Chapter 01 - Introduction to Accounting and Business True / False 1. A merchandising business buys products from other businesses to sell to customers. a. True b. False 2. The role of accounting is to provide many different users with financial information to make economic decisions. a. True b. False 3. Accounting information users need reports about the economic activities and condition of businesses. a. True b. False 4. Managerial accounting information is used by external and internal users equally. a. True b. False 5. Senior executives cannot be criminally prosecuted for the wrongdoings they commit on behalf of the companies where they work. a. True b. False 6. Financial accounting provides information to all users, while the main focus for managerial accounting is to provide information to the management. a. True b. False 7. Proper ethical conduct implies that you only consider what's in your best interest. a. True b. False 8. Some of the major fraudulent acts committed by senior executives started as what they considered to be small ethical lapses that grew out of control. a. True b. False 9. A business is an organization in which basic resources or inputs, such as materials and labor, are assembled and processed to provide outputs in the form of goods or services to customers. a. True b. False 10. Two factors that typically lead to ethical violations are relevance and timeliness of accounting information. a. True b. False
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Chapter 01 - Introduction to Accounting and Business 11. Financial accounting reports are relevant only to users within the business. a. True b. False 12. The Sarbanes-Oxley Act established standards for corporate responsibility and disclosure. a. True b. False 13. The main objective for all business is to maximize unrealized profits. a. True b. False 14. The primary role of accounting is to determine the amount of taxes a business will be required to pay to taxing entities. a. True b. False 15. The basic difference between manufacturing and merchandising companies is the completion level of the products they purchase for resale to customers. a. True b. False 16. An example of an external user of accounting information is the federal government. a. True b. False 17. Proprietorships are owned by one owner and provide only services to their customers. a. True b. False 18. About 90% of the businesses in the United States are organized as corporations. a. True b. False 19. The Financial Accounting Standards Board (FASB) is the authoritative body that has primary responsibility for developing accounting principles. a. True b. False 20. The cost concept is the basis for entering the purchase price into the accounting records. a. True b. False 21. The unit of measurement concept requires that economic data be recorded in dollars. a. True b. False Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business 22. If a building is appraised for $85,000, it is offered for sale at $90,000, and the buyer pays $80,000 cash for it, the buyer would record the building at $85,000. a. True b. False 23. The financial statements of a proprietorship should include the owner's personal assets and liabilities. a. True b. False 24. No significant differences exist between the accounting standards issued by the FASB and the IASB. a. True b. False 25. Generally accepted accounting principles regulate how and what financial information is reported by businesses. a. True b. False 26. The IASB maintains an electronic database, called the Accounting Standards Codification, which contains all of the accounting standards that make up GAAP. a. True b. False 27. The accounting equation can be expressed as Assets – Liabilities = Owner's Equity. a. True b. False 28. The rights or claims to the assets of a business may be subdivided into rights of creditors and rights of owners. a. True b. False 29. The owner’s rights to the assets rank ahead of the creditors' rights to the assets. a. True b. False 30. If the liabilities owed by a business total $300,000 and owner's equity is equal to $300,000, then the assets also total $300,000. a. True b. False 31. If total assets decreased by $30,000 during a specific period and owner's equity decreased by $35,000 during the same period, the period's change in total liabilities was a $65,000 increase. a. True b. False 32. If total assets increased by $190,000 during a specific period and liabilities decreased by $10,000 during the same Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business period, the period's change in total owner's equity was a $200,000 increase. a. True b. False 33. If net income for a proprietorship was $50,000, the owner withdrew $20,000 in cash, and the owner invested $10,000 in cash, the capital of the owner increased by $40,000. a. True b. False 34. An account receivable is typically classified as a revenue. a. True b. False 35. An account receivable is a claim against a customer resulting from a sale on account. a. True b. False 36. Paying an account payable increases liabilities and decreases assets. a. True b. False 37. Receiving payments on an account receivable increases both equity and assets. a. True b. False 38. Cash withdrawals by owners decrease assets and increase equity. a. True b. False 39. Purchasing supplies on account increases liabilities and decreases equity. a. True b. False 40. Receiving a bill or otherwise being notified that an amount is owed is not recorded until the amount is paid. a. True b. False 41. Revenue is earned only when money is received. a. True b. False 42. Assets that are used up during the process of earning revenue are called expenses. a. True b. False 43. The excess of revenue over the expenses incurred in earning the revenue is called capital. Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business a. True b. False 44. There are four primary financial statements of a proprietorship: the income statement, the statement of owner's equity, the balance sheet, and the statement of cash flows. a. True b. False 45. An income statement is a summary of the revenues and expenses of a business as of a specific date. a. True b. False 46. A statement of owner's equity reports the changes in the owner's equity for a period of time. a. True b. False 47. The statement of cash flows consists of three sections: Cash Flows from (Used for) Operating Activities, Cash Flows from (Used for) Income Activities, and Cash Flows from (Used for) Equity Activities. a. True b. False 48. The balance sheet represents the accounting equation. a. True b. False 49. Net income and net profit do not mean the same thing. a. True b. False 50. The higher the ratio of liabilities to owner’s equity, the better able a company is to withstand poor business conditions and to pay its obligations to creditors. a. True b. False Multiple Choice 51. Profit is the difference between a. assets and liabilities b. the incoming cash and outgoing cash c. the assets purchased with cash contributed by the owner and the cash spent to operate the business d. the amounts received from customers for goods or services and the amounts paid for the inputs used to provide the goods or services 52. Two common areas of accounting that respectively provide information to internal and external users are a. forensic accounting and financial accounting b. managerial accounting and financial accounting Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business c. managerial accounting and environmental accounting d. financial accounting and tax accounting systems 53. Which of the following best describes accounting? a. records economic data but does not communicate the data to users according to any specific rules b. is an information system that provides reports to users regarding economic activities and condition of a business c. is of no use by individuals outside of the business d. is used only for filling out tax returns and for financial statements for various type of governmental reporting requirements 54. Which type of accountant typically practices as an individual or as a member of a public accounting firm? a. Certified Public Accountant b. Certified Payroll Professional c. Certified Internal Auditor d. Certified Management Accountant 55. Financial reports are used by a. management b. creditors c. investors d. All of these choices 56. Which of the following is a manufacturing business? a. General Motors b. Facebook c. American Airlines d. Target 57. Which of the following is a service business? a. Dell Inc. b. Wal-Mart Stores, Inc. c. Microsoft Corporation d. Facebook, Inc. 58. Which of the following groups of companies includes examples of merchandising businesses? a. Delta Air Lines, Marriott, Gap Inc. b. Gap Inc., Amazon, Nike Inc. c. GameStop, Sony, Dell d. GameStop, Best Buy, Gap Inc. 59. Which of the following groups is considered to be internal users of accounting information? a. employees and customers b. customers and vendors Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business c. employees and managers d. government entities and banks 60. The following are examples of external users of accounting information except a. government entities b. customers c. creditors d. managers 61. Which of the following is the best description of accounting’s role in business? a. Accounting provides stockholders with information regarding the market value of the company’s stocks. b. Accounting provides information to managers to operate the business and to other users to make decisions regarding the economic condition of the company. c. Accounting helps in decreasing the credit risk of the company. d. Accounting is not responsible for providing any form of information to users. That is the role of the Information Systems Department. 62. Managerial accountants would be responsible for providing information regarding a. tax reports to government agencies b. profit reports to owners and management c. expansion of a product line report to management d. consumer reports to customers 63. Which of the following is not a certification for accountants? a. CIA b. CMA c. CISA d. IRS 64. Which of the following is not a role of accounting in business? a. to provide reports to users about the economic activities and conditions of a business b. to personally guarantee loans of the business c. to provide information to external users to determine the economic performance and condition of the business d. to assess the various informational needs of users and design an accounting system to meet those needs 65. Which of the following is a guideline for behaving ethically? I. Identify the consequences of a decision and its effect on others. II. Consider your obligations and responsibilities to those affected by the decision. III. Identify your decision based on personal standards of honesty and fairness. a. I and II b. II and III c. I and III d. I, II, and III 66. Which of the following would not normally operate as a service business? Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business a. pet groomer b. grocer c. lawn care company d. styling salon 67. Most businesses in the United States are a. proprietorships b. partnerships c. corporations d. cooperatives 68. Which of the following is not a business entity? a. entrepreneurship b. proprietorship c. partnership d. corporation 69. An entity that is organized according to state or federal statutes and in which ownership is divided into shares of stock is a a. proprietorship b. corporation c. partnership d. governmental unit 70. Which of the following is true regarding a limited liability company? a. makes up 10% of business organizations in the United States b. combines the attributes of a partnership and a corporation c. provides tax and liability advantages to the owners d. All of these choices 71. On May 20, White Repair Service extended an offer of $108,000 for land that had been priced for sale at $140,000. On May 30, White Repair Service accepted the seller’s counteroffer of $115,000. On June 20, the land was assessed at a value of $95,000 for property tax purposes. On July 4, White Repair Service was offered $150,000 for the land by a national retail chain. At what value should the land be recorded in White Repair Service’s records? a. $108,000 b. $95,000 c. $140,000 d. $115,000 72. Which of the following is most likely to obtain large amounts of resources by issuing stock? a. partnership b. corporation c. proprietorship d. government entity Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business 73. Which of the following is not a characteristic of a corporation? a. Corporations are organized as a separate legal taxable entity. b. Ownership is divided into shares of stock. c. Corporations experience an ease in obtaining large amounts of resources by issuing stock. d. A corporation’s resources are limited to its individual owners’ resources. 74. The initials GAAP stand for a. general accounting procedures b. generally accepted plans c. generally accepted accounting principles d. generally accepted accounting practices 75. Within the United States, the dominant body in the primary development of accounting principles is the a. American Institute of Certified Public Accountants (AICPA) b. American Accounting Association (AAA) c. Financial Accounting Standards Board (FASB) d. Institute of Management Accountants (IMA) 76. The business entity concept means that a. the owner is part of the business entity b. an entity is organized according to state or federal statutes c. an entity is organized according to the rules set by the FASB d. the entity is an individual economic unit for which data are recorded, analyzed, and reported 77. For accounting purposes, the business entity should be considered separate from its owners if the entity is a. a corporation b. a proprietorship c. a partnership d. All of these choices 78. The objectivity concept requires that a. business transactions be consistent with the objectives of the entity b. the Financial Accounting Standards Board be fair and unbiased in its deliberations over new accounting standards c. accounting principles meet the objectives of the Securities and Exchange Commission d. amounts recorded in the financial statements be based on independently verifiable evidence 79. Karen Meyer owns and operates Crystal Cleaning Company. Recently, Meyer withdrew $10,000 from Crystal Cleaning, and she contributed $6,000, in her name, to the American Red Cross. The contribution of the $6,000 should be recorded on the accounting records of which of the following entities? a. Crystal Cleaning and the American Red Cross b. Karen Meyer's personal records and the American Red Cross c. Karen Meyer's personal records and Crystal Cleaning d. Karen Meyer's personal records, Crystal Cleaning, and the American Red Cross Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business 80. Equipment with an estimated market value of $30,000 is offered for sale at $45,000. The equipment is acquired for $15,000 in cash and a note payable of $20,000 due in 30 days. The amount used in the buyer's accounting records to record this acquisition is a. $30,000 b. $35,000 c. $15,000 d. $45,000 81. Which of the following is the authoritative body in the United States that has the primary responsibility for developing accounting principles? a. FASB b. IRS c. SEC d. AICPA 82. Which of the following concepts relates to separating the reporting of business and personal economic transactions? a. cost concept b. unit of measure concept c. business entity concept d. objectivity concept 83. Donner Company is selling a piece of land adjacent to its business premises. An appraisal reported the market value of the land to be $220,000. Focus Company initially offered to buy the land for $177,000. The companies settled on a purchase price of $212,000. On the same day, another piece of land on the same block sold for $232,000. Under the cost concept, at what amount should the land be recorded in the accounting records of Focus Company? a. $177,000 b. $212,000 c. $220,000 d. $232,000 84. Many countries outside the United States use financial accounting standards issued by the a. AICPA b. SEC c. IASB d. FASB 85. The unit of measure concept a. is only used in the financial statements of manufacturing companies b. is not important when applying the cost concept c. requires that different units be used for assets and liabilities d. requires that economic data be reported in yen in Japan or dollars in the United States 86. Which of the following is not true of accounting principles? a. Financial accountants follow generally accepted accounting principles (GAAP). b. Following GAAP allows accounting information users to compare one company to another. Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business c. A new accounting principle can be adopted with stockholders' approval. d. The Financial Accounting Standards Board (FASB) has primary responsibility for developing accounting principles. 87. The _____ concept requires a company to report its economic activities on a regular basis for a specific period. a. cost b. matching c. objectivity d. time period 88. The annual accounting period adopted by a company is called its a. calendar year b. fiscal year c. natural business year d. natural calendar year 89. The natural business year for most retail businesses ends on a. January 31 b. March 31 c. August 31 d. December 31 90. Which of the following is not a characteristic of a corporation? a. Corporations are organized as a separate legal taxable entity. b. Ownership is divided into shares of stock. c. Corporations experience an ease in obtaining large amounts of resources by issuing stock. d. A corporation’s resources are limited to its individual owners’ resources. 91. On May 7, Carpet Barn Company offered to pay $83,000 for land that had a selling price of $105,000. On May 15, Carpet Barn accepted a counteroffer of $95,000. On June 5, the land was assessed at a value of $115,000 for property tax purposes. On December 10, Carpet Barn Company was offered $135,000 for the land by another company. At what value should the land be recorded in Carpet Barn Company’s records? a. $95,000 b. $105,000 c. $115,000 d. $135,000 92. Donner Company is selling a piece of land adjacent to its business. An appraisal reported the market value of the land to be $120,000. Focus Company initially offered to buy the land for $107,000. The companies settled on a purchase price of $115,000. On the same day, another piece of land on the same block sold for $122,000. Under the cost concept, what amount will be used to record this transaction in Focus Company’s accounting records? a. $107,000 b. $115,000 c. $120,000 d. $122,000 Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business 93. Assets are a. always lower than liabilities b. equal to liabilities less owner’s equity c. the same as expenses because they are acquired with cash d. financed by the owner and/or creditors 94. Debts owed by a business are referred to as a. accounts receivable b. expenses c. owner’s equity d. liabilities 95. The accounting equation may be expressed as a. Assets = Equities − Liabilities b. Assets + Liabilities = Owner's Equity c. Assets = Revenues − Liabilities d. Assets − Liabilities = Owner's Equity 96. Which of the following is not an asset? a. investments b. cash c. inventory d. owner’s equity 97. The assets and liabilities of a company are $128,000 and $84,000, respectively. Owner’s equity should equal a. $212,000 b. $44,000 c. $128,000 d. $84,000 98. If total liabilities decreased by $46,000 during a period of time and owner's equity increased by $60,000 during the same period, the amount and direction (increase or decrease) of the period's change in total assets would be a a. $106,000 increase b. $14,000 increase c. $14,000 decrease d. $106,000 decrease 99. Which of the following is not a business transaction? a. make a sales offer b. sell goods for cash c. receive cash for services to be rendered later d. pay for supplies 100. A business paid $7,000 to a creditor in payment of an amount owed. The effect of the transaction on the accounting Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business equation was to a. increase an asset, decrease another asset b. decrease an asset, decrease a liability c. increase an asset, increase a liability d. increase an asset, increase owner's equity 101. Earning revenue a. increases assets, increases owner’s equity b. increases assets, decreases owner's equity c. increases one asset, decreases another asset d. decreases assets, increases liabilities 102. The monetary value charged to customers for the performance of services sold is called a(n) a. asset b. net income c. capital d. revenue 103. Revenues are reported when a. a contract is signed b. cash is received from the customer c. work is begun on the job d. work is completed on the job 104. Expenses are recorded when a. cash is paid for services rendered b. a bill is received in advance of services rendered c. assets are used in the process of earning revenue d. assets are purchased 105. Goods purchased on account for future use in the business, such as supplies, are called a. prepaid liabilities b. revenues c. prepaid expenses d. liabilities 106. The asset created by a business when it makes a sale on account is termed a. accounts payable b. prepaid expense c. unearned revenue d. accounts receivable 107. The debt created by a business when it makes a purchase on account is referred to as an a. account payable Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business b. account receivable c. asset d. expense payable 108. If total assets decreased by $88,000 during a period of time and owner's equity increased by $71,000 during the same period, then the amount and direction (increase or decrease) of the period's change in total liabilities would be a(n) a. $17,000 increase b. $88,000 decrease c. $159,000 increase d. $159,000 decrease 109. Owner's withdrawals a. increase expenses b. decrease expenses c. increase cash d. decrease owner's equity 110. How does paying a liability in cash affect the accounting equation? a. assets increase; liabilities decrease b. assets increase; liabilities increase c. assets decrease; liabilities decrease d. liabilities decrease; owner's equity increases 111. How does receiving a bill to be paid next month for services received affect the accounting equation? a. assets decrease; owner's equity decreases b. assets increase; liabilities increase c. liabilities increase; owner's equity increases d. liabilities increase; owner's equity decreases 112. How does the purchase of equipment by signing a note affect the accounting equation? a. assets increase; assets decrease b. assets increase; liabilities decrease c. assets increase; liabilities increase d. assets increase; owner's equity increases 113. Land originally purchased for $30,000 is sold for $62,000 in cash. What is the effect of the sale on the accounting equation? a. assets increase by $62,000; owner's equity increases by $62,000 b. assets increase by $32,000; owner's equity increases by $32,000 c. assets increase by $62,000; liabilities decrease by $30,000; owner's equity increases by $32,000 d. assets increase by $30,000; no change in liabilities; owner's equity increases by $62,000 114. Which of the following accounts is a liability? a. Accounts Payable Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business b. Accounts Receivable c. Wages Expense d. Service Revenue 115. Abbie Marson is the sole owner and operator of Great Plains Company. As of the end of its accounting period, December 31, Year 1, Great Plains Company has assets of $940,000 and liabilities of $300,000. During Year 2, Marson invested an additional $73,000 and withdrew $33,000 from the business. What is the amount of net income during Year 2, assuming that as of December 31, Year 2, assets were $995,000 and liabilities were $270,000? a. $45,000 b. $50,000 c. $106,000 d. $370,000 116. Which of the following asset accounts is increased when a receivable is collected? a. Accounts Receivable b. Supplies c. Accounts Payable d. Cash 117. Transactions affecting owner's equity include a. owner's investments and payment of liabilities b. owner's investments, owner's withdrawals, earning of revenues, and incurrence of expenses c. owner's investments, earning of revenues, incurrence of expenses, and collection of accounts receivable d. owner's withdrawals, earning of revenues, incurrence of expenses, and purchase of supplies on account 118. Michael Anderson is starting a computer programming business and has deposited an initial investment of $15,000 into the business cash account. Identify how the accounting equation will be affected. a. increase in assets (Cash) and increase in liabilities (Accounts Payable) b. increase in assets (Cash) and increase in owner’s equity (Michael Anderson, Capital) c. increase in assets (Accounts Receivable) and decrease in liabilities (Accounts Payable) d. increase in assets (Cash) and increase in assets (Accounts Receivable) 119. Gomez Service Company paid its first installment on a note payable of $2,000. How will this transaction affect the accounting equation? a. increase in liabilities (Notes Payable) and decrease in assets (Cash) b. decrease in assets (Cash) and decrease in owner’s equity (Note Payable Expense) c. decrease in assets (Cash) and decrease in assets (Notes Receivable) d. decrease in assets (Cash) and decrease in liabilities (Notes Payable) 120. Ramon Ramos has withdrawn $750 from Ramos Repair Company’s cash account to deposit in his personal account. How does this transaction affect Ramos Repair Company’s accounting equation? a. increase in assets (Accounts Receivable) and decrease in assets (Cash) b. decrease in assets (Cash) and decrease in owner’s equity (Owner’s Withdrawal) c. decrease in assets (Cash) and decrease in liabilities (Accounts Payable) d. increase in assets (Cash) and decrease in owner’s equity (Owner’s Withdrawal) Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business 121. Which of the following is not a business transaction? a. Erin deposits $15,000 in a bank account in the name of Erin’s Lawn Service. b. Erin provided services to customers earning fees of $600. c. Erin purchased hedge trimmers for her lawn service agreeing to pay the supplier next month. d. Erin pays her monthly personal credit card bill. 122. Which of the following is a business transaction? a. purchase inventory on account b. plan advertising for upcoming sale c. give employees a raise beginning next month d. submit estimate for construction project 123. The financial statement that presents a summary of the revenues and expenses of a business for a specific period of time, such as a month or year, is called a(n) a. statement of cash flows b. statement of owner's equity c. income statement d. balance sheet 124. Which of the following financial statements reports information as of a specific date? a. income statement b. statement of owner's equity c. statement of cash flows d. balance sheet 125. Four financial statements are usually prepared for a business. The statement of cash flows is usually prepared last. The statement of owner's equity (OE), the balance sheet (B), and the income statement (I) are prepared in a certain order to obtain information needed for the next statement. In what order are these three statements prepared? a. I,OE, B b. B, I, OE c. OE, I, B d. B,OE, I 126. Liabilities are reported on the a. income statement b. statement of owner's equity c. statement of cash flows d. balance sheet 127. Cash investments made by the owner to the business are reported on the statement of cash flows in the a. financing activities section b. investing activities section c. operating activities section d. supplemental statement Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business 128. The year-end balance of the owner's capital account appears on a. both the statement of owner's equity and the income statement b. only the statement of owner's equity c. both the statement of owner's equity and the balance sheet d. both the statement of owner's equity and the statement of cash flows 129. A financial statement user would determine if a company was profitable or not during a specific period of time by reviewing the a. income statement b. balance sheet c. statement of cash flows d. statement of retained earnings 130. If an owner wanted to know how money flowed into and out of the company, which financial statement would the owner use? a. income statement b. statement of cash flows c. balance sheet d. statement of retained earnings 131. The Assets section of the balance sheet normally presents assets in a. alphabetical order b. the order of largest to smallest dollar amounts c. the order in which they will be converted into cash or used in operations d. the order of smallest to largest dollar amounts 132. All of the following are general-purpose financial statements except a(n) a. balance sheet b. income statement c. statement of owner’s equity d. cash budget 133. All of the following statements regarding the ratio of liabilities to owner’s equity are true except a. a ratio of 1 indicates that liabilities equal owner’s equity b. corporations can use this ratio but substitute total stockholders’ equity for total owner’s equity c. the higher this ratio, the better able a business is to withstand poor business conditions and pay creditors d. the lower this ratio, the better able a business is to withstand poor business conditions and pay creditors 134. Given the following data: Dec. 31,Year 2 Total liabilities $128,250 Total owner’s equity 95,000
Dec. 31,Year 1 $120,000 80,000
Compute the ratio of liabilities to owner’s equity for each year. Round to two decimal places. Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business a. 1.50 and 1.07, respectively c. 1.07 and 1.19, respectively
b. 1.35 and 1.50, respectively d. 1.19 and 1.35, respectively
Matching Match each of the following businesses with the type of business that best describes it. Each letter may be used more than once. a. Service business b. Manufacturing business c. Merchandising business 135. A hospital 136. A dressmaking company 137. A supermarket 138. A modular homebuilder 139. A health club and spa 140. A tax preparation firm 141. A law firm 142. A men’s clothing store 143. A book publisher 144. An automobile dealer Match each of the following companies with the type of business that best describes it. Each letter may be used more than once. a. Service business b. Merchandising business c. Manufacturing business 145. Dillard's 146. Time Warner Cable 147. General Motors 148. Redbox 149. American Airlines 150. Sony 151. Best Buy Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business 152. Banana Republic 153. H&R Block Match each of the following users of accounting information to the type of user: internal or external. Each letter may be used more than once. a. Internal user b. External user 154. Payroll manager 155. Bank 156. President’s secretary 157. Internal Revenue Service 158. Raw material vendors 159. Social Security Administration 160. Health insurance provider 161. Managerial accountant Match each of the following characteristics with the form of business entity that it best describes. Each letter may be used more than once. a. Proprietorship b. Partnership c. Corporation d. Limited liability company (LLC) 162. Comprises 70% of business entities in the United States 163. Generates 90% of business revenues 164. Owned by two or more individuals 165. Organized as a separate legal taxable entity 166. Easy and cheap to organize 167. Often used as an alternative to a partnership 168. Used by large business 169. Has the ability to obtain large amounts of resources 170. Offers tax and legal liability advantages for owners Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business Match each of the following accounts with the account type that best describes it. Each letter may be used more than once. a. Asset b. Liability c. Owner's equity 171. Accounts payable 172. Wages expense 173. Joan Smith, Capital 174. Accounts Receivable 175. Joan Smith, Drawing 176. Land Match each transaction with its effect on the accounting equation. Each letter may be used more than once. a. Increase assets, increase liabilities b. Increase liabilities, decrease owner’s equity c. Increase assets, increase owner’s equity d. No effect e. Decrease assets, decrease liabilities f. Decrease assets, decrease owner’s equity 177. Received cash for services provided 178. Paid the utility bill 179. Investment of land by owner 180. Paid part of an amount owed to a creditor 181. Paid cash for the purchase of a one-year insurance policy 182. Received payment from a customer on account 183. Cash withdrawal by owner 184. Provided a service to a customer on account 185. Purchased supplies on credit 186. Paid wages 187. Cash investment by owner Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business 188. Borrowed money from a bank 189. Purchased equipment for cash 190. Received cash for providing services to customers 191. Used up supplies that were already on hand Match each of the following items to its effect on owner’s equity. Each letter may be used more than once. a. Increases owner’s equity b. Decreases owner’s equity 192. Fees earned 193. Wages expense 194. Withdrawals 195. Lawn care revenue 196. Additional investment in the business 197. Supplies expense Match each of the following characteristics with the financial statement that it best describes. Each letter may be used more than once. a. Income statement b. Balance sheet c. Statement of owner’s equity d. Statement of cash flows 198. Reports as of a specific date 199. The first statement prepared 200. Has three sections: operating, investing, and financing 201. Reports only revenues and expenses 202. The second statement prepared 203. A formal presentation of the accounting equation 204. The connecting link between the income statement and balance sheet Match each of the following items to the financial statement(s) where it can be found. Each letter may be used more than once. a. Balance sheet b. Income statement Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business c. Statement of cash flows d. Statement of owner’s equity 205. Increase in owner's equity 206. Revenues 207. Supplies 208. Land 209. Accounts payable 210. Accounts receivable 211. Operating activities 212. Wages expense 213. Fees earned 214. Net increase in cash Match each of the following activities to the section in which it would be reported on the statement of cash flows. Each letter may be used more than once. a. Cash Flows from (Used for) Operating Activities b. Cash Flows from (Used for) Investing Activities c. Cash Flows from (Used for) Financing Activities d. Does not appear on the statement of cash flows 215. Cash paid for building 216. Cash paid to suppliers 217. Cash paid to owner for personal use 218. Cash received from customers 219. Cash received from owner as additional investment in the business 220. Cash received from sale of a building 221. Borrowed cash from a bank Subjective Short Answer 222. Discuss internal and external users of accounting information. What areas of accounting provide them with information? Give an example of the type of report each type of user might use. 223. Companies like Enron, WorldCom, and Tyco International, Ltd. have been caught in the midst of ethical lapses that Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business led to fines, firings, and criminal and/or civil prosecution. List and briefly describe three factors that are responsible for what went wrong in these companies. 224. List the five steps in the process by which accounting provides information to users. 225. What is the major difference between the objective of financial accounting and the objective of managerial accounting? 226. Give the major disadvantage of disregarding the cost concept and constantly revaluing assets based on appraisals and opinions. 227. Explain the meaning of the business entity concept. 228. Darnell Company purchased $88,000 of computer equipment from Joseph Company. Darnell Company paid for the equipment using cash that had been obtained from the initial investment by Donnie Darnell. Which entity or entities (Darnell Company, Joseph Company, and Donnie Darnell) should record the transaction involving the computer equipment on their accounting records? 229. Bob Johnson is the sole owner of Johnson’s Carpet Cleaning Service. Bob purchased a personal automobile for $10,000 cash plus he took out a loan for $20,000 in his name. Describe how this transaction is related to the business entity concept. 230. Discuss the characteristics of a limited liability company (LLC). 231. Explain the meaning of: (a) the objectivity concept (b) the unit of measure concept 232. Dave Ryan is the owner and operator of Ryan's Arcade. At the end of its accounting period, December 31, Ryan’s Arcade has assets of $450,000 and liabilities of $125,000. Using the accounting equation, determine the following amounts: (a) owner’s equity as of December 31 of the current year (b) owner’s equity as of December 31 at the end of the next year, assuming that assets increased by $65,000 and liabilities increased by $35,000 during the year 233. Krammer Company has liabilities equal to one-fourth of the total assets. Krammer’s owner’s equity is $45,000. Using the accounting equation, what is the amount of liabilities for Krammer? 234. Determine the missing amount for each of the following: Assets (a) $30,000 53,000
Liabilities $38,000 (b) 32,000
Owner's Equity $45,000 22,000 (c)
235. Determine the missing amount designated with an “X” for each of the following: (a) (b) (c)
Assets $78,500 X 49,500
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Liabilities $37,600 53,280 X
Owner’s Equity X $145,000 34,000 Page 23
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Chapter 01 - Introduction to Accounting and Business
236. Use the accounting equation to answer each of the following independent questions. (a) At the beginning of the year, Norton Company's assets were $75,000 and its owner’s equity was $38,000. During the year, assets increased by $18,000 and liabilities increased by $4,000. What was the owner’s equity at the end of the year? (b) At the beginning of the year, Turpin Industries had liabilities of $44,000 and owner’s equity of $66,000. If assets increased by $10,000 and liabilities decreased by $5,000, what was the owner’s equity at the end of the year? The accountant for Scott Industries prepared the following list of accounting equation element balances from the company’s records for the year ended December 31: Fees earned Accounts receivable Equipment Accounts payable Salaries and wages expense Income tax payable Notes payable
$165,000 14,000 64,000 12,000 40,000 5,000 20,000
Cash Selling expenses Scott, capital Interest revenue Prepaid rent Income tax expense Rent expense
$30,000 44,000 27,000 3,000 2,000 18,000 20,000
237. Determine the total assets at the end of the current year for Scott Industries. 238. Determine the total liabilities at the end of the current year for Scott Industries. 239. Based on the information for Scott Industries, is it profitable? Explain your answer. 240. On July 1 of the current year, the assets and liabilities of John Wong, DVM, are as follows: Cash, $27,000; Accounts Receivable, $12,300; Supplies, $3,100; Land, $35,000; Accounts Payable, $13,900. What is the amount of owner's equity (John Wong’s capital) as of July 1 of the current year? 241. Ting Hsu is the owner of Hsu’s Financial Services. At the end of its accounting period, December 31, of Year 1, Hsu’s has assets of $575,000 and owner’s equity of $335,000. Using the accounting equation and considering each case independently, determine the following amounts: (a) Hsu’s liabilities as of December 31 of Year 1. (b) Hsu’s liabilities as of December 31 of Year 2, assuming that assets increased by $56,000 and owner’s equity decreased by $32,000. (c) Net income or net loss during Year 2, assuming that as of December 31, Year 2, assets were $592,000, liabilities were $450,000, and there were no additional investments or withdrawals. 242. Martin Blair is the owner and operator of Martin Consultants. At December 31 of the current year, Martin Consultants has assets of $430,000 and liabilities of $205,000. Using the accounting equation and considering each case independently, determine the following: Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business (a) Martin Blair, capital, as of December 31. (b) Martin Blair, capital, as of December 31 of the next year, assuming that assets increased by $12,000 and liabilities increased by $15,000. (c) Martin Blair, capital, as of December 31 of the next year, assuming that assets decreased by $8,000 and liabilities increased by $14,000. 243. Daniels Company is owned and operated by Thomas Daniels. The following selected transactions were completed by Daniels Company during May: 1. Received cash from owner as additional investment, $55,000. 2. Paid creditors on account, $7,000. 3. Billed customers for services on account, $2,565. 4. Received cash from customers on account, $8,450. 5. Paid cash to owner for personal use, $2,500. 6. Paid the utility bill, $160. Indicate the effect of each transaction on the accounting equation by: (a) Accounting equation element type: (A) assets, (L) liabilities, (OE) owner’s equity, (R) revenue, and (E) expense b) Name of accounting equation element c) The amount of the transaction d) The direction of change (increase or decrease) in the account affected Note: Each transaction has two entries. Entry Entry Accounting Name of Accounting Name of Equation Accounting Increase or Equation Accounting Element Equation Amount Decrease Element Equation Amount (c) (c) Type Element (d) Type Element (a) (b) (a) (b)
Increase or Decrease (d)
1 2 3 4 5 6 244. Collins Landscape Company purchased various landscaping supplies on account to be used for landscape designs for its customers. How will this business transaction affect the accounting equation? 245. Shiny Kar Company had the following transactions. For each transaction, show the effect on the accounting equation by putting the amount and direction (+, –, or NC for no change) in each box of the following table. Assets Liabilities
Owner’s Equity
(a) Shiny Kar withdrew $500 cash for food (b) Shiny Kar Company sold 2 cars for a total of $55,000 on account (c) The cost of the cars sold in (b) above was $40,000 (d) Shiny Kar received a $35,000 payment for a car previously sold on account Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business (e) Shiny Kar paid $450 for advertising (f) Shiny Kar purchased $150 of cleaning supplies on account 246. Ramirez Company received its first electric bill in the amount of $60 which will be paid next month. How will this transaction affect the accounting equation? 247. Simpson Auto Body Repair purchased $20,000 of machinery. The company paid $8,000 in cash at the time of the purchase and signed a promissory note for the remainder to be paid in four monthly installments. (a) How will the purchase affect the accounting equation? (b) How will the payment of the first monthly installment affect the accounting equation (ignore interest)? 248. Indicate how the following transactions affect the accounting equation. (a) The purchase of supplies on account (b) The purchase of supplies for cash (c) A withdrawal by the owner to pay personal expenses (d) Revenues received in cash (e) Sale made on account 249. (a) A vacant lot acquired for $83,000 cash is sold for $127,000 in cash. What is the effect of the sale on the total amount of the seller’s (1) assets, (2) liabilities, and (3) owner’s equity? (b) Assume that the seller owes $52,000 for the land. After receiving the $127,000 cash in (a), the seller pays the $52,000 owed. What is the effect of the payment on the total amount of the seller’s (1) assets, (2) liabilities, and (3) owner’s equity? 250. Austin Land Company sold land for $85,000 in cash. The land was originally purchased for $65,000. At the time of the sale, $40,000 was still owed to Regions Bank. After the sale, Austin Land Company paid off the loan. Explain the effect of the sale and the payoff of the loan on the accounting equation. 251. There are four transactions that affect owner’s equity. (a) What are the two types of transactions that increase owner’s equity? (b) What are the two types of transactions that decrease owner’s equity? 252. Given the following: Beginning capital Ending capital Owner's withdrawals
$58,000 30,000 25,000
Determine net income or net loss. 253. The following selected transactions are completed by a proprietorship. Indicate the effects of each transaction on assets, liabilities, and owner's equity by inserting "+" for increase and "−" for decrease in the appropriate columns at the right. If appropriate, you may insert more than one symbol in a column. (a) (b) (c)
Received cash from owner as an additional investment Purchased supplies on account Paid rent for the current month
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A _____ _____ _____
L _____ _____ _____
OE _____ _____ _____ Page 26
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Chapter 01 - Introduction to Accounting and Business (d) (e) (f) (g) (h) (i) (j) (k)
Received cash for services sold to customers Paid cash to creditor for purchases in (b) Billed customers for services sold on account Received cash on account from customers Owner withdrew cash for personal use Recorded the cost of supplies used during the year Paid wages Purchased a truck for cash
_____ _____ _____ _____ _____ _____ _____ _____
_____ _____ _____ _____ _____ _____ _____ _____
_____ _____ _____ _____ _____ _____ _____ _____
254. The following selected transactions are completed by a proprietorship. Indicate the effects of each transaction on assets, liabilities, and owner's equity by inserting "+" for increase and "−" for decrease in the appropriate columns at the right. If appropriate, you may insert more than one symbol in a column. (a) (b) (c) (d) (e)
Received cash from owner as initial investment Purchased supplies, paying cash Paid creditors on account Received cash from customers on account Paid utilities expense
A _____ _____ _____ _____ _____
L _____ _____ _____ _____ _____
OE _____ _____ _____ _____ _____
255. The following selected transactions are completed by a proprietorship. Indicate the effects of each transaction on assets, liabilities, and owner's equity by inserting "+" for increase and "−" for decrease in the appropriate columns at the right. If appropriate, you may insert more than one symbol in a column. (a) (b) (c) (d) (e)
Paid rent expense Purchased supplies on account Received cash for providing services to customers Billed customers for services on account Paid cash to owner for personal use
A _____ _____ _____ _____ _____
L _____ _____ _____ _____ _____
OE _____ _____ _____ _____ _____
256. The following selected transactions are completed by a proprietorship. Indicate the effects of each transaction on assets, liabilities, and owner's equity by inserting "+" for increase and "−" for decrease in the appropriate columns at the right. If appropriate, you may insert more than one symbol in a column. (a) (b) (c) (d) (e)
Purchased land with cash Received cash from customers on account Determined the amount of supplies used this month Received cash from owner as additional investment Paid miscellaneous expense
A _____ _____ _____ _____ _____
L _____ _____ _____ _____ _____
OE _____ _____ _____ _____ _____
257. Use the following data for Flagger Company to prepare an income statement for the year ended December 31: Fees earned Accounts receivable Equipment Accounts payable Salaries and wages expense Income tax payable Notes payable Powered by Cognero
$168,000 14,000 42,000 12,000 40,000 5,000 20,000
Cash Selling expenses Flagger, capital Rent expense Prepaid rent Income tax expense
$30,000 44,000 36,000 51,000 2,000 18,000 Page 27
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Chapter 01 - Introduction to Accounting and Business The assets and liabilities of Thompson Computer Services at March 31, the end of the current year, and its revenue and expenses for the year follow. The capital of the owner was $180,000 at April 1, the beginning of the current year. Mr. Thompson invested an additional $25,000 in the business during the year. Accounts payable Accounts receivable Cash Fees earned Land Building
$ 2,000 10,340 21,420 73,450 47,000 157,630
Miscellaneous expense Office expense Supplies Wages expense Drawing
$ 1,030 1,240 1,670 23,550 16,570
258. Prepare an income statement for the current year ended March 31. 259. Prepare a statement of owner’s equity for Thompson Computer Services for the current year ended March 31. 260. Prepare a balance sheet for Thompson Computer Services for the current year ended March 31. 261. A summary of cash flows for Linda's Design Services for the year ended December 31 is as follows: Cash receipts: Cash received from customers Cash received from additional investment by owner
$83,990 25,000
Cash payments: Cash paid for expenses and supplies Cash paid for land Cash paid to owner for personal use
$27,410 47,000 5,000
Cash balance as of January 1
$40,600
Prepare a statement of cash flows for Linda's Design Services for the year ended December 31. 262. What information does the income statement give to business users? 263. What are the three sections of the statement of cash flows? 264. Name and describe the four primary financial statements for a proprietorship. 265. A summary of cash flows for Evelyn's Event Planning for the year ended December 31 is as follows: Cash receipts: Cash received from customers Cash received from bank loan
$57,360 15,000
Cash payments: Cash paid for expenses and supplies Cash paid for equipment Cash paid to the owner for personal use
$21,600 18,070 12,000
Cash balance as of January 1
$15,580
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Chapter 01 - Introduction to Accounting and Business Prepare a statement of cash flows for Evelyn's Event Planning for the year ended December 31. 266. The assets and liabilities of Rocky's Day Spa at December 31 and its expenses for the year follow. The capital of the owner was $68,000 at January 1. The owner invested an additional $10,000 during the year. Net income for the year is $45,625. Accounts payable Accounts receivable Cash Fees earned Spa furniture and equipment Computers
$ 4,375 Spa operating expense 8,490 Office expense 13,980 Spa supplies ??? Wages expense 56,000 Drawing 2,130
$23,760 2,470 9,230 26,580 38,170
Prepare an income statement for the current year ended December 31. 267. The assets and liabilities of Rocky's Day Spa on December 31 and its revenue and expenses for the year follow. The capital of the owner was $68,000 on January 1. The owner invested an additional $10,000 during the year. Accounts payable Accounts receivable Cash Fees earned Spa furniture and equipment Computers
$ 4,375 Spa operating expense 8,490 Office expense ??? Spa supplies 98,435 Wages expense 56,000 Drawing 2,130
$23,760 2,470 9,230 26,580 38,170
Prepare a balance sheet for the year ended December 31. 268. The assets and liabilities of Rocky's Day Spa on December 31 and its revenue and expenses for the year follow. The capital of the owner is $68,000 on January 1. The owner invested an additional $10,000 during the year. Accounts payable Accounts receivable Cash Fees earned Spa furniture and equipment Computers
$ 4,375 Spa operating expense 8,490 Office expense 13,980 Spa supplies 98,435 Wages expense 56,000 Drawing 2,130
$23,760 2,470 9,230 26,580 38,170
Prepare a statement of owner’s equity for the current year ended December 31. 269. Explain the interrelationship between the balance sheet and the statement of cash flows. 270. From the following list of items taken from Lamar’s accounting records, identify those that would appear on the income statement. (a) (b) (c) (d) (e) (f) (g)
Rent expense Land Capital Fees earned Withdrawal Wages expense Investment
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Chapter 01 - Introduction to Accounting and Business 271. Identify which of the following items would appear on a balance sheet. (a) (b) (c) (d) (e) (f) (g)
Cash Fees earned Joe Brown, capital Wages payable Rent expense Prepaid advertising Land
272. For each of the following, determine the amount of net income or net loss for the year. (a) (b) (c) (d)
Revenues for the year totaled $71,300 and expenses totaled $35,500. The owner made an additional investment of $15,000 during the year. Revenues for the year totaled $220,500 and expenses totaled $175,000. The owner withdrew $40,000 during the year. Revenues for the year totaled $149,000 and expenses totaled $172,000. The owner invested an additional $12,000 and withdrew $16,000 during the year. Revenues for the year totaled $198,150 and expenses totaled $174,200. The owner withdrew $35,000 during the year.
273. The total assets and total liabilities of Paul’s Pools, a proprietorship, at the beginning and at the end of the current fiscal year are as follows: Total assets Total liabilities (a) (b)
(c)
(d)
January 1 $280,000 205,000
December 31 $475,000 130,000
Determine the amount of net income earned during the year. The owner did not invest any additional assets in the business during the year and made no withdrawals. Determine the amount of net income during the year. The assets and liabilities at the beginning and end of the year are unchanged from the given amounts. However, the owner withdrew $53,000 in cash during the year (no additional investments). Determine the amount of net income earned during the year. The assets and liabilities at the beginning and end of the year are unchanged from the given amounts. However, the owner invested an additional $35,000 in cash in the business in June of the current fiscal year (no withdrawals). Determine the amount of net income earned during the year. The assets and liabilities at the beginning and end of the year are unchanged from the given amounts. However, the owner invested an additional $12,000 in cash in August of the current fiscal year and made 12 monthly cash withdrawals of $1,500 each during the year.
274. The following selected transaction data of a business are for September. Determine the following amounts for September: (a) total revenue, (b) total expenses, (c) net income. Service sales charged to customers on account during September Cash received from cash customers for services performed in September Cash received from customers on account during September: Services performed and charged to customers prior to September Services performed and charged to customers during September Expenses incurred prior to September and paid during September Powered by Cognero
$33,000 28,000 13,000 18,000 6,500 Page 30
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Chapter 01 - Introduction to Accounting and Business Expenses incurred and paid in September Expenses incurred in September but not paid in September Expenses for supplies used and insurance (not given) applicable to September
36,250 5,000 2,000
275. On March 1, the amount of Richard Cook's capital in Richard’s Catering Company was $150,000. During March, he withdrew $31,000 from the business. The amounts of the various assets, liabilities, revenues, and expenses are as follows: Accounts payable Accounts receivable Cash Fees earned Insurance expense Land Miscellaneous expense Prepaid insurance Rent expense Salary expense Supplies Supplies expense Utilities expense
$10,250 45,950 23,840 64,950 1,275 85,400 1,210 3,000 9,000 20,300 900 525 2,800
Prepare (a) an income statement for March, (b) a statement of owner's equity for March, and (c) a balance sheet as of March 31. 276. Harris Designers began operations on April 1. The following financial statements are for Harris Designers for the month ended April 30 (the first month of operations). Determine the missing amounts for letters (a) through (o). Harris Designers Income Statement For the Month Ended April 30 Fees earned Expenses: Wages expense Rent expense Supplies expense Utilities expense Miscellaneous expense Total expenses Net income
$27,000 $5,250 (a) 4,600 400 1,250
Harris Designers Statement of Owner's Equity For the Month Ended April 30 Lori Harris, capital, April 1 Investment on April 1 Net income for April Withdrawals Increase in owner's equity Lori Harris, capital, April 30
$
(b) (c)
$
0
$35,000 (d) (6,000) (e) $38,100
Harris Designers Balance Sheet Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business April 30 Assets Cash Supplies Land
$
(f) 8,100 (g)
Total assets
$55,900
Liabilities Accounts payable Owner's Equity Lori Harris, capital Total liabilities and owner's equity
Harris Designers Statement of Cash Flows For the Month Ended April 30 Cash flows from (used for) operating activities: Cash received from customers Cash paid for expenses and to Net cash flows from operating activities Cash flows from (used for) investing activities: Cash paid for acquisition of land Cash flows from (used for) financing activities: Cash received as owner's investment Cash withdrawal by owner Net cash flows from financing activities Net increase in cash Cash balance, April 1 Cash balance, April 30
$(h) (i) $(j)
$23,000 (4,200) $18,800 (17,000) $
(k) (l) $ $
(m) (n) 0 (n)
Hint: Use the interrelationships among the financial statements to solve this problem. 277. Using the following data for Heavenly Futures Company, prepare an income statement for the month ended August 31. Telephone expense Cash Accounts payable Jason Heavenly, drawing Fees earned Rent expense Supplies Accounts receivable Computer equipment Jason Heavenly, capital (August 1) Wages expense Utilities expense Notes payable Office expense
$ 1,150 3,000 1,540 800 15,700 1,400 140 1,500 20,000 14,320 4,800 750 2,400 420
278. Using the following data for Bright Futures Company, prepare a statement of owner’s equity for the month ended August 31. Telephone expense Cash Accounts payable Powered by Cognero
$ 1,150 3,000 1,540 Page 32
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Chapter 01 - Introduction to Accounting and Business Jason Bright, drawing Fees earned Rent expense Supplies Accounts receivable Computer equipment Jason Bright, capital (August 1) Wages expense Utilities expense Notes payable Office expense
800 15,700 1,400 140 1,500 20,000 14,320 4,800 750 2,400 420
279. Eric Wood, CPA, was organized on January 1 as a proprietorship. List the errors that you find in the following financial statements and prepare corrected statements. Eric Wood, CPA Income Statement For the Three Months Ended March 31 Fees earned Expenses: Salary expense Rent expense Advertising expense Utilities expense Miscellaneous expense Answering service expense Supplies expense Total expenses Net income
$42,000 $9,735 5,200 3,950 3,225 4,000 2,550 4,000
Eric Wood, CPA Statement of Owner's Equity March 31 Eric Wood, capital, January 1 Investment on January 1 $20,000 Net income for the three months 14,000 Withdrawals (5,000) Increase in owner's equity Eric Wood, capital, March 31
Assets Land Cash Accounts payable Supplies Total assets
28,000 $14,000
$
0
31,000 $31,000
Balance Sheet For the Three Months Ended March 31 Owner's Equity $13,000 Eric Wood, capital 10,860 Liabilities 2,670 Accounts receivable 925 $33,225 Total liabilities and owner's equity
$31,000 2,225 $33,225
280. Using the following data for Bright Futures Company, prepare a balance sheet in report form as of August 31. Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business Telephone expense Cash Accounts payable Jason Bright, drawing Fees earned Rent expense Supplies Accounts receivable Computer equipment Jason Bright, capital (August 1) Wages expense Utilities expense Notes payable Office expense
$ 1,150 3,000 1,540 800 15,700 1,400 140 1,500 20,000 14,320 4,800 750 2,400 420
281. Using the following data for Awesome Travel Services, prepare an income statement, a statement of owner’s equity, and a balance sheet for the year ended (or as of) December 31. Accounts payable Accounts receivable Cash Computer equipment Fees earned Rent expense
$12,000 14,000 18,000 21,000 78,000 10,000
J. Trendsetter, capital (January 1) Supplies Income tax expense Utilities expense Wages expense Supplies expense
$10,000 1,000 1,300 8,000 25,000 1,700
There were no additional investments or withdrawals by J. Trendsetter during the year. 282. Given the following data: Dec. 31,Year 2 Total liabilities $128,250 Total owner’s equity 95,000
Dec. 31,Year 1 $120,000 80,000
(a) Compute the ratio of liabilities to owner’s equity for each year. (b) Has the creditors’ risk increased or decreased from December 31, Year 1, to December 31, Year 2? 283. Company G has a ratio of liabilities to stockholders’ equity of 0.12 and 0.28 for Year 1 and Year 2, respectively. In contrast, Company M has a ratio of liabilities to stockholders’ equity of 1.13 and 1.29 for the same period. REQUIRED: Based on this information, which company's creditors are more at risk and why? Should the creditors of either company fear the risk of nonpayment? 284. The following data were taken from Miller Company’s balance sheet: Total liabilities Total owner’s equity
Dec. 31, Year 2 $150,000 75,000
Dec. 31, Year 1 $105,000 60,000
(a) Compute the ratio of liabilities to owner’s equity. Round your answer to one decimal place. (b) Has the creditors’ risk increased or decreased from December 31, Year 1, to December 31, Year 2?
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Chapter 01 - Introduction to Accounting and Business Answer Key 1. True 2. True 3. True 4. False 5. False 6. True 7. False 8. True 9. True 10. False 11. False 12. True 13. False 14. False 15. True 16. True 17. False 18. False 19. True 20. True 21. True 22. False 23. False 24. False 25. True Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business 26. False 27. True 28. True 29. False 30. False 31. False 32. True 33. True 34. False 35. True 36. False 37. False 38. False 39. False 40. False 41. False 42. True 43. False 44. True 45. False 46. True 47. False 48. True 49. False 50. False Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business 51. d 52. b 53. b 54. a 55. d 56. a 57. d 58. d 59. c 60. d 61. b 62. c 63. d 64. b 65. d 66. b 67. a 68. a 69. b 70. d 71. d 72. b 73. d 74. c 75. c 76. d Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business 77. d 78. d 79. b 80. b 81. a 82. c 83. b 84. c 85. d 86. c 87. d 88. b 89. a 90. d 91. a 92. b 93. d 94. d 95. d 96. d 97. b 98. b 99. a 100. b 101. a Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business 102. d 103. d 104. c 105. c 106. d 107. a 108. d 109. d 110. c 111. d 112. c 113. b 114. a 115. a 116. d 117. b 118. b 119. d 120. b 121. d 122. a 123. c 124. d 125. a 126. d 127. a Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business 128. c 129. a 130. b 131. c 132. d 133. c 134. b 135. a 136. b 137. c 138. b 139. a 140. a 141. a 142. c 143. b 144. c 145. b 146. a 147. c 148. a 149. a 150. c 151. b 152. b Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business 153. a 154. a 155. b 156. a 157. b 158. b 159. b 160. b 161. a 162. a 163. c 164. b 165. c 166. a 167. d 168. c 169. c 170. d 171. b 172. c 173. c 174. a 175. c 176. a 177. c 178. b Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business 179. c 180. e 181. d 182. d 183. f 184. c 185. a 186. f 187. c 188. a 189. d 190. c 191. f 192. a 193. b 194. b 195. a 196. a 197. b 198. b 199. a 200. d 201. a 202. c 203. b Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business 204. c 205. d 206. b 207. a 208. a 209. a 210. a 211. c 212. b 213. b 214. c 215. b 216. a 217. c 218. a 219. c 220. b 221. c 222. Internal users of accounting information include managers and employees. The area of accounting that provides internal users with information is called managerial accounting or management accounting. An example of a report that might be used internally is a customer profitability report. External users of accounting information include customers, creditors, banks, and government entities. These users are not directly involved in managing or operating the business. The area of accounting that provides external users with information is called financial accounting. General-purpose financial statements are one type of financial accounting report that is distributed to external users. 223. The three factors are: (1) individual character, (2) firm culture, and (3) lack of laws and enforcement. Honesty, integrity, and fairness in the face of pressure to hide the truth are important characteristics of an ethical businessperson. The behavior and attitude of senior management set the firm’s culture. In firms like Enron, senior managers created a culture of greed and indifference to the truth. That culture flowed down to lower-level managers, who took shortcuts and lied to cover financial frauds. The lack of laws and enforcement has been blamed as a contributing factor to financial reporting abuses. As a result, new laws such as the Sarbanes-Oxley Act (SOX) established a new oversight body for the Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business accounting profession, known as the Public Company Accounting Oversight Board (PCAOB), and established standards to enhance corporate accountability, financial disclosures, and independence. 224. 1. Identify users. 2. Assess users’ information needs. 3. Design the accounting information system to meet users’ needs. 4. Record economic data about business activities and events. 5. Prepare accounting reports for users. 225. The objective of financial accounting is to provide information for the decision-making needs of external users. The objective of managerial accounting is to provide information for internal users. 226. Accounting reports would become unstable and unreliable. 227. The business entity concept limits the economic data in an accounting system to data related directly to the activities of the business. In other words, the business is viewed as an entity separate from its owners, creditors, or other businesses. 228. Darnell Company and Joseph Company 229. Under the business entity concept, economic data are limited to the direct activities of the business. The business is viewed as separate from its owner. Therefore, when Bob buys a personal automobile, it is not listed on the books of Johnson’s Carpet Cleaning Service, unless Bob invests it in the business. In this case, the loan is a personal debt and not a liability of the company, and the cash is from Bob’s personal account and not the company’s account. 230. A limited liability company (LLC) combines the attributes of a partnership and a corporation. It is often used as an alternative to a partnership because it has tax and legal liability advantages for owners. 231. (a) The objectivity concept requires that the amounts recorded in the accounting records be based on objective evidence. In exchanges between a buyer and a seller, both try to get the best price. Only the final agreed-upon amount is objective enough to be recorded in the accounting records. (b) The unit of measure concept requires that economic data be recorded in dollars. Money is a common unit of measurement for entering financial data and preparing reports. 232. (a) $325,000 ($450,000 − $125,000) (b) $355,000 [($450,000 + $65,000) − ($125,000 + $35,000)] 233. Assets = Liabilities + Owner’s Equity 4x = x + $45,000 3x = $45,000 x = $15,000 in liabilities 234. (a) $83,000 ($38,000 + $45,000) (b) $8,000 ($30,000 – $22,000) (c) $21,000 ($53,000 – $32,000) 235. (a) $40,900 ($78,500 − $37,600) (b) $198,280 ($53,280 + $145,000) (c) $15,500 ($49,500 − $34,000) 236. (a) $75,000 − $38,000 = $37,000 beginning of year liabilities Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business ($75,000 + $18,000) − ($37,000 + $4,000) = $52,000 end-of-year owner’s equity (b) $44,000 + $66,000 = $110,000 beginning of year assets ($110,000 + $10,000) − ($44,000 − $5,000) = $81,000 end-of-year owner’s equity 237. $110,000 ($30,000 Cash + $14,000 Accounts Receivable + $64,000 Equipment + $2,000 Prepaid Rent = $110,000) 238. $37,000 ($12,000 Accounts Payable + $5,000 Income Taxes Payable + $20,000 Notes Payable = $37,000) 239. Yes, Scott Industries is profitable. ($165,000 Fees Earned + $3,000 Interest Revenue) − ($40,000 Salaries and Wages Expense + $44,000 Selling Expenses + $18,000 Income Tax Expense + $20,000 Rent Expense) = $46,000 Net Income Scott Industries had net income for the period of $46,000. Since revenues exceeded expenses for the period, the company would be considered profitable. 240. $63,500 ($27,000 Cash + $12,300 Accounts Receivable + $3,100 Supplies + $35,000 Land − $13,900 Accounts Payable = $63,500) 241. (a) $575,000 − $335,000 = $240,000 (b) ($575,000 + $56,000) − ($335,000 − $32,000) = $328,000 (c) $592,000 − $450,000 = $142,000 owner's equity (Year 2) $335,000 − $142,000 = $193,000 net loss 242. (a) $430,000 − $205,000 = $225,000 (b) ($430,000 + $12,000) − ($205,000 + $15,000) = $222,000 (c) ($430,000 − $8,000) − ($205,000 + $14,000) = $203,000 243. Entry Entry Accounting Name of Accounting Name of Increase Increase Equation Accounting Equation Accounting or or Element Equation Amount Element Equation Amount Decrease Decrease (c) (c) Type Element Type Element (d) (d) (a) (b) (a) (b) 1 A Cash $55,000 Increase OE Capital $55,000 Increase A Cash $7,000 Decrease L Accounts $7,000 Decrease 2 Payable A Accounts $2,565 Increase R Fees $2,565 Increase 3 Receivable Earned A Cash $8,450 Increase A Accounts $8,450 Decrease 4 Receivable 5 A Cash $2,500 Decrease OE Drawing $2,500 Increase A Cash $160 Decrease E Utilities $160 Increase 6 Expense 244. Increase assets (Supplies) and increase liabilities (Accounts Payable) 245. Powered by Cognero
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Chapter 01 - Introduction to Accounting and Business (a) (b) (c) (d) (e) (f)
Assets −$500 +$55,000 −$40,000 NC −$450 +$150
Liabilities NC NC NC NC NC +$150
Owner’s Equity −$500 +$55,000 −$40,000 NC −$450 NC
246. Increase liabilities (Accounts Payable) and decrease owner’s equity (Utilities Expense) 247. (a) Increase total assets by a net amount of $12,000 (increase Machinery, $20,000 and decrease Cash, $8,000) and increase liabilities by $12,000 (Notes Payable, $12,000) (b) Decrease assets by $3,000 (decrease Cash,$3,000) and decrease liabilities by $3,000 (Notes Payable,$3,000) 248. (a) Assets increase; liabilities increase (b) No effect (c) Assets decrease; owner's equity decreases (d) Assets increase; owner’s equity increases (e) Assets increase; owner’s equity increases 249. (a) (1) Total assets increased $44,000 (2) No change in liabilities (3) Owner’s equity increased $44,000 (b) (1) Total assets decreased $52,000 (2) Total liabilities decreased $52,000 (3) No change in owner’s equity 250. Total assets decrease $20,000 (Cash increases by $45,000; Land decreases by $65,000) Total liabilities decrease $40,000 (Note payoff to Regions) Owner's equity increases $20,000 (Sales price − Cost of the land) 251. (a) Additional investment by the owner and increase in revenues (b) Withdrawal made by the owner and increase in expenses 252. Ending capital Beginning capital Decrease in capital Withdrawals Net loss
$ 30,000 58,000 $(28,000) (25,000) $ (3,000)
253. (a) (b) (c) (d) (e)
A + + − + −
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L
OE +
+ − + − Page 46
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Chapter 01 - Introduction to Accounting and Business (f) (g) (h) (i) (j) (k)
+ +,− − − − +,−
+ − − −
254. (a) (b) (c) (d) (e)
A + +,− − −,+ −
L
OE +
− −
255. (a) (b) (c) (d) (e)
A − + + + −
L
A −, + +, − − + −
L
OE −
+ + + −
256. (a) (b) (c) (d) (e)
OE − − + −
257. Flagger Company Income Statement For the Year Ended December 31 Fees earned Expenses: Rent expense Selling expenses Salary and wages expense Income tax expense Total expenses Net income
$168,000 $51,000 44,000 40,000 18,000 153,000 $ 15,000
258. Thompson Computer Services Income Statement For the Year Ended March 31 Fees earned Expenses: Powered by Cognero
$73,450 Page 47
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Chapter 01 - Introduction to Accounting and Business Wages expense Office expense Miscellaneous expense Total expenses Net income
$23,550 1,240 1,030 25,820 $47,630
259. Thompson Computer Services Statement of Owner’s Equity For the Year Ended March 31 Thompson, capital, April 1 Additional investment by owner during year Net income for the year Withdrawals Increase in owner’s equity Thompson, capital, March 31
$180,000 $25,000 47,630 (16,570) 56,060 $236,060
260.
Assets Cash Accounts receivable Supplies Land Building Total assets
Thompson Computer Services Balance Sheet March 31 Liabilities $ 21,420 Accounts payable 10,340 1,670 47,000 Owner’s Equity 157,630 Thompson capital Total liabilities and $238,060 owner’s equity
$ 2,000
236,060 $238,060
261. Linda's Design Services Statement of Cash Flows For the Year Ended December 31 Cash flows from (used for) operating activities: Cash received from customers
$83,990
Cash paid for expenses and supplies
(27,410) $ 56,580
Net cash flows from operating activities Cash flows from (used for) investing activities:
(47,000)
Cash paid for land Cash flows from (used for) financing activities: Cash received from owner as investment
$25,000
Cash withdrawal by owner
(5,000)
Net cash flows from financing activities Powered by Cognero
20,000 Page 48
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Chapter 01 - Introduction to Accounting and Business Net increase in cash
$29,580
Cash balance, January 1
40,600
Cash balance, December 31
$70,180
262. The income statement reports the revenues and expenses for a period of time. The result is either a net income or a net loss. 263. Cash Flows from (Used for) Operating Activities, Cash Flows from (Used for) Investing Activities, and Cash Flows from (Used for) Financing Activities 264. 1. Income statement: A summary of the revenue and expenses for a specific period of time, such as a month or a year. 2. Statement of owner’s equity: A summary of the changes in the owner’s equity that have occurred during a specific period of time such as a month or a year. 3. Balance sheet: A list of the assets, liabilities, and owner’s equity as of a specific date, usually at the close of the last day of a month or a year. 4. Statement of cash flows: A summary of the cash receipts and cash payments for a specific period of time, such as a month or a year. 265. Evelyn's Event Planning Statement of Cash Flows For the Year Ended December 31 Cash flows from (used for) operating activities: Cash received from customers $57,360 (21,600) Cash paid for expenses and supplies Net cash flows from operating activities $35,760 Cash flows from (used for) investing activities: Cash paid for equipment Cash flows from (used for) financing activities: Cash received from bank loan Cash withdrawals by owner Net cash flows from financing activities Net increase in cash Cash balance, January 1 Cash balance, December 31
(18,070)
$15,000 (12,000) 3,000 $20,690 15,580 $36,270
266. Rocky's Day Spa Income Statement For the Year Ended December 31 Fees earned Expenses: Wages expense Powered by Cognero
$98,435 $26,580 Page 49
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Chapter 01 - Introduction to Accounting and Business Spa operating expense Office expense Total expenses Net income
23,760 2,470 52,810 $45,625
267.
Assets Cash Accounts receivable Spa supplies Computers Spa furniture and equipment Total assets
Rocky's Day Spa Balance Sheet December 31 Liabilities $13,980 Accounts payable 8,490 9,230 2,130 Owner’s Equity 56,000 $89,830
Owner's capital Total liabilities and owner’s equity
$ 4,375
85,455 $89,830
268. Rocky's Day Spa Statement of Owner’s Equity For the Year Ended December 31 Owner's capital, January 1 Additional investment by owner during year $ 10,000 Net income for the year 45,625 Withdrawals (38,170) Increase in owner’s equity Owner's capital, December 31
$68,000
17,455 $85,455
269. The cash reported on the balance sheet is also reported as the end-of-period cash on the statement of cash flows. 270. (a), (d), (f) 271. (a), (c), (d), (f), (g) 272. (a) $35,800 net income ($71,300 − $35,500) (b) $45,500 net income ($220,500 − $175,000) (c) $(23,000) net loss ($149,000 − $172,000) (d) $23,950 net income ($198,150 − $174,200) 273. (a) Owner's equity at end of year ($475,000 − $130,000) Owner's equity at beginning of year ($280,000 − $205,000) Net income (b) Increase in owner's equity as in (a) Add withdrawals Powered by Cognero
$345,000 75,000 $270,000 $270,000 53,000 Page 50
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Chapter 01 - Introduction to Accounting and Business Net income
$323,000
(c) Increase in owner's equity as in (a) Deduct additional investment Net income
$270,000 35,000 $235,000
(d) Increase in owner's equity as in (a) Add withdrawals ($1,500 × 12) Deduct additional investment Net income
$270,000 18,000 (12,000) $276,000
274. (a) $61,000 ($33,000 + $28,000) (b) $43,250 ($36,250 + $5,000 + $2,000) (c) $17,750 ($61,000 − $43,250) 275. (a) Richard’s Catering Company Income Statement For the Month Ended March 31 Fees earned Expenses: Salary expense Rent expense Utilities expense Insurance expense Supplies expense Miscellaneous expense Total expenses Net income
$64,950 $20,300 9,000 2,800 1,275 525 1,210 35,110 $29,840
(b) Richard’s Catering Company Statement of Owner's Equity For the Month Ended March 31 Richard Cook, capital, March 1 Net income for the month $29,840 Withdrawals (31,000) Decrease in owner's equity Richard Cook, capital, March 31
$150,000
(1,160) $148,840
(c) Richard’s Catering Company Balance Sheet March 31 Assets Liabilities Cash $ 23,840 Accounts payable Accounts receivable 45,950 Prepaid insurance 3,000 Owner's Equity Supplies 900 Richard Cook, capital Land 85,400 Total liabilities and Powered by Cognero
$ 10,250
148,840 Page 51
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Chapter 01 - Introduction to Accounting and Business Total assets
$159,090
owner's equity
$159,090
276. (a) $6,400 (b) $17,900 (c) $9,100 (d) $9,100 (e) $38,100 (f) $30,800 (g) $17,000 (h) $17,800 (i) $38,100 (j) $55,900 (k) $35,000 (l) $6,000 (m) $29,000 (n) $30,800 277. Heavenly Futures Company Income Statement For the Month Ended August 31 Fees earned Expenses: Wages expense Rent expense Telephone expense Utilities expense Office expense Total expenses Net income
$15,700 $4,800 1,400 1,150 750 420 8,520 $ 7,180
278. Bright Futures Company Statement of Owner’s Equity For the Month Ended August 31 Jason Bright, capital, August 1 Net income for August $7,180 Withdrawals (800) Increase in owner’s equity Jason Bright, capital, August 31
$14,320
6,380 $20,700
279. Errors in the Eric Wood, CPA, financial statements include the following: (1)
(2) (3) (4)
Miscellaneous expense is incorrectly listed after utilities expense on the income statement. Miscellaneous expense should be listed as the last expense, regardless of the amount. The operating expenses are incorrectly added. Instead of $28,000, the total should be $32,660. Because operating expenses are incorrectly added, the net income is incorrect. It should be listed as $9,340. The statement of owner's equity should be for a period of time instead of a
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Chapter 01 - Introduction to Accounting and Business specific date. That is, the statement of owner's equity should be reported "For the Three Months Ended March 31." (5) Because the net income was incorrect, the increase in owners' equity and the balance in Eric Wood, Capital are incorrect. They should both be shown as $24,340. (6) The name of the company is missing from the balance sheet heading. (7) The balance sheet should be as of "March 31," not "For the Three Months Ended March 31." (8) Cash, not land, should be the first asset listed on the balance sheet. (9) Accounts payable is incorrectly listed as an asset on the balance sheet. Accounts payable should be listed as a liability. (10) Liabilities should be listed on the balance sheet ahead of owner's equity. (11) Accounts receivable is incorrectly listed as a liability on the balance sheet. Accounts receivable should be listed as an asset. (12) The assets do not total to $33,225 as shown, making the balance sheet out of balance. Correctly prepared financial statements for Eric Wood, CPA, are as follows: Eric Wood, CPA Income Statement For the Three Months Ended March 31 Fees earned Expenses: Salary expense Rent expense Supplies expense Advertising expense Utilities expense Answering service expense Miscellaneous expense Total expenses Net income
$42,000 $9,735 5,200 4,000 3,950 3,225 2,550 4,000 32,660 $ 9,340
Eric Wood, CPA Statement of Owner's Equity For the Three Months Ended March 31 Eric Wood, capital, January 1 Investment on January 1 Net income for three months Withdrawals Increase in owner's equity Eric Wood, capital, March 31
$
0
$20,000 9,340 (5,000) 24,340 $24,340 Eric Wood, CPA Balance Sheet March 31
Assets Cash Accounts receivable Powered by Cognero
$10,860 2,225
Liabilities Accounts payable $ 2,670 Owner's Equity Page 53
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Chapter 01 - Introduction to Accounting and Business Supplies Land Total assets
925 13,000 $27,010
Eric Wood, capital
24,340
Total liabilities and $27,010 owner's equity
280. Bright Futures Company Balance Sheet August 31 Assets Cash Accounts receivable Supplies Computer equipment Total assets
$ 3,000 1,500 140 20,000 $24,640
Liabilities Accounts payable Notes payable Total liabilities Owner's Equity Jason Bright, capital Total liabilities and owner’s equity
$ 1,540 2,400 $ 3,940 20,700 $24,640
281. Awesome Travel Services Income Statement For the Year Ended December 31 Fees earned Expenses: Expenses: Wages expense Rent expense Utilities expense Supplies expense Income tax expense Total expenses Net income
$78,000
$25,000 10,000 8,000 1,700 1,300
Awesome Travel Services Statement of Owner’s Equity For the Year Ended December 31 J. Trendsetter, capital, January 1 Net income for the year J. Trendsetter, capital, December 31
Assets Cash Accounts receivable Powered by Cognero
Awesome Travel Services Balance Sheet December 31 Liabilities $18,000 Accounts payable 14,000
46,000 $32,000
$10,000 32,000 $42,000
$12,000 Page 54
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Chapter 01 - Introduction to Accounting and Business Supplies Computer equipment Total assets
1,000 Owner’s Equity 21,000 J. Trendsetter, capital $54,000 Total liabilities and owner’s equity
42,000 $54,000
282. (a) Dec. 31, Year 2 Total liabilities $128,250 Total owner’s equity 95,000 Ratio of liabilities to owner’s equity 1.35 ($128,250/$95,000)
Dec. 31,Year 1 $120,000 80,000 1.50 ($120,000/$80,000)
(b) Decreased 283. Company M’s creditors are more at risk than are Company G’s creditors. The lower the ratio of liabilities to stockholders' equity, the better able the company is to withstand poor business conditions and pay its obligations to creditors. Without additional information, it appears that the creditors of either company are well protected against the risk of nonpayment, because the ratios are relatively low for both. However, the fact that both ratios are increasing over the period should be monitored for downturns in business conditions. 284. (a) Dec. 31, Year 2: $150,000/$75,000 = 2.0 Dec. 31, Year 1: $105,000/$60,000 = 1.8 (b) Increased
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Chapter 02 - Analyzing Transactions True / False 1. Accounts are records of increases and decreases in individual financial statement items. a. True b. False 2. A chart of accounts is a listing of accounts that make up the journal. a. True b. False 3. The chart of accounts should be the same for each business. a. True b. False 4. Accounts payable are accounts that you expect will be paid to you. a. True b. False 5. Consuming goods and services in the process of generating revenues results in expenses. a. True b. False 6. Prepaid expenses are an example of an expense. a. True b. False 7. The unearned revenue account is an example of a liability. a. True b. False 8. The drawing account is an expense. a. True b. False 9. Accounts in the ledger are usually maintained in alphabetical order. a. True b. False 10. Depending on the account title, the right side of the account is referred to as the credit side. a. True b. False 11. To determine the balance in an account, always subtract credits from debits. a. True b. False Powered by Cognero
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Chapter 02 - Analyzing Transactions 12. An account in its simplest form has three parts to it: a title, an increase side, and a decrease side. a. True b. False 13. The T account got its name because it resembles the letter “T.” a. True b. False 14. The right side of a T account is known as a debit and the left side is known as a credit. a. True b. False 15. A debit entry to the cash account will increase the account. a. True b. False 16. A credit entry to the cash account will increase the account. a. True b. False 17. The cash account will always be debited. a. True b. False 18. The recording of cash receipts to the cash account will be done by debiting the account. a. True b. False 19. The recording of cash payments from the cash account is done by entering the amount as a credit. a. True b. False 20. The balance of an account can be determined by adding all of the debits, adding all of the credits, and adding the amounts together. a. True b. False 21. Liabilities are debts owed by the business entity. a. True b. False 22. The accounts payable account is listed in the chart of accounts as an asset. a. True b. False 23. A drawing account represents the amount of withdrawals made by the owner. Powered by Cognero
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Chapter 02 - Analyzing Transactions a. True b. False 24. Revenues are equal to the difference between cash receipts and cash payments. a. True b. False 25. Expenses result from using up assets or consuming services in the process of generating revenues. a. True b. False 26. Owner’s equity will be reduced by the amount in the drawing account. a. True b. False 27. When an owner invests assets in the business, the capital account increases due to revenue being earned. a. True b. False 28. When an account receivable is collected in cash, the total assets of the business increase. a. True b. False 29. When an account payable is paid with cash, the owner's equity in the business decreases. a. True b. False 30. For a month's transactions for a typical medium-sized business, the salary expense account is likely to have only credit entries. a. True b. False 31. A debit is abbreviated as Db and a credit is abbreviated as Cr. a. True b. False 32. When a business purchases supplies on account, no entry should be made until the invoice is paid. a. True b. False 33. For a month's transactions for a typical medium-sized business, the accounts payable account is likely to have only credit entries. a. True b. False 34. Withdrawals decrease owner's equity and are listed on the income statement as a deduction from revenue. Powered by Cognero
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Chapter 02 - Analyzing Transactions a. True b. False 35. The normal balance of revenue accounts is a credit. a. True b. False 36. The normal balance of an expense account is a credit. a. True b. False 37. The normal balance of the drawing account is a debit. a. True b. False 38. Expense accounts are increased by credits. a. True b. False 39. The normal balance of a capital account is a debit. a. True b. False 40. Revenue accounts are increased by credits. a. True b. False 41. Liability accounts are increased by debits. a. True b. False 42. Journalizing transactions using the double-entry bookkeeping system will eliminate fraud. a. True b. False 43. Transactions are listed in the journal chronologically. a. True b. False 44. Journalizing is the process of entering amounts in the ledger. a. True b. False 45. The process of recording a transaction in the journal is called journalizing. a. True b. False Powered by Cognero
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Chapter 02 - Analyzing Transactions 46. Transactions are initially entered into a record called a journal. a. True b. False 47. The double-entry accounting system records each transaction twice. a. True b. False 48. The increase side of an account is also the side of the normal balance. a. True b. False 49. Journal entries include both debit and credit accounts for each transaction. a. True b. False 50. A transaction that is recorded in the journal is called a journal entry. a. True b. False 51. Assets are increased with debits and decreased with credits. a. True b. False 52. Liabilities are increased with debits and decreased with credits. a. True b. False 53. Debits will increase unearned revenues and revenues. a. True b. False 54. All owner’s equity accounts record increases to the accounts with credits. a. True b. False 55. Journalizing always eliminates fraudulent activity. a. True b. False 56. Journal entries can have more than two accounts as long as the debits equal the credits. a. True b. False 57. Normal account balances are on the increase side of the accounts. Powered by Cognero
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Chapter 02 - Analyzing Transactions a. True b. False 58. The process of transferring data from the journal to the ledger accounts is called posting. a. True b. False 59. The posting reference notation used in the ledger is the account number. a. True b. False 60. The posting reference notation used in the journal is the page number. a. True b. False 61. A notation in the Post. Ref. column of the general journal indicates that the amount has been posted to the ledger. a. True b. False 62. The order of the flow of accounting data is (1) record in the ledger, (2) record in the journal, and (3) prepare the financial statements. a. True b. False 63. The process of transferring the debits and credits from the journal entries to the accounts is known as posting. a. True b. False 64. Postings made to four-column account forms show a new balance after each entry. a. True b. False 65. A group of related accounts that make up a complete unit is called a trial balance. a. True b. False 66. A trial balance determines the accuracy of the numbers. a. True b. False 67. Even when a trial balance is in balance, there may be errors in the individual accounts. a. True b. False 68. The totals at the bottom of the trial balance and the totals at the bottom of the balance sheet both show equality and Powered by Cognero
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Chapter 02 - Analyzing Transactions balancing and therefore should be equal. a. True b. False 69. A proof of the equality of debits and credits in the ledger at the end of an accounting period is called a balance sheet. a. True b. False 70. If the trial balance is in balance, it can be assumed that all journal entries were posted correctly and no errors were made. a. True b. False 71. Posting the credit part of a journal entry to the wrong account will cause the trial balance totals to be unequal. a. True b. False 72. The erroneous arrangement of digits, such as writing $45 as $54, is called a slide. a. True b. False 73. Journalizing a transaction with both the debit and the credit for $69 instead of $96 will cause the trial balance to be out of balance. a. True b. False 74. The erroneous moving of an entire number one or more spaces to the right or left, such as writing $85 as $850, is called a transposition. a. True b. False Multiple Choice 75. Accounts a. do not reflect money amounts b. are not used by entities that manufacture products c. are records of increases and decreases in individual financial statement items d. are only used by large entities with many transactions 76. Accounts are classified in the ledger a. chronologically b. alphabetically c. in accordance with their appearance in the financial statements d. with the accounts used most often listed first 77. Which of the following accounts is an owner's equity account? Powered by Cognero
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Chapter 02 - Analyzing Transactions a. Cash b. Accounts Payable c. Prepaid Insurance d. Ross Morris, Capital 78. The gross increases in owner's equity attributable to business activities are called a. assets b. liabilities c. revenues d. expenses 79. A chart of accounts is a. the same as a balance sheet b. usually a listing of accounts in alphabetical order c. usually a listing of accounts in financial statement order d. used in place of a ledger 80. The debit side of an account a. depends on whether the account is an asset, liability, or owner's equity b. can be either side of the account depending on how the accountant set up the system c. is the right side of the account d. is the left side of the account 81. An account is said to have a debit balance if a. the amount of the debits exceeds the amount of the credits b. there are more entries on the debit side than on the credit side c. there are more entries on the credit side than on the debit side d. the first entry of the accounting period was posted on the debit side 82. Which side of the account increases the cash account? a. credit b. neither a debit nor a credit c. debit d. either a debit or a credit 83. Which statement(s) concerning cash is (are) true? a. Cash will always have more debits than credits. b. Cash will never have a credit balance. c. Cash is increased by debiting. d. All of these choices. 84. Which of the following is true about T accounts? a. The left side of a T account is called the debit side. b. The left side of a T account is called the credit side. Powered by Cognero
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Chapter 02 - Analyzing Transactions c. The right side of a T account is called the debit side. d. Transactions are first recorded in T accounts and then posted to the journal. 85. A cash payment is recorded in the cash account as a. neither a debit nor a credit b. a credit c. a debit d. either a debit or a credit 86. A list of the accounts used by a business is called the a. journal b. chart of accounts c. T chart d. debit listing 87. In the chart of accounts, the balance sheet accounts are normally listed in which order? a. liabilities, assets, owner’s equity b. assets, liabilities, owner’s equity c. owner’s equity, assets, liabilities d. assets, owner’s equity, liabilities 88. In which order are the accounts listed in the chart of accounts? a. assets, expenses, liabilities, owner’s equity, revenues b. owner's equity, assets, liabilities, revenues, expenses c. assets, liabilities, owner’s equity, revenues, expenses d. assets, liabilities, revenues, expenses, owner's equity 89. Which are the parts of the T account? a. title, date, total b. date, debit side, credit side c. title, debit side, credit side d. title, debit side, total 90. The chart of accounts is designed to a. alphabetize the accounts to make reading easier for financial statement users b. organize accounts in order of dollar amount to simplify the accounting information for users c. summarize the transactions and determine ending account balances d. meet the information needs of a company's managers and other users of its financial statements 91. Which group of accounts is comprised of only assets? a. Cash, Accounts Payable, Buildings b. Accounts Receivable, Revenue, Cash c. Prepaid Expenses, Buildings, Patents d. Unearned Revenue, Prepaid Expenses, Cash Powered by Cognero
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Chapter 02 - Analyzing Transactions 92. Which of the following is true about assets? a. Assets include both physical and intangible items. b. Assets include only physical items. c. Assets are the personal property of the owner of the company. d. Assets are the result of selling products or services to customers. 93. Which of the following is not considered to be a liability? a. Wages Payable b. Accounts Receivable c. Unearned Revenue d. Accounts Payable 94. Which of the following statements is not true about liabilities? a. Liabilities are debts owed to outsiders. b. Account titles of liabilities often include the term “payable.” c. Cash received before a service is performed creates a liability. d. Liabilities do not include wages owed to employees of the company. 95. Owner’s equity will be reduced by all of the following except a. revenues b. expenses c. withdrawals d. All of these choices 96. Expenses can result from a. increasing owner’s equity b. consuming services c. using up liabilities d. purchasing assets 97. Assume that you are creating a chart of accounts for a company. Each account number will have two digits. The first digit indicates the major account group to which the account belongs. Which of the following correctly identifies the major account groups typically represented by the numbers 1 through 5? a. 1-Assets, 2-Liabilities, 3-Owner’s Equity, 4-Expenses, 5-Revenues b. 1-Assets, 2-Liabilities, 3-Owner’s Equity, 4-Revenues, 5-Expenses c. 1-Assets, 2-Owner’s Equity, 3-Revenues, 4-Expenses, 5-Drawing d. 1-Owner’s Equity, 2-Drawing, 3-Revenues, 4-Expenses 98. The following accounts appear in the ledger of Monroe Entertainment Co. All accounts have normal balances. Accounts Payable Accounts Receivable Prepaid Insurance Cash Drawing Powered by Cognero
$1,500 1,800 2,000 3,200 1,200
Fees Earned Insurance Expense Land Wages Expense Capital
$3,600 1,300 3,000 1,400 8,800 Page 10
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Chapter 02 - Analyzing Transactions Total assets are a. $10,000 b. $8,000 c. $9,700 d. $9,800 99. The balance of an account is determined by a. adding all of the debits to all of the credits b. always subtracting the debits from the credits c. always subtracting the credits from the debits d. adding all of the debits, adding all of the credits, and then subtracting the smaller sum from the larger sum 100. Which of the following types of accounts have a normal credit balance? a. assets and liabilities b. liabilities and expenses c. revenues and capital d. capital and drawing 101. Which of the following groups of accounts have a normal debit balance? a. revenues, liabilities, and capital b. capital and assets c. liabilities and capital d. assets and expenses 102. Which of the following statements is not a purpose for the journal? a. to show increases and decreases in accounts b. to show a chronological order by date c. to show a complete transaction in one place d. to help locate errors 103. A credit signifies a decrease in a. assets b. liabilities c. capital d. revenue 104. A debit signifies a decrease in a. assets b. expenses c. drawing d. revenues 105. Which of the following applications of the rules of debit and credit is true? a. decrease Prepaid Insurance with a credit and the normal balance is a credit Powered by Cognero
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Chapter 02 - Analyzing Transactions b. increase Accounts Payable with a credit and the normal balance is a debit c. increase Equipment with a debit and the normal balance is a debit d. decrease Cash with a debit and the normal balance is a credit 106. Which of the following describes the classification and normal balance of the fees earned account? a. asset, credit b. liability, credit c. owner's equity, debit d. revenue, credit 107. The classification and normal balance of the accounts payable account are a. asset, credit balance b. liability, credit balance c. owner's equity, credit balance d. revenue, credit balance 108. The classification and normal balance of the drawing account are a. expense, credit balance b. expense, debit balance c. liability, credit balance d. owner's equity, debit balance 109. Which of the following accounts are debited to record increases? a. assets and liabilities b. drawing and liabilities c. expenses and liabilities d. assets and expenses 110. In which of the following types of accounts are increases recorded by credits? a. revenues and liabilities b. drawing and assets c. liabilities and drawing d. expenses and liabilities 111. In which of the following types of accounts are decreases recorded by debits? a. assets b. liabilities c. expenses d. drawing 112. In which of the following types of accounts are decreases recorded by credits? a. liabilities b. owner's equity c. assets Powered by Cognero
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Chapter 02 - Analyzing Transactions d. revenues 113. A credit balance in which of the following accounts would likely indicate an error? a. Fees Earned b. Salary Expense c. Janet James, Capital d. Accounts Payable 114. A debit balance in which of the following accounts would likely indicate an error? a. Salaries Expense b. Notes Payable c. Edgar Martin, Drawing d. Supplies 115. Which of the following entries records the payment of an account payable? a. debit Cash; credit Accounts Payable b. debit Accounts Receivable; credit Cash c. debit Cash; credit Supplies Expense d. debit Accounts Payable; credit Cash 116. Which of the following entries records the investment of cash by Taylor Thomas, owner of a proprietorship? a. debit Taylor Thomas, Capital; credit Accounts Receivable b. debit Cash; credit Taylor Thomas, Capital c. debit Taylor Thomas, Drawing; credit Cash d. debit Cash; credit Taylor Thomas, Drawing 117. Which of the following entries records the withdrawal of cash by Sally Anderson, owner of a proprietorship, for personal use? a. debit Sally Anderson, Capital; credit Cash b. debit Sally Anderson, Drawing; credit Cash c. debit Salaries Expense; credit Cash d. debit Salaries Expense; credit Salaries Payable 118. Office supplies were sold by Janer's Cleaning Service at cost to another repair shop, with cash received. Which of the following entries for Janer's Cleaning Service records this transaction? a. Office Supplies, debit; Cash, credit b. Office Supplies, debit; Accounts Payable, credit c. Cash, debit; Office Supplies, credit d. Accounts Payable, debit; Office Supplies, credit 119. Office supplies purchased by Janer's Cleaning Service on account were returned. Which of the following entries for Janer's Cleaning Service records this transaction? a. Cash, debit; Office Supplies, credit b. Office Supplies, debit; Accounts Receivable, credit c. Accounts Payable, debit; Office Supplies, credit Powered by Cognero
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Chapter 02 - Analyzing Transactions d. Office Supplies, debit; Accounts Payable, credit 120. Cash was paid by Janer's Cleaning Service to creditors on account. Which of the following entries for Janer's Cleaning Service records this transaction? a. Cash, debit; Debbi Janer, Capital, credit b. Accounts Payable, debit; Cash, credit c. Accounts Receivable, debit; Cash, credit d. Accounts Payable, debit; Accounts Receivable, credit 121. The process of initially recording a business transaction is called a. closing b. posting c. journalizing d. balancing 122. Which of the following entries records the acquisition of office supplies on account? a. Office Supplies, debit; Cash, credit b. Cash, debit; Office Supplies, credit c. Office Supplies, debit; Accounts Payable, credit d. Accounts Receivable, debit; Office Supplies, credit 123. Which of the following abbreviations is correct? a. Debit, “Dr”; Credit, “Cd” b. Debit, “Db”; Credit, “Cr” c. Debit, “Db”; Credit, “Cd” d. Debit, “Dr”; Credit, “Cr” 124. Which of the following is not a correct rule of debits and credits? a. Assets, expenses, and withdrawals are increased by debits. b. Assets are decreased by credits and have a normal debit balance. c. Liabilities, revenues, and owner’s equity are increased by credits. d. The normal balance for revenues and expenses is a credit. 125. Gently Laser Clinic purchased laser equipment for $8,500 and paid $2,250 down, with the remainder to be paid later. The correct journal entry would be a. Equipment 2,250 Cash 2,250 b. Cash 2,250 Accounts Payable 6,250 Equipment 8,500 c. Equipment Expense 8,500 Accounts Payable 2,250 Cash 6,250 d. Equipment 8,500 Accounts Payable 6,250 Powered by Cognero
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Chapter 02 - Analyzing Transactions Cash
2,250
126. A transaction can first be found in the accounting records in the a. chart of accounts b. income statement c. balance sheet d. journal 127. The process of recording a transaction in the journal is called a. ledgerizing b. journalizing c. posting d. summarizing 128. Joshua Scott invests $40,000 into his new business. How would this transaction be entered in the journal? a. Cash 40,000 Joshua Scott, Capital 40,000 Invested cash in business. b. Cash 40,000 Joshua Scott, Loan 40,000 Invested cash in business. c. Joshua Scott, Capital 40,000 Cash 40,000 Invested cash in business. d. Joshua Scott, Loan 40,000 Cash 40,000 Invested cash in business. 129. May
23
Cash Scott Clark, Capital Invested cash in business.
22,000 22,000
This journal entry will a. increase Capital and decrease Cash b. increase Cash and decrease Capital c. increase Cash and increase Capital d. decrease Cash and decrease Capital 130. May
24
Land Cash Purchased land for business. What effects does this journal entry have on the accounts? a. increase Cash and increase Land b. increase Land and decrease Cash Powered by Cognero
105,000 105,000
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Chapter 02 - Analyzing Transactions c. decrease Cash and decrease Land d. increase Cash and decrease Land 131. Mar.
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Accounts Payable Cash Paid creditors on account. What effects does this journal entry have on the accounts? a. decrease Accounts Payable, increase Cash b. increase Cash, decrease Accounts Payable c. increase Accounts Payable, increase Cash d. decrease Accounts Payable, decrease Cash
800 800
132. Which of the following accounts would be increased with a credit? a. Land; Accounts Payable; Drawing b. Accounts Payable; Unearned Revenue; Collins, Capital c. Collins, Capital; Accounts Receivable; Unearned Revenue d. Cash; Accounts Receivable; Collins, Capital 133. In accordance with the debit and credit rules, which of the following is true? a. Debits increase assets. b. Credits increase assets. c. Debits increase both assets and capital. d. Credits increase both assets and liabilities. 134. All of the following accounts are increased with a debit except a. Unearned Revenue b. Land c. Accounts Receivable d. Cash 135. Which of the following owner’s equity accounts follows the same debit and credit rules as liabilities? a. expense accounts only b. drawing accounts only c. revenue accounts only d. expense and drawing accounts 136. The payment for the monthly rent will require which of the following entries? a. debit Cash and debit Rent Expense b. credit Cash and credit Rent Expense c. debit Rent Expense and credit Cash d. credit Rent Expense and debit Cash 137. Expenses follow the same debit and credit rules as a. revenues Powered by Cognero
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Chapter 02 - Analyzing Transactions b. the drawing account c. the capital account d. liabilities 138. Which of the following transactions increases owner’s equity? a. Earn revenue b. Withdraw money for personal use c. Pay expenses d. Receive cash from customers on account 139. Which of the following transactions increases owner’s equity? a. Purchase supplies on account b. Provide services on account c. Receive cash from customers on account d. Receive utility bill to be paid next month 140. Which of the following groups of accounts is increased with a debit? a. assets, liabilities, owner’s equity b. assets, drawing, expenses c. assets, revenues, expenses d. assets, liabilities, revenues 141. Which of the following groups of accounts is increased with a credit? a. capital, revenues, expenses b. assets, capital, revenues c. liabilities, capital, revenues d. None of these choices. 142. Which of the following is true regarding normal balances of accounts? a. All accounts have a normal debit balance. b. The normal balance of all accounts will have either a positive or negative balance. c. Accounts that have a normal debit balance will only have debit entries, never credit entries. d. The normal balance is on the increase side of the account. 143. Which of the following is not true with a double-entry accounting system? a. The accounting equation remains in balance. b. The sum of all debits is always equal to the sum of all credits in each journal entry. c. Each business transaction will have two debits. d. Every transaction affects at least two accounts. 144. Mar.
6 Cash Unearned Fees ???????????? What is the best explanation for this journal entry? Powered by Cognero
2,500 2,500
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Chapter 02 - Analyzing Transactions a. Received cash for services performed. b. Received cash for services to be performed in the future. c. Paid cash in advance for services to be performed. d. Performed services for which cash is owed. 145. Apr.
14
Equipment 15,000 Cash 5,000 Notes Payable 10,000 ???????????? Which is the best explanation for this journal entry? a. Purchased equipment; paid cash of $5,000, with the remainder to be paid in the future. b. Purchased equipment; paid cash of $10,000, with the remainder to be received in the future. c. Purchased equipment with cash. d. Purchased equipment on account. 146. A debit may signify a(n) a. decrease in asset accounts b. decrease in liability accounts c. increase in the capital account d. decrease in the drawing account 147. Which of the following entries records the payment of an insurance premium covering the next year? a. debit Prepaid Insurance; credit Cash b. debit Insurance Payable; credit Accounts Receivable c. debit Accounts Payable; credit Cash d. debit Cash; credit Prepaid Insurance 148. Which of the following entries records the payment of insurance for the current month? a. Cash, debit; Insurance Expense, credit b. Insurance Expense, debit; Cash, credit c. Insurance Expense, debit; Accounts Receivable, credit d. Prepaid Insurance, debit; Cash, credit 149. Which of the following entries records the receipt of cash from clients on account? a. Accounts Payable, debit; Fees Earned, credit b. Accounts Receivable, debit; Fees Earned, credit c. Accounts Receivable, debit; Cash, credit d. Cash, debit; Accounts Receivable, credit 150. Which of the following entries records the collection of cash from cash customers? a. Fees Earned, debit; Cash, credit b. Fees Earned, debit; Accounts Receivable, credit c. Cash, debit; Fees Earned, credit Powered by Cognero
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Chapter 02 - Analyzing Transactions d. Accounts Receivable, debit; Fees Earned, credit 151. Which of the following entries records the receipt of cash for two months' rent? The cash was received in advance of providing the service. a. Prepaid Rent, debit; Rent Revenue, credit b. Cash, debit; Unearned Rent, credit c. Cash, debit; Prepaid Rent, credit d. Cash, debit; Rent Expense credit 152. A client has a massage and asks the company bookkeeper to mail her the bill. The bookkeeper should make which entry to record the invoice? a. no entry until the cash is received b. Fees Earned, debit; Accounts Receivable, credit c. Cash, debit; Fees Earned, credit d. Accounts Receivable, debit; Fees Earned, credit 153. The process of transferring the debits and credits from the journal entries to the accounts is called a. sliding b. transposing c. journalizing d. posting 154. The posting process will include the transfer of which of the following data from the journal to the ledger? a. date, amount (debit or credit) b. date, amount (debit or credit), journal page number c. amount (debit or credit), account number d. date, amount (debit or credit) account number 155. The Posting Reference columns are used to trace transactions from the ledger to the journal. What will be entered in the Posting Reference column of (1) the journal and (2) the ledger? a. (1) the amount of the debit or credit and (2) the journal page number b. (1) the journal page number and (2) the date of the transaction c. (1) the journal page number and (2) the account number d. (1) the account number and (2) the journal page number The chart of accounts for Corning Company includes the following: Account Name Cash Accounts Receivable Prepaid Insurance Accounts Payable Unearned Revenue Corning, Capital Corning, Drawing Fees Earned Powered by Cognero
Account Number 11 13 15 21 24 31 32 41 Page 19
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Chapter 02 - Analyzing Transactions Salaries Expense Rent Expense
54 56
Page 3 of the journal contains the following entry: Prepaid Insurance Cash
1,530 1,530
156. What is the posting reference that will be found in the cash account? a. 11 b. 15 c. 3 d. 13 157. What is the posting reference that will be found in the prepaid insurance account? a. 11 b. 15 c. 3 d. 13 158. What posting references will be found in the journal entry? a. 15, 11 b. 15, 3 c. 11, 3 d. 3, 15 159. The chart of accounts for Miguel Company includes the following: Account Name
Account Number 11 13 15 21 24 31 32 41 54 56
Cash Accounts Receivable Prepaid Insurance Accounts Payable Unearned Revenue Miguel, Capital Miguel, Drawing Fees Earned Salaries Expense Rent Expense Page 3 of the journal contains the following transaction: Cash Fees Earned
640 640
What posting references will be found in the journal entry? a. 41, 3 Powered by Cognero
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Chapter 02 - Analyzing Transactions b. 3, 11 c. 11, 41 d. 11, 3 160. The chart of accounts for Miguel Company includes the following: Account Name
Account Number 11 13 15 21 24 31 32 41 54 56
Cash Accounts Receivable Prepaid Insurance Accounts Payable Unearned Revenue Miguel, Capital Miguel, Drawing Fees Earned Salaries Expense Rent Expense Page 5 of the journal contains the following transaction: Salaries Expense Cash
525 525
What is the posting reference that will be found in the salaries expense account? a. 5 b. 11 c. 54 d. 21 161. Proof that the dollar amount of the debits equals the dollar amount of the credits in the ledger means a. all of the information from the journal was correctly transferred to the ledger b. all accounts have their correct balances in the ledger c. only the journal is accurate; the ledger may be incorrect d. only that the debit dollar amounts equal the credit dollar amounts 162. That the total dollar amount of the debits equals the total dollar amount of the credits in the ledger accounts can be verified through a(n) a. chart of accounts b. trial balance c. income statement d. balance sheet 163. Randomly listed steps for preparing a trial balance are as follows: (1) Verify that the total of the Debit column equals the total of the Credit column. (2) List the accounts from the ledger and enter their debit or credit balance in the Debit or Credit column of the trial balance. (3) List the name of the company, the title of the trial balance, and the date the trial balance is prepared. Powered by Cognero
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Chapter 02 - Analyzing Transactions (4)
Total the Debit and Credit columns of the trial balance.
What is the proper order of these steps? a. (3), (2), (4), (1) b. (2), (3), (4), (1) c. (3), (2), (1), (4) d. (4), (3), (2), (1) 164. A trial balance is prepared to a. prove that there were no errors made in recording transactions into the journal b. prove that no errors were made in posting to the ledger c. prove that each account balance is correct d. discover errors that affect the equality of debits and credits 165. The following accounts appear in the ledger of Monroe Entertainment Co. All accounts have normal balances. Accounts Payable Accounts Receivable Cash Kim Monroe, Drawing Prepaid Insurance
$1,500 1,800 3,200 1,200 2,000
Fees Earned Insurance Expense Kim Monroe, Capital Land Wages Expense
$3,600 1,300 8,800 3,000 1,400
When a trial balance is prepared, the total of the debits will be a. $13,900 b. $11,200 c. $12,700 d. $9,700 166. Which of the following is an internal report that will determine if debit balances equal credit balances in the ledger? a. chart of accounts b. income statement c. trial balance d. account reconciliation 167. An overpayment error was discovered in computing and paying the wages of a Jamison Tree Trimming employee. When Jamison receives cash from the employee for the amount of the overpayment, which of the following entries will Jamison make? a. Cash, debit; Wages Expense, credit b. Wages Payable, debit; Wages Expense, credit c. Wages Expense, debit; Cash, credit d. Cash, debit; Wages Payable, credit 168. If the two totals of a trial balance are not equal, it could be due to a. failure to record a transaction b. recording the same erroneous amount for both the debit and the credit parts of a transaction c. an error in determining the account balances, such as a balance being incorrectly computed Powered by Cognero
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Chapter 02 - Analyzing Transactions d. recording the same transaction more than once 169. When a transposition error is made on the trial balance, the difference between the debit and credit totals on the trial balance will be a. zero b. twice the amount of the transposition c. one-half the amount of the transposition d. divisible by 9 170. Which of the following errors would cause the trial balance totals to be unequal? a. A transaction was not posted. b. A payment of $67 for insurance was posted as a debit of $76 to Prepaid Insurance and a credit of $76 to Cash. c. A payment of $4,450 to a creditor was posted as a debit of $4,500 to Accounts Payable and a credit of $450 to Cash. d. Cash received from customers on account was posted as a debit of $720 to Cash and a credit of $720 to Accounts Payable. 171. Which of the following errors will cause the trial balance totals to be unequal? a. posting the debit portion of a journal entry incorrectly when the credit portion of the entry is correctly posted b. failure to record a transaction or to post a transaction c. recording the same transaction more than once d. recording the same erroneous amount for both the debit and the credit parts of a transaction 172. The trial balance is out of balance and the accountant suspects that a transposition or slide error has occurred. What will the accountant do to confirm this suspicion? a. Determine the amount of the error and look for that amount on the trial balance. b. Determine the amount of the error and divide by 2, then look for that amount on the trial balance. c. Determine the amount of the error and refer to the journal entries for that amount. d. Determine the amount of the error and divide by 9. If the result is evenly divided, then this type of error is likely. 173. The purchase of supplies on account was recorded and posted as a debit to Supplies for $500 and a credit to Accounts Receivable for $500. The correcting entry would include a a. credit to Accounts Receivable for $500 b. credit to Accounts Receivable for $1,000 c. credit to Accounts Payable for $500 d. credit to Accounts Payable for $1,000 174. Which of the following is not a useful step in finding errors on the trial balance? a. Determine the difference between debits and credits and look for the amount. b. Determine the difference between debits and credits and change any account to make the trial balance correct. c. Determine the difference between debits and credits, divide the amount by 2, and look for the amount. d. Determine the difference between debits and credits, divide the amount by 9, and if it divides evenly, look for a transposition or slide error. Powered by Cognero
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Chapter 02 - Analyzing Transactions 175. Which of the following statements regarding a horizontal analysis is false? a. A horizontal analysis is used to compare an item in a current statement with the same item in prior statements. b. A horizontal analysis can be performed on a balance sheet and income statement, but not on a statement of cash flows. c. If Fees Earned in Year 1 is $125,000 and Fees Earned in Year 2 is $143,750, a horizontal analysis will indicate a 15% increase over this period. d. When two statements are compared in horizontal analysis, the earlier statement is used as the base for computing the amount and the percent of change. 176. McNally Industries has a condensed income statement as shown. Sales Total operating expenses Net income
Year 2 $198,000 163,000 $ 35,000
Year 1 $165,500 147,500 $ 18,000
Using horizontal analysis, compute the amount and percent change for sales. Round to one decimal place. a. $32,500, 19.6% b. $18,000, 10.9% c. $35,000, 17.7% d. $17,000, 9.4% 177. Richardson Company has a condensed income statement as shown. Sales Total operating expenses Net income
Year 2 $150,000 133,000 $ 17,000
Year 1 $165,500 147,500 $ 18,000
Using horizontal analysis, compute the amount and percent change for sales. Round to one decimal place. a. $(17,000), (11.3%) b. $(15,500), (10.3%) c. $(18,000), (10.9%) d. $(15,500), (9.4%) Matching Match each of the following accounts with its proper account group. a. Assets b. Liabilities c. Owner's Equity d. Revenue e. Expenses 178. Unearned Rent 179. Prepaid Insurance Powered by Cognero
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Chapter 02 - Analyzing Transactions 180. Fees Earned 181. Patents 182. Chris Clark, Drawing Match each of the following accounts to the side of the T account on which its normal balance would appear. a. Debit side b. Credit side 183. John Smith, Capital 184. Accounts Receivable 185. Accounts Payable 186. Fees Earned 187. Copyrights 188. Utilities Expense 189. Notes Payable 190. Unearned Revenues 191. John Smith, Drawing Match each of the following transactions to its effect on the accounting equation. A letter may be used more than once, and not all letters will be used. a. Assets, Dr.; Assets, Cr. b. Assets, Dr.; Owner's Equity (Investment), Cr. c. Assets, Dr.; Liabilities, Cr. d. Assets, Dr.; Owner’s Equity (Revenue), Cr. e. Liabilities, Dr.; Assets, Cr. f. Owner’s Equity (Drawing), Dr.; Assets, Cr. g. Owner’s Equity (Expense), Dr.; Assets, Cr. h. Owner’s Equity (Expense), Dr.; Liabilities, Cr. 192. Paid $725 to a vendor for supplies purchased previously on account. 193. Performed $850 of services and billed the customer. 194. Paid utility bill of $395. 195. Withdrew $145 of supplies for personal use. 196. Paid $315 in salaries. Powered by Cognero
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Chapter 02 - Analyzing Transactions 197. Collected $730 from customers on account. Several types of errors can be made during the journalizing and posting process. Match each of the following errors with an error type. a. Trial balance preparation errors b. Account balance errors c. Posting errors 198. Balance incorrectly computed 199. Debit or credit posting omitted 200. Wrong amount posted to an account 201. Column incorrectly added 202. Balance entered on wrong side of account 203. Amount incorrectly entered on trial balance 204. Balance entered in wrong column or omitted 205. Debit posted as credit, or vice versa Subjective Short Answer 206. The chart of accounts classifies the accounts to make identification of the accounts easier. Describe the numbering system businesses use in setting up the chart of accounts. 207. On January 1, Cassie Harris established a catering service. She would like to open the following accounts in the general ledger. List the accounts in the order in which they should appear in the ledger and propose a two-digit account numbering scheme that is consistent with the rules of a proper chart of accounts. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17.
Cash Supplies Equipment Accounts Payable Cassie Harris, Capital Wages Expense Rent Expense Truck Utilities Expense Cassie Harris, Drawing Truck Expense Prepaid Insurance Fees Earned Miscellaneous Expense Insurance Expense Notes Payable Accounts Receivable
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Chapter 02 - Analyzing Transactions 208. On January 31, the cash account balance was $96,750. During January, cash receipts totaled $305,000 and cash payments totaled $375,880. Determine the cash balance on January 1. 209. Organize the following accounts into the usual sequence of a chart of accounts. Alecia Morris, Capital Alecia Morris, Drawing Accounts Payable Accounts Receivable Cash Fees Earned Miscellaneous Expense Prepaid Rent Salaries Expense Unearned Revenue 210. Compute the following: (a)
Determine the cash receipts for April based on the following data: Cash payments during April Cash account balance, April 1 Cash account balance, April 30
(b)
$63,000 25,500 31,750
Determine the cash received from customers on account during April based on the following data: Accounts receivable account balance, April 1 Accounts receivable account balance, April 30 Fees billed to customers during April
$22,500 15,250 45,000
211. The following select accounts are from the ledger of Garrison Company. For each account, indicate the following: (a) The type of account, using the following abbreviations Asset - A Revenue - R Liability - L Expense - E None of these choices - N (b) The side of the T account in which an increase entry would appear (Dr. or Cr.) Account (1) (2) (3) (4) (5) (6) (7) (8) (9)
Supplies Notes Receivable Fees Earned Garrison, Drawing Accounts Payable Salaries Expense Garrison, Capital Accounts Receivable Equipment
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Type of Account _______ _______ _______ _______ _______ _______ _______ _______ _______
Increase Side ________ ________ ________ ________ ________ ________ ________ ________ ________ Page 27
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Chapter 02 - Analyzing Transactions (10) Notes Payable
_______
________
212. All nine transactions for Dalton Survey Company for September, the first month of operations, are recorded in the following T accounts:
(1) (7) (9)
(4)
Cash 20,000 (3) 6,900 (5) 4,700 (6) (8)
Michael Dalton, Capital (1) 20,000
7,500 2,600 5,500 2,000
Accounts Receivable 4,900 (9) 4,700
(3)
Supplies 7,500
(2)
Equipment 4,500
(5)
Accounts Payable 2,600 (2)
Michael Dalton, Drawing (8)
2,000 Fees Earned (4) (7)
(6)
4,900 6,900
Operating Expenses 5,500
4,500
Indicate the following for each debit and credit: (a) (b)
The type of account affected (asset, liability, capital, drawing, revenue, or expense). The effect on the account, using "+" for increase and "−" for decrease.
Present your answers in the following form: Transaction
Account Debited Type Effect
Account Credited Type Effect
213. On June 1, the cash account balance was $96,750. During June, cash receipts totaled $305,000 and the June 30 balance was $75,880. Determine the cash payments made during June. 214. On September 1, Erika Company purchased land for $47,500 cash. Provide the journal entry for this transaction. 215. On October 10, Nickle Company purchased supplies for $1,800 on account. On October 25, Nickle Company paid the invoice. Journalize the entries required for these transactions 216. On October 17, Nickle Company purchased a building and a plot of land for $750,000. The building was valued at $500,000, while the land carried a value of $250,000. Nickle paid $300,000 down in cash and signed a note payable for the balance. Journalize the entry required for this transaction. Powered by Cognero
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Chapter 02 - Analyzing Transactions 217. On November 1, Nickle Company made a cash payment of $200,000 on a note payable that was generated in the purchase of a building and land. Journalize the entry required for this transaction. 218. On January 7, Damien Lawson invested $45,000 cash to initiate the operation of his business, JumpStart. Journalize the entry required for this transaction. 219. On January 8, Jumpstart purchased several pieces of office equipment at a clearance price of $20,000, paying cash. The equipment was originally priced at $35,000. Journalize the entry required for this transaction. 220. On August 30, JumpStart paid the following expenses: rent, $2,300; utilities, $525; wages, $1,750, and miscellaneous, $275. Journalize these payments as one entry. 221. On October 30, Damien Lawson withdraws $3,330 from JumpStart for personal use. Journalize this event. 222. Several transactions are shown, with the accounting equation stated to the right side of each. Use the following identification codes to indicate the effects of each transaction on the accounting equation. Write your answers in the space provided under the accounting equation. You need an identification code for each element of the accounting equation. An example is given before the first transaction. I - Increase
D - Decrease
NE - No Effect Assets
Example John Smith invests in his new business by giving it his personal drill press valued at $3,500. (a) Cash sales are made. (b) Equipment is purchased on credit. (c) Payment is made for the equipment purchased on credit in (b). (d) The company sold excess supplies to another company on credit. (e) Cash is collected from customers for accounts receivable balances.
I
=
Liabilities
NE
+
Owner’s Equity
I
223. Increases and decreases in various types of accounts follow. In each case, indicate by "Dr." or "Cr." (a) whether the change in the account would be recorded as a debit or a credit and (b) whether the normal balance of the account is a debit or a credit. (a) Recorded As Powered by Cognero
(b) Normal Balance Page 29
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Chapter 02 - Analyzing Transactions (1) Increase in Denice Dickenson, Capital (2) Increase in Denice Dickenson, Drawing (3) Decrease in Accounts Receivable (4) Increase in Notes Payable (5) Increase in Accounts Payable (6) Decrease in Supplies (7) Decrease in Salaries Expense (8) Increase in Accounts Receivable (9) Increase in Cash (10) Decrease in Land
________ ________ ________ ________ ________ ________ ________ ________ ________ ________
_______ _______ _______ _______ _______ _______ _______ _______ _______ _______
224. Journalize the following selected transactions for Long Company’s first month of operations in a two-column journal, identifying each entry by letter. Omit explanations. (a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
Received $18,000 from Katie Long, owner, as an investment in the business. Purchased equipment for $27,000, paying $10,000 in cash and giving a note payable for the remainder. Paid $2,300 for rent for April. Purchased $1,500 of supplies on account. Recorded $9,800 of fees earned on account. Received $7,500 in cash for fees earned. Paid $1,200 to creditors on account. Paid wages of $3,425. Received $7,900 from customers on account. Recorded owner's withdrawal of $1,875.
225. On January 12, JumpStart purchased $870 in office supplies. (a) Journalize this transaction as if JumpStart paid cash. (b) Journalize this transaction as if JumpStart made the purchase on account. (c) Assuming Jumpstart made the purchase on account, journalize the full payment on January 18. 226. On November 10, JumpStart provides $2,900 in services to clients. At the time of service, the clients paid $600 in cash and put the balance on account. (a) Journalize this event. (b) On November 20, JumpStart's clients paid an additional $900 on their accounts due. Journalize this event. (c) Compute the accounts receivable balance on November 30. 227. Journalize the transaction for the purchase of a truck on April 4 for $85,700, paying $15,000 cash and the remainder on account. Omit explanation. 228. Journalize the following selected transactions for January. Explanations may be omitted. Jan.
1 2 3 4 5
Received cash from the investment made by the owner, $14,000. Received cash for providing accounting services, $9,500. Billed customers on account for providing services, $4,200. Paid advertising expense, $700. Received cash from customers on account, $2,500.
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Chapter 02 - Analyzing Transactions 6 7 8
Owner withdrew $1,010. Received telephone bill, $900. Paid telephone bill, $900.
229. On December 1, JumpStart provides $2,800 in services to clients. (a) Journalize this event as if the clients had paid cash at the time the services were rendered. (b) Journalize this event as if the clients received the services on account. (c) Assuming that the clients received the services on account, journalize $1,200 in payments received from the clients on December 30. 230. State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries when recording business transactions during the month. Also, indicate the normal balance of each account. 1. 2. 3.
Fees Earned Utilities Expense Accounts Payable
4. 5. 6.
Supplies Cash Accounts Receivable
231. On October 12, fees earned on account were $14,600. Journalize this transaction. Omit explanation. 232. Journalize the following five transactions for Nexium & Associates, Inc. Omit explanations. Mar. 1 Invoiced client for services provided on account, $800. 9
Purchased office furniture ($1,060) and office supplies ($160) on account from Corner Office, Inc., receiving an invoice for $1,220.
15
Paid Corner Office, Inc. for the furniture and office supplies delivered on March 9.
23
Paid utility bill for the month, $430.
31
Paid salaries of $850 are paid to employees.
233. Journalize the following selected transactions of Mirmax Rentals. Omit explanations. Aug. 1 Purchased two new saws on credit at $425 each. The saws are added to Mirmax’s rental inventory. Payment is due in 30 days. 8
Accepted advance deposits of $125 for tool rentals that will be applied to the cash rental when the tools are returned.
20
Charged customers $1,250 on account for tool rentals. Payment is due within 30 days.
31
Paid utility bill for the month, $180.
31
Received $600 in payments from the customers that were billed for rentals on August 20.
234. On January 1, Merry Walker established a catering service. The accounts to use for transactions (a) through (d), each identified by a number, are listed. Following this list are the transactions that occurred during the first month of Powered by Cognero
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Chapter 02 - Analyzing Transactions operations. For each transaction, indicate the accounts that should be debited and credited by their account number(s). 11. 12. 14. 15. 17. 18. 21. 22. 31. 32. 41. 51. 52. 53. 54. 55 59.
Cash Accounts Receivable Supplies Prepaid Insurance Equipment Truck Accounts Payable Notes Payable Merry Walker, Capital Merry Walker, Drawing Fees Earned Wages Expense Supplies Expense Rent Expense Utilities Expense Truck Expense Miscellaneous Expense
Transactions Account(s) Debited Account(s) Credited a. Merry transferred cash from a personal bank account to an account to be used for the business. b. Paid rent for the period of January 3 to the end of the month. c. Purchased truck for $30,000 with a cash down payment of $5,000 and the remainder on a note. d. Purchased equipment on account. 235. On January 1, Merry Walker established a catering service. The accounts to use for transactions (a) through (e), each identified by a number, are listed. Following this list are the transactions that occurred in Walker’s first month of operations. For each transaction, indicate the accounts that should be debited and credited by their account number(s). 11. 12. 14. 15. 17. 18. 21. 22. 31. 32. 41. 51. 52. 53. 54. 55
Cash Accounts Receivable Supplies Prepaid Insurance Equipment Truck Accounts Payable Notes Payable Merry Walker, Capital Merry Walker, Drawing Fees Earned Wages Expense Supplies Expense Rent Expense Utilities Expense Truck Expense
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Chapter 02 - Analyzing Transactions 56. 59.
Insurance Expense Miscellaneous Expense
Transactions Account(s) Debited Account(s) Credited a. Purchased supplies for cash. b. Paid the annual premiums on property and casualty insurance. c. Received cash for a job previously recorded on account. d. Paid a creditor a portion of the amount owed for equipment previously purchased on account. e. Received cash for a completed job. 236. On January 1, Merry Walker established a catering service. The accounts to use for transactions (a) through (f), each identified by a number, are listed. Following this list are the transactions that occurred in Walker’s first month of operations. For each transaction, indicate the accounts that should be debited and credited by their account number(s). 11. 12. 14. 15 17. 18. 21. 22. 31. 32. 41. 51. 52 53. 54. 55. 56. 57.
Cash Accounts Receivable Supplies Prepaid Insurance Equipment Truck Accounts Payable Notes Payable Merry Walker, Capital Merry Walker, Drawing Fees Earned Wages Expense Supplies Expense Rent Expense Utilities Expense Truck Expense Insurance Expense Miscellaneous Expense
Transactions Account(s) Debited a. Recorded jobs completed on account and sent invoices to customers. b. Received an invoice for truck expenses to be paid in February. c. Paid utilities expense d. Received cash from customers on account. e. Paid employee wages. f. Withdrew cash for personal use.
Account(s) Credited
237. On January 1, Merry Walker established a catering service. The accounts to use for transactions (a) through (f), each Powered by Cognero
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Chapter 02 - Analyzing Transactions identified by a number, are listed. Following this list are the transactions that occurred in Walker’s first month of operations. For each transaction, indicate the accounts that should be debited and credited by their account number(s). 11. 12. 14. 15 17. 18. 21. 22. 23 31. 32. 41. 51. 52 53. 54. 55. 56. 57.
Cash Accounts Receivable Supplies Prepaid Insurance Equipment Truck Accounts Payable Notes Payable Unearned Revenue Merry Walker, Capital Merry Walker, Drawing Fees Earned Wages Expense Supplies Expense Rent Expense Utilities Expense Truck Expense Insurance Expense Miscellaneous Expense
Transactions Account(s) Debited Account(s) Credited a. Purchased supplies on account. b. Paid the invoice previously recorded in transaction (a). c. Bought a three-year insurance policy and paid in full. d. Received $7,000 from a contract to perform accounting services over the next two years. 238. The following two situations are independent of each other. (a) On June 1, the cash account balance was $45,750. During June, cash payments totaled $243,910, and the June 30 balance was $53,200. Determine the cash receipts during June and show your calculation. (b) On March 1, the supplies account balance was $1,800. During March, supplies of $2,450 were purchased, and supplies of $630 were on hand as of March 31. Determine the supplies expense for March and show your calculation. 239. The bookkeeper for Brockton Industries prepared the following journal entries and posted the entries to the general ledger as indicated in the T accounts presented. Assume that the dollar amounts and the descriptions of the entries are correct. July
3
11
Accounts Receivable Service Revenue Customers were billed for services completed. Cash Accounts Receivable
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1,000 1,000
500 500 Page 34
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Chapter 02 - Analyzing Transactions Payment is received from a customer billed for services on July 3. 12
25
7/3
Office Supplies Accounts Payable Purchased office supplies on credit; payment is due in 30 days.
600
Office Furniture Cash Payment is made for office furniture received on July 25.
700
Accounts Receivable 1,000
7/11
Cash 500 7/25
7/12
Office Supplies 600
7/3
700
Service Revenue 1,000 7/11
7/12
Accounts Payable 600
7/25
Office Furniture 700
600
700
500
Required If you assume that all journal entries have been recorded correctly, use the given information to: (1) Identify the postings to the general ledger that were made incorrectly. (2) Describe how each incorrect posting should have been made. 240. Journalize the entries to correct the following errors: (a)
A purchase of supplies for $500 on account was recorded and posted as a debit to Supplies for $200 and as a credit to Accounts Receivable for $200.
(b)
A receipt of $2,500 for fees earned was recorded and posted as a debit to Fees Earned for $2,500 and a credit to Cash for $2,500.
241. On November 30, Damien Lawson is informed by his accountant that $550 of a transaction recording the purchase of office supplies was really office equipment. Prepare the journal entry to correct this situation. 242. The following errors took place in journalizing and posting transactions: (a)
A withdrawal of $5,000 by Stan Norton, owner of the business, was recorded as a debit to Office Expense and a credit to Cash.
(b)
A receipt of $7,800 cash from a customer on account was recorded as a debit to Cash and a credit to Fees Earned.
Journalize the entries to correct the errors. Omit the explanations. 243. For each of the following errors, considered individually, indicate whether the error would cause the trial balance Powered by Cognero
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Chapter 02 - Analyzing Transactions totals to be unequal. If the error would cause the trial balance totals to be unequal, indicate whether the debit or credit total is higher and by how much. (a)
Payment of a cash withdrawal of $6,800 was journalized and posted as a debit of $8,600 to Salaries Expense and a credit of $8,600 to Cash.
(b)
A fee of $9,780 earned was debited to Accounts Receivable for $7,980 and credited to Fees Earned for $9,780.
(c)
A payment of $3,000 to a creditor was posted as a credit of $3,000 to Accounts Payable and a credit of $3,000 to Cash.
244. The unadjusted trial balance for Dawson Designs Co. follows. Required (1) Identify the errors in the trial balance. All accounts have normal balances. (2) Prepare a corrected trial balance.
Cash Accounts Receivable Prepaid Insurance Equipment Accounts Payable Salaries Payable Tim Dawson, Capital Tim Dawson, Drawing Service Revenue Salary Expense Miscellaneous Expense
Dawson Designs Co. Unadjusted Trial Balance For the Month of January Debit Balances 23,000
Credit Balances 49,700
11,300 150,500 6,050 4,250 110,000 18,500 236,600 98,930 424,020
4,970 424,020
245. Prepare a trial balance, listing the following accounts in proper sequence. The accounts (all normal balances) were taken from the ledger of Sophie Designs Co. on April 30. Accounts Payable Accounts Receivable Cash Equipment Fees Earned Miscellaneous Expense Rent Expense
$ 4,100 3,450 6,700 14,500 45,245 850 11,500
Salary Expense Sophie Dawson, Capital Sophie Dawson, Drawing Supplies Supplies Expense Utilities Expense
$14,000 17,800 7,500 3,125 1,700 4,000
246. The following trial balance was prepared for Winslow’s Auto Body on April 30. (a) List the errors in the trial balance. Assume all accounts have normal balances. (b) What would be the new totals in the Debit and Credit columns after errors are corrected? What would be the balance of Accounts Receivable? Winslow’s Auto Body Powered by Cognero
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Chapter 02 - Analyzing Transactions Trial Balance For Month Ending April 30 Debit Balances Cash Accounts Receivable Supplies Equipment Prepaid Insurance Accounts Payable Thad Winslow, Capital Thad Winslow, Drawing Fees Earned Salary Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense
Credit Balances 19,475 ? 1,000
15,000 500 2,500 17,000 1,000 49,600 14,500 9,000 1,400 3,900 250 55,000
81,575
247. Answer the following questions for each of the errors listed, considered individually: (a) (b) (c)
Did the error cause the trial balance totals to be unequal? What is the amount of the difference between the trial balance totals (where applicable)? Which of the trial balance totals, debit or credit, is the larger (where applicable)?
Present your answers in columnar form, using the following headings: Error Totals Difference in Totals Larger of Totals (identifying number) (equal or unequal) (amount) (debit or credit) Errors: (1) A withdrawal of $3,000 cash by the owner was recorded by a debit of $3,000 to Salary Expense and a credit of $3,000 to Cash. (2) A $650 purchase of supplies on account was recorded as a debit of $1,650 to Equipment and a credit of $1,650 to Accounts Payable. (3) A purchase of equipment for $3,450 on account was not recorded. (4) An $870 receipt on account was recorded as an $870 debit to Cash and a $780 credit to Accounts Receivable. (5) A payment of $1,530 cash on account was recorded only as a credit to Cash. (6) Cash sales of $8,500 were recorded as a credit of $8,500 to Cash and a credit of $8,500 to Fees Earned. (7) The debit to record a $4,000 cash receipt on account was posted twice; the credit was posted once. (8) The credit to record a $300 cash payment on account was posted twice; the debit was posted once. (9) The debit balance of $7,400 in Accounts Receivable was recorded in the trial balance as a debit of $7,200. Exhibit 2-1 Powered by Cognero
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Chapter 02 - Analyzing Transactions All nine transactions for Ralston Sports Co. for September, the first month of operations, are recorded in the following T accounts: (1) (7) (9)
(4)
Cash 25,000 (3) 11,900 (5) 9,700 (6) (8) Accounts Receivable 9,900 (9)
James Ralston, Capital (1)
12,500 7,600 10,500 7,000
James Ralston, Drawing 9,700
(8) 7,000
Supplies (3)
(2)
(5)
Fees Earned (4) (7)
12,500
Equipment 9,500
Accounts Payable 7,600 (2)
25,000
9,900 11,900
Operating Expenses (6) 10,500
9,500
248. Refer to Exhibit 2-1. Prepare a trial balance, listing the accounts in their proper order. 249. Lewis Company has the following condensed income statement: Sales Wages expense Rent expense Utilities expense Total operating expenses Net income
Year 2 $178,400 $100,000 33,000 30,000 $163,000 $ 15,400
Year 1 $162,500 $ 92,500 30,000 25,000 $147,500 $ 15,000
Required Prepare a horizontal analysis of Lewis Company’s income statements. Comment on the changes as favorable or unfavorable. 250. Nebraska Technologies has the following condensed income statement: Year 2 Sales Wages expense Rent expense Utilities expense Total operating expenses Powered by Cognero
Year 1 $158,400 $ 80,000 28,000 30,000 $138,000
$162,500 $ 92,500 30,000 25,000 $147,500 Page 38
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Chapter 02 - Analyzing Transactions Net income
$ 20,400
$ 15,000
Required Prepare a horizontal analysis of Nebraska Technologies' income statements. Comment on the changes as favorable or unfavorable.
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Chapter 02 - Analyzing Transactions Answer Key 1. True 2. False 3. False 4. False 5. True 6. False 7. True 8. False 9. False 10. False 11. False 12. True 13. True 14. False 15. True 16. False 17. False 18. True 19. True 20. False 21. True 22. False 23. True 24. False 25. True Powered by Cognero
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Chapter 02 - Analyzing Transactions 26. True 27. False 28. False 29. False 30. False 31. False 32. False 33. False 34. False 35. True 36. False 37. True 38. False 39. False 40. True 41. False 42. False 43. True 44. False 45. True 46. True 47. False 48. True 49. True 50. True Powered by Cognero
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Chapter 02 - Analyzing Transactions 51. True 52. False 53. False 54. False 55. False 56. True 57. True 58. True 59. False 60. False 61. True 62. False 63. True 64. True 65. False 66. False 67. True 68. False 69. False 70. False 71. False 72. False 73. False 74. False 75. c 76. c Powered by Cognero
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Chapter 02 - Analyzing Transactions 77. d 78. c 79. c 80. d 81. a 82. c 83. c 84. a 85. b 86. b 87. b 88. c 89. c 90. d 91. c 92. a 93. b 94. d 95. a 96. b 97. b 98. a 99. d 100. c 101. d Powered by Cognero
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Chapter 02 - Analyzing Transactions 102. d 103. a 104. d 105. c 106. d 107. b 108. d 109. d 110. a 111. b 112. c 113. b 114. b 115. d 116. b 117. b 118. c 119. c 120. b 121. c 122. c 123. d 124. d 125. d 126. d 127. b Powered by Cognero
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Chapter 02 - Analyzing Transactions 128. a 129. c 130. b 131. d 132. b 133. a 134. a 135. c 136. c 137. b 138. a 139. b 140. b 141. c 142. d 143. c 144. b 145. a 146. b 147. a 148. b 149. d 150. c 151. b 152. d Powered by Cognero
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Chapter 02 - Analyzing Transactions 153. d 154. b 155. d 156. c 157. c 158. a 159. c 160. a 161. d 162. b 163. a 164. d 165. a 166. c 167. a 168. c 169. d 170. c 171. a 172. d 173. c 174. b 175. b 176. a 177. d 178. b Powered by Cognero
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Chapter 02 - Analyzing Transactions 179. a 180. d 181. a 182. c 183. b 184. a 185. b 186. b 187. a 188. a 189. b 190. b 191. a 192. e 193. d 194. g 195. f 196. g 197. a 198. b 199. c 200. c 201. a 202. b 203. a Powered by Cognero
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Chapter 02 - Analyzing Transactions 204. a 205. c 206. A chart of accounts is set up by assigning two-digit numbers to each of the accounts for use as references. The first digit indicates the major account group of the ledger in which the account is located. Accounts beginning with 1 represent assets; 2, liabilities; 3, owner's equity; 4, revenue; 5, expenses. The second digit indicates the location of the account within its group. Large companies may have additional digits to accommodate a large number of accounts. 207. 11 Cash 12 Accounts Receivable 13 Supplies 14 Prepaid Insurance 15 Equipment 16 Truck 21 Accounts Payable 22 Notes Payable 31 Cassie Harris, Capital 32 Cassie Harris, Drawing 41 Fees Earned 51 Wages Expense 52 Rent Expense 53 Utilities Expense 54 Truck Expense 55 Insurance Expense 56 Miscellaneous Expense 208. ? + $305,000 − $375,880 = $96,750 Cash balance at January 1 = $167,630 209. Cash Accounts Receivable Prepaid Rent Accounts Payable Unearned Revenue Alecia Morris, Capital Alecia Morris, Drawing Fees Earned Salaries Expense Miscellaneous Expense 210. (a) $69,250 ($31,750 + $63,000 − $25,500) (b) $52,250 ($22,500 + $45,000 − $15,250) 211. (1) (2) (3) (4) (5) Powered by Cognero
Type of Account A A R N L
Increase Side Dr. Dr. Cr. Dr. Cr. Page 48
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Chapter 02 - Analyzing Transactions (6) (7) (8) (9) (10)
E N A A L
Dr. Cr. Dr. Dr. Cr.
212. Transaction (1) (2) (3) (4) (5) (6) (7) (8) (9)
Account Debited Type asset asset asset asset liability expense asset drawing asset
Effect + + + + − + + + +
Account Credited Type capital liability asset revenue asset asset revenue asset asset
Effect + + − + − − + − −
213. $75,880 = $96,750 + $305,000 − ? Cash Payments = $325,870 214. Sept. 1 Land
47,500 Cash
47,500 Purchased land for the company.
215. Oct. 10
Oct. 25
Supplies Accounts Payable Purchased supplies on account.
1,800
Accounts Payable Cash Paid creditor on account.
1,800 1,800
216. Oct. 17 Building Land Cash Notes Payable Purchased building and land with cash down payment.
500,000 250,000 300,000 450,000
217. Nov. 1 Notes Payable Cash Made payment on note payable. 218. Jan. 7
Cash
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1,800
200,000 200,000
45,000 Page 49
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Chapter 02 - Analyzing Transactions Damien Lawson, Capital Invested cash in business. 219. Jan. 8
45,000
Office Equipment Cash Purchased office equipment.
220. Aug. 30
221. Oct. 30
20,000 20,000
Rent Expense Utilities Expense Wages Expense Miscellaneous Expense Cash Paid expenses.
2,300 525 1,750 275 4,850
Damien Lawson, Drawing 3,330 Cash Withdrew cash for personal use.
3,330
222.
(a)
Cash sales are made.
(b)
Equipment is purchased on credit. Payment is made for the equipment purchased on credit in (b). The company sold excess supplies to another company on credit. Cash is collected from customers for accounts receivable balances.
(c)
(d)
(e)
Owner’s Equity
Assets
= Liabilities +
I
NE
I
I
I
NE
D
D
NE
NE
NE
NE
NE
NE
NE
223.
(1) (2) (3) (4) (5) (6) (7) Powered by Cognero
(a) Recorded As Cr. Dr. Cr. Cr. Cr. Cr. Cr.
(b) Normal Balance Cr. Dr. Dr. Cr. Cr. Dr. Dr. Page 50
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Chapter 02 - Analyzing Transactions (8) (9) (10)
Dr. Dr. Cr.
224. (a) Cash Katie Long, Capital
Dr. Dr. Dr.
18,000 18,000
(b) Equipment Cash Notes Payable
27,000
(c) Rent Expense Cash
2,300
(d) Supplies Accounts Payable
1,500
(e) Accounts Receivable Fees Earned
9,800
(f) Cash Fees Earned
7,500
(g) Accounts Payable Cash
1,200
(h) Wages Expense Cash
3,425
(i) Cash Accounts Receivable
7,900
(j) Katie Long, Drawing Cash
1,875
225. (a) Jan. 12 (b) Jan. 12 (c) Jan. 18
226. (a) Nov. 10
10,000 17,000
2,300
1,500
9,800
7,500
1,200
3,425
7,900
1,875
Office Supplies Cash
870
Office Supplies Accounts Payable
870
Accounts Payable Cash
870
Cash Accounts Receivable
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870
870
870
600 2,300 Page 51
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Chapter 02 - Analyzing Transactions Fees Earned (b) Nov. 20
2,900
Cash Accounts Receivable
900 900
(c) Original invoice Less cash paid upon completion Original amount on accounts receivable Less November 20 payment Accounts receivable balance 227. Apr. 4
Truck
$2,900 600 $2,300 900 $1,400
85,700 Cash Accounts Payable
15,000 70,700
228. Date
Description
Post. Ref.
Debit
Credit
Jan. 1 Cash Owner, Capital
14,000
2 Cash Revenues
9,500
3 Accounts Receivable Revenues
4,200
4 Advertising Expense Cash
700
5 Cash Accounts Receivable
2,500
6 Owner, Drawing Cash
1,010
9,500
4,200
700
2,500
1,010
7 Telephone Expense Accounts Payable
900
8 Accounts Payable Cash
900
229. (a) Dec. 1
(b)
14,000
Dec. 1
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900
900
Cash Fees Earned
2,800
Accounts Receivable Fees Earned
2,800
2,800
2,800 Page 52
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Chapter 02 - Analyzing Transactions (c)
Dec. 30
Cash Accounts Receivable
1,200 1,200
230. 1. Credit entries only, normal credit balance 2. Debit entries only, normal debit balance 3. Both debit and credit entries, normal credit balance 4. Both debit and credit entries, normal debit balance 5. Both debit and credit entries, normal debit balance 6. Both debit and credit entries, normal debit balance 231. Oct. 12
Accounts Receivable Fees Earned
232. Mar. 1 Accounts Receivable Service Revenue
14,600 14,600
800 800
9 Office Furniture Office Supplies Accounts Payable
1,060 160
15 Accounts Payable Cash
1,220
23 Utilities Expense Cash
430
31 Salaries Expense Cash
850
233. Aug. 1
8
1,220
1,220
430
850
Equipment (or Tools) Accounts Payable
850
Cash
125
850
Unearned Revenue 20
31
31
Accounts Receivable Rental Revenue
125 1,250 1,250
Utilities Expense Cash
180
Cash
600 Accounts Receivable
234. Transactions a. Powered by Cognero
Account(s) Debited 11
180
600
Account(s) Credited 31 Page 53
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Chapter 02 - Analyzing Transactions b. c. d.
53 18 17
11 11,22 21
235. Transactions a. b. c. d. e.
Account(s) Debited 14 15 11 21 11
Account(s) Credited 11 11 12 11 41
236. Transactions a. b. c. d. e. f.
Account(s) Debited 12 55 54 11 51 32
Account(s) Credited 41 21 11 12 11 11
237. Transactions a. b. c. d.
Account(s) Debited 14 21 15 11
Account(s) Credited 21 11 11 23
238. (a) $53,200 = $45,750 + Cash Receipts − $243,910 Cash Receipts = $251,360 (b) $630 = $1,800 + $2,450 − Supplies Expense Supplies Expense = $3,620 239. (1) The bookkeeper incorrectly posted the July 3, July 11, and 12 journal entries. (2) For the July 3 journal entry, the $1,000 credit to Service Revenue should have been posted to the Service Revenue account as a credit, not as a debit. For the July 11 journal entry, the $500 credit should be posted to Accounts Receivable, not to Service Revenue. For the July 12 journal entry, the $600 credit to Accounts Payable should have been posted as a credit, not as a debit. 240. (a) Accounts Receivable Supplies Supplies Accounts Payable (b) Cash Fees Earned Powered by Cognero
200 200 500 500 5,000 5,000 Page 54
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Chapter 02 - Analyzing Transactions 241. Nov. 30
Office Equipment Office Supplies
550 550
242. (a) Stan Norton, Drawing Office Expense
5,000
(b)
7,800
Fees Earned Accounts Receivable
5,000 7,800
243. (a) The totals are equal. (b) The totals are unequal. The credit total is higher by $1,800. (c) The totals are unequal. The credit total is higher by $6,000. 244. (1) a. The Debit column is added incorrectly; the sum is actually $289,780. b. The trial balance should be dated January 31, rather than “For the Month of January” c. The Accounts Receivable balance should be in the Debit column. d. The Accounts Payable balance should be in the Credit column. e. The Tim Dawson, Drawing balance should be in the Debit column. f. The Miscellaneous Expense balance should be in the Debit column. (2) Dawson Designs Co. Unadjusted Trial Balance January 31 Debit Balances Credit Balances Cash 23,000 Accounts Receivable 49,700 Prepaid Insurance 11,300 Equipment 150,500 Accounts Payable 6,050 Salaries Payable 4,250 Tim Dawson, Capital 110,000 Tim Dawson, Drawing 18,500 Service Revenue 236,600 Salary Expense 98,930 Miscellaneous Expense 4,970 356,900 356,900 245. Sophie Designs Co. Trial Balance April 30
Cash Accounts Receivable Powered by Cognero
Debit Credit Balances Balances 6,700 3,450 Page 55
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Chapter 02 - Analyzing Transactions Supplies Equipment Accounts Payable Sophie Dawson, Capital Sophie Dawson, Drawing Fees Earned Salary Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense
246. (a) (1) (2) (3) (4) (5) (6) (7) (8) (9) (b)
3,125 14,500 4,100 17,800 7,500 45,425 14,000 11,500 4,000 1,700 850 67,325
67,325
In the heading, the date should be April 30; not for a period of time. The Cash balance should be a debit. The Accounts Receivable balance is missing. The Supplies balance should be a debit. The Prepaid Insurance balance should be a debit and this account should follow Accounts Receivable. The Thad Winslow, Capital balance should be a credit. The Thad Winslow, Drawing balance should be a debit. Rent Expense should be a debit. The trial balance does not balance.
The new total for credits would be $69,100 ($2,500 accounts payable + $49,600 fees earned + $17,000 capital). The debits would also total $69,100. Accounts receivable would be $3,075 ($69,100 total credits − $66,025 corrected debits).
247. Error (1) (2) (3) (4) (5) (6) (7) (8) (9)
Totals equal equal equal unequal unequal unequal unequal unequal unequal
Difference in Totals — — — $ 90 1,530 17,000 4,000 300 200
Larger of Totals — — — debit credit credit debit credit credit
248. Ralston Sports Company Trial Balance September 30 Debit Credit Balances Balances Cash 9,000 Accounts Receivable 200 Supplies 12,500 Equipment 9,500 Powered by Cognero
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Chapter 02 - Analyzing Transactions Accounts Payable James Ralston, Capital James Ralston, Drawing Fees Earned Operating Expenses
1,900 25,000 7,000 21,800 10,500 48,700
48,700
249. Year 2
Year 1
$178,400 $100,000 33,000 30,000 $163,000
$162,500 $ 92,500 30,000 25,000 $147,500
$ 15,400
$ 15,000
Sales Wages expense Rent expenses Utilities expense Total operating expenses Net income
Increase/ Percent Decrease Change Amount $15,900 9.8% $ 7,500 8.1 3,000 10.0 5,000 20.0 $15,500 10.5 $
400
2.7
While the increase in sales revenue is favorable, it is not sufficient to offset the rising expenses (unfavorable), resulting in a positive but small increase in net income. 250.
$158,400 $ 80,000 28,000 30,000
Increase/Decrease Percent Amount Change $162,500 $ (4,100) (2.5)% $ 92,500 $(12,500) (13.5) 30,000 (2,000) (6.7) 25,000 5,000 20.0
$138,000 $ 20,400
$147,500 $ 15,000
Year 2 Sales Wages expense Rent expense Utilities expense Total operating expenses Net income
Year 1
$ (9,500) $ 5,400
(6.4) 36.0
The decrease in sales revenue is unfavorable, but it is more than offset by the declines in operating expenses, with the exception of utilities, which increased over the period. Despite the 2.5% drop in sales, the net effect was a favorable increase in net income of 36.0%, which was in large part spurred by the drop in wages expense.
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Chapter 03 - The Adjusting Process True / False 1. Even though GAAP requires the accrual basis of accounting, some businesses prefer using the cash basis of accounting. a. True b. False 2. Generally accepted accounting principles require the accrual basis of accounting. a. True b. False 3. The revenue recognition principle states that revenue should be recorded in the same period as the cash is received. a. True b. False 4. The system of accounting where revenues are recorded when they are earned and expenses are recorded when they are incurred is called the cash basis of accounting. a. True b. False 5. The matching principle requires expenses be recorded in the same period that the related revenue is recorded. a. True b. False 6. For most large businesses, the cash basis of accounting will provide accurate financial statements for user needs. a. True b. False 7. An example of deferred revenue is Unearned Rent. a. True b. False 8. Accruals are needed when an unrecorded expense has been incurred or an unrecorded revenue has been earned. a. True b. False 9. If the debit portion of an adjusting entry is to an asset account, then the credit portion must be to a liability account. a. True b. False 10. The revenue recognition principle requires that the reporting of revenue be included in the period when cash for the service is received. a. True b. False 11. Revenues and expenses should be recorded in the same period to which they relate. a. True Powered by Cognero
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Chapter 03 - The Adjusting Process b. False 12. The matching principle supports matching expenses with the related revenues. a. True b. False 13. The updating of accounts when financial statements are prepared is called the adjusting process. a. True b. False 14. Adjusting entries affect balance sheet accounts to the exclusion of income statement accounts. a. True b. False 15. Adjusting entries affect only expense and asset accounts. a. True b. False 16. An adjusting entry would adjust revenue so it is reported when earned and not when cash is received. a. True b. False 17. An adjusting entry would adjust an expense account so the expense is reported when incurred. a. True b. False 18. An adjusting entry to accrue an incurred expense will affect total liabilities. a. True b. False 19. The difference between deferred revenue and accrued revenue is that accrued revenue has been recorded and needs adjusting and deferred revenue has never been recorded. a. True b. False 20. Deferrals are recorded transactions that delay the recognition of an expense or revenue. a. True b. False 21. Adjustments for accruals are needed to record a revenue that has been earned or an expense that has been incurred but not recorded. a. True b. False 22. Unearned revenue is a liability. a. True Powered by Cognero
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Chapter 03 - The Adjusting Process b. False 23. A company pays an employee $3,000 for a five-day workweek, Monday–Friday. The adjusting entry on December 31, which is a Wednesday, is a debit to Wages Expense of $1,800, and a credit to Wages Payable of $1,800. a. True b. False 24. A company realizes that the last two days' revenue for the month was billed but not recorded. The adjusting entry on December 31 is a debit to Accounts Receivable and a credit to Fees Earned. a. True b. False 25. If the adjustment for accrued salaries at the end of the period is inadvertently omitted, both liabilities and stockholders' equity will be understated for the period. a. True b. False 26. A company pays $36,000 for 12 months' rent on October 1, recording the prepayment as an asset. The adjusting entry on December 31 is a debit to Rent Expense of $9,000, and a credit to Prepaid Rent of $9,000. a. True b. False 27. A company receives $360 for a 12-month trade magazine subscription on August 1. The adjusting entry on December 31 is a debit to Unearned Subscription Revenue of $150 and a credit to Subscription Revenue of $150. a. True b. False 28. A company receives $6,500 for two season tickets sold on September 1. If $2,500 is earned by December 31, the adjusting entry made at that time is a debit to Cash of $2,500, and a credit to Ticket Revenue of $2,500. a. True b. False 29. At year-end, the balance in the prepaid insurance account, prior to any adjustments, is $6,000. The amount of the journal entry required to record insurance expense will be $4,000 if the amount of unexpired insurance applicable to future periods is $2,000. a. True b. False 30. If the adjustment to recognize expired insurance at the end of the period is inadvertently omitted, the assets at the end of the period will be understated. a. True b. False 31. If the adjustment of the unearned rent account at the end of the period to recognize the amount of rent earned is inadvertently omitted, the net income for the period will be understated. a. True b. False Powered by Cognero
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Chapter 03 - The Adjusting Process 32. The systematic allocation of land's cost to expense is called depreciation. a. True b. False 33. The difference between the balance of a fixed asset account and the balance of its related accumulated depreciation account is termed the book value of the asset. a. True b. False 34. The balance in the accumulated depreciation account is the sum of the depreciation expense recorded in past periods. a. True b. False 35. Accumulated depreciation accounts are liability accounts. a. True b. False 36. Accumulated depreciation is reported on the income statement. a. True b. False 37. A contra asset account for Land will normally appear on the balance sheet. a. True b. False 38. Depreciation Expense is reported on the balance sheet as an addition to the related asset. a. True b. False 39. A company depreciates its equipment $500 a year. The adjusting entry on December 31 is a debit to Depreciation Expense of $500 and a credit to Equipment of $500. a. True b. False 40. A fixed asset’s market value is reflected on the balance sheet. a. True b. False 41. If the adjustment for depreciation for the year is inadvertently omitted, the assets on the balance sheet at the end of the period will be understated. a. True b. False 42. Adjusting journal entries are dated on the last day of the period. a. True Powered by Cognero
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Chapter 03 - The Adjusting Process b. False 43. By ignoring and not posting the adjusting journal entries to the appropriate accounts, net income will always be overstated. a. True b. False 44. The financial statements are prepared from the unadjusted trial balance. a. True b. False 45. The adjustment for accrued fees was debited to Accounts Payable instead of Accounts Receivable. This error will be detected when the adjusted trial balance is prepared. a. True b. False 46. The adjusted trial balance verifies that total debits equal total credits before the adjusting entries are prepared. a. True b. False 47. Vertical analysis compares each item in a financial statement with a total amount from the same statement. a. True b. False 48. When preparing an income statement vertical analysis, each revenue and expense is expressed as a percent of net income. a. True b. False 49. Vertical analysis is useful for analyzing financial statement changes over time. a. True b. False Multiple Choice 50. The revenue recognition principle a. is not in conflict with the cash method of accounting b. determines when revenue is credited to a revenue account c. states that revenue is not recorded until the cash is received d. controls all revenue reporting for the cash basis of accounting 51. The matching principle a. addresses the relationship between the journal and the balance sheet b. determines whether the normal balance of an account is a debit or credit c. requires that the dollar amount of debits equal the dollar amount of credits on a trial balance d. states that the revenues and related expenses should be reported in the same period Powered by Cognero
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Chapter 03 - The Adjusting Process 52. Using accrual accounting, revenue is recorded and reported only a. when cash is received without regard to when the services are rendered b. when the services are rendered without regard to when cash is received c. when cash is received at the time services are rendered d. if cash is received after the services are rendered 53. Using accrual accounting, expenses are recorded and reported only a. when they are incurred, whether or not cash is paid b. when they are incurred and paid at the same time c. if they are paid before they are incurred d. if they are paid after they are incurred 54. The accounting principle upon which deferrals and accruals are based is a. matching b. cost c. price-level adjustment d. conservatism 55. If the effect of the debit portion of an adjusting entry is to increase the balance of an expense account, which of the following describes the effect of the credit portion of the entry? a. decreases the balance of an owner's equity account b. increases the balance of a liability account c. increases the balance of an asset account d. decreases the balance of an expense account 56. If the effect of the credit portion of an adjusting entry is to increase the balance of a liability account, which of the following describes the effect of the debit portion of the entry? a. increases the balance of a contra asset account b. increases the balance of an asset account c. decreases the balance of an owner's equity account d. increases the balance of an expense account 57. Prior to the adjusting process, accrued expenses have a. not yet been incurred, paid, or recorded b. been incurred, have not been paid, but have been recorded c. been incurred but not paid and not recorded d. been paid but have not yet been incurred 58. Prior to the adjusting process, accrued revenue has a. been earned and cash received b. been earned and not recorded as revenue c. not been earned but recorded as revenue d. not been recorded as revenue but cash has been received Powered by Cognero
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Chapter 03 - The Adjusting Process 59. Prior to an adjusting entry, prepaid expenses have a. not yet been recorded as expenses but have been paid b. been recorded as expenses and paid c. been incurred and paid d. not yet been recorded as expenses 60. Deferred revenue is revenue that is a. earned and the cash has been received b. earned but the cash has not been received c. not earned and the cash has not been received d. not earned but the cash has been received 61. Adjusting entries are a. the same as correcting entries b. needed to bring accounts up to date and match revenue and expense c. optional under generally accepted accounting principles d. rarely needed in large companies 62. Adjusting entries affect at least one a. income statement account and one balance sheet account b. revenue and the dividends account c. asset and one owner’s equity account d. revenue and one owner’s equity account 63. The term used to describe an expense that has not been paid and has not yet been recognized in the accounts by a routine entry is a. prepaid b. deferred c. accrued d. matched 64. Which of the following is not a characteristic of the accrual basis of accounting? a. Revenues and expenses are reported in the period in which cash is received or paid. b. Revenues are reported on the income statement in the period in which they are earned. c. The accrual basis of accounting supports the matching concept. d. Expenses are reported in the same period as the revenues to which they relate. 65. Generally accepted accounting principles require that companies use the _____ of accounting. a. cash basis b. deferral basis c. accrual basis d. account basis 66. The cash basis of accounting records revenues and expenses when the cash is exchanged, while the accrual basis of accounting Powered by Cognero
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Chapter 03 - The Adjusting Process a. records revenues when they are earned and expenses when they are paid b. records revenues and expenses when they are incurred c. records revenues when cash is received and expenses when they are incurred d. records revenues and expenses when the company needs to apply for a loan 67. By matching revenue earned during the accounting period to related incurred expenses, a. net income or loss will always be underestimated b. net income or loss will always be overestimated c. net income or loss will be properly reported on the income statement d. net income or loss will not be determined 68. Adjusting entries always include a. only income statement accounts b. only balance sheet accounts c. the cash account d. at least one income statement account and one balance sheet account 69. Prepaid expenses are eventually expected to become a. expenses when their future economic value expires or is used up b. revenues when services are performed c. expenses in the period when they are paid d. revenues when the liability is no longer owed 70. Which of the following is considered to be unearned revenue? a. theater tickets sold last month for yesterday’s performance b. theater tickets sold yesterday on credit for yesterday’s performance c. theater tickets that were not sold for the current performance d. theater tickets sold for next month’s performance 71. Which of the following is an example of accrued revenue? a. snow removal services that have been paid for three months in advance b. snow removal services that have been provided but have not been billed or paid c. an agreement that has been signed for snow removal services for the next three months d. snow removal services that have been provided and paid on the same day 72. Which of the following is considered to be an accrued expense? a. A computer technician installed the latest software updates and was paid on the same day. b. A computer technician has been paid in advance to install software updates as they become available. c. A computer technician has just signed an agreement with you regarding pricing for future work. d. A computer technician has installed the latest software updates, but you have not received an invoice or made payment. 73. If there is a balance in the prepaid rent account after adjusting entries are made, it represents a(n) a. deferral Powered by Cognero
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Chapter 03 - The Adjusting Process b. accrual c. revenue d. liability 74. If there is a balance in the unearned subscriptions account after adjusting entries are made, it represents a(n) a. deferral b. accrual c. dividend d. revenue 75. The unexpired insurance at the end of the fiscal period represents a(n) a. accrued asset b. accrued liability c. accrued expense d. deferred expense 76. The general term used to indicate delaying the recognition of an expense already paid or of a revenue already received is a. depreciation b. deferral c. accrual d. inventory 77. Which account would normally not require an adjusting entry? a. Wages Expense b. Accounts Receivable c. Accumulated Depreciation d. Cash 78. The account type and normal balance of Prepaid Expense are a. revenue, credit b. expense, debit c. liability, credit d. asset, debit 79. The account type and normal balance of Unearned Revenue are a. revenue, credit b. expense, debit c. liability, credit d. asset, debit 80. Which of the following accounts would likely be included in an accrual adjusting entry? a. Insurance Expense b. Prepaid Rent Powered by Cognero
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Chapter 03 - The Adjusting Process c. Interest Expense d. Unearned Rent 81. Buster Industries pays weekly salaries of $30,000 on Friday for a five-day week ending on that day. The adjusting entry necessary at the end of the fiscal period ending on Tuesday is a. debit Salaries Payable, $12,000; credit Cash, $12,000 b. debit Salary Expense, $12,000; credit Dividends, $12,000 c. debit Salary Expense, $12,000; credit Salaries Payable, $12,000 d. debit Dividends, $12,000; credit Cash, $12,000 82. The entry to adjust the accounts for salaries accrued at the end of the accounting period is a. debit Salaries Payable; credit Cash b. debit Cash; credit Salaries Payable c. debit Salaries Payable; credit Salaries Expense d. debit Salaries Expense; credit Salaries Payable 83. Data for an adjusting entry described as "accrued wages, $2,020" requires a a. debit to Wages Expense and a credit to Wages Payable b. debit to Wages Payable and a credit to Wages Expense c. debit to Accounts Receivable and a credit to Wages Expense d. debit to Dividends and a credit to Wages Payable 84. Accrued revenues affect _____ on the balance sheet. a. assets b. liabilities c. owner’s capital d. prepaid expenses 85. Accrued expenses affect _____ on the balance sheet. a. assets b. liabilities c. fixed assets d. prepaid expenses 86. Fees payable would appear on the balance sheet as a(n) a. asset b. liability c. fixed asset d. unearned revenue 87. Select the best explanation for the following adjusting entry: Wages Expense Wages Payable ???????????????? Powered by Cognero
4,500 4,500 Page 10
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Chapter 03 - The Adjusting Process a. To record the payment of wages. b. To record wages paid last month. c. To record wages paid in advance. d. To record accrued wages. 88. Which of the following is an example of an accrued expense? a. salary owed but not yet paid b. fees received but not yet earned c. supplies on hand d. a two-year premium paid on a fire insurance policy 89. A business pays biweekly salaries of $20,000 every other Friday for a 10-day period ending on that day. The adjusting entry necessary at the end of the fiscal period ending on the second Wednesday of the pay period includes a a. debit to Salary Expense of $8,000 b. debit to Salaries Payable of $8,000 c. credit to Salary Expense of $16,000 d. credit to Salaries Payable of $16,000 90. A business pays biweekly salaries of $20,000 every other Friday for a 10-day period ending on that day. The last payday of December is Friday, December 27. Assume the next pay period begins on Monday, December 30, and the proper adjusting entry is journalized at the end of the fiscal period (December 31). The entry for the payment of the payroll on Friday, January 10, includes a a. debit to Salary Expense of $16,000 b. debit to Salary Expense of $4,000 c. credit to Salaries Payable of $16,000 d. credit to Salaries Payable of $4,000 91. Which of the following accounts would likely be included in a deferral adjusting entry? a. Interest Revenue b. Unearned Revenue c. Salaries Payable d. Accounts Receivable 92. The balance in the prepaid rent account before adjustment at the end of the year is $32,000, which represents four months' rent paid on December 1. The adjusting entry required on December 31 is a. debit Rent Expense, $8,000; credit Prepaid Rent, $8,000 b. debit Prepaid Rent, $24,000; credit Rent Expense, $8,000 c. debit Rent Expense, $24,000; credit Prepaid Rent, $8,000 d. debit Prepaid Rent, $8,000; credit Rent Expense, $8,000 93. The balance in the office supplies account on January 1 was $7,000, supplies purchased during January were $3,000, and the supplies on hand on January 31 were $2,000. The amount to be used for the appropriate adjusting entry is a. $4,300 b. $12,000 Powered by Cognero
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Chapter 03 - The Adjusting Process c. $5,000 d. $8,000 94. Which of the following is the proper adjusting entry, based on a prepaid insurance account balance before adjustment of $14,000 and unexpired insurance of $3,000, for the fiscal year ending on April 30? a. debit Insurance Expense, $3,000; credit Prepaid Insurance, $3,000 b. debit Insurance Expense, $14,000; credit Prepaid Insurance, $14,000 c. debit Prepaid Insurance, $11,000; credit Insurance Expense, $11,000 d. debit Insurance Expense, $11,000; credit Prepaid Insurance, $11,000 95. The entry to adjust for the cost of supplies used during the accounting period is a. debit Supplies Expense; credit Supplies b. debit Owner’s Equity; credit Supplies c. debit Accounts Payable; credit Supplies d. debit Supplies; credit Owner’s Equity 96. The supplies account had a balance of $4,400 at the beginning of the year and was debited during the year for $2,400, representing the total of supplies purchased during the year. If $400 of supplies are on hand at the end of the year, the supplies expense to be reported on the income statement for the year is a. $400 b. $2,000 c. $6,800 d. $6,400 97. Smokey Company purchases a one-year insurance policy on July 1 for $3,600. The adjusting entry on December 31 is a. debit Insurance Expense, $1,800; credit Prepaid Insurance, $1,800 b. debit Insurance Expense, $1,500; credit Prepaid Insurance, $1,500 c. debit Insurance Expense, $2,100; credit Prepaid Insurance, $2,100 d. debit Prepaid Insurance, $1,800; credit Cash, $1,800 98. Gracie Company made a prepaid rent payment of $2,800 on January 1. The company’s monthly rent is $700. The amount of prepaid rent that would appear on the January 31 balance sheet after adjustment is a. $2,100 b. $700 c. $2,800 d. $1,400 99. The type of account and normal balance of Prepaid Insurance would be a. asset, credit b. asset, debit c. contra asset, credit d. contra asset, debit 100. The type of account and normal balance of Unearned Consulting Fees would be a. revenue, credit Powered by Cognero
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Chapter 03 - The Adjusting Process b. expense, debit c. liability, credit d. liability, debit 101. Supplies are recorded as assets when purchased. Therefore, the credit to Supplies in the adjusting entry is for the amount of supplies a. still on hand b. purchased c. used d. required for the next accounting period 102. The cost of office supplies to be used in future periods is ordinarily shown on the balance sheet as a. stockholders' equity b. an asset c. a contra asset d. a liability 103. Which of the following is an example of a prepaid expense? a. Supplies b. Accounts Receivable c. Unearned Subscription Revenue d. Unearned Fees 104. Prepaid advertising, representing payment for the next quarter, would be reported on the balance sheet as a. an asset b. a liability c. a contra asset d. owner's equity 105. Prepaid rent, representing rent for the next six months' occupancy, would be reported on the tenant's balance sheet as a(n) a. asset b. liability c. owner's equity account d. contra liability 106. The adjusting entry for gym memberships earned that were previously recorded in the unearned gym memberships account is a. debit Unearned Gym Memberships; credit Gym Memberships Revenue b. debit Gym Memberships Revenue; credit Unearned Gym Memberships c. debit Unearned Gym Memberships; credit Prepaid Gym Memberships d. debit Gym Memberships Expense; credit Unearned Gym Memberships 107. Which of the following pairs of accounts could not appear in the same adjusting entry? a. Fees Earned and Unearned Fees Powered by Cognero
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Chapter 03 - The Adjusting Process b. Interest Income and Interest Expense c. Rent Expense and Prepaid Rent d. Salaries Payable and Salaries Expense 108. The unearned rent account has a balance of $72,000. If $18,000 of the $72,000 remains unearned at the end of the accounting period, the amount of the adjusting entry is a. $18,000 b. $90,000 c. $54,000 d. $36,000 109. Select the best explanation for the following adjusting entry: Unearned Revenue 7,500 Fees Earned 7,500 ???????????????? a. To record payment of fees earned. b. To record fees earned at the end of the month. c. To record fees that have not been earned at the end of the month. d. To record payment of fees to be earned. 110. Select the best explanation for the following adjusting entry: Supplies Expense 730 Supplies 730 ???????????????? a. To record supplies used. b. To record purchase of supplies. c. To reduce supplies expense. d. To record sale of supplies. 111. What effect will this adjustment have on the accounting records? Unearned Fees Fees Earned a. increase net income b. increase revenues reported for the period c. decrease liabilities d. All of these choices.
6,375 6,375
112. What effect will this adjusting journal entry have on the accounting records? Supplies Expense Supplies a. increase income b. decrease net income c. decrease expenses Powered by Cognero
760 760
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Chapter 03 - The Adjusting Process d. increase assets 113. How will the following adjusting journal entry affect the accounting equation? Unearned Subscription Revenue Subscription Revenue a. increase assets, increase revenues b. increase liabilities, increase revenues c. decrease liabilities, increase revenues d. decrease liabilities, decrease revenues
11,500 11,500
114. The balance in the supplies account before adjustment at the end of the year is $6,250. The proper adjusting entry if the amount of supplies on hand at the end of the year is $1,500 would be a. debit Supplies, $1,500; credit Supplies Expense, $1,500 b. debit Supplies Expense, $4,750; credit Supplies, $4,750 c. debit Supplies Expense, $1,500; credit Supplies, $1,500 d. debit Supplies, $4,750; credit Supplies Expense, $4,750 115. For the year ending December 31, Orion, Inc. mistakenly omitted adjusting entries for $1,500 of supplies that were used, (2) unearned revenue of $4,200 that was earned, and (3) insurance of $5,000 that expired. For the year ending December 31, what is the effect of these errors on revenues, expenses, and net income? a. Revenues are overstated by $4,200. b. Net income is overstated by $2,300. c. Expenses are overstated by $6,500. d. Expenses are understated by $3,500. 116. The net income reported on the income statement is $58,000. However, adjusting entries have not been made at the end of the period for supplies expense of $2,200 and accrued salaries of $1,300. Net income, as corrected, is a. $56,700 b. $58,000 c. $55,800 d. $54,500 117. At the end of the fiscal year, the usual adjusting entry to account for the expired portion of prepaid insurance was omitted. Which of the following statements is true? a. Total assets at the end of the year will be understated. b. Owner's equity at the end of the year will be understated. c. Net income for the year will be overstated. d. Insurance expense will be overstated. 118. The adjusting entry to account for supplies used was omitted at the end of the year. This would affect the income statement by having a. expenses understated and therefore net income overstated b. revenues understated and therefore net income understated c. expenses understated and therefore net income understated Powered by Cognero
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Chapter 03 - The Adjusting Process d. expenses overstated and therefore net income understated 119. The difference between the balance of a fixed asset account and the related accumulated depreciation account is termed a. historical cost b. contra asset c. book value d. market value 120. The adjusting entry to record the depreciation of a building for the fiscal period is a. debit Depreciation Expense; credit Building b. debit Depreciation Expense; credit Accumulated Depreciation c. debit Accumulated Depreciation; credit Depreciation Expense d. debit Building; credit Depreciation Expense 121. As time passes, fixed assets other than land lose their capacity to provide useful services. To account for this decrease in usefulness, the cost of fixed assets is systematically allocated to expense through a process called a. equipment allocation b. depreciation c. accumulation d. matching 122. Accumulated Depreciation and Depreciation Expense are classified, respectively, as a. expense, contra asset b. asset, contra liability c. revenue, asset d. contra asset, expense 123. What effect will the following adjusting entry have on the accounting records? Depreciation Expense Accumulated Depreciation a. increase net income b. increase revenues c. decrease expenses d. decrease net book value
2,150 2,150
124. Which of the following is not true regarding depreciation? a. Depreciation allocates the cost of a fixed asset over its estimated life. b. Depreciation expense reflects the decrease in market value each year. c. Depreciation is an allocation not a valuation method. d. Depreciation expense does not measure changes in market value. 125. The net book value of a fixed asset is determined by the original cost a. less accumulated depreciation Powered by Cognero
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Chapter 03 - The Adjusting Process b. less market value c. less accumulated depreciation plus depreciation expense d. plus accumulated depreciation 126. At the end of the fiscal year, the usual adjusting entry for depreciation on equipment was omitted. Which of the following is true? a. Total assets will be understated at the end of the current year. b. The balance sheet and income statement will be misstated, but the statement of owner’s equity will be correct for the current year. c. Net income will be overstated for the current year. d. Total liabilities and total assets will be understated. 127. Services were performed but not billed. What effect will this have on the income statement if an adjusting entry is not made? a. Revenues will be overstated. b. Expenses will be overstated. c. Net income will be understated. d. Liabilities will be understated. 128. The omission of an adjusting entry for the depreciation of equipment will have what effect on the financial statements? a. Net income will be overstated on the income statement. b. Expenses will be understated on the income statement. c. Assets will be overstated on the balance sheet. d. All of these choices. 129. Which of the following accounts would most likely appear on an adjusted trial balance but probably would not appear on the unadjusted trial balance? a. Fees Earned b. Accounts Receivable c. Unearned Fees d. Depreciation Expense 130. Which of the following steps in the accounting process would be completed last? a. preparing the adjusted trial balance b. posting c. preparing the financial statements d. journalizing 131. When is the adjusted trial balance prepared? a. before adjusting journal entries are posted b. after adjusting journal entries are posted c. after the adjusting journal entries are journalized d. before the adjusting journal entries are journalized Powered by Cognero
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Chapter 03 - The Adjusting Process 132. What is the purpose of the adjusted trial balance? a. to verify that all of the adjusting entries have been posted b. to verify that the net income (loss) is correctly reported c. to verify that no adjusting journal entry has been omitted d. to verify that the debits and credits balance 133. All of the following statements regarding vertical analysis are true except a. vertical analysis may be prepared for several periods to analyze changes in relationships over time b. in a vertical analysis of a balance sheet, each asset item is stated as a percent of total assets c. in a vertical analysis of an income statement, each item is stated as a percent of total expenses d. major differences between a company’s vertical analysis and industry averages should be investigated 134. Two income statements for Toby Sam Enterprises follow: Toby Sam Enterprises Income Statement For the Years Ended December 31
Fees earned Operating expenses Income from operations
Year 2 $674,350 472,045 $202,305
Year 1 $520,600 338,390 $182,210
Based on a vertical analysis of Toby Sam Enterprises' income statements, has income from operations increased or decreased as a percentage of revenue? a. increased by 5% b. increased by 111% c. decreased by 5% d. decreased by 111% Matching Match each of the following examples to the type of account (a through e) it represents. Letters may be used more than once. a. Prepaid expense b. Accrued expense c. Unearned revenue d. Accrued revenue e. None of these choices 135. Services provided that have not been recorded. 136. Paid for a one-year insurance policy. 137. Retainer fee received from a client for future legal representation. 138. Annual property taxes owed that are to be paid at the beginning of next year. Powered by Cognero
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Chapter 03 - The Adjusting Process 139. Wages owed that will be paid next month. 140. Paid for a six-month magazine subscription. 141. Received payment covering a six-month magazine subscription. 142. Provided tutoring for a student that will be invoiced next month. 143. Received six months of rental payments from a tenant. 144. Paid six months of rental payments to the landlord. 145. Annual depreciation on equipment, recorded on a monthly basis. 146. A contract to provide tutoring services beginning next month was signed. Match each of the following omissions to the effect (a through h) it would have on the balance sheet. a. Assets and owner's equity overstated b. Assets and owner's equity understated c. Assets overstated and owner's equity understated d. Assets understated and owner's equity overstated e. Liabilities and owner's equity overstated f. Liabilities and owner's equity understated g. Liabilities overstated and owner's equity understated h. Liabilities understated and owner's equity overstated 147. No adjustment was made for supplies used up during the month. 148. Wages are paid every Friday for the five-day workweek. The month ended on Monday and no adjustment was recorded. 149. Interest earned on a note receivable was not recorded. 150. Services provided to customers on the last day of the month were not billed. 151. An attorney has earned half of a retainer fee that was received and recorded last month. No adjustment was recorded for the amount earned. 152. Property taxes are paid annually. The estimated monthly amount for the taxes was not recorded. 153. Depreciation on equipment was not recorded. 154. A tenant paid six months' rent in advance when he moved in on the first day of the month. No entry was made on the last day of the month. Subjective Short Answer 155. Explain the difference between the accrual basis of accounting and the cash basis of accounting. Powered by Cognero
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Chapter 03 - The Adjusting Process 156. Indicate which of the following accounts would, under normal circumstances, require an adjusting entry. a. Cash b. Prepaid Insurance c. Depreciation Expense d. Wages Payable e. Accumulated Depreciation f. Equipment 157. List the four basic types of accounts that require adjusting entries and give an example of each. 158. Under the accrual basis, some accounts in the ledger require updating at the end of the period. Discuss the three main reasons for this updating and give an example of each. 159. Explain the difference between accrued revenues and unearned revenues. Provide an example of each. 160. Explain the difference between accrued expenses and prepaid expenses. Provide an example of each. 161. Zoey Bella Company has a payroll of $10,000 for a five-day workweek. Its employees are paid each Friday for the five-day workweek. Journalize the adjusting entry required on December 31, assuming the year ends on a Thursday. 162. On January 1, Newman Company estimated its property tax to be $5,100 for the year. (a) (b) (c)
How much should the company accrue each month for property taxes? Determine the balance in Property Tax Payable as of August 31. Journalize the property tax accrual for September.
163. The company determines that the interest expense on a note payable for the period ending December 31 is $775. This amount is payable on January 1. Journalize these transactions for December 31 and January 1. 164. At the end of the current year, fees of $3,700 have been earned but have not been billed to clients. Journalize the adjusting entry to record the accrued fees. 165. Ski Master Company pays weekly salaries of $18,000 on Friday for a five-day week ending on that day. Journalize the necessary adjusting entry at the end of the accounting period, assuming that the period ends on Wednesday. 166. On December 15, Great Designs Company hired an independent contractor for a project. The contractor completed the project on December 29 and submitted an invoice for $2,425 which was due on January 15. The amount was duly paid on January 15. (a) Journalize the entry or entries necessary to record these transactions. (b) Discuss how the accrual basis of accounting affects this(these) journal entry(ies). 167. Bloom's Company pays biweekly salaries of $40,000 every other Friday for a 10-day period ending on that day. The last payday of December is Friday, December 27. Assuming the next pay period begins on Monday, December 30, journalize the adjusting entry necessary at the end of the fiscal period (December 31). 168. A business pays biweekly salaries of $20,000 every other Friday for a 10-day period ending on that day. The last payday of December is Friday, December 27. Assume the next pay period begins on Monday, December 30 and the proper adjusting entry is journalized at the end of the fiscal period (December 31). Journalize the entry for the payment of the payroll on Friday, January 10. Powered by Cognero
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Chapter 03 - The Adjusting Process 169. Salaries of $6,400 are paid for a five-day week on Friday. Journalize the necessary adjusting entry if the month ends on Thursday. 170. For each of the following, journalize the necessary adjusting entry. Omit explanations. (a)
(b)
(c)
(d)
A business pays weekly salaries of $22,000 on Friday for a five-day week ending on that day. Journalize the necessary adjusting entry at the end of the fiscal period, assuming that the fiscal period ends (1) on Tuesday or (2) on Wednesday. The balance in the prepaid insurance account before adjustment at the end of the year is $18,000. Journalize the adjusting entry required under each of the following alternatives: (1) the amount of insurance expired during the year is $5,300 or (2) the amount of unexpired insurance applicable to a future period is $2,700. On July 1 of the current year, a business pays $54,000 to the city for taxes (license fees) for the coming fiscal year. Journalize the adjusting entry required to bring the accounts affected by the taxes up to date as of July 31. The estimated depreciation on equipment for the year is $32,000.
171. Journalize the adjusting entries necessary at the end of the month for the following items: (a)
(b) (c)
(d) (e)
The beginning balance of the supplies account was $245. During the month the company bought additional supplies in the amount of $735. At the end of the month a physical inventory showed $343 of unused supplies. The company has a 12% note payable in the amount of $17,000 due in six months. The interest expense of $170 for the month has not been recorded. The company has two employees. The manager is paid on the fifteenth of every month for work performed during the first half of the month and on the first of the following month for the work performed during the second half of the month. His monthly salary is $5,500. The other employee is paid $650 for each five-day work week (Monday– Friday). The last day of the month fell on Thursday. The unearned fees account shows a balance of $46,000. According to the manager 60% of that amount has been earned. At the end of the month, $5,700 of services had been performed but not yet billed.
172. A one-year insurance policy was purchased on June 1 for $2,400. Journalize the adjusting entry required on December 31. 173. Gizmo Company purchased a one-year insurance policy on October 1 for $1,800. Journalize the adjusting entry required on December 31. 174. The supplies account had a beginning balance of $1,750. Supplies purchased during the period totaled $3,500. At the end of the period before adjustment, $350 of supplies was on hand. Journalize the adjusting entry for supplies. 175. On January 1, DogMart Company purchased a two-year liability insurance policy for $22,800 cash. The purchase was recorded to Prepaid Insurance. Journalize the January 31 adjusting entry. 176. On March 1, a business paid $3,600 for a 12-month liability insurance policy. On April 1, the business entered into a two-year rental contract for equipment at a total cost of $18,000. Determine the following amounts: (a) Insurance expense for the month of March (b) Balance in Prepaid Insurance as of March 31 (c) Equipment rent expense for the month of April Powered by Cognero
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Chapter 03 - The Adjusting Process (d) Balance in Prepaid Equipment Rental as of April 30 177. On January 1, Power House Co. prepaid the annual rent of $10,140. Journalize this transaction. 178. Journalize the following transactions. (a) On December 1, $18,000 was received for a service contract to be performed from December 1 through April 30. (b) Assuming the work is performed evenly throughout the contract period, journalize the adjusting entry required on December 31. 179. On December 31, the balance in the office supplies account is $1,385. A physical count shows $435 worth of supplies on hand. Journalize the adjusting entry for supplies. 180. On January 2, Dog Mart prepaid $30,000 rent for the year and recorded the prepayment in an asset account. Prepare the January 31 adjusting entry for rent expense. 181. The prepaid insurance account had a beginning balance of $6,600 and was debited for $2,300 for premiums paid during the year. Journalize the adjusting entry required at the end of the year, assuming the amount of unexpired insurance related to future periods is $4,100. 182. The balance in the unearned fees account, before adjustment at the end of the year, is $10,250. Journalize the adjusting entry required if the amount of unearned fees at the end of the year is $3,125. 183. On November 1, clients of Great Designs Company prepaid $4,250 for services to be provided in the future at a rate of $85 per hour. (a) Journalize the receipt of cash. (b) As of November 30, Great Designs shows that 15 hours of services have been provided on this agreement. Journalize the necessary adjusting entry. (c) Determine the total unearned fees in hours and dollars at November 30. 184. On November 15, Great Designs Company purchased an advertising campaign for the month of December. Great Designs paid cash of $2,700 in advance. The advertising campaign ran in December and was completed on December 31. (a) Journalize all necessary entries for the advertising campaign for November and December. (b) Discuss how the matching principle applies to this(these) journal entry(ies). 185. On January 2, Safe Motorcycling Monthly received a check for $72 from a subscriber for a 12-month subscription. The January issue was mailed on January 15. Prepare the necessary entries for the month of January. 186. On January 1, Great Designs Company had a debit balance of $1,450 in the office supplies account. During the month, Great Designs purchased $115 and $160 of office supplies and journalized them to the asset account upon purchasing. On January 31, an inspection of the office supplies cabinet shows that only $350 of office supplies remains. Journalize the January 31 adjusting entry for office supplies. 187. Journalize the required entries for the following items: (a)
Austin Company pays daily wages of $645 (Monday–Friday). Paydays are every other Friday. Journalize the Monday, January 31 adjusting entry, assuming that the previous payday was Friday, January 21.
(b)
Journalize the transaction to record Austin Company’s payroll on Friday, February 4.
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Chapter 03 - The Adjusting Process (c)
Annual depreciation expense on the company’s fixed assets is $39,600. Journalize the adjusting entry to recognize depreciation for the month of January.
(d)
The company’s office supplies account shows a debit balance of $3,755. A count of office supplies on hand on January 31 shows $635 worth of supplies on hand. Journalize the January 31 adjusting entry for Office Supplies.
188. Depreciation on an office building is $2,800. Journalize the adjusting entry required on December 31. 189. DogMart Company records depreciation for equipment. Depreciation for the period ending December 31 is $1,400 for office equipment and $2,650 for production equipment. Journalize the two entries to record the depreciation. 190. Depreciation on equipment for the year is $6,300. (a) Journalize the transaction if the company prepares adjustments once a year. (b) Journalize the transaction if the company prepares adjustments on a monthly basis. 191. The estimated amount of depreciation on equipment for the current year is $5,300. Journalize the adjusting entry to record the depreciation. 192. Accounts to use for transactions (a) through (j), each identified by a number, are listed. Following this list are the transactions. For each transaction, indicate the accounts that should be debited and credited by their account number(s). 21 12 19 16 31 11 56 32 41 55 24 57 25 13 17 18 26 14 18 15 23 54 22
Accounts Payable Accounts Receivable Accumulated Depreciation Building Myra May, Capital Cash Depreciation Expense Myra May, Drawing Fees Earned Insurance Expense Insurance Payable Interest Expense Interest Payable Interest Receivable Land Office Equipment Notes Payable Office Supplies Office Supplies Expense Prepaid Insurance Unearned Fees Wages Expense Wages Payable
Transactions a. Accrued wages as of the last day of month; payment will be made in three days. b. Paid the wages previously recorded in Powered by Cognero
Account(s) Debited
Account(s) Credited
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Chapter 03 - The Adjusting Process transaction (a) plus the wages earned in the first three days of the month. c. Bought a three-year insurance policy and paid in full. d. Made an entry to adjust for the expired portion of the insurance premium. e. Received $7,000 from a contract to perform accounting services over the next two years. f. Made an entry to adjust for half of the services performed in (e). g. Purchased office supplies, paying part cash and charging the balance on account. h. Borrowed money from a bank and signed a note payable due in six months. i. Recorded one month’s accrued interest on the note payable. j. Recorded depreciation on the office equipment. 193. On December 31, a business estimates depreciation on equipment used during the first year of operations to be $2,900. (a) Journalize the adjusting entry required on December 31. (b) If the adjusting entry in (a) were omitted, which items would be erroneously stated on (1) the income statement for the year and (2) the balance sheet as of December 31? 194. Journalize the adjusting entries necessary on December 31 for the following items. Omit explanations. 1. Fees accrued but not billed, $6,300. 2. The supplies account balance on December 31, $4,750; supplies on hand, $960. 3. Wages accrued but not paid, $2,700. 4. Depreciation of office equipment, $1,650. 5. Rent expired during year, $10,800. 195. At January 31, the end of the first month of the year, the usual adjusting entry transferring expired insurance to an expense account is omitted. Which items will be incorrectly stated, because of the error, on (a) the income statement for January and (b) the balance sheet as of January 31? Also indicate whether the items in error will be overstated or understated. 196. At the end of April, the first month of the company's year, the usual adjusting entry transferring rent earned to a revenue account from the unearned rent account was omitted. Indicate which items will be incorrectly stated, because of the error, on (a) the income statement for April and (b) the balance sheet as of April 30. Also indicate whether the items in error will be overstated or understated. 197. Accrued salaries of $600 owed to employees for December 29, 30, and 31 are not taken into consideration in preparing the financial statements for the year ended December 31. Indicate which items will be erroneously stated, because of the error, on (a) the income statement for the year and (b) the balance sheet as of December 31. Also indicate whether the items in error will be overstated or understated 198. For the year ending December 31, Beard Clinical Supplies Co. mistakenly omitted adjusting entries for (1) $9,800 of unearned revenue that was earned, (2) earned revenue that was not billed of $10,200, and (3) accrued wages of $7,000. Indicate the combined effect of the errors on (a) revenues, (b) expenses, and (c) net income. Powered by Cognero
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Chapter 03 - The Adjusting Process 199. For the year ending June 30, Island Clinical Services mistakenly omitted adjusting entries for (1) $1,500 of supplies that were used, (2) unearned revenue of $4,200 that was earned, and (3) insurance of $5,000 that expired. What is the combined effect of these errors on (a) revenues, (b) expenses, and (c) net income for the year ending June 30? 200. At the end of the fiscal year, the following adjusting entries were omitted: (a)
No adjusting entry was made to transfer the $1,750 of prepaid insurance from the asset account to the expense account. (b) No adjusting entry was made to record accrued fees of $525 for services provided to customers. Assuming that financial statements are prepared before the errors are discovered, indicate the effect of each error, considered individually, on the following items. Specify whether each item would be overstated or understated and by how much. If no effect, insert a zero. Error (a) Over- Understated stated
Error (b) Over- Understated stated
(1) Assets at Dec. 31
$
$
$
$
(2) Liabilities at Dec. 31
$
$
$
$
(3) Net income for the year
$
$
$
$
(4) Owner's equity at Dec. 31
$
$
$
$
201. Complete the missing items in this summary of adjustments chart: PREPAID EXPENSES Financial Statement Impact Examples Adjusting Entry if Adjusting Entry Is Omitted Supplies, Dr. Expense Income Statement: (a) Cr. Asset Revenues: No effect Expenses: Understated Net income: (b) Balance Sheet: Assets: (c) Liabilities: (d) Owner's equity: Overstated UNEARNED REVENUES Financial Statement Impact if Examples Adjusting Entry Adjusting Entry is Omitted Unearned rent, (f) Income Statement: (e) Revenues: (g) Expenses: No effect Net income: (h) Balance Sheet: Assets: (i) Liabilities: Overstated Owner's equity: (j) ACCRUED REVENUES Financial Statement Impact if Examples Adjusting Entry Adjusting Entry Is Omitted Powered by Cognero
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Chapter 03 - The Adjusting Process Interest income due on a note, (k)
Dr. Asset Cr. Revenue
Examples Interest due on a note payable, (p)
(q)
Income Statement: Revenues: (l) Expenses: (m) Net income: Understated Balance Sheet: Assets: (n) Liabilities: (o) Owner's equity: Understated ACCRUED EXPENSES Financial Statement Impact if Adjusting Entry Adjusting Entry Is Omitted Income Statement: Revenues: No effect Expenses: (r) Net income: (s) Balance Sheet: Assets: (t) Liabilities: Understated Owner's equity: (u)
202. Journalize the six entries to adjust the accounts at December 31. Omit explanations. (Hint: One of the accounts was affected by two different adjusting entries.) Accounts
Cash Accounts Receivable Supplies Prepaid Insurance Equipment Accumulated Depreciation Wages Payable Unearned Fees Jose Mendez, Capital Fees Earned Wages Expense Supplies Expense Insurance Expense Depreciation Expense
Unadjusted Trial Balance Debit Credit Balances Balances 5,000 32,000 3,600 4,000 11,000
44,300
99,900
Adjusted Trial Balance Debit Credit Balances Balances 5,000 32,600 100 1,400 11,000 1,700 2,000 8,900 3,500 22,000 22,000 69,000 75,000 46,300 3,500 2,600 1,700 99,900 104,200 104,200
203. REM Consulting is completing the accounting information processing at the end of the fiscal year, December 31. The following trial balances are available. Accounts Cash Powered by Cognero
Unadjusted Trial Balance Debit Credit 13,000
Adjusted Trial Balance Debit Credit 13,000 Page 26
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Chapter 03 - The Adjusting Process Accounts Receivable Prepaid Insurance Supplies Machines Accumulated Depreciation Wages Payable Unearned Fees Randall E. Moore, Capital Randall E. Moore, Drawing Fees Earned Wages Expense Depreciation Expense Supplies Expense Insurance Expense
1,500 600 3,800 30,000
1,800 200 3,000 30,000 12,000
17,500 900 6,500 24,000
6,700 24,000 4,800
4,800 25,000
14,000
67,700
67,700
25,500 14,900 5,500 800 400 74,400
74,400
(a) Reconstruct the adjusting entries and give a brief explanation of each. (b) Determine the amount of REM's net income or loss. 204. Jordon J. James started JJJ Consulting on January 1. The following are the account balances at the end of the first month of business, before adjusting entries were recorded: Accounts Payable Accounts Receivable Cash Consulting Revenue Equipment Jordon J. James, Capital Jordon J. James, Drawing Prepaid Rent Supplies
$
300 750 6,300 4,925 7,000 15,000 1,375 4,000 800
Adjustment data: Supplies on hand at the end of the month, $200 Unbilled consulting revenue, $700 Rent expense for the month, $1,000 Depreciation on equipment, $90 (a) Prepare the required adjusting entries, adding accounts as needed. Omit explanations. (b) Prepare an adjusted trial balance for JJJ Consulting as of January 31.
205. For each of the following errors, considered individually, indicate whether the error would cause the adjusted trial balance totals to be unequal. If the error would cause the adjusted trial balance total to be unequal, indicate whether the debit or credit total is higher and by how much. a) The adjustment for unearned fees of $3,260 was journalized as a debit to Accounts Payable for $3,260 and a credit to Fees Earned of $3,260. b) The adjustment for supplies expense of $425 was journalized as a debit to Supplies Expense for $542 and a credit to Supplies for $425. Powered by Cognero
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Chapter 03 - The Adjusting Process 206. Using the following account balances for Garry’s Tree Service, prepare a trial balance. Accounts Payable Accumulated Depreciation—Machinery Cash Garry Mauss, Capital Garry Mauss, Drawing Machinery Prepaid Rent Rent Expense Service Revenue Supplies Wages Expense Wages Payable Unearned Revenue
$ 7,000 7,340 25,000 32,910 3,300 18,350 12,200 11,500 21,000 1,000 2,000 3,600 1,500
207. Indicate whether the following error would cause the adjusted trial balance totals to be unequal. If the error would cause the adjusted trial balance totals to be unequal, indicate whether the debit or credit total is higher and by how much. The entry for $975 of supplies used during the period was journalized as a debit to Supplies Expense for $795 and credit to Supplies for $975. 208. Indicate whether the following error would cause the adjusted trial balance totals to be unequal. If the error would cause the adjusted trial balance totals to be unequal, indicate whether the debit or credit total is higher and by how much. The adjustment for accrued fees of $1,170 was journalized as a debit to Accounts Receivable for $1,170 and a credit to Fees Earned for $1,107. 209. What is the purpose of an adjusted trial balance? What type(s) of error does it detect? What type(s) of error does it not detect? 210. Two income statements for Midnight Enterprises are as follows: Midnight Enterprises Income Statements For the Years Ended December 31
Fees earned Operating expenses Income from operations
Year 2 $674,350 472,045 $202,305
Year 1 $520,600 338,390 $182,210
(a) Prepare a vertical analysis of Midnight Enterprises’ income statements. (b) Does the vertical analysis indicate a favorable or unfavorable change? 211. Two income statements for Danielle’s Design Services are as follows: Danielle’s Design Services Income Statements For the Years Ended December 31 Powered by Cognero
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Chapter 03 - The Adjusting Process Fees earned Expenses: Wages expense Rent expense Supplies expense Miscellaneous expense Total expenses Income from operations
Year 2 $765,340
Year 1 $696,520
$254,000 120,000 76,500 11,680 $462,180 $303,160
$214,600 108,000 98,715 16,420 $437,735 $258,785
(a) Prepare a vertical analysis of Danielle’s Design Services income statements. (b) What types of changes are indicated: favorable or unfavorable? (c) What other information would enhance the analysis?
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Chapter 03 - The Adjusting Process Answer Key 1. True 2. True 3. False 4. False 5. True 6. False 7. True 8. True 9. False 10. False 11. True 12. True 13. True 14. False 15. False 16. True 17. True 18. True 19. False 20. True 21. True 22. True 23. True 24. True 25. False Powered by Cognero
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Chapter 03 - The Adjusting Process 26. True 27. True 28. False 29. True 30. False 31. True 32. False 33. True 34. True 35. False 36. False 37. False 38. False 39. False 40. False 41. False 42. True 43. False 44. False 45. False 46. False 47. True 48. False 49. True 50. b Powered by Cognero
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Chapter 03 - The Adjusting Process 51. d 52. b 53. a 54. a 55. b 56. d 57. c 58. b 59. d 60. d 61. b 62. a 63. c 64. a 65. c 66. b 67. c 68. d 69. a 70. d 71. b 72. d 73. a 74. a 75. d 76. b Powered by Cognero
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Chapter 03 - The Adjusting Process 77. d 78. d 79. c 80. c 81. c 82. d 83. a 84. a 85. b 86. b 87. d 88. a 89. d 90. a 91. b 92. a 93. d 94. d 95. a 96. d 97. a 98. a 99. b 100. c 101. c Powered by Cognero
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Chapter 03 - The Adjusting Process 102. b 103. a 104. a 105. a 106. a 107. b 108. c 109. b 110. a 111. d 112. b 113. c 114. b 115. b 116. d 117. c 118. a 119. c 120. b 121. b 122. d 123. d 124. b 125. a 126. c 127. c Powered by Cognero
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Chapter 03 - The Adjusting Process 128. d 129. d 130. c 131. b 132. d 133. c 134. c 135. d 136. a 137. c 138. b 139. b 140. a 141. c 142. d 143. c 144. a 145. a 146. e 147. a 148. h 149. b 150. b 151. g 152. h Powered by Cognero
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Chapter 03 - The Adjusting Process 153. a 154. g 155. The accrual basis of accounting reports revenues and expenses in the period in which a service has been performed or a product has been delivered, regardless of when cash was received. The cash basis of accounting reports revenues and expenses when cash is received or paid. 156. b, c, d, and e 157. 1. Prepaid expenses; example: prepaid insurance 2. Unearned revenues; example: an attorney’s retainer fee 3. Accrued revenues; example: unpaid interest earned on a note receivable 4. Accrued expenses; example: unpaid wages owed to employees 158. 1. Some expenses are not recorded daily. For example, the daily use of supplies would require many entries with small amounts. Also, the amount of supplies on hand on a day-to-day basis is normally not needed.
2. Some revenues and expenses are incurred as time passes rather than as separate transactions. For example, rent received in advance (unearned rent) expires and becomes revenue with the passage of time. Likewise, prepaid insurance expires and becomes an expense with the passage of time. 3. Some revenues and expenses may be unrecorded at the end of the accounting period. For example, a company may have provided services to customers that it has not billed or recorded at the end of the accounting period. Likewise, a company may not pay its employees until the next accounting period even though the employees have earned their wages in the current period. 159. Accrued revenues are revenues that have been earned but not recorded in the accounts. An example would be unbilled services on account. Unearned revenues are payments that have been received for services or goods to be provided in the future. An example would be rental payments received by a landlord in advance 160. Accrued expenses are expenses that have been incurred but not recorded in the accounts. An example would be unpaid wages due to employees. Prepaid expenses are expenses for which payment has been made and for which economic benefits will be enjoyed in future accounting periods. An example would be an insurance policy purchased to cover future periods. 161. Dec. 31
Wages Expense
8,000
Wages Payable 8,000 Accrued wages [($10,000 ÷ 5) × 4 days]. 162. (a) $425 ($5,100 ÷ 12) (b) $3,400 ($425 × 8) (c) Property Tax Expense 425 Property Tax Payable Record property tax accrual for September. Powered by Cognero
425 Page 36
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Chapter 03 - The Adjusting Process 163. Dec. 31
Interest Expense
775
Interest Payable Jan.
1
775
Interest Payable
775
Cash
775
164. Accounts Receivable Fees Earned
3,700
165. Salaries Expense [($18,000 ÷ 5) × 3] Salaries Payable
10,800
3,700
10,800
166. (a) Dec. 29 Professional Services Expense Accounts Payable
2,425 2,425
Jan. 15 Accounts Payable Cash
2,425 2,425
(b) The accrual basis of accounting is required by GAAP and specifies that an expense should be recognized when incurred and not necessarily when cash is paid. The first journal entry is required to record the expense of the independent contractor in the period in which the services were received. This journal entry created an expense in December’s income statement and a liability on December’s balance sheet. The second entry was to pay the contractor when the payment was due. This removed the liability by resolving it with a cash payment. This journal entry did not affect January’s income statement. 167. Dec. 31
Salary Expense* Salaries Payable *$40,000 ÷ 10 days = $4,000 per day $4,000 per day × 2 days = $8,000
10,800 10,800
168. Jan.10
Salary Expense* 16,000 Salary Payable** 4,000 Cash 20,000 *$20,000 – $4,000 = $16,000 **$20,000 ÷ 10 days = $2,000 per day; $2,000 per day × 2 days = $4,000 169. Salaries Expense [($6,400 ÷ 5) × 4] Salaries Payable
5,120 5,120
170. Powered by Cognero
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Chapter 03 - The Adjusting Process (a) (1) Salary Expense ($22,000 ÷ 5 × 2) Salaries Payable
8,800
(2) Salary Expense ($22,000 ÷ 5 × 3) Salaries Payable
13,200
(b) (1) Insurance Expense Prepaid Insurance (2) Insurance Expense ($18,000 – $2,700) Prepaid Insurance
8,800
13,200 5,300 5,300 15,300 15,300
(c) Taxes Expense ($54,000 ÷ 12) Prepaid Taxes
4,500
(d) Depreciation Expense Accumulated Depreciation
32,000
171. (a)
(b)
(c)
(d)
(e)
4,500
32,000
Supplies Expense ($245 + $735 – $343) Supplies
637
Interest Expense [($17,000 × 12%) ÷ 12] Interest Payable
170
Wages and Salary Expense {($5,500 ÷ 2) + [($650 ÷ 5) × 4]} Wages and Salary Payable
3,270
Unearned Fees Fees Earned ($46,000 × 60%)
27,600
Accounts Receivable Fees Earned
5,700
172. Dec. 31
173. Dec. 31
637
170
3,270
27,600
5,700
Insurance Expense 1,400 Prepaid Insurance 1,400 Insurance expired [($2,400 ÷ 12) × 7 mos.].
Insurance Expense 450 Prepaid Insurance Insurance expired [($1,800 ÷ 12) × 3 mos.].
174. Supplies Expense 4,900 Supplies Supplies used ($1,750 + $3,500 − $350).
450
4,900
175. Powered by Cognero
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Chapter 03 - The Adjusting Process Jan. 31 Insurance Expense 950 Prepaid Insurance 950 Insurance expired ($22,800 ÷ 24). 176. (a) $300 ($3,600 ÷ 12) (b) $3,300 ($3,600 – $300) (c) $750 ($18,000 ÷ 24) (d) $17,250 ($18,000 – $750) 177. Jan. 1
Prepaid Rent Cash
10,140 10,140 Prepaid annual rent.
178. Dec. 1
Cash
18,000 Unearned Fees
31
179. Dec. 31
18,000
Unearned Fees 3,600 Fees Earned Fees earned ($18,000 ÷ 5 mos.).
3,600
Office Supplies Expense 950 Office Supplies Supplies used ($1,385 – $435)
950
180. Jan. 31
Rent Expense ($30,000 ÷ 12) Prepaid Rent
181. Dec. 31
2,500 2,500
Insurance Expense* Prepaid Insurance
4,800 4,800
*$6,600 + $2,300 − $4,100 = $4,800 182. Unearned Fees ($10,250 – $3,125) Fees Earned 183. (a) Nov. 1
7,125
Cash
7,125
4,250 Unearned Service Fees
(b) Nov. 30 Unearned Service Fees ($85 × 15) Service Fees Powered by Cognero
4,250 1,275 1,275 Page 39
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Chapter 03 - The Adjusting Process (c) Original prepaid fees November service fees earned Balance of unearned service fees 184. (a)
Nov. 15
Dec. 31 (b)
$4,250 ÷ $85 per hour = 1,275 $2,975
Prepaid Advertising Cash
2,700
Advertising Expense Prepaid Advertising
2,700
50 hours 15 hours 35 hours
2,700
2,700
Based on the matching principle, the expense should be recorded in the month of December when the advertising campaign ran, even though the cash was paid in November. Thus, the November journal entry creates an asset, prepaid advertising. The December 31 entry recognizes the advertising expense in December and eliminates the prepaid asset.
185. Jan. 2
Cash
72 Unearned Subscription Revenue
Jan. 15 or 31*
Unearned Subscription Revenue Subscription Revenue
72 6 6
*The second entry can be made either on January 15 when the issue is mailed or on January 31 with other adjusting entries. 186. Jan. 31
Office Supplies Expense Office Supplies *Beginning balance Plus purchases
1,375* 1,375 $1,450 $115 160
Available Less ending balance Period expense 187. (a) Jan. 31 Wages Expense Wages Payable Accrued wages ($645 × 6 days). (b) Feb. 4
(c) Jan. 31
275 $1,725 350 $1,375
3,870 3,870
Wages Expense (4 × $645) Wages Payable Cash (10 × $645) Payment of Feb. 4 payroll.
2,580 3,870
Depreciation Expense ($39,600 ÷
3,300
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6,450
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Chapter 03 - The Adjusting Process 12) Accumulated Depreciation Depreciation on fixed assets. (d) Jan. 31
188. Dec. 31
189. Dec. 31
31
3,300
Office Supplies Expense 3,120 Office Supplies Office supplies used ($3,755 – $635).
Depreciation Expense Accumulated Depreciation
3,120
2,800 2,800
Depreciation Expense—Office Equipment Accumulated Depreciation—Office Equipment
1,400
Depreciation Expense—Production Equipment Accumulated Depreciation—Production Equipment
2,650
190. (a) Depreciation Expense Accumulated Depreciation (b) Depreciation Expense ($6,300/12) Accumulated Depreciation 191. Depreciation Expense Accumulated Depreciation 192. Transactions a. b. c. d. e. f. g. h. i. j.
Account(s) Debited 54 22, 54 15 55 11 23 14 11 57 56
193. (a) Depreciation Expense Accumulated Depreciation Powered by Cognero
1,400
2,650
6,300 6,300 525 525
5,300 5,300
Account(s) Credited 22 11 11 15 23 41 11, 21 26 25 19
2,900 2,900 Page 41
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Chapter 03 - The Adjusting Process (b) (1) Depreciation expense would be understated. Net income would be overstated. (2) Accumulated depreciation would be understated, and total assets would be overstated. Owner's equity would be overstated. 194. Dec. 31 31 31 31 31
Accounts Receivable Revenues
6,300
Supplies Expense ($4,750 – $960) Supplies
3,790
Wages Expense Wages Payable
2,700
Depreciation Expense Accumulated Depreciation
1,650
Rent Expense Prepaid Rent
10,800
6,300 3,790 2,700 1,650 10,800
195. (a) Insurance expense (or expenses) will be understated. Net income will be overstated. (b) Prepaid insurance (or assets) will be overstated. Owner's equity will be overstated. 196. (a) Rent revenue (or revenues) will be understated. Net income will be understated. (b) Owner’s equity at the end of the period will be understated. Unearned rent (or liabilities) will be overstated. 197. (a) Salary expense (or expenses) will be understated. Net income will be overstated. (b) Salaries payable (or liabilities) will be understated. Owner’s equity will be overstated. 198. (a) Revenues were understated by $20,000 ($9,800 + $10,200). (b) Expenses were understated by $7,000. (c) Net income was understated by $13,000 ($20,000 − $7,000). 199. (a) Revenues were understated by $4,200. (b) Expenses were understated by $6,500 ($1,500 + $5,000). (c) Net income was overstated by $2,300 ($6,500 − $4,200). 200. Error (a) Error (b) Over- Under- Over- UnderPowered by Cognero
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Chapter 03 - The Adjusting Process (1) Assets at Dec. 31 (2) Liabilities at Dec. 31
stated stated stated stated $1,750 $0 $0 $525 0
0
0
0
(3) Net income for the year
1,750
0
0
525
(4) Owner’s equity at Dec. 31
1,750
0
0
525
201. (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) (o) (p) (q) (r) (s) (t) (u)
Prepaid rent or Prepaid insurance Overstated Overstated No effect Fee or magazine subscription received in advance Dr. Liability, Cr. Revenue Understated Understated No effect Understated Services performed but not yet billed Understated No effect Understated No effect Unpaid wages Dr. Expense, Cr. Liability Understated Overstated No effect Overstated
202. Accounts Receivable Fees Earned
600 600
Supplies Expense Supplies
3,500
Insurance Expense Prepaid Insurance
2,600
Depreciation Expense Accumulated Depreciation
1,700
Unearned Fees Fees Earned
5,400
Wages Expense Wages Payable
2,000
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3,500
2,600
1,700
5,400
2,000 Page 43
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Chapter 03 - The Adjusting Process 203. (a)
Accounts Receivable Fees Earned Accrued fees.
300
Insurance Expense Prepaid Insurance Expired insurance.
400
300
400
Supplies Expense 800 Supplies Supplies used ($3,800 – $3,000). Depreciation Expense Accumulated Depreciation Depreciation on machines.
(b)
800
5,500 5,500
Wages Expense Wages Payable Accrued wages.
900
Unearned Fees Fees Earned Fees earned ($6,700 – $6,500).
200
900
200
$25,500 – $14,900 – $400 – $800 – $5,500 = $3,900 net income
204. (a) Supplies Expense Supplies
600 600
Accounts Receivable Consulting Revenue
700 700
Rent Expense Prepaid Rent
1,000 1,000
Depreciation Expense Accumulated Depreciation
90 90
(b) JJJ Consulting Adjusted Trial Balance January 31 Accounts Cash Accounts Receivable Supplies Prepaid Rent Powered by Cognero
Debit Balances
Credit Balances 6,300 1,450 200 3,000 Page 44
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Chapter 03 - The Adjusting Process Equipment Accumulated Depreciation Accounts Payable Jordan J. James, Capital Jordan J. James, Drawing Consulting Revenue Depreciation Expense Rent Expense Supplies Expense Totals
7,000 90 300 15,000 1,375 5,625 90 1,000 600 21,015
21,015
205. a) The trial balance totals will still be equal, but the balances of Unearned Fees and Accounts Payable will be incorrect as the debit should have been made to Unearned Fees instead of Accounts Payable. b) The debit total exceeds the credit total by $117. 206.
Cash Supplies Prepaid Rent Machinery Accumulated Depreciation—Machinery Accounts Payable Wages Payable Unearned Revenue Garry Mauss, Capital Garry Mauss, Drawing Service Revenue Wage Expense Rent Expense
Debit Credit Balances Balances 25,000 1,000 12,200 18,350 7,340 7,000 3,600 1,500 32,910 3,300 21,000 2,000 11,500 73,350 73,350
207. The total will be unequal with a credit total higher by $180 ($975 − $795). 208. The total will be unequal with a debit total higher by $63 ($1,170 − $1,107). 209. The purpose of an adjusted trial balance is to make sure that debits equal credits before financial statements are prepared. If a debit is incorrectly posted as a credit or vice versa, the error will be detected. Likewise, if the debit(s) and credit(s) for a posted transaction do not equal, that error will be detected. Errors that will not be detected include omitting a required adjusting entry or posting a debit or credit for the correct amount to the wrong account. 210. (a) Midnight Enterprises Income Statements For the Years Ended December 31 Powered by Cognero
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Chapter 03 - The Adjusting Process
Fees earned Operating expenses Income from operations
Year 2 Year 1 Amount Percent Amount Percent $674,350 100% $520,600 100% 472,045 70% 338,390 65% $202,305
30% $182,210
35%
(b) The vertical analysis is indicating an unfavorable change from Year 1 to Year 2 as the operating expenses of the company as a percent of revenues have increased and income from operations has decreased. 211. (a) Danielle’s Design Services Income Statements For the Years Ended December 31 Year 2
Year 1
Amount Percent Amount Fees earned $765,340 100.0% $696,520 Expenses: Wages expense $254,000 33.2% $214,600 Rent expense 120,000 15.7% 108,000 Supplies expense 76,500 10.0% 98,715 Miscellaneous expense 11,680 1.5% 16,420 Total expenses $462,180 60.4% $437,735 Income from operations $303,160 39.6% $258,785 *Differences due to rounding
Percent 100.0% 30.8% 15.5% 14.2% 2.4% 62.9%* 37.1%*
The vertical analysis shows both favorable and unfavorable changes. The increase in wages expense of 2.4% (33.2% − 30.8%) is unfavorable. The decreases in supplies expense of 4.2% (14.2% − 10.0%) and miscellaneous expense of 0.9% (2.4% − 1.5%) are both favorable. Rent as a percentage of fees earned stayed relatively constant. The net result is favorable—an increase in income from operations as a percentage of fees earned from 37.1% to 39.6%. (c) The analysis could be enhanced by comparisons with industry averages.
