and a credit to Interest Payable of $2,250 D) A debit to Interest Expense of $13,500 and a credit to Interest Revenue of $13,500 Answer: A Rationale: Total Interest Expense = ($150,000 x 0.09) = $13,500 Interest Expense for fiscal year = $13,500 x 5/12 = $5,625 Entry March 31, 2020: Interest Expense Interest Payable
$5,625 $5,625
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-75
Topic: Adjusting Accounts LO: 4 Level of Difficulty: MEDIUM 157. Swiss Chocolate Company has a policy of paying for all its utilities one month after they receive the bills. In its Utilities Payable account, Swiss Chocolate reported $94,000 on January 1, 2019, and $112,000 on December 31, 2019. If cash paid for utilities during the year 2019 was $546,000, what was Swiss Chocolate Company’s Utilities Expense for the year 2019? A) $658,000 B) $564,000 C) $640,000 D) $528,000 Answer: B Rationale: Beginning Utilities Payable + Utilities expense - Cash paid = Ending Utilities Payable $94,000 + X - $546,000 = $112,000 X = $112,000 - $94,000 + $546,000 Utilities Expense = $564,000
Topic: Adjusting Accounts LO: 4 Level of Difficulty: MEDIUM 158. Wisconsin Candy Company has a policy of paying for all its utilities one month after they receive the bills. In its Utilities Payable account, Wisconsin Candy Company reported $282,000 on January 1, 2019, and $336,000 on December 31, 2019. If cash paid for utilities during the year 2019 was $1,638,000, what was Wisconsin Candy Company’s Utilities Expense for the year 2019? A) $1,584,000 B) $1,974,000 C) $1,692,000 D) $1,920,000 Answer: C Rationale: Beginning Utilities Payable + Utilities expense - Cash paid = Ending Utilities Payable $282,000 + X - $1,638,000 = $336,000 X = $336,000 - $282,000 + $1,638,000 Utilities Expense = $1,692,000
©Cambridge Business Publishers, 2020 3-76
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Adjusting Accounts LO: 2, 4 Level of Difficulty: MEDIUM 159. Miller Company reported the following balances in the Wages Payable account:
Wages Payable
Jan. 1, 2019 $3,000
Dec. 31, 2019 $6,000
If cash paid for wages during 2019 was $56,000, what was the wages expense reported on the 2016 income statement? A) $61,600 B) $50,000 C) $52,200 D) $59,000 Answer: D Rationale: Beginning Wages Payable + Wages expense - Cash paid = Ending Wages Payable $3,000 + X - $56,000 = $6,000 X = $6,000 - $3,000 + $56,000 = $59,000 = Wages Expense
Topic: Adjusting Accounts LO: 2, 4 Level of Difficulty: MEDIUM 160. Longbottom Company reported the following balances in the Wages Payable account:
Wages Payable
Jan. 1, 2019 $9,000
Dec. 31, 2019 $18,000
If cash paid for wages during 2019 was $168,000, what was the wages expense reported on the 2019 income statement? A) $177,000 B) $184,800 C) $150,000 D) $156,600 Answer: A Rationale: Beginning Wages Payable + Wages expense - Cash paid = Ending Wages Payable $9,000 + X - $168,000 = $18,000 X = $18,000 - $9,000 + $168,000 = $177,000 = Wages Expense
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-77
Topic: Adjusting Accounts LO: 4 Level of Difficulty: EASY 161. What accounts are affected by an adjusting entry that recognizes that services to patients have been earned but not billed? A) Increases in accounts payable and unearned service fees B) Decreases in accounts payable and service revenue C) Decreases in accounts receivable and unearned service fees D) Increases in accounts receivable and service revenue Answer: D Rationale: Revenues from providing a service must be recognized in the period in which the service is performed. Revenues for the period that have been earned but not yet paid or billed, must be accrued, using a period-end adjusting entry. The required entry would be: Accounts receivable Service revenue
XXX XXX
Topic: Adjusting Accounts LO: 2, 4 Level of Difficulty: EASY 162. Nelly Grimm has performed $3,000 of CPA services for a client but has not billed the client as of the end of the accounting period. What adjusting entry must Nellie make? A) Debit Cash and credit Unearned Revenue B) Debit Accounts Receivable and credit Unearned Revenue C) Debit Accounts Receivable and credit Service Revenue D) Debit Unearned Revenue and credit Service Revenue Answer: C Rationale: Revenues from providing a service must be recognized in the period in which the service is performed. Revenues for the period that have been earned but not yet paid or billed, must be accrued, using a period-end adjusting entry. The required entry would be: Accounts receivable Service revenue
XXX XXX
©Cambridge Business Publishers, 2020 3-78
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Adjusting Accounts LO: 2, 4 Level of Difficulty: DIFFICULT 163. AnnMarie, a bank customer, received a loan for $26,000 in exchange for a 7-month, 9% note on October 1, 2019. The note is due on April 30, 2020. If the bank’s accounting period ends on December 31 each year, how much interest revenue from this note should be recognized by the bank in the years 2019 and 2020?
A) B) C) D)
2019 $ 585 $ 780 $ 585 $1,365
2020 $1,365 $ 585 $ 780 $ 0
Answer: C Rationale: Total Interest Expense = ($26,000 x 0.09) x 7/12 = $1,365 Interest Expense for 2019 = $1,365 x 3/7 = $585 Interest Expense for 2020 = $1,365 x 4/7 = $780
Topic: Adjusting Accounts LO: 2, 4 Level of Difficulty: DIFFICULT 164. Baba, a bank customer, received a loan for $78,000 in exchange for a 7-month, 9% note on October 1, 2019. The note is due on April 30, 2020. If the bank’s accounting period ends on December 31 each year, how much interest revenue from this note should be recognized by the bank in the years 2019 and 2020?
A) B) C) D)
2019 $4,095 $1,755 $2,340 $1,755
2020 $ 0 $4,095 $1,755 $2,340
Answer: D Rationale: Total Interest Expense = ($78,000 x 0.09) x 7/12 = $4,095 Interest Expense for 2019 = $4,095 x 3/7 = $1,755 Interest Expense for 2020 = $4,095 x 4/7 = $2,340
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-79
Topic: Adjusting Accounts LO: 2, 4 Level of Difficulty: MEDIUM 165. Portland Fitness Centers have 15,000 members whose monthly dues are $200 each. The company does not send individual bills to customers, who have until the 10th day of the month following the month of service to pay their monthly dues. On December 31, 2019, the company’s records show that 7,000 customers have already paid their December dues, and the payments were properly recorded. The adjusting entry to be recorded on December 31 will include: A) A debit to Accounts Receivable of $1,600,000 B) A debit to Accounts Receivable of $1,400,000 C) A credit to Membership Revenue of $1,400,000 D) A credit to Membership Revenue of $3,000,000 Answer: A Rationale: Total Membership Revenue = 15,000 X $200= $3,000,000 December Membership Revenue received in 2019 = $200 x 7,000 = $1,400,000 (already recorded) December Membership Revenue to be received in 2020 = $200 x (15,000 - 7,000) = $1,600,000 December 31, 2019 entry: Accounts Receivable Membership Revenue
$1,600,000 $1,600,000
Topic: Adjusting Accounts LO: 2, 4 Level of Difficulty: MEDIUM 166. Oregon Fitness Centers have 15,000 members whose monthly dues are $225 each. The company does not send individual bills to customers, who have until the 10th day of the month following the month of service to pay their monthly dues. On December 31, 2019, the company’s records show that 7,000 customers have already paid their December dues, and the payments were properly recorded. The adjusting entry to be recorded on December 31 will include: A) A debit to Accounts Receivable of $1,800,000 B) A debit to Accounts Receivable of $1,575,000 C) A credit to Membership Revenue of $1,575,000 D) A credit to Membership Revenue of $3,375,000 Answer: A Rationale: Total Membership Revenue = 15,000 X $225= $3,375,000 December Membership Revenue received in 2019 = $225 x 7,000 = $1,575,000 (already recorded) December Membership Revenue to be received in 2020 = $225 x (15,000 - 7,000) = $1,800,000 December 31, 2019 entry: Accounts Receivable Membership Revenue
$1,800,000 $1,800,000
©Cambridge Business Publishers, 2020 3-80
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 167. On August 1 of the current year, Hodges Company received $12,000 for legal services to be performed evenly throughout the next six months. The adjusting entry on December 31 of the current year would include a: A) Debit to Service Revenue of $2,000 B) Credit to Unearned Service Revenue of $10,000 C) Credit to Service Revenue of $10,000 D) Debit to Unearned Service Revenue of $2,000 Answer: C Rationale: Service revenue received / 6 months= $12,000 / 6 = $2,000 /month Service revenue current year: $2,000 x 5 months = $10,000 Service revenue next year: $2,000 x 1 month = $2,000 Original entry, August 1: Cash Unearned Service Revenue
$12,000
December 31 adjusting entry: Unearned Service Revenue Service Revenue
$10,000
$12,000
$10,000
Topic: Adjusting Accounts LO: 3 Level of Difficulty: MEDIUM 168. On August 1 of the current year, Kris Company received $36,000 for legal services to be performed evenly throughout the next six months. The adjusting entry on December 31 of the current year would include a: A) Debit to Service Revenue of $6,000 B) Credit to Unearned Service Revenue of $30,000 C) Credit to Service Revenue of $30,000 D) Debit to Unearned Service Revenue of $6,000 Answer: C Rationale: Service revenue received / 6 months= $36,000 / 6 = $6,000 /month Service revenue current year: $6,000 x 5 month = $30,000 Service revenue next year: $6,000 x 1 month = $6,000 Original entry, August 1: Cash Unearned Service Revenue
$36,000
December 31 adjusting entry: Unearned Service Revenue Service Revenue
$30,000
$36,000
$30,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-81
Topic: Adjusting Accounts LO: 2, 4 Level of Difficulty: MEDIUM 169. At the end of the fiscal year, the usual adjusting entry for accrued salaries owed to employees was erroneously omitted. Which of the following statements is true? A) The total of the liabilities at the end of the year was overstated. B) Owner's equity at the end of the year was understated. C) Net income for the year was understated. D) Salary Expense for the year was understated. Answer: D Rationale: The entry which should have been made at fiscal year end to properly accrue salaries owed to employees is: Salary Expense Salaries Payable
$XXX $XXX
Since this entry was not made, salary expense is understated. Liabilities (Salaries Payable) is also understated, not overstated. Since expense is understated, net income and owner’s equity are both overstated, not understated.
Topic: Adjusting Accounts LO: 2, 4 Level of Difficulty: MEDIUM 170. The pre-adjustment net income for a company is $200,000. However, adjusting entries have not been made at the end of the period for accrued revenues of $5,400 and accrued expenses of $2,600. The correctly adjusted Net Income should be: A) $188,000 B) $172,000 C) $177,200 D) $202,800 Answer: D Rationale: Pre-adjustment net income + Accrued revenue – Accrued expenses = Adjusted Net Income $200,000 + $5,400 - $2,600 = X X= $202,800
©Cambridge Business Publishers, 2020 3-82
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Adjusting Accounts LO: 2, 4 Level of Difficulty: MEDIUM 171. The pre-adjustment net income for a company is $600,000. However, adjusting entries have not been made at the end of the period for accrued revenues of $16,200 and accrued expenses of $7,800. The correctly adjusted Net Income should be: A) $608,400 B) $564,000 C) $516,000 D) $531,600 Answer: A Rationale: Pre-adjustment net income + Accrued revenue – Accrued expenses = Adjusted Net Income $600,000 + $16,200 - $7,800 = X X= $608,400
Topic: Adjusting Accounts LO: 2 Level of Difficulty: MEDIUM 172. Which of the following pairs of accounts would not appear in the same adjusting entry? A) Service Revenue and Unearned Revenue B) Interest Revenue and Interest Expense C) Rent Expense and Prepaid Rent D) Salaries Payable and Salaries Expense Answer: B Rationale: Journal entries to record accounting adjustments (adjusting entries) affect one or more balance sheet accounts and one or more income statement accounts. An entry to interest revenue and interest expense would not be an adjusting entry since it affects only income statement accounts.
Topic: Adjusting Accounts LO: 2, 3 Level of Difficulty: MEDIUM 173. Which one of the following adjusting entries increases net income for the period? A) Recognition of interest on a note payable B) Recognition of rent that had been received in advance from customers C) Recognition of wages earned, but not paid to employees D) Recognition of supplies consumed during the period Answer: B Rationale: Original entry when rent was received in advance: Cash XXX Unearned rent revenue
XXX
Entry when unearned rent revenue is recognized: Unearned rent revenue XXX Rent Revenue
XXX
A credit to rent revenue increases net income. The recognition of interest expense, wage expense and supplies consumed (supplies expense) all decrease net income.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-83
Topic: Adjusting Accounts LO: 2, 3 Level of Difficulty: MEDIUM 174. The Unearned Revenue account was not adjusted for work performed in the current period. What is the effect of this error? A) The assets will be understated and expenses will be understated. B) The assets will be overstated and liabilities will be overstated. C) The liabilities will be overstated and revenues will be understated. D) The liabilities will be understated and revenues will be understated. Answer: C Rationale: Original entry when payment was received in advance of services being provided: Cash XXX Unearned revenue XXX Entry that should have been made for work performed in the current period (unearned revenue recognized): Unearned revenue XXX Revenue XXX Unearned revenue is a liability account. So, if the entry is not made, liabilities would be overstated and revenues would be understated.
Topic: Adjusting Accounts LO: 2, 4 Level of Difficulty: MEDIUM 175. Failure to prepare an adjusting entry at the end of the period to record an accrued expense would cause: A) An understatement of expenses and an overstatement of liabilities B) An overstatement of expenses and an overstatement of liabilities C) An overstatement of assets and an overstatement of liabilities D) An understatement of expenses and an understatement of liabilities Answer: D Rationale: Entry required to accrue an expense: Expense account XXX Accounts payable
XXX
Both expenses and liabilities would be understated.
©Cambridge Business Publishers, 2020 3-84
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Closing Process LO: 6, 7 Level of Difficulty: MEDIUM 176. Closing entries are: A) Required to bring all permanent accounts to a zero balance at the end of the accounting period B) Not required to be posted C) Required to bring all temporary accounts to a zero balance prior to starting a new accounting cycle D) Generally taken from the financial statements rather than from the worksheet or the accounts themselves Answer: C Rationale: A temporary account is closed when an entry is made that changes the account balance to zero. The temporary (income statement) accounts are then ready to start accumulating data for the next accounting period.
Topic: Closing Process LO: 6, 7 Level of Difficulty: MEDIUM 177. Which of the following statements is incorrect? A) Prepaid expense, depreciation, and unearned revenue adjusting entries involve previously recorded assets and liabilities B) Closing entries affect the accumulated depreciation account C) Adjusting entries can be used to record both accrued expenses and accrued revenues D) Prepaid expenses, depreciation, and unearned revenues often require adjusting entries to record the effects of the passage of time Answer: B Rationale: Closing entries involve the process of transferring balances in temporary accounts to retained earnings. Temporary accounts are revenue, expense and dividend accounts, which gather information for a particular accounting period. Accumulated depreciation is a liability account, which is a permanent account, whose balance is carried forward to the following accounting period. It is not closed.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-85
Exercises Topic: Wage Expense Accrual LO: 4 1. Better Brakes pays employees each Friday for the five day work-week ending on that day. The company’s normal gross weekly payroll is $10,800. If the last Friday of the month falls on January 25, what adjusting entry should be made on January 31, the fiscal year end? Answer: Jan. 31 Wages expense Wages payable
8,640 8,640
Friday is January 25 and the next workday is Monday, January 28. The company will accrue Monday, January 28, through Thursday, January 31, or 4 days. $10,800 × 4/5 = $8,640
Topic: Journalizing Transactions and Adjusting Accounts LO: 3, 4 2. Clean & Clear Water offers pool and spa cleaning services to hotels and residential customers. Commercial (hotels) customers pay on a monthly contract basis, while residential customers pay an hourly rate based on services provided. In July 2019, Clean & Clear Water signed a 6-month contract with Travel Holidays to provide pool and spa cleaning services for 3 hotel sites. The contract price of $48,000 was collected on July 1, 2019. The services will be provided evenly over the 6 months. During July 2019, Clean & Clear Water also provided 80 hours of residential pool services at $30 per hour. These services have not yet been billed to residential customers. The company uses the account, Fees Receivable, to reflect amounts due but not yet billed. a. Prepare the entry on July 1, 2019 to record the receipt of $48,000 cash related to the contract with Travel Holidays. b. Prepare the adjusting entry to be made on July 31, 2019 for the contract work performed for Travel Holidays during the month. c.
Prepare the adjusting entry needed on July 31, 2019 to reflect the residential pool services performed during the month.
Answer: a. July 1
Cash
48,000
Unearned Service Fees To record cash received in advance. b.
c.
48,000
July 31 Unearned Service Fees Service Fees Revenue To reflect July service fees earned on contract ($48,000 / 6 = $8,000).
8,000
July 31 Fees Receivable Service Fees Revenue To record unbilled service fees earned at July 31, 2016: 80 hours x $30/hr
2,400
8,000
2,400
©Cambridge Business Publishers, 2020 3-86
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Recording Transactions and Adjusting Accounts LO: 3 3. On January 18, 2019, Big City Co, paid $36,000 for a two-year insurance premium that covers February 1, 2019 through January 31, 2021. Urban Pro’s year-end is March 31, 2019. a. What entry is made on January 18, 2019? b. What adjusting entry should be made on March 31, 2019 before the financial statements are prepared for the year ending March 31, 2019? Answer: a. Prepaid Insurance Cash
36,000 36,000
b. Insurance Expense 3,000 Prepaid Insurance $36,000 / 24 months = $1,500 per month $1,500 × 2 months = $3,000 for February and March
3,000
Topic: Recording Transactions and Adjusting Accounts LO: 3 4. The publisher of Entrepreneur Today, a monthly business magazine, received $23,400 for three-year subscriptions on January 1, 2019. a. What entry would be made to record the cash receipt on January 1, 2019? b. What entry should be made before the financial statements are prepared for the month ending January 31, 2019? Answer: a. Jan.1
Cash
23,400 Unearned subscription revenue
b. Jan.31
23,400
Unearned subscription revenue Subscription revenue ($23,400 / 36 months = $650 per month)
650 650
Topic: Recording Transactions and Adjusting Accounts LO: 4, 5 5. Gilgen Brothers earns 6% annual interest on its $150,000 of investments. Interest is paid every six months on June 30 and December 31. a. If monthly financial statements are prepared, what adjusting entry should be made on January 31? b. What effect on the January 31 balance sheet does the adjusting entry have? Answer: a. Interest receivable Interest revenue 150,000 × 6% × 1/12 = $750
750 750
b. Interest receivable, an asset, is increased by $750.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-87
Topic: Adjusting Unearned Revenue LO: 3, 5 6. Big Oil Company received an advance payment of $108,000 for a consulting contract during the year. The balance in the Unearned Consulting Fees account at the beginning of the year was $12,000. At the end of the year, $6,000 was still unearned. Create T-accounts for the accounts involved in the adjusting entry needed at year end, and post all amounts to them, including the adjusting entry necessary, and calculate the account balances. How much will Big Oil report as Consulting Revenue on its income statement for the year? Answer: Adjusting entry required: Unearned Consulting Revenue $114,000 Consulting Revenue (to record consulting revenue earned during the year) Unearned Consulting Revenue 114,000
$114,000
Consulting Revenue
12,000 108,000
114,000
6,000
114,000
Marathon will report $114,000 consulting revenue for the year.
Topic: Preparing a Statement of Stockholders’ Equity LO: 5 7. The Spotless Cleaning company provides janitorial services for commercial customers. On December 31, 2019, the credit balance of the Common Stock and Retained Earnings accounts were $24,000 and $11,000, respectively. During 2020, the company issued $8,400 of stock, and paid $4,000 in dividends. The income statement resulted in a profit of $42,400. Prepare a 2020 statement of stockholders’ equity for Spotless Cleaning. Answer: SPOTLESS CLEANING Statement of Stockholders’ Equity For Year Ended December 31, 2020 Common Stock Balance at December 31, 2019 ...........................$24,000 Stock issuance .................................................. 8,400 Dividends ........................................................... Net income ........................................................ _______ Balance at December 31, 2020 ...........................$32,400
Retained Earnings $11,000 (4,000) 42,400 $49,400
Total Stockholders’ Equity $35,000 8,400 (4,000) 42,400 $81,800
©Cambridge Business Publishers, 2020 3-88
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Preparing an Income Statement LO: 5 8. Use Oma Bean Corporation’s adjusted trial balance to prepare the company’s income statement. OMA BEAN CORPORATION Adjusted Trial Balance For Year Ending December 31, 2019 Debit Cash Accounts receivable Equipment Accumulated depreciation Notes payable Common stock Retained earnings Sales Rent expense Salaries expense Depreciation expense Totals
Credit
$ 66,000 42,000 564,000 $ 108,000 90,000 195,000 93,000 489,000 66,000 174,000 63,000 $975,000
0 $975,000
Answer: OMA BEAN CORPORATION Income Statement For Year Ending December 31, 2019 Sales Rent expense Salaries expense Depreciation expense Net income
$489,000 (66,000) (174,000) (63,000) $ 186,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-89
Topic: Preparing the Statement of Stockholders’ Equity LO: 5 9. Use Oma Bean Corporation’s adjusted trial balance to prepare Oma Bean’s statement of stockholders’ equity for 2019. There were no stock issuances or repurchases during 2019. OMA BEAN CORPORATION Adjusted Trial Balance For Year Ending December 31, 2019 Debit Cash Accounts receivable Equipment Accumulated depreciation Notes payable Common stock Retained earnings Service fees earned Rent expense Salaries expense Depreciation expense Totals
Credit
$ 44,000 28,000 376,000 $ 72,000 60,000 130,000 62,000 326,000 44,000 116,000 42,000 $650,000
0 $650,000
Answer: Net income = Service fees earned – (Rent expense + Salaries expense + Depreciation expense) X = $326,000 – ($44,000 + $116,000 + $42,000) X = $124,000 OMA BEAN CORPORATION Statement of Stockholders’ Equity For Year Ended December 31, 2019 Common Stock
Retained Earnings
Total Stockholders’ Equity
Balance at December 31, 2018 Stock issuance Dividends Net income
$130,000
$62,000
$ 192,000
_______
124,000
124,000
Balance at December 31, 2019
$130,000
$186,000
$316,000
©Cambridge Business Publishers, 2020 3-90
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Preparing a Balance Sheet LO: 5 10. Use Oma Bean Corporation’s adjusted trial balance to prepare Oma Bean’s balance sheet for the current year-end.
OMA BEAN CORPORATION Adjusted Trial Balance For Year Ending December 31, 2019 Debit Cash Accounts receivable Equipment Accumulated depreciation Notes payable Common stock Retained earnings Sales Rent expense Salaries expense Depreciation expense Totals
Credit
$ 66,000 42,000 564,000 $ 108,000 90,000 195,000 93,000 489,000 66,000 174,000 63,000 $975,000
0 $975,000
Answer: Net income = Service fees earned – (Rent expense + Salaries expense + Depreciation expense) X = $489,000 – ($66,000 + $174,000 + $63,000) X = $186,000 Ending retained earnings = Retained earnings, per Adjusted Trial Balance + Net income X = $93,000 + $186,000 X = $279,000 OMA BEAN CORPORATION Balance Sheet December 31, 2019 Cash Accounts receivable Equipment Accumulated depreciation Total assets
$ 66,000 42,000 564,000 (108,000) ________ $564,000
Notes payable Total liabilities
$ 90,000 90,000
Common stock Retained earnings Total liabilities and equity
195,000 279,000 $564,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-91
Topic: Preparing Financial Statements and Closing Procedures Using Retained Earnings LO: 6 11. Use Oma Bean Corporation’s adjusted trial balance to prepare entries to close Oma Bean’s temporary accounts (using Retained Earnings), in journal entry form.
OMA BEAN CORPORATION Adjusted Trial Balance For Year Ending December 31, 2019 Debit Cash Accounts receivable Equipment Accumulated depreciation Notes payable Common stock Retained earnings Sales Rent expense Salaries expense Depreciation expense Totals
Credit
$ 66,000 42,000 564,000 $ 108,000 90,000 195,000 93,000 489,000 66,000 174,000 63,000 $975,000
0 $975,000
Answer: Service Fees Earned Retained Earnings
489,000
Retained Earnings Rent Expense Salaries Expense Depreciation Expense
303,000
489,000
66,000 174,000 63,000
©Cambridge Business Publishers, 2020 3-92
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Permanent and Temporary Accounts, Debits and Credits, and Normal Balances LO: 6 12. Listed below are several accounts of Laura’s Cookies, Inc. Indicate with an X in the proper column whether (1) the account is permanent or temporary, (2) which side of the account increases are recorded on, and (3) which side of the account represents a normal balance. (1)
Permanent
Temporary
(2) Side for Increases
(3) Normal Balances
Debit
Debit
Credit
Credit
Cash Catering Fees Earned Accounts Payable Dividends Wages Expense Equipment Common Stock Advertising Expense Supplies
Answer: (1)
Permanent Cash
X
Catering Fees Earned Accounts Payable
Temporary
(2) Side for Increases
(3) Normal Balances
Debit
Debit
Credit
X X
X
X X
X
X
X
Dividends
X
X
X
Wages Expense
X
X
X
X
X
Equipment
X
Common Stock
X
Advertising Expense Supplies
X X
X
Credit
X
X
X
X
X
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-93
Topic: Permanent and Temporary Accounts, Debits and Credits, and Normal Balances LO: 6 13. Listed below are several accounts of Brick Mason, Inc., a corporation. Indicate with an X in the proper column whether (1) the account is permanent or temporary, (2) which side of the account increases are recorded on, and (3) which side of the account represents a normal balance. (1)
Permanent
Temporary
(2) Side for Increases
(3) Normal Balances
Debit
Debit
Credit
Credit
Cash Dividends Accounts Payable Supplies Expense Notes Payable Common Stock Service Fees Earned Retained Earnings Rent Expense Accounts Receivable
Answer: (1)
Permanent Cash Dividends Accounts Payable
(2) Side for Increases
(3) Normal Balances
Temporary
Debit
Debit
X
X
X
Supplies Expense
Credit
Credit
X X
X
X
X X
Notes Payable
X
X
X
Common Stock
X
X
X
X
X
X
X
Service Fees Earned Retained Earnings
X X
Rent Expense Accounts Receivable
X X
X
X
X
X
©Cambridge Business Publishers, 2020 3-94
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Closing Entries LO: 7 14. Listed below are selected accounts for Benson Company, Inc. Place an X in the proper column to indicate whether, at the end of the accounting period, the account is (1) closed to the Income Summary account; (2) closed to the Retained Earnings; or (3) not closed. Closed to Income Summary
Closed to Retained Earnings
Not Closed
Closed to Income Summary
Closed to Retained Earnings
Not Closed X
Accounts Receivable Depreciation Expense Unearned Service Fees Dividends Salaries Expense Service Fees Earned Income Summary Prepaid Rent Insurance Expense Cash
Answer:
Accounts Receivable Depreciation Expense
X
Unearned Service Fees
X
Dividends
X
Salaries Expense
X
Service Fees Earned
X
Income Summary Prepaid Rent
X
Insurance Expense Cash
X X
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-95
Topic: Closing Entries LO: 7 15. Listed below are selected accounts for Valley Low Corporation. Place an X in the proper column to indicate whether, at the end of the accounting period, the account is (1) closed to the Income Summary account; (2) closed to the Retained Earnings account; or (3) not closed. Closed to Income Summary
Closed to Retained Earnings
Not Closed
Closed to Income Summary
Closed to Retained Earnings
Not Closed
Accumulated Depreciation Accounts Payable Advertising Expense Professional Fees Earned Common Stock Cash Dividends Income Summary Equipment Income Tax Expense Wages Payable
Answer:
X
Accumulated Depreciation
X
Accounts Payable Advertising Expense Professional Fees Earned
X X X
Common Stock X
Cash Dividends
X
Income Summary
X
Equipment Income Tax Expense Wages Payable
X X
©Cambridge Business Publishers, 2020 3-96
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Closing Process Using Retained Earnings LO: 6 16. What are the three major steps in the closing process, when closing to Retained Earnings? Why is the closing process necessary? Answer: The first step is to close revenues to retained earnings. The second step is to close expenses to retained earnings. The third step is to close dividends to retained earnings. The closing process has two purposes: 1) to transfer temporary balances to the permanent accounts and 2) to ready the accounts for the next accounting period.
Topic: Worksheet and Closing Entries LO: 7, 8 17. The income statement columns of a December 31 worksheet for Alexander Company contain only the following: Debit Professional fees earned
Credit 211,800
Insurance expense
25,500
Salaries expense
21,600
Advertising expense
66,900
Utilities expense
15,000
Depreciation expense
19,200
The balance sheet columns of the worksheet contain Cash Dividends, $61,200 (debit). Prepare journal entries to close the accounts, using the Income Summary account. Answer: Dec.
31
31
31
31
Professional Fees Earned Income Summary To close the revenue account.
211,800
Income Summary Insurance Expense Salaries Expense Advertising Expense Utilities Expense Depreciation Expense To close the expense accounts.
148,200
Income Summary Retained Earnings To close the Income Summary account.
63,600
Retained Earnings Cash Dividends To close the Dividends account.
61,200
211,800
25,500 21,600 66,900 15,000 19,200
63,600
61,200
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-97
Topic: Worksheet and Closing Entries LO: 7, 8 18. The income statement columns of a December 31 worksheet for Creative Crafts Corporation contain only the following: Debit Service revenue
Credit 181,400
Wages expense
72,000
Rent expense
34,000
Supplies expense
13,600
Depreciation expense
5,600
Income tax expense
11,800
The balance sheet columns of the worksheet show Cash Dividends with a debit balance of $24,000. Prepare journal entries to close the accounts, using the Income Summary account. Answer: Dec.
31
31
31
31
Service Revenue Income Summary To close the revenue account.
181,400
Income Summary Wages Expense Rent Expense Supplies Expense Depreciation Expense Income Tax Expense To close the expense accounts.
137,000
Income Summary Retained Earnings To close the Income Summary account.
44,400
Retained Earnings Cash Dividends To close the cash dividends account.
24,000
181,400
72,000 34,000 13,600 5,600 11,800
44,400
24,000
©Cambridge Business Publishers, 2020 3-98
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Adjusting and Closing Entries Using Retained Earnings LO: 4, 6 19. Navarro’s Kitchen’s restaurant closes its accounts on December 31 each year, using the Retained Earnings account. On December 31, 2019, Navarro’s Kitchen’s accrued interest income total $1,880 that was earned on a $80,000 investment but not yet received or recorded. Prepare journal entries to: a. Accrue the interest earned on December 31, 2019. b. Close the Interest Income account on December 31, 2019. (The Interest Income account has a year-end balance of $5,800 after adjustments). Answer: a. Dec. 31
b. Dec. 31
Interest Receivable Interest Income To record accrued interest income.
1,880
Interest Income Retained Earnings To close the Interest Income account.
5,800
1,880
5,800
Topic: Worksheets LO: 8 20. Assume that the last four columns of a worksheet for a corporation are identified by the numbers 1─4, as follows: 1. 2. 3. 4.
Income Statement Debit Income Statement Credit Balance Sheet Debit Balance Sheet Credit
Indicate the number of the worksheet column in which the adjusted balances of the following accounts should appear (assume all balances are normal). Accounts Payable
Accumulated Depreciation
Equipment
Unearned Service Fees
Wages Expense
Dividends
Common Stock
Prepaid Advertising
Advertising Expense
Service Fees Earned
Answer: Accounts Payable
4
Accumulated Depreciation
4
Equipment
3
Unearned Service Fees
4
Wages Expense
1
Dividends
3
Common Stock
4
Prepaid Advertising
3
Advertising Expense
1
Service Fees Earned
2
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-99
Topic: Worksheets LO: 8 21. Assume that the last four columns of a worksheet for a corporation are identified by the numbers 1─4, as follows: 1. 2. 3. 4.
Income Statement Debit Income Statement Credit Balance Sheet Debit Balance Sheet Credit
Indicate the number of the worksheet column in which the adjusted balance of the following accounts should appear (assume all balances are normal). Accounts Receivable Building Retained Earnings Prepaid Insurance Utilities Payable Answer: Accounts Receivable Building Retained Earnings Prepaid Insurance Utilities Payable
Income Tax Expense Common Stock Cash Dividends Legal Fees Earned Depreciation Expense
3 3 4 3 4
Income Tax Expense Common Stock Cash Dividends Legal Fees Earned Depreciation Expense
1 4 3 2 1
Topic: Worksheets LO: 8 22. Listed below are six steps followed in preparing a worksheet. They are not in proper order. Identify the correct sequence of worksheet preparation by placing the appropriate letters in the blanks numbered 1 through 6 (letter of the first step goes in blank 1, etc.). a. b. c. d. e. f.
Enter the adjustments on the worksheet and total the adjustments columns. Extend amounts from the adjusted trial balance to the financial statement columns. Prepare an adjusted trial balance by combining information from the first four money columns. Place a heading on the worksheet. Balance the financial statement columns. Enter the unadjusted trial balance on the worksheet.
Correct sequence:
Answer: Correct sequence:
1. 2. 3. 4. 5. 6.
1. 2. 3. 4. 5. 6.
d f a c b e
©Cambridge Business Publishers, 2020 3-100
th
Financial Accounting for Undergraduates, 4 Edition
Problems Topic: Journal and Adjusting Entries LO: 2, 3, 4 1. Below are several accounts from Fulbright Company’s accounting records. Columns representing the accounting equation appear to the right of each transaction listed below. Next to each transaction in the column of the respective account classification, write the 1) name of each account, 2) the dollar amount by which each account increases or decreases, and 3) either debit or credit to indicate the effect on the account, for each of the adjustments necessary at the end of May, 2016. Bethany Company records adjustments monthly. Assets
Liabilities
Equity
Revenues
Expenses
a. Provided lawn services to customers in the amount of $15,000. Customers will pay next month. b. Recognized truck depreciation of $1,500 for the current month. c. Delivered magazines totaling $9,000 to customers that had paid for subscriptions in advance. d. Recognized May’s insurance cost. On April 1, the company had paid $14.400 for 4 months coverage from April 1 to July 31. e. Recognized interest owed on a note payable for $270. f. Recognized supplies used during the month. At the beginning of the month, the total of supplies on hand was $2,700, while only $1,950 of supplies were left at the end of the month. During the month, $12,000 of additional supplies were purchased. g. Accrued wages earned by employees for the last 3 days of the month. Employees work 5 days per week and the weekly wages total $22,500. h. Provided lawn services totaling $18,600 for customers that had paid in advance
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-101
Answer: Assets a. Provided lawn services to customers in the amount of $15,000. Customers will pay next month
Accounts Receivable Debit $15,000
b. Recognized truck depreciation of $1,500 for the current month
Accumulated Depreciation Credit $1,500
c. Delivered magazines totaling $9,000 to customers that had paid for subscriptions in advance.
d. Recognized May’s insurance cost. On April 1, the company had paid $14,400 for 4 months coverage from April 1 to July 31.
g. Accrued wages earned by employees for the last 3 days of the month. Employees work 5 days per week and the weekly wages total $22,500. h. Provided lawn services totaling $18,600 for customers that had paid in advance
Equity
Revenues
Expenses
Service Revenue Credit $15,000 Depreciation Expense Debit $1,500 Unearned Subscription Revenue Debit $9,000
Subscription Revenue Credit $9,000
Insurance Expense Debit $3,600
Prepaid Insurance Credit $3,600
Interest Payable Credit $270
e. Recognized interest owed on a note payable for $270.
f. Recognized supplies used during the month. At the beginning of the month, the total of supplies on hand was $2,700, while only $1,950 of supplies were left at the end of the month. During the month, $12,000 of additional supplies were purchased.
Liabilities
Interest Expense Debit $270
Supplies Credit $12,750
Supplies Expense Debit $12,750
($2,700 + $12,000 - $1,950 = $12,750)
Wages Payable Credit $13,500
Wages Expense Debit $13,500
($22,500 × 3/5 = $13,500)
Unearned Revenue Debit $18,600
Lawn Service Revenue Credit $18,600
©Cambridge Business Publishers, 2020 3-102
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Adjusting Entries LO: 2, 3, 4 2. Communications, Inc. had the following separate situations occur during 2019. The company’s accountant is preparing the annual financial statements at December 31, 2019 and has asked you to prepare the adjusting entries for each situation using the journal entry form. a. On June 1, 2019, Communications, Inc. paid the annual lease amount on its warehouse space. The annual lease is $19,800 and was recorded by debiting Prepaid Rent and crediting Cash. No adjusting entries have been prepared since June 1, 2019. b. The Unearned Revenue account has an unadjusted balance of $12,000 consisting of gift cards sold to customers. Redeemed gift cards that have not yet been recorded total $3,600. c. The company has not yet received a bill for utilities nor paid for the month of December. The expense is estimated to be $2,520. d. On December 1, 2019, Communications, Inc., received $4,500 cash from a customer related to a special order. The special order was delivered to the customer on December 29 but no entry has been made to record the delivery. e. At December 31, 2019, employee wages of $6,900 have been incurred but not paid or recorded. f.
At December 31, 2019, $1,320 of interest has been incurred, but not yet paid or recorded.
g. Unrecorded depreciation on equipment is $8,400. Answer: a. Rent Expense Prepaid Rent To record rent expense for the period ($19,800 × 7/12 = $11,550). b.
c.
d.
e.
f.
g.
11,550 11,550
Unearned Revenue Sales Revenue To record redeemed gift cards.
3,600
Utilities Expense Utilities Payable To record accrued utilities expense.
2,520
Unearned Revenue Sales Revenue To record revenue earned.
4,500
Wages Expense Wages Payable To record accrued wages at the end of the year.
6,900
Interest Expense Interest Payable To record accrued interest at the end of the period.
1,320
Depreciation Expense-Equipment Accumulated Depreciation-Equipment To record depreciation for the period.
8,400
3,600
2,520
4,500
6,900
1,320
8,400
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-103
Topic: Financial Analysis Using Adjusted Data LO: 2, 3, 4 3. Auto Supply Co. has been in operation since January, 2008. Selected T-account balances for Auto Supply Co. are shown below as of January 31, 2019. Adjusting entries have already been posted. The firm uses a calendar-year accounting period but prepares monthly adjustments. Supplies Jan 31 Bal.
Jan 31 Bal.
Supplies Expense
2,200
Jan 31 Bal.
Prepaid Insurance 2,520
Jan 31 Bal.
Wages Payable 3,200
Insurance Expense 360 Wages Expense
Jan 31 Bal.
Jan 31 Bal.
Truck Jan 31 Bal.
5,200
52,800
Accumulated Depreciation - Truck
44,400
9,620
Jan 31 Bal.
a. During January, $4,000 worth of supplies were purchased. If the amount in Supplies Expense represents the January 31 adjustment for the supplies used in January, what was the January 1 beginning balance of Supplies? b. The insurance premium purchased was valid for one year. The amount in the Insurance Expense account represents the adjustment made at January 31 for January insurance expense. What was the amount of the premium and on what date did the insurance policy start? c.
No beginning balance existed in Wages Payable or Wages Expense on January 1. How much cash was paid as wages during January?
d. The truck has a useful life of five years, what is the monthly amount of depreciation expense and how many months has Auto Supply Co. owned the truck? Answer: a. Balance, January 1 = $2,200 − $4,000 + $5,200 = $3,400 b.
Amount of premium = $360 × 12 = $4,320. Therefore, five months' premium ($4,320 − $2,520 = $1,800) has expired by January 31. The policy term began on September 1 of the previous year.
c.
Wages paid in January = $52,800 − $3,200 = $49,600
d.
Monthly depreciation expense = $44,400/60 months = $740 per month Auto Supply Co. has owned the truck for 13 months ($9,620 / $740 = 13 months).
©Cambridge Business Publishers, 2020 3-104
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Preparing an Unadjusted Trial Balance and Adjustments LO: 2, 3, 4 4. Golden Grill, an upscale restaurant on the beach, has just completed its first full year of operations on December 31, 2019. It provides meals both in its restaurant and catering. Selected balances from its general ledger before year-end adjustments follow. (All balances are normal.) Cash Accounts receivable Prepaid advertising Supplies Equipment Notes payable
$64,000 36,000 4,800 3,600 91,200 34,000
Accounts payable Common stock Sales revenue Wages expense Rent expense Utilities expense
$42,400 24,000 196,000 108,000 12,000 5,500
An analysis of the firm’s records reveals the following: a. The balance in Prepaid Advertising represents the amount paid for newspaper advertising for 1 year. The agreement, which calls for the same amount of space each month, covers the period from February 1, 2019, to January 31, 2020. Golden Grill did not advertise during its first month of operations. b. Equipment purchased January 1, 2019, has an estimated life of eight years. c.
Utilities expense does not include the expense for December, estimated at $1,200. The bill will not arrive until January, 2020.
d. At year-end, employees have earned $12,400 in wages that will not be paid until January. e. Supplies available at year-end amounted to $1,300. f.
At year-end, unpaid interest of $400 has accrued on the notes payable.
g. The firm’s lease calls for rent of $1,000 per month payable on the first of each month, plus an amount equal to 1% of annual sales. The rental percentage is payable within 15 days after the end of the year. Prepare adjusting entries in journal entry form.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-105
Answer:
Dec.
31
31
31
31
Dec.
31
31
31
Debit 4,400
Advertising Expense Prepaid Advertising To record 11 months' advertising expense ($4,800 x 11/12 = $4,400).
4,400
Depreciation Expense Accumulated Depreciation To record depreciation for the year ($91,200/8 years = $11,400).
11,400
Utilities Expense Utilities Payable To record estimated December utilities expense.
1,200
Wages Expense Wages Payable To record unpaid wages at December 31.
12,400
Supplies Expense Supplies To record supplies expense for the year ($3,600 - $1,300 = $2,300).
2,300
11,400
1,200
12,400
2,300
Interest Expense Interest Payable To record accrual of interest expense at December 31. Rent Expense Rent Payable To record additional rent owed under lease (1% × $196,000 = $1,960).
Credit
400 400
1,960 1,960
©Cambridge Business Publishers, 2020 3-106
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Journal Entries LO: 2, 3, 4 5. Selected general ledger accounts of Lakeside Company, Inc., are listed below with the identifying account numbers: 11 12 14 15 16 21
Cash Accounts Receivable Prepaid Insurance Equipment Accumulated Depreciation -- Equipment Accounts Payable
22 31 41 51 52 53
Wages Payable Common Stock Service Fees Earned Wages Expense Insurance Expense Depreciation Expense—Equipment
For each of the following transactions or adjustments, indicate the proper accounts to be debited and credited by placing the appropriate account number in the space provided.
a.
Transaction or Adjustment Shareholders invested cash in exchange for stock.
b.
Purchased equipment on account.
c.
Billed customers for services rendered.
d.
Paid balance due on account for equipment purchased.
e.
Collected payments on account from customers.
f.
Made adjustment to record depreciation on equipment.
g.
Made adjustment to accrue wages earned but not paid or recorded.
h.
Made adjustment to record portion of prepaid insurance that had expired.
Debit
Credit
Debit 11
Credit 31
Answer:
a.
Transaction or Adjustment Shareholders invested cash in exchange for stock.
b.
Purchased equipment on account.
15
21
c.
Billed customers for services rendered.
12
41
d.
Paid balance due on account for equipment purchased.
21
11
e.
Collected payments on account from customers.
11
12
f.
Made adjustment to record depreciation on equipment.
53
16
g.
Made adjustment to accrue wages earned but not paid or recorded.
51
22
h.
Made adjustment to record portion of prepaid insurance that had expired.
52
14
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-107
Topic: Journal Entries LO: 2, 3 ,4 6. Selected general ledger accounts of Nova Company, Inc. are listed below with the identifying account numbers: 11 12 14 15 16 21
Cash Accounts Receivable Prepaid Advertising Equipment Accumulated Depreciation -- Equipment Accounts Payable
22 31 41 51 52 53
Unearned Service Fees Common Stock Service Fees Earned Wages Expense Advertising Expense Depreciation Expense—Equipment
For each of the following transactions or adjustments, indicate the proper accounts to be debited and credited by placing the appropriate account number in the space provided.
a.
Transaction or Adjustment Shareholders invested equipment in the business in exchange for stock
b.
Paid two months’ advertising in advance.
c.
Billed customers for services rendered.
d.
Received payment in advance (for future services) from customers.
e.
Collected payments on account from customers.
f.
Made adjustment to record depreciation on equipment.
g.
Made adjustment to record portion of prepaid advertising that had expired. Made adjustment to record portion of service fees received in advance that had been earned.
h.
Debit
Credit
Debit
Credit
Answer:
a.
Transaction or Adjustment Shareholders invested equipment in the business in exchange for stock
15
31
b.
Paid two months’ advertising in advance.
14
11
c.
Billed customers for services rendered.
12
41
d.
Received payment in advance (for future services) from customers.
11
22
e.
Collected payments on account from customers.
11
12
f.
Made adjustment to record depreciation on equipment.
53
16
g.
Made adjustment to record portion of prepaid advertising that had expired. Made adjustment to record portion of service fees received in advance that had been earned.
52
14
22
41
h.
©Cambridge Business Publishers, 2020 3-108
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Adjusting Journal Entries LO: 2, 3, 4 7. Selected accounts of Farm Company are shown below as of January 31 of the current year, before any adjusting entries have been made. Farm Company’s accounting year begins on January 1.
Prepaid rent Supplies Office equipment Unearned service fees Wages expense
Debit $12,600 9,900 25,200
Credit
$18,000 24,000
Use the following information to prepare the necessary January 31 adjusting entries: (1) Prepaid rent represents rent for January, February, March, and April. (2) January 31 supplies on hand total $3,900. (3) Office equipment is expected to last 12 years. (4) Last month the firm received $18,000 of service fees in advance. One-half of these fees were earned during January. (5) Accrued wages not recorded at January 31 are $2,850.
Answer: Jan.
31
31
31
31
31
Rent Expense Prepaid Rent To record January rent expense ($12,600/4 = $3,150).
3,150
Supplies Expense Supplies To record supplies used in January ($9,900 - $3,900).
6,000
Depreciation Expense-- Office Equipment Accumulated Depreciation-- Office Equipment To record January depreciation expense ($25,200 / 144 months = $175).
175
Unearned Service Fees Service Fees Earned To record service fees earned ($18,000 / 2 = $9,000).
9,000
Wages Expense Wages Payable To record accrued wages at January 31.
2,850
3,150
6,000
175
9,000
2,850
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-109
Topic: Adjusting Journal Entries LO: 2, 3, 4 8. Selected accounts of The Hogwarts Company are shown below as of January 31 of the current year, before any adjusting entries have been made. Hogwarts’ accounting year begins on January 1.
Prepaid advertising Supplies Test equipment Unearned service fees Salaries expense
Debit $4,200 11,200 18,000
Credit
$10,200 5,800
Use the following information to prepare the necessary January 31 adjusting entries: (1) Prepaid advertising represents advertising for January, February, and March. (2) January 31 supplies on hand total $2,200. (3) Test equipment is expected to last 10 years. (4) Last month the firm received $10,200 of service fees in advance. The firm performed the necessary work during January. (5) Accrued salaries not recorded at January 31 are $2,000.
Answer: Jan.
31
31
31
31
31
Advertising Expense Prepaid Advertising To record January advertising expense ($4,200 / 3 months = $1,400).
1,400
Supplies Expense Supplies To record supplies used in January ($11,200 - $2,200 = $9,000).
9,000
1,400
9,000
Depreciation Expense-- Test Equipment Accumulated Depreciation-- Test Equipment To record January depreciation expense ($18,000 / 120 months = $150).
150 150
Unearned Service Fees Service Fees Earned To record service fees earned.
10,200
Salaries Expense Salaries Payable To record accrued salaries at January 31.
2,000
10,200
2,000
©Cambridge Business Publishers, 2020 3-110
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Adjusting Journal Entries LO: 2, 3, 4 9. Selected accounts of Moonbeam Company are shown below as of October 31 of the current year, before any adjusting entries have been made. Moonbeam’s accounting year begins October 1.
Supplies Prepaid insurance Office furniture Unearned service fees Interest income
Debit $18,000 6,000 15,360
Credit
$6,000 2,600
Use the following information to prepare the necessary October 31 adjusting entries: (1) October 31 supplies on hand total $6,000. (2) Prepaid insurance represents insurance coverage purchased for a two-year period starting October 1 of the current year. (3) The office furniture is expected to last 8 years. (4) Last month the firm received $6,000 of service fees in advance. One-third of these fees were earned in October. (5) Interest earned on investments at October 31 but not yet received is $1,000.
Answer: Oct.
31
31
31
31
31
Supplies Expense Supplies To record supplies used in October ($18,000 - $6,000 = $12,000).
12,000 12,000
Insurance Expense Prepaid Insurance To record October insurance expense ($6,000 / 24 months = $250).
250
Depreciation Expense-- Office Furniture Accumulated Depreciation-- Office Furniture To record October depreciation expense ($15,360 / 96 months = $160).
160
Unearned Service Fees Service Fees Earned To record service fees earned ($6,000 / 3 = 2,000).
2,000
Interest Receivable Interest Income To record accrued interest income.
1,000
250
160
2,000
1,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-111
Topic: Adjusting Journal Entries LO: 2, 3, 4 10. The list below shows the current account balances and balances that the accounts should have after adjusting entries have been made and posted for Forward Ho, LLC. For each account, prepare a general journal entry that would most likely be appropriate for each adjustment.
a. b. c. d. e. f. g.
Account Accumulated Depreciation—Truck Supplies Wages Payable Prepaid Rent Unearned Service Fees Interest Payable Insurance Expense
Current Balance $1,800 2,820 -2,880 2,400 ---
Adjusted Balance $3,600 930 2,400 1,440 1,950 750 990
Answer: a. Depreciation Expense --Truck Accumulated Depreciation --Truck
1,800
b. Supplies Expense Supplies
1,890
c. Wages Expenses Wages Payable
2,400
d. Rent Expense Prepaid Rent
1,440
1,800
1,890
2,400
1,440
e. Unearned Service Fees Service Fees Earned
450
f.
Interest Expense Interest Payable
750
g. Insurance Expense Prepaid Insurance
990
450
750
990
©Cambridge Business Publishers, 2020 3-112
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Adjusting Journal Entries LO: 2, 3, 4 11. The list below shows the current account balances and balances that the accounts should have after adjusting entries have been made and posted for Forward Ho, LLC. For each account, prepare a general journal entry that would most likely be appropriate for each adjustment.
a. b. c. d. e. f. g.
Account Accumulated Depreciation -- Equipment Supplies Salaries Payable Prepaid Advertising Unearned Service Fees Interest Receivable Insurance Expense
Current Balance -$1,760 --
Adjusted Balance $1,600 740 600
1,200 1,940 ---
700 940 1,000 1,800
Answer: a. Depreciation Expense -- Equipment Accumulated Depreciation --Equipment
1,600
b. Supplies Expense Supplies
1,020
1,600
1,020
c. Salaries Expense Salaries Payable
600
d. Advertising Expense Prepaid Advertising
500
e. Unearned Service Fees Service Fees Earned
1,000
f.
Interest Receivable Interest Income
1,000
g. Insurance Expense Prepaid Insurance
1,800
600
500
1,000
1,000
1,800
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-113
Topic: Adjusting Journal Entries LO: 2, 3, 4 12. Listed below are four categories of adjusting entries. Insert the words “increase,” “decrease,” or “no effect” in the space under the appropriate column heading to indicate how an adjusting entry in that category affects assets, liabilities, revenues and expenses.
(1)
Category Allocating assets to expense. (example: adjusting insurance payment initially debited to Prepaid Insurance)
(2)
Allocating revenues received in advance to revenue. (example: adjusting fees received in advance initially credited to Unearned Fees)
(3)
Accruing expenses (example: accruing wages earned but not paid)
(4)
Accruing revenues (example: accruing interest earned but not received)
Assets
Liabilities
Revenues
Expenses
Assets
Liabilities
Revenues
Expenses
Decrease
No Effect
No Effect
Increase
No Effect
Decrease
Increase
No Effect
No Effect
Increase
No Effect
Increase
Increase
No Effect
Increase
No Effect
Answer:
(1)
(2)
(3)
(4)
Category Allocating assets to expense. (example: adjusting insurance payment initially debited to Prepaid Insurance) Allocating revenues received in advance to revenue. (example: adjusting fees received in advance initially credited to Unearned Fees) Accruing expenses (example: accruing wages earned but not paid) Accruing revenues (example: accruing interest earned but not received)
©Cambridge Business Publishers, 2020 3-114
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Preparing Closing Entries and Post-Closing Trial Balance LO: 7 13. Purrfect Cat Condos provides pet grooming and boarding services for domestic cats. The company has been in existence for 12 years. At December 31, 2019, Purrfect Cat Condos’ adjusted trial balance is as follows: PURRECT CAT CONDOS Adjusted Trial Balance December 31, 2019 Debit Cash Accounts receivable Prepaid insurance Equipment Accumulation depreciation Accounts payable Income tax payable Common stock Retained earnings Service fees earned Miscellaneous income Salaries expense Rent expense Insurance expense Depreciation expense Income tax expense
Credit
$97,200 48,000 7,800 540,000 $126,000 43,800 37,200 244,200 103,500 630,000 12,300 342,000 49,200 10,800 25,200 76,800 $1,197,000
$1,197,000
a. Prepare closing entries in journal entry form, using the Income Summary account. b. After Purrfect Cat Condos’ closing entries are posted, what is the balance in the Retained Earnings account? c.
Prepare Purrfect Cat Condos’ post-closing trial balance.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-115
Answer: Debit a.
Dec. 31
31
31
Service Fees Earned Miscellaneous Income Income Summary To close the revenue accounts.
630,000 12,300
Income Summary Salaries Expense Rent Expense Insurance Expense Depreciation Expense Income Tax Expense To close the expense accounts.
504,000
Income Summary Retained Earnings To close the income summary account.
138,300
Credit
642,300
342,000 49,200 10,800 25,200 76,800
138,300
b. Retained Earnings = $103,500 + $138,300 = $241,800 c. PURRFECT CAT CONDOS Post-Closing Trial Balance December 31, 2019 Debit Cash Accounts receivable Prepaid insurance Equipment Accumulation depreciation Accounts payable Income tax payable Common stock Retained earnings
Credit
$ 97,200 48,000 7,800 540,000
_______
$ 126,000 43,800 37,200 244,200 241,800
$693,000
$693,000
©Cambridge Business Publishers, 2020 3-116
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Preparing Closing Entries and Post-Closing Trial Balance Closing to Retained Earnings LO: 6 14. Purrfect Cat Condos provides pet grooming and boarding services for domestic cats. The company has been in existence for 12 years. At December 31, 2019, Purrfect Cat Condos’ adjusted trial balance is as follows: PURRFECT CAT CONDOS Adjusted Trial Balance December 31, 2019 Debit Cash Accounts receivable Prepaid insurance Equipment Accumulation depreciation Accounts payable Common stock Retained earnings Service fees earned Miscellaneous income Salaries expense Rent expense Insurance expense Depreciation expense Income tax expense Income tax payable
Credit
$ 84,800 32,000 5,200 360,000 $ 84,000 9,200 202,800 69,000 420,000 8,200 228,000 32,800 7,200 16,800 51,200 ________
24,800
$818,000
$818,000
a. Prepare closing entries in journal entry form. Close to Retained Earnings. b. After Purrfect Cat Condos’ closing entries are posted, what is the balance in the Retained Earnings account? c.
Prepare Purrfect Cat Condos’ post-closing trial balance.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 3
3-117
Answer: Debit a.
Dec. 31
31
Service Fees Earned Miscellaneous Income Retained Earnings To close the revenue accounts.
420,000 8,200
Retained Earnings Salaries Expense Rent Expense Insurance Expense Depreciation Expense Income Tax Expense To close the expense accounts.
336,000
Credit
428,200
228,000 32,800 7,200 16,800 51,200
b. Retained Earnings = $69,000 + $428,200 - $336,000 = $161,200
c. PURRFECT CAT CONDO Post-Closing Trial Balance December 31, 2019 Debit Cash Accounts receivable Prepaid insurance Equipment Accumulation depreciation Accounts payable Income tax payable Common stock Retained earnings
Credit
$ 84,800 32,000 5,200 360,000
_______
$ 84,000 9,200 24,800 202,800 161,200
$482,000
$482,000
©Cambridge Business Publishers, 2020 3-118
th
Financial Accounting for Undergraduates, 4 Edition
Chapter 4 Understanding Financial Statements Learning Objectives – Coverage by question True / False
Multiple Choice
Exercises
Problems
LO1 ─ Describe a classified balance sheet.
1-3
1-8, 30-41, 57-64
1-5
1
LO2 – Describe a single-step and multi-step income statement
4, 9, 10
15, 16, 19, 20, 50-56, 65-68
7, 8
LO3 ─ Discuss use of a balance sheet and ratios to assess liquidity and solvency.
5
9-14, 42-45
6, 7
17, 18, 21-23, 46, 47
6, 7
LO4 ─ Discuss use of the income statement and ratios to assess profitability.
LO5 ─ Explain the components of the statement of stockholders’ equity.
6, 7
24-26
9-11
LO6 ─ Explain use of the statement of cash flows to help assess solvency.
8
27-29, 48, 49
12
2-4
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-1
Chapter 4: Understanding Financial Statements
True / False Topic: Current Assets LO: 1 1. Current assets are cash and other assets that will be converted into cash or used up during the normal operating cycle of the business or one year, whichever is shorter. Answer: False Rationale: Current assets are cash and other assets that will be converted into cash or used up during the normal operating cycle of the business or one year, whichever is longer. Topic: Reporting of Assets LO: 1 2. Assets are listed on the balance sheet in order of liquidity and liabilities are listed in order of amount. Answer: False Rationale: Assets are reported in the order of liquidity which reflects the ease of converting into cash. Receivables are reported before inventories, and inventories before PP&E. Liabilities are reported in order of maturity, with current liabilities expected to be paid within one year or within the operating cycle, and long-term liabilities expected to be paid over a longer period of time. Topic: Balance Sheet Report Form LO: 1 3. The report form of the balance sheet displays assets on the left side and liabilities and stockholders’ equity on the right side. Answer: False Rationale: The report form of the balance sheet displays assets on the top, with liabilities displayed below the assets, and stockholders’ equity displayed below liabilities. Topic: Trend Analysis LO: 2 4. Trend analysis is a process in which we compare a company’s results, or the results of a ratio, over time. Answer: True Rationale: Trend analysis is a process in which we compare a company’s results, or the results of a ratio, over time. This technique helps the financial statement user identify any readily observable trends in a company’s performance.
©Cambridge Business Publishers, 2020 4-2
Financial Accounting for Undergraduates, 4th Edition
Topic: Current Ratio LO: 3 5. The current ratio of a company is its current assets divided by its current liabilities. Answer: True Rationale: The current ratio of a company is its current assets divided by its current liabilities. The current ratio is a widely used measure of a company’s liquidity. A current ratio greater than one implies that a company has more cash and current assets than needed to pay off its current obligations and a ratio of less than one implies the opposite. Topic: Analyzing and Recording Equity Transactions LO: 5 6. If Boot Company paid $200,000 cash dividends to its shareholders, retained earnings would be reduced by $200,000. Answer: True Rationale: A cash dividend results in a reduction of retained earnings. Topic: Analyzing and Recording Equity Transactions LO: 5 7. If stockholders’ equity is $300,000 on January 1, 2019, and decreases to $100,000 on December 31, 2019, this could only be due to a net loss of $200,000. Answer: False Rationale: A reduction in stockholders’ equity could also be due to a cash dividend. Topic: Categories for the Statement of Cash Flows LO: 6 8. The statement of cash flows separates cash flows into operating, nonoperating, and investing categories. Answer: False Rationale: The statement of cash flows includes operating activities, investing activities, and financing activities. Topic: Gross Profit LO: 2 9. In a merchandising firm, sales minus cost of goods sold equals income before income taxes. Answer: False. Rationale: For a merchandising company, the cost of goods sold is subtracted from the firm’s net sales to determine its gross profit on sales. Topic: Gross Profit LO: 2 10. Gross profit on sales is obtained by deducting selling expenses from sales. Answer: False. Rationale: Gross profit on sales is defined as the difference between net sales and the cost of goods sold.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-3
Multiple Choice Topic: Current Assets LO: 1 Level of Difficulty: EASY 1. Which one of the following is included in current assets? A) Accounts receivable B) Taxes payable C) Automobiles D) Common stock Answer: A Rationale: Accounts receivable is included in current assets as it represents amount owed by customers that are expected to be paid within one year or the operating cycle. Topic: Reporting of Assets LO: 1 Level of Difficulty: MEDIUM 2. Assets are recorded in the balance sheet in order of: A) Market value B) Historic value C) Liquidity D) Maturity Answer: C Rationale: Liquidity refers to the ease of conversation to cash. Current assets are to be used during the current operating cycle (starting with cash, short-term investments, accounts receivables, inventories and other assets). Market value and historic value refer to the measurement of assets. Maturity refers to the order in which liabilities are recorded in the balance sheet. Topic: Liabilities LO: 1 Level of Difficulty: EASY 3. Which one of the following is not a current liability? A) Taxes payable B) Accounts payable C) Wages payable D) Wage expense Answer: D Rationale: Wages expense is an income statement account, not a balance sheet account. Current liabilities are amounts owed and due to be repaid within one year or within one operating cycle.
©Cambridge Business Publishers, 2020 4-4
Financial Accounting for Undergraduates, 4th Edition
Topic: Currents Assets LO: 1 Level of Difficulty: EASY 4. Current assets are usually listed in the order of their: A) Size: smallest to largest B) Liquidity: most liquid to least liquid C) Size: largest to smallest D) Lack of liquidity: least liquid to most liquid Answer: B Rationale: Current assets are listed on a classified balance sheet in the order of their expected liquidity. Liquidity is determined by the ability of an asset to be readily converted into cash. Topic: Currents Assets LO: 1 Level of Difficulty: EASY 5. Current assets are cash and other assets that will be converted into cash or used up within A) One year B) The normal operating cycle of the business or one year, whichever is longer C) The normal operating cycle of the business D) The normal operating cycle of the business or one year, whichever is shorter Answer: B Rationale: Current assets are cash and other assets that will be converted into cash or used up within the normal operating cycle of the business or one year, whichever is longer. The normal operating cycle of a business is the average period of time between the use of cash to deliver a service or to buy goods for resale and the subsequent collection of cash from customers who purchase those services or products. Topic: Balance Sheet Report Form LO: 1 Level of Difficulty: MEDIUM 6. The balance sheet format that reports assets first and then, beneath the assets, reports the liabilities and stockholders’ equity is called the: A) Account form B) Stack form C) Classified form D) Report form Answer: D Rationale: The balance sheet format that reports assets first and then, beneath the assets, reports the liabilities and stockholders’ equity is called the report form. This is one of the two generally accepted formats for presenting a classified balance sheet.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-5
Topic: Current Assets LO: 1 Level of Difficulty: MEDIUM 7. Which of the following assets would not be classified as a current asset? A) Accounts receivable B) Prepaid rent C) Supplies D) Equipment Answer: D Rationale: Current assets are cash and other assets that will be converted into cash or used up within the normal operating cycle of the business or one year, whichever is longer. Equipment is not readily converted into cash and is classified as a long-term asset. Topic: Stockholders’ Equity and the Balance Sheet LO: 1 Level of Difficulty: MEDIUM 8. The primary components of the stockholders’ equity section of a balance sheet for a corporation are: A) A capital amount for each stockholder in the corporation B) Net income and retained earnings C) Common stock and dividends D) Common stock and retained earnings Answer: D Rationale: Stockholders’ equity is the residual ownership interest in the assets of a business after its liabilities have been paid off, The stockholders; equity of a corporation is divided into two main categories: amounts invested by stockholders (common stock) and the cumulative net income of a business that has not yet been distributed to its stockholders as a dividend (retained earnings). Topic: Solvency LO: 3 Level of Difficulty: MEDIUM 9. Data from the financial statements of Creativity Crafts and Fun Projects, Inc. are presented below (in millions):
Total liabilities, 2019 Total liabilities, 2018 Total assets, 2019 Total assets, 2018 Net Sales, 2019 Net income, 2019
Creativity Crafts $47,940 54,160 87,830 82,350 230,200 4,200
Fun Projects, Inc. $38,190 45,070 64,530 61,610 122,550 2,360
To the nearest hundredth, what is the 2019 debt-to-total-assets ratio for Creativity Crafts? A) 0.55 B) 0.22 C) 3.25 D) 37.93 Answer: A Rationale: Debt-to-total-assets = Total liabilities / Total assets = $47,940 / $87,830= 0.55
©Cambridge Business Publishers, 2020 4-6
Financial Accounting for Undergraduates, 4th Edition
Topic: Solvency LO: 3 Level of Difficulty: MEDIUM 10. Data from the financial statements of Nancarrow Brothers Co. and J. C. Murphy, Inc. are presented below (in millions):
Total liabilities, 2019 Total liabilities, 2018 Total assets, 2019 Total assets, 2018 Net Sales, 2019 Net income, 2019
Nancarrow Brothers Co. $70,914 72,208 100,372 94,114 306,932 280
J. C. Murphy, Inc. $47,422 60,092 73,744 70,416 163,040 1,572
To the nearest hundredth, what is the 2019 debt-to-total-assets ratio for Nancarrow Brothers Co.? A) 0.71 B) 0.26 C) 3.78 D) 44.16 Answer: A Rationale: Debt-to-total-assets = Total liabilities / Total assets = $70,914 / $100,372= 0.71 Topic: Solvency LO: 3 Level of Difficulty: MEDIUM 11. Data from the financial statements of Creativity Crafts and Fun Projects, Inc. are presented below (in millions):
Total liabilities, 2019 Total liabilities, 2018 Total assets, 2019 Total assets, 2018 Net Sales, 2019 Net income, 2019
Creativity Crafts $47,940 54,160 87,830 82,350 230,200 4,200
Fun Projects, Inc. $38,190 45,070 64,530 61,610 122,550 2,360
To the nearest hundredth, what is the 2019 debt-to-total-assets ratio for Fun Projects , Inc.? A) 0.18 B) 0.59 C) 4.24 D) 4.00 Answer: B Rationale: Debt-to-total-assets = Total liabilities / Total assets = $38,190/ $64,530= 0.59
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-7
Topic: Solvency LO: 3 Level of Difficulty: MEDIUM 12. Data from the financial statements of Nancarrow Brothers Co. and J. C. Murphy, Inc. are presented below (in millions):
Total liabilities, 2019 Total liabilities, 2018 Total assets, 2019 Total assets, 2018 Net Sales, 2019 Net income, 2019
Nancarrow Brothers Co.
J. C. Murphy, Inc.
$70,914 72,208 100,372 94,114 306,932 280
$47,422 60,092 73,744 70,416 163,040 1,572
To the nearest hundredth, what is the 2019 debt-to-total-assets ratio for J. C. Murphy, Inc.? A) 0.21 B) 0.64 C) 4.96 D) 4.69 Answer: B Rationale: Debt-to-total-assets = Total liabilities / Total assets = $47,422 / $73,744= 0.64 Topic: Solvency LO: 3 Level of Difficulty: DIFFICULT 13. Best Ball Bearings has a debt-to-total-assets ratio of 0.915 and Amazing Automotive has 0.99. Which of the following statements is true? A) Amazing Automotive reported more dollars of profit than Best Ball Bearings. B) Amazing Automotive has more total debt than does Best Ball Bearings. C) Amazing Automotive is able to bring its product to market more efficiently than Best Ball Bearings. D) Best Ball Bearings would likely be able to borrow money at a lower interest rate than would Amazing Automotive. Answer: D Rationale: Best Ball Bearings is the lower risk borrower of these two companies with a lower debt-tototal-assets ratio. Best Ball Bearings would likely be able to borrow money at a lower interest rate than Amazing Automotive. Amazing’s higher debt-to-total-assets means that the firm relies more on creditor financing than Best Ball Bearings.
©Cambridge Business Publishers, 2020 4-8
Financial Accounting for Undergraduates, 4th Edition
Topic: Current Ratio LO: 3 Level of Difficulty: EASY 14. The current ratio is computed as: A) Current liabilities divided by current assets B) Current assets divided by current liabilities C) Current assets minus current liabilities D) Current assets divided by total assets Answer: B Rationale: The current ratio of a company is its current assets divided by its current liabilities. The current ratio is a widely used measure of a company’s liquidity. A current ratio greater than one implies that a company has more cash and current assets than needed to pay off its current obligations and a ratio of less than one implies the opposite. Topic: Return on Assets Ratio LO: 2 Level of Difficulty: MEDIUM 15. Data from the financial statements of Creativity Crafts and Fun Projects, Inc. are presented below (in millions):
Total liabilities, 2019 Total liabilities, 2018 Total assets, 2019 Total assets, 2018 Net Sales, 2019 Net income, 2019
Creativity Crafts $47,940 54,160 87,830 82,350 230,200 4,200
Fun Projects, Inc. $38,190 45,070 64,530 61,610 122,550 2,360
To the nearest hundredth of a percent, what is the 2019 return on assets ratio for Creativity Crafts? A) 4.78% B) 10.68% C) 6.91% D) Not enough information provided Answer: A Rationale: ROA = Net income / Total assets = $4,200 / $87,830 = 0.0478= 4.78%
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-9
Topic: Return on Assets Ratio LO: 2 Level of Difficulty: MEDIUM 16. Data from the financial statements of Nancarrow Brothers Co. and J. C. Murphy, Inc. are presented below (in millions):
Total liabilities, 2019 Total liabilities, 2018 Total assets, 2019 Total assets, 2018 Net sales, 2019 Net income, 2916
Nancarrow Brothers Co. $73,044 72,208 92,372 93,028 322,932 2,600
J. C. Murphy, Inc. $54,196 60,092 65,744 70,416 163,404 4,415
To the nearest hundredth of a percent, what is the 2019 return on assets ratio for Nancarrow Brothers Co.? A) 6.72% B) 2.81% C) 3.56% D) Not enough information provided Answer: B Rationale: ROA = Net income / Total assets = $2,600 / $92,372 = 0.0281= 2.81% Topic: Return on Sales Ratio LO: 4 Level of Difficulty: MEDIUM 17. Data from the financial statements of Creativity Crafts and Fun Projects, Inc. are presented below (in millions):
Total liabilities, 2019 Total liabilities, 2018 Total assets, 2019 Total assets, 2018 Net Sales, 2019 Net income, 2019
Creativity Crafts $47,940 54,160 87,830 82,350 230,200 4,200
Fun Projects, Inc. $38,190 45,070 64,530 61,610 122,550 2,360
To the nearest hundredth of a percent, what is the 2019 return on sales ratio for Creativity Crafts? A) 0.86% B) 1.09% C) 1.83% D) Not enough information provided Answer: C Rationale: ROS = Net income / Net sales = $4,200 / $230,200 = 0.0183= 1.83%
©Cambridge Business Publishers, 2020 4-10
Financial Accounting for Undergraduates, 4th Edition
Topic: Return on Sales Ratio LO: 4 Level of Difficulty: MEDIUM 18. Data from the financial statements of Nancarrow Brothers Co. and J. C. Murphy, Inc. are presented below (in millions):
Total liabilities, 2019 Total liabilities, 2018 Total assets, 2019 Total assets, 2018 Net sales, 2019 Net income, 2019
Nancarrow Brothers Co. $73,044 72,208 92,372 93,028 322,932 2,600
J. C. Murphy, Inc. $54,196 60,092 65,744 70,416 163,404 4,415
To the nearest hundredth of a percent, what is the 2019 return on sales ratio for Nancarrow Brothers Co.? A) 0.30% B) 0.38% C) 0.81% D) Not enough information provided Answer: C Rationale: ROS = Net income / Net sales = $2,600 / $322,932 = 0.0081= 0.81% Topic: Return on Assets Ratio LO: 2 Level of Difficulty: MEDIUM 19. Data from the financial statements of Creativity Crafts and Fun Projects, Inc. are presented below (in millions):
Total liabilities, 2019 Total liabilities, 2018 Total assets, 2019 Total assets, 2018 Net Sales, 2019 Net income, 2019
Creativity Crafts $47,940 54,160 87,830 82,350 230,200 4,200
Fun Projects, Inc. $38,190 45,070 64,530 61,610 122,550 2,360
To the nearest hundredth of a percent, what is the return on assets ratio 2019 for Fun Projects, Inc.? A) 0.02% B) 4.72% C) 3.66% D) Not enough information is provided Answer: C Rationale: ROA = Net income / Total assets = $2,360 / $64,530 = 0.0363 = 3.66%
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-11
Topic: Return on Assets Ratio LO: 2 Level of Difficulty: MEDIUM 20. Data from the financial statements of Nancarrow Brothers Co. and J. C. Murphy, Inc. are presented below (in millions):
Total liabilities, 2019 Total liabilities, 2018 Total assets, 2019 Total assets, 2018 Net sales, 2019 Net income, 2018
Nancarrow Brothers Co. $73,044 72,208 92,372 93,028 322,932 2,600
J. C. Murphy, Inc. $54,196 60,092 65,744 70,416 163,404 4,415
To the nearest hundredth of a percent, what is the return on assets ratio 2019 for J. C. Murphy, Inc.? A) 6.72% B) 2.81% C) 8.15% D) Not enough information is provided Answer: A Rationale: ROA = Net income / Total Assets = $4,415 / $65,744= 0.0672 = 6.72% Topic: Return on Sales Ratio LO: 4 Level of Difficulty: MEDIUM 21. Data from the financial statements of Creativity Crafts and Fun Projects, Inc. are presented below (in millions):
Total liabilities, 2019 Total liabilities, 2018 Total assets, 2019 Total assets, 2018 Net Sales, 2019 Net income, 2019
Creativity Crafts $47,940 54,160 87,830 82,350 230,200 4,200
Fun Projects, Inc. $38,190 45,070 64,530 61,610 122,550 2,360
To the nearest hundredth of a percent, what is the return on sales ratio 2019 for Fun Projects, Inc.? A) 1.93% B) 2.20% C) 2.67% D) Not enough information is provided Answer: A Rationale: ROS = Net income / Net sales = $2,360 / $122,550 = 0.0193 = 1.93%
©Cambridge Business Publishers, 2020 4-12
Financial Accounting for Undergraduates, 4th Edition
Topic: Return on Sales Ratio LO: 4 Level of Difficulty: MEDIUM 22. Data from the financial statements of Nancarrow Brothers Co. and J. C. Murphy, Inc. are presented below (in millions):
Total liabilities, 2019 Total liabilities, 2018 Total assets, 2019 Total assets, 2018 Net sales, 2019 Net income, 2019
Nancarrow Brothers Co. $73,044 72,208 92,372 93,028 322,932 2,600
J. C. Murphy, Inc. $54,196 60,092 65,744 70,416 163,404 4,415
To the nearest hundredth of a percent, what is the return on sales ratio 2019 for J. C. Murphy, Inc.? A) 2.70% B) 2.39% C) 2.90% D) Not enough information is provided Answer: A Rationale: ROS = Net income / Net sales = $4,415 / $163,404= 0.0270 = 2.70% Topic: Profitability Analysis LO: 4 Level of Difficulty: DIFFICULT 23. Best Ball Bearings has a ROS of 24.60% and Amazing Automotive has an ROS of 27.45%. Which of the following statements is true? A) Amazing Automotive reported more dollars of profit than Best Ball Bearings. B) Amazing Automotive has more of the firm financed with debt than Best Ball Bearings does. C) Amazing Automotive is able to bring its product to market more efficiently than Best Ball Bearings. D) Best Ball Bearings would likely be able to borrow money at a lower interest rate than would Amazing Automotive. Answer: C Rationale: ROS measures profitability and how efficiently a company markets its products to produce profit. Amazing Automotive shows a higher return on sales, which means that it is able to bring its product to market more efficiently than Best Ball Bearings.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-13
Topic: Statement of Stockholders’ Equity LO: 5 Level of Difficulty: MEDIUM 24. Which statement is true of the statement of stockholders’ equity? A) It reports a company’s assets, liabilities, and equities. B) It reports a company’s revenue and expenses for a period. C) It reports a company’s cash flows from operating activities, investing activities, and financing activities. D) It shows a company’s stock issuances and dividends paid to shareholders. Answer: D Rationale: The balance sheet reports a company’s assets, liabilities, and equities; the income statement reports a company’s revenue and expenses for a period; and the statement of cash flows reports a company’s cash flows from operating activities, investing activities, and financing activities. The statement of stockholders’ equity shows changes in all equity accounts, that is, it includes presentation of a company’s stock issuances and dividends paid to shareholder. Topic: Stockholders’ Equity LO: 5 Level of Difficulty: EASY 25. Which of the following is not shown in the statement of stockholder’s equity? A) Unearned revenue B) Dividends C) Retained earnings D) Common stock Answer: A Rationale: Unearned revenue is a liability that represents amounts collected in advance from customers. It is an obligation that must be satisfied with a future cash payment or delivery of goods or services. Topic: Stockholders’ Equity LO: 5 Level of Difficulty: MEDIUM 26. Which one of the following does not impact retained earnings directly? A) Net income B) Net loss C) Dividends D) Stock issuances Answer: D Rationale: Stock issuances impact stockholders’ equity through the common stock account.
©Cambridge Business Publishers, 2020 4-14
Financial Accounting for Undergraduates, 4th Edition
Topic: Categories for the Statement of Cash Flows LO: 6 Level of Difficulty: EASY 27. Which of the following is not a category for classifying cash flows in a statement of cash flows? A) Operating activities B) Nonoperating activities C) Financing activities D) Investing activities Answer: B Rationale: There are three activities: operating, investing, and financing. Topic: Analysis of Cash Flows LO: 6 Level of Difficulty: MEDIUM 28. The following amounts have been taken from the recent financial statements for Daniel Enterprises: Current liabilities $1,335,000
Cash from operations $6,300,000
Expenditures on PPE $2,250,000
Dividends (cash) $195,000
Which of the following amounts is the free cash flow for Daniel Enterprises? A) $ 795,000 B) $ 990,000 C) $3,075,000 D) $4,050,000 Answer: D Rationale: Free cash flow = Cash flow from operations – Capital expenditures X = (Cash from operating activities) – (Payment for expenditures on PPE) X = $6,300,000 – $2,250,000 = $4,050,000 Topic: Analysis of Cash Flows LO: 6 Level of Difficulty: MEDIUM 29. The following amounts have been taken from the recent financial statements for Junnion Foundation: Current liabilities $1,780,000
Cash from operations $8,400,000
Expenditures on PPE $3,000,000
Dividends (cash) $2,600,000
Which of the following amounts is the free cash flow for Junnion Foundation? A) $1,600,000 B) $1,320,000 C) $4,100,000 D) $5,400,000 Answer: D Rationale: Free cash flow = Cash flow from operations – Capital expenditures X = (Cash from operating activities) – (Payment for expenditures on PPE) X = $8,400,000 – $3,000,000 = $5,400,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-15
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: MEDIUM 30. Colorado Company has beginning equity of $900,000, net income of $150,000, dividends of $90,000 and investments by owners in exchange for stock of $30,000. Its ending equity is: A) $669,000 B) $720,000 C) $804,000 D) $990,000 Answer: D Rationale: Ending equity = Beginning equity + Net income (loss) – Dividends + Owner Investments X = $900,000 + 150,000 - $90,000 + $30,000 X = $990,000 Topic: Classified Balance Sheet LO: 1 Level of Difficulty: MEDIUM 31. Mountain Company has beginning equity of $1,200,000, net income of $200,000, dividends of $120,000 and investments by owners in exchange for stock of $40,000. Its ending equity is: A) $ 892,000 B) $ 960,000 C) $1,072,000 D) $1,320,000 Answer: D Rationale: Ending equity = Beginning equity + Net income (loss) – Dividends + Owner Investments X = $1,200,000 + 200,000 - $120,000 + $40,000 X = $1,320,000 Topic: Classified Balance Sheet LO: 1 Level of Difficulty: DIFFICULT 32. During 2019, Wayneright Company’s total assets increased $75,000, and total liabilities decreased $45,000. During the same year, the company’s investors invested an additional $90,000 and the company paid dividends of $45,000. What must have been the company’s net income for 2019? A) $75,000 B) $45,000 C) $60,000 D) $30,000 Answer: A Rationale: Change in Assets = Change in Owner’s Equity + Change in Liabilities +$75,000 = X – $45,000 X = $120,000 = Change in Owner’s Equity Change in Owner’s Equity = Change in owner’s Investments + Net income – Dividends $120,000 = $90,000 + X - $45,000 X = 120,000 - $90,000 + $45,000 X = $75,000
©Cambridge Business Publishers, 2020 4-16
Financial Accounting for Undergraduates, 4th Edition
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: DIFFICULT 33. During 2019, Duncan Company’s total assets increased $100,000, and total liabilities decreased $60,000. During the same year, the company’s investors invested an additional $120,000 and the company paid dividends of $60,000. What must have been the company’s net income for 2019? A) $100,000 B) $ 60,000 C) $ 80,000 D) $ 40,000 Answer: A Rationale: Change in Assets = Change in Owner’s Equity + Change in Liabilities +$100,000 = X - $60,000 X = $160,000 = Change in Owner’s Equity Change in Owner’s Equity = Change in owner’s Investments + Net income – Dividends $160,000 = $120,000 + X - $60,000 X = $160,000 - $120,000 + $60,000 X = $100,000 Topic: Classified Balance Sheet LO: 1 Level of Difficulty: MEDIUM 34. A company reported total stockholders’ equity of $435,000 on its Dec 31, 2018, balance sheet. The following information is available for the year ended Dec 31, 2019: Revenues.......................................................... Expenses......................................................... Liabilities, on December 31, 2019..................
$930,000 495,000 216,000
What are the total assets of the company on December 31, 2019? A) $ 276,000 B) $ 57,000 C) $ 630,000 D) $1,086,000 Answer: D Rationale: Stockholders’ equity 12/31/19 = Stockholders’ equity 12/31/18 + Revenue – Expenses X = $435,000 + $930,000 – $495,000 X = $870,000 Assets = Stockholders’ equity + Liabilities X = $870,000 + $216,000 X = $1,086,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-17
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: MEDIUM 35. A company reported total stockholders’ equity of $580,000 on its Dec 31, 2018, balance sheet. The following information is available for the year ended Dec 31, 2019: Revenues.......................................................... Expenses......................................................... Liabilities, on December 31, 2019..................
$1,240,000 660,000 288,000
What are the total assets of the company on December 31, 2019? A) $ 368,000 B) $ 76,000 C) $ 840,000 D) $1,448,000 Answer: D Rationale: Stockholders’ equity 12/31/19 = Stockholders’ equity 12/31/18 + Revenue – Expenses X = $580,000 + $1,240,000 – $660,000 X = $1,160,000 Assets = Stockholders’ equity + Liabilities X = $1,160,000 + $288,000 X = $1,448,000 Topic: Classified Balance Sheet LO: 1 Level of Difficulty: DIFFICULT 36. Ivey Company began operations on January 1, 2019, with an investment of $186,000 by each of its two stockholders, or a total of $372,000. Net income for its first year of business was $654,000. During the year, the company paid dividends of $90,000 each to its two stockholders. How much is the company’s ending Stockholders’ Equity on December 31, 2019? A) $834,000 B) $648,000 C) $744,000 D) $846,000 Answer: D Rationale: Ending stockholders’ equity = Beginning stockholders’ equity + Contributed capital + Net income – Dividends X = $0 + $372,000 + $654,000 – ($90,000 x 2) X = $846,000
©Cambridge Business Publishers, 2020 4-18
Financial Accounting for Undergraduates, 4th Edition
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: DIFFICULT 37. Melvin Company began operations on January 1, 2019, with an investment of $248,000 by each of its two stockholders, or a total of $496,000. Net income for its first year of business was $872,000. During the year, the company paid dividends of $120,000 each to its two stockholders. How much is the company’s ending Stockholders’ Equity on December 31, 2019? A) B) C) D)
$1,112,000 $ 864,000 $ 992,000 $1,128,000
Answer: D Rationale: Ending Stockholders’ equity = Beginning Stockholders’ equity + Contributed capital + Net income – Dividends X = $0 + $496,000 + $872,000 – ($120,000 x 2) X = $1,128,000 Topic: Classified Balance Sheet LO: 1 Level of Difficulty: DIFFICULT 38. As of December 31, 2018, Foxfire Company had assets of $2,775,000 and liabilities of $855,000. During 2019, the stockholders invested an additional $150,000 and paid dividends of $90,000 from the business. What is the net income for the company during 2019, assuming that as of December 31, 2019, assets were $2,940,000, and liabilities were $765,000? A) $ 225,000 B) $ 195,000 C) $ 315,000 D) $ 60,000 Answer: B Rationale: Stockholders’ equity 12/31/18 = Assets – Liabilities X = $2,775,000 – $855,000 X = $1,920,000 = Stockholders’ equity 12/31/18 Stockholders’ equity 12/31/19 = Assets – Liabilities X = $2,940,000 – $765,000 X = $2,175,000 = Stockholders’ equity 12/31/19 Stockholders’ equity 12/31/19 = Stockholders’ equity 12/31/18 + Additional equity investments + Net income – Dividends $2,175,000 = $1,920,000 + $150,000 + X – $90,000 X = $2,175,000 – $1,920,000 - $150,000 + $90,000 X = $195,000 = Net income
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-19
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: DIFFICULT 39. As of December 31, 2018, Lincolnshire Company had assets of $3,700,000 and liabilities of $1,140,000. During 2019, the stockholders invested an additional $200,000 and paid dividends of $120,000 from the business. What is the net income for the company during 2019, assuming that as of December 31, 2019, assets were $3,920,000, and liabilities were $1,020,000? A) $ 340,000 B) $ 260,000 C) $ 420,000 D) $ 80,000 Answer: B Rationale: Stockholders’ equity 12/31/18 = Assets – Liabilities X = $3,700,000 – $1,140,000 X = $2,560,000 = Stockholders’ equity 12/31/18 Stockholders’ equity 12/31/19 = Assets – Liabilities X = $3,920,000 – $1,020,000 X = $2,900,000 = Stockholders’ equity 12/31/19 Stockholders’ equity 12/31/19 = Stockholders’ equity 12/31/18 + Additional equity investments + Net income – Dividends $2,900,000 = $2,560,000 + $200,000 + X - $120,000 X = $2,900,000 – $2,560,000 – $200,000 + $120,000 X = $260,000 = Net income Topic: Classified Balance Sheet LO: 1 Level of Difficulty: MEDIUM 40. On September 1, 2019, Chartreuse Dog, Inc. reported Retained Earnings of $408,000. During the month of September, Chartreuse Dog generated revenues of $60,000, incurred expenses of $36,000, purchased equipment for $15,000 and paid dividends of $18,000. What is the balance in Retained Earnings on September 30, 2019? A) $408,000 debit B) $ 24,000 credit C) $411,000 credit D) $414,000 credit Answer: D Rationale: Ending Retained earnings = Beginning Retained earnings + Revenues – Expenses –Dividends X = $408,000 + $60,000 – $36,000 - $18,000 X = $414,000 (The balance is a credit, the normal balance for the Retained Earnings account.)
©Cambridge Business Publishers, 2020 4-20
Financial Accounting for Undergraduates, 4th Edition
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: MEDIUM 41. On September 1, 2019, Might Dog, Inc. reported Retained Earnings of $544,000. During the month of September, Bulldog generated revenues of $80,000, incurred expenses of $48,000, purchased equipment for $20,000 and paid dividends of $24,000. What is the balance in Retained Earnings on September 30, 2019? A) $544,000 debit B) $ 32,000 credit C) $548,000 credit D) $552,000 credit Answer: D Rationale: Ending Retained earnings = Beginning Retained earnings + Revenues – Expenses –Dividends X = $544,000 + $80,000 – $48,000 - $24,000 X = $552,000 (The balance is a credit, the normal balance for the Retained Earnings account.) Topic: Working with the Balance Sheet LO: 3 Level of Difficulty: MEDIUM 42. Chelsea Company presented the following data at the end of 2019: Cash Accounts receivable Merchandise inventory Prepaid insurance Property & equipment Accounts payable Unearned revenue Wages payable Bonds payable
$1,575,000 2,800,000 2,450,000 262,500 7,000,000 525,000 600,000 1,200,000 3,000,000
Determine the current ratio for Chelsea Company (rounded). A) 5.15 B) 4.94 C) 3.05 D) 2.78 Answer: C Rationale: Current ratio = Current assets / Current liabilities X = ($1,575,000 + $2,800,000 + $2,450,000 + $262,500) / ($525,000 + $600,000 + $1,200,000) X = $7,087,500 / $ 2,325,000 X = 3.05
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-21
Topic: Working with the Balance Sheet LO: 3 Level of Difficulty: MEDIUM 43. Kirsten Company presented the following data at the end of 2019: Cash Accounts receivable Merchandise inventory Prepaid insurance Property & equipment Accounts payable Unearned revenue Wages payable Bonds payable
$1,800,000 3,200,000 2,800,000 300,000 8,000,000 750,000 800,000 1,600,000 4,000,000
Determine the current ratio for Kirsten Company (rounded). A) 4.41 B) 4.23 C) 2.57 D) 2.38 Answer: C Rationale: Current ratio = Current assets / Current liabilities X = ($1,800,000 + $3,200,000 + $2,800,000 + $300,000) / ($750,000 + $800,000 + $1,600,000) X = $8,100,000 / $ 3,150,000 X = 2.57 Topic: Working with the Balance Sheet LO: 3 Level of Difficulty: MEDIUM 44. Darmstadt Company presented the following data at the end of 2019: Current liabilities Long-term debt Deferred income taxes Preferred stock Common stock Retained earnings
$450,000 1,650,000 600,000 280,000 980,000 945,000
Determine the debt-to-total assets ratio for Darmstadt Company (rounded). A) 0.55 B) 0.35 C) 0.07 D) 0.61
©Cambridge Business Publishers, 2020 4-22
Financial Accounting for Undergraduates, 4th Edition
Answer: A Rationale: Total assets = Total liabilities + Stockholders’ equity X = ($450,000 + $1,650,000 + $600,000) + ($280,000 + $980,000 + $945,000) X = $2,700,000 + $2,205,000 X = $4,905,000 Debt-to-total assets ratio = Total liabilities / Total assets X = $2,700,000 / $4,905,000 X = 0.55 Topic: Working with the Balance Sheet LO: 3 Level of Difficulty: MEDIUM 45. Buick Company presented the following data at the end of 2019: Current liabilities Long-term debt Deferred income taxes Preferred stock Common stock Retained earnings
$400,000 2,200,000 800,000 320,000 1,420,000 1,080,000
Determine the debt-to-total assets ratio for Buick Company (rounded). A) 0.55 B) 0.38 C) 0.08 D) 0.66 Answer: A Rationale: Total assets = Total liabilities + Stockholders’ equity X = ($400,000 + $2,200,000 + $800,000) + ($320,000 + $1,420,000 + $1,080,000) X = $3,400,000 + $2,820,000 X = $6,220,000 Debt-to-total assets ratio = Total liabilities / Total assets X = $3,400,000 / $6,220,000 X = 0.55
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-23
Topic: Working with the Income Statement LO: 4 Level of Difficulty: MEDIUM 46. Herbst Company presented the following data at the end of 2019: Net sales revenue Cost of goods sold Operating expenses Income tax rate
$962,500 375,000 90,000 25%
Determine the company’s return on sales (rounded) A) 37% B) 33% C) 30% D) 39% Answer: D Rationale: Net Income = (Net sales revenue – Cost of goods sold - Operating expenses) x (1 – Income tax rate) X = ($962,500 – $375,000 – $90,000) x (1 - 0.025) X = $497,500 x 0.75 X = $373,125 Return on sales ratio = Net income / Net sales X = $373,125 / $962,500 X = 0.39 = 39% Topic: Working with the Income Statement LO: 4 Level of Difficulty: MEDIUM 47. Fruhling Company presented the following data at the end of 2019: Net sales revenue Cost of goods sold Operating expenses Income tax rate
$1,100,000 500,000 240,000 25%
Determine the company’s return on sales (rounded) A) 31% B) 28% C) 33% D) 25% Answer: D Rationale: Net Income = (Net sales revenue – Cost of goods sold – Operating expenses) x (1 – Income tax rate) X = ($1,100,000 – $500,000 – $240,000) x (1 – 0.025) X = $360,000 x 0.75 X = $270,000 Return on sales ratio = Net income / Net sales X = $270,000 / $1,100,000 X = 0.25 = 25% ©Cambridge Business Publishers, 2020 4-24
Financial Accounting for Undergraduates, 4th Edition
Topic: Working with the Statement of Cash Flows LO: 6 Level of Difficulty: MEDIUM 48. Presented below is the Statement of Cash Flows for EMG Originals Clothing Company: EMG ORIGINALS CLOTHING COMPANY Statement of Cash Flows For Year Ended December 31, 2019 Cash flows from operating activities: Received from sales to customers Interest income received Payment for inventory Payment to employees Net increase from operating activities
$ 1,500,000 30,000 (240,000) (180,000) $ 1,110,000
Cash flows from investing activities: Payment for stock of another company Payment for purchase of equipment Net decrease from investing activities
(150,000) (600,000) $(750,000)
Cash flows from financing activities: Received from loans from bank From issuance of common stock From issuance of bonds Payment of dividends Net increase from financing activities
$ 150,000 450,000 300,000 (60,000) $ 840,000
Net increase in cash
$ 1,200,000
Determine the company’s free cash flow: A) ($450,000) B) $360,000 C) $540,000 D) $510,000 Answer: D Rationale: Free cash flow = Cash flow from operations – Capital expenditures X = (Net increase (in cash) from operating activities) – (Payment for purchase of equipment) X = $1,110,000 – $600,000 X = $510,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-25
Topic: Working with the Statement of Cash Flows LO: 6 Level of Difficulty: MEDIUM 49. Presented below is the Statement of Cash Flows for Margarete Originals Clothing Company: MARGARETE ORIGINALS CLOTHING COMPANY Statement of Cash Flows For Year Ended December 31, 2019 Cash flows from operating activities: Received from sales to customers Interest income received Payment for inventory Payment to employees Net increase from operating activities
$ 2,000,000 40,000 (320,000) (240,000) $ 1,480,000
Cash flows from investing activities: Payment for stock of another company Payment for purchase of equipment Net decrease from investing activities
(200,000) (800,000) $(1,000,000)
Cash flows from financing activities: Received from loans from bank From issuance of common stock From issuance of bonds Payment of dividends Net increase from financing activities
$ 200,000 600,000 400,000 (80,000) $ 1,120,000
Net increase in cash
$ 1,600,000
Determine the company’s free cash flow: A) ($600,000) B) ($520,000) C) $480,000 D) $680,000 Answer: D Rationale: Free cash flow = Cash flow from operations – Capital expenditures X = (Net increase (in cash) from operating activities) – (Payment for purchase of equipment) X = $1,480,000 – $800,000 X = $680,000
©Cambridge Business Publishers, 2020 4-26
Financial Accounting for Undergraduates, 4th Edition
Topic: Gross Profit LO: 2 Level of Difficulty: EASY 50. Net sales less cost of goods sold equals: A) Net income B) Net profit margin C) Gross profit D) Gross profit percentage Answer: C Rationale: Net sales – Cost of goods sold = Gross profit. The gross profit percentage is gross profit divided by sales. Topic: Income Statement LO: 2 Level of Difficulty: MEDIUM 51. The accounting record for Katzen Company reported the following selected information: Operating Expenses Sales Returns and Allowances Sales Discounts Sales Revenue Cost of Goods Sold
$ 270,000 78,000 36,000 1,050,000 402,000
Determine Katzen Company’s gross profit. A) $462,000 B) $534,000 C) $420,000 D) $498,000 Answer: B Rationale: Gross profit = Sales revenue – Sales returns and allowances – Sales discounts – Cost of goods sold X = $1,050,000 – $78,000 – $36,000 –$402,000 X = $534,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-27
Topic: Income Statement LO: 2 Level of Difficulty: MEDIUM 52. The accounting record for Hardware Company reported the following selected information: Operating Expenses Sales Returns and Allowances Sales Discounts Sales Revenue Cost of Goods Sold
$ 360,000 104,000 48,000 1,400,000 536,000
Determine Hardware Company’s gross profit. A) $616,000 B) $712,000 C) $560,000 D) $664,000 Answer: B Rationale: Gross profit = Sales revenue – Sales returns and allowances – Sales discounts - Cost of goods sold X = $1,400,000 – $104,000 – $48,000 – $536,000 X = $712,000 Topic: Income Statement LO: 2 Level of Difficulty: DIFFICULT 53. Determine Sales Revenue for Mountainstone Company with the following data: Cost of Goods Sold Operating Expenses Sales Discounts Sales Returns and Allowances Net Income A) B) C) D)
$1,680,000 420,000 30,000 195,000 510,000
$2,385,000 $2,445,000 $2,835,000 $2,775,000
Answer: C Rationale: Sales revenue – Sales returns and allowances – Sales discounts – Cost of goods sold – Operating expenses = Net income X – $195,000 – $30,000 – $1,680,000 – $420,000 = $510,000 X = $510,000 + $195,000 + $30,000 + $1,680,000 + $420,000 X = $2,835,000
©Cambridge Business Publishers, 2020 4-28
Financial Accounting for Undergraduates, 4th Edition
Topic: Income Statement LO: 2 Level of Difficulty: DIFFICULT 54. Determine Sales Revenue for Cadillac Company with the following data: Cost of Goods Sold Operating Expenses Sales Discounts Sales Returns and Allowances Net Income A) B) C) D)
$2,240,000 560,000 40,000 260,000 680,000
$3,180,000 $3,260,000 $3,780,000 $3,700,000
Answer: C Rationale: Sales revenue – Sales returns and allowances – Sales discounts – Cost of goods sold – Operating expenses = Net Income X – $260,000 – $40,000 – $2,240,000 – $560,000 = $680,000 X = $680,000 + $260,000 + $40,000 + $2,240,000 + $560,000 X = $3,780,000 Topic: Income Statement LO: 2 Level of Difficulty: DIFFICULT 55. Marshall F. Company reported the following year-end amounts: Total Sales Sales Discounts Sales Returns Cost of Goods Sold Gross Profit
$33,600 600 ? 21,000 4,350
What is the company’s Sales Returns for the year? A) $ 2,160 B) $ 2,970 C) $ 7,650 D) $10,860 Answer: C Rationale: Total sales – Sales returns – Sales discounts – Cost of goods sold = Gross profit $33,600 – X – $600 – $21,000 = $4,350 X = $33,600 – $600 – $21,000 – $4,350 X = $7,650
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-29
Topic: Income Statement LO: 2 Level of Difficulty: DIFFICULT 56. Fabulous Mints Company reported the following year-end amounts: Total Sales Sales Discounts Sales Returns Cost of Goods Sold Gross Profit
$44,800 800 ? 28,000 5,800
What is the company’s Sales Returns for the year? A) $ 2,880 B) $ 3,960 C) $10,200 D) $14,480 Answer: C Rationale: Total sales – Sales returns – Sales discounts – Cost of goods sold = Gross profit $44,800 – X – $800 – $28,000 = $5,800 X = $44,800 – $800 – $28,000 - $5,800 X = $10,200 Topic: Classified Balance Sheet LO: 1 Level of Difficulty: EASY 57. Mountain Company has beginning retained earnings of $450,000, earns a net income of $75,000, and pays dividends of $9,000 during the period. The balance in Mountain’s ending retained earnings is: A) $516,000 B) $366,000 C) $534,000 D) $525,000 Answer: A Rationale: Ending retained earnings = Beginning retained earnings + Net income (loss) – Dividends X = $450,000 + $75,000 – $9,000 X = $516,000
©Cambridge Business Publishers, 2020 4-30
Financial Accounting for Undergraduates, 4th Edition
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: EASY 58. Rock Springs Company has beginning retained earnings of $600,000, earns a net income of $100,000, and pays dividends of $12,000 during the period. The balance in Rock Springs’ ending retained earnings is: A) $688,000 B) $488,000 C) $712,000 D) $700,000 Answer: A Rationale: Ending retained earnings = Beginning retained earnings + Net income (loss) – Dividends X = $600,000 + $100,000 – $12,000 X = $688,000 Topic: Classified Balance Sheet LO: 1 Level of Difficulty: MEDIUM 59. Mountain Company has Beginning retained earnings of $450,000, earns a net income of $112,500, and has an Ending retained earnings balance of $552,000 during the period. The amount which Mountain paid in dividends must have been: A) $ 6,000 B) $112,500 C) $ 10,500 D) $102,000 Answer: C Rationale: Ending retained earnings = Beginning retained earnings + Net income (loss) – Dividends $552,000 = $450,000 + $112,500 – X X = $450,000 + $112,500 – $552,000 X = $10,500 Topic: Classified Balance Sheet LO: 1 Level of Difficulty: MEDIUM 60. Rock Springs Company has Beginning retained earnings of $600,000, earns a net income of $150,000, and has an Ending retained earnings balance of $736,000 during the period. The amount which Rock Springs paid in dividends must have been: A) $ 8,000 B) $150,000 C) $ 14,000 D) $136,000 Answer: C Rationale: Ending retained earnings = Beginning retained earnings + Net income (loss) – Dividends $736,000 = $600,000 + $150,000 – X X = $600,000 + $150,000 – $736,000 X = $14,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-31
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: MEDIUM 61. Mountain Company earns a net income of $430,500 and pays dividends of $39,000 during the period. Mountain has ending retained earnings of $733,500. The balance in Mountain’s beginning retained earnings must have been: A) $516,000 B) $391,500 C) $469,500 D) $342,000 Answer: D Rationale: Ending retained earnings = Beginning retained earnings + Net income (loss) – Dividends $733,500 = X + $430,500 – $39,000 X = $733,500 – $430,500 + $39,000 X = $342,000 Topic: Classified Balance Sheet LO: 1 Level of Difficulty: MEDIUM 62. Rock Springs Company earns a net income of $574,000 and pays dividends of $52,000 during the period. Rock Springs has ending retained earnings of $978,000. The balance in Rock Springs’ beginning retained earnings must have been: A) $688,000 B) $522,000 C) $626,000 D) $456,000 Answer: D Rationale: Ending retained earnings = Beginning retained earnings + Net income (loss) – Dividends $978,000 = X + $574,000 – $52,000 X = $978,000 – $574,000 + $52,000 X = $456,000
©Cambridge Business Publishers, 2020 4-32
Financial Accounting for Undergraduates, 4th Edition
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: DIFFICULT 63. Chopper Company reported total stockholders’ equity of $652,500 on its Dec 31, 2018, balance sheet. The following information is available for the year ended Dec 31, 2019: Revenues..................................................... Expenses..................................................... Assets, on December 31, 2019..................
$945,000 $742,500 $1,824,000
What are the total liabilities of the company on December 31, 2019? A) $ 969,000 B) $ 945,000 C) $1,824,000 D) $ 414,000 Answer: A Rationale: Stockholders’ equity 12/31/19 = Stockholders’ equity 12/31/18 + Revenue – Expenses X = $652,500 + $945,000 – $742,500 X = $855,000 Assets = Stockholders’ equity + Liabilities $1,824,000 = $855,000 + X X = $1,824,000 – $855,000 X = $969,000 Topic: Classified Balance Sheet LO: 1 Level of Difficulty: DIFFICULT 64. Henrietta Company reported total stockholders’ equity of $870,000 on its Dec 31, 2018, balance sheet. The following information is available for the year ended Dec 31, 2019: Revenues.......................................................... Expenses......................................................... Assets, on December 31, 2019..................
$1,260,000 $990,000 $2,432,000
What are the total liabilities of the company on December 31, 2019? A) $1,292,000 B) $1,260,000 C) $2,432,000 D) $ 562,000 Answer: A Rationale: Stockholders’ equity 12/31/19 = Stockholders’ equity 12/31/18 + Revenue – Expenses X = $870,000 + $1,260,000 – $990,000 X = $1,140,000 Assets = Stockholders’ equity + Liabilities $2,432,000 = $1,140,000 + X X = $2,432,000 – $1,140,000 X = $1,292,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-33
Topic: Income Statement LO: 2 Level of Difficulty: DIFFICULT 65. Determine Sales revenue for Barko Company with the following data: Cost of Goods Sold Operating Expenses Sales Discounts Sales Returns and Allowances Net Income A) B) C) D)
$1,260,000 315,000 22,500 146,250 382,500
$1,788,750 $1,833,750 $2,126,250 $2,081,250
Answer: C Rationale: Sales revenue – Sales returns and allowances – Sales discounts – Cost of goods sold – Operating expenses = Net income X – $146,250 – $22,500 – $1,260,000 – $315,000 = $382,500 X = $382,500 + $146,250 + $22,500 + $1,260,000 + $315,000 X = $2,126,250 Topic: Income Statement LO: 2 Level of Difficulty: DIFFICULT 66. Determine Sales revenue for Merema Company with the following data: Cost of Goods Sold Operating Expenses Sales Discounts Sales Returns and Allowances Net Income A) B) C) D)
$1,680,000 420,000 30,000 195,000 510,000
$2,385,000 $2,445,000 $2,835,000 $2,775,000
Answer: C Rationale: Sales revenue – Sales returns and allowances – Sales discounts – Cost of goods sold – Operating expenses = Net Income X – $195,000 – $30,000 – $1,680,000 – $420,000 = $510,000 X = $510,000 + $195,000 + $30,000 + $1,680,000 + $420,000 X = $2,835,000
©Cambridge Business Publishers, 2020 4-34
Financial Accounting for Undergraduates, 4th Edition
Topic: Income Statement LO: 2 Level of Difficulty: DIFFICULT 67. Marshall Company reported the following year-end amounts: Total Sales Sales Discounts Sales Returns Cost of Goods Sold Gross Profit
$25,200 450 ? 15,750 3,262
What is the company’s Sales Returns for the year? A) $1,620 B) $2,228 C) $5,738 D) $8,146 Answer: C Rationale: Total sales – Sales returns – Sales discounts – Cost of goods sold = Gross profit $25,200 – X – $450 – $15,750 = $3,262 X = $25,200 – $450 – $15,750 – $3,262 X = $5,738 Topic: Income Statement LO: 2 Level of Difficulty: DIFFICULT 68. Skokie Company reported the following year-end amounts: Total Sales Sales Discounts Sales Returns Cost of Goods Sold Gross Profit
$33,600 600 ? 21,000 4,350
What is the company’s Sales Returns for the year? A) $ 2,160 B) $ 2,970 C) $ 7,650 D) $10,860 Answer: C Rationale: Total sales – Sales returns – Sales discounts – Cost of goods sold = Gross profit $33,600 – X – $600 – $21,000 = $4,350 X = $33,600 – $600 – $21,000 – $4,350 X = $7,650
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-35
Exercises Topic: Balance Sheet Classification LO: 1 1. Listed below are selected accounts for Florida Company, Inc. Select a letter from the following key and place it in the space to the left of the account title to indicate the proper balance sheet classification for the account. Key:
a. b. c. d. e. f.
Current asset Property, Plant, and Equipment Current liability Long-term liability Stockholders’ equity Not a balance sheet account
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Answer: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Accounts payable Long-term notes payable Prepaid rent Dividends Equipment Cash Wages payable Retained earnings Accounts receivable Supplies
c d a f b a c e a a
Accounts payable Long-term notes payable Prepaid rent Dividends Equipment Cash Wages payable Retained earnings Accounts receivable Supplies
©Cambridge Business Publishers, 2020 4-36
Financial Accounting for Undergraduates, 4th Edition
Topic: Balance Sheet Relations LO: 1 2. Compute the missing amounts in the table below:
Total assets Common stock Retained earnings Total liabilities Total liabilities and stockholders’ equity
Year 1 $187,500 (b) $12,600 $93,900 $187,500
Year 2 (a) $37,200 $28,200 $54,000 $119,400
Answer: Total assets Common stock Retained earnings Total liabilities Total liabilities and stockholders’ equity
Year 1 $187,500 (b) $81,000 $12,600 $93,900 $187,500
Year 2 (a) $119,400 $37,200 $28,200 $54,000 $119,400
a. Liabilities and equity – equity = Liabilities $187,500 – equity = $93,900 Equity = $93,600 Common stock + retained earnings = Stockholders’ Equity Common stock + $12,600 = $93,600 Common stock = $81,000 b. Total assets = Liabilities and stockholders’ equity = $119,400 Total assets = $119,400
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-37
Topic: Balance Sheet Accounts LO: 1 3. Identify the following as an asset (A), liability (L), or equity (E) by writing the letter of the correct classification in the space provided. Account
Classification
A. Contributed capital B. Office equipment C. Accounts payable D. Common stock E. Cash F. Accounts receivable G. Wages payable H. Deferred revenue Answer: Account
Classification
A. Contributed capital
(E) Equity
B. Office equipment
(A) Asset
C. Accounts payable
(L) Liability
D. Common stock
(E) Equity
E. Cash
(A) Asset
F. Accounts receivable
(A) Asset
G. Wages payable
(L) Liability
H. Deferred revenue
(L) Liability
©Cambridge Business Publishers, 2020 4-38
Financial Accounting for Undergraduates, 4th Edition
Topic: Balance Sheet Analysis LO: 1 4. For the two unrelated situations below, compute the unknown amounts indicated by the letters (a) and (b).
Beginning: Assets Liabilities Ending: Assets Liabilities During the year: Stock issued Revenues Dividends paid Expenses
(1)
(2)
$96,000 39,000
$144,000 43,200
129,000 33,000
246,000 (b)
9,000 (a) 12,000 27,000
15,000 156,000 9,000 69,000
Answer: (1)
Ending stockholders’ equity ($129,000 – $33,000) Beginning stockholders’ equity ($96,000 – $39,000) Increase Add: Dividends paid Less: Stock issued Net Income Add: Expenses Revenues
(2)
Beginning stockholders’ equity ($144,000 – $43,200) Add: Stock issued Net income ($156,000 – $69,000) Less: Dividends paid Ending stockholders’ equity $246,000 Ending assets – $193,800 Ending stockholders’ equity = Ending liabilities
(a)
$96,000 -57,000 39,000 12,000 51,000 9,000 42,000 27,000 $69,000 $ 100,800 15,000 87,000 $202,800 9,000 $193,800
(b) $ 52,200
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-39
Topic: Balance Sheet Analysis LO: 1 5. For the two unrelated situations below, compute the unknown amounts indicated by the letters (a) and (b).
Beginning: Assets Liabilities Ending: Assets Liabilities During the year: Stock issued Revenues Dividends paid Expenses
(1)
(2)
$42,000 18,000
$61,000 24,000
48,000 15,000
68,000 (b)
(a) 28,000 5,000 16,000
4,000 45,000 3,000 37,000
Answer: (1)
Ending stockholders’ equity ($48,000 - $15,000) Beginning stockholders’ equity ($42,000 - $18,000) Increase Add: Dividends paid Less:
(2)
Net income ($28,000 - $16,000) Stock issued
Beginning stockholders’ equity ($61,000 - $24,000) Add: Stock issued Net income ($45,000 - $37,000) Less: Dividends paid Ending stockholders’ equity $68,000 Ending assets – $46,000 Ending stockholders’ equity Ending liabilities
$33,000 - 24,000 $ 9,000 5,000 14,000 12,000 (a) $ 2,000 $37,000 4,000 8,000 $49,000 3,000 $46,000
(b) $22,000
©Cambridge Business Publishers, 2020 4-40
Financial Accounting for Undergraduates, 4th Edition
Topic: Return on Sales and Debt-to-Total-Assets Ratio LO: 3, 4 6. Elk, Inc. has a debt-to-total-assets ratio of 0.56 and a ROS of 13.4%. The median ROS for similar companies in the same industry as Elk is about 6.3%. The median debt-to-total-assets ratio for similar companies in the same industry is 0.31. Based on this industry information, how does Elk compare to similar companies and what are the causes of these differences? Answer: As the return on sales shows, Elk is outperforming similar companies in its industry as far as its ability to generate profit at 13.4%. This is due to its ability to be more efficient in bringing its product or service to the market and produce a product or service that the market values. Elk’s debt-to-totalassets ratio, as compared to similar companies in its industry, indicates that the company is more aggressive with debt financing approach. The company is using more debt than equity financing, contributing to more credit risk and less solvency than the industry average. Topic: Return on Assets, Return on Sales, and Debt-to-Total-Assets Ratios LO: 2, 3, 4 7. Alvin’s Audio reported the following amounts in its December 31, 2019, and 2018 financial statements. ($ millions) 2019 2018 Sales revenue $555,000 $468,000 Cost of sales 243,000 252,000 Net income 37,100 29,400 Total assets 115,500 105,600 Stockholders’ equity 92,400 75,250 Calculate to the nearest hundredth: (a) Return on sales for 2019 (b) Return on assets for 2019 (c) Debt-to-total-assets ratio as of December 31, 2019 Answer: (a) ROS = Net income / Sales revenue X = $37,100 / $555,000 = 6.68% (b) ROA = Net income / Total assets X = $37,100 / $115,500 = 32.12% (c) Total liabilities = Total assets – Stockholders’ equity X = $115,500 – $92,400 X = $23,100 = Total liabilities Debt-to-total-assets = Total liabilities / Total assets X = $23,100 / $115,500 = 20.00%
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-41
Topic: Prepare an Income Statement LO: 2 8. Prepare an income statement for the month ended July 31, 2019 for Foster Toys. Foster’s account balances for the month ending July 31, 2019 are: Cash Accounts receivable Office supplies Office equipment Land Sales Cash dividends
$ 20,800 57,000 6,200 58,300 140,000 160,000 5,300
Rent expense Utilities expense Salaries expense Miscellaneous expenses Retained earnings, July 1 Common stock Accounts payable
$ 16,600 1,060 32,000 1,290 24,300 152,250 2,000
Answer: FOSTER TOYS Income Statement For Month Ended July 31, 2019 Revenues Sales Expenses Salaries expense Rent expense Utilities expense Miscellaneous expense Total expenses Net income
$160,000 $32,000 16,600 1,060 1,290 50,950 $109,050
©Cambridge Business Publishers, 2020 4-42
Financial Accounting for Undergraduates, 4th Edition
Topic: Preparation of Statement of Stockholders' Equity LO: 5 9. The following is selected financial information for Taglioli, Inc. for its year ending January 31, 2019: Retained earnings, January 31, 2018 ………….... Common stock, January 31, 2018 ……………….. Dividends ………………………………………..….. Net income ………………………………………..… Stock issuances ………………………………….....
$ 195,855 15,000 11,235 43,005 1,800
Prepare a statement of stockholders' equity for 2019 for Taglioli. All amounts are in millions. Answer: TAGLIOLI, INC. Statement of Stockholders' Equity For Year Ended January 31, 2019 Common Stock Balance, January 31, 2018 Stock issuances Net income Dividends Balance, January 31, 2019
$15,000 1,800 0 $16,800
Retained Earnings
Total Equity
$195,855
$210,855 1,800 43,005 (11,235) $244,425
43,005 (11,235) $227,625
Topic: Preparing a Statement of Stockholders’ Equity LO: 5 10. Pokagon reported the following selected information at August 2, 2019 ($ millions): Common stock, August 3, 2018 Stock issued during August 3, 2018 to August 2, 2019 Retained Earnings, August 3, 2018 Net income Dividends
$1,200 640 1,580 1,470 710
Use this information to prepare a statement of stockholders’ equity for Pokagon’s for the year ending August 2, 2019 Answer: POKAGON Statement of Stockholders' Equity For Year Ended August 2, 2019 Balance, August 3, 2018 Stock issuances Net income Dividends Balance, August 2, 2019
Common Stock $1,200 640 0 $1,840
Retained Earnings $ 1,580 1,470 (710) $2,340
Total Equity $2,780 640 1,470 (710) $4,180
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-43
Topic: Equity Changes LO: 5 11. At the end of 2019, LoMo Manufacturing reported the following amounts on its balance sheet: Cash Accounts receivable Equipment Land Accounts payable Common stock Retained earnings
$ 24,300 97,200 78,000 360,000 94,500 285,000 180,000
Answer each of the following independent questions: a. Assume that LoMo’s stockholders’ equity on January 1, 2019 was $396,000. LoMo did not issue common stock during the year, but it paid $54,000 cash in dividends. How much is LoMo’s net income or loss for 2019? b. Assume that LoMo’s stockholders’ equity on January 1, 2019 was $354,000, and that LoMo issued additional common stock of $105,000 and paid $90,000 in cash dividends before the end of 2019. What was LoMo’s net income or net loss for 2019? Answer: a. Increase in equity ($285,000 + $180,000 - $396,000) Add: Dividends Net Income for 2019 b.
Increase in equity ($285,000 + $180,000 - $354,000) Add: Dividends Less: Additional Investment Net Income for 2019
$69,000 54,000 $123,000 $ 111,000 90,000 ( 105,000) $96,000
Topic: Free Cash Flow LO: 6 12. Consider the following 2019 data for three manufacturing firms ($ in millions):
Sammy Industries Mouser Company Lumos Corporation
Current Liabilities $155,800 101,600 116,000
Cash from Operations ($49,400) 171,600 138,400
Expenditures on PPE $36,600 51,600 71,800
Dividends (cash) $21,000 24,800 35,200
Compute the free cash flow for each firm for 2019. Answer: Sammy: Mouser: Lumos:
($49,400) – $36,600 = ($86,000) $171,600 – $51,600 = $120,000 $138,400 – $71,800 = $66,600
©Cambridge Business Publishers, 2020 4-44
Financial Accounting for Undergraduates, 4th Edition
Problems Topic: Constructing a Balance Sheet LO: 1 1. Compute the missing amounts for each of the last 3 years for the Gilgen Company. (millions) Current assets Long-term assets Total assets
2017 $14,445 10,140
Current liabilities Long-term liabilities Total liabilities Stockholders’ equity
$8,133 5,346 $13,479
2018 11,418 $25,557 $7,917 ______ $15,117 10,440
2019 $24,009 ______ $26,448 $7,356 7,092 12,000
Answer: Current assets Long-term assets Total assets Current liabilities Long-term liabilities Total liabilities Stockholders’ equity Total liabilities and stockholders’ equity
2017 $14,445 10,140 $24,585
2018 $14,139 11,418 $25,557
2019 $24,009 2,439 $26,448
$8,133 5,346 $13,479 11,106
$7,917 7,200 $15,117 10,440
$7,356 7,092 $14,448 12,000
$24,585
$25,557
$26,448
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-45
Topic: Prepare a Statement of Stockholders’ Equity LO: 5 2. Prepare a statement of stockholders’ equity for the month ended July 31, 2019 for Foster Toys. Foster’s account balances for the month ending July 31, 2019 are: Cash Accounts receivable Office supplies Office equipment Land Sales Cash dividends
$20,800 57,000 6,200 58,300 140,000 110,000 6,000
Rent expense Utilities expense Salaries expense Misc. expenses Retained earnings, July 1 Common stock Accounts payable
$16,600 1,060 32,000 290 24,300 152,250 51,700
Answer: FOSTER TOYS Statement of Stockholders’ Equity For Month Ended July 31, 2019 Balance, July 1, 2019 Common stock issued Add: Net income* Less: Dividends Balance, July 31, 2019
Common Stock
Retained Earnings
$152,250 0
$24,300
0 $152,250
60,050 (6,000) $78,350
Total Equity $176,550 0 60,050 (6,000) $230,600
*Net Income: $110,000 – $16,600 – $1,060 – $32,000 – $290 = $60,050
©Cambridge Business Publishers, 2020 4-46
Financial Accounting for Undergraduates, 4th Edition
Topic: Preparing a Statement of Stockholders’ Equity LO: 5 3. The following items and amounts are taken from the 2019 financial records of Lumos Corporation: Security deposit…………..... Equipment………………….. Salaries expense…………... Utilities expense…………… Dividends……………………. Accounts payable………….. Cash………………………… Accounts receivable……….
$ 24,600 87,000 126,000 3,300 27,000 109,800 89,700 28,500
Salaries payable……………………. Common stock…………………….. Supplies expense..………………… Retained earnings, Jan. 1, 2019 … Insurance expense………………… Service revenue…………………… Repair expense…………………….
$ 18,000 31,500 14,100 36,000 6,600 225,000 13,500
Prepare a statement of stockholders’ equity for Lumos Corporation for the year ending December 31, 2019. Answer: LUMOS CORPORATION Statement of Stockholders’ Equity For Year Ended December 31, 2019 Common Stock Balance, January 1, 2019 Common stock issued Add: Net income* Less: Dividends Balance, December 31, 2019
$31,500 0 0 $31,500
Retained Earnings
Total Equity
$36,000
$67,500 0 61,500 (27,000) $102,000
61,500 (27,000) $70,500
*Net Income: $225,000 – $126,000 – $3,300 – $14,100 – $13,500 – $6,600 = $61,500
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-47
Topic: Statement of Stockholders’ Equity LO: 5 4. The records of Manhattan T’s show the following information after all transactions are recorded for 2019. Notes payable Service fees earned Supplies expense Insurance expense Miscellaneous expense Common stock, January 1 Accounts payable Dividends
$
24,000 184,400 38,800 14,000 600 22,000 7,200 12,000
Supplies Cash Advertising expense Salaries expense Rent expense Retained earnings, January 1 Accounts receivable Equipment
$ 29,000 43,000 6,800 36,000 32,000 25,000 6,400 60,000
Manhattan T’s raised $16,000 cash through the issuance of additional common stock during the year. Based on this information, prepare Manhattan T’s statement of stockholders’ equity for the year ending December 31, 2019. Answer: MANHATTAN T’S Statement of Stockholders’ Equity For Year Ended December 31, 2019 Common Stock Balance at January 1, 2019 Stock issuance Dividends Net income* Balance at December 31, 2019
$22,000 16,000 __ ___ $38,000
Retained Earnings $25,000 (12,000) 56,200 $69,200
Total Equity $47,000 16,000 (12,000) 56,200 $107,200
*$56,200 = $184,400 – $38,800 – $14,000 – $600 – $6,800 – $36,000 – $32,000
©Cambridge Business Publishers, 2020 4-48
Financial Accounting for Undergraduates, 4th Edition
Chapter 4 Understanding Financial Statements Learning Objectives – Coverage by question True / False
Multiple Choice
Exercises
Problems
LO1 ─ Describe a classified balance sheet.
1-3
1-8, 30-41, 57-64
1-5
1
LO2 – Describe a single-step and multi-step income statement
4, 9, 10
15, 16, 19, 20, 50-56, 65-68
7, 8
LO3 ─ Discuss use of a balance sheet and ratios to assess liquidity and solvency.
5
9-14, 42-45
6, 7
17, 18, 21-23, 46, 47
6, 7
LO4 ─ Discuss use of the income statement and ratios to assess profitability.
LO5 ─ Explain the components of the statement of stockholders’ equity.
6, 7
24-26
9-11
LO6 ─ Explain use of the statement of cash flows to help assess solvency.
8
27-29, 48, 49
12
2-4
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-1
Chapter 4: Understanding Financial Statements
True / False Topic: Current Assets LO: 1 1. Current assets are cash and other assets that will be converted into cash or used up during the normal operating cycle of the business or one year, whichever is shorter. Answer: False Rationale: Current assets are cash and other assets that will be converted into cash or used up during the normal operating cycle of the business or one year, whichever is longer.
Topic: Reporting of Assets LO: 1 2. Assets are listed on the balance sheet in order of liquidity and liabilities are listed in order of amount. Answer: False Rationale: Assets are reported in the order of liquidity which reflects the ease of converting into cash. Receivables are reported before inventories, and inventories before PP&E. Liabilities are reported in order of maturity, with current liabilities expected to be paid within one year or within the operating cycle, and long-term liabilities expected to be paid over a longer period of time.
Topic: Balance Sheet Report Form LO: 1 3. The report form of the balance sheet displays assets on the left side and liabilities and stockholders’ equity on the right side. Answer: False Rationale: The report form of the balance sheet displays assets on the top, with liabilities displayed below the assets, and stockholders’ equity displayed below liabilities.
Topic: Trend Analysis LO: 2 4. Trend analysis is a process in which we compare a company’s results, or the results of a ratio, over time. Answer: True Rationale: Trend analysis is a process in which we compare a company’s results, or the results of a ratio, over time. This technique helps the financial statement user identify any readily observable trends in a company’s performance.
©Cambridge Business Publishers, 2020 4-2
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Current Ratio LO: 3 5. The current ratio of a company is its current assets divided by its current liabilities. Answer: True Rationale: The current ratio of a company is its current assets divided by its current liabilities. The current ratio is a widely used measure of a company’s liquidity. A current ratio greater than one implies that a company has more cash and current assets than needed to pay off its current obligations and a ratio of less than one implies the opposite.
Topic: Analyzing and Recording Equity Transactions LO: 5 6. If Boot Company paid $200,000 cash dividends to its shareholders, retained earnings would be reduced by $200,000. Answer: True Rationale: A cash dividend results in a reduction of retained earnings.
Topic: Analyzing and Recording Equity Transactions LO: 5 7. If stockholders’ equity is $300,000 on January 1, 2019, and decreases to $100,000 on December 31, 2019, this could only be due to a net loss of $200,000. Answer: False Rationale: A reduction in stockholders’ equity could also be due to a cash dividend.
Topic: Categories for the Statement of Cash Flows LO: 6 8. The statement of cash flows separates cash flows into operating, nonoperating, and investing categories. Answer: False Rationale: The statement of cash flows includes operating activities, investing activities, and financing activities.
Topic: Gross Profit LO: 2 9. In a merchandising firm, sales minus cost of goods sold equals income before income taxes. Answer: False. Rationale: For a merchandising company, the cost of goods sold is subtracted from the firm’s net sales to determine its gross profit on sales.
Topic: Gross Profit LO: 2 10. Gross profit on sales is obtained by deducting selling expenses from sales. Answer: False. Rationale: Gross profit on sales is defined as the difference between net sales and the cost of goods sold.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-3
Multiple Choice Topic: Current Assets LO: 1 Level of Difficulty: EASY 1. Which one of the following is included in current assets? A) Accounts receivable B) Taxes payable C) Automobiles D) Common stock Answer: A Rationale: Accounts receivable is included in current assets as it represents amount owed by customers that are expected to be paid within one year or the operating cycle.
Topic: Reporting of Assets LO: 1 Level of Difficulty: MEDIUM 2. Assets are recorded in the balance sheet in order of: A) Market value B) Historic value C) Liquidity D) Maturity Answer: C Rationale: Liquidity refers to the ease of conversation to cash. Current assets are to be used during the current operating cycle (starting with cash, short-term investments, accounts receivables, inventories and other assets). Market value and historic value refer to the measurement of assets. Maturity refers to the order in which liabilities are recorded in the balance sheet.
Topic: Liabilities LO: 1 Level of Difficulty: EASY 3. Which one of the following is not a current liability? A) Taxes payable B) Accounts payable C) Wages payable D) Wage expense Answer: D Rationale: Wages expense is an income statement account, not a balance sheet account. Current liabilities are amounts owed and due to be repaid within one year or within one operating cycle.
©Cambridge Business Publishers, 2020 4-4
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Currents Assets LO: 1 Level of Difficulty: EASY 4. Current assets are usually listed in the order of their: A) Size: smallest to largest B) Liquidity: most liquid to least liquid C) Size: largest to smallest D) Lack of liquidity: least liquid to most liquid Answer: B Rationale: Current assets are listed on a classified balance sheet in the order of their expected liquidity. Liquidity is determined by the ability of an asset to be readily converted into cash.
Topic: Currents Assets LO: 1 Level of Difficulty: EASY 5. Current assets are cash and other assets that will be converted into cash or used up within A) One year B) The normal operating cycle of the business or one year, whichever is longer C) The normal operating cycle of the business D) The normal operating cycle of the business or one year, whichever is shorter Answer: B Rationale: Current assets are cash and other assets that will be converted into cash or used up within the normal operating cycle of the business or one year, whichever is longer. The normal operating cycle of a business is the average period of time between the use of cash to deliver a service or to buy goods for resale and the subsequent collection of cash from customers who purchase those services or products.
Topic: Balance Sheet Report Form LO: 1 Level of Difficulty: MEDIUM 6. The balance sheet format that reports assets first and then, beneath the assets, reports the liabilities and stockholders’ equity is called the: A) Account form B) Stack form C) Classified form D) Report form Answer: D Rationale: The balance sheet format that reports assets first and then, beneath the assets, reports the liabilities and stockholders’ equity is called the report form. This is one of the two generally accepted formats for presenting a classified balance sheet.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-5
Topic: Current Assets LO: 1 Level of Difficulty: MEDIUM 7. Which of the following assets would not be classified as a current asset? A) Accounts receivable B) Prepaid rent C) Supplies D) Equipment Answer: D Rationale: Current assets are cash and other assets that will be converted into cash or used up within the normal operating cycle of the business or one year, whichever is longer. Equipment is not readily converted into cash and is classified as a long-term asset.
Topic: Stockholders’ Equity and the Balance Sheet LO: 1 Level of Difficulty: MEDIUM 8. The primary components of the stockholders’ equity section of a balance sheet for a corporation are: A) A capital amount for each stockholder in the corporation B) Net income and retained earnings C) Common stock and dividends D) Common stock and retained earnings Answer: D Rationale: Stockholders’ equity is the residual ownership interest in the assets of a business after its liabilities have been paid off, The stockholders; equity of a corporation is divided into two main categories: amounts invested by stockholders (common stock) and the cumulative net income of a business that has not yet been distributed to its stockholders as a dividend (retained earnings).
Topic: Solvency LO: 3 Level of Difficulty: MEDIUM 9. Data from the financial statements of Creativity Crafts and Fun Projects, Inc. are presented below (in millions):
Total liabilities, 2019 Total liabilities, 2018 Total assets, 2019 Total assets, 2018 Net Sales, 2019 Net income, 2019
Creativity Crafts
Fun Projects, Inc.
$47,940 54,160 87,830 82,350 230,200 4,200
$38,190 45,070 64,530 61,610 122,550 2,360
To the nearest hundredth, what is the 2019 debt-to-total-assets ratio for Creativity Crafts? A) 0.55 B) 0.22 C) 3.25 D) 37.93 Answer: A Rationale: Debt-to-total-assets = Total liabilities / Total assets = $47,940 / $87,830= 0.55
©Cambridge Business Publishers, 2020 4-6
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Solvency LO: 3 Level of Difficulty: MEDIUM 10. Data from the financial statements of Nancarrow Brothers Co. and J. C. Murphy, Inc. are presented below (in millions):
Total liabilities, 2019 Total liabilities, 2018 Total assets, 2019 Total assets, 2018 Net Sales, 2019 Net income, 2019
Nancarrow Brothers Co. $70,914 72,208 100,372 94,114 306,932 280
J. C. Murphy, Inc. $47,422 60,092 73,744 70,416 163,040 1,572
To the nearest hundredth, what is the 2019 debt-to-total-assets ratio for Nancarrow Brothers Co.? A) 0.71 B) 0.26 C) 3.78 D) 44.16 Answer: A Rationale: Debt-to-total-assets = Total liabilities / Total assets = $70,914 / $100,372= 0.71
Topic: Solvency LO: 3 Level of Difficulty: MEDIUM 11. Data from the financial statements of Creativity Crafts and Fun Projects, Inc. are presented below (in millions):
Total liabilities, 2019 Total liabilities, 2018 Total assets, 2019 Total assets, 2018 Net Sales, 2019 Net income, 2019
Creativity Crafts
Fun Projects, Inc.
$47,940 54,160 87,830 82,350 230,200 4,200
$38,190 45,070 64,530 61,610 122,550 2,360
To the nearest hundredth, what is the 2019 debt-to-total-assets ratio for Fun Projects , Inc.? A) 0.18 B) 0.59 C) 4.24 D) 4.00 Answer: B Rationale: Debt-to-total-assets = Total liabilities / Total assets = $38,190/ $64,530= 0.59
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-7
Topic: Solvency LO: 3 Level of Difficulty: MEDIUM 12. Data from the financial statements of Nancarrow Brothers Co. and J. C. Murphy, Inc. are presented below (in millions):
Total liabilities, 2019 Total liabilities, 2018 Total assets, 2019 Total assets, 2018 Net Sales, 2019 Net income, 2019
Nancarrow Brothers Co.
J. C. Murphy, Inc.
$70,914 72,208 100,372 94,114 306,932 280
$47,422 60,092 73,744 70,416 163,040 1,572
To the nearest hundredth, what is the 2019 debt-to-total-assets ratio for J. C. Murphy, Inc.? A) 0.21 B) 0.64 C) 4.96 D) 4.69 Answer: B Rationale: Debt-to-total-assets = Total liabilities / Total assets = $47,422 / $73,744= 0.64
Topic: Solvency LO: 3 Level of Difficulty: DIFFICULT 13. Best Ball Bearings has a debt-to-total-assets ratio of 0.915 and Amazing Automotive has 0.99. Which of the following statements is true? A) Amazing Automotive reported more dollars of profit than Best Ball Bearings. B) Amazing Automotive has more total debt than does Best Ball Bearings. C) Amazing Automotive is able to bring its product to market more efficiently than Best Ball Bearings. D) Best Ball Bearings would likely be able to borrow money at a lower interest rate than would Amazing Automotive. Answer: D Rationale: Best Ball Bearings is the lower risk borrower of these two companies with a lower debt-tototal-assets ratio. Best Ball Bearings would likely be able to borrow money at a lower interest rate than Amazing Automotive. Amazing’s higher debt-to-total-assets means that the firm relies more on creditor financing than Best Ball Bearings.
©Cambridge Business Publishers, 2020 4-8
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Current Ratio LO: 3 Level of Difficulty: EASY 14. The current ratio is computed as: A) Current liabilities divided by current assets B) Current assets divided by current liabilities C) Current assets minus current liabilities D) Current assets divided by total assets Answer: B Rationale: The current ratio of a company is its current assets divided by its current liabilities. The current ratio is a widely used measure of a company’s liquidity. A current ratio greater than one implies that a company has more cash and current assets than needed to pay off its current obligations and a ratio of less than one implies the opposite.
Topic: Return on Assets Ratio LO: 2 Level of Difficulty: MEDIUM 15. Data from the financial statements of Creativity Crafts and Fun Projects, Inc. are presented below (in millions):
Total liabilities, 2019 Total liabilities, 2018 Total assets, 2019 Total assets, 2018 Net Sales, 2019 Net income, 2019
Creativity Crafts
Fun Projects, Inc.
$47,940 54,160 87,830 82,350 230,200 4,200
$38,190 45,070 64,530 61,610 122,550 2,360
To the nearest hundredth of a percent, what is the 2019 return on assets ratio for Creativity Crafts? A) 4.78% B) 10.68% C) 6.91% D) Not enough information provided Answer: A Rationale: ROA = Net income / Total assets = $4,200 / $87,830 = 0.0478= 4.78%
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-9
Topic: Return on Assets Ratio LO: 2 Level of Difficulty: MEDIUM 16. Data from the financial statements of Nancarrow Brothers Co. and J. C. Murphy, Inc. are presented below (in millions):
Total liabilities, 2019 Total liabilities, 2018 Total assets, 2019 Total assets, 2018 Net sales, 2019 Net income, 2916
Nancarrow Brothers Co. $73,044 72,208 92,372 93,028 322,932 2,600
J. C. Murphy, Inc. $54,196 60,092 65,744 70,416 163,404 4,415
To the nearest hundredth of a percent, what is the 2019 return on assets ratio for Nancarrow Brothers Co.? A) 6.72% B) 2.81% C) 3.56% D) Not enough information provided Answer: B Rationale: ROA = Net income / Total assets = $2,600 / $92,372 = 0.0281= 2.81%
Topic: Return on Sales Ratio LO: 4 Level of Difficulty: MEDIUM 17. Data from the financial statements of Creativity Crafts and Fun Projects, Inc. are presented below (in millions):
Total liabilities, 2019 Total liabilities, 2018 Total assets, 2019 Total assets, 2018 Net Sales, 2019 Net income, 2019
Creativity Crafts
Fun Projects, Inc.
$47,940 54,160 87,830 82,350 230,200 4,200
$38,190 45,070 64,530 61,610 122,550 2,360
To the nearest hundredth of a percent, what is the 2019 return on sales ratio for Creativity Crafts? A) 0.86% B) 1.09% C) 1.83% D) Not enough information provided Answer: C Rationale: ROS = Net income / Net sales = $4,200 / $230,200 = 0.0183= 1.83%
©Cambridge Business Publishers, 2020 4-10
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Return on Sales Ratio LO: 4 Level of Difficulty: MEDIUM 18. Data from the financial statements of Nancarrow Brothers Co. and J. C. Murphy, Inc. are presented below (in millions):
Total liabilities, 2019 Total liabilities, 2018 Total assets, 2019 Total assets, 2018 Net sales, 2019 Net income, 2019
Nancarrow Brothers Co. $73,044 72,208 92,372 93,028 322,932 2,600
J. C. Murphy, Inc. $54,196 60,092 65,744 70,416 163,404 4,415
To the nearest hundredth of a percent, what is the 2019 return on sales ratio for Nancarrow Brothers Co.? A) 0.30% B) 0.38% C) 0.81% D) Not enough information provided Answer: C Rationale: ROS = Net income / Net sales = $2,600 / $322,932 = 0.0081= 0.81%
Topic: Return on Assets Ratio LO: 2 Level of Difficulty: MEDIUM 19. Data from the financial statements of Creativity Crafts and Fun Projects, Inc. are presented below (in millions):
Total liabilities, 2019 Total liabilities, 2018 Total assets, 2019 Total assets, 2018 Net Sales, 2019 Net income, 2019
Creativity Crafts
Fun Projects, Inc.
$47,940 54,160 87,830 82,350 230,200 4,200
$38,190 45,070 64,530 61,610 122,550 2,360
To the nearest hundredth of a percent, what is the return on assets ratio 2019 for Fun Projects, Inc.? A) 0.02% B) 4.72% C) 3.66% D) Not enough information is provided Answer: C Rationale: ROA = Net income / Total assets = $2,360 / $64,530 = 0.0363 = 3.66%
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-11
Topic: Return on Assets Ratio LO: 2 Level of Difficulty: MEDIUM 20. Data from the financial statements of Nancarrow Brothers Co. and J. C. Murphy, Inc. are presented below (in millions):
Total liabilities, 2019 Total liabilities, 2018 Total assets, 2019 Total assets, 2018 Net sales, 2019 Net income, 2018
Nancarrow Brothers Co. $73,044 72,208 92,372 93,028 322,932 2,600
J. C. Murphy, Inc. $54,196 60,092 65,744 70,416 163,404 4,415
To the nearest hundredth of a percent, what is the return on assets ratio 2019 for J. C. Murphy, Inc.? A) 6.72% B) 2.81% C) 8.15% D) Not enough information is provided Answer: A Rationale: ROA = Net income / Total Assets = $4,415 / $65,744= 0.0672 = 6.72%
Topic: Return on Sales Ratio LO: 4 Level of Difficulty: MEDIUM 21. Data from the financial statements of Creativity Crafts and Fun Projects, Inc. are presented below (in millions):
Total liabilities, 2019 Total liabilities, 2018 Total assets, 2019 Total assets, 2018 Net Sales, 2019 Net income, 2019
Creativity Crafts
Fun Projects, Inc.
$47,940 54,160 87,830 82,350 230,200 4,200
$38,190 45,070 64,530 61,610 122,550 2,360
To the nearest hundredth of a percent, what is the return on sales ratio 2019 for Fun Projects, Inc.? A) 1.93% B) 2.20% C) 2.67% D) Not enough information is provided Answer: A Rationale: ROS = Net income / Net sales = $2,360 / $122,550 = 0.0193 = 1.93%
©Cambridge Business Publishers, 2020 4-12
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Return on Sales Ratio LO: 4 Level of Difficulty: MEDIUM 22. Data from the financial statements of Nancarrow Brothers Co. and J. C. Murphy, Inc. are presented below (in millions):
Total liabilities, 2019 Total liabilities, 2018 Total assets, 2019 Total assets, 2018 Net sales, 2019 Net income, 2019
Nancarrow Brothers Co. $73,044 72,208 92,372 93,028 322,932 2,600
J. C. Murphy, Inc. $54,196 60,092 65,744 70,416 163,404 4,415
To the nearest hundredth of a percent, what is the return on sales ratio 2019 for J. C. Murphy, Inc.? A) 2.70% B) 2.39% C) 2.90% D) Not enough information is provided Answer: A Rationale: ROS = Net income / Net sales = $4,415 / $163,404= 0.0270 = 2.70%
Topic: Profitability Analysis LO: 4 Level of Difficulty: DIFFICULT 23. Best Ball Bearings has a ROS of 24.60% and Amazing Automotive has an ROS of 27.45%. Which of the following statements is true? A) Amazing Automotive reported more dollars of profit than Best Ball Bearings. B) Amazing Automotive has more of the firm financed with debt than Best Ball Bearings does. C) Amazing Automotive is able to bring its product to market more efficiently than Best Ball Bearings. D) Best Ball Bearings would likely be able to borrow money at a lower interest rate than would Amazing Automotive. Answer: C Rationale: ROS measures profitability and how efficiently a company markets its products to produce profit. Amazing Automotive shows a higher return on sales, which means that it is able to bring its product to market more efficiently than Best Ball Bearings.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-13
Topic: Statement of Stockholders’ Equity LO: 5 Level of Difficulty: MEDIUM 24. Which statement is true of the statement of stockholders’ equity? A) It reports a company’s assets, liabilities, and equities. B) It reports a company’s revenue and expenses for a period. C) It reports a company’s cash flows from operating activities, investing activities, and financing activities. D) It shows a company’s stock issuances and dividends paid to shareholders. Answer: D Rationale: The balance sheet reports a company’s assets, liabilities, and equities; the income statement reports a company’s revenue and expenses for a period; and the statement of cash flows reports a company’s cash flows from operating activities, investing activities, and financing activities. The statement of stockholders’ equity shows changes in all equity accounts, that is, it includes presentation of a company’s stock issuances and dividends paid to shareholder.
Topic: Stockholders’ Equity LO: 5 Level of Difficulty: EASY 25. Which of the following is not shown in the statement of stockholder’s equity? A) Unearned revenue B) Dividends C) Retained earnings D) Common stock Answer: A Rationale: Unearned revenue is a liability that represents amounts collected in advance from customers. It is an obligation that must be satisfied with a future cash payment or delivery of goods or services.
Topic: Stockholders’ Equity LO: 5 Level of Difficulty: MEDIUM 26. Which one of the following does not impact retained earnings directly? A) Net income B) Net loss C) Dividends D) Stock issuances Answer: D Rationale: Stock issuances impact stockholders’ equity through the common stock account.
©Cambridge Business Publishers, 2020 4-14
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Categories for the Statement of Cash Flows LO: 6 Level of Difficulty: EASY 27. Which of the following is not a category for classifying cash flows in a statement of cash flows? A) Operating activities B) Nonoperating activities C) Financing activities D) Investing activities Answer: B Rationale: There are three activities: operating, investing, and financing.
Topic: Analysis of Cash Flows LO: 6 Level of Difficulty: MEDIUM 28. The following amounts have been taken from the recent financial statements for Daniel Enterprises: Current liabilities
Cash from operations
Expenditures on PPE
Dividends (cash)
$1,335,000
$6,300,000
$2,250,000
$195,000
Which of the following amounts is the free cash flow for Daniel Enterprises? A) $ 795,000 B) $ 990,000 C) $3,075,000 D) $4,050,000 Answer: D Rationale: Free cash flow = Cash flow from operations – Capital expenditures X = (Cash from operating activities) – (Payment for expenditures on PPE) X = $6,300,000 – $2,250,000 = $4,050,000
Topic: Analysis of Cash Flows LO: 6 Level of Difficulty: MEDIUM 29. The following amounts have been taken from the recent financial statements for Junnion Foundation: Current liabilities
Cash from operations
Expenditures on PPE
Dividends (cash)
$1,780,000
$8,400,000
$3,000,000
$2,600,000
Which of the following amounts is the free cash flow for Junnion Foundation? A) $1,600,000 B) $1,320,000 C) $4,100,000 D) $5,400,000 Answer: D Rationale: Free cash flow = Cash flow from operations – Capital expenditures X = (Cash from operating activities) – (Payment for expenditures on PPE) X = $8,400,000 – $3,000,000 = $5,400,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-15
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: MEDIUM 30. Colorado Company has beginning equity of $900,000, net income of $150,000, dividends of $90,000 and investments by owners in exchange for stock of $30,000. Its ending equity is: A) $669,000 B) $720,000 C) $804,000 D) $990,000 Answer: D Rationale: Ending equity = Beginning equity + Net income (loss) – Dividends + Owner Investments X = $900,000 + 150,000 - $90,000 + $30,000 X = $990,000
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: MEDIUM 31. Mountain Company has beginning equity of $1,200,000, net income of $200,000, dividends of $120,000 and investments by owners in exchange for stock of $40,000. Its ending equity is: A) $ 892,000 B) $ 960,000 C) $1,072,000 D) $1,320,000 Answer: D Rationale: Ending equity = Beginning equity + Net income (loss) – Dividends + Owner Investments X = $1,200,000 + 200,000 - $120,000 + $40,000 X = $1,320,000
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: DIFFICULT 32. During 2019, Wayneright Company’s total assets increased $75,000, and total liabilities decreased $45,000. During the same year, the company’s investors invested an additional $90,000 and the company paid dividends of $45,000. What must have been the company’s net income for 2019? A) $75,000 B) $45,000 C) $60,000 D) $30,000 Answer: A Rationale: Change in Assets = Change in Owner’s Equity + Change in Liabilities +$75,000 = X – $45,000 X = $120,000 = Change in Owner’s Equity Change in Owner’s Equity = Change in owner’s Investments + Net income – Dividends $120,000 = $90,000 + X - $45,000 X = 120,000 - $90,000 + $45,000 X = $75,000
©Cambridge Business Publishers, 2020 4-16
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: DIFFICULT 33. During 2019, Duncan Company’s total assets increased $100,000, and total liabilities decreased $60,000. During the same year, the company’s investors invested an additional $120,000 and the company paid dividends of $60,000. What must have been the company’s net income for 2019? A) $100,000 B) $ 60,000 C) $ 80,000 D) $ 40,000 Answer: A Rationale: Change in Assets = Change in Owner’s Equity + Change in Liabilities +$100,000 = X - $60,000 X = $160,000 = Change in Owner’s Equity Change in Owner’s Equity = Change in owner’s Investments + Net income – Dividends $160,000 = $120,000 + X - $60,000 X = $160,000 - $120,000 + $60,000 X = $100,000
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: MEDIUM 34. A company reported total stockholders’ equity of $435,000 on its Dec 31, 2018, balance sheet. The following information is available for the year ended Dec 31, 2019: Revenues.......................................................... Expenses......................................................... Liabilities, on December 31, 2019..................
$930,000 495,000 216,000
What are the total assets of the company on December 31, 2019? A) $ 276,000 B) $ 57,000 C) $ 630,000 D) $1,086,000 Answer: D Rationale: Stockholders’ equity 12/31/19 = Stockholders’ equity 12/31/18 + Revenue – Expenses X = $435,000 + $930,000 – $495,000 X = $870,000 Assets = Stockholders’ equity + Liabilities X = $870,000 + $216,000 X = $1,086,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-17
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: MEDIUM 35. A company reported total stockholders’ equity of $580,000 on its Dec 31, 2018, balance sheet. The following information is available for the year ended Dec 31, 2019: Revenues.......................................................... Expenses......................................................... Liabilities, on December 31, 2019..................
$1,240,000 660,000 288,000
What are the total assets of the company on December 31, 2019? A) $ 368,000 B) $ 76,000 C) $ 840,000 D) $1,448,000 Answer: D Rationale: Stockholders’ equity 12/31/19 = Stockholders’ equity 12/31/18 + Revenue – Expenses X = $580,000 + $1,240,000 – $660,000 X = $1,160,000 Assets = Stockholders’ equity + Liabilities X = $1,160,000 + $288,000 X = $1,448,000
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: DIFFICULT 36. Ivey Company began operations on January 1, 2019, with an investment of $186,000 by each of its two stockholders, or a total of $372,000. Net income for its first year of business was $654,000. During the year, the company paid dividends of $90,000 each to its two stockholders. How much is the company’s ending Stockholders’ Equity on December 31, 2019? A) $834,000 B) $648,000 C) $744,000 D) $846,000 Answer: D Rationale: Ending stockholders’ equity = Beginning stockholders’ equity + Contributed capital + Net income – Dividends X = $0 + $372,000 + $654,000 – ($90,000 x 2) X = $846,000
©Cambridge Business Publishers, 2020 4-18
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: DIFFICULT 37. Melvin Company began operations on January 1, 2019, with an investment of $248,000 by each of its two stockholders, or a total of $496,000. Net income for its first year of business was $872,000. During the year, the company paid dividends of $120,000 each to its two stockholders. How much is the company’s ending Stockholders’ Equity on December 31, 2019? A) B) C) D)
$1,112,000 $ 864,000 $ 992,000 $1,128,000
Answer: D Rationale: Ending Stockholders’ equity = Beginning Stockholders’ equity + Contributed capital + Net income – Dividends X = $0 + $496,000 + $872,000 – ($120,000 x 2) X = $1,128,000
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: DIFFICULT 38. As of December 31, 2018, Foxfire Company had assets of $2,775,000 and liabilities of $855,000. During 2019, the stockholders invested an additional $150,000 and paid dividends of $90,000 from the business. What is the net income for the company during 2019, assuming that as of December 31, 2019, assets were $2,940,000, and liabilities were $765,000? A) $ 225,000 B) $ 195,000 C) $ 315,000 D) $ 60,000 Answer: B Rationale: Stockholders’ equity 12/31/18 = Assets – Liabilities X = $2,775,000 – $855,000 X = $1,920,000 = Stockholders’ equity 12/31/18 Stockholders’ equity 12/31/19 = Assets – Liabilities X = $2,940,000 – $765,000 X = $2,175,000 = Stockholders’ equity 12/31/19 Stockholders’ equity 12/31/19 = Stockholders’ equity 12/31/18 + Additional equity investments + Net income – Dividends $2,175,000 = $1,920,000 + $150,000 + X – $90,000 X = $2,175,000 – $1,920,000 - $150,000 + $90,000 X = $195,000 = Net income
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-19
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: DIFFICULT 39. As of December 31, 2018, Lincolnshire Company had assets of $3,700,000 and liabilities of $1,140,000. During 2019, the stockholders invested an additional $200,000 and paid dividends of $120,000 from the business. What is the net income for the company during 2019, assuming that as of December 31, 2019, assets were $3,920,000, and liabilities were $1,020,000? A) $ 340,000 B) $ 260,000 C) $ 420,000 D) $ 80,000 Answer: B Rationale: Stockholders’ equity 12/31/18 = Assets – Liabilities X = $3,700,000 – $1,140,000 X = $2,560,000 = Stockholders’ equity 12/31/18 Stockholders’ equity 12/31/19 = Assets – Liabilities X = $3,920,000 – $1,020,000 X = $2,900,000 = Stockholders’ equity 12/31/19 Stockholders’ equity 12/31/19 = Stockholders’ equity 12/31/18 + Additional equity investments + Net income – Dividends $2,900,000 = $2,560,000 + $200,000 + X - $120,000 X = $2,900,000 – $2,560,000 – $200,000 + $120,000 X = $260,000 = Net income
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: MEDIUM 40. On September 1, 2019, Chartreuse Dog, Inc. reported Retained Earnings of $408,000. During the month of September, Chartreuse Dog generated revenues of $60,000, incurred expenses of $36,000, purchased equipment for $15,000 and paid dividends of $18,000. What is the balance in Retained Earnings on September 30, 2019? A) $408,000 debit B) $ 24,000 credit C) $411,000 credit D) $414,000 credit Answer: D Rationale: Ending Retained earnings = Beginning Retained earnings + Revenues – Expenses –Dividends X = $408,000 + $60,000 – $36,000 - $18,000 X = $414,000 (The balance is a credit, the normal balance for the Retained Earnings account.)
©Cambridge Business Publishers, 2020 4-20
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: MEDIUM 41. On September 1, 2019, Might Dog, Inc. reported Retained Earnings of $544,000. During the month of September, Bulldog generated revenues of $80,000, incurred expenses of $48,000, purchased equipment for $20,000 and paid dividends of $24,000. What is the balance in Retained Earnings on September 30, 2019? A) $544,000 debit B) $ 32,000 credit C) $548,000 credit D) $552,000 credit Answer: D Rationale: Ending Retained earnings = Beginning Retained earnings + Revenues – Expenses –Dividends X = $544,000 + $80,000 – $48,000 - $24,000 X = $552,000 (The balance is a credit, the normal balance for the Retained Earnings account.)
Topic: Working with the Balance Sheet LO: 3 Level of Difficulty: MEDIUM 42. Chelsea Company presented the following data at the end of 2019: Cash Accounts receivable Merchandise inventory Prepaid insurance Property & equipment Accounts payable Unearned revenue Wages payable Bonds payable
$1,575,000 2,800,000 2,450,000 262,500 7,000,000 525,000 600,000 1,200,000 3,000,000
Determine the current ratio for Chelsea Company (rounded). A) 5.15 B) 4.94 C) 3.05 D) 2.78 Answer: C Rationale: Current ratio = Current assets / Current liabilities X = ($1,575,000 + $2,800,000 + $2,450,000 + $262,500) / ($525,000 + $600,000 + $1,200,000) X = $7,087,500 / $ 2,325,000 X = 3.05
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-21
Topic: Working with the Balance Sheet LO: 3 Level of Difficulty: MEDIUM 43. Kirsten Company presented the following data at the end of 2019: Cash Accounts receivable Merchandise inventory Prepaid insurance Property & equipment Accounts payable Unearned revenue Wages payable Bonds payable
$1,800,000 3,200,000 2,800,000 300,000 8,000,000 750,000 800,000 1,600,000 4,000,000
Determine the current ratio for Kirsten Company (rounded). A) 4.41 B) 4.23 C) 2.57 D) 2.38 Answer: C Rationale: Current ratio = Current assets / Current liabilities X = ($1,800,000 + $3,200,000 + $2,800,000 + $300,000) / ($750,000 + $800,000 + $1,600,000) X = $8,100,000 / $ 3,150,000 X = 2.57
Topic: Working with the Balance Sheet LO: 3 Level of Difficulty: MEDIUM 44. Darmstadt Company presented the following data at the end of 2019: Current liabilities Long-term debt Deferred income taxes Preferred stock Common stock Retained earnings
$450,000 1,650,000 600,000 280,000 980,000 945,000
Determine the debt-to-total assets ratio for Darmstadt Company (rounded). A) 0.55 B) 0.35 C) 0.07 D) 0.61
©Cambridge Business Publishers, 2020 4-22
th
Financial Accounting for Undergraduates, 4 Edition
Answer: A Rationale: Total assets = Total liabilities + Stockholders’ equity X = ($450,000 + $1,650,000 + $600,000) + ($280,000 + $980,000 + $945,000) X = $2,700,000 + $2,205,000 X = $4,905,000 Debt-to-total assets ratio = Total liabilities / Total assets X = $2,700,000 / $4,905,000 X = 0.55
Topic: Working with the Balance Sheet LO: 3 Level of Difficulty: MEDIUM 45. Buick Company presented the following data at the end of 2019: Current liabilities Long-term debt Deferred income taxes Preferred stock Common stock Retained earnings
$400,000 2,200,000 800,000 320,000 1,420,000 1,080,000
Determine the debt-to-total assets ratio for Buick Company (rounded). A) 0.55 B) 0.38 C) 0.08 D) 0.66 Answer: A Rationale: Total assets = Total liabilities + Stockholders’ equity X = ($400,000 + $2,200,000 + $800,000) + ($320,000 + $1,420,000 + $1,080,000) X = $3,400,000 + $2,820,000 X = $6,220,000 Debt-to-total assets ratio = Total liabilities / Total assets X = $3,400,000 / $6,220,000 X = 0.55
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-23
Topic: Working with the Income Statement LO: 4 Level of Difficulty: MEDIUM 46. Herbst Company presented the following data at the end of 2019: Net sales revenue Cost of goods sold Operating expenses Income tax rate
$962,500 375,000 90,000 25%
Determine the company’s return on sales (rounded) A) 37% B) 33% C) 30% D) 39% Answer: D Rationale: Net Income = (Net sales revenue – Cost of goods sold - Operating expenses) x (1 – Income tax rate) X = ($962,500 – $375,000 – $90,000) x (1 - 0.025) X = $497,500 x 0.75 X = $373,125 Return on sales ratio = Net income / Net sales X = $373,125 / $962,500 X = 0.39 = 39%
Topic: Working with the Income Statement LO: 4 Level of Difficulty: MEDIUM 47. Fruhling Company presented the following data at the end of 2019: Net sales revenue Cost of goods sold Operating expenses Income tax rate
$1,100,000 500,000 240,000 25%
Determine the company’s return on sales (rounded) A) 31% B) 28% C) 33% D) 25% Answer: D Rationale: Net Income = (Net sales revenue – Cost of goods sold – Operating expenses) x (1 – Income tax rate) X = ($1,100,000 – $500,000 – $240,000) x (1 – 0.025) X = $360,000 x 0.75 X = $270,000 Return on sales ratio = Net income / Net sales X = $270,000 / $1,100,000 X = 0.25 = 25% ©Cambridge Business Publishers, 2020 4-24
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Working with the Statement of Cash Flows LO: 6 Level of Difficulty: MEDIUM 48. Presented below is the Statement of Cash Flows for EMG Originals Clothing Company: EMG ORIGINALS CLOTHING COMPANY Statement of Cash Flows For Year Ended December 31, 2019 Cash flows from operating activities: Received from sales to customers Interest income received Payment for inventory Payment to employees Net increase from operating activities
$ 1,500,000 30,000 (240,000) (180,000) $ 1,110,000
Cash flows from investing activities: Payment for stock of another company Payment for purchase of equipment Net decrease from investing activities
(150,000) (600,000) $(750,000)
Cash flows from financing activities: Received from loans from bank From issuance of common stock From issuance of bonds Payment of dividends Net increase from financing activities
$ 150,000 450,000 300,000 (60,000) $ 840,000
Net increase in cash
$ 1,200,000
Determine the company’s free cash flow: A) ($450,000) B) $360,000 C) $540,000 D) $510,000 Answer: D Rationale: Free cash flow = Cash flow from operations – Capital expenditures X = (Net increase (in cash) from operating activities) – (Payment for purchase of equipment) X = $1,110,000 – $600,000 X = $510,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-25
Topic: Working with the Statement of Cash Flows LO: 6 Level of Difficulty: MEDIUM 49. Presented below is the Statement of Cash Flows for Margarete Originals Clothing Company: MARGARETE ORIGINALS CLOTHING COMPANY Statement of Cash Flows For Year Ended December 31, 2019 Cash flows from operating activities: Received from sales to customers Interest income received Payment for inventory Payment to employees Net increase from operating activities
$ 2,000,000 40,000 (320,000) (240,000) $ 1,480,000
Cash flows from investing activities: Payment for stock of another company Payment for purchase of equipment Net decrease from investing activities
(200,000) (800,000) $(1,000,000)
Cash flows from financing activities: Received from loans from bank From issuance of common stock From issuance of bonds Payment of dividends Net increase from financing activities
$ 200,000 600,000 400,000 (80,000) $ 1,120,000
Net increase in cash
$ 1,600,000
Determine the company’s free cash flow: A) ($600,000) B) ($520,000) C) $480,000 D) $680,000 Answer: D Rationale: Free cash flow = Cash flow from operations – Capital expenditures X = (Net increase (in cash) from operating activities) – (Payment for purchase of equipment) X = $1,480,000 – $800,000 X = $680,000
©Cambridge Business Publishers, 2020 4-26
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Gross Profit LO: 2 Level of Difficulty: EASY 50. Net sales less cost of goods sold equals: A) Net income B) Net profit margin C) Gross profit D) Gross profit percentage Answer: C Rationale: Net sales – Cost of goods sold = Gross profit. The gross profit percentage is gross profit divided by sales.
Topic: Income Statement LO: 2 Level of Difficulty: MEDIUM 51. The accounting record for Katzen Company reported the following selected information: Operating Expenses Sales Returns and Allowances Sales Discounts Sales Revenue Cost of Goods Sold
$ 270,000 78,000 36,000 1,050,000 402,000
Determine Katzen Company’s gross profit. A) $462,000 B) $534,000 C) $420,000 D) $498,000 Answer: B Rationale: Gross profit = Sales revenue – Sales returns and allowances – Sales discounts – Cost of goods sold X = $1,050,000 – $78,000 – $36,000 –$402,000 X = $534,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-27
Topic: Income Statement LO: 2 Level of Difficulty: MEDIUM 52. The accounting record for Hardware Company reported the following selected information: Operating Expenses Sales Returns and Allowances Sales Discounts Sales Revenue Cost of Goods Sold
$ 360,000 104,000 48,000 1,400,000 536,000
Determine Hardware Company’s gross profit. A) $616,000 B) $712,000 C) $560,000 D) $664,000 Answer: B Rationale: Gross profit = Sales revenue – Sales returns and allowances – Sales discounts - Cost of goods sold X = $1,400,000 – $104,000 – $48,000 – $536,000 X = $712,000
Topic: Income Statement LO: 2 Level of Difficulty: DIFFICULT 53. Determine Sales Revenue for Mountainstone Company with the following data: Cost of Goods Sold Operating Expenses Sales Discounts Sales Returns and Allowances Net Income A) B) C) D)
$1,680,000 420,000 30,000 195,000 510,000
$2,385,000 $2,445,000 $2,835,000 $2,775,000
Answer: C Rationale: Sales revenue – Sales returns and allowances – Sales discounts – Cost of goods sold – Operating expenses = Net income X – $195,000 – $30,000 – $1,680,000 – $420,000 = $510,000 X = $510,000 + $195,000 + $30,000 + $1,680,000 + $420,000 X = $2,835,000
©Cambridge Business Publishers, 2020 4-28
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Income Statement LO: 2 Level of Difficulty: DIFFICULT 54. Determine Sales Revenue for Cadillac Company with the following data: Cost of Goods Sold Operating Expenses Sales Discounts Sales Returns and Allowances Net Income A) B) C) D)
$2,240,000 560,000 40,000 260,000 680,000
$3,180,000 $3,260,000 $3,780,000 $3,700,000
Answer: C Rationale: Sales revenue – Sales returns and allowances – Sales discounts – Cost of goods sold – Operating expenses = Net Income X – $260,000 – $40,000 – $2,240,000 – $560,000 = $680,000 X = $680,000 + $260,000 + $40,000 + $2,240,000 + $560,000 X = $3,780,000
Topic: Income Statement LO: 2 Level of Difficulty: DIFFICULT 55. Marshall F. Company reported the following year-end amounts: Total Sales Sales Discounts Sales Returns Cost of Goods Sold Gross Profit
$33,600 600 ? 21,000 4,350
What is the company’s Sales Returns for the year? A) $ 2,160 B) $ 2,970 C) $ 7,650 D) $10,860 Answer: C Rationale: Total sales – Sales returns – Sales discounts – Cost of goods sold = Gross profit $33,600 – X – $600 – $21,000 = $4,350 X = $33,600 – $600 – $21,000 – $4,350 X = $7,650
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-29
Topic: Income Statement LO: 2 Level of Difficulty: DIFFICULT 56. Fabulous Mints Company reported the following year-end amounts: Total Sales Sales Discounts Sales Returns Cost of Goods Sold Gross Profit
$44,800 800 ? 28,000 5,800
What is the company’s Sales Returns for the year? A) $ 2,880 B) $ 3,960 C) $10,200 D) $14,480 Answer: C Rationale: Total sales – Sales returns – Sales discounts – Cost of goods sold = Gross profit $44,800 – X – $800 – $28,000 = $5,800 X = $44,800 – $800 – $28,000 - $5,800 X = $10,200
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: EASY 57. Mountain Company has beginning retained earnings of $450,000, earns a net income of $75,000, and pays dividends of $9,000 during the period. The balance in Mountain’s ending retained earnings is: A) $516,000 B) $366,000 C) $534,000 D) $525,000 Answer: A Rationale: Ending retained earnings = Beginning retained earnings + Net income (loss) – Dividends X = $450,000 + $75,000 – $9,000 X = $516,000
©Cambridge Business Publishers, 2020 4-30
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: EASY 58. Rock Springs Company has beginning retained earnings of $600,000, earns a net income of $100,000, and pays dividends of $12,000 during the period. The balance in Rock Springs’ ending retained earnings is: A) $688,000 B) $488,000 C) $712,000 D) $700,000 Answer: A Rationale: Ending retained earnings = Beginning retained earnings + Net income (loss) – Dividends X = $600,000 + $100,000 – $12,000 X = $688,000
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: MEDIUM 59. Mountain Company has Beginning retained earnings of $450,000, earns a net income of $112,500, and has an Ending retained earnings balance of $552,000 during the period. The amount which Mountain paid in dividends must have been: A) $ 6,000 B) $112,500 C) $ 10,500 D) $102,000 Answer: C Rationale: Ending retained earnings = Beginning retained earnings + Net income (loss) – Dividends $552,000 = $450,000 + $112,500 – X X = $450,000 + $112,500 – $552,000 X = $10,500
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: MEDIUM 60. Rock Springs Company has Beginning retained earnings of $600,000, earns a net income of $150,000, and has an Ending retained earnings balance of $736,000 during the period. The amount which Rock Springs paid in dividends must have been: A) $ 8,000 B) $150,000 C) $ 14,000 D) $136,000 Answer: C Rationale: Ending retained earnings = Beginning retained earnings + Net income (loss) – Dividends $736,000 = $600,000 + $150,000 – X X = $600,000 + $150,000 – $736,000 X = $14,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-31
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: MEDIUM 61. Mountain Company earns a net income of $430,500 and pays dividends of $39,000 during the period. Mountain has ending retained earnings of $733,500. The balance in Mountain’s beginning retained earnings must have been: A) $516,000 B) $391,500 C) $469,500 D) $342,000 Answer: D Rationale: Ending retained earnings = Beginning retained earnings + Net income (loss) – Dividends $733,500 = X + $430,500 – $39,000 X = $733,500 – $430,500 + $39,000 X = $342,000
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: MEDIUM 62. Rock Springs Company earns a net income of $574,000 and pays dividends of $52,000 during the period. Rock Springs has ending retained earnings of $978,000. The balance in Rock Springs’ beginning retained earnings must have been: A) $688,000 B) $522,000 C) $626,000 D) $456,000 Answer: D Rationale: Ending retained earnings = Beginning retained earnings + Net income (loss) – Dividends $978,000 = X + $574,000 – $52,000 X = $978,000 – $574,000 + $52,000 X = $456,000
©Cambridge Business Publishers, 2020 4-32
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: DIFFICULT 63. Chopper Company reported total stockholders’ equity of $652,500 on its Dec 31, 2018, balance sheet. The following information is available for the year ended Dec 31, 2019: Revenues..................................................... Expenses..................................................... Assets, on December 31, 2019..................
$945,000 $742,500 $1,824,000
What are the total liabilities of the company on December 31, 2019? A) $ 969,000 B) $ 945,000 C) $1,824,000 D) $ 414,000 Answer: A Rationale: Stockholders’ equity 12/31/19 = Stockholders’ equity 12/31/18 + Revenue – Expenses X = $652,500 + $945,000 – $742,500 X = $855,000 Assets = Stockholders’ equity + Liabilities $1,824,000 = $855,000 + X X = $1,824,000 – $855,000 X = $969,000
Topic: Classified Balance Sheet LO: 1 Level of Difficulty: DIFFICULT 64. Henrietta Company reported total stockholders’ equity of $870,000 on its Dec 31, 2018, balance sheet. The following information is available for the year ended Dec 31, 2019: Revenues.......................................................... Expenses......................................................... Assets, on December 31, 2019..................
$1,260,000 $990,000 $2,432,000
What are the total liabilities of the company on December 31, 2019? A) $1,292,000 B) $1,260,000 C) $2,432,000 D) $ 562,000 Answer: A Rationale: Stockholders’ equity 12/31/19 = Stockholders’ equity 12/31/18 + Revenue – Expenses X = $870,000 + $1,260,000 – $990,000 X = $1,140,000 Assets = Stockholders’ equity + Liabilities $2,432,000 = $1,140,000 + X X = $2,432,000 – $1,140,000 X = $1,292,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-33
Topic: Income Statement LO: 2 Level of Difficulty: DIFFICULT 65. Determine Sales revenue for Barko Company with the following data: Cost of Goods Sold Operating Expenses Sales Discounts Sales Returns and Allowances Net Income A) B) C) D)
$1,260,000 315,000 22,500 146,250 382,500
$1,788,750 $1,833,750 $2,126,250 $2,081,250
Answer: C Rationale: Sales revenue – Sales returns and allowances – Sales discounts – Cost of goods sold – Operating expenses = Net income X – $146,250 – $22,500 – $1,260,000 – $315,000 = $382,500 X = $382,500 + $146,250 + $22,500 + $1,260,000 + $315,000 X = $2,126,250
Topic: Income Statement LO: 2 Level of Difficulty: DIFFICULT 66. Determine Sales revenue for Merema Company with the following data: Cost of Goods Sold Operating Expenses Sales Discounts Sales Returns and Allowances Net Income A) B) C) D)
$1,680,000 420,000 30,000 195,000 510,000
$2,385,000 $2,445,000 $2,835,000 $2,775,000
Answer: C Rationale: Sales revenue – Sales returns and allowances – Sales discounts – Cost of goods sold – Operating expenses = Net Income X – $195,000 – $30,000 – $1,680,000 – $420,000 = $510,000 X = $510,000 + $195,000 + $30,000 + $1,680,000 + $420,000 X = $2,835,000
©Cambridge Business Publishers, 2020 4-34
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Income Statement LO: 2 Level of Difficulty: DIFFICULT 67. Marshall Company reported the following year-end amounts: Total Sales Sales Discounts Sales Returns Cost of Goods Sold Gross Profit
$25,200 450 ? 15,750 3,262
What is the company’s Sales Returns for the year? A) $1,620 B) $2,228 C) $5,738 D) $8,146 Answer: C Rationale: Total sales – Sales returns – Sales discounts – Cost of goods sold = Gross profit $25,200 – X – $450 – $15,750 = $3,262 X = $25,200 – $450 – $15,750 – $3,262 X = $5,738
Topic: Income Statement LO: 2 Level of Difficulty: DIFFICULT 68. Skokie Company reported the following year-end amounts: Total Sales Sales Discounts Sales Returns Cost of Goods Sold Gross Profit
$33,600 600 ? 21,000 4,350
What is the company’s Sales Returns for the year? A) $ 2,160 B) $ 2,970 C) $ 7,650 D) $10,860 Answer: C Rationale: Total sales – Sales returns – Sales discounts – Cost of goods sold = Gross profit $33,600 – X – $600 – $21,000 = $4,350 X = $33,600 – $600 – $21,000 – $4,350 X = $7,650
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-35
Exercises Topic: Balance Sheet Classification LO: 1 1. Listed below are selected accounts for Florida Company, Inc. Select a letter from the following key and place it in the space to the left of the account title to indicate the proper balance sheet classification for the account. Key:
a. b. c. d. e. f.
Current asset Property, Plant, and Equipment Current liability Long-term liability Stockholders’ equity Not a balance sheet account
1.
Accounts payable
2.
Long-term notes payable
3.
Prepaid rent
4.
Dividends
5.
Equipment
6.
Cash
7.
Wages payable
8.
Retained earnings
9.
Accounts receivable
10.
Supplies
Answer: 1.
c
Accounts payable
2.
d
Long-term notes payable
3.
a
Prepaid rent
4.
f
Dividends
5.
b
Equipment
6.
a
Cash
7.
c
Wages payable
8.
e
Retained earnings
9.
a
Accounts receivable
10.
a
Supplies
©Cambridge Business Publishers, 2020 4-36
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Balance Sheet Relations LO: 1 2. Compute the missing amounts in the table below:
Total assets Common stock Retained earnings Total liabilities Total liabilities and stockholders’ equity
Year 1
Year 2
$187,500 (b) $12,600 $93,900 $187,500
(a) $37,200 $28,200 $54,000 $119,400
Answer: Total assets Common stock Retained earnings Total liabilities Total liabilities and stockholders’ equity
Year 1
Year 2
$187,500 (b) $81,000 $12,600 $93,900 $187,500
(a) $119,400 $37,200 $28,200 $54,000 $119,400
a. Liabilities and equity – equity = Liabilities $187,500 – equity = $93,900 Equity = $93,600 Common stock + retained earnings = Stockholders’ Equity Common stock + $12,600 = $93,600 Common stock = $81,000 b. Total assets = Liabilities and stockholders’ equity = $119,400 Total assets = $119,400
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-37
Topic: Balance Sheet Accounts LO: 1 3. Identify the following as an asset (A), liability (L), or equity (E) by writing the letter of the correct classification in the space provided. Account
Classification
A. Contributed capital B. Office equipment C. Accounts payable D. Common stock E. Cash F. Accounts receivable G. Wages payable H. Deferred revenue Answer: Account
Classification
A. Contributed capital
(E) Equity
B. Office equipment
(A) Asset
C. Accounts payable
(L) Liability
D. Common stock
(E) Equity
E. Cash
(A) Asset
F. Accounts receivable
(A) Asset
G. Wages payable
(L) Liability
H. Deferred revenue
(L) Liability
©Cambridge Business Publishers, 2020 4-38
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Balance Sheet Analysis LO: 1 4. For the two unrelated situations below, compute the unknown amounts indicated by the letters (a) and (b).
Beginning: Assets Liabilities Ending: Assets Liabilities During the year: Stock issued Revenues Dividends paid Expenses
(1)
(2)
$96,000 39,000
$144,000 43,200
129,000 33,000
246,000 (b)
9,000 (a) 12,000 27,000
15,000 156,000 9,000 69,000
Answer: (1)
Ending stockholders’ equity ($129,000 – $33,000) Beginning stockholders’ equity ($96,000 – $39,000) Increase Add: Dividends paid Less: Stock issued Net Income Add: Expenses Revenues
(2)
Beginning stockholders’ equity ($144,000 – $43,200) Add: Stock issued Net income ($156,000 – $69,000) Less: Dividends paid Ending stockholders’ equity $246,000 Ending assets – $193,800 Ending stockholders’ equity = Ending liabilities
(a)
$96,000 -57,000 39,000 12,000 51,000 9,000 42,000 27,000 $69,000 $ 100,800 15,000 87,000 $202,800 9,000 $193,800
(b) $ 52,200
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-39
Topic: Balance Sheet Analysis LO: 1 5. For the two unrelated situations below, compute the unknown amounts indicated by the letters (a) and (b).
Beginning: Assets Liabilities Ending: Assets Liabilities During the year: Stock issued Revenues Dividends paid Expenses
(1)
(2)
$42,000 18,000
$61,000 24,000
48,000 15,000
68,000 (b)
(a) 28,000 5,000 16,000
4,000 45,000 3,000 37,000
Answer: (1)
Ending stockholders’ equity ($48,000 - $15,000) Beginning stockholders’ equity ($42,000 - $18,000) Increase Add: Dividends paid Less:
(2)
Net income ($28,000 - $16,000) Stock issued
Beginning stockholders’ equity ($61,000 - $24,000) Add: Stock issued Net income ($45,000 - $37,000) Less: Dividends paid Ending stockholders’ equity $68,000 Ending assets – $46,000 Ending stockholders’ equity Ending liabilities
$33,000 - 24,000 $ 9,000 5,000 14,000 12,000 (a) $ 2,000 $37,000 4,000 8,000 $49,000 3,000 $46,000
(b) $22,000
©Cambridge Business Publishers, 2020 4-40
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Return on Sales and Debt-to-Total-Assets Ratio LO: 3, 4 6. Elk, Inc. has a debt-to-total-assets ratio of 0.56 and a ROS of 13.4%. The median ROS for similar companies in the same industry as Elk is about 6.3%. The median debt-to-total-assets ratio for similar companies in the same industry is 0.31. Based on this industry information, how does Elk compare to similar companies and what are the causes of these differences? Answer: As the return on sales shows, Elk is outperforming similar companies in its industry as far as its ability to generate profit at 13.4%. This is due to its ability to be more efficient in bringing its product or service to the market and produce a product or service that the market values. Elk’s debt-to-totalassets ratio, as compared to similar companies in its industry, indicates that the company is more aggressive with debt financing approach. The company is using more debt than equity financing, contributing to more credit risk and less solvency than the industry average.
Topic: Return on Assets, Return on Sales, and Debt-to-Total-Assets Ratios LO: 2, 3, 4 7. Alvin’s Audio reported the following amounts in its December 31, 2019, and 2018 financial statements. ($ millions) 2019 2018 Sales revenue Cost of sales Net income Total assets Stockholders’ equity
$555,000 243,000 37,100 115,500 92,400
$468,000 252,000 29,400 105,600 75,250
Calculate to the nearest hundredth: (a) Return on sales for 2019 (b) Return on assets for 2019 (c) Debt-to-total-assets ratio as of December 31, 2019 Answer: (a) ROS = Net income / Sales revenue X = $37,100 / $555,000 = 6.68% (b) ROA = Net income / Total assets X = $37,100 / $115,500 = 32.12% (c) Total liabilities = Total assets – Stockholders’ equity X = $115,500 – $92,400 X = $23,100 = Total liabilities Debt-to-total-assets = Total liabilities / Total assets X = $23,100 / $115,500 = 20.00%
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-41
Topic: Prepare an Income Statement LO: 2 8. Prepare an income statement for the month ended July 31, 2019 for Foster Toys. Foster’s account balances for the month ending July 31, 2019 are: Cash Accounts receivable Office supplies Office equipment Land Sales Cash dividends
$ 20,800 57,000 6,200 58,300 140,000 160,000 5,300
Rent expense Utilities expense Salaries expense Miscellaneous expenses Retained earnings, July 1 Common stock Accounts payable
$ 16,600 1,060 32,000 1,290 24,300 152,250 2,000
Answer: FOSTER TOYS Income Statement For Month Ended July 31, 2019 Revenues Sales Expenses Salaries expense Rent expense Utilities expense Miscellaneous expense Total expenses Net income
$160,000 $32,000 16,600 1,060 1,290 50,950 $109,050
©Cambridge Business Publishers, 2020 4-42
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Preparation of Statement of Stockholders' Equity LO: 5 9. The following is selected financial information for Taglioli, Inc. for its year ending January 31, 2019: Retained earnings, January 31, 2018 ………….... Common stock, January 31, 2018 ……………….. Dividends ………………………………………..….. Net income ………………………………………..… Stock issuances ………………………………….....
$ 195,855 15,000 11,235 43,005 1,800
Prepare a statement of stockholders' equity for 2019 for Taglioli. All amounts are in millions. Answer: TAGLIOLI, INC. Statement of Stockholders' Equity For Year Ended January 31, 2019 Common Stock Balance, January 31, 2018 Stock issuances Net income Dividends Balance, January 31, 2019
$15,000 1,800 0 $16,800
Retained Earnings
Total Equity
$195,855
$210,855 1,800 43,005 (11,235) $244,425
43,005 (11,235) $227,625
Topic: Preparing a Statement of Stockholders’ Equity LO: 5 10. Pokagon reported the following selected information at August 2, 2019 ($ millions): Common stock, August 3, 2018 Stock issued during August 3, 2018 to August 2, 2019 Retained Earnings, August 3, 2018 Net income Dividends
$1,200 640 1,580 1,470 710
Use this information to prepare a statement of stockholders’ equity for Pokagon’s for the year ending August 2, 2019 Answer: POKAGON Statement of Stockholders' Equity For Year Ended August 2, 2019 Common Stock Balance, August 3, 2018 Stock issuances Net income Dividends Balance, August 2, 2019
$1,200 640 0 $1,840
Retained Earnings $ 1,580 1,470 (710) $2,340
Total Equity $2,780 640 1,470 (710) $4,180
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-43
Topic: Equity Changes LO: 5 11. At the end of 2019, LoMo Manufacturing reported the following amounts on its balance sheet: Cash Accounts receivable Equipment Land Accounts payable Common stock Retained earnings
$ 24,300 97,200 78,000 360,000 94,500 285,000 180,000
Answer each of the following independent questions: a. Assume that LoMo’s stockholders’ equity on January 1, 2019 was $396,000. LoMo did not issue common stock during the year, but it paid $54,000 cash in dividends. How much is LoMo’s net income or loss for 2019? b. Assume that LoMo’s stockholders’ equity on January 1, 2019 was $354,000, and that LoMo issued additional common stock of $105,000 and paid $90,000 in cash dividends before the end of 2019. What was LoMo’s net income or net loss for 2019? Answer: a. Increase in equity ($285,000 + $180,000 - $396,000) Add: Dividends Net Income for 2019 b.
Increase in equity ($285,000 + $180,000 - $354,000) Add: Dividends Less: Additional Investment Net Income for 2019
$69,000 54,000 $123,000 $ 111,000 90,000 ( 105,000) $96,000
Topic: Free Cash Flow LO: 6 12. Consider the following 2019 data for three manufacturing firms ($ in millions):
Sammy Industries Mouser Company Lumos Corporation
Current Liabilities $155,800 101,600 116,000
Cash from Operations ($49,400) 171,600 138,400
Expenditures on PPE $36,600 51,600 71,800
Dividends (cash) $21,000 24,800 35,200
Compute the free cash flow for each firm for 2019. Answer: Sammy: Mouser: Lumos:
($49,400) – $36,600 = ($86,000) $171,600 – $51,600 = $120,000 $138,400 – $71,800 = $66,600
©Cambridge Business Publishers, 2020 4-44
th
Financial Accounting for Undergraduates, 4 Edition
Problems Topic: Constructing a Balance Sheet LO: 1 1. Compute the missing amounts for each of the last 3 years for the Gilgen Company. (millions)
2017
Current assets
$14,445
Long-term assets
10,140
2018
2019 $24,009
Total assets
11,418
______
$25,557
$26,448
Current liabilities
$8,133
$7,917
$7,356
Long-term liabilities
5,346
______
7,092
$13,479
$15,117
Total liabilities Stockholders’ equity
10,440
12,000
Answer: 2017
2018
2019
Current assets Long-term assets Total assets
$14,445 10,140 $24,585
$14,139 11,418 $25,557
$24,009 2,439 $26,448
Current liabilities Long-term liabilities Total liabilities Stockholders’ equity Total liabilities and stockholders’ equity
$8,133 5,346 $13,479 11,106
$7,917 7,200 $15,117 10,440
$7,356 7,092 $14,448 12,000
$24,585
$25,557
$26,448
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-45
Topic: Prepare a Statement of Stockholders’ Equity LO: 5 2. Prepare a statement of stockholders’ equity for the month ended July 31, 2019 for Foster Toys. Foster’s account balances for the month ending July 31, 2019 are: Cash Accounts receivable Office supplies Office equipment Land Sales Cash dividends
$20,800 57,000 6,200 58,300 140,000 110,000 6,000
Rent expense Utilities expense Salaries expense Misc. expenses Retained earnings, July 1 Common stock Accounts payable
$16,600 1,060 32,000 290 24,300 152,250 51,700
Answer: FOSTER TOYS Statement of Stockholders’ Equity For Month Ended July 31, 2019
Balance, July 1, 2019 Common stock issued Add: Net income* Less: Dividends Balance, July 31, 2019
Common Stock
Retained Earnings
$152,250 0
$24,300
0 $152,250
60,050 (6,000) $78,350
Total Equity $176,550 0 60,050 (6,000) $230,600
*Net Income: $110,000 – $16,600 – $1,060 – $32,000 – $290 = $60,050
©Cambridge Business Publishers, 2020 4-46
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Preparing a Statement of Stockholders’ Equity LO: 5 3. The following items and amounts are taken from the 2019 financial records of Lumos Corporation: Security deposit…………..... Equipment………………….. Salaries expense…………... Utilities expense…………… Dividends……………………. Accounts payable………….. Cash………………………… Accounts receivable……….
$ 24,600 87,000 126,000 3,300 27,000 109,800 89,700 28,500
Salaries payable……………………. Common stock…………………….. Supplies expense..………………… Retained earnings, Jan. 1, 2019 … Insurance expense………………… Service revenue…………………… Repair expense…………………….
$ 18,000 31,500 14,100 36,000 6,600 225,000 13,500
Prepare a statement of stockholders’ equity for Lumos Corporation for the year ending December 31, 2019. Answer: LUMOS CORPORATION Statement of Stockholders’ Equity For Year Ended December 31, 2019 Common Stock Balance, January 1, 2019 Common stock issued Add: Net income* Less: Dividends Balance, December 31, 2019
$31,500 0 0 $31,500
Retained Earnings
Total Equity
$36,000
$67,500 0 61,500 (27,000) $102,000
61,500 (27,000) $70,500
*Net Income: $225,000 – $126,000 – $3,300 – $14,100 – $13,500 – $6,600 = $61,500
©Cambridge Business Publishers, 2020 Test Bank, Chapter 4
4-47
Topic: Statement of Stockholders’ Equity LO: 5 4. The records of Manhattan T’s show the following information after all transactions are recorded for 2019. Notes payable Service fees earned Supplies expense Insurance expense Miscellaneous expense Common stock, January 1 Accounts payable Dividends
$
24,000 184,400 38,800 14,000 600 22,000 7,200 12,000
Supplies Cash Advertising expense Salaries expense Rent expense Retained earnings, January 1 Accounts receivable Equipment
$ 29,000 43,000 6,800 36,000 32,000 25,000 6,400 60,000
Manhattan T’s raised $16,000 cash through the issuance of additional common stock during the year. Based on this information, prepare Manhattan T’s statement of stockholders’ equity for the year ending December 31, 2019. Answer: MANHATTAN T’S Statement of Stockholders’ Equity For Year Ended December 31, 2019 Common Stock Balance at January 1, 2019 Stock issuance Dividends Net income* Balance at December 31, 2019
$22,000 16,000 __ ___ $38,000
Retained Earnings $25,000 (12,000) 56,200 $69,200
Total Equity $47,000 16,000 (12,000) 56,200 $107,200
*$56,200 = $184,400 – $38,800 – $14,000 – $600 – $6,800 – $36,000 – $32,000
©Cambridge Business Publishers, 2020 4-48
th
Financial Accounting for Undergraduates, 4 Edition
Chapter 5 Accounting for Merchandising Operations Learning Objectives – Coverage by question True / False
Multiple Choice
1
1
1, 3, 4, 6, 9
1, 4-6, 11-14, 16, 18, 20, 22, 24, 26, 28, 30-41, 53-54
LO3 – Describe the accounting for sales of merchandise.
10
1, 4-6, 15, 42-54
LO4 – Define the gross profit percentage and the return on sales ratio, and explain their use in profitability analysis.
2
65-76
3
LO5 – Appendix 5A: Describe and illustrate a periodic inventory system.
5, 7, 8
2, 3, 7-10, 17, 19, 21, 23, 25, 27, 29, 55-64
2
77-80
4
LO1 – Explain the operations of a merchandise company and contrast that with the operations of a service company. LO2 – Describe the accounting for purchases of merchandise.
LO6 – Appendix 5B: Describe and illustrate the new revenue recognition standard.
Exercises
Problems
1
1, 5
5
2-4
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-1
Chapter 5: Accounting for Merchandising Operations
True / False Topic: Inventory LO: 1, 2 1. Companies should recognize inventory as an expense when purchased. Answer: False Rationale: Companies capitalize inventories when purchased, and expense inventories when sold. Topic: Gross Profit Percentage LO: 4 2. A decline in gross profit percentage can be caused by selling fewer units to customers. Answer: False Rationale: Gross profit percentage is the percentage of gross profit to sales. It indicates the cents that are available from each dollar of sales to cover operating costs and contribute to profits. A change in the number of units sold does not change the percentage, unless the selling price or cost of goods sold changes. Topic: Merchandise Purchasing LO: 2 3. The cost of acquiring inventory includes adding the cost of freight associated with obtaining the inventory and subtracting the amount of cash discount allowed from timely payment. Answer: True Rationale: The cost of inventory should include all costs necessary to get the inventory ready to sell, which includes the cost of freight and a deduction for cash discounts. Topic: Discount Period LO: 2 4. The discount period for payment is always shorter than the credit period. Answer: True Rationale: To encourage the early payment of unpaid bills, many firms offer their customers a cash discount if payment is made within a designated discount period. Sellers usually state cash discounts as a percent of the invoice price. The discount period is the maximum amount of time, stated in days, that a purchaser has within which to pay the seller if the purchaser wants to claim the cash discount. The discount period is always shorter than the credit period. Most merchandisers use the format “cash discount percent/discount period” to designate the cash discount and the discount period.
©Cambridge Business Publishers, 2020 5-2
Financial Accounting for Undergraduates, 4th Edition
Topic: Periodic Inventory System LO: 5 5. If a firm using the periodic inventory system sells merchandise for $320,000 that originally cost $160,000, the firm will debit Sales Revenue for $320,000. Answer: False Rationale: The firm records the following entries: Entry 1: Accounts receivable Sales revenue
$320,000 $320,000
Cost of goods sold $160,000 Inventory $160,000 To record sale of merchandise on credit. Topic: Credit Terms LO: 2 6. In specifying credit terms, 2/10, n/30 means that one-half of the invoice must be paid in 10 days, with the net balance due in 30 days. Answer: False Rationale: 2/10, n/30 represents a cash discount of two percent if paid within ten days of the sale with a total credit period of 30 days following the date of the sale Topic: Periodic Inventory System LO: 5 7. The Purchases account normally has a debit balance. Answer: True Rationale: When a company uses the periodic inventory system, it records the purchase of merchandise by debiting the cost of the merchandise to the Purchases account, rather than the Inventory account, and crediting the cost to Accounts Payable. (The Purchases account has a normal debit balance.) Topic: Periodic Inventory System LO: 5 8. All merchandise purchased for resale by a firm is initially recorded in the Purchases account when the firm uses the periodic inventory system. Answer: True Rationale: When a company uses the periodic inventory system, it records the purchase of merchandise by debiting the cost of the merchandise to the Purchases account, rather than the Inventory account, and crediting the cost to Accounts Payable. (The Purchases account has a normal debit balance.)
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-3
Topic: Transportation Costs LO: 2 9. If merchandise is shipped F.O.B. destination, the seller ultimately bears the expense of transporting it. Answer: True Rationale: Transportation costs are sometimes incurred by a merchandising company when it acquires goods, and this cost is included as part of the acquisition cost of the inventory. When the buyer is responsible for shipping costs, it is referred to as FOB shipping point. When the seller is responsible for shipping costs, it is referred to as FOB destination. Topic: Expense Recognition (Matching) Principle LO: 3 10. Under the matching principle, the cost of inventory should be reported as an expense in the income statement when it is purchased, even if it is purchased on credit and will not be paid until the next reporting period. Answer: False Rationale: Under the matching principle, the cost of inventory should only be reported as expense in the period in which it is used up, typically at the point of sale. Purchased inventories that have not yet been sold are reported as assets. Unpaid amounts to suppliers are reported as liabilities.
©Cambridge Business Publishers, 2020 5-4
Financial Accounting for Undergraduates, 4th Edition
Multiple Choice Topic: Accounting for Sales and Purchases of Merchandise LO: 1, 2, 3 Level of Difficulty: DIFFICULT 1. Which of the following is not true for a retailer using perpetual inventory system? A) When merchandise is purchased FOB shipping point, the buyer assumes the risk of any damage in transit. B) After a physical inventory count, the retailer credits the Inventory account for any missing inventory. C) When the retailer returns defective merchandise to the manufacturer, they credit Purchase Returns. D) The Cost of Goods Sold account is closed at the end of the year with a debit to Income Summary. Answer: C Rationale: When the buyer is responsible for shipping costs, it is referred to as FOB shipping point. Since inventory is being continuously updated using the perpetual inventory system, management can compare these amounts to a physical count of the inventory and credit the Inventory account for any missing inventory. The Cost of Goods Sold, an expense account, is a temporary account which is closed at the end of the year with a debit to Income Summary. Under the perpetual inventory system, the retailer would credit Inventory rather than Purchase Returns for the return of defective merchandise. Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 2. Dells Company uses the periodic inventory system. Sales for 2019 were $1,410,000 while operating expenses were $525,000. Beginning and ending inventories for 2019 were $210,000 and $180,000, respectively. Net purchases were $540,000 while freight in was $45,000. The net income or loss for 2019 was: A) $270,000 net income B) $ 90,000 net income C) $ 30,000 net income D) $ 90,000 net loss Answer: A Rationale: Cost of Goods Sold = Beginning Inventory + Purchases + Freight – Ending Inventory X = $210,000 + $540,000 + $45,000 – $180,000 X = $615,000 = Cost of Goods Sold Sales – Cost of Goods Sold – Operating Expenses = Net Income $1,410,000 – $615,000 – $525,000 = X X = $270,000 = Net Income
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-5
Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 3. Illinois Company uses the periodic inventory system. Sales for 2019 were $1,880,000 while operating expenses were $700,000. Beginning and ending inventories for 2019 were $280,000 and $240,000, respectively. Net purchases were $720,000 while freight in was $60,000. The net income or loss for 2019 was: A) $360,000 net income B) $120,000 net income C) $ 40,000 net income D) $120,000 net loss Answer: A Rationale: Cost of Goods Sold = Beginning Inventory + Purchases + Freight – Ending Inventory X = $280,000 + $720,000 + $60,000 – $240,000 X = $820,000 = Cost of Goods Sold Sales – Cost of Goods Sold – Operating Expenses = Net Income $1,880,000 – $820,000 - $700,000 = X X = $360,000 = Net Income Topic: Cost of Goods Sold LO: 2, 3 Level of Difficulty: EASY 4. On which financial statements would you look to find the total costs of merchandise that remains and the total that has been sold? A) Balance sheet and statement of cash flows B) Balance sheet and income statement C) Statement of cash flows and balance sheet D) Statement of stockholders’ equity and balance sheet Answer: B Rationale: When inventories are used up in production or are sold, their costs are transferred from the balance sheet (inventory account) to the income statement as cost of goods sold. Topic: Cost of Goods Sold LO: 2, 3 Level of Difficulty: MEDIUM 5. Charleston Company purchases $180,000 of inventory during the period and sells $54,000 of it for $90,000. Beginning of the period inventory was $9,000. What is the company’s inventory balance to be reported on its balance sheet at year end? A) $ 54,000 B) $ 64,000 C) $135,000 D) $ 9,000 Answer: C Rationale: Ending Inventory = Beginning Inventory + Purchases – Cost of Goods Sold X = $9,000 + $180,000 – $54,000 X = $135,000
©Cambridge Business Publishers, 2020 5-6
Financial Accounting for Undergraduates, 4th Edition
Topic: Cost of Goods Sold LO: 2, 3 Level of Difficulty: MEDIUM 6. Oaks Company purchases $240,000 of inventory during the period and sells $72,000 of it for $120,000. Beginning of the period inventory was $12,000. What is the company’s inventory balance to be reported on its balance sheet at year end? A) $ 72,000 B) $ 8,000 C) $180,000 D) $ 12,000 Answer: C Rationale: Ending Inventory = Beginning Inventory + Purchases – Cost of Goods Sold X = $12,000 + $240,000 – $72,000 X = $180,000 Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 7. On August 1, Nevling Brothers bought goods with a list price of $14,400, terms 2/10, n/30. The firm records purchases at invoice price, using the periodic inventory system. On August 5, Nevling Brothers returned goods with a list price of $1,800 for credit. If Nevling Brothers paid the supplier the amount due on August 9, the appropriate entry would be: A) Accounts Payable 14,400 Purchases Discounts 288 Cash 14,112 B) Accounts Payable 12,348 Cash 12,348 C) Accounts Payable 12,600 Purchases Discounts 252 Cash 12,348 D) Accounts Payable 12,600 Cash 12,600 Answer: C Rationale: Nevling Brothers records the following entries: August 1: Purchases $14,400 Accounts payable $14,400 To record purchase of goods on credit. August 5:
August 9:
Accounts payable $1,800 Purchase returns To record purchase returns.
$1,800
Accounts payable $12,600 Purchase discounts $ 252 Cash $12,348 To record purchase discount and payment.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-7
Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 8. On August 1, Baker Brothers bought goods with a list price of $19,200, terms 2/10, n/30. The firm records purchases at invoice price, using the periodic inventory system. On August 5, Baker Brothers returned goods with a list price of $2,400 for credit. If Baker Brothers paid the supplier the amount due on August 9, the appropriate entry would be: A) Accounts Payable 19,200 Purchases Discounts 384 Cash 18,816 B) Accounts Payable 18,464 Cash 18,464 C) Accounts Payable 16,800 Purchases Discounts 336 Cash 16,464 D) Accounts Payable 16,800 Cash 16,800 Answer: C Rationale: Baker Brothers records the following entries: August 1: Purchases $19,200 Accounts payable To record purchase of goods on credit August 5:
August 9:
Accounts payable Purchase returns To record purchase returns
$19,200
$2,400
Accounts payable $16,800 Purchase discounts Cash To record purchase discount and payment
$2,400
$ 336 $16,464
Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 9. Lite Company records purchases at invoice price, using the periodic inventory system. On July 5, Lite returned $18,000 of goods purchased on account to the seller. How would Lite record this transfer? A) Accounts Payable 18,000 Purchases Returns and Allowances B) Accounts Receivable 18,000 Purchases Returns and Allowances C) Accounts Payable 18,000 Purchases D) Cash 18,000 Purchases Returns and Allowances
18,000 18,000 18,000 18,000
Answer: A
©Cambridge Business Publishers, 2020 5-8
Financial Accounting for Undergraduates, 4th Edition
Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 10. Lavinia Company records purchases at invoice price, using the periodic inventory system. On July 5, Lavinia returned $24,000 of goods purchased on account to the seller. How would Lavinia record this transfer? A) Accounts Payable 24,000 Purchases Returns and Allowances B) Accounts Receivable 24,000 Purchases Returns and Allowances C) Accounts Payable 24,000 Purchases D) Cash 24,000 Purchases Returns and Allowances
24,000 24,000 24,000 24,000
Answer: A Topic: Inventory Purchases LO: 2 Level of Difficulty: MEDIUM 11. On August 1, Burkett Company bought goods with a list price of $7,200, terms 2/10, n/30. The firm records purchases at invoice price using the perpetual inventory system. On August 5, Burkett returned goods with a list price of $900 for credit. If Burkett paid the supplier the amount due on August 9, the appropriate entry would be: A) Accounts Payable 7,200 Inventory 144 Cash 7,056 B) Accounts Payable 6,174 Cash 6,174 C) Accounts Payable 6,300 Inventory 126 Cash 6,174 D) Accounts Payable 6,300 Cash 6,300 Answer: C Rationale: Burkett records the following entries: August 1:
August 5:
August 9:
Inventory $7,200 Accounts payable To record purchase of goods on credit
$7,200
Accounts payable Inventory To record purchase returns
$ 900
$ 900
Accounts payable $6,300 Inventory Cash To record purchase discount and payment
$ 126 $6,174
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-9
Topic: Inventory Purchases LO: 2 Level of Difficulty: MEDIUM 12. On August 1, Trina Company bought goods with a list price of $9,600, terms 2/10, n/30. The firm records purchases at invoice price using the perpetual inventory system. On August 5, Trina returned goods with a list price of $1,200 for credit. If Trina paid the supplier the amount due on August 9, the appropriate entry would be: A) Accounts Payable 9,600 Inventory 192 Cash 9,408 B) Accounts Payable 8,232 Cash 8,232 C) Accounts Payable 8,400 Inventory 168 Cash 8,232 D) Accounts Payable 8,400 Cash 8,400 Answer: C Rationale: Trina records the following entries: : August 1: Inventory $9,600 Accounts payable To record purchase of goods on credit August 5:
August 9:
Accounts payable Inventory To record purchase returns
$9,600
$1,200 $1,200
Accounts payable $8,400 Inventory Cash To record purchase discount and payment
$ 168 $8,232
Topic: Inventory Purchases LO: 2 Level of Difficulty: MEDIUM 13. Josiah records purchases at invoice price and uses the perpetual inventory system. On July 5, Josiah returned $9,000 of goods purchased on account to the seller. How would Joshua record this transaction? A) Accounts Payable Inventory B) Accounts Receivable Inventory C) Accounts Payable Purchases D) Cash Purchases
9,000 9,000 9,000 9,000 9,000 9,000 9,000 9,000
Answer: A
©Cambridge Business Publishers, 2020 5-10
Financial Accounting for Undergraduates, 4th Edition
Topic: Inventory Purchases LO: 2 Level of Difficulty: MEDIUM 14. Bacerra records purchases at invoice price and uses the perpetual inventory system. On July 5, Bacerra returned $12,000 of goods purchased on account to the seller. How would Bacerra record this transaction? A) Accounts Payable Inventory B) Accounts Receivable Inventory C) Accounts Payable Purchases D) Cash Purchases
12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000
Answer: A Topic: Sales of Merchandise LO: 3 Level of Difficulty: MEDIUM 15. For a firm that uses the perpetual inventory system, the Sales Returns and Allowances account: A) Is not a contra account B) Has a normal credit balance C) Is not used D) Is debited by the firm receiving returned goods from a customer Answer: D Rationale: When a firm receives returned goods from a customer, the following entry is made: Sales returns and allowances Accounts receivable
XXX
Inventory Cost of goods sold To record the return of sales merchandise
XXX
XXX XXX
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: EASY 16. Using a perpetual inventory system, the buyer’s journal entry to record the return of merchandise purchased on account includes a: A) Credit to Purchase Returns B) Credit to Inventory C) Credit to Accounts Payable D) Credit to Cost of Goods Sold Answer: B Rationale: Under a perpetual inventory system, when a buyer returns merchandise to the seller, the following entry is made by the buyer: Accounts payable Inventory
XXX XXX ©Cambridge Business Publishers, 2020
Test Bank, Chapter 5
5-11
Topic: Accounting for Purchases of Merchandise – Periodic LO: 5 Level of Difficulty: EASY 17. Using a periodic inventory system, the buyer’s journal entry to record the return of merchandise purchased on account includes a: A) Credit to Purchase Returns B) Debit to Inventory C) Credit to Accounts Payable D) Debit to Cost of Goods Sold Answer: A Rationale: Under a periodic inventory system, when a buyer returns merchandise to the seller, the following entry is made by the buyer: Accounts payable Purchase returns
XXX XXX
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: EASY 18. Using a perpetual inventory system, the buyer’s journal entry to record the freight costs includes a: A) Debit to Purchases B) Debit to Inventory C) Debit to Freight In D) Debit to Cost of Goods Sold Answer: B Rationale: Under a perpetual inventory system, when a buyer incurs freight costs on merchandise, the following entry is made by the buyer: Inventory Cash
XXX XXX
Topic: Accounting for Purchases of Merchandise – Periodic LO: 5 Level of Difficulty: EASY 19. Using a periodic inventory system, the buyer’s journal entry to record the freight costs includes a: A) Debit to Purchases B) Debit to Inventory C) Debit to Freight In D) Debit to Cost of Goods Sold Answer: C Rationale: Under a periodic inventory system, when a buyer incurs freight costs on merchandise, the following entry is made by the buyer: Freight in XXX Cash XXX
©Cambridge Business Publishers, 2020 5-12
Financial Accounting for Undergraduates, 4th Edition
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: EASY 20. Using a perpetual inventory system, the buyer’s journal entry to record the payment for merchandise within the discount period includes a: A) Debit to Purchases B) Debit to Inventory C) Debit to Accounts Payable D) Debit to Cost of Goods Sold Answer: C Rationale: Under a perpetual inventory system, when a buyer pays for merchandise within the discount period, the following entry is made by the buyer: Accounts payable Inventory Cash
XXX XXX XXX
Topic: Accounting for Purchases of Merchandise – Periodic LO: 5 Level of Difficulty: EASY 21. Using a periodic inventory system, the buyer’s journal entry to record the payment for merchandise within the discount period includes a: A) Credit to Purchase Discounts B) Debit to Inventory C) Credit to Accounts Payable D) Debit to Cost of Goods Sold Answer: A Rationale: Under a periodic inventory system, when a buyer pays for merchandise within the discount period, the following entry is made by the buyer: Accounts payable Purchase discounts Cash
XXX XXX XXX
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: EASY 22. Using a perpetual inventory system, the seller’s journal entry to record the return, by the buyer, of merchandise purchased on account includes a: A) Credit to Purchases Returns B) Debit to Sales Returns and Allowances C) Debit to Accounts Receivable D) Debit to Cost of Goods Sold Answer: B Rationale: Under a perpetual inventory system, when a buyer returns merchandise to the seller, the following entry is made by the seller: Sales returns and allowances Accounts receivable
XXX
Inventory Cost of goods sold
XXX
XXX XXX ©Cambridge Business Publishers, 2020
Test Bank, Chapter 5
5-13
Topic: Accounting for Purchases of Merchandise – Periodic LO: 5 Level of Difficulty: EASY 23. Using a periodic inventory system, the seller’s journal entry to record the return, by the buyer, of merchandise purchased on account includes a: A) Credit to Purchases Returns B) Debit to Sales Returns and Allowances C) Debit to Accounts Receivable D) Credit to Cost of Goods Sold Answer: B Rationale: Under a periodic inventory system, when a buyer returns merchandise to the seller, the following entry is made by the seller: Sales returns and allowances Accounts receivable
XXX XXX
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: EASY 24. Using a perpetual inventory system, the seller’s journal entry to record the payment for merchandise, received from the buyer, within the discount period includes a: A) Debit to Sales Discounts B) Credit to Sales Discounts C) Debit to Accounts Receivable D) Debit to Cost of Goods Sold Answer: A Rationale: Under a perpetual inventory system, when a seller receives payment for merchandise within the discount period, the following entry is made by the seller: Cash Sales discounts Accounts receivable
XXX XXX XXX
Topic: Accounting for Purchases of Merchandise – Periodic LO: 5 Level of Difficulty: EASY 25. Using a periodic inventory system, the sellers journal entry to record the payment for merchandise, received from the buyer, within the discount period includes a: A) Debit to Sales Discounts B) Credit to Sales Discounts C) Debit to Accounts Receivable D) Debit to Cost of Goods Sold Answer: A Rationale: Under a periodic inventory system, when a seller receives payment for merchandise within the discount period, the following entry is made by the seller: Cash Sales discounts Accounts receivable
XXX XXX XXX
©Cambridge Business Publishers, 2020 5-14
Financial Accounting for Undergraduates, 4th Edition
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: EASY 26. Using a perpetual inventory system, the buyer’s journal entry to record the purchase of merchandise on credit includes a: A) Debit to Purchases B) Debit to Inventory C) Debit to Freight In D) Debit to Cost of Goods Sold Answer: B Rationale: Under a perpetual inventory system, when a buyer purchases merchandise on credit, the following entry is made by the buyer: Inventory Accounts payable
XXX XXX
Topic: Accounting for Purchases of Merchandise – Periodic LO: 5 Level of Difficulty: EASY 27. Using a periodic inventory system, the buyer’s journal entry to record the purchase of merchandise on credit includes a: A) Debit to Purchases B) Debit to Inventory C) Debit to Freight In D) Debit to Cost of Goods Sold Answer: A Rationale: Under a periodic inventory system, when a buyer purchases merchandise on credit, the following entry is made by the buyer: Purchases Accounts payable
XXX XXX
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: EASY 28. Using a perpetual inventory system, the seller’s journal entry to record the sale of merchandise on account includes a: A) Credit to Purchases B) Debit to Inventory C) Debit to Accounts Receivable D) Credit to Cost of Goods Sold Answer: C Rationale: Under a perpetual inventory system, when merchandise is sold on account, the following entry is made by the seller: Accounts receivable Sales revenue
XXX
Cost of goods sold Inventory
XXX
XXX XXX
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-15
Topic: Accounting for Purchases of Merchandise – Periodic LO: 5 Level of Difficulty: EASY 29. Using a periodic inventory system, the seller’s journal entry to record the sale of merchandise on account includes a: A) Credit to Purchases B) Debit to Inventory C) Credit to Accounts Receivable D) Credit to Sales Revenue Answer: D Rationale: Under a periodic inventory system, when merchandise is sold on account, the following entry is made by the seller: Accounts receivable Sales revenue
XXX XXX
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: DIFFICULT 30. San Jose Corporation uses the perpetual inventory method. On March 1, it purchased $90,000 of merchandise inventory, terms 2/10, n/30. On March 3, San Jose returned goods (not damaged) that cost $9,000. On March 9, San Jose paid the supplier. On March 9, San Jose should credit: A) Purchase discounts for $1,800 B) Inventory for $1,800 C) Purchase discounts for $1,620 D) Inventory for $1,620 Answer: D Rationale: San Jose records the following entries: March 1:
March 3:
March 9:
Inventory Accounts payable To record purchase of goods on credit
$90,000
Accounts payable Inventory To record purchase returns
$ 9,000
$90,000
$ 9,000
Accounts payable $81,000 Inventory Cash To record purchase discount and payment
$ 1,620 $79,380
©Cambridge Business Publishers, 2020 5-16
Financial Accounting for Undergraduates, 4th Edition
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: DIFFICULT 31. Flagstaff Corporation uses the perpetual inventory method. On March 1, it purchased $120,000 of merchandise inventory, terms 2/10, n/30. On March 3, Flagstaff returned goods (not damaged) that cost $12,000. On March 9, Flagstaff paid the supplier. On March 9, Flagstaff should credit: A) Purchase discounts for $2,400 B) Inventory for $2,400 C) Purchase discounts for $2,160 D) Inventory for $2,160 Answer: D Rationale: Flagstaff records the following entries: March 1:
March 3:
March 9:
Inventory $120,000 Accounts payable To record purchase of goods on credit
$120,000
Accounts payable Inventory To record purchase returns
$ 12,000
$ 12,000
Accounts payable $108,000 Inventory Cash To record purchase discount and payment
$ 2,160 $105,840
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: DIFFICULT 32. Bosworth Company purchased $12,000 worth of merchandise, FOB shipping point. Transportation costs were an additional $1,050. The company later returned $2,250 worth of merchandise and paid the invoice within the 2% cash discount period. The total amount paid for this merchandise is: A) $10,605 B) $10,560 C) $12,789 D) $10,584 Answer: A Rationale: Purchase: Freight: Returns: Discount: Total:
$12,000 1,050 (2,250) (195) $10,605
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-17
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: DIFFICULT 33. Lizard Company purchased $16,000 worth of merchandise, FOB shipping point. Transportation costs were an additional $1,400. The company later returned $3,000 worth of merchandise and paid the invoice within the 2% cash discount period. The total amount paid for this merchandise is: A) $14,140 B) $14,080 C) $17,052 D) $14,112 Answer: A Rationale: Purchase: Freight: Returns: Discount: Total:
$16,000 1,400 (3,000) (260) $14,140
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: DIFFICULT 34. Vienna Stores recorded the following events involving a recent purchase of merchandise: • • • •
Received goods for $60,000, terms 2/10, n/30. Returned $1,200 of the shipment for credit. Paid $300 freight on the shipment. Paid the invoice within the discount period.
As a combined result of these events, the company’s inventory: A) Increased by $57,624 B) Increased by $57,900 C) Increased by $57,918 D) Increased by $57,924 Answer: D Rationale: Purchase: Returns: Freight: Discount: Total:
$60,000 (1,200) 300 (1,176) $57,924
©Cambridge Business Publishers, 2020 5-18
Financial Accounting for Undergraduates, 4th Edition
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: DIFFICULT 35. Clarksburg Stores recorded the following events involving a recent purchase of merchandise: • • • •
Received goods for $80,000, terms 2/10, n/30. Returned $1,600 of the shipment for credit. Paid $400 freight on the shipment. Paid the invoice within the discount period.
