Page 1 · Web viewAlso on January 1, the company paid for a $30,000 machine. The machine has a...

47. Laredo Company got a long term contract to provide services for the El Dorado government. In 20X3, the 5 year contract is set for 100 million dollars cash. Services are to be provided evenly over 20X3 through 20X7.a. In 20X3 Laredo should recognize no revenue.b. In 20X3 Laredo should recognize 100 million in revenue.c. In 20X4 Laredo should recognize no revenue.d. In 20X4 Laredo should recognize 20 million in revenue.e. In 20X7 Laredo should recognize 100 million in revenue.

L.O.: 1 Type: Easy Solution:d

48. In order for revenue to be recognizeda. Goods or services must be delivered.b. Cash or an asset virtually assured of being converted into

cash must be received.c. Goods or services must be delivered and cash or an asset

virtually assured of being converted into cash must be received.

d. Cash must be received.e. Goods or services must be delivered and cash must be received.

L.O.: 1 Type: Easy Solution:c

49. Why is the timing of revenue recogintion important?a. The cash flow statement depends on proper timing.b. Net income depends on proper timing.c. Assets will be in error without proper timing of revenue.d. Timing of revenue must be known in order to expense costs in

advance of sales.e. Investors need to know when gains and losses are taken.

L.O.: 1 Type: Easy Solution:b

50. Assume the periodic inventory system. Westside Company sold inventory to Eastside Company for $6,000 cash. The journal entry to be made by Westside Company is:a. Cost of Goods Sold 6,000

Sales 6,000b. Cash 6,000

Inventory 6,000c. Accounts Receivable 6,000

Sales 6,000d. Cash 6,000

Sales 6,000e. Cash 6,000

Accounts Payable 6,000


51. Assume the periodic inventory system. Northside Company sold inventory to Southside Company for $6,000 for an item from

150

Southside to be delivered at the end of the month. The journal entry to be made by Northside Company is:a. Cost of Goods Sold 6,000


Inventory 6,000c. Accounts Receivable 6,000

Sales 6,000d. Cash 6,000

Sales 6,000e. Cash 6,000



52. Northern Company gave inventory to Southern Company to settle short-term credit for $6,000. The journal entry to be made by Northern Company is:a. Accounts Payable 6,000


Sales 6,000c. Accounts Receivable 6,000

Sales 6,000d. Sales 6,000

Accounts Payable 6,000e. Accounts Payable 6,000

Inventory 6,000

L.O.: 2 Type: Easy Solution:e

53. Assume the periodic inventory system. Frank Company gave a 4% trade discount to Gene Company when it sold inventory for cash that normally sells for $12,000. The journal entry to be made by Frank Company is:a. Cash 11,520

Sales 11,520b. Cash 11,520

Trade Discount 480 Sales 12,000

c. Cash 11,520 Trade Discount Receivable 480 Sales 12,000

d. Cash 12,000 Trade Discount 480 Sales 11,520

e. Cash 12,000 Trade Discount Payable 480 Sales 11,520

L.O.: 3 Type: Moderate Solution:a

151

54. Assume the periodic inventory system. Laredo Company sold inventory on account for $800 on March 8, 20X4, with terms of 2/10, n/30. On March 16, 20X4, the appropriate payment was received from the customer. The journal entry to record the March 16 transaction on Laredo’s books is:a. Cash 800

Accounts Receivable 800b. Cash 784

Cash Discount on Sales 16 Accounts Receivable 800

c. Cash 784 Sales 16 Accounts Receivable 800

d. Cash 800 Cash Discount on Sales 16 Accounts Receivable 784

e. Cash 800 Sales 16 Accounts Receivable 784


55. The difference between gross sales and net sales may includea. bad debts expenseb. sales returnsc. trade discountsd. cost of goods solde. purchase returns


56. Trade discounts:a. apply one or more reductions to the gross selling price for a

particular class of customers in accordance with a company's management policies

b. are offered in order to be competitivec. are offered to encourage certain customer behavior (to

encourage early orders)d. are not detailed on the income statement (gross sales revenue

is shown net of trade discounts)e. All of the above statements are true regarding trade

discounts.

L.O.: 3 Type: Moderate Solution:e

57. Assume the periodic inventory system. Rigo Company sold inventory on account for $800. A week later, the inventory was returned and a full credit was given to the customer. Rigo’s journal entry to record the return of the inventory would be:a. Cash 800

Accounts Receivable 800

152

b. Sales 800 Accounts Receivable 800

c. Sales Discounts 800 Accounts Receivable 800

d. Sales Returns & Allowances 800 Sales 800

e. Sales Returns & Allowances 800 Accounts Receivable 800


58. Assume the periodic inventory system. Riverside Company sold inventory on account for $450. A week later, the inventory was returned and a cash refund was given to the customer. Reiverside’s journal entry to record the return of the inventory would be:a. Cash 450

Accounts Receivable 450b. Sales 450

Accounts Receivable 450c. Sales Discounts 450

Cash 450d. Sales Returns & Allowances 450

Sales 450e. Sales Returns & Allowances 450

Cash 450


59. Troy Company just purchased merchandise costing $700, which has payment terms of 2/10, n/45. Troy Company is uncertain whether to take advantage of the discount. What is the effective annual interest rate associated with this discount, assuming a 365-day year?a. 2.0%b. 3.0%c. 16.2%d. 20.9%e. 21.3%

L.O.: 3 Type: Difficult Solution:e

60. Unruh Company can borrow money from the local bank at 14%. The company just acquired inventory costing $2,900, which has terms of 2/10, n/30. Assuming a 365-day year, which of the following statements is true?a. Do not pay within the discount period since the effective rate

of the discount is 37.2%, while the cost to borrow money is 14%.

b. Pay within the discount period since the effective rate of the discount is 37.2%, while the cost to borrow money is 14%

153

c. Do not pay within the discount period since the effective rate of the discount is 24%, while the cost to borrow money is 14%.

d. Pay within the discount period since the effective rate of the discount is 24%, while the cost to borrow money is 14%.

e. Do not pay within the discount period since the 2% discount is less than the 14% cost to borrow money.

L.O.: 3 Type: Difficult Solution:b

61. Which of the following statements is true?a. Trade discounts and sales returns and allowances are listed on

the income statement as deductions from gross sales.b. Reports to shareholders often omit the details of revenue and

show only net revenue.c. Cash discounts are listed on the income statement as an

expense of doing business.d. "Turnover" is commonly used in the United States to refer to

net sales revenue.e. Cash discounts must appear on cash flow statements.


62. Fryes Company accepts bank cards, which charge a fee of 4% on sales. The company had gross sales of $60,000, of which 25% were cash sales and the remainder were credit sales which are solely attributable to bank cards. The journal entry for Fryes Company is:a. Cash 58,200

Sales 58,200b. Cash 15,000

Accounts Receivable 43,200 Sales 58,200

c. Cash 57,600 Cash discounts for Bank Cards 2,400 Sales 60,000

d. Cash 58,200 Cash Discounts for Bank Cards 1,800 Sales 60,000

e. Cash 15,000 Accounts Receivable 43,200 Cash Discounts on Bank Cards 1,800 Sales 60,000

L.O.: 3 Type: Moderate Solution:d

63. Clavier Company sold inventory to a customer for $400. The customer used a VISA bank card, which charges Clavier a 3% fee. What asset results from this sale?a. Accounts Receivable of $388b. Cash of $400c. Cash of $388d. Sales of $388

154

e. Sales of $400

L.O.: 3 Type: Moderate Solution:c

64. Viking Inc. wishes to borrow $70,000 at 12% interest from the local bank. However, the bank requires a compensating balance of 9%. The effective interest rate that the Viking Inc will pay on the loan is:a. 10.1%b. 11.0%c. 13.2%d. 16.4%e. 21.0%


65. Which of the following is not a procedure used to safeguard cash?a. The serial numbers on the money are recorded and maintained.b. The individuals who receive cash do not also disburse cash.c. The individuals who handle cash do not have access to the

accounting records.d. Cash receipts are immediately recorded and deposited and are

not used directly to make payments.e. Disbursements are made by serially numbered checks, and only

upon proper authorization by someone other than the person writing the check.

L.O.: 4 Type: Easy Solution:a

66. Which of the following statements is false?a. Accepting credit will increase administrative costs.b. Accepting credit will result in losses due to uncollectible

accounts.c. Many small retailers are unwilling to accept any level of

credit risk.d. Credit sales normally will cause an increase in sales revenue.e. Credit risks can vary greatly among industries.

L.O.: 4 Type: Difficult Solution:c

67. Rainbo Company is considering whether to accept credit sales. The company has determined that by allowing credit sales, the additional revenue from the credit sales would be $60,000. Cash sales will be unaffected. The company has a gross profit percentage of 30%. The additional administrative cost associated with allowing credit sales is $10,000. The company expects bad debts to be 8% of credit sales. Which of the following statements is true with respect to the decision to allow credit?a. The company should allow credit sales because the company's

gross profit will increase by $18,000 while the costs of credit will be $14,800.

155

b. The company should not allow credit sales because the company's revenue will increase by $60,000 while the costs of credit will be $14,800.

c. The company should not grant credit sales because the company's profit will increase by $60,000 while the costs of allowing credit will be $14,800.

d. The company should allow credit sales because the company's revenue will increase by $60,000 while the credit costs are $11,440.

e. The company should allow credit sales because the company's profit will increase by $18,000 while the credit costs will be $11,440.

L.O.: 4 Type: Difficult Solution:a

68. Admire Company generated $100,000 in credit sales during 20X4. In February 20X5, Admire realized that $13,500 of the accounts receivable generated from the 20X4 credit sales were uncollectible. Admire seldom experiences bad debts losses; therefore, it used the specific write-off method. Using the matching principle, what is the effect on 20X5 and 20X4 net income as a result of the write-off?a. 20X5 net income is understated by $13,500, while 20X4 net

income is overstated by $13,500.b. 20X5 net income is overstated by $13,500, while 20X4 net

income is understated by $13,500.c. 20X5 net income is neither overstated nor understated, but

20X4 net income is understated by $13,500.d. 20X5 net income is overstated by $13,500, but 20X4 net income

is neither overstated nor understated.e. There is no effect on either year's net income as revenues and

expenses are properly matched.


Table 6-1Cottonwood Company has a December 31 year-end. On November 28, 20X4, the company sold inventory for $750 on account with the terms 2/10, n/30. On February 28, 20X5, the company recognized the account as uncollectible.

69. Referring to Table 6-1, if Cottonwood Company uses the specific write-off method, what can be said with respect to the matching principle.a. The matching principle is not violated using the specific

write-off method.b. 20X4 sales are overstated by $750, and 20X5 sales are

understated by $750.c. 20X4 sales are understated by $750, and 20X5 sales are

overstated by $750.d. 20X4 sales are overstated by $750, and 20X5 sales are

overstated by $750.

156

e. 20X4 sales are understated by $750, and 20X5 sales are understated by $750.


70. Referring to Table 6-1, what is the journal entry for Cottonwood Company on February 28, 20X5, if the company uses the specific write-off method?a. Accounts Receivable 750

Bad Debts Expense 750b. Allowance for Uncollectible Accounts 750

Accounts Receivable 750c. Bad Debts Expense 750

Allowance for Uncollectible Accounts 750d. Accounts Receivable 750

Allowance for Uncollectible Accounts 750e. Bad Debts Expense 750

Accounts Receivable 750


71. Which of the following is not an attribute of the Allowance for Uncollectible Accounts?a. The balance in the account increases when an uncollectible

account is written off.b. It is on the asset side of the balance sheet.c. It is a contra account.d. The balance in the account increases when the adjusting entry

for bad debts expense is recorded.e. It normally has a credit balance.


Table 6-2Burnett Company has sales of $900,000, of which 25% are cash sales and the remainder are on credit. As of year-end, but before the bad debts adjustment, the Allowance for Uncollectible Accounts has a credit balance of $300, and accounts receivable has a debit balance of $60,000.

72. Referring to Table 6-2, if bad debts are estimated to be 1.5% of credit sales, what journal entry will Burnett Company need to prepare in order to estimate bad debts?a. Allowance for Uncollectible Accounts 10,125

Accounts Receivable 10,125b. Bad Debts Expense 9,525

Allowance for Uncollectible Accounts 9,525c. Bad Debts Expense 10,425

Allowance for Uncollectible Accounts 10,425d. Bad Debts Expense 10,125

Allowance for Uncollectible Accounts 10,125e. Bad Debts Expense 13,500

Accounts Receivable 13,500

157


73. Referring to Table 6-2, if it is determined that the company will not collect from Banner and from Parks for the amounts of $425 and $700, respectively, what journal entry would Burnett need to prepare?a. Allowance for Uncollectible Accounts 1,125

Accounts Receivable, Banner 425 Accounts Receivable, Parks 700

b. Bad Debts Expense 1,125 Accounts Receivable, Banner 425 Accounts Receivable, Parks 700

c. Bad Debts Expense 1,125 Allowance for Uncollectible Accounts 1,125

d. Accounts Receivable, Banner 425 Accounts Receivable, Parks 700 Allowance for Uncollectible Accounts 1,125

e. Accounts Receivable, Banner 425 Accounts Receivable, Parks 700 Bad Debts Expense 1,125


74. Which of the following statements associated with the allowance method for bad debts is false?a. The write-off of an uncollectible account does not affect the

accounts receivable subsidiary ledger.b. The write-off of an uncollectible account does not affect the

total amount of current assets.c. The write-off of an uncollectible account does not affect

current liabilities.d. The write-off of an uncollectible account does not affect the

income statement.e. The write-off of an uncollectible account does not affect

stockholders' equity.


75. The estimation of bad debts expense, using the allowance method, has what affect on the balance sheet?a. It has no effect on assets and decreases stockholders' equity.b. It decreases assets and decreases stockholders' equity.c. It increases assets and increases stockholders' equity.d. It decreases assets and increases stockholders' equity.e. It increases assets and decreases stockholders' equity.