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Chapter 04 - Completing the Accounting Cycle True / False 1. Cross-referencing is useful in assuring that the debits and credits are in balance. a. True b. False 2. When accounts do not appear on the unadjusted trial balance but are needed to post adjustments, they are simply added to the Account Title column. a. True b. False 3. From the adjusted trial balance, the revenue and expense accounts will flow into the income statement. a. True b. False 4. There is really no benefit in preparing financial statements in any particular order. a. True b. False 5. On the income statement, miscellaneous expenses are usually presented as the last item without regard to the dollar amount. a. True b. False 6. The usual presentation of the statement of owner's equity is (1) Beginning capital, (2) Net income or loss, (3) Drawing, (4) Owner's contributions, and (5) Ending capital. a. True b. False 7. The difference between a classified balance sheet and one that is not classified is that the classified one has subheadings. a. True b. False 8. Cash and other assets that may reasonably be expected to be realized in cash, sold, or consumed through the normal operations of a business, usually longer than one year, are called current assets. a. True b. False 9. Prepaid Insurance is an example of a current asset. a. True b. False 10. Land is an example of a plant asset. a. True b. False Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle 11. Liabilities that will be due within one year or less and that are to be paid out of current assets are called current liabilities. a. True b. False 12. The amount of the net income for a period appears on both the income statement and the balance sheet for that period. a. True b. False 13. Accrued taxes payable are generally reported on the balance sheet as a current liability. a. True b. False 14. Office Equipment is an example of a current asset account. a. True b. False 15. Capital and drawing are reported in the Owner's Equity section of the balance sheet. a. True b. False 16. Prepaid expenses that benefit a relatively short period of time are listed on the balance sheet as current assets. a. True b. False 17. Unearned revenues that will be earned in a relatively short period of time are listed on the balance sheet as current assets. a. True b. False 18. Accrued expenses are ordinarily listed on the balance sheet as current assets. a. True b. False 19. Accrued revenues are ordinarily listed on the balance sheet as current liabilities. a. True b. False 20. Examples of temporary accounts are Supplies and Prepaid Expenses, which are in the ledger for just a short time before they expire. a. True b. False 21. Accumulated Depreciation is a permanent account. a. True b. False Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle 22. The drawing account is a temporary account. a. True b. False 23. The balance sheet accounts are referred to as real or permanent accounts. a. True b. False 24. Journalizing and posting the adjustments and closing entries updates the ledger for the new accounting period. a. True b. False 25. Net income is closed to the owner's capital account. a. True b. False 26. The accumulated depreciation account is closed to the drawing account. a. True b. False 27. The drawing account is debited in the closing entry. a. True b. False 28. The trial balance prepared after all the closing entries have been posted is called a pre-closing trial balance. a. True b. False 29. Entries required to close the balances of the temporary accounts at the end of the period are called final entries. a. True b. False 30. Journalizing and posting closing entries must be completed before financial statements can be prepared. a. True b. False 31. During the closing process, some balance sheet accounts are closed and end the period with a zero balance. a. True b. False 32. Closing entries are entered directly on to the work sheet. a. True b. False 33. The post-closing trial balance will generally have fewer accounts than the adjusted trial balance. Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle a. True b. False 34. A post-closing trial balance contains only asset and liability accounts. a. True b. False 35. A post-closing trial balance should be prepared before the financial statements are prepared. a. True b. False 36. Assets, liabilities, and owner’s capital are real accounts and do not get closed at the end of the period. a. True b. False 37. All income statement accounts will be closed at the end of the period. a. True b. False 38. Accounts reported on the balance sheet that are carried forward from year to year are known as permanent accounts. a. True b. False 39. Balance sheet accounts are not considered real accounts. a. True b. False 40. Real accounts are not permanent accounts. a. True b. False 41. It is not necessary to post the closing entries to the general ledger. a. True b. False 42. The closing process is sometimes referred to as closing the books. a. True b. False 43. Once an account has been closed for the period, inserting a line in the balance columns zeros out the account, making it ready for the following period. a. True b. False 44. After analyzing and recording transactions in the journal, the next step would be to post the transactions to the ledger. a. True Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle b. False 45. The last step of the accounting cycle is to prepare a post-closing trial balance. a. True b. False 46. The accounting cycle begins with preparing an unadjusted trial balance. a. True b. False 47. Financial statements should be prepared before the closing entries are journalized and posted. a. True b. False 48. The unadjusted, adjusted, and post-closing trial balances are prepared during the accounting cycle of a period. a. True b. False 49. The most important outcome of the accounting cycle is the financial statements. a. True b. False 50. The ability to convert assets into cash is called liquidity. a. True b. False 51. The ability of a business to pay its debts is called solvency. a. True b. False 52. Working capital is the excess of the current liabilities of a business over its current assets. a. True b. False 53. The current ratio is computed by dividing current liabilities by current assets. a. True b. False 54. The current ratio is more useful than working capital in making comparisons across companies. a. True b. False 55. Current assets and current liabilities for Brayden Company are as follows:
Current assets Powered by Cognero
20Y9 $498,600
20Y8 $532,400 Page 5
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Chapter 04 - Completing the Accounting Cycle Current liabilities
269,300
301,500
The change in the current ratio from 20Y8 to 20Y9 was favorable. a. True b. False 56. Current assets and current liabilities for Brayden Company are as follows:
Current assets Current liabilities
20Y9 $498,600 269,300
20Y8 $532,400 301,500
The change in working capital from 20Y8 to 20Y9 indicates that Brayden will no longer be solvent. a. True b. False 57. The income statement can be prepared from the Income Statement columns on the work sheet. a. True b. False 58. The balances of the capital accounts from the Adjusted Trial Balance columns of the work sheet are extended to the Statement of Owner’s Equity columns. a. True b. False 59. The work sheet is not considered a part of the formal accounting records. a. True b. False 60. The work sheet is a working paper that accountants can use to summarize adjusting entries and the account balances for the financial statements. a. True b. False 61. The trial balance may be listed on the work sheet instead of being prepared separately. a. True b. False 62. The totals of the Adjusted Trial Balance columns on a work sheet will always be the sum of the Trial Balance column totals and the Adjustments column totals. a. True b. False 63. A work sheet heading is dated for a period of time. a. True b. False Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle 64. On the work sheet, the capital and drawing account balances are extended from the Adjusted Trial Balance columns to the Balance Sheet columns. a. True b. False 65. After the account balances have been extended from the Adjusted Trial Balance columns on the work sheet, the difference between the initial totals of the Balance Sheet Debit and Credit columns is net income or net loss. a. True b. False 66. After net income or loss is entered on the work sheet, the Debit column total must equal the Credit column total for the Balance Sheet pair of columns. a. True b. False 67. A net loss is shown on the work sheet in the Credit columns of both the Income Statement columns and the Balance Sheet columns. a. True b. False 68. Net income is shown on the work sheet in the Income Statement Debit column and the Balance Sheet Credit column. a. True b. False 69. If the totals of the Income Statement Debit and Credit columns of a work sheet are $27,000 and $29,000, respectively, after all account balances have been extended, the amount of the net loss is $2,000. a. True b. False 70. The balance in the capital account on the work sheet will equal the amount presented on the balance sheet. a. True b. False 71. Since the adjustments are entered on the work sheet, it is not necessary to record them in the journal or post them to the ledger. a. True b. False 72. The chart of accounts, the journal, and the ledger are essential parts of the accounting system. a. True b. False 73. Adjusting entries are not recorded under the cash basis of accounting. a. True b. False Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle 74. Under the cash basis of accounting, a purchase of merchandise on account is not recorded until payment is made. a. True b. False 75. For most businesses, the cash basis of accounting will provide adequate financial statements for user needs. a. True b. False Multiple Choice 76. What is the major difference between the unadjusted trial balance and the adjusted trial balance? a. The adjusted trial balance will show the net income (loss) as an additional account. b. Unlike the adjusted trial balance, the unadjusted trial balance will continue with the end-of-period processing even if it is not in balance. c. The adjusted trial balance reflects the updated balances in the accounts after the adjusting entries. d. The adjusted trial balance will be used to record the adjustments for the period. 77. When preparing the statement of owner's equity, the beginning capital balance can always be found a. in the Income Statement columns of the work sheet b. on the statement of cash flows c. in the general ledger d. in the Balance Sheet columns of the work sheet 78. Accumulated Depreciation appears on the a. balance sheet in the Current Assets section b. balance sheet in the Property, Plant, and Equipment section c. balance sheet in the Long-Term Liabilities section d. income statement as an operating expense 79. Notes receivable due in 350 days appear on the a. balance sheet in the Current Assets section b. balance sheet in the Fixed Assets section c. balance sheet in the Current Liabilities section d. income statement as an expense 80. Unearned fees appear on the a. balance sheet in the Current Assets section b. balance sheet as a current liability c. balance sheet in the Owner's Equity section d. income statement as revenue 81. Which one of the fixed asset accounts listed will not have a related contra asset account? a. Office Equipment b. Land c. Delivery Equipment Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle d. Building 82. Prepaid insurance is reported on the balance sheet as a a. current asset b. fixed asset c. current liability d. long-term liability 83. The first item appearing on the statement of owner's equity is a. net income b. the ending balance of owner's equity c. owner withdrawals d. the beginning balance of owner's equity 84. The statement of owner’s equity should be prepared a. before the income statement and after the balance sheet b. before the income statement and balance sheet c. after the income statement and balance sheet d. after the income statement and before the balance sheet 85. The income statement should be prepared a. before the statement of owner’s equity and balance sheet b. after the statement of owner’s equity and before the balance sheet c. after the statement of owner’s equity and balance sheet d. after the balance sheet and before the statement of owner’s equity Use the adjusted trial balance for Stockton Company to answer the questions that follow.
Cash Accounts Receivable Prepaid Expenses Equipment Accumulated Depreciation Accounts Payable Notes Payable Bob Steely, Capital Bob Steely, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Powered by Cognero
Stockton Company Adjusted Trial Balance December 31 Account No. 11 12 13 18 19 21 22 31 32 41 51 52 53
Debit Balances 6,530 2,100 700 13,700
Credit Balances
1,100 1,900 4,300 12,940 790 9,250 2,500 1,960 775 Page 9
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Chapter 04 - Completing the Accounting Cycle Depreciation Expense Miscellaneous Expense Totals
54 59
250 185 29,490
29,490
86. Use the adjusted trial balance for Stockton Company. Determine the net income (loss) for the period. a. Net income is $9,250. b. Net loss is $(790). c. Net loss is $(5,670). d. Net income is $3,580. 87. Use the adjusted trial balance for Stockton Company. Determine the owner’s equity ending balance. a. $12,150 b. $15,730 c. $6,480 d. $21,400 88. Use the adjusted trial balance for Stockton Company. Determine the total assets. a. $8,630 b. $23,030 c. $21,930 d. $9,330 89. Use the adjusted trial balance for Stockton Company. Determine the current assets. a. $23,030 b. $9,330 c. $21,930 d. $8,630 90. Use the adjusted trial balance for Stockton Company. Determine the total liabilities for the period. a. $1,900 b. $6,200 c. $4,300 d. $20,240 91. The balance sheet should be prepared a. before the income statement and the statement of owner’s equity b. before the income statement and after the statement of owner’s equity c. after the income statement and the statement of owner’s equity d. after the income statement and before the statement of owner’s equity 92. The statement of owner’s equity begins with the beginning balance followed by a. adding net income less withdrawals b. adding net income plus investments c. adding investments less withdrawals Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle d. adding investments plus net income less withdrawals 93. The income statement will present a. revenues less expenses (ordered largest to smallest amounts) with miscellaneous expense listed last b. revenues less expenses (ordered smallest to largest amounts) with miscellaneous expense listed last c. revenues less expenses (ordered in alphabetical order) d. revenues less expenses (order is not important) 94. The classified balance sheet will show which asset subsections? a. Current Assets and Other Equity b. Current Assets and Property, Plant, and Equipment c. Current Liabilities and Short-Term Assets d. Other Revenues and Property, Plant and Equipment 95. The classified balance sheet will show which liability subsections? a. Current Liabilities and Long-Term Liabilities b. Current Liabilities and Other Liabilities c. Other Liabilities and Long-Term Liabilities d. Present Liabilities and Tomorrow’s Liabilities 96. Debts listed as current liabilities are those that a. will be paid in less than one year b. are due to be paid in 5 to 10 years c. are due to be paid in more than one year d. are owed to the owner and will never be paid 97. The following accounts were taken from the Adjusted Trial Balance columns of the work sheet: Accumulated Depreciation Fees Earned Depreciation Expense Insurance Expense Prepaid Insurance Supplies Supplies Expense
$ 3,200 17,400 1,300 400 4,800 900 3,800
Net income for the period is a. $5,500 b. $11,900 c. $17,400 d. $8,700 98. On the balance sheet, owner’s equity is a. added to assets and the two are equal to liabilities b. added to liabilities and the two are equal to assets c. subtracted from liabilities and the net amount is equal to assets Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle d. equal to the total of assets and liabilities 99. Balance sheet accounts a. represent amounts accumulated during a specific period of time b. are called real accounts c. have zero balances after the closing entries have been posted d. are not affected by adjustments 100. Which of the following is not true about closing entries? a. There are two closing entries that update the owner’s equity account. b. After the first closing entry, the owner's capital account has been increased (decreased) by the amount of net income (or loss) for the period. c. All real accounts are closed at the end of the period. d. By closing nominal accounts at the end of the period to zero, it is possible to isolate next period’s information correctly. 101. After posting the first closing entry to the owner's capital account, the balance will be increased (decreased) by a. zero b. owner’s equity c. revenues for the period d. the net income (net loss) for the period 102. What is the first account that should be listed in the post-closing trial balance? a. Net Income b. Owner, Capital c. Cash d. Fees Earned 103. Which of the following account groups does not include a nominal account? a. Cash, Prepaid Insurance, Wages Payable b. Prepaid Insurance, Equipment, Fees Earned c. Owner’s Capital, Owner’s Drawing, Fees Earned d. Rent Revenue, Fees Earned, Miscellaneous Expense 104. There are two closing entries. The first one is to close _____; the second one is to close _____. a. revenues and expenses; the drawing account b. revenues; expenses and the drawing account c. revenues; expenses d. the drawing account; revenues 105. Closing entries a. need not be journalized if adjusting entries are prepared b. need not be posted if the financial statements are prepared from the work sheet c. are not needed if adjusting entries are prepared Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle d. must be journalized and posted 106. Closing entries are dated in the journal as of a. the date they are actually journalized b. the last day of the accounting period c. the first day of the subsequent accounting period d. None of these choices 107. Which of the following accounts would be closed by posting a debit to the account? a. Prepaid Insurance b. Fees Earned c. Josh Morton, Drawing d. Miscellaneous Expense 108. Which of the following accounts should be closed to the capital account at the end of the year? a. Service Revenue b. Equipment c. Unearned Revenue d. Unearned Rent 109. Which of the following accounts will not be closed to the capital account at the end of the year? a. Utilities Expense b. Fees Earned c. Prepaid Insurance d. Insurance Expense 110. Which of the following accounts will be debited in the closing entry at the end of the year? a. Rent Expense b. Fees Earned c. Unearned Fees d. Depreciation Expense 111. The entry to close the appropriate insurance account at the end of the accounting period is a. debit Owner’s Capital; credit Prepaid Insurance b. debit Prepaid Insurance; credit Owner’s Capital c. debit Insurance Expense; credit Owner’s Capital d. debit Owner’s Capital; credit Insurance Expense 112. Which of the following accounts ordinarily appears in the post-closing trial balance? a. Fees Earned b. Supplies Expense c. Zane White, Drawing d. Unearned Rent Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle 113. The post-closing trial balance differs from the adjusted trial balance in that it does not a. take into account closing entries b. take into account adjusting entries c. include balance sheet accounts d. include income statement accounts 114. A summary of selected ledger accounts appears as follows for Alberto’s Plumbing Services for the current calendar year-end. 12/31 Clos.
6/30 11/30
Alberto, Capital 8,500 1/1 Bal. 12/31 Clos.
6,500 15,000
Alberto, Drawing 3,500 12/31 Clos. 5,000
8,500
Net income for the period is a. $13,000 b. $33,500 c. $15,000 d. $18,500 115. Evan Roberts owns a business, Shores Sports, that rents canoes and kayaks. The adjusted trial balance at December 31 is as follows:
Cash Accounts Receivable Interest Receivable Prepaid Insurance Notes Receivable (long-term) Equipment Accumulated Depreciation Accounts Payable Accrued Expenses Payable Income Taxes Payable Unearned Rent Fees Evan Roberts, Capital Evan Roberts, Drawing Rent Fees Earned Furniture Rental Revenue Interest Revenue Wages Expense Powered by Cognero
Account Debit Credit No. Balances Balances 11 1,500 12 2,000 13 100 14 1,600 2,800 16 18
15,000 3,000
19 21
2,400 3,920
22 23 25 31 32 41
2,700 500 7,700 2,000 37,000 1,200
42 43 51
100 19,000 Page 14
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Chapter 04 - Completing the Accounting Cycle Depreciation Expense Utilities Expense Insurance Expense Maintenance Expense Income Tax Expense
52 53 54 55 56
1,800 320 700 9,000 2,700 58,520
58,520
The entry required to close the revenue and expense accounts at the end of the period includes a a. debit to Evan Roberts, Capital for $4,780 b. credit to Evan Roberts, Drawing for $38,300 c. debit to Evan Roberts, Drawing for $33,520 d. credit to Evan Roberts, Capital for $4,780 116. Evan Roberts owns a business, Shore Sports, that rents canoes and kayaks. The adjusted trial balance at December 31 is as follows:
Cash Accounts Receivable Interest Receivable Prepaid Insurance Notes Receivable (long-term) Equipment Accumulated Depreciation Accounts Payable Accrued Expenses Payable Income Taxes Payable Unearned Rent Fees Evan Roberts, Capital Evan Roberts, Drawing Rent Fees Earned Furniture Rental Revenue Interest Revenue Wages Expense Depreciation Expense Utilities Expense Insurance Expense Maintenance Expense Income Tax Expense Totals
Account No. 11 12 13 14 16 18
Debit Credit Balances Balances 1,500 2,000 100 1,600 2,800 15,000 3,000
19 21
2,400 3,920
22 23 25 31 32 41
2,700 500 7,700 2,000 37,000 1,200
42 43 51 52 53 54 55 56
100 19,000 1,800 320 700 9,000 2,700 58,520
58,520
The entry required to close the expense accounts at the end of the period will include a(n) a. increase to Owner’s Capital of $33,520 b. decrease to Owner’s Capital of $33,520 c. increase to Owner’s Capital of $4,780 Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle d. decrease to Owner’s Capital of $4,780 Use the following end-of-period spreadsheet to answer the questions that follow. Finley Company End-of-Period Spreadsheet For the Year Ended December 31
Account Title Cash Accounts Receivable Supplies Equipment Accumulated Depreciation Accounts Payable Wages Payable C. Finley, Capital C. Finley, Drawing Fees Earned Wages Expense Rent Expense Depreciation Expense
Adjusted Trial Balance Dr. Cr. 48,000
Income Statement
Balance Sheet
Dr.
Dr. 48,000
Cr.
18,000 6,000 57,000
18,000 6,000 57,000 18,000
18,000
25,000
25,000
6,000
6,000
33,000
33,000
3,000
3,000 155,000
63,000 27,000 15,000 237,000
Net income
Cr.
155,000 63,000 27,000
237,000
15,000 105,000 50,000 155,000
155,000
132,000
155,000
132,000
82,000 50,000 132,000
117. Use the end-of-period spreadsheet for Finley Company. The first closing entry would include a a. debit to C. Finley, Capital for $155,000 b. debit to C. Finley, Capital for $50,000 c. credit to C. Finley, Capital for $50,000 d. credit to C. Finley, Capital for $155,000 118. Use the end-of-period spreadsheet for Finley Company. The expenses would be closed by a. debiting Wages Expense for $63,000, Rent Expense for $27,000, and Depreciation Expense for $15,000 b. debiting Expenses for $105,000 c. crediting Expenses for $105,000 d. crediting Wages Expense for $63,000, Rent Expense for $27,000, and Depreciation Expense for $15,000 Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle 119. Use the end-of-period spreadsheet for Finley Company. The entry to close C. Finley, Drawing would be a. debit C. Finley, Capital, $3,000; credit C. Finley, Drawing, $3,000 b. debit C. Finley, Capital, $12,000; credit C. Finley, Drawing, $12,000 c. debit C. Finley, Drawing, $3,000; credit C. Finley, Capital, $3,000 d. debit C. Finley, Drawing, $12,000; credit C. Finley, Capital, $12,000 120. Use the end-of-period spreadsheet for Finley Company. The first closing entry would be a. Fees Earned 155,000 Wages Expense 63,000 Rent Expense 27,000 Depreciation Expense 15,000 C. Finley, Capital 260,000 b. Wages Expense 63,000 Rent Expense 27,000 Depreciation Expense 15,000 C. Finley, Capital 50,000 Fees Earned 155,000 c. Fees Earned 155,000 Wages Expense 63,000 Rent Expense 27,000 Depreciation Expense 15,000 C. Finley, Capital 50,000 d. C. Finley, Capital 260,000 Fees Earned 155,000 Wages Expense 63,000 Rent Expense 27,000 Depreciation Expense 15,000 121. Use the end-of-period spreadsheet for Finley Company. The ending balance in C. Finley, Capital is a. $33,000 b. $80,000 c. $30,000 d. $83,000 122. Which of the following has the steps of the accounting cycle in the proper sequence? (Some steps may be missing.) a. analyze and record transactions, post transaction to the ledger, prepare a trial balance, prepare financial statements, journalize closing entries, analyze adjustment data and prepare adjusting entries b. prepare a trial balance, analyze adjustment data, prepare adjusting entries, prepare financial statements, journalize closing entries and post to the ledger, analyze and record transactions, post transactions to the ledger c. analyze and record transactions, post transactions to the ledger, prepare a trial balance, analyze adjustment data, prepare adjusting entries, prepare financial statements, journalize closing entries and post to the ledger, and prepare a post-closing trial balance d. prepare financial statements, journalize closing entries and post to the ledger, analyze and record transactions, post transactions to the ledger, prepare a trial balance, analyze adjustment data, prepare adjusting entries 123. In the accounting cycle, the last step is a. preparing the financial statements Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle b. journalizing and posting the adjusting entries c. preparing a post-closing trial balance d. journalizing and posting the closing entries 124. Of the following steps of the accounting cycle, which step should be completed first? a. Closing entries are journalized and posted to the ledger. b. Transactions are posted to the ledger. c. Adjusting entries are journalized and posted to the ledger. d. Financial statements are prepared. 125. Of the following steps of the accounting cycle, which step should be completed last? a. An adjusted trial balance is prepared. b. Transactions are posted to the ledger. c. An unadjusted trial balance is prepared. d. Adjusting entries are journalized and posted to the ledger. 126. The accounting cycle requires three trial balances to be prepared. In what order should they be prepared? a. post-closing, unadjusted, adjusted b. unadjusted, post-closing, adjusted c. unadjusted, adjusted, post-closing d. post-closing, adjusted, unadjusted 127. During the end-of-period processing, which of the following best describes the logical order of steps? a. preparation of adjustments, adjusted trial balance, financial statements b. preparation of income statement, adjusted trial balance, balance sheet c. preparation of adjusted trial balance, cross-referencing, journalizing d. preparation of adjustments, adjusted trial balance, posting 128. Diane's Designs purchased a one-year liability insurance policy on March 1 of a year for $8,400 and recorded it as a prepaid expense. Which of the following amounts would be recorded as insurance expense during the adjusting process at the end of Diane’s first month of operations on March 31? a. $8,400 b. $840 c. $700 d. $7,700 129. Once the adjusting entries are posted, the adjusted trial balance is prepared to a. verify that the debits and credits are in balance b. verify that the net income correctly flows into the statement of owner’s equity from the income statement c. verify that the net income (loss) is correct for the period d. verify the correct flow of accounts into the financial statements 130. Current assets and current liabilities for Brayden Company are as follows: 20Y9 Powered by Cognero
20Y8 Page 18
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Chapter 04 - Completing the Accounting Cycle Current assets Current liabilities
$498,600 269,300
$532,400 301,500
What is the current ratio for 20Y9 and 20Y8? a. 0.94 and 0.89 b. 1.07 and 1.12 c. 0.54 and 0.57 d. 1.85 and 1.77 131. Current assets and current liabilities for Brayden Company are as follows:
Current assets Current liabilities
20Y9 $498,600 269,300
20Y8 $532,400 301,500
What is the working capital for 20Y9 and 20Y8? a. $498,600 and $532,400 b. $229,300 and $230,900 c. $269,300 and $301,500 d. $(230,900) and $(229,300) 132. Current assets and current liabilities for Brayden Company are as follows:
Current assets Current liabilities
20Y9 $498,600 269,300
20Y8 $532,400 301,500
What conclusions can be drawn regarding Brayden’s ability to meet its financial obligations? a. The current ratio has worsened, and the working capital has decreased. b. The current ratio has improved, and the working capital has increased. c. The current ratio has improved, while the working capital has decreased. d. The current ratio has worsened, but the working capital has increased. 133. The end-of-period spreadsheet a. is an integral part of the accounting cycle b. eliminates the need to rewrite the financial statements c. is a working paper that is required d. is used to summarize account balances and adjustments for the financial statements 134. Which one of the following steps is not aided by the preparation of the end-of-period spreadsheet? a. preparing the adjusted trial balance b. posting to the general ledger c. preparing the financial statements d. preparing the closing entries 135. An end-of-period spreadsheet includes columns for Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle a. adjusting entries b. closing entries c. reversing entries d. adjusting and closing entries 136. When the end-of-period spreadsheet is complete, the Adjustments columns should have a. total credits greater than total debits if a net income was earned b. total debits greater than total credits if a net loss was incurred c. total debits greater than total credits if a net income was earned d. total debits equal to total credits 137. The difference between the totals of the Debit and Credit columns of the Adjusted Trial Balance columns on the endof-period spreadsheet a. is the amount of net income or loss b. indicates there is an error on the work sheet c. is the amount of owner's equity d. is the difference between revenue and expenses 138. Net income appears on the end-of-period spreadsheet in the a. Debit column of the Balance Sheet columns b. Debit column of the Adjustments columns c. Debit column of the Income Statement columns d. Credit column of the Income Statement columns 139. A net loss appears on the end-of-period spreadsheet in the a. Debit column of the Balance Sheet columns b. Credit column of the Balance Sheet columns c. Debit column of the Income Statement columns d. Credit column of the Adjustments columns 140. After net income is entered on the end-of-period spreadsheet, the Balance Sheet Debit and Credit columns must a. be the same amount as the total amount of the Income Statement Debit and Credit columns b. equal each other c. be the same amount as the total amount in the Adjusted Trial Balance Debit and Credit columns d. not be equal to each other and need not be the same total amounts as any other pair of columns on the work sheet 141. Which of the following statements indicates that a company earned a net income for the period? a. The sum of the credits exceeds the sum of the debits in the Balance Sheet columns on the end-of-period spreadsheet. b. The sum of the credits exceeds the sum of the debits in the Income Statement columns on the end-of-period spreadsheet. c. The sum of the debits exceeds the sum of the credits in the Income Statement columns on the end-of-period spreadsheet. d. Cash inflows exceed cash outflows. Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle 142. An amount for which of the following items would appear in the Income Statement columns of the end-of-period spreadsheet? a. Cash b. Prepaid Insurance c. Unearned Revenue d. Net Loss 143. An amount for which of the following accounts would not appear in the Balance Sheet columns of the end-of-period spreadsheet? a. Terry James, Drawing b. Service Revenue c. Unearned Revenue d. Terry James, Drawing and Unearned Revenue 144. Which of the following accounts would appear in the Balance Sheet columns of the end-of-period spreadsheet? a. Consulting Revenue b. Prepaid Insurance c. Rent Expense d. Fees Earned 145. Daniel's end-of-period spreadsheet at the end of July has $4,950 in the Balance Sheet Credit column for Accumulated Depreciation. The end-of-period spreadsheet at the end of August has $7,600 in the Balance Sheet Credit column for Accumulated Depreciation. What is the amount of the depreciation expense adjustment for the month of August? a. $12,550 b. $7,600 c. $4,950 d. $2,650 146. Which of the following does not appear on the end-of-period spreadsheet? a. adjusting entries b. the unadjusted trial balance c. closing entries d. the drawing account 147. After all of the account balances have been extended to the Balance Sheet columns of the work sheet, the totals of the Debit and Credit columns are $36,755 and $32,735, respectively. What is the amount of net income or net loss for the period? a. $4,020 of net income b. $36,755 of net loss c. $4,020 of net loss d. $32,735 of net income 148. After all of the account balances have been extended to the Income Statement columns of the work sheet, the totals of the Debit and Credit columns are $77,500 and $83,900, respectively. What is the amount of the net income or net loss for the period? Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle a. $6,400 of net income b. $6,400 of net loss c. $83,900 of net income d. $77,500 of net loss 149. On September 1, the company pays rent for 12 months in advance and debits an asset account. At year-end, the adjusting entry on the work sheet would a. increase an expense account b. decrease a liability account c. increase an asset account d. decrease an expense account 150. On March 1, a company collects revenue in advance for the next 12 months and credits a liability account. The adjusting entry at year-end on the work sheet would a. increase a liability account b. decrease an asset account c. decrease a revenue account d. decrease a liability account 151. Which of the following is not an essential part of the accounting records? a. journal b. ledger c. chart of accounts d. end-of-period spreadsheet 152. After all of the account balances have been extended to the Balance Sheet columns of the work sheet, the totals of the Debit and Credit columns show debits of $37,686 and credits of $41,101. This indicates that a. neither net income nor loss can be computed because it is found on the income statement b. the company has a net loss of $3,415 for the period c. the company has a net income of $3,415 for the period d. the amounts are out of balance and need to be corrected 153. The Income Statement columns in the end-of-period spreadsheet show that debits total $55,800 and credits total $77,520. What does this information mean to the accountant? a. There is a net income of $21,720. b. There is a net loss of $21,720. c. The accounts are out of balance, indicating that an error has been made. d. The accounts have not been updated. 154. Which of the following businesses is least likely to use the cash basis of accounting? a. attorney's office b. physician’s practice c. real estate agency d. merchandiser of home furnishings Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle 155. Adjusting entries are required at the end of the accounting period in order to fulfill the _____ principle. a. matching b. going concern c. business entity d. objectivity 156. Under the revenue recognition principle, revenues are recorded a. in the same period as related expenses b. when cash is received c. when earned d. when earned or when cash is received, depending on which occurs first Matching Match each of the following accounts listed in the Adjusted Trial Balance columns of the end-of-period spreadsheet (work sheet) to the statement (a–c) to which its balance would flow. Each letter may be used more than once. a. Income statement b. Statement of owner's equity c. Balance sheet 157. Accounts Payable 158. Dobson, Drawing 159. Depreciation Expense 160. Accumulated Depreciation 161. Fees Earned 162. Supplies 163. Supplies Expense 164. Unearned Fees Match each of the following accounts listed in the Adjusted Trial Balance columns of the end-of-period spreadsheet (work sheet) to the statement (a–c) to which its balance would flow. Each letter may be used more than once. a. Income statement b. Statement of owner's equity c. Balance sheet 165. Salaries Payable 166. Fees Earned 167. Accounts Payable Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle 168. Supplies 169. Supplies Expense 170. Unearned Rent 171. Felipe Ramos, Drawing 172. Equipment 173. Accounts Receivable 174. Accumulated Depreciation 175. Salary Expense 176. Depreciation Expense Match each of the following accounts listed in the adjusted trial balance of Blaine Auto Service Company to the section (a–e) in which it would be reported on the balance sheet. Each letter may be used more than once. a. Current Assets b. Property, Plant, and Equipment c. Current Liabilities d. Long-Term Liabilities e. Owner's Equity 177. Blaine Brock, Capital 178. Accumulated Depreciation 179. Unearned Revenues 180. Mortgage Payable 181. Equipment 182. Notes Payable (due in two years) 183. Cash 184. Accounts Receivable Match each of the following accounts listed in the adjusted trial balance to the section (a–d) in which it would be reported on the balance sheet or income statement. Each letter may be used more than once. a. Current Assets section of balance sheet b. Current Liabilities section of balance sheet c. Revenues section of income statement d. Expenses section of income statement Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle 185. Supplies 186. Unearned Fees 187. Prepaid Advertising 188. Advertising Expense 189. Supplies Expense 190. Prepaid Insurance 191. Accounts Payable 192. Fees Earned Match each of the following accounts listed in the adjusted trial balance to the section (a–f) in which it would be reported on the balance sheet or income statement. Each letter may be used more than once. a. Current Assets section of balance sheet b. Property, Plant, and Equipment section of balance sheet c. Current Liabilities section of balance sheet d. Long-Term Liabilities section of balance sheet e. Revenues section of income statement f. Expenses section of income statement 193. Truck 194. Accumulated Depreciation 195. Telephone Expense 196. Fees Earned 197. Wages Payable 198. Prepaid Insurance 199. Office Supplies 200. Dining Expense 201. Unearned Rent Match each of the following accounts to how it would be treated (a–c) in the closing entries at the end of the period. a. Closed with a debit b. Closed with a credit c. N/A (account would not be closed) 202. Utilities Payable Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle 203. Utilities Expense 204. Supplies 205. Supplies Expense 206. Fees Earned 207. Unearned Fees 208. Accounts Receivable 209. Jason Hill, Drawing 210. Jason Hill, Capital 211. Accumulated Depreciation 212. Depreciation Expense 213. Equipment 214. Prepaid Insurance 215. Insurance Expense Match each of the following journal entries with the type of entry (a–c) it represents. Each letter may be used more than once. a. Transaction entry b. Adjusting entry c. Closing entry 216. Cash Fees Earned
450 450
217. Fees Earned ABC, Capital
650 650
218. Utilities Expense Cash
430 430
219. Wages Expense Wages Payable
870 870
220. Unearned Revenue Fees Earned
985 985
221. Owner's Capital Rent Expense Supplies Expense
597 200 180
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Chapter 04 - Completing the Accounting Cycle Utilities Expense Miscellaneous Exp.
110 107
222. RS, Drawing Cash
215 215
223. Accounts Receivable Fees Earned
325 325
Subjective Short Answer 224. You evaluate loan requests as part of your job at Eastwood National Bank. One loan request you received is from Surfer Dude Supplies, a small proprietorship. Richard Tracy, the owner, is requesting $105,000 and brings you a trial balance (or statement of accounts) for his first year of operations ended December 31. While you are willing to work with Richard, how would you explain to him that a complete set of financial statements from his accountant would be more useful for evaluating the loan request? 225. You have just accepted your first job out of college, which requires you to evaluate loan requests at Eastwood National Bank. The first loan request you receive is from Richard Enterprises, a small proprietorship. Richard Tracy, the owner, is requesting $105,000 and brings you the following trial balance (or statement of accounts) for his first year of operations ended December 31. What three accounts do you think should be relabeled for greater clarity?
Cash Billings Due from Others Office Supplies Trucks Equipment Amounts Owed to Others Investment in Business Service Revenue Wages Expense Rent Expense Insurance Expense Utilities Expense Miscellaneous Expense
Richard Enterprises Statement of Accounts December 31 2,050 15,070 7,470 36,370 8,090 2,850 33,500 73,650 30,050 7,330 2,400 700 470 110,000
110,000
226. You have just accepted your first job out of college, which requires you to evaluate loan requests at Eastwood National Bank. The first loan request you receive is from Richard Enterprises, a small proprietorship. Richard Tracy, the owner, is requesting $105,000 and brings you the following trial balance (or statement of accounts) for his first year of operations ended December 31. Which of the following accounts do you think might need to be adjusted before an accurate set of financial statements can be prepared? Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle
Cash Billings Due from Others Office Supplies Trucks Equipment Amounts Owed to Others Investment in Business Service Revenue Wages Expense Rent Expense Insurance Expense Utilities Expense Miscellaneous Expense
Richard Enterprises Statement of Accounts December 31 2,050 15,070 7,470 36,370 8,090 2,850 33,500 73,650 30,050 7,330 2,400 700 470 110,000
110,000
227. Hannah Roberts owns and operates Hannah's Pool Service Company. On January 1, Hannah Roberts, Capital had a balance of $252,000. During the year, Hannah invested an additional $32,000 and withdrew $52,400. For the year ended December 31, Hannah's Pool Service Company reported a net income of $73,200. Prepare a statement of owner’s equity for the year ended December 31. 228. Describe a classified balance sheet. 229. The following balance sheet contains errors. Mark Brock Services Co. Balance Sheet For the Year Ended December 31 Assets Current assets: Cash Accounts payable Supplies Prepaid insurance Land Total current assets Property, plant, and equipment: Building Equipment Total property, plant, and equipment Total assets
$ 7,170 7,500 2,590 800 24,000 $ 42,060
$43,700 29,250 72,950 $131,510 Liabilities
Current liabilities: Accounts receivable Accum. depr.—building Accum. depr.—equipment Net income Powered by Cognero
$10,000 12,525 7,340 11,500 Page 28
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Chapter 04 - Completing the Accounting Cycle Total liabilities
$41,365 Owner's Equity
Wages payable Mark Brock, capital Total owner's equity Total liabilities and owner's equity
$ 1,500 88,645 90,145 $131,510
a. List the errors in the balance sheet. b. Prepare a corrected balance sheet. 230. The following accounts were taken from the Adjusted Trial Balance columns of the end-of-period spreadsheet for April 30, for Finnegan Co.: Accumulated Depreciation Fees Earned Depreciation Expense Rent Expense Prepaid Insurance Supplies Supplies Expense
$32,000 78,000 7,250 34,000 6,000 400 1,800
Prepare an income statement. 231. The following revenue and expense account balances were taken from the Income Statement columns of the work sheet for Fraser Services Co. for December 31: Depreciation Expense Insurance Expense Miscellaneous Expense Rent Expense Service Revenue Supplies Expense Utilities Expense Wages Expense
$ 4,950 2,900 1,200 24,000 92,500 3,150 5,000 63,750
Prepare an income statement. 232. The following data were taken from the Adjusted Trial Balance columns of the end-of-period spreadsheet for April 30, for Abigail Company: Accumulated Depreciation Prepaid Rent Supplies Unearned Fees Trucks Cash Abigail, Capital
$42,400 6,800 850 7,310 49,300 3,400 ?
Prepare a classified balance sheet. 233. The following is the adjusted trial balance for Nadia Company. Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle Nadia Company Adjusted Trial Balance December 31 Account Debit Credit No. Balances Balances Cash 11 5,130 Accounts Receivable 12 3,300 Prepaid Expenses 13 420 Equipment 18 12,400 Accumulated Depreciation 19 2,200 Accounts Payable 21 700 Notes Payable (due on June 30) 22 3,070 Nadia Porter, Capital 31 13,000 Nadia Porter, Drawing 32 700 Fees Earned 41 10,930 Wages Expense 51 2,450 Rent Expense 52 1,900 Utilities Expense 53 1,475 Depreciation Expense 54 1,150 Miscellaneous Expense 59 975 Totals 29,900 29,900 Prepare an income statement, statement of owner’s equity, and balance sheet. Assume that the capital account started with a beginning balance of $10,000 and that the owner made an additional investment of $3,000 during the year. 234. Reconstruct the adjusting and closing entries from the following T accounts:
Prepaid Insurance 1,200 200 1,000
Madison Cox, Capital 7,000 5,280 2,100 10,180
Wages Expense 2,600 530 Powered by Cognero
Accounts Receivable 6,000 1,500 7,500
Unearned Revenue 1,350 435 915
Madison Cox, Drawing 2,100 2,100 0
Rent Expense 1,145 1,145
Insurance Expense 200 200
Wages Payable 530 530
Fees Earned 8,000 1,500 435 9,935 0 Utilities Expense 180 180 Page 30
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Chapter 04 - Completing the Accounting Cycle 3,130
0
0
0
0 235. Reconstruct adjusting and closing entries for the month ended September 30 from the following T accounts:
Prepaid Insurance 1,350 130 1,220
Accounts Receivable 1,250 275 1,525
Diane Lin, Drawing 2,400 2,400 0
Diane Lin, Capital 7,000 580 2,400 4,020
Wages Expense 3,600 385 3,985 0
Unearned Revenue 1,050 235 815
Rent Expense 1,880 1,880 0
Wages Payable 385 385
Fees Earned 5,000 275 235 5,510 0
Insurance Expense 130 130 0
Utilities Expense 95 95 0
236. The following are selected T accounts for the current year for Linda's Surveying Services: Linda Winter, Capital Clos. 1/1 12/31 25,000Bal. 12/31
Linda Winter, Drawing 20,000 48,000
3/31
12,00012/31
12/22
13,000
Clos. 25,000
Prepare a statement of owner's equity. 237. List and describe the purpose of the two closing entries 238. Robert Evans owns a business, Beachside Realty, that rents condominiums and furnishings. The adjusted trial balance at December 31 is as follows:
Cash Accounts Receivable Interest Receivable Prepaid Insurance Notes Receivable (long-term) Powered by Cognero
Account No. 11 12 13 14 16
Debit Balances 1,500 2,000 100 1,600 2,800
Credit Balances
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Chapter 04 - Completing the Accounting Cycle Equipment Accumulated Depreciation Accounts Payable Accrued Expenses Payable Income Taxes Payable Unearned Rent Fees Robert Evans, Capital Robert Evans, Drawing Rent Fees Earned Furniture Rental Revenue Interest Revenue Wages Expense Depreciation Expense Utilities Expense Insurance Expense Maintenance Expense Income Tax Expense
18 19 21 22 23 24 31 32 41 42 43 51 52 53 54 55 56
15,000 3,000 2,400 3,920 2,700 500 7,700 2,000 37,000 1,200 100 19,000 1,800 320 700 9,000 2,700 58,520
58,520
Journalize the entry required to close the revenue and expense accounts at the end of the period. 239. Robert Evans owns a business, Beachside Realty, that rents condominiums and furnishings. The adjusted trial balance at December 31 is as follows:
Cash Accounts Receivable Interest Receivable Prepaid Insurance Notes Receivable (long-term) Equipment Accumulated Depreciation Accounts Payable Accrued Expenses Payable Income Taxes Payable Unearned Rent Fees Robert Evans, Capital Robert Evans, Drawing Rent Fees Earned Furniture Rental Revenue Interest Revenue Wages Expense Depreciation Expense Utilities Expense Insurance Expense Maintenance Expense Income Tax Expense Powered by Cognero
Account No. 11 12 13 14 16 18 19 21 22 23 24 31 32 41 42 43 51 52 53 54 55 56
Debit Balances 1,500 2,000 100 1,600 2,800 15,000
Credit Balances
3,000 2,400 3,920 2,700 500 7,700 2,000 37,000 1,200 100 19,000 1,800 320 700 9,000 2,700 Page 32
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Chapter 04 - Completing the Accounting Cycle 58,520
58,520
Journalize the entry required to close the drawing account at the end of the period. 240. After the accounts have been adjusted at January 31, the end of the year, the following balances are taken from the ledger of Harrison's Dog Walking Service Company: Harrison Taylor, Capital Harrison Taylor, Drawing Fees Earned Wages Expense Rent Expense Supplies Expense Miscellaneous Expense
$349,000 6,000 124,600 29,000 43,000 7,300 5,700
Journalize the entries required to close the accounts 241. Robert Evans owns a business, Beachside Realty, that rents condominiums and furnishings. The adjusted trial balance at December 31 is as follows:
Cash Accounts Receivable Interest Receivable Prepaid Insurance Notes Receivable (long-term) Equipment Accumulated Depreciation Accounts Payable Accrued Expenses Payable Income Taxes Payable Unearned Rent Fees Robert Evans, Capital Robert Evans, Drawing Rent Fees Earned Furniture Rental Revenue Interest Revenue Wages Expense Depreciation Expense Utilities Expense Insurance Expense Maintenance Expense Income Tax Expense
Account No. 11 12 13 14 16 18 19 21 22 23 24 31 32 41 42 43 51 52 53 54 55 56
Debit Balances 1,500 2,000 100 1,600 2,800 15,000
Credit Balances
3,000 2,400 3,920 2,700 500 13,700 2,000 31,000 1,200 100 19,000 1,800 320 700 9,000 2,700 58,520
58,520
Journalize the closing entry required to transfer the income or loss at the end of the period. 242. On the basis of the following data taken from the Adjusted Trial Balance columns of the work sheet for the year ended March 31 for Banes Domino's Company, journalize the closing entries. Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle Cash Accounts Receivable Supplies Equipment Accumulated Depreciation Accounts Payable Jack Banes, Capital Jack Banes, Drawing Fees Earned Salary Expense Rent Expense Depreciation Expense Supplies Expense Miscellaneous Expense
30,000 45,200 5,000 169,900 32,000 12,500 71,600 47,000 510,000 244,500 48,000 25,000 9,500 2,000 626,100
626,100
243. After all adjustments have been made, but before the accounts have been closed, the following balances were taken from the ledger of Ramona’s Designs: Accounts Payable Accounts Receivable Accumulated Depreciation Cash Depreciation Expense Equipment Insurance Expense Prepaid Insurance
$ 27,600 64,500 73,325 17,150 13,500 165,000 2,510 6,275
Rent Expense Salary Expense Salaries Payable Service Revenue Supplies Supplies Expense Ramona Cross, Capital Ramona Cross, Drawing
$ 32,700 41,390 8,150 186,000 1,500 2,500 99,950 48,000
Journalize the entries to close the appropriate accounts. 244. On the basis of the following information taken from the Adjusted Trial Balance columns of the work sheet for the month ended September 30, journalize the closing entries for Perez Roofing Company. Cash Accounts Receivable Office Supplies Repair Parts Machinery Accumulated Depreciation Accounts Payable Notes Payable Sam Perez, Capital Sam Perez, Drawing Service Revenue Wages Expense Office Supplies Expense Repair Parts Expense Depreciation Expense
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22,500 3,575 2,850 3,785 17,750 3,250 1,150 6,500 2,500 1,750 47,200 4,840 1,275 925 1,350 60,600
60,600
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Chapter 04 - Completing the Accounting Cycle 245. The following adjusted trial balance is the result of the adjustments made at the end of the month of March for Erik Martin Company. Use these adjusted values to journalize the closing entries for Erik Martin Company. Cash Accounts Receivable Office Supplies Store Supplies Machinery Accumulated Depreciation Accounts Payable Notes Payable Erik Martin, Capital Erik Martin, Drawing Service Revenue Wages Expense Office Supplies Expense Store Supplies Expense Depreciation Expense
24,750 5,750 3,525 4,785 9,750 2,150 3,550 7,500 19,725 6,250 36,500 6,425 1,465 5,150 1,575 69,425
69,425
246. The following adjusted trial balance is the result of the adjustments made at the end of the month of July for Ladonna Douglas Company. Utilize these adjusted values to perform the closing entries for Ladonna Douglas Company. Cash Accounts Receivable Office Supplies Store Supplies Machinery Accumulated Depreciation Accounts Payable Notes Payable Ladonna Douglas, Capital Ladonna Douglas, Drawing Service Revenue Wages Expense Rent Expense Advertising Expense Office Supplies Expense Store Supplies Expense Depreciation Expense
34,750 9,750 2,525 4,785 10,750 2,150 14,300 11,500 53,725 13,250 41,500 37,425 3,000 2,750 1,465 2,150 575 123,175
123,175
247. Journalize closing entries from the following end-of-period spreadsheet. Austin Enterprises End-of-Period Spreadsheet For the Year Ended December 31 Unadjusted Trial Balance Account Title Powered by Cognero
Dr.
Cr.
Adjustments Dr.
Cr.
Adjusted Trial Balance Dr.
Cr. Page 35
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Chapter 04 - Completing the Accounting Cycle Cash 26,500 Accounts Receivable 5,000 Supplies 8,000 Equipment 18,500 Accumulated Depreciation Accounts Payable Wages Payable Don Austin, Capital Don Austin, 2,000 Drawing Fees Earned Wages Expense 18,000 Supplies Expense Depreciation Expense 78,000
26,500 7,000 7,000 1,000 18,500 3,500
2,000
1,500 11,000
5,000 11,000 1,000 8,000
1,000 8,000 2,000 57,500
2,000
59,500
1,000 7,000 3,500
19,000 7,000 3,500
78,000 13,500
13,500 84,500
84,500
248. The following is the adjusted trial balance for Miller Company. Miller Company Adjusted Trial Balance December 31
Cash Accounts Receivable Prepaid Expenses Equipment Accumulated Depreciation Accounts Payable Notes Payable Diane Miller, Capital Diane Miller, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Depreciation Expense Miscellaneous Expense
Account Debit No. Balances 11 8,130 12 3,300 13 2,750 18 10,400 19 21 22 31 32 4,870 41 51 12,450 52 4,900 53 3,475 54 2,150 59 1,275 53,700
Credit Balances
2,200 2,700 1,000 11,200 36,600
53,700
Journalize the closing entries, and prepare the post-closing trial balance. 249. The following are all the steps in the accounting cycle. List them in the order in which they should be completed. - Closing entries are journalized and posted to the ledger. - An unadjusted trial balance is prepared. Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle - An optional end-of-period spreadsheet (work sheet) is prepared. - A post-closing trial balance is prepared. - Adjusting entries are journalized and posted to the ledger. - Transactions are analyzed and recorded in the journal. - Adjustment data are assembled and analyzed. - Financial statements are prepared. - An adjusted trial balance is prepared. - Transactions are posted to the ledger. 250. Dana Bowen Company is completing its first year of operations on April 30. a. Reconstruct the journal entries for the year ended April 30 from the T accounts. Assign letters to each transaction, as follows: (a)–(l) Transaction entries (m)–(r) Adjusting entries b. Determine the ending balance of each account. c. Prepare the income statement, the statement of owner’s equity, and the balance sheet. d. Journalize the closing entries (s)–(t). e. Prepare the post-closing trial balance. Accounts Receivable 1,250 385
Cash 6,500 900
Prepaid Insurance 1,940
Supplies 870 540
725
400 420 1,940 2,500 50 350 930
Equipment 2,500
Accumulated Depreciation 130
Unearned Revenue 930 590
Fees Earned 900 1,250 Powered by Cognero
Accounts Payable
Wages Payable 870
Dana Bowen, Capital 6,500 2,500
Dana Bowen, Drawing 350
Wages Expense 420 225
Rent Expense 400
225
Supplies Expense 540 Page 37
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Chapter 04 - Completing the Accounting Cycle 2,500 385 590 Insurance Expense 725
Depreciation Expense 130
Miscellaneous Expense 50
251. Prior to adjustment at August 31, Salary Expense has a debit balance of $298,500. Salaries owed but not paid as of the same date total $4,200. a. b.
Journalize the adjusting entry to record accrued salaries as of August 31. Indicate the amount at which Salaries Expense would be included in the closing entry on August 31 and whether it would be a debit or credit.
252. The balances in the ledger of Good Landscape Services as of January 31 before adjustments are as follows: Cash Supplies Prepaid Insurance Equipment Accumulated Depreciation
$ 6,750 3,900 8,400 41,750 9,950
Dalton Good, Capital Dalton Good, Drawing Service Revenue Salary Expense Rent Expense Miscellaneous Expense
$29,775 3,425 56,300 24,300 6,000 1,500
Adjustment data are as follows: supplies on hand, January 31, $900; insurance expired for January, $1,100; depreciation on equipment for January, $1,600; salaries accrued, January 31, $1,650. a. b. c.
Prepare a 10-column end-of-period spreadsheet for Good Landscape Services for January. On the basis of the work sheet in (a), prepare the (1) income statement, (2) statement of owner's equity (assume no additional owner investments were made during the month), and (3) balance sheet On the basis of the work sheet in (a) journalize the closing entries as of January 31.
253. Kirk Enterprises offers rug cleaning services to business clients. The unadjusted trial balance was prepared on the end-of-period spreadsheet (work sheet) for the month ended July 31, as follows:
Kirk Enterprises End-of-Period Spreadsheet For the Month Ended July 31
Cash Prepaid Insurance Fees Receivable Powered by Cognero
Unadjusted Trial Balance Dr. Cr. 36 12 56
Adjustments Dr.
Cr.
Adjusted Trial Balance Dr. Cr.
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Chapter 04 - Completing the Accounting Cycle Supplies Equipment Accumulated Depreciation Unearned Revenue Accounts Payable Wages Payable Ruben Ramon, Capital Ruben Ramon, Drawing Service Revenue Advertising Expense Wages Expense Insurance Expense Supplies Expense Depreciation Expense
12 60 12 20 32 84 4 80 28 20
228
228
Adjustment Data: (a) The equipment is estimated to last for five years with no salvage value. The asset will be depreciated evenly over its useful life. Record one month’s depreciation. (b) Accrued wages, $2. (c) Unused supplies on hand, $8. (d) Of the unearned revenue, 75% has been earned. (e) Unexpired insurance remaining at the end of the month, $9. Required: Enter the adjustment data on the work sheet, and complete the Adjusted Trial Balance columns. 254. The end-of-period spreadsheet (work sheet) for the current year for Jamal Company shows Balance Sheet columns with a debit total of $630,430 and a credit total of $614,210. This is before the amount for net income or net loss has been included. In preparing the income statement from the end-of-period spreadsheet, what is the amount of net income or net loss? 255. The end-of-period spreadsheet (work sheet) for the current year for Jamal Company shows Balance Sheet columns with a debit total of $614,210 and a credit total of $630,430. This is before the amount for net income or net loss has been included. In preparing the income statement from the work sheet, what is the amount of net income or net loss? 256. Austin Enterprises was started by Daniel Austin. During the current year, Daniel Austin invested $8,000 in the business. Based on the following end-of-period spreadsheet, prepare an income statement, statement of owner’s equity, and balance sheet for Austin Enterprises for the year ended December 31.
Account Title Cash Accounts Receivable Supplies Equipment Powered by Cognero
Austin Enterprises End-of-Period Spreadsheet For the Year Ended December 31 Adjusted Trial Balance Income Statement Dr. Cr. Dr. Cr. 26,500 7,000 1,000 18,500
Balance Sheet Dr. Cr. 26,500 7,000 1,000 18,500 Page 39
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Chapter 04 - Completing the Accounting Cycle Accumulated Depr.—Equip. Accounts Payable Wages Payable Daniel Austin, Capital Daniel Austin, Drawing Fees Earned Wages Expense Rent Expense Depreciation Expense
5,000 11,000 1,000 8,000
5,000 11,000 1,000 8,000
2,000
2,000 59,500
19,000 7,000 3,500 84,500
84,500
Net income
59,500 19,000 7,000 3,500 29,500 30,000 59,500
59,500
55,000
59,500
55,000
25,000 30,000 55,000
257. Complete the following end-of-period spreadsheet for Danilo Enterprises.
Account Title Cash Accounts Receivable Supplies Equipment Accumulated Depr.— Equip. Accounts Payable Wages Payable Tony Danilo, Capital Tony Danilo, Drawing Fees Earned Wages Expense Rent Expense Depreciation Expense
Danilo Enterprises End-of-Period Spreadsheet For the Year Ended December 31 Adjusted Income Trial Balance Statement Dr. Cr. Dr. Cr. 14,500 7,500 500 20,500
Balance Sheet Dr. Cr.
15,000 9,500 3,060 18,240 1,000 34,000 18,000 9,300 8,500 79,800
79,800
Net loss 258. Explain how net income or loss is determined by using the end-of-period spreadsheets. 259. If end-of-period spreadsheets are not considered part of the formal accounting records, why are they used?
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Chapter 04 - Completing the Accounting Cycle Answer Key 1. False 2. True 3. True 4. False 5. True 6. False 7. True 8. False 9. True 10. True 11. True 12. False 13. True 14. False 15. False 16. True 17. False 18. False 19. False 20. False 21. True 22. True 23. True 24. True 25. True Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle 26. False 27. False 28. False 29. False 30. False 31. False 32. False 33. True 34. False 35. False 36. True 37. True 38. True 39. False 40. False 41. False 42. True 43. True 44. True 45. True 46. False 47. True 48. True 49. True 50. True Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle 51. True 52. False 53. False 54. True 55. True 56. False 57. True 58. False 59. True 60. True 61. True 62. False 63. True 64. True 65. True 66. True 67. False 68. True 69. False 70. False 71. False 72. True 73. True 74. True 75. False 76. c Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle 77. c 78. b 79. a 80. b 81. b 82. a 83. d 84. d 85. a 86. d 87. b 88. c 89. b 90. b 91. c 92. d 93. a 94. b 95. a 96. a 97. b 98. b 99. b 100. c 101. d Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle 102. c 103. a 104. a 105. d 106. b 107. b 108. a 109. c 110. b 111. d 112. d 113. d 114. c 115. d 116. c 117. c 118. d 119. a 120. c 121. b 122. c 123. c 124. b 125. a 126. c 127. a Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle 128. c 129. a 130. d 131. b 132. c 133. d 134. b 135. a 136. d 137. b 138. c 139. a 140. b 141. b 142. d 143. b 144. b 145. d 146. c 147. a 148. a 149. a 150. d 151. d 152. b Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle 153. a 154. d 155. a 156. c 157. c 158. b 159. a 160. c 161. a 162. c 163. c 164. a 165. c 166. a 167. c 168. c 169. a 170. c 171. b 172. c 173. c 174. c 175. a 176. a 177. e 178. b Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle 179. c 180. d 181. b 182. d 183. a 184. a 185. a 186. b 187. a 188. d 189. d 190. a 191. b 192. c 193. b 194. b 195. f 196. e 197. c 198. a 199. a 200. f 201. c 202. c 203. b Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle 204. c 205. b 206. a 207. c 208. c 209. b 210. c 211. c 212. b 213. c 214. c 215. b 216. a 217. c 218. a 219. b 220. b 221. c 222. a 223. a 224. A set of financial statements provides useful information concerning the economic condition of a company. For example, the balance sheet describes the financial condition of the company as of a given date and is useful in assessing the company’s financial soundness and liquidity. The income statement describes the results of operations for a period and indicates the profitability of the company. The statement of owner’s equity describes the changes in the owner’s interest in the company for a period. Each of these statements is useful in evaluating whether to extend credit to the company. 225. The following items should be relabeled for greater clarity: Billings Due from Others—Accounts Receivable Amounts Owed to Others—Accounts Payable Investment in Business—Richard Tracy, Capital Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle 226. The following adjustments might be necessary before an accurate set of financial statements can be prepared: ∙ No office supplies expense is shown. The office supplies account should be adjusted for the supplies used during the year. ∙ No depreciation expense is shown for the trucks or equipment. An adjusting entry should be prepared for depreciation expense on each of these assets. ∙ An inquiry should be made as to whether any accrued expenses, such as wages, exist at the end of the year. ∙ An inquiry should be made as to whether any prepaid expenses, such as rent or insurance, exist at the end of the year. ∙ An inquiry should be made as to whether any unearned revenue exists at the end of the year. ∙ An inquiry should be made as to whether the owner withdrew any funds from the company during the year. No drawing account is shown in the “statement of accounts.” 227. Hannah's Pool Service Company Statement of Owner’s Equity For the Year Ended December 31 Hannah Roberts, capital, January 1 Investment during year Net income Withdrawals during year Increase in owner’s equity Hannah Roberts, capital, December 31
$252,000 $32,000 73,200 (52,400) 52,800 $304,800
228. A classified balance sheet shows subsections for assets and liabilities. Assets are commonly divided into two sections: Current Assets and Property, Plant, and Equipment. Liabilities are also commonly divided into two sections: Current Liabilities and Long-Term Liabilities. It also includes the Owner's Equity section. The owner’s equity is added to the total liabilities, and this total must be equal to the total assets. 229. a. (1) Date of statement should be "December 31" not "For the Year Ended December 31." (2) Accounts payable should be a current liability. (3) Land is a fixed asset and should be listed as property, plant, and equipment. (4) Accumulated depreciation should be deducted from the related fixed asset in the Property, Plant, and Equipment section. (5) A math error was made in determining the amount of total assets. (6) Accounts receivable should be a current asset. (7) Net income would be reported on the income statement and not the balance sheet. (8) Wages payable should be listed as a current liability. b. A corrected balance sheet would appear as follows: Mark Brock Services Co. Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle Balance Sheet December 31 Assets Current assets: Cash Accounts receivable Supplies Prepaid insurance Total current assets Property, plant, and equipment: Land Building Less accum. depr. Equipment Less accum. depr. Total property, plant, and equipment Total assets
$ 7,170 10,000 2,590 800 $ 20,560
$24,000 $43,700 12,525 $29,250 7,340
31,175 21,910 77,085 $97,645
Liabilities Current liabilities: Accounts payable Wages payable Total liabilities
$7,500 1,500 $ 9,000 Owner's Equity
Mark Brock, capital Total liabilities and owner's equity
88,645 $97,645
230. Finnegan Co. Income Statement For the Period Ended April 30 Fees earned Expenses: Rent expense Depreciation expense Supplies expense Total expenses Net income
$78,000 $34,000 7,250 1,800 43,050 $34,950
231. Fraser Services Co. Income Statement For the Year Ended December 31 Service revenue Expenses: Wages expense Rent expense Utilities expense Depreciation expense Powered by Cognero
$ 92,500 $63,750 24,000 5,000 4,950 Page 51
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Chapter 04 - Completing the Accounting Cycle Supplies expense Insurance expense Miscellaneous expense Total expenses Net loss
3,150 2,900 1,200 104,950 $(12,450)
232. Abigail Company Balance Sheet April 30 Assets Current assets: Cash $ 3,400 Supplies 850 Prepaid rent 6,800 Total current assets $11,050 Property, plant, and equipment: Trucks $49,300 Less accum. depr. 42,400 Total property, plant, 6,900 and equipment Total assets $17,950 Liabilities Current liabilities: Unearned fees $ 7,310 Total liabilities $ 7,310 Owner's Equity Abigail, capital 10,640 Total liabilities and owner's equity $17,950 233. Nadia Company Income Statement For the Year Ended December 31 Fees earned Expenses: Wages expense Rent expense Utilities expense Depreciation expense Miscellaneous expense Total expenses
$10,930 $2,450 1,900 1,475 1,150 975
Net income Nadia Company Statement of Owner’s Equity For the Year Ended December 31 Nadia Porter, capital, January 1 Investments during the year $3,000 Powered by Cognero
7,950 $ 2,980
$10,000
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Chapter 04 - Completing the Accounting Cycle Net income for the year Withdrawals during the year Increase in owner's equity Nadia Porter, capital, December 31
2,980 (700) 5,280 $15,280
Nadia Company Balance Sheet December 31 Assets Current assets: Cash Accounts receivable Prepaid expenses Total current assets Property, plant, and equipment: Equipment Less accum. depr. Total property, plant, and equipment Total assets
$ 5,130 3,300 420 $ 8,850
$12,400 2,200 10,200 $19,050
Liabilities Current liabilities: Accounts payable
$ 700
Notes payable
3,070
Total liabilities
$ 3,770
Owner's Equity Nadia Porter, capital Total liabilities and owner's equity 234. Adjusting Entries: (a) Insurance Expense Prepaid Insurance (b)
(c)
(d)
15,280 $19,050
200 200
Accounts Receivable Fees Earned
1,500
Unearned Revenue Fees Earned
435
Wages Expense Wages Payable
530
Closing Entries: (a) Fees Earned Powered by Cognero
1,500
435
530
9,935 Page 53
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Chapter 04 - Completing the Accounting Cycle Wages Expense Rent Expense Insurance Expense Utilities Expense Madison Cox, Capital (b)
Madison Cox, Capital Madison Cox, Drawing
3,130 1,145 200 180 5,280 2,100 2,100
235. Adjusting Entries: (a) Insurance Expense Prepaid Insurance
130 130
(b) Accounts Receivable Fees Earned
275
(c) Unearned Revenue Fees Earned
235
(d) Wages Expense Wages Payable
385
Closing Entries: (a) Fees Earned Diane Lin, Capital Wages Expense Rent Expense Insurance Expense Utilities Expense (b) Diane Lin, Capital Diane Lin, Drawing
275
235
385 5,510 580 3,985 1,880 130 95 2,400 2,400
236. Linda's Surveying Services Statement of Owner's Equity For the Year Ended December 31 Linda Winter, capital, January 1 Net income for the year $ 48,000 Withdrawals for the year (25,000) Increase in owner’s equity Linda Winter, capital, December 31
$20,000
23,000 $43,000
237. 1. Close revenues and expenses to the capital account. 2. Close the drawing account to the capital account. At the beginning of the next period, temporary accounts should have zero balances. To achieve a zero balance, temporary account balances are transferred to permanent accounts at the end of the accounting period. The entries that transfer these balances are called closing entries and the transfer process is called the closing process. 238. Dec. 31
Rent Fees Earned
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37,000 Page 54
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Chapter 04 - Completing the Accounting Cycle Furniture Rental Revenue Interest Revenue Wages Expense Depreciation Expense Utilities Expense Insurance Expense Maintenance Expense Income Tax Expense Robert Evans, Capital 239. Dec. 31
240. Jan. 31
31
1,200 100 19,000 1,800 320 700 9,000 2,700 4,780
Robert Evans, Capital Robert Evans, Drawing
2,000 2,000
Fees Earned Wages Expense Rent Expense Supplies Expense Miscellaneous Expense Harrison Taylor, Capital
124,600
Harrison Taylor, Capital Harrison Taylor, Drawing
6,000
241. Dec. 31 Rent Fees Earned Furniture Rental Revenue Interest Revenue Robert Evans, Capital Wages Expense Depreciation Expense Utilities Expense Insurance Expense Maintenance Expense Income Tax Expense
242. Mar. 31 Fees Earned Salary Expense Rent Expense Depreciation Expense Supplies Expense Miscellaneous Expense Jack Banes, Capital 31 Jack Banes, Capital Jack Banes, Drawing Powered by Cognero
29,000 43,000 7,300 5,700 39,600
6,000
31,000 1,200 100 1,220 19,000 1,800 320 700 9,000 2,700
510,000 244,500 48,000 25,000 9,500 2,000 181,000 47,000 47,000 Page 55
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Chapter 04 - Completing the Accounting Cycle 243. Service Revenue Depreciation Expense Insurance Expense Rent Expense Salary Expense Supplies Expense Ramona Cross, Capital Ramona Cross, Capital Ramona Cross, Drawing 244. Sept. 30 Service Revenue Wages Expense Office Supplies Expense Repair Parts Expense Depreciation Expense Sam Perez, Capital 30
Sam Perez, Capital Sam Perez, Drawing
186,000 13,500 2,510 32,700 41,390 2,500 93,400 48,000 48,000
47,200 4,840 1,275 925 1,350 38,810 1,750 1,750
245. Mar. 31
31
Service Revenue Wages Expense Office Supplies Expense Store Supplies Expense Depreciation Expense Erik Martin, Capital Erik Martin, Capital Erik Martin, Drawing
246. July 31 Service Revenue Ladonna Douglas, Capital Wages Expense Rent Expense Advertising Expense Office Supplies Expense Store Supplies Expense Depreciation Expense 31 Ladonna Douglas, Capital Ladonna Douglas, Drawing 247. Dec. 31 Fees Earned Wages Expense Supplies Expense Powered by Cognero
36,500 6,425 1,465 5,150 1,575 21,885 6,250 6,250
41,500 5,865 37,425 3,000 2,750 1,465 2,150 575 13,250 13,250
59,500 19,000 7,000 Page 56
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Chapter 04 - Completing the Accounting Cycle Depreciation Expense Don Austin, Capital
3,500 30,000
31 Don Austin, Capital Don Austin, Drawing 248. Fees Earned Wages Expense Rent Expense Utilities Expense Depreciation Expense Miscellaneous Expense Diane Miller, Capital Diane Miller, Capital Diane Miller, Drawing
2,000 2,000
36,600 12,450 4,900 3,475 2,150 1,275 12,350 4,870 4,870
Miller Company Post-Closing Trial Balance December 31 Account Debit Credit No. Balances Balances Cash 11 8,130 Accounts Receivable 12 3,300 Prepaid Expenses 13 2,750 Equipment 18 10,400 Accumulated Depreciation 19 2,200 Accounts Payable 21 2,700 Notes Payable 22 1,000 Diane Miller, Capital 31 18,680 24,580 24,580 249. 1. Transactions are analyzed and recorded in the journal. 2. Transactions are posted to the ledger. 3. An unadjusted trial balance is prepared. 4. Adjustment data are assembled and analyzed. 5. An optional end-of-period spreadsheet (work sheet) is prepared. 6. Adjusting entries are journalized and posted to the ledger. 7. An adjusted trial balance is prepared. 8. Financial statements are prepared. 9. Closing entries are journalized and posted to the ledger. 10. A post-closing trial balance is prepared. 250. a. Journal Entries: (a) Cash Dana Bowen, Capital (b) Equipment Powered by Cognero
6,500 6,500 2,500 Page 57
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Chapter 04 - Completing the Accounting Cycle Dana Bowen, Capital (c) Cash Fees Earned (d) Rent Expense Cash (e) Accounts Receivable Fees Earned (f) Supplies Accounts Payable (g) Wages Expense Cash (h) Prepaid Insurance Cash (i) Cash Fees Earned (j) Miscellaneous Expense Cash (k) Dana Bowen, Drawing Cash (l) Cash Unearned Revenue
2,500 900 900 400 400 1,250 1,250 870 870 420 420 1,940 1,940 2,500 2,500 50 50 350 350 930 930
Adjusting Entries: (m) Supplies Expense Supplies (n) Accounts Receivable Fees Earned (o) Insurance Expense Prepaid Insurance (p) Depreciation Expense Accumulated Depreciation (q) Wages Expense Wages Payable (r) Unearned Revenue Fees Earned
540 540 385 385 725 725 130 130 225 225 590 590
b. Cash 6,500 900 400 420 1,940
Accounts Receivable 1,250 385 1,635
Prepaid Insurance 1,940
Supplies 870 540 330
725 1,215
2,500 50 350 930 7,670 Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle
Equipment
Accumulated Depreciation
2,500
Accounts Payable
130
Unearned Revenue
Wages Payable 870
Dana Bowen, Capital 6,500 2,500 9,000
Dana Bowen, Drawing 350
Fees Earned 900 1,250 2,500 385 590 5,625
Wages Expense 420 225 645
Rent Expense 400
Insurance Expense 725
Depreciation Expense 130
Miscellaneous Expense 50
930 590 340
225
Supplies Expense 540
c. Dana Bowen Company Income Statement For the Year Ended April 30 Fees earned Expenses: Insurance expense Wages expense Supplies expense Rent expense Depreciation expense Miscellaneous expense Total expenses Net income
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$5,625 $725 645 540 400 130 50 2,490 $3,135
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Chapter 04 - Completing the Accounting Cycle Dana Bowen Company Statement of Owner’s Equity For the Year Ended April 30 Dana Bowen capital, May 1 $ 0 Investment during the year $9,000 Net income for the year 3,135 Withdrawals (350) Increase in owner’s equity 11,785 $11,785 Dana Bowen, capital, April 30 Dana Bowen Company Balance Sheet April 30
Assets Current assets: Cash
$7,670
Accounts receivable Supplies
1,635 330
Prepaid insurance
1,215
Total current assets Property, plant, and equipment: Equipment
$10,850
$2,500
Less accum. depr.
130 Total property, plant, and equipment 2,370 Total assets
$13,220 Liabilities
Current liabilities: Accounts payable $ 870 Wages payable 225 Unearned revenues 340 Total liabilities Owner's Equity Dana Bowen, capital Total liabilities and owner’s equity
$ 1,435 11,785 $13,220
d. Closing Entries: (s) Fees Earned Wages Expense Rent Expense Supplies Expense Insurance Expense Depreciation Expense Powered by Cognero
5,625 645 400 540 725 130 Page 60
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Chapter 04 - Completing the Accounting Cycle Miscellaneous Expense Dana Bowen, Capital (t) Dana Bowen, Capital Dana Bowen, Drawing
50 3,135 350 350
e. Dana Bowen Company Post-Closing Trial Balance For the Year Ended April 30 Account Debit Credit No. Balances Balances Cash 11 7,670 Accounts Receivable 12 1,635 Supplies 13 330 Prepaid Insurance 14 1,215 Equipment 18 2,500 Accumulated Depreciation 19 130 Accounts Payable 21 870 Wages Payable 22 225 Unearned Revenue 24 340 Dana Bowen, Capital 31 11,785 13,350 13,350 251. a. Salaries Expense Salaries Payable
4,200 4,200
b. $298,500 + $4,200 = $302,700 credit
252. a. Good Landscape Services End-of-Period Spreadsheet For the Month Ended January 31
Account Title Cash Supplies Prepaid Insurance Equipment Accumulated Depreciation
Unadjusted Trial Balance Dr. Cr.
Adjustments Dr. Cr.
6,750 3,900 8,400 41,750
(a) 3,000 (b) 1,100
29,775 Dalton Good, Drawing Service Revenue Salary Expense Rent Expense Miscellaneous Expense Powered by Cognero
3,425 56,300 24,300 6,000 1,500
(d) 1,650 Page 61
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Chapter 04 - Completing the Accounting Cycle 96,025
96,025
Supplies Expense Insurance Expense Depreciation Expense Salaries Payable
(a) 3,000 (b) 1,100 (c) 1,600 7,350
(d) 1,650 7,350
Net income Adjusted Trial Balance Dr. Cr.
Income Statement Dr. Cr.
6,750 900 7,300 41,750
Balance Sheet Dr. Cr. 6,750 900 7,300 41,750
11,550 29,775
11,550 29,775
3,425
3,425 56,300
25,950 6,000 1,500 3,000 1,100 1,600
56,300 25,950 6,000 1,500 3,000 1,100 1,600
1,650 99,275
99,275
39,150 17,150 56,300
56,300
60,125
56,300
60,125
1,650 42,975 17,150 60,125
b. (1) Good Landscape Services Income Statement For the Month Ended January 31 Service revenue Expenses: Salary expense Rent expense Supplies expense Depreciation expense Insurance expense Miscellaneous expense Total expenses Net income
$56,300 $25,950 6,000 3,000 1,600 1,100 1,500 39,150 $17,150
b. (2) Good Landscape Services Statement of Owner's Equity For the Month Ended January 31 Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle Dalton Good, capital, January 1 Net income for the month Withdrawals Increase in owner's equity Dalton Good, capital, January 31
$29,775 $17,150 (3,425) 13,725 $43,500
b. (3) Good Landscape Services Balance Sheet January 31 Assets Current assets: Cash $6,750 Supplies 900 Prepaid insurance 7,300 Total current assets
$14,950
Property, plant, and equipment: Equipment $41,750 Less accum. depr. 11,550 Total property, plant, and equipment Total assets Liabilities Current liabilities: Salaries payable Owner's Equity Dalton Good, capital Total liabilities and owner's equity c. Jan. 31 Service Revenue Salary Expense Rent Expense Supplies Expense Depreciation Expense Insurance Expense Miscellaneous Expense Dalton Good, Capital 31
Dalton Good, Capital Dalton Good, Drawing
30,200 $45,150
$1,650 43,500 $45,150
56,300 25,950 6,000 3,000 1,600 1,100 1,500 17,150 3,425 3,425
253. Kirk Enterprises End-of-Period Spreadsheet For the Month Ended July 31 Unadjusted Adjusted Adjustments Trial Balance Trial Balance Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle Dr. Cash Prepaid Insurance Fees Receivable Supplies Equipment Accumulated Depreciation Unearned Revenue Accounts Payable Wages Payable Ruben Ramon, Capital Ruben Ramon, Drawing Service Revenue Advertising Expense Wages Expense Insurance Expense Supplies Expense Depreciation Expense
Cr.
Dr.
Cr.
Dr. Cr. 36
(e) 3
9
(c) 4
56 8 60
36 12 56 12 60 12
(a) 1
13
20 (d) 15
5
32
32 (b) 2
2
84
84
4
4 80
(d) 15
28
28
20
228
95
228
(b) 2
22
(e) 3
3
(c) 4
4
(a) 1
1
25
25
231
231
254. Net Income = Total of Balance Sheet Debit Column – Total of Balance Sheet Credit Column = $630,430 – $614,210 = $16,220 255. Net Income (Loss) = Total of Balance Sheet Debit Column – Total of Balance Sheet Credit Column = $614,210 – $630,430 = $(16,220) 256. Austin Enterprises Income Statement For the Year Ended December 31 Fees earned Expenses: Wages expense Rent expense Depreciation expense Total expenses Powered by Cognero
$59,500 $19,000 7,000 3,500 29,500 Page 64
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Chapter 04 - Completing the Accounting Cycle $30,000
Net income
Austin Enterprises Statement of Owner’s Equity For the Year Ended December 31 Daniel Austin, capital, January 1 $ 0 Investment during the year $ 8,000 Net income for the year 30,000 Withdrawals (2,000) Increase in owner’s equity 36,000 $36,000 Daniel Austin, capital, December 31 Austin Enterprises Balance Sheet December 31 Assets Current assets: Cash Accounts receivable Supplies Total current assets Property, plant, and equipment: Equipment Less accum. depr. Total property, plant, and equipment Total assets Liabilities Current liabilities: Accounts payable Wages payable Total liabilities Owner's Equity Daniel Austin, capital Total liabilities and owner’s equity
$26,500 7,000 1,000 $34,500 $18,500 5,000 13,500 $48,000
$11,000 1,000 $12,000 36,000 $48,000
257. Danilo Enterprises End-of-Period Spreadsheet For the Year Ended December 31 Adjusted Income Balance Sheet Trial Balance Statement Account Title Dr. Cr. Dr. Cr. Dr. Cr. Cash 14,500 14,500 Accounts 7,500 7,500 Receivable Powered by Cognero
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Chapter 04 - Completing the Accounting Cycle Supplies 500 Equipment 20,500 Accumulated 15,000 Depr.— Equip. Accounts 9,500 Payable Wages 3,060 Payable Tony Danilo, 18,240 Capital Tony Danilo, 1,000 Drawing Fees Earned 34,000 Wages 18,000 18,000 Expense Rent Expense 9,300 9,300 Depreciation 8,500 _____ 8,500 Expense 79,800 79,800 35,800 Net loss 35,800
500 20,500 15,000 9,500 3,060 18,240 1,000 34,000
34,000 44,000
45,800
1,800 1,800 35,800 45,800
45,800
258. The difference between the debits and credits of the Income Statement columns is compared to the difference between the debits and credits of the Balance Sheet columns. They should be the same amounts but opposite from each other. If the debits are more than the credits in the Income Statement columns, signifying a net loss, then the credits should be higher than the debits in the Balance Sheet columns by the same amount. If the credits are more than the debits in the Income Statement columns, signifying a net income, then the debits should be higher than the credits in the Balance Sheet columns by the same amount. 259. The end-of-period spreadsheets are tools used by accountants to collect and summarize data for various analysis and reports.
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Chapter 05 - Accounting Systems True / False 1. The methods and procedures for collecting, classifying, summarizing, and reporting a business's financial and operating information are called the accounting system. a. True b. False 2. Systems analysis is the final phase in the creation or revision of an accounting system. a. True b. False 3. Processing methods are the means by which the system collects, summarizes, and reports accounting information. a. True b. False 4. Accounting systems evolve through a three-step process: analysis, design, and feedback. a. True b. False 5. An accounting system design consists of internal controls and information processing methods. a. True b. False 6. Most accounting systems evolve as the business grows and requires changes in its methods for collecting, accumulating, and reporting information. a. True b. False 7. Once an accounting system has been implemented, feedback will be used to continuously analyze and improve the system. a. True b. False 8. Designing a system to meet user needs is the final phase in the creation or revision of an accounting system. a. True b. False 9. When specialized journals are used, the general journal is not necessary. a. True b. False 10. Specialized journals are books of original entry. a. True b. False 11. Transactions must first be recorded in the general journal before they can be entered in specialized journals. Powered by Cognero
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Chapter 05 - Accounting Systems a. True b. False 12. The format and number of specialized journals that a business uses depend upon the legal organization of the business. a. True b. False 13. The basic procedure of posting from a revenue journal is to make all postings at the end of the month. a. True b. False 14. The principal ledger that contains all the balance sheet and income statement accounts is the general ledger. a. True b. False 15. The presence of a subsidiary ledger requires the presence of a summarizing control account in the general ledger. a. True b. False 16. An account for each supplier of merchandise will appear in the accounts payable subsidiary ledger. a. True b. False 17. The customers subsidiary ledger is controlled by the general ledger account entitled Accounts Payable. a. True b. False 18. Even when special journals are used, purchases of store equipment on account are recorded in the general journal. a. True b. False 19. A control account is used to record the details of the individual subsidiary accounts. a. True b. False 20. Even when special journals are used, a personal withdrawal of cash is recorded in the general journal. a. True b. False 21. Services provided for cash are recorded in the revenue journal. a. True b. False 22. Services provided on account are recorded in the revenue journal. a. True b. False Powered by Cognero
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Chapter 05 - Accounting Systems 23. The receipt of cash for the monthly rental of unused office space would be recorded in the revenue journal. a. True b. False 24. The Other Accounts column in the cash receipts journal is used for recording debits to any account for which there is no special debit column. a. True b. False 25. The Other Accounts column in the cash payments journal is used for recording debits to any account for which there is no specialized debit column. a. True b. False 26. Purchases journals will have an Other Accounts Cr. column. a. True b. False 27. The use of subsidiary ledgers is limited to accounts payable and accounts receivable. a. True b. False 28. The revenue journal is designed for the efficient recording of cash sales transactions. a. True b. False 29. The Post. Ref. column of the revenue journal will reference the account number of the customer. a. True b. False 30. The total of the accounts receivable subsidiary accounts and the balance of the accounts receivable control account should equal each other at the end of the period. a. True b. False 31. Adjusting journal entries are recorded in a special journal. a. True b. False 32. Even when special journals are used, closing journal entries are recorded in the general journal. a. True b. False 33. The accounts receivable subsidiary ledger is an example of a special journal. a. True Powered by Cognero
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Chapter 05 - Accounting Systems b. False 34. Posting from a revenue journal to the customer account is normally done only at the end of the month. a. True b. False 35. The purchase of supplies for cash would be recorded in the purchases journal. a. True b. False 36. When a large number of individual accounts with a common characteristic are grouped together in a separate ledger, the summarizing account in the general ledger is called a control account. a. True b. False 37. The customers ledger and the creditors ledger refer to subsidiary ledgers. a. True b. False 38. The total on the "Accounts Payable Creditor Balances" report at January 31, the end of the first month of operations, agrees with the total of the Accounts Payable Dr. column in the cash payments journal for the same period. a. True b. False 39. The columns included in special journals are standardized for all businesses. a. True b. False 40. Generally, subsidiary ledgers are used for general ledger accounts that consist of a large number of individual items. a. True b. False 41. In a computerized accounting system, all postings happen automatically at the end of the month. a. True b. False 42. In computerized accounting systems, reports may be generated at any time. a. True b. False 43. Computerized accounting systems prevent all journalizing errors. a. True b. False 44. Using the Internet to perform business transactions is called e-commerce. a. True Powered by Cognero
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Chapter 05 - Accounting Systems b. False 45. The term B2C refers to transactions conducted between two companies. a. True b. False 46. E-commerce provides additional business opportunities but at the cost of reduced speed and efficiency. a. True b. False 47. One way to report revenue earned by a company is to present it by the different segments of the business. a. True b. False 48. Businesses can only be segmented by type of customer. a. True b. False Multiple Choice 49. A(n) ____ system is the methods and procedures for collecting, classifying, summarizing, and reporting a business’s financial and operating information. a. accounting b. fiduciary c. operations d. auditing 50. The phase of accounting system installation in which the information needs of people in the organization are taken into account is a. analysis b. design c. implementation d. installation 51. Which of the following is not one of the three phases needed when changing an accounting system, either in its entirety or in part? a. analysis b. design c. review d. implementation 52. Which of the following is not part of a three-step process that a growing business uses for the evolution of its accounting system? a. analysis b. design Powered by Cognero
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Chapter 05 - Accounting Systems c. implementation d. feedback 53. The three phases of setting up an accounting system in correct order are a. design, implementation, analysis b. analysis, design, implementation c. design, analysis, implementation d. implementation, design, analysis 54. The goal of systems design is to a. determine when to implement a system b. meet user needs c. determine the size of the competitor's system d. make changes to the present system 55. After an accounting system has been set up, what is the next step? a. Create the chart of accounts. b. Obtain input from users to analyze and improve the system. c. Implement analysis and design. d. Set up internal controls. 56. Processing methods a. are the policies and procedures that protect assets from misuse b. must be computerized c. are the means by which the accounting system collects, summarizes, and reports accounting information d. ensure that business laws and regulations are followed 57. The means by which the accounting system collects, summarizes, and reports accounting information is called information a. reporting methods b. accounting methods c. control methods d. processing methods 58. The primary ledger containing all of the balance sheet and income statement accounts is the a. general ledger b. creditors ledger c. customers ledger d. subsidiary ledger 59. The subsidiary ledger that includes customer account activity is called the a. asset ledger b. accounts payable ledger c. expense ledger Powered by Cognero
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Chapter 05 - Accounting Systems d. accounts receivable ledger 60. Every controlling account must have its own a. revenue ledger b. general ledger c. subsidiary ledger d. journal 61. At the end of the month, the total of the amount column of the revenue journal is posted as a a. debit to Accounts Receivable and a credit to Cash b. debit to Accounts Receivable and a credit to Fees Earned c. debit to Cash and a credit to Fees Earned d. debit to Cash and a credit to Accounts Payable 62. The controlling account in the general ledger that summarizes the individual customer accounts in the subsidiary ledger is entitled a. Purchases b. Accounts Payable c. Fees Earned d. Accounts Receivable 63. When there are a large number of individual accounts with a common characteristic, it is common to place them in a separate ledger called a(n) a. general ledger b. income statement ledger c. group ledger d. subsidiary ledger 64. A purchase of supplies for cash is recorded in the a. revenue journal b. purchases journal c. cash receipts journal d. cash payments journal 65. A purchase of supplies on account is recorded in the a. revenue journal b. general journal c. purchases journal d. cash payments journal 66. Which of the following transactions is recorded in the purchases journal? a. purchase of store supplies on account b. return of damaged office equipment c. purchase of store supplies for cash Powered by Cognero
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Chapter 05 - Accounting Systems d. purchase of office equipment for cash 67. When posting column totals in the purchases journal, a credit should be posted to a. Merchandise Inventory b. Accounts Payable c. Sales Returns and Allowances d. Cash 68. Which of the following transactions is recorded in the revenue journal? a. sale of excess office equipment for cash b. rendering services for cash c. rendering services on account d. sale of excess office equipment on account 69. Each individual entry in the revenue journal is posted to the a. accounts receivable controlling account b. accounts receivable subsidiary ledger c. revenue controlling account d. accounts receivable subsidiary ledger and the controlling account 70. Which of the following is always recorded in the general journal? a. services rendered for cash b. end-of-period adjusting entries c. purchases of equipment on account d. purchases of equipment for cash 71. Which of the following is always recorded in the general journal? a. rendering services for cash b. purchases of supplies on account c. rendering services on account d. closing entries 72. Which of the following is recorded in the cash receipts journal? a. cash withdrawn by the owner b. cash purchase of equipment c. cash received on customer's account d. adjusting entry for depreciation 73. Services performed for cash should be recorded in the a. revenue journal b. purchases journal c. cash receipts journal d. cash payments journal Powered by Cognero
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Chapter 05 - Accounting Systems 74. Which of the following is recorded in the cash payments journal? a. adjusting entry for accrued salaries b. receipt of cash on supplies returned c. receipt of cash from services rendered d. payment of employees' salaries 75. A cash payments journal would not include a(n) a. Cash Cr. column b. Sales Discounts Cr. column c. Accounts Payable Dr. column d. Other Accounts Dr. column 76. In which journal is the return of supplies purchased on account recorded? a. general journal b. cash receipts journal c. cash payments journal d. purchases journal 77. A cash purchase of supplies should be recorded in the a. cash receipts journal b. purchases journal c. general journal d. cash payments journal 78. When posting the column totals of a cash payments journal, a debit should be posted to a. Cash b. Accounts Payable c. Sales Discounts d. Unearned Revenue 79. Subsidiary ledgers a. are used only for accounts payable and accounts receivable b. may be used for various general ledger accounts c. may be used only for the cash account d. are never used for more than four accounts 80. Some of the more common subsidiary ledgers are a. accounts payable, accounts receivable, and owner’s equity subsidiary ledgers b. accounts receivable and accounts payable subsidiary ledgers c. accounts receivable, accounts payable, cash, checking, petty cash, and owner’s equity subsidiary ledgers d. cash and owner’s equity subsidiary ledgers 81. If the individual subsidiary ledger accounts contained the following data: Cadence Company, Vendor, $200, credit balance Franklin Enterprises, Customer, $750, debit balance Powered by Cognero
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Chapter 05 - Accounting Systems Marcelo Construction, Client, $125, debit balance Peyton Supplies, Supplier, $375, credit balance The accounts receivable (A/R) control account and the accounts payable (A/P) control account balances would be a. A/R, $1,375; A/P, $375 b. A/R, $525; A/P, $175 c. A/R, $875; A/P, $575 d. A/R, $750; A/P, $700 82. Which of the following is not considered a special journal? a. purchases journal b. cash receipts journal c. general journal d. cash payments journal 83. Which of the following journals is called an all-purpose journal? a. general journal b. purchases journal c. revenue journal d. accounting journal 84. Which of the following is true about the revenue journal? a. Cash revenues and revenues on account are recorded in the revenue journal. b. Only cash revenues are recorded in the revenue journal. c. Only revenues on account are recorded in the revenue journal. d. Unearned revenues are also recorded in the revenue journal. 85. The cash receipts journal will be used for a. only cash received from customers on account b. all cash received for any purpose c. cash received from customers on account and cash sales d. only cash received from cash sales 86. An “Accounts Receivable Customer Balances” report shows a. revenues by customer for a specified date range b. customer balances owed as of a specific date c. cash payments to creditors for a specific date range d. sales by customer as of a specific date 87. A cash investment made by the owner should be recorded in the a. cash receipts journal b. purchases journal c. cash payments journal d. revenue journal Powered by Cognero
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Chapter 05 - Accounting Systems 88. A withdrawal of cash made by the owner will be found in the a. cash receipts journal b. cash payments journal c. revenue journal d. purchases journal 89. An owner transfers a personal automobile to the company with a fair market value of $12,000. The entry will be made in the a. purchases journal b. cash payments journal c. cash receipts journal d. general journal 90. In which journal would adjusting entries be found? a. cash receipts journal b. cash payments journal c. general journal d. purchases journal 91. In which journal would you find cash revenues recorded? a. cash payments journal b. general journal c. revenues journal d. cash receipts journal 92. In which journal would the payment of salaries be posted? a. cash receipts journal b. special journal c. cash payments journal d. expense journal 93. The following cash receipts journal headings have been suggested for Tower Tree-Trimming Service Company. Which of the following statements is false? Date
Account Debited
Post. Ref.
Accounts Receivable Cr.
Cash Other Accounts Cr. Dr.
a. The second column should be Account Credited. b. The Cash column should be a debit. c. The Other Accounts column should be a credit. d. The Accounts Receivable column should be a debit. 94. Which of the following is not a special journal? a. cash receipts journal b. purchases journal Powered by Cognero
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Chapter 05 - Accounting Systems c. accounts receivable journal d. cash payments journal 95. Which of the following general ledger accounts normally has a subsidiary ledger? a. Owner's Capital b. Drawing c. Supplies d. Accounts Payable 96. The adjustment for supplies used during the period would be recorded in the a. general journal b. purchases journal c. cash payments journal d. cash receipts journal 97. If a company uses special journals, a. it must have one for cash, receivables, and payables b. it may have no more than four c. the quantity and design depend on the needs of the company d. the design must comply with the FASB requirements 98. Mocha Coffee Shop has asked the accountant to keep track of the purchases for beverage, food, and retail items. The accountant has implemented a purchases journal. Which of the following columns should be included in the new purchases journal? a. Accounts Payable Cr., Beverage Supplies Dr., Food Supplies Dr., Retail Items Dr., Other Accounts Dr. b. Accounts Payable Dr., Other Accounts Dr., Beverage Supplies Cr., Food Supplies Cr., Retail Items Cr. c. Beverage Supplies Dr., Food Supplies Dr., Retail Items Dr., Other Accounts Dr., Cash Cr. d. Beverage Supplies Dr., Food Supplies Dr., Retail Items Dr., Other Accounts Cr., Accounts Payable Dr. 99. When using a purchases journal, a. all cash and credit purchases are recorded in the journal b. posting to creditor accounts is only done at the end of the month c. the “Other Accounts” total is posted to Accounts Payable at month’s end d. there will always be an “Accounts Payable Cr.” column 100. When using a revenue journal, a. separate “Fees Earned” and “Accounts Receivable” columns are included b. both cash sales and sales on account are recorded in the journal c. revenues are normally recorded when the company sends customer invoices d. postings to customer accounts are done at month's end 101. Beachside Coffee Shop, in an effort to streamline its accounting system, has decided to utilize a cash receipts journal in its operations. If the company records the cash sale of food for $18, which is the correct entry? a. Cash Cr., $18; Food Revenue Dr., $18 b. Cash Dr., $18; Food Revenue Dr., $18 Powered by Cognero
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Chapter 05 - Accounting Systems c. Cash Dr., $18; Food Revenue Cr., $18 d. Cash Cr., $18; Food Revenue Cr., $18 102. A basic manual accounting system includes all of the following except a a. chart of accounts b. two-column journal c. general ledger d. computer on which the system runs 103. Which of the following statements is false? a. Most computerized accounting systems use principles from manual systems. b. Subsidiary ledgers and special journals are only useful when a business doesn’t have a large number of similar transactions. c. Even small companies use computerized accounting systems. d. Large companies often integrate their accounting system with their automated business systems. 104. A computerized accounting system will not allow which of the following types of journalizing errors? a. entering an amount in an incorrect account b. reversing the debit and credit accounts in a transaction c. processing a transaction that has unequal debits and credits d. entering a transaction with an incorrect date 105. Computerized accounting systems a. are only used by medium- and large-sized companies b. are generally not as accurate as manual systems c. record and post transactions at the same time d. must make use of special journals 106. The total on the "Cash Receipts" report generated by QuickBooks® software at January 31 would be equal to the a. total revenue earned for the month of January b. total of the purchases journal on January 31 c. total of the Cash Dr. column of the cash receipts journal in a manual system d. balance in Accounts Receivable at January 31 107. Which of the following best describes the action necessary to record a sale on account with QuickBooks®? a. Open and complete a “receive payment” form. b. Open and complete an electronic invoice form. c. Open the QuickBooks revenue journal and enter the transaction. d. Open the QuickBooks general ledger and post the transaction directly to the affected accounts. 108. Which of the following is not an advantage of a computerized system over a manual system? a. Transactions are recorded and posted at the same time. b. Accuracy is usually better with a computerized system. c. Current account balances are always available. Powered by Cognero
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Chapter 05 - Accounting Systems d. Internal controls are optional to the computerized system. 109. Month-end postings to control accounts in a computerized accounting system are not required because a. control accounts are not used in computerized systems b. transactions are posted to accounts immediately c. the input operator can choose to post to accounts at any time d. transactions are posted at the end of the financial year 110. Computerized accounting systems a. provide a tedious form of record keeping b. improve the timeliness of reporting c. prevent all journalizing errors d. are only used in medium and large businesses 111. What is meant by the term B2C? a. balance to cash b. business to cash c. book to capital d. business to consumer 112. In addition to B2B and B2C transactions, the Internet is commonly used in all of the following business activities except a. supply chain management b. regulatory compliance management c. customer relationship management d. product life-cycle management 113. When Richard Miller purchases a fishing pole through Amazon.com, he is utilizing a. B1C e-commerce b. B2B e-commerce c. B2C e-commerce d. B1B e-commerce 114. Which of the following is not an area where the Internet is used for business purposes? a. business cycle management b. customer relationship management c. supply chain management d. product life-cycle management 115. E-commerce a. accounts for less than 1% of all retail sales b. only relates to transactions between a company and a consumer c. can improve the speed and efficiency of transactions d. increases paperwork Powered by Cognero
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Chapter 05 - Accounting Systems 116. Business may be segmented by all of the following except a. region b. product line c. customer type d. time period 117. Connie's Specialties Inc. offers exclusive interior design services. The following revenue information was determined from Connie's records. Current Year Consultation services $1,000,000 Design services 1,800,000
Prior Year $ 800,000 1,500,000
Using a horizontal analysis, which is correct? a. Consultation services showed an increase in revenue of 25%. b. Consultation services showed a decrease in revenue of 25%. c. Design services showed an increase in revenue of 25%. d. Design services showed a decrease in revenue of 25%. 118. Segment data a. can be used for vertical, but not horizontal analysis b. is gathered from invoices entered into the accounting system c. is only useful by product line d. analysis is required by GAAP 119. Waller Company does business in two regional segments: North and South. The following annual revenue information was determined from the accounting system’s invoice data: Segment Current Year Prior Year North $ 80,000 $100,000 South 260,000 200,000 Total revenues $340,000 $300,000 Using horizontal analysis, determine the percentage change in revenues for the North region. Round to one decimal place. a. 22.4% b. (20.0)% c. 20.0% d. (22.4)% 120. Snelling Company does business in two regional segments: North and South. The following annual revenue information was determined from the accounting system’s invoice data: Segment Current Year Prior Year North $ 75,000 $100,000 South 260,000 220,000 Total revenues $335,000 $320,000 Using horizontal analysis, determine the percentage change in revenues for the South region. Powered by Cognero
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Chapter 05 - Accounting Systems Round to one decimal place. a. 18.2% b. 84.6% c. (18.2)% d. 15.4% 121. The following is an example of
Segment College textbooks High school textbooks Elementary school textbooks Total revenues
Prior Year $ 55,000 115,000 121,000 $291,000
Increase (Decrease) Amount Percent $ 23,000 41.8% 14,000 12.2 (16,000) (13.2) $ 21,000 7.2
Current Year Amount Percent $ 78,000 25.0% 129,000 41.3 105,000 33.7 $312,000 100.0%
Prior Year Amount Percent $ 55,000 18.9% 115,000 39.5 121,000 41.6 $291,000 100.0%
Current Year $ 78,000 129,000 105,000 $312,000
a. product analysis b. vertical analysis c. horizontal analysis d. percentage analysis 122. The following is an example of Segment College textbooks High school textbooks Elementary school textbooks Total revenues a. product analysis b. vertical analysis c. horizontal analysis d. percentage analysis Matching Match each of the following transactions to the journal or ledger (a through g) in which it would be entered. a. Purchases journal b. Revenue journal c. Cash receipts journal d. Cash payments journal e. Accounts receivable subsidiary ledger f. Accounts payable subsidiary ledger g. General journal 123. Monthly adjustment for supplies used Powered by Cognero
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Chapter 05 - Accounting Systems 124. Cash receipt posting to an individual customer account 125. Record sale on account to customer 126. Record purchase on account from vendor 127. Record payment received from customer 128. Record payment made to vendor 129. Cash payment posting to an individual vendor account Match each of the following transactions to the journal (a through e) in which it would be entered. a. Cash receipts journal b. Cash payments journal c. Revenue journal d. Purchases journal e. General journal 130. Sold services on account 131. Paid for supplies previously purchased on account 132. Journalized the adjusting entry for accrued fees earned 133. Received payment from a customer on account 134. Purchased equipment on account Match each of the following general and subsidiary ledger postings to the description (a through e) that best applies. a. Purchase on account b. Collection from customer on account c. Adjustment for expired insurance d. Payment to creditor on account e. Sale on account 135. Accounts receivable subsidiary ledger/Accounts Receivable Dr. 136. Accounts receivable subsidiary ledger/Accounts Receivable Cr. 137. Accounts payable subsidiary ledger/Accounts Payable Cr. 138. Accounts payable subsidiary ledger/Accounts Payable Dr. 139. No subsidiary ledger posting The following transactions were completed by Franklin Company during January, its first month of operations. Assume that Franklin Company uses the following journals: cash receipts (CR), cash payments (CP), revenue (R), purchases (P), and general (G). Assume that it uses accounts receivable (AR) and accounts payable (AP) subsidiary ledgers as well as a Powered by Cognero
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Chapter 05 - Accounting Systems general ledger. Match each of the following transactions to the journal entry and subsidiary ledger posting (a through k) that best applies. a. CR, no subsidiary posting b. CP, no subsidiary posting c. R, no subsidiary posting d. P, no subsidiary posting e. G, no subsidiary posting f. CR, AR g. CP, AP h. R, AR i. P, AP j. G, AR k. G, AP 140. Issued check for rent 141. Purchased equipment on account 142. Issued an invoice to a customer 143. Received a check from a customer for payment on account 144. Issued check for advertising expense 145. Issued check for a payment on account 146. Issued check for purchase of supplies 147. Issued check for salary 148. Received cash for a sale 149. Purchased supplies on account 150. Purchased a computer for cash 151. Paid for the equipment purchased on account 152. Journalized the adjusting entry for supplies used during the month Match each of the following transactions to the journal (a through c) in which it would be entered. a. Revenue journal b. Cash receipts journal c. General journal 153. Invested additional cash in the business 154. Rendered services for cash Powered by Cognero
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Chapter 05 - Accounting Systems 155. Rendered services on account 156. Received cash on account from a customer 157. Journalized the adjusting entry for supplies used 158. Closed the drawing account at the end of the period Match each of the following transactions to the journal (a through c) in which it would be entered. a. Purchases journal b. Cash payments journal c. General journal 159. Paid rent 160. Purchased supplies on account 161. Purchased computer on account 162. Purchased supplies for cash 163. Paid the premium in advance for a one-year fire insurance policy on the office 164. Journalized the adjusting entry for accrued salaries at month’s end 165. Recognized depreciation on equipment 166. Paid the balance on an account payable Match each of the following transactions to the journal (a through e) in which it would be entered. a. Revenue journal b. Cash receipts journal c. Purchases journal d. Cash payments journal e. General journal 167. Withdrew supplies from the business for personal use (by owner) 168. Rendered services on account 169. Paid vendor on account 170. Received payment from customer on account 171. Purchased supplies on account 172. Journalized the adjusting entry for supplies used during the period 173. Withdrew cash for personal use (by owner) Powered by Cognero
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Chapter 05 - Accounting Systems 174. Received cash from the bank in exchange for a note payable 175. Recognized depreciation on the building 176. Closed the revenue account at the end of the period Match each of the following transactions to the journal (a through e) in which it would be entered. a. Revenue journal b. Cash receipts journal c. Purchases journal d. Cash payments journal e. General journal 177. Recorded adjusting journal entry for accrued interest 178. Performed advising services on account 179. Purchased office supplies on account 180. Borrowed money for expansion project 181. Received payment from customer on account 182. Withdrew cash for personal use (by owner) 183. Paid monthly rent 184. Paid creditor on account Subjective Short Answer 185. Briefly describe the three-step process of accounting system development. 186. Define and describe an accounting system. 187. Journalize the following five transactions of Porshe Creations, using a revenue journal: (a) On March 20, Porshe sold 25 cell phone covers to Xtreme at $4.50 per cover on Invoice No. 887. (b) On March 21, Porshe sold 5 cell phone covers to Sidekick for $7.50 per cover on Invoice No. 908. (c) On March 22, Porshe sold 18 cell phone covers to Rock-On at $4.25 per cover on Invoice No. 938. (d) On March 26, Porshe sold 200 cell phone covers to Micro at $3.75 each on Invoice No. 959. (e) On March 29, Porshe sold 6 cell phone covers to Charmers for $8.35 each on Invoice No. 997. Revenue Journal Date Powered by Cognero
Invoice No.
Account Debited
Post. Ref.
Page 15 Accts. Rec. Dr. Page 20
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Chapter 05 - Accounting Systems Sales Rev. Cr.
188. Discuss the process of posting from a revenue journal to the subsidiary ledger and to the general ledger. 189. Two transactions were posted to the following customer account. NAME: Boogie Board Water Wear ADDRESS: 2340 Xtreme Surf Date Item Post. Ref. July 1 Balance 6 Invoice No. 406 R42 24 Invoice No. 456 CR56
Debit
Credit 645 710
Balance 805 1,450 740
Describe each transaction and the source of each posting. 190. The following purchase transactions occurred during August for Backcountry Kayak Excursions. Aug. 1 Purchased Kevlar kayaks (equipment) for $5,600 on account from Gear Inc. 6 Purchased kayak paddles (supplies) for $3,250 on account from Southland Co. 14 Purchased life vests (supplies) for $2,500 on account from Gear Inc. Journalize these transactions, using a purchases journal.
Date
Account Credited
Post. Ref.
Purchases Journal Accounts Other Payable Supplies Accounts Cr. Dr. Dr.
Page 1 Post. Ref.
Amount
191. For each of the following businesses, explain how a purchases journal might be modified for the specific business. 1. North County Medical Center 2. Tri-County Farms, Inc. 3. Prescott’s Quick Lube and Tire Store 192. Explain what subsidiary ledgers are and give examples of three types of subsidiary ledgers that a business might use. 193. Two transactions were posted to the following customer account: NAME: Gen-X Products, Inc. Address: 123 My Way Powered by Cognero
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Chapter 05 - Accounting Systems Date Mar. 1 10 19
Item Balance Invoice No. 987 Invoice No. 995
Post. Ref. √ R45 CR78
Debit
Credit 990 825
Balance 1,150 2,140 1,315
Describe each transaction and the source of each posting. 194. Two transactions were posted to the following customer account: NAME: Roswell Communications, Inc. Address: 345 Alien Way Date Item Post. Ref. May 1 Balance √ 14 Invoice No. 522 CR230 25 Invoice No. 545 R115
Debit
Credit
Balance 750 125 3,625
625 3,500
Describe each transaction and the source of each posting. 195. Two transactions were posted to the following supplier’s (creditor’s) account: NAME: Banner Computer Services, Inc. Address: 890 Novice Lane Date Item Post. Ref. July 1 Balance √ 19 Invoice No. 45 P16 26 Invoice No. 39 CP36
Debit
Credit 1,755
3,500
Balance 5,645 7,400 3,900
Describe each transaction and the source of each posting. 196. The following cash receipts journal headings have been suggested for Tower Tree-Trimming Service Company. What problems do you see with these headings? Date
Account Credited
Post. Ref.
Fees Earned Cr.
Accounts Receivable Cr.
Cash Other Accounts Cr. Dr.
197. Two transactions were posted to the following supplier’s (creditor’s) account: NAME: Xample, Inc. Address: 567 Harrison Blvd. Date Item Nov. 1 Balance 9 Invoice No. 564 18 Invoice No. 574
Post. Ref. √ CP45 P28
Debit
Credit
Balance
55 75
125 70 145
Describe each transaction and the source of each posting. 198. Davidson, Inc., incurred the following transactions during the month of January. Record the appropriate ones in the cash receipts journal. If a transaction should not be recorded in the cash receipts journal, indicate in which journal it should be entered. (a)
On January 3, Davidson, Inc., purchased a one-year insurance policy for $2,400.
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Chapter 05 - Accounting Systems (b) (c) (d) (e)
Date
The account number for Prepaid Insurance is 16. On January 5, Davidson, Inc., received a payment on account from Pasher Industries of $625. On January 12, Davidson, Inc., made sales on account of $3,500 and sales for cash of $2,300. The account number for Fees Earned is 41. On January 26, Davidson, Inc., received $1,250 in rent revenue from a tenant who leases a portion of its building. The account number for Rent Revenue is 44. On January 29, Davidson, Inc., received a payment on account from Gooden, Inc. for $2,000.
Account Credited
Cash Receipts Journal Other Accounts Post. Accounts Receivable Ref. Cr. Cr.
Cash Dr.
199. Harris, Inc., incurred the following transactions during the month of February. Record the appropriate ones in the cash payments journal. Include posting references. If a transaction should not be recorded in the cash payments journal, indicate in which journal it should be entered. (a) (b) (c) (d) (e)
Date
On February 3, the company purchased $650 worth of supplies on account. The supplies account number is 15. On February 5, Harris, Inc. made a payment on account to Sanders Industries in the amount of $1,215 (Check No. 2214). On February 14, Harris, Inc. bought a one-year insurance policy for $1,500. The prepaid insurance account number is 14 (Check No. 2215). On February 22, Harris, Inc. paid monthly rent of $2,000. The rent expense account number is 63 (Check No. 2216). On February 26, Harris, Inc. purchased equipment, paying cash of $7,000 (Check No. 2217). The equipment account number is 18. Ck. No.
Account Debited
Post. Ref.
Other Accounts Accounts Payable Dr. Dr.
Cash Cr.
200. The following purchases journal headings have been suggested for Tower Tree-Trimming Service Company. What problems do you see with these headings?
Date
Account Credited
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Post. Ref.
Accounts Payable Dr.
Accounts Receivable Cr.
Cash Cr.
Other Accounts Dr.
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Chapter 05 - Accounting Systems
201. List the four most common special journals used in accounting and describe the transactions recorded in each journal. 202. Two transactions were posted to the following creditor’s account: NAME Windsurf, Inc. ADDRESS 343 Coastline Road Date Item Aug. 1 Balance 8 Invoice No. 333 15 Invoice No. 567
Post. Ref.
Debit
Credit
Balance 1,210
—
1,210
CP38 P11
735
735
Describe each transaction and the source of each posting. 203. The posting references in the following purchases journal are indicated by letters. Identify each posting reference [(a) through (i)] as representing (1) a posting to a general ledger account, (2) a posting to a subsidiary ledger account, or (3) that no posting is required.
Account Credited
Date
July 3 7 14 26 31
Morton Company Jackson Co. Fallon Inc. Simpson Bros.
Account
Equipment Powered by Cognero
PURCHASES JOURNAL Accounts Office Post. Payable Supplies Ref. Cr. Dr. (a) (b) (c) (d)
1,150 4,800 7,000 2,350 15,300 (e) Other Accounts Dr.
Page 1 Store Supplies Dr. 1,150
4,800 7,000 11,800 (f)
Post Ref.
(h)
1,150 (g)
Amount
1,950 1,950 Page 24
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Chapter 05 - Accounting Systems (i) 204. The following are selected transactions related to purchases on account and cash payments completed during April of the current year. Apr. 1 Issued Check No. 60 in payment of rent for month, $2,400. 5 Purchased office supplies from Clauson Co., $850. 9 Issued Check No. 61 to Dame Co. for $9,750 for cash purchase of equipment. 10 Purchased store supplies from Ewing Co., $425. 15 Issued Check No. 62 to Clauson Co. in payment of April 5 invoice. 17 Purchased store supplies from Patton Co., $7,500. 20 Issued Check No. 63 to Ewing Co. in payment of April 10 invoice of $425. 25 Purchased equipment from Sloan Co., $7,750. 27 Issued Check No. 64 to Patton Co. for partial payment of the April 17 invoice, $4,000. 30 Purchased office supplies from Winthrop Co., $400. (a) (b) (c)
Date
Journalize the transactions, using a purchases journal and a cash payments journal. Total and rule the purchases and cash payments journals as of April 30. Indicate the method of posting the individual items and the totals of the purchases and cash payments journals in the following manner: (1) For individual items and totals to be posted to the subsidiary ledger or not to be posted, insert a check mark in the Post. Ref. column or under the totals. (2) For individual items and totals to be posted to the general ledger, insert the letter "G" (as a substitute for specific account numbers) in the Post. Ref. column or under the totals.
Ck. No.
CASH PAYMENTS JOURNAL Other Accounts Account Post. Accounts Payable Debited Ref. Dr. Dr.
PURCHASES JOURNAL
Date
Account Credited
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Post. Ref.
Accounts Payable Cr.
Page 11 Cash Cr.
Page 22 Store Supplies Dr.
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Chapter 05 - Accounting Systems Office Supplies Dr.
Other Accounts Dr.
Post. Ref.
Amount
205. The following selected transactions were completed by Ridge Company during March of the current year: Mar. 5 Rendered services on account to Quinton Co., Invoice No. 92, $3,250. 10 Rendered services on account to Martin Inc., Invoice No. 93, $4,500. 13 Received $5,000 in payment of monthly rent, which was due on March 1. 15 Received payment from Quinton Co. for invoice of March 5. 19 Received payment from Martin Inc. for balance due on invoice of March 10. 20 Received amount due from Thomas Co. on sale made in February, $5,200. 31 Rendered services for cash during the month, $15,750. (a) (b) (c)
Date
Date
Journalize the transactions, using a revenue journal and a cash receipts journal. Total and rule the revenue and cash receipts journals. Indicate the method of posting the individual items and the columnar totals of the revenue and cash receipts journals in the following manner: (1) For individual items and totals to be posted to the subsidiary ledger or not to be posted, insert a check mark in the Post. Ref. column or under the totals. (2) For individual items and totals to be posted to the general ledger, insert the letter "G" (as a substitute for specific account numbers) in the Post. Ref. column or under the totals.
Invoice No.
Account Credited
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REVENUE JOURNAL Post. Account Debited Ref.
Page 10 Accts. Rec. Dr. Fees Earned Cr.
CASH RECEIPTS JOURNAL Other Accounts Post. Accounts Receivable Ref. Cr. Cr.
Page 23 Cash Dr.
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Chapter 05 - Accounting Systems 206. Down-Under, an aquatic supply store, makes the following five payments during August. Journalize them in the cash payments journal as appropriate. (a) On August 2, Down-Under paid Pondmaster, Inc. with Check No. 6420 for 6 pumps at $435.00 each. The pumps had been purchased in July on account. (b) On August 10, Down-Under purchased $785.00 of office supplies from Business Systems with Check No. 6421. (c) On August 15, Down-Under paid Aqua Magic $215.00 on account with Check No. 6422. (d) On August 27, Down-Under paid an invoice for merchandise received earlier from Spindrifter, Inc. for 8 drains at $73.50 each with Check No. 6423. (e) On August 31, Down-Under purchased $65.00 of koi clay from The Natural Wonder Company by writing Check No. 6424. (Record in Pond Supplies Expense.) Cash Payments Journal Date
Ck. No.
Account Debited
Post. Ref.
Page 17 Other Accounts Accounts Payable Cash Cr. Dr. Dr.
207. Voyager Electronic Services has three customers in its accounts receivable subsidiary ledger with beginning balances as follows: Fred Yao Ming, $1,150.00 Kohl Townson, $850.00 Chandra Jahi, $1,075.00 Journalize the following transactions, using a general journal. Then post to the accounts receivable account in the general ledger and to the customer accounts in the accounts receivable subsidiary ledger. June 3 10 15 16 23
Kohl Townson paid $325.00 on account. Chandra Jahi purchased $475.00 on account. Fred Yao Ming paid $395.00 on account. Fred Yao Ming purchased $685.00 on account. Kohl Townson purchased $155.00 on account.
Date
General Journal Post. Description Ref.
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Page 41 Debit
Credit
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Chapter 05 - Accounting Systems
GENERAL LEDGER Account Accounts Receivable Post. Date Item Ref. Debit Credit June 1 Beg. balance √
Account No. 12 Balance Debit Credit 3,075.00
ACCOUNTS RECEIVABLE SUBSIDARY LEDGER Fred Yao Ming Post. Date Item Ref. Debit Credit Balance 1,150.00 June 1 Beg. balance √
Kohl Townson Date Item June 1 Beg. balance
Post. Ref.
Debit
Credit
Balance
√
850.00
Chandra Jahi Date
Item
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Post. Ref.
Debit
Credit
Balance Page 28
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Chapter 05 - Accounting Systems June 1 Beg. balance
√
1,075.00
208. The posting references in the following revenue journal are indicated by letters. Identify each posting reference [(a) through (h)] as representing (1) a posting to a general ledger account, (2) a posting to a subsidiary ledger account, or (3) that no posting is required. REVENUE JOURNAL Date Apr. 3 8 13 17 25 30 30
Invoice No. 190 191 192 193 194 195
Account Debited Hill Company North Supply Macon Inc. White Products Easton Supply Karson Enterprises
Post Ref. (a) (b) (c) (d) (e) (f)
Page 25 Acct. Rec. Dr. Fees Earned Cr. 4,750 5,025 2,100 6,000 2,250 3,750 23,875 (g) (h)
209. Sunrise Coffee Shop, in an effort to streamline its accounting system, has decided to utilize a cash receipts journal. Journalize the following selected summary transactions for March, total the columns, and include the posting references that would be inserted when posting the entries/totals to the ledger accounts. A partial chart of accounts follows. After recording the transactions, indicate if there are any additional columns you would add to this journal
Date
Account Credited
Cash Receipts Journal Other Beverage Post. Accounts Revenue Ref. Cr. Cr.
Food Revenue Cr.
Cash Cr.
Mar. 1 Received cash for beverage sales, $375. 1 Received cash for food sales, $250. 1 Received cash for customer sales of Sunrise’s signature coffee mugs, $130. 7 Received cash for beverage sales, $480. 7 Received cash for food sales, $325. 7 Received cash for customer sales of Sunrise’s signature coffee mugs, $115. 10 Received cash on account from Central.com, $900. Powered by Cognero
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Chapter 05 - Accounting Systems Chart of Accounts (Partial) 10 Cash 41 Beverage Revenue 12 Accounts Receivable 42 Food Revenue 15 Retail Items 43 Retail Revenue 210. Explain whether each of the following would usually be used in a computerized accounting system and why or why not. 1. Special journals 2. Accounts receivable control accounts 3. Electronic invoice form 4. Month-end postings to the general ledger 211. The discovery and correction of errors is important in a computerized system. What kinds of errors might occur in these systems? What type(s) of errors will be prevented in a computerized system? 212. Identify the three main advantages of a computerized accounting system over a manual accounting system. 213. Define the meaning of the terms B2C and B2B as they relate to e-commerce. 214. Describe and discuss e-commerce. 215. The Internet creates opportunities for improving the speed and efficiency of transactions. Name and describe three key areas besides e-commerce where the Internet is being used for business purposes. 216. Payton Company has the following segment revenues for the two most recent years. Segment United States Canada Other countries Total revenues
Current Year (in millions) $ 825.00 325.50 215.50 $1,366.00
Prior Year (in millions) $ 600.00 345.50 168.50 $1,114.00
Prepare a horizontal analysis of the segment data. Round to one decimal place. 217. Payton Company has the following segment revenues for the two most recent fiscal years. Segment China Canada Other countries Total revenues
Current Year (in millions) $ 775.00 325.50 215.50 $1,316.00
Prior Year (in millions) $ 650.00 245.50 168.50 $1,064.00
Prepare a vertical analysis of the segment data. Round to one decimal place. 218. Maximilian Corporation provided revenue disclosures for the current year by its major product segments in the notes to its financial statements as follows: Major Product Segments Powered by Cognero
Current Year (in millions) Page 30
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Chapter 05 - Accounting Systems Petroleum-based products Industrial chemicals Refined chemical products Food additives Emulsifiers Pesticides Salts Wetting agents Total revenues
$10,450 9,460 8,575 7,325 6,900 5,870 4,545 3,215 $56,340
Prepare a vertical analysis. Round to one decimal place. 219. Eastwood Publishing reports the following segment data regarding its textbook sales: Segment College textbooks High school textbooks Elementary school textbooks Total revenues
Current Year $ 78,000 129,000 105,000 $312,000
Prior Year $ 55,000 115,000 121,000 $291,000
Perform a horizontal analysis and a vertical analysis for Eastwood Publishing. Round to one decimal place. 220. What is a business segment? How can business segments be analyzed? 221. 123 Kids TV operates in five major international segments. Segment United States Canada England China Brazil Total revenues
Current Year Prior Year (in millions) (in millions) $ 9,132 $ 8,528 8,248 6,391 4,734 4,141 11,700 13,299 5,645 6,391 $39,459 $38,750
Prepare a horizontal analysis of the segment data. Round percentages to two decimal places. 222. Connie and Jill operate Reardon's Bakery which has the following segment revenues for the most recent two fiscal years. Prepare a vertical analysis. Round percentages to two decimal places. Segment Cakes Cupcakes Desserts Beverages Total revenues
Current Year (in thousands) $ 691,000 512,000 417,000 875,000 $2,495,000
Prior Year (in thousands) $ 662,000 550,000 468,000 815,000 $2,495,000
223. Mickey Co. does business in three regional segments: West, East, and Central. The following information is Powered by Cognero
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Chapter 05 - Accounting Systems available: Segment East West Central Total revenues
Current Year (in thousands) $ 776,000 824,000 495,000 $2,095,000
Prior Year (in thousands) $ 664,000 596,000 325,000 $1,585,000
Prepare a horizontal analysis of the segment data. Round percentages to two decimal places. 224. Minnie Co. does business in three segments: Theme Parks, Movie Production, and Merchandise. The following information from the current year is available: Segment Theme Parks Movie Production Merchandise Total revenues
Current Year (in thousands) $ 776,000 824,000 495,000 $2,095,000
Prior Year (in thousands) $ 664,000 596,000 325,000 $1,585,000
Prepare a vertical analysis of the segment data. Round percentages to two decimal places.
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Chapter 05 - Accounting Systems Answer Key 1. True 2. False 3. True 4. False 5. True 6. True 7. True 8. False 9. False 10. True 11. False 12. False 13. False 14. True 15. True 16. True 17. False 18. False 19. False 20. False 21. False 22. True 23. False 24. False 25. True Powered by Cognero
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Chapter 05 - Accounting Systems 26. False 27. False 28. False 29. False 30. True 31. False 32. True 33. False 34. False 35. False 36. True 37. True 38. False 39. False 40. True 41. False 42. True 43. False 44. True 45. False 46. False 47. True 48. False 49. a 50. a Powered by Cognero
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Chapter 05 - Accounting Systems 51. c 52. d 53. b 54. b 55. b 56. c 57. d 58. a 59. d 60. c 61. b 62. d 63. d 64. d 65. c 66. a 67. b 68. c 69. b 70. b 71. d 72. c 73. c 74. d 75. b 76. a Powered by Cognero
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Chapter 05 - Accounting Systems 77. d 78. b 79. b 80. b 81. c 82. c 83. a 84. c 85. b 86. b 87. a 88. b 89. d 90. c 91. d 92. c 93. d 94. c 95. d 96. a 97. c 98. a 99. d 100. c 101. c Powered by Cognero
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Chapter 05 - Accounting Systems 102. d 103. b 104. c 105. c 106. c 107. b 108. d 109. b 110. b 111. d 112. b 113. c 114. a 115. c 116. d 117. a 118. b 119. b 120. a 121. c 122. b 123. g 124. e 125. b 126. a 127. c Powered by Cognero
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Chapter 05 - Accounting Systems 128. d 129. f 130. c 131. b 132. e 133. a 134. d 135. e 136. b 137. a 138. d 139. c 140. b 141. i 142. h 143. f 144. b 145. g 146. b 147. b 148. a 149. i 150. b 151. g 152. e Powered by Cognero
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Chapter 05 - Accounting Systems 153. b 154. b 155. a 156. b 157. c 158. c 159. b 160. a 161. a 162. b 163. b 164. c 165. c 166. b 167. e 168. a 169. d 170. b 171. c 172. e 173. d 174. b 175. e 176. e 177. e 178. a Powered by Cognero
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Chapter 05 - Accounting Systems 179. c 180. b 181. b 182. d 183. d 184. d 185. (1) Analysis. The needs of those who will use the business's financial information are identified. (2) Design. The system is designed so that it will meet the users' needs. (3) Implementation. The chosen system is put in place. 186. An accounting system is the methods and procedures for collecting, classifying, summarizing, and reporting a business’s financial and operating information. Accounting systems for large companies often record more than just basic transaction data (i.e. aircraft maintenance for an airline). These systems evolve through the process of (1) analysis of information needs, (2) system design, and (3) implementation of the design. Input from users is used to analyze and improve the system. 187. Revenue Journal Date Mar. 20 21 22 26 29
Invoice No. 887 908 938 959 997
Account Debited Xtreme Sidekick Rock-On Micro Charmers
Page 15 Post. Ref.
Accts. Rec. Dr. Fees Earned Cr. 112.50 37.50 76.50 750.00 50.10
188. Each transaction is posted individually to customer accounts in the accounts receivable subsidiary ledger. This should be done on a regular basis to keep customer balances current. To provide a trail of the entries posted to the subsidiary and general ledgers, the source of the entries is indicated in the Posting Reference column by inserting the letter R for revenue journal and the page number of the revenue journal. In the revenue journal, a check mark is inserted in the Posting Reference column to indicate that the transaction has been posted to the subsidiary ledger. At the end of the month, the column total of the revenue journal is posted to the general ledger as a debit to Accounts Receivable and a credit to Fees Earned. This total is equal to the sum of the month’s debits to the individual accounts in the subsidiary ledger. 189. Powered by Cognero
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Chapter 05 - Accounting Systems July 6
Sold $645 on account to Boogie Board Water Wear, itemized on Invoice No. 406. Amount posted from Page 42 of the revenue journal Cash of $710 was collected from Boogie Board Water Wear, Invoice No. 456. Amount posted from Page 56 of the cash receipts journal.
July 24
190. Purchases Journal Account Date Credited Aug. 1 Gear Inc. 6 Southland Co. 14 Gear Inc.
Page 1
Accounts Other Post. Payable Supplies Accounts Post. Ref. Cr. Dr. Dr. Ref. Amount 5,600 Equipment 5,600 3,250 3,250 2,500 2,500
191. The items most often purchased on account determine the titles of the Debit columns in the purchases journal. The purchases journal for North County Medical Center may include columns for pharmaceutical products (IV solutions, injectable drugs), linens (sheets, blankets, pillows), and disposable medical equipment (needles, syringes). The purchases journal for Tri-County Farms, Inc. may include columns for the various types of seeds (corn, wheat), livestock (cows, hogs, sheep), fertilizer, and fuel. The purchases journal for Prescott’s Quick Lube and Tire Store may include columns for oil products (motor oil, grease), tires, and maintenance fluids (transmission fluid, antifreeze). 192. A subsidiary ledger groups a large number of accounts with a common characteristic together. Each subsidiary ledger is summarized in the general ledger by a controlling account. Most commonly, companies use accounts receivable and accounts payable subsidiary ledgers to detail individual customer or vendor accounts. Businesses often use subsidiary ledgers to keep track of equipment purchased, its location, and other equipment data. Moreover, a merchandising business might use a subsidiary ledger to keep track of each type of merchandise held in inventory. 193. Mar. 10
Sold $990 on account to Gen-X Products, Inc., itemized on Invoice No. 987. Amount posted from Page 45 of the revenue journal.
19
Collected cash of $825 from Gen-X Products, Inc. (Invoice No. 995). Amount posted from Page 78 of the cash receipts journal.
May 14
Collected cash of $625 from Roswell Communications, Inc. (Invoice No. 522). Amount posted from Page 230 of the cash receipts journal.
25
Sold $3,500 on account to Roswell Communications, Inc., itemized on Invoice No. 545. Amount posted from Page 115 of the revenue journal.
194.
195. July 19
Purchased $1,755 on account from Banner Computer Services, Inc., itemized on Invoice No. 45. Amount posted from Page 16 of the purchases journal.
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Chapter 05 - Accounting Systems 26
Paid $3,500 to Banner Computer Services, Inc. on account (Invoice No. 39). Amount posted from Page 36 of the cash payments journal.
196. The Cash column should be for debits (not credits). The Other Accounts column should be for credits (not debits). A better order of columns would be to group the Other Accounts Cr. column with the other credit columns. 197. Nov. 9
18
Paid $55 to Xample Inc. on account (Invoice No. 564). Amount posted from Page 45 of the cash payments journal. Purchased $75 on account from Xample Inc., itemized on Invoice No. 574. Amount posted from Page 28 of the purchases journal.
198. Cash Receipts Journal Other Accounts Account Post. Accounts Receivable Date Credited Ref. Cr. Cr. 625 √ Jan. 5 Pasher Industries 12 Fees Earned 41 2,300 26 Rent Revenue 44 1,250 29 Gooden, Inc. 2,000 √
Cash Dr. 625 2,300 1,250 2,000
Transaction (a) should be recorded in the cash payments journal and the sales on account in transaction (c) should be recorded in the revenue journal. 199. Date Feb. 5 14 22 26
Ck. No. 2214 2215 2216 2217
Account Debited Sanders Industries Prepaid Insurance Rent Expense Equipment
Post. Ref.
√ 14 63 18
Other Accounts Accounts Dr. Payable Dr. 1,215 1,500 2,000 7,000
Cash Cr. 1,215 1,500 2,000 7,000
Transaction (a) should be recorded in the purchases journal. 200. Accounts Receivable and Cash are not needed in the purchases journal, since this journal is for purchases on account by Tower. Accounts Payable should be a credit. There should be a Supplies Dr. column. Also, there should be two columns to the extreme right with the headings "Post. Ref." and "Amount" in association with the Other Accounts Dr. column. 201. Purchases journal: for purchases made on account Revenue journal: for sales made on account Cash receipts journal: for all cash receipt transactions Cash payments journal: for all cash payment transactions 202. Aug. 8
Paid $1,210 to Windsurf, Inc. on account (Invoice No. 333). Amount posted from
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Chapter 05 - Accounting Systems Page 38 of the cash payments journal. 15
Purchased $735 on account from Windsurf, Inc. itemized on Invoice No. 567. Amount posted from Page 11 of the purchases journal.
203. (1) General ledger account: (e), (f), (g), (h) (2) Subsidiary ledger account: (a), (b), (c), (d) (3) No posting required: (i) 204.
Date Apr. 1 9 15 20 27 30
CASH PAYMENTS JOURNAL Page 11 Other Accounts Check Account Post. Accounts Payable Cash No. Debited Ref. Dr. Dr. Cr. 60 Rent Expense G 2,400 2,400 61 Equipment G 9,750 9,750 62 Clauson Co. √ 850 850 63 Ewing Co. √ 425 425 64 Patton Co. √ 4,000 4,000 12,150 5,275 17,425 (√) (G) (G) PURCHASES JOURNAL
Account Date Credited Apr. 5 Clauson Co. 10 Ewing Co. 17 Patton Co. 25 Sloan Co. 30 Winthrop Co. 30
Office Supplies Dr. 850
Post. Ref. √ √ √ √ √
Page 22
Accounts Store Payable Supplies Cr. Dr. 850 425 425 7,500 7,500 7,750 400 16,925 7,925 (G) (G)
Other Accounts Dr.
Post. Ref.
Amount
Equipment
G
7,750
400 1,250 (G)
7,750 (√ )
205. REVENUE JOURNAL Post. Powered by Cognero
Page 10 Accts. Rec. Dr. Page 43
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Chapter 05 - Accounting Systems Date Invoice No. Account Debited Mar. 5 92 Quinton Co. 10 93 Martin Inc. 31
Ref. √ √
Fees Earned Cr. 3,250 4,500 7,750 (G)(G)
CASH RECEIPTS JOURNAL Page 23 Other Accounts Account Post. Accounts Receivable Cash Date Credited Ref. Cr. Cr. Dr. Mar. 13 Rent Revenue G 5,000 5,000 15 Quinton Co. √ 3,250 3,250 19 Martin Inc. √ 4,500 4,500 20 Thomas Co. √ 5,200 5,200 31 Services Revenue G 15,750 15,750 31 20,750 12,950 33,700 (√) (G) (G) 206. Cash Payments Journal
Date Aug. 2 10 15 27 31
Ck. No. 6420 6421 6422 6423 6424
Account Debited Pondmaster, Inc. Office Supplies Aqua Magic Spindrifter, Inc. Pond Supplies Expense
Post. Ref.
Page 17 Other Accounts Accounts Payable Cash Dr. Dr. Cr. 2,610.00 2,610.00 785.00 785.00 215.00 215.00 588.00 588.00 65.00 65.00
207. General Journal Post. Description Ref.
Date June 3 Cash A/R—Kohl Townson 10 A/R—Chandra Jahi Sales
15 Cash A/R—Fred Yao Ming
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12/√
Debit Credit 325.00 325.00
12/√
475.00 475.00 395.00
12/√
16 A/R—Fred Yao Ming Sales
12/√
23 A/R—Kohl Townson Sales
12/√
395.00 685.00 685.00 155.00 155.00
GENERAL LEDGER Powered by Cognero
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Chapter 05 - Accounting Systems Account Accounts Receivable Date Item June 1 Beg. balance 3 10 15 16 23
Post. Ref.
Debit
√ J41 J41 J41 J41 J41
475.00 685.00 155.00
Account No. 12 Balance Credit Debit Credit 3,075.00 325.00 2,750.00 3,225.00 395.00 2,830.00 3,515.00 3,670.00
ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER Fred Yao Ming Date Item June 1 Beg. balance 15 16
Post. Ref.
Debit
Credit
√ J41 J41
395.00 685.00
Balance 1,150.00 755.00 1,440.00
Kohl Townson Date Item June 1 Beg. balance 3 23
Post. Ref.
Debit
Credit
√ J41 J41
325.00 155.00
Balance 850.00 525.00 680.00
Chandra Jahi Date Item June 1 Beg. balance 10
Post. Ref.
Debit
Credit
√ J41
475.00
Balance 1,075.00 1,550.00
208. (1) General ledger account: (g), (h) (2) Subsidiary ledger account: (a), (b), (c), (d), (e), (f) (3) No posting required: none 209. Cash Receipts Journal Beverage Food Post. Other Revenue Revenue Cash Date Account Credited Ref. Cr. Cr. Cr. Dr. Mar. 1 Cash sales √ 375 375 1 Cash sales √ 250 250 1 Retail Revenue 43 130 130 7 Cash sales √ 480 480 7 Cash sales √ 325 325 Powered by Cognero
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Chapter 05 - Accounting Systems 7 Retail Revenue 10 A/R—Central.com
43 12/√
115 900 1,145 (10)
855 (41)
575 (42)
115 900 2,575 √
Yes. Retail Revenue Cr. and possibly Accounts Receivable Cr. 210. Special journals and accounts receivable control accounts are generally not used in computerized systems. Instead, electronic forms like electronic invoice forms are used to record original transactions. Since the computer automatically posts transactions from electronic forms to the general ledger and individual accounts at the time the transactions are recorded, month-end postings are not necessary in a computerized system. 211. Potential errors: 1. Failing to record transactions. 2. Recording a transaction more than once. 3. Recording a transaction in incorrect accounts. 4. Entering an incorrect number in both the debit and credit parts of the transaction. With a computerized system, you cannot process a transaction unless debits equal credits. Additionally, you cannot post to the wrong account, as posting occurs automatically. 212. 1. Computerized systems simplify the recording process by recording transactions in electronic journals or forms and, at the same time, posting them electronically to the general and subsidiary ledger accounts. 2. Computerized systems are generally more accurate than manual systems. 3. Computerized systems provide management with current account balance information at any time to support decision making, because account balances are updated as transactions are entered. 213. In B2C (business-to-consumer) e-commerce, businesses sell directly to consumers via the Internet. In B2B (businessto-business) e-commerce, transactions are conducted between two businesses via the Internet 214. E-commerce is the term for using the Internet to perform business transactions. B2C e-commerce involves transactions between businesses and consumers. B2B e-commerce involves transactions between two businesses. Currently, e-commerce represents more than $513 billion in retail sales, or more than 9% of all retail sales. B2C allows consumers to shop and receive goods at home, rather than going to a store. The Internet creates opportunities for improving the speed and efficiency of transactions. Many web applications generate accounting transactions as they occur. For example, shopping cart transactions on e-commerce sites generate the accounting revenue transactions for the seller. 215. 1. Supply chain management (SCM): Internet applications to plan supply needs and coordinate them with suppliers. 2. Customer relationship management (CRM): Internet applications to plan and coordinate marketing and sales efforts. 3. Product life-cycle management (PLM): Internet applications to plan and coordinate the product development and design processes. 216. Increase (Decrease) Segment United States Canada Powered by Cognero
Current Year (in millions) $ 825.00 325.50
Prior Year (in millions) $ 600.00 345.50
Amount
Percent
$225.00 (20.0)
37.5% (5.8) Page 46
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Chapter 05 - Accounting Systems Other countries Total revenues
215.50 $1,366.00
168.50 $1,114.00
47.00 $252.00
27.9 22.6
217. Segment China. Canada Other countries Total revenues
Current Year Amount Percent (in millions) $ 775.00 58.9% 325.50 24.7 215.50 16.4 $1,316.00 100.0%
Prior Year Amount Percent (in millions) $ 650.00 61.1% 245.50 23.1 168.50 15.8 $1,064.00 100.0%
218. Major Product Segments Petroleum-based products Industrial chemicals Refined chemical products Food additives Emulsifiers Pesticides Salts Wetting agents Total revenues *Difference in percentages due to rounding.
Current Year (in millions) $10,450 9,460 8,575 7,325 6,900 5,870 4,545 3,215 $56,340
Percent 18.5% 16.8 15.2 13.0 12.2 10.4 8.1 5.7 100.0%*
219. Horizontal Analysis:
Segment College textbooks High school textbooks Elementary school textbooks Total revenues
Increase (Decrease) Current Year Prior Year Amount Percent $ 78,000 $ 55,000 $ 23,000 41.8% 129,000 115,000 14,000 12.2 105,000 121,000 (16,000) (13.2) $312,000 $291,000 $ 21,000 7.2
Vertical Analysis: Segment College textbooks High school textbooks Elementary school textbooks Total revenues
Current Year Prior Year Amount Percent Amount Percent $ 78,000 25.0% $ 55,000 18.9% 129,000 41.3 115,000 39.5 105,000 33.7 121,000 41.6 $312,000 100.0% $291,000 100.0%
220. A business segment is a subset of a business. Businesses may be segmented by region, product or service, or type of customer. Segment analysis uses horizontal and vertical comparisons to analyze the segments’ contributions to the overall performance of the company. Powered by Cognero
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Chapter 05 - Accounting Systems 221.
Segment United States Canada England China Brazil Total revenues
Increase (Decrease) Current Year Prior Year (in millions) (in millions) Amount Percent $ 9,132 $ 8,528 $ 604 7.08% 8,248 6,391 1,857 29.06 4,734 4,141 593 14.32 11,700 13,299 (1,599) (12.02) 5,645 6,391 (746) (11.67) $39,459 $38,750 $ 709 1.83
222.
Segment Cakes Cupcakes Desserts Beverages Total revenues
Current Year Prior Year Amount Amount (in thousands) Percent (in thousands) Percent $ 691,000 27.70% $ 662,000 26.53% 512,000 20.52 550,000 22.04 417,000 16.71 468,000 18.76 875,000 35.07 815,000 32.67 $2,495,000 100.00% $2,495,000 100.00%
223. Increase (Decrease) Segment East West Central Total revenues
Current Year Prior Year (in thousands) (in thousands) $ 776,000 $ 664,000 824,000 596,000 495,000 325,000 $2,095,000 $1,585,000
Amount $112,000 228,000 170,000 $510,000
Percent 16.87% 38.26 52.31 32.18
224.
Segment Theme Parks Movie Production Merchandise Total revenues
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Current Year Prior Year Amount Amount (in thousands) Percent (in thousands) Percent $ 776,000 37.04% $ 664,000 41.89% 824,000 39.33 596,000 37.60 495,000 23.63 325,000 20.51 $2,095,000 100.00% $1,585,000 100.00% (rounded)
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Chapter 06 - Accounting for Merchandising Businesses True / False 1. The most important differences between a service business and a retail business are reflected in their operating cycles and financial statements. a. True b. False 2. In a merchandise business, sales minus operating expenses equals net income. a. True b. False 3. Cost of merchandise sold is the amount that a merchandising company pays for the merchandise it intends to sell. a. True b. False 4. Service businesses provide services for income, while merchandising businesses sell merchandise. a. True b. False 5. In retail businesses, inventory is reported as a current asset. a. True b. False 6. Under a perpetual inventory system, the cost of merchandise on hand at the end of the year can only be determined by reviewing the ledger. a. True b. False 7. In a perpetual inventory system, the merchandise inventory account is only used to reflect the beginning inventory. a. True b. False 8. Freight is the amount paid by the seller to deliver merchandise sold to a customer under FOB shipping point terms. a. True b. False 9. Freight is considered a part of the buyer’s total cost of purchasing inventory under FOB shipping point terms. a. True b. False 10. The cost of merchandise inventory is limited to the purchase price less any purchase discounts. a. True b. False 11. Under the perpetual inventory system, when a sale is made, both the sale and cost of merchandise sold are recorded. a. True Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses b. False 12. If payment is due by the end of the month in which the sale is made, the invoice terms are expressed as n/30. a. True b. False 13. In a perpetual inventory system, when merchandise is returned to the supplier, Cost of Merchandise Sold is debited as part of the transaction. a. True b. False 14. Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally treated as credit sales. a. True b. False 15. Large businesses that make sales to customers who use credit cards, such as American Express, generally treat these sales as cash sales. a. True b. False 16. Most retailers record all credit card sales as credit sales. a. True b. False 17. The fees associated with credit card sales are periodically recorded as expenses. a. True b. False 18. A seller may grant a buyer a reduction in selling price, and this is called a customer discount. a. True b. False 19. A sales discount encourages customers to pay their invoice early. a. True b. False 20. Merchandise Inventory normally has a debit balance. a. True b. False 21. A buyer who acquires merchandise under credit terms of 1/10, n/30 has 30 days after the invoice date to take advantage of the sales discount. a. True b. False 22. In a perpetual inventory system, merchandise returned to vendors reduces the merchandise inventory account. Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses a. True b. False 23. Under the perpetual inventory system, a company purchases merchandise on terms 2/10, n/30. The journal entry for this purchase will include a debit to Cash and a credit to Sales. a. True b. False 24. Purchases of merchandise are typically credited to the merchandise inventory account under the perpetual inventory system. a. True b. False 25. When the seller offers a sales discount, even if borrowing has to be done, it is generally advantageous for the buyer to pay within the discount period. a. True b. False 26. Buyers and sellers do not normally record the list prices of merchandise and the trade discounts in accounts. a. True b. False 27. When a large quantity of merchandise is purchased, a reduction allowed on the sale price is called a trade discount. a. True b. False 28. A deduction allowed to wholesalers and retailers from the price of merchandise listed in catalogs is called a cash discount. a. True b. False 29. Sellers and buyers are required to record trade discounts. a. True b. False 30. If the ownership of merchandise passes to the buyer when the seller delivers the merchandise to the carrier, the terms are considered FOB destination. a. True b. False 31. A sale of $750 on account subject to a sales tax of 6% would be recorded as an account receivable of $750. a. True b. False 32. When merchandise is sold for $600 plus a 6% sales tax, the sales account should be credited for $636. a. True Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses b. False 33. The abbreviation FOB stands for "free on board." a. True b. False 34. Merchandise is sold for $3,600, terms 2/10, n/30, with prepaid freight costs of $150. The amount of the sale recorded is $3,528. a. True b. False 35. If the buyer bears the freight costs related to a purchase, the terms are said to be FOB destination. a. True b. False 36. When the terms of sale are FOB shipping point, the buyer should pay the freight charges. a. True b. False 37. If merchandise costing $3,500, terms FOB destination, 2/10, n/30, with prepaid freight costs of $125, is paid within 10 days, the amount of the purchases discount is $70. a. True b. False 38. The chart of accounts for a merchandising business would include an account called Delivery Expense. a. True b. False 39. There is no difference between the recording of cash sales and the recording of MasterCard or VISA sales. a. True b. False 40. When companies use a perpetual inventory system, the journal entry for the purchase of inventory will include a debit to Purchases. a. True b. False 41. Most companies will not take a purchase discount, because 1% or 2% discounts are insignificant. a. True b. False 42. The seller may prepay the freight costs even though the terms are FOB shipping point. a. True b. False 43. The seller records the sales tax as part of the sales amount. Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses a. True b. False 44. Title to merchandise shipped FOB shipping point passes to the buyer upon delivery of the merchandise to the buyer's place of business. a. True b. False 45. Purchased goods in transit, shipped FOB destination, should be excluded from the ending inventory of the buyer. a. True b. False 46. Because many companies use computerized accounting systems, periodic inventory is widely used. a. True b. False 47. If the perpetual inventory system is used, an account entitled Cost of Merchandise Sold is included in the general ledger. a. True b. False 48. Purchased goods in transit should be included in the ending inventory of the buyer if the goods were shipped FOB shipping point. a. True b. False 49. A business using the perpetual inventory system, with its detailed subsidiary records, does not need to take a physical inventory. a. True b. False 50. The adjusting entry for inventory shrinkage would generally include a debit to Cost of Merchandise Sold. a. True b. False 51. On the income statement in the single-step format, the total of all expenses is deducted from the total of all revenues. a. True b. False 52. Sales is equal to the cost of merchandise sold less the gross profit. a. True b. False 53. Revenue that cannot be associated definitely with operations, such as a gain from the sale of a fixed asset, is listed as Other Revenue on the multiple-step income statement. a. True Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses b. False 54. On a multiple-step income statement, the dollar amount for income from operations is always the same as net income. a. True b. False 55. The single-step income statement is easier to prepare, but a criticism of this format is that gross profit and income from operations are not readily available. a. True b. False 56. Gross profit minus selling expenses equals net income. a. True b. False 57. On the merchandising income statement, sales will be reduced by administrative expenses to arrive at income from operations. a. True b. False 58. As we compare a merchandise business to a service business, the financial statement that changes the most is the balance sheet. a. True b. False 59. Cost of merchandise sold is often the largest expense on a merchandising company’s income statement. a. True b. False 60. The statement of owner’s equity for a merchandising business is prepared in the same manner as for a service business. a. True b. False 61. Other revenue and expense items are not related to the primary operations of the business. a. True b. False 62. Closing entries for a merchandising business are not similar to those for a service business. a. True b. False 63. The asset turnover measures how effectively a business is using its assets to generate sales. a. True b. False Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses 64. For Sullivan Company, the asset turnover increased from 1.25 to 1.50. This is an unfavorable change. a. True b. False 65. Under the gross method of recording sales discounts, the journal entry for a sale of merchandise on account for $3,500, terms 2/10, n/30, would include a credit to Sales Discounts for $70. a. True b. False 66. The gross method of recording sales discounts requires an adjusting entry and a contra asset account. a. True b. False 67. Under the gross method of recording sales discounts, the adjusting entry at the end of the accounting period reduces Sales for the estimated sales discounts related to the current period’s sales that are expected to be taken in the next period. a. True b. False 68. On the balance sheet, Allowance for Sales Discounts will appear as a contra asset account to Sales. a. True b. False 69. When merchandise that was sold is returned, a credit to Customer Refunds Payable is made. a. True b. False 70. Customer Refunds Payable is an account used to record the estimated liability for amounts due to customers for cash refunds and allowances. a. True b. False 71. Estimated Returns Inventory is an account used when adjusting for expected merchandise sales in the next period. a. True b. False 72. Under the periodic inventory system, the cost of merchandise sold is equal to the beginning merchandise inventory plus the cost of merchandise purchased plus the ending merchandise inventory. a. True b. False 73. In a periodic inventory system, the cost of merchandise purchased includes the cost of freight in. a. True b. False 74. In the periodic inventory system, purchases of merchandise for resale are debited to the purchases account. a. True Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses b. False 75. Under the periodic inventory system, the cost of merchandise sold is recorded when sales are made. a. True b. False 76. Under the periodic inventory system, the accounts Purchases, Purchases Returns and Allowances, Purchases Discounts, and Freight In are found on the balance sheet. a. True b. False Multiple Choice 77. Merchandise Inventory is classified on the balance sheet as a a. current liability b. current asset c. long-term asset d. long-term liability 78. Which of the following is not a difference between a retail business and a service business? a. what is sold by the business b. the inclusion of gross profit on the income statement c. elements of the accounting equation d. the inclusion of merchandise inventory on the balance sheet 79. In a merchandising business, operating income plus operating expenses is equal to a. cost of merchandise sold b. cost of merchandise available for sale c. sales d. gross profit 80. Which term is applied to the excess of revenue from sales over the cost of merchandise sold? a. gross profit b. income from operations c. net income d. gross sales 81. The inventory system employing accounting records that continuously disclose the amount of inventory is called a. retail b. periodic c. physical d. perpetual 82. Dollar Co. sold merchandise to Pound Co. on account, $25,500, terms 2/15, net 45. Pound Co. paid the invoice within the discount period. What is the amount of sales from these transactions? Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses a. $25,500 b. $26,010 c. $24,990 d. $16,000 83. The primary difference between a periodic and perpetual inventory system is that a periodic system a. determines the inventory on hand only at the end of the accounting period b. keeps a record showing the inventory on hand at all times c. provides an easy means to determine inventory shrinkage d. records the cost of the sale on the date the sale is made 84. Using a perpetual inventory system, the journal entry for the sale of merchandise on account includes a a. debit to Sales b. debit to Merchandise Inventory c. credit to Merchandise Inventory d. credit to Accounts Receivable 85. Which of the following accounts has a normal debit balance? a. Accounts Payable b. Merchandise Inventory c. Sales d. Interest Revenue 86. Merchandise is ordered on November 10; the merchandise is shipped by the seller and the invoice is prepared, dated, and mailed by the seller on November 13; the merchandise is received by the buyer on November 18; and the entry is made in the buyer's accounts on November 20. The credit period begins with what date? a. November 10 b. November 13 c. November 18 d. November 20 87. If merchandise sold on account is damaged in shipment, the seller may inform the customer of a reduction to the customer’s account by issuing a a. sales invoice b. purchase invoice c. credit memo d. debit memo 88. The arrangements between buyer and seller as to when payments for merchandise are to be made are called a. credit terms b. net cash c. cash on demand d. gross cash 89. In credit terms of 3/15, n/45, the "3" represents the Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses a. number of days in the discount period b. full amount of the invoice c. number of days when the entire amount is due d. percent of the available discount for early payment 90. Merchandise with a sales price of $5,000 is sold on account with terms 2/10, n/30. The journal entry for the sale would include a a. debit to Cash for $5,000 b. debit to Sales Discounts for $100 c. credit to Sales for $4,900 d. debit to Accounts Receivable for $4,880 91. Merchandise subject to terms 2/10, n/30, FOB shipping point, is sold on account to a customer for $25,000. What is the amount of the sales discount allowable? a. $260 b. $500 c. $460 d. $150 92. Which of the following accounts has a normal credit balance? a. Accounts Receivable b. Sales c. Merchandise Inventory d. Delivery Expense 93. Sales to customers who use bank credit cards such as MasterCard and VISA are usually journalized by a a. debit to Bank Credit Card Sales, a debit to Credit Card Expense, and a credit to Sales b. debit to Cash and a credit to Sales c. debit to Cash, a credit to Credit Card Expense, and a credit to Sales d. debit to Sales, a debit to Credit Card Expense, and a credit to Cash 94. Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally treated as a. sales on account b. sales returns c. cash sales d. sales when the credit card company remits the cash 95. When a buyer returns merchandise purchased for cash, the buyer will journalize the transaction as a a. debit to Merchandise Inventory and a credit to Cash b. debit to Cash and a credit to Merchandise Inventory c. debit to Cash and a credit to Sales d. debit to Sales and a credit to Accounts Payable 96. When merchandise purchased on account is returned under the perpetual inventory system, the buyer would debit Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses a. Merchandise Inventory b. Purchases Returns and Allowances c. Accounts Payable d. Accounts Receivable 97. When purchases of merchandise are made on account with a perpetual inventory system, the transaction is journalized with which entry? a. debit Accounts Payable; credit Merchandise Inventory b. debit Merchandise Inventory; credit Accounts Payable c. debit Merchandise Inventory; credit Cash Discounts d. debit Merchandise Inventory; credit Purchases 98. Using a perpetual inventory system, the entry to journalize the purchase of $30,000 of merchandise on account would include a a. debit to Accounts Payable b. debit to Merchandise Inventory c. credit to Merchandise Inventory d. credit to Sales 99. For a buyer using a perpetual inventory system, the entry to record the return of merchandise purchased on account includes a a. debit to Cost of Merchandise Sold b. credit to Accounts Payable c. credit to Merchandise Inventory d. credit to Sales 100. In recording the cost of merchandise sold based on data available from perpetual inventory records, the journal entry is a a. debit to Cost of Merchandise Sold and a credit to Sales b. debit to Cost of Merchandise Sold and a credit to Merchandise Inventory c. debit to Merchandise Inventory and a credit to Cost of Merchandise Sold d. debit to Accounts Receivable and a credit to Merchandise Inventory 101. Norfolk Sporting Goods purchases merchandise with a catalog list price of $30,000. The retailer receives a 30% trade discount and credit terms of 2/10, n/30. What amount should Norfolk debit to the merchandise inventory account? a. $21,000 b. $20,580 c. $30,000 d. $29,400 102. A sales invoice included the following information: merchandise price, $12,000; terms 1/10, n/eom, FOB shipping point with prepaid freight of $900 added to the invoice. Assuming that a credit for merchandise returned of $500 (before discount) is granted prior to payment and the invoice is paid within the discount period, what amount of cash should be received by the seller? a. $12,285 Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses b. $11,500 c. $10,480 d. $11,385 103. Merchandise is sold for cash. The selling price of the merchandise is $6,000, and the sale is subject to a 7% state sales tax. The journal entry for the sale would include a credit to a. Cash for $6,000 b. Sales for $6,240 c. Sales Tax Payable for $420 d. Sales for $5,580 104. If the buyer is to pay the freight costs of delivering merchandise, delivery terms are stated as a. FOB shipping point b. FOB destination c. FOB n/30 d. FOB buyer 105. If the seller is to pay the freight costs of delivering merchandise, the delivery terms are stated as a. FOB shipping point b. FOB destination c. FOB n/30 d. FOB seller 106. If title to merchandise purchases passes to the buyer when the goods are shipped from the seller, the terms are a. n/30 b. FOB shipping point c. FOB destination d. consigned 107. When goods are shipped FOB destination and the seller pays the freight charges, the buyer a. journalizes a reduction for the cost of the merchandise b. journalizes a reimbursement to the seller c. does not take a discount d. makes no journal entry for the freight 108. Pierce Company sold merchandise to Stanton Company on account FOB shipping point, 2/10, net 30, for $20,000. Pierce prepaid the $500 shipping charge. Which of the following entries does Pierce make for this sale? a. Accounts Receivable—Stanton, debit $20,000; Sales, credit $20,000 b. Accounts Receivable—Stanton, debit $19,600; Sales, credit $19,600, and Accounts Receivable—Stanton, debit $500; Cash, credit $500 c. Accounts Receivable—Stanton, debit $20,100; Sales, credit $20,100 d. Accounts Receivable—Stanton, debit $20,000; Sales, credit $20,000, and Delivery Expense, debit $500; Cash, credit $500 109. Emma Co. sold to Isabella Co. merchandise on account FOB shipping point, 2/10, net 30, for $15,000. Emma Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses Co. prepaid the $750 shipping charge. Using the perpetual inventory method, which of the following entries will Isabella Co. make for the payment for the merchandise if Isabella Co. pays within the discount period? a. Accounts Payable—Emma Co., debit $15,000; Cash, credit $15,000 b. Accounts Payable—Emma Co., debit $15,450; Cash, credit $15,450 c. Accounts Payable—Emma Co., debit $15,000; Freight In, debit $750; Cash, credit $15,750 d. Accounts Payable—Emma Co., debit $15,750; Merchandise Inventory, debit $300; Cash, credit $16,050 110. A chart of accounts for a merchandising business a. usually is the same as the chart of accounts for a service business b. usually requires more accounts than does the chart of accounts for a service business c. usually is standardized by the FASB for all merchandising businesses d. always uses a three-digit numbering system 111. Cumberland Co. sells $2,000 of merchandise to Hancock Co. for cash. Cumberland paid $1,250 for the merchandise. Under a perpetual inventory system, which of the following is the correct journal entry(ies)? a. debit Cash, $2,000; credit Merchandise Inventory, $2,000 b. debit Cash, $2,000; credit Sales, $2,000; and debit Cost of Merchandise Sold, $1,250; credit Merchandise Inventory, $1,250 c. debit Cash, $1,250; credit Sales, $1,250 d. debit Accounts Receivable, $2,000; credit Sales, $2,000; and debit Cost of Merchandise Sold, $1,250; credit Merchandise Inventory, $1,250 112. Jacob Co. sells merchandise on account to Isaiah Co. for $9,700. The invoice is dated on May 1 with terms of 1/15, net 45. What is the discount, and up to what date must the invoice be paid in order for the buyer to take advantage of the discount? a. $194, May 15 b. $194, May 16 c. $97, May 15 d. $97, May 16 113. Kaden Co. sells merchandise on account to Jase Co. for $9,600. The invoice is dated July 15 with terms of 1/15, net 45. If Jase Co. chooses not to take the discount, by when should the payment be made? a. July 30 b. August 29 c. August 15 d. July 25 114. To encourage a buyer to pay before the end of the credit period, the seller may offer a (answer from perspective of seller) a. purchases discount b. sales discount c. trade discount d. volume discount 115. Taking advantage of a 2/10, n/30 purchases discount is equal to a yearly savings rate of approximately Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses a. 2% b. 24% c. 20% d. 36% 116. Who is responsible for the freight costs when the terms are FOB shipping point? a. the ultimate customer b. the buyer c. the seller d. either the seller or the buyer 117. Who is responsible for the freight cost when the terms are FOB destination? a. the seller b. the buyer c. the customer d. either the buyer or the seller 118. A retailer purchases merchandise with a catalog list price of $30,000. The retailer receives a 15% trade discount and has credit terms of 2/10, n/30. How much cash will be needed to pay this invoice within the discount period? a. $30,000 b. $24,900 c. $29,400 d. $24,990 119. What type of company would normally offer trade discounts to its customers? a. service company b. retailer c. wholesaler d. online retailer 120. Which of the following accounts will only be found in the chart of accounts of a merchandising company? a. Sales b. Accounts Receivable c. Merchandise Inventory d. Accounts Payable 121. Which of the following items would not affect the cost of merchandise inventory acquired during the period? a. quantity discounts b. purchases discounts c. freight in d. sales commissions 122. If title to merchandise purchases passes to the buyer when the goods are delivered to the buyer, the terms are a. consigned Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses b. n/30 c. FOB shipping point d. FOB destination 123. If merchandise sells for $3,500, with terms of 3/15, n/45, and the cost of the inventory sold is $2,100, the amount charged to sales is a. $3,395 b. $3,500 c. $2,037 d. $2,100 124. Under the perpetual inventory system, all purchases of merchandise are debited to the account a. Merchandise Inventory b. Cost of Merchandise Sold c. Cost of Merchandise Available for Sale d. Purchases 125. When the perpetual inventory system is used, the inventory sold is debited to a. Supplies Expense b. Cost of Merchandise Sold c. Merchandise Inventory d. Sales 126. Under a perpetual inventory system, a. accounting records continuously disclose the amount of inventory b. increases in inventory resulting from purchases are debited to Purchases c. a physical count is required to determine cost of merchandise on hand d. the purchases returns and allowances account is credited when goods are returned to vendors 127. The journal entry for the receipt of inventory purchased for cash in a perpetual inventory system would be a. Jan. 1 Merchandise Inventory 1,500 Cash 1,500 b. Jan. 1 Office Supplies 1,500 Cash 1,500 c. Jan. 1 Purchases 1,500 Accounts Payable 1,500 d. Jan. 1 Cash 1,500 Accounts Receivable 1,500 128. Which of the following items should not be included in the cost of ending merchandise inventory? a. purchased units in transit, shipped FOB shipping point b. purchased units in transit, shipped FOB destination c. units on hand in the warehouse d. sold units in transit, not invoiced, and shipped FOB destination Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses 129. Corbit Corp. sold merchandise for $10,000 cash. The cost of merchandise sold was $7,590. The journal entries for this transaction under the perpetual inventory system would be a. Cash 10,000 Merchandise Inventory 10,000 Cost of Merchandise Sold Sales b. Cash Sales Cost of Merchandise Sold Merchandise Inventory c. Cash Sales
7,590 7,590 10,000 10,000 7,590 7,590 10,000 10,000
Cost of Merchandise Sold Merchandise Inventory d. Cash Sales
10,000
Cost of Merchandise Sold Merchandise Inventory
7,590
10,000 7,590 7,590 7,590
130. Merchandise is purchased for $6,000 on September 2 subject to terms of 2/10, n/30, FOB destination. What is the cost of the merchandise if paid on September 12, assuming the discount is taken? a. $6,120 b. $5,940 c. $6,090 d. $5,880 131. Abbey Co. sold merchandise to Gomez Co. on account, $35,000, terms 2/15, net 45. The cost of the merchandise sold was $24,500. Abbey Co. issued a credit memo for $3,600 for defective merchandise, which was not returned to Abbey. Gomez Co. paid the invoice within the discount period. What is the gross profit earned by Abbey Co. on these transactions? a. $10,500 b. $30,772 c. $6,272 d. $31,400 132. If the physical count of inventory revealed $158,000 of merchandise on hand and the inventory records reported $163,000, what would be the necessary adjusting entry for inventory shrinkage? a. debit Merchandise Inventory, $158,000; credit Cost of Merchandise Sold, $158,000 b. debit Merchandise Inventory, $5,000; credit Cost of Merchandise Sold, $5,000 c. debit Cost of Merchandise Sold, $163,000; credit Merchandise Inventory, $163,000 d. debit Cost of Merchandise Sold, $5,000; credit Merchandise Inventory, $5,000 133. Inventory shrinkage is journalized when a. merchandise is returned by a buyer Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses b. merchandise purchased from a seller is incomplete or short c. merchandise is returned to a seller d. there is a difference between the physical count of inventory and the perpetual inventory records 134. Determine income from operations for Jonas Company based on the following data: Sales Operating expenses Cost of merchandise sold a. $485,500 b. $711,500 c. $173,500 d. $226,000
$764,000 52,500 538,000
135. Gross profit is equal to a. sales plus cost of merchandise sold b. sales plus selling expenses c. sales less selling expenses d. sales less cost of merchandise sold 136. When comparing a merchandising business to a service business, the financial statement that changes the most is the a. balance sheet b. income statement c. statement of owner's equity d. statement of cash flows 137. Determine the gross profit for Jefferson Company based on the following data: Sales Selling expenses Cost of merchandise sold a. $495,500 b. $183,500 c. $721,500 d. $226,000
$764,000 42,500 538,000
138. When comparing a retail business to a service business, the financial statement that changes the least is the a. balance sheet b. income statement c. statement of owner's equity d. statement of cash flows 139. Generally, the revenue account for a merchandising business is entitled a. Sales b. Fees Earned Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses c. Gross Sales d. Gross Profit 140. Which account is not classified as a selling expense? a. Sales Salaries b. Delivery Expense c. Cost of Merchandise Sold d. Advertising Expense 141. President's salaries, depreciation of office furniture, and office supplies are a. selling expenses b. miscellaneous expenses c. administrative expenses d. inventory expenses 142. Expenses that are incurred directly or entirely in connection with the sale of merchandise are classified as a. selling expenses b. general expenses c. other expenses d. administrative expenses 143. When the perpetual inventory system is used, the inventory sold is shown on the income statement as a. cost of merchandise sold b. purchases c. purchases returns and allowances d. net purchases 144. The statement of owner's equity shows a. only net income and beginning and ending capital b. only total assets and beginning and ending capital c. only net income, beginning capital, and withdrawals d. beginning and ending capital, all the changes in the owner's capital as a result of net income (loss), and withdrawals 145. Multiple-step income statements show a. gross profit but not income from operations b. neither gross profit nor income from operations c. both gross profit and income from operations d. income from operations but not gross profit 146. The form of income statement that derives its name from the fact that the total of all expenses is deducted from the total of all revenues is called a a. multiple-step income statement b. revenue statement Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses c. report-form income statement d. single-step income statement 147. Which of the following accounts should be closed at the end of the fiscal year? a. Merchandise Inventory b. Accumulated Depreciation c. Owner’s Capital d. Cost of Merchandise Sold 148. Which account will be included in the closing entries of both service and merchandising businesses? a. Advertising Expense b. Cost of Merchandise Sold c. Customer Refunds Payable d. Merchandise Inventory 149. Where are selling and administrative expenses found on the multiple-step income statement? a. before gross profit b. after sales and before gross profit c. after net income and before expenses d. after gross profit 150. Bradford Company had sales of $700,000 for the year. The total assets at the beginning of the year were $240,000, and the total assets at the end of the year were $280,000. The asset turnover is (round answer to two decimal places) a. 2.69 b. 0.40 c. 2.92 d. 0.34 151. Bountiful Company had sales of $650,000 and cost of merchandise sold of $200,000 during the year. The total assets balance at the beginning of the year was $175,000 and at the end of the year was $167,000. Compute the asset turnover. a. 3.00 b. 3.80 c. 0.29 d. 0.26 152. If merchandise sells for $3,500 on account, with terms of 3/15, n/45, and the cost of the inventory sold is $2,100, the amount charged to sales under the gross method is a. $3,395 b. $3,500 c. $2,037 d. $2,100 153. If merchandise sells for $3,500 on account, with terms of 3/15, n/45, and the cost of the inventory sold is $2,100, the journal entry for the receipt of the customer’s payment on account within the discount period under the gross method would include Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses a. a credit to Cash for $3,395 b. a credit to Accounts Receivable for $3,395 c. a debit to Sales of $105 d. a credit to Sales Discounts for $105 154. Using a perpetual inventory system, the journal entry for the return from a customer of merchandise sold on account includes a a. credit to Customer Refunds Payable b. debit to Merchandise Inventory c. credit to Merchandise Inventory d. debit to Cash 155. The journal entry for the return of merchandise from a customer would include a a. debit to Sales b. credit to Sales c. debit to Customer Refunds Payable d. debit to Estimated Returns Inventory 156. What is the major difference between a periodic and a perpetual inventory system? a. Under the periodic inventory system, the purchase of inventory will be debited to the purchases account. b. Under the periodic inventory system, no journal entry is made at the time of the sale of inventory for the cost of the inventory. c. Under the periodic inventory system, all adjustments such as purchases returns and allowances and discounts are reconciled at the end of the month. d. All of these choices are correct. 157. Under the periodic inventory system, the journal entry for the purchase of merchandise inventory will include a debit to a. Merchandise Inventory b. Purchases c. Accounts Payable d. Cost of Merchandise Purchased 158. Using the following information, what is the amount of net income? Purchases Merchandise inventory, September 1 Administrative expenses Rent revenue a. $29,800 b. $29,960 c. $28,760 d. $31,670 Powered by Cognero
$32,000 5,700 910 1,200
Selling expenses Merchandise inventory, September 30 Sales Interest expense
$ 960 6,370 63,000 1,040
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Chapter 06 - Accounting for Merchandising Businesses 159. Using the following information, what is the amount of gross profit? Purchases Merchandise inventory, September 1 Administrative expenses Rent revenue a. $25,300 b. $31,670 c. $30,600 d. $62,840
$32,000 5,700 910 1,200
Selling expenses Merchandise inventory, September 30 Sales Interest expense
$
960 6,370
63,000 1,040
160. Using the following information, what is the amount of income from operations? Purchases Merchandise inventory, September 1 Administrative expenses Rent revenue a. $32,870 b. $31,910 c. $30,710 d. $29,800
$32,000 5,700 910 1,200
Selling expenses Merchandise inventory, September 30 Sales Interest expense
$
960 6,370
63,000 1,040
161. A company using the periodic inventory system has the following account balances: Merchandise Inventory at the beginning of the year, $3,600; Freight In, $650; Purchases, $10,700; Purchases Returns and Allowances, $1,950; Purchases Discounts, $330. The cost of merchandise purchased is equal to a. $12,670 b. $9,070 c. $8,420 d. $17,230 162. Which of the following accounts will not be found in the Cost of Merchandise Sold section of the income statement for a company using the periodic inventory method? a. Purchases b. Freight In c. Selling Expense d. Merchandise Inventory 163. A company using the periodic inventory system has merchandise inventory costing $210 on hand at the beginning of a period. During the period, merchandise costing $635 is purchased. At year-end, merchandise inventory costing $160 is on hand. The cost of merchandise sold for the year is a. $795 b. $685 c. $265 d. $635 Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses 164. Under the periodic inventory system, the journal entry for the cost of merchandise sold at the point of sale will include which of the following? a. None of these choices b. Cost of Merchandise Sold c. Inventory d. Purchases 165. Under a periodic inventory system, closing entries will include a. debits to Sales, Purchases Returns and Allowances, and Purchases Discounts b. credits to Purchases and Sales Discounts c. adjustments to Merchandise Inventory to match physical inventory d. All of these choices 166. The proper journal entry for the receipt of inventory purchased on account in a periodic inventory system would be a. Jan. 1 Merchandise Inventory 1,600 Accounts Payable 1,600 b. Jan. 1 Office Supplies 1,600 Accounts Payable 1,600 c. Jan. 1 Purchases 1,600 Accounts Payable 1,600 d. Jan. 1 Purchases 1,600 Accounts Receivable 1,600 167. Using the following information, determine the cost of merchandise sold. Purchases Merchandise inventory, September 1 Administrative expenses Rent revenue a. $32,400 b. $32,670 c. $31,330 d. $38,370
$32,000 5,700 910 1,200
Selling expenses Merchandise inventory, September 30 Sales Interest expense
$
960 6,370
63,000 1,040
Matching Match each of the following accounts with its normal balance (a or b). a. Debit b. Credit 168. Sales Tax Payable 169. Merchandise Inventory 170. Delivery Expense Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses 171. Cost of Merchandise Sold 172. Customer Refunds Payable 173. Sales Match each of the following definitions with the term (a–h) it defines. a. Freight In b. Delivery Expense c. Merchandise Inventory d. Sales discount e. Purchases Returns and Allowances f. Debit memo g. Purchase discount h. Trade discount 174. Discount taken by the buyer for early payment of invoice 175. Account used to journalize merchandise on hand under a perpetual inventory system 176. Early payment discount offered to customers by the seller 177. Expense account for recording shipping costs paid by the seller 178. Discount to government agencies or customers who purchase large quantities of merchandise 179. Account where returned merchandise or price adjustments are recorded by the buyer under the periodic inventory system 180. Expense account for recording shipping costs paid by the buyer under the periodic inventory system 181. Informs the seller of the reasons for the return of merchandise or the request for a price allowance Match each of the following accounts with the business in which the account would be included in the chart of accounts (a–c). a. Merchandising business with a periodic inventory system b. Merchandising business with a perpetual inventory system c. Merchandising business with either a periodic or perpetual inventory system 182. Purchases 183. Merchandise Inventory 184. Sales 185. Purchases Discounts 186. Cost of Merchandise Sold Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses 187. Freight In 188. Delivery Expense Match each of the following definitions with the term (a–h) it defines. a. Credit terms b. FOB destination c. FOB shipping point d. Periodic inventory system e. Perpetual inventory system f. Inventory shrinkage g. Single-step income statement h. Multiple-step income statement 189. Shipping terms where the ownership of merchandise passes to the buyer when the buyer receives the merchandise 190. Losses of inventory due to theft, damage, spoilage, etc., that cause the actual inventory on hand to be less than that on record 191. Statement where net income is determined by deducting all expenses from all revenues 192. Payment arrangements determined by the seller as to when invoices are due and whether early payment discount is offered 193. Inventory system that updates the merchandise inventory account for every purchase and sales transaction 194. Inventory system that updates the merchandise inventory account only at the end of the accounting period based on a physical count of merchandise on hand 195. Statement that includes subtotals for gross profit and income from operations in determining net income 196. Shipping terms where the ownership of merchandise passes to the buyer when the seller delivers the merchandise to the freight carrier Subjective Short Answer 197. Explain the following statement: “Operating cycles for all merchandising businesses are the same, with similar profit margins.” Include an example(s) to illustrate your explanation. 198. Describe the major differences in preparing the financial statements for a service business and a merchandising business. Service Business Income Statement:
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Merchandising Business Income Statement:
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Chapter 06 - Accounting for Merchandising Businesses
Balance Sheet:
Balance Sheet:
199. Travis Company purchased merchandise on account from a supplier for $5,700, terms 2/10, net 30. Travis Company paid for the merchandise within the discount period. Under a perpetual inventory system, journalize these transactions. 200. On March 25, Osgood Company sold merchandise on account, $10,000, terms n/30. The applicable sales tax percentage is 7.5%. Journalize the transaction 201. On March 29, a customer who owes $10,500 on account to Sonic Sales Company submits a payment of $4,250. Journalize this transaction. 202. Journalize the following merchandise transactions: (a) (b)
Sold merchandise on account, $17,300, with terms 2/10, net 30. The cost of the merchandise sold was $12,600. Received payment within the discount period.
203. Determine the amount to be paid in full settlement of each purchase invoice, assuming that credit for returns and allowances was received prior to payment and that all invoices were paid within the discount period Freight Paid by Freight Terms Seller $4,500 $140 FOB shipping point, 2/10, net 30 7,650 $200 FOB destination, 1/10, net 45
Merchandise (a) (b)
Returns and Allowances $1,200 450
204. Sampson Co. sold merchandise to Batson Co. on account, $46,000, terms 2/15, net 45. The cost of the merchandise sold is $38,500. Batson Co. paid the invoice within the discount period. Journalize these transactions for both Sampson and Batson. Assume both Sampson and Batson use a perpetual inventory system. 205. Which of the following costs would be included in the merchandise inventory of the buyer? (a) Purchase price (b) Insurance in transit FOB shipping point (c) Freight for delivery FOB shipping point (d) Repair due to negligence of receiving clerk (e) Receiving department employee salary (f) Cost of processing purchase orders 206. On March 4, Micro Sales makes $4,850 in sales on bank credit cards that charge a 2.5% service charge. Funds are deposited net of credit card expenses into Micro Sales' bank account at the end of the business day. Journalize the sales and recognition of expense as a single journal entry. 207. For each of the following, determine the cost of inventory reported on the balance sheet. (a) The total merchandise on hand at the end of the year is $62,000. Of the $62,000, $8,000 has Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses (b) (c)
been sold FOB destination and is awaiting pickup by the carrier. The total merchandise inventory at the end of the year was $63,000. Excluded from the amount were purchases of $6,000 in transit under FOB shipping point terms. The total merchandise inventory at the end of the year was $75,000. Excluded from the amount were purchases of $5,000 in transit under FOB destination terms.
208. Using the perpetual inventory system, journalize the entries for the following selected transactions: (a) Sold merchandise on account, for $12,000, terms n/30. The cost of the merchandise sold was $6,500. (b) Sold merchandise to customers who used MasterCard and VISA, $9,500. The cost of the merchandise sold was $5,300. (c) Sold merchandise to customers who used American Express, $2,900. The cost of the merchandise sold was $1,700. (d) Paid an invoice from First National Bank for $385, representing a service fee for processing MasterCard and VISA sales. (e) Paid a $75 processing fee associated with sales made to customers who used American Express. 209. Merchandise with a list price of $4,200 and costing $2,300 is sold on account, subject to the following terms: FOB destination, 2/10, n/30. The seller pays the freight costs of $85 (debit Delivery Expense for the freight costs). Prior to payment for the goods, the seller issues a credit memo for $750 to the customer for merchandise that is defective and not returned. Payment is received within the discount period. The company uses a perpetual inventory system. Journalize the foregoing transactions of the seller in the following sequence: (a) Sold the merchandise, recognizing the sale and cost of merchandise sold. (b) Paid the freight charges. (c) Issued the credit memo. (d) Received payment from the customer. 210. Based on the following information, journalize the entries for the seller and the buyer. Both use a perpetual inventory system. (a) (b) (c)
Seller sold merchandise on account to the buyer, $4,750, terms 2/10, net 30, FOB shipping point. The cost of the merchandise is $2,850. The seller prepays the freight of $75. Buyer issues a $700 debit memo for defective merchandise that is not returned. Buyer pays within the discount period.
Seller Description
Buyer Dr.
Cr.
Description
Dr.
Cr.
211. Details of a purchase invoice and related credit memo are summarized as follows: Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses Invoice:
Cost of merchandise listed on purchase invoice Prepaid freight charge added to invoice Terms, FOB shipping point, 1/10, n/eom
$6,500 150
Credit memo received for defective merchandise
1,500
Assume that the credit memo was received prior to payment and that the invoice is paid within the discount period. Determine the following: (a) (b) (c)
Amount of the purchase discount allowed. Amount to be paid by the purchaser if the discount is taken. Cost of the merchandise to the purchaser if the discount is not taken.
212. Conquest Company uses a perpetual inventory system. Conquest purchased $1,500 of merchandise on account and payment was made within the discount period. The credit terms were 2/10, n/30. Journalize Conquest’s purchase and payment. 213. Merchandise with a list price of $4,700 is purchased on account, terms FOB shipping point, 1/10, n/30. The seller prepaid freight costs of $100. Prior to payment, $1,600 of the merchandise is returned. The invoice is paid within the discount period. Journalize the foregoing transactions of the buyer in the following sequence, assuming a perpetual inventory system is used. (a) Purchased the merchandise. (b) Recorded receipt of the credit memo for merchandise returned. (c) Paid the amount owed. 214. Details of invoices for purchases of merchandise are as follows:
(a) (b) (c) (d)
Merchandise $2,800 7,600 1,400 500
Freight $45 60 55 50
Terms FOB shipping point, 1/10, n/30 FOB destination, n/30 FOB shipping point, 2/10, n/30 FOB destination, 1/10, n/30
Returns and Allowances $200 800 600 0
Determine the amount to be paid in full settlement of each of the invoices, assuming that credit for returns and allowances was received prior to payment and that all invoices were paid within the discount period. 215. Journalize the following selected transactions, assuming a perpetual inventory method is used: (a) (b)
Sold $900 of merchandise on account, subject to 7% sales tax. The cost of the merchandise sold was $510. Paid $436 to the state sales tax department for taxes collected.
216. Gadget Palace is a retailer selling unique hardware. Gadget Palace uses a perpetual inventory system. Journalize the following transactions: July 5 Gadget Palace purchases inventory for sale from Turbo Tools for $11,400 with terms 2/10, n/30. 6 Gadget Palace pays Fast Truck Transport $75 for freight on the July 5 order. 8 Gadget Palace receives a credit memo from Turbo Tools for $215 for damaged merchandise. The merchandise is not returned. 15 Gadget Palace pays Turbo Tools the balance due. Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses 217. Bargain Wholesalers sells pet supplies to retailers including Pet World Supplies. Bargain Wholesalers uses a perpetual inventory system. Journalize the following transactions: May 4 7
Bargain Wholesalers sells inventory to Pet World Supplies for $8,250 with terms 1/10, n/30. The cost of the merchandise is $5,755. Bargain Wholesalers sells an additional $10,985 in inventory to Pet World Supplies with terms 1/10, n/30. The cost of the merchandise is $6,925. Bargain Wholesalers receives a check from Pet World Supplies paying the balance due on both invoices.
13
218. Marshall Supplies is a janitorial supply store that uses a perpetual inventory system. Journalize the following transactions: July Marshall purchases inventory for sale from Tidy Wholesalers for $8,500 with terms 4 1/10, n/30. 5 Marshall pays Express Transfer $45 for freight on the July 4 order. 7 Marshall buys an additional $11,985 in inventory from Tidy Wholesalers with terms 1/10, n/30. 13 Marshall pays Tidy Wholesalers the balance due on both invoices. 219. On March 3, Bluebird Sales makes $4,350 in cash sales of general merchandise that has a cost of $1,512. Bluebird uses a perpetual inventory system. (a) Journalize the sale. (b) Journalize the cost of merchandise sold. 220. On March 5, Blowout Sales makes $22,500 in sales on account. The cost of the merchandise sold is $16,825. Journalize the sales and recognition of the cost of merchandise sold. 221. Journalize the following transactions on the books of Veronica Company, assuming a perpetual inventory system: May 5 Purchased merchandise from Archie Co., $6,000, terms FOB shipping point, 2/10, n/30. Prepaid freight costs of $100 were added to the invoice. 12 Issued a debit memo to Archie Co. for $2,500 of merchandise returned from purchase on May 5. 14 Paid Archie Co. for invoice of May 5, less debit memo of May 12 and discount. 222. Journalize the following transactions on the books of Sparky’s Pet Shop assuming a perpetual inventory system is used. Date Transaction Aug. 1 Purchased $6,000 of merchandise on account, terms 2/10, n/30. 3 Returned $1,500 of merchandise purchased on August 1 due to defects. 7 Recorded cash sales for the first week of August, $9,750; cost of the merchandise was $4,000. 10 Made sale on account to a local breeder for $500, terms 1/10, net 30; cost of the merchandise was $200. 11 Paid for the merchandise purchased on August 1, less return. 20 Received payment from sale of August 10. The customer took the discount. 223. Journalize the following transactions for both Abbott Co. (seller) and Dalton Co. (buyer). Assume both companies use a perpetual inventory system. July 3
Abbott Co. sold merchandise on account to Dalton Co., $7,500, terms FOB shipping
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Chapter 06 - Accounting for Merchandising Businesses
11
point, n/eom. The cost of the merchandise sold was $4,400. Dalton Co. paid $275 to freight company for purchase from Abbott Co. Abbott Co. issued Dalton Co. a credit memo for defective merchandise, $2,250. The merchandise was not returned. Abbott Co. received payment from Dalton Co. for purchase of July 3.
Date
Abbott Co. Description Debit
5 9
Credit
Dalton Co. Description Debit
Credit
224. Using the following list of accounts, construct a chart of accounts for a merchandising business that rents out a portion of its building, and assign account numbers and arrange the accounts in balance sheet and income statement order (“1” for assets, and so on). Each account number should have three digits. Contra accounts should be designated with a decimal of the account (100.1 for contra of account 100). Assets and liabilities should be in order of liquidity; expenses should be in alphabetical order. Accounts Payable Interest Expense Salaries Payable Accounts Receivable Land Sales Accumulated Depr.—Equip Merchandise Inventory Supplies Expense Advertising Expense Notes Payable Unearned Revenue Cash Office Supplies Utilities Expense Cost of Merchandise Sold Owner, Capital Depreciation Expense—Equip. Owner, Drawing Equipment Rent Revenue Salaries Expense 225. Journalize the following transactions for Evans Company. Assume the company uses a perpetual inventory system. (a) (b) (c) (d)
Sold merchandise for $645 cash. The cost of merchandise sold was $375. Sold merchandise for $432 and accepted VISA as the form of payment. The cost of merchandise sold was $195. Sold merchandise on account for $670. The cost of merchandise sold was $438. Paid credit card fees for the month of $85.
226. Madison Company’s perpetual inventory records indicate that $875,300 of merchandise should be on hand on Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses October 31. The physical inventory indicates that $781,900 is actually on hand. Journalize the adjusting entry for the inventory shrinkage for Madison Company for the year ended October 31. 227. The perpetual inventory records of Penny Co. indicate that $415,000 of merchandise should be on hand on December 31. The physical inventory indicates that $370,000 of merchandise is actually on hand. Journalize the adjusting entry for the inventory shrinkage for the year ended December 31. 228. Complete the following data taken from the condensed income statements for merchandising Companies A, B, and C. Income from operations Sales Gross profit Operating expenses Cost of merchandise sold
Company A $315 ? 430 ? 545
Company B $ ? 865 ? 125 320
Company C $215 560 325 ? ?
229. Complete the following data taken from the condensed income statements for merchandising Companies X, Y, and Z. Income (loss) from operations Sales Gross profit Operating expenses Cost of merchandise sold
Company X $220 ? 435 ? 330
Company Y $ ? 1,315 ? 565 775
Company Z $ (70) 890 465 ? ?
230. During the current year, merchandise is sold for $137,500 cash and $425,600 on account. The cost of the merchandise sold is $322,325. What is the amount of the gross profit? 231. During the current year, merchandise is sold for $117,500 cash and $241,750 on account. The cost of the merchandise sold is $157,400. What is the amount of the gross profit? 232. During the current year, merchandise is sold for $86,000 cash and for $93,950 on account. The cost of the merchandise sold is $76,240. What is the gross profit? 233. Determine the gross profit for Jonas Company based on the following data: Sales Selling expenses Cost of merchandise sold
$764,000 52,500 538,000
234. Abbey Co. sold merchandise to Gomez Co. on account, $35,000, terms 2/15, net 45. The cost of the merchandise sold is $24,500. Abbey Co. issued a credit memo for $3,600 for defective merchandise which was not returned. Gomez Co. paid the invoice within the discount period. What is the amount of gross profit earned by Abbey Co. on these transactions? 235. Using the letter preceding each account, arrange the following selected accounts in the order they would normally appear in a chart of accounts of a company that uses a multiple-step income statement. (a)
Accounts Payable
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Chapter 06 - Accounting for Merchandising Businesses (b) (c) (d) (e) (f) (g)
Accounts Receivable Merchandise Inventory Miscellaneous Selling Expense Interest Expense Miscellaneous Administrative Expense Delivery Expense
236. Selected accounts and amounts at the end of the period are as follows. Journalize the closing entry, assuming a perpetual inventory system. Merchandise Inventory Cost of Merchandise Sold
$ 45,500 652,500
237. Prepare (a) a single-step income statement, (b) a statement of owner's equity, and (c) a balance sheet from the following data for Burt Co., taken from the ledger after adjustments on December 31, the end of the fiscal year. Accounts Payable Accounts Receivable Accumulated Depreciation—Office Equipment Accumulated Depreciation—Store Equipment Administrative Expenses Cash Cost of Merchandise Sold Interest Expense Maeve Burt, Capital Maeve Burt, Drawing Merchandise Inventory Note Payable (due in two years) Office Equipment Prepaid Insurance Rent Revenue Salaries Payable Sales Selling Expenses Store Equipment Supplies
$97,200 64,300 72,750 162,100 56,500 53,000 121,700 12,000 81,750 52,000 93,250 154,000 149,750 6,500 17,500 28,700 365,500 41,500 325,000 4,000
238. Prepare a multiple-step income statement for Armstrong Co. from the following data for the year ended December 31. Sales, $755,000; cost of merchandise sold, $330,000; administrative expenses, $35,000; interest expense, $30,000; rent revenue, $25,000; selling expenses, $50,000. 239. Selected data from the ledger of Burt Co., after adjustments, on September 30, the end of the fiscal year, are listed as follows: Accounts Receivable Accumulated Depreciation Administrative Expenses Bob Burt, Capital Bob Burt, Drawing Powered by Cognero
$ 39,120 60,540 90,000 85,000 65,000
Office Equipment Prepaid Insurance Note Payable Salaries Payable Sales
$ 82,700 4,680 77,750 3,060 950,000 Page 31
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Chapter 06 - Accounting for Merchandising Businesses Cost of Merchandise Sold Interest Revenue
550,000 10,000
Selling Expenses Supplies
102,000 3,125
Prepare a single-step income statement and a statement of owner's equity. 240. The following data for the current year ended June 30 are from the accounting records of Zanadu Co.: Administrative expenses Cost of merchandise sold Interest expense Rent revenue Sales Selling expenses
$ 28,750 181,440 3,600 1,500 534,440 65,000
Prepare a multiple-step income statement for the year ended June 30. 241. Sampson Co. sold merchandise to Batson Co. on account, $46,000, terms 2/15, net 45. The cost of the merchandise sold is $38,500. Batson Co. paid the invoice within the discount period. Journalize these transactions for Sampson Co., assuming Sampson uses the gross method of recording sales discounts and has a perpetual inventory system. 242. Journalize the following transactions on the books of Monroe Sales Company, assuming a perpetual inventory system is used and adjustments for customer refunds and estimated returns inventory were made at year-end. Monroe Sales Company uses the net method to record sales. (a) On December 27, 20Y8, Monroe Sales sells $9,525 on account to Garrison Brewer with terms of 2/10, n/30. The cost of the merchandise sold was $6,905. (b) On January 2, 20Y9, a $125 credit memo is given to Garrison Brewer due to returned merchandise. The cost of the returned merchandise was $65. (c) On January 4, 20Y9, Garrison Brewer submits payment in full. 243. Journalize the following transactions assuming the perpetual inventory system and adjustments for customer refunds and estimated returns inventory were made at year-end. The company uses the net method to record sales. Dec. 27 Sold merchandise on account for $3,750, terms n/15. The cost of the merchandise sold was $2,000. Jan. 5 Issued credit memo for $1,050 for merchandise returned from sale on December 27. The cost of the merchandise returned was $610. Received check for the amount due for sale on December 27 less return on January 6 5. 8 Sold merchandise for $7,000 plus 6% sales tax to cash retail customers. The cost of the merchandise sold was $3,830. 244. Journalize these transactions for Armour Inc. using both the periodic inventory system and the perpetual inventory system, presented in the side-by-side format of the following form. Oct.7 Sold merchandise on credit to Rondo Distributors, terms n/30. The cost of the merchandise was $720. 8 Purchased merchandise, $10,000, terms FOB shipping point, 2/15, n/30, with prepaid freight charges of $525 added to the invoice.
Date
PERIODIC INVENTORY SYSTEM Dr. Cr. Description
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PERPETUAL INVENTORY SYSTEM | Dr. Cr. Description | Page 32
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Chapter 06 - Accounting for Merchandising Businesses | | | | | |
245. Using the following data taken from Hsu’s Imports Inc., which uses a periodic inventory system, determine the gross profit to be reported on the income statement for the year ended March 31. Merchandise inventory, April 1 Merchandise inventory, March 31 Purchases Purchases returns and allowances Purchases discounts Sales Freight in
$ 193,250 180,100 1,079,600 51,200 18,500 1,860,000 19,250
246. Using the following data taken from Hsu’s Imports Inc., which uses a periodic inventory system, prepare the Cost of Merchandise Sold section of the income statement for the year ended March 31. Merchandise inventory, April 1 Merchandise inventory, March 31 Purchases Purchases returns and allowances Purchases discounts Sales Freight in
$ 193,250 180,100 1,079,600 51,200 18,500 1,860,000 19,250
247. Using the following data taken from Payton Inc., which uses a periodic inventory system, prepare the Cost of Merchandise Sold section of the income statement for the year ended May 31. Merchandise inventory, June 1 Merchandise inventory, May 31 Purchases Purchases returns and allowances Purchases discounts Sales Freight in
$ 393,250 380,100 1,579,600 81,200 16,500 2,060,000 59,250
248. Using the following data taken from Connor Inc. which uses a periodic inventory system, determine the gross profit to be reported on the income statement for the year ended May 31. Merchandise inventory, June 1 Merchandise inventory, May 31 Purchases Purchases returns and allowances Purchases discounts Sales Freight in Powered by Cognero
$
393,250 380,100 1,579,600 81,200 16,500 2,060,000 59,250 Page 33
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Chapter 06 - Accounting for Merchandising Businesses 249. The following data were extracted from the accounting records of Dana Designs for the year ended March 31: Merchandise inventory, April 1 Merchandise inventory, March 31 Purchases Purchases returns and allowances Purchases discounts Sales Freight in
$530,000 375,000 270,000 25,000 10,000 770,000 3,000
Prepare the Cost of Merchandise Sold section of the income statement for the year ended March 31, using the periodic method. 250. Based upon the following data for a business with a periodic inventory system, determine the cost of merchandise sold for August. Merchandise inventory, August 1 Merchandise inventory, August 31 Purchases Purchases returns and allowances Purchases discounts Freight in
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$ 75,560 96,330 373,880 14,760 10,900 4,135
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Chapter 06 - Accounting for Merchandising Businesses Answer Key 1. True 2. False 3. False 4. True 5. True 6. False 7. False 8. False 9. True 10. False 11. True 12. False 13. False 14. False 15. True 16. False 17. True 18. True 19. True 20. True 21. False 22. True 23. False 24. False 25. True Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses 26. True 27. True 28. False 29. False 30. False 31. False 32. False 33. True 34. True 35. False 36. True 37. True 38. True 39. True 40. False 41. False 42. True 43. False 44. False 45. True 46. False 47. True 48. True 49. False 50. True Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses 51. True 52. False 53. True 54. False 55. True 56. False 57. False 58. False 59. True 60. True 61. True 62. False 63. True 64. False 65. False 66. True 67. True 68. False 69. False 70. True 71. False 72. False 73. True 74. True 75. False 76. False Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses 77. b 78. c 79. d 80. a 81. d 82. c 83. a 84. c 85. b 86. b 87. c 88. a 89. d 90. c 91. b 92. b 93. b 94. c 95. b 96. c 97. b 98. b 99. c 100. b 101. b Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses 102. a 103. c 104. a 105. b 106. b 107. d 108. b 109. b 110. b 111. b 112. d 113. b 114. b 115. d 116. b 117. a 118. d 119. c 120. c 121. d 122. d 123. a 124. a 125. b 126. a 127. a Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses 128. b 129. b 130. d 131. c 132. d 133. d 134. c 135. d 136. b 137. d 138. c 139. a 140. c 141. c 142. a 143. a 144. d 145. c 146. d 147. d 148. a 149. d 150. a 151. b 152. b Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses 153. c 154. b 155. c 156. d 157. b 158. b 159. b 160. d 161. b 162. c 163. b 164. a 165. a 166. c 167. c 168. b 169. a 170. a 171. a 172. b 173. b 174. g 175. c 176. d 177. b 178. h Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses 179. e 180. a 181. f 182. a 183. c 184. c 185. a 186. b 187. a 188. c 189. b 190. f 191. g 192. a 193. e 194. d 195. h 196. c 197. This is not true. While the operations of merchandising businesses generally all involve the purchase of merchandise (purchasing), the sale of products to customers (sales), and the receipt of cash from customers (collection), operating cycles may vary in length between merchandisers. This is due to the nature of the product they sell. An example is a grocery store that depends on selling more products in a very short time span. 198. Service Business Income Statement: Fees earned Less operating expenses Equals income from operations
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Merchandising Business Income Statement: Sales Less cost of merchandise sold Equals gross profit Less operating expenses Equals income from operations Page 42
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Chapter 06 - Accounting for Merchandising Businesses Balance Sheet: No merchandise inventory account
Balance Sheet: Includes merchandise inventory account in the Current Assets section
199. Merchandise Inventory Accounts Payable
5,586
Accounts Payable Cash
5,586
5,586
5,586
200. Mar. 25 Accounts Receivable Sales Sales Tax Payable
10,750 10,000 750
201. Mar. 29 Cash
4,250 4,250
Accounts Receivable 202. (a)
(b)
Accounts Receivable Sales
16,954
Cost of Merchandise Sold Merchandise Inventory
12,600
Cash Accounts Receivable
16,954
16,954
12,600 16,954
203. (a) $4,500 – $1,200 = $3,300; $3,300 – (2% × $3,300) + $140 = $3,300 – $66 + $140 = $3,374 (b) $7,650 – $450 = $7,200; $7,200 – (1% × $7,200) = $7,200 – $72 = $7,128 204. Sampson Co. Journal Entries: Accounts Receivable—Batson Co. Sales
45,080 45,080
Cost of Merchandise Sold Merchandise Inventory
38,500
Cash Accounts Receivable—Batson Co.
45,080
Batson Co. Journal Entries: Merchandise Inventory Accounts Payable—Sampson Co. Accounts Payable—Sampson Co. Cash Powered by Cognero
38,500 45,080 45,080 45,080 45,080 45,080 Page 43
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Chapter 06 - Accounting for Merchandising Businesses 205. (a), (b), and (c) 206. Mar. 4 Cash Credit Card Expense Sales
4,728.75 121.25 4,850.00
The sales can be debited to Cash since the deposit is at the end of the business day. Also, since the credit card expense is easily determined (2.5% of sales), that expense can be immediately identified and should be journalized. 207. (a) $62,000 (b) $69,000 (c) $75,000 208. (a) Accounts Receivable Sales Cost of Merchandise Sold Merchandise Inventory (b) Cash Sales Cost of Merchandise Sold Merchandise Inventory (c) Cash Sales Cost of Merchandise Sold Merchandise Inventory
12,000 12,000 6,500 6,500 9,500 9,500 5,300 5,300 2,900 2,900 1,700 1,700
(d) Credit Card Expense Cash
385
(e) Credit Card Expense Cash
75
209. (a) Accounts Receivable Sales Cost of Merchandise Sold Merchandise Inventory
385
75
4,116 4,116 2,300 2,300
(b) Delivery Expense Cash
85
(c) Customer Refunds Payable Accounts Receivable
735
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85
735 Page 44
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Chapter 06 - Accounting for Merchandising Businesses (d) Cash Accounts Receivable
3,381 3,381
210. (a) Seller Description Accounts Receivable Sales Cost of Merchandise Sold Merchandise Inventory
Dr. 4,655
Dr. 4,730
Cr. 4,730
2,850 2,850
Accounts Receivable Cash
75
(b) Customer Refunds Payable Accounts Receivable (c) Cash Accounts Receivable
Buyer Description Merchandise Inventory 4,655 Accounts Payable Cr.
75 75
686 686
4,044
Accounts Payable Merchandise Inventory
Accounts Payable 4,044 Cash
686 686
4,044 4,044
211. (a) $50 [($6,500 – $1,500) × 1% (b) $5,100 ($6,500 – $1,500 – $50 + $150) (c) $5,150 ($6,500 – $1,500 + $150) 212. (a) Merchandise Inventory Accounts Payable (b) Accounts Payable Cash 213. (a) Merchandise Inventory Accounts Payable
1,470 1,470 1,470 1,470
4,753 4,753
(b) Accounts Payable Merchandise Inventory
1,584
(c) Accounts Payable Cash
3,169
1,584
3,169
214. (a) $2,800 – $200 – $26 + $45 = $2,619 (b) $7,600 – $800 = $6,800 (c) $1,400 – $600 – $16 + $55 = $839 (d) $500 – $5 = $495 215. Powered by Cognero
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Chapter 06 - Accounting for Merchandising Businesses (a) Accounts Receivable Sales Sales Tax Payable Cost of Merchandise Sold Merchandise Inventory (b) Sales Tax Payable Cash 216. July 5
Merchandise Inventory
963 900 63 510 510 436 436
11,172.00
A/P—Turbo Tools
6
11,172.00
Merchandise Inventory
75.00
Cash 8
75.00
A/P—Turbo Tools
210.70
Merchandise Inventory 15
A/P—Turbo Tools
210.70 10,961.30
Cash 217. May 4
7
13
A/R—Pet World Supplies Sales Cost of Merchandise Sold Merchandise Inventory A/R—Pet World Supplies Sales Cost of Merchandise Sold Merchandise Inventory Cash A/R—Pet World Supplies
10,961.30
8,167.50 8,167.50 5,755.00 5,755.00 10,875.15 10,875.15 6,925.00 6,925.00 19,042.65 19,042.65
218. July 4
5
Merchandise Inventory A/P—Tidy Wholesalers Merchandise Inventory
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8,415.00 8,415.00
45.00 Page 46
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Chapter 06 - Accounting for Merchandising Businesses Cash
45.00
Merchandise Inventory A/P—Tidy Wholesalers
7
11,865.15 11,865.15
A/P—Tidy Wholesalers Cash
13
20,280.15 20,280.15
219. (a) Mar. 3 Cash Sales
4,350 4,350
(b) Mar. 3 Cost of Merchandise Sold Merchandise Inventory
1,512 1,512
220. Mar. 5 Accounts Receivable Sales
22,500 22,500
5 Cost of Merchandise Sold Merchandise Inventory
16,825 16,825
221. May
5
12
14
222. Aug. 1
3
7
7
Merchandise Inventory Accounts Payable
5,980 5,980
Accounts Payable Merchandise Inventory
2,450
Accounts Payable Cash
3,530
2,450
3,530
Merchandise 5,880 Inventory Accounts Payable Accounts Payable Merchandise Inventory
1,470
Cash Sales
9,750
1,470
Cost of Merchandise 4,000 Sold Merchandise Inventory
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5,880
9,750
4,000
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Chapter 06 - Accounting for Merchandising Businesses 10
10
11
20
Accounts Receivable Sales
495
Cost of Merchandise Sold Merchandise Inventory
200
Accounts Payable Cash
4,410
495
200
4,410
Cash Accounts Receivable
495 495
223. Abbott Co. Date Description July 3 Accounts Receivable Sales
Dalton Co. Debit Credit Description Debit Credit 7,500 Merch. Inventory 7,500 7,500 Accounts Payable 7,500
Cost of Merch. Sold Merch. Inventory
4,400 4,400
5
9
Customer Refunds Payable Accounts Rec.
11 Cash Accounts Rec.
120.1 200 202 204 207 300
Land Equipment Accumulated Depr.— Equip. Accounts Payable Salaries Payable Unearned Revenue Notes Payable Owner, Capital
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275
Accounts Payable Merch. Inventory
2,250
2,250
Accounts Payable Cash
5,250
5,250
2,250
5,250
224. Acct. No. Description 100 Cash 103 Accounts Receivable 105 Merchandise Inventory 107 Office Supplies 110 120
Merch. Inventory Cash
275
2,250
5,250
Acct. No. Description 302 Owner, Drawing 400 Sales 500 Cost of Merchandise Sold 502 Advertising Expense Depreciation Expense— 504 Equip. 506 Salaries Expense 508 510 600 700
Supplies Expense Utilities Expense Rent Revenue Interest Expense
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Chapter 06 - Accounting for Merchandising Businesses 225. (a)
Cash
645 Sales
645
Cost of Merchandise Sold 375 Merchandise Inventory (b)
Cash
375
432 Sales
(c)
(d)
432
Cost of Merchandise Sold 195 Merchandise Inventory
195
Accounts Receivable Sales
670
670
Cost of Merchandise Sold 438 Merchandise Inventory
438
Credit Card Expense Cash
85
85
226. Oct. 31 Cost of Merchandise Sold Merchandise Inventory
93,400 93,400
227. Dec. 31
45,000 45,000
Cost of Merchandise Sold Merchandise Inventory
228. Income from operations Sales Gross profit Operating expenses Cost of merchandise sold
Company A Company B Company C $315 $420 $215 975 865 560 430 545 325 115 125 110 545 320 235
OR rearranged in the order of the income statement: Company A Company B Company C Sales $975 $865 $560 Less cost of merchandise sold 545 320 235 Gross profit 430 545 325 Less operating expenses 115 125 110 Income from operations 315 420 215 229. Income (loss) from operations Sales Gross profit Powered by Cognero
Company X $220 765 435
Company Y $ (25) 1,315 540
Company Z $ (70) 890 465 Page 49
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Chapter 06 - Accounting for Merchandising Businesses Operating expenses Cost of merchandise sold
215 330
565 775
535 425
Company Y $1,315 775 540 565 (25)
Company Z $890 425 465 535 (70)
OR rearranged in the order of the income statement:
Sales Less cost of merchandise sold Gross profit Less operating expenses Income (loss) from operations
Company X $765 330 435 215 220
230. $137,500 + $425,600 – $322,325 = $240,775 231. $117,500 + $241,750 – $157,400 = $201,850 232. $86,000 + $93,950 – $76,240 = $103,710 233. Gross Profit = Sales ($764,000) – Cost of Merchandise Sold ($538,000) = $226,000 234. Gross Profit = Sales [$35,000 – ($35,000 × 2%)] – [$3,600 – ($3,600 × 2%)] – Cost of Merchandise Sold ($24,500) = $6,272 235. (b) (c) (a) (g) (d) (f) (e) 236. Owner, Capital Cost of Merchandise Sold
652,500 652,500
237. (a) Burt Co. Income Statement For the Year Ended December 31 Revenues: Sales Rent revenue Total revenues Expenses: Cost of merchandise sold Selling expenses Administrative expenses Interest expense Total expenses Net income
$365,500 17,500 $383,000 $121,700 41,500 56,500 12,000 231,700 $151,300
(b) Burt Co. Statement of Owner's Equity For the Year Ended December 31 Maeve Burt, capital, January 1 Powered by Cognero
$ 81,750 Page 50
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Chapter 06 - Accounting for Merchandising Businesses Net income for the year Withdrawals Increase in owner's equity Maeve Burt, capital, December 31
$151,300 (52,000) 99,300 $181,050
(c) Burt Co. Balance Sheet December 31 Assets Current assets: Cash Accounts receivable Merchandise inventory Prepaid insurance Supplies Total current assets Property, plant, and equipment: Store equipment Less accum. depreciation Office equipment Less accum. depreciation Total property, plant, and equipment Total assets
$53,000 64,300 93,250 6,500 4,000 $221,050 $325,000 162,100 $162,900 $149,750 72,750 77,000 239,900 $460,950
Liabilities Current liabilities: Accounts payable Salaries payable Total current liabilities Long-term liabilities: Note payable (due in two years) Total liabilities
$97,200 28,700 $125,900 154,000 $279,900
Owner's Equity Maeve Burt, capital Total liabilities and owner's equity
181,050 $460,950
238. Armstrong Co. Income Statement For the Year Ended December 31 Sales Cost of merchandise sold Gross profit Operating expenses: Selling expenses Administrative expenses Powered by Cognero
$755,000 330,000 $425,000 $50,000 35,000 Page 51
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Chapter 06 - Accounting for Merchandising Businesses Total operating expenses Income from operations Other revenue and expense: Rent revenue Interest expense
85,000 $340,000 $25,000 (30,000)
Net income
(5,000) $335,000
239. Burt Co. Income Statement For the Year Ended September 30 Revenues: Sales Interest revenue Total revenues Expenses: Cost of merchandise sold Selling expenses Administrative expenses Total expenses Net income
$950,000 10,000 $960,000 $550,000 102,000 90,000 742,000 $218,000
Burt Co. Statement of Owner's Equity For the Year Ended September 30 Bob Burt, capital, October 1 Net income for the year Withdrawals Increase in owner's equity Bob Burt, capital, September 30
$ 85,000 $218,000 (65,000) 153,000 $238,000
240. Zanadu Co. Income Statement For the Year Ended June 30 Sales Cost of merchandise sold Gross profit Operating expenses: Selling expenses Administrative expenses Total operating expenses Income from operations Other revenue and expense: Rent revenue Interest expense Net income Powered by Cognero
$534,440 181,440 $353,000 $65,000 28,750 93,750 $259,250 $ 1,500 (3,600)
(2,100) $257,150
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Chapter 06 - Accounting for Merchandising Businesses 241. Accounts Receivable—Batson Co Sales
46,000 46,000
Cost of Merchandise Sold Merchandise Inventory
38,500
Cash Sales Accounts Receivable—Batson Co.
45,080 920
38,500
46,000
242. (a) Accounts Receivable—Garrison Brewer Sales Cost of Merchandise Sold Merchandise Inventory (b) Customer Refunds Payable Accounts Receivable—Garrison Brewer Merchandise Inventory Estimated Returns Inventory (c) Cash Accounts Receivable—Garrison Brewer
9,334.50 9,334.50 6,905.00 6,905.00 122.50 122.50 65.00 65.00 9,212.00 9,212.00
243. Dec. 27
27
Jan.