As a combined result of these events, the company’s inventory: A) Increased by $76,832 B) Increased by $77,200 C) Increased by $77,224 D) Increased by $77,232 Answer: D Rationale: Purchase: Returns: Freight: Discount: Total:
$80,000 (1,600) 400 (1,568) $77,232
Topic: Accounting for Purchases of Merchandise LO: 2 Level of Difficulty: MEDIUM 36. Gulliver’s Groceries purchased milk cartons at an invoice price of $9,000 and terms of 2/10, n/30. On arrival of the goods, Gulliver’s realized that half of the milk was past the expiration date, and returned them immediately to the supplier. If Gulliver’s pays the remaining amount of the invoice within the discount period, the amount paid should be: A) $4,320 B) $8,820 C) $9,000 D) $4,410 Answer: D Rationale: $9,000 (purchases) – $4,500 (returns) = $4,500 balance x 0.98 = $4,410
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-19
Topic: Accounting for Purchases of Merchandise LO: 2 Level of Difficulty: MEDIUM 37. Javier’s Groceries purchased milk cartons at an invoice price of $12,000 and terms of 2/10, n/30. On arrival of the goods, Javier’s realized that half of the milk was past the expiration date, and returned them immediately to the supplier. If Javier’s pays the remaining amount of the invoice within the discount period, the amount paid should be: A) $ 5,760 B) $11,760 C) $12,000 D) $ 5,880 Answer: D Rationale: $12,000 (purchases) – $6,000 (returns) = $6,000 balance x 0.98 = $5,880 Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: MEDIUM 38. Julissa Company sold merchandise in the amount of $17,400 to Nunez Company on September 1, with credit terms of 2/10, n/30. The cost of the merchandise is $7,200. On September 4, Nunez returns some of the merchandise, which was put back into Julissa’s inventory. The selling price and the cost of the returned merchandise are $2,400 and $1,500, respectively. Nunez Company’s journal entry on September 8, when they pay the amount due, will include: (assume both companies use the perpetual inventory method) A) Credit Purchase Discounts $300 B) Credit Cash $15,582 C) Debit Accounts Payable $15,000 D) Credit Sales Discounts $300 Answer: C Rationale: Nunez Company records the following entries: Sept. 1: Merchandise $17,400 Accounts Payable To record purchase of goods on credit Sept. 4:
Sept. 8:
Accounts payable Merchandise To record purchase returns
$17,400
$ 2,400
Accounts payable $15,000 Merchandise Cash To record purchase discount and payment
$ 2,400
$ 300 $14,700
©Cambridge Business Publishers, 2020 5-20
Financial Accounting for Undergraduates, 4th Edition
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: MEDIUM 39. Schulze Company sold merchandise in the amount of $23,200 to Edwardo Company on September 1, with credit terms of 2/10, n/30. The cost of the merchandise is $9,600. On September 4, Edwardo returns some of the merchandise, which was put back into Schulze’s inventory. The selling price and the cost of the returned merchandise are $3,200 and $2,000, respectively. Edwardo Company’s journal entry on September 8, when they pay the amount due, will include: (assume both companies use the perpetual inventory method) A) Credit Purchase Discounts $400 B) Credit Cash $20,776 C) Debit Accounts Payable $20,000 D) Credit Sales Discounts $400 Answer: C Rationale: Edwardo Company records the following entries: Sept. 1:
Sept. 4:
Sept. 8:
Merchandise Accounts Payable To record purchase of goods on credit
$23,200
Accounts payable Merchandise To record purchase returns
$ 3,200
$23,200
Accounts payable $20,000 Merchandise Cash To record purchase discount and payment
$ 3,200
$ 400 $19,600
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: DIFFICULT 40. On June 15, a food wholesaler sold 100 cases of canned soup to Juniper Foods for $90 per case with terms of 2/10, n/30. On June 17, Juniper returned 20 cases of damaged inventory (and received full credit), along with a check for the amount due for the purchase. Given this information, the journal entry by Juniper Foods on June 17 will: A) Debit Accounts Receivable for $9,000 B) Credit Cash for $8,820 C) Debit Cash for $7,056 D) Credit Inventory for $1,944
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-21
Answer: D Rationale: Juniper Foods records the following entries: June 15:
June 17:
June 17:
Inventory Accounts Payable To record purchase of goods on credit
$9,000
Accounts payable Inventory To record purchase returns
$1,800
$9,000
$1,800
Accounts payable $7,200 Inventory Cash To record purchase discount and payment
$ 144 $7,056
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: DIFFICULT 41. On June 15, a food wholesaler sold 100 cases of canned soup to Flavorful Foods for $120 per case with terms of 2/10, n/30. On June 17, Flavorful returned 20 cases of damaged inventory (and received full credit), along with a check for the amount due for the purchase. Given this information, the journal entry by Flavorful Foods on June 17 will: A) Debit Accounts Receivable for $12,000 B) Credit Cash for $11,760 C) Debit Cash for $9,408 D) Credit Inventory for $2,592 Answer: D Rationale: Flavorful7 Foods records the following entries: June 15: Inventory $12,000 Accounts Payable To record purchase of goods on credit June 17:
June 17:
Accounts payable Inventory To record purchase returns
$12,000
$ 2,400 $ 2,400
Accounts payable $ 9,600 Inventory Cash To record purchase discount and payment
$ 192 $ 9,408
©Cambridge Business Publishers, 2020 5-22
Financial Accounting for Undergraduates, 4th Edition
Topic: Accounting for Sales of Merchandise – Perpetual LO: 3 Level of Difficulty: MEDIUM 42. When merchandise that was sold on account is returned, using the perpetual inventory system which accounts are affected in the books of the seller? A) Cash, accounts receivable, cost of goods sold, and sales returns B) Sales returns, accounts receivable, purchases, and cost of goods sold C) Sales returns, accounts receivable, inventory, and cost of goods sold D) Sales returns, accounts receivable, purchases, and inventory Answer: C Rationale: Under a perpetual inventory system, when a buyer returns merchandise to the seller, the following entry is made by the seller: Sales returns and allowances Accounts receivable
XXX
Inventory
XXX
XXX
Cost of goods sold
XXX
Topic: Accounting for Sales of Merchandise – Perpetual LO: 3 Level of Difficulty: MEDIUM 43. A manufacturing company sells goods to a merchandising company, which in turn, sells the goods to a retail customer. The Sales Discounts account is debited by the merchandising company when: A) Defective merchandise is returned by the merchandiser to the manufacturer. B) Defective merchandise is returned by the retail customer to the merchandiser. C) Payment is made to the manufacturer within the discount period. D) The retail customer pays the merchandising company within the discount period. Answer: D Rationale: Under a perpetual inventory system, when a seller (merchandising company) receives payment for merchandise within the discount period, the following entry is made by the seller (merchandising company): Cash Sales discounts Account receivable
XXX XXX XXX
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-23
Topic: Accounting for Sales of Merchandise – Perpetual LO: 3 Level of Difficulty: MEDIUM 44. Using a perpetual inventory system, the seller’s journal entry to record the return of non-defective goods from a customer of merchandise sold on account includes a: A) Credit to Sales Returns and Allowances B) Debit to Cost of Goods Sold C) Credit to Inventory D) Debit to Inventory Answer: D Rationale: Under a perpetual inventory system, when a buyer returns merchandise to the seller, the following entry is made by the seller: Sales returns and allowances Accounts receivable
XXX
Inventory
XXX
XXX
Cost of goods sold
XXX
Topic: Accounting for Sales of Merchandise – Perpetual LO: 3 Level of Difficulty: MEDIUM 45. Linus Van Pelt Company sold merchandise in the amount of $17,400 to Sally Brown Company on February 1, with credit terms of 2/10, n/30. The cost of the items sold is $7,200. On February 4, Sally Brown Company returns some of the merchandise, which was restored into Linus Van Pelt’s inventory. The selling price and the cost of the returned merchandise are $2,400 and $1,500, respectively. The entries that Linus Van Pelt Company must make on February 4 will not include: (assume both companies use the perpetual inventory method) A) Credit to Cost of Goods Sold for $2,400 B) Debit to Inventory for $1,500 C) Debit to Sales Returns and Allowances for $2,400 D) Credit to Accounts Receivable for $2,400 Answer: A Rationale: Linus Van Pelt Company records the following entries: Feb. 1:
Feb. 4:
Accounts receivable Sales revenue
$17,400
Cost of goods sold Inventory To record sale of merchandise on credit
$7,200
$17,400 $7,200
Sales returns and allowances Accounts receivable
$ 2,400
Inventory Cost of goods sold To record purchase returns
$ 1,500
$ 2,400 $ 1,500
©Cambridge Business Publishers, 2020 5-24
Financial Accounting for Undergraduates, 4th Edition
Topic: Accounting for Sales of Merchandise – Perpetual LO: 3 Level of Difficulty: MEDIUM 46. Tweetie Company sold merchandise in the amount of $23,200 to Sylvester Cat Company on February 1, with credit terms of 2/10, n/30. The cost of the items sold is $9,600. On February 4, Sylvester Cat Company returns some of the merchandise, which was restored into Tweetie’s inventory. The selling price and the cost of the returned merchandise are $3,200 and $2,000, respectively. The entries that Tweetie Company must make on February 4 will not include: (assume both companies use the perpetual inventory method) A) Credit to Cost of Goods Sold for $3,200 B) Debit to Inventory for $2,000 C) Debit to Sales Returns and Allowances for $3,200 D) Credit to Accounts Receivable for $3,200 Answer: A Rationale: Tweetie Company records the following entries: Feb. 1:
Feb. 4:
Accounts receivable Sales revenue
$23,200
Cost of goods sold Inventory To record sale of merchandise on credit
$9,600
$23,200 $9,600
Sales returns and allowances Accounts receivable
$ 3,200
Inventory Cost of goods sold To record purchase returns
$ 2,000
$ 3,200 $ 2,000
Topic: Accounting for Sales of Merchandise – Perpetual LO: 3 Level of Difficulty: MEDIUM 47. Trefoil Company sold merchandise on account for $4,500 to GS Cookie Company with credit terms of 2/10, n/30. Five days later, GS Cookie Company returned $1,500 of merchandise that was damaged, along with a check to settle the account. What entry does Trefoil Company make upon receipt of the check? A) Cash 3,000 Accounts Receivable 3,000 B) Cash 2,940 Sales Returns and Allowances 1,560 Accounts Receivable 4,500 C) Cash 2,940 Sales Returns and Allowances 1,500 Sales Discounts 60 Accounts Receivable 4,500 D) Cash 4,410 Sales Discounts 90 Accounts Receivable 4,500
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-25
Answer: C Rationale: To record return and payment: Sales returns and allowances Accounts receivable To record purchase returns
$1,500
Cash Sales discounts Accounts receivable To record sales discount and payment
$2,940 $ 60
$1,500
$3,000
Topic: Accounting for Sales of Merchandise – Perpetual LO: 3 Level of Difficulty: MEDIUM 48. Samores Company sold merchandise on account for $6,000 to DoSiDo Company with credit terms of 2/10, n/30. Five days later, DoSiDo Company returned $2,000 of merchandise that was damaged, along with a check to settle the account. What entry does Samores Company make upon receipt of the check? A) Cash 4,000 Accounts Receivable 4,000 B) Cash 3,920 Sales Returns and Allowances 2,080 Accounts Receivable 6,000 C) Cash 3,920 Sales Returns and Allowances 2,000 Sales Discounts 80 Accounts Receivable 6,000 D) Cash 5,880 Sales Discounts 120 Accounts Receivable 6,000 Answer: C Rationale: To record return and payment: Sales returns and allowances Accounts receivable To record purchase returns
$2,000
Cash Sales discounts Accounts receivable To record sales discount and payment
$3,920 $ 80
$2,000
$4,000
©Cambridge Business Publishers, 2020 5-26
Financial Accounting for Undergraduates, 4th Edition
Topic: Accounting for Sales of Merchandise – Perpetual LO: 3 Level of Difficulty: MEDIUM 49. On January 5, Anka Brahtz Company purchased 11 all-terrain vehicles at a cost of $5,400 each. On February 12, they sold 8 vehicles for $6,900 per unit. If EGN uses a perpetual inventory system, the journal entry to record the sale on February 12th would include all of the following except: A) A credit to Purchases for $43,200 B) A debit to the Cost of Goods Sold for $43,200 C) A credit to Sales Revenue for $55,200 D) A credit to Inventory for $43,200 Answer: A Rationale: Feb. 12: Accounts receivable Sales revenue
$55,200 $55,200
Cost of goods sold $43,200 Inventory To record sale of merchandise on credit
$43,200
Topic: Accounting for Sales of Merchandise – Perpetual LO: 3 Level of Difficulty: MEDIUM 50. On January 5, EMG Company purchased 11 all-terrain vehicles at a cost of $7,200 each. On February 12, they sold 8 vehicles for $9,200 per unit. If EMG uses a perpetual inventory system, the journal entry to record the sale on February 12th would include all of the following except: A) A credit to Purchases for $57,600 B) A debit to the Cost of Goods Sold for $57,600 C) A credit to Sales Revenue for $73,600 D) A credit to Inventory for $57,600 Answer: A Rationale: Feb. 12: Accounts receivable Sales revenue
$73,600
Cost of goods sold $57,600 Inventory To record sale of merchandise on credit
$73,600 $57,600
Topic: Accounting for Sales of Merchandise LO: 3 Level of Difficulty: MEDIUM 51. Woofer Company sold $1,800,000 worth of merchandise, had $150,000 returned, and then the balance was received during the 2% discount period. What were the company’s net sales? A) $1,617,000 B) $1,350,000 C) $1,530,000 D) $1,320,000 Answer: A Rationale: Net Sales = Gross sales revenue – Sales returns and allowances – Sales discounts* X = $1,800,000 – $150,000 – $33,000* X = $1,617,000 *Sales discounts = ($1,800,000 – $150,000) x 0.02 = $33,000 ©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-27
Topic: Accounting for Sales of Merchandise LO: 3 Level of Difficulty: MEDIUM 52. Ribbitt Frog Company sold $2,400,000 worth of merchandise, had $200,000 returned, and then the balance was received during the 2% discount period. What were the company’s net sales? A) $2,156,000 B) $1,800,000 C) $2,040,000 D) $1,760,000 Answer: A Rationale: Net Sales = Gross sales revenue – Sales returns and allowances – Sales discounts* X = $2,400,000 – $200,000 – $44,000* X = $2,156,000 *Sales discounts = ($2,400,000 – $200,000) x 0.02 = $44,000
Topic: Accounting for Sales and Purchases of Merchandise LO: 2, 3 Level of Difficulty: DIFFICULT 53. On June 1, Powell Book Company sold CNN’s Bookstore $12,900 of books for cash. During the month, CNN’s Bookstore returned books costing $1,500 to Powell for a cash refund. In the same month, CNN’s sold the remaining books to their customers for a total of $15,300. As a result of these transactions, at the end of the month, CNN’s accounting equation will show a net: A) Increase of Equity of $3,900 B) Increase of Assets of $15,300 C) Decrease of Assets of $11,400 D) Increase of Equity of $5,400 Answer: A Rationale: CNN’s Bookstore records the following entries: June 1: June 15: June 15:
Inventory Cash Cash Inventory Cash Sales revenue Cost of goods sold Inventory Total Impact
Assets +12,900 -12,900 +1,500 - 1,500 +15,300
Equity
+15,300 -11,400 -11,400 +3,900
+3,900
©Cambridge Business Publishers, 2020 5-28
Financial Accounting for Undergraduates, 4th Edition
Topic: Accounting for Sales and Purchases of Merchandise LO: 2, 3 Level of Difficulty: DIFFICULT 54. On June 1, Puzzling Puzzles Company sold Cari’s Bookstore $17,200 of puzzles for cash. During the month, Cari’s Bookstore returned puzzles costing $2,000 to Puzzling Puzzles for a cash refund. In the same month, Cari’s sold the remaining puzzles to their customers for a total of $20,400. As a result of these transactions, at the end of the month, Cari’s accounting equation will show a net: A) Increase of Equity of $5,200 B) Increase of Assets of $20,400 C) Decrease of Assets of $15,200 D) Increase of Equity of $7,200 Answer: A Rationale: Cari’s Bookstore records the following entries: June 1: June 15: June 15:
Inventory Cash Cash Inventory Cash Sales revenue Cost of goods sold Inventory Total Impact
Assets +17,200 -17,200 +2,000 - 2,000 +20,400 -15,200 +5,200
Equity
+20,400 -15,200 -+5,200
Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 55. Better Gardens, Inc., which uses a periodic inventory system, shows the following on December 31, 2019. Purchase Discounts Freight-in Purchases Beginning Inventory Ending Inventory Purchase Returns
$
16,800 23,400 630,030 100,500 86,400 19,200
The cost of goods sold for the year 2019 is: A) $628,530 B) $596,730 C) $571,530 D) $631,530 Answer: D Rationale: Cost of goods sold = Beginning inventory + (Purchases – Purchase discounts + Freight-in – Purchase returns) – Ending inventory X = $100,500 + ($630,030 – $16,800 + $23,400 – $19,200) – $86,400 X = $631,530
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-29
Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 56. Building Supplies, Inc., which uses a periodic inventory system, shows the following on December 31, 2019. Purchase Discounts Freight-in Purchases Beginning Inventory Ending Inventory Purchase Returns
$
22,400 31,200 840,040 134,000 115,200 25,600
The cost of goods sold for the year 2019 is: A) $838,040 B) $795,640 C) $762,040 D) $842,040 Answer: D Rationale: Cost of goods sold = Beginning inventory + (Purchases – Purchase discounts + Freight-in – Purchase returns) – Ending inventory X = $134,000 + ($840,040 – $22,400 + $31,200 – $25,600) – $115,200 X = $842,040 Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 57. Fondant Company reported the following data for 2019: Cost of Beginning Inventory: Invoice Cost of merchandise purchases: Purchase Returns and Allowances: Purchase Discounts received: Cost of Transportation in: Cost of merchandise sold to customers in sales transactions:
$ 75,000 1,650,000 75,000 30,000 45,000 $990,000
Determine Fondant Company’s Balance of Ending Inventory. A) $1,500,000 B) $1,560,000 C) $ 675,000 D) $ 660,000 Answer: C Rationale: Cost of goods sold = Beginning inventory + (Purchases – Purchase discounts + Freight-in – Purchase returns) – Ending inventory $990,000 = $75,000 + ($1,650,000 – $30,000 + $45,000 – $75,000) - X X = $75,000 + ($1,650,000 – $30,000 + $45,000 – $75,000) – $990,000 X = $675,000 = Ending inventory
©Cambridge Business Publishers, 2020 5-30
Financial Accounting for Undergraduates, 4th Edition
Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 58. Honigkuchen Company reported the following data for 2019: Cost of Beginning Inventory: Invoice Cost of merchandise purchases: Purchase Returns and Allowances: Purchase Discounts received: Cost of Transportation in: Cost of merchandise sold to customers in sales transactions:
$ 100,000 2,200,000 100,000 40,000 60,000 $1,320,000
Determine Honigkuchen Company’s Balance of Ending Inventory. A) $2,000,000 B) $2,080,000 C) $ 900,000 D) $ 880,000 Answer: C Rationale: Cost of goods sold = Beginning inventory + (Purchases – Purchase discounts + Freight-in – Purchase returns) – Ending inventory $1,320,000 = $100,000 + ($2,200,000 – $40,000 + $60,000 – $100,000) – X X = $100,000 + ($2,200,000 – $40,000 + $60,000 – $100,000) – $1,320,000 X = $900,000 = Ending inventory Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 59. Sandpiper Company reported the following year-end amounts: Beginning Inventory Net Cost of Purchases Ending Inventory Cost of Goods Sold
$22,950 101,250 ? 93,150
What is Sandpiper Company’s Ending Inventory for the year? A) $22,950 B) $14,850 C) $31,050 D) $ 8,100 Answer: C Rationale: Cost of goods sold = Beginning inventory + Net cost of purchases – Ending inventory $93,150 = $22,950 + $101,250 – X X = $31,050
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-31
Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 60. Hawk Company reported the following year-end amounts: Beginning Inventory Net Cost of Purchases Ending Inventory Cost of Goods Sold
$30,600 135,000 ? 124,200
What is Hawk Company’s Ending Inventory for the year? A) $30,600 B) $19,800 C) $41,400 D) $10,800 Answer: C Rationale: Cost of goods sold = Beginning inventory + Net cost of purchases – Ending inventory $124,200 = $30,600 + $135,000 – X X = $41,400 Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 61. Emma-Eva Company reported the following balances: Invoice Cost of Purchases Purchase Returns and Allowances Purchase Discounts Received Transportation Cost (Freight-in)
$3,000,000 525,000 75,000 180,000
What is the company’s net cost of purchases? A) $2,220,000 B) $2,580,000 C) $3,780,000 D) $2,400,000 Answer: B Rationale: Invoice cost of purchases – Purchase discounts + Freight-in – Purchase returns and allowances = Net cost pf purchases $3,000,000 - $75,000 + $180,000 – $525,000 = X X = $2,580,000
©Cambridge Business Publishers, 2020 5-32
Financial Accounting for Undergraduates, 4th Edition
Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 62. Avery Street Company reported the following balances: Invoice Cost of Purchases Purchase Returns and Allowances Purchase Discounts Received Transportation Cost (Freight-in)
$4,000,000 700,000 100,000 240,000
What is the company’s net cost of purchases? A) $2,960,000 B) $3,440,000 C) $5,040,000 D) $3,200,000 Answer: B Rationale: Invoice cost of purchases – Purchase discounts + Freight-in – Purchase returns and allowances = Net cost of purchases $4,000,000 – $100,000 + $240,000 – $700,000 = X X = $3,440,000 Topic: Periodic Inventory System LO: 5 Level of Difficulty: DIFFICULT 63. Holmes Company reported the following year-end amounts: Net Sales Beginning Inventory Net Cost of Purchases Ending Inventory Cost of Goods Sold Gross Profit
$157,500 22,950 101,250 ? ? 64,350
What is Holmes Company’s Ending Inventory and Cost of Goods Sold for the year? A) Ending Inventory = $31,050; Cost of Goods Sold = $93,150 B) Ending Inventory = $26,700; Cost of Goods Sold = $60,600 C) Ending Inventory = $14,850; Cost of Goods Sold = $93,150 D) Ending Inventory = $26,250; Cost of Goods Sold = $60,600 Answer: A Rationale: Gross profit = Net sales – Cost of goods sold $64,350 = $157,500 – X X = $157,500 – $64,350 X = $93,150 = Cost of goods sold Cost of goods sold = Beginning inventory + Net cost of purchases – Ending inventory $93,150 = $22,950 + $101,250 – X X = $22,950 + $101,250 – $93,150 X = $31,050 = Ending inventory
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-33
Topic: Periodic Inventory System LO: 5 Level of Difficulty: DIFFICULT 64. Maercker Company reported the following year-end amounts: Net Sales Beginning Inventory Net Cost of Purchases Ending Inventory Cost of Goods Sold Gross Profit
$210,000 30,600 135,000 ? ? 85,800
What is Maercker Company’s Ending Inventory and Cost of Goods Sold for the year? A) Ending Inventory = $41,400; Cost of Goods Sold = $124,200 B) Ending Inventory = $35,600; Cost of Goods Sold = $ 80,800 C) Ending Inventory = $19,800; Cost of Goods Sold = $124,200 D) Ending Inventory = $35,000; Cost of Goods Sold = $ 80,800 Answer: A Rationale: Gross profit = Net sales – Cost of goods sold $85,800 = $210,000 – X X = $210,000 – $85,800 X = $124,200 = Cost of goods sold Cost of goods sold = Beginning inventory + Net cost of purchases – Ending inventory $124,200 = $30,600 + $135,000 – X X = $30,600 + $135,000 – $124,200 X = $41,400 = Ending inventory
Topic: Gross Profit Percentage LO: 4 Level of Difficulty: EASY 65. In 2019, Bright Target Company earned a gross profit of $16,248 million on net sales of $58,966. What is Bright Target’s gross profit percentage for 2019? A) 268.3% B) 58.4% C) 27.6% D) 181.5% Answer: C Rationale: Gross profit percentage = Gross profit on sales / net sales X = $16,248 / $58,966 X = 0.2755 = 27.6%
©Cambridge Business Publishers, 2020 5-34
Financial Accounting for Undergraduates, 4th Edition
Topic: Gross Profit Percentage LO: 4 Level of Difficulty: EASY 66. In 2019, Blue Company earned a gross profit of $25,998 million on net sales of $67,390 million. What is Blue’s gross profit percentage for 2019? A) 311.1% B) 67.9% C) 38.6% D) 211.1% Answer: C Rationale: Gross profit percentage = Gross profit on sales / net sales X = $25,998 / $67,390 X = 0.386 = 38.6% Topic: Gross Profit Percentage LO: 4 Level of Difficulty: MEDIUM 67. In 2019, Wayfield Co. incurred cost of goods sold of $37,323 million on net sales of $56,228 million. What is Wayfield’s gross profit percentage for 2019? A) 33.6% B) 115.3% C) 43.4% D) 31.4% Answer: A Rationale: Gross profit on sales = Net Sales – Cost of goods sold X = $56,228 - $37,323 X = $18,905 = Gross profit on sales Gross profit percentage = Gross profit on sales / Net sales X = $18,905 / $56,228 X = 0.336 = 33.6% Topic: Gross Profit Percentage LO: 4 Level of Difficulty: MEDIUM 68. In 2019, Shield Company incurred cost of goods sold of $59,716 million on net sales of $64,260 million. What is Shield’s gross profit percentage for 2019? A) 7.1% B) 77.4% C) 29.1% D) 21.1% Answer: A Rationale: Gross profit on sales = Net Sales – Cost of goods sold X = $64,260 – $59,716 X = $4,544 = Gross profit on sales Gross profit percentage = Gross profit on sales / Net sales X = $4,544 / $64,260 X = 0.071 = 7.1%
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-35
Topic: Gross Profit Percentage LO: 4 Level of Difficulty: DIFFICULT 69. In 2019, Move It Company incurred cost of goods sold of $36,162 million on gross sales revenue of $76,643 million. Sales returns and allowances were $5,606 million and sales discounts were $1,314 million. What is Move It’s gross profit percentage for 2019? A) 43.0% B) 48.1% C) 56.4% D) 52.7% Answer: B Rationale: Net Sales = Gross sales revenue – Sales returns and allowances – sales discounts X = $76,643 – $5,606 – $1,314 X = $69,723 = Net Sales Gross profit on sales = Net Sales – Cost of goods sold X = $69,723 – $36,162 X = $33,561 = Gross profit on sales Gross profit percentage = Gross profit on sales / net sales X = $33,561 / $69,723 X = 0.481 = 48.1% Topic: Gross Profit Percentage LO: 4 Level of Difficulty: DIFFICULT 70. In 2019, Intersection Company incurred cost of goods sold of $58,215 million on gross sales revenue of $87,592 million. Sales returns and allowances were $7,473 million and sales discounts were $1,752 million. What is Intersection’s gross profit percentage for 2019? A) 34.4% B) 25.7% C) 37.6% D) 35.1% Answer: B Rationale: Net Sales = Gross sales revenue – Sales returns and allowances – sales discounts X = $87,592 – $7,473 – $1,752 X = $78,367 = Net Sales Gross profit on sales = Net Sales – Cost of goods sold X = $78,367 – $58,215 X = $20,152 = Gross profit on sales Gross profit percentage = Gross profit on sales / net sales X = $20,152 / $78,367 X = 0.257 = 25.7%
©Cambridge Business Publishers, 2020 5-36
Financial Accounting for Undergraduates, 4th Edition
Topic: Return on Sales Ratio (Profit Margin) LO: 4 Level of Difficulty: EASY 71. In 2019, Arrow earned a net income of $22,614 million on net sales of $76,643 million. What was Arrow’s return on sales ratio for 2019? A) 29.5% B) 249.2% C) 56.2% D) 163.4% Answer: A Rationale: Return on sales ratio = Net income / Net sales X = $22,614 / $76,643 X = 0.295 = 29.5% Topic: Return on Sales Ratio (Profit Margin) LO: 4 Level of Difficulty: EASY 72. In 2019, Farmer Co. earned a net income of $20,152 million on net sales of $87,592 million. What was Farmer’s return on sales ratio for 2019? A) 23.0% B) 290.5% C) 65.6% E) 190.5% Answer: A Rationale: Return on sales ratio = Net income / Net sales X = $20,152 / $87,592 X = 0.230 = 23.0% Topic: Return on Sales Ratio (Profit Margin) LO: 4 Level of Difficulty: MEDIUM 73. In 2019, Purple Eggplant incurred cost of goods sold of $59,823 million on net sales of $76,643 million. What was Purple Eggplant’s return on sales ratio for 2019? (Assume no other expenses.) A) 10.6% B) 24.1% C) 13.8% D) 21.9% Answer: D Rationale: Net income = Net sales – Cost of goods sold X = $76,643 – $59,823 X = $16,820 = Net income Profit margin = Return on sales ratio Return on sales ratio = Net income / Net sales X = $16,820 / $76,643 X = 0.219 = 21.9%
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-37
Topic: Return on Sales Ratio (Profit Margin) LO: 4 Level of Difficulty: MEDIUM 74. In 2019, Lemon Co. incurred cost of goods sold of $69,763 million on net sales of $87,592 million. What was Lemon’s return on sales ratio for 2019? (Assume no other expenses.) A) 4.3% B) 9.8% C) 5.6% D) 20.4% Answer: D Rationale: Net income = Net sales – Cost of goods sold X = $87,592 – $69,763 X = $17,829 = net income Profit margin = Return on sales ratio Return on sales ratio = Net income / Net sales X = $17,829 / $87,592 X = 0.204 = 20.4% Topic: Return on Sales Ratio (Profit Margin) LO: 4 Level of Difficulty: DIFFICULT 75. In 2019, Arrow Co. incurred cost of goods sold of $56,073 million on gross sales revenue of $76,643 million. Sales returns and allowances were $5,606 million. What was Arrow Co.’s profit margin for 2019? (Assume no other expenses.) A) 19.2% B) 22.7% C) 21.1% D) 20.5% Answer: C Rationale: Net Sales = Gross sales revenue – Sales returns and allowances X = $76,643 – $5,606 X = $71,037 = Net Sales Net income = Net Sales – Cost of goods sold X = $71,037 – $56,073 X = $14,964 = net income Profit margin = Return on sales ratio Return on sales ratio = Net income / Net sales X = $14,964 / $71,037 X = 0.211 = 21.1%
©Cambridge Business Publishers, 2020 5-38
Financial Accounting for Undergraduates, 4th Edition
Topic: Return on Sales Ratio (Profit Margin) LO: 4 Level of Difficulty: DIFFICULT 76. In 2019, Cumquat Co. incurred cost of goods sold of $74,763 million on gross sales revenue of $87,592 million. Sales returns and allowances were $10,473 million. What was Cumquat’s profit margin for 2019? (Assume no other expenses.) A) 6.1% B) 7.2% C) 3.1% D) 6.5% Answer: C Rationale: Net Sales = Gross sales revenue – Sales returns and allowances X = $87,592 – $10,473 X = $77,119 = Net Sales Net income = Net Sales – Cost of goods sold X = $77,119 – $74,763 X = $2,356 = net income Profit margin = Return on sales ratio Return on sales ratio = Net income / Net sales X = $2,356 / $77,119 X = 0.031 = 3.1% Topic: New Revenue Recognition Standard – Sales Discounts LO: 6 Level of Difficulty: MEDIUM 77. During 2019, Reed Corporation sold merchandise for a total of $900,000. The cost of merchandise to Reed was $675,000. Reed offers credit terms of 1/10, n/30 to encourage early payment. At year-end, there are $22,500 of sales still eligible for the 1% discount. Reed believes that all of the companies will pay within the discount period to receive the 1% discount. Assume Reed’s fiscal year is December 31. Reed’s adjusting journal entry will include: A) A debit to Sales Discounts for $225 B) A credit to Allowance for Sales Discounts for $2,250 C) A debit to Sales Discounts for $2,050 D) A credit to Sales Discounts for $225 E) No adjusting journal entry is required. Discount will be recognized when payment is received. Answer: A Rationale: Sales discounts Allowance for sales discounts ($22,500 x 0.01 = $225)
$225 $225
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-39
Topic: New Revenue Recognition Standard – Sales Discounts LO: 6 Level of Difficulty: MEDIUM 78. During 2019, Bava Technologies sold merchandise for a total of $800,000. The cost of merchandise to Bava was $560,000. Bava offers credit terms of 2/10, n/30 to encourage early payment. At yearend, there are $24,000 of sales still eligible for the 2% discount. Bava believes that all of the companies will pay within the discount period to receive the 2% discount. Assume Bava’s fiscal year is December 31. Bava’s adjusting journal entry will include: A) A debit to Sales Discounts for $480 B) A credit to Allowance for Sales Discounts for $4,800 C) A debit to Sales Discounts for $4,800 D) A credit to Sales Discounts for $480 E) No adjusting journal entry is required. Discount will be recognized when payment is received. Answer: A Rationale: Sales discounts Allowance for sales discounts ($24,000 x 0.02 = $480)
$480 $480
Topic: New Revenue Recognition Standard – Sales Returns and Allowances LO: 6 Level of Difficulty: MEDIUM 79. During 2019, Reed Corporation sold merchandise for a total of $900,000. The cost of merchandise to Reed was $675,000. Reed allows a 60 day return period for the merchandise it sells. At year-end, Reed estimates there are $105,000 of sales (with a cost of $78,750 to Reed) that are still within the 60-day return period. From past experience, Bava believes that 10% of this merchandise will be returned. Assume Reed’s fiscal year is December 31. Reed’s adjusting journal entries will include: A) A debit to Estimated Inventory Return for $10,500 B) A credit to Cost of Goods Sold for $7,875 C) A debit to Sales Refunds Payable for $10,500 D) A debit to Sales Returns and Allowances for $7,875 E) No adjusting journal entry is required. Return will be recognized when it occurs. Answer: B Rationale: Sales returns and allowances Sales refunds payable ($105,000 x 0.10) Estimated inventory return Cost of goods sold ($78,750 X 0.10)
$10,500 $10,500 $7,875 $7,875
©Cambridge Business Publishers, 2020 5-40
Financial Accounting for Undergraduates, 4th Edition
Topic: New Revenue Recognition Standard – Sales Returns and Allowances LO: 6 Level of Difficulty: MEDIUM 80. During 2019, Gleeson Technologies sold merchandise for a total of $800,000. The cost of merchandise to Gleeson was $560,000. Gleeson allows a 60 day return period for the merchandise it sells. At year-end, Gleeson estimates there are $90,000 of sales (with a cost of $63,000 to Gleeson) that are still within the 60-day return period. From past experience, Gleeson believes that 5% of this merchandise will be returned. Assume Gleeson’s fiscal year is December 31. Gleeson’s adjusting journal entries will include: A) A debit to Estimated Inventory Return for $4,500 B) A credit to Cost of Goods Sold for $3,150 C) A debit to Sales Refunds Payable for $4,500 D) A debit to Sales Returns and Allowances for $3,150 E) No adjusting journal entry is required. Return will be recognized when it occurs. Answer: B Rationale: Sales returns and allowances Sales refunds payable ($90,000 x 0.05) Estimated inventory return Cost of goods sold ($63,000 x 0.05)
$4,500 $4,500 $3,150 $3,150
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-41
Exercises Topic: Purchase Discounts LO: 2 1. Belpre, Inc. owes $90,000 to William’s Drones Co. for inventory acquired with terms of 3/15, n/30. a. How much will Belpre, Inc. pay if payment is made within the discount period? b. What transaction will Belpre, Inc. record on November 30, the company’s fiscal year end, if the invoice is dated November 28 and payment will be made on December 12? Answer: a. Inventory cost Purchase discount ($90,000 x 3%) Net payment
$90,000 (2,700) $87,300
b. The purchase discount of $2,700 ($90,000 x 3%) is not reflected in the November 30th year-end entry, since payment (within the discount period) for the inventory is not made until after Belpre, Inc.’s year-end. The year-end entry reflects the full cost of the inventory invoice. Inventory Accounts payable
90,000 90,000
Topic: Cost of Goods Sold Using a Periodic System LO: 5 2. Complete the grid to calculate Cost of Goods Sold: a) + Cost of Goods Purchased During the Period = Cost of Goods Available for Sale – b) = Cost of Goods Sold Answer: a) Beginning Inventory b) Ending Inventory
©Cambridge Business Publishers, 2020 5-42
Financial Accounting for Undergraduates, 4th Edition
Topic: Gross Profit Analysis LO: 4 3. As a shareholder of Jacksonville Industries, a manufacturer of DVD players, you are interested in comparing gross profits over a 3-year period. Calculate the gross profit percentage for years 2019, 2018, and 2017 using the income statement items below (in thousands). Interpret your results.
Net sales Cost of goods sold Gross Profit
2019 $20,640 14,830 $5,810
2018 $21,880 14,044 $7,836
2017 $21,540 13,684 $7,856
Answer: Gross profit percentage = Gross profit / Net Sales
Gross profit margin
2019 28.1%
2018 35.8%
2017 36.5%
The gross profit percentage declined sequentially year to year. This is not a good sign, and suggests that the company’s product line may be stale, competition may have increased, economic activity may have declined, or the company may be carrying too much inventory. In the case of DVD players, it is likely that the product line is facing stiff competition from new technology. Topic: New Revenue Recognition Standard – Sales Returns and Allowances LO: 6 4. During 2019, Armstrong Technologies sold merchandise for a total of $1,800,000. The cost of merchandise to Armstrong was $1,350,000. Armstrong offers credit terms of 1/15, n/30 to encourage early payment. At year-end, there are $225,000 of sales still eligible for the 1% discount. Armstrong believes that all of the companies will pay within the discount period to receive the 1% discount. In addition, Armstrong allows a 60 day return period for the merchandise it sells. At year-end, Armstrong estimates there are $675,000 of sales (with a cost of $506,250 to Armstrong) that are still within the 60-day return period. From past experience Armstrong believes that 10% of this merchandise will be returned. Assume Armstrong’s fiscal year is December 31. Prepare the period-end adjusting journal entries needed for Armstrong Technologies to comply with the new revenue recognition standard. Answer: Sales discounts $2,250 Allowance for sales discounts $2,250 To record the estimated sales discount on credit sales still eligible for the discount at year end ($225,000 x 0.01 = $2,250). Sales returns and allowances $67,500 Sales refunds payable $67,500 To record the estimated return of merchandise sold still eligible for return at year end ($675,000 x 0.10). Estimated inventory return $50,625 Cost of goods sold $50,625 To record the estimated return of merchandise sold still eligible for return at year end ($506,250 x 0.10).
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-43
Problems Topic: Credit Terms LO: 2 1. For each of the following Sullivan Company purchases, assume that credit terms are 2/10, n/30. In each case determine (a) the appropriate cash discount available and (b) the cash remitted if the payment is made within the discount period.
1. 2. 3. 4.
Amount of Sale $3,000 3,300 2,700 1,800
Answer: 1. (a) 2% x ($3,000 – $600) = $48 2. (a) 2% x ($3,300 – $300) = $60 3. (a) 2% x ($2,700 – $150) = $51 4. (a) 2% x $1,800 = $36
(a) Discount Available $_____ $_____ $_____ $_____
Merchandise Returned $600 300 150 --
(b) Cash Remitted $_____ $_____ $_____ $_____
(b) $3,000 – $600 – $48 = $2,352 (b) $3,300 – $300 – $60 = $2,940 (b) $2,700 – $150 – $51 = $2,499 (b) $1,800 – $36 = $1,764
Topic: Periodic Inventory System LO: 5 2. The following are selected transactions of Drcman, Inc.: May 10 16 19
Sold and shipped on account to Linley, Inc. merchandise for $2,300, terms 2/10, n/30. Linley, Inc. returned merchandise billed at $600 on May 10. Received a check from Linley, Inc. for full settlement of the May 10 transaction.
Record the above transactions in general journal form as they would appear on the books of (a) Drcman, Inc. and (b) Linley, Inc. Linley, Inc. records purchases at invoice price. Both companies use the periodic inventory system. Omit explanations for the journal entries. Answer: (a) On the books of Drcman, Inc.: May 10 Accounts receivable Sales 16 Sales returns and allowances Accounts receivable 19 Cash Sales discounts Accounts receivable
2,300 2,300 600 600 1,666* 34** 1,700
*($2,300 - $600 - $34 = $1,666) **[($2,300 - $600) x 2% = $34]
(b) On the books of Linley, Inc.: May 10 Purchases 2,300 Accounts payable 16 Accounts payable 600 Purchases returns and allowances 19 Accounts payable 1,700 Purchases discounts Cash
2,300 600 34 1,666
©Cambridge Business Publishers, 2020 5-44
Financial Accounting for Undergraduates, 4th Edition
Topic: Periodic Inventory System LO: 5 3. The following are selected transactions of Carolyn Company: June 20 22 28
Sold and shipped $5,400 merchandise on account to Patrick, Inc., terms 2/10, n/30. Patrick, Inc. returned merchandise billed at $1,500 on June 20. Received a check from Patrick, Inc. for full settlement of the June 20 transaction.
Record the above transactions in general journal form on the books of (a) Carolyn Company and (b) Patrick, Inc. Both companies use the periodic inventory system. Omit explanations for the journal entries. Answer: (a) On the books of Carolyn Company: June 20 Accounts receivable Sales 22 28
5,400 5,400
Sales returns and allowances Accounts receivable
1,500
Cash Sales discounts Accounts receivable
3,822* 78**
1,500
3,900
*($5,400 - $1,500 - $78 = $3,822) **[($5,400 - $1,500) x 2% = $78]
(b) On the books of Patrick Inc.: June 20 Purchases Accounts payable 22 28
5,400 5,400
Accounts payable 1,500 Purchases returns and allowances
1,500
Accounts payable Purchases discounts Cash
78 3,822
3,900
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-45
Topic: Periodic Inventory System LO: 5 4. The adjusted trial balance for Michaelis Company is shown below. Michaelis uses the periodic inventory system. MICHAELIS COMPANY Trial Balance December 31, 2019 Cash Accounts receivable Inventory, January 1 Office supplies Prepaid rent Equipment Accumulated depreciation Accounts payable Common stock Retained earnings Sales Sales returns and allowances Purchases Purchases returns and allowances Freight in Supplies expense Rent expense Salaries expense
Debit $ 109,200 72,000 294,000 2,100 2,700 105,000
Credit
$ 36,000 58,200 80,000 349,000 743,000 26,000 480,000 4,800 15,300 3,600 37,500 123,600 $1,271,000
$1,271,000
Inventory on December 31, 2019, was $306,000. Required: a. Without preparing a formal income statement, calculate the net income or loss for the year. b. What amount of retained earnings would appear on the December 31, 2019 balance sheet? Answer: a. Net sales ($743,0000 - $26,000) Inventory, January 1 Net cost of purchases ($480,000 - $4,800 + $15,300) Cost of goods available for sale Inventory, December 31
$717,000 $294,000 490,500 784,500 306,000
Cost of goods sold
478,500
Gross profit on sales Expenses ($3,600 + $37,500 + $123,600) Net income
238,500 164,700 $ 73,800
b. $349,000 beginning retained earnings + $73,800 net income = $422,800
©Cambridge Business Publishers, 2020 5-46
Financial Accounting for Undergraduates, 4th Edition
Topic: Purchase and Sales of Merchandise Using a Perpetual Inventory System LO: 2, 3 5. The following are selected transactions of Midnight, Inc.: May 10 16 19
Sold and shipped on account to Sirius, Inc. merchandise for $3,000 ($1,800 cost), terms 2/10, n/30. Sirius, Inc. returned merchandise billed at $600 ($360 cost) on May 10. Received a check from Sirius, Inc. for full settlement of the May 10 transaction.
Record the above transactions in general journal form as they would appear on the books of (a) Midnight, Inc. and (b) Sirius, Inc. Both companies use the perpetual inventory system. Omit explanations for the journal entries. Answer: (a) On the books of Midnight, Inc.: May 10 10 16 16 19
Accounts receivable Sales Cost of goods sold Inventory Sales returns and allowances Accounts receivable Inventory Cost of goods sold Cash Sales discounts Accounts receivable
3,000 3,000 1,800 1,800 600 600 360 360 2,352* 48** 2,400
*($3,000 - $600 - $48 = $2,352) **(($3,000 - $600) x 2% = $48)
(b) On the books of Sirius, Inc.: May 10 16 19
Inventory Accounts payable Accounts payable Inventory Accounts payable Inventory Cash
3,000 3,000 600 600 2,400 48 2,352
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-47
Chapter 5 Accounting for Merchandising Operations Learning Objectives – Coverage by question True / False
Multiple Choice
1
1
1, 3, 4, 6, 9
1, 4-6, 11-14, 16, 18, 20, 22, 24, 26, 28, 30-41, 53-54
LO3 – Describe the accounting for sales of merchandise.
10
1, 4-6, 15, 42-54
LO4 – Define the gross profit percentage and the return on sales ratio, and explain their use in profitability analysis.
2
65-76
3
LO5 – Appendix 5A: Describe and illustrate a periodic inventory system.
5, 7, 8
2, 3, 7-10, 17, 19, 21, 23, 25, 27, 29, 55-64
2
77-80
4
LO1 – Explain the operations of a merchandise company and contrast that with the operations of a service company.
LO2 – Describe the accounting for purchases of merchandise.
LO6 – Appendix 5B: Describe and illustrate the new revenue recognition standard.
Exercises
Problems
1
1, 5
5
2-4
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-1
Chapter 5: Accounting for Merchandising Operations
True / False Topic: Inventory LO: 1, 2 1. Companies should recognize inventory as an expense when purchased. Answer: False Rationale: Companies capitalize inventories when purchased, and expense inventories when sold.
Topic: Gross Profit Percentage LO: 4 2. A decline in gross profit percentage can be caused by selling fewer units to customers. Answer: False Rationale: Gross profit percentage is the percentage of gross profit to sales. It indicates the cents that are available from each dollar of sales to cover operating costs and contribute to profits. A change in the number of units sold does not change the percentage, unless the selling price or cost of goods sold changes.
Topic: Merchandise Purchasing LO: 2 3. The cost of acquiring inventory includes adding the cost of freight associated with obtaining the inventory and subtracting the amount of cash discount allowed from timely payment. Answer: True Rationale: The cost of inventory should include all costs necessary to get the inventory ready to sell, which includes the cost of freight and a deduction for cash discounts.
Topic: Discount Period LO: 2 4. The discount period for payment is always shorter than the credit period. Answer: True Rationale: To encourage the early payment of unpaid bills, many firms offer their customers a cash discount if payment is made within a designated discount period. Sellers usually state cash discounts as a percent of the invoice price. The discount period is the maximum amount of time, stated in days, that a purchaser has within which to pay the seller if the purchaser wants to claim the cash discount. The discount period is always shorter than the credit period. Most merchandisers use the format “cash discount percent/discount period” to designate the cash discount and the discount period.
©Cambridge Business Publishers, 2020 5-2
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Periodic Inventory System LO: 5 5. If a firm using the periodic inventory system sells merchandise for $320,000 that originally cost $160,000, the firm will debit Sales Revenue for $320,000. Answer: False Rationale: The firm records the following entries: Entry 1: Accounts receivable Sales revenue
$320,000 $320,000
Cost of goods sold $160,000 Inventory $160,000 To record sale of merchandise on credit.
Topic: Credit Terms LO: 2 6. In specifying credit terms, 2/10, n/30 means that one-half of the invoice must be paid in 10 days, with the net balance due in 30 days. Answer: False Rationale: 2/10, n/30 represents a cash discount of two percent if paid within ten days of the sale with a total credit period of 30 days following the date of the sale
Topic: Periodic Inventory System LO: 5 7. The Purchases account normally has a debit balance. Answer: True Rationale: When a company uses the periodic inventory system, it records the purchase of merchandise by debiting the cost of the merchandise to the Purchases account, rather than the Inventory account, and crediting the cost to Accounts Payable. (The Purchases account has a normal debit balance.)
Topic: Periodic Inventory System LO: 5 8. All merchandise purchased for resale by a firm is initially recorded in the Purchases account when the firm uses the periodic inventory system. Answer: True Rationale: When a company uses the periodic inventory system, it records the purchase of merchandise by debiting the cost of the merchandise to the Purchases account, rather than the Inventory account, and crediting the cost to Accounts Payable. (The Purchases account has a normal debit balance.)
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-3
Topic: Transportation Costs LO: 2 9. If merchandise is shipped F.O.B. destination, the seller ultimately bears the expense of transporting it. Answer: True Rationale: Transportation costs are sometimes incurred by a merchandising company when it acquires goods, and this cost is included as part of the acquisition cost of the inventory. When the buyer is responsible for shipping costs, it is referred to as FOB shipping point. When the seller is responsible for shipping costs, it is referred to as FOB destination.
Topic: Expense Recognition (Matching) Principle LO: 3 10. Under the matching principle, the cost of inventory should be reported as an expense in the income statement when it is purchased, even if it is purchased on credit and will not be paid until the next reporting period. Answer: False Rationale: Under the matching principle, the cost of inventory should only be reported as expense in the period in which it is used up, typically at the point of sale. Purchased inventories that have not yet been sold are reported as assets. Unpaid amounts to suppliers are reported as liabilities.
©Cambridge Business Publishers, 2020 5-4
th
Financial Accounting for Undergraduates, 4 Edition
Multiple Choice Topic: Accounting for Sales and Purchases of Merchandise LO: 1, 2, 3 Level of Difficulty: DIFFICULT 1. Which of the following is not true for a retailer using perpetual inventory system? A) When merchandise is purchased FOB shipping point, the buyer assumes the risk of any damage in transit. B) After a physical inventory count, the retailer credits the Inventory account for any missing inventory. C) When the retailer returns defective merchandise to the manufacturer, they credit Purchase Returns. D) The Cost of Goods Sold account is closed at the end of the year with a debit to Income Summary. Answer: C Rationale: When the buyer is responsible for shipping costs, it is referred to as FOB shipping point. Since inventory is being continuously updated using the perpetual inventory system, management can compare these amounts to a physical count of the inventory and credit the Inventory account for any missing inventory. The Cost of Goods Sold, an expense account, is a temporary account which is closed at the end of the year with a debit to Income Summary. Under the perpetual inventory system, the retailer would credit Inventory rather than Purchase Returns for the return of defective merchandise.
Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 2. Dells Company uses the periodic inventory system. Sales for 2019 were $1,410,000 while operating expenses were $525,000. Beginning and ending inventories for 2019 were $210,000 and $180,000, respectively. Net purchases were $540,000 while freight in was $45,000. The net income or loss for 2019 was: A) $270,000 net income B) $ 90,000 net income C) $ 30,000 net income D) $ 90,000 net loss Answer: A Rationale: Cost of Goods Sold = Beginning Inventory + Purchases + Freight – Ending Inventory X = $210,000 + $540,000 + $45,000 – $180,000 X = $615,000 = Cost of Goods Sold Sales – Cost of Goods Sold – Operating Expenses = Net Income $1,410,000 – $615,000 – $525,000 = X X = $270,000 = Net Income
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-5
Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 3. Illinois Company uses the periodic inventory system. Sales for 2019 were $1,880,000 while operating expenses were $700,000. Beginning and ending inventories for 2019 were $280,000 and $240,000, respectively. Net purchases were $720,000 while freight in was $60,000. The net income or loss for 2019 was: A) $360,000 net income B) $120,000 net income C) $ 40,000 net income D) $120,000 net loss Answer: A Rationale: Cost of Goods Sold = Beginning Inventory + Purchases + Freight – Ending Inventory X = $280,000 + $720,000 + $60,000 – $240,000 X = $820,000 = Cost of Goods Sold Sales – Cost of Goods Sold – Operating Expenses = Net Income $1,880,000 – $820,000 - $700,000 = X X = $360,000 = Net Income
Topic: Cost of Goods Sold LO: 2, 3 Level of Difficulty: EASY 4. On which financial statements would you look to find the total costs of merchandise that remains and the total that has been sold? A) Balance sheet and statement of cash flows B) Balance sheet and income statement C) Statement of cash flows and balance sheet D) Statement of stockholders’ equity and balance sheet Answer: B Rationale: When inventories are used up in production or are sold, their costs are transferred from the balance sheet (inventory account) to the income statement as cost of goods sold.
Topic: Cost of Goods Sold LO: 2, 3 Level of Difficulty: MEDIUM 5. Charleston Company purchases $180,000 of inventory during the period and sells $54,000 of it for $90,000. Beginning of the period inventory was $9,000. What is the company’s inventory balance to be reported on its balance sheet at year end? A) $ 54,000 B) $ 64,000 C) $135,000 D) $ 9,000 Answer: C Rationale: Ending Inventory = Beginning Inventory + Purchases – Cost of Goods Sold X = $9,000 + $180,000 – $54,000 X = $135,000
©Cambridge Business Publishers, 2020 5-6
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Cost of Goods Sold LO: 2, 3 Level of Difficulty: MEDIUM 6. Oaks Company purchases $240,000 of inventory during the period and sells $72,000 of it for $120,000. Beginning of the period inventory was $12,000. What is the company’s inventory balance to be reported on its balance sheet at year end? A) $ 72,000 B) $ 8,000 C) $180,000 D) $ 12,000 Answer: C Rationale: Ending Inventory = Beginning Inventory + Purchases – Cost of Goods Sold X = $12,000 + $240,000 – $72,000 X = $180,000
Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 7. On August 1, Nevling Brothers bought goods with a list price of $14,400, terms 2/10, n/30. The firm records purchases at invoice price, using the periodic inventory system. On August 5, Nevling Brothers returned goods with a list price of $1,800 for credit. If Nevling Brothers paid the supplier the amount due on August 9, the appropriate entry would be: A) Accounts Payable 14,400 Purchases Discounts 288 Cash 14,112 B) Accounts Payable 12,348 Cash 12,348 C) Accounts Payable 12,600 Purchases Discounts 252 Cash 12,348 D) Accounts Payable 12,600 Cash 12,600 Answer: C Rationale: Nevling Brothers records the following entries: August 1: Purchases $14,400 Accounts payable $14,400 To record purchase of goods on credit. August 5:
August 9:
Accounts payable $1,800 Purchase returns To record purchase returns.
$1,800
Accounts payable $12,600 Purchase discounts $ 252 Cash $12,348 To record purchase discount and payment.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-7
Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 8. On August 1, Baker Brothers bought goods with a list price of $19,200, terms 2/10, n/30. The firm records purchases at invoice price, using the periodic inventory system. On August 5, Baker Brothers returned goods with a list price of $2,400 for credit. If Baker Brothers paid the supplier the amount due on August 9, the appropriate entry would be: A) Accounts Payable 19,200 Purchases Discounts 384 Cash 18,816 B) Accounts Payable 18,464 Cash 18,464 C) Accounts Payable 16,800 Purchases Discounts 336 Cash 16,464 D) Accounts Payable 16,800 Cash 16,800 Answer: C Rationale: Baker Brothers records the following entries: August 1: Purchases $19,200 Accounts payable To record purchase of goods on credit August 5:
August 9:
Accounts payable Purchase returns To record purchase returns
$19,200
$2,400
Accounts payable $16,800 Purchase discounts Cash To record purchase discount and payment
$2,400
$ 336 $16,464
Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 9. Lite Company records purchases at invoice price, using the periodic inventory system. On July 5, Lite returned $18,000 of goods purchased on account to the seller. How would Lite record this transfer? A) Accounts Payable 18,000 Purchases Returns and Allowances B) Accounts Receivable 18,000 Purchases Returns and Allowances C) Accounts Payable 18,000 Purchases D) Cash 18,000 Purchases Returns and Allowances
18,000 18,000 18,000 18,000
Answer: A
©Cambridge Business Publishers, 2020 5-8
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 10. Lavinia Company records purchases at invoice price, using the periodic inventory system. On July 5, Lavinia returned $24,000 of goods purchased on account to the seller. How would Lavinia record this transfer? A) Accounts Payable 24,000 Purchases Returns and Allowances B) Accounts Receivable 24,000 Purchases Returns and Allowances C) Accounts Payable 24,000 Purchases D) Cash 24,000 Purchases Returns and Allowances
24,000 24,000 24,000 24,000
Answer: A
Topic: Inventory Purchases LO: 2 Level of Difficulty: MEDIUM 11. On August 1, Burkett Company bought goods with a list price of $7,200, terms 2/10, n/30. The firm records purchases at invoice price using the perpetual inventory system. On August 5, Burkett returned goods with a list price of $900 for credit. If Burkett paid the supplier the amount due on August 9, the appropriate entry would be: A) Accounts Payable 7,200 Inventory 144 Cash 7,056 B) Accounts Payable 6,174 Cash 6,174 C) Accounts Payable 6,300 Inventory 126 Cash 6,174 D) Accounts Payable 6,300 Cash 6,300 Answer: C Rationale: Burkett records the following entries: August 1:
August 5:
August 9:
Inventory $7,200 Accounts payable To record purchase of goods on credit
$7,200
Accounts payable Inventory To record purchase returns
$ 900
$ 900
Accounts payable $6,300 Inventory Cash To record purchase discount and payment
$
126 $6,174
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-9
Topic: Inventory Purchases LO: 2 Level of Difficulty: MEDIUM 12. On August 1, Trina Company bought goods with a list price of $9,600, terms 2/10, n/30. The firm records purchases at invoice price using the perpetual inventory system. On August 5, Trina returned goods with a list price of $1,200 for credit. If Trina paid the supplier the amount due on August 9, the appropriate entry would be: A) Accounts Payable 9,600 Inventory 192 Cash 9,408 B) Accounts Payable 8,232 Cash 8,232 C) Accounts Payable 8,400 Inventory 168 Cash 8,232 D) Accounts Payable 8,400 Cash 8,400 Answer: C Rationale: Trina records the following entries: : August 1: Inventory $9,600 Accounts payable To record purchase of goods on credit August 5:
August 9:
Accounts payable Inventory To record purchase returns
$9,600
$1,200 $1,200
Accounts payable $8,400 Inventory Cash To record purchase discount and payment
$ 168 $8,232
Topic: Inventory Purchases LO: 2 Level of Difficulty: MEDIUM 13. Josiah records purchases at invoice price and uses the perpetual inventory system. On July 5, Josiah returned $9,000 of goods purchased on account to the seller. How would Joshua record this transaction? A) Accounts Payable Inventory B) Accounts Receivable Inventory C) Accounts Payable Purchases D) Cash Purchases
9,000 9,000 9,000 9,000 9,000 9,000 9,000 9,000
Answer: A
©Cambridge Business Publishers, 2020 5-10
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Inventory Purchases LO: 2 Level of Difficulty: MEDIUM 14. Bacerra records purchases at invoice price and uses the perpetual inventory system. On July 5, Bacerra returned $12,000 of goods purchased on account to the seller. How would Bacerra record this transaction? A) Accounts Payable Inventory B) Accounts Receivable Inventory C) Accounts Payable Purchases D) Cash Purchases
12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000
Answer: A
Topic: Sales of Merchandise LO: 3 Level of Difficulty: MEDIUM 15. For a firm that uses the perpetual inventory system, the Sales Returns and Allowances account: A) Is not a contra account B) Has a normal credit balance C) Is not used D) Is debited by the firm receiving returned goods from a customer Answer: D Rationale: When a firm receives returned goods from a customer, the following entry is made: Sales returns and allowances Accounts receivable
XXX
Inventory Cost of goods sold To record the return of sales merchandise
XXX
XXX
XXX
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: EASY 16. Using a perpetual inventory system, the buyer’s journal entry to record the return of merchandise purchased on account includes a: A) Credit to Purchase Returns B) Credit to Inventory C) Credit to Accounts Payable D) Credit to Cost of Goods Sold Answer: B Rationale: Under a perpetual inventory system, when a buyer returns merchandise to the seller, the following entry is made by the buyer: Accounts payable Inventory
XXX XXX ©Cambridge Business Publishers, 2020
Test Bank, Chapter 5
5-11
Topic: Accounting for Purchases of Merchandise – Periodic LO: 5 Level of Difficulty: EASY 17. Using a periodic inventory system, the buyer’s journal entry to record the return of merchandise purchased on account includes a: A) Credit to Purchase Returns B) Debit to Inventory C) Credit to Accounts Payable D) Debit to Cost of Goods Sold Answer: A Rationale: Under a periodic inventory system, when a buyer returns merchandise to the seller, the following entry is made by the buyer: Accounts payable Purchase returns
XXX XXX
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: EASY 18. Using a perpetual inventory system, the buyer’s journal entry to record the freight costs includes a: A) Debit to Purchases B) Debit to Inventory C) Debit to Freight In D) Debit to Cost of Goods Sold Answer: B Rationale: Under a perpetual inventory system, when a buyer incurs freight costs on merchandise, the following entry is made by the buyer: Inventory Cash
XXX XXX
Topic: Accounting for Purchases of Merchandise – Periodic LO: 5 Level of Difficulty: EASY 19. Using a periodic inventory system, the buyer’s journal entry to record the freight costs includes a: A) Debit to Purchases B) Debit to Inventory C) Debit to Freight In D) Debit to Cost of Goods Sold Answer: C Rationale: Under a periodic inventory system, when a buyer incurs freight costs on merchandise, the following entry is made by the buyer: Freight in XXX Cash XXX
©Cambridge Business Publishers, 2020 5-12
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: EASY 20. Using a perpetual inventory system, the buyer’s journal entry to record the payment for merchandise within the discount period includes a: A) Debit to Purchases B) Debit to Inventory C) Debit to Accounts Payable D) Debit to Cost of Goods Sold Answer: C Rationale: Under a perpetual inventory system, when a buyer pays for merchandise within the discount period, the following entry is made by the buyer: Accounts payable Inventory Cash
XXX XXX XXX
Topic: Accounting for Purchases of Merchandise – Periodic LO: 5 Level of Difficulty: EASY 21. Using a periodic inventory system, the buyer’s journal entry to record the payment for merchandise within the discount period includes a: A) Credit to Purchase Discounts B) Debit to Inventory C) Credit to Accounts Payable D) Debit to Cost of Goods Sold Answer: A Rationale: Under a periodic inventory system, when a buyer pays for merchandise within the discount period, the following entry is made by the buyer: Accounts payable Purchase discounts Cash
XXX XXX XXX
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: EASY 22. Using a perpetual inventory system, the seller’s journal entry to record the return, by the buyer, of merchandise purchased on account includes a: A) Credit to Purchases Returns B) Debit to Sales Returns and Allowances C) Debit to Accounts Receivable D) Debit to Cost of Goods Sold Answer: B Rationale: Under a perpetual inventory system, when a buyer returns merchandise to the seller, the following entry is made by the seller: Sales returns and allowances Accounts receivable
XXX
Inventory Cost of goods sold
XXX
XXX XXX ©Cambridge Business Publishers, 2020
Test Bank, Chapter 5
5-13
Topic: Accounting for Purchases of Merchandise – Periodic LO: 5 Level of Difficulty: EASY 23. Using a periodic inventory system, the seller’s journal entry to record the return, by the buyer, of merchandise purchased on account includes a: A) Credit to Purchases Returns B) Debit to Sales Returns and Allowances C) Debit to Accounts Receivable D) Credit to Cost of Goods Sold Answer: B Rationale: Under a periodic inventory system, when a buyer returns merchandise to the seller, the following entry is made by the seller: Sales returns and allowances Accounts receivable
XXX XXX
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: EASY 24. Using a perpetual inventory system, the seller’s journal entry to record the payment for merchandise, received from the buyer, within the discount period includes a: A) Debit to Sales Discounts B) Credit to Sales Discounts C) Debit to Accounts Receivable D) Debit to Cost of Goods Sold Answer: A Rationale: Under a perpetual inventory system, when a seller receives payment for merchandise within the discount period, the following entry is made by the seller: Cash Sales discounts Accounts receivable
XXX XXX XXX
Topic: Accounting for Purchases of Merchandise – Periodic LO: 5 Level of Difficulty: EASY 25. Using a periodic inventory system, the sellers journal entry to record the payment for merchandise, received from the buyer, within the discount period includes a: A) Debit to Sales Discounts B) Credit to Sales Discounts C) Debit to Accounts Receivable D) Debit to Cost of Goods Sold Answer: A Rationale: Under a periodic inventory system, when a seller receives payment for merchandise within the discount period, the following entry is made by the seller: Cash Sales discounts Accounts receivable
XXX XXX XXX
©Cambridge Business Publishers, 2020 5-14
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: EASY 26. Using a perpetual inventory system, the buyer’s journal entry to record the purchase of merchandise on credit includes a: A) Debit to Purchases B) Debit to Inventory C) Debit to Freight In D) Debit to Cost of Goods Sold Answer: B Rationale: Under a perpetual inventory system, when a buyer purchases merchandise on credit, the following entry is made by the buyer: Inventory Accounts payable
XXX XXX
Topic: Accounting for Purchases of Merchandise – Periodic LO: 5 Level of Difficulty: EASY 27. Using a periodic inventory system, the buyer’s journal entry to record the purchase of merchandise on credit includes a: A) Debit to Purchases B) Debit to Inventory C) Debit to Freight In D) Debit to Cost of Goods Sold Answer: A Rationale: Under a periodic inventory system, when a buyer purchases merchandise on credit, the following entry is made by the buyer: Purchases Accounts payable
XXX XXX
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: EASY 28. Using a perpetual inventory system, the seller’s journal entry to record the sale of merchandise on account includes a: A) Credit to Purchases B) Debit to Inventory C) Debit to Accounts Receivable D) Credit to Cost of Goods Sold Answer: C Rationale: Under a perpetual inventory system, when merchandise is sold on account, the following entry is made by the seller: Accounts receivable Sales revenue
XXX
Cost of goods sold Inventory
XXX
XXX
XXX
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-15
Topic: Accounting for Purchases of Merchandise – Periodic LO: 5 Level of Difficulty: EASY 29. Using a periodic inventory system, the seller’s journal entry to record the sale of merchandise on account includes a: A) Credit to Purchases B) Debit to Inventory C) Credit to Accounts Receivable D) Credit to Sales Revenue Answer: D Rationale: Under a periodic inventory system, when merchandise is sold on account, the following entry is made by the seller: Accounts receivable Sales revenue
XXX XXX
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: DIFFICULT 30. San Jose Corporation uses the perpetual inventory method. On March 1, it purchased $90,000 of merchandise inventory, terms 2/10, n/30. On March 3, San Jose returned goods (not damaged) that cost $9,000. On March 9, San Jose paid the supplier. On March 9, San Jose should credit: A) Purchase discounts for $1,800 B) Inventory for $1,800 C) Purchase discounts for $1,620 D) Inventory for $1,620 Answer: D Rationale: San Jose records the following entries: March 1:
March 3:
March 9:
Inventory Accounts payable To record purchase of goods on credit
$90,000
Accounts payable Inventory To record purchase returns
$ 9,000
$90,000
$ 9,000
Accounts payable $81,000 Inventory Cash To record purchase discount and payment
$ 1,620 $79,380
©Cambridge Business Publishers, 2020 5-16
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: DIFFICULT 31. Flagstaff Corporation uses the perpetual inventory method. On March 1, it purchased $120,000 of merchandise inventory, terms 2/10, n/30. On March 3, Flagstaff returned goods (not damaged) that cost $12,000. On March 9, Flagstaff paid the supplier. On March 9, Flagstaff should credit: A) Purchase discounts for $2,400 B) Inventory for $2,400 C) Purchase discounts for $2,160 D) Inventory for $2,160 Answer: D Rationale: Flagstaff records the following entries: March 1:
March 3:
March 9:
Inventory $120,000 Accounts payable To record purchase of goods on credit
$120,000
Accounts payable Inventory To record purchase returns
$ 12,000
$ 12,000
Accounts payable $108,000 Inventory Cash To record purchase discount and payment
$ 2,160 $105,840
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: DIFFICULT 32. Bosworth Company purchased $12,000 worth of merchandise, FOB shipping point. Transportation costs were an additional $1,050. The company later returned $2,250 worth of merchandise and paid the invoice within the 2% cash discount period. The total amount paid for this merchandise is: A) $10,605 B) $10,560 C) $12,789 D) $10,584 Answer: A Rationale: Purchase: Freight: Returns: Discount: Total:
$12,000 1,050 (2,250) (195) $10,605
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-17
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: DIFFICULT 33. Lizard Company purchased $16,000 worth of merchandise, FOB shipping point. Transportation costs were an additional $1,400. The company later returned $3,000 worth of merchandise and paid the invoice within the 2% cash discount period. The total amount paid for this merchandise is: A) $14,140 B) $14,080 C) $17,052 D) $14,112 Answer: A Rationale: Purchase: Freight: Returns: Discount: Total:
$16,000 1,400 (3,000) (260) $14,140
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: DIFFICULT 34. Vienna Stores recorded the following events involving a recent purchase of merchandise: • • • •
Received goods for $60,000, terms 2/10, n/30. Returned $1,200 of the shipment for credit. Paid $300 freight on the shipment. Paid the invoice within the discount period.
As a combined result of these events, the company’s inventory: A) Increased by $57,624 B) Increased by $57,900 C) Increased by $57,918 D) Increased by $57,924 Answer: D Rationale: Purchase: Returns: Freight: Discount: Total:
$60,000 (1,200) 300 (1,176) $57,924
©Cambridge Business Publishers, 2020 5-18
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: DIFFICULT 35. Clarksburg Stores recorded the following events involving a recent purchase of merchandise: • • • •
Received goods for $80,000, terms 2/10, n/30. Returned $1,600 of the shipment for credit. Paid $400 freight on the shipment. Paid the invoice within the discount period.
As a combined result of these events, the company’s inventory: A) Increased by $76,832 B) Increased by $77,200 C) Increased by $77,224 D) Increased by $77,232 Answer: D Rationale: Purchase: Returns: Freight: Discount: Total:
$80,000 (1,600) 400 (1,568) $77,232
Topic: Accounting for Purchases of Merchandise LO: 2 Level of Difficulty: MEDIUM 36. Gulliver’s Groceries purchased milk cartons at an invoice price of $9,000 and terms of 2/10, n/30. On arrival of the goods, Gulliver’s realized that half of the milk was past the expiration date, and returned them immediately to the supplier. If Gulliver’s pays the remaining amount of the invoice within the discount period, the amount paid should be: A) $4,320 B) $8,820 C) $9,000 D) $4,410 Answer: D Rationale: $9,000 (purchases) – $4,500 (returns) = $4,500 balance x 0.98 = $4,410
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-19
Topic: Accounting for Purchases of Merchandise LO: 2 Level of Difficulty: MEDIUM 37. Javier’s Groceries purchased milk cartons at an invoice price of $12,000 and terms of 2/10, n/30. On arrival of the goods, Javier’s realized that half of the milk was past the expiration date, and returned them immediately to the supplier. If Javier’s pays the remaining amount of the invoice within the discount period, the amount paid should be: A) $ 5,760 B) $11,760 C) $12,000 D) $ 5,880 Answer: D Rationale: $12,000 (purchases) – $6,000 (returns) = $6,000 balance x 0.98 = $5,880
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: MEDIUM 38. Julissa Company sold merchandise in the amount of $17,400 to Nunez Company on September 1, with credit terms of 2/10, n/30. The cost of the merchandise is $7,200. On September 4, Nunez returns some of the merchandise, which was put back into Julissa’s inventory. The selling price and the cost of the returned merchandise are $2,400 and $1,500, respectively. Nunez Company’s journal entry on September 8, when they pay the amount due, will include: (assume both companies use the perpetual inventory method) A) Credit Purchase Discounts $300 B) Credit Cash $15,582 C) Debit Accounts Payable $15,000 D) Credit Sales Discounts $300 Answer: C Rationale: Nunez Company records the following entries: Sept. 1: Merchandise $17,400 Accounts Payable To record purchase of goods on credit Sept. 4:
Sept. 8:
Accounts payable Merchandise To record purchase returns
$17,400
$ 2,400
Accounts payable $15,000 Merchandise Cash To record purchase discount and payment
$ 2,400
$ 300 $14,700
©Cambridge Business Publishers, 2020 5-20
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: MEDIUM 39. Schulze Company sold merchandise in the amount of $23,200 to Edwardo Company on September 1, with credit terms of 2/10, n/30. The cost of the merchandise is $9,600. On September 4, Edwardo returns some of the merchandise, which was put back into Schulze’s inventory. The selling price and the cost of the returned merchandise are $3,200 and $2,000, respectively. Edwardo Company’s journal entry on September 8, when they pay the amount due, will include: (assume both companies use the perpetual inventory method) A) Credit Purchase Discounts $400 B) Credit Cash $20,776 C) Debit Accounts Payable $20,000 D) Credit Sales Discounts $400 Answer: C Rationale: Edwardo Company records the following entries: Sept. 1:
Sept. 4:
Sept. 8:
Merchandise Accounts Payable To record purchase of goods on credit
$23,200
Accounts payable Merchandise To record purchase returns
$ 3,200
$23,200
Accounts payable $20,000 Merchandise Cash To record purchase discount and payment
$ 3,200
$ 400 $19,600
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: DIFFICULT 40. On June 15, a food wholesaler sold 100 cases of canned soup to Juniper Foods for $90 per case with terms of 2/10, n/30. On June 17, Juniper returned 20 cases of damaged inventory (and received full credit), along with a check for the amount due for the purchase. Given this information, the journal entry by Juniper Foods on June 17 will: A) Debit Accounts Receivable for $9,000 B) Credit Cash for $8,820 C) Debit Cash for $7,056 D) Credit Inventory for $1,944
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-21
Answer: D Rationale: Juniper Foods records the following entries: June 15:
June 17:
June 17:
Inventory Accounts Payable To record purchase of goods on credit
$9,000
Accounts payable Inventory To record purchase returns
$1,800
$9,000
$1,800
Accounts payable $7,200 Inventory Cash To record purchase discount and payment
$ 144 $7,056
Topic: Accounting for Purchases of Merchandise – Perpetual LO: 2 Level of Difficulty: DIFFICULT 41. On June 15, a food wholesaler sold 100 cases of canned soup to Flavorful Foods for $120 per case with terms of 2/10, n/30. On June 17, Flavorful returned 20 cases of damaged inventory (and received full credit), along with a check for the amount due for the purchase. Given this information, the journal entry by Flavorful Foods on June 17 will: A) Debit Accounts Receivable for $12,000 B) Credit Cash for $11,760 C) Debit Cash for $9,408 D) Credit Inventory for $2,592 Answer: D Rationale: Flavorful7 Foods records the following entries: June 15: Inventory $12,000 Accounts Payable To record purchase of goods on credit June 17:
June 17:
Accounts payable Inventory To record purchase returns
$12,000
$ 2,400 $ 2,400
Accounts payable $ 9,600 Inventory Cash To record purchase discount and payment
$ 192 $ 9,408
©Cambridge Business Publishers, 2020 5-22
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Accounting for Sales of Merchandise – Perpetual LO: 3 Level of Difficulty: MEDIUM 42. When merchandise that was sold on account is returned, using the perpetual inventory system which accounts are affected in the books of the seller? A) Cash, accounts receivable, cost of goods sold, and sales returns B) Sales returns, accounts receivable, purchases, and cost of goods sold C) Sales returns, accounts receivable, inventory, and cost of goods sold D) Sales returns, accounts receivable, purchases, and inventory Answer: C Rationale: Under a perpetual inventory system, when a buyer returns merchandise to the seller, the following entry is made by the seller: Sales returns and allowances Accounts receivable
XXX
Inventory
XXX
XXX
Cost of goods sold
XXX
Topic: Accounting for Sales of Merchandise – Perpetual LO: 3 Level of Difficulty: MEDIUM 43. A manufacturing company sells goods to a merchandising company, which in turn, sells the goods to a retail customer. The Sales Discounts account is debited by the merchandising company when: A) Defective merchandise is returned by the merchandiser to the manufacturer. B) Defective merchandise is returned by the retail customer to the merchandiser. C) Payment is made to the manufacturer within the discount period. D) The retail customer pays the merchandising company within the discount period. Answer: D Rationale: Under a perpetual inventory system, when a seller (merchandising company) receives payment for merchandise within the discount period, the following entry is made by the seller (merchandising company): Cash Sales discounts Account receivable
XXX XXX XXX
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-23
Topic: Accounting for Sales of Merchandise – Perpetual LO: 3 Level of Difficulty: MEDIUM 44. Using a perpetual inventory system, the seller’s journal entry to record the return of non-defective goods from a customer of merchandise sold on account includes a: A) Credit to Sales Returns and Allowances B) Debit to Cost of Goods Sold C) Credit to Inventory D) Debit to Inventory Answer: D Rationale: Under a perpetual inventory system, when a buyer returns merchandise to the seller, the following entry is made by the seller: Sales returns and allowances Accounts receivable
XXX
Inventory
XXX
XXX
Cost of goods sold
XXX
Topic: Accounting for Sales of Merchandise – Perpetual LO: 3 Level of Difficulty: MEDIUM 45. Linus Van Pelt Company sold merchandise in the amount of $17,400 to Sally Brown Company on February 1, with credit terms of 2/10, n/30. The cost of the items sold is $7,200. On February 4, Sally Brown Company returns some of the merchandise, which was restored into Linus Van Pelt’s inventory. The selling price and the cost of the returned merchandise are $2,400 and $1,500, respectively. The entries that Linus Van Pelt Company must make on February 4 will not include: (assume both companies use the perpetual inventory method) A) Credit to Cost of Goods Sold for $2,400 B) Debit to Inventory for $1,500 C) Debit to Sales Returns and Allowances for $2,400 D) Credit to Accounts Receivable for $2,400 Answer: A Rationale: Linus Van Pelt Company records the following entries: Feb. 1:
Feb. 4:
Accounts receivable Sales revenue
$17,400
Cost of goods sold Inventory To record sale of merchandise on credit
$7,200
$17,400
$7,200
Sales returns and allowances Accounts receivable
$ 2,400
Inventory Cost of goods sold To record purchase returns
$ 1,500
$ 2,400
$ 1,500
©Cambridge Business Publishers, 2020 5-24
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Accounting for Sales of Merchandise – Perpetual LO: 3 Level of Difficulty: MEDIUM 46. Tweetie Company sold merchandise in the amount of $23,200 to Sylvester Cat Company on February 1, with credit terms of 2/10, n/30. The cost of the items sold is $9,600. On February 4, Sylvester Cat Company returns some of the merchandise, which was restored into Tweetie’s inventory. The selling price and the cost of the returned merchandise are $3,200 and $2,000, respectively. The entries that Tweetie Company must make on February 4 will not include: (assume both companies use the perpetual inventory method) A) Credit to Cost of Goods Sold for $3,200 B) Debit to Inventory for $2,000 C) Debit to Sales Returns and Allowances for $3,200 D) Credit to Accounts Receivable for $3,200 Answer: A Rationale: Tweetie Company records the following entries: Feb. 1:
Feb. 4:
Accounts receivable Sales revenue
$23,200
Cost of goods sold Inventory To record sale of merchandise on credit
$9,600
$23,200
$9,600
Sales returns and allowances Accounts receivable
$ 3,200
Inventory Cost of goods sold To record purchase returns
$ 2,000
$ 3,200
$ 2,000
Topic: Accounting for Sales of Merchandise – Perpetual LO: 3 Level of Difficulty: MEDIUM 47. Trefoil Company sold merchandise on account for $4,500 to GS Cookie Company with credit terms of 2/10, n/30. Five days later, GS Cookie Company returned $1,500 of merchandise that was damaged, along with a check to settle the account. What entry does Trefoil Company make upon receipt of the check? A) Cash 3,000 Accounts Receivable 3,000 B) Cash 2,940 Sales Returns and Allowances 1,560 Accounts Receivable 4,500 C) Cash 2,940 Sales Returns and Allowances 1,500 Sales Discounts 60 Accounts Receivable 4,500 D) Cash 4,410 Sales Discounts 90 Accounts Receivable 4,500
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-25
Answer: C Rationale: To record return and payment: Sales returns and allowances Accounts receivable To record purchase returns
$1,500
Cash Sales discounts Accounts receivable To record sales discount and payment
$2,940 $ 60
$1,500
$3,000
Topic: Accounting for Sales of Merchandise – Perpetual LO: 3 Level of Difficulty: MEDIUM 48. Samores Company sold merchandise on account for $6,000 to DoSiDo Company with credit terms of 2/10, n/30. Five days later, DoSiDo Company returned $2,000 of merchandise that was damaged, along with a check to settle the account. What entry does Samores Company make upon receipt of the check? A) Cash 4,000 Accounts Receivable 4,000 B) Cash 3,920 Sales Returns and Allowances 2,080 Accounts Receivable 6,000 C) Cash 3,920 Sales Returns and Allowances 2,000 Sales Discounts 80 Accounts Receivable 6,000 D) Cash 5,880 Sales Discounts 120 Accounts Receivable 6,000 Answer: C Rationale: To record return and payment: Sales returns and allowances Accounts receivable To record purchase returns
$2,000
Cash Sales discounts Accounts receivable To record sales discount and payment
$3,920 $ 80
$2,000
$4,000
©Cambridge Business Publishers, 2020 5-26
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Accounting for Sales of Merchandise – Perpetual LO: 3 Level of Difficulty: MEDIUM 49. On January 5, Anka Brahtz Company purchased 11 all-terrain vehicles at a cost of $5,400 each. On February 12, they sold 8 vehicles for $6,900 per unit. If EGN uses a perpetual inventory system, the journal entry to record the sale on February 12th would include all of the following except: A) A credit to Purchases for $43,200 B) A debit to the Cost of Goods Sold for $43,200 C) A credit to Sales Revenue for $55,200 D) A credit to Inventory for $43,200 Answer: A Rationale: Feb. 12: Accounts receivable Sales revenue
$55,200 $55,200
Cost of goods sold $43,200 Inventory To record sale of merchandise on credit
$43,200
Topic: Accounting for Sales of Merchandise – Perpetual LO: 3 Level of Difficulty: MEDIUM 50. On January 5, EMG Company purchased 11 all-terrain vehicles at a cost of $7,200 each. On February 12, they sold 8 vehicles for $9,200 per unit. If EMG uses a perpetual inventory system, the journal entry to record the sale on February 12th would include all of the following except: A) A credit to Purchases for $57,600 B) A debit to the Cost of Goods Sold for $57,600 C) A credit to Sales Revenue for $73,600 D) A credit to Inventory for $57,600 Answer: A Rationale: Feb. 12: Accounts receivable Sales revenue
$73,600
Cost of goods sold $57,600 Inventory To record sale of merchandise on credit
$73,600 $57,600
Topic: Accounting for Sales of Merchandise LO: 3 Level of Difficulty: MEDIUM 51. Woofer Company sold $1,800,000 worth of merchandise, had $150,000 returned, and then the balance was received during the 2% discount period. What were the company’s net sales? A) $1,617,000 B) $1,350,000 C) $1,530,000 D) $1,320,000 Answer: A Rationale: Net Sales = Gross sales revenue – Sales returns and allowances – Sales discounts* X = $1,800,000 – $150,000 – $33,000* X = $1,617,000 *Sales discounts = ($1,800,000 – $150,000) x 0.02 = $33,000 ©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-27
Topic: Accounting for Sales of Merchandise LO: 3 Level of Difficulty: MEDIUM 52. Ribbitt Frog Company sold $2,400,000 worth of merchandise, had $200,000 returned, and then the balance was received during the 2% discount period. What were the company’s net sales? A) $2,156,000 B) $1,800,000 C) $2,040,000 D) $1,760,000 Answer: A Rationale: Net Sales = Gross sales revenue – Sales returns and allowances – Sales discounts* X = $2,400,000 – $200,000 – $44,000* X = $2,156,000 *Sales discounts = ($2,400,000 – $200,000) x 0.02 = $44,000
Topic: Accounting for Sales and Purchases of Merchandise LO: 2, 3 Level of Difficulty: DIFFICULT 53. On June 1, Powell Book Company sold CNN’s Bookstore $12,900 of books for cash. During the month, CNN’s Bookstore returned books costing $1,500 to Powell for a cash refund. In the same month, CNN’s sold the remaining books to their customers for a total of $15,300. As a result of these transactions, at the end of the month, CNN’s accounting equation will show a net: A) Increase of Equity of $3,900 B) Increase of Assets of $15,300 C) Decrease of Assets of $11,400 D) Increase of Equity of $5,400 Answer: A Rationale: CNN’s Bookstore records the following entries:
June 1: June 15: June 15:
Inventory Cash Cash Inventory Cash Sales revenue Cost of goods sold Inventory Total Impact
Assets +12,900 -12,900 +1,500 - 1,500 +15,300
Equity
+15,300 -11,400 -11,400 +3,900
+3,900
©Cambridge Business Publishers, 2020 5-28
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Accounting for Sales and Purchases of Merchandise LO: 2, 3 Level of Difficulty: DIFFICULT 54. On June 1, Puzzling Puzzles Company sold Cari’s Bookstore $17,200 of puzzles for cash. During the month, Cari’s Bookstore returned puzzles costing $2,000 to Puzzling Puzzles for a cash refund. In the same month, Cari’s sold the remaining puzzles to their customers for a total of $20,400. As a result of these transactions, at the end of the month, Cari’s accounting equation will show a net: A) Increase of Equity of $5,200 B) Increase of Assets of $20,400 C) Decrease of Assets of $15,200 D) Increase of Equity of $7,200 Answer: A Rationale: Cari’s Bookstore records the following entries:
June 1: June 15: June 15:
Inventory Cash Cash Inventory Cash Sales revenue Cost of goods sold Inventory Total Impact
Assets +17,200 -17,200 +2,000 - 2,000 +20,400
-15,200 +5,200
Equity
+20,400 -15,200 -+5,200
Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 55. Better Gardens, Inc., which uses a periodic inventory system, shows the following on December 31, 2019. Purchase Discounts Freight-in Purchases Beginning Inventory Ending Inventory Purchase Returns
$
16,800 23,400 630,030 100,500 86,400 19,200
The cost of goods sold for the year 2019 is: A) $628,530 B) $596,730 C) $571,530 D) $631,530 Answer: D Rationale: Cost of goods sold = Beginning inventory + (Purchases – Purchase discounts + Freight-in – Purchase returns) – Ending inventory X = $100,500 + ($630,030 – $16,800 + $23,400 – $19,200) – $86,400 X = $631,530
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-29
Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 56. Building Supplies, Inc., which uses a periodic inventory system, shows the following on December 31, 2019. Purchase Discounts Freight-in Purchases Beginning Inventory Ending Inventory Purchase Returns
$
22,400 31,200 840,040 134,000 115,200 25,600
The cost of goods sold for the year 2019 is: A) $838,040 B) $795,640 C) $762,040 D) $842,040 Answer: D Rationale: Cost of goods sold = Beginning inventory + (Purchases – Purchase discounts + Freight-in – Purchase returns) – Ending inventory X = $134,000 + ($840,040 – $22,400 + $31,200 – $25,600) – $115,200 X = $842,040
Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 57. Fondant Company reported the following data for 2019: Cost of Beginning Inventory: Invoice Cost of merchandise purchases: Purchase Returns and Allowances: Purchase Discounts received: Cost of Transportation in: Cost of merchandise sold to customers in sales transactions:
$ 75,000 1,650,000 75,000 30,000 45,000 $990,000
Determine Fondant Company’s Balance of Ending Inventory. A) $1,500,000 B) $1,560,000 C) $ 675,000 D) $ 660,000 Answer: C Rationale: Cost of goods sold = Beginning inventory + (Purchases – Purchase discounts + Freight-in – Purchase returns) – Ending inventory $990,000 = $75,000 + ($1,650,000 – $30,000 + $45,000 – $75,000) - X X = $75,000 + ($1,650,000 – $30,000 + $45,000 – $75,000) – $990,000 X = $675,000 = Ending inventory
©Cambridge Business Publishers, 2020 5-30
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 58. Honigkuchen Company reported the following data for 2019: Cost of Beginning Inventory: Invoice Cost of merchandise purchases: Purchase Returns and Allowances: Purchase Discounts received: Cost of Transportation in: Cost of merchandise sold to customers in sales transactions:
$ 100,000 2,200,000 100,000 40,000 60,000 $1,320,000
Determine Honigkuchen Company’s Balance of Ending Inventory. A) $2,000,000 B) $2,080,000 C) $ 900,000 D) $ 880,000 Answer: C Rationale: Cost of goods sold = Beginning inventory + (Purchases – Purchase discounts + Freight-in – Purchase returns) – Ending inventory $1,320,000 = $100,000 + ($2,200,000 – $40,000 + $60,000 – $100,000) – X X = $100,000 + ($2,200,000 – $40,000 + $60,000 – $100,000) – $1,320,000 X = $900,000 = Ending inventory
Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 59. Sandpiper Company reported the following year-end amounts: Beginning Inventory Net Cost of Purchases Ending Inventory Cost of Goods Sold
$22,950 101,250 ? 93,150
What is Sandpiper Company’s Ending Inventory for the year? A) $22,950 B) $14,850 C) $31,050 D) $ 8,100 Answer: C Rationale: Cost of goods sold = Beginning inventory + Net cost of purchases – Ending inventory $93,150 = $22,950 + $101,250 – X X = $31,050
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-31
Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 60. Hawk Company reported the following year-end amounts: Beginning Inventory Net Cost of Purchases Ending Inventory Cost of Goods Sold
$30,600 135,000 ? 124,200
What is Hawk Company’s Ending Inventory for the year? A) $30,600 B) $19,800 C) $41,400 D) $10,800 Answer: C Rationale: Cost of goods sold = Beginning inventory + Net cost of purchases – Ending inventory $124,200 = $30,600 + $135,000 – X X = $41,400
Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 61. Emma-Eva Company reported the following balances: Invoice Cost of Purchases Purchase Returns and Allowances Purchase Discounts Received Transportation Cost (Freight-in)
$3,000,000 525,000 75,000 180,000
What is the company’s net cost of purchases? A) $2,220,000 B) $2,580,000 C) $3,780,000 D) $2,400,000 Answer: B Rationale: Invoice cost of purchases – Purchase discounts + Freight-in – Purchase returns and allowances = Net cost pf purchases $3,000,000 - $75,000 + $180,000 – $525,000 = X X = $2,580,000
©Cambridge Business Publishers, 2020 5-32
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Periodic Inventory System LO: 5 Level of Difficulty: MEDIUM 62. Avery Street Company reported the following balances: Invoice Cost of Purchases Purchase Returns and Allowances Purchase Discounts Received Transportation Cost (Freight-in)
$4,000,000 700,000 100,000 240,000
What is the company’s net cost of purchases? A) $2,960,000 B) $3,440,000 C) $5,040,000 D) $3,200,000 Answer: B Rationale: Invoice cost of purchases – Purchase discounts + Freight-in – Purchase returns and allowances = Net cost of purchases $4,000,000 – $100,000 + $240,000 – $700,000 = X X = $3,440,000
Topic: Periodic Inventory System LO: 5 Level of Difficulty: DIFFICULT 63. Holmes Company reported the following year-end amounts: Net Sales Beginning Inventory Net Cost of Purchases Ending Inventory Cost of Goods Sold Gross Profit
$157,500 22,950 101,250 ? ? 64,350
What is Holmes Company’s Ending Inventory and Cost of Goods Sold for the year? A) Ending Inventory = $31,050; Cost of Goods Sold = $93,150 B) Ending Inventory = $26,700; Cost of Goods Sold = $60,600 C) Ending Inventory = $14,850; Cost of Goods Sold = $93,150 D) Ending Inventory = $26,250; Cost of Goods Sold = $60,600 Answer: A Rationale: Gross profit = Net sales – Cost of goods sold $64,350 = $157,500 – X X = $157,500 – $64,350 X = $93,150 = Cost of goods sold Cost of goods sold = Beginning inventory + Net cost of purchases – Ending inventory $93,150 = $22,950 + $101,250 – X X = $22,950 + $101,250 – $93,150 X = $31,050 = Ending inventory
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-33
Topic: Periodic Inventory System LO: 5 Level of Difficulty: DIFFICULT 64. Maercker Company reported the following year-end amounts: Net Sales Beginning Inventory Net Cost of Purchases Ending Inventory Cost of Goods Sold Gross Profit
$210,000 30,600 135,000 ? ? 85,800
What is Maercker Company’s Ending Inventory and Cost of Goods Sold for the year? A) Ending Inventory = $41,400; Cost of Goods Sold = $124,200 B) Ending Inventory = $35,600; Cost of Goods Sold = $ 80,800 C) Ending Inventory = $19,800; Cost of Goods Sold = $124,200 D) Ending Inventory = $35,000; Cost of Goods Sold = $ 80,800 Answer: A Rationale: Gross profit = Net sales – Cost of goods sold $85,800 = $210,000 – X X = $210,000 – $85,800 X = $124,200 = Cost of goods sold Cost of goods sold = Beginning inventory + Net cost of purchases – Ending inventory $124,200 = $30,600 + $135,000 – X X = $30,600 + $135,000 – $124,200 X = $41,400 = Ending inventory
Topic: Gross Profit Percentage LO: 4 Level of Difficulty: EASY 65. In 2019, Bright Target Company earned a gross profit of $16,248 million on net sales of $58,966. What is Bright Target’s gross profit percentage for 2019? A) 268.3% B) 58.4% C) 27.6% D) 181.5% Answer: C Rationale: Gross profit percentage = Gross profit on sales / net sales X = $16,248 / $58,966 X = 0.2755 = 27.6%
©Cambridge Business Publishers, 2020 5-34
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Gross Profit Percentage LO: 4 Level of Difficulty: EASY 66. In 2019, Blue Company earned a gross profit of $25,998 million on net sales of $67,390 million. What is Blue’s gross profit percentage for 2019? A) 311.1% B) 67.9% C) 38.6% D) 211.1% Answer: C Rationale: Gross profit percentage = Gross profit on sales / net sales X = $25,998 / $67,390 X = 0.386 = 38.6%
Topic: Gross Profit Percentage LO: 4 Level of Difficulty: MEDIUM 67. In 2019, Wayfield Co. incurred cost of goods sold of $37,323 million on net sales of $56,228 million. What is Wayfield’s gross profit percentage for 2019? A) 33.6% B) 115.3% C) 43.4% D) 31.4% Answer: A Rationale: Gross profit on sales = Net Sales – Cost of goods sold X = $56,228 - $37,323 X = $18,905 = Gross profit on sales Gross profit percentage = Gross profit on sales / Net sales X = $18,905 / $56,228 X = 0.336 = 33.6%
Topic: Gross Profit Percentage LO: 4 Level of Difficulty: MEDIUM 68. In 2019, Shield Company incurred cost of goods sold of $59,716 million on net sales of $64,260 million. What is Shield’s gross profit percentage for 2019? A) 7.1% B) 77.4% C) 29.1% D) 21.1% Answer: A Rationale: Gross profit on sales = Net Sales – Cost of goods sold X = $64,260 – $59,716 X = $4,544 = Gross profit on sales Gross profit percentage = Gross profit on sales / Net sales X = $4,544 / $64,260 X = 0.071 = 7.1%
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-35
Topic: Gross Profit Percentage LO: 4 Level of Difficulty: DIFFICULT 69. In 2019, Move It Company incurred cost of goods sold of $36,162 million on gross sales revenue of $76,643 million. Sales returns and allowances were $5,606 million and sales discounts were $1,314 million. What is Move It’s gross profit percentage for 2019? A) 43.0% B) 48.1% C) 56.4% D) 52.7% Answer: B Rationale: Net Sales = Gross sales revenue – Sales returns and allowances – sales discounts X = $76,643 – $5,606 – $1,314 X = $69,723 = Net Sales Gross profit on sales = Net Sales – Cost of goods sold X = $69,723 – $36,162 X = $33,561 = Gross profit on sales Gross profit percentage = Gross profit on sales / net sales X = $33,561 / $69,723 X = 0.481 = 48.1%
Topic: Gross Profit Percentage LO: 4 Level of Difficulty: DIFFICULT 70. In 2019, Intersection Company incurred cost of goods sold of $58,215 million on gross sales revenue of $87,592 million. Sales returns and allowances were $7,473 million and sales discounts were $1,752 million. What is Intersection’s gross profit percentage for 2019? A) 34.4% B) 25.7% C) 37.6% D) 35.1% Answer: B Rationale: Net Sales = Gross sales revenue – Sales returns and allowances – sales discounts X = $87,592 – $7,473 – $1,752 X = $78,367 = Net Sales Gross profit on sales = Net Sales – Cost of goods sold X = $78,367 – $58,215 X = $20,152 = Gross profit on sales Gross profit percentage = Gross profit on sales / net sales X = $20,152 / $78,367 X = 0.257 = 25.7%
©Cambridge Business Publishers, 2020 5-36
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Return on Sales Ratio (Profit Margin) LO: 4 Level of Difficulty: EASY 71. In 2019, Arrow earned a net income of $22,614 million on net sales of $76,643 million. What was Arrow’s return on sales ratio for 2019? A) 29.5% B) 249.2% C) 56.2% D) 163.4% Answer: A Rationale: Return on sales ratio = Net income / Net sales X = $22,614 / $76,643 X = 0.295 = 29.5%
Topic: Return on Sales Ratio (Profit Margin) LO: 4 Level of Difficulty: EASY 72. In 2019, Farmer Co. earned a net income of $20,152 million on net sales of $87,592 million. What was Farmer’s return on sales ratio for 2019? A) 23.0% B) 290.5% C) 65.6% E) 190.5% Answer: A Rationale: Return on sales ratio = Net income / Net sales X = $20,152 / $87,592 X = 0.230 = 23.0%
Topic: Return on Sales Ratio (Profit Margin) LO: 4 Level of Difficulty: MEDIUM 73. In 2019, Purple Eggplant incurred cost of goods sold of $59,823 million on net sales of $76,643 million. What was Purple Eggplant’s return on sales ratio for 2019? (Assume no other expenses.) A) 10.6% B) 24.1% C) 13.8% D) 21.9% Answer: D Rationale: Net income = Net sales – Cost of goods sold X = $76,643 – $59,823 X = $16,820 = Net income Profit margin = Return on sales ratio Return on sales ratio = Net income / Net sales X = $16,820 / $76,643 X = 0.219 = 21.9%
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-37
Topic: Return on Sales Ratio (Profit Margin) LO: 4 Level of Difficulty: MEDIUM 74. In 2019, Lemon Co. incurred cost of goods sold of $69,763 million on net sales of $87,592 million. What was Lemon’s return on sales ratio for 2019? (Assume no other expenses.) A) 4.3% B) 9.8% C) 5.6% D) 20.4% Answer: D Rationale: Net income = Net sales – Cost of goods sold X = $87,592 – $69,763 X = $17,829 = net income Profit margin = Return on sales ratio Return on sales ratio = Net income / Net sales X = $17,829 / $87,592 X = 0.204 = 20.4%
Topic: Return on Sales Ratio (Profit Margin) LO: 4 Level of Difficulty: DIFFICULT 75. In 2019, Arrow Co. incurred cost of goods sold of $56,073 million on gross sales revenue of $76,643 million. Sales returns and allowances were $5,606 million. What was Arrow Co.’s profit margin for 2019? (Assume no other expenses.) A) 19.2% B) 22.7% C) 21.1% D) 20.5% Answer: C Rationale: Net Sales = Gross sales revenue – Sales returns and allowances X = $76,643 – $5,606 X = $71,037 = Net Sales Net income = Net Sales – Cost of goods sold X = $71,037 – $56,073 X = $14,964 = net income Profit margin = Return on sales ratio Return on sales ratio = Net income / Net sales X = $14,964 / $71,037 X = 0.211 = 21.1%
©Cambridge Business Publishers, 2020 5-38
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Return on Sales Ratio (Profit Margin) LO: 4 Level of Difficulty: DIFFICULT 76. In 2019, Cumquat Co. incurred cost of goods sold of $74,763 million on gross sales revenue of $87,592 million. Sales returns and allowances were $10,473 million. What was Cumquat’s profit margin for 2019? (Assume no other expenses.) A) 6.1% B) 7.2% C) 3.1% D) 6.5% Answer: C Rationale: Net Sales = Gross sales revenue – Sales returns and allowances X = $87,592 – $10,473 X = $77,119 = Net Sales Net income = Net Sales – Cost of goods sold X = $77,119 – $74,763 X = $2,356 = net income Profit margin = Return on sales ratio Return on sales ratio = Net income / Net sales X = $2,356 / $77,119 X = 0.031 = 3.1%
Topic: New Revenue Recognition Standard – Sales Discounts LO: 6 Level of Difficulty: MEDIUM 77. During 2019, Reed Corporation sold merchandise for a total of $900,000. The cost of merchandise to Reed was $675,000. Reed offers credit terms of 1/10, n/30 to encourage early payment. At year-end, there are $22,500 of sales still eligible for the 1% discount. Reed believes that all of the companies will pay within the discount period to receive the 1% discount. Assume Reed’s fiscal year is December 31. Reed’s adjusting journal entry will include: A) A debit to Sales Discounts for $225 B) A credit to Allowance for Sales Discounts for $2,250 C) A debit to Sales Discounts for $2,050 D) A credit to Sales Discounts for $225 E) No adjusting journal entry is required. Discount will be recognized when payment is received. Answer: A Rationale: Sales discounts Allowance for sales discounts ($22,500 x 0.01 = $225)
$225 $225
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-39
Topic: New Revenue Recognition Standard – Sales Discounts LO: 6 Level of Difficulty: MEDIUM 78. During 2019, Bava Technologies sold merchandise for a total of $800,000. The cost of merchandise to Bava was $560,000. Bava offers credit terms of 2/10, n/30 to encourage early payment. At yearend, there are $24,000 of sales still eligible for the 2% discount. Bava believes that all of the companies will pay within the discount period to receive the 2% discount. Assume Bava’s fiscal year is December 31. Bava’s adjusting journal entry will include: A) A debit to Sales Discounts for $480 B) A credit to Allowance for Sales Discounts for $4,800 C) A debit to Sales Discounts for $4,800 D) A credit to Sales Discounts for $480 E) No adjusting journal entry is required. Discount will be recognized when payment is received. Answer: A Rationale: Sales discounts Allowance for sales discounts ($24,000 x 0.02 = $480)
$480 $480
Topic: New Revenue Recognition Standard – Sales Returns and Allowances LO: 6 Level of Difficulty: MEDIUM 79. During 2019, Reed Corporation sold merchandise for a total of $900,000. The cost of merchandise to Reed was $675,000. Reed allows a 60 day return period for the merchandise it sells. At year-end, Reed estimates there are $105,000 of sales (with a cost of $78,750 to Reed) that are still within the 60-day return period. From past experience, Bava believes that 10% of this merchandise will be returned. Assume Reed’s fiscal year is December 31. Reed’s adjusting journal entries will include: A) A debit to Estimated Inventory Return for $10,500 B) A credit to Cost of Goods Sold for $7,875 C) A debit to Sales Refunds Payable for $10,500 D) A debit to Sales Returns and Allowances for $7,875 E) No adjusting journal entry is required. Return will be recognized when it occurs. Answer: B Rationale: Sales returns and allowances Sales refunds payable ($105,000 x 0.10) Estimated inventory return Cost of goods sold ($78,750 X 0.10)
$10,500 $10,500
$7,875 $7,875
©Cambridge Business Publishers, 2020 5-40
th
Financial Accounting for Undergraduates, 4 Edition
Topic: New Revenue Recognition Standard – Sales Returns and Allowances LO: 6 Level of Difficulty: MEDIUM 80. During 2019, Gleeson Technologies sold merchandise for a total of $800,000. The cost of merchandise to Gleeson was $560,000. Gleeson allows a 60 day return period for the merchandise it sells. At year-end, Gleeson estimates there are $90,000 of sales (with a cost of $63,000 to Gleeson) that are still within the 60-day return period. From past experience, Gleeson believes that 5% of this merchandise will be returned. Assume Gleeson’s fiscal year is December 31. Gleeson’s adjusting journal entries will include: A) A debit to Estimated Inventory Return for $4,500 B) A credit to Cost of Goods Sold for $3,150 C) A debit to Sales Refunds Payable for $4,500 D) A debit to Sales Returns and Allowances for $3,150 E) No adjusting journal entry is required. Return will be recognized when it occurs. Answer: B Rationale: Sales returns and allowances Sales refunds payable ($90,000 x 0.05) Estimated inventory return Cost of goods sold ($63,000 x 0.05)
$4,500 $4,500
$3,150 $3,150
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-41
Exercises Topic: Purchase Discounts LO: 2 1. Belpre, Inc. owes $90,000 to William’s Drones Co. for inventory acquired with terms of 3/15, n/30. a. How much will Belpre, Inc. pay if payment is made within the discount period? b. What transaction will Belpre, Inc. record on November 30, the company’s fiscal year end, if the invoice is dated November 28 and payment will be made on December 12? Answer: a. Inventory cost Purchase discount ($90,000 x 3%) Net payment
$90,000 (2,700) $87,300 th
b. The purchase discount of $2,700 ($90,000 x 3%) is not reflected in the November 30 year-end entry, since payment (within the discount period) for the inventory is not made until after Belpre, Inc.’s year-end. The year-end entry reflects the full cost of the inventory invoice. Inventory Accounts payable
90,000 90,000
Topic: Cost of Goods Sold Using a Periodic System LO: 5 2. Complete the grid to calculate Cost of Goods Sold: a) + Cost of Goods Purchased During the Period = Cost of Goods Available for Sale – b) = Cost of Goods Sold Answer: a) Beginning Inventory b) Ending Inventory
©Cambridge Business Publishers, 2020 5-42
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Gross Profit Analysis LO: 4 3. As a shareholder of Jacksonville Industries, a manufacturer of DVD players, you are interested in comparing gross profits over a 3-year period. Calculate the gross profit percentage for years 2019, 2018, and 2017 using the income statement items below (in thousands). Interpret your results.
Net sales Cost of goods sold Gross Profit
2019
2018
2017
$20,640 14,830 $5,810
$21,880 14,044 $7,836
$21,540 13,684 $7,856
Answer: Gross profit percentage = Gross profit / Net Sales
Gross profit margin
2019
2018
2017
28.1%
35.8%
36.5%
The gross profit percentage declined sequentially year to year. This is not a good sign, and suggests that the company’s product line may be stale, competition may have increased, economic activity may have declined, or the company may be carrying too much inventory. In the case of DVD players, it is likely that the product line is facing stiff competition from new technology.
Topic: New Revenue Recognition Standard – Sales Returns and Allowances LO: 6 4. During 2019, Armstrong Technologies sold merchandise for a total of $1,800,000. The cost of merchandise to Armstrong was $1,350,000. Armstrong offers credit terms of 1/15, n/30 to encourage early payment. At year-end, there are $225,000 of sales still eligible for the 1% discount. Armstrong believes that all of the companies will pay within the discount period to receive the 1% discount. In addition, Armstrong allows a 60 day return period for the merchandise it sells. At year-end, Armstrong estimates there are $675,000 of sales (with a cost of $506,250 to Armstrong) that are still within the 60-day return period. From past experience Armstrong believes that 10% of this merchandise will be returned. Assume Armstrong’s fiscal year is December 31. Prepare the period-end adjusting journal entries needed for Armstrong Technologies to comply with the new revenue recognition standard. Answer: Sales discounts $2,250 Allowance for sales discounts $2,250 To record the estimated sales discount on credit sales still eligible for the discount at year end ($225,000 x 0.01 = $2,250). Sales returns and allowances $67,500 Sales refunds payable $67,500 To record the estimated return of merchandise sold still eligible for return at year end ($675,000 x 0.10). Estimated inventory return $50,625 Cost of goods sold $50,625 To record the estimated return of merchandise sold still eligible for return at year end ($506,250 x 0.10).
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-43
Problems Topic: Credit Terms LO: 2 1. For each of the following Sullivan Company purchases, assume that credit terms are 2/10, n/30. In each case determine (a) the appropriate cash discount available and (b) the cash remitted if the payment is made within the discount period.
1. 2. 3. 4.
Amount of Sale $3,000 3,300 2,700 1,800
Answer: 1. (a) 2% x ($3,000 – $600) = $48 2. (a) 2% x ($3,300 – $300) = $60 3. (a) 2% x ($2,700 – $150) = $51 4. (a) 2% x $1,800 = $36
(a) Discount Available $_____ $_____ $_____ $_____
Merchandise Returned $600 300 150 --
(b) Cash Remitted $_____ $_____ $_____ $_____
(b) $3,000 – $600 – $48 = $2,352 (b) $3,300 – $300 – $60 = $2,940 (b) $2,700 – $150 – $51 = $2,499 (b) $1,800 – $36 = $1,764
Topic: Periodic Inventory System LO: 5 2. The following are selected transactions of Drcman, Inc.: May 10 16 19
Sold and shipped on account to Linley, Inc. merchandise for $2,300, terms 2/10, n/30. Linley, Inc. returned merchandise billed at $600 on May 10. Received a check from Linley, Inc. for full settlement of the May 10 transaction.
Record the above transactions in general journal form as they would appear on the books of (a) Drcman, Inc. and (b) Linley, Inc. Linley, Inc. records purchases at invoice price. Both companies use the periodic inventory system. Omit explanations for the journal entries. Answer: (a) On the books of Drcman, Inc.: May 10 Accounts receivable Sales 16 Sales returns and allowances Accounts receivable 19 Cash Sales discounts Accounts receivable
2,300 2,300 600 600 1,666* 34** 1,700
*($2,300 - $600 - $34 = $1,666) **[($2,300 - $600) x 2% = $34]
(b) On the books of Linley, Inc.: May 10 Purchases 2,300 Accounts payable 16 Accounts payable 600 Purchases returns and allowances 19 Accounts payable 1,700 Purchases discounts Cash
2,300 600 34 1,666
©Cambridge Business Publishers, 2020 5-44
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Periodic Inventory System LO: 5 3. The following are selected transactions of Carolyn Company: June 20 22 28
Sold and shipped $5,400 merchandise on account to Patrick, Inc., terms 2/10, n/30. Patrick, Inc. returned merchandise billed at $1,500 on June 20. Received a check from Patrick, Inc. for full settlement of the June 20 transaction.
Record the above transactions in general journal form on the books of (a) Carolyn Company and (b) Patrick, Inc. Both companies use the periodic inventory system. Omit explanations for the journal entries. Answer: (a) On the books of Carolyn Company: June 20 Accounts receivable Sales 22
28
5,400 5,400
Sales returns and allowances Accounts receivable
1,500
Cash Sales discounts Accounts receivable
3,822* 78**
1,500
3,900
*($5,400 - $1,500 - $78 = $3,822) **[($5,400 - $1,500) x 2% = $78]
(b) On the books of Patrick Inc.: June 20 Purchases Accounts payable 22
28
5,400 5,400
Accounts payable 1,500 Purchases returns and allowances
1,500
Accounts payable Purchases discounts Cash
78 3,822
3,900
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-45
Topic: Periodic Inventory System LO: 5 4. The adjusted trial balance for Michaelis Company is shown below. Michaelis uses the periodic inventory system. MICHAELIS COMPANY Trial Balance December 31, 2019 Cash Accounts receivable Inventory, January 1 Office supplies Prepaid rent Equipment Accumulated depreciation Accounts payable Common stock Retained earnings Sales Sales returns and allowances Purchases Purchases returns and allowances Freight in Supplies expense Rent expense Salaries expense
Debit $ 109,200 72,000 294,000 2,100 2,700 105,000
Credit
$ 36,000 58,200 80,000 349,000 743,000 26,000 480,000 4,800 15,300 3,600 37,500 123,600 $1,271,000
$1,271,000
Inventory on December 31, 2019, was $306,000. Required: a. Without preparing a formal income statement, calculate the net income or loss for the year. b. What amount of retained earnings would appear on the December 31, 2019 balance sheet? Answer: a. Net sales ($743,0000 - $26,000) Inventory, January 1 Net cost of purchases ($480,000 - $4,800 + $15,300) Cost of goods available for sale Inventory, December 31
$717,000 $294,000 490,500 784,500 306,000
Cost of goods sold
478,500
Gross profit on sales Expenses ($3,600 + $37,500 + $123,600) Net income
238,500 164,700 $ 73,800
b. $349,000 beginning retained earnings + $73,800 net income = $422,800
©Cambridge Business Publishers, 2020 5-46
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Purchase and Sales of Merchandise Using a Perpetual Inventory System LO: 2, 3 5. The following are selected transactions of Midnight, Inc.: May 10 16 19
Sold and shipped on account to Sirius, Inc. merchandise for $3,000 ($1,800 cost), terms 2/10, n/30. Sirius, Inc. returned merchandise billed at $600 ($360 cost) on May 10. Received a check from Sirius, Inc. for full settlement of the May 10 transaction.
Record the above transactions in general journal form as they would appear on the books of (a) Midnight, Inc. and (b) Sirius, Inc. Both companies use the perpetual inventory system. Omit explanations for the journal entries. Answer: (a) On the books of Midnight, Inc.: May 10 10 16 16 19
Accounts receivable Sales Cost of goods sold Inventory Sales returns and allowances Accounts receivable Inventory Cost of goods sold Cash Sales discounts Accounts receivable
3,000 3,000 1,800 1,800 600 600 360 360 2,352* 48** 2,400
*($3,000 - $600 - $48 = $2,352) **(($3,000 - $600) x 2% = $48)
(b) On the books of Sirius, Inc.: May 10 16 19
Inventory Accounts payable Accounts payable Inventory Accounts payable Inventory Cash
3,000 3,000 600 600 2,400 48 2,352
©Cambridge Business Publishers, 2020 Test Bank, Chapter 5
5-47
Chapter 6 Accounting for Inventory Learning Objectives – Coverage by question True / False
Multiple Choice
1
1, 101, 102
LO2 – Describe inventory costing using specific identification, FIFO, LIFO and weighted-average cost.
10, 11
11, 20-23, 25-32, 35-37, 41-43, 47-49, 53-55, 59-61, 65-67, 71-73, 80-82, 90, 103-124
4-6, 12, 13
1-5, 8, 9
LO3 – Analyze the financial effects of different inventory costing methods on company profit.
2-4, 7, 8, 12, 13
2-8, 12, 24-28, 33, 34, 89, 125-128
1, 2, 12, 13
1-5, 7
LO4 – Apply the lower-ofcost-or-net realizable method.
9, 14, 15
9, 10, 18, 19, 91-94, 129-138
11
11
LO5 – Define inventory turnover and days’ sales in inventory and explain the use of these ratios.
6, 16
14-17, 95-100
7
6, 10
38-40, 44-46, 50-52, 56-58, 62-64, 68-70, 74-79, 83-88, 139-150
9, 10
13
3, 8
LO1 – Explain inventory concepts and modern inventory practices.
LO6 – Appendix 6A: Describe inventory costing under a perpetual inventory system using specific identification, FIFO, LIFO and weighted-average cost. LO7 – Appendix 6B: Define the LIFO reserve and explain how it is used to compare the performance of companies using different inventory costing methods
5
Exercises
Problems
6
4, 10
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-1
Chapter 6: Accounting for Inventory
True / False Topic: Inventory Costing LO: 1 1. Inventory costs are all costs necessary to acquire and sell the merchandise. Answer: False Rationale: All necessary costs incurred to acquire merchandise inventory and deliver it to the buyer’s place of business are included in the buyer’s cost of inventory. This includes the purchase price of the merchandise, plus any transportation or freight-in costs, less any purchase returns and allowances and any purchase discounts. Topic: LIFO Costing LO: 3 2. When inventory quantities are maintained or increased during a period, the periodic LIFO method prevents any part of the beginning inventory amount from becoming part of the period’s cost of goods sold. Answer: True Rationale: LIFO assumes that the most recent purchases are sold first. If inventory quantities are maintained or increased during a period, they will be used to calculate the period’s cost of goods sold, and thus, will prevent any part of the beginning inventory amount from becoming part of the period’s cost of goods sold. Topic: Inventory Costing and the Balance Sheet LO: 3 3. FIFO inventory costing yields more accurate reporting of the inventory balance on the balance sheet than the LIFO method. Answer: True Rationale: FIFO assumes that the most recently purchased goods are remaining in inventory’s balance. Hence, the balance sheet reports inventories at more current costs. Topic: FIFO Inventory Costing and Profit LO: 3 4. In periods of rising prices, companies that use FIFO inventory costing report higher gross profit than they would if they used LIFO. Answer: True Rationale: In periods of rising prices, companies which use the FIFO method of inventory costing, will have a lower cost of inventory than would be the case if they utilized the LIFO method of inventory costing. If inventory costs less, than the cost of goods sold will be lower and thus, gross profits will be higher than would be reported if the companies used the LIFO method.
©Cambridge Business Publishers, 2020 6-2
Financial Accounting for Undergraduates, 4th Edition
Topic: LIFO Disclosures LO: 7 5. Companies using LIFO are required to disclose the amount at which inventory would have been reported had the company used FIFO. The difference between LIFO and FIFO inventories is called the LIFO reserve. Answer: True Rationale: The disclosure of the LIFO reserve is required for those companies using LIFO inventory costing. This disclosure allows analysts to adjust the balance sheet and income statement for LIFO effects when comparing LIFO and FIFO companies. Topic: Inventory Turnover Ratio LO: 5 6. A low inventory turnover indicates that a firm is able to sell its inventory more quickly. Answer: False Rationale: Inventory turnover indicates how many times inventory turns (is sold) during a period. More turns indicate that inventory is sold more quickly. Topic: FIFO Costing LO: 3 7. Under the periodic FIFO method of inventory costing, the ending inventory amount reflects the most recent acquisition costs. Answer: True Rationale: FIFO assumes that the most recently purchased goods are remaining in inventory’s balance. Hence, the balance sheet reports inventories at more current costs. Topic: Inventory Errors LO: 3 8. Under the periodic inventory system, an uncorrected error in an ending inventory amount will affect income determination for two accounting periods. Answer: True Rationale: An uncorrected error in an ending inventory amount will affect income determination because the value of ending inventory reported on the balance sheet in the period of the error will be misstated resulting in the cost of goods sold being misstated and thus, the current net income being misstated. Further, the error is not limited to only the current period—net income in the following period is also affected, because the current period’s misstated ending inventory becomes the next period misstated beginning inventory. Topic: IFRS Inventory Costing LO: 4 9. Inventory costing procedures used by businesses are the same in all countries. Answer: False Rationale: Inventory costing procedures used by businesses in countries other than the U.S. are much the same as those in the U.S., with a few exceptions. Under IFRS, LIFO is not generally accepted, and IFRS permits inventory to be revalued upwards if the inventory’s fair value appreciates above the acquisition cost.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-3
Topic: Inventory Costing Methods LO: 2 10. A company that uses LIFO must sell its oldest goods first. Answer: False Rationale: LIFO represents a cost flow, not the physical unit flow. Topic: Weighted-Average Inventory Costing LO: 2 11. The average unit cost used in the weighted-average inventory pricing method is calculated by dividing the total units available for sale into the period’s net cost of purchases. Answer: False Rationale: The average unit cost used in the weighted-average inventory pricing method is calculated by dividing the total units available for sale into the period’s costs of goods available for sale. Topic: LIFO versus FIFO LO: 3 12. When a company uses LIFO and prices are declining, profits will be higher than if the company had used FIFO. Answer: True Rationale: If prices are declining, the cost of the most recently purchased units will be less than the cost of older units. These newer units will flow to the income statement with a smaller cost than under FIFO causing profits to be higher. Topic: Weighted-Average Inventory Costing LO: 3 13. A weighted-average approach to costing inventory most naturally fits operations that involve differentiated products of high unit value. Answer: False Rationale: Weighted-average cost is best suited for businesses that warehouse a large volume of undifferentiated goods in a common area. Liquid fuels, grains, and other commodities are examples. Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 14. The lower-of-cost-or-net realizable value method may be applied to each inventory item or to totals of each inventory category or to the entire inventory. Answer: True Rationale: The lower-of-cost-or-net realizable value method may be applied on an individual item-byitem basis or to totals of each inventory category or to the entire inventory.
©Cambridge Business Publishers, 2020 6-4
Financial Accounting for Undergraduates, 4th Edition
Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 15. The lower-of-cost-or-net realizable value method provides for the recognition of inventory losses from price declines in the period the inventory is sold. Answer: False Rationale: The lower-of-cost-or-realizable value method provides for the recognition of an inventory write-down loss when the inventory’s net realizable value declines below its recorded acquisition cost. Under lower-of-cost-or-net realizable value, a loss is reported in the period when the inventory’s net realizable value declines, rather than during a subsequent period when the actual sale of the inventory takes place. Topic: Days’ Sales in Inventory LO: 5 16. A firm’s “days’ sales in inventory” is computed by dividing 365 by its inventory turnover. Answer: True Rationale: An extension of the inventory turnover ratio, this ratio indicates how many days it takes, on average, for a firm to sell its inventory.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-5
Multiple Choice Topic: Inventory Costs for Manufacturing Companies LO: 1 Level of Difficulty: EASY 1. Which of the following is not an inventory account for manufacturing companies? A) Work-in-process B) Finished goods C) Cost of goods sold D) Raw materials Answer: C Rationale: Raw materials, work-in-process, and finished goods are all inventory accounts. Cost of goods sold is the account used for goods that are sold and is reported on the income statement. Topic: Inventory Count Errors LO: 3 Level of Difficulty: DIFFICULT 2. During its first and second years of operations, Lupin Company, a corporation using a periodic inventory system, made undiscovered errors in taking its year-end inventories that overstated year 1 ending inventory by $240,000 and overstated year 2 ending inventory by $180,000. The combined effect of these errors on reported income is: Year 1 A) Overstated $240,000 B) Overstated $240,000 C) Understated $240,000 D) Overstated $240,000
Year 2 Overstated $420,000 Overstated $180,000 Understated $420,000 Understated $60,000
Year 3 Understated $180,000 Not affected --Not affected --Understated $180,000
Answer: D Rationale: Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory
Therefore:
Year 1: X = $0 + $0 - $240,000 X = -$240,000 = CGS understated (-)
Year 2: X = $240,000 + $0 - $180,000 X = +$60,000 = CGS overstated (+)
Year 3: X = +$180,000 + $0 - $0 X = +$180,000 = CGS overstated (+)
Income: overstated
Income: understated
Income: understated
©Cambridge Business Publishers, 2020 6-6
Financial Accounting for Undergraduates, 4th Edition
Topic: Inventory Count Errors LO: 3 Level of Difficulty: DIFFICULT 3. During its first and second years of operations, Clover Company, a corporation using a periodic inventory system, made undiscovered errors in taking its year-end inventories that overstated year 1 ending inventory by $320,000 and overstated year 2 ending inventory by $240,000. The combined effect of these errors on reported income is: Year 1 A) Overstated $320,000 B) Overstated $320,000 C) Understated $320,000 D) Overstated $320,000
Year 2 Overstated $560,000 Overstated $240,000 Understated $560,000 Understated $80,000
Year 3 Understated $240,000 Not affected --Not affected --Understated $240,000
Answer: D Rationale: Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory
Therefore:
Year 1: X = $0 + $0 - $320,000 X = -$320,000 = CGS understated (-)
Year 2: X = $320,000 + $0 - $240,000 X = +$80,000 = CGS overstated (+)
Year 3: X = +$240,000 + $0 - $0 X = +$240,000 = CGS overstated (+)
Income: overstated
Income: understated
Income: understated
Topic: Gross Profit Calculation LO: 3 Level of Difficulty: MEDIUM 4. The weighted-average cost method is used by Jose, Inc. Sales are $240,000, the number of units available for sale is 100, the number of units sold during the period is 75, and the weighted-average cost of the goods available for sale is $600 each. How much is gross profit for the company? A) $ 30,000 B) $ 45,000 C) $ 60,000 D) $195,000 Answer: D Rationale: Gross profit = $240,000 (sales) – [$600 (weighted-average cost) x 75 (units)] = $195,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-7
Topic: Gross Profit Calculation LO: 3 Level of Difficulty: MEDIUM 5. The weighted-average cost method is used by Hector, Inc. Sales are $320,000, the number of units available for sale is 100, the number of units sold during the period is 75, and the weighted-average cost of the goods available for sale is $800 each. How much is gross profit for the company? A) $ 40,000 B) $ 60,000 C) $ 80,000 D) $260,000 Answer: D Rationale: Gross profit = $320,000 (sales) – [$800 (weighted-average cost) x 75 (units)] = $260,000 Topic: Inventory Count Errors LO: 3 Level of Difficulty: MEDIUM 6. During its first year of operations, Richmond Company, using a periodic inventory system, made undiscovered errors in taking its year-end inventory that overstated Year 1 ending inventory by $150,000. The effect of these errors on reported income is: Year 1 A) Understated $150,000 B) Overstated $150,000 C) Overstated $150,000 D) Overstated $150,000
Year 2 Understated $150,000 Understated $150,000 Not affected --Overstated $150,000
Answer: B Rationale: Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory
Therefore:
Year 1: X = $0 + $0 - $150,000 X = -$150,000 = CGS understated (-)
Year 2: X = $150,000 + $0 - $0 X = +$150,000 = CGS overstated (+)
Income: overstated
Income: understated
©Cambridge Business Publishers, 2020 6-8
Financial Accounting for Undergraduates, 4th Edition
Topic: Inventory Count Errors LO: 3 Level of Difficulty: MEDIUM 7. During its first year of operations, Oscar Company, using a periodic inventory system, made undiscovered errors in taking its year-end inventory that overstated Year 1 ending inventory by $200,000. The effect of these errors on reported income is: Year 1 A) Understated $200,000 B) Overstated $200,000 C) Overstated $200,000 D) Overstated $200,000
Year 2 Understated $200,000 Understated $200,000 Not affected --Overstated $200,000
Answer: B Rationale: Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory Year 1: Year 2: X = $0 + $0 - $200,000 X = $200,000 + $0 - $0 X = $0 - $200,000 X = $200,000 - $0 X = -$200,000 X = +$200,000 = CGS understated (-) = CGS overstated (+) Therefore:
Income: overstated
Income: understated
Topic: Inventory Costing and the Balance Sheet LO: 3 Level of Difficulty: MEDIUM 8. Assuming rising prices, which method will give the highest dollar value for cost of goods sold on the income statement? A) FIFO B) Average Cost C) LIFO D) All of these give equal values for cost of goods sold Answer: C Rationale: Under LIFO, the most costly units are the ones last purchased during a period of rising prices. LIFO matches these higher cost items against sales as cost of goods sold.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-9
Topic: Lower-of-Cost-or-Net Realizable Value LO: 4 Level of Difficulty: MEDIUM 9. The following data refer to Coat Company’s ending inventory: Item Code Small Medium Large Extra-Large
Quantity 100 420 600 220
Unit Cost $171 114 126 201
Unit Market $174 132 132 192
How much is the inventory if the lower-of-cost-or-net realizable value rule is applied to each item of inventory? A) $189,480 B) $182,820 C) $199,080 D) None of the above Answer: B Rationale: (100 x $171) + (420 x $114) + (600 x $126) + (220 x $192) = $182,820 Topic: Lower-of-Cost-or-Net Realizable Value LO: 4 Level of Difficulty: MEDIUM 10. The following data refer to Lion Company’s ending inventory: Item Code Small Medium Large Extra-Large
Quantity 100 420 600 220
Unit Cost $228 152 168 268
Unit Market $232 176 176 256
How much is the inventory if the lower-of-cost-or-net realizable value rule is applied to each item of inventory? A) $252,640 B) $243,760 C) $265,440 D) None of the above Answer: B Rationale: (100 x $228) + (420 x $152) + (600 x $168) + (220 x $256) = $243,760
©Cambridge Business Publishers, 2020 6-10
Financial Accounting for Undergraduates, 4th Edition
Topic: LIFO LO: 2 Level of Difficulty: EASY 11. Under which method of inventory cost flows is the cost flow assumed to be in the reverse order in which the expenditures were made? A) First-in, first-out B) Last-in, first-out C) Average cost D) Lower of cost or net realizable value Answer: B Rationale: Under LIFO, the cost flow is assumed to be in the reverse order in which the expenditures were made. Topic: LIFO Impacts LO: 3 Level of Difficulty: MEDIUM 12. Assuming sales hold steady, which of the following actions would result in lowering income taxes for a company that uses the LIFO inventory method? A) Increasing sales prices B) Buying extra inventory near the end of the year in an inflationary environment C) Allowing the inventory quantity at year end to fall below beginning year levels D) None of these. All would cause increasing taxes Answer: B Rationale: LIFO transfers the cost of the most recent purchases to cost of goods sold. These recent purchases are likely to be higher than the cost of earlier purchases, causing income taxes to be lower. Buying extra inventory at year end with a higher cost would cause a lowering of taxes since these units would be part of cost of goods sold. Topic: LIFO Reserve LO: 7 Level of Difficulty: EASY 13. Humphrey Company uses the LIFO inventory costing method for both its tax reporting purposes and its financial reporting purposes. Humphrey’s inventories are reported at $1,004 million on its balance sheet. In its footnotes, Humphrey Company is required to report the amount at which inventories would have been reported under FIFO method. The difference between these two numbers is commonly referred to as what? A) LCM disclosures B) LIFO holding gain C) LIFO liquidation D) LIFO reserve Answer: D Rationale: Companies using LIFO are also required to state the amount at which inventory would have been reported had the company used FIFO. The difference between the two is called the LIFO reserve.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-11
Topic: Inventory Turnover LO: 5 Level of Difficulty: EASY 14. Tin Company and Aluminum Company reported the following information in their financial statements, prior to their merger:
$millions 2019 2018
Sales $42,750 41,250
Tin Company COGS $40,775 29,960
Inventories $10,005 12,660
Sales $66,420 69,150
Aluminum Company COGS Inventories $56,175 $25,350 42,700 26,950
To the closest hundredth, how much is the 2019 inventory turnover for Tin Company? A) 3.38 B) 2.82 C) 1.50 D) 3.60 Answer: D Rationale: $40,775 / [($10,005 + $12,660)/2] = 3.60 Topic: Inventory Turnover LO: 5 Level of Difficulty: EASY 15. Wood Company and Plastic Company reported the following information in their financial statements, prior to their merger:
$millions 2019 2018
Sales $57,000 55,000
Wood Company COGS Inventories $40,775 $13,340 29,960 16,880
Sales $88,560 92,200
Plastic Company COGS Inventories $64,200 $33,800 48,800 30,800
To the closest hundredth, how much is the 2019 inventory turnover for Wood Company? A) 3.06 B) 2.42 C) 1.28 D) 2.70 Answer: D Rationale: $40,775 / [($13,340 + $16,880)/2] = 2.70
©Cambridge Business Publishers, 2020 6-12
Financial Accounting for Undergraduates, 4th Edition
Topic: Inventory Turnover LO: 5 Level of Difficulty: EASY 16. North Company and Carolina Company reported the following information in their financial statements, prior to their merger:
$millions 2019 2018
Sales $42,750 41,250
North Company COGS Inventories $33,775 $10,005 29,960 12,660
Sales $66,420 69,150
Carolina Company COGS Inventories $63,175 $25,350 49,350 26,950
To the closest hundredth, how much is the 2019 inventory turnover for Carolina Company? A) 2.42 B) 0.97 C) 1.86 D) 1.94 Answer: A Rationale: $63,175 / [($25,350 + $26,950)/2] = 2.42 Topic: Inventory Turnover LO: 5 Level of Difficulty: EASY 17. Utah Company and Arizona Company reported the following information in their financial statements, prior to their merger:
$millions 2019 2018
Sales $57,000 55,000
Utah Company COGS Inventories $ 3,600 $13,340 34,240 16,880
Arizona Company Sales COGS Inventories $88,560 $63,175 $33,800 92,100 49,350 30,800
To the closest hundredth, how much is the 2019 inventory turnover for Arizona Company? A) 1.96 B) 0.90 C) 1.60 D) 1.87 Answer: A Rationale: $63,175 / [($33,800 + $30,800) / 2] = 1.96
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-13
Topic: Lower-of-Cost-or-Net Realizable Value LO: 4 Level of Difficulty: MEDIUM 18. The following data refer to Wards Company’s ending inventory: Item Code Small Medium Large Extra-Large
Quantity 45 60 65 35
Unit Cost $96 138 150 162
Unit NRV $114 132 126 159
How much is ending inventory if the lower-of-cost-or-net realizable value rule is applied to the total inventory? A) $26,805 B) $26,415 C) $26,436 D) $28,020 Answer: A Rationale: Cost: (45 × $96) + (60 × $138) + (65 × $150) + (35 × 162) = $28,020 NRV: (45 × $114) + (60 × $132) + (65 × $126) + (35 × $159) = $26,805 Lowest total is NRV. Topic: Lower-of-Cost-or-Net Realizable Value LO: 4 Level of Difficulty: MEDIUM 19. The following data refer to Montgomery Company’s ending inventory: Item Code Small Medium Large Extra-Large
Quantity 45 60 65 35
Unit Cost $128 184 200 216
Unit Market $152 176 168 212
How much is ending inventory if the lower-of-cost-or-net realizable value rule is applied to the total inventory? A) $35,740 B) $35,220 C) $37,360 D) $35,256 Answer: A Rationale: Cost: (45 × $128) + (60 × $184) + (65 × $200) + (35 × 216) = $37,360 NRV: (45 × $152) + (60 × $176) + (65 × $168) + (35 × $212) = $35,740 Lowest total is NRV.
©Cambridge Business Publishers, 2020 6-14
Financial Accounting for Undergraduates, 4th Edition
Topic: FIFO LO: 2 Level of Difficulty: MEDIUM 20. The following inventory was available for sale during the year for Dolphin Tools: Beginning inventory …………….. First purchase …………………… Second purchase ……………….. Third purchase ………………..…
10 units at $120 15 units at $165 30 units at $210 20 units at $195
Dolphin has 25 units on hand at the end of the year. What is the dollar amount of inventory at the end of the year according to the first-in, first-out method? A) $4,950 B) $8,925 C) $4,725 D) $5,850 Answer: A Rationale: (20 x $195) + (5 x $210) = $4,950 Topic: FIFO LO: 2 Level of Difficulty: MEDIUM 21. The following inventory was available for sale during the year for Tower Tools: Beginning inventory …………….. First purchase …………………… Second purchase ……………….. Third purchase ………………..…
10 units at $160 15 units at $220 30 units at $280 20 units at $260
Tower Tools has 25 units on hand at the end of the year. What is the dollar amount of inventory at the end of the year according to the first-in, first-out method? A) $ 6,600 B) $11,900 C) $ 6,300 D) $ 7,800 Answer: A Rationale: (20 x $260) + (5 x $280) = $6,600
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-15
Topic: FIFO LO: 2 Level of Difficulty: MEDIUM 22. The following hammers were available for sale during the year for Helen Tools: Beginning inventory …..........…... 10 units at $120 First purchase …………...…….… 15 units at $150 Second purchase …………...…... 30 units at $180 Third purchase ……………....….. 20 units at $195 Helen has 25 hammers on hand at the end of the year. What is the dollar amount of cost of goods sold for the year according to the first-in, first-out method? A) $5,925 B) $7,950 C) $4,725 D) $5,850 Answer: B Rationale: (10 x $120) + (15 x $150) + (25 x $180) = $7,950 Topic: FIFO LO: 2 Level of Difficulty: MEDIUM 23. The following hammers were available for sale during the year for Albert’s Tools: Beginning inventory …..........…... 10 units at $80 First purchase …………...…….… 15 units at $100 Second purchase …………...…... 30 units at $120 Third purchase ……………....….. 25 units at $130 Albert has 30 hammers on hand at the end of the year. What is the dollar amount of cost of goods sold for the year according to the first-in, first-out method? A) $7,900 B) $5,300 C) $3,850 D) $7,800 Answer: B Rationale: (10 x $80) + (15 x $100) + (25 x $120) = $5,300 Topic: Financial Statement Effects of Inventory Costing LO: 3 Level of Difficulty: MEDIUM 24. If inventory at the end of the year is understated by $105,000, what will this error cause? A) An understatement of net income for the year by $105,000 B) An overstatement of gross profit for the year by $105,000 C) An overstatement of inventory for the year by $105,000 D) An understatement of cost of goods sold for the year by $105,000 Answer: A Rationale: A $105,000 understatement of inventory at the end of the year will cause the cost of goods sold to be overstated by $105,000, the gross profit for the year to be understated by $105,000, and net income for the year to be understated by $105,000. ©Cambridge Business Publishers, 2020 6-16
Financial Accounting for Undergraduates, 4th Edition
USE THE FOLLOWING INFORMATION FOR QUESTIONS 25 & 26. Timber Company imports and sells a product produced in Canada. In the summer of 2019, a natural disaster disrupted production, affecting its supply of product. Timber Company uses the LIFO inventory method. On January 1, 2019, Timber Company’s inventory records were as follows: Year purchased 2017 2018 Total
Quantity (units) 2,000 5,000 7,000
Cost per unit $120 $165
Total cost $240,000 825,000 $1,065,000
Through mid-December of 2019, purchases were limited to 8,000 units, because the cost had increased to $240 per unit. Timber sold 14,200 units during 2019 at a price of $306 per unit, which significantly depleted its inventory. Timber Company uses a periodic inventory system
Topic: Gross Profit Under LIFO LO: 2, 3 Level of Difficulty: MEDIUM 25. Assume that Timber Company makes no further purchases during 2019. Compute Timber Company’s gross profit for 2019. A) $ 321,800 B) $3,109,800 C) $3,741,000 D) $1,456,200 Answer: D Rationale: Sales revenue Cost of goods sold
14,200 x $306 = (8,000 x $240) + (5,000 x $165) + (1,200 x $120)
Gross profit
$4,345,200 2,889,000 $1,456,200
Topic: Gross Profit Under LIFO LO: 2, 3 Level of Difficulty: MEDIUM 26. Assume that Timber Company purchases 11,400 more of the $240 units on December 31, 2019. Compute Timber Company’s gross profit for 2019. A) $2,736,000 B) $ 937,200 C) $3,109,800 D) $1,285,800 Answer: B Rationale: Sales revenue Cost of goods sold Gross profit
14,200 x $306 = 14,200 x $240 =
$4,345,200 3,408,000 $ 937,200
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-17
USE THE FOLLOWING INFORMATION FOR QUESTIONS 27 & 28. Northern Creations Company imports and sells a product produced in Canada. In the summer of 2019, a natural disaster disrupted production, affecting its supply of product. Northern Creations Company uses the LIFO inventory method. On January 1, 2019, Northern Creations Company’s inventory records were as follows: Year purchased 2017 2018 Total
Quantity (units) 2,000 5,000 7,000
Cost per unit $160 $220
Total cost $ 320,000 1,100,000 $1,420,000
Through mid-December of 2019, purchases were limited to 8,000 units, because the cost had increased to $320 per unit. Northern Creations sold 14,200 units during 2019 at a price of $408 per unit, which significantly depleted its inventory. Northern Creations uses a periodic inventory system
Topic: Gross Profit Under LIFO LO: 2, 3 Level of Difficulty: MEDIUM 27. Assume that Northern Creations Company makes no further purchases during 2019. Compute Nature Creations Company’s gross profit for 2019. A) $1,762,400 B) $4,146,400 C) $4,988,000 D) $1,941,600 Answer: D Rationale: Sales revenue Cost of goods sold Gross profit
14,200 x $408 = (8,000 x $320) + (5,000 x $220) + (1,200 x $160) =
$5,793,600 3,852,000 $1,941,600
Topic: Gross Profit Under LIFO LO: 2, 3 Level of Difficulty: MEDIUM 28. Assume that Northern Creations Company purchases 11,400 more of the $320 units on December 31, 2019. Compute Northern Creations Company’s gross profit for 2019. A) $3,648,000 B) $1,249,600 C) $4,146,400 D) $1,714,400 Answer: B Rationale: Sales revenue Cost of goods sold Gross profit
14,200 x $408 = 14,200 x $320 =
$5,793,600 4,544,000 $ 1,249,600
©Cambridge Business Publishers, 2020 6-18
Financial Accounting for Undergraduates, 4th Edition
Topic: Weighted-Average Cost LO: 2 Level of Difficulty: MEDIUM 29. The following amounts and costs of platters were available for sale by Cataling Ceramics during 2019: Beginning inventory................. First purchase.......................... Second purchase...................... Third purchase........................
10 units at $123 15 units at $165 30 units at $210 25 units at $195
Cataling Ceramics, which uses a periodic inventory system, has 35 platters on hand at the end of the year. What is the dollar amount of inventory at the end of the year according to the weighted-average cost method? A) $14,880 B) $ 9,300 C) $ 5,198 D) $ 6,510 Answer: D Rationale: (10 units x $123) + (15 units x $165) + (30 units x $210) + (25 units x $195) = $14,880 $14,880 / 80 units = $186 35 units x $186 = $6,510 Topic: Weighted-Average Cost LO: 2 Level of Difficulty: MEDIUM 30. The following amounts and costs of platters were available for sale by Cibula Ceramics during 2019: Beginning inventory................. First purchase.......................... Second purchase...................... Third purchase........................
10 units at $164 15 units at $220 30 units at $280 25 units at $260
Cibula Ceramics, which uses a periodic inventory system, has 35 platters on hand at the end of the year. What is the dollar amount of inventory at the end of the year according to the weighted-average cost method? A) $19,840 B) $12,400 C) $ 6,930 D) $ 8,680 Answer: D Rationale: (10 units x $164) + (15 units x $220) + (30 units x $280) + (25 units x $260) = $19,840 $19,840 / 80 units = $248 35 units x $248 = $8,680
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-19
Topic: Weighted-Average Cost LO: 2 Level of Difficulty: MEDIUM 31. The following amounts and costs of platters were available for sale by Southwest Pottery during 2019: Beginning inventory.................. 10 units at $123 First purchase.......................... 15 units at $165 Second purchase....................... 30 units at $210 Third purchase......................... 25 units at $195 Southwest Pottery, which uses a periodic inventory system, has 35 platters on hand at the end of the year. How much is cost of goods sold in dollars at the end of the year according to the weighted-average cost method? A) $14,880 B) $ 5,580 C) $ 8,370 D) $ 5,198 Answer: C Rationale: (10 units x $123) + (15 units x $165) + (30 units x $210) + (25 units x $195) = $14,880 $14,880 / 80 units = $186 45 units sold x $186 = $8,370 Topic: Weighted-Average Cost LO: 2 Level of Difficulty: MEDIUM 32. The following amounts and costs of platters were available for sale by Colorado Pottery during 2019: Beginning inventory.................. 10 units at $164 First purchase.......................... 15 units at $220 Second purchase....................... 30 units at $280 Third purchase......................... 25 units at $260 Colorado Pottery, which uses a periodic inventory system, has 35 platters on hand at the end of the year. How much is cost of goods sold in dollars at the end of the year according to the weighted-average cost method? A) $19,840 B) $ 7,440 C) $11,160 D) $ 6,930 Answer: C Rationale: (10 units x $164) + (15 units x $220) + (30 units x $280) + (25 units x $260) = $19,840 $19,840 / 80 units = $248 45 units sold x $248 = $11,160
©Cambridge Business Publishers, 2020 6-20
Financial Accounting for Undergraduates, 4th Edition
Topic: Inventory Errors LO: 3 Level of Difficulty: DIFFICULT 33. During its first and second years of operations, Explorer Company, a corporation using a periodic inventory system, made undiscovered errors in taking its year-end inventories that understated Year 1 ending inventory by $120,000 and overstated Year 2 ending inventory by $165,000. The combined effect of these errors on reported income is: Year 1 A) Understated $120,000 B) Understated $120,000 C) Understated $120,000 D) Overstated $0,000
Year 2 Overstated $165,000 Overstated $45,000 Overstated $285,000 Understated $165,000
Year 3 Not affected --Not affected --Understated $165,000 Overstated $45,000
Answer: C Rationale: Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory Year 1: X = $0 + $0 – (-$120,000) X = +$120,000 = CGS overstated (+)
Year 2: X = -$120,000 + $0 - $165,000 X = -$285,000 = CGS understated (-)
Year 3: X = +$165,000 + $0 - $0 X = +$165,000 = CGS overstated (+)
Income: understated (-)
Income: overstated (+)
Income: understated (-)
Topic: Inventory Errors LO: 3 Level of Difficulty: DIFFICULT 34. During its first and second years of operations, Sierra Company, a corporation using a periodic inventory system, made undiscovered errors in taking its year-end inventories that understated Year 1 ending inventory by $160,000 and overstated Year 2 ending inventory by $220,000. The combined effect of these errors on reported income is: Year 1 A) Understated $160,000 B) Understated $160,000 C) Understated $160,000 D) Overstated $160,000
Year 2 Overstated $220,000 Overstated $60,000 Overstated $380,000 Understated $220,000
Year 3 Not affected --Not affected --Understated $220,000 Overstated $60,000
Answer: C Rationale: Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory: Year 1: Year 2: Year 3: X = $0 + $0 – (-$160,000) X = -$160,000 + $0 - $220,000 X = +$220,000 + $0 - $0 X = +$160,000 X = -$380,000 X = +$220,000 = CGS overstated (+) = CGS understated (-) = CGS overstated (+) Income: understated (-)
Income: overstated (+)
Income: understated (-) ©Cambridge Business Publishers, 2020
Test Bank, Chapter 6
6-21
USE THE FOLLOWING INFORMATION FOR QUESTIONS 35-40. The following data represent the beginning inventory and, in order of occurrence, the purchases and sales of Quebec, Inc. for an operating period.
Beginning Inventory Sale No. 1 Purchase No. 1 Sale No. 2 Purchase No. 2 Totals
Units 32
Unit Cost $ 54
Total Cost $1,728
Units Sold 10
28 20 80
60
1,680
57
1,140 $4,548
32 __ 42
Topic: FIFO Method LO: 2 Level of Difficulty: MEDIUM 35. Assuming Quebec, Inc. uses FIFO periodic inventory procedures, the ending inventory cost is: A) $2,052 B) $2,088 C) $2,166 D) $2,220 Answer: D Rationale: (20 x $57) + (18 x $60) = $2,220 Topic: LIFO Method LO: 2 Level of Difficulty: MEDIUM 36. Assuming Quebec, Inc. uses LIFO periodic inventory procedures, the ending inventory cost is: A) $1,989 B) $2,088 C) $2,166 D) $2,220 Answer: B Rationale: (32 x $54) + (6 x $60) = $2,088 Topic: Weighted-Average Method LO: 2 Level of Difficulty: MEDIUM 37. Assuming Quebec, Inc. uses weighted-average (periodic) inventory procedures, the ending inventory cost is: A) $2,160.30 B) $2,163.00 C) $2,166.00 D) $2,392.20 Answer: A Rationale: $4,548 / 80 = $56.85; 38 x $56.85 = $2,160.30
©Cambridge Business Publishers, 2020 6-22
Financial Accounting for Undergraduates, 4th Edition
Topic: FIFO Perpetual Inventory LO: 6 Level of Difficulty: MEDIUM 38. Assuming Quebec, Inc. uses the FIFO perpetual inventory procedures, it records sale No. 2 as an entry to Cost of Goods Sold for: A) $1,728 B) $1,788 C) $1,860 D) $1,896 Answer: B Rationale: (22 x $54) + (10 x $60) = $1,788 Topic: LIFO Perpetual Inventory LO: 6 Level of Difficulty: MEDIUM 39. Assuming Quebec, Inc. uses the LIFO perpetual inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods Sold for: A) $1,728 B) $1,788 C) $1,860 D) $1,896 Answer: D Rationale: (28 x $60) + (4 x $54) = $1,896 Topic: Weighted-Average Perpetual Inventory LO: 6 Level of Difficulty: MEDIUM 40. Assuming Quebec, Inc. uses weighted-average (perpetual) inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods sold for: A) $1,817.61 B) $1,824.00 C) $1,835.52 D) $1,819.20 Answer: C Rationale: Average unit cost after purchase No. 1 = $2,868 / 50 = $57.36; 32 x $57.36 = $1,835.52 Purchased
Beg. Inventory Sale No. 1 Purchase No. 1 Sale No. 2 Purchase No. 2 Total
Units 32
Unit Cost $54.00
Inventory Balance Total $1,728
Units Sold 10
28 20 80
60.00 57.00
1,680 1,140 $4,548
32 __ 42
Units 32 22 50 18 38
Unit Cost $54.00 54.00 57.36 57.36 57.18
Total $1,728.00 1,188.00 2,868.00 1,032.48 2,172.48
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-23
USE THE FOLLOWING INFORMATION FOR QUESTIONS 41-46. The following data represent the beginning inventory and, in order of occurrence, the purchases and sales of Sox, Inc. for an operating period.
Beginning Inventory Sale No. 1 Purchase No. 1 Sale No. 2 Purchase No. 2 Totals
Units 32
Unit Cost $ 72
Total Cost $2,304
Units Sold 10
28
80
2,240 32
20 80
76
1,520 $6,064
42
Topic: FIFO Method LO: 2 Level of Difficulty: MEDIUM 41. Assuming Sox, Inc. uses FIFO periodic inventory procedures, the ending inventory cost is: A) $2,736 B) $2,784 C) $2,888 D) $2,960 Answer: D Rationale: (20 x $76) + (18 x $80) = $2,960 Topic: LIFO Method LO: 2 Level of Difficulty: MEDIUM 42. Assuming Sox, Inc. uses LIFO periodic inventory procedures, the ending inventory cost is: A) $2,632 B) $2,784 C) $2,888 D) $2,360 Answer: B Rationale: (32 x $72) + (6 x $80) = $2,784 Topic: Weighted-Average Method LO: 2 Level of Difficulty: MEDIUM 43. Assuming Sox, Inc. uses weighted-average (periodic) inventory procedures, the ending inventory cost is: A) $2,880.40 B) $2,884.00 C) $2,888.00 D) $3,189.60 Answer: A Rationale: $6,064 / 80 = $75.80; 38 x $75.80 = $2,880.40
©Cambridge Business Publishers, 2020 6-24
Financial Accounting for Undergraduates, 4th Edition
Topic: FIFO Perpetual Inventory LO: 6 Level of Difficulty: MEDIUM 44. Assuming Sox, Inc. uses the FIFO perpetual inventory procedures, it records sale No. 2 as an entry to Cost of Goods Sold for: A) $2,304 B) $2,384 C) $2,408 D) $2,528 Answer: B Rationale: (22 x $72) + (10 x $80) = $2,384 Topic: LIFO Perpetual Inventory LO: 6 Level of Difficulty: MEDIUM 45. Assuming Sox, Inc. uses the LIFO perpetual inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods Sold for: A) $2,304 B) $2,384 C) $2,480 D) $2,528 Answer: D Rationale: (28 x $80) + (4 x $72) = $2,528 Topic: Weighted-Average Perpetual Inventory LO: 6 Level of Difficulty: MEDIUM 46. Assuming Sox, Inc. uses weighted-average (perpetual) inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods sold for: A) $2,423.48 B) $2,432.00 C) $2,447.36 D) $2,425.60 Answer: C Rationale: Average unit cost after purchase No. 1 = $3,824 / 50 = $76.48; 32 x $76.48 = $2,447.36 Purchased
Beg. Inventory Sale No. 1 Purchase No. 1 Sale No. 2 Purchase No. 2 Total
Units 32
Unit Cost $72
Inventory Balance Total $2,304
Units Sold 10
28 20 80
80 76
2,240 1,520 $6,064
32 __ 42
Units 32 22 50 18 38
Unit Cost $72.00 72.00 76.48 76.48 76.23
Total $2,304.00 1,584.00 3,824.00 1,376.64 2,896.64
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-25
USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 47-52. The following data represent the beginning inventory and, in order of occurrence, the purchases and sales of Ilse’s Garden, Inc., for an operating period.
Beginning Inventory Sale No. 1 Purchase No. 1 Sale No. 2 Purchase No. 2 Totals
Units 30
Unit Cost $21
Total Cost $ 630
Units Sold 20
50
30
1,500
20 100
33
660 $2,790
40 __ 60
Topic: FIFO Method LO: 2 Level of Difficulty: MEDIUM 47. Assuming Ilse’s Garden, Inc. uses FIFO periodic inventory procedures, the ending inventory cost is: A) $1,260 B) $1,320 C) $ 840 D) $ 930 Answer: A Rationale: (20 x $233) + (20 x $30) = $1,260 Topic: LIFO Method LO: 2 Level of Difficulty: MEDIUM 48. Assuming Ilse’s Garden, Inc. uses LIFO periodic inventory procedures, the ending inventory cost is: A) $ 840 B) $1,260 C) $ 930 D) $1,320 Answer: C Rationale: (30 x $21) + (10 x $30) = $930 Topic: Weighted-Average Method LO: 2 Level of Difficulty: MEDIUM 49. Assuming Ilse’s Garden, Inc. uses weighted-average (periodic) inventory procedures, the ending inventory cost is: A) $1,110 B) $1,116 C) $1,650 D) $1,140 Answer: B Rationale: $2,790 / 100 = $27.90 40 x $27.90 = $1,116 ©Cambridge Business Publishers, 2020 6-26
Financial Accounting for Undergraduates, 4th Edition
Topic: FIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 50. Assuming Ilse’s Garden, Inc. uses FIFO perpetual inventory procedures, it records sale No. 2 as an entry to Cost of Goods Sold for: A) $1,110 B) $1,200 C) $ 840 D) $1,260 Answer: A Rationale: (10 x $21) + (30 x $30) = $1,110 Topic: LIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 51. Assuming Ilse’s Garden, Inc. uses LIFO perpetual inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods Sold for: A) $840 B) $1,200 C) $1,110 D) $1,320 Answer: B Rationale: 40 x $30 = $1,200 Topic: Weighted-Average Perpetual Method LO: 6 Level of Difficulty: MEDIUM 52. Assuming Ilse’s Garden, Inc. uses weighted-average (perpetual) inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods Sold for: A) $1,140 B) $1,116 C) $1,020 D) $1,065 Answer: A Rationale: Average unit cost after purchase No. 1 is: $1,710 / 60 = $28.50; 40 x $28.50 = $1,140 Purchased
Beg. Inventory Sale No. 1 Purchase No. 1 Sale No. 2 Purchase No. 2 Total
Units 30
Unit Cost $21
Inventory Balance Total $630
Units Sold 20
50 20 100
30 33
1,500 660 $2,790
40 __ 60
Units 30 10 60 20 40
Unit Cost $21.00 $21.00 $28.50 $28.50 $30.75
Total $ 630 210 1,710 570 1,230
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-27
USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 53-58. The following data represent the beginning inventory and, in order of occurrence, the purchases and sales of Delacour, Inc. for an operating period.
Beginning Inventory Sale No. 1 Purchase No. 1 Sale No. 2 Purchase No. 2 Totals
Units 30
Unit Cost $28
Total Cost $ 840
Units Sold 20
50
40
2,000
20 100
44
880 $3,720
40 __ 60
Topic: FIFO Method LO: 2 Level of Difficulty: MEDIUM 53. Assuming Delacour, Inc. uses FIFO periodic inventory procedures, the ending inventory cost is: A) $1,680 B) $1,760 C) $1,120 D) $1,240 Answer: A Rationale: (20 x $44) + (20 x $40) = $1,680 Topic: LIFO Method LO: 2 Level of Difficulty: MEDIUM 54. Assuming Delacour, Inc. uses LIFO periodic inventory procedures, the ending inventory cost is: A) $1,120 B) $1,680 C) $1,240 D) $1,760 Answer: C Rationale: (30 x $28) + (10 x $40) = $1,240 Topic: Weighted-Average Method LO: 2 Level of Difficulty: MEDIUM 55. Assuming Delacour, Inc. uses weighted-average (periodic) inventory procedures, the ending inventory cost is: A) $1,474 B) $1,488 C) $2,200 D) $1,520 Answer: B Rationale: $3,720 / 100 = $37.20; 40 x $37.20 = $1,488
©Cambridge Business Publishers, 2020 6-28
Financial Accounting for Undergraduates, 4th Edition
Topic: FIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 56. Assuming Delacour, Inc. uses FIFO perpetual inventory procedures, it records sale No. 2 as an entry to Cost of Goods Sold for: A) $1,480 B) $1,600 C) $1,120 D) $1,680 Answer: A Rationale: (10 x $28) + (30 x $40) = $1,480 Topic: LIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 57. Assuming Delacour, Inc. uses LIFO perpetual inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods Sold for: A) $1,120 B) $1,600 C) $1,480 D) $1,760 Answer: B Rationale: 40 x $40 = $1,600 Topic: Weighted-Average Perpetual Method LO: 6 Level of Difficulty: MEDIUM 58. Assuming Delacour, Inc. uses weighted-average (perpetual) inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods Sold for: A) $1,520 B) $1,488 C) $1,360 D) $1,420 Answer: A Rationale: Average unit cost after purchase No. 1 is: $2,280 / 60 = $38.00; 40 x $38.00 = $1,520 Purchased
Beg. Inventory Sale No. 1 Purchase No. 1 Sale No. 2 Purchase No. 2 Total
Units 30
Unit Cost $28
Inventory Balance Total $840
Units Sold 20
50 20 100
40 44
2,000 880 $3,720
40 __ 60
Units 30 10 60 20 40
Unit Cost $28.00 $28.00 $38.00 $38.00 $41.00
Total $ 840 280 2,280 760 1,640
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-29
USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 59-64. The following data represent the beginning inventory and, in order of occurrence, the purchases and sales of Woof, Inc. for an operating period.
Beginning Inventory Sale No. 1 Purchase No. 1 Sale No. 2 Purchase No. 2 Totals
Units 50
Unit Cost $93
Total Cost $4,650
Units Sold 40
30
75
2,250
40 120
66
2,640 $9,540
32 __ 72
Topic: FIFO Method LO: 2 Level of Difficulty: MEDIUM 59. Assuming Woof, Inc. uses FIFO periodic inventory procedures, the ending inventory cost is: A) $3,240 B) $4,464 C) $3,168 D) $3,600 Answer: A Rationale: (40 x $66) + (8 x $75) = $3,240 Topic: LIFO Method LO: 2 Level of Difficulty: MEDIUM 60. Assuming Woof, Inc. uses LIFO periodic inventory procedures, the ending inventory cost is: A) $3,168 B) $3,240 C) $3,816 D) $4,464 Answer: D Rationale: 48 x $93 = $4,464 Topic: Weighted-Average Method LO: 2 Level of Difficulty: MEDIUM 61. Assuming Woof, Inc. uses weighted-average (periodic) inventory procedures, the ending inventory cost is: A) $3,276 B) $3,744 C) $3,816 D) $3,240 Answer: C Rationale: $9,540 / 120 = $79.50 48 x $79.50 = $3,816
©Cambridge Business Publishers, 2020 6-30
Financial Accounting for Undergraduates, 4th Edition
Topic: FIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 62. Assuming Woof, Inc. uses FIFO perpetual inventory procedures, the ending inventory cost is: A) $4,464 B) $3,240 C) $3,600 D) $3,168 E) None of the above Answer: B Rationale: (40 x $66) + (8 x $75) = $3,240 Topic: LIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 63. Assuming Woof, Inc. uses LIFO perpetual inventory procedures, the ending inventory cost is: A) $3,168 B) $3,240 C) $4,464 D) $3,384 Answer: D Rationale: (8 x $93) + (40 x $66) = $3,384 Topic: Weighted-Average Perpetual Method LO: 6 Level of Difficulty: MEDIUM 64. Assuming Woof, Inc. uses weighted-average (perpetual) inventory procedures, the ending inventory cost is: A) $3,744 B) $3,186 C) $3,384 D) $3,276 Answer: D Rationale: Purchased
Beg. Inventory Sale No. 1 Purchase No. 1 Sale No. 2 Purchase No. 2 Total
Units 50
Unit Cost $93
Inventory Balance Total $4,650
Units Sold 40
30 40 120
75 66
2,250 2,640 $9,540
32 __ 72
Units 50 10 40 8 48
Unit Cost 93.00 93.00 79.50 79.50 68.25
Total $4,650 930 3,180 636 3,276
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-31
USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 65-70. The following data represent the beginning inventory and, in order of occurrence, the purchases and sales of Purr–A-Lot, Inc. for an operating period.
Beginning Inventory Sale No. 1 Purchase No. 1 Sale No. 2 Purchase No. 2 Totals
Units 50
Unit Cost $124
Total Cost $ 6,200
Units Sold 40
30
100
3,000
40 120
88
3,520 $12,720
32 __ 72
Topic: FIFO Method LO: 2 Level of Difficulty: MEDIUM 65. Assuming Purr–A-Lot, Inc. uses FIFO periodic inventory procedures, the ending inventory cost is: A) $4,320 B) $5,952 C) $4,114 D) $4,800 Answer: A Rationale: (40 x $88) + (8 x $100) = $4,320 Topic: LIFO Method LO: 2 Level of Difficulty: MEDIUM 66. Assuming Purr–A-Lot, Inc. uses LIFO periodic inventory procedures, the ending inventory cost is: A) $4,224 B) $4,320 C) $5,088 D) $5,952 Answer: D Rationale: 48 x $124 = $5,952 Topic: Weighted-Average Method LO: 2 Level of Difficulty: MEDIUM 67. Assuming Purr–A-Lot, Inc. uses weighted-average (periodic) inventory procedures, the ending inventory cost is: A) $4,368 B) $4,992 C) $5,088 D) $4,320 Answer: C Rationale: $12,720 / 120 = $106; 48 x $106 = $5,088
©Cambridge Business Publishers, 2020 6-32
Financial Accounting for Undergraduates, 4th Edition
Topic: FIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 68. Assuming Purr–A-Lot, Inc. uses FIFO perpetual inventory procedures, the ending inventory cost is: A) $5,952 B) $4,320 C) $4,800 D) $4,224 Answer: B Rationale: (40 x $88) + (8 x $100) = $4,320 Topic: LIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 69. Assuming Purr–A-Lot, Inc. uses LIFO perpetual inventory procedures, the ending inventory cost is: A) $4,224 B) $4,320 C) $5,952 D) $4,512 Answer: D Rationale: (8 x $124) + (40 x $88) = $4,512 Topic: Weighted-Average Perpetual Method LO: 6 Level of Difficulty: MEDIUM 70. Assuming Purr–A-Lot, Inc. uses weighted-average (perpetual) inventory procedures, the ending inventory cost is: A) $4,992 B) $5,088 C) $4,512 D) $4,368 Answer: D Rationale:
Beg. Inventory Sale No. 1 Purchase No. 1 Sale No. 2 Purchase No. 2 Total
Units 50
Purchased Unit Cost Total $124 $ 6,200
Units Sold 40
30 40 120
100 88
3,000 3,520 $12,720
32 __ 72
Inventory Balance Units Unit Cost Total 50 $124.00 $6,200 10 124.00 1,240 40 106.00 4,240 8 106.00 848 48 91.00 4,368
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-33
USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 71-79. The following data represent the beginning inventory and, in the order of occurrence, the purchases and sales of Mullenax Company for an operating period.
Beginning Inventory Purchase No. 1 Sale No. 1 Purchase No. 2 Sale No. 2 Purchase No. 3 Totals
Units 20 20
Unit Cost $87 93
Total Cost $ 1,740 1,860
90
96
8,640
70 200
108
7,560 $19,800
Units Sold
30 80 ___ 110
Topic: FIFO Method LO: 2 Level of Difficulty: MEDIUM 71. Assuming Mullenax Company uses FIFO periodic inventory procedures, the ending inventory cost is: A) $9,720 B) $8,400 C) $9,480 D) $7,560 Answer: C Rationale: (70 x $108) + (20 x $96) = $9,480 Topic: LIFO Method LO: 2 Level of Difficulty: MEDIUM 72. Assuming Mullenax Company uses LIFO periodic inventory procedures, the ending inventory cost is: A) $7,380 B) $9,480 C) $9,390 D) $8,400 Answer: D Rationale: (20 x $87) + (20 x $93) + (50 x $96) = $8,400 Topic: Weighted-Average Method LO: 2 Level of Difficulty: MEDIUM 73. Assuming Mullenax Company uses weighted-average (periodic) inventory procedures, the ending inventory cost is: A) $ 8,910 B) $ 8,640 C) $ 9,468 D) $10,890 Answer: A Rationale: $19,800 / 200 = $99; 90 x $99 = $8,910 ©Cambridge Business Publishers, 2020 6-34
Financial Accounting for Undergraduates, 4th Edition
Topic: FIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 74. Assuming Mullenax Company uses FIFO perpetual inventory procedures, sale No. 1 is recorded as an entry to Cost of Goods Sold for: A) $2,700 B) $2,730 C) $2,670 D) $2,880 Answer: C Rationale: (20 x $87) + (10 x $93) = $2,670 Topic: FIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 75. Assuming Mullenax Company uses FIFO perpetual inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods Sold for: A) $7,632 B) $7,650 C) $7,680 D) $7,920 E) None of the above Answer: B Rationale: (10 x $93) + (70 x $96) = $7,650 Topic: LIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 76. Assuming Mullenax Company uses LIFO perpetual inventory procedures, sale No. 1 is recorded as an entry to Cost of Goods Sold for: A) $2,730 B) $2,700 C) $2,670 D) $3,240 Answer: A Rationale: (20 x $93) + (10 x $87) = $2,730 Topic: LIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 77. Assuming Mullenax Company uses LIFO perpetual inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods Sold for: A) $8,640 B) $7,680 C) $7,650 D) $7,632 Answer: B Rationale: 80 x $96 = $7,680
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-35
Topic: Weighted-Average Perpetual Method LO: 6 Level of Difficulty: MEDIUM 78. Assuming Mullenax Company uses weighted-average (perpetual) inventory procedures, sale No. 1 is recorded as an entry to Cost of Goods Sold for: A) $2,790 B) $2,730 C) $2,700 D) $2,670 Answer: C Rationale: 30 x $90 = $2,700
Beg. Inventory Purchase No. 1 Sale No. 1 Purchase No. 2 Sale No. 2 Purchase No. 3 Totals
Units 20 20
Purchased Unit Cost Total $87 $ 1,740 93 1,860
Units Sold
30 90
96
70 200
108
8,640 7,560 $19,800
80 ___ 110
Inventory Balance Units Unit Cost Total 20 $87.00 $1,740 40 90.00 3.600 10 90.00 900 100 95.40 9,540 20 95.40 1,908 90 105.20 9,468
Topic: Weighted-Average Perpetual Method LO: 6 Level of Difficulty: MEDIUM 79. Assuming Mullenax Company uses weighted-average (perpetual) inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods Sold for: A) $7,632 B) $7,650 C) $7,680 D) $7,920 Answer: A Rationale: Average unit cost after purchase No. 2 = $9,540 / 100 = $95.40;
Beg. Inventory Purchase No. 1 Sale No. 1 Purchase No. 2 Sale No. 2 Purchase No. 3 Totals
Units 20 20
Purchased Unit Cost Total $87 $ 1,740 93 1,860
Units Sold
30 90 70 200
96 108
8,640 7,560 $19,800
80 ___ 110
80 x $95.40 = $7,632
Inventory Balance Units Unit Cost Total 20 $87.00 $1,740 40 90.00 3,600 10 90.00 900 100 95.40 9,540 20 95.40 1,908 90 105.20 9,468
©Cambridge Business Publishers, 2020 6-36
Financial Accounting for Undergraduates, 4th Edition
USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 80-88. The following data represent the beginning inventory and, in the order of occurrence, the purchases and sales of Tina Star Company for an operating period. Units Beginning Inventory Purchase No. 1 Sale No. 1 Purchase No. 2 Sale No. 2 Purchase No. 3 Totals
20 20
Unit Cost
Total Cost
$116 124
$ 2,320 2,480
Units Sold
30 90 70 200
128 144
11,520 10,080 $26,400
80 ____ 110
Units on Hand 20 40 10 100 20 90
Topic: FIFO Method LO: 2 Level of Difficulty: MEDIUM 80. Assuming Tina Star Company uses FIFO periodic inventory procedures, the ending inventory cost is: A) $12,960 B) $12,000 C) $12,640 D) $10,080 Answer: C Rationale: (70 x $144) + (20 x $128) = $12,640 Topic: LIFO Method LO: 2 Level of Difficulty: MEDIUM 81. Assuming Tina Star Company uses LIFO periodic inventory procedures, the ending inventory cost is: A) $10,440 B) $12,640 C) $12,520 D) $11,200 Answer: D Rationale: (20 x $116) + (20 x $124) + (50 x $128) = $11,200 Topic: Weighted-Average Method LO: 2 Level of Difficulty: MEDIUM 82. Assuming Tina Star Company uses weighted-average (periodic) inventory procedures, the ending inventory cost is: A) $11,880 B) $11,520 C) $12,624 D) $14,520 Answer: A Rationale: $26,400 / 200 = $132; 90 x $132 = $11,880
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-37
Topic: FIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 83. Assuming Tina Star Company uses FIFO perpetual inventory procedures, sale No. 1 is recorded as an entry to Cost of Goods Sold for: A) $3,600 B) $3,640 C) $3,560 D) $3,840 Answer: C Rationale: (20 x $116) + (10 x $124) = $3,560 Topic: FIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 84. Assuming Tina Star Company uses FIFO perpetual inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods Sold for: A) $10,176 B) $10,200 C) $10,240 D) $10,560 Answer: B Rationale: (10 x $124) + (70 x $128) = $10,200 Topic: LIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 85. Assuming Tina Star Company uses LIFO perpetual inventory procedures, sale No. 1 is recorded as an entry to Cost of Goods Sold for: A) $3,640 B) $3,600 C) $3,560 D) $4,320 Answer: A Rationale: (20 x $124) + (10 x $116) = $3,640 Topic: LIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 86. Assuming Tina Star Company uses LIFO perpetual inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods Sold for: A) $11,520 B) $10,240 C) $10,200 D) $10,176 Answer: B Rationale: 80 x $128 = $10,240
©Cambridge Business Publishers, 2020 6-38
Financial Accounting for Undergraduates, 4th Edition
Topic: Weighted-Average Perpetual Method LO: 6 Level of Difficulty: MEDIUM 87. Assuming Tina Star Company uses weighted-average (perpetual) inventory procedures, sale No. 1 is recorded as an entry to Cost of Goods Sold for: A) $3,960 B) $3,640 C) $3,600 D) $3,560 Answer: C Rationale: 30 x $120 = $3,600
Beg. Inventory Purchase No. 1 Sale No. 1 Purchase No. 2 Sale No. 2 Purchase No. 3 Totals
Units 20 20
Purchased Unit Cost Total $116 $ 2,320 124 2,480
Units Sold
30 90 70 200
128 144
11,520 10,080 $26,400
80 ___ 110
Inventory Balance Units Unit Cost Total 20 $116.00 $2,320 40 120.00 4,800 10 120.00 1,200 100 127.20 12,720 20 127.20 2,544 90 140.27 12,624
Topic: Weighted-Average Perpetual Method LO: 6 Level of Difficulty: MEDIUM 88. Assuming Tina Star Company uses weighted-average (perpetual) inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods Sold for: A) $10,176 B) $10,200 C) $10,240 D) $10,560 Answer: A Rationale: 80 x $127.20= $10,176
Beg. Inventory Purchase No. 1 Sale No. 1 Purchase No. 2 Sale No. 2 Purchase No. 3 Totals
Units 20 20
Purchased Unit Cost Total $116 $ 2,320 124 2,480
Units Sold
30 90
128
11,520
70 200
144
10,080 $26,400
80 ___ 110
Inventory Balance Units Unit Cost Total 20 $116.00 $2,320 40 120.00 4,800 10 120.00 1,200 100 127.20 12,720 20 127.20 2,544 90 140.27 12,624
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-39
Topic: Specific Identification Method LO: 3 Level of Difficulty: EASY 89. The specific identification inventory costing method: A) Is more appropriate for a firm selling construction equipment than for a firm selling greeting cards B) Measures the ending inventory at the actual prices of the specific units sold during the period C) Uses expected future acquisition costs rather than historical costs to measure the ending inventory D) Is not a generally accepted method of pricing inventories Answer: A Rationale: The specific identification method involves (1) keeping track of the purchase cost of each specific unit available for sale and (2) costing the ending inventory at the actual costs of the specific units not sold. Specific identification is typically used by companies that manufacture a small volume of products with relatively high unit values. Airplanes, jewelry, and construction equipment are examples of products that would justify the cost of tracking the specific unit cost of each inventory item. Topic: Inventory Costing Methods LO: 2 Level of Difficulty: EASY 90. Which of the following inventory costing methods most closely matches the cost flow with the goods flow? A) FIFO B) Specific identification C) LIFO D) Weighted average Answer: A Rationale: FIFO approximates the actual physical flow of goods for most firms. Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 Level of Difficulty: MEDIUM 91. The lower-of-cost-or-net realizable value method for inventory may be applied to: A) Each inventory item B) The totals of major inventory classes or categories C) The total inventory D) All of the above Answer: D Rationale: The lower-of-cost-or-net realizable value method for inventory may be applied to each inventory item, to totals of major inventory classes or categories, or to the total inventory.
©Cambridge Business Publishers, 2020 6-40
Financial Accounting for Undergraduates, 4th Edition
Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 Level of Difficulty: MEDIUM 92. The lower-of-cost-or-net realizable value method for inventory: A) States that inventory must be reported on the balance sheet at its current net realizable value and may cause inventory to be written up to an amount larger than historical cost B) Must be applied to inventory on an item by item basis C) Places losses from price declines in the period the goods are sold rather than in the period of the price decline D) None of the above Answer: D Rationale: The lower-of-cost-or-net realizable value method for inventory provides for the recognition of an inventory write-down loss when the inventory’s net realizable value declines below its recorded acquisition cost. Under net lower-of-cost-or-net realizable value, a loss is reported in the period when the inventory’s net realizable value declines, rather than during a subsequent period when the actual sale of the inventory takes place. The lower-of-cost-or-net realizable value method can be applied to each individual item inventory, different categories of inventory or to total inventory. Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 Level of Difficulty: MEDIUM 93. At year-end, The Big Chill Shop has a freezer on hand that has been used as a demonstration model. The freezer cost $1,170 and sells for $2,250 when new. In its present condition, the freezer will be sold for $1,140. Related selling costs are an estimated $60. At what amount should the freezer be carried in inventory? A) $1,125 B) $1,140 C) $1,080 D) $1,200 Answer: C Rationale: Carry at net realizable value: $1,140 - $60 = $1,080 Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 Level of Difficulty: MEDIUM 94. At year-end, The Stone Cold Shop has a freezer on hand that has been used as a demonstration model. The freezer cost $1,560 and sells for $3,000 when new. In its present condition, the freezer will be sold for 1,520. Related selling costs are an estimated $80. At what amount should the freezer be carried in inventory? A) $1,500 B) $1,520 C) $1,440 D) $1,600 Answer: C Rationale: Carry at net realizable value: $1,520 - $80 = $1,440
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-41
Topic: Inventory Turnover LO: 5 Level of Difficulty: EASY 95. For 2019, Nadi Company reported sales of $2,700,000, cost of goods sold of $2,000,000, and a gross profit of $900,000. Nadi’s inventory at January 1, 2016 was $510,000; the inventory at December 31, 2019 was $750,000. Nadi’s 2019 inventory turnover is: A) 7.99 B) 4.74 C) 3.17 D) 2.31 Answer: C Rationale: $2,000,000 / [($750,000 + $510,000) / 2] = 3.17 Topic: Inventory Turnover LO: 5 Level of Difficulty: EASY 96. For 2019, Kate Company reported sales of $3,600,000, cost of goods sold of $2,000,000, and a gross profit of $1,600,000. Kate’s inventory at January 1, 2019 was $480,000; the inventory at December 31, 2019 was $600,000. Kate’s 2019 inventory turnover is: A) 3.33 B) 4.17 C) 3.70 D) 2.08 Answer: C Rationale: $2,000,000 / [($600,000 + $480,000) / 2] = 3.70 Topic: Inventory Turnover LO: 5 Level of Difficulty: MEDIUM 97. A firm’s inventory turnover: A) Is computed by dividing cost of goods sold by the end-of-year inventory B) Is affected by the inventory costing method used C) Becomes the days’ sales in inventory when multiplied by 365 D) Is generally interpreted as favorable if it is smaller than the industry average Answer: B Rationale: The inventory turnover ratio is calculated as: Inventory turnover = Cost of goods sold / Average inventory. In general, the faster a company can turn over its inventory, the more profitable the company will be. Further, the higher the inventory turnover ratio, the less time a firm has its funds tied up in its inventory and the less risk the firm faces from trying to sell out-of-date merchandise. An extension of the inventory turnover ratio is the days’ sales in inventory, is calculated as: Days' sales in inventory = 365 / Inventory turnover.
©Cambridge Business Publishers, 2020 6-42
Financial Accounting for Undergraduates, 4th Edition
Topic: Inventory Turnover and Days’ Sales in Inventory Ratios LO: 5 Level of Difficulty: EASY 98. Brian Company’s average inventory for 2019 was $22,500 and its inventory turnover for 2019 was 8.25; Brian’s 2019 days’ sales in inventory (computed to one decimal place) is: A) 8.5 days B) 44.2 days C) 45.8 days D) 35.5 days Answer: B Rationale: 365 / 8.25 = 44.2 days Topic: Inventory Turnover and Days’ Sales in Inventory Ratios LO: 5 Level of Difficulty: EASY 99. Anderson Company’s average inventory for 2019 was $30,000 and its inventory turnover for 2019 was 7.0; Anderson’s 2019 days’ sales in inventory (computed to one decimal place) is: A) 12.7 days B) 52.1 days C) 68.5 days D) 53.8 days Answer: B Rationale: 365 / 7.0 = 52.1 days Topic: Inventory Turnover and Days’ Sales in Inventory Ratios LO: 5 Level of Difficulty: MEDIUM 100. If a firm’s inventory turnover increases, its days’ sales in inventory will: A) Increase B) Decrease C) Be unaffected D) Change, but the direction of the effect can’t be predicted Answer: B Rationale: The days’ sales in inventory is calculated as: Days' sales in inventory = 365 / Inventory turnover. Since inventory turnover is in the denominator of the equation, if the denominator increases the results of the equation will decrease. So, an increase in the firm’s inventory turnover will decrease the days’ sales in inventory ratio. Topic: Inventory Ownership and Physical Count LO: 1 Level of Difficulty: EASY 101. Goods in transit which are shipped F.O.B. shipping point should be: A) Included in the inventory of the shipping company B) Included in the inventory of the buyer C) Included in the inventory of the seller D) None of the above Answer: B Rationale: When the freight terms are F.O.B. shipping point, the buyer assumes ownership of the merchandise at the time the common carrier accepts the items from the seller. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-43
Topic: Inventory Ownership and Physical Count LO: 1 Level of Difficulty: EASY 102. What is consigned inventory? A) Goods that are sold, but payment is not required until the goods are sold B) Goods that are shipped, and title transfers to the buyer C) Goods that have been segregated for shipment to a customer D) Goods that are shipped, but title remains with the seller Answer: D Rationale: Consignment goods are items held for sale by parties other than the item’s owner. Topic: FIFO Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 103. Charleston Company uses the periodic inventory system. For the current month, the beginning inventory consisted of 1,200 units that cost $45 each. During the month, the company made two purchases: 500 units at $43.50 each and 2,000 units at $42 each. Charleston Company also sold 2,150 units during the month. Using the periodic FIFO method, what is the cost of ending inventory? A) $65,100 B) $56,850 C) $60,219 D) $55,800 Answer: A Rationale: (1,550 x $42) = $65,100 Topic: FIFO Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 104. Hill Company uses the periodic inventory system. For the current month, the beginning inventory consisted of 1,200 units that cost $60 each. During the month, the company made two purchases: 500 units at $58 each and 2,000 units at $56 each. Hill Company also sold 2,150 units during the month. Using the periodic FIFO method, what is the cost of ending inventory? A) $86,800 B) $75,800 C) $80,292 D) $74,400 Answer: A Rationale: (1,550 x $56) = $86,800
©Cambridge Business Publishers, 2020 6-44
Financial Accounting for Undergraduates, 4th Edition
Topic: Weighted-Average Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 105. Holiday Company uses the periodic inventory system. For the current month, the beginning inventory consisted of 200 units that cost $195 each. During the month, the company made two purchases: 300 units at $207 each and 150 units at $210 each. The company also sold 500 units during the month. Using the periodic weighted-average cost method, what is the cost of ending inventory? A) $101,310 B) $ 30,600 C) $ 31,500 D) $100,200 Answer: B Rationale: (200 x $195) + (300 x $207) + (150 x $210) = $132,600 Average unit cost at month end = $132,600 / 650 = $204; 150 Units x $204 = $30,600 Topic: Weighted-Average Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 106. Elliot Company uses the periodic inventory system. For the current month, the beginning inventory consisted of 200 units that cost $260 each. During the month, the company made two purchases: 300 units at $276 each and 150 units at $280 each. The company also sold 500 units during the month. Using the periodic weighted-average cost method, what is the cost of ending inventory? A) $135,080 B) $ 40,800 C) $ 42,000 D) $133,600 Answer: B Rationale: (200 x $260) + (300 x $276) + (150 x $280) = $176,800 Average unit cost at month end = $176,800 / 650 = $272; 150 Units x $272 = $40,800
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-45
USE THE FOLLOWING INVENTORY RELATED INFORMATION FOR QUESTIONS 107-109. The following represents the inventory of Julissa Company for the month of January: Jan.
Jan.
1
On hand, 10 units at $60 each
8 22 28
Purchases 25 units at $69 each 50 units at $78 each 15 units at $87 each
Jan.
4 15 26
Sales 8 units @ $225 each 20 units @ $225 each 52 units @ $225 each
Topic: FIFO Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 107. Calculate Julissa Company’s Cost of Goods Sold using Periodic FIFO for the month of January. A) $5,790 B) $5,835 C) $5,898 D) $6,240 Answer: B Rationale: (10 x $60) + (25 x $69) + (45 x $78) = $5,835 Topic: LIFO Inventory Costing Method LO: 2 Level of Difficulty: EASY 108. Calculate Julissa Company’s Ending Inventory on January 31 using Periodic LIFO. A) $1,290 B) $1,362 C) $1,632 D) $1,695 Answer: A Rationale: (10 x $60) + (10 x $69) = $1,290 Topic: Weighted-Average Inventory Costing Method LO: 2 Level of Difficulty: EASY 109. Calculate Julissa Company’s Cost of Goods Sold using Periodic Weighted-Average for the month of January (rounded to the nearest dollar). A) $6,159 B) $6,024 C) $5,649 D) $5,820 Answer: B Rationale: (10 x $60) + (25 x $69) + (50 x $78) + (15 x $87) = $7,530 Average unit cost at month end = $7,530 / 100 = $75.30 80 Units x $75.30 = $6,024
©Cambridge Business Publishers, 2020 6-46
Financial Accounting for Undergraduates, 4th Edition
USE THE FOLLOWING INVENTORY RELATED INFORMATION FOR QUESTIONS 110-112. The following represents the inventory of Moonlight Company for the month of January: Jan.
Jan.
1
On hand, 10 units at $80 each
8 22 28
Purchases 25 units at $92 each 50 units at $104 each 15 units at $116 each
Jan.
4 15 26
Sales 8 units @ $300 each 20 units @ $300 each 52 units @ $300 each
Topic: FIFO Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 110. Calculate Moonlight Company’s Cost of Goods Sold using Periodic FIFO for the month of January. A) $7,720 B) $7,780 C) $7,864 D) $8,320 Answer: B Rationale: (10 x $80) + (25 x $92) + (45 x $104) = $7,780 Topic: LIFO Inventory Costing Method LO: 2 Level of Difficulty: EASY 111. Calculate Moonlight Company’s Ending Inventory on January 31 using Periodic LIFO. A) $1,720 B) $1,816 C) $2,176 D) $2,260 Answer: A Rationale: (10 x $80) + (10 x $92) = $1,720 Topic: Weighted-Average Inventory Costing Method LO: 2 Level of Difficulty: EASY 112. Calculate Moonlight Company’s Cost of Goods Sold using Periodic Weighted-Average for the month of January (rounded to the nearest dollar). A) $8,212 B) $8,032 C) $7,532 D) $7,760 Answer: B Rationale: (10 x $80) + (25 x $92) + (50 x $104) + (15 x $116) = $10,040 Average unit cost at month end = $10,040 / 100 = $100.40 80 Units x $100.40 = $8,032
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-47
USE THE FOLLOWING INVENTORY RELATED INFORMATION FOR QUESTIONS 113-115. The following represents the inventory of Omar Company for the month of April: April 1 April 2 April 3 April 10 April 21 April 28
Beginning Inventory Sales Purchases Sales Purchases Sales
100 units @ $12 50 units 300 units @ $18 250 units 400 units @ $24 200 units
Topic: LIFO Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 113. Assuming a periodic inventory system is used by Omar Company, what is ending inventory under LIFO? A) $7,200 B) $9,900 C) $4,800 D) $6,300 Answer: C Rationale: (100 x $12) + (200 x $18) = $4,800 Topic: FIFO Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 114. Assuming a periodic inventory system is used by Omar Company, what is cost of goods sold under FIFO? A) $6,300 B) $7,200 C) $9,900 D) $9,000 Answer: D Rationale: (100 x $12) + (300 x $18) + (100 x $24) = $9,000 Topic: Weighted-Average Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 115. Assuming a periodic inventory system is used by Omar Company, what is ending inventory under the Weighted-Average Cost method? A) $ 6,942 B) $11,625 C) $ 6,075 D) $10,125 Answer: C Rationale: (100 x $12) = (300 x $18) + (400 x $24) = $16,200 Average unit cost at month end = $16,200 / 800 = $20.25; 300 x $20.25 = $6,075 ©Cambridge Business Publishers, 2020 6-48
Financial Accounting for Undergraduates, 4th Edition
USE THE FOLLOWING INVENTORY RELATED INFORMATION FOR QUESTIONS 116-118. The following represents the inventory of Kailey Company for the month of April: April 1 Beginning Inventory 100 units @ $16 April 2 Sales 50 units April 3 Purchases 300 units @ $24 April 10 Sales 250 units April 21 Purchases 400 units @ $32 April 28 Sales 200 units
Topic: LIFO Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 116. Assuming a periodic inventory system is used by Kailey Company, what is ending inventory under LIFO? A) $ 9,600 B) $13,200 C) $ 6,400 D) $ 8,400 Answer: C Rationale: (100 x $16) + (200 x $24) = $6,400 Topic: FIFO Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 117. Assuming a periodic inventory system is used by Kailey Company, what is cost of goods sold under FIFO? A) $ 8,400 B) $ 9,600 C) $13,200 D) $12,000 Answer: D Rationale: (100 x $16) + (300 x $24) + (100 x $32) = $12,000 Topic: Weighted-Average Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 118. Assuming a periodic inventory system is used by Kailey Company, what is ending inventory under the Weighted-Average Cost method? A) $ 9,256 B) $15,500 C) $, 8,100 D) $13,500 Answer: C Rationale: (100 x $16) + (300 x $24) + (400 x $32) = $21,600 Average unit cost at month end = $21,600 / 800 = $27; 300 x $27 = $8,100
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-49
USE THE FOLLOWING INVENTORY RELATED INFORMATION FOR QUESTIONS 119-121. On September 1, the beginning inventory for Anisha Company was 110 units at $150 each. Purchases and sales during September were: Purchases During Sept 2019 Sept 7 120 units @ $168 Sept 17 70 units @ $132 Sept 25 100 units @ $126
Sales During Sept 2019 Sept 12 70 units Sept 22 110 units Sept 29 90 units
Topic: LIFO Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 119. What is the cost of ending inventory for Anisha Company on September 30 if the periodic LIFO costing method is used? A) $21,840 B) $16,560 C) $19,860 D) $19,500 Answer: C Rationale: (110 x $150) + (20 x $168) = $19,860 Topic: FIFO Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 120. What is the cost of goods sold for September for Anisha Company if the periodic FIFO costing method is used? A) $41,760 B) $38,640 C) $41,940 D) $41,700 Answer: C Rationale: (110 x $150) + (120 x $168) + (40 x $132) = $41,940 Topic: Weighted-Average Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 121. What is the cost of ending inventory for September for Anisha Company if the periodic weightedaverage costing method is used? (Round your answer to the nearest dollar) A) $16,398.00 B) $19,012.50 C) $16,088.00 D) $18,828.00 Answer: B Rationale: (110 x $150) + (120 x $168) + (70 x $132) + (100 x $126) = $58,500 Average unit cost at month end = $58,500 / 400 = $146.25 130 Units x $146.25 = $19,012.50
©Cambridge Business Publishers, 2020 6-50
Financial Accounting for Undergraduates, 4th Edition
USE THE FOLLOWING INVENTORY RELATED INFORMATION FOR QUESTIONS 122-124. On September 1, the beginning inventory for Tevonian Company was 110 units at $200 each. Purchases and sales during September were: Purchases During Sept 2019 Sept 7 120 units @ $224 Sept 17 70 units @ $176 Sept 25 100 units @ $168
Sales During Sept 2019 Sept 12 70 units Sept 22 110 units Sept 29 90 units
Topic: LIFO Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 122. What is the cost of ending inventory for Tevonian Company on September 30 if the periodic LIFO costing method is used? A) $28,640 B) $22,080 C) $26,480 D) $26,000 Answer: C Rationale: (110 x $200) + (20 x $224) = $26,480 Topic: FIFO Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 123. What is the cost of goods sold for September for Tevonian Company if the periodic FIFO costing method is used? A) $54,960 B) $51,520 C) $55,920 D) $55,600 Answer: C Rationale: (110 x $200) + (120 x $224) + (40 x $176) = $55,920 Topic: Weighted-Average Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 124. What is the cost of ending inventory for September for Tevonian Company if the periodic weightedaverage costing method is used? (Round your answer to the nearest dollar) A) $21,984 B) $25,350 C) $21,452 D) $25,104 Answer: B Rationale: (110 x $200) + (120 x $224) + (70 + $176) + (100 x $168) = $78,000 Average unit cost at month end = $78,000 / 400 = $195 130 Units x $195 = $25,350
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-51
Topic: Inventory Errors LO: 3 Level of Difficulty: DIFFICULT 125. In its 2019 income statement, Mary T. Company reported cost of goods sold of $225,000. Later, Mary T. determined that beginning inventory for 2019 was understated by $69,000, and the ending inventory for 2019 was understated by $30,000. What should be the corrected amount for cost of goods sold for 2019? A) $294,000 B) $216,000 C) $285,000 D) $225,000 Answer: A Rationale: Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory 2019 X = (-$69,000) + $0 - (-$30,000) X = -$39,000 = CGS understated (-) Cost of goods sold (CGS) as originally reported: Adjustment for understatement of CGS (implies add to get correct CGS) CGS for 2019, adjusted amount
$255,000 39,000 $294,000
Topic: Inventory Errors LO: 3 Level of Difficulty: DIFFICULT 126. In its 2019 income statement, Hubbard Company reported cost of goods sold of $340,000. Later, Hubbard determined that beginning inventory for 2019 was understated by $92,000, and the ending inventory for 2019 was understated by $40,000. What should be the corrected amount for cost of goods sold for 2019? A) $392,000 B) $288,000 C) $380,000 D) $340,000 Answer: A Rationale: Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory 2019 X = (-$92,000) + $0 - (-$40,000) X = -$52,000 = CGS understated (-) Cost of goods sold (CGS) as originally reported: Adjustment for understatement of CGS (implies add to get correct CGS) CGS for 2019, adjusted amount
$340,000 52,000 $392,000
©Cambridge Business Publishers, 2020 6-52
Financial Accounting for Undergraduates, 4th Edition
Topic: Inventory Errors LO: 3 Level of Difficulty: DIFFICULT 127. A company discovered in 2020 that it had overstated the inventory balance for Dec 31, 2018 by $30,000. The company had (incorrectly) reported Net Income to be $900,000 for 2018, and $1,200,000 for 2019. What are the corrected Net Incomes for 2018 and 2019? A) B) C) D)
Corrected 2018 Net Income $930,000 $870,000 $870,000 $930,000
Corrected 2019 Net Income $1,170,000 $1,170,000 $1,230,000 $1,230,000
Answer: C Rationale: Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory:
Therefore:
Year 2018: X = $0 + $0 - $30,000 X = -$30,000 = CGS understated (-)
Year 2019: X = $30,000 + $0 - $0 X = $30,000 = CGS overstated (+)
Income: overstated
Income: understated
Net income (NI) as originally reported: Adjustment for (over)understatement of NI: Net income, adjusted amount
Year 2018 $900,000 (30,000) $870,000
Year 2019 $1,200,000 30,000 $1,230,000
Topic: Inventory Errors LO: 3 Level of Difficulty: DIFFICULT 128. A company discovered in 2020 that it had overstated the inventory balance for Dec 31, 2018 by $40,000. The company had (incorrectly) reported Net Income to be $1,200,000 for 2018, and $1,600,000 for 2019. What are the corrected Net Incomes for 2018 and 2019? A) B) C) D)
Corrected 2018 Net Income $1,240,000 $1,160,000 $1,160,000 $1,240,000
Corrected 2019 Net Income $1,560,000 $1,560,000 $1,640,000 $1,640,000
Answer: C Rationale: Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory
Therefore:
Year 2018: X = $0 + $0 - $40,000 X = -$40,000 = CGS understated (-)
Year 2019: X = $40,000 + $0 - $0 X = $40,000 = CGS overstated (+)
Income: overstated
Income: understated
Net income (NI) as originally reported: Adjustment for (over) understatement of NI: Net income, adjusted amount
Year 2018 $1,200,000 (40,000) $1,160,000
Year 2019 $1,600,000 40,000 $1,640,000 ©Cambridge Business Publishers, 2020
Test Bank, Chapter 6
6-53
Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 Level of Difficulty: MEDIUM 129. Quantum Corporation sells three different products. The following information is available on December 31: Inventory Item X Y Z
Units 100 200 500
Cost per unit $12.00 $ 6.00 $ 9.00
NRV per unit $ 9.00 $ 3.00 $12.00
When applying the lower-of-cost-or-net realizable value rule to each item, what will Quantum report as its cost of ending inventory on December 31? A) $6,900 B) $6,600 C) $7,950 D) $6,000 Answer: D Rationale: (100 x $9) + (200 x $3) + (500 x $9) = $6,000 Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 Level of Difficulty: MEDIUM 130. SiSi Corporation sells three different products. The following information is available on December 31: Inventory Item X Y Z
Units 100 200 500
Cost per unit $16.00 $ 8.00 $12.00
NRV per unit $12.00 $ 4.00 $16.00
When applying the lower-of-cost-or-net realizable value rule to each item, what will SiSi report as its cost of ending inventory on December 31? A) $ 9,200 B) $ 8,800 C) $10,600 D) $ 8,000 Answer: D Rationale: (100 x $12) + (200 x $4) + (500 x $12) = $8,000
©Cambridge Business Publishers, 2020 6-54
Financial Accounting for Undergraduates, 4th Edition
Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 Level of Difficulty: MEDIUM 131. Use the following data for Moon Company, determine the value inventory under the lower-of- costor-net realizable value rule, applied on an individual item basis. Commodity A B C A) B) C) D)
Inventory Quantity 200 100 400
Unit Cost Price $30 $42 $24
Unit NRV $21 $48 $18
$18,000 $15,600 $20,400 $20,100
Answer: B Rationale: (200 x $21) + (100 x $42) + (400 x $18) = $15,600 Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 Level of Difficulty: MEDIUM 132. Use the following data for Hubbard Model Car Company, determine the value of inventory under the lower-of-cost-or-net realizable value rule, applied on an individual item basis. Commodity A B C A) B) C) D)
Inventory Quantity 200 100 400
Unit Cost Price $40 $56 $32
Unit NRV $28 $64 $24
$24,000 $20,800 $27,200 $26,800
Answer: B Rationale: (200 x $28) + (100 x $56) + (400 x $24) = $20,800
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-55
Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 Level of Difficulty: MEDIUM 133. Data on the physical inventory for Grand Home Company as of December 31, 2019 are given below: Inventory Items Appliances: Refrigerators Dishwashers Ovens Electronics: Stereos Televisions
Quantity on hand
Unit Cost
Unit NRV
12 18 15
$1,500 $ 900 $ 750
$1,350 $825 $900
20 25
$1,050 $1,350
$1,125 $1,278
Assuming the Grand Home Company applies the lower-of-cost-or-net realizable value method on the inventory by major category of items, the inventory balance reported on the Balance Sheet as of December 31, 2019 will be: A) $ 99,000 B) $ 99,300 C) $ 99,900 D) $100,200 Answer: A Rationale: Appliances: Cost: (12 × $1,500) + (18 × $900) + (15 × $750) = $45,450 NRV: (12 × $1,350) + (18 × $825) + (15 × $900) = $44,550 Lowest is NRV. Electronics: Cost: (20 × $1,050) + (25 × $1,350) = $54,750 NRV: (20 × $1,125) + (25 × $1,278) = $54,450 Lowest is NRV Total inventory value: ($44,550 + $54,450) = $99,000
©Cambridge Business Publishers, 2020 6-56
Financial Accounting for Undergraduates, 4th Edition
Topic: Lower-of-Cost-or Net Realizable Value Method LO: 4 Level of Difficulty: MEDIUM 134. Data on the physical inventory for Lu Company as of December 31, 2019 are given below: Inventory Items Appliances: Refrigerators Dishwashers Ovens Electronics: Stereos Televisions
Quantity on hand
Unit Cost
Unit NRV
12 18 15
$2,000 $1,200 $1,000
$1,800 $1,100 $1,200
20 25
$1,400 $1,800
$1,500 $1,704
Assuming the Lu Company applies the lower-or-cost-or-net realizable value method on the inventory by major category of items, the inventory balance reported on the Balance Sheet as of December 31, 2019 will be: A) $132,000 B) $132,400 C) $133,200 D) $133,600 Answer: A Rationale: Appliances: Cost: (12 × $2,000) + (18 × $1,200) + (15 × $1,000) = $60,600 NRV: (12 × $1,800) + (18 × $1,100) + (15 × $1,200) = $59,400 Lowest is NRV. Electronics: Cost: (20 × $1,400) + (25 × $1,800) = $73,000 NRV: (20 × $1,500) + (25 × $1,704) = $72,600 Lowest is NRV. Total inventory value: ($59,400 + $72,600) = $132,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-57
Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 Level of Difficulty: DIFFICULT 135. Basic inventory data for Value Company as of June 30 are presented below: Item Sporting Goods: Baseballs Footballs Basketballs Electronics: CD Players DVD Players
Quantity
Unit Cost
Unit NRV
20 40 10
$ 54 $165 $ 60
$ 48 $174 $ 75
20 30
$246 $174
$225 $165
Assume Value Company applies the lower-of-cost-or-net realizable value method for the inventory by major category. Determine the amount of inventory adjustment required at the end of the year. A) $ 390 B) $ (690) C) $1,080 D) $ (300) Answer: B Rationale: Sporting Goods: Cost: (20 × $54) + (40 × $165) + (10 × $60) = $8,280 NRV: (20 × $48) + (40 × $174) + (10 × $75) = $8,670 Lowest is cost. Electronics: Cost: (20 × $246) + (30 × $174) = $10,140 NRV: (20 × $225) + (30 × $165) = $9,450 Lowest is NRV. Total inventory value: $8,280 + $9,450) = Less: Cost ($8,280 + $10,140) = Inventory adjustment =
$17,730 - $18,420 - $ 690
©Cambridge Business Publishers, 2020 6-58
Financial Accounting for Undergraduates, 4th Edition
Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 Level of Difficulty: DIFFICULT 136. Basic inventory data for Granite Company as of June 30 are presented below: Item Sporting Goods: Baseballs Footballs Basketballs Electronics: CD Players DVD Players
Quantity
Unit Cost
Unit NRV
20 40 10
$ 72 $220 $ 80
$ 64 $232 $100
20 30
$328 $232
$300 $220
Assume Granite Company applies the lower-of-cost-or-net realizable value method for the inventory by major category. Determine the amount of inventory adjustment required at the end of the year. A) $ 520 B) ($ 920) C) $1,440 D) ($ 400) Answer: B Rationale: Sporting Goods: Cost: (20 × $72) + (40 × $220) + (10 × $80) = $11,040 NRV: (20 × $64) + (40 × $232) + (10 × $100) = $11,560 Lowest is cost. Electronics: Cost: (20 × $328) + (30 × $232) = $13,520 NRV: (20 × $300) + (30 × $220) = $12,600 Lowest is NRV. Total inventory value: ($11,040 + $12,600) = Less: Cost ($11,040 + $13,520) = Inventory adjustment =
$23,640 - $24,560 - $ 920
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-59
Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 Level of Difficulty: DIFFICULT 137. Using the information below applies to Super Sporting Goods store, calculate the amount of inventory adjustment using the lower-of-cost-or-net realizable value method applied to the inventory on a major category basis.
Football items: Helmets Cleats Pads Baseball items: Gloves Jerseys
# of Units
Cost/Unit
NRV/Unit
20 10 30
$ 90 $150 $ 60
$75 $60 $75
40 50
$ 30 $ 120
$45 $75
A) $(1,350) B) $ 2,865 C) $ 8,325 D) $(2,400) Answer: D Rationale: Football items: Cost: (20 × $90) + (10 × $150) + (30 × $60) = $5,100 NRV: (20 × $75) + (10 × $60) + (30 × $75) = $4,350 Lowest is NRV. Baseball items: Cost: (40 × $30) + (50 × $120) = $7,200 NRV: (40 × $45) + (50 × $75) = $5,550 Lowest is NRV. Total inventory value: ($4,350 + $5,550) = Less: Cost ($5,100 + $7,200) = Inventory adjustment =
$9,900 -$12,300 - $2,400
©Cambridge Business Publishers, 2020 6-60
Financial Accounting for Undergraduates, 4th Edition
Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 Level of Difficulty: DIFFICULT 138. Using the information below for Morrie Majors Sports store, calculate the amount of inventory adjustment using the lower-of-cost-or-net realizable value method applied to the inventory on a major category basis:
Football items: Helmets Cleats Pads Baseball items: Gloves Jerseys
# of Units
Cost/Unit
NRV/Unit
20 10 30
$120 $200 $ 80
$100 $ 80 $100
40 50
$ 40 $160
$ 60 $100
A) ($ 1,800) B) $ 3,200 C) $11,100 D) ($ 3,200) Answer: D Rationale: Football items: Cost: (20 × $120) + (10 × $200) + (30 × $80) = $6,800 NRV: (20 × $100) + (10 × $80) + (30 × $100) = $5,800 Lowest is NRV. Baseball items: Cost: (40 × $40) + (50 × $160) = $9,600 NRV: (40 × $60) + (50 × $100) = $7,400 Lowest is NRV. Total inventory value: ($5,800 + $7,400) = Less: Cost ($6,800 + $9,600) = Inventory adjustment =
$13,200 -$16,400 - $ 3,200
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-61
USE THE FOLLOWING INVENTORY RELATED INFORMATION FOR QUESTIONS 139-141. The following data regarding purchases and sales of a commodity were taken from the perpetual inventory account of He Company: May 1 6 8 16 20 23 30
Balance Sale Purchase Sale Purchase Sale Purchase
25 units at $120 20 units 20 units at $123 10 units 20 units at $126 25 units 15 units at $127
Topic: Appendix 6A: Inventory Costing Methods and the Perpetual Inventory System LO: 6 Level of Difficulty: DIFFICULT 139. Using the perpetual FIFO method, what amount would be reported by He Company for Cost of Goods sold for the month of May? A) $6,720 B) $6,480 C) $6,725 D) $6,690 Answer: A Rationale: (25 x $120) + (20 x $123) + (10 x $126) = $6,720 Topic: Appendix 6A: Inventory Costing Methods and the Perpetual Inventory System LO: 6 Level of Difficulty: DIFFICULT 140. Using the perpetual LIFO method, what amount would be reported by He Company under Cost of Ending Inventory on May 31? A) $3,125 B) $3,145 C) $3,165 D) $3,130 Answer: B Rationale: (5 x $125) + (5 x $123) + (15 x $127) = $3,145
©Cambridge Business Publishers, 2020 6-62
Financial Accounting for Undergraduates, 4th Edition
Topic: Appendix 6A: Inventory Costing Methods and the Perpetual Inventory System LO: 6 Level of Difficulty: DIFFICULT 141. Using the perpetual weighted-average method, what amount would be reported for cost of goods sold on He Company’s Income Statement for May (rounded to the nearest dollar)? A) $6,816 B) $6,708 C) $6,736 D) $6,804 Answer: C Rationale: (20 x $120.00) + (10 x $122.40) + (25 x $124.46) = $6,735.50 = $6,736 Purchased
Balance: May 1 Sale May 6 Purchase May 8 Sale May 16 Purchase May 20 Sale May 23 Purchase May 30 Totals
Units 25
Unit Cost $120
Inventory Balance Total $3,000
Units Sold 20
20
$123
2,460 10
20
$126
2,520
15 80
$127
1,905 $9,885
25 __ 55
Units 25 5 25 15 35 10 25
Unit Cost $120.00 120.00 122.40 122.40 124.46* 124.46 125.98*
Total $3,000.00 600.00 3,060.00 1,836.00 4,356.10 1,244.60 3,149.50
*Rounded
USE THE FOLLOWING INVENTORY RELATED INFORMATION FOR QUESTIONS 142-144. The following data regarding purchases and sales of a commodity were taken from the perpetual inventory account of Huang Company: May 1 6 8 16 20 23 30
Balance Sale Purchase Sale Purchase Sale Purchase
25 units at $160 20 units 20 units at $164 10 units 20 units at $168 25 units 15 units at $172
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-63
Topic: Appendix 6A: Inventory Costing Methods and the Perpetual Inventory System LO: 6 Level of Difficulty: DIFFICULT 142. Using the perpetual FIFO method, what amount would be reported by Huang Company for Cost of Goods sold for the month of May? A) $8,960 B) $9,120 C) $8,980 D) $8,920 Answer: A Rationale: (25 x $160) + (20 x $164) + (10 x $168) = $8,960 Topic: Appendix 6A: Inventory Costing Methods and the Perpetual Inventory System LO: 6 Level of Difficulty: DIFFICULT 143. Using the perpetual LIFO method, what amount would be reported by Huang Company under Cost of Ending Inventory on May 31? A) $4,160 B) $4,200 C) $4,220 D) $4,260 Answer: B Rationale: (15 x $172) + (5 x $164) + (5 x $160) = $4,200 Topic: Appendix 6A: Inventory Costing Methods and the Perpetual Inventory System LO: 6 Level of Difficulty: DIFFICULT 144. Using the perpetual weighted-average method, what amount would be reported for cost of goods sold on Huang Company’s Income Statement for May (Rounded final answer to the nearest dollar)? A) $9,089 B) $8,944 C) $8,981 D) $9,072 Answer: C Rationale: (20 x $160.00) + (10 x $163.20) + (25 x $165.94) = $8,980.50 = $8,981 Purchased
Balance: May 1 Sale May 6 Purchase May 8 Sale May 16 Purchase May 20 Sale May 23 Purchase May 30 Totals
Units 25
Unit Cost $160
Inventory Balance Total $ 4,000
Units Sold 20
20
$164
3,280
20
$168
3,360
15 80
$172
2,580 $13,220
10 25 __ 55
Units 25 5 25 15 35 10 25
Unit Cost $160.00 160.00 163.20 163.20 165.94 165.94 169.58
Total $4,000.00 800.00 4,080.00 2,448.00 5,808.00 1,659.40 4,239.40
©Cambridge Business Publishers, 2020 6-64
Financial Accounting for Undergraduates, 4th Edition
USE THE FOLLOWING INVENTORY RELATED INFORMATION FOR QUESTIONS 145-147. Dracopoli’s Sporting Goods, which uses a perpetual inventory system, had the following inventory records for the month of January. Beginning inventory Sales, Jan. 1 - Jan. 10 Purchase, Jan. 11 Sales, Jan. 12 - Jan. 20 Purchase, Jan. 21 Sales, Jan. 22-31
70 units @ $300 per unit 50 units 40 units @ $309 per unit 50 units 50 units @ $315 per unit 40 units
Topic: Appendix 6A: Inventory Costing Methods and the Perpetual Inventory System LO: 6 Level of Difficulty: DIFFICULT 145. Assuming the last in first out (LIFO) method is used, what is Dracopoli’s Cost of Goods Sold for the month of January? A) $42,960 B) $42,840 C) $43,810 D) $42,900 Answer: A Rationale: (50 x $300) + (40 x $309) + (10 x $300) + (40 x $315) = $42,960 Topic: Appendix 6A: Inventory Costing Methods and the Perpetual Inventory System LO: 6 Level of Difficulty: DIFFICULT 146. Assuming the first in first out (FIFO) method is used, what is Dracopoli’s total Cost of Goods Sold for the month of January? A) $42,840 B) $42,810 C) $42,960 D) 42,9000 Answer: B Rationale: (50 x $300) + (30 x $309) + (20 x $300) + (10 x $309) + (30 x $315) = $42,810
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-65
Topic: Appendix 6A: Inventory Costing Methods and the Perpetual Inventory System LO: 6 Level of Difficulty: DIFFICULT 147. Assuming the Weighted-Average method is used, what is the total cost of Dracopoli’s ending inventory on January 31? A) $6,300 B) $6,270 C) $6,000 D) $6,200 Answer: B Rationale: 20 x $313.50 = $6,270
Units Beginning Bal. Sales Jan. 1-10 Purchase Jan. 11 Sales Jan. 12-20 Purchase Jan. 21 Sales Jan. 22-31 Totals
70
Purchased Unit Cost $300
Total
Units Sold
Units
$21,000 50
40
309
12,360 50
50 ___ 160
315
15,750 ______ $49,110
40 140
70 20 60 10 60 20
Inventory Balance Unit Cost Total $300.00 300.00 306.00 306.00 313.50 313.50
$21,000 6,000 18,360 3,060 18,810 6,270
USE THE FOLLOWING INVENTORY RELATED INFORMATION FOR QUESTIONS 148-150. Hubbard’s Sporting Goods, which uses a perpetual inventory system, had the following inventory records for the month of January. Beginning inventory Sales, Jan. 1 - Jan. 10 Purchase, Jan. 11 Sales, Jan. 12 - Jan. 20 Purchase, Jan. 21 Sales, Jan. 22-31
70 units @ $400 per unit 50 units 40 units @ $412 per unit 50 units 50 units @ $420 per unit 40 units
Topic: Appendix 6A: Inventory Costing Methods and the Perpetual Inventory System LO: 6 Level of Difficulty: DIFFICULT 148. Assuming the last in first out (LIFO) method is used, what is Hubbard’s Cost of Goods Sold for the month of January? A) $57,280 B) $57,120 C) $57,080 D) $57,200 Answer: A Rationale: (50 x $400) + (40 x $412) + (10 x $400) + (40 x $420) = $57,280 ©Cambridge Business Publishers, 2020 6-66
Financial Accounting for Undergraduates, 4th Edition
Topic: Appendix 6A: Inventory Costing Methods and the Perpetual Inventory System LO: 6 Level of Difficulty: DIFFICULT 149. Assuming the first in first out (FIFO) method is used, what is Hubbard’s total Cost of Goods Sold for the month of January? A) $57,120 B) $57,080 C) $57,280 D) $57,200 Answer: B Rationale: (50 x $400) + (30 x $412) + (20 x $400) + (10 x $412) + (30 x $420) = $57,080 Topic: Appendix 6A: Inventory Costing Methods and the Perpetual Inventory System LO: 6 Level of Difficulty: DIFFICULT 150. Assuming the weighted-average method is used, what is the total cost of Hubbard’s ending inventory on January 31? A) $8,400 B) $8,360 C) $8,000 D) $8,200 Answer: B Rationale: 20 x $418 = $8,360
Beginning Bal. Sales Jan. 1-10 Purchase Jan. 11 Sales Jan. 12-20 Purchase Jan. 21 Sales Jan. 22-31 Totals
Units
Purchased Unit Cost
Total
70
$400
$28,000
Units Sold 50
40
412
16,480
50 ___ 160
420
21,000 ______ $65,480
50 40 140
Inventory Balance Units Unit Cost Total 70 20 60 10 60 20
$400 400 408 408 418 418
$28,000 8,000 24,480 4,080 25,080 8,360
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-67
Exercises Topic: Inventory Errors LO: 3 1. Bradley Company reported the following net income amounts: 2017, $246,000; 2018, $150,000: and 2019, $120,000. In 2020, the company discovered errors that had been made in computing the ending inventories for 2017 and 2018, as follows: 2017 2018
Ending inventory understated by $18,000 Ending inventory understated by $21,000
Compute the correct net incomes for 2017, 2018, and 2019. Answer: 2017 net income: As reported Correction for 2017 inventory understatement Corrected net income
$246,000 18,000 $264,000
2018 net income: As reported Correction for 2017 inventory understatement Correction for 2018 inventory understatement Corrected net income
$150,000 (18,000) 21,000 $153,000
2019 net income: As reported Correction for 2018 inventory understatement Corrected net income
$120,000 (21,000) $99,000
Note: An understatement of ending inventory means an overstatement of cost of goods sold, which in turn means an understatement of net income in a given period. In the following period, beginning inventory will be misstated which will affect net income.
©Cambridge Business Publishers, 2020 6-68
Financial Accounting for Undergraduates, 4th Edition
Topic: Inventory Errors LO: 3 2. Maria Company reported the following net income amounts: 2017, $140,000; 2018, $116,000; and 2019, $106,000. In 2020, the company discovered errors that had been made in computing the ending inventories for 2017 and 2018, as follows: 2017 2018
Ending inventory overstated by $12,000 Ending inventory understated by $6,000
Compute the correct net incomes for 2017, 2018, and 2019. Answer: 2017 net income: As reported Correction for 2017 inventory overstatement Corrected net income
$140,000 (12,000) $128,000
2018 net income: As reported Correction for 2017 inventory overstatement Correction for 2018 inventory understatement Corrected net income
$116,000 12,000 6,000 $134,000
2019 net income: As reported Correction for 2018 inventory understatement Corrected net income
$106,000 (6,000) $100,000
Note: An overstatement of ending inventory means an understatement of cost of goods sold, which in turn means an overstatement of net income in a given period. An understatement of ending inventory means an overstatement of cost of goods sold, which in turn means an understatement of net income in a given period. In both cases, in the following period, beginning inventory will be misstated which will affect net income. Topic: LIFO Reserves LO: 7 3. Chief Software Company’s 2019 balance sheet reveals that inventories reported on a LIFO basis are $16,860 million. In a footnote, management stated that the LIFO reserve was $2,400 million. a. How much would Chief’s Software’s ending inventory be using FIFO? b. What is the total cumulative tax effect of using LIFO given a 35% income tax rate? Answer: a. LIFO reserve is the difference in inventory carrying amount between the FIFO and LIFO cost methods. To adjust a LIFO inventory value to a FIFO inventory value, the LIFO reserve is added to LIFO inventories. LIFO inventory LIFO reserve Inventory with FIFO method
$16,860 2,400 $19,260
b. Using LIFO has decreased pre-tax profits by $2,400 million due to higher cost of goods sold. Decrease in income taxes: $2,400 million × 35% = $840 million
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-69
Topic: FIFO Method LO: 2 4. M. Wards’ inventories are determined using FIFO (periodic). information for the first quarter of 2019: Beginning inventory, January 1, 2019 (1) Purchase (2) Purchase (3) Purchase Ending inventory, March 31, 2019
M. Wards provided the following
60 units @ $63.00 40 units @ $56.25 95 units @ $66.00 30 units @ $64.50 45 units
a. Compute the company’s cost of goods sold for the first quarter. b. Computer the ending inventory to be reported on M. Wards’ balance sheet at March 31, 2019. Answer: a. Units sold = 60 + 40 + 95 + 30 – 45 = 180 Costs of goods sold: (60 units × $63.00) + (40 units × $56.25) + (80 units × $66) = $11,310 b. Ending inventory (15 units × $66.00) + (30 units × $64.50 = $2,925 Topic: Weighted-Average Cost Method LO: 2 5. Tablet Company, which uses a periodic inventory system, reports the following in its inventory records for June:
Beginning Inventory Purchase #1 Purchase #2
Units 10 5 5
Unit Cost $12.00 $10.00 $14.00
During June, Tablet Company sold 12 units. Using the weighted-average cost method, compute the cost of goods sold for June and the June 30 ending inventory balance for this product. Answer: Beginning Inventory Purchase #1 Purchase #2 Totals
Units 10 5 5 20
Unit Cost $12.00 $10.00 $14.00
Cost $120 50 70 $240
Average unit cost = $240 / 20 = $12.00 Cost of goods sold = 12 × $12.00 = $144 Ending inventory = 8 × $12.00 = $96
©Cambridge Business Publishers, 2020 6-70
Financial Accounting for Undergraduates, 4th Edition
Topic: Inventory Costing Methods LO: 2 6. Autok Fabricators, Inc. has 10 units in beginning inventory costing $45 each. It purchased 90 more for $36 each during the month. The company sold 80 units during the month. Autok used a periodic inventory system. Calculate cost of goods sold using: a. FIFO b. Weighted-average cost c. LIFO Answer: a. FIFO Cost of goods sold = (10 × $45) + (70 × $36) = $2,970 b. Beginning inventory Purchases
Units 10 90 100
Dollars/unit $45.00 36.00
Inventory $ 450.00 3,240.00 $3,690.00
Cost per unit = $3,690 / 100 = $36.90 Cost of goods sold = $36.90 × 80 = $2,952 c.
LIFO Cost of goods sold = 80 × $36 = $2,880
Topic: Inventory Turnover LO: 5 7. Selected balance sheet and income statement information for Nathan Company and Ehrenhofer Company for 2019 follows (in thousands):
Nathan Company Ehrenhofer Company
COGS $40,000 $60,904
Average Inventory $8,000 $4,000
a. Compute the inventory turnover rate for Nathan Co. and Ehrenhofer Co. for 2019. b. Comment on the differences you observe between the turnover rates for these two companies. Answer: a. Inventory turnover = Cost of goods sold / Average inventory Nathan Co.: $40,000 / $8,000 = 5.00 Ehrenhofer Co.: $60,904 / $4,000 = 15.23 b. Nathan Co. maintains a higher inventory level given its cost of goods sold which contributes to slower turnover rate. Ehrenhofer Co., however, maintains considerably less inventory on hand, yielding a higher turnover rate than Nathan Co.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-71
Topic: LIFO Reserve LO: 7 8. K. Block, Inc., reports the following information in its annual report:
Inventory value at LIFO LIFO reserve Inventory value at FIFO
January 1, 2019 $912,000 20,000 $932,000
December 31, 2019 $956,000 30,000 $986,000
Sales for 2019 totaled $8,400,000. Cost of goods sold under LIFO totaled $3,700,000. Compute K. Block’s cost of goods sold and gross profit assuming it uses the FIFO method. Answer: Change in LIFO reserve = $30,000 - $20,000 = $10,000 Sales revenue Cost of goods sold Gross profit
($3,700,000 - $10,000) =
$8,400,000 3,690,000 $4,710,000
Topic: Perpetual Inventory System LO: 6 9. The following are 2019 inventory data for SiSi Company, which uses a perpetual inventory system. January 1 March 8 August 19 October 24
Beginning inventory, 90 units @ $225 per unit. Purchased 160 units @ $240 per unit. Sold 225 units. Purchased 100 units @ $270 per unit.
Ending inventory at December 31 is 125 units. Compute the cost of the ending inventory using the following methods: a. FIFO b. Weighted-average c. LIFO Answer: a. FIFO:
25 units @ $240 = 100 units @ $270 = 125 units
$ 6,000 27,000 $33,000
b. Weighted-average: 125 units @ $262.92 = $32,865 Purchased
Beginning Bal. Purchase Mar. 8 Sales Aug. 19 Purchase Oct. 24 Totals c.
Units 90 160 100 350
LIFO: 100 units @ $270 = 25 units @ $225 = 125 units
Unit Cost $225 240 270
Inventory Balance Total $20,250 38,400 27,000 $85,650
Units Sold
225 ___ 225
Units 90 250 25 125
Unit Cost $225.00 234.60 234.60 262.92
Total $20,250 58,650 5,865 32,865
$ 27,000 5,625 $32,625
©Cambridge Business Publishers, 2020 6-72
Financial Accounting for Undergraduates, 4th Edition
Topic: Perpetual Inventory System LO: 6 10. The following are 2019 inventory data for Galla Company, which uses a perpetual inventory system. January 1 April 8 July 19 November 24
Beginning inventory, 60 units @ $100 per unit. Purchased 40 units @ $106 per unit. Sold 75 units. Purchased 25 units @ $108 per unit.
Ending inventory at December 31 is 50 units. Compute the cost of the ending inventory using the following methods: a. First-in, first-out b. Weighted-average c. Last-in, first-out Answer: a. FIFO:
25 units @ $106 = $2,650 25 units @ $108 = 2,700 50 units $5,350
b. Weighted-average: 50 units @ $105.20 = $5,260
Units Beginning Bal. Purchase Apr. 8 Sales July 19 Purchase Nov. 24 Totals c.
LIFO:
Purchased Unit Cost
Total
60 40
$100 106
$ 6,000 4,240
25 125
108
2,700 $12,940
25 units @ $108 = 25 units @ $100 = 50
Units Sold
75 __ 75
Units 60 100 25 50
Inventory Balance Unit Cost Total $100.00 102.40 102.40 105.20
$ 6,000 10,240 2,560 5,260
$2,700 2,500 $5,200
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-73
Topic: Lower-of-Cost-or-Net Realizable Value LO: 4 11. Bargain Barn Clothing Company had the following inventory at December 31, 2019:
Blouses Model 1 Model 2 Model 3 Skirts Model 4 Model 5 Model 6
Quantity
Unit Cost
Unit NRV
350 375 600
$ 54 $ 63 $ 84
$ 60 $ 75 $ 78
750 435 150
$ 90 $ 96 $126
$ 72 $108 $114
a. Determine ending inventory by applying the lower-of-cost-or-net realizable value rule to: 1. Each item of inventory 2. Each major category of inventory 3. Total inventory b. Which of the lower-of-cost-or-net realizable value procedures from requirement A results in the lowest net income for 2019? Explain. Answer: a. 1. (350 × $54) + (375 × $63) + (600 × $78) + (750 × $72) + (435 × $96) + (150 × $114) = $202,185 2. Blouses: Skirts:
(350 × $54) + (375 × $63) + (600 × $84) = $92,925 (350 × $60) + (375 × $75) + (600 × $78) = $95,925 (750 × $90) + (435 × $96) + (150 × $126) = $128,160 (750 × $72) + (435 × $108) + (150 × $114) = $118,080
Inventory would be reported at $92,925 + $118,080 = $211,005 3. (350 × $54) + (375 × $63) + (600 × $84) + (750 × $90) + (435 × $96) + (150 × $126) = $221,085 (350 × $60) + (375 × $75) + (600 × $78) + (750 × $72) + (435 × $108) + (150 × $114) = $214,005 Inventory would be reported at $214,005. b. Applying the lower-of-cost-or-net realizable value rule to individual items in inventory results in the lowest inventory amount, the highest cost of goods sold, and the lowest net income.
©Cambridge Business Publishers, 2020 6-74
Financial Accounting for Undergraduates, 4th Edition
Topic: LIFO LO: 2, 3 12. Heinrich Company, which uses a periodic inventory system, imports and sells a product produced in Germany. In the summer of 2018, a natural disaster disrupted production, affecting its supply of product. Heinrich uses the LIFO inventory method. On January 1, 2019, Heinrich’s inventory records were as follows: Year purchased 2017 2018 Total
Quantity (units) 2,500 4,500 7,000
Cost per unit $20 $40
Total cost $ 50,000 180,000 $230,000
Through mid-December of 2019, purchases were limited to 50,000 units, because the cost had increased to $50 per unit. Heinrich sold 55,000 units during 2019 at a selling price of $100 per unit, which significantly depleted its inventory. The cost was expected to drop to $42 per unit by early January 2020. a. Assume that Heinrich makes no further purchases during 2019. Compute the gross profit for 2019. b. Assume that Heinrich purchases 8,800 units before the end of December 2019 at $50 each. Compute its gross profit for 2019. c.
If Heinrich’s corporate tax rate is 30%, how much tax savings will result from the purchase of inventory before year end?
Answer: a. Sales revenue (55,000 × $100) Cost of goods sold (50,000 × $50)+ (4,500 × $40) + (500 × $20) Gross profit
$5,500,000 2,690,000 $2,810,000
b. Sales revenue (55,000 × $100) Cost of goods sold (55,000 × $50) Gross profit
$5,500,000 2,750,000 $2,750,000
c.
Gross profit Income taxes (30%)
No year-end purchase $2,810,000 843,000
Taxes saved by buying before year-end
$
N/A
Purchase 8,800 units before year-end $2,750,000 825,000 $
18,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-75
Topic: LIFO LO: 2, 3 13. At the beginning of July, Escape Luggage, which uses a periodic inventory system, holds 15 units of its only product with a per-unit cost of $420. During July, Escape sells 40 units. A summary of purchases during the current period follows: Beginning inventory First purchase Second purchase Third purchase
15 units at $420 30 units at $465 15 units at $480 20 units at $495
Assume that Escape utilizes the LIFO method and instead of making the third purchase during July, the company allows its inventory level to decline by delaying the third purchase until August. Compute cost of goods sold for July under both scenarios: a. If the third purchase is made during July b. If the third purchase is delayed to August Discuss the effect on July profit if the company delays the third purchase until August. Answer: a. Cost of goods sold = (20 × $495) + (15 × $480) + (5 × $465) = $19,425 b. Cost of goods sold = (15 × $480) + (25 × $465) = $18,825 The company’s LIFO gross profit will increase by $600 ($19,425 – $18,825) if the purchase is delayed until August. The company has, in effect, dipped into lower-cost layers to boost current period profit, all from a simple delay of inventory purchases.
©Cambridge Business Publishers, 2020 6-76
Financial Accounting for Undergraduates, 4th Edition
Problems Topic: Inventory Costing LO: 2, 3 1. At the beginning of the current period, Viraat Industries, which uses a periodic inventory system, has 150 units of a product with a unit cost of $480. The inventory records report the following transactions: Beginning Inventory Purchase #1 Purchase #2 Purchase #3
Units 150 150 70 30
Unit Cost $480 $528 $570 $630 400
Cost $72,000 79,200 39,900 18,900 $210,000
During the current period, Viraat sells 340 units. a. Assume Viraat uses the FIFO method. Compute the cost of goods sold for the current period and the ending inventory balance for this product. b. Assume Viraat uses the LIFO method. Compute the cost of goods sold for the current period and the ending inventory balance for this product. c. Assume Viraat uses the weighted-average cost method. Compute the cost of goods sold for the current period and the ending inventory balance for this product. Answer: Ending inventory units = 150 + 150 + 70 +30 – 340 = 60 a. FIFO: Units 150 150 40 Units 30 30 b. LIFO Units 30 70 150 90 Units 60 c.
Unit Cost $480 528 570 Cost of goods sold Unit Cost $630 570 Ending inventory
Cost $72,000 79,200 22,800 $174,000 Cost $18,900 17,100 $36,000
Unit Cost $630 570 528 480 Cost of goods sold Unit Cost $480 Ending inventory
Cost $ 18,900 39,900 79,200 43,200 $181,200 Cost $28,800 $28,800
Weighted-average cost: Weighted-average unit cost = $210,000 / 400 = $525 Cost of goods sold = 340 × $525 = $178,500 Ending inventory = 60 × $525 = $31,500 ©Cambridge Business Publishers, 2020
Test Bank, Chapter 6
6-77
Topic: Inventory Costing LO: 2, 3 2. Bowling Green Tires, which uses a periodic inventory system, has the following inventory records for the month ending July 31, 2019:
Beginning Inventory Purchase #1 Purchase #2 Purchase #3
Units 100 40 30 20
Unit Cost $36.00 $30.00 $34.00 $32.00
Findlay sold 140 tires during July. Compute the ending inventory and the cost of goods sold for the period using FIFO, LIFO, and weighted-average cost inventory methods. Answer: Ending inventory units = 100 + 40 + 30 +20 – 140 = 50 FIFO Units 100 40
Unit Cost $36 30 Cost of goods sold
Cost $3,600 1,200 $4,800
Units 20 30
Unit Cost $32 34 Ending inventory
Cost $ 640 1,020 $1,660
Units 20 30 40 50
Unit Cost $32 34 30 36 Cost of goods sold
Cost $ 640 1,020 1,200 1,800 $4,660
Units 50
Unit Cost 36 Ending inventory
Cost $1,800 $1,800
LIFO
Weighted-average cost: Total cost of inventory available for sale: ($36 × 100) + ($30 × 40) + ($34 × 30) + ($32 × 20) = $6,460 Average unit cost = $6,460 / 190 = $34 Cost of goods sold = 140 × $34 = $4,760 Ending inventory = 50 × $34 = $1,700
©Cambridge Business Publishers, 2020 6-78
Financial Accounting for Undergraduates, 4th Edition
Topic: Gross Profit Percentage LO: 2, 3 3. Topside Shoes Company’s sales totaled $28,000,000 for 2019. Information concerning Topside Shoes Company’s gross profit under three inventory costing methods follows: FIFO LIFO Weighted average
$2,700,000 $2,910,000 $2,760,000
Compute the gross profit percentage for each costing method. Which method shows the highest gross profit? Answer: FIFO LIFO Weighted average
Gross profit $2,700,000 2,910,000 $2,760,000
Gross profit percentage 9.64% 10.39% 9.86%
First-in, first-out shows the lowest gross profit percentage. Topic: LIFO and FIFO LO: 2, 3, 7 4. A summary of inventory records for St. Clair Motors Company, which uses a periodic inventory system, reveals the following: Inventory on January 1, 2019 Inventory purchased in 2019 Total cost of goods available for sale in 2019
30 units @ $1,040 each 35 units @ $1,066 each 65 units
$31,200 37,310 $68,510
During 2019, 35 units were sold at $1,800 per unit, generating total sales revenue of $63,000. a. Determine cost of goods sold, gross profit, and the inventory balance under LIFO method. b. Determine the LIFO reserve for St. Clair Motors Company. Answer: a. LIFO assumes that the last units purchased are the first units sold. Sales Cost of goods sold (35 units × $1,066) Gross profit
$63,000 37,310 $25,690
Inventory Balance: 30 units at $1,040 = $31,200 b. FIFO method. This method assumes that the first units purchased are the first units sold. Sales COGS Gross Profit
$63,000 30 units × $1,040 = 5 units × $1,066 =
$31,200 5,330
36,530 $26,470
Inventory Balance: 30 units at $1,066 = $31,980 LIFO reserve: FIFO – LIFO inventory = $31,980 – $31,200 = $780 ©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-79
Topic: LIFO, FIFO, and Weighted-Average Cost LO: 2, 3 5. A summary of inventory records for Bousfield Company, which uses a periodic inventory system, reveals the following: Inventory on January 1, 2019 Inventory purchased in 2019 Total cost of goods available for sale in 2019
30 units @ $900 each $ 27,000 20 units @ $1,290 each 25,800 50 units $52,800
During 2019, 35 units were sold at $1,800 per unit for total sales revenue of $63,000. Compute cost of goods sold, gross profit, and the inventory balance for the current period under FIFO, LIFO, and weighted-average cost methods. Answer: FIFO assumes that the first units purchased are the first units sold. Sales Cost of goods sold (30 × $900) + (5 × $1,290) Gross profit
$63,000 33,450 $29,550
FIFO inventory balance: 15 units at $1,290 = $ 19,350 LIFO assumes that the last units purchased are the first units sold. Sales Cost of goods sold (20 × $1,290) + (15 × $900) Gross profit
$63,000 39,300 $23,700
LIFO inventory valance: 15 units at $900 = $13,500 Weighted-average cost assumes that all units are sold without regard to any order in which they are purchased. Weighted-average cost per unit: $52,800 / 50 = $1,056 Sales Cost of goods sold (35 × $1,056) Gross profit
$63,000 36,960 $26,040
Weighted-average cost inventory balance: 15 units at $1,056 = $15,840
©Cambridge Business Publishers, 2020 6-80
Financial Accounting for Undergraduates, 4th Edition
Topic: Inventory Turnover and Transportation Costs LO: 1, 5 6. The following data are excerpted from Belpre Co.’s 2019 financial statements (in millions): Assets Cash & cash equivalents Accounts receivable, net Inventories
2019 $ 6,261 7,488 20,367
$
2018 1,329 7,581 21,747
Other current assets
2,031
642
Total current assets
$36,147
$31,299
2019 $190,005 160,027 $ 29,978
2018 $177,102 148,369 $ 28,733
Net sales Cost of sales Gross profit Vienna’s inventory footnote follows:
Inventories Inventories are valued on a lower of last-in, first-out (LIFO) cost or market basis. At August 31, 2019 and 2018, inventories would have been greater by $3,717 million and $3,201 million, respectively, if they had been valued on a lower of first-in, first-out (FIFO) cost or market basis. Inventory includes product cost, inbound freight, warehousing costs and vendor allowances that are not included as a reduction of advertising expense. a. Compute the inventory turnover ratios for 2019 and 2018 (ending inventory in 2017 is $20,373 million). What does this say about the company? b. Is it correct to include in-bound freight in Belpre’s inventory cost? Why or why not? Answer: a. 2019: $160,027 / (($20,367 + $21,747) / 2) = 7.60 2018: $148,369 / (($21,747 + $20,373) / 2) = 7.05 Belpre appears to be doing well in controlling its inventory despite the increase in Cost of Goods Sold as a percent of sales. b. Yes, it is correct under GAAP to include any costs associated with securing ownership of the asset. If purchasing the inventory involved any fees or taxes, that too would become part of the asset’s cost.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-81
Topic: Inventory Errors LO: 3 7. A firm’s operating figures for three successive periods are shown below:
Sales Beginning Inventory Net Cost of Purchases Cost of Goods Available for Sale Ending Inventory Cost of Goods Sold
(1) $120,000 $ 24,000 82,000 $106,000 30,000 $ 76,000
Period (2) $126,000 $ 30,000 78,000 $108,000 34,000 $ 74,000
Gross Profit
$ 44,000
$ 52,000
(3) $122,000 $ 34,000 72,000 $106,000 32,000 $ 74,000 $ 48,000
Assuming the following errors were made, compute the correct amount of gross profit for each period. Period 1 2 Correct gross profit:
Error in Ending Inventory Overstated $2,000 Understated $6,000
Period 1: $________ Period 2: $________ Period 3: $________
Answer: Period 1: $42,000 ($44,000 – $2,000) Period 2: $60,000 ($52,000 + $2,000 + $6,000) Period 3: $42,000 ($48,000 – $6,000)
©Cambridge Business Publishers, 2020 6-82
Financial Accounting for Undergraduates, 4th Edition
Topic: Inventory Costing Methods Periodic System LO: 2 8. Willowbrook Company, which uses the periodic inventory system, has the following records for 2019:
Beginning inventory Purchases:
Units 100 40 62 35 13 250
February 8 June 15 August 22 November 29
Unit Cost $252 264 255 261 270
Total $25,200 10,560 15,810 9,135 3,510 $64,215
Ending inventory at December 31 is 108 units. Compute the cost of the ending inventory and the cost of goods sold using the following methods: a. FIFO b. Weighted-average c. LIFO Answer: a. FIFO:
Ending inventory
Units 13 35 60 108
@ @ @
Cost of goods available for sale Less: Ending inventory Cost of goods sold
Cost $270 261 255
= = =
Total $ 3,510 9,135 15,300 $27,945
$64,215 27,945 $36,270
b. Weighted-average: Cost of goods available for sale / Total units available for sale = $64,215 / 250 = $256.86 Average unit cost Ending inventory = 108 units x $256.86 = $27,740.88 Cost of goods available for sale Less: Ending Inventory Cost of goods sold c.
$64,215.00 27,740.88 $36,474.12
LIFO:
Ending inventory
Units 100 8 108
Cost of goods available for sale Less: Ending inventory Cost of goods sold
@ @
Cost $252 264
= =
Total $25,200 2,112 $27,312
$64,215 27,312 $36,903
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-83
Topic: Inventory Costing Methods Periodic System LO: 2 9. Karin Company, which uses the periodic inventory system, has the following records for 2019:
Beginning inventory Purchases:
Units 60 25 55 20 40
March 6 July 12 August 19 October 27
Unit Cost $80 84 88 90 92
Ending inventory at December 31 is 80 units. Compute the cost of the ending inventory and the cost of goods sold using the following methods: a. FIFO b. Weighted-average c. LIFO Answer: a. FIFO:
Ending inventory
Units 40 20 20 80
@ @ @
Cost $92 90 88
Cost of goods available for sale Less: Ending inventory Cost of goods sold
= = =
Total $3,680 1,800 1,760 $7,240
$17,220 7,240 $9,980
b. Weighted-average: Cost of goods available for sale/Total units available for sale = $17,220 / 200 = $86.10 Average unit cost Ending inventory = 80 units x $86.10 = $6,888 Cost of goods available for sale Less: Ending inventory Cost of goods sold c.
$17,220 6,888 $10,332
LIFO:
Ending inventory
Units 60 20 80
Cost of goods available for sale Less: Ending inventory Cost of goods sold
@ @
Cost $80 84
= =
Total $4,800 1,680 $6,480
$17,220 6,480 $10,740
©Cambridge Business Publishers, 2020 6-84
Financial Accounting for Undergraduates, 4th Edition
Topic: Inventory Analysis LO: 5, 7 10. The following are the income statement, the assets section of the balance sheet, and inventory disclosures from Carl’s Toys, a toy manufacturer, for 2019.