76. The write-off of a specific account for bad debts has what effect on the balance sheet under the allowance method?a. It has no effect on total assets or stockholders' equity.

158

b. It decreases assets and decreases stockholders' equity.c. It increases assets and decreases stockholders' equity. d. It decreases assets and has no effect on stockholders' equity.e. It has no effect on assets and decreases owner's equity.


77. A bad debts recovery has what effect on the balance sheet under the allowance method for bad debts?a. It has no effect on total assets or stockholders' equity.b. It decreases assets and decreases stockholders' equity.c. It increases assets and decreases stockholders' equity. d. It decreases assets and has no effect on stockholders' equity.e. It has no effect on assets and decreases owner's equity.


78. The accounts receivable subsidiary ledger:a. is not affected by the write-off of individual accountsb. provides the supporting detail (i.e., individual customer

names and amounts owed) for the general ledger account "Accounts Receivable"

c. is kept for both the "Accounts Receivable" and the "Allowance for Uncollectible Accounts" accounts

d. is only kept by companies that use the allowance method of estimating bad debts

e. All of the above are true statements.

L.O.: 5 Type: Moderate Solution:b

Table 6-3Burnap Company has performed the following year-end analysis of its accounts receivable:

Total 1-30 Days 31-60 Days 61-90 Days Over 90 Days$72,000 $45,000 $14,000 $8,000 $5,000

The company had sales of $850,000 of which 20% were cash sales. As of year-end, the balance in Allowance for Uncollectible Accounts before adjusting for bad debts was a $400 debit. Burnap Company has estimated the following bad debts percentages:

1-30 days 6% 31-60 days 15% 61-90 days 40% Over 90 days 75%

Ending Accounts Receivable 10% Total Credit Sales 1.5%

79. Referring to Table 6-3, what is the journal entry that Burnap Company will make if it estimates bad debts by using a percentage of credit sales?a. Bad Debts Expense 9,800

Allowance for Uncollectible Accounts 9,800

159

b. Bad Debts Expense 10,200 Allowance for Uncollectible Accounts 10,200

c. Bad Debts Expense 10,600 Allowance for Uncollectible Accounts 10,600

d. Bad Debts Expense 12,350 Allowance for Uncollectible Accounts 12,350

e. Bad Debts Expense 12,750 Allowance for Uncollectible Accounts 12,750


80. Referring to Table 6-3, what is the balance in the Allowance for Uncollectible Accounts after Burnap Company estimates bad debts using a percentage of credit sales?a. $9,800b. $10,200c. $10,600d. $12,350e. $12,750


81. Referring to Table 6-3, what is the balance in the Allowance for Uncollectible Accounts if Burnap Company estimates bad debts using a percentage of ending accounts receivable?a. $6,900b. $7,200c. $7,500d. $84,000e. $84,300


82. Cline Company had total credit sales for the past year of $800,000. As of year-end, but before estimating bad debts, the company had a $70,000 debit balance in accounts receivable and a $600 debit balance in the Allowance for Uncollectible Accounts. Upon examination of the accounts receivable, it was found that 55% of the balance was 1-30 days old, 30% was 31-60 days old, 9% were 61-90 days old, and 6% were over 90 days old. Cline Company estimates the following bad debts percentages: 1-30 days 10% 31-60 days 25% 61-90 days 40% Over 90 days 80%The journal entry necessary to estimate bad debts using the aging method is:a. Bad Debts Expense 14,380

Accounts Receivable 14,380b. Bad Debts Expense 14,380

Allowance for Uncollectible Accounts 14,380c. Bad Debts Expense 14,980

160

Allowance for Uncollectible Accounts 14,980d. Bad Debts Expense 15,580

Allowance for Uncollectible Accounts 15,580e. Bad Debts Expense 16,180

Allowance for Uncollectible Accounts 16,180

L.O.: 5 Type: Difficult Solution:d

83. Assume Precision uses the allowance method for bad debts. Precision Inc wrote off the $550 account of Peel’s Company on April 6, 20X4. On September 12, 20X4, Precision Inc received a check for $550 from Peel’s Company. The journal entries that Precision Inc will make on September 12, 20X4, is:a. Bad Debts Expense 550


Bad Debts Expense 550c. Accounts Receivable 550

Allowance for Uncollectible Accounts 550 Cash 550 Accounts Receivable 550

d. Cash 550 Accounts Receivable 550

e. No journal entry is required on September 12, 20X4.


84. Assume Broadway uses the allowance method for bad debts. Broadway Company wrote off the $75 account of Anita Jones on April 6, 20X4. On September 12, 20X4, Broadway Company received a check for $75 from Anita Jones. The journal entries that Broadway will make on September 12, 20X4, is:a. Cash 75


Bad Debts Expense 75c. Accounts Receivable 75

Bad Debts Expense 75 Cash 75 Accounts Receivable 75

d. Allowance for Uncollectible Account 75 Bad Debts Expense 75 Cash 75 Accounts Receivable 75

e. Accounts Receivable 75 Allowance for Uncollectible Accounts 75 Cash 55 Accounts Receivable 55


161

Table 6-4Consider the following information: Cash sales $ 50,000 Credit sales 450,000 Beginning Cash 10,000 Ending Cash 14,000 Beginning Retained Earnings 35,000 Ending Retained Earnings 48,000 Beginning Accounts Receivable 30,000 Ending Accounts Receivable 40,000 Net Income 58,000

85. Referring to Table 6-4, determine the accounts receivable turnover.a. 1.20b. 2.92c. 11.43d. 12.86e. 14.29


86. Referring to Table 6-4 and assuming a 365-day year, determine the days to collect accounts receivable.a. 304.2 daysb. 125.0 daysc. 31.9 daysd. 30.4 dayse. 28.4 days


87. Accounting controls:a. include all methods and procedures that facilitate

management’s planning and control of operationsb. help maximize efficiency and minimize waste, unintentional

errors, and fraudc. include procedures for granting credit to customersd. are not concerned with safeguarding assetse. All of the above statements are true concerning accounting

controls.


88. All of the following statements concerning controls are appropriate except:a. Administrative controls consider the organization plan.b. Accounting controls include procedures that facilitate

management’s planning and control of operations.

162

c. Accounting controls include the methods and procedures for authorizing transactions and safeguarding assets.

d. Accounting controls are present to ensure the accuracy of the financial records.

e. Accounting controls minimize waste, errors, and fraud within an organization.


89. The internal accounting control that provides reasonable assurance

that all authorized transactions are recorded in the correct amounts, periods, and accounts is:a. authorizationb. recordingc. safeguardingd. reconciliatione. valuation


90. Which of the following internal accounting control objectives relate to establishing the system of accountability and are aimed at the prevention of errors and irregularities? 1. authorization 2. promoting operating efficiency 3. reconciliation 4. recording 5. safeguarding 6. valuationa. 3 and 4b. 4 and 5c. 1, 3, and 4d. 1, 4, and 5e. 2, 3, and 5


91. Which of the following statements describes the purpose of a management report?a. A management report usually states that management is

responsible for all audited and unaudited information in the annual report, including a statement on the adequacy of internal controls.

b. A management report includes information with respect to management's compensation, including the salaries and bonuses received by the top executives of the company.

c. A management report lists the executives of the company and states what changes have been made in management personnel since the prior period and why those changes were made.

163

d. A management report states how well or poorly the company performed during the most recent period.

e. A management report states the acquisitions and divestitures that a company has made during the current period.


92. Which of the following is not a typical attribute of an audit committee?a. Audit committees typically meet at least twice a year.b. Internal and external auditors report only to the audit

committee and to no member of management.c. Audit committees are comprised solely of outside board

members.d. Audit committees act as a liaison among the full board,

internal auditors, external auditors, and management.e. Audit committees gather information directly from internal and

external auditors.


93. Which of the following items from the checklist of internal control is most important?a. proper authorizationb. separation of dutiesc. honest, reliable personnel d. adequate documentse. physical safeguards


94. All of the following statements are attributes of the principle of having reliable personnel with clear responsibilities except:a. Employee theft causes larger losses to companies than

shoplifting.b. Responsibility for results should be traced to the individual

level.c. Appropriate overseeing and appraisal of employees is

necessary.d. Incompetent or dishonest individuals cannot undermine a strong

internal control system.e. Employers who use low-cost talent may find such a policy

expensive in the long-run, due to fraud and poor productivity.


95. The primary goal of the separation of duties is:a. to provide greater training to employees by allowing them to

work on different tasksb. to make sure that one person, acting alone, cannot defraud the

company

164

c. to ensure that no one in management accumulates too much organizational power and control

d. to provide clear promotion tracks within one's disciplinee. to provide a work environment where no one person is

overloaded with work or does so many things that they become indispensable to the company


96. A policy that states that the board of directors must approve all expenditures for capital assets in excess of $50,000 is an example of:a. specific authorization b. general authorizationc. adequate documentationd. proper procedurese. independent check


97. A policy that forces clerks to make change by pricing items at $1.99, $2.99, and $3.99 rather than at $2, $3, and $4 is an example of:a. adequate documentationb. general authorizationc. specific authorizationd. proper procedurese. independent check


98. A policy that requires organizations to use procedures manuals to specify the flow of documents and provide information and instructions to facilitate adequate record-keeping is an example of:a. adequate documentationb. general authorizationc. specific authorizationd. proper procedurese. independent check


99. Rotation of duties has all of the following attributes except:a. rotation of duties is not necessary if a company is bondedb. at least two employees know how to do each jobc. it discourages employees from engaging in fraudulent

activitiesd. employees can exchange duties and thus can become familiar

with more aspects of a company's operations

165

e. it reduces the likelihood of major problems in the event that an employee leaves the company


100. Internal auditors:a. are company employeesb. help design the company's control systemsc. assess the degree of management’s compliance with the existing

control systemd. are an example of an independent checke. All of the above are true statements.


101. Which of the following tasks is not commonly performed by an external auditor?a. External auditors examine transactions, but the number

examined is dependent on the strength or weakness of the internal control system.

b. External auditors evaluate the system of internal controls.c. External auditors test whether the internal control system is

being followed.d. External auditors assume responsibility for the total accuracy

of the financial statements.e. External auditors inspect a sample of the transactions that

are entered into the records of a company.


102. A policy of routinely paying the invoice amount without checking supporting documentation except on a random sampling basis is an example of:a. cost-benefit analysis b. adequate documentationc. physical safeguardsd. independent checke. separation of duties


103. Management reports:a. state that management is responsible for all audited and

unaudited information in the annual reportb. include a description of the composition and duties of the

audit committeec. include a description of the duties of the independent auditord. include a statement on the adequacy of the company's system of

internal controlse. All of the above are true statements.


166

104. The following represent common reconciling items within a bank reconciliation: 1. bank service charges 2. deposits in transit 3. outstanding checksWhich of the above items will be an adjustment to the balance per books?a. 1 onlyb. 2 onlyc. 3 onlyd. 1 and 2e. 2 and 3

L.O.: app. Type: Moderate Solution:a

105. A bank overdrafta. is typical on a bank reconciliation.b. represents a customer’s overpayment.c. is an occasional courtesy from a bank.d. happens only of a company’s year end.e. is the amount of money a company keeps as a compensating

balance.

L.O.: app. Type: Moderate Solution:c

106. The bank reconciliation isa. only required when a company suspects fraud.b. supplied as a bank courtesy.c. needed because the IRS requires them for cash-basis companies.d. an important part of internal control.e. usually reported in a company footnote.

L.O.: app. Type: Moderate Solution:d

167

Problems

107. Traditional Company is a manufacturer of furniture. On June 16, 20X4, Traditional Company received an order from Contemporary Mart for 15 living room sets at $1,500 per set. The furniture was delivered by Traditional to Contemporary Mart on June 30, 20X4, at which time Traditional billed Contemporary Mart under the terms 2/30, n/60. Contemporary Mart paid Traditional on July 25. Assume Traditional uses a periodic inventory system.

Prepare the appropriate journal entries for the Traditional Company as of the following dates: a. June 16 b. June 30 c. July 25

L.O.: 2 Type: Moderate Solution:

a. No entryb. Accounts Receivable 22,500 Sales 22,500c. Cash 22,050 Sales Discount 450 Accounts Receivable 22,500

108. The following information pertains to results obtained during the month of July 20X4 for Mirage Video Company: Sales Returns and Allowances $ 21,000 Gross Sales 720,000 Cash Discounts 15,000

Of the gross sales, $245,000 were sales made to customers who used their bank cards. The bank card company charged Mirage Video Company a 3% fee.

Prepare the revenue section of the income statement for Mirage Video Company for the month ended July 31, 20X4.


Sales $720,000 Less: Sales Returns & Allowances (21,000) Cash Discount on Sales (15,000) Cash Discount on Bank Cards ( 7,350)Net Sales $676,650

168

109.On May 27, 20X4, Midway Company agreed to sell 60 refrigerators to a local home construction company. The sales contract stated that the normal selling price of the refrigerators was $500 each, but a 4% trade discount was given due to the size of the order. The terms of the sales are 2/10, n/30. The refrigerators are to be delivered on June 22, 20X4. The invoice was dated June 22, 20X4. The customer paid the appropriate amount on June 30.

A. What is the gross revenue that Midway Company should recognize in June 20X4?

B. What is the net revenue that Midway Company should recognize in June 20X4?


a.$28,800b.$28,224

110. In its first year of operations, 20X4, Trendy Fashion had credit sales of $350,000 to 120 different customers. Of this amount, Mr. Fox purchased $400 and Ms. Hound purchased $180 on account. During the year, cash collections of $321,000 were made, of which Mr. Fox paid $360 and Ms. Hound paid $60. At the end of 20X4, bad debts expense was estimated to be 5% of ending accounts receivable. On February 23, 20X5, the balance in Ms. Hound's account was written off as uncollectible.