5
5
6
8
8
Accounts Receivable Sales
3,750
Cost of Merchandise Sold Merchandise Inventory
2,000
Customer Refunds Payable Accounts Receivable
1,050
3,750
2,000
1,050
Merchandise Inventory Estimated Returns Inventory
610
Cash Accounts Receivable
2,700
Cash Sales Sales Tax Payable
7,420
Cost of Merchandise Sold Merchandise Inventory
3,830
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610
2,700
7,000 420
3,830 Page 53
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Chapter 06 - Accounting for Merchandising Businesses 244. PERPETUAL INVENTORY SYSTEM Dr. Cr. Description Dr. Cr. Accounts 1,200 1,200 Receivable 1,200 Sales 1,200
PERIODIC INVENTORY SYSTEM Date Description Oct. Accounts 7 Receivable Sales
8
Purchases
9,800
Freight In
525
Accounts Payable
Cost of Merchandise Sold 720 Merchandise 720 Inventory Merchandise 10,325 Inventory Accounts 10,325 Payable 10,325
245. Gross Profit = Sales – COMS* = $1,860,000 – $1,042,300** = $817,700 *Cost of merchandise sold **Cost of merchandise sold: Merchandise inventory, April 1 $ 193,250 Cost of merchandise purchased: Purchases $1,079,600 Purchases returns and allowances (51,200) Purchases discounts (18,500) Net purchases $1,009,900 Freight in 19,250 Total cost of merchandise purchased 1,029,150 Merchandise available for sale $1,222,400 Merchandise inventory, March 31 (180,100) $1,042,300 Cost of merchandise sold 246. Cost of merchandise sold: Merchandise inventory, April 1 Cost of merchandise purchased: Purchases Purchases returns and allowances Purchases discounts Net purchases Freight in Total cost of merchandise purchased Merchandise available for sale Merchandise inventory, March 31 Cost of merchandise sold Powered by Cognero
$ 193,250 $1,079,600 (51,200) (18,500) $1,009,900 19,250 1,029,150 $1,222,400 (180,100) $1,042,300 Page 54
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Chapter 06 - Accounting for Merchandising Businesses
247. Cost of merchandise sold: $ 393,250
Merchandise inventory, June 1 Cost of merchandise purchased: Purchases Purchases returns and allowances Purchases discounts Net purchases Freight in Total cost of merchandise purchased Merchandise available for sale Merchandise inventory, May 31
$1,579,600 (81,200) (16,500) $1,481,900 59,250 1,541,150 $1,934,400 (380,100) $1,554,300
Cost of merchandise sold
248. Gross Profit = Sales – COMS* = $2,060,000 – $1,554,300** = $505,700 *Cost of merchandise sold **Cost of merchandise sold: Merchandise inventory, June 1 Cost of merchandise purchased: Purchases Purchases returns and allowances Purchases discounts Net purchases Freight in Total cost of merchandise purchased Merchandise available for sale Merchandise inventory, May 31 Cost of merchandise sold
$ 393,250 $1,579,600 (81,200) (16,500) $1,481,900 59,250
249. Cost of merchandise sold: Merchandise inventory, April 1 Cost of merchandised purchased: Purchases Purchases returns and allowances Purchases discounts Net purchases Freight in Total cost of merchandise purchased Merchandise available for sale Merchandise inventory, March 31 Powered by Cognero
1,541,150 $1,934,400 380,100 $1,554,300
$530,000 $270,000 (25,000) (10,000) $235,000 3,000 238,000 $768,000 (375,000) Page 55
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Chapter 06 - Accounting for Merchandising Businesses Cost of merchandise sold 250. Cost of merchandise sold: Merchandise inventory, August 1 Cost of merchandise purchased: Purchases Purchases returns and allowances Purchases discounts Net purchases Freight in Total cost of merchandise purchased Merchandise available for sale Merchandise inventory, August 31 Cost of merchandise sold
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393,000
$ 75,560 $373,880 (14,760) (10,900) $348,220 4,135 352,355 $427,915 (96,330) $331,585
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Chapter 07 - Inventories True / False 1. One of the two primary objectives of internal control procedures over inventory is to properly report inventory on the financial statements. a. True b. False 2. A purchase order establishes an initial record of the receipt of the inventory. a. True b. False 3. A perpetual inventory system is an effective means of control over inventory. a. True b. False 4. A subsidiary inventory ledger can be an aid in maintaining inventory quantities at their proper levels. a. True b. False 5. Safeguarding inventory and proper reporting of the inventory in the financial statements are the reasons for controlling the inventory. a. True b. False 6. Inventory controls start when the merchandise is shelved in the store area. a. True b. False 7. A physical inventory should be taken at the end of every month. a. True b. False 8. The specific identification inventory method should be used when the inventory consists of identical, low-cost units that are purchased and sold frequently. a. True b. False 9. The choice of an inventory costing method has no significant impact on the financial statements. a. True b. False 10. Of the three widely used inventory costing methods (FIFO, LIFO, and weighted average cost), the LIFO method of costing inventory assumes costs are charged based on the most recent purchases first. a. True b. False Powered by Cognero
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Chapter 07 - Inventories 11. When using the FIFO inventory costing method, the most recent costs are assigned to the cost of merchandise sold. a. True b. False 12. FIFO is the inventory costing method that follows the physical flow of the goods. a. True b. False 13. Under the LIFO inventory costing method, the most recent costs are assigned to ending inventory. a. True b. False 14. The weighted average inventory cost flow method is the least used of the inventory costing methods. a. True b. False 15. If the perpetual inventory system is used, the merchandise inventory account is debited for purchases of merchandise. a. True b. False 16. Under the periodic inventory system, the merchandise inventory account continuously discloses the amount of inventory on hand. a. True b. False 17. Under the periodic inventory system, a physical inventory is taken to determine the cost of the inventory on hand and the cost of the merchandise sold. a. True b. False 18. The three inventory costing methods will normally each yield different amounts of net income. a. True b. False 19. The weighted average cost method will always yield results between FIFO and LIFO. a. True b. False 20. During periods of increasing costs, the use of the FIFO method of costing inventory will result in a greater amount of net income than would result from the use of the LIFO cost method. a. True b. False 21. During periods of increasing costs, the use of the FIFO method of costing inventory will yield an inventory amount for the balance sheet that is higher than LIFO would produce. a. True Powered by Cognero
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Chapter 07 - Inventories b. False 22. During periods of rapidly rising costs, the use of the LIFO method results in illusory or inventory profits. a. True b. False 23. During periods of decreasing costs, the use of the LIFO method of costing inventory will result in a lower amount of net income than would result from the use of the FIFO method. a. True b. False 24. During periods of increasing costs, an advantage of the LIFO inventory cost method is that it matches more recent costs against current revenues. a. True b. False 25. In valuing merchandise for inventory purposes, net realizable value is the estimated selling price less any direct costs of disposal. a. True b. False 26. Unsold consigned merchandise should be included in the consignee's inventory. a. True b. False 27. If ending inventory for the year is understated, net income for the year is overstated. a. True b. False 28. If ending inventory for the year is overstated, owner's equity reported on the balance sheet at the end of the year is understated. a. True b. False 29. The lower of cost or market is a method of inventory valuation. a. True b. False 30. "Market" as used in the phrase "lower of cost or market" for valuing inventory, refers to the price at which the inventory is being offered for sale by its owner. a. True b. False 31. A consignor who has goods out on consignment with an agent should include the goods in ending inventory even though they are not in the possession of the consignor. a. True Powered by Cognero
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Chapter 07 - Inventories b. False 32. The use of the lower-of-cost-or-market method of inventory valuation increases net income for the period in which the inventory replacement price declined. a. True b. False 33. The lower-of-cost-or-market method of determining the value of ending inventory can be applied on an item-by-item basis or to the total inventory. a. True b. False 34. When merchandise inventory is shown on the balance sheet, both the method of determining the cost of the inventory and the method of valuing the inventory should be shown. a. True b. False 35. It is not unusual for large companies to use different inventory costing methods for different segments of their inventory. a. True b. False 36. Direct disposal costs do not include special advertising or sales commissions. a. True b. False 37. Inventory errors, if not discovered, will self-correct within two years. a. True b. False 38. Generally, the lower the days' sales in inventory, the better. a. True b. False 39. One negative effect of carrying too much inventory is risk that customers will change their buying habits. a. True b. False 40. Average inventory is computed by adding the inventory at the beginning of the period to the inventory at the end of the period and dividing by 2. a. True b. False 41. Inventory turnover measures the length of time it takes to acquire, sell, and replace the inventory. a. True b. False Powered by Cognero
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Chapter 07 - Inventories 42. In the retail inventory method, the cost to retail ratio is equal to the cost of merchandise sold divided by the retail price of the merchandise sold. a. True b. False 43. Use of the retail inventory method requires taking a physical count of inventory. a. True b. False 44. If a fire destroys the merchandise inventory, the gross profit method can be used to estimate the cost of merchandise destroyed. a. True b. False 45. If a company uses a periodic inventory system, the gross profit method can be used to estimate inventory for monthly or quarterly statements. a. True b. False Multiple Choice 46. Under a perpetual inventory system, the amount of each type of merchandise on hand is available in the a. customer's ledger b. creditor's ledger c. inventory ledger d. purchase ledger 47. Which document authorizes the purchase of inventory from an approved vendor? a. purchase order b. petty cash voucher c. receiving report d. vendor's invoice 48. The primary objectives of control over inventory are a. safeguarding the inventory from damage and maintaining constant observation of the inventory b. reporting inventory in the financial statements and taking a physical inventory c. maintaining constant observation of the inventory and reporting inventory in the financial statements d. safeguarding inventory from damage and reporting inventory in the financial statements 49. Taking a physical count of inventory a. is not necessary when a periodic inventory system is used b. should be done near year-end c. has no internal control relevance d. is not necessary when a perpetual inventory system is used
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Chapter 07 - Inventories 50. Control of inventory should begin as soon as the inventory is ordered. Which of the following internal control steps is not done to meet this goal? a. check the invoice to the receiving report b. check the invoice to the purchase order c. check the invoice with the person who specifically purchased the item d. check the invoice for mathematical accuracy 51. All of the following are documents used for inventory control except a a. petty cash voucher b. vendor's invoice c. receiving report d. purchase order 52. Which document establishes an initial record of the receipt of inventory? a. receiving report b. vendor's invoice c. purchase order d. petty cash voucher 53. Which of the following is not an example of safeguarding inventory? a. storing inventory in restricted areas b. using physical devices such as two-way mirrors, cameras, and alarms c. matching receiving documents, purchase orders, and vendor’s invoice d. returning inventory that is defective or broken 54. Which of the following methods is appropriate for a business whose inventory consists of a relatively small number of unique, high-cost items? a. FIFO b. LIFO c. weighted average cost d. specific identification 55. Ending inventory is made up of the oldest purchases when a company uses a. first-in, first-out b. last-in, first-out c. weighted average cost d. retail method 56. When merchandise sold is assumed to be in the order in which the purchases were made, the company is using a. first-in, last-out b. last-in, first-out c. first-in, first-out d. weighted average cost 57. The two most widely used methods for determining the cost of inventory are Powered by Cognero
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Chapter 07 - Inventories a. FIFO and LIFO b. FIFO and weighted average cost c. LIFO and weighted average cost d. gross profit and weighted average cost 58. Cost flow is in the order in which costs were incurred when using a. weighted average cost b. last-in, first-out c. first-in, first-out d. first-in, last-out 59. Cost flow is in the reverse order in which costs were incurred when using a. weighted average cost b. last-in, first-out c. first-in, first-out d. first-in, last-out 60. The inventory method that assigns the most recent costs to cost of merchandise sold is a. FIFO b. LIFO c. weighted average cost d. specific identification 61. The inventory costing method that reports the most current prices in ending inventory is a. FIFO b. specific identification c. LIFO d. weighted average cost 62. The inventory costing method that reports the earliest costs in ending inventory is a. FIFO b. LIFO c. weighted average cost d. specific identification 63. Which of the following companies would be more likely to use the specific identification inventory costing method? a. Gordon’s Jewelers b. Lowe’s c. Best Buy d. Walmart Addison, Inc. uses a perpetual inventory system. The following is information about one inventory item for the month of September: Sept. 1
Inventory
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20 units at $20 Page 7
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Chapter 07 - Inventories 4 10 17 30
Sale Purchase Sale Purchase
10 units 30 units at $25 20 units 10 units at $30
64. If Addison uses FIFO, the cost of the ending merchandise inventory on September 30 is a. $800 b. $650 c. $750 d. $700 65. Use the information for Addison, Inc. If Addison uses LIFO, the cost of the ending merchandise inventory on September 30 is a. $800 b. $650 c. $750 d. $700 66. When using a perpetual inventory system, the journal entry for the cost of merchandise sold is a. debit Cost of Merchandise Sold; credit Sales b. debit Cost of Merchandise Sold; credit Merchandise Inventory c. debit Merchandise Inventory; credit Cost of Merchandise Sold d. No journal entry is necessary for the cost of merchandise sold. 67. Under the _____ inventory method, accounting records maintain a continuously updated inventory value. a. retail b. periodic c. physical d. perpetual 68. The inventory data for an item for November are: Nov. 1 4 10 17 30
Inventory Sale Purchase Sale Purchase
20 units at $19 10 units 30 units at $20 20 units 10 units at $21
Using a perpetual system, what is the cost of merchandise sold for November if the company uses LIFO? a. $610 b. $600 c. $590 d. $580 69. The inventory data for an item for November are: Nov. 1
Inventory
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20 units at $19 Page 8
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Chapter 07 - Inventories 4 10 17 30
Sale Purchase Sale Purchase
10 units 30 units at $20 20 units 10 units at $21
Using a perpetual system, what is the cost of merchandise sold for November if the company uses FIFO? a. $610 b. $600 c. $590 d. $580 Use this information to answer the following questions. Boxwood Company sells blankets for $60 each. The following was taken from the inventory records during May. The company had no beginning inventory on May 1. Date May 3 10 17 20 23 30
Blankets Purchase Sale Purchase Sale Sale Purchase
Units 5 3 10 6 3 10
Cost $20 24
30
70. Assuming that the company uses the perpetual inventory system, determine the cost of merchandise sold for the sale of May 20 using the LIFO inventory cost method. a. $136 b. $144 c. $180 d. $120 71. Assuming that the company uses the perpetual inventory system, determine the cost of merchandise sold for the sale of May 20 using the FIFO inventory cost method. a. $120 b. $180 c. $136 d. $144 72. Assuming that the company uses the perpetual inventory system, determine the ending inventory value for the month of May using the FIFO inventory cost method. a. $364 b. $372 c. $324 d. $320 73. Assuming that the company uses the perpetual inventory system, determine the gross profit for the sale of May 23 Powered by Cognero
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Chapter 07 - Inventories using the FIFO inventory cost method. a. $108 b. $120 c. $72 d. $180 74. Assuming that the company uses the perpetual inventory system, determine the ending inventory for the month of May using the LIFO inventory cost method. a. $324 b. $372 c. $320 d. $364 75. Assuming that the company uses the perpetual inventory system, determine the gross profit for the month of May using the LIFO cost method. a. $348 b. $452 c. $444 d. $356 Use this information to answer the following questions. The following units of an inventory item were available for sale during the year: Beginning inventory First purchase Second purchase Third purchase
10 units at $55 25 units at $60 30 units at $65 15 units at $70
The firm uses the periodic inventory system. During the year, 60 units of the item were sold. 76. The value of ending inventory using FIFO is a. $1,250 b. $1,350 c. $1,375 d. $1,150 77. The value of ending inventory using LIFO is a. $1,250 b. $1,350 c. $1,375 d. $1,150 78. The value of ending inventory rounded to the nearest dollar using the weighted average cost method is a. $1,353 b. $1,263 Powered by Cognero
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Chapter 07 - Inventories c. $1,375 d. $1,150 Use this information to answer the following questions. These lots of a particular commodity were available for sale during the year: Beginning inventory First purchase Second purchase Third purchase
10 units at $30 25 units at $32 30 units at $34 10 units at $35
79. The firm uses the periodic system, and there are 20 units of the commodity on hand at the end of the year. What is the amount of inventory at the end of the year according to the LIFO method? a. $655 b. $620 c. $690 d. $659 80. The firm uses the periodic system, and there are 20 units of the commodity on hand at the end of the year. What is the amount of inventory at the end of the year according to the FIFO method? a. $655 b. $620 c. $690 d. $659 81. The firm uses the periodic system, and there are 20 units of the commodity on hand at the end of the year. What is the amount of inventory at the end of the year rounded to the nearest dollar according to the weighted average cost method? a. $655 b. $620 c. $690 d. $659 Use this information to answer the following questions. These lots of a particular commodity were available for sale during the year: Beginning inventory First purchase Second purchase Third purchase
5 units at $61 15 units at $63 10 units at $74 10 units at $77
The firm uses the periodic system, and there are 20 units of the commodity on hand at the end of the year. 82. What is the amount of cost of merchandise sold for the year according to the weighted average cost method? a. $1,380 b. $1,375 Powered by Cognero
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Chapter 07 - Inventories c. $1,510 d. $1,250 83. What is the amount of cost of merchandise sold for the year according to the FIFO method? a. $1,380 b. $1,375 c. $1,510 d. $1,250 84. What is the amount of cost of merchandise sold for the year according to the LIFO method? a. $1,380 b. $1,375 c. $1,510 d. $1,250 85. Under a periodic inventory system a. accounting records continuously disclose the amount of inventory b. a separate account for each type of merchandise is maintained in a subsidiary ledger c. a physical inventory is taken at the end of the period d. Merchandise Inventory is debited when goods are returned to vendors Use this information to answer the following questions. These lots of a particular commodity were available for sale during the year: Beginning inventory First purchase Second purchase Third purchase
10 units at $60 25 units at $65 30 units at $68 15 units at $75
The firm uses the periodic system, and there are 25 units of the commodity on hand at the end of the year. 86. What is the amount of inventory at the end of the year using the FIFO method? a. $1,685 b. $1,575 c. $1,805 d. $3,585 87. What is the amount of inventory at the end of the year using the LIFO method? a. $1,685 b. $1,575 c. $1,805 d. $3,815 88. What is the amount of inventory at the end of the year rounded to the nearest dollar using the weighted average cost method? Powered by Cognero
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Chapter 07 - Inventories a. $1,685 b. $1,575 c. $1,805 d. $3,705 89. If Beginning Inventory (BI) + Purchases (P) – Ending Inventory (EI) = Cost of Merchandise Sold (COMS), an equivalent equation can be written as a. BI + P = COMS – EI b. BI – P = COMS + EI c. BI + P = COMS + EI d. EI + P = COMS – BI 90. During a period of consistently rising prices, the method of inventory that will result in reporting the greatest cost of merchandise sold is a. FIFO b. LIFO c. specific identification d. weighted average cost 91. During times of rising prices, which of the following is not an accurate statement? a. Weighted average costing will yield results that are between those of FIFO and LIFO. b. LIFO will result in a higher cost of merchandise sold than FIFO. c. FIFO will result in a higher net income than LIFO. d. LIFO will result in higher income taxes than FIFO. 92. If the revenues are correctly reported and the gross profit of a company is understated, what is the effect on owner’s equity? a. understated b. overstated c. correctly stated d. None of these choices 93. If merchandise inventory is being valued at cost and the price level is steadily rising, the method of costing that will yield the highest net income is a. periodic b. LIFO c. FIFO d. weighted average cost 94. If merchandise inventory is being valued at cost and the purchase price is steadily falling, which method of costing will yield the largest net income? a. specific identification b. LIFO c. FIFO Powered by Cognero
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Chapter 07 - Inventories d. weighted average cost 95. Which of the following will be the same amount regardless of the cost flow assumption adopted? a. number of items ordered b. gross profit c. cost of merchandise sold d. ending merchandise inventory 96. FIFO reports higher gross profit and net income than the LIFO method when a. prices are increasing b. prices are decreasing c. prices remain stable d. prices are reduced by 50% 97. During a period of falling prices, which of the following inventory methods generally results in the lowest balance sheet amount for inventory? a. weighted average cost method b. LIFO method c. FIFO method d. cannot tell without more information 98. Damaged merchandise that can be sold only at prices below cost should be valued at a. net realizable value b. LIFO c. FIFO d. weighted average cost 99. If a manufacturer ships merchandise to a retailer on consignment, the unsold merchandise should be included in the inventory of the a. consignee b. retailer c. manufacturer d. shipper 100. Merchandise inventory at the end of the year was inadvertently overstated. Which of the following statements correctly states the effect of the error on net income, assets, and owner's equity? a. Net income is overstated, assets are overstated, and owner's equity is understated. b. Net income is overstated, assets are overstated, and owner's equity is overstated. c. Net income is understated, assets are understated, and owner's equity is understated. d. Net income is understated, assets are understated, and owner's equity is overstated. 101. Merchandise inventory at the end of the year was understated. Which of the following statements correctly states the effect of the error? a. Net income is understated. b. Net income is overstated. Powered by Cognero
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Chapter 07 - Inventories c. Cost of merchandise sold is understated. d. Merchandise inventory reported on the balance sheet is overstated. 102. Merchandise inventory at the end of the year is overstated. Which of the following statements correctly states the effect of the error? a. Owner's equity is overstated. b. Cost of merchandise sold is overstated. c. Gross profit is understated. d. Net income is understated. 103. If the cost of an item of inventory is $60 and the current replacement cost is $75, the amount included in inventory according to the lower-of-cost-or-market method is a. $15 b. $60 c. $75 d. $135 104. Kristin’s Boutique has identified the following items for possible inclusion in its December 31 inventory. Which of the following would not be included in the year-end inventory? a. Merchandise purchased FOB shipping point was picked up by the freight company but had still not arrived at Kristin’s Boutique as of December 31. b. Kristin's has merchandise on consignment from Abby Co. in its store. c. Kristin's has sent merchandise to various retailers on a consignment basis. d. Kristin's has merchandise on hand that has been returned by customers because of wrong size. 105. During the taking of its physical inventory on December 31, Barry’s Bike Shop incorrectly counted its inventory as $350,000 instead of the correct amount of $280,000. The effect on the balance sheet and income statement would be a. assets overstated by $70,000; retained earnings understated by $70,000; and net income statement understated by $70,000 b. assets overstated by $70,000; retained earnings understated by $70,000; and no effect on the income statement c. assets, retained earnings, and net income all overstated by $70,000 d. assets and retained earnings overstated by $70,000 and net income understated by $70,000 106. If a company mistakenly counts more items during a physical inventory than actually exist, how will the error affect its bottom line? a. There will be no change to net income. b. Net income will be overstated. c. Net income will be understated. d. Only gross profit will be affected. 107. If a company mistakenly counts less items during a physical inventory than actually exist, how will the error affect the cost of merchandise sold? a. understated b. overstated c. no change Powered by Cognero
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Chapter 07 - Inventories d. only inventory will be affected 108. Determine the total value of the merchandise using net realizable value. Item Doll Horse a. $35 b. $80 c. $115 d. $25
Quantity 10 5
Selling Price $7 9
Commission $2 3
109. If a company values inventory at the lower of cost or market, which of the following is the value of merchandise inventory on the balance sheet? Apply the lower-of-cost-or-market method to inventory as a whole. Item Product C Product D a. $6,960 b. $7,700 c. $6,540 d. $7,280
Inventory Quantity 420 370
Unit Cost Price $6 12
Unit Market Price $ 5 14
110. Too much inventory on hand causes a. funds to be tied up that could be used to improve operations b. an increase to the cost of safeguarding assets c. an increase to the losses caused by price declines d. All of these choices 111. Which of the following is used to analyze the efficiency and effectiveness of inventory management? a. inventory turnover only b. days’ sales in inventory only c. both inventory turnover and days’ sales in inventory d. neither inventory turnover nor days’ sales in inventory 112. Which of the following measures the relationship between cost of merchandise sold and the amount of inventory carried during the period? a. inventory turnover b. fixed asset turnover c. retail method of inventory costing d. gross profit method of inventory costing 113. Which of the following measures the length of time it takes to acquire, sell, and replace inventory? a. inventory turnover b. days’ sales in inventory Powered by Cognero
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Chapter 07 - Inventories c. retail method of inventory costing d. gross profit method of inventory costing 114. Excess inventory results in all of the following except a. tied-up funds that could be used to improve operations b. lost sales c. increased storage expense d. increased risk of loss due to damage 115. The days' sales in inventory measures the a. length of time it takes to acquire, sell, and replace the inventory b. length of time it takes to acquire and receive payment for the inventory c. number of days inventory is on hand prior to sale d. number of days inventory takes to arrive after ordering 116. For the year ended December 31, Depot Max’s cost of merchandise sold was $56,900. Inventory at the beginning of the year was $6,540. Ending inventory was $7,250. Compute Depot Max’s inventory turnover for the year. a. 8.7 b. 7.8 c. 8.3 d. 44.0 117. For the year ended December 31, Depot Max’s cost of merchandise sold was $56,900. Inventory at the beginning of the year was $6,540. Ending inventory was $7,250. Depot Max’s days' sales in inventory is closest to a. 42 b. 46 c. 8 d. 44 118. The method of estimating inventory that uses records of the selling prices of the merchandise is called the a. retail method b. gross profit method c. inventory turnover method d. weighted average cost method 119. On the basis of the following data, what is the estimated cost of the merchandise inventory on May 31 using the retail method? May 1 Merchandise inventory May 1–31 Purchases May 1–31 Sales
Cost $125,000 235,000
Retail $166,667 313,333 230,000
a. $250,000 b. $360,000 c. $172,500 Powered by Cognero
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Chapter 07 - Inventories d. $187,500 120. If the estimated rate of gross profit is 30%, what is the estimated cost of the merchandise inventory on September 30, based on the following data? Sept. 1 Merchandise inventory (at cost) Sept. 1–30 Purchases, net (at cost) Sept. 1–30 Sales
$125,000 300,000 150,000
a. $320,000 b. $192,500 c. $275,000 d. $105,000 121. All of the following are reasons to use an estimated method of costing inventory except a. perpetual inventory records are not maintained b. purchase records are not maintained c. a disaster has destroyed the inventory records and the inventory d. interim financial statements are required but physical inventory is only taken at the end of the financial accounting period 122. Garrison Company uses the retail method of inventory costing. It started the year with an inventory that had a retail cost of $45,000. During the year, Garrison purchased an inventory with a retail sales value of $300,000. After performing a physical inventory, Garrison found the inventory at retail to be $80,000. The markup is 100% of cost. Determine the ending inventory at its estimated cost. a. $160,000 b. $80,000 c. $40,000 d. $45,000 123. A company will most likely use an estimated method of determining inventory when a. the company decides not to do a physical inventory b. a natural disaster has destroyed most of the inventory c. the company has not kept up with its inventory records d. the company is preparing annual financial statements 124. Stevens Company started the year with an inventory cost of $145,000. During the month of January, Stevens purchased inventory that cost $53,000. January sales totaled $140,000. Estimated gross profit is 35%. The estimated ending inventory as of January 31 is a. $58,000 b. $91,000 c. $107,000 d. $69,300 Matching Powered by Cognero
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Chapter 07 - Inventories Match each of the following descriptions to the appropriate document used for inventory control (a–c). a. Receiving report b. Vendor’s invoice c. Purchase order 125. Last document in the chain, use to compare all three for accuracy 126. Authorizes the purchase of inventory from an approved vendor 127. Establishes an initial record of the receipt of inventory Match each of the following descriptions to the appropriate cost flow assumption (a–d). a. Weighted average cost b. First-in, first-out (FIFO) c. Last-in, first-out (LIFO) d. Specific identification 128. The cost of the units sold and in ending inventory is a weighted average of the purchase costs. 129. Cost flow is assumed to be in the reverse order of costs incurred. 130. Cost flow matches the unit sold to the unit purchased. 131. Cost flow is in the order in which the costs were incurred. Match each of the following descriptions to the appropriate inventory system (a or b). a. Perpetual b. Periodic 132. This system can be costly and time consuming if not computerized. 133. Average cost is rarely used with this system. 134. Under this system, only revenue is recorded when sales are made. 135. When using this system, a physical inventory is necessary to determine cost of merchandise sold. Match each of the following descriptions to the appropriate cost flow assumption (a–c). a. FIFO b. LIFO c. Weighted average cost 136. Produces the same cost of merchandise sold under both the periodic and the perpetual inventory systems 137. Rarely used with a perpetual inventory system 138. Produces results that are similar to the specific identification method 139. Widely used for tax purposes Powered by Cognero
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Chapter 07 - Inventories 140. Never results in either the highest or lowest possible net income 141. Produces the highest gross profit when costs are decreasing 142. Produces the highest ending inventory when costs are increasing 143. Assigns the same value to all inventory units 144. Prohibited under International Financial Reporting Standards (IFRS) 145. Does not follow the physical flow of goods in most cases 146. Cost of the latest purchases are assigned to ending inventory Match each of the following situations to its impact (a–c) on the current year's net income. a. Net income for the current year will be overstated. b. Net income for the current year will be understated. c. There will be no error effect on net income. 147. Purchased merchandise was shipped FOB shipping point on the last day of the year. The cost of the merchandise was not included in ending inventory. 148. Merchandise was purchased FOB destination on the last day of the year. The cost of the merchandise purchased was not included in ending inventory. 149. Merchandise held on consignment was included in the count of ending inventory. 150. A consignor included merchandise in the hands of the consignee in ending inventory. 151. Beginning inventory was understated. 152. Merchandise that was sold and shipped FOB destination on the last day of the year was not included in the seller’s ending inventory. 153. Merchandise that was sold and shipped FOB shipping point on the last day of the year was not included in the seller’s ending inventory. 154. The beginning inventory was recorded as $10,000, when actual inventory on hand was $12,000. Match each of the following merchandise items to its status (a or b) as part of Hampton Co.’s. current inventory. a. Include in inventory count b. Exclude from inventory count 155. Merchandise on hand had been sold earlier in the year but had been returned by customers for various warranty repairs. 156. Hampton Co. sent merchandise on a consignment basis on December 31 just prior to the physical count. 157. On December 22, Hampton Co. ordered merchandise on FOB destination terms. The merchandise was shipped by the supplier on December 30 but had not been received by December 31. Powered by Cognero
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Chapter 07 - Inventories 158. On December 27, Hampton Co. ordered merchandise on FOB shipping point terms. The merchandise was shipped on December 29 but had not been received by December 31. 159. Merchandise sold FOB shipping point on December 31 was picked up by the freight company just before closing on December 31. 160. Merchandise shipped to a customer FOB destination was picked up by the freight company on December 28 but had not arrived at its destination as of December 31. Subjective Short Answer 161. Safeguarding inventory from damage or theft is a primary objective for the control of inventory. If you were running a clothing store, name three specific controls you would implement to guard inventory from theft. 162. List three different security measures taken to safeguard inventory. 163. List the internal control objectives illustrated by the following: a. b. c.
Keeping the inventory storeroom locked Counting the inventory at the end of the accounting period and comparing it with the inventory ledger clerk's records Using subsidiary ledgers and a perpetual inventory system
164. Three identical units of merchandise were purchased during March, as shown:
Mar. 3 10 19 Total
Purchase Purchase Purchase
Units 1 1 1 3
Cost $ 830 840 880 $2,550
Assume that one unit is sold on March 23 for $1,125. Determine the gross profit for March and ending inventory on March 31 using (a) FIFO, (b) LIFO, and (c) weighted average cost methods. 165. Three identical units of merchandise were purchased during May, as follows:
May 3 10 19 Total
Purchase Purchase Purchase
Units 1 1 1 3
Cost $130 136 142 $408
Assume that two units are sold on May 23 for $313 total. Determine the gross profit for May and ending inventory on May 31 using (a) FIFO, (b) LIFO, and (c) weighted average cost methods. 166. Assume that three identical units of merchandise were purchased during October, as follows:
Oct. 5 12 Powered by Cognero
Purchase Purchase
Units 1 1
Cost $5 13 Page 21
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Chapter 07 - Inventories 28 Total
Purchase
1 3
15 $33
Assume one unit is sold on October 31 for $28. Determine cost of merchandise sold, gross profit, and ending inventory under the LIFO method. 167. Assume that three identical units of merchandise were purchased during October, as follows:
Oct. 5 12 28 Total
Purchase Purchase Purchase
Units 1 1 1 3
Cost $ 5 13 15 $33
Assume one unit is sold on October 31 for $28. Determine cost of merchandise sold, gross profit, and ending inventory under the weighted average cost method. 168. Assume that three identical units of merchandise are purchased during October, as follows:
Oct. 5 12 28
Purchase Purchase Purchase
Total
Units 1 1 1
Cost $5 13 15
3
$33
Assume one unit is sold on October 31 for $28. Determine cost of merchandise sold, gross profit, and ending inventory under the FIFO method. 169. Three identical units of merchandise were purchased during July, as follows:
July 3 10 24
Purchase Purchase Purchase
Total
Units 1 1 1
Cost
3
$ 35 36 37 $108
Average cost per unit
$36
Assume one unit sells on July 28 for $45. Determine the gross profit, cost of merchandise sold, and ending inventory on July 31 using the (a) first-in, first-out, (b) last-in, first-out, and (c) weighted average cost flow methods. 170. Describe three inventory cost flow assumptions and how they impact the financial statements. 171. The following data regarding purchases and sales of a commodity were taken from the related perpetual inventory account: June 1 6
Balance Sale
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25 units at $60 20 units Page 22
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Chapter 07 - Inventories 8 16 20 23 30
Purchase Sale Purchase Sale Purchase
20 units at $61 10 units 20 units at $62 25 units 15 units at $63
Determine the cost of the ending inventory at June 30, using (a) the first-in, first-out (FIFO) method and (b) the last-in, first-out (LIFO) method. Identify the quantity, unit price, and total cost of each lot in the inventory. 172. Beginning inventory, purchases, and sales data for hammers are as follows: Mar. 3 11 14 21 25
Inventory Purchase Sale Purchase Sale
12 units at $15 13 units at $17 18 units 9 units at $20 10 units
Assuming the business maintains a perpetual inventory system, complete the subsidiary inventory ledger and determine the cost of merchandise sold and ending inventory under the following assumptions: a. First-in, first-out Cost of Merchandise Sold
Purchases Date
Unit Cost
Qty.
Total Cost
Qty.
Unit Cost
Total Cost
Inventory Qty.
Unit Cost
Total Cost
Mar. 3 11 14 21 25 Balances b. Last-in, first-out Purchases Date Qty. Mar. 3 11 14 21 25 Balances
Unit Cost
Total Cost
Cost of Merchandise Sold Qty.
Unit Cost
Total Cost
Inventory Qty.
Unit Cost
Total Cost
173. Beginning inventory, purchases, and sales for an inventory item are as follows: Sept. 1 Beginning inventory Powered by Cognero
24 units
@
$15 Page 23
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Chapter 07 - Inventories 5 Sale 17 Purchase 30 Sale
17 units 10 units 8 units
@
$20
Assuming a perpetual inventory system and the first-in, first-out method, determine (a) the cost of the merchandise sold for the September 30 sale and (b) the inventory on September 30. 174. Beginning inventory, purchases, and sales for an inventory item are as follows: Beginning inventory Sale First purchase Sale Second purchase Sale
150 units @ $755 120 units 400 units @ $785 200 units 300 units @ $805 290 units
The firm uses the perpetual inventory system and there are 240 units of the item on hand at the end of the year. What is the total cost of ending inventory according to FIFO? 175. Beginning inventory, purchases, and sales for an inventory item are as follows: Beginning inventory Sale First purchase Sale Second purchase Sale
150 units @ $755 120 units 400 units @ $785 200 units 300 units @ $805 290 units
The firm uses the perpetual inventory system and there are 240 units of the item on hand at the end of the year. What is the total cost of ending inventory according to LIFO? 176. Beginning inventory, purchases, and sales for an inventory item are as follows: Sept. 1 Beginning inventory 5 Sale 17 Purchase 30 Sale
24 units 17 units 10 units 8 units
@
$10
@
$15
Assuming a perpetual inventory system and the last-in, first-out method, determine (a) the cost of the merchandise sold for the September 30 sale and (b) the inventory on September 30. 177. Using a LIFO perpetual cost flow and the following data for Beamer Company, determine the value of the ending inventory and the cost of merchandise sold for the month of November. Nov. 1 4 11 12 22 23
Purchase Sale Purchase Sale Purchase Sale
600 units $80 each 200 units 350 units $82 each 275 units 175 units $84 each 155 units
Calculate the following: (a) Inventory valuation at the end of November Powered by Cognero
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Chapter 07 - Inventories (b) Cost of merchandise sold for November 178. Complete the following subsidiary inventory ledger using the perpetual FIFO method of inventory flow. Inventory Valuation—Perpetual FIFO Purchased Unit Date Units Cost July 2 Bal. July 5
600
$12
200
$13
Bal. July 7 Bal. July 10
325
Inventory Inventory Unit Units Dollar Balance Costs Balance
$14
300 150 250
$13
Bal. July 22
50 205
Bal. July 25 Bal. July 28
Unit Cost
300
Bal. July 12 Bal. July 18
Units Sold
120 180 330
$15
Bal. July 31
70 5
Ending Balance
FIFO INVENTORY VALUATION:
179. Beginning inventory, purchases, and sales data for tennis rackets are as follows: Apr.
3 Inventory 11 Purchase 14 Sale 21 Purchase
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12 units 13 units 18 units 9 units
@ @
$45 $47
@
$60 Page 25
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Chapter 07 - Inventories 25 Sale
10 units
Complete the subsidiary inventory ledger assuming the business maintains a perpetual inventory system and computes the cost of merchandise sold and ending inventory using FIFO. Cost of Merchandise Sold
Purchases
Date
Qty.
Unit Cost
Total Cost
Unit Cost
Qty.
Inventory
Total Cost
Total cost of merchandise sold
Qty.
Total Cost
Unit Cost
Ending inventory value
180. Beginning inventory, purchases, and sales data for tennis rackets are as follows: Apr. 3 Inventory 11 Purchase 14 Sale 21 Purchase 25 Sale
12 units 13 units 18 units 9 units 10 units
@ @
$45 $47
@
$60
Complete the subsidiary inventory ledger assuming the business maintains a perpetual inventory system and computes the cost of merchandise sold and ending inventory using LIFO. Cost of Merchandise Sold
Purchases
Date
Qty.
Unit Cost
Total Cost
Qty.
Unit Cost
Total Cost
Total cost of merchandise sold
Inventory
Qty.
Unit Cost
Total Cost
Ending inventory value
181. Beginning inventory, purchases, and sales data for widgets are as follows: Apr.
3 Inventory 11 Purchase 14 Sale
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15 units 12 units 18 units
@ @
$30 $27
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Chapter 07 - Inventories 21 Purchase 25 Sale
7 units 10 units
@
$25
Complete the subsidiary inventory ledger assuming the business maintains a perpetual inventory system and computes the cost of merchandise sold and ending inventory using FIFO. Cost of Merchandise Sold
Purchases Date
Qty.
Unit Cost
Total Cost
Qty.
Unit Cost
Total Cost
Total cost of merchandise sold
Inventory Qty.
Unit Cost
Total Cost
Ending inventory value
182. Beginning inventory, purchases, and sales data for widgets are as follows: Apr.
3 Inventory 11 Purchase 14 Sale 21 Purchase 25 Sale
15 units 12 units 18 units 7 units 10 units
@ @
$30 $27
@
$25
Complete the subsidiary inventory ledger assuming the business maintains a perpetual inventory system and computes the cost of merchandise sold and ending inventory using LIFO. Cost of Merchandise Sold
Purchases Date
Qty.
Unit Cost
Total Cost
Qty.
Unit Cost
Total cost of merchandise sold
Total Cost
Inventory Qty.
Unit Cost
Total Cost
Ending inventory value
183. The units of an item available for sale during the year were as follows: January 10 February 27 July 11 Powered by Cognero
Inventory Purchase Purchase
27 units @ $90 54 units @ $98 63 units @ $106 Page 27
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Chapter 07 - Inventories November 13
Purchase
36 units @ $115
There are 50 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the ending inventory cost by (a) the first-in, first-out method, (b) the last-in, first-out method, and (c) the weighted average cost method. Show your work. 184. The units of an item available for sale during the year were as follows: January 11 February 27 November 21
Inventory Purchase Purchase
60 units @ $145 90 units @ $150 75 units @ $154
There are 48 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the inventory cost by (a) the first-in, first-out method, (b) the last-in, first-out method, and (c) the weighted average cost method. Show your work. 185. The units of Manganese Plus available for sale during the year were as follows: Mar. 1 June 16 Nov. 28
Inventory Purchase Purchase
16 units 30 units 45 units 91 units
@ $30 @ $35 @ $39
$ 480 1,050 1,755 $3,285
There are 15 units of the product in the physical inventory at November 30. The periodic inventory system is used. Determine the inventory cost by the (a) FIFO, (b) LIFO, and (c) weighted average cost methods. 186. The units of an item available for sale during the year were as follows: Jan. 1 Inventory Mar. 4 Purchase June 7 Purchase Nov. 15 Purchase
25 units at $45 15 units at $50 35 units at $58 20 units at $65
There are 30 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the ending inventory cost using FIFO. 187. The units of an item available for sale during the year were as follows: Jan. 1 Apr. 4 May 20 Oct. 30
Inventory Purchase Purchase Purchase
10 units at $25 15 units at $24 20 units at $28 18 units at $30
There are 19 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the ending inventory cost using LIFO. 188. The beginning inventory and purchases of an item for the period were as follows: Beginning inventory First purchase Second purchase Third purchase Powered by Cognero
6 units at $70 each 10 units at $75 each 18 units at $80 each 10 units at $90 each Page 28
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Chapter 07 - Inventories The company uses the periodic system, and there were 15 units in the inventory at the end of the period. Determine the cost of the 15 units in the inventory by each of the following methods, presenting details of your computations: (a) first-in, first-out; (b) last-in, first-out; (c) weighted average cost. Do not round your intermediate computations. Round your final answer to two decimal places. 189. Beginning inventory and purchases and sales data for T-shirts are as follows: Apr.
3 Inventory 11 Purchase 14 Sale 21 Purchase 25 Sale
24 units 26 units 36 units 18 units 20 units
@ @
$10 $12
@
$15
Assuming the business maintains a periodic inventory system, determine the cost of merchandise sold and ending inventory under the following assumptions: a. FIFO b. LIFO c. Weighted average cost (round cost of merchandise sold and ending inventory to the nearest dollar) 190. The units of Product Green-2 available for sale during the year were as follows: Apr. 1 June 16 Sept. 28
Inventory Purchase Purchase
15 units 29 units 45 units
@ @ @
$30 $33 $35
There are 17 units of the product in the physical inventory at September 30. The periodic inventory system is used. Determine the cost of merchandise sold by the (a) FIFO, (b) LIFO, and (c) weighted average cost methods. 191. Brutus Corporation, a newly formed corporation, has the following transactions during May, its first month of operations. May 1 Purchased 500 units @ $25.00 each. 4 Purchased 300 units @ $24.00 each. 6 Sold 400 units @ $38.00 each. 8 Purchased 700 units @ $23.00 each. 13 Sold 450 units @ $37.50 each. 20 Purchased 250 units @ $25.25 each. 22 Sold 275 units @ $36.00 each. 27 Sold 300 units @ $37.00 each. 28 Purchased 550 units @ $26.00 each. 30 Sold 100 units @ $39.00 each. Determine the total sales, cost of merchandise sold, gross profit, and ending inventory using each of the following inventory methods: 1. FIFO perpetual 2. FIFO periodic 3. LIFO perpetual 4. LIFO periodic 5. Weighted average cost periodic (round average to nearest cent) 192. Complete the chart, indicating whether LIFO or FIFO would give the highest and lowest amounts for each item, assuming a period of increasing costs. Powered by Cognero
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Chapter 07 - Inventories Highest Amount
Lowest Amount
Cost of merchandise sold Gross profit Net income Ending merchandise inventory 193. The units of Manganese Plus available for sale during the year were as follows: Mar. 1 June 16 Nov. 28
Inventory Purchase Purchase
16 units 30 units 45 units 91 units
@ $30 @ $35 @ $39
$ 480 1,050 1,755 $3,285
There are 15 units of the product in the physical inventory at November 30. The periodic inventory system is used. Determine the difference in gross profit between the LIFO and FIFO inventory cost systems. 194. On the basis of the following data, determine the value of the inventory at the lower of cost or market. Apply lower of cost or market to each inventory item.
Item
Inventory Quantity
Cost per Unit
A B C
300 200 100
$15.00 14.00 17.00
Market value per Unit $14.50 15.00 17.50
Total Cost
Total Market
$4,500 2,800 1,700
$4,350 3,000 1,750
195. Determine the total value of the merchandise using net realizable value. Item Doll Horse
Quantity 10 5
Selling Price
Commission $7 9
$2 3
196. During the taking of its physical inventory on December 31, Almond Supplies Company incorrectly counted its inventory as $545,000 instead of the correct amount of $554,000. Indicate the effects of the misstatement on Almond Supplies Company’s balance sheet and income statement for the year ended December 31. 197. While taking a physical inventory, a company counts its inventory as less than the actual amount on hand. How will this error affect the income statement? 198. On the basis of the following data, determine the value of the inventory at the lower of cost or market. Apply lower of cost or market to each inventory item. Show your work. Item Product C Product D
Inventory Quantity 300 420
Unit Cost Price $6 12
Unit Market Price $ 5 14
199. On the basis of the following data, determine the value of the inventory at the lower of cost or market. Apply lower of cost or market to each inventory item. Show your work. Powered by Cognero
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Chapter 07 - Inventories Item Gear X Gear Y
Inventory Quantity 175 225
Unit Cost Price $33 27
Unit Market Price $29 28
200. The following basic inventory data for April 30 are for a business that employs the lower-of-cost-or-market basis of inventory valuation to each item. Total Inventory Market Value Commodity Quantity Cost per Unit per Unit A 35 $ 52 $ 55 B 20 155 150 C 25 82 85 D 40 58 55 a. b.
Cost _______ _______ _______ _______
Market _______ _______ _______ _______
LCM _______ _______ _______ _______
Complete the table. Determine the amount of reduction in the inventory at April 30 attributable to market decline.
201. a. Explain the effect of the following on the financial statements: Goods held on consignment were included in the ending inventory count. Goods purchased FOB shipping point were in transit on the last day of the year. These goods were not counted as part of ending inventory. Goods sold FOB shipping point were in transit on the last day of the year. These goods were not counted as part of ending inventory. b. What happens if inventory errors are not found and corrected? 202. On the basis of the following data for Sanford Industries as of December 31, determine the value of the inventory at the lower of cost or market. Also, show how the merchandise inventory would appear on the balance sheet (assume that the cost was determined by the FIFO method). Apply lower of cost or market to each inventory item. Commodity Size 4 Size 5 Size 6 Size 7
Inventory Quantity 9 10 14 12
Cost per Unit $17 17 20 13
Market Value per Unit $19 14 22 15
203. Based on the following information, compute (a) inventory turnover, (b) average daily cost of merchandise sold, and (c) days' sales in inventory for the current year. Use a 365-day year. (d) If an inventory turnover of 12 is average for the industry, how is this company doing? Item Cost of merchandise sold Inventory
Prior Year $172,900 18,000
Current Year $215,000 12,000
204. The following data were taken from Castle, Inc.: Powered by Cognero
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Chapter 07 - Inventories Cost of merchandise sold Inventory, end of year Inventory, beginning of the year
$894,000 78,000 92,000
Determine the inventory turnover ratio and the days’ sales in inventory for Castle Inc. Round to two decimal places. 205. Based on the following information, compute (a) inventory turnover (b) average daily cost of merchandise sold using a 365-day year and (c) days’ sales in inventory. Cost of merchandise sold Inventory: Beginning Ending
$195,640 20,500 18,628
206. The following data were taken from the annual reports of Big Bang Inc., a manufacturer of fireworks, and Orange Inc., a manufacturer of computers.
Cost of merchandise sold Inventory, end of year Inventory, beginning of year
Big Bang Inc. $830,000 190,000 240,000
Orange Inc. $11,540,000 320,000 290,000
a. Determine the (1) inventory turnover and (2) days' sales in inventory for Big Bang and Orange. Round your answers to two decimal places. b. How would you expect these measures to compare between the companies? Why? 207. Based on the following data, determine the estimated cost of the merchandise inventory on March 31 using the retail method. Cost $225,000 454,245
March 1 Merchandise inventory March 1–31 Purchases (net) March 1–31 Sales
Retail $357,600 612,750 835,000
208. A business using the retail method of inventory costing determines that merchandise inventory at retail is $2,300,000. If the ratio of cost to retail price is 55%, what is the amount of inventory to be reported on the financial statements? 209. Based on the following data, estimate the cost of ending merchandise inventory using the gross profit method. Sales Estimated gross profit rate
$250,000 25%
Beginning merchandise inventory Purchases (net) Merchandise available for sale
$
9,000 211,000 $220,000
210. Fill in the missing amounts from the following chart regarding the determination of Bean Corporation’s estimated inventory using the retail method of estimation. Powered by Cognero
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Chapter 07 - Inventories
Merchandise inventory, October 1 Purchases for October (net) Merchandise available for sale Ratio of cost to retail price: ? Sales for October Merchandise at retail, October 31 Merchandise at cost, October 31
Cost $13,687 ? $82,528
Retail $19,553 98,344 $ ? ? $25,340 $
?
211. During August, the first month of the fiscal year, sales totaled $875,000 and the cost of merchandise available for sale totaled $850,000. Estimate the cost of the merchandise inventory as of August 31, based on an estimated gross profit rate of 45%. 212. On the basis of the following data, estimate the cost of the merchandise inventory at March 31 by the retail method. March 1 March 1–31 March 1–31
Merchandise inventory Purchases (net) Sales
Cost $250,000 850,000
Retail $ 350,000 1,650,000 845,000
213. On the basis of the following data, determine the estimated cost of the inventory as of March 31 by the retail method, presenting details of the computation in good order. March 1 March 1– 31 March 1– 31
Merchandise inventory Purchases (net) Sales
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Cost $310,000
Retail $550,000
307,250
515,000 400,000
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Chapter 07 - Inventories Answer Key 1. True 2. False 3. True 4. True 5. True 6. False 7. False 8. False 9. False 10. True 11. False 12. True 13. False 14. True 15. True 16. False 17. True 18. True 19. True 20. True 21. True 22. False 23. False 24. True 25. True Powered by Cognero
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Chapter 07 - Inventories 26. False 27. False 28. False 29. True 30. False 31. True 32. False 33. True 34. True 35. True 36. False 37. True 38. True 39. True 40. True 41. False 42. False 43. False 44. True 45. True 46. c 47. a 48. d 49. b 50. c Powered by Cognero
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Chapter 07 - Inventories 51. a 52. a 53. d 54. d 55. b 56. c 57. a 58. c 59. b 60. b 61. a 62. b 63. a 64. a 65. c 66. b 67. d 68. c 69. d 70. b 71. c 72. b 73. a 74. d 75. c 76. c Powered by Cognero
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Chapter 07 - Inventories 77. d 78. b 79. b 80. c 81. d 82. a 83. d 84. c 85. c 86. c 87. b 88. a 89. c 90. b 91. d 92. a 93. c 94. b 95. a 96. a 97. c 98. a 99. c 100. b 101. a Powered by Cognero
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Chapter 07 - Inventories 102. a 103. b 104. b 105. c 106. b 107. b 108. b 109. a 110. d 111. c 112. a 113. b 114. b 115. a 116. c 117. d 118. a 119. d 120. a 121. b 122. c 123. b 124. c 125. b 126. c 127. a Powered by Cognero
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Chapter 07 - Inventories 128. a 129. c 130. d 131. b 132. a 133. a 134. b 135. b 136. a 137. c 138. a 139. b 140. c 141. b 142. a 143. c 144. b 145. b 146. a 147. b 148. c 149. a 150. c 151. a 152. b Powered by Cognero
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Chapter 07 - Inventories 153. c 154. a 155. b 156. a 157. b 158. a 159. b 160. a 161. Answers will vary but may include ink tags, alarm tags, bells that signal a customer is entering the area to try on clothing, chains that hook through the sleeves of garments and are locked onto clothing racks, scanners to screen customers as they leave the store for unpaid merchandise, and greeters at the store's entrance to keep customers from bringing in bags that can be used to shoplift merchandise. 162. Answers will vary and may include: - Storing inventory in areas that are restricted to only authorized employees. - Using physical devices such as two-way mirrors, cameras, and security guards. - Locking high-priced inventory in cabinets. - Placing sensors at each of the exits that are set off by alarm tags. 163. a. Safeguarding the inventory from damage or theft b. Safeguarding the inventory from damage or theft and reporting inventory in the financial statements c. Keeping inventory at proper levels and reporting inventory in the financial statements 164. Gross Profit
Ending Inventory
a.
First-in, first-out (FIFO)
$295 ($1,125 – $830)
$1,720 ($840 + $880)
b.
Last-in, first-out (LIFO)
$245 ($1,125 – $880)
$1,670 ($830 + $840)
c.
Weighted average cost
$2,550 ÷ 3 = $850 avg. cost $275 ($1,125 – $850)
$1,700 ($850 × 2)
165. a.
First-in, first-out (FIFO)
Gross Profit $47 [$313 – ($130 + $136)]
b.
Last-in, first-out (LIFO)
$35 [$313 – ($142 + $136)]
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Ending Inventory $142 $130 Page 40
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Chapter 07 - Inventories c.
Weighted average cost
$408 ÷ 3 = $136 average cost $41 [$313 – ($136 × 2 units)]
$136
166. Sales Cost of merchandise sold Gross profit Ending inventory ($5 + $13)
October 31 $28 15 $13 $18
167. Sales Cost of merchandise sold ($33 ÷ 3)
October 31 $28 11
Gross profit
$17
Ending inventory ($11 × 2)
$22
168. October 31 $28 5
Sales Cost of merchandise sold Gross profit
$23
Ending inventory ($13 + $15)
$28
169.
a. First-in, first-out
Gross Profit $45 – $35 = $10
Cost of Merchandise Sold $35
Ending Inventory $108 – $35 = $73
b. Last-in, first-out
$45 – $37 = $8
$37
$108 – $37 = $71
c. Weighted average cost
$45 – $36 = $9
$36
$108 – $36 = $72
170. 1. Cost flow is in the order in which costs were incurred or first-in, first-out (FIFO). The first units purchased are assumed sold, so the oldest costs flow to the income statement and the cost of the newest purchases are on the balance sheet. 2. Cost flow is in the reverse order in which costs were incurred or last-in, first-out (LIFO). The last units purchased are assumed sold, so the newest costs flow to the income statement and the cost of the oldest purchases are on the balance sheet. 3. Cost flow is an average of the costs. Under the weighted average cost method, all units are assigned the same average cost for the period. 171. Powered by Cognero
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Chapter 07 - Inventories a.
b.
June 20 30
10 units at $62 15 units at $63
June 1 8 30
Total
$ 620 945 $1,565
5 units at $60 5 units at $61 15 units at $63 Total
$ 300 305 945 $1,550
172. a. First-in, first-out Cost of Merchandise Sold
Purchases Date Mar. 3 11
Unit Total Qty. Cost Cost Qty. 13
$17
21
Unit Cost
$221 12 6
14 9
$20
$180 7 3
25
Inventory
Balances
Total Unit Total Cost Qty. Cost Cost 12 $15 $180 12 $15 $180 13 $17 221 $15 $180 7 $17 $119 $17 102 7 $17 $119 9 $20 180 $17 $119 6 $20 $120 $20 60 $461 $120
b. Last-in, first-out Cost of Merchandise Sold
Purchases Date
Qty.
Unit Total Cost Cost Qty.
Mar. 3 11
13
$17
$221
9
$20
$180
14 21
Inventory
25 Balances
Unit Total Unit Total Cost Cost Qty. Cost Cost 12 $15 $180 12 $15 $180 13 $17 221 13 $17 $221 7 $15 $105 5 $15 75 7 $15 $105 9 $20 180 9 $20 $180 6 $15 $90 1 $15 15 $491
$90
173. a. Cost of merchandise sold: 7 units @ $15 = $105 1 unit @ $20 = 20 8 units $125 Powered by Cognero
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Chapter 07 - Inventories b. Inventory, September 30: 9 units @ $20 = $180 174. $805 × 240 units = $193,200 175. ($755 × 30 units) + ($785 × 200 units) + ($805 × 10 units) = $187,700 176. a. Cost of merchandise sold: 8 units @ $15 = $120 b. Inventory on September 30: 7 units @ $10 = $ 70 2 units @ $15 = 30 9 units $100 177. Ending inventory valuation: 400 @ $80 = $32,000 75 @ $82 = 6,150 20 @ $84 = 1,680 $39,830 Cost of merchandise sold: 200 @ $80 = $16,000 275 @ $82 = 22,550 155 @ $84 = 13,020 $51,570 178. Inventory Valuation—Perpetual FIFO Date July 2 Bal. July 5
Purch. Units 600
Unit Cost $12
200
$13
Bal. July 7 Bal. July 10
325
Bal. July 12 Bal. Powered by Cognero
Units Sold
Unit Cost
300
$12
300 150
$12 $13
$14
Inventory Inventory Units Unit Dollar Balance Costs Balance 600 $12 $ 7,200 $ 7,200 600 $12 $ 7,200 200 $13 2,600 $ 9,800 300 $12 $ 3,600 200 $13 2,600 $ 6,200 300 $12 $ 3,600 200 $13 2,600 325 $14 4,550 $10,750 50 $13 $ 650 325 $14 4,550 $ 5,200 Page 43
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Chapter 07 - Inventories July 18
250
$13
Bal. July 22 Bal. July 25 Bal. July 28
330
$13 $14 $13
50 205
$13 $14
120 250
$14 $13
120 180
$14 $13
70
$13
$15
Bal. July 31
50 325 250
70 330 70 5
$
650 4,550 3,250 $ 8,450 $ 1,680 3,250 $ 4,930 $ 910 $ $
910 910 4,950 $ 5,860 $ 4,875
$13 $15
$13 $15 $15 325 FIFO INVENTORY VALUATION:
End Bal.
$4,875
179. Purchases Date Qty.
Unit Cost
Total Cost
$47
$611
Cost of Merchandise Sold Unit Total Qty. Cost Cost
Apr. 3 11
13
12 6
14 9
21
$60
$45 $47
$540 282
Inventory Unit Total Cost Cost 12 $45 $540
Qty.
12 13 7
$45 $47 $47
$540 611 $329
7 9 6
$47 $60 $60
$329 540 $360
$540
7 $47 $329 3 $60 180 Total cost of Ending inventory inventory sold $1,331 value
25
$360
180. Purchases Date Qty.
Unit Total Cost Cost
Apr. 3 11
13
$47
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$611
Cost of Merchandise Sold Unit Total Qty. Cost Cost
Inventory Unit Total Cost Cost 12 $45 $540
Qty.
12 13
$45 $47
$540 611 Page 44
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Chapter 07 - Inventories 13 5
14 9
21
$60
$47 $45
$611 225
$540
7
$45
$315
7 9 6
$45 $60 $45
$315 540 $270
9 $60 $540 1 $45 45 Total cost of Ending merchandise inventory sold $1,421 value
25
$270
181. Cost of Merchandise Sold Unit Total Qty. Cost Cost
Purchases Unit Total Date Qty. Cost Cost Apr. 3 12 $27 $324 11
15 3
14 7
21
$25
$30 $27
$175 9 $27 1 $25 Total cost of merchandise sold
25
$450 81
$243 25
Inventory Unit Total Cost Cost 15 $30 $450
Qty.
15 12 9
$30 27 $27
$450 324 $243
9 7 6
$27 25 $25
$243 175 $150
Ending inventory $799 value
$150
182.
Date Apr. 3 11
12
$27
7
$25
14 21
Cost of Inventory Merchandise Sold Unit Total Unit Total Qty. Cost Cost Qty. Cost Cost 15 $30 $450 $324 15 $30 $450 12 $27 324 12 $27 $324 9 $30 $270 6 $30 180 $175 9 $30 $270 7 $25 175 7 $25 $175 6 $30 $180 3 $30 90 Total cost of Ending merchandise inventory sold $769 value $180
Purchases Unit Total Qty. Cost Cost
25
183. Powered by Cognero
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Chapter 07 - Inventories a. b. c.
$5,624 (36 units at $115 + 14 units at $106 = $4,140; $4,140 + $1,484) $4,684 (27 units at $90 + 23 units at $98 = $2,430; $2,430 + $2,254) $5,150 ($18,540* ÷ 180 units = $103; 50 units at $103) *Cost of merchandise available for sale: 27 units at $90 54 units at $98 63 units at $106 36 units at $115 180 units (at average cost of $103)
184. a. b. c.
$ 2,430 5,292 6,678 4,140 $18,540
$7,392 (48 units × $154) $6,960 (48 units × $145) $7,200 ($33,750* ÷ 225 units = $150; 48 units × $150) *Cost of merchandise available for sale: 60 units at $145 90 units at $150 75 units at $154 225 units (at average cost of $150)
$ 8,700 13,500 11,550 $33,750
185. a. 15 units @ $39 = $585 b. 15 units @ $30 = $450 c. $3,285 ÷ 91 = $36.10 per unit; 15 units @ $36.10 = $541.50 186. $1,880 (20 units at $65 and 10 units at $58) 187. $466 (10 units at $25 and 9 units at $24) 188. a. 10 units @ $90 5 units @ $80 Total
$ 900 400 $1,300
b. 6 units @ $70 9 units @ $75 Total
$ 420 675 $1,095
c. Average unit cost = $3,510 ÷ 44 = 15 units @ $79.7727 = 189. a. FIFO Apr. 3 Inventory 11 Purchase Powered by Cognero
$79.7727 $1,196.59
24 units @ 10 26 units @ 12
$240 312 Page 46
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Chapter 07 - Inventories 21 Purchase Available for sale
18 units @ 15 68
270 $822
14 Sale
Cost of merchandise sold
24 units @ 10 12 units @ 12 14 units @ 12 6 units @ 15 56
$240 144 168 90 $642
Ending inventory
12 units @ 15
$180
3 Inventory 11 Purchase 21 Purchase Available for sale
24 units @ 10 26 units @ 12 18 units @ 15 68
$240 312 270 $822
14 Sale
Cost of merchandise sold
18 units @ 15 18 units @ 12 8 units @ 12 12 units @ 10 56
$270 216 96 120 $702
Ending inventory
12 units @ 10
$120
c. Weighted average cost Apr. 3 Inventory 11 Purchase 21 Purchase Available for sale
24 units @ 10 26 units @ 12 18 units @ 15 68
$240 312 270 $822
56 × $12.09
$677
12 × $12.09
$145
25 Sale
b. LIFO Apr.
25 Sale
Average cost $822 ÷ 68 = $12.09 Apr. 14 and 25 Cost of merchandise sold Ending inventory 190. a. FIFO
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15 units @ $30 = 29 units @ $33 = 28 units @ $35 = Total
$ 450 957 980 $2,387 Page 47
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Chapter 07 - Inventories b. LIFO
45 units @ $35 = 27 units @ $33 = Total
c. Weighted average cost $2,982 ÷ 89 = $33.51 72 units @ $33.51 =
$1,575 891 $2,466
$2,412.72
191. Total sales (not dependent on inventory method): May 6 400 @ $38.00 = $15,200.00 13 450 @ $37.50 = 16,875.00 22 275 @ $36.00 = 9,900.00 27 300 @ $37.00 = 11,100.00 30 100 @ $39.00 = 3,900.00 Total sales 1,525 units $56,975.00 Total merchandise available for sale: May 1 500 @ $25.00 = $12,500.00 4 300 @ $24.00 = 7,200.00 8 700 @ $23.00 = 16,100.00 20 250 @ $25.25 = 6,312.50 28 550 @ $26.00 = 14,300.00 Total 2,300 units $56,412.50 1. and 2. FIFO perpetual, FIFO periodic: There is no difference between these methods since FIFO is always first-in, first-out. Ending inventory: Total Units – Units Sold = Ending Inventory 2,300 – 1,525 = 775 units 225 @ $25.25 = 550 @ $26.00 = Ending inventory
$ 5,681.25 14,300.00 $19,981.25
Cost of merchandise sold: Total goods available Less ending inventory Cost of merchandise sold
$56,412.50 19,981.25 $36,431.25
Gross profit: Total sales Less cost of merchandise sold Gross profit
$56,975.00 36,431.25 $20,543.75
3. LIFO perpetual: Inventory Valuation Purchased Powered by Cognero
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Chapter 07 - Inventories Date May 1 May 4 Bal. May 6 Bal. May 8 Bal. May 13 Bal. May 20 Bal. May 22 May 27 Bal. May 28 May 30 Bal.
Units/ Units Inventory Balance Price Sold Cost Balance 500 25.00 12,500.00 300 24.00 7,200.00 19,700.00 300 24.00 (7,200.00) 100 25.00 (2,500.00) 400 25.00 10,000.00 700 23.00 16,100.00 10,000.00 400 25.00 23.00 16,100.00 700 26,100.00 450 23.00 (10,350.00) 10,000.00 400 25.00 5,750.00 250 23.00 15,750.00 250 25.25 6,312.50 22,062.50 250 25.25 (6,312.50) 25 23.00 (575.00) 225 23.00 (5,175.00) 75 25.00 (1,875.00) 325 25.00 8,125.00 550 26.00 14,300.00 100 26.00 (2,600.00) 325 25.00 8,125.00 450 26.00 11,700.00 19,825.00 Ending inventory
Cost of merchandise sold: Total goods available Less ending inventory Cost of merchandise sold
$56,412.50 19,825.00 $36,587.50
Gross profit: Total sales Less COMS Gross profit
$56,975.00 36,587.50 $20,387.50
4. LIFO periodic: Ending inventory: 500 @ $25.00 = 275 @ $24.00 = Ending inventory
$12,500.00 6,600.00 $19,100.00
Cost of merchandise sold: Powered by Cognero
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Chapter 07 - Inventories Total goods available Less ending inventory Cost of merchandise sold
$56,412.50 19,100.00 $37,312.50
Gross profit: Total sales Less COMS Gross profit
$56,975.00 37,312.50 $19,662.50
5. Weighted average cost periodic: Average cost: $56,412.50 ÷ 2,300 units = $24.53 Ending inventory: 775 units × $24.53 = $19,010,75 Cost of merchandise sold: $56,412.50 – $19,010.75 = $37,401.75 Gross profit: $56,975.00 – $37,401.75 = $19,573.25 192.
Cost of merchandise sold Gross profit Net income Ending merchandise inventory
Highest Amount LIFO FIFO FIFO FIFO
Lowest Amount FIFO LIFO LIFO LIFO
193. FIFO cost of merchandise sold (16 × $30) + (30 × $35) + (30 × $39) LIFO cost of merchandise sold (45 × $39) + (30 × $35) + (1 × $30) Difference
$2,700 2,835 $ 135
194. Total Item A B C Total
Inventory Cost Market Value Quantity per Unit per Unit 300 $15.00 $14.50 200 14.00 15.00 100 17.00 17.50
Cost Market LCM $4,500 $4,350 $4,350 2,800 3,000 2,800 1,700 1,750 1,700 $8,850
195. Item Doll Powered by Cognero
Quantity 10
Selling Price
Commission $7
Total $2
$50 Page 50
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Chapter 07 - Inventories Horse
5
9
3
Total
30 $80
196. Amount of Misstatement Overstatement (Understatement) Balance Sheet: Merchandise inventory understated Current assets understated Total assets understated Owner’s equity understated
$(9,000) (9,000) (9,000) (9,000)
Income Statement: Cost of merchandise sold overstated Gross profit understated Net income understated
$ 9,000 (9,000) (9,000)
197. Because the ending physical inventory is understated, the cost of merchandise sold will be overstated. Thus, the gross profit and the net income will be understated. 198. Total Market Inventory Cost per Value per Item Quantity Unit Unit Product C 300 $6 $5 Product D 420 12 14 Total
Cost Market $1,800 $1,500 5,040 5,880 $6,840 $7,380
LCM $1,500 5,040 $6,540
199. Total
Item Gear X Gear Y
Market Inventory Cost per Value per Quantity Unit Unit 175 $33 $29 225 27 28
Total
Cost Market $ 5,775 $ 5,075 6,075 6,300
LCM $ 5,075 6,075
$11,850 $11,375 $11,150
200. a. Total Inventory Commodity Quantity Powered by Cognero
Cost per
Market Value
Cost
Market
LCM Page 51
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Chapter 07 - Inventories A B C D Total
Unit per Unit $ 52 $ 55 $1,820 155 150 3,100 82 85 2,050 58 55 2,320 $9,290
35 20 25 40
$1,925 3,000 2,125 2,200 $9,250
$1,820 3,000 2,050 2,200 $9,070
b. $220 ($9,290– $9,070) 201. a. Goods held on consignment were included in the ending inventory count: Goods held on consignment should not be included in the consignee’s ending inventory. By including these goods, ending inventory, gross profit and net income are overstated and cost of merchandise sold is understated. On the balance sheet, inventory, current assets, total assets, and owner's equity are all overstated. Goods purchased FOB shipping point were in transit on the last day of the year. These goods were not counted as part of ending inventory: Goods purchased FOB shipping point become part of inventory when they are shipped to the purchaser. Thus, these goods should have been included in ending inventory even though they were not yet received. By excluding these goods, ending inventory, gross profit, and net income are understated and cost of merchandise sold is overstated. On the balance sheet, inventory, current assets, total assets, and owner's equity are all understated. Goods sold FOB shipping point were in transit on the last day of the year. These goods were not counted as part of ending inventory: When goods are sold FOB shipping point, title transfers when they are shipped to the purchaser. As such, they should not have been included in ending inventory, so this transaction has no error effect on the financial statements. b. The income statement and balance sheet will have errors in the current year. Inventory errors reverse themselves within two years. If the errors are not discovered, the income statement and balance sheet will be correct at the end of the next year. 202. Inventory valuation = $729 Total Commodity Size 4 Size 5 Size 6 Size 7 Totals
Inventory Quantity
Cost per Unit
9 10 14 12
$17 17 20 13
Market Value per Unit $19 14 22 15
Cost
Market
$153 170 280 156 $759
$171 140 308 180 $799
LCM $153 140 280 156 $729
Sanford Industries Balance Sheet December 31 Assets Current assets: Merchandise inventory at lower of cost (first-in, first-out) or market Powered by Cognero
$729.00 Page 52
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Chapter 07 - Inventories 203. a. $215,000 ÷ [($18,000 + $12,000) ÷ 2] = $215,000 ÷ $15,000 = 14.33 times b. $215,000 ÷ 365 = $589.04 c. $15,000 ÷ $589.04 = 25.5 days d. This company is doing worse than the overall industry. 204. Inventory Turnover = Cost of Merchandise Sold ÷ Average Inventory Inventory Turnover = $894,000 ÷ [($78,000 + $92,000) ÷ 2] Inventory Turnover = 10.52 Days’ Sales in Inventory = Average Inventory ÷ Average Daily Cost of Merchandise Sold Days’ Sales in Inventory = $85,000 ÷ ($894,000 ÷ 365) Days’ Sales in Inventory = 34.70 205. a. $195,640 ÷ [($20,500 + $18,628) ÷ 2] = $195,640 ÷ $19,564 = 10 b. $195,640 ÷ 365 = $536 c. $19,564 ÷ $536 = 36.5 days 206. a. (1) Inventory Turnover: Big Bang Inc.: 3.86 {$830,000 ÷ [($190,000 + $240,000) ÷ 2]} Orange Inc.: 37.84 {$11,540,000 ÷ [($320,000 + $290,000) ÷ 2]} (2) Days' Sales in Inventory: Big Bang Inc. Ave. Inv.: ($190,000 + $240,000) ÷ 2 = $215,000 Ave. Daily COMS: $830,000 ÷ 365 = $2,274 $215,000 ÷ $2,274 = 94.55 days Orange Inc. Ave. Inv.: ($320,000 + $290,000) ÷ 2 = $305,000 Ave. Daily COMS: $11,540,000 ÷ 365 = $31,616 $305,000 ÷ $31,616 = 9.65 days b.
You would expect Big Bang’s inventory turnover to be lower. Big Bang’s business is seasonal in nature, with most of its revenue generated during the major holidays. Much of its nonholiday inventory will most likely turn over very slowly. Orange, on the other hand, turns its inventory over very quickly. A computer manufacturer maintains a low inventory, which allows it to respond quickly to customer needs. Additionally, computer products can quickly become obsolete, so Orange cannot risk building large inventories. For these same reasons, Big Bang’s days' sales in inventory is expected to be higher than Orange’s.
207. March 1 March 1–31
Merchandise inventory Purchases (net)
Powered by Cognero
Cost $225,000 454,245
Retail $357,600 612,750 Page 53
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Chapter 07 - Inventories
March 1–31 March 1–31
Merchandise available for sale Ratio of cost to retail: $679,245 ÷ $970,350 = 70% Sales Merchandise inventory (at retail) Estimated merchandise inventory at estimated cost ($135,350 × 70%)
$679,245
$970,350
835,000 $135,350 $ 94,745
208. $2,300,000 × 55% = $1,265,000 209. Merchandise available for sale Sales Less estimated gross profit ($250,000 × 25%) Estimated cost of merchandise sold Estimated ending merchandise inventory
$220,000 $250,000 62,500 187,500 $ 32,500
210. Merchandise inventory, October 1 Purchases for October (net) Merchandise available for sale
Cost Retail $13,687 $ 19,553 68,841 98,344 $82,528 $117,897
Ratio of cost to retail price: 70% ($82,528 ÷ $117,897) Sales for October Merchandise at retail, October 31
92,557 $ 25,340
Merchandise at cost, October 31 ($25,340 × 70%)
$17,738
211. Merchandise available for sale in August August sales Less estimated gross profit ($875,000 × 45%) Estimated cost of merchandise sold Estimated ending merchandise inventory
$850,000 $875,000 393,750 481,250 $368,750
212. March 1 Merchandise inventory Purchases (net) March 1–31 Merchandise available for sale Ratio of cost to retail price: 55% ($1,100,000 ÷ $2,000,000) Sales for March Powered by Cognero
Cost $ 250,000 850,000 $1,100,000
Retail $ 350,000 1,650,000 $2,000,000
845,000 Page 54
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Chapter 07 - Inventories Merchandise inventory, March 31 at retail Merchandise inventory, March 31 at est. cost ($1,155,000 × 55%)
$1,155,000 $ 635,250
213. Merchandise inventory, March 1 Purchases in March (net) Merchandise available for sale Ratio of cost to retail price: 58% ($617,250 ÷ $1,065,000) Sales for March Merchandise inventory, March 31, at retail Merchandise inventory, March 31, at est. cost ($665,000 × 58%)
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Cost $310,000 307,250 $617,250
Retail $ 550,000 515,000 $1,065,000
400,000 $ 665,000 $385,700
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Chapter 08 - Internal Control and Cash True / False 1. The Sarbanes-Oxley Act applies only to companies whose stock is traded on public exchanges. a. True b. False 2. Sarbanes-Oxley’s purpose is to maintain public confidence and trust in the financial reporting of companies. a. True b. False 3. There are three internal control objectives and they are to safeguard the company's reputation, ensure accurate financial reports, and ensure compliance with applicable laws. a. True b. False 4. The Sarbanes-Oxley Act requires that financial statements of all public companies report on management's conclusions about the effectiveness of the company's internal control procedures. a. True b. False 5. Sarbanes-Oxley requires sole proprietorships to maintain strong and effective internal controls and thus deter fraud and prevent misleading financial statements. a. True b. False 6. The control environment in an internal control structure is the overall attitude of management and employees about the importance of internal control. a. True b. False 7. Separating the responsibilities for purchasing, receiving, and paying for equipment is an example of the control procedure: separating operations, custody of assets, and accounting. a. True b. False 8. Internal control is enhanced by separating the control of a transaction from the record-keeping function. a. True b. False 9. A backlog in recording transactions is an example of a warning sign from the accounting system. a. True b. False 10. Money orders are considered cash. a. True b. False Powered by Cognero
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Chapter 08 - Internal Control and Cash 11. A customer's check received in settlement of an account receivable is considered cash. a. True b. False 12. Businesses that have several bank accounts, petty cash, and cash on hand would maintain a separate ledger account for each type of cash. a. True b. False 13. For a strong internal control system over cash, it is important to have the duties related to cash receipts and cash payments divided among different employees. a. True b. False 14. If the balance in Cash Short and Over at the end of a period is a credit, it indicates that cash shortages have exceeded cash overages for the period. a. True b. False 15. If the balance in Cash Short and Over at the end of a period is a credit, it should be reported as "Other Income" on the income statement. a. True b. False 16. An example of good internal controls over cash payments is the taking of all cash discounts offered. a. True b. False 17. A voucher is a form on which is recorded pertinent data about a liability and the particulars of its payment. a. True b. False 18. When the voucher system is used, the amount due on each voucher represents the credit balance of an account payable if the voucher is in full payment to a creditor. a. True b. False 19. A voucher system is an example of an internal control procedure over cash payments. a. True b. False 20. A voucher is a written authorization to make a cash payment. a. True b. False 21. The bank often informs the company of bank service charges by including a credit memo with the monthly bank Powered by Cognero
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Chapter 08 - Internal Control and Cash statement. a. True b. False 22. Bank customers are considered creditors of the bank so the bank shows their accounts with credit balances on the bank's records. a. True b. False 23. Depositing all cash, checks, etc., in a bank and paying with checks is an internal control procedure over cash. a. True b. False 24. For efficiency of operations and better control over cash, a company should maintain only one bank account. a. True b. False 25. The bank reconciliation is an important part of the system of internal controls. a. True b. False 26. In preparing a bank reconciliation, the amount of deposits in transit is deducted from the balance per bank statement. a. True b. False 27. In preparing a bank reconciliation, the amount of outstanding checks is added to the balance per bank statement. a. True b. False 28. In preparing a bank reconciliation, the amount indicated by a debit memo for bank service charges is added to the balance per company's records. a. True b. False 29. In preparing a bank reconciliation, the amount of a canceled check omitted from the journal is added to the balance per company's records. a. True b. False 30. A check for $342 was erroneously charged by the bank as $432. In order for the bank reconciliation to balance, you must add $90 to the bank statement balance. a. True b. False 31. An adjustment for a customer’s NSF check is included in a company’s bank reconciliation as a deduction from the cash balance according to the bank statement. Powered by Cognero
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Chapter 08 - Internal Control and Cash a. True b. False 32. The amount of the "adjusted balance" appearing on the bank reconciliation as of a given date is the amount that is shown on the balance sheet for that date. a. True b. False 33. All bank memos reported on the bank reconciliation require entries in the company's accounts. a. True b. False 34. To enhance internal control, the bank reconciliation should be prepared by an employee who does not take part in or record cash transactions. a. True b. False 35. The bank reconciles its statement to the company's records. a. True b. False 36. In preparing a bank reconciliation, the amount indicated by a credit memo for a note receivable collected by the bank is added to the balance per company's records. a. True b. False 37. In preparing a bank reconciliation, the amount of an error indicating the recording of a check in the journal for an amount larger than the amount of the check is added to the balance per company's records. a. True b. False 38. A check outstanding for two consecutive months will appear only on the first month's bank reconciliation. a. True b. False 39. After a bank reconciliation is completed, journal entries are prepared for all adjusting items appearing in the bank section and the company section of the bank reconciliation. a. True b. False 40. A business that requires all cash payments be made by check cannot use a petty cash system. a. True b. False 41. In establishing a petty cash fund, a check is written for the amount of the fund and is journalized as a debit to Accounts Payable and a credit to Petty Cash. Powered by Cognero
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Chapter 08 - Internal Control and Cash a. True b. False 42. Expenditures from a petty cash fund are documented by a petty cash receipt. a. True b. False 43. The sum of the money on hand and petty cash receipts in a petty cash fund will always be equal to the balance in the petty cash account. a. True b. False 44. When the petty cash fund is replenished, the petty cash account is credited for the total of all expenditures made since the fund was last replenished. a. True b. False 45. Most companies that have several bank accounts, petty cash, and cash on hand would list each separately on the balance sheet. a. True b. False 46. A petty cash fund is used to pay relatively large amounts. a. True b. False 47. The petty cash fund eliminates the need for a bank checking account. a. True b. False 48. A compensating balance occurs when a bank may require a company to maintain a maximum cash balance. a. True b. False 49. Cash equivalents include short-term investments that will be converted to cash within 120 days. a. True b. False 50. Money market accounts, commercial paper, and U.S. Treasury bills are examples of cash equivalents. a. True b. False 51. The ratio of cash to monthly cash expenses includes both cash and cash equivalents in the numerator. a. True b. False Powered by Cognero
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Chapter 08 - Internal Control and Cash Multiple Choice 52. Sarbanes-Oxley applies to a. publicly held companies b. not-for-profit organizations c. privately held businesses d. All of these choices 53. "To maintain public confidence and trust in the financial reporting of companies" is the purpose of a. the FASB b. the IRS c. Sarbanes-Oxley d. GAAP 54. Which of the following is not an element of internal control? a. risk assessment b. monitoring c. information and communication d. cost-benefit considerations 55. Which of the following is not a factor that influences a business's control environment? a. management's philosophy and operating style b. organizational structure c. proofs and security measures d. personnel policies 56. When there are major changes in a company's strategy, business structure, or operations, evaluations of controls are usually performed by a. external auditors b. internal auditors c. senior management d. the Securities and Exchange Commission 57. The objectives of internal control are to a. control the internal organization of the Accounting Department personnel and equipment b. provide reasonable assurance that assets are safeguarded and used for business purposes, financial reports are accurate, and laws and regulations are complied with c. prevent fraud and promote the social interest of the company d. provide control over "internal-use only" reports and employee internal conduct 58. Which of the following reflects a weak internal control system? a. All employees are well supervised. b. A single employee is responsible for comparing a receiving report to an invoice. c. All employees must take their vacations. d. A single employee is responsible for collecting and recording cash. Powered by Cognero
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Chapter 08 - Internal Control and Cash 59. Internal control does not consist of policies and procedures that a. protect assets from misuse b. ensure employees and managers comply with laws and regulations c. guarantee the company will earn a profit d. ensure that business information is accurate 60. A firm's internal control environment is not influenced by a. management's operating style b. organizational structure c. personnel policies d. monitoring policies 61. An element of internal control is a. risk assessment b. journals c. subsidiary ledgers d. controlling accounts 62. A necessary element of internal control is a. a database b. systems design c. systems analysis d. information and communication 63. Which of the following should not be considered cash by an accountant? a. money orders b. bank checking accounts c. postage stamps d. travelers' checks 64. The cash account in the company's ledger is a(n) a. asset with a normal debit balance b. asset with a normal credit balance c. liability with a normal debit balance d. liability with a normal credit balance 65. The portion of an invoice that is returned with payment is a a. remittance advice b. voucher c. debit memo d. credit memo 66. The debit balance in Cash Short and Over at the end of an accounting period is reported as Powered by Cognero
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Chapter 08 - Internal Control and Cash a. an expense on the income statement b. income on the income statement c. an asset on the balance sheet d. a liability on the balance sheet 67. Procedures designed to protect cash from theft and misuse from the time it is received until it can be deposited in a bank are called a. accounting controls b. cash controls c. FASB controls d. GAAP controls 68. A special form on which is recorded pertinent data about a liability and the particulars of its payment is called a(n) a. invoice b. voucher c. debit memo d. remittance advice 69. EFT a. means efficient funds transfer b. can process certain cash transactions at less cost than using the mail would incur c. makes it easier to document purchase and sale transactions d. means effective funds transfer 70. A voucher is usually supported by a. a supplier's invoice b. a purchase order c. a receiving report d. All of these choices 71. Credit memos from the bank a. decrease a bank customer's account b. are used to show a bank service charge c. show that a company has deposited a customer's NSF check d. show that the bank has collected a note receivable for the customer 72. Consider the following information taken from the cash account. Assume cash payments were 80% of collections. ?? $115,375 ?? $80,275
Cash Beginning balance Deposits Checks Ending balance
How much was the beginning balance of the cash account? a. $57,200 Powered by Cognero
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Chapter 08 - Internal Control and Cash b. $92,300 c. $103,350 d. $35,100 73. A bank statement a. is a credit reference letter written by the company's bank b. shows a company the financial position of the bank as of a certain date c. is a bill from the bank for services rendered d. shows the activity that increased or decreased the company's account balance 74. A debit or credit memo describing entries in the company's bank account may be enclosed with the bank statement. An example of a credit memo is a. a deposited check returned for insufficient funds b. collection of a note receivable for the company c. a service charge d. notification that a customer's check for $375 was recorded by the company as $735 on the deposit ticket 75. A check drawn by a company for $340 in payment of a liability was recorded in the journal as $430. This item would be included on the bank reconciliation as a(n) a. addition to the balance per the company's records b. addition to the balance per the bank statement c. deduction from the balance per the bank statement d. deduction from the balance per the company's records 76. A check drawn by a company for $340 in payment of a liability was recorded in the journal as $430. What entry is required in the company's accounts? a. debit Accounts Payable; credit Cash b. debit Cash; credit Accounts Receivable c. debit Cash; credit Accounts Payable d. debit Accounts Receivable; credit Cash 77. A bank reconciliation should be prepared periodically because a. the company's records and the bank's records are in agreement b. the bank has not recorded all of its transactions c. any differences between the company's records and the bank's records should be determined, and any errors made by either party should be discovered and corrected d. the bank must make sure that its records are correct 78. The bank reconciliation a. should be prepared by an employee who records cash transactions b. is part of the internal control system c. is for information purposes only d. is sent to the bank for verification 79. Journal entries based on the bank reconciliation are required in the company's accounts for Powered by Cognero
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Chapter 08 - Internal Control and Cash a. outstanding checks b. deposits in transit c. bank errors d. book errors 80. Accompanying the bank statement was a debit memo for bank service charges. On the bank reconciliation, the item is a(n) a. deduction from the balance per company's records b. addition to the balance per bank statement c. deduction from the balance per bank statement d. addition to the balance per company's records 81. Accompanying the bank statement was a debit memo for bank service charges. What entry is required in the company's accounts? a. debit Miscellaneous Expense; credit Cash b. debit Cash; credit Other Income c. debit Cash; credit Accounts Payable d. debit Accounts Payable; credit Cash 82. A check drawn by a company in payment of a voucher for $965 was recorded in the journal as $695. This item would be included in the bank reconciliation as a(n) a. deduction from the balance per the company's records b. addition to the balance per the bank statement c. deduction from the balance per the bank statement d. addition to the balance per the company's records 83. A check drawn by a company in payment of a voucher for $965 was recorded in the journal as $695. What entry is required in the company's accounts? a. debit Accounts Payable; credit Cash b. debit Cash; credit Accounts Receivable c. debit Cash; credit Accounts Payable d. debit Accounts Receivable; credit Cash 84. Receipts from cash sales of $3,200 were recorded incorrectly in the cash receipts journal as $2,300. This item would be included on the bank reconciliation as a(n) a. deduction from the balance per company's records b. addition to the balance per bank statement c. deduction from the balance per bank statement d. addition to the balance per company's records 85. Accompanying the bank statement was a credit memo for a short-term note collected by the bank for the company. This item is a(n) a. deduction from the balance per company's records b. addition to the balance per bank statement c. deduction from the balance per bank statement Powered by Cognero
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Chapter 08 - Internal Control and Cash d. addition to the balance per company's records 86. Accompanying the bank statement was a credit memo for a short-term note collected by the bank for the customer. What entry is required in the company's accounts? a. debit Notes Receivable; credit Cash b. debit Cash; credit Miscellaneous Income c. debit Cash; credit Notes Receivable and Interest Revenue d. debit Accounts Receivable; credit Cash 87. The amount of deposits in transit is included on the bank reconciliation as a(n) a. deduction from the balance per the company records b. deduction from the balance per bank statement c. addition to the balance per bank statement d. addition to the balance per company records 88. The amount of the outstanding checks is included on the bank reconciliation as a(n) a. deduction from the balance per company's records b. addition to the balance per bank statement c. deduction from the balance per bank statement d. addition to the balance per company's records 89. Which of the following items that appeared on the bank reconciliation did not require a journal entry? a. bank service charges b. deposits in transit c. NSF checks d. a check for $630, recorded in the check register for $360 90. What entry is required in the company's accounts to record outstanding checks? a. debit Accounts Receivable; credit Cash b. debit Cash; credit Accounts Receivable c. debit Cash; credit Accounts Payable d. no entry required 91. Accompanying the bank statement was a debit memo for an NSF check received from a customer. This item would be included on the bank reconciliation as a(n) a. deduction from the balance per company's records b. addition to the balance per bank statement c. deduction from the balance per bank statement d. addition to the balance per company's records 92. Accompanying the bank statement was a debit memo for an NSF check received from a customer. What entry is required in the company's accounts? a. debit Other Income; credit Cash b. debit Cash; credit Other Income c. debit Cash; credit Accounts Receivable Powered by Cognero
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Chapter 08 - Internal Control and Cash d. debit Accounts Receivable; credit Cash 93. The amount of cash to be reported on the balance sheet at June 30 is the a. total of the Cash column in the cash receipts journal as of June 30 b. adjusted balance appearing in the bank reconciliation for June 30 c. total of the Cash column in the cash payments journal as of June 30 d. balance as of June 30 on the bank statement 94. Which of the following would be deducted from the balance per company records on a bank reconciliation? a. service charges b. outstanding checks c. deposits in transit d. notes collected by the bank 95. Which of the following would be added to the balance per company records on a bank reconciliation? a. service charges b. outstanding checks c. deposits in transit d. notes collected by the bank 96. Which of the following would be subtracted from the balance per company records on a bank reconciliation? a. outstanding checks b. deposits in transit c. notes collected by the bank d. error in recording a check issued for $732 as $723 97. Which of the following would be subtracted from the balance per bank on a bank reconciliation? a. outstanding checks b. deposits in transit c. notes collected by the bank d. service charges 98. A bank reconciliation should be prepared a. whenever the bank refuses to lend the company money b. to explain any difference between the balance per company records with the balance per bank records c. by the company's bank d. by the person who is authorized to sign checks 99. Minor Company had checks outstanding totaling $19,200 on its April bank reconciliation. In May, Minor Company issued checks totaling $64,900. The May bank statement shows that $47,600 in checks cleared the bank in May. A check of $300 from one of Minor Company's customers was also returned marked "NSF." The amount of outstanding checks on Minor Company's May bank reconciliation should be a. $28,400 b. $66,800 c. $17,300 Powered by Cognero
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Chapter 08 - Internal Control and Cash d. $36,500 100. Rodgers Company gathered the following reconciling information in preparing its May bank reconciliation. Determine the adjusted balance on May 31. Cash balance per company records, May 31 Deposits in transit Notes receivable and interest collected by bank Bank charge for check printing Outstanding checks NSF check a. $5,870 b. $6,245 c. $4,930 d. $3,845
$5,400 375 650 40 2,400 140
101. Gunnar Company gathered the following reconciling information in preparing its September bank reconciliation. Determine the adjusted balance on September 30. Cash balance per company records, September 30 Deposits in transit Notes receivable and interest collected by bank Bank charge for check printing Outstanding checks NSF check a. $5,130 b. $3,690 c. $3,040 d. $1,590
$2,750 200 630 50 1,250 290
102. Jamison Company gathered the following reconciling information in preparing its June bank reconciliation. Determine the cash balance per company records (before adjustment) on June 30. Cash balance per bank, June 30 Note receivable collected by bank Outstanding checks Deposits in transit Bank service charge NSF check a. $8,065 b. $10,565 c. $15,065 d. $6,435
$13,000 4,000 7,000 2,500 35 1,900
103. Thompson Company gathered the following reconciling information in preparing its October bank reconciliation. Determine the cash balance per company records (before adjustment) on June 30. Cash balance per bank, October 31 Powered by Cognero
$17,000 Page 13
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Chapter 08 - Internal Control and Cash Note receivable collected by bank Outstanding checks Deposits in transit Bank service charge NSF check a. $11,050 b. $19,450 c. $15,950 d. $11,150
4,800 6,500 3,000 50 2,300
104. During a bank reconciliation process, a. outstanding checks and deposits in transit are added to the bank statement balance b. outstanding checks are subtracted and deposits in transit are added to the bank statement balance c. outstanding checks and deposits in transit are subtracted from the bank statement balance d. outstanding checks are added and deposits in transit are subtracted from the bank statement balance 105. Savannah Company gathered the following reconciling information in preparing its October bank reconciliation. Determine the adjusted balance on October 31. Balance per bank Balance per company records Bank service charges Deposit in transit NSF check Outstanding checks a. $14,470 b. $10,705 c. $15,095 d. $15,720
$16,750 16,125 80 2,195 950 3,850
106. In the normal operation of business, you receive a check from a customer and deposit it into your checking account. With your bank statement, you are advised that this check for $775 is “NSF.” The bank also informs you that due to the amount of activity on your business account the monthly service charge is $75. During a bank reconciliation, you will a. subtract both values from the cash balance according to the bank statement b. add both values to the cash balance according to the company’s records c. add both values to the cash balance according to the bank statement d. subtract both values from the cash balance according to the company’s records 107. A $150 petty cash fund has cash of $54 and receipts of $83. The journal entry to replenish the account would include a a. credit to Petty Cash for $29 b. debit to Cash for $83 c. debit to Cash Short and Over for $13 d. credit to Cash for $54 108. A $135 petty cash fund has cash of $18 and receipts of $120. The journal entry to replenish the account would Powered by Cognero
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Chapter 08 - Internal Control and Cash include a a. credit to Petty Cash for $120 b. debit to Cash for $120 c. credit to Cash Short and Over for $3 d. credit to Cash for $102 109. Entries are made to the petty cash account when a. making payments out of the fund b. recording shortages in the fund c. replenishing the petty cash fund d. establishing the fund 110. The type of account and normal balance of Petty Cash is a(n) a. revenue, credit b. asset, debit c. liability, credit d. expense, debit 111. The debit made in the journal to reimburse the petty cash fund is to a. Petty Cash b. Accounts Receivable c. Cash d. various accounts for which the petty cash was disbursed 112. A $200 petty cash fund has cash of $20 and receipts of $177. The journal entry to replenish the account would include a credit to a. Cash for $20 b. Cash Short and Over for $3 c. Petty Cash for $190 d. Cash for $180 113. Cash equivalents include a. checks b. coins and currency c. money market accounts and commercial paper d. stocks and short-term bonds 114. Cash equivalents a. are illegal in some states b. will be converted to cash within two years c. will be converted to cash within 90 days d. will be converted to cash within 120 days 115. A minimum cash balance required by a bank is called Powered by Cognero
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Chapter 08 - Internal Control and Cash a. cash in bank b. a cash equivalent c. a compensating balance d. an EFT 116. Which of the following would not be included with the cash and cash equivalents on the balance sheet? a. commercial paper b. short-term receivables c. certificates of deposit d. money market mutual funds 117. Pilger Corporation has cash on hand at year-end of $201,000 and a negative cash flow from operations of $144,000. What is the ratio of cash to monthly cash expenses? a. 12.0 months b. 7.2 months c. 1.4 months d. 16.8 months 118. During the year, Tempo Inc. has monthly cash expenses of $115,000. On December 31, its cash balance is $1,437,500. The ratio of cash to monthly cash expenses is a. 8.0 months b. 12.5 months c. 87.5 months d. 11.5 months Matching Match each of the following elements of internal control to a phrase (a–e) that applies to it. a. Provides reasonable assurance that business goals will be achieved b. Used by management for guiding operations and ensuring compliance with requirements c. Overall attitude of management and employees d. Used to locate weaknesses and improve controls e. Identifies, analyzes, and assesses likeliness of vulnerabilities 119. Control environment 120. Risk assessment 121. Control procedures 122. Monitoring 123. Information and communication Match each of the following activities to an element of internal control (a–c). Each letter may be used more than once. a. Risk assessment Powered by Cognero
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Chapter 08 - Internal Control and Cash b. Control procedures c. Monitoring 124. Rotating duties 125. Observing employee behavior and the accounting system for indicators of control problems 126. Separating responsibilities for related operations 127. Analyzing the significance of changes in economic factors 128. Hiring and properly training competent personnel Match each of the following items with how it would appear on the bank statement (a–d). Each letter may be used more than once. Some letters may not be used. a. With a debit memo entry that increases the account balance b. With a debit memo entry that decreases the account balance c. With a credit memo entry that increases the account balance d. With a credit memo entry that decreases the account balance 129. EFT payment 130. Bank correction of an error due to posting another customer’s check to your account 131. Bank service charge 132. Note and interest collected for the company 133. Customer’s NSF check 134. Correction of the bank’s error recording a $250 deposit as $520 135. EFT deposit 136. Correction of the bank’s error recording a $300 check as $30 Match each of the following reconciling items to its proper placement (a–d) on the bank statement. Each letter may be used more than once. Some letters may not be used. a. Bank statement adjustment b. Company’s records adjustment c. Either d. Neither 137. Outstanding checks 138. NSF check 139. Error in recording a check 140. Bank charges Powered by Cognero
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Chapter 08 - Internal Control and Cash 141. Note collected by the bank 142. Interest revenue 143. Deposit in transit Match each of the following reconciling items to its proper treatment (a–d) on the bank reconciliation. Each letter may be used more than once. a. Added to the cash balance according to the company’s records b. Subtracted from the cash balance according to the company’s records c. Added to the cash balance according to the bank statement d. Subtracted from the cash balance according to the bank statement 144. Outstanding checks 145. Bank service charge 146. Deposit in transit 147. NSF check 148. EFT deposit from a customer 149. Charges for some other company’s safe deposit box posted by the bank to the company’s account 150. A $1,000 note from a customer collected by the bank 151. Interest revenue earned on a note receivable collected by the bank 152. Check issued for $690 incorrectly recorded by the company as $960 153. Check issued for $420 incorrectly recorded by the company as $240 Subjective Short Answer 154. List the objectives of internal control, and provide three examples of control procedures. 155. You began your new job as the accountant at Bolivar Industries during the month of December. During your first month, you found several warning signs related to control issues, as follows: (1) While looking through the invoices, you found Invoices 213–242, 245–271, and 275–290. It appears that invoices 243, 244, 272, 273, and 274 are missing. (2) During the month, Clerk #3 issued $250 in refunds as compared to Clerks #1, #2, and #4 who issued less than $50 each. (3) The daily cash receipts and bank deposits reconcile, except on Tuesdays during the month. (4) Business is generally brisk during the holiday season, but two weeks before Christmas there was a sudden increase in slow payments. Powered by Cognero
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Chapter 08 - Internal Control and Cash a. What kinds of issues could be associated with these warning signs? b. List three controls that could be put in place regarding the cash refunds mentioned in (a) (2). 156. Two features of internal control are presented in the following sections. Each is followed by a list of four irregularities that occurred in processing data. Identify the one irregularity from each list that would be discovered or prevented by the feature of internal control described. a.
The sum of the balances of the accounts in the accounts receivable subsidiary ledger is compared at the end of each month with the balance of the accounts receivable account in the general ledger by a person who has no responsibility for maintaining either the general ledger or the subsidiary ledger. (1) (2) (3) (4)
b.
Five hours of services were rendered but the customer was only billed for four hours. A cash receipt of $750 was recorded correctly in the accounts receivable controlling account but was posted to the customer's ledger as $75. A bill for services rendered to Cole Co. was erroneously posted to the account of Coleman Co. in the accounts receivable subsidiary ledger. No entry was made in the accounting records for services rendered to a customer.
Both cash and credit charges for services rendered are recorded on prenumbered invoices. At the end of the day, all invoices are accounted for before the duplicate copies of the invoices are routed to the Accounting Department for entry into the accounts and the cash is sent to the Cashier's Department for deposit. (1) (2) (3) (4)
Some charge customers complained that the monthly statements of account did not add all amounts correctly. Some clerks used incorrect hourly rates in preparing invoices. Some clerks destroyed duplicate copies of cash invoices and misappropriated the cash. Some charge customers complained that the monthly statement of account did not indicate credits for payments made.
157. List and define each of the five elements of internal control. 158. The following procedures were recently implemented at Health Station, Inc. For each procedure, indicate whether the internal control over cash represents a strength or a weakness. If it is a weakness, explain how the control can be strengthened. a. All mail is opened by the mail clerk, who forwards all cash remittances to the cashier. The cashier prepares a listing of the cash receipts and forwards a copy of the list to the accounts receivable clerk for recording in the accounts. b. The accounts payable clerk prepares a voucher for each disbursement. The voucher along with the supporting documentation is forwarded to the treasurer’s office for approval. c. At the end of each day, all cash receipts are placed in the bank’s night depository. d. The bank reconciliation is prepared by the cashier, who works under the supervision of the treasurer. 159. The following procedures were recently implemented at Pampered Pets, Inc. For each procedure, indicate whether the internal control over cash represents a strength or a weakness. If it is a weakness, explain how the control can be strengthened. Powered by Cognero
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Chapter 08 - Internal Control and Cash a. At the end of the day, cash register clerks are required to use their own funds to make up any cash shortages in their registers. b. At the end of the day, an accounting clerk compares the duplicate copy of the daily cash deposit slip with the deposit receipt obtained from the bank. c. After necessary approvals have been obtained for the payment of a voucher, the treasurer signs and mails the check. The treasurer then stamps the voucher and supporting documentation as paid and returns the voucher and supporting documentation to the accounts payable clerk for filing. d. Along with the petty cash receipts for postage, office supplies, etc., several postdated employee checks are in the petty cash fund. 160. The following selected transactions relate to cash collections for a firm that maintains a $100 change fund at all times. Journalize the transactions for each of the two days of cash receipts from sales. a. b.
Actual cash in cash register, $5,412.36; cash receipts per cash register tally, $5,413.07. Actual cash in cash register, $3,712.95; cash receipts per cash register tally, $3,712.16.
161. The actual cash received during the week ended June 6 for cash sales was $8,276, and the amount indicated by the cash register total was $8,262. Journalize the cash receipts and cash sales. 162. The actual cash received during the week ended October 31 for cash sales was $23,447, and the amount indicated by the cash register total was $23,457. Journalize the cash receipts and cash sales. 163. Scharf Company is a retailer located in a state without sales tax. The following data were given to you to complete the transactions for the day’s sales to be recorded. All cash drawers start with $100 in change. Cash in drawer Sales reading
Reg. 1 $974.50 879.50
Reg. 2 $1,383.66 1,298.16
Reg. 3 $939.46 839.46
Reg. 4 $1,137.91 1,030.33
Journalize the entries for the cash receipts and cash sales for EACH cash register separately. 164. Describe the features of a voucher system, and list typical supporting documents for a voucher. 165. The actual cash received during the week ended June 7 for cash sales was $18,632, and the amount indicated by the cash register total was $18,628. Journalize the entry for the cash receipts and cash sales. 166. Consider the following journal entry made by Jones Company for one day's sales of a single cashier. What might have happened to create this amount of Cash Short and Over difference? Give three possible reasons for this difference. Cash Cash Short and Over Sales
2,235 100 2,135
167. List the principal advantages of electronic funds transfers. 168. The following information is from Madison Corporation’s accounting records for May. Check No. 3269 was returned as a double payment and voided. Checks that have not cleared the bank include No. 3252, No. 3260, and series No. 3275– 3278. Powered by Cognero
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Chapter 08 - Internal Control and Cash Check No. 3247 3248 3249 3250 3251 3252 3253 3254 3255 3256 3257 3258 3259 3260 3261 3262
Amount $ 32.64 400.00 309.22 256.00 3,212.17 56.89 98.02 47.55 1,124.77 250.00 68.00 215.56 38.55 92.65 44.61 72.96
Check No. 3263 3264 3265 3266 3267 3268 3269 3270 3271 3272 3273 3274 3275 3276 3277 3278
Amount $ 24.87 45.00 33.78 756.77 84.34 789.00 48.90 34.41 872.00 22.00 562.38 512.00 603.50 67.00 301.61 47.88
In addition to the list of checks, Madison had Check No. 2264 for $32.98 and Check No. 2655 for $45.99 outstanding previously that have not cleared. a. Create an outstanding checks list for Madison at the end of May. b. What is the total amount of checks that cleared the bank (written in May)? 169. Consider the following information from the company’s records. Assume cash payments (checks) were 84% of collections (deposits). Cash ?? $245,000 ?? $80,275
Beg. balance Deposits Checks End. balance
How much was the beginning balance of the cash account? 170. Jackson Industries has collected the following information but needs assistance completing the table. The cash payments (checks) were 90% of collections (deposits). Cash ?? $511,770 ?? $102,275
Beg. balance Deposits Checks End. balance
How much was the beginning balance of the cash account? 171. Using the following information, prepare a bank reconciliation for Miller Co. for August 31: (1) (2) (3)
The bank statement balance is $4,690. The cash account balance is $5,080. Outstanding checks amounted to $715.
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Chapter 08 - Internal Control and Cash (4) (5) (6)
Deposits in transit are $1,020. The bank service charge is $40. A check for $72 for supplies was recorded as $27 in the ledger.
172. Using the following information, prepare a bank reconciliation for Candace Co. for May 31: (1) (2) (3) (4) (5) (6)
The bank statement balance is $2,936. The cash account balance is $3,194. Outstanding checks amounted to $465. Deposits in transit are $655. The bank service charge is $50. A check for $97 for supplies was recorded as $79 in the ledger.
173. Bank reconciliation information for Kaden Co. for May 31 is as follows: (1) (2) (3) (4) (5) (6)
The bank statement balance is $2,936. The cash account balance is $3,194. Outstanding checks amounted to $465. Deposits in transit are $655. The bank service charge is $50. A check for $97 for supplies was recorded as $79 in the ledger.
Journalize any necessary entries related to the reconciliation data. 174. The bank statement for Farmer Co. indicates a balance of $7,735 on June 30. After the journals for June were posted, the cash account had a balance of $4,098. Prepare a bank reconciliation on the basis of the following reconciling items: (1) (2) (3) (4) (5) (6)
Cash sales of $742 were erroneously recorded in the cash receipts journal as $724. Deposits in transit not recorded by bank, $425. Bank debit memo for service charges, $35. Bank credit memo for note collected by bank, $2,475 including $75 interest. Bank debit memo for $256 NSF (not sufficient funds) check from Janice Smith, a customer. Checks outstanding, $1,860.
175. Accompanying a bank statement for Marsh Land Properties is a credit memo for payment on a $15,000 one-year note receivable and $900 of interest collected by the bank. Marsh Land Properties had been notified by the bank at the time of collection, but had made no entries. Journalize the entry that should be made by Marsh Land to bring the accounting records up to date. 176. For each of the following, explain whether the issue would require you to prepare a journal entry for your company, assuming any original entry is correct. If an entry is required, please include it as part of your answer. (1) The bank recorded your deposit as $91 rather than the actual amount of $191. (2) Two outstanding checks amounted to $450. (3) Company Check No. 538 for postage was recorded incorrectly by the company bookkeeper as $50 instead of $59. (4) The bank paid a check for $500 after the company had issued a stop payment and voided the check. (5) An EFT deposit was made by one of the company’s customers, Atlas Design, for merchandise received. The sale had previously been recorded when shipped and was equal to the payment amount of $125. 177. The following data were gathered to use in reconciling the bank account of Savannah Company: Balance per bank Balance per company records Powered by Cognero
$16,750 16,125 Page 22
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Chapter 08 - Internal Control and Cash Bank service charges Deposit in transit NSF check Outstanding checks
80 2,195 950 3,850
What is the adjusted balance on the bank reconciliation? 178. The following data were gathered to use in reconciling the bank statement of Build-A-Lot: Balance per bank Balance per company records Bank service charges Deposits in transit NSF checks Outstanding checks
$14,355 14,010 80 4,100 775 5,300
a. What is the adjusted balance on the bank reconciliation? b. Journalize any necessary entries for Build-A-Lot based on the bank reconciliation. 179. Roper Electronics received its bank statement for the month of August with an ending balance of $11,775. Roper determined that Check No. 613 for $155 and Check No. 601 for $420 were both outstanding. A $6,900 deposit for August 30 was in transit as of the end of the month. Northern Regional Bank also collected $5,250 on a note receivable, which included interest of $250. The bank statement reveals a bank service charge of $20. A customer check for $68 was returned with the bank statement marked “NSF.” The ending balance of the Roper cash account is $12,938. a. Prepare a bank reconciliation as of August 31. b. Journalize any necessary entries based on the bank reconciliation. 180. Green Valley Bank sent Comstock Industries its end-of-month bank statement for July. The end-of-month balance by the bank is $11,237. The statement shows that a deposit for $4,250 is in transit at the end of the statement period. The statement also revealed that checks for $87, $105, and $95 are outstanding. Green Valley collected a $4,000 note receivable plus $120 of interest revenue. The bank charged monthly service fees of $55. The end-of-month balance per company records is $11,135. a. Prepare a bank reconciliation as of July 31. b. Journalize any necessary entries based on the bank reconciliation. 181. The cash account for Santiago Co. on May 31 indicated a balance of $20,915. The March bank statement indicated an ending balance of $25,645. Comparing the bank statement, the canceled checks, and the accompanying memos with the records revealed the following reconciling items: (1) Checks outstanding totaled $5,975. (2) A deposit of $3,796 had been made too late to appear on the bank statement. (3) A check for $1,482 returned with the statement had been incorrectly recorded as $482. The check was originally issued to pay on account. (4) The bank collected $4,515 on a note left for collection of which $515 was interest revenue. (5) Bank service charges for May amounted to $70. (6) A check for $894 was returned by the bank because of insufficient funds. a. Prepare a bank reconciliation as of May 31. b. Journalize any necessary entries based on the bank reconciliation. 182. The bank statement for Jeffrey Co. indicates a balance of $8,785 on October 31. The cash balance according to the Powered by Cognero
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Chapter 08 - Internal Control and Cash company’s records is $8,998. The following additional data were gathered to use in reconciling the bank account: (1) (2) (3) (4) (5) (6)
Cash sales of $945 had been erroneously recorded in the cash receipts journal as $495. Deposits in transit not recorded by bank, $778. Bank debit memo for service charges, $40. Bank credit memo for note collected by bank, $23,985 plus $885 interest. Bank debit memo for $756 NSF (not sufficient funds) check from Calin Sams, a customer. Checks outstanding, $1,860.
Journalize any necessary entries for Jeffrey Co. based on the bank reconciliation data. 183. The bank statement for Gatlin Co. indicates a balance of $7,735 on June 30. The cash balance according to the company’s records is $4,098. The following additional data were gathered to use in reconciling the bank account: (1) (2) (3) (4) (5) (6)
Cash sales of $742 had been erroneously recorded in the cash receipts journal as $724. Deposits in transit not recorded by bank, $425. Bank debit memo for service charges, $35. Bank credit memo for note collected by bank, $2,475 including $75 interest. Bank debit memo for $256 NSF (not sufficient funds) check from Janice Smith, a customer. Checks outstanding, $1,860.
Journalize any necessary entries for Gatlin Co. based on the bank reconciliation data. 184. Journalize the entries for the following transactions: Mar. 1 31
Established a petty cash fund of $300. The amount of cash in the petty cash fund is now $64. The fund is replenished based on the following receipts: office supplies, $137; selling expenses, $112.
Journalize any discrepancy in the cash short and over account. 185. On April 2, Granger Sales decides to establish a $125 petty cash fund to relieve the burden on Accounting. a. Journalize the establishment of the fund. b. On April 10, the petty cash fund has receipts for mail and postage of $43.50, contributions and donations of $29.50, meals and entertainment of $38.25, and $13.55 in cash. Journalize the replenishment of the fund. c. On April 11, Granger Sales decides to increase petty cash to $200. Journalize this event. 186. The last custodian of the petty cash fund was hospitalized, and you have been asked to take stock of the fund and replenish it. When you receive the fund, it has $299 in cash and receipts as follows: Office supplies Advertising Transportation by taxi
$295 120 75
The petty cash fund was established to have $800 in it. Based on what you have found, what journal entry should be recorded to replenish the fund? 187. Journalize the entries for the following transactions: June 1 30 Powered by Cognero
Established a petty cash fund of $200. The amount of cash in the petty cash fund is now $57. The fund is Page 24
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Chapter 08 - Internal Control and Cash replenished based on the following receipts: postage, $25; entertainment, $100; and miscellaneous, $20. 188. On April 3, Snappy Sales decides to establish a $135 petty cash fund to relieve the burden on Accounting. a. Journalize the establishment of the fund. b. On April 11, the petty cash fund has receipts for mail and postage of $32.75, contributions and donations of $25.25, meals and entertainment of $68.00, and $9.75 in cash. Journalize the replenishment of the fund. c. On April 12, Snappy Sales decides to increase petty cash to $175. Journalize this transaction. 189. Journalize the following transactions related to petty cash: a. b.
c.
Established a petty cash fund of $235. The petty cash fund now has a balance of $42.80. Replenished the fund, based on the following disbursements as indicated by a summary of the petty cash receipts: office supplies, $74.50; miscellaneous administrative expense, $92.75; and miscellaneous selling expense, $18.60. Increased the petty cash fund to $300.
190. On August 3, Sonar Sales decides to establish a $275 petty cash fund to relieve the burden on Accounting. a. Journalize the establishment of the fund. b. On August 11, the petty cash fund has receipts for mail and postage of $124.75, contributions and donations of $53.25, meals and entertainment of $63.85, and $32.75 in cash. Journalize the replenishment of the fund. c. On August 12, Sonar Sales decides to increase petty cash to $400. Journalize this transaction. 191. Stephanie Jo Company established a petty cash fund of $300 on May 1. At the end of the month, the petty cash fund has $42 in cash and receipts for postage, $39; entertainment, $146; and office supplies, $70. Journalize the necessary entries related to petty cash. Record any discrepancy in the cash short and over account. 192. Journalize the entries for the following transactions: Sept. 1 Established a petty cash fund of $350. 30 The amount of cash in the petty cash fund is now $130. The fund is replenished based on the following receipts: office supplies, $116; postage, $100. 193. You began your new job as the accountant for Morton Company. You were surprised to find that the company had a $2,000 petty cash fund, which sits in the break room. The president of the company told you: “Our petty cash system here works quite smoothly. Since everyone is honest here, everyone has access to the fund for incidentals that might pop up in the course of the business day. Most of these situations don’t have any receipts tied to them, so I just put the money back in the fund when my secretary tells me that we have run out of petty cash and we debit the amount to Miscellaneous Expense.” Answer the following: a. Should you implement some controls on petty cash? Why? b. If so, what controls could be used for petty cash? 194. a. Where are cash equivalents disclosed in the financial statements? b. List three examples of cash equivalents. 195. Why would a bank require a company to maintain a compensating balance? Powered by Cognero
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Chapter 08 - Internal Control and Cash 196. Garden Gate, Inc. reported the following data in its August 31 annual report: Cash and cash equivalents Cash flow from operations
$ 485,625 (630,000)
a. What is the company’s “cash burn” per month? b. What is the company’s ratio of cash to monthly cash expenses? c. Interpret the ratio you computed in (b). What are the implications for Garden Gate, Inc.? 197. The following data are from the Muffin Shoppe for the past four years. Year Ending December 31 Year 1 Year 2 Year 3 Year 4 $ $ $ $ 38,788 65,216 70,691 78,274 (39,264) (50,580) (45,768) (57,744)
Cash and cash equivalents Cash flow from operations Compute the following: Year 1
Year Ending December 31 Year 2 Year 3
Year 4
Monthly cash expenses Ratio of cash to monthly cash expenses 198. Farm Store, Inc., reported the following data in its December 31 annual report: Cash and cash equivalents Cash flow from operations
$1,050,000 (420,000)
a. What is the company’s “cash burn” per month? b. What is the company’s ratio of cash to monthly cash expenses? c. Interpret the ratio you computed in part (b). What are the implications for Farm Store, Inc.? 199. Aspen, Inc. reported the following data in its annual report: Cash and cash equivalents Cash flow from operations
$ 460,000 (240,000)
a. What is the company’s “cash burn” per month? b. What is the company’s ratio of cash to monthly cash expenses? 200. The following data are from Autumn Company for the past four years.
Cash and cash equivalents Cash flow from operations
Year Ending December 31 Year 1 Year 2 Year 3 Year 4 $ 23,788 $ 45,776 $ 52,899 $ 82,744 (32,556) (47,880) (32,357) (16,450)
Compute the following: Year Ending December 31 Powered by Cognero
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Chapter 08 - Internal Control and Cash Year 1
Year 2
Year 3
Year 4
Monthly cash expenses Ratio of cash to monthly cash expenses 201. Groceries R Us, Inc., reported the following data in its annual report. Cash and cash equivalents Cash flow from operations
$2,280,000 (240,000)
a. What is the company’s “cash burn” per month? b. What is the company’s ratio of cash to monthly cash expenses? c. Interpret the ratio you computed in part (b). What are the implications for Groceries R Us, Inc.?
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Chapter 08 - Internal Control and Cash Answer Key 1. True 2. True 3. False 4. True 5. False 6. True 7. False 8. True 9. True 10. True 11. True 12. True 13. True 14. False 15. True 16. True 17. True 18. True 19. True 20. True 21. False 22. True 23. True 24. False 25. True Powered by Cognero
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Chapter 08 - Internal Control and Cash 26. False 27. False 28. False 29. False 30. True 31. False 32. True 33. True 34. True 35. False 36. True 37. True 38. False 39. False 40. True 41. False 42. True 43. False 44. False 45. False 46. False 47. False 48. False 49. False 50. True Powered by Cognero
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Chapter 08 - Internal Control and Cash 51. True 52. a 53. c 54. d 55. c 56. b 57. b 58. d 59. c 60. d 61. a 62. d 63. c 64. a 65. a 66. a 67. b 68. b 69. b 70. d 71. d 72. a 73. d 74. b 75. a 76. c Powered by Cognero
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Chapter 08 - Internal Control and Cash 77. c 78. b 79. d 80. a 81. a 82. a 83. a 84. d 85. d 86. c 87. c 88. c 89. b 90. d 91. a 92. d 93. b 94. a 95. d 96. d 97. a 98. b 99. d 100. a 101. c Powered by Cognero
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Chapter 08 - Internal Control and Cash 102. d 103. a 104. b 105. c 106. d 107. c 108. c 109. d 110. b 111. d 112. d 113. c 114. c 115. c 116. b 117. d 118. b 119. c 120. e 121. a 122. d 123. b 124. b 125. c 126. b 127. a Powered by Cognero
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Chapter 08 - Internal Control and Cash 128. b 129. b 130. c 131. b 132. c 133. b 134. b 135. c 136. c 137. a 138. b 139. b 140. b 141. b 142. b 143. a 144. d 145. b 146. c 147. b 148. a 149. c 150. a 151. a 152. a Powered by Cognero
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Chapter 08 - Internal Control and Cash 153. b 154. The objectives of internal control are to provide reasonable assurance that: (1) Assets are safeguarded and used for business purposes. (2) Business information is accurate. (3) Employees and managers comply with laws and regulations. Examples of control procedures are: (1) Responsibilities for related operations are separated. (2) Duties are rotated. (3) Reports are submitted to management. There are many other examples that would be correct. 155. a. (1) Missing invoices or gaps in transaction numbers could mean that the invoices are being used for fraudulent transactions. (2) An unusually high number of refunds for Clerk #3 could mean that the individual is creating fictitious refunds and pocketing the cash. (3) The difference could mean that receipts are being pocketed before being deposited. Maybe there is a person responsible for making the deposits on Tuesdays that is the culprit. (4) A sudden increase in slow payments could mean that an employee is pocketing the payments. b. Answers should include three of the following: • • • • • •
Place surveillance cameras at customer service area. Place supervisor as a second authorizer on refund transactions. Prohibit cash refunds and require exchanges of merchandise instead. Provide employee training. Incorporate special alerts for critical dollar thresholds through company software. Require information about the original transaction to be part of the refund process
156. a. (2) b. (3) 157. (1) Control Environment. The control environment is the overall attitude of management and employees about the importance of controls. (2) Risk Assessment. Risk assessment is the identification of risks faced by an organization so that management can take necessary actions to control them. (3) Control Procedures. The control procedures are the policies and procedures designed to provide reasonable assurance that the business goals are met and fraud is prevented. (4) Monitoring. Monitoring includes observing employee behavior and the accounting system for indicators of control problems. (5) Information and Communication. Information communicated to management about the control environment, risk assessment, control procedures, and monitoring is used by management for guiding operations and ensuring compliance with reporting, legal, and regulatory requirements. Powered by Cognero
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Chapter 08 - Internal Control and Cash 158. a. This is a weakness. The mail clerk should prepare an initial listing of cash remittances before forwarding the cash receipts to the cashier. This establishes initial accountability for the cash receipts. The mail clerk should forward a copy of the listing of remittances to the accounts receivable clerk for recording in the accounts. b. This is a strength. c. This is a strength. d. This is a weakness. The bank reconciliation should be prepared by someone not involved with the handling or recording of cash. 159. a. This is a weakness. Requiring cash register clerks to make up any cash shortages from their own funds gives the clerks an incentive to shortchange customers. That is, the clerks will want to make sure that they don’t have a shortage at the end of the day. In addition, one might also assume that the clerks can keep any overages. This would again encourage clerks to shortchange customers. The shortchanging of customers will create customer complaints, etc. The best policy is to report any cash shortages or overages at the end of each day. If there is consistently cash short or over, then corrective action (training, removal, etc.) could be taken. b. This is a strength. c. This is a strength. d. This is a weakness. Employees should not be allowed to use the petty cash fund to cash personal checks. In any case, postdated checks should not be accepted. In effect, postdated checks represent a receivable from the employees. 160. a. Cash Cash Short and Over Sales b. Cash Cash Short and Over Sales 161. June 6
Cash Sales Cash Short and Over
162. Oct. 31 Cash Cash Short and Over Sales
5,412.36 0.71 5,413.07 3,712.95 0.79 3,712.16 8,276 8,262 14 23,447 10 23,457
163. Note: Each cash drawer starts with $100. This must be subtracted from the total cash in drawer to determine the cash short/over amount. Reg. 1 Cash Cash Short and Over Sales Reg. 2 Cash Powered by Cognero
874.50 5.00 879.50 1,283.66 Page 35
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Chapter 08 - Internal Control and Cash Cash Short and Over Sales Reg. 3 Cash Sales
14.50 1,298.16 839.46 839.46
Reg. 4 Cash Cash Short and Over Sales
1,037.91 7.58 1,030.33
164. A voucher system is used to control cash payments. It provides reasonable assurance that only authorized payments are made and that all cash discounts are taken. Specifically, a voucher system is a set of procedures for authorizing and recording liabilities and cash payments. After a voucher is prepared, it is submitted for approval. Once approved, the voucher is recorded in the accounts and filed by due date. Upon payment, the voucher is recorded in the same manner as the payment of an account payable. Typical supporting documents for a voucher are a supplier's invoice, a purchase order, and a receiving report. 165. June 7
Cash Sales Cash Short and Over
18,632 18,628 4
166. There are many possibilities, but the most likely culprits are as follows: (1) The beginning change fund in the drawer was not considered. (2) A collection of an accounts receivable could have not been recorded, making the cash “heavy” to sales. (3) A customer may have used a debit card and requested $100 cash back that was not given to the customer (expect a call from the customer). (4) A sale for the exact amount of $100 was not recorded into the sales of the cash register. However, this is a VERY improbable occurrence. (5) A void could have taken place and the cash not refunded or possibly not removed. In this case, you would certainly investigate the voided items and the actions of the cashier as well as the history of cash reconciliations for this cashier. 167. • •
EFTs cost less than receiving cash payments through the mail. EFTs enhance internal controls over cash, since the cash is received directly by the bank without any employees handling cash. EFTs reduce late payments from customers and speed up the processing of cash receipts.
• 168. a.
Madison Company May 31 Outstanding Checks List Check No. 2264 2655 Powered by Cognero
Amount $ 32.98 45.99 Page 36
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Chapter 08 - Internal Control and Cash 3252 3260 3275 3276 3277 3278 Total
56.89 92.65 603.50 67.00 301.61 47.88 $1,248.50
b. Students must remember to not include the voided Check No. 3269. Check No. Amount 3247 $ 32.64 3248 400.00 3249 309.22 3250 256.00 3251 3,212.17 3253 98.02 3254 47.55 3255 1,124.77 3256 250.00 3257 68.00 3258 215.56 3259 38.55 3261 44.61 3262 72.96 3263 24.87 3264 45.00 3265 33.78 3266 756.77 3267 84.34 3268 789.00 3270 34.41 3271 872.00 3272 22.00 3273 562.38 3274 512.00 Total $9,906.60 169. Checks = $245,000 × 84% = $205,800 Beginning Balance = Ending Balance + Checks – Deposits = $80,275 + $205,800 – $245,000 = $41,075 170. Checks = $511,770 × 90% = $460,593 Beginning Balance = Ending Balance + Checks – Deposits = $102,275 + $460,593 – $511,770 = $51,098 171. Miller Co. Bank Reconciliation August 31 Cash balance according to bank statement Add deposits in transit not recorded by bank Powered by Cognero
$4,690 1,020 Page 37
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Chapter 08 - Internal Control and Cash Deduct outstanding checks Adjusted balance
(715) $4,995
Cash balance according to company's records Deduct: Bank service charge Error in recording check Adjusted balance
$5,080 $40 45
(85) $4,995
172. Candace Co. Bank Reconciliation May 31 Cash balance according to bank statement Add deposits in transit not recorded by bank Deduct outstanding checks Adjusted balance
$2,936 655 (465) $3,126
Cash balance according to company's records Deduct: Bank service charge Error in recording check Adjusted balance
$50 18
$3,194
173. Miscellaneous Expense Supplies Cash
50 18
(68) $3,126
68
174. Farmer Co. Bank Reconciliation June 30 Cash balance according to bank statement Add deposits in transit not recorded by bank Deduct outstanding checks Adjusted balance Cash balance according to company's records Add: Note collected by bank, including $75 interest Error in recording cash sales of $742 as $724 Deduct: NSF check from Janice Smith Bank service charges Adjusted balance 175. Cash Notes Receivable Interest Revenue
$ 7,735 425 (1,860) $6,300 $ 4,098 $2,475 18 $ 256 35
2,493 (291) $6,300
15,900 15,000 900
176. (1) If you recorded the deposit correctly in your company’s books, then no additional journal entry is required. (2) Since your company has already recorded these checks correctly, no additional journal entry is required by your company. Powered by Cognero
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Chapter 08 - Internal Control and Cash (3) The journal entry required by the company to correct the books in this case is: Postage Expense Cash
9 9
(4) The bank is at fault here and no additional journal entry is required by the company. (5) Since the company has to be notified by the bank when direct deposits occur, the company will need this journal entry: Cash Accounts Receivable—Atlas Design
125 125
177. $15,095, computed as follows: Bank section of reconciliation: $16,750 + $2,195 – $3,850 = $15,095 OR Company section of reconciliation: $16,125 – $80 – $950 = $15,095 178. a. $13,155, computed as follows: Bank section of reconciliation: $14,355 + $4,100 – $5,300 = $13,155 OR Company section of reconciliation: $14,010 – $80 – $775 = $13,155 b.
Accounts Receivable Miscellaneous Expense Cash
775 80 855
179. a. Roper Electronics Bank Reconciliation
August 31 Cash balance according to bank statement Add deposit in transit Deduct outstanding checks: No. 601 No. 613 Adjusted balance
$11,775 6,900 $420 155
Cash balance according to Roper Electronics Add note and interest collected by bank Deduct: Check returned because of insufficient funds Bank service charge Adjusted balance b. Aug. 31
31
$12,938 5,250 $ 68 20
Cash Notes Receivable Interest Revenue
5,250
Miscellaneous Expense Accounts Receivable Cash
20 68
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(575) $18,100
(88) $18,100
5,000 250
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Chapter 08 - Internal Control and Cash 180. a. Comstock Industries Bank Reconciliation
July 31 Cash balance according to bank statement Add deposit in transit, not recorded by bank Deduct outstanding checks:
$11,237 4,250 $ 87 105 95
Adjusted balance
(287) $15,200
Cash balance according to Comstock Industries Add note and interest collected by bank Deduct bank service charges Adjusted balance
$11,135 4,120 (55) $15,200
b. July 31
31
Cash Notes Receivable Interest Revenue
4,100
Miscellaneous Expense Cash
55
4,000 100 55
181. a. Santiago Co. Bank Reconciliation May 31 Cash balance according to bank statement Add deposit not recorded by bank Deduct outstanding checks Adjusted balance Cash balance according to company’s records Add proceeds of note and interest collected by bank Deduct: Error in recording check Bank service charges Nonsufficient funds check Adjusted balance b. May 31
31
Cash Note Receivable Interest Revenue
4,515
Accounts Payable Miscellaneous Expense Accounts Receivable Cash
1,000 70 894
182. Cash Powered by Cognero
$25,645 3,796 (5,975) $23,466 $20,915 4,515 $1,000 70 894
(1,964) $23,466
4,000 515
1,964
25,320 Page 40
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Chapter 08 - Internal Control and Cash Notes Receivable Interest Revenue Sales
23,985 885 450
Accounts Receivable—Calin Sams Miscellaneous Expense Cash
756 40 796
183. Cash Note Receivable Interest Revenue Sales
2,493 2,400 75 18
Accounts Receivable—Janice Smith Miscellaneous Expense Cash
256 35 291
184. Mar. 1 Petty Cash Cash
300 300
31 Office Supplies Selling Expenses Cash Short and Over Cash 185. a. Apr. 2
b.
10
c.
11
137 112 13 236
Petty Cash Cash
125.00
Mail and Postage Expense Contributions and Donations Expense Meals and Entertainment Expense Cash Short and Over Cash
43.50 29.50 38.25 0.20
Petty Cash Cash
75.00
186. Office Supplies Advertising Expense Transportation Expense Cash Short and Over Cash
125.00
75.00 295 120 75 11 501
187. June 1 Petty Cash Cash 30
Postage Expense Entertainment Expense Miscellaneous Expense Cash Short and Over
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111.45
200 200 25 100 20 2 Page 41
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Chapter 08 - Internal Control and Cash Cash 188. a. Apr. 3
b.
c.
11
12
143
Petty Cash Cash
135.00
Mail and Postage Expense Contributions and Donations Expense Meals and Entertainment Expense Cash Short and Over Cash
32.75 25.25 68.00
Petty Cash Cash
40.00
189. a. Petty Cash Cash b. Office Supplies Miscellaneous Admin. Expense Miscellaneous Selling Expense Cash Short and Over Cash c. Petty Cash Cash
135.00
0.75 125.25
40.00
235.00 235.00 74.50 92.75 18.60 6.35 192.20 65.00 65.00
190. a. Aug. 3 Petty Cash Cash
275.00 275.00
b.
11 Mail and Postage Expense 124.75 Contributions and Donations Expense 53.25 Meals and Entertainment Expense 63.85 Cash Short and Over 0.40 Cash 242.25
c.
12 Petty Cash Cash
125.00 125.00
191. May 1 Petty Cash Cash 31 Postage Expense Entertainment Expense Office Supplies Cash Short and Over Cash 192. Sept. 1 Petty Cash Cash Powered by Cognero
300 300 39 146 70 3 258 350 350 Page 42
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Chapter 08 - Internal Control and Cash 30 Office Supplies Postage Expense Cash Short and Over Cash
116 100 4 220
193. a. Even though the president thinks the petty cash system works well, $2,000 is a tempting sum for theft. Even with only $2,000, if the fund is replenished frequently, a significant amount of cash could be stolen. For example, if the fund is replenished weekly, then $104,000 ($2,000 × 52 weeks) could be subject to theft. The issue of debiting the amount used to Miscellaneous Expense is a questionable practice that would typically be flagged by the independent auditor. b. Controls for petty cash include (1) placing restrictions on the maximum amount and types of payments that can be made from the fund, (2) designating one person who is responsible for the fund, (3) maintaining a written record of all payments, (4) requiring support (receipts) for payments from the fund, and (5) periodic review by an independent person of the funds on hand and the payments made. 194. a. Cash account on the balance sheet b. Money market funds; notes of major corporations (commercial paper); and U.S. Treasury bills 195. Usually, a compensating balance is part of a loan agreement or line of credit. It provides a degree of assurance to the bank that the company will be able to make its required minimum payments. 196. a. $630,000 ÷ 12 = $52,500 per month b. $485,625 ÷ $52,500 = 9.3 months c. The ratio indicates that Garden Gate, Inc., has 9.3 months of cash remaining as of August 31. To continue operations beyond 9.3 months, Garden Gate will need to generate positive cash flows from operations, sell investments, or raise additional financing from its owners or by issuing debt. 197. Year Ending December 31 Year 1 Year 2 Year 3 Year 4 Monthly cash expenses $3,272 $4,215 $3,814 $4,812 11.85 15.47 18.53 16.27 Ratio of cash to monthly cash expenses months months months months 198. a. $420,000 ÷ 12 = $35,000 per month b. $1,050,000 ÷ $35,000 = 30 months, or 2.5 years c. The ratio indicates that Farm Store, Inc., has 2.5 years of cash remaining as of December 31. To continue operations beyond 2.5 years, Farm Store will need to generate positive cash flows from operations, sell investments, or raise additional financing from its owners or by issuing debt. 199. a. $240,000 ÷ 12 = $20,000 per month b. $460,000 ÷ $20,000 = 23 months 200. Powered by Cognero
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Chapter 08 - Internal Control and Cash Year 1 Monthly cash expenses $2,713 8.8 Ratio of cash to monthly cash expenses months
Year Ending December 31 Year 2 Year 3 Year 4 $3,990 $2,696 $1,371 11.5 19.6 60.4 months months months
201. a. $240,000 ÷ 12 = $20,000 per month b. $2,280,000 ÷ $20,000 = 114 months, or 9.5 years c. The ratio indicates that Groceries R Us, Inc., has 9.5 years of cash remaining as of the date of its annual report. To continue operations beyond 9.5 years, Farm Store will need to generate positive cash flows from operations, sell investments, or raise additional financing from its owners or by issuing debt.
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Chapter 09 - Receivables True / False 1. Accounts receivable and notes receivable from sales transactions can also be called trade receivables. a. True b. False 2. Other (nontrade) receivables that are not expected to be collected within one year are reported in the Investments section of the balance sheet. a. True b. False 3. Trade receivables occur when two companies trade or exchange notes receivable. a. True b. False 4. Other receivables include nontrade receivables such as loans to company officers. a. True b. False 5. Both accounts receivable and notes receivable represent claims that are expected to be collected in cash. a. True b. False 6. Companies may sell their receivables, which is often the case when a company issues its own credit card. a. True b. False 7. Of the two methods of accounting for uncollectible receivables, the allowance method makes use of an estimate of uncollectible receivables. a. True b. False 8. An advantage of a company selling its receivables is that it immediately receives cash for operating and other needs. a. True b. False 9. Small companies can use either the direct write-off method or the allowance method. a. True b. False 10. GAAP requires companies with a large amount of receivables to use the allowance method. a. True b. False 11. The direct write-off method records bad debt expense when an account is determined to be uncollectible. a. True Powered by Cognero
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Chapter 09 - Receivables b. False 12. Generally accepted accounting principles do not normally allow the use of the direct write-off method of accounting for uncollectible accounts. a. True b. False 13. The direct write-off method records bad debt expense in the year the specific account receivable is determined to be uncollectible. a. True b. False 14. No allowance account is used with the direct write-off method. a. True b. False 15. When using the direct write-off method of accounting for uncollectible receivables, the account Allowance for Doubtful Accounts is debited when a specific account is determined to be uncollectible. a. True b. False 16. When an account receivable that has been written off is subsequently collected, the account receivable must first be reinstated before recording the receipt of payment. a. True b. False 17. Although Allowance for Doubtful Accounts normally has a credit balance, it may have either a debit or a credit balance before adjusting entries are recorded at the end of the accounting period. a. True b. False 18. Allowance for Doubtful Accounts is a liability account. a. True b. False 19. When using the percent of sales method of estimating uncollectibles, the entry to record bad debt expense includes a credit to Accounts Receivable. a. True b. False 20. The difference between the balance in Accounts Receivable and the balance in Allowance for Doubtful Accounts is called the net realizable value of the receivables. a. True b. False 21. When the allowance method for accounting for uncollectible receivables is used, net income is reduced when a specific receivable is written off. Powered by Cognero
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Chapter 09 - Receivables a. True b. False 22. At the end of a period (before adjustment), Allowance for Doubtful Accounts has a credit balance of $250. The credit sales for the period total $500,000. If the company estimates uncollectible accounts expense at 1% of credit sales, the amount of bad debt expense to be recorded in an adjusting entry is $4,750. a. True b. False 23. At the end of a period (before adjustment), Allowance for Doubtful Accounts has a debit balance of $500. Credit sales for the period total $800,000. If bad debt expense is estimated at 1% of credit sales, the amount of bad debt expense to be recorded in the adjusting entry is $8,500. a. True b. False 24. At the end of a period (before adjustment), Allowance for Doubtful Accounts has a debit balance of $2,000. The Accounts Receivable balance is analyzed by aging the accounts, and the amount estimated to be uncollectible is $15,000. The amount to be recorded in the adjusting entry for the bad debt expense is $15,000. a. True b. False 25. At the end of a period (before adjustment), Allowance for Doubtful Accounts has a credit balance of $5,000. The Accounts Receivable balance is analyzed by aging the accounts and the amount estimated to be uncollectible is $50,000. The amount to be recorded in the adjusting entry for the bad debt expense is $45,000. a. True b. False 26. When using the analysis of receivables method for estimating uncollectible receivables, the amount computed in the analysis is usually the amount that would be recorded in the end-of-period adjusting entry. a. True b. False 27. The balance in Allowance for Doubtful Accounts at the end of the year includes the total of all accounts written off since the beginning of the year. a. True b. False 28. When accounting for uncollectible receivables and using the percentage of sales method, the matching concept is violated. a. True b. False 29. A primary difference between the direct write-off and allowance methods is whether or not bad debt is based on a percentage of sales. a. True b. False Powered by Cognero
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Chapter 09 - Receivables 30. The due date of a 60-day note dated July 10 is September 10. a. True b. False 31. The maturity value of a 12%, 60-day note for $5,000 is $5,600. a. True b. False 32. The maturity value of a note receivable is always the same as its face value. a. True b. False 33. The interest on a 6%, 60-day note for $5,000 is $300. a. True b. False 34. The party promising to pay a note at maturity is the maker. a. True b. False 35. In computing the maturity date of a note, the date the note is issued is included but the due date is omitted. a. True b. False 36. If a promissory note is dishonored, the payee should still record interest revenue. a. True b. False 37. The equation for computing interest on an interest-bearing note is as follows: Interest = Maturity Value × Interest Rate × Time. a. True b. False 38. If the maker of a note fails to pay the debt on the due date, the note is said to be dishonored. a. True b. False 39. When a note is received from a customer on account, it is recorded by debiting Notes Receivable and crediting Accounts Receivable. a. True b. False 40. When a note is written to settle an open account, no entry is necessary. a. True b. False Powered by Cognero
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Chapter 09 - Receivables 41. The balance of Allowance for Doubtful Accounts is added to Accounts Receivable on the balance sheet. a. True b. False 42. Receivables that are expected to be collected in cash in 18 months or less are reported in the Current Assets section of the balance sheet. a. True b. False 43. The accounts receivable turnover ratio is computed by dividing total sales by the average accounts receivable during the year. a. True b. False 44. The accounts receivable turnover measures the length of time in days it takes to collect a receivable. a. True b. False 45. Days’ sales in receivables is an estimate of the length of time the accounts receivable have been outstanding. a. True b. False Multiple Choice 46. A note receivable due in 18 months is listed on the balance sheet under the caption a. Long-term liabilities b. Fixed assets c. Current assets d. Investments 47. The receivable that is usually evidenced by a formal, written instrument of credit is a(n) a. trade receivable b. note receivable c. accounts receivable d. income tax receivable 48. Which of the following receivables would not be classified as an “other receivable”? a. advance to an employee b. interest receivable c. refundable income tax d. notes receivable from sales transactions 49. Other receivables includes all of the following except a. notes receivable from sales transactions b. receivables from employees Powered by Cognero
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Chapter 09 - Receivables c. taxes receivable d. interest receivable 50. Notes or accounts receivable that result from sales transactions are often called a. nontrade receivables b. trade receivables c. merchandise receivables d. sales receivables 51. The term "receivables" includes all a. money claims against other entities b. merchandise to be collected from individuals or companies c. cash to be paid to creditors d. cash to be paid to debtors 52. If collection of an other receivable is expected beyond one year, it is classified as a(n) a. other receivable under Noncurrent Assets b. other receivable under Current Assets c. investment under Current Assets d. investment under Noncurrent Assets 53. An account becomes uncollectible a. when an account receivable is converted into a note receivable b. when a discount is availed on notes receivable c. There is no general rule for when an account becomes uncollectible. d. at the end of the fiscal year 54. The two methods of accounting for uncollectible receivables are the allowance method and the a. equity method b. direct write-off method c. interest method d. cost method 55. The direct write-off method of accounting for uncollectible accounts a. emphasizes balance sheet relationships b. is often used by small companies and companies with few receivables c. emphasizes cash realizable value d. emphasizes the matching of expenses with revenues 56. An alternative name for Bad Debt Expense is a. Collection Expense b. Credit Loss Expense c. Uncollectible Accounts Expense d. Doubtless Accounts Expense Powered by Cognero
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Chapter 09 - Receivables 57. Two methods of accounting for uncollectible accounts are the a. direct write-off method and the allowance method b. allowance method and the accrual method c. allowance method and the net realizable method d. direct write-off method and the accrual method 58. The operating expense recorded from uncollectible receivables can be called all of the following except a. Accounts Receivable b. Bad Debt Expense c. Doubtful Accounts Expense d. Uncollectible Accounts Expense 59. Indications that an account may be uncollectible include all of the following except the customer a. closes its business b. is making small but regular payments c. files for bankruptcy d. cannot be located 60. Selling receivables a. can shift some of the risk to the buyer b. delays the receipt of cash c. occurs when an account becomes uncollectible d. results in bad debt expense 61. Under the direct write-off method of accounting for uncollectible accounts, Bad Debt Expense is recorded a. at the end of each accounting period b. when a credit sale is past due c. whenever a predetermined amount of credit sales has been made d. when an account is determined to be worthless 62. If the direct write-off method of accounting for uncollectible receivables is used, what general ledger account is credited to write off a customer's account as uncollectible? a. Uncollectible Accounts Expense b. Accounts Receivable c. Allowance for Doubtful Accounts d. Interest Expense 63. One of the weaknesses of the direct write-off method is that it a. understates accounts receivable on the balance sheet b. violates the matching concept c. is too difficult to use for many companies d. is based on estimates 64. Lowery Co. uses the direct write-off method of accounting for uncollectible accounts receivable. Lowery has a Powered by Cognero
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Chapter 09 - Receivables customer whose accounts receivable balance has been determined to likely be uncollectible. The entry to write off this account would be a. debit Allowance for Doubtful Accounts; credit Accounts Receivable b. debit Accounts Receivable; credit Notes Receivable c. debit Bad Debt Expense; credit Allowance for Doubtful Accounts d. debit Bad Debt Expense; credit Accounts Receivable 65. If the direct write-off method of accounting for uncollectible receivables is used, what general ledger account is debited to write off a customer's account as uncollectible? a. Uncollectible Accounts Receivable b. Accounts Receivable c. Allowance for Doubtful Accounts d. Bad Debt Expense 66. If the allowance method of accounting for uncollectible receivables is used, what general ledger account is debited to write off a customer's account as uncollectible? a. Uncollectible Accounts Expense b. Allowance for Doubtful Accounts c. Accounts Receivable d. Interest Expense 67. After the accounts are adjusted and closed at the end of the fiscal year, Accounts Receivable has a balance of $340,000 and Allowance for Doubtful Accounts has a balance of $51,000. What is the net realizable value of accounts receivable? a. $51,000 b. $289,000 c. $340,000 d. $391,000 68. If the allowance method of accounting for uncollectible receivables is used, what general ledger account is credited to write off a customer's account as uncollectible? a. Uncollectible Accounts Expense b. Accounts Receivable c. Allowance for Doubtful Accounts d. Interest Expense 69. On the balance sheet, the amount shown for Allowance for Doubtful Accounts is equal to the a. uncollectible accounts expense for the year b. total of the accounts receivable written off during the year c. total estimated uncollectible accounts as of the end of the year d. sum of all accounts that are past due 70. What is the type of account and normal balance of Allowance for Doubtful Accounts? a. contra asset; credit b. asset; debit Powered by Cognero
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Chapter 09 - Receivables c. asset; credit d. contra asset; debit 71. When the allowance method is used to account for uncollectible accounts, Bad Debt Expense is debited when a. a customer's account becomes past due b. an account becomes bad and is written off c. a sale is made d. management estimates the amount of uncollectibles 72. A debit balance in Allowance for Doubtful Accounts a. is the normal balance for that account b. indicates that actual bad debt write-offs have been less than what was estimated c. cannot occur if the percentage of receivables method of estimating bad debts is used d. indicates that actual bad debt write-offs have exceeded previous provisions for bad debts 73. To record estimated uncollectible receivables using the allowance method, the adjusting entry would be a a. debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts b. debit to Accounts Receivable and a credit to Allowance for Doubtful Accounts c. debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable d. debit to Loss on Credit Sales and a credit to Accounts Receivable 74. Under the allowance method, when a year-end adjustment is made for estimated uncollectible accounts a. liabilities decrease b. net income is unchanged c. total assets are unchanged d. total assets decrease 75. Tanning Company analyzes its receivables to estimate bad debt expense. The accounts receivable balance is $390,000 and credit sales are $1,300,000. An aging of accounts receivable shows that approximately 5% of the outstanding receivables will be uncollectible. What adjusting entry will Tanning Company make if Allowance for Doubtful Accounts has a credit balance of $2,500 before adjustment? a. Bad Debt Expense 17,000 Allowance for Doubtful Accounts 17,000 b. Bad Debt Expense 19,500 Allowance for Doubtful Accounts 19,500 c. Bad Debt Expense 22,000 Allowance for Doubtful Accounts 22,000 d. Bad Debt Expense 65,000 Allowance for Doubtful Accounts 65,000 76. You have just received notice that a customer with an account receivable balance has gone bankrupt and will not make any future payments. Assuming you use the allowance method, the entry you make is to a. debit Bad Debt Expense and credit Allowance for Doubtful Accounts b. debit Bad Debt Expense and credit Accounts Receivable c. debit Allowance for Doubtful Accounts and credit Accounts Receivable Powered by Cognero
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Chapter 09 - Receivables d. debit Allowance for Doubtful Accounts and credit Bad Debt Expense 77. The balance in Allowance for Doubtful Accounts will directly impact the end-of-period adjustment for bad debt expense when using the a. allowance method based on aging the receivables b. direct write-off method c. allowance method based on the percent of sales method d. declining value method 78. An aging of a company's accounts receivable indicates that the estimate of uncollectible receivables totals $7,900. If Allowance for Doubtful Accounts has a $700 credit balance, the adjustment to record the bad debt expense for the period will require a a. debit to Bad Debt Expense for $8,600 b. debit to Bad Debt Expense for $7,900 c. debit to Bad Debt Expense for $7,200 d. credit to Allowance for Doubtful Accounts for $700 79. An aging of a company's accounts receivable indicates that the estimate of uncollectible accounts totals $6,400. If Allowance for Doubtful Accounts has a $1,300 debit balance, the adjustment to record the bad debt expense for the period will require a a. debit to Bad Debt Expense for $7,700 b. debit to Bad Debt Expense for $6,400 c. debit to Bad Debt expense for $5,100 d. credit to Allowance for Doubtful Accounts for $1,300 80. An aging of a company's accounts receivable indicates that the estimate of the uncollectible accounts totals $4,000. If Allowance for Doubtful Accounts has a $800 credit balance, the adjustment to record the bad debt expense for the period will require a a. debit to Allowance for Doubtful Accounts for $3,200 b. debit to Bad Debt Expense for $3,200 c. debit to Allowance for Doubtful Accounts for $4,000 d. credit to Allowance for Doubtful Accounts for $4,000 81. The collection of an account that had been previously written off under the allowance method of accounting for uncollectibles a. will increase net income in the period it is collected b. will decrease net income in the period it is collected c. does not affect net income in the period it is collected d. requires a correcting entry for the period in which the account was written off 82. Allowance for Doubtful Accounts has a credit balance of $2,100 at the end of the year (before adjustment), and an analysis of customers' accounts indicates uncollectible receivables of $19,700. Which of the following entries records the proper adjustment for bad debt expense? a. debit Allowance for Doubtful Accounts, $17,600; credit Bad Debt Expense, $17,600 b. debit Allowance for Doubtful Accounts, $21,800; credit Bad Debt Expense, $21,800 c. debit Bad Debt Expense, $21,800; credit Allowance for Doubtful Accounts, $21,800 Powered by Cognero
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Chapter 09 - Receivables d. debit Bad Debt Expense, $17,600; credit Allowance for Doubtful Accounts, $17,600 83. Allowance for Doubtful Accounts has a debit balance of $1,100 at the end of the year (before adjustment), and an analysis of customers' accounts indicates uncollectible receivables of $12,900. Which of the following entries records the proper adjustment for bad debt expense? a. debit Bad Debt Expense, $14,000; credit Allowance for Doubtful Accounts, $14,000 b. debit Allowance for Doubtful Accounts, $14,000; credit Bad Debt Expense, $14,000 c. debit Allowance for Doubtful Accounts, $11,800; credit Bad Debt Expense, $11,800 d. debit Bad Debt Expense, $11,800; credit Allowance for Doubtful Accounts, $11,800 84. Allowance for Doubtful Accounts has a debit balance of $600 at the end of the year (before adjustment), and an analysis of accounts in the customers ledger indicates uncollectible receivables of $13,000. Which of the following entries records the proper adjusting entry for bad debt expense? a. debit Bad Debt Expense, $600; credit Allowance for Doubtful Accounts, $600 b. debit Bad Debt Expense, $12,400; credit Allowance for Doubtful Accounts, $12,400 c. debit Allowance for Doubtful Accounts, $600; credit Bad Debt Expense, $600 d. debit Bad Debt Expense, $13,600; credit Allowance for Doubtful Accounts, $13,600 85. At the beginning of the year, the balance in Allowance for Doubtful Accounts is a credit of $760. During the year, previously written off accounts of $120 are reinstated and accounts totaling $740 are written off as uncollectible. The endof-year balance (before adjustment) in Allowance for Doubtful Accounts should be a. $760 b. $120 c. $140 d. $740 86. Jefferson uses the percent of sales method of estimating uncollectible receivables. Based on past history, 2% of credit sales are expected to be uncollectible. Sales for the current year are $5,550,000. Which of the following is correct? a. Uncollectible accounts are estimated to be $55,500. b. Uncollectible accounts are estimated to be $111,000. c. Bad debt expense is estimated to be $5,550. d. Bad debt expense is estimated to be $11,100. 87. Jefferson uses the percent of sales method of estimating uncollectible receivables. Based on past history, 2% of credit sales are expected to be uncollectible. Sales for the current year are $5,550,000. Which of the following is correct regarding the entry to record estimated uncollectible receivables? a. Cash will be debited. b. Bad Debt Expense will be credited. c. Allowance for Doubtful Accounts will be credited. d. Accounts Receivable will be debited. 88. Miles uses the allowance method and wrote off the account of James. Miles then received $559 as partial payment on the account of James. The journal entry for the initial write-off includes a a. debit to Allowance for Doubtful Accounts b. credit to Cash Powered by Cognero
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Chapter 09 - Receivables c. debit to Accounts Receivable—James d. credit to Bad Debt Expense 89. Using the allowance method of accounting for uncollectible receivables, the entry to reinstate a specific receivable previously written off would include a a. credit to Bad Debt Expense b. credit to Accounts Receivable c. debit to Allowance for Doubtful Accounts d. debit to Accounts Receivable 90. Dalton Company uses the allowance method to account for uncollectible receivables. Dalton has determined that the Irish Company account is uncollectible. To write off this account, Dalton should debit a. Bad Debt Expense and credit Accounts Receivable—Irish Company b. Bad Debt Expense and credit Allowance for Doubtful Accounts c. Allowance for Doubtful Accounts and credit Accounts Receivable—Irish Company d. Accounts Receivable—Irish Company and credit Allowance for Doubtful Accounts 91. In accounting for uncollectible receivables, the balance in Allowance for Doubtful Accounts will directly impact the amount of the adjustment when applying a. the direct write-off method b. the percentage of sales method c. the analysis of receivables method d. both the percentage of sales and analysis of receivables methods 92. Abbott Company uses the allowance method of accounting for uncollectible receivables. Abbott estimates that 3% of credit sales will be uncollectible. On January 1, Allowance for Doubtful Accounts had a credit balance of $2,400. During the year, Abbott wrote off accounts receivable totaling $1,800 and made credit sales of $100,000. There were no sales returns during the year. After the adjusting entry, the December 31 balance in Bad Debt Expense will be a. $1,200 b. $3,000 c. $3,600 d. $7,200 93. A company uses the allowance method to account for uncollectible accounts receivable. When the firm writes off a specific customer's account receivable, a. total current assets are reduced b. total expenses for the period are increased c. the net realizable value of accounts receivable increases d. there is no effect on total current assets or total expenses 94. Allowance for Doubtful Accounts has a credit balance of $1,300 at the end of the year (before adjustment). The company prepares an analysis of customers' accounts to estimate the amount of uncollectible accounts of $41,900. Which of the following adjusting entries would be made to record the bad debt expense for the year? a. debit Allowance for Doubtful Accounts, $40,600; credit Bad Debt Expense, $40,600 b. debit Allowance for Doubtful Accounts, $43,200; credit Bad Debt Expense, $43,200 Powered by Cognero
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Chapter 09 - Receivables c. debit Bad Debt Expense, $43,200; credit Allowance for Doubtful Accounts, $43,200 d. debit Bad Debt Expense, $40,600; credit Allowance for Doubtful Accounts, $40,600 95. Allowance for Doubtful Accounts has a debit balance of $2,300 at the end of the year (before adjustment). The company prepares an analysis of customers' accounts and estimates the amount of uncollectible accounts to be $31,900. Which of the following adjusting entries is needed for the bad debt expense for the year? a. debit Bad Debt Expense, $34,200; credit Allowance for Doubtful Accounts, $34,200 b. debit Allowance for Doubtful Accounts, $34,200; credit Bad Debt Expense, $34,200 c. debit Allowance for Doubtful Accounts, $29,600; credit Bad Debt Expense, $29,600 d. debit Bad Debt Expense, $29,600; credit Allowance for Doubtful Accounts, $29,600 96. Allowance for Doubtful Accounts has a debit balance of $2,500 at the end of the year (before adjustment), and bad debt expense is estimated at 4% of credit sales. If credit sales are $800,000, the amount of the adjusting entry for the estimate of the uncollectible accounts a. is $29,500 b. is $34,500 c. is $32,000 d. cannot be determined with the information given 97. Allowance for Doubtful Accounts has a credit balance of $800 at the end of the year (before adjustment), and an analysis of accounts in the customers ledger indicates that the estimated amount of uncollectible accounts is $16,000. Based on the estimate, which of the following adjusting entries should be made? a. debit Bad Debt Expense, $800; credit Allowance for Doubtful Accounts, $800 b. debit Bad Debt Expense, $15,200; credit Allowance for Doubtful Accounts, $15,200 c. debit Allowance for Doubtful Accounts, $800; credit Bad Debt Expense, $800 d. debit Bad Debt Expense, $16,800; credit Allowance for Doubtful Accounts, $16,800 98. The allowance method of estimating uncollectible accounts receivable based on an analysis of receivables shows that $640 of accounts receivable are uncollectible. Allowance for Doubtful Accounts has a debit balance of $110. The adjusting entry at the end of the year will include a credit to Allowance for Doubtful Accounts in the amount of a. $110 b. $640 c. $530 d. $750 99. Allowance for Doubtful Accounts has a credit balance of $500 at the end of the year (before adjustment), and bad debt expense is estimated at 3% of credit sales. If credit sales are $300,000, the amount of the adjusting entry for the estimated uncollectible accounts receivable a. is $8,500 b. is $9,500 c. is $9,000 d. cannot be determined with the information given 100. Allowance for Doubtful Accounts is classified as a(n) _____ account and has a normal _____ balance. a. owner's equity; credit b. contra asset; debit Powered by Cognero
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Chapter 09 - Receivables c. owner's equity; debit d. contra asset; credit 101. Under the allowance method of accounting for uncollectible receivables, writing off an uncollectible account a. affects only income statement accounts b. is not an acceptable practice c. affects only balance sheet accounts d. affects both balance sheet and income statement accounts 102. At the end of the current year, Accounts Receivable has a balance of $550,000; Allowance for Doubtful Accounts has a credit balance of $5,500; and sales for the year total $2,500,000. An analysis of receivables estimates uncollectible receivables as $25,000. Determine the amount of the adjusting entry for bad debt expense and the adjusted balance of Allowance for Doubtful Accounts, respectively. a. $19,500 and $25,000 b. $30,500 and $525,000 c. $19,500 and $525,000 d. $30,500 and $25,000 103. At the end of the current year, Accounts Receivable has a balance of $550,000; Allowance for Doubtful Accounts has a credit balance of $5,500; and sales for the year total $2,500,000. An analysis of receivables estimates uncollectible receivables as $25,000. Determine the net realizable value of accounts receivable after adjustment. (Hint: Determine the amount of the adjusting entry for bad debt expense and the adjusted balance of Allowance for Doubtful Accounts.) a. $550,000 b. $544,500 c. $525,000 d. $575,000 104. When comparing the direct write-off method and the allowance method of accounting for uncollectible receivables, a major difference is that the direct write-off method a. uses a percentage of sales to estimate uncollectible accounts b. is used primarily by large companies with many receivables c. is used primarily by small companies with few receivables d. uses an allowance account 105. When a company uses the allowance method of accounting for uncollectible receivables, which entry would not be found in its general journal? a. Bad Debt Expense 500 Allowance for Doubtful Accounts 500 b. Bad Debt Expense 500 Accounts Receivable—Bob Smith 500 c. Cash 300 Allowance for Doubtful Accounts 200 Accounts Receivable—Bob Smith 500 Powered by Cognero
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Chapter 09 - Receivables d. Cash Accounts Receivable—Bob Smith
500 500
106. When a company uses the allowance method of accounting for uncollectible receivables, the entry to reinstate a previously written off account would include a a. credit to Bad Debt Expense b. debit to Bad Debt Expense c. debit to Allowance for Doubtful Accounts d. credit to Allowance for Doubtful Accounts 107. The amount for which a promissory note is written is called the a. realizable value b. maturity value c. face value d. proceeds 108. The amount of the promissory note plus the interest earned on the due date is called the a. interest value b. maturity value c. face value d. issuance value 109. A 60-day, 12% note for $7,000, dated April 15, is received from a customer on account. The face value of the note is a. $6,860 b. $7,140 c. $7,840 d. $7,000 110. A 60-day, 9% note for $10,000, dated May 1, is received from a customer on account. The maturity value of the note is a. $10,000 b. $10,150 c. $10,900 d. $9,100 111. Interest on a note can be computed without knowledge of the a. fair value of the note b. rate of interest c. note duration d. principal amount 112. On October 1, Black Company receives a 9% interest-bearing note from Reese Company to settle a $20,000 account receivable. The note is due in six months. At December 31, Black should record interest revenue of a. $0 b. $450 Powered by Cognero
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Chapter 09 - Receivables c. $900 d. $1,800 113. If the maker of a promissory note fails to pay the note on the due date, the note is said to be a. displaced b. disallowed c. dishonored d. discounted 114. The journal entry for a note received from a customer to replace an account is a. debit Notes Receivable; credit Accounts Receivable b. debit Accounts Receivable; credit Notes Receivable c. debit Cash; credit Notes Receivable d. debit Notes Receivable; credit Notes Payable 115. A $6,000, 60-day, 12% note is not paid by the maker at maturity. The journal entry to recognize this event is a. debit Cash, $6,120; credit Notes Receivable, $6,120 b. debit Accounts Receivable, $6,120; credit Notes Receivable, $6,000; credit Interest Receivable, $120 c. debit Notes Receivable, $6,060; credit Accounts Receivable, $6,060 d. debit Accounts Receivable, $6,120; credit Notes Receivable, $6,000; credit Interest Revenue, $120 116. When referring to a note receivable or promissory note, a. the maker is the party to whom the money is due b. the note is not considered a formal credit instrument c. the note cannot be factored to another party d. the note may be used to settle an accounts receivable 117. When a company receives an interest-bearing note receivable, it will a. debit Notes Receivable for the maturity value of the note b. debit Notes Receivable for the face value of the note c. credit Notes Receivable for the maturity value of the note d. credit Notes Receivable for the face value of the note 118. Paper Company receives a $6,000, three-month, 6% promissory note from Dame Company in settlement of an open accounts receivable. What entry will Paper Company make upon receiving the note? a. Notes Receivable, Dame Company 6,000 Accounts Receivable, Dame Company 6,000 b. Notes Receivable, Dame Company 6,090 Accounts Receivable, Dame Company 6,090 c. Notes Receivable, Dame Company 6,090 Accounts Receivable, Dame Company 6,000 Interest Revenue 90 d. Notes Receivable, Dame Company 6,000 Interest Revenue 90 Accounts Receivable, Dame Company 6,000 Powered by Cognero
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Chapter 09 - Receivables Interest Receivable
90
119. The maturity value of a $40,000, 9%, 40-day note receivable dated July 3 is a. $40,000 b. $40,400 c. $43,600 d. $44,000 120. Harper Company lends Hewell Company $40,000 on March 1, accepting a four-month, 6% interest note. Harper Company prepares financial statements on March 31. What adjusting entry should be made before the financial statements can be prepared? a. Cash 200 Interest Revenue 200 b. Interest Receivable 800 Interest Revenue 800 c. Interest Receivable 200 Interest Revenue 200 d. Notes Receivable 40,000 Cash 40,000 121. On August 1, Kim Company accepted a 90-day note receivable as payment for services provided to Hsu Company. The terms of the note were $20,000 face value and 6% interest. On October 30, the journal entry for the collection of the note should include a a. credit to Notes Receivable for $20,300 b. debit to Interest Receivable for $300 c. credit to Interest Revenue for $300 d. debit to Notes Receivable for $20,000 122. Which of these statements is not true? a. Current assets are normally reported in order of their liquidity. b. Disclosures related to receivables are reported in the financial statement notes. c. Cash and cash equivalents are the first items reported under Current Assets. d. All receivables that are expected to be realized in cash beyond 265 days are reported in the Noncurrent Assets section. 123. Current assets are usually listed in order a. of the due date b. of the size c. alphabetically d. of liquidity 124. The accounts receivable turnover measures a. how frequently during the year the accounts receivable are converted to cash b. the number of days of accounts receivable outstanding c. the fair market value of accounts receivable Powered by Cognero
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Chapter 09 - Receivables d. the efficiency of the accounts payable function 125. Days' sales in receivables a. is an estimate of the length of time the receivables have been outstanding b. measures the number of times the receivables turn over each year c. is credit sales divided by average receivables d. is not meaningful and therefore is not used 126. Given the following information, compute the accounts receivable turnover. Cash Sales a. 6.75 b. 7.50 c. 6.13 d. 6.82
$150,000 Accounts receivable, beginning of year 135,000 Accounts receivable, end of year
$18,000 22,000
Matching Match each of the following descriptions to the method of accounting for uncollectible receivables (a–d) it describes. Each term may be used more than once. a. Direct write-off method b. Aging of receivables method c. Percent of sales method d. Allowance method 127. This method records bad debts when specific accounts are deemed uncollectible. 128. When using this method, estimated bad debts are added to the existing allowance balance. 129. This method is most often used by small companies with few receivables. 130. This method is based on the theory that older accounts are less likely to be collected. 131. This method focuses on the balance sheet. 132. This method estimates the uncollectible accounts receivable at the end of the accounting period. 133. With this method, there is no allowance account. 134. This method focuses on the income statement. 135. When writing off a specific uncollectible account, this method debits Bad Debt Expense. Match each of the following descriptions to the term (a–h) it describes. Each term will be used only once. a. Face amount b. Term c. Interest Powered by Cognero
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Chapter 09 - Receivables d. Maturity value e. Dishonored note f. Maker g. Notes receivable h. Interest rate 136. A formal, written instrument of credit that represents amounts due from customers 137. The amount due that must be paid at the due date of a note receivable 138. The amount charged for using the money of another party 139. The stated rate charged for using the money of another party 140. A note that is not paid when it is due 141. The dollar amount stated on a promissory note 142. The party promising to pay a note 143. The time between the date a note is issued and the due date of the note Match each of the following descriptions to the term (a–i) it describes. a. Accounts receivable turnover b. Net realizable value c. Accounts receivable d. Aging the receivables e. Receivables f. Direct write-off method g. Allowance for doubtful accounts h. Bad debt expense i. Notes receivable 144. A receivable created from selling merchandise or services on account 145. The process of analyzing the accounts receivable and classifying them according to various age groupings, with the due date being the base point for determining age 146. A contra asset that represents the amount of estimated uncollectible receivables 147. Records bad debt expense only when a specific customer’s account is deemed worthless 148. Operating expense recorded as a result of receivables becoming uncollectible 149. The difference between accounts receivable and allowance for doubtful accounts 150. Amounts owed by customers documented by a formal written instrument of credit Powered by Cognero
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Chapter 09 - Receivables 151. All money claims against other entities 152. Measures how frequently during the year accounts receivable are being turned into cash Subjective Short Answer 153. Other than Accounts Receivable and Notes Receivable, name other receivables that might be included in the general ledger. 154. Discuss the similarities and differences between accounts receivable, notes receivable, and other receivables. 155. List at least three indicators that a receivable may be uncollectible. 156. Journalize the following transactions using the direct write-off method of accounting for uncollectible receivables. Apr. 1 Sold merchandise on account to Jim Dobbs, $7,200. The cost of the merchandise is $5,400. June 10 Received payment for one-third of the receivable from Jim Dobbs and wrote off the remainder. Oct. 11 Reinstated the account of Jim Dobbs and received cash in full payment. 157. Stephanie Roe utilizes the direct write-off method of accounting for uncollectible receivables. On September 15, she is notified by the attorneys for Jacob Marley that Jacob Marley is bankrupt, and none of the $675 balance due on his account is expected in the liquidation process. Journalize the entry to write off Jacob Marley’s account. 158. Journalize the following transactions using the direct write-off method of accounting for uncollectible receivables. Feb. 20 Received $1,000 from Andrew Warren and wrote off the remainder owed of $4,000 as uncollectible. May 10 Reinstated the account of Andrew Warren and received $4,000 cash in full payment. 159. Determine the amount to be added to Allowance for Doubtful Accounts in each of the following cases and indicate the ending balance in each case. a. b.
Credit balance of $300 in Allowance for Doubtful Accounts just prior to adjustment. Analysis of Accounts Receivable indicates uncollectible receivables of $8,500. Credit balance of $500 in Allowance for Doubtful Accounts just prior to adjustment. Uncollectible receivables are estimated at 2% of credit sales, which totaled $1,000,000 for the year.
160. Journalize the following transactions using the allowance method of accounting for uncollectible receivables. Apr. 1 Sold merchandise on account to Jim Dobbs, $7,200. The cost of the merchandise is $5,400. June 10 Received payment for one-third of the receivable from Jim Dobbs and wrote off the remainder. Oct. 11 Reinstated the account of Jim Dobbs and received cash in full payment. 161. At the end of the current year, Accounts Receivable has a balance of $700,000; Allowance for Doubtful Accounts has a credit balance of $5,500; and sales for the year total $3,500,000. Bad debt expense is estimated at ½ of 1% of sales. Determine (a) the amount of the adjusting entry for bad debt expense; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable. 162. At the end of the current year, Accounts Receivable has a balance of $750,000; Allowance for Doubtful Accounts has a debit balance of $6,200; and sales for the year total $3,500,000. Bad debt expense is estimated at ½ of 1% of sales. Determine (a) the amount of the adjusting entry for bad debt expense; (b) the adjusted balances of Accounts Receivable, Powered by Cognero
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Chapter 09 - Receivables Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable. 163. At the end of the current year, Accounts Receivable has a balance of $90,000; Allowance for Doubtful Accounts has a credit balance of $850; and sales for the year total $300,000. Bad debt expense is estimated at 2.5% of sales. Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable. 164. At the end of the current year, Accounts Receivable has a balance of $550,000; Allowance for Doubtful Accounts has a credit balance of $5,500; and sales for the year total $2,500,000. An analysis of receivables estimates uncollectible receivables as $25,000. Determine (a) the amount of the adjusting entry for bad debt expense; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable. 165. At the end of the current year, Accounts Receivable has a balance of $675,000; Allowance for Doubtful Accounts has a debit balance of $5,400; and sales for the year total $3,000,000. An analysis of receivables indicates the uncollectible receivables are estimated to be $45,000. Determine (a) the amount of the adjusting entry for bad debt expense; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable. 166. Discount Mart utilizes the allowance method of accounting for uncollectible receivables. On December 12, the company receives a $550 check from Chad Thomas in settlement of Thomas’s $1,100 outstanding accounts receivable. Due to Thomas’s failing health, he is closing his company and is expecting to make no further payments to Discount Mart. Journalize this transaction. 167. On June 30 (the end of the period), Brown Company has a credit balance of $2,275 in Allowance for Doubtful Accounts. An evaluation of accounts receivable indicates that the proper balance should be $30,025. Journalize the appropriate adjusting entry. 168. The partially completed aging of receivables schedule for Torme Designs follows: Age Interval Not past due 1–30 days past due 31–60 days past due 61–90 days past due 91–180 days past due 181–365 days past due Over 365 days past due Total
Balance $850,000 47,500 21,750 11,250 5,065 2,500 1,145 $939,210
Estimated Uncollectible Accounts Percentage Amount 3.50% 5.00 10.00 20.00 30.00 50.00 95.00
a. Complete the schedule and determine the total estimate of uncollectible accounts. Show amounts to the nearest cent (do not round). b. Assuming Allowance for Doubtful Accounts has an unadjusted credit balance of $1,135, journalize the adjusting entry for the bad debt expense for the year. 169. For each of the following scenarios, indicate the amount of the adjusting journal entry for bad debt expense to be recorded, the balance in Allowance for Doubtful Accounts after adjustment at December 31, and the net realizable value Powered by Cognero
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Chapter 09 - Receivables of accounts receivable at December 31. a. Based on an analysis of Simmons Company’s $380,000 balance in Accounts Receivable at December 31, it was estimated that $15,500 will be uncollectible. There is a credit balance of $1,200 in Allowance for Doubtful Accounts before adjustment. b. Blake Company had credit sales of $900,000 at year-end, an Accounts Receivable balance of $425,000 at December 31, and an Allowance for Doubtful Accounts credit balance of $11,000 before adjustment. Blake estimates bad debt expense as ¾ of 1% of credit sales. c. Hidgon Inc. has a balance of $812,000 in Accounts Receivable at December 31. An analysis of those receivables shows $24,000 will probably not be collected. Before adjusting entries are prepared, Allowance for Doubtful Accounts has a debit balance of $750. 170. A partially completed aging of receivables schedule for Lindy Designs follows:
Age Interval Not past due 1–30 days past due 31–60 days past due 61–90 days past due 91–180 days past due 181–365 days past due Over 365 days past due Total
Estimated Uncollectible Accounts Balance Percentage Amount $550,000 2.50% 96,500 4.00 43,750 9.50 22,250 16.00 5,600 31.00 3,100 60.00 1,250 95.00 $722,450
a. Complete the schedule and determine the total estimate of uncollectible accounts. Show amounts to the nearest cent (do not round). b. If Allowance for Doubtful Accounts has an unadjusted credit balance of $9,700, record the adjusting entry for bad debt expense for the year. c. If Allowance for Doubtful Accounts has an unadjusted debit balance of $9,700, record the adjusting entry for bad debt expense for the year. 171. Discuss the (a) focus and (b) financial statement emphasis of the percent of sales and the analysis of receivables methods of estimating bad debts. 172. Discuss the two methods for recording bad debt expense. What type of company uses each method? 173. For a business that uses the allowance method of accounting for uncollectible receivables: a.
Journalize the entries for the following transactions: (1)
(2) (3)
Record the adjusting entry at December 31, the end of the first fiscal year, to record the bad debt expense. The accounts receivable account has a balance of $800,000, and the contra asset account before adjustment has a debit balance of $600. Analysis of the receivables indicates uncollectible receivables of $18,000. In March of the next year, the $350 owed by Fronk Co. on account is written off as uncollectible. In November of the next year, $200 of the Fronk Co. account is reinstated and
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Chapter 09 - Receivables (4)
b.
payment of that amount is received. In December of the next year, $400 is received on the $600 owed by Dodger Co. and the remainder is written off as uncollectible.
Redo the entries in steps (a2), (a3), and (a4), assuming the company uses the direct writeoff method.
174. Morry Company wrote off the following accounts receivable as uncollectible for the first year of its operations ending December 31: Customer J. Jackson L. Stanton C. Barton S. Fenton Total
Amount $10,000 9,500 13,100 2,400 $35,000
a.
Journalize the write-offs for the current year under the direct write-off method.
b.
Journalize the write-offs for the current year under the allowance method. Also, journalize the adjusting entry for uncollectible receivables assuming the company made $2,400,000 of credit sales during the year and, based on the industry average, the company expects uncollectible receivables to be 1.5% of credit sales.
c.
How much higher or lower would Morry Company’s net income have been under the direct write-off method than under the allowance method?
175. Fellows Corporation has determined that the $2,700 accounts receivable due from Andrew Stevens is uncollectible. Compare the journal entry that is required under the direct write-off method to the journal entry that is required using the allowance method. 176. Journalize the following transactions in the accounts of Simmons Company: Mar. 1 Received a $60,000, 60-day, 6% note dated March 1 from Bynum Co. on account. 18 Received a $25,000, 60-day, 9% note dated March 18 from Solo Co. on account. Apr. 30 The note dated March 1 from Bynum Co. is dishonored, and the customer’s account is charged for the note, including interest. May 17 The note dated March 18 from Solo Co. is dishonored, and the customer’s account is charged for the note, including interest. July 29 Cash is received for the amount due on the dishonored note dated March 1 plus interest for 90 days at 8% on the total amount debited to Bynum Co. on April 30. Aug. 23 Wrote off against the allowance account the amount charged to Solo Co. on May 17 for the dishonored note dated March 18. 177. Sunshine Service Center received a 120-day, 6% note for $40,000, dated April 12 from a customer on account. a. b. c.
Determine the due date of the note. Determine the maturity value of the note. Journalize the entry for the receipt of the payment of the note at maturity.
178. Determine the due date and amount of interest due at maturity on the following notes: Powered by Cognero
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Chapter 09 - Receivables Origination Date Mar. 15 May 1
a. b.
Face Amount $8,000 12,000
Term of Note 60 days 90 days
Interest Rate 9% 8%
Maturity Date _______ _______
Interest Amount _______ _______
179. Blackwell Industries received a 120-day, 9% note for $180,000, dated August 10 from a customer on account. a. Determine the due date of the note. b. Determine the maturity value of the note. c. Journalize the entry for the receipt of the payment of the note at maturity. 180. Determine the due date and the amount of interest due at maturity on the following notes: a. b. c. d. e.
Date of Note October 1 August 30 May 30 March 6 May 23
Face Amount $21,000 9,000 12,000 15,000 9,000
Interest Rate 8% 10 12 9 10
Term of Note 60 days 120 days 90 days 60 days 60 days
181. Journalize the following transactions for Lucite Company: Nov. 14 Received a $4,800, 90-day, 9% note from Alan Albertson in payment of his account. Dec. 31 Accrued interest on the Albertson note. Feb. 12 Received the amount due from Albertson on his note. 182. For each of the following notes receivable held by Winter Company, determine the interest revenue to be reported on the income statements. Round answers to nearest whole dollar.
Date
Face
Rate
Term
Aug. 8, Year 1 Oct. 7, Year 1 Jan. 6, Year 2 Nov. 12, Year 1
$15,000 22,000 30,000 28,000
7% 8 8 9
180 days 60 days 90 days 60 days
Year 1 Interest Revenue
Year 2 Interest Revenue
183. Mr. Potts issued a 90-day, 7% note for $200,000, dated February 3 to Valley Co. on account. (Assume a 360-day year when computing interest.) a. Determine the due date of the note. b. Determine the interest. c. Determine the maturity value of the note. d. Journalize the entry for the receipt of the note from Potts on February 3. e. Journalize the entry for the receipt of payment of the note at maturity by Valley Co. 184. Lone Star Company received a 90-day, 6% note for $80,000, dated March 12 from a customer on account. (Assume a 360-day year when computing interest.) a. b. c.
Determine the due date of the note. Determine the maturity value of the note. Journalize the entry for the receipt of the payment of the note at maturity.
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Chapter 09 - Receivables 185. Watson Co. issued a 60-day, 8% note for $18,000, dated April 5, to Laker Company on account. (Assume a 360-day year when computing interest.) a. b. c.
Determine the due date of the note. Determine the maturity value of the note. Journalize the entries to record the following: (1) Receipt of the note by the payee. (2) Receipt by the payee of the amount due on the note at maturity.
186. Journalize the following transactions (assume a 360-day year when computing interest): Mar. 1 Received a 90-day, 10% note for $24,000, dated March 1, from Batson Co. on account. May 30 The note of March 1 was dishonored. 187. Journalize the following transactions of Upton Drugs: July 8 Received a $180,000, 90-day, 8% note dated July 8 from Miracle Chemical on account. Oct. 6 The note is dishonored by Miracle Chemical. Nov. 5 Received the amount due on the dishonored note plus interest for 30 days at 10% on the total amount charged to Miracle Chemical on October 6. 188. Journalize the following transactions for Scott Company: Nov. 4 Received a $6,500, 90-day, 6% note from Michael Tims in payment of his account. Dec. 31 Accrued interest on the Tims note. Feb. 2 Received the amount due from Tims on his note. 189. For each of the following notes receivables held by Christensen Company, determine the interest revenue to be reported on the income statements for the year ended December 31. Round answers to the nearest whole dollar. Date Aug. 8 Oct. 7 Jan. 6 Nov. 12
Face $45,000 62,000 28,000 43,000
Rate 7% 5 4 6
Term Interest Revenue 45 days 60 days 120 days 60 days
190. On the basis of the following data related to assets due within one year for Simons Co., prepare a partial balance sheet at December 31. Show total current assets. Cash Accounts receivable Allowance for doubtful accounts Interest receivable Supplies Inventory Other current assets
$ 56,000 325,000 25,000 3,000 4,000 45,000 10,000
191. On the basis of the following data related to assets due within one year for Webb Co., prepare a partial balance sheet at December 31. Show total current assets. Cash Powered by Cognero
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Chapter 09 - Receivables Notes receivable Accounts receivable Allowance for doubtful accounts Interest receivable
50,000 275,000 40,000 1,000
192. On the basis of the following data related to assets due within one year for Barnes Co., prepare a partial balance sheet at December 31. Show total current assets. Accounts receivable Allowance for doubtful accounts Cash Interest receivable Merchandise inventory Notes receivable
$ 38,000 5,000 45,000 5,500 88,000 100,000
193. Based on the following data for Jake Company and using a 365-day year, compute (a) the accounts receivable turnover and (b) days' sales in receivables for Year 2. Round to two decimal places. The industry average accounts receivable turnover is 20, and the industry average days' sales in receivables is 25. (c) Comment on Jake Company’s situation. 12/31/Year 1 accounts receivable 12/31/Year 2 accounts receivable For the year ended 12/31/Year 1, sales For the year ended 12/31/Year 2, sales
$ 100,000 70,000 1,050,000 1,200,000
194. For fiscal Year 1 and Year 2, Grange Co. reported the following:
Sales Accounts receivable
Year Ended December 31, Year 2 Year 1 $34,124,961 $44,123,486 719,365 749,321
a. Compute the accounts receivable turnover for Year 2. Round to two decimal places. b. Compute the days’ sales in receivables at the end of Year 2. Round to two decimal places. 195. Financial statement data for the years ended December 31 for Parker Corporation are as follows: Sales Accounts receivable: Beginning of year End of year
Current Year $2,595,600
Prior Year $2,409,500
390,000 434,000
400,000 390,000
a. Determine the accounts receivable turnover for each year. Round to one decimal place. b. Determine the days’ sales in receivables for each year. Round to whole days. c. Does the change in accounts receivable turnover and days’ sales in receivables from the first year to the second year indicate a favorable or unfavorable change?
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Chapter 09 - Receivables Answer Key 1. True 2. True 3. False 4. True 5. True 6. True 7. True 8. True 9. True 10. True 11. True 12. True 13. True 14. True 15. False 16. True 17. True 18. False 19. False 20. True 21. False 22. False 23. False 24. False 25. True Powered by Cognero
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Chapter 09 - Receivables 26. False 27. False 28. False 29. False 30. False 31. False 32. False 33. False 34. True 35. False 36. True 37. False 38. True 39. True 40. False 41. False 42. False 43. True 44. False 45. True 46. d 47. b 48. d 49. a 50. b Powered by Cognero
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Chapter 09 - Receivables 51. a 52. d 53. c 54. b 55. b 56. c 57. a 58. a 59. b 60. a 61. d 62. b 63. b 64. d 65. d 66. b 67. b 68. b 69. c 70. a 71. d 72. d 73. a 74. d 75. a 76. c Powered by Cognero
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Chapter 09 - Receivables 77. a 78. c 79. a 80. b 81. c 82. d 83. a 84. d 85. c 86. b 87. c 88. a 89. d 90. c 91. c 92. b 93. d 94. d 95. a 96. c 97. b 98. d 99. c 100. d 101. c Powered by Cognero
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Chapter 09 - Receivables 102. a 103. c 104. c 105. b 106. d 107. c 108. b 109. d 110. b 111. a 112. b 113. c 114. a 115. d 116. d 117. b 118. a 119. b 120. c 121. c 122. d 123. d 124. a 125. a 126. a 127. a Powered by Cognero
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Chapter 09 - Receivables 128. c 129. a 130. b 131. b 132. d 133. a 134. c 135. c 136. g 137. d 138. c 139. h 140. e 141. a 142. f 143. b 144. c 145. d 146. g 147. f 148. h 149. b 150. i 151. e 152. a Powered by Cognero
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Chapter 09 - Receivables 153. Interest Receivable, Receivables from Officers or Employees, Taxes Receivable 154. Accounts receivable result from the sale of goods and services on credit. They are normally collected within a short period of time (30–60 days) and are classified as current assets on the balance sheet. Notes receivable can also result from the sale of goods, generally when the amount owed is due in more than 60 days. Notes can also be used to settle accounts receivable. Notes are formal written instruments of credit. When collection is expected to be in less than one year, they are classified as current assets on the balance sheet. Other receivables result from nontrade transactions (interest, taxes, amounts due from employees). They are generally reported separately on the balance sheet. If collection is expected in less than one year, they are classified as current assets. If not, they are classified as noncurrent assets and reported under Investments. 155. Answers may vary and should include three of the following: 1. The receivable is past due. 2. The customer does not respond to the company’s attempts to collect. 3. The customer files for bankruptcy. 4. The customer closes its business. 5. The company cannot locate the customer. 156. Apr. 1
1
June 10
Oct. 11
11
Accounts Receivable Sales
7,200
Cost of Merchandise Sold Merchandise Inventory
5,400
Cash Bad Debt Expense Accounts Receivable—Jim Dobbs
2,400 4,800
Accounts Receivable—Jim Dobbs Bad Debt Expense
4,800
Cash Accounts Receivable—Jim Dobbs
4,800
157. Sept. 15 Bad Debt Expense Accounts Receivable—Jacob Marley 158. Feb.
May
20
10
10
7,200
5,400
7,200
4,800
4,800 675 675
Cash Bad Debt Expense Accounts Receivable—Andrew Warren
1,000 4,000
Accounts Receivable—Andrew Warren Bad Debt Expense
4,000
Cash Accounts Receivable—Andrew Warren
4,000
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5,000
4,000
4,000 Page 33
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Chapter 09 - Receivables 159. a. Amount added: $8,200 b. Amount added: $20,000
Ending balance: $8,500 Ending balance: $20,500
160. Apr. 1
1
June 10
Oct. 11
11
161. a.
Accounts Receivable Sales
7,200
Cost of Merchandise Sold Merchandise Inventory
5,400
Cash Allowance for Doubtful Accounts Accounts Receivable—Jim Dobbs
2,400 4,800
Accounts Receivable—Jim Dobbs Allowance for Doubtful Accounts
4,800
Cash Accounts Receivable—Jim Dobbs
4,800
5,400
7,200
4,800
4,800
$17,500 ($3,500,000 × 0.005)
b.
Accounts Receivable Allowance for Doubtful Accounts ($5,500 + $17,500) Bad Debt Expense
c.
Net realizable value ($700,000 – $23,000)
162. a.
$17,500 ($3,500,000 × 0.005)
b.
Accounts Receivable Allowance for Doubtful Accounts ($17,500 – $6,200) Bad Debt Expense
c.
Net realizable value ($750,000 – $11,300)
163. a.
$7,500 ($300,000 × 0.025)
b.
7,200
Accounts Receivable Allowance for Doubtful Accounts ($850 + $7,500) Bad Debt Expense
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Adjusted Balance Debit (Credit) $700,000 (23,000) 17,500 $677,000
Adjusted Balances Debit (Credit) $750,000 (11,300) 17,500 $738,700
Adjusted Balance Debit (Credit) $90,000 (8,350) 7,500 Page 34
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Chapter 09 - Receivables c.
Net realizable value ($90,000 – $8,350)
164. a.
$19,500 ($25,000 – $5,500)
$81,650
b.
Accounts Receivable Allowance for Doubtful Accounts ($5,500 + $19,500) Bad Debt Expense
c.
Net realizable value ($550,000 – $25,000)
165. a.
$50,400 ($45,000 + $5,400)
$525,000
b.
Accounts Receivable Allowance for Doubtful Accounts ($50,400 – $5,400) Bad Debt Expense
c.
Net realizable value ($675,000 – $45,000)
166. Dec. 12
Cash Allowance for Doubtful Accounts Accounts Receivable—Chad Thomas
167. June 30 Bad Debt Expense* Allowance for Doubtful Accounts
Adjusted Balance Debit (Credit) $550,000 (25,000) 19,500
Adjusted Balance Debit (Credit) $675,000 (45,000) 50,400 $630,000
550 550 1,100 27,750 27,750
*$30,025 – $2,275 = $27,750 168. a. Age Interval Not past due 1–30 days past due 31–60 days past due 61–90 days past due 91–180 days past due 181–365 days past due Over 365 days past due Total
Estimated Uncollectible Accounts Balance Percentage Amount $850,000 3.50% $29,750.00 47,500 5.00 2,375.00 21,750 10.00 2,175.00 11,250 20.00 2,250.00 5,065 30.00 1,519.50 2,500 50.00 1,250.00 1,145 95.00 1,087.75 $939,210 $40,407.25
b. Dec. 31 Bad Debt Expense* 39,272.25 Allowance for Doubtful Accounts 39,272.25 Powered by Cognero
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Chapter 09 - Receivables *$40,407.25 – $1,135.00 = $39,272.25 169. a. Bad debt expense ($15,500 − $1,200) Allowance for doubtful accounts at Dec. 31 Net realizable value of accounts receivable at Dec. 31 ($380,000 – $15,500)
$ 14,300 15,500 364,500
b. Bad debt expense (0.0075 × $900,000) Allowance for doubtful accounts at Dec. 31 ($11,000 + $6,750) Net realizable value of accounts receivable at Dec. 31 ($425,000 – $17,750)
$ 6,750
c. Bad debt expense [$24,000 − $(750)] Allowance for doubtful accounts at Dec. 31 Net realizable value of accounts receivable at Dec. 31 ($812,000 – $24,000)
$ 24,750 24,000
17,750 407,250
788,000
170. a. Age Interval Not past due 1–30 days past due 31–60 days past due 61–90 days past due 91–180 days past due 181–365 days past due Over 365 days past due Total b. Dec. 31
Estimated Uncollectible Accounts Balance Percentage Amount $550,000 2.50% $13,750.00 96,500 4.00 3,860.00 43,750 9.50 4,156.25 22,250 16.00 3,560.00 5,600 31.00 1,736.00 3,100 60.00 1,860.00 1,250 95.00 1,187.50 $722,450 $30,109.75
Bad Debt Expense* Allowance for Doubtful Accounts
20,409.75 20,409.75
*$30,109.75 – $9,700.00 = $20,409.75 c. Dec. 31
Bad Debt Expense* Allowance for Doubtful Accounts
39,809.75 39,809.75
*$30,109.75 – $(9,700.00) = $39,809.75 171. a. Bad debt expense is the focus of the percent of sales method. It places more emphasis on matching revenues and expenses and thus emphasizes the income statement. b. The allowance for doubtful accounts is the focus of the analysis of receivables method. It places more emphasis on the net realizable value of receivables and thus emphasizes the balance sheet. 172. The first method is the direct write-off method. Under this method, bad debt expense is recorded only when an account is deemed uncollectible. This method is most often used by small companies and those with few receivables. The second method is the allowance method. Under this method, bad debt expense is recorded by estimating bad debts at the end of the accounting period. Companies that have a large amount of receivables are required to use this method under generally accepted accounting principles (GAAP). Powered by Cognero
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Chapter 09 - Receivables 173. a. (1) Bad Debt Expense Allowance for Doubtful Accounts
18,600
(2) Allowance for Doubtful Accounts Accounts Receivable—Fronk Co.
350
(3) Accounts Receivable—Fronk Co. Allowance for Doubtful Accounts
200
Cash Accounts Receivable—Fronk Co.
200
(4) Cash Allowance for Doubtful Accounts Accounts Receivable—Dodger Co.
400 200
(2) Bad Debt Expense Accounts Receivable—Fronk Co.
350
(3) Accounts Receivable—Fronk Co. Bad Debt Expense
200
18,600
350
200
200
600
b. 350
200
Cash Accounts Receivable—Fronk Co.
200
(4) Cash Bad Debt Expense Accounts Receivable—Dodger Co.
400 200
174. a. Bad Debt Expense Accounts Receivable—J. Jackson Accounts Receivable—L. Stanton Accounts Receivable—C. Barton Accounts Receivable—S. Fenton b. Allowance for Doubtful Accounts Accounts Receivable—J. Jackson Accounts Receivable—L. Stanton Accounts Receivable—C. Barton Accounts Receivable—S. Fenton
600
35,000 10,000 9,500 13,100 2,400 35,000
Bad Debt Expense* 36,000 Allowance for Doubtful Accounts *Uncollectible accounts estimate: $2,400,000 × 1.5% = $36,000 Powered by Cognero
200
10,000 9,500 13,100 2,400
36,000
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Chapter 09 - Receivables c. Net income would have been $1,000 higher under the direct write-off method, because bad debt expense is $1,000 higher under the allowance method ($36,000 expense under the allowance method vs. $35,000 expense under the direct write-off method). 175. Under the direct write-off method, Bad Debt Expense will be debited for $2,700. Under the allowance method, the debit will be made to Allowance for Doubtful Accounts. Under both methods, Accounts Receivable—Andrew Stevens will be credited for $2,700. 176. Mar.
1
18
Apr. 30
May 17
July 29
Aug.23
Notes Receivable—Bynum Co. Accounts Receivable—Bynum Co.
60,000
Notes Receivable—Solo Co. Accounts Receivable—Solo Co.
25,000
Accounts Receivable—Bynum Co. Notes Receivable—Bynum Co. Interest Revenue* *$60,000 × 6% × (60 ÷ 360) = $600
60,600
Accounts Receivable—Solo Co. Notes Receivable—Solo Co. Interest Revenue* *$25,000 × 9% × (60 ÷ 360) = $375
25,375
Cash Accounts Receivable—Bynum Co. Interest Revenue* *60,600 × 8% × (90 ÷ 360) = $1,212
61,812
Allowance for Doubtful Accounts Accounts Receivable—Solo Co.
25,375
60,000
25,000
60,000 600
25,000 375
60,600 1,212
25,375
177. a. August 10 determined as follows: April (30 – 12) May June July August Term of note
18 days 31 30 31 10 120 days
b. $40,800 {$40,000 + [$40,000 × 6% × (120 ÷ 360)]} c. Aug. 10
Cash Notes Receivable Interest Revenue
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40,800 40,000 800 Page 38
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Chapter 09 - Receivables 178. a. May 14 [(31 – 15) + 30 + 14 = 60]; $120 [$8,000 × 9% × (60 ÷ 360)] b. July 30 [(31 – 1) + 30 + 30 = 90]; $240 [$12,000 × 8% × (90 ÷ 360)] 179. a. The due date for the note is December 8, determined as follows: August (31–10) 21 days September 30 October 31 November 30 December 8 Term of note 120 days b.
$185,400 {$180,000 + [$180,000 × 9% × (120 ÷ 360)]}
c. Dec. 8
Cash Notes Receivable Interest Revenue
185,400 180,000 5,400
180. a. b. c. d. e.
Due Date Nov. 30 [(31 – 1) + 30 = 60] Dec. 28 [(31 – 30) + 30 + 31 + 30 + 28 = 120] Aug. 28 [(31 – 30) + 30 + 31 + 28 = 90] May 5 July 22
181. Nov. 14
Dec. 31
Interest $280
[$21,000 × 8% × (60 ÷ 360)]
300
[$9,000 × 10% × (120 ÷ 360)]
360
[$12,000 × 12% × (90 ÷ 360)]
225 150
[$15,000 × 9% × (60 ÷ 360)] [$9,000 × 10% × (60 ÷ 360)]
Notes Receivable—Alan Albertson Accounts Receivable—Alan Albertson Interest Receivable Interest Revenue*
4,800.00 4,800.00 56.40 56.40
*$4,800.00 × 9% × (47 ÷ 360) Feb. 12
Cash Interest Receivable Interest Revenue** Notes Receivable—Alan Albertson
4,908.00 56.40 51.60 4,800.00
**$4,800.00 × 9% × (43 ÷ 360) 182.
Date Aug. 8, Year 1 Powered by Cognero
Face
Rate
$15,000
7%
Year 1 Year 2 Interest Interest Term Revenue Revenue 180 days $423* $102** Page 39
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Chapter 09 - Receivables Oct. 7, Year 1 Jan. 6, Year 2 Nov. 12, Year 1
22,000 30,000 28,000
8 8 9
60 days 90 days 60 days
293 0 343
0 600 77
*$15,000 × 7% × (145 ÷ 360) = $423 (rounded) **$15,000 × 7% × (35 ÷ 360) = $102 (rounded) 183. a. May 4, determined as follows: February (28–3) March April May Term of note
25 days 31 days 30 days 4 days 90 days
b.
Interest = Face Amount × Interest Rate × (Term ÷ 360 days) Interest = $200,000 × 7% × (90 ÷ 360) Interest = $3,500
c.
Maturity Value = Face Amount + Interest Maturity Value = $200,000 + $3,500 Maturity Value = $203,500
d. Notes Receivable—Mr. Potts Accounts Receivable—Mr. Potts
200,000
e.
203,500
Cash Notes Receivable—Mr. Potts Interest Revenue
200,000 200,000 3,500
184. a. June 10, determined as follows: March (31–12) 19 days April 30 May 31 June 10 Term of note 90 days b. $81,200 {$80,000 + [$80,000 × 6% × (90 ÷ 360)]} c. June 10 Cash 81,200 Notes Receivable 80,000 Interest Revenue 1,200 185. a.
June 4 [(30 – 5) + 31 + 4 = 60]
b.
$18,240 {$18,000 + [$18,000 × 8% × (60 ÷ 360)]}
c. (1)
Notes Receivable—Watson Co. Accounts Receivable—Watson Co.
(2) Cash Powered by Cognero
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Chapter 09 - Receivables Notes Receivable—Watson Co. Interest Revenue 186. Mar. 1
May 30
18,000 240
Notes Receivable—Batson Co. Accounts Receivable—Batson Co.
24,000
Accounts Receivable—Batson Co. Notes Receivable Interest Revenue*
24,600
24,000
24,000 600
*$24,000 × 10% × (90 ÷ 360) 187. July 8
Oct. 6
Nov. 5
Notes Receivable—Miracle Chemical Accounts Receivable—Miracle Chemical
180,000
Accounts Receivable—Miracle Chemical Notes Receivable—Miracle Chemical Interest Revenue
183,600
Cash Accounts Receivable—Miracle Chemical Interest Revenue* *$183,600 × 10% × (30 ÷ 360) = $1,530
185,130
180,000
180,000 3,600
188. Nov. 4 Notes Receivable—Michael Tims Accounts Receivable—Michael Tims
183,600 1,530*
6,500.00 6,500.00
Dec. 31 Interest Receivable Interest Revenue*
61.75 61.75
Feb. 2 Cash Interest Receivable Interest Revenue** Notes Receivable—Michael Tims
6,597.50 61.75 35.75 6,500.00
*$6,500 × 6% × (57 ÷ 360) = $61.75 **$6,500 × 6% × (33 ÷ 360) = $35.75 189. Date Aug. 8 Oct. 7 Jan. 6 Nov. 12
Face $45,000 62,000 28,000 43,000
Rate 7% 5 4 6
Term 45 days 60 days 120 days 49 days
Interest Revenue $394 517 373 351
190. Simons Co. Balance Sheet Powered by Cognero
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Chapter 09 - Receivables December 31 Assets Current assets: Cash Accounts receivable Less allowance for doubtful accounts Inventory Interest receivable Supplies Other current assets Total current assets
$ 56,000 $325,000 25,000
300,000 45,000 3,000 4,000 10,000 $418,000
191. Webb Co. Balance Sheet December 31 Assets Current assets: Cash Notes receivable Accounts receivable Less allowance for doubtful accounts Interest receivable Total current assets
$ 96,000 50,000 $275,000 40,000
235,000 1,000 $382,000
192. Barnes Co. Balance Sheet December 31 Assets Current assets: Cash Notes receivable Accounts receivable Less allowance for doubtful accounts Interest receivable Merchandise inventory Total current assets
$ 45,000 100,000 $38,000 5,000
33,000 5,500 88,000 $271,500
193. a. $1,200,000 ÷ [($100,000 + $70,000) ÷ 2] = 14.12 b.
[($70,000 + $100,000) ÷ 2] ÷ ($1,200,000 ÷ 365 days) = 25.85 days
c.
The accounts receivable turnover is significantly less than the industry average, while the days’ sales in receivables is close to the industry average. Jake Company appears to be collecting payment on credit sales within 26 days, which is in line with the industry. However, the low accounts receivable turnover is of concern, and its causes should be investigated. Perhaps Jake Company has a higher percentage of credit (vs. cash) sales than
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Chapter 09 - Receivables the industry average. 194. a. Accounts Receivable Turnover = Sales ÷ Average Accounts Receivable = $34,124,961 ÷ [($749,321 + $719,365) ÷ 2] = 46.47 times b. Days’ Sales in Receivables = Average Accounts Receivable ÷ Average Daily Sales = [($749,321 + $719,365) ÷ 2] ÷ ($34,124,961 ÷ 365 days) = 7.85 days 195. a. Accounts receivable turnover: Current Year Average accounts receivable: ($390,000 + $434,000) ÷ 2 $412,000 ($400,000 + $390,000) ÷ 2 Accounts receivable turnover: $2,595,600 ÷ $412,000 6.3 $2,409,500 ÷ $395,000
Prior Year
$395,000
6.1
b. Days’ sales in receivables: Current Year Average daily sales: $2,595,600 ÷ 365 days $2,409,500 ÷ 365 days Days’ sales in receivables: $412,000 ÷ $7,111 $395,000 ÷ $6,601
Prior Year
$7,111 $6,601 58 days 60 days
c. The increase in the accounts receivable turnover from 6.1 to 6.3 and the decrease in days’ sales in receivables from 60 days to 58 days indicate a favorable change in the efficiency of collecting accounts receivable.