STATEMENTS OF OPERATIONS (In thousands) Net sales Cost of sales Gross profit Advertising expenses Other selling expenses Operating income Interest expense Interest (income) Other non-operating expense (income) Income before income taxes Provision for income taxes Net income ASSETS (In thousands) Current Assets Cash and equivalents Accounts receivable, less allowance Inventories Prepaid expenses and other current assets Total Current Assets Property, plant, and equipment, net Goodwill Other noncurrent assets Total Assets
For the Year 2018
2019 $10,860 5,432 5,428 1,218 2,748 1,462 144 (16) 14 1,320 262 $ 1,058
$11,836 6,468 5,368 1,438 2,846 1,084 164 (50) (6) 976 216 $ 760
2017 $11,940 6,383 5,557 1,418 2,677 1,462 142 (66) (21) 1,407 207 $ 1,200
Dec. 31, 2019
Dec. 31, 2018
$2,234 1,501 712 666 5,113 1,010 1,657 1,786 $9,566
$1,236 1,748 972 820 4,776 1,072 1,632 1,872 $9,352
Inventories Inventories, net of an allowance for excess quantities and obsolescence, are stated at the lowerof-cost-or-net realizable value . Cost is determined by the first-in, first-out method. Required: a. Compute the inventory turnover for both 2019 and 2018. The 2017 ending inventories balance was $856 (thousand). Interpret and explain the change in inventory turnover as a positive or a negative for the company. b. Compute the days’ sales in inventory for both 2019 and 2018. Discuss what this measures and the importance of this measurement in analyzing company performance. c.
What inventory costing method does Carl’s Toys use? Is there any adjustment required to Carl’s Toys’ balance sheet amount of inventories for a LIFO reserve? Describe why such an adjustment is needed or not needed for Foster Toys.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-85
Answer: a. Inventory turnover = COGS / Average inventory 2019 = $5,432 / (($712 + $972) / 2) = 6.45 2018 = $6,468 / (($972 + $856) / 2) = 7.08 Carl’s Toys’ inventory turnover decreased slightly from 2018 to 2019. This small change is generally not viewed as a problem, although the turnover should be monitored to be sure there are no underlying problems. A more detailed analysis as to what exactly caused the decreased inventory turnover rate would be helpful for management. b. Days’ sales in inventory = 365 / Inventory turnover: 2019 = 365 / 6.45 = 56.6 2018 = 365 / 7.08 = 51.6 Days’ sales in inventory is a measurement of how long, on average, inventories are on the shelves before being sold. In analyzing company performance, this measurement is important to determine if a company is optimizing its inventory levels while using the most cost efficient supply chains and management systems in place to reach this optimum level of inventory. The measurement can truly add some insight into a company’s performance for future periods. An increase in days’ sales in inventory is generally viewed as a negative development for the firm because its inventory is turning slower, which does not indicate good inventory control. c.
Carl’s Toys uses FIFO costing method as stated in the note disclosure. Carl’s Toys is not required to have an adjustment to its balance sheet amount of inventory because it currently costs inventory using the FIFO inventory costing method. A restatement from FIFO to LIFO isn’t a requirement. An adjustment would be required if Carl’s Toys used LIFO costing method, that disclosed the amount to adjust inventories to the FIFO method.
©Cambridge Business Publishers, 2020 6-86
Financial Accounting for Undergraduates, 4th Edition
Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 11. Calvin Company had the following inventory at December 31, 2019.
Quantity
Unit Price Cost NRV
Calculators Model R Model S Model T
250 200 400
72 90 114
$78 87 105
MP3 players Model A Model B Model C
150 180 60
96 120 147
93 126 141
Determine the ending inventory amount by applying the lower-of-cost-or-net realizable value method to: a. Each item of inventory b. Each major category of inventory c. The total inventory Answer: a. Lower-of-cost-or-net realizable value for each inventory item: Calculators Model R: 250 x $72 = $18,000 Model S: 200 x $87 = $17,400 Model T: 400 x $105 = $42,000 Subtotal $77,400 MP3 players Model A: 150 x $93 = $ 13,950 Model B: 180 x $120 = $21,600 Model C: 60 x $141 = $ 8,460 Subtotal $44,010 Total $121,410 b. Calculators Cost Model R: (250 units) $18,000 Model S: (200 units) 18,000 Model T: (400 units) 45,600 Subtotal $81,600
NRV $19,500 17,400 42,000 $78,900
MP3 players Model A: (150 units) $14,400 Model B: (180 units) 21,600 Model C: (60 units) 8,820 Subtotal $44,820 Total $126,420
$ 13,950 22,680 8,460 $45,090 $123,990
Lower-of-cost-or-net realizable value by each major category of inventory is $78,900 + $44,820 = $123,720 c.
Lower-of-cost-or-net realizable value for the total inventory is $123,990 (computations in part b)
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-87
Chapter 6 Accounting for Inventory Learning Objectives – Coverage by question True / False
Multiple Choice
1
1, 101, 102
LO2 – Describe inventory costing using specific identification, FIFO, LIFO and weighted-average cost.
10, 11
11, 20-23, 25-32, 35-37, 41-43, 47-49, 53-55, 59-61, 65-67, 71-73, 80-82, 90, 103-124
4-6, 12, 13
1-5, 8, 9
LO3 – Analyze the financial effects of different inventory costing methods on company profit.
2-4, 7, 8, 12, 13
2-8, 12, 24-28, 33, 34, 89, 125-128
1, 2, 12, 13
1-5, 7
LO4 – Apply the lower-ofcost-or-net realizable method.
9, 14, 15
9, 10, 18, 19, 91-94, 129-138
11
11
LO5 – Define inventory turnover and days’ sales in inventory and explain the use of these ratios.
6, 16
14-17, 95-100
7
6, 10
38-40, 44-46, 50-52, 56-58, 62-64, 68-70, 74-79, 83-88, 139-150
9, 10
13
3, 8
LO1 – Explain inventory concepts and modern inventory practices.
LO6 – Appendix 6A: Describe inventory costing under a perpetual inventory system using specific identification, FIFO, LIFO and weighted-average cost. LO7 – Appendix 6B: Define the LIFO reserve and explain how it is used to compare the performance of companies using different inventory costing methods
5
Exercises
Problems
6
4, 10
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-1
Chapter 6: Accounting for Inventory
True / False Topic: Inventory Costing LO: 1 1. Inventory costs are all costs necessary to acquire and sell the merchandise. Answer: False Rationale: All necessary costs incurred to acquire merchandise inventory and deliver it to the buyer’s place of business are included in the buyer’s cost of inventory. This includes the purchase price of the merchandise, plus any transportation or freight-in costs, less any purchase returns and allowances and any purchase discounts.
Topic: LIFO Costing LO: 3 2. When inventory quantities are maintained or increased during a period, the periodic LIFO method prevents any part of the beginning inventory amount from becoming part of the period’s cost of goods sold. Answer: True Rationale: LIFO assumes that the most recent purchases are sold first. If inventory quantities are maintained or increased during a period, they will be used to calculate the period’s cost of goods sold, and thus, will prevent any part of the beginning inventory amount from becoming part of the period’s cost of goods sold.
Topic: Inventory Costing and the Balance Sheet LO: 3 3. FIFO inventory costing yields more accurate reporting of the inventory balance on the balance sheet than the LIFO method. Answer: True Rationale: FIFO assumes that the most recently purchased goods are remaining in inventory’s balance. Hence, the balance sheet reports inventories at more current costs.
Topic: FIFO Inventory Costing and Profit LO: 3 4. In periods of rising prices, companies that use FIFO inventory costing report higher gross profit than they would if they used LIFO. Answer: True Rationale: In periods of rising prices, companies which use the FIFO method of inventory costing, will have a lower cost of inventory than would be the case if they utilized the LIFO method of inventory costing. If inventory costs less, than the cost of goods sold will be lower and thus, gross profits will be higher than would be reported if the companies used the LIFO method.
©Cambridge Business Publishers, 2020 6-2
th
Financial Accounting for Undergraduates, 4 Edition
Topic: LIFO Disclosures LO: 7 5. Companies using LIFO are required to disclose the amount at which inventory would have been reported had the company used FIFO. The difference between LIFO and FIFO inventories is called the LIFO reserve. Answer: True Rationale: The disclosure of the LIFO reserve is required for those companies using LIFO inventory costing. This disclosure allows analysts to adjust the balance sheet and income statement for LIFO effects when comparing LIFO and FIFO companies.
Topic: Inventory Turnover Ratio LO: 5 6. A low inventory turnover indicates that a firm is able to sell its inventory more quickly. Answer: False Rationale: Inventory turnover indicates how many times inventory turns (is sold) during a period. More turns indicate that inventory is sold more quickly.
Topic: FIFO Costing LO: 3 7. Under the periodic FIFO method of inventory costing, the ending inventory amount reflects the most recent acquisition costs. Answer: True Rationale: FIFO assumes that the most recently purchased goods are remaining in inventory’s balance. Hence, the balance sheet reports inventories at more current costs.
Topic: Inventory Errors LO: 3 8. Under the periodic inventory system, an uncorrected error in an ending inventory amount will affect income determination for two accounting periods. Answer: True Rationale: An uncorrected error in an ending inventory amount will affect income determination because the value of ending inventory reported on the balance sheet in the period of the error will be misstated resulting in the cost of goods sold being misstated and thus, the current net income being misstated. Further, the error is not limited to only the current period—net income in the following period is also affected, because the current period’s misstated ending inventory becomes the next period misstated beginning inventory.
Topic: IFRS Inventory Costing LO: 4 9. Inventory costing procedures used by businesses are the same in all countries. Answer: False Rationale: Inventory costing procedures used by businesses in countries other than the U.S. are much the same as those in the U.S., with a few exceptions. Under IFRS, LIFO is not generally accepted, and IFRS permits inventory to be revalued upwards if the inventory’s fair value appreciates above the acquisition cost.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-3
Topic: Inventory Costing Methods LO: 2 10. A company that uses LIFO must sell its oldest goods first. Answer: False Rationale: LIFO represents a cost flow, not the physical unit flow.
Topic: Weighted-Average Inventory Costing LO: 2 11. The average unit cost used in the weighted-average inventory pricing method is calculated by dividing the total units available for sale into the period’s net cost of purchases. Answer: False Rationale: The average unit cost used in the weighted-average inventory pricing method is calculated by dividing the total units available for sale into the period’s costs of goods available for sale.
Topic: LIFO versus FIFO LO: 3 12. When a company uses LIFO and prices are declining, profits will be higher than if the company had used FIFO. Answer: True Rationale: If prices are declining, the cost of the most recently purchased units will be less than the cost of older units. These newer units will flow to the income statement with a smaller cost than under FIFO causing profits to be higher.
Topic: Weighted-Average Inventory Costing LO: 3 13. A weighted-average approach to costing inventory most naturally fits operations that involve differentiated products of high unit value. Answer: False Rationale: Weighted-average cost is best suited for businesses that warehouse a large volume of undifferentiated goods in a common area. Liquid fuels, grains, and other commodities are examples.
Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 14. The lower-of-cost-or-net realizable value method may be applied to each inventory item or to totals of each inventory category or to the entire inventory. Answer: True Rationale: The lower-of-cost-or-net realizable value method may be applied on an individual item-byitem basis or to totals of each inventory category or to the entire inventory.
©Cambridge Business Publishers, 2020 6-4
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 15. The lower-of-cost-or-net realizable value method provides for the recognition of inventory losses from price declines in the period the inventory is sold. Answer: False Rationale: The lower-of-cost-or-realizable value method provides for the recognition of an inventory write-down loss when the inventory’s net realizable value declines below its recorded acquisition cost. Under lower-of-cost-or-net realizable value, a loss is reported in the period when the inventory’s net realizable value declines, rather than during a subsequent period when the actual sale of the inventory takes place.
Topic: Days’ Sales in Inventory LO: 5 16. A firm’s “days’ sales in inventory” is computed by dividing 365 by its inventory turnover. Answer: True Rationale: An extension of the inventory turnover ratio, this ratio indicates how many days it takes, on average, for a firm to sell its inventory.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-5
Multiple Choice Topic: Inventory Costs for Manufacturing Companies LO: 1 Level of Difficulty: EASY 1. Which of the following is not an inventory account for manufacturing companies? A) Work-in-process B) Finished goods C) Cost of goods sold D) Raw materials Answer: C Rationale: Raw materials, work-in-process, and finished goods are all inventory accounts. Cost of goods sold is the account used for goods that are sold and is reported on the income statement.
Topic: Inventory Count Errors LO: 3 Level of Difficulty: DIFFICULT 2. During its first and second years of operations, Lupin Company, a corporation using a periodic inventory system, made undiscovered errors in taking its year-end inventories that overstated year 1 ending inventory by $240,000 and overstated year 2 ending inventory by $180,000. The combined effect of these errors on reported income is: Year 1 A) Overstated $240,000 B) Overstated $240,000 C) Understated $240,000 D) Overstated $240,000
Year 2 Overstated $420,000 Overstated $180,000 Understated $420,000 Understated $60,000
Year 3 Understated $180,000 Not affected --Not affected --Understated $180,000
Answer: D Rationale: Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory
Therefore:
Year 1: X = $0 + $0 - $240,000 X = -$240,000 = CGS understated (-)
Year 2: X = $240,000 + $0 - $180,000 X = +$60,000 = CGS overstated (+)
Year 3: X = +$180,000 + $0 - $0 X = +$180,000 = CGS overstated (+)
Income: overstated
Income: understated
Income: understated
©Cambridge Business Publishers, 2020 6-6
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Inventory Count Errors LO: 3 Level of Difficulty: DIFFICULT 3. During its first and second years of operations, Clover Company, a corporation using a periodic inventory system, made undiscovered errors in taking its year-end inventories that overstated year 1 ending inventory by $320,000 and overstated year 2 ending inventory by $240,000. The combined effect of these errors on reported income is: Year 1 A) Overstated $320,000 B) Overstated $320,000 C) Understated $320,000 D) Overstated $320,000
Year 2 Overstated $560,000 Overstated $240,000 Understated $560,000 Understated $80,000
Year 3 Understated $240,000 Not affected --Not affected --Understated $240,000
Answer: D Rationale: Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory
Therefore:
Year 1: X = $0 + $0 - $320,000 X = -$320,000 = CGS understated (-)
Year 2: X = $320,000 + $0 - $240,000 X = +$80,000 = CGS overstated (+)
Year 3: X = +$240,000 + $0 - $0 X = +$240,000 = CGS overstated (+)
Income: overstated
Income: understated
Income: understated
Topic: Gross Profit Calculation LO: 3 Level of Difficulty: MEDIUM 4. The weighted-average cost method is used by Jose, Inc. Sales are $240,000, the number of units available for sale is 100, the number of units sold during the period is 75, and the weighted-average cost of the goods available for sale is $600 each. How much is gross profit for the company? A) $ 30,000 B) $ 45,000 C) $ 60,000 D) $195,000 Answer: D Rationale: Gross profit = $240,000 (sales) – [$600 (weighted-average cost) x 75 (units)] = $195,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-7
Topic: Gross Profit Calculation LO: 3 Level of Difficulty: MEDIUM 5. The weighted-average cost method is used by Hector, Inc. Sales are $320,000, the number of units available for sale is 100, the number of units sold during the period is 75, and the weighted-average cost of the goods available for sale is $800 each. How much is gross profit for the company? A) $ 40,000 B) $ 60,000 C) $ 80,000 D) $260,000 Answer: D Rationale: Gross profit = $320,000 (sales) – [$800 (weighted-average cost) x 75 (units)] = $260,000
Topic: Inventory Count Errors LO: 3 Level of Difficulty: MEDIUM 6. During its first year of operations, Richmond Company, using a periodic inventory system, made undiscovered errors in taking its year-end inventory that overstated Year 1 ending inventory by $150,000. The effect of these errors on reported income is: Year 1 A) Understated $150,000 B) Overstated $150,000 C) Overstated $150,000 D) Overstated $150,000
Year 2 Understated $150,000 Understated $150,000 Not affected --Overstated $150,000
Answer: B Rationale: Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory
Therefore:
Year 1: X = $0 + $0 - $150,000 X = -$150,000 = CGS understated (-)
Year 2: X = $150,000 + $0 - $0 X = +$150,000 = CGS overstated (+)
Income: overstated
Income: understated
©Cambridge Business Publishers, 2020 6-8
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Inventory Count Errors LO: 3 Level of Difficulty: MEDIUM 7. During its first year of operations, Oscar Company, using a periodic inventory system, made undiscovered errors in taking its year-end inventory that overstated Year 1 ending inventory by $200,000. The effect of these errors on reported income is: Year 1 A) Understated $200,000 B) Overstated $200,000 C) Overstated $200,000 D) Overstated $200,000
Year 2 Understated $200,000 Understated $200,000 Not affected --Overstated $200,000
Answer: B Rationale: Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory Year 1: Year 2: X = $0 + $0 - $200,000 X = $200,000 + $0 - $0 X = $0 - $200,000 X = $200,000 - $0 X = -$200,000 X = +$200,000 = CGS understated (-) = CGS overstated (+) Therefore:
Income: overstated
Income: understated
Topic: Inventory Costing and the Balance Sheet LO: 3 Level of Difficulty: MEDIUM 8. Assuming rising prices, which method will give the highest dollar value for cost of goods sold on the income statement? A) FIFO B) Average Cost C) LIFO D) All of these give equal values for cost of goods sold Answer: C Rationale: Under LIFO, the most costly units are the ones last purchased during a period of rising prices. LIFO matches these higher cost items against sales as cost of goods sold.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-9
Topic: Lower-of-Cost-or-Net Realizable Value LO: 4 Level of Difficulty: MEDIUM 9. The following data refer to Coat Company’s ending inventory: Item Code
Quantity
Unit Cost
Unit Market
Small Medium Large Extra-Large
100 420 600 220
$171 114 126 201
$174 132 132 192
How much is the inventory if the lower-of-cost-or-net realizable value rule is applied to each item of inventory? A) $189,480 B) $182,820 C) $199,080 D) None of the above Answer: B Rationale: (100 x $171) + (420 x $114) + (600 x $126) + (220 x $192) = $182,820
Topic: Lower-of-Cost-or-Net Realizable Value LO: 4 Level of Difficulty: MEDIUM 10. The following data refer to Lion Company’s ending inventory: Item Code
Quantity
Unit Cost
Unit Market
Small Medium Large Extra-Large
100 420 600 220
$228 152 168 268
$232 176 176 256
How much is the inventory if the lower-of-cost-or-net realizable value rule is applied to each item of inventory? A) $252,640 B) $243,760 C) $265,440 D) None of the above Answer: B Rationale: (100 x $228) + (420 x $152) + (600 x $168) + (220 x $256) = $243,760
©Cambridge Business Publishers, 2020 6-10
th
Financial Accounting for Undergraduates, 4 Edition
Topic: LIFO LO: 2 Level of Difficulty: EASY 11. Under which method of inventory cost flows is the cost flow assumed to be in the reverse order in which the expenditures were made? A) First-in, first-out B) Last-in, first-out C) Average cost D) Lower of cost or net realizable value Answer: B Rationale: Under LIFO, the cost flow is assumed to be in the reverse order in which the expenditures were made.
Topic: LIFO Impacts LO: 3 Level of Difficulty: MEDIUM 12. Assuming sales hold steady, which of the following actions would result in lowering income taxes for a company that uses the LIFO inventory method? A) Increasing sales prices B) Buying extra inventory near the end of the year in an inflationary environment C) Allowing the inventory quantity at year end to fall below beginning year levels D) None of these. All would cause increasing taxes Answer: B Rationale: LIFO transfers the cost of the most recent purchases to cost of goods sold. These recent purchases are likely to be higher than the cost of earlier purchases, causing income taxes to be lower. Buying extra inventory at year end with a higher cost would cause a lowering of taxes since these units would be part of cost of goods sold.
Topic: LIFO Reserve LO: 7 Level of Difficulty: EASY 13. Humphrey Company uses the LIFO inventory costing method for both its tax reporting purposes and its financial reporting purposes. Humphrey’s inventories are reported at $1,004 million on its balance sheet. In its footnotes, Humphrey Company is required to report the amount at which inventories would have been reported under FIFO method. The difference between these two numbers is commonly referred to as what? A) LCM disclosures B) LIFO holding gain C) LIFO liquidation D) LIFO reserve Answer: D Rationale: Companies using LIFO are also required to state the amount at which inventory would have been reported had the company used FIFO. The difference between the two is called the LIFO reserve.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-11
Topic: Inventory Turnover LO: 5 Level of Difficulty: EASY 14. Tin Company and Aluminum Company reported the following information in their financial statements, prior to their merger: Tin Company
Aluminum Company
$millions
Sales
COGS
Inventories
Sales
COGS
Inventories
2019 2018
$42,750 41,250
$40,775 29,960
$10,005 12,660
$66,420 69,150
$56,175 42,700
$25,350 26,950
To the closest hundredth, how much is the 2019 inventory turnover for Tin Company? A) 3.38 B) 2.82 C) 1.50 D) 3.60 Answer: D Rationale: $40,775 / [($10,005 + $12,660)/2] = 3.60
Topic: Inventory Turnover LO: 5 Level of Difficulty: EASY 15. Wood Company and Plastic Company reported the following information in their financial statements, prior to their merger: Wood Company
Plastic Company
$millions
Sales
COGS
Inventories
Sales
COGS
Inventories
2019 2018
$57,000 55,000
$40,775 29,960
$13,340 16,880
$88,560 92,200
$64,200 48,800
$33,800 30,800
To the closest hundredth, how much is the 2019 inventory turnover for Wood Company? A) 3.06 B) 2.42 C) 1.28 D) 2.70 Answer: D Rationale: $40,775 / [($13,340 + $16,880)/2] = 2.70
©Cambridge Business Publishers, 2020 6-12
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Inventory Turnover LO: 5 Level of Difficulty: EASY 16. North Company and Carolina Company reported the following information in their financial statements, prior to their merger: North Company
Carolina Company
$millions
Sales
COGS
Inventories
Sales
COGS
Inventories
2019 2018
$42,750 41,250
$33,775 29,960
$10,005 12,660
$66,420 69,150
$63,175 49,350
$25,350 26,950
To the closest hundredth, how much is the 2019 inventory turnover for Carolina Company? A) 2.42 B) 0.97 C) 1.86 D) 1.94 Answer: A Rationale: $63,175 / [($25,350 + $26,950)/2] = 2.42
Topic: Inventory Turnover LO: 5 Level of Difficulty: EASY 17. Utah Company and Arizona Company reported the following information in their financial statements, prior to their merger: Utah Company
Arizona Company
$millions
Sales
COGS
Inventories
Sales
COGS
Inventories
2019 2018
$57,000 55,000
$
$13,340 16,880
$88,560 92,100
$63,175 49,350
$33,800 30,800
3,600 34,240
To the closest hundredth, how much is the 2019 inventory turnover for Arizona Company? A) 1.96 B) 0.90 C) 1.60 D) 1.87 Answer: A Rationale: $63,175 / [($33,800 + $30,800) / 2] = 1.96
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-13
Topic: Lower-of-Cost-or-Net Realizable Value LO: 4 Level of Difficulty: MEDIUM 18. The following data refer to Wards Company’s ending inventory: Item Code
Quantity
Unit Cost
Unit NRV
Small Medium Large Extra-Large
45 60 65 35
$96 138 150 162
$114 132 126 159
How much is ending inventory if the lower-of-cost-or-net realizable value rule is applied to the total inventory? A) $26,805 B) $26,415 C) $26,436 D) $28,020 Answer: A Rationale: Cost: (45 × $96) + (60 × $138) + (65 × $150) + (35 × 162) = $28,020 NRV: (45 × $114) + (60 × $132) + (65 × $126) + (35 × $159) = $26,805 Lowest total is NRV.
Topic: Lower-of-Cost-or-Net Realizable Value LO: 4 Level of Difficulty: MEDIUM 19. The following data refer to Montgomery Company’s ending inventory: Item Code
Quantity
Unit Cost
Unit Market
Small Medium Large Extra-Large
45 60 65 35
$128 184 200 216
$152 176 168 212
How much is ending inventory if the lower-of-cost-or-net realizable value rule is applied to the total inventory? A) $35,740 B) $35,220 C) $37,360 D) $35,256 Answer: A Rationale: Cost: (45 × $128) + (60 × $184) + (65 × $200) + (35 × 216) = $37,360 NRV: (45 × $152) + (60 × $176) + (65 × $168) + (35 × $212) = $35,740 Lowest total is NRV.
©Cambridge Business Publishers, 2020 6-14
th
Financial Accounting for Undergraduates, 4 Edition
Topic: FIFO LO: 2 Level of Difficulty: MEDIUM 20. The following inventory was available for sale during the year for Dolphin Tools: Beginning inventory …………….. First purchase …………………… Second purchase ……………….. Third purchase ………………..…
10 units at $120 15 units at $165 30 units at $210 20 units at $195
Dolphin has 25 units on hand at the end of the year. What is the dollar amount of inventory at the end of the year according to the first-in, first-out method? A) $4,950 B) $8,925 C) $4,725 D) $5,850 Answer: A Rationale: (20 x $195) + (5 x $210) = $4,950
Topic: FIFO LO: 2 Level of Difficulty: MEDIUM 21. The following inventory was available for sale during the year for Tower Tools: Beginning inventory …………….. First purchase …………………… Second purchase ……………….. Third purchase ………………..…
10 units at $160 15 units at $220 30 units at $280 20 units at $260
Tower Tools has 25 units on hand at the end of the year. What is the dollar amount of inventory at the end of the year according to the first-in, first-out method? A) $ 6,600 B) $11,900 C) $ 6,300 D) $ 7,800 Answer: A Rationale: (20 x $260) + (5 x $280) = $6,600
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-15
Topic: FIFO LO: 2 Level of Difficulty: MEDIUM 22. The following hammers were available for sale during the year for Helen Tools: Beginning inventory …..........…... 10 units at $120 First purchase …………...…….… 15 units at $150 Second purchase …………...…... 30 units at $180 Third purchase ……………....….. 20 units at $195 Helen has 25 hammers on hand at the end of the year. What is the dollar amount of cost of goods sold for the year according to the first-in, first-out method? A) $5,925 B) $7,950 C) $4,725 D) $5,850 Answer: B Rationale: (10 x $120) + (15 x $150) + (25 x $180) = $7,950
Topic: FIFO LO: 2 Level of Difficulty: MEDIUM 23. The following hammers were available for sale during the year for Albert’s Tools: Beginning inventory …..........…... 10 units at $80 First purchase …………...…….… 15 units at $100 Second purchase …………...…... 30 units at $120 Third purchase ……………....….. 25 units at $130 Albert has 30 hammers on hand at the end of the year. What is the dollar amount of cost of goods sold for the year according to the first-in, first-out method? A) $7,900 B) $5,300 C) $3,850 D) $7,800 Answer: B Rationale: (10 x $80) + (15 x $100) + (25 x $120) = $5,300
Topic: Financial Statement Effects of Inventory Costing LO: 3 Level of Difficulty: MEDIUM 24. If inventory at the end of the year is understated by $105,000, what will this error cause? A) An understatement of net income for the year by $105,000 B) An overstatement of gross profit for the year by $105,000 C) An overstatement of inventory for the year by $105,000 D) An understatement of cost of goods sold for the year by $105,000 Answer: A Rationale: A $105,000 understatement of inventory at the end of the year will cause the cost of goods sold to be overstated by $105,000, the gross profit for the year to be understated by $105,000, and net income for the year to be understated by $105,000. ©Cambridge Business Publishers, 2020 6-16
th
Financial Accounting for Undergraduates, 4 Edition
USE THE FOLLOWING INFORMATION FOR QUESTIONS 25 & 26. Timber Company imports and sells a product produced in Canada. In the summer of 2019, a natural disaster disrupted production, affecting its supply of product. Timber Company uses the LIFO inventory method. On January 1, 2019, Timber Company’s inventory records were as follows: Year purchased
Quantity (units)
Cost per unit
Total cost
2017 2018
2,000 5,000
$120 $165
$240,000 825,000
Total
7,000
$1,065,000
Through mid-December of 2019, purchases were limited to 8,000 units, because the cost had increased to $240 per unit. Timber sold 14,200 units during 2019 at a price of $306 per unit, which significantly depleted its inventory. Timber Company uses a periodic inventory system
Topic: Gross Profit Under LIFO LO: 2, 3 Level of Difficulty: MEDIUM 25. Assume that Timber Company makes no further purchases during 2019. Compute Timber Company’s gross profit for 2019. A) $ 321,800 B) $3,109,800 C) $3,741,000 D) $1,456,200 Answer: D Rationale: Sales revenue Cost of goods sold
14,200 x $306 = (8,000 x $240) + (5,000 x $165) + (1,200 x $120)
Gross profit
$4,345,200 2,889,000 $1,456,200
Topic: Gross Profit Under LIFO LO: 2, 3 Level of Difficulty: MEDIUM 26. Assume that Timber Company purchases 11,400 more of the $240 units on December 31, 2019. Compute Timber Company’s gross profit for 2019. A) $2,736,000 B) $ 937,200 C) $3,109,800 D) $1,285,800 Answer: B Rationale: Sales revenue Cost of goods sold Gross profit
14,200 x $306 = 14,200 x $240 =
$4,345,200 3,408,000 $ 937,200
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-17
USE THE FOLLOWING INFORMATION FOR QUESTIONS 27 & 28. Northern Creations Company imports and sells a product produced in Canada. In the summer of 2019, a natural disaster disrupted production, affecting its supply of product. Northern Creations Company uses the LIFO inventory method. On January 1, 2019, Northern Creations Company’s inventory records were as follows: Year purchased
Quantity (units)
Cost per unit
Total cost
2017 2018
2,000 5,000
$160 $220
$ 320,000 1,100,000
Total
7,000
$1,420,000
Through mid-December of 2019, purchases were limited to 8,000 units, because the cost had increased to $320 per unit. Northern Creations sold 14,200 units during 2019 at a price of $408 per unit, which significantly depleted its inventory. Northern Creations uses a periodic inventory system
Topic: Gross Profit Under LIFO LO: 2, 3 Level of Difficulty: MEDIUM 27. Assume that Northern Creations Company makes no further purchases during 2019. Compute Nature Creations Company’s gross profit for 2019. A) $1,762,400 B) $4,146,400 C) $4,988,000 D) $1,941,600 Answer: D Rationale: Sales revenue Cost of goods sold Gross profit
14,200 x $408 = (8,000 x $320) + (5,000 x $220) + (1,200 x $160) =
$5,793,600 3,852,000 $1,941,600
Topic: Gross Profit Under LIFO LO: 2, 3 Level of Difficulty: MEDIUM 28. Assume that Northern Creations Company purchases 11,400 more of the $320 units on December 31, 2019. Compute Northern Creations Company’s gross profit for 2019. A) $3,648,000 B) $1,249,600 C) $4,146,400 D) $1,714,400 Answer: B Rationale: Sales revenue Cost of goods sold Gross profit
14,200 x $408 = 14,200 x $320 =
$5,793,600 4,544,000 $ 1,249,600
©Cambridge Business Publishers, 2020 6-18
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Weighted-Average Cost LO: 2 Level of Difficulty: MEDIUM 29. The following amounts and costs of platters were available for sale by Cataling Ceramics during 2019: Beginning inventory................. First purchase.......................... Second purchase...................... Third purchase........................
10 units at $123 15 units at $165 30 units at $210 25 units at $195
Cataling Ceramics, which uses a periodic inventory system, has 35 platters on hand at the end of the year. What is the dollar amount of inventory at the end of the year according to the weighted-average cost method? A) $14,880 B) $ 9,300 C) $ 5,198 D) $ 6,510 Answer: D Rationale: (10 units x $123) + (15 units x $165) + (30 units x $210) + (25 units x $195) = $14,880 $14,880 / 80 units = $186 35 units x $186 = $6,510
Topic: Weighted-Average Cost LO: 2 Level of Difficulty: MEDIUM 30. The following amounts and costs of platters were available for sale by Cibula Ceramics during 2019: Beginning inventory................. First purchase.......................... Second purchase...................... Third purchase........................
10 units at $164 15 units at $220 30 units at $280 25 units at $260
Cibula Ceramics, which uses a periodic inventory system, has 35 platters on hand at the end of the year. What is the dollar amount of inventory at the end of the year according to the weighted-average cost method? A) $19,840 B) $12,400 C) $ 6,930 D) $ 8,680 Answer: D Rationale: (10 units x $164) + (15 units x $220) + (30 units x $280) + (25 units x $260) = $19,840 $19,840 / 80 units = $248 35 units x $248 = $8,680
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-19
Topic: Weighted-Average Cost LO: 2 Level of Difficulty: MEDIUM 31. The following amounts and costs of platters were available for sale by Southwest Pottery during 2019: Beginning inventory.................. 10 units at $123 First purchase.......................... 15 units at $165 Second purchase....................... 30 units at $210 Third purchase......................... 25 units at $195 Southwest Pottery, which uses a periodic inventory system, has 35 platters on hand at the end of the year. How much is cost of goods sold in dollars at the end of the year according to the weighted-average cost method? A) $14,880 B) $ 5,580 C) $ 8,370 D) $ 5,198 Answer: C Rationale: (10 units x $123) + (15 units x $165) + (30 units x $210) + (25 units x $195) = $14,880 $14,880 / 80 units = $186 45 units sold x $186 = $8,370
Topic: Weighted-Average Cost LO: 2 Level of Difficulty: MEDIUM 32. The following amounts and costs of platters were available for sale by Colorado Pottery during 2019: Beginning inventory.................. 10 units at $164 First purchase.......................... 15 units at $220 Second purchase....................... 30 units at $280 Third purchase......................... 25 units at $260 Colorado Pottery, which uses a periodic inventory system, has 35 platters on hand at the end of the year. How much is cost of goods sold in dollars at the end of the year according to the weighted-average cost method? A) $19,840 B) $ 7,440 C) $11,160 D) $ 6,930 Answer: C Rationale: (10 units x $164) + (15 units x $220) + (30 units x $280) + (25 units x $260) = $19,840 $19,840 / 80 units = $248 45 units sold x $248 = $11,160
©Cambridge Business Publishers, 2020 6-20
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Inventory Errors LO: 3 Level of Difficulty: DIFFICULT 33. During its first and second years of operations, Explorer Company, a corporation using a periodic inventory system, made undiscovered errors in taking its year-end inventories that understated Year 1 ending inventory by $120,000 and overstated Year 2 ending inventory by $165,000. The combined effect of these errors on reported income is: Year 1 A) Understated $120,000 B) Understated $120,000 C) Understated $120,000 D) Overstated $0,000
Year 2 Overstated $165,000 Overstated $45,000 Overstated $285,000 Understated $165,000
Year 3 Not affected --Not affected --Understated $165,000 Overstated $45,000
Answer: C Rationale: Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory Year 1: X = $0 + $0 – (-$120,000) X = +$120,000 = CGS overstated (+)
Year 2: X = -$120,000 + $0 - $165,000 X = -$285,000 = CGS understated (-)
Year 3: X = +$165,000 + $0 - $0 X = +$165,000 = CGS overstated (+)
Income: understated (-)
Income: overstated (+)
Income: understated (-)
Topic: Inventory Errors LO: 3 Level of Difficulty: DIFFICULT 34. During its first and second years of operations, Sierra Company, a corporation using a periodic inventory system, made undiscovered errors in taking its year-end inventories that understated Year 1 ending inventory by $160,000 and overstated Year 2 ending inventory by $220,000. The combined effect of these errors on reported income is: Year 1 A) Understated $160,000 B) Understated $160,000 C) Understated $160,000 D) Overstated $160,000
Year 2 Overstated $220,000 Overstated $60,000 Overstated $380,000 Understated $220,000
Year 3 Not affected --Not affected --Understated $220,000 Overstated $60,000
Answer: C Rationale: Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory: Year 1: Year 2: Year 3: X = $0 + $0 – (-$160,000) X = -$160,000 + $0 - $220,000 X = +$220,000 + $0 - $0 X = +$160,000 X = -$380,000 X = +$220,000 = CGS overstated (+) = CGS understated (-) = CGS overstated (+) Income: understated (-)
Income: overstated (+)
Income: understated (-) ©Cambridge Business Publishers, 2020
Test Bank, Chapter 6
6-21
USE THE FOLLOWING INFORMATION FOR QUESTIONS 35-40. The following data represent the beginning inventory and, in order of occurrence, the purchases and sales of Quebec, Inc. for an operating period.
Beginning Inventory Sale No. 1 Purchase No. 1 Sale No. 2 Purchase No. 2 Totals
Units
Unit Cost
Total Cost
32
$ 54
$1,728
Units Sold 10
28 20 80
60
1,680
57
1,140 $4,548
32 __ 42
Topic: FIFO Method LO: 2 Level of Difficulty: MEDIUM 35. Assuming Quebec, Inc. uses FIFO periodic inventory procedures, the ending inventory cost is: A) $2,052 B) $2,088 C) $2,166 D) $2,220 Answer: D Rationale: (20 x $57) + (18 x $60) = $2,220
Topic: LIFO Method LO: 2 Level of Difficulty: MEDIUM 36. Assuming Quebec, Inc. uses LIFO periodic inventory procedures, the ending inventory cost is: A) $1,989 B) $2,088 C) $2,166 D) $2,220 Answer: B Rationale: (32 x $54) + (6 x $60) = $2,088
Topic: Weighted-Average Method LO: 2 Level of Difficulty: MEDIUM 37. Assuming Quebec, Inc. uses weighted-average (periodic) inventory procedures, the ending inventory cost is: A) $2,160.30 B) $2,163.00 C) $2,166.00 D) $2,392.20 Answer: A Rationale: $4,548 / 80 = $56.85; 38 x $56.85 = $2,160.30
©Cambridge Business Publishers, 2020 6-22
th
Financial Accounting for Undergraduates, 4 Edition
Topic: FIFO Perpetual Inventory LO: 6 Level of Difficulty: MEDIUM 38. Assuming Quebec, Inc. uses the FIFO perpetual inventory procedures, it records sale No. 2 as an entry to Cost of Goods Sold for: A) $1,728 B) $1,788 C) $1,860 D) $1,896 Answer: B Rationale: (22 x $54) + (10 x $60) = $1,788
Topic: LIFO Perpetual Inventory LO: 6 Level of Difficulty: MEDIUM 39. Assuming Quebec, Inc. uses the LIFO perpetual inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods Sold for: A) $1,728 B) $1,788 C) $1,860 D) $1,896 Answer: D Rationale: (28 x $60) + (4 x $54) = $1,896
Topic: Weighted-Average Perpetual Inventory LO: 6 Level of Difficulty: MEDIUM 40. Assuming Quebec, Inc. uses weighted-average (perpetual) inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods sold for: A) $1,817.61 B) $1,824.00 C) $1,835.52 D) $1,819.20 Answer: C Rationale: Average unit cost after purchase No. 1 = $2,868 / 50 = $57.36; 32 x $57.36 = $1,835.52 Purchased
Beg. Inventory Sale No. 1 Purchase No. 1 Sale No. 2 Purchase No. 2 Total
Units 32
Unit Cost $54.00
Inventory Balance Total $1,728
Units Sold 10
28 20 80
60.00 57.00
1,680 1,140 $4,548
32 __ 42
Units 32 22 50 18 38
Unit Cost $54.00 54.00 57.36 57.36 57.18
Total $1,728.00 1,188.00 2,868.00 1,032.48 2,172.48
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-23
USE THE FOLLOWING INFORMATION FOR QUESTIONS 41-46. The following data represent the beginning inventory and, in order of occurrence, the purchases and sales of Sox, Inc. for an operating period.
Beginning Inventory Sale No. 1 Purchase No. 1 Sale No. 2 Purchase No. 2 Totals
Units
Unit Cost
Total Cost
32
$ 72
$2,304
Units Sold 10
28
80
2,240 32
20 80
76
1,520 $6,064
42
Topic: FIFO Method LO: 2 Level of Difficulty: MEDIUM 41. Assuming Sox, Inc. uses FIFO periodic inventory procedures, the ending inventory cost is: A) $2,736 B) $2,784 C) $2,888 D) $2,960 Answer: D Rationale: (20 x $76) + (18 x $80) = $2,960
Topic: LIFO Method LO: 2 Level of Difficulty: MEDIUM 42. Assuming Sox, Inc. uses LIFO periodic inventory procedures, the ending inventory cost is: A) $2,632 B) $2,784 C) $2,888 D) $2,360 Answer: B Rationale: (32 x $72) + (6 x $80) = $2,784
Topic: Weighted-Average Method LO: 2 Level of Difficulty: MEDIUM 43. Assuming Sox, Inc. uses weighted-average (periodic) inventory procedures, the ending inventory cost is: A) $2,880.40 B) $2,884.00 C) $2,888.00 D) $3,189.60 Answer: A Rationale: $6,064 / 80 = $75.80; 38 x $75.80 = $2,880.40
©Cambridge Business Publishers, 2020 6-24
th
Financial Accounting for Undergraduates, 4 Edition
Topic: FIFO Perpetual Inventory LO: 6 Level of Difficulty: MEDIUM 44. Assuming Sox, Inc. uses the FIFO perpetual inventory procedures, it records sale No. 2 as an entry to Cost of Goods Sold for: A) $2,304 B) $2,384 C) $2,408 D) $2,528 Answer: B Rationale: (22 x $72) + (10 x $80) = $2,384
Topic: LIFO Perpetual Inventory LO: 6 Level of Difficulty: MEDIUM 45. Assuming Sox, Inc. uses the LIFO perpetual inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods Sold for: A) $2,304 B) $2,384 C) $2,480 D) $2,528 Answer: D Rationale: (28 x $80) + (4 x $72) = $2,528
Topic: Weighted-Average Perpetual Inventory LO: 6 Level of Difficulty: MEDIUM 46. Assuming Sox, Inc. uses weighted-average (perpetual) inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods sold for: A) $2,423.48 B) $2,432.00 C) $2,447.36 D) $2,425.60 Answer: C Rationale: Average unit cost after purchase No. 1 = $3,824 / 50 = $76.48; 32 x $76.48 = $2,447.36 Purchased
Beg. Inventory Sale No. 1 Purchase No. 1 Sale No. 2 Purchase No. 2 Total
Units 32
Unit Cost $72
Inventory Balance Total $2,304
Units Sold 10
28 20 80
80 76
2,240 1,520 $6,064
32 __ 42
Units 32 22 50 18 38
Unit Cost $72.00 72.00 76.48 76.48 76.23
Total $2,304.00 1,584.00 3,824.00 1,376.64 2,896.64
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-25
USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 47-52. The following data represent the beginning inventory and, in order of occurrence, the purchases and sales of Ilse’s Garden, Inc., for an operating period. Units Beginning Inventory Sale No. 1 Purchase No. 1 Sale No. 2 Purchase No. 2 Totals
30
Unit Cost
Total Cost
$21
$ 630
Units Sold 20
50
30
1,500
20 100
33
660 $2,790
40 __ 60
Topic: FIFO Method LO: 2 Level of Difficulty: MEDIUM 47. Assuming Ilse’s Garden, Inc. uses FIFO periodic inventory procedures, the ending inventory cost is: A) $1,260 B) $1,320 C) $ 840 D) $ 930 Answer: A Rationale: (20 x $233) + (20 x $30) = $1,260
Topic: LIFO Method LO: 2 Level of Difficulty: MEDIUM 48. Assuming Ilse’s Garden, Inc. uses LIFO periodic inventory procedures, the ending inventory cost is: A) $ 840 B) $1,260 C) $ 930 D) $1,320 Answer: C Rationale: (30 x $21) + (10 x $30) = $930
Topic: Weighted-Average Method LO: 2 Level of Difficulty: MEDIUM 49. Assuming Ilse’s Garden, Inc. uses weighted-average (periodic) inventory procedures, the ending inventory cost is: A) $1,110 B) $1,116 C) $1,650 D) $1,140 Answer: B Rationale: $2,790 / 100 = $27.90 40 x $27.90 = $1,116 ©Cambridge Business Publishers, 2020 6-26
th
Financial Accounting for Undergraduates, 4 Edition
Topic: FIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 50. Assuming Ilse’s Garden, Inc. uses FIFO perpetual inventory procedures, it records sale No. 2 as an entry to Cost of Goods Sold for: A) $1,110 B) $1,200 C) $ 840 D) $1,260 Answer: A Rationale: (10 x $21) + (30 x $30) = $1,110
Topic: LIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 51. Assuming Ilse’s Garden, Inc. uses LIFO perpetual inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods Sold for: A) $840 B) $1,200 C) $1,110 D) $1,320 Answer: B Rationale: 40 x $30 = $1,200
Topic: Weighted-Average Perpetual Method LO: 6 Level of Difficulty: MEDIUM 52. Assuming Ilse’s Garden, Inc. uses weighted-average (perpetual) inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods Sold for: A) $1,140 B) $1,116 C) $1,020 D) $1,065 Answer: A Rationale: Average unit cost after purchase No. 1 is: $1,710 / 60 = $28.50; 40 x $28.50 = $1,140 Purchased Units Beg. Inventory Sale No. 1 Purchase No. 1 Sale No. 2 Purchase No. 2 Total
30
Inventory Balance
Unit Cost
Total
$21
$630
Units Sold 20
50 20 100
30 33
1,500 660 $2,790
40 __ 60
Units
Unit Cost
Total
30 10 60 20 40
$21.00 $21.00 $28.50 $28.50 $30.75
$ 630 210 1,710 570 1,230
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-27
USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 53-58. The following data represent the beginning inventory and, in order of occurrence, the purchases and sales of Delacour, Inc. for an operating period. Units Beginning Inventory Sale No. 1 Purchase No. 1 Sale No. 2 Purchase No. 2 Totals
30
Unit Cost
Total Cost
$28
$ 840
Units Sold 20
50
40
2,000
20 100
44
880 $3,720
40 __ 60
Topic: FIFO Method LO: 2 Level of Difficulty: MEDIUM 53. Assuming Delacour, Inc. uses FIFO periodic inventory procedures, the ending inventory cost is: A) $1,680 B) $1,760 C) $1,120 D) $1,240 Answer: A Rationale: (20 x $44) + (20 x $40) = $1,680
Topic: LIFO Method LO: 2 Level of Difficulty: MEDIUM 54. Assuming Delacour, Inc. uses LIFO periodic inventory procedures, the ending inventory cost is: A) $1,120 B) $1,680 C) $1,240 D) $1,760 Answer: C Rationale: (30 x $28) + (10 x $40) = $1,240
Topic: Weighted-Average Method LO: 2 Level of Difficulty: MEDIUM 55. Assuming Delacour, Inc. uses weighted-average (periodic) inventory procedures, the ending inventory cost is: A) $1,474 B) $1,488 C) $2,200 D) $1,520 Answer: B Rationale: $3,720 / 100 = $37.20; 40 x $37.20 = $1,488
©Cambridge Business Publishers, 2020 6-28
th
Financial Accounting for Undergraduates, 4 Edition
Topic: FIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 56. Assuming Delacour, Inc. uses FIFO perpetual inventory procedures, it records sale No. 2 as an entry to Cost of Goods Sold for: A) $1,480 B) $1,600 C) $1,120 D) $1,680 Answer: A Rationale: (10 x $28) + (30 x $40) = $1,480
Topic: LIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 57. Assuming Delacour, Inc. uses LIFO perpetual inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods Sold for: A) $1,120 B) $1,600 C) $1,480 D) $1,760 Answer: B Rationale: 40 x $40 = $1,600
Topic: Weighted-Average Perpetual Method LO: 6 Level of Difficulty: MEDIUM 58. Assuming Delacour, Inc. uses weighted-average (perpetual) inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods Sold for: A) $1,520 B) $1,488 C) $1,360 D) $1,420
Answer: A Rationale: Average unit cost after purchase No. 1 is: $2,280 / 60 = $38.00; 40 x $38.00 = $1,520 Purchased Units Beg. Inventory Sale No. 1 Purchase No. 1 Sale No. 2 Purchase No. 2 Total
30
Inventory Balance
Unit Cost
Total
$28
$840
Units Sold 20
50 20 100
40 44
2,000 880 $3,720
40 __ 60
Units
Unit Cost
Total
30 10 60 20 40
$28.00 $28.00 $38.00 $38.00 $41.00
$ 840 280 2,280 760 1,640
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-29
USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 59-64. The following data represent the beginning inventory and, in order of occurrence, the purchases and sales of Woof, Inc. for an operating period. Units Beginning Inventory Sale No. 1 Purchase No. 1 Sale No. 2 Purchase No. 2 Totals
50
Unit Cost
Total Cost
$93
$4,650
Units Sold 40
30
75
2,250
40 120
66
2,640 $9,540
32 __ 72
Topic: FIFO Method LO: 2 Level of Difficulty: MEDIUM 59. Assuming Woof, Inc. uses FIFO periodic inventory procedures, the ending inventory cost is: A) $3,240 B) $4,464 C) $3,168 D) $3,600 Answer: A Rationale: (40 x $66) + (8 x $75) = $3,240
Topic: LIFO Method LO: 2 Level of Difficulty: MEDIUM 60. Assuming Woof, Inc. uses LIFO periodic inventory procedures, the ending inventory cost is: A) $3,168 B) $3,240 C) $3,816 D) $4,464 Answer: D Rationale: 48 x $93 = $4,464
Topic: Weighted-Average Method LO: 2 Level of Difficulty: MEDIUM 61. Assuming Woof, Inc. uses weighted-average (periodic) inventory procedures, the ending inventory cost is: A) $3,276 B) $3,744 C) $3,816 D) $3,240 Answer: C Rationale: $9,540 / 120 = $79.50 48 x $79.50 = $3,816
©Cambridge Business Publishers, 2020 6-30
th
Financial Accounting for Undergraduates, 4 Edition
Topic: FIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 62. Assuming Woof, Inc. uses FIFO perpetual inventory procedures, the ending inventory cost is: A) $4,464 B) $3,240 C) $3,600 D) $3,168 E) None of the above Answer: B Rationale: (40 x $66) + (8 x $75) = $3,240
Topic: LIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 63. Assuming Woof, Inc. uses LIFO perpetual inventory procedures, the ending inventory cost is: A) $3,168 B) $3,240 C) $4,464 D) $3,384 Answer: D Rationale: (8 x $93) + (40 x $66) = $3,384
Topic: Weighted-Average Perpetual Method LO: 6 Level of Difficulty: MEDIUM 64. Assuming Woof, Inc. uses weighted-average (perpetual) inventory procedures, the ending inventory cost is: A) $3,744 B) $3,186 C) $3,384 D) $3,276 Answer: D Rationale: Purchased Units Beg. Inventory Sale No. 1 Purchase No. 1 Sale No. 2 Purchase No. 2 Total
50
Inventory Balance
Unit Cost
Total
$93
$4,650
Units Sold 40
30 40 120
75 66
2,250 2,640 $9,540
32 __ 72
Units
Unit Cost
Total
50 10 40 8 48
93.00 93.00 79.50 79.50 68.25
$4,650 930 3,180 636 3,276
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-31
USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 65-70. The following data represent the beginning inventory and, in order of occurrence, the purchases and sales of Purr–A-Lot, Inc. for an operating period. Units Beginning Inventory Sale No. 1 Purchase No. 1 Sale No. 2 Purchase No. 2 Totals
50
Unit Cost
Total Cost
$124
$ 6,200
Units Sold 40
30
100
3,000
40 120
88
3,520 $12,720
32 __ 72
Topic: FIFO Method LO: 2 Level of Difficulty: MEDIUM 65. Assuming Purr–A-Lot, Inc. uses FIFO periodic inventory procedures, the ending inventory cost is: A) $4,320 B) $5,952 C) $4,114 D) $4,800 Answer: A Rationale: (40 x $88) + (8 x $100) = $4,320
Topic: LIFO Method LO: 2 Level of Difficulty: MEDIUM 66. Assuming Purr–A-Lot, Inc. uses LIFO periodic inventory procedures, the ending inventory cost is: A) $4,224 B) $4,320 C) $5,088 D) $5,952 Answer: D Rationale: 48 x $124 = $5,952
Topic: Weighted-Average Method LO: 2 Level of Difficulty: MEDIUM 67. Assuming Purr–A-Lot, Inc. uses weighted-average (periodic) inventory procedures, the ending inventory cost is: A) $4,368 B) $4,992 C) $5,088 D) $4,320 Answer: C Rationale: $12,720 / 120 = $106; 48 x $106 = $5,088
©Cambridge Business Publishers, 2020 6-32
th
Financial Accounting for Undergraduates, 4 Edition
Topic: FIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 68. Assuming Purr–A-Lot, Inc. uses FIFO perpetual inventory procedures, the ending inventory cost is: A) $5,952 B) $4,320 C) $4,800 D) $4,224 Answer: B Rationale: (40 x $88) + (8 x $100) = $4,320
Topic: LIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 69. Assuming Purr–A-Lot, Inc. uses LIFO perpetual inventory procedures, the ending inventory cost is: A) $4,224 B) $4,320 C) $5,952 D) $4,512 Answer: D Rationale: (8 x $124) + (40 x $88) = $4,512
Topic: Weighted-Average Perpetual Method LO: 6 Level of Difficulty: MEDIUM 70. Assuming Purr–A-Lot, Inc. uses weighted-average (perpetual) inventory procedures, the ending inventory cost is: A) $4,992 B) $5,088 C) $4,512 D) $4,368 Answer: D Rationale: Purchased Units Beg. Inventory Sale No. 1 Purchase No. 1 Sale No. 2 Purchase No. 2 Total
50
Inventory Balance
Unit Cost
Total
$124
$ 6,200
Units Sold 40
30 40 120
100 88
3,000 3,520 $12,720
32 __ 72
Units
Unit Cost
50 10 40 8 48
$124.00 124.00 106.00 106.00 91.00
Total $6,200 1,240 4,240 848 4,368
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-33
USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 71-79. The following data represent the beginning inventory and, in the order of occurrence, the purchases and sales of Mullenax Company for an operating period. Units Beginning Inventory Purchase No. 1 Sale No. 1 Purchase No. 2 Sale No. 2 Purchase No. 3 Totals
Unit Cost
Total Cost
20 20
$87 93
$ 1,740 1,860
90
96
8,640
70 200
108
7,560 $19,800
Units Sold
30 80 ___ 110
Topic: FIFO Method LO: 2 Level of Difficulty: MEDIUM 71. Assuming Mullenax Company uses FIFO periodic inventory procedures, the ending inventory cost is: A) $9,720 B) $8,400 C) $9,480 D) $7,560 Answer: C Rationale: (70 x $108) + (20 x $96) = $9,480
Topic: LIFO Method LO: 2 Level of Difficulty: MEDIUM 72. Assuming Mullenax Company uses LIFO periodic inventory procedures, the ending inventory cost is: A) $7,380 B) $9,480 C) $9,390 D) $8,400 Answer: D Rationale: (20 x $87) + (20 x $93) + (50 x $96) = $8,400
Topic: Weighted-Average Method LO: 2 Level of Difficulty: MEDIUM 73. Assuming Mullenax Company uses weighted-average (periodic) inventory procedures, the ending inventory cost is: A) $ 8,910 B) $ 8,640 C) $ 9,468 D) $10,890 Answer: A Rationale: $19,800 / 200 = $99; 90 x $99 = $8,910 ©Cambridge Business Publishers, 2020 6-34
th
Financial Accounting for Undergraduates, 4 Edition
Topic: FIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 74. Assuming Mullenax Company uses FIFO perpetual inventory procedures, sale No. 1 is recorded as an entry to Cost of Goods Sold for: A) $2,700 B) $2,730 C) $2,670 D) $2,880 Answer: C Rationale: (20 x $87) + (10 x $93) = $2,670
Topic: FIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 75. Assuming Mullenax Company uses FIFO perpetual inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods Sold for: A) $7,632 B) $7,650 C) $7,680 D) $7,920 E) None of the above Answer: B Rationale: (10 x $93) + (70 x $96) = $7,650
Topic: LIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 76. Assuming Mullenax Company uses LIFO perpetual inventory procedures, sale No. 1 is recorded as an entry to Cost of Goods Sold for: A) $2,730 B) $2,700 C) $2,670 D) $3,240 Answer: A Rationale: (20 x $93) + (10 x $87) = $2,730
Topic: LIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 77. Assuming Mullenax Company uses LIFO perpetual inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods Sold for: A) $8,640 B) $7,680 C) $7,650 D) $7,632 Answer: B Rationale: 80 x $96 = $7,680
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-35
Topic: Weighted-Average Perpetual Method LO: 6 Level of Difficulty: MEDIUM 78. Assuming Mullenax Company uses weighted-average (perpetual) inventory procedures, sale No. 1 is recorded as an entry to Cost of Goods Sold for: A) $2,790 B) $2,730 C) $2,700 D) $2,670 Answer: C Rationale: 30 x $90 = $2,700 Purchased Units Beg. Inventory Purchase No. 1 Sale No. 1 Purchase No. 2 Sale No. 2 Purchase No. 3 Totals
Inventory Balance
Unit Cost
Total
20 20
$87 93
$ 1,740 1,860
90
96
8,640
Units Sold
30
70 200
108
7,560 $19,800
80 ___ 110
Units
Unit Cost
Total
20 40 10 100 20 90
$87.00 90.00 90.00 95.40 95.40 105.20
$1,740 3.600 900 9,540 1,908 9,468
Topic: Weighted-Average Perpetual Method LO: 6 Level of Difficulty: MEDIUM 79. Assuming Mullenax Company uses weighted-average (perpetual) inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods Sold for: A) $7,632 B) $7,650 C) $7,680 D) $7,920 Answer: A Rationale: Average unit cost after purchase No. 2 = $9,540 / 100 = $95.40; Purchased Units Beg. Inventory Purchase No. 1 Sale No. 1 Purchase No. 2 Sale No. 2 Purchase No. 3 Totals
Inventory Balance
Unit Cost
Total
20 20
$87 93
$ 1,740 1,860
90
96
8,640
Units Sold
30
70 200
108
80 x $95.40 = $7,632
7,560 $19,800
80 ___ 110
Units
Unit Cost
Total
20 40 10 100 20 90
$87.00 90.00 90.00 95.40 95.40 105.20
$1,740 3,600 900 9,540 1,908 9,468
©Cambridge Business Publishers, 2020 6-36
th
Financial Accounting for Undergraduates, 4 Edition
USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 80-88. The following data represent the beginning inventory and, in the order of occurrence, the purchases and sales of Tina Star Company for an operating period. Units Beginning Inventory Purchase No. 1 Sale No. 1 Purchase No. 2 Sale No. 2 Purchase No. 3 Totals
20 20
Unit Cost
Total Cost
$116 124
$ 2,320 2,480
Units Sold
30 90 70 200
128 144
11,520 10,080 $26,400
80 ____ 110
Units on Hand 20 40 10 100 20 90
Topic: FIFO Method LO: 2 Level of Difficulty: MEDIUM 80. Assuming Tina Star Company uses FIFO periodic inventory procedures, the ending inventory cost is: A) $12,960 B) $12,000 C) $12,640 D) $10,080 Answer: C Rationale: (70 x $144) + (20 x $128) = $12,640
Topic: LIFO Method LO: 2 Level of Difficulty: MEDIUM 81. Assuming Tina Star Company uses LIFO periodic inventory procedures, the ending inventory cost is: A) $10,440 B) $12,640 C) $12,520 D) $11,200 Answer: D Rationale: (20 x $116) + (20 x $124) + (50 x $128) = $11,200
Topic: Weighted-Average Method LO: 2 Level of Difficulty: MEDIUM 82. Assuming Tina Star Company uses weighted-average (periodic) inventory procedures, the ending inventory cost is: A) $11,880 B) $11,520 C) $12,624 D) $14,520 Answer: A Rationale: $26,400 / 200 = $132; 90 x $132 = $11,880
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-37
Topic: FIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 83. Assuming Tina Star Company uses FIFO perpetual inventory procedures, sale No. 1 is recorded as an entry to Cost of Goods Sold for: A) $3,600 B) $3,640 C) $3,560 D) $3,840 Answer: C Rationale: (20 x $116) + (10 x $124) = $3,560
Topic: FIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 84. Assuming Tina Star Company uses FIFO perpetual inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods Sold for: A) $10,176 B) $10,200 C) $10,240 D) $10,560 Answer: B Rationale: (10 x $124) + (70 x $128) = $10,200
Topic: LIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 85. Assuming Tina Star Company uses LIFO perpetual inventory procedures, sale No. 1 is recorded as an entry to Cost of Goods Sold for: A) $3,640 B) $3,600 C) $3,560 D) $4,320 Answer: A Rationale: (20 x $124) + (10 x $116) = $3,640
Topic: LIFO Perpetual Method LO: 6 Level of Difficulty: MEDIUM 86. Assuming Tina Star Company uses LIFO perpetual inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods Sold for: A) $11,520 B) $10,240 C) $10,200 D) $10,176 Answer: B Rationale: 80 x $128 = $10,240
©Cambridge Business Publishers, 2020 6-38
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Weighted-Average Perpetual Method LO: 6 Level of Difficulty: MEDIUM 87. Assuming Tina Star Company uses weighted-average (perpetual) inventory procedures, sale No. 1 is recorded as an entry to Cost of Goods Sold for: A) $3,960 B) $3,640 C) $3,600 D) $3,560 Answer: C Rationale: 30 x $120 = $3,600 Purchased Units Beg. Inventory Purchase No. 1 Sale No. 1 Purchase No. 2 Sale No. 2 Purchase No. 3 Totals
Inventory Balance
Unit Cost
Total
20 20
$116 124
$ 2,320 2,480
90
128
11,520
Units Sold
30
70 200
144
10,080 $26,400
80 ___ 110
Units
Unit Cost
Total
20 40 10 100 20 90
$116.00 120.00 120.00 127.20 127.20 140.27
$2,320 4,800 1,200 12,720 2,544 12,624
Topic: Weighted-Average Perpetual Method LO: 6 Level of Difficulty: MEDIUM 88. Assuming Tina Star Company uses weighted-average (perpetual) inventory procedures, sale No. 2 is recorded as an entry to Cost of Goods Sold for: A) $10,176 B) $10,200 C) $10,240 D) $10,560 Answer: A Rationale: 80 x $127.20= $10,176 Purchased Units Beg. Inventory Purchase No. 1 Sale No. 1 Purchase No. 2 Sale No. 2 Purchase No. 3 Totals
Inventory Balance
Unit Cost
Total
20 20
$116 124
$ 2,320 2,480
90
128
11,520
70 200
144
10,080 $26,400
Units Sold
30 80 ___ 110
Units
Unit Cost
Total
20 40 10 100 20 90
$116.00 120.00 120.00 127.20 127.20 140.27
$2,320 4,800 1,200 12,720 2,544 12,624
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-39
Topic: Specific Identification Method LO: 3 Level of Difficulty: EASY 89. The specific identification inventory costing method: A) Is more appropriate for a firm selling construction equipment than for a firm selling greeting cards B) Measures the ending inventory at the actual prices of the specific units sold during the period C) Uses expected future acquisition costs rather than historical costs to measure the ending inventory D) Is not a generally accepted method of pricing inventories Answer: A Rationale: The specific identification method involves (1) keeping track of the purchase cost of each specific unit available for sale and (2) costing the ending inventory at the actual costs of the specific units not sold. Specific identification is typically used by companies that manufacture a small volume of products with relatively high unit values. Airplanes, jewelry, and construction equipment are examples of products that would justify the cost of tracking the specific unit cost of each inventory item.
Topic: Inventory Costing Methods LO: 2 Level of Difficulty: EASY 90. Which of the following inventory costing methods most closely matches the cost flow with the goods flow? A) FIFO B) Specific identification C) LIFO D) Weighted average Answer: A Rationale: FIFO approximates the actual physical flow of goods for most firms.
Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 Level of Difficulty: MEDIUM 91. The lower-of-cost-or-net realizable value method for inventory may be applied to: A) Each inventory item B) The totals of major inventory classes or categories C) The total inventory D) All of the above Answer: D Rationale: The lower-of-cost-or-net realizable value method for inventory may be applied to each inventory item, to totals of major inventory classes or categories, or to the total inventory.
©Cambridge Business Publishers, 2020 6-40
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 Level of Difficulty: MEDIUM 92. The lower-of-cost-or-net realizable value method for inventory: A) States that inventory must be reported on the balance sheet at its current net realizable value and may cause inventory to be written up to an amount larger than historical cost B) Must be applied to inventory on an item by item basis C) Places losses from price declines in the period the goods are sold rather than in the period of the price decline D) None of the above Answer: D Rationale: The lower-of-cost-or-net realizable value method for inventory provides for the recognition of an inventory write-down loss when the inventory’s net realizable value declines below its recorded acquisition cost. Under net lower-of-cost-or-net realizable value, a loss is reported in the period when the inventory’s net realizable value declines, rather than during a subsequent period when the actual sale of the inventory takes place. The lower-of-cost-or-net realizable value method can be applied to each individual item inventory, different categories of inventory or to total inventory.
Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 Level of Difficulty: MEDIUM 93. At year-end, The Big Chill Shop has a freezer on hand that has been used as a demonstration model. The freezer cost $1,170 and sells for $2,250 when new. In its present condition, the freezer will be sold for $1,140. Related selling costs are an estimated $60. At what amount should the freezer be carried in inventory? A) $1,125 B) $1,140 C) $1,080 D) $1,200 Answer: C Rationale: Carry at net realizable value: $1,140 - $60 = $1,080
Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 Level of Difficulty: MEDIUM 94. At year-end, The Stone Cold Shop has a freezer on hand that has been used as a demonstration model. The freezer cost $1,560 and sells for $3,000 when new. In its present condition, the freezer will be sold for 1,520. Related selling costs are an estimated $80. At what amount should the freezer be carried in inventory? A) $1,500 B) $1,520 C) $1,440 D) $1,600 Answer: C Rationale: Carry at net realizable value: $1,520 - $80 = $1,440
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-41
Topic: Inventory Turnover LO: 5 Level of Difficulty: EASY 95. For 2019, Nadi Company reported sales of $2,700,000, cost of goods sold of $2,000,000, and a gross profit of $900,000. Nadi’s inventory at January 1, 2016 was $510,000; the inventory at December 31, 2019 was $750,000. Nadi’s 2019 inventory turnover is: A) 7.99 B) 4.74 C) 3.17 D) 2.31 Answer: C Rationale: $2,000,000 / [($750,000 + $510,000) / 2] = 3.17
Topic: Inventory Turnover LO: 5 Level of Difficulty: EASY 96. For 2019, Kate Company reported sales of $3,600,000, cost of goods sold of $2,000,000, and a gross profit of $1,600,000. Kate’s inventory at January 1, 2019 was $480,000; the inventory at December 31, 2019 was $600,000. Kate’s 2019 inventory turnover is: A) 3.33 B) 4.17 C) 3.70 D) 2.08 Answer: C Rationale: $2,000,000 / [($600,000 + $480,000) / 2] = 3.70
Topic: Inventory Turnover LO: 5 Level of Difficulty: MEDIUM 97. A firm’s inventory turnover: A) Is computed by dividing cost of goods sold by the end-of-year inventory B) Is affected by the inventory costing method used C) Becomes the days’ sales in inventory when multiplied by 365 D) Is generally interpreted as favorable if it is smaller than the industry average Answer: B Rationale: The inventory turnover ratio is calculated as: Inventory turnover = Cost of goods sold / Average inventory. In general, the faster a company can turn over its inventory, the more profitable the company will be. Further, the higher the inventory turnover ratio, the less time a firm has its funds tied up in its inventory and the less risk the firm faces from trying to sell out-of-date merchandise. An extension of the inventory turnover ratio is the days’ sales in inventory, is calculated as: Days' sales in inventory = 365 / Inventory turnover.
©Cambridge Business Publishers, 2020 6-42
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Inventory Turnover and Days’ Sales in Inventory Ratios LO: 5 Level of Difficulty: EASY 98. Brian Company’s average inventory for 2019 was $22,500 and its inventory turnover for 2019 was 8.25; Brian’s 2019 days’ sales in inventory (computed to one decimal place) is: A) 8.5 days B) 44.2 days C) 45.8 days D) 35.5 days Answer: B Rationale: 365 / 8.25 = 44.2 days
Topic: Inventory Turnover and Days’ Sales in Inventory Ratios LO: 5 Level of Difficulty: EASY 99. Anderson Company’s average inventory for 2019 was $30,000 and its inventory turnover for 2019 was 7.0; Anderson’s 2019 days’ sales in inventory (computed to one decimal place) is: A) 12.7 days B) 52.1 days C) 68.5 days D) 53.8 days Answer: B Rationale: 365 / 7.0 = 52.1 days
Topic: Inventory Turnover and Days’ Sales in Inventory Ratios LO: 5 Level of Difficulty: MEDIUM 100. If a firm’s inventory turnover increases, its days’ sales in inventory will: A) Increase B) Decrease C) Be unaffected D) Change, but the direction of the effect can’t be predicted Answer: B Rationale: The days’ sales in inventory is calculated as: Days' sales in inventory = 365 / Inventory turnover. Since inventory turnover is in the denominator of the equation, if the denominator increases the results of the equation will decrease. So, an increase in the firm’s inventory turnover will decrease the days’ sales in inventory ratio.
Topic: Inventory Ownership and Physical Count LO: 1 Level of Difficulty: EASY 101. Goods in transit which are shipped F.O.B. shipping point should be: A) Included in the inventory of the shipping company B) Included in the inventory of the buyer C) Included in the inventory of the seller D) None of the above Answer: B Rationale: When the freight terms are F.O.B. shipping point, the buyer assumes ownership of the merchandise at the time the common carrier accepts the items from the seller. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-43
Topic: Inventory Ownership and Physical Count LO: 1 Level of Difficulty: EASY 102. What is consigned inventory? A) Goods that are sold, but payment is not required until the goods are sold B) Goods that are shipped, and title transfers to the buyer C) Goods that have been segregated for shipment to a customer D) Goods that are shipped, but title remains with the seller Answer: D Rationale: Consignment goods are items held for sale by parties other than the item’s owner.
Topic: FIFO Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 103. Charleston Company uses the periodic inventory system. For the current month, the beginning inventory consisted of 1,200 units that cost $45 each. During the month, the company made two purchases: 500 units at $43.50 each and 2,000 units at $42 each. Charleston Company also sold 2,150 units during the month. Using the periodic FIFO method, what is the cost of ending inventory? A) $65,100 B) $56,850 C) $60,219 D) $55,800 Answer: A Rationale: (1,550 x $42) = $65,100
Topic: FIFO Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 104. Hill Company uses the periodic inventory system. For the current month, the beginning inventory consisted of 1,200 units that cost $60 each. During the month, the company made two purchases: 500 units at $58 each and 2,000 units at $56 each. Hill Company also sold 2,150 units during the month. Using the periodic FIFO method, what is the cost of ending inventory? A) $86,800 B) $75,800 C) $80,292 D) $74,400 Answer: A Rationale: (1,550 x $56) = $86,800
©Cambridge Business Publishers, 2020 6-44
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Weighted-Average Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 105. Holiday Company uses the periodic inventory system. For the current month, the beginning inventory consisted of 200 units that cost $195 each. During the month, the company made two purchases: 300 units at $207 each and 150 units at $210 each. The company also sold 500 units during the month. Using the periodic weighted-average cost method, what is the cost of ending inventory? A) $101,310 B) $ 30,600 C) $ 31,500 D) $100,200 Answer: B Rationale: (200 x $195) + (300 x $207) + (150 x $210) = $132,600 Average unit cost at month end = $132,600 / 650 = $204; 150 Units x $204 = $30,600
Topic: Weighted-Average Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 106. Elliot Company uses the periodic inventory system. For the current month, the beginning inventory consisted of 200 units that cost $260 each. During the month, the company made two purchases: 300 units at $276 each and 150 units at $280 each. The company also sold 500 units during the month. Using the periodic weighted-average cost method, what is the cost of ending inventory? A) $135,080 B) $ 40,800 C) $ 42,000 D) $133,600 Answer: B Rationale: (200 x $260) + (300 x $276) + (150 x $280) = $176,800 Average unit cost at month end = $176,800 / 650 = $272; 150 Units x $272 = $40,800
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-45
USE THE FOLLOWING INVENTORY RELATED INFORMATION FOR QUESTIONS 107-109. The following represents the inventory of Julissa Company for the month of January: Jan.
Jan.
1
On hand, 10 units at $60 each
8 22 28
Purchases 25 units at $69 each 50 units at $78 each 15 units at $87 each
Jan.
4 15 26
Sales 8 units @ $225 each 20 units @ $225 each 52 units @ $225 each
Topic: FIFO Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 107. Calculate Julissa Company’s Cost of Goods Sold using Periodic FIFO for the month of January. A) $5,790 B) $5,835 C) $5,898 D) $6,240 Answer: B Rationale: (10 x $60) + (25 x $69) + (45 x $78) = $5,835
Topic: LIFO Inventory Costing Method LO: 2 Level of Difficulty: EASY 108. Calculate Julissa Company’s Ending Inventory on January 31 using Periodic LIFO. A) $1,290 B) $1,362 C) $1,632 D) $1,695 Answer: A Rationale: (10 x $60) + (10 x $69) = $1,290
Topic: Weighted-Average Inventory Costing Method LO: 2 Level of Difficulty: EASY 109. Calculate Julissa Company’s Cost of Goods Sold using Periodic Weighted-Average for the month of January (rounded to the nearest dollar). A) $6,159 B) $6,024 C) $5,649 D) $5,820 Answer: B Rationale: (10 x $60) + (25 x $69) + (50 x $78) + (15 x $87) = $7,530 Average unit cost at month end = $7,530 / 100 = $75.30 80 Units x $75.30 = $6,024
©Cambridge Business Publishers, 2020 6-46
th
Financial Accounting for Undergraduates, 4 Edition
USE THE FOLLOWING INVENTORY RELATED INFORMATION FOR QUESTIONS 110-112. The following represents the inventory of Moonlight Company for the month of January: Jan.
Jan.
1
On hand, 10 units at $80 each
8 22 28
Purchases 25 units at $92 each 50 units at $104 each 15 units at $116 each
Jan.
4 15 26
Sales 8 units @ $300 each 20 units @ $300 each 52 units @ $300 each
Topic: FIFO Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 110. Calculate Moonlight Company’s Cost of Goods Sold using Periodic FIFO for the month of January. A) $7,720 B) $7,780 C) $7,864 D) $8,320 Answer: B Rationale: (10 x $80) + (25 x $92) + (45 x $104) = $7,780
Topic: LIFO Inventory Costing Method LO: 2 Level of Difficulty: EASY 111. Calculate Moonlight Company’s Ending Inventory on January 31 using Periodic LIFO. A) $1,720 B) $1,816 C) $2,176 D) $2,260 Answer: A Rationale: (10 x $80) + (10 x $92) = $1,720
Topic: Weighted-Average Inventory Costing Method LO: 2 Level of Difficulty: EASY 112. Calculate Moonlight Company’s Cost of Goods Sold using Periodic Weighted-Average for the month of January (rounded to the nearest dollar). A) $8,212 B) $8,032 C) $7,532 D) $7,760 Answer: B Rationale: (10 x $80) + (25 x $92) + (50 x $104) + (15 x $116) = $10,040 Average unit cost at month end = $10,040 / 100 = $100.40 80 Units x $100.40 = $8,032
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-47
USE THE FOLLOWING INVENTORY RELATED INFORMATION FOR QUESTIONS 113-115. The following represents the inventory of Omar Company for the month of April: April 1 April 2 April 3 April 10 April 21 April 28
Beginning Inventory Sales Purchases Sales Purchases Sales
100 units @ $12 50 units 300 units @ $18 250 units 400 units @ $24 200 units
Topic: LIFO Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 113. Assuming a periodic inventory system is used by Omar Company, what is ending inventory under LIFO? A) $7,200 B) $9,900 C) $4,800 D) $6,300 Answer: C Rationale: (100 x $12) + (200 x $18) = $4,800
Topic: FIFO Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 114. Assuming a periodic inventory system is used by Omar Company, what is cost of goods sold under FIFO? A) $6,300 B) $7,200 C) $9,900 D) $9,000 Answer: D Rationale: (100 x $12) + (300 x $18) + (100 x $24) = $9,000
Topic: Weighted-Average Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 115. Assuming a periodic inventory system is used by Omar Company, what is ending inventory under the Weighted-Average Cost method? A) $ 6,942 B) $11,625 C) $ 6,075 D) $10,125 Answer: C Rationale: (100 x $12) = (300 x $18) + (400 x $24) = $16,200 Average unit cost at month end = $16,200 / 800 = $20.25; 300 x $20.25 = $6,075
©Cambridge Business Publishers, 2020 6-48
th
Financial Accounting for Undergraduates, 4 Edition
USE THE FOLLOWING INVENTORY RELATED INFORMATION FOR QUESTIONS 116-118. The following represents the inventory of Kailey Company for the month of April: April 1 Beginning Inventory 100 units @ $16 April 2 Sales 50 units April 3 Purchases 300 units @ $24 April 10 Sales 250 units April 21 Purchases 400 units @ $32 April 28 Sales 200 units
Topic: LIFO Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 116. Assuming a periodic inventory system is used by Kailey Company, what is ending inventory under LIFO? A) $ 9,600 B) $13,200 C) $ 6,400 D) $ 8,400 Answer: C Rationale: (100 x $16) + (200 x $24) = $6,400
Topic: FIFO Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 117. Assuming a periodic inventory system is used by Kailey Company, what is cost of goods sold under FIFO? A) $ 8,400 B) $ 9,600 C) $13,200 D) $12,000 Answer: D Rationale: (100 x $16) + (300 x $24) + (100 x $32) = $12,000
Topic: Weighted-Average Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 118. Assuming a periodic inventory system is used by Kailey Company, what is ending inventory under the Weighted-Average Cost method? A) $ 9,256 B) $15,500 C) $, 8,100 D) $13,500 Answer: C Rationale: (100 x $16) + (300 x $24) + (400 x $32) = $21,600 Average unit cost at month end = $21,600 / 800 = $27; 300 x $27 = $8,100
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-49
USE THE FOLLOWING INVENTORY RELATED INFORMATION FOR QUESTIONS 119-121. On September 1, the beginning inventory for Anisha Company was 110 units at $150 each. Purchases and sales during September were: Purchases During Sept 2019 Sept 7 120 units @ $168 Sept 17 70 units @ $132 Sept 25 100 units @ $126
Sales During Sept 2019 Sept 12 70 units Sept 22 110 units Sept 29 90 units
Topic: LIFO Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 119. What is the cost of ending inventory for Anisha Company on September 30 if the periodic LIFO costing method is used? A) $21,840 B) $16,560 C) $19,860 D) $19,500 Answer: C Rationale: (110 x $150) + (20 x $168) = $19,860
Topic: FIFO Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 120. What is the cost of goods sold for September for Anisha Company if the periodic FIFO costing method is used? A) $41,760 B) $38,640 C) $41,940 D) $41,700 Answer: C Rationale: (110 x $150) + (120 x $168) + (40 x $132) = $41,940
Topic: Weighted-Average Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 121. What is the cost of ending inventory for September for Anisha Company if the periodic weightedaverage costing method is used? (Round your answer to the nearest dollar) A) $16,398.00 B) $19,012.50 C) $16,088.00 D) $18,828.00 Answer: B Rationale: (110 x $150) + (120 x $168) + (70 x $132) + (100 x $126) = $58,500 Average unit cost at month end = $58,500 / 400 = $146.25 130 Units x $146.25 = $19,012.50
©Cambridge Business Publishers, 2020 6-50
th
Financial Accounting for Undergraduates, 4 Edition
USE THE FOLLOWING INVENTORY RELATED INFORMATION FOR QUESTIONS 122-124. On September 1, the beginning inventory for Tevonian Company was 110 units at $200 each. Purchases and sales during September were: Purchases During Sept 2019 Sept 7 120 units @ $224 Sept 17 70 units @ $176 Sept 25 100 units @ $168
Sales During Sept 2019 Sept 12 70 units Sept 22 110 units Sept 29 90 units
Topic: LIFO Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 122. What is the cost of ending inventory for Tevonian Company on September 30 if the periodic LIFO costing method is used? A) $28,640 B) $22,080 C) $26,480 D) $26,000 Answer: C Rationale: (110 x $200) + (20 x $224) = $26,480
Topic: FIFO Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 123. What is the cost of goods sold for September for Tevonian Company if the periodic FIFO costing method is used? A) $54,960 B) $51,520 C) $55,920 D) $55,600 Answer: C Rationale: (110 x $200) + (120 x $224) + (40 x $176) = $55,920
Topic: Weighted-Average Inventory Costing Method LO: 2 Level of Difficulty: MEDIUM 124. What is the cost of ending inventory for September for Tevonian Company if the periodic weightedaverage costing method is used? (Round your answer to the nearest dollar) A) $21,984 B) $25,350 C) $21,452 D) $25,104 Answer: B Rationale: (110 x $200) + (120 x $224) + (70 + $176) + (100 x $168) = $78,000 Average unit cost at month end = $78,000 / 400 = $195 130 Units x $195 = $25,350
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-51
Topic: Inventory Errors LO: 3 Level of Difficulty: DIFFICULT 125. In its 2019 income statement, Mary T. Company reported cost of goods sold of $225,000. Later, Mary T. determined that beginning inventory for 2019 was understated by $69,000, and the ending inventory for 2019 was understated by $30,000. What should be the corrected amount for cost of goods sold for 2019? A) $294,000 B) $216,000 C) $285,000 D) $225,000 Answer: A Rationale: Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory 2019 X = (-$69,000) + $0 - (-$30,000) X = -$39,000 = CGS understated (-) Cost of goods sold (CGS) as originally reported: Adjustment for understatement of CGS (implies add to get correct CGS) CGS for 2019, adjusted amount
$255,000 39,000 $294,000
Topic: Inventory Errors LO: 3 Level of Difficulty: DIFFICULT 126. In its 2019 income statement, Hubbard Company reported cost of goods sold of $340,000. Later, Hubbard determined that beginning inventory for 2019 was understated by $92,000, and the ending inventory for 2019 was understated by $40,000. What should be the corrected amount for cost of goods sold for 2019? A) $392,000 B) $288,000 C) $380,000 D) $340,000 Answer: A Rationale: Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory 2019 X = (-$92,000) + $0 - (-$40,000) X = -$52,000 = CGS understated (-) Cost of goods sold (CGS) as originally reported: Adjustment for understatement of CGS (implies add to get correct CGS) CGS for 2019, adjusted amount
$340,000 52,000 $392,000
©Cambridge Business Publishers, 2020 6-52
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Inventory Errors LO: 3 Level of Difficulty: DIFFICULT 127. A company discovered in 2020 that it had overstated the inventory balance for Dec 31, 2018 by $30,000. The company had (incorrectly) reported Net Income to be $900,000 for 2018, and $1,200,000 for 2019. What are the corrected Net Incomes for 2018 and 2019?
A) B) C) D)
Corrected 2018 Net Income $930,000 $870,000 $870,000 $930,000
Corrected 2019 Net Income $1,170,000 $1,170,000 $1,230,000 $1,230,000
Answer: C Rationale: Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory:
Therefore:
Year 2018: X = $0 + $0 - $30,000 X = -$30,000 = CGS understated (-)
Year 2019: X = $30,000 + $0 - $0 X = $30,000 = CGS overstated (+)
Income: overstated
Income: understated
Net income (NI) as originally reported: Adjustment for (over)understatement of NI: Net income, adjusted amount
Year 2018 $900,000 (30,000) $870,000
Year 2019 $1,200,000 30,000 $1,230,000
Topic: Inventory Errors LO: 3 Level of Difficulty: DIFFICULT 128. A company discovered in 2020 that it had overstated the inventory balance for Dec 31, 2018 by $40,000. The company had (incorrectly) reported Net Income to be $1,200,000 for 2018, and $1,600,000 for 2019. What are the corrected Net Incomes for 2018 and 2019?
A) B) C) D)
Corrected 2018 Net Income $1,240,000 $1,160,000 $1,160,000 $1,240,000
Corrected 2019 Net Income $1,560,000 $1,560,000 $1,640,000 $1,640,000
Answer: C Rationale: Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory
Therefore:
Year 2018: X = $0 + $0 - $40,000 X = -$40,000 = CGS understated (-)
Year 2019: X = $40,000 + $0 - $0 X = $40,000 = CGS overstated (+)
Income: overstated
Income: understated
Net income (NI) as originally reported: Adjustment for (over) understatement of NI: Net income, adjusted amount
Year 2018 $1,200,000 (40,000) $1,160,000
Year 2019 $1,600,000 40,000 $1,640,000 ©Cambridge Business Publishers, 2020
Test Bank, Chapter 6
6-53
Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 Level of Difficulty: MEDIUM 129. Quantum Corporation sells three different products. The following information is available on December 31: Inventory Item
Units
Cost per unit
NRV per unit
X Y Z
100 200 500
$12.00 $ 6.00 $ 9.00
$ 9.00 $ 3.00 $12.00
When applying the lower-of-cost-or-net realizable value rule to each item, what will Quantum report as its cost of ending inventory on December 31? A) $6,900 B) $6,600 C) $7,950 D) $6,000 Answer: D Rationale: (100 x $9) + (200 x $3) + (500 x $9) = $6,000
Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 Level of Difficulty: MEDIUM 130. SiSi Corporation sells three different products. The following information is available on December 31: Inventory Item
Units
Cost per unit
NRV per unit
X Y Z
100 200 500
$16.00 $ 8.00 $12.00
$12.00 $ 4.00 $16.00
When applying the lower-of-cost-or-net realizable value rule to each item, what will SiSi report as its cost of ending inventory on December 31? A) $ 9,200 B) $ 8,800 C) $10,600 D) $ 8,000 Answer: D Rationale: (100 x $12) + (200 x $4) + (500 x $12) = $8,000
©Cambridge Business Publishers, 2020 6-54
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 Level of Difficulty: MEDIUM 131. Use the following data for Moon Company, determine the value inventory under the lower-of- costor-net realizable value rule, applied on an individual item basis.
A) B) C) D)
Commodity
Inventory Quantity
Unit Cost Price
Unit NRV
A B C
200 100 400
$30 $42 $24
$21 $48 $18
$18,000 $15,600 $20,400 $20,100
Answer: B Rationale: (200 x $21) + (100 x $42) + (400 x $18) = $15,600
Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 Level of Difficulty: MEDIUM 132. Use the following data for Hubbard Model Car Company, determine the value of inventory under the lower-of-cost-or-net realizable value rule, applied on an individual item basis.
A) B) C) D)
Commodity
Inventory Quantity
Unit Cost Price
Unit NRV
A B C
200 100 400
$40 $56 $32
$28 $64 $24
$24,000 $20,800 $27,200 $26,800
Answer: B Rationale: (200 x $28) + (100 x $56) + (400 x $24) = $20,800
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-55
Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 Level of Difficulty: MEDIUM 133. Data on the physical inventory for Grand Home Company as of December 31, 2019 are given below: Inventory Items Appliances: Refrigerators Dishwashers Ovens Electronics: Stereos Televisions
Quantity on hand
Unit Cost
Unit NRV
12 18 15
$1,500 $ 900 $ 750
$1,350 $825 $900
20 25
$1,050 $1,350
$1,125 $1,278
Assuming the Grand Home Company applies the lower-of-cost-or-net realizable value method on the inventory by major category of items, the inventory balance reported on the Balance Sheet as of December 31, 2019 will be: A) $ 99,000 B) $ 99,300 C) $ 99,900 D) $100,200 Answer: A Rationale: Appliances: Cost: (12 × $1,500) + (18 × $900) + (15 × $750) = $45,450 NRV: (12 × $1,350) + (18 × $825) + (15 × $900) = $44,550 Lowest is NRV. Electronics: Cost: (20 × $1,050) + (25 × $1,350) = $54,750 NRV: (20 × $1,125) + (25 × $1,278) = $54,450 Lowest is NRV Total inventory value: ($44,550 + $54,450) = $99,000
©Cambridge Business Publishers, 2020 6-56
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Lower-of-Cost-or Net Realizable Value Method LO: 4 Level of Difficulty: MEDIUM 134. Data on the physical inventory for Lu Company as of December 31, 2019 are given below: Inventory Items Appliances: Refrigerators Dishwashers Ovens Electronics: Stereos Televisions
Quantity on hand
Unit Cost
Unit NRV
12 18 15
$2,000 $1,200 $1,000
$1,800 $1,100 $1,200
20 25
$1,400 $1,800
$1,500 $1,704
Assuming the Lu Company applies the lower-or-cost-or-net realizable value method on the inventory by major category of items, the inventory balance reported on the Balance Sheet as of December 31, 2019 will be: A) $132,000 B) $132,400 C) $133,200 D) $133,600 Answer: A Rationale: Appliances: Cost: (12 × $2,000) + (18 × $1,200) + (15 × $1,000) = $60,600 NRV: (12 × $1,800) + (18 × $1,100) + (15 × $1,200) = $59,400 Lowest is NRV. Electronics: Cost: (20 × $1,400) + (25 × $1,800) = $73,000 NRV: (20 × $1,500) + (25 × $1,704) = $72,600 Lowest is NRV. Total inventory value: ($59,400 + $72,600) = $132,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-57
Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 Level of Difficulty: DIFFICULT 135. Basic inventory data for Value Company as of June 30 are presented below: Item Sporting Goods: Baseballs Footballs Basketballs Electronics: CD Players DVD Players
Quantity
Unit Cost
Unit NRV
20 40 10
$ 54 $165 $ 60
$ 48 $174 $ 75
20 30
$246 $174
$225 $165
Assume Value Company applies the lower-of-cost-or-net realizable value method for the inventory by major category. Determine the amount of inventory adjustment required at the end of the year. A) $ 390 B) $ (690) C) $1,080 D) $ (300) Answer: B Rationale: Sporting Goods: Cost: (20 × $54) + (40 × $165) + (10 × $60) = $8,280 NRV: (20 × $48) + (40 × $174) + (10 × $75) = $8,670 Lowest is cost. Electronics: Cost: (20 × $246) + (30 × $174) = $10,140 NRV: (20 × $225) + (30 × $165) = $9,450 Lowest is NRV. Total inventory value: $8,280 + $9,450) = Less: Cost ($8,280 + $10,140) = Inventory adjustment =
$17,730 - $18,420 - $ 690
©Cambridge Business Publishers, 2020 6-58
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 Level of Difficulty: DIFFICULT 136. Basic inventory data for Granite Company as of June 30 are presented below: Item Sporting Goods: Baseballs Footballs Basketballs Electronics: CD Players DVD Players
Quantity
Unit Cost
Unit NRV
20 40 10
$ 72 $220 $ 80
$ 64 $232 $100
20 30
$328 $232
$300 $220
Assume Granite Company applies the lower-of-cost-or-net realizable value method for the inventory by major category. Determine the amount of inventory adjustment required at the end of the year. A) $ 520 B) ($ 920) C) $1,440 D) ($ 400) Answer: B Rationale: Sporting Goods: Cost: (20 × $72) + (40 × $220) + (10 × $80) = $11,040 NRV: (20 × $64) + (40 × $232) + (10 × $100) = $11,560 Lowest is cost. Electronics: Cost: (20 × $328) + (30 × $232) = $13,520 NRV: (20 × $300) + (30 × $220) = $12,600 Lowest is NRV. Total inventory value: ($11,040 + $12,600) = Less: Cost ($11,040 + $13,520) = Inventory adjustment =
$23,640 - $24,560 - $ 920
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-59
Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 Level of Difficulty: DIFFICULT 137. Using the information below applies to Super Sporting Goods store, calculate the amount of inventory adjustment using the lower-of-cost-or-net realizable value method applied to the inventory on a major category basis.
Football items: Helmets Cleats Pads Baseball items: Gloves Jerseys
# of Units
Cost/Unit
NRV/Unit
20 10 30
$ 90 $150 $ 60
$75 $60 $75
40 50
$ 30 $ 120
$45 $75
A) $(1,350) B) $ 2,865 C) $ 8,325 D) $(2,400) Answer: D Rationale: Football items: Cost: (20 × $90) + (10 × $150) + (30 × $60) = $5,100 NRV: (20 × $75) + (10 × $60) + (30 × $75) = $4,350 Lowest is NRV. Baseball items: Cost: (40 × $30) + (50 × $120) = $7,200 NRV: (40 × $45) + (50 × $75) = $5,550 Lowest is NRV. Total inventory value: ($4,350 + $5,550) = Less: Cost ($5,100 + $7,200) = Inventory adjustment =
$9,900 -$12,300 - $2,400
©Cambridge Business Publishers, 2020 6-60
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 Level of Difficulty: DIFFICULT 138. Using the information below for Morrie Majors Sports store, calculate the amount of inventory adjustment using the lower-of-cost-or-net realizable value method applied to the inventory on a major category basis:
Football items: Helmets Cleats Pads Baseball items: Gloves Jerseys
# of Units
Cost/Unit
NRV/Unit
20 10 30
$120 $200 $ 80
$100 $ 80 $100
40 50
$ 40 $160
$ 60 $100
A) ($ 1,800) B) $ 3,200 C) $11,100 D) ($ 3,200) Answer: D Rationale: Football items: Cost: (20 × $120) + (10 × $200) + (30 × $80) = $6,800 NRV: (20 × $100) + (10 × $80) + (30 × $100) = $5,800 Lowest is NRV. Baseball items: Cost: (40 × $40) + (50 × $160) = $9,600 NRV: (40 × $60) + (50 × $100) = $7,400 Lowest is NRV. Total inventory value: ($5,800 + $7,400) = Less: Cost ($6,800 + $9,600) = Inventory adjustment =
$13,200 -$16,400 - $ 3,200
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-61
USE THE FOLLOWING INVENTORY RELATED INFORMATION FOR QUESTIONS 139-141. The following data regarding purchases and sales of a commodity were taken from the perpetual inventory account of He Company: May 1 6 8 16 20 23 30
Balance Sale Purchase Sale Purchase Sale Purchase
25 units at $120 20 units 20 units at $123 10 units 20 units at $126 25 units 15 units at $127
Topic: Appendix 6A: Inventory Costing Methods and the Perpetual Inventory System LO: 6 Level of Difficulty: DIFFICULT 139. Using the perpetual FIFO method, what amount would be reported by He Company for Cost of Goods sold for the month of May? A) $6,720 B) $6,480 C) $6,725 D) $6,690 Answer: A Rationale: (25 x $120) + (20 x $123) + (10 x $126) = $6,720
Topic: Appendix 6A: Inventory Costing Methods and the Perpetual Inventory System LO: 6 Level of Difficulty: DIFFICULT 140. Using the perpetual LIFO method, what amount would be reported by He Company under Cost of Ending Inventory on May 31? A) $3,125 B) $3,145 C) $3,165 D) $3,130 Answer: B Rationale: (5 x $125) + (5 x $123) + (15 x $127) = $3,145
©Cambridge Business Publishers, 2020 6-62
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Appendix 6A: Inventory Costing Methods and the Perpetual Inventory System LO: 6 Level of Difficulty: DIFFICULT 141. Using the perpetual weighted-average method, what amount would be reported for cost of goods sold on He Company’s Income Statement for May (rounded to the nearest dollar)? A) $6,816 B) $6,708 C) $6,736 D) $6,804 Answer: C Rationale: (20 x $120.00) + (10 x $122.40) + (25 x $124.46) = $6,735.50 = $6,736 Purchased
Balance: May 1 Sale May 6 Purchase May 8 Sale May 16 Purchase May 20 Sale May 23 Purchase May 30 Totals
Inventory Balance
Units
Unit Cost
Total
25
$120
$3,000
Units Sold 20
20
$123
2,460
20
$126
2,520
15 80
$127
1,905 $9,885
10 25 __ 55
Units
Unit Cost
Total
25 5 25 15 35 10 25
$120.00 120.00 122.40 122.40 124.46* 124.46 125.98*
$3,000.00 600.00 3,060.00 1,836.00 4,356.10 1,244.60 3,149.50
*Rounded
USE THE FOLLOWING INVENTORY RELATED INFORMATION FOR QUESTIONS 142-144. The following data regarding purchases and sales of a commodity were taken from the perpetual inventory account of Huang Company: May 1 6 8 16 20 23 30
Balance Sale Purchase Sale Purchase Sale Purchase
25 units at $160 20 units 20 units at $164 10 units 20 units at $168 25 units 15 units at $172
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-63
Topic: Appendix 6A: Inventory Costing Methods and the Perpetual Inventory System LO: 6 Level of Difficulty: DIFFICULT 142. Using the perpetual FIFO method, what amount would be reported by Huang Company for Cost of Goods sold for the month of May? A) $8,960 B) $9,120 C) $8,980 D) $8,920 Answer: A Rationale: (25 x $160) + (20 x $164) + (10 x $168) = $8,960
Topic: Appendix 6A: Inventory Costing Methods and the Perpetual Inventory System LO: 6 Level of Difficulty: DIFFICULT 143. Using the perpetual LIFO method, what amount would be reported by Huang Company under Cost of Ending Inventory on May 31? A) $4,160 B) $4,200 C) $4,220 D) $4,260 Answer: B Rationale: (15 x $172) + (5 x $164) + (5 x $160) = $4,200
Topic: Appendix 6A: Inventory Costing Methods and the Perpetual Inventory System LO: 6 Level of Difficulty: DIFFICULT 144. Using the perpetual weighted-average method, what amount would be reported for cost of goods sold on Huang Company’s Income Statement for May (Rounded final answer to the nearest dollar)? A) $9,089 B) $8,944 C) $8,981 D) $9,072 Answer: C Rationale: (20 x $160.00) + (10 x $163.20) + (25 x $165.94) = $8,980.50 = $8,981 Purchased
Balance: May 1 Sale May 6 Purchase May 8 Sale May 16 Purchase May 20 Sale May 23 Purchase May 30 Totals
Inventory Balance
Units
Unit Cost
Total
25
$160
$ 4,000
Units Sold 20
20
$164
3,280
20
$168
3,360
15 80
$172
2,580 $13,220
10 25 __ 55
Units
Unit Cost
Total
25 5 25 15 35 10 25
$160.00 160.00 163.20 163.20 165.94 165.94 169.58
$4,000.00 800.00 4,080.00 2,448.00 5,808.00 1,659.40 4,239.40
©Cambridge Business Publishers, 2020 6-64
th
Financial Accounting for Undergraduates, 4 Edition
USE THE FOLLOWING INVENTORY RELATED INFORMATION FOR QUESTIONS 145-147. Dracopoli’s Sporting Goods, which uses a perpetual inventory system, had the following inventory records for the month of January. Beginning inventory Sales, Jan. 1 - Jan. 10 Purchase, Jan. 11 Sales, Jan. 12 - Jan. 20 Purchase, Jan. 21 Sales, Jan. 22-31
70 units @ $300 per unit 50 units 40 units @ $309 per unit 50 units 50 units @ $315 per unit 40 units
Topic: Appendix 6A: Inventory Costing Methods and the Perpetual Inventory System LO: 6 Level of Difficulty: DIFFICULT 145. Assuming the last in first out (LIFO) method is used, what is Dracopoli’s Cost of Goods Sold for the month of January? A) $42,960 B) $42,840 C) $43,810 D) $42,900 Answer: A Rationale: (50 x $300) + (40 x $309) + (10 x $300) + (40 x $315) = $42,960
Topic: Appendix 6A: Inventory Costing Methods and the Perpetual Inventory System LO: 6 Level of Difficulty: DIFFICULT 146. Assuming the first in first out (FIFO) method is used, what is Dracopoli’s total Cost of Goods Sold for the month of January? A) $42,840 B) $42,810 C) $42,960 D) 42,9000 Answer: B Rationale: (50 x $300) + (30 x $309) + (20 x $300) + (10 x $309) + (30 x $315) = $42,810
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-65
Topic: Appendix 6A: Inventory Costing Methods and the Perpetual Inventory System LO: 6 Level of Difficulty: DIFFICULT 147. Assuming the Weighted-Average method is used, what is the total cost of Dracopoli’s ending inventory on January 31? A) $6,300 B) $6,270 C) $6,000 D) $6,200 Answer: B Rationale: 20 x $313.50 = $6,270 Purchased Beginning Bal. Sales Jan. 1-10 Purchase Jan. 11 Sales Jan. 12-20 Purchase Jan. 21 Sales Jan. 22-31 Totals
Inventory Balance
Units
Unit Cost
Total
70
$300
$21,000
Units Sold
Units
Unit Cost
70 20 60 10 60 20
$300.00 300.00 306.00 306.00 313.50 313.50
50 40
309
12,360 50
50 ___ 160
315
15,750 ______ $49,110
40 140
Total $21,000 6,000 18,360 3,060 18,810 6,270
USE THE FOLLOWING INVENTORY RELATED INFORMATION FOR QUESTIONS 148-150. Hubbard’s Sporting Goods, which uses a perpetual inventory system, had the following inventory records for the month of January. Beginning inventory Sales, Jan. 1 - Jan. 10 Purchase, Jan. 11 Sales, Jan. 12 - Jan. 20 Purchase, Jan. 21 Sales, Jan. 22-31
70 units @ $400 per unit 50 units 40 units @ $412 per unit 50 units 50 units @ $420 per unit 40 units
Topic: Appendix 6A: Inventory Costing Methods and the Perpetual Inventory System LO: 6 Level of Difficulty: DIFFICULT 148. Assuming the last in first out (LIFO) method is used, what is Hubbard’s Cost of Goods Sold for the month of January? A) $57,280 B) $57,120 C) $57,080 D) $57,200 Answer: A Rationale: (50 x $400) + (40 x $412) + (10 x $400) + (40 x $420) = $57,280 ©Cambridge Business Publishers, 2020 6-66
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Appendix 6A: Inventory Costing Methods and the Perpetual Inventory System LO: 6 Level of Difficulty: DIFFICULT 149. Assuming the first in first out (FIFO) method is used, what is Hubbard’s total Cost of Goods Sold for the month of January? A) $57,120 B) $57,080 C) $57,280 D) $57,200 Answer: B Rationale: (50 x $400) + (30 x $412) + (20 x $400) + (10 x $412) + (30 x $420) = $57,080
Topic: Appendix 6A: Inventory Costing Methods and the Perpetual Inventory System LO: 6 Level of Difficulty: DIFFICULT 150. Assuming the weighted-average method is used, what is the total cost of Hubbard’s ending inventory on January 31? A) $8,400 B) $8,360 C) $8,000 D) $8,200 Answer: B Rationale: 20 x $418 = $8,360 Purchased Beginning Bal. Sales Jan. 1-10 Purchase Jan. 11 Sales Jan. 12-20 Purchase Jan. 21 Sales Jan. 22-31 Totals
Inventory Balance
Units
Unit Cost
Total
70
$400
$28,000
Units Sold 50
40
412
16,480
50 ___ 160
420
21,000 ______ $65,480
50 40 140
Units
Unit Cost
Total
70 20 60 10 60 20
$400 400 408 408 418 418
$28,000 8,000 24,480 4,080 25,080 8,360
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-67
Exercises Topic: Inventory Errors LO: 3 1. Bradley Company reported the following net income amounts: 2017, $246,000; 2018, $150,000: and 2019, $120,000. In 2020, the company discovered errors that had been made in computing the ending inventories for 2017 and 2018, as follows: 2017 2018
Ending inventory understated by $18,000 Ending inventory understated by $21,000
Compute the correct net incomes for 2017, 2018, and 2019. Answer: 2017 net income: As reported Correction for 2017 inventory understatement Corrected net income
$246,000 18,000 $264,000
2018 net income: As reported Correction for 2017 inventory understatement Correction for 2018 inventory understatement Corrected net income
$150,000 (18,000) 21,000 $153,000
2019 net income: As reported Correction for 2018 inventory understatement Corrected net income
$120,000 (21,000) $99,000
Note: An understatement of ending inventory means an overstatement of cost of goods sold, which in turn means an understatement of net income in a given period. In the following period, beginning inventory will be misstated which will affect net income.
©Cambridge Business Publishers, 2020 6-68
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Inventory Errors LO: 3 2. Maria Company reported the following net income amounts: 2017, $140,000; 2018, $116,000; and 2019, $106,000. In 2020, the company discovered errors that had been made in computing the ending inventories for 2017 and 2018, as follows: 2017 2018
Ending inventory overstated by $12,000 Ending inventory understated by $6,000
Compute the correct net incomes for 2017, 2018, and 2019. Answer: 2017 net income: As reported Correction for 2017 inventory overstatement Corrected net income
$140,000 (12,000) $128,000
2018 net income: As reported Correction for 2017 inventory overstatement Correction for 2018 inventory understatement Corrected net income
$116,000 12,000 6,000 $134,000
2019 net income: As reported Correction for 2018 inventory understatement Corrected net income
$106,000 (6,000) $100,000
Note: An overstatement of ending inventory means an understatement of cost of goods sold, which in turn means an overstatement of net income in a given period. An understatement of ending inventory means an overstatement of cost of goods sold, which in turn means an understatement of net income in a given period. In both cases, in the following period, beginning inventory will be misstated which will affect net income.
Topic: LIFO Reserves LO: 7 3. Chief Software Company’s 2019 balance sheet reveals that inventories reported on a LIFO basis are $16,860 million. In a footnote, management stated that the LIFO reserve was $2,400 million. a. How much would Chief’s Software’s ending inventory be using FIFO? b. What is the total cumulative tax effect of using LIFO given a 35% income tax rate? Answer: a. LIFO reserve is the difference in inventory carrying amount between the FIFO and LIFO cost methods. To adjust a LIFO inventory value to a FIFO inventory value, the LIFO reserve is added to LIFO inventories. LIFO inventory LIFO reserve Inventory with FIFO method
$16,860 2,400 $19,260
b. Using LIFO has decreased pre-tax profits by $2,400 million due to higher cost of goods sold. Decrease in income taxes: $2,400 million × 35% = $840 million
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-69
Topic: FIFO Method LO: 2 4. M. Wards’ inventories are determined using FIFO (periodic). information for the first quarter of 2019: Beginning inventory, January 1, 2019 (1) Purchase (2) Purchase (3) Purchase Ending inventory, March 31, 2019
M. Wards provided the following
60 units @ $63.00 40 units @ $56.25 95 units @ $66.00 30 units @ $64.50 45 units
a. Compute the company’s cost of goods sold for the first quarter. b. Computer the ending inventory to be reported on M. Wards’ balance sheet at March 31, 2019. Answer: a. Units sold = 60 + 40 + 95 + 30 – 45 = 180 Costs of goods sold: (60 units × $63.00) + (40 units × $56.25) + (80 units × $66) = $11,310 b. Ending inventory (15 units × $66.00) + (30 units × $64.50 = $2,925
Topic: Weighted-Average Cost Method LO: 2 5. Tablet Company, which uses a periodic inventory system, reports the following in its inventory records for June:
Beginning Inventory Purchase #1 Purchase #2
Units
Unit Cost
10 5 5
$12.00 $10.00 $14.00
During June, Tablet Company sold 12 units. Using the weighted-average cost method, compute the cost of goods sold for June and the June 30 ending inventory balance for this product. Answer: Beginning Inventory Purchase #1 Purchase #2 Totals
Units 10 5 5 20
Unit Cost $12.00 $10.00 $14.00
Cost $120 50 70 $240
Average unit cost = $240 / 20 = $12.00 Cost of goods sold = 12 × $12.00 = $144 Ending inventory = 8 × $12.00 = $96
©Cambridge Business Publishers, 2020 6-70
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Inventory Costing Methods LO: 2 6. Autok Fabricators, Inc. has 10 units in beginning inventory costing $45 each. It purchased 90 more for $36 each during the month. The company sold 80 units during the month. Autok used a periodic inventory system. Calculate cost of goods sold using: a. FIFO b. Weighted-average cost c. LIFO Answer: a. FIFO Cost of goods sold = (10 × $45) + (70 × $36) = $2,970 b. Beginning inventory Purchases
Units
Dollars/unit
Inventory
10 90 100
$45.00 36.00
$ 450.00 3,240.00 $3,690.00
Cost per unit = $3,690 / 100 = $36.90 Cost of goods sold = $36.90 × 80 = $2,952 c.
LIFO Cost of goods sold = 80 × $36 = $2,880
Topic: Inventory Turnover LO: 5 7. Selected balance sheet and income statement information for Nathan Company and Ehrenhofer Company for 2019 follows (in thousands):
Nathan Company Ehrenhofer Company
COGS
Average Inventory
$40,000 $60,904
$8,000 $4,000
a. Compute the inventory turnover rate for Nathan Co. and Ehrenhofer Co. for 2019. b. Comment on the differences you observe between the turnover rates for these two companies. Answer: a. Inventory turnover = Cost of goods sold / Average inventory Nathan Co.: $40,000 / $8,000 = 5.00 Ehrenhofer Co.: $60,904 / $4,000 = 15.23 b. Nathan Co. maintains a higher inventory level given its cost of goods sold which contributes to slower turnover rate. Ehrenhofer Co., however, maintains considerably less inventory on hand, yielding a higher turnover rate than Nathan Co.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-71
Topic: LIFO Reserve LO: 7 8. K. Block, Inc., reports the following information in its annual report:
Inventory value at LIFO LIFO reserve Inventory value at FIFO
January 1, 2019 $912,000 20,000 $932,000
December 31, 2019 $956,000 30,000 $986,000
Sales for 2019 totaled $8,400,000. Cost of goods sold under LIFO totaled $3,700,000. Compute K. Block’s cost of goods sold and gross profit assuming it uses the FIFO method. Answer: Change in LIFO reserve = $30,000 - $20,000 = $10,000 Sales revenue Cost of goods sold Gross profit
($3,700,000 - $10,000) =
$8,400,000 3,690,000 $4,710,000
Topic: Perpetual Inventory System LO: 6 9. The following are 2019 inventory data for SiSi Company, which uses a perpetual inventory system. January 1 March 8 August 19 October 24
Beginning inventory, 90 units @ $225 per unit. Purchased 160 units @ $240 per unit. Sold 225 units. Purchased 100 units @ $270 per unit.
Ending inventory at December 31 is 125 units. Compute the cost of the ending inventory using the following methods: a. FIFO b. Weighted-average c. LIFO Answer: a. FIFO:
25 units @ $240 = 100 units @ $270 = 125 units
$ 6,000 27,000 $33,000
b. Weighted-average: 125 units @ $262.92 = $32,865 Purchased
Beginning Bal. Purchase Mar. 8 Sales Aug. 19 Purchase Oct. 24 Totals c.
Inventory Balance
Units 90 160
Unit Cost $225 240
Total $20,250 38,400
100 350
270
27,000 $85,650
LIFO: 100 units @ $270 = 25 units @ $225 = 125 units
Units Sold
225 ___ 225
Units 90 250 25 125
Unit Cost $225.00 234.60 234.60 262.92
Total $20,250 58,650 5,865 32,865
$ 27,000 5,625 $32,625
©Cambridge Business Publishers, 2020 6-72
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Perpetual Inventory System LO: 6 10. The following are 2019 inventory data for Galla Company, which uses a perpetual inventory system. January 1 April 8 July 19 November 24
Beginning inventory, 60 units @ $100 per unit. Purchased 40 units @ $106 per unit. Sold 75 units. Purchased 25 units @ $108 per unit.
Ending inventory at December 31 is 50 units. Compute the cost of the ending inventory using the following methods: a. First-in, first-out b. Weighted-average c. Last-in, first-out Answer: a. FIFO:
25 units @ $106 = $2,650 25 units @ $108 = 2,700 50 units $5,350
b. Weighted-average: 50 units @ $105.20 = $5,260 Purchased Beginning Bal. Purchase Apr. 8 Sales July 19 Purchase Nov. 24 Totals c.
LIFO:
Inventory Balance
Units
Unit Cost
Total
60 40
$100 106
$ 6,000 4,240
25 125
108
2,700 $12,940
25 units @ $108 = 25 units @ $100 = 50
Units Sold
75 __ 75
Units
Unit Cost
Total
60 100 25 50
$100.00 102.40 102.40 105.20
$ 6,000 10,240 2,560 5,260
$2,700 2,500 $5,200
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-73
Topic: Lower-of-Cost-or-Net Realizable Value LO: 4 11. Bargain Barn Clothing Company had the following inventory at December 31, 2019:
Blouses Model 1 Model 2 Model 3 Skirts Model 4 Model 5 Model 6
Quantity
Unit Cost
Unit NRV
350 375 600
$ 54 $ 63 $ 84
$ 60 $ 75 $ 78
750 435 150
$ 90 $ 96 $126
$ 72 $108 $114
a. Determine ending inventory by applying the lower-of-cost-or-net realizable value rule to: 1. Each item of inventory 2. Each major category of inventory 3. Total inventory b. Which of the lower-of-cost-or-net realizable value procedures from requirement A results in the lowest net income for 2019? Explain. Answer: a. 1. (350 × $54) + (375 × $63) + (600 × $78) + (750 × $72) + (435 × $96) + (150 × $114) = $202,185 2. Blouses: Skirts:
(350 × $54) + (375 × $63) + (600 × $84) = $92,925 (350 × $60) + (375 × $75) + (600 × $78) = $95,925 (750 × $90) + (435 × $96) + (150 × $126) = $128,160 (750 × $72) + (435 × $108) + (150 × $114) = $118,080
Inventory would be reported at $92,925 + $118,080 = $211,005 3. (350 × $54) + (375 × $63) + (600 × $84) + (750 × $90) + (435 × $96) + (150 × $126) = $221,085 (350 × $60) + (375 × $75) + (600 × $78) + (750 × $72) + (435 × $108) + (150 × $114) = $214,005 Inventory would be reported at $214,005. b. Applying the lower-of-cost-or-net realizable value rule to individual items in inventory results in the lowest inventory amount, the highest cost of goods sold, and the lowest net income.
©Cambridge Business Publishers, 2020 6-74
th
Financial Accounting for Undergraduates, 4 Edition
Topic: LIFO LO: 2, 3 12. Heinrich Company, which uses a periodic inventory system, imports and sells a product produced in Germany. In the summer of 2018, a natural disaster disrupted production, affecting its supply of product. Heinrich uses the LIFO inventory method. On January 1, 2019, Heinrich’s inventory records were as follows: Year purchased
Quantity (units)
Cost per unit
Total cost
2017 2018 Total
2,500 4,500 7,000
$20 $40
$ 50,000 180,000 $230,000
Through mid-December of 2019, purchases were limited to 50,000 units, because the cost had increased to $50 per unit. Heinrich sold 55,000 units during 2019 at a selling price of $100 per unit, which significantly depleted its inventory. The cost was expected to drop to $42 per unit by early January 2020. a. Assume that Heinrich makes no further purchases during 2019. Compute the gross profit for 2019. b. Assume that Heinrich purchases 8,800 units before the end of December 2019 at $50 each. Compute its gross profit for 2019. c.
If Heinrich’s corporate tax rate is 30%, how much tax savings will result from the purchase of inventory before year end?
Answer: a. Sales revenue (55,000 × $100) Cost of goods sold (50,000 × $50)+ (4,500 × $40) + (500 × $20) Gross profit
$5,500,000 2,690,000 $2,810,000
b. Sales revenue (55,000 × $100) Cost of goods sold (55,000 × $50) Gross profit
$5,500,000 2,750,000 $2,750,000
c.
Gross profit Income taxes (30%)
No year-end purchase $2,810,000 843,000
Taxes saved by buying before year-end
$
N/A
Purchase 8,800 units before year-end $2,750,000 825,000 $
18,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-75
Topic: LIFO LO: 2, 3 13. At the beginning of July, Escape Luggage, which uses a periodic inventory system, holds 15 units of its only product with a per-unit cost of $420. During July, Escape sells 40 units. A summary of purchases during the current period follows: Beginning inventory First purchase Second purchase Third purchase
15 units at $420 30 units at $465 15 units at $480 20 units at $495
Assume that Escape utilizes the LIFO method and instead of making the third purchase during July, the company allows its inventory level to decline by delaying the third purchase until August. Compute cost of goods sold for July under both scenarios: a. If the third purchase is made during July b. If the third purchase is delayed to August Discuss the effect on July profit if the company delays the third purchase until August. Answer: a. Cost of goods sold = (20 × $495) + (15 × $480) + (5 × $465) = $19,425 b. Cost of goods sold = (15 × $480) + (25 × $465) = $18,825 The company’s LIFO gross profit will increase by $600 ($19,425 – $18,825) if the purchase is delayed until August. The company has, in effect, dipped into lower-cost layers to boost current period profit, all from a simple delay of inventory purchases.
©Cambridge Business Publishers, 2020 6-76
th
Financial Accounting for Undergraduates, 4 Edition
Problems Topic: Inventory Costing LO: 2, 3 1. At the beginning of the current period, Viraat Industries, which uses a periodic inventory system, has 150 units of a product with a unit cost of $480. The inventory records report the following transactions:
Beginning Inventory Purchase #1 Purchase #2 Purchase #3
Units 150 150 70 30
Unit Cost $480 $528 $570 $630 400
Cost $72,000 79,200 39,900 18,900 $210,000
During the current period, Viraat sells 340 units. a. Assume Viraat uses the FIFO method. Compute the cost of goods sold for the current period and the ending inventory balance for this product. b. Assume Viraat uses the LIFO method. Compute the cost of goods sold for the current period and the ending inventory balance for this product. c. Assume Viraat uses the weighted-average cost method. Compute the cost of goods sold for the current period and the ending inventory balance for this product. Answer: Ending inventory units = 150 + 150 + 70 +30 – 340 = 60 a. FIFO: Units 150 150 40 Units 30 30
b. LIFO Units 30 70 150 90 Units 60
c.
Unit Cost $480 528 570 Cost of goods sold Unit Cost $630 570 Ending inventory
Cost $72,000 79,200 22,800 $174,000 Cost $18,900 17,100 $36,000
Unit Cost $630 570 528 480 Cost of goods sold Unit Cost $480 Ending inventory
Cost $ 18,900 39,900 79,200 43,200 $181,200 Cost $28,800 $28,800
Weighted-average cost: Weighted-average unit cost = $210,000 / 400 = $525 Cost of goods sold = 340 × $525 = $178,500 Ending inventory = 60 × $525 = $31,500 ©Cambridge Business Publishers, 2020
Test Bank, Chapter 6
6-77
Topic: Inventory Costing LO: 2, 3 2. Bowling Green Tires, which uses a periodic inventory system, has the following inventory records for the month ending July 31, 2019: Units
Unit Cost
100 40 30 20
$36.00 $30.00 $34.00 $32.00
Beginning Inventory Purchase #1 Purchase #2 Purchase #3
Findlay sold 140 tires during July. Compute the ending inventory and the cost of goods sold for the period using FIFO, LIFO, and weighted-average cost inventory methods. Answer: Ending inventory units = 100 + 40 + 30 +20 – 140 = 50 FIFO Units
Unit Cost
100 40
$36 30 Cost of goods sold
Units
Unit Cost
20 30
$32 34 Ending inventory
Units
Unit Cost
20 30 40 50
$32 34 30 36 Cost of goods sold
Units
Unit Cost
50
36 Ending inventory
Cost $3,600 1,200 $4,800 Cost $ 640 1,020 $1,660
LIFO Cost $ 640 1,020 1,200 1,800 $4,660 Cost $1,800 $1,800
Weighted-average cost: Total cost of inventory available for sale: ($36 × 100) + ($30 × 40) + ($34 × 30) + ($32 × 20) = $6,460 Average unit cost = $6,460 / 190 = $34 Cost of goods sold = 140 × $34 = $4,760 Ending inventory = 50 × $34 = $1,700
©Cambridge Business Publishers, 2020 6-78
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Gross Profit Percentage LO: 2, 3 3. Topside Shoes Company’s sales totaled $28,000,000 for 2019. Information concerning Topside Shoes Company’s gross profit under three inventory costing methods follows: FIFO LIFO Weighted average
$2,700,000 $2,910,000 $2,760,000
Compute the gross profit percentage for each costing method. Which method shows the highest gross profit? Answer: FIFO LIFO Weighted average
Gross profit
Gross profit percentage
$2,700,000 2,910,000 $2,760,000
9.64% 10.39% 9.86%
First-in, first-out shows the lowest gross profit percentage.
Topic: LIFO and FIFO LO: 2, 3, 7 4. A summary of inventory records for St. Clair Motors Company, which uses a periodic inventory system, reveals the following: Inventory on January 1, 2019
30 units @ $1,040 each
$31,200
Inventory purchased in 2019 Total cost of goods available for sale in 2019
35 units @ $1,066 each 65 units
37,310 $68,510
During 2019, 35 units were sold at $1,800 per unit, generating total sales revenue of $63,000. a. Determine cost of goods sold, gross profit, and the inventory balance under LIFO method. b. Determine the LIFO reserve for St. Clair Motors Company. Answer: a. LIFO assumes that the last units purchased are the first units sold. Sales Cost of goods sold (35 units × $1,066) Gross profit
$63,000 37,310 $25,690
Inventory Balance: 30 units at $1,040 = $31,200 b. FIFO method. This method assumes that the first units purchased are the first units sold. Sales COGS Gross Profit
$63,000 30 units × $1,040 = 5 units × $1,066 =
$31,200 5,330
36,530 $26,470
Inventory Balance: 30 units at $1,066 = $31,980 LIFO reserve: FIFO – LIFO inventory = $31,980 – $31,200 = $780 ©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-79
Topic: LIFO, FIFO, and Weighted-Average Cost LO: 2, 3 5. A summary of inventory records for Bousfield Company, which uses a periodic inventory system, reveals the following: Inventory on January 1, 2019 Inventory purchased in 2019 Total cost of goods available for sale in 2019
30 units @ $900 each $ 27,000 20 units @ $1,290 each 25,800 50 units $52,800
During 2019, 35 units were sold at $1,800 per unit for total sales revenue of $63,000. Compute cost of goods sold, gross profit, and the inventory balance for the current period under FIFO, LIFO, and weighted-average cost methods. Answer: FIFO assumes that the first units purchased are the first units sold. Sales Cost of goods sold (30 × $900) + (5 × $1,290) Gross profit
$63,000 33,450 $29,550
FIFO inventory balance: 15 units at $1,290 = $ 19,350 LIFO assumes that the last units purchased are the first units sold. Sales Cost of goods sold (20 × $1,290) + (15 × $900) Gross profit
$63,000 39,300 $23,700
LIFO inventory valance: 15 units at $900 = $13,500 Weighted-average cost assumes that all units are sold without regard to any order in which they are purchased. Weighted-average cost per unit: $52,800 / 50 = $1,056 Sales Cost of goods sold (35 × $1,056) Gross profit
$63,000 36,960 $26,040
Weighted-average cost inventory balance: 15 units at $1,056 = $15,840
©Cambridge Business Publishers, 2020 6-80
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Inventory Turnover and Transportation Costs LO: 1, 5 6. The following data are excerpted from Belpre Co.’s 2019 financial statements (in millions): Assets
2019
Cash & cash equivalents Accounts receivable, net Inventories
$ 6,261 7,488 20,367
2018 $
1,329 7,581 21,747
Other current assets
2,031
642
Total current assets
$36,147
$31,299
2019
2018
$190,005 160,027 $ 29,978
$177,102 148,369 $ 28,733
Net sales Cost of sales Gross profit Vienna’s inventory footnote follows:
Inventories Inventories are valued on a lower of last-in, first-out (LIFO) cost or market basis. At August 31, 2019 and 2018, inventories would have been greater by $3,717 million and $3,201 million, respectively, if they had been valued on a lower of first-in, first-out (FIFO) cost or market basis. Inventory includes product cost, inbound freight, warehousing costs and vendor allowances that are not included as a reduction of advertising expense. a. Compute the inventory turnover ratios for 2019 and 2018 (ending inventory in 2017 is $20,373 million). What does this say about the company? b. Is it correct to include in-bound freight in Belpre’s inventory cost? Why or why not? Answer: a. 2019: $160,027 / (($20,367 + $21,747) / 2) = 7.60 2018: $148,369 / (($21,747 + $20,373) / 2) = 7.05 Belpre appears to be doing well in controlling its inventory despite the increase in Cost of Goods Sold as a percent of sales. b. Yes, it is correct under GAAP to include any costs associated with securing ownership of the asset. If purchasing the inventory involved any fees or taxes, that too would become part of the asset’s cost.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-81
Topic: Inventory Errors LO: 3 7. A firm’s operating figures for three successive periods are shown below: Period Sales Beginning Inventory Net Cost of Purchases Cost of Goods Available for Sale Ending Inventory Cost of Goods Sold
(1) $120,000 $ 24,000 82,000 $106,000 30,000 $ 76,000
(2) $126,000 $ 30,000 78,000 $108,000 34,000 $ 74,000
(3) $122,000 $ 34,000 72,000 $106,000 32,000 $ 74,000
Gross Profit
$ 44,000
$ 52,000
$ 48,000
Assuming the following errors were made, compute the correct amount of gross profit for each period. Period 1 2 Correct gross profit:
Error in Ending Inventory Overstated $2,000 Understated $6,000
Period 1: $________ Period 2: $________ Period 3: $________
Answer: Period 1: $42,000 ($44,000 – $2,000) Period 2: $60,000 ($52,000 + $2,000 + $6,000) Period 3: $42,000 ($48,000 – $6,000)
©Cambridge Business Publishers, 2020 6-82
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Inventory Costing Methods Periodic System LO: 2 8. Willowbrook Company, which uses the periodic inventory system, has the following records for 2019:
Beginning inventory Purchases:
Units 100 40 62 35 13 250
February 8 June 15 August 22 November 29
Unit Cost $252 264 255 261 270
Total $25,200 10,560 15,810 9,135 3,510 $64,215
Ending inventory at December 31 is 108 units. Compute the cost of the ending inventory and the cost of goods sold using the following methods: a. FIFO b. Weighted-average c. LIFO Answer: a. FIFO: Units
Ending inventory
13 35 60 108
Cost @ @ @
Cost of goods available for sale Less: Ending inventory Cost of goods sold
$270 261 255
Total = = =
$ 3,510 9,135 15,300 $27,945
$64,215 27,945 $36,270
b. Weighted-average: Cost of goods available for sale / Total units available for sale = $64,215 / 250 = $256.86 Average unit cost Ending inventory = 108 units x $256.86 = $27,740.88 Cost of goods available for sale Less: Ending Inventory Cost of goods sold c.
$64,215.00 27,740.88 $36,474.12
LIFO: Units
Ending inventory
100 8 108
Cost of goods available for sale Less: Ending inventory Cost of goods sold
Cost @ @
$252 264
Total = =
$25,200 2,112 $27,312
$64,215 27,312 $36,903
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-83
Topic: Inventory Costing Methods Periodic System LO: 2 9. Karin Company, which uses the periodic inventory system, has the following records for 2019:
Beginning inventory Purchases:
Units
Unit Cost
60 25 55 20 40
$80 84 88 90 92
March 6 July 12 August 19 October 27
Ending inventory at December 31 is 80 units. Compute the cost of the ending inventory and the cost of goods sold using the following methods: a. FIFO b. Weighted-average c. LIFO Answer: a. FIFO: Units
Ending inventory
40 20 20 80
Cost @ @ @
$92 90 88
Cost of goods available for sale Less: Ending inventory Cost of goods sold
Total = = =
$3,680 1,800 1,760 $7,240
$17,220 7,240 $9,980
b. Weighted-average: Cost of goods available for sale/Total units available for sale = $17,220 / 200 = $86.10 Average unit cost Ending inventory = 80 units x $86.10 = $6,888 Cost of goods available for sale Less: Ending inventory Cost of goods sold c.
$17,220 6,888 $10,332
LIFO: Units
Ending inventory
60 20 80
Cost of goods available for sale Less: Ending inventory Cost of goods sold
Cost @ @
$80 84
Total = =
$4,800 1,680 $6,480
$17,220 6,480 $10,740
©Cambridge Business Publishers, 2020 6-84
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Inventory Analysis LO: 5, 7 10. The following are the income statement, the assets section of the balance sheet, and inventory disclosures from Carl’s Toys, a toy manufacturer, for 2019. For the Year STATEMENTS OF OPERATIONS
2019
2018
2017
(In thousands) Net sales Cost of sales Gross profit Advertising expenses Other selling expenses Operating income Interest expense Interest (income) Other non-operating expense (income) Income before income taxes Provision for income taxes Net income
$10,860 5,432 5,428 1,218 2,748 1,462 144 (16) 14 1,320 262 $ 1,058
$11,836 6,468 5,368 1,438 2,846 1,084 164 (50) (6) 976 216 $ 760
$11,940 6,383 5,557 1,418 2,677 1,462 142 (66) (21) 1,407 207 $ 1,200
ASSETS (In thousands) Current Assets Cash and equivalents Accounts receivable, less allowance Inventories Prepaid expenses and other current assets Total Current Assets Property, plant, and equipment, net Goodwill Other noncurrent assets Total Assets
Dec. 31, 2019
Dec. 31, 2018
$2,234 1,501 712 666 5,113 1,010 1,657 1,786 $9,566
$1,236 1,748 972 820 4,776 1,072 1,632 1,872 $9,352
Inventories Inventories, net of an allowance for excess quantities and obsolescence, are stated at the lowerof-cost-or-net realizable value . Cost is determined by the first-in, first-out method. Required: a. Compute the inventory turnover for both 2019 and 2018. The 2017 ending inventories balance was $856 (thousand). Interpret and explain the change in inventory turnover as a positive or a negative for the company. b. Compute the days’ sales in inventory for both 2019 and 2018. Discuss what this measures and the importance of this measurement in analyzing company performance. c.
What inventory costing method does Carl’s Toys use? Is there any adjustment required to Carl’s Toys’ balance sheet amount of inventories for a LIFO reserve? Describe why such an adjustment is needed or not needed for Foster Toys.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-85
Answer: a. Inventory turnover = COGS / Average inventory 2019 = $5,432 / (($712 + $972) / 2) = 6.45 2018 = $6,468 / (($972 + $856) / 2) = 7.08 Carl’s Toys’ inventory turnover decreased slightly from 2018 to 2019. This small change is generally not viewed as a problem, although the turnover should be monitored to be sure there are no underlying problems. A more detailed analysis as to what exactly caused the decreased inventory turnover rate would be helpful for management. b. Days’ sales in inventory = 365 / Inventory turnover: 2019 = 365 / 6.45 = 56.6 2018 = 365 / 7.08 = 51.6 Days’ sales in inventory is a measurement of how long, on average, inventories are on the shelves before being sold. In analyzing company performance, this measurement is important to determine if a company is optimizing its inventory levels while using the most cost efficient supply chains and management systems in place to reach this optimum level of inventory. The measurement can truly add some insight into a company’s performance for future periods. An increase in days’ sales in inventory is generally viewed as a negative development for the firm because its inventory is turning slower, which does not indicate good inventory control. c.
Carl’s Toys uses FIFO costing method as stated in the note disclosure. Carl’s Toys is not required to have an adjustment to its balance sheet amount of inventory because it currently costs inventory using the FIFO inventory costing method. A restatement from FIFO to LIFO isn’t a requirement. An adjustment would be required if Carl’s Toys used LIFO costing method, that disclosed the amount to adjust inventories to the FIFO method.
©Cambridge Business Publishers, 2020 6-86
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Lower-of-Cost-or-Net Realizable Value Method LO: 4 11. Calvin Company had the following inventory at December 31, 2019.
Quantity
Unit Price Cost NRV
Calculators Model R Model S Model T
250 200 400
72 90 114
$78 87 105
MP3 players Model A Model B Model C
150 180 60
96 120 147
93 126 141
Determine the ending inventory amount by applying the lower-of-cost-or-net realizable value method to: a. Each item of inventory b. Each major category of inventory c. The total inventory Answer: a. Lower-of-cost-or-net realizable value for each inventory item: Calculators Model R: 250 x $72 = $18,000 Model S: 200 x $87 = $17,400 Model T: 400 x $105 = $42,000 Subtotal $77,400 MP3 players Model A: 150 x $93 = $ 13,950 Model B: 180 x $120 = $21,600 Model C: 60 x $141 = $ 8,460 Subtotal $44,010 Total $121,410 b. Calculators Cost Model R: (250 units) $18,000 Model S: (200 units) 18,000 Model T: (400 units) 45,600 Subtotal $81,600
NRV $19,500 17,400 42,000 $78,900
MP3 players Model A: (150 units) $14,400 Model B: (180 units) 21,600 Model C: (60 units) 8,820 Subtotal $44,820 Total $126,420
$ 13,950 22,680 8,460 $45,090 $123,990
Lower-of-cost-or-net realizable value by each major category of inventory is $78,900 + $44,820 = $123,720 c.
Lower-of-cost-or-net realizable value for the total inventory is $123,990 (computations in part b)
©Cambridge Business Publishers, 2020 Test Bank, Chapter 6
6-87
Chapter 7 Internal Control and Cash Learning Objectives – Coverage by question True / False LO1 – Define the three elements of fraud.
1
LO2 – Discuss how the COSO framework helps prevent fraud, identify potential internal control failures, and discuss SOX regulations.
2, 3
LO3 – Define cash and discuss the accounting for cash.
Multiple Choice
Exercises
1-5, 8, 33, 34
9-11, 15, 16, 20-24, 29-31, 47-52
LO4 – Describe the internal controls for cash.
6, 8, 9
4, 6-8,
LO5 – Illustrate the bank reconciliation process.
4, 5, 7
9, 11-32, 35-52
LO6 – Describe the four primary activities of effective cash management.
10
LO7 – Appendix 7A: Describe financial statement audits and operational audits.
11
Problems
3
1-3
1
©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-1
Chapter 7: Internal Control and Cash
True / False Topic: Fraud LO: 1 1. The three elements that are almost always present when a fraud occurs are pressure, rationalization and concealment. Answer: False Rationale: Research has shown that three elements are almost always present when a fraud occurs. These elements are often referred to as the fraud triangle and include (1) a perceived pressure, (2) some way to rationalize the fraudulent act, and (3) a perceived opportunity. Topic: Internal Control LO: 2 2. Requiring employees to take vacations is an example of a good internal accounting control feature. Answer: True Rationale: Requiring employees to take vacations of at least one week in duration may also disclose errors or irregularities when another employee performs the vacationing employee’s duties. This personnel policy acts as a detection control. Topic: Segregation of Duties LO: 2 3. Good internal accounting control requires that the person handling cash should also make any related journal entries so that responsibility for cash can be assigned to one person. Answer: False Rationale: Segregation of duties requires that when allocating various duties within the accounting system, management should make sure that no employee is assigned too many different responsibilities. As a general rule, no individual employee should be able to perpetrate and conceal irregularities in the transaction processing system. To accomplish this, management must separate three functions: the authorization function, the recording function, and the custody function. Topic: Bank Reconciliations LO: 5 4. At the end of an accounting period, the “cash balance per bank statement” on that date is usually the proper cash amount to show on the balance sheet. Answer: False Rationale: The reconciled cash balance computed through the bank reconciliation procedure is the cash amount that appears on a company’s balance sheet.
©Cambridge Business Publishers, 2020 7-2
Financial Accounting for Undergraduates, 4th Edition
Topic: Outstanding Checks LO: 5 5. Outstanding checks are checks a company has written and recorded as cash disbursements that have not yet been presented to the bank for payment. Answer: True Rationale: Checks a company has written and recorded as cash disbursements that have not yet been presented to the bank for payment are called outstanding checks. Topic: Petty Cash LO: 4 6. It is efficient, less costly, to pay small bills each day with cash available from a petty cash fund. Answer: True Rationale: Most businesses find it inconvenient and expensive to write checks for small expenditures. Instead, these businesses establish a petty cash fund. A petty cash fund is a small amount of cash that is placed in a secure location on a business’s premises to be used to pay for small expenditures such as postage, delivery service charges, and minor purchases of supplies. Topic: Bank Reconciliation LO: 5 7. Journal entries are required for all adjustments to the “cash balance per bank statement” in a bank reconciliation, Answer: False Rationale: Deposits in transit and outstanding checks are not reflected in the cash balance per bank statement, but they do not require a journal entry, since they have already been recorded in the ending balance on the cash account in the general ledger. Topic: Internal Controls for Cash LO: 4 8. Good internal accounting control over cash includes depositing all cash receipts in the bank each day. Answer: True Rationale: Cash may be received on account (check) or from retail sales. For cash received by check, the mailroom’s duties include: endorsing the checks and sending them to the treasurer. For retail sales, the retail sales supervisor’s duties include: sending a prepared written report of sales and cash received to the treasurer along with the cash. The treasurer’s duties include: preparing a deposit slip for the cash and checks and sending these items to the bank each day.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-3
Topic: Petty Cash LO: 4 9. Disbursements from a petty cash fund should be made with checks that are prenumbered. Answer: False Rationale: Petty Cash is an example of cash on hand that is used for small disbursements and is maintained at the company. Although the use of a petty cash fund violates the rule that all cash payments should be made by check or EFT, control can be maintained by handling the fund on an imprest basis with documented procedures. A business establishes a petty cash fund by writing a check against the firm’s checking account and cashing the check at the bank. All replenishments of the petty cash fund are also made by check. As a result, all expenditures are ultimately controlled by check, providing a paper trail of all cash transfers to the petty cash fund. Topic: Effective Cash Management LO: 6 10. The most effective tool for external parties to monitor a company’s cash is the income statement. Answer: False Rationale: The most effective tool for external parties to monitor a company’s cash is the statement of cash flows. Topic: Operational Audits LO: 7 11. An operational audit is an examination of a company’s annual financial statements by a firm of independent certified public accountants. Answer: False Rationale: An operational audit is an evaluation of activities, systems, and internal controls within a company to determine their efficiency, effectiveness, and economy. Operational auditing goes beyond accounting records and financial statements to obtain a full understanding of the operations of a company. Companies dedicated to continuous quality improvement often use operational audits to identify specific areas where they need to improve the quality of their operations or products.
©Cambridge Business Publishers, 2020 7-4
Financial Accounting for Undergraduates, 4th Edition
Multiple Choice Topic: COSO Framework LO: 2 Level of Difficulty: EASY 1. Which of the following is not an internal control component identified in the COSO framework: A) Risk assessment B) Monitoring activities C) Technology D) Control environment Answer: C Rationale: The COSO framework identifies five internal control components: (1) the control environment, (2) risk assessment, (3) control activities, (4) information and communication, and (5) monitoring activities. Topic: Internal Control LO: 2 Level of Difficulty: EASY 2. Which of the following is desirable in a good system of internal accounting control? A) Responsibility and authority for a given function should be shared among several employees B) Appropriate forms, such as checks and sales invoices, should have preprinted control numbers C) All accounting personnel in a firm should be bonded D) To obtain the benefit of specialization, employees should not be rotated among similar jobs Answer: B Rationale: The use of control numbers on all business documents as a detection control enabling a business to track each check written. Responsibilities should not be shared. The organizational structure of a company defines the lines of authority and responsibility within the company. It informs employees about who is in charge of which functions and to whom each person reports. Requiring job rotation and vacations allows another employee to perform these job responsibilities, often leading to the discovery of fraud. There is no requirement that personnel in a firm should be bonded. Topic: Segregation of Duties LO: 2 Level of Difficulty: EASY 3. Which of the following is a poor internal accounting control feature? A) Segregation of duties. B) Combining authorization with custodianship. C) Rotation of personnel. D) Internal auditing. Answer: B Rationale: Segregation of duties requires that when allocating various duties within the accounting system, management should make sure that no employee is assigned too many different responsibilities. As a general rule, no individual employee should be able to perpetrate and conceal irregularities in the transaction processing system. To accomplish this, management must separate three functions: the authorization function, the recording function, and the custody function.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-5
Topic: Internal Controls for Cash LO: 2, 4 Level of Difficulty: EASY 4. Procedures requiring that the recording of asset transactions be separated from the custody of those assets: A) Will uncover collusion among employees B) Are important only in very large businesses C) Are especially important in handling cash D) Make it easy for an employee to cover up the theft of an asset Answer: C Rationale: Segregation of duties requires that when allocating various duties within the accounting system, management should make sure that no employee is assigned too many different duties. Most companies develop elaborate internal controls to protect their cash because it is their most liquid asset, and in all likelihood, an important operating asset. Cash is highly desirable, easily taken and concealed, and quickly converted into other assets. Topic: Internal Control LO: 2 Level of Difficulty: EASY 5. In establishing an effective internal control structure, management should: A) Establish a good control environment. B) Provide an effective accounting system. C) Integrate control procedures into the control environment and accounting system. D) All of the above. Answer: D Rationale: The control environment sets the tone of the organization. The accounting system represents a cornerstone of the control environment that is necessary to reduce the opportunity for, and success of, fraudulent behavior. Topic: Internal Controls for Cash LO: 4 Level of Difficulty: MEDIUM 6. From the viewpoint of good internal accounting control, which of the following individuals would be the proper person to prepare bank reconciliations for a company that receives cash payments both through the mail and from customers in person? A) The individual who opens the company’s mail and lists the payments received B) The individual who works in the customer service department and receives payments from customers who pay in person C) The individual who deposits the daily cash receipts in the bank D) None of the above Answer: D Rationale: Internal audit is an independent department; it has no recurring custody, recording, or authorization duties related to accounting transactions and therefore should prepare the monthly bank reconciliation and create any needed journal entries.
©Cambridge Business Publishers, 2020 7-6
Financial Accounting for Undergraduates, 4th Edition
Topic: Internal Controls for Cash LO: 4 Level of Difficulty: EASY 7. Which of the following features should not be included in a good system of internal accounting control over cash? A) All receipts are deposited daily in the bank. B) All major disbursements are made by check, and an imprest fund is used for petty cash disbursements. C) Cash handling is separated from the recording of cash transactions. D) Monthly bank reconciliations are prepared by the person who makes the daily bank deposits. Answer: D Rationale: Internal audit is an independent department; it has no recurring custody, recording, or authorization duties related to accounting transactions and therefore should prepare the monthly bank reconciliation and create any needed journal entries. Topic: Internal Controls for Cash LO: 2, 4 Level of Difficulty: EASY 8. Which of the following is not a feature of good internal accounting control over cash? A) All cash receipts are deposited in the bank each day. B) Most bills are paid with paper currency and coins to minimize the bank service charges. C) A bank reconciliation is prepared when each bank statement is received. D) Cash is handled separately from the recording of cash transactions. Answer: B Rationale: Payments should be made using checks, which have control numbers, referred to as a check number, preprinted on them. Each control number should be unique for that type of document. These numbers are a detection control enabling a firm to track each check written, and to ensure that no one has written an improper check against their account. Topic: Cash Balance LO: 3, 5 Level of Difficulty: EASY 9. The Cash amount properly shown on the year-end balance sheet is the A) Balance in the general ledger account before the year-end bank reconciliation B) Balance per the year-end bank statement C) Balance per the year-end bank statement less deposits in transit and plus outstanding checks D) Balance in the general ledger account after entries from the year-end bank reconciliation have been posted Answer: D Rationale: The cash amount properly shown on the year-end balance sheet is the general ledger account balance, after the year-end bank reconciliation has been completed.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-7
Topic: Reporting Cash LO: 3 Level of Difficulty: EASY 10. A compensating balance refers to: A) The minimum balance established for a petty cash fund B) A minimum balance that a financial institution requires a firm to maintain in its account as part of a borrowing arrangement C) The final cash balance achieved in a bank reconciliation D) The amount of cash invested temporarily in highly marketable securities Answer: B Rationale: A compensating balance is a minimum cash balance that a bank requires a firm to maintain in its bank account as part of a borrowing arrangement. Topic: Bank Reconciliation LO: 3, 5 Level of Difficulty: EASY 11. The following journal entry is necessary upon discovery of a “NSF” check during a bank reconciliation: A) Accounts Receivable Cash B) Not Sufficient Funds Expense Cash C) Miscellaneous Expense Cash D) No entry is necessary because the bank makes the entry. Answer: A Rationale: An NSF check, is a check from an individual or company that had an insufficient cash balance in the bank when the holder of the check presented it to the bank for payment. The original entry recorded when the check was received from the customer was a debit to Cash and a credit to Accounts Receivable. This entry needs to be reversed with a debit to Accounts Receivable and a credit to Cash. Topic: Bank Reconciliation LO: 5 Level of Difficulty: EASY 12. At May 31, Michaelis Company has outstanding checks totaling $19,600. The bank reconciliation for May should show these checks as a(n): A) Deduction from balance per bank statement B) Addition to balance per bank statement C) Addition to balance per general ledger D) Deduction from balance per general ledger Answer: A Rationale: Outstanding checks are checks not yet recorded by the bank. They must be deducted from the balance per the bank statement to reconcile to the ending balance in the cash account in the general ledger.
©Cambridge Business Publishers, 2020 7-8
Financial Accounting for Undergraduates, 4th Edition
Topic: Bank Reconciliation LO: 5 Level of Difficulty: EASY 13. Third Montana Bank collected a note for Nicole Company. This collection, not yet recorded in Nicole’s books, appears on the bank reconciliation as a(n): A) Addition to balance per general ledger B) Deduction from balance per bank statement C) Addition to balance per bank statement D) Deduction from balance per general ledger Answer: A Rationale: The collection of the note, recorded as a cash receipt by the bank, but not yet recorded by Nicole Company, must be added to the general ledger cash account balance, in order to reconcile to the bank statement. Topic: Bank Reconciliation LO: 5 Level of Difficulty: EASY 14. Which of the following bank reconciliation items should not be added to or subtracted from the bank statement balance to determine the reconciled cash balance? A) Outstanding checks B) Deposits in the mail but not yet received by the bank C) Bank service charges D) None of the above Answer: C Rationale: A bank service charge should not be added to or subtracted from the bank statement balance to determine the reconciled cash balance, because it is already reflected in the bank statement balance. Topic: Bank Reconciliation LO: 3, 5 Level of Difficulty: EASY 15. Which of the following items would you add to the Flitter Company’s bank statement balance to arrive at the reconciled cash balance in a bank reconciliation: A) Bank service charges B) Outstanding and “NSF” checks C) “NSF” checks Bank collection charges D) None of the above Answer: D Rationale: To arrive at the reconciled cash balance in a bank reconciliation, you would add deposits in transit and any corrections to the bank statement balance.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-9
Topic: Bank Reconciliation LO: 3, 5 Level of Difficulty: EASY 16. Which of the following would you add to the balance per general ledger to arrive at the reconciled cash balance in a bank reconciliation? A) Bank service charge B) Collection of a note by bank C) “NSF” checks D) Deposits in transit Answer: B Rationale: A collection of a note by bank would be added to the balance per general ledger, to arrive at the reconciled cash balance, in a bank reconciliation, because it has not yet been recorded in the general ledger. Topic: Bank Reconciliation LO: 5 Level of Difficulty: EASY 17. Which of the following would you deduct from the bank statement balance to arrive at the reconciled cash balance in a bank reconciliation: A) Bank service charges B) Deposits in transit C) “NSF” checks D) Outstanding checks Answer: D Rationale: To arrive at the reconciled cash balance in a bank reconciliation, you would deduct outstanding checks from the bank statement balance, since they have not yet been recorded by the bank. Topic: Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 18. In reconciling the January bank statement, the vice president discovered that the bookkeeper had recorded a check written for $681 as $816 in the cash disbursements journal. For the bank reconciliation, the $135 error should be: A) Added to balance per bank statement B) Added to balance per general ledger C) Deducted from balance per bank statement D) Deducted from balance per general ledger Answer: B Rationale: In order to reconcile to the bank statement, the $135 error should be added to the general ledger cash account balance, since $135 less was disbursed, than was recorded.
©Cambridge Business Publishers, 2020 7-10
Financial Accounting for Undergraduates, 4th Edition
Topic: Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 19. In reconciling the September bank statement, the vice president discovered that the bookkeeper had recorded a check written for $438 as $483 in the cash disbursements journal. For the bank reconciliation, the $45 error should be: A) Added to balance per bank statement B) Added to balance per general ledger C) Deducted from balance per bank statement D) Deducted from balance per general ledger Answer: B Rationale: In order to reconcile to the bank statement, the $45 error should be added to the general ledger cash account balance, since $45 less was disbursed, than was recorded. Topic: Bank Reconciliation LO: 3, 5 Level of Difficulty: EASY 20. Watkis Company received its February bank statement, which included a memo indicating that the check of Sarah Company for $652 had been returned as “NSF.” Watkis’ bank reconciliation should list this check as a(n): A) Addition to balance per bank statement B) Deduction from balance per bank statement C) Addition to balance per general ledger D) Deduction from balance per general ledger Answer: D Rationale: In order to reconcile to the bank statement, the $652 non-sufficient-funds (NSF) check should be subtracted from the general ledger cash account balance, since $652 less was added to the bank account balance, than was recorded in the general ledger. Topic: Bank Reconciliation LO: 3, 5 Level of Difficulty: MEDIUM 21. The following information pertains to Mateo Company: Cash balance per bank statement Cash balance per general ledger Bank service charge Deposits in transit to bank Outstanding checks NSF check returned by bank
$21,525 22,620 60 2,700 1,965 300
Mateo should show the following reconciled cash balance from the bank reconciliation on its balance sheet: A) $20,310 B) $25,335 C) $22,260 D) $24,165 Answer: C Rationale: $21,525 balance per bank statement + $2,700 deposits in transit - $1,965 outstanding checks = $22,260. $22,620 balance per general ledger - $60 service charge - $300 NSF check = $22,260. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-11
Topic: Bank Reconciliation LO: 3, 5 Level of Difficulty: MEDIUM 22. The following information pertains to Julianna Company: Cash balance per bank statement Cash balance per general ledger Bank service charge Deposits in transit to bank Outstanding checks NSF check returned by bank
$28,700 30,160 80 3,600 2,620 400
Julianna should show the following reconciled cash balance from the bank reconciliation on its balance sheet: A) $27,080 B) $33,780 C) $29,680 D) $32,220 Answer: C Rationale: $28,700 balance per bank statement + $3,600 deposits in transit - $2,620 outstanding checks = $29,680. $30,160 balance per general ledger - $80 service charge - $400 NSF check = $29,680. Topic: Bank Reconciliation LO: 3, 5 Level of Difficulty: MEDIUM 23. The following information pertains to the Juniper Company: Cash balance per bank statement Cash balance per general ledger Bank service charge Deposits in transit to bank Outstanding checks NSF check returned by bank
$23,250 22,005 75 1,125 2,955 510
Juniper should show the following reconciled cash balance from the bank reconciliation on its balance sheet: A) $21,420 B) $21,930 C) $24,375 D) $19,995 Answer: A Rationale: $23,250 balance per bank statement + $1,125 deposits in transit - $2,955 outstanding checks = $21,420. $22,005 balance per books - $75 service charge - $510 NSF check = $21,420.
©Cambridge Business Publishers, 2020 7-12
Financial Accounting for Undergraduates, 4th Edition
Topic: Bank Reconciliation LO: 3, 5 Level of Difficulty: MEDIUM 24. The following information pertains to the Simran Company: Cash balance per bank statement Cash balance per general ledger Bank service charge Deposits in transit to bank Outstanding checks NSF check returned by bank
$31,000 29,340 100 1,500 3,940 680
Simran should show the following reconciled cash balance from the bank reconciliation on its balance sheet: E) $28,560 F) $29,240 G) $32,500 H) $26,660 Answer: A Rationale: $31,000 balance per bank statement + $1,500 deposits in transit - $3,940 outstanding checks = $28,560. $29,340 balance per books - $100 service charge - $680 NSF check = $28,560. Topic: Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 25. Cyprus, Inc.’s June bank statement shows a June 30 balance of $27,150. Prior to reconciliation, its books show a cash balance of $27,630. The information below pertains to Cyprus: Deposits in transit Checks outstanding Bank service charges Error in Cyprus’s records overstating cash disbursement Check of another company charged erroneously against Cyprus, Inc.’s bank account Bank statement shows bank collected a note receivable and interest income for Cyprus, Inc.
$2,100 1,440 60 270 750 720
The reconciled cash balance at June 30 on the bank reconciliation should be: A) $30,300 B) $28,560 C) $28,020 D) $27,810 Answer: B Rationale: $27,150 balance per bank statement + $2,100 deposits in transit - $1,440 outstanding checks + $750 bank error correction = $28,560. $27,630 balance per books - $60 service charge + $270 company error correction + $720 collection of note receivable and interest income = $28,560.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-13
Topic: Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 26. Athens, Inc.’s June bank statement shows a June 30 balance of $36,200. Prior to reconciliation, its books show a cash balance of $36,840. The information below pertains to Athens: Deposits in transit Checks outstanding Bank service charges Error in Athens’ records overstating cash disbursement Check of another company charged erroneously against Athens, Inc.’s bank account Bank statement shows bank collected a note receivable and interest income for Athens, Inc.
$2,800 1,920 80 360 1,000 960
The reconciled cash balance at June 30 on the bank reconciliation should be: A) $40,400 B) $38,080 C) $37,360 D) $37,080 Answer: B Rationale: $36,200 balance per bank statement + $2,800 deposits in transit - $1,920 outstanding checks + $1,000 bank error correction = $38,080. $36,840 balance per books - $80 service charge + $360 company error correction + $960 collection of note receivable and interest income = $38,080. Topic: Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 27. Marathon, Inc.’s April bank statement shows an April 30 balance of $15,360. Prior to reconciliation, its books show a cash balance of $16,530. The information below pertains to Marathon, Inc. Deposits in transit Checks outstanding Bank service charge Error in Marathon’s records understating cash disbursement Check of another company charged erroneously against Marathon’s bank account Bank statement shows bank collected a note receivable and interest income for Marathon
$2,400 1,395 30 540 345 750
The reconciled cash balance at April 30 on the bank reconciliation should be: A) $18,105 B) $14,010 C) $16,365 D) $16,710 Answer: D Rationale: $15,360 balance per bank statement + $2,400 deposits in transit - $1,395 outstanding checks + $345 bank error correction = $16,710. $16,530 balance per books - $30 service charge - $540 company error correction + $750 collection of note receivable and interest income = $16,710. ©Cambridge Business Publishers, 2020 7-14
Financial Accounting for Undergraduates, 4th Edition
Topic: Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 28. Keyser, Inc.’s April bank statement shows an April 30 balance of $20,480. Prior to reconciliation, its books show a cash balance of $22,040. The information below pertains to Keyser, Inc. Deposits in transit Checks outstanding Bank service charge Error in Keyser’s records understating cash disbursement Check of another company charged erroneously against Keyser’s bank account Bank statement shows bank collected a note receivable and interest income for Keyser
$3,200 1,860 40 720 460 1,000
The reconciled cash balance at April 30 on the bank reconciliation should be: A) $24,140 B) $18,680 C) $21,820 D) $22,280 Answer: D Rationale: $20,480 balance per bank statement + $3,200 deposits in transit - $1,860 outstanding checks + $460 bank error correction = $22,280. $22,040 balance per books - $40 service charge - $720 company error correction + $1,000 collection of note receivable and interest income = $22,280. Topic: Bank Reconciliation LO: 3, 5 Level of Difficulty: MEDIUM 29. In preparing its bank reconciliation at March 31, Valley Company has the following information: Cash balance per bank statement Cash balance per general ledger Deposits in transit Outstanding checks Deposit erroneously recorded by bank in Valley’s account on March 12 Bank service charges for March NSF check returned by bank
$111,150 114,000 17,250 17,250 750 150 3,450
What is the proper cash balance at March 31 for balance sheet purposes? A) $107,250 B) $110,250 C) $110,400 D) $111,150 Answer: C Rationale: $111,150 balance per bank statement + $17,250 deposits in transit - $17,250 outstanding checks - $750 bank error correction = $110,400. $114,000 balance per books - $150 service charge - $3,450 NSF check = $110,400.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-15
Topic: Bank Reconciliation LO: 3, 5 Level of Difficulty: MEDIUM 30. In preparing its bank reconciliation at March 31, Mountainview Company has the following information: Cash balance per bank statement Cash balance per general ledger Deposits in transit Outstanding checks Deposit erroneously recorded by bank in Mountainview’s account on March 12 Bank service charges for March NSF check returned by bank
$148,200 152,000 23,000 23,000 1,000 200 4,600
What is the proper cash balance at March 31 for balance sheet purposes? A) $143,000 B) $147,000 C) $147,200 D) $148,200 Answer: C Rationale: $148,200 balance per bank statement + $23,000 deposits in transit - $23,000 outstanding checks - $1,000 bank error correction = $147,200. $152,000 balance per books - $200 service charge - $4,600 NSF check = $147,200. Topic: Bank Reconciliation LO: 3, 5 Level of Difficulty: EASY 31. After completing a bank reconciliation, you are preparing journal entries to agree the New Horizons Company’s Cash account balance with the reconciled balance shown on the reconciliation. Which of the following requires a journal entry? A) Deposits in transit at the end of the period B) Outstanding checks at the end of the period C) An error by the bank in recording one of the firm’s deposits D) An “NSF” check Answer: D Rationale: An NSF check, is a check from an individual or company that had an insufficient cash balance in the bank when the holder of the check presented it to the bank for payment. The original entry recorded when the check was received from the customer was a debit to Cash and a credit to Accounts Receivable. This entry needs to be reversed with a debit to Accounts Receivable and a credit to Cash.
©Cambridge Business Publishers, 2020 7-16
Financial Accounting for Undergraduates, 4th Edition
Topic: Bank Reconciliation LO: 5 Level of Difficulty: EASY 32. After completing a bank reconciliation, you are preparing journal entries to agree the Yankee Company’s Cash account balance with the reconciled balance shown on the reconciliation. Which of the following requires a journal entry? A) Service charges for the period B) Outstanding checks at the end of the period C) Deposits in transit at the end of the period D) An error by the bank in recording one of the firm’s deposits Answer: A Rationale: A service charge from the bank is a charge not yet recorded by the Yankee Company. A service charge must be recorded as a reduction in the cash balance and as an expense. Topic: Internal Audit LO: 2 Level of Difficulty: EASY 33. Internal auditing is a company function that: A) Audits the firm’s financial statements and expresses an opinion on them B) Provides independent appraisals of the company’s financial statements, its internal control, and its operations C) Prepares the firm’s income tax returns D) All of the above Answer: B Rationale: Internal auditing is a company function that provides independent appraisals of the company’s internal statements, its internal control, and its operations. Topic: Internal Control Activities LO: 2 Level of Difficulty: EASY 34. Identify the principle of internal control that is violated in the following situation: Alexis Company is a very small business. Alexis Bailey, one of the two office clerks, opens the mail each day and removes the cash receipts that come in the mail. Alexis then records the receipts in the cash records and the customer's account and deposits the cash in the bank. A) B) C) D)
Insure assets and bond key employee Maintain adequate records Divide responsibility for related transactions. Perform regular and independent reviews
Answer: C Rationale: Segregation of duties, or dividing responsibility for related transactions, is a prevention control intended to deter an individual employee from being able to perpetrate and conceal irregularities in the transaction process.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-17
Topic: The Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 35. The bank statement reported an ending balance of $43,860 after deducting $660 in service charges and an addition of $13,500 for a note collected by the bank on the Cherokee Company's behalf. The company books reported an ending balance of $29,070, and determined that deposits in transit equal $16,800 and outstanding checks equal $18,750. What is the adjusted cash balance? A) $41,910 B) $16,800 C) $35,910 D) $21,120 Answer: A Rationale: $29,070 balance per books - $660 service charge + $13,500 note collected by the bank = $41,910 adjusted cash balance. $43,860 balance per bank statement + $16,800 deposits in transit - $18,750 outstanding checks = $41,910. Topic: The Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 36. The bank statement reported an ending balance of $58,480 after deducting $880 in service charges and an addition of $18,000 for a note collected by the bank on the Bandit Company's behalf. The company books reported an ending balance of $38,760, and determined that deposits in transit equal $22,400 and outstanding checks equal $25,000. What is the adjusted cash balance? A) $55,880 B) $22,400 C) $47,880 D) $28,160 Answer: A Rationale: $38,760 balance per books - $880 service charge + $18,000 note collected by the bank = $55,880 adjusted cash balance. $58,480 balance per bank statement + $22,400 deposits in transit - $25,000 outstanding checks = $55,880.
©Cambridge Business Publishers, 2020 7-18
Financial Accounting for Undergraduates, 4th Edition
Topic: The Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 37. In comparing the canceled checks on the bank statement with the entries in the accounting records, O’Brien Company found that check number 4239 for May's rent was correctly written and drawn for $9,855 but was erroneously entered in the accounting records as $9,585. When preparing the May bank reconciliation, the O’Brien Company should: A) Deduct $270 from the book balance of cash B) Add $270 to the bank statement balance C) Deduct $270 from the bank statement balance D) Add $270 to the book balance of cash Answer: A Rationale: In order to reconcile to the bank statement, the $270 error ($9,855 - $9,585) in recording check #4239 in the general ledger must be subtracted from the general ledger cash account balance, since $270 more was deducted from the bank account balance, than was deducted in the general ledger. Topic: The Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 38. In comparing the canceled checks on the bank statement with the entries in the accounting records, it is found that check number 4239 for May's rent was correctly written and drawn for $6,750 but was erroneously entered in the accounting records as $6,570. When preparing the May bank reconciliation, the Tammy Company should: A) Deduct $180 from the book balance of cash B) Add $180 to the bank statement balance C) Deduct $180 from the bank statement balance D) Add $180 to the book balance of cash Answer: A Rationale: In order to reconcile to the bank statement, the $180 error ($6,750 - $6,570) in recording check #4239 in the general ledger must be subtracted from the general ledger cash account balance, since $180 more was deducted from the bank account balance, than was deducted in the general ledger.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-19
Topic: The Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 39. During its year-end bank reconciliation, Farley Company finds that Check No. 951 was written for $124.05 on the books, but the check was written and cleared the bank for the correct amount, $142.05. The correct treatment on the bank reconciliation would be: A) On the bank side, deduct $18 from payments and add $18 to ending balance B) On the book side, deduct $18 from receipts and add $18 to ending balance C) On the book side, add $18 to payments and deduct $18 from ending balance D) On the bank side, add $18 to receipts and add $18 to ending balance Answer: C Rationale: In order to reconcile to the bank statement, the $18.00 error ($142.05 - $124.05) in recording check #951 in the general ledger must be subtracted from the general ledger cash account balance, (and $18.00 must be recoded as an expense [payment]), since $18.00 more was deducted from the bank account balance, than was deducted in the general ledger. Topic: The Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 40. During its year-end bank reconciliation, Red River Company finds that Check No. 951 was written for $49.70 on the books, but the check was written and cleared the bank for the correct amount, $94.70. The correct treatment on the bank reconciliation would be: A) On the bank side, deduct $45 from payments and add $45 to ending balance B) On the book side, deduct $45 from payments and add $45 to ending balance C) On the book side, add $45 to payments and deduct $45 from ending balance D) On the bank side, add $45 to receipts and add $45 to ending balance Answer: C Rationale: In order to reconcile to the bank statement, the $45.00 error ($94.70 - $49.70) in recording check #951 in the general ledger must be subtracted from the general ledger cash account balance, (and $45.00 must be recoded as an expense [payment]), since $45.00 more was deducted from the bank account balance, than was deducted in the general ledger. Topic: The Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 41. If the Cherry Creek Company’s accountant mistakenly records a deposit of $681 as $861, the error would be shown on the bank reconciliation statement as a: A) $180 deduction from the book balance B) $180 addition to the bank balance C) $180 addition to the book balance D) $180 deduction from the bank balance Answer: A Rationale: In order to reconcile to the bank statement, the $180 error ($861 - $681) in recording a deposit in the general ledger must be deducted from the general ledger cash account balance, since $180 less was added to the bank account balance, than was added in the general ledger.
©Cambridge Business Publishers, 2020 7-20
Financial Accounting for Undergraduates, 4th Edition
Topic: The Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 42. If the Four Corners Company’s accountant mistakenly records a deposit of $383 as $838, the error would be shown on the bank reconciliation statement as a: A) $455 deduction from the book balance B) $455 addition to the bank balance C) $455 addition to the book balance D) $455 deduction from the bank balance Answer: A Rationale: In order to reconcile to the bank statement, the $455 error ($838 - $383) in recording a deposit in the general ledger must be deducted from the general ledger cash account balance, since $455 less was added to the bank account balance, than was added in the general ledger. Topic: The Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 43. In preparing its June 30, 2019 bank reconciliation, a company has available the following information: Balance per bank statement, June 30 Deposit in transit, June 30 Return of customer’s check not sufficient funds Outstanding checks as of June 30 Bank service charges for June
$82,950 11,700 1,800 8,250 525
As of June 30, the company’s adjusted cash balance is: A) $66,600 B) $61,500 C) $66,300 D) $86,400 Answer: D Rationale: $82,950 balance per bank statement + $11,700 deposits in transit - $8,250 outstanding checks = $86,400 adjusted cash balance.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-21
Topic: The Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 44. In preparing its June 30, 2019 bank reconciliation, a company has available the following information: Balance per bank statement, June 30 Deposit in transit, June 30 Return of customer’s check not sufficient funds Outstanding checks as of June 30 Bank service charges for June
$110,600 15,600 2,400 11,000 700
As of June 30, the company’s adjusted cash balance is: A) $ 88,800 B) $ 82,000 C) $ 88,400 D) $115,200 Answer: D Rationale: $110,600 balance per bank statement + $15,600 deposits in transit - $11,000 outstanding checks = $115,200 adjusted cash balance. Topic: The Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 45. Carl Nickolas Company prepares bank reconciliations that adjust to the correct balance of cash, based on the following: Outstanding checks Note collected for Carl Nickolas by bank Bank service charges Check written for $482 incorrectly recorded in books at $428; check cleared the bank for $482 NSF check Unadjusted book balance Deposits in transit
$ 1,062 3,300 162 54 492 19,794 1,152
Determine the adjusted cash balance. A) $22,494 B) $23,448 C) $22,386 D) $21,324 Answer: C Rationale: $19,794 unadjusted book balance + $3,300 note collected by bank - $162 bank service charge - $54 incorrectly recorded check - $492 NSF check = $22,386 adjusted cash balance.
©Cambridge Business Publishers, 2020 7-22
Financial Accounting for Undergraduates, 4th Edition
Topic: The Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 46. Bash Bowling Company prepares bank reconciliations that adjust to the correct balance of cash, based on the following: Outstanding checks Note collected for Bash Bowling by bank Bank service charges Check written for $196 incorrectly recorded in books at $178; check cleared the bank for $196 NSF check Unadjusted book balance Deposits in transit
$ 354 1,100 54 18 164 6,598 384
Determine the adjusted cash balance. A) $7,498 B) $7,816 C) $7,462 D) $7,108 Answer: C Rationale: $6,598 unadjusted book balance + $1,100 note collected by bank - $54 bank service charge - $18 incorrectly recorded check - $164 NSF check = $7,462 adjusted cash balance. Topic: The Bank Reconciliation LO: 3, 5 Level of Difficulty: DIFFICULT 47. Windham Company developed the following reconciling information in preparing its September bank reconciliation: Cash balance per bank, 9/30 Note receivable collected by bank Outstanding checks Deposits-in-transit Bank service charge NSF check
$24,000 12,000 18,000 9,000 150 3,000
Using the above information, determine the cash balance per books (before adjustments) for Windham Company. A) $ 6,150 B) $24,000 C) $33,000 D) $17,550 Answer: A Rationale: $24,000 cash balance per bank - $12,000 note collected by bank - $18,000 outstanding checks + $9,000 deposits-in-transit + $150 bank service charge + $3,000 NSF check = $6,150 cash balance per books (before adjustments).
©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-23
Topic: The Bank Reconciliation LO: 3, 5 Level of Difficulty: DIFFICULT 48. Heidi Company developed the following reconciling information in preparing its September bank reconciliation: Cash balance per bank, 9/30 Note receivable collected by bank Outstanding checks Deposits-in-transit Bank service charge NSF check
$32,000 16,000 24,000 12,000 200 4,000
Using the above information, determine the cash balance per books (before adjustments) for Heidi Company. A) $ 8,200 B) $32,000 C) $44,000 D) $23,400 Answer: A Rationale: $32,000 cash balance per bank - $16,000 note collected by bank - $24,000 outstanding checks + $12,000 deposits-in-transit + $200 bank service charge + $4,000 NSF check = $8,200 cash balance per books (before adjustments). Topic: The Bank Reconciliation LO: 3, 5 Level of Difficulty: MEDIUM 49. On September 30, the books of Goel Company indicates a balance in the Cash account of $11,034. Determine the adjusted balance on the basis of the following reconciling items:
A) B) C) D)
(a)
Deposits of cash sales of $972 had been erroneously recorded in the cash receipts journal as $927.
(b)
Deposits in transit not recorded by bank, $1,500.
(c)
Bank debit memorandum for service charges, $75.
(d)
Bank credit memorandum for note collected by bank, $8,550, including $150 interest.
(e)
Bank debit memorandum for $654 NSF (not-sufficient-funds) check from Varrat White, a customer.
(f)
Checks outstanding, $6,600.
$18,792 $13,800 $18,900 $20,400
Answer: C Rationale: $11,034 unadjusted book balance + $8,550 note collected by bank - $75 bank service charge + $45 incorrectly recorded deposit - $654 NSF check = $18,900 adjusted cash balance.
©Cambridge Business Publishers, 2020 7-24
Financial Accounting for Undergraduates, 4th Edition
Topic: The Bank Reconciliation LO: 3, 5 Level of Difficulty: MEDIUM 50. On September 30, the books of Ravalli Company indicates a balance in the Cash account of $14,700. Determine the adjusted balance on the basis of the following reconciling items:
A) B) C) D)
(a)
Deposits of cash sales of $1,368 had been erroneously recorded in the cash receipts journal as $1,296.
(b)
Deposits in transit not recorded by bank, $2,000.
(c)
Bank debit memorandum for service charges, $100.
(d)
Bank credit memorandum for note collected by bank, $11,400, including $200 interest.
(e)
Bank debit memorandum for $872 NSF (not-sufficient-funds) check from Bill Smith, a customer.
(f)
Checks outstanding, $8,800.
$25,056 $18,400 $25,200 $27,200
Answer: C Rationale: $14,700 unadjusted book balance + $11,400 note collected by bank - $100 bank service charge + $72 incorrectly recorded deposit - $872 NSF check = $25,200 adjusted cash balance. Topic: The Bank Reconciliation LO: 3, 5 Level of Difficulty: MEDIUM 51. The following information was used in reconciling the bank account for Meyer Company on October 31: Balance per bank, October 31 Insufficient funds check Outstanding checks Utility bill paid by bank Check printing charge Deposits in transit Balance per books, October 31
$27,480 1,050 1,350 930 60 1,830 30,000
Calculate the Adjusted Book Balance on October 31. A) $27,960 B) $25,080 C) $28,260 D) $27,060 Answer: A Rationale: $30,000 balance per books - $930 utility bill paid by bank - $60 check printing charge $1,050 NSF check = $27,960 Adjusted book balance. $27,480 balance per bank statement + $1,830 deposits in transit - $1,350 outstanding checks = $27,960. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-25
Topic: The Bank Reconciliation LO: 3, 5 Level of Difficulty: MEDIUM 52. The following information was used in reconciling the bank account for Minerva Company on October 31: Balance per bank, October 31 Insufficient funds check Outstanding checks Utility bill paid by bank Check printing charge Deposits in transit Balance per books, October 31
$36,640 1,400 1,800 1,240 80 2,440 40,000
Calculate the Adjusted Book Balance on October 31. A) $37,280 B) $33,440 C) $37,680 D) $36,080 Answer: A Rationale: $40,000 balance per books - $1,240 utility bill paid by bank - $80 check printing charge $1,400 NSF check = $37,280 Adjusted book balance. $36,640 balance per bank statement + $2,440 deposits in transit - $1,800 outstanding checks = $37,280.
©Cambridge Business Publishers, 2020 7-26
Financial Accounting for Undergraduates, 4th Edition
Exercises Topic: Effective Cash Management LO: 6 Level of Difficulty: MEDIUM 1. Identify and discuss the four primary activities of effective cash management. Answer: 1. Manage accounts receivable—the manager should try to increase the rate at which accounts receivable are collected. 2. Manage inventory levels—inventory should be maintained at levels that allow a company to satisfy customer needs while avoiding having too much of the company’s resources tied up in inventory. 3. Manage accounts payable—managers must evaluate the tradeoff involved by delaying the payment of accounts payable versus the reduced purchase price that results from timely payment. 4. Invest excess cash—only a sufficient amount of cash necessary to cover a company’s day-to-day needs should be kept on hand; any excess amounts should be invested in an effort to earn an adequate rate of return on cash.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-27
Problems Topic: Bank Reconciliations LO: 5 1. Use the following information to prepare a bank reconciliation for Atticus Company at August 31, 2019: (1)
Cash account balance, August 31, $31,185.90.
(2)
Bank statement balance, August 31, $37,141.50.
(3)
Deposits in transit, $2,880.00.
(4)
Outstanding checks, August 31, $9,570.60.
(5)
Service charge on bank statement not recorded in books, $75.00.
(6)
Bank error - another company’s check charged on Atticus Company’s bank statement, $750.00.
(7)
Check for repairs expense, $2,010.00, incorrectly recorded in books as $2,100.00.
Answer: ATTICUS COMPANY Bank Reconciliation August 31, 2019 Balance per bank statement Add: Deposits in transit Check of another Company charged to Finch Company
$37,141.50 2,880.00
Balance per general ledger Add: Check for $2,010 incorrectly recorded as $2,100
$31,185.90 90.00 $31,275.90
Less: Outstanding checks
750.00 $40,771.50 0 9,570.60
Less: Service charge
75.00
Reconciled balance
$31,200.90
Reconciled balance
$31,200.90
©Cambridge Business Publishers, 2020 7-28
Financial Accounting for Undergraduates, 4th Edition
Topic: Bank Reconciliations LO: 5 2. Use the following information to prepare a bank reconciliation for McGoo Company at August 31, 2019: (1)
Cash account balance, $18,273.40.
(2)
Bank statement balance, August 31, $16,315.00.
(3)
Deposits in transit, $2,800.00.
(4)
Outstanding checks, August 31, $1,850.80.
(5)
Service charge on bank statement not recorded in books, $44.00.
(6)
Bank error - another company’s check charged on McGoo Company’s bank statement, $245.20.
(7)
Check for repairs expense, $1,680, incorrectly recorded in books as $960.00.
Answer: MCGOO COMPANY Bank Reconciliation August 31, 2019 Balance per bank statement Add: Deposits in transit Check of another Company charged to Magee Company
$16,315.00 2,800.00
Less: Outstanding checks
245.20 $19,360.20 1,850.80
Reconciled balance
$17,509.40
Balance per general ledger Less: Service charge Check for $1,680 incorrectly recorded as $960
$18,273.40 44.00
Reconciled balance
$17,509.40
720.00
©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-29
Topic: Bank Reconciliations LO: 3, 5 3. Use the following information to prepare a bank reconciliation for Forester Company at April 30, 2019: (1)
Cash account balance, April 30, $29,359.20.
(2)
Bank statement balance, April 30, $32,274.60.
(3)
Service charge on bank statement not recorded in books, $210.00.
(4)
Deposits in transit, $4,315.80.
(5)
Outstanding checks, April 30, $2,840.40.
(6)
The bank statement included a charge of $1,399.20 for P. Harper’s NSF check. The check, returned with the bank statement, had been received by Forester in payment on account.
(7)
The bank collected a $6,000.00 note in April for Forester. This amount was included in the bank statement, but Forester had not yet recorded the collection. The bank’s $210.00 service charge for April [see (3) above] included collection charge for the note.
Answer: FORESTER COMPANY Bank Reconciliation April 30, 2019 Balance per bank statement Add: Deposits in transit
Balance per general ledger Add: Note Collected by bank
Less: Outstanding checks
$32,274.60 4,315.80 $36,590.40 2,840,40
Less: Service charge NSF check
$29,359.20 6,000.00 $35,359.20 210.00 1,399.20
Reconciled balance
$33,750.00
Reconciled balance
$33,750.00
©Cambridge Business Publishers, 2020 7-30
Financial Accounting for Undergraduates, 4th Edition
Chapter 7 Internal Control and Cash Learning Objectives – Coverage by question True / False LO1 – Define the three elements of fraud.
1
LO2 – Discuss how the COSO framework helps prevent fraud, identify potential internal control failures, and discuss SOX regulations.
2, 3
LO3 – Define cash and discuss the accounting for cash.
Multiple Choice
Exercises
1-5, 8, 33, 34
9-11, 15, 16, 20-24, 29-31, 47-52
LO4 – Describe the internal controls for cash.
6, 8, 9
4, 6-8,
LO5 – Illustrate the bank reconciliation process.
4, 5, 7
9, 11-32, 35-52
LO6 – Describe the four primary activities of effective cash management.
10
LO7 – Appendix 7A: Describe financial statement audits and operational audits.
11
Problems
3
1-3
1
©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-1
Chapter 7: Internal Control and Cash
True / False Topic: Fraud LO: 1 1. The three elements that are almost always present when a fraud occurs are pressure, rationalization and concealment. Answer: False Rationale: Research has shown that three elements are almost always present when a fraud occurs. These elements are often referred to as the fraud triangle and include (1) a perceived pressure, (2) some way to rationalize the fraudulent act, and (3) a perceived opportunity.
Topic: Internal Control LO: 2 2. Requiring employees to take vacations is an example of a good internal accounting control feature. Answer: True Rationale: Requiring employees to take vacations of at least one week in duration may also disclose errors or irregularities when another employee performs the vacationing employee’s duties. This personnel policy acts as a detection control.
Topic: Segregation of Duties LO: 2 3. Good internal accounting control requires that the person handling cash should also make any related journal entries so that responsibility for cash can be assigned to one person. Answer: False Rationale: Segregation of duties requires that when allocating various duties within the accounting system, management should make sure that no employee is assigned too many different responsibilities. As a general rule, no individual employee should be able to perpetrate and conceal irregularities in the transaction processing system. To accomplish this, management must separate three functions: the authorization function, the recording function, and the custody function.
Topic: Bank Reconciliations LO: 5 4. At the end of an accounting period, the “cash balance per bank statement” on that date is usually the proper cash amount to show on the balance sheet. Answer: False Rationale: The reconciled cash balance computed through the bank reconciliation procedure is the cash amount that appears on a company’s balance sheet.
©Cambridge Business Publishers, 2020 7-2
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Outstanding Checks LO: 5 5. Outstanding checks are checks a company has written and recorded as cash disbursements that have not yet been presented to the bank for payment. Answer: True Rationale: Checks a company has written and recorded as cash disbursements that have not yet been presented to the bank for payment are called outstanding checks.
Topic: Petty Cash LO: 4 6. It is efficient, less costly, to pay small bills each day with cash available from a petty cash fund. Answer: True Rationale: Most businesses find it inconvenient and expensive to write checks for small expenditures. Instead, these businesses establish a petty cash fund. A petty cash fund is a small amount of cash that is placed in a secure location on a business’s premises to be used to pay for small expenditures such as postage, delivery service charges, and minor purchases of supplies.
Topic: Bank Reconciliation LO: 5 7. Journal entries are required for all adjustments to the “cash balance per bank statement” in a bank reconciliation, Answer: False Rationale: Deposits in transit and outstanding checks are not reflected in the cash balance per bank statement, but they do not require a journal entry, since they have already been recorded in the ending balance on the cash account in the general ledger.
Topic: Internal Controls for Cash LO: 4 8. Good internal accounting control over cash includes depositing all cash receipts in the bank each day. Answer: True Rationale: Cash may be received on account (check) or from retail sales. For cash received by check, the mailroom’s duties include: endorsing the checks and sending them to the treasurer. For retail sales, the retail sales supervisor’s duties include: sending a prepared written report of sales and cash received to the treasurer along with the cash. The treasurer’s duties include: preparing a deposit slip for the cash and checks and sending these items to the bank each day.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-3
Topic: Petty Cash LO: 4 9. Disbursements from a petty cash fund should be made with checks that are prenumbered. Answer: False Rationale: Petty Cash is an example of cash on hand that is used for small disbursements and is maintained at the company. Although the use of a petty cash fund violates the rule that all cash payments should be made by check or EFT, control can be maintained by handling the fund on an imprest basis with documented procedures. A business establishes a petty cash fund by writing a check against the firm’s checking account and cashing the check at the bank. All replenishments of the petty cash fund are also made by check. As a result, all expenditures are ultimately controlled by check, providing a paper trail of all cash transfers to the petty cash fund.
Topic: Effective Cash Management LO: 6 10. The most effective tool for external parties to monitor a company’s cash is the income statement. Answer: False Rationale: The most effective tool for external parties to monitor a company’s cash is the statement of cash flows.
Topic: Operational Audits LO: 7 11. An operational audit is an examination of a company’s annual financial statements by a firm of independent certified public accountants. Answer: False Rationale: An operational audit is an evaluation of activities, systems, and internal controls within a company to determine their efficiency, effectiveness, and economy. Operational auditing goes beyond accounting records and financial statements to obtain a full understanding of the operations of a company. Companies dedicated to continuous quality improvement often use operational audits to identify specific areas where they need to improve the quality of their operations or products.
©Cambridge Business Publishers, 2020 7-4
th
Financial Accounting for Undergraduates, 4 Edition
Multiple Choice Topic: COSO Framework LO: 2 Level of Difficulty: EASY 1. Which of the following is not an internal control component identified in the COSO framework: A) Risk assessment B) Monitoring activities C) Technology D) Control environment Answer: C Rationale: The COSO framework identifies five internal control components: (1) the control environment, (2) risk assessment, (3) control activities, (4) information and communication, and (5) monitoring activities.
Topic: Internal Control LO: 2 Level of Difficulty: EASY 2. Which of the following is desirable in a good system of internal accounting control? A) Responsibility and authority for a given function should be shared among several employees B) Appropriate forms, such as checks and sales invoices, should have preprinted control numbers C) All accounting personnel in a firm should be bonded D) To obtain the benefit of specialization, employees should not be rotated among similar jobs Answer: B Rationale: The use of control numbers on all business documents as a detection control enabling a business to track each check written. Responsibilities should not be shared. The organizational structure of a company defines the lines of authority and responsibility within the company. It informs employees about who is in charge of which functions and to whom each person reports. Requiring job rotation and vacations allows another employee to perform these job responsibilities, often leading to the discovery of fraud. There is no requirement that personnel in a firm should be bonded.
Topic: Segregation of Duties LO: 2 Level of Difficulty: EASY 3. Which of the following is a poor internal accounting control feature? A) Segregation of duties. B) Combining authorization with custodianship. C) Rotation of personnel. D) Internal auditing. Answer: B Rationale: Segregation of duties requires that when allocating various duties within the accounting system, management should make sure that no employee is assigned too many different responsibilities. As a general rule, no individual employee should be able to perpetrate and conceal irregularities in the transaction processing system. To accomplish this, management must separate three functions: the authorization function, the recording function, and the custody function.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-5
Topic: Internal Controls for Cash LO: 2, 4 Level of Difficulty: EASY 4. Procedures requiring that the recording of asset transactions be separated from the custody of those assets: A) Will uncover collusion among employees B) Are important only in very large businesses C) Are especially important in handling cash D) Make it easy for an employee to cover up the theft of an asset Answer: C Rationale: Segregation of duties requires that when allocating various duties within the accounting system, management should make sure that no employee is assigned too many different duties. Most companies develop elaborate internal controls to protect their cash because it is their most liquid asset, and in all likelihood, an important operating asset. Cash is highly desirable, easily taken and concealed, and quickly converted into other assets.
Topic: Internal Control LO: 2 Level of Difficulty: EASY 5. In establishing an effective internal control structure, management should: A) Establish a good control environment. B) Provide an effective accounting system. C) Integrate control procedures into the control environment and accounting system. D) All of the above. Answer: D Rationale: The control environment sets the tone of the organization. The accounting system represents a cornerstone of the control environment that is necessary to reduce the opportunity for, and success of, fraudulent behavior.
Topic: Internal Controls for Cash LO: 4 Level of Difficulty: MEDIUM 6. From the viewpoint of good internal accounting control, which of the following individuals would be the proper person to prepare bank reconciliations for a company that receives cash payments both through the mail and from customers in person? A) The individual who opens the company’s mail and lists the payments received B) The individual who works in the customer service department and receives payments from customers who pay in person C) The individual who deposits the daily cash receipts in the bank D) None of the above Answer: D Rationale: Internal audit is an independent department; it has no recurring custody, recording, or authorization duties related to accounting transactions and therefore should prepare the monthly bank reconciliation and create any needed journal entries.
©Cambridge Business Publishers, 2020 7-6
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Internal Controls for Cash LO: 4 Level of Difficulty: EASY 7. Which of the following features should not be included in a good system of internal accounting control over cash? A) All receipts are deposited daily in the bank. B) All major disbursements are made by check, and an imprest fund is used for petty cash disbursements. C) Cash handling is separated from the recording of cash transactions. D) Monthly bank reconciliations are prepared by the person who makes the daily bank deposits. Answer: D Rationale: Internal audit is an independent department; it has no recurring custody, recording, or authorization duties related to accounting transactions and therefore should prepare the monthly bank reconciliation and create any needed journal entries.
Topic: Internal Controls for Cash LO: 2, 4 Level of Difficulty: EASY 8. Which of the following is not a feature of good internal accounting control over cash? A) All cash receipts are deposited in the bank each day. B) Most bills are paid with paper currency and coins to minimize the bank service charges. C) A bank reconciliation is prepared when each bank statement is received. D) Cash is handled separately from the recording of cash transactions. Answer: B Rationale: Payments should be made using checks, which have control numbers, referred to as a check number, preprinted on them. Each control number should be unique for that type of document. These numbers are a detection control enabling a firm to track each check written, and to ensure that no one has written an improper check against their account.
Topic: Cash Balance LO: 3, 5 Level of Difficulty: EASY 9. The Cash amount properly shown on the year-end balance sheet is the A) Balance in the general ledger account before the year-end bank reconciliation B) Balance per the year-end bank statement C) Balance per the year-end bank statement less deposits in transit and plus outstanding checks D) Balance in the general ledger account after entries from the year-end bank reconciliation have been posted Answer: D Rationale: The cash amount properly shown on the year-end balance sheet is the general ledger account balance, after the year-end bank reconciliation has been completed.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-7
Topic: Reporting Cash LO: 3 Level of Difficulty: EASY 10. A compensating balance refers to: A) The minimum balance established for a petty cash fund B) A minimum balance that a financial institution requires a firm to maintain in its account as part of a borrowing arrangement C) The final cash balance achieved in a bank reconciliation D) The amount of cash invested temporarily in highly marketable securities Answer: B Rationale: A compensating balance is a minimum cash balance that a bank requires a firm to maintain in its bank account as part of a borrowing arrangement.
Topic: Bank Reconciliation LO: 3, 5 Level of Difficulty: EASY 11. The following journal entry is necessary upon discovery of a “NSF” check during a bank reconciliation: A) Accounts Receivable Cash B) Not Sufficient Funds Expense Cash C) Miscellaneous Expense Cash D) No entry is necessary because the bank makes the entry. Answer: A Rationale: An NSF check, is a check from an individual or company that had an insufficient cash balance in the bank when the holder of the check presented it to the bank for payment. The original entry recorded when the check was received from the customer was a debit to Cash and a credit to Accounts Receivable. This entry needs to be reversed with a debit to Accounts Receivable and a credit to Cash.
Topic: Bank Reconciliation LO: 5 Level of Difficulty: EASY 12. At May 31, Michaelis Company has outstanding checks totaling $19,600. The bank reconciliation for May should show these checks as a(n): A) Deduction from balance per bank statement B) Addition to balance per bank statement C) Addition to balance per general ledger D) Deduction from balance per general ledger Answer: A Rationale: Outstanding checks are checks not yet recorded by the bank. They must be deducted from the balance per the bank statement to reconcile to the ending balance in the cash account in the general ledger.
©Cambridge Business Publishers, 2020 7-8
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Bank Reconciliation LO: 5 Level of Difficulty: EASY 13. Third Montana Bank collected a note for Nicole Company. This collection, not yet recorded in Nicole’s books, appears on the bank reconciliation as a(n): A) Addition to balance per general ledger B) Deduction from balance per bank statement C) Addition to balance per bank statement D) Deduction from balance per general ledger Answer: A Rationale: The collection of the note, recorded as a cash receipt by the bank, but not yet recorded by Nicole Company, must be added to the general ledger cash account balance, in order to reconcile to the bank statement.
Topic: Bank Reconciliation LO: 5 Level of Difficulty: EASY 14. Which of the following bank reconciliation items should not be added to or subtracted from the bank statement balance to determine the reconciled cash balance? A) Outstanding checks B) Deposits in the mail but not yet received by the bank C) Bank service charges D) None of the above Answer: C Rationale: A bank service charge should not be added to or subtracted from the bank statement balance to determine the reconciled cash balance, because it is already reflected in the bank statement balance.
Topic: Bank Reconciliation LO: 3, 5 Level of Difficulty: EASY 15. Which of the following items would you add to the Flitter Company’s bank statement balance to arrive at the reconciled cash balance in a bank reconciliation: A) Bank service charges B) Outstanding and “NSF” checks C) “NSF” checks Bank collection charges D) None of the above Answer: D Rationale: To arrive at the reconciled cash balance in a bank reconciliation, you would add deposits in transit and any corrections to the bank statement balance.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-9
Topic: Bank Reconciliation LO: 3, 5 Level of Difficulty: EASY 16. Which of the following would you add to the balance per general ledger to arrive at the reconciled cash balance in a bank reconciliation? A) Bank service charge B) Collection of a note by bank C) “NSF” checks D) Deposits in transit Answer: B Rationale: A collection of a note by bank would be added to the balance per general ledger, to arrive at the reconciled cash balance, in a bank reconciliation, because it has not yet been recorded in the general ledger.
Topic: Bank Reconciliation LO: 5 Level of Difficulty: EASY 17. Which of the following would you deduct from the bank statement balance to arrive at the reconciled cash balance in a bank reconciliation: A) Bank service charges B) Deposits in transit C) “NSF” checks D) Outstanding checks Answer: D Rationale: To arrive at the reconciled cash balance in a bank reconciliation, you would deduct outstanding checks from the bank statement balance, since they have not yet been recorded by the bank.
Topic: Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 18. In reconciling the January bank statement, the vice president discovered that the bookkeeper had recorded a check written for $681 as $816 in the cash disbursements journal. For the bank reconciliation, the $135 error should be: A) Added to balance per bank statement B) Added to balance per general ledger C) Deducted from balance per bank statement D) Deducted from balance per general ledger Answer: B Rationale: In order to reconcile to the bank statement, the $135 error should be added to the general ledger cash account balance, since $135 less was disbursed, than was recorded.
©Cambridge Business Publishers, 2020 7-10
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 19. In reconciling the September bank statement, the vice president discovered that the bookkeeper had recorded a check written for $438 as $483 in the cash disbursements journal. For the bank reconciliation, the $45 error should be: A) Added to balance per bank statement B) Added to balance per general ledger C) Deducted from balance per bank statement D) Deducted from balance per general ledger Answer: B Rationale: In order to reconcile to the bank statement, the $45 error should be added to the general ledger cash account balance, since $45 less was disbursed, than was recorded.
Topic: Bank Reconciliation LO: 3, 5 Level of Difficulty: EASY 20. Watkis Company received its February bank statement, which included a memo indicating that the check of Sarah Company for $652 had been returned as “NSF.” Watkis’ bank reconciliation should list this check as a(n): A) Addition to balance per bank statement B) Deduction from balance per bank statement C) Addition to balance per general ledger D) Deduction from balance per general ledger Answer: D Rationale: In order to reconcile to the bank statement, the $652 non-sufficient-funds (NSF) check should be subtracted from the general ledger cash account balance, since $652 less was added to the bank account balance, than was recorded in the general ledger.
Topic: Bank Reconciliation LO: 3, 5 Level of Difficulty: MEDIUM 21. The following information pertains to Mateo Company: Cash balance per bank statement Cash balance per general ledger Bank service charge Deposits in transit to bank Outstanding checks NSF check returned by bank
$21,525 22,620 60 2,700 1,965 300
Mateo should show the following reconciled cash balance from the bank reconciliation on its balance sheet: A) $20,310 B) $25,335 C) $22,260 D) $24,165 Answer: C Rationale: $21,525 balance per bank statement + $2,700 deposits in transit - $1,965 outstanding checks = $22,260. $22,620 balance per general ledger - $60 service charge - $300 NSF check = $22,260. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-11
Topic: Bank Reconciliation LO: 3, 5 Level of Difficulty: MEDIUM 22. The following information pertains to Julianna Company: Cash balance per bank statement Cash balance per general ledger Bank service charge Deposits in transit to bank Outstanding checks NSF check returned by bank
$28,700 30,160 80 3,600 2,620 400
Julianna should show the following reconciled cash balance from the bank reconciliation on its balance sheet: A) $27,080 B) $33,780 C) $29,680 D) $32,220 Answer: C Rationale: $28,700 balance per bank statement + $3,600 deposits in transit - $2,620 outstanding checks = $29,680. $30,160 balance per general ledger - $80 service charge - $400 NSF check = $29,680.
Topic: Bank Reconciliation LO: 3, 5 Level of Difficulty: MEDIUM 23. The following information pertains to the Juniper Company: Cash balance per bank statement Cash balance per general ledger Bank service charge Deposits in transit to bank Outstanding checks NSF check returned by bank
$23,250 22,005 75 1,125 2,955 510
Juniper should show the following reconciled cash balance from the bank reconciliation on its balance sheet: A) $21,420 B) $21,930 C) $24,375 D) $19,995 Answer: A Rationale: $23,250 balance per bank statement + $1,125 deposits in transit - $2,955 outstanding checks = $21,420. $22,005 balance per books - $75 service charge - $510 NSF check = $21,420.
©Cambridge Business Publishers, 2020 7-12
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Bank Reconciliation LO: 3, 5 Level of Difficulty: MEDIUM 24. The following information pertains to the Simran Company: Cash balance per bank statement Cash balance per general ledger Bank service charge Deposits in transit to bank Outstanding checks NSF check returned by bank
$31,000 29,340 100 1,500 3,940 680
Simran should show the following reconciled cash balance from the bank reconciliation on its balance sheet: E) $28,560 F) $29,240 G) $32,500 H) $26,660 Answer: A Rationale: $31,000 balance per bank statement + $1,500 deposits in transit - $3,940 outstanding checks = $28,560. $29,340 balance per books - $100 service charge - $680 NSF check = $28,560.
Topic: Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 25. Cyprus, Inc.’s June bank statement shows a June 30 balance of $27,150. Prior to reconciliation, its books show a cash balance of $27,630. The information below pertains to Cyprus: Deposits in transit Checks outstanding Bank service charges Error in Cyprus’s records overstating cash disbursement Check of another company charged erroneously against Cyprus, Inc.’s bank account Bank statement shows bank collected a note receivable and interest income for Cyprus, Inc.
$2,100 1,440 60 270 750 720
The reconciled cash balance at June 30 on the bank reconciliation should be: A) $30,300 B) $28,560 C) $28,020 D) $27,810 Answer: B Rationale: $27,150 balance per bank statement + $2,100 deposits in transit - $1,440 outstanding checks + $750 bank error correction = $28,560. $27,630 balance per books - $60 service charge + $270 company error correction + $720 collection of note receivable and interest income = $28,560.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-13
Topic: Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 26. Athens, Inc.’s June bank statement shows a June 30 balance of $36,200. Prior to reconciliation, its books show a cash balance of $36,840. The information below pertains to Athens: Deposits in transit Checks outstanding Bank service charges Error in Athens’ records overstating cash disbursement Check of another company charged erroneously against Athens, Inc.’s bank account Bank statement shows bank collected a note receivable and interest income for Athens, Inc.
$2,800 1,920 80 360 1,000 960
The reconciled cash balance at June 30 on the bank reconciliation should be: A) $40,400 B) $38,080 C) $37,360 D) $37,080 Answer: B Rationale: $36,200 balance per bank statement + $2,800 deposits in transit - $1,920 outstanding checks + $1,000 bank error correction = $38,080. $36,840 balance per books - $80 service charge + $360 company error correction + $960 collection of note receivable and interest income = $38,080.
Topic: Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 27. Marathon, Inc.’s April bank statement shows an April 30 balance of $15,360. Prior to reconciliation, its books show a cash balance of $16,530. The information below pertains to Marathon, Inc. Deposits in transit Checks outstanding Bank service charge Error in Marathon’s records understating cash disbursement Check of another company charged erroneously against Marathon’s bank account Bank statement shows bank collected a note receivable and interest income for Marathon
$2,400 1,395 30 540 345 750
The reconciled cash balance at April 30 on the bank reconciliation should be: A) $18,105 B) $14,010 C) $16,365 D) $16,710 Answer: D Rationale: $15,360 balance per bank statement + $2,400 deposits in transit - $1,395 outstanding checks + $345 bank error correction = $16,710. $16,530 balance per books - $30 service charge - $540 company error correction + $750 collection of note receivable and interest income = $16,710. ©Cambridge Business Publishers, 2020 7-14
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 28. Keyser, Inc.’s April bank statement shows an April 30 balance of $20,480. Prior to reconciliation, its books show a cash balance of $22,040. The information below pertains to Keyser, Inc. Deposits in transit Checks outstanding Bank service charge Error in Keyser’s records understating cash disbursement Check of another company charged erroneously against Keyser’s bank account Bank statement shows bank collected a note receivable and interest income for Keyser
$3,200 1,860 40 720 460 1,000
The reconciled cash balance at April 30 on the bank reconciliation should be: A) $24,140 B) $18,680 C) $21,820 D) $22,280 Answer: D Rationale: $20,480 balance per bank statement + $3,200 deposits in transit - $1,860 outstanding checks + $460 bank error correction = $22,280. $22,040 balance per books - $40 service charge - $720 company error correction + $1,000 collection of note receivable and interest income = $22,280.
Topic: Bank Reconciliation LO: 3, 5 Level of Difficulty: MEDIUM 29. In preparing its bank reconciliation at March 31, Valley Company has the following information: Cash balance per bank statement Cash balance per general ledger Deposits in transit Outstanding checks Deposit erroneously recorded by bank in Valley’s account on March 12 Bank service charges for March NSF check returned by bank
$111,150 114,000 17,250 17,250 750 150 3,450
What is the proper cash balance at March 31 for balance sheet purposes? A) $107,250 B) $110,250 C) $110,400 D) $111,150 Answer: C Rationale: $111,150 balance per bank statement + $17,250 deposits in transit - $17,250 outstanding checks - $750 bank error correction = $110,400. $114,000 balance per books - $150 service charge - $3,450 NSF check = $110,400.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-15
Topic: Bank Reconciliation LO: 3, 5 Level of Difficulty: MEDIUM 30. In preparing its bank reconciliation at March 31, Mountainview Company has the following information: Cash balance per bank statement Cash balance per general ledger Deposits in transit Outstanding checks Deposit erroneously recorded by bank in Mountainview’s account on March 12 Bank service charges for March NSF check returned by bank
$148,200 152,000 23,000 23,000 1,000 200 4,600
What is the proper cash balance at March 31 for balance sheet purposes? A) $143,000 B) $147,000 C) $147,200 D) $148,200 Answer: C Rationale: $148,200 balance per bank statement + $23,000 deposits in transit - $23,000 outstanding checks - $1,000 bank error correction = $147,200. $152,000 balance per books - $200 service charge - $4,600 NSF check = $147,200.
Topic: Bank Reconciliation LO: 3, 5 Level of Difficulty: EASY 31. After completing a bank reconciliation, you are preparing journal entries to agree the New Horizons Company’s Cash account balance with the reconciled balance shown on the reconciliation. Which of the following requires a journal entry? A) Deposits in transit at the end of the period B) Outstanding checks at the end of the period C) An error by the bank in recording one of the firm’s deposits D) An “NSF” check Answer: D Rationale: An NSF check, is a check from an individual or company that had an insufficient cash balance in the bank when the holder of the check presented it to the bank for payment. The original entry recorded when the check was received from the customer was a debit to Cash and a credit to Accounts Receivable. This entry needs to be reversed with a debit to Accounts Receivable and a credit to Cash.
©Cambridge Business Publishers, 2020 7-16
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Bank Reconciliation LO: 5 Level of Difficulty: EASY 32. After completing a bank reconciliation, you are preparing journal entries to agree the Yankee Company’s Cash account balance with the reconciled balance shown on the reconciliation. Which of the following requires a journal entry? A) Service charges for the period B) Outstanding checks at the end of the period C) Deposits in transit at the end of the period D) An error by the bank in recording one of the firm’s deposits Answer: A Rationale: A service charge from the bank is a charge not yet recorded by the Yankee Company. A service charge must be recorded as a reduction in the cash balance and as an expense.
Topic: Internal Audit LO: 2 Level of Difficulty: EASY 33. Internal auditing is a company function that: A) Audits the firm’s financial statements and expresses an opinion on them B) Provides independent appraisals of the company’s financial statements, its internal control, and its operations C) Prepares the firm’s income tax returns D) All of the above Answer: B Rationale: Internal auditing is a company function that provides independent appraisals of the company’s internal statements, its internal control, and its operations.
Topic: Internal Control Activities LO: 2 Level of Difficulty: EASY 34. Identify the principle of internal control that is violated in the following situation: Alexis Company is a very small business. Alexis Bailey, one of the two office clerks, opens the mail each day and removes the cash receipts that come in the mail. Alexis then records the receipts in the cash records and the customer's account and deposits the cash in the bank. A) B) C) D)
Insure assets and bond key employee Maintain adequate records Divide responsibility for related transactions. Perform regular and independent reviews
Answer: C Rationale: Segregation of duties, or dividing responsibility for related transactions, is a prevention control intended to deter an individual employee from being able to perpetrate and conceal irregularities in the transaction process.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-17
Topic: The Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 35. The bank statement reported an ending balance of $43,860 after deducting $660 in service charges and an addition of $13,500 for a note collected by the bank on the Cherokee Company's behalf. The company books reported an ending balance of $29,070, and determined that deposits in transit equal $16,800 and outstanding checks equal $18,750. What is the adjusted cash balance? A) $41,910 B) $16,800 C) $35,910 D) $21,120 Answer: A Rationale: $29,070 balance per books - $660 service charge + $13,500 note collected by the bank = $41,910 adjusted cash balance. $43,860 balance per bank statement + $16,800 deposits in transit - $18,750 outstanding checks = $41,910.
Topic: The Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 36. The bank statement reported an ending balance of $58,480 after deducting $880 in service charges and an addition of $18,000 for a note collected by the bank on the Bandit Company's behalf. The company books reported an ending balance of $38,760, and determined that deposits in transit equal $22,400 and outstanding checks equal $25,000. What is the adjusted cash balance? A) $55,880 B) $22,400 C) $47,880 D) $28,160 Answer: A Rationale: $38,760 balance per books - $880 service charge + $18,000 note collected by the bank = $55,880 adjusted cash balance. $58,480 balance per bank statement + $22,400 deposits in transit - $25,000 outstanding checks = $55,880.
©Cambridge Business Publishers, 2020 7-18
th
Financial Accounting for Undergraduates, 4 Edition
Topic: The Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 37. In comparing the canceled checks on the bank statement with the entries in the accounting records, O’Brien Company found that check number 4239 for May's rent was correctly written and drawn for $9,855 but was erroneously entered in the accounting records as $9,585. When preparing the May bank reconciliation, the O’Brien Company should: A) Deduct $270 from the book balance of cash B) Add $270 to the bank statement balance C) Deduct $270 from the bank statement balance D) Add $270 to the book balance of cash Answer: A Rationale: In order to reconcile to the bank statement, the $270 error ($9,855 - $9,585) in recording check #4239 in the general ledger must be subtracted from the general ledger cash account balance, since $270 more was deducted from the bank account balance, than was deducted in the general ledger.
Topic: The Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 38. In comparing the canceled checks on the bank statement with the entries in the accounting records, it is found that check number 4239 for May's rent was correctly written and drawn for $6,750 but was erroneously entered in the accounting records as $6,570. When preparing the May bank reconciliation, the Tammy Company should: A) Deduct $180 from the book balance of cash B) Add $180 to the bank statement balance C) Deduct $180 from the bank statement balance D) Add $180 to the book balance of cash Answer: A Rationale: In order to reconcile to the bank statement, the $180 error ($6,750 - $6,570) in recording check #4239 in the general ledger must be subtracted from the general ledger cash account balance, since $180 more was deducted from the bank account balance, than was deducted in the general ledger.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-19
Topic: The Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 39. During its year-end bank reconciliation, Farley Company finds that Check No. 951 was written for $124.05 on the books, but the check was written and cleared the bank for the correct amount, $142.05. The correct treatment on the bank reconciliation would be: A) On the bank side, deduct $18 from payments and add $18 to ending balance B) On the book side, deduct $18 from receipts and add $18 to ending balance C) On the book side, add $18 to payments and deduct $18 from ending balance D) On the bank side, add $18 to receipts and add $18 to ending balance Answer: C Rationale: In order to reconcile to the bank statement, the $18.00 error ($142.05 - $124.05) in recording check #951 in the general ledger must be subtracted from the general ledger cash account balance, (and $18.00 must be recoded as an expense [payment]), since $18.00 more was deducted from the bank account balance, than was deducted in the general ledger.
Topic: The Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 40. During its year-end bank reconciliation, Red River Company finds that Check No. 951 was written for $49.70 on the books, but the check was written and cleared the bank for the correct amount, $94.70. The correct treatment on the bank reconciliation would be: A) On the bank side, deduct $45 from payments and add $45 to ending balance B) On the book side, deduct $45 from payments and add $45 to ending balance C) On the book side, add $45 to payments and deduct $45 from ending balance D) On the bank side, add $45 to receipts and add $45 to ending balance Answer: C Rationale: In order to reconcile to the bank statement, the $45.00 error ($94.70 - $49.70) in recording check #951 in the general ledger must be subtracted from the general ledger cash account balance, (and $45.00 must be recoded as an expense [payment]), since $45.00 more was deducted from the bank account balance, than was deducted in the general ledger.
Topic: The Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 41. If the Cherry Creek Company’s accountant mistakenly records a deposit of $681 as $861, the error would be shown on the bank reconciliation statement as a: A) $180 deduction from the book balance B) $180 addition to the bank balance C) $180 addition to the book balance D) $180 deduction from the bank balance Answer: A Rationale: In order to reconcile to the bank statement, the $180 error ($861 - $681) in recording a deposit in the general ledger must be deducted from the general ledger cash account balance, since $180 less was added to the bank account balance, than was added in the general ledger.
©Cambridge Business Publishers, 2020 7-20
th
Financial Accounting for Undergraduates, 4 Edition
Topic: The Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 42. If the Four Corners Company’s accountant mistakenly records a deposit of $383 as $838, the error would be shown on the bank reconciliation statement as a: A) $455 deduction from the book balance B) $455 addition to the bank balance C) $455 addition to the book balance D) $455 deduction from the bank balance Answer: A Rationale: In order to reconcile to the bank statement, the $455 error ($838 - $383) in recording a deposit in the general ledger must be deducted from the general ledger cash account balance, since $455 less was added to the bank account balance, than was added in the general ledger.
Topic: The Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 43. In preparing its June 30, 2019 bank reconciliation, a company has available the following information: Balance per bank statement, June 30 Deposit in transit, June 30 Return of customer’s check not sufficient funds Outstanding checks as of June 30 Bank service charges for June
$82,950 11,700 1,800 8,250 525
As of June 30, the company’s adjusted cash balance is: A) $66,600 B) $61,500 C) $66,300 D) $86,400 Answer: D Rationale: $82,950 balance per bank statement + $11,700 deposits in transit - $8,250 outstanding checks = $86,400 adjusted cash balance.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-21
Topic: The Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 44. In preparing its June 30, 2019 bank reconciliation, a company has available the following information: Balance per bank statement, June 30 Deposit in transit, June 30 Return of customer’s check not sufficient funds Outstanding checks as of June 30 Bank service charges for June
$110,600 15,600 2,400 11,000 700
As of June 30, the company’s adjusted cash balance is: A) $ 88,800 B) $ 82,000 C) $ 88,400 D) $115,200 Answer: D Rationale: $110,600 balance per bank statement + $15,600 deposits in transit - $11,000 outstanding checks = $115,200 adjusted cash balance.
Topic: The Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 45. Carl Nickolas Company prepares bank reconciliations that adjust to the correct balance of cash, based on the following: Outstanding checks Note collected for Carl Nickolas by bank Bank service charges Check written for $482 incorrectly recorded in books at $428; check cleared the bank for $482 NSF check Unadjusted book balance Deposits in transit
$ 1,062 3,300 162 54 492 19,794 1,152
Determine the adjusted cash balance. A) $22,494 B) $23,448 C) $22,386 D) $21,324 Answer: C Rationale: $19,794 unadjusted book balance + $3,300 note collected by bank - $162 bank service charge - $54 incorrectly recorded check - $492 NSF check = $22,386 adjusted cash balance.
©Cambridge Business Publishers, 2020 7-22
th
Financial Accounting for Undergraduates, 4 Edition
Topic: The Bank Reconciliation LO: 5 Level of Difficulty: MEDIUM 46. Bash Bowling Company prepares bank reconciliations that adjust to the correct balance of cash, based on the following: Outstanding checks Note collected for Bash Bowling by bank Bank service charges Check written for $196 incorrectly recorded in books at $178; check cleared the bank for $196 NSF check Unadjusted book balance Deposits in transit
$ 354 1,100 54 18 164 6,598 384
Determine the adjusted cash balance. A) $7,498 B) $7,816 C) $7,462 D) $7,108 Answer: C Rationale: $6,598 unadjusted book balance + $1,100 note collected by bank - $54 bank service charge - $18 incorrectly recorded check - $164 NSF check = $7,462 adjusted cash balance.
Topic: The Bank Reconciliation LO: 3, 5 Level of Difficulty: DIFFICULT 47. Windham Company developed the following reconciling information in preparing its September bank reconciliation: Cash balance per bank, 9/30 Note receivable collected by bank Outstanding checks Deposits-in-transit Bank service charge NSF check
$24,000 12,000 18,000 9,000 150 3,000
Using the above information, determine the cash balance per books (before adjustments) for Windham Company. A) $ 6,150 B) $24,000 C) $33,000 D) $17,550 Answer: A Rationale: $24,000 cash balance per bank - $12,000 note collected by bank - $18,000 outstanding checks + $9,000 deposits-in-transit + $150 bank service charge + $3,000 NSF check = $6,150 cash balance per books (before adjustments).
©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-23
Topic: The Bank Reconciliation LO: 3, 5 Level of Difficulty: DIFFICULT 48. Heidi Company developed the following reconciling information in preparing its September bank reconciliation: Cash balance per bank, 9/30 Note receivable collected by bank Outstanding checks Deposits-in-transit Bank service charge NSF check
$32,000 16,000 24,000 12,000 200 4,000
Using the above information, determine the cash balance per books (before adjustments) for Heidi Company. A) $ 8,200 B) $32,000 C) $44,000 D) $23,400 Answer: A Rationale: $32,000 cash balance per bank - $16,000 note collected by bank - $24,000 outstanding checks + $12,000 deposits-in-transit + $200 bank service charge + $4,000 NSF check = $8,200 cash balance per books (before adjustments).
Topic: The Bank Reconciliation LO: 3, 5 Level of Difficulty: MEDIUM 49. On September 30, the books of Goel Company indicates a balance in the Cash account of $11,034. Determine the adjusted balance on the basis of the following reconciling items:
A) B) C) D)
(a)
Deposits of cash sales of $972 had been erroneously recorded in the cash receipts journal as $927.
(b)
Deposits in transit not recorded by bank, $1,500.
(c)
Bank debit memorandum for service charges, $75.
(d)
Bank credit memorandum for note collected by bank, $8,550, including $150 interest.
(e)
Bank debit memorandum for $654 NSF (not-sufficient-funds) check from Varrat White, a customer.
(f)
Checks outstanding, $6,600.
$18,792 $13,800 $18,900 $20,400
Answer: C Rationale: $11,034 unadjusted book balance + $8,550 note collected by bank - $75 bank service charge + $45 incorrectly recorded deposit - $654 NSF check = $18,900 adjusted cash balance.
©Cambridge Business Publishers, 2020 7-24
th
Financial Accounting for Undergraduates, 4 Edition
Topic: The Bank Reconciliation LO: 3, 5 Level of Difficulty: MEDIUM 50. On September 30, the books of Ravalli Company indicates a balance in the Cash account of $14,700. Determine the adjusted balance on the basis of the following reconciling items:
A) B) C) D)
(a)
Deposits of cash sales of $1,368 had been erroneously recorded in the cash receipts journal as $1,296.
(b)
Deposits in transit not recorded by bank, $2,000.
(c)
Bank debit memorandum for service charges, $100.
(d)
Bank credit memorandum for note collected by bank, $11,400, including $200 interest.
(e)
Bank debit memorandum for $872 NSF (not-sufficient-funds) check from Bill Smith, a customer.
(f)
Checks outstanding, $8,800.
$25,056 $18,400 $25,200 $27,200
Answer: C Rationale: $14,700 unadjusted book balance + $11,400 note collected by bank - $100 bank service charge + $72 incorrectly recorded deposit - $872 NSF check = $25,200 adjusted cash balance.
Topic: The Bank Reconciliation LO: 3, 5 Level of Difficulty: MEDIUM 51. The following information was used in reconciling the bank account for Meyer Company on October 31: Balance per bank, October 31 Insufficient funds check Outstanding checks Utility bill paid by bank Check printing charge Deposits in transit Balance per books, October 31
$27,480 1,050 1,350 930 60 1,830 30,000
Calculate the Adjusted Book Balance on October 31. A) $27,960 B) $25,080 C) $28,260 D) $27,060 Answer: A Rationale: $30,000 balance per books - $930 utility bill paid by bank - $60 check printing charge $1,050 NSF check = $27,960 Adjusted book balance. $27,480 balance per bank statement + $1,830 deposits in transit - $1,350 outstanding checks = $27,960. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-25
Topic: The Bank Reconciliation LO: 3, 5 Level of Difficulty: MEDIUM 52. The following information was used in reconciling the bank account for Minerva Company on October 31: Balance per bank, October 31 Insufficient funds check Outstanding checks Utility bill paid by bank Check printing charge Deposits in transit Balance per books, October 31
$36,640 1,400 1,800 1,240 80 2,440 40,000
Calculate the Adjusted Book Balance on October 31. A) $37,280 B) $33,440 C) $37,680 D) $36,080 Answer: A Rationale: $40,000 balance per books - $1,240 utility bill paid by bank - $80 check printing charge $1,400 NSF check = $37,280 Adjusted book balance. $36,640 balance per bank statement + $2,440 deposits in transit - $1,800 outstanding checks = $37,280.
©Cambridge Business Publishers, 2020 7-26
th
Financial Accounting for Undergraduates, 4 Edition
Exercises Topic: Effective Cash Management LO: 6 Level of Difficulty: MEDIUM 1. Identify and discuss the four primary activities of effective cash management. Answer: 1. Manage accounts receivable—the manager should try to increase the rate at which accounts receivable are collected. 2. Manage inventory levels—inventory should be maintained at levels that allow a company to satisfy customer needs while avoiding having too much of the company’s resources tied up in inventory. 3. Manage accounts payable—managers must evaluate the tradeoff involved by delaying the payment of accounts payable versus the reduced purchase price that results from timely payment. 4. Invest excess cash—only a sufficient amount of cash necessary to cover a company’s day-to-day needs should be kept on hand; any excess amounts should be invested in an effort to earn an adequate rate of return on cash.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-27
Problems Topic: Bank Reconciliations LO: 5 1. Use the following information to prepare a bank reconciliation for Atticus Company at August 31, 2019: (1)
Cash account balance, August 31, $31,185.90.
(2)
Bank statement balance, August 31, $37,141.50.
(3)
Deposits in transit, $2,880.00.
(4)
Outstanding checks, August 31, $9,570.60.
(5)
Service charge on bank statement not recorded in books, $75.00.
(6)
Bank error - another company’s check charged on Atticus Company’s bank statement, $750.00.
(7)
Check for repairs expense, $2,010.00, incorrectly recorded in books as $2,100.00.
Answer: ATTICUS COMPANY Bank Reconciliation August 31, 2019 Balance per bank statement Add: Deposits in transit Check of another Company charged to Finch Company
$37,141.50 2,880.00
Balance per general ledger Add: Check for $2,010 incorrectly recorded as $2,100
$31,185.90 90.00
Less: Outstanding checks
750.00 $40,771.50 0 9,570.60
$31,275.90
Less: Service charge
75.00
Reconciled balance
$31,200.90
Reconciled balance
$31,200.90
©Cambridge Business Publishers, 2020 7-28
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Bank Reconciliations LO: 5 2. Use the following information to prepare a bank reconciliation for McGoo Company at August 31, 2019: (1)
Cash account balance, $18,273.40.
(2)
Bank statement balance, August 31, $16,315.00.
(3)
Deposits in transit, $2,800.00.
(4)
Outstanding checks, August 31, $1,850.80.
(5)
Service charge on bank statement not recorded in books, $44.00.
(6)
Bank error - another company’s check charged on McGoo Company’s bank statement, $245.20.
(7)
Check for repairs expense, $1,680, incorrectly recorded in books as $960.00.
Answer: MCGOO COMPANY Bank Reconciliation August 31, 2019 Balance per bank statement Add: Deposits in transit Check of another Company charged to Magee Company
$16,315.00 2,800.00 245.20
Less: Outstanding checks
$19,360.20 1,850.80
Reconciled balance
$17,509.40
Balance per general ledger Less: Service charge Check for $1,680 incorrectly recorded as $960
$18,273.40 44.00
Reconciled balance
$17,509.40
720.00
©Cambridge Business Publishers, 2020 Test Bank, Chapter 7
7-29
Topic: Bank Reconciliations LO: 3, 5 3. Use the following information to prepare a bank reconciliation for Forester Company at April 30, 2019: (1)
Cash account balance, April 30, $29,359.20.
(2)
Bank statement balance, April 30, $32,274.60.
(3)
Service charge on bank statement not recorded in books, $210.00.
(4)
Deposits in transit, $4,315.80.
(5)
Outstanding checks, April 30, $2,840.40.
(6)
The bank statement included a charge of $1,399.20 for P. Harper’s NSF check. The check, returned with the bank statement, had been received by Forester in payment on account.
(7)
The bank collected a $6,000.00 note in April for Forester. This amount was included in the bank statement, but Forester had not yet recorded the collection. The bank’s $210.00 service charge for April [see (3) above] included collection charge for the note.
Answer: FORESTER COMPANY Bank Reconciliation April 30, 2019 Balance per bank statement Add: Deposits in transit
$32,274.60 4,315.80
Less: Outstanding checks
$36,590.40 2,840,40
Reconciled balance
$33,750.00
Balance per general ledger Add: Note Collected by bank
$29,359.20 6,000.00
Less: Service charge NSF check
$35,359.20 210.00 1,399.20
Reconciled balance
$33,750.00
©Cambridge Business Publishers, 2020 7-30
th
Financial Accounting for Undergraduates, 4 Edition
Chapter 8 Accounting for Receivables Learning Objectives – Coverage by question LO1 – Define accounts receivable, explain losses from uncollectible accounts, and describe the allowance method of accounting for doubtful accounts. LO2 – Describe and illustrate the percentage of net sales method and the accounts receivable aging method for estimating a business’s bad debts expense.
True / False
Multiple Choice
1, 2, 4, 5, 8-11
1-4, 13-15, 17, 18, 71-74, 79, 80, 85, 86
12
7, 8, 11, 12, 19, 20, 22-37, 40, 61-70, 75-78, 81-84, 87-94
LO3 – Discuss the accounting treatment of credit card sales.
Exercises
Problems
2, 4
1, 3, 4
1, 4-7
21, 95, 96
LO4 – Illustrate a promissory note receivable, discuss the calculation of interest on notes receivable, and present journal entries to record notes receivable and interest.
13-15
41-56, 97-110
LO5 – Define accounts receivable turnover and average collection period and explain their use in the analysis and management of accounts and notes receivable.
3
5, 6, 57-60
LO6 – Appendix 8A. Illustrate the direct write-off method and contrast it with the allowance method for accounting for doubtful accounts.
6, 7
9, 10, 16, 38, 39
8
2
2, 3
6
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-1
Chapter 8: Accounting for Receivables
True / False Topic: Accounts Receivable LO: 1 1. The net accounts receivable reported in the current asset section of a company’s balance sheet represents all receivables expected to be collected within the next year. Answer: True Rationale: A company makes two representations when reporting receivables in the balance sheet. The first is that it expects to collect the amount reported on the balance sheet. The second is that it expects to collect within the next year or operating cycle. Topic: Allowance Account LO: 1 2. The balance in Allowance for Doubtful Accounts represents the amount a company thinks it will not collect from a customer. Answer: True Rationale: The Allowance for Doubtful Accounts is a contra-asset account with a normal credit balance. It is shown on the balance sheet as a deduction from accounts receivable to reflect the expected amount of uncollectible accounts. Topic: Accounts Receivable Turnover LO: 5 3. The higher the accounts receivable turnover is, the faster receivables are being collected. Answer: True Rationale: More turns of accounts receivable indicate that receivables are being collected more quickly. Topic: Bad Debts Expense LO: 1 4. Income statement effects of doubtful accounts occur at the point of estimation, not when an account is written-off. Answer: True Rationale: Under the matching principle, costs relating to anticipated bad debts expense are matched with sales in the period that the sales are recognized. Upon write-off, both the receivable and the allowance account are reduced, leaving net receivables unchanged. Topic: Accounts Receivable LO: 1 5. Advances to company employees should be included in the Accounts Receivable balance. Answer: False Rationale: Advances to employees should be included with the Other Receivables account on the balance sheet. ©Cambridge Business Publishers, 2020 8-2
Financial Accounting for Undergraduates, 4th Edition
Topic: Direct Write-Off Method LO: 6 6. The direct write-off method of accounting for doubtful accounts mismatches revenue and expenses and overstates assets. Answer: True Rationale: Under the direct write-off method, doubtful accounts are charged to the bad debts expense on the income statement in the period in which the accounts are determined to be uncollectible. Under this approach, there is no attempt to estimate the bad debts expense, nor is there any attempt to match this expense with sales revenues in the period in which the credit sales transaction originally occurred. Topic: Direct Write-Off Method LO: 6 7. The direct write-off method of accounting for doubtful accounts follows the accrual concept of accounting more closely than does the allowance method of accounting for doubtful accounts. Answer: False Rationale: The allowance method matches credit losses with the related credit sales in the same time period in which the sale occurs. Under the direct write-off method, doubtful accounts are charged to the bad debts expense on the income statement in the period in which the accounts are determined to be uncollectible. There is no attempt to estimate the bad debts expense, nor is there any attempt to match this expense with sales revenues in the period in which the credit sales transaction originally occurred. Topic: Allowance for Doubtful Accounts LO: 1 8. The Allowance for Doubtful Accounts normally has a credit balance. Answer: True Rationale: The Allowance for Doubtful Accounts is a contra-asset account with a normal credit balance. It is shown on the balance sheet as a deduction from accounts receivable to reflect the expected amount of uncollectible accounts. LO: 1 9. The allowance method of accounting for doubtful accounts recognizes the related expense, even though it is not known which customers’ accounts will be doubtful. Answer: True Rationale: The Allowance for Doubtful Accounts is a contra-asset account with a normal credit balance. It is shown on the balance sheet as a deduction from accounts receivable to reflect the expected amount of uncollectible accounts. However, the company does not know precisely which of its customer accounts will be uncollectible.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-3
Topic: Allowance for Doubtful Accounts LO: 1 10. Under the allowance method of estimating bad debts expense, writing off a specific account reduces the firm’s net assets. Answer: False Rationale: The entry to write-off a specific account receivable is: Allowance for doubtful accounts Accounts receivable
XXX XXX
Both Accounts Receivable and the Allowance for Doubtful Accounts decrease; thus, there is no change in net accounts receivable, i.e., no change in net assets. Topic: Allowance for Doubtful Accounts LO: 1 11. If the allowance method of recording doubtful accounts is used, the entry to write off an account does not affect net income or total assets. Answer: True Rationale: The entry to write-off a specific account receivable is: Allowance for doubtful accounts Accounts receivable
XXX XXX
Both Accounts Receivable and the Allowance for Doubtful Accounts decrease; thus, there is no change in net accounts receivable, i.e., no change in net assets. There is no income statement effect. Topic: Allowance for Doubtful Accounts LO: 2 12. When a firm using the allowance method of estimating bad debts expense recovers the amount of an account receivable previously written off, the recovery is recorded as a debit to Cash and a credit to Miscellaneous Income. Answer: False Rationale: To reinstate the account: Accounts receivable—XYZ Company Allowance for doubtful accounts To record receipt of cash Cash Accounts receivable—XYZ Company
XXX XXX XXX XXX
©Cambridge Business Publishers, 2020 8-4
Financial Accounting for Undergraduates, 4th Edition
Topic: Determining Maturity Date LO: 4 13. A 90-day note dated April 23 has a maturity date of July 23. Answer: False Rationale: A 90-day note dated April 23 has a maturity date of July 22. 7 days in April (30 -23) 31 days in May 30 days in June 22 days in July 90 days Topic: Determining Maturity Date LO: 4 14. A 3-month note dated July 1 has a maturity date of October 1. Answer: True Rationale: If the duration of a note is expressed in months, the maturity date is calculated simply by counting the number of months from the date of issue. For example, a three-month note dated July 1 would mature on October 1. Topic: Interest on Notes Receivable LO: 4 15. Interest at a rate of 8% on $9,000 for 120 days equals $240. Answer: True Rationale: $9,000 x 8% x 120/360 = $240
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-5
Multiple Choice Topic: Accounts Receivable LO: 1 Level of Difficulty: EASY 1. On which financial statement and at what amount are accounts receivable reported? A) Balance sheet at the amount owed by customers B) Income statement at the net uncollectible amount C) Income statement at the amount written off D) Balance sheet at the net realizable value Answer: D Rationale: Accounts receivable are reported on the balance sheet at the amount expected to be collected which is accounts receivable less allowance for doubtful accounts, also known as net realizable value. Topic: Accounts Receivable LO: 1 Level of Difficulty: EASY 2. At what amount will accounts receivable for Advantage Company be reported on the balance sheet if the gross receivable balance is $52,000 and the allowance for doubtful accounts is estimated at 4% of gross receivables? A) $52,960 B) $47,000 C) $49,920 D) $28,200 Answer: C Rationale: Receivables are reported net of the allowance account. In this case, $52,000 – ($52,000 x 4%) = $49,920. Topic: Accounts Receivable LO: 1 Level of Difficulty: EASY 3. At what amount will accounts receivable for Horizon Company be reported on the balance sheet if the gross receivable balance is $156,000 and the allowance for doubtful accounts is estimated at 4% of gross receivables? A) $158,880 B) $141,000 C) $149,760 D) $ 84,600 Answer: C Rationale: Receivables are reported net of the allowance account. In this case, $156,000 – ($156,000 x 4%) = $149,760.