Prepare the appropriate journal entry on the books of Trendy Fashion for:a. the $350,000 in credit salesb. the collection of $321,000 from credit customersc. the estimation of bad debts expensed. the write-off of Ms. Hound's account


a. Accounts Receivable 350,000 Sales 350,000b. Cash 321,000 Accounts Receivable 321,000c. Bad Debts Expense 1,450 Allowance for Uncollectible Accounts 1,450d. Allowance for Uncollectible Accounts 120 Accounts Receivable - Hound 120

169

111. Donelson Company has the following information available as of December 31, 20X4:

Total Accounts 1-30 31-60 61-90 Over 90Receivable Days Days Days Days $60,000 $46,500 $7,400 $3,700 $2,400

Total credit sales for the year ended December 31, 20X4, were $825,000.The balance in the Allowance for Uncollectible Accounts at December 31, 20X4, is a $500 debit.

The estimated bad debts percentages are as follows: as a percentage of credit sales 1% as a percentage of ending accounts receivable 10% as a percentage of aging accounts receivable: 1-30 days 3% 31-60 days 15% 61-90 days 35% Over 90 days 75%

Given the above information, prepare the journal entry on December 31, 20X4 to estimate bad debts under the allowance method using the:a. percentage of credit sales methodb. percentage of ending accounts receivable methodc. aging of accounts receivable method

L.O.: 5 Type: Difficult Solution:

a. Bad Debts Expense 8,250* Allowance for Uncollectible Accounts 8,250

b. Bad Debts Expense 6,500** Allowance for Uncollectible Accounts 6,500

c. Bad Debts Expense 6,100*** Allowance for Uncollectible Accounts 6,100

* ($825,000 X .01)= $8,250** ($60,000 X .10) = $6,000 ($6,000 + $500) = $6,500***($46,500 X .03) + ($7,400 X .15) + ($3,700 X .35) + ($2,400 X .75) = $5,600 ($5,600 + $500) = $6,100

170

112. Hotel Unlimited has many accounts receivable. Hotel Unlimited's balance sheet as of December 31, 20X3, showed Accounts Receivable of $36,000 and an Allowance for Uncollectible Accounts of $3,400 credit. In early 20X4, write-offs of customer accounts of $2,800 were made. In late 20X4, a customer Joesy whose $1,000 debt had been written off earlier won a $1 million promotion cash prize. She immediately remitted $1,000 to Hotel Unlimited.

Prepare the journal entries for the:a. $2,800 write-off in early 20X4.b. receipt from Joesy in late 20X4.


a. Allowance for Uncollectible Accounts 2,800 Accounts Receivable 2,800b. Accounts Receivable 1,000 Allowance for Uncollectible Accounts 1,000 Cash 1,000 Accounts Receivable 1,000

113. Mulberry Company reports the following information for the years ended December 31, 20X3 and 20X4:

20X4 20X3 Sales $980,000 $820,000 Accounts Receivable 75,000 65,000

Sales consisted of 80% credit sales and 20% cash sales during 20X3 and 20X4.

From the information given above for Mulberry Company, determine the:a. accounts receivable turnover for 20X4b. days to collect accounts receivable for 20X4


a. The accounts receivable turnover for 20X4 is: $784,000/[($75,000 + $65,000)/2] = 11.2b. The days to collect accounts receivable for 20X4 is: 365 days/11.2 = 32.6 days

171

114. The following information is associated with the bank reconciliation of Fish Tackle Company as of October 31, 20X4: Balance per bank $956 Balance per books 538 Bank service charge 31 Deposits in transit 108 NSF check from a credit customer 57 Outstanding checks 614

a. Prepare a bank reconciliation for Fish Tackle Company dated October 31, 20X4.

b. Prepare the adjusting entries needed by Fish Tackle Company as a result of the bank reconciliation.

L.O.: app. Type: Moderate Solution:

a. Balance per books $538 Balance per bank $956 Less: bank service charge - 31 Add: deposits in transit 108 NSF check - 57 Less: outstanding checks -614 $450 $450

b. Bank Service Charge Expense 31 Cash 31

Accounts Receivable 57 Cash 57

Essays

115. What are the major characteristics of sales revenue recognition.

L.O.: 1 Type: Easy Solution:

(1). Goods or services must be delivered to the customers, that is, revenue must be earned.(2). Cash or an asset virtually assured of being converted into cash must be received, that is, revenue must be realized.

116. State the key features included in a management report.


A management report should include these key features: It states that management bears the primary responsibility for a

company's financial statements. It states that management is responsible for all audited and un-

audited information in an annual report. It states that the company maintains adequate internal controls. It describes the composition and duties of the audit committee of

the board of directors. It describes the duties of the independent auditor.

117. Name four internal controls specific to the cash account.

172


Four internal controls specific to the cash account include:1. The receiving and disbursing of cash should be separated.2. All receipts should be deposited intact every day.3. All major cash disbursements should be made by serially

numbered checks and require proper authorization.4. Bank accounts should be reconciled monthly.5. Different individuals should hand cash and have access to the accounting records.

118. Describe a typical audit committee and discuss its primary responsibility.


Audit committees typically have three or more outside board members and several inside directors. Outside board members are not employees of the company, whereas inside directors are employees who serve as part of the company's management. The primary responsibility of the audit committee is to oversee the internal accounting controls, the financial statements, and the financial affairs of the corporation.

45. Given the following data, what is cost of goods sold?Sales revenue $845,000Beginning inventory 110,000Ending inventory 200,000Purchases of inventory 705,000a. $615,000b. $815,000c. $320,000d. $905,000e. $735,000


46. Given the following data, what is cost of goods sold?Sales revenue $10,000Beginning inventory 3,000Ending inventory 7,000Purchases of inventory 5,000a. $12,000b. $ 9,000c. $ 8,000d. $ 7,000e. $ 1,000


173

47. Given the following information, determine the gross profit.Accounts Receivable $ 17,000Administrative Expenses 24,000Cost of Goods Sold 88,000Depreciation Expense 5,000Income Tax Expense 4,000Inventory 26,000Sales 242,000Selling Expenses 36,000Wage Expense 75,000a. $ 11,000b. $ 15,000c. $ 39,000d. $119,000e. $154,000


48. The calculation of cost of goods sold under the periodic system isa. beginning inventory + purchasesb. beginning inventory + ending inventory - purchasesc. beginning inventory + ending inventory + purchasesd. beginning inventory + purchases - ending inventorye. ending inventory + purchases - beginning inventory


49. Which of the following attributes associated with a perpetual and periodic inventory system is incorrect?a. Historically, the periodic system has been associated with low

volume, high value items.b. Historically, the perpetual system has been considered more

expensive and cumbersome to maintain.c. The perpetual system is better able to aid management in

pricing and ordering inventory.d. Computerized inventory systems and optical scanning equipment

are examples of ways to implement a perpetual inventory system.

e. The perpetual inventory system is more likely than the periodic inventory system to isolate inventory shrinkage due to breakage, loss, or theft.


50. A perpetual inventory system offers all of the following characteristics except:a. it is less expensive than a periodic systemb. inventory balances are always currentc. it helps salespeople determine whether there is a sufficient

supply on hand to fill the customer ordersd. it enhances internal control

174

e. All of the above are characteristics of a perpetual inventory system.


51. If a company uses a perpetual inventory system, it will maintain all the following accounts except:a. cost of goods soldb. inventoryc. salesd. purchasese. All of the above accounts are used with a perpetual inventory

system.


52. In a periodic inventory system the quantity of ending inventory is

determined by:a. subtracting units sold from units purchasedb. a physical inventory countc. looking at the balance in the inventory accountd. subtracting cost of goods sold from the beginning inventory

balancee. adding units sold to the beginning inventory balance


53. At year-end, the perpetual inventory system of Florida Company indicated an ending inventory level of 300 units at a cost of $10 each. A physical count performed at year-end resulted in 292 units being on hand at a cost of $10 each. What journal entry, if any, is necessary at year-end?a. No journal entry is necessary.b. Cost of Goods Sold 80

Inventory 80c. Cost of Goods Sold 80

Inventory Shrinkage 80d. Inventory Shrinkage 80

Cost of Goods Sold 80e. Inventory 80

Cost of Goods Sold 80


54. If a company is using a periodic inventory system, the balance in its inventory account three-quarters of the way through an accounting period would be equal to the:a. amount of inventory on hand at that dateb. inventory on hand at the beginning of the periodc. total of the beginning inventory plus goods purchased during

the accounting periodd. amount of goods purchased during the period

175

e. inventory on hand at the beginning of the period multiplied by 75%


55. The journal entry to purchase merchandise under a periodic inventory system includes a debit to:a. Cost of Goods Soldb. Inventoryc. Purchasesd. Accounts Receivablee. Accounts Payable


56. The journal entry to sell merchandise under a periodic inventory system includes a:a. debit to Cost of Goods Soldb. debit to Inventoryc. credit to Purchasesd. credit to Salese. credit to Accounts Receivable


Table 7-1 Nickie Inc acquired inventory on account on May 1, 20X4. The cost of the inventory was $70,000. The terms of the purchase were 2/10, n/30. Upon inspection of the inventory on May 2, $2,800 worth of inventory was returned. Nickie Inc paid for the inventory on May 8. Nickie Company operates under a periodic inventory system.

57. Referring to Table 7-1, what journal entry will Nickie Inc make on May 1, 20X4? a. Inventory 68,600

Accounts Payable 68,600 b. Inventory 70,000

Accounts Payable 70,000c. Inventory 70,000

Cash Discounts on Purchases 1,400 Accounts Payable 68,600

d. Purchases 70,000 Accounts Payable 70,000

e. Purchases 70,000 Cash Discounts on Purchases 1,400 Accounts Payable 68,600


58. Referring to Table 7-1, what journal entry will Nickie Inc make on May 2, 20X4?

176

a. Accounts Payable 2,744 Inventory 2,744

b. Accounts Payable 2,800 Inventory 2,800

c. Accounts Payable 2,800 Purchases 2,800

d. Accounts Payable 2,800 Purchase Returns and Allowances 2,800

e. Accounts Payable 2,744 Cash Discounts on Purchases 56 Purchase Returns and Allowances 2,800


59. Referring to Table 7-1, what journal entry will Nickie Inc make on May 8, 20X4? a. Accounts Payable 67,200

Cash 67,200b. Accounts Payable 67,200

Cash Discounts on Purchases 1,344 Cash 65,856

c. Accounts Payable 67,200 Cash Discounts on Purchases 1,400 Cash 65,800

d. Accounts Payable 67,200 Inventory 1,344 Cash 65,856

e. Accounts Payable 67,200 Purchases 1,400 Cash 65,800


60. Which of the following statements is incorrect?a. Both freight-in and freight-out affect gross profit.b. Freight-in appears as part of cost of goods sold.c. Freight-out is a shipping expense.d. Freight-in occurs when the terms of the invoice are FOB

shipping point.e. When the seller bears the shipping cost, the inventory is

stated as FOB destination.


61. Which of the following statements is correct?a. Purchase returns and allowances are accounted for separately

under the perpetual inventory system but are combined into the inventory account under the periodic inventory system.

b. The perpetual inventory system continually updates the inventory, purchase discounts, and cost of goods sold accounts.

177

c. The perpetual inventory system requires a closing entry in order to determine cost of goods sold before cost of goods sold can be closed to the income summary account.

d. The purchases account is used under both the periodic and perpetual inventory systems.

e. Under the periodic inventory system, neither the cost of goods sold account nor the inventory account is computed on a daily basis.


Table 7-2 The Clark Company had the following transactions occur during May 20X4.

May 2 Inventory was purchased on account for $8,000, terms 2/10, n/30.May 3 Inventory costing $500 was returned.May 9 Clark Company paid for the inventory.May 15 Inventory costing $3,600 was sold on account for $4,800, terms 3/10, n/45.May 31 Closing entries are prepared for the month-end financial statements.