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Chapter 10 - Long-Term Assets: Fixed and Intangible True / False 1. Long-lived assets that are intangible in nature, used in the operations of the business, and not held for sale in the ordinary course of business are called fixed assets. a. True b. False 2. The acquisition costs of property, plant, and equipment should include all normal, reasonable and necessary costs to get the asset in place and ready for use. a. True b. False 3. When land is purchased to construct a new building, the cost of removing any structures on the land should be charged to the building account. a. True b. False 4. Land acquired as a speculation is reported under Investments on the balance sheet. a. True b. False 5. Standby equipment held for use in the event of a breakdown of regular equipment is reported as property, plant, and equipment on the balance sheet. a. True b. False 6. The cost of repairing damage to a machine during installation is debited to a fixed asset account. a. True b. False 7. During construction of a building, the cost of interest on a construction loan should be charged to an expense account. a. True b. False 8. The cost of computer equipment does not include the consultant's fee to supervise installation of the equipment. a. True b. False 9. An asset leased under an operating lease will appear on the balance sheet as a long-term asset. a. True b. False 10. Long-lived assets held for sale are classified as fixed assets. a. True b. False Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible 11. A tangible asset is one that lacks physical existence. a. True b. False 12. Capital expenditures are costs that improve a fixed asset or extend its useful life. a. True b. False 13. The cost of new equipment is called a revenue expenditure because it will help generate revenues in the future. a. True b. False 14. Expenditures that increase operating efficiency or capacity for the remaining useful life of a fixed asset are called capital expenditures. a. True b. False 15. The cost of replacing an engine in a truck is an example of ordinary maintenance. a. True b. False 16. Functional depreciation occurs when a fixed asset is no longer able to provide services at the level for which it was intended. a. True b. False 17. The normal balance of the accumulated depreciation account is a debit. a. True b. False 18. As a company records depreciation expense for a period of time, cash is accumulated to replace fixed assets as they wear out. a. True b. False 19. All property, plant, and equipment assets are depreciated over time. a. True b. False 20. The book value of a fixed asset reported on the balance sheet represents its market value on that date. a. True b. False 21. The depreciable cost of a building is the same as its acquisition cost. a. True b. False Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible 22. It is necessary for a company to use the same depreciation method for all of its depreciable assets. a. True b. False 23. It is not necessary for a company to use the same depreciation method for all of its fixed assets. a. True b. False 24. An estimate of the amount for which an asset can be sold at the end of its useful life is called residual value. a. True b. False 25. The units-of-activity depreciation method provides a good match of expenses against revenue. a. True b. False 26. Once the useful life of a depreciable asset has been estimated and the amount to be depreciated each year has been determined, the amounts cannot be changed. a. True b. False 27. Residual value is not incorporated in the initial computations for double-declining-balance depreciation. a. True b. False 28. The double-declining-balance method is an accelerated depreciation method. a. True b. False 29. The double-declining-balance depreciation method computes depreciation each year by taking twice the straight-line rate times the book value of the asset at the beginning of each year. a. True b. False 30. The amount of depreciation expense for the first full year of use of a fixed asset costing $95,000, with an estimated residual value of $5,000 and a useful life of 5 years, is $19,000 by the straight-line method. a. True b. False 31. The amount of depreciation expense for a fixed asset costing $95,000, with an estimated residual value of $5,000 and a useful life of 5 years or 20,000 operating hours, is $21,375 by the units-of-activity method during a period when the asset was used for 4,500 hours. a. True b. False
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Chapter 10 - Long-Term Assets: Fixed and Intangible 32. The amount of the depreciation expense for the second full year of use of a fixed asset costing $100,000, with an estimated residual value of $5,000 and a useful life of 4 years, is $25,000 by the double-declining-balance method. a. True b. False 33. When depreciation estimates are revised, all years of the asset’s life are affected. a. True b. False 34. The double-declining-balance method of depreciation uses a declining percentage rate in determining the depreciation amount. a. True b. False 35. Regardless of the depreciation method, the amount that will be depreciated during the life of the asset will be the same. a. True b. False 36. Revising depreciation estimates affects the amounts of depreciation expense recorded in past periods. a. True b. False 37. Capital expenditures are costs that are charged to stockholders' equity accounts. a. True b. False 38. Though a piece of equipment is still being used, the equipment should be removed from the accounts if it has been fully depreciated. a. True b. False 39. When selling a piece of equipment for cash, a loss will result when the proceeds of the sale are less than the book value of the asset. a. True b. False 40. Losses on the discarding of fixed assets are reported on the income statement. a. True b. False 41. A gain can be realized when a fixed asset is discarded. a. True b. False 42. The journal entry for the disposal of fixed assets will include a credit to Accumulated Depreciation. Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible a. True b. False 43. Both the initial cost of the asset and the accumulated depreciation will be taken off the books with the disposal of the asset. a. True b. False 44. Minerals removed from the earth are classified as intangible assets. a. True b. False 45. The method used to compute the depletion of a natural resource is the straight-line method. a. True b. False 46. Intangible assets differ from property, plant, and equipment assets in that they lack physical substance. a. True b. False 47. The cost of a patent with a remaining legal life of 10 years and an estimated useful life of 7 years is amortized over 10 years. a. True b. False 48. The transfer to expense of the cost of intangible assets attributed to the passage of time or decline in usefulness is called amortization. a. True b. False 49. Costs associated with normal research and development activities should be treated as intangible assets. a. True b. False 50. Patents are exclusive rights to produce and sell goods with one or more unique features. a. True b. False 51. When a company establishes an outstanding reputation and has a competitive advantage because of it, the company should record goodwill on its financial statements. a. True b. False 52. The difference between the balance in a fixed asset account and its related accumulated depreciation account is the asset's book value. a. True Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible b. False 53. An exchange of similar assets is said to have commercial substance if future cash flows change as a result of the exchange. a. True b. False 54. When old equipment is traded in for new equipment, the difference between the list price and the trade-in allowance is called boot. a. True b. False 55. When a plant asset is traded for another similar asset, losses on the asset traded are not recognized. a. True b. False 56. When exchanging equipment, if the trade-in allowance is greater than the book value, a loss results. a. True b. False 57. If a fixed asset with a book value of $10,000 is traded for a similar fixed asset, a trade-in allowance of $15,000 is granted by the seller, and the transaction is deemed to have commercial substance, the buyer would report a gain on exchange of fixed assets of $5,000. a. True b. False 58. When a seller allows a buyer an amount for old equipment that is traded in for new equipment of similar use, this amount is known as boot. a. True b. False 59. An exchange is said to have commercial substance if future cash flows remain the same as a result of the exchange. a. True b. False Multiple Choice 60. A characteristic of a fixed asset is that it is a. intangible b. used in the operations of a business c. held for sale in the ordinary course of business d. a short-term investment 61. Land acquired so it can be resold in the future is listed on the balance sheet as a(n) a. fixed asset b. current asset Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible c. investment d. intangible asset 62. Which of the following should be included in the acquisition cost of a piece of equipment? a. transportation costs b. installation costs c. testing costs prior to placing the equipment into production d. All of these choices 63. Which of the following is included in the cost of constructing a building? a. insurance costs during construction b. cost of paving the parking lot c. cost of repairing vandalism damage during construction d. cost of removing the demolished building existing on the land when it was purchased 64. Which of the following is included in the cost of land? a. cost of paving a parking lot b. brokerage commission c. outdoor parking lot lighting attached to the land d. fences on the land 65. The proper journal entry for the purchase of a computer costing $975 on account to be utilized within the business would be a. Office Supplies 975 Accounts Payable 975 b. Office Equipment 975 Accounts Payable 975 c. Office Supplies 975 Accounts Receivable 975 d. Office Equipment 975 Accounts Receivable 975 66. A building with an appraisal value of $154,000 is made available at an offer price of $172,000. The purchaser acquires the property for $40,000 in cash, a 90-day note payable for $45,000, and a mortgage amounting to $75,000. The cost of the building to be reported on the balance sheet is a. $154,000 b. $172,000 c. $160,000 d. $120,000 67. The acquisition of a used machine with a purchase price of $77,000, requiring an overhaul costing $8,000, installation costs of $5,000, and special acquisition fees of $3,000 would be journalized with a debit to the asset account for a. $93,000 b. $90,000 c. $82,000 Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible d. $85,000 68. The acquisition of a new machine with a purchase price of $109,000, transportation costs of $12,000, installation costs of $5,000, and special acquisition fees of $6,000, would be journalized with a debit to the asset account for a. $114,000 b. $126,000 c. $121,000 d. $132,000 69. In a lease contract, the party who legally owns the asset is the a. lessee b. lessor c. operator d. banker 70. The journal entry for recording payment for the short-term lease of a fixed asset would a. be a memo entry only b. debit the fixed asset and credit Cash c. debit Rent Expense and credit Cash d. debit a liability and credit Cash 71. Which of the following are criteria for determining whether to record an asset as a fixed asset? a. must be an investment and long-lived b. must be long-lived and used by the company in its normal operations c. must be short-lived and tangible d. must be tangible and an investment 72. Expenditures that add to the utility of fixed assets for more than one accounting period are a. committed expenditures b. revenue expenditures c. utility expenditures d. capital expenditures 73. A capital expenditure results in a debit to a(n) a. expense account b. capital account c. liability account d. asset account 74. Which of the following is an example of a capital expenditure? a. cleaning the carpet in the front room b. tuning-up a company truck c. replacing an engine in a company car d. replacing all burned-out light bulbs in the factory Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible 75. Factors contributing to a decline in the usefulness of a fixed asset may be divided into which of the following two categories? a. salvage and functional b. physical and functional c. residual and salvage d. functional and residual 76. A fixed asset's estimated value at the time it is to be retired from service is called a. book value b. residual value c. market value d. carrying value 77. All of the following are needed for the computation of straight-line depreciation except a. cost b. residual value c. estimated life d. units produced 78. The method of determining depreciation that yields successive reductions in the periodic depreciation charge over the estimated life of the asset is the a. units-of-production method b. double-declining-balance method c. straight-line method d. time-valuation method 79. When the amount of use of a fixed asset varies from year to year, the method of determining depreciation expense that best matches allocation of cost with revenue is a. the double-declining-balance method b. the straight-line method c. the units-of-activity method d. MACRS 80. A machine with a cost of $120,000 has an estimated residual value of $15,000 and an estimated life of 5 years or 15,000 hours. It is to be depreciated by the units-of-activity method. What is the amount of depreciation for the second full year, during which the machine was used 5,000 hours? a. $5,000 b. $35,000 c. $21,000 d. $45,000 81. Equipment with a cost of $220,000 has an estimated residual value of $30,000 and an estimated life of 10 years or 19,000 hours. It is to be depreciated by the straight-line method. What is the amount of depreciation for the first full year, during which the equipment was used 2,100 hours? a. $19,000 Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible b. $21,000 c. $22,000 d. $30,000 82. A machine with a cost of $75,000 has an estimated residual value of $5,000 and an estimated life of 4 years or 18,000 hours. What is the amount of depreciation for the second full year, using the double-declining-balance method? a. $17,500 b. $37,500 c. $18,750 d. $16,667 83. Equipment with a cost of $160,000, an estimated residual value of $40,000, and an estimated life of 15 years was depreciated by the straight-line method for 4 years. Due to obsolescence, it was determined that the remaining useful life should be shortened by 3 years and the residual value changed to zero. The depreciation expense for the current and future years is a. $11,636 b. $16,000 c. $11,000 d. $8,000 84. The depreciation method that does not use residual value in computing the first year's depreciation expense is a. straight-line b. units-of-activity c. double-declining-balance d. sum-of-the-years-digits 85. If a fixed asset, such as a computer, were purchased on January 1 for $3,750 with an estimated life of 3 years and a salvage or residual value of $150, the journal entry for monthly expense under straight-line depreciation is a. Depreciation Expense 100 Accumulated Depreciation 100 b. Depreciation Expense 1,200 Accumulated Depreciation 1,200 c. Accumulated Depreciation 1,200 Depreciation Expense 1,200 d. Accumulated Depreciation 100 Depreciation Expense 100 86. Accumulated Depreciation a. is used to show the amount of cost expiration of intangibles b. is the same as Depreciation Expense c. is a contra asset account d. is used to show the amount of cost expiration of natural resources 87. Residual value is also known as all of the following except a. scrap value Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible b. trade-in value c. salvage value d. net book value 88. The formula for depreciable cost is a. Initial Cost + Residual Value b. Initial Cost – Residual Value c. Initial Cost – Accumulated Depreciation d. Depreciable Cost = Initial Cost 89. Expected useful life is a. computed when the asset is sold b. estimated at the time that the asset is placed in service c. determined each year that the depreciation computation is made d. of no bearing on the depreciation computation 90. The formula for annual depreciation using the straight-line depreciation method is a. Initial Cost ÷ Estimated Useful Life b. Depreciable Cost ÷ Estimated Useful Life c. Depreciable Cost × Estimated Useful Life d. Initial Cost × Estimated Useful Life 91. The formula for annual depreciation using the units-of-activity method is a. (Initial Cost ÷ Estimated Output) × Actual Yearly Output b. (Depreciable Cost ÷ Yearly Output) × Estimated Output c. Depreciable Cost ÷ Yearly Output d. (Depreciable Cost ÷ Estimated Output) × Actual Yearly Output 92. On June 1, Aaron Company purchased equipment at a cost of $120,000 that has a depreciable cost of $90,000 and an estimated useful life of 3 years and 30,000 hours, which ends on December 31. Using straight-line depreciation, compute depreciation expense for the final (partial) year of service. a. $17,500 b. $30,000 c. $12,500 d. $40,000 93. On June 1, Michael Company purchased equipment at a cost of $120,000 that has a depreciable cost of $90,000 and an estimated useful life of 3 years or 30,000 hours. Using straight-line depreciation, compute depreciation expense for the second year. a. $17,500 b. $30,000 c. $12,500 d. $40,000 Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible 94. On June 1, Scotter Company purchased equipment at a cost of $120,000 that has a depreciable cost of $90,000 and an estimated useful life of 3 years or 30,000 hours. Using straight-line depreciation, compute depreciation expense for the first year, which ends on December 31. a. $17,500 b. $30,000 c. $12,500 d. $40,000 95. Computer equipment was acquired at the beginning of the year at a cost of $57,000 that has an estimated residual value of $9,000 and an estimated useful life of 5 years. Determine the second-year depreciation using the straight-line method. a. $13,200 b. $19,200 c. $9,600 d. $9,000 96. Which of the following statements is true? a. If using the double-declining-balance method, the total amount of depreciation expense during the life of the asset will be the highest. b. If using the units-of-activity method, it is possible to depreciate more than the depreciable cost. c. If using the straight-line method, the amount of depreciation expense during the first year is higher than that of the double-declining-balance method. d. Regardless of the depreciation method, the amount of total depreciation expense during the life of the asset will be the same. 97. An asset was purchased for $120,000 on January 1, Year 1 and originally estimated to have a useful life of 10 years with a residual value of $10,000. At the beginning of the third year, it was determined that the remaining useful life of the asset was only 4 years with a residual value of $2,000. Compute the third-year depreciation expense using the revised amounts and straight-line method. a. $25,000 b. $11,000 c. $24,000 d. $24,500 98. Machinery was purchased on January 1 for $51,000. The machinery has an estimated life of 7 years and an estimated salvage value of $9,000. Double-declining-balance depreciation for the second year (rounded to the nearest dollar) would be a. $10,929 b. $6,000 c. $10,500 d. $10,408 99. A fixed asset with a cost of $30,000 and accumulated depreciation of $28,500 is sold for $3,500. What is the amount of the gain or loss on the sale of the fixed asset? a. $2,000 loss Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible b. $1,500 loss c. $3,500 gain d. $2,000 gain 100. When a company discards machinery that is fully depreciated, this transaction would be journalized as a a. debit to Accumulated Depreciation and a credit to Machinery b. debit to Machinery and a credit to Accumulated Depreciation c. debit to Cash and a credit to Accumulated Depreciation d. debit to Depreciation Expense and a credit Accumulated Depreciation 101. When a company sells machinery at a price equal to its book value, this transaction would be journalized as a a. debit to Cash and Accumulated Depreciation and a credit to Machinery b. debit to Machinery and a credit to Cash and Accumulated Depreciation c. debit to Cash and Machinery and a credit to Accumulated Depreciation d. debit to Cash and Depreciation Expense and a credit to Accumulated Depreciation 102. On December 31, Strike Company has decided to discard one of its batting cages. The equipment had an initial cost of $310,000 and has accumulated depreciation of $260,000. Depreciation has been recorded up to the end of the year. Which of the following will be included in the journal entry for the disposal? a. Accumulated Depreciation, debit, $310,000 b. Loss on Disposal of Asset, debit, $260,000 c. Equipment, credit, $310,000 d. Gain on Disposal of Asset, credit, $50,000 103. On December 31, Strike Company sold one of its batting cages for $50,000. The equipment had an original cost of $310,000 and has accumulated depreciation of $260,000. Depreciation has been recorded up to the end of the year. What is the amount of the gain or loss on this transaction? a. gain of $50,000 b. loss of $50,000 c. no gain or loss d. cannot be determined with information given 104. On December 31, Strike Company sold one of its batting cages for $20,000. The equipment had an initial cost of $310,000 and has accumulated depreciation of $260,000. Depreciation has been recorded up to the end of the year. What is the amount of the gain or loss on this transaction? a. gain of $20,000 b. gain of $30,000 c. loss of $20,000 d. loss of $30,000 105. On December 31, Strike Company sold one of its batting cages for $55,000. The equipment had an initial cost of $310,000 and has accumulated depreciation of $260,000. Depreciation has been recorded up to the end of the year. What is the amount of the gain or loss on this transaction? a. loss of $55,000 b. loss of $5,000 Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible c. gain of $5,000 d. gain of $55,000 106. The accumulated depletion account is a. an expense account b. an intangible asset account c. reported on the income statement as other expense d. a contra asset account 107. The accumulated depletion of a natural resource is reported on the a. balance sheet as depreciation from the cost of the resource b. income statement as an increase in revenue c. balance sheet as a deduction from the cost of the natural resource d. income statement as a deduction from revenues 108. The process of transferring the cost of metal ores and other minerals removed from the earth to an expense account is called a. depletion b. deferral c. amortization d. depreciation 109. Sands Company purchased mining rights for $500,000. It expects to harvest 1 million tons of ore over the next 5 years. During the current year, Sands mined 350,000 tons of ore. The journal entry for the depletion would include a a. debit to Depletion Expense for $175,000 b. credit to Depletion Expense for $350,000 c. debit to Accumulated Depletion for $175,000 d. credit to Accumulated Depletion for $350,000 110. The natural resources of some companies include a. timber, metal ores, and minerals b. timber, equipment, and patents c. minerals, trademarks, and land d. metal ores, copyrights, and supplies 111. Weber Company purchased a mining site for $1,750,000 on July 1. The company expects to mine ore for the next 10 years and anticipates that a total of 400,000 tons will be recovered. The estimated residual value of the property is $150,000. During the first year, the company extracted 6,500 tons of ore. The depletion expense is a. $17,500 b. $16,000 c. $26,000 d. $15,000 112. The process of transferring the cost of an asset to an expense account is called all of the following except a. depletion Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible b. allocation c. amortization d. depreciation 113. Expenditures for research and development are generally recorded as a. current operating expenses b. assets and amortized over their estimated useful life c. assets and amortized over 40 years d. current assets 114. The term applied to the amount of cost to transfer to expense resulting from a decline in the utility of intangible assets is a. amortization b. depletion c. depreciation d. allocation 115. Xtra Company purchased a business from Argus for $96,000 above the fair value of its net assets. Argus had developed the goodwill over 12 years. How much would Xtra amortize the goodwill for its first year? a. $7,000 b. $8,000 c. $0 (goodwill is not amortized) d. cannot be determined with information given 116. Which intangible assets are amortized over their useful life? a. trademarks b. goodwill c. patents d. All of these choices 117. The name, term, or symbol used to identify a business and its products is called a. goodwill b. a patent c. a trademark d. a copyright 118. Fixed assets are ordinarily presented on the balance sheet a. at current market values b. at replacement costs c. at cost less accumulated depreciation d. in a separate section along with intangible assets 119. The ratio measuring the number of sales dollars earned per dollar of fixed assets is the a. fixed asset turnover ratio Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible b. days' in assets ratio c. current asset turnover ratio d. intangible asset ratio 120. The higher the fixed asset turnover ratio, the a. less efficiently a company is using its fixed assets in generating sales b. more efficiently a company is using its fixed assets in generating sales c. more efficiently a company is using its current assets in generating sales d. more efficiently a company is using its intangible assets in generating sales 121. Which of the following statements is true? a. A larger fixed asset turnover ratio is associated with firms that are more labor intensive and require smaller fixed asset investments. b. The fixed asset turnover ratio cannot be compared across time for an individual company. c. A smaller fixed asset turnover ratio is associated with firms that are more labor intensive and require smaller fixed asset investments. d. The fixed asset turnover ratio is not useful for comparing different companies. 122. Newport Company has sales of $2,025,000 for the current year. The book value of its fixed assets at the beginning of the year was $550,000 and at the end of the year was $800,000. The fixed asset turnover ratio for Newport is a. 3.0 b. 3.6 c. 3.7 d. 2.5 123. A fixed asset with a cost of $52,000 and accumulated depreciation of $47,500 is traded for a similar asset priced at $60,000 (fair market value) in a transaction with commercial substance. Assuming a trade-in allowance of $5,000, at what cost will the new equipment be recorded in the books? a. $54,000 b. $59,500 c. $60,000 d. $60,500 124. A fixed asset with a cost of $41,000 and accumulated depreciation of $36,000 is traded for a similar asset priced at $50,000 (fair market value) in a transaction with commercial substance. Assuming a trade-in allowance of $4,000, at what cost will the new equipment be recorded in the books? a. $54,000 b. $45,000 c. $51,000 d. $50,000 125. A fixed asset with a cost of $41,000 and accumulated depreciation of $36,500 is traded for a similar asset priced at $60,000. Assuming a trade-in allowance of $3,000, the recognized loss on the trade is a. $3,000 b. $4,500 Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible c. $500 d. $1,500 126. Bacon Company acquired new machinery with a price of $15,200 by trading in similar old machinery and paying $12,700. The old machinery originally cost $9,000 and had accumulated depreciation of $5,000. In recording this transaction, Bacon Company should record a. the new machinery at $16,700 b. the new machinery at $12,700 c. a gain of $1,500 d. a loss of $1,500 127. When a company exchanges machinery and receives a trade-in allowance greater than the book value, this transaction would be journalized with which of the following entries (assuming the exchange was considered to have commercial substance)? a. debit Machinery and Accumulated Depreciation; credit Machinery, Cash, and Gain on Exchange of Machinery b. debit Machinery and Accumulated Depreciation; credit Machinery and Cash c. debit Cash and Machinery; credit Accumulated Depreciation d. debit Cash and Machinery; credit Accumulated Depreciation and Machinery 128. When a company exchanges machinery and receives a trade-in allowance less than the book value, this transaction would be journalized with which of the following entries? a. debit Machinery and Accumulated Depreciation; credit Machinery and Cash b. debit Cash and Machinery; credit Accumulated Depreciation c. debit Cash and Machinery; credit Accumulated Depreciation and Machinery d. debit Machinery, Accumulated Depreciation, and Loss on Exchange of Machinery; credit Machinery and Cash 129. On December 31, Strike Company traded in one of its batting cages for another one that has a cost of $500,000. Strike receives a trade-in allowance of $11,000. The old equipment had an initial cost of $215,000 and has accumulated depreciation of $185,000. Depreciation has been recorded up to the end of the year. The difference will be paid in cash. What is the amount of the gain or loss on this transaction? a. loss of $11,000 b. gain of $11,000 c. loss of $19,000 d. no loss or gain Matching Match each of the following costs associated with long-lived assets to the account (a–e) to which the cost would ultimately be debited. Each account may be used more than once, and some accounts may not be used. a. Buildings b. Machinery and Equipment c. Land d. Land Improvements e. Other Expense 130. Fees paid to architect to design new office building Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible 131. Cost of insurance during the construction of new office building 132. Interest on money borrowed to finance construction of new office building 133. Sales taxes paid on new factory equipment 134. Freight costs paid on purchase of new equipment 135. Repairs made to used office equipment 136. Costs to survey a new piece of land for a new business location 137. Costs of government permits required to develop land for a new business location 138. Purchase price of land purchased for new business site 139. Landscaping at new business location 140. Cost of lubricating oil purchased for periodic oil changes for equipment 141. Cost of repainting the trim on a building 142. Cost of special foundation for new equipment acquired 143. Attorney’s fee for title search of land 144. Cost of repairing vandalism damage to equipment during installation 145. Cost of landfill for building site Match each of the following costs associated with long-lived assets to the account (a–e) to which the cost would ultimately be debited. Each account may be used more than once, and some accounts may not be used. a. Land Improvements b. Buildings c. Land d. Machinery and Equipment e. Other Expense 146. Fences around land at new business location 147. Paved parking areas at new business location 148. Outdoor lighting at new business location 149. Walkways to surround new business location 150. Modifying a building purchased for new business location 151. Supplies (materials) used to test new equipment Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible 152. Cost of installing new equipment 153. Cost of grading and leveling land to be used for a new business site 154. Cost of removing an existing building to ready land for use as a new business site 155. Cost assessed by city for paving a public street that borders land on which a new business location will be constructed 156. Fee paid for installation of equipment 157. Insurance on new equipment while in transit 158. Cost incurred in repairing damage resulting from installation of new equipment 159. Special assessment paid to city for extension of water main to property 160. Delinquent real estate taxes assumed by purchaser on property acquired for a building site 161. Architect’s fee for building plans and supervision of construction Match each of the following costs with its classification and treatment (a–c) as a revenue or capital expenditure. Each term may be used more than once. a. Ordinary maintenance and repairs to be treated as a revenue expenditure, increasing an expense account b. Asset improvements to be treated as a capital expenditure, decreasing an accumulated depreciation account c. Extraordinary repairs to be treated as a capital expenditure, increasing an asset account 162. Overhauling an engine in a large truck 163. Exterior and interior painting 164. Paving a new parking lot 165. New landscaping 166. Installing a new air conditioning system in an old building 167. Resurfacing a pool in an apartment building 168. Adding refrigerant to an air conditioning system 169. Fixing damage due to a car accident Match each of the following costs related to XYZ Co.’s office building to its proper classification (a or b). a. Capital expenditure b. Revenue expenditure 170. Replaced a broken window Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible 171. Replaced the roof that had been on the building for 23 years 172. Serviced all the air conditioners before summer started 173. Replaced the air conditioners in the customer service areas 174. Added a warehouse to the back of the building 175. Repainted the interior walls 176. Installed window shutters on all windows Match each of the following assets to its proper classification (a–d). Each classification may be used more than once. a. Fixed asset b. Intangible asset c. Natural resource d. None of these 177. Computer 178. Patent 179. Oil reserve 180. Goodwill 181. U.S. Treasury note 182. Land used for employee parking 183. Gold mine Match each of the following items to the type of intangible asset (a–d) it represents. a. Patent b. Copyright c. Trademark d. Goodwill 184. Rights to sell a book and make a profit 185. McDonald’s golden arches 186. A new kitchen gadget that can be produced by only one company 187. Location of a company 188. iTunes music Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible 189. Reputation of a company 190. Nike swoosh 191. Mickey Mouse Match each of the following account names to the financial statement section (a–i) in which it would appear. Sections may be used more than once or may not be used at all. a. Current Assets b. Fixed Assets c. Intangible Assets d. Current Liabilities e. Long-Term Liabilities f. Owner's Equity g. Revenues h. Operating Expenses i. Other Revenue and Expense 192. Accumulated Depreciation—Building 193. Depreciation Expense 194. Amortization Expense 195. Land Improvements 196. Gain on Sale of Equipment 197. Loss on Disposal of Asset 198. Loss from Impaired Goodwill 199. Research and Development Costs Subjective Short Answer 200. Based on the following data, determine the cost of the land to be reported on the balance sheet. Land purchase price Broker's commission Payment for demolition and removal of existing building Cash received from sale of materials salvaged from demolished building
$178,000 15,000 5,000 2,000
201. Falcon Company acquired an adjacent lot to construct a new warehouse, paying $40,000 and giving a short-term note for $410,000. Legal fees paid were $13,275, delinquent taxes assessed were $14,500, and fees paid to remove an old building from the land were $15,800. Materials salvaged from the demolition of the building were sold for $6,800. A contractor was paid $890,000 to construct the new warehouse. Determine the cost of the land to be reported on the balance sheet and show your work. Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible 202. Eagle Country Club has acquired a lot to construct a clubhouse. Eagle had the following costs related to the construction: Architects’ fees Construction labor Engineers’ fees Fences around building Grading and leveling Insurance costs incurred during construction Interest on money borrowed for construction Land Building materials Sales taxes Trees and shrubs
$ 45,000 80,000 15,000 9,000 10,000 7,000 5,000 73,000 237,000 6,000 6,000
Determine the cost of the clubhouse to be reported on the balance sheet. 203. Champion Company purchased and installed carpet in its new general offices on March 31 for a total cost of $18,000. The carpet is estimated to have a 15-year useful life and no residual value. a. b.
Journalize the March 31 purchase of the new carpet. Journalize the December 31 adjusting entry for the partial-year depreciation of the carpet, assuming that Champion Company uses the straight-line method.
204. A number of major structural repairs completed at the beginning of the current fiscal year at a cost of $1,000,000 are expected to extend the life of a building 10 years beyond the original estimate. The original cost of the building was $6,552,000, and it has been depreciated by the straight-line method for 25 years. Estimated residual value is negligible and has been ignored. The related accumulated depreciation account after the depreciation adjustment at the end of the preceding fiscal year is $4,550,000. a. b. c. d. e. f.
What has the amount of annual depreciation been in past years? What was the original life estimate of the building? To what account should the $1,000,000 be debited? What is the book value of the building after the extraordinary repairs have been made? What is the expected remaining life of the building after the extraordinary repairs have been made? What is the amount of straight-line depreciation for the current year, assuming that the repairs were completed at the very beginning of the current year? Round to the nearest dollar.
205. Journalize each of the following transactions: a. b. c.
A wing costing $2,345,000 was added to the building. A new mortgage was issued for the cost. Equipment was upgraded to increase its capacity to produce widgets. The upgrade cost of $11,500 was paid in cash. A major overhaul costing $8,000 on a machine increased the useful life by 4 years. The payment was made in cash.
206. On April 15, Compton Co. paid $2,800 to upgrade a delivery truck and $125 for an oil change. Journalize the entries for the upgrade to the delivery truck and oil change expenditures. 207. Comment on the validity of the following statements. "As an asset loses its ability to provide services, cash needs to be set aside to replace it. Depreciation accomplishes this goal." 208. Computer equipment was acquired at the beginning of the year at a cost of $65,000 that has an estimated residual Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible value of $3,800 and an estimated useful life of 8 years. Determine the (a) depreciable cost, (b) straight-line rate, and (c) annual straight-line depreciation. 209. A double-declining-balance rate for computing depreciation expense is determined by doubling the straight-line rate. Assuming that an asset has a useful life of 25 years, determine the rate to be used under the double-declining-balance method. 210. Copy equipment was acquired at the beginning of the year at a cost of $72,000 that has an estimated residual value of $9,000 and an estimated useful life of 5 years. It is estimated that the machine will output an estimated 1,000,000 copies. This year, 315,000 copies were made. Determine the (a) depreciable cost, (b) depreciation rate, and (c) units-ofactivity depreciation for the year. 211. A machine costing $57,000 with a 6-year life and $54,000 depreciable cost was purchased on January 1. Compute the yearly depreciation expense using straight-line depreciation. 212. A machine costing $185,000 with a 5-year life and $20,000 residual value was purchased on January 2. Compute depreciation for each of the 5 years, using the double-declining-balance method. 213. Computer equipment was acquired at the beginning of the year at a cost of $63,000 that has an estimated residual value of $3,000 and an estimated useful life of 5 years. Determine the (a) depreciable cost, (b) double-declining-balance rate, and (c) double-declining-balance depreciation for the first year. 214. Convert each of the following estimates of useful life to a straight-line depreciation rate, stated as a percentage. a. 2 years b. 8 years c. 10 years d. 20 years e. 25 years f. 40 years g. 50 years 215. Prior to adjustment at the end of the year, the balance in Trucks is $300,900 and the balance in Accumulated Depreciation—Trucks is $88,200. Details of the subsidiary ledger are as follows: Truck No. 1 2 3 4 a.
b.
Estimated Estimated Useful Cost Residual Value Life $100,000 $13,000 300,000 72,900 9,900 300,000 38,000 3,000 200,000 90,000 13,000 200,000
Accumulated Depreciation at Beginning of Year
Miles Operated During Year — 30,000 $60,000 25,000 8,050 45,000 20,150 40,000
Based on the units-of-activity method, determine the depreciation rates per mile and the amount to be credited to the Accumulated Depreciation section of each of the subsidiary accounts for the miles operated during the current year. Round rates to 1/10 of a cent. Journalize the adjusting entry to record depreciation for the year.
216. An asset was purchased for $58,000 and originally estimated to have a useful life of 10 years with a residual value of $3,000. After 2 years of straight-line depreciation, it was determined that the remaining useful life of the asset was only 2 years with a residual value of $2,000. Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible a. Determine the amount of the annual depreciation for the first 2 years. b. Determine the book value at the end of Year 2. c. Determine the depreciation expense for each of the remaining years after revision. 217. For each of the following fixed assets, determine the depreciation expense for Year 3. Disposal date is N/A if asset is still in use. Method: SL = straight-line; DDB = double-declining-balance Assume the estimated life is 5 years for each asset. Item
Cost
A B C D
$40,000 50,000 60,000 80,000
Residual Value
Purchase Date
Disposal Date
$ 4,000 July 1, Year 3 N/A 5,000 Jan. 1, Year 1 Aug. 31,Year 3 2,000 Oct. 1, Year 3 N/A 10,000 Jan. 1, Year 2 Apr. 1, Year 3
Depr. Method
Depr. Expense Year 3
SL SL DDB DDB
218. Equipment purchased at the beginning of the fiscal year for $360,000 is expected to have a useful life of 5 years, or 14,000 operating hours, and a residual value of $10,000. Compute the depreciation for the first and second years of use by each of the following methods: a. Straight-line b. Units-of-activity (1,200 hours first year; 2,250 hours second year) c. Double-declining-balance 219. Machinery is purchased on July 1 of the current fiscal year for $240,000. It is expected to have a useful life of 4 years, or 25,000 operating hours, and a residual value of $15,000. Compute the depreciation for the last 6 months of the current fiscal year ending December 31 by each of the following methods: a. Straight-line b. Double-declining-balance c. Units-of-activity (used for 1,600 hours during the current year) 220. Determine the depreciation for the year of acquisition and for the following year of a fixed asset acquired on October 1 for $500,000 with an estimated life of 5 years, and residual value of $50,000, using (a) the double-declining-balance method and (b) the straight-line method. Assume a fiscal year ending December 31. 221. Equipment costing $80,000 with a useful life of 10 years and a residual value of $8,000 has been depreciated for 6 years by the straight-line method. Assume a fiscal year ending December 31. a. b.
What is the book value at the end of the sixth year of use? If early in the seventh year it is estimated that the remaining useful life is 5 years (instead of 4) and the residual value is $6,000, what is the amount of depreciation for the seventh year?
222. On January 1, Golden Sales bought $135,000 in fixed assets associated with sales equipment. The residual value of these assets is estimated at $10,000 at the end of their 4-year service life. Golden Sales managers want to evaluate the options of depreciation. a. Compute the annual straight-line depreciation, and journalize the sample depreciation entry to be recorded at the end of each of the 4 years. b. Compute the double-declining-balance depreciation, and journalize the depreciation entries to be recorded at the end of each of the 4 years. Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible 223. On July 1, Harding Construction purchases a bulldozer for $228,000. The equipment has an 8-year life with a residual value of $16,000. Harding uses straight-line depreciation. a. Compute the depreciation expense, and journalize the depreciation entry for the first year ending December 31. b. Compute the third year’s depreciation expense, and journalize the depreciation entry for the third year ending December 31. c. Compute the last year’s depreciation expense, and journalize the depreciation entry for the last year. 224. On July 1, Hartford Construction purchases a bulldozer for $228,000. The equipment has a 9-year life with a residual value of $16,000. Hartford uses the units-of-activity method of depreciation, and the bulldozer is expected to yield 26,500 operating hours. a. Compute the depreciation expense per hour of operation. b. The bulldozer is operated 1,250 hours in the first year, 2,755 hours in the second year, and 1,225 hours in the third year of operations. Journalize the depreciation expense for each year. 225. Equipment was purchased on January 5, Year 1, at a cost of $90,000. The equipment had an estimated useful life of 8 years and an estimated residual value of $8,000. After using the equipment for 3 years, the useful life was revised to a total of 10 years and the residual value was reduced to $2,004. Determine the straight-line depreciation expense for Year 4 and the following years. 226. A copy machine acquired on May 1 with a cost of $2,545 has an estimated useful life of 3 years. Assuming that it will have a residual value of $445, determine the depreciation for the first and second years by the straight-line method. Round to the nearest whole dollar. 227. A copy machine acquired with a cost of $1,410 has an estimated useful life of 4 years. It is also expected to have a useful operating life of 13,350 copies. Assuming that it will have a residual value of $75, determine the depreciation for the first year by the following methods: a. Straight-line b. Double-declining-balance c. Units-of-activity (4,500 copies were made the first year) 228. On July 1, Andrew Company purchased equipment at a cost of $150,000 that has a depreciable cost of $120,000 and an estimated useful life of 3 years or 60,000 hours Using straight-line depreciation, journalize the entry to record depreciation expense for (a) the first year, (b) the second year, and (c) the last year. 229. A copy machine acquired on July 1 with a cost of $1,450 has an estimated useful life of 4 years. Assuming that it will have a residual value of $250, determine the depreciation for the first year by the double-declining-balance method. 230. Computer equipment (office equipment) purchased 6½ years ago for $170,000, with an estimated life of 8 years and a residual value of $10,000, is now sold. (Appropriate entries for depreciation had been made for the first 6 years of use.) a. Journalize the depreciation for the one-half year prior to the sale, using the straight-line method. b. Journalize the sale of the equipment, assuming it is sold for $60,000 cash. c. Journalize the sale of the equipment, assuming it is sold for $25,000 cash. Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible 231. Equipment was acquired at the beginning of the year at a cost of $75,000. The equipment was depreciated using the straight-line method based on an estimated useful life of 6 years and an estimated residual value of $7,500. a. b. c.
Compute the depreciation expense for the first year. Assuming the equipment was sold at the end of the second year for $59,000, determine the gain or loss on sale of the equipment. Journalize the entry for the sale.
232. Equipment acquired on January 2, Year 1, at a cost of $525,000 has an estimated useful life of 8 years and an estimated residual value of $45,000. a. b. c. d.
Compute the annual amount of depreciation for the first 3 years, assuming the straightline method of depreciation is used. Determine the book value of the equipment on January 1, Year 4. Assuming that the equipment is sold on January 2, Year 4, for $326,000, journalize the entry for the sale. Assuming that the equipment is sold on January 2, Year 4, for $394,000, journalize the entry for the sale.
233. Williams Company acquired machinery on July 1, Year 1, at a cost of $130,000. The estimated useful life of the machinery was 10 years, and the estimated residual value was $10,000. Williams uses the double-declining-balance method of depreciation. On October 1, Year 4, Williams sold the equipment for $75,000. a. Journalize the entry for the depreciation on this machinery for Year 1. b. Journalize the entry for the sale of the machinery. 234. Solare Company acquired mineral rights for $60,000,000. The diamond deposit is estimated at 6,000,000 tons. During the current year, 2,300,000 tons were mined and sold. a. Determine the depletion rate. b. Determine the amount of depletion expense for the current year. c. Journalize the adjusting entry to recognize the depletion expense. 235. Carter Co. acquired drilling rights for $18,550,000. The oil deposit is estimated at 74,200,000 gallons. During the current year, 6,000,000 gallons were drilled. Journalize the adjusting entry at December 31 to recognize the depletion expense. 236. Chasteen Company acquired mineral rights for $9,100,000. The mineral deposit is estimated at 65,000,000 tons. During the current year, 18,375,000 tons were mined and sold. a. Determine the amount of depletion expense for the current year. b. Journalize the adjusting entry to recognize the depletion expense. 237. On December 31, Bowman Company estimated that goodwill of $80,000 was impaired. On June 1, a patent with an estimated useful economic life of 10 years was acquired for $252,000. a. Journalize the adjusting entry on December 31 for the impaired goodwill. b. Journalize the adjusting entry on December 31 for the amortization of the patent rights. 238. On December 31, it was estimated that goodwill of $65,000 was impaired. On July 1, a patent with an estimated useful economic life of 10 years was acquired for $60,000. a. Journalize the adjusting entry on December 31 for the impaired goodwill. Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible b. Journalize the adjusting entry on December 31 for the amortization of the patent rights. 239. On July 1, Sterns Co. acquired patent rights for $36,000. The patent has a useful life of 6 years and a legal life of 15 years. Journalize the adjusting entry on December 31 to recognize the amortization. 240. The following information was taken from a recent annual report of Harrison Company (in millions): Current Year Preceding Year Land and buildings $726 $361 Machinery, equipment, and internal-use software 595 470 Office furniture and equipment 94 81 Other fixed assets related to leases 760 569 Accumulated depreciation and amortization 894 644 a. b.
Compute the book value of the fixed assets for the current year and the preceding year and explain the differences, if any. Would you normally expect the book value of fixed assets to increase or decrease during the year?
241. Fill in the missing numbers using the formula for the fixed asset turnover ratio: Company A Company B Company C Company D Sales $5,000,000 $720,000 $900,000 ? Beginning fixed assets $450,000 $275,000 ? $380,000 Ending fixed assets $800,000 ? $310,000 $420,000 Fixed asset turnover ratio ? 2.4 3.0 2.6 242. Financial statement data for the years ended December 31 for Parker Corporation are as follows: Sales Fixed assets (net): Beginning of year End of year
Current Year $2,595,600
Prior Year $2,409,498
901,070 829,330
820,000 901,070
a. Determine the fixed asset turnover ratio for the current and prior years. b. Does the change in fixed asset turnover ratio from the prior year to the current year indicate a favorable or unfavorable change? 243. Equipment acquired at a cost of $126,000 has a book value of $42,000. Journalize the disposal of the equipment under the following independent assumptions: a. b. c. d.
The equipment had no market value and was discarded. The equipment is sold for $54,000. The equipment is sold for $24,000. The equipment is traded in for a similar asset. The list price of the new equipment is $63,000. The buyer gave no cash in the exchange. The transaction lacks commercial substance.
244. On the first day of the fiscal year, a new walk-in cooler with a list price of $58,000 was acquired in exchange for an old cooler and $44,000 cash. The old cooler had a cost of $25,000 and accumulated depreciation of $16,000. Assume the transaction has commercial substance. a. Determine the gain to be recorded on the exchange. Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible b. Journalize the entry for the exchange. 245. On October 1, Sebastian Company acquired new equipment with a fair market value of $458,000. Sebastian received a trade-in allowance of $92,000 on the old equipment of a similar type and paid cash of $366,000. The following information about the old equipment is obtained from the account in the equipment ledger: Cost, $336,000; accumulated depreciation on December 31, the end of the preceding fiscal year, $220,000; annual depreciation, $20,000. Assuming the exchange has commercial substance, journalize the entries for: (a) the current depreciation of the old equipment to the date of trade-in and (b) the exchange transaction on October 1. 246. Machinery acquired at a cost of $80,000 and on which there is accumulated depreciation of $55,000 (including depreciation for the current year to date) is exchanged for similar machinery. Assume that the transaction has commercial substance. Journalize the entries for the exchange of the machinery under each of the following assumptions: a. Price of new, $120,000; trade-in allowance on old, $4,000; balance paid in cash. b. Price of new, $120,000; trade-in allowance on old, $34,000; balance paid in cash.
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Chapter 10 - Long-Term Assets: Fixed and Intangible Answer Key 1. False 2. True 3. False 4. True 5. True 6. False 7. False 8. False 9. False 10. False 11. False 12. True 13. False 14. True 15. False 16. True 17. False 18. False 19. False 20. False 21. False 22. False 23. True 24. True 25. True Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible 26. False 27. True 28. True 29. True 30. False 31. False 32. True 33. False 34. False 35. True 36. False 37. False 38. False 39. True 40. True 41. False 42. False 43. True 44. False 45. False 46. True 47. False 48. True 49. False 50. True Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible 51. False 52. True 53. True 54. True 55. False 56. False 57. True 58. False 59. False 60. b 61. c 62. d 63. a 64. b 65. b 66. c 67. a 68. d 69. b 70. c 71. b 72. d 73. d 74. c 75. b 76. b Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible 77. d 78. b 79. c 80. b 81. a 82. c 83. b 84. c 85. a 86. c 87. d 88. b 89. b 90. b 91. d 92. c 93. b 94. a 95. c 96. d 97. c 98. d 99. d 100. a 101. a Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible 102. c 103. c 104. d 105. c 106. d 107. c 108. a 109. a 110. a 111. c 112. b 113. a 114. a 115. c 116. c 117. c 118. c 119. a 120. b 121. a 122. a 123. c 124. d 125. d 126. d 127. a Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible 128. d 129. c 130. a 131. a 132. a 133. b 134. b 135. b 136. c 137. c 138. c 139. d 140. e 141. e 142. b 143. c 144. e 145. c 146. a 147. a 148. a 149. a 150. b 151. d 152. d Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible 153. c 154. c 155. c 156. d 157. d 158. e 159. c 160. c 161. b 162. c 163. a 164. b 165. b 166. b 167. c 168. a 169. a 170. b 171. a 172. b 173. a 174. a 175. b 176. a 177. a 178. b Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible 179. c 180. b 181. d 182. a 183. c 184. b 185. c 186. a 187. d 188. b 189. d 190. c 191. c 192. b 193. h 194. h 195. b 196. i 197. i 198. i 199. h 200. Cost of Land = Land Purchase Price + Broker's Commission + Payment for the Demolition and Removal of Existing Building – Cash Received from Sale of Materials Salvaged from Demolished Building = $178,000 + $15,000 + $5,000 – $2,000 = $196,000 201. Initial cost of land ($40,000 + $410,000) Plus: Legal fees Delinquent taxes Powered by Cognero
$450,000 $13,275 14,500 Page 36
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Chapter 10 - Long-Term Assets: Fixed and Intangible Demolition of building Less: Cost of land
15,800
43,575 $493,575 6,800 $486,775
Salvaged materials
202. Architects’ fees Construction labor Engineers’ fees Insurance costs incurred during construction Interest on money borrowed for construction Building materials Sales taxes Cost of clubhouse 203. a. Mar. 31 Carpet Cash
$ 45,000 80,000 15,000 7,000 5,000 237,000 6,000 $395,000
18,000 18,000
b. Dec. 31 Depreciation Expense Accumulated Depreciation [($18,000 ÷ 15 years) × 9/12]
900 900
204. a. $182,000 ($4,550,000 ÷ 25) b. 36 years ($6,552,000 ÷ $182,000) c. Accumulated Depreciation—Building d. $3,002,000 ($6,552,000 + $1,000,000 – $4,550,000) e. 21 years (36 – 25 + 10) f. $142,952 ($3,002,000 ÷ 21) 205. a. Building Mortgage Payable
2,345,000 2,345,000
b. Equipment Cash
11,500
c. Accumulated Depreciation—Machinery Cash
8,000
206. Apr. 15 Delivery Truck Cash 15 Repairs and Maintenance Expense Cash
11,500
8,000
2,800 2,800 125 125
207. Depreciation is the periodic transfer of the cost of an asset to expense. Depreciation is a noncash expense. Depreciation does not accumulate cash for replacements. Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible 208. a. b. c.
$61,200 (Initial Cost – Estimated Residual Value = $65,000 – $3,800) 12.5% (100% ÷ 8) $7,650 ($61,200 × 12.5%)
209. Straight-Line Rate = 100% ÷ 25 = 4% Double-Declining-Balance Rate = 4% × 2 = 8% 210. a. $63,000 (Initial Cost – Estimated Residual Value = $72,000 – $9,000) b. $0.063 per copy (Depreciable Cost ÷ Total Units of Output = $63,000 ÷1,000,000 copies) c. $19,845 (315,000 copies × $0.063) 211. $54,000 ÷ 6 years = $9,000 per year 212. Depreciation rate: (100% ÷ 5) × 2 = 40% Year 1 $185,000 × 40% = $74,000 Year 2: $185,000 − $74,000 = $111,000; $111,000 × 40% = $44,400 Year 3: $111,000 − $44,400 = $66,600; $66,600 × 40% = $26,640 Year 4: $66,600 − $26,640 = $39,960; $39,960 × 40% = $15,984 Year 5: $23,976 – $20,000 = $3,976 213. a. $60,000 (Initial Cost – Estimated Residual Value = $63,000 – $3,000) b. 40% (100% ÷ 5) × 2 c. $25,200 ($63,000 × 40%) 214. a. 50% (100% ÷ 2) b. 12.5% (100% ÷ 8) c. 10% (100% ÷ 10) d. 5% (100% ÷ 20) e. 4% (100% ÷ 25) f. 2.5% (100% ÷ 40) g. 2% (100% ÷ 50) 215. a. Truck No. Rate per Mile Miles Operated Depreciation 1 29.0 cents 30,000 $ 8,700 2 21.0 25,000 3,000* 3 17.5 45,000 7,875 4 38.5 40,000 15,400 Total $34,975 *Mileage depreciation of $5,250 (21 cents × 25,000) is limited to $3,000, which reduces the book value of the truck to $9,900, its residual value. b. Depreciation Expense—Trucks Accumulated Depreciation—Trucks
34,975 34,975
216. a. $5,500 (Cost – Residual Value) ÷ Useful Life = ($58,000 – $3,000) ÷ 10 b. $47,000 [Initial Cost – Total Depreciation for Years 1 and 2 = $58,000 – ($5,500 × 2)] c. $22,500 [(Book Value at End of Year 2 – Revised Residual Value) ÷ Revised Useful Life = ($47,000 – $2,000) ÷ 2] 217. Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible
Item
Cost
Residual Value Purchase Date
Disposal Date
A B C D
$40,000 $ 4,000 July 1, Year 3 50,000 5,000 Jan. 1, Year 1 60,000 2,000 Oct. 1, Year 3 80,000 10,000 Jan. 1, Year 2
N/A Aug. 31, Year 3 N/A Apr. 1, Year 3
Depr. Depr. Expense Method Year 3
SL SL DDB DDB
$3,600 6,000 6,000 4,800
218. a. b. c.
1st Year $70,000 [($360,000 – $10,000) ÷ 5] $30,000 [($360,000 – $10,000) ÷ 14,000 hours × 1,200] $144,000 ($360,000 × 40%)
a. b. c.
2nd Year $70,000 [($360,000 – $10,000) ÷ 5] $56,250 [($360,000 – $10,000) ÷ 14,000 hours × 2,250] $86,400 [($360,000 – $144,000) × 40%]
219. a. $28,125 {[($240,000 – $15,000) ÷ 4] × 6/12} b. $60,000 ($240,000 × 50% × 6/12) c. $14,400 {[($240,000 – $15,000) ÷ 25,000 hours] × 1,600 hours} 220. a. Year of acquisition: $50,000 ($500,000 × 40% × 3/12) Following year: $180,000 [($500,000 – $50,000) × 40%] b. Year of acquisition: $22,500 {[($500,000 – $50,000) ÷ 5] × 3/12} Following year: $90,000 [($500,000 – $50,000) ÷ 5] 221. a. $80,000 – $8,000 = $72,000 $72,000 ÷ 10 = $7,200 $7,200 × 6 = $43,200 $80,000 – $43,200 = $36,800 b. ($36,800 – $6,000) ÷ 5 = $6,160 222. a. Initial cost Less residual value Depreciable cost Divided by useful life Annual depreciation Dec. 31
$135,000 10,000 $125,000 ÷ 4 years $ 31,250
Depreciation Expense—Sales Equipment Accumulated Depreciation—Sales Equipment
31,250 31,250
b. Year $135,000 × 50% = $67,500 1: Year ($135,000 – $67,500) × 50% = $33,750 2: Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible Year ($135,000 – $67,500 – $33,750) × 50% = $16,875 3: Year $135,000 – $67,500 – $33,750 – $16,875 – $10,000 = $6,875* 4: *Depreciation cannot bring book value below $10,000 residual. Year 1 Dec. 31 Year 2 Dec. 31
Year 3 Dec. 31 Year 4 Dec. 31
Depreciation Expense—Sales Equipment Accumulated Depreciation—Sales Equipment
67,500
Depreciation Expense—Sales Equipment Accumulated Depreciation—Sales Equipment
33,750
67,500
33,750 16,875
Depreciation Expense—Sales Equipment Accumulated Depreciation—Sales Equipment
16,875 6,875
Depreciation Expense—Sales Equipment Accumulated Depreciation—Sales Equipment
223. Annual depreciation: Initial cost Less residual value Depreciable cost Divided by useful life in years Annual depreciation
6,875
$228,000 16,000 $212,000 ÷ 8 $ 26,500
a. First-year depreciation is $26,500 × 6/12 = $13,250 (July through December) Dec. 31 Depreciation Expense 13,250 Accumulated Depreciation 13,250 b. Third-year depreciation is the same as the annual depreciation computed previously. Dec. 31 Depreciation Expense 26,500 Accumulated Depreciation 26,500 c. Last-year depreciation is $26,500 × 6/12 = $13,250 (January through June) Dec 31 Depreciation Expense 13,250 Accumulated Depreciation 13,250 224. a. Hourly depreciation is: Initial cost Less residual value Depreciable cost Useful life in hours Hourly depreciation
$228,000 16,000 $212,000 ÷ 26,500 $ 8
b. First year: 1,250 hours × $8 per hour = $10,000 Year 1 Depreciation Expense 10,000 Accumulated Depreciation 10,000 Powered by Cognero
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Chapter 10 - Long-Term Assets: Fixed and Intangible Second year: 2,755 hours × $8 per hour = $22,040 Year 2 Depreciation Expense 22,040 Accumulated Depreciation
22,040
Third year: 1,225 hours × $8 per hour = $9,800 Year 3 Depreciation Expense Accumulated Depreciation
9,800
9,800
225. Book value at beginning of Year 4: Cost $90,000 Residual 8,000 Depreciable cost $82,000 Depreciation expense for each of the first 3 years: $82,000 ÷ 8 = $10,250 Accumulated depreciation: $10,250 × 3 = $30,750 Book value Jan. 1, Year 4: $90,000 − $30,750 = $59,250 Revised depreciation expense computation: Book value at beginning of Year 4 $59,250 Less revised residual value 2,004 Remaining depreciable amount $57,246 Divided by remaining life ÷ 7 Depreciation expense for Year 4 $ 8,178 226. Straight-Line Depreciation = (Cost – Estimated Residual Value) ÷ Estimated Life Straight-Line Depreciation = ($2,545 – $445) ÷ 3 Straight-Line Depreciation = $700 per year First Year = $700 × 8/12 = $467 Second Year = $700 227. a. Straight-Line Depreciation = (Cost – Estimated Residual Value) ÷ Estimated Life = ($1,410 – $75) ÷ 4 = $333.75 per year b. Double-Declining-Balance Depreciation = $705, determined as follows: Year 1
Cost $1,410
Book Value at Beginning of Year $1,410
Rate 50%*
Depreciation for Year $705
*Rate = (100% ÷ 4) × 2 c.
Units-of-Activity Depreciation = (Cost – Estimated Residual Value) ÷ Estimated Copies = ($1,410 – $75) ÷ 13,350 = $0.10 per copy First-Year Depreciation = $0.10 × 4,500 = $450
228. $120,000 ÷ 3 years = $40,000 per full year $40,000 × 6/12 = $20,000 for first and final (partial) years a. Depreciation Expense Accumulated Depreciation
20,000
b. Depreciation Expense Accumulated Depreciation
40,000
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20,000 40,000 Page 41
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Chapter 10 - Long-Term Assets: Fixed and Intangible c. Depreciation Expense Accumulated Depreciation
20,000 20,000
229. First-Year Depreciation = $725 × 6/12 = $362.50 Year 1
Cost $1,450
Book Value at Beginning of Year $1,450
Rate 50%*
Depreciation for Year $725.00
Rate = (100% ÷ 4) × 2 = 50% 230. a.
b.
c.
Depreciation Expense—Office Equipment Accum. Depr.—Office Equipment [($170,000 – $10,000) ÷ 8] × ½
10,000
Cash Accum. Depr.—Office Equipment* Office Equipment Gain on Sale of Equipment** *[($170,000 – $10,000) ÷ 8] × 6.5 **$60,000 – ($170,000 – $130,000) Cash Accum. Depr.—Office Equipment Loss on Sale of Equipment Office Equipment
60,000 130,000
10,000
170,000 20,000
25,000 130,000 15,000 170,000
231. a. $11,250 [(Cost – Residual Value) ÷ Useful Life = ($75,000 – $7,500) ÷ 6] b. $6,500 gain (Accumulated Depreciation at End of Second Year = $11,250 × 2 = $22,500 Book Value at End of Second Year = $75,000 – $22,500 = $52,500 Gain on Sale = Selling Price – Book Value at End of Second Year = $59,000 – $52,500 = $6,500) c. Cash 59,000 Accumulated Depreciation 22,500 Equipment 75,000 Gain on Sale Equipment 6,500 232. a. Yearly depreciation expense: $60,000 [($525,000 – $45,000) ÷ 8] b.
$345,000 [$525,000 – ($60,000 × 3)]
c. Cash Accumulated Depreciation—Equipment Loss on Sale of Equipment Equipment
326,000 180,000 19,000
d. Cash Accumulated Depreciation—Equipment Equipment
394,000 180,000
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525,000
525,000 Page 42
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Chapter 10 - Long-Term Assets: Fixed and Intangible Gain on Sale of Equipment 233. a.
b.
49,000
Depreciation Expense Accumulated Depreciation—Machinery ($130,000 × 0.20 × 6/12)
13,000 13,000
Cash Accumulated Depreciation—Machinery Machinery Gain on Sale of Machinery
75,000 66,352 130,000 11,352
234. a. $10 per ton ($60,000,000 ÷ 6,000,000 tons) b. $23,000,000 ($10 × 2,300,000 tons) c. Dec. 31 Depletion Expense Accumulated Depletion
23,000,000 23,000,000
235. Dec. 31 Depletion Expense Accumulated Depletion
1,500,000* 1,500,000
*$18,550,000 ÷ 74,200,000 = $0.25 per gallon $0.25 × 6,000,000 gallons = $1,500,000 236. a. $9,100,000 ÷ 65,000,000 tons = $0.14 depletion per ton 18,375,000 × $0.14 = $2,572,500 depletion expense b.
Depletion Expense Accumulated Depletion
237. a. Dec. 31 Loss from Impaired Goodwill Goodwill b. Dec.31 Amortization Expense—Patents Patents ($252,000 ÷ 10) × 7/12 238. a. Loss from Impaired Goodwill Goodwill b. Amortization Expense—Patents Patents ($60,000 ÷ 10) × ½ Dec. 31 Amortization Expense―Patents Patents ($36,000 ÷ 6) × ½ Powered by Cognero
2,572,500 2,572,500
80,000 80,000 14,700 14,700
65,000 65,000 3,000 3,000
239. 3,000 3,000
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Chapter 10 - Long-Term Assets: Fixed and Intangible 240. a. Property, plant, and equipment (in millions): Current Preceding Year Year Land and buildings $ 726 $ 361 Machinery, equipment, and internal-use software 595 470 Office furniture and equipment 94 81 Other fixed assets related to leases 760 569 Total fixed assets $2,175 $1,481 Less accumulated depreciation and amortization 894 644 Book value $1,281 $ 837 A comparison of the book values of the current and preceding years indicates that they increased. A comparison of the total cost and accumulated depreciation reveals that Harrison purchased $694 million ($2,175 – $1,481) of additional fixed assets, which was offset by the additional depreciation expense of $250 million ($894 – $644) recorded during the current year. b. The book value of fixed assets should normally increase during the year. Although additional depreciation expense will reduce the book value, most companies invest in new assets in an amount that is at least equal to the depreciation expense. However, during periods of economic downturn, companies purchase fewer fixed assets, and the book value of their fixed assets may decline. 241.
Sales Beginning fixed assets Ending fixed assets Fixed asset turnover ratio
Company Company Company Company A B C D $5,000,000 $720,000 $900,000 $1,040,000 $450,000 $275,000 $290,000 $380,000 $800,000 $325,000 $310,000 $420,000 8.0 2.4 3.0 2.6
242. a.
Fixed assets (net): Beginning of year End of year Total Average fixed assets
Current Year
Prior Year
$ 901,070 829,330 $1,730,400 ÷ 2 $ 865,200
$ 820,000 901,070 $1,721,070 ÷ 2 $ 860,535
Fixed asset turnover ratio: Current year ($2,595,600 ÷ $865,200) = 3.0 Prior year ($2,409,498 ÷ $860,535) = 2.8 b. The change in the fixed asset turnover ratio indicates an increase in efficiency of using fixed assets to generate sales. 243. a.
Loss on Disposal of Equipment Accumulated Depreciation—Equipment
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42,000 84,000 Page 44
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Chapter 10 - Long-Term Assets: Fixed and Intangible Equipment b.
c.
d.
126,000
Cash Accumulated Depreciation—Equipment Equipment Gain on Sale of Equipment
54,000 84,000
Cash Accumulated Depreciation—Equipment Loss on Sale of Equipment Equipment
24,000 84,000 18,000
Equipment (new) Accumulated Depreciation—Equipment Equipment (old)
42,000 84,000
244. a. List price Book value of old cooler Cash paid Gain on exchange
126,000 12,000
126,000
126,000
$58,000 $ 9,000 44,000 53,000 $ 5,000
b. Equipment (new) 58,000 Accumulated Depreciation 16,000 Equipment (old) 25,000 Gain on Exchange of Equipment 5,000 Cash 44,000 245. a. Depreciation Expense—Equipment Accumulated Depreciation—Equipment $20,000 × 9/12 b.
Accumulated Depreciation—Equipment Equipment Loss on Exchange of Equipment Equipment Cash
246. a. Accumulated Depreciation—Machinery Machinery Loss on Disposal of Fixed Assets Machinery Cash b.
Accumulated Depreciation—Machinery Machinery Machinery Gain on Exchange of Machinery
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15,000 15,000
235,000 458,000 9,000 336,000 366,000
55,000 120,000 21,000 80,000 116,000 55,000 120,000 80,000 9,000 Page 45
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Chapter 10 - Long-Term Assets: Fixed and Intangible Cash
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86,000
Page 46
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Chapter 11 - Current Liabilities and Payroll True / False 1. For most companies, notes payable is the largest current liability. a. True b. False 2. All long-term liabilities eventually become current liabilities. a. True b. False 3. For a current liability to exist, the liability must be due usually within a year and must be paid out of current assets. a. True b. False 4. The borrower issues a note payable to a creditor. a. True b. False 5. Notes payable may be issued to creditors to satisfy previously created accounts payable. a. True b. False 6. Interest expense is reported in the Operating Expense section of the income statement. a. True b. False 7. An interest-bearing note is a loan in which the lender deducts interest from the amount loaned before the money is advanced to the borrower. a. True b. False 8. The amount borrowed is equal to the face amount of the note on an interest-bearing note payable. a. True b. False 9. The amount of money a borrower receives from the lender is called the discount rate. a. True b. False 10. The proceeds of a discounted note are equal to the face value of the note. a. True b. False 11. The discount on a note payable is charged to an account that has a normal credit balance. a. True b. False Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll 12. The proceeds from discounting a $20,000, 60-day note payable at 6% are $20,200. a. True b. False 13. Amounts withheld from each employee for social security and Medicare vary by state. a. True b. False 14. An employee's take-home pay is equal to gross pay less all voluntary deductions. a. True b. False 15. Form W-4 is a form authorizing employers to withhold a portion of employee earnings for payment of an employee’s federal income taxes. a. True b. False 16. Taxes deducted from an employee's earnings to finance social security and Medicare benefits are called FICA taxes. a. True b. False 17. Generally, all deductions made from an employee's gross pay are required by law. a. True b. False 18. Payroll taxes are based on the employee's net pay. a. True b. False 19. Most employers are required to withhold federal unemployment taxes from employee earnings. a. True b. False 20. FICA tax is a payroll tax that is paid only by employers. a. True b. False 21. Medicare taxes are paid by both the employee and the employer. a. True b. False 22. Federal unemployment taxes are paid by the employer and the employee. a. True b. False Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll 23. Federal unemployment compensation taxes that are collected by the federal government are not paid directly to the unemployed but are allocated among the states for use in state programs. a. True b. False 24. Federal income taxes are subject to a maximum amount per employee per year. a. True b. False 25. Federal unemployment compensation tax becomes an employer's liability at the time the employee is paid. a. True b. False 26. Form W-2 is called the Wage and Tax Statement. a. True b. False 27. FICA tax becomes a liability to the federal government at the time an employee's payroll is prepared. a. True b. False 28. Payroll taxes only include social security taxes and federal unemployment and state unemployment taxes. a. True b. False 29. Federal income taxes withheld increase the employer's payroll tax expense. a. True b. False 30. The use of a separate payroll bank account is not an advantageous control, because it creates more complexity in reconciliation functions for a company and invites theft. a. True b. False 31. Employers are required to compute and report payroll taxes on a calendar-year basis, even if a different fiscal year is used for financial reporting and income tax purposes. a. True b. False 32. Payroll taxes levied against employers become an employer liability at the time the employee wages are incurred. a. True b. False 33. Most employers use payroll checks drawn on a special bank account for paying the payroll. a. True b. False Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll 34. The payroll register is a multicolumn form used to assemble the payroll-related data for all employees. a. True b. False 35. The total net pay for a period is determined from the payroll register. a. True b. False 36. Internal controls for cash payments apply to payrolls. a. True b. False 37. For proper matching of revenues and expenses, the estimated cost of fringe benefits must be recognized as an expense of the period during which the employee earns the benefits. a. True b. False 38. Depending on when an unfunded pension liability is to be paid, it will be classified on the balance sheet as either a long-term or a current liability. a. True b. False 39. During the first year of operations, employees earned vacation pay of $35,000. The vacations will be taken during the second year. The vacation pay expense should be recorded in the second year as the vacations are taken by the employees. a. True b. False 40. One of the more popular defined contribution plans is the 401k plan. a. True b. False 41. A defined contribution plan promises employees a fixed annual pension benefit. a. True b. False 42. In a defined benefits plan, the employer bears the investment risks in funding a future retirement income benefit. a. True b. False 43. The accounting for defined benefit plans is usually very easy and straightforward. a. True b. False 44. During the first year of operations, a company granted warranties on its products at an estimated cost of $8,500. The product warranty expense should be recorded in the years of the expenditures to repair the products covered by the Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll warranty payments. a. True b. False 45. Obligations that may arise from past transactions only if certain events occur in the future are contingent liabilities. a. True b. False 46. In order to be a recorded contingent liability, the liability must be possible and easily estimated. a. True b. False 47. The journal entry for the cost of warranty repairs that were incurred during the current period, but related to sales made in prior years, includes a debit to Warranty Expense. a. True b. False Multiple Choice 48. Current liabilities are due a. but not receivable for more than one year b. but not payable for more than one year c. and receivable within one year d. and payable within one year 49. Notes may be issued a. when assets are purchased b. to creditors to temporarily satisfy an account payable created earlier c. when borrowing money d. All of these choices 50. On June 8, Smith Technologies issued a $75,000, 6%, 140-day note payable to Johnson Company. What are the proceeds of the note on June 8? a. 0 b. $70,500 c. $75,000 d. $76,750 51. On June 8, Williams Company issued an $80,000, 5%, 120-day note payable to Brown Industries. Assuming a 360day year, what is the maturity value of the note? a. $82,600 b. $84,000 c. $81,333 d. $88,200
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Chapter 11 - Current Liabilities and Payroll 52. On July 8, Jones Inc. issued an $80,000, 6%, 120-day note payable to Miller Company. Assume that the fiscal year of Jones ends on July 31. Using the 360-day year, what is the amount of interest expense recognized by Jones in the current fiscal year, rounded to the nearest dollar? a. $700 b. $4,200 c. $307 d. $1,400 53. On June 1, Davis Inc. issued an $84,000, 5%, 120-day note payable to Garcia Company. Assume that the fiscal year of Garcia ends June 30. Using the 360-day year, what is the amount of interest revenue recognized by Garcia in the following year, rounded to the nearest dollar? a. $700 b. $1,600 c. $1,062 d. $4,200 54. On May 18, Rodriguez Co. issued an $84,000, 6%, 120-day note payable on an overdue account payable to Wilson Company. Assume that the fiscal year of Rodriguez ends on June 30. Which of the following relationships is true? a. Rodriguez is the creditor and credits Accounts Receivable. b. Wilson is the creditor and debits Accounts Receivable. c. Wilson is the borrower and credits Accounts Payable. d. Rodriguez is the borrower and debits Accounts Payable. 55. Martinez Co. borrowed $50,000 on March 1 of the current year by signing a 60-day, 9%, interest-bearing note. Assuming a 360-day year, when the note is paid on April 30, the entry for the payment should include a a. debit to Interest Payable for $750 b. debit to Interest Expense for $750 c. credit to Cash for $50,000 d. credit to Cash for $54,500 56. When a borrower receives the face amount of a discounted note less the discount, the amount is known as the a. note proceeds b. note discount c. note deferred interest d. note principal 57. Assuming a 360-day year, the interest charged by the bank at the rate of 6% on a 90-day, discounted note payable of $100,000 is a. $6,000 b. $1,500 c. $500 d. $3,000 58. Assuming a 360-day year, when a $50,000, 90-day, 9% interest-bearing note payable matures, the total payment will be Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll a. $51,125 b. $54,500 c. $1,125 d. $4,500 59. Assuming a 360-day year, proceeds of $48,750 were received from discounting a $50,000, 90-day note at a bank. The discount rate used by the bank in computing the proceeds was a. 6.25% b. 10% c. 10.26% d. 9.75% 60. Anderson Co. issued a $50,000, 60-day, discounted note to National Bank. The discount rate is 6%. At maturity, assuming a 360-day year, the borrower will pay a. $53,000 b. $50,500 c. $50,000 d. $49,500 61. Chang Co. issued a $50,000, 120-day, discounted note to Guarantee Bank. The discount rate is 6%. Assuming a 360day year, the cash proceeds to Chang Co. are a. $49,750 b. $47,000 c. $49,000 d. $51,000 62. The journal entry for the issuance of a note for the purpose of converting an existing account payable would be a. debit Cash; credit Accounts Payable b. debit Accounts Payable; credit Cash c. debit Cash; credit Notes Payable d. debit Accounts Payable; credit Notes Payable 63. The journal entry for the issuance of an interest-bearing note for the purpose of borrowing funds for the business is a. debit Accounts Payable; credit Notes Payable b. debit Cash; credit Notes Payable c. debit Notes Payable; credit Cash d. debit Cash and Interest Expense; credit Notes Payable 64. The journal entry for the issuance of a discounted note for the purpose of borrowing funds for the business is a. debit Cash and Interest Expense; credit Notes Payable b. debit Cash and Interest Payable; credit Notes Payable c. debit Accounts Payable; credit Notes Payable d. debit Notes Payable; credit Cash 65. The journal entry for the payment of a discounted note is Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll a. debit Notes Payable and Interest Expense; credit Cash b. debit Notes Payable; credit Cash c. debit Cash; credit Notes Payable d. debit Accounts Payable; credit Cash 66. The journal entry for the payment of an interest-bearing note is a. debit Cash; credit Notes Payable b. debit Accounts Payable; credit Cash c. debit Notes Payable and Interest Expense; credit Cash d. debit Notes Payable and Interest Receivable; credit Cash 67. A current liability is a debt that is reasonably expected to be paid a. between 6 and 18 months b. out of currently recognized revenues c. within one year d. out of cash currently on hand 68. Taylor Bank lends Guarantee Company $150,000 on January 1. Guarantee Company signs a $150,000, 8%, ninemonth note. The journal entry made by Guarantee Company on January 1 for the proceeds and issuance of the note is a. Interest Expense 12,000 Cash 138,000 Notes Payable 150,000 b. Cash Notes Payable
150,000
c. Cash Interest Expense Notes Payable
162,000
d. Notes Payable Interest Payable Cash Interest Expense
120,000 7,200
150,000
12,000 150,000
120,000 7,200
69. The journal entry for the conversion of a $6,300 account payable to a note payable would be a. Cash 6,300 Notes Payable 6,300 b. Notes Receivable Notes Payable
6,300
c. Notes Payable Cash
6,300
d. Accounts Payable Notes Payable
6,300
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6,300
6,300 6,300 Page 8
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Chapter 11 - Current Liabilities and Payroll 70. Current liabilities are a. due and receivable within one year b. due and to be paid out of current assets within one year c. due, but not payable for more than one year d. payable if a possible subsequent event occurs 71. Which of the following would most likely be classified as a current liability? a. two-year note payable b. bond payable c. mortgage payable d. unearned rent 72. Assuming a 360-day year, when a $20,000, 90-day, 5% interest-bearing note payable matures, total payment will be a. $21,000 b. $1,000 c. $20,250 d. $250 73. The current portion of long-term debt should a. be classified as a long-term liability b. not be separated from the long-term portion of debt c. be paid immediately d. be reclassified as a current liability 74. On January 5, Thomas Company, which follows a calendar year, issued $1,000,000 of notes payable, of which $250,000 is due on January 1 each of the next four years. The proper balance sheet presentation on December 31 is a. Current liabilities, $1,000,000 b. Current liabilities, $250,000; Long-term debt, $750,000 c. Long-term debt, $1,000,000 d. Current liabilities, $750,000; Long-term debt, $250,000 75. Proper payroll accounting methods are important for a business for all of the following reasons except a. good employee morale requires timely and accurate payroll payments b. payroll is subject to various federal and state regulations c. to help a business with cash flow problems by delayed payments of payroll taxes to federal and state agencies d. payroll and related payroll taxes have a significant effect on the net income of most businesses 76. The amount of federal income taxes withheld from an employee's gross pay is recorded as a(n) a. payroll expense b. contra account c. asset d. liability 77. Which of the following is not a determinant in computing federal income taxes withheld from an individual's pay? Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll a. filing status b. type of earnings c. gross pay d. number of exemptions 78. Which of the following would be used to compute the federal income taxes to be withheld from an employee's earnings? a. FICA tax rate b. wage and tax statement c. FUTA tax rate d. wage bracket and withholding table 79. Which of the following taxes would be deducted in determining an employee's net pay? a. FUTA taxes b. SUTA taxes c. FICA taxes d. All of these choices 80. Which of the following taxes are employers required to withhold from employees? a. FICA tax b. FICA tax and state and federal unemployment tax c. state unemployment tax d. federal unemployment tax 81. Thomas Martin receives an hourly wage rate of $40, with time-and-a-half pay for all hours worked in excess of 40 hours during a week. Payroll data for the current week are as follows: hours worked, 48; federal income tax withheld, $350; social security tax rate, 6.0%; and Medicare tax rate, 1.5%. What is the gross pay for Martin? a. $449 b. $1,730 c. $2,080 d. $1,581 82. Martin Jackson receives an hourly wage rate of $30, with time-and-a-half pay for all hours worked in excess of 40 hours during a week. Payroll data for the current week are as follows: hours worked, 46; federal income tax withheld, $350; social security tax rate, 6.0%; and Medicare tax rate, 1.5%. What is the net amount to be paid to Jackson? a. $1,470.00 b. $1,009.75 c. $1,097.95 d. $460.25 83. The total earnings of an employee for a payroll period is referred to as a. take-home pay b. pay net of taxes c. net pay d. gross pay Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll 84. Most employers are levied a tax on payrolls for a. sales tax b. medical insurance premiums c. federal unemployment compensation tax d. union dues 85. Which of the following will have no effect on an employee’s take-home pay? a. social security tax b. unemployment tax c. marital status d. number of exemptions claimed 86. Sadie White receives an hourly wage rate of $30, with time-and-a-half pay for all hours worked in excess of 40 during a week. Payroll data for the current week are as follows: hours worked, 48; federal income tax withheld, $300; social security tax rate, 6.0%; and Medicare tax rate, 1.5%. What is the net amount to be paid to White? a. $1,443 b. $1,143 c. $1,260 d. $1,000 87. Davis and Thompson have earnings of $850 each. The social security tax rate is 6.0%, and the Medicare tax rate is 1.5%. Assuming that these are the only two employees and that neither have reached the maximum earnings subject to FICA taxes, what will be the employer's total FICA taxes for this payroll period? a. $102.00 b. $127.50 c. $96.00 d. $25.50 88. The following totals for the month of June were taken from the payroll register of Arcon Company: Salaries expense Social security and Medicare taxes withheld Income taxes withheld Retirement savings
$14,000 1,050 2,600 1,000
The journal entry for the payment of net pay would include a a. debit to Salaries Payable for $14,000 b. debit to Salaries Payable for $9,350 c. credit to Salaries Expense for $9,350 d. credit to Salaries Payable for $9,350 89. Which of the following is included in the employer's payroll taxes? a. SUTA tax b. FUTA tax c. social security tax Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll d. All of these choices 90. Which of the following is required to be withheld from an employee's gross pay? a. both federal and state unemployment compensation taxes b. only federal unemployment compensation tax c. only federal income tax d. only state unemployment compensation tax 91. Each year, there is a maximum for the amount of earnings subject to all of the following taxes except a. social security tax b. federal income tax c. federal unemployment tax d. state unemployment tax 92. Lee Company has the following information for the pay period of December 15–31: Gross payroll Social security rate Medicare rate
$16,000 6.0% 1.5%
Federal income tax withheld Federal unemployment tax rate State unemployment tax rate
$4,000 0.8% 5.4%
Assuming that for the year to date no employees have reached the maximum earnings subject to FICA or unemployment taxes, salaries payable would be recorded for a. $16,000 b. $9,808 c. $10,800 d. $11,040 93. Payroll taxes levied against employees become liabilities a. the first of the following month b. when the payroll is paid to employees c. when data are entered in a payroll register d. at the end of an accounting period 94. Payroll entries are made with data from the a. wage and tax statement b. employee's earnings record c. employer's quarterly federal tax return d. payroll register 95. Which of the following forms is typically given to employees at the end of the calendar year so that employees can file their individual income tax forms? a. Employee’s Withholding Allowance Certificate (Form W-4) b. Wage and Tax Statement (Form W-2) c. Employer's Quarterly Federal Tax Return (Form 941) d. 401k plans Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll 96. The employee's earnings record would contain which of the following data that the payroll register would probably not contain? a. deductions b. net pay c. overtime earnings d. cumulative earnings 97. The detailed record indicating the data for each employee for each payroll period and the cumulative total earnings for each employee is called the a. payroll register b. payroll check c. employee's earnings record d. employer's earnings record 98. An employee receives an hourly wage rate of $15, with time-and-a-half for all hours worked in excess of 40 during the week. Payroll data for the current week are as follows: hours worked, 48; federal income tax withheld, $120; social security tax rate, 6.0%; Medicare tax rate, 1.5%; state unemployment compensation tax, 3.4% on the first $7,000; and federal unemployment compensation tax, 0.8% on the first $7,000. What is the net amount to be paid to the employee? a. $568.74 b. $601.50 c. $660.00 d. $574.90 Use this information for Magnum Company to answer the following questions. The following totals for the month of April were compiled from the payroll data of Magnum Company: Salaries FICA taxes withheld Income taxes withheld Medical insurance deductions Federal unemployment taxes State unemployment taxes
$12,000 900 2,500 450 32 216
99. The journal entry for the monthly payroll on April 30 would include a a. credit to Salaries Payable for $8,150 b. debit to Salaries Expense for $7,902 c. debit to Salaries Payable for $8,150 d. debit to Salaries Payable for $7,902 100. The journal entry for the accrual of the employer’s payroll taxes would include a a. debit to Payroll Tax Expense for $2,500 b. debit to FICA Taxes Payable for $1,800 c. credit to Payroll Tax Expense for $248 d. debit to Payroll Tax Expense for $1,148
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Chapter 11 - Current Liabilities and Payroll 101. The following totals for the month of April were compiled from the payroll data of Magnum Company: Salaries FICA taxes withheld Income taxes withheld Medical insurance deductions Unemployment taxes
$10,000 750 2,000 450 420
The journal entry for the accrual of the employer’s payroll taxes would include a a. debit to Payroll Tax Expense for $1,170 b. debit to FICA Taxes Payable for $1,500 c. credit to Payroll Tax Expense for $420 d. debit to Payroll Tax Expense for $1,620 102. An employee receives an hourly wage rate of $15, with time and a half for all hours worked in excess of 40 during the week. Payroll data for the current week are as follows: hours worked, 46; federal income tax withheld, $110; cumulative earnings for the year prior to this week, $24,500; social security tax rate, 6.0%; Medicare tax rate, 1.5%; state unemployment compensation tax, 3.4% on the first $7,000; and federal unemployment compensation tax, 0.8% on the first $7,000. What is the net amount to be paid to the employee? a. $569.88 b. $539.00 c. $625.00 d. $544.88 103. The following totals for the month of June were compiled from the payroll data of Young Company: Salaries expense Social security and Medicare taxes withheld Income taxes withheld Retirement savings Salaries subject to federal and state unemployment taxes of 6.2%
$15,000 1,125 3,000 500 4,000
The journal entry for the accrual of the employer’s payroll taxes would include a debit to a. Payroll Tax Expense for $2,498 b. Social Security and Medicare Tax Payable for $2,250 c. Payroll Tax Expense for $1,373 d. Payroll Tax Expense for $3,000 Use this information for Harris Company to answer the following questions. Harris Company has the following information for the pay period of January 15–31: Gross payroll Social security rate Medicare rate
$10,000 6.0% 1.5%
Federal income tax withheld Federal unemployment tax rate State unemployment tax rate
$1,800 0.8% 5.4%
Assume that for the year to date no employees have reached the maximum earnings subject to FICA taxes. 104. Salaries Payable would be recorded for Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll a. $8,200 b. $6,830 c. $8,630 d. $7,450 105. Assuming that all wages are subject to federal and state unemployment taxes, the employer's payroll tax expense would be a. $1,370 b. $750 c. $620 d. $2,870 106. Assume that social security taxes are payable at a 6.0% rate and Medicare taxes are payable at a 1.5% rate with no maximum earnings, and federal and state unemployment compensation taxes total 4.6% on the first $7,000 of earnings. If an employee earns $2,500 for the current week and the employee's year-to-date earnings before this week were $6,800, what is the total payroll tax related to the current week? a. $187.50 b. $196.70 c. $344.50 d. $9.20 107. According to a summary of the payroll of Scotland Company, $500,000 was subject to the 6.0% social security tax and to the 1.5% Medicare tax. Federal income tax withheld was $98,000. Also, $15,000 was subject to state (4.2%) and federal (0.8%) unemployment taxes. The journal entry for the accrued payroll taxes would include a a. debit to SUTA Payable for $630 b. debit to SUTA Payable for $18,900 c. credit to SUTA Payable for $630 d. credit to SUTA Payable for $18,900 108. Which of the following is an example of a variable component of a payroll system? a. hours worked b. Medicare tax rate c. rate of pay d. social security number 109. According to a summary of the payroll of Scotland Company, $500,000 was subject to the 6.0% social security tax and to the 1.5% Medicare tax. Federal income tax withheld was $98,000. Also, $15,000 was subject to state (4.2%) and federal (0.8%) unemployment taxes. The journal entry for accrued salaries would include a a. debit to Salaries Payable of $450,000 b. credit to Salaries Payable of $500,000 c. debit to Salaries Expense of $500,000 d. credit to Salaries Expense of $450,000 110. According to a summary of the payroll of Scotland Company, $500,000 was subject to the 6.0% social security tax and to the 1.5% Medicare tax. Federal income tax withheld was $98,000. Also, $15,000 was subject to state (4.2%) and federal (0.8%) unemployment taxes. The journal entry for the accrued salaries would include a Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll a. debit to Salaries Payable for $313,000 b. credit to Salaries Payable for $364,500 c. debit to Salaries Expense for $364,500 d. credit to Salaries Expense for $313,000 111. An aid in internal control over payrolls that indicates employee attendance is the a. time card b. voucher system c. payroll register d. employee's earnings record 112. A pension plan that requires the employer to make annual pension contributions, with no promise to employees regarding future pension payments, is termed a. funded b. unfunded c. defined benefit d. defined contribution 113. During its first year of operations, a company granted its employees vacation privileges and pension rights estimated at a cost of $21,500 and $15,000, respectively. The vacations are expected to be taken in the next year, and the pension rights are expected to be paid in the future 5–30 years. What is the total cost of vacation pay and pension rights to be recognized in the first year? a. $15,000 b. $36,500 c. $6,500 d. $21,500 114. A pension plan that promises employees a fixed annual pension benefit, based on years of service and compensation, is called a(n) a. defined contribution plan b. defined benefit plan c. unfunded plan d. compensation plan 115. Vacation pay payable is reported on the balance sheet as a(n) a. current liability or long-term liability, depending on when the vacations will be taken by employees b. current liability c. expense d. long-term liability 116. An unfunded pension liability is reported on the balance sheet as a. a current liability b. owner's equity c. a long-term liability d. a current liability or long-term liability, depending on when the pension liability is to be paid Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll 117. The journal entry a company uses for accrued vacation privileges for its employees at the end of the year is a. debit Vacation Pay Expense; credit Vacation Pay Payable b. debit Vacation Pay Payable; credit Vacation Pay Expense c. debit Salaries Expense; credit Cash d. debit Salaries Expense; credit Salaries Payable 118. The journal entry a company uses for fully funded pension rights for its salaried employees at the end of the year is a. debit Salaries Expense; credit Cash b. debit Pension Expense; credit Unfunded Pension Liability c. debit Pension Expense; credit Unfunded Pension Liability and Cash d. debit Pension Expense; credit Cash 119. The journal entry a company uses for partially funded pension rights for its salaried employees at the end of the year is a. debit Salaries Expense; credit Cash b. debit Pension Expense; credit Unfunded Pension Liability c. debit Pension Expense; credit Unfunded Pension Liability and Cash d. debit Pension Expense; credit Cash 120. The journal entry a company uses for pension rights that have not been funded for its salaried employees at the end of the year is a. debit Salaries Expense; credit Cash b. debit Pension Expense; credit Unfunded Pension Liability c. debit Pension Expense; credit Unfunded Pension Liability and Cash d. debit Pension Expense; credit Cash 121. Zennia Company provides its employees with varying amounts of vacation per year, depending on their length of employment. The estimated amount of the current year’s vacation cost is $135,000. On December 31, the end of the current year, the current month’s accrued vacation pay is a. $135,000 b. $67,500 c. $0 d. $11,250 122. Hall Company sells merchandise with a one-year warranty. In the current year, sales consist of 4,500 units. It is estimated that warranty repairs will average $10 per unit sold and 30% of the repairs will be made in the current year and 70% in the next year. On the current year's income statement, Hall should show warranty expense of a. $45,000 b. $13,500 c. $31,500 d. $0 123. Excom sells radios, and each unit carries a two-year replacement warranty. The cost to repair defects under the warranty is estimated at 5% of the sales price. During September, Excom sells 100 radios for $50 each. One radio is actually replaced during September. For what amount in September would Excom debit Product Warranty Expense? Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll a. $50 b. $250 c. $30 d. $120 124. Wright Company sells merchandise with a one-year warranty. In the current year, sales consisted of 2,000 units. It is estimated that warranty repairs will average $15 per unit sold and 30% of the repairs will be made in the current year and 70% in the next year. On the current year's income statement, Wright should show warranty expense of a. $9,000 b. $21,000 c. $30,000 d. $0 125. Scott Company sells merchandise with a one-year warranty. Sales consisted of 2,500 units in Year 1 and 2,000 units in Year 2. It is estimated that warranty repairs will average $10 per unit sold, and 30% of the repairs will be made in Year 1 and 70% in Year 2 for the Year 1 sales. Similarly, 30% of repairs will be made in Year 2 and 70% in Year 3 for the Year 2 sales. On the Year 3 income statement, how much of the warranty expense shown will be due to Year 1 sales? a. $6,000 b. $14,000 c. $20,000 d. $0 126. The cost of a product warranty should be included as an expense in the a. period the cash is collected for a product sold on account b. future period when the cost of repairing the product is paid c. period of the sale of the product d. future period when the product is repaired or replaced 127. McKay Company sells merchandise with a one-year warranty. In Year 1, sales consisted of 1,200 units. It is estimated that warranty repairs will average $10 per unit sold and 30% of the repairs will be made in Year 1 and 70% in Year 2. On the Year 1 income statement, McKay should show warranty expense of a. $3,600 b. $8,400 c. $12,000 d. $0 128. Blast Company sells portable CD players, and each unit carries a one-year replacement warranty. The cost to repair defects under the warranty is estimated at 10% of the sales price. During May, Blast sells 650 portable CD players for $50 each. For what amount in May would Blast debit Product Warranty Expense? a. $3,250 b. $1,625 c. $650 d. $1,300 129. Estimating and recording product warranty expense in the period of the sale best follows the Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll a. cost concept b. business entity concept c. matching concept d. materiality concept 130. The journal entry a company uses for the estimated product warranty expense is a. debit Product Warranty Expense; credit Product Warranty Payable b. debit Product Warranty Payable; credit Cash c. debit Product Warranty Expense; credit Cash d. debit Product Warranty Payable; credit Product Warranty Expense 131. Which of the following is the most desirable quick ratio? a. 2.20 b. 1.80 c. 1.95 d. 1.50 132. Crafter Company has the following assets and liabilities: Assets Cash Accounts receivable Inventory Equipment
$28,000 15,000 20,000 50,000
Liabilities Current portion of long-term debt Accounts payable Long-term debt
$10,000 2,000 25,000
Determine the quick ratio (rounded to one decimal place). a. 5.3 b. 3.6 c. 3.3 d. 2.3 133. Based on the following data, what is the quick ratio (rounded to one decimal place)? Accounts payable Accounts receivable Accrued liabilities Cash Intangible assets Inventory Long-term investments Long-term liabilities Marketable securities Fixed assets Powered by Cognero
$ 30,000 60,000 5,000 30,000 50,000 69,000 80,000 100,000 30,000 670,000 Page 19
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Chapter 11 - Current Liabilities and Payroll Prepaid expenses a. 3.4 b. 3.0 c. 2.2 d. 1.8
1,000
134. Quick assets include a. cash, cash equivalents, receivables, prepaid expenses, and inventory b. cash, cash equivalents, receivables, and prepaid expenses c. cash, cash equivalents, receivables, and inventory d. cash, cash equivalents, and receivables 135. Young Company has the following assets and liabilities: Assets Cash Accounts receivable Inventory Equipment
$35,000 15,000 30,000 50,000
Liabilities Current portion of long-term debt Accounts payable Long-term debt
$10,000 2,000 25,000
Determine the quick ratio (rounded to one decimal place). a. 6.7 b. 13.0 c. 4.2 d. 3.5 136. Which of the following is the most desirable quick ratio? a. 1.20 b. 1.00 c. 0.95 d. 0.50 Matching Match each of the following payroll terms to the description (a–f) that best applies. Each description may be used more than once, and some descriptions may not be used. a. Amount is limited, withheld from employee only b. Amount is limited, withheld from employee and matched by employer c. Amount is limited, paid by employer only d. Amount is not limited, withheld from employee only e. Amount is not limited, withheld from employee and matched by employer Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll f. Amount is not limited, paid by employer only 137. Federal income tax 138. FICA—Social security 139. FICA—Medicare 140. Federal unemployment compensation tax (FUTA) 141. State unemployment compensation tax (SUTA) Match each of the following contingent liability scenarios to its proper accounting treatment (a–d). Each treatment may be used more than once, and some treatments may not be used. a. Record only b. Record and disclose c. Disclose only d. Do not record or disclose 142. Event is reasonably possible and amount is estimable. 143. Event is reasonably possible but amount is not estimable. 144. Event is probable and amount is estimable. 145. Event is probable but amount is not estimable. 146. Event is remote and amount is estimable. 147. Event is remote and amount is not estimable. Match each of the following items with the term or phrase (a–g) that best describes it. Terms or phrases may be used more than once. a. Current ratio b. Working capital c. Quick assets d. Quick ratio e. Record an accrual and disclose in the notes to the financial statements f. Disclose only in notes to financial statements g. No disclosure needed in notes to financial statements 148. Current Assets ÷ Current Liabilities 149. Remote contingent liability 150. Current Assets – Current Liabilities 151. Cash + Temporary Investments + Accounts Receivable Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll 152. (Cash + Temporary Investments + Accounts Receivable) ÷ Current Liabilities 153. Probable likelihood and estimable liability 154. Probable likelihood of a liability but cannot be estimated 155. Reasonably possible likelihood of a liability 156. Measures the “instant” debt-paying ability of a company Subjective Short Answer 157. A business issued a 120-day, 6% note for $10,000 to a creditor on account. The company uses a 360-day year for interest computations. Journalize the entries for (a) the issuance of the note and (b) the payment of the note at maturity, including interest. 158. On August 1, Batson Company issued a 60-day note with a face amount of $140,000 to Jergens Company for merchandise inventory. (Assume a 360-day year is used for interest computations.) a. Determine the proceeds of the note assuming the note carries an interest rate of 6%. b. Determine the proceeds of the note assuming the note is discounted at 6%. 159. Journalize the following, assuming a 360-day year is used for interest computations: Apr. 30 May 30
Issued a $150,000, 30-day, 6% note dated April 30 to Misner Co. on account. Paid Misner Co. the amount owed on the note dated April 30.
160. Roseland Design borrowed $700,000 on a 90-day note from CorpOne Funding Company. CorpOne discounts the note at 8%. (Assume a 360-day year is used for interest computations.) a.
Journalize Roseland’s entries for: (1) The issuance of the note. (2) The payment of the note at maturity.
b.
Journalize CorpOne’s entries for: (1) The receipt of the note. (2) The receipt of the payment of the note at maturity.
161. Journalize the following entries on the books of the borrower and creditor. (Assume a 360-day year is used for interest computations.) June
1
30 Aug. 29
James Co. purchased merchandise on account from O’Leary Co., $90,000, terms n/30. The cost of merchandise sold was $54,000. James Co. issued a 60-day, 5% note for $90,000 on account. James Co. paid the amount due.
162. Journalize the following entries on the books of the borrower and creditor. (Assume a 360-day year is used for interest computations.) June
1 30
Regis Co. purchased merchandise on account from Winthrop Co., $60,000, terms n/30. The cost of merchandise sold was $36,000. Regis Co. issued a 60-day, 5% note for $60,000 on account.
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Chapter 11 - Current Liabilities and Payroll Aug. 29
Regis Co. paid the amount due.
163. On October 1, Ramos Co. signed a $90,000, 60-day note at the bank to be paid on November 30. (Assume a 360-day year is used for interest computations.) a. Journalize the entries for October 1 and November 30, assuming the note was discounted at 6%. b. Journalize the entries for October 1 and November 30, assuming the note was interest-bearing at 6%. 164. Journalize the following entries on the books of Winston Co. for August 1, September 1, and November 30. (Assume a 360-day year is used for interest computations.) Aug. 1 Sept. 1 Nov. 30
Winston Co. purchased merchandise for $75,000 on account from Bagley Co., terms n/30. Winston Co. issued a 90-day, 6% note for $75,000 on account. Winston Co. paid the amount due.
165. A borrower has two alternatives for a loan: (1) issue a $480,000, 60-day, 8% note or (2) issue a $480,000, 60-day note that the creditor discounts at 8%. (Assume a 360-day year is used for interest computations.) a. Compute the amount of the interest expense for each option. b. Determine the proceeds received by the borrower in each situation. 166. Blake Green’s weekly gross earnings for the week ending December 7 were $2,500, and her federal income tax withholding was $525. Assuming the social security tax rate is 6.0%, the Medicare tax rate is 1.5%, and Green’s earnings to date have not reached the maximum subject to FICA taxes, what is Green’s net pay? 167. John Woods’ weekly gross earnings for the present week were $2,500.00. Woods has 2 exemptions. Using an $81.00 value for each exemption and the following tax rate schedule, what is Woods’ federal income tax withholding? Single person (including head of household) If amount of wages (after subtracting The amount of income tax withholding withholding is: allowance) is: Not over $73
$0
Over– $73 $260 $832 $1,692 $3,164 $3,998 $9,887
But not over– $260.......$0.00 plus 10% $832.......$18.70 plus 12% $1,692....$87.34 plus 22% $3,164....$276.54 plus 24% $3,998....$629.82 plus 32% $9,887....$896.70 plus 35% ...............$2,957.85 plus 37%
of excess over– $73 $260 $832 $1,692 $3,164 $3,998 $9,887
168. An employee earns $40 per hour and 1.5 times that rate for all hours in excess of 40 hours per week. Assume that the employee worked 60 hours during the week and that earnings to date have not reached the maximum subject to FICA taxes. Assume further that the social security tax rate is 6.0%, the Medicare tax rate is 1.5%, and the federal income tax to be withheld is $614. a. Determine the gross pay for the week. Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll b. Determine the net pay for the week. 169. Dixon Sales has seven sales employees that receive weekly paychecks. Each employee earns $10.25 per hour and has worked 40 hours in the pay period. Total federal income tax withholdings are $344.40. Each employee pays 3.0% in state income tax, 6.0% in social security tax, 1.5% in Medicare tax, and 0.5% toward retirement savings. Journalize the recognition of the pay period ending January 19 that will be paid to the employees on January 26. 170. Mobile Sales has five sales employees that receive weekly paychecks. Each employee earns $11.50 per hour and has worked 40 hours in the pay period. Total federal income tax withholdings are $276.00. Each employee pays 3.0% in state income tax, 6.0% in social security tax, 1.5% in Medicare tax, and 0.5% toward retirement savings. Journalize the pay period ending January 19 that will be paid to the employees on January 26. 171. The following information is for employee Ella Dodd for the week ended March 15: Total hours worked: 48 Pay rate: $15 per hour, with double time for all hours in excess of 40 Federal income tax withheld: $200 United Fund deduction: $50 Cumulative earnings prior to current week: $6,400 Tax rates: Social security: 6.0% on all earnings Medicare tax: 1.5% on all earnings State unemployment: 3.4% on maximum earnings of $7,000; paid by employer only Federal unemployment: 0.8% on maximum earnings of $7,000; paid by employer only a. b.
Determine (1) gross earnings, (2) total deductions, and (3) net pay for Ella Dodd. Determine each of the employer's payroll taxes related to the earnings of Ella Dodd for the week ended March 15.
172. The summary of the payroll for the monthly pay period ending July 15 indicated the following: Sales salaries Federal income tax withheld Office salaries Medical insurance withheld Social security tax withheld Medicare tax withheld
$125,000 32,300 35,000 7,370 10,200 2,550
Journalize the entries for (a) the payroll and (b) the employer's payroll tax expense for the month. The state unemployment tax rate is 3.1%, and the federal unemployment tax rate is 0.8%. Only $25,000 of salaries is subject to unemployment taxes. 173. Excel Products Inc. pays its employees semimonthly. The summary of the payroll for December 31 indicated the following: Salaries expense Federal income tax withheld
$120,000 20,000
Assume all salary amounts are subject to social security tax of 6.0% and Medicare tax of 1.5%, and $10,000 is subject to state unemployment tax of 4.3% and federal unemployment tax of 0.8%. Journalize the entry for the employer’s payroll tax expense Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll 174. An employee receives an hourly rate of $15, with time and a half for all hours worked in excess of 40 during the week. Payroll data for the current week are as follows: hours worked, 46; federal income tax withheld, $120; cumulative earnings for the year prior to this week, $5,500; social security tax rate, 6.0%; Medicare tax rate, 1.5%; state unemployment compensation tax rate, 3.4% on the first $7,000; federal unemployment compensation tax, 0.8% on the first $7,000. Journalize the entries for the payroll and the employer’s payroll tax expense. 175. Townson Company had gross wages of $200,000 during the week ended December 10. The amount of wages subject to federal and state unemployment taxes was $24,000. Assume all wages were subject to FICA taxes. Tax rates are as follows: Social security 6.0% Medicare 1.5 State unemployment 5.3 Federal unemployment 0.8 The total amount withheld from employee wages for federal income taxes was $32,000. a. Journalize the entry for the payroll for the week of December 10. b. Journalize the entry for the employer’s payroll tax expense for the week of December 10. 176. According to a summary of the payroll of Scotland Company, total gross pay was $500,000, all earnings were subject to the 6.0% social security tax and 1.5% Medicare tax, and federal income tax withheld was $98,000. Also, $15,000 was subject to state (4.2%) and federal (0.8%) unemployment taxes a. Journalize the entry for the payroll. b. Journalize the entry for the employer’s payroll tax expense. 177. The payroll register of Seaside Architecture Company indicates $990.00 of social security and $247.50 of Medicare tax withheld on total salaries of $16,500.00 for the period. Federal withholding for the period totaled $4,235.00. Journalize the entry for the payroll. 178. The payroll register of Seaside Architecture Company indicates $870.00 of social security and $217.50 of Medicare tax withheld on total salaries of $14,500.00 for the period. Assume earnings subject to state and federal unemployment compensation taxes are $5,250.00 at the federal rate of 0.8% and state rate of 5.4%. Journalize the entry for the employer’s payroll tax expense for the period. 179. List five internal controls that relate directly to payroll. 180. The payroll summary for December 31 for Waters Co. revealed total earnings of $80,000. Assume all earnings were subject to 6.0% social security tax and 1.5% Medicare tax, and earnings of $3,000 were subject to 4.3% state and 0.8% federal unemployment compensation tax. Journalize the entry for the employer’s payroll tax expense. 181. Perez Company has the following information for the pay period of January 15–31: Gross payroll Social security rate Medicare rate
$20,000 6.0% 1.5%
Federal income tax withheld Federal unemployment tax rate State unemployment tax rate
$2,500 0.8% 5.4%
Assuming no employees have reached the maximum earnings for any taxes, compute salaries payable and the employer’s payroll tax expense. 182. An employee receives an hourly rate of $45, with time and a half for all hours worked in excess of 40 during the week. Payroll data for the current week are as follows: hours worked, 48; federal income tax withheld, $950; social Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll security tax rate, 6.0%; Medicare tax rate, 1.5%; state unemployment compensation tax, 3.4% on the first $7,000; federal unemployment compensation tax, 0.8% on the first $7,000. Compute the employer's payroll tax expense related to this employee’s earnings. 183. The following totals for the month of February were taken from the payroll register of Arcon Company: Salaries expense Social security and Medicare taxes withheld Income taxes withheld Retirement savings Salaries subject to federal and state unemployment taxes of 6.2%
$13,000 975 2,600 500 4,000
a. How much is the total employer’s payroll tax expense for Arcon Company for this payroll? b. Assume that the monthly salaries expense remains the same for the entire year and no employees are hired or fired during that time. Based on what you learned in Chapter 11 about payroll taxes, do you expect the total payroll tax expense to stay the same every month? Explain. 184. According to a summary of the payroll of Sinclair Company, $505,000 was subject to the 6.0% social security tax and $545,000 was subject to the 1.5% Medicare tax. Also, $10,000 was subject to state and federal unemployment taxes. a. b.
Compute the employer’s payroll taxes using the following rates: State unemployment, 4.2%; Federal unemployment, 0.8%. Journalize the entry for the employer's payroll tax expense.
185. Martin Services Company provides its employees vacation benefits and a defined contribution pension plan. Employees earned vacation pay of $39,500 for the period. The pension plan requires a contribution to the plan administrator equal to 9% of employee salaries. Salaries were $750,000 during the period. Journalize the entries for (a) the accrued vacation pay and (b) the payment to the pension plan administrator. 186. The following two independent sets of transactions are for Welcott Company: a. Welcott provides its employees with varying amounts of vacation per year, depending on the length of employment. The estimated amount of the current year’s vacation pay is $78,000. Journalize the adjusting entry required on January 31, the end of the first month of the year, for the accrued vacation pay. b. Welcott maintains a defined contribution pension plan for its employees. The plan requires quarterly installments to be paid to the funding agent, Northern Trust, by the fifteenth of the month following the end of each quarter. Assuming that the pension cost is $119,600 for the quarter ended December 31, journalize entries for (1) the accrued pension liability on December 31 and (2) the payment to the funding agent on January 15. 187. Journalize the following transactions for Riley Corporation: Dec. 31 The accrued product warranty expense for the year is estimated to be 2.5% of sales. Sales for the year totaled $8,850,000. 31 The accrued vacation pay for the year is estimated to be $75,000. 31 Paid First Insurance Co. $55,000 as fund trustee for the pension plan. The annual pension cost is $87,000. 188. Journalize the following transactions for Howard Company: Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll Dec. 31
The accrued product warranty expense for the year is estimated to be 2.3% of sales. Sales for the year totaled $6,005,000.
31
The accrued vacation pay for the year is estimated to be $75,225.
31
Paid Reliable Insurance Co. $275,000 as fund trustee for the pension plan. The annual pension cost is $350,000.
189. Journalize the following transactions: Dec. 31
The accrued product warranty expense for the year is estimated to be 1.5% of sales. Sales for the year totaled $7,760,000.
31
The accrued vacation pay for the year is estimated to be $46,000.
31
Paid Reliable Insurance Co. $85,000 as fund trustee for the pension plan. The annual pension cost is $109,000.
190. Nelson Industries warrants its products for one year. The estimated product warranty is 4.3% of sales. Sales were $475,000 for September. In October, a customer received warranty repairs requiring $215 of parts and $65 of labor. a. b.
Journalize the adjusting entry required at September 30, the end of the first month of the current fiscal year, for the estimated product warranty expense. Journalize the entry for the warranty work provided in October.
191. Ecco Company sold $150,000 of kitchen appliances with six-month warranties during September. The cost to repair defects under the warranty is estimated at 6% of the sales price. On October 15, a customer required a $200 part replacement, plus $85 labor under the warranty. Journalize the entries for (a) the estimated expense on September 30 and (b) the October 15 warranty work. 192. Florida Keys Construction installs swimming pools. It estimates warranty obligations to be 3% of sales. For the year just ending, Florida Keys’ sales were $1,450,000. Previous quarterly entries debiting Warranty Expense totaled $28,700. Determine the estimated warranty expense for the year, and journalize the entry necessary to bring the account to the needed balance. 193. Aqua Construction installs swimming pools. It estimates warranty obligations to be 5% of sales. For the year just ending, Aqua’s sales were $1,500,000. Previous quarterly entries debiting Warranty Expense totaled $48,700. Determine the estimated warranty expense for the year, and journalize the entry necessary to bring the account to the needed balance. 194. Lamar Industries warrants its products for one year. The estimated product warranty expense is 3% of sales. Sales for June were $190,000. In July, a customer received warranty repairs requiring $185 of parts and $50 of labor. a. b.
Journalize the adjusting entry required at June 30, the end of the first month of the current fiscal year, for the estimated product warranty expense. Journalize the entry for the warranty work provided in July.
195. Several months ago, Jones Company experienced a spill of hazardous materials into the White River from one of its plants. As a result, the Environmental Protection Agency (EPA) fined the company $405,000. The company contested the fine. In addition, an employee is seeking $180,000 damages related to the spill. Finally, a homeowner has sued the company for $260,000. Although the homeowner lives 30 miles downstream from the plant, he believes that the spill has reduced his home’s resale value by $260,000. Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll Jones’ legal counsel believes the following will happen in relationship to these incidents: • • • • a.
It is probable that the EPA fine will stand. An out-of-court settlement for $165,000 has recently been reached with the employee, with the final papers to be signed next week. Counsel believes that the homeowner’s case is weak and will be decided in favor of Jones Company. Other litigation related to the spill is possible, but the damage amounts are uncertain. Based on this information, journalize the contingent liabilities associated with the spill. Use the account “Damage Awards and Fines” to recognize the expense for the period. Prepare a note disclosure related to the spill.
b.
196. Several months ago, Maximilien Company experienced a spill of radioactive materials into the Missouri River from one of its plants. As a result, the Environmental Protection Agency (EPA) fined the company $1,750,000. The company contested the fine. In addition, an employee is seeking $975,000 damages related to the spill. Finally, a homeowner has sued the company for $580,000. Although the homeowner lives 15 miles downstream from the plant, he believes that the spill has reduced his home’s resale value by $580,000. Maximilien's legal counsel believes the following will happen in relationship to these incidents: • • • • a. b.
It is probable that the EPA fine will stand. An out-of-court settlement for $650,000 has recently been reached with the employee, with the final papers to be signed next week. Counsel believes that the homeowner’s case is weak and will be decided in favor of Maximilien Company. Other litigation related to the spill is possible, but the damage amounts are uncertain. Based on this information, journalize the contingent liabilities associated with the spill. Use the account “Damage Awards and Fines” to recognize the expense for the period. Prepare a note disclosure related to the spill.
197. Hadley Industries warrants its products for one year. The estimated product warranty expense is 4% of sales. Assume that sales were $210,000 for June. In July, a customer received warranty repairs requiring $205 of parts and $75 of labor. a. b.
Journalize the adjusting entry required at June 30, the end of the first month of the current fiscal year, for the estimated product warranty expense. Journalize the entry for the warranty work provided in July.
198. The current assets and current liabilities for Kolbie Company and Newton Company are as follows at the end of a recent fiscal period: Kolbie Company (in millions) Current assets: Cash and cash equivalents Short-term investments Accounts receivable Inventories Other current assets* Total current assets Powered by Cognero
$ 8,352 6,034 3,029 446 2,195 $20,056
Newton Company (in millions) $ 8,546 752 5,152 660 2,829 $17,939 Page 28
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Chapter 11 - Current Liabilities and Payroll Current liabilities: Accounts payable Accrued and other current liabilities Total current liabilities
$ 4,970 3,329 $ 8,299
$10,430 6,361 $16,791
*These represent prepaid expenses and other nonquick current assets. a. Determine the quick ratio for both companies. Round to two decimal places. b. Interpret the quick ratio difference between the two companies. 199. Core Company had the following assets and liabilities as of December 31: Assets Cash Accounts receivable Inventory Equipment
$58,000 25,000 20,000 50,000
Liabilities Current portion of long-term debt Accounts payable Long-term debt
$20,000 12,000 25,000
Compute the current ratio, working capital, and quick ratio. 200. Davis Company and Bender Inc. had the following summary balances as of December 31: Account Cash Cash equivalents Current notes receivable Accounts receivable Prepaid expenses Merchandise inventory Fixed assets Accumulated depreciation—fixed assets Accounts payable Current accrued liabilities Mortgage payable Owner’s equity Totals
Davis Company Dr. Cr. $ 321 88 56 603 55 714 920 $ 415 260 213 917 952 $2,757 $2,757
Bender Inc. Dr. Cr. $ 425 95 46 307 85 898 755 $ 225 198 149 824 1,215 $2,611 $2,611
a. Compute the quick ratio for each company. Round to two decimal places. b. Comment on which company is more able to meet current liabilities. 201. Company A and Company B had the following summary balances as of December 31:
Account Cash Powered by Cognero
Company A Dr. Cr. $21
Company B Dr. $25
Cr. Page 29
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Chapter 11 - Current Liabilities and Payroll Cash equivalents Trade notes receivable Accounts receivable Prepaid expenses Merchandise inventory Fixed assets Accumulated depreciation—fixed assets Accounts payable Current accrued liabilities Mortgage payable Owner’s equity Total
8 7 6 5 14 20
$81
10 6 7 5 8 55 $5 26 13 17 20 $81
$116
$25 8 19 24 40 $116
a. Compute the quick ratio for each company. Round to two decimal places. b. Comment on which company is more able to meet current liabilities.
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Chapter 11 - Current Liabilities and Payroll Answer Key 1. False 2. True 3. True 4. True 5. True 6. False 7. False 8. True 9. False 10. False 11. False 12. False 13. False 14. False 15. True 16. True 17. False 18. False 19. False 20. False 21. True 22. False 23. True 24. False 25. True Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll 26. True 27. False 28. False 29. False 30. False 31. True 32. False 33. True 34. True 35. True 36. True 37. True 38. True 39. False 40. True 41. False 42. True 43. False 44. False 45. True 46. False 47. False 48. d 49. d 50. c Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll 51. c 52. c 53. c 54. d 55. b 56. a 57. b 58. a 59. b 60. c 61. c 62. d 63. b 64. a 65. b 66. c 67. c 68. b 69. d 70. b 71. d 72. c 73. d 74. b 75. c 76. d Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll 77. b 78. d 79. c 80. a 81. c 82. b 83. d 84. c 85. b 86. b 87. b 88. b 89. d 90. c 91. b 92. c 93. b 94. d 95. b 96. d 97. c 98. b 99. a 100. d 101. a Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll 102. a 103. c 104. d 105. a 106. b 107. c 108. a 109. c 110. b 111. a 112. d 113. b 114. b 115. a 116. d 117. a 118. d 119. c 120. b 121. d 122. a 123. b 124. c 125. d 126. c 127. c Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll 128. a 129. c 130. a 131. a 132. b 133. a 134. d 135. c 136. a 137. d 138. b 139. e 140. c 141. c 142. c 143. c 144. b 145. c 146. d 147. d 148. a 149. g 150. b 151. c 152. d Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll 153. e 154. f 155. f 156. d 157. a. Accounts Payable Notes Payable b.
10,000 10,000
Notes Payable Interest Expense* Cash *$10,000 × 6% × 120 ÷ 360 = $200
10,000 200 10,200
158. a. $140,000 b. $138,600 [$140,000 – ($140,000 × 6% × 60 ÷ 360)] 159. Apr. 30
May 30
Accounts Payable—Misner Co. Notes Payable—Misner Co.
150,000
Notes Payable—Misner Co. Interest Expense* Cash *$150,000 × 6% × 30 ÷ 360
150,000 750
160. a. (1) Cash Interest Expense* Notes Payable
b.
150,000
150,750
686,000 14,000 700,000
(2) Notes Payable Cash
700,000
(1) Notes Receivable Cash Interest Revenue*
700,000
(2) Cash Notes Receivable *$700,000 × 8% × 90 ÷ 360
700,000
700,000
686,000 14,000
700,000
161. James Co. (Borrower) June 1 Merchandise Inventory Accounts Payable 30 Accounts Payable Notes Payable Powered by Cognero
90,000 90,000 90,000 90,000 Page 37
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Chapter 11 - Current Liabilities and Payroll Aug. 29 Notes Payable Interest Expense* Cash O’Leary Co. (Creditor) June 1 Accounts Receivable Sales
90,000 750 90,750 90,000 90,000
1 Cost of Merchandise Sold Merchandise Inventory
54,000
30 Notes Receivable Accounts Receivable
90,000
Aug. 29 Cash Notes Receivable Interest Revenue* *$90,000 × 5% × 60 ÷ 360
90,750
54,000
90,000 90,000 750
162. June 1
Regis Co. (Borrower) Merchandise Inventory Accounts Payable
60,000 60,000
30 Accounts Payable Notes Payable
60,000
Aug. 29 Notes Payable Interest Expense* Cash
60,000 500
Winthrop Co. (Creditor) June 1 Accounts Receivable Sales
60,000
60,500
60,000 60,000
1 Cost of Merchandise Sold Merchandise Inventory
36,000
30 Notes Receivable Accounts Receivable
60,000
Aug. 29 Cash Notes Receivable Interest Revenue* *$60,000 × 5% × 60 ÷ 360
60,500
163. a. Oct. 1 Cash Interest Expense* Notes Payable Powered by Cognero
36,000
60,000
60,000 500
89,100 900 90,000 Page 38
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Chapter 11 - Current Liabilities and Payroll Nov. 30 Notes Payable Cash
90,000
b. Oct. 1 Cash Notes Payable
90,000
Nov. 30 Notes Payable Interest Expense* Cash *$90,000 × 6% × 60 ÷ 360 164. Aug. 1 Merchandise Inventory Accounts Payable
90,000
90,000 90,000 900 90,900
75,000 75,000
Sept. 1 Accounts Payable Notes Payable
75,000
Nov. 30 Notes Payable Interest Expense* Cash *$75,000 × 6% × 90 ÷ 360
75,000 1,125
165. a. b.
75,000
76,125
$480,000 × 8% × 60 ÷ 360 = $6,400 for each alternative. (1) $480,000 simple interest note: $480,000 proceeds (2) $480,000 discounted note: $480,000 – $6,400 interest = $473,600 proceeds
166. Gross earnings Less: Federal income tax withholding Social security tax ($2,500 × 6.0%) Medicare tax ($2,500 × 1.5%) Net pay 167. Gross earnings Allowance per exemption Multiplied by allowances claimed on Form W-4 Amount subject to withholding
$2,500.00 (525.00) (150,000) (37.50) $1,787.50
$2,500.00 $81.00 × 2
162.00 $2,338.00
Base withholding from given wage bracket above Plus additional withholding: 24% of excess over $1,692 Federal income tax withholding
$276.54 155.04 $431.58
168. a. Regular pay (40 hrs. × $40) Overtime pay (20 hrs. × $60) Gross pay
$1,600 1,200 $2,800
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Chapter 11 - Current Liabilities and Payroll b. Gross pay Less:
$2,800 Social security tax (6.0% × $2,800) Medicare tax (1.5% × $2,800) Federal withholding
$168 42 614
Net pay 169. Date Jan. 19
Description Debt Credit Sales Wages Expense 2,870.00 Employees Federal Income 344.40 Tax Payable Employees State Income 86.10 Tax Payable Social Security Tax Payable 172.20 Medicare Tax Payable 43.05 Retirement Savings Payable 14.35 Sales Wages Payable 2,209.90
824 $1,976
Supporting Computation (7 × 40 × $10.25) (Given) ($2,870.00 × 3.0%) ($2,870.00 × 6.0%) ($2,870.00 × 1.5%) ($2,870.00 × 0.5%) (Gross Pay – Deductions)
170. Date Jan. 19
Description
Debit
Sales Wages Expense
Credit 2,300.00
Employees Federal Income Tax Payable Employees State Income Tax Payable Social Security Tax Payable Medicare Tax Payable Retirement Savings Payable Sales Wages Payable 171. a. (1) 40 hours at $15 8 hours at $30 (2) Deductions: Federal income tax United Fund Social security tax (6.0% of $840) Medicare tax (1.5% of $840) Total deductions (3) Net pay b. Social security tax (6.0% × $840) Medicare tax (1.5% × $840) State unemployment tax (3.4% × $600) Federal unemployment tax (0.8% × $600) Powered by Cognero
Supporting Computation 5 employees × 40 hours × $11.50 276.00 Given 69.00
($2,300.00 × 3.0%)
138.00
($2,300.00 × 6.0%)
34.50 11.50
($2,300.00 × 1.5%) ($2,300.00 × 0.5%)
1,771.00 (Gross Pay – Deductions)
$600.00 240.00
$840.00
$200.00 50.00 50.40 12.60 313.00 $527.00 $50.40 12.60 20.40 4.80 Page 40
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Chapter 11 - Current Liabilities and Payroll Total employer payroll taxes
$88.20
172. a. 125,000
Sales Salaries Expense Office Salaries Expense Social Security Tax Payable Medicare Tax Payable Employees Federal Income Tax Payable Medical Insurance Payable Salaries Payable b. Payroll Tax Expense Social Security Tax Payable Medicare Tax Payable State Unemployment Tax Payable Federal Unemployment Tax Payable 173. Payroll Tax Expense Social Security Tax Payable Medicare Tax Payable State Unemployment Tax Payable Federal Unemployment Tax Payable Supporting computations: Social security tax (6.0% × $120,000) Medicare tax (1.5% × $120,000) State unemployment tax (4.3% × $120,000) Federal unemployment tax (0.8% × $120,000) Total payroll tax expense
174. Salaries Expense [($15 × 40) + ($22.50 × 6)] Social Security Tax Payable ($735 × 6.0%) Medicare Tax Payable ($735 × 1.5%) Employees Federal Income Tax Payable Salaries Payable
Payroll Tax Expense Social Security Tax Payable ($735 × 6.0%) Medicare Tax Payable ($735 × 1.5%) Powered by Cognero
35,000 10,200 2,550 32,300 7,370 107,580 13,725 10,200 2,550 775 200
$9,510 7,200 1,800 430 80 $7,200 1,800 430 80 $9,510
735.00 44.10 11.03 120.00 559.87
86.00 44.10 11.03 Page 41
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Chapter 11 - Current Liabilities and Payroll State Unemployment Tax Payable ($735 × 3.4%) Federal Unemployment Tax Payable ($735 × 0.8%)
24.99 5.88
175. a. Wages Expense Social Security Tax Payable ($200,000 × 6.0%) Medicare Tax Payable ($200,000 × 1.5%) Employees Federal Income Tax Payable Wages Payable
200,000 12,000 3,000 32,000 153,000
b. Payroll Tax Expense Social Security Tax Payable Medicare Tax Payable State Unemployment Tax Payable ($24,000 × 5.3%) Federal Unemployment Tax Payable ($24,000 × 0.8%) 176. a. Salaries Expense Social Security Tax Payable (6.0% × $500,000) Medicare Tax Payable (1.5% × $500,000) Employees Federal Income Tax Payable Salaries Payable
12,000 3,000 1,272 192
500,000 30,000 7,500 98,000 364,500
b. Payroll Tax Expense Social Security Tax Payable Medicare Tax Payable State Unemployment Tax Payable (4.2% × $15,000) Federal Unemployment Tax Payable (0.8% × $15,000) 177. Salaries Expense Social Security Tax Payable Medicare Tax Payable Employees Federal Income Tax Payable Salaries Payable
16,464
38,250 30,000 7,500 630 120
16,500.00 990.00 247.50 4,235.00 11,027.50
178.
Payroll Tax Expense Social Security Tax Payable Medicare Tax Payable State Unemployment Tax Payable* Federal Unemployment Tax Payable** *$5,250.00 × 5.4% **$5,250.00 × 0.8% Powered by Cognero
1,413.00 870.00 217.50 283.50 42.00
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Chapter 11 - Current Liabilities and Payroll 179. All of the cash payment controls. Proper written authorization of additions and deletions of employees. Proper written authorization of payroll rate changes. Control of employee attendance records. Verification that employees are correctly recording their time and attendance. Blank payroll checks controlled and accounted for. Controlled access to check-signing machine. Separate payroll bank account. 180. Payroll Tax Expense Social Security Tax Payable ($80,000 × 6.0%) Medicare Tax Payable ($80,000 × 1.5%) State Unemployment Tax Payable ($3,000 × 4.3%) Federal Unemployment Tax Payable ($3,000 × 0.8%) 181. Salaries payable: Gross payroll Less: Social security tax ($20,000 × 6.0%) Medicare ($20,000 × 1.5%) Federal income tax withheld Salaries payable (net pay)
6,153 4,800 1,200 129 24
$20,000 $1,200 300 2,500
Payroll tax expense: Social security tax ($20,000 × 6.0%) Medicare tax ($20,000 × 1.5%) Federal unemployment tax ($20,000 × 0.8%) State unemployment tax ($20,000 × 5.4%) Total payroll tax expense
4,000 $16,000 $1,200 300 160 1,080 $2,740
182. Employee Wages = (40 × $45) + (8 × $67.50) = $2,340 Social security tax ($2,340× 6.0%) Medicare tax ($2,340× 1.5%) State unemployment tax ($2,340× 3.4%) Federal unemployment tax ($2,340× 0.8%) Total payroll tax expense
$140.40 35.10 79.56 18.72 $273.78
183. a. Total payroll tax expense: $975 matching social security and Medicare taxes + $248 ($4,000 × 6.2%) unemployment taxes = $1,223 b. Total payroll tax expense is not expected to stay the same every month. The salaries subject to unemployment taxes should soon be zero, and it is possible that some employees may exceed the limit for social security tax before the year ends, so total payroll tax expense should decrease. 184. a. Social security tax (6.0% × $545,000) Medicare tax (1.5% × $545,000) State unemployment tax (4.2% × $10,000) Federal unemployment tax (0.8% × $10,000) Powered by Cognero
$32,700 8,175 420 80 Page 43
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Chapter 11 - Current Liabilities and Payroll $41,375 b. Payroll Tax Expense Social Security Tax Payable Medicare Tax Payable State Unemployment Tax Payable Federal Unemployment Tax Payable
41,375 32,700 8,175 420 80
185. a. Vacation Pay Expense Vacation Pay Payable b. Pension Expense Cash
39,500 39,500 67,500 67,500
186. a.
Jan. 31 Vacation Pay Expense Vacation Pay Payable
6,500 6,500
b. (1) Dec. 31 Pension Expense Unfunded Pension Liability (2) Jan. 15
Unfunded Pension Liability Cash
187. Dec. 31 Product Warranty Expense Product Warranty Payable ($8,850,000 × 2.5%).
119,600 119,600 119,600 119,600
221,250 221,250
31 Vacation Pay Expense Vacation Pay Payable
75,000
31 Pension Expense Cash Unfunded Pension Liability
87,000
188. Dec. 31 Product Warranty Expense Product Warranty Payable ($6,005,000 × 2.3%).
75,000
55,000 32,000
138,115 138,115
31 Vacation Pay Expense Vacation Pay Payable
75,225
31 Pension Expense Cash Unfunded Pension Liability
350,000
189. Dec. 31 Product Warranty Expense Product Warranty Payable ($7,760,000 × 1.5%). Powered by Cognero
75,225 275,000 75,000
116,400 116,400 Page 44
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Chapter 11 - Current Liabilities and Payroll 31 Vacation Pay Expense Vacation Pay Payable
46,000
31 Pension Expense Cash Unfunded Pension Liability
109,000
46,000
85,000 24,000
190.
a.
b.
20,425
Product Warranty Expense Product Warranty Payable (4.3%×$475,000).
20,425 280
Product Warranty Payable Supplies Wages Payable
215 65
191. a. Product Warranty Expense Product Warranty Payable ($150,000 × 6%).
9,000 9,000
b. Product Warranty Payable Supplies Wages Payable
285 200 85
192. Due to sales of $1,450,000, warranty liability is $43,500 ($1,450,000 × 3%). Since $28,700 has already been recognized, $14,800 ($43,500 – $28,700) must still be recognized. Dec. 31
Warranty Expense Warranty Payable
14,800 14,800
193. The sales were $1,500,000; thus, the warranty liability is $75,000 ($1,500,000 × 5%). Since $48,700 has already been recognized, $26,300 ($75,000 – $48,700) must still be recognized. Dec. 31
Warranty Expense Warranty Payable
194. a. Product Warranty Expense Product Warranty Payable (3% × $190,000). b. Product Warranty Payable Supplies Wages Payable 195. a. Damage Awards and Fines EPA Fines Payable Litigation Claims Payable Powered by Cognero
26,300 26,300
5,700 5,700
235 185 50
570,000 405,000 165,000 Page 45
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Chapter 11 - Current Liabilities and Payroll Note: “Damage Awards and Fines” would be disclosed on the income statement under “Other expenses.” b. The company experienced a hazardous materials spill at one of its plants during the previous period. This spill has resulted in a number of lawsuits to which the company is a party. The Environmental Protection Agency (EPA) has fined the company $405,000, which the company is contesting in court. Although the company does not admit fault, legal counsel believes that the fine payment is probable. In addition, an employee has sued the company. A $165,000 out-of-court settlement has been reached with the employee. The EPA fine and out-of-court settlement have been recognized as an expense for the period. There is one other outstanding lawsuit related to this incident. Counsel does not believe that the lawsuit has merit. Other lawsuits and unknown liabilities may arise from this incident. 196. a. Damage Awards and Fines EPA Fines Payable Litigation Claims Payable
2,400,000 1,750,000 650,000
Note: “Damage Awards and Fines” would be disclosed on the income statement under “Other expenses.” b. The company experienced a radioactive materials spill at one of its plants during the previous period. This spill has resulted in a number of lawsuits to which the company is a party. The Environmental Protection Agency (EPA) has fined the company $1,750,000, which the company is contesting in court. Although the company does not admit fault, legal counsel believes that the fine payment is probable. In addition, an employee has sued the company. A $650,000 out-of-court settlement has been reached with the employee. The EPA fine and out-of-court settlement have been recognized as an expense for the period. There is one other outstanding lawsuit related to this incident. Counsel does not believe that the lawsuit has merit. Other lawsuits and unknown liabilities may arise from this incident. 197. a. Product Warranty Expense Product Warranty Payable (4% × $210,000). b. Product Warranty Payable Supplies Wages Payable
8,400 8,400
280 205 75
198. a. Quick Ratio = Quick Assets ÷ Current Liabilities Kolbie Company: Powered by Cognero
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Chapter 11 - Current Liabilities and Payroll Quick Ratio = ($8,352 + $6,034 + $3,029) ÷ $8,299 = 2.10 Newton Company: Quick Ratio = ($8,546 + $752 + $5,152) ÷ $16,791 = 0.86 b. It is clear that Kolbie’s short-term liquidity is stronger than Newton’s. Kolbie’s quick ratio is 144% [(2.10 – 0.86) ÷ 0.86] higher. Kolbie has a much stronger relative cash and short-term investment position than does Newton. Kolbie’s cash and shortterm investments are over 72% of total current assets (173% of current liabilities), compared to Newton’s 52% of total current assets (55% of current liabilities). In addition, Newton’s relative accounts payable position is larger than Kolbie’s, indicating the possibility that Newton has longer supplier payment terms than does Kolbie. A quick ratio of 2.10 for Kolbie suggests ample flexibility to make strategic investments with its excess cash, while a quick ratio of 0.86 for Newton indicates an efficient but tight quick asset management policy. 199. Current ratio: ($58,000 + $25,000 + $20,000) ÷ ($20,000 + $12,000) = 3.2 Working capital: $103,000 – $32,000 = $71,000 Quick ratio: ($58,000 + $25,000) ÷ ($20,000 + $12,000) = 2.6 200. a. Davis Company quick ratio: ($321 + $88 + $56 + $603) ÷ ($260 + $213) = $1,068 ÷ $473 = 2.26 Bender Inc. quick ratio: ($425 + $95 + $46 + $307) ÷ ($198 + $149) = $873 ÷ $347 = 2.52 b. Bender Inc. is more liquid. 201. a. Company A quick ratio: ($21 + $8 + $7 + $6) ÷ ($26 + $13) = $42 ÷ $39 = 1.08 Company B quick ratio: ($25 + $10 + $6 + $7) ÷ ($8 + $19) = $48 ÷ $27 = 1.78 b. Company B is more liquid.
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies True / False 1. The proprietorship is a less widely used form of business than the partnership. a. True b. False 2. In a general partnership, each partner is individually liable to creditors for debts incurred by the partnership. a. True b. False 3. With a partnership, there is no limitation on legal liability. a. True b. False 4. A partnership is subject to federal income taxes. a. True b. False 5. A disadvantage of partnerships is the mutual agency of all partners. a. True b. False 6. A partnership requires only an agreement between two or more persons to organize. a. True b. False 7. Each partner may withdraw the assets he or she contributed to the partnership at any time. a. True b. False 8. One of the major disadvantages of the partnership is its limited life. a. True b. False 9. When compared to a proprietorship, one of the major advantages of a partnership is its relative ease of formation. a. True b. False 10. An advantage of the partnership form of business is that each partner’s potential loss is limited to that partner’s investment in the partnership. a. True b. False 11. A limited liability company is a business entity form designed to overcome some of the disadvantages of the partnership form. a. True Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies b. False 12. For tax purposes, a limited liability company may elect to be treated as a partnership. a. True b. False 13. The limited liability company may elect to be manager-managed rather than member-managed, which means that only authorized members may legally bind the corporation. a. True b. False 14. Each partner has a separate capital and withdrawal account. a. True b. False 15. One reason that the division of income (loss) is reported at the bottom of the income statement is to provide the information for recording a closing entry. a. True b. False 16. If the partnership agreement does not otherwise state, partnership income is divided in proportion to the individual partner's capital balance. a. True b. False 17. The salary allocation to partners used in dividing net income would also appear as salary expense on the partnership income statement. a. True b. False 18. If the articles of partnership provide for annual salary allowances of $36,000 and $18,000 to Partner X and Partner Y, respectively, and net income is $30,000, Partner X's share of net income is $20,000. a. True b. False 19. If the net income of a partnership is less than the total of the allowances provided by the partnership agreement, the difference must be divided among the partners according to the income-sharing ratio. a. True b. False 20. The amount that a partner withdraws as a monthly salary allowance does not affect the division of net income. a. True b. False 21. Partner A devotes full time and Partner B devotes one-half time to their partnership. If the partnership agreement is silent concerning the division of net income, Partner A will receive a $20,000 share of a net income of $30,000. Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies a. True b. False 22. In the distribution of income, the net income is less than the salary and interest allowances granted; the remaining balance will be a negative amount that must be divided among the partners as though it were a net loss. a. True b. False 23. Details of the division of partnership income should normally be disclosed in the financial statements. a. True b. False 24. When a partner withdraws from the partnership, the partnership dissolves. a. True b. False 25. When a partner invests noncash assets in a partnership, the assets are recorded at the partner's book value. a. True b. False 26. A new partner contributes accounts receivable to a partnership, which appears in the ledger of his sole proprietorship at $20,500, and there was an allowance for doubtful accounts of $750. If $600 of the accounts receivable are completely worthless, the partnership Accounts Receivable should be debited for $19,900. a. True b. False 27. Many partnerships provide for the admission of new partners or withdrawals of present partners by amending existing partnership agreements, so that the firm may continue to operate without executing a new agreement. a. True b. False 28. A partnership's asset accounts should be changed from cost to fair market value when a new partner is admitted to a firm or an existing partner withdraws or dies. a. True b. False 29. In admitting a new partner who purchases an interest, the capital interest of the new partner is obtained from the current partners and both the total assets and total capital are increased. a. True b. False 30. When a new partner purchases the entire interest of an old partner, the new partner's capital account should be credited for the amount he or she paid to the old partner. a. True b. False
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 31. The asset revaluation account is a permanent balance sheet account. a. True b. False 32. When a new partner is admitted by making an investment in the partnership, the old partners' capital accounts are always credited. a. True b. False 33. When a new partner is admitted by making an investment of assets in the partnership and the new partner has to pay a premium for admission, a bonus is divided among the old partners' capital accounts. a. True b. False 34. Sarno has a capital balance of $42,000 after adjusting the assets to fair market value. Minton contributes $22,000 to receive a 30% interest in the new partnership. The bonus paid by Minton is $2,800. a. True b. False 35. If not enough partnership cash or other assets are available to pay the withdrawing partner, a liability may be created for the amount owed the withdrawing partner. a. True b. False 36. When a partner withdraws from the partnership by selling his or her interest back to the partnership, the remaining partners must pay the withdrawing partner a specified amount from their personal assets. a. True b. False 37. X sells to A one-half of a partnership capital interest that totals $70,000 for $40,000. A's capital account in the partnership should be credited for $40,000. a. True b. False 38. When a new partner is admitted to a partnership, all partnership assets should be revised to reflect current values. a. True b. False 39. If a new partner is to be admitted to a partnership and a bonus is attributed to the old partnership, the bonus should be divided between the capital accounts of the original partners according to their capital balances. a. True b. False 40. When a new partner is admitted to a partnership, bonuses attributable to either the old partnership or to the incoming partner may be recognized in accordance with the agreement among the partners. a. True Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies b. False 41. When the asset revaluation account is used to revalue assets prior to admitting a new partner, Asset Revaluation is debited with an upward revaluation of an asset. a. True b. False 42. In a partnership liquidation, gains and losses on the sale of partnership assets are divided among the partners' capital accounts on the basis of their capital balances. a. True b. False 43. If the share of losses on realization of the sale of noncash assets exceeds the balance in a partner's capital account, the resulting balance is called a deficiency. a. True b. False 44. In a partnership liquidation, if a partner has a debit capital balance in his or her capital account, he or she is responsible for contributing personal assets sufficient to eliminate the deficit. a. True b. False 45. The process of winding up the affairs of a partnership is referred to as realization. a. True b. False 46. The distribution of cash, as the final process in winding up the affairs of a partnership, is based on the income-sharing ratio. a. True b. False 47. In the liquidating process, any uncollectible deficiency becomes a loss to the partnership and is divided among the remaining partners' capital balances based on their income-sharing ratio. a. True b. False 48. After all noncash assets have been converted to cash and all liabilities paid, A, B, and C have capital balances of $10,000 (debit), $5,000 (debit), and $25,000 (credit). The cash available for distribution to the partners is $10,000. a. True b. False 49. The statement of members’ equity is used for equity reporting of a partnership. a. True b. False 50. The partner capital accounts may change due to capital additions, net income, or withdrawals. Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies a. True b. False 51. The equity reporting for a limited liability company is similar to that of a partnership, but the changes in capital are shown on a statement of members' equity. a. True b. False 52. The chart of accounts for a partnership, with the exception of additional drawing and capital accounts, does not differ from the chart of accounts for a sole proprietorship. a. True b. False 53. Revenue per employee may be used to measure partnership (LLC) efficiency. a. True b. False Multiple Choice 54. Which of the following is a characteristic of a general partnership? a. The partners have co-ownership of partnership property. b. The partnership is subject to federal income tax. c. The partnership has an unlimited life. d. The partners have limited liability. 55. Which of the following is not a characteristic of a general partnership? a. The partnership is created by a contract. b. Mutual agency exists. c. Partners share equally in net income or net losses unless an agreement states differently. d. Dissolution occurs only when all partners agree. 56. Which of the following is a characteristic of a general partnership? a. simple to form b. limitation on legal liability c. unlimited life d. not taxable 57. Which of the following is a characteristic of a partnership? a. taxable b. simple to form c. limited liability d. limited life 58. An advantage of the proprietorship form of business organization is a. unlimited liability Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies b. mutual agency c. ease of formation d. limited life 59. The characteristic of a partnership that gives the authority to any partner to legally bind the partnership and all other partners to business contracts is called a. unlimited liability b. ease of formation c. mutual agency d. dissolution 60. When a limited liability company is formed, a. the partnership activities are limited b. all partners have limited liability c. some of the partners have limited liability d. none of the partners has limited liability 61. Which of the following forms of legal business entity provides limited liability to its owners but is not taxable? a. sole proprietorship b. corporation c. partnership d. limited liability company (LLC) 62. Which of the following is not a characteristic of a limited liability company? a. unlimited life b. limited legal liability c. taxable d. moderate ability to raise capital 63. When a partnership is formed, assets contributed by the partners should be recorded on the partnership books at their a. book values on the partners' books prior to their being contributed to the partnership b. fair market value at the time of the contribution c. original costs to the partner contributing them d. assessed values for property tax purposes 64. As part of the initial investment, Ray Blake contributes equipment that had originally cost $125,000 and on which accumulated depreciation of $100,000 has been recorded. If similar equipment would cost $150,000 to replace and the partners agree on a valuation of $29,000 for the contributed equipment, what amount should be debited to the equipment account? a. $29,000 b. $150,000 c. $125,000 d. $100,000 65. Luke and John share income and losses in a 2:1 ratio (2/3 to Luke and 1/3 to John) after allowing for salaries of Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies $48,000 to Luke and $60,000 to John. Net income for the partnership is $93,000. Income should be divided as a. Luke, $46,500; John, $46,500 b. Luke, $55,000; John, $38,000 c. Luke, $65,000; John, $28,000 d. Luke, $38,000; John, $55,000 66. As part of the initial investment, Jackson contributes accounts receivable that had a balance of $22,500 in the accounts of a sole proprietorship. Of this amount, $3,000 is deemed completely worthless. For the remaining accounts, the partnership will establish a provision for possible future uncollectible accounts of $1,500. The amount debited to Accounts Receivable for the new partnership is a. $18,000 b. $22,500 c. $21,000 d. $19,500 67. Jordon and Heidi share income equally. For the current year, the partnership net income is $40,000. Jordon made withdrawals of $14,000, and Heidi made withdrawals of $15,000. At the beginning of the year, the capital account balances were: Jordon, Capital, $40,000; Heidi, Capital, $58,000. Jordon’s capital account balance at the end of the year is a. $68,000 b. $54,000 c. $74,000 d. $46,000 68. Sadie and Sam share income equally. For the current year, the partnership net income is $40,000. Sadie made withdrawals of $14,000 and Sam made withdrawals of $15,000. At the beginning of the year, the capital account balances were: Sadie, Capital, $42,000; Sam, Capital, $58,000. Sam’s capital account balance at the end of the year is a. $78,000 b. $43,000 c. $63,000 d. $93,000 69. Partnership income and losses are usually divided on the basis of interest, salaries, and stated ratios because a. partners seldom contribute time and resources equally b. this method reflects the amount of time devoted to the partnership by the partners c. it is simpler than following the legal rules d. it prevents arguments among the partners 70. Carrie and Callie form a partnership in which Carrie contributes $85,000 in assets and agrees to devote half time to the partnership. Callie contributes $50,000 in assets and agrees to devote full time to the partnership. If no additional information is available, how will Carrie and Callie share in the division of income? a. 63% to Carrie and 37% to Callie b. 33% to Carrie and 67% to Callie c. 50% to Carrie and 50% to Callie d. 67% to Carrie and 33% to Callie 71. Seth and Rachel have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies partnership include the following provisions regarding the division of net income: interest on original investments at 15%; salary allowances of $24,000 and $20,000, respectively; and the remainder to be divided equally. How much of the net income of $90,000 is allocated to Seth? a. $42,750 b. $47,750 c. $45,000 d. $43,250 72. Seth and Beth have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 10%; salary allowances of $27,000 and $18,000, respectively; and the remainder to be divided equally. How much of the net income of $42,000 is allocated to Seth? a. $20,000 b. $23,000 c. $32,000 d. $0 73. Seth and Rachel have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 10%; salary allowances of $27,000 and $18,000, respectively; and the remainder divided equally. How much of the net loss of $16,000 is allocated to Seth? a. $8,000 b. $6,000 c. $4,000 d. $16,000 74. If there is no written agreement as to the way income will be divided among partners, a. they will share income and losses equally b. they will share income and losses according to their capital balances c. they will share income and losses according to the time devoted to the business d. there really is no partnership 75. Jefferson has a capital balance of $65,000 and devotes full time to a partnership. Washington has a capital balance of $45,000 and devotes half time to the partnership. If no other information is available regarding distributions, how should net income be divided? a. 59% to Jefferson and 41% to Washington b. 50% to Jefferson and 50% to Washington c. 41% to Jefferson and 59% to Washington d. 33% to Jefferson and 67% to Washington 76. Details of the division of net income for a partnership should be disclosed in the a. Assets section of the balance sheet b. partners’ subsidiary ledger c. statement of cash flows d. partnership income statement Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 77. Patty and Paul are partners who share income in the ratio of 3:2 (3/5 to Patty and 2/5 to Paul). Their capital balances are $90,000 and $130,000, respectively, on January 1. The partnership generated net income of $40,000 for the year. What is Paul’s capital balance after closing the revenue and expense accounts to the capital accounts? a. $120,000 b. $146,000 c. $164,000 d. $160,000 78. Rex and Kelsey are partners who share income in the ratio of 3:2 (3/5 to Rex and 2/5 to Kelsey). Their capital balances are $95,000 and $140,000, respectively, on January 1. The partnership generated net income of $40,000 for the year. What is Rex’s capital balance after closing the revenue and expense accounts to the capital accounts? a. $71,000 b. $119,000 c. $146,000 d. $111,000 Use this information to answer the questions that follow. Sandra and Kelsey are forming a partnership. Sandra will invest a piece of equipment with a book value of $7,500 and a fair market value of $18,000. Kelsey will invest a building with a book value of $40,000 and a fair market value of $44,000. 79. What amount will be recorded to the building account? a. $24,000 b. $14,000 c. $40,000 d. $44,000 80. What amount will be recorded to Sandra’s capital account? a. $18,000 b. $7,500 c. $25,500 d. $10,500 81. What amount will be recorded to Kelsey’s capital account? a. $14,000 b. $24,000 c. $40,000 d. $44,000 82. Hannah Johnson contributed equipment, inventory, and $53,000 cash to a partnership. The equipment had a book value of $25,000 and a market value of $28,000. The inventory had a book value of $50,000 but only had a market value of $15,000 due to obsolescence. The partnership also assumed a $12,000 note payable owed by Hannah that was originally used to purchase the equipment. What amount should be recorded to Hannah’s capital account? a. $96,000 Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies b. $84,000 c. $108,000 d. $116,000 83. Henry Jones contributed equipment, inventory, and $44,000 cash to a partnership. The equipment had a book value of $35,000 and market value of $28,000. The inventory had a book value of $25,000 but only had a market value of $12,000 due to obsolescence. The partnership also assumed a $15,000 note payable owed by Henry that was originally used to purchase the equipment. What amount should be recorded to Henry’s capital account? a. $104,000 b. $89,000 c. $69,000 d. $84,000 84. Tanner and Teresa share income and losses in a 2:1 ratio (2/3 to Tanner and 1/3 to Teresa) after allowing for salaries of $42,000 to Tanner and $60,000 to Teresa. Net income of the partnership is $132,000. How should income be divided for Tanner and Teresa? a. Tanner, $57,000; Teresa, $75,000 b. Tanner, $58,000; Teresa, $74,000 c. Tanner, $75,000; Teresa, $57,000 d. Tanner, $62,000; Teresa, $70,000 85. Carla and Eliza share income equally. For the current year, the partnership net income is $40,000. Carla made withdrawals of $12,000, and Eliza made withdrawals of $21,000. At the beginning of the year, the capital account balances were: Carla, Capital, $42,000; Eliza, Capital, $55,000. Eliza’s capital account balance at the end of the year is a. $34,000 b. $54,000 c. $78,000 d. $75,000 86. Xavier and Yolanda have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 20%; salary allowances of $27,000 and $18,000, respectively; and the remainder to be divided equally. How much of the net income of $81,000 is allocated to Xavier? a. $37,000 b. $40,000 c. $42,000 d. $42,500 87. Xavier and Yolanda have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 20%; salary allowances of $34,000 and $26,000, respectively; and the remainder to be divided equally. How much of the net income of $120,000 is allocated to Yolanda? a. $46,000 b. $61,000 Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies c. $60,000 d. $66,000 88. Xavier and Yolanda have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 20%; salary allowances of $34,000 and $26,000, respectively; and the remainder to be divided equally. How much of the net income of $120,000 is allocated to Xavier? a. $59,000 b. $61,000 c. $49,000 d. $44,000 89. Xavier and Yolanda have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 10%; salary allowances of $38,000 and $28,000, respectively; and the remainder to be divided equally. How much of the net income of $77,000 is allocated to Yolanda? a. $77,000 b. $38,000 c. $36,000 d. $44,000 90. Xavier and Yolanda have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 10%; salary allowances of $38,000 and $28,000, respectively; and the remainder to be divided equally. How much of the net income of $77,000 is allocated to Xavier? a. $66,000 b. $41,000 c. $36,000 d. $43,000 91. Xavier and Yolanda have original investments of $50,000 and $100,000, respectively, in a partnership. The articles of partnership include the following provisions regarding the division of net income: interest on original investment at 10%; salary allowances of $27,000 and $18,000, respectively; and the remaining income (loss) equally. How much of the net loss of $(6,000) is allocated to Yolanda? a. $(1,000) b. $(3,000) c. $(5,000) d. $0 92. Tucker and Titus are partners who share income in the ratio of 3:1 (3/4 to Tucker and 1/4 to Titus). Their capital balances are $40,000 and $60,000, respectively. The partnership generated net income of $40,000 for the year. What is Tucker’s capital balance after closing the revenue and expense accounts to the capital accounts? a. $40,000 b. $70,000 c. $10,000 d. $80,000 Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 93. Tomas and Saturn are partners who share income in the ratio of 3:1 (3/4 to Tomas and 1/4 to Saturn). Their capital balances are $80,000 and $120,000, respectively. The partnership generated net income of $30,000. What is Tomas’s capital balance after closing the revenue and expense accounts to the capital accounts? a. $102,500 b. $22,500 c. $57,500 d. $127,500 94. Tomas and Saturn are partners who share income in the ratio of 3:1 (3/4 to Tomas and 1/4 to Saturn). Their capital balances are $80,000 and $120,000, respectively. The partnership generated net income of $30,000. What is Saturn’s capital balance after closing the revenue and expense accounts to the capital accounts? a. $102,500 b. $120,000 c. $112,500 d. $127,500 95. Tomas and Saturn are partners who share income in the ratio of 3:1 (3/4 to Tomas and 1/4 to Saturn). Their capital balances are $40,000 and $60,000, respectively. The partnership generated net income of $20,000. What is Saturn’s capital balance after closing the revenue and expense accounts to the capital accounts? a. $55,000 b. $75,000 c. $45,000 d. $65,000 96. Franco and Jason share income and losses in a 2:1 (2/3 to Franco and 1/3 to Jason) ratio after allowing for salaries of $15,000 and $30,000, respectively. If the partnership suffers a $15,000 loss, by how much would Jason’s capital account increase? a. $10,000 b. $20,000 c. $40,000 d. $25,000 97. Singer and McMann are partners in a business. Singer’s original capital was $40,000 and McMann’s was $60,000. They agree to salaries of $12,000 and $18,000 for Singer and McMann, respectively, and 10% interest on original capital. If they agree to share the remaining profits and losses on a 3:2 ratio (3/5 to Singer and 2/5 to McMann), what will Singer’s share of the income be if the income for the year is $50,000? a. $24,000 b. $22,000 c. $16,000 d. $23,400 98. Singer and McMann are partners in a business. Singer’s original capital was $40,000 and McMann’s was $60,000. They agree to salaries of $12,000 and $18,000 for Singer and McMann, respectively, and 10% interest on original capital. If they agree to share the remaining profits and losses on a 3:2 ratio (3/5 to Singer and 2/5 to McMann), what will McMann's share of the income be if the income for the year is $30,000? Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies a. $20,000 b. $18,000 c. $18,600 d. $17,400 99. Singer and McMann are partners in a business. Singer’s original capital was $40,000 and McMann’s was $60,000. They agree to salaries of $12,000 and $18,000 for Singer and McMann, respectively, and 10% interest on original capital. If they agree to share the remaining profits and losses in a 3:2 ratio (3/5 to Singer and 2/5 to McMann), what will Singer’s share of the income (loss) be if the net loss for the year is $(10,000)? a. $(12,600) b. $(14,000) c. $(6,000) d. $(10,000) 100. Paul and Roger are partners who share income in the ratio of 3:2 (3/5 to Paul and 2/5 to Roger). Their capital balances are $90,000 and $130,000, respectively. The partnership generated net income of $50,000 for the year. What is Roger’s capital balance after closing the revenue and expense accounts to the capital accounts? a. $155,000 b. $150,000 c. $110,000 d. $115,000 101. Paul and Roger are partners who share income in the ratio of 3:2 (3/5 to Paul and 2/5 to Roger). Their capital balances are $90,000 and $130,000, respectively. The partnership generated net income of $50,000 for the year. What is Paul’s capital balance after closing the revenue and expense accounts to the capital accounts? a. $108,000 b. $120,000 c. $115,000 d. $180,000 102. Jackson and Campbell have capital balances of $100,000 and $300,000, respectively. Jackson devotes full time and Campbell devotes one-half time to the business. Determine the division of $150,000 of net income when there is no reference to division in the partnership agreement. a. $75,000 and $75,000 b. $37,500 and $112,500 c. $100,000 and $50,000 d. $112,500 and $37,500 103. Jackson and Campbell have capital balances of $100,000 and $300,000, respectively. Jackson devotes full time and Campbell devotes one-half time to the business. Determine the division of $150,000 of net income in the ratio of time devoted to business. a. $75,000 and $75,000 b. $37,500 and $112,500 c. $100,000 and $50,000 d. $112,500 and $37,500 Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 104. Jackson and Campbell have capital balances of $100,000 and $300,000, respectively. Jackson devotes full time and Campbell devotes one-half time to the business. Determine the division of $150,000 of net income in the ratio of capital balances. a. $75,000 and $75,000 b. $37,500 and $112,500 c. $100,000 and $50,000 d. $50,000 and $100,000 105. Singer and McMann are partners in a business. Singer’s original capital was $40,000 and McMann’s was $60,000. They agree to salaries of $12,000 and $18,000 for Singer and McMann, respectively, and 10% interest on original capital. If they agree to share the remaining profits and losses on a 3:2 ratio, what will McMann’s share of the income be if the income for the year is $15,000? a. $6,000 b. $9,400 c. $12,600 d. $14,000 106. Lambert invests $20,000 for a 1/3 interest in a partnership in which the other partners have capital totaling $34,000 before admitting Lambert. What is Lambert’s capital after admission? a. $18,000 b. $20,000 c. $6,667 d. $11,333 107. Douglas pays Selena $45,000 for her 30% interest in a partnership with net assets of $125,000. Following this transaction, Douglas’s capital account should have a credit balance of a. $37,500 b. $45,000 c. $13,500 d. more than $45,000 108. Nick is admitted to an existing partnership by investing cash. Nick agrees to pay a bonus for his ownership interest because of the past success of the partnership. When Nick’s investment in the partnership is recorded, a. his capital account will be credited for more than the cash he invested b. his capital account will be credited for the amount of cash he invested c. a bonus will be credited for the amount of cash he invested d. a bonus will be distributed to the old partners' capital accounts 109. Bobbi and Stuart are partners. The partnership capital of Bobbi is $40,000 and that of Stuart is $70,000. Bobbi sells his interest in the partnership to John for $50,000. The journal entry for the admission of John as a new partner would include a credit to a. John’s capital account for $40,000 b. Stuart’s capital account for $10,000 c. John’s capital account for $50,000 d. John’s capital account for $40,000 and a credit to Stuart’s capital account for $10,000 Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 110. When a partner dies, the capital account balances of the remaining partners a. will increase b. will decrease c. will remain the same d. may increase, decrease, or remain the same 111. A partner withdraws from a partnership by selling her interest to another person who currently is not associated with the firm. As a result of this transaction, the capital account balance of the other partners in the partnership a. will increase b. will decrease c. will remain the same d. may increase, decrease, or remain the same 112. Samuel and Darci are partners. The partnership capital for Samuel is $50,000 and that of Darci is $60,000. Josh is admitted as a new partner by investing $50,000 cash. Josh is given a 20% interest in return for his investment. The amount of the bonus to the old partners is a. $0 b. $18,000 c. $8,000 d. $10,000 113. Abby and Bailey are partners who share income in the ratio of 2:1 and have capital balances of $60,000 and $30,000, respectively. With the consent of Bailey, Sandra buys one-half of Abby's interest for $35,000. For what amount will Abby's capital account be debited to record admission of Sandra to the partnership? a. $40,000 b. $15,000 c. $35,000 d. $30,000 114. A new partner may be admitted to a partnership by a. inheriting a partnership interest b. contributing assets to the partnership c. purchasing a specific quantity of assets from the partnership d. a written approval under the federal law 115. At the end of the accounting period, the balance in the asset revaluation account will a. appear as an asset on the balance sheet b. appear as an expense on the income statement c. be closed to the capital accounts d. be distributed to the accumulated depreciation accounts 116. When a new partner is admitted to a partnership, there should be a(n) a. revaluation of assets b. realization of assets c. allocation of assets Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies d. return of assets 117. When a new partner is admitted to a partnership, there should be a(n) a. increase in the total assets of the partnership b. new capital account added to the ledger for the new partner c. increase in the total owners' equity of the partnership d. debit amount to the partner’s capital account for the cash received by the current partner 118. When an additional partner is admitted to a partnership by contribution of assets to the partnership, a. the total assets of the partnership do not change b. no liabilities can be contributed at the same time c. the amount of the cash contribution is the same as the amount of the debit to the new partner's capital account d. the total of the owners' equity accounts increases 119. When a new partner is admitted to a partnership, a bonus a. may be attributable to the existing partners b. may only result from more cash being given by the new partner than the value of the assets being purchased c. agreed upon by the partners is recorded as an asset so long as the amount is within the range set by the SEC d. is not recorded 120. The Calvin-Dogwood Partnership plans to form a new partnership with Alexis. The existing partnership owns inventory that was purchased for $90,000, has a current replacement cost of $85,900, and is priced to sell for $125,000. At what amount should the inventory be recorded in the accounts of the new partnership if Alexis is to be admitted? a. $129,100 b. $85,900 c. $90,000 d. $125,000 121. Immediately prior to the admission of Abbott, the Smith-Jones Partnership determines that equipment that cost $20,000, with accumulated depreciation of $5,000, has a current market value of $12,000. Assuming an asset revaluation account is used, the journal entry to revalue the equipment will include a. a debit to Asset Revaluation of $12,000 b. a debit to Asset Revaluation of $3,000 c. a credit to Equipment of $3,000 d. a credit to Accumulated Depreciation of $3,000 122. Benson and Orton are partners who share income in the ratio of 2:3 and have capital balances of $60,000 and $40,000, respectively. Ramsey is admitted to the partnership and is given a 40% interest by investing $20,000. What is Benson’s capital balance after admitting Ramsey? a. $20,000 b. $24,000 c. $48,800 d. $71,200 123. Benson and Orton are partners who share income in the ratio of 2:3 and have capital balances of $60,000 and Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies $40,000, respectively. Ramsey is admitted to the partnership and is given a 10% interest by investing $20,000. What is Orton’s capital balance after admitting Ramsey? a. $44,800 b. $35,200 c. $20,000 d. $16,000 124. Benton and Orton are partners who share income in the ratio of 1:3 and have capital balances of $70,000 and $30,000, respectively. Ramsey is admitted to the partnership and is given a 40% interest by investing $20,000. What is Benton’s capital balance after admitting Ramsey? a. $20,000 b. $7,000 c. $70,000 d. $63,000 125. Benson and Orton are partners who share income in the ratio of 1:3 and have capital balances of $70,000 and $30,000, respectively. Ramsey is admitted to the partnership and is given a 40% interest by investing $20,000. What is Orton’s capital balance after admitting Ramsey? a. $20,000 b. $9,000 c. $70,000 d. $63,000 126. Singer and McMann are partners in a business. Singer’s original capital was $40,000 and McMann’s was $60,000. They agree to salaries of $12,000 and $18,000 for Singer and McMann, respectively, and 10% interest on original capital. If they agree to share the remaining profits and losses in a 3:2 ratio, what will Singer’s share of the income be if the income for the year is $15,000? a. $9,000 b. $2,400 c. $1,000 d. $5,600 127. Immediately prior to the admission of Allen, the Sanson-Jeremy Partnership assets had been adjusted to current market prices and the capital balances of Sanson and Jeremy were $80,000 and $120,000, respectively. If the parties agree that the business is worth $240,000, what is the amount of bonus that should be recognized in the accounts at the admission of Allen? a. $60,000 b. $80,000 c. $40,000 d. $100,000 128. The Craig-Doran Partnership plans to form a new partnership with Alexis. The existing partnership owns inventory that was purchased for $85,000, has a current replacement cost of $54,500, and is priced to sell for $98,000. At what amount should the inventory be recorded in the accounts of the new partnership if Alexis is to be admitted? a. $98,000 b. $54,500 Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies c. $85,000 d. $79,167 129. A ratio of 4:2:1 is the same as a. 40%:20%:10% b. 4/7:2/7:1/7 c. 4/10:2/10:1/20 d. 7/4:7/2:7/1 130. Alpha and Beta are partners who share income in the ratio of 1:2 and have capital balances of $40,000 and $70,000, respectively, at the time they decide to terminate the partnership. Noncash assets with a book value of $110,000 are sold for $50,000. What amount of loss on realization should be allocated to Alpha? a. $60,000 b. $20,000 c. $30,000 d. $50,000 131. Teri, Doug, and Brian are partners with capital balances of $20,000, $30,000, and $50,000, respectively. They share income and losses in the ratio of 3:2:1. Revenue accounts for the period total $350,000. Expense accounts for the period total $380,000. The revenue and expense accounts are closed to the capital accounts. Doug withdraws from the partnership. How much cash does he receive upon withdrawal? a. $30,000 b. $20,000 c. $40,000 d. $24,000 132. A partnership liquidation occurs when a. a new partner is admitted b. a partner dies c. the ownership interest of one partner is sold to a new partner d. the assets are sold, liabilities paid, and business operations terminated 133. The balance sheet of Morgan and Rockwell was as follows immediately prior to the partnership's liquidation: cash, $20,000; other assets, $160,000; liabilities, $40,000; Morgan, capital, $60,000; Rockwell, capital, $80,000. The other assets were sold for $139,000. Morgan and Rockwell share profits and losses in a 2:1 ratio. As a final cash distribution from the liquidation, Morgan will receive cash totaling a. $46,000 b. $51,000 c. $60,000 d. $49,500 134. Harriet, Mickey, and Zack decide to liquidate their partnership. All assets are sold, and the liabilities are paid. Following these transactions, the capital balances and profit and loss percentages are as follows: Harriet, $27,000 and 30%; Mickey, $(12,000) and 40%; Zack, $43,000 and 30%. Mickey is unable to contribute any assets to reduce the deficit. How much cash will Harriet receive as a result of the partnership liquidation? a. $27,000 Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies b. $21,000 c. $23,400 d. $15,000 135. The remaining cash of a partnership (after creditors have been paid) upon liquidation is divided among partners according to their a. capital balances b. contribution of assets c. drawing balances d. income-sharing ratio 136. A gain or loss on realization is divided among partners according to their a. income-sharing ratio b. capital balances c. drawing balances d. contribution of assets 137. Adriana and Belen are partners who share income in the ratio of 3:2 and have capital balances of $50,000 and $90,000, respectively, at the time they decide to terminate the partnership. After all noncash assets are sold and all liabilities are paid, there is a cash balance of $90,000. How much cash should be distributed to Adriana? a. $50,000 b. $20,000 c. $30,000 d. $45,000 138. Everett, Miguel, and Ramona are partners, sharing income 1:2:3. After selling all of the assets for cash, dividing losses on realization, and paying liabilities, the balances in the capital accounts are as follows: Everett, $50,000 Cr.; Miguel, $40,000 Dr.; and Ramona, $30,000 Cr. How much cash is available for distribution to the partners? a. $120,000 b. $30,000 c. $40,000 d. $90,000 139. Everett, Miguel, and Ramona are partners, sharing income 1:2:3. After selling all of the assets for cash, dividing losses on realization, and paying liabilities, the balances in the capital accounts are as follows: Everett, $50,000 Cr.; Miguel, $40,000 Dr.; and Ramona, $30,000 Cr. How much cash should be distributed to Everett assuming that Miguel pays the deficiency? a. $50,000 b. $20,000 c. $30,000 d. $40,000 140. Antonio and Barbara are partners who share income in the ratio of 1:2 and have capital balances of $40,000 and $70,000, respectively, at the time they decide to terminate the partnership. After all noncash assets are sold and all liabilities are paid, there is a cash balance of $80,000. What amount of loss on realization should be allocated to Barbara? a. $80,000 Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies b. $10,000 c. $20,000 d. $30,000 141. Soledad and Winston are partners who share income in the ratio of 1:3 and have capital balances of $100,000 and $140,000, respectively, at the time they decide to terminate the partnership. After all noncash assets are sold and all liabilities are paid, there is a cash balance of $130,000. What amount of loss on realization should be allocated to Soledad? a. $60,000 b. $27,500 c. $92,500 d. $32,500 142. Soledad and Winston are partners who share income in the ratio of 1:3 and have capital balances of $100,000 and $140,000, respectively, at the time they decide to terminate the partnership. After all noncash assets are sold and all liabilities are paid, there is a cash balance of $130,000. What amount of loss on realization should be allocated to Winston? a. $110,000 b. $97,500 c. $42,500 d. $82,500 143. Partners Ken and Macki each have a $40,000 capital balance and share income and losses in the ratio of 3:2. Cash equals $20,000, noncash assets equal $120,000, and liabilities equal $60,000. If the noncash assets are sold for $80,000, Macki’s capital account will a. decrease by $16,000 b. decrease by $24,000 c. increase by $24,000 d. decrease by $40,000 144. Partners Ken and Macki each have a $40,000 capital balance and share income and losses in the ratio of 3:2. Cash equals $20,000, noncash assets equal $120,000, and liabilities equal $60,000. If the noncash assets are sold for $50,000, and each partner is personally insolvent, Partner Macki will eventually receive cash of a. $0 b. $10,000 c. $12,000 d. $20,000 145. Partners Ken and Macki each have a $40,000 capital balance and share income and losses in the ratio of 3:2. Cash equals $20,000, noncash assets equal $120,000, and liabilities equal $60,000. If the noncash assets are sold for $60,000, and both partners agree to make up any capital deficits with personal cash contributions, Partner Macki will eventually receive cash of a. $0 b. $4,000 c. $16,000 d. $24,000 Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies Use this information to answer the questions that follow. The capital accounts of Harrison and Marti have balances of $160,000 and $110,000, respectively, on January 1, the beginning of the current fiscal year. On April 10, Harrison invested an additional $20,000. During the year, Harrison and Marti withdrew $96,000 and $78,000, respectively, and net income for the year was $264,000. The articles of partnership make no reference to the division of net income. 146. Based on this information, the statement of partners’ equity would show what amount in the capital account for Marti on December 31? a. $216,000 b. $164,000 c. $380,000 d. $52,000 147. Based on this information, the statement of partners’ equity would show what amount in the capital account for Harrison on December 31? a. $216,000 b. $164,000 c. $380,000 d. $52,000 148. Based on this information, the statement of partners’ equity would show what amount as total capital for the partnership on December 31? a. $216,000 b. $164,000 c. $380,000 d. $52,000 Use this information to answer the questions that follow. The capital accounts of Hawk and Martin have balances of $160,000 and $140,000, respectively, on January 1, the beginning of the current fiscal year. On April 10, Hawk invested an additional $10,000. During the year, Hawk and Martin withdrew $86,000 and $68,000, respectively, and net income for the year was $258,000. The articles of partnership make no reference to the division of net income. 149. Based on this information, the statement of partners’ equity would show what amount in the capital account for Martin on December 31? a. $173,000 b. $211,000 c. $201,000 d. $232,000 150. Based on this information, the statement of partners’ equity would show what amount in the capital account for Hawk on December 31? a. $211,600 b. $213,000 Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies c. $201,000 d. $203,000 151. Based on this information, the statement of partners’ equity would show what amount as total capital for the partnership on December 31? a. $384,600 b. $412,600 c. $404,000 d. $414,000 152. Paradise Architects had total revenue of $5,400,000 and revenue per employee of $200,000 in 20Y1. In 20Y2, total revenue increased to $5,700,000 and the number of employees expanded to 30. Did employee efficiency increase or decrease with the expansion, and by how much? a. increased by $300,000 b. increased by $10,000 c. decreased by $10,000 d. decreased by $100,000 Matching Match each of the following statements to the term (a–h) it best describes. a. Partnership b. Partnership agreement c. Distribution of remaining cash to partners d. Mutual agency e. Equally f. Death of a partner g. Liquidation h. Unlimited liability 153. When a partnership cannot pay its debts with business assets, the partners must use personal assets to meet the debt. 154. Agreement that is the contract between partners 155. A voluntary association of two or more persons who co-own a business for profit 156. Every partner can bind the business to a contract within the scope of the partnership’s regular business operations. 157. The process of going out of business by selling the entity’s assets and paying its liabilities 158. Without an agreement, the law will stipulate this method of sharing profits and losses. 159. The final step in the liquidation of a partnership 160. Causes the closing of accounts and settling with a partner's estate Match each of the following statements to the term (a–h) it best describes. Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies a. Deficiency b. Realization c. Proprietorship d. Partnership e. Mutual agency f. Liquidation g. Income-sharing ratio h. Statement of partnership equity 161. Where changes in partner capital accounts for a period of time are reported 162. The share of loss on realization is greater than the balance in partner capital 163. Each partner may act on behalf of the entire partnership so that the liabilities created by one partner become the liabilities of all partners 164. An association of two or more persons to own and manage a business for profit 165. Business owned by a single individual 166. A step during liquidation when partnership assets are sold 167. Used to divide the excess of allowances over loss when net losses occur 168. The winding-up process of a partnership Subjective Short Answer 169. What is a partnership? Describe a partnership in terms of its characteristics. 170. Jesse and Tim form a partnership by combining the assets of their separate businesses. Jesse contributes accounts receivable with a face amount of $50,000 and equipment with a cost of $180,000 and accumulated depreciation of $100,000. The partners agree that the equipment is to be valued at $58,000, that $3,500 of the accounts receivable are completely worthless and are not to be accepted by the partnership, and that $2,000 is a reasonable allowance for the uncollectibility of the remaining accounts receivable. Tim contributes cash of $21,000 and merchandise inventory of $44,500. The partners agree that the merchandise inventory is to be valued at $48,000. Journalize the entries in the partnership accounts for (a) Jesse’s investment and (b) Tim’s investment. 171. Barton and Fallows form a partnership by combining the assets of their separate businesses. Barton contributes accounts receivable with a face amount of $50,000 and equipment with a cost of $190,000 and accumulated depreciation of $100,000. The partners agree that the equipment is to be valued at $85,000, that $3,500 of the accounts receivable are completely worthless and are not to be accepted by the partnership, and that $1,500 is a reasonable allowance for the uncollectibility of the remaining accounts receivable. Fallows contributes cash of $28,500 and merchandise inventory of $55,500. The partners agree that the merchandise inventory is to be valued at $60,000. Journalize the entries in the partnership accounts for (a) Barton’s investment and (b) Fallows’s investment. 172. Trevor Smith contributed equipment, inventory, and $54,000 cash to a partnership. The equipment had a book value of $30,000 and a market value of $36,000. The inventory had a book value of $60,000, but only had a market value of $20,000, due to obsolescence. The partnership also assumed a $17,000 note payable owed by Smith that was used Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies originally to purchase the equipment. Journalize the entry for Smith’s contribution to the partnership. 173. Emmett and Sierra formed a partnership dividing income as follows: 1. Annual salary allowance to Emmett of $48,000 2. Interest of 8% on each partner’s capital balance on January 1 3. Any remaining net income divided equally Emmett and Sierra had $25,000 and $140,000, respectively, in their January 1 capital balances. Net income for the year was $200,000. How much net income should be distributed to Emmett? 174. Emerson and Dakota formed a partnership dividing income as follows: 1. Annual salary allowance to Emerson of $58,000 2. Interest of 8% on each partner’s capital balance on January 1 3. Any remaining net income divided equally Emerson and Dakota had $25,000 and $140,000, respectively, in their January 1 capital balances. Net income for the year was $220,000. How much net income should be distributed to Dakota? 175. Holly and Luke formed a partnership, investing $240,000 and $80,000, respectively. Determine their participation in the year’s net income of $200,000 under each of the following independent assumptions: a. b. c. d. e.
No agreement concerning division of net income Divided in the ratio of original capital investment Interest at the rate of 15% allowed on original investments and the remainder divided in the ratio of 2:3 (2/5 to Holly and 3/5 to Luke) Salary allowances of $50,000 and $70,000, respectively, and the balance divided equally Allowance of interest at the rate of 15% on original investments, salary allowances of $50,000 and $70,000, respectively, and the remainder divided equally
176. Holly and Luke formed a partnership, investing $240,000 and $80,000, respectively. Determine their participation in the year’s net income of $380,000 under each of the following independent assumptions: a. b. c. d. e.
No agreement concerning division of net income Divided in the ratio of original capital investment Interest at the rate of 15% allowed on original investments and the remainder divided in the ratio of 2:3 (2/5 to Holly and 3/5 to Luke) Salary allowances of $50,000 and $70,000, respectively, and the balance divided equally Allowance of interest at the rate of 15% on original investments, salary allowances of $50,000 and $70,000, respectively, and the remainder divided equally
177. Gentry, sole proprietor of a hardware business, decides to form a partnership with Noel. Gentry’s accounts are as follows: Cash Powered by Cognero
Book Value $ 25,000
Market Value $ 25,000 Page 25
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies Accounts Receivable (net) Inventory Land Building (net) Accounts Payable Mortgage Payable
52,000 112,000 40,000 300,000 25,000 145,000
45,000 125,000 100,000 340,000 25,000 145,000
Noel agrees to contribute $80,000 for a 20% interest. Journalize the entries for (a) Gentry’s investment and (b) Noel’s investment. 178. Brad Simmons, sole proprietor of a hardware business, decides to form a partnership with Rich Winter. Brad’s accounts are as follows: Cash Accounts Receivable (net) Inventory Land Building (net) Accounts Payable Mortgage Payable
Book Value $ 30,000 55,000 112,000 40,000 500,000 25,000 125,000
Market Value $ 30,000 45,000 135,000 100,000 540,000 25,000 125,000
Rich agrees to contribute $170,000 for a 20% interest. Journalize the entries for (a) Brad’s investment and (b) Rich’s investment. 179. Rodgers and Winter had capital balances of $60,000 and $90,000, respectively, at the beginning of the current fiscal year. The articles of partnership provide for salary allowances of $25,000 and $30,000, respectively; an allowance of interest at 12% on the capital balances at the beginning of the year; and the remaining net income divided equally. Net income for the current year was $110,000. a. b.
Present the Division of Net Income section of the income statement for the current year. Assuming that the net income had been $65,000 instead of $110,000, present the Division of Net Income section of the income statement for the current year.
180. Reardon and Reese had capital balances of $140,000 and $160,000, respectively, at the beginning of the current fiscal year. The partnership agreement provides for salary allowances of $25,000 and $35,000, respectively; an allowance of interest at 12% on the capital balances at the beginning of the year; and the remaining net income divided equally. Net income for the current year was $120,000. a. b.
Present the Division of Net Income section of the income statement for the current year. Assuming that the net income had been $76,000 instead of $120,000, present the Division of Net Income section of the income statement for the current year.
181. Jackson and Campbell have capital balances of $100,000 and $300,000, respectively. Jackson devotes full time and Campbell one-half time to the business. Determine the division of $150,000 of net income under each of the following assumptions: a. b. c.
No agreement as to division of net income In ratio of capital balances In ratio of time devoted to business
182. Jackson and Campbell have capital balances of $100,000 and $300,000 respectively. Jackson devotes full time and Campbell one-half time to the business. Determine the division of $120,000 of net income under each of the following Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies assumptions: a. b. c. d. e.
No agreement as to division of net income In ratio of capital balances In ratio of time devoted to business Interest of 10% on capital balances and the remainder divided equally Interest of 10% on capital balances, salaries of $40,000 to Jackson and $20,000 to Campbell, and the remainder divided equally
183. Derek and Hailey, partners sharing net income in the ratio of 2:1, admit Ben to the partnership in accordance with the following agreement: • • • a.
b.
Merchandise inventory recorded in the partnership accounts at $62,500 is to be revalued at its current replacement price of $68,500. Ben invested $48,000 in cash for a 30% interest in the partnership, which has total net assets (assets minus liabilities) of $130,000 that includes the inventory revaluation and the cash invested by Ben. The income-sharing ratio of Derek, Hailey, and Ben is to be 2:1:1. Journalize the entries for the revaluation of merchandise inventory and the admission of Ben to the partnership. (The partnership does not use the temporary asset revaluation account.) A few years later, the capital balances of Derek, Hailey, and Ben were $150,000, $90,000, and $55,000, respectively. At this time, Kacy is admitted to the partnership by the purchase of one-half of Derek’s interest for $80,000. Journalize the entry for the admission of Kacy to the partnership.
184. Gavin invested $45,000 in the Jason and Kelly Partnership for ownership equity of $45,000. Prior to the investment, land was revalued to a market value of $320,000 from a book value of $200,000. Jason and Kelly shared net income in a 1:2 ratio. a. Journalize the entry for the revaluation of land. (The partnership does not use the temporary asset revaluation account.) b. Journalize the entry to admit Gavin. 185. Gleason invested $90,000 in the James and Kirk Partnership for ownership equity of $90,000. Prior to the investment, land was revalued to a market value of $425,000 from a book value of $200,000. James and Kirk share net income in a 1:2 ratio. a. Journalize the entry for the revaluation of land. (The partnership does not use the temporary asset revaluation account.) b. Journalize the entry to admit Gleason. 186. Malcolm has a capital balance of $90,000 after adjusting to fair market value. Celeste contributes $45,000 to receive a 25% interest in a new partnership with Malcolm. Determine the amount and recipient of the partner bonus. 187. After the tangible assets have been adjusted to current market prices, the capital accounts of Harper and Kahlil have balances of $60,000 and $90,000, respectively. Fay is to be admitted to the partnership, contributing $45,000 cash, for which she is to receive an ownership equity of $60,000. All partners share equally in income. a. Journalize the entry for the admission of Fay, who is to receive a bonus of $15,000. b. What are the capital balances of each partner after the admission of the new partner? Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 188. The capital accounts of Hope and Indiana have balances of $115,000 and $95,000, respectively. Clint and Casey are to be admitted to the partnership. Clint buys 20% of Hope’s interest for $30,000 and 25% of Indiana’s interest for $20,000. Casey contributes $45,000 cash to the partnership, for which he is to receive an ownership equity of $45,000. a. Journalize the entries for the admission of (1) Clint and (2) Casey. b. What are the capital balances of each partner after the admission of the new partners? 189. Benson contributed land, inventory, and $22,000 cash to a partnership. The land had a book value of $65,000 and a market value of $111,000. The inventory had a book value of $60,000 and a market value of $58,000. The partnership also assumed a $52,000 note payable owned by Benson that was used originally to purchase the land. Journalize the entry for Benson’s contribution to the partnership. 190. Kala and Leah, partners in Best Designs, have capital balances of $40,000 and $60,000, respectively. Adam joins the partnership by buying one-half of Kala’s interest for $30,000. In addition, because of Adam’s outstanding sales skills, the partners agree to increase his interest to 40% if he invests another $10,000. The income-sharing ratio of Kala, Leah, and Adam is 4:3:1. a. b.
Journalize the entries for the admission of Adam to the partnership. Immediately after Adam’s admission to the partnership, Leah sells one-fourth of her interest to Denton for $35,000. Journalize the entry for this transaction.
191. Amazon invested $128,000 in the Jungle and River Partnership for ownership equity of $128,000. Prior to the investment, equipment was revalued to a market value of $90,000 from a book value of $72,000. Jungle and River share net income in a 2:1 ratio. a. Journalize the entry for the revaluation of equipment. (The partnership does not use the temporary asset revaluation account.) b. Journalize the entry to admit Amazon. 192. Watson purchased one-half of Dalton’s interest in the Patton and Dalton Partnership for $45,000. Prior to the investment, land was revalued to a market value of $135,000 from a book value of $93,000. Patton and Dalton share net income equally. Dalton had a capital balance of $35,000 prior to these transactions. a. Journalize the entry for the revaluation of land. (The partnership does not use the temporary asset revaluation account.) b. Journalize the entry to admit Watson. 193. Wonder purchased one-half of Darwin’s interest in the Todd and Darwin Partnership for $50,000. Prior to the investment, land was revalued to a market value of $175,000 from a book value of $100,000. Todd and Darwin share net income equally. Darwin had a capital balance of $40,000 prior to these transactions. a. Journalize the entry for the revaluation of land. (The partnership does not use the temporary asset revaluation account.) b. Journalize the entry to admit Wonder. 194. S. Stephens and J. Perez are partners in Space Designs. Stephens and Perez share income equally. D. Fredericks will be admitted to the partnership. Prior to the admission, equipment was revalued downward by $8,000. The capital balances of each partner are $100,000 and $139,000, respectively, prior to the revaluation. Space Designs does not use the temporary asset revaluation account. a. b.
Journalize the entry for the asset revaluation. Journalize the entry for Fredericks’ admission under the following independent situations: (1) Fredericks purchased a 20% interest for $50,000.
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies (2)
Fredericks purchased a 30% interest for $125,000.
195. Prior to liquidating their partnership, Samuel and Brian had capital accounts of $60,000 and $240,000, respectively. The partnership assets were sold for $120,000. The partnership had no liabilities. Samuel and Brian share income and losses equally. a. Determine the amount of Samuel’s deficiency. b. Determine the amount distributed to Brian, assuming Samuel is unable to satisfy the deficiency. 196. Prior to liquidating their partnership, Craig and Jenny had capital accounts of $70,000 and $110,000, respectively. The partnership assets were sold for $285,000. The partnership had $25,000 of liabilities. Craig and Jenny share income and losses equally. Determine the amount received by Jenny as a final distribution from liquidation of the partnership. 197. Prior to liquidating their partnership, Porter and Robert had capital account balances of $160,000 and $100,000, respectively. Prior to liquidation, the partnership had no cash assets other than what was realized from the sale of the partnership assets. These partnership assets were sold for $250,000. The partnership had $10,000 of liabilities. Porter and Robert share income and losses equally. Determine the amount received by Porter as a final distribution from liquidation of the partnership. 198. Immediately prior to the process of liquidation, partners Micco, Niccum, and Orwell have capital balances of $70,000, $20,000, and $30,000, respectively. There is a cash balance of $10,000, noncash assets total $160,000, and liabilities total $50,000. The partners share net income and losses in the ratio of 2:2:1. Journalize the entries for the following liquidation using Noncash Assets as the account title for the noncash assets and Liabilities as the account title for all creditors' claims. a. Sold the noncash assets for $80,000 in cash. b. Divided the loss on realization. c. Paid the liabilities. d. Received cash from the partner with the deficiency. e. Distributed the cash to the partners. 199. The capital accounts of Heidi and Moss have balances of $90,000 and $65,000, respectively, on January 1, the beginning of the current fiscal year. On April 10, Heidi invested an additional $8,000. During the year, Heidi and Moss withdrew $40,000 and $32,000, respectively. Revenues were $540,000 and expenses were $420,000 for the year. The articles of partnership make no reference to the division of net income. a. Prepare a statement of partnership equity for the partnership of Heidi and Moss. b. Journalize the entries to: (1) Close the revenues and expenses accounts. (2) Close the drawing accounts. 200. The partnership of Miner Company began operations on January 1, with contributions as follows: Waverley Marquez
$35,000 40,000
The following additional partner transactions took place during the year: • •
In early January, Houston is admitted to the partnership by contributing $25,000 cash for a 25% interest. Net income of $160,000 was earned. In addition, Waverley received a salary allowance of $30,000 for the year. The three partners agree to an income-sharing ratio equal to their capital balances after admitting Houston.
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies •
The partners’ withdrawals are equal to half of their respective distributions of income after salary (i.e., half their respective portions of the $130,000).
Prepare a statement of partnership equity for the year ended December 31. 201. Sharp and Townson had capital balances of $60,000 and $120,000, respectively, on January 1 of the current year. On May 8, Sharp invested an additional $10,000 in the partnership. During the year, Sharp and Townson withdrew $25,000 and $45,000, respectively. The revenue account at the end of the year had a balance of $600,000, and the expense accounts had a balance of $510,000. Sharp and Townson have agreed to split net income on a 2:1 basis (2/3 to Sharp and 1/3 to Townson). a. Prepare the statement of partnership equity for the current year. b. Journalize the entries to close the revenue and expense accounts and the drawing accounts. 202. Hamir, Darci, and Pete are partners sharing income in the ratio of 3:2:1. After the firm’s loss from liquidation is distributed, the capital account balances were Hamir, $45,000 Dr.; Darci, $90,000 Cr., and Pete, $64,000 Cr. If Hamir is personally bankrupt and unable to pay any of the $45,000, what will be the amount of cash received by Darci and Pete upon liquidation? Show your work. 203. After discontinuing the ordinary business operations and closing the accounts on May 7, the ledger of the partnership of Anna, Brian, and Cole indicated the following: Cash Noncash Assets Liabilities Anna, Capital Brian, Capital Cole, Capital
$
7,500 105,000
$112,500
$ 27,500 45,000 15,000 25,000 $112,500
The partners share net income and losses in the ratio of 3:2:1. Between May 7 and May 30, the noncash assets were sold for $150,000, the liabilities were paid, and the remaining cash was distributed to the partners. a. b.
Prepare a statement of partnership liquidation. Assume the same facts as in (a), except that the noncash assets were sold for $45,000 and any partner with a capital deficiency pays the amount of the deficiency to the partnership. Prepare a statement of partnership liquidation.
204. Top Dog, LLC provides repair services for oil rigs. The firm has five members in the LLC, which did not change between the first year and the second year. During Year 2, the business expanded into three new regions of the country. The following revenue and employee information is provided: Revenues (in thousands) Number of employees
Year 1 $60,525 120
Year 2 $58,500 160
a. For Years 1 and 2, determine the revenue per employee (excluding members). b. Interpret the results. 205. Easy Sailing, LLC provides repair services for commercially owned boats and yachts. The firm has five members in the LLC, which did not change between the first year and the second year. During Year 2, the business expanded into three new regions of the country. The following revenue and employee information is provided: Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies Revenues (in thousands) Number of employees
Year 1 $50,625 125
Year 2 $57,750 175
a. For Years 1 and 2, determine the revenue per employee (excluding members). b. Interpret the results.
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies Answer Key 1. False 2. True 3. True 4. False 5. True 6. True 7. False 8. True 9. False 10. False 11. True 12. True 13. True 14. True 15. True 16. False 17. False 18. False 19. True 20. False 21. False 22. True 23. True 24. True 25. False Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 26. True 27. True 28. True 29. False 30. False 31. False 32. False 33. True 34. True 35. True 36. False 37. False 38. True 39. False 40. True 41. False 42. False 43. True 44. True 45. False 46. False 47. True 48. True 49. False 50. True Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 51. True 52. True 53. True 54. a 55. d 56. d 57. d 58. c 59. c 60. b 61. d 62. c 63. b 64. a 65. d 66. d 67. d 68. c 69. a 70. c 71. d 72. b 73. b 74. a 75. b 76. d Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 77. b 78. b 79. d 80. a 81. d 82. b 83. c 84. d 85. b 86. b 87. b 88. a 89. c 90. b 91. c 92. b 93. a 94. d 95. d 96. a 97. b 98. a 99. b 100. b 101. b Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 102. a 103. c 104. b 105. d 106. a 107. a 108. d 109. a 110. d 111. c 112. b 113. d 114. b 115. c 116. a 117. b 118. d 119. a 120. b 121. b 122. c 123. a 124. d 125. b 126. c 127. c Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 128. b 129. b 130. b 131. b 132. d 133. a 134. b 135. a 136. a 137. b 138. c 139. a 140. c 141. b 142. d 143. a 144. b 145. c 146. b 147. a 148. c 149. c 150. b 151. d 152. c Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 153. h 154. b 155. a 156. d 157. g 158. e 159. c 160. f 161. h 162. a 163. e 164. d 165. c 166. b 167. g 168. f 169. A partnership is an association of two or more persons who own and manage a business for profit. The partnership form of business is moderately complex to form, has no limitation on legal liability, is not taxable, has limited life, and provides a limited ability to raise capital (funds). Further, the property invested becomes the joint property of all partners. Each partner shares mutual agency and participates in the income (or losses) of the business. 170. a. Accounts Receivable Equipment Allowance for Doubtful Accounts Jesse, Capital b. Cash Merchandise Inventory Tim, Capital 171. a. Accounts Receivable Equipment Powered by Cognero
46,500 58,000 2,000 102,500 21,000 48,000 69,000
46,500 85,000 Page 38
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies Allowance for Doubtful Accounts Barton, Capital
1,500 130,000
b. Cash Merchandise Inventory Fallows, Capital 172. Cash Inventory Equipment Notes Payable Trevor Smith, Capital
28,500 60,000 88,500
54,000 20,000 36,000 17,000 93,000
173. Salary Interest (8% × $25,000) Remaining income Total distribution to Emmett
$ 48,000 2,000 69,400* $119,400
*($200,000 – $48,000 – $2,000 – $11,200) × 50% = $69,400 174. Salary Interest (8% × $140,000) Remaining income Total distribution to Dakota
$
0 11,200 74,400* $85,600
*($220,000 – $58,000 – $2,000 – $11,200) × 50% = $74,400 175. Holly
Luke
Total
a. Net Income (1:1)
$100,000
$100,000
$200,000
b. Net Income (3:1)
$150,000
$50,000
$200,000
c. Interest Allowance + Remaining Income (2:3) = Net Income
$36,000 + $60,800 = $96,800
$12,000 + $48,000 + $91,200 = $152,000 = $103,200 $200,000
d. Salary Allowance + Remaining Income (1:1) = Net Income
$50,000 + $40,000 = $90,000
$70,000 + $120,000 + $40,000 = $80,000 = $110,000 $200,000
e. Interest Allowance + Salary Allowance + Remaining Income (1:1) = Net Income
$36,000 + $50,000 + $16,000 = $102,000
$12,000 + $48,000 + $70,000 + $120,000 + $16,000 = $32,000 = $98,000 $200,000
Holly
Luke
176.
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Total Page 39
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies a. Net Income (1:1)
$190,000
$190,000
$380,000
b. Net Income (3:1)
$285,000
$95,000
$380,000
$36,000 + $12,000 + $48,000 + $132,800 = $199,200 = $332,000 = $168,800 $211,200 $380,000
c. Interest Allowance + Remaining Income (2:3) = Net Income
$50,000 + $70,000 + $120,000 + $130,000 = $130,000 = $260,000 = $180,000 $200,000 $380,000
d. Salary Allowance + Remaining Income (1:1) = Net Income
$36,000 + $12,000 + $48,000 + $50,000 + $70,000 + $120,000 + $106,000 = $106,000 = $212,000 = $192,000 $188,000 $380,000
e. Interest Allowance + Salary Allowance + Remaining Income (1:1) = Net Income 177. a. Cash Accounts Receivable Inventory Land Building Accounts Payable Mortgage Payable Gentry, Capital b.
25,000 45,000 125,000 100,000 340,000 25,000 145,000 465,000
Cash Gentry, Capital Noel, Capital*
80,000 29,000 109,000
*($465,000 + $80,000) × 20% 178. a. Cash Accounts Receivable Inventory Land Building Accounts Payable Mortgage Payable Brad Simmons, Capital b.
30,000 45,000 135,000 100,000 540,000 25,000 125,000 700,000
Cash Brad Simmons, Capital Rich Winter, Capital*
170,000 4,000 174,000
*($700,000 + $170,000) × 20% 179. a. Rodgers Powered by Cognero
Winter
Total Page 40
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies Division of net income: Salary allowance Interest allowance Remaining income Net income b. Division of net income: Salary allowance Interest allowance Total Deduct excess of allowances over net income Net income
$25,000 7,200 18,500 $50,700
$30,000 10,800 18,500 $59,300
$ 55,000 18,000 37,000 $110,000
$25,000 7,200 $32,200
$30,000 10,800 $40,800
$55,000 18,000 $73,000
(4,000) $28,200
(4,000) $36,800
(8,000) $65,000
Reardon
Reese
Total
$25,000 16,800 12,000 $53,800
$35,000 19,200 12,000 $66,200
$ 60,000 36,000 24,000 $120,000
$25,000 16,800 $41,800
$35,000 19,200 $54,200
$60,000 36,000 $96,000
10,000 $31,800
10,000 $44,200
20,000 $76,000
180. a. Division of net income: Salary allowance Interest allowance Remaining income Net income b. Division of net income: Salary allowance Interest allowance Total Deduct excess of allowances over net income Net income 181. a.
Jackson Campbell $75,000 $75,000
b.
$37,500
$112,500
c.
$100,000
$50,000
Computations Jackson: 1/2 × $150,000 Campbell: 1/2 × $150,000 Jackson: 1/4 × $150,000 Campbell: 3/4 × $150,000 Jackson: 2/3 × $150,000 Campbell: 1/3 × $150,000
182. a.
Jackson Campbell $60,000 $60,000
b.
$30,000
$90,000
c.
$80,000
$40,000
d.
$50,000
$70,000
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Computations Jackson: 1/2 × $120,000 Campbell: 1/2 × $120,000 Jackson: 1/4 × $120,000 Campbell: 3/4 × $120,000 Jackson: 2/3 × $120,000 Campbell: 1/3 × $120,000 Jackson: [(10% × $100,000) + (1/2 × $80,000)] Page 41
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies e.
$60,000
$60,000
Campbell: [(10% × $300,000) + (1/2 × $80,000)] Jackson: [(10% × $100,000) + $40,000 + (1/2 × $20,000)] Campbell: [(10% × $300,000) + $20,000 + (1/2 × $20,000)]
183. a. Merchandise Inventory Derek, Capital Hailey, Capital
6,000 4,000 2,000
Cash Derek, Capital Hailey, Capital Ben, Capital
48,000
b. Derek, Capital Kacy, Capital
75,000
6,000 3,000 39,000
75,000
184. a. Land Jason, Capital (1/3 × $120,000) Kelly, Capital (2/3 × $120,000)
120,000 40,000 80,000
b. Cash Gavin, Capital
45,000 45,000
185. a. Land James, Capital Kirk, Capital
225,000 75,000 150,000
b. Cash Gleason, Capital
90,000 90,000
186. Equity of Malcom Celeste’s contribution Total equity after admitting Celeste Celeste’s equity interest Celeste’s equity after admission
$ 90,000 45,000 $135,000 × 25% $ 33,750
Celeste’s contribution Celeste’s equity after admission Bonus paid to Malcolm
$45,000 33,750 $11,250
187. a. Cash Harper, Capital Kahlil, Capital Fay, Capital b. Harper Powered by Cognero
45,000 7,500 7,500 60,000 $52,500 Page 42
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies Kahlil Fay 188. a. (1)
(2)
82,500 60,000
Hope, Capital (20% × $115,000) Indiana, Capital (25% × $95,000) Clint, Capital
23,000 23,750
Cash
45,000
46,750
Casey, Capital b.
45,000
Hope Indiana Clint Casey
189. Cash Inventory Land Notes Payable Benson, Capital
$92,000 71,250 46,750 45,000
22,000 58,000 111,000
190. a. Kala, Capital Adam, Capital
52,000 139,000
20,000 20,000
Cash Kala, Capital Leah, Capital Adam, Capital
10,000 8,000 6,000
b. Leah, Capital Denton, Capital
13,500
191. a. Equipment Jungle, Capital River, Capital b. Cash Amazon, Capital 192. a. Land Patton, Capital Dalton, Capital b. Dalton, Capital Watson, Capital*
24,000
13,500
18,000 12,000 6,000 128,000 128,000
42,000 21,000 21,000 28,000 28,000
*($35,000 + $21,000) × 50% Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies 193. a. Land Todd, Capital Darwin, Capital b. Darwin, Capital Wonder, Capital*
75,000 37,500 37,500 38,750 38,750
*($40,000 + $37,500) × 50% 194. a.
b.
(1)
S. Stephens, Capital J. Perez, Capital Equipment
4,000 4,000
Cash S. Stephens, Capital J. Perez, Capital D. Fredericks, Capital
50,000 3,100 3,100
8,000
56,200
Supporting computations for the bonus: Equity of S. Stephens Equity of J. Perez Contribution by D. Fredericks Total equity after admitting D. Fredericks D. Fredericks’ equity interest after admission D. Fredericks’ equity after admission Contribution by D. Fredericks Bonus paid to D. Fredericks
$ 96,000 135,000 50,000 $281,000 × 20% $ 56,200 50,000 $ 6,200
The bonus to Fredericks is debited equally between Stephens' and Perez’s capital accounts. (2) Cash S. Stephens, Capital J. Perez, Capital D. Fredericks, Capital
125,000 9,100 9,100 106,800
Supporting computations for the bonus: Equity of S. Stephens Equity of J. Perez Contribution by D. Fredericks Total equity after admitting D. Fredericks D. Fredericks' equity interest after admission D. Fredericks' equity after admission Contribution by D. Fredericks D. Fredericks' equity after admission Bonus paid to S. Stephens and J. Perez Powered by Cognero
$ 96,000 135,000 125,000 $356,000 × 30% $106,800 $125,000 106,800 $ 18,200 Page 44
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies The bonus to Stephens and Perez is credited equally between Stephens’ and Perez’s capital accounts. 195. a.
b.
Samuel’s equity prior to liquidation Realization of asset sale Book value of assets ($60,000 + $240,000) Loss on liquidation Samuel’s share of loss (50% × $180,000) Samuel’s deficiency
$ 60,000 $ 120,000 300,000 $(180,000) (90,000) $ (30,000)
$240,000 – $90,000 share of loss – $30,000 = $120,000 Samuel’s deficiency also equals the amount of cash realized from the sale of the partnership assets.
196. Jenny’s equity prior to liquidation Realization of asset sales Book value of assets ($180,000 + $25,000) Gain on liquidation Jenny’s share of gain (50% × $80,000) Jenny’s cash distribution
$110,000 $285,000 205,000 $ 80,000 40,000 $150,000
197. Porter’s equity prior to liquidation Realization of asset sales Book value of assets ($160,000 + $100,000 + $10,000) Loss on liquidation Porter’s share of loss (50% × $20,000) Porter’s cash distribution 198. a. Cash Loss on Realization Noncash Assets
80,000 80,000 160,000
b. Micco, Capital Niccum, Capital Orwell, Capital Loss on Realization
32,000 32,000 16,000
c. Liabilities Cash
50,000
d. Cash Niccum, Capital
12,000
e. Micco, Capital Orwell, Capital
38,000 14,000
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$160,000 $250,000 270,000 $(20,000) $(10,000) $150,000
80,000
50,000
12,000
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies Cash
52,000
199. a. Heidi and Moss Statement of Partnership Equity For the Year Ended December 31 Heidi Moss Balances, January 1 $90,000 $65,000 Capital additions 8,000 0 Net income for the year 60,000 60,000 Partner withdrawals (40,000) (32,000) Balances, December 31 $118,000 $93,000 b. (1) Revenues Expenses Heidi, Capital Moss, Capital (2) Heidi, Capital Moss, Capital Heidi, Drawing Moss, Drawing
Total $155,000 8,000 120,000 (72,000) $211,000
540,000 420,000 60,000 60,000 40,000 32,000 40,000 32,000
200. Miner Company Statement of Partnership Equity For the Year Ended December 31
Balances, January 1 Admission of Houston Salary allowance Remaining income Less: Partner withdrawals Partnership capital, December 31
Total Waverley, Marquez, Houston, Partnership Capital Capital Capital Capital $35,000 $40,000 $ 75,000 0 0 $25,000 25,000 30,000 0 0 30,000 45,500 52,000 32,500 130,000 (22,750) (26,000) (16,250) (65,000) $87,750 $66,000 $41,250 $195,000
Admission of Houston: Equity of initial partners prior to admission Contribution by Houston Total Houston’s equity interest after admission Houston’s equity after admission Contribution by Houston Bonus Powered by Cognero
$ 75,000 25,000 $100,000 × 25% $ 25,000 25,000 $ 0 Page 46
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies Net income distribution: The income-sharing ratio is equal to the proportion of the capital balances after admitting Houston according to the partnership agreement: Waverley: $35,000 ÷ $100,000 = 35% Marquez: $40,000 ÷ $100,000 = 40% Houston: $25,000 ÷ $100,000 = 25% These ratios can be multiplied by the $130,000 remaining income ($160,000 – $30,000 salary allowance to Waverley) to distribute the earnings to the respective partner capital accounts, as follows: Waverley: 35% × $130,000 = $45,500 Marquez: 40% × $130,000 = $52,000 Houston: 25% × $130,000 = $32,500 Withdrawals: The partners agreed to take half of their respective earnings (after Waverley’s salary allowance) as withdrawals, as follows: Waverley: 1/2 × $45,500 = $22,750* Marquez: 1/2 × $52,000 = $26,000 Houston: 1/2 × $32,500 = $16,250 *Note: Waverley did not take the salary allowance as a withdrawal but allowed it to remain in the member equity account. 201. (a) Sharp and Townson Statement of Partnership Equity For the Year Ended December 31 Sharp Townson Balances, January 1 $ 60,000 $120,000 Capital additions 10,000 Net income for the year 60,000 30,000 Partner withdrawals (25,000) (45,000) Balances, December 31 $105,000 $105,000 b. Revenue Expenses Sharp, Capital Townson, Capital Sharp, Capital Townson, Capital Sharp, Drawing Townson, Drawing
Total $180,000 10,000 90,000 (70,000) $210,000
600,000 510,000 60,000 30,000 25,000 45,000 25,000 45,000
202. Capital balances after realization Distribution of partner deficiency Capital balances after deficiency distribution
Hamir Darci Pete $(45,000) $90,000 $64,000 45,000 (30,000)* (15,000)** $ 0 $60,000 $49,000
*$45,000 × 2/3 Powered by Cognero
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies **$45,000 × 1/3 203. a. Statement of Partnership Liquidation For Period May 7–30 Capital Noncash Anna Brian Cash + Assets = Liabilities + (3/6) + (2/6) + Balances before realization $ 7,500 $105,000 Sale of assets and division of gain +150,000 –105,000 Balances after realization $157,500 $ 0 Payment of liabilities –27,500 Balances after payment of liabilities $130,000 $ 0 Cash distributed to partners –130,000 0 Final balances $ $ 0
Cole (1/6)
$27,500 $45,000
$15,000$25,000
+ 22,500
+15,000 + 7,500
$27,500 $67,500
$30,000 $32,500
– 27,500
$
$
0 $67,500
$30,000 $32,500
– 67,500
–30,000 –32,500 $ 0 $ 0
0 $
0
b. Anna, Brian, and Cole Statement of Partnership Liquidation For Period May 7–30 Capital Noncash Anna Brian Cash + Assets = Liabilities + (3/6) + (2/6) + Balances before realization Sale of assets and division of loss Balances after realization Payment of liabilities Balances after payment of liabilities
Cole (1/6)
$ 7,500 $105,000
$27,500 $45,000
$15,000 $25,000
+45,000 –105,000
–30,000
–20,000 –10,000
$27,500 $15,000
$(5,000) $15,000
$52,500 $
0
–27,500
$25,000 $
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–27,500
0
$
0 $15,000
$(5,000) $15,000 Page 48
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Chapter 12 - Accounting for Partnerships and Limited Liability Companies Receipt of deficiency Balances Cash distributed to partners Final balances
+ 5,000 $30,000 $
0
$
–30,000 $
0 $
0
$
0 $15,000
+ 5,000 $ 0 $15,000
–15,000
–15,000
0 $
0
$
0
$
0
204. a. Revenue per employee, Year 1: $60,525,000 ÷ 120 = $504,375 Revenue per employee, Year 2: $58,500,000 ÷ 160 = $365,625 b. Revenues decreased between the two years; however, the number of employees has increased at a faster rate. Thus, the revenue per employee declined from $504,375 in Year 1 to $365,625 in Year 2. This indicates that the efficiency of the firm has declined between the two years. This is likely the result of the expansion. That is, the large increase in the employment base is the likely result of the expansion into the three new regions. These new employees may need to be trained and thus are not as efficient in their jobs as the more experienced employees in the existing regions. Often, a business will suffer productivity losses in the midst of significant expansion because of the inexperience of the new employees. 205. a. Revenue per employee, Year 1: $50,625,000 ÷ 125 = $405,000 Revenue per employee, Year 2: $57,750,000 ÷ 175 = $330,000 b. Revenues increased between the two years; however, the number of employees has increased at a faster rate. Thus, the revenue per employee declined from $405,000 in the first year to $330,000 in the second year. This indicates that the efficiency of the firm has declined between the two years. This is likely the result of the expansion. That is, the large increase in the employment base is the likely result of the expansion into the three new regions. These new employees may need to be trained and thus are not as efficient in their jobs as the more experienced employees in the existing regions. Often, a business will suffer productivity losses in the midst of significant expansion because of the inexperience of the new employees.
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends True / False 1. Twenty percent of all businesses in the United States are corporations, and they account for 80% of the total business dollars generated. a. True b. False 2. A corporation is a separate entity for accounting purposes but not for legal purposes. a. True b. False 3. The financial loss that each stockholder in a corporation can incur is usually limited to the amount invested by the stockholder. a. True b. False 4. Under the Internal Revenue Code, corporations are required to pay federal income taxes. a. True b. False 5. Double taxation is a disadvantage of a corporation because the corporation has to pay income taxes at twice the rate applied to partnerships. a. True b. False 6. The initial owners of stock of a newly formed corporation are called directors. a. True b. False 7. While some businesses have been granted charters under state laws, most businesses receive their charters under federal laws. a. True b. False 8. Organizational expenses are classified as intangible assets on the balance sheet. a. True b. False 9. The two main sources of stockholders' equity are investments contributed by stockholders and net income retained in the business. a. True b. False 10. Retained Earnings represents past net income less past dividends; therefore, any balance in this account would be listed on the income statement. a. True Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends b. False 11. The net increase or decrease in Retained Earnings for a period is recorded by closing entries. a. True b. False 12. The balance in Retained Earnings should be interpreted as representing surplus cash left over for dividends. a. True b. False 13. A deficit in retained earnings is reported in the Stockholders' Equity section of the balance sheet. a. True b. False 14. When no-par common stock with a stated value is issued for cash, the common stock account is credited for an amount equal to the cash proceeds. a. True b. False 15. The par value of common stock must always be equal to its market value on the date the stock is issued. a. True b. False 16. For accounting purposes, stated value is treated the same way as par value. a. True b. False 17. The issuance of common stock affects both paid-in capital and retained earnings. a. True b. False 18. The main source of paid-in capital is from issuing stock. a. True b. False 19. The number of shares of outstanding stock is equal to the number of shares authorized minus the number of shares issued. a. True b. False 20. The amount of capital paid in by the stockholders of the corporation is called legal capital. a. True b. False 21. If the dividend amount of preferred stock, $50 par value, is quoted as 8%, then the dividend per share would be $4. a. True Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends b. False 22. If 50,000 shares are authorized, 41,000 shares are issued, and 2,000 shares are reacquired, the number of outstanding shares is 43,000. a. True b. False 23. Preferred stockholders must receive their current-year dividends before the common stockholders can receive any dividends. a. True b. False 24. If a corporation is liquidated, preferred stockholders are paid before the creditors and before the common stockholders. a. True b. False 25. Paid-in capital may originate from real estate transactions. a. True b. False 26. The par value of stock is an assigned per-share amount defined in many states as legal capital. a. True b. False 27. A large public corporation normally uses registrars and transfer agents to maintain the records of stockholders. a. True b. False 28. When common stock is issued in exchange for land, the land should be recorded in the accounts at the par value of the stock issued. a. True b. False 29. When a corporation issues stock at a premium, it reports the premium as an Other Income item on the income statement. a. True b. False 30. When no-par stock is issued, Common Stock is credited for the selling price of the stock issued. a. True b. False 31. A large retained earnings account means that there is cash available to pay dividends. a. True b. False Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 32. When the board of directors declares a cash or stock dividend, this action decreases retained earnings. a. True b. False 33. The declaration of a cash dividend decreases a corporation's stockholders equity' and decreases its assets. a. True b. False 34. One of the prerequisites to paying a cash dividend is sufficient retained earnings. a. True b. False 35. Cash dividends become a liability to a corporation on the date of record. a. True b. False 36. The declaration and issuance of a stock dividend do not affect the total amount of a corporation's assets, liabilities, or stockholders' equity. a. True b. False 37. The declaration of a stock dividend decreases a corporation's stockholders' equity and increases its liabilities. a. True b. False 38. Before a stock dividend can be declared or paid, there must be sufficient cash. a. True b. False 39. The day on which the board of directors of the corporation distributes a dividend is called the declaration date. a. True b. False 40. A 10% stock dividend will increase the number of shares outstanding, but the book value per share will decrease. a. True b. False 41. The stock dividends distributable account is listed in the Current Liabilities section of the balance sheet. a. True b. False 42. A corporation has 10,000 shares of $100 par stock outstanding. If the corporation issues a 5-for-1 stock split, the number of shares outstanding after the split will be 40,000. a. True b. False Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 43. The primary purpose of a stock split is to reduce the number of shares outstanding in order to encourage more investors to enter the market for the company's shares. a. True b. False 44. The reduction in the par or stated value of common stock, accompanies by the issuance of a proportionate number of additional shares, is called a stock split. a. True b. False 45. A corporation has 12,000 shares of $20 par stock outstanding that has a current market value of $150. If the corporation issues a 4-for-1 stock split, the market value of the stock will fall to approximately $50. a. True b. False 46. A stock split results in a transfer at market value from retained earnings to paid-in capital. a. True b. False 47. If 20,000 shares are authorized, 15,000 shares are issued, and 500 shares are held as treasury stock, a cash dividend of $1 per share would amount to $15,000. a. True b. False 48. Cash dividends are normally paid on shares of treasury stock. a. True b. False 49. The cost method of accounting for the purchase and sale of treasury stock is a commonly used method. a. True b. False 50. Under the cost method, when treasury stock is purchased by the corporation, the par value and the price at which the stock was originally issued are important. a. True b. False 51. If 100 shares of treasury stock were purchased for $50 per share and then sold at $60 per share, $1,000 of income is reported on the income statement. a. True b. False 52. A sale of treasury stock may result in a decrease in paid-in capital. All decreases should be charged to Paid-In Capital from Sale of Treasury Stock. a. True b. False Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 53. Treasury stock is listed in the Stockholders' Equity section of the balance sheet. a. True b. False 54. A restriction/appropriation of retained earnings establishes cash assets that are set aside for a specific purpose. a. True b. False 55. A prior period adjustment should be reported as an adjustment to the beginning balance of retained earnings on the retained earnings statement in the period in which the adjustment was made. a. True b. False 56. The amount of a corporation's retained earnings that has been restricted/appropriated should be reported in the notes to the financial statements. a. True b. False 57. The cost of treasury stock is shown as a deduction following paid-in capital and retained earnings in the Stockholders’ Equity section of the balance sheet. a. True b. False 58. The retained earnings statement may be combined with the income statement. a. True b. False 59. If paid-in capital in excess of par―preferred stock is $30,000, preferred stock is $200,000, paid-in capital in excess of par―common stock is $20,000, common stock is $525,000, and retained earnings is $105,000 (deficit), total stockholders' equity is $880,000. a. True b. False 60. If a company has preferred stock, the preferred stock dividend is added to net income when computing earnings per common share. a. True b. False Multiple Choice 61. Which of the following is not a characteristic of a corporation? a. The financial loss that a stockholder may suffer from owning stock in a public company is limited. b. Cash dividends paid by a corporation are deductible as expenses by the corporation. c. A corporation can own property in its name. d. Corporations are required to file federal income tax returns.