©Cambridge Business Publishers, 2020 8-6
Financial Accounting for Undergraduates, 4th Edition
Topic: Doubtful Accounts LO: 1 Level of Difficulty: MEDIUM 4. Which of the following does not occur when a company receives additional information that requires it to increase its expectations of doubtful accounts receivable? A) Accounts receivable (net) is reduced B) Bad debts expense is increased C) Net income is reduced D) The allowance account is decreased Answer: D Rationale: When a company receives additional information that requires it to increase its expectations of doubtful accounts receivable, the following entry is made: Bad debts expense Allowance for doubtful accounts To record the increase in bad debts expense.
XXX XXX
Net Accounts Receivable is reduced because the Allowance for Doubtful Accounts, a contra-asset account, is increased, resulting in additional expense and a reduction of profit and retained earnings. Topic: Average Collection Period LO: 5 Level of Difficulty: EASY 5. Which of the following formula computes the average collection period? A) 365 / Average accounts receivable B) Account receivable / Average daily sales C) Sales / Average accounts receivable D) 365 / Accounts receivable turnover Answer: D Rationale: Average collection period = 365 / Accounts receivable turnover Topic: Average Collection Period LO: 5 Level of Difficulty: MEDIUM 6. If the collection period lengthens compared to historic figures and industry averages, what might the reason be? A) Deterioration of collectability of receivables B) A change in sales mix to longer paying customers C) A decrease in the amount of sales generated D) A and B Answer: D Rationale: A lengthened collection period means that receivables turnover slows. Answers A and B are reasons for a slowdown in the receivables turnover.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-7
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 7. Great Landscapes Company estimates its doubtful accounts by aging its accounts receivable and applying percentages to various aged categories of accounts. The Great Landscapes Company computes a total of $3,600 in estimated doubtful accounts as of December 31, 2019. Its Accounts Receivable account has a balance of $112,800 and its Allowance for Doubtful Accounts has a credit balance of $600 before adjustment at December 31, 2019. How much bad debts expense will Great Escapes report in 2019? A) $ 480 B) $3,840 C) $3,000 D) $3,360 Answer: C Rationale: To bring the allowance to the desired balance of $3,600, the Great Landscapes Company will need to increase the allowance account by $3,000, resulting in bad debts expense of that same amount. Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 8. Green Garden Company estimates its doubtful accounts by aging its accounts receivable and applying percentages to various aged categories of accounts. The Green Garden Company computes a total of $10,800 in estimated doubtful accounts as of December 31, 2019. Its Accounts Receivable account has a balance of $338,400 and its Allowance for Doubtful Accounts has a credit balance of $1,800 before adjustment at December 31, 2019. How much bad debts expense will Green Garden report in 2019? A) $ 1,440 B) $11,520 C) $ 9,000 D) $10,080 Answer: C Rationale: To bring the allowance to the desired balance of $10,080, the Green Garden Company will need to increase the allowance account by $9,000, resulting in bad debts expense of that same amount. Topic: Direct Write-Off Method LO: 6 Level of Difficulty: EASY 9. A major shortcoming of the direct write-off method is that credit losses are: A) Not matched with sales B) Never recognized C) Not shown in the subsidiary ledger D) Sometimes collected at a future date Answer: A Rationale: Under the direct write-off method, doubtful accounts are charged to the bad debts expense on the income statement in the period in which the accounts are determined to be uncollectible. Under this approach, there is no attempt to estimate the bad debts expense, nor is there any attempt to match this expense with sales revenues in the period in which the credit sales transaction originally occurred. ©Cambridge Business Publishers, 2020 8-8
Financial Accounting for Undergraduates, 4th Edition
Topic: Direct Write-Off Method LO: 6 Level of Difficulty: MEDIUM 10. In accounting for credit losses: A) The allowance method matches losses with related sales better than the direct write-off method. B) The direct write-off method involves estimating credit losses. C) The direct write-off method consistently understates assets on the balance sheet. D) Both (B) and (C) Answer: A Rationale: The allowance method matches credit losses with the related credit sales in the same time period in which the sale occurs. Under the direct write-off method, doubtful accounts are charged to the bad debts expense on the income statement in the period in which the accounts are determined to be uncollectible. There is no attempt to estimate the bad debts expense, nor is there any attempt to match this expense with sales revenues in the period in which the credit sales transaction originally occurred. Under this approach, expenses are understated and net income, retained earnings and total assets are overstated. Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: MEDIUM 11. On December 31, 2019 before adjusting entries, Accounts Receivable for California Company had a debit balance of $200,000, and the Allowance for Doubtful Accounts had a credit balance of $6,000. Credit sales for the year were $1,600,000. If credit losses are estimated at 1% of credit sales: A) The balance of the Allowance for Doubtful Accounts will be $10,000 after adjustment. B) The balance of the Allowance for Doubtful Accounts will be $22,000 after adjustment. C) The balance of the Allowance for Doubtful Accounts will be $16,000 after adjustment. D) Bad Debts Expense for the year will be $22,000. Answer: B Rationale: Ending balance in Allowance for Doubtful Accounts = $6,000 + ($1,600,000 x 1%) = $22,000 Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: MEDIUM 12. On December 31, 2019 before adjusting entries, Accounts Receivable for Atlanta Company had a debit balance of $600,000, and the Allowance for Doubtful Accounts had a credit balance of $18,000. Credit sales for the year were $4,800,000. If credit losses are estimated at 1% of credit sales: A) The balance of the Allowance for Doubtful Accounts will be $30,000 after adjustment. B) The balance of the Allowance for Doubtful Accounts will be $66,000 after adjustment. C) The balance of the Allowance for Doubtful Accounts will be $48,000 after adjustment. D) Bad Debts Expense for the year will be $66,000. Answer: B Rationale: Ending balance in Allowance for Doubtful Accounts = $18,000 + ($4,800,000 x 1%) = $66,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-9
Topic: Allowance Method LO: 1 Level of Difficulty: MEDIUM 13. Under the allowance method of accounting for credit losses, the entry to write off a specific account: A) Will increase total assets B) Debits Bad Debts Expense and credits Allowance for Doubtful Accounts C) Is the same as the entry to write off a specific account under the direct write-off method D) Does not affect net income or total assets Answer: D Rationale: When a specific account receivable should be written off and removed from a company’s balance sheet, the following entry is made: Allowance for Doubtful accounts Accounts receivable XYZ Company To write off the XYZ Company’s account receivable
XXX XXX
The journal entry to write off an account receivable does not affect a company’s net income or total assets. Topic: Allowance Method LO: 1 Level of Difficulty: MEDIUM 14. Boulder Beaver Company had a $150,000 beginning balance in Accounts Receivable and a $6,000 credit balance in the Allowance for Doubtful Accounts. During the year, credit sales were $600,000 and customers’ accounts collected were $590,000. Also, $4,000 in worthless accounts were written off. What was the net amount of receivables included in the current assets at the end of the year, before any provision was made for doubtful accounts? A) $130,000 B) $126,000 C) $154,000 D) $120,000 Answer: C Rationale: Year-end Allowance for Doubtful Accounts = $6,000 - $4,000 = $2,000 Year-end Accounts receivable = $150,000 + $600,000 – $590,000 – $4,000 = $156,000 Net Accounts Receivable = $156,000 – $2,000 = $154,000
©Cambridge Business Publishers, 2020 8-10
Financial Accounting for Undergraduates, 4th Edition
Topic: Allowance Method LO: 1 Level of Difficulty: MEDIUM 15. John Den Bear Company had a $450,000 beginning balance in Accounts Receivable and a $18,000 credit balance in the Allowance for Doubtful Accounts. During the year, credit sales were $1,800,000 and customers’ accounts collected were $1,770,000. Also, $12,000 in worthless accounts were written off. What was the net amount of receivables included in the current assets at the end of the year, before any provision was made for doubtful accounts? A) $390,000 B) $378,000 C) $462,000 D) $240,000 Answer: C Rationale: Year-end Allowance for Doubtful Accounts = $18,000 - $12,000 = $6,000 Year-end Accounts receivable = $450,000 + $1,800,000 – $1,770,000 – $12,000= $468,000 Net Accounts Receivable = $468,000 – $6,000 = $462,000 Topic: Direct Write-Off Method LO: 6 Level of Difficulty: EASY 16. The entry to record the write-off of Ward Company’s account under the direct write-off method is: A) Accounts Receivable--Ward Company Allowance for Doubtful Accounts B) Bad Debts Expense Allowance for Doubtful Accounts C) Allowance for Doubtful Accounts Accounts Receivable--Ward Company D) Bad Debts Expense Accounts Receivable--Ward Company Answer: D Rationale: Under the direct write-off method, doubtful accounts are charged to the bad debts expense on the income statement in the period in which the accounts are determined to be uncollectible. The journal entry made when the direct write-off method is used is: Bad debt expense – Ward Company Accounts receivable – Ward Company
XXX XXX
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-11
Topic: Allowance Method LO: 1 Level of Difficulty: EASY 17. The entry to record the write-off of Sepich, Inc.’s account using the allowance method is: A) Bad Debts Expense Allowance for Doubtful Accounts B) Bad Debts Expense Accounts Receivable--Sepich, Inc. C) Allowance for Doubtful Accounts Accounts Receivable--Sepich, Inc. D) Accounts Receivable--Sepich, Inc. Allowance for Doubtful Accounts Answer: C Rationale: The journal entry to write off an account receivable does not affect a company’s net income or total assets. By means of the year-end adjusting entry, the bad debts expense is reported in the period when the related sales revenue is recorded. Because the Allowance for Doubtful Accounts is deducted from the Accounts Receivable account on the balance sheet, the net realizable value of accounts receivable is unchanged by the account write off. When a specific account receivable should be written off and removed from a company’s balance sheet the following entry should be made: Allowance for Doubtful Accounts Accounts Receivable
XXX XXX
Topic: Allowance Method LO: 1 Level of Difficulty: MEDIUM 18. If a company fails to make an adjusting entry to estimate doubtful accounts, then this error: A) Understates owners’ equity B) Understates assets C) Overstates net income D) Overstates expenses Answer: C Rationale: The proper entry to record the estimate for doubtful accounts is: Bad Debts Expense Allowance for Doubtful Accounts
XXX XXX
If this entry is not made, expense is understated and thus, net income is overstated.
©Cambridge Business Publishers, 2020 8-12
Financial Accounting for Undergraduates, 4th Edition
Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: MEDIUM 19. Assume the following unadjusted account balances at the end of the accounting period for Margarete Company: Accounts Receivable, $100,000; Allowance for Doubtful Accounts, $1,400 (debit balance); and Net sales, $1,200,000. If Margarete’s past experience indicates credit losses of 1% of net sales, the adjusting entry to estimate doubtful accounts is: A) Bad Debts Expense Accounts Receivable B) Bad Debts Expense Allowance for Doubtful Accounts C) Bad Debts Expense Allowance for Doubtful Accounts D) Bad Debts Expense Allowance for Doubtful Accounts
12,000 12,000 10,600 10,600 13,400 13,400 12,000 12,000
Answer: D Rationale: Bad debt expense = Credit Sales x % of past credit losses X = $1,200,000 x 1% = $12,000 Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: MEDIUM 20. Assume the following unadjusted account balances at the end of the accounting period for Emmie Company: Accounts Receivable, $300,000; Allowance for Doubtful Accounts, $4,200 (debit balance); and Net sales, $3,600,000. If Emmie’s past experience indicates credit losses of 1% of net sales, the adjusting entry to estimate doubtful accounts is: A) Bad Debts Expense Accounts Receivable B) Bad Debts Expense Allowance for Doubtful Accounts C) Bad Debts Expense Allowance for Doubtful Accounts D) Bad Debts Expense Allowance for Doubtful Accounts
36,000 36,000 31,800 31,800 40,200 40,200 36,000 36,000
Answer: D Rationale: Bad debt expense = Credit Sales x % of past credit losses X = $3,600,000 x 1% = $36,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-13
Topic: Credit Card Sales LO: 3 Level of Difficulty: EASY 21. A retailer that makes credit card sales: A) Absorbs any losses on uncollectible credit card accounts B) Is charged a fee ranging from 1% to 5% of the amount of each credit card sale C) Records such sales as a debit to Cash or Accounts Receivable, a debit to Credit Card Fees Expense, and a credit to Sales Revenue D) Both (B) and (C). Answer: D Rationale: The credit card fee usually ranges from one percent to five percent of the amount of the credit card purchase. The journal entry to record a $1,000 credit card sale, with a three percent credit card fee, is as follows: Cash (or Accounts receivable) 970 Credit card fee expense 30 Sales revenue 1,000 To record credit card sales and collection, less a three percent fee. Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 22. River Forest, Inc.’s $180,000 Accounts Receivable balance at December 31 consisted of $160,000 current balances and $20,000 past-due balances. At December 31, the Allowance for Doubtful Accounts had a credit balance of $1,600. River Forest estimated that 2% of current balances and 15% of past-due balances will prove uncollectible. The adjusting entry to record credit losses is: A) Bad Debts Expense Allowance for Doubtful Accounts B) Bad Debts Expense Allowance for Doubtful Accounts C) Bad Debts Expense Accounts Receivable D) Bad Debts Expense Allowance for Doubtful Accounts
5,800 5,800 4,600 4,600 4,200 4,200 7,400 7,400
Answer: B Rationale: Allowance required = (2% x $160,000) + (15% x $20,000) = $6,200 desired balance Required adjusting entry = $6,200 – $1,600 = $4,600
©Cambridge Business Publishers, 2020 8-14
Financial Accounting for Undergraduates, 4th Edition
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 23. Hockey, Inc.’s $540,000 Accounts Receivable balance at December 31 consisted of $480,000 current balances and $60,000 past-due balances. At December 31, the Allowance for Doubtful Accounts had a credit balance of $4,800. Hockey, Inc. estimated that 2% of current balances and 15% of past-due balances will prove uncollectible. The adjusting entry to record credit losses is: A) Bad Debts Expense Allowance for Doubtful Accounts B) Bad Debts Expense Allowance for Doubtful Accounts C) Bad Debts Expense Accounts Receivable D) Bad Debts Expense Allowance for Doubtful Accounts
17,400 17,400 13,800 13,800 12,600 12,600 22,200 22,200
Answer: B Rationale: Allowance required = (2% x $480,000) + (15% x $60,000) = $18,600 desired balance Required adjusting entry = $18,600 – $4,800 = $13,800 Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: MEDIUM 24. Princess Company’s Accounts Receivable balance at December 31 was $300,000 and there was a credit balance of $1,400 in the Allowance for Doubtful Accounts. The year’s sales were $1,800,000. Princess estimates credit losses for the year at 1.5% of sales. After the appropriate adjusting entry is made for credit losses, what is the net amount of accounts receivable included in the current assets at year-end? A) $300,000 B) $271,600 C) $325,400 D) $277,400 Answer: B Rationale: Bad Debt Expense = $1,800,000 x 1.5% = $27,000 Allowance for Doubtful Accounts = $1,400 + $27,000 = $28,400 Net Accounts Receivable = $300,000 – $28,400 = $271,600
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-15
Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: MEDIUM 25. Mario Company’s Accounts Receivable balance at December 31 was $900,000 and there was a credit balance of $4,200 in the Allowance for Doubtful Accounts. The year’s sales were $5,400,000. Mario estimates credit losses for the year at 1.5% of sales. After the appropriate adjusting entry is made for credit losses, what is the net amount of accounts receivable included in the current assets at year-end? A) $900,000 B) $814,800 C) $976,305 D) $832,200 Answer: B Rationale: Bad Debt Expense = $5,400,000 x 1.5% = $81,000 Allowance for Doubtful Accounts = $4,200 + $81,000 = $85,200 Net Accounts Receivable = $900,000 – $85,200 = $814,800 Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 26. McKinley Company’s Accounts Receivable balance at December 31 was $200,000, and there was a debit balance of $1,200 in the Allowance for Doubtful Accounts. Mc Kinley estimates that 3% of the Accounts Receivable will prove to be uncollectible. After the appropriate adjusting entry is made for credit losses, what is the net amount of accounts receivable included in the current assets at year-end? A) $175,800 B) $173.400 C) $194,000 D) $180,000 Answer: C Rationale: Allowance required = 3% x $200,000 = $6,000 Net Accounts Receivable = $200,000 – $6,000 = $194,000 Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 27. Vandy Company’s Accounts Receivable balance at December 31 was $600,000, and there was a debit balance of $3,600 in the Allowance for Doubtful Accounts. Vandy estimates that 3% of the Accounts Receivable will prove to be uncollectible. After the appropriate adjusting entry is made for credit losses, what is the net amount of accounts receivable included in the current assets at year-end? A) $527,400 B) $520,200 C) $582,000 D) $540,000 Answer: C Rationale: Allowance required = 3% x $600,000 = $18,000 Net Accounts Receivable = $600,000 – $18,000 = $582,000 ©Cambridge Business Publishers, 2020 8-16
Financial Accounting for Undergraduates, 4th Edition
Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: MEDIUM 28. Assume the following unadjusted account balances at the end of the accounting period for Cottle Company: Accounts Receivable, $30,000; Allowances for Doubtful Accounts, $800 (debit balance); Net sales, $240,000. If Cottle Company’s past experience indicates credit losses of 2% of net sales, the adjusting entry to estimate uncollectible accounts is: A) Bad Debts Expense Allowance for Doubtful Accounts B) Bad Debts Expense Allowance for Doubtful Accounts C) Bad Debts Expense Allowance for Doubtful Accounts D) Bad Debts Expense Accounts Receivable
4,800 4,800 5,600 5,600 4,000 4,000 4,700 4,700
Answer: A Rationale: Adjustment required = 2% x $240,000 = $4,800 Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: MEDIUM 29. Assume the following unadjusted account balances at the end of the accounting period for Jasek Company: Accounts Receivable, $90,000; Allowances for Doubtful Accounts, $2,400 (debit balance); Net sales, $720,000. If Jaroslav Company’s past experience indicates credit losses of 2% of net sales, the adjusting entry to estimate uncollectible accounts is: A) Bad Debts Expense Allowance for Doubtful Accounts B) Bad Debts Expense Allowance for Doubtful Accounts C) Bad Debts Expense Allowance for Doubtful Accounts D) Bad Debts Expense Accounts Receivable
14,400 14,400 15,300 15,300 12,000 12,000 14,400 14,400
Answer: A Rationale: Adjustment required = 2% x $720,000 = $14,400
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-17
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 30. Assume the following unadjusted account balances at the end of the accounting period for Montana Hardware: Accounts Receivable, $80,000; Allowance for Doubtful Accounts, $1,600 (debit balance); Sales revenue, $900,000. If Montana Hardware ages the accounts and determines that $4,000 of the receivables may be uncollectible, the adjusting entry should be: A) Bad Debts Expense Allowance for Doubtful Accounts B) Bad Debts Expense Allowance for Doubtful Accounts C) Bad Debts Expense Allowance for Doubtful Accounts D) Bad Debts Expense Accounts Receivable
4,000 4,000 5,600 5,600 2,400 2,400 4,000 4,000
Answer: B Rationale: Required adjusting entry = $4,000 – ($1,600) = $5,600 Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 31. Assume the following unadjusted account balances at the end of the accounting period for Colorado Hardware: Accounts Receivable, $240,000; Allowance for Doubtful Accounts, $4,800 (debit balance); Sales revenue, $2,700,000. If Colorado Hardware ages the accounts and determines that $12,000 of the receivables may be uncollectible, the adjusting entry should be: A) Bad Debts Expense Allowance for Doubtful Accounts B) Bad Debts Expense Allowance for Doubtful Accounts C) Bad Debts Expense Allowance for Doubtful Accounts D) Bad Debts Expense Accounts Receivable
12,000 12,000 16,800 16,800 7,200 7,200 12,000 12,000
Answer: B Rationale: Required adjusting entry = Desired balance in Allowance for Doubtful Accounts – Year-end balance X = $12,000 – ($4,800) = $16,800
©Cambridge Business Publishers, 2020 8-18
Financial Accounting for Undergraduates, 4th Edition
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 32. Assume the following unadjusted account balances at the end of the accounting period for Candy Crunch Palace: Accounts Receivable, $90,000; Allowance for Doubtful Accounts, $1,000 (credit balance); and Sales revenue $600,000. If Candy Crunch Palace ages the accounts and determines that $5,000 of receivables may be uncollectible, the adjusting entry should be: A) Bad Debts Expense Accounts Receivable B) Bad Debts Expense Allowance for Doubtful Accounts C) Bad Debts Expense Allowance for Doubtful Accounts D) Bad Debts Expense Allowance for Doubtful Accounts
5,000 5,000 4,000 4,000 3,000 3,000 5,000 5,000
Answer: B Rationale: Required adjusting entry = $5,000 – $1,000 = $4,000 Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 33. Assume the following unadjusted account balances at the end of the accounting period for Guatemala Cafe: Accounts Receivable, $135,000; Allowance for Doubtful Accounts, $3,000 (credit balance); and Sales revenue $1,800,000. If Guatemala ages the accounts and determines that $15,000 of receivables may be uncollectible, the adjusting entry should be: A) Bad Debts Expense Accounts Receivable B) Bad Debts Expense Allowance for Doubtful Accounts C) Bad Debts Expense Allowance for Doubtful Accounts D) Bad Debts Expense Allowance for Doubtful Accounts
15,000 15,000 12,000 12,000 9,000 9,000 15,000 15,000
Answer: B Rationale: Required adjusting entry = $15,000 – $3,000 = $12,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-19
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: DIFFICULT 34. New Zealand, Inc. had a $140,000 beginning balance in Accounts Receivable and a $5,000 credit balance in the Allowance for Doubtful Accounts. During the year, credit sales were $800,000 and customers’ accounts collected were $810,000. Also, $4,000 in worthless accounts were written off. An aging of the accounts indicates that 5% of the end-of-the-year Accounts Receivable balance is doubtful for collection. What amount of Bad Debts Expense should be provided at year-end? A) $6,300 B) $7,300 C) $7,600 D) $5,300 Answer: D Rationale: Year-end A/R = $140,000 + $800,000 – $810,000 – $4,000 = $126,000 Allowance for Doubtful Accounts balance = $126,000 x 5% = $6,300 Year-end Allowance for Doubtful Accounts = $5,000 - $4,000 = $1,000 Bad Debt Expense = $6,300 - $1,000 = $5,300 Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: DIFFICULT 35. Monkey, Inc. had a $420,000 beginning balance in Accounts Receivable and a $15,000 credit balance in the Allowance for Doubtful Accounts. During the year, credit sales were $2,400,000 and customers’ accounts collected were $2,430,000. Also, $12,000 in worthless accounts were written off. An aging of the accounts indicates that 5% of the end-of-the-year Accounts Receivable balance is doubtful for collection. What amount of Bad Debts Expense should be provided at year-end? A) $18.900 B) $21,900 C) $22,800 D) $15,900 Answer: D Rationale: Year-end A/R = $420,000 + $2,400,000 – $2,430,000 – $12,000 = $378,000 Allowance for Doubtful Accounts balance = $378,000 x 5% = $18,900 Year-end Allowance for Doubtful Accounts = $15,000 - $12,000 = $3,000 Bad Debt Expense = $18,900 - $3,000 = $15,900
©Cambridge Business Publishers, 2020 8-20
Financial Accounting for Undergraduates, 4th Edition
Topic: Recovery of Account Written Off Under Allowance Method LO: 2 Level of Difficulty: MEDIUM 36. United Company uses the allowance method of recording credit losses. In November 2019, United wrote off the $1,800 account of Gamma Company. In January 2020, Gamma paid the $1,800. The entry or entries to record the payment is/are: A) Cash
1,800
Recoveries of Accounts Written Off B) Accounts Receivable—Gamma Co. Allowance for Doubtful Accounts Cash Accounts Receivable—Gamma Co. C) Allowance for Doubtful Accounts Accounts Receivable—Gamma Co. D) Accounts Receivable—Gamma Co. Bad Debts Expense Cash Accounts Receivable—Gamma Co. Answer: B Rationale: Nov. 2019 Allowance for doubtful accounts Accounts receivable—Gamma Co. To write off the Gamma Company’s account
1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800
1,800 1,800
Jan. 2020 Accounts receivable—Gamma Co. 1,800 Allowance for doubtful accounts 1,800 To reinstate Gamma Co.’s account to the extent of the recovery Jan. 2020 Cash Accounts receivable—Gamma Co. To record collection of cash on account
1,800 1,800
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-21
Topic: Recovery of Account Written Off Under Allowance Method LO: 2 Level of Difficulty: MEDIUM 37. Northwest Company uses the allowance method of recording credit losses. In November 2019, Northwest wrote off the $5,400 account of Delta Company. In January 2020, Delta paid the $5,400. The entry or entries to record the payment is/are: A) Cash 5,400 Recoveries of Accounts Written Off 5,400 B) Accounts Receivable—Delta Co. 5,400 Allowance for Doubtful Accounts 5,400 Cash 5,400 Accounts Receivable—Delta Co. 5,400 C) Allowance for Doubtful Accounts 5,400 Accounts Receivable—Delta Co. 5,400 D) Accounts Receivable—Delta Co. 5,400 Bad Debts Expense 5,400 Cash 5,400 Accounts Receivable—Delta Co. 5,400 Answer: B Rationale: Nov. 2019 Allowance for doubtful accounts Accounts receivable—Delta Co. To write off the Delta Co.’s account
5,400 5,400
Jan. 2020 Accounts receivable— Delta Co. 5,400 Allowance for doubtful accounts To reinstate Delta Co.’s account to the extent of the recovery Jan. 2020 Cash Accounts receivable— Delta Co. To record collection of cash on account
5,400
5,400 5,400
©Cambridge Business Publishers, 2020 8-22
Financial Accounting for Undergraduates, 4th Edition
Topic: Recovery of Account Written Off Under Direct Write-Off Method LO: 6 Level of Difficulty: MEDIUM 38. Tiny Company uses the direct write-off method of recording credit losses. Tiny Company wrote off the $1,600 account of Tim Co. in October 2019. In February 2020, Tiny Company received a final $600 payment from Tim’s trustee in bankruptcy. Giant should make the following entry or entries to record the payment: A) Cash
600
Allowance for Doubtful Accounts B) Allowance for Doubtful Accounts Bad Debts Expense C) Accounts Receivable—Tim Co. Allowance for Doubtful Accounts D) Accounts Receivable—Tim Co. Bad Debts Expense Cash Accounts Receivable—Tim Co. Answer: D Rationale: Oct. 2019 Bad debts expense Accounts receivable – Tim Co. To write off the Tim Co.’s account
600 600 600 600 600 600 600 600 600
600 600
Feb. 2020 Accounts receivable – Tim Co. 600 Bad debts expense 600 To reinstate Tim Co.’s account to the extent of the recovery. Feb. 2020 Cash Accounts receivable—Tim Co. To record collection of cash on account
600 600
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-23
Topic: Recovery of Account Written Off Under Direct Write-Off Method LO: 6 Level of Difficulty: MEDIUM 39. Mercury Company uses the direct write-off method of recording credit losses. Mercury Company wrote off the $4,800 account of Venus Co. in October 2019. In February 2020, Mercury Company received a final $1,800 payment from Venus’ trustee in bankruptcy. Mercury should make the following entry or entries to record the payment: A) Cash
1,800
Allowance for Doubtful Accounts B) Allowance for Doubtful Accounts Bad Debts Expense C) Accounts Receivable – Venus Co. Allowance for Doubtful Accounts D) Accounts Receivable – Venus Co. Bad Debts Expense Cash Accounts Receivable – Venus Co.
1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800
Answer: D Rationale: Oct. 2019 Bad debts expense 4,800 Accounts receivable – Venus Co. To write off the Venus Co.’s account
4,800
Feb. 2020 Accounts receivable –Venus Co. 1,800 Bad debts expense 1,800 To reinstate Venus Co.’s account to the extent of the recovery. Feb. 2020 Cash Accounts receivable – Venus Co. To record collection of cash on account
1,800 1,800
©Cambridge Business Publishers, 2020 8-24
Financial Accounting for Undergraduates, 4th Edition
Topic: Recovery of Accounts Written Off Under the Allowance Method LO: 2 Level of Difficulty: MEDIUM 40. After writing off a customer’s account, a company using the allowance method subsequently collected the account in full. It should: A) Debit Cash and credit Accounts Receivable B) Debit Cash and credit Miscellaneous Income C) Debit Accounts Receivable and credit Allowance for Doubtful Accounts D) Both A) and C) Answer: D Rationale: Allowance for doubtful accounts Accounts receivable—customer To write off a customer’s account
XXX XXX
Accounts receivable—customer XXX Allowance for doubtful accounts To reinstate customer’s account to the extent of the recovery Cash
XXX
XXX
Accounts receivable—customer To record collection of cash on account
XXX
Topic: Notes Receivable and Interest LO: 4 Level of Difficulty: MEDIUM 41. Robbie Company paid Hoover Company for merchandise with an $8,000, 60-day, 9% note dated April 1. If Robbie Company pays the note at maturity, what entry should Hoover make at that time? A) Cash
8,720
Interest income Notes receivable B) Notes payable Interest expense Cash C) Cash Interest income Notes receivable D) Notes payable Interest expense Cash
720 8,000 8,000 720 8,720 8,120 120 8,000 7,880 120 8,000
Answer: C Rationale: April 1 Notes receivable 8,000 Accounts receivable Received 60 day, nine percent note in payment of account. June 1
8,120 Interest income Notes receivable Collected Robbie Company note ($8,000 x 9% x 60/360 = $120)
8,000
Cash
120 8,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-25
Topic: Notes Receivable and Interest LO: 4 Level of Difficulty: MEDIUM 42. Chopper Company paid Keith Company for merchandise with a $24,000, 60-day, 9% note dated April 1. If Chopper Company pays the note at maturity, what entry should Keith make at that time? A) Cash
26,160
Interest income Notes receivable B) Notes payable Interest expense Cash C) Cash Interest income Notes receivable D) Notes payable Interest expense Cash
2,160 24,000 24,000 2,160 26,160 24,360 360 24,000 23,640 360 24,000
Answer: C Rationale: April 1 Notes receivable 24,000 Accounts receivable 24,000 Received 60 day, nine percent note in payment of account. June 1
Cash
24,360 Interest income 360 Notes receivable 24,000 Collected Chopper Company note ($24,000 x 9% x 60/360 = $360)
Topic: Notes Receivable and Interest LO: 4 Level of Difficulty: MEDIUM 43. A $20,000, 3-month, 8% note is dated June 1, 2016. The maturity date and maturity value of the note are, respectively: A) September 1, 2016; $20,400 B) August 29, 2016; $20,400 C) September 1, 2016; $400 D) August 29, 2016; $20,000 Answer: A Rationale: Maturity value = $20,000 + ($20,000 x 8% x 3/12) = $20,400
©Cambridge Business Publishers, 2020 8-26
Financial Accounting for Undergraduates, 4th Edition
Topic: Notes Receivable and Interest LO: 4 Level of Difficulty: MEDIUM 44. A $60,000, 3-month, 8% note is dated June 1, 2019. The maturity date and maturity value of the note are, respectively: A) September 1, 2019; $61,200 B) August 29, 2019; $61,200 C) September 1, 2019; $1,200 D) August 29, 2019; $60,000 Answer: A Rationale: $60,000 + ($60,000 x 8% x 3/12) = $61,200 Topic: Notes Receivable and Interest LO: 4 Level of Difficulty: MEDIUM 45. A $30,000, 120-day, 9% note is dated April 30, 2019. The maturity date and maturity value of the note are, respectively: A) August 31, 2016; $32,960 B) August 28, 2016; $30,900 C) September 1, 2016; $32,960 D) August 28, 2016; $960 Answer: B Rationale: Computation of maturity date: May (31 days) + June (30 days) + July (31 days) + August (28 days) = 120 days; Maturity value = $30,000 + ($30,000 x 9% x 120/360) = $30,900 Topic: Notes Receivable and Interest LO: 4 Level of Difficulty: MEDIUM 46. A $90,000, 120-day, 9% note is dated April 30, 2019. The maturity date and maturity value of the note are, respectively: A) August 31, 2019; $99,880 B) August 28, 2019; $92,700 C) September 1, 2019; $98,880 D) August 28, 2019; $ 2,880 Answer: B Rationale: Computation of maturity date: May (31 days) + June (30 days) + July (31 days) + August (28 days) = 120 days; Maturity value = $90,000 + ($90,000 x 9% x 120/360) = $92,700 Topic: Notes Receivable and Interest LO: 4 Level of Difficulty: EASY 47. A note for $24,000 is dated May 3, 2019 and it matures on August 1, 2019. The note is a: A) 3-month note B) 90-day note C) 91-day note D) Both A and B Answer: B Rationale: Computation of maturity date: May (28 days) + June (30 days) + July (31 days) + August (1 day) = 90 days ©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-27
Topic: Notes Receivable and Interest LO: 4 Level of Difficulty: EASY 48. On December 11, 2019, Fred gave a $20,000, 60-day, 9% note to Barnie in payment of an account. On December 31, 2019, Barnie should record: A) $100 interest income B) $100 interest expense C) $300 interest income D) $300 interest expense Answer: A Rationale: Dec. 31 Interest receivable 100 Interest income To accrue interest income on the note from Fred Company ($20,000 x 9% x 20/360 = $100)
100
Topic: Notes Receivable and Interest LO: 4 Level of Difficulty: EASY 49. On December 11, 2019, Red gave a $60,000, 60-day, 9% note to Cardinal in payment of an account. On December 31, 2019, cardinal should record: A) $300 interest income B) $300 interest expense C) $900 interest income D) $900 interest expense Answer: A Rationale: Dec. 31 Interest receivable 300 Interest income To accrue interest income on the note from Red Company ($60,000 x 9% x 20/360 = $300)
300
Topic: Interest Receivable LO: 4 Level of Difficulty: MEDIUM 50. If Bruce Company fails to make an adjusting entry to accrue interest on a note receivable, then this error: A) Overstates expenses B) Understates income C) Understates assets and owners’ equity D) All of these except A Answer: D Rationale: The adjusting entry that Bruce Company makes, to record the earned, but uncollected, interest income is as follows: Interest receivable Interest income To accrue interest income on the note receivable
XX XX
If this entry is not made, income, owners’ equity, and assets would all be understated. ©Cambridge Business Publishers, 2020 8-28
Financial Accounting for Undergraduates, 4th Edition
Topic: Notes Receivable and Interest LO: 4 Level of Difficulty: MEDIUM 51. On November 16, 2019, Shoe Company borrowed $20,000 from Lace Company and gave a 90-day, 12% note. On December 31, 2019 the end of the accounting period, Lace makes the following entry: A) Notes receivable Interest income B) Interest receivable Interest income C) Cash Interest income D) Interest receivable Interest income
300 300 600 600 300 300 300 300
Answer: D Rationale: Dec. 31 Interest receivable 300 Interest income 300 To accrue interest income on the note from Shoe Company ($20,000 x 12% x 45/360 = $300) Topic: Notes Receivable and Interest LO: 4 Level of Difficulty: MEDIUM 52. On November 16, 2019, Pea Company borrowed $60,000 from Coat Company and gave a 90-day, 12% note. On December 31, 2019 the end of the accounting period, Coat makes the following entry: A) Notes receivable Interest income B) Interest receivable Interest income C) Cash Interest income D) Interest receivable Interest income
900 900 1,800 1,800 900 900 900 900
Answer: D Rationale: The adjusting entry that Coat Company makes at December 31, 2019, to record the earned, but uncollected, interest income is as follows: Dec. 31
Interest receivable 900 Interest income 900 To accrue interest income on the note from Pea Company ($60,000 x 12% x 45/360 = $900)
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-29
Topic: Interest Receivable LO: 4 Level of Difficulty: MEDIUM 53. Rain Company paid Drop Company for merchandise with a $9,000, 90-day, 10% note dated December 11, 2019. What entry should Drop Company make in its books at the end of the accounting period on December 31, 2019? A) Interest receivable Interest income B) Cash Interest receivable C) Interest income Interest receivable D) Cash Interest income
50 50 50 50 50 50 50 50
Answer: A Rationale: Dec. 31 Interest receivable 50 Interest income 50 To accrue interest income on the note from Rain Company ($9,000 x 10% x 20/360 = $50) Topic: Interest Receivable LO: 4 Level of Difficulty: MEDIUM 54. Sun Company paid Shine Company for merchandise with a $27,000, 90-day, 10% note dated December 11, 2019. What entry should Shine Company make in its books at the end of the accounting period on December 31, 2019? A) Interest receivable Interest income B) Cash Interest receivable C) Interest income Interest receivable D) Cash Interest income
150 150 150 150 150 150 150 150
Answer: A Rationale: Dec. 31 Interest receivable 150 Interest income 150 To accrue interest income on the note from Sun Company ($27,000 x 10% x 20/360 = $150)
©Cambridge Business Publishers, 2020 8-30
Financial Accounting for Undergraduates, 4th Edition
Topic: Notes Receivable LO: 4 Level of Difficulty: MEDIUM 55. Angela, Inc. received a $16,000 30-day, 9% note dated December 21, 2019 from Alyssa Company. On December 31, 2019, Angela made the necessary adjusting entry to accrue interest income on the note. Angela’s entry to record payment of the note on January 20, 2020 was: A) Cash
16,120 Interest income Notes receivable
B) Cash
120 16,000 16,040
Interest income Notes receivable C) Cash
40 16,000 16,120
Interest receivable Interest income Notes receivable D) Cash
40 80 16,000 16,080
Interest income Notes receivable
80 16,000
Answer: C Rationale: Dec. 31 Interest receivable 40 Interest income 40 To accrue interest income on the note from Alyssa Company ($16,000 x 9% x 10/360 = $40 accrued interest) Jan. 20
Cash
16,120 Interest receivable 40 Interest income 80 Notes receivable 16,000 Received payment of principal and interest from Alyssa Company ($16,000 x 9% x 20/360 = $80 interest)
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-31
Topic: Notes Receivable LO: 4 Level of Difficulty: MEDIUM 56. Balen, Inc. received a $48,000 30-day, 9% note dated December 21, 2019 from Vargas Company. On December 31, 2019, Balen made the necessary adjusting entry to accrue interest income on the note. Balen’s entry to record payment of the note on January 20, 2020 was: A) Cash
48,360 Interest income Notes receivable
B) Cash
360 48,000 48,120
Interest income Notes receivable C) Cash
120 48,000 48,360
Interest receivable Interest income Notes receivable D) Cash
120 240 48,000 48,240
Interest income Notes receivable
240 48,000
Answer: C Rationale: Dec. 31 Interest receivable 120 Interest income 120 To accrue interest income on the note from Vargas Company ($48,000 x 9% x 10/360 = $120 accrued interest) Jan. 20
Cash
48,360 Interest receivable 120 Interest income 240 Notes receivable 48,000 Received payment of principal and interest from Vargas Company ($48,000 x 9% x 20/360 = $240 interest)
Topic: Account Receivable Turnover LO: 5 Level of Difficulty: EASY 57. Percy, Inc. had net sales of $1,530,000 during 2019. On January 1, 2019, Percy’s accounts receivable were $320,000. On December 31, 2019, Percy’s accounts receivable were $400,000. What was Annabeth’s accounts receivable turnover for 2019? A) 4.25 B) 3.03 C) 3.83 D) 4.78 Answer: A Rationale: Accounts receivable turnover = Net sales / Average accounts receivable (net) X = $1,530,000 / [($320,000 + $400,000) / 2] = 4.25 ©Cambridge Business Publishers, 2020 8-32
Financial Accounting for Undergraduates, 4th Edition
Topic: Account Receivable Turnover LO: 5 Level of Difficulty: EASY 58. Tower, Inc. had net sales of $4,725,000 during 2019. On January 1, 2019, Tower’s accounts receivable were $960,000. On December 31, 2019, Tower’s accounts receivable were $1,200,000. What was Tower’s accounts receivable turnover for 2019? A) 4.93 B) 4.38 C) 8.53 D) 2.78 Answer: B Rationale: Accounts receivable turnover = Net sales / Average accounts receivable (net) X = $4,725,000 / [($960,000 + $1,200,000) / 2] = 4.38 Topic: Average Collection Period LO: 5 Level of Difficulty: MEDIUM 59. Percy, Inc. had net sales of $1,530,000 during 2019. On January 1, 2019, Percy’s accounts receivable were $320,000. On December 31, 2019, Percy’s accounts receivable were $400,000. What was Percy’s average collection period for 2019? A) 85.9 days B) 15.5 days C) 95.4 days D) 43.0 days Answer: A Rationale: Average collection period = 365 / Accounts receivable turnover X = 365 / ($1,530,000 / [($320,000 + $400,000) / 2]) = 85.9 days Topic: Average Collection Period LO: 5 Level of Difficulty: MEDIUM 60. Tower, Inc. had net sales of $4,725,000 during 2019. On January 1, 2019, Tower’s accounts receivable were $960,000. On December 31, 2019, Tower’s accounts receivable were $1,200,000. What was Tower’s average collection period for 2019? A) 83.4 days B) 13.8 days C) 96.2 days D) 43.3 days Answer: A Rationale: Average collection period = 365 / Accounts receivable turnover X = 365 / ($4,725,000 / [($960,000 + $1,200,000) / 2]) = 83.4 days
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-33
Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: EASY 61. Storm Company has net credit sales of $1,800,000 for the year and it estimates that doubtful accounts will be 2% of sales. If its Allowance for Doubtful Accounts has a credit balance of $6,000 prior to adjustment, its balance after adjustment will be a credit of: A) $28,000 B) $42,000 C) $27,960 D) $26,000 Answer: B Rationale: Bad Debt Expense = $1,800,000 x 2% = $36,000; Allowance for Doubtful Accounts = $6,000 + $36,000 = $42,000 Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: EASY 62. Scorpion Company has net credit sales of $5,400,000 for the year and it estimates that doubtful accounts will be 2% of sales. If its Allowance for Doubtful Accounts has a credit balance of $18,000 prior to adjustment, its balance after adjustment will be a credit of: A) $ 84,000 B) $126,000 C) $ 83,880 D) $ 78,000 Answer: B Rationale: Bad Debt Expense = $5,400,000 x 2% = $108,000 Allowance for Doubtful Accounts = $18,000 + $108,000 = $126,000 Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 63. At the beginning of 2019, Page Company’s allowance for doubtful accounts is $24,000. During 2019, $8,500 was written off as uncollectible. On December 31, 2019, Page Company used an aging schedule of accounts receivable and determined that $21,060 of the accounts receivable would probably be uncollectible. What would be the bad debts expense that should be reported on Page Company’s 2019 income statement? A) $ 2,940 B) $53,560 C) $11,440 D) $ 5,560 Answer: D Rationale: Year-end Allowance for Doubtful Accounts = $24,000 - $8,500 = $15,500 Bad Debt Expense = $21,060 - $15,500 = $5,560
©Cambridge Business Publishers, 2020 8-34
Financial Accounting for Undergraduates, 4th Edition
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 64. At the beginning of 2019, Brown Company’s allowance for doubtful accounts is $72,000. During 2019, $25,500 was written off as uncollectible. On December 31, 2019, Brown Company used an aging schedule of accounts receivable and determined that $63,180 of the accounts receivable would probably be uncollectible. What would be the bad debts expense that should be reported on Brown Company’s 2019 income statement? A) $109,680 B) $160,680 C) $ 34,440 D) $ 16,680 Answer: D Rationale: Year-end Allowance for Doubtful Accounts = $72,000 - $25,500 = $46,500 Bad Debt Expense = $63,180 - $46,500 = $16,680 Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 65. Losh Company has the following unadjusted account balances on December 31, 2019. The preadjustment balance of Allowance for Doubtful Accounts is $3,200 debit. This company uses the following aging of accounts receivable to estimate its bad debts. Accounts Age
Balance
Estimated Uncollectible %
Current (not yet due) 1-30 past due 31-60 past due 61-90 past due Over 90 days past due Total
$192,000 $128,000 $ 32,000 $ 13,000 $ 6,400 $371,400
1.0% 3.5% 12.0% 42.0% 67.0%
The Net Realizable Value of Accounts Receivable reported on the year-end Balance Sheet will be: A) $354,612 B) $391,925 C) $351,412 D) $348,212 Answer: C Rationale: Net Realizable Value of Accounts Receivable = $371,400 - $19,988 = $351,412 Accounts Age Current (not yet due) 1-30 past due 31-60 past due 61-90 past due Over 90 days past due Total
Balance $192,000 $128,000 $ 32,000 $ 13,000 $ 6,400 $371,400
Estimated Uncollectible % 1.0% 3.5% 12.0% 42.0% 67.0%
Allowance Required $ 1,920 4,480 3,840 5,460 4,288 $19,988
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-35
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 66. Pinata Company has the following unadjusted account balances on December 31, 2019. The preadjustment balance of Allowance for Doubtful Accounts is $9,600 debit. This company uses the following aging of accounts receivable to estimate its bad debts. Accounts Age Current (not yet due) 1-30 past due 31-60 past due 61-90 past due Over 90 days past due Total
Balance $576,000 $384,000 $ 96,000 $ 39,000 $ 19,200 $1,114,200
Estimated Uncollectible % 1.0% 3.5% 12.0% 42.0% 67.0%
The Net Realizable Value of Accounts Receivable reported on the year-end Balance Sheet will be: A) $1,063,836 B) $1,175,775 C) $1,054,236 D) $1,044,636 Answer: C Rationale: Net Realizable Value of Accounts Receivable = $1,114,200 - $59,964 = $1,054,236 Accounts Age Current (not yet due) 1-30 past due 31-60 past due 61-90 past due Over 90 days past due Total
Balance $576,000 $384,000 $ 96,000 $ 39,000 $ 19,200 $1,114,200
Estimated Uncollectible % 1.0% 3.5% 12.0% 42.0% 67.0%
Allowance Required $ 5,760 13,440 11,520 16,380 12,864 $59,964
©Cambridge Business Publishers, 2020 8-36
Financial Accounting for Undergraduates, 4th Edition
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 67. An aging of Bicycle Company's accounts receivable indicates that $20,000 is estimated to be uncollectible. If Allowance for Doubtful Accounts has a $3,000 credit balance, the adjustment to record bad debts for the period will require a: A) Debit to Bad Debts Expense for $20,000 B) Debit to Allowance for Doubtful Accounts for $17,000 C) Debit to Bad Debts Expense for $17,000 D) Credit to Allowance for Doubtful Accounts for $20,000 Answer: C Rationale: Bad Debt Expense = $20,000 - $3,000 = $17,000 Thus, the adjustment to record bad debts for the period will be: Bad Debts Expense Allowance for Doubtful Accounts
17,000 17,000
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 68. An aging of Coco Company's accounts receivable indicates that $60,000 is estimated to be uncollectible. If Allowance for Doubtful Accounts has a $9,000 credit balance, the adjustment to record bad debts for the period will require a: A) Debit to Bad Debts Expense for $60,000 B) Debit to Allowance for Doubtful Accounts for $51,000 C) Debit to Bad Debts Expense for $51,000 D) Credit to Allowance for Doubtful Accounts for $60,000 Answer: C Rationale: Bad Debt Expense = $60,000 - $9,000 = $51,000 Thus, the adjustment to record bad debts for the period will be: Bad Debts Expense Allowance for Doubtful Accounts
51,000 51,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-37
Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: DIFFICULT 69. Cunningham Company’s Accounts Receivable account has a balance of $644,000 and the Allowance for Doubtful Accounts has a debit balance of $1,700 at fiscal year-end prior to adjustment. If the estimate based on the percentage of sales approach to estimating uncollectibles is $39,800, the net realizable value of accounts receivable reported on the balance sheet after adjustment is: A) $604,200 B) $605,900 C) $602,500 D) $642,300 Answer: B Rationale: Allowance for Doubtful Accounts = $(1,700) + $39,800 = $38,100 Net Realizable Value of Accounts Receivable = $644,000 - $38,100 = $605,900 Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: DIFFICULT 70. Johnnie Company’s Accounts Receivable account has a balance of $1,932,000 and the Allowance for Doubtful Accounts has a debit balance of $5,100 at fiscal year-end prior to adjustment. If the estimate based on the percentage of sales approach to estimating uncollectibles is $119,400, the net realizable value of accounts receivable reported on the balance sheet after adjustment is: A) $1,812,600 B) $1,817,700 C) $1,807,500 D) $1,920,900 Answer: B Rationale: Allowance for Doubtful Accounts = $(5,100) + $119,400 = $114,300 Net Realizable Value of Accounts Receivable = $1,932,000 - $114,300 = $1,817,700 Topic: Accounts Receivable Write-offs LO: 1 Level of Difficulty: DIFFICULT 71. Cooper Company’s net accounts receivable before write-offs is $1,690,000. What is the balance in net accounts receivable, if $39,600 in doubtful accounts are written off? A) $1,646,000 B) $1,734,000 C) $1,690,000 D) Cannot be determined Answer: C Rationale: When the journal entry is recorded to write-off doubtful accounts, a debit is made to Allowance for Doubtful Accounts and a credit to Accounts Receivable – decreasing both account balances for the written off amount. The net effect is no change to the Accounts receivable, net balance.
©Cambridge Business Publishers, 2020 8-38
Financial Accounting for Undergraduates, 4th Edition
Topic: Accounts Receivable Write-offs LO: 1 Level of Difficulty: DIFFICULT 72. Spencer Company’s net accounts receivable before write-offs is $5,070,000. What is the balance in net accounts receivable, if $118,800 in doubtful accounts are written off under the allowance method? A) $4,938,000 B) $5,202,000 C) $5,070,000 D) Cannot be determined Answer: C Rationale: When the journal entry is recorded to write-off doubtful accounts, a debit is made to Allowance for Doubtful Accounts and a credit to Accounts Receivable – decreasing both account balances for the written off amount. The net effect is no change to the Accounts receivable, net balance. Topic: Accounts Receivable Write-offs LO: 1 Level of Difficulty: MEDIUM 73. Prior to the write off of a $500 customer account, Parthenon Company had the following account balances: Accounts receivable Allowance for doubtful accounts
$19,600 1,000
The net realizable value of the Accounts Receivable before and after the write-off was: A) B) C) D)
Before $18,600 $18,800 $18,600 $18,600
After $18,600 $18,600 $18,400 $18,300
Answer: A Rationale: The journal entry to write off an account receivable does not affect a company’s total assets. Allowance for doubtful accounts Accounts receivable – customer account To write off the customer’s account receivable.
Accounts receivable Allowance for doubtful accounts Net realizable
Before $19,600 1,000 $18,600
500 500 After $19,100 500 $18,600
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-39
Topic: Accounts Receivable Write-offs LO: 1 Level of Difficulty: MEDIUM 74. Prior to the write off of a $1,500 customer account, Betty Company had the following account balances: Accounts receivable Allowance for doubtful accounts
$58,800 3,000
The net realizable value of the Accounts Receivable before and after the write-off was: A) B) C) D)
Before $55,800 $55,800 $55,800 $55,800
After $55,800 $58,800 $55,200 $54,900
Answer: A Rationale: The journal entry to write off an account receivable does not affect a company’s total assets. Allowance for doubtful accounts Accounts receivable – customer account To write off the customer’s account receivable. Accounts receivable Allowance for doubtful accounts Net realizable
Before $58,800 3,000 $55,800
1,500 1,500 After $57,300 1,500 $55,800
Topic: Estimating Credit Losses LO: 2 Level of Difficulty: DIFFICULT 75. Thor Company’s Accounts Receivable account has a balance of $800,000 at the end of the year, and the company estimates the Net Realizable Value of Accounts Receivable to be $768,000. The Allowance for Doubtful Accounts has a credit balance of $18,000 at the beginning of the current year, and during the year, Thor wrote off $15,000 of accounts receivable. The year-end adjusting entry would require a: A) A credit to Allowance for Doubtful Accounts for $35,000 B) A debit to Bad Debts Expense for $14,000 C) A debit to Bad Debts Expense for $29,000 D) A credit to Allowance for Doubtful Accounts for $32,000 Answer: C Rationale: Allowance for Doubtful Accounts = $800,000 - $768,000 = $32,000 Year-end Allowance for Doubtful Accounts, before adjustment = $18,000 - $15,000 = $3,000 Required Allowance adjustment = $32,000 - $3,000 = $29,000 The year-end adjusting entry: Bad debts expense Allowance for doubtful accounts To record the bad debts expense for the year.
29,000 29,000
©Cambridge Business Publishers, 2020 8-40
Financial Accounting for Undergraduates, 4th Edition
Topic: Estimating Credit Losses LO: 2 Level of Difficulty: DIFFICULT 76. Saturn Company’s Accounts Receivable account has a balance of $2,400,000 at the end of the year, and the company estimates the Net Realizable Value of Accounts Receivable to be $2,304,000. The Allowance for Doubtful Accounts has a credit balance of $54,000 at the beginning of the current year, and during the year, Saturn wrote off $45,000 of accounts receivable. The year-end adjusting entry would require a: A) A credit to Allowance for Doubtful Accounts for $105,000 B) A debit to Bad Debts Expense for $42,000 C) A debit to Bad Debts Expense for $87,000 D) A credit to Allowance for Doubtful Accounts for $96,000 Answer: C Rationale: Allowance for Doubtful Accounts = $2,400,000 - $2,304,000 = $96,000 Year-end Allowance for Doubtful Accounts, before adjustment = $54,000 - $45,000 = $9,000 Required Allowance adjustment = $96,000 - $9,000 = $87,000 The year-end adjusting entry: Bad debts expense Allowance for doubtful accounts To record the bad debts expense for the year.
87,000 87,000
Topic: Estimating Credit Losses LO: 2 Level of Difficulty: DIFFICULT 77. Dahmen Company’s Accounts Receivable Account has a debit balance of $1,800,000, and the Allowance for Doubtful Accounts has a debit balance of $4,000 at the end of the year before adjustment. An analysis of their customers' accounts estimates that 2% of year end account receivable will be uncollectible. The adjusting journal entry for doubtful accounts will include: A) Debit Bad Debts Expense $326,000 B) Credit Allowance for Doubtful Accounts, $36,000 C) Debit Bad Debts Expense $40,000 D) Credit Allowance for Doubtful Accounts, $32,000 Answer: C Rationale: Estimated uncollectible receivables = $1,800,000 x 2% = $36,000 Required Allowance adjustment = $36,000 – (-$4,000) = $40,000 The year-end adjusting entry: Bad debts expense Allowance for doubtful accounts To record the bad debts expense for the year
40,000 40,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-41
Topic: Estimating Credit Losses LO: 2 Level of Difficulty: DIFFICULT 78. Gleeson Company’s Accounts Receivable Account has a debit balance of $5,400,000, and the Allowance for Doubtful Accounts has a debit balance of $12,000 at the end of the year before adjustment. An analysis of their customers' accounts estimates that 2% of year end account receivable will be uncollectible. The adjusting journal entry for doubtful accounts will include: A) Debit Bad Debts Expense $978,000 B) Credit Allowance for Doubtful Accounts, $108,000 C) Debit Bad Debts Expense $120,000 D) Credit Allowance for Doubtful Accounts, $96,000 Answer: C Rationale: Estimated uncollectible receivables = $5,400,000 x 2% = $108,000 Required Allowance adjustment = $108,000 – (-$12,000) = $120,000 The year-end adjusting entry: Bad debts expense Allowance for doubtful accounts To record the bad debts expense for the year
120,000 120,000
Topic: Accounts Receivable Write-offs LO: 1 Level of Difficulty: MEDIUM 79. On January 1, 2019, the accounts receivable balance for Hades Company was $14,000 and the balance in the allowance for doubtful accounts was $1,400. On that day, a $600 doubtful account was written-off. The net realizable value of accounts receivable immediately after the write-off is: A) $12,600 B) $13,600 C) $13,000 D) $12,200 Answer: A Rationale: The journal entry to write off an account receivable does not affect a company’s total assets. Allowance for doubtful accounts Accounts receivable – customer account To write off the customer’s account receivable.
Accounts receivable Allowance for doubtful accounts Net realizable
Before $14,000 1,400 $12,600
600 600
After $13,400 800 $12,600
©Cambridge Business Publishers, 2020 8-42
Financial Accounting for Undergraduates, 4th Edition
Topic: Accounts Receivable Write-offs LO: 1 Level of Difficulty: MEDIUM 80. On January 1, 2019, the accounts receivable balance for Heaven Company was $42,000 and the balance in the allowance for doubtful accounts was $4,200. On that day, a $1,800 doubtful account was written-off. The net realizable value of accounts receivable immediately after the write-off is: A) $37,800 B) $40,800 C) $39,000 D) $36,300 Answer: A Rationale: The journal entry to write off an account receivable does not affect a company’s total assets. Allowance for doubtful accounts Accounts receivable – customer account To write off the customer’s account receivable.
Accounts receivable Allowance for doubtful accounts Net realizable
Before $42,000 4,200 $37,800
1,800 1,800
After $40,200 2,400 $37,800
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 81. The data below is for Cronus Corporation for 2019. Accounts receivable - December 31, 2019 Customer accounts written off as uncollectible during 2019: Allowance for doubtful accounts - January 1, 2019 Estimated doubtful accounts based on an aging analysis
$1,072,000 16,000 17,400 21,200
If the aging approach is used to estimate bad debts, determine the bad debt expense for 2019. A) $16,000 B) $16,200 C) $17,400 D) $19,800 Answer: D Rationale: If the aging approach is used to estimate bad debts, the computation is as follows: Allowance for doubtful accounts 1/1/2019 Less: Write-offs Balance before adjustment for bad debts
$17,400 (16,000) $ 1,400
Required allowance based on an aging analysis Less: Balance before adjustment for bad debts Bad debt expense for 2019
$21,200 (1,400) $19,800
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-43
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 82. The data below is for Beta Corporation for 2019. Accounts receivable - December 31, 2019 Customer accounts written off as uncollectible during 2019: Allowance for doubtful accounts - January 1, 2019 Estimated doubtful accounts based on an aging analysis
$3,216,000 48,000 52,200 63,600
If the aging approach is used to estimate bad debts, determine the bad debt expense for 2019. A) $48,000 B) $48,600 C) $52,200 D) $59,400 Answer: D Rationale: If the aging approach is used to estimate bad debts, the computation is as follows: Allowance for doubtful accounts 1/1/2019 Less: Write-offs Balance before adjustment for bad debts
$52,200 (48,000) $ 4,200
Required allowance based on an aging analysis Less: Balance before adjustment for bad debts Bad debt expense for 2019
$63,600 (4,200) $59,400
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 83. Accounts receivable Michelin, Inc. has a balance of $2,100,000 and the allowance for doubtful accounts has a credit balance of $14,800 at fiscal year-end prior to adjustment. If the estimate of doubtful accounts determined by aging the receivables is $37,000, the amount of bad debts expense is: A) $35,000 B) $22,200 C) $49,800 D) $14,800 Answer: B Rationale: Required allowance based on aging method: Less: Allowance for Doubtful Accounts prior to adjustment: Year-end adjustment required
$37,000 (14,800) $22,200
©Cambridge Business Publishers, 2020 8-44
Financial Accounting for Undergraduates, 4th Edition
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 84. Accounts receivable Superior, Inc. has a balance of $6,300,000 and the allowance for doubtful accounts has a credit balance of $44,400 at fiscal year-end prior to adjustment. If the estimate of doubtful accounts determined by aging the receivables is $111,000, the amount of bad debts expense is: A) $105,000 B) $ 66,600 C) $149,400 D) $ 44,400 Answer: B Rationale: Required allowance based on aging method: Less: Allowance for Doubtful Accounts prior to adjustment: Year-end adjustment required
$111,000 (44,400) $66,600
Topic: Accounts Receivable LO: 1 Level of Difficulty: DIFFICULT 85. During 2019, Pine Company’s credit sales were $262,000, and its cash collections from credit customers were $250,000. Also, $3,600 in doubtful accounts receivable were written off (using the allowance method) during the year. On December 31, 2019, the company’s Accounts Receivable balance was $50,000. What must have been the balance of accounts receivables on January 1, 2019? A) $65,600 B) $41,600 C) $58,400 D) $34,200 Answer: B Rationale: Ending A/R = Beg. A/R + Credit sales – Cash collections – Write-offs $50,000 = X + $262,000 - $250,000 – $3,600 X = $41,600 = Beg. A/R
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-45
Topic: Accounts Receivable LO: 1 Level of Difficulty: DIFFICULT 86. During 2019, Neptune Company’s credit sales were $786,000, and its cash collections from credit customers were $750,000. Also, $10,800 in doubtful accounts receivable were written off (using the allowance method) during the year. On December 31, 2019, the company’s Accounts Receivable balance was $150,000. What must have been the balance of accounts receivables on January 1, 2019? A) $196,800 B) $124,800 C) $175,200 D) $102,600 Answer: B Rationale: Ending A/R = Beg. A/R + Credit sales – Cash collections – Write-offs $150,000 = X + $786,000 – $750,000 – $10,800 X = $124,800 = Beg. A/R Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: MEDIUM 87. The December 31, 2019 unadjusted Trial Balance of Kermit Company included the following accounts: Accounts Receivable Allowance for Doubtful Accounts Sales Revenue
$20,000 1,500 (debit) 250,000
If it is estimated that 1 percent of the Sales Revenue is uncollectible, the Net Realizable Value of Accounts Receivable on December 31, 2019 Balance Sheet will be: A) $17,400 B) $18,400 C) $15,800 D) $19,000 Answer: D Rationale: Bad Debt Expense = $250,000 x 1% = $2,500 Allowance for Doubtful Accounts = $(1,500) + $2,500 = $1,000 Net Realizable Value of Accounts Receivable = $20,000 – $1,000 = $19,000
©Cambridge Business Publishers, 2020 8-46
Financial Accounting for Undergraduates, 4th Edition
Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: MEDIUM 88. The December 31, 2019 unadjusted Trial Balance of Moonstar Company included the following accounts: Accounts Receivable Allowance for Doubtful Accounts Sales Revenue
$60,000 4,500 (debit) 750,000
If it is estimated that 1 percent of the Sales Revenue is uncollectible, the Net Realizable Value of Accounts Receivable on December 31, 2019 Balance Sheet will be: A) $52,200 B) $55,200 C) $47,400 D) $57,000 Answer: D Rationale: Bad Debt Expense = $750,000 x 1% = $7,500 Allowance for Doubtful Accounts = $(4,500) + $7,500 = $3,000 Net Realizable Value of Accounts Receivable = $60,000 – $3,000 = $57,000 Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 89. On December 31, 2019, Paper Company’s accounts receivable balance was of $600,000, and an analysis of their accounts receivable suggests that the Allowance for Doubtful Accounts should be 2% of accounts receivable. The balance in the Allowance for Doubtful Accounts on January 1, 2019 was $11,940 (credit). During the year 2019, Paper wrote off $12,900 of bad debts. What amount should be reported as the Bad debt expense for the year 2019? A) $12,000 B) $12,400 C) $12,960 D) $11,040 Answer: C Rationale: Year-end Allowance = Beginning Allowance + Bad Debt expense – Write-offs ($600,000 x 2%) = $11,940 + X – $12,900 $12,000 = $11,940 + X – $12,900 X = $12,960
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-47
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 90. On December 31, 2019, Bula Company’s accounts receivable balance was of $1,800,000, and an analysis of their accounts receivable suggests that the Allowance for Doubtful Accounts should be 2% of accounts receivable. The balance in the Allowance for Doubtful Accounts on January 1, 2019 was $35,820 (credit). During the year 2019, Bula wrote off $38,700 of bad debts. What amount should be reported as the Bad debt expense for the year 2019? A) $36,000 B) $37,200 C) $38,880 D) $33,120 Answer: C Rationale: Year-end Allowance = Beginning Allowance + Bad Debt expense – Write-offs ($1,800,000 x 2%) = $35,820 + X – $38,700 $36,000 = $35,820 + X – $38,700 X = $38,880 Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 91. Feldman’s Allowance for Doubtful Accounts had a credit balance of $12,600 on January 1, 2019. During 2019, the company wrote off $10,200 of Accounts Receivable as uncollectible. The company prepared the following summary schedule from an aging of accounts receivable outstanding on December 31, 2019: 1-30 days $200,000 1%
Balance of A/R Estimated Uncollectible %
31-60 days $80,000 5%
61-90 days $28,000 10%
Over 90 days $18,000 30%
Determine the Bad debts Expense to be recorded on December 31, 2019. A) $11,800 B) $ 8,600 C) $14,200 D) $16,600 Answer: A Rationale: Desired Year-end Allowance Balance = Beginning Allowance Balance + Bad Debt expense Adjustment – Write-offs $14,200 = $12,600 + X – $10,200 X = $11,800
Balance of A/R Estimated Uncollectible % Allowance required
1-30 days $200,000 1% $5,000
31-60 days $80,000 5% $4,000
61-90 days $28,000 10% $2,800
Over 90 days $18,000 30% $5,400
Total
$14,200
©Cambridge Business Publishers, 2020 8-48
Financial Accounting for Undergraduates, 4th Edition
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 92. Star’s Allowance for Doubtful Accounts had a credit balance of $37,800 on January 1, 2019. During 2019, the company wrote off $30,600 of Accounts Receivable as uncollectible. The company prepared the following summary schedule from an aging of accounts receivable outstanding on December 31, 2019: 1-30 days $600,000 1%
Balance of A/R Estimated Uncollectible %
31-60 days $240,000 5%
61-90 days $84,000 10%
Over 90 days $54,000 30%
Determine the Bad debts Expense to be recorded on December 31, 2019. A) $35,400 B) $25,800 C) $42,600 D) $49,800 Answer: A Rationale: Desired Year-end Allowance Balance = Beginning Allowance Balance + Bad Debt expense Adjustment – Write-offs $42,600 = $37,800 + X – $30,600 X = $42,600 – $37,800 + $30,600 X = $35,400
Balance of A/R Estimated Uncollectible % Allowance required
1-30 days $600,000 1% $6,000
31-60 days $240,000 5% $12,000
61-90 days $84,000 10% $8,400
Over 90 days $54,000 30% $16,200
Total
$42,600
Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: MEDIUM 93. Crescent Company reported total sales for the current year to be $5,000,000, including cash sales of $1,000,000. Management estimates bad debts to be 5% of credit sales. The Allowance for Doubtful Accounts prior to adjustment has a debit balance of $20,000. The ending balance of the Allowance for Doubtful Accounts after adjustment will be: A) $120,000 B) $170,000 C) $220,000 D) $180,000 Answer: D Rationale: Bad Debt Expense = ($5,000,000 –- $1,000,000) x 5% = $200,000 Allowance for Doubtful Accounts ending balance = $200,000 + (-$20,000) = $180,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-49
Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: MEDIUM 94. Chipmunk Company reported total sales for the current year to be $15,000,000, including cash sales of $3,000,000. Management estimates bad debts to be 5% of credit sales. The Allowance for Doubtful Accounts prior to adjustment has a debit balance of $60,000. The ending balance of the Allowance for Doubtful Accounts after adjustment will be: A) $360,000 B) $510,000 C) $660,000 D) $540,000 Answer: D Rationale: Bad Debt Expense = ($15,000,000 – $3,000,000) x 5% = $600,000 Allowance for Doubtful Accounts ending balance = $600,000 + (-$60,000) = $540,000 Topic: Credit Card Sales LO: 3 Level of Difficulty: MEDIUM 95. Omega Company agrees to transfer cash to Gamma Company immediately upon deposit of that company’s credit card sales receipts. Omega Company charges 2% of card sales as its fee. If Gamma Company deposits $114,000 credit card sales receipts, which of the following statements are true? A) Omega Company will pay Gamma Company a $2,280 credit card fee. B) Gamma Company will receive $111,720 cash from Omega Company. C) Omega Company will receive $114,000 cash from Gamma Company. D) Gamma Company will receive $114,000 cash from Omega Company. Answer: B Rationale: Cash 111,720 Credit card fee expense 2,280 Sales revenue To record credit card sales and collection less a two percent fee.
114,000
©Cambridge Business Publishers, 2020 8-50
Financial Accounting for Undergraduates, 4th Edition
Topic: Credit Card Sales LO: 3 Level of Difficulty: MEDIUM 96. Wisconsin Company agrees to transfer cash to Dells Company immediately upon deposit of that company’s credit card sales receipts. Wisconsin Company charges 2% of card sales as its fee. If Dells Company deposits $342,000 credit card sales receipts, which of the following statements are true? A) Wisconsin Company will pay Dells Company a $6,840 credit card fee. B) Dells Company will receive $335,160 cash from Wisconsin Company. C) Wisconsin Company will receive $342,000 cash from Dells Company. D) Dells Company will receive $342,000 cash from Wisconsin Company. Answer: B Rationale: Cash 335,160 Credit card fee expense 6,840 Sales revenue To record credit card sales and collection less a two percent fee.
342,000
Topic: Notes Receivable LO: 4 Level of Difficulty: MEDIUM 97. Paddington Company lends Bear Company $100,000 on April 1, 2019 accepting a four-month, 9% interest note. Paddington Company prepares its financial statements on April 30, 2019. What adjusting entry should be made by Paddington Company before the financial statements can be prepared? A) Note Receivable Cash B) Interest Receivable Interest Income C) Cash Interest Income D) Interest Receivable Interest Income
100,000 100,000 3,000 3,000 750 750 750 750
Answer: D Rationale: Apr. 30 Interest receivable 750 Interest income To accrue interest income on the note from Bear Company ($100,000 × 0.09 × 1/12 = $750).
750
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-51
Topic: Notes Receivable LO: 4 Level of Difficulty: MEDIUM 98. Bri Company lends Tyrone Company $300,000 on April 1, 2019 accepting a four-month, 9% interest note. Bri Company prepares its financial statements on April 30, 2019. What adjusting entry should be made by Bri Company before the financial statements can be prepared? A) Note Receivable Cash B) Interest Receivable Interest Income C) Cash Interest Income D) Interest Receivable Interest Income
300,000 300,000 9,000 9,000 2,250 2,250 2,250 2,250
Answer: D Rationale: Apr. 30 Interest receivable 2,250 Interest income 2,250 To accrue interest income on the note from Tyrone Company ($300,000 × 0.09 × 1/12 = $2,250). Topic: Notes Receivable LO: 4 Level of Difficulty: DIFFICUT 99. Buick Company lends Ford Company $60,000 on August 1, 2019 in exchange of a 9-month, 12% interest note. If Buick Company accrued interest on its December 31, 2019 year-end, what entry must it make to record the collection of the note and interest at its maturity date? A. Cash Notes Receivable Interest Receivable Interest Income B. Notes Receivable Interest Receivable Interest Income Cash C. Cash Notes Receivable Interest Income D. Cash Notes Receivable Interest Receivable Interest Income
65,400 60,000 2,400 3,000 60,000 3,000 2,400 65,400 65,400 60,000 5,400 65,400 60,000 3,000 2,400
©Cambridge Business Publishers, 2020 8-52
Financial Accounting for Undergraduates, 4th Edition
Answer: D Rationale: Dec. 31 Interest receivable 3,000 Interest income 3,000 To accrue interest income on the note from Ford Company ($60,000 × 0.12 × 5/12 = $3,000). May 1
Cash 65,400 Interest receivable 3,000 Interest income 2,400 Notes receivable—Ford Company 60,000 Received payment of principal and interest from Ford Company ($60,000 × 0.12 × 4/12 = $2,400).
Topic: Notes Receivable LO: 4 Level of Difficulty: DIFFICULT 100. Sidley Company lends Austin Company $180,000 on August 1, 2019 in exchange of a 9-month, 12% interest note. If Sidley Company accrued interest on its December 31, 2019 year-end, what entry must it make to record the collection of the note and interest at its maturity date? A. Cash Notes Receivable Interest Receivable Interest Income B. Notes Receivable Interest Receivable Interest Income Cash C. Cash Notes Receivable Interest Income D. Cash Notes Receivable Interest Receivable Interest Income
196,200 180,000 7,200 9,000 180,000 9,000 7,200 196,200 196,200 180,000 16,200 196,200 180,000 9,000 7,200
Answer: D Rationale: Dec. 31 Interest receivable 9,000 Interest income 9,000 To accrue interest income on the note from Austin Company ($180,000 × 0.12 × 5/12 = $9,000). May 1
Cash
196,200 Interest receivable 9,000 Interest income 7,200 Notes receivable— Austin Company 180,000 Received payment of principal and interest from Austin Company ($180,000 × 0.12 × 4/12 = $7,200).
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-53
Topic: Notes Receivable LO: 4 Level of Difficulty: DIFFICULT 101. On November 1, 2019, Chocolate Company accepted a 3-month note receivable as payment for services provided to Brownie Company. The face value was $18,000, and had a stated 6% annual rate of interest. Chocolate Company closed its books on December 31, 2019. On February 1, 2020, the journal entry to record the collection of the note should include a credit to: A) Notes Receivable for $18,270 B) Interest Receivable for $270 C) Interest Income for $270 D) Interest Income for $90 Answer: D Rationale: Dec. 31 Interest receivable 180 Interest income 180 To accrue interest income on the note from Brownie Company ($18,000 × 0.06 × 2/12 = $180). Feb. 1
Cash
18,270 Interest receivable 180 Interest income 90 Notes receivable—Brownie Company 18,000 Received payment of principal and interest from Brownie Company ($18,000 × 0.06 × 1/12= $90).
Topic: Notes Receivable LO: 4 Level of Difficulty: DIFFICULT 102. On November 1, 2019, Kringle Company accepted a 3-month note receivable as payment for services provided to Kris Company. The face value was $54,000 and it had a stated 6% annual rate of interest. Kringle Company closed its books on December 31, 2019. On February 1, 2020, the journal entry to record the collection of the note should include a credit to: A) Notes Receivable for $54,810 B) Interest Receivable for $810 C) Interest Income for $810 D) Interest Income for $270 Answer: D Rationale: Dec. 31 Interest receivable 540 Interest income 540 To accrue interest income on the note from Kris Company ($54,000 × 0.06 × 2/12 = $540). When the note is subsequently paid on Feb. 1, 2020, Kringle Company makes the following journal entry: Feb. 1
Cash
54,810 Interest receivable 540 Interest income 270 Notes receivable—Kris Company 54,000 Received payment of principal and interest from Kris Company ($54,000 × 0.06 × 1/12= $270)
©Cambridge Business Publishers, 2020 8-54
Financial Accounting for Undergraduates, 4th Edition
Topic: Notes Receivable LO: 4 Level of Difficulty: MEDIUM 103. Johnathan Company is holding a $6,000, 90-day, 6% note receivable, dated December 1, 2019. The journal entry to record accrued interest at the end of its fiscal year on December 31, 2019 will include a: A) Debit to interest receivable for $30 B) Credit interest income for $90 C) Credit note receivable for $6,000 D) Debit cash for $6,090 Answer: A Rationale: Dec. 31 Interest receivable 30 Interest income To accrue interest income on a customer note ($6,000 × 0.06 × 30/360 = $30).
30
Topic: Notes Receivable LO: 4 Level of Difficulty: MEDIUM 104. Lakeside Company is holding a $18,000, 90-day, 6% note receivable, dated December 1, 2019. The journal entry to record accrued interest at the end of its fiscal year on December 31, 2019 will include a: A) Debit to interest receivable for $90 B) Credit interest income for $270 C) Credit note receivable for $18,000 D) Debit cash for $18,270 Answer: A Rationale: Dec. 31 Interest receivable 90 Interest income To accrue interest income on a customer note ($18,000 × 0.06 × 30/360 = $90).
90
Topic: Notes Receivable LO: 4 Level of Difficulty: MEDIUM 105. Clover Company received a Note Receivable from a customer for a sale. The 9 percent, 9-month note was received on May 31, 2019 for an amount of $300,000. Determine the company’s accrued interest receivable (from this note) on its December 31, 2019 balance sheet. A) $13,500 B) $18,000 C) $27,000 D) $15,750 Answer: D Rationale: Dec. 31 Interest receivable 15,750 Interest income To accrue interest income on a customer note ($300,000 × 0.09 × 7/12 = $15,750).
15,750
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-55
Topic: Notes Receivable LO: 4 Level of Difficulty: MEDIUM 106. Lovegood Company received a Note Receivable from a customer for a sale. The 9 percent, 9month note was received on May 31, 2019 for an amount of $900,000. Determine the company’s accrued interest receivable (from this note) on its December 31, 2019 balance sheet. A) $54,500 B) $54,000 C) $81,000 D) $47,250 Answer: D Rationale: Dec. 31 Interest receivable 47,250 Interest income To accrue interest income on a customer note ($900,000 × 0.09 × 7/12 = $47,250).
47,250
Topic: Notes Receivable LO: 4 Level of Difficulty: MEDIUM 107. On December 1, 2019, Susan Company accepts a $24,000, 90 day, 8% note from a customer. If Susan Company’s accounting period ends on December 31, and the note is collected on March 1, 2020, which one of the following statements will be true for Susan Company? A) On March 1, 2020, they will credit Interest Receivable for $160 B) On December 31, 2019, they will debit Interest Income for $160 C) On December 31, 2019, they will credit Interest Receivable for $160 D) On March 1, 2020, they will credit Interest Income for $160 Answer: A Rationale: Dec. 31 Interest receivable Interest income To accrue interest income on the note ($24,000 × 0.08 × 30/360 = $160) Mar. 1
160 160
Cash
24,480 Interest receivable Interest income Notes receivable Received payment of principal and interest ($24,000 × 0.08 × 60/360= $320)
160 320 24,000
©Cambridge Business Publishers, 2020 8-56
Financial Accounting for Undergraduates, 4th Edition
Topic: Notes Receivable LO: 4 Level of Difficulty: MEDIUM 108. On December 1, 2019, Xia Company accepts a $72,000, 90 day, 8% note from a customer. If Xia Company’s accounting period ends on December 31, and the note is collected on March 1, 2020 which one of the following statements will be true for Xia Company? A) On March 1, 2020, they will credit Interest Receivable for $480 B) On December 31, 2019, they will debit Interest Income for $480 C) On December 31, 2019, they will credit Interest Receivable for $480 D) On March 1, 2020, they will credit Interest Income for $480 Answer: A Rationale: Dec. 31 Interest receivable Interest income To accrue interest income on the note ($72,000 × 0.08 × 30/360 = $480). Mar. 1
480 480
Cash
73,440 Interest receivable Interest income Notes receivable Received payment of principal and interest ($72,000 × 0.08 × 60/360= $960)
480 960 72,000
Topic: Notes Receivable LO: 4 Level of Difficulty: DIFFICULT 109. On December 1, 2019, Pinto Company accepted a $24,000, 120 day, 8% note from a customer in granting an extension to a past due account. Pinto Company’s accounting period ends on December 31, and the note is collected in full on the due date. Which one of the following statements will be false for Pinto Company? A) On March 31, 2020, they will credit Interest Income for $480 B) On December 31, 2019, they will credit Interest Receivable for $160 C) On March 31, 2020, they will credit Interest Receivable for $160 D) On March 31, 2020, they will credit Notes Receivable for $24,000 Answer: B Rationale: Dec. 31 Interest receivable Interest income To accrue interest income on the note ($24,000 × 0.08 × 30/360 = $160) Mar. 31
160
24,640 Interest receivable Interest income Notes receivable Received payment of principal and interest ($24,000 × 0.08 × 90/360= $480).
160
Cash
160 480 24,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-57
Topic: Notes Receivable LO: 4 Level of Difficulty: DIFFICULT 110. On December 1, 2019, Camp Halfblood Company accepted a $72,000, 120 day, 8% note from a customer in granting an extension to a past due account. Camp Halfblood Company’s accounting period ends on December 31, and the note is collected in full on the due date. Which one of the following statements will be false for Camp Halfblood Company? A) On March 31, 2020, they will credit Interest Income for $1,440 B) On December 31, 2019, they will credit Interest Receivable for $480 C) On March 31, 2020, they will credit Interest Receivable for $480 D) On March 31, 2020, they will credit Notes Receivable for $72,000 Answer: B Rationale: Dec. 31 Interest receivable Interest income To accrue interest income on the note ($72,000 × 0.08 × 30/360 = $480) Mar. 31
480 480
Cash
73,920 Interest receivable Interest income Notes receivable Received payment of principal and interest ($72,000 × 0.08 × 90/360 = $1,440)
480 1,440 72,000
©Cambridge Business Publishers, 2020 8-58
Financial Accounting for Undergraduates, 4th Edition
Exercises Topic: Accounts Receivable Aging Method LO: 2 1. Quebec Market reports the following analysis of potential losses in its accounts receivable: Receivable Balance $67,200 30,000 18,000 3,300 $118,500
Age Past Due 0-30 days past due 31-60 days past due 61-90 days past due Over 90 days past due Total
Estimated Loss (%) 0.5% 1.8% 4.3% 45.5%
The balance of Allowance for Doubtful Accounts is $600 credit balance on December 31, 2019 prior to adjustments. Required: a. Compute bad debts expense that will be recorded for 2019. (Round to nearest whole dollar.) b. What is the amount of net accounts receivable to be reported on Quebec Market’s December 31, 2019 balance sheet? Answer: a. Bad debts expense = $3,152 - $600 = $2,552 Age of Accounts 0-30 days 31 to 60 day 61 to 90 days Over 90 days Total
Receivables Balance $67,200 30,000 18,000 3,300 $118,500
Estimated % Uncollectible 0.5% 1.8% 4.3% 45.5%
Estimated Uncollectible Amount $ 336 540 774 1,502 $3,152
b. Accounts receivable, net = $118,500 - $3,152 = $115,348
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-59
Topic: Accounts Receivable Turnover Rate LO: 5 2. La Cantina Co. reports the following in its 2019 annual report:
Sales Accounts receivable
2019 $10,597,336 900,516
2018 $10,265,536 1,052,112
2017 $9,893,432 1,141,906
Calculate the accounts receivable turnover and average collection period for 2019 and 2018. Comment on the findings. Answer: AR turnover: 2019: $10,597,336 / [($900,516 + $1,052,112) / 2] = 10.85 times 2018: $10,265,536 / [($1,052,112 + $1,141,906) / 2] = 9.36 times Average collection period: 2019: 365 / 10.85 = 33.6 days 2018: 365 / 9.36 = 39.0 days The accounts receivable turnover increased from 9.36 to 10.85 from 2018 to 2019. The increase in accounts receivable turnover indicates an increase in the receivables collection rate as the company is collecting amounts due from customers more efficiently. The average collection period decreased from 39 days to about 34 days from 2018 to 2019. The findings suggest an increase in quality of the receivables. Topic: Accounts Receivable Aging Method LO: 2 3. Xia, Inc. estimated doubtful accounts receivable at December 31, 2019 at $10,116, based on estimates on various ages of receivables and before learning of the bankruptcy of one of its customers. The customer owed $4,020, and the legal department has estimated costs to collect the balance owed by this customer at $6,000. The gross receivables balance on December 31, 2019 after write-offs is $252,900, and the allowance for doubtful accounts balance is $10,860 at December 31, 2018. At December 12, 2019, the company wrote off $5,100 of other accounts deemed uncollectible. Required: a. How would the legal department advise Xia to handle the collection of the $4,020? b. Draw a t-account for Allowance for Doubtful Accounts and post all 2019 amounts to it, assuming that both the $5,100 and $4,020 have been written off. c. What is the effect of the $5,100 write off on gross and net accounts receivable? Answer: a. The legal department would advise Xia to write off the $4,020 based on costs versus benefits. The estimated cost of $6,000 exceeds the $4,020 amount that might be collectible. b.
Allowance for Doubtful Accounts 10,860 Beg. Bal. Write-off 5,100 Write-off 4,020 8,376 Estimate 10,116 End. Bal.
c.
The write-off would result in a reduction of gross accounts receivable by $5,100. However, the write-off would have no effect on net accounts receivable, as the accounts receivable and the allowance account (contra account) are both reduced by the same amount.
©Cambridge Business Publishers, 2020 8-60
Financial Accounting for Undergraduates, 4th Edition
Topic: Accounts Receivable Aging Method LO: 2 4. Zihao, Inc. provided the following aging of its receivables at December 31. Age of Accounts 0-30 days 31 to 60 day 61 to 90 days 91 to 120 days Over 121 days Total
Receivables Balance $184,000 96,000 34,000 21,000 11,000 $346,000
Estimated % Uncollectible 0.4% 2.4% 6.0% 9.1% 51.4%
During the year, $12,512 of receivables were written off. The balance at the beginning of the year in the allowance account was $12,000. Required: a. How much will Zihao report as bad debts expense for the year? b. How much is the net value of Zihao’s receivables at year end? Answer: a. Allowance for doubtful accounts = Beginning balance Allowance for doubtful accounts + Bad debt expense – Write-offs $12,645 = $12,000 + X - $12,512 Bad debts expense = $13,157 Age of Accounts 0-30 days 31 to 60 day 61 to 90 days 91 to 120 days Over 121 days Total
Receivables Balance $184,000 96,000 34,000 21,000 11,000 $346,000
Estimated % Uncollectible 0.4% 2.4% 6.0% 9.1% 51.4%
Estimated Uncollectible Amount $ 736 2,304 2,040 1,911 5,654 $12,645
b. Accounts receivable, net = Accounts receivable balance – Allowance for doubtful accounts = $346,000 – $12,645 = $333,355
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-61
Problems Topic: Accounts Receivable Aging Method LO: 2 1. At December 31, 2019, Carl’s Toys had a balance of $248,100 in its Accounts Receivable account and a credit balance of $900 in its Allowance for Doubtful Accounts account. Carl’s Toys analyzed and aged its accounts receivable based on the following estimated uncollectible amounts: Age of Accounts Current 31 to 60 day 61 to 90 days Over 91 days Total
Receivables Balance $ 130,500 66,300 26,700 24,600 $248,100
Estimated % Uncollectible 0.6% 2.0% 5.5% 21.0%
The company bases its provision for credit losses on the aging analysis. Required: a. What amount of bad debt expense will Carl’s Toys report in its 2019 income statement? (Round to nearest whole dollar amount.) b. How would Accounts Receivable and the Allowance for Doubtful Accounts appear in its December 31, 2019, balance sheet? Answer: a. As of December 31, 2019: Age of Accounts Current 31 to 60 day 61 to 90 days Over 91 days Total
Receivables Balance $ 130,500 66,300 26,700 24,600 $248,100
Estimated % Uncollectible 0.6% 2.0% 5.5% 21.0% Unused allowance Bad debts expense
Uncollectible Accounts $ 783 1,326 1,469 5,166 8,744 900 $7,844
b. Current asset section of balance sheet: Accounts receivable, net of $8,744 allowance……………$239,356
©Cambridge Business Publishers, 2020 8-62
Financial Accounting for Undergraduates, 4th Edition
Topic: Accounts Receivable Reporting and Receivable Turnover LO:1, 5 2. Malfoy’s accounts receivable financial data (in millions) for three years are listed below: 2019 Sales $159,600 Gross accounts receivable 4,950 Allowance for doubtful accounts 360
2018 $183,050 5,460 300
2017 $139,300 4,350 330
Required: a. Calculate the net value of receivables that will be reported on Malfoy’s balance sheet for each year. b. Determine the accounts receivable turnover for 2019 and 2018. c. Compare the accounts receivable turnovers for 2019 and 2018 and comment on the differences. Answer: a. Amounts in millions Gross accounts receivable Allowance for doubtful accounts Net realizable value
2019 $4,950 360 $4,590
2018 $5,460 300 $5,160
2017 $4,350 3,320 $4,020
b. Sales / Average accounts receivable (net) 2019: Turnover = $159,600 / (($4,590 + $5,160) / 2)) = 32.74 times 2018: Turnover = $183,050 / (($5,160 + $4,020) / 2)) = 39.88 times c.
The accounts receivable turnover indicates how quickly accounts receivable are being converted to cash. From the data above, the accounts receivable turnover declined from 2018 to 2019, indicating the company is not collecting its receivables as quickly.
Topic: Receivable Turnover and Average Collection Period LO: 5 3. Define accounts receivable turnover and the average collection period. What insights do these ratios offer an analysis of a company’s accounts receivable? Answer: Accounts receivable turnover = Net sales / Average accounts receivable (net) Average collection period = 365 / Accounts receivable turnover Accounts receivable turnover indicates how many times a year a firm collects its average accounts receivable, and thus, measures how fast accounts receivable are being converted into cash. In general, the higher the accounts receivable turnover ratio, the faster a company is converting its receivables into cash. Average collection period indicates how many days it takes on average to collect an account receivable. These two ratios offer two important insights. First, changes in turnover signal the quality of the accounts receivable. If turnover slows, it could be a sign of the deterioration of the collectability of receivables. There may be alternative explanations including a change in credit policies, customer mix, etc. However, it is still something important to include in our analysis. Second, an increase in receivables ties up more cash, hampering asset utilization. Receivables must be financed, and slower turning receivables present an increased risk of loss.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-63
Topic: Bad Debts Expense LO: 1, 2 4. D’Costa Company uses the allowance method of handling credit losses. It estimates losses at 2% of credit sales, which were $1,800,000 this year. At December 31 of this year, the Accounts Receivable balance is $270,000, and the Allowance for Doubtful Accounts has a $3,600 credit balance before adjustment. Required: a. Give the adjusting entry to record bad debts expense for this year. b. What net amount of accounts receivable would appear on the December 31 balance sheet this year? c. Assume that D’Costa Company uses aged accounts receivable as a basis of estimating credit losses, instead of a percent of credit sales. If the firm estimates that $22,800 of the accounts will prove uncollectible, what adjusting entry would D’Costa Company make to record the bad debts expense for this year? Answer: a. Bad debts expense Allowance for doubtful accounts To record bad debts expense at 2% of $1,800,000 credit sales.
36,000 36,000
b. $270,000 - ($3,600 + $36,000) = $230,400 c.
Bad debts expense Allowance for doubtful accounts To record bad debts expense ($22,800 - $3,600 = $19,200).
19,200 19,200
Topic: Accounts Receivable Journal Entries LO: 2 5. On January 1 of the current year, Neptune, Inc. had the following accounts on its books: Accounts Receivable Allowance for Doubtful Accounts
$240,000 8,000
(debit) (credit)
During this year, credit sales were $1,200,000 and collections on account were $1,160,000. Required: a. Prepare general journal entries for the following transactions that occurred during the year: (1) Wrote off N. Purcell’s account, $6,800. (2) Wrote off J. Stein’s account, $2,400. (3) J. Stein, who is in bankruptcy, paid $800 in final settlement of the account written off in transaction (2). This amount is not included in the $1,160,000 collections. (4) On December 31, estimated the year’s bad debts expense at 1% of credit sales. b. Show how Accounts Receivable and the Allowance for Doubtful Accounts would appear on the year-end balance sheet.
©Cambridge Business Publishers, 2020 8-64
Financial Accounting for Undergraduates, 4th Edition
Answer: a. (1) Allowance for Doubtful Accounts Accounts Receivable-- N. Purcell To write off N. Purcell’s account.
6,800 6,800
(2) Allowance for Doubtful Accounts Accounts Receivable-- J. Stein To write off J. Stein ’s account.
2,400 2,400
(3) Accounts Receivable-- J. Stein Allowance for Doubtful Accounts To reinstate amount collected from J. Stein .
800 800
Cash
800
Accounts Receivable-- J. Stein To record collection from. J. Stein.
800
(4) Bad Debts Expense Allowance for Doubtful Accounts To record bad debts expense at 1 % of credit sales. b. Accounts Receivable* Less: Allowance for Doubtful Accounts**
12,000 12,000
$270,800 11,600 $259,200
*Accounts Receivable = $240,000 + $1,200,000 - $1,160,000 - $6,800 - $2,400 + $800 - $800 = $270,800 **Allowance for Doubtful Accounts = $8,000 - $6,800 - $2,400 + $800 + $12,000 = $11,600
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-65
Topic: Direct Write-Off and Allowance Methods LO: 2, 6 6. Goofy Company, which has been in business for three years, makes all sales on account and does not offer discounts. The firm’s sales, collections, and write-offs of doubtful accounts are shown below: Year 1 2 3
Sales $ 660,000 690,000 1,050,000
Collections $ 330,000 600,000 990,000
Accounts Written Off $ 5,400 7,200 10,800
Required: a. If the firm uses the direct write-off method of recognizing credit losses during the three years: (1) Determine the total amount of accounts receivable appearing on the balance sheet at the end of the third period. (2) Give the total amount of bad debts expense appearing on the firm’s income statement over the three-year period. b. If the firm uses the allowance method of recognizing credit losses, at 1.5% sales: (1) Give the net amount of accounts receivable appearing on the balance sheet at the end of the third period. (2) Determine the total amount of bad debts expense appearing on the firm’s income statement over the three-year period. Answer: Year 1 2 3 Total
Sales $ 660,000 690,000 1,050,000 $2,400,000
Collections $ 330,000 600,000 990,000 $1,920,000
Accounts Written Off $ 5,400 7,200 10,800 $23,400
a. (1) Total Accounts Receivable = Total Sales – Total Collections – Total Accounts Written Off X =$2,400,000 - $1,920,000 - $23,400 X = $456,600 (2) Total Bad Debt Expense = Bad Debt Expense Year 1 + Bad Debt Expense Year 2 + Bad Debt Expense Year 3 X = $5,400 + $7,200 + $10,800 X = $23,400 b. (1) Total Accounts Receivable = Total Sales – Total Collections – Total Accounts Written-Off + Decrease in Allowance for Writing–off Bad Debt – Increase in Allowance for Estimated Bad Debt Expense X =$2,400,000 - $1,920,000 - $23,400 + $23,400 - $36,000 X = $444,000 (2) Estimate of credit losses using the percentage of net sales = Expected credit loss percentage x Credit Sales X = 1.5% x $2,400,000 X = $36,000 ©Cambridge Business Publishers, 2020 8-66
Financial Accounting for Undergraduates, 4th Edition
Topic: Accounts Receivable Aging Method LO: 2 7. At December 31 of the current year, Mars Company had a balance of $728,000 in its Accounts Receivable account and a credit balance of $6,000 in the Allowance for Doubtful Accounts. The company has aged its accounts as follows: Current 0-60 days past due 61-180 days past due Over 180 days past due
$592,000 64,000 48,000 24,000 $728,000
In the past, the company has experienced losses as follows: 1% of current balances, 5% of balances 0-60 days past due, 15% of balances 61-180 days past due, and 30% of balances over 180 days past due. The company bases its bad debts expense on the aging analysis. Required: a. Prepare the adjusting journal entry to record the bad debts expense for the year. b. Show how Accounts Receivable and the Allowance for Doubtful Accounts would appear in the December 31 balance sheet. c. On January 15 of the subsequent year, Mars Company wrote off the account of Ares, $2,400. Give the entry for the write-off. d. On February 20 of the subsequent year, Mars Company collected the $2,400 on the Ares account written off on January 15. Give the entry or entries for the recovery. Answer: a. Bad debts expense Allowance for doubtful accounts To provide for credit losses as follows: $592,000 x 1% = 64,000 x 5% = 48,000 x 15% = 24,000 x 30% = Less credit balance in Allowance for Doubtful Accounts
b. Current Assets: Accounts Receivable Less: Allowance for Doubtful Accounts Account Receivable (net) c.
Jan. 15
d. Feb. 20
20
17,520 17,520 $ 5,920 3,200 7,200 7,200 $23,520 6,000 $17,520
$728,000 23,520 $704,480
Allowance for Doubtful Accounts Accounts Receivable--Ares To write off Ares’s account.
2,400
Accounts Receivable--Ares Allowance for Doubtful Accounts To reinstate Ares’s account.
2,400
Cash
2,400
Accounts Receivable--Ares To record Ares’s remittance.
2,400
2,400
2,400
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-67
Topic: Notes Receivable and Interest Income LO: 4 8. Brad Company had the following transactions during the current year: May
7
Received an $25,200, 75-day, 10% note from S. Sabtini in payment of account receivable.
June 1
Wrote off customer M. Rotter’s account, $2,700. (Brad Company uses the allowance method of recording credit losses.)
July 21
S. Sabtini paid note due today.
Sept 15
M. Rotter paid account written off on June 1.
Dec 19
Received a $36,000, 60-day, 9% note from Z. Inman on account.
Required: a. Record the above transactions in general journal form. b. Make any necessary adjusting entries for interest at December 31. Answer: a. May 7
June 1
July 21
Notes Receivable 25,200 Accounts Receivable - S. Sabtini Received an $16,800, 75-day, 10% note from S. Sabtini .
25,200
Allowance for Doubtful Accounts Accounts Receivable - M. Rotter To write off M. Rotter’s account.
2,700
2,700
Cash
25,725 Interest Income 525 Notes Receivable 25,200 S. Sabtini paid note due today ($25,200 x 10% x 75/360 = $525 interest).
Sept. 15 Accounts Receivable - M. Rotter Allowance for Doubtful Accounts To reinstate M. Rotter’s account. 15 Cash
2,700 2,700 2,700
Accounts Receivable - M. Rotter Received $1,800 from M. Rotter. Dec. 19
b. Dec. 31
2,700
Notes Receivable 36,000 Accounts Receivable - Z. Inman Received a $36,000, 60-day, 9% note from Z. Inman . Interest Receivable 108 Interest Income To accrue interest on Z. Inman’s note ($36,000 x 9% x 12/360 = $108).
36,000
108
©Cambridge Business Publishers, 2020 8-68
Financial Accounting for Undergraduates, 4th Edition
Chapter 8 Accounting for Receivables Learning Objectives – Coverage by question LO1 – Define accounts receivable, explain losses from uncollectible accounts, and describe the allowance method of accounting for doubtful accounts. LO2 – Describe and illustrate the percentage of net sales method and the accounts receivable aging method for estimating a business’s bad debts expense.
True / False
Multiple Choice
1, 2, 4, 5, 8-11
1-4, 13-15, 17, 18, 71-74, 79, 80, 85, 86
12
7, 8, 11, 12, 19, 20, 22-37, 40, 61-70, 75-78, 81-84, 87-94
LO3 – Discuss the accounting treatment of credit card sales.
Exercises
Problems
2, 4
1, 3, 4
1, 4-7
21, 95, 96
LO4 – Illustrate a promissory note receivable, discuss the calculation of interest on notes receivable, and present journal entries to record notes receivable and interest.
13-15
41-56, 97-110
LO5 – Define accounts receivable turnover and average collection period and explain their use in the analysis and management of accounts and notes receivable.
3
5, 6, 57-60
LO6 – Appendix 8A. Illustrate the direct write-off method and contrast it with the allowance method for accounting for doubtful accounts.
6, 7
9, 10, 16, 38, 39
8
2
2, 3
6
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-1
Chapter 8: Accounting for Receivables
True / False Topic: Accounts Receivable LO: 1 1. The net accounts receivable reported in the current asset section of a company’s balance sheet represents all receivables expected to be collected within the next year. Answer: True Rationale: A company makes two representations when reporting receivables in the balance sheet. The first is that it expects to collect the amount reported on the balance sheet. The second is that it expects to collect within the next year or operating cycle.
Topic: Allowance Account LO: 1 2. The balance in Allowance for Doubtful Accounts represents the amount a company thinks it will not collect from a customer. Answer: True Rationale: The Allowance for Doubtful Accounts is a contra-asset account with a normal credit balance. It is shown on the balance sheet as a deduction from accounts receivable to reflect the expected amount of uncollectible accounts.
Topic: Accounts Receivable Turnover LO: 5 3. The higher the accounts receivable turnover is, the faster receivables are being collected. Answer: True Rationale: More turns of accounts receivable indicate that receivables are being collected more quickly.
Topic: Bad Debts Expense LO: 1 4. Income statement effects of doubtful accounts occur at the point of estimation, not when an account is written-off. Answer: True Rationale: Under the matching principle, costs relating to anticipated bad debts expense are matched with sales in the period that the sales are recognized. Upon write-off, both the receivable and the allowance account are reduced, leaving net receivables unchanged.
Topic: Accounts Receivable LO: 1 5. Advances to company employees should be included in the Accounts Receivable balance. Answer: False Rationale: Advances to employees should be included with the Other Receivables account on the balance sheet. ©Cambridge Business Publishers, 2020 8-2
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Direct Write-Off Method LO: 6 6. The direct write-off method of accounting for doubtful accounts mismatches revenue and expenses and overstates assets. Answer: True Rationale: Under the direct write-off method, doubtful accounts are charged to the bad debts expense on the income statement in the period in which the accounts are determined to be uncollectible. Under this approach, there is no attempt to estimate the bad debts expense, nor is there any attempt to match this expense with sales revenues in the period in which the credit sales transaction originally occurred.
Topic: Direct Write-Off Method LO: 6 7. The direct write-off method of accounting for doubtful accounts follows the accrual concept of accounting more closely than does the allowance method of accounting for doubtful accounts. Answer: False Rationale: The allowance method matches credit losses with the related credit sales in the same time period in which the sale occurs. Under the direct write-off method, doubtful accounts are charged to the bad debts expense on the income statement in the period in which the accounts are determined to be uncollectible. There is no attempt to estimate the bad debts expense, nor is there any attempt to match this expense with sales revenues in the period in which the credit sales transaction originally occurred.
Topic: Allowance for Doubtful Accounts LO: 1 8. The Allowance for Doubtful Accounts normally has a credit balance. Answer: True Rationale: The Allowance for Doubtful Accounts is a contra-asset account with a normal credit balance. It is shown on the balance sheet as a deduction from accounts receivable to reflect the expected amount of uncollectible accounts.
LO: 1 9. The allowance method of accounting for doubtful accounts recognizes the related expense, even though it is not known which customers’ accounts will be doubtful. Answer: True Rationale: The Allowance for Doubtful Accounts is a contra-asset account with a normal credit balance. It is shown on the balance sheet as a deduction from accounts receivable to reflect the expected amount of uncollectible accounts. However, the company does not know precisely which of its customer accounts will be uncollectible.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-3
Topic: Allowance for Doubtful Accounts LO: 1 10. Under the allowance method of estimating bad debts expense, writing off a specific account reduces the firm’s net assets. Answer: False Rationale: The entry to write-off a specific account receivable is: Allowance for doubtful accounts Accounts receivable
XXX XXX
Both Accounts Receivable and the Allowance for Doubtful Accounts decrease; thus, there is no change in net accounts receivable, i.e., no change in net assets.
Topic: Allowance for Doubtful Accounts LO: 1 11. If the allowance method of recording doubtful accounts is used, the entry to write off an account does not affect net income or total assets. Answer: True Rationale: The entry to write-off a specific account receivable is: Allowance for doubtful accounts Accounts receivable
XXX XXX
Both Accounts Receivable and the Allowance for Doubtful Accounts decrease; thus, there is no change in net accounts receivable, i.e., no change in net assets. There is no income statement effect.
Topic: Allowance for Doubtful Accounts LO: 2 12. When a firm using the allowance method of estimating bad debts expense recovers the amount of an account receivable previously written off, the recovery is recorded as a debit to Cash and a credit to Miscellaneous Income. Answer: False Rationale: To reinstate the account: Accounts receivable—XYZ Company Allowance for doubtful accounts To record receipt of cash Cash Accounts receivable—XYZ Company
XXX XXX
XXX XXX
©Cambridge Business Publishers, 2020 8-4
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Determining Maturity Date LO: 4 13. A 90-day note dated April 23 has a maturity date of July 23. Answer: False Rationale: A 90-day note dated April 23 has a maturity date of July 22. 7 days in April (30 -23) 31 days in May 30 days in June 22 days in July 90 days
Topic: Determining Maturity Date LO: 4 14. A 3-month note dated July 1 has a maturity date of October 1. Answer: True Rationale: If the duration of a note is expressed in months, the maturity date is calculated simply by counting the number of months from the date of issue. For example, a three-month note dated July 1 would mature on October 1.
Topic: Interest on Notes Receivable LO: 4 15. Interest at a rate of 8% on $9,000 for 120 days equals $240. Answer: True Rationale: $9,000 x 8% x 120/360 = $240
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-5
Multiple Choice Topic: Accounts Receivable LO: 1 Level of Difficulty: EASY 1. On which financial statement and at what amount are accounts receivable reported? A) Balance sheet at the amount owed by customers B) Income statement at the net uncollectible amount C) Income statement at the amount written off D) Balance sheet at the net realizable value Answer: D Rationale: Accounts receivable are reported on the balance sheet at the amount expected to be collected which is accounts receivable less allowance for doubtful accounts, also known as net realizable value.
Topic: Accounts Receivable LO: 1 Level of Difficulty: EASY 2. At what amount will accounts receivable for Advantage Company be reported on the balance sheet if the gross receivable balance is $52,000 and the allowance for doubtful accounts is estimated at 4% of gross receivables? A) $52,960 B) $47,000 C) $49,920 D) $28,200 Answer: C Rationale: Receivables are reported net of the allowance account. In this case, $52,000 – ($52,000 x 4%) = $49,920.
Topic: Accounts Receivable LO: 1 Level of Difficulty: EASY 3. At what amount will accounts receivable for Horizon Company be reported on the balance sheet if the gross receivable balance is $156,000 and the allowance for doubtful accounts is estimated at 4% of gross receivables? A) $158,880 B) $141,000 C) $149,760 D) $ 84,600 Answer: C Rationale: Receivables are reported net of the allowance account. In this case, $156,000 – ($156,000 x 4%) = $149,760.
©Cambridge Business Publishers, 2020 8-6
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Doubtful Accounts LO: 1 Level of Difficulty: MEDIUM 4. Which of the following does not occur when a company receives additional information that requires it to increase its expectations of doubtful accounts receivable? A) Accounts receivable (net) is reduced B) Bad debts expense is increased C) Net income is reduced D) The allowance account is decreased Answer: D Rationale: When a company receives additional information that requires it to increase its expectations of doubtful accounts receivable, the following entry is made: Bad debts expense Allowance for doubtful accounts To record the increase in bad debts expense.
XXX XXX
Net Accounts Receivable is reduced because the Allowance for Doubtful Accounts, a contra-asset account, is increased, resulting in additional expense and a reduction of profit and retained earnings.
Topic: Average Collection Period LO: 5 Level of Difficulty: EASY 5. Which of the following formula computes the average collection period? A) 365 / Average accounts receivable B) Account receivable / Average daily sales C) Sales / Average accounts receivable D) 365 / Accounts receivable turnover Answer: D Rationale: Average collection period = 365 / Accounts receivable turnover
Topic: Average Collection Period LO: 5 Level of Difficulty: MEDIUM 6. If the collection period lengthens compared to historic figures and industry averages, what might the reason be? A) Deterioration of collectability of receivables B) A change in sales mix to longer paying customers C) A decrease in the amount of sales generated D) A and B Answer: D Rationale: A lengthened collection period means that receivables turnover slows. Answers A and B are reasons for a slowdown in the receivables turnover.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-7
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 7. Great Landscapes Company estimates its doubtful accounts by aging its accounts receivable and applying percentages to various aged categories of accounts. The Great Landscapes Company computes a total of $3,600 in estimated doubtful accounts as of December 31, 2019. Its Accounts Receivable account has a balance of $112,800 and its Allowance for Doubtful Accounts has a credit balance of $600 before adjustment at December 31, 2019. How much bad debts expense will Great Escapes report in 2019? A) $ 480 B) $3,840 C) $3,000 D) $3,360 Answer: C Rationale: To bring the allowance to the desired balance of $3,600, the Great Landscapes Company will need to increase the allowance account by $3,000, resulting in bad debts expense of that same amount.
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 8. Green Garden Company estimates its doubtful accounts by aging its accounts receivable and applying percentages to various aged categories of accounts. The Green Garden Company computes a total of $10,800 in estimated doubtful accounts as of December 31, 2019. Its Accounts Receivable account has a balance of $338,400 and its Allowance for Doubtful Accounts has a credit balance of $1,800 before adjustment at December 31, 2019. How much bad debts expense will Green Garden report in 2019? A) $ 1,440 B) $11,520 C) $ 9,000 D) $10,080 Answer: C Rationale: To bring the allowance to the desired balance of $10,080, the Green Garden Company will need to increase the allowance account by $9,000, resulting in bad debts expense of that same amount.
Topic: Direct Write-Off Method LO: 6 Level of Difficulty: EASY 9. A major shortcoming of the direct write-off method is that credit losses are: A) Not matched with sales B) Never recognized C) Not shown in the subsidiary ledger D) Sometimes collected at a future date Answer: A Rationale: Under the direct write-off method, doubtful accounts are charged to the bad debts expense on the income statement in the period in which the accounts are determined to be uncollectible. Under this approach, there is no attempt to estimate the bad debts expense, nor is there any attempt to match this expense with sales revenues in the period in which the credit sales transaction originally occurred. ©Cambridge Business Publishers, 2020 8-8
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Direct Write-Off Method LO: 6 Level of Difficulty: MEDIUM 10. In accounting for credit losses: A) The allowance method matches losses with related sales better than the direct write-off method. B) The direct write-off method involves estimating credit losses. C) The direct write-off method consistently understates assets on the balance sheet. D) Both (B) and (C) Answer: A Rationale: The allowance method matches credit losses with the related credit sales in the same time period in which the sale occurs. Under the direct write-off method, doubtful accounts are charged to the bad debts expense on the income statement in the period in which the accounts are determined to be uncollectible. There is no attempt to estimate the bad debts expense, nor is there any attempt to match this expense with sales revenues in the period in which the credit sales transaction originally occurred. Under this approach, expenses are understated and net income, retained earnings and total assets are overstated.
Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: MEDIUM 11. On December 31, 2019 before adjusting entries, Accounts Receivable for California Company had a debit balance of $200,000, and the Allowance for Doubtful Accounts had a credit balance of $6,000. Credit sales for the year were $1,600,000. If credit losses are estimated at 1% of credit sales: A) The balance of the Allowance for Doubtful Accounts will be $10,000 after adjustment. B) The balance of the Allowance for Doubtful Accounts will be $22,000 after adjustment. C) The balance of the Allowance for Doubtful Accounts will be $16,000 after adjustment. D) Bad Debts Expense for the year will be $22,000. Answer: B Rationale: Ending balance in Allowance for Doubtful Accounts = $6,000 + ($1,600,000 x 1%) = $22,000
Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: MEDIUM 12. On December 31, 2019 before adjusting entries, Accounts Receivable for Atlanta Company had a debit balance of $600,000, and the Allowance for Doubtful Accounts had a credit balance of $18,000. Credit sales for the year were $4,800,000. If credit losses are estimated at 1% of credit sales: A) The balance of the Allowance for Doubtful Accounts will be $30,000 after adjustment. B) The balance of the Allowance for Doubtful Accounts will be $66,000 after adjustment. C) The balance of the Allowance for Doubtful Accounts will be $48,000 after adjustment. D) Bad Debts Expense for the year will be $66,000. Answer: B Rationale: Ending balance in Allowance for Doubtful Accounts = $18,000 + ($4,800,000 x 1%) = $66,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-9
Topic: Allowance Method LO: 1 Level of Difficulty: MEDIUM 13. Under the allowance method of accounting for credit losses, the entry to write off a specific account: A) Will increase total assets B) Debits Bad Debts Expense and credits Allowance for Doubtful Accounts C) Is the same as the entry to write off a specific account under the direct write-off method D) Does not affect net income or total assets Answer: D Rationale: When a specific account receivable should be written off and removed from a company’s balance sheet, the following entry is made: Allowance for Doubtful accounts Accounts receivable XYZ Company To write off the XYZ Company’s account receivable
XXX XXX
The journal entry to write off an account receivable does not affect a company’s net income or total assets.
Topic: Allowance Method LO: 1 Level of Difficulty: MEDIUM 14. Boulder Beaver Company had a $150,000 beginning balance in Accounts Receivable and a $6,000 credit balance in the Allowance for Doubtful Accounts. During the year, credit sales were $600,000 and customers’ accounts collected were $590,000. Also, $4,000 in worthless accounts were written off. What was the net amount of receivables included in the current assets at the end of the year, before any provision was made for doubtful accounts? A) $130,000 B) $126,000 C) $154,000 D) $120,000 Answer: C Rationale: Year-end Allowance for Doubtful Accounts = $6,000 - $4,000 = $2,000 Year-end Accounts receivable = $150,000 + $600,000 – $590,000 – $4,000 = $156,000 Net Accounts Receivable = $156,000 – $2,000 = $154,000
©Cambridge Business Publishers, 2020 8-10
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Allowance Method LO: 1 Level of Difficulty: MEDIUM 15. John Den Bear Company had a $450,000 beginning balance in Accounts Receivable and a $18,000 credit balance in the Allowance for Doubtful Accounts. During the year, credit sales were $1,800,000 and customers’ accounts collected were $1,770,000. Also, $12,000 in worthless accounts were written off. What was the net amount of receivables included in the current assets at the end of the year, before any provision was made for doubtful accounts? A) $390,000 B) $378,000 C) $462,000 D) $240,000 Answer: C Rationale: Year-end Allowance for Doubtful Accounts = $18,000 - $12,000 = $6,000 Year-end Accounts receivable = $450,000 + $1,800,000 – $1,770,000 – $12,000= $468,000 Net Accounts Receivable = $468,000 – $6,000 = $462,000
Topic: Direct Write-Off Method LO: 6 Level of Difficulty: EASY 16. The entry to record the write-off of Ward Company’s account under the direct write-off method is: A) Accounts Receivable--Ward Company Allowance for Doubtful Accounts B) Bad Debts Expense Allowance for Doubtful Accounts C) Allowance for Doubtful Accounts Accounts Receivable--Ward Company D) Bad Debts Expense Accounts Receivable--Ward Company Answer: D Rationale: Under the direct write-off method, doubtful accounts are charged to the bad debts expense on the income statement in the period in which the accounts are determined to be uncollectible. The journal entry made when the direct write-off method is used is: Bad debt expense – Ward Company Accounts receivable – Ward Company
XXX XXX
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-11
Topic: Allowance Method LO: 1 Level of Difficulty: EASY 17. The entry to record the write-off of Sepich, Inc.’s account using the allowance method is: A) Bad Debts Expense Allowance for Doubtful Accounts B) Bad Debts Expense Accounts Receivable--Sepich, Inc. C) Allowance for Doubtful Accounts Accounts Receivable--Sepich, Inc. D) Accounts Receivable--Sepich, Inc. Allowance for Doubtful Accounts Answer: C Rationale: The journal entry to write off an account receivable does not affect a company’s net income or total assets. By means of the year-end adjusting entry, the bad debts expense is reported in the period when the related sales revenue is recorded. Because the Allowance for Doubtful Accounts is deducted from the Accounts Receivable account on the balance sheet, the net realizable value of accounts receivable is unchanged by the account write off. When a specific account receivable should be written off and removed from a company’s balance sheet the following entry should be made: Allowance for Doubtful Accounts Accounts Receivable
XXX XXX
Topic: Allowance Method LO: 1 Level of Difficulty: MEDIUM 18. If a company fails to make an adjusting entry to estimate doubtful accounts, then this error: A) Understates owners’ equity B) Understates assets C) Overstates net income D) Overstates expenses Answer: C Rationale: The proper entry to record the estimate for doubtful accounts is: Bad Debts Expense Allowance for Doubtful Accounts
XXX XXX
If this entry is not made, expense is understated and thus, net income is overstated.
©Cambridge Business Publishers, 2020 8-12
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: MEDIUM 19. Assume the following unadjusted account balances at the end of the accounting period for Margarete Company: Accounts Receivable, $100,000; Allowance for Doubtful Accounts, $1,400 (debit balance); and Net sales, $1,200,000. If Margarete’s past experience indicates credit losses of 1% of net sales, the adjusting entry to estimate doubtful accounts is: A) Bad Debts Expense Accounts Receivable B) Bad Debts Expense Allowance for Doubtful Accounts C) Bad Debts Expense Allowance for Doubtful Accounts D) Bad Debts Expense Allowance for Doubtful Accounts
12,000 12,000 10,600 10,600 13,400 13,400 12,000 12,000
Answer: D Rationale: Bad debt expense = Credit Sales x % of past credit losses X = $1,200,000 x 1% = $12,000
Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: MEDIUM 20. Assume the following unadjusted account balances at the end of the accounting period for Emmie Company: Accounts Receivable, $300,000; Allowance for Doubtful Accounts, $4,200 (debit balance); and Net sales, $3,600,000. If Emmie’s past experience indicates credit losses of 1% of net sales, the adjusting entry to estimate doubtful accounts is: A) Bad Debts Expense Accounts Receivable B) Bad Debts Expense Allowance for Doubtful Accounts C) Bad Debts Expense Allowance for Doubtful Accounts D) Bad Debts Expense Allowance for Doubtful Accounts
36,000 36,000 31,800 31,800 40,200 40,200 36,000 36,000
Answer: D Rationale: Bad debt expense = Credit Sales x % of past credit losses X = $3,600,000 x 1% = $36,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-13
Topic: Credit Card Sales LO: 3 Level of Difficulty: EASY 21. A retailer that makes credit card sales: A) Absorbs any losses on uncollectible credit card accounts B) Is charged a fee ranging from 1% to 5% of the amount of each credit card sale C) Records such sales as a debit to Cash or Accounts Receivable, a debit to Credit Card Fees Expense, and a credit to Sales Revenue D) Both (B) and (C). Answer: D Rationale: The credit card fee usually ranges from one percent to five percent of the amount of the credit card purchase. The journal entry to record a $1,000 credit card sale, with a three percent credit card fee, is as follows: Cash (or Accounts receivable) 970 Credit card fee expense 30 Sales revenue 1,000 To record credit card sales and collection, less a three percent fee.
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 22. River Forest, Inc.’s $180,000 Accounts Receivable balance at December 31 consisted of $160,000 current balances and $20,000 past-due balances. At December 31, the Allowance for Doubtful Accounts had a credit balance of $1,600. River Forest estimated that 2% of current balances and 15% of past-due balances will prove uncollectible. The adjusting entry to record credit losses is: A) Bad Debts Expense Allowance for Doubtful Accounts B) Bad Debts Expense Allowance for Doubtful Accounts C) Bad Debts Expense Accounts Receivable D) Bad Debts Expense Allowance for Doubtful Accounts
5,800 5,800 4,600 4,600 4,200 4,200 7,400 7,400
Answer: B Rationale: Allowance required = (2% x $160,000) + (15% x $20,000) = $6,200 desired balance Required adjusting entry = $6,200 – $1,600 = $4,600
©Cambridge Business Publishers, 2020 8-14
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 23. Hockey, Inc.’s $540,000 Accounts Receivable balance at December 31 consisted of $480,000 current balances and $60,000 past-due balances. At December 31, the Allowance for Doubtful Accounts had a credit balance of $4,800. Hockey, Inc. estimated that 2% of current balances and 15% of past-due balances will prove uncollectible. The adjusting entry to record credit losses is: A) Bad Debts Expense Allowance for Doubtful Accounts B) Bad Debts Expense Allowance for Doubtful Accounts C) Bad Debts Expense Accounts Receivable D) Bad Debts Expense Allowance for Doubtful Accounts
17,400 17,400 13,800 13,800 12,600 12,600 22,200 22,200
Answer: B Rationale: Allowance required = (2% x $480,000) + (15% x $60,000) = $18,600 desired balance Required adjusting entry = $18,600 – $4,800 = $13,800
Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: MEDIUM 24. Princess Company’s Accounts Receivable balance at December 31 was $300,000 and there was a credit balance of $1,400 in the Allowance for Doubtful Accounts. The year’s sales were $1,800,000. Princess estimates credit losses for the year at 1.5% of sales. After the appropriate adjusting entry is made for credit losses, what is the net amount of accounts receivable included in the current assets at year-end? A) $300,000 B) $271,600 C) $325,400 D) $277,400 Answer: B Rationale: Bad Debt Expense = $1,800,000 x 1.5% = $27,000 Allowance for Doubtful Accounts = $1,400 + $27,000 = $28,400 Net Accounts Receivable = $300,000 – $28,400 = $271,600
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-15
Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: MEDIUM 25. Mario Company’s Accounts Receivable balance at December 31 was $900,000 and there was a credit balance of $4,200 in the Allowance for Doubtful Accounts. The year’s sales were $5,400,000. Mario estimates credit losses for the year at 1.5% of sales. After the appropriate adjusting entry is made for credit losses, what is the net amount of accounts receivable included in the current assets at year-end? A) $900,000 B) $814,800 C) $976,305 D) $832,200 Answer: B Rationale: Bad Debt Expense = $5,400,000 x 1.5% = $81,000 Allowance for Doubtful Accounts = $4,200 + $81,000 = $85,200 Net Accounts Receivable = $900,000 – $85,200 = $814,800
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 26. McKinley Company’s Accounts Receivable balance at December 31 was $200,000, and there was a debit balance of $1,200 in the Allowance for Doubtful Accounts. Mc Kinley estimates that 3% of the Accounts Receivable will prove to be uncollectible. After the appropriate adjusting entry is made for credit losses, what is the net amount of accounts receivable included in the current assets at year-end? A) $175,800 B) $173.400 C) $194,000 D) $180,000 Answer: C Rationale: Allowance required = 3% x $200,000 = $6,000 Net Accounts Receivable = $200,000 – $6,000 = $194,000
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 27. Vandy Company’s Accounts Receivable balance at December 31 was $600,000, and there was a debit balance of $3,600 in the Allowance for Doubtful Accounts. Vandy estimates that 3% of the Accounts Receivable will prove to be uncollectible. After the appropriate adjusting entry is made for credit losses, what is the net amount of accounts receivable included in the current assets at year-end? A) $527,400 B) $520,200 C) $582,000 D) $540,000 Answer: C Rationale: Allowance required = 3% x $600,000 = $18,000 Net Accounts Receivable = $600,000 – $18,000 = $582,000 ©Cambridge Business Publishers, 2020 8-16
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: MEDIUM 28. Assume the following unadjusted account balances at the end of the accounting period for Cottle Company: Accounts Receivable, $30,000; Allowances for Doubtful Accounts, $800 (debit balance); Net sales, $240,000. If Cottle Company’s past experience indicates credit losses of 2% of net sales, the adjusting entry to estimate uncollectible accounts is: A) Bad Debts Expense Allowance for Doubtful Accounts B) Bad Debts Expense Allowance for Doubtful Accounts C) Bad Debts Expense Allowance for Doubtful Accounts D) Bad Debts Expense Accounts Receivable
4,800 4,800 5,600 5,600 4,000 4,000 4,700 4,700
Answer: A Rationale: Adjustment required = 2% x $240,000 = $4,800
Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: MEDIUM 29. Assume the following unadjusted account balances at the end of the accounting period for Jasek Company: Accounts Receivable, $90,000; Allowances for Doubtful Accounts, $2,400 (debit balance); Net sales, $720,000. If Jaroslav Company’s past experience indicates credit losses of 2% of net sales, the adjusting entry to estimate uncollectible accounts is: A) Bad Debts Expense Allowance for Doubtful Accounts B) Bad Debts Expense Allowance for Doubtful Accounts C) Bad Debts Expense Allowance for Doubtful Accounts D) Bad Debts Expense Accounts Receivable
14,400 14,400 15,300 15,300 12,000 12,000 14,400 14,400
Answer: A Rationale: Adjustment required = 2% x $720,000 = $14,400
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-17
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 30. Assume the following unadjusted account balances at the end of the accounting period for Montana Hardware: Accounts Receivable, $80,000; Allowance for Doubtful Accounts, $1,600 (debit balance); Sales revenue, $900,000. If Montana Hardware ages the accounts and determines that $4,000 of the receivables may be uncollectible, the adjusting entry should be: A) Bad Debts Expense Allowance for Doubtful Accounts B) Bad Debts Expense Allowance for Doubtful Accounts C) Bad Debts Expense Allowance for Doubtful Accounts D) Bad Debts Expense Accounts Receivable
4,000 4,000 5,600 5,600 2,400 2,400 4,000 4,000
Answer: B Rationale: Required adjusting entry = $4,000 – ($1,600) = $5,600
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 31. Assume the following unadjusted account balances at the end of the accounting period for Colorado Hardware: Accounts Receivable, $240,000; Allowance for Doubtful Accounts, $4,800 (debit balance); Sales revenue, $2,700,000. If Colorado Hardware ages the accounts and determines that $12,000 of the receivables may be uncollectible, the adjusting entry should be: A) Bad Debts Expense Allowance for Doubtful Accounts B) Bad Debts Expense Allowance for Doubtful Accounts C) Bad Debts Expense Allowance for Doubtful Accounts D) Bad Debts Expense Accounts Receivable
12,000 12,000 16,800 16,800 7,200 7,200 12,000 12,000
Answer: B Rationale: Required adjusting entry = Desired balance in Allowance for Doubtful Accounts – Year-end balance X = $12,000 – ($4,800) = $16,800
©Cambridge Business Publishers, 2020 8-18
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 32. Assume the following unadjusted account balances at the end of the accounting period for Candy Crunch Palace: Accounts Receivable, $90,000; Allowance for Doubtful Accounts, $1,000 (credit balance); and Sales revenue $600,000. If Candy Crunch Palace ages the accounts and determines that $5,000 of receivables may be uncollectible, the adjusting entry should be: A) Bad Debts Expense Accounts Receivable B) Bad Debts Expense Allowance for Doubtful Accounts C) Bad Debts Expense Allowance for Doubtful Accounts D) Bad Debts Expense Allowance for Doubtful Accounts
5,000 5,000 4,000 4,000 3,000 3,000 5,000 5,000
Answer: B Rationale: Required adjusting entry = $5,000 – $1,000 = $4,000
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 33. Assume the following unadjusted account balances at the end of the accounting period for Guatemala Cafe: Accounts Receivable, $135,000; Allowance for Doubtful Accounts, $3,000 (credit balance); and Sales revenue $1,800,000. If Guatemala ages the accounts and determines that $15,000 of receivables may be uncollectible, the adjusting entry should be: A) Bad Debts Expense Accounts Receivable B) Bad Debts Expense Allowance for Doubtful Accounts C) Bad Debts Expense Allowance for Doubtful Accounts D) Bad Debts Expense Allowance for Doubtful Accounts
15,000 15,000 12,000 12,000 9,000 9,000 15,000 15,000
Answer: B Rationale: Required adjusting entry = $15,000 – $3,000 = $12,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-19
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: DIFFICULT 34. New Zealand, Inc. had a $140,000 beginning balance in Accounts Receivable and a $5,000 credit balance in the Allowance for Doubtful Accounts. During the year, credit sales were $800,000 and customers’ accounts collected were $810,000. Also, $4,000 in worthless accounts were written off. An aging of the accounts indicates that 5% of the end-of-the-year Accounts Receivable balance is doubtful for collection. What amount of Bad Debts Expense should be provided at year-end? A) $6,300 B) $7,300 C) $7,600 D) $5,300 Answer: D Rationale: Year-end A/R = $140,000 + $800,000 – $810,000 – $4,000 = $126,000 Allowance for Doubtful Accounts balance = $126,000 x 5% = $6,300 Year-end Allowance for Doubtful Accounts = $5,000 - $4,000 = $1,000 Bad Debt Expense = $6,300 - $1,000 = $5,300
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: DIFFICULT 35. Monkey, Inc. had a $420,000 beginning balance in Accounts Receivable and a $15,000 credit balance in the Allowance for Doubtful Accounts. During the year, credit sales were $2,400,000 and customers’ accounts collected were $2,430,000. Also, $12,000 in worthless accounts were written off. An aging of the accounts indicates that 5% of the end-of-the-year Accounts Receivable balance is doubtful for collection. What amount of Bad Debts Expense should be provided at year-end? A) $18.900 B) $21,900 C) $22,800 D) $15,900 Answer: D Rationale: Year-end A/R = $420,000 + $2,400,000 – $2,430,000 – $12,000 = $378,000 Allowance for Doubtful Accounts balance = $378,000 x 5% = $18,900 Year-end Allowance for Doubtful Accounts = $15,000 - $12,000 = $3,000 Bad Debt Expense = $18,900 - $3,000 = $15,900
©Cambridge Business Publishers, 2020 8-20
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Recovery of Account Written Off Under Allowance Method LO: 2 Level of Difficulty: MEDIUM 36. United Company uses the allowance method of recording credit losses. In November 2019, United wrote off the $1,800 account of Gamma Company. In January 2020, Gamma paid the $1,800. The entry or entries to record the payment is/are: A) Cash
1,800
Recoveries of Accounts Written Off B) Accounts Receivable—Gamma Co. Allowance for Doubtful Accounts Cash Accounts Receivable—Gamma Co. C) Allowance for Doubtful Accounts Accounts Receivable—Gamma Co. D) Accounts Receivable—Gamma Co. Bad Debts Expense Cash Accounts Receivable—Gamma Co. Answer: B Rationale: Nov. 2019 Allowance for doubtful accounts Accounts receivable—Gamma Co. To write off the Gamma Company’s account
1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800
1,800 1,800
Jan. 2020
Accounts receivable—Gamma Co. 1,800 Allowance for doubtful accounts 1,800 To reinstate Gamma Co.’s account to the extent of the recovery
Jan. 2020
Cash Accounts receivable—Gamma Co. To record collection of cash on account
1,800 1,800
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-21
Topic: Recovery of Account Written Off Under Allowance Method LO: 2 Level of Difficulty: MEDIUM 37. Northwest Company uses the allowance method of recording credit losses. In November 2019, Northwest wrote off the $5,400 account of Delta Company. In January 2020, Delta paid the $5,400. The entry or entries to record the payment is/are: A) Cash 5,400 Recoveries of Accounts Written Off 5,400 B) Accounts Receivable—Delta Co. 5,400 Allowance for Doubtful Accounts 5,400 Cash 5,400 Accounts Receivable—Delta Co. 5,400 C) Allowance for Doubtful Accounts 5,400 Accounts Receivable—Delta Co. 5,400 D) Accounts Receivable—Delta Co. 5,400 Bad Debts Expense 5,400 Cash 5,400 Accounts Receivable—Delta Co. 5,400 Answer: B Rationale: Nov. 2019 Allowance for doubtful accounts Accounts receivable—Delta Co. To write off the Delta Co.’s account
5,400 5,400
Jan. 2020 Accounts receivable— Delta Co. 5,400 Allowance for doubtful accounts To reinstate Delta Co.’s account to the extent of the recovery Jan. 2020 Cash Accounts receivable— Delta Co. To record collection of cash on account
5,400
5,400 5,400
©Cambridge Business Publishers, 2020 8-22
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Recovery of Account Written Off Under Direct Write-Off Method LO: 6 Level of Difficulty: MEDIUM 38. Tiny Company uses the direct write-off method of recording credit losses. Tiny Company wrote off the $1,600 account of Tim Co. in October 2019. In February 2020, Tiny Company received a final $600 payment from Tim’s trustee in bankruptcy. Giant should make the following entry or entries to record the payment: A) Cash
600
Allowance for Doubtful Accounts B) Allowance for Doubtful Accounts Bad Debts Expense C) Accounts Receivable—Tim Co. Allowance for Doubtful Accounts D) Accounts Receivable—Tim Co. Bad Debts Expense Cash Accounts Receivable—Tim Co. Answer: D Rationale: Oct. 2019 Bad debts expense Accounts receivable – Tim Co. To write off the Tim Co.’s account
600 600 600 600 600 600 600 600 600
600 600
Feb. 2020 Accounts receivable – Tim Co. 600 Bad debts expense 600 To reinstate Tim Co.’s account to the extent of the recovery. Feb. 2020 Cash Accounts receivable—Tim Co. To record collection of cash on account
600 600
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-23
Topic: Recovery of Account Written Off Under Direct Write-Off Method LO: 6 Level of Difficulty: MEDIUM 39. Mercury Company uses the direct write-off method of recording credit losses. Mercury Company wrote off the $4,800 account of Venus Co. in October 2019. In February 2020, Mercury Company received a final $1,800 payment from Venus’ trustee in bankruptcy. Mercury should make the following entry or entries to record the payment: A) Cash
1,800
Allowance for Doubtful Accounts B) Allowance for Doubtful Accounts Bad Debts Expense C) Accounts Receivable – Venus Co. Allowance for Doubtful Accounts D) Accounts Receivable – Venus Co. Bad Debts Expense Cash Accounts Receivable – Venus Co.
1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800
Answer: D Rationale: Oct. 2019 Bad debts expense 4,800 Accounts receivable – Venus Co. To write off the Venus Co.’s account
4,800
Feb. 2020 Accounts receivable –Venus Co. 1,800 Bad debts expense 1,800 To reinstate Venus Co.’s account to the extent of the recovery. Feb. 2020 Cash Accounts receivable – Venus Co. To record collection of cash on account
1,800 1,800
©Cambridge Business Publishers, 2020 8-24
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Recovery of Accounts Written Off Under the Allowance Method LO: 2 Level of Difficulty: MEDIUM 40. After writing off a customer’s account, a company using the allowance method subsequently collected the account in full. It should: A) Debit Cash and credit Accounts Receivable B) Debit Cash and credit Miscellaneous Income C) Debit Accounts Receivable and credit Allowance for Doubtful Accounts D) Both A) and C) Answer: D Rationale: Allowance for doubtful accounts Accounts receivable—customer To write off a customer’s account
XXX XXX
Accounts receivable—customer XXX Allowance for doubtful accounts To reinstate customer’s account to the extent of the recovery Cash
XXX
XXX
Accounts receivable—customer To record collection of cash on account
XXX
Topic: Notes Receivable and Interest LO: 4 Level of Difficulty: MEDIUM 41. Robbie Company paid Hoover Company for merchandise with an $8,000, 60-day, 9% note dated April 1. If Robbie Company pays the note at maturity, what entry should Hoover make at that time? A) Cash
8,720
Interest income Notes receivable B) Notes payable Interest expense Cash C) Cash Interest income Notes receivable D) Notes payable Interest expense Cash
720 8,000 8,000 720 8,720 8,120 120 8,000 7,880 120 8,000
Answer: C Rationale: April 1 Notes receivable 8,000 Accounts receivable Received 60 day, nine percent note in payment of account. June 1
8,120 Interest income Notes receivable Collected Robbie Company note ($8,000 x 9% x 60/360 = $120)
8,000
Cash
120 8,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-25
Topic: Notes Receivable and Interest LO: 4 Level of Difficulty: MEDIUM 42. Chopper Company paid Keith Company for merchandise with a $24,000, 60-day, 9% note dated April 1. If Chopper Company pays the note at maturity, what entry should Keith make at that time? A) Cash
26,160
Interest income Notes receivable B) Notes payable Interest expense Cash C) Cash Interest income Notes receivable D) Notes payable Interest expense Cash
2,160 24,000 24,000 2,160 26,160 24,360 360 24,000 23,640 360 24,000
Answer: C Rationale: April 1 Notes receivable 24,000 Accounts receivable 24,000 Received 60 day, nine percent note in payment of account. June 1
Cash
24,360 Interest income 360 Notes receivable 24,000 Collected Chopper Company note ($24,000 x 9% x 60/360 = $360)
Topic: Notes Receivable and Interest LO: 4 Level of Difficulty: MEDIUM 43. A $20,000, 3-month, 8% note is dated June 1, 2016. The maturity date and maturity value of the note are, respectively: A) September 1, 2016; $20,400 B) August 29, 2016; $20,400 C) September 1, 2016; $400 D) August 29, 2016; $20,000 Answer: A Rationale: Maturity value = $20,000 + ($20,000 x 8% x 3/12) = $20,400
©Cambridge Business Publishers, 2020 8-26
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Notes Receivable and Interest LO: 4 Level of Difficulty: MEDIUM 44. A $60,000, 3-month, 8% note is dated June 1, 2019. The maturity date and maturity value of the note are, respectively: A) September 1, 2019; $61,200 B) August 29, 2019; $61,200 C) September 1, 2019; $1,200 D) August 29, 2019; $60,000 Answer: A Rationale: $60,000 + ($60,000 x 8% x 3/12) = $61,200
Topic: Notes Receivable and Interest LO: 4 Level of Difficulty: MEDIUM 45. A $30,000, 120-day, 9% note is dated April 30, 2019. The maturity date and maturity value of the note are, respectively: A) August 31, 2016; $32,960 B) August 28, 2016; $30,900 C) September 1, 2016; $32,960 D) August 28, 2016; $960 Answer: B Rationale: Computation of maturity date: May (31 days) + June (30 days) + July (31 days) + August (28 days) = 120 days; Maturity value = $30,000 + ($30,000 x 9% x 120/360) = $30,900
Topic: Notes Receivable and Interest LO: 4 Level of Difficulty: MEDIUM 46. A $90,000, 120-day, 9% note is dated April 30, 2019. The maturity date and maturity value of the note are, respectively: A) August 31, 2019; $99,880 B) August 28, 2019; $92,700 C) September 1, 2019; $98,880 D) August 28, 2019; $ 2,880 Answer: B Rationale: Computation of maturity date: May (31 days) + June (30 days) + July (31 days) + August (28 days) = 120 days; Maturity value = $90,000 + ($90,000 x 9% x 120/360) = $92,700
Topic: Notes Receivable and Interest LO: 4 Level of Difficulty: EASY 47. A note for $24,000 is dated May 3, 2019 and it matures on August 1, 2019. The note is a: A) 3-month note B) 90-day note C) 91-day note D) Both A and B Answer: B Rationale: Computation of maturity date: May (28 days) + June (30 days) + July (31 days) + August (1 day) = 90 days ©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-27
Topic: Notes Receivable and Interest LO: 4 Level of Difficulty: EASY 48. On December 11, 2019, Fred gave a $20,000, 60-day, 9% note to Barnie in payment of an account. On December 31, 2019, Barnie should record: A) $100 interest income B) $100 interest expense C) $300 interest income D) $300 interest expense Answer: A Rationale: Dec. 31 Interest receivable 100 Interest income To accrue interest income on the note from Fred Company ($20,000 x 9% x 20/360 = $100)
100
Topic: Notes Receivable and Interest LO: 4 Level of Difficulty: EASY 49. On December 11, 2019, Red gave a $60,000, 60-day, 9% note to Cardinal in payment of an account. On December 31, 2019, cardinal should record: A) $300 interest income B) $300 interest expense C) $900 interest income D) $900 interest expense Answer: A Rationale: Dec. 31 Interest receivable 300 Interest income To accrue interest income on the note from Red Company ($60,000 x 9% x 20/360 = $300)
300
Topic: Interest Receivable LO: 4 Level of Difficulty: MEDIUM 50. If Bruce Company fails to make an adjusting entry to accrue interest on a note receivable, then this error: A) Overstates expenses B) Understates income C) Understates assets and owners’ equity D) All of these except A Answer: D Rationale: The adjusting entry that Bruce Company makes, to record the earned, but uncollected, interest income is as follows: Interest receivable Interest income To accrue interest income on the note receivable
XX XX
If this entry is not made, income, owners’ equity, and assets would all be understated.
©Cambridge Business Publishers, 2020 8-28
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Notes Receivable and Interest LO: 4 Level of Difficulty: MEDIUM 51. On November 16, 2019, Shoe Company borrowed $20,000 from Lace Company and gave a 90-day, 12% note. On December 31, 2019 the end of the accounting period, Lace makes the following entry: A) Notes receivable Interest income B) Interest receivable Interest income C) Cash Interest income D) Interest receivable Interest income
300 300 600 600 300 300 300 300
Answer: D Rationale: Dec. 31 Interest receivable 300 Interest income 300 To accrue interest income on the note from Shoe Company ($20,000 x 12% x 45/360 = $300)
Topic: Notes Receivable and Interest LO: 4 Level of Difficulty: MEDIUM 52. On November 16, 2019, Pea Company borrowed $60,000 from Coat Company and gave a 90-day, 12% note. On December 31, 2019 the end of the accounting period, Coat makes the following entry: A) Notes receivable Interest income B) Interest receivable Interest income C) Cash Interest income D) Interest receivable Interest income
900 900 1,800 1,800 900 900 900 900
Answer: D Rationale: The adjusting entry that Coat Company makes at December 31, 2019, to record the earned, but uncollected, interest income is as follows: Dec. 31
Interest receivable 900 Interest income 900 To accrue interest income on the note from Pea Company ($60,000 x 12% x 45/360 = $900)
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-29
Topic: Interest Receivable LO: 4 Level of Difficulty: MEDIUM 53. Rain Company paid Drop Company for merchandise with a $9,000, 90-day, 10% note dated December 11, 2019. What entry should Drop Company make in its books at the end of the accounting period on December 31, 2019? A) Interest receivable Interest income B) Cash Interest receivable C) Interest income Interest receivable D) Cash Interest income
50 50 50 50 50 50 50 50
Answer: A Rationale: Dec. 31 Interest receivable 50 Interest income 50 To accrue interest income on the note from Rain Company ($9,000 x 10% x 20/360 = $50)
Topic: Interest Receivable LO: 4 Level of Difficulty: MEDIUM 54. Sun Company paid Shine Company for merchandise with a $27,000, 90-day, 10% note dated December 11, 2019. What entry should Shine Company make in its books at the end of the accounting period on December 31, 2019? A) Interest receivable Interest income B) Cash Interest receivable C) Interest income Interest receivable D) Cash Interest income
150 150 150 150 150 150 150 150
Answer: A Rationale: Dec. 31 Interest receivable 150 Interest income 150 To accrue interest income on the note from Sun Company ($27,000 x 10% x 20/360 = $150)
©Cambridge Business Publishers, 2020 8-30
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Notes Receivable LO: 4 Level of Difficulty: MEDIUM 55. Angela, Inc. received a $16,000 30-day, 9% note dated December 21, 2019 from Alyssa Company. On December 31, 2019, Angela made the necessary adjusting entry to accrue interest income on the note. Angela’s entry to record payment of the note on January 20, 2020 was: A) Cash
16,120 Interest income Notes receivable
B) Cash
120 16,000 16,040
Interest income Notes receivable C) Cash
40 16,000 16,120
Interest receivable Interest income Notes receivable D) Cash
40 80 16,000 16,080
Interest income Notes receivable
80 16,000
Answer: C Rationale: Dec. 31 Interest receivable 40 Interest income 40 To accrue interest income on the note from Alyssa Company ($16,000 x 9% x 10/360 = $40 accrued interest) Jan. 20
Cash
16,120 Interest receivable 40 Interest income 80 Notes receivable 16,000 Received payment of principal and interest from Alyssa Company ($16,000 x 9% x 20/360 = $80 interest)
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-31
Topic: Notes Receivable LO: 4 Level of Difficulty: MEDIUM 56. Balen, Inc. received a $48,000 30-day, 9% note dated December 21, 2019 from Vargas Company. On December 31, 2019, Balen made the necessary adjusting entry to accrue interest income on the note. Balen’s entry to record payment of the note on January 20, 2020 was: A) Cash
48,360 Interest income Notes receivable
B) Cash
360 48,000 48,120
Interest income Notes receivable C) Cash
120 48,000 48,360
Interest receivable Interest income Notes receivable D) Cash
120 240 48,000 48,240
Interest income Notes receivable
240 48,000
Answer: C Rationale: Dec. 31 Interest receivable 120 Interest income 120 To accrue interest income on the note from Vargas Company ($48,000 x 9% x 10/360 = $120 accrued interest) Jan. 20
Cash
48,360 Interest receivable 120 Interest income 240 Notes receivable 48,000 Received payment of principal and interest from Vargas Company ($48,000 x 9% x 20/360 = $240 interest)
Topic: Account Receivable Turnover LO: 5 Level of Difficulty: EASY 57. Percy, Inc. had net sales of $1,530,000 during 2019. On January 1, 2019, Percy’s accounts receivable were $320,000. On December 31, 2019, Percy’s accounts receivable were $400,000. What was Annabeth’s accounts receivable turnover for 2019? A) 4.25 B) 3.03 C) 3.83 D) 4.78 Answer: A Rationale: Accounts receivable turnover = Net sales / Average accounts receivable (net) X = $1,530,000 / [($320,000 + $400,000) / 2] = 4.25 ©Cambridge Business Publishers, 2020 8-32
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Account Receivable Turnover LO: 5 Level of Difficulty: EASY 58. Tower, Inc. had net sales of $4,725,000 during 2019. On January 1, 2019, Tower’s accounts receivable were $960,000. On December 31, 2019, Tower’s accounts receivable were $1,200,000. What was Tower’s accounts receivable turnover for 2019? A) 4.93 B) 4.38 C) 8.53 D) 2.78 Answer: B Rationale: Accounts receivable turnover = Net sales / Average accounts receivable (net) X = $4,725,000 / [($960,000 + $1,200,000) / 2] = 4.38
Topic: Average Collection Period LO: 5 Level of Difficulty: MEDIUM 59. Percy, Inc. had net sales of $1,530,000 during 2019. On January 1, 2019, Percy’s accounts receivable were $320,000. On December 31, 2019, Percy’s accounts receivable were $400,000. What was Percy’s average collection period for 2019? A) 85.9 days B) 15.5 days C) 95.4 days D) 43.0 days Answer: A Rationale: Average collection period = 365 / Accounts receivable turnover X = 365 / ($1,530,000 / [($320,000 + $400,000) / 2]) = 85.9 days
Topic: Average Collection Period LO: 5 Level of Difficulty: MEDIUM 60. Tower, Inc. had net sales of $4,725,000 during 2019. On January 1, 2019, Tower’s accounts receivable were $960,000. On December 31, 2019, Tower’s accounts receivable were $1,200,000. What was Tower’s average collection period for 2019? A) 83.4 days B) 13.8 days C) 96.2 days D) 43.3 days Answer: A Rationale: Average collection period = 365 / Accounts receivable turnover X = 365 / ($4,725,000 / [($960,000 + $1,200,000) / 2]) = 83.4 days
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-33
Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: EASY 61. Storm Company has net credit sales of $1,800,000 for the year and it estimates that doubtful accounts will be 2% of sales. If its Allowance for Doubtful Accounts has a credit balance of $6,000 prior to adjustment, its balance after adjustment will be a credit of: A) $28,000 B) $42,000 C) $27,960 D) $26,000 Answer: B Rationale: Bad Debt Expense = $1,800,000 x 2% = $36,000; Allowance for Doubtful Accounts = $6,000 + $36,000 = $42,000
Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: EASY 62. Scorpion Company has net credit sales of $5,400,000 for the year and it estimates that doubtful accounts will be 2% of sales. If its Allowance for Doubtful Accounts has a credit balance of $18,000 prior to adjustment, its balance after adjustment will be a credit of: A) $ 84,000 B) $126,000 C) $ 83,880 D) $ 78,000 Answer: B Rationale: Bad Debt Expense = $5,400,000 x 2% = $108,000 Allowance for Doubtful Accounts = $18,000 + $108,000 = $126,000
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 63. At the beginning of 2019, Page Company’s allowance for doubtful accounts is $24,000. During 2019, $8,500 was written off as uncollectible. On December 31, 2019, Page Company used an aging schedule of accounts receivable and determined that $21,060 of the accounts receivable would probably be uncollectible. What would be the bad debts expense that should be reported on Page Company’s 2019 income statement? A) $ 2,940 B) $53,560 C) $11,440 D) $ 5,560 Answer: D Rationale: Year-end Allowance for Doubtful Accounts = $24,000 - $8,500 = $15,500 Bad Debt Expense = $21,060 - $15,500 = $5,560
©Cambridge Business Publishers, 2020 8-34
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 64. At the beginning of 2019, Brown Company’s allowance for doubtful accounts is $72,000. During 2019, $25,500 was written off as uncollectible. On December 31, 2019, Brown Company used an aging schedule of accounts receivable and determined that $63,180 of the accounts receivable would probably be uncollectible. What would be the bad debts expense that should be reported on Brown Company’s 2019 income statement? A) $109,680 B) $160,680 C) $ 34,440 D) $ 16,680 Answer: D Rationale: Year-end Allowance for Doubtful Accounts = $72,000 - $25,500 = $46,500 Bad Debt Expense = $63,180 - $46,500 = $16,680
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 65. Losh Company has the following unadjusted account balances on December 31, 2019. The preadjustment balance of Allowance for Doubtful Accounts is $3,200 debit. This company uses the following aging of accounts receivable to estimate its bad debts. Accounts Age
Balance
Estimated Uncollectible %
Current (not yet due) 1-30 past due 31-60 past due 61-90 past due Over 90 days past due Total
$192,000 $128,000 $ 32,000 $ 13,000 $ 6,400 $371,400
1.0% 3.5% 12.0% 42.0% 67.0%
The Net Realizable Value of Accounts Receivable reported on the year-end Balance Sheet will be: A) $354,612 B) $391,925 C) $351,412 D) $348,212 Answer: C Rationale: Net Realizable Value of Accounts Receivable = $371,400 - $19,988 = $351,412 Accounts Age Current (not yet due) 1-30 past due 31-60 past due 61-90 past due Over 90 days past due Total
Balance $192,000 $128,000 $ 32,000 $ 13,000 $ 6,400 $371,400
Estimated Uncollectible % 1.0% 3.5% 12.0% 42.0% 67.0%
Allowance Required $ 1,920 4,480 3,840 5,460 4,288 $19,988
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-35
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 66. Pinata Company has the following unadjusted account balances on December 31, 2019. The preadjustment balance of Allowance for Doubtful Accounts is $9,600 debit. This company uses the following aging of accounts receivable to estimate its bad debts. Accounts Age
Balance
Current (not yet due) 1-30 past due 31-60 past due 61-90 past due Over 90 days past due Total
$576,000 $384,000 $ 96,000 $ 39,000 $ 19,200 $1,114,200
Estimated Uncollectible % 1.0% 3.5% 12.0% 42.0% 67.0%
The Net Realizable Value of Accounts Receivable reported on the year-end Balance Sheet will be: A) $1,063,836 B) $1,175,775 C) $1,054,236 D) $1,044,636 Answer: C Rationale: Net Realizable Value of Accounts Receivable = $1,114,200 - $59,964 = $1,054,236 Accounts Age Current (not yet due) 1-30 past due 31-60 past due 61-90 past due Over 90 days past due Total
Balance $576,000 $384,000 $ 96,000 $ 39,000 $ 19,200 $1,114,200
Estimated Uncollectible % 1.0% 3.5% 12.0% 42.0% 67.0%
Allowance Required $ 5,760 13,440 11,520 16,380 12,864 $59,964
©Cambridge Business Publishers, 2020 8-36
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 67. An aging of Bicycle Company's accounts receivable indicates that $20,000 is estimated to be uncollectible. If Allowance for Doubtful Accounts has a $3,000 credit balance, the adjustment to record bad debts for the period will require a: A) Debit to Bad Debts Expense for $20,000 B) Debit to Allowance for Doubtful Accounts for $17,000 C) Debit to Bad Debts Expense for $17,000 D) Credit to Allowance for Doubtful Accounts for $20,000 Answer: C Rationale: Bad Debt Expense = $20,000 - $3,000 = $17,000 Thus, the adjustment to record bad debts for the period will be: Bad Debts Expense Allowance for Doubtful Accounts
17,000 17,000
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 68. An aging of Coco Company's accounts receivable indicates that $60,000 is estimated to be uncollectible. If Allowance for Doubtful Accounts has a $9,000 credit balance, the adjustment to record bad debts for the period will require a: A) Debit to Bad Debts Expense for $60,000 B) Debit to Allowance for Doubtful Accounts for $51,000 C) Debit to Bad Debts Expense for $51,000 D) Credit to Allowance for Doubtful Accounts for $60,000 Answer: C Rationale: Bad Debt Expense = $60,000 - $9,000 = $51,000 Thus, the adjustment to record bad debts for the period will be: Bad Debts Expense Allowance for Doubtful Accounts
51,000 51,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-37
Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: DIFFICULT 69. Cunningham Company’s Accounts Receivable account has a balance of $644,000 and the Allowance for Doubtful Accounts has a debit balance of $1,700 at fiscal year-end prior to adjustment. If the estimate based on the percentage of sales approach to estimating uncollectibles is $39,800, the net realizable value of accounts receivable reported on the balance sheet after adjustment is: A) $604,200 B) $605,900 C) $602,500 D) $642,300 Answer: B Rationale: Allowance for Doubtful Accounts = $(1,700) + $39,800 = $38,100 Net Realizable Value of Accounts Receivable = $644,000 - $38,100 = $605,900
Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: DIFFICULT 70. Johnnie Company’s Accounts Receivable account has a balance of $1,932,000 and the Allowance for Doubtful Accounts has a debit balance of $5,100 at fiscal year-end prior to adjustment. If the estimate based on the percentage of sales approach to estimating uncollectibles is $119,400, the net realizable value of accounts receivable reported on the balance sheet after adjustment is: A) $1,812,600 B) $1,817,700 C) $1,807,500 D) $1,920,900 Answer: B Rationale: Allowance for Doubtful Accounts = $(5,100) + $119,400 = $114,300 Net Realizable Value of Accounts Receivable = $1,932,000 - $114,300 = $1,817,700
Topic: Accounts Receivable Write-offs LO: 1 Level of Difficulty: DIFFICULT 71. Cooper Company’s net accounts receivable before write-offs is $1,690,000. What is the balance in net accounts receivable, if $39,600 in doubtful accounts are written off? A) $1,646,000 B) $1,734,000 C) $1,690,000 D) Cannot be determined Answer: C Rationale: When the journal entry is recorded to write-off doubtful accounts, a debit is made to Allowance for Doubtful Accounts and a credit to Accounts Receivable – decreasing both account balances for the written off amount. The net effect is no change to the Accounts receivable, net balance.
©Cambridge Business Publishers, 2020 8-38
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Accounts Receivable Write-offs LO: 1 Level of Difficulty: DIFFICULT 72. Spencer Company’s net accounts receivable before write-offs is $5,070,000. What is the balance in net accounts receivable, if $118,800 in doubtful accounts are written off under the allowance method? A) $4,938,000 B) $5,202,000 C) $5,070,000 D) Cannot be determined Answer: C Rationale: When the journal entry is recorded to write-off doubtful accounts, a debit is made to Allowance for Doubtful Accounts and a credit to Accounts Receivable – decreasing both account balances for the written off amount. The net effect is no change to the Accounts receivable, net balance.
Topic: Accounts Receivable Write-offs LO: 1 Level of Difficulty: MEDIUM 73. Prior to the write off of a $500 customer account, Parthenon Company had the following account balances: Accounts receivable Allowance for doubtful accounts
$19,600 1,000
The net realizable value of the Accounts Receivable before and after the write-off was:
A) B) C) D)
Before $18,600 $18,800 $18,600 $18,600
After $18,600 $18,600 $18,400 $18,300
Answer: A Rationale: The journal entry to write off an account receivable does not affect a company’s total assets. Allowance for doubtful accounts Accounts receivable – customer account To write off the customer’s account receivable.
Accounts receivable Allowance for doubtful accounts Net realizable
Before $19,600 1,000 $18,600
500 500
After $19,100 500 $18,600
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-39
Topic: Accounts Receivable Write-offs LO: 1 Level of Difficulty: MEDIUM 74. Prior to the write off of a $1,500 customer account, Betty Company had the following account balances: Accounts receivable Allowance for doubtful accounts
$58,800 3,000
The net realizable value of the Accounts Receivable before and after the write-off was:
A) B) C) D)
Before $55,800 $55,800 $55,800 $55,800
After $55,800 $58,800 $55,200 $54,900
Answer: A Rationale: The journal entry to write off an account receivable does not affect a company’s total assets. Allowance for doubtful accounts Accounts receivable – customer account To write off the customer’s account receivable. Accounts receivable Allowance for doubtful accounts Net realizable
Before $58,800 3,000 $55,800
1,500 1,500 After $57,300 1,500 $55,800
Topic: Estimating Credit Losses LO: 2 Level of Difficulty: DIFFICULT 75. Thor Company’s Accounts Receivable account has a balance of $800,000 at the end of the year, and the company estimates the Net Realizable Value of Accounts Receivable to be $768,000. The Allowance for Doubtful Accounts has a credit balance of $18,000 at the beginning of the current year, and during the year, Thor wrote off $15,000 of accounts receivable. The year-end adjusting entry would require a: A) A credit to Allowance for Doubtful Accounts for $35,000 B) A debit to Bad Debts Expense for $14,000 C) A debit to Bad Debts Expense for $29,000 D) A credit to Allowance for Doubtful Accounts for $32,000 Answer: C Rationale: Allowance for Doubtful Accounts = $800,000 - $768,000 = $32,000 Year-end Allowance for Doubtful Accounts, before adjustment = $18,000 - $15,000 = $3,000 Required Allowance adjustment = $32,000 - $3,000 = $29,000 The year-end adjusting entry: Bad debts expense Allowance for doubtful accounts To record the bad debts expense for the year.
29,000 29,000
©Cambridge Business Publishers, 2020 8-40
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Estimating Credit Losses LO: 2 Level of Difficulty: DIFFICULT 76. Saturn Company’s Accounts Receivable account has a balance of $2,400,000 at the end of the year, and the company estimates the Net Realizable Value of Accounts Receivable to be $2,304,000. The Allowance for Doubtful Accounts has a credit balance of $54,000 at the beginning of the current year, and during the year, Saturn wrote off $45,000 of accounts receivable. The year-end adjusting entry would require a: A) A credit to Allowance for Doubtful Accounts for $105,000 B) A debit to Bad Debts Expense for $42,000 C) A debit to Bad Debts Expense for $87,000 D) A credit to Allowance for Doubtful Accounts for $96,000 Answer: C Rationale: Allowance for Doubtful Accounts = $2,400,000 - $2,304,000 = $96,000 Year-end Allowance for Doubtful Accounts, before adjustment = $54,000 - $45,000 = $9,000 Required Allowance adjustment = $96,000 - $9,000 = $87,000 The year-end adjusting entry: Bad debts expense Allowance for doubtful accounts To record the bad debts expense for the year.
87,000 87,000
Topic: Estimating Credit Losses LO: 2 Level of Difficulty: DIFFICULT 77. Dahmen Company’s Accounts Receivable Account has a debit balance of $1,800,000, and the Allowance for Doubtful Accounts has a debit balance of $4,000 at the end of the year before adjustment. An analysis of their customers' accounts estimates that 2% of year end account receivable will be uncollectible. The adjusting journal entry for doubtful accounts will include: A) Debit Bad Debts Expense $326,000 B) Credit Allowance for Doubtful Accounts, $36,000 C) Debit Bad Debts Expense $40,000 D) Credit Allowance for Doubtful Accounts, $32,000 Answer: C Rationale: Estimated uncollectible receivables = $1,800,000 x 2% = $36,000 Required Allowance adjustment = $36,000 – (-$4,000) = $40,000 The year-end adjusting entry: Bad debts expense Allowance for doubtful accounts To record the bad debts expense for the year
40,000 40,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-41
Topic: Estimating Credit Losses LO: 2 Level of Difficulty: DIFFICULT 78. Gleeson Company’s Accounts Receivable Account has a debit balance of $5,400,000, and the Allowance for Doubtful Accounts has a debit balance of $12,000 at the end of the year before adjustment. An analysis of their customers' accounts estimates that 2% of year end account receivable will be uncollectible. The adjusting journal entry for doubtful accounts will include: A) Debit Bad Debts Expense $978,000 B) Credit Allowance for Doubtful Accounts, $108,000 C) Debit Bad Debts Expense $120,000 D) Credit Allowance for Doubtful Accounts, $96,000 Answer: C Rationale: Estimated uncollectible receivables = $5,400,000 x 2% = $108,000 Required Allowance adjustment = $108,000 – (-$12,000) = $120,000 The year-end adjusting entry: Bad debts expense Allowance for doubtful accounts To record the bad debts expense for the year
120,000 120,000
Topic: Accounts Receivable Write-offs LO: 1 Level of Difficulty: MEDIUM 79. On January 1, 2019, the accounts receivable balance for Hades Company was $14,000 and the balance in the allowance for doubtful accounts was $1,400. On that day, a $600 doubtful account was written-off. The net realizable value of accounts receivable immediately after the write-off is: A) $12,600 B) $13,600 C) $13,000 D) $12,200 Answer: A Rationale: The journal entry to write off an account receivable does not affect a company’s total assets. Allowance for doubtful accounts Accounts receivable – customer account To write off the customer’s account receivable.
Accounts receivable Allowance for doubtful accounts Net realizable
Before $14,000 1,400 $12,600
600 600
After $13,400 800 $12,600
©Cambridge Business Publishers, 2020 8-42
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Accounts Receivable Write-offs LO: 1 Level of Difficulty: MEDIUM 80. On January 1, 2019, the accounts receivable balance for Heaven Company was $42,000 and the balance in the allowance for doubtful accounts was $4,200. On that day, a $1,800 doubtful account was written-off. The net realizable value of accounts receivable immediately after the write-off is: A) $37,800 B) $40,800 C) $39,000 D) $36,300 Answer: A Rationale: The journal entry to write off an account receivable does not affect a company’s total assets. Allowance for doubtful accounts Accounts receivable – customer account To write off the customer’s account receivable.
Accounts receivable Allowance for doubtful accounts Net realizable
Before $42,000 4,200 $37,800
1,800 1,800
After $40,200 2,400 $37,800
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 81. The data below is for Cronus Corporation for 2019. Accounts receivable - December 31, 2019 Customer accounts written off as uncollectible during 2019: Allowance for doubtful accounts - January 1, 2019 Estimated doubtful accounts based on an aging analysis
$1,072,000 16,000 17,400 21,200
If the aging approach is used to estimate bad debts, determine the bad debt expense for 2019. A) $16,000 B) $16,200 C) $17,400 D) $19,800 Answer: D Rationale: If the aging approach is used to estimate bad debts, the computation is as follows: Allowance for doubtful accounts 1/1/2019 Less: Write-offs Balance before adjustment for bad debts
$17,400 (16,000) $ 1,400
Required allowance based on an aging analysis Less: Balance before adjustment for bad debts Bad debt expense for 2019
$21,200 (1,400) $19,800
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-43
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 82. The data below is for Beta Corporation for 2019. Accounts receivable - December 31, 2019 Customer accounts written off as uncollectible during 2019: Allowance for doubtful accounts - January 1, 2019 Estimated doubtful accounts based on an aging analysis
$3,216,000 48,000 52,200 63,600
If the aging approach is used to estimate bad debts, determine the bad debt expense for 2019. A) $48,000 B) $48,600 C) $52,200 D) $59,400 Answer: D Rationale: If the aging approach is used to estimate bad debts, the computation is as follows: Allowance for doubtful accounts 1/1/2019 Less: Write-offs Balance before adjustment for bad debts
$52,200 (48,000) $ 4,200
Required allowance based on an aging analysis Less: Balance before adjustment for bad debts Bad debt expense for 2019
$63,600 (4,200) $59,400
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 83. Accounts receivable Michelin, Inc. has a balance of $2,100,000 and the allowance for doubtful accounts has a credit balance of $14,800 at fiscal year-end prior to adjustment. If the estimate of doubtful accounts determined by aging the receivables is $37,000, the amount of bad debts expense is: A) $35,000 B) $22,200 C) $49,800 D) $14,800 Answer: B Rationale: Required allowance based on aging method: Less: Allowance for Doubtful Accounts prior to adjustment: Year-end adjustment required
$37,000 (14,800) $22,200
©Cambridge Business Publishers, 2020 8-44
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 84. Accounts receivable Superior, Inc. has a balance of $6,300,000 and the allowance for doubtful accounts has a credit balance of $44,400 at fiscal year-end prior to adjustment. If the estimate of doubtful accounts determined by aging the receivables is $111,000, the amount of bad debts expense is: A) $105,000 B) $ 66,600 C) $149,400 D) $ 44,400 Answer: B Rationale: Required allowance based on aging method: Less: Allowance for Doubtful Accounts prior to adjustment: Year-end adjustment required
$111,000 (44,400) $66,600
Topic: Accounts Receivable LO: 1 Level of Difficulty: DIFFICULT 85. During 2019, Pine Company’s credit sales were $262,000, and its cash collections from credit customers were $250,000. Also, $3,600 in doubtful accounts receivable were written off (using the allowance method) during the year. On December 31, 2019, the company’s Accounts Receivable balance was $50,000. What must have been the balance of accounts receivables on January 1, 2019? A) $65,600 B) $41,600 C) $58,400 D) $34,200 Answer: B Rationale: Ending A/R = Beg. A/R + Credit sales – Cash collections – Write-offs $50,000 = X + $262,000 - $250,000 – $3,600 X = $41,600 = Beg. A/R
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-45
Topic: Accounts Receivable LO: 1 Level of Difficulty: DIFFICULT 86. During 2019, Neptune Company’s credit sales were $786,000, and its cash collections from credit customers were $750,000. Also, $10,800 in doubtful accounts receivable were written off (using the allowance method) during the year. On December 31, 2019, the company’s Accounts Receivable balance was $150,000. What must have been the balance of accounts receivables on January 1, 2019? A) $196,800 B) $124,800 C) $175,200 D) $102,600 Answer: B Rationale: Ending A/R = Beg. A/R + Credit sales – Cash collections – Write-offs $150,000 = X + $786,000 – $750,000 – $10,800 X = $124,800 = Beg. A/R
Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: MEDIUM 87. The December 31, 2019 unadjusted Trial Balance of Kermit Company included the following accounts: Accounts Receivable Allowance for Doubtful Accounts Sales Revenue
$20,000 1,500 (debit) 250,000
If it is estimated that 1 percent of the Sales Revenue is uncollectible, the Net Realizable Value of Accounts Receivable on December 31, 2019 Balance Sheet will be: A) $17,400 B) $18,400 C) $15,800 D) $19,000 Answer: D Rationale: Bad Debt Expense = $250,000 x 1% = $2,500 Allowance for Doubtful Accounts = $(1,500) + $2,500 = $1,000 Net Realizable Value of Accounts Receivable = $20,000 – $1,000 = $19,000
©Cambridge Business Publishers, 2020 8-46
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: MEDIUM 88. The December 31, 2019 unadjusted Trial Balance of Moonstar Company included the following accounts: Accounts Receivable Allowance for Doubtful Accounts Sales Revenue
$60,000 4,500 (debit) 750,000
If it is estimated that 1 percent of the Sales Revenue is uncollectible, the Net Realizable Value of Accounts Receivable on December 31, 2019 Balance Sheet will be: A) $52,200 B) $55,200 C) $47,400 D) $57,000 Answer: D Rationale: Bad Debt Expense = $750,000 x 1% = $7,500 Allowance for Doubtful Accounts = $(4,500) + $7,500 = $3,000 Net Realizable Value of Accounts Receivable = $60,000 – $3,000 = $57,000
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 89. On December 31, 2019, Paper Company’s accounts receivable balance was of $600,000, and an analysis of their accounts receivable suggests that the Allowance for Doubtful Accounts should be 2% of accounts receivable. The balance in the Allowance for Doubtful Accounts on January 1, 2019 was $11,940 (credit). During the year 2019, Paper wrote off $12,900 of bad debts. What amount should be reported as the Bad debt expense for the year 2019? A) $12,000 B) $12,400 C) $12,960 D) $11,040 Answer: C Rationale: Year-end Allowance = Beginning Allowance + Bad Debt expense – Write-offs ($600,000 x 2%) = $11,940 + X – $12,900 $12,000 = $11,940 + X – $12,900 X = $12,960
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-47
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 90. On December 31, 2019, Bula Company’s accounts receivable balance was of $1,800,000, and an analysis of their accounts receivable suggests that the Allowance for Doubtful Accounts should be 2% of accounts receivable. The balance in the Allowance for Doubtful Accounts on January 1, 2019 was $35,820 (credit). During the year 2019, Bula wrote off $38,700 of bad debts. What amount should be reported as the Bad debt expense for the year 2019? A) $36,000 B) $37,200 C) $38,880 D) $33,120 Answer: C Rationale: Year-end Allowance = Beginning Allowance + Bad Debt expense – Write-offs ($1,800,000 x 2%) = $35,820 + X – $38,700 $36,000 = $35,820 + X – $38,700 X = $38,880
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 91. Feldman’s Allowance for Doubtful Accounts had a credit balance of $12,600 on January 1, 2019. During 2019, the company wrote off $10,200 of Accounts Receivable as uncollectible. The company prepared the following summary schedule from an aging of accounts receivable outstanding on December 31, 2019:
Balance of A/R Estimated Uncollectible %
1-30 days
31-60 days
61-90 days
Over 90 days
$200,000 1%
$80,000 5%
$28,000 10%
$18,000 30%
Determine the Bad debts Expense to be recorded on December 31, 2019. A) $11,800 B) $ 8,600 C) $14,200 D) $16,600 Answer: A Rationale: Desired Year-end Allowance Balance = Beginning Allowance Balance + Bad Debt expense Adjustment – Write-offs $14,200 = $12,600 + X – $10,200 X = $11,800
Balance of A/R Estimated Uncollectible % Allowance required
1-30 days
31-60 days
61-90 days
Over 90 days
Total
$200,000 1% $5,000
$80,000 5% $4,000
$28,000 10% $2,800
$18,000 30% $5,400
$14,200
©Cambridge Business Publishers, 2020 8-48
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Accounts Receivable Aging Method LO: 2 Level of Difficulty: MEDIUM 92. Star’s Allowance for Doubtful Accounts had a credit balance of $37,800 on January 1, 2019. During 2019, the company wrote off $30,600 of Accounts Receivable as uncollectible. The company prepared the following summary schedule from an aging of accounts receivable outstanding on December 31, 2019:
Balance of A/R Estimated Uncollectible %
1-30 days
31-60 days
61-90 days
Over 90 days
$600,000 1%
$240,000 5%
$84,000 10%
$54,000 30%
Determine the Bad debts Expense to be recorded on December 31, 2019. A) $35,400 B) $25,800 C) $42,600 D) $49,800 Answer: A Rationale: Desired Year-end Allowance Balance = Beginning Allowance Balance + Bad Debt expense Adjustment – Write-offs $42,600 = $37,800 + X – $30,600 X = $42,600 – $37,800 + $30,600 X = $35,400
Balance of A/R Estimated Uncollectible % Allowance required
1-30 days
31-60 days
61-90 days
Over 90 days
Total
$600,000 1% $6,000
$240,000 5% $12,000
$84,000 10% $8,400
$54,000 30% $16,200
$42,600
Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: MEDIUM 93. Crescent Company reported total sales for the current year to be $5,000,000, including cash sales of $1,000,000. Management estimates bad debts to be 5% of credit sales. The Allowance for Doubtful Accounts prior to adjustment has a debit balance of $20,000. The ending balance of the Allowance for Doubtful Accounts after adjustment will be: A) $120,000 B) $170,000 C) $220,000 D) $180,000 Answer: D Rationale: Bad Debt Expense = ($5,000,000 –- $1,000,000) x 5% = $200,000 Allowance for Doubtful Accounts ending balance = $200,000 + (-$20,000) = $180,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-49
Topic: Percentage of Net Sales Method LO: 2 Level of Difficulty: MEDIUM 94. Chipmunk Company reported total sales for the current year to be $15,000,000, including cash sales of $3,000,000. Management estimates bad debts to be 5% of credit sales. The Allowance for Doubtful Accounts prior to adjustment has a debit balance of $60,000. The ending balance of the Allowance for Doubtful Accounts after adjustment will be: A) $360,000 B) $510,000 C) $660,000 D) $540,000 Answer: D Rationale: Bad Debt Expense = ($15,000,000 – $3,000,000) x 5% = $600,000 Allowance for Doubtful Accounts ending balance = $600,000 + (-$60,000) = $540,000
Topic: Credit Card Sales LO: 3 Level of Difficulty: MEDIUM 95. Omega Company agrees to transfer cash to Gamma Company immediately upon deposit of that company’s credit card sales receipts. Omega Company charges 2% of card sales as its fee. If Gamma Company deposits $114,000 credit card sales receipts, which of the following statements are true? A) Omega Company will pay Gamma Company a $2,280 credit card fee. B) Gamma Company will receive $111,720 cash from Omega Company. C) Omega Company will receive $114,000 cash from Gamma Company. D) Gamma Company will receive $114,000 cash from Omega Company. Answer: B Rationale: Cash 111,720 Credit card fee expense 2,280 Sales revenue To record credit card sales and collection less a two percent fee.
114,000
©Cambridge Business Publishers, 2020 8-50
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Credit Card Sales LO: 3 Level of Difficulty: MEDIUM 96. Wisconsin Company agrees to transfer cash to Dells Company immediately upon deposit of that company’s credit card sales receipts. Wisconsin Company charges 2% of card sales as its fee. If Dells Company deposits $342,000 credit card sales receipts, which of the following statements are true? A) Wisconsin Company will pay Dells Company a $6,840 credit card fee. B) Dells Company will receive $335,160 cash from Wisconsin Company. C) Wisconsin Company will receive $342,000 cash from Dells Company. D) Dells Company will receive $342,000 cash from Wisconsin Company. Answer: B Rationale: Cash 335,160 Credit card fee expense 6,840 Sales revenue To record credit card sales and collection less a two percent fee.
342,000
Topic: Notes Receivable LO: 4 Level of Difficulty: MEDIUM 97. Paddington Company lends Bear Company $100,000 on April 1, 2019 accepting a four-month, 9% interest note. Paddington Company prepares its financial statements on April 30, 2019. What adjusting entry should be made by Paddington Company before the financial statements can be prepared? A) Note Receivable Cash B) Interest Receivable Interest Income C) Cash Interest Income D) Interest Receivable Interest Income
100,000 100,000 3,000 3,000 750 750 750 750
Answer: D Rationale: Apr. 30 Interest receivable 750 Interest income To accrue interest income on the note from Bear Company ($100,000 × 0.09 × 1/12 = $750).
750
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-51
Topic: Notes Receivable LO: 4 Level of Difficulty: MEDIUM 98. Bri Company lends Tyrone Company $300,000 on April 1, 2019 accepting a four-month, 9% interest note. Bri Company prepares its financial statements on April 30, 2019. What adjusting entry should be made by Bri Company before the financial statements can be prepared? A) Note Receivable Cash B) Interest Receivable Interest Income C) Cash Interest Income D) Interest Receivable Interest Income
300,000 300,000 9,000 9,000 2,250 2,250 2,250 2,250
Answer: D Rationale: Apr. 30 Interest receivable 2,250 Interest income 2,250 To accrue interest income on the note from Tyrone Company ($300,000 × 0.09 × 1/12 = $2,250).
Topic: Notes Receivable LO: 4 Level of Difficulty: DIFFICUT 99. Buick Company lends Ford Company $60,000 on August 1, 2019 in exchange of a 9-month, 12% interest note. If Buick Company accrued interest on its December 31, 2019 year-end, what entry must it make to record the collection of the note and interest at its maturity date? A. Cash Notes Receivable Interest Receivable Interest Income B. Notes Receivable Interest Receivable Interest Income Cash C. Cash Notes Receivable Interest Income D. Cash Notes Receivable Interest Receivable Interest Income
65,400 60,000 2,400 3,000 60,000 3,000 2,400 65,400 65,400 60,000 5,400 65,400 60,000 3,000 2,400
©Cambridge Business Publishers, 2020 8-52
th
Financial Accounting for Undergraduates, 4 Edition
Answer: D Rationale: Dec. 31 Interest receivable 3,000 Interest income 3,000 To accrue interest income on the note from Ford Company ($60,000 × 0.12 × 5/12 = $3,000). May 1
Cash 65,400 Interest receivable 3,000 Interest income 2,400 Notes receivable—Ford Company 60,000 Received payment of principal and interest from Ford Company ($60,000 × 0.12 × 4/12 = $2,400).
Topic: Notes Receivable LO: 4 Level of Difficulty: DIFFICULT 100. Sidley Company lends Austin Company $180,000 on August 1, 2019 in exchange of a 9-month, 12% interest note. If Sidley Company accrued interest on its December 31, 2019 year-end, what entry must it make to record the collection of the note and interest at its maturity date? A. Cash Notes Receivable Interest Receivable Interest Income B. Notes Receivable Interest Receivable Interest Income Cash C. Cash Notes Receivable Interest Income D. Cash Notes Receivable Interest Receivable Interest Income
196,200 180,000 7,200 9,000 180,000 9,000 7,200 196,200 196,200 180,000 16,200 196,200 180,000 9,000 7,200
Answer: D Rationale: Dec. 31 Interest receivable 9,000 Interest income 9,000 To accrue interest income on the note from Austin Company ($180,000 × 0.12 × 5/12 = $9,000). May 1
Cash
196,200 Interest receivable 9,000 Interest income 7,200 Notes receivable— Austin Company 180,000 Received payment of principal and interest from Austin Company ($180,000 × 0.12 × 4/12 = $7,200).
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-53
Topic: Notes Receivable LO: 4 Level of Difficulty: DIFFICULT 101. On November 1, 2019, Chocolate Company accepted a 3-month note receivable as payment for services provided to Brownie Company. The face value was $18,000, and had a stated 6% annual rate of interest. Chocolate Company closed its books on December 31, 2019. On February 1, 2020, the journal entry to record the collection of the note should include a credit to: A) Notes Receivable for $18,270 B) Interest Receivable for $270 C) Interest Income for $270 D) Interest Income for $90 Answer: D Rationale: Dec. 31 Interest receivable 180 Interest income 180 To accrue interest income on the note from Brownie Company ($18,000 × 0.06 × 2/12 = $180). Feb. 1
Cash
18,270 Interest receivable 180 Interest income 90 Notes receivable—Brownie Company 18,000 Received payment of principal and interest from Brownie Company ($18,000 × 0.06 × 1/12= $90).
Topic: Notes Receivable LO: 4 Level of Difficulty: DIFFICULT 102. On November 1, 2019, Kringle Company accepted a 3-month note receivable as payment for services provided to Kris Company. The face value was $54,000 and it had a stated 6% annual rate of interest. Kringle Company closed its books on December 31, 2019. On February 1, 2020, the journal entry to record the collection of the note should include a credit to: A) Notes Receivable for $54,810 B) Interest Receivable for $810 C) Interest Income for $810 D) Interest Income for $270 Answer: D Rationale: Dec. 31 Interest receivable 540 Interest income 540 To accrue interest income on the note from Kris Company ($54,000 × 0.06 × 2/12 = $540). When the note is subsequently paid on Feb. 1, 2020, Kringle Company makes the following journal entry: Feb. 1
Cash
54,810 Interest receivable 540 Interest income 270 Notes receivable—Kris Company 54,000 Received payment of principal and interest from Kris Company ($54,000 × 0.06 × 1/12= $270)
©Cambridge Business Publishers, 2020 8-54
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Notes Receivable LO: 4 Level of Difficulty: MEDIUM 103. Johnathan Company is holding a $6,000, 90-day, 6% note receivable, dated December 1, 2019. The journal entry to record accrued interest at the end of its fiscal year on December 31, 2019 will include a: A) Debit to interest receivable for $30 B) Credit interest income for $90 C) Credit note receivable for $6,000 D) Debit cash for $6,090 Answer: A Rationale: Dec. 31 Interest receivable 30 Interest income To accrue interest income on a customer note ($6,000 × 0.06 × 30/360 = $30).
30
Topic: Notes Receivable LO: 4 Level of Difficulty: MEDIUM 104. Lakeside Company is holding a $18,000, 90-day, 6% note receivable, dated December 1, 2019. The journal entry to record accrued interest at the end of its fiscal year on December 31, 2019 will include a: A) Debit to interest receivable for $90 B) Credit interest income for $270 C) Credit note receivable for $18,000 D) Debit cash for $18,270 Answer: A Rationale: Dec. 31 Interest receivable 90 Interest income To accrue interest income on a customer note ($18,000 × 0.06 × 30/360 = $90).
90
Topic: Notes Receivable LO: 4 Level of Difficulty: MEDIUM 105. Clover Company received a Note Receivable from a customer for a sale. The 9 percent, 9-month note was received on May 31, 2019 for an amount of $300,000. Determine the company’s accrued interest receivable (from this note) on its December 31, 2019 balance sheet. A) $13,500 B) $18,000 C) $27,000 D) $15,750 Answer: D Rationale: Dec. 31 Interest receivable 15,750 Interest income To accrue interest income on a customer note ($300,000 × 0.09 × 7/12 = $15,750).
15,750
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-55
Topic: Notes Receivable LO: 4 Level of Difficulty: MEDIUM 106. Lovegood Company received a Note Receivable from a customer for a sale. The 9 percent, 9month note was received on May 31, 2019 for an amount of $900,000. Determine the company’s accrued interest receivable (from this note) on its December 31, 2019 balance sheet. A) $54,500 B) $54,000 C) $81,000 D) $47,250 Answer: D Rationale: Dec. 31 Interest receivable 47,250 Interest income To accrue interest income on a customer note ($900,000 × 0.09 × 7/12 = $47,250).
47,250
Topic: Notes Receivable LO: 4 Level of Difficulty: MEDIUM 107. On December 1, 2019, Susan Company accepts a $24,000, 90 day, 8% note from a customer. If Susan Company’s accounting period ends on December 31, and the note is collected on March 1, 2020, which one of the following statements will be true for Susan Company? A) On March 1, 2020, they will credit Interest Receivable for $160 B) On December 31, 2019, they will debit Interest Income for $160 C) On December 31, 2019, they will credit Interest Receivable for $160 D) On March 1, 2020, they will credit Interest Income for $160 Answer: A Rationale: Dec. 31 Interest receivable Interest income To accrue interest income on the note ($24,000 × 0.08 × 30/360 = $160) Mar. 1
160 160
Cash
24,480 Interest receivable Interest income Notes receivable Received payment of principal and interest ($24,000 × 0.08 × 60/360= $320)
160 320 24,000
©Cambridge Business Publishers, 2020 8-56
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Notes Receivable LO: 4 Level of Difficulty: MEDIUM 108. On December 1, 2019, Xia Company accepts a $72,000, 90 day, 8% note from a customer. If Xia Company’s accounting period ends on December 31, and the note is collected on March 1, 2020 which one of the following statements will be true for Xia Company? A) On March 1, 2020, they will credit Interest Receivable for $480 B) On December 31, 2019, they will debit Interest Income for $480 C) On December 31, 2019, they will credit Interest Receivable for $480 D) On March 1, 2020, they will credit Interest Income for $480 Answer: A Rationale: Dec. 31 Interest receivable Interest income To accrue interest income on the note ($72,000 × 0.08 × 30/360 = $480). Mar. 1
480 480
Cash
73,440 Interest receivable Interest income Notes receivable Received payment of principal and interest ($72,000 × 0.08 × 60/360= $960)
480 960 72,000
Topic: Notes Receivable LO: 4 Level of Difficulty: DIFFICULT 109. On December 1, 2019, Pinto Company accepted a $24,000, 120 day, 8% note from a customer in granting an extension to a past due account. Pinto Company’s accounting period ends on December 31, and the note is collected in full on the due date. Which one of the following statements will be false for Pinto Company? A) On March 31, 2020, they will credit Interest Income for $480 B) On December 31, 2019, they will credit Interest Receivable for $160 C) On March 31, 2020, they will credit Interest Receivable for $160 D) On March 31, 2020, they will credit Notes Receivable for $24,000 Answer: B Rationale: Dec. 31 Interest receivable Interest income To accrue interest income on the note ($24,000 × 0.08 × 30/360 = $160) Mar. 31
160
24,640 Interest receivable Interest income Notes receivable Received payment of principal and interest ($24,000 × 0.08 × 90/360= $480).
160
Cash
160 480 24,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-57
Topic: Notes Receivable LO: 4 Level of Difficulty: DIFFICULT 110. On December 1, 2019, Camp Halfblood Company accepted a $72,000, 120 day, 8% note from a customer in granting an extension to a past due account. Camp Halfblood Company’s accounting period ends on December 31, and the note is collected in full on the due date. Which one of the following statements will be false for Camp Halfblood Company? A) On March 31, 2020, they will credit Interest Income for $1,440 B) On December 31, 2019, they will credit Interest Receivable for $480 C) On March 31, 2020, they will credit Interest Receivable for $480 D) On March 31, 2020, they will credit Notes Receivable for $72,000 Answer: B Rationale: Dec. 31 Interest receivable Interest income To accrue interest income on the note ($72,000 × 0.08 × 30/360 = $480) Mar. 31
480 480
Cash
73,920 Interest receivable Interest income Notes receivable Received payment of principal and interest ($72,000 × 0.08 × 90/360 = $1,440)
480 1,440 72,000
©Cambridge Business Publishers, 2020 8-58
th
Financial Accounting for Undergraduates, 4 Edition
Exercises Topic: Accounts Receivable Aging Method LO: 2 1. Quebec Market reports the following analysis of potential losses in its accounts receivable: Receivable Balance $67,200 30,000 18,000 3,300 $118,500
Age Past Due 0-30 days past due 31-60 days past due 61-90 days past due Over 90 days past due Total
Estimated Loss (%) 0.5% 1.8% 4.3% 45.5%
The balance of Allowance for Doubtful Accounts is $600 credit balance on December 31, 2019 prior to adjustments. Required: a. Compute bad debts expense that will be recorded for 2019. (Round to nearest whole dollar.) b. What is the amount of net accounts receivable to be reported on Quebec Market’s December 31, 2019 balance sheet? Answer: a. Bad debts expense = $3,152 - $600 = $2,552 Age of Accounts 0-30 days 31 to 60 day 61 to 90 days Over 90 days Total
Receivables Balance $67,200 30,000 18,000 3,300 $118,500
Estimated % Uncollectible 0.5% 1.8% 4.3% 45.5%
Estimated Uncollectible Amount $ 336 540 774 1,502 $3,152
b. Accounts receivable, net = $118,500 - $3,152 = $115,348
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-59
Topic: Accounts Receivable Turnover Rate LO: 5 2. La Cantina Co. reports the following in its 2019 annual report:
Sales Accounts receivable
2019 $10,597,336 900,516
2018 $10,265,536 1,052,112
2017 $9,893,432 1,141,906
Calculate the accounts receivable turnover and average collection period for 2019 and 2018. Comment on the findings. Answer: AR turnover: 2019: $10,597,336 / [($900,516 + $1,052,112) / 2] = 10.85 times 2018: $10,265,536 / [($1,052,112 + $1,141,906) / 2] = 9.36 times Average collection period: 2019: 365 / 10.85 = 33.6 days 2018: 365 / 9.36 = 39.0 days The accounts receivable turnover increased from 9.36 to 10.85 from 2018 to 2019. The increase in accounts receivable turnover indicates an increase in the receivables collection rate as the company is collecting amounts due from customers more efficiently. The average collection period decreased from 39 days to about 34 days from 2018 to 2019. The findings suggest an increase in quality of the receivables.
Topic: Accounts Receivable Aging Method LO: 2 3. Xia, Inc. estimated doubtful accounts receivable at December 31, 2019 at $10,116, based on estimates on various ages of receivables and before learning of the bankruptcy of one of its customers. The customer owed $4,020, and the legal department has estimated costs to collect the balance owed by this customer at $6,000. The gross receivables balance on December 31, 2019 after write-offs is $252,900, and the allowance for doubtful accounts balance is $10,860 at December 31, 2018. At December 12, 2019, the company wrote off $5,100 of other accounts deemed uncollectible. Required: a. How would the legal department advise Xia to handle the collection of the $4,020? b. Draw a t-account for Allowance for Doubtful Accounts and post all 2019 amounts to it, assuming that both the $5,100 and $4,020 have been written off. c. What is the effect of the $5,100 write off on gross and net accounts receivable? Answer: a. The legal department would advise Xia to write off the $4,020 based on costs versus benefits. The estimated cost of $6,000 exceeds the $4,020 amount that might be collectible. b.
Allowance for Doubtful Accounts 10,860 Beg. Bal. Write-off 5,100 Write-off 4,020 8,376 Estimate 10,116 End. Bal.
c.
The write-off would result in a reduction of gross accounts receivable by $5,100. However, the write-off would have no effect on net accounts receivable, as the accounts receivable and the allowance account (contra account) are both reduced by the same amount.
©Cambridge Business Publishers, 2020 8-60
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Accounts Receivable Aging Method LO: 2 4. Zihao, Inc. provided the following aging of its receivables at December 31.
Age of Accounts 0-30 days 31 to 60 day 61 to 90 days 91 to 120 days Over 121 days Total
Receivables Balance $184,000 96,000 34,000 21,000 11,000 $346,000
Estimated % Uncollectible 0.4% 2.4% 6.0% 9.1% 51.4%
During the year, $12,512 of receivables were written off. The balance at the beginning of the year in the allowance account was $12,000. Required: a. How much will Zihao report as bad debts expense for the year? b. How much is the net value of Zihao’s receivables at year end? Answer: a. Allowance for doubtful accounts = Beginning balance Allowance for doubtful accounts + Bad debt expense – Write-offs $12,645 = $12,000 + X - $12,512 Bad debts expense = $13,157
Age of Accounts 0-30 days 31 to 60 day 61 to 90 days 91 to 120 days Over 121 days Total
Receivables Balance $184,000 96,000 34,000 21,000 11,000 $346,000
Estimated % Uncollectible 0.4% 2.4% 6.0% 9.1% 51.4%
Estimated Uncollectible Amount $ 736 2,304 2,040 1,911 5,654 $12,645
b. Accounts receivable, net = Accounts receivable balance – Allowance for doubtful accounts = $346,000 – $12,645 = $333,355
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-61
Problems Topic: Accounts Receivable Aging Method LO: 2 1. At December 31, 2019, Carl’s Toys had a balance of $248,100 in its Accounts Receivable account and a credit balance of $900 in its Allowance for Doubtful Accounts account. Carl’s Toys analyzed and aged its accounts receivable based on the following estimated uncollectible amounts:
Age of Accounts Current 31 to 60 day 61 to 90 days Over 91 days Total
Receivables Balance $ 130,500 66,300 26,700 24,600 $248,100
Estimated % Uncollectible 0.6% 2.0% 5.5% 21.0%
The company bases its provision for credit losses on the aging analysis. Required: a. What amount of bad debt expense will Carl’s Toys report in its 2019 income statement? (Round to nearest whole dollar amount.) b. How would Accounts Receivable and the Allowance for Doubtful Accounts appear in its December 31, 2019, balance sheet? Answer: a. As of December 31, 2019:
Age of Accounts Current 31 to 60 day 61 to 90 days Over 91 days Total
Receivables Balance $ 130,500 66,300 26,700 24,600 $248,100
Estimated % Uncollectible 0.6% 2.0% 5.5% 21.0% Unused allowance Bad debts expense
Uncollectible Accounts $ 783 1,326 1,469 5,166 8,744 900 $7,844
b. Current asset section of balance sheet: Accounts receivable, net of $8,744 allowance……………$239,356
©Cambridge Business Publishers, 2020 8-62
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Accounts Receivable Reporting and Receivable Turnover LO:1, 5 2. Malfoy’s accounts receivable financial data (in millions) for three years are listed below: 2019
2018
2017
Sales $159,600 Gross accounts receivable 4,950 Allowance for doubtful accounts 360
$183,050 5,460 300
$139,300 4,350 330
Required: a. Calculate the net value of receivables that will be reported on Malfoy’s balance sheet for each year. b. Determine the accounts receivable turnover for 2019 and 2018. c. Compare the accounts receivable turnovers for 2019 and 2018 and comment on the differences. Answer: a. Amounts in millions Gross accounts receivable Allowance for doubtful accounts Net realizable value
2019
2018
2017
$4,950 360 $4,590
$5,460 300 $5,160
$4,350 3,320 $4,020
b. Sales / Average accounts receivable (net) 2019: Turnover = $159,600 / (($4,590 + $5,160) / 2)) = 32.74 times 2018: Turnover = $183,050 / (($5,160 + $4,020) / 2)) = 39.88 times c.
The accounts receivable turnover indicates how quickly accounts receivable are being converted to cash. From the data above, the accounts receivable turnover declined from 2018 to 2019, indicating the company is not collecting its receivables as quickly.
Topic: Receivable Turnover and Average Collection Period LO: 5 3. Define accounts receivable turnover and the average collection period. What insights do these ratios offer an analysis of a company’s accounts receivable? Answer: Accounts receivable turnover = Net sales / Average accounts receivable (net) Average collection period = 365 / Accounts receivable turnover Accounts receivable turnover indicates how many times a year a firm collects its average accounts receivable, and thus, measures how fast accounts receivable are being converted into cash. In general, the higher the accounts receivable turnover ratio, the faster a company is converting its receivables into cash. Average collection period indicates how many days it takes on average to collect an account receivable. These two ratios offer two important insights. First, changes in turnover signal the quality of the accounts receivable. If turnover slows, it could be a sign of the deterioration of the collectability of receivables. There may be alternative explanations including a change in credit policies, customer mix, etc. However, it is still something important to include in our analysis. Second, an increase in receivables ties up more cash, hampering asset utilization. Receivables must be financed, and slower turning receivables present an increased risk of loss.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-63
Topic: Bad Debts Expense LO: 1, 2 4. D’Costa Company uses the allowance method of handling credit losses. It estimates losses at 2% of credit sales, which were $1,800,000 this year. At December 31 of this year, the Accounts Receivable balance is $270,000, and the Allowance for Doubtful Accounts has a $3,600 credit balance before adjustment. Required: a. Give the adjusting entry to record bad debts expense for this year. b. What net amount of accounts receivable would appear on the December 31 balance sheet this year? c. Assume that D’Costa Company uses aged accounts receivable as a basis of estimating credit losses, instead of a percent of credit sales. If the firm estimates that $22,800 of the accounts will prove uncollectible, what adjusting entry would D’Costa Company make to record the bad debts expense for this year? Answer: a. Bad debts expense Allowance for doubtful accounts To record bad debts expense at 2% of $1,800,000 credit sales.
36,000 36,000
b. $270,000 - ($3,600 + $36,000) = $230,400 c.
Bad debts expense Allowance for doubtful accounts To record bad debts expense ($22,800 - $3,600 = $19,200).
19,200 19,200
Topic: Accounts Receivable Journal Entries LO: 2 5. On January 1 of the current year, Neptune, Inc. had the following accounts on its books: Accounts Receivable Allowance for Doubtful Accounts
$240,000 8,000
(debit) (credit)
During this year, credit sales were $1,200,000 and collections on account were $1,160,000. Required: a. Prepare general journal entries for the following transactions that occurred during the year: (1) Wrote off N. Purcell’s account, $6,800. (2) Wrote off J. Stein’s account, $2,400. (3) J. Stein, who is in bankruptcy, paid $800 in final settlement of the account written off in transaction (2). This amount is not included in the $1,160,000 collections. (4) On December 31, estimated the year’s bad debts expense at 1% of credit sales. b. Show how Accounts Receivable and the Allowance for Doubtful Accounts would appear on the year-end balance sheet.
©Cambridge Business Publishers, 2020 8-64
th
Financial Accounting for Undergraduates, 4 Edition
Answer: a. (1) Allowance for Doubtful Accounts Accounts Receivable-- N. Purcell To write off N. Purcell’s account.
6,800 6,800
(2) Allowance for Doubtful Accounts Accounts Receivable-- J. Stein To write off J. Stein ’s account.
2,400 2,400
(3) Accounts Receivable-- J. Stein Allowance for Doubtful Accounts To reinstate amount collected from J. Stein .
800 800
Cash
800
Accounts Receivable-- J. Stein To record collection from. J. Stein.
800
(4) Bad Debts Expense Allowance for Doubtful Accounts To record bad debts expense at 1 % of credit sales.
b. Accounts Receivable* Less: Allowance for Doubtful Accounts**
12,000 12,000
$270,800 11,600 $259,200
*Accounts Receivable = $240,000 + $1,200,000 - $1,160,000 - $6,800 - $2,400 + $800 - $800 = $270,800 **Allowance for Doubtful Accounts = $8,000 - $6,800 - $2,400 + $800 + $12,000 = $11,600
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-65
Topic: Direct Write-Off and Allowance Methods LO: 2, 6 6. Goofy Company, which has been in business for three years, makes all sales on account and does not offer discounts. The firm’s sales, collections, and write-offs of doubtful accounts are shown below: Year 1 2 3
Sales
Collections
Accounts Written Off
$ 660,000 690,000 1,050,000
$ 330,000 600,000 990,000
$ 5,400 7,200 10,800
Required: a. If the firm uses the direct write-off method of recognizing credit losses during the three years: (1) Determine the total amount of accounts receivable appearing on the balance sheet at the end of the third period. (2) Give the total amount of bad debts expense appearing on the firm’s income statement over the three-year period. b. If the firm uses the allowance method of recognizing credit losses, at 1.5% sales: (1) Give the net amount of accounts receivable appearing on the balance sheet at the end of the third period. (2) Determine the total amount of bad debts expense appearing on the firm’s income statement over the three-year period. Answer: Year
Sales
Collections
Accounts Written Off
1 2 3 Total
$ 660,000 690,000 1,050,000 $2,400,000
$ 330,000 600,000 990,000 $1,920,000
$ 5,400 7,200 10,800 $23,400
a. (1) Total Accounts Receivable = Total Sales – Total Collections – Total Accounts Written Off X =$2,400,000 - $1,920,000 - $23,400 X = $456,600 (2) Total Bad Debt Expense = Bad Debt Expense Year 1 + Bad Debt Expense Year 2 + Bad Debt Expense Year 3 X = $5,400 + $7,200 + $10,800 X = $23,400 b. (1) Total Accounts Receivable = Total Sales – Total Collections – Total Accounts Written-Off + Decrease in Allowance for Writing–off Bad Debt – Increase in Allowance for Estimated Bad Debt Expense X =$2,400,000 - $1,920,000 - $23,400 + $23,400 - $36,000 X = $444,000 (2) Estimate of credit losses using the percentage of net sales = Expected credit loss percentage x Credit Sales X = 1.5% x $2,400,000 X = $36,000 ©Cambridge Business Publishers, 2020 8-66
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Accounts Receivable Aging Method LO: 2 7. At December 31 of the current year, Mars Company had a balance of $728,000 in its Accounts Receivable account and a credit balance of $6,000 in the Allowance for Doubtful Accounts. The company has aged its accounts as follows: Current 0-60 days past due 61-180 days past due Over 180 days past due
$592,000 64,000 48,000 24,000 $728,000
In the past, the company has experienced losses as follows: 1% of current balances, 5% of balances 0-60 days past due, 15% of balances 61-180 days past due, and 30% of balances over 180 days past due. The company bases its bad debts expense on the aging analysis. Required: a. Prepare the adjusting journal entry to record the bad debts expense for the year. b. Show how Accounts Receivable and the Allowance for Doubtful Accounts would appear in the December 31 balance sheet. c. On January 15 of the subsequent year, Mars Company wrote off the account of Ares, $2,400. Give the entry for the write-off. d. On February 20 of the subsequent year, Mars Company collected the $2,400 on the Ares account written off on January 15. Give the entry or entries for the recovery. Answer: a. Bad debts expense Allowance for doubtful accounts To provide for credit losses as follows: $592,000 x 1% = 64,000 x 5% = 48,000 x 15% = 24,000 x 30% = Less credit balance in Allowance for Doubtful Accounts
b. Current Assets: Accounts Receivable Less: Allowance for Doubtful Accounts Account Receivable (net) c.
Jan. 15
d. Feb. 20
20
17,520 17,520 $ 5,920 3,200 7,200 7,200 $23,520 6,000 $17,520
$728,000 23,520 $704,480
Allowance for Doubtful Accounts Accounts Receivable--Ares To write off Ares’s account.
2,400
Accounts Receivable--Ares Allowance for Doubtful Accounts To reinstate Ares’s account.
2,400
Cash
2,400
Accounts Receivable--Ares To record Ares’s remittance.
2,400
2,400
2,400
©Cambridge Business Publishers, 2020 Test Bank, Chapter 8
8-67
Topic: Notes Receivable and Interest Income LO: 4 8. Brad Company had the following transactions during the current year: May
7
Received an $25,200, 75-day, 10% note from S. Sabtini in payment of account receivable.
June 1
Wrote off customer M. Rotter’s account, $2,700. (Brad Company uses the allowance method of recording credit losses.)
July 21
S. Sabtini paid note due today.
Sept 15
M. Rotter paid account written off on June 1.
Dec 19
Received a $36,000, 60-day, 9% note from Z. Inman on account.
Required: a. Record the above transactions in general journal form. b. Make any necessary adjusting entries for interest at December 31. Answer: a. May 7
June 1
July 21
Notes Receivable 25,200 Accounts Receivable - S. Sabtini Received an $16,800, 75-day, 10% note from S. Sabtini .
25,200
Allowance for Doubtful Accounts Accounts Receivable - M. Rotter To write off M. Rotter’s account.
2,700
2,700
Cash
25,725 Interest Income 525 Notes Receivable 25,200 S. Sabtini paid note due today ($25,200 x 10% x 75/360 = $525 interest).
Sept. 15 Accounts Receivable - M. Rotter Allowance for Doubtful Accounts To reinstate M. Rotter’s account. 15 Cash
2,700 2,700 2,700
Accounts Receivable - M. Rotter Received $1,800 from M. Rotter. Dec. 19
b. Dec. 31
2,700
Notes Receivable 36,000 Accounts Receivable - Z. Inman Received a $36,000, 60-day, 9% note from Z. Inman .
Interest Receivable 108 Interest Income To accrue interest on Z. Inman’s note ($36,000 x 9% x 12/360 = $108).
36,000
108
©Cambridge Business Publishers, 2020 8-68
th
Financial Accounting for Undergraduates, 4 Edition
Chapter 9 Accounting for Long-Lived and Intangible Assets Learning Objectives –Coverage by question True / False
Multiple Choice
Exercises
LO1 – Discuss the nature of plant assets and identify the accounting guidelines relating to their initial measurement.
1, 11-14, 32
21-33, 102-105
9, 15
LO2 – Discuss the nature of depreciation, illustrate three depreciation methods, and explain impairment losses.
2, 3, 5-7, 12, 15-19
1-5, 7-13, 17,18, 34-60, 106-127
3-5, 9-13
LO3 – Discuss the distinction between revenue expenditures and capital expenditures.
6, 20-22
3, 61-64
6, 16
LO4 – Explain and illustrate the accounting for disposals of plant assets.
4, 26-29
6, 14, 15, 73-90, 128-138
1, 7
LO5 – Discuss the nature of, and the accounting for, intangible assets and natural resources.
8-10, 12, 30, 31, 35
16, 19, 20, 91-93, 139-142
6, 14
LO6 – Illustrate the balance sheet presentation of plant assets and intangible assets. LO7 – Define the return on assets ratio and the asset turnover ratio and explain their use.
Problems
1, 2
3-5
94, 95
23-25, 33, 34
65-72, 96-101
2, 8
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-1
Chapter 9: Accounting for Long-Lived and Intangible Assets
True / False Topic: Capitalization of Assets LO: 1 1. Once amounts are debited to a plant asset account on the balance sheet, the cost is then allocated to an expense on the income statement as that asset is used in operations. Answer: True Topic: Depreciation Assumptions LO: 2 2. Depreciation requires only two estimates—useful life and salvage value—both of which are specified by GAAP depending on the asset type. Answer: False Rationale: GAAP does not specify useful life and salvage value amounts. Managers must estimate these amounts based upon the time period that the asset is expected to generate resources for the company and a reasonable amount for which the asset can be sold at the end of its estimated life. Topic: Changes in Accounting Estimates LO: 2 3. Changes in accounting estimates affect only the current and future periods’ income statements. Answer: True Rationale: Changes in accounting estimates require no cumulative effect adjustments or restatements of prior periods’ income statements. They are applied prospectively from the date of change. Topic: Gains and Losses on Sales LO: 4 4. A sale of a plant asset at less than cost requires that a company recognize a loss in the income statement. Answer: False Rationale: Gains and losses are determined based on the selling price compared to the book value, not the cost. Topic: Asset Impairment LO: 2 5. Impairment of long-term plant assets is determined by comparing the sum of expected future cash flows from the asset with the asset’s net book value. Answer: True Rationale: Impairment of long-term plant assets is determined by comparing the sum of expected future cash flows from the asset with its net book value. If the asset is deemed to be impaired, it is written down to its fair market value and the write-down is recorded as a loss on the income statement.
©Cambridge Business Publishers, 2020 9-2
Financial Accounting for Undergraduates, 4th Edition
Topic: Depreciation LO: 2, 3 6. Depreciation is the recognition of the change in fair market value of a plant asset over time. Answer: False Rationale: Depreciation is the process of allocating the cost of plant assets to the accounting periods in which the assets provide benefits. Depreciation does not parallel market value. Topic: Accelerated Depreciation LO: 2 7. One purpose of using accelerated depreciation for tax purposes is it reduces income taxes payable in the early years of life of a plant asset. Answer: True Rationale: Both a reduction of income and the company’s income tax liability are effects of accelerated depreciation in the early years of life. Topic: R&D Costs LO: 5 8. R&D expense is treated as an operating expense and is not capitalized. Answer: True Rationale: Although the R&D assets are similar to regular plant assets, under GAAP, R&D costs are expensed. Topic: IFRS LO: 5 9. Under IFRS, development costs can be capitalized as intangible assets when specific criteria are met. Answer: True Rationale: Under IFRS, only development costs can be capitalized as intangible assets when specific criteria are met. U.S. GAAP requires both research and development costs be expensed when incurred. Topic: Franchises LO: 5 10. Franchises are considered to be an identifiable intangible asset and may be definite or indefinite. Answer: True Topic: Plant Assets Classification LO: 1 11. Land used as a site for operating facilities is classified in the intangible assets category on the balance sheet. Answer: False Rationale: Plant assets refer to a firm’s long-lived property, plant and equipment. Intangible assets, on the other hand, refer to those economic resources that benefit a company’s operations, but which lack the physical substance that characterizes plant assets.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-3
Topic: Depreciation and Amortization Definition LO: 1, 2, 5 12. In accounting, the terms “depreciation” and “amortization” both have basically the same meaning-that is, a periodic charging to expense. Answer: True Topic: Acquisition Cost LO: 1 13. The initial recorded cost of a plant asset should include both the cash and/or cash equivalent given up to acquire the asset and any costs of preparation for use. Answer: True Rationale: Plant assets refer to a firm’s long-lived property, plant and equipment. Long-lived assets are initially recorded on the balance sheet at their acquisition cost. This measure is also called the asset’s historical cost because it represents the amount expended when the asset was originally acquired. In general, the acquisition cost of a long-lived asset equals the cash and/or cash equivalent given up to acquire the asset and to prepare it for its intended use. Topic: Deferred Payment Purchase LO: 1 14. The interest cost incurred to finance the acquisition of a delivery truck is part of the truck’s initial cost. Answer: False Rationale: If an asset’s purchase price is not immediately paid in cash, the cash-equivalent purchase price at the date of acquisition is determined and recorded in the asset account. Because the truck is ready for immediate use, the interest cost is charged to interest expense and does not become part of its acquisition cost. Topic: Useful Life LO: 2 15. A plant asset’s useful life to an entity extends from its acquisition date to its disposal date. Answer: True Rationale: Useful life is the expected period of economic usefulness to a business that is, the period from the date of acquisition to the expected date of disposal. Topic: Depreciation LO: 2 16. Periodic depreciation for accounting purposes is the decrease in a plant asset’s fair market value from the beginning of the period to the end of the period. Answer: False Rationale: Depreciation accounting is an attempt to allocate, in a systematic and rational manner, the difference between an asset’s acquisition cost and its estimated salvage value over the estimated useful life of the asset.
©Cambridge Business Publishers, 2020 9-4
Financial Accounting for Undergraduates, 4th Edition
Topic: Book Value LO: 2 17. Over the life of a depreciable asset, its recorded cost decreases, the related accumulated depreciation increases, and its book value remains constant. Answer: False Rationale: Over the life of a depreciable asset, its recorded cost remains the same, the related accumulated depreciation increases, and its book value (cost – accumulated depreciation) decreases. Topic: Tax Depreciation LO: 2 18. The tax advantage of using accelerated depreciation results from the increased amount of total depreciation deductions that are available over the life of the related asset. Answer: False Rationale: Depreciation expense may be deducted by a business on its federal income tax return as a normal business expense. As a consequence, some refer to the tax deductibility of depreciation as a “tax shield” since depreciation expense lowers a business’s taxable income, and hence, lowers the actual income taxes that must be paid. The depreciation expense deducted on a business’s income tax return, however, may differ substantially from the depreciation expense reported on a company’s income statement because the calculation of tax depreciation follows income tax regulations referred to as the modified accelerated cost recovery system (MACRS). Topic: Unit-of-Production Method LO: 2 19. The units-of-production depreciation method allocates depreciation in proportion to the asset’s use in operations. Answer: True Topic: Maintenance and Repair Expenses LO: 3 20. Expenditures for ordinary maintenance and repairs of plant assets are capital expenditures. Answer: False Rationale: Expenditures for ordinary maintenance and repairs of plant assets are referred to as revenue expenditures and are charged to expense as they are incurred. Topic: Betterments LO: 3 21. Betterments can improve the quality of services rendered by a plant asset without necessarily extending its useful life. Answer: True
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-5
Topic: Repair Costs LO: 3 22. The cost of repairing a new desk’s leg--broken accidentally by an employee moving the desk into place--is expensed immediately. Answer: True Topic: Return on Assets Ratio LO: 7 23. Return on assets is computed by dividing net sales by average total assets. Answer: False Rationale: Return on assets is computed by dividing net income (not net sales) by average total assets. Topic: Return on Assets Ratio LO: 7 24. Return on assets measures how effectively a firm uses its assets in its operations. Answer: True Topic: Asset Turnover Ratio LO: 7 25. Asset turnover is computed by dividing net sales by average total assets. Answer: True Topic: Disposal of Plant Assets LO: 4 26. Sean Company purchases equipment for $7,700 for which it estimates a seven-year useful life and a $700 salvage value. If Sean uses straight-line depreciation and sells the equipment for $3,500 after four years of use, Sean will show a $300 gain on the sale. Answer: False Rationale: ($7,700 - $700) / 7 = $1,000 annual depreciation $7,700 - (4 x $1,000) = $3,700 book value at disposal date $3,500 proceeds - $3,700 book value = $200 loss on sale Topic: Disposal of Plant Assets LO: 4 27. A loss is recorded when a plant asset is sold for more than its book value. Answer: False Rationale: A loss is recorded when a plant asset is sold for less, not more, than its book value.
©Cambridge Business Publishers, 2020 9-6
Financial Accounting for Undergraduates, 4th Edition
Topic: Disposal of Plant Assets LO: 4 28. No gain or loss is recorded when a plant asset is sold for an amount equal to its book value. Answer: True Topic: Disposal of Plant Assets LO: 4 29. If an uninsured asset is destroyed by fire before the end of its useful life, the firm suffers a loss measured by the asset’s estimated salvage value. Answer: False Rationale: Should the equipment be abandoned, stolen, or destroyed (with no insurance coverage) before the end of its expected useful life, a loss equal to its book value is recorded. Topic: Research and Development Costs LO: 5 30. All research and development costs related to a firm’s products and its production processes must be expensed when incurred. Answer: True Topic: Amortization Period LO: 5 31. The amortization period for all intangible assets is 40 years. Answer: False Rationale: The amortization of an intangible asset carried on the balance sheet involves the periodic expensing of the asset’s cost over the term of its expected useful life (the period over which it will benefit the company). Topic: Leasehold Improvements LO: 1 32. The costs of leasehold improvements are depreciated over the life of the lease or the life of the improvements, whichever is shorter. Answer: True Topic: Asset Turnover LO: 7 33. Asset turnover is computed as net sales divided by year-end total assets. Answer: False Rationale: Asset turnover is computed as net sales divided by Average total assets, not year-end total assets.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-7
Topic: Asset Turnover LO: 7 34. Asset turnover measures how effectively a firm generates sales revenue from its investment in assets. Answer: True Topic: Natural Resources LO: 5 35. Accumulated Depletion is the estimated cost of natural resources removed from their natural setting to date. Answer: True
©Cambridge Business Publishers, 2020 9-8
Financial Accounting for Undergraduates, 4th Edition
Multiple Choice Topic: Depreciation Expense Using the Double-Declining-Balance Method LO: 2 Level of Difficulty: MEDIUM 1. On January 1, 2019, Upward Company purchased a copy machine. The machine costs $320,000, its estimated useful life is 8 years, and its expected salvage value is $20,000. What is the depreciation expense for 2020 using double-declining-balance method? A) $80,000 B) $60,000 C) $52,500 D) $35,000 Answer: B Rationale: Double-declining-balance rate = 1/8 × 2 = 25%. Depreciation expense of year 2019 is $320,000 × 25% = $80,000 Depreciation expense of year 2020 is $240,000 × 25% = $60,000 Topic: Depreciation Expense Using the Double-Declining-Balance Method LO: 2 Level of Difficulty: MEDIUM 2. On January 1, 2019, Seek Company purchased a copy machine. The machine costs $960,000, its estimated useful life is 8 years, and its expected salvage value is $60,000. What is the depreciation expense for 2020 using double-declining-balance method? A) $240,000 B) $180,000 C) $157,500 D) $105,000 Answer: B Rationale: Double-declining-balance rate = 1/8 × 2 = 25%. Depreciation expense of year 2019 is $960,000 × 25% = $240,000 Depreciation expense of year 2020 is $720,000 × 25% = $180,000 Topic: Depreciation Assumptions LO: 2, 3 Level of Difficulty: EASY 3. Which of the following estimates are required when calculating depreciation expense? 1. Depreciation rate 2. Useful life 3. Expected maintenance costs 4. Salvage value A) B) C) D)
1, 2, and 4 1, 2, 3, and 4 2 and 4 2, 3, and 4
Answer: A Rationale: Expected maintenance costs are not capitalized, nor do they impact the amount of depreciation per period. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-9
Topic: Straight-Line Depreciation LO: 2 Level of Difficulty: EASY 4. Which statement is true concerning the straight-line method of depreciation? A) Depreciation is recognized evenly over the estimated useful life of the asset B) Purchase cost is expensed in the year of acquisition C) Depreciation is equal to the proceeds received on sale less the amount paid to acquire the asset D) Depreciation does not take salvage value into consideration Answer: A Rationale: When using the straight-line method of depreciation, depreciation is recognized evenly over the estimated useful life of the asset. Topic: Depreciation Assumptions LO: 2 Level of Difficulty: EASY 5. Which of the following is not necessary in calculating the depreciation expense for the first year for a newly purchased factory forklift? A) Estimated useful life B) Fair market value of the forklift during its useful life C) Total cost of the forklift at acquisition and the estimated salvage value D) Depreciation rate Answer: B Rationale: The fair market value is not factor in calculating annual depreciation. Topic: Gain (Loss) on Asset Sales LO: 4 Level of Difficulty: EASY 6. How is the gain (loss) on a plant asset sale calculated? A) Asset sale price – Asset purchase cost B) Asset fair value – Asset sale price C) Asset sale price – Book value of the asset D) Asset sale price – Total accumulated depreciation Answer: C Rationale: The gain (loss) on the sale of a plant asset is computed as: Asset sale price – book value of the asset Topic: Impairment LO: 2 Level of Difficulty: EASY 7. At what point is an asset considered to be impaired? A) When the net book value is greater than the sum of expected cash flows B) When the net book value is less than the sum of expected cash flows C) When the net book value is less than the fair value D) When the net book value is greater than the fair value Answer: A Rationale: As asset is impaired if its net book value (purchase cost less accumulated depreciation) is greater than the sum of cash flows expected to flow from that asset.
©Cambridge Business Publishers, 2020 9-10
Financial Accounting for Undergraduates, 4th Edition
Topic: Depreciation LO: 2 Level of Difficulty: MEDIUM 8. Saul Company purchased a tractor at a cost of $180,000. The tractor has an estimated salvage value of $20,000 and an estimated life of 8 years, or 12,000 hours of operation. The tractor was purchased on January 1, 2019 and was used 2,400 hours in 2019 and 2,200 hours in 2020. What method of depreciation will produce the maximum depreciation expense in 2019? A) Straight-line B) Units-of-production C) Double-declining-balance D) All methods produce the same expense in 2019 Answer: C Rationale: Straight-line: ($180,000 – $20,000) / 8 = $20,000 per year Double-declining balance: $180,000 × (1/8 × 2) = $45,000 for 2019 Units of production: ($180,000 – $20,000) × (2,400 hours / 12,000 hours) = $32,000 for 2019 Topic: Depreciation LO: 2 Level of Difficulty: MEDIUM 9. Saul Company purchased a tractor at a cost of $120,000. The tractor has an estimated salvage value of $20,000 and an estimated life of 8 years, or 12,000 hours of operation. The tractor was purchased on January 1, 2019 and was used 2,400 hours in 2019 and 2,100 hours in 2020. What method of depreciation will produce the maximum depreciation expense in 2020? A) Straight-line B) Units-of-production C) Double-declining-balance D) All methods produce the same expense in 2020 Answer: C Rationale: Straight-Line: ($120,000 – $20,000) / 8 = $12,500 per year Double-declining balance: $120,000 × (1/8 × 2) = $30,000 for 2019 ($120,000 – $30,000) × 1/4 = $22,500 for 2020 Units of production: ($120,000 – 20,000) × (2,100 hours / 12,000 hours) = $17,500 for 2020 Topic: Calculating Depreciation LO: 2 Level of Difficulty: EASY 10. Saul Company purchased a tractor at a cost of $180,000. The tractor has an estimated salvage value of $20,000 and an estimated life of 8 years, or 12,000 hours of operation. The tractor was purchased on January 1, 2019 and was used 2,400 hours in 2019 and 2,200 hours in 2020. What amount will Saul Company report as depreciation expense over the 8-year life of the equipment using straight-line depreciation? A) $ 25,000 B) $ 40,000 C) $180,000 D) $160,000 Answer: D Rationale: $180,000 – $20,000 = $160,000 ©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-11
Topic: Calculating Depreciation LO: 2 Level of Difficulty: EASY 11. Spencer Company purchased a tractor at a cost of $540,000. The tractor has an estimated salvage value of $60,000 and an estimated life of 8 years, or 12,000 hours of operation. The tractor was purchased on January 1, 2019 and was used 2,400 hours in 2019 and 2,200 hours in 2020. What amount will Spencer Company report as depreciation expense over the 8-year life of the equipment using straight-line depreciation? A) $ 75,000 B) $120,000 C) $540,000 D) $480,000 Answer: D Rationale: $540,000 – $60,000 = $480,000 Topic: Calculating Book Value LO: 2 Level of Difficulty: EASY 12. Saul Company purchased a tractor at a cost of $120,000 on January 1, 2019. The tractor has an estimated salvage value of $20,000 and an estimated life of 8 years. If Saul uses the straight-line method, what is the book value at January 1, 2023? A) $70,000 B) $50,000 C) $82,500 D) None of the above Answer: A Rationale: Accumulated depreciation = [($120,000 – $20,000) / 8] × 4 = $50,000 Book value = $120,000 – $50,000 = $70,000 Topic: Calculating Book Value LO: 2 Level of Difficulty: EASY 13. Spencer Company purchased a tractor at a cost of $360,000 on January 1, 2019. The tractor has an estimated salvage value of $60,000 and an estimated life of 8 years. If Spencer uses the straight-line method, what is the book value at January 1, 2023? A) $210,000 B) $150,000 C) $247,500 D) None of the above Answer: A Rationale: Accumulated depreciation = [($360,000 – $60,000) / 8] × 4 = $150,000 Book value = $360,000 – $150,000 = $210,000
©Cambridge Business Publishers, 2020 9-12
Financial Accounting for Undergraduates, 4th Edition
Topic: Disposal of Plant Asset LO: 4 Level of Difficulty: MEDIUM 14. Steve Company purchased a tractor at a cost of $180,000. The tractor has an estimated salvage value of $20,000 and an estimated life of 8 years, or 10,000 hours of operation. The tractor was purchased on January 1, 2019 and was used 2,400 hours in 2019 and 2,100 hours in 2020. On January 1, 2021, the company decided to sell the tractor for $70,000. Steve uses the units-ofproduction method to account for the depreciation on the tractor. Based on this information, the entry to record the sale of the tractor will show: A) No gain or loss on the sale B) A loss of $38,000 C) A loss of $70,000 D) A gain of $70,000 Answer: B Rationale: Rate = ($180,000 – $20,000) / 10,000 hours = $16 per hour Expense for 2 years = $16 x 4,500 hours = $72,000 Gain (loss) on sale = Selling price – Book value = $70,000 – ($180,000 – $72,000) = $38,000 loss Topic: Disposal of Plant Asset LO: 4 Level of Difficulty: MEDIUM 15. Berning Company purchased a tractor at a cost of $540,000. The tractor has an estimated salvage value of $60,000 and an estimated life of 8 years, or 10,000 hours of operation. The tractor was purchased on January 1, 2019 and was used 2,400 hours in 2019 and 2,100 hours in 2020. On January 1, 2021, the company decided to sell the tractor for $210,000. Berning uses the units-ofproduction method to account for the depreciation on the tractor. Based on this information, the entry to record the sale of the tractor will show: A) No gain or loss on the sale B) A loss of $114,000 C) A loss of $150,000 D) A gain of $150,000 Answer: B Rationale: Rate = ($540,000 – $60,000) / 10,000 hours = $48 per hour Expense for 2 years = $48 x 4,500 hours = $216,000 Gain (loss) on sale = Selling price – Book value = $210,000 – ($540,000 – $216,000) = $114,000 loss Topic: Goodwill LO: 5 Level of Difficulty: EASY 16. Goodwill can be recorded as an asset when: A) An offer is received to purchase the business at a price in excess of the value of the assets B) A business has above normal profitability compared to other businesses in its industry C) A business is purchased and payment is made in excess of the fair value of the identifiable net assets D) A business can determine that it has created customer goodwill and name recognition Answer: C Rationale: Goodwill is an intangible asset that is only recorded when one company acquires another company at an excess purchase price over the fair market value of its identifiable net assets. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-13
Topic: Changes in Accounting Estimates LO: 2 Level of Difficulty: MEDIUM 17. Oaks Company purchased a tractor at a cost of $180,000 on January 1, 2019. The tractor has an estimated salvage value of $20,000 and an estimated life of 8 years. At the end of two years of service, Oaks reevaluated the tractor’s useful life. Management extended the useful life an additional four years, but estimated that the tractor would have no residual value at the end of this time. If the company uses straight-line depreciation, what amount would be recorded as the depreciation expense each year, beginning with the third year? A) $ 7,500 B) $18,750 C) $15,834 D) $14,000 Answer: D Rationale: $180,000 – ($20,000* x 2) = $140,000 Revised remaining life = 8 – 2 + 4 = 10 years $140,000 / 10 years = $14,000 *($180,000 - $20,000) / 8
Topic: Changes in Accounting Estimates LO: 2 Level of Difficulty: MEDIUM 18. Natalie Company purchased a tractor at a cost of $540,000 on January 1, 2019. The tractor has an estimated salvage value of $60,000 and an estimated life of 8 years. At the end of two years of service, Natalie reevaluated the tractor’s useful life. Management extended the useful life an additional four years, but estimated that the tractor would have no residual value at the end of this time. If the company uses straight-line depreciation, what amount would be recorded as the depreciation expense each year, beginning with the third year? A) $22,500 B) $56,250 C) $47,502 D) $42,000 Answer: D Rationale: $540,000 – ($60,000 x 2) = $420,000 Revised remaining life = 8 – 2 + 4 = 10 years $420,000 / 10 years = $42,000
©Cambridge Business Publishers, 2020 9-14
Financial Accounting for Undergraduates, 4th Edition
Topic: Intangible Assets LO: 5 Level of Difficulty: EASY 19. How should intangible assets be disclosed on the balance sheet? A) At the estimated fair value at the balance sheet date B) At cost in the current assets section C) Net of the costs already amortized D) As a reduction of stockholders’ equity Answer: C Rationale: The cost of the intangible asset is presented in the balance sheet net of accumulated amortization. Topic: IFRS R&D LO: 5 Level of Difficulty: EASY 20. Which statement is true as it relates to IFRS’ reporting requirements for internally-developed intangibles? A) IFRS allows both research and development costs to be capitalized when specific criteria are met B) IFRS allows research costs to be capitalized when specific criteria are met C) IFRS allows development costs to be capitalized when specific criteria are met D) IFRS requires that both research and development costs be expensed when incurred Answer: C Rationale: Development costs can be capitalized as intangible assets under IFRS, though GAAP requires both research and development costs be expensed when incurred. Topic: Long-Lived Assets Classification LO: 1 Level of Difficulty: EASY 21. Which of the following is not a balance sheet category for long-lived assets? A) Plant assets B) Revenue expenditures C) Intangible assets D) None of the above Answer: B Rationale: Revenue expenditures are reflected on the income statement. Topic: Long-Lived Assets Periodic Write-Off LO: 1 Level of Difficulty: EASY 22. Which of the following is a term identifying the periodic expensing of a plant asset? A) Amortization B) Depletion C) Betterment D) Depreciation Answer: D Rationale: Depreciation refers to the process of allocating a portion of an asset’s acquisition cost to expense on the income statement to reflect the consumption of the asset as it produces revenue for a business.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-15
Topic: Land LO: 1 Level of Difficulty: EASY 23. Which of the following plant assets is not depreciated? A) Leasehold improvements B) Equipment C) Land for site use D) Furniture Answer: C Rationale: Land is not depreciated. Topic: Land Improvements LO: 1 Level of Difficulty: EASY 24. Which of the following plant assets is not depreciated? A) Furniture and equipment B) Land improvements C) Delivery truck D) All of these are depreciated Answer: D Rationale: Property improvements that have limited lives are classified as land improvements.es for these assets are charged to a separate Land Improvement account on the balance sheet and depreciated over the estimated useful life of the improvements. Topic: Acquisition Cost LO: 1 Level of Difficulty: MEDIUM 25. Oval Company acquired a machine that involved the following expenditures and related factors: Gross invoice price …………….……………. Sales tax ……………………………………… Cash discount taken …………………………. Freight ………………………………………… Assembly of machine ……………………….. Installation of machine ……………………….. Assorted spare parts for future use ………… Tuning and adjusting machine before use …
$76,000 2,850 1,140 1,350 1,800 2,700 5,400 900
The initial accounting cost of the machine should be: A) $87,010 B) $84,460 C) $89,860 D) $85,600 Answer: B Rationale: $76,000 + $2,850 – $1,140 + $1,350 + $1,800 + $2,700 + $900 = $84,460
©Cambridge Business Publishers, 2020 9-16
Financial Accounting for Undergraduates, 4th Edition
Topic: Acquisition Cost LO: 1 Level of Difficulty: MEDIUM 26. Triangle Company acquired a machine that involved the following expenditures and related factors: Gross invoice price …………….……………. Sales tax ……………………………………… Cash discount taken …………………………. Freight ………………………………………… Assembly of machine ……………………….. Installation of machine ……………………….. Assorted spare parts for future use ………… Tuning and adjusting machine before use …
$228,000 8,550 3,420 4,050 5,400 8,100 16,200 2,700
The initial accounting cost of the machine should be: A) $203,220 B) $253,380 C) $180,180 D) $196,380 Answer: B Rationale: $228,000 + $8,550 – $3,420 + $4,050 + $5,400 + $8,100 + $2,700 = $253,380 Topic: Acquisition Cost LO: 1 Level of Difficulty: MEDIUM 27. Peak, Inc. acquired a machine that involved the following expenditures and related factors: Gross invoice price …………………………………………….. $27,200 Sales tax ………………………………………………………… 1,760 Cash discount taken …………………………………………… 544 Freight ………………………………………………………….... 960 Assembly of machine ………………………………………….. 800 Installation of machine ………………………………………… 1,200 Tuning and adjusting machine before use …………………… 640 The initial accounting cost of the machine should be: A) $34,576 B) $28,016 C) $32,016 D) $31,616 Answer: C Rationale: $27,200 + $1,760 – $544 + $960 + $800 + $1,200 + $640 = $32,016
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-17
Topic: Acquisition Cost LO: 1 Level of Difficulty: MEDIUM 28. Summit, Inc. acquired a machine that involved the following expenditures and related factors: Gross invoice price …………………………………………….. $81,600 Sales tax ………………………………………………………… 5,280 Cash discount taken …………………………………………… 1,632 Freight ………………………………………………………….... 2,880 Assembly of machine ………………………………………….. 2,400 Installation of machine ………………………………………… 3,600 Tuning and adjusting machine before use …………………… 1,920 The initial accounting cost of the machine should be: A) $102,528 B) $ 84,480 C) $ 96,048 D) $ 94,848 Answer: C Rationale: $81,600 + $5,280 – $1,632 + $2,880 + $2,400 + $3,600 + $1,920 = $96,048 Topic: Expenditures Related to Land LO: 1 Level of Difficulty: EASY 29. A land site for a new office building is purchased for $360,000 by Texas Coast Company. A barn on the site will be razed at a net cost of $34,000. The $34,000 razing expenditure is properly debited to: A) Office Building B) Land C) Razing Expense D) Land Improvements Answer: B Rationale: A payment to remove a barn increases the land’s acquisition cost, because removing the barn prepares the land for its intended use. The cost should be capitalized or added to the cost of the land.