62. Referring to Table 7-2, if Clark Company were using the perpetual inventory system, what is the journal entry for May 2? a. Inventory 8,000

Accounts Payable 8,000b. Purchases 7,840

Accounts Payable 7,840c. Purchases 8,000

Accounts Payable 8,000d. Inventory 7,840

Cash Discounts on Purchases 160 Accounts Payable 8,000

e. Purchases 7,840 Cash Discounts on Purchases 160 Accounts Payable 8,000


63. Referring to Table 7-2, if Clark Company were using the periodic inventory system, what is the journal entry for May 2? a. Inventory 7,840

Accounts Payable 7,840b. Inventory 8,000

Accounts Payable 8,000c. Purchases 8,000


178

d. Inventory 7,840 Cash Discounts on Purchases 160 Accounts Payable 8,000

e. Purchases 7,840 Cash Discounts on Purchases 160 Accounts Payable 8,000


64. Referring to Table 7-2, if Clark Company were using the perpetual inventory system, what is the journal entry for May 3? a. Accounts Payable 500

Inventory 500b. Accounts Payable 500

Purchases 500c. Accounts Payable 500

Purchase Returns and Allowances 500

d. Accounts Payable 500 Cash Discounts on Purchases 10 Inventory 490

e. Accounts Payable 500 Cash Discounts on Purchases 10 Purchases 490


65. Referring to Table 7-2, if Clark Company were using the periodic inventory system, what is the journal entry on May 3? a. Accounts Payable 500

Inventory 500b. Accounts Payable 500

Purchases 500c. Accounts Payable 500

Purchase Returns and Allowances 500d. Accounts Payable 500

Cash Discounts on Purchases 10 Inventory 490

e. Accounts Payable 500 Cash Discounts on Purchases 10 Purchases 490


66. Referring to Table 7-2, if Clark Company were using the perpetual inventory system, what is the journal entry for May 9? a. Accounts Payable 7,500

Inventory 160

179

Cash 7,340b. Accounts Payable 7,500

Inventory 150 Cash 7,350

c. Accounts Payable 8,000 Inventory 160 Cash 7,840

d. Accounts Payable 7,500 Cash Discounts on Purchases 160 Cash 7,340

e. Accounts Payable 7,500 Cash Discounts on Purchases 150 Cash 7,350


67. Referring to Table 7-2, if Clark Company were using the periodic inventory system, what is the journal entry for May 9?

a. Accounts Payable 7,500 Inventory 160 Cash 7,340

b. Accounts Payable 7,500 Inventory 150 Cash 7,350

c. Accounts Payable 8,000 Inventory 160 Cash 7,840

d. Accounts Payable 7,500 Cash Discounts on Purchases 160 Cash 7,340

e. Accounts Payable 7,500 Cash Discounts on Purchases 150 Cash 7,350


68. Referring to Table 7-2, if Clark Company were using a perpetual inventory system, what is the journal entry for May 15? a. Accounts Receivable 4,800

Sales 4,800b. Accounts Receivable 4,800

Sales 4,800 Cost of Goods Sold 3,492 Cash Discounts on Sales 108 Inventory 3,600

c. Accounts Receivable 4,800 Sales 4,800 Cost of Goods Sold 3,600 Inventory 3,600

180

d. Accounts Receivable 4,656 Cash Discount on Sales 144 Sales 4,800

e. Accounts Receivable 4,656 Cash Discount on Sales 144 Sales 4,800 Cost of Goods Sold 3,600 Inventory 3,600


69. Referring to Table 7-2, if Clark Company were using a periodic inventory system, what is the journal entry on May 15? a. Accounts Receivable 4,800

Sales 4,800b. Accounts Receivable 4,800

Sales 4,800 Cost of Goods Sold 3,492 Cash Discounts on Sales 108 Inventory 3,600

c. Accounts Receivable 4,800 Sales 4,800 Cost of Goods Sold 3,600 Inventory 3,600

d. Accounts Receivable 4,656 Cash Discount on Sales 144 Sales 4,800

e. Accounts Receivable 4,656 Cash Discount on Sales 144 Sales 4,800 Cost of Goods Sold 3,600 Inventory 3,600


70. Using the LIFO method, the earliest purchases of inventory are assumed to be contained:a. on the balance sheet as part of ending inventoryb. on the income statement as part of cost of goods soldc. equally split between the income statement and the balance

sheetd. impossible to determine from the given data e. The earliest purchases of inventory under LIFO are not shown

on any financial statement.


71. Using the FIFO method, the earliest purchases of inventory are assumed to be contained:a. on the balance sheet as part of ending inventory

181

b. on the income statement as part of cost of goods soldc. equally split between the income statement and the balance

sheetd. impossible to determine from the given data e. The earliest purchases of inventory under FIFO are not shown

on any financial statement.


72. Which of the following inventory methods requires a company to keep track of the actual movement of individual inventory items?a. FIFOb. LIFOc. weighted-averaged. specific identificatione. FIFO and LIFO


73. When inventory prices are rising, all of the following are reasons for choosing the LIFO versus the FIFO method except:a. LIFO generally results in lower income taxes paidb. LIFO uses more current costs in calculating cost of goods soldc. LIFO avoids inventory profitsd. LIFO reports the most up-to-date inventory values on the

balance sheete. None of the above are correct.


74. When inventory prices are rising, the ending inventory balance reported on a LIFO basis is generally:a. lower than on a FIFO basisb. equal to a FIFO basisc. greater than on a FIFO basisd. equal to a weighted-average basise. greater than a weighted-average basis


75. When inventory prices are rising, the FIFO method will generally yield a gross profit that is:a. less than the LIFO methodb. equal to the gross profit of the LIFO methodc. FIFO does not generally cause a gross profit that is different

from that of any other costing methodd. higher than the LIFO methode. All of the above are correct.


182

76. In a transaction where the merchandise invoice indicates F.O.B. shipping point, who pays the cost of shipping?a. the buyerb. the sellerc. the common carrierd. the freight forwardere. none of the above


77. Which inventory valuation method allows a company the greatest latitude in reporting results in any given period?a. FIFOb. LIFOc. specific identificationd. weighted-averagee. No method allows more latitude in reporting results than

another.


78. Which inventory valuation method is capable of allowing different cost of goods sold and inventory account balances within a given accounting period?a. FIFOb. LIFOc. specific identificationd. weighted-averagee. Each method is capable of giving only one cost of goods sold

and inventory balance for a given period.


79. Assuming inflation, if a company wanted to maximize net income, it would select which of the following inventory valuation methods? a. FIFOb. LIFOc. weighted-averaged. The selection of an inventory valuation method does not affect

the net income. e. specific identification


80. Which of the following statements best describes how management selects an inventory valuation method? a. If a company generally sells its oldest inventory first, it

must use the FIFO inventory valuation method.b. If a company generally sells its oldest inventory first, it

must use the LIFO inventory valuation method.

183

c. If a company generally sells its newest inventory first, it must use the FIFO inventory valuation method.

d. If a company sometimes sells its newest inventory and sometimes sells its oldest inventory, then it must use the weighted average inventory valuation method.

e. A company may choose any inventory valuation method even if it is contradictory to the physical flow of inventory.


81. Assuming inflation, which of the following relationships among inventory valuation methods is incorrectly stated?a. FIFO has a higher inventory balance and a higher net income

than LIFO.b. FIFO has a higher inventory balance and a higher net income

than weighted-average.c. LIFO has a higher inventory balance and a higher net income

than weighted-average.d. Weighted-average has a higher inventory balance and a lower

cost of goods sold than LIFO.e. LIFO has a lower inventory balance and a higher cost of goods

sold than FIFO.


82. Assuming inflation, which of the following statements incorrectly describes an attribute of, or the relationship among, inventory valuation methods?a. Specific identification is used primarily when inventory

consists of a relatively few but very expensive and distinctive items.

b. Given inflation and in order to minimize taxes, most firms have tended to switch to LIFO if they had been using FIFO.

c. LIFO tends to provide inventory valuations that closely approximate the actual market value of the inventory at the balance sheet date.

d. LIFO tends to combine current sales prices and current acquisition costs through cost of goods sold.

e. Weighted average provides less extreme balance sheet and income statement results than either FIFO or LIFO.


Table 7-3 Brooks Company had the following activity in its inventory account during May 20X4.

Cost per TotalDate Activity Units Unit CostMay 1 Beginning inventory 100 $3.00 $300May 3 Purchase 40 3.10 124

184

May 7 Sale 50May 12 Purchase 50 3.20 160May 16 Sale 70May 23 Sale 40May 30 Purchase 60 3.30 198

Units in beginning inventory 100 unitsUnits purchased 150 unitsUnits sold 160 units

83. Referring to Table 7-3, what is the ending inventory balance at May 31, 20X4, for Brooks Company if the company uses perpetual FIFO as its inventory valuation method? a. $198.00b. $270.00c. $294.00d. $297.50e. $358.00


84. Referring to Table 7-3, what is the cost of goods sold for the month ended May 31, 20X4, for Brooks Company if the company uses periodic FIFO as its inventory valuation method?a. $424.00b. $485.00c. $488.00d. $500.00e. $584.00


85. Referring to Table 7-3, what is the ending inventory at May 31, 20X4, for Brooks Company if the company uses periodic weighted average as its inventory valuation method (round all calculations to the nearest penny)?a. $281.70b. $285.60c. $290.22d. $290.70e. $294.00


86. Referring to Table 7-3, what is the ending inventory balance at May 31, 20X4, for Brooks Company if the company uses perpetual LIFO as its inventory valuation method?a. $240b. $270c. $288d. $300

185

e. $438


87. Referring to Table 7-3, what is the cost of goods sold for the month ended May 31, 20X4, for Brooks Company if the company uses perpetual LIFO as its inventory valuation method?a. $344b. $482c. $494d. $502e. $542


88. Referring to Table 7-3, what is the ending inventory balance at May 31, 20X4, for Brooks Company if the company uses periodic LIFO as its inventory valuation method?a. $240b. $270c. $288d. $300e. $438


89. FIFO tends to decrease taxes when: a. costs are increasingb. costs are decreasingc. costs are constantd. FIFO will always yield the lowest possible taxese. Impossible to determine without specific cost data


90. LIFO tends to decrease taxes when:a. costs are decliningb. costs are constantc. costs are increasingd. LIFO will always yield the lowest possible taxes.e. Impossible to determine without specific cost data


91. Which of the following correctly states an attribute associated with the LIFO inventory valuation method?a. The replacement cost is the cost of goods sold of an inventory

item that is sold today.b. An increase in the replacement cost of the inventory held

during the current period is called a holding gain.

186

c. A LIFO layer is maintained only as long as that purchase is the most recent purchase.

d. Assuming inflation across time periods, a LIFO inventory liquidation will result in a lower net income.

e. A LIFO reserve is established if a deflationary trend occurs.


92. Because of generally rising prices, a LIFO liquidation willa. decrease net income.b. increase cost of goods sold.c. increase net income.d. increase inventory.e. occur often because of matching.


93. Because of rising prices, LIFO inventory reservesa. make the inventory higher under LIFO than FIFO.b. make the inventory higher under FIFO than LIFO.c. inflate the balance sheet asset total.d. make stockholders’ owners equity look higher than they would

under FIFO.e. are very rare.


94. The replacement costs have increased from $2.90 per unit to 3.40 per unit from the time 500 units of inventory were purchased. The year-end audit found 200 units remaining in stock. The company should take what following step? a. Cost of goods sold 750

Inventory 750b. Inventory 750

Cost of goods sold 750c. Cost of goods sold 100

Inventory 100d. Inventory 100

Cost of goods sold 100e. Make no entry.


95. Joe Co. has 200 units of inventory which are currently priced $4.90 per unit at the market. Originally this inventory cost $5.50 per unit from an order of 400. Joe Co. should a. Loss on inventory write-down 120

Inventory 120

187

b. Inventory 120 Loss on inventory write-down 120

c. Loss on inventory write-down 240 Inventory 240

d. Inventory 240 Loss on inventory writedown 240

e. Make no entry.


96. The lower-of-cost-or-market practice is based on thea. consistency principle.b. entity concept.c. reliability principle.d. conservatism principle.e. historical cost concept.


97. If the ending inventory is overstated by $15,000 in 20X4, and assuming a constant 30% tax rate, then what will be the effect on net income in 20X5?a. Net income will be understated by $4,500 in 20X5.b. Net income will be overstated by $4,500 in 20X5.c. Net income will be understated by $10,500 in 20X5.d. Net income will be overstated by $10,500 in 20X5.e. Net income will not be overstated or understated in 20X5.


98. If ending inventory is understated by $8,000 in 20X4, and assuming a constant 30% tax rate, then what will be the effect on retained earnings in 20X5?a. The 20X5 ending retained earnings will be understated by

$2,400.b. The 20X5 ending retained earnings will be overstated by

$2,400.c. The 20X5 ending retained earnings will be understated by

$5,600.d. The 20X5 ending retained earnings will be overstated by

$5,600.e. The 20X5 ending retained earnings will not be understated or

overstated.


99. If ending inventory is understated by $7,000 in 20X4, and assuming a constant 30% tax rate, then what will be the effect on gross profit in 20X4?a. 20X4 gross profit will be understated by $2,100.

188

b. 20X4 gross profit will be understated by $4,900.c. 20X4 gross profit will be overstated by $4,900.d. 20X4 gross profit will be understated by $7,000.e. 20X4 gross profit will be overstated by $7,000.


100.Two separate errors affected Dryer Shirts in 20X4. The beginning inventory was overstated by $17,000 and the ending inventory was overstated by $23,000. Ignoring taxes, net income in 20X4 will be:a. overstated by $40,000b. understated by $23,000c. overstated by $23,000d. overstated by $6,000e. understated by $40,000


101.Two separate errors affected Dryer Shirts in 20X4. The beginning inventory was overstated by $17,000 and the ending inventory was overstated by $23,000. Ignoring taxes, net income in 20X5 will be:a. overstated by $40,000b. understated by $23,000c. overstated by $23,000d. overstated by $6,000e. understated by $40,000


102. Hewitt Company had sales during February 20X5 of $29,000. During the month, the company had purchases of $17,000. At February 1, 20X5, the company had inventory of $4,500. Assuming the company has a gross profit percentage of 40%, what is the estimated ending inventory for Hewitt Company at February 28, 20X5?a. $ 4,100b. $ 4,900c. $7,300d. $7,500e. $9,900


103. For the Marsh Store, the gross profit percentage was 73% in 19X4 and 79% in 19X3. Management shoulda. should be pleased at the profits.b. investigate inventory shrinkage.c. consider that a competitor’s store closing helped results.d. decrease prices.

189

e. hire new auditors.


104. Acme Production had inventory of $8,000 on January 1, 20X4, and $12,000 on December 31, 20X4. Sales for 20X4 were $250,000 and the company's gross profit percentage was 35%. What was the inventory turnover for Acme Production for 20X4?a. 7.29 timesb. 8.75 timesc. 13.54 timesd. 16.25 timese. 25.00 times


190

Problems

105. Witten Company uses a periodic inventory system and on October 3, 20X4, purchased inventory on account for $20,000. The terms of the purchase were 3/10, n/45. Shipping was $800, FOB destination. On October 4, the inventory was inspected, and it was discovered that some was damaged. The seller granted Witten Company a $600 allowance. On October 11, Witten Company paid the appropriate amount. Prepare the journal entries for each of the events noted above.