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 62. Characteristics of a corporation include a. shareholders who are mutual agents b. direct management by the shareholders (owners) c. its inability to own property d. shareholders who have limited liability 63. One of the main disadvantages of the corporate form is the a. professional management b. double taxation of dividends c. charter d. requirement to stock 64. A disadvantage of the corporate form of business entity is a. mutual agency for stockholders b. unlimited liability for stockholders c. corporations are subject to more governmental regulations d. the ease of transfer of ownership 65. Under the corporate form of business organization, a. ownership rights are easily transferred b. a stockholder is personally liable for the debts of the corporation c. stockholders’ acts can bind the corporation even though the stockholders have not been appointed as agents of the corporation d. stockholders wishing to sell their corporate shares must get the approval of other stockholders 66. Those most responsible for the major policy decisions of a corporation are the a. management b. board of directors c. employees d. stockholders 67. Which of the following would not be considered an advantage of the corporate form of organization? a. government regulation b. separate legal existence c. continuous life d. limited liability of stockholders 68. Which of the following is not true of a corporation? a. It may enter into binding legal contracts in its own name. b. It may sue and be sued. c. The acts of its owners bind the corporation. d. It may buy, own, and sell property. 69. The ability of a corporation to obtain capital is Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends a. less than the ability of a partnership b. about the same as the ability of a partnership c. restricted because of the limited life of the corporation d. enhanced because of limited liability and ease of share transferability 70. Which of the following statements concerning taxation is accurate? a. Corporations pay federal income taxes but not state income taxes. b. Corporations pay federal and state income taxes. c. Only the owners must pay taxes on corporate income. d. Corporations pay income taxes but their owners do not. 71. The term deficit is used to refer to a debit balance in which of the following accounts of a corporation? a. Retained Earnings b. Treasury Stock c. Organizational Expenses d. Common Stock 72. Stockholders' equity a. is usually equal to cash on hand b. includes paid-in capital and liabilities c. includes retained earnings and paid-in capital d. is shown on the income statement 73. The state charter allows a corporation to issue only a certain number of shares of each class of stock. This amount of stock is called a. treasury stock b. issued stock c. outstanding stock d. authorized stock 74. Which of the following is not a right possessed by common stockholders of a corporation? a. the right to vote in the election of the board of directors b. the right to receive a minimum amount of dividends c. the right to sell their stock to anyone they choose d. the right to share in assets upon liquidation 75. The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 40,000 shares were originally issued and 10,000 were subsequently reacquired. What is the number of shares outstanding? a. 10,000 b. 40,000 c. 30,000 d. 50,000 76. The par value per share of common stock represents the Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends a. minimum selling price of the stock established by the articles of incorporation b. minimum amount the stockholder will receive when the corporation is liquidated c. dollar amount assigned to each share d. amount of dividend per share to be received each year 77. Nebraska Inc. issues 3,000 shares of common stock for $45,000. The stock has a stated value of $10 per share. The journal entry for the stock issuance would include a credit to Common Stock for a. $30,000 b. $45,000 c. $15,000 d. $3,000 78. The excess of issue price over par of common stock is termed a(n) a. discount b. income c. deficit d. premium 79. The journal entry for the issuance of 150 shares of $5 par common stock at par to an attorney in payment of legal fees for organizing the corporation includes a credit to a. Organizational Expenses b. Goodwill c. Common Stock d. Cash 80. The price at which a stock can be sold depends on a number of factors. Which of the following is not one of those factors? a. the financial condition, earnings record, and dividend record of the corporation b. investor expectations of the corporation's earning power c. how high the par value is d. general business and economic conditions and prospects 81. The journal entry for the issuance of common stock at a price above par includes a debit to a. Organizational Expenses b. Common Stock c. Cash d. Paid-In Capital in Excess of Par—Common Stock 82. Kansas Company acquired a building valued at $210,000 for property tax purposes in exchange for 12,000 shares of its $5 par common stock. The stock is widely traded and selling for $15 per share. At what amount should the building be recorded by Kansas Company? a. $60,000 b. $180,000 c. $210,000 d. $120,000 Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 83. The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 30,000 shares were originally issued and 5,000 were subsequently reacquired. What is the number of shares outstanding? a. 35,000 b. 70,000 c. 25,000 d. 30,000 84. Par value a. is the monetary value assigned per share in the corporate charter b. represents what a share of stock is worth c. represents the original selling price for a share of stock d. is established for a share of stock after it is issued 85. The authorized stock of a corporation a. must be recorded in a formal accounting entry b. only reflects the initial capital needs of the company c. is indicated in its bylaws d. is indicated in its charter 86. If Dakota Company issues 1,500 shares of $6 par common stock for $75,000, a. Common Stock will be credited for $75,000 b. Paid-In Capital in Excess of Par will be credited for $9,000 c. Paid-In Capital in Excess of Par will be credited for $66,000 d. Cash will be debited for $66,000 87. If common stock is issued for an amount greater than par value, the excess should be credited to a. Retained Earnings b. Cash c. Legal Capital d. Paid-In Capital in Excess of Par 88. Sneed Corporation issues 10,000 shares of $50 par preferred stock for cash at $75 per share. The journal entry for the transaction will consist of a debit to Cash for $750,000 and a credit or credits to a. Preferred Stock for $750,000 b. Preferred Stock for $500,000 and Paid-In Capital in Excess of Par—Preferred Stock for $250,000 c. Preferred Stock for $500,000 and Retained Earnings for $250,000 d. Paid-In Capital from Preferred Stock for $750,000 89. Alma Corp. issues 1,000 shares of $10 par common stock at $14 per share. When the transaction is journalized, credits are made to a. Common Stock, $14,000 b. Common Stock, $10,000, and Paid-In Capital in Excess of Par—Common Stock, $4,000 c. Common Stock, $4,000, and Paid-In Capital in Excess of Stated Value, $10,000 d. Common Stock, $10,000, and Retained Earnings, $4,000 Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 90. Nexis Corp. issues 1,000 shares of $15 par value common stock at $22 per share. When the transaction is journalized, credits are made to a. Common Stock, $15,000, and Paid-In Capital in Excess of Par—Common Stock, $7,000 b. Common Stock, $22,000, and Retained Earnings, $15,000 c. Common Stock, $7,000, and Paid-In Capital in Excess of Stated Value, $15,000 d. Common Stock, $22,000 91. When Wisconsin Corporation was formed on January 1, the corporate charter provided for 100,000 shares of $10 par value common stock. During its first month of operation, the corporation issued 8,500 shares of stock at a price of $16 per share. The journal entry for this transaction would include a a. debit to Cash for $85,000 b. credit to Common Stock for $136,000 c. credit to Paid-In Capital in Excess of Par—Common Stock for $51,000 d. debit to Common Stock for $85,000 92. Sabas Company has issued and outstanding 20,000 shares of $100 par, 2% cumulative preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: Year 1 Year 2 Year 3
$10,000 45,000 90,000
Determine the dividend per share for preferred and common stock for the second year. a. $2.25 and $0 b. $2.25 and $0.45 c. $0 and $0.45 d. $2.00 and $0.45 93. Sabas Company has 20,000 shares of $100 par, 2% cumulative preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: Year 1: Year 2: Year 3:
$10,000 45,000 90,000
Determine the dividend per share for preferred and common stock for the first year. a. $0.50 and $0.10 b. $0 and $0.10 c. $0.50 and $0 d. $2.00 and $0 94. The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 60,000 shares were originally issued and 10,000 were subsequently reacquired. What is the amount of cash dividends to be paid if a $2per-share dividend is declared? a. $60,000 Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends b. $20,000 c. $120,000 d. $100,000 95. The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 45,000 shares were originally issued and 5,000 were subsequently reacquired. What is the amount of cash dividends to be paid if a $2per-share dividend is declared? a. $80,000 b. $10,000 c. $90,000 d. $100,00 96. The date on which a cash dividend becomes a binding legal obligation is the a. declaration date b. date of record c. payment date d. last day of the fiscal year 97. The cumulative effect of the declaration and payment of a cash dividend on a company’s financial statements is to a. decrease total liabilities and stockholders' equity b. increase total expenses and total liabilities c. increase total assets and stockholders' equity d. decrease total assets and stockholders' equity 98. Which of the following is the appropriate journal entry for the declaration of cash dividends? a. Retained Earnings Cash b. Cash Dividends Payable Cash c. Paid-In Capital Cash Dividends Payable d. Cash Dividends Cash Dividends Payable 99. Texas Inc. has 10,000 shares of 6%, $125 par value cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31. What is the annual dividend on the preferred stock? a. $60 per share b. $75,000 in total c. $10,000 in total d. $0.75 per share 100. Which of the following is not a prerequisite to paying a cash dividend? a. formal action by the board of directors b. market value in excess of par value per share c. sufficient cash Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends d. sufficient retained earnings 101. The liability for a dividend is recorded on which of the following dates? a. date of record b. date of payment c. last day of the fiscal year d. date of declaration 102. A company with 100,000 authorized shares of $4 par common stock issued 40,000 shares at $8. Subsequently, the company declared a 2% stock dividend on a date when the market price was $11 per share. What is the amount transferred from the retained earnings account to paid-in capital accounts as a result of the stock dividend? a. $3,200 b. $6,400 c. $4,800 d. $8,800 103. A company with 100,000 authorized shares of $4 par common stock issued 50,000 shares at $9. Subsequently, the company declared a 2% stock dividend on a date when the market price was $10 per share. The effect of the declaration and issuance of the stock dividend is to a. decrease retained earnings, increase common stock, and increase paid-in capital b. increase retained earnings, decrease common stock, and decrease paid-in capital c. increase retained earnings, decrease common stock, and increase paid-in capital d. decrease retained earnings, increase common stock, and decrease paid-in capital 104. A company with 100,000 authorized shares of $4 par common stock issued 40,000 shares at $8. Subsequently, the company declared a 4% stock dividend on a date when the market price was $12 per share. What is the amount transferred from the retained earnings account to paid-in capital accounts as a result of the stock dividend? a. $12,800 b. $19,200 c. $32,000 d. $48,800 105. Sabas Company has issued and outstanding 20,000 shares of $100 par, 2% cumulative preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: Year 1 Year 2 Year 3
$10,000 45,000 90,000
Determine the dividend per share for preferred and common stock for the third year. a. $4.50 and $0.25 b. $3.25 and $0.25 c. $4.50 and $0.90 d. $2.00 and $0.25 106. Sabas Company has 20,000 shares of $100 par, 2% cumulative preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends Year 1 Year 2 Year 3
$10,000 45,000 90,000
Determine the dividends in arrears for preferred stock for the second year. a. $25,000 b. $10,000 c. $0 d. $30,000 107. When a stock dividend is declared, which of the following accounts is credited? a. Common Stock b. Dividends Payable c. Stock Dividends Distributable d. Retained Earnings 108. A reduction of par or stated value of stock results from a a. liquidating dividend b. stock split c. stock option d. preferred dividend 109. A corporation has 50,000 shares of $25 par stock outstanding. If the corporation issues a 3-for-1 stock split, the number of shares outstanding after the split will be a. 150,000 shares b. 50,000 shares c. 100,000 shares d. 16,666 shares 110. When a corporation completes a 3-for-1 stock split, a. the ownership interest of current stockholders is decreased b. the market price per share of the stock is decreased c. the par value per share is decreased d. the market price per share of the stock and the par value per share are decreased 111. A corporation has 50,000 shares of $28 par stock outstanding that has a current market value of $150 per share. If the corporation issues a 4-for-1 stock split, the market value of the stock will fall to approximately a. $7.00 b. $112.00 c. $37.50 d. $600.00 112. The primary purpose of a stock split is to a. increase paid-in capital b. reduce the market price of the stock per share Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends c. increase the market price of the stock per share d. increase retained earnings 113. Which of the following statements is not true about a 2-for-1 stock split? a. Par value per share is reduced to half of what it was before the split. b. Total contributed capital increases. c. The market price will probably decrease. d. A stockholder with 10 shares before the split owns 20 shares after the split. 114. A corporation has 50,000 shares of $25 par stock outstanding that has a current market value of $150 per share. If the corporation issues a 5-for-1 stock split, the market value of the stock after the split will be approximately a. $25 b. $150 c. $5 d. $30 115. A corporation has 50,000 shares of $25 par stock outstanding that has a current market value of $120. If the corporation issues a 5-for-1 stock split, the par value of the stock after the split will be a. $5 b. $60 c. $25 d. $24 116. Nevada Corporation has 30,000 shares of $25 par stock outstanding that has a current market value of $120. If the corporation issues a 5-for-1 stock split, the number of shares outstanding will be a. 60,000 b. 6,000 c. 150,000 d. 15,000 117. Treasury stock shares are a. shares held by the U.S. Treasury Department b. part of the total outstanding shares but not part of the total issued shares of a corporation c. unissued shares that are held by the treasurer of the corporation d. issued shares that have been reacquired by a corporation 118. On January 1, Vermont Corporation had 40,000 shares of $10 par value common stock issued and outstanding. All 40,000 shares had been issued in a prior period at $20 per share. On February 1, Vermont purchased 3,750 shares of treasury stock for $24 per share and later sold the treasury shares for $21 per share on March 1. The journal entry for the purchase of the treasury shares on February 1 would include a a. credit to Treasury Stock for $90,000 b. debit to Treasury Stock for $90,000 c. debit to a loss account for $112,500 d. credit to a gain account for $112,500 Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 119. Which of the following is not a reason for a corporation to buy back its own stock? a. resale to employees b. bonus to employees c. support the market price of the stock d. increase the shares outstanding 120. How is treasury stock shown on the balance sheet? a. as an asset b. as a decrease in stockholders' equity c. as an increase in stockholders' equity d. Treasury stock is not shown on the balance sheet. 121. The excess of sales price of treasury stock over its cost should be credited to a. Treasury Stock Receivable b. Premium on Capital Stock c. Paid-In Capital from Sale of Treasury Stock d. Income from Sale of Treasury Stock 122. Treasury stock that was purchased for $3,000 is sold for $3,500. As a result of these two transactions combined, a. income will be increased by $500 b. stockholders' equity will be increased by $3,500 c. stockholders' equity will be increased by $500 d. stockholders' equity will not change 123. Treasury stock that had been purchased for $5,600 last month was reissued this month for $8,500. The journal entry for the reissuance would include a credit to a. Treasury Stock for $8,500 b. Paid-In Capital from Sale of Treasury Stock for $8,500 c. Paid-In Capital in Excess of Par—Common Stock for $2,900 d. Paid-In Capital from Sale of Treasury Stock for $2,900 124. A corporation purchased 1,000 shares of its own $5 par common stock at $10 and subsequently sold 500 of the shares at $20. What amount of revenue is realized from the sale? a. $0 b. $5,000 c. $2,500 d. $10,000 125. A corporation purchases 10,000 shares of its own $10 par common stock for $35 per share, recording it at cost. What will be the effect on total stockholders' equity? a. increase by $100,000 b. increase by $350,000 c. decrease by $100,000 d. decrease by $350,000 Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 126. What is the total stockholders' equity based on the following account balances? Common Stock Paid-In Capital in Excess of Par Retained Earnings Treasury Stock a. $670,000 b. $655,000 c. $640,000 d. $565,000
$375,000 90,000 190,000 15,000
127. In which section of the financial statements would Paid-In Capital from Sale of Treasury Stock be reported? a. Other Expense section of the income statement b. Intangible Assets section of the balance sheet c. Stockholders' Equity section of the balance sheet d. Other Income section of the income statement 128. Which of the following is not classified as paid-in capital on the balance sheet? a. common stock b. common stock distributable c. excess of issue price over par d. treasury stock 129. All of the following are normally found in a corporation's Stockholders' Equity section of the balance sheet except a. Common Stock b. Paid-In Capital in Excess of Par c. Dividends in Arrears d. Retained Earnings 130. Which of the following amounts should be disclosed in the Stockholders' Equity section of the balance sheet? a. the number of shares of common stock outstanding b. the number of shares of common stock issued c. the number of shares of common stock authorized d. All of these choices 131. Significant changes in stockholders' equity are reported on the a. income statement b. retained earnings statement c. statement of stockholders' equity d. statement of cash flows 132. Retained earnings a. is the same as contributed capital b. cannot have a debit balance c. changes are summarized in the retained earnings statement Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends d. is equal to cash on hand 133. Which of the following would appear as a prior period adjustment? a. loss resulting from the sale of fixed assets b. difference between the actual and estimated uncollectible accounts receivable c. error in the computation of depreciation expense in the preceding year d. loss from the restructuring of assets 134. A restriction/appropriation of retained earnings a. decreases total assets b. increases total retained earnings c. decreases total retained earnings d. has no effect on total retained earnings 135. Dayton Corporation began the current year with a retained earnings balance of $32,000. During the year, the company corrected an error made in the prior year, which was a failure to record depreciation expense of $3,000 on equipment. Also, during the current year, the company earned net income of $12,000 and declared cash dividends of $7,000. Compute the year-end retained earnings balance. a. $34,000 b. $37,000 c. $41,000 d. $44,000 136. What is the total stockholders' equity based on the following data? Common Stock Paid-in Capital in Excess of Par Retained Earnings (deficit) a. $1,095,000 b. $1,151,000 c. $1,039,000 d. $679,000
$360,000 735,000 (56,000)
137. The two main sources of stockholders' equity are a. investments by stockholders and net income retained in the business b. investments by stockholders and dividends paid c. net income retained in the business and dividends paid d. investments by stockholders and purchases of assets 138. Treasury stock should be reported in the financial statements of a corporation as a(n) a. investment b. liability c. current asset d. deduction from stockholders' equity 139. Earnings per share Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends a. is the net income per common share b. must be reported by a public company c. helps compare companies of different sizes d. All of these choices 140. Oregon, Inc., reported net income of $105,000. During the current year, the company had 5,000 shares of $100 par, 5% preferred stock and 10,000 shares of $5 par common stock outstanding. Oregon's earnings per share is a. $8.00 b. $18.00 c. $5.08 d. $5.00 Matching Match each of the following stockholders' equity concepts to the appropriate term (a–h). a. Articles of incorporation b. Limited liability c. Bylaws d. Corporation e. Public corporation f. Board of directors g. Private corporation h. Dividends 141. A legal entity, separate from the people who create and operate it 142. A company whose shares can be bought and sold in public markets 143. The rules and procedures for conducting a corporation's affairs 144. A company whose shares are not bought or sold in public markets 145. Document that formally creates a corporation 146. Creditors cannot pursue stockholders' personal assets to satisfy claims 147. Group that meets periodically to establish corporate policies 148. Corporate income distributed to stockholders Match each of the following stockholders' equity concepts to the most appropriate term (a–h). a. Authorized shares b. Issued shares c. Outstanding shares d. Par value e. Common stock Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends f. Preferred stock g. Paid-In Capital in Excess of Par h. Transfer agent 149. The account used to record the difference when issue price exceeds par value of stock 150. The dollar amount assigned to each share of stock 151. The number of shares currently held by stockholders 152. A class of stock having first rights to dividends of a corporation 153. The maximum number of shares a company can issue to shareholders 154. The number of shares sold to stockholders 155. A class of stock that provides no preference rights to shareholders 156. A financial institution that records and maintains records of another company's stockholders Match each of the following stockholders' equity concepts to the appropriate term (a–h). a. Cash dividend b. Date of record c. Stock Dividends Distributable d. Date of declaration e. Treasury stock f. Preferred stock g. Date of payment h. Paid-In Capital in Excess of Par 157. Equity account reflecting shares “owed” to stockholders 158. Shares of common stock that were issued and then reacquired by a company 159. Owners of this class of stock are entitled to receive dividends first 160. Cash distribution of a company’s earnings to stockholders 161. Account used when shares are issued for an amount greater than par value 162. The day of the event that creates a liability to company 163. The date that is used to determine the owners of stock who will receive the current dividend 164. The date when dividends are actually distributed to stockholders Match each of the following equations to the appropriate result (a–h). a. Treasury Stock Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends b. Retained Earnings (ending) c. Preferred Stock d. Excess of Issue Price over Par (preferred) e. Common Stock f. Total Paid-In Capital g. Excess of Issue Price over Par (common) h. Total Stockholders' Equity 165. Number of Shares of Preferred Stock Issued × Par Value of Preferred Stock 166. (Price of Common Stock – Par Value of Common Stock) × Number of Shares of Common Stock Issued 167. (Price of Preferred Stock – Par Value of Preferred Stock) × Number of Shares of Preferred Stock Issued 168. Par Value of Common Stock × Number of Shares of Common Stock Issued 169. Beginning Retained Earnings + Net Income – Cash Dividends 170. Preferred Stock + Excess of Issue Price over Par (Preferred) + Common Stock + Excess of Issue Price over Par (Common) + Paid-In Capital from Sale of Treasury Stock 171. Total Paid-In Capital + Retained Earnings – Treasury Stock 172. Number of Reacquired Shares of Common Stock × Purchase Price of Common Stock Subjective Short Answer 173. On February 1 of the current year, Motor, Inc., issued 700 shares of $2 par common stock to an attorney in return for preparing and filing the articles of incorporation. The value of the services is $9,600. Journalize this transaction. 174. On April 1, 10,000 shares of $5 par common stock were issued at $22, and on April 7, 5,000 shares of $50 par preferred stock were issued at $104. Journalize the entries for April 1 and 7. 175. On May 10, a company issued for cash 1,500 shares of no-par common stock (with a stated value of $2) at $14, and on May 15, it issued for cash 2,000 shares of $15 par preferred stock at $58. Journalize the entries for May 10 and 15, assuming that the common stock is to be credited with the stated value. 176. On April 10, a company acquired land in exchange for 1,000 shares of $20 par common stock with a current market price of $73. Journalize this transaction. 177. On May 1, 10,000 shares of $10 par common stock were issued at $30, and on May 7, 5,000 shares of $50 par preferred stock were issued at $111. Journalize the entries for May 1 and 7. 178. On February 13, Epperson Company issued for cash 75,000 shares of no-par common stock (with a stated value of $125) at $140. On September 9, Epperson issued at par 15,000 shares of 1%, $60 par preferred stock at par for cash. On November 23, Epperson issued for cash 8,000 shares of 1%, $60 par preferred stock at $70. Journalize the entries for the February 13, September 9, and November 23 transactions. Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 179. A corporation was organized on January 1 of the current year with an authorization of 20,000 shares of 4%, $12 par preferred stock and 100,000 shares of $3 par common stock. The following selected transactions were completed during the first year of operations: Jan.
3
Issued 15,000 shares of common stock at $23 per share for cash.
31
Issued 200 shares of common stock to an attorney in payment of legal fees for organizing the corporation. The value of the stock at the time of payment was $25 per share.
Feb. 24
Issued 20,000 shares of common stock in exchange for land, buildings, and equipment with fair market prices of $65,000, $120,000, and $45,000, respectively.
Mar. 15
Issued 2,000 shares of preferred stock at $56 for cash.
Journalize the transactions. 180. On April 10, Maranda Corporation issued for cash 11,000 shares of no-par common stock at $25. On May 5, Maranda issued at par 1,000 shares of 4%, $50 par preferred stock for cash. On May 25, Maranda issued for cash 15,000 shares of 4%, $50 par preferred stock at $55. Journalize the entries for the April 10, May 5, and May 25 transactions. 181. Wonder Sales is authorized to issue 100,000 shares of 2%, $100 par preferred stock and 1,000,000 shares of $10 par common stock. Journalize the following transactions: a. On January 2, Wonder Sales issues 5,000 shares of preferred stock for $110 per share and 65,000 shares of common stock at $10 per share. b. On January 25, Wonder Sales issues 250 shares of preferred stock to Morton Law Firm for settlement of a $36,000 invoice for incorporation services. c. On January 31, Wonder Sales issues 500 shares of common stock to Setup Inc. for fixtures that have a fair market value of $8,500. 182. Sabas Company has 20,000 shares of $100 par, 2% cumulative preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: Year 1 Year 2 Year 3
$20,000 50,000 90,000
Determine the dividend per share for preferred and common stock for each year. 183. Sabas Company has issued and outstanding 40,000 shares of $100 par, 1% preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: Year 1 Year 2 Year 3
$50,000 90,000 130,000
Determine the dividend per share for preferred and common stock for each year. 184. Macy Company has issued and outstanding 10,000 shares of 2% cumulative preferred stock of $50 par and 25,000 Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends shares of $75 par common stock. The following amounts were distributed as dividends: Year 1 Year 2 Year 3
$30,000 6,000 80,000
Determine the dividend per share for preferred and common stock for each year. 185. Sabas Company has issued and outstanding 20,000 shares of $100 par, 1% noncumulative preferred stock and 100,000 shares of $50 par common stock. The following amounts were distributed as dividends: Year 1 Year 2 Year 3
$10,000 15,000 90,000
Determine the dividend per share for preferred and common stock for each year. 186. On January 1, Year 1, a company had the following transactions: • • •
Issued 10,000 shares of $2 par common stock for $12 per share. Issued 3,000 shares of $50 par, 6% cumulative preferred stock for $70 per share. Purchased 1,000 shares of previously issued common stock for $15 per share.
The company had the following dividend information available: Year 1 Year 2 Year 3 Year 4
No dividend paid Paid $2,000 total dividends Paid $20,000 total dividends Paid $25,000 total dividends
Using the following format, fill in the correct values for each year: Common stock dividend Preferred stock dividend Dividends in arrears
Year 1 ______ ______ ______
Year 2 ______ ______ ______
Year 3 ______ ______ ______
Year 4 ______ ______ ______
187. A company had stock outstanding as follows during each of its first three years of operations: 2,500 shares of 10%, $100 par, cumulative preferred stock and 50,000 shares of $10 par common stock. The amounts distributed as dividends follow. Determine the total and per-share dividends for each class of stock for each year by completing the schedule. Preferred Common Year Dividends Total Per Share Total Per Share 1 $10,000 _________ _________ _________ _________ 2 25,000 _________ _________ _________ _________ 3 60,000 _________ _________ _________ _________ 188. The dates of importance in connection with a cash dividend of $50,000 on a corporation’s common stock are January 15, February 15, and March 15. Journalize the entries required on each date. 189. Vincent Corporation has 100,000 shares of $100 par common stock outstanding. On June 30, Vincent Corporation declared a 5% stock dividend to be issued on July 30 to stockholders of record July 15. The market price of the stock was $132 a share on June 30. Journalize the entries required on June 30, July 15, and July 30. Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 190. Indicate whether the following actions would (+) increase, (–) decrease, or (0) not affect a company's total assets, liabilities, and stockholders' equity.
a. b. c. d.
Declaring a cash dividend Paying the cash dividend declared in (a) Declaring a stock dividend Issuing stock certificates for the stock dividend declared in (c)
Assets _______ _______ _______
Liabilities _______ _______ _______
Stockholders' Equity _______ _______ _______
_______
_______
_______
191. The following account balances appeared on the balance sheet of Osgood Industries at the beginning of the period: Common Stock (300,000 shares authorized, $100 par) Paid-In Capital in Excess of Par—Common Stock Retained Earnings
$10,000,000 2,000,000 45,000,000
During the period, the board of directors declared a 2% stock dividend when the market price of the stock was $135 per share. a.
b.
c.
Journalize the entries for the following: (1) Declaration of the dividend, capitalizing an amount equal to market value (2) Issuance of the stock certificates Determine the following amounts before the stock dividend was declared: (1) Total paid-in capital (2) Total retained earnings (3) Total stockholders’ equity Determine the following amounts after the stock dividend was declared and closing entries were made at the end of the year: (1) Total paid-in capital (2) Total retained earnings (3) Total stockholders’ equity
192. Solar Company has 600,000 shares of $75 par common stock outstanding. On February 13, Solar declared a 3% stock dividend to be issued on April 30 to stockholders of record on March 14. The market price of the stock was $90 per share on February 13. Journalize the entries required on February 13, March 14, and April 30. 193. The following transaction took place for XYZ Corporation: Nov. 12 Declared a total cash dividend of $45,000 for stockholders of record November 20 payable on December 1. a. Journalize the entries required by these events. b. Briefly describe the significance of November 20. 194. Journalize the following selected transactions completed during the current fiscal year: Mar. 24
The board of directors of New Town, Inc., declared a stock split that reduced the par of common shares from $100 to $20. This action increased the number of outstanding
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends shares to 500,000. 26
Declared a dividend of $1.75 per share on the outstanding shares of common stock.
Apr. 5
Paid the dividend declared on March 26.
Nov. 1
Declared a 5% stock dividend on the common stock outstanding (the fair market value of the stock to be issued is $25).
Dec. 1
Issued the certificates for the common stock dividend declared on November 1.
195. Journalize the following selected transactions completed during the current fiscal year: Jan.
Feb.
3
The board of directors declared a stock split that reduced the par of common shares from $100 to $20. This action increased the number of outstanding shares to 400,000.
22
Declared a dividend of $1.75 per share on the outstanding shares of common stock.
8
Paid the dividend declared on January 22.
Sept. 1
Declared a 5% stock dividend on the common stock outstanding (the fair market value of the stock to be issued is $30.)
Oct.
Issued the certificates for the common stock dividend declared on September 1.
1
196. Selected transactions completed by Breezeway Construction during the current fiscal year are as follows: Feb.
3 Split the common stock 2-for-1 and reduced the par from $40 to $20 per share. After the split, there were 250,000 common shares outstanding.
Apr. 10 Declared semiannual dividends of $1.50 on 18,000 shares of preferred stock and $0.08 on the common stock to stockholders of record on May 10, payable on June 9. June 9
Paid the cash dividends.
Oct. 10
Declared semiannual dividends of $1.50 on the preferred stock and $0.04 on the common stock (before the stock dividend). In addition, a 2% common stock dividend was declared on the common stock outstanding. The fair market value of the common stock is estimated at $36.
Dec. 9
Paid the cash dividends and issued the certificates for the common stock dividend.
Journalize these transactions. 197. Marcos Company, which had 35,000 shares of common stock outstanding, declared a 4-for-1 stock split. a. b.
What will be the number of shares outstanding after the split? If the common stock had a market price of $280 per share before the stock split, what would be an approximate market price per share after the split?
198. A corporation, which had 18,000 shares of common stock outstanding, declared a 3-for-1 stock split. a. What will be the number of shares outstanding after the split? b. If the common stock had a market price of $240 per share before the stock split, what would be an approximate market price per share after the split? Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends c.
Journalize the entry for the stock split.
199. Journalize the following transactions: a. b. c. d.
Issued 1,000 shares of $10 par common stock at $56 for cash. Issued 1,400 shares of $10 par common stock in exchange for equipment with a fair market price of $21,000. Purchased 100 shares of treasury stock at $25. Sold the 100 shares of treasury stock purchased in (c) at $30.
200. Journalize the following transactions: a. b. c. d.
Issued 1,000 shares of $10 par common stock at $59 for cash. Issued 1,400 shares of $10 par common stock in exchange for equipment with a fair market price of $60,000. Purchased 100 shares of treasury stock at $32. Sold the 100 shares of treasury stock purchased in (c) at $42.
201. Journalize the following transactions: a. b. c. d.
Issued 1,000 shares of $15 par common stock at $54 for cash. Issued 1,400 shares of no-par common stock in exchange for equipment with a fair market price of $24,000. Purchased 100 shares of treasury stock at $26. Sold 100 shares of treasury stock purchased in (c) at $29.
202. A company has 10,000 shares of $10 par common stock outstanding. Journalize the following transactions: a. b. c. d.
Purchased 1,000 shares of treasury stock at $12. The treasury stock is accounted for by the cost method. There were no previous purchases of treasury shares. Sold 500 shares of treasury stock at $15. Purchased equipment for $75,000, paying $25,000 in cash and issuing 4,000 shares of common stock for the remaining. Sold 500 shares of treasury stock at $11.
203. Journalize the following transactions for Maine Corp.: a. b. c. d.
Issued 2,000 shares of $10 par common stock at $72 for cash. Issued 2,500 shares of common stock in exchange for land with a fair market price of $130,000. Purchased 400 shares of treasury stock at $70. Sold the 400 shares of treasury stock purchased in (c) at $76.
204. A company has 10,000 shares of $10 par common stock outstanding. Journalize the following transactions: a. b. c. d.
Purchased 1,500 shares of treasury stock at $16. The treasury stock is accounted for by the cost method. There were no previous purchases of treasury shares. Sold 1,000 shares of treasury stock at $19. Purchased equipment for $80,000, paying $25,000 in cash and issuing 4,000 shares of common stock. Sold 500 shares of treasury stock at $14.
205. Carmen Company is a corporation that has issued both preferred and common stock. As of January 1, it had 50,000 Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends shares of 2.75%, $100 par, preferred stock outstanding and 250,000 shares of $10 par common stock outstanding. Journalize the following transactions: a. On January 31, the board of directors issues a requirement to purchase 5,000 shares of its common stock at market price. The shares are purchased at a market price of $22 per share. b. On March 15, Carmen declares a dividend on preferred stock of $2.75 per share. The date of record is March 25 and the date of payment is March 31. c. On December 1, Carmen declares a cash dividend on common stock of $0.12 per share. The date of record is December 15 and the date of payment is December 21. d. On December 27, the board orders that 2,500 shares of the treasury stock purchased in (a) be sold. The sale price is $25 per share. 206. Journalize the following selected transactions completed during the current fiscal year: Feb.
May
1
The board of directors declared a stock split that reduced the par of common shares from $100 to $20. This action increased the number of outstanding shares to 500,000.
11
Purchased 25,000 shares of the company's own stock at $44, recording the treasury stock at cost.
1
Declared a dividend of $2.50 per share on the outstanding shares of common stock.
15
Paid the dividend declared on May 1.
Oct. 19
Declared a 2% stock dividend on the common stock outstanding (the fair market value of the stock to be issued is $55).
Nov. 12
Issued the certificates for the common stock dividend declared on October 19.
207. On February 1, Marine Company reacquired 7,500 shares of its common stock at $30 per share. On March 15, Marine sold 4,500 of the reacquired shares at $34 per share. On June 2, Marine sold the remaining shares at $28 per share. Journalize the transactions of February 1, March 15, and June 2. 208. On April 2 a corporation purchased for cash 5,000 shares of its own $10 par common stock at $16 per share. It sold 3,000 of the treasury shares at $19 per share on June 10. The remaining 2,000 shares were sold on November 10 for $12 per share. a. Journalize the entries for the purchase (treasury stock is recorded at cost). b. Journalize the entries for the sale of the stock. 209. On June 5, Belen Corporation reacquired 3,300 shares of its own common stock at $45 per share. On July 15, Belen sold 2,000 of the reacquired shares at $48 per share. On August 30, Belen sold the remaining shares at $42 per share. Journalize the transactions of June 5, July 15, and August 30. 210. On March 4 of the current year, Barefoot Bay, Inc. reacquired 5,000 shares of its common stock at $89 per share. On August 7, Barefoot Bay sold 3,500 of the reacquired shares at $100 per share. The remaining 1,500 shares were sold at $88 per share on November 29. a. b. c.
Journalize the transactions of March 4, August 7, and November 29. What is the balance in Paid-In Capital from Sale of Treasury Stock on December 31 of the current year? Why might Barefoot Bay, Inc. have purchased the treasury stock?
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 211. Torre Company has the following stockholders' equity account balances on December 31: Common Stock, $5 par (60,000 shares issued) Paid-In Capital in Excess of Par—Common Stock Preferred Stock, $100 par (5,000 shares issued) Paid-In Capital in Excess of Par—Preferred Stock Retained Earnings Treasury Stock (cost, $12 per share) a. b. c. d. e. f. g.
$300,000 600,000 500,000 100,000 200,000 60,000
How many shares of treasury stock are owned? What was the average market price per share at which common stock was issued? What was the average market price per share at which preferred stock was issued? What is the total value of the paid-in capital portion of stockholders' equity? What is the total value of stockholders' equity? How many shares of common stock are outstanding? If net income for the year was $75,000 and a preferred stock dividend of $20,000 was paid, what was the beginning value of retained earnings? How much is earnings per share for the year?
212. At December 31, Idaho Company had the following ending account balances: Retained Earnings Preferred Stock ($100 par, 7% cumulative, 10,000 authorized, 5,000 issued and outstanding) Treasury Stock Paid-In Capital in Excess of Par—Common Stock Paid-In Capital in Excess of Par—Preferred Stock Common Stock ($5 par value, 500,000 shares authorized, 105,000 issued)
$250,000 500,000 40,000 625,000 50,000 525,000
Prepare the Stockholders' Equity section of the balance sheet using Method 2 (showing combined additional paid-in capital). 213. Using the following accounts and balances, prepare the Stockholders’ Equity section of the balance sheet using Method 1 (separating sources of additional paid-in capital). Fifty thousand shares of common stock are authorized, and 5,000 shares have been reacquired. Common Stock, $50 par Paid-In Capital in Excess of Par Paid-In Capital from Sale of Treasury Stock Retained Earnings Treasury Stock
$1,250,000 800,000 42,000 4,350,000 155,000
214. Big Bluestem Inc. reported the following results for the year ending April 30: Retained earnings, May 1 Net income Cash dividends declared Stock dividends declared
$3,750,000 720,000 80,000 220,000
Prepare a retained earnings statement for the fiscal year ended April 30. 215. Using the following information, prepare the Stockholders’ Equity section of the balance sheet using Method 1 Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends (separating sources of additional paid-in capital). Seventy thousand shares of common stock are authorized and 7,000 shares have been reacquired. Common Stock, $75 par Paid-In Capital in Excess of Par Paid-In Capital from Sale of Treasury Stock Retained Earnings Treasury Stock
$4,725,000 679,000 25,200 2,032,800 600,000
216. Firefly, Inc., reported the following results for the year ending July 31: Retained earnings, August 1 Net income Cash dividends declared Stock dividends declared
$875,000 450,000 140,000 60,000
Prepare a retained earnings statement for the fiscal year ended July 31. 217. A company had the following stockholders' equity information available at year-end: Issued 11,000 shares of $2 par common stock for $12 per share. Issued 5,000 shares of $50 par, 6% preferred stock for $70 per share. Purchased 1,000 shares of previously issued common stock for $15 per share. Reported net income of $200,000. Declared and paid the preferred stock dividend. Determine the earnings per share for the current year.
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends Answer Key 1. False 2. False 3. True 4. True 5. False 6. False 7. False 8. False 9. True 10. False 11. True 12. False 13. True 14. False 15. False 16. True 17. False 18. True 19. False 20. False 21. True 22. False 23. True 24. False 25. True Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 26. True 27. True 28. False 29. False 30. True 31. False 32. True 33. False 34. True 35. False 36. True 37. False 38. False 39. False 40. True 41. False 42. False 43. False 44. True 45. False 46. False 47. False 48. False 49. True 50. False Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 51. False 52. False 53. True 54. False 55. True 56. True 57. True 58. True 59. False 60. False 61. b 62. d 63. b 64. c 65. a 66. b 67. a 68. c 69. d 70. b 71. a 72. c 73. d 74. b 75. c 76. c Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 77. a 78. d 79. c 80. c 81. c 82. b 83. c 84. a 85. d 86. c 87. d 88. b 89. b 90. a 91. c 92. a 93. c 94. d 95. a 96. a 97. d 98. d 99. b 100. b 101. d Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 102. d 103. a 104. b 105. b 106. a 107. c 108. b 109. a 110. d 111. c 112. b 113. b 114. d 115. a 116. c 117. d 118. b 119. d 120. b 121. c 122. c 123. d 124. a 125. d 126. c 127. c Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 128. d 129. c 130. d 131. c 132. c 133. c 134. d 135. a 136. c 137. a 138. d 139. d 140. a 141. d 142. e 143. c 144. g 145. a 146. b 147. f 148. h 149. g 150. d 151. c 152. f Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 153. a 154. b 155. e 156. h 157. c 158. e 159. f 160. a 161. h 162. d 163. b 164. g 165. c 166. g 167. d 168. e 169. b 170. f 171. h 172. a 173. Feb. 1 Organizational Expenses Common Stock Paid-In Capital in Excess of Par— Common Stock 174. Apr. 1 Cash Common Stock Paid-In Capital in Excess of Par— Common Stock Powered by Cognero
9,600 1,400 8,200
220,000 50,000 170,000 Page 36
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 7 Cash Preferred Stock Paid-In Capital in Excess of Par— Preferred Stock
520,000 250,000 270,000
175. May 10 Cash Common Stock Paid-In Capital in Excess of Stated Value—Common Stock
21,000 3,000 18,000
15 Cash 116,000 Preferred Stock Paid-In Capital in Excess of Par— Preferred Stock 176. Apr. 10 Land Common Stock Paid-In Capital in Excess of Par— Common Stock 177. May 1 Cash Common Stock Paid-In Capital in Excess of Par—Common Stock 7 Cash Preferred Stock Paid-In Capital in Excess of Par—Preferred Stock 178. Feb. 13
Sept. 9
Nov. 23
30,000 86,000
73,000 20,000 53,000
300,000 100,000 200,000 555,000 250,000 305,000
Cash (75,000 shares × $140) Common Stock (75,000 shares × $125) Paid-In Capital in Excess of Stated Value [75,000 shares × ($140 – $125)]
10,500,000 9,375,000 1,125,000
Cash Preferred Stock (15,000 shares × $60).
900,000
Cash (8,000 shares × $70) Preferred Stock (8,000 shares × $60) Paid-In Capital in Excess of Par [8,000 shares × ($70 – $60)]
560,000
179. Jan. 3 Cash Powered by Cognero
900,000
480,000 80,000
345,000 Page 37
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends Common Stock Paid-In Capital in Excess of Par— Common Stock 31 Organizational Expenses Common Stock Paid-In Capital in Excess of Par— Common Stock
45,000 300,000 5,000 600 4,400
Feb. 24 Land 65,000 Buildings 120,000 Equipment 45,000 Common Stock Paid-In Capital in Excess of Par— Common Stock Mar. 15 Cash 112,000 Preferred Stock Paid-In Capital in Excess of Par— Preferred Stock 180. Apr. 10 Cash Common Stock (11,000 × $25). May 5
25
b.
c.
24,000 88,000
275,000
50,000
Cash Preferred Stock Paid-In Capital in Excess of Par [15,000 × ($55 – $50)]
825,000
50,000
750,000 75,000
1,200,000 500,000 50,000 650,000
Jan. 25 Organizational Expense Preferred Stock Paid-In Capital in Excess of Par—Preferred Stock
36,000
Jan. 31 Fixtures Common Stock Paid-In Capital in Excess of Par—Common Stock
8,500
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170,000
275,000
Cash Preferred Stock (1,000 × $50).
181. a. Jan. 2 Cash Preferred Stock Paid-In Capital in Excess of Par—Preferred Stock Common Stock
60,000
25,000 11,000
5,000 3,500 Page 38
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 182. Yearly Preferred Stock Dividend to Be Paid = 20,000 × $100 × 2% = $40,000 Amount distributed Preferred dividend (20,000 shares) Common dividend (100,000 shares) Preferred dividends in arrears Dividend per share: Preferred stock Common stock
Year 1 $20,000 20,000 $ 0 $20,000
Year 2 $50,000 50,000 $ 0 $10,000
Year 3 $90,000 50,000 $40,000 $ 0
$1.00 $0.00
$2.50 $0.00
$2.50 $0.40
183. Yearly Preferred Stock Dividend to Be Paid = 20,000 × $100 × 2% = $40,000
Amount distributed Preferred dividend (40,000 shares) Common dividend (100,000 shares) Dividend per share: Preferred stock Common stock
Year 1 $50,000 40,000 $10,000
Year 2 $90,000 40,000 $50,000
Year 3 $130,000 40,000 $ 90,000
$1.00 $0.10
$1.00 $0.50
$1.00 $0.90
184. Yearly Preferred Stock Dividend to Be Paid = 10,000 × $50 × 2% = $10,000
Amount distributed Preferred dividend (40,000 shares) Common dividend (100,000 shares) Preferred dividends in arrears *($4,000 + $10,000) Dividend per share: Preferred stock Common stock
Year 1 $30,000 10,000 $20,000 $ 0
Year 2 $6,000 6,000 $ 0 $4,000
Year 3 $80,000 14,000* $66,000 $ 0
$1.00 $0.80
$0.60 $0.00
$1.40 $2.64
185. Yearly Preferred Stock Dividend to Be Paid = 20,000 × $100 × 1% = $20,000
Amount distributed Preferred dividend (20,000 shares) Common dividend (100,000 shares) Preferred dividends in arrears Dividend per share: Preferred stock Common stock
Year 1 $10,000 10,000 $ 0 $10,000
Year 2 $15,000 15,000 $ 0 $15,000
Year 3 $90,000 35,000 $55,000 $ 0
$0.50 $0.00
$0.75 $0.00
$1.75 $0.55
186. Common stock dividend Preferred stock dividend Dividends in arrears Powered by Cognero
Year 1 None None $9,000
Year 2 None $ 2,000 16,000
Year 3 None $20,000 5,000
Year 4 $11,000 14,000 None Page 39
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 187.
Year 1 2 3 188. Jan. 15
Preferred Common Dividends Total Per Share Total Per Share $10,000 $10,000 $ 4.00 None None 25,000 25,000 10.00 None None 60,000 40,000 16.00 $20,000 $0.40
Cash Dividends Cash Dividends Payable
50,000 50,000
Feb. 15 No entry required. Mar. 15 Cash Dividends Payable Cash
50,000 50,000
189. June 30 Stock Dividends (100,000 × 5% × $132) Stock Dividends Distributable (5,000 × $100) Paid-In Capital in Excess of Par—Common Stock
660,000 500,000 160,000
July 15 No entry required. July 30 Stock Dividends Distributable Common Stock
500,000 500,000
190.
a. Declaring a cash dividend b. Paying the cash dividend declared in (a) c. Declaring a stock dividend d. Issuing stock certificates for the stock dividend declared in (c)
Assets Liabilities 0 + – – 0 0 0
0
191. a. (1) Stock Dividends {[($10,000,000/$100) × $135] × 2%} Stock Dividends Distributable (2,000 × $100) Paid-In Capital in Excess of Par— Common Stock (2) Stock Dividends Distributable Common Stock
Stockholders' Equity – 0 0 0
270,000* 200,000 70,000 200,000 200,000
b. (1) $12,000,000 ($10,000,000 + $2,000,000) (2) $45,000,000 Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends (3) $57,000,000 ($12,000,000 + $45,000,000) c. (1) $12,270,000 ($12,000,000 + $270,000) (2) $44,730,000 ($45,000,000 – $270,000) (3) $57,000,000 ($12,270,000 + $44,730,000) 192. Feb. 13
Stock Dividends (600,000 × 1,620,000 3% × $90) Stock Dividends Distributable (18,000 × $75) Paid-In Capital in Excess of Par— Common Stock ($1,620,000 – $1,350,000)
Mar. 14
No entry required.
Apr. 30
Stock Dividends Distributable Common Stock
1,350,000
Cash Dividends Cash Dividends Payable
45,000
193. a. Nov. 12 20 Dec. 1
1,350,000 270,000
1,350,000
45,000
No entry required. Cash Dividends Payable Cash
45,000 45,000
b. The stock must be owned on or before November 20 in order to receive this dividend. 194. Mar. 24 No entry required. 26 Cash Dividends Cash Dividends Payable
875,000 875,000
Apr. 5 Cash Dividends Payable Cash
875,000
Nov. 1 Stock Dividends Stock Dividends Distributable Paid-In Capital in Excess of Par—Common Stock
625,000
Dec. 1 Stock Dividends Distributable Common Stock
500,000
195. Jan. 3 22
875,000 500,000 125,000 500,000
No entry required. Cash Dividends Cash Dividends Payable
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700,000 700,000 Page 41
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends Feb. 8
Sept. 1
Oct. 1
Cash Dividends Payable Cash
700,000
Stock Dividends Stock Dividends Distributable Paid-In Capital in Excess of Par—Common Stock
600,000
Stock Dividends Distributable Common Stock
400,000
700,000
400,000 200,000 400,000
196. Feb. 3 No entry required. Apr. 10
June 9
Cash Dividends* Cash Dividends Payable *[(18,000 shares × $1.50) + (250,000 shares × $0.08)]
47,000
Cash Dividends Payable Cash
47,000
Oct. 10 Cash Dividends* Cash Dividends Payable *[(18,000 shares × $1.50) + (250,000 shares × $0.04)] 10
Dec. 9
9
Stock Dividends (250,000 shares × 2% × $36) Stock Dividends Distributable (5,000 × $20) Paid-In Capital in Excess of Par—Common Stock
47,000
47,000 37,000 37,000
180,000 100,000 80,000
Cash Dividends Payable Cash
37,000
Stock Dividends Distributable Common Stock
100,000
37,000
100,000
197. a. 140,000 shares (35,000 × 4) b. $70 per share ($280 ÷ 4) 198. a. Number of Shares Outstanding after Split = Current Number of Shares Outstanding × Ratio of Stock Split = 18,000 shares × 3 = 54,000 shares b. Approximate Market Price per Share after Split = Current Market Price ÷ Ratio of Stock Split = $240 ÷ 3 = $80 per share c. No entry required. 199. a. Cash Powered by Cognero
56,000 Page 42
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends Common Stock Paid-In Capital in Excess of Par—Common Stock b. Equipment Common Stock Paid-In Capital in Excess of Par—Common Stock c. Treasury Stock Cash d. Cash Treasury Stock Paid-In Capital from Sale of Treasury Stock 200. a. Cash Common Stock Paid-In Capital in Excess of Par—Common Stock b. Equipment Common Stock Paid-In Capital in Excess of Par—Common Stock c. Treasury Stock Cash d. Cash Treasury Stock Paid-In Capital from Sale of Treasury Stock 201. a. Cash Common Stock Paid-In Capital in Excess of Par—Common Stock b. Equipment Common Stock c. Treasury Stock Cash d. Cash Treasury Stock Paid-In Capital from Sale of Treasury Stock 202. a. Treasury Stock Cash b. Cash Paid-In Capital from Sale of Treasury Powered by Cognero
10,000 46,000 21,000 14,000 7,000 2,500 2,500 3,000 2,500 500
59,000 10,000 49,000 60,000 14,000 46,000 3,200 3,200 4,200 3,200 1,000
54,000 15,000 39,000 24,000 24,000 2,600 2,600 2,900 2,600 300
12,000 12,000 7,500 1,500 Page 43
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends Stock [500 shares × ($15 – $12)] Treasury Stock (500 shares × $12)
6,000
c. Equipment Cash Common Stock Paid-In Capital in Excess of Par— Common Stock d. Cash Paid-In Capital from Sale of Treasury Stock Treasury Stock
75,000 25,000 40,000 10,000 5,500 500 6,000
203. a. Cash Common Stock Paid-In Capital in Excess of Par—Common Stock b. Land Common Stock Paid-In Capital in Excess of Par—Common Stock c. Treasury Stock Cash d. Cash Treasury Stock Paid-In Capital from Sale of Treasury Stock 204. a. Treasury Stock Cash b. Cash Paid-In Capital from Sale of Treasury Stock Treasury Stock c. Equipment Cash Common Stock Paid-In Capital in Excess of Par— Common Stock d. Cash Paid-In Capital from Sale of Treasury Stock Treasury Stock 205. a. Jan. 31 Treasury Stock—Common Stock Cash b. Mar. 15 Cash Dividends—Preferred Stock Cash Dividends Payable Powered by Cognero
144,000 20,000 124,000 130,000 25,000 105,000 28,000 28,000 30,400 28,000 2,400
24,000 24,000 19,000 3,000 16,000 80,000 25,000 40,000 15,000 7,000 1,000 8,000 110,000 110,000 137,500 137,500 Page 44
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends 25 No entry required. 31 Cash Dividends Payable Cash
137,500
c. Dec. 1 Cash Dividends—Common Stock Cash Dividends Payable
29,400
137,500 29,400
Note: While there are 250,000 shares of common stock issued, only 245,000 are outstanding due to the 5,000 shares held in treasury. Dec. 15 No entry required. 21 Cash Dividends Payable Cash
29,400
d. Dec. 27 Cash Treasury Stock—Common Stock (2,500 × $22) Paid-In Capital from Sales of Treasury Stock (2,500 × $3)
62,500
29,400
55,000 7,500
206. Feb. 1 No entry required. 11 Treasury Stock Cash
1,100,000 1,100,000
May 1 Cash Dividends Cash Dividends Payable
1,187,500
15 Cash Dividends Payable Cash
1,187,500
Oct. 19
Stock Dividends Stock Dividends Distributable Paid-In Capital in Excess of Par—Common Stock
Nov. 12 Stock Dividends Distributable Common Stock 207. Feb. 1
Mar. 15
June
2
1,187,500 1,187,500 522,500 190,000 332,500 190,000 190,000
Treasury Stock (7,500 × $30) Cash
225,000
Cash (4,500 × $34) Treasury Stock (4,500 × $30) Paid-In Capital from Sale of Treasury Stock [4,500 × ($34 – $30)]
153,000
Cash (3,000 × $28) Paid-In Capital from Sale of Treasury
84,000
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225,000
135,000 18,000
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends Stock [3,000 × ($30 – $28)] Treasury Stock (3,000 × $30) 208. a. Apr. 2 Treasury Stock (5,000 × $16) Cash b. June 10 Cash (3,000 × $19) Treasury Stock (3,000 × $16) Paid-In Capital from Sale of Treasury Stock [3,000 × ($16 – $19)] Nov. 10 Cash (2,000 × $12) Paid-In Capital from Sale of Treasury Stock [2,000 × ($16 – $12)] Treasury Stock (2,000 × $16) 209. June 5 July 15
Aug. 30
6,000 90,000
80,000 80,000 57,000 48,000 9,000 24,000 8,000 32,000
Treasury Stock (3,300 × $45) Cash
148,500
Cash (2,000 × $48) Treasury Stock (2,000 × $45) Paid-In Capital from Sale of Treasury Stock [2,000 × ($48 – $45)]
96,000
Cash (1,300 × $42) Paid-in Capital from Sale of Treasury Stock [1,300 × ($45 – $42)] Treasury Stock (1,300 × $45)
54,600
210. a. Mar. 4
Aug. 7
Nov. 29
148,500 90,000 6,000
3,900 58,500
Treasury Stock Cash
445,000
Cash Treasury Stock (3,500 × $89) Paid-In Capital from Sale of Treasury Stock
350,000
Cash Paid-In Capital from Sale of Treasury Stock Treasury Stock (1,500 × $89)
132,000
445,000
311,500 38,500
1,500 133,500
b. $37,000 credit c. Barefoot Bay may have purchased the stock to support the market price of the stock, to provide shares for resale to employees, or for reissuance to employees as a bonus according to stock purchase agreements. 211. a. 5,000 shares ($60,000 ÷ 12) Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends b. c. d. e. f. g.
$15 per share ($900,000 ÷ 60,000) $120 per share ($600,000 ÷ 5,000) $1,500,000 paid-in capital ($300,000 + $600,000 + $500,000 + $100,000) $1,640,000 total stockholders' equity ($1,500,000 + $200,000 – $60,000) 55,000 shares of common stock outstanding (60,000 – 5,000 shares of treasury stock) $145,000 beginning retained earnings ($200,000 + $20,000 – $75,000) $1 earnings per share [($75,000 – $20,000) ÷ 55,000]
212. Stockholders' Equity Contributed capital: Preferred 7% stock, $100 par (10,000 shares authorized, 5,000 issued) Common stock, $5 par (500,000 shares authorized, 105,000 shares issued) Additional paid-in capital Total contributed capital Retained earnings Treasury stock Total stockholders' equity
$ 500,000 525,000 675,000 $1,700,000 250,000 (40,000) $1,910,000
213. Stockholders’ Equity Paid-in capital: Common stock, $50 par (50,000 shares authorized, 25,000 issued) Excess over par Paid-in capital, common stock From sale of treasury stock Total paid-in capital Retained earnings Treasury stock (5,000 shares at cost) Total stockholders’ equity
$1,250,000 800,000 $2,050,000 42,000 $2,092,000 4,350,000 (155,000) $6,287,000
214. Big Bluestem Inc. Retained Earnings Statement For the Year Ended April 30 Retained earnings, May 1 Net income Dividends declared Increase in retained earnings Retained earnings, April 30
$3,750,000 $ 720,000 (300,000) 420,000 $4,170,000
215. Stockholders’ Equity Paid-in capital: Powered by Cognero
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Chapter 13 - Corporations: Organization, Stock Transactions, and Dividends Common stock, $75 par (70,000 shares authorized, 63,000 shares issued) Excess over par Paid in capital, common stock From sale of treasury stock Total paid-in capital Retained earnings Treasury stock (7,000 shares at cost) Total stockholders’ equity
$4,725,000 679,000 $5,404,000 25,200 $5,429,200 2,032,800 (600,000) $6,862,000
216. Firefly, Inc. Retained Earnings Statement For the Year Ended July 31 Retained earnings, August 1 $ 875,000 Net income $ 450,000 Dividends declared (200,000) Increase in retained earnings 250,000 Retained earnings, July 31 $1,125,000 217. ($200,000 – $15,000) ÷ 10,000 common shares = $18.50 EPS
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Chapter 14 - Long-Term Liabilities: Bonds and Notes True / False 1. A bond is simply a form of an interest-bearing note. a. True b. False 2. Bondholders are creditors of the issuing corporation. a. True b. False 3. Bondholders' claims on the assets of the corporation rank ahead of stockholders' claims. a. True b. False 4. A bond is usually divided into a number of individual bonds of $500 each. a. True b. False 5. If the bondholder has the right to exchange a bond for shares of common stock, the bond is called a convertible bond. a. True b. False 6. The prices of bonds are quoted as a percentage of the bonds' market value. a. True b. False 7. The face value of a term bond is payable at a single specific date in the future. a. True b. False 8. When a corporation issues bonds, it executes a contract with the bondholders, known as a bond debenture. a. True b. False 9. The market rate of interest is affected by a variety of factors, including investors' assessment of current economic conditions. a. True b. False 10. When the market rate of interest is less than the contract rate for a bond, the bond will sell for a premium. a. True b. False 11. Bonds are sold at face value when the contract rate is equal to the market rate of interest. a. True b. False Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes 12. The price of a bond is equal to the sum of the interest payments and the face amount of the bonds. a. True b. False 13. If the market rate of interest is 8% and a corporation's bonds bear interest at 7%, the bonds will sell at a premium. a. True b. False 14. The total interest expense over the entire life of a bond is equal to the sum of the interest payments plus the total discount or minus the total premium related to the bond. a. True b. False 15. Premium on bonds payable may be amortized by the straight-line method if the results obtained by its use do not materially differ from the results obtained by use of the interest method. a. True b. False 16. If the straight-line method of amortization is used, the amount of unamortized premium on bonds payable will decrease as the bonds approach maturity. a. True b. False 17. If the straight-line method of amortization of discount on bonds payable is used, the amount of yearly interest expense will increase as the bonds approach maturity. a. True b. False 18. There are two methods of amortizing a bond discount or premium: the straight-line method and the double-decliningbalance method. a. True b. False 19. The effective interest rate method of amortizing a bond discount or premium is the preferred method. a. True b. False 20. The amount of interest expense reported on the income statement will be more than the interest paid to bondholders if the bonds were originally sold at a discount. a. True b. False 21. The amortization of a premium on bonds payable decreases bond interest expense. a. True b. False Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes 22. If the amount of a bond premium on an issued 11%, 4-year, $100,000 bond is $12,928, the semiannual straight-line amortization of the premium is $1,416. a. True b. False 23. If the amount of a bond premium on an issued 11%, 4-year, $100,000 bond is $12,928 and straight-line amortization is used, the annual interest expense is $5,500. a. True b. False 24. To determine the 6-month interest payment amount on a bond, you would take one-half of the market rate times the face value of the bond. a. True b. False 25. Interest payments on 12% bonds with a face value of $20,000 and interest paid semiannually would be $2,400 every 6 months. a. True b. False 26. Amortization is the allocation process of writing off bond premiums and discounts to interest expense over the life of the bond issue. a. True b. False 27. If bonds are sold for a discount, the carrying value of the bonds is equal to the face value less the unamortized discount. a. True b. False 28. Both callable and noncallable bonds can be purchased by the issuing corporation on the open market. a. True b. False 29. There is a loss on redemption of bonds when bonds are redeemed above carrying value. a. True b. False 30. When a portion of a bond issue is redeemed, a related proportion of the unamortized premium or discount must be written off. a. True b. False 31. A corporation often issues callable bonds to protect itself against significant declines in future interest rates. a. True b. False Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes 32. Callable bonds can be redeemed by the issuing corporation at the fair market price of the bonds. a. True b. False 33. Only callable bonds can be purchased by the issuing corporation before maturity. a. True b. False 34. Callable bonds are redeemable by the issuing corporation within the period of time and at the price stated in the bond indenture. a. True b. False 35. The carrying amount of the bonds is defined as the face value of the bonds plus any unamortized discount or less any unamortized premium. a. True b. False 36. If bonds of $1,000,000 with unamortized discount of $10,000 are redeemed at 98, the gain on redemption of bonds is $10,000. a. True b. False 37. Gains on the redemption of bonds are reported in the Other Revenue section of the income statement. a. True b. False 38. Discount on Bonds Payable is a contra liability account. a. True b. False 39. When there are material differences between the results of using the straight-line method and using the effective interest rate method of amortization, the effective interest rate method should be used. a. True b. False 40. An installment note is a debt that requires the borrower to make equal periodic payments to the lender for the term of the note. a. True b. False 41. The interest portion of an installment note payment is computed by multiplying the interest rate by the carrying amount of the note at the end of the period. a. True b. False
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Chapter 14 - Long-Term Liabilities: Bonds and Notes 42. Bonds payable should be reported on the balance sheet at face value plus or minus any unamortized premium or discount. a. True b. False 43. The balance in a bond discount account should be reported on the balance sheet as a deduction from the related bonds payable. a. True b. False 44. The balance in Premium on Bonds Payable should be reported as a deduction from Bonds Payable on the balance sheet. a. True b. False 45. The higher the times interest earned ratio, the better the creditors’ protection. a. True b. False 46. The times interest earned ratio is computed by dividing bonds payable by interest expense. a. True b. False 47. The concept of present value is that an amount of cash to be received at some date in the future is the equivalent of the same amount of cash held at an earlier date. a. True b. False 48. An equal stream of periodic payments is called an annuity. a. True b. False 49. The buyer determines how much to pay for bonds by computing the present value of future cash receipts using the contract rate of interest. a. True b. False 50. The present value of the periodic bond interest payments is the value today of the amount of interest to be received at the end of future interest periods. a. True b. False 51. The present value of an annuity is the sum of the present values of each cash flow. a. True b. False
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Chapter 14 - Long-Term Liabilities: Bonds and Notes 52. The present value of $5,000 to be received in 4 years at a market rate of interest of 6% compounded annually is $3,636.30. a. True b. False 53. One reason a dollar today is worth more than a dollar one year from today is the time value of money. a. True b. False 54. If $500,000 of 10-year bonds with interest payable semiannually are sold for $494,040 based on (1) the present value of $500,000 due in 20 periods at 5% plus (2) the present value of twenty $25,000 payments at 5%, the nominal or contract rate and the market rate of interest for the bonds are both 10%. a. True b. False 55. When the effective interest rate method of amortization is used, the amount of interest expense for a given period is computed by multiplying the contract rate of interest by the bond’s carrying value at the beginning of the given period. a. True b. False 56. The effective interest rate method produces a constant dollar amount of interest expense to be reported each interest period. a. True b. False Multiple Choice 57. One potential advantage of a corporation issuing bonds rather than additional common stock is a. the interest on bonds must be paid when due b. the corporation must pay the bonds at maturity c. the interest expense reduces taxable income and, thus, income tax expense d. a higher earnings per share is guaranteed for existing common shareholders 58. Which of the following is not an advantage of issuing bonds instead of additional common stock? a. Tax savings result. b. Income to common shareholders may increase. c. Earnings per share on common stock may be lower. d. Stockholder control is not affected. 59. A bond indenture is a. a contract between the corporation issuing the bonds and the underwriters selling the bonds b. the amount due at the maturity date of the bonds c. a contract between the corporation issuing the bonds and the bondholders d. the amount for which the corporation can buy back the bonds prior to the maturity date 60. When the corporation issuing the bonds has the right to redeem the bonds prior to maturity, the bonds are Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes a. convertible bonds b. unsecured bonds c. debenture bonds d. callable bonds 61. When the maturities of a bond issue are spread over several dates, the bonds are called a. serial bonds b. bearer bonds c. debenture bonds d. term bonds 62. The market interest rate related to a bond is also called the a. stated interest rate b. effective interest rate c. contract interest rate d. straight-line rate 63. If the market rate of interest is 7%, the price of 6% bonds paying interest semiannually with a face value of $500,000 will be a. equal to $500,000 b. greater than $500,000 c. less than $500,000 d. greater than or less than $500,000, depending on the maturity date of the bonds 64. When the market rate of interest on bonds is higher than the contract rate, the bonds will sell at a. a premium b. their face value c. their maturity value d. a discount 65. The interest rate specified in the bond indenture is called the a. discount rate b. contract rate c. market rate d. effective rate 66. A legal document that indicates the name of the issuer, the face value of the bond and such other data is called a. trading on the equity b. a convertible bond c. a bond debenture d. a bond indenture 67. Bonds that may be redeemed prior to maturity at the option of the issuer are called a. debentures Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes b. callable bonds c. early retirement bonds d. options 68. If $1,000,000 of 8% bonds are issued at 102 3/4, the amount of cash received from the sale is a. $1,080,000 b. $972,500 c. $1,000,000 d. $1,027,500 69. If $2,000,000 of 10% bonds are issued at 97, the amount of cash received from the sale is a. $2,060,000 b. $2,000,000 c. $2,100,000 d. $1,940,000 70. On January 1 of the current year, Barton Corporation issued 10%, 5-year bonds with a face value of $200,000. The bonds are sold for $191,000. The bonds pay interest semiannually on June 30 and December 31, and the maturity date is December 31, 5 years from now. Barton records straight-line amortization of the bond discount. The bond interest expense for the current year ended December 31 is a. $10,900 b. $18,200 c. $21,800 d. $29,000 71. Selling the bonds at a premium has the effect of a. raising the effective interest rate above the stated interest rate b. attracting investors that are willing to pay a lower rate of interest than on similar bonds c. causing the interest expense to be higher than the bond interest paid d. causing the interest expense to be lower than the bond interest paid 72. If bonds are issued at a discount, it means that the a. bondholder will receive effectively less interest than the contractual rate of interest b. market interest rate is lower than the contractual interest rate c. market interest rate is higher than the contractual interest rate d. financial strength of the issuer is suspect 73. Levi Company issued $200,000 of 12% bonds on January 1 at face value. The bonds pay interest semiannually on January 1 and July 1. The bonds are dated January 1 and mature in 5 years on January 1. The total interest expense related to these bonds for the current year ending on December 31 is a. $2,000 b. $6,000 c. $18,000 d. $24,000 Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes 74. A corporation issues for cash $1,000,000 of 10%, 20-year bonds, interest payable annually, at a time when the market rate of interest is 12%. The straight-line method is adopted for the amortization of bond discount or premium. Which of the following statements is true? a. The amount of annual interest expense is computed at 10% of the bond carrying amount at the beginning of the year. b. The amount of annual interest expense gradually decreases over the life of the bonds. c. The amount of unamortized discount decreases from its balance at issuance date to a zero balance at maturity. d. The bonds will be issued at a premium. 75. If the straight-line method of amortization of bond premium or discount is used, which of the following statements is true? a. Annual interest expense will increase over the life of the bonds with the amortization of bond premium. b. Annual interest expense will remain the same over the life of the bonds with the amortization of bond discount. c. Annual interest expense will decrease over the life of the bonds with the amortization of bond discount. d. Annual interest expense will increase over the life of the bonds with the amortization of bond discount. 76. Basil Corporation issues for cash $1,000,000 of 8%, 10-year bonds, interest payable annually, at a time when the market rate of interest is 7%. The straight-line method is adopted for the amortization of bond discount or premium. Which of the following statements is true? a. The carrying amount increases from its amount at issuance date to $1,000,000 at maturity. b. The carrying amount decreases from its amount at issuance date to $1,000,000 at maturity. c. The amount of annual interest paid to bondholders increases over the 10-year life of the bonds. d. The amount of annual interest expense decreases as the bonds approach maturity. 77. Dylan Corporation issues for cash $2,000,000 of 8%, 15-year bonds, interest payable annually, at a time when the market rate of interest is 9%. The straight-line method is adopted for the amortization of bond discount or premium. Which of the following statements is true? a. The amount of annual interest paid to bondholders remains the same over the life of the bonds. b. The amount of annual interest expense decreases as the bonds approach maturity. c. The amount of annual interest paid to bondholders increases over the 15-year life of the bonds. d. The carrying amount decreases from its amount at issuance date to $2,000,000 at maturity. 78. The adjusting entry for the amortization of a discount on bonds payable is a. debit Discount on Bonds Payable, credit Interest Expense b. debit Interest Expense, credit Discount on Bonds Payable c. debit Interest Expense, credit Cash d. debit Bonds Payable, credit Interest Expense 79. The journal entry a company makes for the issuance of bonds when the contract rate and the market rate are the same is to a. debit Bonds Payable, credit Cash b. debit Cash and Discount on Bonds Payable, credit Bonds Payable c. debit Cash, credit Premium on Bonds Payable and Bonds Payable d. debit Cash, credit Bonds Payable Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes 80. The journal entry a company makes for the issuance of bonds when the contract rate is greater than the market rate would be a. debit Bonds Payable, credit Cash b. debit Cash and Discount on Bonds Payable, credit Bonds Payable c. debit Cash, credit Premium on Bonds Payable and Bonds Payable d. debit Cash, credit Bonds Payable 81. The journal entry a company makes for the issuance of bonds when the contract rate is less than the market rate would be a. debit Bonds Payable, credit Cash b. debit Cash and Discount on Bonds Payable, credit Bonds Payable c. debit Cash, credit Premium on Bonds Payable and Bonds Payable d. debit Cash, credit Bonds Payable 82. The journal entry a company makes for the payment of interest, interest expense, and amortization of bond discount is a. debit Interest Expense, credit Cash and Discount on Bonds Payable b. debit Interest Expense, credit Cash c. debit Interest Expense and Discount on Bonds Payable, credit Cash d. debit Interest Expense, credit Interest Payable and Discount on Bonds Payable 83. The journal entry a company makes for the payment of interest, interest expense, and amortization of bond premium is a. debit Interest Expense, credit Cash and Premium on Bonds Payable b. debit Interest Expense, credit Cash c. debit Interest Expense and Premium on Bonds Payable, credit Cash d. debit Interest Expense, credit Interest Payable and Premium on Bonds Payable 84. On January 1, Elias Corporation issued 10% bonds with a face value of $50,000. The bonds are sold for $46,000. The bonds pay interest semiannually on June 30 and December 31 and the maturity date is December 31, 10 years from now. Elias records straight-line amortization of the bond discount. The bond interest expense for the year ended December 31 of the first year is a. $5,000 b. $5,200 c. $5,800 d. $5,400 85. If Eddie Industries issues $1,500,000 of 8% bonds at 105, the amount of cash received from the sale is a. $1,425,000 b. $1,080,000 c. $1,000,000 d. $1,575,000 86. If the market rate of interest is greater than the contractual rate of interest, bonds will sell a. at a premium b. at face value c. at a discount Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes d. only after the stated rate of interest is increased 87. The interest expense recorded on an interest payment date is increased a. only if the market rate of interest is less than the stated rate of interest on that date b. by the amortization of premium on bonds payable c. by the amortization of discount on bonds payable d. only if the bonds were sold at face value 88. On January 1, a $2,000,000, 10%, 5-year bond was issued for $1,960,000. Interest is paid semiannually on January 1 and July 1. If the issuing corporation uses the straight-line method to amortize the discount on bonds payable, the semiannual amortization amount is a. $8,000 b. $2,000 c. $4,000 d. $10,000 89. If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest semiannually would sell at an amount a. less than face value b. equal to the face value c. greater than face value d. The answer cannot be determined from the information given. 90. Franklin Corporation issues a $50,000, 10%, 5-year bond on January 1 for $52,100. Interest is paid semiannually on January 1 and July 1. If Franklin uses the straight-line method of amortization of bond premium, the amount of bond interest expense to be recognized on July 1 is a. $10,290 b. $2,710 c. $2,500 d. $2,290 91. If bonds are issued at a premium, the stated interest rate is a. higher than the market rate of interest b. lower than the market rate of interest c. too low to attract investors d. adjusted to a higher rate of interest 92. Freeman Corporation issues a $2,000,000, 8%, 10-year bond dated January 1 at 96. The journal entry for the issuance will show a a. debit to Cash for $2,000,000 b. credit to Discount on Bonds Payable for $80,000 c. credit to Bonds Payable for $1,920,000 d. debit to Cash for $1,920,000 93. Glenn Corporation issues a $2,000,000, 8%, 10-year bond dated January 1 at 96. The journal entry for the issuance Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes will show a a. debit to Discount on Bonds Payable for $80,000 b. debit to Cash for $2,000,000 c. credit to Bonds Payable for $1,920,000 d. credit to Cash for $1,920,000 94. Hayden Corporation issues a $2,000,000, 8%, 10-year bond dated January 1 at 92. The journal entry for the issuance will show a a. credit to Discount on Bonds Payable for $160,000 b. debit to Cash for $2,000,000 c. credit to Bonds Payable for $2,000,000 d. credit to Cash for $1,840,000 95. Bonds with a face amount of $1,000,000 are sold at 106. The journal entry for the issuance is a. Cash 1,000,000 Premium on Bonds Payable 60,000 Bonds Payable 1,060,000 b. Cash 1,060,000 Premium on Bonds Payable 60,000 Bonds Payable 1,000,000 c. Cash 1,060,000 Discount on Bonds Payable 60,000 Bonds Payable 1,000,000 d. Cash 1,060,000 Bonds Payable 1,060,000 96. Bonds with a face amount of $1,000,000 are sold at 98. The journal entry for the issuance is a. Cash 1,000,000 Premium on Bonds Payable 20,000 Bonds Payable 980,000 b. Cash 980,000 Premium on Bonds Payable 20,000 Bonds Payable 1,000,000 c. Cash 980,000 Discount on Bonds Payable 20,000 Bonds Payable 1,000,000 d. Cash 980,000 Bonds Payable 980,000 97. If bonds payable are not callable, the issuing corporation a. can exchange them for common stock b. can repurchase them on the open market c. must get special permission from the SEC to repurchase them d. is more likely to repurchase them if the interest rates increase 98. When callable bonds are redeemed below carrying value, Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes a. Gain on Redemption of Bonds is credited b. Loss on Redemption of Bonds is debited c. Retained Earnings is credited d. Retained Earnings is debited 99. Bonds Payable has a balance of $1,000,000 and Discount on Bonds Payable has a balance of $10,000. If the issuing corporation redeems the bonds at 97.5, what is the amount of gain or loss on redemption? a. $10,000 loss b. $25,000 loss c. $25,000 gain d. $15,000 gain 100. Bonds Payable has a balance of $900,000, and Premium on Bonds Payable has a balance of $10,000. If the issuing corporation redeems the bonds at 103, what is the amount of gain or loss on redemption? a. $1,200 loss b. $1,200 gain c. $17,000 loss d. $17,000 gain 101. A $300,000 bond was redeemed at 98 when the carrying value of the bond was $292,000. The journal entry for the redemption would include a a. loss on bond redemption of $4,000 b. gain on bond redemption of $4,000 c. gain on bond redemption of $2,000 d. loss on bond redemption of $2,000 102. A $300,000 bond was redeemed at 104 when the carrying value of the bond was $316,000. The journal entry for the redemption would include a a. loss on bond redemption of $3,000 b. gain on bond redemption of $3,000 c. gain on bond redemption of $4,000 d. loss on bond redemption of $4,000 103. Bonds Payable has a balance of $1,000,000, and Discount on Bonds Payable has a balance of $15,500. If the issuing corporation redeems the bonds at 98.5, what is the amount of gain or loss on redemption? a. $500 loss b. $15,500 loss c. $15,500 gain d. $500 gain 104. On the first day of the fiscal year, Lisbon Co. issued $1,000,000 of 7%, 10-year bonds for $1,050,000, with interest payable semiannually. The journal entry for the amortization of the premium (by the straight-line method) for the year by Lisbon Co. includes a debit to a. Interest Expense for $2,500 b. Premium on Bonds Payable for $2,500 Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes c. Interest Expense for $5,000 d. Premium on Bonds Payable for $5,000 105. On the first day of the fiscal year, Lisbon Co. issued $1,000,000 of 7%, 10-year bonds for $1,050,000, with interest payable semiannually. If Lisbon uses the straight-line method for amortizing the premium and combines interest and amortization in the same entry, the journal entry for the first semiannual interest payment would include a debit to a. Interest Payable for $30,000 b. Interest Expense for $32,500 c. Cash for $70,000 d. Premium on Bonds Payable for $5,500 106. Bonds Payable has a balance of $1,000,000 and Premium on Bonds Payable has a balance of $7,000. If the issuing corporation redeems the bonds at 101, what is the amount of gain or loss on redemption? a. $3,000 loss b. $3,000 gain c. $7,000 loss d. $7,000 gain 107. If a company borrows money from a bank as an installment note, the interest portion of each annual payment will a. equal the interest rate on the note times the carrying amount of the note at the beginning of the period b. remain constant over the term of the note c. equal the interest rate on the note times the face amount d. increase over the term of the note 108. On the first day of the fiscal year, Hawthorne Company obtained an $88,000, 5%, 7-year installment note from Seaside Bank. The note requires annual payments of $15,208, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of $4,400 and principal repayment of $10,808. The journal entry Hawthorne would make for the first annual payment due on the note would include a a. debit to Cash for $15,208 b. credit to Notes Payable for $10,808 c. debit to Interest Expense for $4,400 d. debit to Notes Payable for $15,208 109. On January 1, Gemstone Company obtained a $165,000, 7%, 10-year installment note from Guarantee Bank. The note requires annual payments of $23,492, with the first payment occurring on December 31. The first payment consists of interest of $11,550 and principal repayment of $11,942. The journal entry for the payment would include a a. debit to Cash for $11,942 b. credit to Interest Payable for $11,550 c. debit to Notes Payable for $11,942 d. debit to Interest Expense for $23,492 110. On January 1, Gemstone Company obtained a $165,000, 7%, 10-year installment note from Guarantee Bank. The note requires annual payments of $23,492, with the first payment occurring on December 31. The first payment consists of interest of $11,550 and principal repayment of $11,942. The journal entry for the issuance of the installment note for cash on January 1 would include a a. debit to Interest Expense for $11,550 Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes b. credit to Interest Payable for $11,550 c. credit to Notes Payable for $165,000 d. debit to Notes Payable for $165,000 111. On January 1, Zero Company obtained a $52,000, 6.5%, 4-year installment note from Regional Bank. The note requires annual payments consisting of principal and interest of $15,179, beginning on December 31 of the current year. The December 31, Year 1, carrying amount in the amortization table for this installment note will be equal to a. $27,635 b. $40,201 c. $36,821 d. $48,620 112. On January 1, Year 1, Zero Company obtained a $52,000, 6.5%, 4-year installment note from Regional Bank. The note requires annual payments of $15,179, beginning on December 31, Year 1. The December 31, Year 2 carrying amount in the amortization table for this installment note will be equal to a. $26,000 b. $27,635 c. $21,642 d. $28,402 113. On January 1, Year 1, Zero Company obtained a $52,000, 6.5%, 4-year installment note from Regional Bank. The note requires annual payments of $15,179, beginning on December 31, Year 1. The December 31, Year 3 carrying amount in the amortization table for this installment note will be equal to a. $0 b. $13,000 c. $14,252 d. $16,603 114. An installment note payable for a principal amount of $94,000 at 6% interest requires Lawson Company to repay the principal and interest in equal annual payments of $22,315 beginning December 31, of the first year, for each of the next 5 years. After the final payment, the carrying amount on the note will be a. $1,263 b. $21,053 c. $22,315 d. $0 115. When the bonds are sold for more than their face value, the carrying value of the bonds is equal to a. face value b. face value plus the unamortized discount c. face value minus the unamortized premium d. face value plus the unamortized premium 116. The balance in Discount on Bonds Payable a. should be reported on the balance sheet as an asset because it has a debit balance b. should be allocated to the remaining periods for the life of the bonds by the straight-line method, if the results Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes obtained by that method materially differ from the results that would be obtained by the effective interest rate method c. would be added to the related bonds payable to determine the carrying amount of the bonds d. would be subtracted from the related bonds payable on the balance sheet 117. The balance in Premium on Bonds Payable a. should be reported on the balance sheet as a deduction from the related bonds payable b. should be allocated to the remaining periods for the life of the bonds by the straight-line method, if the results obtained by that method materially differ from the results that would be obtained by the effective interest rate method c. would be added to the related bonds payable on the balance sheet d. should be reported in the Paid-In Capital section of the balance sheet 118. Any unamortized premium should be reported on the balance sheet of the issuing corporation as a. a direct deduction from the face amount of the bonds in the Liabilities section b. paid-in capital c. a direct deduction from retained earnings d. an addition to the face amount of the bonds in the Liabilities section 119. The balance in Discount on Bonds Payable that is applicable to bonds due in 3 years would be reported on the balance sheet under a. Investments b. Long-term liabilities c. Current assets d. Intangible assets 120. Balance sheet and income statement data indicate the following: Bonds payable, 6% (due in 15 years) Preferred 8% stock, $100 par (no change during the year) Common stock, $50 par (no change during the year) Income before income tax for year Income tax for year Common dividends paid Preferred dividends paid
$1,200,000 200,000 1,000,000 320,000 80,000 60,000 16,000
Based on the data presented, what is the times interest earned ratio (round to two decimal places)? a. 5.00 b. 5.44 c. 4.00 d. 4.33 121. Debtors are interested in the times interest earned ratio because they want to a. know what rate of interest the corporation is paying b. have adequate protection against a potential drop in earnings jeopardizing their interest payments Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes c. be sure their debt is backed by collateral d. know the tax effect of lending to a corporation 122. The times interest earned ratio is computed as a. (Income Before Income Tax + Interest Expense) ÷ Interest Expense b. (Income Before Income Tax – Interest Expense) ÷ Interest Expense c. Income Before Income Tax ÷ Interest Expense d. (Income Before Income Tax + Interest Expense) ÷ Interest Revenue 123. Balance sheet and income statement data indicate the following: Bonds payable, 6% (this is Year 4 of 20 years) Preferred 8% stock, $100 par (no change during the year) Common stock, $50 par (no change during the year) Income before income tax for year Income tax for year Common dividends paid Preferred dividends paid
$1,000,000 200,000 1,000,000 340,000 80,000 60,000 16,000
Based on the data presented above, what is the times interest earned ratio (round to two decimal places)? a. 5.25 b. 6.67 c. 4.66 d. 4.83 124. The present value of $40,000 to be received in 2 years, at 12% compounded annually, is (rounded to nearest dollar) a. $31,888 b. $48,112 c. $8,112 d. $40,000 125. A corporation issues for cash $9,000,000 of 8%, 30-year bonds, with interest payable semiannually. The amount received for the bonds will be the a. present value of 60 semiannual interest payments of $360,000, plus the present value of $9,000,000 to be repaid in 30 years, computed at the market rate of interest b. present value of 30 annual interest payments of $720,000, computed at the contract rate of interest c. present value of 30 annual interest payments of $360,000, plus the present value of $9,000,000 to be repaid in 30 years, computed at the market rate of interest d. present value of $9,000,000 to be repaid in 30 years, less the present value of 60 semiannual interest payments of $360,000, computed at the contract rate of interest 126. The present value of $60,000 to be received in 1 year, at 6% compounded annually, is (rounded to nearest dollar) a. $56,604 b. $63,396 c. $60,000 Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes d. $3,396 127. When the market rate of interest was 12%, Halprin Corporation issued $1,000,000, 11%, 10-year bonds that pay interest annually. The selling price of this bond issue was a. $321,970 b. $1,000,000 c. $943,494 d. $621,524 128. Designer Company issued 10-year bonds on January 1. The 6% bonds have a face value of $800,000 and pay interest every January 1 and July 1. The bonds were sold for $690,960 based on the market interest rate of 8%. Designer uses the effective interest rate method to amortize bond discounts and premiums. On July 1 of the first year, Designer should record an interest expense (rounded to the nearest dollar) of a. $27,638 b. $24,000 c. $48,000 d. $55,277 129. Merchant Company issued 10-year bonds on January 1. The 15% bonds have a face value of $100,000 and pay interest every January 1 and July 1. The bonds were sold for $117,205 based on the market interest rate of 12%. Merchant uses the effective interest rate method to amortize bond discounts and premiums. On July 1 of the first year, Merchant should record interest expense (rounded to the nearest dollar) of a. $7,032 b. $7,500 c. $8,790 d. $14,065 130. When the effective interest rate method is used, the amortization of the bond premium a. increases interest expense each period b. decreases interest expense each period c. increases interest expense in some periods and decreases interest expense in other periods d. has no effect on the interest expense in any period Matching Match each of the following descriptions to the term (a–g) it describes. a. Contract rate b. Effective or market rate c. Bond discount d. Bond premium e. Bond f. Bond indenture g. Principal 131. The face amount of each bond Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes 132. A form of an interest-bearing note 133. The return required by the market on the day of issuance 134. If the contract rate exceeds the market rate 135. The rate printed on the bond certificate 136. If the contract rate is less than the market rate 137. The contract between bond issuer and bond purchaser Match each of the following descriptions to the term (a–g) it describes. a. EPS b. Face value c. Callable bond d. Indenture e. Term bond f. Convertible bond g. Serial bond 138. A measure of income earned by each share of common stock 139. The entire principal of the bond is paid back on maturity date 140. The value of a bond stated on the bond certificate 141. The legal contract between issuer and bondholder 142. Allows the issuer to redeem bonds before maturity date 143. The principal of the bond issue is paid back in installments 144. Allows the bondholder to exchange bond for shares of stock Subjective Short Answer 145. Two companies are financed as follows: Bonds payable, 9% issued at face Common stock, $25 par
X Co. $5,000,000 3,000,000
Y Co. $3,000,000 3,000,000
Income tax is estimated at 40% of income for both companies. Determine for each company the earnings per share of common stock, assuming that the income before bond interest and income taxes is $2,280,000 each. 146. Ulmer Company is considering the following alternative financing plans: Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes
Issue 8% bonds at face value Issue preferred stock, $15 par Issue common stock, $10 par
Plan 1 $2,000,000 — 2,000,000
Plan 2 $1,000,000 1,500,000 1,500,000
Income tax is estimated at 35% of income. Dividends of $1 per share were declared and paid on the preferred stock. Determine the earnings per share of common stock, assuming income before bond interest and income tax is $600,000. 147. Sorenson Co. is considering the following alternative plans for financing the company: Plan 1 Issue 10% bonds (at face) Issue $10 par common stock
— $4,000,000
Plan 2 $3,000,000 1,000,000
Income tax is estimated at 40% of income. Determine the earnings per share of common stock under the two alternative financing plans, assuming income before bond interest and income tax is $1,000,000. 148. Jenson Co. is considering the following alternative plans for financing the company: Plan 1 Issue 10% bonds (at face) Issue $10 common stock
— $3,000,000
Plan 2 $2,000,000 1,000,000
Income tax is estimated at 40% of income. Determine the earnings per share of common stock under the two alternative financing plans, assuming income before bond interest and income tax is $1,000,000. 149. On the first day of the fiscal year, a company issues a $1,000,000, 7%, 5-year bond that pays semiannual interest of $35,000 ($1,000,000 × 7% × 1/2), receiving cash of $884,171. Journalize the entry for the issuance of the bonds. 150. On the first day of the fiscal year, a company issues a $500,000, 8%, 10-year bond that pays semiannual interest of $20,000 ($500,000 × 8% × 1/2), receiving cash of $437,740. Journalize the entry for the issuance of the bonds. 151. On the first day of the fiscal year, a company issues a $1,000,000, 7%, 5-year bond that pays semiannual interest of $35,000 ($1,000,000 × 7% × 1/2), receiving cash of $884,171. Journalize the first interest payment and the amortization of the related bond discount using the straight-line method. Round answers to the nearest dollar. 152. On the first day of the fiscal year, a company issues an $800,000, 6%, 5-year bond that pays semiannual interest of $24,000 ($800,000 × 6% × 1/2), receiving cash of $690,960. Journalize the entry for the first interest payment and the amortization of the related bond discount using the straight-line method. 153. On the first day of the fiscal year, a company issues a $500,000, 8%, 10-year bond that pays semiannual interest of $20,000 ($500,000 × 8% × 1/2), receiving cash of $530,000. Journalize the entry for the issuance of the bonds. 154. On the first day of the fiscal year, a company issues a $500,000, 8%, 10-year bond that pays semiannual interest of $20,000 ($500,000 × 8% × 1/2), receiving cash of $520,000. Journalize the entry for the first interest payment and amortization of premium using the straight-line method. Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes 155. A $375,000 bond issue on which there is an unamortized discount of $40,000 is redeemed for $320,000. Journalize the redemption of the bonds. 156. A $500,000 bond issue on which there is an unamortized discount of $35,000 is redeemed for $475,000. Journalize the redemption of the bonds. 157. A $500,000 bond issue on which there is an unamortized discount of $20,000 is redeemed for $475,000. Journalize the redemption of the bonds. 158. Journalize the entries for the following: a. Issued a $500,000, 6%, 5-year bond, receiving cash of $490,000. b. Issued a $500,000, 6%, 5-year bond, receiving cash of $515,000. 159. Brubeck Co. issued $10,000,000 of 8% 30-year bonds on May 1 of the current year, with interest payable on May 1 and November 1. The fiscal year of the company is the calendar year. Journalize the entries for the following selected transactions for the current year: May 1 Nov. 1 Dec. 31
Issued the bonds for cash at their face amount. Paid the interest on the bonds. Accrued interest for 2 months.
160. On the first day of the current fiscal year, $1,500,000 of 8%, 10-year bonds, with interest payable semiannually, were issued for $1,225,000. Journalize the following transactions for the current fiscal year: a. b. c.
Issuance of the bonds. First semiannual interest payment (record as a separate entry from discount amortization). Amortization of bond discount for the year, using the straight-line method of amortization.
161. On the first day of the current fiscal year, $2,000,000 of 7%, 10-year bonds, with interest payable annually, were sold for $2,125,000. Journalize the following transactions for the current fiscal year: a. b. c.
Issuance of the bonds. First annual interest payment (record as a separate entry from premium amortization). Amortization of bond premium for the year, using the straight-line method of amortization.
162. On August 1, Clayton Co. issued $1,300,000 of 9%, 20-year bonds, dated August 1, for $1,225,000. Interest is payable semiannually on February 1 and August 1. The fiscal year of the company is the calendar year. Journalize the following transactions for the current year: a. b.
Issuance of the bonds. Accrual of interest on December 31 and amortization of the bond discount for the first year using the straight-line method (as separate entries). Round to the nearest dollar when necessary.
163. On the first day of the fiscal year, Lisbon Co. issued $1,000,000 of 7%, 10-year bonds for $1,050,000, with interest payable semiannually. Journalize the following transactions for the current fiscal year: a. b. c.
Issuance of the bonds. Second semiannual interest payment (record as a separate entry from the premium amortization). Amortization of bond premium for the first year, using the straight-line method.
164. Journalize the following selected bond transactions: a.
Issued $2,750,000 of 8%, 10-year bonds at 97.
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Chapter 14 - Long-Term Liabilities: Bonds and Notes b. c.
Amortized bond discount for a full year, using the straight-line method (as a separate entry from the interest payment). At the end of the third year, called bonds at 98. The bonds were carried at $2,692,250 at the time of the redemption.
165. A company issued $1,000,000 of 8%, 30-year callable bonds on April 1, with interest payable on April 1 and October 1. The fiscal year of the company is the calendar year. Journalize the entries for the following selected transactions: Year 1 Apr. 1 Oct. 1 Year 3 Oct. 1
Issued the bonds for cash at their face amount. Paid the interest on the bonds.
Called the bond issue at 104, the rate provided in the bond indenture. (Omit entry for payment of interest.)
166. Luke Corp. issued $2,000,000 of 9%, 20-year callable bonds on July 1, Year 1, with interest payable on June 30 and December 31. The fiscal year of the company is the calendar year. Journalize the entries for the following selected transactions: Year 1 July 1 Dec. 31 Year 5 Dec. 31
Issued the bonds for cash at their face amount. Paid the interest on the bonds.
Called the bond issue at 97, the rate provided in the bond indenture. (Omit entry for payment of interest.)
167. On June 30, Jamison Company issued $2,500,000 of 8%, 10-year bonds, dated June 30, for $2,580,000. Journalize the entries for the following transactions: a. b. c.
Issuance of bonds. Payment of first semiannual interest on December 31 (record as a separate entry from the premium amortization). Amortization by straight-line method of bond premium on December 31.
168. Compute the total amount of interest expense over the life of the bonds for the following independent situations: a. $100,000 face value, 10%, 10-year bonds issued at 101 b. $240,000 face value, 5%, 5-year bonds issued at 100 c. $300,000 face value, 9%, 6-year bonds issued at 98 169. Journalize the following selected bond transactions: a. Issued $100,000 of 7%, 10-year bonds, receiving $94,000 in cash. b. Issued $100,000 of 7%, 10-year bonds, receiving $104,000 in cash. 170. On January 1, Yeargan Company obtained a $125,000, 5%, 7-year installment note from Farmers Bank. The note requires annual payments of $21,602, with the first payment occurring on the last day of the fiscal year. The first payment consists of $6,250 interest and principal repayment of $15,352. Journalize the following transactions: a. Issued the installment note for cash on January 1. Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes b.
Paid the first annual payment on the note.
171. Glover Corporation issued $2,000,000 of 7.5%, 6-year bonds dated March 1, with semiannual interest payments on September 1 and March 1. The bonds were issued on March 1 at 97. Glover’s year-end is December 31. If required, round answers to the nearest whole amount. a. Were the bonds issued at a premium, at a discount, or at face value? b. Was the market rate of interest higher, lower, or the same as the contract rate of interest? c. If the company uses the straight-line method of amortization, what is the amount of interest expense Glover Corporation will show for the first year ended December 31? d. What is the carrying value of the bonds on December 31? 172. On January 1, Luther Co. issued a $1,000,000, 8%, 5-year installment note payable. The first note payment consists of $250,456 principal plus interest due on January 1 of the next year. a. Journalize the adjusting entry at December 31 to accrue interest for the year. b. Show the account(s) and amount(s) and where it(they) will appear on a multiple-step income statement prepared on December 31. c. Show the account(s) and amount(s) and where it(they) will appear on a classified balance sheet prepared on December 31. 173. Given the following data, determine the times interest earned ratio. Net income, $70,000 Bonds payable, issued at face value, 8%, $5,000,000 Preferred stock, $50 par value, 6%, 10,000 shares issued and outstanding Tax rate is 30%. 174. Balance sheet and income statement data indicate the following: Bonds payable, 8% (issued 2000, due 2024) Preferred 5% stock, $100 par (no change during year) Common stock, $50 par (no change during year) Income before income tax for year Income tax for year Common dividends paid Preferred dividends paid a. b.
Company A $1,200,000 300,000 1,000,000 495,000 75,000 50,000 15,000
Company B $900,000 400,000 1,000,000 130,000 12,000 0 20,000
For each company, what is the times interest earned ratio (round to one decimal place)? Which company gives potential creditors the most protection?
175. Use the following tables to compute the present value of a $25,000, 7%, 5-year bond that pays $1,750 ($25,000 × 7%) interest annually, if the market rate of interest is 7%. Present Value of $1 at Compound Interest Periods 5% 6% 1 0.95238 0.94340 2 0.90703 0.89000 3 0.86384 0.83962 4 0.82270 0.79209 5 0.78353 0.74726 Powered by Cognero
7% 0.93458 0.87344 0.81630 0.76290 0.71299
10% 0.90909 0.82645 0.75131 0.68301 0.62092 Page 23
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Chapter 14 - Long-Term Liabilities: Bonds and Notes 6 7 8 9 10
0.74622 0.71068 0.67684 0.64461 0.61391
0.70496 0.66506 0.62741 0.59190 0.55839
0.66634 0.62275 0.58201 0.54393 0.50835
0.56447 0.51316 0.46651 0.42410 0.38554
Present Value of Annuity of $1 at Compound Interest Periods 5% 6% 7% 1 0.95238 0.94340 0.93458 2 1.85941 1.83339 1.80802 3 2.72325 2.67301 2.62432 4 3.54595 3.46511 3.38721 5 4.32948 4.21236 4.10020 6 5.07569 4.91732 4.76654 7 5.78637 5.58238 5.38929 8 6.46321 6.20979 5.97130 9 7.10782 6.80169 6.51523 10 7.72173 7.36009 7.02358
10% 0.90909 1.73554 2.48685 3.16987 3.79079 4.35526 4.86842 5.33493 5.75902 6.14457
176. Using the following table, determine the present value of $15,000 to be received in 10 years, if the market rate is 5% compounded annually. Periods 1 2 3 4 5 6 7 8 9 10
5% 0.95238 0.90703 0.86384 0.82270 0.78353 0.74622 0.71068 0.67684 0.64461 0.61391
6% 0.94340 0.89000 0.83962 0.79209 0.74726 0.70496 0.66506 0.62741 0.59190 0.55839
7% 0.93458 0.87344 0.81630 0.76290 0.71299 0.66634 0.62275 0.58201 0.54393 0.50835
10% 0.90909 0.82645 0.75131 0.68301 0.62092 0.56447 0.51316 0.46651 0.42410 0.38554
177. Using the following table, determine the present value of $40,000 to be received in 5 years, if the market rate is 7% compounded annually? Periods 1 2 3 4 5 6 7 8 9 10
5% 0.95238 0.90703 0.86384 0.82270 0.78353 0.74622 0.71068 0.67684 0.64461 0.61391
6% 0.94340 0.89000 0.83962 0.79209 0.74726 0.70496 0.66506 0.62741 0.59190 0.55839
7% 0.93458 0.87344 0.81630 0.76290 0.71299 0.66634 0.62275 0.58201 0.54393 0.50835
10% 0.90909 0.82645 0.75131 0.68301 0.62092 0.56447 0.51316 0.46651 0.42410 0.38554
178. Given the following data, journalize the entry for interest expense and any related amortization on July 1 of the first Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes year using the effective interest rate method. The bonds were issued on January 1 for $7,411,233. Bonds payable, maturing in 10 years = $8,000,000 Contract interest rate = 5% Market (effective) interest rate = 6% Round answers to nearest dollar. 179. On January 1, Year 1, Kennard Co. issued $2,000,000, 5%, 10-year bonds, with interest payable on June 30 and December 31 to yield 6%. Use the following format and round figures to nearest dollar. The bonds were issued for $1,851,234. a. Prepare an amortization schedule for Year 1 and Year 2 using the effective interest rate method.
Date
Cash Paid
Interest Expense
Discount Amortization
Unamortized Discount
Bond Carrying Value
b. Show how this bond would be reported on the balance sheet at December 31, Year 2.
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Chapter 14 - Long-Term Liabilities: Bonds and Notes Answer Key 1. True 2. True 3. True 4. False 5. True 6. False 7. True 8. False 9. True 10. True 11. True 12. False 13. False 14. True 15. True 16. True 17. False 18. False 19. True 20. True 21. True 22. False 23. False 24. False 25. False Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes 26. True 27. True 28. True 29. True 30. True 31. True 32. False 33. False 34. True 35. False 36. True 37. True 38. True 39. True 40. True 41. False 42. True 43. True 44. False 45. True 46. False 47. False 48. True 49. False 50. True Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes 51. True 52. False 53. True 54. False 55. False 56. False 57. c 58. c 59. c 60. d 61. a 62. b 63. c 64. d 65. b 66. d 67. b 68. d 69. d 70. c 71. d 72. c 73. d 74. c 75. b 76. b Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes 77. a 78. b 79. d 80. c 81. b 82. a 83. c 84. d 85. d 86. c 87. c 88. c 89. c 90. d 91. a 92. d 93. a 94. c 95. b 96. c 97. b 98. a 99. d 100. c 101. d Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes 102. c 103. a 104. d 105. b 106. a 107. a 108. c 109. c 110. c 111. b 112. b 113. c 114. d 115. d 116. d 117. c 118. d 119. b 120. b 121. b 122. a 123. b 124. a 125. a 126. a 127. c Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes 128. a 129. a 130. b 131. g 132. e 133. b 134. d 135. a 136. c 137. f 138. a 139. e 140. b 141. d 142. c 143. g 144. f 145. X Co. Earnings before bond interest and income tax Interest on bonds Income before income tax Income tax Net income Shares of common stock outstanding Earnings per share on common stock
Y Co.
$2,280,000 $2,280,000 450,000 270,000 $1,830,000 $2,010,000 732,000 804,000 $1,098,000 $1,206,000 ÷ 120,000 ÷ 120,000 $ $9.15 $ $10.05
146. Earnings before bond interest and income tax Bond interest Income before income tax Powered by Cognero
Plan 1 $600,000 160,0001 $440,000
Plan 2 $600,000 80,0003 $520,000 Page 31
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Chapter 14 - Long-Term Liabilities: Bonds and Notes 154,0002 $286,000 0 $286,000 200,000 $ 1.43
Income tax Net income Dividends on preferred stock Earnings available for common stock Shares of common stock outstanding Earnings per share on common stock 1 $2,000,000 × 8% 2 $440,000 × 35% 3 $1,000,000 × 8% 4 $520,000 × 35%
182,0004 $338,000 100,000 $238,000 150,000 $ 1.59
147. Earnings before bond interest and income tax Bond interest expense Income before taxes Income tax (40%) Net income Dividends on preferred stock Available for dividends on common stock Shares of common stock outstanding Earnings per share
Plan 1 Plan 2 $1,000,000 $1,000,000 0 300,000* $1,000,000 $ 700,000 400,000 280,000 $ 600,000 $ 420,000 0 0 $ 600,000 $ 420,000 ÷ 400,000 ÷100,000 4.20 $ 1.50 $
*$3,000,000 × 10% 148. Earnings before bond interest and income tax Interest on bonds Income before income tax Income tax (40%) Available for dividends on common stock Dividends on preferred stock Earnings available for common stock Shares of common stock outstanding Earnings per share of common stock *$2,000,000 × 10%
Plan 1 Plan 2 $1,000,000 $1,000,000 0 200,000* $1,000,000 $ 800,000 400,000 320,000 $ 600,000 $ 480,000 0 0 $ 600,000 $ 480,000 ÷ 300,000 ÷ 100,000 $ 2.00 $ 4.80
149. Cash Discount on Bonds Payable Bonds Payable
884,171 115,829
150. Cash Discount on Bonds Payable Bonds Payable
437,740 62,260
1,000,000
500,000
151. Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes Interest Expense Discount on Bonds Payable* Cash *[($1,000,000 − $884,171) ÷ 5] × 1/2 152. Interest Expense Discount on Bonds Payable* Cash *[($800,000 − $690,960) ÷ 5] × 1/2 153. Cash Premium on Bonds Payable Bonds Payable 154. Interest Expense Premium on Bonds Payable* Cash *[($520,000 − $500,000) ÷ 10] × 1/2 155. Bonds Payable Discount on Bonds Payable Gain on Redemption of Bonds Cash 156. Bonds Payable Loss on Redemption of Bonds Discount on Bonds Payable Cash 157. Bonds Payable Gain on Redemption of Bonds Discount on Bonds Payable Cash 158. a. Cash Discount on Bonds Payable Bonds Payable b. Cash Premium on Bonds Payable Bonds Payable 159. May
1
Cash
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46,583 11,583 35,000
34,904 10,904 24,000
530,000 30,000 500,000
19,000 1,000 20,000
375,000 40,000 15,000 320,000
500,000 10,000 35,000 475,000
500,000 5,000 20,000 475,000
490,000 10,000 500,000 515,000 15,000 500,000
10,000,000 Page 33
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Chapter 14 - Long-Term Liabilities: Bonds and Notes Bonds Payable Nov. 1
Dec. 31
10,000,000
Interest Expense* Cash *$10,000,000 × 8% × 1/2
400,000
Interest Expense** Interest Payable **$10,000,000 × 8% × 2/12
133,333
160. a. Cash Discount on Bonds Payable Bonds Payable b. Interest Expense* Cash *$1,500,000 × 8% × 1/2 c. Interest Expense** Discount on Bonds Payable **$275,000 ÷ 10 161. a. Cash Premium on Bonds Payable Bond Payable b. Interest Expense* Cash *$2,000,000 × 7% c. Premium on Bonds Payable Interest Expense** **$125,000 ÷ 10 162. a. Cash Discount on Bonds Payable Bonds Payable b. Interest Expense* Interest Payable *$1,300,000 × 9% × 5/12 Interest Expense** Discount on Bonds Payable **$75,000 ÷ 20 × 5/12 163. a. Cash Powered by Cognero
400,000
133,333
1,225,000 275,000 1,500,000 60,000 60,000
27,500 27,500
2,125,000 125,000 2,000,000 140,000 140,000
12,500 12,500
1,225,000 75,000 1,300,000 48,750 48,750
1,563 1,563
1,050,000 Page 34
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Chapter 14 - Long-Term Liabilities: Bonds and Notes Premium on Bonds Payable Bonds Payable b. Interest Expense* Cash *$1,000,000 × 7% × 1/2 c. Premium on Bonds Payable Interest Expense** **$50,000 ÷ 10
50,000 1,000,000 35,000 35,000
5,000 5,000
164. a. Cash* 2,667,500 Discount on Bonds Payable 82,500 Bonds Payable 2,750,000 *$2,750,000 × 0.97 b. Interest Expense** 8,250 Discount on Bonds Payable 8,250 **$82,500 ÷ 10 c. Bonds Payable 2,750,000 Loss on Redemption of Bonds 2,750 Discount on Bonds Payable*** 57,750 Cash**** 2,695,000 ***$82,500 – ($8,250 × 3) OR $2,750,000 – $2,692,250 ****$2,750,000 × 0.98 165. Year 1 Apr. 1 Cash Bonds Payable Oct. 1 Interest Expense* Cash *$1,000,000 × 8% × 1/2 Year 3 Oct. 1 Bonds Payable Loss on Redemption of Bonds Cash** **$1,000,000 × 1.04 166. Year 1 July 1
Cash Bonds Payable
Dec. 31 Interest Expense* Cash *$2,000,000 × 9% × 1/2 Year 5 Powered by Cognero
1,000,000 1,000,000 40,000 40,000
1,000,000 40,000 1,040,000
2,000,000 2,000,000 90,000 90,000
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Chapter 14 - Long-Term Liabilities: Bonds and Notes Dec. 31 Bonds Payable Gain on Redemption of Bonds Cash** **$2,000,000 × 0.97 167. a. Cash Premium on Bonds Payable Bonds Payable b.
c.
2,000,000 60,000 1,940,000
2,580,000 80,000 2,500,000
Interest Expense* Cash *$2,500,000 × 8% × 1/2
100,000
Premium on Bonds Payable Interest Expense** **$80,000 ÷ 10 × 1/2
4,000
100,000
4,000
168. a. $100,000 × 0.01 = $1,000 premium $100,000 × 10% = $10,000 annual cash payment $10,000 × 10 years = $100,000 $100,000 – $1,000 = $99,000 total interest expense b. $240,000 × 5% = $12,000 annual cash payment $12,000 × 5 years = $60,000 total interest expense c. $300,000 × 0.02 = $6,000 discount $300,000 × 9% = $27,000 annual cash payment $27,000 × 6 years = $162,000 $162,000 + $6,000 = $168,000 total interest expense 169. a. Cash Discount on Bonds Payable Bonds Payable b. Cash Premium on Bonds Payable Bonds Payable 170. a. Cash Notes Payable b. Interest Expense Notes Payable Cash
94,000 6,000 100,000 104,000 4,000 100,000
125,000 125,000 6,250 15,352 21,602
171. a. The bonds were issued at a discount. b. The market rate of interest was higher than 7.5% since the bonds were issued at a discount. c. $2,000,000 × 0.075 × 10/12 = $125,000 interest expense prior to amortization $2,000,000 – $1,940,000 = $60,000 discount on bonds payable Powered by Cognero
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Chapter 14 - Long-Term Liabilities: Bonds and Notes $60,000 ÷ 6 = $10,000 annual amortization of discount $10,000 × 10/12 = $8,333 current year’s amortization of discount $125,000 + $8,333 = $133,333 d. $2,000,000 – $60,000 + $8,333 = $1,948,333 172. a. Interest Expense* Interest Payable *8% × $1,000,000
80,000 80,000
b. Other expense: Interest expense
$80,000
c. Current liabilities: Interest payable $ 80,000 Notes payable (current portion) 250,456 Long-term liabilities: Notes payable** **$1,000,000 − $250,456
749,544
173. Times Interest Earned = (Income Before Income Tax + Interest Expense) ÷ Interest Expense = [($70,000 ÷ 70%) + (8% × $5,000,000)] ÷ (8% × $5,000,000) = ($100,000 + $400,000) ÷ $400,000 = $500,000 ÷ $400,000 = 1.25 174. a. Company A: Times Interest Earned = (Income Before Income Tax + Interest Expense) ÷ Interest Expense = [$495,000 + (8% × $1,200,000)] ÷ (8% × $1,200,000) = ($495,000 + $96,000) ÷ $96,000 = $591,000 ÷ $96,000 = 6.2 Company B: Times Interest Earned = (Income Before Income Tax + Interest Expense) ÷ Interest Expense = [$130,000 + (8% × $900,000)] ÷ (8% × $900,000) = ($130,000 + $72,000) ÷ $72,000 = $202,000 ÷ $72,000 = 2.8 b. Company A offers potential creditors the most protection. 175. Present value of face value of $25,000 due in 5 years at 7% compounded annually: $25,000 × 0.71299 (present value factor of $1 for 5 periods at 7%) Present value of 5 annual interest payments of $1,750 at 7% interest compounded annually: $1,750 × 4.10020 (present value of annuity of $1 for 5 periods at 7%) Total present value of bonds *Rounded
$17,825*
7,175* $25,000*
176. $15,000 × 0.61391= $9,208.65 177. $40,000 × 0.71299 = $28,519.60 178. Interest Expense ($7,411,233 × 6% ÷ 2) Discount on Bonds Payable Cash ($8,000,000 × 5% ÷ 2) Powered by Cognero
222,337 22,337 200,000 Page 37
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Chapter 14 - Long-Term Liabilities: Bonds and Notes 179. a.
Date 1/1/Year 1 6/30/Year 1 12/31/Year 1 6/30/Year 2 12/31/Year 2
Cash Paid
Interest Expense
Discount Amortization
$50,000 50,000 50,000 50,000
$55,537 55,703 55,874 56,050
$5,537 5,703 5,874 6,050
b. Long-term liabilities: Bond payable, 5%, due in 8 years Less unamortized discount
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$2,000,000 125,602
Unamortized Discount $148,766 143,229 137,526 131,652 125,602
Bond Carrying Value $1,851,234 1,856,771 1,862,474 1,868,348 1,874,398
$1,874,398
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Chapter 15 - Investments True / False 1. Most companies invest excess cash in bonds as investments in order to profit long-term from the growth of the investment. a. True b. False 2. Equity investments do not have a fixed maturity date. a. True b. False 3. An equity investment in less than 20% of another company’s outstanding stock is accounted for using the fair value method. a. True b. False 4. Ordinarily, a corporation owning a significant portion of the voting stock of another corporation accounts for the investment using the equity method. a. True b. False 5. The investor carrying an investment by the equity method records cash dividends received as an increase in the amount of the investment. a. True b. False 6. Under the equity method, a stock purchase is recorded at its original cost and is not adjusted to fair market value each accounting period. a. True b. False 7. The equity method causes the investment account to mirror the proportional changes in book value of the investee. a. True b. False 8. Accounting for the sale of stock is the same for both the fair value and equity methods of accounting for investments. a. True b. False 9. A corporation owning all or a majority of the voting stock of another corporation is known as the parent company. a. True b. False 10. When a corporation owns less than 20% of the stock of another company, dividends received are not treated as revenue. a. True Powered by Cognero
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Chapter 15 - Investments b. False 11. The financial statements resulting from combining parent and subsidiary statements are called consolidated statements. a. True b. False 12. It is not possible for one company to influence the operating policies of another company unless it owns more than a 50% interest in that company. a. True b. False 13. The equity method is usually more appropriate for accounting for investments where the purchaser does not have significant influence over the investee. a. True b. False 14. Investments in stocks that are expected to be held for the long term are listed in the Stockholders' Equity section of the balance sheet. a. True b. False 15. As with other assets, the cost of a bond investment includes all costs related to the purchase. a. True b. False 16. If bonds are purchased between interest dates, the buyer must also pay the seller any accrued interest since the last interest payment date. a. True b. False 17. When a bond is purchased as an investment, the purchase price, minus the brokerage commission, plus any accrued interest is recorded. a. True b. False 18. The amount of interest paid when buying a bond as an investment should be credited to Interest Revenue. a. True b. False 19. To record a bond investment made between interest payment dates, Investment in Bonds would be debited and Cash and Interest Revenue would be credited. a. True b. False 20. When long-term investments in bonds are sold before their maturity date, the seller deducts any accrued interest since the last interest payment date from the selling price. Powered by Cognero
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Chapter 15 - Investments a. True b. False 21. If the proceeds from the sale of bond investments exceed the carrying amount of the bonds, a gain is realized. a. True b. False 22. Any gains or losses on the sale of bonds normally would be reported in the Other Revenue (Loss) section of the income statement. a. True b. False 23. When bonds held as long-term investments are purchased at a price other than the face value, the premium or discount should be amortized over the remaining life of the bonds. a. True b. False 24. Held-to-maturity securities are reported on the balance sheet at fair market value. a. True b. False 25. Held-to-maturity securities maturing beyond a year are reported as noncurrent assets. a. True b. False 26. Investments in bonds that management intends to hold to maturity are called trading securities. a. True b. False 27. Investments―Bonds is reported on the balance sheet at lower of cost or market. a. True b. False 28. Investments―Bonds is listed on the balance sheet after Bonds Payable. a. True b. False 29. Held-to-maturity investments are recorded at their cost, which would include broker’s commissions. a. True b. False 30. Trading securities should be reported on the financial statements at fair market value. a. True b. False 31. Available-for-sale securities are securities that management expects to sell in the future, but not in the near term. Powered by Cognero
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Chapter 15 - Investments a. True b. False 32. Trading securities are reported on the balance sheet at cost. a. True b. False 33. Any difference between the fair market values of trading securities and their cost is a realized gain or loss. a. True b. False 34. Unrealized gains and losses on trading securities are not included in the computation of income from operations. a. True b. False 35. In order to maintain a record of the original cost of a trading security, the fair value adjustments are debited or credited to the account Valuation Allowance for Trading Investments. a. True b. False 36. Growth firms generally pay regular dividends to stockholders. a. True b. False 37. Comprehensive income is all changes in stockholders' equity during the period except those resulting from dividends and stockholders' investments. a. True b. False 38. Comprehensive income must be reported on the income statement. a. True b. False 39. The cumulative effects of other comprehensive income items may be reported separately from retained earnings and paid-in capital on the balance sheet as accumulated other comprehensive income. a. True b. False 40. Comprehensive income does not affect net income or retained earnings. a. True b. False 41. The cumulative effects of other comprehensive income items are included in retained earnings on the balance sheet. a. True b. False Powered by Cognero
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Chapter 15 - Investments 42. A foreign currency adjustment is an example of an item that would be included in other comprehensive income. a. True b. False Multiple Choice 43. Temporary investments a. are reported as current assets b. include cash equivalents c. do not include equity securities d. include cash used to expand current operations 44. Which of the following is not a reason to invest excess cash in temporary investments? a. earn interest revenue b. influence the operations of another company c. receive dividends d. realize gains from the increase in market value of the securities 45. Debt securities include a. preferred stock b. common stock c. notes and bonds d. All of these choices 46. Which of the following is part of the primary objective of investing in temporary investments? a. All of these choices b. realize gains from increases in market price of the securities c. receive dividends d. earn interest revenue 47. Equity securities include a. preferred stock b. notes c. bonds d. bank deposits 48. Cash generated from operations can be used for which of the following investment purposes? a. supporting current operating activities b. investing in temporary and long-term investments to earn additional revenue and/or realize an appreciation in value c. investing in the stock of other companies for strategic reasons d. All of these choices 49. Long-term investments that involve the purchase of a significant portion of the stock of another company may be held for a strategic purpose, such as Powered by Cognero
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Chapter 15 - Investments a. the receipt of dividends b. expansion into new markets c. the gains from the increase in market value d. the receipt of interest revenue 50. Which of the following statements is not a reason a company may purchase another company's stock? a. earning a return on excess cash b. sustaining the other company's stock price c. gaining control of another company's operations d. developing or maintaining business relationships 51. Which of the following stock investments should be accounted for using the fair value method? a. investments of less than 20% ownership b. investments between 20% and 50% ownership c. all investments of less 50% ownership d. investments of over 50% ownership 52. Jarvis Corporation makes an investment in 100 shares of Saxton Company's common stock. The stock is purchased for $45 a share plus brokerage fees of $280. The journal entry for the purchase is a. Cash Investments—Saxton Company Stock
4,500
b. Investments—Saxton Company Stock Cash
4,780
c. Investments—Saxton Company Stock Brokerage Fee Expense Cash
4,500 280
d. Investments—Saxton Company Stock Cash
4,500
4,500
4,780
4,780 4,500
53. The fair value method of accounting for stock a. recognizes dividends as income b. is only appropriate as part of a consolidation c. requires the investment to be increased by the reported net income of the investee d. requires the investment to be decreased by the reported net income of the investee 54. An investor purchased 500 shares of common stock, $25 par, for $21,750. Subsequently, 100 shares were sold for $49.50 per share. What is the amount of gain or loss on the sale? a. $12,750 gain b. $600 gain c. $600 loss d. $9,250 loss 55. The equity method of accounting for investments requires Powered by Cognero
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Chapter 15 - Investments a. a year-end adjustment to revalue the stock to lower of cost or market b. the investment to be reported at its original cost c. the investment to be increased by the reported net income of the investee d. the investment to be increased by the dividends paid by the investee 56. Armando Company owns 17,000 of the 70,000 shares of common stock outstanding of Tito Company and exercises a significant influence over its operating and financial policies. The investment should be accounted for by the a. equity method b. fair value method c. consolidation method d. fair value or equity method 57. Under the equity method, the receipt of cash dividends on an investment in common stock of Vallerio Corporation is accounted for as a debit to Cash and a credit to a. Investment in Vallerio Corporation Stock b. Retained Earnings c. Dividend Revenue d. Dividends Receivable 58. The method of accounting for investments in equity securities in which the investor records its share of periodic net income of the investee is the a. cost method b. fair value method c. income method d. equity method 59. When shares of stock held as an investment are sold, the difference between the proceeds and the carrying amount of the investment is recorded as a(n) a. prior period adjustment b. operating income and loss c. paid-in capital addition d. gain or loss 60. Which of the following items would not affect the investor's income for the period? a. interest received on a temporary investment in bonds b. dividends received on a long-term investment in stock where the investor owns 10% of the investee's stock c. dividends received on a long-term investment in stock where the investor owns 30% of the investee's stock d. interest received on a long-term investment in bonds 61. Wendell Company owns 28% of the common stock of Porter Company and accounts for the investment using the equity method. Assuming that Wendell Company purchased the stock several years ago, the balance in the investment account would be equal to the original cost of the a. investment b. investment plus Wendell’s share of Porter’s net income earned since the investment was purchased c. investment plus the total amount of dividends Wendell has received from Porter since the investment was Powered by Cognero
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Chapter 15 - Investments purchased d. investment plus Wendell’s share of Porter’s net income earned since the investment was purchased minus the total amount of dividends Wendell has received from Porter since the investment was purchased 62. Blanton Corporation purchased 15% of the outstanding shares of common stock of Worton Corporation as a long-term investment. Subsequently, Worton Corporation reported net income and declared and paid cash dividends. What journal entry would Blanton Corporation use for the dividends it receives? a. debit Investments—Worton Corporation Stock; credit Cash b. debit Cash; credit Dividend Revenue c. debit Investments—Worton Corporation Stock; credit Income of Worton Corporation d. debit Cash; credit Investments—Worton Corporation Stock 63. Blanton Corporation purchased 35% of the outstanding shares of common stock of Worton Corporation as a long-term investment. Subsequently, Worton Corporation reported net income and declared and paid cash dividends. What journal entry would Blanton Corporation use for the dividends it receives from Worton Corporation? a. debit Investments—Worton Corporation Stock; credit Cash b. debit Cash; credit Dividend Revenue c. debit Investments—Worton Corporation Stock; credit Income of Worton Corporation d. debit Cash; credit Investments—Worton Corporation Stock 64. Zach Company owns 45% of the voting stock of Tomas Corporation and uses the equity method in recording this investment. Tomas Corporation reported a $20,000 net loss. Zach Company's entry would include a a. credit to Cash for $9,000 b. debit to the investment account for $9,000 c. credit to the investment account for $9,000 d. credit to a loss account for $9,000 65. Parker Company owns 83% of the outstanding stock of Tadeo Company. Parker Company is referred to as the a. parent company b. minority interest c. affiliate company d. subsidiary company 66. Gale Company owns 87% of the outstanding stock of Leonardo Company. Leonardo Company is referred to as the a. parent company b. minority interest c. affiliate company d. subsidiary company 67. Financial statements in which financial data for two or more companies are combined as a single entity are called a. conventional statements b. consolidated statements c. audited statements d. constitutional statements Powered by Cognero
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Chapter 15 - Investments 68. In general, consolidated financial statements should be prepared a. when a corporation owns more than 20% and less than 40% of the common stock of another company b. when a corporation owns more than 50% of the common stock of another company c. only when a corporation owns 100% of the common stock of another company d. whenever the market value of the stock investment is significantly lower than its cost 69. For accounting purposes, the method used to account for investments in common stock is determined by a. the amount paid for the stock by the investor b. whether the acquisition of the stock by the investor was "friendly" or "hostile" c. the extent of an investor's influence over the operating and financial affairs of the investee d. whether the stock has paid dividends in past years 70. An investor purchased 500 shares of common stock, $25 par, for $19,250. Subsequently, 100 shares were sold for $35 per share. What is the amount of gain or loss on the sale? a. $3,500 gain b. $350 gain c. $350 loss d. $500 gain 71. When the fair value method is used to account for an equity investment, the carrying value of the investment is affected by a. the dividend distributions of the investee b. the periodic net income of the investee c. the earnings and dividend distributions of the investee d. neither the earnings nor the dividends of the investee 72. On February 12, Addison, Inc., purchased 6,000 shares of Lucas Company at $22 per share plus a $240 brokerage fee. On August 22, Lucas paid a dividend per share of $0.42. On November 10, 4,000 shares of Lucas stock were sold for $28 per share less a $160 brokerage fee. The journal entry for the purchase would include a a. debit to Investments—Lucas Company Stock for $132,000 b. credit to Cash for $132,000 c. debit to Investments—Lucas Company Stock for $132,240 d. credit to Investments—Lucas Company Stock for $240 73. A company whose stock is more than 50% owned by another company is called the a. controlling company b. investee company c. subsidiary company d. sibling company 74. On February 12, Addison, Inc. purchased 6,000 shares of Lucas Company at $22 per share plus a $240 brokerage fee. On August 22, Lucas paid a dividend per share of $0.42. On November 10, 4,000 shares of Lucas stock were sold for $28 per share less a $160 brokerage fee. The journal entry for the sale would include a a. debit to Cash for $111,840 b. credit to Investments—Lucas Company Stock for $112,000 Powered by Cognero
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Chapter 15 - Investments c. credit to Loss on Sale for $23,680 d. debit to Cash for $112,000 75. If one company owns more than 50% of the common stock of another company, a. a partnership exists b. a parent-subsidiary relationship exists c. the company whose stock is owned must be liquidated d. the cost method should be used to account for the investment 76. On June 1, $50,000 of bonds were purchased between interest dates. The brokerage commission was $500. The bonds pay interest at 12%, which is paid semiannually on January 1 and July 1. What is the total cost to be debited to Investments—Bonds? a. $50,000 b. $50,500 c. $49,500 d. $53,000 77. On June 1, $40,000 of bonds were purchased between interest dates. The brokerage commission was $600. The bonds pay interest at 12%, which is paid semiannually on January 1 and July 1. How much interest revenue will be recorded on July 1? a. $400 b. $406 c. $2,000 d. $2,400 78. Ruben Company purchased $100,000 of Evans Company bonds at 100 plus $1,500 in accrued interest. The bond interest rate is 8% and interest is paid semiannually. The journal entry for the purchase would be a. debit Investments—Evans Company Bonds, $101,500; credit Cash, $101,500 b. debit Investments—Evans Company Bonds, $100,000; credit Interest Revenue, $1,500, and Cash, $98,500 c. debit Investments—Evans Company Bonds, $100,000, and Interest Receivable $1,500; credit Cash, $101,500 d. debit Investments—Evans Company Bonds, $100,000; credit Cash, $100,000 79. Ruben Company purchased $100,000 of Evans Company bonds at 100 plus $1,500 in accrued interest. The bond interest rate is 8%, and interest is paid semiannually. The journal entry for the receipt of interest on the next interest payment date would be a. debit Cash, $4,000; credit Interest Revenue, $4,000 b. debit Cash, $4,000; credit Interest Receivable, $4,000 c. debit Cash, $4,000; credit Interest Receivable, $1,500, and Interest Revenue, $2,500 d. debit Cash, $2,500; credit Interest Revenue, $2,500 80. Ruben Company purchased $100,000 of Evans Company bonds at 100. Ruben later sold the bonds for $104,500 plus $500 in accrued interest. The journal entry for the sale of the bonds would be a. debit Cash, $105,000; credit Investments—Evans Company Bonds, $104,500, and Interest Revenue, $500 b. debit Cash, $105,000; credit Investments—Evans Company Bonds, $100,000, and Gain on Sale of Investments, $5,000 Powered by Cognero
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Chapter 15 - Investments c. debit Cash, $104,500, and Interest Receivable, $500; credit Investments—Evans Company Bonds, $100,000, Gain on Sale of Investments, $4,500, and Interest Revenue, $500 d. debit Cash, $105,000; credit Investments—Evans Company Bonds, $100,000, Gain on Sale of Investments, $4,500, and Interest Revenue, $500 81. Jacks Corporation purchases $200,000 bonds plus accrued interest for 2 months of $2,000 from Kennedy Company on March 1. The bonds have an annual interest rate of 6% payable on June 30 and December 31. The entry for the purchase of the bonds would include a a. debit to Interest Receivable for $2,000 b. debit to Investments—Kennedy Company Bonds for $202,000 c. debit to Cash for $200,000 d. credit to Interest Revenue for $2,000 82. On April 1, Alliance Company purchased $50,000 of Tetter Company’s 12% bonds at 100 plus accrued interest of $2,000. On June 30, Alliance received its first semiannual interest. On February 1, Alliance sold $40,000 of the bonds at 103 plus accrued interest. The journal entry Alliance will record on April 1 for the purchase of the bonds will include a a. credit to Interest Payable for $2,000 b. debit to Investments—Tetter Company Bonds for $52,000 c. debit to Cash for $50,000 d. debit to Investments—Tetter Company Bonds for $50,000 Use this information for Pierce Company to answer the questions that follow. On May 1, Pierce Company purchased $60,000 of Stanton Company’s 12% bonds at 100 plus accrued interest of $2,400. On June 30, Pierce received its first semiannual interest. On February 1, Pierce sold $50,000 of the bonds at 103 plus accrued interest. 83. The journal entry Pierce records on June 30 will include a a. credit to Interest Revenue for $2,400 b. debit to Cash for $3,600 c. credit to Cash for $2,400 d. credit to Interest Receivable for $1,200 84. The journal entry Pierce records on February 1 will include a a. credit to Interest Revenue for $1,500 b. credit to Gain on Sale of Investments for $1,500 c. credit to Cash for $52,500 d. credit to Interest Receivable for $600 85. What are the total proceeds from the February 1 sale? a. $52,400 b. $51,500 c. $50,000 d. $52,000 86. Alan Company purchased $400,000 of ABC Co. 5% bonds at 100 plus accrued interest of $4,500. Alan later sold Powered by Cognero
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Chapter 15 - Investments $250,000 of the bonds at 97. The journal entry for the purchase would include a a. credit to Interest Receivable for $4,500 b. credit to Interest Revenue for $4,500 c. debit to Interest Receivable for $4,500 d. debit to Interest Revenue for $4,500 87. Interest revenue on bonds is reported as a. an addition to the investment in bonds account b. part of comprehensive income but not as part of net income c. part of Other Revenue (Loss) d. part of income from operations 88. Held-to-maturity securities a. are reported at fair market value b. include stocks as well as bonds c. may be reported as current or noncurrent assets d. All of these choices 89. Held-to-maturity securities a. are reported at their fair market value on the balance sheet date b. include both stocks and bonds c. are primarily purchased to earn interest revenue d. All of these choices 90. Temporary investments such as in trading securities are a. recorded at cost but reported at fair market value b. recorded at cost and reported at cost c. recorded at cost but reported at lower of cost or fair market value d. recorded at fair market value and reported at fair market value 91. Yankton Company began the year without an investment portfolio. During the year, it purchased investments classified as trading securities at a cost of $13,000. At the end of the year, the market value of the securities was $11,000. Yankton Company's financial statements for the current year should show a. a realized loss of $2,000 on the income statement and net trading investments of $13,000 on the balance sheet b. no loss on the income statement and net trading investments of $13,000 on the balance sheet c. no loss on the income statement, net trading investments of $11,000, and an unrealized loss of $2,000 as a stockholders’ equity adjustment on the balance sheet d. an unrealized loss of $2,000 on the income statement and net trading investments of $11,000 on the balance sheet 92. Yankton Company began the year without an investment portfolio. During the year, it purchased investments classified as available-for-sale securities at a cost of $13,000. At the end of the year, the market value of the securities was $11,000. Yankton Company's financial statements for the current year should show a. an unrealized loss of $2,000 on the income statement and available-for-sale investments of $13,000 on the balance sheet Powered by Cognero
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Chapter 15 - Investments b. no loss on the income statement and available-for-sale investments of $13,000 on the balance sheet c. no loss on the income statement, net available-for-sale investments of $11,000 in the Current Assets section of the balance sheet, and an unrealized loss of $2,000 as a stockholders’ equity adjustment on the balance sheet d. a realized loss of $2,000 on the income statement and net available-for-sale investments of $11,000 on the balance sheet 93. The market price that would be received for a security if it were sold is the a. fair value b. test value c. investing value d. historical value 94. The account Unrealized Gain (Loss) on Available-for-Sale Investments should be included on the a. income statement in the Other Revenue and Expense section b. balance sheet as an adjustment to the asset account c. balance sheet as an adjustment to stockholders' equity d. statement of retained earnings 95. The account Unrealized Gain (Loss) on Trading Investments should be included on the a. income statement in the Other Revenue and Expense section b. balance sheet as an adjustment to the asset account c. balance sheet as an adjustment to stockholders' equity d. statement of retained earnings 96. The valuation allowance for the trading investments account is found on the a. income statement in the Other Revenue and Expense section b. balance sheet as an adjustment to the asset account c. balance sheet as an adjustment to stockholders' equity d. statement of retained earnings 97. On January 1, Butte Company’s valuation allowance for trading investments account has a debit balance of $23,200. On December 31, the cost of the trading securities portfolio was $80,000. The fair value was $98,000. Which of the following would Butte report on the income statement for the current year? a. an unrealized loss on trading investments, $5,200 b. an unrealized gain on trading investments, $5,200 c. an unrealized gain on trading investments, $18,000 d. an unrealized loss on trading investments, $18,000 98. Trading securities are a. reported at fair value in the Assets section of the balance sheet and any associated unrealized gains or losses are reported in the Other Revenue (Loss) section of the income statement b. reported in the Stockholders’ Equity section of the balance sheet and any associated unrealized gains or losses are reported in the Other Revenue (Loss) section of the income statement c. reported at cost on the balance sheet and any associated unrealized gains or losses are reported as an expense against operating revenue on the income statement Powered by Cognero
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Chapter 15 - Investments d. reported at fair value in the Assets section of the balance sheet and any associated unrealized gains or losses are reported as an adjustment in the Stockholders’ Equity section of the balance sheet 99. GAAP requires trading and available-for-sale investments to be reported at their a. fair value b. historical cost c. market value d. net realizable value 100. Edison Corporation paid a dividend of $10 per share on its $100 par preferred stock and $4 per share on its $20 par common stock. The market value of the common stock is $80 per share. Edison’s dividend yield is a. 5% b. 10% c. 25% d. 20% 101. A company that has 25,000 shares of $5.00 par common stock issued and outstanding paid a dividend of $0.40 per share. The market value of the stock is $16 per share. The company’s dividend yield is a. 2.5% b. 400% c. 16% d. 40% 102. The dividend yield is measured as a. Dividends per Share of Common Stock ÷ Market Price per Share of Common Stock b. Dividends per Share of Preferred Stock ÷ Market Price per Share of Common Stock c. Dividends per Share of Common Stock ÷ Market Price per Share of Preferred Stock d. Dividends per Share of Preferred Stock ÷ Market Price per Share of Preferred Stock 103. On July 5, Winter Company had a market price of $58 per share of common stock. For the previous year, Winter Company paid an annual dividend of $3.48 per share. What is the dividend yield for Winter Company? a. 6.0% b. 0.6% c. 16.67% d. 1.67% 104. Which of the following is not a part of comprehensive income? a. foreign currency adjustments b. cash flows from stock investments c. unrealized gains and losses on available-for-sale securities d. pension liability adjustments 105. Which of the following would be considered an "other comprehensive income" item? a. net income b. extraordinary loss related to flood Powered by Cognero
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Chapter 15 - Investments c. gain on disposal of discontinued operations d. unrealized loss on available-for-sale securities 106. Companies may report comprehensive income on each of the following statements except a. the income statement b. a separate statement of comprehensive income c. the statement of cash flows d. None of these choices Matching Match each of the definitions that follow with the appropriate investment term (a–j). a. Debt securities b. Equity securities c. Investor d. Investee e. Fair value method f. Trading securities g. Available-for-sale securities h. Held-to-maturity securities i. Equity method j. Business combination 107. Debt and equity securities purchased and sold to earn short-term profits from changes in the market price 108. Preferred and common stock that represent ownership in a company and do not have a fixed maturity date 109. The method of reporting an investment that represents less than 20% of the voting stock of another company 110. When using this, dividends are treated as a reduction of the investment 111. Notes and bonds that pay interest and have a fixed maturity 112. Debt investments that a company intends to keep until their maturity date 113. Securities not held for trading or to maturity or other strategic reasons 114. The company investing in another company’s stock 115. What occurs when a company purchases 50% or more of another company’s stock 116. The company whose stock is purchased by another entity Match each of the definitions that follow with the appropriate investment term (a–j). a. Equity method b. Parent company c. Subsidiary company Powered by Cognero
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Chapter 15 - Investments d. Consolidated financial statements e. Fair value f. Unrealized gain or loss on investments. g. Valuation allowance for investments h. Dividend yield i. Amortized cost j. Fair value method 117. A corporation owning all or the majority of the voting stock of another corporation 118. A balance sheet account where the fair value adjustment for investments is reported 119. A corporation controlled by another corporation that owns all or the majority of its voting stock 120. The method of accounting for investments of 20% to 50% in another company’s stock 121. The market price that would be received if an investment were sold 122. Measurement of the rate of return to stockholders based on cash dividends 123. Combined reporting of a corporation and another corporation it controls 124. Recognition of changes in the fair value of short-term investments 125. The value assigned to held-to-maturity securities 126. Appropriate method for accounting for small stock investments Subjective Short Answer 127. Discuss why companies invest cash in short-term temporary investments versus long-term investments. 128. Define debt securities and equity securities. Include their similarities and differences in your discussion. 129. On February 12, Addison, Inc., purchased 6,000 shares of Lucas Company at $22 per share plus a $240 brokerage fee. This purchase represents less than 20% ownership of Lucas Company. On August 22, Lucas paid a dividend per share of $0.42. On November 10, 4,000 shares of Lucas stock were sold for $28 per share less a $160 brokerage fee. Journalize the entries for the original purchase, dividend, and sale. 130. On January 2, Todd Company acquired 40% of the outstanding stock of McGuire Company for $205,000. For the year ending December 31, McGuire earned income of $48,000 and paid dividends of $14,000. Journalize the entries for Todd Company for the purchase of the stock, share of McGuire Company income, and dividends received from McGuire Company. 131. Journalize the entries for the following selected equity investment transactions completed by Perry Company during the current year. Perry accounts for the Dexter Co. investment using the fair value method. Feb. 2
Purchased for cash 900 shares of Dexter Co. stock for $54 per
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Chapter 15 - Investments
Apr. 16 June 17 Aug. 19 Nov. 14
share plus a $450 brokerage commission. This represents a less than 10% ownership interest in the company. Received dividends of $0.25 per share on Dexter Co. stock. Sold 200 shares of Dexter Co. stock for $70 per share less a $500 brokerage commission. Purchased 600 shares of Dexter Co. stock for $65 per share plus a $300 brokerage commission. Received dividends of $0.30 per share on Dexter Co. stock.
132. Ramiro Company purchased 40% of the outstanding stock of Marco Company on January 1. Marco reported net income of $95,000 and declared dividends of $35,000 during the year. How much would Ramiro adjust its investment in Marco Company under the equity method? 133. Pepito Company purchased 40% of the outstanding stock of Reyes Company on January 1. Reyes reported net income of $75,000 and declared dividends of $15,000 during the year. How much would Pepito adjust its investment in Reyes Company under the equity method? 134. Sutton Company purchased 10% of the outstanding stock of Roberts Company on January 1. Roberts reported net income of $155,000 and declared dividends of $40,000 during the year. How would these events be reported by Sutton using the fair value method? 135. Journalize the entries for the following selected equity investment transactions completed by Flurry Company during the current year. Flurry’s purchase represents less than 20% of the total outstanding Braxter Co. stock. Feb. 2 Apr. 16 June 17
Purchased for cash 500 shares of Braxter Co. stock for $34 per share plus a $250 brokerage commission. Received dividends of $0.35 per share on Braxter Co. stock. Sold 100 shares of Braxter Co. stock for $40 per share less a $100 brokerage commission.
136. On March 1, Year 1, Chase Inc. purchases 35% of the outstanding shares of Glory Corporation stock for $325,000. On December 31, Year 1, Glory reports net income of $162,000. On January 15, Year 2, Glory pays total dividends to stockholders of $33,000. Journalize the three transactions. 137. Journalize the following transactions for Batson Co.: Sept. 1 Batson Co. purchased 1,200 of the 100,000 outstanding shares of Michael Corp. stock for $20.75 per share plus a $70 commission. Dec. 31 Michael Corp.’s total earnings for the period are $84,000. 31 Michael Corp. paid a total of $40,000 in cash dividends to shareholders of record. 138. Journalize the following transactions for Morgan Co.: July 1 Morgan Co. purchased 32,000 of 100,000 outstanding shares of Gordon Corp. stock for $10 per share plus a $400 commission. Dec. 31 Gordon Corp.'s total earnings for the period are $80,000. 31 Gordon Corp. paid a total of $45,000 in cash dividends. 139. Journalize the following selected transactions of Masterson Co.: Powered by Cognero
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Chapter 15 - Investments Aug. 1 1 Sept. 1 1 Dec. 31 31
Purchased 600 shares of the 100,000 shares outstanding of $10 par common shares of Dankin Corporation for $5,100. Purchased 3,500 of the 10,000 outstanding common shares of Ramon Co. for $45,700. The investment was accounted for by the equity method. Received a cash dividend of $1 per share on the Dankin Corporation stock acquired on August 1. Received a cash dividend of $2 per share on the Ramon Co. stock acquired on August 1. Sold 100 shares of the Dankin Corporation shares acquired on August 1 for $2,100. Dankin Corporation reported net income of $30,000 and Ramon Company’s reported net income was $50,000.
140. Discuss the appropriate financial treatment when an investor has a greater than 50% ownership in another company. 141. On May 1, Knox Inc. purchases $100,000 of 10-year, 6% Madison Corporation bonds dated March 1 at 100 plus accrued interest. Journalize the entry for the bond purchase. 142. On May 1, Cedar Inc. purchases $100,000 of 10-year, Madison Corporation 6% bonds dated March 1 at 100 plus accrued interest. Journalize the entry for the semiannual receipt of interest on September 1. 143. On May 1, Cedar Inc. purchases $150,000 of 10-year, Knox Corporation 8% bonds dated March 1 at 100 plus accrued interest. Journalize the entry for the semiannual receipt of interest on March 1, Year 2. 144. On October 1, Marcus Corporation purchased $20,000 of 6% bonds of Roberts Corporation due in 8½ years. The bonds were purchased at their face amount plus interest of $400 accrued from July 1, the date of the last semiannual interest payment. Journalize the purchase. 145. On September 1, Year 1, Parsons Company purchased $84,000 of 10-year, 7% government bonds at 100 plus accrued interest. The semiannual interest payment dates are June 30 and December 31. Interest computations are done by the month. a. Journalize the entry for the bond purchase. b. Journalize the receipt of interest on December 31 of the first year. c. Journalize the sale of the bonds on February 1 of the second year for $82,000 plus accrued interest. 146. Journalize the entries for the following selected bond investment transactions for Southwest Bank: Apr. 1 Purchased $400,000 of Daytona Beach 4.5% bonds at 100 plus accrued interest of $4,500. July 1 Received the first semiannual interest payment. Sept. 1 Sold $250,000 of the bonds at 97, plus accrued interest of $1,875. 147. On August 1, Year 1, Bee Company purchased $1,500,000 of Ant Company 10-year, 6% bonds, dated July 1, at 100 plus accrued interest. On March 1, Year 2, Bee sold half of the bonds for $782,500 plus accrued interest. Journalize the following transactions: a. b. c.
Purchase of bonds on August 1, Year 1. Receipt of first semiannual interest payment on December 31, Year 1. The sale of the bonds on March 1, Year 2.
148. Journalize the entries for the following selected transactions of Oliver Co.: May 1 Purchased $100,000 of Kruse Co. 6% bonds at their face amount plus accrued interest of $2,000. July 1 Received first semiannual interest payment. Sept. 1 Sold the bonds at 97 plus accrued interest of $1,000. Powered by Cognero
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Chapter 15 - Investments 149. Albright Company purchased as a long-term investment $500,000 of Benton Corporation 10-year, 9% bonds. Journalize the following selected transactions: Mar. 1 Purchased bonds at their face amount for $500,000. May 1 Sold half the bonds at 98 plus accrued interest of $3,750. The broker deducted $200 for brokerage fees and taxes, remitting the balance. 150. On January 1, the valuation allowance for trading investments account has a zero balance. On December 31, the cost of trading securities portfolio was $64,200, and the fair value was $67,000. Prepare the December 31 adjusting journal entry for the unrealized gain or loss on trading investments. 151. Skyline, Inc., purchased a portfolio of trading securities during the current fiscal year. The cost and fair value of this portfolio on December 31 were as follows: Issuing Company Alcon, Inc. Easton Company Panther Company Total
Total Cost Total Fair Value $16,000 $15,000 23,000 21,500 9,000 9,200 $48,000 $45,700
a. Journalize the adjusting entry for the fair value of the trading securities on December 31. b. Where will the information from the journal entry be reported on the financial statements? 152. Skyline, Inc., purchased a portfolio of available-for-sale securities during the current fiscal year. The cost and fair value of this portfolio on December 31 were as follows: Issuing Company Blackstone, Inc. Flagler Company Patterson Corporation Total
Cost $ 4,000 3,000 7,500 $14,500
Fair Value $ 5,200 2,700 9,800 $17,700
a. Journalize the adjusting entry for the fair value of the portfolio of securities on December 31. b. Where will the information from the journal entry be reported on the financial statements? 153. The income statement for Hudson Company reported net income of $345,000 for the year ended December 31 before considering the following: • • • •
During the year, the company purchased trading securities. At year-end, the fair value of the investment portfolio was $23,000 less than cost. The balance of Retained Earnings was $823,000 on January 1. Hudson Company paid $43,000 in cash dividends during the year.
Compute the balance of Retained Earnings on December 31. 154. The income statement for Dobson Corporation reported net income of $22,400 for the year ended December 31 before considering the following: • • •
During the year, the company purchased available-for-sale securities. At year-end, the fair value of the investment portfolio was $2,100 more than cost. The balance of Retained Earnings was $83,000 on January 1.
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Chapter 15 - Investments •
Dobson Corporation paid $9,000 in cash dividends during the year.
Compute the balance of Retained Earnings on December 31. 155. Discuss the similarities and differences in reporting trading securities, available-for-sale securities, and held-tomaturity securities. 156. On January 1, the valuation allowance for available-for-sale investments account had a zero balance. On December 31, the cost of the available-for-sale securities was $48,700, and the fair value was $39,200. Journalize the adjusting entry for the unrealized gain or loss for available-for-sale investments on December 31. 157. On April 1, ValueTime, Inc., had a market price per common share of $24.00. For the previous year, ValueTime paid a dividend of $1.50 per share. Compute the dividend yield for ValueTime, Inc. 158. Nicer Corporation reported net income of $50,000 in the current year. There are 10,000 shares of $100 par, 6% preferred stock and 50,000 shares of $2 par common stock outstanding. During the year, Nicer paid the preferred stockholders a $6-per-share dividend and also paid $30,000 to common shareholders. The market value of Nicer’s preferred stock is $95, and of Nicer’s common stock, $5. a. Compute the dividend yield for Nicer Corporation. b. Why does the dividend yield vary widely across firms? 159. LM, Inc., reported net income for the year ending December 31 of $483,500. Dividends paid during the year totaled $52,900. The company holds available-for-sale securities with an original cost of $162,000 and a fair value of $181,000 at the end of the year. It also holds trading securities with an original cost of $150,000 and a fair value of $147,000. Retained earnings on January 1 was $736,400, and accumulated other comprehensive income on January 1 was $16,200. Compute the following balances to be reported in the financial statements dated December 31: a. Valuation allowance for available-for-sale securities b. Comprehensive income c. Retained earnings d. Accumulated other comprehensive income 160. Gerardo Company had a net income of $75,000 and other comprehensive income of $12,500 for the year. On January 1, the retained earnings balance was $525,000 and the accumulated other comprehensive income balance was $55,000. Determine the (a) comprehensive income for the year, (b) the retained earnings balance on December 31, and (c) the accumulated other comprehensive income on December 31. 161. Herberto Company had a net income of $74,000 and other comprehensive loss of $8,500 for the year. On January 1, the retained earnings balance was $425,000, and the accumulated other comprehensive income balance was $52,000. Determine the (a) comprehensive income for the year, (b) the retained earnings balance on December 31, and (c) the accumulated other comprehensive income on December 31. 162. (a) What is comprehensive income? (b) How is it computed? (c) What are some examples of items included in other comprehensive income? (d) Where is comprehensive income reported?
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Chapter 15 - Investments Answer Key 1. False 2. True 3. True 4. True 5. False 6. True 7. True 8. True 9. True 10. False 11. True 12. False 13. False 14. False 15. True 16. True 17. False 18. False 19. False 20. False 21. True 22. True 23. True 24. False 25. True Powered by Cognero
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Chapter 15 - Investments 26. False 27. False 28. False 29. True 30. True 31. True 32. False 33. False 34. True 35. True 36. False 37. True 38. False 39. True 40. True 41. False 42. True 43. a 44. b 45. c 46. a 47. a 48. d 49. b 50. b Powered by Cognero
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Chapter 15 - Investments 51. a 52. b 53. a 54. b 55. c 56. a 57. a 58. d 59. d 60. c 61. d 62. b 63. d 64. c 65. a 66. d 67. b 68. b 69. c 70. c 71. d 72. c 73. c 74. a 75. b 76. b Powered by Cognero
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Chapter 15 - Investments 77. a 78. c 79. c 80. d 81. a 82. d 83. b 84. b 85. d 86. c 87. c 88. c 89. c 90. a 91. d 92. c 93. a 94. c 95. a 96. b 97. a 98. a 99. a 100. a 101. a Powered by Cognero
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Chapter 15 - Investments 102. a 103. a 104. b 105. d 106. c 107. f 108. b 109. e 110. i 111. a 112. h 113. g 114. c 115. j 116. d 117. b 118. g 119. c 120. a 121. e 122. h 123. d 124. f 125. i 126. j 127. When companies temporarily have excess cash not needed for current operations, they often invest it in debt or Powered by Cognero
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Chapter 15 - Investments equity securities. These investments can be short or long term in nature. The primary reasons companies invest short term is to earn interest, receive dividends, and realize gains from the increase in the market price of the securities. When companies make temporary investments, they are listed as current assets on the balance sheet. Long-term investments may be made for the same reasons. However, many long-term investments involve the purchase of a significant portion of the stock of another company. Such investments usually have a strategic purpose, such as reduction of costs or expansion into new markets. 128. Debt securities are notes and bonds that pay interest and have a fixed maturity date. Equity securities are shares of preferred and common stock that represent ownership in a company and do not have a fixed maturity date. Investments in both types of securities may be for the short term with the objectives to earn interest, receive dividends, and/or realize gains from increases in market value. Investments in both types of securities may also be for the long term. 129. Feb. 12
Investments—Lucas Company Stock* Cash *(6,000 shares × $22 per share) + $240
Aug. 22
Nov. 10
Cash Dividend Revenue* *$0.42 per share × 6,000 shares Cash* Gain on Sale of Investments Investments—Lucas Company Stock** *(4,000 shares × $28) – $160 **4,000 shares × ($132,240 ÷ 6,000 shares)
2,520 2,520
111,840 23,680 88,160
130. Jan.
2
Dec. 31
Investment in McGuire Company Stock Income of McGuire Company* *(40% × $48,000)
19,200
Cash Investment in McGuire Company Stock* *(40% × $14,000)
5,600
31
Investment in McGuire Company Stock Cash
132,240 132,240
131. Feb. 2
Investments—Dexter Co. Stock* Cash *(900 shares × $54) + $450
Apr. 16
June 17
Aug. 19
Cash Dividend Revenue* *900 shares × $0.25
205,000 205,000 19,200
5,600
49,050 49,050 225 225
Cash* Investments—Dexter Co. Stock** Gain on Sale of Investments *(200 shares × $70) – $500 **($49,050 ÷ 900) × 200
13,500
Investments—Dexter Co. Stock*
39,300
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10,900 2,600
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Chapter 15 - Investments Cash *(600 shares × $65) + $300 Nov. 14
39,300
Cash Dividend Revenue* *(900 – 200 + 600) × $0.30
390 390
132. Ramiro’s share of Marco’s reported net income (40% × $95,000) Less Ramiro’s share of the Marco’s dividend (40% × $35,000) Increase in Investment in Marco Company Stock 133. Pepito’s share of Reyes' reported net income (40% × $75,000) Less Pepito’s share of the Reyes dividend (40% × $15,000) Increase in Investment in Reyes Company Stock
$38,000 14,000 $24,000
$30,000 6,000 $24,000
134. When using the fair value method, there is no adjustment to the investment for the investor’s share of income or dividends. As the owner of 10% of the stock, Sutton would receive $4,000 of the declared dividend, which would be reported as other revenue. 135. Feb.
2 Investments—Braxter Co. Stock* Cash *(500 × $34) + $250
17,250 17,250
Apr. 16 Cash Dividend Revenue* *500 × $0.35
175 175
June 17 Cash* Investments—Braxter Co. Stock** Gain on Sale of Investments *(100 × $40) – $100 **($17,250 ÷ 500) × 100
3,900 3,450 450
136. Year 1 Mar. 1
Dec. 31 Year 2 Jan. 15
Investments in Glory Corporation Stock Cash
325,000
Investments in Glory Corporation Stock Income of Glory Corporation
56,700
Cash Investments in Glory Corporation Stock
11,550
137. Sept. 1
Investments—Michael Corp. Stock* Cash *(1,200 × $20.75) + $70
Dec. 31
325,000
56,700
11,550
24,970 24,970
No entry required.
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Chapter 15 - Investments Dec. 31
Cash Dividend Revenue* *($40,000 ÷ 100,000) × 1,200
138. July 1 Dec. 31
Dec. 31
Investments in Gordon Corp. Stock* Income of Gordon Corp. *$80,000 × 32%
Sept. 1 Sept. 1 Dec. 31
Dec. 31
480
320,400 320,400 25,600 25,600
Cash 14,400 Investments in Gordon Corp. Stock* *$45,000 × 32%
139. Aug. 1 Aug. 1
Investments in Gordon Corp. Stock Cash
480
Investments in Dankin Corporation Stock Cash
Investments in Ramon Co. Stock Cash
5,100 5,100 45,700 45,700
Cash Dividend Revenue Cash Investments in Ramon Co. Stock
14,400
600 600 7,000 7,000
Cash 2,100 Investments—Dankin Corporation Stock* Gain on Sale of Investments *($5,100 ÷ 600) × 100
850 1,250
Investments—Ramon Co. Stock* Income of Ramon Co. *$50,000 × 35%
17,500
17,500
140. If an investor purchases more than 50% of another company, the investor is considered to have control over the investee. The purchase is deemed a business combination. The corporation that owns the majority interest is called the parent company; the controlled company is called the subsidiary company. Parent and subsidiary corporations may continue to maintain separate accounting records throughout the year and prepare their own financial statements. At the end of the year, the financial statements of the parent and subsidiary(ies) are combined into consolidated financial statements. 141. Investments—Madison Corporation Bonds 100,000 Interest Receivable ($100,000 × 6% × 2/12) 1,000 Cash 101,000 142. Cash Interest Receivable ($100,000 × 6% × 2/12) Interest Revenue ($100,000 × 6% × 4/12) Powered by Cognero
3,000 1,000 2,000 Page 28
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Chapter 15 - Investments 143. Cash Interest Revenue ($150,000 × 8% × 1/2)
6,000 6,000
144. Oct. 1 Investments—Roberts Corporation Bonds 20,000 Interest Receivable 400 Cash 20,400 145. a.
b.
c.
Year 1 Sept. 1
Dec. 31
Year 2 Feb. 1
Investments—Government Bonds Interest Receivable ($84,000 × 7% × 2/12) Cash
84,000 980
Cash ($84,000 × 7% × 6/12) Interest Receivable Interest Revenue ($84,000 × 7% × 4/12)
2,940
Cash [$82,000 + ($84,000 × 7% × 1/12)] Loss on Sale of Investments Investments—Government Bonds Interest Revenue
82,490 2,000
84,980
980 1,960
84,000 490
146. Apr. 1 Investments—Daytona Beach Bonds 400,000 Interest Receivable 4,500 Cash 404,500 July 1
Cash ($400,000 × 4.5% × ½) Interest Receivable Interest Revenue
9,000 4,500 4,500
Sept. 1 Cash* 244,375 Loss on Sale of Investments 7,500 Interest Revenue Investments—Daytona Beach Bonds *Sale proceeds ($250,000 × 97%) Accrued interest Total proceeds from sale
1,875 250,000
$242,500 1,875 $244,375
147. a. Investments—Ant Company Bonds Interest Receivable ($1,500,000 × 6% × 1/12) Cash
1,500,000 7,500 1,507,500
b. Cash Interest Revenue Interest Receivable
45,000
c. Cash Interest Revenue ($750,000 × 6% × 2/12)
790,000
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37,500 7,500
7,500 Page 29
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Chapter 15 - Investments Gain on Sale of Investments Investments—Ant Company Bonds 148. May 1 Investments—Kruse Co. Bonds Interest Receivable Cash July 1 Cash Interest Receivable Interest Revenue ($100,000 × 6% × 2/12) Sept. 1 Cash Loss on Sale of Investments Investments—Kruse Co. Bonds Interest Revenue 149. Mar. 1 Investments—Benton Corporation Bonds Cash May 1 Cash* Loss on Sale of Investment Investments—Benton Corporation Bonds Interest Revenue *($250,000 × 98%) – $200 + $3,750 150. Dec. 31
32,500 750,000
100,000 2,000 102,000 3,000 2,000 1,000 98,000 3,000 100,000 1,000
500,000 500,000 248,550 5,200 250,000 3,750
Valuation Allowance for Trading Investments Unrealized Gain on Trading Investments
151. a. Unrealized Loss on Trading Investments* Valuation Allowance for Trading Investments *$45,700 – $48,000
2,800 2,800
2,300 2,300
b. The unrealized loss will be reported on the income statement as part of Other Revenue (Loss). The valuation allowance will reduce the value of the portfolio on the balance sheet. 152. a.
Valuation Allowance for Available-for-Sale Investments Unrealized Gain (Loss) on Available-for-Sale Investments ($17,700 – $14,500)
3,200 3,200
b. The unrealized gain will be reported on the balance sheet as an adjustment to stockholders’ equity. The valuation allowance will increase the value of the portfolio in the Assets section on the balance sheet. 153. Retained earnings, January 1 Powered by Cognero
$ 823,000 Page 30
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Chapter 15 - Investments Plus net income* Less dividends Retained earnings, December 31
322,000 (43,000) $1,102,000
*Because these are trading securities, the decrease in fair value is part of the net income computation ($345,000 – $23,000). 154. Retained earnings, January 1 Plus net income* Less dividends Retained earnings, December 31
$83,000 22,400 (9,000) $96,400
*Because these are available-for-sale securities, the increase in fair market value is an adjustment to stockholders’ equity, not net income. 155. Both trading securities and available-for-sale securities are reported at fair value on the balance sheet date. Held-tomaturity securities are reported at amortized cost. Unrealized gains and losses on trading securities are reported on the income statement as part of Other Revenue (Loss). Unrealized gains and losses on available-for-sale securities are reported in the Stockholders' Equity section of the balance sheet. Unrealized gains and losses are not computed or reported on held-to-maturity securities. Trading securities are always reported as current assets. Available-for-sale and held-to-maturity securities may be reported as current or noncurrent assets. The classification for available-for-sale securities depends on management intent. The classification for held-to-maturity securities depends on the remaining time to maturity. 156. Dec. 31
Unrealized Loss on Available-for-Sale Investments Valuation Allowance for Available-for-Sale Investments *Available-for-sale investments at fair value, December 31 Available-for-sale investments at cost, December 31 Unrealized loss on available-for-sale investments, December 31
9,500* 9,500 $39,200 48,700 $(9,500)
157. Dividend Yield = Dividends per Share of Common Stock ÷ Market Price per Share of Common Stock = $1.50 ÷ $24.00 = 6.25% 158. a. Dividend Yield = Dividends per Share of Common Stock ÷ Market Price per Share of Common Stock = $0.60* ÷ $5.00 = 12% *$30,000 ÷ 50,000 shares b. Growth firms tend to retain their earnings to fund future growth, resulting in a small dividend yield. Other companies regularly pay dividends to stockholders resulting in larger dividend yields. 159. a. Valuation allowance for available-for-sale securities: $181,000 – $162,000 = $19,000 b. Comprehensive income: $483,500 + $19,000 = $502,500 c. Retained earnings: Powered by Cognero
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Chapter 15 - Investments $736,400 + $483,500 – $52,900 = $1,167,000 d. Accumulated other comprehensive income: $16,200 + $19,000 = $35,200 160. a. $87,500 ($75,000 + $12,500) b. $600,000 ($525,000 + $75,000) c. $67,500 ($55,000 + $12,500) 161. a. $65,500 ($74,000 – $8,500) b. $499,000 ($425,000 + $74,000) c. $43,500 ($52,000 – $8,500) 162. a. Comprehensive income is all changes in stockholders’ equity during a period, except those resulting from dividends and stockholders’ investments. b. It is computed by adding other comprehensive income to net income. c. Other comprehensive income items include unrealized gains and losses on availablefor-sale-securities and foreign currency and pension liability adjustments. d. Comprehensive income is reported on the financial statements in one of the following two ways: (1) On the income statement. (2) In a separate statement of comprehensive income that immediately follows the income statement.
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Chapter 16 - Statement of Cash Flows True / False 1. The statement of cash flows is not one of the basic financial statements. a. True b. False 2. Cash, as the term is used for the statement of cash flows, could indicate either cash or cash equivalents. a. True b. False 3. The statement of cash flows is an optional financial statement. a. True b. False 4. The statement of cash flows shows the effects on cash of a company's operating, investing, and financing activities. a. True b. False 5. The statement of cash flows reports a firm's major sources of cash receipts and major uses of cash for a period of time. a. True b. False 6. Cash flows from operating activities, as part of the statement of cash flows, include cash transactions that enter into the determination of net income. a. True b. False 7. To arrive at net cash flows from operating activities using the indirect method, it is necessary to convert the income statement from an accrual basis to the cash basis of accounting. a. True b. False 8. Cash flows from investing activities, as part of the statement of cash flows, would include any receipts from the sale of land. a. True b. False 9. Cash flows from financing activities, as part of the statement of cash flows, would include any payments for dividends. a. True b. False 10. Cash flows from investing activities, as part of the statement of cash flows, would include any payments for the purchase of treasury stock. a. True b. False Powered by Cognero
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Chapter 16 - Statement of Cash Flows 11. Cash flows from investing activities, as part of the statement of cash flows, would include any receipts from the issuance of bonds payable. a. True b. False 12. There are two alternatives for reporting cash flows from operating activities on the statement of cash flows: (1) the direct method and (2) the indirect method. a. True b. False 13. The direct method of preparing the operating activities section of the statement of cash flows reports major classes of cash receipts and cash payments related to the day-to-day operations of the business. a. True b. False 14. Under the direct method of reporting cash flows from operating activities, the primary source of cash is cash received from customers. a. True b. False 15. The main disadvantage of the direct method of reporting cash flows from operating activities is that the necessary data are often costly to accumulate. a. True b. False 16. A major disadvantage of the indirect method of reporting cash flows from operating activities is that the difference between the net amount of cash flows from operating activities and net income is emphasized. a. True b. False 17. Cash outflows from financing activities include the payment of cash dividends, the acquisition of treasury stock, and the repayment of amounts borrowed. a. True b. False 18. Cash flows from investing activities, as part of the statement of cash flows, include payments for the acquisition of fixed assets. a. True b. False 19. The acquisition of land in exchange for common stock is an example of a noncash investing and financing activity. a. True b. False 20. If a business issued bonds payable in exchange for land, the transaction would be reported in a separate section of the statement of cash flows. a. True Powered by Cognero
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Chapter 16 - Statement of Cash Flows b. False 21. In preparing the statement of cash flows, the correct order of reporting cash activities is financing, operating, and investing. a. True b. False 22. A cash flow per share amount should be reported on the statement of cash flows. a. True b. False 23. Purchasing equipment by issuing a 6-month note should be shown on the statement of cash flows under the investing activities section. a. True b. False 24. Cash inflows and outflows are not netted in the investing or financing sections of the statement of cash flows but are separately disclosed to give the reader full information. a. True b. False 25. Rarely will the cash flows from operating activities, as reported on the statement of cash flows, be the same as the net income reported on the income statement. a. True b. False 26. In preparing the operating activities section of the statement of cash flows by the indirect method, the net decrease in inventories from the beginning to the end of the period is added to net income for the period. a. True b. False 27. In preparing the operating activities section of the statement of cash flows by the indirect method, the depreciation expense for the period is added to the net income for the period. a. True b. False 28. In preparing the operating activities section of the statement of cash flows by the indirect method, the amortization of bond discount for the period is deducted from the net income for the period. a. True b. False 29. Net income was $51,000 for the year. The accumulated depreciation balance increased by $14,000 over the year. There were no sales of fixed assets or changes in noncash current assets or liabilities. Under the indirect method, the net cash flows from operations is $37,000. a. True b. False Powered by Cognero
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Chapter 16 - Statement of Cash Flows 30. Net income for the year was $29,500. Accounts receivable increased $2,500, and accounts payable increased $5,400. There were no other changes in noncash current assets and liabilities. Under the indirect method, the net cash flows from operations is $32,400. a. True b. False 31. Under the indirect method, expenses that do not affect cash are added to net income in the operating activities section of the statement of cash flows. a. True b. False 32. If land costing $145,000 was sold for $205,000, the $60,000 gain on the sale would be added to net income in the operating activities section of the statement of cash flows (prepared by the indirect method). a. True b. False 33. Using the indirect method, if land costing $85,000 was sold for $145,000, the amount reported in the financing activities section of the statement of cash flows would be $85,000. a. True b. False 34. A building with a cost of $153,000 and accumulated depreciation of $42,000 was sold for an $11,000 gain. When using the indirect method, the cash generated from this investing activity is $121,000. a. True b. False 35. There is no difference in the investing and financing sections of the statement of cash flows using the indirect and direct methods. a. True b. False 36. Repayments of bonds would be shown as a cash outflow in the investing section of the statement of cash flows. a. True b. False 37. If cash dividends of $135,000 were paid during the year and the company sold 1,000 shares of common stock at $30 per share, the statement of cash flows would report net cash flows from financing activities as $165,000. a. True b. False 38. The declaration and issuance of a stock dividend would be reported on the statement of cash flows. a. True b. False 39. If 800 shares of $40 par common stock are sold for $43,000, the $43,000 would be reported in the financing activities section of the statement of cash flows. a. True Powered by Cognero
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Chapter 16 - Statement of Cash Flows b. False 40. If $475,000 of bonds payable are sold at 101, $475,000 would be reported in the financing activities section of the statement of cash flows. a. True b. False 41. Cash paid to acquire treasury stock should be shown on the statement of cash flows under investing activities. a. True b. False 42. Free cash flow is net cash flows from investing activities less cash used to purchase fixed assets needed to maintain current productive capacity. a. True b. False 43. Free cash flow measures the operating cash flow available to a company after it purchases the property, plant, and equipment (PP&E) necessary to maintain its current operations. a. True b. False 44. When using the spreadsheet (work sheet) method to prepare the statement of cash flows, no order of analysis is required, but it is more efficient to start with Retained Earnings and proceed upward in the account listing. a. True b. False 45. When using the spreadsheet (work sheet) method to prepare the statement of cash flows, the Balance columns should total to zero. a. True b. False 46. Under the direct method of preparing a statement of cash flows, the gain on the sale of land is not adjusted or reported as part of cash flows from operating activities. a. True b. False 47. The manner of reporting cash flows from investing and financing activities will be different under the direct method as compared to the indirect method. a. True b. False 48. Sales reported on the income statement were $372,000. The accounts receivable balance declined $4,500 over the year. The amount of cash received from customers was $367,500. a. True b. False 49. To determine cash paid for merchandise for the statement of cash flows using the direct method, a decrease in Powered by Cognero
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Chapter 16 - Statement of Cash Flows accounts payable is added to the cost of merchandise sold. a. True b. False 50. To determine cash paid for operating expenses for the statement of cash flows using the direct method, a decrease in prepaid expenses is added to operating expenses other than depreciation. a. True b. False 51. To determine cash paid for operating expenses for the statement of cash flows using the direct method, a decrease in accrued expenses payable is added to operating expenses other than depreciation. a. True b. False 52. To determine cash paid for income taxes for the statement of cash flows using the direct method, an increase in income taxes payable is added to the income tax expense. a. True b. False Multiple Choice 53. Which of the following is not one of the four basic financial statements? a. balance sheet b. statement of cash flows c. statement of changes in financial position d. income statement 54. Which of the following can be found on the statement of cash flows? a. cash flows from operating activities b. total assets c. total changes in stockholders' equity d. changes in retained earnings 55. On the statement of cash flows, the Cash Flows from (used for) Operating Activities section would include a. cash received from the issuance of capital stock b. cash received from the sale of investments c. cash paid for the acquisition of investments d. cash received from customers 56. Preferred stock issued in exchange for land would be reported on the statement of cash flows in a. the Cash Flows from (used for) Financing Activities section b. the Cash Flows from (used for) Investing Activities section c. a separate section of noncash investing and financing activities, usually at the bottom of the statement d. the Cash Flows from (used for) Operating Activities section
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Chapter 16 - Statement of Cash Flows 57. Cash paid to purchase long-term investments would be reported on the statement of cash flows in a. the Cash Flows from (used for) Operating Activities section b. the Cash Flows from (used for) Financing Activities section c. the Cash Flows from (used for) Investing Activities section d. a separate section of noncash investing and financing activities 58. Which of the following would not be found in a schedule of noncash investing and financing activities reported at the bottom of a statement of cash flows? a. equipment acquired in exchange for a note payable b. bonds payable exchanged for capital stock c. purchase of treasury stock for cash d. capital stock issued to acquire fixed assets 59. Which of the following does not represent an outflow of cash and therefore would not be reported on the statement of cash flows as a use of cash? a. purchase of noncurrent assets b. purchase of treasury stock c. discarding an asset that had been fully depreciated d. payment of cash dividends 60. Which of the following represents an inflow of cash and therefore would be reported on the statement of cash flows? a. retirement of bond payable b. acquisition of treasury stock c. declaration of stock dividends d. issuance of long-term debt 61. A 10-year bond was issued at face value for $250,000 cash. This transaction should be shown on a statement of cash flows under a. investing activities b. financing activities c. noncash investing and financing activities d. operating activities 62. Cash paid for preferred stock dividends should be shown on the statement of cash flows under a. investing activities b. financing activities c. noncash investing and financing activities d. operating activities 63. The last item on the statement of cash flows prior to the schedule of noncash investing and financing activities reports a. the net increase or decrease in cash b. cash at the end of the period c. net cash flows from investing activities d. net cash flows from financing activities Powered by Cognero
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Chapter 16 - Statement of Cash Flows 64. Which of the following is a noncash investing and financing activity? a. payment of a cash dividend b. payment of a 6-month note payable c. purchase of merchandise inventory on account d. issuance of common stock to acquire land 65. Which of the following should be shown on a statement of cash flows under the financing activities section? a. the purchase of a long-term investment in the common stock of another company b. the payment of cash to retire a long-term note c. the proceeds from the sale of a building d. the issuance of a long-term note to acquire land 66. A company purchases equipment for $32,000 cash. This transaction should be shown on the statement of cash flows under a. investing activities b. financing activities c. noncash investing and financing activities d. operating activities 67. Cash flow per share is a. required to be reported on the balance sheet b. required to be reported on the income statement c. required to be reported on the statement of cash flows d. not required to be reported on any statement 68. On the statement of cash flows prepared by the indirect method, the operating activities section would include a. receipts from the sale of investments b. gains or losses on fixed assets c. payments for cash dividends d. receipts from the issuance of capital stock 69. The statement of cash flows is not useful for a. planning future investing and financing activities b. determining a company’s ability to pay its debts c. determining a company’s ability to pay dividends d. computing the net worth of a company 70. Cash received from the issuance of a mortgage note payable would be classified as a(n) a. investing activity b. operating activity c. noncash investing and financing activity d. financing activity 71. Which of the following would not be on the statement of cash flows? Powered by Cognero
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Chapter 16 - Statement of Cash Flows a. cash flows from investing activities b. cash flows from financing activities c. cash flows from operating activities d. cash flows from contingent activities 72. The order of presentation of activities on the statement of cash flows is a. operating, investing, and financing b. operating, financing, and investing c. financing, operating, and investing d. financing, investing, and operating 73. Financing activities include a. lending money b. acquiring investments c. issuing debt d. acquiring long-lived assets 74. Which of the following increases cash? a. depreciation expense b. acquisition of treasury stock c. borrowing money by issuing a 6-month note d. the declaration of a cash dividend 75. Which of the following would not be classified as an operating activity? a. interest expense b. income taxes c. payment of dividends d. selling expenses 76. A business issues 20-year bonds payable in exchange for preferred stock. This transaction would be reported on the statement of cash flows in a. a separate section of noncash investing and financing activities at the bottom of the statement b. the Cash Flows from (used for) Financing Activities section c. the Cash Flows from (used for) Investing Activities section d. the Cash Flows from (used for) Operating Activities section 77. On the statement of cash flows, the operating activities section would include a. cash received from the issuance of common stock b. cash paid for interest on short-term notes payable c. cash paid for the purchase of investments d. cash paid for cash dividends 78. Depreciation on factory equipment would be reported on the statement of cash flows prepared by the indirect method in Powered by Cognero
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Chapter 16 - Statement of Cash Flows a. the Cash Flows from (used for) Financing Activities section b. the Cash Flows from (used for) Investing Activities section c. a separate section of noncash investing and financing activities d. the Cash Flows from (used for) Operating Activities section 79. Which of the following should be added to net income in computing net cash flows from operating activities using the indirect method? a. an increase in inventory b. a decrease in accounts payable c. preferred dividends declared and paid d. a decrease in accounts receivable 80. Which of the following should be deducted from net income in computing the net cash flows from operating activities using the indirect method? a. depreciation expense b. gain on sale of land c. a loss on the sale of equipment d. dividends declared and paid 81. Which of the following should be added to net income in computing net cash flows from operating activities using the indirect method? a. a gain on the sale of land b. a decrease in accounts payable c. an increase in accrued liabilities d. dividends paid on common stock 82. On the statement of cash flows prepared by the indirect method, a $50,000 gain on the sale of investments would be a. deducted from net income in converting the net income reported on the income statement to net cash flows from operating activities b. added to net income in converting the net income reported on the income statement to net cash flows from operating activities c. added to dividends declared in converting the dividends declared to the net cash flows from financing activities related to dividends d. deducted from dividends declared in converting the dividends declared to the net cash flows from financing activities related to dividends 83. Accounts receivable from sales transactions were $51,000 at the beginning of the year and $64,000 at the end of the year. Net income reported on the income statement for the year was $105,000. Exclusive of the effect of other adjustments, the net cash flows from operating activities to be reported on the statement of cash flows prepared by the indirect method would be a. $105,000 b. $118,000 c. $92,000 d. $169,000 84. The net income reported on the income statement for the current year was $275,000. Depreciation recorded on fixed Powered by Cognero
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Chapter 16 - Statement of Cash Flows assets and amortization of patents for the year were $40,000 and $9,000, respectively. Balances of current asset and current liability accounts at the end and at the beginning of the year are as follows: Cash Accounts Receivable Inventories Prepaid Expenses Accounts Payable (merchandise creditors)
End $ 50,000 112,000 105,000 4,500 75,000
Beginning $ 60,000 108,000 93,000 6,500 89,000
What is the amount of the net cash flows from operating activities reported on the statement of cash flows prepared by the indirect method? a. $198,000 b. $324,000 c. $352,000 d. $296,000 85. The following information is available from the current period financial statements: Net income Depreciation expense Increase in accounts receivable Decrease in accounts payable
$175,000 28,000 16,000 (21,000)
The net cash flows from operating activities using the indirect method is a. $166,000 b. $184,000 c. $110,000 d. $240,000 86. On the statement of cash flows, the investing activities section would include a. cash received from the issuance of capital stock b. cash paid for dividends c. cash paid for retirement of bonds payable d. cash received from the sale of investments 87. Cash paid for equipment would be reported on the statement of cash flows in a. the Cash Flows from (used for) Operating Activities section b. the Cash Flows from (used for) Financing Activities section c. the Cash Flows from (used for) Investing Activities section d. a separate section of noncash investing and financing activities 88. On the statement of cash flows prepared using the indirect method, a $7,500 gain on the sale of fixed assets would be a. added to net income in converting the net income reported on the income statement to cash flows from operating activities b. deducted from net income in converting the net income reported on the income statement to cash flows from operating activities c. added to dividends declared in converting the dividends declared to the cash flows from financing activities Powered by Cognero
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Chapter 16 - Statement of Cash Flows related to dividends d. deducted from dividends declared in converting the dividends declared to the cash flows from financing activities related to dividends 89. Which of the following should be deducted from net income in computing net cash flows from operating activities using the indirect method? a. a decrease in inventory b. a decrease in accounts payable c. preferred dividends declared and paid d. a decrease in accounts receivable 90. Which of the following should be added to net income in computing net cash flows from operating activities using the indirect method? a. depreciation expense b. an increase in inventory c. a gain on the sale of equipment d. dividends declared and paid 91. The net income reported on the income statement for the current year was $250,000. Depreciation recorded on fixed assets and amortization of patents for the year were $40,000, and $9,000, respectively. Balances of current asset and current liability accounts at the end and at the beginning of the year are as follows: Cash Accounts Receivable Inventories Prepaid Expenses Accounts Payable (merchandise creditors)
End $ 50,000 112,000 105,000 4,500 75,000
Beginning $ 60,000 108,000 93,000 6,500 89,000
What is the amount of net cash flows from operating activities reported on the statement of cash flows prepared by the indirect method? a. $271,000 b. $279,000 c. $327,000 d. $256,000 92. The following information is available from the current period financial statements: Net income Depreciation expense Increase in accounts receivable Decrease in accounts payable
$165,000 28,000 16,000 21,000
The net cash flows from operating activities using the indirect method is a. $230,000 b. $188,000 c. $198,000 d. $156,000 Powered by Cognero
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Chapter 16 - Statement of Cash Flows 93. The beginning and ending balances of Accounts Receivable for the year are $40,000 and $32,000, respectively. Income reported on the income statement for the year is $110,000. Exclusive of the effect of other adjustments, the net cash flows from operating activities to be reported on the statement of cash flows using the indirect method is a. $118,000 b. $110,000 c. $102,000 d. $150,000 94. Baxter Company reported a net loss of $13,000 for the year ended December 31. During the year, accounts receivable decreased by $5,000, merchandise inventory increased by $8,000, accounts payable increased by $10,000, and depreciation expense of $4,000 was recorded. During the year, operating activities under the indirect method a. provided net cash of $8,000 b. provided net cash of $2,000 c. used net cash of $8,000 d. used net cash of $2,000 95. A company had net income of $252,000. Depreciation expense was $26,000. During the year, accounts receivable and merchandise inventory increased by $15,000 and $40,000, respectively. Prepaid expenses and accounts payable decreased by $2,000 and $4,000, respectively. There was also a loss on the sale of equipment of $3,000. How much was the net cash flows from operating activities on the statement of cash flows using the indirect method? a. $217,000 b. $224,000 c. $284,000 d. $305,000 96. A corporation uses the indirect method of preparing the statement of cash flows. A fixed asset has been sold for $25,000, representing a gain of $4,500. The value of this transaction appearing in the operating activities section of the statement of cash flows is a. $25,000 b. $(4,500) c. $29,500 d. $4,500 97. The beginning and ending balances of Accounts Receivable for the year are $40,000 and $31,000, respectively. Income reported on the income statement for the year is $120,000. Exclusive of the effect of other adjustments, the net cash flows from operating activities to be reported on the statement of cash flows using the indirect method is a. $120,000 b. $129,000 c. $151,000 d. $111,000 98. If accounts payable have increased during a period, a. revenues on an accrual basis are less than revenues on a cash basis b. expenses on an accrual basis are less than expenses on a cash basis c. expenses on an accrual basis are the same as expenses on a cash basis Powered by Cognero
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Chapter 16 - Statement of Cash Flows d. expenses on an accrual basis are greater than expenses on a cash basis 99. Changes in current assets and current liabilities are reported on the statement of cash flows, using the indirect method, in the a. operating activities section b. financing activities section c. investing activities section d. separate section of noncash investing and financing activities 100. In computing net cash flows from operating activities using the indirect method, a gain on the sale of equipment is a. added to net income b. deducted from net income c. ignored because it does not affect cash d. reported supplementally as a noncash investing and financing activity 101. Net income for the year was $45,500. Accounts receivable increased by $5,500, and accounts payable increased by $11,200. Under the indirect method, the net cash flows from operating activities is a. $51,200 b. $45,500 c. $62,200 d. $28,800 102. Rogers Company reported net income of $35,000 for the year. During the year, accounts receivable increased by $7,000, accounts payable decreased by $3,000, and depreciation expense of $8,000 was recorded. Net cash flows from operating activities under the indirect method for the year is a. $53,000 b. $47,000 c. $33,000 d. $37,000 103. A building with a book value of $54,000 is sold for $63,000 cash. Using the indirect method, this transaction should be shown on the statement of cash flows as an increase of a. $54,000 from investing activities b. $63,000 from investing activities and a deduction from net income of $9,000 c. $9,000 from investing activities d. $54,000 from investing activities and an addition to net income of $9,000 104. Land costing $71,000 was sold for $50,000 cash. The loss on the sale was reported on the income statement as other expense. On the statement of cash flows, what amount should be reported as an investing activity from the sale of land? a. $50,000 b. $71,000 c. $121,000 d. $21,000 105. If a gain of $11,000 is realized in selling (for cash) office equipment having a book value of $55,000, the total Powered by Cognero
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Chapter 16 - Statement of Cash Flows amount reported in the investing activities section of the statement of cash flows is a. $44,000 b. $11,000 c. $55,000 d. $66,000 106. Which of the following types of transactions would be reported as a cash flows from (used for) investing activity on the statement of cash flows? a. issuance of bonds payable b. issuance of capital stock c. purchase of treasury stock d. purchase of noncurrent assets 107. Land costing $140,000 was sold for $173,000 cash. The gain on the sale was reported on the income statement as other income. On the statement of cash flows, what amount should be reported as an investing activity from the sale of land? a. $173,000 b. $140,000 c. $313,000 d. $33,000 108. Equipment with an original cost of $75,000 and accumulated depreciation of $20,000 was sold at a loss of $7,000. As a result of this transaction, cash would a. increase by $48,000 b. decrease by $7,000 c. increase by $55,000 d. decrease by $27,000 109. Zenith Corporation sells some of its used store fixtures for $5,300. The acquisition cost of the fixtures is $12,500, and the accumulated depreciation on these fixtures is $9,750. The value of this transaction appearing in the investing section of the statement of cash flows is a. $12,500 b. $5,300 c. $2,750 d. $2,550 110. Firefly Inc. sold land for $225,000 cash. The land had been purchased 5 years earlier for $275,000. The loss on the sale was reported on the income statement. On the statement of cash flows, what amount should Firefly report as an investing activity from the sale of the land? a. $225,000 b. $275,000 c. $50,000 d. $500,000 111. On the statement of cash flows, the financing activities section would include all of the following except Powered by Cognero
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Chapter 16 - Statement of Cash Flows a. cash received from the sale of bonds payable b. cash paid for dividends c. cash paid for the purchase of treasury stock d. cash paid for the interest on bonds payable 112. On the statement of cash flows, the financing activities section would include a. receipts from the sale of investments b. payments for the acquisition of investments c. receipts from a note receivable d. receipts from the issuance of capital stock 113. Cash dividends paid on common stock would be reported on the statement of cash flows in a. the Cash Flows from (used for) Financing Activities section b. the Cash Flows from (used for) Investing Activities section c. a separate section of noncash investing and financing activities d. the Cash Flows from (used for) Operating Activities section 114. Cash dividends of $45,000 were declared during the year. Cash dividends payable were $10,000 at the beginning of the year and $15,000 at the end of the year. The amount of cash paid for dividends during the year is a. $50,000 b. $40,000 c. $55,000 d. $35,000 115. Cash dividends of $50,000 were declared during the year. Cash dividends payable were $10,000 and $5,000 at the beginning and end of the year, respectively. The amount of cash paid for dividends during the year is a. $55,000 b. $50,000 c. $65,000 d. $60,000 116. Norris Company declared cash dividends of $60,000 during the year. Cash dividends payable were $20,000 at the beginning of the year and $25,000 at the end of the year. The amount of cash paid for dividends during the year is a. $55,000 b. $80,000 c. $105,000 d. $65,000 117. The current period statement of cash flows includes the following: Cash balance at the beginning of the period Net cash flows from operating activities Net cash flows used for investing activities Net cash flows used for financing activities
$310,000 185,000 (43,000) (97,000)
The cash balance at the end of the period is Powered by Cognero
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Chapter 16 - Statement of Cash Flows a. $45,000 b. $635,000 c. $355,000 d. $125,000 118. Free cash flow is a. all cash in the bank b. cash from operations c. the net cash flows from financing activities less the cash used to purchase fixed assets and pay dividends d. the net cash flows from operating activities less the cash used to purchase the fixed assets necessary to maintain current operations 119. Free cash flow is a measure of the operating cash flow available to a company after it a. purchases the PP&E needed to maintain current production b. pays dividends and redeems bonds payable c. invests in the PP&E needed to achieve desired future productive capacity d. invests in needed fixed assets and redeems bonds payable 120. The operating cash flow available for a company to use after purchasing the fixed assets that are necessary to maintain current productive capacity is called the a. free cash flow b. modified cash flow c. PPE cash flow d. restricted cash flow 121. When using the spreadsheet (work sheet) method to prepare the statement of cash flows using the indirect method, the first step is to a. list the title of each income statement account in the Accounts column b. list the titles of the noncash current asset and current liability accounts in the Accounts column c. list the title of each balance sheet account in the Accounts column d. analyze the changes in all noncash accounts to determine which ones should be listed in the Accounts column 122. When using the spreadsheet (work sheet) method to analyze noncash accounts, it is best to start with a. Cash b. Accounts Receivable c. Retained Earnings d. Sales 123. When using the spreadsheet (work sheet) method to prepare the statement of cash flows using the indirect method, entries made on the spreadsheet are a. not recorded in the journal or posted to the ledger b. recorded in the journal and posted to the ledger c. recorded in the journal but not posted to the ledger d. not recorded in the journal but are posted to the ledger Powered by Cognero
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Chapter 16 - Statement of Cash Flows 124. The cost of merchandise sold during the year was $50,000. Merchandise inventories were $12,500 and $10,500 at the beginning and end of the year, respectively. Accounts payable were $6,000 and $5,000 at the beginning and end of the year, respectively. Using the direct method of reporting cash flows from operating activities, cash paid for merchandise during the year is a. $49,000 b. $47,000 c. $51,000 d. $53,000 125. Sales for the year were $600,000. Accounts receivable were $100,000 and $80,000 at the beginning and end of the year, respectively. Cash received from customers to be reported on the statement of cash flows using the direct method is a. $700,000 b. $600,000 c. $580,000 d. $620,000 Use the information provided for Washington Company to answer the questions that follow. The following selected account balances appear on the financial statements of Washington Company: Accounts Receivable, January 1 Accounts Receivable, December 31 Accounts Payable, January 1 Accounts Payable, December 31 Merchandise Inventory, January 1 Merchandise Inventory, December 31 Sales Cost of Merchandise Sold
$13,000 9,000 4,000 7,000 10,000 15,000 56,000 31,000
Washington Company uses the direct method to determine net cash flows from operating activities. 126. Cash received from customers during the year is a. $56,000 b. $52,000 c. $60,000 d. $45,000 127. Cash paid for merchandise during the year is a. $39,000 b. $33,000 c. $29,000 d. $23,000 128. Income tax expense was $175,000 for the year. Income taxes payable was $30,000 and $40,000 at the beginning and end of the year, respectively. Cash paid for income taxes reported on the statement of cash flows using the direct method is a. $175,000 Powered by Cognero
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Chapter 16 - Statement of Cash Flows b. $165,000 c. $205,000 d. $215,000 129. The cost of merchandise sold during the year was $45,000. Merchandise inventories were $13,500 and $10,500 at the beginning and end of the year, respectively. Accounts payable were $7,000 and $5,000 at the beginning and end of the year, respectively. Using the direct method of reporting cash flows from operating activities, cash paid for merchandise during the year is a. $46,000 b. $44,000 c. $50,000 d. $40,000 Matching Match each of the following items to its treatment (a–c) on the statement of cash flows when determining net cash flows from operating activities by the indirect method. a. Added to net income b. Deducted from net income c. Not included in the operating activities section 130. Increase in prepaid expenses 131. Amortization of patents 132. Increase in salaries payable 133. Gain on sale of fixed assets 134. Decrease in accounts receivable 135. Increase in notes receivable due in 60 days 136. Amortization of discount on bonds payable 137. Decrease in merchandise inventory 138. Depreciation of fixed assets 139. Loss on retirement of long-term debt 140. Decrease in accounts payable 141. Increase in notes payable due in 30 days 142. Increase in income taxes payable Match each of the following transactions to its effect (a–g) on the statement of cash flows prepared using the indirect method. Each effect may be used more than once, or not at all. Powered by Cognero
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Chapter 16 - Statement of Cash Flows a. Increase cash from operating activities b. Decrease cash from operating activities c. Increase cash from investing activities d. Decrease cash from investing activities e. Increase cash from financing activities f. Decrease cash from financing activities g. Disclosed as a noncash investing and financing activity 143. Purchase of equipment 144. Repayment of long-term note payable 145. Amortization of intangible assets 146. Exchange of land for common stock 147. Payment of dividends 148. Sale of land 149. Gain on sale of investments (treatment of the gain only) 150. Acquisition of treasury stock 151. Increase in accounts receivable balance 152. Decrease in accounts payable balance Match each of the following items to the section (a–d) of the statement of cash flows (indirect method) where it would be reported. Each section may be used more than once. a. Operating activities section b. Financing activities section c. Investing activities section d. Schedule of noncash financing and investing activities 153. Increase in income taxes payable 154. Amortization of patent 155. Sale of machinery held for use by the company 156. Issuance of bond payable 157. Purchase of the stock of another company as an investment 158. Decrease in inventory 159. Exchange of land for note payable Powered by Cognero
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Chapter 16 - Statement of Cash Flows 160. Payment of dividends to stockholders 161. Increase in accounts receivable 162. Loss on sale of equipment Match each of the following items to the section (a–d) of the statement of cash flows (indirect method) where it would be reported. Each section may be used more than once, or not at all. a. Operating activities section b. Investing activities section c. Financing activities section d. Schedule of noncash financing and investing activities 163. Purchased buildings 164. Sold patent 165. Net income 166. Issued common stock for cash 167. Paid cash dividends 168. Depreciation expense 169. Redeemed bonds 170. Purchased treasury stock 171. Sold long-term investment 172. Sold equipment at book value Match each of the following items to the section (a–d) of the statement of cash flows (indirect method) where it would be reported. Each section may be used more than once. a. Operating activities section b. Investing activities section c. Financing activities section d. Schedule of noncash financing and investing activities 173. Gain on sale of land 174. Payment of dividends 175. Purchase of equipment 176. Net income 177. Issuance of preferred stock Powered by Cognero
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Chapter 16 - Statement of Cash Flows 178. Amortization expense 179. Purchase of patents 180. Acquisition of treasury stock 181. Retirement of long-term debt 182. Distribution of stock dividend 183. Sale of fixed assets at book value 184. Increase in inventory Match each of the following transactions to the section and effect (a–g) on the statement of cash flows. Each option may be used more than once, or not at all. a. Investing activities, cash inflow b. Investing activities, cash outflow c. Financing activities, cash inflow d. Financing activities, cash outflow e. Operating activities, cash inflow f. Operating activities, cash outflow g. Schedule of noncash investing and financing activities, NA 185. Paid the weekly payroll 186. Paid an account payable 187. Issued bonds payable for cash 188. Declared and paid a cash dividend 189. Paid cash for a new piece of equipment 190. Purchased treasury stock for cash 191. Paid cash for stock in another company 192. Recorded depreciation 193. Received cash for sales 194. Sold a long-term stock investment for cash at book value Subjective Short Answer 195. The net income reported on the income statement for the current year is $210,000. Depreciation recorded on equipment and a building amount to $62,500 for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows: Powered by Cognero
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Chapter 16 - Statement of Cash Flows Cash Accounts Receivable (net) Inventories Prepaid Expenses Accounts Payable (merchandise creditors) Salaries Payable a. b.
End of Year Beginning of Year $ 56,000 $ 59,500 71,000 73,400 140,000 126,500 7,800 8,400 62,600 66,400 9,000 8,250
Prepare the operating activities section of the statement of cash flows, using the indirect method. If the direct method had been used, would the net cash flows from operating activities have been the same? Explain.
196. The income statement disclosed the following items for the current year: Depreciation expense Gain on disposal of equipment Net income
$ 36,000 21,000 317,500
Balances of the noncash current asset and current liability accounts changed between December 31, last year, and December 31, this year, as follows: Increase in accounts receivable Decrease in inventory Decrease in prepaid insurance Decrease in accounts payable Increase in income taxes payable Increase in dividends payable
$5,600 3,200 1,200 3,800 1,200 850
Prepare the operating activities section of the statement of cash flows using the indirect method. 197. Durrand Corporation’s accumulated depreciation increased by $12,000, while patents decreased by $2,200 between consecutive balance sheet dates. There were no purchases or sales of depreciable or intangible assets during the year. In addition, the income statement showed a gain of $4,300 from sale of land. The company earned a net income of $65,000. Assuming there were no changes in noncash current assets and liabilities, determine the net cash flows from operating activities under the indirect method. 198. Fortune Corporation’s comparative balance sheet showed noncash current assets and liabilities as follows: Accounts receivable Merchandise inventory Accounts payable Dividends payable
Dec. 31, Year 2 $ 7,500 11,500 4,300 4,000
Dec. 31, Year 1 $ 5,200 16,000 5,200 3,000
Adjust Year 2 net income of $65,000 for changes in current operating assets and liabilities to arrive at net cash flows from operating activities using the indirect method. 199. Kennedy, Inc., reported the following data: Net income Depreciation expense Loss on disposal of equipment Powered by Cognero
$118,000 15,000 (10,000) Page 23
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Chapter 16 - Statement of Cash Flows Gain on sale of building Increase in accounts receivable Decrease in accounts payable
20,000 7,000 (2,000)
Prepare the operating activities section of the statement of cash flows using the indirect method. 200. Samuel Company’s accumulated depreciation—equipment account increased by $6,000, while patents decreased by $2,200 between balance sheet dates. There were no purchases or sales of depreciable or intangible assets during the year. In addition, the income statement showed a loss of $3,200 from the sale of investments. Assume no changes in noncash current assets and liabilities. Samuel Company reported a net income of $92,000. Determine the net cash flows from (used for) operating activities, using the indirect method. 201. Dorman Company reported the following data: Net income Depreciation expense Gain on disposal of equipment Decrease in accounts receivable Decrease in accounts payable
$225,000 25,000 20,500 14,000 3,600
Prepare the operating activities section of the statement of cash flows, using the indirect method. 202. The net income reported for the current year was $63,000. Depreciation recorded on fixed assets for the year was $24,000. Balances of the current asset and current liability accounts at the end and beginning of the year are as follows: Cash Accounts Receivable (net) Inventories Prepaid Expenses Accounts Payable (merchandise creditors) Cash Dividends Payable Salaries Payable
End $65,000 70,000 86,000 4,000 51,000 4,500 6,000
Beginning $ 70,000 57,000 102,000 4,500 58,000 6,500 7,500
Prepare the operating activities section of the statement of cash flows, using the indirect method. 203. Dickinson Company reported net income of $155,000 for the current year. Depreciation recorded on buildings and equipment amounted to $65,000 for the year. In addition, a building with an original cost of $250,000 and accumulated depreciation of $190,000 on the date of the sale was sold for $75,000. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows: Cash Accounts Receivable Inventories Accounts Payable
End of Year $20,000 19,000 50,000 12,000
Beginning of Year $15,000 32,000 65,000 18,000
Prepare the operating activities section of the statement of cash flows, using the indirect method. 204. The net income reported on the income statement for the current year was $58,000. Depreciation recorded on fixed assets for the year was $24,000. In addition, equipment with an original cost of $130,000 and accumulated depreciation of $115,000 on the date of the sale was sold for $20,000. Balances of the current asset and current liability accounts at the Powered by Cognero
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Chapter 16 - Statement of Cash Flows end and beginning of the year are as follows: Cash Accounts Receivable (net) Inventories Prepaid Expenses Accounts Payable (merchandise creditors) Cash Dividends Payable Salaries Payable
End $65,000 70,000 85,000 4,000 50,000 4,500 6,000
Beginning $ 70,000 63,000 102,000 4,500 58,000 6,500 7,500
Prepare the operating activities section of the statement of cash flows, using the indirect method. 205. Balances of the current asset and current liability accounts at the end and beginning of the year are as follows: Cash Accounts Receivable (net) Inventories Accounts Payable (merchandise creditors) Salaries Payable Sales (on account) Cost of Merchandise Sold Operating Expenses Other Than Depreciation
End $ 62,000 75,000 54,000
Beginning $73,000 60,000 47,000
43,000 2,800 210,000 70,000 67,000
37,000 3,800
Use the direct method to prepare the operating activities section of a statement of cash flows. 206. Lamar Corporation purchased land for $150,000. Later in the year, the company sold land with a book value of $190,000 for $200,000. Show how the effects of these transactions are reported on the statement of cash flows using the indirect method. 207. The following two scenarios are independent of one another. a. An analysis of the general ledger accounts indicates that office equipment was sold for $39,600 during the year. The equipment originally cost $68,000 and had accumulated depreciation of $22,500 on the date of sale. Indicate how the elements of this transaction would be reported on the statement of cash flows using the indirect method. b. An analysis of the general ledger accounts indicates that delivery equipment, which cost $97,000 and on which accumulated depreciation totaled $42,100 on the date of sale, was sold for $57,500 during the year. Using this information, indicate the items to be reported on the statement of cash flows. 208. An analysis of the general ledger accounts indicates that equipment, with an original cost of $200,000 and accumulated depreciation of $170,000 on the date of sale, was sold for $20,000 during the year. Using this information, indicate the items to be reported on the statement of cash flows using the indirect method. 209. State the section(s) of the statement of cash flows prepared by the indirect method (operating activities, investing activities, financing activities, or not reported) and the amount that would be reported for each of the following transactions: a. b.
Received $120,000 from the sale of land costing $70,000. Purchased investments for $75,000.
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Chapter 16 - Statement of Cash Flows c. d. e. f. g. h. i.
Declared $35,000 cash dividends on stock. Dividends of $5,000 were payable at the beginning of the year, and $6,000 were payable at the end of the year. Acquired equipment for $64,000 cash. Declared and issued 100 shares of $20 par common stock as a stock dividend, when the market price of the stock was $32 a share. Recognized depreciation for the year, $37,000. Issued 85,000 shares of $10 par common stock for $25 a share, receiving cash. Issued $500,000 of 20-year, 10% bonds payable at 99. Borrowed $43,000 from Regional Bank, issuing a 5-year, 8% note for that amount.
210. Complete each of the columns in the following table, indicating in which section each item would be reported on the statement of cash flows (operating, investing, or financing), the amount that would be reported, and whether the item would create an increase or decrease in cash. For items that affect more than one section of the statement, indicate all affected. Assume that the indirect method of reporting cash flows from operating activities is used. The first item has been completed as an example. Item Depreciation of $15,000 for the period Issuance of common stock for $35,000 Increase in accounts payable of $7,000 Retirement of $100,000 bonds payable at 97 Purchase of long-term investments for $94,500 Dividends declared and paid of $8,300 Increase in prepaid rent of $4,500 Decrease in inventory of $5,300 Purchase of equipment for $17,600 cash Sale of land originally costing $134,000 for $130,000 Decrease in taxes payable of $2,100
Statement Section Operating
Amount to Report $15,000
+/– Effect on Cash Increase
211. The board of directors declared cash dividends totaling $168,000 during the year. The comparative balance sheet indicated dividends payable of $46,000 at the beginning of the year and $42,000 at the end of the year. What was the amount of cash paid for dividends during the year? 212. On the basis of the details of the following common stock account, determine line item(s) for the financing section of the statement of cash flows. Common Stock, $10 Par Date Jan. 1 Mar. 7 Sept. 20 Dec. 10
Item Balance, 50,000 shares 5,000 shares issued at par for cash 2,500-share stock dividend 2,000 shares issued at
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Debit —
Credit —
Debit —
Balance Credit 500,000
—
50,000
—
550,000
—
25,000 20,000
—
575,000 595,000 Page 26
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Chapter 16 - Statement of Cash Flows $20 for cash
—
—
213. The board of directors of Kendall Co. declared cash dividends totaling $390,000 during the current year. The comparative balance sheet indicates dividends payable of $58,000 at the beginning of the year and $73,000 at the end of the year. What was the amount of cash dividends paid during the year? 214. Condensed comparative balance sheets for Larson Co. at December 31, Years 1 and 2, appear as follows:
Cash Accounts receivable (net) Inventories Equipment Accumulated depreciation Total assets
Year 2 $ 100,000 78,000 101,500 410,000 (150,000) $ 539,500
Year 1 $ 78,000 85,000 90,000 370,000 (158,000) $ 465,000
Accounts payable (merchandise creditors) Cash dividends payable Common stock, $10 par Paid-in capital in excess of par Retained earnings Total liabilities and stockholders’ equity
$ 58,500 5,000 200,000 62,000 214,000 $539,500
$ 55,000 4,000 170,000 60,000 176,000 $465,000
In addition to the balance sheet data, assume that: • • • •
Equipment costing $125,000 was purchased for cash. Equipment costing $85,000 with accumulated depreciation of $65,000 was sold for $15,000. The stock was issued for cash. The only entries in the retained earnings account were net income of $51,000 and cash dividends declared of $13,000.
Prepare a statement of cash flows for the year ended December 31, Year 2, using the indirect method. 215. Condensed comparative balance sheets of Posner Company at December 31, Years 1 and 2, appear as follows: Cash Accounts receivable (net) Inventories Investments Equipment Accumulated depreciation—equipment Total assets
Year 2 $ 53,000 37,000 108,500 — 573,200 (142,000) $ 629,700
Year 1 $ 50,000 48,000 100,000 70,000 450,000 (176,000) $ 542,000
Accounts payable Bonds payable, due Year 2 Common stock, $10 par Paid-in capital in excess of par Retained earnings Total liabilities and stockholders’ equity
$ 62,500 — 335,000 70,000 162,200 $ 629,700
$ 43,800 100,000 285,000 55,000 58,200 $ 542,000
The income statement for the current year is as follows: Powered by Cognero
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Chapter 16 - Statement of Cash Flows Sales Cost of merchandise sold Gross profit Operating expenses: Depreciation expense Other operating expenses Income from operations Other revenue and expense: Gain on sale of investment Interest expense Income before income tax Income tax expense Net income
$625,700 340,000 $285,700 $26,000 68,000
$ 4,000 (6,000)
94,000 $191,700
(2,000) $189,700 60,700 $129,000
Additional data for the current year are as follows: • • • •
Fully depreciated equipment costing $60,000 was scrapped, no salvage, and new equipment was purchased for $183,200. Bonds payable for $100,000 were retired by payment at their face amount. 5,000 shares of common stock were issued at $13 for cash. Cash dividends declared and paid, $25,000.
Prepare a statement of cash flows for the year ended December 31, Year 2, using the indirect method. 216. Condensed comparative balance sheets of Barry Company at December 31, Years 1 and 2, are as follows: Cash Accounts receivable (net) Inventories Investments Equipment Accumulated depreciation—equipment Total assets
Year 2 $ 72,000 61,000 121,000 — 515,000 (153,000) $616,000
Year 1 $ 42,500 70,200 105,000 100,000 425,000 (175,000) $567,700
Accounts payable Bonds payable Common stock, $20 par Paid-in capital in excess of par Retained earnings Total liabilities and stockholders’ equity
$ 59,750 — 375,000 50,000 131,250 $616,000
$ 47,250 75,000 325,000 25,000 95,450 $567,700
Additional data for Year 2 are as follows: • • • • • •
Net income, $75,800. Depreciation reported on income statement, $38,000. Fully depreciated equipment costing $60,000 was scrapped, no salvage value, and new equipment was purchased for $150,000. Bonds payable of $75,000 were retired by payment at their face amount. 2,500 shares of common stock were issued at $30 for cash. Cash dividends declared and paid, $40,000.
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Chapter 16 - Statement of Cash Flows •
Investments of $100,000 were sold for $125,000.
Prepare a statement of cash flows for the year ended December 31, Year 2, using the indirect method. 217. Condensed comparative balance sheets of Garrett Company at December 31, Years 1 and 2, are as follows: Cash Accounts receivable (net) Inventories Equipment Accumulated depreciation Total assets
Year 2 $ 90,000 78,000 106,500 410,000 (150,000) $ 534,500
Year 1 $ 78,000 85,000 90,000 370,000 (158,000) $ 465,000
Accounts payable (merchandise creditors) Cash dividends payable Common stock, $10 par Paid-in capital in excess of par Retained earnings Total liabilities and stockholders’ equity
$ 53,500 5,000 200,000 62,000 214,000 $534,500
$ 55,000 4,000 170,000 60,000 176,000 $465,000
In addition, assume that equipment costing $125,000 was purchased for cash, and equipment costing $85,000 with accumulated depreciation of $65,000 was sold for $15,000; that the stock was issued for cash; and that the only entries in the retained earnings account were for net income of $56,000 and cash dividends declared of $18,000. Prepare a statement of cash flows for the year ended December 31, Year 2, using the indirect method. 218. Condensed comparative balance sheets of Branch Company at December 31, Years 1 and 2, are as follows: Cash Accounts receivable (net) Inventories Land Equipment Accumulated depreciation Total assets
Year 2 $ 65,000 78,000 106,500 — 495,000 (215,000) $529,500
Year 1 $ 54,000 85,000 90,000 20,000 370,000 (158,000) $461,000
Accounts payable (merchandise creditors) Common stock, $10 par Paid-in capital in excess of par Retained earnings Total liabilities and stockholders’ equity
$ 53,500 200,000 62,000 214,000 $529,500
$ 55,000 170,000 60,000 176,000 $461,000
In addition, assume that equipment costing $125,000 was purchased for cash, and the land was sold for $15,000. The stock was issued for cash, and the only entries in the retained earnings account were for net income of $56,000 and cash dividends declared and paid of $18,000. Prepare a statement of cash flows for the year ended December 31, Year 2, using the indirect method. 219. Condensed comparative balance sheets of Breach Company at December 31, Years 1 and 2, are as follows: Year 2 Powered by Cognero
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Chapter 16 - Statement of Cash Flows Cash Accounts receivable (net) Inventories Equipment Accumulated depreciation Total assets
$ 170,000 78,000 106,500 395,000 (195,000) $ 554,500
$ 74,000 85,000 90,000 370,000 (158,000) $ 461,000
Accounts payable (merchandise creditors) Taxes payable Common stock, $10 par Retained earnings Total liabilities and stockholders’ equity
$ 51,000 2,500 262,000 239,000 $ 554,500
$ 50,000 5,000 230,000 176,000 $ 461,000
In addition, assume: • • • •
Equipment costing $25,000 was purchased for cash and no long-term assets were sold during the period. Stock was issued for cash—3,200 shares at par. Net income for the current year was $76,000. Cash dividends declared and paid were $13,000.