©Cambridge Business Publishers, 2020 9-18
Financial Accounting for Undergraduates, 4th Edition
Topic: Package Purchase LO: 1 Level of Difficulty: MEDIUM 30. Minerva Company purchased land and a building for a total price of $5,200,000. Individually, the land was appraised at $840,000 and the building at $4,760,000. How much should be recorded as the acquisition cost of each asset? A) Land, $840,000; building, $4,760,000 B) Land, $840,000; building, $4,360,000 C) Land, $780,000; building, $4,420,000 D) Land, $800,000; building, $4,400,000 Answer: C Rationale: Total appraised value: $840,000 + $4,760,000 = $5,600,000 Land: ($840,000 / $5,600,000) x ($5,200,000) = $780,000 Building: ($4,760,000 / $5,600,000) x ($5,200,000) = $4,420,000 Topic: Package Purchase LO: 1 Level of Difficulty: MEDIUM 31. Nair Company purchased land and a building for a total price of $15,600,000. Individually, the land was appraised at $2,520,000 and the building at $14,280,000. How much should be recorded as the acquisition cost of each asset? A) Land, $2,520,000; building, $14,280,000 B) Land, $2,520,000; building, $13,080,000 C) Land, $2,340,000; building, $13,260,000 D) Land, $2,400,000; building, $13,200,000 Answer: C Rationale: Total appraised value: $2,520,000 + $14,280,000 = $16,800,000 Land: ($2,520,000 / $16,800,000) x ($15,600,000) = $2,340,000 Building: ($14,280,000 / $16,800,000) x ($15,600,000) = $13,260,000 Topic: Package Purchase LO: 1 Level of Difficulty: MEDIUM 32. For $11,100,000, Neptune, Inc. purchased another company’s land, building, and equipment. Independent appraisals indicate the values of these assets as follows: land, $1,830,000; building, $7,320,000; and equipment, $3,050,000. How much should be recorded as the acquisition cost of each asset? A) Land, $1,830,000; building, $7,320,000; equipment, $3,050,000 B) Land, $1,665,000; building, $6,660,000; equipment, $2,775,000 C) Land, $1,250,000; building, $7,200,000; equipment, $3,300,000 D) Land, $1,747,500; building, $6,990,000; equipment, $2,912,500 Answer: B Rationale: Total appraised value: $1,830,000 + $7,320,000 + $3,050,000 = $12,200,000 Land: ($1,830,000 / $12,200,000) x ($11,100,000) = $1,665,000 Building: ($7,320,000 / $12,200,000) ($11,100,000) = $6,660,000 Equipment: ($3,050,000 / $12,200,000) ($11,100,000) = $2,775,000 ©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-19
Topic: Package Purchase LO: 1 Level of Difficulty: MEDIUM 33. For $33,300,000, Saturn, Inc. purchased another company’s land, building, and equipment. Independent appraisals indicate the values of these assets as follows: land, $3,660,000; building, $23,790,000; and equipment, $9,150,000. How much should be recorded as the acquisition cost of each asset? A) Land, $3,660,000; building, $23,790,000; equipment, $9,150,000 B) Land, $3,330,000; building, $21,645,000; equipment, $8,325,000 C) Land, $3,750,000; building, $21,600,000; equipment, $9,900,000 D) Land, $3,495,000; building, $22,717,500; equipment, $8,737,500 Answer: B Rationale: Total appraised value: $3,660,000 + $21,600,000 + $10,800,000 = $36,600,000 Land: ($3,660,000 / $36,600,000) x ($33,300,000) = $3,330,000 Building: ($23,790,000 / $36,600,000) x ($33,300,000) = $21,645,000 Equipment: ($9,150,000 / $36,600,000) x ($33,300,000) = $8,325,000 Topic: Depreciation Purpose LO: 2 Level of Difficulty: EASY 34. The purpose of depreciation accounting is to: A) Reflect changes in the current value of a plant asset over its useful life B) Accumulate funds to replace a plant asset at the end of its useful life C) Allocate a plant asset’s cost, less its salvage value, to expense over the asset’s useful life D) Have a plant asset’s book value equal its initial cost by the end of its useful life Answer: C Rationale: Depreciation accounting is an attempt to allocate, in a systematic and rational manner, the difference between an asset’s initial cost by the end of its useful life and salvage value over the estimated useful life of the asset. Topic: Salvage Value LO: 2 Level of Difficulty: EASY 35. What is the term identifying the expected net recovery from the disposal of a plant asset at the end of its useful life? A) Accumulated depreciation B) Salvage value C) Depreciation expense D) Fair value Answer: B Rationale: Salvage value (or residual value) is the expected net recovery (sales proceeds– disposal costs) when the asset is sold or removed from service.
©Cambridge Business Publishers, 2020 9-20
Financial Accounting for Undergraduates, 4th Edition
Topic: Straight-Line Depreciation LO: 2 Level of Difficulty: EASY 36. On January 1, 2019, Ray, Inc. acquired a new machine for $186,750. Its estimated useful life is nine years with an expected salvage value of $6,750. Assuming straight-line depreciation, 2019 depreciation expense is: A) $20,750 B) $16,500 C) $19,000 D) $20,000 Answer: D Rationale: ($186,750 – $6,750) / 9 = $20,000 Topic: Straight-Line Depreciation LO: 2 Level of Difficulty: EASY 37. On January 1, 2019, Ray Roberto, Inc. acquired a new machine for $560,250. Its estimated useful life is nine years with an expected salvage value of $20,250. Assuming straight-line depreciation, 2019 depreciation expense is: A) $47,250 B) $49,500 C) $57,000 D) $60,000 Answer: D Rationale: ($560,250 – $20,250) / 9 = $60,000 Topic: Straight-Line Depreciation LO: 2 Level of Difficulty: EASY 38. On April 1, 2019, Albert, Inc. acquired a new machine for $160,000. Its estimated useful life is eight years with an expected salvage value of $16,000. Assuming straight-line depreciation, 2019 depreciation expense is: A) $18,000 B) $13,500 C) $15,000 D) $20,000 Answer: B Rationale: [($160,000 – $16,000) / 8] (9/12) = $13,500
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-21
Topic: Straight-Line Depreciation LO: 2 Level of Difficulty: EASY 39. On April 1, 2019, Veronica, Inc. acquired a new machine for $480,000. Its estimated useful life is eight years with an expected salvage value of $48,000. Assuming straight-line depreciation, 2019 depreciation expense is: A) $54,000 B) $40,500 C) $45,000 D) $60,000 Answer: B Rationale: [($480,000 – $48,000) / 8] (9/12) = $40,500 Topic: Units-of-Production Depreciation LO: 2 Level of Difficulty: EASY 40. On January 1, 2019, Mandarin Company purchased a new truck for $29,400. Its estimated useful life is seven years or 200,000 miles. The truck’s expected salvage value is $1,400. During 2019, the truck was driven 20,000 miles. Assuming units-of-production depreciation, 2019 depreciation expense is: A) $2,940 B) $4,200 C) $2,800 D) $4,000 Answer: C Rationale: [($29,400 – $1,400) / 200,000] x (20,000) = $2,800 Topic: Units-of-Production Depreciation LO: 2 Level of Difficulty: EASY 41. On January 1, 2019, Mango Company purchased a new truck for $88,200. Its estimated useful life is seven years or 200,000 miles. The truck’s expected salvage value is $4,200. During 2019, the truck was driven 20,000 miles. Assuming units-of-production depreciation, 2019 depreciation expense is: A) $10,584 B) $12,600 C) $ 8,400 D) $12,000 Answer: C Rationale: [($88,200 – $4,200) / 200,000] x (20,000) = $8,400
©Cambridge Business Publishers, 2020 9-22
Financial Accounting for Undergraduates, 4th Edition
Topic: Units-of-Production Depreciation LO: 2 Level of Difficulty: EASY 42. On January 1, 2019, Ivey Company purchased a bottle-capping machine for $160,000. During its useful life, the company expects that the machine will cap 1,500,000 bottles. The machine’s expected salvage value is $10,000. During 2019, the machine capped 250,000 bottles and during 2020, the machine capped 300,000 bottles. Assuming units-of-production depreciation, 2020 depreciation expense is: A) $25,000 B) $26,666 C) $30,000 D) $32,000 Answer: C Rationale: [($160,000 – $10,000) / 1,500,000] x (300,000) = $30,000 Topic: Units-of-Production Depreciation LO: 2 Level of Difficulty: EASY 43. On January 1, 2019, Thomas Peter Company purchased a bottle-capping machine for $480,000. During its useful life, the company expects that the machine will cap 1,500,000 bottles. The machine’s expected salvage value is $30,000. During 2019, the machine capped 250,000 bottles and during 2020, the machine capped 300,000 bottles. Assuming units-of-production depreciation, 2020 depreciation expense is: A) $75,000 B) $79,998 C) $90,000 D) $96,000 Answer: C Rationale: [($480,000 – $30,000) / 1,500,000] x (300,000) = $90,000 Topic: Units-of-Production Depreciation LO: 2 Level of Difficulty: EASY 44. Which of the following depreciation methods most closely relates periodic depreciation expense to the periodic use of the asset? A) Straight line. B) Units of production. C) Double-declining balance D) None of the above Answer: B Rationale: The units-of-production method allocates depreciation in proportion to an asset’s use in operations. Under this method, the depreciation per unit of production is first calculated by dividing the total depreciable cost of the asset by the asset’s projected units of production capacity.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-23
Topic: Double-Declining Method Depreciation LO: 2 Level of Difficulty: MEDIUM 45. On January 1, 2019, Camire, Inc. purchased a new machine for $160,000. Its estimated useful life is eight years with an expected salvage value of $12,000. Assuming double-declining balance depreciation, 2019 depreciation expense is: A) $20,000 B) $13,500 C) $37,000 D) $40,000 Answer: D Rationale: $160,000 x (2/8) = $40,000 Topic: Double-Declining Method Depreciation LO: 2 Level of Difficulty: MEDIUM 46. On January 1, 2019, Ceramics, Inc. purchased a new machine for $480,000. Its estimated useful life is eight years with an expected salvage value of $36,000. Assuming double-declining balance depreciation, 2019 depreciation expense is: A) $ 45,000 B) $ 40,500 C) $111,000 D) $120,000 Answer: D Rationale: $480,000 x (2/8) = $120,000 Topic: Double-Declining Method Depreciation LO: 2 Level of Difficulty: MEDIUM 47. On January 1, 2019, Fullerton, Inc. purchased a new machine for $180,000. Its estimated useful life is eight years with an expected salvage value of $18,000. Assuming double-declining balance depreciation, 2020 depreciation expense is: A) $45,000 B) $30,375 C) $33,750 D) $40,500 Answer: C Rationale: 2019 depreciation = $180,000 x (2/8) = $45,000 2020 depreciation = ($180,000 – $45,000) x (2/8) = $33,750
©Cambridge Business Publishers, 2020 9-24
Financial Accounting for Undergraduates, 4th Edition
Topic: Double-Declining Method Depreciation LO: 2 Level of Difficulty: MEDIUM 48. On January 1, 2019, Calvin, Inc. purchased a new machine for $192,000. Its estimated useful life is 10 years with an expected salvage value of $32,000. Assuming double-declining balance depreciation, 2019 depreciation expense is: A) $20,000 B) $12,000 C) $38,400 D) $32,000 Answer: C Rationale: $192,000 x (2/10) = $38,400 Topic: Double-Declining Method Depreciation LO: 2 Level of Difficulty: MEDIUM 49. On January 1, 2019, Hobbes, Inc. purchased a new machine for $576,000. Its estimated useful life is 10 years with an expected salvage value of $96,000. Assuming double-declining balance depreciation, 2019 depreciation expense is: A) $ 60,000 B) $ 36,000 C) $115,200 D) $ 96,000 Answer: C Rationale: $576,000 x (2/10) = $115,200 Topic: Double-Declining Method Depreciation LO: 2 Level of Difficulty: MEDIUM 50. On January 1, 2019, Presto, Inc. purchased a new machine for $192,000. Its estimated useful life is 16 years with an expected salvage value of $32,000. Assuming double-declining balance depreciation, 2020 depreciation expense is: A) $21,000 B) $17,500 C) $12,000 D) $24,000 Answer: A Rationale: 2019 depreciation = $192,000 x (2/16) = $24,000 2020 depreciation = ($192,000 – $24,000) (2/16) = $21,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-25
Double-Declining Method Depreciation LO: 2 Level of Difficulty: MEDIUM 51. Equipment was purchased for $180,000 on March 1, 2019. Its estimated useful life is eight years with a $18,000 expected salvage value. Using double-declining balance depreciation, the 2020 depreciation expense is: A) $35,625 B) $37,500 C) $33,750 D) $40,500 Answer: A Rationale: 2019 depreciation = ($180,000) (2/8) (10/12) = $37,500 2020 depreciation = ($180,000 – $37,500) (2/8) = $35,625 Topic: Double-Declining Method Depreciation LO: 2 Level of Difficulty: MEDIUM 52. Equipment was purchased for $72,000 on October 1, 2019. Its estimated useful life is four years with a $4,200 expected salvage value. Using double-declining balance depreciation, the 2020 depreciation expense is: A) $31,500 B) $ 9,000 C) $ 7,500 D) $18,000 Answer: A Rationale: 2019 depreciation = ($72,000) (2/4) (3/12) = $9,000 2020 depreciation = ($72,000 – $9,000) (2/4) = $31,500 Topic: Accumulated Depreciation LO: 2 Level of Difficulty: MEDIUM 53. At the end of the expected useful life of a depreciable asset with an estimated 15% salvage value, the accumulated depreciation would equal the original cost of the asset under which of the following depreciation methods?
A) B) C) D)
Straight Line Yes No Yes No
Units-of Production Yes No No Yes
Double-Declining Balance Yes No Yes No
Answer: B Rationale: A depreciable asset is not depreciated below its estimated salvage value. Therefore, the accumulated depreciation would never equal the original cost of the asset.
©Cambridge Business Publishers, 2020 9-26
Financial Accounting for Undergraduates, 4th Edition
Topic: Salvage Value LO: 2 Level of Difficulty: EASY 54. Which depreciation method does not consider salvage value in its first year calculation? A) Straight line B) Double-declining balance C) Units of production D) None of the above Answer: B Rationale: An asset’s salvage value is not considered in the calculation of declining-balance depreciation, except that the depreciation of an asset stops when the asset’s book value equals its estimated salvage value. Topic: Depreciation Methods LO: 2 Level of Difficulty: MEDIUM 55. Which of the following depreciation methods would result in the most depreciation in the first year, assuming an eight year life and no salvage value? A) Double-declining balance B) Straight line C) Not enough information available to determine answer D) The depreciation would be the same under both methods Answer: A Rationale: Double declining-balance = 2/8 or 25% in first year Straight-line = 1/8 or 12.5% in first year Topic: Change in Accounting Estimate LO: 2 Level of Difficulty: MEDIUM 56. Helmut, Inc. purchased a truck on July 1, 2019, for $37,800. At that time, the truck’s useful life was an estimated five years with no salvage value. Before the entry to record 2021 depreciation was made, the truck’s estimated useful life was changed to four years with a $1,400 salvage value. Using straight-line depreciation, what is the 2021 depreciation expense? A) $ 7,560 B) $ 9,100 C) $10,024 D) $10,584 Answer: C Rationale: Book value at time of revision: $37,800 - (1.5 years x $7,560*) = $26,460 $26,460 - $1,400 salvage value = $25,060 revised remaining depreciation $25,060/2.5 years revised remaining useful life = $10,024 *$37,800 / 5 = $7,560 = Annual straight-line depreciation
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-27
Topic: Change in Accounting Estimate LO: 2 Level of Difficulty: MEDIUM 57. Raas, Inc. purchased a truck on January 1, 2019, for $144,000. At that time, the truck’s useful life was an estimated four years with no salvage value. Before the entry to record 2022 depreciation was made, the truck’s estimated useful life was changed to six years with a $2,700 salvage value. Using straight-line deprecation, what is the 2022 depreciation expense? A) $ 11,100 B) $18,000 C) $ 9,000 D) $ 4,050 Answer: A Rationale: Book value at time of revision: $144,000 – (3 years x $36,000*) = $36,000 $36,000 – $2,700 salvage value = $33,300 revised remaining depreciation $33,300 / 3** years revised remaining useful life = $11,100 *$144,000 / 4 = $36,000 = Annual straight-line depreciation **6 years revised useful life – 3 years of useful life utilized = 3 years remaining useful life
Topic: Change in Accounting Estimate LO: 2 Level of Difficulty: MEDIUM 58. Eastern Company purchased a machine on January 1, 2019, for $180,000. At that time, the machine’s useful life was an estimated six years with a zero salvage value. Just before depreciation was recorded for 2023, the machine’s estimated useful life was extended by six years with a $12,000 salvage value. Using straight-line depreciation, what is the 2023 depreciation expense? A) $30,000 B) $13,716 C) $13,500 D) $ 6,000 Answer: D Rationale: Book value at time of revision: $180,000 – (4 years x $30,000*) = $60,000 $60,000 – $12,000 salvage value = $48,000 revised remaining depreciation $48,000 / 8** years revised remaining useful life = $6,000 *$180,000 / 6 = $30,000 = Annual straight-line depreciation **(6 - 4) years remaining pre-revision useful life + 6 years of extended useful life = 8 years remaining useful life
©Cambridge Business Publishers, 2020 9-28
Financial Accounting for Undergraduates, 4th Edition
Topic: Book Value LO: 2 Level of Difficulty: EASY 59. The book value of a depreciable asset is: A) The original cost of the asset B) The original cost of the asset less its accumulated depreciation C) The original cost of the asset less its salvage value D) The accumulated depreciation on the asset Answer: B Rationale: The book value of an asset is the acquisition cost less accumulated depreciation. It is also referred to as the net book value. Topic: Accelerated Depreciation LO: 2 Level of Difficulty: MEDIUM 60. An accelerated depreciation method recognizes: A) Equal amounts of depreciation for each year of an asset’s useful life B) Larger amounts of depreciation in the later periods than are recognized in the early periods of an asset’s useful life C) Larger amounts of depreciation in the early periods than are recognized in the later periods of an asset’s useful life D) More total depreciation expense over an asset’s useful life than is recognized by the straight-line method Answer: C Rationale: An accelerated depreciation method is a deprecation method in which amounts of depreciation expense taken in the early years of an asset’s life are greater than the amounts expensed in later years. Topic: Revenue Expenditure LO: 3 Level of Difficulty: EASY 61. A revenue expenditure: A) Increases the book value of a long-term asset B) Decreases the book value of a long-term asset C) Increases a revenue account D) Increases an expense account Answer: D Rationale: Revenue expenditures are expenditures relating to plant assets that are expensed when incurred. The following list identifies two common types of revenue expenditures: 1. Expenditures for ordinary maintenance and repairs of existing plant assets. 2. Expenditures to acquire low-cost items that benefit the firm for several periods.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-29
Topic: Capital Expenditure LO: 3 Level of Difficulty: EASY 62. Which of the following is a capital expenditure? A) Cost to add air conditioning to a company car B) Cost to purchase garbage cans for the company conference room C) Cost to replace spark plug on company lawnmower D) Cost to have store windows washed Answer: A Rationale: Capital expenditures increase the book value of long-lived assets. Two typical capital expenditures related to property, plant, and equipment are initial acquisitions and additions and betterments. Topic: Revenue Expenditure LO: 3 Level of Difficulty: EASY 63. Which of the following is a revenue expenditure? A) Adding air conditioning to a company car B) Adding a loading and unloading dock to the company’s warehouse C) Purchasing a microcomputer for the marketing department D) Replacing the battery in a company truck Answer: D Rationale: Revenue expenditures are expenditures relating to plant assets that are expensed when incurred. Two common types of revenue expenditures are: 1. Expenditures for ordinary maintenance and repairs of existing plant assets, and 2. Expenditures to acquire low-cost items that benefit the firm for several periods. Topic: Capital Expenditure LO: 3 Level of Difficulty: EASY 64. Which of the following is a capital expenditure? A) Cleaning, waxing, and polishing a company car B) Purchasing a wastebasket for company office C) Adding a power winch to a company service truck D) Replacing filters on the company furnace Answer: C Rationale: Capital expenditures increase the book value of long-lived assets. Two typical capital expenditures related to property, plant, and equipment are initial acquisitions and additions and betterments.
©Cambridge Business Publishers, 2020 9-30
Financial Accounting for Undergraduates, 4th Edition
Topic: Return on Assets LO: 7 Level of Difficulty: EASY 65. Return on assets is computed as: A) Net sales/Average total assets B) Average total assets/Net income C) Average total assets/Net sales D) Net income/Average total assets Answer: D Rationale: The return on assets ratio is calculated as: Return on assets = Net income /Average total assets. This ratio relates data from two financial statements—the income statement and the balance sheet. Topic: Return on Assets LO: 7 Level of Difficulty: EASY 66. At January 1, 2019, Crane Company had total assets of $1,800,000 and at December 31, 2019, its total assets were $2,200,000. Crane’s net sales for 2019 were $1,700,000 and its 2019 net income was $110,000. Crane’s return on assets for 2019 is: A) 5.5% B) 5.0% C) 6.5% D) 85.0% Answer: A Rationale: $110,000 / [($1,800,000 + $2,200,000) / 2] = 5.5% Topic: Return on Assets LO: 7 Level of Difficulty: EASY 67. At January 1, 2019, Flamingo Company had total assets of $5,400,000 and at December 31, 2019, its total assets were $6,600,000. Flamingo’s net sales for 2019 were $5,100,000 and its 2019 net income was $420,000. Flamingo’s return on assets for 2019 is: A) 7.0% B) 9.2% C) 7.8% D) 99.2% Answer: A Rationale: $420,000 / [($5,400,000 + $6,600,000) / 2] = 7.0%
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-31
Topic: Asset Turnover Ratio LO: 7 Level of Difficulty: EASY 68. At January 1, 2019, Bragg Company had total assets of $1,800,000 and at December 31, 2019, its total assets were $2,200,000. Bragg’s net sales for 2019 were $3,700,000 and its 2019 net income was $110,000. Bragg’s asset turnover ratio for 2019 is: A) 0.055 B) 0.050 C) 0.065 D) 1.850 Answer: D Rationale: $3,700,000 / [($1,800,000 + $2,200,000) / 2] = 1.85 Topic: Asset Turnover Ratio LO: 7 Level of Difficulty: EASY 69. At January 1, 2019, Bakas Company had total assets of $5,400,000 and at December 31, 2019, its total assets were $6,600,000. Markus’s net sales for 2019 were $13,650,000 and its 2019 net income was $360,000. Bakas’s asset turnover ratio for 2019 is: A) 0.070 B) 0.064 C) 0.078 D) 2.275 Answer: D Rationale: $13,650,000 / [($5,400,000 + $6,600,000) / 2] = 2.275 Topic: Return on Assets LO: 7 Level of Difficulty: EASY 70. At January 1, 2019, Kane Company had total assets of $2,100,000 and at December 31, 2019, its total assets were $2,400,000. Kane’s net sales for 2019 were $3,000,000 and its 2021 net income was $210,000. DuPage’s return on assets for 2019 is: A) 7.00% B) 8.75% C) 9.33% D) 87.47% Answer: C Rationale: $210,000 / [($2,100,000 + $2,400,000) / 2] = 9.33%
©Cambridge Business Publishers, 2020 9-32
Financial Accounting for Undergraduates, 4th Edition
Topic: Asset Turnover Ratio LO: 7 Level of Difficulty: EASY 71. At January 1, 2019, Peter & Sons Company had total assets of $1,400,000 and at December 31, 2019, its total assets were $1,600,000. Peter & Sons’ net sales for 2019 were $1,350,000 and its 2019 net income was $120,000. Peter & Sons’ asset turnover for 2019 is: A) 0.08 B) 0.07 C) 0.90 D) 1.25 Answer: C Rationale: $1,350,000 / [($1,400,000 + $1,600,000) / 2] = 0.90 Topic: Asset Turnover Ratio LO: 7 Level of Difficulty: EASY 72. Pokagon Store’s 2019 financial statements show earnings before interest of $3,273 million, net income of $210 million, sales of $235,226 million, and average total assets of $65,025 million. How much is Pokagon Store’s asset turnover for the year? A) 3.62 B) 0.39 C) 4.00 D) 5.88 Answer: A Rationale: Asset turnover = Sales / Average total assets = $235,226 million / $65,025 million = 3.62 Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 73. On January 1, 2018, Fireside Company purchased equipment for $172,000. Fireside uses straightline depreciation and estimates an eight-year useful life and a $12,000 salvage value. On December 31, 2022, Fireside sells the equipment for $60,000. In recording this sale, Fireside should reflect: A) A $ 6,000 loss B) A $24,000 loss C) A $12,000 loss D) No gain or loss Answer: C Rationale: ($172,000 – $12,000) / 8 = $20,000 annual depreciation $172,000 – (5 x $20,000) = $72,000 book value at disposal date $72,000 book value - $60,000 proceeds = $12,000 loss on sale
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-33
Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 74. On January 1, 2018, Lumos Company purchased a machine for $70,200. Lumos uses straight-line depreciation and estimates an eight-year useful life and an $5,400 salvage value. On December 31, 2021, Lumos sells the machine for $42,000. In recording this sale, Lumos should reflect: A) A $4,200 gain B) A $1,200 loss C) A $9,600 gain D) No gain or loss Answer: A Rationale: ($70,200 – $5,400) / 8 = $8,100 annual depreciation $70,200 – (4 x $8,100) = $37,800 book value at disposal date $42,000 proceeds – $37,800 book value = $4,200 gain on sale Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 75. On January 1, 2019, Shadow, Inc. purchased equipment for $54,000. Shadow uses straight-line depreciation and estimates a 10-year useful life and a $6,000 salvage value. On December 31, 2023, Shadow sells the equipment for $28,400. In recording this sale, Shadow should reflect: A) A $ 2,800 gain B) A $ 3,200 gain C) A $ 6,000 gain D) A $12,800 gain Answer: D Rationale: ($54,000 – $6,000) / 10 = $4,800 annual depreciation $54,000 – (8 x $4,800) = $15,600 book value at disposal date $28,400 proceeds – $15,600 book value = $12,800 gain Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 76. On January 1, 2017, Starch, Inc. purchased a machine for $120,000. Starch uses straight-line depreciation and estimates a seven-year useful life and a $4,500 salvage value. On December 31, 2023, Starch cannot locate a buyer for the used machine so it is scrapped. In recording the machine retirement, Starch should reflect: A) No gain or loss B) A $ 4,500 gain C) A $ 4,500 loss D) A 115,500 loss Answer: C Rationale: ($12,000 – $4,500) / 7 = $16,500 annual depreciation $120,000 – (7 x $16,500) = $4,500 book value at disposal date = $4,500 loss on retirement ©Cambridge Business Publishers, 2020 9-34
Financial Accounting for Undergraduates, 4th Edition
Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 77. On January 1, 2017, Twinkle, Inc. purchased a machine for $160,000. Twinkle uses straight-line depreciation and estimates a seven-year useful life and a $6,000 salvage value. On December 31, 2023, Twinkle cannot locate a buyer for the used machine so it is scrapped. In recording the machine retirement, Twinkle should reflect: A) No gain or loss B) A $6,000 gain C) A $6,000 loss D) A $154,000 loss Answer: C Rationale: ($160,000 – $6,000) / 7 = $22,000 annual depreciation $160,000 – (7 x $22,000) = $6,000 book value at disposal date = $6,000 loss on retirement Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 78. On January 1, 2017, Cornie, Inc. purchased a machine for $111,600. Cornie uses straight-line depreciation and estimates an eight-year useful life and a $3,600 salvage value. On December 31, 2024, Cornie cannot locate a buyer for the used machine so it is scrapped. In recording the machine retirement, Cornie should reflect: A) No gain or loss B) A $ 3,600 gain C) A $ 3,600 loss D) A $86,400 loss Answer: C Rationale: ($111,600 – $3,600) / 8 = $13,500 annual depreciation $111,600 – (8 x $13,500) = $3,600 book value at disposal date = $3,600 loss on retirement
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-35
Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 79. On January 1, 2017, Flute, Inc. purchased a machine for $148,800. Flute uses straight-line depreciation and estimates an eight-year useful life and a $4,800 salvage value. On December 31, 2024, Flute cannot locate a buyer for the used machine so it is scrapped. In recording the machine retirement, Flute should reflect: A) No gain or loss B) A $4,800 gain C) A $4,800 loss D) A $115,200 loss Answer: C Rationale: ($148,800 – $4,800) / 8 = $18,000 annual depreciation $148,800 – (8 x $18,000) = $4,800 book value at disposal date = $4,800 loss on retirement Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 80. On July 1, 2018, Nanette Company purchased equipment for $216,000. Nanette uses straight-line depreciation and estimates a six-year useful life and a $36,000 salvage value. On December 31, 2021, the equipment is destroyed by fire. The equipment is not insured. The journal entry to record the equipment’s destruction should reflect: A) A $ 36,000 loss B) A $111,000 loss C) A $ 75,000 loss D) A $105,000 loss Answer: B Rationale: ($216,000 – $36,000) / 6 = $30,000 annual depreciation $216,000 – (3.5 x $60,000) = $111,000 book value at date of fire = $111,000 fire loss
©Cambridge Business Publishers, 2020 9-36
Financial Accounting for Undergraduates, 4th Edition
Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 81. On January 1, 2018, Salt Company purchased equipment for $32,000. Salt uses straight-line depreciation and estimates a five-year useful life and a $2,000 salvage value. On December 31, 2022, the equipment was stolen. Assuming the equipment was not insured against theft, the journal entry to record the theft should reflect: A) No gain or loss B) A $30,000 loss C) A $32,000 loss D) A $ 2,000 loss Answer: D Rationale: ($32,000 – $2,000) / 5 = $6,000 annual depreciation $32,000 – (5 x $6,000) = $2,000 book value at date of theft = $2,000 theft loss Topic: Asset Disposal Journal Entries LO: 4 Level of Difficulty: MEDIUM 82. Several years ago, Kokoras, Inc. purchased a computer costing $135,000, for which total depreciation of $105,000 has been recorded. Assuming that the computer is sold for $45,000 cash, the proper entry to record the sale is: A) Debit Cash, $45,000; debit Accumulated Depreciation, $105,000; credit Computer, $135,000 B) Debit Cash, $45,000; debit Accumulated Depreciation, $105,000; credit Computer, $144,000 C) Debit Cash, $45,000; debit Accumulated Depreciation, $105,000; credit Computer, $135,000; credit Gain on Sale of Computer, $15,000 D) Debit Cash, $45,000; credit Computer $30,000; credit Gain on Sale of Computer, $15,000 Answer: C Rationale: The gain of $15,000 is calculated as the sale proceeds of $45,000 minus the asset’s book value of $30,000 ($135,000 - $105,000). The journal entry to record the sale is: Cash Accumulated depreciation—Computer Computer Gain on sale of Computer To record the sale of equipment for $45,000.
45,000 105,000 135,000 15,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-37
Topic: Asset Disposal Journal Entries LO: 4 Level of Difficulty: MEDIUM 83. Several years ago, Beglen, Inc. purchased a computer costing $180,000, for which total depreciation of $140,000 has been recorded. Assuming that the computer is sold for $60,000 cash, the proper entry to record the sale is: A) Debit Cash, $60,000; debit Accumulated Depreciation, $140,000; credit Computer, $180,000 B) Debit Cash, $60,000; debit Accumulated Depreciation, $140,000; credit Computer, $192,000 C) Debit Cash, $60,000; debit Accumulated Depreciation, $140,000; credit Computer, $180,000; credit Gain on Sale of Computer, $20,000 D) Debit Cash, $60,000; credit Computer $40,000; credit Gain on Sale of Computer, $20,000 Answer: C Rationale: The gain of $20,000 is calculated as the sale proceeds of $60,000 minus the asset’s book value of $40,000 ($180,000 - $140,000). The journal entries to record the sale are: Cash Accumulated depreciation—Computer Computer Gain on sale of Computer To record the sale of equipment for $60,000.
60,000 140,000 180,000 20,000
Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 84. On June 30, 2019, Robert, Inc. sold some used equipment for $90,000. The equipment had been purchased several years ago for $195,000. Robert, Inc. properly recorded a $21,000 gain on the sale. The accumulated depreciation on the equipment at the date of sale was: A) $ 96,000 B) $102,000 C) $126,000 D) $ 66,000 Answer: C Rationale: $195,000 old equipment cost + $21,000 gain on sale – $90,000 cash received = $126,000 accumulated depreciation
©Cambridge Business Publishers, 2020 9-38
Financial Accounting for Undergraduates, 4th Edition
Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 85. On June 30, 2019, Milch, Inc. sold some used equipment for $120,000. The equipment had been purchased several years ago for $260,000. Milch, Inc. properly recorded a $28,000 gain on the sale. The accumulated depreciation on the equipment at the date of sale was: A) $128,000 B) $136,000 C) $168,000 D) $ 88,000 Answer: C Rationale: $260,000 old equipment cost + $28,000 gain on sale – $120,000 cash received = $168,000 accumulated depreciation Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 86. On April 30, 2019, TWC & Brothers sold some used equipment for $84,000. The accumulated depreciation on the equipment when sold was $96,000. TWC & Brothers properly recorded a $33,000 gain on the sale. The original cost of the equipment when it was purchased several years ago by TWC & Brothers must have been: A) $ 42,000 B) $ 75,000 C) $117,000 D) $147,000 Answer: D Rationale: $84,000 cash + $96,000 accumulated depreciation – $33,000 gain on sale = $147,000 original cost of equipment Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 87. On April 30, 2019, Peter & Sons sold some used equipment for $112,000. The accumulated depreciation on the equipment when sold was $128,000. Peter & Sons properly recorded a $44,000 gain on the sale. The original cost of the equipment when it was purchased several years ago by Peter & Sons must have been: A) $ 56,000 B) $100,000 C) $156,000 D) $196,000 Answer: D Rationale: $112,000 cash + $128,000 accumulated depreciation – $44,000 gain on sale = $196,000 original cost of equipment ©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-39
Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: EASY 88. Glencoe Company sells a plant asset and correctly records a gain on the sale. The presence of a gain means the sales proceeds must have been greater than the plant asset’s: A) Book value B) Accumulated depreciation C) Original cost D) Original cost minus estimated salvage value Answer: A Rationale: Sales proceeds in excess of book value create a gain. Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: EASY 89. A gain or loss on the sale of a plant asset is determined by comparing the: A) Asset’s original cost with the sales proceeds B) Asset’s book value with the sales proceeds C) Asset’s original cost with the asset’s book value D) Initial estimate of the asset’s salvage value with the sales proceeds Answer: B Rationale: Sale proceeds in excess of book value create a gain, whereas book values in excess of sales proceeds create a loss. Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 90. One of Elm Company’s plant assets is destroyed by fire before the end of its useful life. Which one of the following independent situations results in a gain for Elm Company? A) The plant asset is not insured. B) The plant asset is insured, and the insurance settlement equals the asset’s book value. C) The plant asset is insured, and the asset’s book value exceeds the insurance settlement. D) The plant asset is insured, and the insurance settlement exceeds the asset’s book value. Answer: D Rationale: An insurance settlement is similar to sales proceeds, in that cash is received for the plant asset. So, if the asset is insured, and if insurance proceeds received are in excess of the asset’s book value, a gain is created.
©Cambridge Business Publishers, 2020 9-40
Financial Accounting for Undergraduates, 4th Edition
Topic: Patents LO: 5 Level of Difficulty: EASY 91. An exclusive right, granted by the federal government for 20 years, to exclude others from making, using, or selling an invention is a: A) Franchise B) Copyright C) Patent D) Leasehold Answer: C Rationale: A patent is an exclusive privilege granted to an inventor by the U.S. Patent Office for a period of 20 years from the date the patent application is filed. A patent gives the patent holder the right to exclude others from making, using, or selling the invention. Topic: Intangibles Amortization Expense LO: 5 Level of Difficulty: EASY 92. Unless another amortization method is shown to be more appropriate, intangible assets are amortized using the: A) Straight-line method B) Percentage depletion method C) Double declining-balance method D) Units-of-production method Answer: A Rationale: The amortization of an intangible asset carried on the balance sheet involves the periodic expensing of the asset’s cost over the term of its expected useful life. Straight-line amortization is typically used for intangible assets unless another method is shown to be more appropriate. Topic: Research and Development Costs LO: 5 Level of Difficulty: EASY 93. Research and development costs that relate to a firm’s products and its production processes: A) Must be expensed when incurred B) Are capitalized when the costs benefit future periods C) May be expensed or capitalized at the discretion of the firm’s management. D) Must be capitalized and amortized over 40 years Answer: A Rationale: Research and development costs are not capitalized to the balance sheet as an intangible asset because GAAP guidelines require that these expenditures be expensed when incurred.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-41
Topic: Balance Sheet Presentation of Long-Lived Assets LO: 6 Level of Difficulty: EASY 94. Where are plant assets and intangible assets classified in a balance sheet? A) Between current assets and investments B) Immediately before current assets C) After current assets and investments D) After long-term liabilities Answer: C Rationale: Plant assets and intangible assets are presented on the balance sheet below the Current assets category. The assets are listed on a classified balance sheet in descending order of liquidity. Topic: Balance Sheet Presentation of Long-Lived Assets LO: 6 Level of Difficulty: EASY 95. Which of the following shows the listed items in their proper order of presentation in a balance sheet? A) Plant assets, intangible assets, current assets B) Current assets, plant assets, intangible assets C) Current assets, intangible assets, plant assets D) Intangible assets, plant assets, current assets Answer: B Rationale: Assets are listed on a classified balance sheet in descending order of liquidity. Topic: Asset Turnover Ratio LO: 7 Level of Difficulty: EASY 96. The asset turnover ratio relates financial data from the balance sheet with financial data from the: A) Statement of cash flows B) Income statement C) Statement of owners’ equity D) Balance sheet Answer: B Rationale: The asset turnover ratio is a ratio that evaluates a company’s effective use of its assets. The asset turnover ratio is calculated as follows: Asset turnover = Net sales / Average total assets. This ratio relates data from two financial statements—the income statement and the balance sheet. Topic: Return on Assets Ratio LO: 7 Level of Difficulty: EASY 97. The return on assets ratio relates financial data from the balance sheet with financial data from the: A) Statement of cash flows B) Income statement C) Statement of owners’ equity D) Balance sheet Answer: B Rationale: The return on assets ratio is a widely used indicator that focuses on a firm’s financial health. The return on assets ratio is calculated as: Return on assets = Net income /Average total assets. This ratio relates data from two financial statements—the income statement and the balance sheet. ©Cambridge Business Publishers, 2020 9-42
Financial Accounting for Undergraduates, 4th Edition
Topic: Asset Turnover Ratio LO: 7 Level of Difficulty: EASY 98. Asset turnover is computed as: A) Average total assets x Net sales B) Average total assets / Net sales C) Net sales / Average total assets D) Net income / Year-end total assets Answer: C Rationale: The asset turnover ratio is a ratio that evaluates a company’s effective use of its assets. The asset turnover ratio is calculated as follows: Asset turnover = Net sales / Average total assets. Topic: Asset Turnover Ratio LO: 7 Level of Difficulty: EASY 99. During 2019, Belmont, Inc. had net sales of $19,880,000 and net income of $2,430,000. Total assets were $13,800,000 at January 1, 2019 and $16,200,000 at December 31, 2019. Belmont’s asset turnover for 2019 is: A) 1.405 B) 0.182 C) 0.196 D) 1.325 Answer: D Rationale: Asset turnover = Net sales / Average total assets. X = $19,880,000 / [($13,800,000 + $16,200,000) / 2] X = $19,880,000 / $15,000,000 X = 1.325 Topic: Asset Turnover Ratio LO: 7 Level of Difficulty: MEDIUM 100. Grove Company’s 2019 asset turnover was 3.0. The firm’s total assets were $8,750,000 at January 1, 2019 and $9,300,000 at December 31, 2019. Net sales for 2019 were: A) $26,286,000 B) $ 4,436,445 C) $22,460,000 D) $27,075,000 Answer: D Rationale: Asset turnover = Net sales / Average total assets. 3.0 = X / [($8,750,000 + $9,300,000) / 2] X = 3.0 x [($8,750,000 + $9,300,000) / 2] X = 3.0 x $9,025,000 X = $27,075,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-43
Topic: Asset Turnover Ratio LO: 7 Level of Difficulty: MEDIUM 101. Tiffany Company’s 2019 asset turnover was 3.0. The firm’s total assets were $10,000,000 at January 1, 2019 and $12,400,000 at December 31, 2019. Net sales for 2019 were: A) $25,200,000 B) $ 5,511,112 C) $27,900,000 D) $33,600,000 Answer: D Rationale: Asset turnover = Net sales / Average total assets. 3.0 = X / [($10,000,000 + $12,400,000) / 2] X = 3.0 x [($10,000,000 + $12,400,000) / 2] X = 3.0 x $11,200,000 X = $33,600,000 Topic: Package Purchases LO: 1 Level of Difficulty: EASY 102. Nutgum Company made a package purchase of three pieces of machinery for $48,000. The fair market values of the machinery were determined to be as follows: Machine A Machine B Machine C
$24,000 38,400 33,600
What cost should Nutgum record for Machine C? A) $12,000 B) $33,600 C) $19,200 D) $16,800 Answer: D Rationale: Asset Machine A Machine B Machine C Totals
Estimated Fair Market Value $24,000 38,400 33,600 $96,000
Percent of Total 25% 40% 35% 100%
Allocation of Purchase Price $12,000 (25% x $48,000) 19,200 (40% x $48,000) 16,800 (35% x $48,000) $48,000
©Cambridge Business Publishers, 2020 9-44
Financial Accounting for Undergraduates, 4th Edition
Topic: Package Purchases LO: 1 Level of Difficulty: EASY 103. Taffy Company made a package purchase of three pieces of machinery for $144,000. The fair market values of the machinery were determined to be as follows: Machine A Machine B Machine C
$ 72,000 115,200 100,800
What cost should Taffy Company record for Machine C? A) $ 36,000 B) $100,800 C) $ 57,600 D) $ 50,400 Answer: D Rationale: Asset Machine A Machine B Machine C Totals
Estimated Fair Market Value $72,000 115,200 100,800 $288,000
Percent of Total 25% 40% 35% 100%
Allocation of Purchase Price $36,000 (25% x $144,000) 57,600 (40% x $144,000) 50,400 (35% x $144,000) $144,000
Topic: Package Purchases LO: 1 Level of Difficulty: MEDIUM 104. Hubert Company purchased a property (including land and building). The company acquired the property in exchange for a 15-year mortgage for $1,800,000. Their insurance company appraised the components as follows: Land Building Parking lot
$400,000 1,400,000 200,000
What should be the cost basis for the building? A) $1,260,000 B) $1,400,000 C) $1,200,000 D) $1,244,444 Answer: A Rationale: Sometimes several long-lived assets are purchased as a package. The total package price is allocated among the acquired assets on the basis of their relative market or appraisal values. Asset Land Building Parking lot Totals
Estimated Fair Market Value $ 400,000 1,400,000 200,000 $2,000,000
Percent of Total 20% 70% 10% 100%
Allocation of Purchase Price $ 360,000 (20% x $1,800,000) 1,260,000 (70% x $1,800,000) 180,000 (10% x $1,800,000) $1,800,000 ©Cambridge Business Publishers, 2020
Test Bank, Chapter 9
9-45
Topic: Package Purchases LO: 1 Level of Difficulty: MEDIUM 105. Henry Company purchased a property (including land and building). The company acquired the property in exchange for a 15-year mortgage for $5,400,000. Their insurance company appraised the components as follows: Land Building Parking lot
$1,200,000 4,200,000 600,000
What should be the cost basis for the building? A) $3,780,000 B) $3,000,000 C) $3,600,000 D) $3,633,333 Answer: A Rationale: Asset Land Building Parking lot Totals
Estimated Fair Market Value $ 1,200,000 4,200,000 600,000 $6,000,000
Percent of Total 20% 70% 10% 100%
Allocation of Purchase Price $ 1,080,000 (20% x $5,400,000) 3,780,000 (70% x $5,400,000) 540,000 (10% x $5,400,000) $5,400,000
Topic: Straight-Line Depreciation LO: 2 Level of Difficulty: MEDIUM 106. Caesar Company bought a machine on January 1, 2019. The machine cost $144,000 and had an expected salvage value of $24,000. The life of the machine was estimated to be 5 years. Using straight line depreciation, the book value of the machine at the beginning of the third year would be: A) $120,000 B) $48,000 C) $72,000 D) $96,000 Answer: D Rationale: Annual depreciation = ($144,000 - $24,000) / 5 = $24,000 $144,000 – (2 x $24,000) = $96,000
©Cambridge Business Publishers, 2020 9-46
Financial Accounting for Undergraduates, 4th Edition
Topic: Straight-Line Depreciation LO: 2 Level of Difficulty: MEDIUM 107. Apple Company bought a machine on January 1, 2019. The machine cost $432,000 and had an expected salvage value of $72,000. The life of the machine was estimated to be 5 years. Using straight line depreciation, the book value of the machine at the beginning of the third year would be: A) $360,000 B) $144,000 C) $216,000 D) $288,000 Answer: D Rationale: Annual depreciation = ($432,000 - $72,000) / 5 = $72,000 $432,000 – (2 x $72,000) = $288,000 Topic: Units-of-Production Depreciation Method LO: 2 Level of Difficulty: MEDIUM 108. Jafari Corporation purchased a truck at the beginning of 2019 for $180,000. The truck is estimated to have a salvage value of $6,000 and a useful life of 240,000 miles. It was driven 36,000 miles in 2019 and 64,000 miles in 2020. What is the book value of the truck on December 31, 2020? A) $111,600 B) $ 84,000 C) $107,500 D) $ 60,000 Answer: C Rationale: Depreciation per unit = ($180,000 - $6,000) / 240,000 = $0.725 per mile $0.725 x (36,000 + 64,000) = $72,500 $180,000 - $72,500 = $107,500 Topic: Units-of-Production Depreciation Method LO: 2 Level of Difficulty: MEDIUM 109. Arabia Corporation purchased a truck at the beginning of 2019 for $540,000. The truck is estimated to have a salvage value of $18,000 and a useful life of 480,000 miles. It was driven 72,000 miles in 2019 and 128,000 miles in 2020. What is the book value of the truck on December 31, 2020? A) $334,800 B) $252,000 C) $322,500 D) $180,000 Answer: C Rationale: Depreciation per unit = ($540,000 - $18,000) / 480,000 = $1.0875 per mile $1.0875 x (72,000 + 128,000) = $217,500 $540,000 - $217,500 = $322,500 ©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-47
Topic: Declining-Balance Depreciation Method LO: 2 Level of Difficulty: DIFFICULT 110. On April 30, 2019, Macy Products purchased machinery for $132,000. The useful life of this machinery is estimated at 5 years, with a $32,000 residual value. The company uses the doubledeclining-balance method. Depreciation expense for the fiscal year ending on December 31, 2020 will be: A) $31,680 B) $36,800 C) $42,134 D) $38,720 Answer: D Rationale: $132,000 x 2/5 x 8/12 = $35,200 ($132,000 - $35,200) x 2/5 = $38,720 Topic: Declining-Balance Depreciation Method LO: 2 Level of Difficulty: DIFFICULT 111. On April 30, 2019, Penny Products purchased machinery for 396,000. The useful life of this machinery is estimated at 5 years, with a $96,000 residual value. The company uses the doubledeclining-balance method. Depreciation expense for the fiscal year ending on December 31, 2020 will be: A) $ 95,040 B) $110,400 C) $126,400 D) $116,160 Answer: D Rationale: $396,000 x 2/5 x 8/12 = $105,600 ($396,000 - $105,600) x 2/5 = $116,160 Topic: Declining-Balance Depreciation Method LO: 2 Level of Difficulty: DIFFICULT 112. On April 1, 2019, Lake Co. purchased machinery for $240,000. Salvage value was estimated to be $10,000. The machinery will be depreciated over ten years using the double-declining balance method. If depreciation is computed on the basis of the nearest full month, determine the depreciation expense for the period January 1 thru December 31, 2020 on this machinery. A) $41,600 B) $40,800 C) $41,400 D) $41,866 Answer: B Rationale: $240,000 x 2/10 x 9/12 = $36,000 ($240,000 - $36,000) x 2/10 = $40,800 ©Cambridge Business Publishers, 2020 9-48
Financial Accounting for Undergraduates, 4th Edition
Topic: Declining-Balance Depreciation Method LO: 2 Level of Difficulty: MEDIUM 113. Paden City Company purchased a new van for floral deliveries on January 1, 2019. The van cost $108,000 with an estimated life of 5 years and $12,000 salvage value at the end of its useful life. The double-declining-balance method of depreciation will be used. What is the balance of the Accumulated Depreciation account at the end of 2020? A) $43,200 B) $25,920 C) $57,600 D) $69,120 Answer: D Rationale: $108,000 x 2/5 = $43,200 ($108,000 - $43,200) x 2/5 = $25,920 $43,200 + $25,920 = $69,120 Topic: Declining-Balance Depreciation Method LO: 2 Level of Difficulty: MEDIUM 114. Durham Company purchased a new van for floral deliveries on January 1, 2019. The van cost $84,000 with an estimated life of 5 years and $10,000 salvage value at the end of its useful life. The double-declining-balance method of depreciation will be used. What is the balance of the Accumulated Depreciation account at the end of 2020? A) $33,600 B) $20,160 C) $16,800 D) $53,760 Answer: D Rationale: $84,000 x 2/5 = $33,600 ($84,000 - $33,600) x 2/5 = $20,160 $33,600 + 20,160 = $53,760
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-49
Topic: Declining-Balance Depreciation Method LO: 2 Level of Difficulty: MEDIUM 115. On January 1, 2018, Beast Company acquired equipment for $360,000. The estimated life of the equipment is 5 years or 20,000 hours. The estimated residual value is $60,000. What is the amount of depreciation expense for 2020, if the company uses the double-decliningbalance method of depreciation? A) $77,760 B) $51,840 C) $43,200 D) $86,400 Answer: B Rationale: $360,000 x 2/5 = $144,000 ($360,000 - $144,000) x 2/5 = $86,400 ($216,000 - $86,400) x 2/5 = $51,840 Topic: Declining-Balance Depreciation Method LO: 2 Level of Difficulty: MEDIUM 116. On January 1, 2019, Sabrina Company acquired equipment for $480,000. The estimated life of the equipment is 5 years or 20,000 hours. The estimated residual value is $80,000. What is the amount of depreciation expense for 2020, if the company uses the double-decliningbalance method of depreciation? A) $103,680 B) $ 69,120 C) $ 57,600 D) $115,200 Answer: B Rationale: $480,000 x 2/5 = $192,000 ($480,000 - $192,000) x 2/5 = $115,200 ($288,000 - $115,200) x 2/5 = $69,120
©Cambridge Business Publishers, 2020 9-50
Financial Accounting for Undergraduates, 4th Edition
Topic: Declining-Balance Depreciation Method LO: 2 Level of Difficulty: MEDIUM 117. Gold Star Company purchased a machine on January 1, 2019 for $120,000, with a 5-year life, and a $12,000 residual life. Compute the book value of the machine on December 31, 2021 if the company uses the doubledeclining balance method of depreciation. A) $20,000 B) $25,920 C) $21,600 D) $48,000 Answer: B Rationale: $120,000 x 2/5 = $48,000 ($120,000 - $48,000) x 2/5 = $28,800 ($72,000 - $28,800) x 2/5 = $17,280 $120,000 - ($48,000 + $28,800 + $17,280) = $25,920 Topic: Declining-Balance Depreciation Method LO: 2 Level of Difficulty: MEDIUM 118. Golden Dollar Company purchased a machine on January 1, 2019 for $360,000, with a 5-year life, and a $36,000 residual life. If Compute the book value of the machine on December 31, 2021 if the company uses the doubledeclining balance method of depreciation. A) $ 60,000 B) $ 77,760 C) $ 64,800 D) $144,000 Answer: B Rationale: $360,000 x 2/5 = $144,000 ($360,000 - $144,000) x 2/5 = $86,400 ($216,000 - $86,400) x 2/5 = $51,840 $360,000 - ($144,000 + $86,400 + $51,840) = $77,760
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-51
Topic: Declining-Balance Depreciation Method LO: 2 Level of Difficulty: DIFFICULT 119. Gold Stat Company purchased a machine on January 1, 2019 for $120,000, with a 5-year life, and a $12,000 residual life. If the company uses the double-declining balance method of depreciation, compute the depreciation expense for the year ended December 31, 2023. A) $15,554 B) $12,000 C) $ 3,552 D) $ 6,220 Answer: C Rationale: Year of Useful Life 2019 2020 2021 2022 2023
Beginning Accumulated Depreciation $ 0 $ 48,000 $ 76,800 $ 94,080 $104,448
Acquisition Cost $120,000 $120,000 $120,000 $120,000 $120,000
Beginning Book Value $120,000 $ 72,000 $ 43,200 $ 25,920 $ 15,552
x x x x
Twice Straight-line Percentage 40% 40% 40% 40% (exceeds limit)*
= = = =
Annual Depreciation Expense $48,000 $28,800 $17,280 $10,368 $ 3,552
* In the fifth year that the depreciation expense is only $3,552, the amount needed to reduce the asset’s book value to its estimated salvage value of $12,000. Assets are not depreciated below their estimated salvage value.
Topic: Declining-Balance Depreciation Method LO: 2 Level of Difficulty: DIFFICULT 120. Golden Dollar Company purchased a machine on January 1, 2019 for $360,000, with a 5-year life, and a $36,000 residual life. If the company uses the double-declining balance method of depreciation, compute the depreciation expense for the year ended December 31, 2023. A) $46,662 B) $36,000 C) $10,656 D) $18,660 Answer: C Rationale: Year of Useful Life
Acquisition Cost
Beginning Accumulated Depreciation
Beginning Book Value
2019 2020
Twice Straight-line Percentage
$360,000
$
0
$360,000
x
40%
=
$144,000
$360,000
$ 144,000
$216,000
x
40%
=
$ 86,400
2021
$360,000
$230,400
$129,600
x
40%
=
$ 51,840
2022
$360,000
$282,240
$ 77,760
x
40%
=
$ 31,104
2023
$360,000
$313,344
$ 46,656
(exceeds limit)*
Annual Depreciation Expense
$ 10,656
* In the fifth year that the depreciation expense is only $10,656, the amount needed to reduce the asset’s book value to its estimated salvage value of $36,000. Assets are not depreciated below their estimated salvage value. ©Cambridge Business Publishers, 2020 9-52
Financial Accounting for Undergraduates, 4th Edition
Topic: Depreciation Estimate Changes LO: 2 Level of Difficulty: MEDIUM 121. Joy Machinery acquired a new machine on January 1, 2017 at a cost of $100,000, which was estimated to have a useful life of 10 years, and a salvage value of $40,000. Straight-line depreciation was used. On January 1, 2022, management decided that the estimate of useful life had been too long and that the machinery would have to be retired after two more years, (that is, at the end of the eighth year of service), but would retain its original salvage value. Under this revised estimate, calculate the depreciation expense for the seventh year of use. A) $20,000 B) $12,000 C) $10,000 D) $12,500 Answer: B Rationale: Annual depreciation = ($100,000 - $40,000) / 10 = $6,000 Original acquisition cost Depreciation recorded (6 years @ $6,000) Book value at start of Year 7 Less salvage value Revised remaining depreciable cost
$100,000 (36,000) $ 64,000 (40,000) $ 24,000
Revised depreciation for Years 7 and 8: $24,000 / 2 = $12,000 per year Topic: Depreciation Estimate Changes LO: 2 Level of Difficulty: MEDIUM 122. Swift Corporation purchased a depreciable asset for $1,170,000 on January 1, 2018. The estimated salvage value is $90,000, and the estimated useful life is 9 years. The straight-line method is used for depreciation. On January 1, 2021, Swift changed its estimates to a total remaining useful life of 8 years with a salvage value of $150,000. What is 2021 depreciation expense? A) $ 82,500 B) $120,000 C) $150,000 D) $180,000 Answer: A Rationale: Annual depreciation = ($1,170,000 - $90,000) / 9 = $120,000 Original acquisition cost Depreciation recorded (3 years @ $120,000) Book value at start of Year 4 Less revised salvage value Revised remaining depreciable cost
$1,170,000 (360,000) $810,000 (150,000) $660,000
Revised depreciation for Years 4 – 11: $660,000 / 8 = $82,500 per year
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-53
Topic: Depreciation Estimate Changes LO: 2 Level of Difficulty: MEDIUM 123. Tidy Corporation purchased a depreciable asset for $1,560,000 on January 1, 2018. The estimated salvage value is $120,000, and the estimated useful life is 9 years. The straight-line method is used for depreciation. On January 1, 2021, Tidy changed its estimates to a total remaining useful life of 8 years with a salvage value of $200,000. What is 2018 depreciation expense? A) $110,000 B) $160,000 C) $200,000 D) $240,000 Answer: A Rationale: Annual depreciation = ($1,560,000 - $120,000) / 9 = $160,000 Original acquisition cost Depreciation recorded (3 years @ $160,000) Book value at start of Year 4 Less revised salvage value Revised remaining depreciable cost
$1,560,000 (480,000) $1,080,000 (200,000) $ 880,000
Revised depreciation for Years 4 – 11: $880,000 / 8 = $110,000 per year Topic: Depreciation Estimate Changes LO: 2 Level of Difficulty: MEDIUM 124. Equipment costing $120,000 with a salvage value of $12,000 and an estimated life of 8 years has been depreciated by Davey Company using the straight-line method for 2 years. Assuming a revised estimated total life of 6 years, and no change in the salvage value, determine the depreciation expense for Year 3. A) $20,250 B) $ 8,001 C) $ 9,000 D) $64,000 Answer: A Rationale: Annual depreciation = ($120,000 - $12,000) / 8 = $13,500 Original acquisition cost Depreciation recorded (2 years @ $13,500) Book value at start of Year 3 Less salvage value Revised remaining depreciable cost
$120,000 (27,000) $93,000 (12,000) $81,000
Revised depreciation for Years 3 – 6: $81,000 / 4 = $20,250 per year
©Cambridge Business Publishers, 2020 9-54
Financial Accounting for Undergraduates, 4th Edition
Topic: Depreciation Estimate Changes LO: 2 Level of Difficulty: MEDIUM 125. Fantasyland Company purchased equipment with a cost of $190,000, with an estimated residual value of $10,000, and an estimated life of 15 years. After 5 full years of recording depreciation by the straight-line method, it was determined that due to obsolescence, the equipment’s useful life should be reduced by 5 years and the residual value changed to zero. The depreciation expense for Year 6 is: A) $11,000 B) $22,000 C) $20,000 D) $26,000 Answer: D Rationale: Annual depreciation ($190,000 - $10,000) / 15 = $12,000 Original acquisition cost Depreciation recorded (5 years @ $12,000) Book value at start of Year 6 Less salvage value Revised remaining depreciable cost
$190,000 (60,000) $130,000 (0) $130,000
Revised depreciation for Years 6 – 10: $130,000 / 5 = $26,000 per year Topic: Depreciation Estimate Changes LO: 2 Level of Difficulty: MEDIUM 126. Rabbit Company purchased equipment with a cost of $570,000, with an estimated residual value of $30,000, and an estimated life of 15 years. After 5 full years of recording depreciation by the straight-line method, it was determined that due to obsolescence, the equipment’s useful life should be reduced by 5 years and the residual value changed to zero. The depreciation expense for year 6 is: A) $33,000 B) $66,000 C) $60,000 D) $78,000 Answer: D Rationale: Annual depreciation ($570,000 - $30,000) / 15 = $36,000 Original acquisition cost Depreciation recorded (5 years @ $36,000) Book value at start of Year 6 Less salvage value Revised remaining depreciable cost
$570,000 (180,000) $390,000 (0) $390,000
Revised depreciation for Years 6 – 10: $390,000 / 5 = $78,000 per year
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-55
Topic: Depreciation Estimate Changes LO: 2 Level of Difficulty: MEDIUM 127. A company purchased a computer on January 1, 2019 for $40,000 cash. The computer is estimated to have a 5 year useful life, and no salvage value. On January 1, 2020, due to obsolescence, the computer is estimated to have only 2 years of remaining useful life, and the estimated salvage value after the 2 remaining years will be $4,000. Assuming straight line depreciation, the amount of depreciation expense to be recorded on December 31, 2020 will be: A) $16,000 B) $12,000 C) $20,000 D) $14,000 Answer: D Rationale: Annual depreciation = ($40,000 - $0) / 5 = $8,000 Original acquisition cost Depreciation recorded (1 year @ $8,000) Book value at start of Year 2 Less salvage value Revised remaining depreciable cost
$40,000 (8,000) $32,000 (4,000) $28,000
Revised depreciation for Years 2 and 3: $28,000 / 2 = $14,000 per year Topic: Sale of Plant Assets LO: 4 Level of Difficulty: MEDIUM 128. On January 1, 2018, Frontier Corporation purchased for $474,000, equipment having a useful life of ten years and an estimated salvage value of $24,000. Adventure has recorded depreciation of the equipment on the straight-line method. On December 31, 2025, the equipment was sold for $84,000. As a result of this sale, Frontier should recognize: A) $-0B) A gain of $40,800 C) A loss of $30,000 D) A loss of $84,000 Answer: C Rationale: ($474,000 - $24,000) / 10 = $45,000 $474,000 – ($45,000 x 8) = $114,000 book value $84,000 - $114,000 = $(30,000) loss
©Cambridge Business Publishers, 2020 9-56
Financial Accounting for Undergraduates, 4th Edition
Topic: Sale of Plant Assets LO: 4 Level of Difficulty: MEDIUM 129. Fashion Company sells a plant asset that originally cost $360,000 for $120,000 on December 31, 2019. The accumulated depreciation account had a balance of $180,000 after the current year's depreciation had been recorded. The company should recognize a: A) $120,000 loss on disposal B) $ 60,000 loss on disposal C) $ 60,000 gain on disposal D) $120,000 gain on disposal Answer: B Rationale: $360,000 - $180,000 = $180,000 book value $120,000 - $180,000 = $(60,000) loss Topic: Sale of Plant Assets LO: 4 Level of Difficulty: MEDIUM 130. Bread Company sells a plant asset that originally cost $1,080,000 for $360,000 on December 31, 2019. The accumulated depreciation account had a balance of $540,000 after the current year's depreciation had been recorded. The company should recognize a: A) $360,000 loss on disposal B) $180,000 loss on disposal C) $180,000 gain on disposal D) $360,000 gain on disposal Answer: B Rationale: $1,080,000 - $540,000 = $540,000 book value $360,000 - $540,000 = $(180,000) loss
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-57
Topic: Sale of Plant Assets LO: 4 Level of Difficulty: DIFFICULT 131. On January 1, 2017, Alexis Company purchased a delivery truck for $60,000. They estimated the useful life of the truck to be 6 years, and the salvage value to be $12,000. On July 1, 2022, they sold the truck for a loss of $1,200. Assuming the company uses straight line depreciation, calculate the selling price of the truck. A) $10,500 B) $11,800 C) $14,800 D) $17,500 Answer: C Rationale: Accumulated depreciation = $60,000 - $12,000 / 6 = $8,000 x 5.5 years = $44,000 The journal entry to record the sale is: Cash Loss on sale of plant assets Accumulated depreciation—Delivery Truck Delivery Truck To record the sale of delivery truck.
X 1,200 44,000 60,000
X = $60,000 - $44,000 - $1,200 X = $14,800 Cash/Selling price Topic: Sale of Plant Assets LO: 4 Level of Difficulty: DIFFICULT 132. On January 1, 2017, Panda Company purchased a delivery truck for $105,000. They estimated the useful life of the truck to be 6 years, and the salvage value to be $19,500. On July 1, 2022, they sold the truck for a loss of $2,700. Assuming the company uses straight line depreciation, calculate the selling price of the truck. A) $22,125 B) $24,825 C) $23,925 D) $33,750 Answer: C Rationale: Accumulated depreciation = $105,000 - $19,500 / 6 = $14,250 x 5.5 years = $78,375 The journal entry to record the sale is: Cash Loss on sale of plant assets Accumulated depreciation—Delivery Truck Delivery Truck To record the sale of delivery truck.
X 2,700 78,375 105,000
X = $105,000 - $78,375 - $2,700 X = $23,925 Cash/Selling price
©Cambridge Business Publishers, 2020 9-58
Financial Accounting for Undergraduates, 4th Edition
Topic: Sale of Plant Assets LO: 4 Level of Difficulty: MEDIUM 133. A truck that cost Starch Company $36,000, was estimated to have a salvage value of $8,000, and was expected to last 10 years. At the end of 5 years of use (assume straight line depreciation), it was sold for $30,000, the journal entry to record the sale will involve a: A) Debit to Accumulated Depreciation - Truck for $14,000 B) Credit to Truck for $22,000 C) Debit to Loss on Sale for $8,000 D) Credit to Gain on Sale for $16,000 Answer: A Rationale: The journal entry to record the sale is: Cash Accumulated depreciation—Delivery Truck* Delivery Truck Gain on sale of plant assets To record the sale of delivery truck for $30,000.
30,000 14,000 36,000 8,000
*($36,000 - $8,000) / 10 = $2,800 x 5 years = $14,000
Topic: Sale of Plant Assets LO: 4 Level of Difficulty: MEDIUM 134. A truck that cost Owle Company $108,000, was estimated to have a salvage value of $24,000, and was expected to last 10 years. At the end of 5 years of use (assume straight line depreciation), it was sold for $90,000, the journal entry to record the sale will involve a: A) Debit to Accumulated Depreciation - Truck for $42,000 B) Credit to Truck for $66,000 C) Debit to Loss on Sale for $24,000 D) Credit to Gain on Sale for $48,000 Answer: A Rationale: The journal entry to record the sale is: Cash Accumulated depreciation—Delivery Truck* Delivery Truck Gain on sale of plant assets To record the sale of delivery truck for $90,000.
90,000 42,000 108,000 24,000
*($108,000 - $24,000) / 10 = $8,400 x 5 years = $42,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-59
Topic: Sale of Plant Assets LO: 4 Level of Difficulty: DIFFICULT 135. Portland Company purchased a machine on January 1, 2018 for $24,000. The company estimates that the machine will have a $2,000 salvage value at the end of its 10 year useful life. On September 30, 2022 the machine was sold for a gain of $1,750. What must have been the selling price of the machine? A) $14,350 B) $11,800 C) $15,300 D) $17,500 Answer: C Rationale: Accumulated depreciation: ($24,000 - $2,000) / 10 = $2,200 X 4.75 years = $10,450 The journal entry to record the sale is: Cash Accumulated depreciation—Machine Gain on sale of Machine Machine To record the sale of machine.
X 10,450 1,750 24,000
X = $24,000 - $10,450 + $1,750 X = $15,300 Topic: Sale of Plant Assets LO: 4 Level of Difficulty: DIFFICULT 136. Rite Company purchased a machine on January 1, 2018 for $72,000. The company estimates that the machine will have a $6,000 salvage value at the end of its 10 year useful life. On September 30, 2022 the machine was sold for a gain of $5,250. What must have been the selling price of the machine? A) $43,050 B) $35,400 C) $45,900 D) $52,500 Answer: C Rationale: Accumulated depreciation: ($72,000 - $6,000) / 10 = $6,600 X 4.75 years = $31,350 The journal entry to record the sale is: Cash Accumulated depreciation—Machine Gain on sale of Machine Machine To record the sale of machine.
X 31,350 5,250 72,000
X = $72,000 - $31,350 + $5,250 X = $45,900
©Cambridge Business Publishers, 2020 9-60
Financial Accounting for Undergraduates, 4th Edition
Topic: Sale of Plant Assets LO: 4 Level of Difficulty: DIFFICULT 137. On January 1, 2019, Chace Instruments sold a depreciable asset for cash of $400,000 and recognized a gain of $60,000. The asset had been purchased on January 1, 2014 with an estimated useful life of 10 years, and no salvage value. The asset was depreciated using the straight-line method. What must have been the original cost of the asset? A) $660,000 B) $800,000 C) $680,000 D) $920,000 Answer: C Rationale: Annual depreciation = (X - $0) / 10 = (X / 10) Accumulated Depreciation = 5 years x (X / 10) = (5X / 10) = X / 2 (X = Original cost of asset) The journal entry to record the sale is: Cash Accumulated depreciation—Asset Gain on sale of Asset Asset To record the sale of the asset
400,000 X/2 60,000 X
Solve for X (original cost of asset): $400,000 + X/2 = $60,000 + X X - X/2 = $400,000 - $60,000 X/2 = $340,000 X = $680,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-61
Topic: Sale of Plant Assets LO: 4 Level of Difficulty: DIFFICULT 138. On January 1, 2019, Philadelphia Instruments sold a depreciable asset for cash of $1,200,000 and recognized a gain of $180,000. The asset had been purchased on January 1, 2014 with an estimated useful life of 10 years, and no salvage value. The asset was depreciated using the straight-line method. What must have been the original cost of the asset? A) $1,980,000 B) $2,400,000 C) $2,040,000 D) $2,750,000 Answer: C Rationale: Annual depreciation = (X - $0) / 10 = (X / 10) Accumulated Depreciation = 5 years x (X / 10) = (5X / 10) = X / 2 (X = Original cost of asset) The journal entry to record the sale is: Cash Accumulated depreciation—Asset Gain on sale of Asset Asset To record the sale of the asset
1,200,000 X/2 180,000 X
Solve for X (original cost of asset): $1,200,000 + X/2 = $180,000 + X X - X/2 = $1,200,000 - $180,000 X/2 = $1,020,000 X = $2,040,000 Topic: Natural Resources LO: 5 Level of Difficulty: MEDIUM 139. On April 1, 2019, Justin Company purchased a copper mine at a cost of $28,000,000. The mine was estimated to contain 1,000,000 tons of ore and to have a residual value of $8,000,000 after mining operations are completed. During the year, 250,000 tons of ore were removed from the mine. On December 31, 2019, the book value of the mine is: A) $20,500,000 B) $23,000,000 C) $17,500,000 D) $14,000,000 Answer: B Rationale: Depletion per unit = ($28,000,000 - $8,000,000) / 1,000,000 tons = $20 per ton $20 x 250,000 = $5,000,000 depletion $28,000,000 - $5,000,000 = $23,000,000
©Cambridge Business Publishers, 2020 9-62
Financial Accounting for Undergraduates, 4th Edition
Topic: Natural Resources LO: 5 Level of Difficulty: MEDIUM 140. On April 1, 2019, Leon Company purchased a copper mine at a cost of $84,000,000. The mine was estimated to contain 4,000,000 tons of ore and to have a residual value of $24,000,000 after mining operations are completed. During the year, 750,000 tons of ore were removed from the mine. On December 31, 2019, the book value of the mine is: A) $90,000,000 B) $72,750,000 C) $52,500,000 D) $48,750,000 Answer: B Rationale: Depletion per unit = ($84,000,000 - $24,000,000) / 4,000,000 tons = $15 per ton $15 x 750,000 = $11,250,000 depletion $84,000,000 - $11,250,000 = $72,750,000 Topic: Natural Resources LO: 5 Level of Difficulty: EASY 141. On June 1, 2019, Martin Products purchased a silver mine for $3,000,000. Costs to further explore and develop the mine totaled $1,500,000. The value of the mine once mining operations are completed is expected to total $1,000,000. Martin Products expects to extract 1,250,000 tons of ore from the mine. During 2019, 150,000 tons of ore were extracted. 80,000 tons were sold to another company for further processing. What is the depletion rate for Martin Products? A) $3.60 per ton B) $2.80 per ton C) $2.40 per ton D) $1.60 per ton Answer: B Rationale: Depletion per unit = ($3,000,000 +1,500,000-1,000,000) / 1,250,000 tons = $2.80
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-63
Topic: Natural Resources LO: 5 Level of Difficulty: MEDIUM 142. On June 1, 2019, Martin Products purchased a silver mine for $3,000,000. Costs to further explore and develop the mine totaled $1,500,000. The value of the mine once mining operations are completed is expected to total $1,000,000. Martin Products expects to extract 1,250,000 tons of ore from the mine. During 2019, 150,000 tons of ore were extracted. 80,000 tons were sold to another company for further processing. What is the balance in the Inventory – Silver Ore account at December 31, 2019? A) $252,000 B) $420,000 C) $112,000 D) $196,000 Answer: D Rationale: Depletion per unit = ($3,000,000 +1,500,000-1,000,000) / 1,250,000 tons = $2.80. inventory = 150,000 – 80,000 = 70,000. 70,000 * $2.80 = $196,000.
Tons in
©Cambridge Business Publishers, 2020 9-64
Financial Accounting for Undergraduates, 4th Edition
Exercises Topic: Gains and Losses on Asset Sales LO: 4 1. Holmes Packaging sold a machine for $49,500. The company bought this machine for $120,000 seven years ago and was depreciating it on a straight-line basis over ten years to a $12,000 salvage value. What is the gain (loss) that Holmes Packaging should report? Answer: Annual depreciation = (Acquisition cost - Salvage value) / Estimated useful life X = ($120,000 - $12,000) / 10 = $10,800 per year Accumulated Depreciation 7 years x $10,800 = $75,600 Book value = Historical cost – Accumulation depreciation X = $120,000 –$75,600 X = $44,400 When an asset is sold, the company recognizes a gain (loss) equal to the difference between selling price and its carrying value reported on the balance sheet. Gain (loss) on sale = Selling price of asset – Net book value X= $49,500– $44,400 X = $5,100 gain Topic: Asset Turnover LO: 7 2. Determine the 2019 asset turnover for Physics Laboratories using the financial statement information below:
Total assets Net sales Cost of goods sold Net income
2019 $840,400 5,005,000 2,800,000 1,584,000
2018 $761,800 4,800,000 3,000,000 1,100,000
Answer: Asset turnover = Net sales/Average total assets X = $5,005,000 / [($840,400 + $761,800) / 2] X = 6.25
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-65
Topic: Depreciation Expense ‒ Straight-Line Method LO: 2 3. Vermont Industries, a clothing mail-order retailer, purchased a new industrial sewing machine for $156,000. This machine is expected to operate for 5 years after which it will be sold for salvage value estimated to be $9,000. What is the yearly depreciation expense under the straight-line method? Answer: Depreciation expense = Depreciation base x Depreciation rate Depreciation base = Cost – salvage value X = $156,000 – $9,000 X = $147,000 Depreciation rate = 1/useful life X = 1/5 = 20% Depreciation expense = $147,000 × 20% X = $29,400/year Topic: Straight-Line and Double-Declining-Balance Depreciation LO: 2 4. Perfect Pastries buys a display case for her bakery business on January 1, 2019. The case cost $36,000 and is expected to be used for ten years. At the end of the ten years it is expected that the case can be sold for $4,000. Compute the depreciation expense for the third year (2021) using both straight-line and doubledeclining-balance depreciation methods. Answer: Straight-line expense per year = (Acquisition cost - Salvage value) / Estimated useful life X = ($36,000 – $4,000) / 10 X= $3,200 Depreciation per year Straight-line depreciation rate = 100 percent / estimated useful life X= 100% / 10 X = 10% Double-declining-balance rate = straight-line rate x 2 X= 10% × 2 X = 20%: Year 2019 2020 2021
Beginning Book Value $36,000 28,800 23,040
Depreciation Expense $7,200 5,760 4,608
Accumulated Depreciation $7,200 12,960 17,568
Ending Book Value $28,800 23,040 18,432
©Cambridge Business Publishers, 2020 9-66
Financial Accounting for Undergraduates, 4th Edition
Topic: Double-Declining-Balance Method LO: 2 5. Kaitlin Block Publishing, a textbook publishing firm, purchased a new machine for $120,000. This machine is expected to operate for 10 years, after which it will be sold for salvage value (estimated to be $9,000). How much will the first and second year’s depreciation expense be under the double-decliningbalance method? Answer: Double-declining-balance rate = straight-line rate x 2 X = 100%/10 x 2 X= 20% Year 1: $120,000 x 0.20 = $24,000 Year 2: $96,000 x 0.20 = $19,200 Beginning Book Value $120,000 96,000
Year 1 2
Depreciation Expense $24,000 19,200
Accumulated Depreciation $ 24,000 43,200
Ending Book Value $96,000 76,800
Topic: Capitalize or Expense Tangible and Intangible Assets LO: 3, 5 6. For each of the following items, indicate whether the costs should be capitalized or expensed immediately. 1. 2. 3. 4.
Purchased a patent for $32,000. Paid $715,000 to overhaul a drilling rig. The overhaul will extend the useful life by 3 years. Paid $1,600 for routine maintenance and lubrication of a tractor. Paid $19,000 to install new equipment in the production line that will “super-cool” the product and allow for faster shipping of fresher merchandise.
Answer: 1. Capitalize. This is a purchased intangible asset. 2. Capitalize. The useful life is extended. 3. Expense.
This is a routine expense for normal wear and tear.
4. Capitalize. The new equipment enhances the product line.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-67
Topic: Gains and Losses on Asset Sales LO: 4 7. Scheuller Company had machinery that had originally cost $246,000. The machinery was three years old and had been depreciated using the double-declining-balance method, over a five-year useful life with a residual value of $18,000. Answer each of the following independent questions: Required: a. If the company sold the machinery for $105,000, prepare a journal entry to record the sale. b. If the company sold the machinery for $48,000, prepare a journal entry to record the sale. Answer: Twice the straight-line rate = 1/5 x 2 = 40% Year 1: $246,000 x 0.40 = Year 2: ($246,000 ‒ $98,400) × 0.40 = Year 3: ($246,000 ‒ $98,400 ‒ $59,040) × 0.40 = Total accumulated depreciation
$ 98,400 59,040 35,424 $192,864
a. Cash Accumulated depreciation Machinery Gain on sale of machinery
105,000 192,864
b. Cash Accumulated depreciation Loss on sale of machinery Machinery
48,000 192,864 5,136
246,000 51,864
246,000
Topic: Asset Turnover LO: 7 8. The following information is reported for the high-tech manufacturing companies, Storm Company and Cloud Industries (amounts in millions):
2019 2018
Storm Company Sales Total Assets $68,000 $16,400 $52,000 $12,000
Cloud Industries Sales Total Assets $70,000 $36,000 $76,000 $38,000
Compute the 2019 asset turnover for both companies. Comment on any differences you observe. Answer: Asset turnover = Net sales/Average total assets
Storm Company Cloud Industries
Asset turnover rates for 2019 $68,000 / [($16,400 + $12,000) / 2] = 4.79 $70,000 / [($36,000 + $38,000) / 2] = 1.89
Storm turns its assets over more quickly than does Cloud. Storm generates more dollars of revenue for each dollar of assets.
©Cambridge Business Publishers, 2020 9-68
Financial Accounting for Undergraduates, 4th Edition
Topic: Package Purchase and Double-Declining Depreciation LO: 1, 2 9. On January 1, 2019, Ginger Company purchased land and a building for a total cash price of $6,900,000. Individually, the land was appraised at $2,250,000 and the building at $5,250,000. The buildings estimated useful life is 25 years and its estimated salvage value is $300,000. Required: a. Prepare the journal entry to record the purchase of land and building on January 1, 2019. b. What is the 2019 depreciation expense on the building, assuming that double declining-balance depreciation is used? Answer: a. 2019 Jan. 1
Land Building
2,070,000 4,830,000 Cash
6,900,000
Land: ($2,250,000 / $7,500,000) x ($6,900,000) = $2,070,000; Building: ($5,250,000 / $7,500,000) x ($6,900,000) = $4,830,000. b. Double-declining balance rate: (1/25) x (2) = 8%. 2019 depreciation expense: 8% x $4,830,000 = $386,400. Topic: Depreciation Calculations LO: 2 10. On January 1, 2019, Chelsea Company purchased for $180,000 a new machine that has an estimated useful life of ten years (or 550,000 stamping operations), after which the expected salvage value is $10,000. Under each of the following depreciation methods, calculate the depreciation expense for 2019. Required: a. Straight-line depreciation b. Double-declining balance depreciation c. Units-of-production depreciation, if 66,000 stamping operations were made in 2019 Answer: a. ($180,000 - $10,000) / 10 years = $17,000. b. 20% x $180,000 = $36,000. c.
[($180,000 - $10,000) / 550,000] x 66,000 = $20,400.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-69
Topic: Depreciation Calculations LO: 2 11. On January 1, 2019, WV Hills Company purchased for $180,000 a new machine that has an estimated useful life of eight years (or 500,000 stamping operations), after which the expected salvage value is $7,200. Under each of the following depreciation methods, calculate the depreciation expense for 2020. Required: a. Straight-line depreciation b. Double-declining balance depreciation c. Units-of-production depreciation, if 70,000 stamping operations were made in 2020 Answer: a. ($180,000 - $7,200) / 8 years = $21,600 b. 25%* x ($180,000 - $45,000**) = $33,750 * (100% / 8 x 2) = 25% ** 25% x $180,000 = $45,000 DDB depreciation for 2019
c.
[($180,000 - $7,200) / 500,000] x 70,000 = $24,192
Topic: Depreciation Calculations LO: 2 12. On January 1, 2019, Wild Blue Company purchased for $400,000 a new machine that has an estimated useful life of four years (or 660,000 cutting operations), after which the expected salvage value is $40,000. Under each of the following depreciation methods, calculate the depreciation expense for 2019. Required: a. Straight-line depreciation b. Double-declining balance depreciation c. Units-of-production depreciation, if 99,000 cutting operations were made in 2019 Answer: a. ($400,000 - $40,000) / 4 years = $90,000 b. 50%* x $400,000 = $200,000 * (100% / 4 x 2) = 50%
c.
[($400,000 - $40,000) / 660,000] x 99,000 = $54,000
©Cambridge Business Publishers, 2020 9-70
Financial Accounting for Undergraduates, 4th Edition
Topic: Depreciation Calculations LO: 2 13. On July 1, 2019, Wyoming Systems Company purchased for $81,000 a new machine that has an estimated useful life of six years (or 300,000 cutting operations), after which the expected salvage value is $5,400. Under each of the following depreciation methods, calculate the depreciation expense for 2020. Required: a. Straight-line depreciation b. Double declining-balance depreciation c. Units-of-production depreciation, if 55,000 cutting operations were made in 2020 Answer: a. ($81,000 - $5,400) / 6 years = $12,600 b. 2019: (6/12) x (33-1/3%* x $81,000) = $13,500 2020: 33-1/3% x ($81,000 - $13,500) = $22,500 *(100% / 6 x 2) = 33 1/3%
c.
[($81,000 - $5,400) / 300,000] x 55,000 = $13,860
Topic: Intangible Assets LO: 5 14. Following is a numbered list of assets and the definitions of six assets. Place the number of the appropriate asset in the space to the left of its definition. (1) Copyright (2) Goodwill (3) Patent
(4) Trademark (5) Franchise
a.
The amount paid by one company in the acquisition of another company, above the amount that can be attributed to the identifiable net assets of the acquired company.
b.
Legal protection for an owner against the unauthorized reproduction of a specific written work, recorded work, or artwork.
c.
The exclusive and continuing right to use certain terms, names, or symbols, usually to identify a brand or family of products.
d.
An exclusive privilege granted an inventor to exclude others from making, using, or selling the invention.
e.
An exclusive right to operate or sell a specific brand of products in a given geographical area.
Answer: a. (2) Goodwill b. (1) Copyright c.
(4) Trademark
d. (3) Patent e. (5) Franchise ©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-71
Topic: Expenditures Related to Land and Buildings LO: 1 15. Evan Office Company purchased a land site for the purpose of constructing a new office building. Put an X in the appropriate column to show whether each of the following expenditures should be charged to Land, Building, Land Improvements, or some other account, respectively.
a.
Cost of land site on which an old building was located.
b.
Consultant’s fee paid to realtor who helped locate the site.
c.
Cost of tearing down old building.
d.
Architect’s fees on new building.
e.
Cost of construction insurance covering fire and other risks.
f.
Cost to tow truck that got mired in the mud during the construction of the building.
g.
Cost of paving parking lot for staff and visitors.
Land
Building
Land Improvements
Other Account
Land
Building
Land Improvements
Other Account
Answer:
a. b. c.
Cost of land site on which an old building was located.
X
Consultant’s fee paid to realtor who helped locate the site.
X
Cost of tearing down old building.
X
d.
Architect’s fees on new building.
X
e.
Cost of construction insurance covering fire and other risks.
X
f.
g.
Cost to tow truck that got mired in the mud during the construction of the building. Cost of paving parking lot for staff and visitors.
X X
©Cambridge Business Publishers, 2020 9-72
Financial Accounting for Undergraduates, 4th Edition
Topic: Revenue Expenditures vs. Capital Expenditures LO: 3 16. Place an X in the appropriate column to indicate whether the item listed is a capital expenditure or a revenue expenditure.
a.
Cost of a new desk for controller’s office.
b.
Cost of regular maintenance to building heating system.
c.
Cost of a new engine for a company truck.
d.
Cost of fixing a keyboard for a company computer.
e.
Cost of a new pencil holder (estimated useful life of 40 years) for desk of controller.
f.
Cost of installing air conditioning in company automobile used by sales manager
g.
Cost of annual window cleaning service.
Capital Expenditure
Revenue Expenditure
Capital Expenditure
Revenue Expenditure
Answer:
a.
Cost of a new desk for controller’s office.
b.
Cost of regular maintenance to building heating system.
X X
c.
Cost of a new engine for a company truck.
d.
Cost of fixing a keyboard for a company computer.
X
e.
Cost of a new pencil holder (estimated useful life of 40 years) for desk of controller.
X
f. g.
Cost of installing air conditioning in company automobile used by sales manager Cost of annual window cleaning service.
X
X X
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-73
Problems Topic: Change in Accounting Estimate LO: 2 1. On January 1, 2017, Airedale Company purchased new equipment for $1,125,000. The equipment had an estimated $90,000 salvage value at the end of its estimated ten-year useful life. Straight-line depreciation has been recorded. Before adjusting the accounts for 2022, Airedale Company reduces the useful life of the equipment by one year and decreases the salvage value to $67,500. Required: a. Calculate the 2022 depreciation expense. b. What is the equipment’s book value at the end of 2022 after recording the 2022 depreciation expense? Answer: a. Original asset cost $1,125,000 Depreciation already recorded: ($1,125,000 - $90,000) / 10 years = $130,500; $103,500 x 5 years = 517,500 Book value at start of sixth year 607,500 Revised salvage value 67,500 Revised remaining depreciation $540,000 Revised remaining useful life [(10-5) - 1]
4 years
Revised 2022 depreciation expense: $540,000 / 4 years =
$ 135,000
b. Machine (original cost) Less: Accumulated depreciation ($517,500 + $135,000) Book value at December 31, 2022
$1,125,000 652,500 $472,500
Topic: Change in Accounting Estimate LO: 2 2. On January 1, 2016, Chipmunk Company purchased new equipment for $440,000. The equipment had an estimated $40,000 salvage value at the end of its estimated ten-year useful life. Straight-line depreciation has been recorded. Before adjusting the accounts for 2022, Chipmunk extends the useful life of the equipment by four years and decreases the salvage value to $20,000. Required: a. Calculate the 2022 depreciation expense. b. What is the equipment’s book value at the end of 2022 after recording the 2022 depreciation expense?
©Cambridge Business Publishers, 2020 9-74
Financial Accounting for Undergraduates, 4th Edition
Answer: a. Original asset cost Depreciation already recorded: ($440,000 - $40,000) / 10 years = $40,000; $40,000 x 6 years = Book value at start of seventh year Revised salvage value Revised remaining depreciation
$440,000 240,000 $200,000 20,000 $ 180,000
Revised remaining useful life [(10-6) + 4]
8 years
Revised 2022 depreciation expense: $180,000 / 8 years =
$ 22,500
b. Machine (original cost) Less: Accumulated depreciation ($240,000 + $22,500) Book value at December 31, 2022
$440,000 262,500 $ 177,500
Topic: Gain/Loss on Asset Disposal LO: 4 3. Custom Fabrication Company has a machine that originally cost $201,000. Depreciation has been recorded for seven years using the straight-line method, with a $9,000 estimated salvage value at the end of an expected eight-year useful life. After recording depreciation at the end of the seventh year, Custom Fabrication disposes of the machine. For each of the following independent disposals of the machine, place the dollar amount of the recognized gain or loss in the appropriate column. If there is no recognized gain or loss, place a zero in each column. Gain
Loss
a. Sold machine for $9,000 cash. b. Sold machine for $60,000 cash. Answer:
a. Sold machine for $9,000 cash. b. Sold machine for $600,000 cash.
Sales Price $9,000 $60,000
-
Book Value $33,000 $33,000
Gain = =
Loss $24,000
$27,000
($201,000 - $9,000) / 8 = $24,000 annual depreciation $201,000 - (7 x $24,000) = $33,000 book value at date of disposal
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-75
Topic: Gain/Loss on Asset Disposal LO: 4 4. Mule Company has a machine that originally cost $90,000. Depreciation has been recorded for three years using the straight-line method, with a $10,000 estimated salvage value at the end of an expected ten-year useful life. After recording depreciation at the end of the third year, Horseshoe disposes of the machine. For each of the following independent disposals of the machine, place the dollar amount of the recognized gain or loss in the appropriate column. If there is no recognized gain or loss, place a zero in each column. Gain
Loss
a. Sold machine for $56,000 cash. b. Sold machine for $70,000 cash. Answer:
a. Sold machine for $56,000 cash. b. Sold machine for $70,000 cash.
Sales Price $56,000 $70,000
-
Book Value $66,000 $66,000
Gain = =
Loss $10,000
$4,000
($90,000 - $10,000) / 10 = $8,000 annual depreciation $90,000 - (3 x $8,000) = $66,000 book value at date of disposal Topic: Gain/Loss on Asset Disposal LO: 4 5. Seligman, Inc. has a computer that originally cost $46,200. Depreciation has been recorded for five years using the straight-line method, with a $4,200 estimated salvage value at the end of an expected seven-year life. After recording depreciation at the end of the fifth year, Seligman disposes of the computer. For each of the following independent disposals of the computer, place the dollar amount of the recognized gain or loss in the appropriate column. If there is no recognized gain or loss, place a zero in each column. Gain
Loss
a. The uninsured computer is stolen. b. The computer is destroyed by water damage; insurance settlement is $21,000. Answer: a. The uninsured computer is stolen. b. The computer is destroyed by water damage; insurance settlement is $21,000
Sales Price $0 $21,000
-
Book Value $16,200 $16,200
Gain = =
Loss $16,200
$4,800
($46,200 - $4,200) / 7 = $6,000 annual depreciation $46,200 - (5 x $6,000) = $16,200 book value at date of disposal ©Cambridge Business Publishers, 2020 9-76
Financial Accounting for Undergraduates, 4th Edition
Chapter 9 Accounting for Long-Lived and Intangible Assets Learning Objectives –Coverage by question True / False
Multiple Choice
Exercises
LO1 – Discuss the nature of plant assets and identify the accounting guidelines relating to their initial measurement.
1, 11-14, 32
21-33, 102-105
9, 15
LO2 – Discuss the nature of depreciation, illustrate three depreciation methods, and explain impairment losses.
2, 3, 5-7, 12, 15-19
1-5, 7-13, 17,18, 34-60, 106-127
3-5, 9-13
LO3 – Discuss the distinction between revenue expenditures and capital expenditures.
6, 20-22
3, 61-64
6, 16
LO4 – Explain and illustrate the accounting for disposals of plant assets.
4, 26-29
6, 14, 15, 73-90, 128-138
1, 7
LO5 – Discuss the nature of, and the accounting for, intangible assets and natural resources.
8-10, 12, 30, 31, 35
16, 19, 20, 91-93, 139-142
6, 14
LO6 – Illustrate the balance sheet presentation of plant assets and intangible assets. LO7 – Define the return on assets ratio and the asset turnover ratio and explain their use.
Problems
1, 2
3-5
94, 95
23-25, 33, 34
65-72, 96-101
2, 8
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-1
Chapter 9: Accounting for Long-Lived and Intangible Assets
True / False Topic: Capitalization of Assets LO: 1 1. Once amounts are debited to a plant asset account on the balance sheet, the cost is then allocated to an expense on the income statement as that asset is used in operations. Answer: True
Topic: Depreciation Assumptions LO: 2 2. Depreciation requires only two estimates—useful life and salvage value—both of which are specified by GAAP depending on the asset type. Answer: False Rationale: GAAP does not specify useful life and salvage value amounts. Managers must estimate these amounts based upon the time period that the asset is expected to generate resources for the company and a reasonable amount for which the asset can be sold at the end of its estimated life.
Topic: Changes in Accounting Estimates LO: 2 3. Changes in accounting estimates affect only the current and future periods’ income statements. Answer: True Rationale: Changes in accounting estimates require no cumulative effect adjustments or restatements of prior periods’ income statements. They are applied prospectively from the date of change.
Topic: Gains and Losses on Sales LO: 4 4. A sale of a plant asset at less than cost requires that a company recognize a loss in the income statement. Answer: False Rationale: Gains and losses are determined based on the selling price compared to the book value, not the cost.
Topic: Asset Impairment LO: 2 5. Impairment of long-term plant assets is determined by comparing the sum of expected future cash flows from the asset with the asset’s net book value. Answer: True Rationale: Impairment of long-term plant assets is determined by comparing the sum of expected future cash flows from the asset with its net book value. If the asset is deemed to be impaired, it is written down to its fair market value and the write-down is recorded as a loss on the income statement.
©Cambridge Business Publishers, 2020 9-2
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Depreciation LO: 2, 3 6. Depreciation is the recognition of the change in fair market value of a plant asset over time. Answer: False Rationale: Depreciation is the process of allocating the cost of plant assets to the accounting periods in which the assets provide benefits. Depreciation does not parallel market value.
Topic: Accelerated Depreciation LO: 2 7. One purpose of using accelerated depreciation for tax purposes is it reduces income taxes payable in the early years of life of a plant asset. Answer: True Rationale: Both a reduction of income and the company’s income tax liability are effects of accelerated depreciation in the early years of life.
Topic: R&D Costs LO: 5 8. R&D expense is treated as an operating expense and is not capitalized. Answer: True Rationale: Although the R&D assets are similar to regular plant assets, under GAAP, R&D costs are expensed.
Topic: IFRS LO: 5 9. Under IFRS, development costs can be capitalized as intangible assets when specific criteria are met. Answer: True Rationale: Under IFRS, only development costs can be capitalized as intangible assets when specific criteria are met. U.S. GAAP requires both research and development costs be expensed when incurred.
Topic: Franchises LO: 5 10. Franchises are considered to be an identifiable intangible asset and may be definite or indefinite. Answer: True
Topic: Plant Assets Classification LO: 1 11. Land used as a site for operating facilities is classified in the intangible assets category on the balance sheet. Answer: False Rationale: Plant assets refer to a firm’s long-lived property, plant and equipment. Intangible assets, on the other hand, refer to those economic resources that benefit a company’s operations, but which lack the physical substance that characterizes plant assets.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-3
Topic: Depreciation and Amortization Definition LO: 1, 2, 5 12. In accounting, the terms “depreciation” and “amortization” both have basically the same meaning-that is, a periodic charging to expense. Answer: True
Topic: Acquisition Cost LO: 1 13. The initial recorded cost of a plant asset should include both the cash and/or cash equivalent given up to acquire the asset and any costs of preparation for use. Answer: True Rationale: Plant assets refer to a firm’s long-lived property, plant and equipment. Long-lived assets are initially recorded on the balance sheet at their acquisition cost. This measure is also called the asset’s historical cost because it represents the amount expended when the asset was originally acquired. In general, the acquisition cost of a long-lived asset equals the cash and/or cash equivalent given up to acquire the asset and to prepare it for its intended use.
Topic: Deferred Payment Purchase LO: 1 14. The interest cost incurred to finance the acquisition of a delivery truck is part of the truck’s initial cost. Answer: False Rationale: If an asset’s purchase price is not immediately paid in cash, the cash-equivalent purchase price at the date of acquisition is determined and recorded in the asset account. Because the truck is ready for immediate use, the interest cost is charged to interest expense and does not become part of its acquisition cost.
Topic: Useful Life LO: 2 15. A plant asset’s useful life to an entity extends from its acquisition date to its disposal date. Answer: True Rationale: Useful life is the expected period of economic usefulness to a business that is, the period from the date of acquisition to the expected date of disposal.
Topic: Depreciation LO: 2 16. Periodic depreciation for accounting purposes is the decrease in a plant asset’s fair market value from the beginning of the period to the end of the period. Answer: False Rationale: Depreciation accounting is an attempt to allocate, in a systematic and rational manner, the difference between an asset’s acquisition cost and its estimated salvage value over the estimated useful life of the asset.
©Cambridge Business Publishers, 2020 9-4
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Book Value LO: 2 17. Over the life of a depreciable asset, its recorded cost decreases, the related accumulated depreciation increases, and its book value remains constant. Answer: False Rationale: Over the life of a depreciable asset, its recorded cost remains the same, the related accumulated depreciation increases, and its book value (cost – accumulated depreciation) decreases.
Topic: Tax Depreciation LO: 2 18. The tax advantage of using accelerated depreciation results from the increased amount of total depreciation deductions that are available over the life of the related asset. Answer: False Rationale: Depreciation expense may be deducted by a business on its federal income tax return as a normal business expense. As a consequence, some refer to the tax deductibility of depreciation as a “tax shield” since depreciation expense lowers a business’s taxable income, and hence, lowers the actual income taxes that must be paid. The depreciation expense deducted on a business’s income tax return, however, may differ substantially from the depreciation expense reported on a company’s income statement because the calculation of tax depreciation follows income tax regulations referred to as the modified accelerated cost recovery system (MACRS).
Topic: Unit-of-Production Method LO: 2 19. The units-of-production depreciation method allocates depreciation in proportion to the asset’s use in operations. Answer: True
Topic: Maintenance and Repair Expenses LO: 3 20. Expenditures for ordinary maintenance and repairs of plant assets are capital expenditures. Answer: False Rationale: Expenditures for ordinary maintenance and repairs of plant assets are referred to as revenue expenditures and are charged to expense as they are incurred.
Topic: Betterments LO: 3 21. Betterments can improve the quality of services rendered by a plant asset without necessarily extending its useful life. Answer: True
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-5
Topic: Repair Costs LO: 3 22. The cost of repairing a new desk’s leg--broken accidentally by an employee moving the desk into place--is expensed immediately. Answer: True
Topic: Return on Assets Ratio LO: 7 23. Return on assets is computed by dividing net sales by average total assets. Answer: False Rationale: Return on assets is computed by dividing net income (not net sales) by average total assets.
Topic: Return on Assets Ratio LO: 7 24. Return on assets measures how effectively a firm uses its assets in its operations. Answer: True
Topic: Asset Turnover Ratio LO: 7 25. Asset turnover is computed by dividing net sales by average total assets. Answer: True
Topic: Disposal of Plant Assets LO: 4 26. Sean Company purchases equipment for $7,700 for which it estimates a seven-year useful life and a $700 salvage value. If Sean uses straight-line depreciation and sells the equipment for $3,500 after four years of use, Sean will show a $300 gain on the sale. Answer: False Rationale: ($7,700 - $700) / 7 = $1,000 annual depreciation $7,700 - (4 x $1,000) = $3,700 book value at disposal date $3,500 proceeds - $3,700 book value = $200 loss on sale
Topic: Disposal of Plant Assets LO: 4 27. A loss is recorded when a plant asset is sold for more than its book value. Answer: False Rationale: A loss is recorded when a plant asset is sold for less, not more, than its book value.
©Cambridge Business Publishers, 2020 9-6
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Disposal of Plant Assets LO: 4 28. No gain or loss is recorded when a plant asset is sold for an amount equal to its book value. Answer: True
Topic: Disposal of Plant Assets LO: 4 29. If an uninsured asset is destroyed by fire before the end of its useful life, the firm suffers a loss measured by the asset’s estimated salvage value. Answer: False Rationale: Should the equipment be abandoned, stolen, or destroyed (with no insurance coverage) before the end of its expected useful life, a loss equal to its book value is recorded.
Topic: Research and Development Costs LO: 5 30. All research and development costs related to a firm’s products and its production processes must be expensed when incurred. Answer: True
Topic: Amortization Period LO: 5 31. The amortization period for all intangible assets is 40 years. Answer: False Rationale: The amortization of an intangible asset carried on the balance sheet involves the periodic expensing of the asset’s cost over the term of its expected useful life (the period over which it will benefit the company).
Topic: Leasehold Improvements LO: 1 32. The costs of leasehold improvements are depreciated over the life of the lease or the life of the improvements, whichever is shorter. Answer: True
Topic: Asset Turnover LO: 7 33. Asset turnover is computed as net sales divided by year-end total assets. Answer: False Rationale: Asset turnover is computed as net sales divided by Average total assets, not year-end total assets.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-7
Topic: Asset Turnover LO: 7 34. Asset turnover measures how effectively a firm generates sales revenue from its investment in assets. Answer: True
Topic: Natural Resources LO: 5 35. Accumulated Depletion is the estimated cost of natural resources removed from their natural setting to date. Answer: True
©Cambridge Business Publishers, 2020 9-8
th
Financial Accounting for Undergraduates, 4 Edition
Multiple Choice Topic: Depreciation Expense Using the Double-Declining-Balance Method LO: 2 Level of Difficulty: MEDIUM 1. On January 1, 2019, Upward Company purchased a copy machine. The machine costs $320,000, its estimated useful life is 8 years, and its expected salvage value is $20,000. What is the depreciation expense for 2020 using double-declining-balance method? A) $80,000 B) $60,000 C) $52,500 D) $35,000 Answer: B Rationale: Double-declining-balance rate = 1/8 × 2 = 25%. Depreciation expense of year 2019 is $320,000 × 25% = $80,000 Depreciation expense of year 2020 is $240,000 × 25% = $60,000
Topic: Depreciation Expense Using the Double-Declining-Balance Method LO: 2 Level of Difficulty: MEDIUM 2. On January 1, 2019, Seek Company purchased a copy machine. The machine costs $960,000, its estimated useful life is 8 years, and its expected salvage value is $60,000. What is the depreciation expense for 2020 using double-declining-balance method? A) $240,000 B) $180,000 C) $157,500 D) $105,000 Answer: B Rationale: Double-declining-balance rate = 1/8 × 2 = 25%. Depreciation expense of year 2019 is $960,000 × 25% = $240,000 Depreciation expense of year 2020 is $720,000 × 25% = $180,000
Topic: Depreciation Assumptions LO: 2, 3 Level of Difficulty: EASY 3. Which of the following estimates are required when calculating depreciation expense? 1. Depreciation rate 2. Useful life 3. Expected maintenance costs 4. Salvage value A) B) C) D)
1, 2, and 4 1, 2, 3, and 4 2 and 4 2, 3, and 4
Answer: A Rationale: Expected maintenance costs are not capitalized, nor do they impact the amount of depreciation per period. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-9
Topic: Straight-Line Depreciation LO: 2 Level of Difficulty: EASY 4. Which statement is true concerning the straight-line method of depreciation? A) Depreciation is recognized evenly over the estimated useful life of the asset B) Purchase cost is expensed in the year of acquisition C) Depreciation is equal to the proceeds received on sale less the amount paid to acquire the asset D) Depreciation does not take salvage value into consideration Answer: A Rationale: When using the straight-line method of depreciation, depreciation is recognized evenly over the estimated useful life of the asset.
Topic: Depreciation Assumptions LO: 2 Level of Difficulty: EASY 5. Which of the following is not necessary in calculating the depreciation expense for the first year for a newly purchased factory forklift? A) Estimated useful life B) Fair market value of the forklift during its useful life C) Total cost of the forklift at acquisition and the estimated salvage value D) Depreciation rate Answer: B Rationale: The fair market value is not factor in calculating annual depreciation.
Topic: Gain (Loss) on Asset Sales LO: 4 Level of Difficulty: EASY 6. How is the gain (loss) on a plant asset sale calculated? A) Asset sale price – Asset purchase cost B) Asset fair value – Asset sale price C) Asset sale price – Book value of the asset D) Asset sale price – Total accumulated depreciation Answer: C Rationale: The gain (loss) on the sale of a plant asset is computed as: Asset sale price – book value of the asset
Topic: Impairment LO: 2 Level of Difficulty: EASY 7. At what point is an asset considered to be impaired? A) When the net book value is greater than the sum of expected cash flows B) When the net book value is less than the sum of expected cash flows C) When the net book value is less than the fair value D) When the net book value is greater than the fair value Answer: A Rationale: As asset is impaired if its net book value (purchase cost less accumulated depreciation) is greater than the sum of cash flows expected to flow from that asset.
©Cambridge Business Publishers, 2020 9-10
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Depreciation LO: 2 Level of Difficulty: MEDIUM 8. Saul Company purchased a tractor at a cost of $180,000. The tractor has an estimated salvage value of $20,000 and an estimated life of 8 years, or 12,000 hours of operation. The tractor was purchased on January 1, 2019 and was used 2,400 hours in 2019 and 2,200 hours in 2020. What method of depreciation will produce the maximum depreciation expense in 2019? A) Straight-line B) Units-of-production C) Double-declining-balance D) All methods produce the same expense in 2019 Answer: C Rationale: Straight-line: ($180,000 – $20,000) / 8 = $20,000 per year Double-declining balance: $180,000 × (1/8 × 2) = $45,000 for 2019 Units of production: ($180,000 – $20,000) × (2,400 hours / 12,000 hours) = $32,000 for 2019
Topic: Depreciation LO: 2 Level of Difficulty: MEDIUM 9. Saul Company purchased a tractor at a cost of $120,000. The tractor has an estimated salvage value of $20,000 and an estimated life of 8 years, or 12,000 hours of operation. The tractor was purchased on January 1, 2019 and was used 2,400 hours in 2019 and 2,100 hours in 2020. What method of depreciation will produce the maximum depreciation expense in 2020? A) Straight-line B) Units-of-production C) Double-declining-balance D) All methods produce the same expense in 2020 Answer: C Rationale: Straight-Line: ($120,000 – $20,000) / 8 = $12,500 per year Double-declining balance: $120,000 × (1/8 × 2) = $30,000 for 2019 ($120,000 – $30,000) × 1/4 = $22,500 for 2020 Units of production: ($120,000 – 20,000) × (2,100 hours / 12,000 hours) = $17,500 for 2020
Topic: Calculating Depreciation LO: 2 Level of Difficulty: EASY 10. Saul Company purchased a tractor at a cost of $180,000. The tractor has an estimated salvage value of $20,000 and an estimated life of 8 years, or 12,000 hours of operation. The tractor was purchased on January 1, 2019 and was used 2,400 hours in 2019 and 2,200 hours in 2020. What amount will Saul Company report as depreciation expense over the 8-year life of the equipment using straight-line depreciation? A) $ 25,000 B) $ 40,000 C) $180,000 D) $160,000 Answer: D Rationale: $180,000 – $20,000 = $160,000 ©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-11
Topic: Calculating Depreciation LO: 2 Level of Difficulty: EASY 11. Spencer Company purchased a tractor at a cost of $540,000. The tractor has an estimated salvage value of $60,000 and an estimated life of 8 years, or 12,000 hours of operation. The tractor was purchased on January 1, 2019 and was used 2,400 hours in 2019 and 2,200 hours in 2020. What amount will Spencer Company report as depreciation expense over the 8-year life of the equipment using straight-line depreciation? A) $ 75,000 B) $120,000 C) $540,000 D) $480,000 Answer: D Rationale: $540,000 – $60,000 = $480,000
Topic: Calculating Book Value LO: 2 Level of Difficulty: EASY 12. Saul Company purchased a tractor at a cost of $120,000 on January 1, 2019. The tractor has an estimated salvage value of $20,000 and an estimated life of 8 years. If Saul uses the straight-line method, what is the book value at January 1, 2023? A) $70,000 B) $50,000 C) $82,500 D) None of the above Answer: A Rationale: Accumulated depreciation = [($120,000 – $20,000) / 8] × 4 = $50,000 Book value = $120,000 – $50,000 = $70,000
Topic: Calculating Book Value LO: 2 Level of Difficulty: EASY 13. Spencer Company purchased a tractor at a cost of $360,000 on January 1, 2019. The tractor has an estimated salvage value of $60,000 and an estimated life of 8 years. If Spencer uses the straight-line method, what is the book value at January 1, 2023? A) $210,000 B) $150,000 C) $247,500 D) None of the above Answer: A Rationale: Accumulated depreciation = [($360,000 – $60,000) / 8] × 4 = $150,000 Book value = $360,000 – $150,000 = $210,000
©Cambridge Business Publishers, 2020 9-12
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Disposal of Plant Asset LO: 4 Level of Difficulty: MEDIUM 14. Steve Company purchased a tractor at a cost of $180,000. The tractor has an estimated salvage value of $20,000 and an estimated life of 8 years, or 10,000 hours of operation. The tractor was purchased on January 1, 2019 and was used 2,400 hours in 2019 and 2,100 hours in 2020. On January 1, 2021, the company decided to sell the tractor for $70,000. Steve uses the units-ofproduction method to account for the depreciation on the tractor. Based on this information, the entry to record the sale of the tractor will show: A) No gain or loss on the sale B) A loss of $38,000 C) A loss of $70,000 D) A gain of $70,000 Answer: B Rationale: Rate = ($180,000 – $20,000) / 10,000 hours = $16 per hour Expense for 2 years = $16 x 4,500 hours = $72,000 Gain (loss) on sale = Selling price – Book value = $70,000 – ($180,000 – $72,000) = $38,000 loss
Topic: Disposal of Plant Asset LO: 4 Level of Difficulty: MEDIUM 15. Berning Company purchased a tractor at a cost of $540,000. The tractor has an estimated salvage value of $60,000 and an estimated life of 8 years, or 10,000 hours of operation. The tractor was purchased on January 1, 2019 and was used 2,400 hours in 2019 and 2,100 hours in 2020. On January 1, 2021, the company decided to sell the tractor for $210,000. Berning uses the units-ofproduction method to account for the depreciation on the tractor. Based on this information, the entry to record the sale of the tractor will show: A) No gain or loss on the sale B) A loss of $114,000 C) A loss of $150,000 D) A gain of $150,000 Answer: B Rationale: Rate = ($540,000 – $60,000) / 10,000 hours = $48 per hour Expense for 2 years = $48 x 4,500 hours = $216,000 Gain (loss) on sale = Selling price – Book value = $210,000 – ($540,000 – $216,000) = $114,000 loss
Topic: Goodwill LO: 5 Level of Difficulty: EASY 16. Goodwill can be recorded as an asset when: A) An offer is received to purchase the business at a price in excess of the value of the assets B) A business has above normal profitability compared to other businesses in its industry C) A business is purchased and payment is made in excess of the fair value of the identifiable net assets D) A business can determine that it has created customer goodwill and name recognition Answer: C Rationale: Goodwill is an intangible asset that is only recorded when one company acquires another company at an excess purchase price over the fair market value of its identifiable net assets. ©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-13
Topic: Changes in Accounting Estimates LO: 2 Level of Difficulty: MEDIUM 17. Oaks Company purchased a tractor at a cost of $180,000 on January 1, 2019. The tractor has an estimated salvage value of $20,000 and an estimated life of 8 years. At the end of two years of service, Oaks reevaluated the tractor’s useful life. Management extended the useful life an additional four years, but estimated that the tractor would have no residual value at the end of this time. If the company uses straight-line depreciation, what amount would be recorded as the depreciation expense each year, beginning with the third year? A) $ 7,500 B) $18,750 C) $15,834 D) $14,000 Answer: D Rationale: $180,000 – ($20,000* x 2) = $140,000 Revised remaining life = 8 – 2 + 4 = 10 years $140,000 / 10 years = $14,000 *($180,000 - $20,000) / 8
Topic: Changes in Accounting Estimates LO: 2 Level of Difficulty: MEDIUM 18. Natalie Company purchased a tractor at a cost of $540,000 on January 1, 2019. The tractor has an estimated salvage value of $60,000 and an estimated life of 8 years. At the end of two years of service, Natalie reevaluated the tractor’s useful life. Management extended the useful life an additional four years, but estimated that the tractor would have no residual value at the end of this time. If the company uses straight-line depreciation, what amount would be recorded as the depreciation expense each year, beginning with the third year? A) $22,500 B) $56,250 C) $47,502 D) $42,000 Answer: D Rationale: $540,000 – ($60,000 x 2) = $420,000 Revised remaining life = 8 – 2 + 4 = 10 years $420,000 / 10 years = $42,000
©Cambridge Business Publishers, 2020 9-14
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Intangible Assets LO: 5 Level of Difficulty: EASY 19. How should intangible assets be disclosed on the balance sheet? A) At the estimated fair value at the balance sheet date B) At cost in the current assets section C) Net of the costs already amortized D) As a reduction of stockholders’ equity Answer: C Rationale: The cost of the intangible asset is presented in the balance sheet net of accumulated amortization.
Topic: IFRS R&D LO: 5 Level of Difficulty: EASY 20. Which statement is true as it relates to IFRS’ reporting requirements for internally-developed intangibles? A) IFRS allows both research and development costs to be capitalized when specific criteria are met B) IFRS allows research costs to be capitalized when specific criteria are met C) IFRS allows development costs to be capitalized when specific criteria are met D) IFRS requires that both research and development costs be expensed when incurred Answer: C Rationale: Development costs can be capitalized as intangible assets under IFRS, though GAAP requires both research and development costs be expensed when incurred.
Topic: Long-Lived Assets Classification LO: 1 Level of Difficulty: EASY 21. Which of the following is not a balance sheet category for long-lived assets? A) Plant assets B) Revenue expenditures C) Intangible assets D) None of the above Answer: B Rationale: Revenue expenditures are reflected on the income statement.
Topic: Long-Lived Assets Periodic Write-Off LO: 1 Level of Difficulty: EASY 22. Which of the following is a term identifying the periodic expensing of a plant asset? A) Amortization B) Depletion C) Betterment D) Depreciation Answer: D Rationale: Depreciation refers to the process of allocating a portion of an asset’s acquisition cost to expense on the income statement to reflect the consumption of the asset as it produces revenue for a business.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-15
Topic: Land LO: 1 Level of Difficulty: EASY 23. Which of the following plant assets is not depreciated? A) Leasehold improvements B) Equipment C) Land for site use D) Furniture Answer: C Rationale: Land is not depreciated.
Topic: Land Improvements LO: 1 Level of Difficulty: EASY 24. Which of the following plant assets is not depreciated? A) Furniture and equipment B) Land improvements C) Delivery truck D) All of these are depreciated Answer: D Rationale: Property improvements that have limited lives are classified as land improvements.es for these assets are charged to a separate Land Improvement account on the balance sheet and depreciated over the estimated useful life of the improvements. Topic: Acquisition Cost LO: 1 Level of Difficulty: MEDIUM 25. Oval Company acquired a machine that involved the following expenditures and related factors: Gross invoice price …………….……………. Sales tax ……………………………………… Cash discount taken …………………………. Freight ………………………………………… Assembly of machine ……………………….. Installation of machine ……………………….. Assorted spare parts for future use ………… Tuning and adjusting machine before use …
$76,000 2,850 1,140 1,350 1,800 2,700 5,400 900
The initial accounting cost of the machine should be: A) $87,010 B) $84,460 C) $89,860 D) $85,600 Answer: B Rationale: $76,000 + $2,850 – $1,140 + $1,350 + $1,800 + $2,700 + $900 = $84,460
©Cambridge Business Publishers, 2020 9-16
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Acquisition Cost LO: 1 Level of Difficulty: MEDIUM 26. Triangle Company acquired a machine that involved the following expenditures and related factors: Gross invoice price …………….……………. Sales tax ……………………………………… Cash discount taken …………………………. Freight ………………………………………… Assembly of machine ……………………….. Installation of machine ……………………….. Assorted spare parts for future use ………… Tuning and adjusting machine before use …
$228,000 8,550 3,420 4,050 5,400 8,100 16,200 2,700
The initial accounting cost of the machine should be: A) $203,220 B) $253,380 C) $180,180 D) $196,380 Answer: B Rationale: $228,000 + $8,550 – $3,420 + $4,050 + $5,400 + $8,100 + $2,700 = $253,380
Topic: Acquisition Cost LO: 1 Level of Difficulty: MEDIUM 27. Peak, Inc. acquired a machine that involved the following expenditures and related factors: Gross invoice price …………………………………………….. Sales tax ………………………………………………………… Cash discount taken …………………………………………… Freight ………………………………………………………….... Assembly of machine ………………………………………….. Installation of machine ………………………………………… Tuning and adjusting machine before use ……………………
$27,200 1,760 544 960 800 1,200 640
The initial accounting cost of the machine should be: A) $34,576 B) $28,016 C) $32,016 D) $31,616 Answer: C Rationale: $27,200 + $1,760 – $544 + $960 + $800 + $1,200 + $640 = $32,016
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-17
Topic: Acquisition Cost LO: 1 Level of Difficulty: MEDIUM 28. Summit, Inc. acquired a machine that involved the following expenditures and related factors: Gross invoice price …………………………………………….. Sales tax ………………………………………………………… Cash discount taken …………………………………………… Freight ………………………………………………………….... Assembly of machine ………………………………………….. Installation of machine ………………………………………… Tuning and adjusting machine before use ……………………
$81,600 5,280 1,632 2,880 2,400 3,600 1,920
The initial accounting cost of the machine should be: A) $102,528 B) $ 84,480 C) $ 96,048 D) $ 94,848 Answer: C Rationale: $81,600 + $5,280 – $1,632 + $2,880 + $2,400 + $3,600 + $1,920 = $96,048
Topic: Expenditures Related to Land LO: 1 Level of Difficulty: EASY 29. A land site for a new office building is purchased for $360,000 by Texas Coast Company. A barn on the site will be razed at a net cost of $34,000. The $34,000 razing expenditure is properly debited to: A) Office Building B) Land C) Razing Expense D) Land Improvements Answer: B Rationale: A payment to remove a barn increases the land’s acquisition cost, because removing the barn prepares the land for its intended use. The cost should be capitalized or added to the cost of the land.
©Cambridge Business Publishers, 2020 9-18
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Package Purchase LO: 1 Level of Difficulty: MEDIUM 30. Minerva Company purchased land and a building for a total price of $5,200,000. Individually, the land was appraised at $840,000 and the building at $4,760,000. How much should be recorded as the acquisition cost of each asset? A) Land, $840,000; building, $4,760,000 B) Land, $840,000; building, $4,360,000 C) Land, $780,000; building, $4,420,000 D) Land, $800,000; building, $4,400,000 Answer: C Rationale: Total appraised value: $840,000 + $4,760,000 = $5,600,000 Land: ($840,000 / $5,600,000) x ($5,200,000) = $780,000 Building: ($4,760,000 / $5,600,000) x ($5,200,000) = $4,420,000
Topic: Package Purchase LO: 1 Level of Difficulty: MEDIUM 31. Nair Company purchased land and a building for a total price of $15,600,000. Individually, the land was appraised at $2,520,000 and the building at $14,280,000. How much should be recorded as the acquisition cost of each asset? A) Land, $2,520,000; building, $14,280,000 B) Land, $2,520,000; building, $13,080,000 C) Land, $2,340,000; building, $13,260,000 D) Land, $2,400,000; building, $13,200,000 Answer: C Rationale: Total appraised value: $2,520,000 + $14,280,000 = $16,800,000 Land: ($2,520,000 / $16,800,000) x ($15,600,000) = $2,340,000 Building: ($14,280,000 / $16,800,000) x ($15,600,000) = $13,260,000
Topic: Package Purchase LO: 1 Level of Difficulty: MEDIUM 32. For $11,100,000, Neptune, Inc. purchased another company’s land, building, and equipment. Independent appraisals indicate the values of these assets as follows: land, $1,830,000; building, $7,320,000; and equipment, $3,050,000. How much should be recorded as the acquisition cost of each asset? A) Land, $1,830,000; building, $7,320,000; equipment, $3,050,000 B) Land, $1,665,000; building, $6,660,000; equipment, $2,775,000 C) Land, $1,250,000; building, $7,200,000; equipment, $3,300,000 D) Land, $1,747,500; building, $6,990,000; equipment, $2,912,500 Answer: B Rationale: Total appraised value: $1,830,000 + $7,320,000 + $3,050,000 = $12,200,000 Land: ($1,830,000 / $12,200,000) x ($11,100,000) = $1,665,000 Building: ($7,320,000 / $12,200,000) ($11,100,000) = $6,660,000 Equipment: ($3,050,000 / $12,200,000) ($11,100,000) = $2,775,000 ©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-19
Topic: Package Purchase LO: 1 Level of Difficulty: MEDIUM 33. For $33,300,000, Saturn, Inc. purchased another company’s land, building, and equipment. Independent appraisals indicate the values of these assets as follows: land, $3,660,000; building, $23,790,000; and equipment, $9,150,000. How much should be recorded as the acquisition cost of each asset? A) Land, $3,660,000; building, $23,790,000; equipment, $9,150,000 B) Land, $3,330,000; building, $21,645,000; equipment, $8,325,000 C) Land, $3,750,000; building, $21,600,000; equipment, $9,900,000 D) Land, $3,495,000; building, $22,717,500; equipment, $8,737,500 Answer: B Rationale: Total appraised value: $3,660,000 + $21,600,000 + $10,800,000 = $36,600,000 Land: ($3,660,000 / $36,600,000) x ($33,300,000) = $3,330,000 Building: ($23,790,000 / $36,600,000) x ($33,300,000) = $21,645,000 Equipment: ($9,150,000 / $36,600,000) x ($33,300,000) = $8,325,000
Topic: Depreciation Purpose LO: 2 Level of Difficulty: EASY 34. The purpose of depreciation accounting is to: A) Reflect changes in the current value of a plant asset over its useful life B) Accumulate funds to replace a plant asset at the end of its useful life C) Allocate a plant asset’s cost, less its salvage value, to expense over the asset’s useful life D) Have a plant asset’s book value equal its initial cost by the end of its useful life Answer: C Rationale: Depreciation accounting is an attempt to allocate, in a systematic and rational manner, the difference between an asset’s initial cost by the end of its useful life and salvage value over the estimated useful life of the asset.
Topic: Salvage Value LO: 2 Level of Difficulty: EASY 35. What is the term identifying the expected net recovery from the disposal of a plant asset at the end of its useful life? A) Accumulated depreciation B) Salvage value C) Depreciation expense D) Fair value Answer: B Rationale: Salvage value (or residual value) is the expected net recovery (sales proceeds– disposal costs) when the asset is sold or removed from service.
©Cambridge Business Publishers, 2020 9-20
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Straight-Line Depreciation LO: 2 Level of Difficulty: EASY 36. On January 1, 2019, Ray, Inc. acquired a new machine for $186,750. Its estimated useful life is nine years with an expected salvage value of $6,750. Assuming straight-line depreciation, 2019 depreciation expense is: A) $20,750 B) $16,500 C) $19,000 D) $20,000 Answer: D Rationale: ($186,750 – $6,750) / 9 = $20,000
Topic: Straight-Line Depreciation LO: 2 Level of Difficulty: EASY 37. On January 1, 2019, Ray Roberto, Inc. acquired a new machine for $560,250. Its estimated useful life is nine years with an expected salvage value of $20,250. Assuming straight-line depreciation, 2019 depreciation expense is: A) $47,250 B) $49,500 C) $57,000 D) $60,000 Answer: D Rationale: ($560,250 – $20,250) / 9 = $60,000
Topic: Straight-Line Depreciation LO: 2 Level of Difficulty: EASY 38. On April 1, 2019, Albert, Inc. acquired a new machine for $160,000. Its estimated useful life is eight years with an expected salvage value of $16,000. Assuming straight-line depreciation, 2019 depreciation expense is: A) $18,000 B) $13,500 C) $15,000 D) $20,000 Answer: B Rationale: [($160,000 – $16,000) / 8] (9/12) = $13,500
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-21
Topic: Straight-Line Depreciation LO: 2 Level of Difficulty: EASY 39. On April 1, 2019, Veronica, Inc. acquired a new machine for $480,000. Its estimated useful life is eight years with an expected salvage value of $48,000. Assuming straight-line depreciation, 2019 depreciation expense is: A) $54,000 B) $40,500 C) $45,000 D) $60,000 Answer: B Rationale: [($480,000 – $48,000) / 8] (9/12) = $40,500
Topic: Units-of-Production Depreciation LO: 2 Level of Difficulty: EASY 40. On January 1, 2019, Mandarin Company purchased a new truck for $29,400. Its estimated useful life is seven years or 200,000 miles. The truck’s expected salvage value is $1,400. During 2019, the truck was driven 20,000 miles. Assuming units-of-production depreciation, 2019 depreciation expense is: A) $2,940 B) $4,200 C) $2,800 D) $4,000 Answer: C Rationale: [($29,400 – $1,400) / 200,000] x (20,000) = $2,800
Topic: Units-of-Production Depreciation LO: 2 Level of Difficulty: EASY 41. On January 1, 2019, Mango Company purchased a new truck for $88,200. Its estimated useful life is seven years or 200,000 miles. The truck’s expected salvage value is $4,200. During 2019, the truck was driven 20,000 miles. Assuming units-of-production depreciation, 2019 depreciation expense is: A) $10,584 B) $12,600 C) $ 8,400 D) $12,000 Answer: C Rationale: [($88,200 – $4,200) / 200,000] x (20,000) = $8,400
©Cambridge Business Publishers, 2020 9-22
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Units-of-Production Depreciation LO: 2 Level of Difficulty: EASY 42. On January 1, 2019, Ivey Company purchased a bottle-capping machine for $160,000. During its useful life, the company expects that the machine will cap 1,500,000 bottles. The machine’s expected salvage value is $10,000. During 2019, the machine capped 250,000 bottles and during 2020, the machine capped 300,000 bottles. Assuming units-of-production depreciation, 2020 depreciation expense is: A) $25,000 B) $26,666 C) $30,000 D) $32,000 Answer: C Rationale: [($160,000 – $10,000) / 1,500,000] x (300,000) = $30,000
Topic: Units-of-Production Depreciation LO: 2 Level of Difficulty: EASY 43. On January 1, 2019, Thomas Peter Company purchased a bottle-capping machine for $480,000. During its useful life, the company expects that the machine will cap 1,500,000 bottles. The machine’s expected salvage value is $30,000. During 2019, the machine capped 250,000 bottles and during 2020, the machine capped 300,000 bottles. Assuming units-of-production depreciation, 2020 depreciation expense is: A) $75,000 B) $79,998 C) $90,000 D) $96,000 Answer: C Rationale: [($480,000 – $30,000) / 1,500,000] x (300,000) = $90,000
Topic: Units-of-Production Depreciation LO: 2 Level of Difficulty: EASY 44. Which of the following depreciation methods most closely relates periodic depreciation expense to the periodic use of the asset? A) Straight line. B) Units of production. C) Double-declining balance D) None of the above Answer: B Rationale: The units of production method allocates depreciation in proportion to an asset’s use in operations. Under this method, the depreciation per unit of production is first calculated by dividing the total depreciable cost of the asset by the asset’s projected units of production capacity.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-23
Topic: Double-Declining Method Depreciation LO: 2 Level of Difficulty: MEDIUM 45. On January 1, 2019, Camire, Inc. purchased a new machine for $160,000. Its estimated useful life is eight years with an expected salvage value of $12,000. Assuming double-declining balance depreciation, 2019 depreciation expense is: A) $20,000 B) $13,500 C) $37,000 D) $40,000 Answer: D Rationale: $160,000 x (2/8) = $40,000
Topic: Double-Declining Method Depreciation LO: 2 Level of Difficulty: MEDIUM 46. On January 1, 2019, Ceramics, Inc. purchased a new machine for $480,000. Its estimated useful life is eight years with an expected salvage value of $36,000. Assuming double-declining balance depreciation, 2019 depreciation expense is: A) $ 45,000 B) $ 40,500 C) $111,000 D) $120,000 Answer: D Rationale: $480,000 x (2/8) = $120,000
Topic: Double-Declining Method Depreciation LO: 2 Level of Difficulty: MEDIUM 47. On January 1, 2019, Fullerton, Inc. purchased a new machine for $180,000. Its estimated useful life is eight years with an expected salvage value of $18,000. Assuming double-declining balance depreciation, 2020 depreciation expense is: A) $45,000 B) $30,375 C) $33,750 D) $40,500 Answer: C Rationale: 2019 depreciation = $180,000 x (2/8) = $45,000 2020 depreciation = ($180,000 – $45,000) x (2/8) = $33,750
©Cambridge Business Publishers, 2020 9-24
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Double-Declining Method Depreciation LO: 2 Level of Difficulty: MEDIUM 48. On January 1, 2019, Calvin, Inc. purchased a new machine for $192,000. Its estimated useful life is 10 years with an expected salvage value of $32,000. Assuming double-declining balance depreciation, 2019 depreciation expense is: A) $20,000 B) $12,000 C) $38,400 D) $32,000 Answer: C Rationale: $192,000 x (2/10) = $38,400
Topic: Double-Declining Method Depreciation LO: 2 Level of Difficulty: MEDIUM 49. On January 1, 2019, Hobbes, Inc. purchased a new machine for $576,000. Its estimated useful life is 10 years with an expected salvage value of $96,000. Assuming double-declining balance depreciation, 2019 depreciation expense is: A) $ 60,000 B) $ 36,000 C) $115,200 D) $ 96,000 Answer: C Rationale: $576,000 x (2/10) = $115,200
Topic: Double-Declining Method Depreciation LO: 2 Level of Difficulty: MEDIUM 50. On January 1, 2019, Presto, Inc. purchased a new machine for $192,000. Its estimated useful life is 16 years with an expected salvage value of $32,000. Assuming double-declining balance depreciation, 2020 depreciation expense is: A) $21,000 B) $17,500 C) $12,000 D) $24,000 Answer: A Rationale: 2019 depreciation = $192,000 x (2/16) = $24,000 2020 depreciation = ($192,000 – $24,000) (2/16) = $21,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-25
Double-Declining Method Depreciation LO: 2 Level of Difficulty: MEDIUM 51. Equipment was purchased for $180,000 on March 1, 2019. Its estimated useful life is eight years with a $18,000 expected salvage value. Using double-declining balance depreciation, the 2020 depreciation expense is: A) $35,625 B) $37,500 C) $33,750 D) $40,500 Answer: A Rationale: 2019 depreciation = ($180,000) (2/8) (10/12) = $37,500 2020 depreciation = ($180,000 – $37,500) (2/8) = $35,625
Topic: Double-Declining Method Depreciation LO: 2 Level of Difficulty: MEDIUM 52. Equipment was purchased for $72,000 on October 1, 2019. Its estimated useful life is four years with a $4,200 expected salvage value. Using double-declining balance depreciation, the 2020 depreciation expense is: A) $31,500 B) $ 9,000 C) $ 7,500 D) $18,000 Answer: A Rationale: 2019 depreciation = ($72,000) (2/4) (3/12) = $9,000 2020 depreciation = ($72,000 – $9,000) (2/4) = $31,500
Topic: Accumulated Depreciation LO: 2 Level of Difficulty: MEDIUM 53. At the end of the expected useful life of a depreciable asset with an estimated 15% salvage value, the accumulated depreciation would equal the original cost of the asset under which of the following depreciation methods?
A) B) C) D)
Straight Line Yes No Yes No
Units-of Production Yes No No Yes
Double-Declining Balance Yes No Yes No
Answer: B Rationale: A depreciable asset is not depreciated below its estimated salvage value. Therefore, the accumulated depreciation would never equal the original cost of the asset.
©Cambridge Business Publishers, 2020 9-26
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Salvage Value LO: 2 Level of Difficulty: EASY 54. Which depreciation method does not consider salvage value in its first year calculation? A) Straight line B) Double-declining balance C) Units of production D) None of the above Answer: B Rationale: An asset’s salvage value is not considered in the calculation of declining-balance depreciation, except that the depreciation of an asset stops when the asset’s book value equals its estimated salvage value.
Topic: Depreciation Methods LO: 2 Level of Difficulty: MEDIUM 55. Which of the following depreciation methods would result in the most depreciation in the first year, assuming an eight year life and no salvage value? A) Double-declining balance B) Straight line C) Not enough information available to determine answer D) The depreciation would be the same under both methods Answer: A Rationale: Double declining-balance = 2/8 or 25% in first year Straight-line = 1/8 or 12.5% in first year
Topic: Change in Accounting Estimate LO: 2 Level of Difficulty: MEDIUM 56. Helmut, Inc. purchased a truck on July 1, 2019, for $37,800. At that time, the truck’s useful life was an estimated five years with no salvage value. Before the entry to record 2021 depreciation was made, the truck’s estimated useful life was changed to four years with a $1,400 salvage value. Using straight-line depreciation, what is the 2021 depreciation expense? A) $ 7,560 B) $ 9,100 C) $10,024 D) $10,584 Answer: C Rationale: Book value at time of revision: $37,800 - (1.5 years x $7,560*) = $26,460 $26,460 - $1,400 salvage value = $25,060 revised remaining depreciation $25,060/2.5 years revised remaining useful life = $10,024 *$37,800 / 5 = $7,560 = Annual straight-line depreciation
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-27
Topic: Change in Accounting Estimate LO: 2 Level of Difficulty: MEDIUM 57. Raas, Inc. purchased a truck on January 1, 2019, for $144,000. At that time, the truck’s useful life was an estimated four years with no salvage value. Before the entry to record 2022 depreciation was made, the truck’s estimated useful life was changed to six years with a $2,700 salvage value. Using straight-line deprecation, what is the 2022 depreciation expense? A) $ 11,100 B) $18,000 C) $ 9,000 D) $ 4,050 Answer: A Rationale: Book value at time of revision: $144,000 – (3 years x $36,000*) = $36,000 $36,000 – $2,700 salvage value = $33,300 revised remaining depreciation $33,300 / 3** years revised remaining useful life = $11,100 *$144,000 / 4 = $36,000 = Annual straight-line depreciation **6 years revised useful life – 3 years of useful life utilized = 3 years remaining useful life
Topic: Change in Accounting Estimate LO: 2 Level of Difficulty: MEDIUM 58. Eastern Company purchased a machine on January 1, 2019, for $180,000. At that time, the machine’s useful life was an estimated six years with a zero salvage value. Just before depreciation was recorded for 2023, the machine’s estimated useful life was extended by six years with a $12,000 salvage value. Using straight-line depreciation, what is the 2023 depreciation expense? A) $30,000 B) $13,716 C) $13,500 D) $ 6,000 Answer: D Rationale: Book value at time of revision: $180,000 – (4 years x $30,000*) = $60,000 $60,000 – $12,000 salvage value = $48,000 revised remaining depreciation $48,000 / 8** years revised remaining useful life = $6,000 *$180,000 / 6 = $30,000 = Annual straight-line depreciation **(6 - 4) years remaining pre-revision useful life + 6 years of extended useful life = 8 years remaining useful life
©Cambridge Business Publishers, 2020 9-28
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Book Value LO: 2 Level of Difficulty: EASY 59. The book value of a depreciable asset is: A) The original cost of the asset B) The original cost of the asset less its accumulated depreciation C) The original cost of the asset less its salvage value D) The accumulated depreciation on the asset Answer: B Rationale: The book value of an asset is the acquisition cost less accumulated depreciation. It is also referred to as the net book value.
Topic: Accelerated Depreciation LO: 2 Level of Difficulty: MEDIUM 60. An accelerated depreciation method recognizes: A) Equal amounts of depreciation for each year of an asset’s useful life B) Larger amounts of depreciation in the later periods than are recognized in the early periods of an asset’s useful life C) Larger amounts of depreciation in the early periods than are recognized in the later periods of an asset’s useful life D) More total depreciation expense over an asset’s useful life than is recognized by the straight-line method Answer: C Rationale: An accelerated depreciation method is a deprecation method in which amounts of depreciation expense taken in the early years of an asset’s life are greater than the amounts expensed in later years.
Topic: Revenue Expenditure LO: 3 Level of Difficulty: EASY 61. A revenue expenditure: A) Increases the book value of a long-term asset B) Decreases the book value of a long-term asset C) Increases a revenue account D) Increases an expense account Answer: D Rationale: Revenue expenditures are expenditures relating to plant assets that are expensed when incurred. The following list identifies two common types of revenue expenditures: 1. Expenditures for ordinary maintenance and repairs of existing plant assets. 2. Expenditures to acquire low cost items that benefit the firm for several periods.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-29
Topic: Capital Expenditure LO: 3 Level of Difficulty: EASY 62. Which of the following is a capital expenditure? A) Cost to add air conditioning to a company car B) Cost to purchase garbage cans for the company conference room C) Cost to replace spark plug on company lawnmower D) Cost to have store windows washed Answer: A Rationale: Capital expenditures increase the book value of long lived assets. Two typical capital expenditures related to property, plant, and equipment are initial acquisitions and additions and betterments.
Topic: Revenue Expenditure LO: 3 Level of Difficulty: EASY 63. Which of the following is a revenue expenditure? A) Adding air conditioning to a company car B) Adding a loading and unloading dock to the company’s warehouse C) Purchasing a microcomputer for the marketing department D) Replacing the battery in a company truck Answer: D Rationale: Revenue expenditures are expenditures relating to plant assets that are expensed when incurred. Two common types of revenue expenditures are: 1. Expenditures for ordinary maintenance and repairs of existing plant assets, and 2. Expenditures to acquire low cost items that benefit the firm for several periods.
Topic: Capital Expenditure LO: 3 Level of Difficulty: EASY 64. Which of the following is a capital expenditure? A) Cleaning, waxing, and polishing a company car B) Purchasing a wastebasket for company office C) Adding a power winch to a company service truck D) Replacing filters on the company furnace Answer: C Rationale: Capital expenditures increase the book value of long lived assets. Two typical capital expenditures related to property, plant, and equipment are initial acquisitions and additions and betterments.
©Cambridge Business Publishers, 2020 9-30
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Return on Assets LO: 7 Level of Difficulty: EASY 65. Return on assets is computed as: A) Net sales/Average total assets B) Average total assets/Net income C) Average total assets/Net sales D) Net income/Average total assets Answer: D Rationale: The return on assets ratio is calculated as: Return on assets = Net income /Average total assets. This ratio relates data from two financial statements—the income statement and the balance sheet.
Topic: Return on Assets LO: 7 Level of Difficulty: EASY 66. At January 1, 2019, Crane Company had total assets of $1,800,000 and at December 31, 2019, its total assets were $2,200,000. Crane’s net sales for 2019 were $1,700,000 and its 2019 net income was $110,000. Crane’s return on assets for 2019 is: A) 5.5% B) 5.0% C) 6.5% D) 85.0% Answer: A Rationale: $110,000 / [($1,800,000 + $2,200,000) / 2] = 5.5%
Topic: Return on Assets LO: 7 Level of Difficulty: EASY 67. At January 1, 2019, Flamingo Company had total assets of $5,400,000 and at December 31, 2019, its total assets were $6,600,000. Flamingo’s net sales for 2019 were $5,100,000 and its 2019 net income was $420,000. Flamingo’s return on assets for 2019 is: A) 7.0% B) 9.2% C) 7.8% D) 99.2% Answer: A Rationale: $420,000 / [($5,400,000 + $6,600,000) / 2] = 7.0%
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-31
Topic: Asset Turnover Ratio LO: 7 Level of Difficulty: EASY 68. At January 1, 2019, Bragg Company had total assets of $1,800,000 and at December 31, 2019, its total assets were $2,200,000. Bragg’s net sales for 2019 were $3,700,000 and its 2019 net income was $110,000. Bragg’s asset turnover ratio for 2019 is: A) 0.055 B) 0.050 C) 0.065 D) 1.850 Answer: D Rationale: $3,700,000 / [($1,800,000 + $2,200,000) / 2] = 1.85
Topic: Asset Turnover Ratio LO: 7 Level of Difficulty: EASY 69. At January 1, 2019, Bakas Company had total assets of $5,400,000 and at December 31, 2019, its total assets were $6,600,000. Markus’s net sales for 2019 were $13,650,000 and its 2019 net income was $360,000. Bakas’s asset turnover ratio for 2019 is: A) 0.070 B) 0.064 C) 0.078 D) 2.275 Answer: D Rationale: $13,650,000 / [($5,400,000 + $6,600,000) / 2] = 2.275
Topic: Return on Assets LO: 7 Level of Difficulty: EASY 70. At January 1, 2019, Kane Company had total assets of $2,100,000 and at December 31, 2019, its total assets were $2,400,000. Kane’s net sales for 2019 were $3,000,000 and its 2021 net income was $210,000. DuPage’s return on assets for 2019 is: A) 7.00% B) 8.75% C) 9.33% D) 87.47% Answer: C Rationale: $210,000 / [($2,100,000 + $2,400,000) / 2] = 9.33%
©Cambridge Business Publishers, 2020 9-32
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Asset Turnover Ratio LO: 7 Level of Difficulty: EASY 71. At January 1, 2019, Peter & Sons Company had total assets of $1,400,000 and at December 31, 2019, its total assets were $1,600,000. Peter & Sons’ net sales for 2019 were $1,350,000 and its 2019 net income was $120,000. Peter & Sons’ asset turnover for 2019 is: A) 0.08 B) 0.07 C) 0.90 D) 1.25 Answer: C Rationale: $1,350,000 / [($1,400,000 + $1,600,000) / 2] = 0.90
Topic: Asset Turnover Ratio LO: 7 Level of Difficulty: EASY 72. Pokagon Store’s 2019 financial statements show earnings before interest of $3,273 million, net income of $210 million, sales of $235,226 million, and average total assets of $65,025 million. How much is Pokagon Store’s asset turnover for the year? A) 3.62 B) 0.39 C) 4.00 D) 5.88 Answer: A Rationale: Asset turnover = Sales / Average total assets = $235,226 million / $65,025 million = 3.62
Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 73. On January 1, 2018, Fireside Company purchased equipment for $172,000. Fireside uses straightline depreciation and estimates an eight-year useful life and a $12,000 salvage value. On December 31, 2022, Fireside sells the equipment for $60,000. In recording this sale, Fireside should reflect: A) A $ 6,000 loss B) A $24,000 loss C) A $12,000 loss D) No gain or loss Answer: C Rationale: ($172,000 – $12,000) / 8 = $20,000 annual depreciation $172,000 – (5 x $20,000) = $72,000 book value at disposal date $72,000 book value - $60,000 proceeds = $12,000 loss on sale
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-33
Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 74. On January 1, 2018, Lumos Company purchased a machine for $70,200. Lumos uses straight-line depreciation and estimates an eight-year useful life and an $5,400 salvage value. On December 31, 2021, Lumos sells the machine for $42,000. In recording this sale, Lumos should reflect: A) A $4,200 gain B) A $1,200 loss C) A $9,600 gain D) No gain or loss Answer: A Rationale: ($70,200 – $5,400) / 8 = $8,100 annual depreciation $70,200 – (4 x $8,100) = $37,800 book value at disposal date $42,000 proceeds – $37,800 book value = $4,200 gain on sale
Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 75. On January 1, 2019, Shadow, Inc. purchased equipment for $54,000. Shadow uses straight-line depreciation and estimates a 10-year useful life and a $6,000 salvage value. On December 31, 2023, Shadow sells the equipment for $28,400. In recording this sale, Shadow should reflect: A) A $ 2,800 gain B) A $ 3,200 gain C) A $ 6,000 gain D) A $12,800 gain Answer: D Rationale: ($54,000 – $6,000) / 10 = $4,800 annual depreciation $54,000 – (8 x $4,800) = $15,600 book value at disposal date $28,400 proceeds – $15,600 book value = $12,800 gain
Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 76. On January 1, 2017, Starch, Inc. purchased a machine for $120,000. Starch uses straight-line depreciation and estimates a seven-year useful life and a $4,500 salvage value. On December 31, 2023, Starch cannot locate a buyer for the used machine so it is scrapped. In recording the machine retirement, Starch should reflect: A) No gain or loss B) A $ 4,500 gain C) A $ 4,500 loss D) A 115,500 loss Answer: C Rationale: ($12,000 – $4,500) / 7 = $16,500 annual depreciation $120,000 – (7 x $16,500) = $4,500 book value at disposal date = $4,500 loss on retirement ©Cambridge Business Publishers, 2020 9-34
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 77. On January 1, 2017, Twinkle, Inc. purchased a machine for $160,000. Twinkle uses straight-line depreciation and estimates a seven-year useful life and a $6,000 salvage value. On December 31, 2023, Twinkle cannot locate a buyer for the used machine so it is scrapped. In recording the machine retirement, Twinkle should reflect: A) No gain or loss B) A $6,000 gain C) A $6,000 loss D) A $154,000 loss Answer: C Rationale: ($160,000 – $6,000) / 7 = $22,000 annual depreciation $160,000 – (7 x $22,000) = $6,000 book value at disposal date = $6,000 loss on retirement
Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 78. On January 1, 2017, Cornie, Inc. purchased a machine for $111,600. Cornie uses straight-line depreciation and estimates an eight-year useful life and a $3,600 salvage value. On December 31, 2024, Cornie cannot locate a buyer for the used machine so it is scrapped. In recording the machine retirement, Cornie should reflect: A) No gain or loss B) A $ 3,600 gain C) A $ 3,600 loss D) A $86,400 loss Answer: C Rationale: ($111,600 – $3,600) / 8 = $13,500 annual depreciation $111,600 – (8 x $13,500) = $3,600 book value at disposal date = $3,600 loss on retirement
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-35
Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 79. On January 1, 2017, Flute, Inc. purchased a machine for $148,800. Flute uses straight-line depreciation and estimates an eight-year useful life and a $4,800 salvage value. On December 31, 2024, Flute cannot locate a buyer for the used machine so it is scrapped. In recording the machine retirement, Flute should reflect: A) No gain or loss B) A $4,800 gain C) A $4,800 loss D) A $115,200 loss Answer: C Rationale: ($148,800 – $4,800) / 8 = $18,000 annual depreciation $148,800 – (8 x $18,000) = $4,800 book value at disposal date = $4,800 loss on retirement
Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 80. On July 1, 2018, Nanette Company purchased equipment for $216,000. Nanette uses straight-line depreciation and estimates a six-year useful life and a $36,000 salvage value. On December 31, 2021, the equipment is destroyed by fire. The equipment is not insured. The journal entry to record the equipment’s destruction should reflect: A) A $ 36,000 loss B) A $111,000 loss C) A $ 75,000 loss D) A $105,000 loss Answer: B Rationale: ($216,000 – $36,000) / 6 = $30,000 annual depreciation $216,000 – (3.5 x $60,000) = $111,000 book value at date of fire = $111,000 fire loss
©Cambridge Business Publishers, 2020 9-36
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 81. On January 1, 2018, Salt Company purchased equipment for $32,000. Salt uses straight-line depreciation and estimates a five-year useful life and a $2,000 salvage value. On December 31, 2022, the equipment was stolen. Assuming the equipment was not insured against theft, the journal entry to record the theft should reflect: A) No gain or loss B) A $30,000 loss C) A $32,000 loss D) A $ 2,000 loss Answer: D Rationale: ($32,000 – $2,000) / 5 = $6,000 annual depreciation $32,000 – (5 x $6,000) = $2,000 book value at date of theft = $2,000 theft loss
Topic: Asset Disposal Journal Entries LO: 4 Level of Difficulty: MEDIUM 82. Several years ago, Kokoras, Inc. purchased a computer costing $135,000, for which total depreciation of $105,000 has been recorded. Assuming that the computer is sold for $45,000 cash, the proper entry to record the sale is: A) Debit Cash, $45,000; debit Accumulated Depreciation, $105,000; credit Computer, $135,000 B) Debit Cash, $45,000; debit Accumulated Depreciation, $105,000; credit Computer, $144,000 C) Debit Cash, $45,000; debit Accumulated Depreciation, $105,000; credit Computer, $135,000; credit Gain on Sale of Computer, $15,000 D) Debit Cash, $45,000; credit Computer $30,000; credit Gain on Sale of Computer, $15,000 Answer: C Rationale: The gain of $15,000 is calculated as the sale proceeds of $45,000 minus the asset’s book value of $30,000 ($135,000 - $105,000). The journal entry to record the sale is: Cash Accumulated depreciation—Computer Computer Gain on sale of Computer To record the sale of equipment for $45,000.
45,000 105,000 135,000 15,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-37
Topic: Asset Disposal Journal Entries LO: 4 Level of Difficulty: MEDIUM 83. Several years ago, Beglen, Inc. purchased a computer costing $180,000, for which total depreciation of $140,000 has been recorded. Assuming that the computer is sold for $60,000 cash, the proper entry to record the sale is: A) Debit Cash, $60,000; debit Accumulated Depreciation, $140,000; credit Computer, $180,000 B) Debit Cash, $60,000; debit Accumulated Depreciation, $140,000; credit Computer, $192,000 C) Debit Cash, $60,000; debit Accumulated Depreciation, $140,000; credit Computer, $180,000; credit Gain on Sale of Computer, $20,000 D) Debit Cash, $60,000; credit Computer $40,000; credit Gain on Sale of Computer, $20,000 Answer: C Rationale: The gain of $20,000 is calculated as the sale proceeds of $60,000 minus the asset’s book value of $40,000 ($180,000 - $140,000). The journal entries to record the sale are: Cash Accumulated depreciation—Computer Computer Gain on sale of Computer To record the sale of equipment for $60,000.
60,000 140,000 180,000 20,000
Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 84. On June 30, 2019, Robert, Inc. sold some used equipment for $90,000. The equipment had been purchased several years ago for $195,000. Robert, Inc. properly recorded a $21,000 gain on the sale. The accumulated depreciation on the equipment at the date of sale was: A) $ 96,000 B) $102,000 C) $126,000 D) $ 66,000 Answer: C Rationale: $195,000 old equipment cost + $21,000 gain on sale – $90,000 cash received = $126,000 accumulated depreciation
©Cambridge Business Publishers, 2020 9-38
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 85. On June 30, 2019, Milch, Inc. sold some used equipment for $120,000. The equipment had been purchased several years ago for $260,000. Milch, Inc. properly recorded a $28,000 gain on the sale. The accumulated depreciation on the equipment at the date of sale was: A) $128,000 B) $136,000 C) $168,000 D) $ 88,000 Answer: C Rationale: $260,000 old equipment cost + $28,000 gain on sale – $120,000 cash received = $168,000 accumulated depreciation
Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 86. On April 30, 2019, TWC & Brothers sold some used equipment for $84,000. The accumulated depreciation on the equipment when sold was $96,000. TWC & Brothers properly recorded a $33,000 gain on the sale. The original cost of the equipment when it was purchased several years ago by TWC & Brothers must have been: A) $ 42,000 B) $ 75,000 C) $117,000 D) $147,000 Answer: D Rationale: $84,000 cash + $96,000 accumulated depreciation – $33,000 gain on sale = $147,000 original cost of equipment
Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 87. On April 30, 2019, Peter & Sons sold some used equipment for $112,000. The accumulated depreciation on the equipment when sold was $128,000. Peter & Sons properly recorded a $44,000 gain on the sale. The original cost of the equipment when it was purchased several years ago by Peter & Sons must have been: A) $ 56,000 B) $100,000 C) $156,000 D) $196,000 Answer: D Rationale: $112,000 cash + $128,000 accumulated depreciation – $44,000 gain on sale = $196,000 original cost of equipment ©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-39
Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: EASY 88. Glencoe Company sells a plant asset and correctly records a gain on the sale. The presence of a gain means the sales proceeds must have been greater than the plant asset’s: A) Book value B) Accumulated depreciation C) Original cost D) Original cost minus estimated salvage value Answer: A Rationale: Sales proceeds in excess of book value create a gain.
Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: EASY 89. A gain or loss on the sale of a plant asset is determined by comparing the: A) Asset’s original cost with the sales proceeds B) Asset’s book value with the sales proceeds C) Asset’s original cost with the asset’s book value D) Initial estimate of the asset’s salvage value with the sales proceeds Answer: B Rationale: Sale proceeds in excess of book value create a gain, whereas book values in excess of sales proceeds create a loss.
Topic: Gain/Loss on Asset Disposal LO: 4 Level of Difficulty: MEDIUM 90. One of Elm Company’s plant assets is destroyed by fire before the end of its useful life. Which one of the following independent situations results in a gain for Elm Company? A) The plant asset is not insured. B) The plant asset is insured, and the insurance settlement equals the asset’s book value. C) The plant asset is insured, and the asset’s book value exceeds the insurance settlement. D) The plant asset is insured, and the insurance settlement exceeds the asset’s book value. Answer: D Rationale: An insurance settlement is similar to sales proceeds, in that cash is received for the plant asset. So, if the asset is insured, and if insurance proceeds received are in excess of the asset’s book value, a gain is created.
©Cambridge Business Publishers, 2020 9-40
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Patents LO: 5 Level of Difficulty: EASY 91. An exclusive right, granted by the federal government for 20 years, to exclude others from making, using, or selling an invention is a: A) Franchise B) Copyright C) Patent D) Leasehold Answer: C Rationale: A patent is an exclusive privilege granted to an inventor by the U.S. Patent Office for a period of 20 years from the date the patent application is filed. A patent gives the patent holder the right to exclude others from making, using, or selling the invention.
Topic: Intangibles Amortization Expense LO: 5 Level of Difficulty: EASY 92. Unless another amortization method is shown to be more appropriate, intangible assets are amortized using the: A) Straight-line method B) Percentage depletion method C) Double declining-balance method D) Units-of-production method Answer: A Rationale: The amortization of an intangible asset carried on the balance sheet involves the periodic expensing of the asset’s cost over the term of its expected useful life. Straight line amortization is typically used for intangible assets unless another method is shown to be more appropriate.
Topic: Research and Development Costs LO: 5 Level of Difficulty: EASY 93. Research and development costs that relate to a firm’s products and its production processes: A) Must be expensed when incurred B) Are capitalized when the costs benefit future periods C) May be expensed or capitalized at the discretion of the firm’s management. D) Must be capitalized and amortized over 40 years Answer: A Rationale: Research and development costs are not capitalized to the balance sheet as an intangible asset because GAAP guidelines require that these expenditures be expensed when incurred.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-41
Topic: Balance Sheet Presentation of Long-Lived Assets LO: 6 Level of Difficulty: EASY 94. Where are plant assets and intangible assets classified in a balance sheet? A) Between current assets and investments B) Immediately before current assets C) After current assets and investments D) After long-term liabilities Answer: C Rationale: Plant assets and intangible assets are presented on the balance sheet below the Current assets category. The assets are listed on a classified balance sheet in descending order of liquidity.
Topic: Balance Sheet Presentation of Long-Lived Assets LO: 6 Level of Difficulty: EASY 95. Which of the following shows the listed items in their proper order of presentation in a balance sheet? A) Plant assets, intangible assets, current assets B) Current assets, plant assets, intangible assets C) Current assets, intangible assets, plant assets D) Intangible assets, plant assets, current assets Answer: B Rationale: Assets are listed on a classified balance sheet in descending order of liquidity.
Topic: Asset Turnover Ratio LO: 7 Level of Difficulty: EASY 96. The asset turnover ratio relates financial data from the balance sheet with financial data from the: A) Statement of cash flows B) Income statement C) Statement of owners’ equity D) Balance sheet Answer: B Rationale: The asset turnover ratio is a ratio that evaluates a company’s effective use of its assets. The asset turnover ratio is calculated as follows: Asset turnover = Net sales / Average total assets. This ratio relates data from two financial statements—the income statement and the balance sheet.
Topic: Return on Assets Ratio LO: 7 Level of Difficulty: EASY 97. The return on assets ratio relates financial data from the balance sheet with financial data from the: A) Statement of cash flows B) Income statement C) Statement of owners’ equity D) Balance sheet Answer: B Rationale: The return on assets ratio is a widely used indicator that focuses on a firm’s financial health. The return on assets ratio is calculated as: Return on assets = Net income /Average total assets. This ratio relates data from two financial statements—the income statement and the balance sheet. ©Cambridge Business Publishers, 2020 9-42
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Asset Turnover Ratio LO: 7 Level of Difficulty: EASY 98. Asset turnover is computed as: A) Average total assets x Net sales B) Average total assets / Net sales C) Net sales / Average total assets D) Net income / Year-end total assets Answer: C Rationale: The asset turnover ratio is a ratio that evaluates a company’s effective use of its assets. The asset turnover ratio is calculated as follows: Asset turnover = Net sales / Average total assets.
Topic: Asset Turnover Ratio LO: 7 Level of Difficulty: EASY 99. During 2019, Belmont, Inc. had net sales of $19,880,000 and net income of $2,430,000. Total assets were $13,800,000 at January 1, 2019 and $16,200,000 at December 31, 2019. Belmont’s asset turnover for 2019 is: A) 1.405 B) 0.182 C) 0.196 D) 1.325 Answer: D Rationale: Asset turnover = Net sales / Average total assets. X = $19,880,000 / [($13,800,000 + $16,200,000) / 2] X = $19,880,000 / $15,000,000 X = 1.325
Topic: Asset Turnover Ratio LO: 7 Level of Difficulty: MEDIUM 100. Grove Company’s 2019 asset turnover was 3.0. The firm’s total assets were $8,750,000 at January 1, 2019 and $9,300,000 at December 31, 2019. Net sales for 2019 were: A) $26,286,000 B) $ 4,436,445 C) $22,460,000 D) $27,075,000 Answer: D Rationale: Asset turnover = Net sales / Average total assets. 3.0 = X / [($8,750,000 + $9,300,000) / 2] X = 3.0 x [($8,750,000 + $9,300,000) / 2] X = 3.0 x $9,025,000 X = $27,075,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-43
Topic: Asset Turnover Ratio LO: 7 Level of Difficulty: MEDIUM 101. Tiffany Company’s 2019 asset turnover was 3.0. The firm’s total assets were $10,000,000 at January 1, 2019 and $12,400,000 at December 31, 2019. Net sales for 2019 were: A) $25,200,000 B) $ 5,511,112 C) $27,900,000 D) $33,600,000 Answer: D Rationale: Asset turnover = Net sales / Average total assets. 3.0 = X / [($10,000,000 + $12,400,000) / 2] X = 3.0 x [($10,000,000 + $12,400,000) / 2] X = 3.0 x $11,200,000 X = $33,600,000
Topic: Package Purchases LO: 1 Level of Difficulty: EASY 102. Nutgum Company made a package purchase of three pieces of machinery for $48,000. The fair market values of the machinery were determined to be as follows: Machine A Machine B Machine C
$24,000 38,400 33,600
What cost should Nutgum record for Machine C? A) $12,000 B) $33,600 C) $19,200 D) $16,800 Answer: D Rationale: Asset Machine A Machine B Machine C Totals
Estimated Fair Market Value $24,000 38,400 33,600 $96,000
Percent of Total 25% 40% 35% 100%
Allocation of Purchase Price $12,000 (25% x $48,000) 19,200 (40% x $48,000) 16,800 (35% x $48,000) $48,000
©Cambridge Business Publishers, 2020 9-44
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Package Purchases LO: 1 Level of Difficulty: EASY 103. Taffy Company made a package purchase of three pieces of machinery for $144,000. The fair market values of the machinery were determined to be as follows: Machine A Machine B Machine C
$ 72,000 115,200 100,800
What cost should Taffy Company record for Machine C? A) $ 36,000 B) $100,800 C) $ 57,600 D) $ 50,400 Answer: D Rationale: Asset Machine A Machine B Machine C Totals
Estimated Fair Market Value
Percent of Total 25% 40% 35% 100%
$72,000 115,200 100,800 $288,000
Allocation of Purchase Price $36,000 (25% x $144,000) 57,600 (40% x $144,000) 50,400 (35% x $144,000) $144,000
Topic: Package Purchases LO: 1 Level of Difficulty: MEDIUM 104. Hubert Company purchased a property (including land and building). The company acquired the property in exchange for a 15-year mortgage for $1,800,000. Their insurance company appraised the components as follows: Land Building Parking lot
$400,000 1,400,000 200,000
What should be the cost basis for the building? A) $1,260,000 B) $1,400,000 C) $1,200,000 D) $1,244,444 Answer: A Rationale: Sometimes several long-lived assets are purchased as a package. The total package price is allocated among the acquired assets on the basis of their relative market or appraisal values.
Asset Land Building Parking lot Totals
Estimated Fair Market Value $ 400,000 1,400,000 200,000 $2,000,000
Percent of Total 20% 70% 10% 100%
Allocation of Purchase Price $ 360,000 (20% x $1,800,000) 1,260,000 (70% x $1,800,000) 180,000 (10% x $1,800,000) $1,800,000 ©Cambridge Business Publishers, 2020
Test Bank, Chapter 9
9-45
Topic: Package Purchases LO: 1 Level of Difficulty: MEDIUM 105. Henry Company purchased a property (including land and building). The company acquired the property in exchange for a 15-year mortgage for $5,400,000. Their insurance company appraised the components as follows: Land Building Parking lot
$1,200,000 4,200,000 600,000
What should be the cost basis for the building? A) $3,780,000 B) $3,000,000 C) $3,600,000 D) $3,633,333 Answer: A Rationale: Asset Land Building Parking lot Totals
Estimated Fair Market Value $ 1,200,000 4,200,000 600,000 $6,000,000
Percent of Total 20% 70% 10% 100%
Allocation of Purchase Price $ 1,080,000 (20% x $5,400,000) 3,780,000 (70% x $5,400,000) 540,000 (10% x $5,400,000) $5,400,000
Topic: Straight-Line Depreciation LO: 2 Level of Difficulty: MEDIUM 106. Caesar Company bought a machine on January 1, 2019. The machine cost $144,000 and had an expected salvage value of $24,000. The life of the machine was estimated to be 5 years. Using straight line depreciation, the book value of the machine at the beginning of the third year would be: A) $120,000 B) $48,000 C) $72,000 D) $96,000 Answer: D Rationale: Annual depreciation = ($144,000 - $24,000) / 5 = $24,000 $144,000 – (2 x $24,000) = $96,000
©Cambridge Business Publishers, 2020 9-46
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Straight-Line Depreciation LO: 2 Level of Difficulty: MEDIUM 107. Apple Company bought a machine on January 1, 2019. The machine cost $432,000 and had an expected salvage value of $72,000. The life of the machine was estimated to be 5 years. Using straight line depreciation, the book value of the machine at the beginning of the third year would be: A) $360,000 B) $144,000 C) $216,000 D) $288,000 Answer: D Rationale: Annual depreciation = ($432,000 - $72,000) / 5 = $72,000 $432,000 – (2 x $72,000) = $288,000
Topic: Units-of-Production Depreciation Method LO: 2 Level of Difficulty: MEDIUM 108. Jafari Corporation purchased a truck at the beginning of 2019 for $180,000. The truck is estimated to have a salvage value of $6,000 and a useful life of 240,000 miles. It was driven 36,000 miles in 2019 and 64,000 miles in 2020. What is the book value of the truck on December 31, 2020? A) $111,600 B) $ 84,000 C) $107,500 D) $ 60,000 Answer: C Rationale: Depreciation per unit = ($180,000 - $6,000) / 240,000 = $0.725 per mile $0.725 x (36,000 + 64,000) = $72,500 $180,000 - $72,500 = $107,500
Topic: Units-of-Production Depreciation Method LO: 2 Level of Difficulty: MEDIUM 109. Arabia Corporation purchased a truck at the beginning of 2019 for $540,000. The truck is estimated to have a salvage value of $18,000 and a useful life of 480,000 miles. It was driven 72,000 miles in 2019 and 128,000 miles in 2020. What is the book value of the truck on December 31, 2020? A) $334,800 B) $252,000 C) $322,500 D) $180,000 Answer: C Rationale: Depreciation per unit = ($540,000 - $18,000) / 480,000 = $1.0875 per mile $1.0875 x (72,000 + 128,000) = $217,500 $540,000 - $217,500 = $322,500 ©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-47
Topic: Declining-Balance Depreciation Method LO: 2 Level of Difficulty: DIFFICULT 110. On April 30, 2019, Macy Products purchased machinery for $132,000. The useful life of this machinery is estimated at 5 years, with a $32,000 residual value. The company uses the doubledeclining-balance method. Depreciation expense for the fiscal year ending on December 31, 2020 will be: A) $31,680 B) $36,800 C) $42,134 D) $38,720 Answer: D Rationale: $132,000 x 2/5 x 8/12 = $35,200 ($132,000 - $35,200) x 2/5 = $38,720
Topic: Declining-Balance Depreciation Method LO: 2 Level of Difficulty: DIFFICULT 111. On April 30, 2019, Penny Products purchased machinery for 396,000. The useful life of this machinery is estimated at 5 years, with a $96,000 residual value. The company uses the doubledeclining-balance method. Depreciation expense for the fiscal year ending on December 31, 2020 will be: A) $ 95,040 B) $110,400 C) $126,400 D) $116,160 Answer: D Rationale: $396,000 x 2/5 x 8/12 = $105,600 ($396,000 - $105,600) x 2/5 = $116,160
Topic: Declining-Balance Depreciation Method LO: 2 Level of Difficulty: DIFFICULT 112. On April 1, 2019, Lake Co. purchased machinery for $240,000. Salvage value was estimated to be $10,000. The machinery will be depreciated over ten years using the double-declining balance method. If depreciation is computed on the basis of the nearest full month, determine the depreciation expense for the period January 1 thru December 31, 2020 on this machinery. A) $41,600 B) $40,800 C) $41,400 D) $41,866 Answer: B Rationale: $240,000 x 2/10 x 9/12 = $36,000 ($240,000 - $36,000) x 2/10 = $40,800 ©Cambridge Business Publishers, 2020 9-48
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Declining-Balance Depreciation Method LO: 2 Level of Difficulty: MEDIUM 113. Paden City Company purchased a new van for floral deliveries on January 1, 2019. The van cost $108,000 with an estimated life of 5 years and $12,000 salvage value at the end of its useful life. The double-declining-balance method of depreciation will be used. What is the balance of the Accumulated Depreciation account at the end of 2020? A) $43,200 B) $25,920 C) $57,600 D) $69,120 Answer: D Rationale: $108,000 x 2/5 = $43,200 ($108,000 - $43,200) x 2/5 = $25,920 $43,200 + $25,920 = $69,120
Topic: Declining-Balance Depreciation Method LO: 2 Level of Difficulty: MEDIUM 114. Durham Company purchased a new van for floral deliveries on January 1, 2019. The van cost $84,000 with an estimated life of 5 years and $10,000 salvage value at the end of its useful life. The double-declining-balance method of depreciation will be used. What is the balance of the Accumulated Depreciation account at the end of 2020? A) $33,600 B) $20,160 C) $16,800 D) $53,760 Answer: D Rationale: $84,000 x 2/5 = $33,600 ($84,000 - $33,600) x 2/5 = $20,160 $33,600 + 20,160 = $53,760
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-49
Topic: Declining-Balance Depreciation Method LO: 2 Level of Difficulty: MEDIUM 115. On January 1, 2018, Beast Company acquired equipment for $360,000. The estimated life of the equipment is 5 years or 20,000 hours. The estimated residual value is $60,000. What is the amount of depreciation expense for 2020, if the company uses the double-decliningbalance method of depreciation? A) $77,760 B) $51,840 C) $43,200 D) $86,400 Answer: B Rationale: $360,000 x 2/5 = $144,000 ($360,000 - $144,000) x 2/5 = $86,400 ($216,000 - $86,400) x 2/5 = $51,840
Topic: Declining-Balance Depreciation Method LO: 2 Level of Difficulty: MEDIUM 116. On January 1, 2019, Sabrina Company acquired equipment for $480,000. The estimated life of the equipment is 5 years or 20,000 hours. The estimated residual value is $80,000. What is the amount of depreciation expense for 2020, if the company uses the double-decliningbalance method of depreciation? A) $103,680 B) $ 69,120 C) $ 57,600 D) $115,200 Answer: B Rationale: $480,000 x 2/5 = $192,000 ($480,000 - $192,000) x 2/5 = $115,200 ($288,000 - $115,200) x 2/5 = $69,120
©Cambridge Business Publishers, 2020 9-50
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Declining-Balance Depreciation Method LO: 2 Level of Difficulty: MEDIUM 117. Gold Star Company purchased a machine on January 1, 2019 for $120,000, with a 5-year life, and a $12,000 residual life. Compute the book value of the machine on December 31, 2021 if the company uses the doubledeclining balance method of depreciation. A) $20,000 B) $25,920 C) $21,600 D) $48,000 Answer: B Rationale: $120,000 x 2/5 = $48,000 ($120,000 - $48,000) x 2/5 = $28,800 ($72,000 - $28,800) x 2/5 = $17,280 $120,000 - ($48,000 + $28,800 + $17,280) = $25,920
Topic: Declining-Balance Depreciation Method LO: 2 Level of Difficulty: MEDIUM 118. Golden Dollar Company purchased a machine on January 1, 2019 for $360,000, with a 5-year life, and a $36,000 residual life. If Compute the book value of the machine on December 31, 2021 if the company uses the doubledeclining balance method of depreciation. A) $ 60,000 B) $ 77,760 C) $ 64,800 D) $144,000 Answer: B Rationale: $360,000 x 2/5 = $144,000 ($360,000 - $144,000) x 2/5 = $86,400 ($216,000 - $86,400) x 2/5 = $51,840 $360,000 - ($144,000 + $86,400 + $51,840) = $77,760
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-51
Topic: Declining-Balance Depreciation Method LO: 2 Level of Difficulty: DIFFICULT 119. Gold Stat Company purchased a machine on January 1, 2019 for $120,000, with a 5-year life, and a $12,000 residual life. If the company uses the double-declining balance method of depreciation, compute the depreciation expense for the year ended December 31, 2023. A) $15,554 B) $12,000 C) $ 3,552 D) $ 6,220 Answer: C Rationale: Year of Useful Life
Acquisition Cost
Beginning Accumulated Depreciation
Beginning Book Value
2019 2020 2021 2022 2023
$120,000 $120,000 $120,000 $120,000 $120,000
$ 0 $ 48,000 $ 76,800 $ 94,080 $104,448
$120,000 $ 72,000 $ 43,200 $ 25,920 $ 15,552
Twice Straight-line Percentage x x x x
Annual Depreciation Expense
40% 40% 40% 40% (exceeds limit)*
= = = =
$48,000 $28,800 $17,280 $10,368 $ 3,552
* In the fifth year that the depreciation expense is only $3,552, the amount needed to reduce the asset’s book value to its estimated salvage value of $12,000. Assets are not depreciated below their estimated salvage value.
Topic: Declining-Balance Depreciation Method LO: 2 Level of Difficulty: DIFFICULT 120. Golden Dollar Company purchased a machine on January 1, 2019 for $360,000, with a 5-year life, and a $36,000 residual life. If the company uses the double-declining balance method of depreciation, compute the depreciation expense for the year ended December 31, 2023. A) $46,662 B) $36,000 C) $10,656 D) $18,660 Answer: C Rationale: Year of Useful Life
Acquisition Cost
Beginning Accumulated Depreciation
Beginning Book Value
2019 2020
Twice Straight-line Percentage
$360,000
$
0
$360,000
x
40%
=
$144,000
$360,000
$ 144,000
$216,000
x
40%
=
$ 86,400
2021
$360,000
$230,400
$129,600
x
40%
=
$ 51,840
2022
$360,000
$282,240
$ 77,760
x
40%
=
$ 31,104
2023
$360,000
$313,344
$ 46,656
(exceeds limit)*
Annual Depreciation Expense
$ 10,656
* In the fifth year that the depreciation expense is only $10,656, the amount needed to reduce the asset’s book value to its estimated salvage value of $36,000. Assets are not depreciated below their estimated salvage value.
©Cambridge Business Publishers, 2020 9-52
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Depreciation Estimate Changes LO: 2 Level of Difficulty: MEDIUM 121. Joy Machinery acquired a new machine on January 1, 2017 at a cost of $100,000, which was estimated to have a useful life of 10 years, and a salvage value of $40,000. Straight-line depreciation was used. On January 1, 2022, management decided that the estimate of useful life had been too long and that the machinery would have to be retired after two more years, (that is, at the end of the eighth year of service), but would retain its original salvage value. Under this revised estimate, calculate the depreciation expense for the seventh year of use. A) $20,000 B) $12,000 C) $10,000 D) $12,500 Answer: B Rationale: Annual depreciation = ($100,000 - $40,000) / 10 = $6,000 Original acquisition cost Depreciation recorded (6 years @ $6,000) Book value at start of Year 7 Less salvage value Revised remaining depreciable cost
$100,000 (36,000) $ 64,000 (40,000) $ 24,000
Revised depreciation for Years 7 and 8: $24,000 / 2 = $12,000 per year
Topic: Depreciation Estimate Changes LO: 2 Level of Difficulty: MEDIUM 122. Swift Corporation purchased a depreciable asset for $1,170,000 on January 1, 2018. The estimated salvage value is $90,000, and the estimated useful life is 9 years. The straight-line method is used for depreciation. On January 1, 2021, Swift changed its estimates to a total remaining useful life of 8 years with a salvage value of $150,000. What is 2021 depreciation expense? A) $ 82,500 B) $120,000 C) $150,000 D) $180,000 Answer: A Rationale: Annual depreciation = ($1,170,000 - $90,000) / 9 = $120,000 Original acquisition cost Depreciation recorded (3 years @ $120,000) Book value at start of Year 4 Less revised salvage value Revised remaining depreciable cost
$1,170,000 (360,000) $810,000 (150,000) $660,000
Revised depreciation for Years 4 – 11: $660,000 / 8 = $82,500 per year
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-53
Topic: Depreciation Estimate Changes LO: 2 Level of Difficulty: MEDIUM 123. Tidy Corporation purchased a depreciable asset for $1,560,000 on January 1, 2018. The estimated salvage value is $120,000, and the estimated useful life is 9 years. The straight-line method is used for depreciation. On January 1, 2021, Tidy changed its estimates to a total remaining useful life of 8 years with a salvage value of $200,000. What is 2018 depreciation expense? A) $110,000 B) $160,000 C) $200,000 D) $240,000 Answer: A Rationale: Annual depreciation = ($1,560,000 - $120,000) / 9 = $160,000 Original acquisition cost Depreciation recorded (3 years @ $160,000) Book value at start of Year 4 Less revised salvage value Revised remaining depreciable cost
$1,560,000 (480,000) $1,080,000 (200,000) $ 880,000
Revised depreciation for Years 4 – 11: $880,000 / 8 = $110,000 per year
Topic: Depreciation Estimate Changes LO: 2 Level of Difficulty: MEDIUM 124. Equipment costing $120,000 with a salvage value of $12,000 and an estimated life of 8 years has been depreciated by Davey Company using the straight-line method for 2 years. Assuming a revised estimated total life of 6 years, and no change in the salvage value, determine the depreciation expense for Year 3. A) $20,250 B) $ 8,001 C) $ 9,000 D) $64,000 Answer: A Rationale: Annual depreciation = ($120,000 - $12,000) / 8 = $13,500 Original acquisition cost Depreciation recorded (2 years @ $13,500) Book value at start of Year 3 Less salvage value Revised remaining depreciable cost
$120,000 (27,000) $93,000 (12,000) $81,000
Revised depreciation for Years 3 – 6: $81,000 / 4 = $20,250 per year
©Cambridge Business Publishers, 2020 9-54
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Depreciation Estimate Changes LO: 2 Level of Difficulty: MEDIUM 125. Fantasyland Company purchased equipment with a cost of $190,000, with an estimated residual value of $10,000, and an estimated life of 15 years. After 5 full years of recording depreciation by the straight-line method, it was determined that due to obsolescence, the equipment’s useful life should be reduced by 5 years and the residual value changed to zero. The depreciation expense for Year 6 is: A) $11,000 B) $22,000 C) $20,000 D) $26,000 Answer: D Rationale: Annual depreciation ($190,000 - $10,000) / 15 = $12,000 Original acquisition cost Depreciation recorded (5 years @ $12,000) Book value at start of Year 6 Less salvage value Revised remaining depreciable cost
$190,000 (60,000) $130,000 (0) $130,000
Revised depreciation for Years 6 – 10: $130,000 / 5 = $26,000 per year
Topic: Depreciation Estimate Changes LO: 2 Level of Difficulty: MEDIUM 126. Rabbit Company purchased equipment with a cost of $570,000, with an estimated residual value of $30,000, and an estimated life of 15 years. After 5 full years of recording depreciation by the straight-line method, it was determined that due to obsolescence, the equipment’s useful life should be reduced by 5 years and the residual value changed to zero. The depreciation expense for year 6 is: A) $33,000 B) $66,000 C) $60,000 D) $78,000 Answer: D Rationale: Annual depreciation ($570,000 - $30,000) / 15 = $36,000 Original acquisition cost Depreciation recorded (5 years @ $36,000) Book value at start of Year 6 Less salvage value Revised remaining depreciable cost
$570,000 (180,000) $390,000 (0) $390,000
Revised depreciation for Years 6 – 10: $390,000 / 5 = $78,000 per year
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-55
Topic: Depreciation Estimate Changes LO: 2 Level of Difficulty: MEDIUM 127. A company purchased a computer on January 1, 2019 for $40,000 cash. The computer is estimated to have a 5 year useful life, and no salvage value. On January 1, 2020, due to obsolescence, the computer is estimated to have only 2 years of remaining useful life, and the estimated salvage value after the 2 remaining years will be $4,000. Assuming straight line depreciation, the amount of depreciation expense to be recorded on December 31, 2020 will be: A) $16,000 B) $12,000 C) $20,000 D) $14,000 Answer: D Rationale: Annual depreciation = ($40,000 - $0) / 5 = $8,000 Original acquisition cost Depreciation recorded (1 year @ $8,000) Book value at start of Year 2 Less salvage value Revised remaining depreciable cost
$40,000 (8,000) $32,000 (4,000) $28,000
Revised depreciation for Years 2 and 3: $28,000 / 2 = $14,000 per year
Topic: Sale of Plant Assets LO: 4 Level of Difficulty: MEDIUM 128. On January 1, 2018, Frontier Corporation purchased for $474,000, equipment having a useful life of ten years and an estimated salvage value of $24,000. Adventure has recorded depreciation of the equipment on the straight-line method. On December 31, 2025, the equipment was sold for $84,000. As a result of this sale, Frontier should recognize: A) $-0B) A gain of $40,800 C) A loss of $30,000 D) A loss of $84,000 Answer: C Rationale: ($474,000 - $24,000) / 10 = $45,000 $474,000 – ($45,000 x 8) = $114,000 book value $84,000 - $114,000 = $(30,000) loss
©Cambridge Business Publishers, 2020 9-56
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Sale of Plant Assets LO: 4 Level of Difficulty: MEDIUM 129. Fashion Company sells a plant asset that originally cost $360,000 for $120,000 on December 31, 2019. The accumulated depreciation account had a balance of $180,000 after the current year's depreciation had been recorded. The company should recognize a: A) $120,000 loss on disposal B) $ 60,000 loss on disposal C) $ 60,000 gain on disposal D) $120,000 gain on disposal Answer: B Rationale: $360,000 - $180,000 = $180,000 book value $120,000 - $180,000 = $(60,000) loss
Topic: Sale of Plant Assets LO: 4 Level of Difficulty: MEDIUM 130. Bread Company sells a plant asset that originally cost $1,080,000 for $360,000 on December 31, 2019. The accumulated depreciation account had a balance of $540,000 after the current year's depreciation had been recorded. The company should recognize a: A) $360,000 loss on disposal B) $180,000 loss on disposal C) $180,000 gain on disposal D) $360,000 gain on disposal Answer: B Rationale: $1,080,000 - $540,000 = $540,000 book value $360,000 - $540,000 = $(180,000) loss
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-57
Topic: Sale of Plant Assets LO: 4 Level of Difficulty: DIFFICULT 131. On January 1, 2017, Alexis Company purchased a delivery truck for $60,000. They estimated the useful life of the truck to be 6 years, and the salvage value to be $12,000. On July 1, 2022, they sold the truck for a loss of $1,200. Assuming the company uses straight line depreciation, calculate the selling price of the truck. A) $10,500 B) $11,800 C) $14,800 D) $17,500 Answer: C Rationale: Accumulated depreciation = $60,000 - $12,000 / 6 = $8,000 x 5.5 years = $44,000 The journal entry to record the sale is: Cash Loss on sale of plant assets Accumulated depreciation—Delivery Truck Delivery Truck To record the sale of delivery truck.
X 1,200 44,000 60,000
X = $60,000 - $44,000 - $1,200 X = $14,800 Cash/Selling price
Topic: Sale of Plant Assets LO: 4 Level of Difficulty: DIFFICULT 132. On January 1, 2017, Panda Company purchased a delivery truck for $105,000. They estimated the useful life of the truck to be 6 years, and the salvage value to be $19,500. On July 1, 2022, they sold the truck for a loss of $2,700. Assuming the company uses straight line depreciation, calculate the selling price of the truck. A) $22,125 B) $24,825 C) $23,925 D) $33,750 Answer: C Rationale: Accumulated depreciation = $105,000 - $19,500 / 6 = $14,250 x 5.5 years = $78,375 The journal entry to record the sale is: Cash Loss on sale of plant assets Accumulated depreciation—Delivery Truck Delivery Truck To record the sale of delivery truck.
X 2,700 78,375 105,000
X = $105,000 - $78,375 - $2,700 X = $23,925 Cash/Selling price
©Cambridge Business Publishers, 2020 9-58
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Sale of Plant Assets LO: 4 Level of Difficulty: MEDIUM 133. A truck that cost Starch Company $36,000, was estimated to have a salvage value of $8,000, and was expected to last 10 years. At the end of 5 years of use (assume straight line depreciation), it was sold for $30,000, the journal entry to record the sale will involve a: A) Debit to Accumulated Depreciation - Truck for $14,000 B) Credit to Truck for $22,000 C) Debit to Loss on Sale for $8,000 D) Credit to Gain on Sale for $16,000 Answer: A Rationale: The journal entry to record the sale is: Cash Accumulated depreciation—Delivery Truck* Delivery Truck Gain on sale of plant assets To record the sale of delivery truck for $30,000.
30,000 14,000 36,000 8,000
*($36,000 - $8,000) / 10 = $2,800 x 5 years = $14,000
Topic: Sale of Plant Assets LO: 4 Level of Difficulty: MEDIUM 134. A truck that cost Owle Company $108,000, was estimated to have a salvage value of $24,000, and was expected to last 10 years. At the end of 5 years of use (assume straight line depreciation), it was sold for $90,000, the journal entry to record the sale will involve a: A) Debit to Accumulated Depreciation - Truck for $42,000 B) Credit to Truck for $66,000 C) Debit to Loss on Sale for $24,000 D) Credit to Gain on Sale for $48,000 Answer: A Rationale: The journal entry to record the sale is: Cash Accumulated depreciation—Delivery Truck* Delivery Truck Gain on sale of plant assets To record the sale of delivery truck for $90,000.
90,000 42,000 108,000 24,000
*($108,000 - $24,000) / 10 = $8,400 x 5 years = $42,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-59
Topic: Sale of Plant Assets LO: 4 Level of Difficulty: DIFFICULT 135. Portland Company purchased a machine on January 1, 2018 for $24,000. The company estimates that the machine will have a $2,000 salvage value at the end of its 10 year useful life. On September 30, 2022 the machine was sold for a gain of $1,750. What must have been the selling price of the machine? A) $14,350 B) $11,800 C) $15,300 D) $17,500 Answer: C Rationale: Accumulated depreciation: ($24,000 - $2,000) / 10 = $2,200 X 4.75 years = $10,450 The journal entry to record the sale is: Cash Accumulated depreciation—Machine Gain on sale of Machine Machine To record the sale of machine.
X 10,450 1,750 24,000
X = $24,000 - $10,450 + $1,750 X = $15,300
Topic: Sale of Plant Assets LO: 4 Level of Difficulty: DIFFICULT 136. Rite Company purchased a machine on January 1, 2018 for $72,000. The company estimates that the machine will have a $6,000 salvage value at the end of its 10 year useful life. On September 30, 2022 the machine was sold for a gain of $5,250. What must have been the selling price of the machine? A) $43,050 B) $35,400 C) $45,900 D) $52,500 Answer: C Rationale: Accumulated depreciation: ($72,000 - $6,000) / 10 = $6,600 X 4.75 years = $31,350 The journal entry to record the sale is: Cash Accumulated depreciation—Machine Gain on sale of Machine Machine To record the sale of machine.
X 31,350 5,250 72,000
X = $72,000 - $31,350 + $5,250 X = $45,900
©Cambridge Business Publishers, 2020 9-60
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Sale of Plant Assets LO: 4 Level of Difficulty: DIFFICULT 137. On January 1, 2019, Chace Instruments sold a depreciable asset for cash of $400,000 and recognized a gain of $60,000. The asset had been purchased on January 1, 2014 with an estimated useful life of 10 years, and no salvage value. The asset was depreciated using the straight-line method. What must have been the original cost of the asset? A) $660,000 B) $800,000 C) $680,000 D) $920,000 Answer: C Rationale: Annual depreciation = (X - $0) / 10 = (X / 10) Accumulated Depreciation = 5 years x (X / 10) = (5X / 10) = X / 2 (X = Original cost of asset) The journal entry to record the sale is: Cash Accumulated depreciation—Asset Gain on sale of Asset Asset To record the sale of the asset
400,000 X/2 60,000 X
Solve for X (original cost of asset): $400,000 + X/2 = $60,000 + X X - X/2 = $400,000 - $60,000 X/2 = $340,000 X = $680,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-61
Topic: Sale of Plant Assets LO: 4 Level of Difficulty: DIFFICULT 138. On January 1, 2019, Philadelphia Instruments sold a depreciable asset for cash of $1,200,000 and recognized a gain of $180,000. The asset had been purchased on January 1, 2014 with an estimated useful life of 10 years, and no salvage value. The asset was depreciated using the straight-line method. What must have been the original cost of the asset? A) $1,980,000 B) $2,400,000 C) $2,040,000 D) $2,750,000 Answer: C Rationale: Annual depreciation = (X - $0) / 10 = (X / 10) Accumulated Depreciation = 5 years x (X / 10) = (5X / 10) = X / 2 (X = Original cost of asset) The journal entry to record the sale is: Cash Accumulated depreciation—Asset Gain on sale of Asset Asset To record the sale of the asset
1,200,000 X/2 180,000 X
Solve for X (original cost of asset): $1,200,000 + X/2 = $180,000 + X X - X/2 = $1,200,000 - $180,000 X/2 = $1,020,000 X = $2,040,000
Topic: Natural Resources LO: 5 Level of Difficulty: MEDIUM 139. On April 1, 2019, Justin Company purchased a copper mine at a cost of $28,000,000. The mine was estimated to contain 1,000,000 tons of ore and to have a residual value of $8,000,000 after mining operations are completed. During the year, 250,000 tons of ore were removed from the mine. On December 31, 2019, the book value of the mine is: A) $20,500,000 B) $23,000,000 C) $17,500,000 D) $14,000,000 Answer: B Rationale: Depletion per unit = ($28,000,000 - $8,000,000) / 1,000,000 tons = $20 per ton $20 x 250,000 = $5,000,000 depletion $28,000,000 - $5,000,000 = $23,000,000
©Cambridge Business Publishers, 2020 9-62
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Natural Resources LO: 5 Level of Difficulty: MEDIUM 140. On April 1, 2019, Leon Company purchased a copper mine at a cost of $84,000,000. The mine was estimated to contain 4,000,000 tons of ore and to have a residual value of $24,000,000 after mining operations are completed. During the year, 750,000 tons of ore were removed from the mine. On December 31, 2019, the book value of the mine is: A) $90,000,000 B) $72,750,000 C) $52,500,000 D) $48,750,000 Answer: B Rationale: Depletion per unit = ($84,000,000 - $24,000,000) / 4,000,000 tons = $15 per ton $15 x 750,000 = $11,250,000 depletion $84,000,000 - $11,250,000 = $72,750,000 Topic: Natural Resources LO: 5 Level of Difficulty: EASY 141. On June 1, 2019, Martin Products purchased a silver mine for $3,000,000. Costs to further explore and develop the mine totaled $1,500,000. The value of the mine once mining operations are completed is expected to total $1,000,000. Martin Products expects to extract 1,250,000 tons of ore from the mine. During 2019, 150,000 tons of ore were extracted. 80,000 tons were sold to another company for further processing. What is the depletion rate for Martin Products? A) $3.60 per ton B) $2.80 per ton C) $2.40 per ton D) $1.60 per ton Answer: B Rationale: Depletion per unit = ($3,000,000 +1,500,000-1,000,000) / 1,250,000 tons = $2.80
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-63
Topic: Natural Resources LO: 5 Level of Difficulty: MEDIUM 142. On June 1, 2019, Martin Products purchased a silver mine for $3,000,000. Costs to further explore and develop the mine totaled $1,500,000. The value of the mine once mining operations are completed is expected to total $1,000,000. Martin Products expects to extract 1,250,000 tons of ore from the mine. During 2019, 150,000 tons of ore were extracted. 80,000 tons were sold to another company for further processing. What is the balance in the Inventory – Silver Ore account at December 31, 2019? A) $252,000 B) $420,000 C) $112,000 D) $196,000 Answer: D Rationale: Depletion per unit = ($3,000,000 +1,500,000-1,000,000) / 1,250,000 tons = $2.80. inventory = 150,000 – 80,000 = 70,000. 70,000 * $2.80 = $196,000.
Tons in
©Cambridge Business Publishers, 2020 9-64
th
Financial Accounting for Undergraduates, 4 Edition
Exercises Topic: Gains and Losses on Asset Sales LO: 4 1. Holmes Packaging sold a machine for $49,500. The company bought this machine for $120,000 seven years ago and was depreciating it on a straight-line basis over ten years to a $12,000 salvage value. What is the gain (loss) that Holmes Packaging should report? Answer: Annual depreciation = (Acquisition cost - Salvage value) / Estimated useful life X = ($120,000 - $12,000) / 10 = $10,800 per year Accumulated Depreciation 7 years x $10,800 = $75,600 Book value = Historical cost – Accumulation depreciation X = $120,000 –$75,600 X = $44,400 When an asset is sold, the company recognizes a gain (loss) equal to the difference between selling price and its carrying value reported on the balance sheet. Gain (loss) on sale = Selling price of asset – Net book value X= $49,500– $44,400 X = $5,100 gain
Topic: Asset Turnover LO: 7 2. Determine the 2019 asset turnover for Physics Laboratories using the financial statement information below:
Total assets Net sales Cost of goods sold Net income
2019
2018
$840,400 5,005,000 2,800,000 1,584,000
$761,800 4,800,000 3,000,000 1,100,000
Answer: Asset turnover = Net sales/Average total assets X = $5,005,000 / [($840,400 + $761,800) / 2] X = 6.25
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-65
Topic: Depreciation Expense ‒ Straight-Line Method LO: 2 3. Vermont Industries, a clothing mail-order retailer, purchased a new industrial sewing machine for $156,000. This machine is expected to operate for 5 years after which it will be sold for salvage value estimated to be $9,000. What is the yearly depreciation expense under the straight-line method? Answer: Depreciation expense = Depreciation base x Depreciation rate Depreciation base = Cost – salvage value X = $156,000 – $9,000 X = $147,000 Depreciation rate = 1/useful life X = 1/5 = 20% Depreciation expense = $147,000 × 20% X = $29,400/year
Topic: Straight-Line and Double-Declining-Balance Depreciation LO: 2 4. Perfect Pastries buys a display case for her bakery business on January 1, 2019. The case cost $36,000 and is expected to be used for ten years. At the end of the ten years it is expected that the case can be sold for $4,000. Compute the depreciation expense for the third year (2021) using both straight-line and doubledeclining-balance depreciation methods. Answer: Straight-line expense per year = (Acquisition cost - Salvage value) / Estimated useful life X = ($36,000 – $4,000) / 10 X= $3,200 Depreciation per year Straight-line depreciation rate = 100 percent / estimated useful life X= 100% / 10 X = 10% Double-declining-balance rate = straight-line rate x 2 X= 10% × 2 X = 20%:
Year 2019 2020 2021
Beginning Book Value $36,000 28,800 23,040
Depreciation Expense $7,200 5,760 4,608
Accumulated Depreciation $7,200 12,960 17,568
Ending Book Value $28,800 23,040 18,432
©Cambridge Business Publishers, 2020 9-66
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Double-Declining-Balance Method LO: 2 5. Kaitlin Block Publishing, a textbook publishing firm, purchased a new machine for $120,000. This machine is expected to operate for 10 years, after which it will be sold for salvage value (estimated to be $9,000). How much will the first and second year’s depreciation expense be under the double-decliningbalance method? Answer: Double-declining-balance rate = straight-line rate x 2 X = 100%/10 x 2 X= 20% Year 1: $120,000 x 0.20 = $24,000 Year 2: $96,000 x 0.20 = $19,200 Beginning Book Value $120,000 96,000
Year 1 2
Depreciation Expense $24,000 19,200
Accumulated Depreciation $ 24,000 43,200
Ending Book Value $96,000 76,800
Topic: Capitalize or Expense Tangible and Intangible Assets LO: 3, 5 6. For each of the following items, indicate whether the costs should be capitalized or expensed immediately. 1. 2. 3. 4.
Purchased a patent for $32,000. Paid $715,000 to overhaul a drilling rig. The overhaul will extend the useful life by 3 years. Paid $1,600 for routine maintenance and lubrication of a tractor. Paid $19,000 to install new equipment in the production line that will “super-cool” the product and allow for faster shipping of fresher merchandise.
Answer: 1. Capitalize. This is a purchased intangible asset. 2. Capitalize. The useful life is extended. 3. Expense.
This is a routine expense for normal wear and tear.
4. Capitalize. The new equipment enhances the product line.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-67
Topic: Gains and Losses on Asset Sales LO: 4 7. Scheuller Company had machinery that had originally cost $246,000. The machinery was three years old and had been depreciated using the double-declining-balance method, over a five-year useful life with a residual value of $18,000. Answer each of the following independent questions: Required: a. If the company sold the machinery for $105,000, prepare a journal entry to record the sale. b. If the company sold the machinery for $48,000, prepare a journal entry to record the sale.
Answer: Twice the straight-line rate = 1/5 x 2 = 40% Year 1: $246,000 x 0.40 = Year 2: ($246,000 ‒ $98,400) × 0.40 = Year 3: ($246,000 ‒ $98,400 ‒ $59,040) × 0.40 = Total accumulated depreciation
$ 98,400 59,040 35,424 $192,864
a. Cash Accumulated depreciation Machinery Gain on sale of machinery
105,000 192,864
b. Cash Accumulated depreciation Loss on sale of machinery Machinery
48,000 192,864 5,136
246,000 51,864
246,000
Topic: Asset Turnover LO: 7 8. The following information is reported for the high-tech manufacturing companies, Storm Company and Cloud Industries (amounts in millions): Storm Company 2019 2018
Sales $68,000 $52,000
Total Assets $16,400 $12,000
Cloud Industries Sales $70,000 $76,000
Total Assets $36,000 $38,000
Compute the 2019 asset turnover for both companies. Comment on any differences you observe. Answer: Asset turnover = Net sales/Average total assets Asset turnover rates for 2019 Storm Company Cloud Industries
$68,000 / [($16,400 + $12,000) / 2] = 4.79 $70,000 / [($36,000 + $38,000) / 2] = 1.89
Storm turns its assets over more quickly than does Cloud. Storm generates more dollars of revenue for each dollar of assets.
©Cambridge Business Publishers, 2020 9-68
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Package Purchase and Double-Declining Depreciation LO: 1, 2 9. On January 1, 2019, Ginger Company purchased land and a building for a total cash price of $6,900,000. Individually, the land was appraised at $2,250,000 and the building at $5,250,000. The buildings estimated useful life is 25 years and its estimated salvage value is $300,000. Required: a. Prepare the journal entry to record the purchase of land and building on January 1, 2019. b. What is the 2019 depreciation expense on the building, assuming that double declining-balance depreciation is used? Answer: a. 2019 Jan. 1
Land Building
2,070,000 4,830,000 Cash
6,900,000
Land: ($2,250,000 / $7,500,000) x ($6,900,000) = $2,070,000; Building: ($5,250,000 / $7,500,000) x ($6,900,000) = $4,830,000. b. Double-declining balance rate: (1/25) x (2) = 8%. 2019 depreciation expense: 8% x $4,830,000 = $386,400.
Topic: Depreciation Calculations LO: 2 10. On January 1, 2019, Chelsea Company purchased for $180,000 a new machine that has an estimated useful life of ten years (or 550,000 stamping operations), after which the expected salvage value is $10,000. Under each of the following depreciation methods, calculate the depreciation expense for 2019. Required: a. Straight-line depreciation b. Double-declining balance depreciation c. Units-of-production depreciation, if 66,000 stamping operations were made in 2019 Answer: a. ($180,000 - $10,000) / 10 years = $17,000. b. 20% x $180,000 = $36,000. c.
[($180,000 - $10,000) / 550,000] x 66,000 = $20,400.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-69
Topic: Depreciation Calculations LO: 2 11. On January 1, 2019, WV Hills Company purchased for $180,000 a new machine that has an estimated useful life of eight years (or 500,000 stamping operations), after which the expected salvage value is $7,200. Under each of the following depreciation methods, calculate the depreciation expense for 2020. Required: a. Straight-line depreciation b. Double-declining balance depreciation c. Units-of-production depreciation, if 70,000 stamping operations were made in 2020 Answer: a. ($180,000 - $7,200) / 8 years = $21,600 b. 25%* x ($180,000 - $45,000**) = $33,750 * (100% / 8 x 2) = 25% ** 25% x $180,000 = $45,000 DDB depreciation for 2019
c.
[($180,000 - $7,200) / 500,000] x 70,000 = $24,192
Topic: Depreciation Calculations LO: 2 12. On January 1, 2019, Wild Blue Company purchased for $400,000 a new machine that has an estimated useful life of four years (or 660,000 cutting operations), after which the expected salvage value is $40,000. Under each of the following depreciation methods, calculate the depreciation expense for 2019. Required: a. Straight-line depreciation b. Double-declining balance depreciation c. Units-of-production depreciation, if 99,000 cutting operations were made in 2019 Answer: a. ($400,000 - $40,000) / 4 years = $90,000 b. 50%* x $400,000 = $200,000 * (100% / 4 x 2) = 50%
c.
[($400,000 - $40,000) / 660,000] x 99,000 = $54,000
©Cambridge Business Publishers, 2020 9-70
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Depreciation Calculations LO: 2 13. On July 1, 2019, Wyoming Systems Company purchased for $81,000 a new machine that has an estimated useful life of six years (or 300,000 cutting operations), after which the expected salvage value is $5,400. Under each of the following depreciation methods, calculate the depreciation expense for 2020. Required: a. Straight-line depreciation b. Double declining-balance depreciation c. Units-of-production depreciation, if 55,000 cutting operations were made in 2020 Answer: a. ($81,000 - $5,400) / 6 years = $12,600 b. 2019: (6/12) x (33-1/3%* x $81,000) = $13,500 2020: 33-1/3% x ($81,000 - $13,500) = $22,500 *(100% / 6 x 2) = 33 1/3%
c.
[($81,000 - $5,400) / 300,000] x 55,000 = $13,860
Topic: Intangible Assets LO: 5 14. Following is a numbered list of assets and the definitions of six assets. Place the number of the appropriate asset in the space to the left of its definition. (1) Copyright (2) Goodwill (3) Patent
(4) Trademark (5) Franchise
a.
The amount paid by one company in the acquisition of another company, above the amount that can be attributed to the identifiable net assets of the acquired company.
b.
Legal protection for an owner against the unauthorized reproduction of a specific written work, recorded work, or artwork.
c.
The exclusive and continuing right to use certain terms, names, or symbols, usually to identify a brand or family of products.
d.
An exclusive privilege granted an inventor to exclude others from making, using, or selling the invention.
e.
An exclusive right to operate or sell a specific brand of products in a given geographical area.
Answer: a. (2) Goodwill b. (1) Copyright c.
(4) Trademark
d. (3) Patent e. (5) Franchise
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-71
Topic: Expenditures Related to Land and Buildings LO: 1 15. Evan Office Company purchased a land site for the purpose of constructing a new office building. Put an X in the appropriate column to show whether each of the following expenditures should be charged to Land, Building, Land Improvements, or some other account, respectively.
a.
Cost of land site on which an old building was located.
b.
Consultant’s fee paid to realtor who helped locate the site.
c.
Cost of tearing down old building.
d.
Architect’s fees on new building.
e.
Cost of construction insurance covering fire and other risks.
f.
Cost to tow truck that got mired in the mud during the construction of the building.
g.
Cost of paving parking lot for staff and visitors.
Land
Building
Land Improvements
Other Account
Land
Building
Land Improvements
Other Account
Answer:
a. b. c.
Cost of land site on which an old building was located.
X
Consultant’s fee paid to realtor who helped locate the site.
X
Cost of tearing down old building.
X
d.
Architect’s fees on new building.
X
e.
Cost of construction insurance covering fire and other risks.
X
f.
g.
Cost to tow truck that got mired in the mud during the construction of the building. Cost of paving parking lot for staff and visitors.
X X
©Cambridge Business Publishers, 2020 9-72
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Revenue Expenditures vs. Capital Expenditures LO: 3 16. Place an X in the appropriate column to indicate whether the item listed is a capital expenditure or a revenue expenditure.
a.
Cost of a new desk for controller’s office.
b.
Cost of regular maintenance to building heating system.
c.
Cost of a new engine for a company truck.
d.
Cost of fixing a keyboard for a company computer.
e.
Cost of a new pencil holder (estimated useful life of 40 years) for desk of controller.
f.
Cost of installing air conditioning in company automobile used by sales manager
g.
Cost of annual window cleaning service.
Capital Expenditure
Revenue Expenditure
Capital Expenditure
Revenue Expenditure
Answer:
a.
Cost of a new desk for controller’s office.
b.
Cost of regular maintenance to building heating system.
X X
c.
Cost of a new engine for a company truck.
d.
Cost of fixing a keyboard for a company computer.
X
e.
Cost of a new pencil holder (estimated useful life of 40 years) for desk of controller.
X
f. g.
Cost of installing air conditioning in company automobile used by sales manager Cost of annual window cleaning service.
X
X X
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-73
Problems Topic: Change in Accounting Estimate LO: 2 1. On January 1, 2017, Airedale Company purchased new equipment for $1,125,000. The equipment had an estimated $90,000 salvage value at the end of its estimated ten-year useful life. Straight-line depreciation has been recorded. Before adjusting the accounts for 2022, Airedale Company reduces the useful life of the equipment by one year and decreases the salvage value to $67,500. Required: a. Calculate the 2022 depreciation expense. b. What is the equipment’s book value at the end of 2022 after recording the 2022 depreciation expense? Answer: a. Original asset cost $1,125,000 Depreciation already recorded: ($1,125,000 - $90,000) / 10 years = $130,500; $103,500 x 5 years = 517,500 Book value at start of sixth year 607,500 Revised salvage value 67,500 Revised remaining depreciation $540,000 Revised remaining useful life [(10-5) - 1]
4 years
Revised 2022 depreciation expense: $540,000 / 4 years =
$ 135,000
b. Machine (original cost) Less: Accumulated depreciation ($517,500 + $135,000) Book value at December 31, 2022
$1,125,000 652,500 $472,500
Topic: Change in Accounting Estimate LO: 2 2. On January 1, 2016, Chipmunk Company purchased new equipment for $440,000. The equipment had an estimated $40,000 salvage value at the end of its estimated ten-year useful life. Straight-line depreciation has been recorded. Before adjusting the accounts for 2022, Chipmunk extends the useful life of the equipment by four years and decreases the salvage value to $20,000. Required: a. Calculate the 2022 depreciation expense. b. What is the equipment’s book value at the end of 2022 after recording the 2022 depreciation expense?
©Cambridge Business Publishers, 2020 9-74
th
Financial Accounting for Undergraduates, 4 Edition
Answer: a. Original asset cost Depreciation already recorded: ($440,000 - $40,000) / 10 years = $40,000; $40,000 x 6 years = Book value at start of seventh year Revised salvage value Revised remaining depreciation
$440,000 240,000 $200,000 20,000 $ 180,000
Revised remaining useful life [(10-6) + 4]
8 years
Revised 2022 depreciation expense: $180,000 / 8 years =
$ 22,500
b. Machine (original cost) Less: Accumulated depreciation ($240,000 + $22,500) Book value at December 31, 2022
$440,000 262,500 $ 177,500
Topic: Gain/Loss on Asset Disposal LO: 4 3. Custom Fabrication Company has a machine that originally cost $201,000. Depreciation has been recorded for seven years using the straight-line method, with a $9,000 estimated salvage value at the end of an expected eight-year useful life. After recording depreciation at the end of the seventh year, Custom Fabrication disposes of the machine. For each of the following independent disposals of the machine, place the dollar amount of the recognized gain or loss in the appropriate column. If there is no recognized gain or loss, place a zero in each column. Gain
Loss
a. Sold machine for $9,000 cash. b. Sold machine for $60,000 cash.
Answer:
a. Sold machine for $9,000 cash.
Sales Price $9,000
b. Sold machine for $600,000 cash.
$60,000
-
Book Value $33,000
Gain =
-
$33,000
=
Loss $24,000
$27,000
($201,000 - $9,000) / 8 = $24,000 annual depreciation $201,000 - (7 x $24,000) = $33,000 book value at date of disposal
©Cambridge Business Publishers, 2020 Test Bank, Chapter 9
9-75
Topic: Gain/Loss on Asset Disposal LO: 4 4. Mule Company has a machine that originally cost $90,000. Depreciation has been recorded for three years using the straight-line method, with a $10,000 estimated salvage value at the end of an expected ten-year useful life. After recording depreciation at the end of the third year, Horseshoe disposes of the machine. For each of the following independent disposals of the machine, place the dollar amount of the recognized gain or loss in the appropriate column. If there is no recognized gain or loss, place a zero in each column. Gain
Loss
a. Sold machine for $56,000 cash. b. Sold machine for $70,000 cash.
Answer:
a. Sold machine for $56,000 cash.
Sales Price $56,000
b. Sold machine for $70,000 cash.
$70,000
-
Book Value $66,000
Gain =
-
$66,000
=
Loss $10,000
$4,000
($90,000 - $10,000) / 10 = $8,000 annual depreciation $90,000 - (3 x $8,000) = $66,000 book value at date of disposal
Topic: Gain/Loss on Asset Disposal LO: 4 5. Seligman, Inc. has a computer that originally cost $46,200. Depreciation has been recorded for five years using the straight-line method, with a $4,200 estimated salvage value at the end of an expected seven-year life. After recording depreciation at the end of the fifth year, Seligman disposes of the computer. For each of the following independent disposals of the computer, place the dollar amount of the recognized gain or loss in the appropriate column. If there is no recognized gain or loss, place a zero in each column. Gain
Loss
a. The uninsured computer is stolen. b. The computer is destroyed by water damage; insurance settlement is $21,000. Answer:
a. The uninsured computer is stolen. b. The computer is destroyed by water damage; insurance settlement is $21,000
Sales Price $0 $21,000
-
Book Value $16,200
Gain =
-
$16,200
=
Loss $16,200
$4,800
($46,200 - $4,200) / 7 = $6,000 annual depreciation $46,200 - (5 x $6,000) = $16,200 book value at date of disposal ©Cambridge Business Publishers, 2020 9-76
th
Financial Accounting for Undergraduates, 4 Edition
Chapter 10 Accounting for Liabilities Learning Objectives – Coverage by question True / False
Multiple Choice
Exercises
LO1 – Describe the nature of liabilities and discuss various current liabilities
9, 10, 14-17
1-3, 6, 8, 11, 14, 15, 23, 24, 27, 29, 31-58, 67-74, 76-102
1, 3, 4, 6, 7, 12-14
LO2 – Illustrate the accounting for long-term liabilities.
1-5
4, 5, 9, 10, 13, 16-21, 103-108, 112-121
2, 3, 5, 8, 10
LO3 – Define contingent liabilities and explain the rules for their accounting and disclosure in the financial statements.
6, 11-13
7, 12, 25, 26, 28, 30-38, 96-102
9, 13
LO4 – Define the current ratio, quick ratio, and times-interestearned ratio and explain their use.
18-20
59-66, 75
15 - 17
1, 2
LO5 – Appendix 10A. Explain bond pricing and illustrate the straight-line and effective interest methods of amortizing bond discounts/premiums.
21
109-111, 122, 123
18,19
3-6
LO6 – Appendix 10B Describe the accounting for leases.
7, 8
22, 124
Problems
20
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-1
Chapter 10: Accounting for Liabilities
True / False Topic: Issuing Bonds LO: 2 1. A bond that will sell for a discount when the market rate is greater than the coupon rate. Answer: True Topic: Secondary Market for Bonds LO: 2 2. Once sold, bonds can be traded in the market place similar to shares of stock. Answer: True Topic: Zero-Coupon Bonds LO: 2 3. Zero-coupon notes do not pay periodic interest payments. Answer: True Topic: Discount Bond LO: 2 4. A bond selling for an amount above face value is said to be selling at a discount. Answer: False Rationale: This bond would sell at a premium, not a discount. Topic: Bond Ratings LO: 2 5. Bond ratings specify the amount at which investors can buy bonds from companies. Answer: False Rationale: Bond ratings are published by companies such as Moody’s and S&P and aim to rate bonds so that its default risk is more accurately determined and priced by the market. Topic: Contingent Liabilities LO: 3 6. Contingent liabilities that a company considers to be reasonably possible and for which a company is able to reasonably estimate the amount of a loss are recognized on the balance sheet and the income statement. Answer: False Rationale: Only ‘probable’ contingent liabilities are estimated and recorded on the balance sheet and the income statement. Anything less than ‘probable,’ (such as ‘reasonably possible’) is disclosed in the financial statement footnotes.
©Cambridge Business Publishers, 2020 10-2
Financial Accounting for Undergraduates, 4th Edition
Topic: Operating Leases LO: 6 7. Effective for years beginning after December 31, 2019, most operating leases will appear as assets on the lessee’s balance sheet. Answer: True Rationale: Under ASC Topic 842, operating leases with terms greater than 12 months will be reported as right-of-use assets. Topic: Financial Statement Effects of Finance Leases LO: 6 8. Recognizing a lease as a finance lease requires that both the leased asset and lease liability be reported on the balance sheet. Answer: True Topic: Liabilities Definition LO: 1 9. Liabilities are obligations resulting from past transactions that require the firm to pay money, provide goods, or perform services in the future. Answer: True Topic: Current Liabilities Definition LO: 1 10. Current liabilities are limited to those obligations that require the payment of cash within the coming year or the operating cycle, whichever is longer. Answer: False Rationale: Current liabilities are obligations that will require, within the coming year or the normal operating cycle, whichever is longer, the use of existing current assets or the creation of other current liabilities. Topic: Contingent Liabilities Definition LO: 3 11. A contingent liability is an obligation that may develop from an existing situation depending on the occurrence of a future event. Answer: True Topic: Contingent Liabilities LO: 3 12. A contingent liability that will probably occur should be recorded in the accounts even though the amount cannot be reasonably estimated. Answer: False Rationale: Whether or not a contingent liability is recorded in the accounts depends on the likelihood of the future event occurring and the measurability of the obligation.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-3
Topic: Contingent Liabilities LO: 3 13. Lawsuits and credit guarantees are examples of contingent liabilities. Answer: True Topic: Federal Unemployment Insurance LO: 1 14. Federal unemployment tax is withheld from each employee’s wages. Answer: False Rationale: Federal and state unemployment taxes are levied only on employers as a percentage of the gross payroll, subject to various limits. Topic: FICA Taxes LO: 1 15. In most situations, the total FICA tax levied on employers will exceed the amount of FICA tax withheld from employees. Answer: False Rationale: Each employer is required to pay an amount equal to the FICA taxes withheld from the employees’ gross pay. Topic: Payroll Tax Withholdings LO: 1 16. The required withholding of federal income taxes and FlCA taxes from employees’ wages results in a direct reduction of operating expenses for the employer firm. Answer: False Rationale: Employees’ gross pay, the amount earned before any withholdings, is the employer’s wage expense. The federal income taxes and FICA taxes withheld from employees’ gross pay are an “expense” to the employees. Law mandates that employers withhold these taxes from its employees and pay it to the government on the employees’ behalf. This process does not reduce the amount paid in wage expenses by the employer. Topic: Payroll Expenses LO: 1 17. The employer firm’s total expenses for employing an employee is less than the related employee’s gross earnings. Answer: False Rationale: An employer must pay the cost of an employee’s gross earnings (subject to employee withholdings) plus the related employer’s payroll taxes on those gross earnings. Topic: Quick Ratio LO: 4 18. Quick ratio is another name for the current ratio. Answer: False Rationale: The quick ratio differs from the current ratio in that the numerator only contains cash, short-term investments, and accounts receivable. ©Cambridge Business Publishers, 2020 10-4
Financial Accounting for Undergraduates, 4th Edition
Topic: Working Capital LO: 4 19. Net working capital = Current assets + Current liabilities Answer: False Rationale: Working capital = Current assets less current liabilities Topic: Times-Interest-Earned Ratio LO: 4 20. The times-interest-earned ratio reflects the number of times that the company earned interest during the year. Answer: False Rationale: Times-interest-earned ratio reflects the operating income available to pay interest expense during the year. Topic: Bond Valuation LO: 5 21. There are two cash flows associated with bonds—a single payment at maturity and periodic interest payments. Answer: True Rationale: The single payment is the principal due when the bond matures. Interest payments are most often paid semi-annually.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-5
Multiple Choice Topic: Current Liabilities LO: 1 Level of Difficulty: MEDIUM 1. Which of the following does not affect the current liabilities section of the balance sheet? A) Purchase of inventory on credit B) Wages owed to employees but not yet paid C) Insurance bill to be paid next month D) Sale of goods on credit Answer: D Rationale: The sale of goods on credit impacts current assets, accounts receivable. All the other items are liabilities that the company must pay within the next year, current liabilities. Topic: Interest Accrual LO: 1 Level of Difficulty: EASY 2. Brothers Inc. issued a 120-day note in the amount of $180,000 on November 1, 2019 with an annual rate of 6%. What amount of interest has accrued as of December 31, 2019? A) $3,000 B) $2,250 C) $1,800 D) Zero. The interest is accrued at the end of the 120 day period. Answer: C Rationale: $180,000 × 6% × 60/360 = $1,800 Topic: Interest Accrual LO: 1 Level of Difficulty: EASY 3. Goel Inc. issued a 120-day note in the amount of $540,000 on November 1, 2019 with an annual rate of 6%. What amount of interest has accrued as of December 31, 2019? A) $9,000 B) $6,750 C) $5,400 D) Zero. The interest is accrued at the end of the 120 day period. Answer: C Rationale: $540,000 × 6% × 60/360 = $5,400
©Cambridge Business Publishers, 2020 10-6
Financial Accounting for Undergraduates, 4th Edition
Topic: Bond Ratings LO: 2 Level of Difficulty: EASY 4. Which of the following corporate bond ratings are listed in an increasing level of risk? A) AAA, A, BB, C B) A, AAA, BB, C C) BB, C, A, AAA D) C, BB, A, AAA Answer: A Rationale: As debt quality moves from AAA to CCC, the market interest rate required increases. Topic: Coupon Rate LO: 2 Level of Difficulty: EASY 5. For what is the coupon rate used to compute? A) Rate that investors expect to earn on this investment B) Interest payments paid to bondholders during the life of the bond issue C) Bond issue price D) Fee paid to an underwriter for determining the bond price Answer: B Rationale: Coupon rates are used to compute the dollar amount of interest payments paid to the bondholder semi-annually. Topic: Transaction Analysis of Current Liabilities LO: 1 Level of Difficulty: MEDIUM 6. Which of the following transactions that impact current liabilities has a corresponding entry on the income statement? A) Purchase inventory on credit from company QRS on January 1 B) Payment to QRS on February 1 for a January 1 purchase C) Interest accrued on a note payable D) Payment to employees in March for wages earned in February Answer: C Rationale: The purchase of inventory on credit is increases inventory (asset) and accounts payable (liability). Payment of accounts payable decreases cash (asset) and accounts payable (liability). Interest accrued on a note payable increases current liabilities (interest payable) and increases interest expense on the income statement. Payment of accrued wages decreases cash (asset) and wages payable (liability).
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-7
Topic: Contingent Liability LO: 3 Level of Difficulty: MEDIUM 7. Which one of the following would be considered a contingent liability? A) A company owes $200,000 on inventories purchased on credit. B) A company has $1,690,000 worth of bonds outstanding. C) A company estimates that it will probably have to pay $2,400,000 to the Department of Environment Protection for a chemical spill. D) The company has access to a line of credit with a bank in the amount of $3,000,000. Answer: C Rationale: For a liability to be a contingent liability, the amount must be able to be estimated and must be probable. Topic: Current Liability LO: 1 Level of Difficulty: EASY 8. Which of the following does not represent a current liability? A) Accrual of taxes payable B) Short-term loan C) Advance payments received from customers D) Bond issue Answer: D Rationale: Bonds are issued to raise capital with repayment of the principal amount on a specified date in the future more than one year from the point of issue. Bonds are considered long-term liabilities. Topic: Bond Payment Periods LO: 2 Level of Difficulty: EASY 9. How many payment periods are in a 6-year, 8% bond with an effective interest rate of 6%, and paid semiannually? A) 3 B) 12 C) 48 D) 6 Answer: B Rationale: 6 years × 2 = 12 payment periods Topic: Bond Payment Periods LO: 2 Level of Difficulty: EASY 10. How many payment periods are in a 12-year, 8% bond with an effective interest rate of 6%, and paid semiannually? A) 3 B) 12 C) 48 D) 24 Answer: D Rationale: 12 years × 2 = 24 payment periods ©Cambridge Business Publishers, 2020 10-8
Financial Accounting for Undergraduates, 4th Edition
Topic: Transaction Analysis LO: 1 Level of Difficulty: MEDIUM 11. What effects would the accrual of $160 of interest on a note payable have on financial statements? I. II. III. IV. V. A) B) C) D)
Balance sheet: Income statement: Balance sheet: Balance sheet: Balance sheet:
Liabilities are decreased by $160 Expenses are increased by $160 Retained earnings are decreased by $160 Cash assets are decreased by $160 Liabilities are increased by $160
I, II, and III II, III, and V II, IV, and V II, III, and IV
Answer: B Rationale: Interest is recorded on the balance sheet as interest payable, increasing liabilities by $160, decreasing retained earnings by $160, and adding $160 to expenses on the income statement. Since no cash is spent to pay the note or the interest, cash assets are not affected. Topic: Contingent Liabilities LO: 3 Level of Difficulty: EASY 12. According to U.S. GAAP, which criteria must be met in order to recognize a contingent liability? A) The obligation is certain to require payment at some point in the future. B) The obligation is probable. C) The obligation is estimable. D) Answers B and C Answer: D Rationale: Contingent liabilities are only recognized when the amount is probable and estimable. An obligation that is guaranteed at some point in the future is a definite liability. Topic: Bond Pricing LO: 2 Level of Difficulty: EASY 13. The price of a bond is equivalent to: I. II. III. IV. A) B) C) D)
Face value Projected interest payments discounted to the present The amortization amount of a bond The present value of the principal payment
I + III I – III II + IV I + II
Answer: C Rationale: The price of a bond is the present value of both the interest payments and the principal payment.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-9
Topic: Transaction Analysis LO: 1 Level of Difficulty: MEDIUM 14. Weasley Mart borrows $210,000 on July 1 with a short-term loan that has an annual interest rate of 5% which is payable on the first day of each subsequent quarter. What will Weasley Mart need to accrue on August 31, assuming that no accrual has yet been made? A) $10,500; Decrease liabilities and decrease cash B) $3,500; Decrease liabilities, decrease cash C) $1,750; Increase liabilities, increase expenses D) $3,500; Increase liabilities, decrease retained earnings Answer: C Rationale: $210,000 x 5% x 2/12 = $1,750 Topic: Transaction Analysis LO: 1 Level of Difficulty: MEDIUM 15. Avery Mart borrows $630,000 on July 1 with a short-term loan that has an annual interest rate of 5% which is payable on the first day of each subsequent quarter. What will Avery Mart need to accrue on August 31, assuming that no accrual has yet been made? A) $31,500; Decrease liabilities and decrease cash B) $10,500; Decrease liabilities, decrease cash C) $5,250; Increase liabilities, increase expenses D) $10,500; Increase liabilities, decrease retained earnings Answer: C Rationale: $630,000 x 5% x 2/12 = $5,250 Topic: Bond Retirement LO: 2 Level of Difficulty: MEDIUM 16. On April 30, 2019, one year before maturity, Yellow Plums, Inc. retired $300,000 of 8% bonds payable at 103. The book value of the bonds on April 30 was $289,200. Bond interest was last paid on April 30, 2019. What is the gain or loss on the retirement of the bonds? A) $19,800 loss B) $10,800 gain C) $30,600 gain D) $24,000 loss Answer: A Rationale: (103% x $300,000) – $289,200 = $19,800.