Oct. 3 Purchases 20,000 Accounts Payable 20,000Oct. 4 Accounts Payable 600 Purchase Returns and Allowances 600Oct. 11 Accounts Payable 19,400 Cash Discounts on Purchases 582 Cash 18,818

191

106. Cleary Company had inventory of $200 on March 1. The company had the following transactions during March.

March 2 Purchased inventory on account for $2,000, terms 2/10, n/30.

March 3 Returned $100 worth of inventory from the March 2 purchase.

March 9 Paid the appropriate amount for the inventory purchased on

March 2.

Prepare the appropriate journal entry for each of the above transactions assuming Cleary Company uses a perpetual inventory system.


March 2 Inventory 2,000 Accounts Payable 2,000March 3 Accounts Payable 100 Inventory 100March 9 Accounts Payable 1,900 Inventory 38 Cash 1,862

192

107. Crawford Company had inventory of $350 on March 1. The company had the following transactions during March.

Mar. 2 Purchased inventory on account for $1,800, terms 2/10, n/30.

Mar. 3 Returned $150 worth of inventory from the Mar. 2 purchase.Mar. 9 Paid the appropriate amount for the inventory purchased on

Mar. 2.Mar. 17 Sold inventory costing $1,000 for $1,920 in cash.Mar. 28 Prepared closing entries for the month (prepare entries only for sales and cost of goods sold)

Prepare the appropriate journal entry for each of the above transactions assuming Crawford Company uses the perpetual inventory method.


Mar 2 Inventory 1,800 Accounts Payable 1,800Mar 3 Accounts Payable 150 Inventory 150Mar 9 Accounts Payable 1,650 Inventory 33 Cash 1,617Mar 17 Cash 1,920 Sales 1,920 Cost of Goods Sold 1,000 Inventory 1,000Mar 28 Sales 1,920 Income Summary 1,920 Income Summary 1,000 Cost of Goods Sold 1,000

193

Table 7-4Galaxy Company uses the periodic inventory method and recorded the following inventory and purchase transactions for the month of August 20X4.Date Transaction Units Unit Cost TotalAug 1 Beginning inventory 3,000 units @ $1.00 $3,000Aug 3 Purchases 900 units @ $1.20 1,080Aug 10 Purchases 800 units @ $1.40 1,120Aug 17 Purchases 600 units @ $1.60 960Aug 24 Purchases 300 units @ $1.80 540

108. Referring to the information in Table 7-4, determine the ending inventory balance at August 31 and the cost of goods sold for the month of August, 20X4 for Galaxy Company. Galaxy Company sold 3,100 units during August, 20X4. On August 31, a physical inventory count was conducted, and 2,500 units were on hand. Assume the company uses the first-in-first-out (FIFO) cost flow assumption.


Note that ending inventory equals 2,500 units, cost of goods sold equals 3,100 units and the total dollar amount of ending inventory and cost of goods sold must equal $6,700. FIFO ending inventory Aug. 24 Purchase 300 units @ $1.80 $ 540 Aug. 17 Purchase 600 units @ $1.60 960 Aug. 10 Purchase 800 units @ $1.40 1,120 Aug. 3 Purchase 800 units @ $1.20 960 2,500 $3,580

FIFO periodic cost of goods sold Aug. 3 Purchase 100 units @ $1.20 $ 120 Aug. 1 B.I. 3,000 units @ $1.00 3,000 3,100 $3,120

194

109.Referring to the information in Table 7-4, determine the ending inventory balance at August 31 and the cost of goods sold for the month of August, 20X4 for Galaxy Company. Galaxy Company sold 3,100 units during August, 20X4. On August 31, a physical inventory count was conducted, and 2,500 units were on hand. Assume the company uses the last-in-first-out (LIFO) cost flow assumption.


Note: Ending inventory equals 2,500 units, cost of goods sold equals 3,100 units and the total dollar amount of ending inventory and cost of goods sold must equal $6,700. LIFO ending inventory Aug. 1 B.I. 2,500 units @ $1.00 $2,500

LIFO periodic cost of goods sold Aug. 24 Pur. 300 units @ $1.80 $ 540 Aug. 17 Pur. 600 units @ $1.60 960 Aug. 10 Pur. 800 units @ $1.40 1,120 Aug. 3 Pur. 900 units @ $1.20 1,080 Aug. 1 B.I. 500 units @ $1.00 500 3,000 $4,200

195

Table 7-5Cole Company operates under a perpetual inventory system. It began operations on March 1, 20X4, and had the following transactions affecting inventory during March 20X4.March 1 Purchase 500 units @ $5.00 $2,500March 5 Sale 200 unitsMarch 10 Purchase 300 units @ $5.20 $1,560March 15 Sale 320 unitsMarch 20 Purchase 400 units @ $5.40 $2,160March 25 Sale 230 units

110. Referring to Cole Company information in Table 7-5, determine the cost of goods sold for the month of March, 20X4 and the ending inventory balance at March 31, 20X4. Assume the company uses the first-in-first-out (FIFO) cost flow assumption.


Note that 750 units were sold, 450 units are in ending inventory, and the total dollar amount of ending inventory and cost of goods sold must equal $6,220.FIFO perpetual inventory methodCost of goods sold March 5 Sale 200 units @ $5.00 $1,000 March 15 Sale 300 units @ $5.00 1,500 20 units @ $5.20 104 March 25 Sale 230 units @ $5.20 1,196 $3,800

Ending inventory 50 units @ $5.20 $ 260 400 units @ $5.40 2,160 $2,420

196

111. Refer to the Cole Company information in Table 7-5. Assume the company is trying to decide between the periodic method and the perpetual method. Cole has decided to use the last-in-first-out cost flow assumption. Determine the cost of goods sold for the month of March, 20X4 and the ending inventory balance at March 31, 20X4, using both the perpetual method and the periodic method.


The perpetual focuses upon sales, periodic focuses upon purchases. This problem demonstrates this to the student. Note that 750 units were sold, 450 units are in ending inventory, and the total dollar amount of ending inventory and cost of goods sold must equal $6,220.

LIFO perpetual methodCost of goods sold March 5 sale 200 units @ $5.00 $1,000 March 15 sale 300 units @ $5.20 1,560 20 units @ $5.00 100 March 25 sale 230 units @ $5.40 1,242 $3,902

Ending inventory 280 units @ $5.00 $1,400 170 units @ $5.40 918 $2,318 LIFO periodic inventory methodCost of goods sold March 20 purchase 400 units @ $5.40 $2,160 March 10 purchase 300 units @ $5.20 1,560 March 1 purchase 50 units @ $5.00 250 $3,970

LIFO ending inventory March 1 purchase 450 units @ $5.00 $2,250

197

112. Murray Inc had the following inventory balance as of June 30, 20X4.

June 3 order of 400 units @ $10.50 $ 4,200June 8 order of 100 units @ $11.00 1,100June 19 order of 200 units @ $11.50 2,300 $ 7,600

On July 1, 20X4, the company sold 240 units at $16.00 per unit. On July 10, 20X4, a competitor announced a new model which resulted in the cost of Murray inventory dropping to the new replacement cost, which was $10.75. Murray Inc uses a perpetual inventory system.

1. What is the balance in the inventory account on July 9, 20X4, if Murray Inc uses: a. FIFO? b. LIFO?2. What journal entry is necessary on July 10, 20X4, if Murray Inc uses lower-of-cost-or-market, where cost is defined as: a. FIFO? b. LIFO?


1a. FIFO. 160 units @ $10.50 $ 1,680 100 units @ $11.00 1,100 200 units @ $11.50 2,300 $ 5,080

1b. LIFO. 400 units @ $10.50 $4,200 60 units @ $11.00 660 $4,860

2a. FIFO Loss on Write-down of Inventory 175 Inventory 175 [(200 units x ($11.50 - $10.75)) + (100 units x ($11 - $10.75))]

2b. LIFO. Loss on Write-down of Inventory 15 Inventory 15 (60 units x ($11.00 - $10.75))

198

113. Presented below are the income statements for Shaw Company for the years ended December 31, 20X4, 20X3, and 20X2.

The Shaw CompanyComparative Income StatementsFor years ending December 31

20X4 20X3 20X2 Sales $910 $790 $620 Less: Cost of Goods Sold: Beginning Inventory 90 70 60 Purchases 550 510 420 Goods Available for Sale 640 580 480 Less: Ending Inventory 80 90 70 Cost of Goods Sold 560 490 410 Gross Profit 350 300 210 Less: Operating Expenses 70 60 50 Income Before Taxes 280 240 160Income Tax Expense (40%) 112 96 64Net Income $168 $144 $ 96

In 20X5 it was discovered that the 20X2 ending inventory was understated by $20, and the 20X4 ending inventory was overstated by $10. The 20X2 beginning inventory and the 20X3 ending inventory were correctly stated.

Identify the accounts which are incorrect on the 20X2, 20X3, and 20X4 income statements. State the dollar error (by how much they are incorrect) and whether the amounts overstate or understate balances.


The Shaw CompanyComparative Income StatementsFor years ending December 31

20X4 20X3 20X2 Sales $910 $790 $620 Less: Cost of goods sold Beginning inventory 90 70 ($20 under) 60 Purchases 550 510 420 Goods available for sale 640 580 ($20 under) 480 Less: Ending inventory 80 ($10 over) 90 70 ($20 under) Cost of goods sold 560 ($10 under) 490 ($20 under) 410 ($20 over)Gross profit 350 ($10 over) 300 ($20 over) 210 ($20 under)Less: Operating expenses 70 60 50 Income before taxes 280($10 over) 240 ($20 over) 160 ($20 under)

199

Income tax expense (40%) 112 ($ 4 over) 96 ($ 8 over) 64 ($ 8 under)Net income $168 ($ 6 over) $144 ($12 over) $ 96 ($12 under)

114.Armstrong Company uses a periodic inventory system. On January 1, 20X6, the company had beginning inventory of $979,000. From January 1 to April 27, the company purchased $285,000 of inventory and had sales revenue of $840,000. On the morning of April 28, an earthquake occurred which resulted in the total loss of all inventory. The company's gross profit percentage has averaged 40%. What is the estimated inventory loss due to the earthquake?


Sales $840,000Less: Cost of goods sold 504,000(60% X $840,000) Gross Profit $336,000(40% X $840,000)

Beginning inventory $979,000Plus purchases 285,000Goods available for sale 1,164,000Less Cost of goods sold (from above) 504,000Equals Estimated ending inventory $660,000

Estimated ending inventory = $660,000

54. Repairs made to equipment as part of yearly maintenance would be recorded in the journal by:a. debiting equipmentb. debiting repairs expensec. debiting depreciation expensed. debiting accumulated depreciatione. crediting accumulated depreciation


55. Treating a capital expenditure as repairs and maintenance expense:

a. understates expenses and overstates owners' equityb. understates expenses and understates assetsc. overstates expenses and understates net incomed. overstates assets and overstates owners' equitye. overstates assets and overstates revenue


56. Expenditures for long-lived assets are expensed when theya. add new assets.b. increase capacity.

200

c. improve efficiency.d. provide benefit lasting one year or less.e. lengthen an asset’s useful life.


Table 8-1Didde Company acquired a building and the two acres of land on which it is located. The total purchase price was $1,000,000. For valuation purposes, the company contacted three local commercial real estate agents, who gave the following valuation estimates:

Land BuildingGloria Child $ 450,000 $1,050,000Shelly Bop $ 600,000 $ 900,000Joe Bee $ 300,000 $1,200,000

57. Referring to Table 8-1, if Didde Company used the valuation made by Joe Bee, and assuming it paid cash for the land and building, what journal entry would Didde Company make to record the purchase?a. Land 300,000

Building 700,000 Cash 1,000,000

b. Land 200,000 Building 800,000 Cash 1,000,000

c. Land 300,000 Building 1,200,000 Cash 1,500,000

d. Land 400,000 Building 600,000 Cash 1,000,000

e. Land 300,000 Building 1,200,000 Cash 1,000,000 Gain on Purchase of Assets 500,000


58. Referring to Table 8-1, if Didde Company used the valuation made by Shelly Bop, and assuming it paid cash for the land and building, what journal entry would Didde Company make to record the purchase?a. Land 300,000

Building 700,000 Cash 1,000,000


c. Land 600,000 Building 900,000

201

Cash 1,500,000d. Land 400,000

Building 600,000 Cash 1,000,000

e. Land 600,000 Building 900,000 Cash 1,000,000 Gain on Purchase of Assets 500,000


59. Referring to Table 8-1, if Didde Company used the valuation made by Gloria Child, and assuming it paid cash for the land and building, what journal entry would Didde Company make to record the purchase?a. Land 300,000

Building 700,000 Cash 1,000,000


c. Land 450,000 Building 1,050,000 Cash 1,500,000

d. Land 366,667 Building 633,333 Cash 1,000,000

e. Land 450,000 Building 1,050,000 Cash 500,000 Gain on Purchase of Assets 500,000


60. Equipment is acquired for $100,000. Freight costs are $1,800, sales tax amounted to $1,000. Maintenance during the first year of use cost $6,000. What is the cost of the equipment?a. $102,800b. $100,000c. $108,800d. $101,000e. $101,800


61. The removal of an old building to make land suitable for its intended use is charged to:a. repairs expenseb. landc. buildingsd. land improvementse. none of the above

202


Table 8-2Farthing Company acquired a $40,000 machine on January 1, 20X4. The machine is estimated to have a useful life of 5 years, and a residual value of $4,000. For unit depreciation purposes, the machine is expected to produce 500,000 units.