Prepare a statement of cash flows for the year ended December 31, Year 2, using the indirect method. 220. Based on the following, what is the free cash flow? Net cash flows from operating activities Net cash flows used for investing activities Net cash flows used for financing activities
$318,000 (30,000) 30,000
Cash flows from operations include $2,000 for depreciation. Cash flows from investing include the purchase of a replacement asset for $100,000 and the sale of the one used in production, which is now obsolete, for $70,000. Cash flows from financing include $70,000 of borrowing. 221. Connor Designs Company has net cash flows from operating activities of $425,000. Cash flows used for investments in property, plant, and equipment totaled $65,000, of which 70% was used to replace machinery to maintain existing capacity. What is the free cash flow for Connor Designs? 222. Condensed comparative balance sheets of ConnieJo Company at December 31, Years 1 and 2, are as follows: Cash Accounts receivable (net) Inventories Investments Equipment Accumulated depreciation—equipment Total assets
Year 2 $ 45,000 51,300 147,200 0 493,000 (113,700) $622,800
Year 1 $ 53,500 58,000 135,000 60,000 375,000 (128,000) $ 553,500
Accounts payable Bonds payable, due Year 4 Common stock, $10 par
$ 61,500 0 250,000
$ 42,600 100,000 200,000
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Chapter 16 - Statement of Cash Flows Paid-in capital in excess of par Retained earnings Total liabilities and stockholders’ equity
75,000 236,300 $ 622,800
50,000 160,900 $553,500
The income statement for Year 2 is as follows: Sales Cost of merchandise sold Gross profit Operating expenses: Depreciation expense Other operating expenses Income from operations Other revenue and expense: Gain on sale of investment Interest expense Income before income tax Income tax expense Net income
$623,000 348,500 $274,500 $ 24,700 75,300
$ 5,000 (12,000)
100,000 $174,500
(7,000) $167,500 64,100 $103,400
Additional data for the current year are as follows: • • • • •
Fully depreciated equipment costing $39,000 was scrapped, no salvage value, and equipment was purchased for $157,000. Bonds payable for $100,000 were retired by payment at their face amount. 5,000 shares of common stock were issued at $15 for cash. Cash dividends declared and paid, $28,000. All sales are on account.
Prepare a statement of cash flows for the year ending December 31, Year 2, using the direct method of reporting cash flows from operating activities. 223. The cash flows from operating activities are reported by the direct method on the statement of cash flows. Determine the following: a. b.
If sales for the current year were $375,000 and accounts receivable increased by $29,000 during the year, what was the amount of cash received from customers? If income taxes for the current year were $39,000 and income taxes payable decreased by $21,000 during the year, what was the amount of cash paid for income taxes?
224. Selected data for the current year ended December 31 are as follows:
Accrued expenses (operating expenses) Accounts payable (merchandise creditors) Inventories Prepaid expenses
Balance December 31 $29,500 90,000 42,500 23,000
Balance January 1 $ 22,000 135,000 68,000 20,000
During the current year, the cost of merchandise sold was $620,000 and the operating expenses other than depreciation were $142,000. The direct method is used for presenting the cash flows from operating activities on the statement of cash flows. Powered by Cognero
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Chapter 16 - Statement of Cash Flows Determine the amount reported on the statement of cash flows for (a) cash paid for merchandise and (b) cash paid for operating expenses. 225. Balances of the current asset and current liability accounts at the end and beginning of the year are as follows: Cash Accounts Receivable (net) Inventories Accounts Payable (merchandise creditors) Salaries Payable Sales (on account) Cost of Merchandise Sold Operating Expenses Other Than Depreciation
End $ 67,000 73,000 54,000
Beginning $73,000 60,000 37,000
43,000 1,800 210,000 70,000 67,000
37,000 3,800 ― ― ―
Use the direct method to prepare the operating activities section of a statement of cash flows. 226. Cost of merchandise sold reported on the income statement was $155,000. The accounts payable balance increased $8,000, and the inventory balance increased by $21,000 over the year. Determine the amount of cash paid for merchandise. 227. Sales reported on the income statement were $690,000. The accounts receivable balance declined $39,000 over the year. Determine the amount of cash received from customers. 228. Selected data taken from the accounting records of Laser Inc. for the current year ended December 31 are as follows:
Accrued expenses payable Accounts payable (merchandise creditors) Inventories Prepaid expenses
Balance, December 31 $ 5,590 41,730 77,350 3,250
Balance, January 1 $ 6,110 46,020 84,110 3,900
During the current year, the cost of merchandise sold was $448,500, and the operating expenses other than depreciation were $78,000. The direct method is used for presenting the cash flows from operating activities on the statement of cash flows. Determine the amount reported on the statement of cash flows for: a. Cash paid for merchandise b. Cash paid for operating expenses 229. The cash flows from operating activities are reported by the direct method on the statement of cash flows. Determine the following: a.
b.
If sales for the current year were $695,000 and accounts receivable decreased by $43,500 during the year, what was the amount of cash received from customers? If income tax expense for the current year was $56,000 and income taxes payable decreased by $5,200 during the year, what was the amount of cash paid for income taxes?
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Chapter 16 - Statement of Cash Flows
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Chapter 16 - Statement of Cash Flows Answer Key 1. False 2. True 3. False 4. True 5. True 6. True 7. True 8. True 9. True 10. False 11. False 12. True 13. True 14. True 15. True 16. False 17. True 18. True 19. True 20. True 21. False 22. False 23. False 24. False 25. True Powered by Cognero
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Chapter 16 - Statement of Cash Flows 26. True 27. True 28. False 29. False 30. True 31. True 32. False 33. False 34. False 35. True 36. False 37. False 38. False 39. True 40. False 41. False 42. False 43. True 44. True 45. True 46. True 47. False 48. False 49. True 50. False Powered by Cognero
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Chapter 16 - Statement of Cash Flows 51. True 52. False 53. c 54. a 55. d 56. c 57. c 58. c 59. c 60. d 61. b 62. b 63. b 64. d 65. b 66. a 67. d 68. b 69. d 70. d 71. d 72. a 73. c 74. c 75. c 76. a Powered by Cognero
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Chapter 16 - Statement of Cash Flows 77. b 78. d 79. d 80. b 81. c 82. a 83. c 84. d 85. a 86. d 87. c 88. b 89. b 90. a 91. a 92. d 93. a 94. d 95. b 96. b 97. b 98. d 99. a 100. b 101. a Powered by Cognero
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Chapter 16 - Statement of Cash Flows 102. c 103. b 104. a 105. d 106. d 107. a 108. a 109. b 110. a 111. d 112. d 113. a 114. b 115. a 116. a 117. c 118. d 119. a 120. a 121. c 122. c 123. a 124. a 125. d 126. c 127. b Powered by Cognero
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Chapter 16 - Statement of Cash Flows 128. b 129. b 130. b 131. a 132. a 133. b 134. a 135. b 136. a 137. a 138. a 139. a 140. b 141. a 142. a 143. d 144. f 145. a 146. g 147. f 148. c 149. b 150. f 151. b 152. b Powered by Cognero
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Chapter 16 - Statement of Cash Flows 153. a 154. a 155. c 156. b 157. c 158. a 159. d 160. b 161. a 162. a 163. b 164. b 165. a 166. c 167. c 168. a 169. b 170. b 171. c 172. c 173. a 174. c 175. b 176. a 177. c 178. a Powered by Cognero
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Chapter 16 - Statement of Cash Flows 179. b 180. c 181. c 182. d 183. b 184. a 185. f 186. f 187. c 188. d 189. b 190. d 191. b 192. e 193. e 194. a 195. a. Cash flows from (used for) operating activities: Net income Adjustments to reconcile net income to net cash flows from (used for) operating activities: Depreciation Changes in current operating assets and liabilities: Decrease in accounts receivable Increase in inventories Decrease in prepaid expenses Decrease in accounts payable Increase in salaries payable Net cash flows from operating activities
$210,000
62,500
2,400 (13,500) 600 (3,800) 750 $258,950
b. Yes. While the approach and presentation are different, both methods ultimately report the same amount of net cash flows from operating activities. Powered by Cognero
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Chapter 16 - Statement of Cash Flows 196. Cash flows from (used for) operating activities: Net income Adjustments to reconcile net income to net cash flows from (used for) operating activities: Depreciation Gain on disposal of equipment Changes in current operating assets and liabilities: Increase in accounts receivable Decrease in inventory Decrease in prepaid insurance Decrease in accounts payable Increase in income taxes payable Net cash flows from operating activities
$317,500
36,000 (21,000)
(5,600) 3,200 1,200 (3,800) 1,200 $328,700
Note: The change in dividends payable would be used to adjust the dividends declared in obtaining the cash paid for dividends in the financing activities section of the statement of cash flows. 197. Net income Adjustments to reconcile net income to net cash flows from (used for) operating activities: Depreciation Amortization Gain from sale of land Net cash flows from operating activities 198. Net income Adjustments to reconcile net income to net cash flows from (used for) operating activities: Changes in current operating assets and liabilities: Increase in accounts receivable Decrease in inventory Decrease in accounts payable Net cash flows from operating activities
$65,000
12,000 2,200 (4,300) $74,900
$65,000
(2,300) 4,500 (900) $66,300
199. Cash flows from (used for) operating activities: Net income $118,000 Adjustments to reconcile net income to net cash flows from (used for) operating activities: Depreciation 15,000 Loss on disposal of equipment 10,000 Gain on sale of building (20,000) Changes in current operating assets and liabilities: Powered by Cognero
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Chapter 16 - Statement of Cash Flows Increase in accounts receivable Decrease in accounts payable Net cash flows from operating activities
(7,000) (2,000)
200. Net income Adjustments to reconcile net income to net cash flows from (used for) operating activities: Depreciation Amortization Loss from sale of investments Net cash flows from operating activities 201. Cash flows from (used for) operating activities: Net income Adjustments to reconcile net income to net cash flows from (used for) operating activities: Depreciation Gain on disposal of equipment Changes in current operating assets and liabilities: Decrease in accounts receivable Decrease in accounts payable Net cash flows from operating activities
$114,000
$ 92,000
6,000 2,200 3,200 $103,400
$225,000
25,000 (20,500)
14,000 (3,600) $239,900
202. Cash flows from (used for) operating activities: Net income Adjustments to reconcile net income to net cash flows from (used for) operating activities: Depreciation Changes in current operating assets and liabilities: Decrease in inventories Decrease in prepaid expenses Increase in accounts receivable (net) Decrease in accounts payable Decrease in salaries payable Net cash flows from operating activities 203. Cash flows from (used for) operating activities: Net income Adjustments to reconcile net income to net cash flows from (used for) operating activities Depreciation expense Gain on sale of building Changes in current operating assets and liabilities: Decrease in accounts receivable Decrease in inventories Decrease in accounts payable Powered by Cognero
$ 63,000
24,000 16,000 500 (13,000) (7,000) (1,500) $ 82,000
$155,000
65,000 (15,000) 13,000 15,000 (6,000) Page 43
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Chapter 16 - Statement of Cash Flows Net cash flows from operating activities 204. Cash flows from (used for) operating activities: Net income Adjustments to reconcile net income to net cash flows from (used for) operating activities: Depreciation Gain on sale of equipment Changes in current operating assets and liabilities: Decrease in inventories Decrease in prepaid expenses Increase in accounts receivable (net) Decrease in accounts payable Decrease in salaries payable Net cash flows from operating activities 205. Cash flows from (used for) operating activities: Cash received from customers* Cash paid for merchandise** Cash paid for operating expenses*** Net cash flows from operating activities
$227,000
$58,000
24,000 (5,000) 17,000 500 (7,000) (8,000) (1,500) $78,000
$195,000 (71,000) (68,000) $ 56,000
*Sales – Increase in Receivables = $210,000 – $15,000 **Cost of Merchandise Sold + Increase in Inventories – Increase in Accounts Payable = $70,000 + $7,000 – $6,000 ***Operating Expenses Other Than Depreciation + Decrease in Salaries Payable = $67,000 + $1,000 206. Adjustments to reconcile net income to net cash flows from (used for) operating activities: Gain on sale of land* $ (10,000) Cash flows from (used for) investing activities: Cash received for sale of land Cash paid for purchase of land
$ 200,000 (150,000)
*Gain on Sale of Land = Selling Price – Book Value = $200,000 – $190,000 = $10,000 207. a. Cash flows from (used for) operating activities: Net income Adjustments to reconcile net income to net cash flows from (used for) operating activities: Loss on sale of equipment* $ 5,900 *Loss on Sale of Equipment = Selling Price – Book Value = $39,600 – ($68,000 – $22,500) = $5,900 Cash flows from (used for) investing activities: Cash received from sale of equipment
$39,600
b. Cash flows from (used for) operating activities: Powered by Cognero
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Chapter 16 - Statement of Cash Flows Net income Adjustments to reconcile net income to net cash flows from (used for) operating activities: Gain on sale of equipment* *Gain on Sale of Equipment = Selling Price – Book Value of Equipment = $57,500 – ($97,000 – $42,100) = $2,600
$(2,600)
Cash flows from (used for) investing activities: Cash received from sale of equipment
$57,500
208. Cash flows from (used for) operating activities: Net income Adjustments to reconcile net income to net cash flows from (used for) operating activities: Loss on sale of equipment*
$10,000
*Loss on Sale of Equipment = Selling Price – Book Value = $20,000 – ($200,000 – $170,000) = $10,000 Cash flows from (used for) investing activities: Cash received from sale of equipment
$20,000
209. a. Investing activities, $120,000 (the $50,000 gain on the sale would be deducted from net income in determining the net cash flows from operating activities) b. Investing activities, $(75,000) c. Financing activities, $(34,000) (Cash Payment of Dividends = Dividends Payable at Beginning of Year + Dividends Declared during Year – Dividends Payable at End of Year = $5,000 + $35,000 – $6,000 = $34,000) d. Investing activities, $(64,000) e. Not reported f. Operating activities, $37,000 (addition to net income in determining cash flows from operating activities) g. Financing activities, $2,125,000 (85,000 × $25 = $2,125,000) h. Financing activities, $495,000 ($500,000 × 0.99 = $495,000) i. Financing activities, $43,000 210. Item
Amount +/– Statement to Effect Section Report on Cash
Depreciation of $15,000 for the period Operating $15,000 Increase Issuance of common stock for $35,000 Financing 35,000 Increase Powered by Cognero
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Chapter 16 - Statement of Cash Flows Increase in accounts payable of $7,000 Operating
7,000 Increase Retirement of $100,000 bonds payable Operating 3,000 Decrease at 97 Financing 97,000 Decrease Purchase of long-term investments for Investing 94,500 Decrease $94,500 Dividends declared and paid of $8,300 Financing Increase in prepaid rent of $4,500 Decrease in inventory of $5,300 Purchase of equipment for $17,600 cash Sale of land originally costing $134,000 for $130,000 Decrease in taxes payable of $2,100
Operating Operating
8,300 Decrease 4,500 Decrease 5,300 Increase
Investing 17,600 Decrease Operating 4,000 Increase Investing 130,000 Increase Operating 2,100 Decrease
211. Dividends declared Add: Decrease in dividends payable Cash dividends paid during the year
$168,000 4,000 $172,000
The company probably had four quarterly payments—the first one being $46,000 declared in the preceding year and three payments of $42,000 each—of dividends declared and paid during the current year. Thus, $172,000 [$46,000 + (3 × $42,000)] is the amount of cash payments to stockholders. The $42,000 of dividends payable at the end of the year will be paid in the first quarter of the next year. 212. Cash flows from (used for) financing activities: Cash received from issuing common stock*
$90,000
*$50,000 + (2,000 × $20) 213. Dividends declared Less increase in dividends payable Cash dividends paid
$390,000 15,000 $375,000
214. Larson Co. Statement of Cash Flows For Year Ended December 31, Year 2 Cash flows from (used for) operating activities: Net income $ 51,000 Adjustments to reconcile net income to net cash flows from (used for) operating activities: Depreciation 57,000* Loss on sale of equipment 5,000 Changes in current operating assets and liabilities: Decrease in accounts receivable 7,000 Increase in inventories (11,500) Powered by Cognero
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Chapter 16 - Statement of Cash Flows Increase in accounts payable Net cash flows from operating activities Cash flows from (used for) investing activities: Cash received from sale of equipment Cash paid for purchase of equipment Net cash flows used for investing activities Cash flows from financing activities: Cash received from issuance of common stock Cash paid for dividends Net cash flows used for financing activities Net increase in cash Cash balance, January 1, Year 2 Cash balance, December 31, Year 2
3,500 $112,000 $ 15,000 (125,000) (110,000) $ 32,000 (12,000)** 20,000 $ 22,000 78,000 $100,000
*$150,000 – ($158,000 – $65,000) **$13,000 + $4,000 – $5,000 215. Posner Company Statement of Cash Flows For the Year Ended December 31, Year 2 Cash flows from (used for) operating activities: Net income $ 129,000 Adjustments to reconcile net income to net cash flows from (used for) operating activities: Depreciation 26,000 Gain on sale of investment (4,000) Changes in current operating assets and liabilities: Decrease in accounts receivable 11,000 Increase in accounts payable 18,700 Increase in inventories (8,500) Net cash flows from operating activities Cash flows from (used for) investing activities: Cash received from sale of investments $ 74,000 Cash paid for purchase of equipment (183,200) Net cash flows used for investing activities Cash flows from (used for) financing activities: Cash from sale of common stock $ 65,000 Cash paid to retire bonds payable (100,000) Cash paid for dividends (25,000) Net cash flows used for financing activities Net increase in cash Cash balance, January 1, Year 2 Cash balance, December 31, Year 2
$172,200
(109,200)
(60,000) $ 3,000 50,000 $ 53,000
216. Barry Company Statement of Cash Flows For the Year Ended December 31, Year 2 Powered by Cognero
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Chapter 16 - Statement of Cash Flows Cash flows from (used for) operating activities: Net income $ 75,800 Adjustments to reconcile net income to net cash flows from (used for) operating activities: Depreciation 38,000 Gain on sale of investments (25,000) Changes in current operating assets and liabilities: Decrease in accounts receivable 9,200 Increase in accounts payable 12,500 Increase in inventories (16,000) Net cash flows from operating activities Cash flows (used for) from investing activities: Cash from sale of investments $125,000 Cash paid for purchase of equipment (150,000) Net cash flows used for investing activities Cash flows from (used for) financing activities: Cash received from issuing common stock $75,000 Cash paid to retire bonds payable (75,000) Cash paid for dividends (40,000) Net cash flows used for financing activities Net increase in cash Cash balance, January 1, Year 2 Cash balance, December 31, Year 2
$94,500
(25,000)
(40,000) $29,500 42,500 $72,000
217. Garrett Company Statement of Cash Flows For the Year Ended December 31, Year 2 Cash flows from (used for) operating activities: Net income $ 56,000 Adjustments to reconcile net income to net cash flows from (used for) operating activities: Depreciation 57,000* Loss on sale of equipment 5,000 Changes in current operating assets and liabilities: Decrease in accounts 7,000 receivable Increase in inventories (16,500) Decrease in accounts (1,500) payable Net cash flows from operating activities Cash flows from (used for) investing activities: Cash from sale of equipment $ 15,000 Cash paid for purchase of (125,000) equipment Net cash flows used for investing activities Cash flows from (used for) financing activities: Powered by Cognero
$107,000
(110,000)
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Chapter 16 - Statement of Cash Flows Cash received from issuance of common stock Cash paid for dividends Net cash flows used for financing activities Net increase in cash Cash balance, January 1, Year 2 Cash balance, December 31, Year 2 *$150,000 – ($158,000 – $65,000) **$18,000 + $4,000 – $5,000
$ 32,000 (17,000)** 15,000 $ 12,000 78,000 $ 90,000
218. Branch Company Statement of Cash Flows For the Year Ended December 31, Year 2 Cash flows from (used for) operating activities: Net income $ 56,000 Adjustments to reconcile net income to net cash flows from (used for) operating activities: Depreciation 57,000 Loss on sale of land 5,000 Changes in current operating assets and liabilities: Decrease in accounts receivable 7,000 Increase in inventories (16,500) Decrease in accounts payable (1,500) Net cash flows from operating activities $107,000 Cash flows from (used for) investing activities: Cash received from sale of land $ 15,000 Cash paid for purchase of equipment (125,000) Net cash flows used for investing activities (110,000) Cash flows from (used for) financing activities: Cash received from sale of common stock $32,000 Cash paid for dividends (18,000) Net cash flows used for financing activities 14,000 Net increase in cash $ 11,000 Cash balance, January 1, Year 2 54,000 Cash balance, December 31, Year 2 $ 65,000 219. Breach Company Statement of Cash Flows For the Year Ended December 31, Year 2 Cash flows from (used for) operating activities: Net income $ 76,000 Adjustments to reconcile net income to net cash flows from (used for) operating activities: Depreciation 37,000 Changes in current operating assets and liabilities: Decrease in accounts receivable 7,000 Powered by Cognero
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Chapter 16 - Statement of Cash Flows Increase in accounts payable Increase in inventories Decrease in taxes payable Net cash flows from operating activities Cash flows from (used for) investing activities: Cash paid for purchase of equipment Net cash flows used for investing activities Cash flows from (used for) financing activities: Cash received from issuing common stock Cash paid for dividends Net cash flows used for financing activities Net increase in cash Cash balance, January 1, Year 2 Cash balance December 31, Year 2
1,000 (16,500) (2,500) $102,000 $(25,000) (25,000) $ 32,000 (13,000) 19,000 $ 96,000 74,000 $170,000
220. $318,000 – $100,000 = $218,000 221. Cash flows from operating activities Less cash paid for PP&E to maintain current production levels* Free cash flow
$425,000 45,500 $379,500
*$65,000 × 70% = $45,500 222. ConnieJo Company Statement of Cash Flows For the Year Ended December 31, Year 2 Cash flows from (used for) operating activities: Cash received from customers Cash paid for merchandise Cash paid for operating expenses Cash paid for interest Cash paid for income taxes Net cash flows from operating activities Cash flows from (used for) investing activities: Cash received from sale of investments Cash paid for purchase of equipment Net cash flows used for investing activities Cash flows from (used for) financing activities: Cash received from issuing common stock Cash paid for dividends Cash paid to retire bonds payable Net cash flows used for financing activities Net decrease in cash Cash balance, January 1, Year 2 Cash balance, December 31, Year 2 223. a. Sales Powered by Cognero
$629,700 (341,800) (75,300) (12,000) (64,100) $136,500 $ 65,000 (157,000) (92,000) $ 75,000 (28,000) (100,000) (53,000) $ (8,500) 53,500 $ 45,000
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Chapter 16 - Statement of Cash Flows Less increase in accounts receivable Cash received from customers
29,000 $346,000
b. Income tax Add decrease in income taxes payable Cash paid for income taxes
$39,000 21,000 $60,000
224. a. Cost of merchandise sold Decrease in accounts payable Decrease in inventories Cash paid for merchandise b. Operating expenses other than depreciation Increase in accrued expenses Increase in prepaid expenses Cash paid for operating expenses 225. Cash flows from (used for) operating activities: Cash received from customers* Cash paid for merchandise** Cash paid for operating expenses*** Net cash flows from operating activities
$620,000 45,000 $665,000 (25,500) $639,500 $142,000 (7,500) $134,500 3,000 $137,500
$197,000 (81,000) (69,000) $ 47,000
*Sales – Increase in Receivables = $210,000 – $13,000 **Cost of Merchandise Sold + Increase in Inventories – Increase in Accounts Payable = $70,000 + $17,000 – $6,000 ***Operating Expenses Other Than Depreciation + Decrease in Salaries Payable = $67,000 + $2,000 226. Cost of merchandise sold Increase in inventories Increase in accounts payable Cash paid for merchandise
$155,000 21,000 (8,000) $168,000
227. Sales Decrease in accounts receivable Cash received from customers
$690,000 39,000 $729,000
228. a. Cost of merchandise sold Decrease in accounts payable Decrease in inventories Cash paid for merchandise
$448,500 4,290 (6,760) $446,030
b. Operating expenses other than depreciation
$78,000
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Chapter 16 - Statement of Cash Flows Decrease in accrued expenses payable Decrease in prepaid expenses Cash paid for operating expenses
520 (650) $77,870
229. a. Sales Decrease in accounts receivable Cash received from customers
$695,000 43,500 $738,500
b. Income tax expense Decrease in income taxes payable Cash paid for income taxes
$ 56,000 5,200 $ 61,200
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Chapter 17 - Financial Statement Analysis True / False 1. Factors that reflect the ability of a business to pay its debts and earn a reasonable amount of income are referred to as solvency, profitability, and liquidity. a. True b. False 2. When you are interpreting financial ratios, it is useful to compare a company's ratios to the same ratios from a prior period or to the ratios of another company in the same industry. a. True b. False 3. Comparative financial statements are designed to compare the financial statements of two or more corporations. a. True b. False 4. In horizontal analysis, the current year is the base year. a. True b. False 5. On a common-sized income statement, all items are stated as a percent of total assets or equities at year-end. a. True b. False 6. The analysis of increases and decreases in the amount and percentage of comparative financial statement items is referred to as horizontal analysis. a. True b. False 7. A 15% change in sales will result in a 15% change in net income. a. True b. False 8. A financial statement showing each item on the statement as a percentage of one key item on the statement is called a common-sized financial statement. a. True b. False 9. The relationship of each asset item as a percent of total assets is an example of vertical analysis. a. True b. False 10. Vertical analysis refers to comparing the financial statements of a single company over several years. a. True b. False Powered by Cognero
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Chapter 17 - Financial Statement Analysis 11. In a common-sized income statement, each item is expressed as a percentage of net income. a. True b. False 12. In the vertical analysis of a balance sheet, the base for current liabilities is total liabilities. a. True b. False 13. Using vertical analysis of the income statement, a company's net income as a percentage of sales is 15%; therefore, the cost of merchandise sold as a percentage of sales must be 85%. a. True b. False 14. In the vertical analysis of an income statement, each item is generally stated as a percentage of sales. a. True b. False 15. The excess of current assets over current liabilities is referred to as working capital. a. True b. False 16. Dollar amounts of working capital are difficult to assess when comparing companies of different sizes or in comparing such amounts with industry figures. a. True b. False 17. Using measures to assess a business's ability to pay its current liabilities is called current position analysis. a. True b. False 18. Current position analysis is used by short-term creditors to assess how quickly they will be repaid. a. True b. False 19. An advantage of the current ratio is that it considers the makeup of the current assets. a. True b. False 20. If two companies have the same current ratio, their ability to pay short-term debt is the same. a. True b. False 21. The ratio of the sum of cash, receivables, and temporary investments to current liabilities is referred to as the current ratio. a. True b. False Powered by Cognero
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Chapter 17 - Financial Statement Analysis 22. A balance sheet shows cash, $75,000; temporary investments, $115,000; accounts receivable, $150,000; inventories, $222,500; and accounts payable, $225,000. The current ratio is 2.5. a. True b. False 23. If a firm has a current ratio of 2, the subsequent collection of a 60-day note receivable on account will cause the ratio to decrease. a. True b. False 24. If a firm has a quick ratio of 1, the subsequent payment of an account payable will cause the ratio to increase. a. True b. False 25. If the accounts receivable turnover for the current year has decreased when compared with the ratio for the preceding year, there has been an acceleration in the collection of receivables. a. True b. False 26. An increase in the accounts receivable turnover may be due to a change in how credit is granted and/or in collection practices. a. True b. False 27. The number of days' sales in receivables is one means of expressing the relationship between average daily sales and accounts receivable. a. True b. False 28. A firm selling food should have a higher inventory turnover rate than a firm selling office furniture. a. True b. False 29. The number of days' sales in inventory is one means of expressing the relationship between the cost of merchandise sold and merchandise inventory. a. True b. False 30. Assuming that the quantities of inventory on hand during the current year were sufficient to meet all demands for sales, a decrease in the inventory turnover for the current year when compared with the turnover for the preceding year indicates an improvement in inventory management. a. True b. False 31. Solvency analysis focuses on the ability of a business to pay its long-term liabilities. a. True Powered by Cognero
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Chapter 17 - Financial Statement Analysis b. False 32. The ratio of fixed assets to long-term liabilities provides a measure of a firm’s ability to pay dividends. a. True b. False 33. A decrease in the ratio of liabilities to stockholders' equity indicates an improvement in the margin of safety for creditors. a. True b. False 34. In computing the asset turnover ratio, the numerator is net income. a. True b. False 35. The return on total assets measures the profitability of total assets, without considering how the assets are financed. a. True b. False 36. In computing the return on total assets, interest expense is subtracted from net income before dividing by average total assets. a. True b. False 37. The denominator for the computation of the return on total assets is average total assets. a. True b. False 38. When the return on total assets is greater than the return on common stockholders' equity, the management of the company has effectively used leverage. a. True b. False 39. When computing the return on common stockholders' equity, preferred stock dividends are subtracted from net income. a. True b. False 40. If a company has issued only one class of stock, the earnings per share are determined by dividing net income plus interest expense by the number of shares outstanding. a. True b. False 41. The ratio of the market price per share of common stock on a specific date to the annual earnings per share is referred to as the price-earnings ratio. a. True Powered by Cognero
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Chapter 17 - Financial Statement Analysis b. False 42. The dividend yield is equal to the dividends per share divided by the par value per share of common stock. a. True b. False 43. Comparing dividends per share to earnings per share indicates the extent to which the corporation is retaining its earnings for use in operations. a. True b. False 44. Ratios and various other analytical measures are not a substitute for sound judgment, nor do they provide definitive guides for action. a. True b. False 45. Analyzing a company's performance should take into account conditions peculiar to the industry and the general economic conditions. a. True b. False 46. A company can compare its financial data to the data of other companies and industry averages to evaluate its position. a. True b. False 47. If Epsilon Company's price-earnings ratio on common stock is greater than Iota Company's, then Iota Company would be expected to have the best potential for future common stock price appreciation. a. True b. False 48. The effects of differences in accounting methods are of little importance when analyzing comparable data from competing businesses. a. True b. False 49. The report on internal control required by the Sarbanes-Oxley Act of 2002 may be prepared by either management or the company’s auditors. a. True b. False 50. The auditor's report is where the auditor certifies that the financial statements present fairly the financial position, results of operations, and cash flows of the company. a. True b. False 51. In a company's annual report, the section called Management's Discussion and Analysis provides critical information Powered by Cognero
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Chapter 17 - Financial Statement Analysis for interpreting the financial statements and assessing the future of the company. a. True b. False 52. A clean audit opinion is not the same as an unmodified opinion. a. True b. False 53. Unusual items affecting the current period’s income statement consist of changes in accounting principles and discontinued operations. a. True b. False 54. When a corporation discontinues a segment of its operations at a loss, the loss should be reported as a separate item after income from continuing operations on the income statement. a. True b. False 55. An unusual item is often related to current operations and occurs infrequently. a. True b. False 56. Reporting unusual items separately on the income statement allows investors to isolate the effects of these items on income and cash flows. a. True b. False 57. Unusual items affecting the prior period’s income statement consist of changes in or errors in applying accounting principles. a. True b. False 58. Earnings per share amounts are only required to be presented for income from continuing operations and net income on the face of the statement. a. True b. False Multiple Choice 59. Which of the following is not a characteristic evaluated in ratio analysis? a. liquidity b. profitability c. solvency d. marketability 60. Short-term creditors are typically most interested in analyzing a company's Powered by Cognero
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Chapter 17 - Financial Statement Analysis a. marketability b. profitability c. operating results d. liquidity 61. The percentage analysis of increases and decreases in individual items on comparative financial statements is called a. vertical analysis b. solvency analysis c. profitability analysis d. horizontal analysis 62. Which of the following is the most useful in analyzing companies of different sizes? a. comparative statements b. common-sized financial statements c. price-level accounting d. audit report 63. The percent of fixed assets to total assets is an example of a. vertical analysis b. solvency analysis c. profitability analysis d. horizontal analysis 64. What type of analysis is indicated by the following?
Current assets Fixed assets a. vertical analysis b. horizontal analysis c. liquidity analysis d. common-size analysis
Current Year Preceding Year $ 430,000 $ 500,000 1,740,000 1,500,000
Increase (Decrease) Amount Percent $ (70,000) (14%) 240,000 16
65. An analysis in which all the components of an income statement are expressed as a percentage of sales is a a. vertical analysis b. horizontal analysis c. liquidity analysis d. solvency analysis 66. A balance sheet that displays only component percentages is a a. trend balance sheet b. comparative balance sheet c. condensed balance sheet d. common-sized balance sheet Powered by Cognero
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Chapter 17 - Financial Statement Analysis 67. One reason that a common-sized statement is a useful tool in financial analysis is that it enables the user to a. judge the relative potential of two companies of similar size in different industries b. determine which companies in a single industry are of the same value c. determine which companies in a single industry are of the same size d. make a better comparison of two companies of different sizes in the same industry 68. Assume the following sales data for a company: Current year Preceding year
$325,000 250,000
What is the percentage increase in sales from the preceding year to the current year? a. 70.0% b. 76.9% c. 30.0% d. 50.0% 69. On a common-sized balance sheet, 100% is assigned to a. total property, plant, and equipment b. total current assets c. total liabilities d. total assets 70. On a common-sized income statement, 100% is assigned to a. net cost of merchandise sold b. net income c. gross profit d. sales 71. Horizontal analysis is a technique for evaluating financial statement data a. for one period of time b. over a period of time c. on a certain date d. as it may appear in the future 72. Horizontal analysis of comparative financial statements includes a. development of common-sized statements b. computation of liquidity ratios c. computation of dollar amount changes and percentage changes from the previous to the current year d. evaluation of each component in a financial statement to a total within the statement 73. In horizontal analysis, each item is expressed as a percentage of the a. base year figure b. retained earnings figure Powered by Cognero
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Chapter 17 - Financial Statement Analysis c. total assets figure d. net income figure 74. Assume the following sales data for a company: Current year Preceding year
$1,025,000 820,000
What is the percentage increase in sales from the preceding year to the current year? a. 100% b. 25% c. 125% d. 75% 75. The following income statement information is for Sadie Company: Sales Cost of merchandise sold Gross profit
$175,000 115,000 $ 60,000
Using vertical analysis of the income statement for Sadie Company, determine the change in gross profit. a. 100.0% b. 66.5% c. 34.3% d. 29.4% 76. In a vertical analysis of an income statement, the base for computing the cost of merchandise sold percentage is a. the previous year’s cost of merchandise sold amount b. sales c. total expenses d. gross profit 77. The relationship of $325,000 to $125,000, expressed as a ratio, is a. 2.0 b. 2.6 c. 2.5 d. 0.5 Use the information provided for Harding Company to answer the questions that follow. Harding Company Accounts payable Accounts receivable Accrued liabilities Cash Intangible assets Inventory Long-term investments Powered by Cognero
$ 40,000 65,000 7,000 30,000 40,000 72,000 110,000 Page 9
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Chapter 17 - Financial Statement Analysis Long-term liabilities Notes payable (short-term) Property, plant, and equipment Prepaid expenses Temporary investments
75,000 30,000 625,000 2,000 36,000
78. Based on the data for Harding Company, what is the amount of quick assets? a. $205,000 b. $203,000 c. $131,000 d. $66,000 79. Based on the data for Harding Company, what is the amount of working capital? a. $238,000 b. $128,000 c. $168,000 d. $203,000 80. Based on the data for Harding Company, what is the quick ratio (rounded to one decimal place)? a. 2.7 b. 2.6 c. 1.7 d. 0.9 81. A company with working capital of $720,000 and a current ratio of 2.2 pays a $125,000 short-term liability. The amount of working capital immediately after payment is a. $845,000 b. $595,000 c. $720,000 d. $125,000 82. Which of the following measures a company’s ability to pay its current liabilities? a. earnings per share b. inventory turnover c. current ratio d. times interest earned 83. Which of the following is not included in the computation of the quick ratio? a. inventory b. marketable securities c. accounts receivable d. cash 84. The numerator for the computation of accounts receivable turnover is a. total assets Powered by Cognero
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Chapter 17 - Financial Statement Analysis b. sales c. accounts receivable at year-end d. average accounts receivable 85. Based on the following data, what is the accounts receivable turnover? Sales on account during year Cost of merchandise sold during year Accounts receivable, beginning of year Accounts receivable, end of year Merchandise inventory, beginning of year Merchandise inventory, end of year a. 17.5 b. 2.6 c. 20.0 d. 15.5
$700,000 270,000 45,000 35,000 90,000 110,000
86. An acceleration in the collection of receivables will tend to cause the accounts receivable turnover to a. decrease b. remain the same c. either increase or decrease d. increase 87. Based on the following data for the current year, what is the number of days' sales in receivables? Sales on account during year Cost of merchandise sold during year Accounts receivable, beginning of year Accounts receivable, end of year Merchandise inventory, beginning of year Merchandise inventory, end of year a. 7 days b. 3 days c. 15 days d. 25 days
$584,000 300,000 45,000 35,000 90,000 110,000
88. Based on the following data for the current year, what is the inventory turnover? Sales on account during year Cost of merchandise sold during year Accounts receivable, beginning of year Accounts receivable, end of year Merchandise inventory, beginning of year Merchandise inventory, end of year a. 2.7 b. 9.7 c. 2.5 d. 3.0 Powered by Cognero
$700,000 270,000 45,000 35,000 90,000 110,000
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Chapter 17 - Financial Statement Analysis 89. Based on the following data for the current year, what is the number of days' sales in inventory (rounded to nearest whole day)? Sales on account during year Cost of merchandise sold during year Accounts receivable, beginning of year Accounts receivable, end of year Merchandise inventory, beginning of year Merchandise inventory, end of year a. 51 days b. 44 days c. 7 days d. 8 days
$1,204,500 657,000 75,000 85,000 85,600 98,600
90. The current ratio is a. used to evaluate a company's liquidity and short-term debt-paying ability b. a solvency measure that indicates the margin of safety for bondholders c. computed by dividing current liabilities by current assets d. computed by subtracting current liabilities from current assets 91. A company with $70,000 in current assets and $50,000 in current liabilities pays a $1,000 current liability. As a result of this transaction, the current ratio and working capital will a. both decrease b. both increase c. increase and remain the same, respectively d. remain the same and decrease, respectively 92. Financial information for Brock Company is provided as follows. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. Assets Cash and short-term investments Accounts receivable (net) Merchandise inventory Property, plant, and equipment Total assets
$ 40,000 30,000 25,000 215,000 $310,000
Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Stockholders’ equity—common Total liabilities and stockholders’ equity
$ 60,000 95,000 155,000 $310,000
Income Statement Sales Cost of merchandise sold Gross profit Operating expenses Net income
$90,000 45,000 $45,000 20,000 $25,000
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Chapter 17 - Financial Statement Analysis Number of shares of common stock Market price of common stock
6,000 $20
What is the current ratio? a. 1.42 b. 1.17 c. 1.58 d. 0.67 Use the information provided for Privett Company to answer the questions that follow.
Privett Company Accounts payable Accounts receivable Accrued liabilities Cash Intangible assets Inventory Long-term investments Long-term liabilities Notes payable (short-term) Property, plant, and equipment Prepaid expenses Temporary investments
$ 30,000 35,000 7,000 25,000 40,000 72,000 100,000 75,000 20,000 400,000 2,000 36,000
93. Based on the data for Privett Company, what is the amount of quick assets? a. $168,000 b. $96,000 c. $60,000 d. $61,000 94. Based on the data for Privett Company, what is the amount of working capital? a. $213,000 b. $113,000 c. $153,000 d. $39,000 95. Based on the data for Privett Company, what is the quick ratio (rounded to one decimal place)? a. 1.7 b. 2.9 c. 1.1 d. 1.0 96. A common measure of liquidity is a. the asset turnover ratio Powered by Cognero
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Chapter 17 - Financial Statement Analysis b. dividends per share of common stock c. the accounts receivable turnover d. gross profit 97. Which of the following ratios provides a solvency measure that shows the margin of safety of bondholders and also gives an indication of the potential ability of the business to borrow additional funds on a long-term basis? a. ratio of fixed assets to long-term liabilities b. asset turnover ratio c. number of days' sales in receivables d. return on stockholders' equity 98. Times interest earned is computed as a. net income plus interest expense, divided by interest expense b. income before income tax plus interest expense, divided by interest expense c. net income divided by interest expense d. income before income tax divided by interest expense 99. Balance sheet and income statement data indicate the following: Bonds payable, 10% (due in 2 years) Preferred 5% stock, $100 par (no change during year) Common stock, $50 par (no change during year) Income before income tax for year Income tax for year Common dividends paid Preferred dividends paid
$1,000,000 300,000 2,000,000 550,000 80,000 50,000 15,000
Based on the data presented, what is the times interest earned ratio? (Round to one decimal place.) a. 1.5 times b. 6.4 times c. 6.5 times d. 5.5 times 100. Hsu Company reported the following on its income statement: Income before income taxes Income tax expense Net income
$420,000 120,000 $300,000
Interest expense was $80,000. Hsu Company's times interest earned ratio is a. 8.00 b. 6.25 c. 5.25 d. 5.00 101. The ability of a business to pay its debts as they come due and to earn a reasonable net income includes a. solvency and leverage Powered by Cognero
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Chapter 17 - Financial Statement Analysis b. solvency and profitability c. solvency and liquidity d. solvency and equity 102. Percentage analyses, ratios, turnovers, and other measures of financial position and operating results are a. a substitute for sound judgment b. useful analytical measures c. enough information for analysis; industry information is not needed d. unnecessary for analysis if industry information is available 103. The tendency of the return on stockholders' equity to vary disproportionately from the return on total assets is because of a. leverage b. solvency c. yield d. quick assets Use this information for Kellman Company to answer the questions that follow. The balance sheets at the end of each of the first 2 years of operations indicate the following: Kellman Company Total current assets Total investments Total property, plant, and equipment Total current liabilities Total long-term liabilities Preferred 9% stock, $100 par Common stock, $10 par Paid-in capital in excess of par—common stock Retained earnings
Year 2 $600,000 60,000 900,000 125,000 350,000 100,000 600,000 75,000 310,000
Year 1 $560,000 40,000 700,000 65,000 250,000 100,000 600,000 75,000 210,000
104. Using the balance sheets for Kellman Company, if net income is $150,000 and interest expense is $20,000 for Year 2, what is the return on total assets for the year (rounded to one decimal place)? a. 10.4% b. 11.9% c. 10.5% d. 8.4% 105. Using the balance sheets for Kellman Company, if net income is $150,000 and interest expense is $20,000 for Year 2, what is the return on stockholders' equity for Year 2 (rounded to two decimal places)? a. 6.9% b. 14.49% c. 16.04% d. 13.80% Powered by Cognero
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Chapter 17 - Financial Statement Analysis 106. Using the balance sheets for Kellman Company, if net income is $250,000 and interest expense is $30,000 for Year 2, what are the earnings per share on common stock for Year 2 (rounded to the nearest cent)? a. $4.16 b. $4.32 c. $4.02 d. $2.49 107. Using the balance sheets for Kellman Company, if net income is $250,000 and interest expense is $20,000 for Year 2, and the market price of common shares is $30, what is the price-earnings ratio on common stock for Year 2? (Round intermediate computation to two decimal places and final answer to one decimal place.) a. 7.5 b. 13.4 c. 12.1 d. 8.5 108. The numerator for the return on common stockholders' equity computation is a. net income b. net income minus preferred dividends c. income before income tax d. income from operations minus interest expense 109. The numerator for the return on total assets computation is a. net income b. net income plus tax expense c. net income plus interest expense d. net income minus preferred dividends 110. The following information is available for Jase Company: Market price per share of common stock Earnings per share on common stock
$25.00 1.25
Which of the following statements is correct? a. The price-earnings ratio is 20 and a share of common stock was selling for 20 times the amount of earnings per share at the end of the year. b. The price-earnings ratio is 5% and a share of common stock was selling for 5% more than the amount of earnings per share at the end of the year. c. The price-earnings ratio is 10 and a share of common stock was selling for 125 times the amount of earnings per share at the end of the year. d. The market price per share and the earnings per share are not statistically related to each other. 111. The following information is available for Meyer Company: Dividends per share of common stock Market price per share of common stock
$ 1.80 30.00
Which of the following statements is correct? Powered by Cognero
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Chapter 17 - Financial Statement Analysis a. The dividend yield is 6.0%, which is of interest to investors seeking an increase in market price of their stocks. b. The dividend yield is 6.0%, which is of special interest to investors seeking to earn revenue on their investments. c. The dividend yield is 16.7%, which is of interest to bondholders. d. The dividend yield is 16.7%, which is an important measure of solvency. 112. The particular analytical measures chosen to analyze a company may be influenced by all of the following except a. industry type b. general economic environment c. diversity of business operations d. product quality or service effectiveness 113. Richards Corporation had net income of $250,000 and paid dividends to common stockholders of $50,000. It had 50,000 shares of common stock outstanding during the entire year. Richards Corporation's common stock is selling for $35 per share. The price-earnings ratio is a. 7 b. 14 c. 2 d. 5 114. Leverage implies that a company has a. debt financing b. equity financing c. a high current ratio d. a high earnings per share The following information pertains to Diane Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. Use this information to answer the questions that follow. Assets Cash and short-term investments Accounts receivable (net) Merchandise inventory Property, plant, and equipment Total assets
$ 30,000 20,000 15,000 185,000 $250,000
Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Stockholders’ equity—common Total liabilities and stockholders’ equity
$ 45,000 70,000 135,000 $250,000
Income Statement Sales Cost of merchandise sold Gross profit Operating expenses Interest expense
$ 85,000 45,000 $ 40,000 (15,000) (5,000)
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Chapter 17 - Financial Statement Analysis Net income Number of shares of common stock outstanding Market price per share of common stock Total dividends paid Net cash flows from operating activities
$ 20,000 6,000 $20 $9,000 $30,000
115. Using the data provided for Diane Company, what is the asset turnover? a. 1.00 b. 2.94 c. 0.18 d. 0.34 116. Using the data provided for Diane Company, what is the return on total assets? a. 10% b. 8% c. 0.1% d. 1% 117. Using the data provided for Diane Company, what are the dividends per common share? a. $20.00 b. $3.00 c. $0.67 d. $1.50 118. Using the data provided for Diane Company, what is the dividend yield? a. 7.5% b. 0.75% c. 13.3% d. 1.3% 119. Using the data provided for Diane Company, what is the return on common stockholders’ equity? a. 6.75% b. 14.8% c. 7.4% d. 13.5% 120. Using the data provided for Diane Company, what is the price-earnings ratio? a. 8.0 b. 2.5 c. 4.0 d. 6.0 121. The following information pertains to Newman Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. Powered by Cognero
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Chapter 17 - Financial Statement Analysis Assets Cash and short-term investments Accounts receivable (net) Merchandise inventory Property, plant, and equipment Total assets
$ 40,000 30,000 25,000 215,000 $310,000
Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Stockholders’ equity—common Total liabilities and stockholders’ equity
$ 60,000 95,000 155,000 $310,000
Income Statement Sales Cost of merchandise sold Gross profit Operating expenses Interest expense Net income
$90,000 45,000 $45,000 (16,200) (3,800) $25,000
Number of shares of common stock Market price of common stock Dividends per share Net cash flows from operating activities
6,000 $40.00 $1.00 $40,000
What is the return on total assets for Newman Company (rounded to one decimal place)? a. 9.3% b. 6.8% c. 10.5% d. 16.1% 122. The following information pertains to Dallas Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. Assets Cash and short-term investments Accounts receivable (net) Merchandise inventory Property, plant, and equipment Total assets
$ 40,000 30,000 25,000 280,000 $375,000
Liabilities and Stockholders’ Equity Current liabilities Long-term liabilities Stockholders’ equity—common Total liabilities and stockholders’ equity
$ 60,000 95,000 220,000 $375,000
Income Statement Sales Cost of merchandise sold Gross profit
$90,000 45,000 $45,000
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Chapter 17 - Financial Statement Analysis Operating expenses Net income
15,000 $30,000
Number of shares of common stock Market price of common stock Dividends per share Net cash flows from operating activities
6,000 $20.00 $1.00 $40,000
What is the return on stockholders’ equity (rounded to one decimal place)? a. 7.3% b. 13.6% c. 20.5% d. 40.9% 123. A company reports the following: Net income Preferred dividends Shares of common stock outstanding Market price per share of common stock
$160,000 $10,000 20,000 $35
The company’s earnings per share on common stock is a. $13.33 b. $8.50 c. $7.50 d. $35.00 124. The price-earnings ratio on common stock is computed as a. market price per share of common stock divided by earnings per share on common stock b. earnings per share of common stock divided by market price per share of common stock c. market price per share of common stock divided by dividends per share of common stock d. dividends per share of common stock divided by earnings per share on common stock 125. Dividend yield on common stock is computed as a. dividends on common stock divided by shares of common stock outstanding b. net income minus preferred dividends divided by shares of common stock outstanding c. dividends per share of common stock divided by earnings per share d. dividends per share of common stock divided by market price per share of common stock 126. Corporate annual reports typically do not contain a. management discussion and analysis b. an SEC statement expressing an opinion c. accompanying notes d. an auditor's report 127. The independent auditor's report a. describes which financial statements are covered by the audit Powered by Cognero
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Chapter 17 - Financial Statement Analysis b. gives the auditor's opinion regarding the fairness of the financial statements c. summarizes what the auditor did d. states that the financial statements were presented on time 128. The purpose of an audit is to a. determine whether or not a company is a good investment b. render an opinion on the fairness of the statements c. determine whether or not a company complies with corporate social responsibility d. determine whether or not a company is a good credit risk 129. Which of the following is required by the Sarbanes-Oxley Act? a. price-earnings ratio b. report on internal control c. vertical analysis d. common-sized statement 130. All of the following are typically included in the Management’s Discussion and Analysis in annual reports except a. explanations of any significant changes between the current and prior years’ financial statements b. management’s assessment of liquidity c. journal entries d. off-balance-sheet arrangements 131. Which of the following would appear as an unusual item on the income statement? a. loss resulting from the sale of fixed assets b. gain resulting from the disposal of a segment of the business c. presentation of earnings per share d. stock split 132. A loss on disposal of a segment would be reported on the income statement as a(n) a. administrative expense b. other expense c. deduction from income from continuing operations d. selling expense 133. Which of the following is not an unusual item? a. a segment of the business being sold b. corporate income tax being paid c. a change from one accounting method to another acceptable accounting method d. closure of all outlet stores 134. Which of the following is considered an unusual item affecting the prior period’s income statement? a. a change in accounting principles b. fixed asset impairments c. sale of company stores in Florida Powered by Cognero
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Chapter 17 - Financial Statement Analysis d. discontinued operations 135. A loss due to a discontinued operation should be reported on the income statement a. above income from continuing operations b. without related tax effect c. below income from continuing operations d. as an operating expense 136. A change from one acceptable accounting method to another is reported a. on the statement of retained earnings, as a correction to the beginning balance b. on the income statement, below income from continuing operations c. on the income statement, above income tax expense d. through a retroactive restatement of prior period earnings 137. Which of the following items should be classified as an unusual item on an income statement? a. gain on the retirement of a bond payable b. gain on a sale of a long-term investment c. loss due to a discontinued operation in Colorado d. selling treasury stock for more than the company paid for it 138. Which of the following items appear on the corporate income statement before income from continuing operations? a. cumulative effect of a change in accounting principle b. income tax expense c. presentation of earnings per share d. loss on discontinued operations Matching Match each of the following descriptions to the term (a–h) it describes. a. Solvency b. Leverage c. Times interest earned d. Horizontal analysis e. Vertical analysis f. Common-sized financial statements g. Current position analysis h. Profitability analysis 139. A percentage analysis of increases and decreases in related items on comparative financial statements 140. Using debt to increase the return on an investment 141. An analysis of a company’s ability to pay its current liabilities 142. The percentage analysis of the relationship of each component in a financial statement to a total within the statement Powered by Cognero
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Chapter 17 - Financial Statement Analysis 143. A company's ability to make interest payments and repay debt at maturity 144. Focuses on a company’s ability to generate future earnings 145. Useful for comparing one company to another or to industry averages 146. Measures the risk that interest payments will not be made if earnings decrease Match each of the following ratios to its use (a–h). Items may be used more than once. a. Assesses the profitability of the assets b. Assesses how effectively assets are used c. Indicates the ability to pay current liabilities d. Indicates how much of the company is financed by debt and equity e. Indicates instant debt-paying ability f. Assesses the profitability of the investment by common stockholders g. Indicates future earnings prospects h. Indicates the extent to which earnings are being distributed to common stockholders 147. Price-earnings (P/E) ratio 148. Working capital 149. Return on total assets 150. Ratio of liabilities to stockholders’ equity 151. Quick ratio 152. Return on common stockholders’ equity 153. Current ratio 154. Asset turnover ratio 155. Dividends per share 156. Earnings per share (EPS) on common stock Subjective Short Answer 157. Cash and accounts receivable for Adams Company are as follows: Cash Accounts receivable (net)
Current Year $70,000 70,400
Prior Year $50,000 80,000
What are the amounts and percentages of increase or decrease that would be shown with horizontal analysis? 158. The following items were taken from the financial statements of Tilden, Inc., over a 3-year period: Powered by Cognero
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Chapter 17 - Financial Statement Analysis Item Sales Cost of merchandise sold Gross profit
Year 3 $360,000 225,000 $135,000
Year 2 $335,000 205,000 $130,000
Year 1 $290,000 185,000 $105,000
Compute the following for each of the items listed: a. b.
The amount and percentage change from Year 2 to Year 3. The amount and percentage change from Year 1 to Year 2.
(Round percentages to one decimal place.) 159. Comparative information taken from Friction Company's financial statements is as follows: a. b. c. d. e. f.
Year 2 $ 25,500 106,200 77,000 654,000 160,000 28,000
Notes receivable Accounts receivable Retained earnings Sales Operating expenses Income taxes payable
Year 1 $ 30,000 90,000 70,000 600,000 200,000 20,000
Using horizontal analysis, show the percentage change and direction (increase or decrease) from Year 1 to Year 2 with Year 1 as the base year. 160. Revenue and expense data for Young Technologies Inc. are as follows: Sales Cost of merchandise sold Selling expenses Administrative expenses Income tax expense a. b.
Year 2 $500,000 325,000 70,000 75,000 10,500
Year 1 $440,000 242,000 79,200 70,400 16,400
Prepare an income statement in comparative form, stating each item for both years as an amount and as a percent of sales. Round to the nearest whole percent. Comment on the significant changes disclosed by the comparative income statement.
161. Cash and accounts receivable for Ashfall Co. are as follows: Cash Accounts receivable (net)
Current Year $62,400 42,000
Prior Year $58,000 50,000
Based on this information, what is the amount and percentage of increase or decrease that would be shown on a balance sheet with horizontal analysis? Round percentages to one decimal place. 162. Income statement information for Lucy Company is as follows: Sales Cost of merchandise sold Gross profit Powered by Cognero
$175,000 105,000 $ 70,000 Page 24
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Chapter 17 - Financial Statement Analysis Prepare a vertical analysis of the income statement for Lucy Company. 163. Why would you or why wouldn’t you compare an organization like Ford Motor Company to the local car dealer “Johnson City Ford/Lincoln/Mercury” using vertical and horizontal analysis? 164. The balance sheet data for Randolph Company for 2 recent years are as follows: Current assets Plant assets Total assets
Assets
Year 2 $ 445 680 $1,125
Year 1 $280 520 $800
Liabilities & Stockholders' Equity Current liabilities Long-term debt Common stock Retained earnings Total liabilities and stockholders' equity
$ 285 255 325 260 $1,125
$120 160 320 200 $800
a. b.
Using horizontal analysis, show the percentage change for each balance sheet item using Year 1 as the base year. Using vertical analysis, prepare a comparative balance sheet.
Round percentages to one decimal place. 165. Condensed data taken from the ledger of St. Louis Company at December 31, for the current and preceding years, are as follows: Current assets Property, plant, and equipment Intangible assets Current liabilities Long-term liabilities Common stock Retained earnings
Year 2 $160,000 450,000 20,700 70,000 210,000 225,000 125,700
Year 1 $130,000 400,000 30,000 80,000 250,000 150,000 80,000
Prepare a comparative balance sheet, with horizontal analysis, for December 31, Year 2 and Year 1. (Round percentages to one decimal place.) 166. Revenue and expense data for Bluestem Company are as follows: Administrative expenses Cost of merchandise sold Income tax expense Sales Selling expenses a. b.
Year 2 $ 37,000 350,000 40,000 800,000 150,000
Year 1 $ 20,000 320,000 32,000 700,000 110,000
Prepare a comparative income statement, with vertical analysis, stating each item for both years as a percent of sales. (Round percentages to one decimal place.) Comment on significant changes disclosed by the comparative income statement.
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Chapter 17 - Financial Statement Analysis 167. What is a major advantage of using percentages rather than dollar changes in doing horizontal and vertical analyses? 168. The following items are reported on a company’s balance sheet: Cash Marketable securities Accounts receivable Inventory Accounts payable
$230,000 50,000 200,000 240,000 300,000
Determine (a) the current ratio and (b) the quick ratio. (Round answers to one decimal place.) 169. The following items are reported on a company’s balance sheet: Cash Marketable securities Accounts receivable Inventory Accounts payable
$400,000 50,000 150,000 200,000 250,000
Determine (a) the current ratio and (b) the quick ratio. (Round answers to one decimal place.) 170. The following items are reported on Denver Company’s balance sheet: Cash Marketable securities Accounts receivable (net) Inventory Accounts payable
$190,000 160,000 240,000 350,000 600,000
Determine (a) the current ratio and (b) the quick ratio. (Round answers to one decimal place.) 171. For Garrison Corporation, the working capital at the end of the current year is $10,000 more than the working capital at the end of the preceding year, reported as follows: Current assets: Cash, marketable securities, and receivables Inventories Total current assets Current liabilities Working capital
Year 2
Year 1
$ 80,000 120,000 $200,000 100,000 $100,000
$ 84,000 66,000 $150,000 60,000 $ 90,000
Has the current position of Garrison Corporation improved? Explain. 172. A company reports the following: Sales Average accounts receivable (net)
$720,000 45,000
Determine (a) the accounts receivable turnover and (b) the number of days’ sales in receivables. (Round answers to one decimal place.) 173. A company reports the following: Powered by Cognero
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Chapter 17 - Financial Statement Analysis Sales Average accounts receivable (net)
$1,200,000 50,000
Determine (a) the accounts receivable turnover and (b) the number of days’ sales in receivables. (Round answers to one decimal place.) 174. A company reports the following: Cost of merchandise sold Average merchandise inventory
$610,000 80,000
Determine (a) the inventory turnover and (b) the number of days’ sales in inventory. (Round answers to one decimal place.) 175. The following data are available for Martin Solutions, Inc.: Year 2 Sales $1,139,600 Beginning merchandise inventory 80,000 Cost of merchandise sold 500,800 Ending merchandise inventory 72,000 a.
b.
Year 1 $1,192,320 64,000 606,000 80,000
Determine for each year: (1) Inventory turnover (2) Number of days’ sales in inventory (Round the intermediate computation to the nearest whole number and the final answer to one decimal place.) What conclusions can be drawn from these data concerning the inventories?
176. The following data are taken from the balance sheet at the end of the current year: Cash Temporary investments Accounts receivable Inventory Prepaid expenses Property, plant, and equipment Accounts payable Accrued liabilities Income tax payable Notes payable, short-term
$154,000 350,000 210,000 240,000 15,000 375,000 245,000 4,000 10,000 85,000
Determine the (a) working capital, (b) current ratio, and (c) quick ratio. (Round ratios to one decimal place.) 177. The following data are taken from the financial statements: Average accounts receivable (net) Accounts receivable (net), end of year Sales on account a.
Current Year Preceding Year $123,000 $ 95,000 129,012 87,516 950,000 825,000
Assuming that credit terms on all sales are n/45, determine for each year: (1) Accounts receivable turnover (Round to two decimal places.) (2) Number of days’ sales in receivables (Round intermediate computation to the nearest whole number and the final answer to two decimal places.)
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Chapter 17 - Financial Statement Analysis b.
What conclusions can be drawn from these data concerning accounts receivable and credit policies?
178. The following data are taken from the financial statements: Sales Cost of merchandise sold Average merchandise inventory a.
b.
Current Year $3,600,000 2,000,000 372,000
Preceding Year $4,000,000 2,700,000 352,000
Determine for each year: (1) Inventory turnover (Round answer to one decimal place.) (2) Number of days’ sales in inventory (Round intermediate computation to the nearest whole number and the final answer to two decimal places.) What conclusions can be drawn from these data concerning the inventories?
179. The following information was taken from Slater Company’s balance sheet: Fixed assets (net) Long-term liabilities Total liabilities Total stockholders’ equity
$1,250,000 500,000 672,000 1,680,000
Determine the company’s (a) ratio of fixed assets to long-term liabilities and (b) ratio of liabilities to stockholders’ equity. (Round answers to one decimal place.) 180. A company reports the following: Income before income tax expense $600,000 Interest expense 150,000 Determine the times interest earned ratio. (Round to one decimal place.) 181. The following information has been condensed from the December 31 balance sheets of Gabriel Co.: Assets: Current assets Fixed assets (net) Total assets Liabilities: Current liabilities Long-term liabilities Total liabilities Stockholders' equity Total liabilities and stockholders' equity a. b. c.
Year 2
Year 1
$ 825,500 1,473,600 $2,299,100
$ 674,300 1,275,300 $1,949,600
$ 313,500 703,000 $1,016,500 $1,282,600
$ 309,600 545,000 $ 854,600 $1,095,000
$2,299,100
$1,949,600
Determine the ratio of fixed assets to long-term liabilities for each year. Determine the ratio of liabilities to stockholders' equity for each year. Comment on the year-to-year changes for both ratios.
(Round answers to two decimal places.) Powered by Cognero
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Chapter 17 - Financial Statement Analysis 182. The balance sheet for Seuss Company at the end of the current fiscal year indicated the following: Bonds payable, 10% (20-year term) Preferred 10% stock, $100 par Common stock, $10 par
$5,000,000 1,000,000 2,000,000
Income before income tax was $1,500,000, and income taxes were $200,000 for the current year. Cash dividends paid on common stock during the current year totaled $150,000. The common stock sells for $75 per share at the end of the year. Determine each of the following: a. Times interest earned b. Earnings per share on common stock c. Price-earnings ratio d. Dividends per share of common stock e. Dividend yield Round to one decimal place except earnings per share and dividends per share, which should be rounded to two decimal places. 183. Define solvency and profitability. How are they interrelated? 184. A company reports the following: Sales Average total assets
$2,400,000 1,500,000
Determine the asset turnover ratio. (Round to one decimal place.) 185. A company reports the following: Sales Average total assets
$2,520,000 1,400,000
Determine the asset turnover ratio. (Round to one decimal place.) 186. A company reports the following income statement and balance sheet information for the current year: Net income Interest expense Average total assets
$ 180,000 20,000 2,000,000
Determine the return on total assets. 187. A company reports the following: Net income Preferred dividends Shares of common stock outstanding Market price per share of common stock
$150,000 $10,000 20,000 $35
Determine the company’s earnings per share on common stock. 188. A company reports the following: Powered by Cognero
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Chapter 17 - Financial Statement Analysis Net income Preferred dividends Average stockholders’ equity Average common stockholders’ equity
$ 350,000 50,000 1,000,000 800,000
Determine the (a) return on stockholders’ equity and (b) return on common stockholders’ equity. (Round percentages to one decimal place.) 189. A company reports the following: Net income Preferred dividends Shares of common stock outstanding Market price per share of common stock
$270,000 $10,000 20,000 $36.40
Determine the company’s price-earnings ratio. (Round to one decimal place.) 190. The following selected data were taken from the financial statements of the Winter Group for the 3 most recent years of operations:
Total assets Notes payable (10% interest) Common stock Preferred $6 stock, $100 par Retained earnings
Dec. 31, Year 3 $3,000,000 1,000,000 400,000 200,000 1,126,000
Dec. 31, Year 2 $2,700,000 1,000,000 400,000 200,000 896,000
Dec. 31, Year 1 $2,400,000 1,000,000 400,000 200,000 600,000
The Year 3 net income was $242,000, and the Year 2 net income was $308,000. No dividends on common stock were declared during the 3 years. a. b.
Determine the return on total assets, the return on stockholders' equity, and the return on common stockholders' equity for Years 2 and 3. (Round percentages to one decimal place.) What conclusions can be drawn from these data as to the company's profitability?
191. Selected data from Carmen Company at year-end are as follows: Total assets Average total assets Net income Sales Average common stockholders' equity Net cash flows from operating activities Shares of common stock outstanding Long-term investments
$2,000,000 $2,200,000 $250,000 $1,300,000 $1,000,000 $275,000 10,000 $400,000
Determine: a. Asset turnover ratio b. Return on total assets c. Return on common stockholders' equity d. Earnings per share on common stock. Assume the company had no preferred stock or interest expense. Powered by Cognero
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Chapter 17 - Financial Statement Analysis (Round dollar values to two decimal places and other final answers to one decimal place.) 192. The following information was taken from the financial statement of Fox Resources for December 31 of the current fiscal year: Common stock, $20 par value (no change during the year) Preferred 10% stock, $40 par (no change during the year)
$5,000,000 2,000,000
The net income was $600,000, and the declared dividends on the common stock were $125,000 for the current year. The market price of the common stock is $20 per share. Determine for the common stock: a. Earnings per share b. Price-earnings ratio c. Dividends per share d. Dividend yield (Round to one decimal place except earnings per share, which should be rounded to two decimal places.) 193. The following data are taken from the financial statements: Current assets Property, plant, and equipment Current liabilities (non-interest-bearing) Long-term liabilities, 12% Preferred 10% stock Common stock, $25 par Retained earnings, beginning of year Net income for year Preferred dividends declared Common dividends declared
Current Year $ 745,000 1,510,000
Preceding Year $ 820,000 1,400,000
160,000 400,000 250,000 1,200,000
140,000 400,000 250,000 1,200,000
230,000 110,000 (25,000) (70,000)
160,000 155,000 (25,000) (60,000)
The current market price per share of common stock is $25. Determine for the current year: a. Return on total assets b. Return on stockholders' equity c. Return on common stockholders' equity d. Earnings per share on common stock e. Price-earnings ratio on common stock f. Dividend yield (Round dollar values to two decimal places and other final answers to one decimal place.) 194. Abigail Company reports the following: Net income Preferred dividends Average stockholders’ equity Average common stockholders’ equity Powered by Cognero
$ 295,000 30,000 1,000,000 700,000 Page 31
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Chapter 17 - Financial Statement Analysis Determine (a) the return on stockholders’ equity and (b) the return on common stockholders’ equity. (Round answers to one decimal place.) 195. Rho, Sigma, and Tau companies have the following data for the current year: Price-earnings ratio
Rho Company 23.7
Sigma Company 16.9
Tau Company 30.1
Which company would be expected to have the best potential for future common stock price appreciation? 196. CorpCo gathered the following information as of the end of the current fiscal year: Dividends on common stock Market price per share of common stock Shares of common stock outstanding Dividends on preferred stock Shares of preferred stock outstanding Earnings per share on common stock Dividends per share of common stock Net income
$125,000 $115 5,000 $65,000 600 $102 $25 $575,000
What is CorpCo's dividend yield? Give the answer as a percent (rounded to one decimal place). 197. CorpCo gathered the following information as of the end of the current fiscal year: Dividends on common stock Market price per share of common stock Shares of common stock outstanding Dividends on preferred stock Shares of preferred stock outstanding Earnings per share on common stock Dividends per share of common stock Net income
$125,000 $115 5,000 $65,000 600 $102 $25 $575,000
What is CorpCo's price-earnings ratio? (Round to one decimal place.) 198. What information is generally included in the Management's Discussion and Analysis (MD&A) section of a corporate annual report? 199. Gallant Company reported net income of $2,500,000. The income statement included a $200,000 loss on discontinued operations, after applicable income tax. There were 100,000 shares of $10 par common stock and 40,000 shares of 4% preferred stock of $100 par outstanding throughout the current year. Prepare the earnings per share section of Gallant Company’s income statement. 200. Zeus Company reports the following for the current year: Income from continuing operations before income tax Loss from discontinued operations Weighted average number of common shares outstanding Applicable tax rate Powered by Cognero
$500,000 $90,000* 40,000 40% Page 32
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Chapter 17 - Financial Statement Analysis *Net of any tax effect a. b.
Prepare a partial income statement for Zeus Company beginning with income from continuing operations before income tax expense. Compute the earnings per common share for Zeus.
201. Prepare an income statement using the following data for New Orleans Adventures for the year ended December 31, 20Y3: Sales Cost of merchandise sold Operating expenses Income tax expense Loss on discontinued operations
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$24,500,000 10,900,000 6,300,000 500,000 100,000
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Chapter 17 - Financial Statement Analysis Answer Key 1. True 2. True 3. False 4. False 5. False 6. True 7. False 8. True 9. True 10. False 11. False 12. False 13. False 14. True 15. True 16. True 17. True 18. True 19. False 20. False 21. False 22. True 23. False 24. False 25. False Powered by Cognero
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Chapter 17 - Financial Statement Analysis 26. True 27. True 28. True 29. True 30. False 31. True 32. False 33. True 34. False 35. True 36. False 37. True 38. False 39. True 40. False 41. True 42. False 43. True 44. True 45. True 46. True 47. False 48. False 49. False 50. True Powered by Cognero
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Chapter 17 - Financial Statement Analysis 51. True 52. False 53. False 54. True 55. False 56. True 57. True 58. True 59. d 60. d 61. d 62. b 63. a 64. b 65. a 66. d 67. d 68. c 69. d 70. d 71. b 72. c 73. a 74. b 75. c 76. b Powered by Cognero
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Chapter 17 - Financial Statement Analysis 77. b 78. c 79. b 80. c 81. c 82. c 83. a 84. b 85. a 86. d 87. d 88. a 89. a 90. a 91. c 92. c 93. b 94. b 95. a 96. c 97. a 98. b 99. c 100. b 101. b Powered by Cognero
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Chapter 17 - Financial Statement Analysis 102. b 103. a 104. b 105. b 106. c 107. a 108. b 109. c 110. a 111. b 112. d 113. a 114. a 115. d 116. a 117. d 118. a 119. b 120. d 121. a 122. b 123. c 124. a 125. d 126. b 127. b Powered by Cognero
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Chapter 17 - Financial Statement Analysis 128. b 129. b 130. c 131. b 132. c 133. b 134. a 135. c 136. d 137. c 138. b 139. d 140. b 141. g 142. e 143. a 144. h 145. f 146. c 147. g 148. c 149. a 150. d 151. e 152. f Powered by Cognero
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Chapter 17 - Financial Statement Analysis 153. c 154. b 155. h 156. f 157. Cash Accounts receivable
$20,000 increase ($70,000 – $50,000), or 40% $9,600 decrease ($70,400 – $80,000), or (12%)
158.
Sales Cost of merchandise sold Gross profit
(a) Year 2 to 3 Amount Percent $25,000 7.5% 20,000 9.8 $ 5,000 3.8
(b) Year 1 to 2 Amount Percent $45,000 15.5% 20,000 10.8 $25,000 23.8
159. a. $4,500 ÷ $30,000 = 15% decrease b. $16,200 ÷ $90,000 = 18% increase c. $7,000 ÷ $70,000 = 10% increase d. $54,000 ÷ $600,000 = 9% increase e. $40,000 ÷ $200,000 = 20% decrease f. $8,000 ÷ $20,000 = 40% increase 160. a. Young Technologies Inc. Comparative Income Statement For the Years Ended December 31, Year 2 and Year 1
Sales Cost of merchandise sold Gross profit Selling expenses Administrative expenses Total expenses Income from operations Income tax expense Net income
Year 2 Amount Percent $500,000 100% 325,000 65 $175,000 35% $ 70,000 14% 75,000 15 $145,000 29% $ 30,000 6% 10,500 2 $ 19,500 4%
Year 1 Amount Percent $440,000 100% 242,000 55 $198,000 45% $ 79,200 18% 70,400 16 $149,600 34% $ 48,400 11% 16,400 4 $ 32,000 7%
b. The vertical analysis indicates that the cost of merchandise sold as a percent of sales increased by 10% (65% vs. 55%) between the 2 years. Selling and administrative expenses as a percentage of sales decreased by 5%, and income tax expense decreased by 2%. Overall, net income as a percent of sales dropped by 3%. 161. Powered by Cognero
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Chapter 17 - Financial Statement Analysis Cash Accounts receivable
$4,400 increase ($62,400 – $58,000), or 7.6% $8,000 decrease ($42,000 – $50,000), or (16%)
162. Sales Cost of merchandise sold Gross profit
Amount Percentage $175,000 100% ($175,000 ÷ $175,000) 105,000 60 ($105,000 ÷ $175,000) $ 70,000 40% ($70,000 ÷ $175,000)
163. Ford Motor Company is an automobile manufacturer with many aspects within the overall company such as military sales, foundries, and credit and financing operations, and its car sales are usually limited to resellers or large fleet purchasers. Johnson City Ford/Lincoln/Mercury is a local reseller that does not have the diverse operations of Ford Motor Company. Most of its sales, which would include new and used vehicles, would be to ultimate consumers and to smaller fleet operations. Major revenues may come from repairs and upgrades of vehicles. Its “credit” department may actually be a representative of another organization specializing in automobile financing. While they both sell Ford cars, they are not comparable companies. 164. a. Assets Current assets Plant assets Total assets
Increase (Decrease) Year 2 Year 1 Amount Percent $ 445 $280 $165 58.9% 680 520 160 30.8% $1,125 $800 $325 40.6%
Liabilities & Stockholders' Equity Current liabilities $ 285 $120 Long-term debt 255 160 Common stock 325 320 Retained earnings 260 200 Total liabilities and stockholders' $1,125 $800 equity b. Assets Current assets Plant assets Total assets
$165 95 5 60
137.5% 59.4% 1.6% 30.0%
$325
40.6%
Year 2 Year 1 Amount Percent Amount Percent $ 445 39.6% $280 35.0% 680 60.4 520 65.0 $1,125 100.0% $800 100.0%
Liabilities & Stockholders' Equity Current liabilities $ 285 Long-term debt 255 Common stock 325 Retained earnings 260 Total liabilities and stockholders' equity $1,125
25.3% 22.7 28.9 23.1
$120 160 320 200
15.0% 20.0 40.0 25.0
100.0%
$800
100.0%
165. St. Louis Company Powered by Cognero
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Chapter 17 - Financial Statement Analysis Comparative Balance Sheet December 31, Year 2 and Year 1 Year 2 Assets Current assets Property, plant, and equipment Intangible assets Total assets Liabilities Current liabilities Long-term liabilities Total liabilities Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity
Year 1
Increase (Decrease) Amount Percent
$160,000 $130,000 $ 30,000 23.1% 450,000 400,000 50,000 12.5% 20,700 30,000 (9,300) (31.0%) $630,700 $560,000 $ 70,700 12.6%
$ 70,000 $ 80,000 $(10,000) (12.5%) 210,000 250,000 (40,000) (16.0%) $280,000 $330,000 $(50,000) (15.2%) $225,000 $150,000 $ 75,000 125,700 80,000 45,700 $350,700 $230,000 $120,700
50.0% 57.1% 52.5%
$630,700 $560,000 $ 70,700
12.6%
166. (a) Bluestem Company Comparative Income Statement For Years Ended December 31, Year 2 and Year 1
Sales Cost of merchandise sold Gross profit Selling expenses Administrative expenses Total operating expenses Income before income tax expense Income tax expense Net income b.
Year 2 Amount Percent $800,000 100.0% 350,000 43.8 $450,000 56.2% $150,000 18.8% 37,000 4.6 $187,000 23.4%
Year 1 Amount Percent $700,000 100.0% 320,000 45.7 $380,000 54.3% $110,000 15.7% 20,000 2.9 $130,000 18.6%
$263,000 40,000 $223,000
$250,000 32,000 $218,000
32.8% 5.0 27.8%
35.7% 4.6 31.1%
There was a 1.9% decrease in the cost of merchandise sold, and a 1.7% increase in administrative expenses. However, the more significant increase of 3.1% in selling expenses offset the 1.9% decrease in cost of merchandise sold and contributed greatly to the 3.3% decrease in net income.
167. When percentages are utilized rather than dollars, companies that are not the same size can be compared. If Carbondale Chemicals has $10 billion in sales per year and Heartland Chemicals has $500 million in sales per year, these two companies can still be compared by using percentages determined by the analysis. These companies' results can also be compared to industry averages. 168. a. Current Ratio = Current Assets ÷ Current Liabilities = (Cash + Marketable Securities + Accounts Receivable + Inventory) ÷ Accounts Payable = ($230,000 + $50,000 + Powered by Cognero
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Chapter 17 - Financial Statement Analysis $200,000 + $240,000) ÷ $300,000 = $720,000 ÷ $300,000 = 2.4 b.
Quick Ratio = Quick Assets ÷ Current Liabilities = (Cash + Marketable Securities + Accounts Receivable) ÷ Accounts Payable = ($230,000 + $50,000 + $200,000) ÷ $300,000 = $480,000 ÷ $300,000 = 1.6
169. a. Current Ratio = Current Assets ÷ Current Liabilities = (Cash + Marketable Securities + Accounts Receivable + Inventory) ÷ Accounts Payable = ($400,000 + $50,000 + $150,000 + $200,000) ÷ $250,000 = $800,000 ÷ $250,000 = 3.2 b.
170. a.
b.
Quick Ratio = Quick Assets ÷ Current Liabilities = (Cash + Marketable Securities + Accounts Receivable) ÷ Accounts Payable = ($400,000 + $50,000 + $150,000) ÷ $250,000 = $600,000 ÷ $250,000 = 2.4
Current Ratio = Current Assets ÷ Current Liabilities = (Cash + Marketable Securities + Accounts Receivable + Inventory) ÷ Accounts Payable = ($190,000 + $160,000 + $240,000 + $350,000) ÷ $600,000 = 1.6 Quick Ratio = Quick Assets ÷ Current Liabilities = (Cash + Marketable Securities + Accounts Receivable) ÷ Accounts Payable = ($190,000 + $160,000 + $240,000) ÷ $600,000 = 1.0
171. The amount of working capital and the change in working capital are just two indicators of the strength of the current position. A comparison of the current and quick ratios, along with the amount of working capital, gives a better analysis of the current position. Working capital Current ratio Quick ratio
Year 2 $100,000 2.0 0.8
Year 1 $90,000 2.5 1.4
Although working capital has increased, the current ratio has fallen from 2.5 to 2.0, and the quick ratio has fallen from 1.4 to 0.8. Reductions in the current and quick ratios imply that it has become difficult for the company to convert its assets into cash to pay off its short-term liabilities, so the current position has deteriorated. 172. a. Accounts Receivable Turnover = Sales ÷ Average Accounts Receivable = $720,000 ÷ $45,000 = 16.0 b.
Number of Days’ Sales in Receivables = Average Accounts Receivable ÷ Average Daily Sales = $45,000 ÷ ($720,000 ÷ 365) = $45,000 ÷ $1,972.6 = 22.8
173. a. Accounts Receivable Turnover = Sales ÷ Average Accounts Receivable = $1,200,000 ÷ $50,000 = 24.0 b.
Number of Days’ Sales in Receivables = Average Accounts Receivable ÷ Average Daily Sales = $50,000 ÷ ($1,200,000 ÷ 365) = $50,000 ÷ $3,287.7 = 15.2
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Chapter 17 - Financial Statement Analysis 174. (a) Inventory Turnover = Cost of Merchandise Sold ÷ Average Merchandise Inventory = $610,000 ÷ $80,000 = 7.6 (b) Number of Days’ Sales in Inventory = Average Merchandise Inventory ÷ Average Daily Cost of Merchandise Sold = $80,000 ÷ ($610,000 ÷ 365) = $80,000 ÷ $1,671.2 = 47.9 days 175. a. (1) Inventory Turnover = Cost of Merchandise Sold ÷ Average Merchandise Inventory Year 2 $500,800 ($72,000 + $80,000) ÷ 2 Year 1
$606,000 ($80,000 + $64,000) ÷ 2
= 6.6
= 8.4
(2) Number of Days’ Sales in Inventory = Average Merchandise Inventory ÷ Average Daily Cost of Merchandise Sold Year 2
($72,000 + $80,000) ÷ 2 $1,372*
= 55.4
Year 1
($80,000 + $64,000) ÷ 2 $1,660**
= 43.4
*$1,372 = $500,800 ÷ 365 days **$1,660 = $606,000 ÷ 365 days b.
The inventory position of the business has deteriorated. The inventory turnover has decreased, while the number of days’ sales in inventory has increased. The sales volume has declined faster than the inventory has declined, thus resulting in the deteriorating inventory position.
176. a. Working Capital = Current Assets – Current Liabilities = (Cash + Temporary Investments + Accounts Receivable + Inventory + Prepaid Expenses) ÷ (Accounts Payable + Accrued Liabilities + Income Tax Payable + Notes Payable) = ($154,000 + $350,000 + $210,000 + $240,000 + $15,000) – ($245,000 + $4,000 + $10,000 + $85,000) = $969,000 – $344,000 = $625,000 b.
Current Ratio = Current Assets ÷ Current Liabilities = (Cash + Temporary Investments + Accounts Receivable + Inventory + Prepaid Expenses) ÷ (Accounts Payable + Accrued Liabilities + Income Tax Payable + Notes Payable) = ($154,000 + $350,000 + $210,000 + $240,000 + $15,000) ÷ ($245,000 + $4,000 + $10,000 + $85,000) = $969,000 ÷ $344,000 = 2.8
c.
Quick Ratio = Quick Assets ÷ Current Liabilities = (Cash + Temporary Investments + Accounts Receivable) ÷ (Accounts Payable + Accrued Liabilities + Income Tax Payable + Notes Payable) = ($154,000 + $350,000 + $210,000) ÷ ($245,000 + $4,000 + $10,000 + $85,000) = $714,000 ÷ $344,000 = 2.1
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Chapter 17 - Financial Statement Analysis 177. a. Current Year Preceding Year (1)
Sales on Account ÷ Average Accounts Receivable (net) $950,000 ÷ $123,000 $825,000 ÷ $95,000
(2)
7.72 8.68
Average Accounts Receivable ÷ Average Daily Sales on Account* $123,000 ÷ $2,603 $95,000 ÷ $2,260
47.25 42.04
*Current: $950,000 ÷ 365 = $2,603 Preceding: $825,000 ÷ 365 = $2,260 b.
Although sales increased during the current year, a favorable change, several unfavorable changes are disclosed by the analysis. The accounts receivable turnover has declined from 8.68 in the preceding year to 7.72 in the current year. Based on credit terms of n/45, a turnover of less than 8 indicates that some receivables are not being collected within the 45-day period. Likewise, the number of days' sales in receivables indicates an unfavorable change, increasing from 42.04 at the end of the preceding year to 47.25 at the end of the current year.
178. a. Current Year (1)
(2)
Inventory Turnover = Cost of Merchandise Sold ÷ Average Merchandise Inventory $2,000,000 ÷ $372,000 $2,700,000 ÷ $352,000 Number of Days’ Sales in Inventory = Average Merchandise Inventory ÷ Average Daily Cost of Merchandise Sold* $372,000 ÷ 5,479 days $352,000 ÷ 7,397 days
Preceding Year
5.4 7.7
67.90 47.59
*Average Daily Cost of Merchandise Sold = Cost of Merchandise Sold ÷ 365 days $2,000,000 ÷ 365 5,479 days $2,700,000 ÷ 365 7,397 days b.
Sales decreased while gross profit increased. The inventory turnover declined and the number of days' sales in inventory increased, which are unfavorable changes.
179. a. Ratio of Fixed Assets to Long-Term Liabilities = Fixed Assets ÷ Long-Term Liabilities = $1,250,000 ÷ $500,000 = 2.5 Powered by Cognero
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Chapter 17 - Financial Statement Analysis b. Ratio of Liabilities to Stockholders' Equity = Total Liabilities ÷ Total Stockholders’ Equity = $672,000 ÷ $1,680,000 = 0.4 180. Times Interest Earned = (Income Before Income Tax + Interest Expense) ÷ Interest Expense = ($600,000 + $150,000) ÷ $150,000 = 5.0 181. a. Year 2 Ratio of fixed assets to long-term liabilities: $1,473,600 ÷ $703,000 $1,275,300 ÷ $545,000 b. Ratio of liabilities to stockholders' equity: $1,016,500 ÷ $1,282,600 $854,600 ÷ $1,095,000 c.
Year 1
2.10 2.34
0.79 0.78
In the second year, the margin of safety to creditors is lower. There are fewer fixed assets on a proportionate basis to protect the interests of the long-term creditors than in the first year. Also, the ratio of liabilities to stockholders’ equity has risen slightly in the second year, which indicates that more of the company is financed by debt rather than equity.
182. a. Times Interest Earned = (Income Before Income Tax + Interest Expense) ÷ Interest Expense = ($1,500,000 + $500,000) ÷ $500,000 = 4.0 times b.
Earnings per Share on Common Stock = (Net Income – Preferred Dividends) ÷ Common Shares Outstanding = ($1,300,000 – $100,000) ÷ 200,000 shares = $6.00
c.
Price-Earnings Ratio = Market Price per Share ÷ Earnings per Share = $75.00 ÷ $6.00 = 12.5
d.
Dividends per Share of Common Stock = Common Dividends ÷ Common Shares Outstanding = $150,000 ÷ 200,000 shares = $0.75
e.
Dividend Yield = Common Dividend per Share ÷ Share Price = $0.75 ÷ $75.00 = 1%
183. Solvency is the ability of a company to meet its financial obligations (debts) as they become due. Profitability is the ability of a company to earn income. They are interrelated because a company that cannot earn a profit will likely have difficulty paying its debts. In turn, a company that cannot pay its debts will have difficulty obtaining credit. A lack of credit can prevent a company from taking actions (i.e., expansion) that would increase profitability. 184. Asset Turnover Ratio = Sales ÷ Average Total Assets = $2,400,000 ÷ $1,500,000 = 1.6 Powered by Cognero
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Chapter 17 - Financial Statement Analysis 185. Asset Turnover Ratio = Sales ÷ Average Total Assets = $2,520,000 ÷ $1,400,000 = 1.8 186. Return on Total Assets = (Net Income + Interest Expense) ÷ Average Total Assets = ($180,000 + $20,000) ÷ $2,000,000 = 10% 187. Earnings per Share on Common Stock = (Net Income – Preferred Dividends) ÷ Shares of Common Stock Outstanding = ($150,000 – $10,000) ÷ 20,000 = $7.00 188. a. Return on Stockholders’ Equity = Net Income ÷ Average Stockholders’ Equity = $350,000 ÷ $1,000,000 = 35.0% b.
Return on Common Stockholders’ Equity = (Net Income – Preferred Dividends) ÷ Average Common Stockholders’ Equity = ($350,000 – $50,000) ÷ $800,000 = 37.5%
189. Earnings per Share on Common Stock = (Net Income – Preferred Dividends) ÷ Shares of Common Stock Outstanding = ($270,000 – $10,000) ÷ 20,000 = $13.00 Price-Earnings Ratio = Market Price per Share of Common Stock ÷ Earnings per Share on Common Stock = $36.40 ÷ $13.00 = 2.8 190. a. Return on Total Assets = (Net Income + Interest Expense ) ÷ Average Total Assets Year 3: ($242,000 + $100,000) ÷ $2,850,000* = 12.0% Year 2: ($308,000 + $100,000) ÷ $2,550,000** = 16.0% *($3,000,000 + $2,700,000) ÷ 2 **($2,700,000 + $2,400,000) ÷ 2 Return on Stockholders’ Equity = Net Income ÷ Average Stockholders’ Equity Year 3: $242,000 ÷ $1,611,000* = 15.0% Year 2: $308,000 ÷ $1,348,000** = 22.8% *($1,726,000 + $1,496,000) ÷ 2 **($1,496,000 + $1,200,000) ÷ 2 Return on Common Stockholders’ Equity = (Net Income – Preferred Dividends) ÷ Average Common Stockholders’ Equity Year 3: ($242,000 – $12,000) ÷ $1,411,000* = 16.3% Year 2: ($308,000 – $12,000) ÷ $1,148,000** = 25.8% *($1,526,000 + $1,296,000) ÷ 2 **($1,296,000 + $1,000,000) ÷ 2 b.
The profitability ratios indicate that the Winter Group’s profitability has deteriorated. Most of this change is from net income falling from $308,000 in Year 2 to $242,000 in Year 3. The cost of debt is 10%. Since the return on total assets exceeds this amount in either year, there is positive leverage from use of debt. However, this leverage is greater in Year 2 because the return on total assets exceeds the cost of debt by a greater amount in Year 2.
191. a. Asset Turnover Ratio Powered by Cognero
= Sales ÷ Average Total Assets = $1,300,000 ÷ ($2,200,000 – Page 47
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Chapter 17 - Financial Statement Analysis $400,000) = 0.7 b.
Return on Total Assets
= (Net Income + Interest Expense) ÷ Average Total Assets = ($250,000 + $0) ÷ $2,200,000 = 11.4%
c.
Return on Common Stockholders' Equity = ($250,000 – $0) ÷ $1,000,000 = 25%
d.
Earnings per Share on Common Stock
= $250,000 ÷ 10,000 = $25.00 per share
192. a. Earnings per Share = (Net Income – Preferred Dividends) ÷ Common Shares Outstanding = ($600,000 – $200,000) ÷ 250,000 shares = $1.60 b.
Price-Earnings Ratio = Market Price per Share ÷ Earnings per Share = $20.00 ÷ $1.60 = 12.5
c.
Dividends per Share = Common Dividends ÷ Common Shares Outstanding = $125,000 ÷ 250,000 shares = $0.50
d.
Dividend Yield = Dividends per Share of Common Stock ÷ Market Price per Share of Common Stock = $0.50 ÷ $20.00 = 2.5%
193. a. Return on Total Assets
b.
Return on Stockholders' Equity
= (Net Income + Interest Expense) ÷ Average Total Assets = ($110,000 + $48,000) ÷ [($2,255,000 + $2,220,000) ÷ 2] = $158,000 ÷ $2,237,500 = 7.1%
= Net Income ÷ Average Stockholders' Equity = $110,000 ÷ [($1,680,000 + $1,610,000) ÷ 2] $110,000 ÷ $1,645,000 = 6.7%
c. Return on Common Stockholders' Equity = ($110,000 – $25,000) ÷ [($1,430,000 + $1,360,000) ÷ 2] = $85,000 ÷ $1,395,000 = 6.1% Powered by Cognero
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Chapter 17 - Financial Statement Analysis d. Earnings per Share on Common Stock = ($110,000 – $25,000) ÷ 48,000 = $85,000 ÷ 48,000 = $1.77 e. Price-Earnings Ratio on Common Stock
= Market Price per Share of Common Stock/Earnings per Share of Common Stock = $25 ÷ $1.77 = 14.1%
f. Dividend Yield
= Dividends per Share of Common Stock ÷ Market Price per Share of Common Stock = $1.46 ÷ $25 = 5.8%
194. a. Return on Stockholders’ Equity = Net Income ÷ Average Stockholders’ Equity = $295,000 ÷ $1,000,000 = 29.5% Return on Common Stockholders’ Equity = (Net Income – Preferred Dividends) ÷ Average Common Stockholders' Equity = ($295,000 – $30,000) ÷ $700,000 = 37.9%
b.
195. The price-earnings (P/E) ratio on common stock measures a company’s future earnings prospects. Therefore, Tau Company, with the highest P/E ratio, would be expected to have the best potential for future common stock price appreciation. 196. Dividend Yield = Dividends per Share of Common Stock ÷ Market Price per Share of Common Stock = $25 ÷ $115 = 21.7% 197. Price-Earnings Ratio = Market Price per Share of Common Stock ÷ Earnings per Share on Common Stock = $115 ÷ $102 = 1.1 198. The MD&A section typically includes: •
Management’s analysis and explanations of any significant changes between the current and prior years’ financial statements.
•
Important accounting principles or policies that could affect interpretation of the financial statements, including the effect of changes in accounting principles or the adoption of new principles.
•
Management’s assessment of the company’s liquidity and the availability of capital to the company.
•
Significant risk exposures that might affect the company.
•
Any “off-balance-sheet” arrangements such as leases not included directly on the financial statements.
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Chapter 17 - Financial Statement Analysis 199. Earnings per common share: Income from continuing operations* Loss on discontinued operations ($200,000 ÷ 100,000 shares) Net income
*Net income Loss on discontinued operations Income from continuing operations
$25.40 (2.00) $23.40
$2,500,000 (200,000) $2,700,000
Earnings per Share on Common Stock = (Income from Continuing Operations – Preferred Dividends) ÷ Common Shares Outstanding = ($2,700,000 – $160,000) ÷ 100,000 shares = $25.40 per share 200. a. Zeus Company Partial Income Statement For the Year Ended December 31 Income from continuing operations before income tax expense Income tax expense Income from continuing operations Loss on discontinued operations (net of tax) Net income
$500,000 200,000 $300,000 (90,000) $210,000
b. Zeus Company Partial Income Statement For the Year Ended December 31 Earnings per common share: Income from continuing operations Loss from discontinued operations Net income
$7.50* (2.25)** $5.25
*$7.50 = $300,000 ÷ 40,000 shares **$(2.25) = $(90,000) ÷ 40,000 shares 201. New Orleans Adventures Income Statement For the Year Ended December 31, 20Y3 Sales Cost of merchandise sold Gross profit Operating expenses Income from continuing operations before Powered by Cognero
$24,500,000 10,900,000 $13,600,000 6,300,000 Page 50
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Chapter 17 - Financial Statement Analysis income tax expense Income tax expense Income from continuing operations Loss on discontinued operations Net income
Powered by Cognero
$ 7,300,000 500,000 $ 6,800,000 (100,000) $ 6,700,000
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Chapter 18 - Introduction to Managerial Accounting True / False 1. Managerial accounting reports must be prepared according to generally accepted accounting principles. a. True b. False 2. Managerial accounting uses only past data in reports to aid management in the decision-making process. a. True b. False 3. Managerial accounting information includes both historical and estimated data. a. True b. False 4. Since there are few rules to restrict how an organization chooses to arrange its own internal data for decision making, managerial accounting provides ample opportunity for creativity and change. a. True b. False 5. A diagram of the operating structure of an organization is called an organization chart. a. True b. False 6. In most business organizations, the chief accountant is called the treasurer. a. True b. False 7. In most business organizations, the chief management accountant is called the controller. a. True b. False 8. A staff department or unit is one that provides services, assistance, and advice to the departments with line or other staff responsibilities. a. True b. False 9. The vice presidents of production and sales and the controller hold line positions in most large organizations. a. True b. False 10. A staff department has no direct authority over a line department. a. True b. False 11. The controller's staff consists of management accountants responsible for systems and procedures, general accounting, budgets, taxes, and cost accounting. Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting a. True b. False 12. Managerial accounting reports must be useful to the user of the information. a. True b. False 13. Planning is the process of monitoring operating results and comparing actual results with the expected results. a. True b. False 14. Planning is the process of developing the company’s objectives or goals and translating these objectives into courses of action. a. True b. False 15. Controlling deals with choosing goals and deciding how to achieve them. a. True b. False 16. Controlling is the process of monitoring operating results and comparing actual results with the expected results. a. True b. False 17. Managers use managerial accounting information to evaluate performance of a company’s operation. a. True b. False 18. Managerial accounting information is for external as well as internal stakeholders. a. True b. False 19. A report analyzing how many products need to be sold to cover operating costs is not typically a managerial accounting report. a. True b. False 20. A report analyzing the dollar savings of purchasing new equipment to speed up the production process is a managerial accounting report. a. True b. False 21. A performance report that identifies the amount of employee downtime is a financial accounting report. a. True b. False Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting 22. Managerial accounting provides useful information to managers on product costs. a. True b. False 23. The payment of dividends is an example of a cost. a. True b. False 24. A cost is a payment of cash for the purpose of generating revenues. a. True b. False 25. Goods that are part way through the manufacturing process, but not yet complete, are referred to as materials inventory. a. True b. False 26. The cost of a manufactured product generally consists of direct materials cost, direct labor cost, and factory overhead cost. a. True b. False 27. The cost of a material that is an integral part of the finished product is classified as factory overhead cost. a. True b. False 28. The cost of wages paid to employees directly involved in converting materials to finished product is classified as direct labor cost. a. True b. False 29. If the cost of employee wages is not a significant portion of the total product cost, the wages are classified as direct materials cost. a. True b. False 30. For a construction contractor, the wages of carpenters would be classified as factory overhead cost. a. True b. False 31. For an automotive repair shop, the wages of mechanics would be classified as direct labor cost. a. True b. False 32. Costs other than direct materials and direct labor incurred in the manufacturing process are classified as factory overhead. Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting a. True b. False 33. Depreciation on factory plant and equipment is an example of factory overhead cost. a. True b. False 34. Cost of oil used to lubricate factory machinery and equipment is an example of a direct materials cost. a. True b. False 35. If the cost of materials is not a significant portion of the total product cost, the materials may be classified as part of factory overhead cost. a. True b. False 36. Factory overhead cost is sometimes referred to as factory burden. a. True b. False 37. Conversion cost is the combination of direct labor cost and factory overhead cost. a. True b. False 38. Conversion cost is the combination of direct materials cost and factory overhead cost. a. True b. False 39. Factory overhead is an example of a product cost. a. True b. False 40. Direct labor costs are included in the conversion costs of a product. a. True b. False 41. Materials and labor costs that are not directly traced to the finished product are classified as factory overhead. a. True b. False 42. Materials and labor costs that are not directly traced to the finished product are classified as cost of goods sold. a. True b. False 43. Indirect labor would be included in factory overhead. a. True Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting b. False 44. A cost object indicates how costs are related or identified. a. True b. False 45. Direct costs are specifically traced to a cost object. a. True b. False 46. Indirect costs are specifically traced to a cost object. a. True b. False 47. Period (nonmanufacturing) costs are classified into two categories: selling and administrative. a. True b. False 48. Prime costs are the combination of direct labor costs and factory overhead costs. a. True b. False 49. Prime costs are the combination of direct materials and direct labor costs. a. True b. False 50. Conversion costs are the combination of direct labor, direct material, and factory overhead costs. a. True b. False 51. Manufacturers use machinery and labor to convert direct materials into finished products. a. True b. False 52. Period costs include direct materials and direct labor. a. True b. False 53. Period costs can be found on both the balance sheet and the income statement. a. True b. False 54. Product costs are not expensed until the product is sold. a. True b. False Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting 55. The plant manager’s salary in a manufacturing business would be considered an indirect cost. a. True b. False 56. Operating expenses are product costs and are expensed when the product is sold. a. True b. False 57. Period costs are operating costs that are expensed in the period in which the goods are sold. a. True b. False 58. Factory overhead includes all manufacturing costs except direct materials and direct labor. a. True b. False 59. Labor costs that are directly traceable to the product are part of factory overhead. a. True b. False 60. Product costs include direct labor and advertising expense. a. True b. False 61. Indirect labor and indirect materials would be part of factory overhead. a. True b. False 62. Prime costs consist of factory overhead and direct labor. a. True b. False 63. Conversion costs consist of product costs and period costs. a. True b. False 64. Prime costs consist of direct materials, indirect materials, and direct labor. a. True b. False 65. Sustainability practice focuses on short-term solutions to sustain company profits. a. True b. False 66. An example of an eco-efficiency measure would be cost savings generated by recycling. a. True Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting b. False 67. The Sustainability Accounting Standards Board (SASB) standards are required, just as GAAP standards are required. a. True b. False 68. Only the value of the inventory that is sold will appear on the income statement. a. True b. False 69. On the balance sheet for a manufacturing business, inventories are categorized as materials, work in process, and finished goods. a. True b. False 70. The statement of cost of goods manufactured is an extension of the income statement for a manufacturing company. a. True b. False Multiple Choice 71. In order to be useful to managers, managerial accounting reports should possess all of the following characteristics except a. provide objective measures of past operations and subjective estimates about future decisions b. be prepared in accordance with generally accepted accounting principles c. be provided at any time management needs information d. be prepared to report information for any unit of the business to support decision making 72. What is the primary criterion for the preparation of managerial accounting reports? a. relevance of the reports b. manager needs c. timing of the reports d. cost of the reports 73. Which of the following is most associated with managerial accounting? a. must follow GAAP b. may rely on estimates and forecasts c. is prepared for users outside the organization d. always reports on the entire entity 74. Which of the following is most associated with financial accounting? a. can have both objective and subjective information b. can be prepared periodically, or as needed c. prepared in accordance with GAAP d. can be prepared for the entity or segment Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting 75. Which of the following statements is false? a. There is no overlap between financial and managerial accounting. b. Managerial accounting sometimes relies on past information. c. Managerial accounting does not need to conform to GAAP. d. Financial accounting must conform to GAAP. 76. In most business organizations, the chief management accountant is called the a. chief accounting officer b. controller c. chairman of the board d. chief executive officer 77. All of the following employees hold line positions except a. vice president of production b. vice president of finance c. manager of equipment d. vice president of sales 78. The controller's staff often consists of several management accountants. All of the following would most likely be on the controller's staff except a. general accountants b. budget analysts c. investments and shareholder relations managers d. cost accountants 79. Managerial accounting reports are a. prepared according to GAAP b. prepared according to management needs c. prepared periodically only d. related to the entire business entity only 80. Who are the individuals charged with the responsibility for directing the day-to-day operations of a business? a. investors b. managers c. shareholders d. customers 81. Which of the following are basic phases of the management process? a. supervising and directing b. decision making and supervising c. organizing and directing d. planning and controlling 82. What term is used to describe the process of monitoring operating results and comparing actual results with the expected results? Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting a. improving b. controlling c. directing d. planning 83. Accounting designed to meet the needs of decision makers inside the business is a. general accounting b. financial accounting c. managerial accounting d. external accounting 84. What term is used to describe the process of developing the organization’s objectives and translating those into courses of action? a. supervising b. planning c. improving d. decision making 85. The primary goal of managerial accounting is to provide information to a. investors b. creditors c. management d. external auditors 86. Which of the following is true of preparing managerial accounting reports? a. Managerial accounting reports are prepared according to GAAP. b. Managerial accounting reports must contain objective data only. c. Managerial accounting reports may be prepared at fixed intervals or on an as-needed basis. d. Managerial accounting reports are prepared for external users and company management. 87. Which of the following is not a characteristic of useful managerial accounting reports? a. accurate b. adhere to GAAP c. historical and estimated data d. prepared as needed 88. Managers use managerial accounting information for all of the following except to a. evaluate the company’s stock performance b. analyze the performance of a company’s operations c. support long-term planning decisions d. determine the cost of manufacturing a product 89. Managerial accountants could prepare all of the following reports except a(n) a. performance report identifying amounts of scrap Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting b. control report comparing direct material usage over time c. sales report targeting monthly sales and potential bonuses d. annual report for external regulators such as the SEC 90. Compute conversion costs given the following data: direct materials, $347,500; direct labor, $196,300; factory overhead, $187,900; and selling expenses, $45,290. a. $543,800 b. $187,900 c. $731,700 d. $384,200 91. Which of the following is not true regarding direct materials for a bakery? a. Flour and sugar would probably be direct materials. b. Eggs would probably be a direct material. c. Oil to lubricate factory machines would not be a direct material. d. Paper cupcake liners, that become part of the product, must be accounted for as direct materials. 92. The cost of a manufactured product generally consists of which of the following costs? a. direct materials cost and factory overhead cost only b. direct labor cost and factory overhead cost only c. direct labor cost, direct materials cost, and factory overhead cost d. direct materials cost and direct labor cost only 93. Materials must have which two qualities in order to be classified as direct materials? a. They must be classified as both prime costs and conversion costs. b. They must be introduced into the process in both work in process inventories and finished goods inventories. c. They must be an integral part of the finished product, but can be an insignificant portion of the total product cost. d. They must be an integral part of the finished product and a significant portion of the total product cost. 94. Which of the following is an example of direct materials cost for an automobile manufacturer? a. cost of oil lubricants for factory machinery b. cost of wages of assembly worker c. salary of production supervisor d. cost of interior upholstery 95. A plant manager’s salary is a(n) a. direct cost and an indirect cost b. direct cost c. indirect cost d. period cost 96. If the cost of a material is a small portion of total production cost, it may be classified as part of a. direct labor cost Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting b. selling and administrative costs c. miscellaneous costs d. factory overhead cost 97. The cost of wages paid to employees directly involved in the manufacturing process in converting materials into finished products is classified as a a. factory overhead cost b. direct labor cost c. miscellaneous cost d. direct materials cost 98. Which of the following is an example of direct labor cost for a cell phone manufacturer? a. cost of oil lubricants for factory machinery b. cost of wages of assembly worker c. salary of plant supervisor d. cost of phone components 99. Costs other than direct materials cost and direct labor cost incurred in the manufacturing process are classified as a. factory overhead costs b. miscellaneous expenses c. product costs d. period costs 100. Which of the following is an example of a factory overhead cost? a. repair and maintenance cost on an administrative building b. factory heating and lighting cost c. insurance premiums on salespersons' automobiles d. president's salary 101. Period costs include a. current assets on the balance sheet b. current liabilities on the balance sheet c. operating costs that are shown on the income statement when products are sold d. operating costs that are shown on the income statement in the period in which they are incurred 102. Another term for factory overhead is a. surplus b. period cost c. supervisory cost d. factory burden 103. Which of the following costs are conversion costs? a. direct labor cost and factory overhead cost b. direct materials cost and direct labor cost Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting c. factory overhead cost d. direct materials cost and factory overhead cost 104. Goods that are partially completed by a manufacturer are a. merchandise inventory b. work in process inventory c. finished goods inventory d. materials inventory 105. What term refers to the cost of changing direct materials into a finished manufactured product? a. factory overhead cost b. period cost c. conversion cost d. direct labor cost 106. Which of the following items would not be classified as part of factory overhead? a. direct labor used b. amortization of manufacturing patents c. production supervisors' salaries d. factory supplies used 107. Which of the following is part of factory overhead cost? a. sales commissions b. depreciation of factory equipment and machines c. depreciation of salesperson's vehicle d. direct materials used 108. Which of the following manufacturing costs is an indirect cost of producing a product? a. oil lubricants used for factory machinery b. commissions for sales personnel c. hourly wages of an assembly worker d. memory chips for a microcomputer manufacturer 109. All of the following could be considered a direct material except a. steel b. fabric c. glue d. lumber 110. Prime costs are a. direct materials and factory overhead b. direct materials and direct labor c. direct labor and factory overhead d. period costs and factory overhead Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting 111. A product cost is a. expensed in the period in which it is manufactured b. shown with current liabilities on the balance sheet c. shown with operating expenses on the income statement d. expensed in the period the product is sold 112. Conversion costs are a. direct materials and direct labor b. direct materials and factory overhead c. factory overhead and direct labor d. direct materials and indirect labor 113. Which of the following is not a prime cost? a. plant janitor’s wages b. direct labor wages c. machine operator wages d. assembly line wages Use the information provided for Darwin Company to answer the questions that follow. Darwin Company Sales Direct materials used Depreciation on factory equipment Indirect labor Direct labor Factory rent Factory utilities Sales salaries expense Office salaries expense Indirect materials
$76,500 7,300 4,700 5,900 10,500 4,200 1,200 15,600 8,900 1,200
114. Darwin Company's product costs are a. $24,500 b. $30,300 c. $29,200 d. $35,000 115. Darwin Company's period costs are a. $24,500 b. $30,300 c. $29,200 d. $35,000 116. Product costs a. appear only on the balance sheet Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting b. appear only on the income statement c. are expensed as costs are incurred for direct labor, direct material, and factory overhead d. appear on both the income statement and balance sheet 117. All of the following are product costs except a. direct materials b. sales and administrative expenses c. direct labor d. factory overhead 118. Indirect labor and indirect materials are classified as a. factory overhead and product costs b. factory overhead and period costs c. operating costs and period costs d. operating costs and product costs 119. An example of a period cost is a. advertising expense b. indirect materials c. depreciation on factory equipment d. property taxes on plant facilities 120. Direct labor and direct materials are a. product costs and expensed when the goods are sold b. product costs and expensed when incurred c. period costs and expensed when incurred d. period costs and expensed when the goods are sold 121. Indirect costs incurred in a manufacturing environment that are not traced directly to a product are treated as a. period costs and expensed when incurred b. product costs and expensed when the goods are sold c. product costs and expensed when incurred d. period costs and expensed when the goods are sold 122. Rent expense on a factory building would be treated as a a. period cost b. product cost c. direct cost d. direct materials cost 123. Insurance expense incurred on a factory building would be treated as a a. direct cost b. period cost c. product cost Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting d. selling cost Use the information provided for Jensen Company to answer the questions that follow. Jensen Company Direct materials used Direct labor incurred Factory overhead incurred Operating expenses
$345,000 250,000 400,000 175,000
124. Jensen Company’s period costs are a. $345,000 b. $250,000 c. $400,000 d. $175,000 125. Jensen Company’s product costs are a. $995,000 b. $920,000 c. $825,000 d. $770,000 126. Which of the following may not be a factory overhead cost? a. materials used directly in the manufacturing process of the product b. insurance on factory equipment c. salaries of production supervisors d. property tax on factory building 127. Factory overhead includes a. factory rent and direct labor b. direct materials and direct labor c. indirect materials and direct materials d. indirect labor and indirect materials 128. All of the following are examples of indirect labor except a. maintenance personnel b. janitorial personnel c. machine operators d. plant managers 129. Which of the following is not an example of a sustainable business activity? a. use of wind turbines to generate energy b. crop rotation c. expanded public transportation systems d. reduction of employee idle time Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting 130. Replacing light fixtures with energy-efficient lighting is an example of which eco-efficiency measure? a. material use efficiency b. energy efficiency c. waste efficiency d. fuel efficiency 131. Which of the following accounts will not be found on the statement of cost of goods manufactured? a. Factory Overhead b. Work in Process c. Purchases d. Cost of Goods Sold 132. Given the following data: Cost of materials used Direct labor costs Factory overhead Work in process, beginning Work in process, ending Finished goods, beginning Finished goods, ending
$45,000 48,000 39,000 28,000 18,000 28,000 18,000
What is the cost of goods sold? a. $152,000 b. $142,000 c. $10,000 d. $128,000 133. Given the following data: Beginning raw materials inventory Materials purchased Ending raw materials inventory
$30,000 65,000 40,000
What is the amount of raw materials used? a. $5,000 b. $55,000 c. $75,000 d. $30,000 134. A company manufactured 50,000 units of a product at a cost of $450,000. It sold 45,000 units at $15 each. The gross profit is a. $750,000 b. $240,000 c. $600,000 d. $270,000 Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting 135. The following information is taken from the financial records of Gunner Manufacturing: Cost of materials used Direct labor costs Factory overhead Work in process, beginning Work in process, ending
$45,000 48,000 39,000 18,000 28,000
What is the cost of goods manufactured? a. $178,000 b. $132,000 c. $122,000 d. $142,000 136. Which of the following are reported on the income statement as part of cost of goods? a. administrative expenses b. period costs c. cost of goods manufactured d. operating expenses 137. What is the purpose of the statement of cost of goods manufactured? a. to determine the ending materials inventory b. to determine the ending work in process inventory c. to determine the amount transferred to finished goods d. All of these choices 138. Costs on the income statement for both a merchandiser and a manufacturer would be a. operating expenses b. direct materials c. direct labor incurred d. cost of goods manufactured 139. Purchases on the income statement of a retail business is comparable to _____ on the income statement of a manufacturing business. a. finished goods b. cost of merchandise available c. cost of goods manufactured d. work in process 140. Cost of goods sold for a manufacturer equals cost of goods manufactured plus a. beginning work in process inventory less ending work in process inventory b. ending work in process inventory less beginning work in process inventory c. beginning finished goods inventory less ending finished goods inventory d. ending finished goods inventory less beginning finished goods inventory 141. Given the following data: Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting Work in process, beginning Work in process, ending Direct labor costs Cost of goods manufactured Factory overhead
$14,000 20,000 4,000 8,000 8,000
Direct materials used is a. $2,000 b. $4,000 c. $8,000 d. $14,000 142. Cost of goods manufactured is equal to a. total manufacturing costs plus ending materials inventory less beginning materials inventory b. cost of goods sold plus beginning work in process inventory less ending work in process inventory c. total manufacturing costs plus ending work in process inventory less beginning work in process inventory d. total manufacturing costs plus beginning work in process inventory less ending work in process inventory 143. Finished goods inventory is reported on the a. income statement as a period cost b. balance sheet as a long-term asset c. balance sheet as a current asset d. income statement as revenue 144. Beginning work in process is equal to a. cost of goods manufactured plus ending work in process minus manufacturing costs incurred during the current period b. cost of goods manufactured minus ending work in process plus manufacturing costs incurred during the current period c. ending work in process plus manufacturing costs incurred during the current period d. manufacturing costs incurred during the current period minus ending work in process 145. All of the following would be reported on the balance sheet as a current asset except a. factory overhead b. materials inventory c. finished goods inventory d. work in process inventory 146. Smith Company reports the following information: Cost of goods manufactured Direct materials used Direct labor incurred Work in process inventory, January 1
$68,250 27,000 25,000 11,000
Factory overhead is 75% of the cost of direct labor. Work in process inventory on December 31 is Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting a. $16,250 b. $8,500 c. $18,750 d. $13,500 147. At the beginning of the current year, Grant Company’s work in process inventory account had a balance of $30,000. During the year, $68,000 of direct materials were used in production, and $66,000 of direct labor costs were incurred. Factory overhead for the year amounted to $90,000. Cost of goods manufactured is $230,000. The balance in Work in Process Inventory on December 31 is a. $24,000 b. $44,000 c. $66,000 d. $36,000 148. A company used $35,000 of direct materials, incurred $73,000 in direct labor cost, and had $114,000 in factory overhead costs during the period. If beginning and ending work in process inventories were $28,000 and $32,000, respectively, the cost of goods manufactured was a. $218,000 b. $226,000 c. $190,000 d. $222,000 149. Cost of goods manufactured during the year is $240,000, and work in process inventory on December 31 is $50,000. Work in process inventory during the year decreased by 60%. Total manufacturing costs incurred are a. $190,000 b. $165,000 c. $290,000 d. $315,000 150. Work in process inventory on December 31 of the current year is $44,000. Work in process inventory increased by 60% during the year. Cost of goods manufactured amounts to $275,000. What are the total manufacturing costs incurred in the current year? a. $291,500 b. $302,000 c. $275,750 d. $233,750 151. Work in process inventory on December 31 is $42,000. Work in process inventory decreased by 40% during the year. Total manufacturing costs incurred amount to $260,000. What is the cost of goods manufactured? a. $232,000 b. $302,000 c. $288,000 d. $190,000 152. Work in process inventory increased by $20,000 during the current year. Cost of goods manufactured was $180,000. Total manufacturing costs incurred are Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting a. $198,000 b. $160,000 c. $189,000 d. $200,000 153. Which of the following will not be found on the balance sheet of a manufacturing company? a. cost of goods sold b. materials c. work in process d. finished goods 154. A company sells goods for $150,000 that cost $54,000 to manufacture. Which of the following statements is true? a. The company will recognize sales on the balance sheet of $150,000. b. The company will recognize $96,000 gross profit on the balance sheet. c. The company will decrease finished goods by $54,000. d. The company will increase finished goods by $54,000. 155. The cost of goods sold for Michaels Manufacturing in the current year was $233,000. The January 1 finished goods inventory balance was $31,600, and the December 31 finished goods inventory balance was $24,200. Cost of goods manufactured during the period was a. $233,000 b. $225,600 c. $288,800 d. $240,400 156. Which of the following would least likely be considered a managerial accounting report? a. a report to analyze potential efficiencies and savings for the purchase of new production equipment b. a schedule of total manufacturing costs incurred c. a statement of cost of goods manufactured d. a statement of stockholders’ equity Matching Match each of the following descriptions to the phase of the management process (a–e) it describes. a. Planning b. Directing c. Controlling d. Improving e. Decision making 157. Used by managers for continuous improvement 158. Managers must continually choose among alternative actions 159. Used by management to develop the organization's objectives and goals Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting 160. Monitoring the operating results of implemented plans and comparing actual results to expected results 161. Process by which managers run day-to-day operations Match each of the following items for a bakery to the type of cost (a–d) it represents. Each type may be used more than once. a. Direct materials b. Direct labor c. Factory overhead d. Nonmanufacturing cost 162. Salesperson commissions 163. Factory rent 164. Depreciation expense—factory 165. Frosting 166. Baker’s wages 167. Depreciation expense—office 168. Cupcake mix 169. Sprinkles for decoration (indirect material) Match each of the following items for Cupcake Company to the type(s) of cost (a–d) it represents. Each type may be used more than once. a. Prime cost b. Conversion cost c. Both prime and conversion costs d. Neither prime nor conversion cost 170. Salesperson commissions 171. Factory rent 172. Depreciation expense—factory 173. Frosting 174. Baker’s wages 175. Depreciation expense—office 176. Cupcake mix 177. Sprinkles for decoration (indirect material) Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting Match each of the following items for Bartel Corporation, a manufacturer of bar stools, to the type of cost (a or b) it represents. a. Direct cost b. Indirect cost 178. The production labor wages for the bar stool assemblers 179. The factory supervisor’s salary for the bar stool factory 180. Lubricants used on the bar stool manufacturing equipment 181. Manufacturing costs for wood and steel used in the bar stools 182. Nails and screws used in the production of the bar stools Match each of the following items to the type of cost (a or b) it represents a. Product cost b. Period cost 183. Tires for the bicycles 184. Electricity costs to run the factory 185. Selling costs for the period 186. Delivery costs to take the bicycles to stores 187. Accountant salaries Match each of the following items for Green Company, a lawn mower manufacturer, to the type of manufacturing cost (a– c) it represents. a. Direct materials b. Direct labor c. Factory overhead 188. Wheels 189. Depreciation on worker's tools 190. Wages of assemblers 191. Grease for wheel axles Match each of the following items to the type of cost (a–c) it represents. a. Direct cost b. Indirect cost c. Neither direct nor indirect cost 192. Labor for machine maintenance Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting 193. Factory equipment depreciation 194. Materials not traced to specific products 195. Office equipment depreciation 196. Materials traced to specific products 197. Insurance expired on administrative facilities 198. Product assembly labor incurred 199. Administrative office salaries 200. Salespersons' salaries 201. Utilities on factory building 202. Utilities on administrative facilities Match each description to the appropriate term (a–d). Each cost type may be used more than once. a. Direct materials b. Selling and administrative expense c. Factory overhead d. Direct labor 203. Rent expense on factory building 204. Sales supplies used 205. Factory supplies used 206. Indirect materials used 207. Wages of assembly line personnel 208. Cost of primary material used to make product 209. Depreciation on office equipment 210. Rent on office facilities 211. Insurance expired on factory equipment 212. Utilities incurred in the office 213. Advertising expense Match each of the following items for Mostess Company, a cake factory, to the type of cost (a or b) it represents. a. Product cost Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting b. Period cost 214. Frosting 215. Baker's wages 216. Advertising fees 217. Delivery expense Match each of the following items to the type of cost (a or b) it most typically represents. a. Product cost b. Period cost 218. Direct materials used 219. Factory utilities 220. Salespersons' commissions 221. Salary of plant manager 222. Indirect materials used 223. Depreciation on store equipment 224. Indirect labor incurred 225. Advertising expense 226. Direct labor incurred 227. Factory machinery repairs and maintenance 228. Depreciation on factory machinery 229. Plant insurance expired Subjective Short Answer 230. Differentiate between financial and managerial accounting, addressing such issues as users, nature of information, guidelines for preparation, timeliness, and focus of reporting. 231. What is decision making? Who is responsible for decision making in a managerial situation? 232. Differentiate between a line department and a staff department. 233. Differentiate between period and product costs, including examples of each type of cost. 234. Differentiate between: a. Direct materials versus indirect materials Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting b.
Direct labor versus indirect labor
235. Putney Company reports the following information: Sales Cost of direct materials used in production Depreciation on factory equipment Indirect labor Direct labor Factory rent Factory utilities Sales salaries expense Office salaries expense Indirect materials
$76,500 7,300 4,700 5,900 10,500 4,200 1,200 15,600 8,900 1,200
Compute: a. Product costs b. Period costs 236. The following information is available for Carter Corporation: • • • • • • •
Materials inventory decreased $4,000. Materials inventory on December 31 was 50% of materials inventory on January 1. Beginning work in process inventory was $145,000. Ending finished goods inventory was $65,000. Purchases of direct materials were $154,700. Direct materials used were 2.5 times the cost of direct labor. Total manufacturing costs incurred were $246,400, 80% of cost of goods manufactured and $156,000 less than cost of goods sold.
Compute: a. Finished goods inventory on January 1 b. Work in process inventory on December 31 c. Direct labor incurred d. Factory overhead incurred e. Materials inventory on January 1 f. Direct materials used 237. Zoe Corporation has the following information for the month of March: Cost of materials used in production Direct labor Factory overhead Work in process inventory, March 1 Work in process inventory, March 31 Finished goods inventory, March 1 Finished goods inventory, March 31
$69,000 27,000 34,000 15,000 19,500 25,000 23,000
Determine the (a) cost of goods manufactured and (b) cost of goods sold. 238. Sienna Company has the following information for January: Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting Cost of materials used in production Direct labor Factory overhead Work in process inventory, January 1 Work in process inventory, January 31
$20,000 15,000 24,000 2,900 3,500
Determine the cost of goods manufactured. 239. Magnus Industries has the following data: Beginning raw materials inventory Materials purchased Ending raw materials inventory
$75,000 40,000 60,000
Determine the cost of raw materials used. 240. Watson Company has the following data: Work in process inventory, beginning Work in process inventory, ending Direct labor costs Cost of goods manufactured Factory overhead
$18,000 25,000 5,000 9,000 7,000
Determine the amount of direct materials used. 241. Laramie Technologies has the following data: Work in process inventory, beginning Work in process inventory, ending Direct labor costs Cost of materials used Factory overhead
$45,000 32,000 56,000 50,000 28,000
Determine the cost of goods manufactured. 242. Keeton Company has the following data: Cost of materials used Direct labor costs Factory overhead Work in process inventory, beginning Work in process inventory, ending Finished goods inventory, beginning Finished goods inventory, ending
$60,000 58,000 33,000 29,000 18,000 32,000 18,000
Determine the cost of goods sold. 243. Zoe Corporation has the following information for the month of March: Purchases Materials inventory, March 1 Materials inventory, March 31 Powered by Cognero
$ 92,000 6,000 8,000 Page 26
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Chapter 18 - Introduction to Managerial Accounting Direct labor Factory overhead Work in process inventory, March 1 Work in process inventory, March 31 Finished goods inventory, March 1 Finished goods inventory, March 31 Sales Selling and administrative expenses
25,000 37,000 22,000 23,500 21,000 30,000 257,000 79,000
Prepare (a) a schedule of cost of goods manufactured, (b) an income statement for the month ended March 31, and (c) the Inventories section of the balance sheet. 244. The following data (in thousands of dollars) have been taken from the accounting records of Rayburn Corporation for the current year: Sales Selling expenses Factory overhead Direct labor Administrative expenses Direct materials purchased during year Finished goods inventory, January 1 Finished goods inventory, December 31 Materials inventory, January 1 Materials inventory, December 31 Work in process inventory, January 1 Work in process inventory, December 31
$1,980 280 460 400 300 240 240 320 80 140 140 100
Determine: a. Cost of the direct materials used in production during the year b. Cost of goods manufactured for the year c. Cost of goods sold for the year d. Net income for the year Present all computations and final answers in thousands of dollars. 245. Allen Company used $71,000 of direct materials and incurred $37,000 of direct labor costs during the current year. Indirect labor amounted to $2,700, while indirect materials used totaled $1,600. Other operating costs pertaining to the factory included utilities of $3,100, maintenance of $4,500, supplies of $1,800, depreciation of $7,900, and property taxes of $2,600. There was no beginning or ending finished goods inventory, but work in process inventory began the year with a $5,500 balance and ended the year with a $7,500 balance. Prepare a statement of cost of goods manufactured for Allen Company for the year ended December 31. 246. Davis Manufacturing Company had the following data for a recent year: Accounts receivable Materials inventory Work in process inventory Finished goods inventory
January 1 $27,000 22,500 70,200 3,000
December 31 $33,000 6,000 48,000 15,000
Collections on account were $625,000. Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting Cost of goods sold was 68% of sales. Direct materials purchased amounted to $90,000. Factory overhead was 300% of the cost of direct labor. Compute: a. Sales revenue (all sales were on account) b. Cost of goods sold c. Cost of goods manufactured d. Direct materials used e. Direct labor incurred f. Factory overhead incurred 247. Taylor Industries had a fire, and some of its accounting records were destroyed. Available information is as follows for the year ended December 31: Materials inventory, December 31 Direct materials purchased Direct materials used Cost of goods manufactured
$ 15,000 28,000 22,900 135,000
Additional information: Factory overhead is 150% of direct labor cost. Finished goods inventory decreased by $18,000 during the year. Work in process inventory increased by $12,000 during the year. Determine: a. Materials inventory, January 1 b. Direct labor incurred c. Factory overhead incurred d. Cost of goods sold
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Chapter 18 - Introduction to Managerial Accounting Answer Key 1. False 2. False 3. True 4. True 5. True 6. False 7. True 8. True 9. False 10. True 11. True 12. True 13. False 14. True 15. False 16. True 17. True 18. False 19. False 20. True 21. False 22. True 23. False 24. True 25. False Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting 26. True 27. False 28. True 29. False 30. False 31. True 32. True 33. True 34. False 35. True 36. True 37. True 38. False 39. True 40. True 41. True 42. False 43. True 44. True 45. True 46. False 47. True 48. False 49. True 50. False Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting 51. True 52. False 53. False 54. True 55. True 56. False 57. False 58. True 59. False 60. False 61. True 62. False 63. False 64. False 65. False 66. True 67. False 68. False 69. True 70. True 71. b 72. b 73. b 74. c 75. a 76. b Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting 77. b 78. c 79. b 80. b 81. d 82. b 83. c 84. b 85. c 86. c 87. b 88. a 89. d 90. d 91. d 92. c 93. d 94. d 95. c 96. d 97. b 98. b 99. a 100. b 101. d Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting 102. d 103. a 104. b 105. c 106. a 107. b 108. a 109. c 110. b 111. d 112. c 113. a 114. d 115. a 116. d 117. b 118. a 119. a 120. a 121. b 122. b 123. c 124. d 125. a 126. a 127. d Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting 128. c 129. d 130. b 131. d 132. a 133. b 134. d 135. c 136. c 137. c 138. a 139. c 140. c 141. a 142. d 143. c 144. a 145. a 146. d 147. a 148. a 149. b 150. a 151. c 152. d Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting 153. a 154. c 155. b 156. d 157. d 158. e 159. a 160. c 161. b 162. d 163. c 164. c 165. a 166. b 167. d 168. a 169. c 170. d 171. b 172. b 173. a 174. c 175. d 176. a 177. b 178. a Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting 179. b 180. b 181. a 182. a 183. a 184. a 185. b 186. b 187. b 188. a 189. c 190. b 191. c 192. b 193. b 194. b 195. c 196. a 197. c 198. a 199. c 200. c 201. b 202. c 203. c Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting 204. b 205. c 206. c 207. d 208. a 209. b 210. b 211. c 212. b 213. b 214. a 215. a 216. b 217. b 218. a 219. a 220. b 221. a 222. a 223. b 224. a 225. b 226. a 227. a 228. a 229. a Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting 230. Users Nature of information Guidelines for preparation Timeliness Focus of reporting
Managerial Accounting Financial Accounting Management External users and company management Objective and subjective Objective Prepared according to Prepared according to management needs GAAP Prepared at fixed intervals Prepared at fixed intervals and on an as-needed basis Company as a whole or as Company as a whole a segment
231. Inherent in each management process (planning, directing, controlling, and improving) is decision making. In managing a company, management must continually decide among alternative actions. For example, in directing operations, managers must continually decide on an operating structure, training procedures, and staffing of day-to-day operations. 232. A line department is directly involved in providing goods or services to the customers of the company. Individuals in a line position are responsible for manufacturing and selling a company's products. Examples of a line position include senior vice president of equipment, plant manager, and managing director. A staff department provides services, assistance, and advice to the departments with line or other staff responsibilities. A staff department has no direct authority over a line department. Examples of staff positions include chief administrative officer, vice president of human resources, chief financial officer, and controller. 233. Period costs consist of selling and administrative expenses. Selling expenses are incurred in marketing the product and delivering the product to customers. Administrative expenses are incurred in managing the company and are not directly related to the manufacturing or selling functions. Selling expenses include advertising expenses, sales salaries expenses, and commissions expenses. Administrative expenses include office salaries expenses, office supplies expense, and depreciation expense of the office building and equipment. Product costs consist of manufacturing costs: direct materials, direct labor, and factory overhead. Direct materials are the materials that go into the production of the product. The direct materials for a bakery include flour, sugar, eggs, and shortening. Direct labor costs are the wages or salaries of the employees that are actually producing/assembling the product. Factory overhead would include the salaries of production supervisors and the depreciation, insurance, and taxes on the factory building and equipment. 234. a. Direct materials must become a physical part of the finished product and their costs must be separately and conveniently traceable through the manufacturing process to finished goods inventory. Examples include wood, leather, steel, etc. Indirect materials become part of the finished product, but their minor costs cannot conveniently be traced directly to particular finished products. They are included as part of factory overhead. b. Direct labor cost is the compensation of employees who physically convert materials into the company’s products and whose effort can be traced directly to finished goods inventory. Examples include machine operators and assemblers. Indirect labor is factory labor that is difficult to trace to specific products. Instead, the cost is included in factory overhead. Examples include forklift operators, janitors, and plant managers. Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting 235. a. Product Costs = $7,300 + $4,700 + $5,900 + $10,500 + $4,200 + $1,200 + $1,200 = $35,000 b. Period Costs = $15,600 + $8,900 = $24,500 236. a. Cost of Goods Sold = $246,400 + $156,000 = $402,400 Cost of Goods Manufactured = $246,400 ÷ 0.80 = $308,000 Finished Goods Inventory on January 1 = $402,400 + $65,000 – $308,000 = $159,400 b.
Work in Process Inventory on December 31 = $246,400 + $145,000 – $308,000 = $83,400
c.
Direct Labor Incurred = $158,700 ÷ 2.5 = $63,480
d.
Factory Overhead Incurred = $246,400 – $158,700 – $63,480 = $24,220
e.
Materials Inventory on January 1 = X $4,000 = 0.5X X = $8,000
f.
Materials Inventory on December 31 = $8,000 – $4,000 = $4,000 Direct Materials Used = $8,000 + $154,700 – $4,000 = $158.700
237. a. Beginning work in process inventory Direct materials Direct labor Factory overhead Total manufacturing costs incurred Total manufacturing costs Less ending work in process inventory Cost of goods manufactured
$ 15,000 $69,000 27,000 34,000 130,000 $145,000 19,500 $125,500
b. Finished goods inventory, March 1 Cost of goods manufactured Cost of finished goods available for sale Less finished goods inventory, March 31 Cost of goods sold 238. Beginning work in process inventory Direct materials Direct labor Factory overhead Total manufacturing costs incurred Total manufacturing costs Less ending work in process inventory Cost of goods manufactured Powered by Cognero
$ 25,000 125,500 $150,500 23,000 $127,500
$ 2,900 $20,000 15,000 24,000 59,000 $61,900 3,500 $58,400 Page 39
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Chapter 18 - Introduction to Managerial Accounting 239. Raw Materials Used = $75,000 + $40,000 – $60,000 = $55,000 240. Direct Materials Used = ($25,000 – $18,000 + $9,000) – ($7,000 + $5,000) = $4,000 241. Cost of Goods Manufactured = $50,000 + $56,000 + $28,000 + ($45,000 – $32,000) = $147,000 242. Cost of Goods Sold = $60,000 + $58,000 + $33,000 + ($29,000 – $18,000) + ($32,000 – $18,000) = $176,000 243. a. Zoe Corporation Statement of Cost of Goods Manufactured For the Month Ended March 31 Work in process inventory, March 1 $ 22,000 Direct materials: Materials inventory, March 1 $ 6,000 Purchases 92,000 Cost of materials available for use $98,000 Less materials inventory, March 31 8,000 Cost of direct materials used $90,000 Direct labor 25,000 Factory overhead 37,000 Total manufacturing costs incurred 152,000 Total manufacturing costs $174,000 Less work in process inventory, March 31 23,500 Cost of goods manufactured $150,500 b. Zoe Corporation Income Statement For the Month Ended March 31 Sales Cost of goods sold: Finished goods inventory, March 1 Cost of goods manufactured Cost of finished goods available for sale Less finished goods inventory, March 31 Cost of goods sold Gross profit Operating expenses: Selling and administrative expenses Net income c. Inventories: Finished goods Work in process Materials Total inventories
$257,000 $ 21,000 150,500 $171,500 30,000 141,500 $115,500 79,000 $ 36,500
$30,000 23,500 8,000 $61,500
244. a. Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting Materials inventory, January 1 Add materials purchased Cost of materials available for use Less materials inventory, December 31 Cost of direct materials used
$ 80 240 $320 140 $180
b. Direct materials used in production Direct labor Factory overhead Total manufacturing costs incurred Work in process inventory, January 1 Total manufacturing costs Less work in process inventory, December 31 Cost of goods manufactured
$ 180 400 460 $1,040 140 $1,180 100 $1,080
c. Finished goods inventory, January 1 Cost of goods manufactured Cost of finished goods available for sale Less finished goods inventory, December 31 Cost of goods sold
$ 240 1,080 $1,320 320 $1,000
d. Sales Cost of goods sold Gross profit Operating expenses: Administrative expenses Selling expenses Net income
$1,980 1,000 $ 980 $300 280
580 $ 400
245. Allen Company Statement of Cost of Goods Manufactured For the Year Ended December 31 Work in process inventory, January 1 $ 5,500 Direct materials $71,000 Direct labor 37,000 Factory overhead: Indirect labor $2,700 Indirect materials 1,600 Utilities 3,100 Maintenance 4,500 Supplies 1,800 Depreciation 7,900 Property taxes 2,600 24,200 Total manufacturing costs incurred 132,200 Total manufacturing costs $137,700 Powered by Cognero
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Chapter 18 - Introduction to Managerial Accounting Less work in process inventory, December 31 Cost of goods manufactured
7,500 $130,200
246. a. Sales Revenue = $33,000 + $625,000 – $27,000 = $631,000 b.
Cost of Goods Sold = $631,000 × 68% = $429,080
c.
Cost of Goods Manufactured = $15,000 + $429,080 – $3,000 = $441.080
d.
Direct Materials Used = $22,500 + $90,000 – $6,000 = $106,500
e.
Production Costs Incurred = $441,080 + $48,000 – $70,200 = $418,880 Conversion Costs = $418,880 – $106,500 = $312,380 $312,380 = Factory Overhead + Direct Labor Let X = Direct Labor 3X + X = $312,380 4X = $312,380 Direct Labor Incurred = $78,095
f.
Factory Overhead Incurred = $78,095 × 3 = $234,285
247. a. Materials Inventory, January 1 = $15,000 + $22,900 – $28,000 = $9,900 b.
Total Manufacturing Costs Incurred = $135,000 + $12,000 = $147,000 Conversion Costs = $147,000 – $22,900 = $124,100 $124,100 = Factory Overhead + Direct Labor Let X = Direct Labor X + 1.5X = $124,100 2.5X = $124,100 Direct Labor = $49,640
c.
Factory Overhead Incurred = $49,640 × 1.5 = $74,460
d.
Cost of Goods Sold = $135,000 + $18,000 = $153,000
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Chapter 19 - Job Order Costing True / False 1. Cost accounting systems measure, record, and report product costs. a. True b. False 2. The job order cost and process cost systems are the same in how they accumulate and record costs. a. True b. False 3. A job order cost accounting system provides for a separate record of the cost of each particular quantity of product that passes through the factory. a. True b. False 4. A process cost accounting system provides for a separate record of the cost of each particular quantity of product that passes through the factory. a. True b. False 5. A process cost accounting system provides product costs for each of the departments or processes within the factory. a. True b. False 6. A process cost accounting system is best used by manufacturers of like units of product that are not distinguishable from each other during a continuous production process. a. True b. False 7. The process cost system is appropriate where few products are manufactured and each product is made to customers' specifications. a. True b. False 8. A job order cost system would be appropriate for a crude oil refining business. a. True b. False 9. Perpetual inventory controlling accounts and subsidiary ledgers are maintained for materials, work in process, and finished goods in job order cost systems. a. True b. False 10. When goods are sold, their costs are transferred from Work in Process to Finished Goods. a. True b. False Powered by Cognero
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Chapter 19 - Job Order Costing 11. The materials requisition serves as the source document for debiting the accounts in the materials ledger. a. True b. False 12. Materials are transferred from the storeroom to the factory in response to materials requisitions. a. True b. False 13. The document that serves as the basis for recording direct labor on a job cost sheet is the clock card. a. True b. False 14. The document that serves as the basis for recording direct labor on a job cost sheet is the time ticket. a. True b. False 15. Depreciation expense on factory equipment is part of factory overhead cost. a. True b. False 16. Factory overhead is applied to production using a predetermined overhead rate. a. True b. False 17. If factory overhead applied exceeds the actual factory overhead costs, the factory overhead account will have a credit balance. a. True b. False 18. If factory overhead applied exceeds the actual costs, overhead is said to be underapplied. a. True b. False 19. If the underapplied factory overhead amount is immaterial, it is transferred to Cost of Goods Sold at the end of the fiscal year. a. True b. False 20. Each account in the work in process subsidiary ledger in a job order cost system is called a job cost sheet. a. True b. False 21. In the job order cost system, the finished goods account is the controlling account for the factory overhead ledger. a. True b. False Powered by Cognero
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Chapter 19 - Job Order Costing 22. The inventory accounts generally maintained by a manufacturing firm are only finished goods and materials. a. True b. False 23. Generally accepted accounting principles require companies to use only one factory overhead rate for product costing. a. True b. False 24. Activity-based costing is a method of accumulating and allocating costs by department. a. True b. False 25. Interim financial statements for a manufacturing business would report overapplied factory overhead as a deferred item on the balance sheet. a. True b. False 26. The debit to Factory Overhead for the cost of indirect materials is obtained from the summary of the materials requisitions. a. True b. False 27. In a factory with several processing departments, a single factory overhead rate may not provide accurate product costs and effective cost control. a. True b. False 28. Nonmanufacturing costs are generally classified into two categories: selling and administrative. a. True b. False 29. The current year's advertising costs are normally considered period costs. a. True b. False 30. Direct labor cost is an example of a period cost. a. True b. False 31. A manufacturing business reports just two types of inventory on its balance sheet: work in process inventory and finished goods inventory. a. True b. False 32. On the balance sheet for a manufacturing business, the cost of direct materials, direct labor, and factory overhead, which have entered into the manufacturing process but are associated with products that have not been finished, are Powered by Cognero
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Chapter 19 - Job Order Costing reported as direct materials inventory. a. True b. False 33. As product costs are incurred in the manufacturing process, they are accounted for as assets and reported on the balance sheet as inventory. a. True b. False 34. The storeroom releases materials for use in manufacturing when a receiving report is received. a. True b. False 35. Period costs are costs that are incurred for the production requirements of a certain period. a. True b. False 36. Job order cost systems can be used to compare unit costs of similar jobs to determine if costs are staying within expected ranges. a. True b. False 37. Job cost sheets can be used to analyze the possible reasons for increased materials costs for a type of job. a. True b. False 38. Job order cost accounting systems may be used to evaluate a company's efficiency. a. True b. False 39. Information about costs developed through a job order cost system cannot be used to evaluate an organization’s cost performance. a. True b. False 40. Job order cost accounting systems may be used for evaluating and controlling costs in a service business. a. True b. False 41. The job order cost system may be used by service firms to determine revenues, expenses, and ultimately profit. a. True b. False 42. The job order cost system is not used by service organizations. a. True b. False Powered by Cognero
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Chapter 19 - Job Order Costing 43. A law firm would use a job order cost system to accumulate all of the costs associated with a particular client engagement, such as lawyer time, copying charges, filing fees, and overhead. a. True b. False 44. Job order cost accounting systems can be used only for companies that manufacture a product. a. True b. False 45. The direct labor and overhead costs of providing services to clients are accumulated in a work in process account. a. True b. False 46. In a job order cost accounting system for a service business, materials costs are normally included as part of overhead. a. True b. False 47. A service organization will not use job order costing because it has no direct materials. a. True b. False 48. Using the job order cost system, service organizations are able to bill customers on a weekly or monthly basis, even when the job has not been completed. a. True b. False Multiple Choice 49. Which of the following are the two main types of cost accounting systems for manufacturing operations? a. process cost and general accounting systems b. job order cost and process cost systems c. job order and general accounting systems d. process cost and replacement cost systems 50. Which of the following would most likely use a job order cost system? a. paper mill b. swimming pool installer c. company that manufactures chlorine for swimming pools d. oil refinery 51. Which of the following would be most likely to use a process cost system? a. custom furniture manufacturer b. auto body repair shop c. law firm Powered by Cognero
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Chapter 19 - Job Order Costing d. lawn fertilizer manufacturer 52. Which of the following systems provides for a separate record of the cost of each particular quantity of product that passes through the factory? a. job order cost system b. general cost system c. replacement cost system d. process cost system 53. For which of the following businesses would the job order cost system be appropriate? a. canned soup processor b. oil refinery c. lumber mill d. hospital 54. For which of the following businesses would the process cost system be appropriate? a. custom cabinet maker b. landscaper c. paper mill d. catering firm 55. Which of the following is not a characteristic of a job order cost system? a. It accumulates cost for each department within the factory. b. It provides a separate record for the cost of each quantity of product that passes through the factory. c. It is best suited for industries that manufacture custom goods. d. It uses only one work in process account. 56. Which of the following products would be manufactured using a job order cost system? a. cell phone b. highlighter pen c. graduation invitation d. recliner 57. Job order costing and process costing are a. pricing systems b. cost accounting systems c. cost flow systems d. inventory tracking systems 58. Which of the following is not a reason a firm would use a job order cost system? a. to help control costs b. to determine product pricing c. to determine department costs within the firm d. to determine profit Powered by Cognero
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Chapter 19 - Job Order Costing 59. Which of the following costs are not included in finished goods inventory? a. direct labor b. factory overhead c. chief financial officer's salary d. direct materials 60. Which of the following is the correct flow of manufacturing costs? a. raw materials, work in process, finished goods, cost of goods sold b. raw materials, finished goods, cost of goods sold, work in process c. work in process, finished goods, raw materials, cost of goods sold d. cost of goods sold, raw materials, work in process, finished goods 61. On which of the following would the labor costs for an individual job be recorded? a. clock cards b. in-and-out cards c. time tickets d. payroll register 62. Thomlin Company forecasts that total factory overhead for the current year will be $15,500,000 with 250,000 total machine hours. Year to date, the actual overhead is $16,000,000, and the actual machine hours are 330,000 hours. The predetermined factory overhead rate based on machine hours is a. $48 per machine hour b. $62 per machine hour c. $45 per machine hour d. $50 per machine hour 63. Thomlin Company forecasts that total factory overhead for the current year will be $15,000,000 with 300,000 total machine hours. Year to date, the actual overhead is $16,000,000, and the actual machine hours are 330,000 hours. If Thomlin Company uses a predetermined factory overhead rate based on machine hours for applying overhead, as of this point in time (year to date), the overhead is a. $1,000,000 overapplied b. $1,000,000 underapplied c. $500,000 overapplied d. $500,000 underapplied 64. At the end of the year, overhead applied was $42,000,000. Actual overhead was $40,300,000. Closing over/underapplied overhead into Cost of Goods Sold would cause net income to a. increase by $1,700,000 b. decrease by $1,700,000 c. increase by $3,400,000 d. decrease by $3,400,000 65. Which of the following is a period cost? a. depreciation on factory lunchroom furniture b. salary of telephone receptionist in the sales office Powered by Cognero
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Chapter 19 - Job Order Costing c. salary of a security guard for the factory parking lot d. computer chips used by a computer manufacturer 66. Which of the following is a product cost? a. salary of a sales manager b. advertising for a particular product c. drill bits for a drill press used in the plant assembly area d. salary of the company receptionist 67. The document authorizing the issuance of materials from the storeroom is a a. materials requisition b. purchase requisition c. receiving report d. purchase order 68. The source document for debiting Work in Process for direct materials is a a. purchase order b. purchase requisition c. materials requisition d. receiving report 69. In a job order cost accounting system, the journal entry for the flow of direct materials into production is to a. debit Work in Process, credit Materials b. debit Materials, credit Work in Process c. debit Factory Overhead, credit Materials d. debit Work in Process, credit Supplies 70. A summary of the materials requisitions completed during a period serves as the basis for transferring the cost of the materials from the materials controlling account in the general ledger to the controlling accounts for a. Work in Process and Cost of Goods Sold b. Work in Process and Factory Overhead c. Finished Goods and Cost of Goods Sold d. Work in Process and Finished Goods 71. In a job order cost system, when goods that have been ordered are received, the quantity received and the condition of the goods are entered on a a. purchase order b. sales invoice c. receiving report d. purchase requisition 72. The amount of time spent by an employee on an individual job is recorded on a. pay stubs b. in-and-out cards Powered by Cognero
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Chapter 19 - Job Order Costing c. time tickets d. employees' earnings records 73. When an employee reports for work, he or she may register with a. an electronic badge b. a clock card c. an in-and-out card d. All of these choices 74. The basis for recording direct labor costs incurred is a summary of the period's a. job cost sheets b. time tickets c. employees' earnings records d. clock cards 75. The journal entry for the flow of direct labor costs into production in a job order cost accounting system is to a. debit Factory Overhead, credit Work in Process b. debit Finished Goods, credit Wages Payable c. debit Work in Process, credit Wages Payable d. debit Factory Overhead, credit Wages Payable 76. At the end of July, the first month of the current fiscal year, the factory overhead account had a debit balance. Which of the following describes the nature of this balance and how it would be reported on the interim balance sheet? a. overapplied, deferred credit b. underapplied, deferred debit c. underapplied, deferred credit d. overapplied, deferred debit 77. At the end of the fiscal year, the balance in Factory Overhead is small. The balance would be a. transferred to Work in Process b. transferred to Cost of Goods Sold c. transferred to Finished Goods d. allocated between Work in Process and Finished Goods 78. The details concerning the costs incurred on each job order are accumulated in a work in process account and supported by a a. stock ledger b. materials ledger c. cost ledger d. creditors ledger 79. Each document in the cost ledger is called a a. finished goods sheet b. stock record Powered by Cognero
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Chapter 19 - Job Order Costing c. materials requisition d. job cost sheet 80. Selected accounts with some amounts omitted are as follows:
Aug. 1 31 31 31
Balance Direct materials Direct labor Factory overhead
Aug. 1–31 Costs incurred
Work in Process 275,000 Aug. 31 Goods finished X 450,000 X Factory Overhead 145,000 Aug. 1 Balance 31 Applied (30% of direct labor cost)
1,030,000
15,000
X
If the balance of Work in Process on August 31 is $220,000, what was the amount debited to Work in Process for direct materials in August? a. $390,000 b. $170,000 c. $525,000 d. $580,000 81. Selected accounts with some amounts omitted are as follows:
Aug. 1 31 31 31
Balance Direct materials Direct labor Factory overhead
Aug. 1–31 Costs incurred
Work in Process 275,000 Aug. 31 Goods finished X 450,000 X Factory Overhead 145,000 Aug. 1 Balance 31 Applied
1,030,000
15,000 X
If the balance of Work in Process on August 31 is $220,000, what was the amount debited to Work in Process for factory overhead in August, assuming a factory overhead rate of 30% of direct labor costs? a. $10,000 b. $70,000 c. $120,000 d. $135,000 82. Selected accounts with some amounts omitted are as follows: Oct. 1 Balance 31 Direct materials 31 Direct labor Powered by Cognero
Work in Process 20,000 Oct. 31 96,700 201,000
Goods finished
X
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Chapter 19 - Job Order Costing 31 Factory overhead Oct. 1 31
Balance Goods finished
X Finished Goods 52,000 360,000
If the balance of Work in Process on October 31 is $21,000, what was the amount of factory overhead applied in October? a. $63,300 b. $21,300 c. $42,300 d. $11,300 83. Selected accounts with a credit amount omitted are as follows: Apr. 1 30 30 30 Apr. 1 30
Balance Direct materials Direct labor Factory overhead
Work in Process 7,000 Apr. 30 Goods finished 78,400 195,000 136,500
Balance Goods finished
Finished Goods 42,000 387,000
X
What was the balance of Work in Process as of April 30? a. $8,100 b. $35,000 c. $29,900 d. $22,900 84. If the amount of factory overhead cost incurred exceeds the amount applied, the factory overhead account will have a a. debit balance and be underapplied b. credit balance and be underapplied c. credit balance and be overapplied d. debit balance and be overapplied 85. The recording of the factory labor incurred for general factory use would include a debit to a. Factory Overhead b. Wages Payable c. Wages Expense d. Cost of Goods Sold 86. The recording of the application of factory overhead costs to jobs would include a credit to a. Factory Overhead b. Wages Payable c. Work in Process d. Cost of Goods Sold Powered by Cognero
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Chapter 19 - Job Order Costing 87. Recording jobs completed would include a debit to a. Factory Overhead b. Finished Goods c. Work in Process d. Cost of Goods Sold 88. Recording jobs completed would include a credit to a. Factory Overhead b. Finished Goods c. Work in Process d. Cost of Goods Sold 89. Recording jobs shipped and customers billed would include a debit to a. Accounts Payable b. Cash c. Finished Goods d. Cost of Goods Sold 90. Recording jobs shipped and customers billed would include a credit to a. Accounts Payable b. Cash c. Finished Goods d. Cost of Goods Sold 91. The finished goods account is the controlling account for the a. cost ledger b. materials ledger c. work in process ledger d. stock ledger 92. The controlling account for the cost ledger is a. Finished Goods b. Materials c. Work in Process d. Cost of Goods Sold 93. Reynolds Manufacturers Inc. has estimated total factory overhead costs of $95,000 and expected direct labor hours of 9,500 for the current fiscal year. If Job 117 incurs 2,300 direct labor hours, Work in Process will be debited and Factory Overhead will be credited for a. $21,850 b. $2,300 c. $95,000 d. $23,000 94. A widely used activity base for developing factory overhead rates in highly automated settings is Powered by Cognero
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Chapter 19 - Job Order Costing a. direct labor hours b. direct labor dollars c. direct materials d. machine hours 95. When Job 117 was completed, direct materials totaled $4,400; direct labor, $5,600; and factory overhead, $2,400. A total of 1,000 units were produced at a per-unit cost of a. $12,400 b. $1,240 c. $124 d. $12.40 96. The journal entries for the cost and sale of a finished good on account would a. debit Cost of Goods Sold and credit Finished Goods b. debit Cost of Goods Sold, credit Finished Goods, debit Accounts Receivable, and credit Sales c. debit Sales Expense, credit Finished Goods, credit Cash, and credit Accounts Receivable d. debit Work in Process, credit Finished Goods, debit Accounts Receivable, and credit Sales 97. All of the following are examples of activity bases except a. salaries of supervisors b. quality inspections of products c. number of machine setups d. direct labor hours 98. Materials purchased on account during the month totaled $190,000. Materials requisitioned and placed in production totaled $165,000. The journal entry for the materials purchased on account is a. Materials 165,000 Accounts Payable 165,000 b. Materials 190,000 Accounts Payable 190,000 c. Materials 190,000 Cash 190,000 d. Accounts Payable 190,000 Materials 190,000 99. Materials purchased on account during the month amounted to $190,000. Materials requisitioned and placed in production totaled $156,000. The journal entry for the transaction for materials requisitioned by the production department is a. Materials 156,000 Work in Process 156,000 b. Work in Process 190,000 Materials 190,000 c. Work in Process 156,000 Materials 156,000 d. Work in Process 156,000 Cash 156,000 Powered by Cognero
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Chapter 19 - Job Order Costing 100. During the period, labor costs incurred amounted to $175,000, including $150,000 for production orders and $25,000 for general factory use. In addition, factory overhead charged to production was $32,000. The journal entry for the direct labor costs is a. Work in Process 150,000 Wages Payable 150,000 b. Work in Process 175,000 Wages Payable 175,000 c. Wages Payable 175,000 Work in Process 175,000 d. Wages Payable 150,000 Work in Process 150,000 101. During the period, labor costs incurred amounted to $175,000, including $150,000 for production orders and $25,000 for general factory use. Factory overhead applied to production was $32,000. The journal entry for the actual factory overhead costs incurred is a. Accounts Payable 25,000 Factory Overhead 25,000 b. Factory Overhead 32,000 Accounts Payable 32,000 c. Work in Process 25,000 Wages Payable 25,000 d. Factory Overhead 25,000 Wages Payable 25,000 102. During the period, labor costs incurred amounted to $175,000, including $150,000 for production orders and $25,000 for general factory use. Factory overhead applied to production was $23,000. The journal entry for the factory overhead applied to production is a. Work in Process 25,000 Factory Overhead 25,000 b. Factory Overhead 23,000 Work in Process 23,000 c. Work in Process 23,000 Factory Overhead 23,000 d. Factory Overhead 25,000 Accounts Payable 25,000 103. The cost of production of completed and transferred goods during the period amounted to $540,000, and the finished products shipped to customers had total production costs of $375,000. The journal entry for the transfer of costs from work in process to finished goods is a. Finished Goods 375,000 Work in Process 375,000 b. Finished Goods 540,000 Work in Process 540,000 c. Work in Process 540,000 Finished Goods 540,000 d. Work in Process 375,000 Finished Goods 375,000 Powered by Cognero
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Chapter 19 - Job Order Costing 104. The cost of production of completed and transferred goods during the period amounted to $540,000, and the finished products shipped to customers had production costs of $375,000. The journal entry for the transfer of costs from finished goods to cost of goods sold is a. Finished Goods 540,000 Cost of Goods Sold 540,000 b. Finished Goods 375,000 Cost of Goods Sold 375,000 c. Cost of Goods Sold 375,000 Finished Goods 375,000 d. Cost of Goods Sold 540,000 Finished Goods 540,000 105. Costs that are incurred in generating revenues during the period, but are not involved in the manufacturing process, are referred to as a. period costs b. conversion costs c. factory overhead costs d. product costs 106. Costs that are treated as assets until the product is sold are a. product costs b. period costs c. conversion costs d. selling expenses 107. The period costs of a textbook printer would include a. wages of a press operator b. factory insurance costs c. CEO salary d. paper costs 108. Which of the following are controlling accounts for a manufacturing business, each with its own subsidiary ledger a. Finished Goods, Work in Process, and Cost of Goods Sold b. Materials, Work in Process, and Cost of Goods Sold c. Materials, Work in Process, and Finished Goods d. Materials, Finished Goods, and Cost of Goods Sold 109. For a manufacturing business, products that are in the process of being manufactured are referred to as a. supplies inventory b. work in process inventory c. finished goods inventory d. materials inventory 110. The journal entry for the purchase of $45,000 of raw materials is Powered by Cognero
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Chapter 19 - Job Order Costing a. Materials Accounts Receivable b. Materials Accounts Payable c. Inventory Accounts Receivable d. Inventory Cash
45,000 45,000 45,000 45,000 45,000 45,000 45,000 45,000
111. The journal entry for the transfer of 1,600 units of Part No. 1177, with a value of $2.50 each, to work in process is a. Materials 4,000 Work in Process 4,000 b. Work in Process 4,000 Factory Overhead 4,000 c. Work in Process 4,000 Materials 4,000 d. Work in Process 4,000 Cash 4,000 112. Which of the following represents the factory overhead applied to a product? a. predetermined factory overhead rate times estimated activity base b. actual factory overhead rate times estimated activity base c. predetermined factory overhead rate times actual activity base d. actual factory overhead rate times actual activity base 113. Which of the following is the formula to compute the predetermined factory overhead rate? a. estimated total factory overhead costs divided by estimated activity base b. actual total factory overhead costs divided by estimated activity base c. estimated total factory overhead costs divided by actual activity base d. actual total factory overhead costs divided by actual activity base 114. Aspen Technologies has the following budget data: Estimated direct labor hours Estimated direct labor dollars Estimated total factory overhead costs
15,000 $90,000 $198,000
If factory overhead is to be applied based on direct labor hours, the predetermined factory overhead rate is a. $7.50 b. $13.20 c. $2.20 d. $16.50 115. A manufacturing company applies factory overhead based on direct labor hours. At the beginning of the year, it estimated that total factory overhead costs would be $360,000 and direct labor hours would be 30,000. Actual factory overhead costs incurred were $377,200, and actual direct labor hours were 36,000. What is the amount of overapplied or underapplied manufacturing overhead at the end of the year? Powered by Cognero
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Chapter 19 - Job Order Costing a. $6,000 overapplied b. $6,000 underapplied c. $54,800 overapplied d. $54,800 underapplied Use the budget and actual data provided for Sharp Company to answer the questions that follow. Sharp Company Estimated direct labor hours Estimated direct labor dollars Estimated factory overhead costs Actual direct labor hours Actual direct labor dollars Actual factory overhead costs
12,000 $90,000 $179,000 11,500 $92,000 $180,000
116. If factory overhead is to be applied based on direct labor dollars, the predetermined factory overhead rate is a. 199% b. 196% c. $14.92 d. $15.65 117. If factory overhead is applied based on direct labor hours, the amount of overhead to be applied is a. $180,000 b. $171,580 c. $172,500 d. $184,000 118. A manufacturing company applies factory overhead based on direct labor hours. At the beginning of the year, it estimated that total factory overhead costs would be $360,000 and direct labor hours would be 30,000. Actual manufacturing overhead costs incurred were $377,200, and actual direct labor hours were 36,000. What is the predetermined factory overhead rate per direct labor hour? a. $12.00 b. $10.00 c. $12.57 d. $10.48 119. A manufacturing company applies factory overhead based on direct labor hours. At the beginning of the year, it estimated that total factory overhead costs would be $360,000 and direct labor hours would be 30,000. Actual manufacturing overhead costs incurred were $377,200, and actual direct labor hours were 36,000. The journal entry to apply the factory overhead costs for the year would include a a. debit to Factory Overhead for $360,000 b. credit to Factory Overhead for $432,000 c. debit to Factory Overhead for $377,200 d. credit to Factory Overhead for $360,000 Use the information provided for Adams Company to answer the questions that follow. Powered by Cognero
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Chapter 19 - Job Order Costing Adams Company is a manufacturing company that has worked on several production jobs during the first quarter of the year. The balances for the jobs for the quarter are as follows: Job. No. 356 357 358 359 360
Balance $ 450 1,235 378 689 456
Jobs 356, 357, 358, and 359 were completed. Jobs 356 and 357 were sold at a profit of $500 on each job. 120. What is the ending balance of Work in Process for Adams Company at the end of the first quarter? a. $0 b. $456 c. $3,208 d. $2,752 121. What is the ending balance of Cost of Goods Sold for Adams Company at the end of the first quarter? a. $456 b. $2,685 c. $1,685 d. $685 122. What is the ending balance of Finished Goods for Adams Company at the end of the first quarter? a. $456 b. $1,067 c. $1,685 d. $2,752 123. What is the balance of Sales for Adams Company at the end of the first quarter? a. $1,685 b. $2,685 c. $1,000 d. $685 124. What is the gross profit for Adams Company at the end of the first quarter? a. $1,685 b. $2,685 c. $1,000 d. $685 125. When journalizing indirect labor in a job order cost system, the debit is charged to a. Wages Expense b. Wages Payable c. Factory Overhead Powered by Cognero
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Chapter 19 - Job Order Costing d. Cost of Goods Sold 126. A separate account for each material is found in a a. general ledger b. materials ledger c. receiving report d. job cost sheet 127. The materials requisition is used to a. release materials from the storeroom to production b. release finished goods to the shipping department c. record the acquisition of materials from a vendor d. record and electronically transmit materials data in place of a receiving report 128. Period costs are a. found on the balance sheet b. not involved in the production process c. classified as direct labor, direct material, or factory overhead d. found on the job cost sheets 129. Cavy Company estimates that the total factory overhead for the following year will be $1,250,000. The company has decided that the basis for applying factory overhead should be machine hours, which is estimated to be 40,000 hours. The machine hours for the month of April for all of the jobs were 4,780. If the actual factory overhead totaled $141,800, determine the over- or underapplied amount for the month. a. $7,575 underapplied b. $35,220 underapplied c. $7,575 overapplied d. $35,220 overapplied 130. Period costs are classified as either a. selling expenses or production expenses b. administrative expense or production expenses c. selling expenses or administrative expenses d. general expenses or selling expenses 131. Winston Company estimates that the total factory overhead for the following year will be $1,250,000. The company has decided that the basis for applying factory overhead should be machine hours, which is estimated to be 50,000 hours. The total machine hours for the year were 54,300. The actual factory overhead costs for the year were $1,375,000. Determine the over- or underapplied amount for the year. a. $17,500 overapplied b. $17,500 underapplied c. $118,250 overapplied d. $118,250 underapplied 132. Sanders Inc. has applied $567,988 of overhead to jobs in the cost ledger. Actual overhead at the end of the year is Powered by Cognero
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Chapter 19 - Job Order Costing $575,000. The adjustment for over- or underapplied overhead is a. $7,012 overapplied, increase Cost of Goods Sold b. $7,012 underapplied, increase Cost of Goods Sold c. $7,012 overapplied, decrease Cost of Goods Sold d. $7,012 underapplied, decrease Cost of Goods Sold 133. All of the following are true regarding product costs except a. product costs are found on the balance sheet until inventory is sold b. product costs consist of direct labor, direct materials, and factory overhead c. product costs can be found in three accounts on the balance sheet d. product costs include sales and administrative expenses 134. A job order cost accounting system accumulates and records product costs by jobs. The resulting total and unit product costs can be used to do all of the following except a. make cost comparisons across similar jobs b. analyze cost trends over time c. compare actual costs to expected costs d. create customer profiles for the sales staff 135. A difference in quantity of materials used on two comparable jobs may be caused by a. inadequately trained employees b. poor quality materials c. improperly maintained tools d. All of these choices 136. Which of the following would not be found in the accounting system of a service provider? a. cost ledger b. finished goods ledger c. deferred revenue account d. job cost sheets 137. Which of the following entries would not be found on the books of a service provider? a. a debit to Work in Process and a credit to Materials b. a debit to Work in Process and a credit to Wages Payable c. a debit to Work in Process and a credit to Overhead d. a debit to Cost of Services and a credit to Work in Process 138. In a job order cost accounting system used by a service business, which of the following items would normally not be included as part of overhead? a. materials b. direct labor c. indirect labor d. supplies 139. The direct labor and overhead costs of providing services to clients are accumulated in Powered by Cognero
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Chapter 19 - Job Order Costing a. Finished Services Expense b. Work in Process c. Administrative Salaries Expense d. Overhead 140. When a job is completed in a service organization, the job costs are transferred to the a. work in process account b. cost of services account c. finished goods account d. cost of goods sold account Matching Match each of the following phrases with the term (a–g) that it most closely describes. a. Job order cost system b. Process cost system c. Activity-based costing d. Underapplied overhead e. Overapplied overhead f. Finished goods ledger g. Materials ledger 141. A system that uses a different overhead rate for each activity 142. A subsidiary ledger that maintains a separate account for each type of material 143. Applied overhead is more than actual overhead incurred 144. Typically used by companies that make custom products 145. Typically used by companies whose products are indistinguishable from each other 146. The stock ledger 147. Applied overhead is less than actual overhead incurred Match each of the costs that follow to the type of product cost (a–c) it represents, or designate it as not a product cost (d). a. Direct labor b. Direct materials c. Factory overhead d. Not a product cost 148. Factory depreciation 149. President’s salary 150. Sales commissions Powered by Cognero
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Chapter 19 - Job Order Costing 151. Wood 152. Factory supervisor’s salary 153. Assembler’s wages 154. Plastic parts 155. Machine operator 156. Maintenance supplies Match each of the following phrases with the term (a–e) that it most closely describes. Each term will be used only once. a. Job cost sheets b. Materials requisitions c. Receiving report d. Time tickets e. Cost allocation 157. The process by which factory overhead is assigned to a cost object 158. These make up the work in process subsidiary ledger 159. Serve as the basis for recording direct labor on a job cost sheet 160. Prepared when materials that have been ordered are received and inspected 161. Serve as the basis for recording materials used Subjective Short Answer 162. Define and discuss the two main types of cost accounting systems for manufacturing operations. What are their similarities and differences? 163. Journalize the following transactions: 1. 2. 3.
March 10: 500 units of raw materials were purchased on account at $4.00 per unit. March 15: 250 units of raw materials were requisitioned at $4.50 per unit for production, Job 872. March 25: 215 units of raw materials were requisitioned at $5.00 per unit for production, Job 879.
164. Cavy Company accumulated 560 hours of direct labor on Job 345 and 800 hours on Job 777. The direct labor was incurred at a rate of $20 per direct labor hour for Job 345 and $21 per direct labor for Job 777. Journalize the entry for the flow of labor costs into production. 165. During April, Cavy Company incurred factory overhead as follows: Indirect materials Factory supervision labor Utilities Depreciation (factory) Powered by Cognero
$11,000 4,000 500 700 Page 22
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Chapter 19 - Job Order Costing Equipment rental
750
Journalize the factory overhead incurred during April. 166. Cavy Company estimates that total factory overhead costs will be $660,000 for the year. Direct labor hours are estimated to be 100,000. a. Determine the: (1) Predetermined factory overhead rate (2) Amount of factory overhead applied to Job 345 if the amount of direct labor hours is 560 and Job 777 if the amount of direct labor hours is 800 b. Journalize the entry to apply factory overhead for April, assuming Jobs 560 and 777 are the only jobs in production during the month. 167. Cavy Company estimates that total factory overhead for the following year will be $1,470,000. The company has decided that the basis for applying factory overhead should be machine hours, which is estimated to be 40,000 hours. Compute the predetermined factory overhead rate. 168. Cavy Company estimates that total factory overhead for the following year will be $1,250,000. The company has determined that the basis for applying factory overhead will be machine hours, which is estimated to be 40,000 hours. There are 4,780 machine hours for all of the jobs in the month of April. What amount will be applied to all of the jobs for the month of April? 169. Cavy Company estimates that total factory overhead for the following year will be $1,470,000. The company has decided that the basis for applying factory overhead should be machine hours, which is estimated to be 40,000 hours. The machine hours for the month of April for all of the jobs were 4,780. Journalize the entry to apply factory overhead. 170. At the end of April, Cavy Company had completed Jobs 765 and 766. The individual job cost sheets reveal the following information: Job Job No. 765 Job No. 766
Direct Materials $5,670 8,900
Direct Labor $3,500 4,775
Machine Hours 27 44
Job 765 produced 152 units, and Job 766 consisted of 250 units. Assuming that the predetermined factory overhead rate is applied by using machine hours at a rate of $200 per hour, determine the (a) balance on the job cost sheets for each job and (b) the cost per unit at the end of April. 171. Cavy Company completed 26,000 units during the year at a cost of $2,139,800. The beginning finished goods inventory was 5,000 units valued at $405,000. Assuming a FIFO cost flow, determine the cost of goods sold for 20,000 units. 172. Cavy Company estimates that total factory overhead for the following year will be $1,250,000. The company has decided that the basis for applying factory overhead should be machine hours, which is estimated to be 40,000 hours. The actual machine hours for the month of April for all of the jobs were 4,780. If the actual factory overhead totaled $141,800, determine the over- or underapplied amount for the month. 173. Winston Company estimates that total factory overhead for the following year will be $1,250,000. The company has decided that the basis for applying factory overhead should be machine hours, which is estimated to be 50,000 hours. The total actual machine hours for the year were 54,300 hours. The actual factory overhead for the year was $1,375,000. Powered by Cognero
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Chapter 19 - Job Order Costing a. b. c.
Determine the total factory overhead applied during the year. Compute the over- or underapplied factory overhead for the year. Journalize the entry to close Factory Overhead to Cost of Goods Sold.
174. Winston Company estimates that total factory overhead for the following year will be $1,250,000. The company has decided that the basis for applying factory overhead should be machine hours, which is estimated to be 50,000 hours. The total actual machine hours for the year were 54,300 hours. The actual factory overhead for the year was $1,348,800. a. b. c.
Determine the total factory overhead applied. Compute the over- or underapplied factory overhead for the year. Journalize the entry to close Factory Overhead to Cost of Goods Sold.
175. Cranston Company estimates the following overhead costs for the coming year: Equipment depreciation Equipment maintenance Supervisory salaries Factory rent Total
$160,000 60,000 40,000 100,000 $360,000
Cranston is also budgeting $600,000 in direct labor costs and 15,000 machine hours for the coming year. a. b.
Compute the predetermined factory overhead rate using direct labor costs as the allocation base. Compute the predetermined factory overhead rate using machine hours as the allocation base.
176. Flagler Company allocates factory overhead based on machine hours. It estimated total factory overhead costs for the year to be $420,000 and estimated machine hours to be 50,000. Actual hours and costs for the year were 46,000 machine hours and $380,000 of factory overhead. a. b. c.
Compute the predetermined factory overhead rate for the year. Compute the amount of applied factory overhead for the year. Determine the amount of under- or overapplied factory overhead for the year.
177. Jase Company allocates factory overhead based on a predetermined factory overhead rate of $9.00 per direct labor hour. Job J904 required 8 tons of direct material at a cost of $600 per ton and took employees who earn $21 per hour a total of 80 hours to complete. What is the total cost of Job J904? 178. Technics Inc., a manufacturing company, utilizes job order costing. Each division establishes its own estimates regarding overhead, which are as follows: Total estimated factory overhead Total estimated machine hours Total estimated direct labor hours
Division A $128,000 16,000 $155,000
Division B $261,000 72,500 $290,000
If Division A allocates overhead on the basis of machine hours and Division B allocates overhead as a percentage of direct labor costs, what would the predetermined factory overhead rate be for each division? 179. Crain Company budgeted 35,000 direct labor hours and incurred 40,000 direct labor hours during the year. It estimated factory overhead at $735,000 and actually incurred $780,000 of factory overhead costs for the year. Powered by Cognero
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Chapter 19 - Job Order Costing a. Compute the predetermined factory overhead rate for the year. b. Compute the amount of applied factory overhead for the year. c. Determine the amount of under- or overapplied factory overhead for the year. 180. National Survey Company uses a job order cost system. a.
b. c.
Indicate the source of the data for debiting Work in Process for each of the following: (1) Direct materials requisitioned (2) Direct labor used Indicate the source of the data for crediting Work in Process for jobs completed. Present a list of the three controlling accounts used in the general ledger to record the inventories and, in each case, indicate the related subsidiary ledger.
181. During August, the receipts and distributions of Material No. B4G9 are as follows: Aug. 3 16 29
Received 1,100 units at $15 1,700 units at $17 900 units at $18
Aug. 11 18 30
Issued 700 units for Job No. 116 1,900 units for Job No. 117 800 units for Job No. 118
a. b.
Determine the cost of each of the three issues under a perpetual system, using the first-in, first-out method. Journalize a summary entry for the issuance of the materials for the month, assuming that the cost of issuances is determined by the first-in, first-out method.
182. A summary of the time tickets for August follows: Job No. 321 329 336
Amount $11,000 9,200 5,000
Description 342 346 Indirect
Amount $8,300 5,700 8,000
Journalize the entries for (a) the labor cost incurred and (b) the application of factory overhead to production for August. The factory overhead rate is 70% of direct labor cost. 183. The following account appears in the ledger after only part of the postings have been completed for July, the first month of the current fiscal year: July 1 Balance Direct materials Direct labor
Work in Process 60,200 147,000 120,000
Factory overhead is applied to jobs at the rate of 60% of direct labor cost. The actual factory overhead incurred for July was $75,000. Jobs completed during the month totaled $301,200. a.
Journalize the entries for (1) the application of factory overhead to production during July and (2) the jobs completed during July.
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Chapter 19 - Job Order Costing b. c. d.
What is the balance of the factory overhead account on July 31? Was factory overhead over- or underapplied on July 31? Determine the balance of Work in Process on July 31.
184. Journalize the entries for the following summarized operations related to production for a company using a job order cost system: a. b.
c.
d. e. f. g. h. i.
Materials purchased on account Materials requisitioned: For production orders For general factory use Factory labor used: On production orders For general factory purposes Depreciation on factory equipment Expiration of prepaid expenses, chargeable to factory Factory overhead costs incurred on account Factory overhead applied, based on machine hours Jobs finished Jobs shipped to customers: Selling price (assume all sold on account) Cost of goods sold
$176,000 153,700 2,700 141,300 12,000 37,000 6,100 76,000 105,300 415,300 638,000 412,000
185. The balance of Material Q on May 1 and the receipts and issuances during May are as follows: Balance, May 1 Received, May 11 Received, May 25
8 at $32 23 at $33 15 at $35
Issued, May 17 Issued, May 27
14 18
Determine the cost of each of the issuances under a perpetual system, using the FIFO method. 186. Harper Company uses a job order cost system. Journalize the entries for materials and labor, based on the following data: Raw materials issued: Job No. 609, $850; for general use in factory, $600 Labor time tickets: Job No. 609, $1,600; $400 for supervision 187. Six selected transactions for the current month are indicated by letters in the following T accounts in a job order cost accounting system: Materials (a)
Wages Payable (b) Factory Overhead (a) (c) Powered by Cognero
Work in Process (a) (d) (b) (c) (f)
Finished Goods (d) (e) Page 26
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Chapter 19 - Job Order Costing (b)
(f)
(f)
Cost of Goods Sold (e) (f) Describe each of the six transactions. 188. On November 2, Newsprint Manufacturing purchases 5 rolls of paper on account at $125 per roll for use within the production process. On November 5, 4 rolls of this paper are issued to Job 157A in the Printing Department. The Printing Department records $675 in direct labor and $1,150 of factory overhead to Job 157A. On November 8, Printing transfers Job 157A to the Folding Department. The Folding Department applies $450 in direct labor and $655 in factory overhead to Job 157A. Job 157A is transferred to finished goods inventory on November 9. a. b. c. d. e.
Journalize the purchase of the paper. Journalize the transfer of raw materials to work in process, the application of direct labor, and the application of manufacturing overhead to Job 157A while in the Printing Department. Journalize the transfer of Job 157A to the Folding Department at actual cost. Journalize the application of direct labor and the application of manufacturing overhead to Job 157A while in the Folding Department. Journalize the transfer of Job 157A to finished goods inventory at actual cost.
189. On May 15, the Stamping Department accepted Job 051507A to make 1,000 funnels. Materials requisitioned were 1,100 sheets at $1.20 per sheet and 1,150 grommets at $0.15 per set. The activity base used by the Stamping Department is the drop-forge strokes indicated by a machine-mounted counter. The counter indicated 1,115 strokes were used on the job in the current period. Factory overhead is applied at $2.25 for each drop-forge stroke. Additionally, $375 of overhead is applied to each job due to setup and tear down. Direct labor is applied at $22.50 per hour for the machine operator and $11.10 for the machine loader. The job required 6.5 hours of labor. Upon completion, the job was transferred to finished goods inventory. Journalize all events as of May 15. 190. On November 14, the Milling Department accepted Job 111407A for 1,000 pounds of cereal mix. Materials: Oats Wheat Barley Malt Honey Water Time: Miller Loader
Standard Qty. 525 pounds 450 pounds 85 pounds 65 pounds 25 quarts 25 gallons
Standard Cost $1.25 per pound $1.15 per pound $1.45 per pound $2.15 per pound $1.20 per quart $0.45 per gallon
4.5 hours 1.5 hours
$22.75 per hour $11.50 per hour
Overhead is applied at $5.75 per pound completed. The recipe produced 1,025 pounds of cereal mix. a. b. c. d.
Journalize the entry for the issuance of raw materials to Job 111407A. Journalize the entry for direct labor incurred for Job 111407A. Journalize the entry to apply manufacturing overhead to Job 111407A. Journalize the entry to transfer Job 111407A to finished goods on November 14.
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Chapter 19 - Job Order Costing 191. Put the following in the order of the flow of manufacturing costs for a company: a. b. c. d. e. f. g. h.
Closing under/overapplied factory overhead to cost of goods sold Materials purchased Factory labor used and factory overhead incurred in production Completed jobs moved to finished goods Factory overhead applied to jobs according to the predetermined overhead rate Materials requisitioned to jobs Selling of finished product Preparation of financial statements to determine gross profit
192. At the end of the period, Carson Company had the following balances in selected accounts: Materials Finished goods Work in process Cost of goods sold Factory overhead a. b.
$
80,000 190,000 70,000 1,000,000 30,000
The factory overhead balance is relatively small; journalize the entry to close the factory overhead account assuming a debit balance. What does a debit balance mean? The factory overhead balance is relatively small; journalize the entry to close the factory overhead account assuming a credit balance. What does a credit balance mean?
193. Discuss how job order cost information is used in decision making. What are some possible reasons that actual cost of materials would exceed expected costs for a job? 194. Discuss the use of job order costing for professional services businesses. What are the similarities and differences between service and manufacturing business job order costing? 195. The following is a list of costs incurred by several business organizations: a. b. c. d. e. f. g. h. i. j. k. l. m. n. o. p. q. r. s.
Telephone cable for a telephone company Membership fees for a health club for executives Salary of the director of internal auditing Long-distance telephone bill for calls made by salespersons Carrying cases for a manufacturer of video camcorders Cotton for a textile manufacturer of blue jeans Bandages for the emergency room of a hospital Cost of company holiday party Electricity used to operate factory machinery State unemployment compensation taxes for factory workers Gloves for factory machine operators Fees paid for lawn service for office grounds Salary of secretary to vice president of finance Salary of secretary to vice president of marketing Production supervisor's salary Engine oil for manufacturer and distributor of motorcycles Oil lubricants for factory plant and equipment Cost of a radio commercial Depreciation on factory equipment
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Chapter 19 - Job Order Costing t. u. v. w. x. y. z.
Wages of checkout clerk in company-owned retail outlet Maintenance and repair costs for factory equipment Depreciation on office equipment Bonuses paid to salespersons Insurance on factory building Training for accounting personnel on use of microcomputer Steel for a construction contractor
Classify each of the preceding costs as product costs or period costs. For those costs classified as product costs, indicate whether the product cost is a direct materials cost, direct labor cost, or factory overhead cost. For those costs classified as period costs, indicate whether the period cost is a selling expense or an administrative expense. Use the following tabular headings for preparing your answer. Place an X in the appropriate column.
Cost
Product Cost Direct Direct Factory Materials Labor Overhead Cost Cost Cost
Period Cost Selling Administrative Expense Expense
196. List the accounts used in the cost flow for (a) a manufacturer and (b) a service provider.
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Chapter 19 - Job Order Costing Answer Key 1. True 2. False 3. True 4. False 5. True 6. True 7. False 8. False 9. True 10. False 11. False 12. True 13. False 14. True 15. True 16. True 17. True 18. False 19. True 20. True 21. False 22. False 23. False 24. False 25. True Powered by Cognero
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Chapter 19 - Job Order Costing 26. True 27. True 28. True 29. True 30. False 31. False 32. False 33. True 34. False 35. False 36. True 37. True 38. True 39. False 40. True 41. True 42. False 43. True 44. False 45. True 46. True 47. False 48. True 49. b 50. b Powered by Cognero
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Chapter 19 - Job Order Costing 51. d 52. a 53. d 54. c 55. a 56. c 57. b 58. c 59. c 60. a 61. c 62. b 63. c 64. a 65. b 66. c 67. a 68. c 69. a 70. b 71. c 72. c 73. d 74. b 75. c 76. b Powered by Cognero
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Chapter 19 - Job Order Costing 77. b 78. c 79. d 80. a 81. d 82. a 83. c 84. a 85. a 86. a 87. b 88. c 89. d 90. c 91. d 92. c 93. d 94. d 95. d 96. b 97. a 98. b 99. c 100. a 101. d Powered by Cognero
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Chapter 19 - Job Order Costing 102. c 103. b 104. c 105. a 106. a 107. c 108. c 109. b 110. b 111. c 112. c 113. a 114. b 115. c 116. a 117. b 118. a 119. b 120. b 121. c 122. b 123. b 124. c 125. c 126. b 127. a Powered by Cognero
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Chapter 19 - Job Order Costing 128. b 129. c 130. c 131. b 132. b 133. d 134. d 135. d 136. b 137. a 138. b 139. b 140. b 141. c 142. g 143. e 144. a 145. b 146. f 147. d 148. c 149. d 150. d 151. b 152. c Powered by Cognero
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Chapter 19 - Job Order Costing 153. a 154. b 155. a 156. c 157. e 158. a 159. d 160. c 161. b 162. The two main types of cost accounting systems are job order cost systems and process cost systems. Both methods measure, record, and report product costs, which are used for setting product prices, controlling operations, and developing financial statements. Each system differs in how it accumulates and records costs. A job order cost system provides product costs for each quantity of product that is manufactured. Each quantity of product that is produced is called a job. This type of system is used by companies that manufacture custom products or batches of similar products. A process cost system provides product costs for each manufacturing department or process. Process cost systems are used by companies that manufacture products that are indistinguishable from each other and manufactured using a continuous process. 163. Mar. 10
15
25
Materials Accounts Payable
2,000
Work in Process Materials
1,125
Work in Process Materials
1,075
164. Work in Process* Wages Payable
2,000
1,125
1,075
28,000 28,000
*(560 × $20) + (800 × $21)
165. Factory Overhead Materials Wages Payable Utilities Payable Accumulated Depreciation—Factory Equipment Rental Payable Powered by Cognero
16,950 11,000 4,000 500 700 750 Page 36
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Chapter 19 - Job Order Costing 166. a. (1) Predetermined Factory Overhead Rate = Estimated Total Factory Overhead Costs ÷ Estimated Activity Base = $660,000 ÷ 100,000 = $6.60 per labor hour (2)
Applied Factory Overhead Costs = Actual Direct Labor Hours × Predetermined Factory Overhead Rate Job 345: 560 hrs. × $6.60 = $3,696 Job 777: 800 hrs. × $6.60 = $5,280
b. Work in Process Factory Overhead
8,976 8,976
167. Predetermined Factory Overhead Rate = Estimated Total Factory Overhead Costs ÷ Estimated Activity Base = $1,470,000 ÷ 40,000 = $36.75 per machine hour 168. Predetermined Factory Overhead Rate = Estimated Total Factory Overhead Costs ÷ Estimated Activity Base = $1,250,000 ÷ 40,000 hours = $31.25 Applied Factory Overhead Costs = Actual Direct Labor Hours × Predetermined Factory Overhead Rate = 4,780 hours × $31.25 = $149,375 169. Work in Process* Factory Overhead
175,665 175,665
*($1,470,000 ÷ 40,000) × 4,780
170. a. Job No. 765 = $14,570 [$5,670 + $3,500 + (27 × $200)] Job No. 766 = $22,475 [$8,900 + $4,775 + (44 × $200)] b.
Job No. 765 = $95.86 ($14,570 ÷ 152) Job No. 766 = $89.90 ($22,475 ÷ 250)
171. $405,000 + (15,000 × $82.30*) = $1,639,500 *$2,139,800 ÷ 26,000 172. Predetermined Factory Overhead Rate = Estimated Total Factory Overhead Costs ÷ Estimated Activity Base = $1,250,000 ÷ 40,000 = $31.25 per machine hour Applied Factory Overhead = Predetermined Factory Overhead Rate × Actual Machine Hours = $31.25 × 4,780 = $149,375 Overapplied Factory Overhead = Applied Overhead – Actual Overhead = $149,375 –$141,800 = $7,575 overapplied 173. a. Predetermined Factory Overhead Rate = Estimated Total Factory Overhead Costs ÷ Estimated Activity Base = $1,250,000 ÷ 50,000 = $25 per machine hour Applied Factory Overhead = Actual Machine Hours × Predetermined Factory Overhead Rate = 54,300 hours × Rate = 54,300 hours x $25 = $1,357,500 b.
Underapplied Factory Overhead = Actual Overhead – Applied Overhead = $1,375,000 – $1,357,500 = $17,500 underapplied
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Chapter 19 - Job Order Costing c. Cost of Goods Sold Factory Overhead
17,500 17,500
174. a. Predetermined Factory Overhead Rate = Estimated Total Factory Overhead Costs ÷ Estimated Activity Base = $1,250,000 ÷ 50,000 = $25 per machine hour Applied Factory Overhead = Actual Machine Hours × Predetermined Factory Rate = 54,300 hours × $25 = $1,357,500 b.
Overapplied Factory Overhead = Applied Overhead – Actual Overhead = $1,357,500 – $1,348,800 = $8,700 overapplied
c. Factory Overhead Cost of Goods Sold
8,700 8,700
175. a. Predetermined Factory Overhead Rate = Estimated Total Factory Overhead Costs ÷ Estimated Activity Base = $360,000 ÷ $600,000 = 60% of direct labor costs b.
Predetermined Factory Overhead Rate = Estimated Total Factory Overhead Costs ÷ Estimated Activity Base = $360,000 ÷ 15,000 machine hours = $24 per machine hour
176. a. Predetermined Factory Overhead Rate = Estimated Total Factory Overhead Costs ÷ Estimated Activity Base = $420,000 ÷ 50,000 = $8.40 per machine hour b.
Applied Factory Overhead = Predetermined Factory Overhead Rate × Actual Machine Hours = $8.40 × 46,000 = $386,400
c.
Overapplied Factory Overhead = Applied Overhead – Actual Overhead = $386,400 – $380,000 = $6,400 overapplied
177. Direct materials Direct labor Factory overhead Total cost of J904
8 tons × $600 80 hours × $21 80 hours × $9
$4,800 1,680 720 $7,200
178. Division A: Predetermined Factory Overhead Rate = Estimated Total Factory Overhead Costs ÷ Estimated Activity Base = $128,000 ÷ 16,000 = $8 per machine hour Division B: Predetermined Factory Overhead Rate = Estimated Total Factory Overhead Costs ÷ Estimated Activity Base = $261,000 ÷ $290,000 = 90% of direct labor costs 179. Powered by Cognero
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Chapter 19 - Job Order Costing a.
Predetermined Factory Overhead Rate = Estimated Total Factory Overhead Costs ÷ Estimated Activity Base = $735,000 ÷ 35,000 = $21 per direct labor hour
b.
Applied Factory Overhead = Predetermined Factory Overhead Rate × Actual Direct Labor Hours = $21 × 40,000 = $840,000
c.
Overapplied Factory Overhead = Applied Overhead – Actual Overhead = $840,000 – $780,000 = $60,000 overapplied
180. a. (1) (2) b. c.
Summary of materials requisitions Summary of time tickets
Job cost sheets for jobs completed Controlling Account Materials Work in Process Finished Goods
181. a. Aug. 11 issue: 18 issue: 31 issue: b.
Subsidiary Ledger Materials ledger Cost ledger Finished goods ledger (or stock ledger)
700 × $15 (400 × $15) + (1,500 × $17) (200 × $17) + (600 × $18)
Work in Process Materials
56,200 56,200
182. a. Work in Process Factory Overhead Wages Payable
39,200 8,000
b.
27,440
Work in Process* Factory Overhead *70% × $39,200
183. a. (1) Work in Process Factory Overhead* *60% × $120,000 (2) Finished Goods Work in Process b.
$10,500 31,500 14,200 $56,200
47,200
27,440
72,000 72,000
301,200 301,200
Actual Overhead (debit) – Applied Overhead (credit) = $75,000 – $72,000 = $3,000 debit balance
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Chapter 19 - Job Order Costing c.
Underapplied
d.
Total debits to Work in Process: Balance, July 1 Direct materials Direct labor Factory overhead Less cost of goods finished during July (credit) Balance, Work in Process, July 31 (debit)
184. a. Materials Accounts Payable b.
c.
d.
e.
f.
g.
h.
i.
$ 60,200 147,000 120,000 72,000
301,200 $ 98,000
176,000 176,000
Work in Process Factory Overhead Materials
153,700 2,700
Work in Process Factory Overhead Wages Payable
141,300 12,000
Factory Overhead Accumulated Depreciation— Factory Equipment
37,000
Factory Overhead Prepaid Expenses
6,100
Factory Overhead Accounts Payable
76,000
Work in Process Factory Overhead
105,300
Finished Goods Work in Process
415,300
Accounts Receivable Sales
638,000
Cost of Goods Sold Finished Goods
412,000
185. May 17 issue: May 27 issue:
$399,200
156,400
153,300
37,000
6,100
76,000
105,300
415,300
638,000
412,000
(8 × $32) + (6 × $33) = $454 (17 × $33) + (1 × $35) = $596
186. Powered by Cognero
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Chapter 19 - Job Order Costing Work in Process Factory Overhead Raw Materials
850 600
Work in Process Factory Overhead Wages Payable
1,600 400
1,450
2,000
187. a. Materials requisitioned for use (both direct and indirect) b. Factory labor used (both direct and indirect) c. Factory overhead applied to jobs d. Completed jobs transferred to finished goods e. Goods sold f. Underapplied overhead disposed of 188. a.
b.
Nov. 2
Nov. 5
5
5
c.
d.
Nov. 8
Nov. 8
8
e.
Nov. 9
189. May 15
15
Raw Materials Accounts Payable
625
Work in Process—Printing Raw Materials
500
Work in Process—Printing Wages Payable
675
Work in Process—Printing Factory Overhead
1,150
Work in Process—Folding Work in Process—Printing
2,325
Work in Process—Folding Work in Process—Printing
450
Work in Process—Folding Factory Overhead
655
Finished Goods Work in Process—Folding
3,430
625
500
675
1,150
2,325
450
655
3,430
Work in Process* Raw Materials *(1,100 × $1.20) + ($1,150 × $0.15)
1,492.50
Work in Process* Factory Overhead
2,883.75
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1,492.50
2,883.75 Page 41
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Chapter 19 - Job Order Costing *$375 + (1,115 × $2.25) 15
15
Work in Process* Wages Payable *($22.50 + $11.10) × 6.5 hrs. Finished Goods Inventory* Work in Process *1,492.50 + $2,883.75 + $218.40
218.40 218.40
4,594.65 4,594.65
190.
a.
b.
c.
d.
Nov. 14
Nov. 14
Nov. 14
Nov. 14
Work in Process* Materials *(525 × $1.25) + ($450 × $1.15) + (85 × $1.45) + (65 × $2.15) + (25 × $1.20) + (25 × $0.45) Work in Process* Wages Payable *(4.5 × $22.75) + (1.5 × $11.50)
1,478.00 1,478.00
119.63 119.63
Work in Process* Overhead *1,025 × $5.75
5,893.75
Finished Goods* Work in Process *1,478.00 + $119.63 + $5,893.75
7,491.38
5,893.75
7,491.38
191. b. Materials purchased f. Materials requisitioned to jobs c. Factory labor used and factory overhead incurred in production e. Factory overhead applied to jobs according to the predetermined overhead rate d. Completed jobs moved to finished goods a. Closing under/overapplied factory overhead to cost of goods sold g. Selling of finished product h. Preparation of financial statements to determine gross profit 192. a. Cost of Goods Sold Powered by Cognero
30,000 Page 42
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Chapter 19 - Job Order Costing Factory Overhead
30,000
A debit balance indicates that the factory overhead was underapplied.
b.
Factory Overhead Cost of Goods Sold
30,000 30,000
A credit balance indicates that the factory overhead was overapplied. 193. A job order cost accounting system accumulates and records product costs by jobs. The resulting total and unit product costs can be compared to similar jobs, compared over time, or compared to expected costs. In this way, a job order cost system can be used by managers for evaluating and controlling costs. Possible reasons that actual material costs would exceed expected costs include poorly trained employees, poor quality materials, faulty equipment, or incorrect instructions. 194. Professional service providers—attorneys, physicians, advertising agencies, etc.—may use job order cost accounting systems. In such cases, clients are considered jobs. Like manufacturers, direct labor and overhead costs for service companies are accumulated in work in process accounts. Unlike manufacturers, materials costs for service companies are usually insignificant and treated as overhead. When a job is completed, its cost is transferred to the cost of services account, which is similar to the cost of goods sold account. Service companies do not use a finished goods account, as services cannot be stored in an inventory. The revenues for services are recorded upon completion. 195. Product Cost Direct Direct Factory Materials Labor Overhead Cost Cost Cost Cost a. X b. c. d. e. X f. X g. X h. i. X j. X k. X l. m. n. o. X p. X q. X r. s. X t. u. X v. w. Powered by Cognero
Period Cost Selling Administrative Expense Expense X X X
X
X X X
X X X X Page 43
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Chapter 19 - Job Order Costing x. y. z.
X X X
196. a. Materials Wages Payable Factory Overhead Work in Process Finished Goods Cost of Goods Sold b.
Supplies Wages Payable Overhead Work in Process Cost of Services
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Chapter 20 - Process Cost Systems True / False 1. Process manufacturing usually reflects a manufacturer that produces small quantities of unique items. a. True b. False 2. Process cost systems use job cost sheets to accumulate cost data. a. True b. False 3. Both process and job order cost systems use a perpetual inventory system for materials, work in process, and finished goods. a. True b. False 4. If the principal products of a manufacturing process are identical, a process cost system is more appropriate than a job order cost system. a. True b. False 5. If the products of a manufacturing process are produced to customer specifications, a process cost system is more appropriate than a job order cost system. a. True b. False 6. Process manufacturers typically use large machines to process a continuous flow of raw materials into a finished state. a. True b. False 7. In a process cost system, each process will have a work in process inventory account. a. True b. False 8. Industries that typically use process cost systems include chemicals, oil, metals, food, paper, and pharmaceuticals. a. True b. False 9. Direct materials, direct labor, and factory overhead are assigned to each manufacturing process in a process cost system. a. True b. False 10. Custom-made goods would be accounted for using a process cost system. a. True b. False Powered by Cognero
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Chapter 20 - Process Cost Systems 11. In a process cost system, a separate work in process inventory account is maintained for each customer’s job. a. True b. False 12. In a process cost system, product costs are accumulated by processing department rather than by job. a. True b. False 13. Equivalent units are the sum of direct materials used and direct labor incurred. a. True b. False 14. Conversion costs include materials, direct labor, and factory overhead. a. True b. False 15. The direct materials costs and direct labor costs incurred by a production department are referred to as conversion costs. a. True b. False 16. The direct labor costs and factory overhead costs incurred by a production department are referred to as conversion costs. a. True b. False 17. The first step in determining the cost of goods completed and ending inventory valuation using process costing is to compute equivalent units of production. a. True b. False 18. Conversion costs are usually incurred evenly throughout a process. a. True b. False 19. Equivalent units of production are the number of units that could have been manufactured from start to finish during an accounting period. a. True b. False 20. Both job order and process cost accounting systems use equivalent units of production to determine costs. a. True b. False 21. If 30,000 units of materials enter production during the first year of operations, 25,000 of the units are finished, and 5,000 are 50% completed, the number of equivalent units of production would be 28,500. Powered by Cognero
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Chapter 20 - Process Cost Systems a. True b. False 22. If 16,000 units of materials enter production during the first year of operations, 12,000 of the units are finished, and 4,000 are 75% completed, the number of equivalent units of production would be 15,000. a. True b. False 23. If the costs of direct materials, direct labor, and factory overhead were $277,300, $52,600, and $61,000, respectively, for 14,000 equivalent units of production, the total conversion cost was $390,900. a. True b. False 24. If the costs of direct materials, direct labor, and factory overhead were $60,000, $35,000, and $25,000, respectively, for 20,000 equivalent units of production, the conversion cost per equivalent unit was $6. a. True b. False 25. If the costs of direct materials, direct labor, and factory overhead were $522,200, $82,700, and $45,300, respectively, for 16,000 equivalent units of production, the conversion cost per equivalent unit was $8. a. True b. False 26. If 10,000 units that were 50% completed were in process on November 1, 90,000 units were completed during November, and 20,000 units were 20% completed on November 30, the number of equivalent units of production for November was 90,000. (Assume no loss of units in production and that inventories are costed by the first-in, first-out method.) a. True b. False 27. If 10,000 units that were 40% completed were in process on November 1, 80,000 units were completed during November, and 12,000 units were 20% completed on November 30, the number of equivalent units of production for November was 75,600. (Assume no loss of units in production and that inventories are costed by the first-in, first-out method.) a. True b. False 28. In applying the first-in, first-out method of costing inventories, if 8,000 units that are 30% completed are in process on June 1, 28,000 units are completed during June, and 4,000 units are 75% completed on June 30, the number of equivalent units of production for June is 33,400. a. True b. False 29. In applying the first-in, first-out method of costing inventories, if 8,000 units that are 30% completed are in process on June 1, 28,000 units are completed during June, and 4,000 units are 80% completed on June 30, the number of equivalent units of production for June is 28,600. a. True Powered by Cognero
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Chapter 20 - Process Cost Systems b. False 30. The cost of production report reports the cost of the goods sold. a. True b. False 31. The cost of production report shows the costs incurred by a department and the allocation of those costs between completed (transferred out) and partially completed units. a. True b. False 32. The cost of production report summarizes (1) the units for which the department is accountable and the disposition of those units and (2) the costs incurred by the department and the allocation of those costs. a. True b. False 33. One of the differences between process costing and job order costing is that the amounts used to transfer costs between accounts come from the cost of production report instead of job cost sheets. a. True b. False 34. In a process cost system, costs flow into finished goods inventory only from the work in process inventory of the last manufacturing process. a. True b. False 35. Conversion costs are generally added evenly throughout the process. a. True b. False 36. Equivalent units should be computed separately for direct materials and conversion costs. a. True b. False 37. A process manufacturer will have a separate work in process account for each process or department. a. True b. False 38. In a process cost system, the cost per equivalent unit is computed before computing equivalent units. a. True b. False 39. Costs of ending inventory in process are included in the cost per equivalent unit computation on the cost of production report by the FIFO method. a. True b. False Powered by Cognero
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Chapter 20 - Process Cost Systems 40. Conversion and direct materials are generally both added at the end of the production process. a. True b. False 41. Gilbert Corporation had 25,000 finished units and 8,000 units 35% complete. The equivalent units totaled 30,200. a. True b. False 42. The last step in the preparation of a cost of production report is the computation of equivalent units of production. a. True b. False 43. Equivalent units of production are always the same as the total number of physical units finished during the period. a. True b. False 44. Once equivalent units are computed for materials, this number will also be used for direct labor and factory overhead. a. True b. False 45. If a department that applies the FIFO cost flow method starts the reporting period with 50,000 physical units that were 25% complete with respect to direct materials and 40% complete with respect to conversion, it must add 12,500 equivalent units of direct materials and 20,000 equivalent units of direct labor to complete them. a. True b. False 46. The FIFO cost flow method separates work done on beginning inventory in the previous period from work done on it in the current period. a. True b. False 47. When the purchase of materials is journalized in a process cost accounting system, the materials account is credited. a. True b. False 48. In a process cost system, indirect materials are charged to Work in Process. a. True b. False 49. With a process cost system, the amount journalized for the cost added to finished goods is taken from the cost of production report of the last processing department. a. True b. False 50. A process cost accounting system records all actual factory overhead costs directly in the work in process account. a. True Powered by Cognero
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Chapter 20 - Process Cost Systems b. False 51. The journal entry to transfer goods in process from Department X to Department Y includes a debit to Work in Process—Department X. a. True b. False 52. All costs of the processes in a process cost system ultimately pass through the cost of goods sold account. a. True b. False 53. One of the primary uses of a cost of production report is to assist management in controlling production costs. a. True b. False 54. Yield measures the ratio of the materials output quantity to the materials input quantity. a. True b. False 55. In lean manufacturing, processing functions are combined into work centers, sometimes called departments. a. True b. False 56. Companies recognizing the need to simultaneously produce products with high quality, low cost, and instant availability have adopted a lean manufacturing philosophy. a. True b. False 57. The closer a company moves toward lean manufacturing, the more differences in unit costs between average costing and FIFO will be reduced. a. True b. False 58. Companies that use the average cost method for process costing have unit costs that include costs from more than one accounting period. a. True b. False 59. If a company uses average costing instead of FIFO, it will still get the same unit costs. a. True b. False 60. The FIFO method of process costing is simpler than the average cost method. a. True b. False Powered by Cognero
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Chapter 20 - Process Cost Systems Multiple Choice 61. For which of the following businesses would a process cost system be appropriate? a. boat repair service b. shampoo manufacturer c. dressmaker d. custom furniture manufacturer 62. Process and job order cost systems are similar in all of the following ways except a. both classify product costs as direct materials, direct labor, and factory overhead b. both allocate factory overhead costs to products c. both use perpetual inventory system for materials, work in process, and finished goods d. both use job cost sheets 63. The cost system best suited to industries that manufacture a large number of products that are indistinguishable from each other using a continuous production process is the a. process cost system b. departmental cost system c. first-in, first-out cost system d. job order cost system 64. In process cost accounting, the costs of direct materials and direct labor are charged directly to a. service departments b. processing departments c. customer accounts receivable d. job orders 65. The three categories of manufacturing costs comprising the total cost of work in process are direct labor, direct materials, and a. selling expenses b. direct expenses c. accounting salaries expense d. factory overhead 66. A process cost system would be appropriate for a a. natural gas refinery b. jet airplane builder c. catering business d. custom cabinet builder 67. All of the following are characteristics of a process cost system except a. the system may use several work in process inventory accounts b. manufacturing costs are grouped by department rather than by job c. the system accumulates costs per job d. the cost flows are similar to the physical flow of materials through the production departments Powered by Cognero
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Chapter 20 - Process Cost Systems 68. Which of the following would use a process cost system? a. custom home builder b. custom helicopter manufacturer c. graduation photographer d. lumber mill 69. If a company uses a process cost system to account for the costs in its five production departments, how many work in process accounts will it use? a. 6 b. 5 c. 4 d. 2 70. Which of the following is not a characteristic of a process cost system? a. Manufacturing costs are grouped by departments. b. The system may use several work in process accounts. c. The system measures costs for each completed job. d. The system allocates costs between completed and partially completed units within a department. 71. In a process cost system, the amount of work in process inventory is valued by a. finding the sum of all open job costs b. allocating departmental costs between completed and partially completed units c. multiplying units in ending inventory by the direct materials cost per unit d. finding the sum of all completed jobs 72. The two categories of cost comprising conversion costs are a. direct labor and indirect labor b. direct labor and factory overhead c. factory overhead and direct materials d. direct labor and direct materials 73. The four steps necessary to complete a cost of production report in a process cost system are: 1. 2. 3. 4.
Allocate costs to units transferred out and partially completed units. Determine the units to be assigned costs. Determine the cost per equivalent unit. Compute equivalent units of production.