©Cambridge Business Publishers, 2020 10-10
Financial Accounting for Undergraduates, 4th Edition
Topic: Bond Retirement LO: 2 Level of Difficulty: MEDIUM 17. On April 30, 2019, one year before maturity, Green Tomatoes, Inc. retired $900,000 of 8% bonds payable at 103. The book value of the bonds on April 30 was $867,600. Bond interest was last paid on April 30, 2019. What is the gain or loss on the retirement of the bonds? A) $59,400 loss B) $32,400 gain C) $46,800 gain D) $72,000 loss Answer: A Rationale: (103% x $900,000) – $867,600 = $59,400. Topic: Bond Issuance LO: 2 Level of Difficulty: EASY 18. If bonds are issued at 103, this means that: A) A $1,500 bond sold for $103. B) The bonds sold at a discount. C) A $3,000 bond sold for $3,090. D) The bond rate of interest is 10.3% of the market rate of interest. Answer: C Rationale: Bonds are typically quoted at a percent of face value: 103% × $3,000 bond = $3,090 Topic: Bond Amortization LO: 2 Level of Difficulty: MEDIUM 19. Courtney Industries plans to issue 8-year, 8%, $200,000 bonds paying interest on an annual basis, at a $4,000 premium. Which one of the following statements is true? A) The cash paid to bondholders will be $4,000 each interest period. B) Courtney will receive $196,000 as the issue price. C) Courtney’s annual interest expense on the bonds will be less than the amount of interest payments to bondholders each year. D) Courtney’s annual interest expense on the bonds will be greater than the amount of interest payments to bondholders each year. Answer: C Rationale: Since the premium is a benefit the issuer receives at issuance, the interest expense will be less than the amount of interest payments to bondholders each year.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-11
Topic: Bond Interest Payments LO: 2 Level of Difficulty: MEDIUM 20. On January 1, 2019, Amin, Inc. issued $1,200,000, 10-year, 8% bonds for $1,050,450. The bonds pay interest on June 30 and December 31. The market rate is 10%. How much is the interest expense on the bonds for the first interest payment on June 30, 2019? A) $ 52,523 B) $105,045 C) $ 96,000 D) $ 48,000 Answer: A Rationale: $1,050,450 × 10% × 6/12 = $52,523 Topic: Bond Interest Payments LO: 2 Level of Difficulty: MEDIUM 21. On January 1, 2019, Pelino, Inc. issued $1,600,000, 10-year, 8% bonds for $1,400,600. The bonds pay interest on June 30 and December 31. The market rate is 10%. How much is the interest expense on the bonds for the first interest payment on June 30, 2019? A) $ 70,030 B) $140,060 C) $168,000 D) $ 64,000 Answer: A Rationale: $1,400,600 × 10% × 6/12 = $70,030 Topic: Finance Lease Conditions LO: 6 Level of Difficulty: EASY 22. Which of the following is not a condition requiring the use of the finance lease reporting method? A) The lease automatically transfers ownership of the leased asset from the lessor to the lessee at the termination of the lease. B) The lease term is for the major part of the remaining economic useful life of the leased asset. C) The lease allows the lessee to use the leased asset during the lease term. D) The lease provides that the lessee can purchase the leased asset for a nominal amount (bargain purchase price) at the termination of the lease. Answer: C Rationale: For both finance and operating leases, the lease agreement allows the lessee to use the leased asset.
©Cambridge Business Publishers, 2020 10-12
Financial Accounting for Undergraduates, 4th Edition
Topic: Current Liabilities Definition LO: 1 Level of Difficulty: MEDIUM 23. Current liabilities are all obligations that require, within the coming year or current operating cycle, whichever is longer: A) The payment of cash B) The use of existing current assets C) The creation of other current liabilities D) Either the use of existing current assets or the creation of other current liabilities Answer: D Rationale: Current liabilities are obligations that will require, within the coming year or the normal operating cycle, whichever is longer, (1) the use of existing current assets or (2) the creation of other current liabilities. Topic: Current Liabilities Definition LO: 1 Level of Difficulty: EASY 24. Which one of the following is a current liability? A) A credit guarantee provided for a supplier B) Bond payable C) Accounts receivable D) FICA taxes payable Answer: D Topic: Contingent Liabilities LO: 3 Level of Difficulty: EASY 25. Which of the following is a contingent liability? A) Notes payable B) Credit guarantees C) Income tax payable D) Excise tax payable Answer: B Topic: Contingent Liabilities LO: 3 Level of Difficulty: EASY 26. Which of the following is not a contingent liability? A) Environmental cleanup costs B) Lawsuits C) Discount on notes payable D) Credit guarantees Answer: C
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-13
Topic: Income Tax Payable LO: 1 Level of Difficulty: MEDIUM 27. Which of the following liabilities is most likely an estimated amount rather than an amount known with certainty? A) Wages payable B) FICA taxes payable C) Accounts payable D) Income tax payable Answer: D Rationale: The tax due is determined in accordance with tax law, rulings by taxing agencies, and court decisions. Because the administration of tax law is quite complex and many honest differences exist in their interpretation, the tax obligation reported on a tax return is only an estimate until the government reviews and accepts a firm’s calculations. Topic: Contingent Liabilities LO: 3 Level of Difficulty: EASY 28. A contingent liability is an obligation that depends on the occurrence of a future event and that should be recorded in the accounts: A) If the related future event will probably occur B) If the amount is due in cash within one year C) If the amount is reasonably estimated D) The related future event will probably occur and the amount is reasonably estimated. Answer: D Rationale: Whether or not a contingent liability is recorded in the accounts depends on the likelihood of the future event occurring and the measurability of the obligation. Topic: Current Liabilities Definition LO: 1 Level of Difficulty: EASY 29. A current liability is an obligation that requires the use of an existing asset or the creation of another current liability: A) Within the coming year or the operating cycle, whichever is shorter B) Within the coming year or the operating cycle, whichever is longer C) Within the coming year D) Within the next operating cycle Answer: B Rationale: Current liabilities are obligations that will require, within the coming year or the normal operating cycle, whichever is longer, the use of existing current assets or the creation of other current liabilities.
©Cambridge Business Publishers, 2020 10-14
Financial Accounting for Undergraduates, 4th Edition
Topic: Contingent Liabilities LO: 3 Level of Difficulty: MEDIUM 30. A contingent liability is an obligation that should be: A) Disclosed in a footnote to the balance sheet when the contingency is remote B) Recorded in the accounts if the amount may be reasonably estimated and it is probable that the future event creating the obligation will occur C) Classified in the owners’ equity section of the balance sheet when the future event creating the liability is not likely to occur D) Recorded in the accounts and classified in a contingent liabilities section of the balance sheet between current liabilities and long-term liabilities Answer: B Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 31. Oak Park Appliances, Inc. sells food processors for $300 with a 120-day warranty against defects. Past experience indicates that 5% of the processors will have some defect during the warranty period and that the necessary repairs and adjustments will cost $50 per defective unit. Sales for August were $438,000. 30 of the units sold in August were reported defective and repaired in August. What is the August 31 journal entry for the estimated liability for product warranties for units sold in August? A) Product Warranty Expense 21,900 Estimated Liability for Product Warranty 21,900 B) Product Warranty Expense 3,650 Estimated Liability for Product Warranty 3,650 C) Estimated Liability for Product Warranty 3,650 Product Warranty Expense 3,650 D) Product Warranty Expense 2,150 Estimated Liability for Product Warranty 2,150 Answer: D Rationale: $438,000 / $300 = 1,460 units 1,460 x 0.05 = 73 defective 73 - 30 = 43; 43 x $50 = $2,150
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-15
Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 32. Forest Grove Appliances, Inc. sells food processors for $900 with a 120-day warranty against defects. Past experience indicates that 5% of the processors will have some defect during the warranty period and that the necessary repairs and adjustments will cost $150 per defective unit. Sales for August were $1,404,000. 30 of the units sold in August were reported defective and repaired in August. What is the August 31 journal entry for the estimated liability for product warranties for units sold in August? A) Product Warranty Expense 70,200 Estimated Liability for Product Warranty 70,200 B) Product Warranty Expense 11,700 Estimated Liability for Product Warranty 11,700 C) Estimated Liability for Product Warranty 11,700 Product Warranty Expense 11,700 D) Product Warranty Expense 7,200 Estimated Liability for Product Warranty 7,200 Answer: D Rationale: $1,404,000 / $900 = 1,560 units 1,560 x 0.05 = 78 defective 78 - 30 = 48; 48 x $150 = $7,200 Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 33. Boris, Inc. sells a single product for $900 per unit, including a 90-day warranty against defects. It is estimated that 3% of the units sold will prove defective and require an average repair cost of $70 per unit. During July, 800 units were sold. Five of them were reported defective and repaired in July. What amount should be added to the Estimated Liability for Product Warranties for July? A) $ 4,500 B) $ 1,680 C) $18,900 D) $ 1,330 Answer: D Rationale: 800 x 0.03 = 24 defective 24 - 5 = 19; 19 x $70 = $1,330
©Cambridge Business Publishers, 2020 10-16
Financial Accounting for Undergraduates, 4th Edition
Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 34. Crescent City, Inc. sells a single product for $2,700 per unit, including a 90-day warranty against defects. It is estimated that 3% of the units sold will prove defective and require an average repair cost of $210 per unit. During July, 800 units were sold. Five of them were reported defective and repaired in July. What amount should be added to the Estimated Liability for Product Warranties for July? A) $13,500 B) $44,100 C) $56,700 D) $ 3,990 Answer: D Rationale: 800 x 0.03 = 24 defective 24 - 5 = 19; 19 x $210 = $3,990 Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 35. Pedal Power Products Company sells bicycles for $240, with a 30-day warranty against defects. Past experience indicates that 6% of the bicycles will have a defect and that the necessary repairs will cost $32 per bicycle. Sales for May were $216,000; 20 units sold in May were found defective and repaired that month. What is the May 31 journal entry for the estimated liability for product warranties? A) Product Warranty Expense 1,088 Estimated Liability for Product Warranty 1,088 B) Product Warranty Expense 640 Estimated Liability for Product Warranty 640 C) Estimated Liability for Product Warranty 1,728 Product Warranty Expense 1,728 D) Estimated Liability for Product Warranty 1,088 Product Warranty Expense 1,088 Answer: A Rationale: $216,000/$240 = 900 units 900 x 0.06 = 54 defective 54 - 20 = 34; 34 x $32 = $1,088
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-17
Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 36. Perfect Pedal Products Company sells bicycles for $720, with a 30-day warranty against defects. Past experience indicates that 6% of the bicycles will have a defect and that the necessary repairs will cost $96 per bicycle. Sales for May were $648,000; 20 units sold in May were found defective and repaired that month. What is the May 31 journal entry for the estimated liability for product warranties? A) Product Warranty Expense 3,264 Estimated Liability for Product Warranty 3,264 B) Product Warranty Expense 1,920 Estimated Liability for Product Warranty 1,920 C) Estimated Liability for Product Warranty 5,184 Product Warranty Expense 5,184 D) Estimated Liability for Product Warranty 3,264 Product Warranty Expense 3,264 Answer: A Rationale: $648,000/$720 = 900 units 900 x 0.06 = 54 defective 54 - 20 = 34; 34 x $96 = $3,264 Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 37. Klug Technology, Inc. was organized to sell a single product for $1,200 per unit, including a 60-day warranty against defects. Engineering estimates indicate that 5% of the units sold will prove defective and require an average repair cost of $100 per unit. During the first month of operations, total sales were $408,000. Nine units sold in the first month were found defective and repaired that month. The accrued liability for product warranties at month-end should be: A) $1,700 B) $ 800 C) $ 900 D) $2,300 Answer: B $408,000/$1,200 = 340 units 340 x 0.05 = 17 defective 17 - 9 = 8; 8 x $100 = $800
©Cambridge Business Publishers, 2020 10-18
Financial Accounting for Undergraduates, 4th Edition
Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 38. Super Tech was organized to sell a single product for $3,600 per unit, including a 60-day warranty against defects. Engineering estimates indicate that 5% of the units sold will prove defective and require an average repair cost of $300 per unit. During the first month of operations, total sales were $1,152,000. Nine units sold in the first month were found defective and repaired that month. The accrued liability for product warranties at month-end should be: A) $4,800 B) $2,100 C) $2,700 D) $6,900 Answer: B Rationale: $1,152,000/$3,600 = 320 units 320 x 0.05 = 16 defective 16 - 9 = 7; 7 x $300 = $2,100 Topic: Sales and Excise Taxes Payable LO: 1 Level of Difficulty: MEDIUM 39. Cracker Company sold goods for which it received total cash payments of $427,800. A 9% excise tax and a 6% sales tax were included in the total cash payments. Sales revenue recorded should be: A) $363,630 B) $389,298 C) $372,000 D) $400,632 Answer: C Rationale: X + 0.09X + 0.06X = $427,800 1.15X = $427,800 X = $372,000 Topic: Sales Taxes Payable LO: 1 Level of Difficulty: MEDIUM 40. Dresden Company sold merchandise for which it received total cash payments of $1,316,100. A 7% sales tax was included in the total cash payments. The proper amount to record as sales would be: A) $1,408,227 B) $1,223,973 C) $1,284,000 D) $1,230,000 Answer: D Rationale: X + 0.07X = $1,316,100 1.07X = $1,316,100 X = $1,230,000 ©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-19
Topic: Sales Taxes Payable LO: 1 Level of Difficulty: MEDIUM 41. Alsfeld Company sold merchandise for which it received total cash payments of $3,948,300. A 7% sales tax was included in the total cash payments. The proper amount to record as sales would be: A) $4,104,000 B) $3,671,919 C) $3,852,252 D) $3,690,000 Answer: D Rationale: X + 0.07X = $3,948,300 1.07X = $3,948,300 X = $3,690,000 Topic: Sales and Excise Taxes Payable LO: 1 Level of Difficulty: MEDIUM 42. Pokagon Company sold merchandise for which it received $355,200, including sales and excise taxes. All of the firm’s sales are subject to a 6% sales tax but only 50% of sales are subject to a 10% excise tax. Sales before sales taxes and excise taxes were: A) $300,000 B) $320,000 C) $316,128 D) $316,000 Answer: B Rationale: X + 0.06X + 0.10 (0.50X) = $355,200 1.11X = $355,200 X = $320,000 Topic: Sales and Excise Taxes Payable LO: 1 Level of Difficulty: MEDIUM 43. Herald Company sold merchandise for which it received $1,065,600, including sales and excise taxes. All of the firm’s sales are subject to a 6% sales tax but only 50% of sales are subject to a 10% excise tax. Sales before sales taxes and excise taxes were: A) $900,000 B) $960,000 C) $948,384 D) $948,000 Answer: B Rationale: X + 0.06X + 0.10 (0.50X) = $1,065,600 1.11X = $1,065,600 X = $960,000 ©Cambridge Business Publishers, 2020 10-20
Financial Accounting for Undergraduates, 4th Edition
Topic: Sales Tax Payable LO: 1 Level of Difficulty: MEDIUM 44. Azul, Inc. records sales at amounts that include sales tax. During June, total sales of $180,200, including 6% sales tax, were recorded. The sales tax liability for June is: A) $ 10,812 B) $170,000 C) $ 10,200 D) $169,388 Answer: C Rationale: 1.06X = $180,200 X = $170,000 $180,200 - $170,000= $10,200 Topic: Sales Tax Payable LO: 1 Level of Difficulty: MEDIUM 45. Coffee, Inc. records sales at amounts that include sales tax. During June, total sales of $540,600, including 6% sales tax, were recorded. The sales tax liability for June is: A) $ 32,436 B) $510,000 C) $ 30,600 D) $508,164 Answer: C Rationale: 1.06X = $540,600 X = $510,000 $540,600 - $510,000 = $30,600
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-21
Topic: Sales and Excise Taxes Payable LO: 1 Level of Difficulty: MEDIUM 46. Southeastern Company sells four tires to George. Each tire retails for $190 and is subject to sales tax of 5% and federal excise tax of 10%. Southeastern Company’s journal entry to record the transaction is: A) Cash
760 Sales
B) Cash
760 874
Sales C) Cash
874 874
Sales Sales Tax Payable Excise Tax Payable D) Cash Sales Tax Expense Excise Tax Expense Sales
760 38 76 760 38 76 874
Answer: C Rationale: 4 x $190 = $760 $760 x 0.05 = $38 $760 x 0.10 = $76 Topic: Sales and Excise Taxes Payable LO: 1 Level of Difficulty: MEDIUM 47. Northern Company sells four tires to Road Runner. Each tire retails for $570 and is subject to sales tax of 5% and federal excise tax of 10%. Northern Company’s journal entry to record the transaction is: A) Cash
2,280 Sales
B) Cash
2,280 2,622
Sales C) Cash
2,622 2,622
Sales Sales Tax Payable Excise Tax Payable D) Cash Sales Tax Expense Excise Tax Expense Sales
2,280 114 228 2,280 114 228 2,622
Answer: C Rationale: 4 x $570 = $2,280 $2,280 x 0.05 = $114 $2,280 x 0.10 = $228
©Cambridge Business Publishers, 2020 10-22
Financial Accounting for Undergraduates, 4th Edition
Topic: Payroll Taxes LO: 1 Level of Difficulty: EASY 48. Which of the following is not a payroll tax on wages or salaries? A) FICA tax B) Federal Unemployment tax C) Federal product excise tax D) State unemployment tax Answer: C Rationale: An excise tax is applied to products and services, not to wages and salaries. Topic: Payroll Taxes LO: 1 Level of Difficulty: MEDIUM 49. Assume that Josh earns $24 per hour and he worked 40 hours this week. The Social Security rate is 6.2% and the Medicare rate is 1.45%, and his entire earnings are subject to both FICA taxes. Also, $120 in income taxes and $40 of union dues are withheld. Josh’s net take-home pay should be: A) $726.56 B) $800.00 C) $640.00 D) $738.80 Answer: A Rationale: 40 x $24 = $960 $960 x (0.062 + 0.0145) = $73.44 $960 - $73.44 - $120 - $40 = $726.56 Topic: Payroll Taxes LO: 1 Level of Difficulty: MEDIUM 50. Assume that Brian earns $72 per hour and he worked 40 hours this week. The Social Security rate is 6.2% and the Medicare rate is 1.45%, and his entire earnings are subject to both FICA taxes. Also, $360 in income taxes and $120 of union dues are withheld. Brian’s net take-home pay should be: A) $2,179.68 B) $2,400.00 C) $1,920.00 D) $2,216.40 Answer: A Rationale: 40 x $72 = $2,280 $2,280 x (0.062 + 0.0145) = $220.32 $2,280 - $220.32 - $360 - $120 = $2,179.68
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-23
Topic: Payroll Taxes LO: 1 Level of Difficulty: MEDIUM 51. Assume that Josh earns $36.00 per hour, that he worked 40 hours this week. The Social Security rate is 6.2% and the Medicare rate is 1.45%, and his entire earnings are subject to both FICA taxes. Also, $225 in income taxes and $30 of union dues are withheld. Josh’s take-home pay should be: A) $1,329.60 B) $1,074.84 C) $1,185.00 D) $1,440.00 Answer: B Rationale: 40 x $36 = $1,440 $1,440 x (0.062 + 0.0145) = $110.16 $1,440 - $110.16 - $225 - $30 = $1,074.84 Topic: Payroll Taxes LO: 1 Level of Difficulty: MEDIUM 52. Assume that Brian earns $108.00 per hour, that he worked 40 hours this week. The Social Security rate is 6.2% and the Medicare rate is 1.45%, and his entire earnings are subject to both FICA taxes. Also, $675 in income taxes and $90 of union dues are withheld. Josh’s take-home pay should be: A) $3,988.80 B) $3,224.52 C) $3,555.00 D) $4,320.00 Answer: B Rationale: 40 x $108 = $4,320 $4,320 x (0.062 + 0.0145) = $330.48 $4,320 - $330.48 - $675 - $90 = $3,224.52 Topic: Federal Unemployment Tax LO: 1 Level of Difficulty: EASY 53. Federal unemployment taxes are: A) Levied against both employee and employer B) Levied against only the employer C) Levied against only the employee D) None of the above Answer: B Rationale: Federal unemployment taxes are only levied against the employer.
©Cambridge Business Publishers, 2020 10-24
Financial Accounting for Undergraduates, 4th Edition
Topic: Payroll Taxes LO: 1 Level of Difficulty: MEDIUM 54. A firm has the following monthly payroll for June 2019: Total salaries Salaries subject to FICA taxes (6.2% + 1.45%) Salaries subject to FUTA (0.8%) and state unemployment taxes (2.7%) Income taxes withheld
$120,000 120,000 28,000 10,800
In recording the payroll, the net payroll payable is: A) $ 97,200 B) $100,020 C) $ 99,040 D) $ 81,200 Answer: B Rationale: $120,000 x (0.062 + 0.0145) = $9,180 $120,000 - $9,180 - $10,800 = $100,020 Topic: Payroll Taxes LO: 1 Level of Difficulty: MEDIUM 55. A firm has the following monthly payroll for June 2019: Total salaries Salaries subject to FICA taxes (6.2% + 1.45%) Salaries subject to FUTA (0.8%) and state unemployment taxes (2.7%) Income taxes withheld
360,000 360,000 84,000 32,400
In recording the payroll, the net payroll payable is: A) $291,600 B) $300,060 C) $263,874 D) $182,814 Answer: B Rationale: $360,000 x (0.062 + 0.0145) = $27,540 $360,000 - $27,540 - $32,400 = $300,060
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-25
Topic: Payroll Taxes LO: 1 Level of Difficulty: MEDIUM 56. Moonbeam Company has the following monthly payroll for June 2019: Total salaries Salaries subject to FICA taxes (6.2% + 1.45%) Salaries subject to FUTA (0.8%) and state unemployment taxes (2.7%) Income taxes withheld
$108,000 108,000 28,000 9,700
The total employer’s payroll tax expense for this period is: A) $10,476 B) $ 1,558 C) $18,942 D) $ 9,242 Answer: D Rationale: $108,000 x (0.062 + 0.0145) = $8,262 $28,000 x (0.027 + 0.008) = $980 $8,262 + $980 = $9,242 Topic: Payroll Taxes LO: 1 Level of Difficulty: MEDIUM 57. Sunshine Company has the following monthly payroll for June 2019: Total salaries Salaries subject to FICA taxes (6.2% + 1.45%) Salaries subject to FUTA (0.8%) and state unemployment taxes (2.7%) Income taxes withheld
$324,000 324,000 84,000 29,250
The total employer’s payroll tax expense for this period is: A) $31,428 B) $ 3,174 C) $60,126 D) $27,726 Answer: D Rationale: $314,000 x (0.062 + 0.0145) = $24,786 $84,000 x (0.027 + 0.008) = $2,940 $24,786 + $2,940= $27,726
©Cambridge Business Publishers, 2020 10-26
Financial Accounting for Undergraduates, 4th Edition
Topic: Payroll Taxes LO: 1 Level of Difficulty: MEDIUM 58. A firm has the following monthly payroll for April 2019: Total salaries Salaries subject to FICA taxes (6.2% + 1.45%) Salaries subject to FUTA tax (0.8%) and state unemployment taxes (5.4%) Income taxes withheld
$180,000 180,000 32,000 19,200
The total employer’s payroll tax expense for this period is: A) $13,158 B) $28,300 C) $15,754 D) $34,954 Answer: C Rationale: $180,000 x (0.062 + 0.0145) = $13,770 $32,000 x (0.054 + 0.008) = $1,984 $13,770 + $1,984 = $15,754 Topic: Working Capital LO: 4 Level of Difficulty: MEDIUM 59. Working capital is defined as: A) Assets – liabilities B) Current assets C) Current assets – Current liabilities D) Market value – Book value Answer: C Topic: Current Ratio and Working Capital LO: 4 Level of Difficulty: DIFFICULT 60. If Foster Toys has a current ratio of 3.2 and working capital of $4,400,000, which of the following will cause both the current ratio and working capital to decrease? A) Paid accounts payable in the amount of $60,000 B) Recorded unpaid salaries in the amount of $160,000 C) Borrowed $200,000 from a bank to be repaid in 90-days D) Purchased $30,000 of inventory on credit Answer: B Rationale: Working capital will remain the same in A, C, and D. Only option B will show a decrease in both the current ratio and working capital. Recording unpaid salaries increases accounts payable (current liability), which is the denominator of the current ratio computation. This will result in a decrease in the current ratio. Similarly, a larger amount of current liabilities will be subtracted from current assets to result in a smaller amount of working capital.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-27
Topic: Working Capital LO: 4 Level of Difficulty: EASY 61. Working capital is defined as: A) Current assets plus plant assets B) Current assets plus current liabilities C) Current assets minus current liabilities D) Current assets divided by current liabilities Answer: C Rationale: Working capital of a firm is the difference between the value of its current assets and the value of its current liabilities. Topic: Current Ratio LO: 4 Level of Difficulty: DIFFICULT 62. Willowwood Company has a current ratio of 3.10. Which of the following events would cause its current ratio to increase? A) Collection of an account receivable B) Payment of an account payable C) Purchase of office supplies on account D) Purchase of equipment on account Answer: B Rationale: Payment on accounts payable will cause the current ratio to increase. See examples below: Payment 1 of $200 and Payment 2 of $10. Both result in an increase in the current ratio. Current assets Current liabilities Current ratio
Before Payment $3,100 $1,000 3.10
Payment 1: $200 $2,900 $ 800 3.625
Payment 2: $10 $3,090 $ 990 3.121
Topic: Quick Ratio LO: 4 Level of Difficulty: MEDIUM 63. The December 31, 2019, balance sheet of Ivey Company includes the following information: Inventory Prepaid Expenses Total Current Assets Total Current Liabilities Accounts Payable
$750,000 60,000 1,800,000 875,000 540,000
What is Ivey’s quick ratio at December 31, 2019? A) 0.80 B) 2.57 C) 1.85 D) 1.13 Answer: D Rationale: $1,800,000 - $750,000 - $60,000 = $990,000. $990,000 / $875,000 = 1.13 ©Cambridge Business Publishers, 2020 10-28
Financial Accounting for Undergraduates, 4th Edition
Topic: Quick Ratio LO: 4 Level of Difficulty: MEDIUM 64. The December 31, 2019, balance sheet of Patrick Company includes the following information: Inventory Prepaid Expenses Total Current Assets Total Current Liabilities Accounts Payable
$1,500,000 120,000 3,600,000 1,575,000 1,080,000
What is Patrick’s quick ratio at December 31, 2019? A) 0.80 B) 1.71 C) 1.85 D) 1.26 Answer: D Rationale: $3,600,000 - $1,500,000 - $120,000 = $1,980,000. $1,980,000 / $1,575,000 = 1.26 Topic: Quick Ratio LO: 4 Level of Difficulty: MEDIUM 65. The December 31, 2019, balance sheet of Simon Company includes the following information: Cash Short-term Investments Accounts Receivable Inventory Prepaid Expenses Current Liabilities Total Liabilities
$ 120,000 60,000 340,000 360,000 80,000 300,000 1,200,000
What is Simon’s quick ratio at December 31, 2019? A) 0.89 B) 2.42 C) 1.73 D) 1.56 Answer: C Rationale: $120,000 + $60,000 + $340,000 = $520,000. $520,000/$300,000 = 1.73
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-29
Topic: Quick Ratio LO: 4 Level of Difficulty: MEDIUM 66. The December 31, 2019, balance sheet of Bash Company includes the following information: Cash Short-term Investments Accounts Receivable Inventory Prepaid Expenses Current Liabilities Total Liabilities
$ 360,000 180,000 1,020,000 1,080,000 240,000 1,312,500 360,000
What is Bash’s quick ratio at December 31, 2019? A) 0.76 B) 2.33 C) 1.19 D) 1.33 Answer: C Rationale: $360,000 + $180,000 + $1,020,000 = $1,560,000. $1,056,000/$1,312,500 = 1.19 Topic: Interest Payable LO: 1 Level of Difficulty: MEDIUM 67. On November 1, Minerva borrowed from Dumbledore, giving him a $12,000, 3 month, 9% note, interest payable at maturity. Minerva made no entry after November 1. What entry would Minerva make on December 31, the end of the accounting period? A) Interest Payable Interest Expense B) Interest Expense Interest Payable C) Interest Expense Cash D) Interest Expense Discount on Notes Payable
180 180 180 180 180 180 180 180
Answer: B Rationale: $12,000 x 9% x 2/12 = $180
©Cambridge Business Publishers, 2020 10-30
Financial Accounting for Undergraduates, 4th Edition
Topic: Interest Payable LO: 1 Level of Difficulty: MEDIUM 68. On November 1, Luna borrowed from Lumos, giving him a $36,000, 3 month, 9% note, interest payable at maturity. Luna made no entry after November 1. What entry would Luna make on December 31, the end of the accounting period? A) Interest Payable Interest Expense B) Interest Expense Interest Payable C) Interest Expense Cash D) Interest Expense Discount on Notes Payable
540 540 540 540 540 540 540 540
Answer: B Rationale: $36,000 x 9% x 2/12 = $540 Topic: Notes Payable LO: 1 Level of Difficulty: MEDIUM 69. Michigan Company paid Wisconsin Company for merchandise with a $6,400, 90-day, 8% note dated May 10. If Michigan Company pays the note at maturity, what entry should be made at that time? A) Notes Payable Interest Payable Cash B) Cash Notes Payable Interest Payable C) Notes Payable Interest Expense Cash D) Notes Payable Interest Expense Cash
6,528 128 6,400 6,528 128 6,400 6,400 128 6,528 6,400 128 6,272
Answer: C Rationale: $6,400 x 8% x 90/360 = $128
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-31
Topic: Notes Payable LO: 1 Level of Difficulty: MEDIUM 70. France Company paid Heidelberg Company for merchandise with a $19,200, 90-day, 8% note dated May 10. If France Company pays the note at maturity, what entry should be made at that time? A) Notes Payable Interest Payable Cash B) Cash Notes Payable Interest Payable C) Notes Payable Interest Expense Cash D) Notes Payable Interest Expense Cash
19,584 384 19,200 19,584 384 19,200 19,200 384 19,554 19,200 384 18,816
Answer: C Rationale: $19,200 x 8% x 90/360 = $384 Topic: Interest Payable LO: 1 Level of Difficulty: MEDIUM 71. On December 1, Jenna borrowed $12,000 from Bacerra, giving a 90-day, 10% note. Which entry would Jenna make on December 31, the end of the accounting period? A) Interest Expense Interest Payable B) Interest Expense Discount on Notes Payable C) Interest Expense Interest Payable D) Interest Expense Cash
100 100 100 100 300 300 300 300
Answer: A Rationale: $12,000 x 10% x 30/360 = $100
©Cambridge Business Publishers, 2020 10-32
Financial Accounting for Undergraduates, 4th Edition
Topic: Interest Payable LO: 1 Level of Difficulty: MEDIUM 72. On December 1, Julian borrowed $36,000 from Jessie, giving a 90-day, 10% note. Which entry would Julian make on December 31, the end of the accounting period? A) Interest Expense Interest Payable B) Interest Expense Discount on Notes Payable C) Interest Expense Interest Payable D) Interest Expense Cash
300 300 300 300 900 900 900 900
Answer: A Rationale: $36,000 x 10% x 30/360 = $300 Topic: Notes Payable LO: 1 Level of Difficulty: MEDIUM 73. On December 1, Hedwig Company borrowed $20,000 from Pigwidgeon Company, giving a 60-day, 12% note. If the correct adjusting entry is made on December 31, Hedwig’s entry at maturity is: A) Notes Payable Cash B) Notes Payable Interest Payable Interest Expense Cash C) Notes Payable Interest Expense Cash D) Notes Payable Interest Payable Cash
20,000 20,000 20,000 200 200 20,400 20,000 400 20,400 20,000 400 20,400
Answer: B Rationale: $20,000 x 12% x 30/360 = $200 accrued interest
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-33
Topic: Notes Payable LO: 1 Level of Difficulty: MEDIUM 74. On December 1, Screech Company borrowed $60,000 from Hedwig Company, giving a 60-day, 12% note. If the correct adjusting entry is made on December 31, Screech’s entry at maturity is: A) Notes Payable Cash B) Notes Payable Interest Payable Interest Expense Cash C) Notes Payable Interest Expense Cash D) Notes Payable Interest Payable Cash
60,000 60,000 60,000 600 600 61,200 60,000 1,200 61,200 60,000 1,200 61,200
Answer: B Rationale: $60,000 x 12% x 30/360 = $600 accrued interest Topic: Current Ratio LO: 4 Level of Difficulty: MEDIUM 75. What does the current ratio measure? A) Solvency B) Profitability C) Short-term debt paying ability D) Leverage Answer: C Rationale: The current ratio is a measure of short-term debt paying ability. It measures a company’s ability to pay its current obligations as they become due. Topic: Current Liabilities LO: 1 Level of Difficulty: MEDIUM 76. On September 1, 2019, Maibritt Equipment signed a 12-month, 9% interest bearing note payable for $200,000. Assuming Maibritt maintains its books on a calendar year basis, the amount of interest expense that should be reported in the 2020 income statement for this note would be: A) $12,000 B) $ 8,000 C) $18,000 D) $ 6,000 Answer: A Rationale: $200,000 x 9% x 8/12 = $12,000 interest expense
©Cambridge Business Publishers, 2020 10-34
Financial Accounting for Undergraduates, 4th Edition
Topic: Current Liabilities LO: 1 Level of Difficulty: MEDIUM 77. On September 1, 2019, Bea Equipment signed a 12-month, 9% interest bearing note payable for $600,000. Assuming Bea maintains its books on a calendar year basis, the amount of interest expense that should be reported in the 2020 income statement for this note would be: A) $36,000 B) $24,000 C) $54,000 D) $18,000 Answer: A Rationale: $600,000 x 9% x 8/12 = $36,000 interest expense Topic: Current Liabilities LO: 1 Level of Difficulty: DIFFICULT 78. Rafael Company borrowed $24,000 from Bank of Jane on December 1, 2019, and signed a 90 day, 8% Notes Payable. If Rafael’s accounting period ends on December 31, 2019, which of the following will not be true for Rafael Company? A) On December 31, 2019, Rafael will debit Interest Expense for $160 B) On December 31, 2019 Rafael, will credit Interest Payable for $160 C) On March 1, 2020, Rafael will debit Interest Expense for $320 D) On March 1, 2020, Rafael will debit Interest Payable for $320 Answer: D Rationale: At year-end, Rafael Company records the following entry: 2019 Dec. 31
Interest expense Interest payable To accrue interest expense on the note to Bank of Jane ($24,000 × 0.08 × 30/360 = $160).
160 160
When the note payable to Bank of Jane is subsequently paid on March 1, 2020, Rafael Company makes the following entry: 2020 Mar. 1
Notes payable—Bank of Jane Interest payable Interest expense Cash Paid principal and interest to Bank of Jane ($24,000 × 0.08 × 60/360 = $320).
24,000 160 320 24,480
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-35
Topic: Current Liabilities LO: 1 Level of Difficulty: DIFFICULT 79. Snow White Company borrowed $72,000 from Bank of Fairytales on December 1, 2019, and signed a 90 day, 8% Notes Payable. If Snow White’s accounting period ends on December 31, 2019, which of the following will not be true for Snow White Company? A) On December 31, 2019, Snow White will debit Interest Expense for $480 B) On December 31, 2019 Snow White, will credit Interest Payable for $480 C) On March 1, 2020, Snow White will debit Interest Expense for $960 D) On March 1, 2020, Snow White will debit Interest Payable for $960 Answer: D Rationale: At year-end, Snow White Company records the following entry: 2019 Dec. 31
Interest expense 480 Interest payable To accrue interest expense on the note to Bank of Fairytales ($72,000 × 0.08 × 30/360 = $480).
480
When the note payable to Bank of Fairytales is subsequently paid on March 1, 2020, Snow White Company makes the following entry: 2020 Mar. 1
Notes payable—Bank of Fairytales Interest payable Interest expense Cash Paid principal and interest to Bank of Fairytales ($72,000 × 0.08 × 60/360 = $960).
72,000 480 960 73,440
©Cambridge Business Publishers, 2020 10-36
Financial Accounting for Undergraduates, 4th Edition
Topic: Current Liabilities LO: 1 Level of Difficulty: DIFFICULT 80. On December 1, 2019, MAI Company purchased $60,000 of equipment by issuing a 120-day, 10% note payable to Bank of Washington. Assuming the company’s accounting period ends on December 31, the journal entry recorded by MAI Company on the note maturity date will include: A) Debit to Interest Expense for $1,500 B) Debit to Interest Payable for $1,500 C) Debit to Interest Payable for $1,000 D) Debit to Interest Expense for $500 Answer: A Rationale: At year-end, MAI Company records the following entry: 2019 Dec. 31
Interest expense 500 Interest payable To accrue interest expense on the note to Bank of Washington ($60,000 × 0.10 × 30/360 = $500).
500
When the note payable to Bank of Washington is subsequently paid on April 1, 2020, MAI Company makes the following entry: 2020 Apr. 1
Notes payable—Bank of Washington Interest payable Interest expense Cash Paid principal and interest to Bank of Washington ($60,000 × 0.10 × 90/360 = $1,500).
60,000 500 1,500 62,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-37
Topic: Current Liabilities LO: 1 Level of Difficulty: DIFFICULT 81. On December 1, 2019, Coke Company purchased $180,000 of equipment by issuing a 120-day, 10% note payable to Bank of Georgia. Assuming the company’s accounting period ends on December 31, the journal entry recorded by Coke Company on the note maturity date will include: A) Debit to Interest Expense for $4,500 B) Debit to Interest Payable for $4,500 C) Debit to Interest Payable for $3,000 D) Debit to Interest Expense for $1,500 Answer: A Rationale: At year-end, Coke Company records the following entry: 2019 Dec. 31
Interest expense 1,500 Interest payable 1,500 To accrue interest expense on the note to Bank of Georgia ($180,000 × 0.10 × 30/360 = $1,500).
When the note payable to Bank of Georgia is subsequently paid on April 1, 2020, Coke Company makes the following entry: 2020 Apr. 1
Notes payable—Bank of Georgia Interest payable Interest expense Cash Paid principal and interest to Bank of Georgia ($180,000 × 0.10 × 90/360 = $4,500).
180,000 1,500 4,500 186,000
©Cambridge Business Publishers, 2020 10-38
Financial Accounting for Undergraduates, 4th Edition
Topic: Current Liabilities LO: 1 Level of Difficulty: DIFFICULT 82. Kangaroo Company signed a three-month, 8% note on November 1, 2019 for the purchase of $120,000 of inventory. Assuming the company’s accounting period ends on December 31, which one of the following statements is not correct? A) On February 1, 2020, the company will debit Interest Expense for $1,600. B) On December 31, 2019 the company will debit Interest Expense for $1,600. C) On February 1, 2020, the company will debit Interest Payable for $1,600. D) On December 31, 2019, the company will credit Interest Payable for $1,600. Answer: A Rationale: At year-end, Kangaroo Company records the following entry: 2019 Dec. 31
Interest expense Interest payable To accrue interest expense on the note ($120,000 × 0.08 × 2/12 = $1,600).
1,600 1,600
When the note payable is subsequently paid on February 1, 2020, Kangaroo Company makes the following entry: 2020 Feb. 1
Notes payable Interest payable Interest expense Cash Paid principal and interest ($120,000 × 0.08 × 1/12 = $800).
120,000 1,600 800 122,400
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-39
Topic: Current Liabilities LO: 1 Level of Difficulty: DIFFICULT 83. Wombat Company signed a three-month, 8% note on November 1, 2019 for the purchase of $360,000 of inventory. Assuming the company’s accounting period ends on December 31, which one of the following statements is not correct? A) On February 1, 2020, the company will debit Interest Expense for $4,800. B) On December 31, 2019 the company will debit Interest Expense for $4,800. C) On February 1, 2020, the company will debit Interest Payable for $4,800. D) On December 31, 2019, the company will credit Interest Payable for $4,800. Answer: A Rationale: At year-end, Wombat Company records the following entry: 2019 Dec. 31
Interest expense Interest payable To accrue interest expense on the note ($360,000 × 0.08 × 2/12 = $4,800).
4,800 4,800
When the note payable is subsequently paid on February 1, 2020, Wombat Company makes the following entry: 2020 Feb. 1
Notes payable Interest payable Interest expense Cash Paid principal and interest ($360,000 × 0.08 × 1/12 = $2,400).
360,000 4,800 2,400 367,200
©Cambridge Business Publishers, 2020 10-40
Financial Accounting for Undergraduates, 4th Edition
Topic: Current Liabilities LO: 1 Level of Difficulty: DIFFICULT 84. Montana Company signed a $180,000, 90-day, 9% note payable, on December 1, 2019. If the accounting period ends on December 31, 2019, the entry made on the note’s maturity (March 1, 2020) will include: A) A debit to Interest Payable for $2,700 B) A debit to Interest Expense for $4,050 C) A debit to Interest Expense for $1,350 D) A debit to Interest Expense for $2,700 Answer: D Rationale: At year-end, Montana Company records the following entry: 2019 Dec. 31 Interest expense 1,350 Interest payable To accrue interest expense on the note ($180,000 × 0.09 × 30/360 = $1,350).
1,350
When the note payable is subsequently paid on March 1, 20, Montana Company makes the following entry: 2020 Mar. 1
Notes payable 180,000 Interest payable 1,350 Interest expense 2,700 Cash Paid principal and interest ($180,000 × 0.09 × 60/360 = $2,700).
184,050
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-41
Topic: Current Liabilities LO: 1 Level of Difficulty: DIFFICULT 85. Idaho Company signed a $540,000, 90-day, 9% note payable, on December 1, 2019. If the accounting period ends on December 31, 2019, the entry made on the note’s maturity (March 1, 2020) will include: A) A debit to Interest Payable for $8,100 B) A debit to Interest Expense for $12,150 C) A debit to Interest Expense for $4,050 D) A debit to Interest Expense for $8,100 Answer: D Rationale: At year-end, Idaho Company records the following entry: 2019 Dec. 31
Interest expense 4,050 Interest payable 4,050 To accrue interest expense on the note ($540,000 × 0.09 × 30/360 = $4,050).
When the note payable is subsequently paid on March 1, 2020, Idaho Company makes the following entry: 2020 Mar. 1
Notes payable 540,000 Interest payable 4,050 Interest expense 8,100 Cash Paid principal and interest ($540,000 × 0.09 × 60/360 = $8,100).
552,150
Topic: Current Liabilities LO: 1 Level of Difficulty: MEDIUM 86. Charter Company has a total payroll of $780,000 which is subject to a 7.65% FICA tax. Assuming $180,000 was subject to state and federal unemployment tax rates of 4% and 0.8% respectively, the entry to accrue payroll taxes would include a: A) Debit to payroll tax expense for $94,340 B) Credit to SUTA tax payable for $25,200 C) Debit to FICA tax expense for $11,900 D) Credit to FUTA tax payable for $1,440 Answer: D Rationale: Payroll tax expense Federal unemployment tax payable State unemployment tax payable FICA taxes payable To record the payroll taxes for Charter Company.
68,310 1,440 7,200 59,670
©Cambridge Business Publishers, 2020 10-42
Financial Accounting for Undergraduates, 4th Edition
Topic: Current Liabilities LO: 1 Level of Difficulty: MEDIUM 87. Four Points Company has a total payroll of $2,340,000 which is subject to a 7.65% FICA tax. Assuming $540,000 was subject to state and federal unemployment tax rates of 4% and 0.8% respectively, the entry to accrue payroll taxes would include a: A) Debit to payroll tax expense for $283,020 B) Credit to SUTA tax payable for $75,600 C) Debit to FICA tax expense for $35,700 D) Credit to FUTA tax payable for $4,320 Answer: D Rationale: Payroll tax expense Federal unemployment tax payable State unemployment tax payable FICA taxes payable To record the payroll taxes for Four Points Company.
204,930 4,320 21,600 179,010
Topic: Current Liabilities LO: 1 Level of Difficulty: DIFFICULT 88. Assume that the current rate for FICA social security is 6.2% (for the first $102,000 of an employee’s salary) and the FICA Medicare rate is 1.45% for all salary. Also, the current FUTA tax rate is 0.8%, and the SUTA tax rate is 5.4%, which apply to the first $7,000 of an employee's pay. Assume that an employee earned $300,000 in 2019. What is the employer’s total payroll-related expense for this employee for 2019? A) $316,998 B) $316,868 C) $311,108 D) $323,384 Answer: C Rationale: Payroll tax expense 11,108 Federal unemployment tax payable State unemployment tax payable FICA social security taxes payable ($102,000 x 6.2%) FICA Medicare taxes payable ($300,000 x 1.45%) To record the payroll taxes
56 378 6,324 4,350
Wages + Payroll tax expense = Total payroll related expense $300,000 + $11,108 = $311,108
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-43
Topic: Current Liabilities LO: 1 Level of Difficulty: DIFFICULT 89. Assume that the current rate for FICA social security is 6.2% (for the first $102,000 of an employee’s salary) and the FICA Medicare rate is 1.45% for all salary. Also, the current FUTA tax rate is 0.8%, and the SUTA tax rate is 5.4%, which apply to the first $7,000 of an employee's pay. Assume that an employee earned $525,000 in 2019. What is the employer’s total payroll-related expense for this employee for 2019? A) $475,497 B) $475,302 C) $539,371 D) $597,713 Answer: C Rationale: Payroll tax expense 14,371 Federal unemployment tax payable State unemployment tax payable FICA social security taxes payable ($102,000 x 6.2%) FICA Medicare taxes payable ($525,000 x 1.45%) To record the payroll taxes
56 378 6,324 7,613
Wages + Payroll tax expense = Total payroll related expense $525,000 + $14,371 = $539,371 Topic: Current Liabilities LO: 1 Level of Difficulty: DIFFICULT 90. Denver Company has a monthly gross payroll (paid on the last day of each month) of $172,000, which is subject to unemployment taxes (Federal at 0.8% and State at 5.4%). All earnings are subject to 7.65% FICA tax (combined Social Security and Medicare). Federal income tax withholdings are 25%, and state income tax withholdings are 8% of total earnings. Assuming no individual employee has reached the maximum limit for Social Security tax or for unemployment tax, which of the following is not true for the month ended January 31? A) Denver Company will record a net payroll of $102,082. B) Denver Company will record a total liability for FICA Taxes of $13,158. C) Denver Company will record a liability for Federal Unemployment Taxes of $1,376. D) Denver Company will record a liability for State Income Taxes of $13,760. Answer: B Rationale: Entry to record monthly payroll: Salaries and wage expense 172,000 Federal income tax withholding payable State income tax withholding payable FICA taxes payable Payroll payable To record the payroll for the month ended January 31.
43,000 13,760 13,158 102,082
Continued
©Cambridge Business Publishers, 2020 10-44
Financial Accounting for Undergraduates, 4th Edition
Payroll tax expense 23,822 FICA taxes payable Federal unemployment tax payable State unemployment tax payable To record the payroll taxes for the month ended January 31.
13,158 1,376 9,288
Total FICA liability is the sum of the employee portion ($13,158) plus the employer portion ($13,158) = $26,316. Topic: Current Liabilities LO: 1 Level of Difficulty: DIFFICULT 91. Pennsylvania Company has a monthly gross payroll (paid on the last day of each month) of $516,000, which is subject to unemployment taxes (Federal at 0.8% and State at 5.4%). All earnings are subject to 7.65% FICA tax (combined Social Security and Medicare). Federal income tax withholdings are 25%, and state income tax withholdings are 8% of total earnings. Assuming no individual employee has reached the maximum limit for Social Security tax or for unemployment tax, which of the following is not true for the month ended January 31? A) Pennsylvania Company will record a net payroll of $306,246. B) Pennsylvania Company will record a total liability for FICA Taxes of $39,474. C) Pennsylvania Company will record a liability for Federal Unemployment Taxes of $4,128. D) Pennsylvania Company will record a liability for State Income Taxes of $41,280. Answer: B Rationale: Entry to record monthly payroll: Salaries and wage expense 516,000 Federal income tax withholding payable State income tax withholding payable FICA taxes payable Payroll payable To record the payroll for the month ended January 31.
129,000 41,280 39,474 306,246
Payroll tax expense 71,466 FICA taxes payable Federal unemployment tax payable State unemployment tax payable To record the payroll taxes for the month ended January 31.
39,474 4,128 27,864
Total FICA liability is the sum of the employee portion ($39,474) plus the employer portion ($39,474) = $78,948.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-45
Topic: Current Liabilities LO: 1 Level of Difficulty: MEDIUM 92. Hola Company has 5 sales employees, each of whom earns $8,000 per month and is paid on the last working day of the month. Each employee's wages are subject to FICA social security taxes of 6.2% and Medicare taxes of 1.45% on all wages. Withholding for each employee also includes federal income tax of 16% and monthly medical insurance premiums of $220 for each employee. The entry to accrue the company’s monthly sales salaries expense on January 31 will not include: A) A credit to Accrued Payroll Payable of $10,560 B) A credit to FICA-Medicare Taxes Payable for $580 C) A credit to FICA-Social Security Taxes Payable for $2,480 D) A credit to Employee Medical Insurance Payable for $1,100 Answer: A Rationale: Salary and wage expense Federal income tax payable Employee medical insurance payable FICA social security taxes payable FICA Medicare taxes payable Payroll payable To record the monthly payroll for Hola Company.
40,000 6,400 1,100 2,480 580 29,440
Topic: Current Liabilities LO: 1 Level of Difficulty: MEDIUM 93. Barker Company has 5 sales employees, each of whom earns $24,000 per month and is paid on the last working day of the month. Each employee's wages are subject to FICA social security taxes of 6.2% and Medicare taxes of 1.45% on all wages. Withholding for each employee also includes federal income tax of 16% and monthly medical insurance premiums of $660 for each employee. The entry to accrue the company’s monthly sales salaries expense on January 31 will not include: A) A credit to Accrued Payroll Payable of $31,680 B) A credit to FICA-Medicare Taxes Payable for $1,740 C) A credit to FICA-Social Security Taxes Payable for $7,440 D) A credit to Employee Medical Insurance Payable for $3,300 Answer: A Rationale: Salary and wage expense 120,000 Federal income tax payable Employee medical insurance payable FICA social security taxes payable FICA Medicare taxes payable Payroll payable To record the monthly payroll for Barker Company.
19,200 3,300 7,440 1,740 88,320
©Cambridge Business Publishers, 2020 10-46
Financial Accounting for Undergraduates, 4th Edition
Topic: Current Liabilities LO: 1 Level of Difficulty: MEDIUM 94. Hola Company has 5 sales employees, each of whom earns $8,000 per month and is paid on the last working day of the month. The gross monthly payroll is subject to federal unemployment taxes of 0.8% and state unemployment taxes of 4.0%. All earnings are subject to FICA social security taxes of 6.2% and Medicare taxes of 1.45%. Withholding for each employee also includes federal income tax of 16% and monthly medical insurance premiums of $220 for each employee. Monthly payroll tax expense will be: A) $ 5,980 B) $ 6,080 C) $ 4,980 D) $11,380 Answer: C Rationale: Payroll tax expense FICA taxes payable Federal unemployment tax payable State unemployment tax payable To record the payroll taxes for the month
4,980 3,060 320 1,600
Topic: Current Liabilities LO: 1 Level of Difficulty: MEDIUM 95. Barker Company has 5 sales employees, each of whom earns $24,000 per month and is paid on the last working day of the month. The gross monthly payroll is subject to federal unemployment taxes of 0.8% and state unemployment taxes of 4.0%. All earnings are subject to FICA social security taxes of 6.2% and Medicare taxes of 1.45%. Withholding for each employee also includes federal income tax of 16% and monthly medical insurance premiums of $660 for each employee. Monthly payroll tax expense for January 31 will be: A) $14,940 B) $18,240 C) $16,440 D) $34,140 Answer: A Rationale: Payroll tax expense FICA taxes payable Federal unemployment tax payable State unemployment tax payable To record the payroll taxes for the month
14,940 9,180 960 4,800
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-47
Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 96. Sic ‘n Span Inc. sells washing machines with a 2 year warranty. Sic ‘n Span estimates that total warranty costs are 3% of sales. In the year 2019, Sic ‘n Span recorded total sales of washing machines of $1,400,000. The balance in the Estimated Liability for Warranties account was $76,400 on December 31, 2018, and $51,200 on December 31, 2019. What must have been the actual cost of repairs (covered under warranty) for the year 2019? A) $67,200 B) $65,800 C) $13,800 D) $88,600 Answer: A Rationale: Washing Machine sales Rate of projected defective units Total Cost of washing machines expected to fail
$1,400,000 x 0.03 $ 42,000
Beginning balance in Estimated Liability for Warranties 1/1/19 Add: Estimated liability for product warranty for 2019 Less: Balance in Estimated Liability for Warranties 12/31/19 Actual cost of repairs in 2019
$76,400 42,000 (51,200) $67,200
Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 97. Laundry Needs, Inc. sells washing machines with a 2 year warranty. Laundry Needs estimates that total warranty costs are 3% of sales. In the year 2019, Washing Machines recorded total sales of washing machines of $4,200,000. The balance in the Estimated Liability for Warranties account was $229,200 on December 31, 2018, and $153,600 on December 31, 2019. What must have been the actual cost of repairs (covered under warranty) for the year 2019? A) $201,600 B) $197,400 C) $ 41,400 D) $265,800 Answer: A Rationale: Washing Machine sales Rate of projected defective units Total Cost of washing machines expected to fail
$4,200,000 x 0.03 $ 126,000
Beginning balance in Estimated Liability for Warranties 1/1/19 Add: Estimated liability for product warranty for 2019 Less: Balance in Estimated Liability for Warranties 12/31/19 Actual cost of repairs in 2019
$229,200 126,000 (153,600) $201,600
©Cambridge Business Publishers, 2020 10-48
Financial Accounting for Undergraduates, 4th Edition
Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 98. Eastern Company estimates warranty expense as 5% of sales. On January 1, 2019 warranties payable was $20,000, and the December 31 liability for the warranty was $22,000. During the year Western recorded sales of $300,000. The amount paid by Eastern during the year to meet its warranty obligations was: A) $30,000 B) $15,000 C) $12,000 D) $13,000 Answer: D Rationale: Sales Rate of projected warranty expense Total Cost of expected warranty expense
$300,000 x 0.05 $ 15,000
Beginning balance in Estimated Liability for Warranties 1/1/19 Add: Estimated liability for product warranty balance for 2019 Less: Balance in Estimated Liability for Warranties 12/31/19 Actual cost of repairs in 2019
$20,000 15,000 (22,000) $ 13,000
Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 99. Kaila Company sells computers with a 6-month warranty. It is estimated that 2% of all units sold will need repairs under warranty at an estimated cost of $600 per unit. During January, the company sold 100,000 computers at $5,250 each, and 1,500 computers were turned in for repairs during that same month. The total actual repairs costs amounted to $555,000 from the computer parts inventory. The balance in the Estimated Warranty Liability Account on January 1 was $45,000. What is the balance in the Estimated Warranty Liability Account at the end of January 2019? A) $ 690,000 B) $1,245,000 C) $ 650,000 D) $1,800,000 Answer: A Rationale: Number of units sold Rate of projected defective units Total units expected to fail
100,000 x 0.02 2,000
Average repair cost per unit Estimated liability for product warranty at end of month
x $600 $1,200,000
Beginning balance in Estimated Liability for Warranties 1/1/19 Add: Estimated liability for product warranty for January Less: Total actual repair costs in January Liability for product warranty balance at 1/31/2019
$45,000 1,200,000 (555,000) $690,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-49
Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 100. Bean Company sells computers with a 6-month warranty. It is estimated that 2% of all units sold will need repairs under warranty at an estimated cost of $800 per unit. During January, the company sold 100,000 computers at $7,000 each; 1,500 of those computers were turned in for repairs during that same month. The total actual repairs costs amounted to $740,000 from the computer parts inventory. The balance in the Estimated Warranty Liability Account on January 1, 2019 was $60,000. What is the balance in the Estimated Warranty Liability Account at the end of January 2019? A) $ 920,000 B) $1,660,000 C) $ 860,000 D) $2,400,000 Answer: A Rationale: Number of units sold Rate of projected defective units Total units expected to fail
100,000 0.02 2,000
x
Average repair cost per unit Estimated liability for product warranty at end of month
x $800 $1,600,000
Beginning balance in Estimated Liability for Warranties 1/1/19 Add: Estimated liability for product warranty for January Less: total actual repair costs in January Liability for product warranty balance at 1/31/2019
$ 60,000 1,600,000 (740,000) $ 920,000
Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 101. Eva Company provides a 12-month warranty on all their products. During 2019, they had total sales of $1,050,000, and estimated warranty costs to be 3% of sales. On January 1, 2019, the Estimated Warranty Liability account had a debit balance of $4,500, and it had a credit balance of $7,500 on December 31, 2019. What was the actual cost of repairs covered under warranties during 2019? A) $25,500 B) $31,500 C) $26,250 D) $19,500 Answer: D Rationale: Sales Rate of projected warranty expense Total Cost of expected warranty expense
$1,050,000 x 0.03 $ 31,500
Beginning balance in Estimated Liability for Warranties 1/1/19 Add: Estimated liability for product warranty for 2019 Less: Balance in Estimated Liability for Warranties 12/31/19 Actual cost of repairs in 2019
$ (4,500) 31,500 (7,500) $ 19,500
©Cambridge Business Publishers, 2020 10-50
Financial Accounting for Undergraduates, 4th Edition
Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 102. Emma Company provides a 12-month warranty on all their products. During 2019, they had total sales of $1,400,000, and estimated warranty costs to be 3% of sales. On January 1, 2019, the Estimated Warranty Liability account had a debit balance of $6,000, and it had a credit balance of $10,000 on December 31, 2019. What was the actual cost of repairs covered under warranties during 2019? A) $43,000 B) $31,400 C) $35,000 D) $26,000 Answer: D Rationale: Sales Rate of projected warranty expense Total Cost of expected warranty expense
$1,400,000 x 0.03 $ 42,000
Beginning balance in Estimated Liability for Warranties 1/1/19 Add: Estimated liability for product warranty for 2019 Less: Balance in Estimated Liability for Warranties 12/31/19 Actual cost of repairs in 2019
$ $
(6,000) 42,000 (10,000) 26,000
Topic: Bonds Payable LO: 2 Level of Difficulty: DIFFICULT 103. Joseph Company issues bonds with a par value of $1,350,000 on their issue date. The bonds mature in 5 years and pay 6% annual interest in semiannual payments. On the issue date, the market rate of interest (annual) is 8%. Compute the price of the bonds on their issue date. (If PV tables are used, select the closest answer from the options provided.) A) $1,257,219 B) $1,179,458 C) $1,080,515 D) $1,240,503 Answer: D Rationale:
N
I/Yr
PMT
PV (press)
FV
10
4
40500
1240053
1350000
N = (5 x 2) = 10 I = (8% / 2) = 4 Semi-annual interest payments: $1,350,000 x (0.06 x 1/2) = $40,500
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-51
Topic: Bonds Payable LO: 2 Level of Difficulty: DIFFICULT 104. Darlene & Joe Company issues bonds with a par value of $1,800,000 on their issue date. The bonds mature in 5 years and pay 6% annual interest in semiannual payments. On the issue date, the market rate of interest (annual) is 8%. Compute the price of the bonds on their issue date. (The answer assumes the use of a financial calculator. (If PV tables are used, select the closest answer from the options provided.) A) $1,685,148 B) $2,660,447 C) $1,547,345 D) $1,654,004 Answer: D Rationale:
N
I/Yr
PMT
PV (press)
FV
10
4
54000
1654004
1800000
N = (5 x 2) = 10 I = (8% / 2) = 4 Semi-annual interest payments: $1,800,000 x (0.06 x 1/2) = $54,000 Topic: Bonds Payable LO: 2 Level of Difficulty: DIFFICULT 105. Cottle Corporation issued $600,000 of 15-year bonds on January 1. The bonds pay interest on January 1 and July 1 with a stated annual rate of 8 percent. If the market rate of annual interest at the time the bonds are sold is 6 percent, what will be the issue price of the bonds? (If PV tables are used, select the closest answer from the options provided.) A) $665,214 B) $496,116 C) $717,603 D) $702,564 Answer: C Rationale:
N
I/Yr
PMT
PV (press)
FV
30
3
24000
717603
600000
N = (15 x 2) = 30 I = (6% / 2) = 3 Semi-annual interest payments: $600,000 x (0.08 x 1/2) = $24,000
©Cambridge Business Publishers, 2020 10-52
Financial Accounting for Undergraduates, 4th Edition
Topic: Bonds Payable LO: 2 Level of Difficulty: DIFFICULT 106. Brooks Corporation issued $800,000 of 15-year bonds on January 1. The bonds pay interest on January 1 and July 1 with a stated annual rate of 8 percent. If the market rate of annual interest at the time the bonds are sold is 6 percent, what will be the issue price of the bonds? (The answer assumes the use of a financial calculator. If PV tables are used, select the closest answer from the options provided.) A) $ 921,878 B) $ 809,145 C) $ 956,804 D) $1,738,786 Answer: C Rationale:
N
I/Yr
PMT
PV (press)
FV
30
3
32000
956804
800000
N = (15 x 2) = 30 I = (6% / 2) = 3 Semi-annual interest payments: $800,000 x (0.08 x 1/2) = $32,000 Topic: Bonds Payable LO: 2 Level of Difficulty: DIFFICULT 107. When the market rate of interest was 10%, Gloria Corporation issued $1,800,000, 12%, 8-year bonds that pay interest semiannually. The selling price of this bond issue was: (If PV tables are used, select the closest answer from the options provided.) A) $2,207,538 B) $1,618,011 C) $1,995,080 D) $1,621,080 Answer: C Rationale:
N
I/Yr
PMT
PV (press)
FV
16
5
108000
1995080
1800000
N = (8 x 2) = 16 I = (10% / 2) = 5 Semi-annual interest payments: $1,800,000 x (0.12 x 1/2) = $108,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-53
Topic: Bonds Payable LO: 2 Level of Difficulty: DIFFICULT 108. When the market rate of interest was 10%, Gloria Corporation issued $2,400,000, 12%, 8-year bonds that pay interest semiannually. The selling price of this bond issue was: (If PV tables are used, select the closest answer from the options provided.) A) $2,843,745 B) $2,408,727 C) $2,660,106 D) $2,410,773 Answer: C Rationale:
N
I/Yr
PMT
PV (press)
FV
16
5
144000
2660106
2400000
N = (8 x 2) = 16 I = (10% / 2) = 5 Semi-annual interest payments: $2,400,000 x (0.12 x 1/2) = $144,000 Topic: Bonds Payable LO: 5 Level of Difficulty: DIFFICULT 109. On January 1, 2019, Camire Company issues $540,000, 15 year, 8% bonds (paying semiannual interest) for $645,842, when the annual market rate of interest is 6%. If the company uses the effective interest method of amortization, the journal entry to record the semi-annual interest on June 30 will include a: A) Debit to premium on bonds payable for $2,225 B) Debit to interest expense for $21,600 C) Credit to cash for $19,375 D) Debit to interest expense for $38,694 Answer: A Rationale: Semi-annual interest payments: $540,000 x (0.08 x 1/2) = $21,600
Date At Issue June 30
Interest Paid
Interest Expense
Periodic Amortization
$21,600
$19,375
$2,225
June 30 Bond interest expense 19,375 Premium on bonds payable 2,225 Cash To record semiannual interest payment and amortization.
Unamortized Premium $105,842 $103,617
Book Value $645,842 $643,617
21,600
©Cambridge Business Publishers, 2020 10-54
Financial Accounting for Undergraduates, 4th Edition
Topic: Bonds Payable LO: 5 Level of Difficulty: DIFFICULT 110. On January 1, 2019, Food Design Company issues $960,000, 15 year, 8% bonds (paying semiannual interest) for $1,148,164, when the annual market rate of interest is 6%. If the company uses the effective interest method of amortization, the journal entry to record the semi-annual interest on June 30 will include a: A) Debit to premium on bonds payable for $3,955 B) Debit to interest expense for $38,400 C) Credit to cash for $76,800 D) Debit to interest expense for $68,890 Answer: A Rationale: Semi-annual interest payments: $960,000 x (0.08 x 1/2) = $38,400
Date At Issue June 30
Interest Paid
Interest Expense
Periodic Amortization
$38,400
$34,445
$3,955
Unamortized Premium $188,164 $184,209
June 30 Bond interest expense 34,445 Premium on bonds payable 3,955 Cash To record semiannual interest payment and amortization.
Book Value $1,148,164 $1,144,209
38,400
Topic: Bonds Payable LO: 5 Level of Difficulty: MEDIUM 111. Dance Company issued 6%, 5 year bonds, with par value of $2,400,000, paying semiannual interest for $2,205,339. The annual market rate of interest on the date of issue was 8%. Assuming effective interest method of amortization, calculate the bond interest expense on the first interest payment date. A) $ 88,214 B) $ 72,000 C) $194,661 D) $176,427 Answer: A Rationale: Semi-annual interest payments: $2,400,000 x (0.06 x 1/2) = $72,000
Date At Issue 1st Payment
Interest Paid
Interest Expense
Periodic Amortization
$72,000
$88,214
$16,214
Unamortized Discount $194,661 $178,447
Book Value $2,205,339 $2,221,553
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-55
Topic: Bonds Payable LO: 2 Level of Difficulty: MEDIUM 112. Prior to maturity, Candy Apple Red Company called and retired a $1,200,000, 8% bond issued at 102. If the unamortized premium on the bonds is $3,000, the journal entry will include a: A) Debit to bonds payable for $1,224,000 B) Debit to loss on bond retirement of $24,000 C) Credit to gain on bond retirement for $24,000 D) Debit to premium on bonds payable for $3,000 Answer: D Rationale: Note that since we are not given the amount of cash paid to retire the bonds, we do not know the cash amount or whether there’s a gain or a loss on retirement. However, the journal entry to record the retirement would include: Bonds payable 1,200,000 Premium on bonds payable 3 ,000 Loss on bond retirement (if needed) XXX Cash Gain on bond retirement (if needed) To retire bonds at XXX and record (gain or loss) on retirement.
XXX XXX
©Cambridge Business Publishers, 2020 10-56
Financial Accounting for Undergraduates, 4th Edition
Topic: Bonds Payable LO: 2 Level of Difficulty: MEDIUM 113. Bowling Green Associates has outstanding Bonds Payable, with a par value of $120,000, and carrying value of $116,800. If Bowling Green purchases the bonds in the open market at a price of 98.0 and retires them, which of the following is true? A) Bowling Green will recognize a loss of $3,200. B) Bowling Green will recognize a gain of $3,200. C) Bowling Green will recognize a gain of $800. D) Bowling Green will recognize a loss of $800. Answer: D Rationale: Purchase of bonds on the market: Par Value x Market Price = Amount paid $120,000 x 98% = $117,600 Carrying value of Bonds Payable Less: Cost of Bonds purchased on the open market Loss on transaction
$116,800 (117,600) $ (800)
Topic: Bonds Payable LO: 2 Level of Difficulty: MEDIUM 114. Foxrun Associates has outstanding Bonds Payable, with a par value of $120,000, and carrying value of $116,700. If Foxrun purchases the bonds in the open market at a price of 97.0 and retires them, which of the following is true? A) Foxrun Associates will recognize a loss of $3,300. B) Foxrun Associates will recognize a gain of $3,300. C) Foxrun Associates will recognize a gain of $300. D) Foxrun Associates will recognize a loss of $300. Answer: C Rationale: Purchase of bonds on the market: Par Value x Market Price = Amount paid $120,000 x 97% = $116,400 Carrying value of Bonds Payable Less: Cost of Bonds purchased on the open market Gain on transaction
$116,700 (116,400) $ 300
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-57
Topic: Bonds Payable LO: 2 Level of Difficulty: MEDIUM 115. Hickenlooper Company retired a $900,000, 7% bond issue at 98. If the unamortized discount is $7,200, the entry will include a: A) Debit to loss on bond retirement for $10,800 B) Credit to gain on bond retirement for $10,800 C) Debit to loss on bond retirement for $7,200 D) Credit to gain on bond retirement for $7,200 Answer: B Rationale: Entry to record retirement of Bonds: Bonds payable Discount on bonds payable Gain on bond retirement Cash To retire bonds and record gain on retirement. (0.98 x $900,000)
900,000 7,200 10,800 882,000
Topic: Bonds Payable LO: 2 Level of Difficulty: MEDIUM 116. Hicks Company’s Bonds Payable has a balance of $1,200,000 and Discount on Bonds Payable has a balance of $15,000. If the issuing corporation retires the bonds at a market price of 97, what is the amount of gain or loss on retirement? A) $15,000 loss B) $15,000 gain C) $21,000 loss D) $21,000 gain Answer: D Rationale: Book value of Bond $1,200,000 - $15,000= $1,185,000 Retirement Price = $1,200,000 x 0.97 = $1,164,000 Gain on Retirement = $1,185,000 - $1,164,000 = $21,000
©Cambridge Business Publishers, 2020 10-58
Financial Accounting for Undergraduates, 4th Edition
Topic: Bonds Payable LO: 2 Level of Difficulty: MEDIUM 117. Charlie Company’s Bonds Payable has a balance of $2,700,000 and Discount on Bonds Payable has a balance of $33,750. If the issuing corporation retires the bonds at a market price of 97, what is the amount of gain or loss on retirement? A) $33,750 loss B) $33,750 gain C) $47,250 loss D) $47,250 gain Answer: D Rationale: Book value of Bond = $2,700,000 - $33,750 = $2,666,250 Retirement Price = $2,700,000 x 0.97 = $2,619,000 Gain on Retirement = $2,666,250 - $2,619,000 = $47,250 Topic: Bonds Payable LO: 2 Level of Difficulty: DIFFICULT 118. Quechua Company borrowed $90,000 cash on January 1, 2019, by signing an 8% mortgage note that is to be repaid in 10 equal annual end-of-year payments. The first payment is due on December 31, 2019. The journal entry to record the first payment will include: A) A debit to Notes Payable for $7,200 B) A debit to Notes Payable for $13,413 C) A debit to Interest Expense for $13,413 D) A debit to Notes Payable for $6,213 Answer: D Rationale: Computation of mortgage note payments:
N
I/Yr
PMT (press)
PV
10
8
13413
90000
Interest expense: $90,000 x 8% = $7,200 Journal entry to record the first payment: Interest expense Mortgage note payable Cash To record annual mortgage loan payment.
7,200 6,213 13,413
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-59
Topic: Bonds Payable LO: 2 Level of Difficulty: DIFFICULT 119. Westwood Company borrowed $202,500 cash on January 1, 2019, by signing an 8% mortgage note that is to be repaid in 10 equal annual end-of-year payments. The first payment is due on December 31, 2019. The journal entry to record the first payment will include: A) A debit to Notes Payable for $16,200 B) A debit to Notes Payable for $30,178 C) A debit to Interest Expense for $30,178 D) A debit to Notes Payable for $13,978 Answer: D Rationale: Computation of mortgage note payments:
N
I/Yr
PMT (press)
PV
10
8
30178
202500
Interest expense: $202,500 x 8% = $16,200 Journal entry to record the first payment: Interest expense Mortgage note payable Cash To record annual mortgage loan payment.
16, 200 13,978 30,178
Topic: Bonds Payable LO: 2 Level of Difficulty: DIFFICULT 120. On January 1, Alicia Company borrowed $30,000 cash by signing an 8 year, 7% mortgage note that requires equal total payments on December 31 of each year. The balance in the Note Payable account after the first payment is made is: A) $27,900 B) $26,250 C) $26,339 D) $27,076 Answer: D Rationale: Payment Date
Cash Payment
Jan.1, 2019 Dec. 31, 2019
$5,024
Interest Expense $2,100
Principal Repaid
Note Payable Balance
$2,924
$30,000 27,076
Computation of mortgage note payments:
N
I/Yr
PMT (press)
PV
8
7
5024
30000
©Cambridge Business Publishers, 2020 10-60
Financial Accounting for Undergraduates, 4th Edition
Topic: Bonds Payable LO: 2 Level of Difficulty: DIFFICULT 121. On January 1, 2019 Tracey Sisters Company borrowed $90,000 cash by signing an 8 year, 7% mortgage note that requires equal total payments on December 31 of each year. The balance in the Mortgage Note Payable account after the first payment is made is: A) $83,700 B) $78,750 C) $79,017 D) $81,228 Answer: D Rationale: Payment Date
Cash Payment
Interest Expense
Principal Repaid
Jan.1, 2019 Dec. 31, 2019
Note Payable Balance $90,000
$15,072
$6,300
$8,772
81,228
Computation of mortgage note payments:
N
I/Yr
PMT (press)
PV
8
7
15072
90000
Topic: Bond Pricing with Tables LO: 5—Appendix 10A Level of Difficulty: MEDIUM 122. Eva Industries issued bonds with a face value of $7,000,000 and a coupon rate of 5% paid semiannually for 4 years. The market rate of interest is 6%. How much is the market value of the bond using a present value table? A) $6,125,000 B) $6,754,316 C) $6,797,846 D) $6,938,225 Answer: B Rationale: Interest payment = $7,000,000 × 5% × 6/12 = $175,000 n = (4 * 2) = 8 I = (6% / 2) = 3 PV of interest payments, n = 8, I = 3 PV of principal, n = 8, I = 3 PV
7.01969 × $ 175,000 = 0.78941 × $7,000,000 =
$1,228,446 5,525,870 $6,754,316
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-61
Topic: Bond Pricing with Tables LO: 5—Appendix 10A Level of Difficulty: MEDIUM 123. Brahtz Industries issued bonds with a face value of $21,000,000 and a coupon rate of 5% paid semiannually for 4 years. The market rate of interest is 6%. How much is the market value of the bond using a present value table? A) $18,375,000 B) $20,262,947 C) $20,393,538 D) $20,814,675 Answer: B Rationale: Interest payment = $21,000,000 × 5% × 6/12 = $525,000 n = (4 * 2) = 8 I = (6% / 2) = 3 PV of interest payments, n = 8, I = 3 PV of principal, n = 8, I = 3 PV
7.01969 × $ 525,000 = 0.78941 × $21,000,000 =
$3,685,337 16,577,610 $20,262,947
Topic: Leases LO: 6 – Appendix 10B Level of Difficulty: Medium 124. Pendergraf Manufacturing leased some manufacturing equipment for five years on July 1, 2020. The equipment has an expected life of 10 years. The monthly lease payments are $8,500 ($510,000 in total). At the end of the lease term, Pendergraf has a right to purchase the equipment for $1,000. The present value of the lease payments at 5% is $451,200. The entry to record the lease in July will include: A) A debit to Lease expense of $8,500. B) A debit to Equipment of $510,000 C) A debit to Right-of-Use Asset (Equipment) of $451,200 D) A debit to Equipment of $511,000 Answer: C Rationale: The lease is recorded as an asset at the present value of the lease payments.
©Cambridge Business Publishers, 2020 10-62
Financial Accounting for Undergraduates, 4th Edition
Exercises Topic: Accrued Interest LO: 1 1. Perfect Pet Company gave a creditor a 90-day, 6% note payable for $28,000 on December 1, 2019. What amount of interest will be accrued as of December 31, 2019? Where will this amount be reported in the company’s financial statements? Answer: $28,000 × 6% × 30/360 = $140 Reported as a current liability as interest payable on the balance sheet Topic: Gain (Loss) on Bond Repayment LO: 2 2. On June 30, one year before maturity, Boat Shoes, Inc. retired $600,000 of its 10% bonds payable at 96. The bond’s book value on June 30 is $495,000. Bond interest is presently paid up to the date of retirement. How much is the gain or loss on the retirement of these bonds? Answer: Cash for retirement = $600,000 x 0.96 = $576,000 Gain (loss) = Net bonds payable - Cash payment = $495,000 – $576,000 = $81,000 loss Topic: Financial Statement Classification LO: 1, 2 3. Indicate the proper financial classification (balance sheet or income statement) for each of the following accounts: A. B. C. D.
Loss on bond retirement Bonds payable Mortgage interest expense Bonds due to be paid within 12 months
Answer: A. Reported on the income statement B. Shown on the balance sheet as long-term liability C. Reported on the income statement D. Reported as a current liability on the balance sheet
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-63
Topic: Accrued Interest LO: 1 4. Calculate the interest accrued for each of the following notes payable owed by Boundas Resorts as of December 31, 2019: Lender Roof Point Second Bank Step Up
Date of Note 10/01/19 12/01/19 3/31/19
Principal $90,000 $45,000 $30,000
Coupon Rate 10.0% 8.0% 9.0%
Term 6 months 90 days 1 year
Answer: Lender Roof Point Second Bank Step Up
Interest Accrued $2,250 $300 $2,025
Principal × Annual Rate × Time outstanding $90,000 ×10.0% × 3/12 $45,000 × 8.0% × 30/360 $30,000 × 9.0% × 9/12
Topic: Bond Retirement LO: 2 5. Kenyon Company issued $1,050,000 of 7%, 20-year bonds at 104 on January 1, 2008. Interest is payable semi-annually on July 1 and January 1. Through January 1, 2019, Kenyon amortized $25,500 of the bond premium. On January 1, 2019, Kenyon retires the bond at 101 (after making the interest payment on that date). Indicate the journal entry for the bond retirement on January 1, 2019. Answer: $1,050,000 × 1.04 = $1,092,000 issue price $1,050,000 × 1.01 = $1,060,500 retirement amount Unamortized premium = $42,000 premium ‒ $25,500 amortized = $16,500 Book value of bonds on date of repurchase = $1,050,000 + $16,500 = $1,066,500 Gain on retirement = $1,060,500 - $1,066,500 = $6,000 2016 Jan. 1
Bonds payable Premium on bonds payable Gain on bond retirement Cash
1,050,000 16,500 6,000 1,060,500
©Cambridge Business Publishers, 2020 10-64
Financial Accounting for Undergraduates, 4th Edition
Topic: Transaction Analysis LO: 1 6. Determine how each of the following transactions affect liabilities. A. Payment to employees for wages previously accrued B. Accrue interest of $200 on a note payable C. Payment of $180 to bank for interest accrued on a note payable Answer: A. This transaction reduces current liabilities with a decrease in cash and a decrease in wages payable. B. Interest payable increases which is a current liability. Interest expense also increases on the income statement causing retained earnings to decrease. C. Interest payable, a current liability, decreases along with cash. Topic: Interest Accrual LO: 1 7. Stone Mountain took out a one-year, 6%, $100,000 to be repaid on April 1, 2020. Interest is due when the loan is repaid. How much interest should be accrued at December 31, 2019, and how should it be recorded in the financial statements? Answer: Interest expense = Principal × Annual interest rate × Portion of year outstanding = $100,000 × 6% × 9/12 = $4,500 The $4,500 should be recorded as an increase in liabilities (interest payable) and an increase in interest expense on the income statement which in turn reduces retained earnings on the balance sheet. Topic: Gain (Loss) on Note Retirement LO: 2 8. Fergus Fabricators, a manufacturing company, paid $20,400,000 to retire $24,000,000 in 7% notes due in 5 years. The book value of the notes was $19,200,000 at the date of retirement. How much is the net gain or loss on the redemption of these notes? Prepare the journal entry to record the transaction. Answer: $20,400,000 paid - $19,200,000 book value = $1,200,000 net loss Notes payable Loss on note retirement Cash
19,200,000 1,200,000 20,400,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-65
Topic: Recognition and Disclosure LO: 3 9. The following items represent various types of liabilities. 1. A manufacturing company is sued for alleged product liability. The company’s attorney does not feel that the suit will result in liability to the company, but a loss is possible. If adversely adjudicated, the liability would be material. 2. Alpha has sold products to Sparkle Jewelers, a retailer that sold the products to customers. The manufacturer’s warranty offers replacement of the product if it is found to be defective within 90 days of the sale to the consumer. Historically, 0.06% of the products are returned for replacement. 3. A customer has filed a lawsuit for a minor amount against Sparkle Jewelers. Sparkle’s attorneys have reviewed the case and have found that many similar cases have never been awarded to the plaintiff. Identify if the above independent situations should be (a) recorded in the financial statements, (b) disclosed in a footnote in the financial statements, or (c) neither. Answer: 1. (b) Disclosed in footnote because this is reasonably possible 2. (a) Recorded in the financial statements because the costs are probable and reasonably estimable. 3. (c) Neither recorded nor disclosed because this is not even reasonably possible Topic: Interest Expense and Bonds LO: 2 10. Explain the differences in the components of interest expense for the bonds sold at face value, at a discount, and at a premium. Answer: When a bond is sold at face value, the cost to the issuing company is only the cost of the cash interest paid. Interest expense, in this case, is equal to the cash interest paid. When a bond is sold at a discount, the interest expense is equal to the cash interest paid plus the amortization of the discount. When a bond is sold at a premium, the interest expense is equal to the cash interest paid less the amortization of the premium.
©Cambridge Business Publishers, 2020 10-66
Financial Accounting for Undergraduates, 4th Edition
Topic: Sales and Excise Taxes Payable LO: 1 11. Modern Telephone billed a customer $5,089.20, an amount that includes an excise tax of 10% and a sales tax of 6%. a. What amount of revenue should be recorded? b. Present a general journal entry to record this transaction on Modern Telephone’s books. Answer: a. ($5,089.20 / 1.16) = $4,387.24 b. Accounts Receivable Sales revenue Sales tax payable Excise tax payable To record sales and related taxes. *Adjusted for $0.01 due to rounding.
5,089.20 4,387.24 263.23 438.73*
Topic: Warranty Liabilities LO: 1, 3 12. Port Aransas Company sells a product that carries a 60-day unconditional warranty against product failure. Based on statistical analysis, Port Aransas knows that between the time of sale and the lapse of the warranty, 4% of the units sold will fail and require repair at an avenge cost of $40 per unit. The following data reflect the first three months during which the product was sold.
Units sold Known units of product failure From sales of October November December
October 30,000
November 36,000
December 60,000
480
600 300
120 960 900
Prepare the general journal entry to record Port Aransas’ estimated liability for product warranties at December 31. Assume that warranty costs of known failures have already been reflected in the records. Answer: Units sold Estimated failure rate Total failures expected Failures already occurred Expected future failures
October 30,000 0.04 1,200 1,200 0
November 36,000 0.04 1,440 1,260 180
Total failures expected (180 + 1,500) Avenge cost per failure Total expected future warranty costs Product Warranty Expense Estimated Liability for Product Warranty
December 60,000 0.04 2,400 900 1,500 1,680 x $40 $67,200
67,200 67,200 ©Cambridge Business Publishers, 2020
Test Bank, Chapter 10
10-67
Topic: Payroll-Related Liabilities LO: 1 13. The following data are taken from Duncan Wayneright Corporation’s monthly payroll for August 2019: Administrative salaries Sales salaries Total payroll Wages subject to FICA taxes (6.2% + 1.45%) Wages subject to FUTA and state unemployment taxes Federal income taxes withheld from all salaries
$48,000 96,000 $144,000 $144,000 $36,000 $18,600
Assume that the company is subject to a 2.7% state unemployment tax and a 0.8% federal unemployment tax. Record the general journal entry to: a. Accrue the payroll. b. Accrue the employer’s payroll taxes. Answer: a. Administrative Salaries Expense Sales Salaries Expense FICA Tax Payable (7.65% x $144000) Federal Income Tax Withheld Payroll Payable To record August payroll.
48,000 96,000 11,016 18,600 114,384
b. Payroll Tax Expense FICA Tax Payable Federal Unemployment Tax Payable (0.8% x $36,000) State Unemployment Tax Payable (2.7% x $36,000) To record August payroll tax expense.
12,276 11,016 288 972
Topic: Working Capital LO: 4 14. Murnau, Inc. has $1,400 working capital and $3,300 of current assets. What is the firm’s current liabilities? Answer: Working capital = Current assets – Current liabilities. $1,400 = $3,300 – Current liabilities Current liabilities = $1,900
©Cambridge Business Publishers, 2020 10-68
Financial Accounting for Undergraduates, 4th Edition
Topic: Times-Interest-Earned Ratio LO: 4 15. Use the selected balance sheet and income statement information below for Sunshine, Inc. to compute the times-interest-earned ratio. Explain what information this ratio provides. Current assets $36,450,675
Current liabilities $25,507,200
Pretax income $6,125,525
Interest expense $1,706,250
Answer: Times-interest-earned = Earnings before interest expense and taxes / Interest expense = ($6,125,525 + $1,706,350) / $1,706,350 = 4.59 Moonbeam has operating income available to pay its annual interest expense 4.59 times for the year. Topic: Current Ratio LO: 4 16. Use the selected balance sheet and income statement information below for Brahtz Inc. to compute the current ratio. Explain what information this ratio provides. Current assets $46,025,788
Current liabilities $22,318,800
Pretax income $6,450,900
Interest expense $1,950,000
Answer: Current ratio = Current assets / Current liabilities = $46,025,788 / $22,318,600 = 2.06 Anka is able to cover its current debt about 2.06 times with its current assets. Topic: Present Value of Bonds LO: 5—Appendix 10A 17. Wiesbaden Investments recently issued bonds with a face value of $2,000,000 and a coupon rate of 5% for 6 years. The market rate of interest is 4% and the bonds pay interest semi-annually. Compute the market value of the bond on the issue date. Answer: Interest payment = $2,000,000 × 5% × 6/12 = $50,000 PV of principal, n = 6 × 2 = 12; I = 4%/2 = 2%: PV of interest payments, n = 6 × 2 = 12; I = 4%/2 = 2% Total present value
$2,000,000 × 0.78849 = $50,000 × 10.57534 =
N
I/Yr
PMT
PV (press)
FV
12
2
50,000
2,105,753
2,000,000
$1,576,980 $528,767 $2,105,747
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-69
Topic: Bond Pricing LO: 5—Appendix 10A 18. If Ray’s Motor Parts issues $6,900,000 in 6% bonds due in 5 years with semiannual interest payments, how much should it expect to raise if the market return for similar bonds is 8%? Answer: Interest payment = $6,900,000 × 6% × 6/12 = $207,000 PV of the principal = 0.67556 × $6,900,000; (n = 5 x 2 = 10, I = 8%/2 = 4%) PV of the interest payments = 8.11090 × $207,000; (n =10, I = 8%/2 = 4%) PV of the bonds
N
I/Yr
PMT
PV (press)
FV
10
4
207000
6340348
6900000
$4,661,364 1,678,956 $6,340,320
Topic: Leases LO: 6—Appendix 10B 19. Langley Enterprises leases a semi-trailer truck from Rogers Rental for 10 years on January 1, 2020. Langley agrees to make quarterly payments of $4,000. The first payment is due March 31, 2020. At the end of the lease term, Langley agrees to pay Rogers $2,500. The market value of the truck is expected to be $25,000 at the end of the lease. Langley uses 8% as its discount rate. What is the entry to record the lease on January 1? PV of the bargain purchase option = 0.45289× $2,500 (n =10 x 4 = 40; I = 8%/4 = 2%) PV of the lease payments = 27.35548 × $4,000 (n =10 x 4 = 40; I = 8%/4 = 2%) PV of the bonds Right-of-Use Asset (Truck) Lease liability (Truck)
$1,132 109,422 $110,554
110,554 110,554
©Cambridge Business Publishers, 2020 10-70
Financial Accounting for Undergraduates, 4th Edition
Problems Topic: Current Ratio and Times-Interest-Earned Ratio LO: 4 1. Selected balance sheet and income statement information for a jewelry company for 2017 through 2019 follows: ($millions) Net sales Interest expense Pretax income Net income Current assets Total assets Current liabilities
2019 $ 5,130 207 1,365 795 7,338 10,469 2,450
2018 $8,547 110 1,281 660 6,147
2017 $ 8,7844 90 2,026 969 5,766
9,306
9,003
2,457
2,405
a. Compute the current ratio for each year and discuss any trends. b. Compute times interest earned for each year and discuss any trends. Answer: a. Current ratio = Current assets / Current liabilities ($ millions) Current assets Divided by current liabilities = Current Ratio
2019 $7,338 2,450 3.00
2018 $6,147 2,457 2.50
2017 $5,766 2,405 2.40
The current ratio has increased slightly from 2017 through 2018 but increased more substantially from 2018 to 2019. Overall, their current ratio is at a healthy level. A high current ratio does not mean the company is safe from falling into liquidity problems. The company can still run into liquidity problems if its liabilities mature quicker than their current assets are converted into cash. We might benefit from additional information on the maturity schedule of liabilities and the expected conversion of its current assets into cash in order to evaluate the company’s short-term liquidity with more accuracy. b. Times interest earned = (Pre-tax Income + Interest expense) / Interest expense 2019: ($1,365 + $207) / $207 = 7.59 2018: ($1,281 + $110) / $110 = 12.65 2017: ($2,026 + $90) / $90 = 23.51 The 2019 times interest earned ratio is above the range (3.0 - 4.0) at which investment professionals believe is a relatively safe level. However, the downward trend of the times interest earned ratio over the years is concerning as the company’s ability to pay its current interest charges has declined over the past two years.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-71
Topic: Current Ratio and Times-Interest-Earned Ratio LO: 4 2. Selected balance sheet and income statement information for the office supply retailer, Organized Plus Co., for 2019 through 2017 follows: ($ thousands) Interest expense Pretax income Net income Current assets Total assets Current liabilities
2019 414,794 2,311,788 1,477,342 12,349,534 27,434,668 6,619,060
$
2018 $262,105 2,486,168 1,610,528 11,594,516 26,146,110 8,479,538
2017 $67,086 3,088,964 1,991,340 9,110,760 18,072,680 4,567,325
a. Compute the current ratio for each year and discuss any trends. b. Compute times-interest-earned ratio for each year and discuss any trends. Answer: a. 2019: $12,349,534 / $6,619,060 = 1.87 2018: $11,594,516 / $8,479,538 = 1.37 2017: $9,110,760 / $4,567,325 = 1.99 Organized Plus Co.’s current ratio has shown significant improvement from 2018 to 2019, although it is still below the company’s 2017 level. Overall, Organized Plus Co.’s current ratio shows the company has enough current assets to cover its current liabilities. b. 2019: ($2,311,788 + $414,794) / $414,794 = 6.57 2018: ($2,486,168 + $262,105) / $262,105 = 10.49 2017: ($3,088,964 + $ 67,086) / $ 67,086 = 47.04 Organized Plus Co.’s times interest earned ratios have significantly declined over the past year years. Although 6.57 is above the range that investment professionals consider a safe level (3.0 – 4.0), the significant decrease for the last two years is concerning.
©Cambridge Business Publishers, 2020 10-72
Financial Accounting for Undergraduates, 4th Edition
Topic: Bond Pricing LO: 5—Appendix 10A 3. Broad Horizons, Inc. plans to issue 20-year notes with a face value of $14,400,000 and an annual coupon rate of 5.5%. The market rate of interest is 4%. Interest payments will be made semiannually. a. Compute the market value of the bonds. b. Assume the market rate remains at 4% after 5 years. How much cash will Bright Future, Inc. need to pay off the notes at this time? Answer: a. Interest payment = $14,400,000 × 5.5% × 6/12 = $396,000 PV of principal, n = 20 × 2 = 40; I = 4%/2 = 2% PV of interest payments, n = 20 × 2 = 40; I = 4%/2 = 2% Total present value
$14,400,000 × 0.45289 = $396,000 × 27.35548 =
N
I/Yr
PMT
PV (press)
FV
40
2
396,000
17,354,386
14,400,000
$ 6,521,616 $10,832,770 $17,354,386
b. Interest payment = $14,400,000 × 5.5% × 6/12 = $396,000 PV of principal, n = 15 × 2 = 30; I = 4%/2 = 2% PV of interest payments, n = 15 × 2 = 30; I = 4%/2 = 2% Total present value
$14,400,000 × 0.55207 = $396,000 × 22.39646 =
N
I/Yr
PMT
PV (press)
FV
30
2
396,000
16,818,817
14,400,000
$ 7,949,808 $ 8,868,998 $16,818,806
Topic: Present Value Using Tables LO: 5—Appendix 10A 4. Compute the present value for each of the following amounts. a. $150,000 received in 8 years if annual interest rate is: (1) 10% compounded annually or (2) 10% compounded semiannually b. $15,000 received at the end of each year for the next 4 years if the money is worth 8% per year compounded annually Answer: a. (1) Present value of $150,000 at n = 8; I = 10% $150,000 × 0.46651 = $69,977 (2) Present value of a sum of $150,000 at n = 8 × 2 = 16; I = 10%/2 = 5% $150,000 × 0.45811 = 68,717 b. Present value of an annuity of $15,000 at n = 4; I = 8% $15,000 × 3.31213 = $49,682
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-73
Topic: Bond Pricing LO: 5—Appendix 10A 5. Investment Company issues $1,500,000 of 8% bonds that pay interest semiannually and mature in 10 years. Compute the bonds’ issue price assuming that the bonds’ market interest rate is: a. 6% per year compounded semiannually b. 10% per year compounded semiannually Answer: Interest Payment = $1,500,000 × 8% × 6/12 = $60,000 a. Selling price of the bond discounted at 6%: PV of principal repayment ($1,500,000 x 0.55368*) = PV of interest payments ($60,000 x 14.87747**) =
$ 830,520 892,648 $1,723,168
*Present value of a sum, n = 10 x 2 = 20; I= 6%/2 = 3% **Present value of an annuity, n = 10 x 2 = 20; I = 6%/2 = 3%
N
I/Yr
PMT
PV (press)
FV
20
3
60000
1723162
1500000
b. Selling price of the bond discounted at 10%: PV of principal repayment ($1,500,000 × 0.37689*) = PV of interest payments ($60,000 × 12.46221**) =
$565,335 747,733 $1,313,068
*Present value of a sum, n = 10 x 2 = 20; I= 10%/2 = 5% **Present value of an annuity, n = 10 x 2 = 20; I = 10%/2 = 5%
N
I/Yr
PMT
PV (press)
FV
20
5
60000
1313067
1500000
©Cambridge Business Publishers, 2020 10-74
Financial Accounting for Undergraduates, 4th Edition
Topic: Bond Pricing and Amortization LO: 5—Appendix 10A 6. Waveland Corporation issued $120,000,000 in bonds which mature in 5 years. The bonds pay an annual coupon rate of 10%. Interest payments are made semi-annually. The current market rate for similar bonds is 8%. a. At what price should this bond offering sell? b. Create a table showing the amortized premium or discount the first three years of the bonds. c. How much is the book value of the bonds at the end of the first year (2 payments)? Answer (using PV tables): a. Interest payment = $120,000,000 × 10% × 6/12 = $6,000,000 *Present value of a sum, n = 5 x 2 = 10; I= 8%/2 = 4% **Present value of an annuity, n = 5 x 2 = 10; I = 8%/2 = 4%
PV of principal = 0.67556* × $120,000,000 PV of interest payments = 8.11090** × $6,000,000 PV of the bonds
$ 81,067,200 48,665,400 $129,732,600
***(E – face amount)
b.
A
Period Issue 1 2 3 c.
B
Interest Paid (5% of face value)
C
Interest Expense (4% of Amortization bond value) (A -B)
$6,000,000 6,000,000 6,000,000
$5,189,304 5,156,876 5,123,151
$810,696 843,124 876,849
D
E
Premium (D-C) $9,732,600*** 8,921,904 8,078,780 7,201,931
Bond Payable ($120,000,000 + D) $129,732,600 128,921,904 128,078,780 127,201,931
$128,921,904
Answer (using financial calculator): a. Interest payment = $120,000,000 × 10% × 6/12 = $6,000,000
N
I/Yr
PMT
PV (press)
FV
10
4
6,000,000
129,733,075
120,000,000
C
D
***(E – face amount)
b.
A
Period Issue 1 2 3 c.
Interest Paid (5% of face value) $6,000,000 6,000,000 6,000,000
B
Interest Expense (4% of Amortization bond value) (A -B) $5,189,323 5,156,896 5,123,172
$810,677 $843,104 $876,828
Premium (D-C) $9,733,075*** 8,922,398 8,079,294 7,202,466
E Bond Payable ($120,000,000 + D) $129,733,075 128,922,398 128,079,294 127,202,466
$128,922,398 ©Cambridge Business Publishers, 2020
Test Bank, Chapter 10
10-75
Chapter 10 Accounting for Liabilities Learning Objectives – Coverage by question True / False
Multiple Choice
Exercises
LO1 – Describe the nature of liabilities and discuss various current liabilities
9, 10, 14-17
1-3, 6, 8, 11, 14, 15, 23, 24, 27, 29, 31-58, 67-74, 76-102
1, 3, 4, 6, 7, 12-14
LO2 – Illustrate the accounting for long-term liabilities.
1-5
4, 5, 9, 10, 13, 16-21, 103-108, 112-121
2, 3, 5, 8, 10
LO3 – Define contingent liabilities and explain the rules for their accounting and disclosure in the financial statements.
6, 11-13
7, 12, 25, 26, 28, 30-38, 96-102
9, 13
LO4 – Define the current ratio, quick ratio, and times-interestearned ratio and explain their use.
18-20
59-66, 75
15 - 17
1, 2
LO5 – Appendix 10A. Explain bond pricing and illustrate the straight-line and effective interest methods of amortizing bond discounts/premiums.
21
109-111, 122, 123
18,19
3-6
LO6 – Appendix 10B Describe the accounting for leases.
7, 8
22, 124
Problems
20
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-1
Chapter 10: Accounting for Liabilities
True / False Topic: Issuing Bonds LO: 2 1. A bond that will sell for a discount when the market rate is greater than the coupon rate. Answer: True
Topic: Secondary Market for Bonds LO: 2 2. Once sold, bonds can be traded in the market place similar to shares of stock. Answer: True
Topic: Zero-Coupon Bonds LO: 2 3. Zero-coupon notes do not pay periodic interest payments. Answer: True
Topic: Discount Bond LO: 2 4. A bond selling for an amount above face value is said to be selling at a discount. Answer: False Rationale: This bond would sell at a premium, not a discount.
Topic: Bond Ratings LO: 2 5. Bond ratings specify the amount at which investors can buy bonds from companies. Answer: False Rationale: Bond ratings are published by companies such as Moody’s and S&P and aim to rate bonds so that its default risk is more accurately determined and priced by the market.
Topic: Contingent Liabilities LO: 3 6. Contingent liabilities that a company considers to be reasonably possible and for which a company is able to reasonably estimate the amount of a loss are recognized on the balance sheet and the income statement. Answer: False Rationale: Only ‘probable’ contingent liabilities are estimated and recorded on the balance sheet and the income statement. Anything less than ‘probable,’ (such as ‘reasonably possible’) is disclosed in the financial statement footnotes.
©Cambridge Business Publishers, 2020 10-2
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Operating Leases LO: 6 7. Effective for years beginning after December 31, 2019, most operating leases will appear as assets on the lessee’s balance sheet. Answer: True Rationale: Under ASC Topic 842, operating leases with terms greater than 12 months will be reported as right-of-use assets.
Topic: Financial Statement Effects of Finance Leases LO: 6 8. Recognizing a lease as a finance lease requires that both the leased asset and lease liability be reported on the balance sheet. Answer: True
Topic: Liabilities Definition LO: 1 9. Liabilities are obligations resulting from past transactions that require the firm to pay money, provide goods, or perform services in the future. Answer: True
Topic: Current Liabilities Definition LO: 1 10. Current liabilities are limited to those obligations that require the payment of cash within the coming year or the operating cycle, whichever is longer. Answer: False Rationale: Current liabilities are obligations that will require, within the coming year or the normal operating cycle, whichever is longer, the use of existing current assets or the creation of other current liabilities.
Topic: Contingent Liabilities Definition LO: 3 11. A contingent liability is an obligation that may develop from an existing situation depending on the occurrence of a future event. Answer: True
Topic: Contingent Liabilities LO: 3 12. A contingent liability that will probably occur should be recorded in the accounts even though the amount cannot be reasonably estimated. Answer: False Rationale: Whether or not a contingent liability is recorded in the accounts depends on the likelihood of the future event occurring and the measurability of the obligation.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-3
Topic: Contingent Liabilities LO: 3 13. Lawsuits and credit guarantees are examples of contingent liabilities. Answer: True
Topic: Federal Unemployment Insurance LO: 1 14. Federal unemployment tax is withheld from each employee’s wages. Answer: False Rationale: Federal and state unemployment taxes are levied only on employers as a percentage of the gross payroll, subject to various limits.
Topic: FICA Taxes LO: 1 15. In most situations, the total FICA tax levied on employers will exceed the amount of FICA tax withheld from employees. Answer: False Rationale: Each employer is required to pay an amount equal to the FICA taxes withheld from the employees’ gross pay.
Topic: Payroll Tax Withholdings LO: 1 16. The required withholding of federal income taxes and FlCA taxes from employees’ wages results in a direct reduction of operating expenses for the employer firm. Answer: False Rationale: Employees’ gross pay, the amount earned before any withholdings, is the employer’s wage expense. The federal income taxes and FICA taxes withheld from employees’ gross pay are an “expense” to the employees. Law mandates that employers withhold these taxes from its employees and pay it to the government on the employees’ behalf. This process does not reduce the amount paid in wage expenses by the employer.
Topic: Payroll Expenses LO: 1 17. The employer firm’s total expenses for employing an employee is less than the related employee’s gross earnings. Answer: False Rationale: An employer must pay the cost of an employee’s gross earnings (subject to employee withholdings) plus the related employer’s payroll taxes on those gross earnings.
Topic: Quick Ratio LO: 4 18. Quick ratio is another name for the current ratio. Answer: False Rationale: The quick ratio differs from the current ratio in that the numerator only contains cash, short-term investments, and accounts receivable. ©Cambridge Business Publishers, 2020 10-4
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Working Capital LO: 4 19. Net working capital = Current assets + Current liabilities Answer: False Rationale: Working capital = Current assets less current liabilities
Topic: Times-Interest-Earned Ratio LO: 4 20. The times-interest-earned ratio reflects the number of times that the company earned interest during the year. Answer: False Rationale: Times-interest-earned ratio reflects the operating income available to pay interest expense during the year.
Topic: Bond Valuation LO: 5 21. There are two cash flows associated with bonds—a single payment at maturity and periodic interest payments. Answer: True Rationale: The single payment is the principal due when the bond matures. Interest payments are most often paid semi-annually.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-5
Multiple Choice Topic: Current Liabilities LO: 1 Level of Difficulty: MEDIUM 1. Which of the following does not affect the current liabilities section of the balance sheet? A) Purchase of inventory on credit B) Wages owed to employees but not yet paid C) Insurance bill to be paid next month D) Sale of goods on credit Answer: D Rationale: The sale of goods on credit impacts current assets, accounts receivable. All the other items are liabilities that the company must pay within the next year, current liabilities.
Topic: Interest Accrual LO: 1 Level of Difficulty: EASY 2. Brothers Inc. issued a 120-day note in the amount of $180,000 on November 1, 2019 with an annual rate of 6%. What amount of interest has accrued as of December 31, 2019? A) $3,000 B) $2,250 C) $1,800 D) Zero. The interest is accrued at the end of the 120 day period. Answer: C Rationale: $180,000 × 6% × 60/360 = $1,800
Topic: Interest Accrual LO: 1 Level of Difficulty: EASY 3. Goel Inc. issued a 120-day note in the amount of $540,000 on November 1, 2019 with an annual rate of 6%. What amount of interest has accrued as of December 31, 2019? A) $9,000 B) $6,750 C) $5,400 D) Zero. The interest is accrued at the end of the 120 day period. Answer: C Rationale: $540,000 × 6% × 60/360 = $5,400
©Cambridge Business Publishers, 2020 10-6
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Bond Ratings LO: 2 Level of Difficulty: EASY 4. Which of the following corporate bond ratings are listed in an increasing level of risk? A) AAA, A, BB, C B) A, AAA, BB, C C) BB, C, A, AAA D) C, BB, A, AAA Answer: A Rationale: As debt quality moves from AAA to CCC, the market interest rate required increases.
Topic: Coupon Rate LO: 2 Level of Difficulty: EASY 5. For what is the coupon rate used to compute? A) Rate that investors expect to earn on this investment B) Interest payments paid to bondholders during the life of the bond issue C) Bond issue price D) Fee paid to an underwriter for determining the bond price Answer: B Rationale: Coupon rates are used to compute the dollar amount of interest payments paid to the bondholder semi-annually.
Topic: Transaction Analysis of Current Liabilities LO: 1 Level of Difficulty: MEDIUM 6. Which of the following transactions that impact current liabilities has a corresponding entry on the income statement? A) Purchase inventory on credit from company QRS on January 1 B) Payment to QRS on February 1 for a January 1 purchase C) Interest accrued on a note payable D) Payment to employees in March for wages earned in February Answer: C Rationale: The purchase of inventory on credit is increases inventory (asset) and accounts payable (liability). Payment of accounts payable decreases cash (asset) and accounts payable (liability). Interest accrued on a note payable increases current liabilities (interest payable) and increases interest expense on the income statement. Payment of accrued wages decreases cash (asset) and wages payable (liability).
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-7
Topic: Contingent Liability LO: 3 Level of Difficulty: MEDIUM 7. Which one of the following would be considered a contingent liability? A) A company owes $200,000 on inventories purchased on credit. B) A company has $1,690,000 worth of bonds outstanding. C) A company estimates that it will probably have to pay $2,400,000 to the Department of Environment Protection for a chemical spill. D) The company has access to a line of credit with a bank in the amount of $3,000,000. Answer: C Rationale: For a liability to be a contingent liability, the amount must be able to be estimated and must be probable.
Topic: Current Liability LO: 1 Level of Difficulty: EASY 8. Which of the following does not represent a current liability? A) Accrual of taxes payable B) Short-term loan C) Advance payments received from customers D) Bond issue Answer: D Rationale: Bonds are issued to raise capital with repayment of the principal amount on a specified date in the future more than one year from the point of issue. Bonds are considered long-term liabilities.
Topic: Bond Payment Periods LO: 2 Level of Difficulty: EASY 9. How many payment periods are in a 6-year, 8% bond with an effective interest rate of 6%, and paid semiannually? A) 3 B) 12 C) 48 D) 6 Answer: B Rationale: 6 years × 2 = 12 payment periods
Topic: Bond Payment Periods LO: 2 Level of Difficulty: EASY 10. How many payment periods are in a 12-year, 8% bond with an effective interest rate of 6%, and paid semiannually? A) 3 B) 12 C) 48 D) 24 Answer: D Rationale: 12 years × 2 = 24 payment periods ©Cambridge Business Publishers, 2020 10-8
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Transaction Analysis LO: 1 Level of Difficulty: MEDIUM 11. What effects would the accrual of $160 of interest on a note payable have on financial statements? I. II. III. IV. V. A) B) C) D)
Balance sheet: Income statement: Balance sheet: Balance sheet: Balance sheet:
Liabilities are decreased by $160 Expenses are increased by $160 Retained earnings are decreased by $160 Cash assets are decreased by $160 Liabilities are increased by $160
I, II, and III II, III, and V II, IV, and V II, III, and IV
Answer: B Rationale: Interest is recorded on the balance sheet as interest payable, increasing liabilities by $160, decreasing retained earnings by $160, and adding $160 to expenses on the income statement. Since no cash is spent to pay the note or the interest, cash assets are not affected.
Topic: Contingent Liabilities LO: 3 Level of Difficulty: EASY 12. According to U.S. GAAP, which criteria must be met in order to recognize a contingent liability? A) The obligation is certain to require payment at some point in the future. B) The obligation is probable. C) The obligation is estimable. D) Answers B and C Answer: D Rationale: Contingent liabilities are only recognized when the amount is probable and estimable. An obligation that is guaranteed at some point in the future is a definite liability.
Topic: Bond Pricing LO: 2 Level of Difficulty: EASY 13. The price of a bond is equivalent to: I. II. III. IV. A) B) C) D)
Face value Projected interest payments discounted to the present The amortization amount of a bond The present value of the principal payment
I + III I – III II + IV I + II
Answer: C Rationale: The price of a bond is the present value of both the interest payments and the principal payment.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-9
Topic: Transaction Analysis LO: 1 Level of Difficulty: MEDIUM 14. Weasley Mart borrows $210,000 on July 1 with a short-term loan that has an annual interest rate of 5% which is payable on the first day of each subsequent quarter. What will Weasley Mart need to accrue on August 31, assuming that no accrual has yet been made? A) $10,500; Decrease liabilities and decrease cash B) $3,500; Decrease liabilities, decrease cash C) $1,750; Increase liabilities, increase expenses D) $3,500; Increase liabilities, decrease retained earnings Answer: C Rationale: $210,000 x 5% x 2/12 = $1,750
Topic: Transaction Analysis LO: 1 Level of Difficulty: MEDIUM 15. Avery Mart borrows $630,000 on July 1 with a short-term loan that has an annual interest rate of 5% which is payable on the first day of each subsequent quarter. What will Avery Mart need to accrue on August 31, assuming that no accrual has yet been made? A) $31,500; Decrease liabilities and decrease cash B) $10,500; Decrease liabilities, decrease cash C) $5,250; Increase liabilities, increase expenses D) $10,500; Increase liabilities, decrease retained earnings Answer: C Rationale: $630,000 x 5% x 2/12 = $5,250
Topic: Bond Retirement LO: 2 Level of Difficulty: MEDIUM 16. On April 30, 2019, one year before maturity, Yellow Plums, Inc. retired $300,000 of 8% bonds payable at 103. The book value of the bonds on April 30 was $289,200. Bond interest was last paid on April 30, 2019. What is the gain or loss on the retirement of the bonds? A) $19,800 loss B) $10,800 gain C) $30,600 gain D) $24,000 loss Answer: A Rationale: (103% x $300,000) – $289,200 = $19,800.
©Cambridge Business Publishers, 2020 10-10
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Bond Retirement LO: 2 Level of Difficulty: MEDIUM 17. On April 30, 2019, one year before maturity, Green Tomatoes, Inc. retired $900,000 of 8% bonds payable at 103. The book value of the bonds on April 30 was $867,600. Bond interest was last paid on April 30, 2019. What is the gain or loss on the retirement of the bonds? A) $59,400 loss B) $32,400 gain C) $46,800 gain D) $72,000 loss Answer: A Rationale: (103% x $900,000) – $867,600 = $59,400.
Topic: Bond Issuance LO: 2 Level of Difficulty: EASY 18. If bonds are issued at 103, this means that: A) A $1,500 bond sold for $103. B) The bonds sold at a discount. C) A $3,000 bond sold for $3,090. D) The bond rate of interest is 10.3% of the market rate of interest. Answer: C Rationale: Bonds are typically quoted at a percent of face value: 103% × $3,000 bond = $3,090
Topic: Bond Amortization LO: 2 Level of Difficulty: MEDIUM 19. Courtney Industries plans to issue 8-year, 8%, $200,000 bonds paying interest on an annual basis, at a $4,000 premium. Which one of the following statements is true? A) The cash paid to bondholders will be $4,000 each interest period. B) Courtney will receive $196,000 as the issue price. C) Courtney’s annual interest expense on the bonds will be less than the amount of interest payments to bondholders each year. D) Courtney’s annual interest expense on the bonds will be greater than the amount of interest payments to bondholders each year. Answer: C Rationale: Since the premium is a benefit the issuer receives at issuance, the interest expense will be less than the amount of interest payments to bondholders each year.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-11
Topic: Bond Interest Payments LO: 2 Level of Difficulty: MEDIUM 20. On January 1, 2019, Amin, Inc. issued $1,200,000, 10-year, 8% bonds for $1,050,450. The bonds pay interest on June 30 and December 31. The market rate is 10%. How much is the interest expense on the bonds for the first interest payment on June 30, 2019? A) $ 52,523 B) $105,045 C) $ 96,000 D) $ 48,000 Answer: A Rationale: $1,050,450 × 10% × 6/12 = $52,523
Topic: Bond Interest Payments LO: 2 Level of Difficulty: MEDIUM 21. On January 1, 2019, Pelino, Inc. issued $1,600,000, 10-year, 8% bonds for $1,400,600. The bonds pay interest on June 30 and December 31. The market rate is 10%. How much is the interest expense on the bonds for the first interest payment on June 30, 2019? A) $ 70,030 B) $140,060 C) $168,000 D) $ 64,000 Answer: A Rationale: $1,400,600 × 10% × 6/12 = $70,030
Topic: Finance Lease Conditions LO: 6 Level of Difficulty: EASY 22. Which of the following is not a condition requiring the use of the finance lease reporting method? A) The lease automatically transfers ownership of the leased asset from the lessor to the lessee at the termination of the lease. B) The lease term is for the major part of the remaining economic useful life of the leased asset. C) The lease allows the lessee to use the leased asset during the lease term. D) The lease provides that the lessee can purchase the leased asset for a nominal amount (bargain purchase price) at the termination of the lease. Answer: C Rationale: For both finance and operating leases, the lease agreement allows the lessee to use the leased asset.
©Cambridge Business Publishers, 2020 10-12
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Current Liabilities Definition LO: 1 Level of Difficulty: MEDIUM 23. Current liabilities are all obligations that require, within the coming year or current operating cycle, whichever is longer: A) The payment of cash B) The use of existing current assets C) The creation of other current liabilities D) Either the use of existing current assets or the creation of other current liabilities Answer: D Rationale: Current liabilities are obligations that will require, within the coming year or the normal operating cycle, whichever is longer, (1) the use of existing current assets or (2) the creation of other current liabilities.
Topic: Current Liabilities Definition LO: 1 Level of Difficulty: EASY 24. Which one of the following is a current liability? A) A credit guarantee provided for a supplier B) Bond payable C) Accounts receivable D) FICA taxes payable Answer: D
Topic: Contingent Liabilities LO: 3 Level of Difficulty: EASY 25. Which of the following is a contingent liability? A) Notes payable B) Credit guarantees C) Income tax payable D) Excise tax payable Answer: B
Topic: Contingent Liabilities LO: 3 Level of Difficulty: EASY 26. Which of the following is not a contingent liability? A) Environmental cleanup costs B) Lawsuits C) Discount on notes payable D) Credit guarantees Answer: C
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-13
Topic: Income Tax Payable LO: 1 Level of Difficulty: MEDIUM 27. Which of the following liabilities is most likely an estimated amount rather than an amount known with certainty? A) Wages payable B) FICA taxes payable C) Accounts payable D) Income tax payable Answer: D Rationale: The tax due is determined in accordance with tax law, rulings by taxing agencies, and court decisions. Because the administration of tax law is quite complex and many honest differences exist in their interpretation, the tax obligation reported on a tax return is only an estimate until the government reviews and accepts a firm’s calculations.
Topic: Contingent Liabilities LO: 3 Level of Difficulty: EASY 28. A contingent liability is an obligation that depends on the occurrence of a future event and that should be recorded in the accounts: A) If the related future event will probably occur B) If the amount is due in cash within one year C) If the amount is reasonably estimated D) The related future event will probably occur and the amount is reasonably estimated. Answer: D Rationale: Whether or not a contingent liability is recorded in the accounts depends on the likelihood of the future event occurring and the measurability of the obligation.
Topic: Current Liabilities Definition LO: 1 Level of Difficulty: EASY 29. A current liability is an obligation that requires the use of an existing asset or the creation of another current liability: A) Within the coming year or the operating cycle, whichever is shorter B) Within the coming year or the operating cycle, whichever is longer C) Within the coming year D) Within the next operating cycle Answer: B Rationale: Current liabilities are obligations that will require, within the coming year or the normal operating cycle, whichever is longer, the use of existing current assets or the creation of other current liabilities.
©Cambridge Business Publishers, 2020 10-14
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Contingent Liabilities LO: 3 Level of Difficulty: MEDIUM 30. A contingent liability is an obligation that should be: A) Disclosed in a footnote to the balance sheet when the contingency is remote B) Recorded in the accounts if the amount may be reasonably estimated and it is probable that the future event creating the obligation will occur C) Classified in the owners’ equity section of the balance sheet when the future event creating the liability is not likely to occur D) Recorded in the accounts and classified in a contingent liabilities section of the balance sheet between current liabilities and long-term liabilities Answer: B
Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 31. Oak Park Appliances, Inc. sells food processors for $300 with a 120-day warranty against defects. Past experience indicates that 5% of the processors will have some defect during the warranty period and that the necessary repairs and adjustments will cost $50 per defective unit. Sales for August were $438,000. 30 of the units sold in August were reported defective and repaired in August. What is the August 31 journal entry for the estimated liability for product warranties for units sold in August? A) Product Warranty Expense 21,900 Estimated Liability for Product Warranty 21,900 B) Product Warranty Expense 3,650 Estimated Liability for Product Warranty 3,650 C) Estimated Liability for Product Warranty 3,650 Product Warranty Expense 3,650 D) Product Warranty Expense 2,150 Estimated Liability for Product Warranty 2,150 Answer: D Rationale: $438,000 / $300 = 1,460 units 1,460 x 0.05 = 73 defective 73 - 30 = 43; 43 x $50 = $2,150
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-15
Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 32. Forest Grove Appliances, Inc. sells food processors for $900 with a 120-day warranty against defects. Past experience indicates that 5% of the processors will have some defect during the warranty period and that the necessary repairs and adjustments will cost $150 per defective unit. Sales for August were $1,404,000. 30 of the units sold in August were reported defective and repaired in August. What is the August 31 journal entry for the estimated liability for product warranties for units sold in August? A) Product Warranty Expense 70,200 Estimated Liability for Product Warranty 70,200 B) Product Warranty Expense 11,700 Estimated Liability for Product Warranty 11,700 C) Estimated Liability for Product Warranty 11,700 Product Warranty Expense 11,700 D) Product Warranty Expense 7,200 Estimated Liability for Product Warranty 7,200 Answer: D Rationale: $1,404,000 / $900 = 1,560 units 1,560 x 0.05 = 78 defective 78 - 30 = 48; 48 x $150 = $7,200
Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 33. Boris, Inc. sells a single product for $900 per unit, including a 90-day warranty against defects. It is estimated that 3% of the units sold will prove defective and require an average repair cost of $70 per unit. During July, 800 units were sold. Five of them were reported defective and repaired in July. What amount should be added to the Estimated Liability for Product Warranties for July? A) $ 4,500 B) $ 1,680 C) $18,900 D) $ 1,330 Answer: D Rationale: 800 x 0.03 = 24 defective 24 - 5 = 19; 19 x $70 = $1,330
©Cambridge Business Publishers, 2020 10-16
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 34. Crescent City, Inc. sells a single product for $2,700 per unit, including a 90-day warranty against defects. It is estimated that 3% of the units sold will prove defective and require an average repair cost of $210 per unit. During July, 800 units were sold. Five of them were reported defective and repaired in July. What amount should be added to the Estimated Liability for Product Warranties for July? A) $13,500 B) $44,100 C) $56,700 D) $ 3,990 Answer: D Rationale: 800 x 0.03 = 24 defective 24 - 5 = 19; 19 x $210 = $3,990
Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 35. Pedal Power Products Company sells bicycles for $240, with a 30-day warranty against defects. Past experience indicates that 6% of the bicycles will have a defect and that the necessary repairs will cost $32 per bicycle. Sales for May were $216,000; 20 units sold in May were found defective and repaired that month. What is the May 31 journal entry for the estimated liability for product warranties? A) Product Warranty Expense 1,088 Estimated Liability for Product Warranty 1,088 B) Product Warranty Expense 640 Estimated Liability for Product Warranty 640 C) Estimated Liability for Product Warranty 1,728 Product Warranty Expense 1,728 D) Estimated Liability for Product Warranty 1,088 Product Warranty Expense 1,088 Answer: A Rationale: $216,000/$240 = 900 units 900 x 0.06 = 54 defective 54 - 20 = 34; 34 x $32 = $1,088
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-17
Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 36. Perfect Pedal Products Company sells bicycles for $720, with a 30-day warranty against defects. Past experience indicates that 6% of the bicycles will have a defect and that the necessary repairs will cost $96 per bicycle. Sales for May were $648,000; 20 units sold in May were found defective and repaired that month. What is the May 31 journal entry for the estimated liability for product warranties? A) Product Warranty Expense 3,264 Estimated Liability for Product Warranty 3,264 B) Product Warranty Expense 1,920 Estimated Liability for Product Warranty 1,920 C) Estimated Liability for Product Warranty 5,184 Product Warranty Expense 5,184 D) Estimated Liability for Product Warranty 3,264 Product Warranty Expense 3,264 Answer: A Rationale: $648,000/$720 = 900 units 900 x 0.06 = 54 defective 54 - 20 = 34; 34 x $96 = $3,264
Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 37. Klug Technology, Inc. was organized to sell a single product for $1,200 per unit, including a 60-day warranty against defects. Engineering estimates indicate that 5% of the units sold will prove defective and require an average repair cost of $100 per unit. During the first month of operations, total sales were $408,000. Nine units sold in the first month were found defective and repaired that month. The accrued liability for product warranties at month-end should be: A) $1,700 B) $ 800 C) $ 900 D) $2,300 Answer: B $408,000/$1,200 = 340 units 340 x 0.05 = 17 defective 17 - 9 = 8; 8 x $100 = $800
©Cambridge Business Publishers, 2020 10-18
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 38. Super Tech was organized to sell a single product for $3,600 per unit, including a 60-day warranty against defects. Engineering estimates indicate that 5% of the units sold will prove defective and require an average repair cost of $300 per unit. During the first month of operations, total sales were $1,152,000. Nine units sold in the first month were found defective and repaired that month. The accrued liability for product warranties at month-end should be: A) $4,800 B) $2,100 C) $2,700 D) $6,900 Answer: B Rationale: $1,152,000/$3,600 = 320 units 320 x 0.05 = 16 defective 16 - 9 = 7; 7 x $300 = $2,100
Topic: Sales and Excise Taxes Payable LO: 1 Level of Difficulty: MEDIUM 39. Cracker Company sold goods for which it received total cash payments of $427,800. A 9% excise tax and a 6% sales tax were included in the total cash payments. Sales revenue recorded should be: A) $363,630 B) $389,298 C) $372,000 D) $400,632 Answer: C Rationale: X + 0.09X + 0.06X = $427,800 1.15X = $427,800 X = $372,000
Topic: Sales Taxes Payable LO: 1 Level of Difficulty: MEDIUM 40. Dresden Company sold merchandise for which it received total cash payments of $1,316,100. A 7% sales tax was included in the total cash payments. The proper amount to record as sales would be: A) $1,408,227 B) $1,223,973 C) $1,284,000 D) $1,230,000 Answer: D Rationale: X + 0.07X = $1,316,100 1.07X = $1,316,100 X = $1,230,000 ©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-19
Topic: Sales Taxes Payable LO: 1 Level of Difficulty: MEDIUM 41. Alsfeld Company sold merchandise for which it received total cash payments of $3,948,300. A 7% sales tax was included in the total cash payments. The proper amount to record as sales would be: A) $4,104,000 B) $3,671,919 C) $3,852,252 D) $3,690,000 Answer: D Rationale: X + 0.07X = $3,948,300 1.07X = $3,948,300 X = $3,690,000
Topic: Sales and Excise Taxes Payable LO: 1 Level of Difficulty: MEDIUM 42. Pokagon Company sold merchandise for which it received $355,200, including sales and excise taxes. All of the firm’s sales are subject to a 6% sales tax but only 50% of sales are subject to a 10% excise tax. Sales before sales taxes and excise taxes were: A) $300,000 B) $320,000 C) $316,128 D) $316,000 Answer: B Rationale: X + 0.06X + 0.10 (0.50X) = $355,200 1.11X = $355,200 X = $320,000
Topic: Sales and Excise Taxes Payable LO: 1 Level of Difficulty: MEDIUM 43. Herald Company sold merchandise for which it received $1,065,600, including sales and excise taxes. All of the firm’s sales are subject to a 6% sales tax but only 50% of sales are subject to a 10% excise tax. Sales before sales taxes and excise taxes were: A) $900,000 B) $960,000 C) $948,384 D) $948,000 Answer: B Rationale: X + 0.06X + 0.10 (0.50X) = $1,065,600 1.11X = $1,065,600 X = $960,000 ©Cambridge Business Publishers, 2020 10-20
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Sales Tax Payable LO: 1 Level of Difficulty: MEDIUM 44. Azul, Inc. records sales at amounts that include sales tax. During June, total sales of $180,200, including 6% sales tax, were recorded. The sales tax liability for June is: A) $ 10,812 B) $170,000 C) $ 10,200 D) $169,388 Answer: C Rationale: 1.06X = $180,200 X = $170,000 $180,200 - $170,000= $10,200
Topic: Sales Tax Payable LO: 1 Level of Difficulty: MEDIUM 45. Coffee, Inc. records sales at amounts that include sales tax. During June, total sales of $540,600, including 6% sales tax, were recorded. The sales tax liability for June is: A) $ 32,436 B) $510,000 C) $ 30,600 D) $508,164 Answer: C Rationale: 1.06X = $540,600 X = $510,000 $540,600 - $510,000 = $30,600
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-21
Topic: Sales and Excise Taxes Payable LO: 1 Level of Difficulty: MEDIUM 46. Southeastern Company sells four tires to George. Each tire retails for $190 and is subject to sales tax of 5% and federal excise tax of 10%. Southeastern Company’s journal entry to record the transaction is: A) Cash
760 Sales
B) Cash
760 874
Sales C) Cash
874 874
Sales Sales Tax Payable Excise Tax Payable D) Cash Sales Tax Expense Excise Tax Expense Sales
760 38 76 760 38 76 874
Answer: C Rationale: 4 x $190 = $760 $760 x 0.05 = $38 $760 x 0.10 = $76
Topic: Sales and Excise Taxes Payable LO: 1 Level of Difficulty: MEDIUM 47. Northern Company sells four tires to Road Runner. Each tire retails for $570 and is subject to sales tax of 5% and federal excise tax of 10%. Northern Company’s journal entry to record the transaction is: A) Cash
2,280 Sales
B) Cash
2,280 2,622
Sales C) Cash
2,622 2,622
Sales Sales Tax Payable Excise Tax Payable D) Cash Sales Tax Expense Excise Tax Expense Sales
2,280 114 228 2,280 114 228 2,622
Answer: C Rationale: 4 x $570 = $2,280 $2,280 x 0.05 = $114 $2,280 x 0.10 = $228
©Cambridge Business Publishers, 2020 10-22
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Payroll Taxes LO: 1 Level of Difficulty: EASY 48. Which of the following is not a payroll tax on wages or salaries? A) FICA tax B) Federal Unemployment tax C) Federal product excise tax D) State unemployment tax Answer: C Rationale: An excise tax is applied to products and services, not to wages and salaries.
Topic: Payroll Taxes LO: 1 Level of Difficulty: MEDIUM 49. Assume that Josh earns $24 per hour and he worked 40 hours this week. The Social Security rate is 6.2% and the Medicare rate is 1.45%, and his entire earnings are subject to both FICA taxes. Also, $120 in income taxes and $40 of union dues are withheld. Josh’s net take-home pay should be: A) $726.56 B) $800.00 C) $640.00 D) $738.80 Answer: A Rationale: 40 x $24 = $960 $960 x (0.062 + 0.0145) = $73.44 $960 - $73.44 - $120 - $40 = $726.56
Topic: Payroll Taxes LO: 1 Level of Difficulty: MEDIUM 50. Assume that Brian earns $72 per hour and he worked 40 hours this week. The Social Security rate is 6.2% and the Medicare rate is 1.45%, and his entire earnings are subject to both FICA taxes. Also, $360 in income taxes and $120 of union dues are withheld. Brian’s net take-home pay should be: A) $2,179.68 B) $2,400.00 C) $1,920.00 D) $2,216.40 Answer: A Rationale: 40 x $72 = $2,280 $2,280 x (0.062 + 0.0145) = $220.32 $2,280 - $220.32 - $360 - $120 = $2,179.68
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-23
Topic: Payroll Taxes LO: 1 Level of Difficulty: MEDIUM 51. Assume that Josh earns $36.00 per hour, that he worked 40 hours this week. The Social Security rate is 6.2% and the Medicare rate is 1.45%, and his entire earnings are subject to both FICA taxes. Also, $225 in income taxes and $30 of union dues are withheld. Josh’s take-home pay should be: A) $1,329.60 B) $1,074.84 C) $1,185.00 D) $1,440.00 Answer: B Rationale: 40 x $36 = $1,440 $1,440 x (0.062 + 0.0145) = $110.16 $1,440 - $110.16 - $225 - $30 = $1,074.84
Topic: Payroll Taxes LO: 1 Level of Difficulty: MEDIUM 52. Assume that Brian earns $108.00 per hour, that he worked 40 hours this week. The Social Security rate is 6.2% and the Medicare rate is 1.45%, and his entire earnings are subject to both FICA taxes. Also, $675 in income taxes and $90 of union dues are withheld. Josh’s take-home pay should be: A) $3,988.80 B) $3,224.52 C) $3,555.00 D) $4,320.00
Answer: B Rationale: 40 x $108 = $4,320 $4,320 x (0.062 + 0.0145) = $330.48 $4,320 - $330.48 - $675 - $90 = $3,224.52
Topic: Federal Unemployment Tax LO: 1 Level of Difficulty: EASY 53. Federal unemployment taxes are: A) Levied against both employee and employer B) Levied against only the employer C) Levied against only the employee D) None of the above Answer: B Rationale: Federal unemployment taxes are only levied against the employer.
©Cambridge Business Publishers, 2020 10-24
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Payroll Taxes LO: 1 Level of Difficulty: MEDIUM 54. A firm has the following monthly payroll for June 2019: Total salaries Salaries subject to FICA taxes (6.2% + 1.45%) Salaries subject to FUTA (0.8%) and state unemployment taxes (2.7%) Income taxes withheld
$120,000 120,000 28,000 10,800
In recording the payroll, the net payroll payable is: A) $ 97,200 B) $100,020 C) $ 99,040 D) $ 81,200 Answer: B Rationale: $120,000 x (0.062 + 0.0145) = $9,180 $120,000 - $9,180 - $10,800 = $100,020
Topic: Payroll Taxes LO: 1 Level of Difficulty: MEDIUM 55. A firm has the following monthly payroll for June 2019: Total salaries Salaries subject to FICA taxes (6.2% + 1.45%) Salaries subject to FUTA (0.8%) and state unemployment taxes (2.7%) Income taxes withheld
360,000 360,000 84,000 32,400
In recording the payroll, the net payroll payable is: A) $291,600 B) $300,060 C) $263,874 D) $182,814 Answer: B Rationale: $360,000 x (0.062 + 0.0145) = $27,540 $360,000 - $27,540 - $32,400 = $300,060
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-25
Topic: Payroll Taxes LO: 1 Level of Difficulty: MEDIUM 56. Moonbeam Company has the following monthly payroll for June 2019: Total salaries Salaries subject to FICA taxes (6.2% + 1.45%) Salaries subject to FUTA (0.8%) and state unemployment taxes (2.7%) Income taxes withheld
$108,000 108,000 28,000 9,700
The total employer’s payroll tax expense for this period is: A) $10,476 B) $ 1,558 C) $18,942 D) $ 9,242 Answer: D Rationale: $108,000 x (0.062 + 0.0145) = $8,262 $28,000 x (0.027 + 0.008) = $980 $8,262 + $980 = $9,242
Topic: Payroll Taxes LO: 1 Level of Difficulty: MEDIUM 57. Sunshine Company has the following monthly payroll for June 2019: Total salaries Salaries subject to FICA taxes (6.2% + 1.45%) Salaries subject to FUTA (0.8%) and state unemployment taxes (2.7%) Income taxes withheld
$324,000 324,000 84,000 29,250
The total employer’s payroll tax expense for this period is: A) $31,428 B) $ 3,174 C) $60,126 D) $27,726 Answer: D Rationale: $314,000 x (0.062 + 0.0145) = $24,786 $84,000 x (0.027 + 0.008) = $2,940 $24,786 + $2,940= $27,726
©Cambridge Business Publishers, 2020 10-26
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Payroll Taxes LO: 1 Level of Difficulty: MEDIUM 58. A firm has the following monthly payroll for April 2019: Total salaries Salaries subject to FICA taxes (6.2% + 1.45%) Salaries subject to FUTA tax (0.8%) and state unemployment taxes (5.4%) Income taxes withheld
$180,000 180,000 32,000 19,200
The total employer’s payroll tax expense for this period is: A) $13,158 B) $28,300 C) $15,754 D) $34,954 Answer: C Rationale: $180,000 x (0.062 + 0.0145) = $13,770 $32,000 x (0.054 + 0.008) = $1,984 $13,770 + $1,984 = $15,754
Topic: Working Capital LO: 4 Level of Difficulty: MEDIUM 59. Working capital is defined as: A) Assets – liabilities B) Current assets C) Current assets – Current liabilities D) Market value – Book value Answer: C
Topic: Current Ratio and Working Capital LO: 4 Level of Difficulty: DIFFICULT 60. If Foster Toys has a current ratio of 3.2 and working capital of $4,400,000, which of the following will cause both the current ratio and working capital to decrease? A) Paid accounts payable in the amount of $60,000 B) Recorded unpaid salaries in the amount of $160,000 C) Borrowed $200,000 from a bank to be repaid in 90-days D) Purchased $30,000 of inventory on credit Answer: B Rationale: Working capital will remain the same in A, C, and D. Only option B will show a decrease in both the current ratio and working capital. Recording unpaid salaries increases accounts payable (current liability), which is the denominator of the current ratio computation. This will result in a decrease in the current ratio. Similarly, a larger amount of current liabilities will be subtracted from current assets to result in a smaller amount of working capital.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-27
Topic: Working Capital LO: 4 Level of Difficulty: EASY 61. Working capital is defined as: A) Current assets plus plant assets B) Current assets plus current liabilities C) Current assets minus current liabilities D) Current assets divided by current liabilities Answer: C Rationale: Working capital of a firm is the difference between the value of its current assets and the value of its current liabilities.
Topic: Current Ratio LO: 4 Level of Difficulty: DIFFICULT 62. Willowwood Company has a current ratio of 3.10. Which of the following events would cause its current ratio to increase? A) Collection of an account receivable B) Payment of an account payable C) Purchase of office supplies on account D) Purchase of equipment on account Answer: B Rationale: Payment on accounts payable will cause the current ratio to increase. See examples below: Payment 1 of $200 and Payment 2 of $10. Both result in an increase in the current ratio. Current assets Current liabilities Current ratio
Before Payment $3,100 $1,000 3.10
Payment 1: $200 $2,900 $ 800 3.625
Payment 2: $10 $3,090 $ 990 3.121
Topic: Quick Ratio LO: 4 Level of Difficulty: MEDIUM 63. The December 31, 2019, balance sheet of Ivey Company includes the following information: Inventory Prepaid Expenses Total Current Assets Total Current Liabilities Accounts Payable
$750,000 60,000 1,800,000 875,000 540,000
What is Ivey’s quick ratio at December 31, 2019? A) 0.80 B) 2.57 C) 1.85 D) 1.13 Answer: D Rationale: $1,800,000 - $750,000 - $60,000 = $990,000. $990,000 / $875,000 = 1.13 ©Cambridge Business Publishers, 2020 10-28
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Quick Ratio LO: 4 Level of Difficulty: MEDIUM 64. The December 31, 2019, balance sheet of Patrick Company includes the following information: Inventory Prepaid Expenses Total Current Assets Total Current Liabilities Accounts Payable
$1,500,000 120,000 3,600,000 1,575,000 1,080,000
What is Patrick’s quick ratio at December 31, 2019? A) 0.80 B) 1.71 C) 1.85 D) 1.26 Answer: D Rationale: $3,600,000 - $1,500,000 - $120,000 = $1,980,000. $1,980,000 / $1,575,000 = 1.26
Topic: Quick Ratio LO: 4 Level of Difficulty: MEDIUM 65. The December 31, 2019, balance sheet of Simon Company includes the following information: Cash Short-term Investments Accounts Receivable Inventory Prepaid Expenses Current Liabilities Total Liabilities
$ 120,000 60,000 340,000 360,000 80,000 300,000 1,200,000
What is Simon’s quick ratio at December 31, 2019? A) 0.89 B) 2.42 C) 1.73 D) 1.56 Answer: C Rationale: $120,000 + $60,000 + $340,000 = $520,000. $520,000/$300,000 = 1.73
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-29
Topic: Quick Ratio LO: 4 Level of Difficulty: MEDIUM 66. The December 31, 2019, balance sheet of Bash Company includes the following information: Cash Short-term Investments Accounts Receivable Inventory Prepaid Expenses Current Liabilities Total Liabilities
$ 360,000 180,000 1,020,000 1,080,000 240,000 1,312,500 360,000
What is Bash’s quick ratio at December 31, 2019? A) 0.76 B) 2.33 C) 1.19 D) 1.33 Answer: C Rationale: $360,000 + $180,000 + $1,020,000 = $1,560,000. $1,056,000/$1,312,500 = 1.19
Topic: Interest Payable LO: 1 Level of Difficulty: MEDIUM 67. On November 1, Minerva borrowed from Dumbledore, giving him a $12,000, 3 month, 9% note, interest payable at maturity. Minerva made no entry after November 1. What entry would Minerva make on December 31, the end of the accounting period? A) Interest Payable Interest Expense B) Interest Expense Interest Payable C) Interest Expense Cash D) Interest Expense Discount on Notes Payable
180 180 180 180 180 180 180 180
Answer: B Rationale: $12,000 x 9% x 2/12 = $180
©Cambridge Business Publishers, 2020 10-30
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Interest Payable LO: 1 Level of Difficulty: MEDIUM 68. On November 1, Luna borrowed from Lumos, giving him a $36,000, 3 month, 9% note, interest payable at maturity. Luna made no entry after November 1. What entry would Luna make on December 31, the end of the accounting period? A) Interest Payable Interest Expense B) Interest Expense Interest Payable C) Interest Expense Cash D) Interest Expense Discount on Notes Payable
540 540 540 540 540 540 540 540
Answer: B Rationale: $36,000 x 9% x 2/12 = $540
Topic: Notes Payable LO: 1 Level of Difficulty: MEDIUM 69. Michigan Company paid Wisconsin Company for merchandise with a $6,400, 90-day, 8% note dated May 10. If Michigan Company pays the note at maturity, what entry should be made at that time? A) Notes Payable Interest Payable Cash B) Cash Notes Payable Interest Payable C) Notes Payable Interest Expense Cash D) Notes Payable Interest Expense Cash
6,528 128 6,400 6,528 128 6,400 6,400 128 6,528 6,400 128 6,272
Answer: C Rationale: $6,400 x 8% x 90/360 = $128
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-31
Topic: Notes Payable LO: 1 Level of Difficulty: MEDIUM 70. France Company paid Heidelberg Company for merchandise with a $19,200, 90-day, 8% note dated May 10. If France Company pays the note at maturity, what entry should be made at that time? A) Notes Payable Interest Payable Cash B) Cash Notes Payable Interest Payable C) Notes Payable Interest Expense Cash D) Notes Payable Interest Expense Cash
19,584 384 19,200 19,584 384 19,200 19,200 384 19,554 19,200 384 18,816
Answer: C Rationale: $19,200 x 8% x 90/360 = $384
Topic: Interest Payable LO: 1 Level of Difficulty: MEDIUM 71. On December 1, Jenna borrowed $12,000 from Bacerra, giving a 90-day, 10% note. Which entry would Jenna make on December 31, the end of the accounting period? A) Interest Expense Interest Payable B) Interest Expense Discount on Notes Payable C) Interest Expense Interest Payable D) Interest Expense Cash
100 100 100 100 300 300 300 300
Answer: A Rationale: $12,000 x 10% x 30/360 = $100
©Cambridge Business Publishers, 2020 10-32
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Interest Payable LO: 1 Level of Difficulty: MEDIUM 72. On December 1, Julian borrowed $36,000 from Jessie, giving a 90-day, 10% note. Which entry would Julian make on December 31, the end of the accounting period? A) Interest Expense Interest Payable B) Interest Expense Discount on Notes Payable C) Interest Expense Interest Payable D) Interest Expense Cash
300 300 300 300 900 900 900 900
Answer: A Rationale: $36,000 x 10% x 30/360 = $300
Topic: Notes Payable LO: 1 Level of Difficulty: MEDIUM 73. On December 1, Hedwig Company borrowed $20,000 from Pigwidgeon Company, giving a 60-day, 12% note. If the correct adjusting entry is made on December 31, Hedwig’s entry at maturity is: A) Notes Payable Cash B) Notes Payable Interest Payable Interest Expense Cash C) Notes Payable Interest Expense Cash D) Notes Payable Interest Payable Cash
20,000 20,000 20,000 200 200 20,400 20,000 400 20,400 20,000 400 20,400
Answer: B Rationale: $20,000 x 12% x 30/360 = $200 accrued interest
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-33
Topic: Notes Payable LO: 1 Level of Difficulty: MEDIUM 74. On December 1, Screech Company borrowed $60,000 from Hedwig Company, giving a 60-day, 12% note. If the correct adjusting entry is made on December 31, Screech’s entry at maturity is: A) Notes Payable Cash B) Notes Payable Interest Payable Interest Expense Cash C) Notes Payable Interest Expense Cash D) Notes Payable Interest Payable Cash
60,000 60,000 60,000 600 600 61,200 60,000 1,200 61,200 60,000 1,200 61,200
Answer: B Rationale: $60,000 x 12% x 30/360 = $600 accrued interest
Topic: Current Ratio LO: 4 Level of Difficulty: MEDIUM 75. What does the current ratio measure? A) Solvency B) Profitability C) Short-term debt paying ability D) Leverage Answer: C Rationale: The current ratio is a measure of short-term debt paying ability. It measures a company’s ability to pay its current obligations as they become due.
Topic: Current Liabilities LO: 1 Level of Difficulty: MEDIUM 76. On September 1, 2019, Maibritt Equipment signed a 12-month, 9% interest bearing note payable for $200,000. Assuming Maibritt maintains its books on a calendar year basis, the amount of interest expense that should be reported in the 2020 income statement for this note would be: A) $12,000 B) $ 8,000 C) $18,000 D) $ 6,000 Answer: A Rationale: $200,000 x 9% x 8/12 = $12,000 interest expense
©Cambridge Business Publishers, 2020 10-34
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Current Liabilities LO: 1 Level of Difficulty: MEDIUM 77. On September 1, 2019, Bea Equipment signed a 12-month, 9% interest bearing note payable for $600,000. Assuming Bea maintains its books on a calendar year basis, the amount of interest expense that should be reported in the 2020 income statement for this note would be: A) $36,000 B) $24,000 C) $54,000 D) $18,000 Answer: A Rationale: $600,000 x 9% x 8/12 = $36,000 interest expense
Topic: Current Liabilities LO: 1 Level of Difficulty: DIFFICULT 78. Rafael Company borrowed $24,000 from Bank of Jane on December 1, 2019, and signed a 90 day, 8% Notes Payable. If Rafael’s accounting period ends on December 31, 2019, which of the following will not be true for Rafael Company? A) On December 31, 2019, Rafael will debit Interest Expense for $160 B) On December 31, 2019 Rafael, will credit Interest Payable for $160 C) On March 1, 2020, Rafael will debit Interest Expense for $320 D) On March 1, 2020, Rafael will debit Interest Payable for $320 Answer: D Rationale: At year-end, Rafael Company records the following entry: 2019 Dec. 31
Interest expense Interest payable To accrue interest expense on the note to Bank of Jane ($24,000 × 0.08 × 30/360 = $160).
160 160
When the note payable to Bank of Jane is subsequently paid on March 1, 2020, Rafael Company makes the following entry: 2020 Mar. 1
Notes payable—Bank of Jane Interest payable Interest expense Cash Paid principal and interest to Bank of Jane ($24,000 × 0.08 × 60/360 = $320).
24,000 160 320 24,480
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-35
Topic: Current Liabilities LO: 1 Level of Difficulty: DIFFICULT 79. Snow White Company borrowed $72,000 from Bank of Fairytales on December 1, 2019, and signed a 90 day, 8% Notes Payable. If Snow White’s accounting period ends on December 31, 2019, which of the following will not be true for Snow White Company? A) On December 31, 2019, Snow White will debit Interest Expense for $480 B) On December 31, 2019 Snow White, will credit Interest Payable for $480 C) On March 1, 2020, Snow White will debit Interest Expense for $960 D) On March 1, 2020, Snow White will debit Interest Payable for $960 Answer: D Rationale: At year-end, Snow White Company records the following entry: 2019 Dec. 31
Interest expense 480 Interest payable To accrue interest expense on the note to Bank of Fairytales ($72,000 × 0.08 × 30/360 = $480).
480
When the note payable to Bank of Fairytales is subsequently paid on March 1, 2020, Snow White Company makes the following entry: 2020 Mar. 1
Notes payable—Bank of Fairytales Interest payable Interest expense Cash Paid principal and interest to Bank of Fairytales ($72,000 × 0.08 × 60/360 = $960).
72,000 480 960 73,440
©Cambridge Business Publishers, 2020 10-36
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Current Liabilities LO: 1 Level of Difficulty: DIFFICULT 80. On December 1, 2019, MAI Company purchased $60,000 of equipment by issuing a 120-day, 10% note payable to Bank of Washington. Assuming the company’s accounting period ends on December 31, the journal entry recorded by MAI Company on the note maturity date will include: A) Debit to Interest Expense for $1,500 B) Debit to Interest Payable for $1,500 C) Debit to Interest Payable for $1,000 D) Debit to Interest Expense for $500 Answer: A Rationale: At year-end, MAI Company records the following entry: 2019 Dec. 31
Interest expense 500 Interest payable To accrue interest expense on the note to Bank of Washington ($60,000 × 0.10 × 30/360 = $500).
500
When the note payable to Bank of Washington is subsequently paid on April 1, 2020, MAI Company makes the following entry: 2020 Apr. 1
Notes payable—Bank of Washington Interest payable Interest expense Cash Paid principal and interest to Bank of Washington ($60,000 × 0.10 × 90/360 = $1,500).
60,000 500 1,500 62,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-37
Topic: Current Liabilities LO: 1 Level of Difficulty: DIFFICULT 81. On December 1, 2019, Coke Company purchased $180,000 of equipment by issuing a 120-day, 10% note payable to Bank of Georgia. Assuming the company’s accounting period ends on December 31, the journal entry recorded by Coke Company on the note maturity date will include: A) Debit to Interest Expense for $4,500 B) Debit to Interest Payable for $4,500 C) Debit to Interest Payable for $3,000 D) Debit to Interest Expense for $1,500 Answer: A Rationale: At year-end, Coke Company records the following entry: 2019 Dec. 31
Interest expense 1,500 Interest payable 1,500 To accrue interest expense on the note to Bank of Georgia ($180,000 × 0.10 × 30/360 = $1,500).
When the note payable to Bank of Georgia is subsequently paid on April 1, 2020, Coke Company makes the following entry: 2020 Apr. 1
Notes payable—Bank of Georgia Interest payable Interest expense Cash Paid principal and interest to Bank of Georgia ($180,000 × 0.10 × 90/360 = $4,500).
180,000 1,500 4,500 186,000
©Cambridge Business Publishers, 2020 10-38
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Current Liabilities LO: 1 Level of Difficulty: DIFFICULT 82. Kangaroo Company signed a three-month, 8% note on November 1, 2019 for the purchase of $120,000 of inventory. Assuming the company’s accounting period ends on December 31, which one of the following statements is not correct? A) On February 1, 2020, the company will debit Interest Expense for $1,600. B) On December 31, 2019 the company will debit Interest Expense for $1,600. C) On February 1, 2020, the company will debit Interest Payable for $1,600. D) On December 31, 2019, the company will credit Interest Payable for $1,600. Answer: A Rationale: At year-end, Kangaroo Company records the following entry: 2019 Dec. 31
Interest expense Interest payable To accrue interest expense on the note ($120,000 × 0.08 × 2/12 = $1,600).
1,600 1,600
When the note payable is subsequently paid on February 1, 2020, Kangaroo Company makes the following entry: 2020 Feb. 1
Notes payable Interest payable Interest expense Cash Paid principal and interest ($120,000 × 0.08 × 1/12 = $800).
120,000 1,600 800 122,400
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-39
Topic: Current Liabilities LO: 1 Level of Difficulty: DIFFICULT 83. Wombat Company signed a three-month, 8% note on November 1, 2019 for the purchase of $360,000 of inventory. Assuming the company’s accounting period ends on December 31, which one of the following statements is not correct? A) On February 1, 2020, the company will debit Interest Expense for $4,800. B) On December 31, 2019 the company will debit Interest Expense for $4,800. C) On February 1, 2020, the company will debit Interest Payable for $4,800. D) On December 31, 2019, the company will credit Interest Payable for $4,800. Answer: A Rationale: At year-end, Wombat Company records the following entry: 2019 Dec. 31
Interest expense Interest payable To accrue interest expense on the note ($360,000 × 0.08 × 2/12 = $4,800).
4,800 4,800
When the note payable is subsequently paid on February 1, 2020, Wombat Company makes the following entry: 2020 Feb. 1
Notes payable Interest payable Interest expense Cash Paid principal and interest ($360,000 × 0.08 × 1/12 = $2,400).
360,000 4,800 2,400 367,200
©Cambridge Business Publishers, 2020 10-40
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Current Liabilities LO: 1 Level of Difficulty: DIFFICULT 84. Montana Company signed a $180,000, 90-day, 9% note payable, on December 1, 2019. If the accounting period ends on December 31, 2019, the entry made on the note’s maturity (March 1, 2020) will include: A) A debit to Interest Payable for $2,700 B) A debit to Interest Expense for $4,050 C) A debit to Interest Expense for $1,350 D) A debit to Interest Expense for $2,700 Answer: D Rationale: At year-end, Montana Company records the following entry: 2019 Dec. 31 Interest expense 1,350 Interest payable To accrue interest expense on the note ($180,000 × 0.09 × 30/360 = $1,350).
1,350
When the note payable is subsequently paid on March 1, 20, Montana Company makes the following entry: 2020 Mar. 1
Notes payable 180,000 Interest payable 1,350 Interest expense 2,700 Cash Paid principal and interest ($180,000 × 0.09 × 60/360 = $2,700).
184,050
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-41
Topic: Current Liabilities LO: 1 Level of Difficulty: DIFFICULT 85. Idaho Company signed a $540,000, 90-day, 9% note payable, on December 1, 2019. If the accounting period ends on December 31, 2019, the entry made on the note’s maturity (March 1, 2020) will include: A) A debit to Interest Payable for $8,100 B) A debit to Interest Expense for $12,150 C) A debit to Interest Expense for $4,050 D) A debit to Interest Expense for $8,100 Answer: D Rationale: At year-end, Idaho Company records the following entry: 2019 Dec. 31
Interest expense 4,050 Interest payable 4,050 To accrue interest expense on the note ($540,000 × 0.09 × 30/360 = $4,050).
When the note payable is subsequently paid on March 1, 2020, Idaho Company makes the following entry: 2020 Mar. 1
Notes payable 540,000 Interest payable 4,050 Interest expense 8,100 Cash Paid principal and interest ($540,000 × 0.09 × 60/360 = $8,100).
552,150
Topic: Current Liabilities LO: 1 Level of Difficulty: MEDIUM 86. Charter Company has a total payroll of $780,000 which is subject to a 7.65% FICA tax. Assuming $180,000 was subject to state and federal unemployment tax rates of 4% and 0.8% respectively, the entry to accrue payroll taxes would include a: A) Debit to payroll tax expense for $94,340 B) Credit to SUTA tax payable for $25,200 C) Debit to FICA tax expense for $11,900 D) Credit to FUTA tax payable for $1,440 Answer: D Rationale: Payroll tax expense Federal unemployment tax payable State unemployment tax payable FICA taxes payable To record the payroll taxes for Charter Company.
68,310 1,440 7,200 59,670
©Cambridge Business Publishers, 2020 10-42
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Current Liabilities LO: 1 Level of Difficulty: MEDIUM 87. Four Points Company has a total payroll of $2,340,000 which is subject to a 7.65% FICA tax. Assuming $540,000 was subject to state and federal unemployment tax rates of 4% and 0.8% respectively, the entry to accrue payroll taxes would include a: A) Debit to payroll tax expense for $283,020 B) Credit to SUTA tax payable for $75,600 C) Debit to FICA tax expense for $35,700 D) Credit to FUTA tax payable for $4,320 Answer: D Rationale: Payroll tax expense Federal unemployment tax payable State unemployment tax payable FICA taxes payable To record the payroll taxes for Four Points Company.
204,930 4,320 21,600 179,010
Topic: Current Liabilities LO: 1 Level of Difficulty: DIFFICULT 88. Assume that the current rate for FICA social security is 6.2% (for the first $102,000 of an employee’s salary) and the FICA Medicare rate is 1.45% for all salary. Also, the current FUTA tax rate is 0.8%, and the SUTA tax rate is 5.4%, which apply to the first $7,000 of an employee's pay. Assume that an employee earned $300,000 in 2019. What is the employer’s total payroll-related expense for this employee for 2019? A) $316,998 B) $316,868 C) $311,108 D) $323,384 Answer: C Rationale: Payroll tax expense 11,108 Federal unemployment tax payable State unemployment tax payable FICA social security taxes payable ($102,000 x 6.2%) FICA Medicare taxes payable ($300,000 x 1.45%) To record the payroll taxes
56 378 6,324 4,350
Wages + Payroll tax expense = Total payroll related expense $300,000 + $11,108 = $311,108
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-43
Topic: Current Liabilities LO: 1 Level of Difficulty: DIFFICULT 89. Assume that the current rate for FICA social security is 6.2% (for the first $102,000 of an employee’s salary) and the FICA Medicare rate is 1.45% for all salary. Also, the current FUTA tax rate is 0.8%, and the SUTA tax rate is 5.4%, which apply to the first $7,000 of an employee's pay. Assume that an employee earned $525,000 in 2019. What is the employer’s total payroll-related expense for this employee for 2019? A) $475,497 B) $475,302 C) $539,371 D) $597,713 Answer: C Rationale: Payroll tax expense 14,371 Federal unemployment tax payable State unemployment tax payable FICA social security taxes payable ($102,000 x 6.2%) FICA Medicare taxes payable ($525,000 x 1.45%) To record the payroll taxes
56 378 6,324 7,613
Wages + Payroll tax expense = Total payroll related expense $525,000 + $14,371 = $539,371
Topic: Current Liabilities LO: 1 Level of Difficulty: DIFFICULT 90. Denver Company has a monthly gross payroll (paid on the last day of each month) of $172,000, which is subject to unemployment taxes (Federal at 0.8% and State at 5.4%). All earnings are subject to 7.65% FICA tax (combined Social Security and Medicare). Federal income tax withholdings are 25%, and state income tax withholdings are 8% of total earnings. Assuming no individual employee has reached the maximum limit for Social Security tax or for unemployment tax, which of the following is not true for the month ended January 31? A) Denver Company will record a net payroll of $102,082. B) Denver Company will record a total liability for FICA Taxes of $13,158. C) Denver Company will record a liability for Federal Unemployment Taxes of $1,376. D) Denver Company will record a liability for State Income Taxes of $13,760. Answer: B Rationale: Entry to record monthly payroll: Salaries and wage expense 172,000 Federal income tax withholding payable State income tax withholding payable FICA taxes payable Payroll payable To record the payroll for the month ended January 31.
43,000 13,760 13,158 102,082
Continued
©Cambridge Business Publishers, 2020 10-44
th
Financial Accounting for Undergraduates, 4 Edition
Payroll tax expense 23,822 FICA taxes payable Federal unemployment tax payable State unemployment tax payable To record the payroll taxes for the month ended January 31.
13,158 1,376 9,288
Total FICA liability is the sum of the employee portion ($13,158) plus the employer portion ($13,158) = $26,316.
Topic: Current Liabilities LO: 1 Level of Difficulty: DIFFICULT 91. Pennsylvania Company has a monthly gross payroll (paid on the last day of each month) of $516,000, which is subject to unemployment taxes (Federal at 0.8% and State at 5.4%). All earnings are subject to 7.65% FICA tax (combined Social Security and Medicare). Federal income tax withholdings are 25%, and state income tax withholdings are 8% of total earnings. Assuming no individual employee has reached the maximum limit for Social Security tax or for unemployment tax, which of the following is not true for the month ended January 31? A) Pennsylvania Company will record a net payroll of $306,246. B) Pennsylvania Company will record a total liability for FICA Taxes of $39,474. C) Pennsylvania Company will record a liability for Federal Unemployment Taxes of $4,128. D) Pennsylvania Company will record a liability for State Income Taxes of $41,280. Answer: B Rationale: Entry to record monthly payroll: Salaries and wage expense 516,000 Federal income tax withholding payable State income tax withholding payable FICA taxes payable Payroll payable To record the payroll for the month ended January 31.
129,000 41,280 39,474 306,246
Payroll tax expense 71,466 FICA taxes payable Federal unemployment tax payable State unemployment tax payable To record the payroll taxes for the month ended January 31.
39,474 4,128 27,864
Total FICA liability is the sum of the employee portion ($39,474) plus the employer portion ($39,474) = $78,948.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-45
Topic: Current Liabilities LO: 1 Level of Difficulty: MEDIUM 92. Hola Company has 5 sales employees, each of whom earns $8,000 per month and is paid on the last working day of the month. Each employee's wages are subject to FICA social security taxes of 6.2% and Medicare taxes of 1.45% on all wages. Withholding for each employee also includes federal income tax of 16% and monthly medical insurance premiums of $220 for each employee. The entry to accrue the company’s monthly sales salaries expense on January 31 will not include: A) A credit to Accrued Payroll Payable of $10,560 B) A credit to FICA-Medicare Taxes Payable for $580 C) A credit to FICA-Social Security Taxes Payable for $2,480 D) A credit to Employee Medical Insurance Payable for $1,100 Answer: A Rationale: Salary and wage expense Federal income tax payable Employee medical insurance payable FICA social security taxes payable FICA Medicare taxes payable Payroll payable To record the monthly payroll for Hola Company.
40,000 6,400 1,100 2,480 580 29,440
Topic: Current Liabilities LO: 1 Level of Difficulty: MEDIUM 93. Barker Company has 5 sales employees, each of whom earns $24,000 per month and is paid on the last working day of the month. Each employee's wages are subject to FICA social security taxes of 6.2% and Medicare taxes of 1.45% on all wages. Withholding for each employee also includes federal income tax of 16% and monthly medical insurance premiums of $660 for each employee. The entry to accrue the company’s monthly sales salaries expense on January 31 will not include: A) A credit to Accrued Payroll Payable of $31,680 B) A credit to FICA-Medicare Taxes Payable for $1,740 C) A credit to FICA-Social Security Taxes Payable for $7,440 D) A credit to Employee Medical Insurance Payable for $3,300 Answer: A Rationale: Salary and wage expense Federal income tax payable Employee medical insurance payable FICA social security taxes payable FICA Medicare taxes payable Payroll payable To record the monthly payroll for Barker Company.
120,000 19,200 3,300 7,440 1,740 88,320
©Cambridge Business Publishers, 2020 10-46
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Current Liabilities LO: 1 Level of Difficulty: MEDIUM 94. Hola Company has 5 sales employees, each of whom earns $8,000 per month and is paid on the last working day of the month. The gross monthly payroll is subject to federal unemployment taxes of 0.8% and state unemployment taxes of 4.0%. All earnings are subject to FICA social security taxes of 6.2% and Medicare taxes of 1.45%. Withholding for each employee also includes federal income tax of 16% and monthly medical insurance premiums of $220 for each employee. Monthly payroll tax expense will be: A) $ 5,980 B) $ 6,080 C) $ 4,980 D) $11,380 Answer: C Rationale: Payroll tax expense FICA taxes payable Federal unemployment tax payable State unemployment tax payable To record the payroll taxes for the month
4,980 3,060 320 1,600
Topic: Current Liabilities LO: 1 Level of Difficulty: MEDIUM 95. Barker Company has 5 sales employees, each of whom earns $24,000 per month and is paid on the last working day of the month. The gross monthly payroll is subject to federal unemployment taxes of 0.8% and state unemployment taxes of 4.0%. All earnings are subject to FICA social security taxes of 6.2% and Medicare taxes of 1.45%. Withholding for each employee also includes federal income tax of 16% and monthly medical insurance premiums of $660 for each employee. Monthly payroll tax expense for January 31 will be: A) $14,940 B) $18,240 C) $16,440 D) $34,140 Answer: A Rationale: Payroll tax expense FICA taxes payable Federal unemployment tax payable State unemployment tax payable To record the payroll taxes for the month
14,940 9,180 960 4,800
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-47
Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 96. Sic ‘n Span Inc. sells washing machines with a 2 year warranty. Sic ‘n Span estimates that total warranty costs are 3% of sales. In the year 2019, Sic ‘n Span recorded total sales of washing machines of $1,400,000. The balance in the Estimated Liability for Warranties account was $76,400 on December 31, 2018, and $51,200 on December 31, 2019. What must have been the actual cost of repairs (covered under warranty) for the year 2019? A) $67,200 B) $65,800 C) $13,800 D) $88,600 Answer: A Rationale: Washing Machine sales Rate of projected defective units Total Cost of washing machines expected to fail
$1,400,000 x 0.03 $ 42,000
Beginning balance in Estimated Liability for Warranties 1/1/19 Add: Estimated liability for product warranty for 2019 Less: Balance in Estimated Liability for Warranties 12/31/19 Actual cost of repairs in 2019
$76,400 42,000 (51,200) $67,200
Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 97. Laundry Needs, Inc. sells washing machines with a 2 year warranty. Laundry Needs estimates that total warranty costs are 3% of sales. In the year 2019, Washing Machines recorded total sales of washing machines of $4,200,000. The balance in the Estimated Liability for Warranties account was $229,200 on December 31, 2018, and $153,600 on December 31, 2019. What must have been the actual cost of repairs (covered under warranty) for the year 2019? A) $201,600 B) $197,400 C) $ 41,400 D) $265,800 Answer: A Rationale: Washing Machine sales Rate of projected defective units Total Cost of washing machines expected to fail
$4,200,000 x 0.03 $ 126,000
Beginning balance in Estimated Liability for Warranties 1/1/19 Add: Estimated liability for product warranty for 2019 Less: Balance in Estimated Liability for Warranties 12/31/19 Actual cost of repairs in 2019
$229,200 126,000 (153,600) $201,600
©Cambridge Business Publishers, 2020 10-48
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 98. Eastern Company estimates warranty expense as 5% of sales. On January 1, 2019 warranties payable was $20,000, and the December 31 liability for the warranty was $22,000. During the year Western recorded sales of $300,000. The amount paid by Eastern during the year to meet its warranty obligations was: A) $30,000 B) $15,000 C) $12,000 D) $13,000 Answer: D Rationale: Sales Rate of projected warranty expense Total Cost of expected warranty expense
$300,000 x 0.05 $ 15,000
Beginning balance in Estimated Liability for Warranties 1/1/19 Add: Estimated liability for product warranty balance for 2019 Less: Balance in Estimated Liability for Warranties 12/31/19 Actual cost of repairs in 2019
$20,000 15,000 (22,000) $ 13,000
Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 99. Kaila Company sells computers with a 6-month warranty. It is estimated that 2% of all units sold will need repairs under warranty at an estimated cost of $600 per unit. During January, the company sold 100,000 computers at $5,250 each, and 1,500 computers were turned in for repairs during that same month. The total actual repairs costs amounted to $555,000 from the computer parts inventory. The balance in the Estimated Warranty Liability Account on January 1 was $45,000. What is the balance in the Estimated Warranty Liability Account at the end of January 2019? A) $ 690,000 B) $1,245,000 C) $ 650,000 D) $1,800,000 Answer: A Rationale: Number of units sold Rate of projected defective units Total units expected to fail
x
100,000 0.02 2,000
Average repair cost per unit Estimated liability for product warranty at end of month
x $600 $1,200,000
Beginning balance in Estimated Liability for Warranties 1/1/19 Add: Estimated liability for product warranty for January Less: Total actual repair costs in January Liability for product warranty balance at 1/31/2019
$45,000 1,200,000 (555,000) $690,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-49
Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 100. Bean Company sells computers with a 6-month warranty. It is estimated that 2% of all units sold will need repairs under warranty at an estimated cost of $800 per unit. During January, the company sold 100,000 computers at $7,000 each; 1,500 of those computers were turned in for repairs during that same month. The total actual repairs costs amounted to $740,000 from the computer parts inventory. The balance in the Estimated Warranty Liability Account on January 1, 2019 was $60,000. What is the balance in the Estimated Warranty Liability Account at the end of January 2019? A) $ 920,000 B) $1,660,000 C) $ 860,000 D) $2,400,000 Answer: A Rationale: Number of units sold Rate of projected defective units Total units expected to fail
100,000 0.02 2,000
x
Average repair cost per unit Estimated liability for product warranty at end of month
x $800 $1,600,000
Beginning balance in Estimated Liability for Warranties 1/1/19 Add: Estimated liability for product warranty for January Less: total actual repair costs in January Liability for product warranty balance at 1/31/2019
$
60,000 1,600,000 (740,000) $ 920,000
Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 101. Eva Company provides a 12-month warranty on all their products. During 2019, they had total sales of $1,050,000, and estimated warranty costs to be 3% of sales. On January 1, 2019, the Estimated Warranty Liability account had a debit balance of $4,500, and it had a credit balance of $7,500 on December 31, 2019. What was the actual cost of repairs covered under warranties during 2019? A) $25,500 B) $31,500 C) $26,250 D) $19,500 Answer: D Rationale: Sales Rate of projected warranty expense Total Cost of expected warranty expense
$1,050,000 x 0.03 $ 31,500
Beginning balance in Estimated Liability for Warranties 1/1/19 Add: Estimated liability for product warranty for 2019 Less: Balance in Estimated Liability for Warranties 12/31/19 Actual cost of repairs in 2019
$ (4,500) 31,500 (7,500) $ 19,500
©Cambridge Business Publishers, 2020 10-50
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Warranty Liabilities LO: 1, 3 Level of Difficulty: MEDIUM 102. Emma Company provides a 12-month warranty on all their products. During 2019, they had total sales of $1,400,000, and estimated warranty costs to be 3% of sales. On January 1, 2019, the Estimated Warranty Liability account had a debit balance of $6,000, and it had a credit balance of $10,000 on December 31, 2019. What was the actual cost of repairs covered under warranties during 2019? A) $43,000 B) $31,400 C) $35,000 D) $26,000 Answer: D Rationale: Sales Rate of projected warranty expense Total Cost of expected warranty expense
$1,400,000 x 0.03 $ 42,000
Beginning balance in Estimated Liability for Warranties 1/1/19 Add: Estimated liability for product warranty for 2019 Less: Balance in Estimated Liability for Warranties 12/31/19 Actual cost of repairs in 2019
$
$
(6,000) 42,000 (10,000) 26,000
Topic: Bonds Payable LO: 2 Level of Difficulty: DIFFICULT 103. Joseph Company issues bonds with a par value of $1,350,000 on their issue date. The bonds mature in 5 years and pay 6% annual interest in semiannual payments. On the issue date, the market rate of interest (annual) is 8%. Compute the price of the bonds on their issue date. (If PV tables are used, select the closest answer from the options provided.) A) $1,257,219 B) $1,179,458 C) $1,080,515 D) $1,240,503 Answer: D Rationale:
N
I/Yr
PMT
PV (press)
FV
10
4
40500
1240053
1350000
N = (5 x 2) = 10 I = (8% / 2) = 4 Semi-annual interest payments: $1,350,000 x (0.06 x 1/2) = $40,500
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-51
Topic: Bonds Payable LO: 2 Level of Difficulty: DIFFICULT 104. Darlene & Joe Company issues bonds with a par value of $1,800,000 on their issue date. The bonds mature in 5 years and pay 6% annual interest in semiannual payments. On the issue date, the market rate of interest (annual) is 8%. Compute the price of the bonds on their issue date. (The answer assumes the use of a financial calculator. (If PV tables are used, select the closest answer from the options provided.) A) $1,685,148 B) $2,660,447 C) $1,547,345 D) $1,654,004 Answer: D Rationale:
N
I/Yr
PMT
PV (press)
FV
10
4
54000
1654004
1800000
N = (5 x 2) = 10 I = (8% / 2) = 4 Semi-annual interest payments: $1,800,000 x (0.06 x 1/2) = $54,000
Topic: Bonds Payable LO: 2 Level of Difficulty: DIFFICULT 105. Cottle Corporation issued $600,000 of 15-year bonds on January 1. The bonds pay interest on January 1 and July 1 with a stated annual rate of 8 percent. If the market rate of annual interest at the time the bonds are sold is 6 percent, what will be the issue price of the bonds? (If PV tables are used, select the closest answer from the options provided.) A) $665,214 B) $496,116 C) $717,603 D) $702,564 Answer: C Rationale:
N
I/Yr
PMT
PV (press)
FV
30
3
24000
717603
600000
N = (15 x 2) = 30 I = (6% / 2) = 3 Semi-annual interest payments: $600,000 x (0.08 x 1/2) = $24,000
©Cambridge Business Publishers, 2020 10-52
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Bonds Payable LO: 2 Level of Difficulty: DIFFICULT 106. Brooks Corporation issued $800,000 of 15-year bonds on January 1. The bonds pay interest on January 1 and July 1 with a stated annual rate of 8 percent. If the market rate of annual interest at the time the bonds are sold is 6 percent, what will be the issue price of the bonds? (The answer assumes the use of a financial calculator. If PV tables are used, select the closest answer from the options provided.) A) $ 921,878 B) $ 809,145 C) $ 956,804 D) $1,738,786 Answer: C Rationale:
N
I/Yr
PMT
PV (press)
FV
30
3
32000
956804
800000
N = (15 x 2) = 30 I = (6% / 2) = 3 Semi-annual interest payments: $800,000 x (0.08 x 1/2) = $32,000
Topic: Bonds Payable LO: 2 Level of Difficulty: DIFFICULT 107. When the market rate of interest was 10%, Gloria Corporation issued $1,800,000, 12%, 8-year bonds that pay interest semiannually. The selling price of this bond issue was: (If PV tables are used, select the closest answer from the options provided.) A) $2,207,538 B) $1,618,011 C) $1,995,080 D) $1,621,080 Answer: C Rationale:
N
I/Yr
PMT
PV (press)
FV
16
5
108000
1995080
1800000
N = (8 x 2) = 16 I = (10% / 2) = 5 Semi-annual interest payments: $1,800,000 x (0.12 x 1/2) = $108,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-53
Topic: Bonds Payable LO: 2 Level of Difficulty: DIFFICULT 108. When the market rate of interest was 10%, Gloria Corporation issued $2,400,000, 12%, 8-year bonds that pay interest semiannually. The selling price of this bond issue was: (If PV tables are used, select the closest answer from the options provided.) A) $2,843,745 B) $2,408,727 C) $2,660,106 D) $2,410,773 Answer: C Rationale:
N
I/Yr
PMT
PV (press)
FV
16
5
144000
2660106
2400000
N = (8 x 2) = 16 I = (10% / 2) = 5 Semi-annual interest payments: $2,400,000 x (0.12 x 1/2) = $144,000
Topic: Bonds Payable LO: 5 Level of Difficulty: DIFFICULT 109. On January 1, 2019, Camire Company issues $540,000, 15 year, 8% bonds (paying semiannual interest) for $645,842, when the annual market rate of interest is 6%. If the company uses the effective interest method of amortization, the journal entry to record the semi-annual interest on June 30 will include a: A) Debit to premium on bonds payable for $2,225 B) Debit to interest expense for $21,600 C) Credit to cash for $19,375 D) Debit to interest expense for $38,694 Answer: A Rationale: Semi-annual interest payments: $540,000 x (0.08 x 1/2) = $21,600
Date
Interest Paid
Interest Expense
Periodic Amortization
At Issue June 30
$21,600
$19,375
$2,225
June 30 Bond interest expense 19,375 Premium on bonds payable 2,225 Cash To record semiannual interest payment and amortization.
Unamortized Premium
Book Value
$105,842
$645,842
$103,617
$643,617
21,600
©Cambridge Business Publishers, 2020 10-54
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Bonds Payable LO: 5 Level of Difficulty: DIFFICULT 110. On January 1, 2019, Food Design Company issues $960,000, 15 year, 8% bonds (paying semiannual interest) for $1,148,164, when the annual market rate of interest is 6%. If the company uses the effective interest method of amortization, the journal entry to record the semi-annual interest on June 30 will include a: A) Debit to premium on bonds payable for $3,955 B) Debit to interest expense for $38,400 C) Credit to cash for $76,800 D) Debit to interest expense for $68,890 Answer: A Rationale: Semi-annual interest payments: $960,000 x (0.08 x 1/2) = $38,400
Date
Interest Paid
Interest Expense
Periodic Amortization
$38,400
$34,445
$3,955
Unamortized Premium
Book Value
$188,164
$1,148,164
$184,209
$1,144,209
At Issue June 30
June 30 Bond interest expense 34,445 Premium on bonds payable 3,955 Cash To record semiannual interest payment and amortization.
38,400
Topic: Bonds Payable LO: 5 Level of Difficulty: MEDIUM 111. Dance Company issued 6%, 5 year bonds, with par value of $2,400,000, paying semiannual interest for $2,205,339. The annual market rate of interest on the date of issue was 8%. Assuming effective interest method of amortization, calculate the bond interest expense on the first interest payment date. A) $ 88,214 B) $ 72,000 C) $194,661 D) $176,427 Answer: A Rationale: Semi-annual interest payments: $2,400,000 x (0.06 x 1/2) = $72,000
Date At Issue st 1 Payment
Interest Paid $72,000
Interest Expense $88,214
Periodic Amortization
Unamortized Discount
Book Value
$16,214
$194,661 $178,447
$2,205,339 $2,221,553
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-55
Topic: Bonds Payable LO: 2 Level of Difficulty: MEDIUM 112. Prior to maturity, Candy Apple Red Company called and retired a $1,200,000, 8% bond issued at 102. If the unamortized premium on the bonds is $3,000, the journal entry will include a: A) Debit to bonds payable for $1,224,000 B) Debit to loss on bond retirement of $24,000 C) Credit to gain on bond retirement for $24,000 D) Debit to premium on bonds payable for $3,000 Answer: D Rationale: Note that since we are not given the amount of cash paid to retire the bonds, we do not know the cash amount or whether there’s a gain or a loss on retirement. However, the journal entry to record the retirement would include: Bonds payable 1,200,000 Premium on bonds payable 3 ,000 Loss on bond retirement (if needed) XXX Cash Gain on bond retirement (if needed) To retire bonds at XXX and record (gain or loss) on retirement.
XXX XXX
©Cambridge Business Publishers, 2020 10-56
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Bonds Payable LO: 2 Level of Difficulty: MEDIUM 113. Bowling Green Associates has outstanding Bonds Payable, with a par value of $120,000, and carrying value of $116,800. If Bowling Green purchases the bonds in the open market at a price of 98.0 and retires them, which of the following is true? A) Bowling Green will recognize a loss of $3,200. B) Bowling Green will recognize a gain of $3,200. C) Bowling Green will recognize a gain of $800. D) Bowling Green will recognize a loss of $800. Answer: D Rationale: Purchase of bonds on the market: Par Value x Market Price = Amount paid $120,000 x 98% = $117,600 Carrying value of Bonds Payable Less: Cost of Bonds purchased on the open market Loss on transaction
$116,800 (117,600) $ (800)
Topic: Bonds Payable LO: 2 Level of Difficulty: MEDIUM 114. Foxrun Associates has outstanding Bonds Payable, with a par value of $120,000, and carrying value of $116,700. If Foxrun purchases the bonds in the open market at a price of 97.0 and retires them, which of the following is true? A) Foxrun Associates will recognize a loss of $3,300. B) Foxrun Associates will recognize a gain of $3,300. C) Foxrun Associates will recognize a gain of $300. D) Foxrun Associates will recognize a loss of $300. Answer: C Rationale: Purchase of bonds on the market: Par Value x Market Price = Amount paid $120,000 x 97% = $116,400 Carrying value of Bonds Payable Less: Cost of Bonds purchased on the open market Gain on transaction
$116,700 (116,400) $ 300
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-57
Topic: Bonds Payable LO: 2 Level of Difficulty: MEDIUM 115. Hickenlooper Company retired a $900,000, 7% bond issue at 98. If the unamortized discount is $7,200, the entry will include a: A) Debit to loss on bond retirement for $10,800 B) Credit to gain on bond retirement for $10,800 C) Debit to loss on bond retirement for $7,200 D) Credit to gain on bond retirement for $7,200 Answer: B Rationale: Entry to record retirement of Bonds: Bonds payable Discount on bonds payable Gain on bond retirement Cash To retire bonds and record gain on retirement. (0.98 x $900,000)
900,000 7,200 10,800 882,000
Topic: Bonds Payable LO: 2 Level of Difficulty: MEDIUM 116. Hicks Company’s Bonds Payable has a balance of $1,200,000 and Discount on Bonds Payable has a balance of $15,000. If the issuing corporation retires the bonds at a market price of 97, what is the amount of gain or loss on retirement? A) $15,000 loss B) $15,000 gain C) $21,000 loss D) $21,000 gain Answer: D Rationale: Book value of Bond $1,200,000 - $15,000= $1,185,000 Retirement Price = $1,200,000 x 0.97 = $1,164,000 Gain on Retirement = $1,185,000 - $1,164,000 = $21,000
©Cambridge Business Publishers, 2020 10-58
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Bonds Payable LO: 2 Level of Difficulty: MEDIUM 117. Charlie Company’s Bonds Payable has a balance of $2,700,000 and Discount on Bonds Payable has a balance of $33,750. If the issuing corporation retires the bonds at a market price of 97, what is the amount of gain or loss on retirement? A) $33,750 loss B) $33,750 gain C) $47,250 loss D) $47,250 gain Answer: D Rationale: Book value of Bond = $2,700,000 - $33,750 = $2,666,250 Retirement Price = $2,700,000 x 0.97 = $2,619,000 Gain on Retirement = $2,666,250 - $2,619,000 = $47,250
Topic: Bonds Payable LO: 2 Level of Difficulty: DIFFICULT 118. Quechua Company borrowed $90,000 cash on January 1, 2019, by signing an 8% mortgage note that is to be repaid in 10 equal annual end-of-year payments. The first payment is due on December 31, 2019. The journal entry to record the first payment will include: A) A debit to Notes Payable for $7,200 B) A debit to Notes Payable for $13,413 C) A debit to Interest Expense for $13,413 D) A debit to Notes Payable for $6,213 Answer: D Rationale: Computation of mortgage note payments:
N
I/Yr
PMT (press)
PV
10
8
13413
90000
Interest expense: $90,000 x 8% = $7,200 Journal entry to record the first payment: Interest expense Mortgage note payable Cash To record annual mortgage loan payment.
7,200 6,213 13,413
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-59
Topic: Bonds Payable LO: 2 Level of Difficulty: DIFFICULT 119. Westwood Company borrowed $202,500 cash on January 1, 2019, by signing an 8% mortgage note that is to be repaid in 10 equal annual end-of-year payments. The first payment is due on December 31, 2019. The journal entry to record the first payment will include: A) A debit to Notes Payable for $16,200 B) A debit to Notes Payable for $30,178 C) A debit to Interest Expense for $30,178 D) A debit to Notes Payable for $13,978 Answer: D Rationale: Computation of mortgage note payments:
N
I/Yr
PMT (press)
PV
10
8
30178
202500
Interest expense: $202,500 x 8% = $16,200 Journal entry to record the first payment: Interest expense Mortgage note payable Cash To record annual mortgage loan payment.
1 6 , 2 00 13,978 30,178
Topic: Bonds Payable LO: 2 Level of Difficulty: DIFFICULT 120. On January 1, Alicia Company borrowed $30,000 cash by signing an 8 year, 7% mortgage note that requires equal total payments on December 31 of each year. The balance in the Note Payable account after the first payment is made is: A) $27,900 B) $26,250 C) $26,339 D) $27,076 Answer: D Rationale: Payment Date
Cash Payment
Interest Expense
Principal Repaid
Jan.1, 2019
Note Payable Balance $30,000
Dec. 31, 2019
$5,024
$2,100
$2,924
27,076
Computation of mortgage note payments:
N
I/Yr
PMT (press)
PV
8
7
5024
30000
©Cambridge Business Publishers, 2020 10-60
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Bonds Payable LO: 2 Level of Difficulty: DIFFICULT 121. On January 1, 2019 Tracey Sisters Company borrowed $90,000 cash by signing an 8 year, 7% mortgage note that requires equal total payments on December 31 of each year. The balance in the Mortgage Note Payable account after the first payment is made is: A) $83,700 B) $78,750 C) $79,017 D) $81,228 Answer: D Rationale: Payment Date
Cash Payment
Interest Expense
Principal Repaid
Jan.1, 2019 Dec. 31, 2019
Note Payable Balance $90,000
$15,072
$6,300
$8,772
81,228
Computation of mortgage note payments:
N
I/Yr
PMT (press)
PV
8
7
15072
90000
Topic: Bond Pricing with Tables LO: 5—Appendix 10A Level of Difficulty: MEDIUM 122. Eva Industries issued bonds with a face value of $7,000,000 and a coupon rate of 5% paid semiannually for 4 years. The market rate of interest is 6%. How much is the market value of the bond using a present value table? A) $6,125,000 B) $6,754,316 C) $6,797,846 D) $6,938,225 Answer: B Rationale: Interest payment = $7,000,000 × 5% × 6/12 = $175,000 n = (4 * 2) = 8 I = (6% / 2) = 3 PV of interest payments, n = 8, I = 3 PV of principal, n = 8, I = 3 PV
7.01969 × $ 175,000 = 0.78941 × $7,000,000 =
$1,228,446 5,525,870 $6,754,316
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-61
Topic: Bond Pricing with Tables LO: 5—Appendix 10A Level of Difficulty: MEDIUM 123. Brahtz Industries issued bonds with a face value of $21,000,000 and a coupon rate of 5% paid semiannually for 4 years. The market rate of interest is 6%. How much is the market value of the bond using a present value table? A) $18,375,000 B) $20,262,947 C) $20,393,538 D) $20,814,675 Answer: B Rationale: Interest payment = $21,000,000 × 5% × 6/12 = $525,000 n = (4 * 2) = 8 I = (6% / 2) = 3 PV of interest payments, n = 8, I = 3 PV of principal, n = 8, I = 3 PV
7.01969 × $ 525,000 = 0.78941 × $21,000,000 =
$3,685,337 16,577,610 $20,262,947
Topic: Leases LO: 6 – Appendix 10B Level of Difficulty: Medium 124. Pendergraf Manufacturing leased some manufacturing equipment for five years on July 1, 2020. The equipment has an expected life of 10 years. The monthly lease payments are $8,500 ($510,000 in total). At the end of the lease term, Pendergraf has a right to purchase the equipment for $1,000. The present value of the lease payments at 5% is $451,200. The entry to record the lease in July will include: A) A debit to Lease expense of $8,500. B) A debit to Equipment of $510,000 C) A debit to Right-of-Use Asset (Equipment) of $451,200 D) A debit to Equipment of $511,000 Answer: C Rationale: The lease is recorded as an asset at the present value of the lease payments.
©Cambridge Business Publishers, 2020 10-62
th
Financial Accounting for Undergraduates, 4 Edition
Exercises Topic: Accrued Interest LO: 1 1. Perfect Pet Company gave a creditor a 90-day, 6% note payable for $28,000 on December 1, 2019. What amount of interest will be accrued as of December 31, 2019? Where will this amount be reported in the company’s financial statements? Answer: $28,000 × 6% × 30/360 = $140 Reported as a current liability as interest payable on the balance sheet
Topic: Gain (Loss) on Bond Repayment LO: 2 2. On June 30, one year before maturity, Boat Shoes, Inc. retired $600,000 of its 10% bonds payable at 96. The bond’s book value on June 30 is $495,000. Bond interest is presently paid up to the date of retirement. How much is the gain or loss on the retirement of these bonds? Answer: Cash for retirement = $600,000 x 0.96 = $576,000 Gain (loss) = Net bonds payable - Cash payment = $495,000 – $576,000 = $81,000 loss
Topic: Financial Statement Classification LO: 1, 2 3. Indicate the proper financial classification (balance sheet or income statement) for each of the following accounts: A. B. C. D.
Loss on bond retirement Bonds payable Mortgage interest expense Bonds due to be paid within 12 months
Answer: A. Reported on the income statement B. Shown on the balance sheet as long-term liability C. Reported on the income statement D. Reported as a current liability on the balance sheet
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-63
Topic: Accrued Interest LO: 1 4. Calculate the interest accrued for each of the following notes payable owed by Boundas Resorts as of December 31, 2019: Lender Roof Point Second Bank Step Up
Date of Note
Principal
Coupon Rate
Term
10/01/19 12/01/19 3/31/19
$90,000 $45,000 $30,000
10.0% 8.0% 9.0%
6 months 90 days 1 year
Answer: Lender
Interest Accrued
Roof Point Second Bank Step Up
Principal × Annual Rate × Time outstanding
$2,250 $300 $2,025
$90,000 ×10.0% × 3/12 $45,000 × 8.0% × 30/360 $30,000 × 9.0% × 9/12
Topic: Bond Retirement LO: 2 5. Kenyon Company issued $1,050,000 of 7%, 20-year bonds at 104 on January 1, 2008. Interest is payable semi-annually on July 1 and January 1. Through January 1, 2019, Kenyon amortized $25,500 of the bond premium. On January 1, 2019, Kenyon retires the bond at 101 (after making the interest payment on that date). Indicate the journal entry for the bond retirement on January 1, 2019. Answer: $1,050,000 × 1.04 = $1,092,000 issue price $1,050,000 × 1.01 = $1,060,500 retirement amount Unamortized premium = $42,000 premium ‒ $25,500 amortized = $16,500 Book value of bonds on date of repurchase = $1,050,000 + $16,500 = $1,066,500 Gain on retirement = $1,060,500 - $1,066,500 = $6,000 2016 Jan. 1
Bonds payable Premium on bonds payable Gain on bond retirement Cash
1,050,000 16,500 6,000 1,060,500
©Cambridge Business Publishers, 2020 10-64
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Transaction Analysis LO: 1 6. Determine how each of the following transactions affect liabilities. A. Payment to employees for wages previously accrued B. Accrue interest of $200 on a note payable C. Payment of $180 to bank for interest accrued on a note payable Answer: A. This transaction reduces current liabilities with a decrease in cash and a decrease in wages payable. B. Interest payable increases which is a current liability. Interest expense also increases on the income statement causing retained earnings to decrease. C. Interest payable, a current liability, decreases along with cash.
Topic: Interest Accrual LO: 1 7. Stone Mountain took out a one-year, 6%, $100,000 to be repaid on April 1, 2020. Interest is due when the loan is repaid. How much interest should be accrued at December 31, 2019, and how should it be recorded in the financial statements? Answer: Interest expense = Principal × Annual interest rate × Portion of year outstanding = $100,000 × 6% × 9/12 = $4,500 The $4,500 should be recorded as an increase in liabilities (interest payable) and an increase in interest expense on the income statement which in turn reduces retained earnings on the balance sheet.
Topic: Gain (Loss) on Note Retirement LO: 2 8. Fergus Fabricators, a manufacturing company, paid $20,400,000 to retire $24,000,000 in 7% notes due in 5 years. The book value of the notes was $19,200,000 at the date of retirement. How much is the net gain or loss on the redemption of these notes? Prepare the journal entry to record the transaction. Answer: $20,400,000 paid - $19,200,000 book value = $1,200,000 net loss Notes payable Loss on note retirement Cash
19,200,000 1,200,000 20,400,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-65
Topic: Recognition and Disclosure LO: 3 9. The following items represent various types of liabilities. 1. A manufacturing company is sued for alleged product liability. The company’s attorney does not feel that the suit will result in liability to the company, but a loss is possible. If adversely adjudicated, the liability would be material. 2. Alpha has sold products to Sparkle Jewelers, a retailer that sold the products to customers. The manufacturer’s warranty offers replacement of the product if it is found to be defective within 90 days of the sale to the consumer. Historically, 0.06% of the products are returned for replacement. 3. A customer has filed a lawsuit for a minor amount against Sparkle Jewelers. Sparkle’s attorneys have reviewed the case and have found that many similar cases have never been awarded to the plaintiff. Identify if the above independent situations should be (a) recorded in the financial statements, (b) disclosed in a footnote in the financial statements, or (c) neither. Answer: 1. (b) Disclosed in footnote because this is reasonably possible 2. (a) Recorded in the financial statements because the costs are probable and reasonably estimable. 3. (c) Neither recorded nor disclosed because this is not even reasonably possible
Topic: Interest Expense and Bonds LO: 2 10. Explain the differences in the components of interest expense for the bonds sold at face value, at a discount, and at a premium. Answer: When a bond is sold at face value, the cost to the issuing company is only the cost of the cash interest paid. Interest expense, in this case, is equal to the cash interest paid. When a bond is sold at a discount, the interest expense is equal to the cash interest paid plus the amortization of the discount. When a bond is sold at a premium, the interest expense is equal to the cash interest paid less the amortization of the premium.
©Cambridge Business Publishers, 2020 10-66
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Sales and Excise Taxes Payable LO: 1 11. Modern Telephone billed a customer $5,089.20, an amount that includes an excise tax of 10% and a sales tax of 6%. a. What amount of revenue should be recorded? b. Present a general journal entry to record this transaction on Modern Telephone’s books. Answer: a. ($5,089.20 / 1.16) = $4,387.24 b. Accounts Receivable Sales revenue Sales tax payable Excise tax payable To record sales and related taxes. *Adjusted for $0.01 due to rounding.
5,089.20 4,387.24 263.23 438.73*
Topic: Warranty Liabilities LO: 1, 3 12. Port Aransas Company sells a product that carries a 60-day unconditional warranty against product failure. Based on statistical analysis, Port Aransas knows that between the time of sale and the lapse of the warranty, 4% of the units sold will fail and require repair at an avenge cost of $40 per unit. The following data reflect the first three months during which the product was sold.
Units sold Known units of product failure From sales of October November December
October 30,000
November 36,000
December 60,000
480
600 300
120 960 900
Prepare the general journal entry to record Port Aransas’ estimated liability for product warranties at December 31. Assume that warranty costs of known failures have already been reflected in the records. Answer: Units sold Estimated failure rate Total failures expected Failures already occurred Expected future failures
October 30,000 0.04 1,200 1,200 0
November 36,000 0.04 1,440 1,260 180
Total failures expected (180 + 1,500) Avenge cost per failure Total expected future warranty costs Product Warranty Expense Estimated Liability for Product Warranty
December 60,000 0.04 2,400 900 1,500 1,680 x $40 $67,200
67,200 67,200
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-67
Topic: Payroll-Related Liabilities LO: 1 13. The following data are taken from Duncan Wayneright Corporation’s monthly payroll for August 2019: Administrative salaries Sales salaries Total payroll Wages subject to FICA taxes (6.2% + 1.45%) Wages subject to FUTA and state unemployment taxes Federal income taxes withheld from all salaries
$48,000 96,000 $144,000 $144,000 $36,000 $18,600
Assume that the company is subject to a 2.7% state unemployment tax and a 0.8% federal unemployment tax. Record the general journal entry to: a. Accrue the payroll. b. Accrue the employer’s payroll taxes. Answer: a. Administrative Salaries Expense Sales Salaries Expense FICA Tax Payable (7.65% x $144000) Federal Income Tax Withheld Payroll Payable To record August payroll.
48,000 96,000 11,016 18,600 114,384
b. Payroll Tax Expense FICA Tax Payable Federal Unemployment Tax Payable (0.8% x $36,000) State Unemployment Tax Payable (2.7% x $36,000) To record August payroll tax expense.
12,276 11,016 288 972
Topic: Working Capital LO: 4 14. Murnau, Inc. has $1,400 working capital and $3,300 of current assets. What is the firm’s current liabilities? Answer: Working capital = Current assets – Current liabilities. $1,400 = $3,300 – Current liabilities Current liabilities = $1,900
©Cambridge Business Publishers, 2020 10-68
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Times-Interest-Earned Ratio LO: 4 15. Use the selected balance sheet and income statement information below for Sunshine, Inc. to compute the times-interest-earned ratio. Explain what information this ratio provides. Current assets
Current liabilities
Pretax income
Interest expense
$36,450,675
$25,507,200
$6,125,525
$1,706,250
Answer: Times-interest-earned = Earnings before interest expense and taxes / Interest expense = ($6,125,525 + $1,706,350) / $1,706,350 = 4.59 Moonbeam has operating income available to pay its annual interest expense 4.59 times for the year.
Topic: Current Ratio LO: 4 16. Use the selected balance sheet and income statement information below for Brahtz Inc. to compute the current ratio. Explain what information this ratio provides. Current assets
Current liabilities
Pretax income
Interest expense
$46,025,788
$22,318,800
$6,450,900
$1,950,000
Answer: Current ratio = Current assets / Current liabilities = $46,025,788 / $22,318,600 = 2.06 Anka is able to cover its current debt about 2.06 times with its current assets.
Topic: Present Value of Bonds LO: 5—Appendix 10A 17. Wiesbaden Investments recently issued bonds with a face value of $2,000,000 and a coupon rate of 5% for 6 years. The market rate of interest is 4% and the bonds pay interest semi-annually. Compute the market value of the bond on the issue date. Answer: Interest payment = $2,000,000 × 5% × 6/12 = $50,000 PV of principal, n = 6 × 2 = 12; I = 4%/2 = 2%: PV of interest payments, n = 6 × 2 = 12; I = 4%/2 = 2% Total present value
$2,000,000 × 0.78849 = $50,000 × 10.57534 =
N
I/Yr
PMT
PV (press)
FV
12
2
50,000
2,105,753
2,000,000
$1,576,980 $528,767 $2,105,747
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-69
Topic: Bond Pricing LO: 5—Appendix 10A 18. If Ray’s Motor Parts issues $6,900,000 in 6% bonds due in 5 years with semiannual interest payments, how much should it expect to raise if the market return for similar bonds is 8%? Answer: Interest payment = $6,900,000 × 6% × 6/12 = $207,000 PV of the principal = 0.67556 × $6,900,000; (n = 5 x 2 = 10, I = 8%/2 = 4%) PV of the interest payments = 8.11090 × $207,000; (n =10, I = 8%/2 = 4%) PV of the bonds
N
I/Yr
PMT
PV (press)
FV
10
4
207000
6340348
6900000
$4,661,364 1,678,956 $6,340,320
Topic: Leases LO: 6—Appendix 10B 19. Langley Enterprises leases a semi-trailer truck from Rogers Rental for 10 years on January 1, 2020. Langley agrees to make quarterly payments of $4,000. The first payment is due March 31, 2020. At the end of the lease term, Langley agrees to pay Rogers $2,500. The market value of the truck is expected to be $25,000 at the end of the lease. Langley uses 8% as its discount rate. What is the entry to record the lease on January 1? PV of the bargain purchase option = 0.45289× $2,500 (n =10 x 4 = 40; I = 8%/4 = 2%) PV of the lease payments = 27.35548 × $4,000 (n =10 x 4 = 40; I = 8%/4 = 2%) PV of the bonds Right-of-Use Asset (Truck) Lease liability (Truck)
$1,132 109,422 $110,554
110,554 110,554
©Cambridge Business Publishers, 2020 10-70
th
Financial Accounting for Undergraduates, 4 Edition
Problems Topic: Current Ratio and Times-Interest-Earned Ratio LO: 4 1. Selected balance sheet and income statement information for a jewelry company for 2017 through 2019 follows: ($millions) Net sales Interest expense Pretax income Net income Current assets Total assets Current liabilities
2019
2018
2017
$ 5,130 207 1,365 795 7,338
$8,547 110 1,281 660 6,147
$ 8,7844 90 2,026 969 5,766
9,306
9,003
2,457
2,405
10,469 2,450
a. Compute the current ratio for each year and discuss any trends. b. Compute times interest earned for each year and discuss any trends. Answer: a. Current ratio = Current assets / Current liabilities ($ millions) Current assets Divided by current liabilities = Current Ratio
2019
2018
2017
$7,338 2,450 3.00
$6,147 2,457 2.50
$5,766 2,405 2.40
The current ratio has increased slightly from 2017 through 2018 but increased more substantially from 2018 to 2019. Overall, their current ratio is at a healthy level. A high current ratio does not mean the company is safe from falling into liquidity problems. The company can still run into liquidity problems if its liabilities mature quicker than their current assets are converted into cash. We might benefit from additional information on the maturity schedule of liabilities and the expected conversion of its current assets into cash in order to evaluate the company’s short-term liquidity with more accuracy. b. Times interest earned = (Pre-tax Income + Interest expense) / Interest expense 2019: ($1,365 + $207) / $207 = 7.59 2018: ($1,281 + $110) / $110 = 12.65 2017: ($2,026 + $90) / $90 = 23.51 The 2019 times interest earned ratio is above the range (3.0 - 4.0) at which investment professionals believe is a relatively safe level. However, the downward trend of the times interest earned ratio over the years is concerning as the company’s ability to pay its current interest charges has declined over the past two years.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-71
Topic: Current Ratio and Times-Interest-Earned Ratio LO: 4 2. Selected balance sheet and income statement information for the office supply retailer, Organized Plus Co., for 2019 through 2017 follows: ($ thousands) Interest expense Pretax income Net income Current assets Total assets Current liabilities
$
2019
2018
2017
414,794 2,311,788 1,477,342 12,349,534 27,434,668 6,619,060
$262,105 2,486,168 1,610,528 11,594,516 26,146,110 8,479,538
$67,086 3,088,964 1,991,340 9,110,760 18,072,680 4,567,325
a. Compute the current ratio for each year and discuss any trends. b. Compute times-interest-earned ratio for each year and discuss any trends. Answer: a. 2019: $12,349,534 / $6,619,060 = 1.87 2018: $11,594,516 / $8,479,538 = 1.37 2017: $9,110,760 / $4,567,325 = 1.99 Organized Plus Co.’s current ratio has shown significant improvement from 2018 to 2019, although it is still below the company’s 2017 level. Overall, Organized Plus Co.’s current ratio shows the company has enough current assets to cover its current liabilities. b. 2019: ($2,311,788 + $414,794) / $414,794 = 6.57 2018: ($2,486,168 + $262,105) / $262,105 = 10.49 2017: ($3,088,964 + $ 67,086) / $ 67,086 = 47.04 Organized Plus Co.’s times interest earned ratios have significantly declined over the past year years. Although 6.57 is above the range that investment professionals consider a safe level (3.0 – 4.0), the significant decrease for the last two years is concerning.
©Cambridge Business Publishers, 2020 10-72
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Bond Pricing LO: 5—Appendix 10A 3. Broad Horizons, Inc. plans to issue 20-year notes with a face value of $14,400,000 and an annual coupon rate of 5.5%. The market rate of interest is 4%. Interest payments will be made semiannually. a. Compute the market value of the bonds. b. Assume the market rate remains at 4% after 5 years. How much cash will Bright Future, Inc. need to pay off the notes at this time? Answer: a. Interest payment = $14,400,000 × 5.5% × 6/12 = $396,000 PV of principal, n = 20 × 2 = 40; I = 4%/2 = 2% PV of interest payments, n = 20 × 2 = 40; I = 4%/2 = 2% Total present value
$14,400,000 × 0.45289 = $396,000 × 27.35548 =
N
I/Yr
PMT
PV (press)
FV
40
2
396,000
17,354,386
14,400,000
$ 6,521,616 $10,832,770 $17,354,386
b. Interest payment = $14,400,000 × 5.5% × 6/12 = $396,000 PV of principal, n = 15 × 2 = 30; I = 4%/2 = 2% PV of interest payments, n = 15 × 2 = 30; I = 4%/2 = 2% Total present value
$14,400,000 × 0.55207 = $396,000 × 22.39646 =
N
I/Yr
PMT
PV (press)
FV
30
2
396,000
16,818,817
14,400,000
$ 7,949,808 $ 8,868,998 $16,818,806
Topic: Present Value Using Tables LO: 5—Appendix 10A 4. Compute the present value for each of the following amounts. a. $150,000 received in 8 years if annual interest rate is: (1) 10% compounded annually or (2) 10% compounded semiannually b. $15,000 received at the end of each year for the next 4 years if the money is worth 8% per year compounded annually Answer: a. (1) Present value of $150,000 at n = 8; I = 10% $150,000 × 0.46651 = $69,977 (2) Present value of a sum of $150,000 at n = 8 × 2 = 16; I = 10%/2 = 5% $150,000 × 0.45811 = 68,717 b. Present value of an annuity of $15,000 at n = 4; I = 8% $15,000 × 3.31213 = $49,682
©Cambridge Business Publishers, 2020 Test Bank, Chapter 10
10-73
Topic: Bond Pricing LO: 5—Appendix 10A 5. Investment Company issues $1,500,000 of 8% bonds that pay interest semiannually and mature in 10 years. Compute the bonds’ issue price assuming that the bonds’ market interest rate is: a. 6% per year compounded semiannually b. 10% per year compounded semiannually Answer: Interest Payment = $1,500,000 × 8% × 6/12 = $60,000 a. Selling price of the bond discounted at 6%: PV of principal repayment ($1,500,000 x 0.55368*) = PV of interest payments ($60,000 x 14.87747**) =
$ 830,520 892,648 $1,723,168
*Present value of a sum, n = 10 x 2 = 20; I= 6%/2 = 3% **Present value of an annuity, n = 10 x 2 = 20; I = 6%/2 = 3%
N
I/Yr
PMT
PV (press)
FV
20
3
60000
1723162
1500000
b. Selling price of the bond discounted at 10%: PV of principal repayment ($1,500,000 × 0.37689*) = PV of interest payments ($60,000 × 12.46221**) =
$565,335 747,733 $1,313,068
*Present value of a sum, n = 10 x 2 = 20; I= 10%/2 = 5% **Present value of an annuity, n = 10 x 2 = 20; I = 10%/2 = 5%
N
I/Yr
PMT
PV (press)
FV
20
5
60000
1313067
1500000
©Cambridge Business Publishers, 2020 10-74
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Bond Pricing and Amortization LO: 5—Appendix 10A 6. Waveland Corporation issued $120,000,000 in bonds which mature in 5 years. The bonds pay an annual coupon rate of 10%. Interest payments are made semi-annually. The current market rate for similar bonds is 8%. a. At what price should this bond offering sell? b. Create a table showing the amortized premium or discount the first three years of the bonds. c. How much is the book value of the bonds at the end of the first year (2 payments)? Answer (using PV tables): a. Interest payment = $120,000,000 × 10% × 6/12 = $6,000,000 *Present value of a sum, n = 5 x 2 = 10; I= 8%/2 = 4% **Present value of an annuity, n = 5 x 2 = 10; I = 8%/2 = 4%
PV of principal = 0.67556* × $120,000,000 PV of interest payments = 8.11090** × $6,000,000 PV of the bonds
$ 81,067,200 48,665,400 $129,732,600
***(E – face amount)
b.
Period Issue 1 2 3 c.
A
B
C
D
E
Interest Paid (5% of face value)
Interest Expense (4% of bond value)
Amortization (A -B)
$6,000,000 6,000,000 6,000,000
$5,189,304 5,156,876 5,123,151
$810,696 843,124 876,849
Premium (D-C) $9,732,600*** 8,921,904 8,078,780 7,201,931
Bond Payable ($120,000,000 + D) $129,732,600 128,921,904 128,078,780 127,201,931
$128,921,904
Answer (using financial calculator): a. Interest payment = $120,000,000 × 10% × 6/12 = $6,000,000
N
I/Yr
PMT
PV (press)
FV
10
4
6,000,000
129,733,075
120,000,000
D
***(E – face amount)
b.
Period Issue 1 2 3 c.
A
B
C
Interest Paid (5% of face value)
Interest Expense (4% of bond value)
Amortization (A -B)
$6,000,000 6,000,000 6,000,000
$5,189,323 5,156,896 5,123,172
$810,677 $843,104 $876,828
Premium (D-C) $9,733,075*** 8,922,398 8,079,294 7,202,466
E Bond Payable ($120,000,000 + D) $129,733,075 128,922,398 128,079,294 127,202,466
$128,922,398 ©Cambridge Business Publishers, 2020
Test Bank, Chapter 10
10-75
Chapter 11 Stockholders’ Equity Learning Objectives – Coverage by question True / False
Multiple Choice
Exercises
Problems
LO1 – Define the corporate form of organization and discuss its principal characteristics.
10-13
21-25
LO2 – Explain the difference between par value stock and no-par value stock.
14, 15
1, 26, 27
LO3 – Identify and discuss the two types of capital stock and their respective stockholder rights.
5, 16-18
3, 7, 11-13, 19, 20, 28-40
13, 14
1, 2
LO4 – Describe the accounting for issuances of capital stock.
1, 19
4-6, 14, 41 - 53, 87-92
1-3, 6, 7, 10-12, 15, 16
1
LO5 – Define and discuss the accounting for stock splits.
20, 21, 24
8, 9, 15-18, 54-57
8, 9
LO6 – Explain the accounting for treasury stock.
2, 3, 6, 9, 22
50-53, 58-61, 82, 93-104
1-3, 6, 7, 9, 11, 12, 15, 16
LO7 – Identify and distinguish between cash dividends and stock dividends.
3, 4, 7, 8, 25-28
2, 10, 20, 68-72, 82, 105-122
2-5, 13-14 18-20
LO8 – Illustrate the statement of retained earnings and the statement of stockholders’ equity.
29, 30
76-81, 83-86
1, 2
LO9 – Define the return on common stockholders’ equity, dividend yield, and dividend payout ratio and explain their use.
23, 24
62-67
17
3, 4
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-1
Chapter 11: Stockholders’ Equity
True / False Topic: Cost vs. Market Value of Stockholders’ Equity LO: 4 1. Stockholders’ equity represents the current market value of a company. Answer: False Rationale: Stockholders’ equity is accounted for at historical cost. Topic: Gains (Losses) on Stock Transactions LO: 6 2. Companies must report ‘gains and losses’ on transactions relating to purchases and sales of their own stock on the income statement as other income or expense. Answer: False Rationale: Companies are prohibited by GAAP from reporting ‘gains and losses’ of their own stock on the income statement. Instead, the “gain” (“loss”) is credited (debited) to Additional Paidin Capital. Topic: Gains (Losses) on Stock Transactions LO: 6, 7 3. There are never any income statement effects recognized when a purchase or sale of stock or payment of dividends occurs. Answer: True Rationale: Any “gains” or “losses” incurred due to the purchase and sale of stock are reflected as increases (decreases) in the paid-in-capital component of stockholders’ equity. Dividends are reflected as decreases in the retained earnings component of stockholders’ equity. Topic: Income Statement Treatment of Dividends LO: 7 4. A company’s profit declines when dividends are paid because a company must recognize an expense for the amount of the dividend. Answer: False Rationale: Declaration and payment of cash dividends reduces cash and retained earnings, and is not recorded as an expense in the income statement. Topic: Preferred Preference in Bankruptcy LO: 3 5. If Heinz loses its dominance in the ketchup market and eventually goes “belly up”, its preferred shareholders carry senior positions as claimants in bankruptcy over the common shareholders. Answer: True Rationale: Preferred shareholders carry senior positions to common shareholders in liquidation distributions.
©Cambridge Business Publishers, 2020 11-2
Financial Accounting for Undergraduates, 4th Edition
Topic: Sale of Treasury Stock LO: 6 6. A re-issuance of treasury stock has the potential to yield a gain or loss on the income statement. Answer: False Rationale: The difference between the proceeds received and the original repurchase price of the treasury stock is reflected as an increase or decrease in the additional paid-in capital component of stockholders’ equity. Topic: Cash Dividends LO: 7 7. Cash dividends reduce both cash and retained earnings by the amount of the dividends paid. Answer: True Topic: Large Stock Dividends LO: 7 8. When a “large” stock dividend is paid out, retained earnings are reduced by the market value of the dividend. Answer: False Rationale: When a large stock dividend is paid, retained earnings are reduced by the par value of the dividend. Retained earnings are reduced by the market value of the stock dividend if it is considered to be a “small” stock dividend. Topic: IFRS Accounting for Treasury Stock Repurchases LO: 6 9. IFRS allows the repurchase of a company’s own stock to be reported as a decrease to the common equity amounts in stockholders’ equity. Answer: True Rationale: IFRS is similar to GAAP in reporting treasury stock in the financial statements. Topic: Equity in Different Organizational Forms LO: 1 10. The principal difference in the financial statements of proprietorships, partnerships, and corporations is in the asset section of the balance sheet. Answer: False Rationale: The principal difference in the financial statements of proprietorships, partnerships, and corporations is in the equity section of the balance sheet. Topic: Corporation Regulation and Supervision LO: 1 11. Corporations are subject to greater degrees of regulation and supervision than are proprietorships and partnerships. Answer: True
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-3
Topic: Limited Liability LO: 1 12. Stockholders of a corporation have unlimited liability; that is, they are responsible separately and collectively for unsatisfied obligations of the corporation. Answer: False Rationale: The liability of stockholders with respect to a company’s business affairs is usually limited to the value of their investment in the corporation. Topic: Corporation Taxation LO: 1 13. Corporations pay an income tax only on that portion of their earnings that is distributed to stockholders as dividends. Answer: False Rationale: Corporations are subject to federal income taxes on any earned income. Stockholders are likewise subject to income taxation on any income received from a corporation as dividends, leading to a situation of double taxation of a corporation’s distributed earnings. Topic: Par Value LO: 2 14. The par value of a stock represents the market value of the stock on the date it is first issued. Answer: False Rationale: In the early days of corporate stock issuances, par value represented the market value of the stock when it was issued. In more recent times, however, par values have typically been set at amounts well below a stocks’ fair market value on the date of issue. As a consequence, a stock’s par value has no economic significance today. Topic: No-Par Value LO: 2 15. No-par stock refers to the stock of a corporation whose current market price has fallen below its par value. Answer: False Rationale: Most states permit the issuance of capital stock without a par value, called no-par value stock. The company’s board of directors, however, usually sets a stated value for the no-par stock. In such cases, the stated value will determine the corporation’s legal capital. Topic: Cumulative Feature LO: 3 16. The cumulative feature on preferred stock means that regular dividends to preferred stockholders omitted in past years must be paid in addition to the current year’s dividend before any dividend distribution may be made to common stockholders. Answer: True
©Cambridge Business Publishers, 2020 11-4
Financial Accounting for Undergraduates, 4th Edition
Topic: Residual Ownership LO: 3 17. Preferred stockholders compose the basic, residual ownership class in a corporation. Answer: False Rationale: When a corporation liquidates, it converts its assets to a form suitable for distribution, usually cash, which it then distributes to all parties (including preferred stockholders) having claims on the corporate assets. Any assets remaining after all claims have been satisfied belong to the residual owners of the corporation—common stockholders. Topic: Issued Shares LO: 3 18. For a corporation, the shares of outstanding stock plus the shares of treasury stock equals the shares of issued stock. Answer: True Topic: Noncash Stock Issuances LO: 4 19. Property or services received in exchange for capital stock should be recorded at the par or stated value of the shares issued. Answer: False Rationale: When property or services are received in exchange for capital stock, the exchange is recorded at the fair value of the services or property received. Topic: Stock Splits LO: 5 20. A forward stock split reduces the dollar balance of the stock account whose stock is split. Answer: False Rationale: A forward stock split increases the number of shares outstanding and is accounted for by reducing the par value or stated value of the stock affected. A forward stock split does not change the balances of any of the stockholders’ equity accounts. Topic: Stock Splits LO: 5 21. The primary reason for a stock split is to reduce the market price of the stock. Answer: True Topic: Treasury Stock LO: 6 22. Treasury stock is classified as a long-term investment in the balance sheet. Answer: False Rationale: The Treasury Stock account is a contra-stockholders’ equity account and its balance is deducted when deriving total stockholders’ equity on the balance sheet.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-5
Topic: Return on Common Stockholders’ Equity LO: 9 23. Return on common stockholders’ equity is computed by dividing the annual net income available to common stockholders by the average common stockholders’ equity for the year. Answer: True Topic: Return on Common Stockholders’ Equity and Stock Splits LO: 5, 9 24. If a firm splits its common stock three for one at year-end, then the return on common stockholders’ equity will be lower than what it would have been without the stock split. Answer: False Rationale: The return on common stockholders’ equity is calculated as: (net income – preferred stock dividends) divided by average common stockholders’ equity. A forward stock split does not change the balances of any of the stockholders’ equity accounts. Since the stockholders’ equity account (the ratio denominator) does not change, the ratio does not change as a result of the stock split. Topic: Stock Dividend Distributable LO: 7 25. The Stock Dividend Distributable account should be classified on the balance sheet as a current liability. Answer: False Rationale: If a balance sheet is prepared between the declaration date and the distribution date of a stock dividend, the Stock Dividend Distributable account is shown in stockholders’ equity immediately after the Common Stock account. Topic: Stock Dividends LO: 7 26. The accounting for large stock dividends (those over 25%) differs from the accounting for small stock dividends (those less than 25%). Answer: True Topic: Cash Dividends LO: 7 27. Cash dividends become an obligation of the corporation on the date they are declared by the board of directors. Answer: True Topic: Cash Dividends LO: 7 28. Cash dividends are paid to those stockholders who own the shares of stock on the dividend payment date. Answer: False Rationale: At the date of declaration a record date and payment date are established. Stockholders owning stock on the declaration date receive the dividend even if they dispose of their shares before the payment date. Therefore, shares sold between the record date and the payment date, are sold ex dividend—that is, they are sold without the right to receive the dividend.
©Cambridge Business Publishers, 2020 11-6
Financial Accounting for Undergraduates, 4th Edition
Topic: Statement of Stockholders’ Equity LO: 8 29. A statement of stockholders’ equity includes an analysis of the Retained Earnings account for the accounting period. Answer: True Topic: Statement of Retained Earnings LO: 8 30. A statement of retained earnings will disclose the amount of net income (or loss) for the accounting period. Answer: True
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-7
Multiple Choice Topic: Par Value LO: 2 Level of Difficulty: EASY 1. Which best describes par value for stock? A) An arbitrary amount set by the company for each share of stock B) The value at which stock shares were issued C) The current market value of the stock D) The amount expected to be paid out as a dividend on a share of stock Answer: A Rationale: The par value is an arbitrary amount specified in the corporate charter for each share of stock. Generally, it has no substance from a financial reporting or statement analysis perspective. Topic: Small Stock Dividends LO: 7 Level of Difficulty: MEDIUM 2. For small stock dividends, by what amount are retained earnings reduced? A) Par value of the dividend B) Book value of the dividend C) Par value of the stock D) Market value of the dividend Answer: D Topic: Convertible Securities LO: 3 Level of Difficulty: MEDIUM 3. Which benefits do convertible preferred stockholders hold? I. The securities carry a fixed dividend yield. II. The securities carry a senior claimant position in bankruptcy. III. The owner can convert the debt or equity security into another equity security. A) B) C) D)
I and II II and III I only I, II, and III
Answer: D Rationale: A convertible security has all of the benefits listed. Topic: Paid-In Capital LO: 4 Level of Difficulty: EASY 4. Which one of the following selections is a not component of Paid-in Capital? A) Retained earnings B) Common stock C) Additional paid-In capital D) All of the above Answer: A Rationale: Retained earnings is a separate component of stockholder’s equity.
©Cambridge Business Publishers, 2020 11-8
Financial Accounting for Undergraduates, 4th Edition
Topic: Accounting for Stock Issuance LO: 4 Level of Difficulty: MEDIUM 5. If a company issues 10,000 shares of $6 par value common stock at a market price of $90 per share, which of the following is the correct balance sheet entry? A) Increase cash by $900,000 and increase paid-in capital by $900,000 B) Increase cash by $900,000 and increase retained earnings by $900,000 C) Increase revenues by $900,000 D) Increase common stock and cash by $60,000 Answer: A Topic: Accounting for Stock Issuance LO: 4 Level of Difficulty: MEDIUM 6. If a company issues 10,000 shares of $8 par value common stock at a market price of $120 per share, which of the following is the correct balance sheet entry? A) Increase cash by $1,200,000 and increase paid-in capital by $1,200,000 B) Increase cash by $1,200,000 and increase retained earnings by $1,200,000 C) Increase revenues by $1,200,000 D) Increase common stock and cash by $80,000 Answer: A Topic: Dividend Preference for Preferred Stock LO: 3 Level of Difficulty: EASY 7. In October 2019, Illini Corporation distributed profits to its preferred shareholders before its common shareholders. What is the name of the preference that allows this? A) Asset distribution preference B) Treasury preference C) Dividend preference D) Profits preference Answer: C Rationale: Dividend preference refers to the fact that preferred shareholders receive dividends on their shares before common shareholders receive their dividends. Topic: Stock Split LO: 5 Level of Difficulty: MEDIUM 8. During May 2019, Mathew Outdoor Corporation announced a 3-for-1 forward stock split. This brought the number of shares outstanding from 25,792,000 shares to ___________ shares, and its $1.80 par value to _______ per share. A) 8,597,334; $5.40 B) 8,897,334; $0.60 C) 77,376,000; $5.40 D) 77,376,000; $0.60 Answer: D Rationale: 25,792,000 × 3 = 77,376,000 shares; Par value = $1.80/3 = $0.60 per share
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-9
Topic: Stock Split LO: 5 Level of Difficulty: MEDIUM 9. During May 2019, Brian Outdoor Corporation announced a 4-for-1 stock split. This brought the number of shares outstanding from 14,681,000 shares to ___________ shares, and its $5.40 par value to _____ per share. A) 3,670,250; $21.60 B) 3,670,250; $ 1.35 C) 58,724,000; $21.60 D) 58,724,000; $ 1.35 Answer: D Rationale: 14,681,000 million × 4 = 58,724,000 shares; Par value = $5.40/4 = $1.35 per share Topic: Large Stock Dividend LO: 7 Level of Difficulty: MEDIUM 10. Oma Company plans to issue a large stock dividend. In accounting for this transaction, what effects occur to the contributed capital section of stockholders’ equity? A) Common stock increases by the total market value of the dividend B) Common stock increases by the number of dividend shares × par value per share, and retained earnings decreases for the same amount C) Common stock increases by the number of dividend shares × par value per share, and retained earnings increases for the balance D) Retained earnings increases by the number of dividend shares × par value per share, and additional paid-in capital increases for the balance Answer: B Rationale: Common stock increased by: Dividend shares × Par value per share. Retained earnings is decreased by the same amount. Topic: Dividend Preference LO: 3 Level of Difficulty: MEDIUM 11. Ponce Company has 50,000 shares of $100 par value, 8% cumulative preferred stock and 160,000 shares of $60 par value common stock. Ponce declares and pays cash dividends amounting to $440,000. If no arrearage on the preferred stock exits, how much in total dividends is paid to each class of stock? A) Preferred Common $440,000 $0 B) Preferred Common $128,000 $312,000 C) Preferred Common $320,000 $120,000 D) Preferred Common $400,000 $40,000 Answer: D Rationale: $100 × 50,000 × 8% = $400,000 Balance to common: $440,000 - $400,000 = $40,000 ©Cambridge Business Publishers, 2020 11-10
Financial Accounting for Undergraduates, 4th Edition
Topic: Dividend Preference LO: 3 Level of Difficulty: MEDIUM 12. Nunez Company has 50,000 shares of $300 par value, 8% cumulative preferred stock and 160,000 shares of $180 par value common stock. Nunez declares and pays cash dividends amounting to $1,320,000. If no arrearage on the preferred stock exits, how much in total dividends is paid to each class of stock? A) Preferred Common $1,320,000 $0 B) Preferred Common $389,000 $936,000 C) Preferred Common $960,000 $360,000 D) Preferred Common $1,200,000 $120,000 Answer: D Rationale: $300 × 50,000 × 8% = $1,200,000 Balance to common: $1,320,000 - $1.200,000 = $120,000 Topic: Asset Distribution Preference LO: 3 Level of Difficulty: MEDIUM 13. As a preferred stockholder, you are entitled to numerous preferences and privileges over common stockholders. If you are a preferred stockholder of a company that has fallen on economic hardship and is likely to go bankrupt, which preference or privilege of preferred stock is going to be most useful to you? A) Dividend preference B) Asset distribution preference C) Conversion privileges D) Participation privilege Answer: B Rationale: If a company fails, its assets are sold and the proceeds are paid to debt holders and stockholders, in that order. Preferred shareholders receive payment in full before common shareholders. Topic: Paid-In Capital LO: 4 Level of Difficulty: EASY 14. In what section of the stockholders’ equity portion of the balance sheet can preferred stock, common stock, and additional paid-in capital be found? A) Paid-in capital B) Treasury stock C) Earned capital D) Retained earnings Answer: A Rationale: All stock accounts are found in the paid-in capital section of stockholders’ equity.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-11
USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 15 & 16. On September 1, 2019, Nichole Company’s balance sheet indicates there are 1,800,000 shares of $60 par value common shares in the Common Stock account and $1,350,000 in the Additional Paid-in Capital account. There are 3,000,000 shares authorized. On September 2, Nichole splits its stock 2 for 1.
Topic: Stock Split LO: 5 Level of Difficulty: MEDIUM 15. How many shares of Nichole common stock are issued and outstanding immediately after the stock split? A) 900,000 B) 3,600,000 C) 4,200,000 D) 12,000,000 Answer: B Rationale: Immediately after the 2 for 1 stock split, the company has 3,600,000 (1,800,000 x 2) shares of $30 ($60 / 2) par value common stock issued and outstanding. Topic: Stock Split LO: 5 Level of Difficulty: EASY 16. What is the dollar balance of Nichole’s common stock account immediately after the stock split? A) $ 54,000,000 B) $108,000,000 C) $ 27,000,000 D) $216,000,000 Answer: B Rationale: The dollar balance in the Common Stock account is unchanged by the stock split; the balance remains at $108,000,000 (3,600,000 shares x $30 par value per share).
©Cambridge Business Publishers, 2020 11-12
Financial Accounting for Undergraduates, 4th Edition
USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 17 & 18. On September 1, 2019, CNN Company’s balance sheet indicates there are 1,800,000 shares of $120 par value common shares in the Common Stock account and $18,000,000 in the Additional Paid-in Capital account. There are 4,000,000 shares authorized. On September 2, CNN splits its stock 2 for 1.
Topic: Stock Split LO: 5 Level of Difficulty: MEDIUM 17. How many shares of CNN common stock are issued and outstanding immediately after the stock split? A) 1,200,000 B) 4,800,000 C) 3,600,000 D) 16,000,000 Answer: C Rationale: Immediately after the 2 for 1 stock split, the company has 3,600,000 (1,800,000 ´ 2) shares of $60 [$120 / 2] par value common stock issued and outstanding. Topic: Stock Split LO: 5 Level of Difficulty: EASY 18. What is the dollar balance of CNN’s common stock account immediately after the stock split? A) $ 36,000,000 B) $216,000,000 C) $ 18,000,000 D) $144,000,000 Answer: B Rationale: The dollar balance in the Common Stock account is unchanged by the stock split; the balance remains at $216,000,000 (3,600,000 shares x $60 par value per share). Topic: Dividends LO: 3 Level of Difficulty: MEDIUM 19. Jessie Company has 40,000 shares of $240 par value, 5% cumulative preferred stock and 140,000 shares of $60 par value common stock. Jessie declares and pays cash dividends amounting to $675,000. If no arrearage on the preferred stock exists, how much in dividends per share (use two decimal places) is paid to the common stockholders? A) $ 1.39 B) $11.92 C) $ 2.98 D) $ 4.80 Answer: A Rationale:
$240 × 40,000 × 5% Balance to common ($675,000 - $480,000) Per share to common: $195,000/140,000 shares
Distribution to Preferred Common $480,000 $195,000 $1.39
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-13
Topic: Dividends LO: 3, 7 Level of Difficulty: MEDIUM 20. Alicia Company has 40,000 shares of $320 par value, 5% cumulative preferred stock and 140,000 shares of $80 par value common stock. Alicia declares and pays cash dividends amounting to $900,000. If no arrearage on the preferred stock exists, how much in dividends per share (use two decimal places) is paid to the common stockholders? A) $ 1.86 B) $16.00 C) $ 4.00 D) $ 6.44 Answer: A Rationale:
$320 × 40,000 × 5% Balance to common ($900,000 - $640,000) Per share to common: $260,000/140,000 shares
Distribution to Preferred Common $640,000 $260,000 $1.86
Topic: Disadvantages of the Corporate Form of Organization LO: 1 Level of Difficulty: EASY 21. Which of the following is an organizational disadvantage of a corporation? A) Separate legal entity B) Taxable entity C) Relative ease of ownership transfer D) Limited liability of owners Answer: B Rationale: The organizational disadvantages of a corporation include organization costs, taxation, regulation, and supervision. Topic: Advantages of the Corporate Form of Organization LO: 1 Level of Difficulty: EASY 22. Which of the following is an organizational advantage of a corporation? A) Nontaxable entity B) Legal entity separate from the owners C) Unlimited liability of owners D) Limited ability to raise capital Answer: B Rationale: The organizational advantages of a corporation include being a separate legal entity, having limited liability, ease of transferability of ownership, having continuity of existence, and the ease of raising capital.