62. Referring to Table 8-2, what is the depreciable value of the machine acquired by Farthing Company?a. $ 4,000b. $36,000c. $40,000d. $8,000e. cannot be determined without additional data


63. Referring to Table 8-2, if Farthing Company uses straight-line depreciation, what is the depreciation expense in 20X5?a. $ 3,686b. $ 7,200c. $ 8,000d. $ 8,800e. $12,500


64. Referring to Table 8-2, if Farthing Company uses straight-line depreciation, what is the balance in the accumulated depreciation account on January 1, 20X6?a. $14,400b. $16,000c. $17,600d. $21,600e. $24,000


65. Referring to Table 8-2, if Farthing Company uses unit depreciation, and the company produces 80,000 units in 20X4, what will be the depreciation expense for 20X4?a. $5,760b. $6,400c. $7,200d. $8,000e. $8,800


203

66. Referring to Table 8-2, if Farthing Company uses unit depreciation and the company produces 80,000 units in 20X4, 130,000 units in 20X5, and 160,000 units in 20X6, what is the depreciation expense in 20X6?a. $ 6,682b. $11,520c. $12,800d. $26,640e. $29,600


67. Referring to Table 8-2, if Farthing Company uses unit depreciation, and the company produces 80,000 units in 20X4, 130,000 units in 20X5, 160,000 units in 20X6, and 70,000 units in 20X7, what is the net book value of the machine at December 31, 20X7?a. $4,000b. $4,320c. $4,800d. $8,320e. $8,800


68. Referring to Table 8-2, if Farthing Company uses double-declining-balance depreciation, what is the depreciation expense in 20X4? a. $14,400b. $16,000c. $17,600d. $25,000e. $27,776


69. Referring to Table 8-2, if Farthing Company uses double-declining-balance depreciation, what is the depreciation expense in 20X5?a. $ 8,640b. $ 9,600c. $10,560d. $14,400e. $16,000


70. Referring to Table 8-2, what is the balance in the accumulated depreciation account on December 31, 20X5, if Farthing Company uses double-declining-balance depreciation?a. $23,040

204

b. $25,600c. $28,160d. $28,800e. $32,000


71. Referring to Table 8-2, if Farthing Company uses double-declining-balance depreciation, what is the depreciation expense in 20X6?a. $ 5,184b. $ 5,760c. $ 6,336d. $14,400e. $16,000


72. Referring to Table 8-2, what is the balance in the accumulated depreciation account on December 31, 20X6, if Farthing Company uses double-declining-balance depreciation?a. $28,224b. $31,360c. $34,496d. $37,140e. $40,000


73. Referring to Table 8-2, if Farthing Company uses double-declining-balance depreciation, what is the net book value of the machine on December 31, 20X6?a. $ -0- b. $ 4,000c. $ 8,640d. $11,776e. $12,640


74. Referring to Table 8-2, assume Farthing Company was considering the use of double-declining-balance depreciation. The company wishes to minimize its tax payments in 20X6, 20X7, and 20X8. The company is considering switching to straight-line depreciation as soon as it becomes more advantageous to do so. In what year will that occur?a. Straight-line depreciation is never more advantageous than

double-declining-balance depreciation.b. Year 20X6c. Year 20X7d. Year 20X8

205

e. In this case, the depreciation expense in 20X8 will be the same for both methods, since you do not depreciate below residual value in either method.


75. To measure depreciation for a plant asset, all of the following must be known except:a. estimated useful lifeb. current market valuec. estimate residual valued. historical coste. All of the above must be known to measure depreciation for a

plant asset.


76. Book value is defined as:a. cost less salvage valueb. current market value less accumulated depreciationc. cost less accumulated depreciationd. cost plus accumulated depreciatione. cost plus salvage value


77. The double-declining-balance method of depreciation:a. causes less depreciation in the early years of an asset's use

as compared to other depreciation methodsb. causes the same amount of depreciation in the early years of

an asset's use as compared to other depreciation methodsc. causes more depreciation in the early years of an asset's use

as compared to other depreciation methodsd. is not an acceptable depreciation method according to

generally accepted accounting principlese. none of the above


Table 8-3Diamond Company acquired a $60,000 machine on January 1, 20X4. The machine is estimated to have a useful life of 4 years, and a residual value of $10,000. For unit depreciation purposes, the machine is expected to produce 500,000 units.

78. Referring to Table 8-3, what is the depreciable value of the machine acquired by Diamond Company?a. $10,000b. $50,000c. $60,000d. $15,000

206

e. cannot be determined without additional data


79. Referring to Table 8-3, if Diamond Company used straight-line depreciation, what will be the depreciation expense in 20X4?a. $ 7,200b. $ 8,000c. $ 8,800d. $12,500e. $13,888


80. Referring to Table 8-3, if Diamond Company uses straight-line depreciation, what is the depreciation expense in 20X6?a. $ 3,686b. $ 7,200c. $ 8,000d. $ 8,800e. $12,500


81. Referring to Table 8-3, if Diamond Company uses straight-line depreciation, what is the balance in the accumulated depreciation account on January 1, 20X6?a. $14,400b. $16,000c. $17,600d. $21,600e. $25,000


82. Referring to Table 8-3, if Diamond Company uses unit depreciation, and the company produces 80,000 units in 20X4, what will be the depreciation expense for 20X4?a. $5,760b. $6,400c. $7,200d. $8,000e. $8,800


83. Referring to Table 8-3, if Diamond Company uses unit depreciation and the company produces 80,000 units in 20X4, 130,000 units in 20X5, and 160,000 units in 20X6, what is the depreciation expense in 20X6?a. $ 8,000

207

b. $13,000c. $12,800d. $16,000e. $37,000


84. Referring to Table 8-3, if Diamond Company uses unit depreciation, and the company produces 80,000 units in 20X4, 130,000 units in 20X5, 160,000 units in 20X6 and 70,000 units in 20X7, what is the net book value of the machine at December 31, 20X7?a. $ 8,000b. $13,000c. $12,800d. $16,000e. $37,000


85. Referring to Table 8-3, if Diamond Company uses double-declining-balance depreciation, what is the depreciation expense in 20X4? a. $12,500b. $16,000c. $17,500d. $25,000e. $30,000


86. Referring to Table 8-3, assume Diamond Company uses double-declining-balance depreciation, what is the depreciation expense in 20X5?a. $ 8,640b. $ 9,600c. $12,500d. $15,000e. $25,000


87. Referring to Table 8-3, what is the balance in the accumulated depreciation account on December 31, 20X5, if Diamond Company uses double-declining-balance depreciation?a. $25,000b. $30,000c. $40,000d. $45,000e. $50,000


208

88. Which of the following is an appropriate description of an attribute associated with depreciation?a. The depreciable value of a tangible asset is the total

acquisition cost of the asset.b. The residual value of a tangible asset is the estimated amount

to be received for an asset upon its disposal at the end of its useful life.

c. The useful life of a tangible asset is the time period over which the company believes it will own the asset.

d. The estimation of useful lives is almost always based upon when the tangible asset will physically wear out.

e. Depreciation attempts to measure the deteriorating market value of an asset.


89. Depreciation expense computed under double-declining-balance will decrease each year because the:a. book value used in the computation each year increasesb. book value used in the computation each year decreasesc. rate used in the computation each year increasesd. rate used in the computation each year decreasese. All the above are correct.


Table 8-4Rocket Company bought a machine for $15,000 on January 1, 20X3 with a useful life of 4 years and a salvage value of $3,000. At the beginning of 20X5, Rocket finds the residual value will be zero.

90. Using Table 8-4 and assuming Rocket employs straight-line depreciation, what will be the depreciation expense in 20X5?a. $3,000b. $4,500c. $6,000d. $7,500e. $10,500


91. Using Table 8-4 and assuming Rocket employs double-declining balance depreciation, what will be the depreciation expense in 20X5?a. $1,125b. $1,875c. $2,625d. $3,000e. $10,500

209


92. Using Table 8-4 and assuming Rocket employs straight-line depreciation, additionally suppose that Rocket finds a $200 attachment that extends the life of the equipment 2 years beyond the original estimate. What will be the depreciation expense in 20X5?a. $2,250b. $2,300c. $3,000d. $5,250e. $10,500


93. Which of the following is an attribute associated with the modified accelerated cost recovery system (MACRS)?a. For most assets, MACRS approximates straight-line

depreciation.b. MACRS depreciates assets over a longer useful life than would

be expected from the asset, thus making the asset last longer on the books.

c. MACRS allows for greater depreciation expense in the later years of an asset's life, thus reducing the taxes a company will have to pay during those years.

d. The purpose of MACRS is to provide more flexibility in GAAP depreciation methods.

e. none of the above


94. Attributes associated with the United States' tax law's treatment of long-lived assets include all of the following except:a. The United States' tax law allows for very accelerated rates

of depreciation, based upon the general use of double-declining-balance depreciation coupled with shorter useful lives than would normally be allowed.

b. The United States' tax law is written by the United States Congress.

c. The United States' tax law is the basis used for shareholder reporting purposes.

d. United States' tax law changes in some way almost every year.e. United States' tax laws can be quite different from tax laws

in other countries.


95. MACRSa. has longer lives than economic lives resulting in higher

income taxes.

210

b. has longer lives than economic lives resulting in lower income taxes.

c. has shorter lives than economic lives resulting in higher income taxes.

d. has shorter lives than economic lives resulting in lower income taxes.

e. has lives equivalent to economic lives.


96. Which of the following statements is considered incorrect?a. Depreciation methods provide a systematic way to expense the

cost of an asset, although this expense is not a negative cash flow.

b. Depreciation is an allocation of the original cost of an asset to the periods in which the asset is used.

c. Accumulated depreciation is the summation of the amount of the original cost of an asset already written off to expense in prior periods.

d. Accumulated depreciation is not a pile of cash waiting to be used.

e. Charging depreciation expense provides a means of setting aside cash for the replacement of an asset.


Table 8-5 Granada Company began operations on January 1, 20X4, when the owners invested $80,000 cash in the company. Also on January 1, the company paid for a $30,000 machine. The machine has a useful life of four years and a $2,000 residual value. During its first year of operations, the company had sales of $96,000 and operating expenses except depreciation of $67,000. All sales were cash sales and all non-depreciation operating expenses were paid in cash. Granada Company has a 30% tax rate and pays all taxes on December 31.

97. Referring to Table 8-5, what is the cash balance before taxes on December 31, 20X4, if Granada Company uses straight-line depreciation?a. $72,000b. $76,900c. $79,000d. $81,100e. $86,000


98. Referring to Table 8-5, what is the cash balance before taxes on December 31, 20X4, if Granada Company uses double-declining- balance depreciation?a. $64,000

211

b. $74,500c. $79,000d. $83,500e. $94,000


99. Referring to Table 8-5, what is the net cash provided by operating activities before taxes for 20X4, if Granada Company uses straight-line depreciation?a. $(74,000)b. $(67,000)c. $ 22,000d. $ 25,000e. $ 29,000


100. Referring to Table 8-5, what is the net cash provided by operating activities before taxes for 20X4, if Granada Company uses double-declining-balance depreciation?a. $(81,000)b. $(67,000)c. $ 14,000d. $ 25,000e. $ 29,000


101. Referring to Table 8-5, what is the cash balance after taxes on December 31, 20X4, if Granada Company uses straight-line depreciation?a. $55,300b. $72,400c. $72,550d. $94,050e. $94,400


102. Referring to Table 8-5, what is the cash balance after taxes on December 31, 20X4, if Granada Company uses double-declining-balance depreciation?a. $59,800b. $74,500c. $74,800d. $88,800e. $89,500


212

103. Referring to Table 8-5, what is the net cash provided by operating activities after taxes for 20X4, if Granada Company uses straight-line depreciation?a. $ 6,600b. $15,050c. $15,400d. $22,400e. $22,550


104. Referring to Table 8-5, what is the net cash provided by operating activities after taxes for 20X4, if Granada Company uses double-declining-balance depreciation?a. $ 6,860b. $ 9,800c. $10,500d. $24,500e. $24,800


105. A major expenditure made to equipment that extends its useful life beyond the original estimate is journalized by:a. debiting repairs expenseb. debiting depreciation expensec. debiting equipmentd. crediting depreciation expensee. crediting accumulated depreciation


106. Which of the following activities classify as a betterment?a. oilingb. polishingc. restoring to working order after an accidentd. adjustinge. rehabilitating to increase rent


105. The expenditure for an improvement to equipment that would increase output is journalized by:a. crediting accumulated depreciationb. crediting depreciation expensec. debiting depreciation expensed. debiting equipmente. debiting repair expense


213

106. Frecently sold some equipment for $3,800 cash. The equipment cost $19,600 and had accumulated depreciation through the date of sale totaling $17,300. The journal entry to record the sale of the equipment will include a:a. credit to accumulated depreciation of $17,300b. credit to equipment for $2,300c. debit to gain on sale of equipment for $1,500d. credit to gain on sale of equipment for $1,500e. debit to depreciation expense for $17,300


107. Equipment costing $20,000 with $17,800 of accumulated depreciation is sold for $2,500 cash. The journal entry will involve a:a. debit to depreciation expense for $17,800b. credit to depreciation expense for $17,800c. credit to accumulated depreciation for $17,800d. debit to accumulated depreciation for $17,800e. debit to accumulated depreciation for $2,200


108. Equipment costing $45,000 with a book value of $12,000 is sold for $21,500. The journal entry will involve a:a. credit to accumulated depreciation for $14,900b. debit to accumulated depreciation for $22,000c. debit to accumulated depreciation for $33,000d. credit to equipment for $22,000e. credit to accumulated depreciation for $22,000


109. The entry to journalize an equipment’s impairment loss would includea. debit accumulated depreciationb. credit accumulated depreciationc. credit impairment lossd. debit equipmente. credit equipment


110. A recoverability test for impairmenta. is based on discounted present value.b. requires SEC approval.c. establishes that the asset is impaired.d. only occurs when the asset is sold.e. identifies the write-up value


214

111. Dwyer Company determines the following information at year end about a piece of equipment that has a net book value of $75,000. Assume the equipment will not be for sale.Present value of future expected net cash flows $52,500Undiscounted future expected cash flows 63,500Estimated costs to sell 4,000The impairment loss isa. $22,500b. $48,500c. $52,500d. $57,500e. $0 No impairment loss


112. Attributes associated with intangible assets include all of the following except:a. The economic life of an intangible asset does not always equal

its legal life.b. The cost of developing an intangible asset internally is

capitalized as an asset.c. Intangible assets are similar to fixed assets, in that their

acquisition costs are capitalized as assets, and this cost is expensed over their estimated useful lives.

d. Intangible assets are long-lived assets which are not physical in nature.

e. Examples of an intangible asset include patents, copyrights, and goodwill.