The correct ordering of the steps is a. 2, 4, 3, 1 b. 4, 2, 3, 1 c. 2, 3, 4, 1 d. 2, 3, 1, 4 74. Which of the following costs incurred by a paper manufacturer would be included in the group of costs referred to as Powered by Cognero
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Chapter 20 - Process Cost Systems conversion costs? a. accounting department costs b. raw lumber c. assembly labor's wages d. administrative salaries 75. Which of the following costs incurred by a tool manufacturer would not be included in conversion costs? a. factory supervisor's salary b. machine operator's wages c. raw steel d. factory maintenance personnel supplies 76. In the manufacture of 10,000 units of a product, direct materials cost incurred was $165,000, direct labor cost incurred was $105,000, and applied factory overhead was $53,000. What is the total conversion cost? a. $218,000 b. $158,000 c. $323,000 d. $53,000 77. Department M had 600 units 60% completed in process at the beginning of June, 6,000 units completed during June, and 700 units 30% completed at the end of June. Using the first-in, first-out method of inventory costing, what was the number of equivalent units of production for conversion costs for the period? a. 7,300 units b. 5,640 units c. 6,700 units d. 5,850 units 78. Department M had 2,000 units 40% completed in process at the beginning of June, 12,000 units completed during June, and 1,200 units 25% completed at the end of June. What was the number of equivalent units of production for conversion costs for June if the first-in, first-out method is used to cost inventories? a. 11,500 units b. 11,200 units c. 15,200 units d. 10,000 units Use this information about Department G to answer the questions that follow. Department G had 3,600 units 25% completed at the beginning of the period, 11,000 units were completed during the period, 3,000 units were 20% completed at the end of the period, and the following manufacturing costs were debited to the departmental work in process account during the period: Work in process, beginning of period Costs added during period: Direct materials (10,400 units at $8) Direct labor Factory overhead Powered by Cognero
$40,000 83,200 63,000 25,000 Page 9
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Chapter 20 - Process Cost Systems All direct materials are added at the beginning of the process, and the first-in, first-out cost flow method is used. 79. Determine the total cost of the inventory in process at the end of the period. Round the unit cost computation to the nearest cent. a. $16,163 b. $21,432 c. $35,670 d. $28,932 80. Determine the total cost of the 3,600 units of beginning inventory that were completed during the period. Round the unit cost computation to the nearest cent. a. $62,194 b. $16,163 c. $40,000 d. $19,275 81. Determine the total cost of the units started and completed during the period. Round the unit cost computation to the nearest cent. a. $211,200 b. $120,028 c. $190,275 d. $20,934 82. Department R had 5,000 units in work in process that were 75% completed as to labor and overhead at the beginning of the period. During the period, 30,000 units of direct materials were added, 32,000 units were completed, and 3,000 units were 40% completed as to labor and overhead at the end of the period. All materials are added at the beginning of the process. The first-in, first-out method is used to cost inventories. The number of equivalent units of production for conversion costs for the period was a. 32,450 b. 29,450 c. 31,950 d. 26,000 Use this information about Department S to answer the questions that follow. Department S had no work in process at the beginning of the period. It added 12,000 units of direct materials during the period at a cost of $84,000. During the period, 9,000 units were completed, and 3,000 units were 30% completed as to labor and overhead at the end of the period. All materials are added at the beginning of the process. Direct labor was $49,500, and factory overhead was $9,900. 83. The total conversion costs for the period were a. $59,400 b. $49,500 c. $143,400 d. $9,900 84. The total cost of units completed during the period was Powered by Cognero
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Chapter 20 - Process Cost Systems a. $117,000 b. $143,400 c. $121,000 d. $127,450 85. The following production data were taken from the records of the Finishing Department for June: Inventory in process, June 1, 25% completed Transferred to finished goods during June Equivalent units of production during June
1,500 units 5,000 units 5,200 units
Determine the number of equivalent units of production in the June 30 Finishing Department inventory, assuming that the first-in, first-out cost flow method is used. The completion percentage of 25% applies to both direct materials and conversion costs. a. 575 units b. 200 units c. 1,000 units d. 300 units 86. The debits to Work in Process—Assembly Department for May, together with data concerning production, are as follows: May 1, work in process: Materials cost, 3,000 units Conversion costs, 3,000 units, 66.7% completed Materials added during May, 10,000 units Conversion costs during May Goods finished during May, 11,500 units May 31 work in process, 1,500 units, 50% completed
$ 8,000 6,000 30,000 31,000
All direct materials are added at the beginning of the process, and the first-in, first-out cost flow method is used. The materials cost per equivalent unit for May is a. $3.00 b. $3.80 c. $2.92 d. $2.31 87. Department E had 4,000 units in work in process that were 40% completed at the beginning of the period at a cost of $12,500. During the period, 14,000 units of direct materials were added at a cost of $28,700 and 15,000 units were completed. At the end of the period, 3,000 units were 75% completed. All materials are added at the beginning of the process. Direct labor was $32,450, and factory overhead was $18,710. The number of equivalent units of production for the period for conversion if the first-in, first-out method is used to cost inventories was a. 15,650 b. 14,850 c. 14,150 d. 14,650 88. Department A had 1,000 units in Work in Process that were 60% completed at the beginning of the period at a cost of $7,000. During the period, 4,000 units of direct materials were added at a cost of $8,200 and 4,500 units were completed. Powered by Cognero
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Chapter 20 - Process Cost Systems At the end of the period, 500 units were 40% completed. All materials are added at the beginning of the process. Direct labor was $28,700, and factory overhead was $4,510. The cost of the 500 units in process at the end of the period if the first-in, first-out cost flow method is used was a. $3,240 b. $5,175 c. $2,569 d. $2,645 89. In the manufacture of 8,000 units of a product, direct materials cost incurred was $154,600, direct labor cost incurred was $84,000, and applied factory overhead was $45,500. What is the total conversion cost? a. $129,500 b. $154,600 c. $284,100 d. $238,600 90. Department S had 500 units 60% completed in process at the beginning of the period, 9,000 units completed during the period, and 600 units 30% completed at the end of the period. Assume the completion percentage applies to both direct materials and conversion costs, and the first-in-first-out cost flow method is used. The conversion equivalent units of production for the period are a. 8,880 b. 9,300 c. 8,700 d. 9,000 91. Department K had 3,000 units 45% completed in process at the beginning of the period, 17,000 units completed during the period, and 1,200 units 40% completed at the end of the period. Assume the completion percentage applies to both direct materials and conversion costs, and the first-in first-out cost flow method is used. The conversion equivalent units of production for the period are a. 18,350 b. 16,310 c. 15,650 d. 16,130 Use this information about Department A to answer the questions that follow. Department A had 5,000 units in Work in Process that were 60% completed as to labor and overhead at the beginning of the period. There were 39,000 units of direct materials added during the period, 31,000 units were completed during the period, and 8,000 units were 80% completed as to labor and overhead at the end of the period. All materials are added at the beginning of the process, and the first-in, first-out cost flow method is used. 92. The conversion equivalent units of production for the period are a. 34,400 b. 34,200 c. 32,400 d. 34,000
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Chapter 20 - Process Cost Systems 93. The materials equivalent units of production for the period are a. 39,000 b. 29,800 c. 29,000 d. 32,000 Use this information about the Finishing Department to answer the questions that follow. The following production data were taken from the records of the Finishing Department for June: Inventory in process, June 1 (30% completed) Completed units during June Ending inventory (60% complete)
4,000 units 65,000 units 7,000 units
All direct materials are added at the beginning of the process, and the first-in-first-out cost flow method is used. 94. The conversion equivalent units of production in the June 30 Finishing Department inventory are a. 68,000 units b. 70,400 units c. 66,200 units d. 4,200 units 95. The materials equivalent units of production in the June 30 Finishing Department inventory are a. 7,000 units b. 68,000 units c. 72,000 units d. 76,000 units 96. The debits to Work in Process—Assembly Department for April, together with data concerning production, are as follows: April 1, work in process: Materials cost, 3,000 units Conversion costs, 3,000 units, 60% completed Materials added during April, 10,000 units Conversion costs during April Goods finished during April, 12,000 units April 30 work in process, 1,000 units, 40% completed
$ 7,200 6,000 25,000 35,750
All direct materials are added at the beginning of the process, and the first-in, first-out cost flow method is used. The materials cost per equivalent unit for April is a. $2.48 b. $2.08 c. $2.50 d. $5.25 97. The debits to Work in Process—Assembly Department for April, together with data concerning production, are as follows: Powered by Cognero
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Chapter 20 - Process Cost Systems April 1, work in process: Materials cost, 3,000 units Conversion costs, 3,000 units, 40% completed Materials added during April, 10,000 units Conversion costs during April Goods finished during April, 12,000 units April 30 work in process, 1,000 units, 40% completed
$ 7,200 6,000 25,000 30,800
All direct materials are added at the beginning of the process, and the first-in, first-out cost flow method is used. The conversion cost per equivalent unit for April is a. $2.48 b. $2.75 c. $2.50 d. $5.25 Use this information about Department B to answer the questions that follow. Department B had 3,000 units in work in process that were 25% completed at the beginning of the period at a cost of $12,500. There were 13,700 units of direct materials added during the period at a cost of $28,700, 15,000 units were completed during the period, and 1,700 units were 95% completed at the end of the period. All materials are added at the beginning of the process, and the first-in, first-out cost flow method is used. Direct labor was $32,450, and factory overhead was $18,710. 98. The conversion equivalent units of production for the period are a. 14,365 b. 13,615 c. 12,000 d. 15,865 99. The materials equivalent units of production for the period are a. 16,700 b. 12,000 c. 1,700 d. 13,700 Use this information about Super Co. to answer the questions that follow. The following unit data were assembled for the assembly process of Super Co. for the month of April. Direct materials are added at the beginning of the process. Conversion costs are added uniformly over the production process. The company uses the FIFO cost flow method. Beginning work in process (60% completed) Units started in April Ending work in process (30% completed)
Units 5,000 48,000 4,000
100. The conversion equivalent units of production for the period are a. 50,200 Powered by Cognero
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Chapter 20 - Process Cost Systems b. 48,000 c. 53,000 d. 46,200 101. The materials equivalent units of production for the period are a. 48,000 b. 49,000 c. 43,000 d. 53,000 Use this information about Carmelita Inc. to answer the questions that follow. Carmelita Inc. has the following information available:
Direct materials Conversion costs
Costs from Beginning Inventory Costs from Current Period $2,000 $ 22,252 6,200 150,536
102. At the beginning of the period, there were 500 units in process that were 60% complete as to conversion costs and 100% complete as to direct materials costs. During the period, 4,500 units were started and completed. Ending inventory contained 340 units that were 30% complete as to conversion costs and 100% complete as to materials costs. The company uses the FIFO cost flow method. The equivalent units of production for direct materials and conversion costs, respectively, were a. 5,340 for direct materials and 4,902 for conversion costs b. 4,840 for direct materials and 4,802 for conversion costs c. 4,602 for direct materials and 4,802 for conversion costs d. 4,902 for direct materials and 4,802 for conversion costs 103. At the beginning of the period, there were 500 units in process that were 60% complete as to conversion costs and 100% complete as to direct materials costs. During the period, 4,500 units were started and completed. Ending inventory contained 340 units that were 30% complete as to conversion costs and 100% complete as to materials costs. The company uses the FIFO cost flow method. The cost of completing a unit of product during the current period was a. $36.19 b. $34.88 c. $35.90 d. $35.89 104. At the beginning of the period, there were 500 units in process that were 60% complete as to conversion costs and 100% complete as to direct materials costs. During the period, 4,500 units were started and completed. Ending inventory contained 340 units that were 30% complete as to conversion costs and 100% complete as to materials costs. Assume that the company uses the FIFO cost flow method. Round cost-per-unit figures to the nearest cent when computing total costs. The total costs transferred to Finished Goods for units started and completed were a. $161,775 b. $156,960 Powered by Cognero
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Chapter 20 - Process Cost Systems c. $162,855 d. $161,505 105. When preparing the cost of production report using the FIFO method, equivalent production units are generally determined for a. direct materials and conversion costs b. direct materials only c. conversion costs only d. direct materials and direct labor costs only 106. The portion of whole units that were completed with respect to either materials or conversion costs within a given accounting period is the definition of a. units started and completed b. equivalent units c. conversion costs d. ending work in process 107. Which of the following is not included in conversion costs? a. direct labor b. factory overhead c. indirect labor d. direct materials 108. A report prepared periodically for each processing department summarizing the product costs incurred by the department and the allocation of those costs between completed and partially completed units is termed a a. factory overhead production report b. manufacturing cost report c. process cost report d. cost of production report Use this information about Department G to answer the questions that follow. Department G had 3,600 units that were 40% completed at the beginning of the period, 12,000 units that were completed during the period, 2,000 units that were 20% completed at the end of the period, and the following manufacturing costs that were debited to the departmental work in process account during the period: Work in process, beginning of period Costs added during period: Direct materials (10,400 at $9.8365) Direct labor Factory overhead
$ 60,000 102,300 79,800 25,200
All direct materials are added at the beginning of the process, and the first-in, first-out cost flow method is used. 109. Determine the equivalent units for direct materials and conversion costs, respectively. a. 14,000 and 12,160 b. 10,400 and 10,960 Powered by Cognero
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Chapter 20 - Process Cost Systems c. 14,000 and 13,600 d. 10,400 and 10,240 110. Determine the direct materials cost and conversion cost per equivalent unit, respectively. a. $5.94 and $5.86 b. $5.94 and $6.38 c. $8.00 and $8.68 d. $9.84 and $9.58 Use this information about Department W to answer the questions that follow. Department W had 2,400 units, one-third completed at the beginning of the period. There were 16,000 units transferred to Department X from Department W during the period, and 1,800 units were one-half completed at the end of the period. Assume the completion ratios apply to both direct materials and conversion costs, and the company uses the FIFO cost flow method. 111. What is the total number of units to be assigned costs on the cost of production report for Department W? a. 12,000 units b. 13,600 units c. 18,500 units d. 17,800 units 112. Determine the conversion equivalent units of production for the period for Department W. a. 16,100 units b. 13,600 units c. 15,000 units d. 18,500 units 113. Carolwood Company manufactures widgets and uses process costing. The status of the beginning and ending inventory is as follows: Beginning inventory Ending inventory
30% of the manufacturing process is complete 55% of the manufacturing process is complete
Direct materials are added to the manufacturing process in stages. None are added when production begins. Approximately half of the materials are added when the product is 25% complete. The other half is added when the product is 50% complete. What percentage complete are beginning inventory and ending inventory with respect to direct materials (DM) and conversion costs (CC)? a. Beg. inventory: DM—50%, CC—30% End. inventory: DM—100%, CC—55% b. Beg. inventory: DM—50%, CC—30% End. inventory: DM—55%, CC—55% c. Beg. inventory: DM—30%, CC—30% End. inventory: DM—55%, CC—55% d. Beg. inventory: DM—50%, CC—70% End. inventory: DM—100%, CC—45% Powered by Cognero
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Chapter 20 - Process Cost Systems 114. Blue Lake Water Company has two departments: Purifying and Bottling. The Bottling Department received 76,000 liters from the Purifying Department. During the period, the Bottling Department completed 74,000 liters, including 3,000 liters of work in process at the beginning of the period. The ending work in process was 5,000 liters. How many liters were started and completed during the period? a. 71,000 b. 69,000 c. 73,000 d. 79,000 Use this information about Penny, Inc. to answer the questions that follow. Penny, Inc., employs a process cost system and uses the FIFO cost flow method. Direct materials are added at the beginning of the process. Here is information about the July activities: On July 1: Beginning inventories Direct materials cost Conversion costs
850 units, 60% complete $5,000 $4,000
During July: Number of units started Direct materials added Conversion costs added
15,000 $155,000 $83,520
On July 31: Ending inventories
1,600 units, 40% complete
115. The number of units started and completed in July was a. 14,250 b. 15,000 c. 13,400 d. 15,740 116. The conversion equivalent units of production for July are a. 14,400 b. 14,380 c. 14,550 d. 15,850 117. Determine the cost of goods completed and transferred out during July. Round unit cost computations to the nearest cent and final answer to the nearest whole dollar. a. $227,251 b. $225,060 c. $236,905 d. $228,200 Powered by Cognero
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Chapter 20 - Process Cost Systems 118. The cost per equivalent unit for materials used during July was a. $10.78 b. $10.33 c. $9.78 d. $10.65 Use this information about Department J to answer the questions that follow. Department J had no work in process at the beginning of the period. 18,000 units were completed during the period, and 2,000 units were 30% completed at the end of the period. The following manufacturing costs were debited to the departmental work in process account during the period: Direct materials (20,000 at $5) Direct labor Factory overhead
$100,000 142,300 57,200
Assume that all direct materials are added at the beginning of the process, the company uses the FIFO cost flow method, and unit cost computations are rounded to the nearest cent. 119. The total cost of the 18,000 units completed during the period is a. $199,500 b. $299,500 c. $256,500 d. $283,140 120. The total cost of the departmental work in process inventory at the end of the period is a. $90,000 b. $283,140 c. $199,500 d. $16,438 121. In a process cost system, the cost of completed production in Department A is transferred to Department B by which of the following journal entries? a. debit Work in Process—Dept. B; credit Work in Process—Dept. A b. debit Work in Process—Dept. B; credit Finished Goods—Dept. A c. debit Work in Process—Dept. B; credit Cost of Goods Sold—Dept. A d. debit Finished Goods—Dept. A; credit Work in Process—Dept. B Use this information about Mocha Company to answer the questions that follow. Mocha Company manufactures a single product by a continuous process, involving three production departments. The records indicate that direct materials, direct labor, and applied factory overhead for Department 1 were $100,000, $125,000, and $150,000, respectively. The records further indicate that direct materials, direct labor, and applied factory overhead for Department 2 were $55,000, $65,000, and $80,000, respectively. In addition, work in process at the beginning of the period for Department 1 totaled $75,000, and work in process at the end of the period totaled $60,000. 122. The journal entry for the flow of costs into Department 1 during the period for direct materials is a. Work in Process—Department 1 100,000 Powered by Cognero
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Chapter 20 - Process Cost Systems Materials b. Work in Process—Department 1 Materials c. Materials Work in Process—Department 1 d. Materials Work in Process—Department 1
100,000 55,000 55,000 100,000 100,000 55,000 55,000
123. The journal entry for the flow of costs into Department 2 during the period for direct materials is a. Work in Process—Department 2 100,000 Materials 100,000 b. Work in Process—Department 2 55,000 Materials 55,000 c. Work in Process—Department 2 150,000 Materials 150,000 d. Materials 55,000 Work in Process—Department 2 55,000 124. The journal entry for the flow of costs into Department 1 for direct labor is a. Work in Process—Department 1 65,000 Wages Payable 65,000 b. Wages Payable 125,000 Work in Process—Department 1 125,000 c. Work in Process—Department 1 125,000 Wages Payable 125,000 d. Wages Payable 65,000 Work in Process—Department 1 65,000 125. The journal entry for the flow of costs into Department 2 for direct labor is a. Work in Process—Department 2 65,000 Wages Payable 65,000 b. Wages Payable 65,000 Work in Process—Department 2 65,000 c. Work in Process—Department 2 125,000 Wages Payable 125,000 d. Work in Process—Department 2 185,000 Wages Payable 185,000 126. The journal entry for the flow of costs into Department 1 during the period for applied overhead is a. Factory Overhead—Department 1 150,000 Work in Process—Department 1 150,000 b. Work in Process—Department 1 125,000 Factory Overhead—Department 1 125,000 c. Work in Process—Department 1 80,000 Factory Overhead—Department 1 80,000 d. Work in Process—Department 1 150,000 Factory Overhead—Department 1 150,000 Powered by Cognero
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Chapter 20 - Process Cost Systems 127. The journal entry for the flow of costs into Department 2 for applied overhead is a. Factory Overhead—Department 2 80,000 Work in Process—Department 2 80,000 b. Work in Process—Department 2 230,000 Factory Overhead—Department 2 230,000 c. Work in Process—Department 2 80,000 Factory Overhead—Department 2 80,000 d. Work in Process—Department 2 150,000 Factory Overhead—Department 2 150,000 128. The journal entry for the flow of costs from Department 1 into Department 2 is a. Work in Process—Department 2 390,000 Work in Process—Department 1 390,000 b. Work in Process—Department 2 330,000 Work in Process—Department 1 330,000 c. Work in Process—Department 2 215,000 Work in Process—Department 1 215,000 d. Work in Process—Department 2 375,000 Work in Process—Department 1 375,000 129. Mocha Company manufactures a single product by a continuous process involving three production departments. The records indicate that direct materials, direct labor, and applied factory overhead for Department 1 were $100,000, $125,000, and $150,000, respectively. Work in process at the beginning of the period for Department 1 was $75,000, and work in process at the end of the period totaled $60,000. The records indicate that direct materials, direct labor, and applied factory overhead for Department 2 were $50,000, $60,000, and $70,000, respectively. In addition, work in process at the beginning of the period for Department 2 totaled $75,000, and work in process at the end of the period totaled $60,000. The journal entry for the flow of costs into Department 3 during the period is a. Work in Process—Department 3 585,000 Work in Process—Department 2 585,000 b. Work in Process—Department 3 570,000 Work in Process—Department 2 570,000 c. Work in Process—Department 3 555,000 Work in Process—Department 2 555,000 d. Work in Process—Department 3 165,000 Work in Process—Department 2 165,000 130. Mocha Company manufactures a single product by a continuous process involving three production departments. The records indicate that direct materials, direct labor, and applied factory overhead for Department 1 were $100,000, $125,000, and $150,000, respectively. The records further indicate that direct materials, direct labor, and applied factory overhead for Department 2 were $50,000, $60,000, and $70,000, respectively. Department 2 has transferred in costs of $390,000 for the current period. In addition, work in process at the beginning of the period for Department 2 totaled $75,000 and work in process at the end of the period totaled $90,000. The journal entry for the flow of costs into Department 3 during the period is a. Work in Process—Department 3 375,000 Work in Process—Department 2 375,000 b. Work in Process—Department 3 570,000 Work in Process—Department 2 570,000 Powered by Cognero
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Chapter 20 - Process Cost Systems c. Work in Process—Department 3 Work in Process—Department 2 d. Work in Process—Department 3 Work in Process—Department 2
490,000 490,000 555,000 555,000
131. Mocha Company manufactures a single product by a continuous process involving three production departments. The records indicate that direct materials, direct labor, and applied factory overhead for Department 2 were $100,000, $125,000, and $150,000, respectively. The records further indicate that direct materials, direct labor, and applied factory overhead for Department 3 were $50,000, $60,000, and $70,000, respectively. In addition, work in process at the beginning of the period for Department 3 totaled $75,000, and work in process at the end of the period totaled $60,000. The journal entry for the flow of costs into Department 3 during the period for direct materials is a. Work in Process—Department 3 100,000 Materials 100,000 b. Work in Process—Department 3 125,000 Materials 125,000 c. Work in Process—Department 3 50,000 Materials 50,000 d. Work in Process—Department 3 70,000 Materials 70,000 132. Which of the following is not a use of the cost of production report? a. to help managers control operations b. to help managers isolate problems c. to project production d. to help managers improve operations 133. Which of the following measures would not help managers to control and improve operations? a. units produced per time period b. cost trends of a product c. yield trends d. commissions paid per time period 134. Lean manufacturing is a business philosophy that focuses on reducing time and cost and eliminating poor quality. This is accomplished in manufacturing and nonmanufacturing processes by a. moving a product from process to process as each function is completed b. combining processing functions into work centers and cross-training workers to perform more than one function c. having production supervisors attempt to enter enough materials into manufacturing to keep all manufacturing departments operating d. having workers typically perform one function on a continuous basis 135. When a firm adopts lean manufacturing, a. new, more efficient machinery and equipment must be purchased and installed in the original layout b. machinery and equipment are moved into small autonomous production lines called manufacturing cells c. new machinery and equipment must be purchased from franchised JIT dealers d. employees are retrained on different equipment but the plant layout generally stays unchanged Powered by Cognero
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Chapter 20 - Process Cost Systems 136. Which of the following best describes the effect on direct labor when management adopts a lean production process? a. Workers typically perform one function. b. The environment becomes more labor intensive. c. Each employee runs a single machine. d. Workers are often cross-trained to perform more than one function. 137. According to lean manufacturing, a. finished goods should always be available in case a customer wants something b. employees should be expert at one function rather than be cross-trained for multiple functions c. movement of the product and material is reduced d. the product moves from process to process until completion 138. Lean manufacturing attempts to significantly reduce a. profits b. inventory needed to produce products c. waste and simplify the production process d. processing time Use this information about the Assembly Department to answer the questions that follow. The debits to Work in Process—Assembly Department for April, together with data concerning production, are as follows: April 1, work in process: Materials cost, 3,000 units Conversion costs, 3,000 units, 80% completed Materials added during April, 10,000 units Conversion costs during April Goods finished during April, 11,500 units April 30 work in process, 1,500 units, 60% completed
$ 7,500 6,000 29,000 35,000 — —
All direct materials are added at the beginning of the process, and the average cost method is used to cost inventories. 139. The number of equivalent units of production for April is a. 10,000 b. 11,500 c. 12.400 d. 13,000 140. The cost per equivalent unit for April is a. $2.70 b. $6.25 c. $6.40 d. $6.74 Use this information about Department E to answer the questions that follow. Powered by Cognero
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Chapter 20 - Process Cost Systems Department E had 4,000 units in Work in Process that were 40% completed at the beginning of the period at a cost of $12,500. There were 14,000 units of direct materials added during the period at a cost of $28,700. There were 15,000 units completed during the period, and 3,000 units were 75% completed at the end of the period. All materials are added at the beginning of the process, and the average cost method is used to cost inventories. Direct labor was $32,450, and factory overhead was $18,710. 141. The number of equivalent units of production for the period is a. 15,650 b. 14,850 c. 18,000 d. 17,250 142. The total (whole) units to account for during production is a. 15,650 b. 18,000 c. 17,250 d. 17,700 143. The cost per equivalent unit for the period is a. $4.63 b. $5.13 c. $5.35 d. $5.79 Matching Match each of the following businesses to the type of cost system (a or b) it would most likely use. a. Job order cost system b. Process cost system 144. Movie studio 145. Gasoline refinery 146. Home construction 147. Paper manufacturer 148. Flour mill 149. Tax consultant 150. Paint manufacturer 151. Nail manufacturer 152. Web designer Powered by Cognero
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Chapter 20 - Process Cost Systems 153. Lotions and cosmetics manufacturer Match each of the following phrases to the term (a–i) it best describes. a. Direct labor and factory overhead b. Direct labor and direct materials c. Transferred-in costs d. Equivalent units e. Process costing f. Job order costing g. First-in, first-out method h. Cost of production report i. Whole units 154. A cost flow method that assumes that items and their associated costs flow out of a process in the same order that they came into the process 155. Measure of the work done during a production period, expressed in terms of fully completed units of output 156. Conversion costs 157. Summary of the activity in a processing department for a specific period 158. Cost system used by a company producing computer chips 159. The number of units in production during a period, whether completed or not 160. Costs incurred in a previous process that are carried forward as part of the product’s cost when it moves to the next department 161. Cost system used by a company producing custom window treatments Match each of the following phrases to the term (a–e) it best describes. a. Cost of production report b. Equivalent units of production c. Manufacturing cells d. Yield e. Lean manufacturing 162. Measures the quantity of output of production relative to the inputs 163. Provides information for controlling and improving operations 164. Focuses on reducing time, cost, and poor quality within the process 165. The portion of whole units that are complete with respect to materials or conversion costs 166. Work centers for processing in a lean production process Powered by Cognero
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Chapter 20 - Process Cost Systems Subjective Short Answer 167. Job order and process cost systems are both used by manufacturers. Briefly contrast the characteristics of the two types of manufacturers likely to use these systems. 168. Explain the concept of equivalent units. Give an example to validate your explanation. 169. Mountain Springs Water Company has two departments, Purifying and Bottling. The Bottling Department received 67,000 liters from the Purifying Department. During the period, the Bottling Department completed 65,000 liters, including 3,000 liters of work in process at the beginning of the period. The ending work in process had 5,000 liters. How many liters were started and completed during the period? 170. Mountain Springs Water Company has two departments, Purifying and Bottling. The Bottling Department received 58,000 liters from the Purifying Department. During the period, the Bottling Department completed 56,000 liters, including 4,000 liters of work in process at the beginning of the period. The ending work in process had 6,000 liters. How many liters were started and completed during the period? 171. Mountain Springs Water Company has two departments, Purifying and Bottling. The Bottling Department had 3,000 liters in beginning work in process that were 30% completed. During the period, 71,000 liters were completed. The ending work in process had 5,000 liters that were 70% completed. Assume that Mountain Springs uses the FIFO cost flow method and that materials are added at the beginning of the process. What are the materials equivalent units of production for the period? 172. Mountain Springs Water Company has two departments, Purifying and Bottling. The Bottling Department had 8,000 liters in beginning work in process that were 60% complete. During the period, 70,000 liters were completed. The ending work in process had 3,000 liters that were 60% complete. Assume that Mountain Springs uses the FIFO cost flow method and that materials are added at the beginning of the process. What are the materials equivalent units of production for the period? 173. The Bottling Department of Mountain Springs Water Company had 5,000 liters in beginning work in process that were 20% complete. During the period, 58,000 liters were completed. The ending work in process inventory had 3,000 liters that were 90% complete. Assume that Mountain Springs uses the FIFO cost flow method and that materials are added at the beginning of the process. What are the conversion equivalent units of production for the period? 174. The Bottling Department of Mountain Springs Water Company had 4,000 liters in beginning work in process that were 40% complete. During the period, 66,000 liters were completed. The ending work in process inventory had 3,000 liters that were 70% complete. Assume that Mountain Springs uses the FIFO cost flow method and that materials are added at the beginning of the process. What are the conversion equivalent units of production for the period? 175. The cost of direct materials transferred into the Bottling Department of Mountain Springs Water Company is $27,225. The conversion cost for the period in the Bottling Department is $7,596. The total equivalent units for direct materials and conversion are 60,500 and 63,300, respectively. Determine the direct materials and conversion cost per equivalent unit. Round answers to the nearest cent. 176. The cost of direct materials transferred into the Bottling Department of Mountain Springs Water Company is $28,072. The conversion cost for the period in the Bottling Department is $10,275. The total equivalent units for direct materials and conversion are 63,800 and 68,500, respectively. Determine the direct materials and conversion cost per equivalent unit. Round answers to the nearest cent. 177. The cost per equivalent unit of direct materials and conversion in the Bottling Department of Mountain Springs Water Company is $0.45 and $0.12, respectively. The equivalent units to be assigned costs are as follows: Powered by Cognero
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Chapter 20 - Process Cost Systems
Inventory in process, beginning of period Started and completed during the period Transferred out of Bottling (completed) Inventory in process, end of period
Direct Materials 0 57,000 57,000 3,500
Conversion 3,500 57,000 60,500 1,800
Total units and costs to be assigned
60,500
62,300
The beginning work in process inventory had a cost of $2,200. Determine the cost of completed and transferred-out production and the ending work in process inventory. 178. The cost per equivalent unit of direct materials and conversion in the Bottling Department of Beverages on Jolt Company is $0.47 and $0.15, respectively. The equivalent units to be assigned costs are as follows: Direct Materials Inventory in process, beginning of period Started and completed during the period Transferred out of Bottling (completed) Inventory in process, end of period Total units to be assigned costs
0 52,000 52,000 3,500 55,500
Conversion 3,000 52,000 55,000 2,100 57,100
The beginning work in process inventory had a cost of $3,500. Determine the cost of completed and transferred-out production and the ending work in process inventory. 179. Alexandra Company’s Molding Department opened on July 1. During July, 70,000 units were completed and transferred out to the next department. On July 31, the 10,000 units that remained in inventory were 40% complete with respect to conversion costs and 100% complete with respect to materials. How many equivalent units of work did the Molding Department complete during July for materials and conversion costs? 180. Kramer Company started its production operations on August 1. During August, the Printing Department completed 17,600 units. There were 4,400 units in ending inventory that were 80% complete with respect to materials and 10% complete with respect to conversion costs. During August, the department had accumulated materials costs of $45,408 and conversion costs of $76,670. a. Compute the cost of the goods transferred out. b. Determine the value of the Printing Department’s ending inventory in process. 181. The inventory on June 1 and costs charged to Work in Process—Department A during June are as follows: 3,800 units, 60% completed $ 60,400 Direct materials, 32,000 units 378,000 Direct labor 274,000 Factory overhead 168,000 Total $880,400 During June, 32,000 units were placed into production and 31,200 units were completed, including those in inventory on June 1. On June 30, the inventory of work in process consisted of 4,600 units which were 85% completed. All materials are added at the beginning of the process, and the first-in, first-out cost flow method is used. Determine the following (round unit cost data to four decimal places to minimize rounding differences): Powered by Cognero
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Chapter 20 - Process Cost Systems a. b. c. d. e.
Conversion equivalent units of production Conversion cost per equivalent unit Total and unit cost of finished goods started in prior period and completed in the current period Total and unit cost of finished goods started and completed in the current period Total cost of work in process inventory, June 30
182. Stevens Company's inventory on March 1 and the costs charged to Work in Process—Department B during March are as follows: Beginning work in process, 12,000 units, 60% complete From Department A, 55,000 units started this period Direct materials added Direct labor incurred Factory overhead incurred
$ 62,400 115,500 384,915 138,000
During March, all direct materials were transferred in from Department A; the units in process at March 1 were completed and transferred to finished goods; and of the 55,000 units entering the department, all were completed except 6,000 units that were 70% completed. Stevens uses the first-in, first-out cost flow method. Prepare a cost of production report for March. Round unit cost data to four decimal places and total cost to the nearest dollar. 183. Austin Co. manufactures a product called Aster in a three-process series. All materials are added at the beginning of the first process, and Austin uses the first-in, first-out cost flow method. Unit and cost data for the first process (Department A) for the month of December follow: Work in process inventory: December 1 December 31 Started in December: Direct materials cost Conversion cost Completed in December
Units
Completion
Cost
12,000 5,000 14,000
60% 40%
$140,400 ?
21,000
106,400 70,310 ?
Prepare Austin's Department A cost of production report for December. 184. Erin Company's inventory at December 1 and the costs charged to Work in Process—Department B during December are as follows: 1,200 units, 40% completed From Department A, 26,000 units Direct labor Factory overhead
$ 47,800 845,000 312,000 176,770
During December, all direct materials are transferred from Department A, the units in process at December 1 were completed during the period and transferred to finished goods, and of the 26,000 units that entered the department, all were completed during the period except 1,000 units that were 70% complete as to conversion costs. Inventories are costed by the first-in, first-out method. Prepare a cost of production report for December. 185. Everett Company's inventory at December 31 and the costs charged to Work in Process—Department B during Powered by Cognero
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Chapter 20 - Process Cost Systems December are as follows: Dec. 1 WIP, 500 units, 60% completed From Department A, 10,000 units Direct labor Factory overhead
$ 3,460 36,300 7,960 12,500
During December, all direct materials were transferred in from Department A, and the units in process at December 1 were completed during the period and transferred to finished goods. Of the 10,000 units entering the department, all were completed except 1,200 units that were 25% completed as to conversion costs. Inventories are costed by the first-in, firstout method. Prepare a cost of production report for December. 186. Nichols Manufacturing Company has one processing department with information for the month of May as follows: May 1 WIP, 800 units, 70% completed Units started, 14,000 units Direct materials Direct labor Factory overhead
$5,010 57,400 20,049 30,073
All direct materials are added at the beginning of the process. During May, the units in process on May 1 were completed. Of the 14,000 units started, all were completed except 1,500 units that were 30% completed as to conversion costs. Inventories are costed by the first-in, first-out method. Prepare a cost of production report for May. 187. Eagle Co. manufactures bentwood chairs and tables. Wood for both products is steam-bent in the same process, but different types of wood are used for each product. Thus, materials cost is identified separately to each product. One production cycle uses 20 board feet. Labor cost is identified to the process as a whole, as is overhead cost. Data for the month of July follow: Direct material cost per board foot Number of parts formed per production cycle (20 board feet) Actual operating hours in July Parts produced during July Budgeted annual conversion cost: Labor Utilities Depreciation Other overhead Total Budgeted annual operating hours for steam-bending a b. c.
Chairs $3.60
Tables $4.20
10 120 4,000
8 380 9,000
$150,000 125,000 65,000 50,000 $390,000 5,200
Compute July's predetermined rate for the steam-bending process Compute July's direct material costs for chairs and tables Compute conversion costs to be applied to chairs and tables in July
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Chapter 20 - Process Cost Systems d.
Journalize the following entries: (1) Assignment of direct materials to chairs and tables (2) Application of conversion costs to chairs and tables (3) The transfer of completed chairs and tables to the Finishing Department. All of July's production was completed in July.
188. The Brass Works is in the process of determining manufacturing overhead. Journalize events (a) through (d) to Factory Overhead, Administrative Expenses, or Selling Expenses, or allocate between the three as appropriate. Next, compute the predetermined factory overhead rate and apply overhead to Work in Process. a.
Brass Works purchases an insurance policy for $4,000. It has been determined that 80% of the value of the policy protects production, and the balance protects the administrative offices. Brass Works charges insurance initially to expense.
b.
The electric bill shows an amount due of $1,200. This meter is utilized only by production, as the office spaces have their own meter.
c.
Payroll reports that the sales manager’s salary for the period is $3,500 and that production supervisors' wages for the period are $5,500.
d.
The stockroom reports that $2,575 in materials were purchased for the Maintenance Department.
e.
If the driver for the application of overhead is drop-forge strokes and there are expected to be 1,000 strokes in this period, what is the rate per stroke? Round to three decimal places.
f.
Assuming that there are 1,150 drop-forge strokes in this period, apply factory overhead to Work in Process. Round to the nearest dollar.
189. The cost of materials transferred into the Bottling Department of Mountain Springs Water Company is $32,400, with $26,000 from the Purifying Department, plus an additional $6,400 from the materials storeroom. The conversion cost for the period in the Bottling Department is $8,750 ($3,750 factory applied and $5,000 direct labor). The total cost transferred to finished goods for the period is $31,980. The Bottling Department had a beginning inventory of $1,860. a. b.
Journalize the cost of transferred-in materials, conversion costs, and the cost transferred out to finished goods. Determine the balance of Work in Process—Bottling at the end of the period.
190. The estimated total factory overhead cost and total machine hours for Department 40 for the current year are $250,000 and 56,250, respectively. During January, the first month of the current year, actual machine hours used totaled 5,100 and factory overhead cost incurred totaled $22,000. a. b. c. d.
Compute the predetermined factory overhead rate based on machine hours. Round to the nearest cent. Journalize the entry to apply factory overhead to production in Department 40 for January. Determine the balance of Factory Overhead—Department 40 at January 31. Does the balance of Factory Overhead—Department 40 at January 31 represent over- or underapplied factory overhead?
191. A firm produces its products by a continuous process involving three production departments, 1 through 3. Journalize Powered by Cognero
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Chapter 20 - Process Cost Systems the following selected transactions related to production during August: a. b. c. d. e. f. g. h.
Materials purchased on account, $120,000. Material requisitioned for use in Department 1, $125,700, of which $124,200 entered directly into the product. Labor cost incurred in Department 1, $195,400, of which $174,000 was used directly in the manufacture of the product. Factory overhead costs for Department 1 incurred on account, $54,700. Depreciation on machinery in Department 1, $29,200. Expiration of prepaid insurance chargeable to Department 1, $7,000. Factory overhead applied to production in Department 1, $106,300. Output of Department 1 transferred to Department 2, $362,700.
192. Describe the flow of materials in a process cost accounting system. 193. Zang Co. manufactures its products in a continuous process involving two departments, Machining and Assembly. Journalize the following transactions related to production during June: a. b. c. d. e. f. g.
Materials purchased on account, $180,000. Materials requisitioned by: Machining, $73,000 direct and $9,000 indirect materials; Assembly, $4,900 indirect materials. Direct labor used by Machining, $23,000; Assembly, $47,000. Depreciation expenses: Machining, $4,500; Assembly, $7,800. Factory overhead applied: Machining, $9,700; Assembly, $11,300. Machining Department transferred $98,300 to Assembly Department; Assembly Department transferred $83,400 to finished goods. Sold goods on account, $100,000; cost of goods sold, $68,000.
194. The cost of energy consumed in producing good units in the Bottling Department of Mountain Springs Water Company was $36,850 and $39,060 for June and July, respectively. The number of equivalent units produced in June and July was 55,000 and 62,000 liters, respectively. Evaluate the change in the cost of energy between the two months. 195. Welber Corporation had inventory at June 1 and costs charged to Work in Process—Department 60 during June as follows: Inventory, June 1 (3,800 units, 80% completed) Direct materials added, 32,000 units Direct labor Factory overhead applied Total
$ 60,400 368,000 244,000 188,000 $860,400
During June, 32,000 units were placed into production and 31,200 units were completed and transferred to finished goods, including those in inventory on June 1. On June 30, the inventory of work in process consisted of 4,600 units that were 40% completed. Inventories are costed by the average cost method, and all materials are added at the beginning of the process. Prepare a cost of production report for Department 60 for June, using the average cost method. Round the cost per equivalent unit to four decimal places. 196. Discuss how the equivalent units of production are computed under the average cost method. Powered by Cognero
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Chapter 20 - Process Cost Systems Answer Key 1. False 2. False 3. True 4. True 5. False 6. True 7. True 8. True 9. True 10. False 11. False 12. True 13. False 14. False 15. False 16. True 17. False 18. True 19. True 20. False 21. False 22. True 23. False 24. False 25. True Powered by Cognero
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Chapter 20 - Process Cost Systems 26. False 27. False 28. False 29. False 30. False 31. True 32. True 33. True 34. True 35. True 36. True 37. True 38. False 39. True 40. False 41. False 42. False 43. False 44. False 45. False 46. True 47. False 48. False 49. True 50. False Powered by Cognero
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Chapter 20 - Process Cost Systems 51. False 52. True 53. True 54. True 55. False 56. True 57. True 58. True 59. False 60. False 61. b 62. d 63. a 64. b 65. d 66. a 67. c 68. d 69. b 70. c 71. b 72. b 73. a 74. c 75. c 76. b Powered by Cognero
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Chapter 20 - Process Cost Systems 77. d 78. a 79. d 80. a 81. b 82. b 83. a 84. a 85. a 86. a 87. a 88. d 89. a 90. a 91. d 92. a 93. a 94. d 95. a 96. c 97. b 98. d 99. d 100. d 101. a Powered by Cognero
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Chapter 20 - Process Cost Systems 102. b 103. c 104. a 105. a 106. b 107. d 108. d 109. b 110. d 111. d 112. a 113. a 114. a 115. c 116. b 117. a 118. b 119. d 120. d 121. a 122. a 123. b 124. c 125. a 126. d 127. c Powered by Cognero
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Chapter 20 - Process Cost Systems 128. a 129. a 130. d 131. c 132. c 133. d 134. b 135. b 136. d 137. c 138. c 139. c 140. b 141. d 142. b 143. c 144. a 145. b 146. a 147. b 148. b 149. a 150. b 151. b 152. a Powered by Cognero
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Chapter 20 - Process Cost Systems 153. b 154. g 155. d 156. a 157. b 158. e 159. i 160. c 161. f 162. d 163. a 164. e 165. b 166. c 167. Job Order Cost System Custom orders Heterogeneous product Low production volume Low to medium standardization
Process Cost System Continuous production process Homogeneous product High production volume High standardization
168. Equivalent units are a measure of the amount of work done during a production period, expressed in terms of fully completed units of output. If 40,000 units were started and completed, then the equivalent units would equal 40,000 units. However, if those same 40,000 units were started and only 50% complete, then the equivalent units would be 40,000 × 50% = 20,000 units. 169. Liters Started and Completed during Period = Liters Completed – Liters in Beginning WIP = 65,000 – 3,000 = 62,000 liters 170. Liters Started and Completed during Period = Liters Completed – Liters in Beginning WIP = 56,000 – 4,000 = 52,000 liters 171. Whole Units Powered by Cognero
Materials Equivalent Units Page 38
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Chapter 20 - Process Cost Systems Inventory in process, beginning of period Started and completed during the period Transferred out of Bottling (completed) Inventory in process, end of period
0%
0
68,000 × 100%
68,000
71,000 5,000 × 100%
68,000 5,000
Total units to be assigned costs
76,000
73,000
3,000 ×
172.
Inventory in process, beginning of period Started and completed during the period Transferred out of Bottling (completed) Inventory in process, end of period
Whole Equivalent Units Units 8,000 × 0% 0 62,000 × 100% 62,000 70,000 62,000 3,000 × 100% 3,000
Total units to be assigned costs
73,000
65,000
173.
Inventory in process, beginning of period Started and completed during the period Transferred out of Bottling (completed) Inventory in process, end of period
Conversion Whole Equivalent Units Units 5,000 × 80% 4,000 53,000 × 100% 53,000 58,000 57,000 3,000 × 90% 2,700
Total units to be assigned costs
61,000
59,700
174.
Inventory in process, beginning of period Started and completed during the period Transferred out of Bottling (completed) Inventory in process, end of period
Conversion Whole Equivalent Units Units 4,000 × 60% 2,400 62,000 × 100% 62,000 66,000 64,400 3,000 × 70% 2,100
Total units to be assigned costs
69,000
66,500
175. Materials Cost per Equivalent Unit = $27,225 ÷ 60,500 liters = $0.45 Conversion Cost per Equivalent Unit = $7,596 ÷ 63,300 liters = $0.12 176. Materials Cost per Equivalent Unit = $28,072 ÷ 63,800 liters = $0.44 Conversion Cost per Equivalent Unit = $10,275 ÷ 68,500 liters = $0.15 177. Direct Materials Powered by Cognero
Conversion
Total Page 39
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Chapter 20 - Process Cost Systems Inventory in process, beginning balance Inventory in process, beginning of period Started and completed during the period Transferred out of Bottling (completed) Inventory in process, end of period
$ 2,200 0 57,000 × $0.45
3,500 × $0.12 57,000 × $0.12
3,500 × $0.45
1,800 × $0.12
420 32,490 $35,110 1,791
Total costs assigned by the Bottling Dept.
$36,901
Completed and transferred-out production Inventory in process, ending
$35,110 $1,791
178. Direct Materials Conversion Inventory in process, balance Inventory in process, beginning 3,000 × 0 $0.15 of period Started and completed during the 52,000 × 52,000 × period $0.47 $0.15 Transferred out of Bottling (completed) Inventory in process, end of 3,500 × 2,100 × period $0.47 $0.15 Total costs assigned by the Bottling Department Completed and transferred out production Inventory in process, ending
Total $ 3,500 450 32,240 $36,190 1,960 $38,150 $36,190 $1,960
179. Materials Equivalent Units = 70,000 + (10,000 × 100%) = 80,000 Conversion Equivalent Units = 70,000 + (10,000 × 40%) = 74,000 180. Materials Cost per Equivalent Unit = $45,408 ÷ [17,600 + (80% × 4,400)] = $2.15 Conversion Cost per Equivalent Unit = $76,670 ÷ [17,600 + (10% × 4,400)] = $4.25 a. Cost of Goods Transferred Out = ($2.15 + $4.25) × 17,600 = $112,640 b, Ending WIP = ($2.15 × 80% × 4,400) + ($4.25 × 10% × 4,400) = $9,438 181. a. Conversion equivalent units of production: To process units in inventory on June 1: 3,800 × 40% To process units started and completed in June: 31,200 – 3,800 To process units in inventory on June 30: 4,600 × 85% Powered by Cognero
1,520 27,400 3,910 Page 40
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Chapter 20 - Process Cost Systems Equivalent units of production b.
32,830
Conversion cost per equivalent unit: Conversion costs: Direct labor Factory overhead Total Unit conversion cost, $442,000 ÷ 32,830
$274,000 168,000 $442,000 $13.4633
c. Cost of finished goods started in the prior period and completed in current period: Work in process inventory on June 1 $60,400 Conversion costs in current period: 1,520 units at $13.4633 20,464 Total cost $80,864 Unit cost $80,864 ÷ 3,800 $21.2800 d.
e.
Cost of finished goods started and completed in current period: Direct materials: 27,400 units at $11.8125* Conversion costs: 27,400 units at $13.4633 Total cost Unit cost $692,557 ÷ 27,400 *$378,000 ÷ 32,000 Cost of work in process inventory at June 30: Direct materials: 4,600 units at $11.8125 Conversion costs: 3,910* units at $13.4633 Total cost *4,600 × 85%
$323,663 368,894 $692,557 $25.2758
$ 54,338 52,642 $106,980
182. Stevens Company Cost of Production Report—Department B For the Month Ended March 31
UNITS Units charged to production: Inventory in process, March 1 Received from Dept. A Total units accounted for by Dept. B Units to be assigned costs: Inventory in process, March 1 (60% completed) Started and completed in March Transferred to finished goods in March Inventory in process, March 31 (70% completed) Total units to be assigned costs Powered by Cognero
Equivalent Units Whole Direct Units Materials Conversion 12,000 55,000 67,000
12,000 49,000 61,000
0 49,000 49,000
4,800 49,000 53,800
6,000 67,000
6,000 55,000
4,200 58,000 Page 41
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Chapter 20 - Process Cost Systems Costs COSTS Costs per equivalent unit: Total costs for March in Dept. B Total equivalent units Cost per equivalent unit
Direct MaterialsConversion $115,500 $522,915 ÷ 55,000 ÷ 58,000 $ 2.1000 $ 9.0158
Costs assigned to production: Inventory in process, March 1 Costs incurred in March Total costs accounted for by Dept. B Costs allocated to completed and partially completed units: Inventory in process, March 1, balance To complete inventory in process, March 1 Started and completed in March Transferred to finished goods in March Inventory in process, March 31 Total costs assigned by Dept. B
Total
$ 62,400 638,415 $700,815
$ 62,400 $
0 $ 43,276
43,276
102,900a 441,774b
544,674 $650,350
12,600c
50,466 $700,816
37,866d
a
49,000 × $2.1000 49,000 × $9.0158 c 6,000 × $2.1000 d 4,200 × $9.0158 b
183. Austin Company Cost of Production Report—Department A For the Month Ended December 31 Equivalent Units Whole Direct UNITS Conversion Units Materials Units charged to production: Inventory in process, Dec. 1 12,000 Received from materials storeroom 14,000 Total units accounted for by Dept. A 26,000 Units to be assigned costs: Inventory in process, Dec. 1 (60% 12,000 0 4,800 completed) Started and completed in December 9,000 9,000 9,000 Transferred to Dept. B in December 21,000 9,000 13,800 Inventory in process, Dec. 31 (40% 5,000 5,000 2,000 complete) Total units to be assigned costs 26,000 14,000 15,800 Powered by Cognero
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Chapter 20 - Process Cost Systems Costs COSTS
Direct Materials Conversion
Costs per equivalent unit: Total costs for December in Dept. $106,400 A Total equivalent units ÷14,000 Cost per equivalent unit $ 7.60 Costs assigned to production: Inventory in process, Dec. 1 Costs incurred in December Total costs accounted for by Dept. A Costs allocated to completed and partially completed units: Inventory in process, Dec. 1, balance To complete inventory in process, $ 0 Dec. 1 Started and completed in 68,400b December Transferred to Dept. B in December Inventory in process, Dec. 31 38,000d Total costs assigned by Dept. A
Total
$ 70,310 ÷15,800 $ 4.45 $140,400 176,710 $317,110
$140,400 $21,360a
21,360
40,050c
108,450
e
$270,210 46,900 $317,110
8,900
a
4,800 × $4.45 9,000 × $7.60 c 9,000 × $4.45 d 5,000 × $7.60 e 2,000 × $4.45 b
184. Erin Company Cost of Production Report—Department B For the Month Ended December 31 Equivalent Units Whole Direct UNITS Units Materials Conversion Units charged to production: Inventory in process, Dec. 1 1,200 Received from Dept. A 26,000 Total units accounted for by 27,200 Dept. B Units to be assigned costs: Inventory in process, Dec. 1 (40% completed) Started and completed in December Transferred to finished goods in Powered by Cognero
1,200
0
720
25,000
25,000
25,000 Page 43
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Chapter 20 - Process Cost Systems December Inventory in process, Dec. 31 (70% completed) Total units to be assigned costs
26,200
25,000
25,720
1,000 27,200
1,000 26,000
700 26,420
Costs COSTS Materials Conversion Costs per equivalent unit: Total costs for December in $845,000 $488,770 Dept. B Total equivalent units ÷ 26,000 ÷ 26,420 Cost per equivalent unit $ 32.50 $ 18.50 Costs assigned to production: Inventory in process, Dec. 1 Costs incurred in December Total costs accounted for by Dept. B Costs allocated to completed and partially completed units: Inventory in process, Dec. 1, balance To complete inventory in $ 0 $ 13,320a process, Dec. 1 Cost of completed Dec. 1 work in process Started and completed in 812,500b 462,500c December Transferred to finished goods in December Inventory in process, Dec. 31 32,500d 12,950e Total costs assigned by Dept. B
Total
$
47,800 1,333,770
$1,381,570
$
47,800 13,320
$
61,120
1,275,000 $1,336,120 45,450 $1,381,570
a
720 × $18.50 25,000 × $32.50 c 25,000 × $18.50 d 1,000 × $32.50 e 700 × $18.50 b
185. Everett Company Cost of Production Report—Department B For the Month Ended December 31 Equivalent Units Whole Direct UNITS Units Materials Conversion Units charged to production: Inventory in process, Dec. 1 500 Received from Dept. A 10,000 Total units accounted for by Dept. B 10,500 Units to be assigned costs: Powered by Cognero
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Chapter 20 - Process Cost Systems Inventory in process, Dec. 1 (60% completed) Started and completed in December Transferred to finished goods in December Inventory in process, Dec. 31 (25% completed) Total units to be assigned costs
500 8,800
0 8,800
200 8,800
9,300
8,800
9,000
1,200 10,500
1,200 10,000
300 9,300
Costs COSTS
Direct Materials Conversion
Cost per equivalent unit: Total costs for December, in Dept. $36,300 $20,460 B Total equivalent units ÷ 10,000 ÷ 9,300 Cost per equivalent unit $3.63 $2.20 Costs assigned to production: Inventory in process, Dec. 1 Costs incurred in December Total costs accounted for by Dept. B Costs allocated to completed and partially completed units: Inventory in process, Dec. 1 balance To complete inventory $ 0 $ 440a process, Dec. 1 Cost of completed Dec. 1 work in process Started and completed in 31,944b 19,360c December Transferred to finished goods in December Inventory in process, Dec. 31 4,356d 660e Total costs assigned by Dept. B
Total
$ 3,460 56,760 $60,220
$ 3,460 440 $3,900 51,304 $55,204 5,016 $60,220
a
200 × $2.20 8,800 × $3.63 c 8,800 × $2.20 d 1,200 × $3.63 e 300 × $2.20 b
186. Nichols Manufacturing Company Cost of Production Report For the Month Ended May 31 Equivalent Units UNITS Powered by Cognero
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Chapter 20 - Process Cost Systems Whole Units Units charged to production: Inventory in process, May 1 Received from materials storeroom Total units accounted for Units to be assigned costs: Inventory in process, May 1 (70% completed) Started and completed in May Transferred to finished goods Inventory in process, May 31 (30% completed) Total units to be assigned costs
COSTS Cost per equivalent unit: Total costs for May Total equivalent units Cost per equivalent unit Costs assigned to production: Inventory in process, May 1 Costs incurred in May Total costs accounted for Costs allocated to completed and partially completed units: Inventory in process, May 1, balance To complete inventory in process, May 1 Started and completed in May Transferred to finished goods in May Inventory in process, May 31 Total costs assigned
Direct Conversion Materials
800 14,000 14,800 800 12,500 13,300
0 12,500 12,500
240 12,500 12,740
1,500 14,800
1,500 14,000
450 13,190
Costs Direct Total Materials Conversion $57,400 ÷14,000 $ 4.10
$50,122a ÷13,190 $ 3.80
$ 5,010 107,522 $112,532
$
5,010
51,250
$ 912b 47,500d
912 98,750
e
f
$104,672 7,860 $112,532
$
0 c
6,150
1,710
a
$20,049 + $30,073 240 × $3.80 c 12,500 × $4.10 d 12,500 × $3.80 e 1,500 × $4.10 f 450 × $3.80 b
187. a. Steam-Bending Conversion Cost per Hour = $390,000 ÷ 5,200 hrs. = $75 per hour Powered by Cognero
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Chapter 20 - Process Cost Systems b.
Direct material cost per unit: ($3.60/ft. × 20 ft. per cycle) 10 parts per cycle
Chairs
Tables
$7.20
($4.20/ft. × 20 ft. per cycle) 8 parts per cycle Total direct materials cost: 4,000 units × $7.20/unit 9,000 units × $10.50/unit c.
Conversion cost per unit: ($75/hr. × 120 hrs./mo.) 4,000 units
$10.50
$28,800 $94,500
2.25
($75/hr. × 380 hrs./mo.) 9,000 units Total conversion cost: 4,000 units × $2.25/unit 9,000 units × $3.17/unit d.
3.17 (rounded)
$9,000 $28,530
(1) Work in Process—Chairs Work in Process—Tables Materials
28,800 94,500
(2) Work in Process—Chairs Work in Process—Tables Factory Overhead—Chairs Factory Overhead—Tables
9,000 28,530
(3) Finished Goods—Chairs Finished Goods—Tables Work in Process—Chairs Work in Process—Tables
37,800 123,030
123,300
9,000 28,530
37,800 123,030
188. a. Factory Overhead ($4,000 × 80%) Administrative Expenses ($4,000 × 20%) Cash
3,200 800
b. Factory Overhead Cash
1,200
c. Selling Expenses Factory Overhead Wages Payable
3,500 5,500
d. Factory Overhead Accounts Payable
2,575
e. Factory Overhead Factory Overhead
$ 3,200 1,200
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4,000 1,200
9,000 2,575
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Chapter 20 - Process Cost Systems Factory Overhead Factory Overhead Total
5,500 2,575 $12,475
Predetermined Factory Overhead Rate = Estimated Factory Overhead Costs ÷ Estimated Activity Base = $12,475 ÷ 1,000 strokes = $12.475 per stroke f. Applied Factory Overhead = Predetermined Factory Overhead Rate × Actual Activity Base = $12.475 × 1,150 = $14,346 Work in Process Factory Overhead 189. a. Work in Process—Bottling Work in Process—Purifying Materials
14,346 14,346
32,400 26,000 6,400
Work in Process—Bottling Factory Overhead—Bottling Wages Payable
8,750
Finished Goods Work in Process—Bottling
31,980
3,750 5,000 31,980
b. $11,030 ($1,860 + $32,400 + $8,750 – $31,980) 190. a. Predetermined Factory Overhead Rate = Estimated Factory Overhead Costs ÷ Estimated Activity Base = $250,000 ÷ 56,250 = $4.44 per machine hour b.
Work in Process—Department 40* Factory Overhead—Department 40 *5,100 × $4.44
22,644 22,644
c. Factory Overhead Balance = Applied Overhead (credit) – Actual Overhead (debit) = $22,644 – 22,000 = $644 (credit) d.
Overapplied factory overhead
191. a. Materials Accounts Payable b.
c.
d.
120,000 120,000
Factory Overhead—Department 1 Work in Process—Department 1 Materials
1,500 124,200
Factory Overhead—Department 1 Work in Process—Department 1 Wages Payable
21,400 174,000
Factory Overhead—Department 1
54,700
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125,700
195,400
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Chapter 20 - Process Cost Systems Accounts Payable e.
f.
g.
h.
54,700
Factory Overhead—Department 1 Accumulated Depreciation— Machinery
29,200
Factory Overhead—Department 1 Prepaid Insurance
7,000
Work in Process—Department 1 Factory Overhead—Department 1
106,300
Work in Process—Department 2 Work in Process—Department 1
362,700
29,200
7,000
106,300
362,700
192. When raw materials are purchased, they are debited to Materials. When direct materials are needed in a production department, a materials requisition report is used to move the materials from the storeroom to the production department. Direct materials used are recorded with a debit to Work in Process Inventory for that department and a credit to Materials. Indirect materials used in a department are recorded with a debit to Factory Overhead and a credit to Materials. 193. a. Materials Accounts Payable b.
c.
d.
e.
f.
g.
180,000 180,000
Work in Process—Machining Factory Overhead—Machining Factory Overhead—Assembly Materials
73,000 9,000 4,900
Work in Process—Machining Work in Process—Assembly Wages Payable
23,000 47,000
Factory Overhead—Machining Factory Overhead—Assembly Accumulated Depreciation
4,500 7,800
Work in Process—Machining Work in Process—Assembly Factory Overhead—Machining Factory Overhead—Assembly
9,700 11,300
Work in Process—Assembly Work in Process—Machining
98,300
Finished Goods Work in Process—Assembly
83,400
Accounts Receivable Sales
100,000
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86,900
70,000
12,300
9,700 11,300
98,300
83,400
100,000 Page 49
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Chapter 20 - Process Cost Systems Cost of Goods Sold Finished Goods 194. Energy costs per liter, June:
Energy costs per liter, July:
68,000 68,000
$36,850 = $0.67 55,000 liters $39,060 = $0.63 62,000 liters
The cost of energy has improved by $0.04 ($0.67 – $0.63) per liter between June and July. 195. Welber Corporation Cost of Production Report—Department 60 For the Month Ended June 30
UNITS Units to account for during production: Inventory in process, June 1 Received from Dept. 59 Total units accounted for by Dept. 60 Units to be assigned costs: Transferred to finished goods in June Inventory in process, June 30 (40% completed) Total units to be assigned costs COSTS Cost per equivalent unit: Total costs for July in Dept. 61 Total equivalent units Cost per equivalent unit Costs assigned to production: Inventory in process, June 1 Direct materials, direct labor, and factory overhead incurred in June Total costs accounted for by Dept. 61 Costs allocated to completed and partially completed units: Transferred to finished goods in June (31,200 × $26.0412) Inventory in process, June 30 (1,840 × $26.0412) Total costs assigned by Dept. B
Whole Units
Equivalent Units of Production
3,800 32,000 35,800 31,200
31,200
4,600 35,800
1,840 33,040 Costs $860,400 ÷ 33,040 $26.0412 $ 60,400 800,000 $860,400
$812,485 47,915* $860,400
*Rounded (forced down) Powered by Cognero
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Chapter 20 - Process Cost Systems 196. Under average costing, the equivalent units of production are determined by adding the equivalent units in the ending work in process inventory to the units completed and transferred during the period. The equivalent units in beginning work in process are ignored for this computation.
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Chapter 21 - Cost-Volume-Profit Analysis True / False 1. Cost behavior refers to the methods used to estimate costs for use in managerial decision making. a. True b. False 2. Cost behavior refers to the manner in which a cost changes as the related activity changes. a. True b. False 3. The fixed cost per unit varies with changes in the level of activity. a. True b. False 4. A production supervisor's salary that does not vary with the number of units produced is an example of a fixed cost. a. True b. False 5. Direct materials cost that varies with the number of units produced is an example of a fixed cost of production. a. True b. False 6. In order to choose the proper activity base for a cost, a managerial accountant must be familiar with the operations of the entity. a. True b. False 7. The relevant range is useful for analyzing cost behavior for management decision-making purposes. a. True b. False 8. The relevant activity base for a cost depends on which base is most closely associated with the cost and the decisionmaking needs of management. a. True b. False 9. The range of activity over which changes in cost are of interest to management is called the relevant range. a. True b. False 10. Total fixed costs change as the level of activity changes. a. True b. False 11. Because variable costs are assumed to change in direct proportion to changes in the activity level, the graph of the variable costs when plotted against the activity level appears as a circle. Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis a. True b. False 12. Variable costs are costs that remain constant in total dollar amount as the level of activity changes. a. True b. False 13. Variable costs are costs that remain constant on a per-unit basis as the level of activity changes. a. True b. False 14. Variable costs are costs that vary in total in direct proportion to changes in the activity level. a. True b. False 15. Variable costs are costs that vary on a per-unit basis with changes in the activity level. a. True b. False 16. Direct materials and direct labor costs are examples of variable costs of production. a. True b. False 17. Total variable costs change as the level of activity changes. a. True b. False 18. Unit variable cost does not change as the number of units of activity changes. a. True b. False 19. A mixed cost has characteristics of both variable and fixed costs. a. True b. False 20. Rental charges of $40,000 per year plus $3 for each machine hour over 18,000 hours are an example of a fixed cost. a. True b. False 21. A rental cost of $20,000 plus $0.70 per machine hour of use is an example of a mixed cost. a. True b. False 22. For purposes of analysis, mixed costs can generally be separated into their variable and fixed components. a. True b. False Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis 23. The contribution margin ratio is the same as the profit-volume ratio. a. True b. False 24. Variable costs as a percentage of sales are equal to 100% minus the contribution margin ratio. a. True b. False 25. The dollars available from each unit of sales to cover fixed costs and profit are the unit variable cost. a. True b. False 26. The ratio that indicates the percentage of each sales dollar available to cover the fixed costs and to provide income from operations is termed the contribution margin ratio. a. True b. False 27. If sales total $2,000,000, fixed costs total $800,000, and variable costs are 60% of sales, the contribution margin ratio is 60%. a. True b. False 28. If sales total $2,000,000, fixed costs total $800,000, and variable costs are 60% of sales, the contribution margin ratio is 40%. a. True b. False 29. The data required for determining the break-even point for a business are the total estimated fixed costs for a period, stated as a percentage of net sales. a. True b. False 30. If fixed costs are $500,000 and variable costs are 60% of break-even sales, profit is $0 when sales revenue is $930,000. a. True b. False 31. If fixed costs are $850,000 and the unit contribution margin is $50, the break-even point is 15,000 units. a. True b. False 32. The point in operations at which revenues and expenses are exactly equal is called the break-even point. a. True b. False
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Chapter 21 - Cost-Volume-Profit Analysis 33. Break-even analysis is one type of cost-volume-profit analysis. a. True b. False 34. If the property tax rates are increased, this change in fixed costs will result in a decrease in the break-even point. a. True b. False 35. If yearly insurance premiums are increased, this change in fixed costs will result in an increase in the break-even point. a. True b. False 36. If employees accept a wage contract that increases the unit contribution margin, the break-even point will decrease. a. True b. False 37. If employees accept a wage contract that decreases the unit contribution margin, the break-even point will decrease. a. True b. False 38. If direct materials cost per unit increases, the break-even point will decrease. a. True b. False 39. If direct materials cost per unit increases, the break-even point will increase. a. True b. False 40. If direct materials cost per unit decreases, the amount of sales necessary to earn a desired amount of profit will decrease. a. True b. False 41. If fixed costs are $450,000 and the unit contribution margin is $50, the sales necessary to earn a target profit of $50,000 are 10,000 units. a. True b. False 42. If fixed costs are $650,000 and the unit contribution margin is $30, the sales necessary to earn a target profit of $30,000 are 14,000 units. a. True b. False 43. Only a single line, which represents the difference between total sales revenues and total costs, is plotted on the profitvolume chart. Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis a. True b. False 44. Only a single line, which represents the difference between total sales revenues and total costs, is plotted on the costvolume-profit chart. a. True b. False 45. Cost-volume-profit analysis can be presented in both equation form and graphic form. a. True b. False 46. The reliability of cost-volume-profit analysis does not depend on the assumption that costs can be accurately divided into fixed and variable components. a. True b. False 47. If a business sells two products, it is not possible to estimate the break-even point. a. True b. False 48. If a business sells four products, it is not possible to estimate the break-even point. a. True b. False 49. Even if a business sells six products, it is possible to estimate the break-even point. a. True b. False 50. If the unit selling price is $40, the volume of sales is $3,000,000, sales at the break-even point amount to $2,500,000, and the maximum possible sales are $3,300,000, the margin of safety is 11,500 units. a. True b. False 51. If the unit selling price is $40, the volume of sales is $3,000,000, sales at the break-even point amount to $2,500,000, and the maximum possible sales are $3,300,000, the margin of safety is 14,500 units. a. True b. False 52. If the volume of sales is $6,000,000 and sales at the break-even point amount to $4,800,000, the margin of safety is 25%. a. True b. False 53. If the volume of sales is $7,000,000 and sales at the break-even point amount to $4,800,000, the margin of safety is 45.8%. Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis a. True b. False 54. Companies with large amounts of fixed costs will generally have a high operating leverage. a. True b. False 55. A low operating leverage is normal for highly automated industries. a. True b. False 56. Garmo Co. has an operating leverage of 5. Next year's sales are expected to increase by 10%. The company's income from operations will increase by 50%. a. True b. False 57. Absorption costing is required for financial reporting under generally accepted accounting principles. a. True b. False 58. The adoption of variable costing for managerial decision making is based on the premise that fixed factory overhead costs are related to productive capacity of the manufacturing plant and are normally not affected by the number of units produced. a. True b. False 59. In an absorption costing income statement, the manufacturing margin is the excess of sales over the variable cost of goods sold. a. True b. False 60. Assuming no other changes, income from operations will be the same under both the variable and absorption costing methods when the number of units manufactured equals the number of units sold. a. True b. False Multiple Choice 61. Cost behavior refers to the manner in which a cost a. changes as the related activity changes b. is allocated to products c. is used in setting selling prices d. is estimated 62. The three most common cost behavior classifications are a. variable costs, product costs, and sunk costs Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis b. fixed costs, variable costs, and mixed costs c. variable costs, period costs, and differential costs d. variable costs, sunk costs, and opportunity costs 63. Costs that remain constant in total dollar amount as the level of activity changes are called a. fixed costs b. mixed costs c. product costs d. variable costs
Figure 21-1 64. Which of the graphs in Figure 21-1 illustrates the behavior of a total fixed cost? a. Graph 2 b. Graph 3 c. Graph 4 d. Graph 1 65. Which of the graphs in Figure 21-1 illustrates the behavior of a total variable cost? a. Graph 2 b. Graph 3 c. Graph 4 d. Graph 1 66. Which of the graphs in Figure 21-1 illustrates the nature of a mixed cost? a. Graph 2 b. Graph 3 Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis c. Graph 4 d. Graph 1 67. Which of the following costs is an example of a cost that remains the same in total as the number of units produced changes? a. direct labor b. salary of a factory supervisor c. units-of-production depreciation on factory equipment d. direct materials 68. Which of the following describes the behavior of the fixed cost per unit? a. decreases with increasing production b. decreases with decreasing production c. remains constant with changes in production d. increases with increasing production 69. Which of the following activity bases would be the most appropriate for food costs of a hospital? a. number of nurses scheduled to work b. number of MRIs taken c. number of patients who stay in the hospital d. quantity of prescriptions filled 70. Which of the following activity bases would be the most appropriate for gasoline costs of a delivery service? a. number of truck drivers b. total miles driven c. number of trucks in service d. number of packages picked up 71. Most operating decisions of management focus on a narrow range of activity called the a. relevant range of production b. strategic level of production c. optimal level of production d. tactical operating level of production 72. Costs that vary in total in direct proportion to changes in an activity level are called a. fixed costs b. sunk costs c. variable costs d. differential costs 73. Which of the following is an example of a cost that varies in total as the number of units produced changes? a. salary of a production supervisor b. direct materials cost c. property taxes on factory buildings Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis d. straight-line depreciation on factory equipment 74. Which of the following is not an example of a cost that varies in total as the number of units produced changes? a. electricity per kilowatt-hour to operate factory equipment b. direct materials cost c. straight-line depreciation on factory equipment d. wages of assembly worker 75. Which of the following is not an example of a cost that varies in total as the number of units produced changes? a. electricity per kilowatt-hour to operate factory equipment b. direct materials cost c. insurance premiums on factory building d. wages of assembly worker 76. Which of the following describes the behavior of a variable cost per unit? a. varies in increasing proportion with changes in the activity level b. varies in decreasing proportion with changes in the activity level c. remains constant with changes in the activity level d. varies in direct proportion with the activity level 77. The graph of a variable cost when plotted against its related activity base appears as a a. circle b. rectangle c. straight line d. curved line 78. A cost that has characteristics of both a variable cost and a fixed cost is called a a. variable/fixed cost b. mixed cost c. discretionary cost d. sunk cost 79. Which of the following costs is a mixed cost? a. salary of a factory supervisor b. electricity costs of $3 per kilowatt-hour c. rental costs of $10,000 per month plus $0.30 per machine hour of use d. straight-line depreciation on factory equipment 80. For purposes of analysis, mixed costs are a. classified as fixed costs b. classified as variable costs c. classified as period costs d. separated into their variable and fixed cost components Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis 81. Strait Co. manufactures office furniture. During the most productive month of the year, 3,000 desks were manufactured at a total cost of $59,000. In the month of lowest production, the company made 1,125 desks at a cost of $38,000. Using the high-low method of cost estimation, total fixed costs are a. $21,000 b. $25,400 c. $42,000 d. $13,000 82. Given the following cost and activity observations for Bounty Company’s utilities, use the high-low method to determine Bounty’s variable utilities cost per machine hour. Round to the nearest cent. Cost March April May June a. $10.00 b. $0.67 c. $0.63 d. $0.11
$3,100 2,700 2,900 3,600
Machine Hours 15,000 10,000 12,000 18,000
83. Given the following cost and activity observations for Smithson Company’s utilities, use the high-low method to determine Smithson’s fixed costs per month. Do not round intermediate computations. Cost January February March April a. $1,533 b. $2,530 c. $22,800 d. $50,600
$52,200 75,000 57,000 64,000
Machine Hours 20,000 29,000 22,000 24,500
84. Given the following cost and activity observations for George Company’s utilities, use the high-low method to determine George’s variable utilities cost per machine hour. Cost May
$16,500
Machine Hours 105,000
June
18,000
120,000
July
16,000
100,000
August
17,500
117,000
a. $100.00 b. $1.00 Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis c. $10.00 d. $0.10 85. Manley Co. manufactures office furniture. During the most productive month of the year, 4,500 desks were manufactured at a total cost of $86,625. In its slowest month, the company made 1,800 desks at a cost of $49,500. Using the high-low method of cost estimation, total fixed costs a. are $61,875 b. are $33,875 c. are $24,750 d. cannot be determined from the data given 86. Which of the following statements regarding fixed and variable costs is true? a. Both costs are constant when considered on a per-unit basis. b. Both costs are constant when considered on a total basis. c. Fixed costs are constant in total, and variable costs are constant per unit. d. Variable costs are constant in total, and fixed costs vary in total. 87. As production increases, the fixed cost per unit a. increases b. decreases c. remains the same d. either increases or decreases, depending on the variable costs 88. Understanding how costs behave is useful to management for all the following reasons except a. predicting customer demand b. predicting profits as sales and production volumes change c. estimating costs d. changing an existing product production 89. The manufacturing costs of Calico Industries for 3 months of the year are as follows:
April May June
Total Cost $120,000 74,000 90,900
Production (units) 280,000 165,000 230,000
Using the high-low method, the variable cost per unit and the total fixed costs are a. $0.78 per unit and $4,000, respectively b. $0.40 per unit and $8,000, respectively c. $4.00 per unit and $800, respectively d. $7.80 per unit and $4,000, respectively 90. As production increases, variable costs per unit a. stay the same b. increase Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis c. decrease d. either increase or decrease, depending on the fixed costs 91. Thompson Company manufactures and sells cookware. Because of current trends, it expects to increase sales by 15% next year. If this expected level of production and sales occurs and plant expansion is not needed, how should this increase affect next year’s total amounts for the following costs? Variable Costs a. increase b. increase c. no change d. decrease
Fixed Costs increase no change no change increase
Mixed Costs increase increase increase increase
92. Given the following costs and activities for Dance Company, use the high-low method to determine Dance’s variable electrical costs per machine hour. Costs August $11,700 September 13,200 October 11,400 a. $2.08 b. $6.00 c. $0.60 d. $1.20
Machine Hours 15,000 17,500 14,500
93. Given the following cost data, what type of cost is shown? Cost per Unit $6,000 3,000 2,000 1,500 a. mixed cost b. variable cost c. fixed cost d. period cost
Number of Units 1 2 3 4
94. Given the following cost data, what type of cost is shown? Total Cost $8,000 8,500 9,000 9,500 a. mixed cost b. variable cost c. fixed cost Powered by Cognero
Number of Units 1 2 3 4
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Chapter 21 - Cost-Volume-Profit Analysis d. period cost 95. Given the following cost data, what type of cost is shown? Total Cost $20 40 60 80 a. mixed cost b. variable cost c. fixed cost d. period cost
Number of Units 1 2 3 4
96. The systematic examination of the relationships among selling prices, sales and production volume, costs, expenses, and profits is termed a. contribution margin analysis b. cost-volume-profit analysis c. budgetary analysis d. gross profit analysis 97. In cost-volume-profit analysis, all costs are classified into which of the following two categories? a. mixed costs and variable costs b. sunk costs and fixed costs c. discretionary costs and sunk costs d. variable costs and fixed costs 98. Contribution margin is a. the excess of sales over variable costs b. another term for volume in the "cost-volume-profit" analysis c. profit d. the same as sales revenue 99. The contribution margin ratio is the a. same as the variable cost ratio b. same as profit c. portion of equity contributed by stockholders d. same as the profit-volume ratio 100. If sales are $820,000, variable costs are 55% of sales, and income from operations is $260,000, what is the contribution margin ratio? a. 45% b. 55% c. 62% d. 32% Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis 101. What ratio indicates the percentage of each sales dollar that is available to cover fixed costs and to provide a profit? a. margin of safety ratio b. contribution margin ratio c. costs and expenses ratio d. profit ratio 102. A firm operated at 90% of capacity for the past year, during which fixed costs were $420,000, variable costs were 40% of sales, and sales were $1,000,000. Income from operations was a. $180,000 b. $420,000 c. $1,080,000 d. $980,000 103. If sales are $425,000, variable costs are 62% of sales, and income from operations is $50,000, what is the contribution margin ratio? a. 38% b. 26.8% c. 11.8% d. 62% 104. Variable costs as a percentage of sales for Lemon Inc. are 80%, current sales are $600,000, and fixed costs are $130,000. How much will income from operations change if sales increase by $40,000? a. $8,000 increase b. $8,000 decrease c. $30,000 decrease d. $30,000 increase 105. Spice Inc.'s unit selling price is $60, unit variable costs are $35, fixed costs are $125,000, and current sales are 10,000 units. How much will income from operations change if sales increase by 8,000 units? a. $150,000 decrease b. $175,000 increase c. $200,000 increase d. $150,000 increase 106. Bryce Co. sales are $914,000, variable costs are $498,130, and income from operations is $196,000. What is the contribution margin ratio? a. 52.2% b. 28.4% c. 54.5% d. 45.5% 107. A firm operated at 80% of capacity for the past year, during which fixed costs were $330,000, variable costs were 70% of sales, and sales were $1,000,000. Income (loss) from operations was a. $140,000 b. $(30,000) Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis c. $370,000 d. $670,000 108. Lee Industry's sales are $525,000, variable costs are 53% of sales, and income from operations is $19,000. What is the contribution margin ratio? a. 47% b. 26.5% c. 9.5% d. 53% 109. Zipee Inc.'s unit selling price is $90, unit variable costs are $40.50, fixed costs are $170,000, and current sales are 12,000 units. How much will income from operations change if sales increase by 5,000 units? a. $125,000 decrease b. $175,000 increase c. $75,000 increase d. $247,500 increase 110. Zeke Company sells 25,000 units at $21 per unit. Variable costs are $10 per unit, and fixed costs are $75,000. The contribution margin ratio (rounded to the nearest whole percent) and the unit contribution margin are a. 47% and $11 per unit, respectively b. 53% and $7 per unit, respectively c. 47% and $8 per unit, respectively d. 52% and $11 per unit, respectively 111. If the contribution margin ratio for France Company is 45%, sales were $425,000, and fixed costs were $100,000, what was the income from operations? a. $233,750 b. $91,250 c. $191,250 d. $133,750 112. If fixed costs are $250,000, the unit selling price is $125, and the unit variable costs are $73, what is the break-even point in sales units (rounded to a whole number)? a. 3,425 units b. 2,381 units c. 2,000 units d. 4,808 units 113. If fixed costs are $750,000 and variable costs are 60% of sales, what is the break-even point in sales dollars? a. $1,250,000 b. $450,000 c. $1,875,000 d. $300,000 114. If fixed costs are $1,200,000, the unit selling price is $240, and the unit variable costs are $110, what is the amount Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis of sales in units (rounded to a whole number) required to realize a target profit of $200,000? a. 9,231 units b. 12,000 units c. 10,769 units d. 5,833 units 115. If fixed costs are $300,000, the unit selling price is $31, and the unit variable costs are $22, what is the break-even point in sales units if fixed costs are reduced by $30,000? a. 30,000 units b. 8,710 units c. 12,273 units d. 20,000 units 116. If fixed costs are $500,000, the unit selling price is $55, and the unit variable costs are $30, what is the break-even point in sales units if fixed costs are increased by $80,000? a. 10,545 units b. 19,333 units c. 23,200 units d. 25,000 units 117. Reynold's Grocery has fixed costs of $350,000, the unit selling price is $29, and the unit variable costs are $20. What is the break-even point in sales units (rounded to a whole number) if the unit variable costs are decreased by $4? a. 26,923 units b. 12,069 units c. 21,875 units d. 38,889 units 118. If fixed costs are $450,000, the unit selling price is $75, and the unit variable costs are $50, what are the old and new break-even points in sales units (rounded to a whole number) if the unit selling price increases by $10? a. 6,000 units and 5,294 units, respectively b. 18,000 units and 6,000 units, respectively c. 18,000 units and 12,857 units, respectively d. 9,000 units and 15,000 units, respectively 119. If fixed costs are $400,000 and the unit contribution margin is $20, what is the break-even point in sales units? a. 25,000 units b. 10,000 units c. 400,000 units d. 20,000 units 120. Johnson Plumbing's fixed costs are $700,000 and the unit contribution margin is $17. What amount of units (rounded to a whole number) must be sold in order to realize a target profit of $100,000? a. 5,000 b. 41,176 c. 47,059 Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis d. 58,882 121. If fixed costs are $500,000 and the unit contribution margin is $20, what is the break-even point in sales units if fixed costs are reduced by $80,000? a. 25,000 b. 29,000 c. 4,000 d. 21,000 122. If fixed costs are $600,000 and the unit contribution margin is $40, what is the break-even point in sales units if fixed costs are increased by $90,000? a. 17,250 b. 15,000 c. 8,333 d. 9,667 123. If fixed costs are $561,000 and the unit contribution margin is $8.00, what is the break-even point in sales units if variable costs are decreased by $0.50 a unit? a. 66,000 b. 70,125 c. 74,800 d. 60,000 124. If variable costs per unit increased because of an increase in hourly wage rates, the break-even point would a. decrease b. increase c. remain the same d. increase or decrease, depending on the percentage increase in wage rates 125. If variable costs per unit decreased because of a decrease in utility rates, the break-even point would a. decrease b. increase c. remain the same d. increase or decrease, depending on the percentage increase in utility rates 126. If fixed costs increased and variable costs per unit decreased, the break-even point a. would increase b. would decrease c. would remain the same d. cannot be determined from the data provided 127. Which of the following conditions would cause the break-even point to decrease? a. total fixed costs increase b. unit selling price decreases c. unit variable cost decreases Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis d. unit variable cost increases 128. Which of the following conditions would cause the break-even point to increase? a. total fixed costs decrease b. unit selling price increases c. unit variable cost decreases d. unit variable cost increases 129. Which of the following conditions would cause the break-even point to increase? a. total fixed costs increase b. unit selling price increases c. unit variable cost decreases d. total fixed costs decrease 130. Charlotte Co. has budgeted salary increases to factory supervisors totaling 9%. If selling prices and all other cost relationships are held constant, next year's break-even point a. will decrease by 9% b. will increase by 9% c. cannot be determined from the data given d. will increase at a rate greater than 9% 131. Flying Cloud Co. has the following operating data for its manufacturing operations: Unit selling price Unit variable cost Total fixed costs
$
250 100 840,000
The company has decided to increase the wages of hourly workers which will increase the unit variable cost by 10%. Increases in the salaries of factory supervisors and property taxes for the factory will increase fixed costs by 4%. If sales prices are held constant, the next break-even point for Flying Cloud Co. will be a. increased by 640 units b. increased by 400 units c. decreased by 640 units d. increased by 800 units 132. If fixed costs are $850,000 and variable costs are 60% of sales, what is the break-even point in sales dollars? a. $2,125,000 b. $340,000 c. $3,400,000 d. $1,416,666 133. O'Boyle Co.'s fixed costs are $256,000, the unit selling price is $36, and the unit variable costs are $20. What is the break-even point in sales units? a. 12,800 units b. 4,571 units c. 16,000 units Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis d. 7,111 units 134. Piper Technology's fixed costs are $1,500,000, the unit selling price is $250, and the unit variable costs are $130. What is the amount of sales in units (rounded to a whole number) required to realize a target profit of $200,000? a. 14,167 units b. 12,500 units c. 16,000 units d. 11,538 units 135. Payton Industries has fixed costs of $490,000, the unit selling price is $35, and the unit variable costs are $20. What is the break-even point in sales units if fixed costs are reduced by $40,000? a. 32,667 units b. 14,000 units c. 30,000 units d. 24,500 units 136. Connor Company's fixed costs are $400,000, the unit selling price is $25, and the unit variable costs are $15. What is the break-even point in sales units if the variable costs are increased by $2? a. 50,000 units b. 30,770 units c. 40,000 units d. 26,667 units 137. Jacob Inc. has fixed costs of $240,000, a unit selling price of $32, and unit variable costs of $20. What are the old and new break-even points in sales units if the unit selling price increases by $4? a. 7,500 units and 6,667 units, respectively b. 20,000 units and 30,000 units, respectively c. 20,000 units and 15,000 units, respectively d. 12,000 units and 15,000 units, respectively 138. When Isaiah Company has fixed costs of $120,000 and the contribution margin is $30, the break-even point in sales units is a. 16,000 units b. 8,000 units c. 6,000 units d. 4,000 units 139. Kaden Company's fixed costs are $46,800, the unit selling price is $42, and the unit variable costs are $24. The break-even point in sales units is a. 2,400 b. 1,950 c. 1,114 d. 2,600 140. If fixed costs are $46,800, the unit selling price is $42, and the unit variable costs are $24, what is the break-even Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis point in sales units if the variable costs are decreased by $2? a. 2,127 b. 1,114 c. 2,340 d. 1,950 141. The point where the sales line and the total costs line intersect on the cost-volume-profit chart represents the a. maximum possible operating loss b. maximum possible operating profit c. total fixed costs d. break-even point 142. The point where the profit line intersects the horizontal axis on the profit-volume chart represents the a. maximum possible operating loss b. maximum possible operating profit c. total fixed costs d. break-even point 143. With the aid of spreadsheets, managers can vary assumptions regarding selling prices, costs, and volume and can immediately see the effects of each change on the break-even point and profit. This is called a. "what if" or sensitivity analysis b. vary the data analysis c. computer-aided analysis d. data gathering 144. Which of the following is not an assumption underlying cost-volume-profit analysis? a. The break-even point will be passed during the period. b. Total sales and total costs can be represented by straight lines. c. Costs can be accurately divided into fixed and variable components. d. The sales mix is constant. 145. In a cost-volume-profit chart, the a. total cost line begins at zero b. slope of the total cost line is dependent on the fixed cost per unit c. total cost line begins at the total fixed cost value on the vertical axis d. total cost line normally ends at the highest sales value 146. The relative distribution of sales among the various products sold by a business is the a. business's basket of goods b. contribution margin mix c. sales mix d. product portfolio 147. When a business sells more than one product at varying selling prices, the business's break-even point can be determined as long as the number of products does not exceed Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis a. two b. three c. fifteen d. There is no limit. Use this information for Carter Co. to answer the questions that follow. Carter Co. sells two products, arks and bins. Last year, Carter sold 14,000 units of arks and 56,000 units of bins. Related data are as follows: Product Arks Bins
Unit Selling Price $120 80
Unit Variable Cost $80 60
Unit Contribution Margin $40 20
148. What was Carter Co.'s sales mix last year? a. 20% arks, 80% bins b. 12% arks, 28% bins c. 70% arks, 30% bins d. 40% arks, 20% bins 149. What was Carter Co.'s unit selling price of E, with E representing one overall "enterprise" product? a. $200 b. $100 c. $80 d. $88 150. What was Carter Co.'s variable cost of E? a. $140 b. $70 c. $64 d. $60 151. What was Carter Co.'s unit contribution margin of E? a. $24 b. $60 c. $92 d. $20 152. Assuming that last year's fixed costs totaled $960,000, what was Carter Co.'s break-even point in sales units? a. 40,000 units b. 12,000 units c. 35,000 units d. 28,000 units 153. If a business had sales of $4,000,000 and a margin of safety of 25%, the break-even point in sales dollars was Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis a. $5,000,000 b. $3,000,000 c. $12,000,000 d. $1,000,000 154. Forde Co. has an operating leverage of 4. Sales are expected to increase by 12% next year. Income from operations is a. unaffected b. expected to increase by 3% c. expected to increase by 48% d. expected to increase by 4% 155. If sales are $400,000, variable costs are 80% of sales, and income from operations is $40,000, what is the operating leverage? a. 0.0 b. 7.5 c. 2.0 d. 1.3 156. The difference between the current sales revenue and the sales at the break-even point is called the a. contribution margin b. margin of safety c. price factor d. operating leverage 157. Cost-volume-profit analysis cannot be used if which of the following occurs? a. Costs cannot be properly classified into fixed and variable costs. b. The total fixed costs change. c. The per-unit variable costs change. d. Per-unit sales prices change. 158. Assume that Corn Co. sold 8,000 units of Product A and 2,000 units of Product B during the past year. The unit contribution margins for Products A and B are $30 and $60, respectively. Corn has fixed costs of $378,000. The breakeven point in sales units is a. 8,000 units b. 6,300 units c. 12,600 units d. 10,500 units 159. Harley Company has sales of $500,000, variable costs are 75% of sales, and income from operations is $40,000. What is Harley's operating leverage? a. 0.0 b. 1.2 c. 1.3 d. 3.1 Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis 160. Rocky Company reports the following data: Sales Variable costs Fixed costs
$800,000 300,000 120,000
Rocky Company’s operating leverage is a. 6.7 b. 2.7 c. 1.0 d. 1.3 Use this information for Rusty Co. to answer the questions that follow. Rusty Co. sells two products, X and Y. Last year, Rusty sold 5,000 units of X and 35,000 units of Y. Related data are as follows: Product X Y
Unit Selling Price Price $110 70
Unit Variable Cost $70 50
Unit Contribution Margin $40 20
161. What is the unit selling price of Rusty's one overall enterprise product, E? Do not round interim computations. a. $180 b. $75 c. $100 d. $110 162. What was Rusty Co.’s sales mix last year? a. 58% X, 42% Y b. 60% X, 40% Y c. 30% X, 70% Y d. 12.5% X, 87.5% Y 163. What was the unit variable cost of Rusty’s one overall enterprise product, E? Do not round interim computations. a. $52.50 b. $70.00 c. $120.00 d. $50.00 164. What was the unit contribution margin of Rusty’s one overall enterprise product, E? Do not round interim computations. a. $60.00 b. $20.00 c. $40.00 d. $22.50 Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis 165. Assuming that last year’s fixed costs totaled $675,000, what was Rusty Co.’s break-even point in sales units? Do not round interim computations. a. 16,875 units b. 30,100 units c. 30,000 units d. 11,250 units 166. Beemer's sales are $400,000, variable costs are 75% of sales, and income from operations is $50,000. The operating leverage is a. 2.5 b. 7.5 c. 2.0 d. 0.0 167. When units manufactured exceed units sold, variable costing income a. equals absorption costing income b. is less than absorption costing income c. is greater than absorption costing income d. is greater by the number of units produced multiplied by the variable cost ratio Use this information for Timmer Corporation to answer the questions that follow. Timmer Corporation just started business in January. There were no beginning inventories. During the year, it manufactured 12,000 units of product and sold 10,000 units. The selling price of each unit was $20. Variable manufacturing costs were $4 per unit, and variable selling and administrative costs were $2 per unit. Fixed manufacturing costs were $24,000, and fixed selling and administrative costs were $6,000. 168. What would Timmer's income from operations be for the year using absorption costing? a. $114,000 b. $110,000 c. $4,000 d. $106,000 169. What would Timmer's income from operations be for the year using variable costing? a. $114,000 b. $110,000 c. $4,000 d. $106,000 170. What would be the difference in Timmer’s income from operations for the year if it used variable costing instead of absorption costing? a. no difference b. $2,000 greater c. $4,000 less d. $6,000 less Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis Matching Match each of the following costs of producing T-shirts to its proper classification (a–c). a. Variable cost b. Fixed cost c. Mixed cost 171. Ink used for screen printing 172. Warehouse rent of $8,000 per month plus $0.50 per square foot of storage used 173. Thread 174. Electricity costs of $0.038 per kilowatt-hour 175. Janitorial costs of $4,000 per month 176. Advertising costs of $12,000 per month 177. Accounting salaries 178. Color dyes for producing different colors of T-shirts 179. Salary of the production supervisor 180. Straight-line depreciation on sewing machines 181. Salaries of internal pattern designers 182. Hourly wages of sewing machine operators 183. Property taxes on factory, building, and equipment 184. Cotton and polyester cloth 185. Maintenance costs with sewing machine company (The cost is $2,000 per year plus $0.001 for each machine hour of use.) Match each of the following costs to the cost graph (a–e) that best depicts its cost behavior as the number of units produced and sold increases.
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Chapter 21 - Cost-Volume-Profit Analysis
a. Graph 1 b. Graph 2 c. Graph 3 d. Graph 4 e. Graph 5 186. Sales commissions of $6,000 plus $0.05 for each item sold 187. Rent on warehouse of $12,000 per month 188. Insurance costs of $2,500 per month 189. Per-unit cost of direct labor 190. Total employer pension costs of $0.35 per direct labor hour 191. Per-unit straight-line depreciation costs 192. Per-unit cost of direct materials 193. Total direct materials cost 194. Electricity costs of $5,000 per month plus $0.0004 per kilowatt-hour 195. Per-unit cost of plant superintendent's salary 196. Salary of the night-time security guard of $3,800 per month 197. Total direct labor cost 198. Straight-line depreciation on factory equipment Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis Match each of the following descriptions with the term (a–e) it best describes. a. Relevant range b. Break-even point c. Contribution margin d. Fixed costs e. Variable costs 199. Vary in proportion to changes in activity levels 200. Remain the same in total dollar amount as the level of activity changes 201. Where a business’s revenues exactly equal costs 202. A specific activity range over which the cost changes are of interest 203. The excess of sales revenues over variable costs Match each of the following descriptions with the term (a–e) it best describes. a. Profit-volume chart b. Cost-volume-profit chart c. Sales mix d. Operating leverage e. Margin of safety 204. Indicates the possible decrease in sales that may occur before operating loss results 205. Contribution margin divided by income from operations 206. Graphically shows costs, sales, and operating profit or loss at various levels of units sold 207. Plots only the difference between total sales and total costs 208. The relative distribution of sales among products sold by a company Subjective Short Answer 209. The manufacturing costs of Mocha Industries for 3 months of the year are as follows: April May June
Total Cost $ 63,100 80,740 100,900
Production 1,100 units 1,800 2,600
Using the high-low method, determine the (a) variable cost per unit and (b) the total fixed costs. If required, round answer to the nearest cent. 210. Global Publishers has collected the following data for recent months: Month Powered by Cognero
Issues Published
Total Cost Page 27
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Chapter 21 - Cost-Volume-Profit Analysis March April May June
20,500 21,800 17,750 21,200
$21,190 22,464 18,495 21,876
a. Using the high-low method, find the variable cost per unit and total fixed costs. If required, round answers to the nearest cent. b. What is the estimated cost for a month in which 19,000 issues are published? 211. Consider the following information: Variable cost per unit July fixed cost per unit Units sold and produced in July
$5 $7 28,000
What is the total estimated cost for August if 30,000 units are projected to be produced and sold? 212. Copper Hill Inc. manufactures laser printers within a relevant range of production of 70,000 to 100,000 printers per year. The following partially completed manufacturing cost schedule has been prepared: Number of Printers Produced 70,000 90,000 100,000 Total costs: Total variable costs Total fixed costs Total costs Cost per unit: Variable cost per unit Fixed cost per unit Total cost per unit
$350,000 630,000 $980,000
(d) (e) (f)
(j) (k) (l)
(a) (b) (c)
(g) (h) (i)
(m) (n) (o)
Complete the preceding cost schedule, identifying each cost by the appropriate letter (a–o). 213. The manufacturing cost of Carrie Industries for the first 3 months of the year are provided as follows: January February March
Total Cost $ 91,500 115,500 79,500
Production 2,300 units 3,100 1,900
Using the high-low method, determine the (a) variable cost per unit and (b) the total fixed cost. If required, round answer to the nearest cent. 214. Blane Company has the following data: Total sales Total variable costs Fixed costs Units sold
$800,000 $300,000 $200,000 50,000 units
What will income from operations be if units sold double to 100,000 units? 215. Bluegill Company sells 45,000 units at $18 per unit. Fixed costs are $62,000, and income from operations is Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis $298,000. Determine the (a) variable cost per unit, (b) unit contribution margin, and (c) contribution margin ratio. 216. Swannanoa Company's budgeted sales are $1,000,000, fixed costs are $350,000, and variable costs are $600,000 a. What is the budgeted contribution margin ratio? b. If the contribution margin ratio is 30%, sales are $900,000, and fixed costs are $200,000, what is the income from operations? 217. Penny Company sells 25,000 units at $59 per unit. Variable costs are $29 per unit, and loss from operations is $(50,000). Determine the (a) unit contribution margin (b) contribution margin ratio, and (c) fixed costs per unit at production of 25,000 units. If required, round to two decimal places. 218. Consider the following: Variable cost as a percentage of sales Unit variable cost Fixed costs
60% $30 $200,000
What is the break-even point in sales units? 219. Gladstorm Enterprises sells a product for $60 per unit. The variable cost is $20 per unit, while fixed costs are $85,000. Determine the (a) break-even point in sales units and (b) break-even point in sales units if the selling price increased to $80 per unit. Round answers to the nearest whole number. 220. Mia Enterprises sells a product for $90 per unit. The variable cost is $40 per unit, while fixed costs are $75,000. Determine the (a) break-even point in sales units and (b) break-even point in sales units if the selling price increased to $100 per unit. 221. Atlantic Company sells a product with a break-even point of 3,000 sales units. The variable cost is $60 per unit, and fixed costs are $270,000. Determine the (a) unit sales price and (b) break-even point in sales units if the company desires a target profit of $36,000. 222. Douglas Company has a contribution margin ratio of 30%. If Douglas has $336,420 in fixed costs, what amount of sales dollars will need to be generated in order for the company to break even? 223. Waterfall Company sells a product for $150 per unit. The variable cost is $80 per unit, and fixed costs are $270,000. Determine the (a) break-even point in sales units and (b) break-even point in sales units if the company desires a target profit of $36,000. Round answers to the nearest whole number. 224. For the current year ending January 31, Harp Company expects fixed costs of $188,500 and a unit variable cost of $51.50. For the coming year, a new wage contract will increase the unit variable cost to $55.50. The selling price of $70.00 per unit is expected to remain the same. a. b.
Compute the break-even point in sales units for the current year. Round answer to the nearest whole number. Compute the anticipated break-even point in sales units for the coming year, assuming the new wage contract is signed.
225. Carrolton, Inc., currently sells widgets for $80 per unit. The variable cost is $30 per unit, and total fixed costs equal $240,000 per year. Sales are currently 20,000 units annually. The company is considering a 20% drop in selling price that it believes will raise units sold by 20%. Assuming all costs stay the same, what is the impact on income if this change is made? Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis 226. Louis Company sells a single product at a price of $65 per unit. Variable costs per unit are $45, and total fixed costs are $625,500. Louis is considering the purchase of a new piece of equipment that would increase the fixed costs to $800,000, but decrease the variable costs per unit to $42. If Louis Company expects to sell 44,000 units next year, should it purchase this new equipment? 227. For the current year ending April 30, Hal Company expects fixed costs of $60,000, a unit variable cost of $70, and anticipated break-even of 1,715 sales units. a. b.
Compute the unit sales price. Round answer to the nearest dollar. Compute the sales (units) required to realize a target profit of $8,000. Round intermediate calculations and final answer to the nearest whole number.
228. Currently, the unit selling price is $50, the variable cost is $34, and the total fixed costs are $108,000. A proposal is being evaluated to increase the selling price to $54. a. b.
Compute the current break-even point in sales units. Compute the anticipated break-even point in sales units, assuming that the unit selling price is increased and all costs remain constant.
229. Perfect Stampers makes and sells aftermarket hubcaps. The variable cost for each hubcap is $4.75, and the hubcap sells for $9.95. Perfect Stampers has fixed costs per month of $3,120. Compute the contribution margin per unit and the break-even point in sales units and in sales dollars for the month. 230. For the past year, Iris Company had fixed costs of $6,708,000, a unit variable cost of $444, and a unit selling price of $600. For the coming year, no changes are expected in revenues and costs, except that a new wage contract will increase variable costs by $6 per unit. Determine the break-even point in sales units for (a) the past year and (b) the coming year. 231. For the past year, Pedi Company had fixed costs of $70,000, unit variable costs of $32, and a unit selling price of $40. For the coming year, no changes are expected in revenues and costs, except that property taxes are expected to increase by $10,000. Determine the break-even point in sales units for (a) the past year and (b) the coming year. 232. For the coming year, River Company estimates fixed costs at $109,000, the unit variable cost at $21, and the unit selling price at $85. Determine (a) the break-even point in sales units, (b) the unit sales required to realize a target profit of $150,000, and (c) the expected income from operations if sales total $500,000. Round units to the nearest whole number and percentage to one decimal place. 233. Racer Industries sells a product for $250 per unit. The variable cost is $130 per unit, and fixed costs are $900,000. a. How many units must Racer sell in order to break even? b. How many units must Racer sell in order to earn a profit of $480,000? c. A new employee suggests that Racer Industries sponsor a 10K marathon as a form of advertising. The cost to sponsor the event is $7,200. How many more units must be sold to cover this cost? 234. A company with a break-even point at $900,000 in sales revenue had fixed costs of $225,000. When actual sales were $1,000,000, variable costs were $750,000. Determine (a) the margin of safety expressed in dollars, (b) the margin of safety expressed as a percentage of sales, (c) the contribution margin ratio, and (d) the income from operations. 235. A company has a margin of safety of 25%, a contribution margin ratio of 30%, and sales of $1,000,000. a. b. c.
What is the break-even point in sales dollars? What is the income from operations? If neither the relationship between variable costs and sales nor the amount of fixed costs is
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Chapter 21 - Cost-Volume-Profit Analysis expected to change in the next year, how much additional income from operations can be earned by increasing sales by $110,000? 236. Bobby Company has fixed costs of $160,000. The unit selling price, variable cost per unit, and contribution margin per unit for the company’s two products are as follows: Contribution Margin Product Selling Price per Unit Variable Cost per Unit per Unit X $180 $100 $80 Y 100 60 40 The sales mix for products X and Y is 60% and 40%, respectively. Determine the break-even point in units of X and Y. 237. Steven Company has fixed costs of $160,000. The unit selling price, variable cost per unit, and contribution margin per unit for the company’s two products are as follows: Product X Y
Selling Price per Unit Variable Cost per Unit $180 $80 100 50
Contribution Margin per Unit $100 50
The sales mix for products X and Y is 60% and 40%, respectively. Determine the break-even point in units of X and Y. 238. Klein Company reports the following data: Sales Variable costs Fixed costs
$980,000 500,000 350,000
Determine Klein Company’s operating leverage. Round answer to two decimal places. 239. Tom Company reports the following data: Sales Variable costs Fixed costs
$600,000 400,000 100,000
Determine Tom Company’s operating leverage. 240. Dean Company has sales of $500,000, and the break-even point in sales dollars is $300,000. Determine the company’s margin of safety percentage. 241. Grant Company has sales of $300,000, and the break-even point in sales dollars is $225,000. Determine the company’s margin of safety percentage. 242. Trail Bikes, Inc., sells three Deluxe bikes for every seven Standard bikes. The Deluxe bike sells for $1,800 and has variable costs of $1,200. The Standard bike sells for $600 and has variable costs of $200. a. If Trail Bikes has fixed costs that total $1,702,000, how many bikes must be sold in order for the company to break even? b. How many of these bikes will be Deluxe bikes, and how many will be Standard bikes? 243. If a business had a capacity of $10,000,000 of sales, actual sales of $6,000,000, break-even sales of $4,200,000, fixed costs of $1,800,000, and variable costs of 60% of sales, what is the margin of safety expressed as a percentage of sales? Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis 244. Safari Co. sells two products, orks and zins. Last year, Safari sold 21,000 units of orks and 14,000 units of zins. Related data are as follows: Product Orks Zins
Unit Selling Price $120 80
Unit Variable Cost $80 60
Unit Contribution Margin $40 20
Compute the following: a. Safari Co.’s sales mix b. Safari Co.’s unit selling price of E c. Safari Co.’s unit contribution margin of E d. Safari Co.’s break-even point in sales units assuming that last year’s fixed costs were $160,000 245. A business had a margin of safety ratio of 20%, variable costs of 75% of sales, fixed costs of $240,000, a break-even point of $960,000, and income from operations of $60,000 for the current year. Compute the current year's sales. 246. Cordell, Inc., has an operating leverage of 3. Sales are expected to increase by 9% next year. What is the expected change in income from operations next year? 247. Silver River Company sells products S and T and has made the following estimates for the coming year: Product S T
Unit Selling Price $30 70
Unit Variable Cost $24 56
Sales Mix 60% 40
Fixed costs are estimated at $202,400. Determine (a) the estimated sales in units of the overall product necessary to reach the break-even point for the coming year, (b) the estimated number of units of each product necessary to be sold to reach the break-even point for the coming year, and (c) the estimated sales in units of the overall product necessary to realize a target profit of $119,600 for the coming year. 248. Define operating leverage. Explain the relationship between a company’s operating leverage and how a change in sales is expected to impact profits. 249. The following data are available from the accounting records of Willow Creek Co. for the month ended May 31. During the accounting period, 17,000 units were manufactured and sold at a price of $60 per unit. There were no beginning inventories, and all units were completed (no work in process). Cost
Total Cost
Number of Units
Unit Cost
Manufacturing costs: Variable Fixed Total
$442,000 170,000 $612,000
17,000 17,000
$26 10 $36
Selling and administrative expenses: Variable ($2 per unit sold) Fixed Total a. b.
$34,000 32,000 $66,000
Prepare a variable costing income statement. Prepare an absorption costing income statement.
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Chapter 21 - Cost-Volume-Profit Analysis 250. Explain how variable costing income from operations will be different from absorption costing income from operations under the following situations: a. A company had no beginning or ending inventory. During the year, it produced and sold 10,000 units. b. A company had no beginning inventory. During the year, it produced 10,000 units and sold 8,000 units. c. A company had 2,000 units in beginning inventory. During the year, it produced 10,000 units and sold 12,000 units. 251. Roller Paint Co. reported the following data for the month of September. There were no beginning inventories and all units were completed (no work in process). Total Cost Manufacturing costs: Variable Fixed Total Selling and administrative expenses: Variable Fixed
$465,000 210,000 $675,000
Number of Units 30,000 30,000
Unit Cost $15.50 7.00 $22.50
$2.00 per unit sold $39,000
In the month of September, 28,000 of the 30,000 units manufactured were sold at a price of $80.00 per unit. a. Prepare a variable costing income statement. b. Prepare an absorption costing income statement. c. Briefly explain why there is a difference in income from operations between the two methods.
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Chapter 21 - Cost-Volume-Profit Analysis Answer Key 1. False 2. True 3. True 4. True 5. False 6. True 7. True 8. True 9. True 10. False 11. False 12. False 13. True 14. True 15. False 16. True 17. True 18. True 19. True 20. False 21. True 22. True 23. True 24. True 25. False Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis 26. True 27. False 28. True 29. False 30. False 31. False 32. True 33. True 34. False 35. True 36. True 37. False 38. False 39. True 40. True 41. True 42. False 43. True 44. False 45. True 46. False 47. False 48. False 49. True 50. False Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis 51. False 52. False 53. False 54. True 55. False 56. True 57. True 58. True 59. False 60. True 61. a 62. b 63. a 64. d 65. b 66. a 67. b 68. a 69. c 70. b 71. a 72. c 73. b 74. c 75. c 76. c Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis 77. c 78. b 79. c 80. d 81. b 82. d 83. a 84. d 85. c 86. c 87. b 88. a 89. b 90. a 91. b 92. c 93. c 94. a 95. b 96. b 97. d 98. a 99. d 100. a 101. b Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis 102. a 103. a 104. a 105. c 106. d 107. b 108. a 109. d 110. d 111. b 112. d 113. c 114. c 115. a 116. c 117. a 118. c 119. d 120. c 121. d 122. a 123. a 124. b 125. a 126. d 127. c Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis 128. d 129. a 130. c 131. a 132. a 133. c 134. a 135. c 136. a 137. c 138. d 139. d 140. c 141. d 142. d 143. a 144. a 145. c 146. c 147. d 148. a 149. d 150. c 151. a 152. a Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis 153. b 154. c 155. c 156. b 157. a 158. d 159. d 160. d 161. b 162. d 163. a 164. d 165. c 166. c 167. b 168. a 169. b 170. c 171. a 172. c 173. a 174. a 175. b 176. b 177. b 178. a Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis 179. b 180. b 181. b 182. a 183. b 184. a 185. c 186. b 187. c 188. c 189. c 190. a 191. d 192. c 193. a 194. b 195. d 196. c 197. a 198. c 199. e 200. d 201. b 202. a 203. c Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis 204. e 205. d 206. b 207. a 208. c 209. a. ($100,900 – $63,100) ÷ (2,600 – 1,100) = $25.20 per unit b. $100,900 – ($25.20 × 2,600) = $35,380 210. a. Variable Cost per Unit = ($22,464 – $18,495) ÷ (21,800 – 17,750) = $0.98 per unit Total Fixed Costs = $18,495 – (17,750 × $0.98) = $1,100 b. Total Cost = $1,100 + ($0.98 × Number of Issues Published) = $1,100 + ($0.98 × 19,000) = $19,720 211. Total Fixed Costs = $7 × 28,000 = $196,000 Total Cost (at 30,000 units) = $196,000 + ($5 × 30,000 units) = $346,000 212. a. $5.00 ($350,000 ÷ 70,000 printers) b. $9.00 ($630,000 ÷ 70,000 printers) c. $14.00 ($980,000 ÷ 70,000 printers) d. $450,000 ($5.00 × 90,000 printers) e. $630,000 f. $1,080,000 ($450,000 + $630,000) g. $5.00 h. $7.00 ($630,000 ÷ 90,000 printers) i. $12.00 ($1,080,000 ÷ 90,000 printers) j. $500,000 ($5.00 × 100,000 printers) k. $630,000 l. $1,130,000 ($500,000 + $630,000) m. $5.00 n. $6.30 ($630,000 ÷ 100,000 units) o. $11.30 ($1,130,000 ÷ 100,000 units) 213. a. ($115,500 – $79,500) ÷ (3,100 – 1,900) = $30 per unit b. $115,500 – ($30 × 3,100) = $22.500 214. Total sales Total variable costs Contribution margin Fixed costs Income from operations
$1,600,000 600,000 $1,000,000 200,000 $ 800,000
215. a. Contribution Margin = Income from Operations – Fixed Costs = $298,000 + $62,000 = $360,000 Variable Costs = Sales – Contribution Margin = (45,000 × $18) – Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis
b. c.
$360,000 = $810,000 – $360,000 = $450,000 Variable Cost per Unit = $450,000 ÷ 45,000 = $10 Unit Contribution Margin = Sales Price per Unit – Variable Cost per Unit = $18 – $10 = $8 per unit Contribution Margin Ratio = Unit Contribution Margin ÷ Sales Price per Unit = $8 ÷ $18 = 44.44%
216. a. Contribution Margin = Sales – Variable Costs = $1,000,000 – $600,000 = $400,000 Contribution Margin Ratio = Contribution Margin ÷ Sales = $400,000 ÷ $1,000,000 = 40% b.
Contribution Margin = Sales × Contribution Margin Ratio = $900,000 × 30% = $270,000 Income from Operations = Contribution Margin – Fixed Costs = $270,000 – $200,000 = $70,000
217. a. Unit Contribution Margin = Sales Price per Unit – Variable Cost per Unit = $59 – $29 = $30 per unit b. Contribution Margin Ratio = Unit Contribution Margin ÷ Sales Price per Unit = $30 ÷ $59 = 50.8% c. Fixed Costs = Loss from Operations – Contribution Margin = $(50,000) – (25,000 × $30) = $(50,000) – $750,000 = $(800,000) Fixed Costs per Unit = $800,000 ÷ 25,000 = $32 per unit 218. Sales Price = $30 ÷ 60% = $50 Contribution Margin Ratio = Sales % – Variable Cost % = 100% – 60% = 40% Unit Contribution Margin = 40% × $50 = $20 Break-Even Sales (units) = Fixed Costs ÷ Unit Contribution Margin = $200,000 ÷ $20 = 10,000 units 219. a. Break-Even Sales (units) = Fixed Costs ÷ Unit Contribution Margin = $85,000 ÷ ($60 – $20) = $85,000 ÷ $40 = 2,125 units b. Break-Even Sales (units) = Fixed Costs ÷ Unit Contribution Margin = $85,000 ÷ ($80 – $20) = $85,000 ÷ $60 = 1,417 units 220. a. Break-Even Sales (units) = Fixed Costs ÷ Unit Contribution Margin = $75,000 ÷ ($90 – $40) = $75,000 ÷ $50 = 1,500 units b. Break-Even Sales (units) = Fixed Costs ÷ Unit Contribution Margin = $75,000 ÷ ($100 – $40) = $75,000 ÷ $60 = 1,250 units 221. a. Break-Even Sales (units) = Fixed Costs ÷ Unit Contribution Margin = Fixed Costs ÷ (Units Sales Price – Unit Variable Cost) Let X = Unit Sales Price $270,000 ÷ (X – $60) = 3,000 units $270,000 ÷ 3,000 = (X – $60) $90 = (X – $60) $90 + $60 = X X = $150 b. Break-Even Sales (units) = (Fixed Costs + Target Profit) ÷ Unit Contribution Margin = ($270,000 + $36,000) ÷ ($150 – $60) = $306,000 ÷ $90 = 3,400 units Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis 222. Break-Even Sales ($) = Fixed Costs ÷ Contribution Margin Ratio = $336,420 ÷ 30% = $1,121,400 223. a. Break-Even Sales (units) = Fixed Costs ÷ Unit Contribution Margin = $270,000 ÷ ($150 – $80) = $270,000 ÷ $70 = 3,857 units b. Break-Even Sales (units) = (Fixed Costs + Target Profit) ÷ Unit Contribution Margin = ($270,000 + $36,000) ÷ $70 = $306,000 ÷ $70 = 4,371 units 224. a. Break-Even Sales (units) = Fixed Costs ÷ Unit Contribution Margin = $188,500 ÷ ($70.00 – $51.50) = $188,500 ÷ $18.50 = 10,189 units b. Break-Even Sales (units) = Fixed Costs ÷ Unit Contribution Margin = $188,500 ÷ ($70.00 – $55.50) = $188,500 ÷ $14.50 = 13,000 units 225. Current Scenario: SP VC CM
$80 30 $50 × 20,000 units = $1,000,000 total contribution margin
Proposed Change: SP $80 × 80% = $64 VC 30 CM $34 × (20,000 × 1.2) = $816,000 total contribution margin Total CM (and income) drops by $184,000 ($1,000,000 – $816,000). 226. Under the current system, Louis’s profit when 44,000 units are sold is [($65 – $45) × 44,000] – $625,500 = $254,500. If the new equipment is purchased, Louis’s profit when 44,000 units are sold is [($65 – $42) × 44,000] – $800,000 = $212,000. Louis is better off not buying the new equipment. 227. a. Break-Even Sales (units) = Fixed Costs ÷ Unit Contribution Margin = Fixed Costs ÷ (Units Sales Price – Unit Variable Cost) Let X = Unit Sales Price $60,000 ÷ (X – $70) = 1,715 units $60,000 ÷ 1,715 = (X – $70) $35 = (X – $70) $35 + $70 = X X = $105 b. Break-Even Sales (units) = (Fixed Costs + Target Profit) ÷ Unit Contribution Margin = ($60,000 + $8,000) ÷ ($105 – $70) = $68,000 ÷ $35 = 1,943 units
228. a. Break-Even Sales (units) = Fixed Costs ÷ Unit Contribution Margin = $108,000 ÷ ($50 – $34) = 6,750 units b. Break-Even Sales (units) = Fixed Costs ÷ Unit Contribution Margin = $108,000 ÷ ($54 – $34) = 5,400 units Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis 229. Unit Contribution Margin = Sales Price per Unit – Variable Cost per Unit = $9.95 – $4.75 = $5.20 Break-Even Sales (units) = Fixed Costs ÷ Unit Contribution Margin = $3,120 ÷ $5.20 = 600 units Break-Even Sales ($) = Break-Even Sales (units) × Sales Price per Unit = 600 × $9.95 = $5,970 230. a. Break-Even Sales (units) = Fixed Costs ÷ Unit Contribution Margin = $6,708,000 ÷ ($600 − $444) = $6,708,000 ÷ $156 = 43,000 units b. Break-Even Sales (units) = Fixed Costs ÷ Unit Contribution Margin = $6,708,000 ÷ [$600 – ($444 + $6)] = $6,708,000 ÷ $150 = 44,720 units 231. a. Break-Even Sales (units) = Fixed Costs ÷ Unit Contribution Margin = $70,000 ÷ ($40 − $32) = $70,000 ÷ $8 = 8,750 units b. Break-Even Sales (units) = Fixed Costs ÷ Unit Contribution Margin = ($70,000 + $10,000) ÷ $8 = $80,000 ÷ $8 = 10,000 units 232. a. Break-Even Sales (units) = Fixed Costs ÷ Unit Contribution Margin = $109,000 ÷ ($85 – $21) = $109,000 ÷ $64 = 1,703 units b. Break-Even Sales (units) = (Fixed Costs + Target Profit) ÷ Unit Contribution Margin = ($109,000 + $150,000) ÷ $64 = 4,047 units c.
Contribution Margin Ratio = Unit Contribution Margin ÷ Unit Sales Price = $64 ÷ $85 = 75.3% Contribution Margin = Total Sales × Contribution Margin Ratio = $500,000 × 75.3% = $376,500 Income from Operations = Contribution Margin – Fixed Costs = $376,500 – $109,000 = $267,500
233. a. Break-Even Sales (units) = Fixed Costs ÷ Unit Contribution Margin = $900,000 ÷ ($250 – $130) = $900,000 ÷ $120 = 7,500 units b. Break-Even Sales (units) = (Fixed Costs + Target Profit) ÷ Unit Contribution Margin = ($900,000 + $480,000) ÷ ($250 – $130) = $1,380,000 ÷ $120 = 11,500 units c. Additional Sales (units) Needed = Advertising Cost ÷ Contribution Margin = $7,200 ÷ $120 = 60 units 234. a. Margin of Safety ($) = Sales – Sales at BreakEven Point = $1,000,000 – $900,000 = $100,000 b. Margin of Safety % = $100,000 ÷ $1,000,000 = 10% c. Contribution Margin Ratio = Contribution Margin ÷ Sales = ($1,000,000 – $750,000) ÷ $1,000,000 = $250,000 ÷ $1,000,000 = 25% d. Income from Operations = Contribution Margin – Fixed Costs = $250,000 – $225,000 = $25,000 235. a. Margin of Safety = $1,000,000 × 25% = $250,000 Break-Even Point = $1,000,000 – $250,000 = $750,000 Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis b. c.
$250,000 (margin of safety) × 30% (contribution margin ratio) = $75,000 $110,000 × 30% = $33,000
236. Unit Contribution Margin of E = ($80 × 60%) + ($40 × 40%) = $48 + $16 = $64 Break-Even Sales (units) of E = Fixed Costs ÷ Unit Contribution Margin = $160,000 ÷ $64 = 2,500 units 2,500 × 60% = 1,500 units of X 2,500 × 40% = 1,000 units of Y 237. Unit Contribution Margin of E = ($100 × 60%) + ($50 × 40%) = $60 + $20 = $80 Break-Even Sales (units) of E = Fixed Costs ÷ Unit Contribution Margin = $160,000 ÷ $80 = 2,000 units 2,000 × 60% = 1,200 units of X 2,000 × 40% = 800 units of Y 238. Contribution Margin = Sales – Variable Costs = $980,000 – $500,000 = $480,000 Income from Operations = Contribution Margin – Fixed Costs = $480,000 – $350,000 = $130,000 Operating Leverage = Contribution Margin ÷ Income from Operations = $480,000 ÷ $130,000 = 3.69 239. Contribution Margin = Sales – Variable Costs = $600,000 – $400,000 = $200,000 Income from Operations = Contribution Margin – Fixed Costs = $200,000 – $100,000 = $100,000 Operating Leverage = Contribution Margin ÷ Income from Operations = $200,000 ÷ $100,000 = 2 240. Margin of Safety = (Sales – Sales at Break-Even Point) ÷ Sales = ($500,000 – $300,000) ÷ $500,000 = 40% 241. Margin of Safety = (Sales – Sales at Break-Even Point) ÷ Sales = ($300,000 – $225,000) ÷ $300,000 = 25% 242. a. Contribution Margin of Deluxe Bikes = $1,800 – $1,200 = $600 Contribution Margin of Standard Bikes = $600 – $200 = $400 Unit Contribution Margin of E = ($600 × 30%) + ($400 × 70%) = $180 + $280 = $460 Break-Even Sales (units) of E = Fixed Costs ÷ Unit Contribution Margin = $1,702,000 ÷ $460 = 3,700 bikes b. Sales mix at break-even: 3,700 × 30% = 1,110 Deluxe bikes 3,700 × 70% = 2,590 Standard bikes 243. Margin of Safety = (Sales – Sales at Break-Even) ÷ Sales = ($6,000,000 – $4,200,000) ÷ $6,000,000 = 30% 244. a. Orks: 21,000 ÷ (21,000 + 14,000) = 60% Zins: 14,000 ÷ (21,000 + 14,000) = 40% b. Selling Price of E = ($120 × 60%) + ($80 × 40%) = $72 + $32 = $104 c. Unit Contribution Margin of E = [($120 – $80) × 60%] + [($80 – $60) × 40%] = $24 + $8 = $32 d. Break-Even Sales (units) of E = Fixed Costs ÷ Contribution Margin = $160,000 ÷ $32 = 5,000 units Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis 245. Sales ($) = Break-Even Sales ($) + [Sales ($) × Margin of Safety (%)] Let X = Sales ($) X = $960,000 + (X × 20%) X – (X × 20%) = $960,000 80%X = $960,000 X = $960,000 ÷ 80% X = $1,200,000 246. Percent Change in Income from Operations = Percent Change in Sales × Operating Leverage = 9% × 3 = 27% 247. a. Product S: Unit Contribution Margin = $30 – $24 = $6 Product T: Unit Contribution Margin = $70 – $56 = $14 Contribution Margin of E = ($6 × 60%) + ($14 × 40%) = $3.60 + $5.60 = $9.20 Break-Even Sales (units) of E = Fixed Costs ÷ Contribution Margin = $202,400 ÷ $9.20 = 22,000 units b. Sales mix at break-even: S: 13,200 units (22,000 units × 60%) T: 8,800 units (22,000 units × 40%) c. Break-Even Sales (units) = (Fixed Costs + Target Profit) ÷ Unit Contribution Margin = ($202,400 + $119,600) ÷ $9.20 = 35,000 units 248. Operating leverage is the relationship between a company’s contribution margin and its income from operations. Companies with a high level of fixed costs have a high operating leverage, and companies with low fixed costs have a low operating leverage. To compute how a change in sales will impact profits, multiply the anticipated percentage change in sales by the operating leverage. Thus, the higher a company’s operating leverage, the larger the anticipated increase in profits from a change in sales. 249. a. Willow Creek Co. Variable Costing Income Statement For the Month Ended May 31 Sales (17,000 × $60) $1,020,000 Variable cost of goods sold (17,000 × $26) 442,000 Manufacturing margin $ 578,000 Variable selling and administrative 34,000 expenses Contribution margin $ 544,000 Fixed costs: Fixed manufacturing costs $170,000 Fixed selling and administrative expenses 32,000 202,000 Income from operations $ 342,000 b. Willow Creek Co. Absorption Costing Income Statement For the Month Ended May 31 Sales (17,000 × $60) Cost of goods sold Gross profit Powered by Cognero
$1,020,000 612,000 $ 408,000 Page 47
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Chapter 21 - Cost-Volume-Profit Analysis Selling and administrative expenses Income from operations
66,000 $ 342,000
250. a. When there are no inventories (everything that is produced is sold), then variable costing income = absorption costing income. b. When the units produced > units sold, variable costing income < absorption costing income. c. When the units produced < units sold, variable costing income > absorption costing income. 251. a. Roller Paint Co. Variable Costing Income Statement For the Month Ended September 30 Sales (28,000 × $80.00) $2,240,000 Variable cost of goods sold: Variable cost of goods manufactured (30,000 × $15.50) $465,000 Less ending inventory (2,000 × $15.50) 31,000 Variable cost of goods sold 434,000 Manufacturing margin $1,806,000 Variable selling and administrative 56,000 expenses (28,000 × $2.00) Contribution margin $1,750,000 Fixed costs: Fixed manufacturing costs $210,000 Fixed selling and administrative 39,000 249,000 expenses Income from operations $1,501,000 b. Roller Paint Co. Absorption Costing Income Statement For the Month Ended September 30 Sales (28,000 × $80.00) $2,240,000 Cost of goods sold: Cost of goods manufactured (30,000 × $675,000 $22.50) Less ending inventory (2,000 × $22.50) 45,000 Cost of goods sold 630,000 Gross profit $1,610,000 Selling and administrative expenses [(28,000 × $2.00) + $39,000] 95,000 Income from operations $1,515,000 c. The difference of $14,000 in the amount of income from operations is due to the different treatment of fixed manufacturing expenses. The entire amount of the fixed manufacturing costs is included as an expense of the period in the variable costing statement. The ending inventory in the absorption costing statement includes $14,000 (2,000 × $7.00) of fixed manufacturing costs. This $14,000, by being included in inventory, is thus excluded from the current cost of goods sold and deferred to another period. Powered by Cognero
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Chapter 21 - Cost-Volume-Profit Analysis
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Chapter 22 - Budgeting True / False 1. The task of preparing a budget should be the sole task of the most important department in an organization. a. True b. False 2. A formal written statement of management's plans for the future, expressed in financial terms, is called a budget. a. True b. False 3. Budgets are normally used only by profit-making businesses. a. True b. False 4. The objectives of budgeting are (1) establishing specific goals for future operations, (2) executing plans to achieve the goals, and (3) periodically comparing actual results with these goals. a. True b. False 5. When budget goals are set too tight, the budget becomes less effective as a tool for planning and controlling operations. a. True b. False 6. Employees view budgeting more positively when goals are established for them by senior management. a. True b. False 7. Consulting the persons affected by a budget when it is prepared can provide an effective means of motivation and cooperation. a. True b. False 8. Past performance is the best overall basis for evaluating current performance and assessing the need for corrective action. a. True b. False 9. When slack is built into the budget, it may create inefficiencies. a. True b. False 10. The responsibility for coordinating the preparation of a master budget should be assigned to the CEO of a firm. a. True b. False 11. The budget procedures used by a large manufacturer of automobiles would probably not differ from those used by a Powered by Cognero
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Chapter 22 - Budgeting small manufacturer of paper products. a. True b. False 12. A budget procedure that provides for the maintenance at all times of a 12-month projection into the future is called continuous budgeting. a. True b. False 13. A budget procedure that provides for the maintenance at all times of a 12-month projection into the future is called master budgeting. a. True b. False 14. The method of budgeting that requires managers to estimate sales, production, and other operating data as though operations are being started for the first time is called zero-based budgeting. a. True b. False 15. The method of budgeting that requires all levels of management to start from zero in estimating sales, production, and other operating data is called noncontinuous budgeting. a. True b. False 16. Budgets are prepared in the Accounting Department and monitored by various department managers. a. True b. False 17. Once a static budget has been determined, it is changed regularly as the underlying activity changes. a. True b. False 18. The flexible budget is, in effect, a series of static budgets for different levels of activity. a. True b. False 19. Flexible budgeting requires all levels of management to start from zero and estimate sales, production, and other operating data as though operations were being started for the first time. a. True b. False 20. Flexible budgeting builds the effect of changes in level of activity into the budget system. a. True b. False 21. In preparing flexible budgets, the first step is to identify the fixed and variable components of the various costs and Powered by Cognero
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Chapter 22 - Budgeting expenses being budgeted. a. True b. False 22. A process whereby the effect of fluctuations in the level of activity is built into the budgeting system is referred to as flexible budgeting. a. True b. False 23. The financial budgets of a business include the cash budget, the budgeted income statement, and the budgeted balance sheet. a. True b. False 24. The master budget is an integrated set of budgets that tie together a company’s operating, financing, and investing activities into an integrated plan for the coming year. a. True b. False 25. The sales budget is derived from the production budget. a. True b. False 26. The first operating budget to be prepared is usually the sales budget. a. True b. False 27. The first operating budget to be prepared is usually the production budget. a. True b. False 28. After the sales budget is prepared, the production budget is normally prepared next. a. True b. False 29. The budgeted volume of production is based on the sum of (1) the expected sales volume and (2) the desired ending inventory, less (3) the estimated beginning inventory. a. True b. False 30. The budgeted volume of production is normally computed as the sum of (1) the expected sales volume and (2) the desired ending inventory. a. True b. False 31. If Division Inc. expects to sell 200,000 units in the current year, desires ending inventory of 24,000 units, and has Powered by Cognero
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Chapter 22 - Budgeting 22,000 units on hand as of the beginning of the year, the budgeted volume of production for the year is 202,000 units. a. True b. False 32. If Division Inc. expects to sell 200,000 units in the current year, desires ending inventory of 24,000 units, and has 22,000 units on hand as of the beginning of the year, the budgeted volume of production for the year is 198,000 units. a. True b. False 33. The budgeted direct materials purchases is based on the sum of (1) the materials needed for production and (2) the desired ending materials inventory, less (3) the estimated beginning materials inventory. a. True b. False 34. The budgeted direct materials purchases is normally computed as the sum of (1) the materials for production and (2) the desired ending inventory. a. True b. False 35. The production budget is the starting point for preparation of the direct labor cost budget. a. True b. False 36. The sales budget is the starting point for preparation of the direct labor cost budget. a. True b. False 37. Supervisor salaries, maintenance, and indirect factory wages would normally appear in the factory overhead cost budget. a. True b. False 38. Supervisor salaries, maintenance, and indirect factory wages would normally appear in the selling and administrative expenses budget. a. True b. False 39. Supervisor salaries and indirect factory wages would normally appear in the direct labor cost budget. a. True b. False 40. Detailed supplemental schedules based on department responsibility are often prepared for major items in the selling and administrative expenses budget. a. True b. False Powered by Cognero
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Chapter 22 - Budgeting 41. The first budget to be prepared is usually the cash budget. a. True b. False 42. Part of the cash budget is based on information drawn from the capital expenditures budget. a. True b. False 43. A capital expenditures budget is prepared for 5 to 10 years into the future. a. True b. False 44. The capital expenditures budget details future plans for acquisition of fixed assets. a. True b. False 45. The cash budget summarizes future plans for acquisition of fixed assets. a. True b. False 46. The cash budget is affected by the sales budget, the various budgets for manufacturing costs and operating expenses, and the capital expenditures budget. a. True b. False 47. The cash budget presents the expected inflow and outflow of cash for a specified period of time. a. True b. False 48. The budgeted balance sheet assumes that all operating and financing plans are met. a. True b. False 49. The capital expenditures budget is part of the planned investing activities of a company. a. True b. False Multiple Choice 50. A formal written statement of management's plans for the future, expressed in financial terms, is a a. gross profit report b. responsibility report c. budget d. performance report 51. The budget process involves doing all of the following except Powered by Cognero
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Chapter 22 - Budgeting a. establishing specific goals b. executing plans to achieve the goals c. periodically comparing actual results with the goals d. dismissing all managers who fail to achieve operational goals specified in the budget 52. The budgetary unit of an organization that is led by a manager who has both the authority over and responsibility for the unit's performance is known as a a. control center b. budgetary area c. responsibility center d. managerial department 53. The benefits of comparing actual performance of the operations against planned goals include all of the following except a. providing prompt feedback to employees about their performance relative to the goal b. preventing unplanned expenditures c. helping to establish spending priorities d. determining how managers are performing against prior years' actual operating results 54. Budgeting supports the planning process by encouraging all of the following activities except a. requiring all organizational units to establish their goals for the upcoming period b. increasing the motivation of managers and employees by providing agreed-upon expectations c. directing and coordinating operations during the period d. improving overall decision making by considering all viewpoints, options, and cost-reduction possibilities 55. When a manager seeks to achieve personal departmental objectives that may work to the detriment of the rest of the company, the organization is experiencing a. budgetary slack b. padding c. goal conflict d. cushions 56. The budgeting process does not involve which of the following activities? a. establishment of specific goals b. periodic comparison of actual results to goals c. execution of plans to achieve goals d. increase in sales by increasing marketing efforts 57. Budgets need to be fair and attainable for employees to consider the budget important in their normal daily activities. Which of the following is not considered a human behavior problem? a. setting goals among managers that conflict with one another b. setting goals too tightly, making it difficult to meet performance expectations c. allowing employees the opportunity to be a part of the budget process d. allowing goals to be set so low that employees develop a “spend it or lose it” attitude Powered by Cognero
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Chapter 22 - Budgeting 58. Which of the following budgets allows for adjustments in activity levels? a. static budget b. continuous budget c. zero-based budget d. flexible budget 59. The process of developing budget estimates that require managers to estimate sales, production, and other operating data as though operations were being initiated for the first time is referred to as a. flexible budgeting b. continuous budgeting c. zero-based budgeting d. master budgeting 60. A variant of fiscal-year budgeting whereby a 12-month projection into the future is maintained at all times is termed a. flexible budgeting b. continuous budgeting c. zero-based budgeting d. master budgeting 61. Jase Manufacturing Co.'s static budget for 10,000 units of production includes $40,000 for direct labor and $4,000 for variable electric power. Total fixed costs are $24,000. At 12,000 units of production, a flexible budget would show a. variable costs of $52,800 and $29,000 of fixed costs b. variable costs of $44,000 and $24,000 of fixed costs c. variable costs of $52,800 and $24,000 of fixed costs d. variable and fixed costs totaling $68,000 62. Miller and Sons' static budget for 10,000 units of production includes $50,000 for direct materials, $44,000 for direct labor, variable utilities of $5,000, and supervisor salaries of $24,000. A flexible budget for 12,000 units of production would show a. the same cost structure in total b. direct materials of $60,000, direct labor of $52,800, utilities of $6,000, and supervisor salaries of $28,800 c. total variable costs of $148,000 d. direct materials of $60,000, direct labor of $52,800, utilities of $6,000, and supervisor salaries of $24,000 63. A disadvantage of static budgets is that they a. are dependent on the previous year's actual results b. cannot be used by service companies c. do not allow for possible changes in underlying activity levels d. show the expected results of a responsibility center for several levels of activity 64. A series of static budgets for different levels of activity is termed a(n) a. flexible budget b. variable budget c. master budget d. activity budget Powered by Cognero
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Chapter 22 - Budgeting 65. Chelsea Manufacturing Co.'s static budget for 5,000 units of production includes $40,000 for direct labor and $5,000 for variable electric power. Total fixed costs are $23,000. At 8,000 units of production, a flexible budget would show a. variable costs of $64,000 and $28,000 of fixed costs b. variable costs of $64,000 and $23,000 of fixed costs c. variable costs of $72,000 and $23,000 of fixed costs d. variable and fixed costs totaling $107,000 66. Laurie Inc.’s static budget for 10,000 units of production includes $60,000 for direct materials, $44,000 for direct labor, fixed utilities costs of $5,000, and supervisor salaries of $25,000. A flexible budget for 12,000 units of production would show a. the same cost structure in total b. direct materials of $72,000, direct labor of $52,800, fixed utilities costs of $5,000, and supervisor salaries of $25,000 c. total variable costs of $159,800 d. direct materials of $60,000, direct labor of $52,800, fixed utilities costs of $6,000, and supervisor salaries of $25,000 67. The primary difference between a static budget and a flexible budget is that a static budget a. is suitable in a volatile demand situation while a flexible budget is suitable in a stable demand situation b. is concerned only with future acquisitions of fixed assets, whereas a flexible budget is concerned with expenses that vary with sales c. includes only fixed costs, whereas a flexible budget includes only variable costs d. is a plan for a single level of production, whereas a flexible budget can be converted to any level of production 68. At the beginning of the period, the Cutting Department budgeted direct labor of $155,000, direct materials of $165,000, and fixed factory overhead of $15,000 for 9,000 hours of production. The department actually completed 10,000 hours of production. What is the appropriate total budget for the department, assuming it uses flexible budgeting? Round hourly rates to two decimal places. a. $416,000 b. $370,500 c. $368,889 d. $335,000 69. At the beginning of the period, the Assembly Department budgeted direct labor of $110,000, direct materials of $170,000, and fixed factory overhead of $28,000 for 8,000 hours of production. The department actually completed 10,000 hours of production. What is the appropriate total budget for the department, assuming it uses flexible budgeting? Round hourly rates to two decimal places. a. $288,000 b. $305,000 c. $350,000 d. $378,000 70. Principal components of a master budget include a. production budget b. sales budget Powered by Cognero
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Chapter 22 - Budgeting c. capital expenditures budget d. All of these choices 71. The first operating budget customarily prepared as part of an entity's master budget is the a. production budget b. cash budget c. sales budget d. direct materials purchases budget 72. The operating budgets of a company include the a. cash budget b. capital expenditures budget c. financing budget d. production budget 73. Which of the following budgets is not directly associated with the production budget? a. direct materials purchases budget b. sales budget c. capital expenditures budget d. direct labor cost budget 74. If budgeted beginning inventory is $8,000, budgeted ending inventory is $9,400, and budgeted cost of goods sold is $10,260, budgeted production should be a. $1,400 b. $9,600 c. $11,660 d. $11,550 75. The production budgets are used to prepare which of the following budgets? a. operating expenses b. direct materials purchases, direct labor cost, and factory overhead cost c. sales in dollars d. sales in units 76. Motorcycle Manufacturers, Inc. projected sales of 78,000 machines for the year. The estimated January 1 inventory is 6,500 units, and the desired December 31 inventory is 6,000 units. What is the budgeted production (in units) for the year? a. 78,500 b. 70,000 c. 77,500 d. 70,500 Use this information about Flushing Company to answer the questions that follow. The budgeted production and sales information for Flushing Company for the month of December is as follows: Product XXX Powered by Cognero
Product ZZZ Page 9
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Chapter 22 - Budgeting Estimated beginning inventory Desired ending inventory Region I, anticipated sales Region II, anticipated sales
32,000 units 34,000 units 320,000 units 180,000 units
20,000 units 17,000 units 260,000 units 140,000 units
The unit selling price for Product XXX is $5 and for Product ZZZ is $15. 77. Budgeted sales for the month are a. $3,180,000 b. $5,820,000 c. $1,800,000 d. $8,500,000 78. Budgeted production for Product XXX during the month is a. 498,000 units b. 502,000 units c. 534,000 units d. 566,000 units 79. Budgeted production for Product ZZZ during the month is a. 403,000 units b. 380,000 units c. 397,000 units d. 417,000 units 80. For February, sales revenue is $700,000, sales commissions are 5% of sales, the sales manager's salary is $96,000, advertising expenses are $90,000, shipping expenses total 2% of sales, and miscellaneous selling expenses are $2,500 plus ½ of 1% of sales. Total selling expenses for the month of February are a. $161,000 b. $237,500 c. $235,000 d. $241,000 81. For April, sales revenue is $700,000, sales commissions are 5% of sales, the sales manager's salary is $98,000, advertising expenses are $90,000, shipping expenses total 2% of sales, and miscellaneous selling expenses are $2,100 plus ½ of 1% of sales. Total selling expenses for the month of April are a. $159,100 b. $242,600 c. $186,000 d. $182,100 82. Stephanie Corporation sells a single product. Budgeted sales for the year are anticipated to be 640,000 units, estimated beginning inventory is 108,000 units, and desired ending inventory is 90,000 units. The quantities of direct materials expected to be used for each unit of finished product areas follows: Material A: 0.50 lb. per unit @ $0.70 per pound Material B: 1.00 lb. per unit @ $1.70 per pound Powered by Cognero
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Chapter 22 - Budgeting Material C: 1.20 lb. per unit @ $1.00 per pound The dollar amount of Material A to be used in production during the year is a. $217,700 b. $528,700 c. $311,000 d. $224,600 83. For March, sales revenue is $1,000,000, sales commissions are 5% of sales, the sales manager's salary is $80,000, advertising expenses are $65,000, shipping expenses total 1% of sales, and miscellaneous selling expenses are $2,100 plus 1% of sales. Total selling expenses for the month of March are a. $217,100 b. $205,000 c. $207,100 d. $142,100 Use this information for Mandy Corporation to answer the questions that follow. Mandy Corporation sells a single product. Budgeted sales for the year are anticipated to be 640,000 units, estimated beginning inventory is 98,000 units, and desired ending inventory is 80,000 units. The quantities of direct materials expected to be used for each unit of finished product are as follows: Material A: 0.50 lb. per unit @ $0.60 per pound Material B: 1.00 lb. per unit @ $1.70 per pound Material C: 1.20 lb. per unit @ $1.00 per pound 84. The dollar amount of Material B to be used in production during the year is a. $1,057,400 b. $1,193,400 c. $1,026,800 d. $1,224,000 85. The dollar amount of Material C to be used in production during the year is a. $746,400 b. $724,800 c. $824,400 d. $758,160 86. Production and sales estimates for March for Robin Co. are as follows: Estimated inventory (units), March 1 Desired inventory (units), March 31 Expected sales volume (units): Area M Area L Area O Unit sales price
18,000 21,600 7,000 8,000 9,000 $15
Budgeted production for March is Powered by Cognero
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Chapter 22 - Budgeting a. 24,000 b. 27,000 c. 27,600 d. 21,600 87. Production and sales estimates for May for Cardinal Co. are as follows: Estimated inventory (units), May 1 Desired inventory (units), May 31 Expected sales volume (units): Area W Area X Area Y Unit sales price
19,500 19,300 6,000 7,000 8,000 $20
The number of units expected to be sold in May is a. 21,000 b. 3,700 c. 22,800 d. 18,300 88. Production and sales estimates for June are as follows: Estimated inventory (units), June 1 Desired inventory (units), June 30 Expected sales volume (units): Area X Area Y Area Z Unit sales price
20,000 19,000 7,000 4,000 5,500 $20
Budgeted production for June is a. 11,000 b. 12,500 c. 15,500 d. 13,500 89. Production and sales estimates for June are as follows: Estimated inventory (units), June 1 Desired inventory (units), June 30 Expected sales volume (units): Area X Area Y Area Z Unit sales price
8,000 9,000 4,000 10,000 6,000 $25
The budgeted total sales for June is a. $225,000 b. $500,000 Powered by Cognero
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Chapter 22 - Budgeting c. $525,000 d. $200,000 90. If the expected sales volume for the current period is 8,000 units, the desired ending inventory is 1,400 units, and the beginning inventory is 1,200 units, the number of units set forth in the production budget, representing total production for the current period, is a. 10,600 b. 8,200 c. 66,000 d. 6,800 Use this information for August production to answer the questions that follow. Production estimates for August are as follows: Estimated inventory (units), August 1 Desired inventory (units), August 31 Expected sales volume (units), August
12,000 9,000 75,000
For each unit produced, the direct materials requirements are as follows: Material A ($5 per lb.) 3 lb. Material B ($18 per lb.) ½ lb. 91. The number of pounds of Material A and Material B required for August production is a. 216,000 lb. of A; 72,000 lb. of B b. 216,000 lb. of A; 36,000 lb. of B c. 225,000 lb. of A; 37,500 lb. of B d. 234,000 lb. of A; 39,000 lb. of B 92. The total direct materials purchases (assuming no beginning or ending inventory of material) of Material A and Material B required for August production is a. $1,080,000 for A; $1,296,000 for B b. $1,080,000 for A; $648,000 for B c. $1,125,000 for A; $675,000 for B d. $1,170,000 for A; $702,000 for B 93. Production and sales estimates for May are as follows: Estimated inventory (units), May 1 Desired inventory (units), May 31 Expected sales volume (units): South region West region North region Unit sales price
30,000 25,000 20,000 40,000 20,000 $10
The number of units expected to be manufactured in May is a. 85,000 b. 80,000 c. 75,000 Powered by Cognero
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Chapter 22 - Budgeting d. 105,000 94. Which of the following budgets provides the starting point for the preparation of the direct labor cost budget? a. direct materials purchases budget b. cash budget c. production budget d. sales budget 95. Production and sales estimates for April are as follows: Estimated inventory (units), April 1 Desired inventory (units), April 30 Expected sales volume (units): Area A Area B Area C Unit sales price
19,000 18,000 3,000 4,750 4,250 $20
The number of units expected to be manufactured in April is a. 11,000 b. 9,500 c. 12,000 d. 13,000 96. Production and sales estimates for April are as follows: Estimated inventory (units), April 1 Desired inventory (units), April 30 Expected sales volume (units): Area A Area B Area C Unit sales price
9,000 8,000 3,500 4,750 4,250 $20
The budgeted total sales for April is a. $200,000 b. $230,000 c. $270,000 d. $250,000 97. If the expected sales volume for the current period is 7,000 units, the desired ending inventory is 400 units, and the beginning inventory is 400 units, the number of units set forth in the production budget, representing total production for the current period, is a. 6,700 b. 7,400 c. 7,100 d. 7,000 Powered by Cognero
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Chapter 22 - Budgeting Use this information about July production to answer the questions that follow. Production estimates for July are as follows: Estimated inventory (units), July 1 Desired inventory (units), July 31 Expected sales volume (units), July
8,500 10,500 76,000
For each unit produced, the direct materials requirements are as follows: Direct material A ($5 per lb.) 3 lb. Direct material B ($18 per lb.) ½ lb. 98. The number of pounds of Material A and Material B required for July production is a. 216,000 lb. of A; 36,000 lb. of B b. 216,000 lb. of A; 72,000 lb. of B c. 234,000 lb. of A; 39,000 lb. of B d. 225,000 lb. of A; 37,500 lb. of B 99. The total direct materials purchases of Material A and Material B (assuming no beginning or ending material inventory) required for July production is a. $1,080,000 for A; $648,000 for B b. $1,080,000 for A; $1,296,000 for B c. $1,170,000 for A; $702,000 for B d. $1,125,000 for A; $675,000 for B Use this information about Cardinal Company to answer the questions that follow. Cardinal Company had a finished goods inventory of 55,000 units on January 1. Its projected sales for the next four months were: January, 200,000 units; February, 180,000 units; March, 210,000 units; and April, 230,000 units. Cardinal Company wishes to maintain a desired ending finished goods inventory of 20% of the following month's sales. 100. Determine the budgeted units of production for January. a. 236,000 b. 181,000 c. 200,000 d. 219,000 101. Determine the budgeted units of production for February. a. 186,000 b. 181,000 c. 222,000 d. 174,000 102. Determine the budgeted units of production for March. a. 256,000 b. 206,000 c. 214,000 d. 298,000 Powered by Cognero
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Chapter 22 - Budgeting 103. Determine the budgeted units of inventory for March 31. a. 46,000 b. 36,000 c. cannot be determined from the data given d. 42,000 104. Willow Valley’s April sales forecast projects that 7,000 units will sell at a price of $10.50 per unit. The desired ending inventory is 30% higher than the beginning inventory, which was 1,000 units. Budgeted production in April would be a. 8,000 units b. 7,000 units c. 7,300 units d. 6,300 units Use this information about Bluebird Company to answer the questions that follow. The following is the budgeted production and sales information for Bluebird Company for the month of December. Product XXX 30,000 units 32,000 units 520,000 units
Estimated beginning inventory Desired ending inventory Anticipated sales
Product ZZZ 18,000 units 15,000 units 460,000 units
The unit selling price for Product XXX is $5 and for Product ZZZ is $14. 105. Budgeted production for Product XXX during the month is a. 522,000 units b. 552,000 units c. 518,000 units d. 520,000 units 106. Budgeted production for Product ZZZ during the month is a. 460,000 units b. 475,000 units c. 457,000 units d. 463,000 units 107. Truliant Co. sells a product called Withitall and has predicted the following sales for the first 4 months of the current year: Sales in units
January 1,700
February 1,900
March 2,100
April 1,600
Ending inventory for each month should be 20% of the next month’s sales. How many units should be produced in February? a. 1,940 b. 1,800 c. 1,900 Powered by Cognero
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Chapter 22 - Budgeting d. 1,850 108. An October sales forecast projects that 7,000 units are going to be sold at a price of $11.50 per unit. The desired ending inventory in units is 15% higher than the beginning inventory of 1,000 units. Total October sales are anticipated to be a. $69,000 b. $80,500 c. $70,000 d. $92,000 109. Production and sales estimates for June are as follows: Estimated inventory (units), June 1 Desired inventory (units), June 30 Expected sales volume (units): Area X Area Y Area Z Unit sales price
16,000 18,000 4,000 6,000 5,500 $20
The number of units expected to be manufactured in June is a. 15,500 b. 17,500 c. 16,500 d. 13,500 Use this information about Product A and Product B to answer the questions that follow. Next year’s sales forecast shows that 20,000 units of Product A and 22,000 units of Product B are going to be sold for prices of $10 and $12 per unit, respectively. The desired ending inventory of Product A is 20% higher than its beginning inventory of 2,000 units. The beginning inventory of Product B is 2,500 units. The desired ending inventory of Product B is 3,000 units. 110. Total budgeted sales of both products for the year would be a. $42,000 b. $200,000 c. $264,000 d. $464,000 111. Budgeted production of Product A for the year would be a. 22,400 units b. 20,400 units c. 20,000 units d. 12,200 units 112. Budgeted production of Product B for the year would be a. 24,500 units b. 22,500 units Powered by Cognero
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Chapter 22 - Budgeting c. 26,500 units d. 23,200 units 113. If the expected sales volume for the current period is 9,000 units, the desired ending inventory is 200 units, and the beginning inventory is 300 units, the number of units set forth in the production budget, representing total production for the current period, is a. 9,000 b. 8,900 c. 8,700 d. 9,100 114. Consider Derek's budget information: materials to be used, $64,750; direct labor, $198,400; factory overhead, $394,800; work in process inventory on January 1, $189,100; and work in process inventory on December 31, $197,600. What is the budgeted cost of goods manufactured for the year? a. $649,450 b. $657,950 c. $197,600 d. $1,044,650 115. The budgeted finished goods inventory and cost of goods sold for a manufacturing company for the year are as follows: January 1 finished goods, $765,000; December 31 finished goods, $540,000; and cost of goods sold for the year, $2,560,000. The budgeted cost of goods manufactured for the year is a. $1,255,000 b. $2,335,000 c. $2,785,000 d. $3,100,000 116. Heedy Company is trying to decide how many units of merchandise to produce each month. The company policy is to have 20% of the next month’s sales in inventory at the end of each month. Projected sales for August, September, and October are 30,000 units, 20,000 units, and 40,000 units, respectively. How many units must be produced in September? a. 24,000 b. 18,000 c. 28,000 d. 22,000 117. The budgeted finished goods inventory and cost of goods sold for a manufacturing company for the year are as follows: January 1 finished goods, $765,000; December 31 finished goods, $640,000; and cost of goods sold, $2,560,000. The budgeted cost of goods manufactured is a. $1,405,000 b. $2,560,000 c. $2,435,000 d. $3,965,000 118. Gilbert’s expects its September sales to be 20% higher than its August sales of $150,000. Manufacturing costs were $100,000 in August and are expected to be $120,000 in September. All sales are on credit and are collected as follows: 30% in the month of the sale and 70% in the following month. Payments of manufacturing costs are as follows: 25% in Powered by Cognero
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Chapter 22 - Budgeting the month of production and 75% in the following month. The beginning cash balance on September 1 is $7,500. The ending balance on September 30 would be a. $61,500 b. $75,000 c. $72,300 d. $71,500 119. Woodpecker Co. has $296,000 in accounts receivable on January 1. Budgeted sales for January are $860,000. Woodpecker Co. expects to sell 20% of its merchandise for cash. Of the remaining 80% of sales on account, 75% are expected to be collected in the month of sale and the remainder the following month. The January cash collections from sales are a. $812,000 b. $688,000 c. $468,000 d. $984,000 120. The budget that summarizes future plans for the acquisition of fixed assets is the a. direct materials purchases budget b. production budget c. sales budget d. capital expenditures budget 121. Estimated cash payments are planned reductions in cash from all of the following except a. manufacturing and operating expenses b. capital expenditures c. notes and accounts receivable collections d. payments for interest or dividends Use this information about Nuthatch Corporation to answer the questions that follow. Nuthatch Corporation began its operations on September 1 of the current year. Budgeted sales for the first 3 months of business—September, October, and November—are $260,000, $375,000, and $400,000, respectively. The company expects to sell 30% of its merchandise for cash. Of sales on account, 80% are expected to be collected in the month of the sale and 20% in the month following the sale. 122. The cash collections expected in September from accounts receivable are estimated to be a. $223,600 b. $145,600 c. $182,000 d. $168,000 123. The cash collections expected in October from accounts receivable are estimated to be a. $246,400 b. $262,500 c. $210,000 d. $294,500 Powered by Cognero
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Chapter 22 - Budgeting 124. The cash collections expected in November from accounts receivable are projected to be a. $280,000 b. $316,400 c. $295,200 d. $276,500 Use this information about Finch Company to answer the questions that follow. Finch Company began its operations on March 31 of the current year. Finch has the following projected costs: Manufacturing costs (1) Insurance expense (2) Depreciation expense Property tax expense (3) (1) (2) (3)
April $156,800 1,000 2,000 500
May $195,200 1,000 2,000 500
June $217,600 1,000 2,000 500
Of the manufacturing costs, three-fourths are paid for in the month they are incurred and one-fourth is paid for in the following month. Insurance expense is $1,000 a month; however, the insurance is paid four times yearly, in the first month of the quarter (i.e., January, April, July, and October). Property tax is paid once a year in November.
125. The cash payments expected for Finch Company in the month of April are a. $122,600 b. $120,600 c. $123,100 d. $121,100 126. The cash payments expected for Finch Company in the month of May are a. $185,600 b. $149,900 c. $187,600 d. $189,100 127. The cash payments expected for Finch Company in the month of June are a. $215,500 b. $188,800 c. $214,000 d. $212,000 128. Planning for capital expenditures is necessary for all of the following reasons except a. machinery and other fixed assets wear out b. expansion may be necessary to meet increased demand c. amounts spent for office equipment may be immaterial d. fixed assets may fall below minimum standards of efficiency Powered by Cognero
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Chapter 22 - Budgeting 129. As of January 1 of the current year, Grayson Company had accounts receivable of $40,000. The sales for January, February, and March were $120,000, $140,000, and $150,000, respectively. Of each month’s sales, 20% are for cash. Of the remaining 80% (the credit sales), 60% are collected in the month of sale, with the remaining 40% collected in the following month. What is the total cash collected (both from accounts receivable and for cash sales) in the month of January? a. $64,000 b. $107,000 c. $61,600 d. $121,600 130. As of January 1 of the current year, Grackle Company had accounts receivable of $50,000. The sales for January, February, and March were $120,000, $140,000, and $150,000, respectively. Of each month’s sales, 20% are for cash. Of the remaining 80% (the credit sales), 60% are collected in the month of sale, with the remaining 40% collected in the following month. What is the total cash collected (both from accounts receivable and for cash sales) in the month of February? a. $129,600 b. $62,400 c. $133,600 d. $91,200 131. As of January 1 of the current year, Grackle Company had accounts receivable of $50,000. The sales for January, February, and March were $120,000, $140,000, and $150,000, respectively. Of each month’s sales, 20% are for cash. Of the remaining 80% (the credit sales), 60% are collected in the month of sale, with the remaining 40% collected in the following month. What is the total cash collected (both from accounts receivable and cash sales) in the month of March? a. $74,800 b. $146,800 c. $102,000 d. $116,800 132. As of January 1 of the current year, Gunner Company had accounts receivable of $50,000. The sales for January, February, and March were $120,000, $140,000, and $150,000, respectively. Of each month’s sales, 20% are for cash. Of the remaining 80% (the credit sales), 60% are collected in the month of sale, with the remaining 40% collected in the following month. What is the accounts receivable balance as of March 31? a. $72,000 b. $48,000 c. $58,720 d. $60,000 Use this information about Dove Corporation to answer the questions that follow. Dove Corporation began its operations on September 1 of the current year. Budgeted sales for the first 3 months of business—September, October, and November—are $250,000, $320,000, and $410,000, respectively. The company expects to sell 25% of its merchandise for cash. Of sales on account, 70% are expected to be collected in the month of the sale and 30% in the month following the sale. 133. The cash collections expected in October are a. $320,000 b. $248,000 Powered by Cognero
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Chapter 22 - Budgeting c. $304,250 d. $382,500 134. The cash collections in November are a. $317,750 b. $389,750 c. $490,000 d. $410,000 135. Fashion Jeans, Inc. sells two lines of jeans—Simple Life and Fancy Life. Simple Life sells for $85, and Fancy Life sells for $100. The company sells all of its jeans on credit and estimates that 60% is collected in the month of the sale, 35% is collected in the following month, and the rest is considered to be uncollectible. The estimated sales for Simple Life are: January, 20,000 pairs of jeans; February, 27,500 pairs of jeans; and March, 25,000 pairs of jeans. The estimated sales for Fancy Life are: January, 18,000 pairs of jeans; February, 19,000 pairs of jeans; and March, 20,500 pairs of jeans. What are the expected cash receipts for the month of March? a. $3,988,125 b. $2,505,000 c. $2,125,000 d. $4,175,000 Use this information about Theo Company to answer the questions that follow. Theo Company is preparing its cash budget. Its cash balance on January 1 is $290,000, and it has a minimum cash requirement of $340,000. The following data have been provided: Cash receipts Cash payments
January $1,061,200 984,500
February $1,182,400 1,210,000
March $1,091,700 1,075,000
136. What is the amount of the deficiency or excess cash (after considering the minimum cash balance required) for January? a. excess of $26,700 b. deficiency of $136,700 c. excess of $356,700 d. excess of $60,000 137. What is the amount of cash excess or deficiency (after considering the minimum cash balance required) for February? a. deficiency of $109,100 b. excess of $10,900 c. deficiency of $900 d. excess of $109,100 138. What is the amount of cash excess or deficiency (after considering the minimum cash balance required) for March? a. excess of $214,200 b. excess of $15,800 c. deficiency of $60,000 Powered by Cognero
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Chapter 22 - Budgeting d. excess of $25,300 139. When preparing the cash budget, all of the following should be considered except a. cash receipts from customers b. depreciation expense c. cash payments to suppliers d. cash payments for equipment 140. Which of the following would not be used in preparing a cash budget for October? a. beginning cash balance on October 1 b. budgeted salaries expense for October c. estimated depreciation expense for October d. budgeted sales and collections for October 141. Southern Company is preparing a cash budget for April. The company has $12,000 cash at the beginning of April and anticipates $30,000 in cash receipts and $34,500 in cash disbursements during April. Southern Company has an agreement with its bank to maintain a minimum cash balance of $10,000. To maintain the required balance during April, the company must a. borrow $4,500 b. borrow $2,500 c. borrow $7,500 d. borrow $5,000 142. Tara Company’s budget shows the following credit sales for the current year: September, $25,000; October, $36,000; November, $30,000; December, $32,000. Experience has shown that payment for credit sales is received as follows: 15% in the month of sale, 60% in the first month after sale, 20% in the second month after sale, and 5% is uncollectible. How much cash will Tara Company expect to collect in November as a result of current and past credit sales? a. $19,700 b. $28,400 c. $30,000 d. $31,100 143. A company’s history indicates that 20% of its sales are for cash and the rest are on credit. Collections on credit sales are 20% in the month of the sale, 50% in the next month, 25% the following month, and 5% is uncollectible. Projected sales for December, January, and February are $60,000, $85,000, and $95,000, respectively. The February expected cash receipts from all current and prior credit sales are a. $61,200 b. $57,000 c. $66,400 d. $90,250 Matching Match each of the following phrases with the term (a–e) it best describes. a. Planning b. Directing Powered by Cognero
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Chapter 22 - Budgeting c. Controlling d. Budgetary slack e. Goal conflict 144. Actions to achieve budgeted goals 145. Setting goals 146. Occurs when budgets are set too loose 147. Occurs when employee self-interests are different from company goals 148. Compares actual performance against budgeted goals Match each of the following phrases with the term (a–e) it best describes. a. Static budget b. Flexible budget c. Master budget d. Sales budget e. Production budget 149. Integrated set of operating and financial budgets for a period of time 150. Begins by estimating the quantity of sales 151. Shows expected results at several activity levels 152. Estimates the number of units to be manufactured to meet sales and inventory levels 153. Shows expected results at only one activity level Match each of the following phrases with the term (a–f) it best describes. a. Budget b. Capital expenditures budget c. Sales budget d. Production budget e. Cash budget f. Budgeted balance sheet 154. An accounting report that presents predicted amounts of the company’s assets, liabilities, and equity as of the end of the budget period 155. Plays an important role for organizations in planning, directing, and controlling a company's future goals 156. A plan showing the units of goods to be sold and the sales to be derived; usually the starting point in the budgeting process 157. A plan that lists dollar amounts to be spent on purchasing additional plant assets to carry out the budgeted business activities Powered by Cognero
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Chapter 22 - Budgeting 158. A plan showing the number of units to be produced each month 159. A plan that shows the expected cash inflows and outflows during the budget period, including receipts from loans needed to maintain a minimum cash balance and repayments of such loans Subjective Short Answer 160. At the beginning of the period, the Cutting Department budgeted direct labor of $30,000 and supervisor salaries of $20,000 for 3,000 hours of production. The department actually completed 5,000 hours of production. Determine the budget for the department assuming that it uses flexible budgeting. 161. Doran Technologies produces a single product. Expected manufacturing costs are as follows: Variable costs Direct materials Direct labor Manufacturing overhead Fixed costs per month Depreciation Supervisor salaries Other fixed costs
$4.00 per unit $1.20 per unit $0.95 per unit
$ 6,000 13,500 3,850
Estimate manufacturing costs for production levels of 25,000 units, 30,000 units, and 35,000 units per month. 162. Rodger's Cabinet Manufacturers produces one product in a single manufacturing department. It uses flexible budgets that are based on the following manufacturing data for the month of July: Direct materials Direct labor Electric power (variable) Electric power (fixed) Supervisor salaries Property taxes on factory Straight-line depreciation
$8 per unit $5 per unit $0.30 per unit $4,000 per month $25,000 per month $4,000 per month $2,900 per month
Prepare a flexible manufacturing budget for Rodger's based on production of 10,000, 15,000, and 20,000 units. 163. Cedar Jeans Company produces one product in a single manufacturing department. Prepare a flexible manufacturing budget for the year using production levels of 16,000, 18,000, and 20,000 units produced. The following is additional information necessary to complete the budget: Variable costs Direct labor Direct materials Variable manufacturing costs Fixed costs Supervisor salaries Powered by Cognero
$6.00 per unit $8.00 per unit $2.50 per unit
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Chapter 22 - Budgeting Rent Depreciation on equipment
12,000 24,000
164. At the beginning of the period, the Molding Department budgeted direct labor of $33,000 and supervisor salaries of $24,000 for 3,000 hours of production. The department actually completed 2,500 hours of production. Determine the budget for the department assuming that it uses flexible budgeting. 165. Prepare a monthly flexible selling expense budget for Cottonwood Company for sales volumes of $300,000, $350,000, and $400,000, based on the following data: Sales commissions Sales manager's salary Advertising expense Shipping expense Miscellaneous selling expense
6% of sales $120,000 per month $90,000 per month 1% of sales $6,000 per month plus 1.5% of sales
166. Why is the sales budget usually the first of the operating budgets prepared? 167. Osprey Cycles, Inc. projected sales of 75,000 bicycles for the year. The estimated January 1 inventory is 5,000 units, and the desired December 31 inventory is 8,000 units. What is the budgeted production (in units) for the year? 168. To meet projected annual sales, Bluegill Manufacturers, Inc. needs to produce 75,000 machines for the year. The estimated January 1 inventory is 7,000 units, and the desired December 31 inventory is 12,000 units. What are projected sales units for the year? 169. Magnolia, Inc., manufactures bedding sets. The budgeted production is for 55,000 comforters this year. Each comforter requires 7 yards of material. The estimated January 1 beginning inventory is 31,000 yards with the desired ending balance of 30,000 yards of material. If the material costs $4.00 per yard, prepare the direct materials purchases budget for the year. 170. Sleep Tight, Inc., manufactures bedding sets. The budgeted production is for 52,000 comforters this year. Each comforter requires 1.5 hours to cut and sew the material. The cost of cutting and sewing labor is $12.50 per hour. Determine the direct labor cost budget for this year. 171. Good Night, Inc., manufactures comforters. The estimated inventories on January 1 for finished goods, work in process, and materials were $51,000, $28,000, and $33,000, respectively. The desired inventories on December 31 for finished goods, work in process, and materials were $48,000, $35,000, and $29,000, respectively. Direct materials purchases were $555,000. Direct labor was $252,000 for the year. Factory overhead was $176,000. Prepare a cost of goods sold budget for Good Night, Inc. 172. Sleep Tight, Inc., manufactures comforters. The estimated inventories on January 1 for finished goods, work in process, and materials were $39,000, $33,000, and $27,000, respectively. The desired inventories on December 31 for finished goods, work in process, and materials were $42,000, $35,000, and $21,000, respectively. Direct materials purchases were $575,000, direct labor was $212,000 for the year, and factory overhead was $156,000. Prepare a cost of goods sold budget for Sleep Tight, Inc. 173. Kid's World Industries has projected sales of 67,000 machines for the current year. The estimated January 1 inventory is 6,000 units, and the desired December 31 inventory is 15,000 units. What is the budgeted production (in units) for the year? 174. Future Technologies projected sales of 35,000 computers for this year. The estimated January 1 inventory is 3,000 Powered by Cognero
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Chapter 22 - Budgeting units, and the desired December 31 inventory is 9,000 units. What is the budgeted production (in units) for the year? 175. Based on the following production and sales data of Frixion Co. for March of the current year, prepare (a) a sales budget and (b) a production budget. Estimated inventory, March 1 Desired inventory, March 31 Expected sales volume: Area I Area II Unit sales price
Product T 28,000 units 32,000 units
Product X 20,000 units 15,000 units
320,000 units 190,000 units $6
260,000 units 130,000 units $14
176. Tough Jeans Company produces two different styles of jeans, Working Life and Social Life. The company sales budget estimates that 400,000 of the Working Life jeans and 250,000 of the Social Life jeans will be sold during the year. The company begins with 9,000 pairs of Working Life and 18,000 pairs of Social Life in finished goods inventory. The company desires ending inventory of 7,500 of Working Life and 10,000 of Social Life. Prepare a production budget for the year ended December 31. 177. Diamond Company manufactures two models of cassette recorders, VCH and MTV. Based on the following production data for April, prepare a production budget. Estimated inventory (units), April 1 Desired inventory (units), April 30 Expected sales volume (units): Eastern zone Midwest zone Western zone
VCH 2,900 6,900
MTV 4,000 5,250
12,500 19,000 14,500
12,960 19,800 9,840
178. Purple Co.'s production budget for Product X for the year ended December 31 is as follows: Expected units to be sold Plus desired ending inventory, December 31 Total units required Less estimated beginning inventory, January 1 Total units to be produced
Product X 640,000 85,000 725,000 90,000 635,000
In Purple's production operations, Materials A, B, and C are required to make Product X. The quantities of direct materials expected to be used for each unit of product are as follows: Material A 0.50 lb. per unit Material B 1.00 lb. per unit Material C 1.20 lb. per unit The prices of direct materials are as follows: Material A $0.60 per lb. Material B $1.70 per lb. Material C $1.00 per lb. Prepare a direct materials purchases budget for Product X, assuming that there are no beginning or ending inventories for direct materials (all units purchased are used in production). Powered by Cognero
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Chapter 22 - Budgeting 179. Ruff Jeans Company produces two different types of jeans, Simple Life and Fancy Life. The company sales budget estimates that 350,000 of the Simple Life jeans and 200,000 of the Fancy Life jeans will be sold during the current year. The production budget requires 353,500 units of Simple Life and 196,000 of Fancy Life to be manufactured. Simple Life jeans require 3 yards of denim material, a zipper, and 25 yards of thread. Fancy Life jeans require 4.5 yards of denim material, a zipper, and 40 yards of thread. Each yard of denim material costs $3.25, each zipper costs $0.75, and the thread is $0.02 per yard. There is enough material to make 2,000 jeans of each type at the beginning of the year. The desired amount of materials left in ending inventory is to have enough to manufacture 3,500 jeans of each type. Prepare a direct materials purchases budget. 180. Good Eats, Inc. manufactures flatware sets. The budgeted production is for 80,000 sets this year. Each set requires 2.5 hours to polish the material. If polishing labor costs $15.00 per hour, determine the direct labor cost budget for polishing for the year. 181. Describe a master budget and the ways in which the individual budgets within the master budget interrelate. 182. Big Wheel, Inc., collects 25% of its sales on account in the month of the sale and 75% in the month following the sale. Sales on account are budgeted to be $225,000 for March and $250,000 for April. What are the budgeted cash receipts from sales on account for April? 183. Big Wheel, Inc., collects 25% of its sales on account in the month of the sale and 75% in the month following the sale. Sales on account are budgeted to be $150,000 for March and receipts from sales on account total $162,500 in April. What are the budgeted sales on account for April? 184. Flanders Industries collects 35% of its sales on account in the month of the sale and 65% in the month following the sale. Sales on account are budgeted to be $175,000 for May and $225,000 for June. What are the budgeted cash receipts from sales on account for June? 185. The treasurer of Calico Dreams Company has accumulated the following budget information for the first 2 months of the coming fiscal year: Sales Manufacturing costs Selling and administrative expenses Capital additions
March $450,000 290,000 41,400 250,000
April $520,000 350,000 46,400 —
The company expects to sell about 35% of its merchandise for cash. Of sales on account, 80% are collected in full in the month of the sale and the remainder in the month following the sale. One-fourth of the manufacturing costs are paid in the month in which they are incurred and the other three-fourths in the following month. Depreciation, insurance, and property taxes represent $6,400 of the monthly selling and administrative expenses. Insurance is paid in February, and property taxes are paid yearly in September. A $40,000 installment on income taxes is to be paid in April. Of the remainder of the selling and administrative expenses, one-half is to be paid in the month in which they are incurred and the balance in the following month. Capital additions of $250,000 are paid in March. Current assets as of March 1 are composed of cash of $45,000 and accounts receivable of $51,000. Current liabilities as of March 1 are accounts payable of $121,500 ($102,000 for materials purchases and $19,500 for operating expenses). Management desires to maintain a minimum cash balance of $25,000. Prepare a monthly cash budget for March and April. 186. Star Co. was organized on August 1 of the current year. Projected sales for the next three months are as follows: Powered by Cognero
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Chapter 22 - Budgeting August September October
$250,000 200,000 275,000
The company expects to sell 50% of its merchandise for cash. Of the sales on account, 30% are expected to be collected in the month of the sale and the remainder in the following month. Prepare a schedule of collections from sales for August, September, and October. 187. What is a capital expenditures budget? 188. What is a cash budget? How does management use a cash budget?
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Chapter 22 - Budgeting Answer Key 1. False 2. True 3. False 4. True 5. True 6. False 7. True 8. False 9. True 10. False 11. False 12. True 13. False 14. True 15. False 16. False 17. False 18. True 19. False 20. True 21. False 22. True 23. False 24. True 25. False Powered by Cognero
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Chapter 22 - Budgeting 26. True 27. False 28. True 29. True 30. False 31. True 32. False 33. True 34. False 35. True 36. False 37. True 38. False 39. False 40. True 41. False 42. True 43. True 44. True 45. False 46. True 47. True 48. True 49. True 50. c Powered by Cognero
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Chapter 22 - Budgeting 51. d 52. c 53. d 54. c 55. c 56. d 57. c 58. d 59. c 60. b 61. c 62. d 63. c 64. a 65. c 66. b 67. d 68. b 69. d 70. d 71. c 72. d 73. c 74. c 75. b 76. c Powered by Cognero
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Chapter 22 - Budgeting 77. d 78. b 79. c 80. d 81. b 82. a 83. a 84. a 85. a 86. c 87. a 88. c 89. b 90. b 91. b 92. b 93. c 94. c 95. a 96. d 97. d 98. c 99. c 100. b 101. a Powered by Cognero
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Chapter 22 - Budgeting 102. c 103. a 104. c 105. a 106. c 107. a 108. b 109. b 110. d 111. b 112. b 113. b 114. a 115. b 116. a 117. c 118. a 119. d 120. d 121. c 122. b 123. a 124. d 125. b 126. a 127. d Powered by Cognero
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Chapter 22 - Budgeting 128. c 129. d 130. c 131. b 132. b 133. c 134. b 135. a 136. a 137. c 138. b 139. b 140. c 141. b 142. d 143. a 144. b 145. a 146. d 147. e 148. c 149. c 150. d 151. b 152. e Powered by Cognero
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Chapter 22 - Budgeting 153. a 154. f 155. a 156. c 157. b 158. d 159. e 160. Variable cost: Direct labor (5,000 × $10.00* per hour) Fixed cost: Supervisor salaries Total department costs *$30,000 ÷ 3,000 hours
$50,000 20,000 $70,000
161. At 25,000 units = [25,000 × ($4.00 + $1.20 + $0.95)] + ($6,000 + $13,500 + $3,850) = $177,100 At 30,000 units = [30,000 × ($4.00 + $1.20 + $0.95)] + ($6,000 + $13,500 + $3,850) = $207,850 At 35,000 units = [35,000 × ($4.00 + $1.20 + $0.95)] + ($6,000 + $13,500 + $3,850) = $238,600 162. Rodger's Cabinet Manufacturers Flexible Manufacturing Budget For the Month Ended July 31 Units of production 10,000 15,000 Variable costs: Direct materials ($8 per unit) $ 80,000 $120,000 Direct labor ($5 per unit) 50,000 75,000 Electric power ($0.30 per unit) 3,000 4,500 Total variable costs $133,000 $199,500 Fixed costs: Electric power Supervisor salaries Property taxes Depreciation Total fixed costs Total manufacturing costs
$
4,000 25,000 4,000 2,900 $ 35,900 $168,900
$
4,000 25,000 4,000 2,900 $ 35,900 $235,400
20,000 $160,000 100,000 6,000 $266,000
$
4,000 25,000 4,000 2,900 $ 35,900 $301,900
163. Cedar Jeans Company Flexible Manufacturing Budget For the Year Ended December 31 Units of production 16,000 18,000 Variable costs: Powered by Cognero
20,000 Page 36
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Chapter 22 - Budgeting Direct labor ($6.00 per unit) Direct materials ($8.00 per unit) Variable costs ($2.50 per unit) Total variable costs Fixed costs: Supervisor salaries Rent Depreciation on equipment Total fixed costs Total manufacturing costs
$ 96,000 128,000 40,000 $264,000
$108,000 144,000 45,000 $297,000
$120,000 160,000 50,000 $330,000
$ 80,000 12,000 24,000 $116,000 $380,000
$ 80,000 12,000 24,000 $116,000 $413,000
$ 80,000 12,000 24,000 $116,000 $446,000
164. Variable cost: Direct labor (2,500 × $11.00* per hour) Fixed cost: Supervisor salaries Total department cost *$33,000 ÷ 3,000 hours
$27,500 24,000 $51,500
165. Cottonwood Company Monthly Selling Expense Budget $300,000 $350,000
Sales volume Variable costs: Sales commissions Shipping expense Miscellaneous selling expense Total variable costs
$400,000
$ 18,000 3,000 4,500 $ 25,500
$ 21,000 3,500 5,250 $ 29,750
$ 24,000 4,000 6,000 $ 34,000
Fixed costs: Sales salaries expense Advertising expense Miscellaneous selling expense Total fixed costs Total selling expense
$120,000 90,000 6,000 $216,000 $241,500
$120,000 90,000 6,000 $216,000 $245,750
$120,000 90,000 6,000 $216,000 $250,000
166. The sales budget is normally prepared first because the other operating budgets and financial budgets depend on information provided by the sales budget. The plans of most departments are related to expected sales units and dollars. 167. Expected units to be sold Plus desired ending inventory, December 31 Total units required Less estimated beginning inventory, January 1 Total units to be produced 168. Total units to be produced Plus estimated beginning inventory, January 1 Total units available for sale Powered by Cognero
75,000 8,000 83,000 5,000 78,000
75,000 7,000 82,000 Page 37
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Chapter 22 - Budgeting Less desired ending inventory, December 31 Projected sales 169. Yards of material required for production (55,000 × 7 yards) Plus desired ending inventory, December 31 Total yards required Less estimated beginning inventory, January 1 Total yards to be purchased Unit price (per yard) Total direct materials to be purchased 170. Hours required for cutting and sewing (52,000 × 1.5 hrs.) Hourly rate Total direct labor cost
12,000 70,000
385,000 30,000 415,000 31,000 384,000 × $4.00 $1,536,000
78,000 hrs. $12.50 $975,000
171. Good Night, Inc. Cost of Goods Sold Budget For the Year Ending December 31 Finished goods inventory, January 1 Work in process inventory, January 1 Direct materials: Direct materials inventory, January 1 Direct materials purchases Cost of direct materials available for use Less direct materials inventory, December 31 Cost of direct materials placed in production Direct labor Factory overhead Total manufacturing costs Total work in process during the period Less work in process inventory, December 31 Costs of good manufactured
$
$ 28,000
51,000
$ 33,000 555,000 $588,000 29,000 $559,000 252,000 176,000 987,000 $1,015,000 35,000
Cost of finished goods available for sale Less finished goods inventory, December 31 Cost of goods sold
980,000 $1,031,000 48,000 $ 983,000
172. Sleep Tight, Inc. Cost of Goods Sold Budget For the Year Ending December 31 Finished goods inventory, January 1 $ 39,000 Work in process inventory, January 1 $ 33,000 Direct materials: Direct materials, January 1 $ 27,000 Direct materials purchases 575,000 Powered by Cognero
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Chapter 22 - Budgeting Cost of direct materials available for use Less direct materials inventory, December 31 Cost of direct materials placed in production Direct labor
$602,000 21,000 $581,000 212,000
Factory overhead
156,000
Total manufacturing costs Total work in process during the period Less work in process inventory, December 31 Costs of good manufactured Cost of finished goods available for sale Less finished goods inventory, December 31 Cost of goods sold
949,000 $982,000 35,000 947,000 $986,000 42,000 $944,000
173. Expected units to be sold Plus desired ending inventory, December 31 Total units required Less estimated beginning inventory, January 1 Total units to be produced
67,000 15,000 82,000 6,000 76,000
174. Expected units to be sold Plus desired ending inventory, December 31 Total units required Less estimated beginning inventory, January 1 Total units to be produced
35,000 9,000 44,000 3,000 41,000
175. a. Frixion Co. Sales Budget For the Month Ending March 31 Unit Unit Sales Selling Product and Area Volume Price Product T: Area I 320,000 $6 Area II 190,000 $6 Total 510,000 Product X: Area I 260,000 $14 Area II 130,000 $14 Total 390,000 Total revenue from sales
Total Sales $1,920,000 1,140,000 $3,060,000 $3,640,000 1,820,000 $5,460,000 $8,520,000
b. Frixion Co. Production Budget For the Month Ending March 31 Product T Expected units to be sold 510,000 Plus desired ending inventory, March 31 32,000 Powered by Cognero
Product X 390,000 15,000 Page 39
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Chapter 22 - Budgeting Total units required Less estimated beginning inventory, March 1 Total units to be produced
542,000 28,000
405,000 20,000
514,000
385,000
176. Tough Jeans Company Production Budget For the Year Ending December 31 Working Life Expected units to be sold 400,000 Plus desired ending inventory 7,500 Total units required 407,500 Less estimated beginning inventory 9,000 Total units to be produced 398,500
Social Life 250,000 10,000 260,000 18,000 242,000
177. Diamond Company Production Budget For the Month Ending April 30 VCH Expected units to be sold 46,000 Plus desired ending inventory, April 6,900 30 Total units required 52,900 Less estimated beginning inventory, 2,900 April 1 Total units to be produced 50,000
MTV 42,600 5,250 47,850 4,000 43,850
178. A Units required for production of Product X (Note A) Unit price Total direct materials to be purchased Note A:
Direct Materials B
C
317,500 lb. × $0.60
635,000 lb. 762,000 lb. × $1.70 × $1.00
$190,500
$1,079,500
$762,000
Total
$2,032,000
Material A: 635,000 × 0.50 lb. per unit = 317,500 lb. Material B: 635,000 × 1.00 lb. per unit = 635,000 lb. Material C: 635,000 × 1.20 lb. per unit = 762,000 lb.
179. Ruff Jeans Company Direct Materials Purchases Budget For the Year Ending December 31 Denim Zippers Materials required for production: Simple: (353,500 units × 3 yds. material) 1,060,500 Powered by Cognero
Thread
Total
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Chapter 22 - Budgeting (353,500 units × 1 zipper) (353,500 units × 25 yds. thread) Fancy: (196,000 units × 4.5 yds. material) (196,000 units × 1 zipper) (196,000 units × 40 yds. thread) Desired ending inventory: Simple: (3,500 units × 3 yds. material) (3,500 units × 1 zipper) (3,500 units × 25 yds. thread) Fancy: (3,500 units × 4.5 yds. material) (3,500 units × 1 zipper) (3,500 units × 40 yds. thread) Total units required Less beginning inventory: Simple: (2,000 units × 3 yds. material) (2,000 units × 1 zipper) (2,000 units × 25 yds. thread) Fancy: (2,000 units × 4.5 yds. material) (2,000 units × 1 zipper) (2,000 units × 40 yds. thread) Total units to be purchased
353,500 8,837,500 882,000 196,000 7,840,000
10,500 3,500 87,500 15,750 3,500 140,000 1,968,750 556,50016,905,000
6,000 2,000 50,000 9,000 2,000 80,000 1,953,750 552,50016,775,000 × × $3.25 × $0.75 $0.02 $6,349,688$414,375$ 335,500$7,099,563
Unit price Total direct materials to be purchased 180. Hours required (80,000 × 2.5 hrs.) Hourly rate Total direct labor cost
200,000 hrs. × $15.00 $3,000,000
181. The master budget is an integrated set of operating and financial budgets for a period of time. It is prepared from individual budgets of the various segments of the organization. The master budget usually starts with the predictions of sales that make up the sales budget. Using the sales projections, the remaining operating budgets are prepared. The operating budgets can be used to prepare a budgeted income statement. The capital expenditures budget may be planned years in advance and has effects on the operating budgets. For example, depreciation on new manufacturing equipment affects the factory overhead cost budget. Using the information from the operating and capital expenditures budgets, the cash budget is prepared. Finally, the information from these budgets flows into the budgeted balance sheet. 182. Collections from March sales (75% × $225,000) Collections from April sales (25% × $250,000) Total receipts from sales on account Powered by Cognero
April $168,750 62,500 $231,250 Page 41
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Chapter 22 - Budgeting 183. Collections from March sales (75% × $150,000) Collections from April sales (25% × X) Total receipts from sales on account X = $50,000 ÷ 25% = $200,000
April $112,500 50,000 $162,500
184. Collections from May sales (65% × $175,000) Collections from June sales (35% × $225,000) Total receipts from sales on account
June $113,750 78,750 $192,500
185. Calico Dreams Company Cash Budget For the Two Months Ending April 30 March April Estimated cash receipts from: Cash sales* $157,500 $182,000 Collections of accounts receivable** 285,000 328,900 Total cash receipts $442,500 $510,900 Estimated cash payments for: Manufacturing costs $174,500 $305,000 Selling and administrative expenses 37,000 37,500 Capital additions 250,000 Income taxes 40,000 Total cash payments $461,500 $382,500 Cash increase (decrease) $(19,000) $128,400 Cash balance at beginning of month 45,000 26,000 Cash balance at end of month $ 26,000 $154,400 Minimum cash balance 25,000 25,000 Excess $ 1,000 $129,400 *$450,000 × 0.35 = $157,500 $520,000 × 0.35 = $182,000 **($450,000 × 0.65 × 0.80) + $51,000 = $285,000 ($520,000 × 0.65 × 0.80) + ($450,000 × 0.65 × 0.20) = $328,900 186.
Sales Cash sales Credit sales
Star Co. Schedule of Collections from Sales For the Three Months Ending October 31 August September $250,000 $200,000 125,000 100,000 $125,000 $100,000
Collections of accounts receivable: August credit sales: 30% × $125,000 70% × $125,000 Powered by Cognero
October $275,000 137,500 $137,500
$ 37,500 $ 87,500 Page 42
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Chapter 22 - Budgeting September credit sales: 30% × $100,000 70% × $100,000 October credit sales: 30% × $137,500 Cash sales
125,000
100,000
41,250 137,500
Total cash collections
$162,500
$217,500
$248,750
30,000 $70,000
187. The capital expenditures budget lists the amounts to be spent to purchase additional plant assets to carry out the budgeted business activities. 188. A cash budget shows expected cash inflows and outflows during the budget period. Management can arrange loans to cover anticipated cash shortages before they are needed. The cash budget also helps avoid a cash balance that is too large. An excess in cash could be invested in temporary income-producing securities such as U.S. Treasury bills or notes.
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Chapter 23 - Evaluating Variances from Standard Costs True / False 1. A variable cost system is an accounting system where standards are set for each manufacturing cost element. a. True b. False 2. Normal standards allow for normal production difficulties and mistakes. a. True b. False 3. Standard costs serve as a device for measuring efficiency. a. True b. False 4. The standard cost is how much a product should cost to manufacture. a. True b. False 5. Accounting systems that use standards for product costs are called standard cost systems. a. True b. False 6. Accounting systems that use standards for product costs are called budgeted cost systems. a. True b. False 7. Normally, standard costs should be revised when labor rates change to incorporate new union contracts. a. True b. False 8. Standard costs should always be revised when they differ from actual costs. a. True b. False 9. Financial reporting systems that are guided by the principle of exceptions concept focus attention on variances from standard costs. a. True b. False 10. In most businesses, cost standards are established principally by accountants. a. True b. False 11. It is correct to rely exclusively on past cost data when establishing standards. a. True b. False Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs 12. Ideal standards are developed under conditions that assume no idle time, no machine breakdowns, and no materials spoilage. a. True b. False 13. Normal standards do not allow for reasonable production difficulties. a. True b. False 14. If employees are given bonuses for exceeding normal standards, the standards may be very effective in motivating employees. a. True b. False 15. The fact that workers are unable to meet a properly determined direct labor standard is sufficient cause to change the standard. a. True b. False 16. Changes in technology, machinery, or production methods may make past cost data irrelevant when setting standards. a. True b. False 17. The difference between the standard cost of a product and its actual cost is called a variance. a. True b. False 18. Standards are performance goals used to evaluate and control operations. a. True b. False 19. Standards are set for only direct labor and direct materials. a. True b. False 20. The principle of exceptions allows managers to focus on correcting variances between standard costs and actual costs. a. True b. False 21. Because accountants have financial expertise, they are the only ones that are able to set standard costs for the production area. a. True b. False 22. While setting standards, managers should never allow for spoilage or machine breakdowns in their computations. Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs a. True b. False 23. A budget performance report compares actual results with the budgeted amounts and reports differences for possible investigation. a. True b. False 24. A favorable cost variance occurs when actual cost is less than standard cost at actual volumes. a. True b. False 25. An unfavorable cost variance occurs when standard cost at actual volumes exceeds actual cost. a. True b. False 26. Standards are designed to evaluate price and quantity variances separately. a. True b. False 27. If the standard to produce a given amount of product is 2,000 units of direct materials at $12 and the actual is 1,600 units at $13, the direct materials quantity variance is $5,200 favorable. a. True b. False 28. If the standard to produce a given amount of product is 1,000 units of direct materials at $11 and the actual is 800 units at $12, the direct materials quantity variance is $2,200 unfavorable. a. True b. False 29. If the standard to produce a given amount of product is 1,000 units of direct materials at $11 and the actual is 800 units at $12, the direct materials price variance is $800 unfavorable. a. True b. False 30. If the standard to produce a given amount of product is 1,000 units of direct materials at $11 and the actual is 800 units at $12, the direct materials price variance is $800 favorable. a. True b. False 31. If the standard to produce a given amount of product is 1,000 units of direct materials at $11 and the actual is 800 units at $12, the direct materials quantity variance is $1,000 unfavorable. a. True b. False 32. If the standard to produce a given amount of product is 600 direct labor hours at $17 and the actual is 500 hours at Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs $15, the time variance is $1,500 unfavorable. a. True b. False 33. If the standard to produce a given amount of product is 600 direct labor hours at $15 and the actual is 500 hours at $17, the time variance is $1,700 unfavorable. a. True b. False 34. If the standard to produce a given amount of product is 600 direct labor hours at $15 and the actual is 600 hours at $17, the rate variance is $1,200 unfavorable. a. True b. False 35. If the standard to produce a given amount of product is 500 direct labor hours at $15 and the actual is 600 hours at $17, the rate variance is $1,200 favorable. a. True b. False 36. Standard costs are determined by multiplying expected price by expected quantity. a. True b. False 37. Standards are more widely used for nonmanufacturing activities than for manufacturing activities. a. True b. False 38. The direct labor time variance measures the efficiency of the direct labor force. a. True b. False 39. The variance from standard for factory overhead resulting from operating at a level above or below 100% of normal capacity is termed volume variance. a. True b. False 40. The variance from standard for factory overhead resulting from incurring a total amount of factory overhead cost that is greater or less than the amount budgeted for the level of operations achieved is termed controllable variance. a. True b. False 41. The most effective means of presenting standard factory overhead cost variance data is through a factory overhead cost variance report. a. True b. False
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Chapter 23 - Evaluating Variances from Standard Costs 42. Since the controllable variance measures the efficiency of using variable overhead resources, if budgeted variable overhead exceeds actual results, the variance is favorable. a. True b. False 43. An unfavorable fixed factory overhead volume variance may be due to a failure of supervisors to maintain an even flow of work. a. True b. False 44. Favorable fixed factory overhead volume variances are never harmful, since achieving them encourages managers to run the factory above normal capacity. a. True b. False 45. The volume variance measures the use of fixed factory overhead resources. a. True b. False 46. Though favorable fixed factory overhead volume variances are usually good news, if inventory levels are too high, additional production could be harmful. a. True b. False 47. Standard costs are a useful management tool that can be used solely as a statistical device apart from the ledger or they can be incorporated in the accounts. a. True b. False 48. At the end of the fiscal year, the variances from standard are usually transferred to the finished goods account. a. True b. False 49. Standard cost variances are usually not reported in reports to stockholders. a. True b. False 50. Nonfinancial measures are often linked to the inputs or outputs of an activity or process. a. True b. False 51. A company must choose either a standard system or nonfinancial performance measures to evaluate the performance of a company. a. True b. False
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Chapter 23 - Evaluating Variances from Standard Costs 52. Nonfinancial performance output measures are used to improve the input measures. a. True b. False 53. An example of a nonfinancial measure is the number of customer complaints. a. True b. False 54. A company should only use nonfinancial performance measures when financial measures cannot be computed. a. True b. False Multiple Choice 55. Which of the following conditions normally would not indicate that standard costs should be revised? a. The Engineering Department has revised product specifications in responding to customer suggestions. b. The company has signed a new union contract that increases the factory wages on average by $3.50 an hour. c. Actual costs differed from standard costs for the preceding week. d. The average price of raw materials increased from $4.68 per pound to $4.82 per pound. 56. Standards that represent levels of operation that can be attained with reasonable effort are called a. theoretical standards b. ideal standards c. variable standards d. normal standards 57. Standard costs are used in companies for a variety of reasons. Which of the following is not one of the benefits of using standard costs? a. used to indicate where changes in technology and machinery need to be made b. used to estimate cost of inventory c. used to plan direct materials, direct labor, and variable factory overhead d. used to control costs 58. The principle of exceptions allows managers to focus on correcting variances between a. standard costs and actual costs b. variable costs and actual costs c. competitor’s costs and actual costs d. competitor’s costs and standard costs 59. Periodic comparisons between planned objectives and actual performance are reported in a. zero-base reports b. budget performance reports c. master budgets d. budgets Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs 60. The standard price and quantity of direct materials are separated because a. GAAP and IFRS reporting requires separation b. direct materials prices are controlled by the Purchasing Department and quantity used is controlled by the Production Department c. standard prices are more difficult to estimate than standard quantities d. standard quantities change more frequently than standard prices 61. The standards for direct materials are made up of which of the following components? a. variance standard and quantity standard b. materials standard and labor standard c. quality standard and quantity standard d. price standard and quantity standard 62. A favorable cost variance occurs when a. actual costs are more than standard costs b. standard costs are more than actual costs c. standard costs are less than actual costs d. actual costs are the same as standard costs 63. The total manufacturing cost variance consists of a. direct materials price variance, direct labor cost variance, and fixed factory overhead volume variance b. direct materials cost variance, direct labor rate variance, and factory overhead cost variance c. direct materials cost variance, direct labor cost variance, and variable factory overhead controllable variance d. direct materials cost variance, direct labor cost variance, and factory overhead cost variance 64. The total manufacturing cost variance is a. the difference between total actual costs and total standard costs for the units produced b. the flexible budget variance plus the time variance c. the difference between planned costs and standard costs for units produced d. None of these choices 65. Which of the following is not a reason standard costs are separated into two components? a. The price and quantity variances need to be identified separately to correct the actual major differences. b. Identifying variances determines which manager must find a solution to major discrepancies. c. If a negative variance is overshadowed by a favorable variance, managers may overlook potential corrections. d. Variances bring attention to discrepancies in the budget and require managers to revise budgets closer to actual results. 66. Myers Corporation has the following data related to direct materials costs for November: actual costs for 5,000 pounds of material at $4.50 per pound; and standard costs for 4,800 pounds of material at $5.10 per pound. What is the direct materials price variance? a. $3,000 favorable b. $3,000 unfavorable c. $2,880 favorable Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs d. $2,880 unfavorable 67. Jaxson Corporation has the following data related to direct labor costs for September: actual costs are 10,200 hours at $15.75 per hour and standard costs are 10,800 hours at $15.50 per hour. What is the direct labor time variance? a. $9,300 favorable b. $9,300 unfavorable c. $9,450 favorable d. $9,450 unfavorable 68. Myers Corporation has the following data related to direct materials costs for November: actual costs for 5,000 pounds of material at $4.50 per pound and standard costs for 4,800 pounds of material at $5.10 per pound. What is the direct materials quantity variance? a. $1,020 favorable b. $1,020 unfavorable c. $900 favorable d. $900 unfavorable 69. The following data relate to direct labor costs for August: Actual costs Standard costs
5,500 hours @ $24.00 per hour 5,000 hours @ $23.70 per hour
What is the direct labor rate variance? a. $1,650 favorable b. $1,650 unfavorable c. $1,500 favorable d. $1,500 unfavorable 70. The standard costs and actual costs for direct materials for the manufacture of 3,000 actual units of product are as follows: Direct materials
Standard Costs 1,040 kilograms @ $8.75
Direct materials
Actual Costs 2,000 kilograms @ $8.00
The direct materials price variance is a. $2,750 unfavorable variance b. $2,750 favorable variance c. $1,500 favorable variance d. $1,500 unfavorable variance 71. The standard costs and actual costs for direct materials for the manufacture of 2,500 actual units of product are as follows: Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs
Direct materials
Standard Costs 2,500 kilograms @ $8.50
Direct materials
Actual Costs 2,600 kilograms @ $8.75
The direct materials quantity variance is a. $875 favorable variance b. $850 unfavorable variance c. $850 favorable variance d. $875 unfavorable variance 72. If the actual quantity of direct materials used in producing a commodity differs from the standard quantity, the variance is a a. controllable variance b. price variance c. quantity variance d. rate variance 73. If the price paid per unit differs from the standard price per unit for direct materials, the variance is a a. variable variance b. controllable variance c. price variance d. volume variance Use this information for Stringer Company to answer the questions that follow. The following data are given for Stringer Company: Budgeted production Actual production Materials: Standard price per ounce Standard ounces per completed unit Actual ounces purchased and used in production Actual total price paid for materials Labor: Standard hourly labor rate Standard hours allowed per completed unit Actual labor hours worked Actual total labor costs Overhead: Actual and budgeted fixed overhead Standard variable overhead rate Actual variable overhead costs
26,000 units 27,500 units $6.50 8 228,000 $1,504,800 $22 per hour 6.6 183,000 $4,020,000 $1,029,600 $24.50 per standard labor hour $4,520,000
Overhead is applied on standard labor hours. 74. The direct materials price variance is Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs a. $22,800 unfavorable b. $22,800 favorable c. $52,000 unfavorable d. $52,000 favorable 75. The direct materials quantity variance is a. $22,800 favorable b. $22,800 unfavorable c. $52,000 favorable d. $52,000 unfavorable Use this information for Lucy Corporation to answer the questions that follow. Lucy Corporation purchased and used 129,000 board feet of lumber in production at a total cost of $1,548,000. Original production had been budgeted for 22,000 units with a standard material quantity of 5.7 board feet per unit and a standard price of $12 per board foot. Actual production was 23,500 units. 76. The direct materials price variance is a. $0 b. $59,400 unfavorable c. $59,400 favorable d. $6,000 unfavorable 77. The direct materials quantity variance is a. $63,000 favorable b. $63,000 unfavorable c. $59,400 favorable d. $59,400 unfavorable 78. If the wage rate paid per hour differs from the standard wage rate per hour for direct labor, the variance is a a. variable variance b. rate variance c. quantity variance d. volume variance 79. If the actual direct labor hours spent producing a commodity differ from the standard hours, the variance is a a. time variance b. price variance c. quantity variance d. rate variance 80. The following data relate to direct labor costs for the current period: Standard costs Actual costs Powered by Cognero
7,500 hours @ $11.70 6,000 hours @ $12.00 Page 10
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Chapter 23 - Evaluating Variances from Standard Costs What is the direct labor time variance? a. $18,000 favorable b. $18,000 unfavorable c. $17,550 unfavorable d. $17,550 favorable 81. The following data relate to direct labor costs for the current period: Standard costs Actual costs
6,000 hours @ $12.00 7,500 hours @ $11.40
What is the direct labor rate variance? a. $18,000 unfavorable b. $4,500 favorable c. $17,100 unfavorable d. $3,600 favorable 82. The following data relate to direct labor costs for the current period: Standard costs Actual costs
9,000 hours @ $5.50 8,500 hours @ $5.75
What is the direct labor rate variance? a. $2,250 unfavorable b. $2,125 unfavorable c. $2,250 favorable d. $2,125 favorable 83. The following data relate to direct labor costs for the current period: Standard costs Actual costs
36,000 hours @ $22.00 35,000 hours @ $23.00
What is the direct labor time variance? a. $36,000 unfavorable b. $35,000 unfavorable c. $23,000 favorable d. $22,000 favorable 84. The standard costs and actual costs for direct labor for the manufacture of 2,500 actual units of product are as follows: Standard Costs Direct labor 7,500 hours @ $11.80 Actual Costs Direct labor 7,400 hours @ $11.40 The direct labor rate variance is a. $2,960 unfavorable Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs b. $4,500 favorable c. $2,960 favorable d. $4,500 unfavorable 85. The standard costs and actual costs for direct labor in the manufacture of 2,500 units of product are as follows: Standard Costs Direct labor 7,500 hours @ $11.80 Actual Costs Direct labor 7,400 hours @ $11.40 The direct labor time variance is a. $1,180 favorable b. $1,140 unfavorable c. $1,180 unfavorable d. $1,140 favorable Use this information for Alex Company to answer the questions that follow. The following data relate to the direct labor costs of Alex Company for February: Actual costs Standard costs
7,700 hours @ $14.00 7,000 hours @ $16.00
86. What is the direct labor time variance? a. $7,700 favorable b. $7,700 unfavorable c. $11,200 unfavorable d. $11,200 favorable 87. What is the direct labor rate variance? a. $14,000 favorable b. $14,000 unfavorable c. $15,400 favorable d. $15,400 unfavorable Use this information for Harry Company to answer the questions that follow. The following data are given for Harry Company: Budgeted production Actual production Materials: Standard price per ounce Standard ounces per completed unit Actual ounces purchased and used in production Actual price paid for materials Labor: Powered by Cognero
26,000 units 27,500 units $6.50 8 228,000 $1,504,800 Page 12
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Chapter 23 - Evaluating Variances from Standard Costs Standard hourly labor rate Standard hours allowed per completed unit Actual labor hours worked Actual total labor costs Overhead: Actual and budgeted fixed overhead Standard variable overhead rate Actual variable overhead costs
$22.00 per hour 6.6 183,000 $4,020,000 $1,029,600 $24.50 per standard labor hour $4,520,000
Overhead is applied on standard labor hours. (Round interim computations to the nearest cent.) 88. The direct labor rate variance is a. $5,490 unfavorable b. $5,490 favorable c. $33,000 favorable d. $33,000 unfavorable 89. The direct labor time variance is a. $6,000 favorable b. $6,000 unfavorable c. $33,000 unfavorable d. $33,000 favorable Use this information for Flapjack Corporation to answer the questions that follow. Flapjack Corporation had 8,200 actual direct labor hours at an actual rate of $12.40 per hour. Original production had been budgeted for 1,100 units, but only 1,000 units were actually produced. Labor standards were 7.6 hours per completed unit at a standard rate of $13.00 per hour. 90. The direct labor rate variance is a. $4,920 unfavorable b. $4,920 favorable c. $4,560 favorable d. $4,560 unfavorable 91. The direct labor time variance is a. $9,880 favorable b. $9,880 unfavorable c. $7,800 unfavorable d. $7,800 favorable Use this information for Pink Peach Company to answer the questions that follow. The following data relate to direct materials costs for February: Materials cost per yard: standard, $2.00; actual, $2.10 Standard yards per unit: standard, 4.5 yards; actual, 4.75 yards Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs Units of production: 9,500 92. Compute the total direct materials cost variance. a. $9,262.50 unfavorable b. $9,262.50 favorable c. $3,780.00 unfavorable d. $3,562.50 favorable 93. Compute the direct materials price variance. a. $1,795.50 favorable b. $378.00 favorable c. $4,512.50 unfavorable d. $378.00 unfavorable 94. Compute the direct materials quantity variance. a. $4,512.50 unfavorable b. $4,512.50 favorable c. $4,750.00 unfavorable d. $4,750.00 favorable Use this information for Hagedorn Company to answer the questions that follow. The following data relate to direct labor costs for March: Rate: standard, $12.00; actual, $12.25 Hours: standard, 18,500; actual, 17,955 Units of production: 9,450 95. Compute the total direct labor cost variance. a. $2,051.25 favorable b. $2,051.25 unfavorable c. $2,362.50 unfavorable d. $2,362.50 favorable 96. Compute the direct labor time variance. a. $2,362.50 favorable b. $2,362.50 unfavorable c. $6,540.00 favorable d. $6,540.00 unfavorable 97. Compute the direct labor rate variance. a. $4,488.75 unfavorable b. $6,851.25 favorable c. $4,488.75 favorable d. $6,851.25 unfavorable Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs 98. Which of the following is not a reason for a direct materials quantity variance? a. malfunctioning equipment b. purchase of inferior raw materials c. increased material cost per unit d. spoilage of materials 99. One formula to determine the direct labor rate variance is a. Actual Costs + (Actual Hours × Standard Rate) b. Actual Costs – Standard Costs c. (Actual Hours × Standard Rate) – Standard Costs d. Actual Costs – (Actual Hours × Standard Rate) 100. One formula to determine the direct labor time variance is a. Actual Costs – Standard Costs b. Actual Costs + Standard Costs c. (Actual Hours × Standard Rate) – Standard Costs d. Actual Costs – (Actual Hours × Standard Rate) 101. One formula to determine the direct materials price variance is a. Actual Costs – (Actual Quantity × Standard Price) b. Actual Costs + Standard Costs c. Actual Costs – Standard Costs d. (Actual Quantity × Standard Price) – Standard Costs 102. One formula to determine the direct materials quantity variance is a. Actual Costs – Standard Costs b. Standard Costs – Actual Costs c. (Actual Quantity × Standard Price) – Standard Costs d. Actual Costs – (Standard Price × Standard Costs) 103. Which of the following would not lend itself to applying direct labor variances? a. help desk assistant b. research and development scientist c. customer service personnel d. telemarketer Use this information for Bonny Company to answer the questions that follow. The standard costs and actual costs for factory overhead for the manufacture of 2,500 units of actual production are as follows: Standard Costs Fixed overhead (based on 10,000 hours) 3 hours per unit @ $0.80 per hour Variable overhead 3 hours per unit @ $2.00 per hour Actual Costs Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs Total variable overhead cost, $18,000 Total fixed overhead cost, $8,000 104. The fixed factory overhead volume variance is a. $2,000 favorable b. $2,000 unfavorable c. $2,500 unfavorable d. $0 105. The total factory overhead cost variance is a. $2,000 favorable b. $5,000 unfavorable c. $2,500 unfavorable d. $5,000 favorable 106. The variable factory overhead controllable variance is a. $2,000 unfavorable b. $3,000 favorable c. $0 d. $3,000 unfavorable Use this information for Max Company to answer the questions that follow. The standard factory overhead rate is $10 per direct labor hour ($8 for variable factory overhead and $2 for fixed factory overhead) based on 100% of normal capacity of 30,000 direct labor hours. The standard cost and the actual cost of factory overhead for the production of 5,000 units during May were as follows: Standard: Actual:
25,000 hours @ $10 Variable factory overhead Fixed factory overhead
$250,000 $202,500 60,000
107. What is the fixed factory overhead volume variance? a. $12,500 favorable b. $10,000 unfavorable c. $12,500 unfavorable d. $10,000 favorable 108. What is the variable factory overhead controllable variance? a. $10,000 favorable b. $2,500 unfavorable c. $10,000 unfavorable d. $2,500 favorable 109. Assuming that the standard fixed overhead rate is based on full capacity, the cost of available but unused productive capacity is indicated by the a. fixed factory overhead volume variance Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs b. direct labor time variance c. direct labor rate variance d. variable factory overhead controllable variance Use this information for Carol Company to answer the questions that follow. The standard factory overhead rate is $7.50 per machine hour ($6.20 for variable factory overhead and $1.30 for fixed factory overhead) based on 100% of normal capacity of 80,000 machine hours. The standard cost and the actual cost of factory overhead for the production of 15,000 units during August were as follows: Actual: Standard hours allowed for units produced:
Variable factory overhead Fixed factory overhead 60,000 hours
$360,000 104,000
110. What is the fixed factory overhead volume variance? a. $12,000 unfavorable b. $12,000 favorable c. $14,000 unfavorable d. $26,000 unfavorable 111. What is the variable factory overhead controllable variance? a. $12,000 unfavorable b. $12,000 favorable c. $14,000 unfavorable d. $26,000 unfavorable 112. Incurring actual indirect factory wages in excess of budgeted amounts for actual production results in a a. quantity variance b. controllable variance c. volume variance d. rate variance 113. The controllable variance measures a. operating results at less than normal capacity b. the efficiency of using variable overhead resources c. operating results at more than normal capacity d. control over fixed overhead costs 114. The unfavorable volume variance may be due to all of the following factors except a. failure to maintain an even flow of work b. machine breakdowns c. unexpected increases in the cost of utilities d. failure to obtain enough sales orders 115. Favorable volume variances may be harmful when a. machine repairs cause work stoppages Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs b. supervisors fail to maintain an even flow of work c. production in excess of normal capacity cannot be sold d. All of these choices 116. The following data are given for Bahia Company: Budgeted production 1,000 units Actual production 980 units Materials: Standard price per pound $2.00 Standard pounds per completed unit 12 Actual pounds purchased and used in production 11,800 Actual price paid for materials $23,000 Labor: Standard hourly labor rate $14 per hour Standard hours allowed per completed unit 4.5 Actual labor hours worked 4,560 Actual total labor costs $62,928 Overhead: Actual and budgeted fixed overhead $27,000 Standard variable overhead rate $3.50 per standard direct labor hour Actual variable overhead costs $15,500 Overhead is applied on standard labor hours. The variable factory overhead controllable variance is a. $65 unfavorable b. $65 favorable c. $540 unfavorable d. $540 favorable 117. The following data are given for Bahia Company: Budgeted production (at 100% of normal capacity) Actual production Materials: Standard price per pound Standard pounds per completed unit Actual pounds purchased and used in production Actual price paid for materials Labor: Standard hourly labor rate Standard hours allowed per completed unit Actual labor hours worked Actual total labor costs Overhead: Actual and budgeted fixed overhead Standard variable overhead rate Actual variable overhead costs
1,000 units 980 units $2.00 12 11,800 $23,000 $14 per hour 4.5 4,560 $62,928 $27,000 $3.50 per standard labor hour $15,500
Overhead is applied on standard labor hours. Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs The fixed factory overhead volume variance is a. $65 unfavorable b. $65 favorable c. $540 unfavorable d. $540 favorable Use this information for Zoyza Company to answer the questions that follow. The following data are given for Zoyza Company: Budgeted production (at 100% of normal capacity) Actual production Materials: Standard price per ounce Standard ounces per completed unit Actual ounces purchased and used in production Actual price paid for materials Labor: Standard hourly labor rate Standard hours allowed per completed unit Actual labor hours worked Actual total labor costs Overhead: Actual and budgeted fixed overhead Standard variable overhead rate Actual variable overhead costs
26,000 units 27,500 units $6.50 8 228,000 $1,504,800 $22 per hour 6.6 183,000 $4,020,000 $1,029,600 $24.50 per standard labor hour $4,520,000
Overhead is applied on standard labor hours. 118. The variable factory overhead controllable variance is a. $73,250 favorable b. $73,250 unfavorable c. $59,400 favorable d. $59,400 unfavorable 119. The fixed factory overhead volume variance is a. $73,250 unfavorable b. $73,250 favorable c. $59,400 favorable d. $59,400 unfavorable Use this information for St. Augustine Corporation to answer the questions that follow. St. Augustine Corporation originally budgeted for $360,000 of fixed overhead at 100% of normal production capacity. Production was budgeted to be 12,000 units. The standard hours for production were 5 hours per unit. The variable overhead rate was $3 per hour. Actual fixed overhead was $360,000 and actual variable overhead was $170,000. Actual production was 11,700 units. Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs 120. The variable factory overhead controllable variance is a. $9,000 favorable b. $9,000 unfavorable c. $5,500 favorable d. $5,500 unfavorable 121. The fixed factory overhead volume variance is a. $9,000 favorable b. $9,000 unfavorable c. $5,500 favorable d. $5,500 unfavorable Use this information for Yawee Company to answer the questions that follow.