©Cambridge Business Publishers, 2020 11-14
Financial Accounting for Undergraduates, 4th Edition
Topic: Disadvantages of the Corporate Form of Organization LO: 1 Level of Difficulty: EASY 23. A corporation: A) Is less costly to organize than a partnership B) Is subject to less regulation and supervision than a partnership C) Is subject to federal income taxes on its earnings, whereas a partnership is not D) Has an owner’s capital account for each owner, whereas a partnership does not Answer: C Rationale: The organizational disadvantages of a corporation include organization costs, taxation, regulation, and supervision. Topic: Characteristic of a Corporation LO: 1 Level of Difficulty: EASY 24. A corporation: A) Maintains separate capital and drawing accounts for each owner B) May acquire assets, incur debt, and enter into contracts in its own name C) Sells articles of incorporation to obtain funds to acquire operating assets D) Pays state income taxes but is not subject to the federal income tax Answer: B Topic: Articles of Incorporation LO: 1 Level of Difficulty: EASY 25. The document that sets forth the structure and purposes of a corporation is the: A) Charter B) Certificate of common stock C) Certificate of incorporation D) Articles of incorporation Answer: D Topic: Par Value LO: 2 Level of Difficulty: EASY 26. The face value for a share of stock, which may be specified in a corporate charter, is the stock’s: A) Liquidation value B) Stated value C) Par value D) Book value Answer: C Topic: Legal Capital LO: 2 Level of Difficulty: EASY 27. The minimum amount of contributed capital that must remain in the corporation as a margin of protection for creditors is called the: A) Paid-in capital B) Legal capital C) Retained earnings D) Treasury stock Answer: B ©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-15
Topic: Common Stock LO: 3 Level of Difficulty: MEDIUM 28. When only one class of stock is issued by a corporation, it should be termed: A) Authorized stock B) Treasury stock C) Common stock D) Preferred stock Answer: C Topic: Authorized, Issued, and Outstanding Shares LO: 3 Level of Difficulty: MEDIUM 29. Which of the following statements is correct? A) A corporation’s issued stock may exceed its outstanding stock. B) A corporation’s outstanding stock may exceed its authorized stock. C) A corporation’s issued stock may exceed its authorized stock. D) A corporation’s treasury stock may exceed its issued stock. Answer: A Rationale: Authorized shares are the maximum number of shares of stock that may be issued. Issued shares are the shares that have been sold and issued to stockholders. Issued shares also include shares repurchased by the corporation. Shares actually held by stockholders are called outstanding shares. Topic: Preemptive Right LO: 3 Level of Difficulty: EASY 30. Which of the following rights allows a shareholder of a corporation to maintain his or her proportionate interest in the corporation? A) Preemptive right B) Participation right C) Preferred right D) Cumulative right Answer: A Topic: Common Stockholders LO: 3 Level of Difficulty: MEDIUM 31. Which of the following rights do common stockholders typically not have? A) Right to vote and the right to elect the board of directors B) Right to receive the final distribution of assets in liquidation after prior claims have been settled C) Right to participate in additional issues of stock D) Right to receive dividends at a predetermined rate Answer: D Rationale: Common stockholders have the right to vote on corporate matters, to share in the corporation’s net income, to participate in additional issuances of stock, and in the case of a corporate liquidation, to share in any asset distributions after any prior claims against the corporation by its creditors have been settled. Common stockholders do not have a right to receive dividends at a predetermined rate.
©Cambridge Business Publishers, 2020 11-16
Financial Accounting for Undergraduates, 4th Edition
Topic: Preemptive Right LO: 3 Level of Difficulty: EASY 32. The preemptive right refers to the right of common stockholders to: A) Receive dividends before interest is paid to creditors B) Receive assets before preferred stockholders when the corporation dissolves C) Maintain their proportionate interests in the corporation when additional shares are issued D) Vote on matters requiring the approval of owners Answer: C . Topic: Cumulative Dividends LO: 3 Level of Difficulty: MEDIUM 33. Altgeld, Inc., has outstanding 10,000 shares of $150 par value, 7% nonparticipating, cumulative preferred stock and 10,000 shares of $30 par value common stock. If the dividend on preferred stock is one year in arrears, and the total cash dividend declared this year is $216,000, then the total amounts distributed to preferred and common stockholders, respectively, are: A) $ 63,000 and $153,000 B) $210,000 and $ 6,000 C) $105,000 and $111,000 D) $180,000 and $ 36,000 Answer: B Rationale: To preferred (7% x $1,500,000) x 2 years: $210,000 Remainder to common: $6,000 Topic: Cumulative Dividends LO: 3 Level of Difficulty: MEDIUM 34. Belmont, Inc., has outstanding 10,000 shares of $200 par value, 7% nonparticipating, cumulative preferred stock and 10,000 shares of $40 par value common stock. If the dividend on preferred stock is one year in arrears, and the total cash dividend declared this year is $288,000, then the total amounts distributed to preferred and common stockholders, respectively, are: A) $ 84,000 and $204,000 B) $280,000 and $ 8,000 C) $108,000 and $180,000 D) $240,000 and $ 48,000 Answer: B Rationale: To preferred (7% x $2,000,000) x 2 years: $280,000 Remainder to common: $8,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-17
Topic: Cumulative Dividends LO: 3 Level of Difficulty: MEDIUM 35. Kimball, Inc., has outstanding 10,000 shares of $75 par value, 6% nonparticipating, cumulative preferred stock and 16,000 shares of $15 par value common stock. If the dividend on preferred stock is two years in arrears, and the total cash dividend declared this year is $255,000, then the total amounts distributed to preferred and common stockholders, respectively, are: A) $135,000 and $120,000 B) $ 40,500 and $214,500 C) $ 90,000 and $165,000 D) $ 81,000 and $174,000 Answer: A Rationale: To preferred (6% x $750,000) x 3 years: $135,000 Remainder to common: $120,000 Topic: Cumulative Dividends LO: 3 Level of Difficulty: MEDIUM 36. Hinman, Inc., has outstanding 10,000 shares of $100 par value, 6% nonparticipating, cumulative preferred stock and 16,000 shares of $20 par value common stock. If the dividend on preferred stock is two years in arrears, and the total cash dividend declared this year is $340,000, then the total amounts distributed to preferred and common stockholders, respectively, are: A) $180,000 and $160,000 B) $ 54,000 and $286,000 C) $127,500 and $212,500 D) $108,000 and $232,000 Answer: A Rationale: To preferred (6% x $1,000,000) x 3 years: $180,000 Remainder to common: $160,000 Topic: Cumulative Dividends LO: 3 Level of Difficulty: MEDIUM 37. Annabeth, Inc. has outstanding 8,000 shares of $150 par value, 8% nonparticipating, cumulative preferred stock, and 20,000 shares of $45 par value common stock. If the dividend on preferred stock is one year in arrears, and the total cash dividend declared this year is $420,000, the total amounts distributed to preferred and common stockholders are, respectively: A) $192,000 and $228,000 B) $ 96,000 and $324,000 C) $120,000 and $300,000 D) $180,000 and $240,000 Answer: A Rationale: To preferred (8% x $1,200,000) x 2 years: $192,000 Remainder to common: $228,000
©Cambridge Business Publishers, 2020 11-18
Financial Accounting for Undergraduates, 4th Edition
Topic: Cumulative Dividends LO: 3 Level of Difficulty: MEDIUM 38. Wilson, Inc. has outstanding 20,000 shares of $80 par value, 6% nonparticipating, cumulative preferred stock, and 30,000 shares of $20 par value common stock. If the dividend on preferred stock is two years in arrears, and the total cash dividend declared this year is $414,000, the total amounts distributed to preferred and common stockholders are, respectively: A) $ 96,000 and $318,000 B) $192,000 and $222,000 C) $ 48,000 and $366,000 D) $288,000 and $126,000 Answer: D Rationale: To preferred (6% x $1,600,000) x 3 years: $288,000 Remainder to common: $126,000 Topic: Callable Stock LO: 3 Level of Difficulty: MEDIUM 39. A particular stock may be redeemed at a specified price by the issuing corporation at a certain time after its original issue date. This stock is properly considered: A) Convertible B) Participating C) Cumulative D) Callable Answer: D Topic: Dividends in Arrears LO: 3 Level of Difficulty: MEDIUM 40. Assume that a corporation’s dividends are two years in arrears for its outstanding preferred stock. In the corporation’s financial statements, these arrearages are: A) Disclosed as a current liability in the balance sheet B) Disclosed as a long-term liability in the balance sheet C) Disclosed in the notes to the financial statements D) Disclosed as a current liability (for the most recent arrearage) and a long-term liability (for the oldest arrearage) in the balance sheet Answer: C
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-19
Topic: Stock Issuance Journal Entries LO: 4 Level of Difficulty: MEDIUM 41. Bandit, Inc. issued, for $57 per share, 5,000 shares of $30 par value common stock. The journal entry to record this transaction is: A) Cash
285,000 Common Stock
B) Cash
285,000 285,000
Common Stock Paid-in Capital in Excess of Par Value C) Cash
150,000 135,000 285,000
Common Stock Retained Earnings D) Cash
150,000 135,000 285,000
Common Stock Gain on Sale of Stock
150,000 135,000
Answer: B Rationale: Cash received = $57 x 5,000 shares = $285,000 Common stock = $30 par x 5,000 shares = $150,000 Paid–in capital = ($57 - $30) x 5,000 shares = $135,000 Topic: Stock Issuance Journal Entries LO: 4 Level of Difficulty: MEDIUM 42. Minerva, Inc. issued, for $76 per share, 5,000 shares of $40 par value common stock. The journal entry to record this transaction is: A) Cash
380,000 Common Stock
B) Cash
380,000 380,000
Common Stock Paid-in Capital in Excess of Par Value C) Cash
200,000 180,000 380,000
Common Stock Retained Earnings D) Cash
200,000 180,000 380,000
Common Stock Gain on Sale of Stock
200,000 180,000
Answer: B Rationale: Cash received = $76 x 5,000 shares = $380,000 Common stock = $40 par x 5,000 shares = $200,000 Paid–in capital = ($76 - $40) x 5,000 shares = $180,000
©Cambridge Business Publishers, 2020 11-20
Financial Accounting for Undergraduates, 4th Edition
Topic: Stock Issuance Journal Entries LO: 4 Level of Difficulty: MEDIUM 43. Tatro, Inc. issued, for $60 per share, 4,000 shares of $45 par value common stock. The journal entry to record this transaction is: A) Cash
240,000 Common Stock
B) Cash
240,000 240,000
Common Stock Paid-in Capital in Excess of Par Value C) Cash
180,000 60,000 240,000
Common Stock Retained Earnings D) Cash
180,000 60,000 240,000
Common Stock Gain on Sale of Stock
180,000 60,000
Answer: B Rationale: Cash received = $60 x 4,000 shares = $240,000 Common stock = $45 par x 4,000 shares = $180,000 Paid–in capital = ($60 - $45) x 4,000 shares = $60,000 Topic: Stock Issuance Journal Entries LO: 4 Level of Difficulty: MEDIUM 44. Kailey, Inc. issued 20,000 shares of no-par common stock, stated value $20, at $32 cash per share. The journal entry to record this transaction is: A) Cash
640,000 Common Stock
B) Cash
640,000 640,000
Common Stock Paid-in Capital in Excess of Par Value C) Cash D) Cash
400,000 240,000 640,000
Common Stock Retained Earnings
400,000 240,000
640,000 Common Stock Paid-in Capital in Excess of Stated Value
400,000 240,000
Answer: D Rationale: Cash received = $32 x 20,000 shares = $640,000 Common stock = $20 stated value x 20,000 shares = $400,000 Paid–in capital = ($32 - $20) x 20,000 shares = $240,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-21
Topic: Stock Issuance Journal Entries LO: 4 Level of Difficulty: MEDIUM 45. Elijah, Inc. issued 20,000 shares of no-par common stock, stated value $60, at $96 cash per share. The journal entry to record this transaction is: A) Cash
1,920,000 Common Stock
B) Cash
1,920,000 1,920,000
Common Stock Paid-in Capital in Excess of Par Value C) Cash D) Cash
1,200,000 720,000 1,920,000
Common Stock Retained Earnings
1,200,000 720,000
1,920,000 Common Stock Paid-in Capital in Excess of Stated Value
1,200,000 720,000
Answer: D Rationale: Cash received = $96 x 20,000 shares = $1,920,000 Common stock = $60 stated value x 20,000 shares = $1,200,000 Paid –in capital = ($96 - $60) x 20,000 shares = $720,000 Topic: Stock Issuance Journal Entries LO: 4 Level of Difficulty: MEDIUM 46. Necessities, Inc. issued 750 shares of no-par common stock, with no stated value, for $60 cash per share. The journal entry to record this transaction is: A) Cash
45,000 Common Stock
B) Cash
45,000 45,000
Paid-in Capital in Excess of Par Value C) Cash
45,000 45,000
Common Stock Paid-in Capital in Excess of Par Value D) Cash
15,000 30,000 45,000
Common Stock Paid-in Capital in Excess of Par Value
750 44,250
Answer: A Rationale: This is no-par common stock with no stated value. If there is no stated value for the no-par value stock, the entire proceeds are credited to the appropriate capital stock account ($60 x 750 shares = $45,000).
©Cambridge Business Publishers, 2020 11-22
Financial Accounting for Undergraduates, 4th Edition
Topic: Stock Issuance Journal Entries LO: 4 Level of Difficulty: MEDIUM 47. Finest, Inc. issued 750 shares of no-par common stock, with no stated value, for $180 cash per share. The journal entry to record this transaction is: A) Cash
135,000 Common Stock
B) Cash
135,000 135,000
Paid-in Capital in Excess of Par Value C) Cash
135,000 135,000
Common Stock Paid-in Capital in Excess of Par Value D) Cash
45,000 90,000 135,000
Common Stock Paid-in Capital in Excess of Par Value
1,800 133,200
Answer: A Rationale: This is no-par common stock with no stated value. If there is no stated value for the no-par value stock, the entire proceeds are credited to the appropriate capital stock account ($180 x 750 shares = $135,000). Topic: Noncash Stock Issuances LO: 4 Level of Difficulty: MEDIUM 48. On June 1, 2019, 4,000 shares of $20 par value common stock are issued in exchange for new equipment. Comparable equipment sells for $116,000 cash. Other shares of this class of common stock originally sold for $13 per share in 2019. The journal entry to record this exchange should debit the Equipment account for what amount? A) $116,000 B) $ 80,000 C) $104,000 D) $-0Answer: A Topic: Noncash Stock Issuances LO: 4 Level of Difficulty: MEDIUM 49. On June 1, 2019, 4,000 shares of $60 par value common stock are issued in exchange for new equipment. Comparable equipment sells for $348,000 cash. Other shares of this class of common stock originally sold for $39 per share in 2019. The journal entry to record this exchange should debit the Equipment account for what amount? A) $348,000 B) $240,000 C) $312,000 D) $-0Answer: A Rationale: Stock issued in exchange for operating assets is accounted for using the fair value of the asset received.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-23
Topic: Common Stock and Treasury Stock Transactions LO: 4, 6 Level of Difficulty: MEDIUM 50. Circe Corporation was organized on January 1, 2019, with an authorization of 2,000,000 shares of $10 par value common stock. During 2019, Circe had the following common stock transactions: Jan. 4: Apr. 8: June 9: July 29: Dec. 31:
Issued 100,000 shares @ $12 per share. Issued 200,000 shares @ $14 per share. Issued 60,000 shares @ $20 per share. Purchased 40,000 shares (treasury) @ $20 per share. Sold 40,000 shares held in treasury @ $24 per share.
Circe had no other transactions affecting paid-in capital. At December 31, 2019, what is the total amount of paid-in capital? A) $5,360,000 B) $3,600,000 C) $1,840,000 D) $1,600,000 Answer: A Rationale: (100,000 x $12) + (200,000 x $14) + (60,000 x $20) + [40,000 x ($24 - $20)] = $5,360,000 Topic: Common Stock and Treasury Stock Transactions LO: 4, 6 Level of Difficulty: MEDIUM 51. Ioanna Corporation was organized on January 1, 2019, with an authorization of 2,000,000 shares of $30 par value common stock. During 2019, Ioanna had the following common stock transactions: Jan. 4: Apr. 8: June 9: July 29: Dec. 31:
Issued 100,000 shares @ $36 per share. Issued 200,000 shares @ $42 per share. Issued 60,000 shares @ $60 per share. Purchased 40,000 shares (treasury) @ $60 per share. Sold 40,000 shares held in treasury @ $72 per share.
Ioanna had no other transactions affecting paid-in capital. At December 31, 2019, what is the total amount of paid-in capital? A) $16,080,000 B) $ 10,080,000 C) $ 5,520,000 D) $ 4,800,000 Answer: A Rationale: (100,000 x $36) + (200,000 x $42) + (60,000 x $60) + [40,000 x ($72 - $60)] = $16,080,000
©Cambridge Business Publishers, 2020 11-24
Financial Accounting for Undergraduates, 4th Edition
Topic: Common Stock and Treasury Stock Transactions LO: 4, 6 Level of Difficulty: MEDIUM 52. Kedzie Corporation was organized on January 1, 2019, with an authorization of 5,000,000 shares of $2 par value common stock. During 2019, Kedzie had the following common stock transactions: Jan. 4: Apr. 8: July 29: Oct. 18: Dec. 31:
Issued 300,000 shares @ $16 per share. Issued 100,000 shares @ $12 per share. Purchased 90,000 shares (treasury) @ $14 per share. Sold 60,000 shares held in treasury @ $18 per share. Sold 30,000 shares held in treasury @ $12 per share.
Kedzie had no other transactions affecting paid-in capital. At December 31, 2019, what is the total amount of paid-in capital? A) $6,240,000 B) $6,180,000 C) $5,320,000 D) $5,440,000 Answer: B Rationale: (300,000 x $16) + (100,000 x $12) + [60,000 x ($18 - $14)] - [30,000 x ($14 - $12)] = $6,180,000 Topic: Common Stock and Treasury Stock Transactions LO: 4, 6 Level of Difficulty: MEDIUM 53. Sava Corporation was organized on January 1, 2019, with an authorization of 5,000,000 shares of $4 par value common stock. During 2019, Sava had the following common stock transactions: Jan. 4: Apr. 8: July 29: Oct. 18: Dec. 31:
Issued 300,000 shares @ $48 per share. Issued 100,000 shares @ $36 per share. Purchased 90,000 shares (treasury) @ $42 per share. Sold 60,000 shares held in treasury @ $54 per share. Sold 30,000 shares held in treasury @ $36 per share.
Sava had no other transactions affecting paid-in capital. At December 31, 2019, what is the total amount of paid-in capital? A) $18,720,000 B) $18,540,000 C) $15,960,000 D) $16,320,000 Answer: B Rationale: (300,000 x $48) + (100,000 x $36) + [60,000 x ($54 - $48)] - [30,000 x ($42 - $36)] = $18,540,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-25
Topic: Stock Splits LO: 5 Level of Difficulty: MEDIUM 54. At December 31, 2019, North Corporation had 40,000 shares outstanding of $30 par value common stock. The shares were originally issued for $84 per share. On January 1, 2020, Western split its common stock 3 for 1 with a corresponding reduction in the stock’s par value. The market price of the stock just before the split was $150 per share. After the split, the balance in the common stock account is: A) $1,200,000 B) $6,000,000 C) $3,600,000 D) $3,360,000 Answer: A Rationale: 120,000* shares x $10** par value = $1,200,000 *40,000 shares x 3 = 120,000 shares **$30 / 3 = $10 par value per share
Topic: Stock Splits LO: 5 Level of Difficulty: MEDIUM 55. At December 31, 2019, Northwest Corporation had 40,000 shares outstanding of $90 par value common stock. The shares were originally issued for $252 per share. On January 1, 2020, Northwest split its common stock 3 for 1 with a corresponding reduction in the stock’s par value. The market price of the stock just before the split was $450 per share. After the split, the balance in the common stock account is: A) $ 3.600,000 B) $18,000,000 C) $10,800,000 D) $10,080,000 Answer: A Rationale: 120,000* shares x $30** par value = $3,600,000 *40,000 shares x 3 = 120,000 shares **$90 / 3 = $30 par value per share
Topic: Stock Splits LO: 5 Level of Difficulty: MEDIUM 56. At December 31, 2019, Bentley Corporation had 30,000 shares outstanding of $20 par value common stock. The shares were originally issued for $52 per share. On January 1, 2020, Western split its common stock 4 for 1 with a corresponding reduction in the stock’s par value. The market price of the stock just before the split was $120 per share. After the split, the balance of the common stock account is: A) $3,600,000 B) $ 600,000 C) $1,560,000 D) $1,800,000 Answer: B Rationale: 120,000* shares x 5.00** par value = $600,000 *30,000 shares x 4 = 120,000 shares **$20 / 4 = $5 par value per share
©Cambridge Business Publishers, 2020 11-26
Financial Accounting for Undergraduates, 4th Edition
Topic: Stock Splits LO: 5 Level of Difficulty: MEDIUM 57. At December 31, 2019, Western Corporation had 30,000 shares outstanding of $60 par value common stock. The shares were originally issued for $156 per share. On January 1, 2020, Western split its common stock 4 for 1 with a corresponding reduction in the stock’s par value. The market price of the stock just before the split was $360 per share. After the split, the balance of the common stock account is: A) $10,800,000 B) $ 1,800,000 C) $ 4,680,000 D) $ 5,400,000 Answer: B Rationale: 120,000* shares x 15.00** par value = $1,800,000 *30,000 shares x 4 = 120,000 shares **$60 / 4 = $15 par value per share
Treasury Stock LO: 6 Level of Difficulty: MEDIUM 58. San Antonio Corporation purchased 300 shares of its own $20 par value common stock for $15,000. Later, these shares are sold for $16,000 cash. The journal entry to record the sale includes a: A) $ 1,000 credit to Paid-in Capital from Treasury Stock B) $ 9,600 credit to Paid-in Capital from Treasury Stock C) $1,000 credit to Gain on Sale of Treasury Stock D) $16,000 credit to Treasury Stock Answer: A Rationale: The journal entry to record the purchase of 300 shares of $20 par value treasury stock: Treasury stock Cash
15,000 15,000
The journal entry to record the sale of 300 shares of treasury stock for $16,000: Cash
16,000 Treasury stock Paid-in Capital—Treasury stock
15,000 1,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-27
Treasury Stock LO: 6 Level of Difficulty: MEDIUM 59. Austin Corporation purchased 300 shares of its own $60 par value common stock for $45,000. Later, these shares are sold for $48,000 cash. The journal entry to record the sale includes a: A) $ 3,000 credit to Paid-in Capital from Treasury Stock B) $28,800 credit to Paid-in Capital from Treasury Stock C) $ 3,000 credit to Gain on Sale of Treasury Stock D) $48,000 credit to Treasury Stock Answer: A Rationale: The journal entry to record the purchase of 300 shares of $60 par value treasury stock: Treasury stock Cash
45,000 45,000
The journal entry to record the sale of 300 shares of treasury stock for $48,000: Cash
48,000 Treasury stock Paid-in Capital—Treasury stock
45,000 3,000
Topic: Treasury Stock LO: 6 Level of Difficulty: EASY 60. Treasury stock is: A) Stock of other corporations owned by a corporation B) A U.S. government security C) A corporation’s own stock that has been retired D) A corporation’s own stock that has been reacquired and held for future use Answer: D Rationale: When a corporation acquires its own outstanding shares for a purpose other than retiring (cancelling) them, the acquired shares are called treasury stock. Topic: Treasury Stock LO: 6 Level of Difficulty: MEDIUM 61. The excess of the sales price of treasury stock over its cost should be credited to: A) Retained Earnings B) Paid-in Capital from Treasury Stock C) Treasury Stock D) Extraordinary Gain Answer: B
©Cambridge Business Publishers, 2020 11-28
Financial Accounting for Undergraduates, 4th Edition
Topic: Return on Common Stockholders’ Equity LO: 9 Level of Difficulty: EASY 62. Return on common stockholders’ equity is computed by dividing the average common stockholders’ equity for a period into the period’s: A) Net income B) Net income + preferred dividends C) Net income - preferred dividends D) Net income + common dividends Answer: C Topic: Return on Common Stockholders’ Equity LO: 9 Level of Difficulty: EASY 63. Return on common stockholders’ equity is computed by dividing the net income available to common stockholders by: A) Average total stockholders’ equity B) Year-end common stockholders’ equity C) Average common stockholders’ equity D) Year-end total stockholders’ equity Answer: C Topic: Return on Common Stockholders’ Equity LO: 9 Level of Difficulty: MEDIUM 64. During 2019, Leon, Inc.’s net income was $700,000. Its common stockholders’ equity was $1,080,000 at January 1, 2019 and $1,720,000 at December 31, 2019. During 2019, Leon had 10,000 outstanding shares of 6%, $100 par value cumulative preferred stock. During December 2019, Leon’s board of directors declared the annual preferred stock dividend and a $120,000 common stock dividend. What is Leon’s 2019 return on common stockholders’ equity? A) 50.0% B) 37.1% C) 17.0% D) 45.7% Answer: D Rationale: [$700,000 - (6% x $1,000,000)] / [($1,080,000 + $1,720,000) / 2] = 45.7%
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-29
Topic: Return on Common Stockholders’ Equity LO: 9 Level of Difficulty: MEDIUM 65. During 2019 Carol, Inc.’s net income was $2,450,000. Its common stockholders’ equity was $3,240,000 at January 1, 2019 and $5,160,000 at December 31, 2019. During 2019, Carol had 10,000 outstanding shares of 6%, $450 par value cumulative preferred stock. During December 2019, Carol’s board of directors declared the annual preferred stock dividend and a $360,000 common stock dividend. What is Carol’s 2019 return on common stockholders’ equity? A) 50.7% B) 51.9% C) 41.7% D) 59.5% Answer: B Rationale: [ $2,450,000 - (6% x $4,500,000)] / [($3,240,000 + $5,160,000) / 2] = 51.9% Topic: Return on Common Stockholders’ Equity LO: 9 Level of Difficulty: MEDIUM 66. During 2019, Serina, Inc.’s net income was $400,000. Its common stockholders’ equity was $1,400,000 at January 1, 2019 and $1,800,000 at December 31, 2019. During December 2019, Serina’s board of directors declared a $50,000 preferred stock dividend and a $120,000 common stock dividend. What is Serina’s 2019 return on common stockholders’ equity? A) 14.4% B) 25.0% C) 21.9% D) 15.9% Answer: C Rationale: ($400,000 - $50,000) / [($1,400,000 + $1,800,000) / 2] = 21.9% Topic: Return on Common Stockholders’ Equity LO: 9 Level of Difficulty: MEDIUM 67. During 2019, Troy, Inc.’s net income was $1,400,000. Its common stockholders’ equity was $4,200,000 at January 1, 2019 and $5,400,000 at December 31, 2019. During December 2019, Troy’s board of directors declared a $450,000 preferred stock dividend and a $360,000 common stock dividend. What is Troy’s 2019 return on common stockholders’ equity? A) 10.2% B) 31.5% C) 27.6% D) 19.8% Answer: D Rationale: ($1,400,000 - $450,000) / [($4,200,000 + $5,400,000) / 2] = 19.8%
©Cambridge Business Publishers, 2020 11-30
Financial Accounting for Undergraduates, 4th Edition
Topic: Small Stock Dividends LO: 7 Level of Difficulty: MEDIUM 68. How would the declaration of a 10% stock dividend affect each of the following amounts (after the accounts are closed at period-end)? A) Total Retained Earnings Decrease
Total Stockholders’ Equity Decrease
Total Retained Earnings Decrease
Total Stockholders’ Equity No effect
Total Retained Earnings No effect
Total Stockholders’ Equity Decrease
Total Retained Earnings No effect
Total Stockholders’ Equity No effect
Total Retained Earnings Decrease
Total Stockholders’ Equity Increase
B) C) D) E)
Answer: B Rationale: Small stock dividends are recorded at the market value of the shares issued, causing retained earnings to decrease and paid-in capital to increase by this amount. Since retained earnings and paid-in capital are both included in total stockholders’ equity, there is no effect because the increase and the decrease offset each other. Topic: Small Stock Dividends LO: 7 Level of Difficulty: MEDIUM 69. Bryn Mar Company is authorized to issue 1,000,000 shares of $10 par value common stock. By March 15, 2019, the company had issued 200,000 shares at $34 per share. On March 15, 2019, the company declared a 10% stock dividend when the market price was $40 per share. What amount is transferred from retained earnings to paid-in capital as a result of the stock dividend? A) $ 600,000 B) $ 200,000 C) $ 800,000 D) $2,400,000 Answer: C Rationale: (10% x 200,000) x $40 = $800,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-31
Topic: Small Stock Dividends LO: 7 Level of Difficulty: MEDIUM 70. M. Majors Sporting Goods Company is authorized to issue 1,000,000 shares of $30 par value common stock. By March 15, 2019, the company had issued 200,000 shares at $102 per share. On March 15, 2019, the company declared a 10% stock dividend when the market price was $120 per share. What amount is transferred from retained earnings to paid-in capital as a result of the stock dividend? A) $1,800,000 B) $ 600,000 C) $2,400,000 D) $7,200,000 Answer: C Rationale: (10% x 200,000) x $120 = $2,400,000 Topic: Small Stock Dividends LO: 7 Level of Difficulty: MEDIUM 71. Linden Tree Company is authorized to issue 500,000 shares of $20 par value common stock. By March 15, 2019, the company had issued 120,000 shares at $32 per share. On March 15, 2019, the company declared a 5% stock dividend when the market price was $30 per share. What amount is transferred from retained earnings to paid-in capital as a result of the stock dividend? A) $120,000 B) $300,000 C) $180,000 D) $450,000 Answer: C Rationale: (5% x 120,000) x $30 = $180,000 Topic: Small Stock Dividends LO: 7 Level of Difficulty: MEDIUM 72. Oak Company is authorized to issue 500,000 shares of $60 par value common stock. By March 15, 2019, the company had issued 120,000 shares at $96 per share. On March 15, 2019, the company declared a 5% stock dividend when the market price was $90 per share. What amount is transferred from retained earnings to paid-in capital as a result of the stock dividend? A) $ 360,000 B) $ 900,000 C) $ 540,000 D) $1,350,000 Answer: C Rationale: (5% x 120,000) x $90 = $540,000
©Cambridge Business Publishers, 2020 11-32
Financial Accounting for Undergraduates, 4th Edition
Topic: Large Stock Dividends LO: 7 Level of Difficulty: MEDIUM 73. Berwyn Company is authorized to issue 1,000,000 shares of $40 par value common stock. By November 15, 2019, the company had issued 50,000 shares at $50 per share. On November 15, 2019, the company declared a 30% stock dividend when the market price was $52 per share. What amount is transferred from retained earnings to paid-in capital as a result of the stock dividend? A) $ 600,000 B) $ 780,000 C) $2,400,000 D) $3,120,000 Answer: A Rationale: (30% x 50,000) x $40 par value = $600,000 Topic: Large Stock Dividends LO: 7 Level of Difficulty: MEDIUM 74. Mandarin Company is authorized to issue 1,250,000 shares of $15 par value common stock. By November 15, 2019, the company had issued 60,000 shares at $36 per share. On November 15, 2019, the company declared a 50% stock dividend when the market price was $45 per share. What amount is transferred from retained earnings to paid-in capital as a result of the stock dividend? A) $1,875,000 B) $ 450,000 C) $ 900,000 D) $1,350,000 Answer: B Rationale: (50% x 60,000) X $15 par value = $450,000 Topic: Large Stock Dividends LO: 7 Level of Difficulty: MEDIUM 75. Chive Company is authorized to issue 1,250,000 shares of $20 par value common stock. By November 15, 2019, the company had issued 60,000 shares at $48 per share. On November 15, 2019, the company declared a 50% stock dividend when the market price was $60 per share. What amount is transferred from retained earnings to paid-in capital as a result of the stock dividend? A) $2,500,000 B) $ 600,000 C) $1,800,000 D) $1,500,000 Answer: B Rationale: (50% x 60,000) x $20 par value = $600,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-33
Topic: Statement of Retained Earnings LO: 8 Level of Difficulty: EASY 76. Which of the following items is disclosed in a statement of retained earnings? A) Retained earnings balance at the beginning of the period B) Common stock issued during the period C) Treasury shares sold during the period D) Paid-in capital balance at the beginning of the period Answer: A Topic: Statement of Retained Earnings LO: 8 Level of Difficulty: EASY 77. Which of the following events is not disclosed in a statement of retained earnings? A) Cash dividends declared during the period B) Treasury stock acquired during the period C) Stock dividends declared during the period D) Net income for the period Answer: B Topic: Statement of Stockholders’ Equity LO: 8 Level of Difficulty: EASY 78. A statement of stockholders’ equity: A) Replaces the income statement as a basic financial statement B) Presents an analysis of all components of stockholders’ equity for the accounting period C) May be presented in a single-step or multiple-step format D) None of the above Answer: B Topic: Statement of Stockholders’ Equity LO: 8 Level of Difficulty: EASY 79. Which of the following financial statements will disclose the total par value of common stock shares issued during the year? A) Balance sheet B) Statement of retained earnings C) Statement of stockholders’ equity D) Income statement Answer: C
©Cambridge Business Publishers, 2020 11-34
Financial Accounting for Undergraduates, 4th Edition
Topic: Financial Statements LO: 8 Level of Difficulty: EASY 80. Which of the following financial statements will disclose a corporation’s year-end retained earnings? A) Statement of stockholders’ equity B) Balance sheet C) Statement of retained earnings D) All of the above Answer: D Topic: Financial Statements LO: 8 Level of Difficulty: MEDIUM 81. Which of the following financial statements will disclose a firm’s net income for the year? A) Statement of retained earnings B) Income statement C) Statement of stockholders’ equity D) All of the above Answer: D Topic: Retained Earnings LO: 6, 7 Level of Difficulty: MEDIUM 82. Which of the following events increases retained earnings? A) Declaring a cash dividend and paying a previously declared cash dividend B) Declaring a 10% common stock dividend C) Purchasing treasury stock D) None of the above Answer: D Topic: Statement of Stockholders’ Equity LO: 8 Level of Difficulty: MEDIUM 83. Weiss Corporation reported the following information at December 31, 2019: Preferred stock, $30 par, 10,000 shares authorized, issued, and outstanding; cumulative; nonparticipating; callable at par value Common stock, $3 par, 500,000 shares authorized Additional paid-in capital - Common Retained earnings Total stockholders' equity
$300,000 300,000 75,000 225,000 $900,000
The total paid-in capital is: A) $225,000 B) $300,000 C) $525,000 D) $675,000 Answer: D Rationale: $300,000 + $300,000 + $75,000 = $675,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-35
Topic: Statement of Stockholders’ Equity LO: 8 Level of Difficulty: MEDIUM 84. Krueg Corporation reported the following information at December 31, 2019: Preferred stock, $40 par, 10,000 shares authorized, issued, and outstanding; cumulative; nonparticipating; callable at par value Common stock, $4 par, 500,000 shares authorized Additional paid-in capital - Common Retained earnings Total stockholders' equity
$ 400,000 400,000 100,000 300,000 $1,200,000
The total paid-in capital is: A) $300,000 B) $800,000 C) $700,000 D) $900,000 Answer: D Rationale: $400,000 + $400,000 + $100,000 = $900,000 Topic: Statement of Stockholders’ Equity LO: 8 Level of Difficulty: MEDIUM 85. The following selected list of accounts with their normal balances was taken from the general ledger of Robbie Company as of December 31, 2019: Common stock, $1 par Robbie Retained earnings Paid-in capital in excess of par - preferred Treasury Stock Preferred stock, $100 par Paid-in capital in excess of par -common
$ 380,000 262,000 70,000 330,000 600,000 760,000
Given above information, at the end of 2019: A) Total Paid-in Capital is $2,140,000, and Total Stockholders' equity is $2,402,000 B) Total Paid-in Capital is $1,480,000, and Total Stockholders' equity is $1,218,000 C) Total Paid-in Capital is $1,810,000, and Total Stockholders' equity is $1,742,000 D) Total Paid-in Capital is $1,480,000, and Total Stockholders' equity is $1,742,000 Answer: C Rationale: $380,000 + 70,000 + $600,000 + $760,000 = $1,810,000 =Total paid-in capital $1,810,000 + $262,000 - $330,000 = $1,742,000 = Total stockholders’ equity
©Cambridge Business Publishers, 2020 11-36
Financial Accounting for Undergraduates, 4th Edition
Topic: Statement of Stockholders’ Equity LO: 8 Level of Difficulty: MEDIUM 86. The following selected list of accounts with their normal balances was taken from the general ledger of Hoover Company as of December 31, 2019: $ 1,140,000 786,000 210,000 990,000 1,800,000 2,280,000
Common stock, $1 par Hoover Retained earnings Paid-in capital in excess of par - preferred Treasury Stock Preferred stock, $150 par Paid-in capital in excess of par -common
Given above information, at the end of 2019: A) Total Paid-in Capital is $6,420,000, and Total Stockholders' equity is $7,206,000 B) Total Paid-in Capital is $4,440,000, and Total Stockholders' equity is $3,654,000 C) Total Paid-in Capital is $5,430,000, and Total Stockholders' equity is $5,226,000 D) Total Paid-in Capital is $4,440,000, and Total Stockholders' equity is $5,226,000 Answer: C Rationale: $1,140,000 + 210,000 + $1,800,000 + $2,280,000 = $5,430,000 =Total paid-in capital $5,430,000 + $786,000 - $990,000 = $5,226,000 = Total stockholders’ equity Topic: Stock Issuances for Operating assets LO: 4 Level of Difficulty: DIFFICULT 87. A corporation received land valued at $170,000 and a building valued at $205,000 in exchange for 5,000 shares of $40 par value common stock and $100,000 cash. The entry to record this transaction includes a credit to: A) Paid-in capital in excess of par-common for $75,000 B) Common stock for $375,000 C) Retained earnings for $75,000 D) Paid-in-capital in excess of par, common stock for $175,000 Answer: A Rationale: The journal entry would be: Land Building
170,000 205,000 Common Stock Paid-in Capital in Excess of Par Value Cash
200,000 75,000 100,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-37
Topic: Stock Issuances for Operating assets LO: 4 Level of Difficulty: DIFFICULT 88. A corporation received land valued at $510,000 and a building valued at $615,000 in exchange for 5,000 shares of $120 par value common stock and $300,000 cash. The entry to record this transaction includes a credit to: A) Paid-in capital in excess of par-common for $225,000 B) Common stock for $1,125,000 C) Retained earnings for $225,000 D) Paid-in-capital in excess of par, common stock for $525,000 Answer: A Rationale: The journal entry would be: Land Building
510,000 615,000 Common Stock Paid-in Capital in Excess of Par Value Cash
600,000 225,000 300,000
Topic: Stock Issuances for Cash LO: 4 Level of Difficulty: MEDIUM 89. Karloff Corporation issued 25,000 shares of $10 par value common stock at $30 per share. As a result of this transaction, Karloff Corporation’s: A) Paid-in Capital in Excess of Par Value increased by $750,000 B) Paid-in Capital in Excess of Par Value increased by $250,000 C) Common Stock increased by $750,000 D) Common Stock increased by $250,000 Answer: D Rationale: Cash Common Stock Paid-in Capital in Excess of Par Value
750,000 250,000 500,000
Topic: Stock Issuances for Cash LO: 4 Level of Difficulty: MEDIUM 90. Bullwinkle Corporation issued 25,000 shares of $30 par value common stock at $90 per share. As a result of this transaction, Bullwinkle Corporation’s: A) Paid-in Capital in Excess of Par Value increased by $2,250,000 B) Paid-in Capital in Excess of Par Value increased by $750,000 C) Common Stock increased by $2,250,000 D) Common Stock increased by $750,000 Answer: D Rationale: Cash
2,250,000 Common Stock Paid-in Capital in Excess of Par Value
750,000 1,500,000
©Cambridge Business Publishers, 2020 11-38
Financial Accounting for Undergraduates, 4th Edition
Topic: Stock Issuances for Cash LO: 4 Level of Difficulty: MEDIUM 91. Westview Company has 130,000 shares authorized and 10,000 shares issued of $10 par value common stock. On January 1, 2019, the company issues an additional 2,000 shares of common stock in exchange for a building, which has a market value of $300,000. The journal entry to record the exchange will cause Total Paid-In Capital to: A) Increase by $ 20,000 B) Increase by $100,000 C) Increase by $180,000 D) Increase by $300,000 Answer: D Rationale: Building
300,000 Common stock Paid-in capital in excess of par value
20,000 280,000
Topic: Stock Issuances for Operating Assets LO: 4 Level of Difficulty: MEDIUM 92. Maercker Company has 130,000 shares authorized and 10,000 shares issued of $30 par value common stock. On January 1, 2019, the company issues an additional 2,000 shares of common stock in exchange for a building, which has a market value of $900,000. The journal entry to record the exchange will cause Total Paid-in Capital to: A) Increase by $ 60,000 B) Increase by $300,000 C) Increase by $540,000 D) Increase by $900,000 Answer: D Rationale: Building
900,000 Common stock Paid-in capital in excess of par value
60,000 840,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-39
USE THE FOLLOWING INFORMATION FOR QUESTIONS 93 & 94. January 1, 2019:
Atlantic Corporation reacquires 2,000 shares of its $15 par common stock for $66 per share.
March 5, 2019:
Atlantic reissues 1,000 of the above mentioned shares for $75 per share.
Topic: Treasury Stock LO: 6 Level of Difficulty: MEDIUM 93. The journal entry to record the January 1, 2019 transaction will be: A) Investment in Treasury Stock Cash B) Cash Treasury Stock C) Treasury Stock Cash D) Treasury Stock Paid-in-capital, Treasury Stock Cash
132,000 132,000 132,000 132,000 132,000 132,000 30,000 102,000 132,000
Answer: C Rationale: 2,000 shares x $66 = $132,000 Topic: Treasury Stock LO: 6 Level of Difficulty: MEDIUM 94. The journal entry to record the March 5, 2019 transaction will be: A. Cash
75,000 Treasury Stock Paid-in capital, treasury stock
B. Cash
66,000 9,000 75,000
Treasury Stock Gain on sale of treasury stock C. Cash
D. Cash
66,000 9,000 75,000
Treasury Stock Paid-in capital, treasury stock
15,000 60,000
75,000 Treasury Stock Investment income on treasury stock
66,000 9,000
Answer: A Rationale: 1,000 shares x $75 = $75,000; 1,000 shares x $66 = $66,000 $75,000 - $66,000 = $9,000
©Cambridge Business Publishers, 2020 11-40
Financial Accounting for Undergraduates, 4th Edition
USE THE FOLLOWING INFORMATION FOR QUESTIONS 95 & 96. January 1, 2019:
Pacific Corporation reacquires 2,000 shares of its $20 par common stock for $88 per share.
March 5, 2019:
Pacific reissues 1,000 of the above mentioned shares for $100 per share.
Topic: Treasury Stock LO: 6 Level of Difficulty: MEDIUM 95. The journal entry to record the January 1, 2019 transaction will be: A) Investment in Treasury Stock Cash B) Cash Treasury Stock C) Treasury Stock Cash D) Treasury Stock Paid-in-capital, Treasury Stock Cash
176,000 176,000 176,000 176,000 176,000 176,000 40,000 136,000 176,000
Answer: C Rationale: 2,000 shares x $88 = $176,000 Topic: Treasury Stock LO: 6 Level of Difficulty: MEDIUM 96. The journal entry to record the March 5, 2019 transaction will be: A. Cash
100,000 Treasury Stock Paid-in capital, treasury stock
B. Cash
88,000 12,000 100,000
Treasury Stock Gain on sale of treasury stock C. Cash
D. Cash
88,000 12,000 100,000
Treasury Stock Paid-in capital, treasury stock
20,000 80,000
100,000 Treasury Stock Investment income on treasury stock
88,000 12,000
Answer: A Rationale: 1,000 shares x $100 = $100,000; 1,000 shares x $88 = $88,000 $100,000 - $88,000 = $12,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-41
Topic: Treasury Stock LO: 6 Level of Difficulty: MEDIUM 97. Terri Company has never had any treasury stock transactions. On June 1 of the current year, they purchased 100 shares of its common stock (which has a par value of $30) for $15,000. On July 1, they reissued 50 of these shares at $156 per share. What is the balance in the Paid-in- Capital, Treasury Stock account on July 1? A) $ 450 B) $ 600 C) $ 300 D) $4,050 Answer: C Rationale: The journal entry to record the purchase of treasury stock: Treasury stock Cash The journal entry to record the sale treasury stock: Cash Treasury stock Paid-in Capital – Treasury stock *50 shares x $150 per share ($15,000 / 100 shares)
15,000 15,000 7,800 7,500* 300
Topic: Treasury Stock LO: 6 Level of Difficulty: MEDIUM 98. Finance Company has never had any treasury stock transactions. On June 1 of the current year, they purchased 100 shares of its common stock (which has a par value of $40) for $20,000. On July 1, they reissued 50 of these shares at $208 per share. What is the balance in the Paid-in- Capital, Treasury Stock account on July 1? A) $ 600 B) $ 800 C) $ 400 D) $5,400 Answer: C Rationale: The journal entry to record the purchase of treasury stock: Treasury stock Cash The journal entry to record the sale treasury stock: Cash Treasury stock Paid-in Capital – Treasury stock *50 shares x $200 per share ($20,000 / 100 shares)
20,000 20,000 10,400 10,000* 400
©Cambridge Business Publishers, 2020 11-42
Financial Accounting for Undergraduates, 4th Edition
Topic: Treasury Stock LO: 6 Level of Difficulty: MEDIUM 99. On January 1, 2019, Van Lines Company had 100,000 shares of $12 par-value common stock outstanding. On March 1, 2019, they purchased 2,000 of its outstanding shares for $54 per share. On May 1, 2019, it reissued 1,000 shares at $66 per share. The journal entry to record the reissuance of the stock on May 1, 2019 would include: A) Credit Treasury Stock for $108,000 B) Credit Paid-in-Capital, Treasury Stock for $12,000 C) Debit Paid-In Capital, Treasury Stock for $54,000 D) Credit Cash for $66,000 Answer: B Rationale: Cash
66,000 Treasury Stock Paid-in capital, treasury stock
54,000 12,000
Topic: Treasury Stock LO: 6 Level of Difficulty: MEDIUM 100. On January 1, 2019, Mayflower Company had 100,000 shares of $16 par-value common stock outstanding. On March 1, 2019, they purchased 2,000 of its outstanding shares for $72 per share. On May 1, 2019, it reissued 1,000 shares at $88 per share. The journal entry to record the reissuance of the stock on May 1, 2019 would include: A) Credit Treasury Stock for $144,000 B) Credit Paid-in-Capital, Treasury Stock for $16,000 C) Debit Paid-In Capital, Treasury Stock for $72,000 D) Credit Cash for $88,000 Answer: B Rationale: Cash Treasury Stock Paid-in capital, treasury stock
88,000 72,000 16,000
Topic: Treasury Stock LO: 6 Level of Difficulty: MEDIUM 101. Island Company purchased 10,000 shares of own its no par value common stock for $21 per share on January 1. On April 1, 2019, they reissued 5,000 of these shares for $27 a share. The journal entry on April 1, will include a: A) Debit to Retained Earnings for $135,000 B) Debit to Paid-in-Capital, Treasury Stock for $12,000 C) Credit to Treasury Stock for $105,000 D) Debit to Retained Earnings for $30,000 Answer: C Rationale: Cash Treasury Stock Paid-in capital, treasury stock
135,000 105,000 30,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-43
Topic: Treasury Stock LO: 6 Level of Difficulty: MEDIUM 102. Rhode Island Company purchased 10,000 shares of own its no par value common stock for $28 per share on January 1. On April 1, 2019, they reissued 5,000 of these shares for $36 a share. The journal entry on April 1, will include a: A) Debit to Retained Earnings for $180,000 B) Debit to Paid-in-Capital, Treasury Stock for $16,000 C) Credit to Treasury Stock for $140,000 D) Debit to Retained Earnings for $40,000 Answer: C Rationale: Cash Treasury Stock Paid-in capital, treasury stock
180,000 140,000 40,000
Topic: Treasury Stock LO: 6 Level of Difficulty: MEDIUM 103. On April 1, 2019, Ruby Corporation reacquired 1,000 shares of its own $30 par stock for a total of $195,000 cash. On October 15, 300 of the treasury shares were reissued at a price of $210 per share. The journal entry to record the reissuance of the 300 shares of stock on October 15 includes a: A) Credit to Additional-Paid-In Capital: Treasury Stock of $4,500 B) Credit to Common Stock of $9,000 C) Credit to Gain on Treasury Stock of $4,500 D) Credit to Treasury Stock of $63,000 Answer: A Rationale: Cash 63,000 Treasury Stock Paid-in capital, treasury stock *300 shares x $195 per share ($195,000 / 1,000 shares)
58,500* 4,500
Topic: Treasury Stock LO: 6 Level of Difficulty: MEDIUM 104. On April 1, 2019, Crystal Corporation reacquired 1,000 shares of its own $40 par stock for a total of $260,000 cash. On October 15, 300 of the treasury shares were reissued at a price of $280 per share. The journal entry to record the reissuance of the 300 shares of stock on October 15 includes a: A) Credit to Additional-Paid-In Capital: Treasury Stock of $6,000 B) Credit to Common Stock of $12,000 C) Credit to Gain on Treasury Stock of $6,000 D) Credit to Treasury Stock of $84,000 Answer: A Rationale: Cash 84,000 Treasury Stock Paid-in capital, treasury stock *300 shares x $260 per share ($260,000 / 1,000 shares)
78,000* 6,000
©Cambridge Business Publishers, 2020 11-44
Financial Accounting for Undergraduates, 4th Edition
Topic: Cash Dividends and Stock Dividends LO: 7 Level of Difficulty: DIFFICULT 105. Twin Company has 200,000 shares authorized, 150,000 shares issued, and 25,000 shares of Treasury stock on January 1, 2019. On March 1, they declared a 15% stock dividend. The company then declared a $0.70 per share cash dividend. What is the amount of dividends payable? A) $100,625 B) $120,750 C) $105,000 D) $ 87,500 Answer: A Rationale: 125,000 shares outstanding x 1.15% =143,750 shares outstanding as of March 1, 2019 143,750 shares x $0.70 dividend / share = $100,625 Topic: Cash Dividends and Stock Dividends LO: 7 Level of Difficulty: DIFFICULT 106. Navarro Company has 200,000 shares authorized, 150,000 shares issued, and 25,000 shares of Treasury stock on January 1, 2019. On March 1, they declared a 15% stock dividend. The company then declared a $2.10 per share cash dividend. What is the amount of dividends payable? A) $301,875 B) $362,250 C) $262,500 D) $315,000 Answer: A Rationale: 125,000 shares outstanding x 1.15% =143,750 shares outstanding as of March 1, 2019 143,750 shares x $2.10 dividend / share = $301,875 Topic: Cash Dividends and Stock Dividends LO: 7 Level of Difficulty: MEDIUM 107. McGrath Company has 1,000 shares of $100 par value, 5% cumulative preferred stock and 50,000 shares of $20 par value common stock outstanding. The company paid total cash dividends of $2,000 in its first year of operation, and declared total cash dividends of $10,000 in its second year of operation. The cash dividend paid to common stockholders in the second year will be: A) $7,000 B) $2,000 C) $4,500 D) $4,300 Answer: B Rationale: ($100 × 1,000 × 5%) = $5,000 Dividends payable to Preferred each year Balance for Year 1: Payment for Year 1: Balance for Year 2: Payment Year 2
Preferred $ 5,000 (2,000) 8,000 (8,000)
Common $
0
2,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-45
Topic: Cash Dividends LO: 7 Level of Difficulty: MEDIUM 108. Lauer Company has 1,000 shares of $300 par value, 5% cumulative preferred stock and 50,000 shares of $60 par value common stock outstanding. The company paid total cash dividends of $6,000 in its first year of operation, and declared total cash dividends of $30,000 in its second year of operation. The cash dividend paid to common stockholders in the second year will be: A) $21,000 B) $ 6,000 C) $13,500 D) $13,950 Answer: B Rationale: ($300 × 1,000 × 5%) = $15,000 Dividends payable to Preferred each year Balance for Year 1: Payment for Year 1: Balance for Year 2: Payment Year 2
Preferred $15,000 (6,000) 24,000 (24,000)
Common $
0
(6,000)
Topic: Stock Dividends LO: 7 Level of Difficulty: MEDIUM 109. Amin Company has 200,000 shares of $20 par value common stock outstanding. On April 15, 2019 the company declared a 40% stock dividend. The current market value of the stock was $30 per common share. The journal entry on April 15 will include: A) A credit to Stock Dividends Distributable for $2,400,000 B) A debit to Retained Earnings for $2,400,000 C) A credit to Stock Dividend Distributable for $1,600,000 D) A credit to Paid-in Capital in excess of par value, Common Stock for $800,000 Answer: C Rationale: 200,000 shares x 40% x $20 par value The journal entry on April 15 will be: Stock dividends Stock dividend distributable
1,600,000 1,600,000
©Cambridge Business Publishers, 2020 11-46
Financial Accounting for Undergraduates, 4th Edition
Topic: Stock Dividends LO: 7 Level of Difficulty: MEDIUM 110. Sayali Company has 200,000 shares of $60 par value common stock outstanding. On April 15, 2019 the company declared a 40% stock dividend. The current market value of the stock was $90 per common share. The journal entry on April 15 will include: A) A credit to Stock Dividends Distributable for $7,200,000 B) A debit to Retained Earnings for $7,200,000 C) A credit to Stock Dividend Distributable for $4,800,000 D) A credit to Paid-in Capital in excess of par value, Common Stock for $2,400,000 Answer: C Rationale: 200,000 shares x 40% x $60 par value The journal entry on April 15 will be: Stock dividends Stock dividend distributable
4,800,000 4,800,000
Topic: Cash Dividends LO: 7 Level of Difficulty: MEDIUM 111. John, Inc. has 5,000 shares of 6%, $200 par value, cumulative preferred stock and 100,000 shares of $2 par value common stock outstanding. There were no dividends declared in 2018. The board of directors declared and paid dividends of $100,000 each in 2019 and 2020. What is the amount of dividends received by the common stockholders in 2020? A) $20,000 B) $40,000 C) $60,000 D) $80,000 Answer: A Rationale: Preferred stock dividend payable = 5,000 shares x $200 x 6% = $60,000 / year Distribution of dividends: 2018 2019 2020
Balance Balance Paid Balance Paid
Preferred $60,000 120,000 (100,000) 80,000 (80,000)
Common $
0
20,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-47
Topic: Cash Dividends LO: 7 Level of Difficulty: MEDIUM 112. Karin, Inc. has 5,000 shares of 6%, $600 par value, cumulative preferred stock and 100,000 shares of $6 par value common stock outstanding. There were no dividends declared in 2018. The board of directors declared and paid dividends of $300,000 each in 2019 and 2020. What is the amount of dividends received by the common stockholders in 2020? A) $ 60,000 B) $120,000 C) $180,000 D) $240,000 Answer: A Rationale: Preferred stock dividend payable = 5,000 shares x $600 x 6% = $180,000 / year Distribution of dividends:
2018 2019 2020
Balance Balance Paid Balance Paid
Preferred
Common
$180,000 360,000 (300,000) 240,000 (240,000)
$
0
60,000
Topic: Stock Dividends LO: 7 Level of Difficulty: MEDIUM 113. Superior Company had 50,000 shares of $50 par value common stock outstanding on June 30, 2019. On July 1, the board of directors declared a 10% stock dividend when the market value of each share was $54 The journal entry on July 1 will include: A) A credit to Stock Dividend Distributable for $250,000 B) A debit to Retained Earnings for $250,000 C) A credit to Stock Dividend Distributable for $270,000 D) A credit to Paid-in capital in excess of par value $270,000 Answer: A Rationale: 50,000 shares x 10% = 5,000 share stock dividend x $54 = $270,000 The journal entry to record the July 1, 2019 transaction will be: Stock dividends Stock dividends distributable Paid-in capital in excess of par
270,000 250,000 20,000
©Cambridge Business Publishers, 2020 11-48
Financial Accounting for Undergraduates, 4th Edition
Topic: Stock Dividends LO: 7 Level of Difficulty: MEDIUM 114. Balenberg Company had 50,000 shares of $150 par value common stock outstanding on June 30, 2019. On July 1, the board of directors declared a 10% stock dividend when the market value of each share was $162. The journal entry on July 1 will include: A) A credit to Stock Dividend Distributable for $750,000 B) A debit to Retained Earnings for $750,000 C) A credit to Stock Dividend Distributable for $810,000 D) A credit to Paid-in capital in excess of par value $810,000. Answer: A Rationale: 50,000 shares x 10% = 5,000 share stock dividend x $162 = $810,000 The journal entry to record the July 1, 2019 transaction will be: Stock dividends Stock dividends distributable Paid-in capital in excess of par
810,000 750,000 60,000
Topic: Cash Dividends LO: 7 Level of Difficulty: MEDIUM 115. A company has 10,000 shares of $10 par, 3% preferred stock outstanding, and 25,000 shares of $4 par common stock outstanding. The preferred stock is cumulative, and no dividends have been paid for the past two years. If the company wishes to distribute $4 per share to the common stockholders, what is the total amount of dividends that must be paid in the current year? A) $109,000 B) $101,500 C) $103,000 D) $145,000 Answer: A Rationale: (10,000 x $10 x 3% = $3,000 x 3 yrs = $9,000) + (25,000 x $4 = $100,000) = $109,000 Topic: Cash Dividends LO: 7 Level of Difficulty: MEDIUM 116. A company has 10,000 shares of $30 par, 3% preferred stock outstanding, and 25,000 shares of $12 par common stock outstanding. The preferred stock is cumulative, and no dividends have been paid for the past two years. If the company wishes to distribute $12 per share to the common stockholders, what is the total amount of dividends that must be paid in the current year? A) $327,000 B) $304,500 C) $309,000 D) $435,000 Answer: A Rationale: (10,000 x $30 x 3% = $9,000 x 3 yrs = $27,000) + (25,000 x $12 = $300,000) = $327,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-49
Topic: Cash Dividends LO: 7 Level of Difficulty: MEDIUM 117. Gumnut Corporation has the following stock outstanding on December 31, 2019: (a) (b)
Preferred Stock (8 percent cumulative, $20 par, 100,000 shares authorized; 10,000 shares issued and outstanding)
$200,000
Common Stock ($14 par, 1,000,000 shares authorized, 120,000 shares issued and outstanding)
1,680,000
Gumnut did not pay any dividends in 2017. In 2018, they paid total dividends of $20,000, and in 2019, they paid total dividends of $50,000. What amount of dividends will be paid to common stockholders in 2019? A) $28,000 B) $22,000 C) $16,000 D) $20,000 Answer: B Rationale: Preferred stock dividend payable= 10,000 shares x $20 x 8% = $16,000 / year Distribution of dividends: Preferred Common 2017 Balance $16,000 2018 Balance 32,000 Paid (20,000) $ 0 2019 Balance 28,000 Paid (28,000) 22,000 Topic: Cash Dividends LO: 7 Level of Difficulty: MEDIUM 118. Platypus Corporation has the following stock outstanding on December 31, 2019: (a) (b)
Preferred Stock (8 percent cumulative, $60 par, 100,000 shares authorized; 10,000 shares issued and outstanding)
$600,000
Common Stock ($42 par, 1,000,000 shares authorized, 120,000 shares issued and outstanding)
5,040,000
Kangaroo did not pay any dividends in 2017. In 2018, they paid total dividends of $60,000, and in 2019, they paid total dividends of $150,000. What amount of dividends will be paid to common stockholders in 2019? A) $84,000 B) $66,000 C) $48,000 D) $60,000 Answer: B Rationale: Preferred stock dividend payable= 10,000 shares x $60 x 8% = $48,000 / year Distribution of dividends: Preferred Common 2017 2018 2019
Balance Balance Paid Balance Paid
$48,000 96,000 (60,000) 84,000 (84,000)
$
0
66,000
©Cambridge Business Publishers, 2020 11-50
Financial Accounting for Undergraduates, 4th Edition
Topic: Stock Dividends LO: 7 Level of Difficulty: DIFFICULT 119. The stockholders’ equity section of Dasher Company showed the following: Common Stock - $10 par value, 60,000 shares issued and outstanding Contributed Capital in excess of par value, common stock Retained Earnings
$ 600,000 1,800,000 1,600,000
Dasher declared a 10% stock dividend on a day when the market value of the stock was $30 per share. The stock dividend will: A) Increase Paid-in capital in excess of par value, Common Stock by $180,000 B) Decrease Retained Earnings by $120,000 C) Increase Common Stock by $180,000 D) Increase Paid-in capital in excess of par value, Common Stock by $120,000 Answer: D Rationale: 60,000 shares x 10% = 6,000 shares x $30 = $180,000 To record declaration of stock dividend: Stock dividends Stock dividends distributable Paid-in capital in excess of par
180,000 60,000 120,000
To record issuance of stock dividend: Stock dividend distributable Common stock
60,000 60,000
To close the Stock dividends account: Retained earnings Stock dividends
180,000 180,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-51
Topic: Stock Dividends LO: 7 Level of Difficulty: DIFFICULT 120. The stockholders’ equity section of Rudolf Company showed the following: Common Stock - $30 par value, 60,000 shares issued and outstanding Contributed Capital in excess of par value, common stock Retained Earnings
$1,800,000 5,400,000 4,800,000
Rudolf declared a 10% stock dividend on a day when the market value of the stock was $90 per share. The stock dividend will: A) Increase Paid-in capital in excess of par value, Common Stock by $540,000 B) Decrease Retained Earnings by $360,000 C) Increase Common Stock by $540,000 D) Increase Paid-in capital in excess of par value, Common Stock by $360,000 Answer: D Rationale: 60,000 shares x 10% = 6,000 shares x $90 = $540,000 To record declaration of stock dividend: Stock dividends 540,000 Stock dividends distributable Paid-in capital in excess of par
180,000 360,000
To record issuance of stock dividend: Stock dividend distributable Common stock
180,000 180,000
To close the Stock dividends account: Retained earnings Stock dividends
540,000 540,000
©Cambridge Business Publishers, 2020 11-52
Financial Accounting for Undergraduates, 4th Edition
Topic: Stock Dividends LO: 7 Level of Difficulty: DIFFICULT 121. The stockholders' equity section of the balance sheet for Potawatomi Corporation appeared as follows before its recent stock dividend: Common stock, $10 par, 10,000 shares issued and outstanding Additional paid-in capital - common Retained earnings Total stockholders' equity
$ 100,000 120,000 150,000 $370,000
Potawatomi declared a 10% stock dividend when the market price per share was $20. After the stock dividend was distributed, the components of the stockholders' equity section were: Common Stock Additional Paid-in Capital Retained Earnings A. $100,000 $130,000 $170,000 B. $100,000 $130,000 $130,000 C. $110,000 $130,000 $130,000 D. There would be no change in the components of stockholders' equity. Answer: C Rationale: 10,000 shares x 10% = 1,000 share stock dividend x $20 = $20,000 To record declaration of stock dividend: Stock dividends Stock dividends distributable Paid-in capital in excess of par
20,000 10,000 10,000
To record issuance of stock dividend: Stock dividend distributable Common stock
10,000 10,000
To close the Stock dividends account: Retained earnings Stock dividends
20,000 20,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-53
Topic: Stock Dividends LO: 7 Level of Difficulty: DIFFICULT 122. The stockholders' equity section of the balance sheet for Pokagon Corporation appeared as follows before its recent stock dividend: Common stock, $30 par, 10,000 shares issued and outstanding Additional paid-in capital - common Retained earnings Total stockholders' equity
$ 300,000 360,000 450,000 $1,110,000
Pokagon declared a 10% stock dividend when the market price per share was $60. After the stock dividend was distributed, the components of the stockholders' equity section were: Common Stock Additional Paid-in Capital Retained Earnings A. $300,000 $390,000 $510,000 B. $300,000 $390,000 $390,000 C. $330,000 $390,000 $390,000 D. There would be no change in the components of stockholders' equity. Answer: C Rationale: 10,000 shares x 10% = 1,000 share stock dividend x $60 = $60,000 To record declaration of stock dividend: Stock dividends Stock dividends distributable Paid-in capital in excess of par
60,000 30,000 30,000
To record issuance of stock dividend: Stock dividend distributable Common stock
30,000 30,000
To close the Stock dividends account: Retained earnings Stock dividends
60,000 60,000
©Cambridge Business Publishers, 2020 11-54
Financial Accounting for Undergraduates, 4th Edition
Exercises Topic: Reporting Stockholders’ Equity LO: 4, 6, 7, 8 1. Pumpkin Bars Company began business on January 1 and immediately issued 500,000 shares of its $3 par value common stock for $24,000,000. At the end of the year it paid $1,200,000 in cash dividends. In midyear, the firm bought back some of its own shares. The company reports the following additional information at December 31, 2019: Net income Common stock Retained earnings beginning of year Common shares authorized Shares outstanding at year end
$6,000,000 $1,500,000 $0 3,000,000 300,000
Required a. How much is the Additional Paid-in-Capital account at the end of the year? b. Determine the retained earnings amount at the end of the year. c. How many shares of stock are in the treasury at the end of the year? Answer: a. $24,000,000 – $1,500,000 = $22,500,000 b. $6,000,000 – $1,200,000 = $4,800,000 c.
500,000 – 300,000 = 200,000 shares
Topic: Interpreting Stockholders’ Equity LO: 4, 6, 7, 8 2. Use the following consolidated statement of stockholders’ equity to show the summary transactions by preparing an entry in journal form with explanation for each item a. through c. CUNNINGHAM COMPANY, INC. Consolidated Statement of Stockholders’ Equity For the Year Ended December 31, 2019
(in thousands) Balance at 12/31/18
Common Stock, $1 par value
Preferred Stock
Paid-in Capital C.S.
Retained Earnings
Treasury Stock, Common
Total
$1,378
$ 1,951
$ 7,075
$ 59,656
($471)
$ 69,589
Net income
---
---
---
15,377
---
15,377
(1) Redemption and retirement of preferred stock (13,780 shares)
(1,378)
---
---
---
---
(1,378)
(2) Stock options exercised (44,000 shares)
---
44
424
---
---
468
---
---
---
---
(9,414)
(9,414)
---
74
1,818
---
---
1,892
---
358
18,581
---
---
18,939
---
250
8,631
---
---
8,881
---
---
---
(3,086)
---
(3,086)
---
$ 2,677
$36,529
$ 71,947
($9,885)
$101,268
(3) Purchases of common stock (251,040 shares) for treasury (4) Issuance of common stock (74,000 shares) in exchange for convertible subordinated debentures (5) Issuance of common stock (358,000 shares) for cash (6) Issuance of 250,000 shares of common stock in exchange for investment in Stone Company shares (7) Cash dividends – Common stock ($0.40 per share) Balance December 31, 2019
$
Continued ©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-55
Required: a. Pay cash dividends (Item 7) b. Issue common stock (Item 5) c. Purchase treasury shares Item 3) Answer: a. Cash Dividends (or Retained Earnings) Cash To pay cash dividends.
3,086,000 3,086,000
b. Cash
18,939,000
Common Stock Additional Paid-In Capital Issue 358,000 shares of $1 par stock. c.
358,000 18,581,000
Treasury Stock Cash Purchase of 251,040 shares for the treasury at an average price of $37.50 per share ($9,414,000 / 251,040)
9,414,000 9,414,000
Topic: Stock Transactions LO: 4, 6, 7 3. Luna Company had the following transactions during the current year: 1: Luna Company sells 100,000 shares of its no-par common stock for $60. 2: Luna Company buys 5,000 shares of its no-par common stock for $45 per share. 3: Luna Company declares and pays a dividend on its no-par common stock of $9per share. Indicate the effect (increase, decrease, no effect) of each of these stock decisions for each year on the items listed below. Total Assets
Total Liabilities
Total Equity
Operating Income
1 2 3 Answer: 1 2 3
Total Assets
Total Liabilities
Total Equity
Operating Income
Increase Decrease Decrease
No effect No effect No effect
Increase Decrease Decrease
No effect No effect No effect
©Cambridge Business Publishers, 2020 11-56
Financial Accounting for Undergraduates, 4th Edition
Topic: Small Stock Dividend LO: 7 4. Cambridge has 500,000 shares of $3 par value common stock outstanding. The current market price of the stock is $225 per share. Cambridge distributes a stock dividend of 15% of the outstanding shares of common stock. Required: Record the journal entry when the stock dividend is declared and the journal entry when the stock dividend is paid. Answer: Retained Earnings is reduced by 500,000 shares ×15% × $225 = $16,875,000. Common Stock is increased by 500,000 shares × 15% × $3 par = $225,000 par value. Paid-in Capital in Excess of Par Value is increased by the remainder of $16,875,000 - $225,000 = $16,650,000. Stock Dividends (or Retained Earnings) Stock Dividend Distributable Paid-In Capital in Excess of Par Value To declare stock dividend.
16,875,000 225,000 16,650,000
Stock Dividend Distributable Common Stock To pay stock dividend.
225,000 225,000
Topic: Large Stock Dividend LO: 7 5. Orange Parrot Co. announces a stock dividend of 55% of the 2.2 million outstanding shares of common stock. The current price per share is $23.25. Par value of the stock is $0.03 per share. Required: Record the journal entry when the stock dividend is declared and the journal entry when the stock dividend is paid. Answer: Retained earnings are reduced by the par value of the stock. 2.2 million shares × 55% × $0.03 = $36,300 Common Stock is increased by the par value of the stock. There is no effect on paid-in capital because the stock dividend is reported at par value. Stock Dividends (or Retained Earnings) Stock Dividend Distributable To declare stock dividend.
36,300
Stock Dividend Distributable Common Stock To pay stock dividend.
36,300
36,300
36,300
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-57
Topic: Balance Sheet Presentation of Stockholders’ Equity LO: 4, 6 6. Use the following information to prepare the shareholders’ equity section of the balance sheet for Koontz, Incorporated: a. Common Stock—$0.30 par value: 100,000 shares authorized, 37,500 shares outstanding as of December 31, 2019 b. Retained Earnings, December 31, 2019, $108,000 c. Treasury Stock—Koontz repurchased 1,500 shares at $50 per share d. Total Shareholders’ Equity as of December 31, 2019 is $580,000 Answer: Paid-in Capital Common stock ($0.30 par value) Additional paid-in capital Retained earnings Less: Treasury stock at $50 per share Total shareholders’ equity
$11,700 535,300 108,000 655,000 (75,000) $580,000
Calculations: Common stock = 37,500 outstanding + 1,500 treasury stock = 39,000 shares issued 39,000 shares issued × $0.30 per share = $11,700 Treasury stock = 1,500 shares repurchased × $50 per share = $75,000 Additional paid-in capital: $11,700 + $108,000 + X - $75,000 = $580,000; X = $535,300 Topic: Stock Computations with Treasury Stock LO: 4, 6 7. Arkansas Trucking has 250,000 common shares outstanding with a $0.04 par value and $90 current market value. The treasury stock account is reported at $149,400 with an average cost of $8 per share. How much is the total common stock reported on the balance sheet? Answer: Number of shares in treasury stock account = $149,400 / $8 per share = 18,675 shares Total number of shares = 250,000 +18,675 = 268,675 Par value of common stock account = 268,675 shares × $0.04 per share = $10,747
©Cambridge Business Publishers, 2020 11-58
Financial Accounting for Undergraduates, 4th Edition
Topic: Stock Splits LO: 5 8. The August 1, 2019 balance sheet for Dress Company reported 24,000 shares of $10 par value common stock that were issued and outstanding: Common Stock Additional Paid-in Capital
$240,000 $250,000
On August 2, 2019, the company splits its stock 2-for-1. Required: a. How many shares of common stock are issued and outstanding immediately after the stock split? b. What is the dollar balance of common stock immediately after the stock split? Answer: a. The company has 48,000 (24,000 x 2) shares of $5.00 ($10.00/2) par value common stock immediately after the stock split. b. The balance of the common stock account is unchanged (48,000 shares × $5.00 = $240,000). Topic: Outstanding Shares LO: 5, 6 9. Bio Engineering Company initially has 45,000 shares outstanding of common stock on January 1, 2019. During the year, they have the following changes in terms of shares. Feb Mar Oct Nov
3-for-2 stock split 3-for-2 stock split Repurchase 21,000 shares 6-for-5 stock split
Required: Calculate the number of shares it has outstanding at the end of 2019. Answer: 3-for-2 stock split 3-for-2 stock split Repurchase 21,000 shares in October 6-for-5 stock split
67,500 shares 101,250 shares 80,250 shares 96,300 shares
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-59
Topic: Stock Issuances LO: 4 10. On July 1, 2019, Parkside, Inc. issues 10,000 shares of $10 par value preferred stock at $100 cash per share and 20,000 shares of $2 par value common stock at $50 cash per share. What is the journal entry to record these transactions? Answer: Cash Preferred Stock Paid-In Capital in excess of par value – Preferred Stock Issue 10,000 shares of $10 par preferred stock for $100 per share. Cash
1,000,000 100,000 900,000
1,000,000
Common Stock Paid-In Capital in excess of par value – Common Stock Issue 20,000 shares of $2 par common stock for $50 per share.
40,000 960,000
Topic: Shares Issued and Average Price LO: 4, 6 11. Following is the stockholder’s equity section of Rite Soldering, Inc. at December 31, 2019: Stockholders' Equity Common stock - $0.20 par value, authorized 600,000 shares Additional paid-in capital Retained earnings Treasury stock—5,000 shares Total stockholders' equity
December 31, 2019 $ 45,000 1,278,000 120,000 (142,500) $1,300,500
Required: a. Compute the number of shares that have been issued. b. At what average issue price were the shares issued? c. At what average cost were the treasury stock purchased? Answer: a. Total par value / Unit par value = $45,000 / $0.20 = 225,000 shares b. (Common stock + Additional paid-in capital) / Shares issued = Average issue price ($45,000 + $1,278,000) / 225,000 = $5.88 c.
Treasury stock / Treasury shares = Treasury cost per share $142,500 / 5,000 = $28.50 per treasury share
©Cambridge Business Publishers, 2020 11-60
Financial Accounting for Undergraduates, 4th Edition
Topic: Common Stock and Treasury Stock Transactions LO: 4, 6 12. Listed below are nine events involving a corporation’s stockholders’ equity. Insert the words “increase,” “decrease,” or “no effect” under the appropriate column heading to indicate the event’s effect on total paid-in capital, retained earnings, and total stockholders’ equity.
(1) (2) (3) (4) (5) (6)
Total Paid-In Capital
Retained Earnings
Total Stockholders’ Equity
Total Paid-In Capital
Retained Earnings
Total Stockholders’ Equity
Increase
No Effect
Increase
No Effect
No Effect
No Effect
No Effect
No Effect
Decrease
Increase
No Effect
Increase
Increase
No Effect
Increase
Increase
No Effect
Increase
Issued 10,000 shares of common stock for cash at a price higher than par value. Split common stock 2 for 1. Purchased 2,000 shares of own common stock for treasury. Issued 1,000 shares of preferred stock in exchange for new equipment. Sold 800 shares of treasury stock at a price higher than the shares’ reacquisition cost. Issued 1,600 shares of common stock for land whose fair value equaled the par value of the shares issued.
Answer:
(1) (2) (3) (4) (5) (6)
Issued 10,000 shares of common stock for cash at a price higher than par value. Split common stock 2 for 1. Purchased 2,000 shares of own stock for treasury. Issued 1,000 shares of preferred stock in exchange for new equipment. Sold 800 shares of treasury common stock at a price higher than the shares’ reacquisition cost. Issued 1,600 shares of common stock for land whose fair value equaled the par value of the shares issued.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-61
Topic: Preferred Cash Dividends LO: 3, 7 13. Yoke Company has 9,000 shares outstanding of $150 par value, 8% cumulative preferred stock and 60,000 shares of $15 par value common stock. The company declared cash dividends of $648,000. Required: a. If no arrearage on the preferred stock exists, how much in total dividends and in dividends per share is paid to each class of stock? b. If one year’s dividend arrearage on the preferred stock exists, how much in total dividends and in dividends per share is paid to each class of stock? Answer: a. 8% x $1,350,000 Remainder to common Per share: $108,000 / 9,000 $540,000 / 60,000 b. 8% x $1,350,000 x 2 years Remainder to common Per share: $216,000 / 9,000 $432,000 / 60,000
Preferred $108,000
Common $540,000
$12.00 $9.00 Preferred $216,000
Common $432,000
$24.00 $7.20
Topic: Preferred Cash Dividends LO: 3, 7 14. Horizon Company has 15,000 shares outstanding of $200 par value, 7% cumulative preferred stock and 75,000 shares of $40 par value common stock. The company declared cash dividends of $630,000. Required: a. If no arrearage on the preferred stock exists, how much in total dividends and in dividends per share is paid to each class of stock? b. If one year’s dividend arrearage on the preferred stock exists, how much in total dividends and in dividends per share is paid to each class of stock? Answer: a. 7% x $3,000,000 Remainder to common Per share: $210,000 / 15,000 $420,000 / 75,000 b. 7% x $3,000,000 x 2 years Remainder to common Per share: $420,000 / 15,000 $210,000 / 75,000
Preferred $210,000
Common $420,000
$14.00 $5.60 Preferred $420,000
Common $210,000
$28.00 $2.80
©Cambridge Business Publishers, 2020 11-62
Financial Accounting for Undergraduates, 4th Edition
Topic: Common Stock and Treasury Stock Transactions LO: 4, 6 15. Aluminum, Inc. engaged in the following transactions involving its common stock during 2019: Feb. Aug. Sept. Nov.
2 1 1 1
Issued 10,000 shares of $15 par value common stock at $90 cash per share. Purchased back 3,000 shares of common stock at 93 cash per share. Resold 1,200 shares of treasury stock at $99 cash per share. Exchanged remaining 1,800 shares of treasury stock for a patent with a fair value of $162,000.
Required: Prepare general journal entries to record these transactions. Answer: Feb. 2 Cash
900,000
Common Stock Paid-In Capital in excess of par value-Common Issued 10,000 shares at $90 per share. Aug. 1
Sept. 1
150,000 750,000
Treasury Stock Cash Purchased 3,000 shares of treasury stock at $93 per share.
279,000
Cash
118,800
279,000
Treasury Stock Paid-In Capital from Treasury Stock Sold 1,200 shares of treasury stock at $99 per share. Nov. 1
111,600 7,200
Patent 162,000 Paid-In Capital from Treasury Stock 5,400 Treasury Stock Exchanges 1,800 shares of treasury stock for a $162,000 patent.
167,400
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-63
Topic: Common Stock and Treasury Stock Transactions LO: 4, 6 16. Brahtz, Inc. engaged in the following transactions involving its common stock during 2019: Feb. Aug. Sept. Nov.
2 1 1 1
Issued 10,000 shares of $10 par value common stock at $40 cash per share. Purchased back 4,000 shares of common stock at $50 cash per share. Resold 1,000 shares of treasury stock at $56 cash per share. Exchanged remaining 3,000 shares of treasury stock for land with a fair value of $145,000.
Required: Prepare general journal entries to record these transactions. Answer: Feb. 2 Cash
400,000
Common Stock Paid-In Capital in excess of par value-Common Issued 10,000 shares at $40 per share. Aug. 1
Sept. 1
100,000 300,000
Treasury Stock Cash Purchased 4,000 shares of treasury stock at $50 per share.
200,000
Cash
56,000
200,000
Treasury Stock Paid-In Capital from Treasury Stock Sold 1,000 shares of treasury stock at $56 per share. Nov. 1
50,000 6,000
Land Paid-In Capital from Treasury Stock Treasury Stock Exchanged 3,000 shares of treasury stock for land valued at $145,000.
145,000 5,000 150,000
Topic: Return on Common Stockholders’ Equity LO: 9 17. Williams, Inc. has both cumulative preferred stock and common stock outstanding. The following information relates to 2019: Net income Preferred dividends Common dividends Preferred stockholders’ equity, January 1 Preferred stockholders’ equity, December 31 Common stockholders’ equity, January 1 Common stockholders’ equity, December 31
$300,000 78,000 68,000 980,000 1,020,000 1,440,000 1,600,000
Required: What is Williams’ return on common stockholders’ equity for 2019? Answer: Net income - preferred dividends = $300,000 - $78,000 = $222,000 Average common stockholders’ equity = ($1,440,000 + $1,600,000) / 2 = $1,520,000 Return on common stockholders’ equity = $222,000 / $1,520,000 = 14.6%
©Cambridge Business Publishers, 2020 11-64
Financial Accounting for Undergraduates, 4th Edition
Topic: Dividends LO: 7 18. Florence, Inc. has 30,000 shares of $15 par value common stock outstanding and retained earnings of $984,000. Tucson declares a cash dividend of $6.00 per share and, shortly thereafter, a 6% stock dividend. The market price of the stock is $66 per share at the declaration date of the stock dividend. Required: a. Prepare the general journal entries for (1) the declaration of the dividends and (2) the payment (or issuance) of the dividends. b. Assume Tucson declares a 26% stock dividend rather than a 6% stock dividend. Give the general journal entries for (1) the declaration of the stock dividend and (2) the issuance of the stock dividend. Answer: a. (1) Cash Dividends Dividends Payable Declared a cash dividend of $6.00 per share.
(2)
b. (1)
(2)
180,000 180,000
Stock Dividends Stock Dividend Distributable Paid-in Capital in Excess of Par Value Declared a 6% stock dividend (market value of stock was $66 per share).
118,800
Dividends Payable Cash Paid dividend on common stock.
180,000
Stock Dividend Distributable Common Stock Issued stock for 6% stock dividend.
27,000
Stock Dividends Stock Dividend Distributable Declared a 26% stock dividend (7,800 shares).
117,000
Stock Dividend Distributable Common Stock Issued stock for 26% stock dividend.
117,000
27,000 91,800
180,000
27,000
117,000
117,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-65
Topic: Dividends LO: 7 19. Parkersburg, Inc. has 50,000 shares of $20 par value common stock outstanding and retained earnings of $840,000. Parkersburg declares a cash dividend of $6.00 per share and, shortly thereafter, a 5% stock dividend. The market price of the stock is $36 per share at the declaration date of the stock dividend. Required: a. Give the general journal entries for (1) the declaration of the dividends and (2) the payment (or issuance) of the dividends. b. Assume Parkersburg declares a 30% stock dividend rather than a 5% stock dividend. Give the general journal entries for (1) the declaration of the stock dividend and (2) the issuance of the stock dividend. Answer: a. (1) Cash Dividends Dividends Payable Declared a cash dividend of $6.00 per share.
(2)
b. (1)
(2)
300,000 300,000
Stock Dividends Stock Dividend Distributable Paid-in Capital in Excess of Par Value Declared a 5 % stock dividend (market value of stock was $36 per share).
90,000
Dividends Payable Cash Paid dividend on common stock.
300,000
Stock Dividend Distributable Common Stock Issued stock for 5% stock dividend.
50,000
Stock Dividends Stock Dividend Distributable Declared a 30% stock dividend (15,000 shares).
300,000
Stock Dividend Distributable Common Stock Issued stock for 30% stock dividend.
300,000
50,000 40,000
300,000
50,000
300,000
300,000
©Cambridge Business Publishers, 2020 11-66
Financial Accounting for Undergraduates, 4th Edition
Topic: Dividends LO: 7 20. Walley, Inc. has the following stockholders’ equity section. Three transactions that Walley could have made are listed below. Answering each part independently (assume that the stockholders’ equity at the time of each transaction is as shown below), present the proper journal entry to record each transaction. Note that the journal entry for a transaction should not be affected by the entry for any other transaction listed below. Explanations may be omitted, but show computations. Paid-in Capital: Common Stock, $30 Par Value, 100,000 shares authorized, 20,000 shares issued and outstanding Paid-in Capital in Excess of Par Value Retained Earnings Total Stockholders’ Equity
$600,000 342,000 822,000 $1,764,000
Required: a. A cash dividend of $6.00 per share of common stock is declared. b. A 7% stock dividend is declared; the current market value of the stock is $60 per share. c. A 28% stock dividend is declared; the current market value of the stock is $60 per share. Answer: a. Cash Dividends (20,000 x $6.00) Dividends Payable
120,000 120,000
b. Stock Dividends (0.07 x 20,000 x $60) 84,000 Stock Dividend Distributable (0.07 x 20,000 x $30) Paid-in Capital in Excess of Par Value ($84,000 - $42,000) c.
Stock Dividends (0.28 x 20,000 x $30) Stock Dividend Distributable
42,000 42,000
168,000 168,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-67
Problems Topic: Preferred Stock Conversion to Common Stock LO: 3, 4 1. Road Bike Company has preferred stock with a par value of $36 that is convertible into common stock at the ratio of 1 to 1. The common stock has a par value of $24. The following table presents the components of stockholders’ equity for Road Bike Company:
Balance at Dec. 31, 2018
Convertible Redeemable Preferred Stock
Common Stock
Additional Paid-In Capital
Retained Earnings
Total
$1,200,000
$420,000
$ 126,000
$309,000
$2,055,000
78,000
78,000
Net Income Issuance of common shares Conversion of redeemable preferred stock Balance at Dec. 31, 2019
(108,000) $1,092,000
168,000
189,000
72,000 $660,000
36,000 $351,000
357,000 ________ $387,000
0 $2,490,000
Required: a. How many shares of common stock were sold during the year and at what price? b. How many shares of preferred stock were converted this year? Answer: a. $168,000 / 24 = 7,000 shares; [$168,000 + $189,000] / 7,000 shares = $51 per share b. $108,000 / $36 = 3,000 shares Topic: Preferred Preferences LO: 3 2. Identify the benefits received from being a preferred stockholder compared to a common stockholder. Describe the nature of each privilege or preference of each. Answer: a. Dividend Preference: Preferred shareholders receive dividends on their shares before common shareholders do. Also, in the event that dividends are not paid in a year and are in arrears, some preferred stock contracts include a cumulative provision that stipulates that any dividends in arrears must first be paid to preferred shareholders, together with the current year’s dividends, before any dividends are paid to common shareholders. b. Asset Distribution Preference: If a company fails, its assets are sold and the proceeds are paid to the debtholders and stockholders of the company. Preferred stockholders receive payment in full before common stockholders. c.
Conversion Privileges: A conversion privilege that allows preferred stockholders to convert their shares into common shares at a predetermined conversion rate causes the market price of preferred shares to move in a fashion consistent with the related common shares.
d. Participation Feature: This feature allows preferred shareholders to share ratably with common stockholders in dividends. The dividend preference over common shares can be a benefit when dividend payments are meager. But a fixed dividend yield limits upside potential of preferred stock if the company performs exceptionally well. This limitation can be overcome with a participation feature.
©Cambridge Business Publishers, 2020 11-68
Financial Accounting for Undergraduates, 4th Edition
Topic: Statement of Retained Earnings LO: 8 3. Use the appropriate items from the following data to prepare a 2019 statement of retained earnings for Bull Dog Corporation. Retained earnings at January 1, 2019 Cash dividends declared in 2019 Cost of treasury stock acquired in 2019 Net income for 2019 Common stock issued in 2019 (issued at par value)
$1,024,000 240,000 84,000 472,000 300,000
Answer: BULL DOG CORPORATION Statement of Retained Earnings For Year Ended December 31, 2019 Retained earnings, January 1, 2019 Add: Net income Less: Cash dividends declared Retained earnings, December 31, 2019
$1,024,000 472,000 1,496,000 240,000 $1,256,000
Topic: Statement of Retained Earnings LO: 8 4. Use the appropriate items from the following data to prepare a 2019 retained earnings statement for Lightening, Inc. Retained earnings at January 1, 2019 Stock dividends declared in 2019 (fair value of 5% dividend) Net income for 2019 Paid-in capital from treasury stock (generated during 2019)
$1,425,000 138,000 600,000 75,000
Answer: LIGHTENING, INC. Statement of Retained Earnings For Year Ended December 31, 2019 Retained earnings, January 1, 2019 Add: Net income Less: Stock dividends declared Retained earnings, December 31, 2019
$ 1,425,000 600,000 2,025,000 138,000 $1,887,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-69
Chapter 11 Stockholders’ Equity Learning Objectives – Coverage by question True / False
Multiple Choice
Exercises
Problems
LO1 – Define the corporate form of organization and discuss its principal characteristics.
10-13
21-25
LO2 – Explain the difference between par value stock and no-par value stock.
14, 15
1, 26, 27
LO3 – Identify and discuss the two types of capital stock and their respective stockholder rights.
5, 16-18
3, 7, 11-13, 19, 20, 28-40
13, 14
1, 2
LO4 – Describe the accounting for issuances of capital stock.
1, 19
4-6, 14, 41 - 53, 87-92
1-3, 6, 7, 10-12, 15, 16
1
20, 21, 24
8, 9, 15-18, 54-57
8, 9
LO6 – Explain the accounting for treasury stock.
2, 3, 6, 9, 22
50-53, 58-61, 82, 93-104
1-3, 6, 7, 9, 11, 12, 15, 16
LO7 – Identify and distinguish between cash dividends and stock dividends.
3, 4, 7, 8, 25-28
2, 10, 20, 68-72, 82, 105-122
2-5, 13-14 18-20
LO8 – Illustrate the statement of retained earnings and the statement of stockholders’ equity.
29, 30
76-81, 83-86
1, 2
LO9 – Define the return on common stockholders’ equity, dividend yield, and dividend payout ratio and explain their use.
23, 24
62-67
17
LO5 – Define and discuss the accounting for stock splits.
3, 4
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-1
Chapter 11: Stockholders’ Equity
True / False Topic: Cost vs. Market Value of Stockholders’ Equity LO: 4 1. Stockholders’ equity represents the current market value of a company. Answer: False Rationale: Stockholders’ equity is accounted for at historical cost.
Topic: Gains (Losses) on Stock Transactions LO: 6 2. Companies must report ‘gains and losses’ on transactions relating to purchases and sales of their own stock on the income statement as other income or expense. Answer: False Rationale: Companies are prohibited by GAAP from reporting ‘gains and losses’ of their own stock on the income statement. Instead, the “gain” (“loss”) is credited (debited) to Additional Paidin Capital.
Topic: Gains (Losses) on Stock Transactions LO: 6, 7 3. There are never any income statement effects recognized when a purchase or sale of stock or payment of dividends occurs. Answer: True Rationale: Any “gains” or “losses” incurred due to the purchase and sale of stock are reflected as increases (decreases) in the paid-in-capital component of stockholders’ equity. Dividends are reflected as decreases in the retained earnings component of stockholders’ equity.
Topic: Income Statement Treatment of Dividends LO: 7 4. A company’s profit declines when dividends are paid because a company must recognize an expense for the amount of the dividend. Answer: False Rationale: Declaration and payment of cash dividends reduces cash and retained earnings, and is not recorded as an expense in the income statement.
Topic: Preferred Preference in Bankruptcy LO: 3 5. If Heinz loses its dominance in the ketchup market and eventually goes “belly up”, its preferred shareholders carry senior positions as claimants in bankruptcy over the common shareholders. Answer: True Rationale: Preferred shareholders carry senior positions to common shareholders in liquidation distributions.
©Cambridge Business Publishers, 2020 11-2
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Sale of Treasury Stock LO: 6 6. A re-issuance of treasury stock has the potential to yield a gain or loss on the income statement. Answer: False Rationale: The difference between the proceeds received and the original repurchase price of the treasury stock is reflected as an increase or decrease in the additional paid-in capital component of stockholders’ equity.
Topic: Cash Dividends LO: 7 7. Cash dividends reduce both cash and retained earnings by the amount of the dividends paid. Answer: True
Topic: Large Stock Dividends LO: 7 8. When a “large” stock dividend is paid out, retained earnings are reduced by the market value of the dividend. Answer: False Rationale: When a large stock dividend is paid, retained earnings are reduced by the par value of the dividend. Retained earnings are reduced by the market value of the stock dividend if it is considered to be a “small” stock dividend.
Topic: IFRS Accounting for Treasury Stock Repurchases LO: 6 9. IFRS allows the repurchase of a company’s own stock to be reported as a decrease to the common equity amounts in stockholders’ equity. Answer: True Rationale: IFRS is similar to GAAP in reporting treasury stock in the financial statements.
Topic: Equity in Different Organizational Forms LO: 1 10. The principal difference in the financial statements of proprietorships, partnerships, and corporations is in the asset section of the balance sheet. Answer: False Rationale: The principal difference in the financial statements of proprietorships, partnerships, and corporations is in the equity section of the balance sheet.
Topic: Corporation Regulation and Supervision LO: 1 11. Corporations are subject to greater degrees of regulation and supervision than are proprietorships and partnerships. Answer: True
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-3
Topic: Limited Liability LO: 1 12. Stockholders of a corporation have unlimited liability; that is, they are responsible separately and collectively for unsatisfied obligations of the corporation. Answer: False Rationale: The liability of stockholders with respect to a company’s business affairs is usually limited to the value of their investment in the corporation.
Topic: Corporation Taxation LO: 1 13. Corporations pay an income tax only on that portion of their earnings that is distributed to stockholders as dividends. Answer: False Rationale: Corporations are subject to federal income taxes on any earned income. Stockholders are likewise subject to income taxation on any income received from a corporation as dividends, leading to a situation of double taxation of a corporation’s distributed earnings.
Topic: Par Value LO: 2 14. The par value of a stock represents the market value of the stock on the date it is first issued. Answer: False Rationale: In the early days of corporate stock issuances, par value represented the market value of the stock when it was issued. In more recent times, however, par values have typically been set at amounts well below a stocks’ fair market value on the date of issue. As a consequence, a stock’s par value has no economic significance today.
Topic: No-Par Value LO: 2 15. No-par stock refers to the stock of a corporation whose current market price has fallen below its par value. Answer: False Rationale: Most states permit the issuance of capital stock without a par value, called no par value stock. The company’s board of directors, however, usually sets a stated value for the no par stock. In such cases, the stated value will determine the corporation’s legal capital.
Topic: Cumulative Feature LO: 3 16. The cumulative feature on preferred stock means that regular dividends to preferred stockholders omitted in past years must be paid in addition to the current year’s dividend before any dividend distribution may be made to common stockholders. Answer: True
©Cambridge Business Publishers, 2020 11-4
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Residual Ownership LO: 3 17. Preferred stockholders compose the basic, residual ownership class in a corporation. Answer: False Rationale: When a corporation liquidates, it converts its assets to a form suitable for distribution, usually cash, which it then distributes to all parties (including preferred stockholders) having claims on the corporate assets. Any assets remaining after all claims have been satisfied belong to the residual owners of the corporation—common stockholders.
Topic: Issued Shares LO: 3 18. For a corporation, the shares of outstanding stock plus the shares of treasury stock equals the shares of issued stock. Answer: True
Topic: Noncash Stock Issuances LO: 4 19. Property or services received in exchange for capital stock should be recorded at the par or stated value of the shares issued. Answer: False Rationale: When property or services are received in exchange for capital stock, the exchange is recorded at the fair value of the services or property received.
Topic: Stock Splits LO: 5 20. A forward stock split reduces the dollar balance of the stock account whose stock is split. Answer: False Rationale: A forward stock split increases the number of shares outstanding and is accounted for by reducing the par value or stated value of the stock affected. A forward stock split does not change the balances of any of the stockholders’ equity accounts.
Topic: Stock Splits LO: 5 21. The primary reason for a stock split is to reduce the market price of the stock. Answer: True
Topic: Treasury Stock LO: 6 22. Treasury stock is classified as a long-term investment in the balance sheet. Answer: False Rationale: The Treasury Stock account is a contra-stockholders’ equity account and its balance is deducted when deriving total stockholders’ equity on the balance sheet.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-5
Topic: Return on Common Stockholders’ Equity LO: 9 23. Return on common stockholders’ equity is computed by dividing the annual net income available to common stockholders by the average common stockholders’ equity for the year. Answer: True
Topic: Return on Common Stockholders’ Equity and Stock Splits LO: 5, 9 24. If a firm splits its common stock three for one at year-end, then the return on common stockholders’ equity will be lower than what it would have been without the stock split. Answer: False Rationale: The return on common stockholders’ equity is calculated as: (net income – preferred stock dividends) divided by average common stockholders’ equity. A forward stock split does not change the balances of any of the stockholders’ equity accounts. Since the stockholders’ equity account (the ratio denominator) does not change, the ratio does not change as a result of the stock split.
Topic: Stock Dividend Distributable LO: 7 25. The Stock Dividend Distributable account should be classified on the balance sheet as a current liability. Answer: False Rationale: If a balance sheet is prepared between the declaration date and the distribution date of a stock dividend, the Stock Dividend Distributable account is shown in stockholders’ equity immediately after the Common Stock account.
Topic: Stock Dividends LO: 7 26. The accounting for large stock dividends (those over 25%) differs from the accounting for small stock dividends (those less than 25%). Answer: True
Topic: Cash Dividends LO: 7 27. Cash dividends become an obligation of the corporation on the date they are declared by the board of directors. Answer: True
Topic: Cash Dividends LO: 7 28. Cash dividends are paid to those stockholders who own the shares of stock on the dividend payment date. Answer: False Rationale: At the date of declaration a record date and payment date are established. Stockholders owning stock on the declaration date receive the dividend even if they dispose of their shares before the payment date. Therefore, shares sold between the record date and the payment date, are sold ex dividend—that is, they are sold without the right to receive the dividend.
©Cambridge Business Publishers, 2020 11-6
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Statement of Stockholders’ Equity LO: 8 29. A statement of stockholders’ equity includes an analysis of the Retained Earnings account for the accounting period. Answer: True
Topic: Statement of Retained Earnings LO: 8 30. A statement of retained earnings will disclose the amount of net income (or loss) for the accounting period. Answer: True
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-7
Multiple Choice Topic: Par Value LO: 2 Level of Difficulty: EASY 1. Which best describes par value for stock? A) An arbitrary amount set by the company for each share of stock B) The value at which stock shares were issued C) The current market value of the stock D) The amount expected to be paid out as a dividend on a share of stock Answer: A Rationale: The par value is an arbitrary amount specified in the corporate charter for each share of stock. Generally, it has no substance from a financial reporting or statement analysis perspective.
Topic: Small Stock Dividends LO: 7 Level of Difficulty: MEDIUM 2. For small stock dividends, by what amount are retained earnings reduced? A) Par value of the dividend B) Book value of the dividend C) Par value of the stock D) Market value of the dividend Answer: D
Topic: Convertible Securities LO: 3 Level of Difficulty: MEDIUM 3. Which benefits do convertible preferred stockholders hold? I. The securities carry a fixed dividend yield. II. The securities carry a senior claimant position in bankruptcy. III. The owner can convert the debt or equity security into another equity security. A) B) C) D)
I and II II and III I only I, II, and III
Answer: D Rationale: A convertible security has all of the benefits listed.
Topic: Paid-In Capital LO: 4 Level of Difficulty: EASY 4. Which one of the following selections is a not component of Paid-in Capital? A) Retained earnings B) Common stock C) Additional paid-In capital D) All of the above Answer: A Rationale: Retained earnings is a separate component of stockholder’s equity.
©Cambridge Business Publishers, 2020 11-8
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Accounting for Stock Issuance LO: 4 Level of Difficulty: MEDIUM 5. If a company issues 10,000 shares of $6 par value common stock at a market price of $90 per share, which of the following is the correct balance sheet entry? A) Increase cash by $900,000 and increase paid-in capital by $900,000 B) Increase cash by $900,000 and increase retained earnings by $900,000 C) Increase revenues by $900,000 D) Increase common stock and cash by $60,000 Answer: A
Topic: Accounting for Stock Issuance LO: 4 Level of Difficulty: MEDIUM 6. If a company issues 10,000 shares of $8 par value common stock at a market price of $120 per share, which of the following is the correct balance sheet entry? A) Increase cash by $1,200,000 and increase paid-in capital by $1,200,000 B) Increase cash by $1,200,000 and increase retained earnings by $1,200,000 C) Increase revenues by $1,200,000 D) Increase common stock and cash by $80,000 Answer: A
Topic: Dividend Preference for Preferred Stock LO: 3 Level of Difficulty: EASY 7. In October 2019, Illini Corporation distributed profits to its preferred shareholders before its common shareholders. What is the name of the preference that allows this? A) Asset distribution preference B) Treasury preference C) Dividend preference D) Profits preference Answer: C Rationale: Dividend preference refers to the fact that preferred shareholders receive dividends on their shares before common shareholders receive their dividends.
Topic: Stock Split LO: 5 Level of Difficulty: MEDIUM 8. During May 2019, Mathew Outdoor Corporation announced a 3-for-1 forward stock split. This brought the number of shares outstanding from 25,792,000 shares to ___________ shares, and its $1.80 par value to _______ per share. A) 8,597,334; $5.40 B) 8,897,334; $0.60 C) 77,376,000; $5.40 D) 77,376,000; $0.60 Answer: D Rationale: 25,792,000 × 3 = 77,376,000 shares; Par value = $1.80/3 = $0.60 per share
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-9
Topic: Stock Split LO: 5 Level of Difficulty: MEDIUM 9. During May 2019, Brian Outdoor Corporation announced a 4-for-1 stock split. This brought the number of shares outstanding from 14,681,000 shares to ___________ shares, and its $5.40 par value to _____ per share. A) 3,670,250; $21.60 B) 3,670,250; $ 1.35 C) 58,724,000; $21.60 D) 58,724,000; $ 1.35 Answer: D Rationale: 14,681,000 million × 4 = 58,724,000 shares; Par value = $5.40/4 = $1.35 per share
Topic: Large Stock Dividend LO: 7 Level of Difficulty: MEDIUM 10. Oma Company plans to issue a large stock dividend. In accounting for this transaction, what effects occur to the contributed capital section of stockholders’ equity? A) Common stock increases by the total market value of the dividend B) Common stock increases by the number of dividend shares × par value per share, and retained earnings decreases for the same amount C) Common stock increases by the number of dividend shares × par value per share, and retained earnings increases for the balance D) Retained earnings increases by the number of dividend shares × par value per share, and additional paid-in capital increases for the balance Answer: B Rationale: Common stock increased by: Dividend shares × Par value per share. Retained earnings is decreased by the same amount.
Topic: Dividend Preference LO: 3 Level of Difficulty: MEDIUM 11. Ponce Company has 50,000 shares of $100 par value, 8% cumulative preferred stock and 160,000 shares of $60 par value common stock. Ponce declares and pays cash dividends amounting to $440,000. If no arrearage on the preferred stock exits, how much in total dividends is paid to each class of stock? A) Preferred Common $440,000 $0 B) Preferred Common $128,000 $312,000 C) Preferred Common $320,000 $120,000 D) Preferred Common $400,000 $40,000 Answer: D Rationale: $100 × 50,000 × 8% = $400,000 Balance to common: $440,000 - $400,000 = $40,000 ©Cambridge Business Publishers, 2020 11-10
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Dividend Preference LO: 3 Level of Difficulty: MEDIUM 12. Nunez Company has 50,000 shares of $300 par value, 8% cumulative preferred stock and 160,000 shares of $180 par value common stock. Nunez declares and pays cash dividends amounting to $1,320,000. If no arrearage on the preferred stock exits, how much in total dividends is paid to each class of stock? A) Preferred Common $1,320,000 $0 B) Preferred Common $389,000 $936,000 C) Preferred Common $960,000 $360,000 D) Preferred Common $1,200,000 $120,000 Answer: D Rationale: $300 × 50,000 × 8% = $1,200,000 Balance to common: $1,320,000 - $1.200,000 = $120,000
Topic: Asset Distribution Preference LO: 3 Level of Difficulty: MEDIUM 13. As a preferred stockholder, you are entitled to numerous preferences and privileges over common stockholders. If you are a preferred stockholder of a company that has fallen on economic hardship and is likely to go bankrupt, which preference or privilege of preferred stock is going to be most useful to you? A) Dividend preference B) Asset distribution preference C) Conversion privileges D) Participation privilege Answer: B Rationale: If a company fails, its assets are sold and the proceeds are paid to debt holders and stockholders, in that order. Preferred shareholders receive payment in full before common shareholders.
Topic: Paid-In Capital LO: 4 Level of Difficulty: EASY 14. In what section of the stockholders’ equity portion of the balance sheet can preferred stock, common stock, and additional paid-in capital be found? A) Paid-in capital B) Treasury stock C) Earned capital D) Retained earnings Answer: A Rationale: All stock accounts are found in the paid-in capital section of stockholders’ equity.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-11
USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 15 & 16. On September 1, 2019, Nichole Company’s balance sheet indicates there are 1,800,000 shares of $60 par value common shares in the Common Stock account and $1,350,000 in the Additional Paid-in Capital account. There are 3,000,000 shares authorized. On September 2, Nichole splits its stock 2 for 1.
Topic: Stock Split LO: 5 Level of Difficulty: MEDIUM 15. How many shares of Nichole common stock are issued and outstanding immediately after the stock split? A) 900,000 B) 3,600,000 C) 4,200,000 D) 12,000,000 Answer: B Rationale: Immediately after the 2 for 1 stock split, the company has 3,600,000 (1,800,000 x 2) shares of $30 ($60 / 2) par value common stock issued and outstanding.
Topic: Stock Split LO: 5 Level of Difficulty: EASY 16. What is the dollar balance of Nichole’s common stock account immediately after the stock split? A) $ 54,000,000 B) $108,000,000 C) $ 27,000,000 D) $216,000,000 Answer: B Rationale: The dollar balance in the Common Stock account is unchanged by the stock split; the balance remains at $108,000,000 (3,600,000 shares x $30 par value per share).
©Cambridge Business Publishers, 2020 11-12
th
Financial Accounting for Undergraduates, 4 Edition
USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 17 & 18. On September 1, 2019, CNN Company’s balance sheet indicates there are 1,800,000 shares of $120 par value common shares in the Common Stock account and $18,000,000 in the Additional Paid-in Capital account. There are 4,000,000 shares authorized. On September 2, CNN splits its stock 2 for 1.
Topic: Stock Split LO: 5 Level of Difficulty: MEDIUM 17. How many shares of CNN common stock are issued and outstanding immediately after the stock split? A) 1,200,000 B) 4,800,000 C) 3,600,000 D) 16,000,000 Answer: C Rationale: Immediately after the 2 for 1 stock split, the company has 3,600,000 (1,800,000 × 2) shares of $60 [$120 / 2] par value common stock issued and outstanding.
Topic: Stock Split LO: 5 Level of Difficulty: EASY 18. What is the dollar balance of CNN’s common stock account immediately after the stock split? A) $ 36,000,000 B) $216,000,000 C) $ 18,000,000 D) $144,000,000 Answer: B Rationale: The dollar balance in the Common Stock account is unchanged by the stock split; the balance remains at $216,000,000 (3,600,000 shares x $60 par value per share).
Topic: Dividends LO: 3 Level of Difficulty: MEDIUM 19. Jessie Company has 40,000 shares of $240 par value, 5% cumulative preferred stock and 140,000 shares of $60 par value common stock. Jessie declares and pays cash dividends amounting to $675,000. If no arrearage on the preferred stock exists, how much in dividends per share (use two decimal places) is paid to the common stockholders? A) $ 1.39 B) $11.92 C) $ 2.98 D) $ 4.80 Answer: A Rationale:
$240 × 40,000 × 5% Balance to common ($675,000 - $480,000) Per share to common: $195,000/140,000 shares
Distribution to Preferred Common $480,000 $195,000 $1.39
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-13
Topic: Dividends LO: 3, 7 Level of Difficulty: MEDIUM 20. Alicia Company has 40,000 shares of $320 par value, 5% cumulative preferred stock and 140,000 shares of $80 par value common stock. Alicia declares and pays cash dividends amounting to $900,000. If no arrearage on the preferred stock exists, how much in dividends per share (use two decimal places) is paid to the common stockholders? A) $ 1.86 B) $16.00 C) $ 4.00 D) $ 6.44 Answer: A Rationale: Distribution to Preferred Common $320 × 40,000 × 5% Balance to common ($900,000 - $640,000) Per share to common: $260,000/140,000 shares
$640,000 $260,000 $1.86
Topic: Disadvantages of the Corporate Form of Organization LO: 1 Level of Difficulty: EASY 21. Which of the following is an organizational disadvantage of a corporation? A) Separate legal entity B) Taxable entity C) Relative ease of ownership transfer D) Limited liability of owners Answer: B Rationale: The organizational disadvantages of a corporation include organization costs, taxation, regulation, and supervision.
Topic: Advantages of the Corporate Form of Organization LO: 1 Level of Difficulty: EASY 22. Which of the following is an organizational advantage of a corporation? A) Nontaxable entity B) Legal entity separate from the owners C) Unlimited liability of owners D) Limited ability to raise capital Answer: B Rationale: The organizational advantages of a corporation include being a separate legal entity, having limited liability, ease of transferability of ownership, having continuity of existence, and the ease of raising capital.
©Cambridge Business Publishers, 2020 11-14
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Disadvantages of the Corporate Form of Organization LO: 1 Level of Difficulty: EASY 23. A corporation: A) Is less costly to organize than a partnership B) Is subject to less regulation and supervision than a partnership C) Is subject to federal income taxes on its earnings, whereas a partnership is not D) Has an owner’s capital account for each owner, whereas a partnership does not Answer: C Rationale: The organizational disadvantages of a corporation include organization costs, taxation, regulation, and supervision.
Topic: Characteristic of a Corporation LO: 1 Level of Difficulty: EASY 24. A corporation: A) Maintains separate capital and drawing accounts for each owner B) May acquire assets, incur debt, and enter into contracts in its own name C) Sells articles of incorporation to obtain funds to acquire operating assets D) Pays state income taxes but is not subject to the federal income tax Answer: B
Topic: Articles of Incorporation LO: 1 Level of Difficulty: EASY 25. The document that sets forth the structure and purposes of a corporation is the: A) Charter B) Certificate of common stock C) Certificate of incorporation D) Articles of incorporation Answer: D
Topic: Par Value LO: 2 Level of Difficulty: EASY 26. The face value for a share of stock, which may be specified in a corporate charter, is the stock’s: A) Liquidation value B) Stated value C) Par value D) Book value Answer: C
Topic: Legal Capital LO: 2 Level of Difficulty: EASY 27. The minimum amount of contributed capital that must remain in the corporation as a margin of protection for creditors is called the: A) Paid-in capital B) Legal capital C) Retained earnings D) Treasury stock Answer: B ©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-15
Topic: Common Stock LO: 3 Level of Difficulty: MEDIUM 28. When only one class of stock is issued by a corporation, it should be termed: A) Authorized stock B) Treasury stock C) Common stock D) Preferred stock Answer: C
Topic: Authorized, Issued, and Outstanding Shares LO: 3 Level of Difficulty: MEDIUM 29. Which of the following statements is correct? A) A corporation’s issued stock may exceed its outstanding stock. B) A corporation’s outstanding stock may exceed its authorized stock. C) A corporation’s issued stock may exceed its authorized stock. D) A corporation’s treasury stock may exceed its issued stock. Answer: A Rationale: Authorized shares are the maximum number of shares of stock that may be issued. Issued shares are the shares that have been sold and issued to stockholders. Issued shares also include shares repurchased by the corporation. Shares actually held by stockholders are called outstanding shares.
Topic: Preemptive Right LO: 3 Level of Difficulty: EASY 30. Which of the following rights allows a shareholder of a corporation to maintain his or her proportionate interest in the corporation? A) Preemptive right B) Participation right C) Preferred right D) Cumulative right Answer: A
Topic: Common Stockholders LO: 3 Level of Difficulty: MEDIUM 31. Which of the following rights do common stockholders typically not have? A) Right to vote and the right to elect the board of directors B) Right to receive the final distribution of assets in liquidation after prior claims have been settled C) Right to participate in additional issues of stock D) Right to receive dividends at a predetermined rate Answer: D Rationale: Common stockholders have the right to vote on corporate matters, to share in the corporation’s net income, to participate in additional issuances of stock, and in the case of a corporate liquidation, to share in any asset distributions after any prior claims against the corporation by its creditors have been settled. Common stockholders do not have a right to receive dividends at a predetermined rate.
©Cambridge Business Publishers, 2020 11-16
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Preemptive Right LO: 3 Level of Difficulty: EASY 32. The preemptive right refers to the right of common stockholders to: A) Receive dividends before interest is paid to creditors B) Receive assets before preferred stockholders when the corporation dissolves C) Maintain their proportionate interests in the corporation when additional shares are issued D) Vote on matters requiring the approval of owners Answer: C . Topic: Cumulative Dividends LO: 3 Level of Difficulty: MEDIUM 33. Altgeld, Inc., has outstanding 10,000 shares of $150 par value, 7% nonparticipating, cumulative preferred stock and 10,000 shares of $30 par value common stock. If the dividend on preferred stock is one year in arrears, and the total cash dividend declared this year is $216,000, then the total amounts distributed to preferred and common stockholders, respectively, are: A) $ 63,000 and $153,000 B) $210,000 and $ 6,000 C) $105,000 and $111,000 D) $180,000 and $ 36,000 Answer: B Rationale: To preferred (7% x $1,500,000) x 2 years: $210,000 Remainder to common: $6,000
Topic: Cumulative Dividends LO: 3 Level of Difficulty: MEDIUM 34. Belmont, Inc., has outstanding 10,000 shares of $200 par value, 7% nonparticipating, cumulative preferred stock and 10,000 shares of $40 par value common stock. If the dividend on preferred stock is one year in arrears, and the total cash dividend declared this year is $288,000, then the total amounts distributed to preferred and common stockholders, respectively, are: A) $ 84,000 and $204,000 B) $280,000 and $ 8,000 C) $108,000 and $180,000 D) $240,000 and $ 48,000 Answer: B Rationale: To preferred (7% x $2,000,000) x 2 years: $280,000 Remainder to common: $8,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-17
Topic: Cumulative Dividends LO: 3 Level of Difficulty: MEDIUM 35. Kimball, Inc., has outstanding 10,000 shares of $75 par value, 6% nonparticipating, cumulative preferred stock and 16,000 shares of $15 par value common stock. If the dividend on preferred stock is two years in arrears, and the total cash dividend declared this year is $255,000, then the total amounts distributed to preferred and common stockholders, respectively, are: A) $135,000 and $120,000 B) $ 40,500 and $214,500 C) $ 90,000 and $165,000 D) $ 81,000 and $174,000 Answer: A Rationale: To preferred (6% x $750,000) x 3 years: $135,000 Remainder to common: $120,000
Topic: Cumulative Dividends LO: 3 Level of Difficulty: MEDIUM 36. Hinman, Inc., has outstanding 10,000 shares of $100 par value, 6% nonparticipating, cumulative preferred stock and 16,000 shares of $20 par value common stock. If the dividend on preferred stock is two years in arrears, and the total cash dividend declared this year is $340,000, then the total amounts distributed to preferred and common stockholders, respectively, are: A) $180,000 and $160,000 B) $ 54,000 and $286,000 C) $127,500 and $212,500 D) $108,000 and $232,000 Answer: A Rationale: To preferred (6% x $1,000,000) x 3 years: $180,000 Remainder to common: $160,000
Topic: Cumulative Dividends LO: 3 Level of Difficulty: MEDIUM 37. Annabeth, Inc. has outstanding 8,000 shares of $150 par value, 8% nonparticipating, cumulative preferred stock, and 20,000 shares of $45 par value common stock. If the dividend on preferred stock is one year in arrears, and the total cash dividend declared this year is $420,000, the total amounts distributed to preferred and common stockholders are, respectively: A) $192,000 and $228,000 B) $ 96,000 and $324,000 C) $120,000 and $300,000 D) $180,000 and $240,000 Answer: A Rationale: To preferred (8% x $1,200,000) x 2 years: $192,000 Remainder to common: $228,000
©Cambridge Business Publishers, 2020 11-18
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Cumulative Dividends LO: 3 Level of Difficulty: MEDIUM 38. Wilson, Inc. has outstanding 20,000 shares of $80 par value, 6% nonparticipating, cumulative preferred stock, and 30,000 shares of $20 par value common stock. If the dividend on preferred stock is two years in arrears, and the total cash dividend declared this year is $414,000, the total amounts distributed to preferred and common stockholders are, respectively: A) $ 96,000 and $318,000 B) $192,000 and $222,000 C) $ 48,000 and $366,000 D) $288,000 and $126,000 Answer: D Rationale: To preferred (6% x $1,600,000) x 3 years: $288,000 Remainder to common: $126,000
Topic: Callable Stock LO: 3 Level of Difficulty: MEDIUM 39. A particular stock may be redeemed at a specified price by the issuing corporation at a certain time after its original issue date. This stock is properly considered: A) Convertible B) Participating C) Cumulative D) Callable Answer: D
Topic: Dividends in Arrears LO: 3 Level of Difficulty: MEDIUM 40. Assume that a corporation’s dividends are two years in arrears for its outstanding preferred stock. In the corporation’s financial statements, these arrearages are: A) Disclosed as a current liability in the balance sheet B) Disclosed as a long-term liability in the balance sheet C) Disclosed in the notes to the financial statements D) Disclosed as a current liability (for the most recent arrearage) and a long-term liability (for the oldest arrearage) in the balance sheet Answer: C
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-19
Topic: Stock Issuance Journal Entries LO: 4 Level of Difficulty: MEDIUM 41. Bandit, Inc. issued, for $57 per share, 5,000 shares of $30 par value common stock. The journal entry to record this transaction is: A) Cash
285,000 Common Stock
B) Cash
285,000 285,000
Common Stock Paid-in Capital in Excess of Par Value C) Cash
150,000 135,000 285,000
Common Stock Retained Earnings D) Cash
150,000 135,000 285,000
Common Stock Gain on Sale of Stock
150,000 135,000
Answer: B Rationale: Cash received = $57 x 5,000 shares = $285,000 Common stock = $30 par x 5,000 shares = $150,000 Paid–in capital = ($57 - $30) x 5,000 shares = $135,000
Topic: Stock Issuance Journal Entries LO: 4 Level of Difficulty: MEDIUM 42. Minerva, Inc. issued, for $76 per share, 5,000 shares of $40 par value common stock. The journal entry to record this transaction is: A) Cash
380,000 Common Stock
B) Cash
380,000 380,000
Common Stock Paid-in Capital in Excess of Par Value C) Cash
200,000 180,000 380,000
Common Stock Retained Earnings D) Cash
200,000 180,000 380,000
Common Stock Gain on Sale of Stock
200,000 180,000
Answer: B Rationale: Cash received = $76 x 5,000 shares = $380,000 Common stock = $40 par x 5,000 shares = $200,000 Paid–in capital = ($76 - $40) x 5,000 shares = $180,000
©Cambridge Business Publishers, 2020 11-20
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Stock Issuance Journal Entries LO: 4 Level of Difficulty: MEDIUM 43. Tatro, Inc. issued, for $60 per share, 4,000 shares of $45 par value common stock. The journal entry to record this transaction is: A) Cash
240,000 Common Stock
B) Cash
240,000 240,000
Common Stock Paid-in Capital in Excess of Par Value C) Cash
180,000 60,000 240,000
Common Stock Retained Earnings D) Cash
180,000 60,000 240,000
Common Stock Gain on Sale of Stock
180,000 60,000
Answer: B Rationale: Cash received = $60 x 4,000 shares = $240,000 Common stock = $45 par x 4,000 shares = $180,000 Paid–in capital = ($60 - $45) x 4,000 shares = $60,000
Topic: Stock Issuance Journal Entries LO: 4 Level of Difficulty: MEDIUM 44. Kailey, Inc. issued 20,000 shares of no-par common stock, stated value $20, at $32 cash per share. The journal entry to record this transaction is: A) Cash
640,000 Common Stock
B) Cash
640,000 640,000
Common Stock Paid-in Capital in Excess of Par Value C) Cash
D) Cash
400,000 240,000 640,000
Common Stock Retained Earnings
400,000 240,000
640,000 Common Stock Paid-in Capital in Excess of Stated Value
400,000 240,000
Answer: D Rationale: Cash received = $32 x 20,000 shares = $640,000 Common stock = $20 stated value x 20,000 shares = $400,000 Paid–in capital = ($32 - $20) x 20,000 shares = $240,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-21
Topic: Stock Issuance Journal Entries LO: 4 Level of Difficulty: MEDIUM 45. Elijah, Inc. issued 20,000 shares of no-par common stock, stated value $60, at $96 cash per share. The journal entry to record this transaction is: A) Cash
1,920,000 Common Stock
B) Cash
1,920,000 1,920,000
Common Stock Paid-in Capital in Excess of Par Value C) Cash
D) Cash
1,200,000 720,000 1,920,000
Common Stock Retained Earnings
1,200,000 720,000
1,920,000 Common Stock Paid-in Capital in Excess of Stated Value
1,200,000 720,000
Answer: D Rationale: Cash received = $96 x 20,000 shares = $1,920,000 Common stock = $60 stated value x 20,000 shares = $1,200,000 Paid –in capital = ($96 - $60) x 20,000 shares = $720,000
Topic: Stock Issuance Journal Entries LO: 4 Level of Difficulty: MEDIUM 46. Necessities, Inc. issued 750 shares of no-par common stock, with no stated value, for $60 cash per share. The journal entry to record this transaction is: A) Cash
45,000 Common Stock
B) Cash
45,000 45,000
Paid-in Capital in Excess of Par Value C) Cash
45,000 45,000
Common Stock Paid-in Capital in Excess of Par Value D) Cash
15,000 30,000 45,000
Common Stock Paid-in Capital in Excess of Par Value
750 44,250
Answer: A Rationale: This is no-par common stock with no stated value. If there is no stated value for the no par value stock, the entire proceeds are credited to the appropriate capital stock account ($60 x 750 shares = $45,000).
©Cambridge Business Publishers, 2020 11-22
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Stock Issuance Journal Entries LO: 4 Level of Difficulty: MEDIUM 47. Finest, Inc. issued 750 shares of no-par common stock, with no stated value, for $180 cash per share. The journal entry to record this transaction is: A) Cash
135,000 Common Stock
B) Cash
135,000 135,000
Paid-in Capital in Excess of Par Value C) Cash
135,000 135,000
Common Stock Paid-in Capital in Excess of Par Value D) Cash
45,000 90,000 135,000
Common Stock Paid-in Capital in Excess of Par Value
1,800 133,200
Answer: A Rationale: This is no-par common stock with no stated value. If there is no stated value for the no par value stock, the entire proceeds are credited to the appropriate capital stock account ($180 x 750 shares = $135,000).
Topic: Noncash Stock Issuances LO: 4 Level of Difficulty: MEDIUM 48. On June 1, 2019, 4,000 shares of $20 par value common stock are issued in exchange for new equipment. Comparable equipment sells for $116,000 cash. Other shares of this class of common stock originally sold for $13 per share in 2019. The journal entry to record this exchange should debit the Equipment account for what amount? A) $116,000 B) $ 80,000 C) $104,000 D) $-0Answer: A
Topic: Noncash Stock Issuances LO: 4 Level of Difficulty: MEDIUM 49. On June 1, 2019, 4,000 shares of $60 par value common stock are issued in exchange for new equipment. Comparable equipment sells for $348,000 cash. Other shares of this class of common stock originally sold for $39 per share in 2019. The journal entry to record this exchange should debit the Equipment account for what amount? A) $348,000 B) $240,000 C) $312,000 D) $-0Answer: A Rationale: Stock issued in exchange for operating assets is accounted for using the fair value of the asset received.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-23
Topic: Common Stock and Treasury Stock Transactions LO: 4, 6 Level of Difficulty: MEDIUM 50. Circe Corporation was organized on January 1, 2019, with an authorization of 2,000,000 shares of $10 par value common stock. During 2019, Circe had the following common stock transactions: Jan. 4: Apr. 8: June 9: July 29: Dec. 31:
Issued 100,000 shares @ $12 per share. Issued 200,000 shares @ $14 per share. Issued 60,000 shares @ $20 per share. Purchased 40,000 shares (treasury) @ $20 per share. Sold 40,000 shares held in treasury @ $24 per share.
Circe had no other transactions affecting paid-in capital. At December 31, 2019, what is the total amount of paid-in capital? A) $5,360,000 B) $3,600,000 C) $1,840,000 D) $1,600,000 Answer: A Rationale: (100,000 x $12) + (200,000 x $14) + (60,000 x $20) + [40,000 x ($24 - $20)] = $5,360,000
Topic: Common Stock and Treasury Stock Transactions LO: 4, 6 Level of Difficulty: MEDIUM 51. Ioanna Corporation was organized on January 1, 2019, with an authorization of 2,000,000 shares of $30 par value common stock. During 2019, Ioanna had the following common stock transactions: Jan. 4: Apr. 8: June 9: July 29: Dec. 31:
Issued 100,000 shares @ $36 per share. Issued 200,000 shares @ $42 per share. Issued 60,000 shares @ $60 per share. Purchased 40,000 shares (treasury) @ $60 per share. Sold 40,000 shares held in treasury @ $72 per share.
Ioanna had no other transactions affecting paid-in capital. At December 31, 2019, what is the total amount of paid-in capital? A) $16,080,000 B) $ 10,080,000 C) $ 5,520,000 D) $ 4,800,000 Answer: A Rationale: (100,000 x $36) + (200,000 x $42) + (60,000 x $60) + [40,000 x ($72 - $60)] = $16,080,000
©Cambridge Business Publishers, 2020 11-24
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Common Stock and Treasury Stock Transactions LO: 4, 6 Level of Difficulty: MEDIUM 52. Kedzie Corporation was organized on January 1, 2019, with an authorization of 5,000,000 shares of $2 par value common stock. During 2019, Kedzie had the following common stock transactions: Jan. 4: Apr. 8: July 29: Oct. 18: Dec. 31:
Issued 300,000 shares @ $16 per share. Issued 100,000 shares @ $12 per share. Purchased 90,000 shares (treasury) @ $14 per share. Sold 60,000 shares held in treasury @ $18 per share. Sold 30,000 shares held in treasury @ $12 per share.
Kedzie had no other transactions affecting paid-in capital. At December 31, 2019, what is the total amount of paid-in capital? A) $6,240,000 B) $6,180,000 C) $5,320,000 D) $5,440,000 Answer: B Rationale: (300,000 x $16) + (100,000 x $12) + [60,000 x ($18 - $14)] - [30,000 x ($14 - $12)] = $6,180,000
Topic: Common Stock and Treasury Stock Transactions LO: 4, 6 Level of Difficulty: MEDIUM 53. Sava Corporation was organized on January 1, 2019, with an authorization of 5,000,000 shares of $4 par value common stock. During 2019, Sava had the following common stock transactions: Jan. 4: Apr. 8: July 29: Oct. 18: Dec. 31:
Issued 300,000 shares @ $48 per share. Issued 100,000 shares @ $36 per share. Purchased 90,000 shares (treasury) @ $42 per share. Sold 60,000 shares held in treasury @ $54 per share. Sold 30,000 shares held in treasury @ $36 per share.
Sava had no other transactions affecting paid-in capital. At December 31, 2019, what is the total amount of paid-in capital? A) $18,720,000 B) $18,540,000 C) $15,960,000 D) $16,320,000 Answer: B Rationale: (300,000 x $48) + (100,000 x $36) + [60,000 x ($54 - $48)] - [30,000 x ($42 - $36)] = $18,540,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-25
Topic: Stock Splits LO: 5 Level of Difficulty: MEDIUM 54. At December 31, 2019, North Corporation had 40,000 shares outstanding of $30 par value common stock. The shares were originally issued for $84 per share. On January 1, 2020, Western split its common stock 3 for 1 with a corresponding reduction in the stock’s par value. The market price of the stock just before the split was $150 per share. After the split, the balance in the common stock account is: A) $1,200,000 B) $6,000,000 C) $3,600,000 D) $3,360,000 Answer: A Rationale: 120,000* shares x $10** par value = $1,200,000 *40,000 shares x 3 = 120,000 shares **$30 / 3 = $10 par value per share
Topic: Stock Splits LO: 5 Level of Difficulty: MEDIUM 55. At December 31, 2019, Northwest Corporation had 40,000 shares outstanding of $90 par value common stock. The shares were originally issued for $252 per share. On January 1, 2020, Northwest split its common stock 3 for 1 with a corresponding reduction in the stock’s par value. The market price of the stock just before the split was $450 per share. After the split, the balance in the common stock account is: A) $ 3.600,000 B) $18,000,000 C) $10,800,000 D) $10,080,000 Answer: A Rationale: 120,000* shares x $30** par value = $3,600,000 *40,000 shares x 3 = 120,000 shares **$90 / 3 = $30 par value per share
Topic: Stock Splits LO: 5 Level of Difficulty: MEDIUM 56. At December 31, 2019, Bentley Corporation had 30,000 shares outstanding of $20 par value common stock. The shares were originally issued for $52 per share. On January 1, 2020, Western split its common stock 4 for 1 with a corresponding reduction in the stock’s par value. The market price of the stock just before the split was $120 per share. After the split, the balance of the common stock account is: A) $3,600,000 B) $ 600,000 C) $1,560,000 D) $1,800,000 Answer: B Rationale: 120,000* shares x 5.00** par value = $600,000 *30,000 shares x 4 = 120,000 shares **$20 / 4 = $5 par value per share
©Cambridge Business Publishers, 2020 11-26
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Stock Splits LO: 5 Level of Difficulty: MEDIUM 57. At December 31, 2019, Western Corporation had 30,000 shares outstanding of $60 par value common stock. The shares were originally issued for $156 per share. On January 1, 2020, Western split its common stock 4 for 1 with a corresponding reduction in the stock’s par value. The market price of the stock just before the split was $360 per share. After the split, the balance of the common stock account is: A) $10,800,000 B) $ 1,800,000 C) $ 4,680,000 D) $ 5,400,000 Answer: B Rationale: 120,000* shares x 15.00** par value = $1,800,000 *30,000 shares x 4 = 120,000 shares **$60 / 4 = $15 par value per share
Treasury Stock LO: 6 Level of Difficulty: MEDIUM 58. San Antonio Corporation purchased 300 shares of its own $20 par value common stock for $15,000. Later, these shares are sold for $16,000 cash. The journal entry to record the sale includes a: A) $ 1,000 credit to Paid-in Capital from Treasury Stock B) $ 9,600 credit to Paid-in Capital from Treasury Stock C) $1,000 credit to Gain on Sale of Treasury Stock D) $16,000 credit to Treasury Stock Answer: A Rationale: The journal entry to record the purchase of 300 shares of $20 par value treasury stock: Treasury stock Cash
15,000 15,000
The journal entry to record the sale of 300 shares of treasury stock for $16,000: Cash
16,000 Treasury stock Paid-in Capital—Treasury stock
15,000 1,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-27
Treasury Stock LO: 6 Level of Difficulty: MEDIUM 59. Austin Corporation purchased 300 shares of its own $60 par value common stock for $45,000. Later, these shares are sold for $48,000 cash. The journal entry to record the sale includes a: A) $ 3,000 credit to Paid-in Capital from Treasury Stock B) $28,800 credit to Paid-in Capital from Treasury Stock C) $ 3,000 credit to Gain on Sale of Treasury Stock D) $48,000 credit to Treasury Stock Answer: A Rationale: The journal entry to record the purchase of 300 shares of $60 par value treasury stock: Treasury stock Cash
45,000 45,000
The journal entry to record the sale of 300 shares of treasury stock for $48,000: Cash
48,000 Treasury stock Paid-in Capital—Treasury stock
45,000 3,000
Topic: Treasury Stock LO: 6 Level of Difficulty: EASY 60. Treasury stock is: A) Stock of other corporations owned by a corporation B) A U.S. government security C) A corporation’s own stock that has been retired D) A corporation’s own stock that has been reacquired and held for future use Answer: D Rationale: When a corporation acquires its own outstanding shares for a purpose other than retiring (cancelling) them, the acquired shares are called treasury stock.
Topic: Treasury Stock LO: 6 Level of Difficulty: MEDIUM 61. The excess of the sales price of treasury stock over its cost should be credited to: A) Retained Earnings B) Paid-in Capital from Treasury Stock C) Treasury Stock D) Extraordinary Gain Answer: B
©Cambridge Business Publishers, 2020 11-28
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Return on Common Stockholders’ Equity LO: 9 Level of Difficulty: EASY 62. Return on common stockholders’ equity is computed by dividing the average common stockholders’ equity for a period into the period’s: A) Net income B) Net income + preferred dividends C) Net income - preferred dividends D) Net income + common dividends Answer: C
Topic: Return on Common Stockholders’ Equity LO: 9 Level of Difficulty: EASY 63. Return on common stockholders’ equity is computed by dividing the net income available to common stockholders by: A) Average total stockholders’ equity B) Year-end common stockholders’ equity C) Average common stockholders’ equity D) Year-end total stockholders’ equity Answer: C
Topic: Return on Common Stockholders’ Equity LO: 9 Level of Difficulty: MEDIUM 64. During 2019, Leon, Inc.’s net income was $700,000. Its common stockholders’ equity was $1,080,000 at January 1, 2019 and $1,720,000 at December 31, 2019. During 2019, Leon had 10,000 outstanding shares of 6%, $100 par value cumulative preferred stock. During December 2019, Leon’s board of directors declared the annual preferred stock dividend and a $120,000 common stock dividend. What is Leon’s 2019 return on common stockholders’ equity? A) 50.0% B) 37.1% C) 17.0% D) 45.7% Answer: D Rationale: [$700,000 - (6% x $1,000,000)] / [($1,080,000 + $1,720,000) / 2] = 45.7%
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-29
Topic: Return on Common Stockholders’ Equity LO: 9 Level of Difficulty: MEDIUM 65. During 2019 Carol, Inc.’s net income was $2,450,000. Its common stockholders’ equity was $3,240,000 at January 1, 2019 and $5,160,000 at December 31, 2019. During 2019, Carol had 10,000 outstanding shares of 6%, $450 par value cumulative preferred stock. During December 2019, Carol’s board of directors declared the annual preferred stock dividend and a $360,000 common stock dividend. What is Carol’s 2019 return on common stockholders’ equity? A) 50.7% B) 51.9% C) 41.7% D) 59.5% Answer: B Rationale: [ $2,450,000 - (6% x $4,500,000)] / [($3,240,000 + $5,160,000) / 2] = 51.9%
Topic: Return on Common Stockholders’ Equity LO: 9 Level of Difficulty: MEDIUM 66. During 2019, Serina, Inc.’s net income was $400,000. Its common stockholders’ equity was $1,400,000 at January 1, 2019 and $1,800,000 at December 31, 2019. During December 2019, Serina’s board of directors declared a $50,000 preferred stock dividend and a $120,000 common stock dividend. What is Serina’s 2019 return on common stockholders’ equity? A) 14.4% B) 25.0% C) 21.9% D) 15.9% Answer: C Rationale: ($400,000 - $50,000) / [($1,400,000 + $1,800,000) / 2] = 21.9%
Topic: Return on Common Stockholders’ Equity LO: 9 Level of Difficulty: MEDIUM 67. During 2019, Troy, Inc.’s net income was $1,400,000. Its common stockholders’ equity was $4,200,000 at January 1, 2019 and $5,400,000 at December 31, 2019. During December 2019, Troy’s board of directors declared a $450,000 preferred stock dividend and a $360,000 common stock dividend. What is Troy’s 2019 return on common stockholders’ equity? A) 10.2% B) 31.5% C) 27.6% D) 19.8% Answer: D Rationale: ($1,400,000 - $450,000) / [($4,200,000 + $5,400,000) / 2] = 19.8%
©Cambridge Business Publishers, 2020 11-30
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Small Stock Dividends LO: 7 Level of Difficulty: MEDIUM 68. How would the declaration of a 10% stock dividend affect each of the following amounts (after the accounts are closed at period-end)? A) Total Retained Earnings Decrease
Total Stockholders’ Equity Decrease
Total Retained Earnings Decrease
Total Stockholders’ Equity No effect
Total Retained Earnings No effect
Total Stockholders’ Equity Decrease
Total Retained Earnings No effect
Total Stockholders’ Equity No effect
Total Retained Earnings Decrease
Total Stockholders’ Equity Increase
B)
C)
D)
E)
Answer: B Rationale: Small stock dividends are recorded at the market value of the shares issued, causing retained earnings to decrease and paid-in capital to increase by this amount. Since retained earnings and paid-in capital are both included in total stockholders’ equity, there is no effect because the increase and the decrease offset each other.
Topic: Small Stock Dividends LO: 7 Level of Difficulty: MEDIUM 69. Bryn Mar Company is authorized to issue 1,000,000 shares of $10 par value common stock. By March 15, 2019, the company had issued 200,000 shares at $34 per share. On March 15, 2019, the company declared a 10% stock dividend when the market price was $40 per share. What amount is transferred from retained earnings to paid-in capital as a result of the stock dividend? A) $ 600,000 B) $ 200,000 C) $ 800,000 D) $2,400,000 Answer: C Rationale: (10% x 200,000) x $40 = $800,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-31
Topic: Small Stock Dividends LO: 7 Level of Difficulty: MEDIUM 70. M. Majors Sporting Goods Company is authorized to issue 1,000,000 shares of $30 par value common stock. By March 15, 2019, the company had issued 200,000 shares at $102 per share. On March 15, 2019, the company declared a 10% stock dividend when the market price was $120 per share. What amount is transferred from retained earnings to paid-in capital as a result of the stock dividend? A) $1,800,000 B) $ 600,000 C) $2,400,000 D) $7,200,000 Answer: C Rationale: (10% x 200,000) x $120 = $2,400,000
Topic: Small Stock Dividends LO: 7 Level of Difficulty: MEDIUM 71. Linden Tree Company is authorized to issue 500,000 shares of $20 par value common stock. By March 15, 2019, the company had issued 120,000 shares at $32 per share. On March 15, 2019, the company declared a 5% stock dividend when the market price was $30 per share. What amount is transferred from retained earnings to paid-in capital as a result of the stock dividend? A) $120,000 B) $300,000 C) $180,000 D) $450,000 Answer: C Rationale: (5% x 120,000) x $30 = $180,000
Topic: Small Stock Dividends LO: 7 Level of Difficulty: MEDIUM 72. Oak Company is authorized to issue 500,000 shares of $60 par value common stock. By March 15, 2019, the company had issued 120,000 shares at $96 per share. On March 15, 2019, the company declared a 5% stock dividend when the market price was $90 per share. What amount is transferred from retained earnings to paid-in capital as a result of the stock dividend? A) $ 360,000 B) $ 900,000 C) $ 540,000 D) $1,350,000 Answer: C Rationale: (5% x 120,000) x $90 = $540,000
©Cambridge Business Publishers, 2020 11-32
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Large Stock Dividends LO: 7 Level of Difficulty: MEDIUM 73. Berwyn Company is authorized to issue 1,000,000 shares of $40 par value common stock. By November 15, 2019, the company had issued 50,000 shares at $50 per share. On November 15, 2019, the company declared a 30% stock dividend when the market price was $52 per share. What amount is transferred from retained earnings to paid-in capital as a result of the stock dividend? A) $ 600,000 B) $ 780,000 C) $2,400,000 D) $3,120,000 Answer: A Rationale: (30% x 50,000) x $40 par value = $600,000
Topic: Large Stock Dividends LO: 7 Level of Difficulty: MEDIUM 74. Mandarin Company is authorized to issue 1,250,000 shares of $15 par value common stock. By November 15, 2019, the company had issued 60,000 shares at $36 per share. On November 15, 2019, the company declared a 50% stock dividend when the market price was $45 per share. What amount is transferred from retained earnings to paid-in capital as a result of the stock dividend? A) $1,875,000 B) $ 450,000 C) $ 900,000 D) $1,350,000 Answer: B Rationale: (50% x 60,000) X $15 par value = $450,000
Topic: Large Stock Dividends LO: 7 Level of Difficulty: MEDIUM 75. Chive Company is authorized to issue 1,250,000 shares of $20 par value common stock. By November 15, 2019, the company had issued 60,000 shares at $48 per share. On November 15, 2019, the company declared a 50% stock dividend when the market price was $60 per share. What amount is transferred from retained earnings to paid-in capital as a result of the stock dividend? A) $2,500,000 B) $ 600,000 C) $1,800,000 D) $1,500,000 Answer: B Rationale: (50% x 60,000) x $20 par value = $600,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-33
Topic: Statement of Retained Earnings LO: 8 Level of Difficulty: EASY 76. Which of the following items is disclosed in a statement of retained earnings? A) Retained earnings balance at the beginning of the period B) Common stock issued during the period C) Treasury shares sold during the period D) Paid-in capital balance at the beginning of the period Answer: A
Topic: Statement of Retained Earnings LO: 8 Level of Difficulty: EASY 77. Which of the following events is not disclosed in a statement of retained earnings? A) Cash dividends declared during the period B) Treasury stock acquired during the period C) Stock dividends declared during the period D) Net income for the period Answer: B
Topic: Statement of Stockholders’ Equity LO: 8 Level of Difficulty: EASY 78. A statement of stockholders’ equity: A) Replaces the income statement as a basic financial statement B) Presents an analysis of all components of stockholders’ equity for the accounting period C) May be presented in a single-step or multiple-step format D) None of the above Answer: B
Topic: Statement of Stockholders’ Equity LO: 8 Level of Difficulty: EASY 79. Which of the following financial statements will disclose the total par value of common stock shares issued during the year? A) Balance sheet B) Statement of retained earnings C) Statement of stockholders’ equity D) Income statement Answer: C
©Cambridge Business Publishers, 2020 11-34
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Financial Statements LO: 8 Level of Difficulty: EASY 80. Which of the following financial statements will disclose a corporation’s year-end retained earnings? A) Statement of stockholders’ equity B) Balance sheet C) Statement of retained earnings D) All of the above Answer: D
Topic: Financial Statements LO: 8 Level of Difficulty: MEDIUM 81. Which of the following financial statements will disclose a firm’s net income for the year? A) Statement of retained earnings B) Income statement C) Statement of stockholders’ equity D) All of the above Answer: D
Topic: Retained Earnings LO: 6, 7 Level of Difficulty: MEDIUM 82. Which of the following events increases retained earnings? A) Declaring a cash dividend and paying a previously declared cash dividend B) Declaring a 10% common stock dividend C) Purchasing treasury stock D) None of the above Answer: D
Topic: Statement of Stockholders’ Equity LO: 8 Level of Difficulty: MEDIUM 83. Weiss Corporation reported the following information at December 31, 2019: Preferred stock, $30 par, 10,000 shares authorized, issued, and outstanding; cumulative; nonparticipating; callable at par value Common stock, $3 par, 500,000 shares authorized Additional paid-in capital - Common Retained earnings Total stockholders' equity
$300,000 300,000 75,000 225,000 $900,000
The total paid-in capital is: A) $225,000 B) $300,000 C) $525,000 D) $675,000 Answer: D Rationale: $300,000 + $300,000 + $75,000 = $675,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-35
Topic: Statement of Stockholders’ Equity LO: 8 Level of Difficulty: MEDIUM 84. Krueg Corporation reported the following information at December 31, 2019: Preferred stock, $40 par, 10,000 shares authorized, issued, and outstanding; cumulative; nonparticipating; callable at par value Common stock, $4 par, 500,000 shares authorized Additional paid-in capital - Common Retained earnings Total stockholders' equity
$ 400,000 400,000 100,000 300,000 $1,200,000
The total paid-in capital is: A) $300,000 B) $800,000 C) $700,000 D) $900,000 Answer: D Rationale: $400,000 + $400,000 + $100,000 = $900,000
Topic: Statement of Stockholders’ Equity LO: 8 Level of Difficulty: MEDIUM 85. The following selected list of accounts with their normal balances was taken from the general ledger of Robbie Company as of December 31, 2019: Common stock, $1 par Robbie Retained earnings Paid-in capital in excess of par - preferred Treasury Stock Preferred stock, $100 par Paid-in capital in excess of par -common
$ 380,000 262,000 70,000 330,000 600,000 760,000
Given above information, at the end of 2019: A) Total Paid-in Capital is $2,140,000, and Total Stockholders' equity is $2,402,000 B) Total Paid-in Capital is $1,480,000, and Total Stockholders' equity is $1,218,000 C) Total Paid-in Capital is $1,810,000, and Total Stockholders' equity is $1,742,000 D) Total Paid-in Capital is $1,480,000, and Total Stockholders' equity is $1,742,000 Answer: C Rationale: $380,000 + 70,000 + $600,000 + $760,000 = $1,810,000 =Total paid-in capital $1,810,000 + $262,000 - $330,000 = $1,742,000 = Total stockholders’ equity
©Cambridge Business Publishers, 2020 11-36
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Statement of Stockholders’ Equity LO: 8 Level of Difficulty: MEDIUM 86. The following selected list of accounts with their normal balances was taken from the general ledger of Hoover Company as of December 31, 2019: $ 1,140,000 786,000 210,000 990,000 1,800,000 2,280,000
Common stock, $1 par Hoover Retained earnings Paid-in capital in excess of par - preferred Treasury Stock Preferred stock, $150 par Paid-in capital in excess of par -common
Given above information, at the end of 2019: A) Total Paid-in Capital is $6,420,000, and Total Stockholders' equity is $7,206,000 B) Total Paid-in Capital is $4,440,000, and Total Stockholders' equity is $3,654,000 C) Total Paid-in Capital is $5,430,000, and Total Stockholders' equity is $5,226,000 D) Total Paid-in Capital is $4,440,000, and Total Stockholders' equity is $5,226,000 Answer: C Rationale: $1,140,000 + 210,000 + $1,800,000 + $2,280,000 = $5,430,000 =Total paid-in capital $5,430,000 + $786,000 - $990,000 = $5,226,000 = Total stockholders’ equity
Topic: Stock Issuances for Operating assets LO: 4 Level of Difficulty: DIFFICULT 87. A corporation received land valued at $170,000 and a building valued at $205,000 in exchange for 5,000 shares of $40 par value common stock and $100,000 cash. The entry to record this transaction includes a credit to: A) Paid-in capital in excess of par-common for $75,000 B) Common stock for $375,000 C) Retained earnings for $75,000 D) Paid-in-capital in excess of par, common stock for $175,000 Answer: A Rationale: The journal entry would be: Land Building
170,000 205,000 Common Stock Paid-in Capital in Excess of Par Value Cash
200,000 75,000 100,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-37
Topic: Stock Issuances for Operating assets LO: 4 Level of Difficulty: DIFFICULT 88. A corporation received land valued at $510,000 and a building valued at $615,000 in exchange for 5,000 shares of $120 par value common stock and $300,000 cash. The entry to record this transaction includes a credit to: A) Paid-in capital in excess of par-common for $225,000 B) Common stock for $1,125,000 C) Retained earnings for $225,000 D) Paid-in-capital in excess of par, common stock for $525,000 Answer: A Rationale: The journal entry would be: Land Building
510,000 615,000 Common Stock Paid-in Capital in Excess of Par Value Cash
600,000 225,000 300,000
Topic: Stock Issuances for Cash LO: 4 Level of Difficulty: MEDIUM 89. Karloff Corporation issued 25,000 shares of $10 par value common stock at $30 per share. As a result of this transaction, Karloff Corporation’s: A) Paid-in Capital in Excess of Par Value increased by $750,000 B) Paid-in Capital in Excess of Par Value increased by $250,000 C) Common Stock increased by $750,000 D) Common Stock increased by $250,000 Answer: D Rationale: Cash Common Stock Paid-in Capital in Excess of Par Value
750,000 250,000 500,000
Topic: Stock Issuances for Cash LO: 4 Level of Difficulty: MEDIUM 90. Bullwinkle Corporation issued 25,000 shares of $30 par value common stock at $90 per share. As a result of this transaction, Bullwinkle Corporation’s: A) Paid-in Capital in Excess of Par Value increased by $2,250,000 B) Paid-in Capital in Excess of Par Value increased by $750,000 C) Common Stock increased by $2,250,000 D) Common Stock increased by $750,000 Answer: D Rationale: Cash
2,250,000 Common Stock Paid-in Capital in Excess of Par Value
750,000 1,500,000
©Cambridge Business Publishers, 2020 11-38
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Stock Issuances for Cash LO: 4 Level of Difficulty: MEDIUM 91. Westview Company has 130,000 shares authorized and 10,000 shares issued of $10 par value common stock. On January 1, 2019, the company issues an additional 2,000 shares of common stock in exchange for a building, which has a market value of $300,000. The journal entry to record the exchange will cause Total Paid-In Capital to: A) Increase by $ 20,000 B) Increase by $100,000 C) Increase by $180,000 D) Increase by $300,000 Answer: D Rationale: Building
300,000 Common stock Paid-in capital in excess of par value
20,000 280,000
Topic: Stock Issuances for Operating Assets LO: 4 Level of Difficulty: MEDIUM 92. Maercker Company has 130,000 shares authorized and 10,000 shares issued of $30 par value common stock. On January 1, 2019, the company issues an additional 2,000 shares of common stock in exchange for a building, which has a market value of $900,000. The journal entry to record the exchange will cause Total Paid-in Capital to: A) Increase by $ 60,000 B) Increase by $300,000 C) Increase by $540,000 D) Increase by $900,000 Answer: D Rationale: Building
900,000 Common stock Paid-in capital in excess of par value
60,000 840,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-39
USE THE FOLLOWING INFORMATION FOR QUESTIONS 93 & 94. January 1, 2019:
Atlantic Corporation reacquires 2,000 shares of its $15 par common stock for $66 per share.
March 5, 2019:
Atlantic reissues 1,000 of the above mentioned shares for $75 per share.
Topic: Treasury Stock LO: 6 Level of Difficulty: MEDIUM 93. The journal entry to record the January 1, 2019 transaction will be: A) Investment in Treasury Stock Cash B) Cash Treasury Stock C) Treasury Stock Cash D) Treasury Stock Paid-in-capital, Treasury Stock Cash
132,000 132,000 132,000 132,000 132,000 132,000 30,000 102,000 132,000
Answer: C Rationale: 2,000 shares x $66 = $132,000
Topic: Treasury Stock LO: 6 Level of Difficulty: MEDIUM 94. The journal entry to record the March 5, 2019 transaction will be: A. Cash
75,000 Treasury Stock Paid-in capital, treasury stock
B. Cash
66,000 9,000 75,000
Treasury Stock Gain on sale of treasury stock C. Cash
D. Cash
66,000 9,000 75,000
Treasury Stock Paid-in capital, treasury stock
15,000 60,000
75,000 Treasury Stock Investment income on treasury stock
66,000 9,000
Answer: A Rationale: 1,000 shares x $75 = $75,000; 1,000 shares x $66 = $66,000 $75,000 - $66,000 = $9,000
©Cambridge Business Publishers, 2020 11-40
th
Financial Accounting for Undergraduates, 4 Edition
USE THE FOLLOWING INFORMATION FOR QUESTIONS 95 & 96. January 1, 2019:
Pacific Corporation reacquires 2,000 shares of its $20 par common stock for $88 per share.
March 5, 2019:
Pacific reissues 1,000 of the above mentioned shares for $100 per share.
Topic: Treasury Stock LO: 6 Level of Difficulty: MEDIUM 95. The journal entry to record the January 1, 2019 transaction will be: A) Investment in Treasury Stock Cash B) Cash Treasury Stock C) Treasury Stock Cash D) Treasury Stock Paid-in-capital, Treasury Stock Cash
176,000 176,000 176,000 176,000 176,000 176,000 40,000 136,000 176,000
Answer: C Rationale: 2,000 shares x $88 = $176,000
Topic: Treasury Stock LO: 6 Level of Difficulty: MEDIUM 96. The journal entry to record the March 5, 2019 transaction will be: A. Cash
100,000 Treasury Stock Paid-in capital, treasury stock
B. Cash
88,000 12,000 100,000
Treasury Stock Gain on sale of treasury stock C. Cash
D. Cash
88,000 12,000 100,000
Treasury Stock Paid-in capital, treasury stock
20,000 80,000
100,000 Treasury Stock Investment income on treasury stock
88,000 12,000
Answer: A Rationale: 1,000 shares x $100 = $100,000; 1,000 shares x $88 = $88,000 $100,000 - $88,000 = $12,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-41
Topic: Treasury Stock LO: 6 Level of Difficulty: MEDIUM 97. Terri Company has never had any treasury stock transactions. On June 1 of the current year, they purchased 100 shares of its common stock (which has a par value of $30) for $15,000. On July 1, they reissued 50 of these shares at $156 per share. What is the balance in the Paid-in- Capital, Treasury Stock account on July 1? A) $ 450 B) $ 600 C) $ 300 D) $4,050 Answer: C Rationale: The journal entry to record the purchase of treasury stock: Treasury stock Cash The journal entry to record the sale treasury stock: Cash Treasury stock Paid-in Capital – Treasury stock *50 shares x $150 per share ($15,000 / 100 shares)
15,000 15,000
7,800 7,500* 300
Topic: Treasury Stock LO: 6 Level of Difficulty: MEDIUM 98. Finance Company has never had any treasury stock transactions. On June 1 of the current year, they purchased 100 shares of its common stock (which has a par value of $40) for $20,000. On July 1, they reissued 50 of these shares at $208 per share. What is the balance in the Paid-in- Capital, Treasury Stock account on July 1? A) $ 600 B) $ 800 C) $ 400 D) $5,400 Answer: C Rationale: The journal entry to record the purchase of treasury stock: Treasury stock Cash The journal entry to record the sale treasury stock: Cash Treasury stock Paid-in Capital – Treasury stock *50 shares x $200 per share ($20,000 / 100 shares)
20,000 20,000
10,400 10,000* 400
©Cambridge Business Publishers, 2020 11-42
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Treasury Stock LO: 6 Level of Difficulty: MEDIUM 99. On January 1, 2019, Van Lines Company had 100,000 shares of $12 par-value common stock outstanding. On March 1, 2019, they purchased 2,000 of its outstanding shares for $54 per share. On May 1, 2019, it reissued 1,000 shares at $66 per share. The journal entry to record the reissuance of the stock on May 1, 2019 would include: A) Credit Treasury Stock for $108,000 B) Credit Paid-in-Capital, Treasury Stock for $12,000 C) Debit Paid-In Capital, Treasury Stock for $54,000 D) Credit Cash for $66,000 Answer: B Rationale: Cash
66,000 Treasury Stock Paid-in capital, treasury stock
54,000 12,000
Topic: Treasury Stock LO: 6 Level of Difficulty: MEDIUM 100. On January 1, 2019, Mayflower Company had 100,000 shares of $16 par-value common stock outstanding. On March 1, 2019, they purchased 2,000 of its outstanding shares for $72 per share. On May 1, 2019, it reissued 1,000 shares at $88 per share. The journal entry to record the reissuance of the stock on May 1, 2019 would include: A) Credit Treasury Stock for $144,000 B) Credit Paid-in-Capital, Treasury Stock for $16,000 C) Debit Paid-In Capital, Treasury Stock for $72,000 D) Credit Cash for $88,000 Answer: B Rationale: Cash Treasury Stock Paid-in capital, treasury stock
88,000 72,000 16,000
Topic: Treasury Stock LO: 6 Level of Difficulty: MEDIUM 101. Island Company purchased 10,000 shares of own its no par value common stock for $21 per share on January 1. On April 1, 2019, they reissued 5,000 of these shares for $27 a share. The journal entry on April 1, will include a: A) Debit to Retained Earnings for $135,000 B) Debit to Paid-in-Capital, Treasury Stock for $12,000 C) Credit to Treasury Stock for $105,000 D) Debit to Retained Earnings for $30,000 Answer: C Rationale: Cash Treasury Stock Paid-in capital, treasury stock
135,000 105,000 30,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-43
Topic: Treasury Stock LO: 6 Level of Difficulty: MEDIUM 102. Rhode Island Company purchased 10,000 shares of own its no par value common stock for $28 per share on January 1. On April 1, 2019, they reissued 5,000 of these shares for $36 a share. The journal entry on April 1, will include a: A) Debit to Retained Earnings for $180,000 B) Debit to Paid-in-Capital, Treasury Stock for $16,000 C) Credit to Treasury Stock for $140,000 D) Debit to Retained Earnings for $40,000 Answer: C Rationale: Cash Treasury Stock Paid-in capital, treasury stock
180,000 140,000 40,000
Topic: Treasury Stock LO: 6 Level of Difficulty: MEDIUM 103. On April 1, 2019, Ruby Corporation reacquired 1,000 shares of its own $30 par stock for a total of $195,000 cash. On October 15, 300 of the treasury shares were reissued at a price of $210 per share. The journal entry to record the reissuance of the 300 shares of stock on October 15 includes a: A) Credit to Additional-Paid-In Capital: Treasury Stock of $4,500 B) Credit to Common Stock of $9,000 C) Credit to Gain on Treasury Stock of $4,500 D) Credit to Treasury Stock of $63,000 Answer: A Rationale: Cash 63,000 Treasury Stock Paid-in capital, treasury stock *300 shares x $195 per share ($195,000 / 1,000 shares)
58,500* 4,500
Topic: Treasury Stock LO: 6 Level of Difficulty: MEDIUM 104. On April 1, 2019, Crystal Corporation reacquired 1,000 shares of its own $40 par stock for a total of $260,000 cash. On October 15, 300 of the treasury shares were reissued at a price of $280 per share. The journal entry to record the reissuance of the 300 shares of stock on October 15 includes a: A) Credit to Additional-Paid-In Capital: Treasury Stock of $6,000 B) Credit to Common Stock of $12,000 C) Credit to Gain on Treasury Stock of $6,000 D) Credit to Treasury Stock of $84,000 Answer: A Rationale: Cash 84,000 Treasury Stock Paid-in capital, treasury stock *300 shares x $260 per share ($260,000 / 1,000 shares)
78,000* 6,000
©Cambridge Business Publishers, 2020 11-44
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Cash Dividends and Stock Dividends LO: 7 Level of Difficulty: DIFFICULT 105. Twin Company has 200,000 shares authorized, 150,000 shares issued, and 25,000 shares of Treasury stock on January 1, 2019. On March 1, they declared a 15% stock dividend. The company then declared a $0.70 per share cash dividend. What is the amount of dividends payable? A) $100,625 B) $120,750 C) $105,000 D) $ 87,500 Answer: A Rationale: 125,000 shares outstanding x 1.15% =143,750 shares outstanding as of March 1, 2019 143,750 shares x $0.70 dividend / share = $100,625
Topic: Cash Dividends and Stock Dividends LO: 7 Level of Difficulty: DIFFICULT 106. Navarro Company has 200,000 shares authorized, 150,000 shares issued, and 25,000 shares of Treasury stock on January 1, 2019. On March 1, they declared a 15% stock dividend. The company then declared a $2.10 per share cash dividend. What is the amount of dividends payable? A) $301,875 B) $362,250 C) $262,500 D) $315,000 Answer: A Rationale: 125,000 shares outstanding x 1.15% =143,750 shares outstanding as of March 1, 2019 143,750 shares x $2.10 dividend / share = $301,875
Topic: Cash Dividends and Stock Dividends LO: 7 Level of Difficulty: MEDIUM 107. McGrath Company has 1,000 shares of $100 par value, 5% cumulative preferred stock and 50,000 shares of $20 par value common stock outstanding. The company paid total cash dividends of $2,000 in its first year of operation, and declared total cash dividends of $10,000 in its second year of operation. The cash dividend paid to common stockholders in the second year will be: A) $7,000 B) $2,000 C) $4,500 D) $4,300 Answer: B Rationale: ($100 × 1,000 × 5%) = $5,000 Dividends payable to Preferred each year Balance for Year 1: Payment for Year 1: Balance for Year 2: Payment Year 2
Preferred $ 5,000 (2,000) 8,000 (8,000)
Common $
0 2,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-45
Topic: Cash Dividends LO: 7 Level of Difficulty: MEDIUM 108. Lauer Company has 1,000 shares of $300 par value, 5% cumulative preferred stock and 50,000 shares of $60 par value common stock outstanding. The company paid total cash dividends of $6,000 in its first year of operation, and declared total cash dividends of $30,000 in its second year of operation. The cash dividend paid to common stockholders in the second year will be: A) $21,000 B) $ 6,000 C) $13,500 D) $13,950 Answer: B Rationale: ($300 × 1,000 × 5%) = $15,000 Dividends payable to Preferred each year
Balance for Year 1: Payment for Year 1: Balance for Year 2: Payment Year 2
Preferred $15,000 (6,000) 24,000 (24,000)
Common $
0
(6,000)
Topic: Stock Dividends LO: 7 Level of Difficulty: MEDIUM 109. Amin Company has 200,000 shares of $20 par value common stock outstanding. On April 15, 2019 the company declared a 40% stock dividend. The current market value of the stock was $30 per common share. The journal entry on April 15 will include: A) A credit to Stock Dividends Distributable for $2,400,000 B) A debit to Retained Earnings for $2,400,000 C) A credit to Stock Dividend Distributable for $1,600,000 D) A credit to Paid-in Capital in excess of par value, Common Stock for $800,000 Answer: C Rationale: 200,000 shares x 40% x $20 par value The journal entry on April 15 will be: Stock dividends Stock dividend distributable
1,600,000 1,600,000
©Cambridge Business Publishers, 2020 11-46
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Stock Dividends LO: 7 Level of Difficulty: MEDIUM 110. Sayali Company has 200,000 shares of $60 par value common stock outstanding. On April 15, 2019 the company declared a 40% stock dividend. The current market value of the stock was $90 per common share. The journal entry on April 15 will include: A) A credit to Stock Dividends Distributable for $7,200,000 B) A debit to Retained Earnings for $7,200,000 C) A credit to Stock Dividend Distributable for $4,800,000 D) A credit to Paid-in Capital in excess of par value, Common Stock for $2,400,000 Answer: C Rationale: 200,000 shares x 40% x $60 par value The journal entry on April 15 will be: Stock dividends Stock dividend distributable
4,800,000 4,800,000
Topic: Cash Dividends LO: 7 Level of Difficulty: MEDIUM 111. John, Inc. has 5,000 shares of 6%, $200 par value, cumulative preferred stock and 100,000 shares of $2 par value common stock outstanding. There were no dividends declared in 2018. The board of directors declared and paid dividends of $100,000 each in 2019 and 2020. What is the amount of dividends received by the common stockholders in 2020? A) $20,000 B) $40,000 C) $60,000 D) $80,000 Answer: A Rationale: Preferred stock dividend payable = 5,000 shares x $200 x 6% = $60,000 / year Distribution of dividends:
2018 2019 2020
Balance Balance Paid Balance Paid
Preferred $60,000 120,000 (100,000) 80,000 (80,000)
Common
$
0 20,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-47
Topic: Cash Dividends LO: 7 Level of Difficulty: MEDIUM 112. Karin, Inc. has 5,000 shares of 6%, $600 par value, cumulative preferred stock and 100,000 shares of $6 par value common stock outstanding. There were no dividends declared in 2018. The board of directors declared and paid dividends of $300,000 each in 2019 and 2020. What is the amount of dividends received by the common stockholders in 2020? A) $ 60,000 B) $120,000 C) $180,000 D) $240,000 Answer: A Rationale: Preferred stock dividend payable = 5,000 shares x $600 x 6% = $180,000 / year Distribution of dividends:
2018 2019 2020
Balance Balance Paid Balance Paid
Preferred
Common
$180,000 360,000 (300,000) 240,000 (240,000)
$
0 60,000
Topic: Stock Dividends LO: 7 Level of Difficulty: MEDIUM 113. Superior Company had 50,000 shares of $50 par value common stock outstanding on June 30, 2019. On July 1, the board of directors declared a 10% stock dividend when the market value of each share was $54 The journal entry on July 1 will include: A) A credit to Stock Dividend Distributable for $250,000 B) A debit to Retained Earnings for $250,000 C) A credit to Stock Dividend Distributable for $270,000 D) A credit to Paid-in capital in excess of par value $270,000 Answer: A Rationale: 50,000 shares x 10% = 5,000 share stock dividend x $54 = $270,000 The journal entry to record the July 1, 2019 transaction will be: Stock dividends Stock dividends distributable Paid-in capital in excess of par
270,000 250,000 20,000
©Cambridge Business Publishers, 2020 11-48
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Stock Dividends LO: 7 Level of Difficulty: MEDIUM 114. Balenberg Company had 50,000 shares of $150 par value common stock outstanding on June 30, 2019. On July 1, the board of directors declared a 10% stock dividend when the market value of each share was $162. The journal entry on July 1 will include: A) A credit to Stock Dividend Distributable for $750,000 B) A debit to Retained Earnings for $750,000 C) A credit to Stock Dividend Distributable for $810,000 D) A credit to Paid-in capital in excess of par value $810,000. Answer: A Rationale: 50,000 shares x 10% = 5,000 share stock dividend x $162 = $810,000 The journal entry to record the July 1, 2019 transaction will be: Stock dividends Stock dividends distributable Paid-in capital in excess of par
810,000 750,000 60,000
Topic: Cash Dividends LO: 7 Level of Difficulty: MEDIUM 115. A company has 10,000 shares of $10 par, 3% preferred stock outstanding, and 25,000 shares of $4 par common stock outstanding. The preferred stock is cumulative, and no dividends have been paid for the past two years. If the company wishes to distribute $4 per share to the common stockholders, what is the total amount of dividends that must be paid in the current year? A) $109,000 B) $101,500 C) $103,000 D) $145,000 Answer: A Rationale: (10,000 x $10 x 3% = $3,000 x 3 yrs = $9,000) + (25,000 x $4 = $100,000) = $109,000
Topic: Cash Dividends LO: 7 Level of Difficulty: MEDIUM 116. A company has 10,000 shares of $30 par, 3% preferred stock outstanding, and 25,000 shares of $12 par common stock outstanding. The preferred stock is cumulative, and no dividends have been paid for the past two years. If the company wishes to distribute $12 per share to the common stockholders, what is the total amount of dividends that must be paid in the current year? A) $327,000 B) $304,500 C) $309,000 D) $435,000 Answer: A Rationale: (10,000 x $30 x 3% = $9,000 x 3 yrs = $27,000) + (25,000 x $12 = $300,000) = $327,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-49
Topic: Cash Dividends LO: 7 Level of Difficulty: MEDIUM 117. Gumnut Corporation has the following stock outstanding on December 31, 2019: (a)
(b)
Preferred Stock (8 percent cumulative, $20 par, 100,000 shares authorized; 10,000 shares issued and outstanding)
$200,000
Common Stock ($14 par, 1,000,000 shares authorized, 120,000 shares issued and outstanding)
1,680,000
Gumnut did not pay any dividends in 2017. In 2018, they paid total dividends of $20,000, and in 2019, they paid total dividends of $50,000. What amount of dividends will be paid to common stockholders in 2019? A) $28,000 B) $22,000 C) $16,000 D) $20,000 Answer: B Rationale: Preferred stock dividend payable= 10,000 shares x $20 x 8% = $16,000 / year Distribution of dividends: Preferred Common 2017 2018 2019
Balance Balance Paid Balance Paid
$16,000 32,000 (20,000) 28,000 (28,000)
$
0 22,000
Topic: Cash Dividends LO: 7 Level of Difficulty: MEDIUM 118. Platypus Corporation has the following stock outstanding on December 31, 2019: (a)
(b)
Preferred Stock (8 percent cumulative, $60 par, 100,000 shares authorized; 10,000 shares issued and outstanding)
$600,000
Common Stock ($42 par, 1,000,000 shares authorized, 120,000 shares issued and outstanding)
5,040,000
Kangaroo did not pay any dividends in 2017. In 2018, they paid total dividends of $60,000, and in 2019, they paid total dividends of $150,000. What amount of dividends will be paid to common stockholders in 2019? A) $84,000 B) $66,000 C) $48,000 D) $60,000 Answer: B Rationale: Preferred stock dividend payable= 10,000 shares x $60 x 8% = $48,000 / year Distribution of dividends: Preferred Common 2017 2018 2019
Balance Balance Paid Balance Paid
$48,000 96,000 (60,000) 84,000 (84,000)
$
0 66,000
©Cambridge Business Publishers, 2020 11-50
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Stock Dividends LO: 7 Level of Difficulty: DIFFICULT 119. The stockholders’ equity section of Dasher Company showed the following: Common Stock - $10 par value, 60,000 shares issued and outstanding Contributed Capital in excess of par value, common stock Retained Earnings
$ 600,000 1,800,000 1,600,000
Dasher declared a 10% stock dividend on a day when the market value of the stock was $30 per share. The stock dividend will: A) Increase Paid-in capital in excess of par value, Common Stock by $180,000 B) Decrease Retained Earnings by $120,000 C) Increase Common Stock by $180,000 D) Increase Paid-in capital in excess of par value, Common Stock by $120,000 Answer: D Rationale: 60,000 shares x 10% = 6,000 shares x $30 = $180,000 To record declaration of stock dividend: Stock dividends Stock dividends distributable Paid-in capital in excess of par
180,000 60,000 120,000
To record issuance of stock dividend: Stock dividend distributable Common stock
60,000 60,000
To close the Stock dividends account: Retained earnings Stock dividends
180,000 180,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-51
Topic: Stock Dividends LO: 7 Level of Difficulty: DIFFICULT 120. The stockholders’ equity section of Rudolf Company showed the following: Common Stock - $30 par value, 60,000 shares issued and outstanding Contributed Capital in excess of par value, common stock Retained Earnings
$1,800,000 5,400,000 4,800,000
Rudolf declared a 10% stock dividend on a day when the market value of the stock was $90 per share. The stock dividend will: A) Increase Paid-in capital in excess of par value, Common Stock by $540,000 B) Decrease Retained Earnings by $360,000 C) Increase Common Stock by $540,000 D) Increase Paid-in capital in excess of par value, Common Stock by $360,000 Answer: D Rationale: 60,000 shares x 10% = 6,000 shares x $90 = $540,000 To record declaration of stock dividend: Stock dividends 540,000 Stock dividends distributable Paid-in capital in excess of par
180,000 360,000
To record issuance of stock dividend: Stock dividend distributable Common stock
180,000 180,000
To close the Stock dividends account: Retained earnings Stock dividends
540,000 540,000
©Cambridge Business Publishers, 2020 11-52
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Stock Dividends LO: 7 Level of Difficulty: DIFFICULT 121. The stockholders' equity section of the balance sheet for Potawatomi Corporation appeared as follows before its recent stock dividend: Common stock, $10 par, 10,000 shares issued and outstanding Additional paid-in capital - common Retained earnings Total stockholders' equity
$ 100,000 120,000 150,000 $370,000
Potawatomi declared a 10% stock dividend when the market price per share was $20. After the stock dividend was distributed, the components of the stockholders' equity section were: Common Stock Additional Paid-in Capital Retained Earnings A. $100,000 $130,000 $170,000 B. $100,000 $130,000 $130,000 C. $110,000 $130,000 $130,000 D. There would be no change in the components of stockholders' equity. Answer: C Rationale: 10,000 shares x 10% = 1,000 share stock dividend x $20 = $20,000 To record declaration of stock dividend: Stock dividends Stock dividends distributable Paid-in capital in excess of par
20,000 10,000 10,000
To record issuance of stock dividend: Stock dividend distributable Common stock
10,000 10,000
To close the Stock dividends account: Retained earnings Stock dividends
20,000 20,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-53
Topic: Stock Dividends LO: 7 Level of Difficulty: DIFFICULT 122. The stockholders' equity section of the balance sheet for Pokagon Corporation appeared as follows before its recent stock dividend: Common stock, $30 par, 10,000 shares issued and outstanding Additional paid-in capital - common Retained earnings Total stockholders' equity
$ 300,000 360,000 450,000 $1,110,000
Pokagon declared a 10% stock dividend when the market price per share was $60. After the stock dividend was distributed, the components of the stockholders' equity section were: Common Stock Additional Paid-in Capital Retained Earnings A. $300,000 $390,000 $510,000 B. $300,000 $390,000 $390,000 C. $330,000 $390,000 $390,000 D. There would be no change in the components of stockholders' equity. Answer: C Rationale: 10,000 shares x 10% = 1,000 share stock dividend x $60 = $60,000 To record declaration of stock dividend: Stock dividends Stock dividends distributable Paid-in capital in excess of par
60,000 30,000 30,000
To record issuance of stock dividend: Stock dividend distributable Common stock
30,000 30,000
To close the Stock dividends account: Retained earnings Stock dividends
60,000 60,000
©Cambridge Business Publishers, 2020 11-54
th
Financial Accounting for Undergraduates, 4 Edition
Exercises Topic: Reporting Stockholders’ Equity LO: 4, 6, 7, 8 1. Pumpkin Bars Company began business on January 1 and immediately issued 500,000 shares of its $3 par value common stock for $24,000,000. At the end of the year it paid $1,200,000 in cash dividends. In midyear, the firm bought back some of its own shares. The company reports the following additional information at December 31, 2019: Net income Common stock Retained earnings beginning of year Common shares authorized Shares outstanding at year end
$6,000,000 $1,500,000 $0 3,000,000 300,000
Required a. How much is the Additional Paid-in-Capital account at the end of the year? b. Determine the retained earnings amount at the end of the year. c. How many shares of stock are in the treasury at the end of the year? Answer: a. $24,000,000 – $1,500,000 = $22,500,000 b. $6,000,000 – $1,200,000 = $4,800,000 c.
500,000 – 300,000 = 200,000 shares
Topic: Interpreting Stockholders’ Equity LO: 4, 6, 7, 8 2. Use the following consolidated statement of stockholders’ equity to show the summary transactions by preparing an entry in journal form with explanation for each item a. through c. CUNNINGHAM COMPANY, INC. Consolidated Statement of Stockholders’ Equity For the Year Ended December 31, 2019
(in thousands) Balance at 12/31/18
Common Stock, $1 par value
Preferred Stock
Paid-in Capital C.S.
Retained Earnings
Treasury Stock, Common
Total
$1,378
$ 1,951
$ 7,075
$ 59,656
($471)
$ 69,589
Net income
---
---
---
15,377
---
15,377
(1) Redemption and retirement of preferred stock (13,780 shares)
(1,378)
---
---
---
---
(1,378)
(2) Stock options exercised (44,000 shares)
---
44
424
---
---
468
---
---
---
---
(9,414)
(9,414)
---
74
1,818
---
---
1,892
---
358
18,581
---
---
18,939
---
250
8,631
---
---
8,881
---
---
---
(3,086)
---
(3,086)
---
$ 2,677
$36,529
$ 71,947
($9,885)
$101,268
(3) Purchases of common stock (251,040 shares) for treasury (4) Issuance of common stock (74,000 shares) in exchange for convertible subordinated debentures (5) Issuance of common stock (358,000 shares) for cash (6) Issuance of 250,000 shares of common stock in exchange for investment in Stone Company shares (7) Cash dividends – Common stock ($0.40 per share) Balance December 31, 2019
$
Continued ©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-55
Required: a. Pay cash dividends (Item 7) b. Issue common stock (Item 5) c. Purchase treasury shares Item 3) Answer: a. Cash Dividends (or Retained Earnings) Cash To pay cash dividends.
3,086,000 3,086,000
b. Cash
18,939,000
Common Stock Additional Paid-In Capital Issue 358,000 shares of $1 par stock. c.
358,000 18,581,000
Treasury Stock Cash Purchase of 251,040 shares for the treasury at an average price of $37.50 per share ($9,414,000 / 251,040)
9,414,000 9,414,000
Topic: Stock Transactions LO: 4, 6, 7 3. Luna Company had the following transactions during the current year: 1: Luna Company sells 100,000 shares of its no-par common stock for $60. 2: Luna Company buys 5,000 shares of its no-par common stock for $45 per share. 3: Luna Company declares and pays a dividend on its no-par common stock of $9per share. Indicate the effect (increase, decrease, no effect) of each of these stock decisions for each year on the items listed below. Total Assets
Total Liabilities
Total Equity
Operating Income
1 2 3 Answer: Total Assets
Total Liabilities
Total Equity
Operating Income
1
Increase
No effect
Increase
No effect
2
Decrease
No effect
Decrease
No effect
3
Decrease
No effect
Decrease
No effect
©Cambridge Business Publishers, 2020 11-56
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Small Stock Dividend LO: 7 4. Cambridge has 500,000 shares of $3 par value common stock outstanding. The current market price of the stock is $225 per share. Cambridge distributes a stock dividend of 15% of the outstanding shares of common stock. Required: Record the journal entry when the stock dividend is declared and the journal entry when the stock dividend is paid. Answer: Retained Earnings is reduced by 500,000 shares ×15% × $225 = $16,875,000. Common Stock is increased by 500,000 shares × 15% × $3 par = $225,000 par value. Paid-in Capital in Excess of Par Value is increased by the remainder of $16,875,000 - $225,000 = $16,650,000. Stock Dividends (or Retained Earnings) Stock Dividend Distributable Paid-In Capital in Excess of Par Value To declare stock dividend.
16,875,000 225,000 16,650,000
Stock Dividend Distributable Common Stock To pay stock dividend.
225,000 225,000
Topic: Large Stock Dividend LO: 7 5. Orange Parrot Co. announces a stock dividend of 55% of the 2.2 million outstanding shares of common stock. The current price per share is $23.25. Par value of the stock is $0.03 per share. Required: Record the journal entry when the stock dividend is declared and the journal entry when the stock dividend is paid. Answer: Retained earnings are reduced by the par value of the stock. 2.2 million shares × 55% × $0.03 = $36,300 Common Stock is increased by the par value of the stock. There is no effect on paid-in capital because the stock dividend is reported at par value. Stock Dividends (or Retained Earnings) Stock Dividend Distributable To declare stock dividend.
36,300
Stock Dividend Distributable Common Stock To pay stock dividend.
36,300
36,300
36,300
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-57
Topic: Balance Sheet Presentation of Stockholders’ Equity LO: 4, 6 6. Use the following information to prepare the shareholders’ equity section of the balance sheet for Koontz, Incorporated: a. Common Stock—$0.30 par value: 100,000 shares authorized, 37,500 shares outstanding as of December 31, 2019 b. Retained Earnings, December 31, 2019, $108,000 c. Treasury Stock—Koontz repurchased 1,500 shares at $50 per share d. Total Shareholders’ Equity as of December 31, 2019 is $580,000 Answer: Paid-in Capital Common stock ($0.30 par value) Additional paid-in capital Retained earnings Less: Treasury stock at $50 per share Total shareholders’ equity
$11,700 535,300 108,000 655,000 (75,000) $580,000
Calculations: Common stock = 37,500 outstanding + 1,500 treasury stock = 39,000 shares issued 39,000 shares issued × $0.30 per share = $11,700 Treasury stock = 1,500 shares repurchased × $50 per share = $75,000 Additional paid-in capital: $11,700 + $108,000 + X - $75,000 = $580,000; X = $535,300
Topic: Stock Computations with Treasury Stock LO: 4, 6 7. Arkansas Trucking has 250,000 common shares outstanding with a $0.04 par value and $90 current market value. The treasury stock account is reported at $149,400 with an average cost of $8 per share. How much is the total common stock reported on the balance sheet? Answer: Number of shares in treasury stock account = $149,400 / $8 per share = 18,675 shares Total number of shares = 250,000 +18,675 = 268,675 Par value of common stock account = 268,675 shares × $0.04 per share = $10,747
©Cambridge Business Publishers, 2020 11-58
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Stock Splits LO: 5 8. The August 1, 2019 balance sheet for Dress Company reported 24,000 shares of $10 par value common stock that were issued and outstanding: Common Stock Additional Paid-in Capital
$240,000 $250,000
On August 2, 2019, the company splits its stock 2-for-1. Required: a. How many shares of common stock are issued and outstanding immediately after the stock split? b. What is the dollar balance of common stock immediately after the stock split? Answer: a. The company has 48,000 (24,000 x 2) shares of $5.00 ($10.00/2) par value common stock immediately after the stock split. b. The balance of the common stock account is unchanged (48,000 shares × $5.00 = $240,000).
Topic: Outstanding Shares LO: 5, 6 9. Bio Engineering Company initially has 45,000 shares outstanding of common stock on January 1, 2019. During the year, they have the following changes in terms of shares. Feb Mar Oct Nov
3-for-2 stock split 3-for-2 stock split Repurchase 21,000 shares 6-for-5 stock split
Required: Calculate the number of shares it has outstanding at the end of 2019. Answer: 3-for-2 stock split 3-for-2 stock split Repurchase 21,000 shares in October 6-for-5 stock split
67,500 shares 101,250 shares 80,250 shares 96,300 shares
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-59
Topic: Stock Issuances LO: 4 10. On July 1, 2019, Parkside, Inc. issues 10,000 shares of $10 par value preferred stock at $100 cash per share and 20,000 shares of $2 par value common stock at $50 cash per share. What is the journal entry to record these transactions? Answer: Cash Preferred Stock Paid-In Capital in excess of par value – Preferred Stock Issue 10,000 shares of $10 par preferred stock for $100 per share. Cash
1,000,000 100,000 900,000
1,000,000
Common Stock Paid-In Capital in excess of par value – Common Stock Issue 20,000 shares of $2 par common stock for $50 per share.
40,000 960,000
Topic: Shares Issued and Average Price LO: 4, 6 11. Following is the stockholder’s equity section of Rite Soldering, Inc. at December 31, 2019: Stockholders' Equity
December 31, 2019
Common stock - $0.20 par value, authorized 600,000 shares Additional paid-in capital Retained earnings Treasury stock—5,000 shares Total stockholders' equity
$ 45,000 1,278,000 120,000 (142,500) $1,300,500
Required: a. Compute the number of shares that have been issued. b. At what average issue price were the shares issued? c. At what average cost were the treasury stock purchased? Answer: a. Total par value / Unit par value = $45,000 / $0.20 = 225,000 shares b. (Common stock + Additional paid-in capital) / Shares issued = Average issue price ($45,000 + $1,278,000) / 225,000 = $5.88 c.
Treasury stock / Treasury shares = Treasury cost per share $142,500 / 5,000 = $28.50 per treasury share
©Cambridge Business Publishers, 2020 11-60
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Common Stock and Treasury Stock Transactions LO: 4, 6 12. Listed below are nine events involving a corporation’s stockholders’ equity. Insert the words “increase,” “decrease,” or “no effect” under the appropriate column heading to indicate the event’s effect on total paid-in capital, retained earnings, and total stockholders’ equity.
(1)
(2) (3) (4) (5)
(6)
Total Paid-In Capital
Retained Earnings
Total Stockholders’ Equity
Total Paid-In Capital
Retained Earnings
Total Stockholders’ Equity
Increase
No Effect
Increase
No Effect
No Effect
No Effect
No Effect
No Effect
Decrease
Increase
No Effect
Increase
Increase
No Effect
Increase
Increase
No Effect
Increase
Issued 10,000 shares of common stock for cash at a price higher than par value. Split common stock 2 for 1. Purchased 2,000 shares of own common stock for treasury. Issued 1,000 shares of preferred stock in exchange for new equipment. Sold 800 shares of treasury stock at a price higher than the shares’ reacquisition cost. Issued 1,600 shares of common stock for land whose fair value equaled the par value of the shares issued.
Answer:
(1)
(2) (3) (4) (5)
(6)
Issued 10,000 shares of common stock for cash at a price higher than par value. Split common stock 2 for 1. Purchased 2,000 shares of own stock for treasury. Issued 1,000 shares of preferred stock in exchange for new equipment. Sold 800 shares of treasury common stock at a price higher than the shares’ reacquisition cost. Issued 1,600 shares of common stock for land whose fair value equaled the par value of the shares issued.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-61
Topic: Preferred Cash Dividends LO: 3, 7 13. Yoke Company has 9,000 shares outstanding of $150 par value, 8% cumulative preferred stock and 60,000 shares of $15 par value common stock. The company declared cash dividends of $648,000. Required: a. If no arrearage on the preferred stock exists, how much in total dividends and in dividends per share is paid to each class of stock? b. If one year’s dividend arrearage on the preferred stock exists, how much in total dividends and in dividends per share is paid to each class of stock? Answer: a. 8% x $1,350,000 Remainder to common Per share: $108,000 / 9,000 $540,000 / 60,000 b. 8% x $1,350,000 x 2 years Remainder to common Per share: $216,000 / 9,000 $432,000 / 60,000
Preferred $108,000
Common $540,000
$12.00 $9.00 Preferred $216,000
Common $432,000
$24.00 $7.20
Topic: Preferred Cash Dividends LO: 3, 7 14. Horizon Company has 15,000 shares outstanding of $200 par value, 7% cumulative preferred stock and 75,000 shares of $40 par value common stock. The company declared cash dividends of $630,000. Required: a. If no arrearage on the preferred stock exists, how much in total dividends and in dividends per share is paid to each class of stock? b. If one year’s dividend arrearage on the preferred stock exists, how much in total dividends and in dividends per share is paid to each class of stock? Answer: a. 7% x $3,000,000 Remainder to common Per share: $210,000 / 15,000 $420,000 / 75,000 b. 7% x $3,000,000 x 2 years Remainder to common Per share: $420,000 / 15,000 $210,000 / 75,000
Preferred $210,000
Common $420,000
$14.00 $5.60 Preferred $420,000
Common $210,000
$28.00 $2.80
©Cambridge Business Publishers, 2020 11-62
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Common Stock and Treasury Stock Transactions LO: 4, 6 15. Aluminum, Inc. engaged in the following transactions involving its common stock during 2019: Feb. Aug. Sept. Nov.
2 1 1 1
Issued 10,000 shares of $15 par value common stock at $90 cash per share. Purchased back 3,000 shares of common stock at 93 cash per share. Resold 1,200 shares of treasury stock at $99 cash per share. Exchanged remaining 1,800 shares of treasury stock for a patent with a fair value of $162,000.
Required: Prepare general journal entries to record these transactions. Answer: Feb. 2 Cash
900,000
Common Stock Paid-In Capital in excess of par value-Common Issued 10,000 shares at $90 per share. Aug. 1
Sept. 1
150,000 750,000
Treasury Stock Cash Purchased 3,000 shares of treasury stock at $93 per share.
279,000
Cash
118,800
279,000
Treasury Stock Paid-In Capital from Treasury Stock Sold 1,200 shares of treasury stock at $99 per share. Nov. 1
111,600 7,200
Patent 162,000 Paid-In Capital from Treasury Stock 5,400 Treasury Stock Exchanges 1,800 shares of treasury stock for a $162,000 patent.
167,400
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-63
Topic: Common Stock and Treasury Stock Transactions LO: 4, 6 16. Brahtz, Inc. engaged in the following transactions involving its common stock during 2019: Feb. Aug. Sept. Nov.
2 1 1 1
Issued 10,000 shares of $10 par value common stock at $40 cash per share. Purchased back 4,000 shares of common stock at $50 cash per share. Resold 1,000 shares of treasury stock at $56 cash per share. Exchanged remaining 3,000 shares of treasury stock for land with a fair value of $145,000.
Required: Prepare general journal entries to record these transactions. Answer: Feb. 2 Cash
400,000
Common Stock Paid-In Capital in excess of par value-Common Issued 10,000 shares at $40 per share. Aug. 1
Sept. 1
100,000 300,000
Treasury Stock Cash Purchased 4,000 shares of treasury stock at $50 per share.
200,000
Cash
56,000
200,000
Treasury Stock Paid-In Capital from Treasury Stock Sold 1,000 shares of treasury stock at $56 per share. Nov. 1
50,000 6,000
Land Paid-In Capital from Treasury Stock Treasury Stock Exchanged 3,000 shares of treasury stock for land valued at $145,000.
145,000 5,000 150,000
Topic: Return on Common Stockholders’ Equity LO: 9 17. Williams, Inc. has both cumulative preferred stock and common stock outstanding. The following information relates to 2019: Net income Preferred dividends Common dividends Preferred stockholders’ equity, January 1 Preferred stockholders’ equity, December 31 Common stockholders’ equity, January 1 Common stockholders’ equity, December 31
$300,000 78,000 68,000 980,000 1,020,000 1,440,000 1,600,000
Required: What is Williams’ return on common stockholders’ equity for 2019? Answer: Net income - preferred dividends = $300,000 - $78,000 = $222,000 Average common stockholders’ equity = ($1,440,000 + $1,600,000) / 2 = $1,520,000 Return on common stockholders’ equity = $222,000 / $1,520,000 = 14.6%
©Cambridge Business Publishers, 2020 11-64
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Dividends LO: 7 18. Florence, Inc. has 30,000 shares of $15 par value common stock outstanding and retained earnings of $984,000. Tucson declares a cash dividend of $6.00 per share and, shortly thereafter, a 6% stock dividend. The market price of the stock is $66 per share at the declaration date of the stock dividend. Required: a. Prepare the general journal entries for (1) the declaration of the dividends and (2) the payment (or issuance) of the dividends. b. Assume Tucson declares a 26% stock dividend rather than a 6% stock dividend. Give the general journal entries for (1) the declaration of the stock dividend and (2) the issuance of the stock dividend. Answer: a. (1) Cash Dividends Dividends Payable Declared a cash dividend of $6.00 per share.
(2)
b. (1)
(2)
180,000 180,000
Stock Dividends Stock Dividend Distributable Paid-in Capital in Excess of Par Value Declared a 6% stock dividend (market value of stock was $66 per share).
118,800
Dividends Payable Cash Paid dividend on common stock.
180,000
Stock Dividend Distributable Common Stock Issued stock for 6% stock dividend.
27,000
Stock Dividends Stock Dividend Distributable Declared a 26% stock dividend (7,800 shares).
117,000
Stock Dividend Distributable Common Stock Issued stock for 26% stock dividend.
117,000
27,000 91,800
180,000
27,000
117,000
117,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-65
Topic: Dividends LO: 7 19. Parkersburg, Inc. has 50,000 shares of $20 par value common stock outstanding and retained earnings of $840,000. Parkersburg declares a cash dividend of $6.00 per share and, shortly thereafter, a 5% stock dividend. The market price of the stock is $36 per share at the declaration date of the stock dividend. Required: a. Give the general journal entries for (1) the declaration of the dividends and (2) the payment (or issuance) of the dividends. b. Assume Parkersburg declares a 30% stock dividend rather than a 5% stock dividend. Give the general journal entries for (1) the declaration of the stock dividend and (2) the issuance of the stock dividend. Answer: a. (1) Cash Dividends Dividends Payable Declared a cash dividend of $6.00 per share.
(2)
b. (1)
(2)
300,000 300,000
Stock Dividends Stock Dividend Distributable Paid-in Capital in Excess of Par Value Declared a 5 % stock dividend (market value of stock was $36 per share).
90,000
Dividends Payable Cash Paid dividend on common stock.
300,000
Stock Dividend Distributable Common Stock Issued stock for 5% stock dividend.
50,000
Stock Dividends Stock Dividend Distributable Declared a 30% stock dividend (15,000 shares).
300,000
Stock Dividend Distributable Common Stock Issued stock for 30% stock dividend.
300,000
50,000 40,000
300,000
50,000
300,000
300,000
©Cambridge Business Publishers, 2020 11-66
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Dividends LO: 7 20. Walley, Inc. has the following stockholders’ equity section. Three transactions that Walley could have made are listed below. Answering each part independently (assume that the stockholders’ equity at the time of each transaction is as shown below), present the proper journal entry to record each transaction. Note that the journal entry for a transaction should not be affected by the entry for any other transaction listed below. Explanations may be omitted, but show computations. Paid-in Capital: Common Stock, $30 Par Value, 100,000 shares authorized, 20,000 shares issued and outstanding Paid-in Capital in Excess of Par Value Retained Earnings Total Stockholders’ Equity
$600,000 342,000 822,000 $1,764,000
Required: a. A cash dividend of $6.00 per share of common stock is declared. b. A 7% stock dividend is declared; the current market value of the stock is $60 per share. c. A 28% stock dividend is declared; the current market value of the stock is $60 per share. Answer: a. Cash Dividends (20,000 x $6.00) Dividends Payable
120,000 120,000
b. Stock Dividends (0.07 x 20,000 x $60) 84,000 Stock Dividend Distributable (0.07 x 20,000 x $30) Paid-in Capital in Excess of Par Value ($84,000 - $42,000) c.
Stock Dividends (0.28 x 20,000 x $30) Stock Dividend Distributable
42,000 42,000
168,000 168,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-67
Problems Topic: Preferred Stock Conversion to Common Stock LO: 3, 4 1. Road Bike Company has preferred stock with a par value of $36 that is convertible into common stock at the ratio of 1 to 1. The common stock has a par value of $24. The following table presents the components of stockholders’ equity for Road Bike Company:
Balance at Dec. 31, 2018
Convertible Redeemable Preferred Stock
Common Stock
Additional Paid-In Capital
Retained Earnings
Total
$1,200,000
$420,000
$ 126,000
$309,000
$2,055,000
78,000
78,000
Net Income Issuance of common shares Conversion of redeemable preferred stock Balance at Dec. 31, 2019
(108,000) $1,092,000
168,000
189,000
72,000 $660,000
36,000 $351,000
357,000 ________ $387,000
0 $2,490,000
Required: a. How many shares of common stock were sold during the year and at what price? b. How many shares of preferred stock were converted this year? Answer: a. $168,000 / 24 = 7,000 shares; [$168,000 + $189,000] / 7,000 shares = $51 per share b. $108,000 / $36 = 3,000 shares
Topic: Preferred Preferences LO: 3 2. Identify the benefits received from being a preferred stockholder compared to a common stockholder. Describe the nature of each privilege or preference of each. Answer: a. Dividend Preference: Preferred shareholders receive dividends on their shares before common shareholders do. Also, in the event that dividends are not paid in a year and are in arrears, some preferred stock contracts include a cumulative provision that stipulates that any dividends in arrears must first be paid to preferred shareholders, together with the current year’s dividends, before any dividends are paid to common shareholders. b. Asset Distribution Preference: If a company fails, its assets are sold and the proceeds are paid to the debtholders and stockholders of the company. Preferred stockholders receive payment in full before common stockholders. c.
Conversion Privileges: A conversion privilege that allows preferred stockholders to convert their shares into common shares at a predetermined conversion rate causes the market price of preferred shares to move in a fashion consistent with the related common shares.
d. Participation Feature: This feature allows preferred shareholders to share ratably with common stockholders in dividends. The dividend preference over common shares can be a benefit when dividend payments are meager. But a fixed dividend yield limits upside potential of preferred stock if the company performs exceptionally well. This limitation can be overcome with a participation feature.
©Cambridge Business Publishers, 2020 11-68
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Statement of Retained Earnings LO: 8 3. Use the appropriate items from the following data to prepare a 2019 statement of retained earnings for Bull Dog Corporation. Retained earnings at January 1, 2019 Cash dividends declared in 2019 Cost of treasury stock acquired in 2019 Net income for 2019 Common stock issued in 2019 (issued at par value)
$1,024,000 240,000 84,000 472,000 300,000
Answer: BULL DOG CORPORATION Statement of Retained Earnings For Year Ended December 31, 2019 Retained earnings, January 1, 2019 Add: Net income Less: Cash dividends declared Retained earnings, December 31, 2019
$1,024,000 472,000 1,496,000 240,000 $1,256,000
Topic: Statement of Retained Earnings LO: 8 4. Use the appropriate items from the following data to prepare a 2019 retained earnings statement for Lightening, Inc. Retained earnings at January 1, 2019 Stock dividends declared in 2019 (fair value of 5% dividend) Net income for 2019 Paid-in capital from treasury stock (generated during 2019)
$1,425,000 138,000 600,000 75,000
Answer: LIGHTENING, INC. Statement of Retained Earnings For Year Ended December 31, 2019 Retained earnings, January 1, 2019 Add: Net income Less: Stock dividends declared Retained earnings, December 31, 2019
$ 1,425,000 600,000 2,025,000 138,000 $1,887,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 11
11-69
Chapter 12 Statement of Cash Flows Learning Objectives – Coverage by question True / False
Multiple Choice
Exercises
LO1 – Discuss the content and format of the statement of cash flows.
1-9
1-9, 24, 27, 35-44
1-4, 12, 16
LO2 – Explain the preparation of a statement of cash flows using the indirect method.
13
10-16, 45-54
5, 6, 11-15, 17-19
LO3 – Define several ratios used to analyze the statement of cash flows and explain their use.
14
25, 26, 29-34
7, 8
10-12
17-23, 28, 35-40, 55-74
9, 10
LO4 – Appendix 12A Explain the preparation of a statement of cash flows using the direct method.
Problems
1, 3, 4
2
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-1
Chapter 12: Statement of Cash Flows
True / False Topic: Statement of Cash Flows LO: 1 1. The statement of cash flows includes a firm’s cash equivalents such as money market funds, in addition to cash. Answer: True Topic: Cash Flow Activities LO: 1 2. Cash received from the sale of one of a company’s warehouses is classified as a cash flow from investing activities in a statement of cash flows. Answer: True Topic: Cash Flow Activities LO: 1 3. Cash paid as dividends to stockholders is classified as a cash flow from investing activities in a statement of cash flows. Answer: False Rationale: Dividends paid to stockholders are classified as a cash outflow from financing activities. Topic: Cash Flow Activities LO: 1 4. Cash received from customers for services rendered is classified as a cash flow from operating activities in a statement of cash flows. Answer: True Topic: Cash Flow Activities LO: 1 5. Cash paid for interest on a loan is classified as a cash flow from financing activities in a statement of cash flows. Answer: False Rationale: Cash interest payments are included in operating activities. Topic: Cash Flow Activities LO: 1 6. Information about noncash investing and financing activities must be disclosed in a schedule that is separate from the statement of cash flows. Answer: True
©Cambridge Business Publishers, 2020 12-2
Financial Accounting for Undergraduates, 4th Edition
Topic: Cash Flow Activities LO: 1 7. Two different methods of determining and presenting the net cash flows from operating activities are the indirect method and the reconciliation method. Answer: False Rationale: The indirect method and the direct method are two ways to determine and present the statement of cash flows. The indirect method is most popular. Topic: Statement of Cash Flows LO: 1 8. The operating activities section of the statement of cash flows shows a reconciliation of net income to the net cash provided by operating activities amount under the direct method. Answer: False Rationale: The indirect method begins with net income and removes noncash amounts to arrive at cash flows provided by operating activities. Topic: Statement of Cash Flows LO: 1 9. The direct method of presenting the net cash flow from operating activities shows the major categories of operating cash receipts and payments. Answer: True Topic: Convert to Cash Calculations LO: 4 10. If accounts payable increase during an accounting period, then the cash paid for merchandise purchased is less than the merchandise purchases for the period. Answer: True Topic: Convert to Cash Calculations LO: 4 11. If prepaid insurance decreases during an accounting period, then the cash paid for insurance is less than the period’s insurance expense. Answer: True Topic: Convert to Cash Calculations LO: 4 12. If accounts receivable increase during an accounting period, then the cash received from customers is more than the sales revenue for the period. Answer: False Rationale: If accounts receivable is increasing, this means that the amount of sales on credit is greater than the cash received.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-3
Topic: Statement of Cash Flows – Indirect Method LO: 2 13. Depreciation expense is deducted from net income in determining cash flows provided by operating activities under the indirect method. Answer: False Rationale: Depreciation does not involve cash. It is added back to net income in the operating section of the statement of cash flows under the indirect method because it was deducted in determining net income though it did not use cash. Topic: Operating-Cash-Flow-to-Capital-Expenditures Ratio LO: 3 14. The operating-cash-flow-to-capital-expenditures ratio in excess of 1.0 means that the firms’ current operating activities are providing cash in excess of the amount needed to fund its desired investment in plant and intangible assets. Answer: True
©Cambridge Business Publishers, 2020 12-4
Financial Accounting for Undergraduates, 4th Edition
Multiple Choice Topic: Statement of Cash Flows LO: 1 Level of Difficulty: EASY 1. The statement of cash flows explains changes in a firm’s: A) Cash on hand and cash in the bank B) Cash and cash equivalents C) Cash, cash equivalents, and accounts receivable D) Working capital Answer: B Topic: Cash Equivalents LO: 1 Level of Difficulty: EASY 2. Which of the following is a cash equivalent for purposes of preparing a statement of cash flows? A) Accounts receivable B) Investment in subsidiary company common stock C) Inventory D) Investment in a money market fund Answer: D Topic: Cash Equivalents LO: 1 Level of Difficulty: EASY 3. To qualify as a cash equivalent, an investment must be: A) Easily convertible into a known cash amount B) Three months or more from maturity C) Over $500,000 in amount D) All of the above Answer: A Topic: Cash Equivalents LO: 1 Level of Difficulty: EASY 4. A typical example of a cash equivalent is an investment in: A) Treasury stock B) Commercial paper C) Stock of other companies selling on an exchange D) All of the above Answer: B
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-5
Topic: Cash Equivalents LO: 1 Level of Difficulty: EASY 5. Which of the following is not a cash equivalent for purposes of preparing a statement of cash flows? A) Investment in common stock of other companies B) Investment in Treasury bills C) Investment in a money market fund D) Investment in commercial paper Answer: A Topic: Cash Flow Activities LO: 1 Level of Difficulty: MEDIUM 6. A firm’s net cash flow from operating activities includes: A) Cash received from sale of equipment B) Cash received from issuance of common stock C) Cash received from sale of merchandise D) Cash received as payment of loan from a borrower Answer: C Topic: Cash Flow Activities LO: 1 Level of Difficulty: MEDIUM 7. A firm’s cash flow from investing activities includes: A) Cash received from the sale of a plant asset B) Cash paid as dividends C) Cash received from the rendering of services to customers D) Cash paid to retire bonds payable Answer: A Topic: Cash Flow Activities LO: 1 Level of Difficulty: MEDIUM 8. A firm’s cash flow from financing activities includes: A) Cash paid to reacquire treasury stock B) Cash paid for merchandise purchased C) Cash received from sale of investment in bonds D) Cash received as interest income Answer: A
©Cambridge Business Publishers, 2020 12-6
Financial Accounting for Undergraduates, 4th Edition
Topic: Cash Flow Activities LO: 1 Level of Difficulty: MEDIUM 9. In a statement of cash flows, interest paid to creditors is classified as a cash flow from: A) Operating activities B) Trading activities C) Financing activities D) Investing activities Answer: A Topic: Statement of Cash Flows – Indirect Method LO: 2 Level of Difficulty: MEDIUM 10. Which of the following is disclosed separately in a statement of cash flows using the indirect method? A) Net income B) Cash received from customers C) Cash paid to employees and other suppliers D) Increase in retained earnings for the period Answer: A Topic: Cash Flow from Operating Activities Using the Indirect Method LO: 2 Level of Difficulty: MEDIUM 11. Ashford Company has an accrual basis net income of $270,000 in 2019 and the following related items: Depreciation expense Accounts receivable increase Inventory decrease Accounts payable decrease
$57,000 18,000 21,000 12,000
How much is Ashford’s net cash flow from operating activities in 2019? A) $261,000 B) $303,000 C) $186,000 D) $318,000 Answer: D Rationale: $270,000 + $57,000 – $18,000 + $21,000 – $12,000 = $318,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-7
Topic: Cash Flow from Operating Activities Using the Indirect Method LO: 2 Level of Difficulty: MEDIUM 12. Baxa Company has an accrual basis net income of $360,000 in 2019 and the following related items: Depreciation expense Accounts receivable increase Inventory decrease Accounts payable decrease
$76,000 24,000 28,000 16,000
How much is Baxa’s net cash flow from operating activities in 2019? A) $348,000 B) $416,000 C) $472,000 D) $424,000 Answer: D Rationale: $360,000 + $76,000 – $24,000 + $28,000 – $16,000 = $424,000 Topic: Cash Flow from Operating Activities Using the Indirect Method LO: 2 Level of Difficulty: MEDIUM 13. Demi, Inc. has an accrual basis net loss of $60,000 in 2019 and the following related items: Depreciation expense Accounts receivable decrease Inventory increase Accounts payable increase Accrued liabilities increase
$33,000 24,000 18,000 9,000 15,000
How much is Lovato’s net cash flow from operating activities in 2019? A) $105,000 B) $ (12,000) C) $ 3,000 D) $(39,000) Answer: C Rationale: $(60,000) + $33,000 + $24,000 – $18,000 + $9,000 + $15,000 = $3,000
©Cambridge Business Publishers, 2020 12-8
Financial Accounting for Undergraduates, 4th Edition
Topic: Cash Flow from Operating Activities Using the Indirect Method LO: 2 Level of Difficulty: MEDIUM 14. Luna, Inc. has an accrual basis net loss of $80,000 in 2019 and the following related items: Depreciation expense Accounts receivable decrease Inventory increase Accounts payable increase Accrued liabilities increase
$44,000 32,000 24,000 12,000 20,000
How much is Lunas’ net cash flow from operating activities in 2019? A) $140,000 B) $(16,000) C) $ 4,000 D) $ (52,000) Answer: C Rationale: $(80,000) + $44,000 + $32,000 – $24,000 + $12,000 + $20,000 = $4,000 Topic: Cash Flow from Operating Activities Using the Indirect Method LO: 2 Level of Difficulty: MEDIUM 15. Tina’s Art Supplies has an accrual basis net income of $156,000 in 2019 and the following related items: Amortization expense Accounts receivable decrease Inventory decrease Interest payable increase Dividends paid
$39,000 21,000 15,000 18,000 3,000
What is Tina’s Art Supplies’ net cash flow from operating activities in 2019? A) $249,000 B) $141,000 C) $111,000 D) $243,000 Answer: A Rationale: $156,000 + $39,000 + $21,000 + $15,000 + $18,000 = $249,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-9
Topic: Cash Flow from Operating Activities Using the Indirect Method LO: 2 Level of Difficulty: MEDIUM 16. Bruder’s Office Supplies, Inc. has an accrual basis net income of $208,000 in 2019 and the following related items: Amortization expense Accounts receivable decrease Inventory decrease Interest payable increase Dividends paid
$52,000 28,000 20,000 24,000 4,000
What is Bruder’s Office Supplies, Inc.’s net cash flow from operating activities in 2019? A) $332,000 B) $280,000 C) $236,000 D) $328,000 Answer: A Rationale: $208,000 + $52,000 + $28,000 + $20,000 + $24,000 = $332,000 Topic: Cash Received from Customers LO: 4 Level of Difficulty: MEDIUM 17. A company reported annual sales revenue of $1,650,000 in 2019. During the year, accounts receivable decreased from a $42,000 beginning balance to a $36,000 ending balance. Accounts payable decreased from a $33,000 beginning balance to a $24,000 ending balance. How much is cash received from customers for the year? A) $1,647,000 B) $1,614,000 C) $1,656,000 D) $1,662,000 Answer: C Rationale: $1,650,000 + ($42,000 – $36,000) = $1,656,000 Topic: Cash Received from Customers LO: 4 Level of Difficulty: MEDIUM 18. A company reported annual sales revenue of $2,200,000 in 2019. During the year, accounts receivable decreased from a $56,000 beginning balance to a $48,000 ending balance. Accounts payable decreased from a $44,000 beginning balance to a $32,000 ending balance. How much is cash received from customers for the year? A) $2,192,000 B) $1,848,000 C) $2,208,000 D) $2,196,000 Answer: C Rationale: $2,200,000 + ($56,000 – $48,000) = $2,208,000
©Cambridge Business Publishers, 2020 12-10
Financial Accounting for Undergraduates, 4th Edition
Topic: Cash Received from Customers LO: 4 Level of Difficulty: MEDIUM 19. A company reported annual sales revenue of $2,535,000 in 2019. During the year accounts receivable increased from a $42,000 beginning balance to a $57,000 ending balance. Accounts payable decreased from a $39,000 beginning balance to a $18,000 ending balance. How much is cash received from customers for the year? A) $2,520,000 B) $2,541,000 C) $2,592,000 D) $2,550,000 Answer: A Rationale: $2,535,000 – ($57,000 - $42,000) = $2,520,000 Topic: Cash Paid for Merchandise LO: 4 Level of Difficulty: MEDIUM 20. A company reported cost of goods sold of $800,000 for the 2019 year. During the year, inventory increased from a $46,000 beginning balance to a $70,000 ending balance, and accounts payable increased from a $24,000 beginning balance to a $28,000 ending balance. How much is the cash paid for merchandise purchased during the year? A) $860,000 B) $772,000 C) $824,000 D) $820,000 Answer: D Rationale: $800,000 + ($70,000 - $46,000) + ($24,000 – $28,000) = $820,000 Topic: Cash Paid for Merchandise LO: 4 Level of Difficulty: MEDIUM 21. A company reported cost of goods sold of $2,400,000 for the 2019 year. During the year, inventory increased from a $138,000 beginning balance to a $210,000 ending balance, and accounts payable increased from a $72,000 beginning balance to a $84,000 ending balance. How much is the cash paid for merchandise purchased during the year? A) $2,472,000 B) $2,556,000 C) $2,340,000 D) $2,460,000 Answer: D Rationale: $2,400,000 + ($210,000 - $138,000) + ($72,000 – $84,000) = $2,460,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-11
Topic: Cash Paid for Income Taxes LO: 4 Level of Difficulty: MEDIUM 22. A company reported annual income tax expense of $170,000 in 2019. During the year, income tax payable increased from a $12,400 beginning balance to a $17,600 ending balance. How much is cash paid for income taxes during the year? A) $164,800 B) $169,200 C) $175,200 D) $187,600 Answer: A Rationale: $170,000 + ($12,400 – $17,600) = $164,800 Topic: Cash Paid for Income Taxes LO: 4 Level of Difficulty: MEDIUM 23. A company reported annual income tax expense of $510,000 in 2019. During the year, income tax payable increased from a $37,200 beginning balance to a $52,800 ending balance. How much is cash paid for income taxes during the year? A) $494,400 B) $525,600 C) $544,800 D) $457,200 Answer: A Rationale: $510,000 + ($37,200 – $52,800) = $494,400 Topic: Statement of Cash Flows LO: 1 Level of Difficulty: MEDIUM 24. With reference to the reporting of net cash flow from operating activities, which method do most companies use and why? A) Indirect method because it provides better information for decision making B) Direct method because it is based on the accrual basis of accounting C) Direct method because it requires a supplemental indirect method section D) Indirect method because it is less expensive to prepare Answer: D Rationale: The indirect method is easier and cheaper because it takes less time. The direct method requires an additional step in that companies must also present a supplemental indirect method section.
©Cambridge Business Publishers, 2020 12-12
Financial Accounting for Undergraduates, 4th Edition
Topic: Operating-Cash-Flow-to-Current-Liabilities Ratio LO: 3 Level of Difficulty: MEDIUM 25. The following amounts have been taken from the recent financial statements for Merema Industries: Current Liabilities (1/1/2019) $1,860,000
Current Liabilities (12/31/2019) $2,925,000
Cash from Operations $5,335,000
Expenditures on PPE $840,000
To the closest hundredth, which of the following amounts is Merema’s operating-cash-flow-to-currentliabilities ratio? A) 2.51 B) 2.23 C) 2.88 D) 1.83 Answer: B Rationale: $5,335,000 / [($1,860,000 + $2,925,000)/2] = $5,335,000 / $2,392,500 = 2.23 Topic: Operating-Cash-Flow-to-Current-Liabilities Ratio LO: 3 Level of Difficulty: MEDIUM 26. The following amounts have been taken from the recent financial statements for Becky Industries: Current Liabilities (1/1/2019) $2,480,000
Current Liabilities (12/31/2019) $3,900,000
Cash from Operations $6,732,000
Expenditures on PPE $1,120,000
To the closest hundredth, which of the following amounts is Becky’s operating-cash-flow-to-currentliabilities ratio? A) 2.71 B) 2.11 C) 2.05 D) 1.73 Answer: B Rationale: $6,732,000 / [($2,480,000 + $3,900,000)/2] = $6,732,000 / $3,190,000 = 2.11 Topic: Statement of Cash Flows – Direct Method LO: 1 Level of Difficulty: MEDIUM 27. Which of the following is a required separate disclosure for firms using the direct method in the statement of cash flows? A) A reconciliation of net income to net cash flows from operating activities B) A list of all noncash investing and financing transactions C) The policy for determining which highly liquid, short-term investments are treated as cash equivalents D) All of the above Answer: D
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-13
Topic: Statement of Cash Flows – Direct Method LO: 4 Level of Difficulty: MEDIUM 28. Which of the following is not disclosed in a statement of cash flows using the direct method? A) Cash paid for interest B) Cash received from customers C) Cash received from issuing stock D) Depreciation expense Answer: D Topic: Operating-Cash-Flow-to-Total-Liabilities Ratio LO: 3 Level of Difficulty: MEDIUM 29. For the current year, Rex Company’s net cash flow from operating activities is $210,000; its beginning total liabilities were $300,000, and its ending total liabilities were $750,000. The company’s operating-cash-flow-to-total-liabilities ratio for the year is: A) 0.40 B) 0.35 C) 0.28 D) 0.71 Answer: A Rationale: $210,000 / [($300,000 + $750,000) / 2] = 0.40 Topic: Operating-Cash-Flow-to-Total-Liabilities Ratio LO: 3 Level of Difficulty: MEDIUM 30. For the current year, Cart Company’s net cash flow from operating activities is $240,000; its beginning total liabilities were $400,000, and its ending total liabilities were $900,000. The company’s operating-cash-flow-to-total-liabilities ratio for the year is: A) 0.32 B) 0.37 C) 0.27 D) 0.60 Answer: B Rationale: $240,000 / [($400,000 + $900,000) / 2] = 0.37
©Cambridge Business Publishers, 2020 12-14
Financial Accounting for Undergraduates, 4th Edition
Topic: Operating-Cash-Flow-to-Current-Liabilities Ratio LO: 3 Level of Difficulty: MEDIUM 31. Billy Corporation had the following data for 2019: Net cash flow from operating activities Current liabilities at January 1, 2019 Current liabilities at December 31, 2019
$ 9,100,000 $ 9,000,000 $15,000,000
Joel’s operating-cash-flow-to-current-liabilities ratio for 2019 is: A) 0.76 B) 0.61 C) 1.02 D) 0.87 Answer: A Rationale: $9,100,000 / [($9,000,000 + $15,000,000) / 2] = 0.76 Topic: Operating-Cash-Flow-to-Current-Liabilities Ratio LO: 3 Level of Difficulty: MEDIUM 32. Cooper Corporation had the following data for 2019: Net cash flow from operating activities Current liabilities at January 1, 2019 Current liabilities at December 31, 2019
$10,400,000 $12,000,000 $18,000,000
Conner’s operating-cash-flow-to-current-liabilities ratio for 2019 is: A) 0.69 B) 0.58 C) 0.87 D) 0.74 Answer: A Rationale: $10,400,000 / [($12,000,000 + $18,000,000) / 2] = 0.69
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-15
Topic: Operating-Cash-Flow-to-Current-Liabilities Ratio LO: 3 Level of Difficulty: MEDIUM 33. Edmonds Corporation had the following data for 2019: Net cash flows from operating activities Current liabilities at January 1, 2019 Current liabilities at December 31, 2019
$6,454,000 $7,200,000 $14,400,000
Redman’s operating-cash-flow-to-current-liabilities ratio for 2019 is: A) 0.87 B) 0.60 C) 0.57 D) 0.50 Answer: B Rationale: $6,454,000 / [($7,200,000 + $14,400,000) / 2] = 0.60 Topic: Operating-Cash-Flow-to-Current-Liabilities Ratio LO: 3 Level of Difficulty: MEDIUM 34. Bauer Corporation had the following data for 2019: Net cash flows from operating activities Current liabilities at January 1, 2019 Current liabilities at December 31, 2019
$ 7,376,000 $ 9,600,000 $17,200,000
Eddie’s operating-cash-flow-to-current-liabilities ratio for 2019 is: A) 0.43 B) 0.55 C) 0.48 D) 0.77 Answer: B Rationale: $7,376,000 / [($9,600,000 + $17,200,000) / 2] = 0.55
©Cambridge Business Publishers, 2020 12-16
Financial Accounting for Undergraduates, 4th Edition
USE THE FOLLOWING INFORMATION FOR QUESTIONS 35-37. Van Beek Corporation reported the following transactions for 2019: 1. Sold equipment for $21,000. The original cost was $45,000; the book value is $18,000 2. Issued 2,000 shares of $15 par value common stock for $36 per share 3. Paid $9,000 for an Insurance policy which goes into effect in January 2020 4. Recognized $6,000 in Interest expense on Dec 31, 2019 - to be paid on April 30, 2020 5. Received $24,000 as collections from customers for 2018 sales, and $54,000 for 2019 sales 6. Reacquired 300 shares of its own common stock at $60 per share 7. Received $6,000 in dividends on stock held as available for sale 8. Recorded depreciation expense for $15,000 9. Paid $3,000 of dividends to common stockholders 10. Purchased equipment costing $195,000, by making a cash down payment of $60,000 and signing a note for the remaining $135,000. 11. Acquired a building with a market value of $750,000 by issuing 20,000 shares of common stock. 12. Paid salaries of $54,000 13. Cash received from sale of available for sale securities $18,000 14. Repaid a loan, which included $15,000 of the principal and $3,000 in interest Van Beek Corporation uses the direct method for preparing the 2019 Statement of Cash Flows.
Topic: Activity Classifications in the Statement of Cash Flows LO: 1, 4 Level of Difficulty: DIFFICULT 35. The net cash flow from operating activities is: A) $(24,000) B) $ 3,000 C) $ 18,000 D) $ 12,000 Answer: C Rationale: Item # 3 5 5 7 12 14
Amount $ (9,000) 24,000 54,000 6,000 (54,000) (3,000) $18,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-17
Topic: Activity Classifications in the Statement of Cash Flows LO: 1, 4 Level of Difficulty: DIFFICULT 36. The net cash flow from investing activities is: A) $(21,000) B) $(63,000) C) $ (3,000) D) $(36,000) Answer: A Rationale: Item # 1 10 13
Amount $21,000 (60,000) 18,000 $(21,000)
Topic: Activity Classifications in the Statement of Cash Flows LO: 1, 4 Level of Difficulty: DIFFICULT 37. The net cash flow from financing activities is: A) $51,000 B) $36,000 C) $ 9,000 D) $54,000 Answer: B Rationale: Item # 2 6 9 14
Amount $72,000 (18,000) (3,000) (15,000) $36,000
©Cambridge Business Publishers, 2020 12-18
Financial Accounting for Undergraduates, 4th Edition
USE THE FOLLOWING INFORMATION FOR QUESTIONS 38-40. Herman Corporation reported the following transactions for 2019: 1. Sold equipment for $28,000. The original cost was $60,000; the book value is $24,000 2. Issued 2,000 shares of $20 par value common stock for $48 per share 3. Paid $12,000 for an Insurance policy which goes into effect in January 2020 4. Recognized $8,000 in Interest expense on Dec 31, 2019 - to be paid on April 30, 2020 5. Received $32,000 as collections from customers for 2018 sales, and $72,000 for 2019 sales 6. Reacquired 300 shares of its own common stock at $80 per share 7. Received $8,000 in dividends on stock held as available for sale 8. Recorded depreciation expense for $20,000 9. Paid $4,000 of dividends to common stockholders 10. Purchased equipment costing $260,000, by making a cash down payment of $80,000 and signing a note for the remaining $180,000. 11. Acquired a building with a market value of $1,000,000 by issuing 20,000 shares of common stock. 12. Paid salaries of $72,000 13. Cash received from sale of available for sale securities $24,000 14. Repaid a loan, which included $20,000 of the principal and $4,000 in interest Herman Corporation uses the direct method for preparing the 2019 Statement of Cash Flows.
Topic: Activity Classifications in the Statement of Cash Flows LO: 1, 4 Level of Difficulty: DIFFICULT 38. The net cash flow from operating activities is: A) $(32,000) B) $ 4,000 C) $24,000 D) $16,000 Answer: C Rationale: Item # 3 5 5 7 12 14
Amount $(12,000) 32,000 72,000 8,000 (72,000) (4,000) $24,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-19
Topic: Activity Classifications in the Statement of Cash Flows LO: 1, 4 Level of Difficulty: DIFFICULT 39. The net cash flow from investing activities is: A) $(28,000) B) $(84,000) C) $ (4,000) D) $(48,000) Answer: A Rationale: Item # 1 10 13
Amount $28,000 (80,000) 24,000 $(28,000)
Topic: Activity Classifications in the Statement of Cash Flows LO: 1, 4 Level of Difficulty: DIFFICULT 40. The net cash flow from financing activities is: A) $68,000 B) $48,000 C) $12,000 D) $72,000 Answer: B Rationale: Item # 2 6 9 14
Amount $96,000 (24,000) (4,000) (20,000) $48,000
©Cambridge Business Publishers, 2020 12-20
Financial Accounting for Undergraduates, 4th Edition
Topic: Activity Classifications in the Statement of Cash Flows LO: 1 Level of Difficulty: MEDIUM 41. Consider the following events: • • • • •
Cash of $168,000 was used to purchase a used truck. Cash of $120,000 was used to retire bonds. Cash of $75,000 was received from the sale of an investment at a loss. Cash dividends of $42,000 were received from an investment. Plant assets were depreciated $18,000, under the straight-line method.
Compute the net cash flow from investing activities (parentheses indicate an outflow): A) $ 75,000 B) $(213,000) C) $ (21,000) D) $ (93,000) Answer: D Rationale: $(168,000) + $75,000 = $(93,000) Topic: Activity Classifications in the Statement of Cash Flows LO: 1 Level of Difficulty: MEDIUM 42. Consider the following events: • • • • •
Cash of $204,000 was used to purchase a new bulldozer. Cash of $160,000 was used to retire bonds. Cash of $100,000 was received from the sale of an investment at a loss. Cash dividends of $56,000 were received from an investment. Plant assets were depreciated $24,000, under the straight-line method.
Compute the net cash flow from investing activities (parentheses indicate an outflow): A) $ 100,000 B) $(210,000) C) $ (44,000) D) $(104,000) Answer: D Rationale: $(204,000) + $100,000 = $(104,000)
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-21
Topic: Activity Classifications in the Statement of Cash Flows LO: 1 Level of Difficulty: DIFFICULT 43. Consider the following events: • • • • •
25,000 shares of preferred stock, cumulative, 5%, $30 par was issued for $45 a share. The annual cash dividend was declared and paid to the above preferred stock. The company purchased 12,000 shares of common stock at $51 per share to be held as Treasury stock. Interest of $24,000 was paid to bondholders. Bonds Payable with a par value of $300,000 were retired at $324,000.
Compute the net cash flow from financing activities (parentheses indicate an outflow): A) $ 475,500 B) $(214,500) C) $ 151,500 D) $ 189,000 Answer: C Rationale: $1,125,000* – $37,500** – $612,000*** – $324,000 = $151,500 *25,000 shares x $45 = $1,125,000 **25,000 shares x $30 X 5 % = $37,500 ***12,000 shares x $51 = $612,000
Topic: Activity Classifications in the Statement of Cash Flows LO: 1 Level of Difficulty: DIFFICULT 44. Consider the following events: • • • • •
25,000 shares of preferred stock, cumulative, 5%, $40 par was issued for $60 a share. The annual cash dividend was declared and paid to the above preferred stock. The company purchased 12,000 shares of common stock at $68 per share to be held as Treasury stock. Interest of $32,000 was paid to bondholders. Bonds Payable with a par value of $400,000 were retired at $432,000.