113. Amortization of an intangible asset is similar to which depreciation method?a. unit depreciationb. straight-linec. double-declining balanced. MACRSe. none of the above


114. An attribute of leases includes all of the following except:a. An example of a leasehold improvement would be the

installation of new paneling, walls, and a window air conditioner.

b. The lessee must select the shorter of either the useful life of the leasehold improvement or the remaining life of the lease to amortize the leasehold improvement.

215

c. Although they are technically intangible assets, leaseholds and leasehold improvements are frequently classified with plant assets.

d. A leasehold is a right to use a leased asset for a specified period of time beyond one year.

e. Leasehold improvements can be amortized using either accelerated or straight-line methods.


115. Big Company buys Little Company for $11 million. Little Company has assets worth $9 million and liabilities of $2 million. Little’s stockholders’ equity is recorded at $8 million. What goodwill should Big record?a. $10 millionb. $8 millionc. $4 milliond. $2 millione. $0 million


116. Computer Inc has $500,000 of goodwill on the balance sheet. The company determines that an impairment has occurred for $100,000. Computer Inc shoulda. recompute the original purchase and restate all subsequent

statements.b. debit goodwill for $100,000c. credit goodwill for $100,000d. debit goodwill for $400,000e. credit goodwill for $400,000


117. Computer Inc has $400,000 of goodwill on the balance sheet from XYZ Company which was purchased 5 years ago. The goodwill amortization this year should be.a. $10,000b. $20,000c. $40,000d. $80,000e. $0


118. Weber Resources acquired a gold mine for $8,000,000. It is estimated that 40,000 ounces of gold can be extracted from the mine. In the first year of operations, 15,000 ounces of gold were extracted. Weber Resources would recognize:a. an increase in net income of $3,000,000b. depreciation expense of $3,000,000

216

c. cost of goods sold of $3,000,000d. amortization expense of $3,000,000e. depletion expense of $3,000,000


119. In 20X2 Big Tex Oil purchased drilling rights for $1,000,000. At the time, the engineer estimated 20,000 barrels of oil in the field. In 20X3, 4,000 barrels were pumped and in 20X4, 5,000 barrels were pumped. Which entry below is correct? a. credit inventory of $200,000 in 20X2b. debit depreciation expense of $250,000 in 20X3c. debit cost of goods sold of $200,000 in 20X3d. debit depletion expense of $250,000 in 20X4e. debit amortization expense of $200,000 in 20X2


120. Wildcat Resources acquired a silver mine for $4,000,000. The company’s survey estimates that 40,000 ounces of silver can be extracted from the mine, but environmental costs to close the mine will be $1,000,000. In the first year of operations, 15,000 ounces of silver were extracted. Wildcat Resources would recognize:a. depletion expense of $1,500,000b. depreciation expense of $1,500,000c. depletion expense of $1,875,000d. amortization expense of $1,875,000e. environmental expense of $1,000,000


217

Problems

121. For each of the following items, identify whether they are a capital expenditure or an expense:a. Built a new elevator in the office building.b. Acquired a copyright.c. Incurred research and development expense to develop a patent.d. Modified a machine, thus extending its useful life and capabilities.e. Paid wages for the maintenance workers.f. Paid for a new roof on the building.g. Paid for a month's electricity in the office building. h. Replaced the furnace in the office building.i. Replaced the carpeting in the office building.


a. capital expenditureb. capital expenditurec. expensed. capital expendituree. expensef. capital expenditureg. expenseh. capital expenditurei. capital expenditure

218

122. Miller Company acquired land and a building on July 1, 20X4, paying a total of $1,400,000. Separately, the land had an estimated fair market value of $750,000 and the building had an estimated fair market value of $1,125,000. In order to use the property, land improvements of $20,000 were incurred. Additionally, the building needed to be rewired, at a cost of $65,000. Also, certain walls had to be knocked down, while others were constructed. The cost to remove and replace walls was $80,000. The company took occupancy of the building on November 1, 20X4.

For all of items noted above, determine how much will be incorporated into the land account, the building account, or expensed as of Miller Company's year end of December 31, 20X4.


Fair Market Values: Percent Land $ 750,000 .4 Building 1,125,000 .6 Total $1,875,000 1.0

Land: Allocated purchase price $560,000 ($1,400,000 x .4) Land improvements 20,000 $580,000

Building: Allocated purchase price $840,000 ($1,400,000 x .6) Cost of rewiring 65,000 Cost of wall removal and construction 80,000 $985,000

219

123. Herder, Inc. acquired an offroader on January 1, 20X4, for $42,000. The machine is estimated to have a five-year life, with a residual value of $6,000. Herder, Inc. is not certain whether to use the straight-line or double-declining-balance method of depreciation.

Prepare the following depreciation schedule:

Straight-Line Double-Declining-Balance Depreciation Book Depreciation BookDate Expense Value Expense Value01/01/X4 $42,000 $42,00012/31/X412/31/X512/31/X6

L.O.: 3 Type: Difficult Solution: Straight-Line Double-Declining-Balance Depreciation Book Depreciation BookDate Expense Value Expense Value01/01/X4 $42,000 $42,00012/31/X4 $ 7,200 34,800 $16,800 25,20012/31/X5 7,200 27,600 10,080 15,12012/31/X6 7,200 20,400 6,048 9,072

220

124. For each of the independent situations below, determine the age of the asset in question. All assets were acquired at the beginning of the years.

a. The balance in the buildings account is $400,000, while the balance sheet shows the book value of the buildings at $217,600. The notes to the financial statements indicate that straight-line depreciation is used for all plant assets and that residual values are estimated at 5% of cost. The estimated life of the buildings is 25 years.

b. The book value of delivery equipment is $51,520. The cost of the delivery equipment was $80,500. The company uses the straight-line method of depreciation for delivery equipment and estimates life at 5 years or 50,000 units. So far, 27,000 units have been produced. Residual value is 10% of cost.


a. $400,000 X .95 = $380,000 depreciable value$380,000/25 = $15,200 annual depreciation$400,000 - $217,600 = $182,400 balance in accumulated depreciation$182,400/$15,200 = 12 years old

b. $80,500 X .90 = $72,450 depreciable value$72,450/5 = $14,490 annual depreciation$80,500 - $51,520 = $28,980 balance in accumulated

depreciation$28,980/$14,490 = 2 years old

221

125. Hahn Company began operations on January 1, 20X4. On that date, the owners invested $140,000 in the company, and acquired a $90,000 machine. The machine has a useful life of 5 years, and a residual value of $4,000. The company intends to depreciate the machine on a straight-line basis for financial reporting purposes. During 20X4, revenues which were all in cash, totaled $630,000. All operating expenses, other than depreciation and all paid in cash, were $510,000. Hahn Company has a 45% income tax rate.

Given the above information, determine (round all answers to the nearest dollar):a. 20X4 net income using straight-line depreciationb. 20X4 cash provided by operations using straight-line depreciation


a. Sales $630,000Operating expenses 510,000Depreciation expense 17,200Income tax expense 46,260Net Income $ 56,540

b. Sales $630,000Operating expenses 510,000Income tax expense 46,260Net cash provided by operating activities $ 73,740

222

126. Scotty Limited gathered the following data for the year ended December 31, 20X4, related to its equipment.

Equipment Accumulated Depreciation

January 1, 20X4, balance $85,000 $40,000Total debits to the account 55,000 ?Total credits to the account ? 51,000December 31, 20X4, balance 92,000 56,000

Based on the above data, prepare the journal entry to record the sale of equipment during the year for $11,500 cash.


Cash 11,500Loss on Sale of Equipment 1,500Accumulated Depreciation 35,000

Equipment 48,000

223

127. On January 1, 20X4, First Bank acquired 10 cars for company use. The cost of each car was $15,000, and the bank estimated that each car would have a four-year useful life and a residual value of $2,000.

Required:a. Provide the journal entry needed on December 31, 20X5, if four cars

were sold for a total of $17,500 and First Bank usesdouble-declining-balance depreciation.

b. Provide the journal entry needed on December 31, 20X5, if four carswere sold for a total of $17,500 and First Bank usesstraight-line depreciation.

c. Assume instead of the above information that on December 31, 20X5, one of the cars was wrecked. Provide the journal entry needed on December 31, 20X5, if First Bank's insurance company paid $2,900 for the wrecked car and the company uses straight-line depreciation.

L.O.: 8 Type: Difficult Solution:a. Cash 17,500 Accumulated Depreciation 45,000 Gain on Sale of Cars 2,500 Cars 60,000b. Cash 17,500 Accumulated Depreciation 26,000 Loss on Sale of Cars 16,500 Cars 60,000c. Cash 2,900 Accumulated Depreciation 6,500 Loss on Insurance Reimbursement 5,600 Cars 15,000

224

128. Craig Company signed a ten-year lease for a store in the best mall in the area. At the beginning of the seventh year of the lease, the company decided to refurbish the store. The following expenditures were made:

Item Cost Useful Life Carpeting $ 6,000 3 years Painting $ 3,500 5 years Lighting Fixtures $ 4,500 6 years Wall Construction $10,000 8 years

All items were paid in cash. There is no residual value for any of the items noted above.

a. Prepare the journal entry to record the expenditures of theabove items.

b. Prepare the year-end adjustment to record the expense associated with the above items.


a. Leasehold Improvements 24,000 Cash 24,000b. Amortization Expense 6,500 Leasehold Improvements* 6,500

* Carpeting $2,000 Painting 875 Lighting Fixtures 1,125 Wall Construction 2,500 $6,500

225

129. Consider each event concerning intangible assets independently:a. Barden Corporation purchased a patent for $476,000 on January 1, 20X4. The patent has a remaining legal life of 14 years. Due to anticipated technological change, it is expected that the patent will be useless in 5 years.

b. In 20X4, Bennett Company spent $3,500,000 in research and development costs. However, the research did not result in a patent.

Bennett Company acquired a patent from another company for $1,000,000 on January 1, 20X4. The acquired patent is expected to last 8 years.

Prepare all journal entries necessitated by events in a. and b. above during the year 20X4.


a. Patent 476,000 Cash 476,000 Amortization Expense 95,200 Patent 95,200b. Research and Development Expense 3,500,000 Cash 3,500,000 Patent 1,000,000 Cash 1,000,000 Amortization Expense 125,000 Patent 125,000

226

Essays

130. Explain the concept of depreciation. Include in your discussion one common misconception regarding what depreciation represents.


Depreciation is the process of allocating a plant asset's cost to expense over the period the asset is used. This process is designed to match the asset's expense against the revenue generated over the asset's life. The primary purpose of depreciation is to help measure income properly.

Depreciation is not a process of valuation, and depreciation does not mean that the business sets aside cash to replace assets as they become fully depreciated.

Depreciation is also a noncash expense. Depreciation does impact cash flows from operations via the tax savings it generates. It is a tax-deductible expense, thus decreasing the income tax payment.

130. Explain the concept of asset impairment. Include in your discussion the process of computing the impairment.


An asset is considered to be impaired when it ceases to have economic value to the company at least as large as the carrying value (book value) of the asset.

There are two steps in determining asset impairment. The first step is a recoverability test that compares the undiscounted expected future net cash flows from the use of the asset and its eventual disposal to the carrying value of the asset. Go to the second step if there is evidence of impairment in the first step, where the impairment loss is taken at the amount by which the carrying value of the asset exceeds its fair value.

78. A liability is created ______________.a. when merchandise is purchased with cashb. when owners invest in a companyc. when merchandise is sold on accountd. when salary expense is recognized before employees are paide. when rent is paid in advance


79. Liabilities that fall due more than one year beyond the balance sheet date are:

227

a. long-term liabilitiesb. delinquent liabilitiesc. current liabilitiesd. risky liabilitiese. contingent liabilities


80. Examples of a current liability include all of the following except:a. prepaid rentb. accrued income taxes payablec. accrued wages payabled. current portion of long-term debte. accounts payable


81. A written promise to repay a loan principal plus interest at a specific future date is:a. a promissory noteb. a line of creditc. commercial paperd. a product warrantye. a returnable deposit


Table 9-1McCabe Company has a monthly payroll with the following information:

A. The monthly gross salary for all its employees is $60,000. McCabe Company withholds 20% of the employees' gross salary for federal taxes, 6% for state taxes, and 8% for Social Security (FICA) taxes.

B. McCabe Company also incurs other employee-related costs. Specifically, the company must (1) match the Social Security taxes withheld from the employees, (2) contribute 4% of the employees' gross pay to the employees' pension fund, and (3) pay 3% of the employees' gross pay for health insurance premiums on behalf of the employees.