Variable overhead rate Fixed overhead rate Hours Fixed overhead Actual variable overhead Total factory overhead
Standard $3.35 $1.80 18,900 $46,000
Actual
17,955* $67,430 $101,450
*Actual hours are equal to standard hours for units produced. 122. The total factory overhead cost variance is a. $4,866.75 unfavorable b. $4,866.75 favorable c. $8,981.75 favorable d. $8,981.75 unfavorable 123. The fixed factory overhead volume variance is a. $1,701.00 favorable b. $4,866.75 unfavorable c. $1,701.00 unfavorable d. $4,866.75 favorable 124. The variable factory overhead controllable variance is a. $8,981.75 favorable b. $7,280.75 unfavorable c. $8,981.75 unfavorable d. $7,280.75 favorable 125. A negative fixed overhead volume variance can be caused due to all of the following except a. sales orders at a low level b. machine breakdowns Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs c. employee inexperience d. increase in utility costs 126. At the end of the fiscal year, variances from standard costs are usually transferred to the a. direct labor account b. factory overhead account c. cost of goods sold account d. direct materials account 127. Variances from standard costs are reported to a. suppliers b. stockholders c. management d. creditors 128. If at the end of the fiscal year, the variances from standard are significant, the variances should be transferred to the a. work in process account b. cost of goods sold account c. finished goods account d. work in process, cost of goods sold, and finished goods accounts 129. Morocco Desk Co. purchases 6,000 feet of lumber at $6 per foot. The standard price for direct materials is $5. The journal entry for the purchase and unfavorable direct materials price variance is a. Direct Materials Direct Materials Price Variance Accounts Payable b. Direct Materials Accounts Payable c. Direct Materials Direct Materials Price Variance Accounts Payable d. Work in Process Direct Materials Price Variance Accounts Payable
30,000 6,000 36,000 30,000 30,000 36,000 6,000 30,000 36,000 6,000 30,000
130. A company records its inventory purchases at standard cost but also records purchase price variances. The company purchased 5,000 widgets at $8.00 each, and the standard cost for the widgets is $7.60. Which of the following would be included in the journal entry? a. debit Accounts Payable, $38,000 b. credit Direct Materials Price Variance, $2,000 c. debit Accounts Payable, $2,000 d. debit Direct Materials Price Variance, $2,000 Matching Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs Match each of the following descriptions with the term (a–e) it best describes. a. Ideal standard b. Nonfinancial performance measure c. Normal standard d. Unfavorable cost variance e. Favorable cost variance 131. An example is the number of customer complaints 132. Actual Cost > Standard Cost at Actual Volumes 133. Actual Cost < Standard Cost at Actual Volumes 134. Normal standard 135. Theoretical standard Match each of the following formulas or descriptions with the term (a–e) it best describes. a. Direct materials price variance b. Direct labor rate variance c. Direct labor time variance d. Direct materials quantity variance e. Budgeted variable factory overhead 136. (Actual Direct Hours – Standard Direct Hours) × Standard Rate per Hour 137. (Actual Rate per Hour – Standard Rate per Hour) × Actual Hours 138. (Actual Price – Standard Price) × Actual Quantity 139. (Actual Quantity – Standard Quantity) × Standard Price 140. Standard variable overhead for actual units produced Match each of the following items related to a help desk to its relationship (a or b) to the help desk activities. a. Input b. Output 141. Operator training 142. Number of calls per day 143. Maintenance of computer equipment 144. Number of operators 145. Number of complaints Subjective Short Answer Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs 146. Define ideal and normal standards. Which type of standard should be used and why? 147. Compute the standard cost for one pair of boots, based on the following standards for each pair of boots: Standard material quantity: Standard labor: Factory overhead:
1.25 yards of leather at $35.00 per yard 9 hours at $25.75 per hour $1.75 per direct labor hour
148. Sally’s Chocolate Company makes gourmet cupcakes that are sold by the dozen. Compute the standard cost for one dozen cupcakes, based on the following standards: Standard material quantity: Standard labor: Factory overhead:
4.25 cups of ingredients at $0.56 per cup 1.10 hours at $8.30 per hour $3.80 per direct labor hour
149. Compute the standard cost for one hat, based on the following standards for each hat: Standard material quantity: Standard labor: Factory overhead:
3/4 yard of fabric at $5.00 per yard 2 hours at $5.75 per hour $3.20 per direct labor hour
150. Standard and actual costs for direct labor for the manufacture of 300 units of product were as follows: Actual costs Standard costs
125 hours @ $54 131 hours @ $53
Determine the (a) direct labor time variance, (b) direct labor rate variance, and (c) total direct labor cost variance. 151. Ruby Company produces a chair that requires a standard 5 yards of material per unit. The standard price of one yard of material is $7.50. During the month, 8,500 chairs were manufactured, using 43,600 yards at a cost of $7.55 per yard. Determine the (a) direct materials price variance, (b) direct materials quantity variance, and (c) total direct materials cost variance. 152. Ruby Company produces a chair that requires a standard 5 yards of material per unit. The standard price of one yard of material is $7.50. During the month, 8,400 chairs were manufactured, using 43,700 yards at a cost of $7.30 per yard. Determine the (a) direct materials price variance, (b) direct materials quantity variance, and (c) total direct materials cost variance. 153. Ruby Company produces a chair that requires a standard 5 yards of material per unit. The standard price of one yard of material is $7.60. During the month, 8,500 chairs were manufactured, using 40,000 yards at a cost of $7.50. Determine the (a) direct materials price variance, (b) direct materials quantity variance, and (c) total direct materials cost variance. 154. Japan Company produces lamps that require 2.25 standard hours per unit at a standard hourly rate of $15.00 per hour. Actual production of 7,700 units required 19,250 hours at an hourly rate of $14.90 per hour. Determine the (a) direct labor rate variance, (b) direct labor time variance, and (c) total direct labor cost variance. Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs 155. Tippi Company produces lamps that require 2.25 standard hours per unit at a standard hourly rate of $15.00 per hour. Production of 7,700 units required 17,550 hours at an hourly rate of $15.20 per hour. Determine the (a) direct labor rate variance, (b) direct labor time variance, and (c) total direct labor cost variance. 156. Hsu Company produces a part with a standard of 5 yards of material per unit. The standard price of one yard of material is $8.50. During the month, 8,800 parts were manufactured, using 45,700 yards of material at a cost of $8.30. Determine the (a) direct materials price variance, (b) direct materials quantity variance, and (c) total direct materials cost variance. 157. Aquatic Corp.’s standard material requirement and standard cost to produce one Model 2000 is 15 pounds of material at $110 per pound. Last month, Aquatic purchased 170,000 pounds of material at a total cost of $17,850,000. It used 162,000 pounds to produce 10,000 units of Model 2000. Determine the direct materials price variance and the direct materials quantity variance. Use this information for Taylor Company to answer the questions that follow. The following data are given for Taylor Company: Budgeted production Actual production Materials: Standard price per pound Standard pounds per completed unit Actual pounds purchased and used in production Actual price paid for materials Labor: Standard hourly labor rate Standard hours allowed per completed unit Actual labor hours worked Actual total labor costs Overhead: Actual and budgeted fixed overhead Standard variable overhead rate Actual variable overhead costs
1,000 units 980 units $2.00 12 11,800 $23,010 $14.00 per hour 4.5 4,560 $62,928 $27,000 $3.50 per standard labor hour $15,500
Overhead is applied based on standard labor hours. 158. Compute the direct materials price and direct materials quantity variances for Taylor Company. 159. Compute the direct labor rate and direct labor time variances for Taylor Company. 160. Standard and actual costs for direct materials for the manufacture of 1,000 units of product were as follows: Actual costs Standard costs
1,550 lb. @ $9.10 1,600 lb. @ $9.00
Determine the (a) direct materials quantity variance, (b) direct materials price variance, and (c) total direct materials cost variance. 161. Standard and actual costs for direct labor for the manufacture of 1,000 units of product were as follows: Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs Actual costs Standard costs
950 hours @ $37 975 hours @ $36
Determine the (a) direct labor time variance, (b) direct labor rate variance, and (c) total direct labor cost variance. 162. The Finishing Department of Pinnacle Manufacturing Co. prepared the following factory overhead cost budget for October of the current year, during which it expected to operate at a 100% capacity of 10,000 machine hours. Variable costs: Indirect factory wages Power and light Indirect materials Total variable cost Fixed costs: Supervisory salaries Depreciation of plant and equipment Insurance and property taxes Total fixed cost Total factory overhead
$18,000 12,000 4,000 $34,000 $12,000 8,800 3,200 24,000 $58,000
During October, the plant was operated for 9,000 machine hours and the factory overhead costs incurred were as follows: indirect factory wages, $16,400; power and light, $10,000; indirect materials, $3,000; supervisory salaries, $12,000; depreciation of plant and equipment, $8,800; insurance and property taxes, $3,200. Prepare a factory overhead cost variance report for October. (The budgeted amounts for actual production should be based on 9,000 machine hours.) 163. Tucker Company produced 8,900 units of product that required 3.25 standard hours per unit. The standard variable overhead cost per unit is $4.00 per hour. The actual variable factory overhead was $111,000. Determine the variable factory overhead controllable variance. 164. Titus Company produced 8,900 units of a product that required 3.25 standard hours per unit. The standard fixed overhead cost per unit is $1.20 per hour at 29,000 hours, which is 100% of normal capacity. Determine the fixed factory overhead volume variance. 165. Greyson Company produced 8,300 units of product that required 4.25 standard hours per unit. Determine the fixed factory overhead rate at 27,000 hours, which is 100% of normal capacity, if the favorable fixed factory overhead volume variance is $14,895. 166. The following information relates to manufacturing overhead for Chapman Company: Standard: Total fixed factory overhead $450,000 Estimated production 25,000 units (100% of normal capacity) Overhead rates are based on machine hours. Standard hours allowed per unit produced 2 Fixed overhead rate $9.00 per machine hour Variable overhead rate $3.50 per hour Actual: Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs Fixed factory overhead Production Variable overhead
$450,000 24,000 units $170,000
Compute (a) the fixed factory overhead volume variance, (b) the variable factory overhead controllable variance, and (c) the total factory overhead cost variance. 167. Using the following information, prepare a factory overhead cost budget for Andover Company where the total factory overhead cost is $75,500 at normal capacity (100%). Include capacity at 75%, 90%, 100%, and 110%. Total factory overhead variable cost is $6.25 per unit, and total factory overhead fixed costs are $38,000. The information is for the month ended August 31. (Hint: Determine units produced at normal capacity.) 168. Using the following information, prepare a factory overhead cost budget for Jacob Company where the total factory overhead cost is $206,500 at normal capacity (100%). Include capacity at 60%, 80%, 100%, and 120%. Total factory overhead variable cost is $15.25 per unit, and total factory overhead fixed costs are $54,000. The information is for the month ended October 31. (Hint: Determine units produced at normal capacity.) 169. Titus Company purchased on account and used 650 pounds of tomatoes (direct materials) to produce a taco sauce with a 635-pound standard direct materials requirement. The standard materials price is $22.40 per pound. The actual price of the tomatoes was $22.20 per pound. Journalize the entries for (a) the purchase of the tomatoes and (b) the tomatoes entering production. Titus records standards and variances in the general ledger. 170. Prepare an income statement (through income from operations) for presentation to management, using the following data from the records of Greenway Manufacturing Company for November of the current year: Administrative expenses $ 73,500 Cost of goods sold (at standard) 470,000 Direct materials quantity variance—favorable 1,200 Direct materials price variance—favorable 2,400 Direct labor time variance—unfavorable 900 Direct labor rate variance—favorable 500 Factory overhead volume variance—unfavorable 10,000 Factory overhead controllable variance—favorable 1,500 Sales 950,000 Selling expenses 165,800 171. Oak Company produces a chair that requires 6 yards of material per unit. The standard price of one yard of material is $7.50. During the month, 8,500 chairs were manufactured, using 48,875 yards. Journalize the entry for the direct materials used in production. Oak Company records standards and variances in the general ledger. 172. Prepare an income statement for the year ended December 31 through the gross profit for Baxter Company using the following information. Baxter Company sold 8,600 units at $125 per unit. Normal production is 9,000 units. (Do not round the fixed overhead rate computation when determining the fixed factory overhead volume variance.) Standard: 5 yards per unit at $6.30 per yard Actual yards used: 43,240 yards at $6.25 per yard Standard: 2.25 hours per unit at $15.00 Actual hours worked: 19,100 at $14.90 per hour Standard: variable overhead $1.05 per unit Standard: fixed overhead $211,500 Actual total factory overhead: (budgeted and actual amount) $235,500 173. A company records inventory purchases at standard cost and also records purchase price variances. Journalize the Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs entry for a purchase of 6,000 widgets that were bought at $8.00 and have a standard cost of $8.15. 174. A company records inventory purchases at standard cost and also records purchase price variances. Journalize the entry for a purchase of 4,500 widgets that were bought at $7.45 per unit and have a standard cost of $7.15. 175. Robin Company purchased on account and used 520 pounds of direct materials to produce a product with a 510pound standard direct materials requirement. The standard materials price is $2.10 per pound. The actual materials price was $2.00 per pound. Journalize the entries for (a) the purchase of the materials and (b) the materials entering production. Robin Company records standards and variances in the general ledger. 176. Rosser Company produces a chair that requires 4 yards of material per unit. The standard price of one yard of material is $4.50. During the month, 9,500 chairs were manufactured using 37,300 yards of material. Journalize the entry for the direct materials used in production. Rosser Company records standards and variances in the general ledger. 177. Robin Company purchased on account and used 500 pounds of direct materials to produce a product with a 520pound standard direct materials requirement. The standard materials price is $1.90 per pound. The actual materials price was $2.00 per pound. Journalize the entries for (a) the purchase of the materials and (b) the materials entering production. Robin Company records standards and variances in the general ledger. 178. Define nonfinancial performance measures. What are they used for and what are some common examples?
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Chapter 23 - Evaluating Variances from Standard Costs Answer Key 1. False 2. True 3. True 4. True 5. True 6. False 7. True 8. False 9. True 10. False 11. False 12. True 13. False 14. True 15. False 16. True 17. True 18. True 19. False 20. True 21. False 22. False 23. True 24. True 25. False Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs 26. True 27. False 28. False 29. True 30. False 31. False 32. False 33. False 34. True 35. False 36. True 37. False 38. True 39. True 40. True 41. True 42. True 43. True 44. False 45. True 46. True 47. True 48. False 49. True 50. True Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs 51. False 52. True 53. True 54. False 55. c 56. d 57. a 58. a 59. b 60. b 61. d 62. b 63. d 64. a 65. d 66. a 67. a 68. b 69. b 70. c 71. b 72. c 73. c 74. a 75. d 76. a Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs 77. c 78. b 79. a 80. d 81. b 82. b 83. d 84. c 85. a 86. c 87. c 88. b 89. c 90. b 91. c 92. a 93. c 94. c 95. a 96. c 97. a 98. c 99. d 100. c 101. a Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs 102. c 103. b 104. b 105. b 106. d 107. b 108. b 109. a 110. d 111. b 112. b 113. b 114. c 115. c 116. a 117. c 118. b 119. c 120. c 121. b 122. d 123. c 124. b 125. d 126. c 127. c Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs 128. d 129. a 130. d 131. b 132. d 133. e 134. c 135. a 136. c 137. b 138. a 139. d 140. e 141. a 142. b 143. a 144. a 145. b 146. Ideal standards are standards that are only achievable under perfect operating conditions. Normal standards (also called currently attainable standards) allow for normal difficulties and mistakes. They can be attained with reasonable effort. Companies should use normal standards as employees are more likely to put forth their best effort when standards are reasonable. The use of ideal standards may have a negative impact on performance as they are likely to be viewed by employees as unrealistic. 147. Direct materials:
1.25 yards at $35.00 per yard
$ 43.75
Direct labor:
9 hours at $25.75 per hour
231.75
Factory overhead:
9 hours at $1.75 per hour
15.75
Total standard cost per unit Powered by Cognero
$291.25 Page 33
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Chapter 23 - Evaluating Variances from Standard Costs 148. Direct materials: Direct labor: Factory overhead:
4.25 cups at $0.56 per cup 1.10 hours at $8.30 per hour 1.10 hours at $3.80 per hour
Total standard cost per unit 149. Direct materials: 3/4 yard at $5.00 per yard Direct labor: 2 hours at $5.75 per hour Factory overhead: 2 hours at $3.20 per hour Total standard cost per unit
$ 2.38 9.13 4.18 $15.69
$ 3.75 11.50 6.40 $21.65
150. a. Direct Labor Time Variance = (Actual Direct Labor Hours – Standard Direct Labor Hours) × Standard Rate per Hour = (125 hours – 131 hours) × $53 = (6) hours × $53 = $(318) Favorable Variance b. Direct Labor Rate Variance = (Actual Rate per Hour – Standard Rate per Hour) × Actual Hours = ($54 – $53) × 125 hours = $1 × 125 hours = $125 Unfavorable Variance c. Total Direct Labor Cost Variance = Direct Labor Time Variance + Direct Labor Rate Variance = $(318) + $125 = $(193) Favorable Variance 151. a. Direct Materials Price Variance = (Actual Price – Standard Price) × Actual Quantity ($7.55 – $7.50) × 43,600 = $0.05 × 43,600 = $2,180 Unfavorable b. Direct Materials Quantity Variance = (Actual Quantity – Standard Quantity) × Standard Price == [43,600 – (5 × 8,500)] × $7.50 = (43,600 – 42,500) × $7.50 = 1,100 × $7.50 = $8,250 Unfavorable c. Total Direct Materials Cost Variance = Direct Materials Price Variance + Direct Materials Quantity Variance = $2,180 + $8,250 = $10,430 Unfavorable 152. a. Direct Materials Price Variance = (Actual Price – Standard Price) × Actual Quantity = ($7.30 – $7.50) × 43,700 = $(0.20) × 43,700 = $(8,740) Favorable b. Direct Materials Quantity Variance = (Actual Quantity – Standard Quantity) × Standard Price = [43,700 – (5 × 8,400)] × $7.50 = (43,700 – 42,000) × $7.50 = 1,700 × $7.50 =$12,750 Unfavorable c. Total Direct Materials Cost Variance = Direct Materials Price Variance + Direct Materials Quantity Variance = $(8,740) + $12,750 = $4,010 Unfavorable 153. a. Direct Materials Price Variance = (Actual Price – Standard Price) × Actual Quantity = ($7.50 – $7.60) × 40,000 = $(0.10) × 40,000 = $(4,000) Favorable b. Direct Materials Quantity Variance = (Actual Quantity – Standard Quantity) × Standard Price = [40,000 – (8,500 × 5)] × $7.60 = (40,000 – 42,500) × $7.60 = (2,500) × $7.60 = $(19,000) Favorable c. Total Direct Materials Cost Variance = Direct Materials Price Variance + Direct Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs Materials Quantity Variance = $(4,000) + $(19,000) = $(23,000) Favorable 154. a. Direct Labor Rate Variance = (Actual Rate per Hour – Standard Rate per Hour) × Actual Hours = ($14.90 – $15.00) × 19,250 = $(0.10) × 19,250 = $(1,925) Favorable b. Direct Labor Time Variance = (Actual Direct Labor Hours – Standard Direct Labor Hours) × Standard Rate per Hour = [19,250 – (7,700 × 2.25)] × $15.00 = (19,250 – 17,325) × $15.00 = 1,925 × $15.00 = $28,875 Unfavorable c. Total Direct Labor Cost Variance = Direct Labor Rate Variance + Direct Labor Time Variance = $(1,925) + $28,875 = $26,950 Unfavorable 155. a. Direct Labor Rate Variance = (Actual Rate per Hour – Standard Rate per Hour) × Actual Hours = ($15.20 – $15.00) × 17,550 = $0.20 × 17,550 = $3,510 Unfavorable b. Direct Labor Time Variance = (Actual Direct Labor Hours – Standard Direct Labor Hours) × Standard Rate per Hour = [17,550 – (2.25 × 7,700)] × $15.00 = 17,550 – 17,325 × $15.00 = $3,375 Unfavorable c. Total Direct Labor Cost Variance = Direct Labor Rate Variance + Direct Labor Time Variance = $3,510 + $3,375 = $6,885 Unfavorable 156. a. Direct Materials Price Variance = (Actual Price – Standard Price) × Actual Quantity = ($8.30 – $8.50) × 45,700 = $(0.20) × 45,700 = $(9,140) Favorable b. Direct Materials Quantity Variance = (Actual Quantity – Standard Quantity) × Standard Price = [45,700 – (5 × 8,800)] × $8.50 = (45,700 – 44,000) × $8.50 = 1,700 × $8.50 = $14,450 Unfavorable c. Total Direct Materials Cost Variance = Direct Materials Price Variance + Direct Materials Quantity Variance = $(9,140) + $14,450 = $5,310 Unfavorable 157. Actual Price = $17,850,000 ÷ 170,000 pounds = $105 per pound Direct Materials Price Variance = (Actual Price – Standard Price) × Actual Quantity = ($105 – $110) × 170,000 = $(850,000) Favorable Direct Materials Quantity Variance = (Actual Quantity – Standard Quantity) × Standard Price = [162,000 – (15 × 10,000)] × $110 = (162,000 – 150,000) × $110 = 12,000 × $110 = $1,320,000 Unfavorable 158. Direct Materials Price Variance = (Actual Price – Standard Price) × Actual Quantity = [($23,010 ÷ 11,800) – $2.00] × 11,800 = ($1.95 – $2.00) × 11,800 = $(0.05) × 11,800 = $(590) Favorable Direct Materials Quantity Variance = (Actual Quantity – Standard Quantity) × Standard Price = [11,800 – (980 × 12)] × $2.00 = (11,800 – 11,760) × $2.00 = 40 × $2.00 = $80 Unfavorable 159. Direct Labor Rate Variance = (Actual Rate per Hour – Standard Rate per Hour) × Actual Hours = [($62,928 ÷ 4,560) – $14.00] × 4,560 = ($13.80 – $14.00) × 4,560 = $(0.20) × 4,560 = $(912) Favorable Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs Direct Labor Time Variance = (Actual Direct Labor Hours – Standard Direct Labor Hours) × Standard Rate per Hour = [4,560 – (980 × 4.5)] × $14.00 = (4,560 – 4,410) × $14.00 = 150 × $14.00 = $2,100 Unfavorable 160. a. Direct Materials Quantity Variance = (Actual Quantity – Standard Quantity) × Standard Price = (1,550 lb. – 1,600 lb.) × $9.00 = (50) lb.× $9.00 = $(450) Favorable Variance b. Direct Materials Price Variance = (Actual Price – Standard Price) × Actual Quantity = ($9.10 – $9.00) × 1,550 lb. = $0.10 × 1,550 lb. = $155 Unfavorable Variance c. Total Direct Materials Cost Variance = Direct Materials Quantity Variance + Direct Materials Price Variance = $(450) + $155 = $(295) Favorable 161. a. Direct Labor Time Variance = (Actual Direct Labor Hours – Standard Direct Labor Hours) × Standard Rate per Hour = (950 hours – 975 hours) × $36 = (25) hours × $36 = $(900) Favorable Variance b. Direct Labor Rate Variance = (Actual Rate per Hour – Standard Rate per Hour) × Actual Hours = ($37 – $36) × 950 hours = $1 × 950 hours = $950 Unfavorable Variance c. Total Direct Labor Cost Variance = Direct Labor Time Variance + Direct Labor Rate Variance = $(900) + $950 = $50 Unfavorable Variance 162. Pinnacle Manufacturing Co.—Finishing Department Factory Overhead Cost Variance Report For the Month Ended October 31 Productive capacity for the month 10,000 hours Actual production for the month 9,000 hours Variances Actual Budget Unfavorable Favorable Variable factory overhead costs: Indirect factory wages Power and light Indirect materials Total variable factory overhead cost Fixed factory overhead costs: Supervisory salaries Depreciation of plant and equipment Insurance and property taxes Total fixed factory overhead cost Total factory overhead cost Total controllable variances Net controllable variance— favorable Volume variance—unfavorable: Capacity not used at the standard Powered by Cognero
$16,400 $16,200 10,000 10,800 3,000 3,600 $29,400 $30,600
$
200 $ (800) (600)
$12,000 $12,000 8,800 8,800 3,200 3,200 $24,000 $24,000 $53,400 $54,600 $ 200 $(1,200)
$(1,400)
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Chapter 23 - Evaluating Variances from Standard Costs rate for fixed factory overhead (1,000 × $2.40) Total factory overhead cost variance— unfavorable
2,400 $ 1,200
163. Variable Factory Overhead Controllable Variance = Actual Variable Factory Overhead – Budgeted Variable Factory Overhead = $111,000 – (8,900 × 3.25 hours × $4.00) = $111,000 – $115,700 = $(4,700) Favorable 164. Fixed Factory Overhead Volume Variance = (Standard Hours for 100% of Normal Capacity – Standard Hours for Actual Units Produced) × Fixed Factory Overhead Rate = [29,000 hours – (8,900 units × 3.25 hours)] × $1.20 = (29,000 hours – 28,925 hours) × $1.20 = 75 hours × $1.20 = $90 Unfavorable 165. Let X = Fixed Factory Overhead Rate Fixed Factory Overhead Volume Variance = (Standard Hours for 100% of Normal Capacity – Standard Hours for Actual Units Produced) × Fixed Factory Overhead Rate = [27,000 – (8,300 × 4.25)] × X = $(14,895) Favorable (27,000 – 35,275) × X = $(14,895) Favorable (8,275) × X = $(14,895) X = $(14,895) ÷ (8,275) X = $1.80 166. a. Fixed Factory Overhead Volume Variance = (Standard Hours for 100% of Normal Capacity – Standard Hours for Actual Units Produced) × Fixed Factory Overhead Rate = (50,000 hours – 48,000 hours) × $9.00 = 2,000 hours × $9.00 = $18,000 Unfavorable Variance b. Variable Factory Overhead Controllable Variance = Actual Variable Factory Overhead – Budgeted Variable Factory Overhead = $170,000 – (24,000 × 2 × $3.50) = $170,000 – $168,000 = $2,000 Unfavorable c. Total Factory Overhead Cost Variance = Fixed Factory Overhead Volume Variance + Variable Factory Overhead Controllable Variance = $18,000 + $2,000 = $20,000 Unfavorable 167. Andover Company Factory Overhead Cost Budget For the Month Ending August 31 Percent of normal capacity 75% 90% Units produced 4,500 5,400 Budgeted factory overhead: Variable costs ($6.25 per unit) Fixed costs Total factory overhead cost
$28,125 38,000 $66,125
$33,750 38,000 $71,750
100% X
110% 6,600
$37,500 38,000 $75,500
$41,250 38,000 $79,250
X = $37,500 ÷ $6.25 X = 6,000 units 168. Powered by Cognero
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Chapter 23 - Evaluating Variances from Standard Costs Jacob Company Factory Overhead Cost Budget For the Month Ending October 31 Percent of normal capacity 60% 80% Units produced 6,000 8,000 Budgeted factory overhead: Variable costs ($15.25 per unit) Fixed costs Total factory overhead cost
100% X
120% 12,000
$ 91,500 $122,000 $152,500 $183,000 54,000 54,000 54,000 54,000 $145,500 $176,000 $206,500 $237,000
X = $152,500 ÷ $15.25 X = 10,000 units 169. a. Materials (650 × $22.40) Direct Materials Price Variance Accounts Payable (650 × $22.20) b. Work in Process (635 × $22.40) Direct Materials Quantity Variance Materials
14,560 130 14,430 14,224 336 14,560
170. Greenway Manufacturing Company Income Statement For the Month Ended November 30 Sales Cost of goods sold—at standard Gross profit—at standard
$950,000 470,000 $480,000 Unfavorable
Less variance adjustments to gross profit—at standard: Direct materials price Direct materials quantity Direct labor rate Direct labor time Factory overhead controllable Factory overhead volume Net variance from standard cost—unfavorable Gross profit Operating expenses: Selling expenses Administrative expenses Income from operations 171. Work in Process (8,500 × 6 × $7.50) Powered by Cognero
Favorable
$ (2,400) (1,200) (500) $
900 (1,500)
10,000 5,300 $474,700 $165,800 73,500 239,300 $235,400
382,500.00 Page 38
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Chapter 23 - Evaluating Variances from Standard Costs Direct Materials Quantity Variance [(48,875 – 51,000) × $7.50] Materials (48,875 × $7.50)
15,937.50 366,562.50
172. Baxter Company Income Statement Through Gross Profit For the Year Ended December 31 Sales Cost of goods sold—at standard* Gross profit—at standard
$1,075,000 772,280 $ 302,720 Unfavorable Favorable
Less variance adjustments to gross profit—at standard: Direct materials price Direct materials quantity Direct labor rate Direct labor time Factory overhead controllable Factory overhead volume Net variance from standard cost— unfavorable Gross profit
$(2,162) $ 1,512 (1,910) (3,750) 14,970 9,400 18,060 $ 284,660
*[(5 × $6.30) + (2.25 × $15.00) + $1.05 + ($211,500 ÷ 9,000)] × 8,600 units 173. Materials (6,000 × $8.15) Direct Materials Price Variance Accounts Payable (6,000 × $8.00) 174. Materials (4,500 × $7.15) Direct Materials Price Variance Accounts Payable (4,500 × $7.45) 175. a. Materials (520 × $2.10) Direct Materials Price Variance Accounts Payable (520 × $2.00) b. Work in Process (510 × $2.10) Direct Materials Quantity Variance Materials Powered by Cognero
48,900 900 48,000
32,175 1,350 33,525
1,092 52 1,040 1,071 21 1,092 Page 39
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Chapter 23 - Evaluating Variances from Standard Costs 176. Work in Process (9,500 × 4 × $4.50) Direct Materials Quantity Variance Materials (37,300 × $4.50)
171,000
177. a. Materials (500 × $1.90) Direct Materials Price Variance (500 × $0.10) Accounts Payable (500 × $2.00) b. Work in Process (520 × $1.90) Direct Materials Quantity Variance Materials (500 × $1.90)
3,150 167,850
950 50 1,000 988 38 950
178. Nonfinancial performance measures evaluate company outcomes in a measure other than dollars. They are used to evaluate the time, quality, or quantity of a business activity and bring additional perspective to performance evaluation. Common examples include inventory turnover, percent of on-time delivery, employee satisfaction, and number of customer complaints.
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Chapter 24 - Decentralized Operations True / False 1. Separation of businesses into more manageable operating units is termed decentralization. a. True b. False 2. The process of measuring and reporting operating data by responsibility centers is termed responsibility accounting. a. True b. False 3. A decentralized business organization is one in which all major planning and operating decisions are made by top management. a. True b. False 4. A centralized business organization is one in which all major planning and operating decisions are made by top management. a. True b. False 5. The primary disadvantage of decentralized operations is that decisions made by one manager may affect other managers in such a way that the profitability of the entire company may suffer. a. True b. False 6. The three common types of responsibility centers are referred to as cost centers, profit centers, and investment centers. a. True b. False 7. One of the advantages of decentralization is that delegating authority to managers closest to the operation always results in better decisions. a. True b. False 8. Developing and retaining quality managers are advantages of decentralization. a. True b. False 9. A responsibility center in which the department manager has responsibility for and authority over costs, revenues, and assets invested in the department is termed a cost center. a. True b. False 10. Budget performance reports prepared for the vice president of production would generally contain less detail than reports prepared for the various plant managers. a. True Powered by Cognero
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Chapter 24 - Decentralized Operations b. False 11. The amount of detail presented in a budget performance report for a cost center depends on the level of management to which the report is directed. a. True b. False 12. The primary accounting tool for controlling and reporting for cost centers is a budget performance report. a. True b. False 13. Responsibility accounting reports that are given to lower-level managers are usually very detailed; in turn, higherlevel managers will be given a summary report. a. True b. False 14. A manager in a cost center also has responsibility and authority over the revenues. a. True b. False 15. The plant managers in a cost center can be held responsible for major differences between budgeted and actual costs in their plants. a. True b. False 16. A responsibility center in which the authority over and responsibility for costs and revenues is vested in the department manager is termed a profit center. a. True b. False 17. Operating expenses directly traceable to or incurred for the sole benefit of a specific department and usually subject to the control of the department manager are termed direct operating expenses. a. True b. False 18. Sales commission expense for a department store is an example of a direct operating expense. a. True b. False 19. Operating expenses incurred for the entire business as a unit that are not subject to the control of individual department managers are called indirect expenses. a. True b. False 20. Office salaries expense for a department store is an indirect expense. a. True Powered by Cognero
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Chapter 24 - Decentralized Operations b. False 21. The underlying principle of allocating direct operating expenses to departments is to assign to each department an amount of expense proportional to the revenues of that department. a. True b. False 22. Property tax expense for a department store's store equipment is an example of a direct expense. a. True b. False 23. Depreciation expense on store equipment for a department store is an indirect expense. a. True b. False 24. Responsibility accounting reports for profit centers are normally in the form of income statements. a. True b. False 25. The manager of a profit center does not make decisions concerning the fixed assets invested in the center. a. True b. False 26. The profit center income statement should include only revenues and expenses that are controlled by the manager. a. True b. False 27. The manager of the Furniture Department of a leading retailer does not control the salaries of departmental personnel. a. True b. False 28. Service department allocations are similar to the expenses of a profit center that purchased services from a source outside the company. a. True b. False 29. Purchase requisitions for Purchasing and the number of payroll checks for Payroll Accounting are examples of cost drivers. a. True b. False 30. The rates at which centralized services are allocated to each division are called service department allocation rates. a. True b. False 31. The profit center income statement should include only controllable revenues and expenses. Powered by Cognero
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Chapter 24 - Decentralized Operations a. True b. False 32. Controllable expenses are those that can be influenced by the decisions of the profit center management. a. True b. False 33. In an investment center, the manager has the responsibility and the authority to make decisions that affect not only costs and revenues, but also the plant assets invested in the center. a. True b. False 34. Three measures of investment center performance are income from operations, return on investment, and residual income. a. True b. False 35. The major shortcoming of income from operations as an investment center performance measure is that it ignores the amount of revenues earned by the center. a. True b. False 36. If Division Q's yearly income from operations is $30,000 on invested assets of $200,000, the return on investment is 15%. a. True b. False 37. The return on investment may be computed by multiplying investment turnover by the profit margin. a. True b. False 38. If the profit margin for a division is 8% and the investment turnover is 1.2, the return on investment is 9.6%. a. True b. False 39. If the profit margin for a division is 11% and the investment turnover is 1.5, the return on investment is 7.3%. a. True b. False 40. Investment turnover (as used in determining the return on investment) focuses on the rate of profit earned on each sales dollar. a. True b. False 41. The ratio of sales to invested assets is termed the return on investment. a. True Powered by Cognero
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Chapter 24 - Decentralized Operations b. False 42. The major advantage of the return on investment over income from operations as a divisional performance measure is that divisional investment is directly considered and thus comparability of divisions is facilitated. a. True b. False 43. By using the return on investment as a divisional performance measure, divisional managers will always be motivated to invest in proposals that will increase the overall return for the company. a. True b. False 44. The excess of divisional income from operations over a minimum acceptable income from operations is termed the residual income. a. True b. False 45. The minimum acceptable divisional income from operations is set by top management by establishing a maximum return considered acceptable for invested assets. a. True b. False 46. The major advantage of residual income as a performance measure is that it gives consideration to not only a minimum acceptable return on investment but also the total magnitude of income from operations earned by each division. a. True b. False 47. The ratio of income from operations to sales is termed the profit margin component of the return on investment. a. True b. False 48. The ratio of sales to invested assets is termed the investment turnover component of the return on investment. a. True b. False 49. If income from operations for a division is $5,000, invested assets are $25,000, and sales are $30,000, the profit margin is 20%. a. True b. False 50. If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the profit margin is 20%. a. True b. False 51. If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment Powered by Cognero
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Chapter 24 - Decentralized Operations turnover is 1.2. a. True b. False 52. If income from operations for a division is $6,000, invested assets are $25,000, and sales are $30,000, the investment turnover is 5. a. True b. False 53. If income from operations for a division is $30,000, sales are $263,750, and invested assets are $187,500, the investment turnover is 1.3. a. True b. False 54. If income from operations for a division is $120,000, sales are $975,000, and invested assets are $750,000, the investment turnover is 1.3. a. True b. False 55. If divisional income from operations is $75,000, invested assets are $737,500, and the minimum acceptable return on invested assets is 6%, the residual income is $36,750. a. True b. False 56. If divisional income from operations is $100,000, invested assets are $850,000, and the minimum acceptable return on invested assets is 8%, the residual income is $68,000. a. True b. False 57. The profit margin component of return on investment analysis focuses on profitability by indicating the rate of profit earned on each sales dollar. a. True b. False 58. In return on investment analysis, the investment turnover component focuses on efficiency in the use of assets and indicates the rate at which sales are being generated for each dollar of invested assets. a. True b. False 59. The minimum acceptable divisional income from operations is set by top management by establishing a minimum return considered acceptable for invested assets. a. True b. False 60. A disadvantage to using the residual income performance measure is that it encourages managers to spend only the minimum acceptable return on assets set by upper management. a. True Powered by Cognero
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Chapter 24 - Decentralized Operations b. False 61. The DuPont formula uses only financial information to measure the performance of a business. a. True b. False 62. The DuPont formula uses both financial and nonfinancial information to measure the performance of a business. a. True b. False 63. The balanced scorecard is a set of financial and nonfinancial measures that reflect the performance of a business. a. True b. False 64. The objective of transfer pricing is to encourage each division manager to transfer goods and services between divisions if overall company income can be increased by doing so. a. True b. False 65. Transfer prices may be used when decentralized units are organized as cost, profit, or investment centers. a. True b. False 66. Under the cost price approach, the transfer price is the price at which the product or service transferred could be sold to outside buyers. a. True b. False 67. Under the negotiated price approach, the transfer price is the price at which the product or service transferred could be sold to outside buyers. a. True b. False 68. The negotiated price approach allows the managers of decentralized units to agree among themselves on a transfer price. a. True b. False 69. It is beneficial for divisions in a company to negotiate a transfer price when the supplying division has unused capacity in its plant. a. True b. False 70. The cost price approach to transfer pricing is most often used between responsibility centers organized as cost centers that are not concerned with the revenue. a. True Powered by Cognero
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Chapter 24 - Decentralized Operations b. False Multiple Choice 71. Which of the following would be most effective in a small owner–manager operated business? a. profit centers b. centralization c. investment centers d. cost centers 72. Businesses that are separated into two or more manageable units in which managers have authority and responsibility for operations are said to be a. decentralized b. consolidated c. diversified d. centralized 73. Which of the following is not a disadvantage of a decentralized operation? a. competition among managers b. duplication of operations c. price cutting by departments that are competing in the same product market d. top management freed from everyday tasks to do strategic planning 74. Which of the following is the best example of a decentralized operation? a. One owner who prepares, plans, and makes decisions for the entire company. b. Each unit is responsible for its own operations and decision making. c. In a major company, operating decisions are made by top management. d. None of these choices 75. All of the following are advantages of decentralization except a. managers make better decisions when closer to the operations of the company b. expertise in all areas of the business is difficult; decentralization makes it better to delegate certain responsibilities c. each decentralized operation purchases its own assets and pays for operating costs d. decentralized managers can respond quickly to customer needs 76. Which of the following is not one of the common types of responsibility centers? a. cost center b. profit center c. investment center d. revenue center 77. Which of the following is a disadvantage of decentralization? a. Decisions made by one manager may negatively affect the profitability of the entire company. b. Decentralization helps retain quality managers. Powered by Cognero
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Chapter 24 - Decentralized Operations c. Managers closest to the operations make decisions. d. Managers are able to acquire expertise in their areas of responsibility. 78. A manager is responsible for costs but not revenues in a(n) a. profit center b. investment center c. volume center d. cost center 79. In a cost center, the manager has responsibility and authority for making decisions that affect a. revenues b. invested assets c. both costs and revenues d. costs 80. For higher levels of management, responsibility accounting reports a. are more detailed than for lower levels of management b. are more summarized than for lower levels of management c. contain about the same level of detail as reports for lower levels of management d. are rarely provided or reviewed 81. Most manufacturing plants are considered cost centers because they have control over a. sales and costs b. fixed assets and costs c. costs only d. fixed assets and sales 82. Which of the following is a measure of a cost center manager’s performance? a. budget performance report b. return and residual income measures c. divisional income statements d. balance sheet 83. A responsibility center in which the department manager has responsibility for and authority over costs and revenues is called a(n) a. profit center b. investment center c. volume center d. cost center 84. In a profit center, the department manager has responsibility for and the authority to make decisions that affect a. not only costs and revenues, but also assets invested in the center b. the assets invested in the center, but not costs and revenues c. both costs and revenues for the department or division Powered by Cognero
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Chapter 24 - Decentralized Operations d. costs and assets invested in the center, but not revenues 85. Which of the following expenses incurred by the Sporting Goods Department of a department store is a direct expense? a. depreciation expense—office equipment b. insurance on inventory of sporting goods c. uncollectible accounts expense d. office salaries 86. Which of the following expenses incurred by a department store is an indirect expense? a. insurance on merchandise inventory b. sales salaries c. depreciation on store equipment d. salary of vice president of finance 87. In a profit center, the manager has responsibility and authority for making decisions that affect a. long-term liabilities b. assets c. investments d. costs 88. Operating expenses directly traceable to or incurred for the sole benefit of a specific department and usually subject to the control of the department manager are a. miscellaneous administrative expenses b. direct operating expenses c. indirect expenses d. fixed expenses 89. In evaluating the profit center manager, the income from operations should be compared a. across profit centers b. to historical performance or budget c. to the competitor's net income d. to the total company earnings per share 90. Income from operations of the Pierce Automobile Division is $2,225,000. If income from operations before service department allocations is $3,250,000, a. operating expenses are $1,025,000 b. total service department allocations are $1,025,000 c. noncontrollable allocations are $1,025,000 d. direct manufacturing allocations are $1,025,000 91. The costs of services allocated to a profit center on the basis of its use of those services are a. operating expenses b. noncontrollable allocations c. service department allocations Powered by Cognero
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Chapter 24 - Decentralized Operations d. activity allocations 92. Division A reported income from operations of $975,000 and total service department allocations of $675,000. As a result, a. net income was $300,000 b. the gross profit was $300,000 c. income from operations before service department allocations was $1,650,000 d. consolidated net income was $300,000 93. To determine income from operations, total service department allocations are a. added to income from operations before service department allocations b. subtracted from operating expenses c. subtracted from income from operations before service department allocations d. subtracted from gross profit 94. Division L is a profit center that does not sell a product. Income from operations for Division L is $250,000, total service department allocations are $400,000, and operating expenses are $2,750,000. What are the revenues for Division L? a. $650,000 b. $3,000,000 c. $3,400,000 d. $2,750,000 95. Income from operations for Division H is $220,000, and income from operations before service department allocations is $975,000. As a result, a. total operating expenses are $565,000 b. total manufacturing expenses are $565,000 c. direct materials, direct labor, and factory overhead total $565,000 d. total service department allocations are $755,000 96. The following data are taken from the management accounting reports of Dulcimer Co.: Income from operations Total service department allocations
Division A Division B Division C $1,900,000 $1,450,000 $1,450,000 1,700,000 1,050,000 1,100,000
If an incentive bonus is paid to the manager who achieved the highest income from operations before service department allocations, it follows that a. Division A's manager is given the bonus b. Division B's manager is given the bonus c. Division C's manager is given the bonus d. Division B's and Division C's managers divide the bonus 97. The term used to describe expenses that are incurred by a specific department is a. indirect expenses b. margin expenses Powered by Cognero
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Chapter 24 - Decentralized Operations c. departmental expenses d. direct expenses 98. Responsibility accounting reports for profit centers will include a. costs only b. revenues only c. expenses and fixed assets d. revenues, expenses, and income or loss from operations 99. Some organizations use internal centralized service departments to provide services to other divisions or departments within an organization. Which of the following would probably not lend itself as a service department? a. Inventory Control b. Payroll Accounting c. Information and Computer Systems d. Human Resources 100. Which of the following is a measure of a manager’s performance working in a profit center? a. a balance sheet b. the return on investment and residual income measures c. a budget performance report d. the divisional income statements 101. Which of the following would not be considered an internal centralized service department? a. Payroll Accounting Department b. Manufacturing Department c. Information Systems Department d. Purchasing Department Use this information for ABC Corporation to answer the questions that follow. ABC Corporation has three service departments with the following costs and cost drivers: Service Department Graphics Production Accounting Personnel
Cost $200,000 500,000 400,000
Cost Driver Number of copies made Number of invoices processed Number of employees
ABC has three operating divisions, Micro, Macro and Super. Their revenue, cost, and activity information is as follows: Revenues Direct operating expenses Number of copies made Number of invoices processed Number of employees Powered by Cognero
Micro $700,000 $50,000 20,000 700 130
Macro $850,000 $70,000 30,000 800 145
Super $650,000 $100,000 50,000 500 125 Page 12
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Chapter 24 - Decentralized Operations 102. What is the service department allocation rate for the Graphics Production Department? a. $2 per copy b. $10 per copy c. $6.66 per copy d. $0.50 per copy 103. What is the service department allocation rate for the Accounting Department? a. $714 per invoice processed b. $250 per invoice processed c. $625 per invoice processed d. $0.004 per invoice processed 104. What is the service department allocation rate for the Personnel Department? a. $2,758 per employee b. $3,200 per employee c. $3,077 per employee d. $1,000 per employee 105. What are the total service department allocations to the Micro Division? a. $200,000 b. $145,000 c. $60,000 d. $345,000 106. What are the total service department allocations to the Macro Division? a. $405,000 b. $175,000 c. $130,000 d. $305,000 107. What will the income of the Micro Division be after all service department allocations? a. $305,000 b. $650,000 c. $345,000 d. $610,000 108. What are the total service department allocations to the Super Division? a. $350,000 b. $100,000 c. $125,000 d. $550,000 109. What will the income of the Macro Division be after all service department allocations? a. $780,000 Powered by Cognero
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Chapter 24 - Decentralized Operations b. $375,000 c. $575,000 d. $435,000 110. What will the income of the Super Division be after all service department allocations? a. $300,000 b. $325,000 c. $550,000 d. $200,000 111. Blaser Division had $275,000 in invested assets, sales of $330,000, income from operations of $33,000, and a minimum acceptable return of 7.5%. The return on investment for Blaser Division is a. 8.3% b. 10% c. 12% d. 7.5% Use this information for Mason Division to answer the questions that follow. Mason Division had $650,000 in invested assets, sales of $700,000, income from operations of $99,000, and a minimum acceptable return of 15%. 112. The profit margin for Mason Division is a. 7.1% b. 20% c. 15.2% d. 14.1% 113. The investment turnover for Mason Division is a. 1.08 b. 0.93 c. 6.57 d. 7.07 114. The residual income for Mason Division is a. $0 b. $84,150 c. $(6,000) d. $1,500 115. Marshall Division had $220,000 in invested assets, sales of $242,000, income from operations of $66,000, and a minimum acceptable return of 3%. The return on investment for Marshall Division is a. 9.1% b. 30% c. 3.0% Powered by Cognero
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Chapter 24 - Decentralized Operations d. 27.3% Use this information for Chicks Division to answer the questions that follow. Chicks Division had $1,100,000 in invested assets, sales of $1,210,000, income from operations of $302,500, and a minimum acceptable return of 15%. 116. The profit margin for Chicks Division is a. 25% b. 22% c. 15% d. 27.5% 117. The investment turnover for Chicks Division is a. 1.3 b. 1.5 c. 1.0 d. 1.1 118. The residual income for Chicks Division is a. $165,000 b. $302,500 c. $137,500 d. $191,500 Use this information for Clydesdale Division to answer the questions that follow. Clydesdale Division has sales of $4,500,000. It also has invested assets of $2,000,000 and operating expenses of $3,600,000. The company has established a minimum acceptable return of 7%. 119. What is Clydesdale Division's profit margin? a. 20% b. 80% c. 44.4% d. 18% 120. What is Clydesdale Division's investment turnover? a. 1.80 b. 2.25 c. 1.25 d. 1.4 121. What is Clydesdale Division's return on investment? a. 56% b. 20% c. 45% Powered by Cognero
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Chapter 24 - Decentralized Operations d. 25% 122. What is Clydesdale Division's residual income? a. $252,000 b. $900,000 c. $1,400,000 d. $760,000 123. Managers of what type of decentralized units have authority and responsibility for revenues, costs, and assets invested in the unit? a. profit center b. investment center c. production center d. cost center 124. A responsibility center in which the department manager is responsible for costs, revenues, and assets for a department is called a(n) a. cost center b. profit center c. operating center d. investment center 125. In an investment center, the manager has the responsibility for and the authority to make decisions that affect a. the assets invested in the center, but not costs and revenues b. costs and assets invested in the center, but not revenues c. both costs and revenues for the department or division d. costs, revenues, and assets invested in the center 126. The profit margin is the ratio of a. income from operations to sales b. income from operations to invested assets c. assets to liabilities d. sales to invested assets 127. The investment turnover is the ratio of a. income from operations to sales b. income from operations to invested assets c. assets to liabilities d. sales to invested assets 128. The formula for the return on investment is a. Invested Assets ÷ Income from Operations b. Sales ÷ Invested Assets c. Income from Operations ÷ Sales Powered by Cognero
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Chapter 24 - Decentralized Operations d. Income from Operations ÷ Invested Assets 129. Which of the following represents the profit margin factor as used in determining the return on investment by the DuPont formula? a. Sales ÷ Income from Operations b. Income from Operations ÷ Sales c. Invested Assets ÷ Sales d. Sales ÷ Invested Assets 130. Which of the following represents the investment turnover factor as used in determining the return on investment by the DuPont formula? a. Invested Assets ÷ Sales b. Income from Operations ÷ Invested Assets c. Income from Operations ÷ Sales d. Sales ÷ Invested Assets 131. The profit margin for the Central Division of a company is 20%, and the investment turnover is 2.8. What is the return on investment for the Central Division? a. 20% b. 7.1% c. 14% d. 56% 132. The Central Division of Chemical Company has a return on investment of 22% and an investment turnover of 1.4. What is the profit margin? a. 20% b. 15.7% c. 14% d. 6.36% 133. The Central Division of Nebraska Company has a return on investment of 28% and a profit margin of 14%. What is the investment turnover? a. 0.2 b. 2.0 c. 5.0 d. 0.5 134. What additional information is needed to compute the return on investment if income from operations is known? a. invested assets b. residual income c. direct expenses d. sales 135. The Southern Division of Knucklehead Company has a return on investment of 15% and an investment turnover of 1.2. What is the profit margin? Powered by Cognero
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Chapter 24 - Decentralized Operations a. 1.5% b. 12.5% c. 0.67% d. 6.67% 136. The best measure of managerial efficiency in the use of invested assets is a. return on stockholders' equity b. investment turnover c. income from operations d. inventory turnover 137. Two divisions of Oregano Company (Divisions TX and OY) have the same profit margins. Division TX's investment turnover is larger than that of Division OY (1.2 to 1.0). Income from operations for Division TX is $55,000, and income from operations for Division OY is $43,000. Division TX has a higher return on investment than Division OY by a. using income from operations as a performance measure b. comparing the profit margins c. applying a negotiated price measure d. using its assets more efficiently in generating sales 138. The profit margin for Division C is 6%, and the investment turnover is 1.2. What is the return on investment for Division C? a. 20% b. 6.7% c. 7.3% d. 7.2% 139. The excess of divisional income from operations over a minimum acceptable income from operations is a. profit margin b. residual income c. return on investment d. gross profit 140. Assume that divisional income from operations amounts to $215,000, and top management has established 15% as the minimum acceptable return on divisional assets totaling $1,000,000. The residual income for the division is a. $65,000 b. $215,000 c. $635,000 d. $150,000 141. Which of the following is not a measure that management can use in evaluating and controlling investment center performance? a. return on investment b. negotiated price c. residual income d. income from operations Powered by Cognero
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Chapter 24 - Decentralized Operations 142. The ratio of income from operations to sales, which is also a factor in the DuPont formula for determining the return on investment, is called a. profit margin b. indirect expenses c. investment turnover d. cost 143. The ratio of sales to invested assets, which is also a factor in the DuPont formula for determining the return on investment, is called a. profit margin b. indirect margin c. investment turnover d. cost ratio 144. Assume that Division Blue has achieved a yearly income from operations of $110,000 using $900,000 of invested assets. If management has set a minimum acceptable return of 11%, the residual income is a. $99,000 b. $691,000 c. $209,000 d. $11,000 Use this information for Chacha Company to answer the questions that follow. Division A of Chacha Company has sales of $140,000, cost of goods sold of $83,000, operating expenses of $43,000, and invested assets of $150,000. 145. What is the return on investment for Division A? a. 9.3% b. 99.3% c. 74.6% d. 4.6% 146. What is the profit margin for Division A? a. 11.1% b. 10.0% c. 9.0% d. 0.90% 147. What is the investment turnover for Division A? a. 0.93 b. 9.3 c. 1.07 d. 10.7 Use this information for Saunders Company to answer the questions that follow. Powered by Cognero
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Chapter 24 - Decentralized Operations Division D of Saunders Company has sales of $350,000, cost of goods sold of $120,000, operating expenses of $58,000, and invested assets of $150,000. 148. What is the return on investment for Division D? a. 153.3% b. 114.7% c. 87.2% d. 233% 149. What is the profit margin for Division D? a. 42.9% b. 83.4% c. 49.1% d. 65.7% 150. Investment centers differ from profit centers in that they a. are responsible for net income only b. are responsible for asset investments c. have less responsibilities than cost centers and profit centers d. are only responsible for revenues 151. Tom's Tool Division is an investment center and is responsible for all of its net income and the use of its assets. This year, the invested assets totaled $475,000, and income from operations was $275,000. What is the return on investment? a. 57.9% b. 172.3% c. 5.0% d. 115.0% 152. The balanced scorecard measures four areas of financial and nonfinancial performance of a business. Identify one of the following that is not included as a performance measurement. a. internal processes b. financial c. innovation and learning d. decentralization 153. Which of the following is a measure of a manager’s performance working in an investment center? a. return on investment b. residual income c. divisional income statements d. All of these choices Use this information for International Boot Division to answer the questions that follow. International Boot Division has income from operations of $80,000, invested assets of $500,000, and sales of $1,525,000. Powered by Cognero
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Chapter 24 - Decentralized Operations 154. What is the profit margin? a. 33.3% b. 5.2% c. 16.0% d. 19.1% 155. What is the investment turnover for International Boot Division? a. 16.0 b. 3.05 c. 0.33 d. 27.5 156. The balanced scorecard measures a. only financial information b. only nonfinancial information c. both financial and nonfinancial information d. external and internal information 157. Which of the following is not a commonly used approach to setting transfer prices? a. market price approach b. revenue price approach c. negotiated price approach d. cost price approach 158. Determining the transfer price as the price at which the product or service transferred could be sold to outside buyers is known as the a. cost price approach b. negotiated price approach c. revenue price approach d. market price approach Use this information for Square Yard Products Inc. to answer the questions that follow. Materials used by Square Yard Products Inc. in producing Division 3's product are currently purchased from outside suppliers at a cost of $5.00 per unit. However, the same materials are available with Division 6. Division 6 has unused capacity and can produce the materials needed by Division 3 at a variable cost of $3.00 per unit. A transfer price of $3.20 per unit is established, and 40,000 units of material are transferred, with no reduction in Division 6's current sales. 159. How much will Division 3's income from operations increase? a. $150,000 b. $50,000 c. $32,000 d. $72,000 160. How much will Division 6's income from operations increase? Powered by Cognero
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Chapter 24 - Decentralized Operations a. $8,000 b. $15,000 c. $80,000 d. $150,000 161. How much will Square Yard Products Inc.’s total income from operations increase? a. $32,000 b. $112,000 c. $80,000 d. $150,000 Use this information for Jefferson Company to answer the questions that follow. Materials used by Jefferson Company in producing Division C's product are currently purchased from outside suppliers at a cost of $10.00 per unit. However, the same materials are available with Division A. Division A has unused capacity and can produce the materials needed by Division C at a variable cost of $8.50 per unit. A transfer price of $9.50 per unit is negotiated and 25,000 units of material are transferred, with no reduction in Division A's current sales. 162. How much will Division C's income from operations increase? a. $0 b. $75,000 c. $12,500 d. $50,000 163. How much will Division A's income from operations increase? a. $0 b. $75,000 c. $25,000 d. $50,000 164. How much will Jefferson Company's total income from operations increase? a. $37,500 b. $100,000 c. $62,500 d. $150,000 165. Which transfer price approach is used when the transfer price is set at the amount sold to outside buyers? a. market price b. cost price c. negotiated price d. variable price 166. The transfer price approach that uses a variety of cost concepts is the a. negotiated price approach b. standard cost approach Powered by Cognero
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Chapter 24 - Decentralized Operations c. cost price approach d. market price approach 167. Nelson Company's Radio Division currently is purchasing transistors from Charlotte Co. for $3.50 each. The total number of transistors needed is 8,000 per month. Nelson Company's Electronics Division can produce the transistors for a cost of $4.00 each, and it has plenty of capacity to manufacture the units. The $4.00 is made up of $3.25 in variable costs and $0.75 in allocated fixed costs. What should be the range of a possible transfer price? a. $3.26 to $3.49 b. $3.51 to $3.99 c. $3.26 to $3.99 d. $3.25 to $3.50 168. The approach that requires the transfer price to be less than the market price but greater than the supplying division’s variable costs per unit is called the a. cost price approach b. negotiated cost approach c. standard cost approach d. market price approach 169. Heart Company has two divisions. Division A is interested in purchasing 10,000 units from Division B. Capacity is available for Division B to produce these units. The per-unit market price is $30 per unit, with a variable cost of $25. The manager of Division A has offered to purchase the units at $22 per unit. In an effort to make this transfer price beneficial for the company as a whole, what range of prices should be used during negotiations between the two divisions? a. $22 to $30 b. $22 to $25 c. over $30 d. $25 to $30 Matching Match each of the following phrases as describing (a) an advantage, (b) a disadvantage, or (c) neither of decentralization. a. Advantage of decentralization b. Disadvantage of decentralization c. Neither an advantage nor a disadvantage 170. Responsibilities delegated to unit managers 171. Internal price wars 172. Operational issues made by managers closest to the operations 173. Separate office staff 174. Separate sales forces Match each of the following cost drivers with the department (a–h) for which it would most likely be used to allocate Powered by Cognero
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Chapter 24 - Decentralized Operations service department costs. a. Purchasing b. Payroll Accounting c. Human Resources d. Maintenance e. Information and Computer Systems f. Marketing g. Research and Development h. Transportation 175. Number of work orders 176. Number of employees 177. Number of payroll checks 178. Number of purchase requisitions 179. Number of advertising campaigns 180. Number of miles 181. Number of computers in department Match each of the following definitions with the term (a–e) it defines. a. Controllable revenues b. Profit margin c. Investment turnover d. Return on investment e. Residual income 182. The excess of income from operations over a minimum acceptable income from operations 183. The ratio of income from operations to invested assets 184. The ratio of income from operations to sales 185. The revenues earned by a profit center 186. The ratio of sales to invested assets Subjective Short Answer 187. The budget for Department 6 of Cardinal Company for the current month ending March 31 is as follows: Materials Factory wages Supervisory salaries Depreciation of plant and equipment Powered by Cognero
$208,000 265,000 67,800 35,000 Page 24
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Chapter 24 - Decentralized Operations Power and light Insurance and property taxes Maintenance
22,500 15,500 9,700
During March, the costs incurred in Department 6 of Cardinal Company were materials, $204,000; factory wages, $285,000; supervisory salaries, $63,600; depreciation of plant and equipment, $35,000; power and light, $21,360; insurance and property taxes, $14,400; maintenance, $9,456. a. b.
Prepare a budget performance report for the supervisor of Department 6 of Cardinal Company for the month of March. Are there any significant variances (5% or greater) of the budgeted amounts that should be examined by the supervisor? If so, which areas need further investigation?
188. Piano Company’s costs were over budget by $47,000. Piano Company is divided into two regions. The first region’s costs were over budget by $5,000. Determine the amount that the second region’s costs were over or under budget. 189. Xang Company’s costs were over budget by $46,000. Xang Company is divided into two regions. The first region’s costs were over budget by $7,000. Determine the amount that the second region’s costs were over or under budget. 190. The following data pertain to Ace Guitar Company for the current year: Sales Cost of goods sold Selling expenses Purchase requisitions issued Number of employees
Region A $500,000 $200,000 $150,000 55 12
Region B $900,000 $300,000 $275,000 95 18
Service department costs: Purchasing Payroll Accounting
$90,000 30,000
a. Allocate Purchasing Department costs according to the number of purchase requisitions issued for a division, and Payroll Accounting Department costs according to the number of employees in a division. b. Determine the divisional income from operations for Regions A and B. 191. The following data pertain to Terrace Industries for the current year: Sales Cost of goods sold Selling expenses Purchase requisitions issued Number of employees Service department costs: Purchasing Payroll Accounting
District 1 $300,000 $120,000 $55,000 35 7
District 2 $600,000 $150,000 $75,000 65 13
$70,000 40,000
a. Allocate Purchasing Department costs according to the number of purchase requisitions issued for a division, and Payroll Accounting Department costs according to the number of employees in a division. b. Determine the divisional income from operations for Districts 1 and 2. Powered by Cognero
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Chapter 24 - Decentralized Operations 192. A department store apportions payroll costs on the basis of the number of payroll checks issued. Accounting costs are apportioned on the basis of the number of reports. The payroll costs for the year were $231,000, and the accounting costs for the year totaled $75,500. The departments and the number of payroll checks and accounting reports for each are as follows:
Department R Department S Department T
Number of Payroll Checks 483 1,470 147
Number of Reports 70 85 345
Determine the amount of (a) payroll cost and (b) accounting cost to be allocated to each department. 193. The following data pertain to the divisions of Coffee & Cocoa Company: Sales Cost of goods sold Selling expenses Purchase requisitions issued Number of employees
Division A $600,000 $200,000 $150,000 60 13
Division B $900,000 $350,000 $275,000 90 20
Service department costs: Purchasing Payroll Accounting
Division C $300,000 $100,000 $75,000 30 7
$120,600 80,000
Determine the divisional income from operations for the three divisions. Allocate the Purchasing Department costs based on the number of purchase requisitions issued for each division, and the Payroll Accounting Department costs based on the number of employees in each division. 194. Miller's Quarter Horse Division has sales of $4,500,000. It also has invested assets of $2,500,000 and operating expenses of $3,800,000. The company has established a minimum acceptable return of 7%. If needed, round to one decimal place. a. What is the division’s profit margin? b. What is the investment turnover? c. What is the return on investment? d. What is the residual income? 195. Division G of Elephant Preservation Inc. has sales of $895,000, cost of goods sold of $475,000, operating expenses of $79,500, and invested assets of $750,000. Determine: a. The return on investment for Division G b. The profit margin for Division G c. The investment turnover for Division G 196. Bentz Co. has two divisions, A and B. Invested assets and condensed income statement data for each division for the year ended December 31 are as follows: Revenues Powered by Cognero
Division A $190,000
Division B $125,500 Page 26
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Chapter 24 - Decentralized Operations Operating expenses Service department allocations Invested assets a. b.
112,500 29,500 225,000
92,750 12,625 99,000
Prepare condensed income statements for the past year for each division. Using the DuPont formula, determine the profit margin, investment turnover, and return on investment for each division. Round the profit margin percentage to two decimal places and investment turnover to four decimal places.
197. Magnolia Company's Division A has income from operations of $80,000 and assets of $400,000. The minimum acceptable return on assets is 12%. What is the residual income for the division? 198. Ralston Division has income from operations of $75,000, invested assets of $360,000, and sales of $790,000. Use the DuPont formula to compute the return on investment, and show (a) the profit margin, (b) the investment turnover, and (c) return on investment. Round the profit margin percentage to two decimal places and the investment turnover to three decimal places. 199. The Creative Division of Barry Company reported the following results for December: Invested assets Profit margin Return on investment
$1,200,000 25% 30%
Based on this information, what were sales? 200. Data for Divisions A, B, C, D, and E are as follows: Div. A B C D E a. b. c.
Income from Inv. Operations Assets (a) $35,000 $200,000 $455,000 (d) $284,375 $525,000 $73,500 (g) $800,000 (j) (k) (m) (n) $250,000 Sales
Return on Invest. (b) 16.0% (h) (l) (o)
Profit Margin (c) (e) (i) 13.0% 16.0%
Invest. Turnover 1.6 (f) 1.2 2.5 2.0
Determine the missing items, identifying each by letter (a–o). Round percentage and turnover values to one decimal place. Which division is most profitable in terms of income from operations? Which division is most profitable in terms of return on investment?
201. Several items are missing from the following table of return on investment and residual income. Determine the missing items, identifying each item by the appropriate letter (a–l). Round percentage values to one decimal place.
Division East West North South
Invested Assets
Income from Oper.
Return on Invest.
Min. Return
(a) $850,000 $825,000 (j)
(b) $153,000 (g) $129,000
(c) (d) 20.0% 24.0%
16.0% 12.0% (h) (k)
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Min. Amt. of Income from Oper. $128,000 (e) (i) $60,000
Residual Income $10,000 (f) $24,000 (l) Page 27
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Chapter 24 - Decentralized Operations 202. The sales, income from operations, and invested assets for each division of Grosbeak Company are as follows:
Division E Division F Division G a.
b.
Sales $5,000,000 4,800,000 7,000,000
Income from Operations $550,000 860,000 860,000
Invested Assets $2,400,000 2,500,000 2,900,000
Using the DuPont formula, determine the profit margin, investment turnover, and return on investment for each division. Round profit margin percentage to two decimal places, investment turnover to four decimal places, and return on investment to one decimal place. Which division is the most profitable per dollar invested?
203. The sales, income from operations, and invested assets for each division of Wren Company are as follows:
Division C Division D Division E
Sales $5,000,000 6,800,000 3,750,000
Income from Operations $630,000 760,000 750,000
Invested Assets $4,000,000 3,900,000 7,500,000
Management has established a minimum acceptable return for invested assets of 8%. a. b.
Determine the residual income for each division. Based on residual income, which of the divisions is the most profitable?
204. Paduka Industries has several divisions. The Eastern Division has $350,000 of invested assets, income from operations of $200,000, and residual income of $151,000. Determine the minimum acceptable return on divisional assets. 205. The Bottlebrush Division has income from operations of $60,000, invested assets of $345,000, and sales of $786,000. Use the DuPont formula to compute the return on investment, and show (a) the profit margin, (b) the investment turnover, and (c) the return on investment. Round the profit margin percentage to two decimal places, the investment turnover to three decimal places, and the return on investment to two decimal places. 206. The sales, income from operations, invested assets, and residual income for each division of Marcus Company are as follows:
Division X Division Y Division Z
Income Invested from Sales Assets Operations $5,000,000 $645,000 $4,100,000 6,800,000 777,000 4,000,000 3,750,000 760,000 7,600,000
Residual Income $235,000 377,000 0
Determine the minimum acceptable return for invested assets 207. Materials used by Best Bread Company in producing Division A's product are currently purchased from outside suppliers at a cost of $30 per unit. However, the same materials are available from Division B. Division B has unused capacity and can produce the materials needed by Division A at a variable cost of $20 per unit. a. b.
If the negotiated price approach is used, what would be the range of acceptable transfer prices? Assuming a transfer price of $25 per unit is established and 60,000 units of material are
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Chapter 24 - Decentralized Operations
c.
d.
transferred, with no reductions in Division B's current sales, how much would the income from operations of Division A increase? Assuming a transfer price of $25 per unit is established and 60,000 units of material are transferred, with no reductions in Division B's current sales, how much would the income from operations of Division B increase? If a transfer price of $25 per unit is established and 60,000 units of material are transferred, with no reductions in Division B's current sales, how much would Best Bread Company's total income from operations increase?
208. The materials used by Hibiscus Company's Division A are currently purchased from an outside supplier at $55 per unit. Division B is able to supply Division A with 20,000 units at a variable cost of $42 per unit. The two divisions have recently negotiated a transfer price of $48 per unit for the 20,000 units. (a) By how much will each division’s income increase as a result of this transfer? (b) What is the total increase in income for Hibiscus Company? 209. The materials used by Holly Company's Division A are currently purchased from an outside supplier. Division B is able to supply Division A with 20,000 units at a variable cost of $42 per unit. The normal price for which Division B normally sells its units is $53 per unit. What is the range of transfer prices within which the two division managers should negotiate? 210. Materials used by Layton Company's Division 1 are currently purchased from an outside supplier at $58 per unit. Division 2 is able to supply Division 1 with 20,000 units at a variable cost of $46 per unit. The two divisions have recently negotiated a transfer price of $50 per unit for the 20,000 units. a. By how much will each division’s income increase as a result of this transfer? b. What is the total increase in income for Layton?
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Chapter 24 - Decentralized Operations Answer Key 1. True 2. True 3. False 4. True 5. True 6. True 7. False 8. True 9. False 10. True 11. True 12. True 13. True 14. False 15. True 16. True 17. True 18. True 19. True 20. True 21. False 22. True 23. False 24. True 25. True Powered by Cognero
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Chapter 24 - Decentralized Operations 26. True 27. False 28. True 29. True 30. True 31. True 32. True 33. True 34. True 35. False 36. True 37. True 38. True 39. False 40. False 41. False 42. True 43. False 44. True 45. False 46. True 47. True 48. True 49. False 50. True Powered by Cognero
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Chapter 24 - Decentralized Operations 51. True 52. False 53. False 54. True 55. False 56. False 57. True 58. True 59. True 60. False 61. True 62. False 63. True 64. True 65. True 66. False 67. False 68. True 69. True 70. True 71. b 72. a 73. d 74. b 75. c 76. d Powered by Cognero
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Chapter 24 - Decentralized Operations 77. a 78. d 79. d 80. b 81. c 82. a 83. a 84. c 85. b 86. d 87. d 88. b 89. b 90. b 91. c 92. c 93. c 94. c 95. d 96. a 97. d 98. d 99. a 100. d 101. b Powered by Cognero
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Chapter 24 - Decentralized Operations 102. a 103. b 104. d 105. d 106. a 107. a 108. a 109. b 110. d 111. c 112. d 113. a 114. d 115. b 116. a 117. d 118. c 119. a 120. b 121. c 122. d 123. b 124. d 125. d 126. a 127. d Powered by Cognero
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Chapter 24 - Decentralized Operations 128. d 129. b 130. d 131. d 132. b 133. b 134. a 135. b 136. b 137. d 138. d 139. b 140. a 141. b 142. a 143. c 144. d 145. a 146. b 147. a 148. b 149. c 150. b 151. a 152. d Powered by Cognero
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Chapter 24 - Decentralized Operations 153. d 154. b 155. b 156. c 157. b 158. d 159. d 160. a 161. c 162. c 163. c 164. a 165. a 166. c 167. d 168. b 169. d 170. a 171. b 172. a 173. b 174. b 175. d 176. c 177. b 178. a Powered by Cognero
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Chapter 24 - Decentralized Operations 179. f 180. h 181. e 182. e 183. d 184. b 185. a 186. c 187. a. Budget Performance Report Supervisor, Department 6 For Month Ended March 31 Actual Budget $204,000 $208,000 285,000 265,000 63,600 67,800
Materials Factory wages Supervisory salaries Depreciation of plant and equipment Power and light Insurance and property taxes Maintenance b.
35,000 35,000 21,360 22,500 14,400 15,500 9,456 9,700 $632,816 $623,500
Over
(Under) $ (4,000)
$20,000 (4,200)
(1,140) (1,100) (244) $20,000 $(10,684)
Yes, the factory wages, supervisory salaries, power and light, and insurance and property taxes should be examined by the supervisor.
188. $47,000 – $5,000 = $42,000 over budget 189. $46,000 – $7,000 = $39,000 over budget 190. a. Service department allocation rates: Purchasing Department Allocation Rate = $90,000 ÷ (55 + 95) = $90,000 ÷ 150 = $600 Payroll Accounting Allocation Rate = $30,000 ÷ (10 + 18) = $30,000 ÷ 30 = $1,000 Service department cost allocations: To Region A: Purchasing Department service allocations (55 × $600) Payroll Accounting service allocations (12 × $1,000) Total service department allocations to Region A To Region B: Purchasing Department service allocations (95 × $600) Powered by Cognero
$33,000 12,000 $45,000 $57,000 Page 37
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Chapter 24 - Decentralized Operations Payroll Accounting service allocations (18 × $1,000) Total service department allocations to Region B
18,000 $75,000
b. Region A Income from Operations = $500,000 – $200,000 – $150,000 – $45,000 = $105,000 Region B Income from Operations = $900,000 – $300,000 – $275,000 – $75,000 = $250,000 191. a. Service department allocation rates: Purchasing Department Allocation Rate = $70,000 ÷ (35 + 65) = $70,000 ÷ 100 = $700 Payroll Accounting Allocation Rate = $40,000 ÷ (7 + 13) = $40,000 ÷ 20 = $2,000 Service department cost allocations: To District 1: Purchasing Department service allocations (35 × $700) Payroll Accounting service allocations (7 × $2,000) Total service department allocations to District 1 To District 2: Purchasing Department service allocations (65 × $700) Payroll Accounting service allocations (13 × $2,000) Total service department allocations to District 2
$24,500 14,000 $38,500 $45,500 26,000 $71,500
b. District 1 Income from Operations = $300,000 – $120,000 – $55,000 – $38,500 = $86,500 District 2 Income from Operations = $600,000 – $150,000 – $75,000 – $71,500 = $303,500 192. a.
Number of payroll checks Allocation rate* Payroll cost
Total 2,100 × $110 $231,000
Department S 483 1,470 × $110 × $110 $53,130 $161,700
147 × $110 $16,170
b. Number of reports Allocation rate** Accounting cost
500 × $151 $75,500
70 × $151 $10,570
345 × $151 $52,095
R
85 × $151 $12,835
T
Service department allocation rates: *Payroll Department Allocation Rate = $231,000 ÷ (483 + 1,470 + 147) = $231,000 ÷ 2,100 = $110 **Accounting Department Allocation Rate = $75,500 ÷ (70 + 85 + 345) = $75,500 ÷ 500 = $151 193. a. Sales Cost of goods sold Gross profit Selling expenses Income from operations before service department allocations Powered by Cognero
Division A Division B Division C $600,000 $900,000 $300,000 200,000 350,000 100,000 $400,000 $550,000 $200,000 150,000 275,000 75,000 $250,000
$275,000
$125,000 Page 38
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Chapter 24 - Decentralized Operations Service department allocations* Income from operations
66,200 $183,800
100,300 $174,700
34,100 $ 90,900
*Purchasing Department Allocation Rate = Purchasing Department Costs ÷ Total Purchase Requisitions = $120,600 ÷ (60 + 90 + 30) = $120,600 ÷ 180 = $670 per requisition Payroll Accounting Department Allocation Rate = Payroll Accounting Department Costs ÷ Number of Employees = $80,000 ÷ (13 + 20 + 7) = $80,000 ÷ 40 = $2,000 per employee Service department allocations to Division A: Purchasing Department ($670 × 60 reqs.) Payroll Accounting Department ($2,000 × 13 employees)
$40,200 26,000
Total
$66,200
Service department allocations to Division B: Purchasing Department ($670 × 90 reqs.) Payroll Accounting Department ($2,000 × 20 employees)
$ 60,300 40,000
Total
$100,300
Service department allocations to Division C: Purchasing Department ($670 × 30 reqs.)
$20,100
Payroll Accounting Department ($2,000 × 7 employees)
14,000
Total
$34,100
194. a. Profit Margin = Income from Operations ÷ Sales = ($4,500,000 – $3,800,000) ÷ $4,500,000 = $700,000 ÷ $4,500,000 = 15.6% b. Investment Turnover = Sales ÷ Invested Assets = $4,500,000 ÷ $2,500,000 = 1.8 c. Return on Investment = Income from Operations ÷ Invested Assets = $700,000 ÷ $2,500,000 = 28% d. Income from operations Less minimum acceptable income from operations as a percent of invested assets ($2,500,000 × 7%)
$700,000
Residual income
$525,000
175,000
195. a. Return on Investment = Income from Operations ÷ Invested Assets = ($895,000 – $475,000 – $79,500) ÷ $750,000 = $340,500 ÷ $750,000 = 45.4% b. Profit Margin = Income from Operations ÷ Sales = $340,500 ÷ $895,000 = 38.0% c. Investment Turnover = Sales ÷ Invested Assets = $895,000 ÷ $750,000 = 1.19 196. a.
Revenues
Bentz Co. Divisional Income Statements For the Year Ended December 31 Division A $190,000
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Division B $125,500 Page 39
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Chapter 24 - Decentralized Operations Operating expenses Income from operations before service department allocations Service department allocations Income from operations
112,500
92,750
$77,500 29,500 $48,000
$32,750 12,625 $20,125
b. Return on investment: ROI = Profit Margin × Investment Turnover ROI = Income from Operations × Sales Sales Invested Assets Division A: ROI = $48,000 × $190,000 $190,000 $225,000 = 25.26% × 0.8444 = 21.3% Division B: ROI = $20,125 × $125,500 $125,500 $99,000 = 16.04% × 1.2677 = 20.3% 197. Income from operations Less minimum acceptable income from operations as a percent of invested assets ($400,000 × 12%) Residual income
$80,000 48,000 $32,000
198. a. Profit Margin = Income from Operations ÷ Sales = $75,000 ÷ $790,000 = 9.49% b. Investment Turnover = Sales ÷ Invested Assets = $790,000 ÷ $360,000 = 2.194 c. Return on Investment = Profit Margin × Investment Turnover = 9.49% × 2.194 = 20.82% 199. Income from Operations = Invested Assets × Return on Investment = $1,200,000 × 30% = $360,000 Sales = Income from Operations ÷ Profit Margin = $360,000 ÷ 25% = $1,440,000 200. a. (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n)
$320,000 ($200,000 × 1.6) 17.5% ($35,000 ÷ $200,000) 10.9% ($35,000 ÷ $320,000) $45,500 ($284,375 × 16.0%) 10.0% ($45,500 ÷ $455,000) 1.6 ($455,000 ÷ $284,375) $437,500 ($525,000 ÷ 1.2) 16.8% ($73,500 ÷ $437,500) 14.0% ($73,500 ÷ $525,000) $104,000 ($800,000 × 13.0%) $320,000 ($800,000 ÷ 2.5) 32.5% ($104,000 ÷ $320,000) $500,000 ($250,000 × 2.0) $80,000 ($500,000 × 16.0%)
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Chapter 24 - Decentralized Operations b. c.
(o) 32.0% (16.0% × 2.0) Division D Division D
201. (a) $800,000 ($128,000 ÷ 16.0%) (b) $138,000 ($128,000 + $10,000) (c) 17.3% ($138,000 ÷ $800,000) (d) 18.0% ($153,000 ÷ $850,000) (e) $102,000 ($850,000 × 12.0%) (f) $51,000 ($153,000 – $102,000) (g) $165,000 ($825,000 × 20.0%) (h) 17.1% ($141,000 ÷ $825,000) (i) $141,000 ($165,000 – $24,000) (j) $537,500 ($129,000 ÷ 24.0%) (k) 11.2% ($60,000 ÷ $537,500) (l) $69,000 ($129,000 – $60,000) 202. a. Return on investment: ROI = Profit Margin × Investment Turnover ROI = Income from Operations × Sales Sales Invested Assets Division E: ROI = $550,000 × $5,000,000 $5,000,000 $2,400,000 = 11.00% × 2.0833 = 22.9% Division F: ROI = $860,000 × $4,800,000 $4,800,000 $2,500,000 = 17.92% × 1.9200 = 34.4% Division G: ROI = $860,000 × $7,000,000 $7,000,000 $2,900,000 = 12.29% × 2.4138 = 29.7% b.
Division F is the most profitable per dollar invested.
203. a. Division C:
Division D:
Division E: Powered by Cognero
Residual Income = Income from Operations – Minimum Acceptable Income from Operations as a Percent of Invested Assets = $630,000 – ($4,000,000 × 8%) = $630,000 – $320,000 = $310,000 Residual Income = Income from Operations – Minimum Acceptable Income from Operations as a Percent of Invested Assets = $760,000 – ($3,900,000 × 8%) = $760,000 – $312,000 = $448,000 Residual Income = Income from Operations – Minimum Acceptable Income from Operations as a Percent of Invested Assets = $750,000 – Page 41
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Chapter 24 - Decentralized Operations ($7,500,000 × 8%) = $750,000 – $600,000 = $150,000 b.
Division D
204. Residual Income = Income from Operations – Minimum Acceptable Income from Operations as a Percent of Invested Assets Let X% = Minimum Acceptable Return on Invested Assets $200,000 – ($350,000 × X%) = $151,000 $350,000 × X% = $200,000 – $151,000 $350,000 × X% = $49,000 X% = $49,000 ÷ $350,000 X% = 14% 205. a. Profit Margin = Income from Operations ÷ Sales = $60,000 ÷ $786,000 = 7.63% b. Investment Turnover = Sales ÷ Invested Assets = $786,000 ÷ $345,000 = 2.278 c. Return on Investment = Profit Margin × Investment Turnover = 7.63% × 2.278 = 17.38% 206. Division X:
OR Division Y:
Residual Income = Income from Operations – Minimum Acceptable Income from Operations as a Percent of Invested Assets Let X% = Minimum Acceptable Return on Invested Assets $645,000 – ($4,100,000 × X%) = $235,000 $4,100,000 × X% = $645,000 – $235,000 $4,100,000 × X% = $410,000 X% = $410,000 ÷ $4,100,000 X% = 10% Residual Income = Income from Operations – Minimum Acceptable Income from Operations as a Percent of Invested Assets Let X% = Minimum Acceptable Return on Invested Assets $777,000 – ($4,000,000 × X%) = $377,000 $4,000,000 × X% = $777,000 – $377,000 $4,000,000 × X% = $400,000 X% = $400,000 ÷ $4,000,000 X% = 10%
207. a. The range of acceptable prices would be between the variable cost to produce the unit and the market price to buy/sell the unit, or between $20 and $30. b. Increase in Division A's Income from Operations = (Market Price – Transfer Price) × Units Transferred = ($30 – $25) × 60,000 = $300,000 c. Increase in Division B's Income from Operations = (Transfer Price – Variable Cost per Unit) × Units Transferred = ($25 – $20) × 60,000 = $300,000 d. Total Increase in Best Bread Company's Income from Operations = $300,000 + $300,000 = $600,000 208. a. Increase in Division A's Income from Operations = (Market Price – Transfer Price) × Units Transferred = ($55 – $48) × 20,000 = $140,000 Increase in Division B's Income from Operations = (Transfer Price – Variable Cost) × Units Transferred = ($48 – $42) × 20,000 = $120,000 b. Total Increase in Hibiscus Company's Income from Operations = $140,000 + $120,000 = $260,000 Powered by Cognero
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Chapter 24 - Decentralized Operations 209. The range of acceptable prices would be between the variable cost to produce the unit and the market price to buy/sell the unit, or between $42 and $53 per unit. 210. a. Increase in Division 1's Income from Operations = (Market Price – Transfer Price) × Units Transferred = ($58 – $50) × 20,000 = $160,000 Increase in Division 2's Income from Operations = (Transfer Price – Variable Cost) × Units Transferred = ($50 – $46) × 20,000 = $80,000 b. Total Increase in Layton Company's Income from Operations = $160,000 + $80,000 = $240,000
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing True / False 1. Differential revenue is the amount of income that would result from the best available alternative proposed use of cash. a. True b. False 2. Differential revenue is the amount of increase or decrease in revenue expected from a particular course of action as compared with an alternative. a. True b. False 3. If the total unit cost of manufacturing Product Y is currently $36 and the total unit cost after modifying the style is estimated to be $48, the differential cost for this situation is $48. a. True b. False 4. If the total unit cost of manufacturing Product Y is currently $36 and the total unit cost after modifying the style is estimated to be $48, the differential cost for this situation is $12. a. True b. False Use this information for Hill Co. to answer the questions that follow. Hill Co. can further process Product O to produce Product P. Product O is currently selling for $60 per pound and costs $42 per pound to produce. Product P would sell for $82 per pound and would require an additional cost of $13 per pound to produce. 5. The differential revenue of producing Product P over Product O is $82 per pound. a. True b. False 6. The differential revenue of producing Product P over Product O is $22 per pound. a. True b. False 7. The differential cost of producing Product P over Product O is $13 per pound. a. True b. False 8. The differential cost of producing Product P over Product O is $55 per pound. a. True b. False 9. Opportunity cost is the amount of increase or decrease in cost that would result from the best available alternative to the proposed use of cash or its equivalent. a. True b. False Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 10. Differential analysis can aid management in making decisions on a variety of alternatives, including whether to discontinue an unprofitable segment and whether to replace usable plant assets. a. True b. False 11. A cost that will not be affected by later decisions is termed a sunk cost. a. True b. False 12. A cost that will not be affected by later decisions is termed an opportunity cost. a. True b. False 13. The amount of revenue that is foregone from an alternative use of cash is called opportunity cost. a. True b. False 14. Since the costs of producing an intermediate product do not change regardless of whether the intermediate product is sold or processed further, these costs are not considered in deciding whether to further process a product. a. True b. False 15. The costs of initially producing an intermediate product should be considered in deciding whether to further process a product, even though the costs will not change, regardless of the decision. a. True b. False 16. In deciding whether to accept business at a special price, the short-run price should be set high enough to cover all variable costs and expenses. a. True b. False 17. Differential analysis only considers the short-term (1-year) effects of discontinuing a product. a. True b. False 18. Make-or-buy options often arise when a manufacturer has excess productive capacity in the form of unused equipment, space, and labor. a. True b. False 19. In addition to the differential costs in an equipment replacement decision, the remaining useful life of the old equipment and the estimated life of the new equipment are important considerations. a. True b. False Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 20. Manufacturers must conform to the Robinson-Patman Act, which prohibits price discrimination within the United States unless differences in prices can be justified by different costs of serving different customers. a. True b. False 21. When a segment of a company is showing a net loss, it is always best to discontinue the segment in order not to continue with losses. a. True b. False 22. Discontinuing a segment or product may not be the best choice when the segment is contributing to fixed expenses. a. True b. False 23. Differential analysis can be used if management is considering making a part that is currently being purchased but not if considering purchasing a part that is currently being made. a. True b. False 24. When using differential analysis to make a decision regarding the acceptance of an order at a special price, both fixed and variable costs are included in the analysis. a. True b. False 25. A practical approach that is frequently used by managers when setting normal long-run prices is the cost-plus approach. a. True b. False 26. The product cost concept includes all manufacturing costs plus selling and administrative expenses in the cost amount to which the markup is added to determine product price. a. True b. False 27. The product cost concept includes all manufacturing costs in the cost amount to which the markup is added to determine product price. a. True b. False 28. In using the product cost concept of applying the cost-plus approach to product pricing, selling expenses, administrative expenses, and profit are covered in the markup. a. True b. False 29. When estimated costs are used in applying the cost-plus approach to product pricing, the estimates should be based on normal levels of performance. a. True Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing b. False 30. When estimated costs are used in applying the cost-plus approach to product pricing, the estimates should be based on ideal levels of performance. a. True b. False 31. A bottleneck begins when demand for the company’s product exceeds the ability to produce the product. a. True b. False 32. A bottleneck happens when a key piece of manufacturing machinery can produce 1,000 units per hour and demand for the product supports a production rate of 1,200 units per hour. a. True b. False 33. When a bottleneck occurs between two products, the company must determine the contribution margin for each product and manufacture the product that has the highest contribution margin per bottleneck hour. a. True b. False 34. The theory of constraints is a manufacturing strategy that focuses on reducing the influence of bottlenecks on a process. a. True b. False 35. The lowest contribution margin per scarce resource is the most profitable. a. True b. False 36. Activity-based costing provides more accurate and useful cost data than traditional systems. a. True b. False 37. Activity-based costing is determined by charging products for only the services (activities) they used during production. a. True b. False 38. In using the variable cost concept of applying the cost-plus approach to product pricing, fixed manufacturing costs and both fixed and variable selling and administrative expenses must be covered by the markup. a. True b. False 39. Under the total cost concept, manufacturing cost plus desired profit is included in the total cost per unit. a. True Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing b. False 40. The total cost concept includes all manufacturing costs plus selling and administrative expenses in the cost amount to which the markup is added to determine product price. a. True b. False 41. Under the variable cost concept, only variable costs are included in the cost amount per unit to which the markup is added. a. True b. False 42. The desired selling price for a product will be the same under both variable and total cost concepts. a. True b. False 43. Cost-plus methods determine the normal selling price by estimating a cost amount per unit and adding a markup. a. True b. False 44. In using the total cost concept of applying the cost-plus approach to product pricing, selling expenses, administrative expenses, and profit are covered in the markup. a. True b. False 45. In using the variable cost concept of applying the cost-plus approach to product pricing, fixed manufacturing costs and fixed selling and administrative expenses must be covered by the markup. a. True b. False Multiple Choice 46. The amount of increase or decrease in revenue that is expected from a particular course of action as compared with an alternative is a. manufacturing margin b. contribution margin c. differential cost d. differential revenue 47. The amount of increase or decrease in cost that is expected from a particular course of action as compared with an alternative is a. period cost b. product cost c. differential cost d. discretionary cost Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 48. A cost that will not be affected by later decisions is termed a a. period cost b. differential cost c. sunk cost d. replacement cost 49. The condensed income statement of Fletcher Inc. for the past year is as follows:
Sales Cost of goods sold: Variable costs Fixed costs Total cost of goods sold Income (loss) from operations
Product F G $300,000 $210,000
H $340,000
Total $850,000
$180,000 $180,000 50,000 50,000 $230,000 $230,000 $ 70,000 $(20,000)
$220,000 40,000 $260,000 $ 80,000
$590,000 140,000 $730,000 $120,000
Management is considering the discontinuance of the manufacture and sale of Product G at the beginning of the current year. The discontinuance would have no effect on the total fixed costs and expenses or on the sales of Product F and Product H. What is the amount of change in income for the current year that will result from the discontinuance of Product G? a. $20,000 increase b. $30,000 increase c. $20,000 decrease d. $30,000 decrease 50. The condensed income statement of Hayden Corp. for the past year is as follows: Product Sales Cost of goods sold: Variable costs Fixed costs Total cost of goods sold Income (loss) from operations
T $680,000
U $320,000
$540,000 145,000 $685,000 $ (5,000)
$220,000 40,000 $260,000 $ 60,000
Management is considering the discontinuance of the manufacture and sale of Product T at the beginning of the current year. The discontinuance would have no effect on the total fixed costs and expenses or on the sales of Product U. What is the amount of change in income for the current year that will result from the discontinuance of Product T? a. $140,000 increase b. $5,000 increase c. $5,000 decrease d. $140,000 decrease 51. Sage Company is operating at 90% of capacity and is currently purchasing a part used in its manufacturing operations for $15 per unit. The unit cost for the business to make the part is $20 including fixed costs and $11 excluding fixed costs. If 30,000 units of the part are normally purchased during the year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease from making the part rather than purchasing it? Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing a. $150,000 cost increase b. $120,000 cost decrease c. $150,000 cost increase d. $120,000 cost increase 52. Piper Corp. is operating at 70% of capacity and is currently purchasing a part used in its manufacturing operations for $24 per unit. The unit cost for the business to make the part is $36 including fixed costs and $26 excluding fixed costs. If 15,000 units of the part are normally purchased during the year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease from making the part rather than purchasing it? a. $30,000 cost decrease b. $180,000 cost increase c. $30,000 cost increase d. $180,000 cost decrease 53. The amount of revenue that is foregone from an alternative use of cash is called a. differential profit b. sunk cost c. differential revenue d. opportunity cost 54. Yasmin Co. can further process Product B to produce Product C. Product B is currently selling for $30 per pound and costs $28 per pound to produce. Product C would sell for $55 per pound and would require an additional cost of $31 per pound to produce. What is the differential cost of producing Product C? a. $30 per pound b. $31 per pound c. $28 per pound d. $55 per pound Use this information for Carmen Co. to answer the questions that follow. Carmen Co. can further process Product J to produce Product D. Product J is currently selling for $20.00 per pound and costs $15.75 per pound to produce. Product D would sell for $38.00 per pound and would require an additional cost of $8.55 per pound to produce. 55. What is the differential cost of producing Product D? a. $6.50 per pound b. $8.55 per pound c. $17.00 per pound d. $5.25 per pound 56. What is the differential revenue of producing Product D? a. $6.75 per pound b. $22.25 per pound c. $18.00 per pound d. $6.25 per pound Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 57. Grace Co. can further process Product B to produce Product C. Product B is currently selling for $60 per pound and costs $38 per pound to produce. Product C would sell for $95 per pound and would require an additional cost of $13 per pound to produce. What is the differential revenue of producing and selling Product C? a. $35 per pound b. $38 per pound c. $95 per pound d. $60 per pound 58. Delaney Company is considering replacing equipment that originally cost $600,000 and that has $420,000 accumulated depreciation to date. A new machine will cost $790,000. What is the sunk cost in this situation? a. $370,000 b. $790,000 c. $180,000 d. $190,000 59. Delaney Company is considering replacing equipment that originally cost $600,000 and that has $420,000 accumulated depreciation to date. A new machine will cost $790,000, and the old equipment can be sold for $8,000. What is the sunk cost in this situation? a. $172,000 b. $180,000 c. $188,000 d. $290,000 60. Lara Technologies is considering a cash outlay of $250,000 for the purchase of land, which it could lease out for $35,000 per year. If alternative investments that yield a 12% return are available, the opportunity cost of the purchase of the land is a. $35,000 b. $30,000 c. $250,000 d. $4,200 61. Jarrett Company is considering a cash outlay of $300,000 for the purchase of land, which it could lease out for $36,000 per year. If alternative investments that yield a 9% return are available, the opportunity cost of the purchase of the land is a. $27,000 b. $36,000 c. $9,000 d. $72,000 62. Farris Company is considering a cash outlay of $500,000 for the purchase of land, which it could lease out for $40,000 per year. If alternative investments that yield a 15% return are available, the opportunity cost of the purchase of the land is a. $75,000 b. $40,000 c. $44,000 d. $7,500 Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 63. Jacoby Company received an offer from an exporter for 30,000 units of product at $15 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: Domestic unit sales price Unit manufacturing costs: Variable Fixed
$21 12 5
What is the differential revenue from the acceptance of the offer? a. $450,000 b. $630,000 c. $510,000 d. $120,000 Use this information for Stryker Industries to answer the questions that follow. Stryker Industries received an offer from an exporter for 15,000 units of product at $17.50 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: Domestic unit sales price Unit manufacturing costs: Variable Fixed
$20 11 1
64. What is the differential revenue from the acceptance of the offer? a. $300,000 b. $262,500 c. $52,500 d. $250,000 65. What is the differential cost from the acceptance of the offer? a. $200,000 b. $262,500 c. $85,500 d. $165,000 66. What is the amount of differential profit or loss from the acceptance of the offer? a. $97,500 profit b. $94,500 loss c. $37,500 profit d. $37,500 loss Use this information for Rylan Corporation to answer the questions that follow. Rylan Corporation received an offer from an exporter for 25,000 units of product at $16 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available: Domestic unit sales price Unit manufacturing costs: Powered by Cognero
$22 Page 9
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Variable Fixed
11 6
67. What is the differential cost from the acceptance of the offer? a. $150,000 b. $275,000 c. $550,000 d. $125,000 68. What is the amount of the differential profit or loss from the acceptance of the offer? a. $125,000 loss b. $25,000 profit c. $125,000 profit d. $25,000 loss 69. Relevant revenues and costs refer to a. activities that occurred in the past b. monies already earned and/or spent c. last year's income d. differences between the alternatives being considered 70. Keating Co. is considering selling equipment with a cost of $50,000 and accumulated depreciation of $40,000. Keating Co. can sell the equipment through a broker for $25,000, less a 5% broker commission. Alternatively, Gunner Co. has offered to lease the equipment for 5 years for a total of $48,750. Keating will incur repair, insurance, and property tax expenses estimated at $8,000 over the 5-year period. At lease-end, the equipment is expected to have no residual value. The differential profit from the lease alternative is a. $17,000 b. $7,000 c. $27,000 d. $14,500 71. Sparrow Co. is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for $8.00 a unit. The unit cost for Sparrow Co. to make the part is $9.00, which includes $0.60 of fixed costs. If 4,000 units of the part are normally purchased each year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease for making the part rather than purchasing it? a. $12,000 decrease b. $4,000 increase c. $20,000 decrease d. $1,600 increase 72. Heston and Burton, CPAs, currently work a 5-day week. They estimate that net income for the firm would increase by $75,000 annually if they worked an additional day each month. The cost associated with the decision to continue the practice of a 5-day workweek is an example of a(n) a. differential revenue b. sunk cost Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing c. differential profit d. opportunity cost 73. Starling Co. is considering selling a machine with a book value of $12,500 and estimated remaining life of 5 years. The old machine can be sold for $1,500. A new high-speed machine can be purchased at a cost of $25,000. It will have a useful life of 5 years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $26,000 to $23,500 if the new machine is purchased. The differential effect on profit for the new machine for the entire 5 years is a(n) a. decrease of $11,000 b. decrease of $15,000 c. increase of $11,000 d. increase of $15,000 74. Nighthawk Inc. is considering selling an old machine with a book value of $22,500 and an estimated remaining life of 3 years. The old machine can be sold for $6,250. A new machine with a purchase price of $68,750 is being considered as a replacement. It will have a useful life of 3 years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $43,750 to $20,000 if the new machine is purchased. The differential effect on profit for the entire 3 years for the new machine is a(n) a. $8,750 increase b. $31,250 decrease c. $8,750 decrease d. $2,925 decrease Use this information for Falcon Co. to answer the questions that follow. Falcon Co. produces a single product. Its normal selling price is $30 per unit. The variable costs are $19 per unit. Fixed costs are $25,000 for a normal production run of 5,000 units per month. Falcon received a request for a special order that would not interfere with normal sales. The order was for 1,500 units with a special price of $20 per unit. Falcon has the capacity to handle the special order, and for this order, a variable selling cost of $1 per unit would be eliminated. 75. If the order is accepted, what would be the impact on profit? a. decrease of $750 b. decrease of $4,500 c. increase of $3,000 d. increase of $1,500 76. Should the special order be accepted? a. The answer cannot be determined from the data given. b. yes c. no d. There would be no difference in accepting or rejecting the special order. 77. Mighty Safe Fire Alarm is currently buying 50,000 motherboards from MotherBoard, Inc. at a price of $65.00 per board. Mighty Safe is considering making its own motherboards. The costs to make the motherboards are as follows: direct materials, $32.00 per unit; direct labor, $10.00 per unit; and variable factory overhead, $16.00 per unit. Fixed costs for the plant would increase by $75,000. Which option should be selected and why? a. buy, $75,000 more in profits Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing b. make, $275,000 increase in profits c. buy, $275,000 more in profits d. make, $350,000 increase in profits 78. Rowan Quinn Company manufactures kitchen appliances. Currently, it is manufacturing one of its components at a variable cost of $40 and fixed costs of $15 per unit. An outside provider of this component has offered to sell Rowan Quinn the component for $45. Determine the best plan and compute the savings assuming fixed costs are unaffected by the decision. a. $5 savings per unit if manufactured b. $5 savings per unit if purchased c. $10 savings per unit if manufactured d. $15 savings per unit if purchased 79. Discontinuing a product or segment is a huge decision that must be carefully analyzed. Which of the following would be a valid reason not to discontinue an operation? a. Losses are minimal. b. Variable costs are less than revenues. c. Variable costs are more than revenues. d. Allocated fixed costs are more than revenues. 80. Which of the following would be considered a sunk cost? a. purchase price of new equipment b. equipment rental for the production area c. net book value of equipment that has no market value d. warehouse lease expense 81. All of the following should be considered in a make-or-buy decision except a. cost savings b. quality issues with the supplier c. future growth in the plant and other production opportunities d. whether the supplier will make a profit that would no longer belong to the business 82. Which of the following reasons could cause a company to reject an offer to accept business at a special price? a. The additional sales will not conflict with regular sales. b. The additional sales will increase differential profit. c. The additional sales will not increase fixed expenses. d. The additional sales will increase fixed expenses. 83. A practical approach that is frequently used by managers when setting normal long-run prices is a. the cost-plus approach b. the economic theory approach c. the price graph approach d. price skimming 84. Which of the following is not a cost concept commonly used in applying the cost-plus approach to product pricing? Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing a. total cost concept b. product cost concept c. variable cost concept d. fixed cost concept 85. When using the product cost concept of applying the cost-plus approach to product pricing, what is included in the markup? a. desired profit b. total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit c. total costs plus desired profit d. total selling and administrative expenses plus desired profit 86. What cost concept used in applying the cost-plus approach to product pricing covers selling expenses, administrative expenses, and desired profit in the markup? a. total cost concept b. product cost concept c. variable cost concept d. sunk cost concept 87. What cost concept used in applying the cost-plus approach to product pricing includes only total manufacturing costs in the cost amount to which the markup is added? a. variable cost concept b. total cost concept c. product cost concept d. opportunity cost concept 88. The target cost approach assumes that a. markup is added to total cost b. the selling price is set by the marketplace c. markup is added to variable cost d. markup is added to product cost Use this information for Mallard Corporation to answer the questions that follow. Mallard Corporation uses the product cost concept of product pricing. The cost information for the production and sale of 45,000 units of its sole product follows. Mallard desires a profit equal to a 12% rate of return on invested assets of $800,000. Fixed factory overhead cost Fixed selling and administrative costs Variable direct materials cost per unit Variable direct labor cost per unit Variable factory overhead cost per unit Variable selling and administrative cost per unit
$82,000 45,000 5.50 7.65 2.25 0.90
89. The dollar amount of the desired profit from the production and sale of the company's product is Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing a. $105,840 b. $225,000 c. $96,000 d. $220,500 90. The cost per unit for the production of the company's product is a. $13.15 b. $17.22 c. $15.40 d. $15.75 91. The markup percentage on product cost for the company's product is a. 23.4% b. 10.98% c. 26.1% d. 18% 92. The unit selling price for the company's product is a. $19.35 b. $15.75 c. $22.05 d. $21.25 93. What pricing concept considers the price that other providers charge for the same product? a. demand-based concept b. total cost concept c. cost-plus concept d. competition-based concept Use this information for Flyer Company to answer the questions that follow. Flyer Company sells a product in a competitive marketplace. Market analysis indicates that its product would probably sell at $48 per unit. Flyer's management desires a 12.5% profit margin on sales. Its current full cost for the product is $44 per unit. 94. What is the desired profit per unit? a. $6 b. $8 c. $5 d. $4 95. In order to meet the new target cost, how much will Flyer have to cut costs per unit, if any? a. $1 b. $3 c. $2 Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing d. $0 96. What is the target cost of the company’s product? a. $44 b. $42 c. $43 d. $40 97. If the company cannot cut costs any lower than they already are, what would the profit margin on sales be to meet the market selling price? a. 9.3% b. 7.3% c. 10.3% d. 8.3% 98. Which equation better describes target costing? a. Selling Price – Desired Profit = Target Costs b. Selling Price + Profit = Target Costs c. Target Variable Costs + Contribution Margin = Selling Price d. Selling Price = Profit – Target Variable Costs 99. Using the variable cost concept, determine the markup per unit for 30,000 units using the following data: Variable cost per unit Total fixed costs Desired profit
$15 $90,000 $150,000
Round to the nearest dollar. a. $10 b. $15 c. $8 d. $23 100. Swan Company produces a product at a total cost of $43 per unit. Of this amount, $8 per unit is selling and administrative costs. The total variable cost is $30 per unit, and the desired profit is $20 per unit. Determine the markup percentage on product cost. a. 80% b. 46.5% c. 70% d. 110% 101. Using the variable cost concept, determine the selling price per unit for 30,000 units using the following data: Variable cost per unit Total fixed costs Desired profit Powered by Cognero
$15 $90,000 $150,000 Page 15
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Round to the nearest dollar. a. $10 b. $15 c. $8 d. $23 102. Target costing is arrived at by taking the a. selling price minus desired profit b. selling price and adding desired profit c. selling price and subtracting the budget standard cost d. budget standard cost and reducing it by 10% 103. Peyton Company manufactures Phone X and Phone Y. Peyton can sell all it can make of either. Based on the following data, assuming the number of hours is a constraint, which statement is true? Sales price Variable cost Time needed to process
X $48 38
Y $44 28
5 hours
8 hours
a. X is more profitable than Y in using bottleneck resources. b. Y is more profitable than X in using bottleneck resources. c. Neither X nor Y is profitable in using bottleneck resources. d. X and Y are equally profitable in using bottleneck resources. Use this information for Widgeon Co. to answer the questions that follow. Widgeon Co. manufactures three products: Bales, Tales, and Wales. Their selling prices are $55, $78, and $32, respectively. The variable costs for each product are $20, $50, and $15, respectively. Each product must go through the same processing in a machine that is limited to 2,000 hours per month. Bales take 5 hours to process; Tales, 7 hours; and Wales, 1 hour. 104. Which product has the highest contribution margin per machine hour? a. Bales b. Tales c. Wales d. Bales and Tales have the same contribution margin per machine hour. 105. What is the contribution margin per machine hour for Bales? a. $5 b. $7 c. $35 d. $28 106. What is the contribution margin per machine hour for Tales? a. $4 Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing b. $7 c. $28 d. $35 107. What is the contribution margin per machine hour for Wales? a. $35 b. $28 c. $17 d. $7 108. Assuming that Widgeon Co. can sell all of the products it can make, what is the maximum contribution margin it can earn per month? a. $49,000 b. $70,000 c. $56,000 d. $34,000 109. Assume that Widgeon produced enough of the product with the highest contribution margin per unit to use 1,000 hours of machine time. Product demand does not warrant any more production of that product. What is the maximum additional contribution margin that can be realized by utilizing the remaining 1,000 hours on the product with the second highest contribution margin per hour? a. $35,000 b. $7,000 c. $4,000 d. $28,000 Use this information for Miramar Industries to answer the questions that follow. Miramar Industries manufactures two products: A and B. The manufacturing operation involves three overhead activities—production setup, materials handling, and general factory activities. Miramar uses activity-based costing to allocate overhead to products. An activity analysis of the overhead revealed the following estimated costs and activity bases for these activities: Activity Production setup Materials handling General overhead
Cost $250,000 150,000 80,000
Activity Base Number of setups Number of parts Number of direct labor hours
Each product’s total activity in each of the three areas is as follows: Number of setups Number of parts Number of direct labor hours
Product A 100 40,000 8,000
Product B 300 20,000 12,000
110. What is the activity rate for production setup? a. $2,500 per setup Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing b. $833 per setup c. $625 per setup d. $400 per setup 111. What is the activity rate for materials handling? a. $1.50 per part b. $3.75 per part c. $7.50 per part d. $2.50 per part 112. What is the activity rate for general overhead? a. $4.00 per direct labor hour b. $60.00 per direct labor hour c. $6.67 per direct labor hour d. $10.00 per direct labor hour 113. What is the total overhead allocated to Product A using activity-based costing? a. $194,500 b. $162,500 c. $32,000 d. $224,000 114. What is the overhead allocated to Product B using activity-based costing? a. $135,000 b. $175,000 c. $292,500 d. $285,500 Use this information for Swan Company to answer the questions that follow. Swan Company produces a product at a total cost of $43 per unit. Of this amount, $8 per unit is selling and administrative costs. The total variable cost is $30 per unit, and the desired profit is $20 per unit. 115. Determine the markup percentage using the total cost concept. a. 100% b. 110% c. 80% d. 46.5% 116. Determine the markup percentage using the variable cost concept. a. 100% b. 110% c. 80% d. 46.5%
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Use this information for Magpie Corporation to answer the questions that follow. Magpie Corporation uses the total cost concept of product pricing. The cost information for the production and sale of 60,000 units of its sole product follows. Magpie desires a profit equal to a 25% rate of return on invested assets of $700,000. Fixed factory overhead cost Fixed selling and administrative costs Variable direct materials cost per unit Variable direct labor cost per unit Variable factory overhead cost per unit Variable selling and administrative cost per unit
$38,700 7,500 4.60 1.88 1.13 4.50
117. The dollar amount of the desired profit from the production and sale of the company's product is a. $175,000 b. $67,200 c. $73,500 d. $96,000 118. The cost per unit for the production and sale of the company's product is a. $12.11 b. $12.88 c. $15.00 d. $13.50 119. The unit selling price for the company's product is a. $15.00 b. $13.82 c. $15.79 d. $14.76 120. The markup percentage on the total cost of the company's product is a. 21.0% b. 22.6% c. 15.8% d. 24.0% 121. Contractors who sell to government agencies would be most likely to use which of the following cost concepts in pricing their products? a. variable cost concept b. product cost concept c. total cost concept d. fixed cost concept Use this information for Dotterel Corporation to answer the questions that follow. Dotterel Corporation uses the variable cost concept of product pricing. The cost information for the production and sale of Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 35,000 units of its sole product follows. Dotterel desires a profit equal to an 11.2% rate of return on invested assets of $350,000. Fixed factory overhead cost Fixed selling and administrative costs Variable direct materials cost per unit Variable direct labor cost per unit Variable factory overhead cost per unit Variable selling and administrative cost per unit
$105,000 35,000 4.34 5.18 0.98 0.70
122. The variable cost per unit for the production and sale of the company's product is a. $14.00 b. $12.60 c. $9.80 d. $11.20 123. The unit selling price for the company's product is a. $16.32 b. $13.44 c. $12.10 d. $13.72 124. The markup percentage for the sale of the company's product is a. 14% b. 5.6% c. 45.71% d. 11.2% 125. The dollar amount of the desired profit from the production and sale of the company's product is a. $89,600 b. $39,200 c. $70,000 d. $84,000 126. What pricing concept is used if all costs are considered and a fair markup is added to determine the selling price? a. total cost concept b. demand-based concept c. variable cost concept d. fixed cost concept 127. What cost concept used in applying the cost-plus approach to product pricing includes only desired profit in the markup? a. product cost concept b. variable cost concept c. sunk cost concept Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing d. total cost concept 128. When using the total cost concept of applying the cost-plus approach to product pricing, what is included in the markup? a. total selling and administrative expenses plus desired profit b. total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit c. total costs plus desired profit d. desired profit 129. When using the variable cost concept of applying the cost-plus approach to product pricing, what is included in the markup? a. total costs plus desired profit b. desired profit c. total selling and administrative expenses plus desired profit d. total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit Matching Match each of the following phrases with the term (a–e) it best describes. a. Demand-based concept b. Competition-based concept c. Product cost concept d. Target costing e. Production bottleneck 130. Also known as a constraint 131. Combines market-based pricing with a cost-reduction emphasis 132. Only includes the costs of manufacturing in product cost per unit 133. Sets the price according to competitors 134. Sets the price according to demand Match each of the following phrases with the term (a–e) it best describes. a. Opportunity cost b. Sunk cost c. Theory of constraints d. Differential analysis e. Product cost distortion 135. Possible result of using an inappropriate overhead allocation method 136. Revenue forgone from an alternative use of an asset 137. Manufacturing strategy that focuses on reducing bottlenecks Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 138. Not relevant to future decisions 139. Evaluation of how profit will change based on an alternative course of action Match each of the following phrases with the term (a–e) it best describes. a. Engineering change order b. Total cost concept c. Variable cost concept d. Normal selling price e. Setup 140. A document that initiates a product or process change 141. Includes manufacturing costs plus selling and administrative expenses 142. Changing tooling when preparing for a new product 143. Target selling price to be achieved in the long term 144. Variable manufacturing costs plus variable selling and administrative costs are included in cost per unit Subjective Short Answer 145. The Porter Beverage Factory owns a building for its operations. Porter uses only half of the building and is considering two options for the unused space. The Popcorn Store would like to purchase the half of the building that is not being used for $550,000. A 5% commission would have to be paid at the time of purchase. Salty Snacks would like to lease half of the building for the next 5 years at $100,000 each year. Porter would have to continue paying $15,000 of property taxes each year and $2,000 of yearly insurance on the property, according to the proposed lease agreement. Determine the differential profit or loss from the lease alternative. 146. An employee of Morgan Corporation has found some partially completed units of Model X in a dusty corner of the warehouse. A job ticket attached to the units indicates that a total of $750 in manufacturing costs have been used to bring the materials to this point in the manufacturing process. The units can be sold in their current condition for $275 to a scrap metal dealer. If Morgan spends $250 to complete the units, they could be sold for $600. a. What should Morgan do? Why? b. Identify the sunk cost, if any. 147. Lockrite Security Company manufacturers home alarms. Currently, it is manufacturing one of its components at a total cost of $45, which includes fixed costs of $15 per unit. An outside provider of this component has offered to sell Lockrite the component for $40. Provide a differential analysis of the outside purchase proposal. 148. Crane Company's Division B recorded sales of $360,000, variable cost of goods sold of $315,000, variable selling expenses of $13,000, and fixed costs of $61,000; creating an operating loss of $29,000. Determine the differential profit or loss from the sales of Division B. Should this division be discontinued? 149. A commercial oven with a book value of $67,000 has an estimated remaining 5-year life. A proposal is offered to sell the oven for $8,500 and replace it with a new oven costing $110,000. The new machine has a 5-year life with no residual Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing value. Annual maintenance costs for the old machine were $54,000. The new machine would reduce annual maintenance costs by $23,000. Provide a differential analysis on the proposal to replace the commercial oven. 150. An unfinished desk is produced for $36.00 and sold for $65.00. A finished desk can be sold for $75.00. The additional processing cost to complete the finished desk is $5.95. Provide a differential analysis for further processing. 151. Finch, Inc., has bought a new server and must decide what to do with the old one. The cost of the old server was originally $60,000, and it has been depreciated $45,000. The company has received two offers. One offer was made to purchase the equipment outright for $18,500, less a 5% sales commission. The other offer was to lease the equipment for $7,000 for the next 5 years, but the company will be required to provide maintenance and insurance totaling $3,000 per year. What offer should Finch, Inc., accept? 152. Diamond Boot Factory normally sells its specialty boots for $375 a pair. An offer to buy 100 boots for $275 per pair was made by an organization hosting a national event in Norfolk. The variable cost per boot is $250 and special stitching will add another $20 per pair to the cost. Determine the differential profit or loss per pair of boots from selling to the organization. 153. Gull Corp. is considering selling its old popcorn machine and replacing it with a newer one. The old machine has a book value of $5,000, and its remaining useful life is 5 years. Annual costs are $4,000. A high school is willing to buy it for $2,000. New equipment would cost $18,000 with annual operating costs of $1,500. The new machine has an estimated useful life of 5 years. Should the machine be replaced? 154. Lark Art Company sells unfinished wooden decorations at a price of $15. The current profit margin is $5 per decoration. The company is considering taking individual orders and customizing them for customers. To finish the decoration, the company would have to pay additional labor of $3 per unit, additional materials costing an average of $4 per unit, and fixed costs would increase by $1,500. If the company estimates that it can sell 600 units for $25 per unit each month, should it start taking the orders? 155. Hadley Company is considering selling equipment that is no longer needed for operations. The equipment originally cost $600,000 and accumulated depreciation to date totals $460,000. An offer has been received to lease the machine for its remaining useful life for a total of $290,000, after which the equipment will have no salvage value. The repair, insurance, and property tax expenses that would be incurred by Hadley on the machine during the period of the lease are estimated at $75,800. Alternatively, the equipment can be sold through a broker for $230,000 less a 10% commission. Prepare a differential analysis report, dated June 15, on whether the equipment should be leased or sold. 156. Product J is one of the many products manufactured and sold by Oceanside Company. An income statement by product line for the past year indicated a net loss for Product J of $12,250. This net loss resulted from sales of $260,000, cost of goods sold of $186,500, and operating expenses of $85,750. It is estimated that 30% of the cost of goods sold represents fixed factory overhead costs and that 40% of the operating expenses is fixed. If Product J is retained, the revenue, costs, and expenses are not expected to change significantly from those of the current year. Because of the large number of products manufactured, the total fixed costs and expenses are not expected to decline significantly if Product J is discontinued. Prepare a differential analysis report, dated February 8 of the current year, on the proposal to discontinue Product J. 157. Snipe Company has been purchasing a component, Part Q, for $19.20 per unit. Snipe is currently operating at 70% of capacity, and no significant increase in production is anticipated in the near future. The cost of manufacturing a unit of Part Q is estimated as follows: Direct materials Direct labor Powered by Cognero
$11.50 4.50 Page 23
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Variable factory overhead Fixed factory overhead Total
1.12 3.15 $20.27
Prepare a differential analysis report, dated March 12 of the current year, on the decision to make or buy Part Q. 158. Due to Medicare reimbursement cuts, Loving Home Care is considering shutting down its Certified Nursing Assistant (CNA) Division. Fixed costs will have to be transferred to the Nursing Division if the CNA Division is discontinued. Based on the following income statement make a recommendation to the president regarding this decision. Loving Home Care Condensed Income Statement For the Year Ended December 31 Sales Cost of goods sold: Variable costs Fixed costs Total cost of goods sold Income (loss) from operations
Nursing $3,500,000
CNA $1,000,000
Total $4,500,000
$2,000,000 400,000 $2,400,000 $1,100,000
$ 700,000 400,000 $1,100,000 $ (100,000)
$2,700,000 800,000 $3,500,000 $1,000,000
159. MZE Manufacturing Company has a normal plant capacity of 37,500 units per month. Because of an extra-large quantity of inventory on hand, it expects to produce only 30,000 units in May. Monthly fixed costs and expenses are $112,500 ($3 per unit at normal plant capacity), and variable costs and expenses are $8.25 per unit. The present selling price is $13.50 per unit. The company has an opportunity to sell 7,500 additional units at $9.90 per unit to an exporter who plans to market the product under its own brand name in a foreign market. The additional business is therefore not expected to affect the regular selling price or quantity of sales of MZE Manufacturing Company. Prepare a differential analysis report, dated April 21 of the current year, on the proposal to sell at the special price. 160. Piper Rose Boutique has been approached by the community college to make special polo shirts for the faculty and staff. The college is willing to buy 4,000 polos with its own design for $6.00 each. The company normally sells its shirts for $12.00 each. The company has enough excess capacity to make this order. A breakdown of costs is as follows: Direct materials Direct labor Variable costs Fixed costs Total cost per unit
$2.00 0.50 1.50 _2.50 $6.50
Should Piper Rose Boutique accept the special order made by the college? 161. Airflow Company sells a product in a competitive marketplace. Market analysis indicates that the product would probably sell at $28.00 per unit. Airflow management desires a profit equal to a 20% rate of return on invested assets of $1,400,000. Airflow anticipates selling 50,000 units. The current full cost per unit for the product is $25.00 per unit. a. What is the amount of profit per unit? b. What is the target cost per unit if Airflow meets the market dictated price and management’s desired profit? 162. Hummingbird Company uses the product cost concept of applying the cost-plus approach to product pricing. The costs and expenses of producing 25,000 units of Product K are as follows: Variable costs: Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Direct materials Direct labor Factory overhead Selling and administrative expenses Total
$2.50 4.25 1.25 0.50 $8.50
Fixed costs: Factory overhead Selling and administrative expenses
$25,000 17,000
Hummingbird desires a profit equal to a 5% rate of return on invested assets of $642,500. a. b. c. d.
Determine the amount of desired profit from the production and sale of Product K. Determine the total manufacturing costs and the cost amount per unit for the production of 25,000 units of Product K. Determine the markup percentage for Product K. Determine the selling price of Product K.
Round the markup percentage to one decimal place, and other intermediate computations and final answer to two decimal places. 163. Mallory Company produces and sells Product X at a total cost of $35 per unit, of which $28 is product cost and $7 is selling and administrative expenses. In addition, the total cost of $35 is made up of $24 variable cost and $11 fixed cost. The desired profit is $8 per unit. Determine the markup percentage on product cost. 164. Goshawks Co. produces an automotive product and incurs total manufacturing costs of $2,600,000 in the production of 80,000 units. The company desires to earn a profit equal to a 12% rate of return on assets of $960,000. Total selling and administrative expenses are $105,000. a. b.
Determine the markup percentage, using the product cost concept. Compute the selling price per unit of the automotive product.
Round the markup percentage to one decimal place, and other intermediate computations and final answer to two decimal places. 165. Sensational Soft Drinks makes three products: iced tea, soda, and lemonade. The following data are available: Sales price per unit Variable cost per unit Contribution margin per unit
Iced Tea $0.90 0.30 $0.60
Soda $0.60 0.15 $0.45
Lemonade $0.50 0.10 $0.40
Sensational is experiencing a bottleneck in one of its processes that affects each product as follows: Bottleneck process hours per unit a. b.
Iced Tea 3
Soda 3
Lemonade 4
Using a theory of constraints (TOC) approach, rank the products in terms of profitability. What price for lemonade would equate its profitability (contribution margin per bottleneck hour) to that of soda?
166. Ptarmigan Company produces two products. Product A has a contribution margin of $20 and requires 4 machine hours. Product B has a contribution margin of $18 and requires 3 machine hours. Determine the most profitable product assuming the machine hours are the constraint. Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 167. The Eastwood Cake Factory sells chocolate cakes, birthday decorated cakes, and specialty cakes. The factory is experiencing a bottleneck and is trying to determine which cake is more profitable. Even though the company may have to limit the orders that it takes, Eastwood is concerned about customer service and satisfaction. Chocolate Cake $20.00 $5.00
Sales price Variable cost per cake Hours needed to bake, frost, and decorate
Birthday Cake
Specialty Cake
$45.00 $12.00
$60.00 $20.00
2.5 hours
2 hours
1 hour
a. Compute the contribution margin per hour per cake. b. Determine which cakes the company should try to sell more of first, second, and then last. 168. Olsen Company produces two products. Product A has a contribution margin of $30 and requires 10 machine hours. Product B has a contribution margin of $24 and requires 4 machine hours. Determine the most profitable product assuming the machine hours are the constraint. 169. Turtle Company has total estimated factory overhead for the year of $1,200,000, divided into four activities: fabrication, $600,000; assembly, $240,000; setup, $200,000; and materials handling, $160,000. Turtle manufactures two products, Boogie Boards and Surf Boards. The activity-base usage quantities for each product by each activity are as follows: Boogie Boards Surf Boards Total
Fabrication
Assembly
Setup
Materials Handling
10,000 dlh
30,000 dlh
60 setups
100 moves
30,000 40,000 dlh
10,000 440 40,000 dlh 500 setups
700 800 moves
Each product is budgeted for 10,000 units of production for the year. Determine (a) the activity rates for each activity and (b) the factory overhead cost per unit for each product using activity-based costing. 170. Canine Company has total estimated factory overhead for the year of $2,400,000, divided into four activities: fabrication, $1,200,000; assembly, $480,000; setup, $400,000; and materials handling, $320,000. Canine manufactures two products, Standard Crates and Deluxe Crates. The activity-base usage quantities for each product by each activity are as follows: Fabrication Standard Deluxe
20,000 dlh 60,000 80,000 dlh
Materials Handling 60,000 dlh 120 setups 200 moves 20,000 880 1,400 80,000 dlh 1,000 setups 1,600 moves
Assembly
Setup
Each product is budgeted for 20,000 units of production for the year. Determine (a) the activity rates for each activity and (b) the factory overhead cost per unit for each product using activitybased costing. 171. Sierra Company produces its product at a total cost of $89 per unit. Of this amount, $14 per unit is selling and administrative costs. The total variable cost is $58 per unit and the desired profit is $28 per unit. Determine the markup percentage using the (a) total cost, (b) product cost, and (c) variable cost concepts. Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 172. Yakking Co. manufactures mobile cellular equipment and develops a price for the product by using the variable cost concept. Yakking incurs variable costs of $1,900,000 in the production of 100,000 units while fixed costs total $50,000. The company employs $4,725,000 of assets and wishes to earn a profit equal to a 10% rate of return on assets. a. b.
Compute a markup percentage based on variable cost. Determine a selling price.
Round the markup percentage to one decimal place, and other intermediate computations and final answer to two decimal places. 173. Jamison Company produces and sells Product X at a total cost of $25 per unit, of which $15 is product cost and $10 is selling and administrative expenses. In addition, the total cost of $25 is made up of $14 variable cost and $11 fixed cost. The desired profit is $5 per unit. Determine the markup percentage using the total cost concept. 174. Using the variable cost concept, determine the selling price per unit for 30,000 units using the following data: variable cost per unit, $15.00; total fixed costs, $90,000; and desired profit, $150,000. Round the markup percentage to one decimal place and markup to nearest dollar. 175. Jay Company uses the total cost concept of applying the cost-plus approach to product pricing. The costs and expenses of producing and selling 38,400 units of Product F are as follows: Variable costs: Direct materials Direct labor Factory overhead Selling and administrative expenses Total Fixed costs: Factory overhead Selling and administrative expenses
$ 4.70 2.50 1.90 2.60 $11.70 $80,000 14,000
Jay desires a profit equal to a 14% rate of return on invested assets of $640,000. a. b. c. d.
Determine the amount of desired profit from the production and sale of Product F. Determine the total costs and the cost per unit for the production and sale of 38,400 units of Product F. Determine the markup percentage for Product F. Determine the selling price of Product F.
176. Moon Company uses the variable cost concept of applying the cost-plus approach to product pricing. The costs and expenses of producing and selling 75,000 units of Product T are as follows: Variable costs: Direct materials Direct labor Factory overhead Selling and administrative expenses Total Fixed costs: Factory overhead Selling and administrative expenses Powered by Cognero
$ 7.00 3.50 1.50 3.00 $15.00 $45,000 20,000 Page 27
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Moon desires a profit equal to an18% rate of return on invested assets of $1,440,000. a. b. c. d.
Determine the amount of desired profit from the production and sale of Product T. Determine the total variable costs for the production and sale of 75,000 units of Product T. Determine the markup percentage for Product T. Determine the unit selling price of Product T.
Round the markup percentage to one decimal place, and other intermediate computations and final answer to two decimal places. 177. Falcon Inc. manufactures Product B, incurring variable costs of $15.00 per unit and fixed costs of $70,000. Falcon desires a profit equal to a 12% rate of return on assets, $785,000 of assets are devoted to producing Product B, and 100,000 units are expected to be produced and sold. a. b.
Compute the markup percentage, using the total cost concept. Compute the selling price of Product B.
Round intermediate computations and final answer to two decimal places.
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Answer Key 1. False 2. True 3. False 4. True 5. False 6. True 7. True 8. False 9. False 10. True 11. True 12. False 13. True 14. True 15. False 16. True 17. True 18. True 19. True 20. True 21. False 22. True 23. False 24. False 25. True Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 26. False 27. True 28. True 29. True 30. False 31. True 32. True 33. True 34. True 35. False 36. True 37. True 38. False 39. False 40. True 41. True 42. True 43. True 44. False 45. True 46. d 47. c 48. c 49. d 50. d Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 51. b 52. c 53. d 54. b 55. b 56. c 57. a 58. c 59. b 60. b 61. a 62. a 63. a 64. b 65. d 66. a 67. b 68. c 69. d 70. a 71. d 72. d 73. a 74. a 75. c 76. b Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 77. b 78. a 79. b 80. c 81. d 82. d 83. a 84. d 85. d 86. b 87. c 88. b 89. c 90. b 91. a 92. d 93. d 94. a 95. c 96. b 97. d 98. a 99. c 100. a 101. d Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 102. a 103. d 104. c 105. b 106. a 107. c 108. d 109. b 110. c 111. d 112. a 113. a 114. d 115. d 116. b 117. a 118. b 119. c 120. b 121. c 122. d 123. a 124. c 125. b 126. a 127. d Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 128. d 129. d 130. e 131. d 132. c 133. b 134. a 135. e 136. a 137. c 138. b 139. d 140. a 141. b 142. e 143. d 144. c 145.
Differential Analysis Sell Building (Alternative 1) or Lease Building (Alternative 2) Differential Sell Building Lease Building Effects (Alternative 1) (Alternative 2) (Alternative 2) Revenues Costs Profit (loss)
$550,000 (27,500) $522,500
$875,000 (85,000) $790,000
$325,000 (57,500) $267,500
As indicated by the differential analysis, the differential profit from the lease alternative is $267,500. 146. a. Morgan should finish the units because the incremental revenue of $325 ($600 – $275) Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing is greater than the incremental cost of $250. b. The $750 in manufacturing costs that have already been incurred is sunk and not relevant. 147.
Differential Analysis Make Component (Alternative 1) or Buy Component (Alternative 2)
Unit costs: Purchase price Variable costs Fixed costs Total unit costs
Make Component (Alternative 1)
Buy Component (Alternative 2)
Differential Effects (Alternative 2)
$ 0 30 15 $45
$40 0 15 $55
$(40) 30 0 $(10)
148. Differential Analysis Continue Division B (Alternative 1) or Discontinue Division B (Alternative 2)
Revenues Costs: Variable Fixed Total costs Profit (loss)
Continue Discontinue Differential Division B Division B Effects (Alternative 1) (Alternative 2) (Alternative 2) $ 360,000 $ 0 $(360,000)
$(328,000) (61,000) $(389,000)
$(61,000)
$ 328,000 0 $ 328,000
$ (29,000)
$(61,000)
$ (32,000)
$ 0 (61,000)
Division B should not be discontinued. 149. Differential Analysis Continue with Old Oven (Alternative 1) or Replace Old Oven (Alternative 2) Continue with Replace Old Differential Old Oven Oven Effects (Alternative 1) (Alternative 2) (Alternative 2) Revenues: Proceeds from sale of old oven Costs: Powered by Cognero
$
0
$
8,500
$
8,500 Page 35
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Purchase price Variable maintenance costs (5 years) Total costs Profit (loss) *$54,000 × 5 years **($54,000 – $23,000) × 5 years
$
0
(270,000)* $(270,000) $(270,000)
$(110,000)
$(110,000)
(155,000)** $(265,000) $(256,500)
115,000 $ 5,000 $ 13,500
150. Differential Analysis Sell Unfinished Desk (Alternative 1) or Process Further into Finished Desk (Alternative 2)
Revenues, per unit Costs, per unit
Process Further Sell Unfinished into Differential Desk Finished Desk Effects (Alternative 1) (Alternative 2) (Alternative 2) $ 65.00 $ 75.00 $10.00 (36.00) (5.95) (41.95)
Profit (loss)
$ 29.00
$ 33.05
$ 4.05
151.
Differential Analysis Sell Equipment (Alternative 1) or Lease Equipment (Alternative 2) Lease Differential Sell Equipment Equipment Effects (Alternative 1) (Alternative 2) (Alternative 2) Revenues Costs Profit (loss) *$7,000 × 5 years **$18,500 × 5% ***$3,000 × 5 years
$18,500 (925)** $17,575
$ 35,000* (15,000)*** $ 20,000
$ 16,500 (14,075) $ 2,425
Finch should accept the lease offer. 152.
Differential Analysis Reject Order (Alternative 1) or Accept Order (Alternative 2) Differential Reject Order Accept Order Effects (Alternative 1) (Alternative 2) (Alternative 2) Revenues Costs: Powered by Cognero
$0
$ 275
$ 275 Page 36
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Variable manufacturing costs Special stitching (also variable) Total costs Profit (loss)
$0 0 $0 $0
$(250) (20) $(270) $ 5
$(250) (20) $(270) $ 5
153. Differential Analysis Continue with Old Machine (Alternative 1) or Replace Old Machine (Alternative 2) Continue with Replace Old Differential Old Machine Machine Effects (Alternative 1) (Alternative 2) (Alternative 2) Revenues: Proceeds from sale of old machine Costs: Purchase price Variable maintenance costs (5 years) Total costs Profit (loss) *$4,000 × 5 years **$1,500 × 5 years
$
0
$ 2,000
$ 2,000
$
0
$(18,000)
$(18,000)
(7,500)** $(25,500) $(23,500)
12,500 $ (5,500) $ (3,500)
(20,000)* $(20,000) $(20,000)
The machine should not be replaced. 154. Differential Analysis Sell Unfinished Decorations (Alternative 1) or Process Further into Finished Decorations (Alternative 2)
Revenues, per unit Costs, per unit Profit (loss)
Process Sell Further into Unfinished Finished Differential Decorations Decorations Effects (Alternative 1) (Alternative 2) (Alternative 2) $ 15.00 $ 25.00 $10.00 (10.00) (9.50) (19.50)* $ 5.00 $ 5.50 $ 0.50
*$10 + $3 + $4 + ($1,500 ÷ 600) Yes, the company should take additional orders. 155. Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Differential Analysis Sell Equipment (Alternative 1) or Lease Equipment (Alternative 2) June 15 Lease Differential Sell Equipment Equipment Effects (Alternative 1) (Alternative 2) (Alternative 2) Revenues Costs Profit (loss)
$230,000 (23,000) $207,000
$290,000 (75,800) $214,200
$ 60,000 (52,800) $ 7,200
The equipment should be leased. 156. Differential Analysis Continue Product J (Alternative 1) or Discontinue Product J (Alternative 2) February 8 Continue Discontinue Product J Product J Differential Effects (Alternative 1) (Alternative 2) (Alternative 1) Revenues $ 260,000 $ 0 $(260,000) Costs: Variable cost of goods sold $(130,550) $ 0 $ 130,550 Fixed cost of goods sold (55,950) (55,950) 0 Variable operating expenses (51,450) 0 51,450 Fixed operating expenses (34,300) (34,300) 0 Total costs $(272,250) $(90,250) $ 182,000 Profit (loss) $ (12,250) $(90,250) $ (78,000) 157. Differential Analysis Make Part Q (Alternative 1) or Buy Part Q (Alternative 2) March 12 Differential Make Part Q Buy Part Q Effects (Alternative 1) (Alternative 2) (Alternative 2) Unit costs: Purchase price Direct materials Direct labor Variable factory overhead Fixed factory overhead Total unit costs
$ 0.00 11.50 4.50 1.12 3.15 $20.27
$19.20 0.00 0.00 0.00 3.15 $22.35
$19.20 11.50 4.50 1.12 0.00 $(2.08)
The company should make the component. 158. Differential revenue from CNA Powered by Cognero
$1,000,000 Page 38
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing Differential variable costs from CNA Differential profit from CNA
700,000 $ 300,000
Keep the CNA Division, since income would decrease by $300,000 if the division were discontinued. 159.
Differential Analysis Reject Order (Alternative 1) or Accept Order (Alternative 2) April 21 Differential Reject Order Accept Order Effects (Alternative 1) (Alternative 2) (Alternative 2) Revenues Costs: Variable manufacturing costs Profit (loss) *$9.90 × 7,500 **$8.25 × 7,500
$0
$ 74,250*
$ 74,250
0 $0
(61,875)** $ 12,375
(61,875) $ 12,375
Alternatively, the analysis could be prepared showing unit costs only. 160. Yes, Piper Rose Boutique should accept the special order, determined as follows: Differential revenue from accepting offer (4,000 × $6.00) Differential variable costs of additional units (4,000 × $4.00) Differential profit from accepting offer
$24,000 16,000 $ 8,000
161. a. $28.00 – $25.00 = $3.00 b. Desired Profit per Unit = ($1,400,000 × 20%) ÷ 50,000 = $5.60 per unit Target Cost = Expected Selling Price − Desired Profit = $28.00 – $5.60 = $22.40 per unit 162. a. Desired Profit = Invested Assets × Desired Rate of Return = $642,500 × 5% = $32,125 b.
Total manufacturing costs: Variable ($8.00 × 25,000 units) Fixed factory overhead Total Manufacturing cost per unit ($225,000 ÷ 25,000)
$200,000 25,000 $225,000 $9.00
c. Markup = Desired Profit + Total Selling and Admin. Expenses Percentage Total Manufacturing Costs = $32,125 + $17,000 + ($0.50 × 25,000 units) $225,000 Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing = $32,125 + $17,000 + $12,500 $225,000 = $ 61,625 = 27.4% $225,000 d. Cost amount per unit Markup ($9.00 × 27.4%) Selling price
$ 9.00 2.47 $11.47
163. Markup Percentage = (Desired Profit + Total Selling and Administrative Expenses) ÷ Total Manufacturing Costs = ($8 + $7) ÷ $28 = 53.6% 164. a. Markup = Desired Profit + Total Selling and Admin. Expenses Percentage Total Manufacturing Costs = ($960,000 × 12%) + $105,000 $2,600,000 = $220,200 $2,600,000 = 8.5% b.
Manufacturing cost amount per unit ($2,600,000 ÷ 80,000 units) Markup ($32.50 × 8.5%) Selling price
$32.50 2.76 $35.26
165. a. Contribution Margin per Unit = CM per Bottleneck Hour Bottleneck Hours per Unit Rank (1)
Iced Tea:
$0.60 = $0.20 CM per bottleneck hour 3
(2)
Soda:
$0.45 = $0.15 CM per bottleneck hour 3
(3)
Lemonade:
$0.40 = $0.10 CM per bottleneck hour 4
b. Contribution Margin Revised Price Variable Cost per Bottleneck Hour of = of – of Lemonade Soda Lemonade (L) Bottleneck Hours per Unit of Lemonade $0.15 Powered by Cognero
=
L – $0.10 Page 40
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing 4 $0.60
=
L – $0.10
$0.60 + $0.10
=
L
$0.70
=
L
166.
Contribution margin per unit Machine hours Contribution margin per bottleneck hour
Product Product A B $20 $18 ÷ 4 ÷ 3 $ 5 $ 6
Product B is the most profitable in using bottleneck resources. 167. a. Chocolate $15.00, Birthday $13.20, Specialty $20.00 b. Specialty, Chocolate, Birthday
Sales price Variable cost per cake Contribution margin per cake Hours needed to bake, frost, and decorate Contribution margin per hour per cake
Chocolate Cake $20.00 5.00
Birthday Cake $45.00 12.00
Specialty Cake $60.00 20.00
$15.00
$33.00
$40.00
÷
÷ 2.5 hrs.
÷
$13.20
$20.00
1 hr.
$15.00
2 hrs.
168.
Contribution margin per unit Machine hours Contribution margin per bottleneck hour
Product Product A B $30 $24 ÷10 ÷4 $3 $6
Product B is the most profitable in using bottleneck resources. 169. a. Fabrication: $600,000 ÷ 40,000 dlh = $15 per dlh Assembly: $240,000 ÷ 40,000 dlh = $6 per dlh Setup: $200,000 ÷ 500 setups = $400 per setup Materials handling: $160,000 ÷ 800 moves = $200 per move b. Boogie Board
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Surf Board
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing ActivityActivityActivity Activity Activity Activity Base Base Cost Activity Rate Rate Cost Usage Usage 10,000 30,000 $15/dlh $150,000 dlh $15/dlh $450,000 Fabrication dlh 30,000 10,000 $6/dlh 180,000 dlh $6/dlh 60,000 Assembly dlh 60 440 Setup setups $400/setup 24,000 setups $400/setup 176,000 Materials 100 700 handling moves $200/move 20,000 moves $200/move 140,000 Total $374,000 $826,000 Budgeted ÷ 10,000 ÷ 10,000 units Factory overhead per unit $37.40 $82.60 170. a. Fabrication: $1,200,000 ÷ 80,000 dlh = $15 per dlh Assembly: $480,000 ÷ 80,000 dlh = $6 per dlh Setup: $400,000 ÷ 1,000 setups = $400 per setup Materials handling: $320,000 ÷ 1,600 moves = $200 per move b. Standard
Activity Fabrication Assembly Setup Materials handling Total Budgeted units Factory overhead per unit
ActivityBase Usage 20,000 dlh 60,000 dlh
Activity Rate
Deluxe ActivityActivity Base Cost Usage
Activity Rate
Activity Cost
$15/dlh $300,000 60,000dlh
$15/dlh $ 900,000
$6/dlh
$6/dlh
120,000
48,000 880 setups $400/setup
352,000
1,400 40,000 moves
280,000
120 setups $400/setup 200 moves $200/move
360,000 20,000dlh
$200/move
$748,000 ÷ 20,000
$1,652,000 ÷ 20,000
$37.40
$82.60
171. a. Total cost concept: Markup Percentage = Desired Profit ÷ Total Cost = $28 ÷ $89 = 31.5% b. Product cost concept: Markup Percentage = (Desired Profit + Total Selling and Administrative Expense) ÷ Total Product (Manufacturing) Costs = ($28 + $14) ÷ ($89 – $14) = $42 ÷ $75 = 56% Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing c. Variable cost concept: Markup Percentage = (Desired Profit + Total Fixed Costs and Expenses) ÷ Total Variable Cost = [$28 + ($89 – $58)] ÷ $58 = ($28 + $31) ÷ $58 = $59 ÷ $58 = 101.7% 172. a.
Markup Percentage = Desired Profit + Total Fixed Costs Total Variable Costs = (10% × $4,725,000) + $50,000 $1,900,000 =
$522,500 $1,900,000
= 27.5% b.
Variable cost per unit ($1,900,000 ÷ 100,000) Markup ($19.00 × 27.5%) Selling price
$19.00 5.23 $24.23
173. Markup Percentage = Desired Profit ÷ Total Cost = $5 ÷ $25 = 20% 174. Markup Percentage = Desired Profit + Total Fixed Costs Total Variable Costs = $150,000 + $90,000 = 53.3% $450,000 Markup per Unit = $15.00 × 53.3% = $8.00 Selling Price = $15.00 + $8.00 = $23.00 175. a. Desired Profit = Desired Rate of Return × Total Assets = 14% × $640,000 = $89,600 b.
c.
Total costs: Variable ($11.70 × 38,400 units) Fixed ($80,000 + $14,000) Total Units to be sold Cost per unit
$449,280 94,000 $543,280 ÷ 38,400 $ 14.15
Markup Percentage = Desired Profit ÷ Total Costs = $89,600 ÷ $543,280 = $16.5%
d. Total cost per unit Markup ($14.15 × 16.5%) Selling price
$14.15 2.33 $16.48
176. a. Desired Profit = Desired Rate of Return × Total Assets = 18% × Powered by Cognero
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Chapter 25 - Differential Analysis, Product Pricing, and Activity-Based Costing $1,440,000 = $259,200 b.
Total variable costs: $15.00 × 75,000 units = $1,125,000
c.
Markup Percentage = (Desired Profit + Total Fixed Costs) ÷ Total Variable Costs = ($259,200 + $45,000 + $20,0000 ÷ $1,125,000 = $324,200 ÷ $1,125,000 = $28.8%
d. Variable cost per unit Markup ($15.00 × 28.8%) Selling price
$15.00 4.32 $19.32
177. a. Markup Percentage = Desired Profit ÷ Total Costs = ($785,000 × 12%) ÷ [($15 × 100,000) + $70,000] = $94,200 ÷ $1,570,000 = 6.00% b.
Total cost per unit Markup ($15.70 × 6.00%) Selling price of Product B
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$15.70 0.94 $16.64
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Chapter 26 - Capital Investment Analysis True / False 1. The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called capital investment analysis. a. True b. False 2. Care must be taken involving capital investment decisions, since normally a long-term commitment of funds is involved and operations could be affected for many years. a. True b. False 3. A survey of chief financial officers of large U.S. companies reported that over 85% use the average rate of return method. a. True b. False 4. Methods that ignore present value in capital investment analysis include the cash payback method. a. True b. False 5. Methods that ignore present value in capital investment analysis include the average rate of return method. a. True b. False 6. The cash payback method of capital investment analysis is one of the methods referred to as a present value method. a. True b. False 7. The average rate of return method of capital investment analysis gives consideration to the present value of future cash flows. a. True b. False 8. The methods of evaluating capital investment proposals can be grouped into two general categories that can be referred to as (1) average rate of return and (2) cash payback methods. a. True b. False 9. Average rate of return equals average investment divided by estimated average annual income. a. True b. False 10. Average rate of return equals estimated average annual income divided by average investment. a. True b. False Powered by Cognero
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Chapter 26 - Capital Investment Analysis 11. The method of analyzing capital investment proposals in which the estimated average annual income is divided by the average investment is the average rate of return method. a. True b. False 12. The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net cash flow. a. True b. False 13. The excess of the cash flowing in from revenues over the cash flowing out for expenses is termed net discounted cash flow. a. True b. False 14. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $300,000 for the 5 years. The expected average rate of return is 30%. a. True b. False 15. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $300,000 for the 5 years. The expected average rate of return is 37.5%. a. True b. False 16. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $200,000 for the 5 years. The expected average rate of return on investment is 50%. a. True b. False 17. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $200,000 for the 5 years. The expected average rate of return on investment is 25%. a. True b. False 18. The expected period of time that will elapse between the date of a capital investment and the complete recovery in cash of the amount invested is called the discount period. a. True b. False 19. The expected period of time that will elapse between the date of a capital investment and the complete recovery in cash of the amount invested is called the cash payback period. a. True b. False 20. If a proposed expenditure of $70,000 for a fixed asset with a 4-year life has an annual expected net cash flow and net income of $32,000 and $12,000, respectively, the cash payback period is 2.5 years. Powered by Cognero
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Chapter 26 - Capital Investment Analysis a. True b. False 21. If a proposed expenditure of $80,000 for a fixed asset with a 4-year life has an annual expected net cash flow and net income of $32,000 and $12,000, respectively, the cash payback period is 4 years. a. True b. False 22. The cash payback method can be used only when net cash inflows are the same for each period. a. True b. False 23. For Years 1–5, a proposed expenditure of $250,000 for a fixed asset with a 5-year life has expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is 3 years. a. True b. False 24. The average rate of return method of analyzing capital budgeting decisions measures the average rate of return from using the asset over its entire life. a. True b. False 25. The average rate of return is a measure of profitability computed by dividing the average annual cash inflows from an asset by the average amount invested in the asset. a. True b. False 26. The time expected to pass before the net cash flows from an investment would return its initial cost is called the amortization period. a. True b. False 27. A company is considering purchasing a machine for $21,000. The machine will generate income from operations of $2,000; annual net cash flows from the machine will be $3,500. The payback period for the new machine is 10.5 years. a. True b. False 28. A company is considering purchasing a machine for $21,000. The machine will generate income from operations of $2,000; annual net cash flows from the machine will be $3,500. The payback period for the new machine is 6 years. a. True b. False 29. A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual net cash inflows from the investment are $36,000 (Year 1), $30,000 (Year 2), $18,000 (Year 3), $12,000 (Year 4), and $6,000 (Year 5). The average income from operations over the 5-year life is $20,400. The payback period is 3.5 years. a. True Powered by Cognero
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Chapter 26 - Capital Investment Analysis b. False 30. For Years 1–5, a proposed expenditure of $500,000 for a fixed asset with a 5-year life has expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is 5 years. a. True b. False 31. A company is planning to purchase a machine that will cost $24,000, have a 6-year life, and have no salvage value. The company expects to sell the machine’s output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate net cash flows per year of $6,000. The average rate of return for the machine is 16.7%. a. True b. False 32. A company is planning to purchase a machine that will cost $24,000, have a 6-year life, and have no salvage value. The company expects to sell the machine’s output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate net cash flows per year of $6,000. The payback period for the machine is 12 years. a. True b. False 33. A company is considering the purchase of a new machine for $48,000. Management expects that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. All revenues and expenses except depreciation are on a cash basis. The payback period for the machine is 12 years. a. True b. False 34. A company is planning to purchase a machine that will cost $24,000, have a 6-year life, and have no salvage value. The company expects to sell the machine’s output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate net cash flows per year of $6,000. The payback period for the machine is 4 years. a. True b. False 35. A company is considering the purchase of a new machine for $48,000. Management expects that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. All revenues and expenses except depreciation are on a cash basis. The payback period for the machine is 6 years. a. True b. False 36. A company is planning to purchase a machine that will cost $24,000, have a 6-year life, and have no salvage value. The company expects to sell the machine’s output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate net cash flows per year of $6,000. The average rate of return for the machine is 50%. a. True Powered by Cognero
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Chapter 26 - Capital Investment Analysis b. False 37. The methods of evaluating capital investment proposals can be grouped into two general categories that can be referred to as (1) methods that ignore present value and (2) present value methods. a. True b. False 38. Methods that ignore present value in capital investment analysis include the net present value method. a. True b. False 39. Methods that ignore present value in capital investment analysis include the internal rate of return method. a. True b. False 40. The computations involved in the net present value method of analyzing capital investment proposals are less involved than those for the average rate of return method. a. True b. False 41. The computations involved in the net present value method of analyzing capital investment proposals are more involved than those for the average rate of return method. a. True b. False 42. In net present value analysis for a proposed capital investment, the expected future net cash flows are averaged and then reduced to their present values. a. True b. False 43. In net present value analysis for a proposed capital investment, the expected future net cash flows are reduced to their present values. a. True b. False 44. If in evaluating a proposal by use of the net present value method there is a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be rejected. a. True b. False 45. If in evaluating a proposal by use of the net present value method there is a deficiency of the present value of future cash inflows over the amount to be invested, the proposal should be accepted. a. True b. False 46. If in evaluating a proposal by use of the net present value method there is an excess of the present value of future cash inflows over the amount to be invested, the rate of return on the proposal exceeds the rate used in the analysis. Powered by Cognero
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Chapter 26 - Capital Investment Analysis a. True b. False 47. If in evaluating a proposal by use of the net present value method there is an excess of the present value of future cash inflows over the amount to be invested, the rate of return on the proposal is less than the rate used in the analysis. a. True b. False 48. A present value index can be used to rank competing capital investment proposals when the net present value method is used. a. True b. False 49. The internal rate of return method of analyzing capital investment proposals uses present value concepts to compute a rate of return expected from the proposals. a. True b. False 50. Net present value and the payback period are examples of discounted cash flow methods used in capital budgeting decisions. a. True b. False 51. In computing the net present value of an investment in equipment, the required investment and its residual value should be subtracted from the present value of all future cash inflows. a. True b. False 52. In computing the present value of an investment in equipment, the present value of the residual value should be added to the cash inflows. a. True b. False 53. A series of equal cash flows at fixed intervals is termed an annuity. a. True b. False 54. A qualitative characteristic that may impact capital investment analysis is the impact of investment proposals on product quality. a. True b. False 55. A qualitative characteristic that may impact capital investment analysis is manufacturing flexibility. a. True b. False
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Chapter 26 - Capital Investment Analysis 56. A qualitative characteristic that may impact capital investment analysis is employee morale. a. True b. False 57. A qualitative characteristic that may impact capital investment analysis is manufacturing productivity. a. True b. False 58. A qualitative characteristic that may impact capital investment analysis is market opportunities. a. True b. False 59. The process by which management allocates available investment funds among competing capital investment proposals is termed present value analysis. a. True b. False 60. The process by which management allocates available investment funds among competing capital investment proposals is termed capital rationing. a. True b. False Multiple Choice 61. The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called a. absorption cost analysis b. variable cost analysis c. capital investment analysis d. cost-volume-profit analysis 62. Decisions to install new equipment, replace old equipment, and purchase or construct a new building are examples of a. sales mix analysis b. variable cost analysis c. capital investment analysis d. variable cost analysis 63. The methods of evaluating capital investment proposals can be separated into two general groups—present value methods and a. past value methods b. straight-line methods c. reducing value methods d. methods that ignore present value 64. Which of the following are two methods of analyzing capital investment proposals that both ignore present value? a. internal rate of return and average rate of return Powered by Cognero
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Chapter 26 - Capital Investment Analysis b. net present value and average rate of return c. internal rate of return and net present value d. average rate of return and cash payback method 65. The method of analyzing capital investment proposals that divides the estimated average annual income by the average investment is the a. cash payback method b. net present value method c. internal rate of return method d. average rate of return method 66. The primary advantages of the average rate of return method are its ease of computation and the fact that a. it is especially useful to managers whose primary concern is liquidity b. there is less possibility of loss from changes in economic conditions and obsolescence when the commitment is short term c. it emphasizes the amount of income earned over the life of the proposal d. rankings of proposals are necessary 67. The expected average rate of return for a proposed investment of $800,000 in a fixed asset with a useful life of 4 years, straight-line depreciation, no residual value, and an expected total net income of $360,000 for the 4 years is a. 45% b. 22.5% c. 11.3% d. 5.5% 68. The amount of the average investment for a proposed investment of $120,000 in a fixed asset with a useful life of 4 years, straight-line depreciation, no residual value, and an expected total net income of $21,600 for the 4 years is a. $30,000 b. $21,600 c. $5,400 d. $60,000 69. The amount of the estimated average income for a proposed investment of $90,000 in a fixed asset, giving effect to depreciation (straight-line method), with a useful life of 4 years, no residual value, and an expected total income yield of $25,300, is a. $12,650 b. $25,300 c. $6,325 d. $45,000 70. An anticipated purchase of equipment for $490,000 with a useful life of 8 years and no residual value is expected to yield the following annual net incomes and net cash flows: Year 1 2 Powered by Cognero
Net Income $60,000 50,000
Net Cash Flow $110,000 100,000 Page 8
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Chapter 26 - Capital Investment Analysis 3 4 5 6 7 8
50,000 40,000 40,000 40,000 40,000 40,000
100,000 90,000 90,000 90,000 90,000 90,000
What is the cash payback period? a. 5 years b. 4 years c. 6 years d. 3 years 71. Hayden Company is considering the acquisition of a machine that costs $675,000. The machine is expected to have a useful life of 6 years, a negligible residual value, an annual net cash flow of $150,000, and annual income from operations of $87,500. What is the estimated cash payback period for the machine? a. 3.5 years b. 4 years c. 4.5 years d. 5 years 72. The expected average rate of return for a proposed investment of $6,000,000 in a fixed asset, using straight-line depreciation, with a useful life of 20 years, no residual value, and an expected total income of $12,000,000 over the 20 years is a. 20% b. 10% c. 40% d. 5% Use this information for Nebraska Corporation to answer the questions that follow. The management of Nebraska Corporation is considering the purchase of a new machine costing $490,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through 5 are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability: Year 1 2 3 4 5
Income from Operations $100,000 40,000 40,000 10,000 10,000
Net Cash Flow $180,000 120,000 100,000 90,000 120,000
73. The cash payback period for this investment is a. 5 years b. 4 years c. 2 years Powered by Cognero
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Chapter 26 - Capital Investment Analysis d. 3 years 74. The average rate of return for this investment is a. 18% b. 16% c. 58% d. 10% 75. The expected average rate of return for a proposed investment of $650,000 in a fixed asset with a useful life of 4 years, straight-line depreciation, no residual value, and an expected total net income of $240,000 for the 4 years, is a. 13.9% b. 36.9% c. 18.5% d. 9.25% 76. Which of the following is not an advantage of the average rate of return method? a. easy to use b. takes into consideration the time value of money c. includes the amount of income earned over the entire life of the proposal d. emphasizes accounting income 77. Which of the following is an advantage of the cash payback method? a. easy to use b. takes into consideration the time value of money c. includes the cash flow over the entire life of the proposal d. emphasizes accounting income 78. An anticipated purchase of equipment for $520,000, with a useful life of 8 years and no residual value, is expected to yield the following annual net income and net cash flow: Year 1 2 3 4 5 6 7 8
Net Income $60,000 50,000 50,000 40,000 40,000 40,000 40,000 40,000
Net Cash Flow $120,000 110,000 110,000 100,000 80,000 80,000 60,000 60,000
What is the cash payback period? a. 5 years b. 4 years c. 6 years d. 3 years 79. Heidi Company is considering the acquisition of a machine that costs $420,000. The machine is expected to have a Powered by Cognero
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Chapter 26 - Capital Investment Analysis useful life of 6 years, a negligible residual value, an annual net cash flow of $120,000, and annual income from operations of $83,721. What is the estimated cash payback period for the machine? a. 3.5 years b. 5 years c. 5.1 years d. 4 years 80. The expected average rate of return for a proposed investment of $4,800,000 in a fixed asset, using straight-line depreciation, with a useful life of 20 years, no residual value, and an expected total income of $10,560,000 over the 20 years is a. 24% b. 22% c. 45% d. 10% 81. The management of Zesty Corporation is considering the purchase of a new machine costing $400,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through 5 are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this situation: Income from Operations $100,000 40,000 20,000 10,000 10,000
Year 1 2 3 4 5
Net Cash Flow $180,000 120,000 100,000 90,000 90,000
The cash payback period for this investment is a. 5 years b. 4 years c. 2 years d. 3 years 82. The management of Indiana Corporation is considering the purchase of a new machine costing $400,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through 5 are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this investment: Year 1 2 3 4 5
Income from Operations $100,000 60,000 30,000 10,000 10,000
Net Cash Flow $180,000 120,000 100,000 90,000 90,000
The average rate of return for this investment is a. 18% Powered by Cognero
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Chapter 26 - Capital Investment Analysis b. 21% c. 53% d. 10% 83. The management of Charlton Corporation is considering the purchase of a new machine costing $380,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment: Year 1 2 3 4 5
Income from Operations $20,000 20,000 20,000 20,000 20,000
Net Cash Flow $95,000 95,000 95,000 95,000 95,000
The cash payback period for this investment is a. 4 years b. 5 years c. 19 years d. 3.3 years 84. Which of the following is true of the cash payback period? a. the longer the payback, the longer the estimated life of the asset b. the longer the payback, the sooner the cash spent on the investment is recovered c. the shorter the payback, the less likely the possibility of obsolescence d. All of these choices 85. The production department is proposing the purchase of an automatic insertion machine. It has identified three machines and has asked the accountant to analyze them to determine the best cash payback. Which machine has the best payback period? Machine A $ 40,000 300,000
Machine B $ 50,000 250,000
Annual cash flow Initial cost a. Machine A b. Machine C c. Machine B d. They all three have the same cash payback period.
Machine C $ 75,000 500,000
86. The production department is proposing the purchase of an automatic insertion machine. It has identified three machines and has asked the accountant to analyze them to determine the best average rate of return. Which machine has the best average rate of return? Estimated average annual income Average investment a. Machine B Powered by Cognero
Machine A $ 40,000 300,000
Machine B $ 50,000 250,000
Machine C $ 75,000 500,000 Page 12
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Chapter 26 - Capital Investment Analysis b. Machine C c. Machines A and B d. Machine A 87. Which of the following is a method of analyzing capital investment proposals that ignores present value? a. internal rate of return b. net present value c. discounted cash flow d. average rate of return 88. Which of the following are present value methods of analyzing capital investment proposals? a. internal rate of return and average rate of return b. average rate of return and net present value c. net present value and internal rate of return d. net present value and cash payback 89. Which method of evaluating capital investment proposals uses the concept of present value to compute a rate of return? a. average rate of return b. accounting rate of return c. cash payback d. internal rate of return 90. Which of the following is a present value method of analyzing capital investment proposals? a. average rate of return b. cash payback c. accounting rate of return d. net present value Use this information for River Corporation to answer the questions that follow. The management of River Corporation is considering the purchase of a new machine costing $380,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment: Year 1 2 3 4 5
Income from Operations $20,000 20,000 20,000 20,000 20,000
Net Cash Flow $95,000 95,000 95,000 95,000 95,000
91. The cash payback period for this investment is a. 4 years b. 5 years Powered by Cognero
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Chapter 26 - Capital Investment Analysis c. 20 years d. 3 years 92. The average rate of return for this investment is a. 5% b. 10.5% c. 25% d. 15% 93. The net present value for this investment is a. $20,140 b. $(20,140) c. $19,875 d. $(19,875) Use this information for Wyoming Corporation to answer the questions that follow. The management of Wyoming Corporation is considering the purchase of a new machine costing $375,000. The company's desired rate of return is 6%. The present value factor for an annuity of $1 at interest of 6% for 5 years is 4.212. In addition to the foregoing information, use the following data in determining the acceptability of this investment: Year 1 2 3 4 5
Income from Operations $18,750 18,750 18,750 18,750 18,750
Net Cash Flow $93,750 93,750 93,750 93,750 93,750
94. The average rate of return for this investment is a. 5% b. 10% c. 25% d. 15% 95. The cash payback period for this investment is a. 4 years b. 5 years c. 20 years d. 3 years 96. The present value index for this investment is a. 1.00 b. 0.95 c. 1.25 d. 1.05 Powered by Cognero
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Chapter 26 - Capital Investment Analysis 97. The net present value for this investment is a. $(118,145) b. $118,145 c. $19,875 d. $(19,875) 98. Which method of evaluating capital investment proposals uses present value concepts to compute the rate of return from the net cash flows? a. internal rate of return method b. cash payback c. net present value method d. average rate of return method 99. When several alternative investment proposals of the same amount are being considered, the one with the largest net present value is the most desirable. If the alternative proposals involve different amounts of investment, it is useful to prepare a relative ranking of the proposals by using a(n) a. average rate of return index b. consumer price index c. present value index d. price-level index 100. A series of equal cash flows at fixed intervals is termed a(n) a. present value index b. price-level index c. net cash flow d. annuity 101. Using the following partial table of present value of $1 at compound interest, the present value of $15,000 to be received 3 years hence with earnings at the rate of 6% a year is Year 1 2 3 4 a. $12,600 b. $11,880 c. $13,350 d. $11,265
6% 0.943 0.890 0.840 0.792
10% 0.909 0.826 0.751 0.683
12% 0.893 0.797 0.712 0.636
102. Which of the following can be used to place capital investment proposals involving different amounts of investment on a comparable basis for purposes of net present value analysis? a. price-level index b. future value index c. rate of investment index Powered by Cognero
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Chapter 26 - Capital Investment Analysis d. present value index 103. The rate of earnings is 6% and the cash to be received in 4 years is $20,000. The present value amount, using the following partial table of present value of $1 at compound interest, is Year 1 2 3 4
6% 0.943 0.890 0.840 0.792
10% 0.909 0.826 0.751 0.683
12% 0.893 0.797 0.712 0.636
a. $13,660 b. $12,720 c. $15,840 d. $16,800 104. The present value index is computed using which of the following formulas? a. Amount to Be Invested ÷ Average Rate of Return b. Total Present Value of Net Cash Flow ÷ Amount to Be Invested c. Total Present Value of Net Cash Flow ÷ Average Rate of Return d. Amount to Be Invested ÷ Total Present Value of Net Cash Flow 105. An analysis of a proposal by the net present value method indicated that the present value of future cash inflows exceeded the amount to be invested. Which of the following statements best describes the results of this analysis? a. The proposal is desirable, and the rate of return expected from the proposal exceeds the minimum rate used for the analysis. b. The proposal is desirable, and the rate of return expected from the proposal is less than the minimum rate used for the analysis. c. The proposal is undesirable, and the rate of return expected from the proposal is less than the minimum rate used for the analysis. d. The proposal is undesirable, and the rate of return expected from the proposal exceeds the minimum rate used for the analysis. 106. The formula for computing the present value factor for an annuity of $1 is a. Amount to Be Invested ÷ Annual Average Net Income b. Annual Net Cash Flow ÷ Amount to Be Invested c. Annual Average Net Income ÷ Amount to Be Invested d. Amount to Be Invested ÷ Equal Annual Net Cash Flows 107. Which method for evaluating capital investment proposals reduces the expected future net cash flows originating from the proposals to their present values and computes a net present value? a. net present value b. average rate of return c. internal rate of return d. cash payback 108. The management of Arkansas Corporation is considering the purchase of a new machine costing $490,000. The Powered by Cognero
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Chapter 26 - Capital Investment Analysis company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through 5 are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this investment: Income from Operations $100,000 40,000 40,000 10,000 10,000
Year 1 2 3 4 5
Net Cash Flow $180,000 120,000 100,000 90,000 120,000
The net present value for this investment is a. $36,400 b. $55,200 c. $(16,170) d. $(126,800) 109. The management of California Corporation is considering the purchase of a new machine costing $400,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through 5 are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this investment: Year 1 2 3 4 5
Income from Operations $100,000 40,000 20,000 10,000 10,000
Net Cash Flow $180,000 120,000 100,000 90,000 90,000
The present value index for this investment is a. 0.88 b. 1.45 c. 1.14 d. 0.70 110. Motel Corporation is analyzing a capital expenditure that will involve a cash outlay of $208,240. Estimated cash flows are expected to be $40,000 annually for 7 years. The present value factors for an annuity of $1 for 7 years at interest of 6%, 8%, 10%, and 12% are 5.582, 5.206, 4.868, and 4.564, respectively. The internal rate of return for this investment is a. 10% b. 6% c. 12% d. 8% 111. By converting dollars to be received in the future into current dollars, the present value methods take into consideration that money a. has an international rate of exchange Powered by Cognero
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Chapter 26 - Capital Investment Analysis b. is the language of business c. is the measure of assets, liabilities, and stockholders' equity on financial statements d. has a time value Use these present value tables to answer the questions that follow. Here is a table for the present value of $1 at compound interest. Year 1 2 3 4 5
6% 0.943 0.890 0.840 0.792 0.747
10% 0.909 0.826 0.751 0.683 0.621
12% 0.893 0.797 0.712 0.636 0.567
Here is a table for the present value of an annuity of $1 at compound interest. Year 1 2 3 4 5
6% 0.943 1.833 2.673 3.465 4.212
10% 0.909 1.736 2.487 3.170 3.791
12% 0.893 1.690 2.402 3.037 3.605
112. Using the provided present value tables, what would be the present value of $25,000 (rounded to the nearest dollar) to be received 4 years from today, assuming an earnings rate of 10%? a. $19,800 b. $17,075 c. $79,250 d. $15,525 113. Using the provided present value tables, what would be the present value of $30,000 to be received 3 years from today, assuming an earnings rate of 6%? a. $25,200 b. $26,700 c. $23,760 d. $80,190 114. Using the provided present value tables, what is the present value of $3,000 (rounded to the nearest dollar) to be received at the end of each of the next 4 years, assuming an earnings rate of 12%? a. $10,815 b. $7,206 c. $9,111 d. $1,908 115. Using the provided present value tables, if an investment is made now for $23,500 that will generate a cash inflow of $8,000 a year for the next 4 years, what would be the net present value of the investment, assuming an earnings rate of 10%? Powered by Cognero
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Chapter 26 - Capital Investment Analysis a. $23,500 b. $16,050 c. $25,360 d. $1,860 116. Using the provided present value tables, what would be the internal rate of return of an investment of $227,460 that would generate an annual cash inflow of $60,000 for the next 5 years? a. 6% b. 10% c. 12% d. cannot be determined from the data given 117. Using the provided present value tables, what would be the internal rate of return of an investment of $210,600 that would generate an annual cash inflow of $50,000 for the next 5 years? a. 6% b. 10% c. 12% d. 14% 118. Tennessee Corporation is analyzing a capital expenditure that will involve a cash outlay of $109,332. Estimated cash flows are expected to be $36,000 annually for 4 years. The present value factors for an annuity of $1 for 4 years at interest of 10%, 12%, 14%, and 15% are 3.170, 3.037, 2.914, and 2.855, respectively. The internal rate of return for this investment is a. 9% b. 10% c. 12% d. 3% 119. Using the following partial table for the present value of $1 at compound interest, determine the present value of $50,000 to be received 3 years hence with earnings at the rate of 12% a year: Year 1 2 3 4
6% 0.943 0.890 0.840 0.792
10% 0.909 0.826 0.751 0.683
12% 0.893 0.797 0.712 0.636
a. $37,550 b. $31,800 c. $35,600 d. $39,850 120. The rate of earnings is 12% and the cash to be received in 2 years is $10,000. Determine the present value amount, using the following partial table for the present value of $1 at compound interest: Year 1 Powered by Cognero
6% 0.943
10% 0.909
12% 0.893 Page 19
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Chapter 26 - Capital Investment Analysis 2 3 4
0.890 0.840 0.792
0.826 0.751 0.683
0.797 0.712 0.636
a. $8,930 b. $7,120 c. $7,970 d. $8,260 121. The management of Idaho Corporation is considering the purchase of a new machine costing $430,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through 5 are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this investment: Year 1 2 3 4 5
Income from Operations $100,000 40,000 20,000 10,000 10,000
Net Cash Flow $180,000 120,000 100,000 90,000 90,000
The net present value for this investment is a. $16,400 b. $25,200 c. $(99,600) d. $(126,800) 122. The management of Dakota Corporation is considering the purchase of a new machine costing $420,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for Years 1 through 5 are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability of this investment: Year 1 2 3 4 5
Income from Operations $100,000 40,000 20,000 10,000 10,000
Net Cash Flow $180,000 120,000 100,000 90,000 90,000
The present value index for this investment is a. 1.08 b. 1.45 c. 1.14 d. 0.70 Use these present value tables to answer the questions that follow. Here is a table for the present value of $1 at compound interest. Powered by Cognero
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Chapter 26 - Capital Investment Analysis Year 1 2 3 4 5
6% 0.943 0.890 0.840 0.792 0.747
10% 0.909 0.826 0.751 0.683 0.621
12% 0.893 0.797 0.712 0.636 0.567
Here is a table for the present value of an annuity of $1 at compound interest. Year 1 2 3 4 5
6% 0.943 1.833 2.673 3.465 4.212
10% 0.909 1.736 2.487 3.170 3.791
12% 0.893 1.690 2.402 3.037 3.605
123. Using the provided present value tables, what would be the present value of $15,000 to be received at the end of each of the next 2 years, assuming an earnings rate of 6%? a. $27,495 b. $26,040 c. $30,000 d. $25,350 124. Using the provided present value tables, what would be the present value of $8,000 to be received 1 year from today, assuming an earnings rate of 12%? a. $7,544 b. $7,120 c. $7,272 d. $7,144 125. Using the provided present value tables, what is the present value of $6,000 to be received at the end of each of the next 4 years, assuming an earnings rate of 10%? a. $20,790 b. $19,020 c. $14,412 d. $25,272 126. Using the provided present value tables, if an investment is made now for $20,000 that will generate a cash inflow of $7,000 a year for the next 4 years, what would be the present value of the investment cash inflows, assuming an earnings rate of 12%? a. $20,352 b. $3,969 c. $22,190 d. $21,259 127. The production department is proposing the purchase of an automatic insertion machine. It has identified three machines and has asked the accountant to analyze them to determine which of the proposals (if any) meets or exceeds the Powered by Cognero
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Chapter 26 - Capital Investment Analysis company’s policy of a minimum desired rate of return of 10% using the net present value method. Each of the assets has an estimated useful life of 10 years. The accountant has identified the following data: Machine A
Machine B
Machine C
$305,000 300,000
$295,000 300,000
$300,000 300,000
Present value of future cash flows computed using 10% rate of return Amount of initial investment Which of the investments are acceptable? a. Machines A and C b. Machines B and C c. Machine B only d. Machine A only
128. The production department is proposing the purchase of an automatic insertion machine. It has identified three machines, each with an estimated life of 10 years. Which machine offers the best internal rate of return? Annual net cash flows Average investment
Machine A $ 50,000 250,000
Machine B $ 40,000 300,000
Machine C $ 75,000 500,000
a. Machine B only b. Machine C only c. Machines A and B d. Machine A only 129. T-Bone Company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $150,000. The present value of the future cash flows is $141,000. Should the company invest in this project? a. Yes, because net present value is $9,000. b. Yes, because net present value is $(9,000). c. No, because net present value is $(9,000). d. No, because net present value is $(9,000). 130. Brunette Company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $180,000. The present value of the future cash flows generated by the project is $163,000. Should the company invest in this project? a. Yes, because the rate of return on the project exceeds the desired rate of return used to compute the present value of the future cash flows. b. No, because the rate of return on the project is less than the desired rate of return used to compute the present value of the future cash flows. c. No, because net present value is $17,000. d. Yes, because the rate of return on the project is equal to the desired rate of return used to compute the present value of the future cash flows. 131. A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $210,000. The present value of the future cash flows is $225,000. The company’s desired rate of return used in the present Powered by Cognero
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Chapter 26 - Capital Investment Analysis value computations was 12%. Which of the following statements is true? a. The project should not be accepted because the net present value is negative. b. The internal rate of return on the project is less than 12%. c. The internal rate of return on the project is more than 12%. d. The internal rate of return on the project is equal to 12%. 132. A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $100,000. The present value of the future cash flows at the company’s desired rate of return is $105,000. The IRR on the project is 12%. Which of the following statements is true? a. The project should not be accepted because the net present value is negative. b. The desired rate of return used to compute the present value of the future cash flows is less than 12%. c. The desired rate of return used to compute the present value of the future cash flows is more than 12%. d. The desired rate of return used to compute the present value of the future cash flows is equal to 12%. 133. A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $100,000. The present value of the future cash flows at the company’s desired rate of return is $100,000. The IRR on the project is 12%. Which of the following statements is true? a. The project should not be accepted because the net present value is negative. b. The desired rate of return used to compute the present value of the future cash flows is less than 12%. c. The desired rate of return used to compute the present value of the future cash flows is more than 12%. d. The desired rate of return used to compute the present value of the future cash flows is equal to 12%. 134. All of the following qualitative considerations may impact capital investment analysis except a. manufacturing productivity b. manufacturing sunk cost c. manufacturing flexibility d. market opportunities 135. All of the following qualitative considerations may impact capital investment analysis except a. time value of money b. employee morale c. the impact on product quality d. manufacturing flexibility 136. Assume in analyzing alternative proposals that Proposal F has a useful life of 6 years and Proposal J has a useful life of 9 years. What is one widely used method to make the net present values of the proposals comparable? a. Ignore the fact that Proposal F has a useful life of 6 years and treat it as if it has a useful life of 9 years. b. Adjust the life of Proposal J to a time period that is equal to that of Proposal F by estimating a residual value at the end of Year 6. c. Ignore the useful lives of 6 and 9 years and find an average (7 1/2 years). d. Ignore the useful lives of 6 and 9 years and compute the average rate of return. 137. Which of the following provisions of the Internal Revenue Code can be used to reduce the amount of the income tax expense arising from capital investment projects? a. deductions for individuals Powered by Cognero
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Chapter 26 - Capital Investment Analysis b. depreciation deduction c. minimum tax provision d. charitable contributions 138. Which of the following is not considered a complicating factor in capital investment decisions? a. income tax b. lease versus purchasing options c. equal proposal lives d. qualitative factors 139. Periods in time that experience increasing price levels are known as periods of a. inflation b. recession c. depression d. deflation 140. Which of the following would not be considered a good managerial tool in making a decision for determining a capital investment? a. evaluating further assets that are dissimilar in nature or have different useful lives b. using only quantitative measures to evaluate asset purchases c. analyzing lease versus purchase option d. considering income tax ramifications 141. All of the following are factors that may complicate capital investment analysis except a. possible leasing alternatives b. changes in price levels c. sunk costs d. federal income tax ramifications 142. The process by which management allocates available investment funds among competing investment proposals is called a. investment capital b. investment rationing c. cost-volume-profit analysis d. capital rationing 143. In capital rationing, alternative proposals are initially screened by establishing minimum standards, using the a. cash payback and average rate of return methods b. average rate of return and net present value methods c. net present value and cash payback methods d. internal rate of return and net present value methods 144. In capital rationing, alternative proposals that survive initial and secondary screening are normally evaluated in terms of a. present value Powered by Cognero
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Chapter 26 - Capital Investment Analysis b. qualitative factors c. maximum cost d. net cash flow Matching Match each of the following capital investment evaluation methods with the category (a or b) to which it belongs. a. Method that does not use present value b. Method that uses present value 145. Cash payback method 146. Internal rate of return method 147. Average rate of return method 148. Net present value method Match each of the following descriptions with the term (a–e) it best describes. a. Capital investment analysis b. Time value of money concept c. Net present value method d. Average rate of return e. Cash payback period 149. Recognizes that a dollar today is worth more than a dollar tomorrow 150. Often referred to as the discounted cash flow method 151. Also referred to as capital budgeting 152. Average annual income as a percentage of average investment 153. Can be determined by initial cost divided by annual net cash inflow of an investment Match each of the following definitions with the term (a–f) it best defines. a. Capital rationing b. Annuity c. Capital investment analysis d. Internal rate of return method e. Payback period f. Accounting rate of return 154. A measure of the average income as a percent of the average investment 155. The process by which management allocates funds among various capital investment proposals 156. A stream of equal cash flow amounts Powered by Cognero
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Chapter 26 - Capital Investment Analysis 157. A formal means of analyzing long-range investment decisions 158. Uses present value concepts to compute the rate of return on an investment from a capital investment proposal based on its expected net cash flows 159. The length of time it will take to recover through cash inflows the dollars of a capital outlay Subjective Short Answer 160. What is capital investment analysis? Why are capital investment analysis decisions often difficult and risky? 161. Determine the average rate of return for a project that is estimated to yield total income of $600,000 over 4 years, cost $840,000, and has an $80,000 residual value. Round the answer to one decimal place. 162. Proposals L and K each cost $600,000, have 6-year lives, and have expected total cash flows of $720,000. Proposal L is expected to provide equal annual net cash flows of $170,000, while the net cash flows for Proposal K are as follows: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
$250,000 200,000 100,000 50,000 100,000 20,000 $720,000
Determine the cash payback period for each proposal. Round answers to two decimal places. 163. Jimmy Co. is considering a 12-year project that is estimated to cost $1,050,000 and has no residual value. Jimmy Co. seeks to earn an average rate of return of 18% on all capital projects. Determine the necessary average annual income (using straight-line depreciation) that must be achieved on this project for it to be acceptable to Jimmy Co. 164. Determine the average rate of return for a project that is estimated to yield total income of $250,000 over 4 years, cost $480,000, and has a $20,000 residual value. 165. An 8-year project is estimated to cost $400,000 and have no residual value. If the straight-line depreciation method is used and the average rate of return is 5%, determine the estimated annual net income. 166. Dickerson Co. is evaluating a project requiring a capital expenditure of $810,000. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows: Year 1 2 3 4
Net Income $ 75,000 100,000 109,000 36,000 $320,000
Net Cash Flow $285,000 290,000 190,000 125,000 $890,000
The company's minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for Years 1 through 4 is 0.893, 0.797, 0.712, and 0.636, respectively. Determine the average rate of return on the investment. Powered by Cognero
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Chapter 26 - Capital Investment Analysis 167. Proposals M and N each cost $550,000, have 6-year lives, and have expected total cash flows of $750,000. Proposal M is expected to provide equal annual net cash flows of $125,000, while the net cash flows for Proposal N are as follows: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
$250,000 200,000 150,000 75,000 50,000 25,000
Determine the cash payback period for each proposal. 168. A 6-year project is estimated to cost $350,000 and have no residual value. If the straight-line depreciation method is used and the average rate of return is 12%, determine the estimated average annual income. 169. A project has estimated annual net cash flows of $80,000. It is estimated to cost $600,000. Determine the cash payback period. 170. Tipper Co. is considering a 10-year project that is estimated to cost $700,000 and has no residual value. Tipper seeks to earn an average rate of return of 15% on all capital projects. Determine the necessary average annual income (using straight-line depreciation) that must be achieved on this project for it to be acceptable to Tipper Co. 171. Proposals A and B each cost $600,000 and have 5-year lives. Proposal A is expected to provide equal annual net cash flows of $159,000, while the net cash flows for Proposal B are as follows: Year 1 Year 2 Year 3 Year 4 Year 5
$150,000 140,000 110,000 150,000 50,000 $600,000
Determine the cash payback period for each proposal. Round answers to two decimal places. 172. A project has estimated annual net cash flows of $60,000. It is estimated to cost $240,000. Determine the cash payback period. 173. Identify four capital investment evaluation methods discussed in the chapter and discuss the strengths and weaknesses of each method. 174. Vanessa Company is evaluating a project requiring a capital expenditure of $480,000. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows: Year 1 2 3 4
Net Income $ 90,000 80,000 40,000 30,000 $240,000
Net Cash Flow $210,000 200,000 160,000 150,000 $720,000
The company's minimum desired rate of return for net present value analysis is 15%. The present value of $1 at compound interest of 15% for Years 1 through 4 is 0.870, 0.756, 0.658, and 0.572, respectively. Powered by Cognero
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Chapter 26 - Capital Investment Analysis Determine (a) the average rate of return on investment, using straight-line depreciation, and (b) the net present value. 175. BAM Co. is evaluating a project requiring a capital expenditure of $806,250. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows: Year 1 2 3 4
Net Income $ 75,000 102,000 109,500 36,000 $322,500
Net Cash Flow $285,000 290,000 190,000 125,000 $890,000
The company's minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for Years 1 through 4 is 0.893, 0.797, 0.712, and 0.636, respectively. Determine (a) the average rate of return on investment, including the effect of depreciation on the investment, and (b) the net present value. 176. A project has estimated annual cash flows of $95,000 for 4 years and is estimated to cost $260,000. Assume a minimum acceptable rate of return of 10%. Using the following tables determine the (a) net present value of the project and (b) the present value index, rounded to two decimal places. Here is a table for the present value of $1 at compound interest. Year 1 2 3 4 5
6% 0.943 0.890 0.840 0.792 0.747
10% 0.909 0.826 0.751 0.683 0.621
12% 0.893 0.797 0.712 0.636 0.567
Here is a table for the present value of an annuity of $1 at compound interest. Year 1 2 3 4 5
6% 0.943 1.833 2.673 3.465 4.212
10% 0.909 1.736 2.487 3.170 3.791
12% 0.893 1.690 2.402 3.037 3.605
177. A project has estimated annual cash flows of $90,000 for 3 years and is estimated to cost $250,000. Assume a minimum acceptable rate of return of 10%. Using the following tables, determine the (a) net present value of the project and (b) the present value index, rounded to two decimal places. Here is a table for the present value of $1 at compound interest. Year 1 2 3 4 5 Powered by Cognero
6% 0.943 0.890 0.840 0.792 0.747
10% 0.909 0.826 0.751 0.683 0.621
12% 0.893 0.797 0.712 0.636 0.567 Page 28
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Chapter 26 - Capital Investment Analysis Here is a table for the present value of an annuity of $1 at compound interest. Year 1 2 3 4 5
6% 0.943 1.833 2.673 3.465 4.212
10% 0.909 1.736 2.487 3.170 3.791
12% 0.893 1.690 2.402 3.037 3.605
178. A project is estimated to cost $273,840 and provide annual net cash flows of $60,000 for 7 years. Determine the internal rate of return for this project, using the following present value of an annuity table. Year 1 2 3 4 5 6 7 8 9 10
6% 0.943 1.833 2.673 3.465 4.212 4.917 5.582 6.210 6.802 7.360
10% 0.909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 6.145
12% 0.893 1.690 2.402 3.037 3.605 4.111 4.564 4.968 5.328 5.650
179. A project is estimated to cost $248,400 and provide annual cash flows of $50,000 for 8 years. Determine the internal rate of return for this project, using the following present value of an annuity table. Year 1 2 3 4 5 6 7 8 9 10
6% 0.943 1.833 2.673 3.465 4.212 4.917 5.582 6.210 6.802 7.360
10% 0.909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 6.145
12% 0.893 1.690 2.402 3.037 3.605 4.111 4.564 4.968 5.328 5.650
180. What is the present value of $8,000 to be received at the end of 6 years if the required rate of return is 15%? Here is the table for the present value of $1 at compound interest of 15%. Year 1 2 3 4 5
15% 0.870 0.756 0.658 0.572 0.497
Year 6 7 8 9 10
15% 0.432 0.376 0.327 0.284 0.247
Here is the table for the present value of an annuity of $1 at compound interest of 15%. Powered by Cognero
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Chapter 26 - Capital Investment Analysis Year 1 2 3 4 5
15% 0.870 1.626 2.283 2.855 3.353
Year 6 7 8 9 10
15% 3.785 4.160 4.487 4.772 5.019
181. Norton Company is considering a closed-loop geothermal heat pump to replace its existing heating system. The project will require an initial investment of $750,000 and will return $200,000 each year for 5 years. a. If taxes are ignored and the required rate of return is 9%, what is the project’s net present value? b. Based on this analysis, should Norton Company proceed with the project? Here is the table for the present value of $1 at compound interest of 9%. Year 1 2 3 4 5
9% 0.917 0.842 0.772 0.708 0.650
Year 6 7 8 9 10
9% 0.596 0.547 0.502 0.460 0.422
Here is the table for the present value of an annuity of $1 at compound interest of 9%. Year 1 2 3 4 5
9% 0.917 1.759 2.531 3.240 3.890
Year 6 7 8 9 10
9% 4.486 5.033 5.535 5.995 6.418
182. An investment of $185,575 is expected to generate returns of $65,000 per year for each of the next 4 years. What is the investment’s internal rate of return? Here is a table for the present value of $1 at compound interest. Year 1 2 3 4 5
6% 0.943 0.890 0.840 0.792 0.747
10% 0.909 0.826 0.751 0.683 0.621
12% 0.893 0.797 0.712 0.636 0.567
15% 0.870 0.756 0.658 0.572 0.497
Here is a table for the present value of an annuity of $1 at compound interest. Year 1 2 3 4 5
6% 0.943 1.833 2.673 3.465 4.212
10% 0.909 1.736 2.487 3.170 3.791
12% 0.893 1.690 2.402 3.037 3.605
15% 0.870 1.626 2.283 2.855 3.353
183. Dickerson Co. is evaluating a project requiring a capital expenditure of $810,000. The project has an estimated life of Powered by Cognero
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Chapter 26 - Capital Investment Analysis 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows: Year 1 2 3 4
Net Income $ 75,000 100,000 109,000 36,000 $320,000
Net Cash Flow $280,000 300,000 200,000 120,000 $900,000
The company's minimum desired rate of return is 12%. The present value of $1 at compound interest of 12% for Years 1 through 4 is 0.893, 0.797, 0.712, and 0.636, respectively. Determine the net present value. 184. A $550,000 capital investment proposal has an estimated life of 4 years and no residual value. The estimated net cash flows are as follows: Year 1 2 3 4
Net Cash Flow $300,000 280,000 208,000 180,000
The minimum desired rate of return for net present value analysis is 12%. The present value of $1 at compound interest of 12% for Years 1 through 4 is 0.893, 0.797, 0.712, and 0.636, respectively. Determine the net present value. 185. Sunrise Inc. is considering a capital investment proposal that costs $227,500 and has an estimated life of 4 years and no residual value. The estimated net cash flows are as follows: Year 1 2 3 4
Net Cash Flow $97,500 80,000 60,000 40,000
The minimum desired rate of return for net present value analysis is 10%. The present value of $1 at compound interest rates of 10% for Years 1 through 4 is 0.909, 0.826, 0.751, and 0.683, respectively. Determine the net present value. Round interim answers to the nearest dollar. 186. The net present value has been computed for Proposals P and Q. Relevant data are as follows: Amount to be invested Total present value of net cash flow
Proposal P $245,000 296,500
Proposal Q $460,000 425,000
Determine the present value index for each proposal. Round answers to two decimal places. 187. A $400,000 capital investment proposal has an estimated life of 4 years and no residual value. The estimated net cash flows are as follows: Year 1 Powered by Cognero
Net Cash Flow $200,000 Page 31
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Chapter 26 - Capital Investment Analysis 2 3 4
150,000 90,000 80,000
The minimum desired rate of return for net present value analysis is 12%. The present value of $1 at compound interest of 12% for Years 1 through 4 is 0.893, 0.797, 0.712, and 0.636, respectively. Determine the net present value. 188. Briefly describe the time value of money. Why is the time value of money important in capital investment analysis? 189. Project A requires an original investment of $50,000. The project will yield cash flows of $15,000 per year for 7 years. Project B has a computed net present value of $13,500 over a 4-year life. Project A could be sold at the end of 4 years for $25,000. (a) Using the tables that follow, determine the net present value of Project A over a 4-year life with salvage value assuming a minimum rate of return of 12%. (b) Which project provides the greater net present value? Here is a table for the present value of $1 at compound interest. Year 1 2 3 4 5
6% 0.943 0.890 0.840 0.792 0.747
10% 0.909 0.826 0.751 0.683 0.621
12% 0.893 0.797 0.712 0.636 0.567
Here is a table for the present value of an annuity of $1 at compound interest. Year 1 2 3 4 5
6% 0.943 1.833 2.673 3.465 4.212
10% 0.909 1.736 2.487 3.170 3.791
12% 0.893 1.690 2.402 3.037 3.605
190. Project A requires an original investment of $65,000. The project will yield cash flows of $15,000 per year for 7 years. Project B has a computed net present value of $5,500 over a 5-year life. Project A could be sold at the end of 5 years for a price of $30,000. (a) Using the tables that follow, determine the net present value of Project A over a 5-year life with salvage value assuming a minimum rate of return of 12%. (b) Which project provides the greatest net present value? Here is a table for the present value of $1 at compound interest. Year 1 2 3 4 5
6% 0.943 0.890 0.840 0.792 0.747
10% 0.909 0.826 0.751 0.683 0.621
12% 0.893 0.797 0.712 0.636 0.567
Here is a table for the present value of an annuity of $1 at compound interest. Year 1 2 Powered by Cognero
6% 0.943 1.833
10% 0.909 1.736
12% 0.893 1.690 Page 32
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Chapter 26 - Capital Investment Analysis 3 4 5
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2.673 3.465 4.212
2.487 3.170 3.791
2.402 3.037 3.605
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Chapter 26 - Capital Investment Analysis Answer Key 1. True 2. True 3. False 4. True 5. True 6. False 7. False 8. False 9. False 10. True 11. True 12. True 13. False 14. True 15. False 16. False 17. False 18. False 19. True 20. False 21. False 22. False 23. True 24. True 25. False Powered by Cognero
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Chapter 26 - Capital Investment Analysis 26. False 27. False 28. True 29. True 30. False 31. True 32. False 33. False 34. True 35. True 36. False 37. True 38. False 39. False 40. False 41. True 42. False 43. True 44. True 45. False 46. True 47. False 48. True 49. True 50. False Powered by Cognero
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Chapter 26 - Capital Investment Analysis 51. False 52. True 53. True 54. True 55. True 56. True 57. True 58. True 59. False 60. True 61. c 62. c 63. d 64. d 65. d 66. c 67. b 68. d 69. c 70. a 71. c 72. a 73. b 74. b 75. c 76. b Powered by Cognero
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Chapter 26 - Capital Investment Analysis 77. a 78. a 79. a 80. b 81. d 82. b 83. a 84. c 85. c 86. a 87. d 88. c 89. d 90. d 91. a 92. b 93. a 94. b 95. a 96. d 97. c 98. a 99. c 100. d 101. a Powered by Cognero
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Chapter 26 - Capital Investment Analysis 102. d 103. c 104. b 105. a 106. d 107. a 108. c 109. c 110. d 111. d 112. b 113. a 114. c 115. d 116. b 117. a 118. c 119. c 120. c 121. b 122. a 123. a 124. d 125. b 126. d 127. a Powered by Cognero
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Chapter 26 - Capital Investment Analysis 128. a 129. d 130. b 131. c 132. b 133. d 134. b 135. a 136. b 137. b 138. c 139. a 140. b 141. c 142. d 143. a 144. b 145. a 146. b 147. a 148. b 149. b 150. c 151. a 152. d Powered by Cognero
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Chapter 26 - Capital Investment Analysis 153. e 154. f 155. a 156. b 157. c 158. d 159. e 160. Capital investment analysis (or capital budgeting) is the process by which management plans, evaluates, and controls investments in fixed assets. Capital investment analysis decisions are difficult because they are usually based on predictions about an uncertain future. These decisions involve large sums of money committed for long periods of time and may be irreversible. Thus, capital investment decisions are some of the most important decisions that management makes. 161. Average Investment = (Initial Cost + Residual Value) ÷ 2 = ($840,000 + $80,000) ÷ 2 = $460,000 Estimated Average Annual Income = $60,000 ÷ 4 years = $150,000 Average Rate of Return = Estimated Average Annual Income ÷ Average Investment = $150,000 ÷ $460,000 = 32.6% 162. Proposal L: $600,000 ÷ $170,000 = 3.53 years Proposal K: $250,000 + $200,000 + $100,000 + $50,000 = $600,000 = 4 years 163. Estimated Average Annual Income Average Investment
= Average Rate of Return
Let X = Estimated Average Annual Income X ($1,050,000 + $0) ÷ 2 X $525,000 X
= 0.18
= 0.18
= $94,500
164. Estimated Average Annual Income = $250,000 ÷ 4 years = $62,500 Average Investment = (Initial Cost + Residual Value) ÷ 2 = ($480,000 + $20,000) ÷ 2 = $500,000 ÷ 2 = $250,000 Average Rate of Return = Estimated Average Annual Income ÷ Average Investment = $62,500 ÷ $250,000 = 25% 165. Estimated Average Annual Income ÷ Average Investment = Average Rate of Return Let X = Estimated Average Annual Income X ÷ [($400,000 + $0) ÷ 2] = 5% X ÷ $200,000 = 5% X = 5% × $200,000 X = $10,000 Powered by Cognero
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Chapter 26 - Capital Investment Analysis 166. Average Rate of Return = Estimated Average Annual Income ÷ Average Investment = ($320,000 ÷ 4) ÷ [($810,000 + $0) ÷ 2] = $80,000 ÷ $405,000 = 19.8% 167. Proposal M: $550,000 ÷ $125,000 = 4.4 years Proposal N: $250,000 + $200,000 + 2/3($150,000) = $550,000 = 2 2/3 years 168. Estimated Average Annual Income ÷ Average Investment = Average Rate of Return Let X = Estimated Average Annual Income X ÷ [($350,000 + $0) ÷ 2] = 12% X ÷ $175,000 = 12% X = 12% × $175,000 X = $21,000 169. 7.5 years ($600,000 ÷ $80,000) 170. Estimated Average Annual Income Average Investment
= Average Rate of Return
Let X = Estimated Average Annual Income X ($700,000 + $0) ÷ 2 X $350,000
= 0.15
= 0.15
X
= 0.15 × $350,000
X
= $52,500
171. Proposal A: $600,000 ÷ $159,000 = 3.77 years Proposal B: ($150,000 + $140,000 + $110,000 + $150,000 + $50,000) = $600,000 = 5 years 172. Cash Payback Period = Initial Cost ÷ Annual Net Cash Inflow = $240,000 ÷ $60,000 = 4 years 173. The four capital investment models discussed in the chapter are the cash payback method, the average rate of return method, the net present value method, and the internal rate of return method. Following are strengths and weaknesses of each: The cash payback method is easy to understand and is based on cash flows, which are of primary concern to many businesses. However, it ignores profitability and the time value of money. The average rate of return method measures profitability, but it ignores the time value of money. The net present value method and the internal rate of return method are both based on cash flows, profitability, and the time value of money. The disadvantages of these two methods are that they have more complex computations and they assume the cash flows can be reinvested at the minimum desired rate of return. 174. a. Powered by Cognero
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Chapter 26 - Capital Investment Analysis $240,000 ÷ 4 = $60,000 = 25% ($480,000 + $0) ÷ 2 $240,000 b. Present Value Year of $1 at 15% 1 0.870 2 0.756 3 0.658 4 0.572 Total Amount to be invested Net present value
Net Present Value of Cash Flow Net Cash Flow $210,000 $182,700 200,000 151,200 160,000 105,280 150,000 85,800 $720,000 $524,980 480,000 $ 44,980
175. a. $322,500 ÷ 4 = $80,625 = 20% ($806,250 + $0) ÷ 2 $403,125 b. Present Value Year of $1 at 12% 1 0.893 2 0.797 3 0.712 4 0.636 Total Amount to be invested Net present value
Net Cash Flow $285,000 290,000 190,000 125,000 $890,000
Present Value of Net Cash Flow $ 254,505 231,130 135,280 79,500 $ 700,415 806,250 $(105,835)
176. a. Net Present Value = Total Present Value of Net Cash Flow – Amount to Be Invested = ($95,000 × 3.170) – $260,000 = $41,150 b. Present Value Index = Total Present Value of Net Cash Flow ÷ Amount to Be Invested = $301,150 ÷ $260,000 = 1.16 177. a. Net Present Value = Total Present Value of Net Cash Flow – Amount to Be Invested = ($90,000 × 2.487) – $250,000 = $(26,170) b. Present Value Index = Total Present Value of Net Cash Flow ÷ Amount to Be Invested = $223,830 ÷ $250,000 = 0.90 178. 12% ($273,840 ÷ $60,000 = 4.564, the present value of an annuity factor for 7 periods at 12%) 179. 12% ($248,400 ÷ $50,000 = 4.968, the present value of an annuity factor for 8 periods at 12%) 180. $8,000 × 0.432 = $3,456 181. a. Net Present Value = Total Present Value of Net Cash Flow – Amount to Be Invested = ($200,000 × 3.890) – $750,000 = $28,000 b. Yes, since the net present value is greater than zero, Norton Company should proceed with the project. 182. $185,575 ÷ $65,000 = 2.855 at 4 years = 15% Powered by Cognero
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Chapter 26 - Capital Investment Analysis 183. Present Value Present Value of Year of $1 at 12% Net Cash Flow Net Cash Flow 1 0.893 $280,000 $ 250,040 2 0.797 300,000 239,100 3 0.712 200,000 142,400 4 0.636 120,000 76,320 Total $900,000 $ 707,860 Amount to be invested 810,000 Net present value $(102,140) 184. Present Value Year of $1 at 12% 1 0.893 2 0.797 3 0.712 4 0.636 Total Amount to be invested Net present value
Present Value of Net Cash Flow Net Cash Flow $300,000 $267,900 280,000 223,160 208,000 148,096 180,000 114,480 $968,000 $753,636 550,000 $203,636
185.
Year 1 2 3 4 Total Amount to be invested Net present value
Present Value of $1 at 10% 0.909 0.826 0.751 0.683
Present Net Value of Net Cash Flow Cash Flows $ 97,500 $ 88,628 80,000 66,080 60,000 45,060 40,000 27,320 $277,500 $227,088 227,500 $ (412)
186. Present Value Index = Total Present Value of Net Cash Flow ÷ Amount to Be Invested Proposal P: $296,500 = 1.21 $245,000 Proposal Q: $425,000 = 0.92 $460,000 187. Year 1 2 3 4 Total
Present Value of $1 at 12% 0.893 0.797 0.712 0.636
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Net Cash Flow $200,000 150,000 90,000 80,000 $520,000
Present Value of Net Cash Flow $178,600 119,550 64,080 50,880 $413,110 Page 43
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Chapter 26 - Capital Investment Analysis Amount to be invested Net present value
400,000 $ 13,110
188. The time value of money concept recognizes that a dollar today is worth more than a dollar tomorrow, because today’s dollar can earn interest. Since capital investment analysis decisions are often based on cash flows, which will be received in the future, managers often use a process called discounting in order to measure future cash flows in the value of today’s dollar. 189. a. Present value of a $15,000 4-year annuity at 12% Present value of $25,000, 4 years at 12% Total present value of Project A Total cost of Project A Net present value of Project A
$45,555* 15,900** $61,455 50,000 $11,455
*$15,000 × 3.037 (Present value of an annuity of $1) **$25,000 × 0.636 (Present value of $1) b. Project B’s present value of $13,500 is greater than the net present value of Project A of $11,455. 190. a. Present value of a $15,000 5-year annuity at 12% Present value of $30,000, 5 years at 12% Total present value of Project A Total cost of Project A Net present value of Project A
$54,075* 17,010** $71,085 65,000 $ 6,085
*$15,000 × 3.605 (Present value of an annuity of $1) **$30,000 × 0.567 (Present value of $1) b. Project A’s net present value of $6,085 is greater than the net present value of Project B, $5,500.
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