Compute the net cash flow from financing activities (parentheses indicate an outflow): A) $ 234,000 B) $(286,000) C) $ 202,000 D) $ 170,000 Answer: C Rationale: $1,500,000* – $50,000** – $816,000*** – $432,000 = $202,000 *25,000 shares x $60 = $1,500,000 **25,000 shares x $40 X 5 % = $50,000 ***12,000 shares x $68 = $816,000
©Cambridge Business Publishers, 2020 12-22
Financial Accounting for Undergraduates, 4th Edition
Topic: Preparing the Statement of Cash Flows Using the Indirect Method LO: 2 Level of Difficulty: DIFFICULT 45. Consider the following: • • • • • •
Net income, $285,000 Depreciation Expense $33,000 Increase in accounts receivable, $12,000 Decrease in merchandise inventory, $60,000 Decrease in accounts payable, $24,000 Increase in income taxes payable, $9,000
Using the Indirect Method, the Net Cash provided by Operating Activities was: A) $270,000 B) $318,000 C) $303,000 D) $351,000 Answer: D Rationale: $285,000 + $33,000 – $12,000 + $60,000 – $24,000 + $9,000 = $351,000 Topic: Preparing the Statement of Cash Flows Using the Indirect Method LO: 2 Level of Difficulty: DIFFICULT 46. Consider the following: • • • • • •
Net income, $380,000 Depreciation Expense $44,000 Increase in accounts receivable, $16,000 Decrease in merchandise inventory, $80,000 Decrease in accounts payable, $32,000 Increase in income taxes payable, $12,000
Using the Indirect Method, the Net Cash provided by Operating Activities was: A) $336,000 B) $424,000 C) $404,000 D) $468,000 Answer: D Rationale: $380,000 + $44,000 – $16,000 + $80,000 – $32,000 + $12,000 = $468,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-23
Topic: Preparing the Statement of Cash Flows Using the Indirect Method LO: 2 Level of Difficulty: DIFFICULT 47. A company had net income of $1,395,000 in 2019. Depreciation expense is $156,000. During the year, Accounts Receivable and Inventory increased $90,000 and $240,000, respectively. Prepaid Expenses and Accounts Payable decreased $12,000 and $24,000, respectively. There was also a loss on the sale of equipment of $18,000. How much cash was provided by operating activities in 2019? A) $1,176,000 B) $1,227,000 C) $1,656,000 D) $1,728,000 Answer: B Rationale: Cash Flow from operating activities Net income Add (deduct) items to convert net income to cash basis Depreciation Loss on sale of equipment Accounts receivable increase Inventory increase Prepaid expenses decrease Accounts payable decrease Cash provided by operating activities
$1,395,000 156,000 18,000 (90,000) (240,000) 12,000 (24,000) $1,227,000
Topic: Preparing the Statement of Cash Flows Using the Indirect Method LO: 2 Level of Difficulty: DIFFICULT 48. A company had net income of $1,860,000 in 2019. Depreciation expense is $208,000. During the year, Accounts Receivable and Inventory increased $120,000 and $320,000, respectively. Prepaid Expenses and Accounts Payable decreased $16,000 and $32,000, respectively. There was also a loss on the sale of equipment of $24,000. How much cash was provided by operating activities in 2019? A) $1,568,000 B) $1,636,000 C) $2,208,000 D) $2,476,000 Answer: B Rationale: Cash Flow from operating activities Net income Add (deduct) items to convert net income to cash basis Depreciation Loss on sale of equipment Accounts receivable increase Inventory increase Prepaid expenses decrease Accounts payable decrease Cash provided by operating activities
$1,860,000 208,000 24,000 (120,000) (320,000) 16,000 (32,000) $1,636,000
©Cambridge Business Publishers, 2020 12-24
Financial Accounting for Undergraduates, 4th Edition
Topic: Preparing the Statement of Cash Flows Using the Indirect Method LO: 2 Level of Difficulty: DIFFICULT 49. Kaila Company's financial statements show a net income of $567,000 in 2019. The following items also appear on Kaila's balance sheet: Depreciation expense
$120,000
Accounts receivable decrease
36,000
Inventory increase
84,000
Accounts payable increase
24,000
Using the indirect method, what is Kaila's net cash flow from operating activities in 2019? A) $663,000 B) $408,000 C) $696,000 D) $816,000 Answer: A Rationale: Cash Flow from operating activities Net income Add (deduct) items to convert net income to cash basis Depreciation Accounts receivable decrease Inventory increase Accounts payable increase Cash provided by operating activities
$567,000 120,000 36,000 (84,000) 24,000 $663,000
Topic: Preparing the Statement of Cash Flows Using the Indirect Method LO: 2 Level of Difficulty: DIFFICULT 50. Andrew Company's financial statements show a net income of $756,000 in 2019. The following items also appear on Wang's balance sheet: Depreciation expense Accounts receivable decrease Inventory increase Accounts payable increase
$160,000 48,000 112,000 32,000
Using the indirect method, what is Wang's net cash flow from operating activities in 2019? A) $ 884,000 B) $ 544,000 C) $ 948,000 D) $1,088,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-25
Answer: A Rationale: Cash Flow from operating activities Net income Add (deduct) items to convert net income to cash basis Depreciation Accounts receivable decrease Inventory increase Accounts payable increase Cash provided by operating activities
$756,000 160,000 48,000 (112,000) 32,000 $884,000
Topic: Preparing the Statement of Cash Flows Using the Indirect Method LO: 2 Level of Difficulty: DIFFICULT 51. Francisco Company reported sales revenue of $300,000 and total expenses of $270,000 (including depreciation) for the year ended December 31, 2019. During 2019, accounts receivable decreased by $12,000, merchandise inventory increased by $9,000, accounts payable increased by $6,000, and depreciation expense of $21,000 was recorded. Assuming no other data are needed, the net cash inflow from operating activities for 2016 was: A) $54,000 B) $36,000 C) $60,000 D) $21,000 Answer: C Rationale: Cash Flow from operating activities Net income ($300,000 -$270,000) Add (deduct) items to convert net income to cash basis Depreciation Accounts receivable decrease Inventory increase Accounts payable increase Cash provided by operating activities
$30,000 21,000 12,000 (9,000) 6,000 $60,000
©Cambridge Business Publishers, 2020 12-26
Financial Accounting for Undergraduates, 4th Edition
Topic: Preparing the Statement of Cash Flows Using the Indirect Method LO: 2 Level of Difficulty: DIFFICULT 52. Oscar Company reported sales revenue of $400,000 and total expenses of $360,000 (including depreciation) for the year ended December 31, 2019. During 2019, accounts receivable decreased by $16,000, merchandise inventory increased by $12,000, accounts payable increased by $8,000, and depreciation expense of $28,000 was recorded. Assuming no other data are needed, the net cash inflow from operating activities for 2019 was: A) $72,000 B) $56,000 C) $80,000 D) $28,000 Answer: C Rationale: Cash Flow from operating activities Net income ($400,000 - $360,000) Add (deduct) items to convert net income to cash basis Depreciation Accounts receivable decrease Inventory increase Accounts payable increase Cash provided by operating activities
$40,000 28,000 16,000 (12,000) 8,000 $80,000
Topic: Preparing the Statement of Cash Flows Using the Indirect Method LO: 2 Level of Difficulty: DIFFICULT 53. Consider the following: Net Income Depreciation Expense Gain on Sale of Land Increase in Inventory Increase in Wages Payable Payment of Dividends
$51,900 36,000 22,500 6,150 18,450 6,000
Calculate the net cash provided (or used) by operating activities using the indirect method: A) $ 77,700 B) $ 71,700 C) $107,700 D) $ 38,100 Answer: A Rationale: $51,900 + $36,000 - $22,500 - $6,150 + $18,450 = $77,700
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-27
Topic: Preparing the Statement of Cash Flows Using the Indirect Method LO: 2 Level of Difficulty: DIFFICULT 54. Consider the following: Net Income Depreciation Expense Gain on Sale of Land Increase in Inventory Increase in Wages Payable Payment of Dividends
$69,200 48,000 30,000 8,200 24,600 8,000
Calculate the net cash provided (or used) by operating activities using the indirect method: A) $103,600 B) $ 75,600 C) $163,600 D) $ 50,800 Answer: A Rationale: $69,200 + $48,000 - $30,000 - $8,200 + $24,600 = $103,600 Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: DIFFICULT 55. Consider the following: Beginning Merchandise Inventory Ending Merchandise Inventory Beginning Accounts Payable Ending Accounts Payable
$102,000 $132,000 $108,000 $129,000
The cost of goods sold was $1,470,000. What was the amount of cash paid for merchandise? A) $1,470,000 B) $1,479,000 C) $1,521,000 D) $1,461,000 Answer: B Rationale: Cost of goods sold Increase in inventory Increase in Payables Cash paid for merchandise
$1,470,000 30,000 (21,000) $1,479,000
©Cambridge Business Publishers, 2020 12-28
Financial Accounting for Undergraduates, 4th Edition
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: DIFFICULT 56. Consider the following: Beginning Merchandise Inventory Ending Merchandise Inventory Beginning Accounts Payable Ending Accounts Payable
$136,000 $176,000 $144,000 $172,000
The cost of goods sold was $1,960,000. What was the amount of cash paid for merchandise? A) $1,960,000 B) $1,972,000 C) $1,932,000 D) $1,948,000 Answer: B Rationale: Cost of goods sold Increase in inventory Increase in Payables Cash paid for merchandise
$1,960,000 40,000 (28,000) $1,972,000
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: DIFFICULT 57. Crater Company reports a $90,000 increase in inventory and a $30,000 increase in accounts payable during the year. Cost of Goods Sold for the year was $900,000. The cash payments made to suppliers were: A) $ 900,000 B) $1,020,000 C) $ 960,000 D) $ 840,000 Answer: C Rationale: Cost of goods sold Increase in inventory Increase in Payables Cash paid to suppliers
$900,000 90,000 (30,000) $960,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-29
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: DIFFICULT 58. Salt Company reports a $120,000 increase in inventory and a $40,000 increase in accounts payable during the year. Cost of Goods Sold for the year was $1,200,000. The cash payments made to suppliers were: A) $1,200,000 B) $1,040,000 C) $1,280,000 D) $1,120,000 Answer: C Rationale: Cost of goods sold Increase in inventory Increase in Payables Cash paid to suppliers
$1,200,000 120,000 (40,000) $1,280,000
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: MEDIUM 59. Kane, Inc. had cash sales of $750,000 and credit sales of $1,500,000. The accounts receivable balance increased $30,000 during the year. How much cash did Will receive from its customers during the year? A) $2,220,000 B) $2,280,000 C) $1,620,000 D) $1,680,000 Answer: A Rationale: Cash sales Credit sales Increase in receivables Cash received from customers
$ 750,000 1,500,000 (30,000) $2,220,000
©Cambridge Business Publishers, 2020 12-30
Financial Accounting for Undergraduates, 4th Edition
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: MEDIUM 60. Buffet, Inc. had cash sales of $1,000,000 and credit sales of $2,000,000. The accounts receivable balance increased $40,000 during the year. How much cash did Buffet receive from its customers during the year? A) $2,960,000 B) $3,040,000 C) $2,160,000 D) $2,040,000 Answer: A Rationale: Cash sales Credit sales Increase in receivables Cash received from customers
$1,000,000 2,000,000 (40,000) $2,960,000
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: MEDIUM 61. The beginning balance of Prepaid Interest was $5,400 and the ending balance was $7,800. The Interest Expense account for the year was $25,800. How much cash was paid for interest? A) $23,400 B) $28,200 C) $24,300 D) $25,800 Answer: B Rationale: Interest expense account balance Prepaid interest increase Cash paid for interest
$25,800 2,400 $28,200
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-31
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: MEDIUM 62. The beginning balance of Prepaid Interest was $7,200 and the ending balance was $10,400. The Interest Expense account for the year was $34,400. How much cash was paid for interest? A) $33,200 B) $37,600 C) $31,400 D) $34,400 Answer: B Rationale: Interest expense account balance Prepaid interest increase Cash paid for interest
$34,400 3,200 $37,600
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: MEDIUM 63. The beginning balance of Unearned Rent was $24,300 and the ending balance was $33,600. The Rent Earned for the year was $176,100. How much cash was received for rent? A) $234,000 B) $118,200 C) $166,800 D) $185,400 Answer: D Rationale: Rent earned Unearned rent increase Cash received for rent
$176,100 9,300 $185,400
©Cambridge Business Publishers, 2020 12-32
Financial Accounting for Undergraduates, 4th Edition
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: MEDIUM 64. The beginning balance of Unearned Rent was $32,400 and the ending balance was $44,800. The Rent Earned for the year was $234,800. How much cash was received for rent? A) $312,000 B) $157,600 C) $222,400 D) $247,200 Answer: D Rationale: Rent earned Unearned rent increase Cash received for rent
$234,800 12,400 $247,200
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: DIFFICULT 65. Belpre Corporation shows income tax expense of $180,000 in 2019. There has been a $15,000 decrease in federal income taxes payable and a $21,000 increase in state income taxes payable during the year. What was Belpre’s cash payment for income taxes? A) $ 18,000 B) $174,000 C) $165,000 D) $186,000 Answer: B Rationale: Income tax expense Federal income taxes payable decrease State income taxes payable increase Cash payment for income taxes
$180,000 15,000 (21,000) $174,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-33
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: DIFFICULT 66. Martin Corporation shows income tax expense of $240,000 in 2019. There has been a $20,000 decrease in federal income taxes payable and a $28,000 increase in state income taxes payable during the year. What was Martin’s cash payment for income taxes? A) $ 24,000 B) $232,000 C) $220,000 D) $248,000 Answer: B Rationale: Income tax expense Federal income taxes payable decrease State income taxes payable increase Cash payment for income taxes
$240,000 20,000 (28,000) $232,000
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: MEDIUM 67. The financial statements of Dunwoody Townhomes show the following: Unearned Rent, December 31, 2019: Unearned Rent, December 31, 2020: Rent Revenue for 2020:
$ 201,000 $ 189,000 $2,265,000
Cash collected from tenants during 2020 is: A) $2,277,000 B) $2,289,000 C) $2,265,000 D) $2,253,000 Answer: D Rationale: Rent Revenue for 2020 Plus: Unearned Rent, 12/31/20 Less: Unearned Rent, 12/31/19 Cash collected from tenants during 2020
$2,265,000 189,000 (201,000) $2,253,000
©Cambridge Business Publishers, 2020 12-34
Financial Accounting for Undergraduates, 4th Edition
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: MEDIUM 68. The financial statements of Oak Brook Townhomes show the following: Unearned Rent, December 31, 2019: Unearned Rent, December 31, 2020: Rent Revenue for 2020:
$ 268,000 $ 252,000 $3,020,000
Cash collected from tenants during 2020 is: A) $3,036,000 B) $3,052,000 C) $3,020,000 D) $3,004,000 Answer: D Rationale: Rent Revenue for 2020 Plus: Unearned Rent, 12/31/20 Less: Unearned Rent, 12/31/19 Cash collected from tenants during 2020
$3,020,000 252,000 (268,000) $3,004,000
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: MEDIUM 69. If wages expense is $270,000 and the beginning and ending Wages Payable balances are $30,000 and $45,000, respectively, cash paid to employees for wages is: A) $225,000 B) $285,000 C) $255,000 D) Not determinable from the information given Answer: C Rationale: Wage expense Increase in wages payable Cash payment for income taxes
$270,000 (15,000) $255,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-35
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: MEDIUM 70. If wages expense is $360,000 and the beginning and ending Wages Payable balances are $40,000 and $60,000, respectively, cash paid to employees for wages is: A) $300,000 B) $380,000 C) $340,000 D) Not determinable from the information given Answer: C Rationale: Wage expense Increase in wages payable Cash payment to employees
$360,000 (20,000) $340,000
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: MEDIUM 71. If insurance expense is $27,000 and the beginning and ending Prepaid Insurance balances are $3,000 and $4,500, respectively, cash paid for insurance is: A) $25,500 B) $27,000 C) $28,500 D) Not determinable from the information given Answer: C Rationale: Insurance expense Increase in Prepaid Insurance Cash payment for insurance
$27,000 1,500 $28,500
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: MEDIUM 72. If insurance expense is $36,000 and the beginning and ending Prepaid Insurance balances are $4,000 and $6,000, respectively, cash paid for insurance is: A) $34,000 B) $36,000 C) $38,000 D) Not determinable from the information given Answer: C Rationale: Insurance expense Increase in Prepaid Insurance Cash payment for insurance
$36,000 (2,000) $38,000
©Cambridge Business Publishers, 2020 12-36
Financial Accounting for Undergraduates, 4th Edition
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: DIFFICULT 73. The 2019 financial statements for Farmingdale Company show the following: Cost of goods sold Inventory, Beginning Balance Inventory, Ending Balance Accounts Payable, Beginning Balance Accounts Payable, Ending Balance
$363,000 $ 75,000 $ 78,000 $105,000 $ 99,000
Cash paid for merchandise is: A) $372,000 B) $366,000 C) $360,000 D) $354,000 Answer: A Rationale: Cash paid for merchandise Cost of goods sold Inventory increase Accounts payable decrease Cash paid for merchandise
$363,000 3,000 6,000 $372,000
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: DIFFICULT 74. The 2019 financial statements for Champaign Company show the following: Cost of goods sold Inventory, Beginning Balance Inventory, Ending Balance Accounts Payable, Beginning Balance Accounts Payable, Ending Balance
$ 484,000 $ 100,000 $ 104,000 $ 140,000 $ 132,000
Cash paid for merchandise is: A) $496,000 B) $488,000 C) $480,000 D) $472,000 Answer: A Rationale: Cash paid for merchandise Cost of goods sold Inventory increase Accounts payable decrease Cash paid for merchandise
$484,000 4,000 8,000 $496,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-37
Exercises Topic: Cash Flow Activities LO: 1 1. In which of the three activity categories of a statement of cash flows would each of the following items appear and do they represent a cash inflow or cash outflow? Use the following abbreviations: Op Out = Operating Cash Outflow Op In = Operating Cash Inflow Inv Out = Investing Cash Outflow
Answer: Op-In Op-In Op-In Inv-In Fin-In Op-Out Inv-Out Fin-Out
Inv In = Investing Cash Inflow Fin Out = Financing Cash Outflow Fin In = Financing Cash Inflow
a. b. c. d. e. f. g. h.
Cash dividends received Cash interest received Cash receipts from customers Cash collection on loans from borrowers Cash proceeds from the issuance of stock Cash interest paid Cash purchase of equipment Cash dividends paid
a. b. c. d. e. f. g. h.
Cash dividends received Cash interest received Cash receipts from customers Cash collection on loans from borrowers Cash proceeds from the issuance of stock Cash interest paid Cash purchase of equipment Cash dividends paid
Topic: Noncash Investing and Financing Activities LO: 1 2. Warren Industries acquired a $1,500,000 building by issuing a $1,500,000 note payable due to the Community Bank. a. In terms of cash flow reporting, what type of transaction is this? b. What special disclosure is required for this transaction? Answer: a. This is a noncash investing and financing transaction. b. It must be reported in a supplementary schedule to the statement of cash flows.
©Cambridge Business Publishers, 2020 12-38
Financial Accounting for Undergraduates, 4th Edition
Topic: Cash Flow Activities LO: 1 3. Put an X in the appropriate column to show whether each of the following cash flows should be classified as an operating, investing, or financing. Cash Flow a.
Received from issuance of common stock
b.
Paid as interest to creditors
c.
Received from sale of used equipment
d.
Received as dividends
e.
Received as a lawsuit settlement
f.
Paid to purchase treasury stock
g.
Paid to settle a note payable
h.
Received for services rendered
Operating
Investing
Financing
Operating
Investing
Financing
Answer: Cash Flow a.
Received from issuance of common stock
X
b.
Paid as interest to creditors
c.
Received from sale of used equipment
d.
Received as dividends
X
e.
Received as a lawsuit settlement
X
f.
Paid to purchase treasury stock
X
g.
Paid to settle a note payable
X
h.
Received for services rendered
X X
X
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-39
Topic: Cash Flow Activities LO: 1 4. Put an X in the appropriate column to show whether each of the following cash flows should be classified as an operating, investing, or financing cash flow. Cash Flow a.
Paid to purchase delivery truck
b.
Received from issuance of bonds payable
c.
Paid as dividends
d.
Received as interest
e.
Received from sale of a stock investment
f.
Paid as a charitable contribution
g.
Received from sale of bond investment
h.
Paid as income taxes
Operating
Investing
Financing
Operating
Investing
Financing
Answer: Cash Flow a.
Paid to purchase delivery truck
X
b.
Received from issuance of bonds payable
X
c.
Paid as dividends
X
d.
Received as interest
e.
Received from sale of a stock investment
f.
Paid as a charitable contribution
g.
Received from sale of bond investment
h.
Paid as income taxes
X X X X X
©Cambridge Business Publishers, 2020 12-40
Financial Accounting for Undergraduates, 4th Edition
Topic: Statement of Cash Flows – Indirect Method LO: 2 5. Fred Williams, Inc. had the following income statement for 2019: Sales Cost of goods sold Depreciation expense Other operating expenses and taxes Net Income
$2,610,000 1,620,000 135,000 264,000 $ 591,000
Additional information about the company follows:
Accounts receivable Inventory Prepaid expenses Accounts payable
End of Year
Beginning of Year
$ 93,000 129,000 9,000 66,000
$ 114,000 120,000 15,000 69,000
Calculate Fred Williams, Inc.’s cash flows provided by operating activities for 2019 using the indirect method. Answer: Net Income Add (deduct items to convert net income to cash basis: Depreciation Accounts receivable decrease Inventory increase Prepaid expenses decrease Accounts payable decrease Net cash provided by operating activities
$591,000 135,000 21,000 (9,000) 6,000 (3,000) $741,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-41
Topic: Statement of Cash Flows – Indirect Method LO: 2 6. The following information relates to Ponce Company for 2019, in which the company reported a $198,000 net income. Sales Cost of goods sold Operating expenses and income taxes (other than depreciation and amortization) Depreciation of plant assets Amortization of intangible assets Increase in accounts receivable Decrease in inventory Increase in accounts payable Decrease in accrued liabilities Increase in common stock
$1,620,000 948,000 264,000 108,000 24,000 36,000 33,000 18,000 9,000 102,000
Calculate the 2019 net cash flow from operating activities using the indirect method. Answer: Net Income Add (deduct) items to convert net income to cash basis: Depreciation Amortization Accounts receivable increase Inventory decrease Accounts payable increase Accrued liabilities decrease
$198,000 108,000 24,000 (36,000) 33,000 18,000 (9,000)
Net cash provided by operating activities
$336,000
Topic: Comparing Firms Using Ratio Analysis LO: 3 7. Consider the following 2019 data for two manufacturing firms ($ in millions): Average Current Liabilities
Cash from Operations
Expenditures on PPE
Cash Dividends
Bandit Industries
$28,600
$19,360
$3,800
$ 8,600
Cloud Company
44,800
40,920
6,200
15,800
a. Compute the operating-cash-flow-to-current-liabilities ratio for each firm for 2019. b. Compute the operating-cash-flow-to-capital-expenditures ratio for 2019. c. Comment on the results of your computations.
©Cambridge Business Publishers, 2020 12-42
Financial Accounting for Undergraduates, 4th Edition
Answer: a. Bandit: $19,360 / $28,600 = 0.68 Cloud: $40,920 / $44,800 = 0.91 b. Bandit: $19,360 / $3,800 = 5.09 Cloud: $40,920 / $6,200 = 6.60 c.
An operating-cash-flow-to-current-liabilities ratio of 0.5 is considered a strong ratio; consequently, both firms have strong ratios. The higher the ratio, the greater is a firm’s ability to pay current liabilities using its operating cash flow. Cloud’s ratio is very strong, indicating that it generates $0.91 of operating cash flow for every dollar of current liabilities. Again, both firms have strong operating-cash-flow-to-capital expenditures ratios. A ratio in excess of 1.0 is considered a sign of financial strength. Both firms appear to generate sufficient operating cash flow to finance its capital expenditure needs. Analysis of trends in recent years, the ratios of other firms in the same industry, and the stage of a firm’s life cycle would help with the interpretation of the results.
Topic: Comparing Firms Using Ratio Analysis LO: 3 8. Consider the following 2019 data for three manufacturing firms ($ in millions): Average Current Liabilities
Cash from Operations
Expenditures on PPE
Cash Dividends
Hermione Industries
$233,700
$(76,300)
$46,988
$31,500
Harry Company Ron Corporation
152,400 174,000
177,100 207,200
68,250 66,675
37,200 52,800
a. Compute the operating-cash-flow-to-capital-expenditures ratio for each firm for 2019. b. Compute the free cash flow for each firm for 2019. c. Comment on the results of your computations. Answer: a. Hermione: $(76,300) / $46,988 = (1.62) Harry: $177,100 / $68,250 = 2.60 Ron: $207,200 / $66,675 = 3.11 b. Hermione: $(76,300) – $46,988 = $(123,288) Harry: $177,100 – $68,250 = $108,850 Ron: $207,200 – $66,675 = $140,525 c.
Hermione’s operating cash flows are negative which means Hermione will likely need to borrow just to pay its bills, as well as for any additional plant improvements it wishes to make. The firm is undergoing difficult times. Ron appears to be in the best position, with a substantial amount of its operational cash flows available for expansion and other business pursuits. Harry has sufficient operational cash flows for expansion as well as a reasonable operating-cash-flow-to-capitalexpenditures ratio.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-43
Topic: Statement of Cash Flows – Direct Method LO: 4 9. Sam’s Sports had the following income statement for the current year: Sales Cost of goods sold Gross profit Operating expenses: Depreciation expense Wages expense Interest expense Net income
$1,424,000 972,000 $452,000 $44,000 198,000 16,000
258,000 $ 194,000
Additional information about the company follows:
Cash Accounts receivable Inventory Accounts payable Interest payable Wages payable Notes payable
End of Year $ 36,000 46,000 102,000 44,000 10,000 2,000 252,000
Beginning of Year $ 32,000 68,000 116,000 38,000 6,000 4,000 208,000
Calculate Sam’s Sports’ net cash flow provided by operating activities for the current year using the direct method. Show a separate cash flow for each revenue and expense. Answer: Cash received from customers Cash paid for merchandise purchased Cash paid to employees Cash paid for interest Net cash provided by operating activities
(a) $1,446,000 (b) $952,000 (c) 200,000 (d) 12,000
1,164,000 $ 282,000
(a) $1,424,000 + $68,000 – $46,000 = $1,446,000 (b) $972,000 – $116,000 + $102,000 – $44,000 + $38,000 = $952,000 (c) $198,000 + $4,000 – $2,000 = $200,000 (d) $16,000 + $6,000 – $10,000 = $12,000 There is no cash flow associated with depreciation expense.
©Cambridge Business Publishers, 2020 12-44
Financial Accounting for Undergraduates, 4th Edition
Topic: Statement of Cash Flows – Direct Method LO: 4 10. Sun Bums Company had the following income statement for the current year: Sales Cost of goods sold Gross profit Operating expenses: Depreciation expense Wages expense Advertising expense Net income
$ 1,350,000 960,000 $ 390,000 $ 45,000 195,000 30,000
270,000 $ 120,000
Additional information about the company follows:
Cash Accounts receivable Inventory Prepaid advertising Accounts payable Wages payable
End of Year $ 63,000 60,000 99,000 12,000 54,000 6,000
Beginning of Year $ 36,000 54,000 117,000 18,000 63,000 12,000
Calculate Sun Bums’ net cash flow provided by operating activities for the current year using the direct method. Show a separate cash flow for each revenue and expense. Answer: Cash received from customers Cash paid for merchandise purchased Cash paid to employees Cash paid for advertising Net cash provided by operating activities
(a) $1,344,000 (b) $951,000 (c) 201,000 (d) 24,000
1,176,000 $168,000
(a) $1,350,000 + $54,000 – $60,000 = $1,344,000 (b) $960,000 + $99,000 – $117,000 + $63,000 – $54,000 = $951,000 (c) $195,000 + $12,000 – $6,000 = $201,000 (d) $30,000 – $18,000 + $12,000 = $24,000 There is no cash flow associated with depreciation expense.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-45
Topic: Cash Flow from Operating Activities Using the Indirect Method LO: 2 11. The following account changes were presented in a recent balance sheet for Tea Leaves Company ($ in millions). a. b. c. d. e.
$1,000 decrease in inventory $600 increase in depreciation and amortization $1,400 decrease in accounts payable $800 increase in accounts receivable $1,000 increase in accrued liabilities
Determine whether the amount of change would be added to (+) or subtracted from (–) Tea Leaves’ net income for the period when calculating cash flow from operations using the indirect method. Answer: a. + b. + c. – d. – e. +
$1,000 decrease in inventory $600 increase in depreciation and amortization $1,400 decrease in accounts payable $800 increase in accounts receivable $1,000 increase in accrued liabilities
Topic: Investing and Financing Cash Flows LO: 1, 2 12. During 2019, Wards Company’s long-term investments account (at cost) increased $14,000, which was the net result of purchasing stock costing $102,000 and selling stocks costing $120,000 at a $12,000 loss. Wards’ notes payable account decreased $22,000, the net result of issuing $48,000 of notes and paying $70,000 during year on notes. What items and amounts appear in the (a) cash flows from investing activities and (b) cash flows from financing activities sections of Wards Company’s 2019 statement of cash flows? Answer: a. Cash flows from investing activities will show: Purchase of stock investments Sale of stock investments ($120,000 - $12,000)
$ (102,000) 108,000
b. Cash flows from financing activities will show: Issuance of notes Payment of notes
$ 48,000 (70,000)
©Cambridge Business Publishers, 2020 12-46
Financial Accounting for Undergraduates, 4th Edition
Topic: Net Cash Flow from Operating Activities Using the Indirect Method LO: 2 13. Geburtstag Company uses the indirect method. Selected information appears below. Net income Accounts receivable decrease Inventory decrease Accounts payable increase Income tax payable decrease Increase in dividends payable Gain on disposal of equipment Depreciation expense
$1,614,000 69,000 51,000 70,500 22,500 13,800 25,800 93,000
How much is Geburtstags’ net cash flow from operating activities? Answer: Net income Add (deduct) items to convert net income to cash basis: Depreciation expense Gain on disposal of equipment Accounts receivable decrease Inventory decrease Accounts payable increase Income tax payable decrease Net cash provided by operating activities
$1,614,000 93,000 (25,800) 69,000 51,000 70,500 (22,500) $1,849,200
Topic: Net Cash Flow from Operating Activities Using the Indirect Method LO: 2 14. Loyola Industries uses the indirect method. Selected information appears below. Net income Accounts receivable increase Inventory increase Loss on sale of equipment Accounts payable decrease Income tax payable decrease Depreciation expense
$370,000 10,000 14,000 6,400 7,000 15,000 46,000
How much is its net cash flow from operating activities? Answer: Net income Add (deduct) items to convert net income to cash basis Depreciation expense Loss on sale of equipment Accounts receivable increase Inventory increase Accounts payable decrease Income tax payable decrease Net cash provided by operating activities
$370,000 46,000 6,400 (10,000) (14,000) (7,000) (15,000) $376,400
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-47
Topic: Net Cash Flow from Operating Activities Using the Indirect Method LO: 2 15. Parkway, Inc., had a $20,000 net loss from operations in 2019. Depreciation expense for 2019 was $63,200 and a 2019 cash dividend of $72,000 was declared and paid. Balances of the current asset and current liability accounts at the beginning and end of 2019 follow.
Cash Accounts receivable Inventory Prepaid insurance Accounts payable Note payable Accrued liabilities
Ending $87,000 24,000 30,000 12,000 18,000 48,000 10,000
Beginning $74,000 26,000 24,000 16,000 12,800 32,400 15,800
Did Parkway’s 2019 operating activities provide or use cash and by what amount? Use the indirect method to determine your answer and show your work. Answer: Net loss Add (deduct) items to convert net income to cash basis Depreciation expense Accounts receivable decrease ($26,000 – $24,000) Inventory increase ($30,000 – $24,000) Prepaid insurance decrease ($16,000 – $12,000) Accounts payable increase ($18,000 – $12,800) Accrued liabilities decrease ($15,800 – $10,000) Net cash provided by operating activities
$(20,000) 63,200 2,000 (6,000) 4,000 5,200 (5,800) $ 42,600
Parkway, Inc.’s 2019 operating activities provided $42,600 cash.
©Cambridge Business Publishers, 2020 12-48
Financial Accounting for Undergraduates, 4th Edition
Topic: Statement of Cash Flows LO: 1 16. Burwell, Inc. reported the following amounts during 2018 and 2019: Dec. 31, 2019 $78,000 (15,000) (195,000) ? 108,000
Net cash provided (used) by operating activities Net cash provided (used) by financing activities Net cash provided (used) by investing activities Cash balance Net income
Dec. 31, 2018 $(33,000) 135,000 (48,000) 225,000 120,000
a. How much is the net increase or decrease in cash during 2019? b. How much will the company report on its balance sheet at December 31, 2019 as ‘cash’? Answer: a. Net cash provided by operating activities Net cash (used) by financing activities Net cash (used) by investing activities Net decrease in cash during 2019
$ 78,000 (15,000) (195,000) $ (132,000)
b. Beginning cash + change in cash = ending balance $225,000 – $132,000 = $93,000 Topic: Investing Activities Section LO: 2 17. The information below was provided by Tucson Company for 2019 and 2018: Equipment, December 31, 2018 Equipment, December 31, 2019 Accumulated depreciation, December 31, 2018 Accumulated depreciation, December 31, 2019
$132,000 140,000 78,000 60,000
During 2019, Tucson sold equipment with a cost of $50,000 and accumulated depreciation of $38,000. A loss of $2,000 was recognized on the sale of the equipment. Prepare the investing activities section of the statement of cash flows for 2019. Answer: Loss on sale of equipment = Selling price – Book value $(2,000) = Selling price – ($50,000 – $38,000); Selling price = $10,000 cash Cost of new equipment: $132,000 – $50,000 – $140,000 = $58,000 Cash flows from investing activities: Proceeds from sale of plant assets Cost of new equipment Cash flows used for investing activities
$ 10,000 (58,000) ($48,000)
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-49
Topic: Financing Activities Section LO: 2 18. Flying Pigs, Inc. provided the following information for 2019 and 2018: Retained earnings, December 31, 2019 Retained earnings, December 31, 2018 Note payable, December 31, 2019 Note payable, December 31, 2018 Net income—2019
$114,000 120,000 63,000 73,500 96,000
No new loans were taken out during 2019. Prepare the financing activities section of the statement of cash flows for 2019. Answer: Dividends paid = Beginning retained earnings + net income – ending retained earnings = $120,000 + $96,000 – $114,000 = $102,000 Cash paid on loans = Beginning note payable + new loans – ending note payable $73,500 + $0 – $63,000 = $10,500 Cash flows from financing activities: Cash paid for dividends Cash paid for note payable Cash flows used for financing activities
($102,000) (10,500) ($112,500)
Topic: Financing Activities Section LO: 2 19. During 2019, Jennifer, Inc. issued common stock for cash and borrowed $120,000 from the bank on a long-term loan. Jennifer, Inc. provided the following:
Common stock Retained earnings
2019 $61,600 144,000
2018 $32,800 124,000
How much cash was received from issuing common stock? Answer: Cash received for stock issuance = Beginning stock balance +/– Retired stock – Ending stock balance = $32,800 + $0 – $61,600 = $28,800
©Cambridge Business Publishers, 2020 12-50
Financial Accounting for Undergraduates, 4th Edition
Problems Topic: Net Cash Flow from Operating Activities Using the Indirect Method LO: 2 1. Lincoln Helmets purchased equipment for $124,000 cash, sold equipment costing $72,000 with a book value of $44,000 at a loss, and declared dividends during 2019. No new notes payable were issued during the year. Financial data follows:
Cash Accounts receivable Inventory Equipment Accum. depreciation Accounts payable Unearned revenue Accrued salaries Taxes payable Long-term notes payable Common stock Retained earnings
Dec. 31, 2019 $89,200 62,400 56,000 360,000 (92,000) 50,800 32,400 14,000 23,200 74,000 180,000 101,200
Dec. 31, 2018 $86,000 27,600 42,000 308,000 (84,000) 72,800 42,400 17,600 16,000 110,000 56,000 64,800
Change $3,200 34,800 14,000 52,000 (8,000) (22,000) (10,000) (3,600) 7,200 (36,000) 124,000 36,400
Sales revenue Cost of sales Salaries expense Depreciation expense Interest expense Loss on sale of equipment Income taxes expense Net income
2019 $1,700,000 850,000 270,000 36,000 7,000 6,000 88,000 $ 443,000
Required: Calculate cash flows from operations using the indirect method for 2019. Answer: Cash flow from operating activities: Net income $443,000 Add (deduct) items to convert net income to cash basis: Depreciation expense 36,000 Loss on sale of equipment 6,000 Accounts receivable increase (34,800) Inventory increase (14,000) Accounts payable decrease (22,000) Unearned revenues decrease (10,000) Accrued salaries decrease (3,600) Taxes payable increase 7,200 Cash flow from operating activities $407,800
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-51
Topic: Statement of Cash Flows – Direct Method LO: 4 2. The following schedule of cash receipts and payments relates to Zuercher Elements for the year 2019: Cash receipts: From customers From issuance of notes payable From sale of truck
$ 636,000 165,000 18,000
Cash payments: For income taxes For purchase of equipment To employees and suppliers For interest To stockholders as dividends For purchase of treasury stock
$ 48,000 132,000 375,000 12,000 96,000 18,000
Zuercher had $108,000 cash to start 2019 and ended the year with $246,000 cash. Required: In good form, prepare a 2019 statement of cash flows for Zuercher Elements using the direct method. Answer: ZUERCHER ELEMENTS Statement of Cash Flows For Year Ended December 31, 2019 Cash flow from operating activities Cash received from customers Cash paid to employees and suppliers Cash paid for interest Cash paid for income taxes Net cash provided by operating activities Cash flow from investing activities Sale of delivery truck Purchase of equipment Net cash used by investing activities Cash flow from financing activities Issuance of notes payable Payment of dividends Purchase of treasury stock Net cash provided by financing activities Net increase in cash Cash at beginning of year Cash at end of year
$636,000 (375,000) (12,000) (48,000) $201,000
$ 18,000 (132,000) (114,000) $165,000 (96,000) (18,000) 51,000 $ 138,000 108,000 $246,000
©Cambridge Business Publishers, 2020 12-52
Financial Accounting for Undergraduates, 4th Edition
Topic: Statement of Cash Flows – Indirect Method LO: 2 3. The following schedule of information relates to Pittsburgh Products for the year, 2019: Income statement data: Sales Depreciation expense Net income Cash receipts: From issuance of common stock From sale (at book value) of stock investment Cash payments: For purchase of land To stockholders as dividends To payoff notes payable Change in working capital accounts: Cash increase Accounts receivable increase Inventory decrease Accounts payable decrease Accrued liabilities increase
$1,160,000 42,000 154,000 $88,000 56,000 $248,000 44,000 28,000 $10,000 12,000 6,000 8,000 4,000
The cash balance was $44,000 at the beginning of 2019. Required: In good form, prepare a 2019 statement of cash flows for Pittsburgh Products using the indirect method. Answer: PITTSBURGH PRODUCTS Statement of Cash Flows For Year Ended December 31, 2019 Net cash flow from operating activities Net Income Add (deduct) items to convert net income to cash basis: Depreciation Accounts receivable increase Inventory decrease Accounts payable decrease Accrued liabilities increase Net cash provided by operating activities Cash flows from investing activities Sale of stock investment Purchase of land Net cash used by investing activities Cash flows from financing activities Issuance of common stock Retirement of notes payable Payment of dividends Net cash provided by financing activities Net increase in cash Cash at beginning of year Cash at end of year
$154,000 42,000 (12,000) 6,000 (8,000) 4,000 $186,000 56,000 (248,000) (192,000) 88,000 (28,000) (44,000) 16,000 10,000 44,000 $ 54,000 ©Cambridge Business Publishers, 2020
Test Bank, Chapter 12
12-53
Topic: Statement of Cash Flows – Indirect Method LO: 2 4. The following schedule of information relates to San Francisco Bolts for the year 2019: Income statement data: Sales Depreciation expense Net income Cash receipts: From issuance of common stock From sale of plant assets (at book value) From loan repayment by borrower Cash payments: For purchase of stock investment To stockholders as dividends Change in working capital accounts: Cash increase Accounts receivable decrease Inventory increase Accounts payable decrease Accrued liabilities increase
$1,962,000 45,000 234,000 $84,000 15,000 36,000 $66,000 135,000 $237,000 36,000 27,000 9,000 24,000
The cash balance was $63,000 at the beginning of 2019. Required: In good form, prepare a 2019 statement of cash flows for San Francisco Bolts using the indirect method. Answer: SAN FRANCISCO BOLTS Statement of Cash Flows For Year Ended December 31, 2019 Net cash flow from operating activities Net Income Add (deduct) items to convert net income to cash basis: Depreciation Accounts receivable decrease Inventory increase Accounts payable decrease Accrued liabilities increase Net cash provided by operating activities Cash flow from investing activities Sale of plant assets Loan repayment by borrower Purchase of stock investment Net cash used by investing activities Cash flow from financing activities Issuance of common stock Payment of dividends Net cash provided by financing activities Net increase in cash Cash at beginning of year Cash at end of year
$234,000 45,000 36,000 (27,000) (9,000) 24,000 $303,000 15,000 36,000 (66,000) (15,000) 84,000 (135,000) (51,000) 237,000 63,000 $300,000
©Cambridge Business Publishers, 2020 12-54
Financial Accounting for Undergraduates, 4th Edition
Chapter 12 Statement of Cash Flows Learning Objectives – Coverage by question True / False
Multiple Choice
Exercises
LO1 – Discuss the content and format of the statement of cash flows.
1-9
1-9, 24, 27, 35-44
1-4, 12, 16
LO2 – Explain the preparation of a statement of cash flows using the indirect method.
13
10-16, 45-54
5, 6, 11-15, 17-19
LO3 – Define several ratios used to analyze the statement of cash flows and explain their use.
14
25, 26, 29-34
7, 8
10-12
17-23, 28, 35-40, 55-74
9, 10
LO4 – Appendix 12A Explain the preparation of a statement of cash flows using the direct method.
Problems
1, 3, 4
2
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-1
Chapter 12: Statement of Cash Flows
True / False Topic: Statement of Cash Flows LO: 1 1. The statement of cash flows includes a firm’s cash equivalents such as money market funds, in addition to cash. Answer: True
Topic: Cash Flow Activities LO: 1 2. Cash received from the sale of one of a company’s warehouses is classified as a cash flow from investing activities in a statement of cash flows. Answer: True
Topic: Cash Flow Activities LO: 1 3. Cash paid as dividends to stockholders is classified as a cash flow from investing activities in a statement of cash flows. Answer: False Rationale: Dividends paid to stockholders are classified as a cash outflow from financing activities.
Topic: Cash Flow Activities LO: 1 4. Cash received from customers for services rendered is classified as a cash flow from operating activities in a statement of cash flows. Answer: True
Topic: Cash Flow Activities LO: 1 5. Cash paid for interest on a loan is classified as a cash flow from financing activities in a statement of cash flows. Answer: False Rationale: Cash interest payments are included in operating activities.
Topic: Cash Flow Activities LO: 1 6. Information about noncash investing and financing activities must be disclosed in a schedule that is separate from the statement of cash flows. Answer: True
©Cambridge Business Publishers, 2020 12-2
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Cash Flow Activities LO: 1 7. Two different methods of determining and presenting the net cash flows from operating activities are the indirect method and the reconciliation method. Answer: False Rationale: The indirect method and the direct method are two ways to determine and present the statement of cash flows. The indirect method is most popular.
Topic: Statement of Cash Flows LO: 1 8. The operating activities section of the statement of cash flows shows a reconciliation of net income to the net cash provided by operating activities amount under the direct method. Answer: False Rationale: The indirect method begins with net income and removes noncash amounts to arrive at cash flows provided by operating activities.
Topic: Statement of Cash Flows LO: 1 9. The direct method of presenting the net cash flow from operating activities shows the major categories of operating cash receipts and payments. Answer: True
Topic: Convert to Cash Calculations LO: 4 10. If accounts payable increase during an accounting period, then the cash paid for merchandise purchased is less than the merchandise purchases for the period. Answer: True
Topic: Convert to Cash Calculations LO: 4 11. If prepaid insurance decreases during an accounting period, then the cash paid for insurance is less than the period’s insurance expense. Answer: True
Topic: Convert to Cash Calculations LO: 4 12. If accounts receivable increase during an accounting period, then the cash received from customers is more than the sales revenue for the period. Answer: False Rationale: If accounts receivable is increasing, this means that the amount of sales on credit is greater than the cash received.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-3
Topic: Statement of Cash Flows – Indirect Method LO: 2 13. Depreciation expense is deducted from net income in determining cash flows provided by operating activities under the indirect method. Answer: False Rationale: Depreciation does not involve cash. It is added back to net income in the operating section of the statement of cash flows under the indirect method because it was deducted in determining net income though it did not use cash.
Topic: Operating-Cash-Flow-to-Capital-Expenditures Ratio LO: 3 14. The operating-cash-flow-to-capital-expenditures ratio in excess of 1.0 means that the firms’ current operating activities are providing cash in excess of the amount needed to fund its desired investment in plant and intangible assets. Answer: True
©Cambridge Business Publishers, 2020 12-4
th
Financial Accounting for Undergraduates, 4 Edition
Multiple Choice Topic: Statement of Cash Flows LO: 1 Level of Difficulty: EASY 1. The statement of cash flows explains changes in a firm’s: A) Cash on hand and cash in the bank B) Cash and cash equivalents C) Cash, cash equivalents, and accounts receivable D) Working capital Answer: B
Topic: Cash Equivalents LO: 1 Level of Difficulty: EASY 2. Which of the following is a cash equivalent for purposes of preparing a statement of cash flows? A) Accounts receivable B) Investment in subsidiary company common stock C) Inventory D) Investment in a money market fund Answer: D
Topic: Cash Equivalents LO: 1 Level of Difficulty: EASY 3. To qualify as a cash equivalent, an investment must be: A) Easily convertible into a known cash amount B) Three months or more from maturity C) Over $500,000 in amount D) All of the above Answer: A
Topic: Cash Equivalents LO: 1 Level of Difficulty: EASY 4. A typical example of a cash equivalent is an investment in: A) Treasury stock B) Commercial paper C) Stock of other companies selling on an exchange D) All of the above Answer: B
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-5
Topic: Cash Equivalents LO: 1 Level of Difficulty: EASY 5. Which of the following is not a cash equivalent for purposes of preparing a statement of cash flows? A) Investment in common stock of other companies B) Investment in Treasury bills C) Investment in a money market fund D) Investment in commercial paper Answer: A
Topic: Cash Flow Activities LO: 1 Level of Difficulty: MEDIUM 6. A firm’s net cash flow from operating activities includes: A) Cash received from sale of equipment B) Cash received from issuance of common stock C) Cash received from sale of merchandise D) Cash received as payment of loan from a borrower Answer: C
Topic: Cash Flow Activities LO: 1 Level of Difficulty: MEDIUM 7. A firm’s cash flow from investing activities includes: A) Cash received from the sale of a plant asset B) Cash paid as dividends C) Cash received from the rendering of services to customers D) Cash paid to retire bonds payable Answer: A
Topic: Cash Flow Activities LO: 1 Level of Difficulty: MEDIUM 8. A firm’s cash flow from financing activities includes: A) Cash paid to reacquire treasury stock B) Cash paid for merchandise purchased C) Cash received from sale of investment in bonds D) Cash received as interest income Answer: A
©Cambridge Business Publishers, 2020 12-6
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Cash Flow Activities LO: 1 Level of Difficulty: MEDIUM 9. In a statement of cash flows, interest paid to creditors is classified as a cash flow from: A) Operating activities B) Trading activities C) Financing activities D) Investing activities Answer: A
Topic: Statement of Cash Flows – Indirect Method LO: 2 Level of Difficulty: MEDIUM 10. Which of the following is disclosed separately in a statement of cash flows using the indirect method? A) Net income B) Cash received from customers C) Cash paid to employees and other suppliers D) Increase in retained earnings for the period Answer: A
Topic: Cash Flow from Operating Activities Using the Indirect Method LO: 2 Level of Difficulty: MEDIUM 11. Ashford Company has an accrual basis net income of $270,000 in 2019 and the following related items: Depreciation expense Accounts receivable increase Inventory decrease Accounts payable decrease
$57,000 18,000 21,000 12,000
How much is Ashford’s net cash flow from operating activities in 2019? A) $261,000 B) $303,000 C) $186,000 D) $318,000 Answer: D Rationale: $270,000 + $57,000 – $18,000 + $21,000 – $12,000 = $318,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-7
Topic: Cash Flow from Operating Activities Using the Indirect Method LO: 2 Level of Difficulty: MEDIUM 12. Baxa Company has an accrual basis net income of $360,000 in 2019 and the following related items: Depreciation expense Accounts receivable increase Inventory decrease Accounts payable decrease
$76,000 24,000 28,000 16,000
How much is Baxa’s net cash flow from operating activities in 2019? A) $348,000 B) $416,000 C) $472,000 D) $424,000 Answer: D Rationale: $360,000 + $76,000 – $24,000 + $28,000 – $16,000 = $424,000
Topic: Cash Flow from Operating Activities Using the Indirect Method LO: 2 Level of Difficulty: MEDIUM 13. Demi, Inc. has an accrual basis net loss of $60,000 in 2019 and the following related items: Depreciation expense Accounts receivable decrease Inventory increase Accounts payable increase Accrued liabilities increase
$33,000 24,000 18,000 9,000 15,000
How much is Lovato’s net cash flow from operating activities in 2019? A) $105,000 B) $ (12,000) C) $ 3,000 D) $(39,000)
Answer: C Rationale: $(60,000) + $33,000 + $24,000 – $18,000 + $9,000 + $15,000 = $3,000
©Cambridge Business Publishers, 2020 12-8
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Cash Flow from Operating Activities Using the Indirect Method LO: 2 Level of Difficulty: MEDIUM 14. Luna, Inc. has an accrual basis net loss of $80,000 in 2019 and the following related items: Depreciation expense Accounts receivable decrease Inventory increase Accounts payable increase Accrued liabilities increase
$44,000 32,000 24,000 12,000 20,000
How much is Lunas’ net cash flow from operating activities in 2019? A) $140,000 B) $(16,000) C) $ 4,000 D) $ (52,000) Answer: C Rationale: $(80,000) + $44,000 + $32,000 – $24,000 + $12,000 + $20,000 = $4,000
Topic: Cash Flow from Operating Activities Using the Indirect Method LO: 2 Level of Difficulty: MEDIUM 15. Tina’s Art Supplies has an accrual basis net income of $156,000 in 2019 and the following related items: Amortization expense Accounts receivable decrease Inventory decrease Interest payable increase Dividends paid
$39,000 21,000 15,000 18,000 3,000
What is Tina’s Art Supplies’ net cash flow from operating activities in 2019? A) $249,000 B) $141,000 C) $111,000 D) $243,000 Answer: A Rationale: $156,000 + $39,000 + $21,000 + $15,000 + $18,000 = $249,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-9
Topic: Cash Flow from Operating Activities Using the Indirect Method LO: 2 Level of Difficulty: MEDIUM 16. Bruder’s Office Supplies, Inc. has an accrual basis net income of $208,000 in 2019 and the following related items: Amortization expense Accounts receivable decrease Inventory decrease Interest payable increase Dividends paid
$52,000 28,000 20,000 24,000 4,000
What is Bruder’s Office Supplies, Inc.’s net cash flow from operating activities in 2019? A) $332,000 B) $280,000 C) $236,000 D) $328,000 Answer: A Rationale: $208,000 + $52,000 + $28,000 + $20,000 + $24,000 = $332,000
Topic: Cash Received from Customers LO: 4 Level of Difficulty: MEDIUM 17. A company reported annual sales revenue of $1,650,000 in 2019. During the year, accounts receivable decreased from a $42,000 beginning balance to a $36,000 ending balance. Accounts payable decreased from a $33,000 beginning balance to a $24,000 ending balance. How much is cash received from customers for the year? A) $1,647,000 B) $1,614,000 C) $1,656,000 D) $1,662,000 Answer: C Rationale: $1,650,000 + ($42,000 – $36,000) = $1,656,000
Topic: Cash Received from Customers LO: 4 Level of Difficulty: MEDIUM 18. A company reported annual sales revenue of $2,200,000 in 2019. During the year, accounts receivable decreased from a $56,000 beginning balance to a $48,000 ending balance. Accounts payable decreased from a $44,000 beginning balance to a $32,000 ending balance. How much is cash received from customers for the year? A) $2,192,000 B) $1,848,000 C) $2,208,000 D) $2,196,000 Answer: C Rationale: $2,200,000 + ($56,000 – $48,000) = $2,208,000
©Cambridge Business Publishers, 2020 12-10
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Cash Received from Customers LO: 4 Level of Difficulty: MEDIUM 19. A company reported annual sales revenue of $2,535,000 in 2019. During the year accounts receivable increased from a $42,000 beginning balance to a $57,000 ending balance. Accounts payable decreased from a $39,000 beginning balance to a $18,000 ending balance. How much is cash received from customers for the year? A) $2,520,000 B) $2,541,000 C) $2,592,000 D) $2,550,000 Answer: A Rationale: $2,535,000 – ($57,000 - $42,000) = $2,520,000
Topic: Cash Paid for Merchandise LO: 4 Level of Difficulty: MEDIUM 20. A company reported cost of goods sold of $800,000 for the 2019 year. During the year, inventory increased from a $46,000 beginning balance to a $70,000 ending balance, and accounts payable increased from a $24,000 beginning balance to a $28,000 ending balance. How much is the cash paid for merchandise purchased during the year? A) $860,000 B) $772,000 C) $824,000 D) $820,000 Answer: D Rationale: $800,000 + ($70,000 - $46,000) + ($24,000 – $28,000) = $820,000
Topic: Cash Paid for Merchandise LO: 4 Level of Difficulty: MEDIUM 21. A company reported cost of goods sold of $2,400,000 for the 2019 year. During the year, inventory increased from a $138,000 beginning balance to a $210,000 ending balance, and accounts payable increased from a $72,000 beginning balance to a $84,000 ending balance. How much is the cash paid for merchandise purchased during the year? A) $2,472,000 B) $2,556,000 C) $2,340,000 D) $2,460,000 Answer: D Rationale: $2,400,000 + ($210,000 - $138,000) + ($72,000 – $84,000) = $2,460,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-11
Topic: Cash Paid for Income Taxes LO: 4 Level of Difficulty: MEDIUM 22. A company reported annual income tax expense of $170,000 in 2019. During the year, income tax payable increased from a $12,400 beginning balance to a $17,600 ending balance. How much is cash paid for income taxes during the year? A) $164,800 B) $169,200 C) $175,200 D) $187,600 Answer: A Rationale: $170,000 + ($12,400 – $17,600) = $164,800
Topic: Cash Paid for Income Taxes LO: 4 Level of Difficulty: MEDIUM 23. A company reported annual income tax expense of $510,000 in 2019. During the year, income tax payable increased from a $37,200 beginning balance to a $52,800 ending balance. How much is cash paid for income taxes during the year? A) $494,400 B) $525,600 C) $544,800 D) $457,200 Answer: A Rationale: $510,000 + ($37,200 – $52,800) = $494,400
Topic: Statement of Cash Flows LO: 1 Level of Difficulty: MEDIUM 24. With reference to the reporting of net cash flow from operating activities, which method do most companies use and why? A) Indirect method because it provides better information for decision making B) Direct method because it is based on the accrual basis of accounting C) Direct method because it requires a supplemental indirect method section D) Indirect method because it is less expensive to prepare Answer: D Rationale: The indirect method is easier and cheaper because it takes less time. The direct method requires an additional step in that companies must also present a supplemental indirect method section.
©Cambridge Business Publishers, 2020 12-12
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Operating-Cash-Flow-to-Current-Liabilities Ratio LO: 3 Level of Difficulty: MEDIUM 25. The following amounts have been taken from the recent financial statements for Merema Industries: Current Liabilities (1/1/2019) $1,860,000
Current Liabilities (12/31/2019) $2,925,000
Cash from Operations $5,335,000
Expenditures on PPE $840,000
To the closest hundredth, which of the following amounts is Merema’s operating-cash-flow-to-currentliabilities ratio? A) 2.51 B) 2.23 C) 2.88 D) 1.83 Answer: B Rationale: $5,335,000 / [($1,860,000 + $2,925,000)/2] = $5,335,000 / $2,392,500 = 2.23
Topic: Operating-Cash-Flow-to-Current-Liabilities Ratio LO: 3 Level of Difficulty: MEDIUM 26. The following amounts have been taken from the recent financial statements for Becky Industries: Current Liabilities (1/1/2019) $2,480,000
Current Liabilities (12/31/2019) $3,900,000
Cash from Operations $6,732,000
Expenditures on PPE $1,120,000
To the closest hundredth, which of the following amounts is Becky’s operating-cash-flow-to-currentliabilities ratio? A) 2.71 B) 2.11 C) 2.05 D) 1.73 Answer: B Rationale: $6,732,000 / [($2,480,000 + $3,900,000)/2] = $6,732,000 / $3,190,000 = 2.11
Topic: Statement of Cash Flows – Direct Method LO: 1 Level of Difficulty: MEDIUM 27. Which of the following is a required separate disclosure for firms using the direct method in the statement of cash flows? A) A reconciliation of net income to net cash flows from operating activities B) A list of all noncash investing and financing transactions C) The policy for determining which highly liquid, short-term investments are treated as cash equivalents D) All of the above Answer: D
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-13
Topic: Statement of Cash Flows – Direct Method LO: 4 Level of Difficulty: MEDIUM 28. Which of the following is not disclosed in a statement of cash flows using the direct method? A) Cash paid for interest B) Cash received from customers C) Cash received from issuing stock D) Depreciation expense Answer: D
Topic: Operating-Cash-Flow-to-Total-Liabilities Ratio LO: 3 Level of Difficulty: MEDIUM 29. For the current year, Rex Company’s net cash flow from operating activities is $210,000; its beginning total liabilities were $300,000, and its ending total liabilities were $750,000. The company’s operating-cash-flow-to-total-liabilities ratio for the year is: A) 0.40 B) 0.35 C) 0.28 D) 0.71 Answer: A Rationale: $210,000 / [($300,000 + $750,000) / 2] = 0.40
Topic: Operating-Cash-Flow-to-Total-Liabilities Ratio LO: 3 Level of Difficulty: MEDIUM 30. For the current year, Cart Company’s net cash flow from operating activities is $240,000; its beginning total liabilities were $400,000, and its ending total liabilities were $900,000. The company’s operating-cash-flow-to-total-liabilities ratio for the year is: A) 0.32 B) 0.37 C) 0.27 D) 0.60 Answer: B Rationale: $240,000 / [($400,000 + $900,000) / 2] = 0.37
©Cambridge Business Publishers, 2020 12-14
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Operating-Cash-Flow-to-Current-Liabilities Ratio LO: 3 Level of Difficulty: MEDIUM 31. Billy Corporation had the following data for 2019: Net cash flow from operating activities Current liabilities at January 1, 2019 Current liabilities at December 31, 2019
$ 9,100,000 $ 9,000,000 $15,000,000
Joel’s operating-cash-flow-to-current-liabilities ratio for 2019 is: A) 0.76 B) 0.61 C) 1.02 D) 0.87 Answer: A Rationale: $9,100,000 / [($9,000,000 + $15,000,000) / 2] = 0.76
Topic: Operating-Cash-Flow-to-Current-Liabilities Ratio LO: 3 Level of Difficulty: MEDIUM 32. Cooper Corporation had the following data for 2019: Net cash flow from operating activities Current liabilities at January 1, 2019 Current liabilities at December 31, 2019
$10,400,000 $12,000,000 $18,000,000
Conner’s operating-cash-flow-to-current-liabilities ratio for 2019 is: A) 0.69 B) 0.58 C) 0.87 D) 0.74 Answer: A Rationale: $10,400,000 / [($12,000,000 + $18,000,000) / 2] = 0.69
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-15
Topic: Operating-Cash-Flow-to-Current-Liabilities Ratio LO: 3 Level of Difficulty: MEDIUM 33. Edmonds Corporation had the following data for 2019: Net cash flows from operating activities Current liabilities at January 1, 2019 Current liabilities at December 31, 2019
$6,454,000 $7,200,000 $14,400,000
Redman’s operating-cash-flow-to-current-liabilities ratio for 2019 is: A) 0.87 B) 0.60 C) 0.57 D) 0.50
Answer: B Rationale: $6,454,000 / [($7,200,000 + $14,400,000) / 2] = 0.60
Topic: Operating-Cash-Flow-to-Current-Liabilities Ratio LO: 3 Level of Difficulty: MEDIUM 34. Bauer Corporation had the following data for 2019: Net cash flows from operating activities Current liabilities at January 1, 2019 Current liabilities at December 31, 2019
$ 7,376,000 $ 9,600,000 $17,200,000
Eddie’s operating-cash-flow-to-current-liabilities ratio for 2019 is: A) 0.43 B) 0.55 C) 0.48 D) 0.77
Answer: B Rationale: $7,376,000 / [($9,600,000 + $17,200,000) / 2] = 0.55
©Cambridge Business Publishers, 2020 12-16
th
Financial Accounting for Undergraduates, 4 Edition
USE THE FOLLOWING INFORMATION FOR QUESTIONS 35-37. Van Beek Corporation reported the following transactions for 2019: 1. Sold equipment for $21,000. The original cost was $45,000; the book value is $18,000 2. Issued 2,000 shares of $15 par value common stock for $36 per share 3. Paid $9,000 for an Insurance policy which goes into effect in January 2020 4. Recognized $6,000 in Interest expense on Dec 31, 2019 - to be paid on April 30, 2020 5. Received $24,000 as collections from customers for 2018 sales, and $54,000 for 2019 sales 6. Reacquired 300 shares of its own common stock at $60 per share 7. Received $6,000 in dividends on stock held as available for sale 8. Recorded depreciation expense for $15,000 9. Paid $3,000 of dividends to common stockholders 10. Purchased equipment costing $195,000, by making a cash down payment of $60,000 and signing a note for the remaining $135,000. 11. Acquired a building with a market value of $750,000 by issuing 20,000 shares of common stock. 12. Paid salaries of $54,000 13. Cash received from sale of available for sale securities $18,000 14. Repaid a loan, which included $15,000 of the principal and $3,000 in interest Van Beek Corporation uses the direct method for preparing the 2019 Statement of Cash Flows.
Topic: Activity Classifications in the Statement of Cash Flows LO: 1, 4 Level of Difficulty: DIFFICULT 35. The net cash flow from operating activities is: A) $(24,000) B) $ 3,000 C) $ 18,000 D) $ 12,000 Answer: C Rationale: Item # 3 5 5 7 12 14
Amount $ (9,000) 24,000 54,000 6,000 (54,000) (3,000) $18,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-17
Topic: Activity Classifications in the Statement of Cash Flows LO: 1, 4 Level of Difficulty: DIFFICULT 36. The net cash flow from investing activities is: A) $(21,000) B) $(63,000) C) $ (3,000) D) $(36,000) Answer: A Rationale: Item # 1 10 13
Amount $21,000 (60,000) 18,000 $(21,000)
Topic: Activity Classifications in the Statement of Cash Flows LO: 1, 4 Level of Difficulty: DIFFICULT 37. The net cash flow from financing activities is: A) $51,000 B) $36,000 C) $ 9,000 D) $54,000 Answer: B Rationale: Item # 2 6 9 14
Amount $72,000 (18,000) (3,000) (15,000) $36,000
©Cambridge Business Publishers, 2020 12-18
th
Financial Accounting for Undergraduates, 4 Edition
USE THE FOLLOWING INFORMATION FOR QUESTIONS 38-40. Herman Corporation reported the following transactions for 2019: 1. Sold equipment for $28,000. The original cost was $60,000; the book value is $24,000 2. Issued 2,000 shares of $20 par value common stock for $48 per share 3. Paid $12,000 for an Insurance policy which goes into effect in January 2020 4. Recognized $8,000 in Interest expense on Dec 31, 2019 - to be paid on April 30, 2020 5. Received $32,000 as collections from customers for 2018 sales, and $72,000 for 2019 sales 6. Reacquired 300 shares of its own common stock at $80 per share 7. Received $8,000 in dividends on stock held as available for sale 8. Recorded depreciation expense for $20,000 9. Paid $4,000 of dividends to common stockholders 10. Purchased equipment costing $260,000, by making a cash down payment of $80,000 and signing a note for the remaining $180,000. 11. Acquired a building with a market value of $1,000,000 by issuing 20,000 shares of common stock. 12. Paid salaries of $72,000 13. Cash received from sale of available for sale securities $24,000 14. Repaid a loan, which included $20,000 of the principal and $4,000 in interest Herman Corporation uses the direct method for preparing the 2019 Statement of Cash Flows.
Topic: Activity Classifications in the Statement of Cash Flows LO: 1, 4 Level of Difficulty: DIFFICULT 38. The net cash flow from operating activities is: A) $(32,000) B) $ 4,000 C) $24,000 D) $16,000 Answer: C Rationale: Item # 3 5 5 7 12 14
Amount $(12,000) 32,000 72,000 8,000 (72,000) (4,000) $24,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-19
Topic: Activity Classifications in the Statement of Cash Flows LO: 1, 4 Level of Difficulty: DIFFICULT 39. The net cash flow from investing activities is: A) $(28,000) B) $(84,000) C) $ (4,000) D) $(48,000) Answer: A Rationale: Item # 1 10 13
Amount $28,000 (80,000) 24,000 $(28,000)
Topic: Activity Classifications in the Statement of Cash Flows LO: 1, 4 Level of Difficulty: DIFFICULT 40. The net cash flow from financing activities is: A) $68,000 B) $48,000 C) $12,000 D) $72,000 Answer: B Rationale: Item # 2 6 9 14
Amount $96,000 (24,000) (4,000) (20,000) $48,000
©Cambridge Business Publishers, 2020 12-20
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Activity Classifications in the Statement of Cash Flows LO: 1 Level of Difficulty: MEDIUM 41. Consider the following events: • • • • •
Cash of $168,000 was used to purchase a used truck. Cash of $120,000 was used to retire bonds. Cash of $75,000 was received from the sale of an investment at a loss. Cash dividends of $42,000 were received from an investment. Plant assets were depreciated $18,000, under the straight-line method.
Compute the net cash flow from investing activities (parentheses indicate an outflow): A) $ 75,000 B) $(213,000) C) $ (21,000) D) $ (93,000) Answer: D Rationale: $(168,000) + $75,000 = $(93,000)
Topic: Activity Classifications in the Statement of Cash Flows LO: 1 Level of Difficulty: MEDIUM 42. Consider the following events: • • • • •
Cash of $204,000 was used to purchase a new bulldozer. Cash of $160,000 was used to retire bonds. Cash of $100,000 was received from the sale of an investment at a loss. Cash dividends of $56,000 were received from an investment. Plant assets were depreciated $24,000, under the straight-line method.
Compute the net cash flow from investing activities (parentheses indicate an outflow): A) $ 100,000 B) $(210,000) C) $ (44,000) D) $(104,000) Answer: D Rationale: $(204,000) + $100,000 = $(104,000)
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-21
Topic: Activity Classifications in the Statement of Cash Flows LO: 1 Level of Difficulty: DIFFICULT 43. Consider the following events: • • • • •
25,000 shares of preferred stock, cumulative, 5%, $30 par was issued for $45 a share. The annual cash dividend was declared and paid to the above preferred stock. The company purchased 12,000 shares of common stock at $51 per share to be held as Treasury stock. Interest of $24,000 was paid to bondholders. Bonds Payable with a par value of $300,000 were retired at $324,000.
Compute the net cash flow from financing activities (parentheses indicate an outflow): A) $ 475,500 B) $(214,500) C) $ 151,500 D) $ 189,000 Answer: C Rationale: $1,125,000* – $37,500** – $612,000*** – $324,000 = $151,500 *25,000 shares x $45 = $1,125,000 **25,000 shares x $30 X 5 % = $37,500 ***12,000 shares x $51 = $612,000
Topic: Activity Classifications in the Statement of Cash Flows LO: 1 Level of Difficulty: DIFFICULT 44. Consider the following events: • • • • •
25,000 shares of preferred stock, cumulative, 5%, $40 par was issued for $60 a share. The annual cash dividend was declared and paid to the above preferred stock. The company purchased 12,000 shares of common stock at $68 per share to be held as Treasury stock. Interest of $32,000 was paid to bondholders. Bonds Payable with a par value of $400,000 were retired at $432,000.
Compute the net cash flow from financing activities (parentheses indicate an outflow): A) $ 234,000 B) $(286,000) C) $ 202,000 D) $ 170,000 Answer: C Rationale: $1,500,000* – $50,000** – $816,000*** – $432,000 = $202,000 *25,000 shares x $60 = $1,500,000 **25,000 shares x $40 X 5 % = $50,000 ***12,000 shares x $68 = $816,000
©Cambridge Business Publishers, 2020 12-22
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Preparing the Statement of Cash Flows Using the Indirect Method LO: 2 Level of Difficulty: DIFFICULT 45. Consider the following: • • • • • •
Net income, $285,000 Depreciation Expense $33,000 Increase in accounts receivable, $12,000 Decrease in merchandise inventory, $60,000 Decrease in accounts payable, $24,000 Increase in income taxes payable, $9,000
Using the Indirect Method, the Net Cash provided by Operating Activities was: A) $270,000 B) $318,000 C) $303,000 D) $351,000 Answer: D Rationale: $285,000 + $33,000 – $12,000 + $60,000 – $24,000 + $9,000 = $351,000
Topic: Preparing the Statement of Cash Flows Using the Indirect Method LO: 2 Level of Difficulty: DIFFICULT 46. Consider the following: • • • • • •
Net income, $380,000 Depreciation Expense $44,000 Increase in accounts receivable, $16,000 Decrease in merchandise inventory, $80,000 Decrease in accounts payable, $32,000 Increase in income taxes payable, $12,000
Using the Indirect Method, the Net Cash provided by Operating Activities was: A) $336,000 B) $424,000 C) $404,000 D) $468,000 Answer: D Rationale: $380,000 + $44,000 – $16,000 + $80,000 – $32,000 + $12,000 = $468,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-23
Topic: Preparing the Statement of Cash Flows Using the Indirect Method LO: 2 Level of Difficulty: DIFFICULT 47. A company had net income of $1,395,000 in 2019. Depreciation expense is $156,000. During the year, Accounts Receivable and Inventory increased $90,000 and $240,000, respectively. Prepaid Expenses and Accounts Payable decreased $12,000 and $24,000, respectively. There was also a loss on the sale of equipment of $18,000. How much cash was provided by operating activities in 2019? A) $1,176,000 B) $1,227,000 C) $1,656,000 D) $1,728,000 Answer: B Rationale: Cash Flow from operating activities Net income Add (deduct) items to convert net income to cash basis Depreciation Loss on sale of equipment Accounts receivable increase Inventory increase Prepaid expenses decrease Accounts payable decrease Cash provided by operating activities
$1,395,000 156,000 18,000 (90,000) (240,000) 12,000 (24,000) $1,227,000
Topic: Preparing the Statement of Cash Flows Using the Indirect Method LO: 2 Level of Difficulty: DIFFICULT 48. A company had net income of $1,860,000 in 2019. Depreciation expense is $208,000. During the year, Accounts Receivable and Inventory increased $120,000 and $320,000, respectively. Prepaid Expenses and Accounts Payable decreased $16,000 and $32,000, respectively. There was also a loss on the sale of equipment of $24,000. How much cash was provided by operating activities in 2019? A) $1,568,000 B) $1,636,000 C) $2,208,000 D) $2,476,000 Answer: B Rationale: Cash Flow from operating activities Net income Add (deduct) items to convert net income to cash basis Depreciation Loss on sale of equipment Accounts receivable increase Inventory increase Prepaid expenses decrease Accounts payable decrease Cash provided by operating activities
$1,860,000 208,000 24,000 (120,000) (320,000) 16,000 (32,000) $1,636,000
©Cambridge Business Publishers, 2020 12-24
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Preparing the Statement of Cash Flows Using the Indirect Method LO: 2 Level of Difficulty: DIFFICULT 49. Kaila Company's financial statements show a net income of $567,000 in 2019. The following items also appear on Kaila's balance sheet: Depreciation expense
$120,000
Accounts receivable decrease
36,000
Inventory increase
84,000
Accounts payable increase
24,000
Using the indirect method, what is Kaila's net cash flow from operating activities in 2019? A) $663,000 B) $408,000 C) $696,000 D) $816,000 Answer: A Rationale: Cash Flow from operating activities Net income Add (deduct) items to convert net income to cash basis Depreciation Accounts receivable decrease Inventory increase Accounts payable increase
$567,000 120,000 36,000 (84,000) 24,000
Cash provided by operating activities
$663,000
Topic: Preparing the Statement of Cash Flows Using the Indirect Method LO: 2 Level of Difficulty: DIFFICULT 50. Andrew Company's financial statements show a net income of $756,000 in 2019. The following items also appear on Wang's balance sheet: Depreciation expense Accounts receivable decrease Inventory increase Accounts payable increase
$160,000 48,000 112,000 32,000
Using the indirect method, what is Wang's net cash flow from operating activities in 2019? A) $ 884,000 B) $ 544,000 C) $ 948,000 D) $1,088,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-25
Answer: A Rationale: Cash Flow from operating activities Net income Add (deduct) items to convert net income to cash basis Depreciation Accounts receivable decrease Inventory increase Accounts payable increase
$756,000 160,000 48,000 (112,000) 32,000
Cash provided by operating activities
$884,000
Topic: Preparing the Statement of Cash Flows Using the Indirect Method LO: 2 Level of Difficulty: DIFFICULT 51. Francisco Company reported sales revenue of $300,000 and total expenses of $270,000 (including depreciation) for the year ended December 31, 2019. During 2019, accounts receivable decreased by $12,000, merchandise inventory increased by $9,000, accounts payable increased by $6,000, and depreciation expense of $21,000 was recorded. Assuming no other data are needed, the net cash inflow from operating activities for 2016 was: A) $54,000 B) $36,000 C) $60,000 D) $21,000 Answer: C Rationale: Cash Flow from operating activities Net income ($300,000 -$270,000) Add (deduct) items to convert net income to cash basis Depreciation Accounts receivable decrease Inventory increase Accounts payable increase Cash provided by operating activities
$30,000 21,000 12,000 (9,000) 6,000 $60,000
©Cambridge Business Publishers, 2020 12-26
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Preparing the Statement of Cash Flows Using the Indirect Method LO: 2 Level of Difficulty: DIFFICULT 52. Oscar Company reported sales revenue of $400,000 and total expenses of $360,000 (including depreciation) for the year ended December 31, 2019. During 2019, accounts receivable decreased by $16,000, merchandise inventory increased by $12,000, accounts payable increased by $8,000, and depreciation expense of $28,000 was recorded. Assuming no other data are needed, the net cash inflow from operating activities for 2019 was: A) $72,000 B) $56,000 C) $80,000 D) $28,000 Answer: C Rationale: Cash Flow from operating activities Net income ($400,000 - $360,000) Add (deduct) items to convert net income to cash basis Depreciation Accounts receivable decrease Inventory increase Accounts payable increase
$40,000 28,000 16,000 (12,000) 8,000
Cash provided by operating activities
$80,000
Topic: Preparing the Statement of Cash Flows Using the Indirect Method LO: 2 Level of Difficulty: DIFFICULT 53. Consider the following: Net Income Depreciation Expense Gain on Sale of Land Increase in Inventory Increase in Wages Payable Payment of Dividends
$51,900 36,000 22,500 6,150 18,450 6,000
Calculate the net cash provided (or used) by operating activities using the indirect method: A) $ 77,700 B) $ 71,700 C) $107,700 D) $ 38,100 Answer: A Rationale: $51,900 + $36,000 - $22,500 - $6,150 + $18,450 = $77,700
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-27
Topic: Preparing the Statement of Cash Flows Using the Indirect Method LO: 2 Level of Difficulty: DIFFICULT 54. Consider the following: Net Income Depreciation Expense Gain on Sale of Land Increase in Inventory Increase in Wages Payable Payment of Dividends
$69,200 48,000 30,000 8,200 24,600 8,000
Calculate the net cash provided (or used) by operating activities using the indirect method: A) $103,600 B) $ 75,600 C) $163,600 D) $ 50,800 Answer: A Rationale: $69,200 + $48,000 - $30,000 - $8,200 + $24,600 = $103,600
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: DIFFICULT 55. Consider the following: Beginning Merchandise Inventory Ending Merchandise Inventory Beginning Accounts Payable Ending Accounts Payable
$102,000 $132,000 $108,000 $129,000
The cost of goods sold was $1,470,000. What was the amount of cash paid for merchandise? A) $1,470,000 B) $1,479,000 C) $1,521,000 D) $1,461,000 Answer: B Rationale: Cost of goods sold Increase in inventory Increase in Payables Cash paid for merchandise
$1,470,000 30,000 (21,000) $1,479,000
©Cambridge Business Publishers, 2020 12-28
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: DIFFICULT 56. Consider the following: Beginning Merchandise Inventory Ending Merchandise Inventory Beginning Accounts Payable Ending Accounts Payable
$136,000 $176,000 $144,000 $172,000
The cost of goods sold was $1,960,000. What was the amount of cash paid for merchandise? A) $1,960,000 B) $1,972,000 C) $1,932,000 D) $1,948,000 Answer: B Rationale: Cost of goods sold Increase in inventory Increase in Payables Cash paid for merchandise
$1,960,000 40,000 (28,000) $1,972,000
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: DIFFICULT 57. Crater Company reports a $90,000 increase in inventory and a $30,000 increase in accounts payable during the year. Cost of Goods Sold for the year was $900,000. The cash payments made to suppliers were: A) $ 900,000 B) $1,020,000 C) $ 960,000 D) $ 840,000 Answer: C Rationale: Cost of goods sold Increase in inventory Increase in Payables Cash paid to suppliers
$900,000 90,000 (30,000) $960,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-29
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: DIFFICULT 58. Salt Company reports a $120,000 increase in inventory and a $40,000 increase in accounts payable during the year. Cost of Goods Sold for the year was $1,200,000. The cash payments made to suppliers were: A) $1,200,000 B) $1,040,000 C) $1,280,000 D) $1,120,000 Answer: C Rationale: Cost of goods sold Increase in inventory Increase in Payables Cash paid to suppliers
$1,200,000 120,000 (40,000) $1,280,000
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: MEDIUM 59. Kane, Inc. had cash sales of $750,000 and credit sales of $1,500,000. The accounts receivable balance increased $30,000 during the year. How much cash did Will receive from its customers during the year? A) $2,220,000 B) $2,280,000 C) $1,620,000 D) $1,680,000 Answer: A Rationale: Cash sales Credit sales Increase in receivables Cash received from customers
$ 750,000 1,500,000 (30,000) $2,220,000
©Cambridge Business Publishers, 2020 12-30
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: MEDIUM 60. Buffet, Inc. had cash sales of $1,000,000 and credit sales of $2,000,000. The accounts receivable balance increased $40,000 during the year. How much cash did Buffet receive from its customers during the year? A) $2,960,000 B) $3,040,000 C) $2,160,000 D) $2,040,000 Answer: A Rationale: Cash sales Credit sales Increase in receivables Cash received from customers
$1,000,000 2,000,000 (40,000) $2,960,000
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: MEDIUM 61. The beginning balance of Prepaid Interest was $5,400 and the ending balance was $7,800. The Interest Expense account for the year was $25,800. How much cash was paid for interest? A) $23,400 B) $28,200 C) $24,300 D) $25,800 Answer: B Rationale: Interest expense account balance Prepaid interest increase Cash paid for interest
$25,800 2,400 $28,200
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-31
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: MEDIUM 62. The beginning balance of Prepaid Interest was $7,200 and the ending balance was $10,400. The Interest Expense account for the year was $34,400. How much cash was paid for interest? A) $33,200 B) $37,600 C) $31,400 D) $34,400 Answer: B Rationale: Interest expense account balance Prepaid interest increase Cash paid for interest
$34,400 3,200 $37,600
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: MEDIUM 63. The beginning balance of Unearned Rent was $24,300 and the ending balance was $33,600. The Rent Earned for the year was $176,100. How much cash was received for rent? A) $234,000 B) $118,200 C) $166,800 D) $185,400 Answer: D Rationale: Rent earned Unearned rent increase Cash received for rent
$176,100 9,300 $185,400
©Cambridge Business Publishers, 2020 12-32
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: MEDIUM 64. The beginning balance of Unearned Rent was $32,400 and the ending balance was $44,800. The Rent Earned for the year was $234,800. How much cash was received for rent? A) $312,000 B) $157,600 C) $222,400 D) $247,200 Answer: D Rationale: Rent earned Unearned rent increase Cash received for rent
$234,800 12,400 $247,200
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: DIFFICULT 65. Belpre Corporation shows income tax expense of $180,000 in 2019. There has been a $15,000 decrease in federal income taxes payable and a $21,000 increase in state income taxes payable during the year. What was Belpre’s cash payment for income taxes? A) $ 18,000 B) $174,000 C) $165,000 D) $186,000 Answer: B Rationale: Income tax expense Federal income taxes payable decrease State income taxes payable increase Cash payment for income taxes
$180,000 15,000 (21,000) $174,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-33
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: DIFFICULT 66. Martin Corporation shows income tax expense of $240,000 in 2019. There has been a $20,000 decrease in federal income taxes payable and a $28,000 increase in state income taxes payable during the year. What was Martin’s cash payment for income taxes? A) $ 24,000 B) $232,000 C) $220,000 D) $248,000 Answer: B Rationale: Income tax expense Federal income taxes payable decrease State income taxes payable increase Cash payment for income taxes
$240,000 20,000 (28,000) $232,000
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: MEDIUM 67. The financial statements of Dunwoody Townhomes show the following: Unearned Rent, December 31, 2019: Unearned Rent, December 31, 2020: Rent Revenue for 2020:
$ 201,000 $ 189,000 $2,265,000
Cash collected from tenants during 2020 is: A) $2,277,000 B) $2,289,000 C) $2,265,000 D) $2,253,000 Answer: D Rationale: Rent Revenue for 2020 Plus: Unearned Rent, 12/31/20 Less: Unearned Rent, 12/31/19 Cash collected from tenants during 2020
$2,265,000 189,000 (201,000) $2,253,000
©Cambridge Business Publishers, 2020 12-34
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: MEDIUM 68. The financial statements of Oak Brook Townhomes show the following: Unearned Rent, December 31, 2019: Unearned Rent, December 31, 2020: Rent Revenue for 2020:
$ 268,000 $ 252,000 $3,020,000
Cash collected from tenants during 2020 is: A) $3,036,000 B) $3,052,000 C) $3,020,000 D) $3,004,000 Answer: D Rationale: Rent Revenue for 2020 Plus: Unearned Rent, 12/31/20 Less: Unearned Rent, 12/31/19 Cash collected from tenants during 2020
$3,020,000 252,000 (268,000) $3,004,000
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: MEDIUM 69. If wages expense is $270,000 and the beginning and ending Wages Payable balances are $30,000 and $45,000, respectively, cash paid to employees for wages is: A) $225,000 B) $285,000 C) $255,000 D) Not determinable from the information given Answer: C Rationale: Wage expense Increase in wages payable Cash payment for income taxes
$270,000 (15,000) $255,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-35
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: MEDIUM 70. If wages expense is $360,000 and the beginning and ending Wages Payable balances are $40,000 and $60,000, respectively, cash paid to employees for wages is: A) $300,000 B) $380,000 C) $340,000 D) Not determinable from the information given Answer: C Rationale: Wage expense Increase in wages payable Cash payment to employees
$360,000 (20,000) $340,000
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: MEDIUM 71. If insurance expense is $27,000 and the beginning and ending Prepaid Insurance balances are $3,000 and $4,500, respectively, cash paid for insurance is: A) $25,500 B) $27,000 C) $28,500 D) Not determinable from the information given Answer: C Rationale: Insurance expense Increase in Prepaid Insurance Cash payment for insurance
$27,000 1,500 $28,500
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: MEDIUM 72. If insurance expense is $36,000 and the beginning and ending Prepaid Insurance balances are $4,000 and $6,000, respectively, cash paid for insurance is: A) $34,000 B) $36,000 C) $38,000 D) Not determinable from the information given Answer: C Rationale: Insurance expense Increase in Prepaid Insurance Cash payment for insurance
$36,000 (2,000) $38,000
©Cambridge Business Publishers, 2020 12-36
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: DIFFICULT 73. The 2019 financial statements for Farmingdale Company show the following: Cost of goods sold Inventory, Beginning Balance Inventory, Ending Balance Accounts Payable, Beginning Balance Accounts Payable, Ending Balance
$363,000 $ 75,000 $ 78,000 $105,000 $ 99,000
Cash paid for merchandise is: A) $372,000 B) $366,000 C) $360,000 D) $354,000 Answer: A Rationale: Cash paid for merchandise Cost of goods sold Inventory increase Accounts payable decrease
$363,000 3,000 6,000
Cash paid for merchandise
$372,000
Topic: Preparing the Statement of Cash Flows Using the Direct Method LO: 4 Level of Difficulty: DIFFICULT 74. The 2019 financial statements for Champaign Company show the following: Cost of goods sold Inventory, Beginning Balance Inventory, Ending Balance Accounts Payable, Beginning Balance Accounts Payable, Ending Balance
$ 484,000 $ 100,000 $ 104,000 $ 140,000 $ 132,000
Cash paid for merchandise is: A) $496,000 B) $488,000 C) $480,000 D) $472,000 Answer: A Rationale: Cash paid for merchandise Cost of goods sold Inventory increase Accounts payable decrease Cash paid for merchandise
$484,000 4,000 8,000 $496,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-37
Exercises Topic: Cash Flow Activities LO: 1 1. In which of the three activity categories of a statement of cash flows would each of the following items appear and do they represent a cash inflow or cash outflow? Use the following abbreviations: Op Out = Operating Cash Outflow Op In = Operating Cash Inflow Inv Out = Investing Cash Outflow
Inv In = Investing Cash Inflow Fin Out = Financing Cash Outflow Fin In = Financing Cash Inflow
a. Cash dividends received b. Cash interest received c. Cash receipts from customers d. Cash collection on loans from borrowers e. Cash proceeds from the issuance of stock f.
Cash interest paid
g. Cash purchase of equipment h. Cash dividends paid Answer: Op-In
a. Cash dividends received
Op-In
b. Cash interest received
Op-In
c. Cash receipts from customers
Inv-In
d. Cash collection on loans from borrowers
Fin-In
e. Cash proceeds from the issuance of stock
Op-Out
f.
Inv-Out
g. Cash purchase of equipment
Fin-Out
h. Cash dividends paid
Cash interest paid
Topic: Noncash Investing and Financing Activities LO: 1 2. Warren Industries acquired a $1,500,000 building by issuing a $1,500,000 note payable due to the Community Bank. a. In terms of cash flow reporting, what type of transaction is this? b. What special disclosure is required for this transaction? Answer: a. This is a noncash investing and financing transaction. b. It must be reported in a supplementary schedule to the statement of cash flows.
©Cambridge Business Publishers, 2020 12-38
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Cash Flow Activities LO: 1 3. Put an X in the appropriate column to show whether each of the following cash flows should be classified as an operating, investing, or financing. Cash Flow a.
Received from issuance of common stock
b.
Paid as interest to creditors
c.
Received from sale of used equipment
d.
Received as dividends
e.
Received as a lawsuit settlement
f.
Paid to purchase treasury stock
g.
Paid to settle a note payable
h.
Received for services rendered
Operating
Investing
Financing
Operating
Investing
Financing
Answer: Cash Flow a.
Received from issuance of common stock
X
b.
Paid as interest to creditors
c.
Received from sale of used equipment
d.
Received as dividends
X
e.
Received as a lawsuit settlement
X
f.
Paid to purchase treasury stock
X
g.
Paid to settle a note payable
X
h.
Received for services rendered
X X
X
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-39
Topic: Cash Flow Activities LO: 1 4. Put an X in the appropriate column to show whether each of the following cash flows should be classified as an operating, investing, or financing cash flow. Cash Flow a.
Paid to purchase delivery truck
b.
Received from issuance of bonds payable
c.
Paid as dividends
d.
Received as interest
e.
Received from sale of a stock investment
f.
Paid as a charitable contribution
g.
Received from sale of bond investment
h.
Paid as income taxes
Operating
Investing
Financing
Operating
Investing
Financing
Answer: Cash Flow a.
Paid to purchase delivery truck
X
b.
Received from issuance of bonds payable
X
c.
Paid as dividends
X
d.
Received as interest
e.
Received from sale of a stock investment
f.
Paid as a charitable contribution
g.
Received from sale of bond investment
h.
Paid as income taxes
X X X X X
©Cambridge Business Publishers, 2020 12-40
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Statement of Cash Flows – Indirect Method LO: 2 5. Fred Williams, Inc. had the following income statement for 2019: Sales Cost of goods sold Depreciation expense Other operating expenses and taxes Net Income
$2,610,000 1,620,000 135,000 264,000 $ 591,000
Additional information about the company follows:
Accounts receivable Inventory Prepaid expenses Accounts payable
End of Year
Beginning of Year
$ 93,000 129,000 9,000 66,000
$ 114,000 120,000 15,000 69,000
Calculate Fred Williams, Inc.’s cash flows provided by operating activities for 2019 using the indirect method. Answer: Net Income Add (deduct items to convert net income to cash basis: Depreciation Accounts receivable decrease Inventory increase Prepaid expenses decrease Accounts payable decrease Net cash provided by operating activities
$591,000 135,000 21,000 (9,000) 6,000 (3,000) $741,000
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-41
Topic: Statement of Cash Flows – Indirect Method LO: 2 6. The following information relates to Ponce Company for 2019, in which the company reported a $198,000 net income. Sales Cost of goods sold Operating expenses and income taxes (other than depreciation and amortization) Depreciation of plant assets Amortization of intangible assets Increase in accounts receivable Decrease in inventory Increase in accounts payable Decrease in accrued liabilities Increase in common stock
$1,620,000 948,000 264,000 108,000 24,000 36,000 33,000 18,000 9,000 102,000
Calculate the 2019 net cash flow from operating activities using the indirect method. Answer: Net Income Add (deduct) items to convert net income to cash basis: Depreciation Amortization Accounts receivable increase Inventory decrease Accounts payable increase Accrued liabilities decrease
$198,000 108,000 24,000 (36,000) 33,000 18,000 (9,000)
Net cash provided by operating activities
$336,000
Topic: Comparing Firms Using Ratio Analysis LO: 3 7. Consider the following 2019 data for two manufacturing firms ($ in millions): Average Current Liabilities
Cash from Operations
Expenditures on PPE
Cash Dividends
Bandit Industries
$28,600
$19,360
$3,800
$ 8,600
Cloud Company
44,800
40,920
6,200
15,800
a. Compute the operating-cash-flow-to-current-liabilities ratio for each firm for 2019. b. Compute the operating-cash-flow-to-capital-expenditures ratio for 2019. c. Comment on the results of your computations.
©Cambridge Business Publishers, 2020 12-42
th
Financial Accounting for Undergraduates, 4 Edition
Answer: a. Bandit: $19,360 / $28,600 = 0.68 Cloud: $40,920 / $44,800 = 0.91 b. Bandit: $19,360 / $3,800 = 5.09 Cloud: $40,920 / $6,200 = 6.60 c.
An operating-cash-flow-to-current-liabilities ratio of 0.5 is considered a strong ratio; consequently, both firms have strong ratios. The higher the ratio, the greater is a firm’s ability to pay current liabilities using its operating cash flow. Cloud’s ratio is very strong, indicating that it generates $0.91 of operating cash flow for every dollar of current liabilities. Again, both firms have strong operating-cash-flow-to-capital expenditures ratios. A ratio in excess of 1.0 is considered a sign of financial strength. Both firms appear to generate sufficient operating cash flow to finance its capital expenditure needs. Analysis of trends in recent years, the ratios of other firms in the same industry, and the stage of a firm’s life cycle would help with the interpretation of the results.
Topic: Comparing Firms Using Ratio Analysis LO: 3 8. Consider the following 2019 data for three manufacturing firms ($ in millions): Average Current Liabilities
Cash from Operations
Expenditures on PPE
Cash Dividends
Hermione Industries
$233,700
$(76,300)
$46,988
$31,500
Harry Company Ron Corporation
152,400 174,000
177,100 207,200
68,250 66,675
37,200 52,800
a. Compute the operating-cash-flow-to-capital-expenditures ratio for each firm for 2019. b. Compute the free cash flow for each firm for 2019. c. Comment on the results of your computations. Answer: a. Hermione: $(76,300) / $46,988 = (1.62) Harry: $177,100 / $68,250 = 2.60 Ron: $207,200 / $66,675 = 3.11 b. Hermione: $(76,300) – $46,988 = $(123,288) Harry: $177,100 – $68,250 = $108,850 Ron: $207,200 – $66,675 = $140,525 c.
Hermione’s operating cash flows are negative which means Hermione will likely need to borrow just to pay its bills, as well as for any additional plant improvements it wishes to make. The firm is undergoing difficult times. Ron appears to be in the best position, with a substantial amount of its operational cash flows available for expansion and other business pursuits. Harry has sufficient operational cash flows for expansion as well as a reasonable operating-cash-flow-to-capitalexpenditures ratio.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-43
Topic: Statement of Cash Flows – Direct Method LO: 4 9. Sam’s Sports had the following income statement for the current year: Sales Cost of goods sold Gross profit Operating expenses: Depreciation expense Wages expense Interest expense Net income
$1,424,000 972,000 $452,000 $44,000 198,000 16,000
258,000 $ 194,000
Additional information about the company follows:
Cash Accounts receivable Inventory Accounts payable Interest payable Wages payable Notes payable
End of Year $ 36,000 46,000 102,000 44,000 10,000 2,000 252,000
Beginning of Year $ 32,000 68,000 116,000 38,000 6,000 4,000 208,000
Calculate Sam’s Sports’ net cash flow provided by operating activities for the current year using the direct method. Show a separate cash flow for each revenue and expense. Answer: Cash received from customers Cash paid for merchandise purchased Cash paid to employees Cash paid for interest Net cash provided by operating activities
(a) $1,446,000 (b) $952,000 (c) 200,000 (d) 12,000
1,164,000 $ 282,000
(a) $1,424,000 + $68,000 – $46,000 = $1,446,000 (b) $972,000 – $116,000 + $102,000 – $44,000 + $38,000 = $952,000 (c) $198,000 + $4,000 – $2,000 = $200,000 (d) $16,000 + $6,000 – $10,000 = $12,000 There is no cash flow associated with depreciation expense.
©Cambridge Business Publishers, 2020 12-44
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Statement of Cash Flows – Direct Method LO: 4 10. Sun Bums Company had the following income statement for the current year: Sales Cost of goods sold Gross profit Operating expenses: Depreciation expense Wages expense Advertising expense Net income
$ 1,350,000 960,000 $ 390,000 $ 45,000 195,000 30,000
270,000 $ 120,000
Additional information about the company follows:
Cash Accounts receivable Inventory Prepaid advertising Accounts payable Wages payable
End of Year $ 63,000 60,000 99,000 12,000 54,000 6,000
Beginning of Year $ 36,000 54,000 117,000 18,000 63,000 12,000
Calculate Sun Bums’ net cash flow provided by operating activities for the current year using the direct method. Show a separate cash flow for each revenue and expense. Answer: Cash received from customers Cash paid for merchandise purchased Cash paid to employees Cash paid for advertising Net cash provided by operating activities
(a) $1,344,000 (b) $951,000 (c) 201,000 (d) 24,000
1,176,000 $168,000
(a) $1,350,000 + $54,000 – $60,000 = $1,344,000 (b) $960,000 + $99,000 – $117,000 + $63,000 – $54,000 = $951,000 (c) $195,000 + $12,000 – $6,000 = $201,000 (d) $30,000 – $18,000 + $12,000 = $24,000 There is no cash flow associated with depreciation expense.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-45
Topic: Cash Flow from Operating Activities Using the Indirect Method LO: 2 11. The following account changes were presented in a recent balance sheet for Tea Leaves Company ($ in millions). a.
$1,000 decrease in inventory
b.
$600 increase in depreciation and amortization
c.
$1,400 decrease in accounts payable
d.
$800 increase in accounts receivable
e.
$1,000 increase in accrued liabilities
Determine whether the amount of change would be added to (+) or subtracted from (–) Tea Leaves’ net income for the period when calculating cash flow from operations using the indirect method. Answer: a. +
$1,000 decrease in inventory
b.
+
$600 increase in depreciation and amortization
c.
–
$1,400 decrease in accounts payable
d.
–
$800 increase in accounts receivable
e.
+
$1,000 increase in accrued liabilities
Topic: Investing and Financing Cash Flows LO: 1, 2 12. During 2019, Wards Company’s long-term investments account (at cost) increased $14,000, which was the net result of purchasing stock costing $102,000 and selling stocks costing $120,000 at a $12,000 loss. Wards’ notes payable account decreased $22,000, the net result of issuing $48,000 of notes and paying $70,000 during year on notes. What items and amounts appear in the (a) cash flows from investing activities and (b) cash flows from financing activities sections of Wards Company’s 2019 statement of cash flows? Answer: a. Cash flows from investing activities will show: Purchase of stock investments Sale of stock investments ($120,000 - $12,000)
$ (102,000) 108,000
b. Cash flows from financing activities will show: Issuance of notes Payment of notes
$ 48,000 (70,000)
©Cambridge Business Publishers, 2020 12-46
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Net Cash Flow from Operating Activities Using the Indirect Method LO: 2 13. Geburtstag Company uses the indirect method. Selected information appears below. Net income Accounts receivable decrease Inventory decrease Accounts payable increase Income tax payable decrease Increase in dividends payable Gain on disposal of equipment Depreciation expense
$1,614,000 69,000 51,000 70,500 22,500 13,800 25,800 93,000
How much is Geburtstags’ net cash flow from operating activities? Answer: Net income Add (deduct) items to convert net income to cash basis: Depreciation expense Gain on disposal of equipment Accounts receivable decrease Inventory decrease Accounts payable increase Income tax payable decrease Net cash provided by operating activities
$1,614,000 93,000 (25,800) 69,000 51,000 70,500 (22,500) $1,849,200
Topic: Net Cash Flow from Operating Activities Using the Indirect Method LO: 2 14. Loyola Industries uses the indirect method. Selected information appears below. Net income Accounts receivable increase Inventory increase Loss on sale of equipment Accounts payable decrease Income tax payable decrease Depreciation expense
$370,000 10,000 14,000 6,400 7,000 15,000 46,000
How much is its net cash flow from operating activities? Answer: Net income Add (deduct) items to convert net income to cash basis Depreciation expense Loss on sale of equipment Accounts receivable increase Inventory increase Accounts payable decrease Income tax payable decrease Net cash provided by operating activities
$370,000 46,000 6,400 (10,000) (14,000) (7,000) (15,000) $376,400
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-47
Topic: Net Cash Flow from Operating Activities Using the Indirect Method LO: 2 15. Parkway, Inc., had a $20,000 net loss from operations in 2019. Depreciation expense for 2019 was $63,200 and a 2019 cash dividend of $72,000 was declared and paid. Balances of the current asset and current liability accounts at the beginning and end of 2019 follow.
Cash Accounts receivable Inventory Prepaid insurance Accounts payable Note payable Accrued liabilities
Ending $87,000 24,000 30,000 12,000 18,000 48,000 10,000
Beginning $74,000 26,000 24,000 16,000 12,800 32,400 15,800
Did Parkway’s 2019 operating activities provide or use cash and by what amount? Use the indirect method to determine your answer and show your work. Answer: Net loss Add (deduct) items to convert net income to cash basis Depreciation expense Accounts receivable decrease ($26,000 – $24,000) Inventory increase ($30,000 – $24,000) Prepaid insurance decrease ($16,000 – $12,000) Accounts payable increase ($18,000 – $12,800) Accrued liabilities decrease ($15,800 – $10,000) Net cash provided by operating activities
$(20,000) 63,200 2,000 (6,000) 4,000 5,200 (5,800) $ 42,600
Parkway, Inc.’s 2019 operating activities provided $42,600 cash.
©Cambridge Business Publishers, 2020 12-48
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Statement of Cash Flows LO: 1 16. Burwell, Inc. reported the following amounts during 2018 and 2019: Dec. 31, 2019 $78,000 (15,000) (195,000) ? 108,000
Net cash provided (used) by operating activities Net cash provided (used) by financing activities Net cash provided (used) by investing activities Cash balance Net income
Dec. 31, 2018 $(33,000) 135,000 (48,000) 225,000 120,000
a. How much is the net increase or decrease in cash during 2019? b. How much will the company report on its balance sheet at December 31, 2019 as ‘cash’? Answer: a.
Net cash provided by operating activities Net cash (used) by financing activities Net cash (used) by investing activities Net decrease in cash during 2019
$ 78,000 (15,000) (195,000) $ (132,000)
b. Beginning cash + change in cash = ending balance $225,000 – $132,000 = $93,000
Topic: Investing Activities Section LO: 2 17. The information below was provided by Tucson Company for 2019 and 2018: Equipment, December 31, 2018 Equipment, December 31, 2019 Accumulated depreciation, December 31, 2018 Accumulated depreciation, December 31, 2019
$132,000 140,000 78,000 60,000
During 2019, Tucson sold equipment with a cost of $50,000 and accumulated depreciation of $38,000. A loss of $2,000 was recognized on the sale of the equipment. Prepare the investing activities section of the statement of cash flows for 2019. Answer: Loss on sale of equipment = Selling price – Book value $(2,000) = Selling price – ($50,000 – $38,000); Selling price = $10,000 cash Cost of new equipment: $132,000 – $50,000 – $140,000 = $58,000 Cash flows from investing activities: Proceeds from sale of plant assets Cost of new equipment Cash flows used for investing activities
$ 10,000 (58,000) ($48,000)
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-49
Topic: Financing Activities Section LO: 2 18. Flying Pigs, Inc. provided the following information for 2019 and 2018: Retained earnings, December 31, 2019 Retained earnings, December 31, 2018 Note payable, December 31, 2019 Note payable, December 31, 2018 Net income—2019
$114,000 120,000 63,000 73,500 96,000
No new loans were taken out during 2019. Prepare the financing activities section of the statement of cash flows for 2019. Answer: Dividends paid = Beginning retained earnings + net income – ending retained earnings = $120,000 + $96,000 – $114,000 = $102,000 Cash paid on loans = Beginning note payable + new loans – ending note payable $73,500 + $0 – $63,000 = $10,500 Cash flows from financing activities: Cash paid for dividends Cash paid for note payable Cash flows used for financing activities
($102,000) (10,500) ($112,500)
Topic: Financing Activities Section LO: 2 19. During 2019, Jennifer, Inc. issued common stock for cash and borrowed $120,000 from the bank on a long-term loan. Jennifer, Inc. provided the following:
Common stock Retained earnings
2019
2018
$61,600 144,000
$32,800 124,000
How much cash was received from issuing common stock? Answer: Cash received for stock issuance = Beginning stock balance +/– Retired stock – Ending stock balance = $32,800 + $0 – $61,600 = $28,800
©Cambridge Business Publishers, 2020 12-50
th
Financial Accounting for Undergraduates, 4 Edition
Problems Topic: Net Cash Flow from Operating Activities Using the Indirect Method LO: 2 1. Lincoln Helmets purchased equipment for $124,000 cash, sold equipment costing $72,000 with a book value of $44,000 at a loss, and declared dividends during 2019. No new notes payable were issued during the year. Financial data follows:
Cash Accounts receivable Inventory Equipment Accum. depreciation Accounts payable Unearned revenue Accrued salaries Taxes payable Long-term notes payable Common stock Retained earnings
Dec. 31, 2019
Dec. 31, 2018
Change
$89,200 62,400 56,000 360,000 (92,000) 50,800 32,400 14,000 23,200 74,000 180,000 101,200
$86,000 27,600 42,000 308,000 (84,000) 72,800 42,400 17,600 16,000 110,000 56,000 64,800
$3,200 34,800 14,000 52,000 (8,000) (22,000) (10,000) (3,600) 7,200 (36,000) 124,000 36,400
2019 Sales revenue Cost of sales Salaries expense Depreciation expense Interest expense Loss on sale of equipment Income taxes expense Net income
$1,700,000 850,000 270,000 36,000 7,000 6,000 88,000 $ 443,000
Required: Calculate cash flows from operations using the indirect method for 2019. Answer: Cash flow from operating activities: Net income $443,000 Add (deduct) items to convert net income to cash basis: Depreciation expense 36,000 Loss on sale of equipment 6,000 Accounts receivable increase (34,800) Inventory increase (14,000) Accounts payable decrease (22,000) Unearned revenues decrease (10,000) Accrued salaries decrease (3,600) Taxes payable increase 7,200 Cash flow from operating activities $407,800
©Cambridge Business Publishers, 2020 Test Bank, Chapter 12
12-51
Topic: Statement of Cash Flows – Direct Method LO: 4 2. The following schedule of cash receipts and payments relates to Zuercher Elements for the year 2019: Cash receipts: From customers From issuance of notes payable From sale of truck
$ 636,000 165,000 18,000
Cash payments: For income taxes For purchase of equipment To employees and suppliers For interest To stockholders as dividends For purchase of treasury stock
$ 48,000 132,000 375,000 12,000 96,000 18,000
Zuercher had $108,000 cash to start 2019 and ended the year with $246,000 cash. Required: In good form, prepare a 2019 statement of cash flows for Zuercher Elements using the direct method. Answer: ZUERCHER ELEMENTS Statement of Cash Flows For Year Ended December 31, 2019 Cash flow from operating activities Cash received from customers Cash paid to employees and suppliers Cash paid for interest Cash paid for income taxes Net cash provided by operating activities Cash flow from investing activities Sale of delivery truck Purchase of equipment Net cash used by investing activities Cash flow from financing activities Issuance of notes payable Payment of dividends Purchase of treasury stock Net cash provided by financing activities Net increase in cash Cash at beginning of year Cash at end of year
$636,000 (375,000) (12,000) (48,000) $201,000
$ 18,000 (132,000) (114,000) $165,000 (96,000) (18,000) 51,000 $ 138,000 108,000 $246,000
©Cambridge Business Publishers, 2020 12-52
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Statement of Cash Flows – Indirect Method LO: 2 3. The following schedule of information relates to Pittsburgh Products for the year, 2019: Income statement data: Sales Depreciation expense Net income Cash receipts: From issuance of common stock From sale (at book value) of stock investment Cash payments: For purchase of land To stockholders as dividends To payoff notes payable Change in working capital accounts: Cash increase Accounts receivable increase Inventory decrease Accounts payable decrease Accrued liabilities increase
$1,160,000 42,000 154,000 $88,000 56,000 $248,000 44,000 28,000 $10,000 12,000 6,000 8,000 4,000
The cash balance was $44,000 at the beginning of 2019. Required: In good form, prepare a 2019 statement of cash flows for Pittsburgh Products using the indirect method. Answer: PITTSBURGH PRODUCTS Statement of Cash Flows For Year Ended December 31, 2019 Net cash flow from operating activities Net Income Add (deduct) items to convert net income to cash basis: Depreciation Accounts receivable increase Inventory decrease Accounts payable decrease Accrued liabilities increase Net cash provided by operating activities Cash flows from investing activities Sale of stock investment Purchase of land Net cash used by investing activities Cash flows from financing activities Issuance of common stock Retirement of notes payable Payment of dividends Net cash provided by financing activities Net increase in cash Cash at beginning of year Cash at end of year
$154,000 42,000 (12,000) 6,000 (8,000) 4,000 $186,000 56,000 (248,000) (192,000) 88,000 (28,000) (44,000) 16,000 10,000 44,000 $ 54,000 ©Cambridge Business Publishers, 2020
Test Bank, Chapter 12
12-53
Topic: Statement of Cash Flows – Indirect Method LO: 2 4. The following schedule of information relates to San Francisco Bolts for the year 2019: Income statement data: Sales Depreciation expense Net income Cash receipts: From issuance of common stock From sale of plant assets (at book value) From loan repayment by borrower Cash payments: For purchase of stock investment To stockholders as dividends Change in working capital accounts: Cash increase Accounts receivable decrease Inventory increase Accounts payable decrease Accrued liabilities increase
$1,962,000 45,000 234,000 $84,000 15,000 36,000 $66,000 135,000 $237,000 36,000 27,000 9,000 24,000
The cash balance was $63,000 at the beginning of 2019. Required: In good form, prepare a 2019 statement of cash flows for San Francisco Bolts using the indirect method. Answer: SAN FRANCISCO BOLTS Statement of Cash Flows For Year Ended December 31, 2019 Net cash flow from operating activities Net Income Add (deduct) items to convert net income to cash basis: Depreciation Accounts receivable decrease Inventory increase Accounts payable decrease Accrued liabilities increase Net cash provided by operating activities Cash flow from investing activities Sale of plant assets Loan repayment by borrower Purchase of stock investment Net cash used by investing activities Cash flow from financing activities Issuance of common stock Payment of dividends Net cash provided by financing activities Net increase in cash Cash at beginning of year Cash at end of year
$234,000 45,000 36,000 (27,000) (9,000) 24,000 $303,000 15,000 36,000 (66,000) (15,000) 84,000 (135,000) (51,000) 237,000 63,000 $300,000
©Cambridge Business Publishers, 2020 12-54
th
Financial Accounting for Undergraduates, 4 Edition
Chapter 13 Analysis and Interpretation of Financial Statements Learning Objectives – Coverage by question True / False
Multiple Choice
Exercises
Problems
12-14, 16, 17
25-27, 36
12
6
LO2 – Identify the sources of financial information used by investment professionals and explain horizontal financial statement analysis.
3
15-17, 22, 23
LO3 – Explain vertical financial statement analysis.
3, 8
LO4 – Define and discuss financial ratios for analyzing a firm.
1, 2, 4, 5, 7, 9-11, 15
LO5 – Discuss the limitations of financial statement analysis.
6
LO1 – Identify persistent earnings and discuss the content and format of the income statement.
4, 5
1-14, 18-21, 24, 28-35
1-11, 13-16
1-3
LO6 – Appendix 13 Describe financial statement disclosures.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-1
Chapter 13: Analysis and Interpretation of Financial Statements
True / False Topic: Asset Turnover LO: 4 1. Asset turnover measures a company’s solvency. Answer: False Rationale: Asset turnover is one of the ratios used to evaluate a firm’s profitability. It measures how efficiently a firm uses its assets to generate sales revenue. Topic: Inventory Turnover Rate LO: 4 2. All things equal, the higher a company’s inventory turnover rate, the better. Answer: True Topic: Horizontal and Vertical Analysis LO: 2, 3 3. Vertical analysis examines changes in financial data across time. Answer: False Rationale: Vertical analysis is a method that attempts to overcome the size of a company by stating financial information is a ratio form. Horizontal analysis examines changes in financial data across time. Topic: Return on Assets LO: 4 4. Return on assets can be disaggregated into return on sales and return on common stockholders’ equity ratio. Answer: False Rationale: Return on assets can be disaggregated into return on sales and asset turnover. Topic: Return on Assets LO: 4 5. Austin Plumbing Supplies has a return on assets of 25%, while the industry average of similar companies is 15%. This means that Austin Plumbing Supplies’ asset turnover is higher than the industry average. Answer: False Rationale: This is not necessarily the case, since the return on assets is made up of two components, return on sales times asset turnover.
©Cambridge Business Publishers, 2020 13-2
Financial Accounting for Undergraduates, 4th Edition
Topic: Limitations of Ratio Analysis LO: 5 6. One benefit of using ratio analysis to compare two firms in the same industry is that ratios are immune to size and current accounting rules. Answer: False Rationale: By using percentage comparisons, ratio analysis makes firms of different sizes more comparably. However, two firms in the same industry may use very different accounting methods, which would flow through to the ratios and make them non-comparable. Topic: Solvency LO: 4 7. Solvency ratios measure a company’s ability to meet its debt obligations. Answer: True Topic: Vertical Analysis LO: 3 8. A common size balance sheet expresses the balance sheet items as a percentage of total assets. Answer: True Topic: Debt-to-Equity Ratio LO: 4 9. One key measure of profitability is the debt-to-equity ratio. Answer: False Rationale: The debt-to-equity ratio is a measure of long-term solvency when looking at credit risk. Topic: Debt-to-Equity Ratio LO: 4 10. A debt-to-equity ratio of greater than 1.0 means that a firm’s liabilities exceed its owners’ equity. Answer: True
Topic: EPS LO: 4 11. Earnings per share is the amount a company earns and pays out as dividends for each share of common stock outstanding. Answer: False Rationale: Earnings per share is the amount a company earns for each share of common stock outstanding. It is not tied to the amount of dividends paid.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-3
Topic: Change in Accounting Principle LO: 1 12. A change in an accounting principle is reflected through adjustments to future financial statements and, therefore, requires no retroactive or present adjustments to financial statements. Answer: False Rationale: Financial statements of prior years, issued in comparative form with current year financial statements, must be presented using the new accounting principles as if the new method had been used all along. Topic: Change in Accounting Principle LO: 1 13. Changing from straight-line depreciation to double declining-balance depreciation is an example of a change in an accounting principle. Answer: True Topic: Multiple-Step Income Statement LO: 1 14. Determining gross profit is the first step in a multiple-step income statement for a merchandising firm. Answer: True Topic: Price-Earnings Ratio LO: 4 15. The price-earnings ratio indicates how much an investor would have to earn to be able to purchase the stock. Answer: False Rationale: Price-earnings ratio is used to assess a stock’s fair value. Assuming that companies have equivalent persistent earnings and financial risk profiles, the company with the lowest price-earnings ratio may represent the best investment opportunity. Topic: Discontinued Operations LO: 1 16. Revenues from discontinued operations of a company are reported separately from revenues from continuing operations on the income statement. Answer: True Topic: Discontinued Operations LO: 1 17. Income effects of discontinued operations are reported separately from continuing operations on the income statement. Answer: True
©Cambridge Business Publishers, 2020 13-4
Financial Accounting for Undergraduates, 4th Edition
Multiple Choice Topic: Asset Ratios LO: 4 Level of Difficulty: EASY 1. Which one of the following ratios does not involve assets? A) Account receivable turnover B) Current ratio C) Return on sales D) Inventory turnover Answer: C Rationale: Return on sales measures net income against sales revenue, both components of which are income statement amounts and not assets. Topic: Inventory Turnover Rate LO: 4 Level of Difficulty: MEDIUM 2. Which ratio can provide an indication of the salability of the company’s products? A) Account receivable turnover B) Current ratio C) Inventory turnover D) Gross profit margin Answer: C Rationale: Inventory turnover measures the number of times during a period a company sells its inventory. Trends in this metric can provide an indication of the salability of the company’s products. Topic: Liquidity Measure LO: 4 Level of Difficulty: EASY 3. Which of the following is one measure of liquidity? A) Debt-to-equity ratio B) Times-interest-earned ratio C) Quick ratio D) None of the above Answer: C Rationale: The only measure of liquidity listed above is the quick ratio which is a variation of the current ratio (Current Ratio = Current assets / Current liabilities) to focus on quick assets (cash, securities, and receivables). The debt-to-equity ratio and the times interest earned are metrics of solvency analysis.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-5
Topic: Return on Assets LO: 4 Level of Difficulty: EASY 4. Return on assets is computed as: A) Net income / Average stockholders’ equity B). Net income / Average total assets C) Return on sales × Asset turnover D) B or C Answer: D Topic: Return on Common Stockholders’ Equity LO: 4 Level of Difficulty: MEDIUM 5. Aladdin Grocer’s 2019 balance sheet shows average stockholders’ equity of $18,000 million, net operating profit after tax of $1,710 million, net income of $665 million, and common shares issued of $2,874 million. The company has no preferred shares issued. Aladdin Grocer’s return on common stockholders’ equity for the year is: A) 18.61% B) 3.69% C) 7.37% D) 11.07% Answer: B Rationale: $665 million/$18,000 million = 3.69% Topic: Return on Common Stockholders’ Equity LO: 4 Level of Difficulty: MEDIUM 6. Dils Brothers’ 2019 balance sheet shows average stockholders’ equity of $36,000 million, net operating profit after tax of $2,280 million, net income of $760 million, and common shares issued of $3,832 million. The company has no preferred shares issued. Dils Brothers’ return on common stockholders’ equity for the year is: A) 19.83% B) 2.11% C) 6.33% D) 7.30% Answer: B Rationale: $760 million/$36,000 million =2.11%
©Cambridge Business Publishers, 2020 13-6
Financial Accounting for Undergraduates, 4th Edition
Topic: Return on Assets LO: 4 Level of Difficulty: EASY 7. Aladdin Grocer’s 2019 financial statements show average shareholders’ equity of $15,309 million, net income of $2,940 million, and average total assets of $65,025 million. How much is Aladdin Grocer’s return on assets for the year? A) 27.42% B) 4.52% C) 19.18% D) 5.56% Answer: B Rationale: $2,940 million / $65,025 million = 4.52% Topic: Return on Assets LO: 4 Level of Difficulty: EASY 8. Dils Brothers’ 2019 financial statements show average shareholders’ equity of $20,412 million, net income of $5,040 million, and average total assets of $86,700 million. How much is Dils Brothers’ return on assets for the year? A) 11.42% B) 5.81% C) 24.69% D) 4.77% Answer: B Rationale: $5,040 million / $86,700 million = 5.81% Topic: Return on Sales LO: 4 Level of Difficulty: EASY 9. Aladdin Grocer’s 2019 financial statements show net income of $2,940 million, sales of $230,199 million, and average total assets of $69,525 million. How much is Aladdin Grocer’s return on sales for the year? A) 4.24% B) 1.28% C) 35.39% D) 7.52% Answer: B Rationale: $2,940 million / $230,199 million = 1.28%
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-7
Topic: Return on Sales LO: 4 Level of Difficulty: EASY 10. Dils Brothers’ 2019 financial statements show net income of $5,040 million, sales of $306,932 million, and average total assets of $86,700 million. How much is Dils Brothers’ return on sales for the year? A) 4.71% B) 1.64% C) 10.20% D) 5.81% Answer: B Rationale: $5,040 million / $306,932 million = 1.64% Topic: Gross Profit Percentage LO: 4 Level of Difficulty: MEDIUM 11. Use the following selected 2019 balance sheet and income statement information for Homer Glen Supply Co. (in millions) to compute the gross profit percentage to the nearest hundredth of a percent. Net income $104,940
Gross profit on sales $1,050,600
Average total assets $631,050
Sales $2,373,882
Tax rate on operating profit 35%
A) 4.42% B) 8.56% C) 28.76% D) 44.26% Answer: D Rationale: $1,050,600 / $2,373,882 = 44.26% Topic: Gross Profit Percentage LO: 4 Level of Difficulty: MEDIUM 12. Use the following selected 2019 balance sheet and income statement information for Life Improvements Co. (in millions) to compute the gross profit percentage to the nearest hundredth of a percent. Net income $279,840 A) B) C) D)
Gross profit on sales $2,101,200
Average total assets $1,081,800
Sales $2,713,008
Tax rate on operating profit 35%
50.34% 77.45% 10.31% 51.63%
Answer: B Rationale: $2,101,200 / $2,713,008 = 77.45%
©Cambridge Business Publishers, 2020 13-8
Financial Accounting for Undergraduates, 4th Edition
Topic: Return on Assets LO: 4 Level of Difficulty: MEDIUM 13. Use the following selected 2019 balance sheet and income statement information for Homer Glen Supply Co. (in millions) to compute the return on assets to the nearest hundredth. Net income $104,940
Gross profit on sales $1,050,600
Average total assets $631,051
Sales $2,304,756
Tax rate on operating profit 35%
A) 14.83% B) 22.78% C) 4.42% D) 16.63% Answer: D Rationale: $104,940 / $631,051 = 16.63% Topic: Asset Turnover LO: 4 Level of Difficulty: MEDIUM 14. Use the following selected 2019 balance sheet and income statement information for Homer Glen Supply Co. (in millions) to compute asset turnover (AT) to the nearest hundredth of a percent. Net income $69,960
Gross profit on sales $700,400
Average total assets $360,600
Sales $1,356,504
Tax rate on operating profit 35%
A) 0.27 B) 3.76 C) 17.30 D) 5.17 Answer: B Rationale: $1,356,504/ $360,600 = 3.76 Topic: Trend Analysis LO: 2 Level of Difficulty: EASY 15. In trend analysis, of what amount is each item expressed as a percentage? A) Net income B) Average total assets C) Sales revenue D) A base year amount Answer: D Rationale: A base year is selected. Each account is converted to a percentage of that base year amount so users can see the change from year to year.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-9
Topic: Trend Analysis LO: 2 Level of Difficulty: MEDIUM 16. Brown Enterprises reported sales revenue totaling $1,008,000, $1,002,000, and $1,239,000 in the years, 2018, 2019, and 2020, respectively. Performing trend analysis, with 2018 serving as the base year, what is the percentage for 2020? A) 123.69% B) 22.27% C) 122.92% D) 32.91% Answer: C Rationale: $1,239,000 / $1,008,000 = 122.92% Topic: Trend Analysis LO: 2 Level of Difficulty: MEDIUM 17. Ben Enterprises reported sales revenue totaling $1,344,000, $1,340,000, and $3,525,000 in the years, 2018, 2019, and 2020, respectively. Performing trend analysis, with 2018 serving as the base year, what is the percentage for 2020? A) 123.58% B) 262.28% C) 105.36% D) 28.21% Answer: B Rationale: $3,525,000 / $1,344,000 = 262.28% Topic: Debt-to-Equity Ratio LO: 4 Level of Difficulty: EASY 18. At December 31, 2019, David Bash Company has total assets of $1,000,000, total liabilities of $720,000, and total owner’s equity of $280,000. At December 31, 2019, David Bash Company’s debt-to-equity ratio is: A) 0.28 B) 5.00 C) 0.72 D) 2.57 Answer: D Rationale: $720,000/$280,000 = 2.57
©Cambridge Business Publishers, 2020 13-10
Financial Accounting for Undergraduates, 4th Edition
Topic: Debt-to-Equity Ratio LO: 4 Level of Difficulty: EASY 19. At December 31, 2019, Gevas Company has total assets of $3,000,000, total liabilities of $450,000, and total owner’s equity of $2,550,000. At December 31, 2019, Gevas debt-to-equity ratio is: A) 0.18 B) 4.09 C) 0.65 D) 2.10 Answer: A Rationale: $450,000/$2,550,000 = 0.18 Topic: Debt-to-Equity Ratio LO: 4 Level of Difficulty: EASY 20. At December 31, 2019, Jose Company has total assets of $1,800,000, total liabilities of $480,000, and total owner’s equity of $1,320,000. At December 31, 2019, Jose Company’s debt-to-equity ratio is: A) 0.36 B) 1.20 C) 2.75 D) 0.27 Answer: A Rationale: $480,000 / $1,320,000 = 0.36 Topic: Operating-Cash-Flow-to-Current-Liabilities Ratio LO: 4 Level of Difficulty: EASY 21. The operating-cash-flow-to-current-liabilities ratio is computed by dividing a firm’s a net cash flow from operating activities by: A) Current liabilities at the end of the period B) Current liabilities at the beginning of the period C) Total liabilities at the middle of the period D) Average current liabilities for the period Answer: D
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-11
Topic: Trend Percentages LO: 2 Level of Difficulty: EASY 22. Chinchilla Company is preparing trend percentages for its service fees earned for the period 2016 through 2020. The base year is 2016. The 2019 trend percentage is computed as: A) 2019 service fees earned divided by 2018 service fees earned B) 2019 service fees earned divided by 2016 service fees earned C) 2016 service fees earned divided by 2019 service fees earned D) 2018 service fees earned divided by 2019 service fees earned Answer: B Topic: Trend Percentages LO: 2 Level of Difficulty: EASY 23. Begeman Company’s net income was $225,000 for 2018, $243,750 for 2019, and $293,160 for 2020. Assume trend percentages for net income over the three-year period are computed with 2018 serving as the base year. The trend percentage for 2020’s net income is: A) 117.30% B) 120.92% C) 130.29% D) 86.36% Answer: C Rationale: $293,160 / $225,000 = 130.29% Topic: EPS LO: 4 Level of Difficulty: MEDIUM 24. Javier Company reported net income of $4,550 million in 2019. The weighted average number of common shares outstanding during 2019 was 1,662 million shares. Javier paid $135 million in dividends on preferred stock. How much is basic earnings per share amount for 2019? A) $2.61 B) $2.55 C) $2.66 D) $2.75 Answer: C Rationale: ($4,550 million – $135 million) / 1,662 million = $2.66
©Cambridge Business Publishers, 2020 13-12
Financial Accounting for Undergraduates, 4th Edition
Topic: Discontinued Operations LO: 1 Level of Difficulty: EASY 25. Zebra Company sells a segment of its operations at a loss. Zebra has not previously experienced such an event and does not expect to again. The loss from the disposal of the segment should be reported in the income statement as: A) A separate amount in comprehensive income B) A separate amount in a discontinued operations section C) A separate amount in net income from continuing operations D) As part of cost of goods sold Answer: B Topic: Discontinued Operations LO: 1 Level of Difficulty: EASY 26. Information about a segment of the business that a company sells, abandons, or otherwise disposes of is reported in the: A) Retained earnings statement B) Comprehensive income of the income statement C) Discontinued operations section of the income statement D) Balance sheet Answer: C Topic: Single-Step Income Statement LO: 1 Level of Difficulty: EASY 27. A single-step income statement for a merchandising firm: A) Shows a different net income amount than a multiple-step income statement B) May not be used because it is an unacceptable reporting format C) Does not show a gross profit on sales amount D) None of the above Answer: C Rationale: A single-step income statement derives the net income of a business in one step by subtracting total expenses from total revenues. Gross profit is not shown.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-13
Topic: EPS LO: 4 Level of Difficulty: MEDIUM 28. World Airlines has no preferred stock outstanding. The company had 50,000 shares of common stock outstanding on January 1, 2019 and issued 20,000 additional shares on April 1. If World’s net income was $1,077,000, the company should report earnings per share of (to the nearest cent): A) $12.81 B) $13.80 C) $16.57 D) $15.39 Answer: C Rationale: $1,077,000 / [(50,000 x 3/12) + (70,000 x 9/12)] = $16.57 Topic: EPS LO: 4 Level of Difficulty: MEDIUM 29. Party, Inc. has no preferred stock outstanding. The company had 40,000 shares of common stock outstanding on January 1, 2019 and issued 12,000 additional shares on May 1. If Party’s net income was $200,000, the company should report earnings per share of (to the nearest cent): A) $3.85 B) $4.44 C) $4.17 D) $5.24 Answer: C Rationale: $200,000 / [(40,000 x 4/12) + (52,000 x 8/12)] = $4.17 Topic: EPS LO: 4 Level of Difficulty: MEDIUM 30. Texas, Inc. has net income for 2019 of $555,000. At January 1, 2019, the company had outstanding 54,000 shares of $75 par value common stock and 10,000 shares of 6%, $150 par value cumulative preferred stock. On September 1, 2019, an additional 18,000 shares of common stock were issued. What is the earnings per share for 2019 (to the nearest cent)? A) $6.66 B) $7.75 C) $6.47 D) $9.26 Answer: B Rationale: $555,000 – (10,000 x $150 x 6%) = $465,000 $465,000 / [(54,000 x 8/12) + (72,000 x 4/12)] = $7.75
©Cambridge Business Publishers, 2020 13-14
Financial Accounting for Undergraduates, 4th Edition
Topic: EPS LO: 4 Level of Difficulty: MEDIUM 31. Coconut Inc. has net income for 2019 of $272,000. At January 1, 2019, the company had outstanding 37,000 shares of $20 par value common stock and 5,000 shares of 8%, $100 par value cumulative preferred stock. On October 1, 2019, an additional 12,000 shares of common stock were issued. What is the earnings per share for 2019 (to the nearest cent)? A) $4.74 B) $5.80 C) $6.80 D) $5.40 Answer: B Rationale: $272,000 – (5,000 x $100 x 8%) = $232,000 $232,000 / [(37,000 x 9/12) + (49,000 x 3/12)] = $5.80 Topic: EPS LO: 4 Level of Difficulty: MEDIUM 32. At December 31, 2019, Jamie, Inc. had 500,000 shares of common stock issued and outstanding, 250,000 of which had been issued and outstanding throughout the year and 250,000 of which were issued on July 1, 2019. Net income for the year ended December 31, 2019, was $2,385,000. What is Jamie’s 2019 earnings per common share (to the nearest cent)? A) $3.13 B) $3.81 C) $4.77 D) $6.36 Answer: D Rationale: $2,385,000 / [(250,000 x 6/12) + (500,000 x 6/12)] = $6.36 Topic: Price-Earnings Ratio LO: 4 Level of Difficulty: MEDIUM 33. At December 31, 2019, Van Devender’s price-earnings ratio was 13.4. For 2019, Van Devender’s net income was $660,000, its earnings per share was $7.00, and its annual dividend per share was $4.00. What was the per share market price of Van Devender’s stock at December 31, 2019? A) $93.80 B) $40.20 C) $65.60 D) $53.60 Answer: A Rationale: 13.4 x $7.00 = $93.80
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-15
Topic: Price-Earnings Ratio LO: 4 Level of Difficulty: MEDIUM 34. At December 31, 2019, Van Beek’s price-earnings ratio was 14.6. For 2019, Van Beek’s net income was $1,980,000, its earnings per share was $21.00, and its annual dividend per share was $12.00. What was the per share market price of Van Beek’s stock at December 31, 2019? A) $306.60 B) $199.20 C) $248.40 D) $175.20 Answer: A Rationale: 14.6 x $21.00 = $306.60 Topic: Price-Earnings Ratio LO: 4 Level of Difficulty: EASY 35. In computing the price-earnings ratio, the current per share market price of the firm’s common stock is divided by the: A) Par value per common share B) Dividends per common share C) Earnings per common share D) Net income for the year Answer: C Topic: Interest Income and Expense LO: 1 Level of Difficulty: MEDIUM 36. On the income statement of a merchandising company, interest income and interest expense are reported: A) By offsetting interest income and interest expense and showing the excess as an operating revenue or expense B) As separate items of other income and expense below the net operating income or loss C) As part of cost of goods sold D) By showing interest income as additional sales revenue and interest expense as an operating expense Answer: B
©Cambridge Business Publishers, 2020 13-16
Financial Accounting for Undergraduates, 4th Edition
Exercises Topic: Return on Common Stockholders’ Equity LO: 4 1. Selected balance sheet and income statement information for Forester Company follows in millions: Earnings before taxes Average assets Net income Average common stockholders’ equity
$ 850,179 5,456,781 1,614,471 4,481,322
a. Calculate the company’s return on common stockholders’ equity. b. Explain what information this provides to management. Answer: a. Return on common stockholders’ equity = $1,614,471 / $4,481,322 = 36.03% b. Return on common stockholders’ equity shows the profitability of ownership held by a company’s common stockholders. The ratio shows the percentage of income available to common stockholders. Topic: Times-Interest-Earned Ratio LO: 4 2. Selected balance sheet and income statement information from the Vegan’s Company for fiscal years 2018 through 2020 follows (Amounts in millions): Period 2020 2019 2018
Current assets $15,306 18,662 16,130
Current liabilities $9,912 13,146 11,092
Pretax income $4,834 7,182 6,186
Interest expense $732 732 783
Total assets $39,526 42,080 39,360
Equity $17,110 18,226 17,544
a. Compute the times-interest-earned ratio for each year and discuss any trends. b. What concerns about Vegan’s ability to meet its interest obligations might creditors have? Explain. Answer: a. Times-interest-earned ratio = Earnings before taxes and interest / Interest expense (millions) 2020 = ($4,834 + $732) / $732 = 7.60 2019 = ($7,182 + $732) / $732 = 10.81 2018 = ($6,186 + $783) / $783 = 8.90 b. Vegan’s times-interest-earned ratio increased from 8.90 in 2018 to 10.81 times in 2019, then decreased the following year back down to 7.60. The times-interest-earned ratio is an indication of Vegan’s solvency. The ratio evaluates a company’s ability to pay it interest charges from its operating income. With a times interest earned at almost 8 times its interest expense, Vegan’s ability to service its debt is of no concern.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-17
Topic: Liquidity and Solvency Ratios LO: 4 3. Selected recent balance sheet and income statement information for the clothing companies: Coffee Plus and Tea Circle Corporation follows:
Cash Accounts receivable Inventory Total current liabilities Total liabilities Total equity Pre-tax income (loss) Interest expense a. b. c. d.
Coffee Plus (in $000s) $ 9,758 49,290 478,346 737,601 1,340,453 223,209 (177,756) 0
Tea Circle Corporation (in millions) $ 8,250 31,347 32,306 39,645 127,689 46,041 13,552 2,651
Calculate the current ratio and quick ratio for both companies. Which company is more liquid? Calculate the times-interest-earned and debt-to-equity ratios for both companies. Which company is more solvent? Explain.
Answer: a.
Coffee Plus Current Ratio = Current assets / Current liabilities Quick Ratio = [Cash + Short-term investments + AR] Current liabilities
Tea Circle Corporation
($9,758 + $49,290 + $478,346) ($8,250 + $31,347 + $32,306) / $737,601 = 0.73 / $39,645 = 1.81
($9,758 + $49,290) / $737,601 = 0.08
($8,250 + $31,347) / $39,645 = 1.00
b. When looking at either ratio it appears that Coffee Plus is less liquid. Coffee Plus has only 8% coverage of its current obligations with cash, A/R, and short-term investments. The majority of Coffee Plus’ current assets is in inventory, which is a less liquid asset. c.
Coffee Plus
Tea Circle Corporation
Times-interest-earned ratio = (Pre-tax income + Interest expense) Interest expense
($177,756) + $0 / $0 =0
($13,552 + $2,651) / $2,651 = 6.11
Debt-to-equity = Total liabilities / Total equity
$1,340,453 / $223,209 =6.01
$127,689 / $46,041 = 2.77
d. Coffee Plus is questionably insolvent. Although it has no interest expense, it has both a pre-tax loss and a very unhealthy debt-to-equity ratio. Tea Circle is a lot healthier. Its times-interest earned-ratio indicates Tea Circle has about 6.1 times earned income that it needs to pay its annual interest cost. Also, its 2.77 debt-to-equity ratio is substantially lower than that of Coffee Plus’s.
©Cambridge Business Publishers, 2020 13-18
Financial Accounting for Undergraduates, 4th Edition
Topic: Liquidity and Solvency Ratios LO: 4 4. Selected balance sheet and income statement information for two manufacturing companies: Stripe, Inc. and Polka-dot Corporation follows:
Cash Marketable securities Accounts receivable All other current assets Total current liabilities Total liabilities Total equity Pre-tax income Interest expense a. b. c. d.
Stripe (in $ millions) $ 1,860 380 3,460 4,306 7,296 9,592 12,060 1,280 105
Polka-dot (in $ millions) $ 26,558 110 38,424 39,986 129,009 148,564 121,551 18,830 1,791
Calculate the current ratio and quick ratio for both companies. Which company is more liquid? Calculate the times-interest-earned ratio and debt-to-equity ratio for both companies. Which company is more solvent?
Answer: a.
Stripe
Polka-dot
Current Ratio = Current assets / Current liabilities
($1,860 + $380 + $3,460 + $4,306) / $7,296 = 1.37
($26,558 + $110 + $38,424 + $39,986) / $129,009 = 0.81
Quick Ratio = [Cash + Marketable securities + AR] Current liabilities
($1,860 + $380 + $3,460) / $7,296 = 0.78
($26,558 + $110 + $38,424) / $129,009 = 0.50
b. Both companies are liquid, but Stripe is considerably more liquid as shown by its higher current and quick ratios. c.
($ millions)
Stripe
Polka-dot
Times-interest-earned ratio = (Pre-tax income + interest expense) Interest expense
($1,280 + $105) / $105 = 13.19
($18,830 + $1,791) / $1,791 = 11.51
Debt-to-equity = Total liabilities / Total equity
$9,592 / $12,060 = 0.80
$148,564 / $121,551 = 1.22
d. Stripe has a higher times-interest-earned ratio and a lower debt-to-equity ratio. Stripe and Polkadot are both solvent, but Stripe has greater protection being provided to creditors with its lower debt-to-equity ratio.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-19
Topic: Turnover Ratios LO: 4 5. Selected recent balance sheet and income statement information for Frischmuth Systems, Inc. follows: (in millions) Average inventory Average accounts receivable Average accounts payable Sales Cost of goods sold
2019 $ 294 3,072 837 17,105 8,729
a. Calculate accounts receivable turnover for both years. improved during the year or worsened?
2018 $ 318 3,894 9,570 20,997 11,445 Has accounts receivable turnover
b. Calculate inventory turnover for 2019 and 2018. Has inventory turnover improved during the year or worsened? Answer: a. 2019 accounts receivable turnover = $17,105 / $3,072 = 5.57 2018 accounts receivable turnover = $20,997 / $3,894 = 5.39 Accounts receivable turnover has improved during the year. The company collects its receivables balance in 2019 almost 5.6 times compared to collection of almost 5.4 times in 2018. b. 2019 inventory turnover = $8,729 / $294 = 29.69 2018 inventory turnover = $11,445 / $318 = 35.99 Inventory turnover has deteriorated during the year. However, it is still at a turnover that denotes little concern with inventory obsolescence. The company sold its entire inventory cost almost 30 times each year in 2019 as compared to about 36 times during 2018. Topic: Turnover Ratios LO: 4 6. Selected recent balance sheet and income statement information for Shannon & Sisters Corporation follows: (in millions) Average inventory Average accounts receivable Average accounts payable Sales Cost of goods sold
2019 $ 21,012 57,681 29,726 229,104 175,048
2018 $ 23,868 52,755 26,704 236,728 179,398
a. Calculate accounts receivable turnover for 2019 and 2018. Has it improved during the year or worsened? b. Calculate inventory turnover for 2019 and 2018. Has it improved during the year or worsened?
©Cambridge Business Publishers, 2020 13-20
Financial Accounting for Undergraduates, 4th Edition
Answer: a. 2019 accounts receivable turnover = $229,104 / $57,681 = 3.97 2018 accounts receivable turnover = $236,728/ $52,755 = 4.49 During the year, Shannon & Sisters’ accounts receivable has deteriorated from collecting its receivables almost 4.5 times in 2018 compared to slightly less than 4 times in 2019. b. 2019 inventory turnover = $175,048 / $21,012 = 8.33 2018 inventory turnover = $179,398 / $23,868 = 7.52 During the year, inventory turnover improved slightly to selling about 8.3 times the average cost of the inventory in 2019, compared to about 7.5 in 2018. Topic: Turnover Ratios LO: 4 7. Selected recent balance sheet and income statement information for Summersun, Inc. follows: (in millions) Average inventory Average accounts receivable Average accounts payable Sales Cost of goods sold
2019 $ 7,029 7,385 2,949 37,800 30,209
2018 $ 7,821 7,988 3,408 50,197 39,907
a. Calculate accounts receivable turnover for 2019 and 2018. Has it improved during the year or worsened? b. Calculate inventory turnover for 2019 and 2018. Has it improved during the year or worsened? Answer: a. 2019 accounts receivable turnover = $37,800 / $7,385 = 5.12 2018 accounts receivable turnover = $50,197 / $7,988 = 6.28 During the year, Summersun’s accounts receivable turnover deteriorated from collecting its receivables almost 6.3 times per year in 2018 compared to about 5.1 times per year in 2019. b. 2019 inventory turnover = $30,209 / $7,029= 4.30 2018 inventory turnover = $39,907 / $7,821 = 5.10 During the year, Summersun’s inventory turnover declined slightly from selling about 5.1 times the average cost of the inventory in 2018 to about 4.3 times in 2019.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-21
Topic: Accounts Receivable Turnover Ratio LO: 4 8. Selected recent balance sheet and income statement information for the computer software companies, Valley Enterprises and Mountain Industries follow: ( $ millions) Average accounts receivable Average accounts payable Net sales Cost of goods sold Net income Income tax expense
Valley Enterprises $ 36,414 8,194 215,616 88,598 17,302 6,520
Mountain Industries $ 46,539 14,436 246,036 100,810 25,070 10,028
a. Compute accounts receivable turnover for Valley Enterprises and Mountain Industries. b. Interpret and comment on the differences between the receivables turnover rates between each company assuming the industry average is 6.0 times. Answer: a. Valley: $215,616 / $36,414 = 5.92 times Mountain: $246,036 / $46,539 = 5.29 times b. Valley has a slightly higher accounts receivable turnover rate than Mountain. Valley collects its receivables about 5.9 times per year, while Mountain collects its receivables about 5.3 times per year. Turnover rates for both companies are slightly under the 6.0 times industry average. Topic: Turnover Ratios LO: 4 9. Selected recent balance sheet and income statement information for Book Products, Inc. follows (in $ millions): Average accounts receivable Average inventory Net sales Cost of goods sold Pretax income Net income
$9,846 5,814 56,504 30,632 (933) (1,788)
Compute accounts receivable turnover and inventory turnover. Answer: Accounts receivable turnover = Sales / Average accounts receivable = $56,504 / $9,846 = 5.74 Inventory turnover = Cost of goods sold / Average inventory = $30,632 / $5,814 = 5.27
©Cambridge Business Publishers, 2020 13-22
Financial Accounting for Undergraduates, 4th Edition
Topic: Profitability Ratios LO: 4 10. The following is selected balance sheet and income statement information for Mario Company.
2019
Current Assets
Gross Profit on Sales
Net Sales
Net Income
Average Total Assets
Average Common Stockholders’ Equity
$48,062
$200,680
$450,009
$45,216
$273,710
$151,668
Compute the following ratios: a. Gross profit percentage b. Return on sales c. Asset turnover d. Return on assets e. Return on common stockholders’ equity (Mario Company has no preferred stock) Answer: a. $200,680 / $450,009 = 44.59% b. $45,216 / $450,009 = 10.05% c.
$450,009 / $273,710 = 1.64
d. $45,216 / $273,710 = 16.52% e. $45,216 / $ 151,668 = 29.81% Topic: EPS LO: 4 11. During 2019, Homewood Company had 50,000 shares of $30 par value common stock and 7,000 shares of 8%, $90 par value convertible preferred stock outstanding. Homewood Company’s 2019 net income was $1,350,000. Compute earnings per share for 2019. Answer: EPS: [$1,350,000 – (7,000 × $90 × 8%)] / 50,000 = $25.99 per share
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-23
Topic: Multiple-Step Income Statement LO: 1 12. Listed below are five items or sections that may be found in a multiple-step income statement. Place the numbers 1 through 5 in the blank spaces provided to indicate the sequence of these items or sections in the income statement (with 1 assigned to the first item or section, and so on). a. b. c. d. e. Answer: a. 4 b. 2 c. 5 d. 3 e. 1
Discontinued operations Net operating income Net income Net income from continuing operations Gross profit
Discontinued operations Net operating income Net income Net income from continuing operations Gross profit
Topic: EPS LO: 4 13. During 2019, Fabulous Shoe Corporation had 75,000 shares of $10 par value common stock and 10,000 shares of 6%, $50 par value preferred stock outstanding. Fabulous Shoe Corporation’s 2019 net income is $798,000. Compute the earnings per share for 2019. Answer: Net Income Less: Preferred stock dividend requirement (10,000 x $50 x 6%) Earnings available to common stockholders
$798,000 30,000 $768,000
Earnings per share = $768,000 / 75,000 shares = $10.24
©Cambridge Business Publishers, 2020 13-24
Financial Accounting for Undergraduates, 4th Edition
Topic: EPS LO: 4 14. During 2019, Koala Corporation had 160,000 shares of $15 par value common stock and 30,000 shares of 5%, $60 par value preferred stock outstanding. Koala Corporation’s 2019 net income is $1,440,000. Compute the primary earnings per share for 2019. Answer: Net Income Less: Preferred stock dividend requirement (30,000 x $60 x 5%) Earnings available to common stockholders
$1,440,000 90,000 $1,350,000
Earnings per share = $1,350,000 / 160,000 shares = $8.44 Topic: Price-Earnings Ratio LO: 4 15. The following information relates to Reed, Inc.: Net income for 2019 Weighted average common shares outstanding for 2019 Weighted average preferred shares outstanding for 2019 Cash dividends on preferred stock for 2019 Cash dividends on common stock for 2019 Per share market price of preferred stock at December 31, 2019 Per share market price of common stock at December 31, 2019
$1,704,000 160,000 50,000 $400,000 $283,000 $160.00 $146.70
a. Compute Cordova’s 2019 earnings per share. b. Compute Cordova’s price-earnings ratio at December 31, 2019. Answer: a. ($1,704,000 – $400,000) / 160,000 = $8.15 b. $146.70 / $8.15 = 18.0 Topic: Solvency Ratios LO: 4 16. Twin Lakes Company has the following values taken from its 2019 annual report (in thousands): Interest expense Sales Earnings before interest and taxes Total liabilities Stockholders’ equity
$
37,800 480,000 308,000 787,500 600,000
a. Calculate Twin Lakes Company’s times-interest-earned ratio. b. Calculate Twin Lakes Company’s debt-to-equity ratio. Answer: a. Times-interest-earned ratio = $308,000 / $37,800 = 8.15 b. Debt-to-equity ratio = $787,500 / $600,000 = 1.3125 ©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-25
Problems Topic: Turnover Ratios LO: 4 1. Selected recent balance sheet and income statement information from Hats Co. and Gloves, Inc. follows: ($ millions) Sales Cost of goods sold Average accounts receivable Average inventory Average total assets
Hats Co. $7,238 2,919 77 770 4,190
Gloves, Inc. $11,305 3,178 486 1,449 10,827
a. Compute the following turnover rates for each company: 1. Accounts receivable turnover 2. Inventory turnover 3. Asset turnover b. Interpret and comment on any differences you observe between the turnover rates for these two companies. Answer: a. 1. Accounts receivable turnover = Sales / Average accounts receivable Hats Co.= $7,238 / $77 = 94.00 Shorts, Inc. = $11,305 / $486 = 23.26 2. Inventory turnover = Cost of goods sold / Average inventory Hats Co. = $2,919 / $770 = 3.79 Gloves, Inc. = $3,178 / $1,449 = 2.19 3. Asset turnover = Sales / Average assets Hats Co. = $7,238 / $4,190 = 1.73 Gloves, Inc. = $11,305 / $10,827 = 1.04 b. We see from the calculations above that Hats Co. has a considerably higher accounts receivable turnover (94.00) compared to that of Gloves, Inc. (23.26). Consequently, Hats Co. should have a greater profitability and cash flow as well. Hats Co. collects its entire amount of receivables over 90 times a year, while Gloves, Inc. collects only about 23 times per year. Several issues could account for Hats Co.’s higher inventory turnover. For instance, it is possible that Hats Co. may be more efficient at ensuring ‘just-in-time’ deliveries, which means that inventories sit with suppliers, not at Hats Co. Hats Co. also has a higher asset turnover than Gloves, Inc. They have done a more effective job at optimizing investments in total assets required to generate its sales.
©Cambridge Business Publishers, 2020 13-26
Financial Accounting for Undergraduates, 4th Edition
Topic: Use Financial Statements to Calculate and Interpret Liquidity and Solvency Ratios LO: 4 2. The balance sheets and income statements for Star Morning Communications follow: STAR MORNING COMMUNICATIONS Consolidated Balance Sheets December 31, 2019 and 2018 (in thousands, except per share amounts) ASSETS Current Assets: Cash and cash equivalents Receivables, net Inventories, net Prepaid expenses Syndicated programs Deferred income taxes TOTAL CURRENT ASSETS Property and equipment: Land and land improvements Buildings and building improvements Equipment Construction in progress Less accumulated depreciation Net property and equipment Goodwill Broadcast licenses Other intangible assets, net Deferred income taxes Syndicated programs Other assets TOTAL ASSETS
2019
2018
$ 3,369 87,743 3,456 3,673 7,983 4,899 111,123
$ 4,040 103,000 5,935 4,472 11,088 4,869 133,404
35,046 135,548 282,143 3,513 456,250 253,797 202,453 9,098 111,762 24,976 63,368 3,285 1,403 $527,468
35,066 133,252 277,653 8,567 454,538 233,380 221,158 4,285 131,120 26,706 64,420 3,091 11,997 $596,181
Table continued next page
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-27
Table continued STAR MORNING COMMUNICATIONS Consolidated Balance Sheets—continued December 31, 2019 and 2018 (in thousands, except per share amounts) LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Accounts payable Accrued compensation Accrued employee benefits Deferred revenue Accrued income taxes Syndicated programs Other current liabilities Current portion of long-term liabilities TOTAL CURRENT LIABILITIES Accrued employee benefits Syndicated programs Long-term notes payable to banks Other long-term liabilities Shareholders’ Equity: Common stock Additional paid-in capital Accumulated other comprehensive loss Retained earnings Treasury stock, at cost (8,676,705 class B shares) TOTAL SHAREHOLDERS’ EQUITY TOTAL LIABILITIES AND SHAREHOLDERS’EQUITY
2019
2018
$ 48,562 13,963 5,686 15,353 1,884 9,944 6,030 483 101,905 63,268 6,250 151,375 3,595
$ 47,164 15,046 7,214 15,001 43 12,348 6,668 1,609 105,093 64,620 7,871 215,090 5,445
625 258,413 (34,487) 85,239 (108,715) 201,075 $ 527,468
622 256,716 (34,355) 83,794 (108,715) 198,062 $ 596,181
a. Compute the company’s current ratio for 2019 and 2018. Comment on any observed trend. b. Compute the debt-to-equity ratio for 2019 and 2018. Comment on any observed trend. Answer: a. 2019 current ratio = $111,123 / $101,905 = 1.09 2018 current ratio = $133,404 / $105,093 = 1.27 During the year, the company’s current ratio has deteriorated. The decline from 2018 to 2019 warrants attention as liquidity dropped significantly. b. 2019 debt-to-equity ratio = ($527,468 – $201,075) / $201,075 = 1.62 2018 debt-to-equity ratio = ($596,181 – $198,062) / $198,062 = 2.01 Overall levels of debt have decreased during the year and the debt-to-equity ratio has also decreased, which signifies improved solvency.
©Cambridge Business Publishers, 2020 13-28
Financial Accounting for Undergraduates, 4th Edition
Topic: Turnover Ratios LO: 4 3. The partial balance sheets and income statements for Weasley’s, Inc., for fiscal years ending June 30, 2019 and 2018 follow: (in millions) Current Assets Cash and cash equivalents Accounts receivable Inventories Deferred income taxes Prepaid expenses and other current assets Total Current Assets
2019 $
Property, plant and equipment Accumulated depreciation Net property, plant and equipment Goodwill and other intangible assets Other noncurrent assets Total Assets
(in millions) Years ended June 30, Net sales Cost of products sold Selling, general and administrative expense Operating income Interest expense Other non-operating expense, net Earnings from continuing operations before income taxes Income taxes on continuing operations Net earnings from continuing operations Net earnings (loss) from discontinued operations Net earnings
2018
7,172 26,262 30,960 1,814 4,799 71,007
$
4,970 30,425 37,872 3,018 6,020 82,305
54,977 57,129 (25,784) (26,169) 29,193 30,960 133,677 141,000 6,522 7,256 $240,399 $261,521
2019
2018
2017
$276,602 136,143 36,012 104,447
$286,118 138,376 38,363 109,379
$261,912 124,807 36,255 100,850
2,037 840
3,472 693
1,956 848
101,570
105,214
98,046
25,393 76,177 (3,215) $72,962
26,304 78,910 416 $79,326
24,512 73,534 416 $73,950
a. Calculate accounts receivable turnover for 2019 and 2018. Accounts receivable in 2017 totaled $29,831 million. Has accounts receivable turnover improved during the year or worsened? b. Calculate inventory turnover for 2019 and 2018. Inventories in 2017 were $30,686 million. Has inventory turnover improved during the year or worsened? c.
Calculate asset turnover for 2019 and 2085 considering that 2017 total assets are $434,214 million.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-29
Answer: a. 2019 accounts receivable turnover = Sales / Average accounts receivable = $276,602 / [($26,262 + $30,425) / 2] = 9.76 2018 accounts receivable turnover = $286,118 / [(30,425 + $29,831) / 2] = 9.50 Accounts receivable turnover has improved during the year, but not significantly. The company collected its receivables almost 9.50 times during 2019. b. 2019 inventory turnover = Cost of goods sold / Average inventory = $136,143 / [($30,960 + $37,872) / 2] = 3.96 2018 inventory turnover = $138,376 / [($37,872 + $30,686) / 2] = 4.04 Inventory turnover has deteriorated slightly during the year. c.
2019 asset turnover = Sales / Average assets = $276,602 / [($240,399 + $261,521) / 2] = 1.102 2018 asset turnover = $286,118 / [($261,151 + $434,214) / 2] = 0.823
Topic: Common-Size Income Statements LO: 3 4. The income statements for Springdale Corporation for fiscal year 2019 (year ended January 30, 2019) follow: (millions, except per share data)
2019
2018
2017
$126,870
$125,768
$122,942
5,766
6,192
5,688
Total revenues
132,636
131,960
128,630
Cost of sales Selling, general and administrative expenses
88,124
88,314
85,858
19,617
19,431
19,005
Credit card expenses
1,521
1,609
837
Depreciation and amortization Earnings before interest expense and income taxes
2,023
1,826
1,659
21,351
20,780
21,271
970
1,670
1,330
1,414
1,454
1,070
Interest income
(3)
(28)
(21)
Net interest expense
2,381
3,096
2,379
Earnings before income taxes
18,970
17,684
18,892
Provision for income taxes Net earnings
6,839
6,366
6,801
$ 12,131
$ 11,318
$ 12,091
Sales Credit card revenues
Net interest expense Debt collateralized by credit card receivables Other interest expense
a. Prepare a common-size income statement for 2019 and 2018. Round to one decimal place. b. Comment on the most significant changes.
©Cambridge Business Publishers, 2020 13-30
Financial Accounting for Undergraduates, 4th Edition
Answer: a. (millions, except per share data)
2019
2018
$125,768
95.7%
95.3%
5,766
6,192
4.3%
4.7%
Total revenues
132,636
131,960
100.0%
100.00%
Cost of sales
88,124
88,314
66.4%
66.9%
Selling, general and administrative expenses
19,617
19,431
14.8%
14.7%
Credit card expenses
1,521
1,609
1.1%
1.2%
Depreciation and amortization Earnings before interest expense and income taxes
2,023
1,826
1.5%
1.4%
21,351
20,780
16.1%
15.7%
970
1,670
0.7%
1.3%
1,414
1,454
1.1%
1.1%
Interest income
(3)
(28)
0.0%
0.0%
Net interest expense
2,381
3,096
1.8%
2.3%
Earnings before income taxes
18,970
17,684
14.3%
13.4%
6,839 $ 12,131
6,366 $ 11,318
5.2% 9.1%
4.8% 8.6%
Sales Credit card revenues
Net interest expense Debt collateralized by credit card receivables Other interest expense
Provision for income taxes Net earnings
2019
2018
$126,870
NOTE: Some percentage totals may not sum correctly due to rounding. b. As is reflected in the above analysis, Springdale is very consistent between years in terms of its statement of operations performance. However, slight changes for the better include both pretax and after tax earnings, which are improving.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-31
Topic: Common Size Balance Sheets LO: 3 5. The asset section of Fullerton Corporation’s 2019 balance sheet follows: January 30, 2019
January 31, 2018
Cash and cash equivalents Credit card receivables, net of allowance Inventory Other current assets
$ 6,600
$ 2,592
24,497 25,127 9,356
28,294 23,468 8,258
Total current assets Property and equipment Other noncurrent assets Total assets
65,580 66,360 3,731 $135,671
62,612 67,610 3,879 $134,101
(millions, except footnotes)
a. Prepare a common-size statements for the asset section of Belmont’s balance sheet for 2019 and 2018. Round to one decimal place. b. Comment on the most significant changes. Answer: a: January 30, 2019
January 31, 2018
Cash and cash equivalents Credit card receivables, net of allowance
$ 6,600
$ 2,592
4.9%
1.9%
24,497
28,294
18.1%
21.1%
Inventory
25,127
23,468
18.5%
17.5%
Other current assets
9,356
8,258
6.9%
6.2%
Total current assets
65,580
62,612
48.3%*
46.7%
Property and equipment
66,360
67,610
48.9%
50.4%
Other noncurrent assets Total assets
3,731 $135,671
3,879 $134,101
2.8% 100.00%
2.9% 100.00%
(millions, except footnotes)
2019
2018
*Does not foot due to rounding.
b. For the most part, Fullerton’s current assets are strengthening and there are not any significant swings between years. For example, current assets have improved in a way that the most liquid assets have a higher percentage of the total. While inventory is up, receivables are down which indicates the company is efficiently collecting amounts due from customers.
©Cambridge Business Publishers, 2020 13-32
Financial Accounting for Undergraduates, 4th Edition
Topic: Discontinued Operations LO: 1 6. Consider the following results for Camire Brothers:
Revenues Expenses Pretax income
Continuing Operations $290,000 196,000 $ 94,000
Discontinued Operations $62,400 29,000 $ 33,400
Total $352,400 225,000 $ 127,400
Prepare the income statement for this company assuming a 35% income tax rate. statement heading. Answer: Sales revenue Expenses Pretax income Income tax expense Income from continuing operations Income from discontinued operations, net of taxes Net income
Omit the
$290,000 196,000 94,000 32,900 61,100 21,710 $ 82,810
Results from discontinued operations are collapsed into one line item and reported net of income taxes. $33,400 – ($33,400 × 35%) = 21,710
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-33
Chapter 13 Analysis and Interpretation of Financial Statements Learning Objectives – Coverage by question True / False
Multiple Choice
Exercises
Problems
12-14, 16, 17
25-27, 36
12
6
LO2 – Identify the sources of financial information used by investment professionals and explain horizontal financial statement analysis.
3
15-17, 22, 23
LO3 – Explain vertical financial statement analysis.
3, 8
LO4 – Define and discuss financial ratios for analyzing a firm.
1, 2, 4, 5, 7, 9-11, 15
LO5 – Discuss the limitations of financial statement analysis.
6
LO1 – Identify persistent earnings and discuss the content and format of the income statement.
4, 5
1-14, 18-21, 24, 28-35
1-11, 13-16
1-3
LO6 – Appendix 13 Describe financial statement disclosures.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-1
Chapter 13: Analysis and Interpretation of Financial Statements
True / False Topic: Asset Turnover LO: 4 1. Asset turnover measures a company’s solvency. Answer: False Rationale: Asset turnover is one of the ratios used to evaluate a firm’s profitability. It measures how efficiently a firm uses its assets to generate sales revenue.
Topic: Inventory Turnover Rate LO: 4 2. All things equal, the higher a company’s inventory turnover rate, the better. Answer: True
Topic: Horizontal and Vertical Analysis LO: 2, 3 3. Vertical analysis examines changes in financial data across time. Answer: False Rationale: Vertical analysis is a method that attempts to overcome the size of a company by stating financial information is a ratio form. Horizontal analysis examines changes in financial data across time.
Topic: Return on Assets LO: 4 4. Return on assets can be disaggregated into return on sales and return on common stockholders’ equity ratio. Answer: False Rationale: Return on assets can be disaggregated into return on sales and asset turnover.
Topic: Return on Assets LO: 4 5. Austin Plumbing Supplies has a return on assets of 25%, while the industry average of similar companies is 15%. This means that Austin Plumbing Supplies’ asset turnover is higher than the industry average. Answer: False Rationale: This is not necessarily the case, since the return on assets is made up of two components, return on sales times asset turnover.
©Cambridge Business Publishers, 2020 13-2
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Limitations of Ratio Analysis LO: 5 6. One benefit of using ratio analysis to compare two firms in the same industry is that ratios are immune to size and current accounting rules. Answer: False Rationale: By using percentage comparisons, ratio analysis makes firms of different sizes more comparably. However, two firms in the same industry may use very different accounting methods, which would flow through to the ratios and make them non-comparable.
Topic: Solvency LO: 4 7. Solvency ratios measure a company’s ability to meet its debt obligations. Answer: True
Topic: Vertical Analysis LO: 3 8. A common size balance sheet expresses the balance sheet items as a percentage of total assets. Answer: True
Topic: Debt-to-Equity Ratio LO: 4 9. One key measure of profitability is the debt-to-equity ratio. Answer: False Rationale: The debt-to-equity ratio is a measure of long-term solvency when looking at credit risk.
Topic: Debt-to-Equity Ratio LO: 4 10. A debt-to-equity ratio of greater than 1.0 means that a firm’s liabilities exceed its owners’ equity. Answer: True
Topic: EPS LO: 4 11. Earnings per share is the amount a company earns and pays out as dividends for each share of common stock outstanding. Answer: False Rationale: Earnings per share is the amount a company earns for each share of common stock outstanding. It is not tied to the amount of dividends paid.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-3
Topic: Change in Accounting Principle LO: 1 12. A change in an accounting principle is reflected through adjustments to future financial statements and, therefore, requires no retroactive or present adjustments to financial statements. Answer: False Rationale: Financial statements of prior years, issued in comparative form with current year financial statements, must be presented using the new accounting principles as if the new method had been used all along.
Topic: Change in Accounting Principle LO: 1 13. Changing from straight-line depreciation to double declining-balance depreciation is an example of a change in an accounting principle. Answer: True
Topic: Multiple-Step Income Statement LO: 1 14. Determining gross profit is the first step in a multiple-step income statement for a merchandising firm. Answer: True
Topic: Price-Earnings Ratio LO: 4 15. The price-earnings ratio indicates how much an investor would have to earn to be able to purchase the stock. Answer: False Rationale: Price-earnings ratio is used to assess a stock’s fair value. Assuming that companies have equivalent persistent earnings and financial risk profiles, the company with the lowest price-earnings ratio may represent the best investment opportunity.
Topic: Discontinued Operations LO: 1 16. Revenues from discontinued operations of a company are reported separately from revenues from continuing operations on the income statement. Answer: True
Topic: Discontinued Operations LO: 1 17. Income effects of discontinued operations are reported separately from continuing operations on the income statement. Answer: True
©Cambridge Business Publishers, 2020 13-4
th
Financial Accounting for Undergraduates, 4 Edition
Multiple Choice Topic: Asset Ratios LO: 4 Level of Difficulty: EASY 1. Which one of the following ratios does not involve assets? A) Account receivable turnover B) Current ratio C) Return on sales D) Inventory turnover Answer: C Rationale: Return on sales measures net income against sales revenue, both components of which are income statement amounts and not assets.
Topic: Inventory Turnover Rate LO: 4 Level of Difficulty: MEDIUM 2. Which ratio can provide an indication of the salability of the company’s products? A) Account receivable turnover B) Current ratio C) Inventory turnover D) Gross profit margin Answer: C Rationale: Inventory turnover measures the number of times during a period a company sells its inventory. Trends in this metric can provide an indication of the salability of the company’s products.
Topic: Liquidity Measure LO: 4 Level of Difficulty: EASY 3. Which of the following is one measure of liquidity? A) Debt-to-equity ratio B) Times-interest-earned ratio C) Quick ratio D) None of the above Answer: C Rationale: The only measure of liquidity listed above is the quick ratio which is a variation of the current ratio (Current Ratio = Current assets / Current liabilities) to focus on quick assets (cash, securities, and receivables). The debt-to-equity ratio and the times interest earned are metrics of solvency analysis.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-5
Topic: Return on Assets LO: 4 Level of Difficulty: EASY 4. Return on assets is computed as: A) Net income / Average stockholders’ equity B). Net income / Average total assets C) Return on sales × Asset turnover D) B or C Answer: D
Topic: Return on Common Stockholders’ Equity LO: 4 Level of Difficulty: MEDIUM 5. Aladdin Grocer’s 2019 balance sheet shows average stockholders’ equity of $18,000 million, net operating profit after tax of $1,710 million, net income of $665 million, and common shares issued of $2,874 million. The company has no preferred shares issued. Aladdin Grocer’s return on common stockholders’ equity for the year is: A) 18.61% B) 3.69% C) 7.37% D) 11.07% Answer: B Rationale: $665 million/$18,000 million = 3.69%
Topic: Return on Common Stockholders’ Equity LO: 4 Level of Difficulty: MEDIUM 6. Dils Brothers’ 2019 balance sheet shows average stockholders’ equity of $36,000 million, net operating profit after tax of $2,280 million, net income of $760 million, and common shares issued of $3,832 million. The company has no preferred shares issued. Dils Brothers’ return on common stockholders’ equity for the year is: A) 19.83% B) 2.11% C) 6.33% D) 7.30% Answer: B Rationale: $760 million/$36,000 million =2.11%
©Cambridge Business Publishers, 2020 13-6
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Return on Assets LO: 4 Level of Difficulty: EASY 7. Aladdin Grocer’s 2019 financial statements show average shareholders’ equity of $15,309 million, net income of $2,940 million, and average total assets of $65,025 million. How much is Aladdin Grocer’s return on assets for the year? A) 27.42% B) 4.52% C) 19.18% D) 5.56% Answer: B Rationale: $2,940 million / $65,025 million = 4.52%
Topic: Return on Assets LO: 4 Level of Difficulty: EASY 8. Dils Brothers’ 2019 financial statements show average shareholders’ equity of $20,412 million, net income of $5,040 million, and average total assets of $86,700 million. How much is Dils Brothers’ return on assets for the year? A) 11.42% B) 5.81% C) 24.69% D) 4.77% Answer: B Rationale: $5,040 million / $86,700 million = 5.81%
Topic: Return on Sales LO: 4 Level of Difficulty: EASY 9. Aladdin Grocer’s 2019 financial statements show net income of $2,940 million, sales of $230,199 million, and average total assets of $69,525 million. How much is Aladdin Grocer’s return on sales for the year? A) 4.24% B) 1.28% C) 35.39% D) 7.52% Answer: B Rationale: $2,940 million / $230,199 million = 1.28%
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-7
Topic: Return on Sales LO: 4 Level of Difficulty: EASY 10. Dils Brothers’ 2019 financial statements show net income of $5,040 million, sales of $306,932 million, and average total assets of $86,700 million. How much is Dils Brothers’ return on sales for the year? A) 4.71% B) 1.64% C) 10.20% D) 5.81% Answer: B Rationale: $5,040 million / $306,932 million = 1.64%
Topic: Gross Profit Percentage LO: 4 Level of Difficulty: MEDIUM 11. Use the following selected 2019 balance sheet and income statement information for Homer Glen Supply Co. (in millions) to compute the gross profit percentage to the nearest hundredth of a percent.
Net income $104,940
Gross profit on sales $1,050,600
Average total assets $631,050
Sales $2,373,882
Tax rate on operating profit 35%
A) 4.42% B) 8.56% C) 28.76% D) 44.26% Answer: D Rationale: $1,050,600 / $2,373,882 = 44.26%
Topic: Gross Profit Percentage LO: 4 Level of Difficulty: MEDIUM 12. Use the following selected 2019 balance sheet and income statement information for Life Improvements Co. (in millions) to compute the gross profit percentage to the nearest hundredth of a percent.
Net income $279,840 A) B) C) D)
Gross profit on sales $2,101,200
Average total assets $1,081,800
Sales $2,713,008
Tax rate on operating profit 35%
50.34% 77.45% 10.31% 51.63%
Answer: B Rationale: $2,101,200 / $2,713,008 = 77.45%
©Cambridge Business Publishers, 2020 13-8
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Return on Assets LO: 4 Level of Difficulty: MEDIUM 13. Use the following selected 2019 balance sheet and income statement information for Homer Glen Supply Co. (in millions) to compute the return on assets to the nearest hundredth.
Net income $104,940
Gross profit on sales $1,050,600
Average total assets $631,051
Sales $2,304,756
Tax rate on operating profit 35%
A) 14.83% B) 22.78% C) 4.42% D) 16.63% Answer: D Rationale: $104,940 / $631,051 = 16.63%
Topic: Asset Turnover LO: 4 Level of Difficulty: MEDIUM 14. Use the following selected 2019 balance sheet and income statement information for Homer Glen Supply Co. (in millions) to compute asset turnover (AT) to the nearest hundredth of a percent.
Net income $69,960
Gross profit on sales $700,400
Average total assets $360,600
Sales $1,356,504
Tax rate on operating profit 35%
A) 0.27 B) 3.76 C) 17.30 D) 5.17 Answer: B Rationale: $1,356,504/ $360,600 = 3.76
Topic: Trend Analysis LO: 2 Level of Difficulty: EASY 15. In trend analysis, of what amount is each item expressed as a percentage? A) Net income B) Average total assets C) Sales revenue D) A base year amount Answer: D Rationale: A base year is selected. Each account is converted to a percentage of that base year amount so users can see the change from year to year.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-9
Topic: Trend Analysis LO: 2 Level of Difficulty: MEDIUM 16. Brown Enterprises reported sales revenue totaling $1,008,000, $1,002,000, and $1,239,000 in the years, 2018, 2019, and 2020, respectively. Performing trend analysis, with 2018 serving as the base year, what is the percentage for 2020? A) 123.69% B) 22.27% C) 122.92% D) 32.91% Answer: C Rationale: $1,239,000 / $1,008,000 = 122.92%
Topic: Trend Analysis LO: 2 Level of Difficulty: MEDIUM 17. Ben Enterprises reported sales revenue totaling $1,344,000, $1,340,000, and $3,525,000 in the years, 2018, 2019, and 2020, respectively. Performing trend analysis, with 2018 serving as the base year, what is the percentage for 2020? A) 123.58% B) 262.28% C) 105.36% D) 28.21% Answer: B Rationale: $3,525,000 / $1,344,000 = 262.28%
Topic: Debt-to-Equity Ratio LO: 4 Level of Difficulty: EASY 18. At December 31, 2019, David Bash Company has total assets of $1,000,000, total liabilities of $720,000, and total owner’s equity of $280,000. At December 31, 2019, David Bash Company’s debt-to-equity ratio is: A) 0.28 B) 5.00 C) 0.72 D) 2.57 Answer: D Rationale: $720,000/$280,000 = 2.57
©Cambridge Business Publishers, 2020 13-10
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Debt-to-Equity Ratio LO: 4 Level of Difficulty: EASY 19. At December 31, 2019, Gevas Company has total assets of $3,000,000, total liabilities of $450,000, and total owner’s equity of $2,550,000. At December 31, 2019, Gevas debt-to-equity ratio is: A) 0.18 B) 4.09 C) 0.65 D) 2.10 Answer: A Rationale: $450,000/$2,550,000 = 0.18
Topic: Debt-to-Equity Ratio LO: 4 Level of Difficulty: EASY 20. At December 31, 2019, Jose Company has total assets of $1,800,000, total liabilities of $480,000, and total owner’s equity of $1,320,000. At December 31, 2019, Jose Company’s debt-to-equity ratio is: A) 0.36 B) 1.20 C) 2.75 D) 0.27 Answer: A Rationale: $480,000 / $1,320,000 = 0.36
Topic: Operating-Cash-Flow-to-Current-Liabilities Ratio LO: 4 Level of Difficulty: EASY 21. The operating-cash-flow-to-current-liabilities ratio is computed by dividing a firm’s a net cash flow from operating activities by: A) Current liabilities at the end of the period B) Current liabilities at the beginning of the period C) Total liabilities at the middle of the period D) Average current liabilities for the period Answer: D
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-11
Topic: Trend Percentages LO: 2 Level of Difficulty: EASY 22. Chinchilla Company is preparing trend percentages for its service fees earned for the period 2016 through 2020. The base year is 2016. The 2019 trend percentage is computed as: A) 2019 service fees earned divided by 2018 service fees earned B) 2019 service fees earned divided by 2016 service fees earned C) 2016 service fees earned divided by 2019 service fees earned D) 2018 service fees earned divided by 2019 service fees earned Answer: B
Topic: Trend Percentages LO: 2 Level of Difficulty: EASY 23. Begeman Company’s net income was $225,000 for 2018, $243,750 for 2019, and $293,160 for 2020. Assume trend percentages for net income over the three-year period are computed with 2018 serving as the base year. The trend percentage for 2020’s net income is: A) 117.30% B) 120.92% C) 130.29% D) 86.36% Answer: C Rationale: $293,160 / $225,000 = 130.29%
Topic: EPS LO: 4 Level of Difficulty: MEDIUM 24. Javier Company reported net income of $4,550 million in 2019. The weighted average number of common shares outstanding during 2019 was 1,662 million shares. Javier paid $135 million in dividends on preferred stock. How much is basic earnings per share amount for 2019? A) $2.61 B) $2.55 C) $2.66 D) $2.75 Answer: C Rationale: ($4,550 million – $135 million) / 1,662 million = $2.66
©Cambridge Business Publishers, 2020 13-12
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Discontinued Operations LO: 1 Level of Difficulty: EASY 25. Zebra Company sells a segment of its operations at a loss. Zebra has not previously experienced such an event and does not expect to again. The loss from the disposal of the segment should be reported in the income statement as: A) A separate amount in comprehensive income B) A separate amount in a discontinued operations section C) A separate amount in net income from continuing operations D) As part of cost of goods sold Answer: B
Topic: Discontinued Operations LO: 1 Level of Difficulty: EASY 26. Information about a segment of the business that a company sells, abandons, or otherwise disposes of is reported in the: A) Retained earnings statement B) Comprehensive income of the income statement C) Discontinued operations section of the income statement D) Balance sheet Answer: C
Topic: Single-Step Income Statement LO: 1 Level of Difficulty: EASY 27. A single-step income statement for a merchandising firm: A) Shows a different net income amount than a multiple-step income statement B) May not be used because it is an unacceptable reporting format C) Does not show a gross profit on sales amount D) None of the above Answer: C Rationale: A single step income statement derives the net income of a business in one step by subtracting total expenses from total revenues. Gross profit is not shown.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-13
Topic: EPS LO: 4 Level of Difficulty: MEDIUM 28. World Airlines has no preferred stock outstanding. The company had 50,000 shares of common stock outstanding on January 1, 2019 and issued 20,000 additional shares on April 1. If World’s net income was $1,077,000, the company should report earnings per share of (to the nearest cent): A) $12.81 B) $13.80 C) $16.57 D) $15.39 Answer: C Rationale: $1,077,000 / [(50,000 x 3/12) + (70,000 x 9/12)] = $16.57
Topic: EPS LO: 4 Level of Difficulty: MEDIUM 29. Party, Inc. has no preferred stock outstanding. The company had 40,000 shares of common stock outstanding on January 1, 2019 and issued 12,000 additional shares on May 1. If Party’s net income was $200,000, the company should report earnings per share of (to the nearest cent): A) $3.85 B) $4.44 C) $4.17 D) $5.24 Answer: C Rationale: $200,000 / [(40,000 x 4/12) + (52,000 x 8/12)] = $4.17
Topic: EPS LO: 4 Level of Difficulty: MEDIUM 30. Texas, Inc. has net income for 2019 of $555,000. At January 1, 2019, the company had outstanding 54,000 shares of $75 par value common stock and 10,000 shares of 6%, $150 par value cumulative preferred stock. On September 1, 2019, an additional 18,000 shares of common stock were issued. What is the earnings per share for 2019 (to the nearest cent)? A) $6.66 B) $7.75 C) $6.47 D) $9.26 Answer: B Rationale: $555,000 – (10,000 x $150 x 6%) = $465,000 $465,000 / [(54,000 x 8/12) + (72,000 x 4/12)] = $7.75
©Cambridge Business Publishers, 2020 13-14
th
Financial Accounting for Undergraduates, 4 Edition
Topic: EPS LO: 4 Level of Difficulty: MEDIUM 31. Coconut Inc. has net income for 2019 of $272,000. At January 1, 2019, the company had outstanding 37,000 shares of $20 par value common stock and 5,000 shares of 8%, $100 par value cumulative preferred stock. On October 1, 2019, an additional 12,000 shares of common stock were issued. What is the earnings per share for 2019 (to the nearest cent)? A) $4.74 B) $5.80 C) $6.80 D) $5.40 Answer: B Rationale: $272,000 – (5,000 x $100 x 8%) = $232,000 $232,000 / [(37,000 x 9/12) + (49,000 x 3/12)] = $5.80
Topic: EPS LO: 4 Level of Difficulty: MEDIUM 32. At December 31, 2019, Jamie, Inc. had 500,000 shares of common stock issued and outstanding, 250,000 of which had been issued and outstanding throughout the year and 250,000 of which were issued on July 1, 2019. Net income for the year ended December 31, 2019, was $2,385,000. What is Jamie’s 2019 earnings per common share (to the nearest cent)? A) $3.13 B) $3.81 C) $4.77 D) $6.36 Answer: D Rationale: $2,385,000 / [(250,000 x 6/12) + (500,000 x 6/12)] = $6.36
Topic: Price-Earnings Ratio LO: 4 Level of Difficulty: MEDIUM 33. At December 31, 2019, Van Devender’s price-earnings ratio was 13.4. For 2019, Van Devender’s net income was $660,000, its earnings per share was $7.00, and its annual dividend per share was $4.00. What was the per share market price of Van Devender’s stock at December 31, 2019? A) $93.80 B) $40.20 C) $65.60 D) $53.60 Answer: A Rationale: 13.4 x $7.00 = $93.80
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-15
Topic: Price-Earnings Ratio LO: 4 Level of Difficulty: MEDIUM 34. At December 31, 2019, Van Beek’s price-earnings ratio was 14.6. For 2019, Van Beek’s net income was $1,980,000, its earnings per share was $21.00, and its annual dividend per share was $12.00. What was the per share market price of Van Beek’s stock at December 31, 2019? A) $306.60 B) $199.20 C) $248.40 D) $175.20 Answer: A Rationale: 14.6 x $21.00 = $306.60
Topic: Price-Earnings Ratio LO: 4 Level of Difficulty: EASY 35. In computing the price-earnings ratio, the current per share market price of the firm’s common stock is divided by the: A) Par value per common share B) Dividends per common share C) Earnings per common share D) Net income for the year Answer: C
Topic: Interest Income and Expense LO: 1 Level of Difficulty: MEDIUM 36. On the income statement of a merchandising company, interest income and interest expense are reported: A) By offsetting interest income and interest expense and showing the excess as an operating revenue or expense B) As separate items of other income and expense below the net operating income or loss C) As part of cost of goods sold D) By showing interest income as additional sales revenue and interest expense as an operating expense Answer: B
©Cambridge Business Publishers, 2020 13-16
th
Financial Accounting for Undergraduates, 4 Edition
Exercises Topic: Return on Common Stockholders’ Equity LO: 4 1. Selected balance sheet and income statement information for Forester Company follows in millions: Earnings before taxes Average assets Net income Average common stockholders’ equity
$ 850,179 5,456,781 1,614,471 4,481,322
a. Calculate the company’s return on common stockholders’ equity. b. Explain what information this provides to management. Answer: a. Return on common stockholders’ equity = $1,614,471 / $4,481,322 = 36.03% b. Return on common stockholders’ equity shows the profitability of ownership held by a company’s common stockholders. The ratio shows the percentage of income available to common stockholders.
Topic: Times-Interest-Earned Ratio LO: 4 2. Selected balance sheet and income statement information from the Vegan’s Company for fiscal years 2018 through 2020 follows (Amounts in millions):
Period 2020 2019 2018
Current assets $15,306 18,662 16,130
Current liabilities $9,912 13,146 11,092
Pretax income $4,834 7,182 6,186
Interest expense $732 732 783
Total assets $39,526 42,080 39,360
Equity $17,110 18,226 17,544
a. Compute the times-interest-earned ratio for each year and discuss any trends. b. What concerns about Vegan’s ability to meet its interest obligations might creditors have? Explain. Answer: a. Times-interest-earned ratio = Earnings before taxes and interest / Interest expense (millions) 2020 = ($4,834 + $732) / $732 = 7.60 2019 = ($7,182 + $732) / $732 = 10.81 2018 = ($6,186 + $783) / $783 = 8.90 b. Vegan’s times-interest-earned ratio increased from 8.90 in 2018 to 10.81 times in 2019, then decreased the following year back down to 7.60. The times-interest-earned ratio is an indication of Vegan’s solvency. The ratio evaluates a company’s ability to pay it interest charges from its operating income. With a times interest earned at almost 8 times its interest expense, Vegan’s ability to service its debt is of no concern.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-17
Topic: Liquidity and Solvency Ratios LO: 4 3. Selected recent balance sheet and income statement information for the clothing companies: Coffee Plus and Tea Circle Corporation follows:
Cash Accounts receivable Inventory Total current liabilities Total liabilities Total equity Pre-tax income (loss) Interest expense a. b. c. d.
Coffee Plus (in $000s) $ 9,758 49,290 478,346 737,601 1,340,453 223,209 (177,756) 0
Tea Circle Corporation (in millions) $ 8,250 31,347 32,306 39,645 127,689 46,041 13,552 2,651
Calculate the current ratio and quick ratio for both companies. Which company is more liquid? Calculate the times-interest-earned and debt-to-equity ratios for both companies. Which company is more solvent? Explain.
Answer: a.
Coffee Plus Current Ratio = Current assets / Current liabilities Quick Ratio = [Cash + Short-term investments + AR] Current liabilities
Tea Circle Corporation
($9,758 + $49,290 + $478,346) ($8,250 + $31,347 + $32,306) / $737,601 = 0.73 / $39,645 = 1.81
($9,758 + $49,290) / $737,601 = 0.08
($8,250 + $31,347) / $39,645 = 1.00
b. When looking at either ratio it appears that Coffee Plus is less liquid. Coffee Plus has only 8% coverage of its current obligations with cash, A/R, and short-term investments. The majority of Coffee Plus’ current assets is in inventory, which is a less liquid asset. c.
Coffee Plus
Tea Circle Corporation
Times-interest-earned ratio = (Pre-tax income + Interest expense) Interest expense
($177,756) + $0 / $0 =0
($13,552 + $2,651) / $2,651 = 6.11
Debt-to-equity = Total liabilities / Total equity
$1,340,453 / $223,209 =6.01
$127,689 / $46,041 = 2.77
d. Coffee Plus is questionably insolvent. Although it has no interest expense, it has both a pre-tax loss and a very unhealthy debt-to-equity ratio. Tea Circle is a lot healthier. Its times-interest earned-ratio indicates Tea Circle has about 6.1 times earned income that it needs to pay its annual interest cost. Also, its 2.77 debt-to-equity ratio is substantially lower than that of Coffee Plus’s.
©Cambridge Business Publishers, 2020 13-18
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Liquidity and Solvency Ratios LO: 4 4. Selected balance sheet and income statement information for two manufacturing companies: Stripe, Inc. and Polka-dot Corporation follows:
Cash Marketable securities Accounts receivable All other current assets Total current liabilities Total liabilities Total equity Pre-tax income Interest expense a. b. c. d.
Stripe (in $ millions) $ 1,860 380 3,460 4,306 7,296 9,592 12,060 1,280 105
Polka-dot (in $ millions) $ 26,558 110 38,424 39,986 129,009 148,564 121,551 18,830 1,791
Calculate the current ratio and quick ratio for both companies. Which company is more liquid? Calculate the times-interest-earned ratio and debt-to-equity ratio for both companies. Which company is more solvent?
Answer: a.
Stripe
Polka-dot
Current Ratio = Current assets / Current liabilities
($1,860 + $380 + $3,460 + $4,306) / $7,296 = 1.37
($26,558 + $110 + $38,424 + $39,986) / $129,009 = 0.81
Quick Ratio = [Cash + Marketable securities + AR] Current liabilities
($1,860 + $380 + $3,460) / $7,296 = 0.78
($26,558 + $110 + $38,424) / $129,009 = 0.50
b. Both companies are liquid, but Stripe is considerably more liquid as shown by its higher current and quick ratios. c.
($ millions)
Stripe
Polka-dot
Times-interest-earned ratio = (Pre-tax income + interest expense) Interest expense
($1,280 + $105) / $105 = 13.19
($18,830 + $1,791) / $1,791 = 11.51
Debt-to-equity = Total liabilities / Total equity
$9,592 / $12,060 = 0.80
$148,564 / $121,551 = 1.22
d. Stripe has a higher times-interest-earned ratio and a lower debt-to-equity ratio. Stripe and Polkadot are both solvent, but Stripe has greater protection being provided to creditors with its lower debt-to-equity ratio.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-19
Topic: Turnover Ratios LO: 4 5. Selected recent balance sheet and income statement information for Frischmuth Systems, Inc. follows: (in millions) Average inventory Average accounts receivable Average accounts payable Sales Cost of goods sold
2019
2018
$ 294 3,072 837 17,105 8,729
$ 318 3,894 9,570 20,997 11,445
a. Calculate accounts receivable turnover for both years. improved during the year or worsened?
Has accounts receivable turnover
b. Calculate inventory turnover for 2019 and 2018. Has inventory turnover improved during the year or worsened? Answer: a. 2019 accounts receivable turnover = $17,105 / $3,072 = 5.57 2018 accounts receivable turnover = $20,997 / $3,894 = 5.39 Accounts receivable turnover has improved during the year. The company collects its receivables balance in 2019 almost 5.6 times compared to collection of almost 5.4 times in 2018. b. 2019 inventory turnover = $8,729 / $294 = 29.69 2018 inventory turnover = $11,445 / $318 = 35.99 Inventory turnover has deteriorated during the year. However, it is still at a turnover that denotes little concern with inventory obsolescence. The company sold its entire inventory cost almost 30 times each year in 2019 as compared to about 36 times during 2018.
Topic: Turnover Ratios LO: 4 6. Selected recent balance sheet and income statement information for Shannon & Sisters Corporation follows: (in millions) Average inventory Average accounts receivable Average accounts payable Sales Cost of goods sold
2019
2018
$ 21,012 57,681 29,726 229,104 175,048
$ 23,868 52,755 26,704 236,728 179,398
a. Calculate accounts receivable turnover for 2019 and 2018. Has it improved during the year or worsened? b. Calculate inventory turnover for 2019 and 2018. Has it improved during the year or worsened?
©Cambridge Business Publishers, 2020 13-20
th
Financial Accounting for Undergraduates, 4 Edition
Answer: a. 2019 accounts receivable turnover = $229,104 / $57,681 = 3.97 2018 accounts receivable turnover = $236,728/ $52,755 = 4.49 During the year, Shannon & Sisters’ accounts receivable has deteriorated from collecting its receivables almost 4.5 times in 2018 compared to slightly less than 4 times in 2019. b. 2019 inventory turnover = $175,048 / $21,012 = 8.33 2018 inventory turnover = $179,398 / $23,868 = 7.52 During the year, inventory turnover improved slightly to selling about 8.3 times the average cost of the inventory in 2019, compared to about 7.5 in 2018.
Topic: Turnover Ratios LO: 4 7. Selected recent balance sheet and income statement information for Summersun, Inc. follows: (in millions) Average inventory Average accounts receivable Average accounts payable Sales Cost of goods sold
2019
2018
$ 7,029 7,385 2,949 37,800 30,209
$ 7,821 7,988 3,408 50,197 39,907
a. Calculate accounts receivable turnover for 2019 and 2018. Has it improved during the year or worsened? b. Calculate inventory turnover for 2019 and 2018. Has it improved during the year or worsened? Answer: a. 2019 accounts receivable turnover = $37,800 / $7,385 = 5.12 2018 accounts receivable turnover = $50,197 / $7,988 = 6.28 During the year, Summersun’s accounts receivable turnover deteriorated from collecting its receivables almost 6.3 times per year in 2018 compared to about 5.1 times per year in 2019. b. 2019 inventory turnover = $30,209 / $7,029= 4.30 2018 inventory turnover = $39,907 / $7,821 = 5.10 During the year, Summersun’s inventory turnover declined slightly from selling about 5.1 times the average cost of the inventory in 2018 to about 4.3 times in 2019.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-21
Topic: Accounts Receivable Turnover Ratio LO: 4 8. Selected recent balance sheet and income statement information for the computer software companies, Valley Enterprises and Mountain Industries follow: ( $ millions) Average accounts receivable Average accounts payable Net sales Cost of goods sold Net income Income tax expense
Valley Enterprises $ 36,414 8,194 215,616 88,598 17,302 6,520
Mountain Industries $ 46,539 14,436 246,036 100,810 25,070 10,028
a. Compute accounts receivable turnover for Valley Enterprises and Mountain Industries. b. Interpret and comment on the differences between the receivables turnover rates between each company assuming the industry average is 6.0 times. Answer: a. Valley: $215,616 / $36,414 = 5.92 times Mountain: $246,036 / $46,539 = 5.29 times b. Valley has a slightly higher accounts receivable turnover rate than Mountain. Valley collects its receivables about 5.9 times per year, while Mountain collects its receivables about 5.3 times per year. Turnover rates for both companies are slightly under the 6.0 times industry average.
Topic: Turnover Ratios LO: 4 9. Selected recent balance sheet and income statement information for Book Products, Inc. follows (in $ millions): Average accounts receivable Average inventory Net sales Cost of goods sold Pretax income Net income
$9,846 5,814 56,504 30,632 (933) (1,788)
Compute accounts receivable turnover and inventory turnover. Answer: Accounts receivable turnover = Sales / Average accounts receivable = $56,504 / $9,846 = 5.74 Inventory turnover = Cost of goods sold / Average inventory = $30,632 / $5,814 = 5.27
©Cambridge Business Publishers, 2020 13-22
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Profitability Ratios LO: 4 10. The following is selected balance sheet and income statement information for Mario Company.
2019
Current Assets
Gross Profit on Sales
Net Sales
Net Income
Average Total Assets
Average Common Stockholders’ Equity
$48,062
$200,680
$450,009
$45,216
$273,710
$151,668
Compute the following ratios: a. Gross profit percentage b. Return on sales c. Asset turnover d. Return on assets e. Return on common stockholders’ equity (Mario Company has no preferred stock) Answer: a. $200,680 / $450,009 = 44.59% b. $45,216 / $450,009 = 10.05% c.
$450,009 / $273,710 = 1.64
d. $45,216 / $273,710 = 16.52% e. $45,216 / $ 151,668 = 29.81%
Topic: EPS LO: 4 11. During 2019, Homewood Company had 50,000 shares of $30 par value common stock and 7,000 shares of 8%, $90 par value convertible preferred stock outstanding. Homewood Company’s 2019 net income was $1,350,000. Compute earnings per share for 2019. Answer: EPS: [$1,350,000 – (7,000 × $90 × 8%)] / 50,000 = $25.99 per share
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-23
Topic: Multiple-Step Income Statement LO: 1 12. Listed below are five items or sections that may be found in a multiple-step income statement. Place the numbers 1 through 5 in the blank spaces provided to indicate the sequence of these items or sections in the income statement (with 1 assigned to the first item or section, and so on). a.
Discontinued operations
b.
Net operating income
c.
Net income
d.
Net income from continuing operations
e.
Gross profit
Answer: a. 4
Discontinued operations
b.
2
Net operating income
c.
5
Net income
d.
3
Net income from continuing operations
e.
1
Gross profit
Topic: EPS LO: 4 13. During 2019, Fabulous Shoe Corporation had 75,000 shares of $10 par value common stock and 10,000 shares of 6%, $50 par value preferred stock outstanding. Fabulous Shoe Corporation’s 2019 net income is $798,000. Compute the earnings per share for 2019. Answer: Net Income Less: Preferred stock dividend requirement (10,000 x $50 x 6%) Earnings available to common stockholders
$798,000 30,000 $768,000
Earnings per share = $768,000 / 75,000 shares = $10.24
©Cambridge Business Publishers, 2020 13-24
th
Financial Accounting for Undergraduates, 4 Edition
Topic: EPS LO: 4 14. During 2019, Koala Corporation had 160,000 shares of $15 par value common stock and 30,000 shares of 5%, $60 par value preferred stock outstanding. Koala Corporation’s 2019 net income is $1,440,000. Compute the primary earnings per share for 2019. Answer: Net Income Less: Preferred stock dividend requirement (30,000 x $60 x 5%) Earnings available to common stockholders
$1,440,000 90,000 $1,350,000
Earnings per share = $1,350,000 / 160,000 shares = $8.44
Topic: Price-Earnings Ratio LO: 4 15. The following information relates to Reed, Inc.: Net income for 2019 Weighted average common shares outstanding for 2019 Weighted average preferred shares outstanding for 2019 Cash dividends on preferred stock for 2019 Cash dividends on common stock for 2019 Per share market price of preferred stock at December 31, 2019 Per share market price of common stock at December 31, 2019
$1,704,000 160,000 50,000 $400,000 $283,000 $160.00 $146.70
a. Compute Cordova’s 2019 earnings per share. b. Compute Cordova’s price-earnings ratio at December 31, 2019. Answer: a. ($1,704,000 – $400,000) / 160,000 = $8.15 b. $146.70 / $8.15 = 18.0
Topic: Solvency Ratios LO: 4 16. Twin Lakes Company has the following values taken from its 2019 annual report (in thousands): Interest expense Sales Earnings before interest and taxes Total liabilities Stockholders’ equity
$
37,800 480,000 308,000 787,500 600,000
a. Calculate Twin Lakes Company’s times-interest-earned ratio. b. Calculate Twin Lakes Company’s debt-to-equity ratio. Answer: a. Times-interest-earned ratio = $308,000 / $37,800 = 8.15 b. Debt-to-equity ratio = $787,500 / $600,000 = 1.3125 ©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-25
Problems Topic: Turnover Ratios LO: 4 1. Selected recent balance sheet and income statement information from Hats Co. and Gloves, Inc. follows: ($ millions) Sales Cost of goods sold Average accounts receivable Average inventory Average total assets
Hats Co.
Gloves, Inc.
$7,238 2,919 77 770 4,190
$11,305 3,178 486 1,449 10,827
a. Compute the following turnover rates for each company: 1. Accounts receivable turnover 2. Inventory turnover 3. Asset turnover b. Interpret and comment on any differences you observe between the turnover rates for these two companies. Answer: a. 1. Accounts receivable turnover = Sales / Average accounts receivable Hats Co.= $7,238 / $77 = 94.00 Shorts, Inc. = $11,305 / $486 = 23.26 2. Inventory turnover = Cost of goods sold / Average inventory Hats Co. = $2,919 / $770 = 3.79 Gloves, Inc. = $3,178 / $1,449 = 2.19 3. Asset turnover = Sales / Average assets Hats Co. = $7,238 / $4,190 = 1.73 Gloves, Inc. = $11,305 / $10,827 = 1.04 b. We see from the calculations above that Hats Co. has a considerably higher accounts receivable turnover (94.00) compared to that of Gloves, Inc. (23.26). Consequently, Hats Co. should have a greater profitability and cash flow as well. Hats Co. collects its entire amount of receivables over 90 times a year, while Gloves, Inc. collects only about 23 times per year. Several issues could account for Hats Co.’s higher inventory turnover. For instance, it is possible that Hats Co. may be more efficient at ensuring ‘just-in-time’ deliveries, which means that inventories sit with suppliers, not at Hats Co. Hats Co. also has a higher asset turnover than Gloves, Inc. They have done a more effective job at optimizing investments in total assets required to generate its sales.
©Cambridge Business Publishers, 2020 13-26
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Use Financial Statements to Calculate and Interpret Liquidity and Solvency Ratios LO: 4 2. The balance sheets and income statements for Star Morning Communications follow: STAR MORNING COMMUNICATIONS Consolidated Balance Sheets December 31, 2019 and 2018 (in thousands, except per share amounts) 2019 ASSETS Current Assets: Cash and cash equivalents Receivables, net Inventories, net Prepaid expenses Syndicated programs Deferred income taxes TOTAL CURRENT ASSETS Property and equipment: Land and land improvements Buildings and building improvements Equipment Construction in progress Less accumulated depreciation Net property and equipment Goodwill Broadcast licenses Other intangible assets, net Deferred income taxes Syndicated programs Other assets TOTAL ASSETS
2018
$ 3,369 87,743 3,456 3,673 7,983 4,899 111,123
$
4,040 103,000 5,935 4,472 11,088 4,869 133,404
35,046 135,548 282,143 3,513 456,250 253,797 202,453 9,098 111,762 24,976 63,368 3,285 1,403 $527,468
35,066 133,252 277,653 8,567 454,538 233,380 221,158 4,285 131,120 26,706 64,420 3,091 11,997 $596,181
Table continued next page
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-27
Table continued STAR MORNING COMMUNICATIONS Consolidated Balance Sheets—continued December 31, 2019 and 2018 (in thousands, except per share amounts)
LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Accounts payable Accrued compensation Accrued employee benefits Deferred revenue Accrued income taxes Syndicated programs Other current liabilities Current portion of long-term liabilities TOTAL CURRENT LIABILITIES Accrued employee benefits Syndicated programs Long-term notes payable to banks Other long-term liabilities Shareholders’ Equity: Common stock Additional paid-in capital Accumulated other comprehensive loss Retained earnings Treasury stock, at cost (8,676,705 class B shares) TOTAL SHAREHOLDERS’ EQUITY TOTAL LIABILITIES AND SHAREHOLDERS’EQUITY
2019
2018
$ 48,562 13,963 5,686 15,353 1,884 9,944 6,030 483 101,905 63,268 6,250 151,375 3,595
$ 47,164 15,046 7,214 15,001 43 12,348 6,668 1,609 105,093 64,620 7,871 215,090 5,445
625 258,413 (34,487) 85,239 (108,715) 201,075 $ 527,468
622 256,716 (34,355) 83,794 (108,715) 198,062 $ 596,181
a. Compute the company’s current ratio for 2019 and 2018. Comment on any observed trend. b. Compute the debt-to-equity ratio for 2019 and 2018. Comment on any observed trend. Answer: a. 2019 current ratio = $111,123 / $101,905 = 1.09 2018 current ratio = $133,404 / $105,093 = 1.27 During the year, the company’s current ratio has deteriorated. The decline from 2018 to 2019 warrants attention as liquidity dropped significantly. b. 2019 debt-to-equity ratio = ($527,468 – $201,075) / $201,075 = 1.62 2018 debt-to-equity ratio = ($596,181 – $198,062) / $198,062 = 2.01 Overall levels of debt have decreased during the year and the debt-to-equity ratio has also decreased, which signifies improved solvency.
©Cambridge Business Publishers, 2020 13-28
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Turnover Ratios LO: 4 3. The partial balance sheets and income statements for Weasley’s, Inc., for fiscal years ending June 30, 2019 and 2018 follow: (in millions)
2019
Current Assets Cash and cash equivalents Accounts receivable Inventories Deferred income taxes Prepaid expenses and other current assets Total Current Assets
$
Property, plant and equipment Accumulated depreciation Net property, plant and equipment Goodwill and other intangible assets Other noncurrent assets Total Assets
(in millions) Years ended June 30, Net sales Cost of products sold Selling, general and administrative expense Operating income Interest expense Other non-operating expense, net Earnings from continuing operations before income taxes Income taxes on continuing operations Net earnings from continuing operations Net earnings (loss) from discontinued operations Net earnings
2018
7,172 26,262 30,960 1,814 4,799 71,007
$
4,970 30,425 37,872 3,018 6,020 82,305
54,977 57,129 (25,784) (26,169) 29,193 30,960 133,677 141,000 6,522 7,256 $240,399 $261,521
2019
2018
2017
$276,602 136,143 36,012 104,447
$286,118 138,376 38,363 109,379
$261,912 124,807 36,255 100,850
2,037 840
3,472 693
1,956 848
101,570
105,214
98,046
25,393 76,177 (3,215) $72,962
26,304 78,910 416 $79,326
24,512 73,534 416 $73,950
a. Calculate accounts receivable turnover for 2019 and 2018. Accounts receivable in 2017 totaled $29,831 million. Has accounts receivable turnover improved during the year or worsened? b. Calculate inventory turnover for 2019 and 2018. Inventories in 2017 were $30,686 million. Has inventory turnover improved during the year or worsened? c.
Calculate asset turnover for 2019 and 2085 considering that 2017 total assets are $434,214 million.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-29
Answer: a. 2019 accounts receivable turnover = Sales / Average accounts receivable = $276,602 / [($26,262 + $30,425) / 2] = 9.76 2018 accounts receivable turnover = $286,118 / [(30,425 + $29,831) / 2] = 9.50 Accounts receivable turnover has improved during the year, but not significantly. The company collected its receivables almost 9.50 times during 2019. b. 2019 inventory turnover = Cost of goods sold / Average inventory = $136,143 / [($30,960 + $37,872) / 2] = 3.96 2018 inventory turnover = $138,376 / [($37,872 + $30,686) / 2] = 4.04 Inventory turnover has deteriorated slightly during the year. c.
2019 asset turnover = Sales / Average assets = $276,602 / [($240,399 + $261,521) / 2] = 1.102 2018 asset turnover = $286,118 / [($261,151 + $434,214) / 2] = 0.823
Topic: Common-Size Income Statements LO: 3 4. The income statements for Springdale Corporation for fiscal year 2019 (year ended January 30, 2019) follow: (millions, except per share data)
2019
2018
2017
$126,870
$125,768
$122,942
5,766
6,192
5,688
Total revenues
132,636
131,960
128,630
Cost of sales Selling, general and administrative expenses
88,124
88,314
85,858
19,617
19,431
19,005
Credit card expenses
1,521
1,609
837
Depreciation and amortization Earnings before interest expense and income taxes
2,023
1,826
1,659
21,351
20,780
21,271
970
1,670
1,330
1,414
1,454
1,070
Interest income
(3)
(28)
(21)
Net interest expense
2,381
3,096
2,379
Earnings before income taxes
18,970
17,684
18,892
Provision for income taxes Net earnings
6,839
6,366
6,801
$ 12,131
$ 11,318
$ 12,091
Sales Credit card revenues
Net interest expense Debt collateralized by credit card receivables Other interest expense
a. Prepare a common-size income statement for 2019 and 2018. Round to one decimal place. b. Comment on the most significant changes.
©Cambridge Business Publishers, 2020 13-30
th
Financial Accounting for Undergraduates, 4 Edition
Answer: a. (millions, except per share data)
2019
2018
$125,768
95.7%
95.3%
5,766
6,192
4.3%
4.7%
Total revenues
132,636
131,960
100.0%
100.00%
Cost of sales
88,124
88,314
66.4%
66.9%
Selling, general and administrative expenses
19,617
19,431
14.8%
14.7%
Credit card expenses
1,521
1,609
1.1%
1.2%
Depreciation and amortization Earnings before interest expense and income taxes
2,023
1,826
1.5%
1.4%
21,351
20,780
16.1%
15.7%
970
1,670
0.7%
1.3%
1,414
1,454
1.1%
1.1%
Interest income
(3)
(28)
0.0%
0.0%
Net interest expense
2,381
3,096
1.8%
2.3%
Earnings before income taxes
18,970
17,684
14.3%
13.4%
6,839 $ 12,131
6,366 $ 11,318
5.2% 9.1%
4.8% 8.6%
Sales Credit card revenues
Net interest expense Debt collateralized by credit card receivables Other interest expense
Provision for income taxes Net earnings
2019
2018
$126,870
NOTE: Some percentage totals may not sum correctly due to rounding.
b. As is reflected in the above analysis, Springdale is very consistent between years in terms of its statement of operations performance. However, slight changes for the better include both pretax and after tax earnings, which are improving.
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-31
Topic: Common Size Balance Sheets LO: 3 5. The asset section of Fullerton Corporation’s 2019 balance sheet follows: January 30, 2019
January 31, 2018
Cash and cash equivalents Credit card receivables, net of allowance Inventory Other current assets
$ 6,600
$ 2,592
24,497 25,127 9,356
28,294 23,468 8,258
Total current assets Property and equipment Other noncurrent assets Total assets
65,580 66,360 3,731 $135,671
62,612 67,610 3,879 $134,101
(millions, except footnotes)
a. Prepare a common-size statements for the asset section of Belmont’s balance sheet for 2019 and 2018. Round to one decimal place. b. Comment on the most significant changes. Answer: a: January 30, 2019
January 31, 2018
Cash and cash equivalents Credit card receivables, net of allowance
$ 6,600
$ 2,592
4.9%
1.9%
24,497
28,294
18.1%
21.1%
Inventory
25,127
23,468
18.5%
17.5%
Other current assets
9,356
8,258
6.9%
6.2%
Total current assets
65,580
62,612
48.3%*
46.7%
Property and equipment
66,360
67,610
48.9%
50.4%
Other noncurrent assets Total assets
3,731 $135,671
3,879 $134,101
2.8% 100.00%
2.9% 100.00%
(millions, except footnotes)
2019
2018
*Does not foot due to rounding.
b. For the most part, Fullerton’s current assets are strengthening and there are not any significant swings between years. For example, current assets have improved in a way that the most liquid assets have a higher percentage of the total. While inventory is up, receivables are down which indicates the company is efficiently collecting amounts due from customers.
©Cambridge Business Publishers, 2020 13-32
th
Financial Accounting for Undergraduates, 4 Edition
Topic: Discontinued Operations LO: 1 6. Consider the following results for Camire Brothers:
Revenues Expenses Pretax income
Continuing Operations
Discontinued Operations
Total
$290,000 196,000 $ 94,000
$62,400 29,000 $ 33,400
$352,400 225,000 $ 127,400
Prepare the income statement for this company assuming a 35% income tax rate. statement heading. Answer: Sales revenue Expenses Pretax income Income tax expense Income from continuing operations Income from discontinued operations, net of taxes Net income
Omit the
$290,000 196,000 94,000 32,900 61,100 21,710 $ 82,810
Results from discontinued operations are collapsed into one line item and reported net of income taxes. $33,400 – ($33,400 × 35%) = 21,710
©Cambridge Business Publishers, 2020 Test Bank, Chapter 13
13-33
Appendix E Accounting and the Time Value of Money Learning Objectives – Coverage by question True / False
Multiple Choice
LO1—Describe the nature of interest and distinguish between simple and compound interest.
1, 2
1
LO2—Calculate future values.
3
2, 4
3, 4, 6
2
LO3—Calculate present values.
3
3
1, 2, 5
1
Exercises
Essay / Short Answer
Problems
1
©Cambridge Business Publishers, 2020 Test Bank, Appendix E
E-1
Appendix E: Accounting and the Time Value of Money
True/False Topic: Compound Interest LO: 1 1. When interest is earned on interest in a savings account in a bank, this is called compound interest. Answer: True Topic: Time Value of Money LO: 1 2. A dollar received today is worth more than a dollar received two years ago. Answer: False Rationale: A dollar received two years ago is worth more than a dollar received today as it can be invested and will earn additional interest. Topic: Compounding LO: 2, 3 3. If an investment is made that pays 8% annual interest for a 5-year period with quarterly compounding, the number of periods is 60. Answer: False Rationale: There are 20 quarterly periods in five years: 5 years × 4 times per year = 20 periods of compounding.
©Cambridge Business Publishers, 2020 E-2
Financial Accounting for Undergraduates, 4th Edition
Multiple Choice Topic: Time Value of Money LO: 1 Level of Difficulty: EASY 1. Why is one dollar now worth more than one dollar in the future? A) The amount to be received in the future is smaller than the amount to be paid off today B) The value of interest declines over time C) Funds can be invested in earning assets to yield a positive return D) The time value of money depreciates over long periods of time Answer: C Rationale: Investing money received today generates interest so that the investor will have more accumulated funds compared to waiting to receive funds in the future. Topic: Future Value LO: 2 Level of Difficulty: MEDIUM 2. If Mr. Chips, Inc. invests $2,400,000 today at 6% annual interest and the money is compounded semiannually, how much will be in the bank account one year from the date invested? A) $2,472,000 B) $2,544,000 C) $2,546,160 D) $2,547,273 Answer: C Rationale: Amount at end of 6 months: $2,400,000 + ($2,400,000 × 6% × 6/12) = $2,472,000 Amount at end of 12 months: $2,472,000 + ($2,472,000 × 6% × 6/12) = $2,546,160 Topic: Present Value of an Investment LO: 3 Level of Difficulty: MEDIUM 3. Mr. Chips, Inc. wishes to accumulate $1,200,000 to be used to pay off a balloon note at the end of 5 years. How much will Mr. Chips need to invest today to accumulate the desired amount if the investment earns an annual rate of 8% compounded quarterly? (Select the closest amount.) A) $257,458 B) $1,783,167 C) $807,564 D) $1,086,877 Answer: C Rationale: Present value of $1,200,000 at n = 5 × 4 = 20, I = 8%/4 = 2% PV = $1,200,000 × 0.67297 = $807,564 Financial calculator: N = (5 x 4) = 20 I/Y = (8 / 4) = 2 PV = $807,565.60 (rounded)
PV = ?
PMT = 0
FV = 1,200,000
©Cambridge Business Publishers, 2020 Test Bank, Appendix E
E-3
Topic: Future Value of an Annuity LO: 2 Level of Difficulty: MEDIUM 4. Mr. Chips, Inc. wishes to accumulate $2,000,000 to be used to pay off a loan at the end of 10 years. How much will Mr. Chips deposit each year for 10 years (rounded to the nearest dollar), beginning at the end of the first year, to accumulate the desired amount if the investment earns an annual rate of 6%? A) $151,736 B) $143,147 C) $259,215 D) $200,000 Answer: A Rationale: Future value of an annuity factor at n = 10, I = 6% PMT = $2,000,000 / 13.18079 = $151,736 (rounded) Financial calculator: N = 10 I/Y = 6 PMT = 151,736
PMT = ?
PV = 0
FV = 2,000,000
©Cambridge Business Publishers, 2020 E-4
Financial Accounting for Undergraduates, 4th Edition
Exercises Topic: Present Value of a Sum LO: 3 1. Electric Motor Company wants to accumulate $20,000,000 to pay off an equipment loan due in 5 years. How much should Electric Motor Company deposit today if the bank pays 6% interest compounded annually? Answer: Present value of a single amount of $20,000,000 at n = 5; I = 6% $20,000,000 × 0.74726 = $14,945,200 Financial calculator: N=5 I/Y = 6 PV = ? PV = $14,945,163 (rounded)
PMT = 0
FV = 20,000,000
Topic: Present Value of a Sum LO: 3 2. Electric Motor Company wants to accumulate $20,000,000 to pay off an equipment loan due in 5 years. How much should Electric Motor Company deposit today if the bank pays 6% interest compounded semi-annually? Answer: Present value of a single amount of $20,000,000 at n = 5 × 2 = 10; I = 6%/2 = 3% $20,000,000 × 0.74409 = $14,881,800 Financial calculator: N = (5 x 2) = 10 I/Y = (6 / 2) =3 PV = $14,881,878 (rounded)
PV = ?
PMT = 0
FV = 20,000,000
Topic: Future Value of an Annuity LO: 2 3. Electric Motor Company wants to accumulate $16,000,000 to pay off an equipment balloon note due in 3 years. How much should Electric Motor Company deposit each quarter beginning one quarter from today to accumulate the amount required if the bank pays 4% annual interest compounded quarterly? Answer: Future value of an annuity of ? at n = 3 × 4 = 12; I = 4%/4 = 1% = $16,000,000 $16,000,000 / 12.68250 = $1,261,581 (rounded) Financial calculator: N = 12 I/Y = 1 PV = 0 PMT = $1,261,581 (rounded)
PMT = ?
FV = 16,000,000
©Cambridge Business Publishers, 2020 Test Bank, Appendix E
E-5
Topic: Future Value of a Sum LO: 2 4. Solar Co. needs to have $200 million accumulated to fund health insurance payments for its retirees. Will Solar Co. have enough accumulated at the end of 3 years if it deposits $165 million today if compounding occurs semi-annually with an annual rate of 6%? Answer: Future value of a sum of $165,000,000 at n = 3 × 2 = 6; I = 6%/2 = 3% $165,000,000 x 1.19405 = $197,018,250 Financial calculator: N = (3 x 2) = 6 I/Y = (6/2) =3 FV = $197,018,629 (rounded)
PV = 165,000,000
PMT = 0
FV = ?
No. It will have $197.019 million accumulated, which is not enough to fund the health insurance. Topic: Installment Note LO: 3 5. Solar Co. borrowed $5,000,000 to buy equipment to be repaid as an installment note monthly over 2.5 years. How much will Solar Co. pay each month if payments begin one month from now and the loan rate is 12% compounded monthly? Answer: Present value of an annuity of ? at n = 2.5 × 12 = 30; I = 12%/12 = 1% $5,000,000 / 25.80771 = $193,741 (rounded) Financial calculator: N = (2.5 x 12) = 30 I/Y = (12 / 12) = 1 PMT = $193,741 (rounded)
PV = 5,000,000
FV = 0
PMT = ?
Topic: Future Value of a Sum LO: 2 6. Solar Co. borrowed $300,000,000 to buy equipment with the principal and interest to be repaid as a balloon note at the end of 5 years. How much will Solar Co. pay to liquidate the principal of the note at the maturity date if interest is 8% compounded quarterly? Answer: Future value of a sum of $300,000,000 at n = 5 × 4 = 20; I = 8%/4 = 2% $300,000,000 x 1.48595 = $445,785,000 Financial calculator: N = 20 I/Y = 2 PV = 300,000,000 FV = $445,784,219 (rounded)
FV = ?
PMT = 0
©Cambridge Business Publishers, 2020 E-6
Financial Accounting for Undergraduates, 4th Edition
Essay and Short Answer Topic: Time Value of Money LO: 1 1. Why is one dollar now worth more than one dollar in the future? Answer: One reason that a dollar now is worth more than a dollar in the future is risk. Because the future is always uncertain, some event may prevent you from receiving the dollar at a later date. To avoid this risk, we choose the earlier date. A second reason a dollar is worth more now than one dollar in the future is that the dollar has a time value—that is, the dollar received now could be invested such that one year from now, you could have not only the original dollar but also the interest income on the dollar for the past year.
©Cambridge Business Publishers, 2020 Test Bank, Appendix E
E-7
Problems Topic: Present Value Calculations LO: 3 1. An investment of $1,600,000 will return $320,000 per year for 6 years. Should the investment be undertaken if the discount rate is 5% and interest is compounded once per year? Answer: Present value of an annuity: $320,000 at n = 6; I = 5% $320,000 × 5.07569 = $1,624,221 (rounded) Financial calculator: N=6 I/Y = 5 PV =? PV = $1,624,221 (rounded)
PMT = 320,000
Yes. Based on the financial aspects of the investment, it should be undertaken as the present value of $1,624,221 is greater than the initial investment. Topic: Future Value Calculations LO: 2 2. Compute the future value for each of the following amounts. a. $200,000 invested today for 8 years if annual interest rate is: (1) 10% compounded annually or (2) 10% compounded semiannually b. $20,000 received at the end of each year for the next 4 years if the money is worth 8% per year compounded annually Answer: a. Future value of a sum of $200,000 at n = 8; I = 10% (1) $200,000 × 2.14359 = $428,718 Financial calculator: N=8 I/Y = 10 FV = $428,718 (rounded)
PV = 200,000 PMT = 0
FV = ?
Future value of a sum of $200,000 at n = 8 × 2 = 16; I = 10%/2 = 5% (2) $200,000 × 2.18287 = $436,574 Financial calculator: N = 16 I/Y = 5 FV = $436,575 (rounded)
PV = 200,000 PMT = 0
FV = ?
b. Future value of an annuity of $20,000 at n = 4; I = 8% $20,000 × 4.50611 = $90,122 (rounded) Financial calculator: N=4 I/Y = 8 FV = $90,122 (rounded)
PV = 0
PMT = 20,000
FV = ?
©Cambridge Business Publishers, 2020 E-8
Financial Accounting for Undergraduates, 4th Edition
Appendix E Accounting and the Time Value of Money Learning Objectives – Coverage by question True / False
Multiple Choice
LO1—Describe the nature of interest and distinguish between simple and compound interest.
1, 2
1
LO2—Calculate future values.
3
2, 4
3, 4, 6
2
LO3—Calculate present values.
3
3
1, 2, 5
1
Exercises
Essay / Short Answer
Problems
1
©Cambridge Business Publishers, 2020 Test Bank, Appendix E
E-1
Appendix E: Accounting and the Time Value of Money
True/False Topic: Compound Interest LO: 1 1. When interest is earned on interest in a savings account in a bank, this is called compound interest. Answer: True
Topic: Time Value of Money LO: 1 2. A dollar received today is worth more than a dollar received two years ago. Answer: False Rationale: A dollar received two years ago is worth more than a dollar received today as it can be invested and will earn additional interest.
Topic: Compounding LO: 2, 3 3. If an investment is made that pays 8% annual interest for a 5-year period with quarterly compounding, the number of periods is 60. Answer: False Rationale: There are 20 quarterly periods in five years: 5 years × 4 times per year = 20 periods of compounding.
©Cambridge Business Publishers, 2020 E-2
th
Financial Accounting for Undergraduates, 4 Edition
Multiple Choice Topic: Time Value of Money LO: 1 Level of Difficulty: EASY 1. Why is one dollar now worth more than one dollar in the future? A) The amount to be received in the future is smaller than the amount to be paid off today B) The value of interest declines over time C) Funds can be invested in earning assets to yield a positive return D) The time value of money depreciates over long periods of time Answer: C Rationale: Investing money received today generates interest so that the investor will have more accumulated funds compared to waiting to receive funds in the future.
Topic: Future Value LO: 2 Level of Difficulty: MEDIUM 2. If Mr. Chips, Inc. invests $2,400,000 today at 6% annual interest and the money is compounded semiannually, how much will be in the bank account one year from the date invested? A) $2,472,000 B) $2,544,000 C) $2,546,160 D) $2,547,273 Answer: C Rationale: Amount at end of 6 months: $2,400,000 + ($2,400,000 × 6% × 6/12) = $2,472,000 Amount at end of 12 months: $2,472,000 + ($2,472,000 × 6% × 6/12) = $2,546,160
Topic: Present Value of an Investment LO: 3 Level of Difficulty: MEDIUM 3. Mr. Chips, Inc. wishes to accumulate $1,200,000 to be used to pay off a balloon note at the end of 5 years. How much will Mr. Chips need to invest today to accumulate the desired amount if the investment earns an annual rate of 8% compounded quarterly? (Select the closest amount.) A) $257,458 B) $1,783,167 C) $807,564 D) $1,086,877 Answer: C Rationale: Present value of $1,200,000 at n = 5 × 4 = 20, I = 8%/4 = 2% PV = $1,200,000 × 0.67297 = $807,564 Financial calculator: N = (5 x 4) = 20 I/Y = (8 / 4) = 2 PV = $807,565.60 (rounded)
PV = ?
PMT = 0
FV = 1,200,000
©Cambridge Business Publishers, 2020 Test Bank, Appendix E
E-3
Topic: Future Value of an Annuity LO: 2 Level of Difficulty: MEDIUM 4. Mr. Chips, Inc. wishes to accumulate $2,000,000 to be used to pay off a loan at the end of 10 years. How much will Mr. Chips deposit each year for 10 years (rounded to the nearest dollar), beginning at the end of the first year, to accumulate the desired amount if the investment earns an annual rate of 6%? A) $151,736 B) $143,147 C) $259,215 D) $200,000 Answer: A Rationale: Future value of an annuity factor at n = 10, I = 6% PMT = $2,000,000 / 13.18079 = $151,736 (rounded) Financial calculator: N = 10 I/Y = 6 PMT = 151,736
PMT = ?
PV = 0
FV = 2,000,000
©Cambridge Business Publishers, 2020 E-4
th
Financial Accounting for Undergraduates, 4 Edition
Exercises Topic: Present Value of a Sum LO: 3 1. Electric Motor Company wants to accumulate $20,000,000 to pay off an equipment loan due in 5 years. How much should Electric Motor Company deposit today if the bank pays 6% interest compounded annually? Answer: Present value of a single amount of $20,000,000 at n = 5; I = 6% $20,000,000 × 0.74726 = $14,945,200 Financial calculator: N=5 I/Y = 6 PV = ? PV = $14,945,163 (rounded)
PMT = 0
FV = 20,000,000
Topic: Present Value of a Sum LO: 3 2. Electric Motor Company wants to accumulate $20,000,000 to pay off an equipment loan due in 5 years. How much should Electric Motor Company deposit today if the bank pays 6% interest compounded semi-annually? Answer: Present value of a single amount of $20,000,000 at n = 5 × 2 = 10; I = 6%/2 = 3% $20,000,000 × 0.74409 = $14,881,800 Financial calculator: N = (5 x 2) = 10 I/Y = (6 / 2) =3 PV = $14,881,878 (rounded)
PV = ?
PMT = 0
FV = 20,000,000
Topic: Future Value of an Annuity LO: 2 3. Electric Motor Company wants to accumulate $16,000,000 to pay off an equipment balloon note due in 3 years. How much should Electric Motor Company deposit each quarter beginning one quarter from today to accumulate the amount required if the bank pays 4% annual interest compounded quarterly? Answer: Future value of an annuity of ? at n = 3 × 4 = 12; I = 4%/4 = 1% = $16,000,000 $16,000,000 / 12.68250 = $1,261,581 (rounded) Financial calculator: N = 12 I/Y = 1 PV = 0 PMT = $1,261,581 (rounded)
PMT = ?
FV = 16,000,000
©Cambridge Business Publishers, 2020 Test Bank, Appendix E
E-5
Topic: Future Value of a Sum LO: 2 4. Solar Co. needs to have $200 million accumulated to fund health insurance payments for its retirees. Will Solar Co. have enough accumulated at the end of 3 years if it deposits $165 million today if compounding occurs semi-annually with an annual rate of 6%? Answer: Future value of a sum of $165,000,000 at n = 3 × 2 = 6; I = 6%/2 = 3% $165,000,000 x 1.19405 = $197,018,250 Financial calculator: N = (3 x 2) = 6 I/Y = (6/2) =3 FV = $197,018,629 (rounded)
PV = 165,000,000
PMT = 0
FV = ?
No. It will have $197.019 million accumulated, which is not enough to fund the health insurance.
Topic: Installment Note LO: 3 5. Solar Co. borrowed $5,000,000 to buy equipment to be repaid as an installment note monthly over 2.5 years. How much will Solar Co. pay each month if payments begin one month from now and the loan rate is 12% compounded monthly? Answer: Present value of an annuity of ? at n = 2.5 × 12 = 30; I = 12%/12 = 1% $5,000,000 / 25.80771 = $193,741 (rounded) Financial calculator: N = (2.5 x 12) = 30 I/Y = (12 / 12) = 1 PMT = $193,741 (rounded)
PV = 5,000,000
FV = 0
PMT = ?
Topic: Future Value of a Sum LO: 2 6. Solar Co. borrowed $300,000,000 to buy equipment with the principal and interest to be repaid as a balloon note at the end of 5 years. How much will Solar Co. pay to liquidate the principal of the note at the maturity date if interest is 8% compounded quarterly? Answer: Future value of a sum of $300,000,000 at n = 5 × 4 = 20; I = 8%/4 = 2% $300,000,000 x 1.48595 = $445,785,000 Financial calculator: N = 20 I/Y = 2 PV = 300,000,000 FV = $445,784,219 (rounded)
FV = ?
PMT = 0
©Cambridge Business Publishers, 2020 E-6
th
Financial Accounting for Undergraduates, 4 Edition
Essay and Short Answer Topic: Time Value of Money LO: 1 1. Why is one dollar now worth more than one dollar in the future? Answer: One reason that a dollar now is worth more than a dollar in the future is risk. Because the future is always uncertain, some event may prevent you from receiving the dollar at a later date. To avoid this risk, we choose the earlier date. A second reason a dollar is worth more now than one dollar in the future is that the dollar has a time value—that is, the dollar received now could be invested such that one year from now, you could have not only the original dollar but also the interest income on the dollar for the past year.
©Cambridge Business Publishers, 2020 Test Bank, Appendix E
E-7
Problems Topic: Present Value Calculations LO: 3 1. An investment of $1,600,000 will return $320,000 per year for 6 years. Should the investment be undertaken if the discount rate is 5% and interest is compounded once per year? Answer: Present value of an annuity: $320,000 at n = 6; I = 5% $320,000 × 5.07569 = $1,624,221 (rounded) Financial calculator: N=6 I/Y = 5 PV =? PV = $1,624,221 (rounded)
PMT = 320,000
Yes. Based on the financial aspects of the investment, it should be undertaken as the present value of $1,624,221 is greater than the initial investment.
Topic: Future Value Calculations LO: 2 2. Compute the future value for each of the following amounts. a. $200,000 invested today for 8 years if annual interest rate is: (1) 10% compounded annually or (2) 10% compounded semiannually b. $20,000 received at the end of each year for the next 4 years if the money is worth 8% per year compounded annually Answer: a. Future value of a sum of $200,000 at n = 8; I = 10% (1) $200,000 × 2.14359 = $428,718 Financial calculator: N=8 I/Y = 10 FV = $428,718 (rounded)
PV = 200,000 PMT = 0
FV = ?
Future value of a sum of $200,000 at n = 8 × 2 = 16; I = 10%/2 = 5% (2) $200,000 × 2.18287 = $436,574 Financial calculator: N = 16 I/Y = 5 FV = $436,575 (rounded)
PV = 200,000 PMT = 0
FV = ?
b. Future value of an annuity of $20,000 at n = 4; I = 8% $20,000 × 4.50611 = $90,122 (rounded) Financial calculator: N=4 I/Y = 8 FV = $90,122 (rounded)
PV = 0
PMT = 20,000
FV = ?
©Cambridge Business Publishers, 2020 E-8
th
Financial Accounting for Undergraduates, 4 Edition