82. Referring to Table 9-1, what is the appropriate journal entry to be made by McCabe Company for part A of their monthly payroll, which is associated with gross pay and withholdings?a. Compensation Expense 60,000

Salaries and Wages Payable 60,000b. Compensation Expense 60,000

Federal Income Tax Withholding Payable 12,000

228

State Income Tax Withholding Payable 3,600 Social Security Withholding Payable 4,800 Salaries and Wages Payable 39,600

c. Compensation Expense 60,000 Tax Expense 20,400 Federal Tax Withholding Payable 12,000 State and FICA Tax Withholding Payable 8,400 Salaries and Wages Payable 60,000

d. Compensation Expense 60,000 Federal Tax Expense 12,000 State Tax Expense 3,600 Social Security Tax Expense 4,800 Salaries and Wages Payable 80,400

e. Compensation Expense 80,400 Federal Tax Withholding Payable 12,000 State Tax Withholding Payable 3,600 Social Security Tax Withholding Payable 4,800 Salaries and Wages Payable 60,000


83. Referring to Table 9-1, what is the appropriate journal entry to be made by McCabe Company for part B of their monthly payroll, which is associated with other employee-related costs?a. Employee Benefit Expense 9,000

Employer Social Security Payable 4,800 Pension Liability Payable 2,400 Health Insurance Payable 1,800

b. Compensation Expense 9,000 Employer Social Security Payable 4,800 Pension Liability Payable 2,400 Health Insurance Payable 1,800

c. Prepaid Employee Benefits 9,000 Employer Social Security Payable 4,800 Pension Liability Payable 2,400 Health Insurance Payable 1,800

d. Unearned Employee Benefits 9,000 Employer Social Security Payable 4,800 Pension Liability Payable 2,400 Health Insurance Payable 1,800

e. Compensation Expense 9,000 Employer Social Security Payable 4,800 Pension Withholding Payable 2,400 Health Insurance Withholding Payable 1,800


84. A debt contract issued by prominent companies that allow the companies to borrow directly from investors is:a. a promissory noteb. a line of credit

229

c. commercial paperd. product warrantiese. returnable deposits


Table 9-2Patton Enterprises has the following monthly payroll transactions:

A. The monthly gross salary for all its employees is $120,000. Patton withholds 21% of the employees' gross salary for federal taxes, 7% for state taxes, and 9% for Social Security (FICA) taxes.

B. Patton also incurs other employee-related costs. Specifically, the company must (1) match the Social Security taxes withheld from the employees, (2) contribute 3% of the employees' gross pay to the employees' pension fund, and (3) pay 4% of the employees' gross pay for health insurance premiums on behalf of the employees.

85. Referring to Table 9-2, what is the appropriate journal entry to be made by Patton Enterprises for transaction A of its monthly payroll, which is associated with gross pay and withholdings?a. Compensation Expense 120,000

Salaries and Wages Payable 120,000b. Compensation Expense 120,000

Tax Expense 44,400 Federal Income Tax Withholding Payable 25,200 State and FICA Tax Withholding Payable 19,200 Salaries and Wages Payable 120,000

c. Compensation Expense 120,000 Federal Tax Expense 25,200 State Tax Expense 8,400 Social Security Withholding Expense 10,800 Salaries and Wages Payable 164,400

d. Compensation Expense 120,000 Federal Income Tax Withholding Payable 25,200 State Income Tax Withholding Payable 8,400 Social Security Tax Withholding Payable 10,800 Salaries and Wages Payable 75,600

e. Compensation Expense 164,400 Federal Tax Withholding Payable 25,200 State Tax Withholding Payable 8,400 Social Security Tax Withholding Payable 10,800 Salaries and Wages Payable 20,000


230

86. Referring to Table 9-2, what is the appropriate journal entry to be made by Patton Enterprises for transaction B of their monthly payroll, which is associated with other employee-related costs?a. Compensation Expense 19,200

Employer Social Security Payable 10,800 Pension Liability Payable 3,600 Health Insurance Payable 4,800

b. Employee Benefit Expense 19,200 Employer Social Security Payable 10,800 Pension Liability Payable 3,600 Health Insurance Payable 4,800

c. Prepaid Employee Benefits 19,200 Employer Social Security Payable 10,800 Pension Liability Payable 3,600 Health Insurance Payable 4,800

d. Unearned Employee Benefits 19,200 Employer Social Security Payable 10,800 Pension Liability Payable 3,600 Health Insurance Payable 4,800

e. Compensation Expense 19,200 Employer Social Security Payable 10,800 Pension Withholding Payable 3,600 Health Insurance Withholding Payable 4,800


87. Power Company estimated at January 1, 20X4, that its income before taxes for the year ended December 31, 20X4, would be $7,500,000. Power Company's tax rate for the year is 45%. The company made quarterly tax payments on April, June, September, and December 15. The actual income before taxes for the year ended December 31, 20X4, for the Power Company was $7,700,000. What was the balance in the income tax payable account at December 31, 20X4?a. $0b. $90,000c. $110,000d. $150,000e. $200,000


88. Projector Company estimated at January 1, 20X4, that its income before taxes for the year ended December 31, 20X4, would be $5,500,000. Projector Company's tax rate for the year is 42%. The company made quarterly tax payments on April, June, September, and December 15. The actual income before taxes for the year ended December 31, 20X4, for the Projector Company was $5,700,000. What was the balance in the income tax payable account at December 31, 20X4?a. $0

231

b. $84,000c. $100,000d. $144,000e. $200,000


89. The current portion of long-term debt represents:a. the amount of principal on long-term debt that comes due in

the coming yearb. the amount of long-term debt that appears in the non-current

liability section of the balance sheetc. the amount of interest that comes due in the coming yeard. a short-term loan from a bank that has also granted a long-

term loane. the amount of principal and interest that comes due within a

coming year


90. On January 1, 20X3, Davis Company issued $200,000 in long-term bonds at par. The bonds pay interest of 12% on January 1, and the principal will be paid in $25,000 annual increments, beginning on December 31, 20X7, and continuing every year thereafter for 8 years. What journal entry is necessary on December 31, 20X6?a. No journal entry is necessary.b. Cash 25,000

Long-Term Bond Payable 25,000c. Long-Term Bond Payable 25,000

Cash 25,000d. Long-Term Bond Payable 25,000

Current Portion of Long-Term Bond Payable 25,000e. Prepaid Long-Term Bond Payable 25,000

Cash 25,000


91. Sales tax:a. is a tax on sales and is an expense to the company who

collects itb. is collected from the customer and remitted to the state or

local governmentc. is paid daily to the state or local government and, thus,

never appears as a payabled. is represented as a long-term payable on the balance sheete. is not collected on the internet.


92. Stardust Company operates in a state where there is a 7% sales tax. If a customer pays cash for merchandise with a sales price

232

of $300, Stardust would record the transaction using which of the following journal entries?a. Cash 300

Sales 300b. Cash 300

Sales Tax Payable 21 Sales 279

c. Cash 300 Sales Tax Expense 21 Sales Tax Payable 21 Sales 300

d. Cash 321 Sales Tax Payable 21 Sales 300

e. Cash 321 Sales Tax Expense 21 Sales Tax Payable 21 Sales 321


93. Montgomery Variety operates in a state where there is a 6% sales tax. If a customer pays cash for merchandise with a sales price of $500, what effect will this transaction have on Montgomery's balance sheet? (Ignore the effect of cost of goods sold)a. Assets increase by $530, current liabilities increase by $30,

and stockholders’ equity increases by $500.b. Assets increase by $500, and stockholders’ equity increases by

$500.c. Assets increase by $500, long-term liabilities increase by

$30, and stockholders’ equity increases by $500.d. Assets increase by $500, current liabilities increase by $30,

and stockholders’ equity increases by $470.e. Assets increase by $530, long-term liabilities increase by

$30, and stockholders’ equity increases by $500.


Table 9-3Largent Company began business on January 1, 20X4. The company manufactures and sells stereo equipment. The company provides a warranty on its units, whereby the company will replace any defective part for two and one-half years after the sale, at no additional cost to the customer. During 20X4, Largent Company had sales of $700,000. The company estimates that the cost of the warranties will be 3% of sales. No warranty claims were made in 20X4. During 20X5, warranty claims of $14,900 were made. All warranty claims were satisfied and paid for.

94. Referring to Table 9-3, what journal entry, if any, is necessary for 20X4 by Largent Company?

233

a. No journal entry is necessary. b. Prepaid Warranty 21,000

Liability for Warranties 21,000c. Warranty Expense 21,000

Liability for Warranties 21,000d. Warranty Expense 21,000

Warranty Sales 21,000e. Warranty Expense 21,000

Unearned Warranties 21,000


95. Referring to Table 9-3, what journal entry, if any, is necessary for 20X5 by Largent Company?a. No journal entry is necessary. b. Liability for Warranties 14,900

Inventory 14,900c. Prepaid Warranties 14,900

Inventory 14,900d. Warranty Expense 14,900

Inventory 14,900e. Unearned Warranties 14,900

Inventory 14,900


96. Which of the following statements is false?a. Well-known examples of returnable deposits are those for

returnable containers such as soft-drink bottles and beer kegs.

b. Companies that receive deposits record them as a form of receivable.

c. The account Deposits is a current liability of the company receiving the deposit.

d. Ordinarily, the recipient of the cash deposit may use the cash for investment purposes from the date of deposit to the date of its return to the depositor.

e. In some states, the law allows interest earned on deposits to be retained by the landlord; in others, the interest must be paid to the tenant.


97. Unearned revenues:a. are considered to be a type of revenueb. are revenues that are collected before services or goods are

deliveredc. normally has a debit balanced. is credited when the sales revenue is finally earnede. include cash donations made to universities from wealthy

alumni

234


98. Murray publishes the Second Hand News. In April, he collected $60 in advance for one-year subscriptions. He delivered the first issue in May. Assume one issue is published per month. The journal entry to record the delivery of the magazines in May would be: a. Cash 5.00

Subscription Revenue 5.00b. Unearned Subscription Revenue 5.00

Subscription Revenue 5.00c. Prepaid Subscriptions 5.00

Subscription Revenue 5.00d. Prepaid Subscriptions 5.00

Cash 5.00e. Cash 5.00

Prepaid Subscriptions 5.00


99. Shelly Corp. publishes the Uptown Herald. In April, they collected $600 in advance for one-year subscriptions. The journal entry to record the delivery of the newspapers in May would be:a. Cash 50.00

Subscription Revenue 50.00b. Prepaid Subscriptions 50.00

Subscription Revenue 50.00c. Prepaid Subscriptions 50.00

Cash 50.00d. Cash 50.00

Prepaid Subscriptions 50.00e. Unearned Subscription Revenue 50.00

Subscription Revenue 50.00


100. __________________ are a form of long-term debt that is secured by the pledge of specific property.a. Convertible bondsb. Mortgage bondsc. Callable bondsd. Sinking fund bondse. Debentures


101. ________________ are bonds whose holders have claims against only the assets that remain after the claims of the general creditors are satisfied.a. Subordinated debentures

235

b. Mortgage bondsc. Callable bondsd. Sinking fund bondse. Convertible bonds


103. ________________ are subject to redemption before maturity at the option of the issuer.a. Debenturesb. Mortgage bondsc. Callable bondsd. Sinking fund bondse. Convertible bonds


104. Notes and bonds are often called ___________ financial instruments or securities because they can be transferred from one lender to another.a. private placementsb. negotiablec. current liabilitiesd. long term liabilitiese. sinking fund


105. Bonds are typically sold through a. board of directorsb. underwritersc. corporationsd. commercial insurance companiese. none of the above


106. The excess of a bond's issue price over its face value is known as the:a. discountb. effective interest amountc. coupon interest amountd. premiume. contingent liability


107. The interest rate that determines the amount of cash paid for interest to the bondholder is referred to as the:a. effective rateb. market rate

236

c. coupon rated. daily ratee. imputed rate


108. All of the following are rates available for investments in similar bonds at a moment in time, except:a. yield to maturityb. LIBOR ratec. coupon rated. market interest ratee. effective interest rate


109. The cash proceeds received from issuing a bond are less than the face value of the bond. It is apparent that the bond was issued at:a. face valueb. a premiumc. a discountd. par valuee. nominal value


110. The amount earned by an investor expressed as a percentage of the amount invested is called:a. discount rateb. rate of returnc. present valued. future valuee. expected past rate


111. As the market rate of interest rises above the nominal or stated interest rate for a bond, the market price of the bond will:a. stay the sameb. fallc. rised. cannot be determined without more informatione. go in sync with the stock’s price


112. When the market interest rate is 13% and the coupon rate is 10%, a bond sells at:a. a discountb. a premium

237

c. at pard. liquidation valuee. cannot be determined without more information


113. Bond interest payments are typically made ___________.a. annuallyb. semiannuallyc. monthlyd. quarterlye. weekly


114. When the market interest rate is 7% and the coupon rate is 10%, a bond sells at:a. a discountb. a premiumc. at pard. liquidation valuee. cannot be determined without more information


115. If a $10,000 bond, with a 12% coupon rate, is trading at 100, what can be said about the current price and current yield of the bond? Current Price Current Yielda. $10,000 Greater than 12%b. $10,000 Equal to 12%c. $10,000 Less than 12%d. $11,200 Equal to 12%e. $11,200 Less than 12%


116. Which statement is false?a. The periodic interest payment on a bond is based upon the

market rate of interest.b. Typically when a company issues a bond, the company will sell

the bonds to an underwriter, who in turn sells the bonds to the general public.

c. The nominal rate of interest and the market rate of interest are usually different on the date the bond is issued.

d. If a bond is sold at a price that is greater than face value, it is said to be sold at a premium.

e. If a bond is sold at a price that is less than face value, it is said to be sold at a discount.


238

117. Which of the following is false. The discount on bonds payable is:a. amortized over the life of the bondb. deducted from bonds payablec. a contra accountd. a trading security accounte. payable at the maturity date of the bond


118. The discount on bonds payable:a. serves to reduce interest expense on the income statementb. serves to increase interest expense on the income statementc. serves as a disincentive for investment bankers to issue the

debtd. serves to decrease the amount of cash paid to bondholders over

the stated rate of intereste. none of the above


119. Which of the following is not true of bonds issued at a premium?a. The cash proceeds exceed the face amount of the bonds.b. The amortization of bond premium decreases the interest

expense.c. The amount of the Premium on Bonds Payable account is

subtracted from the face amount of the bonds to determine the net liability reported in the balance sheet.

d. The market rate was below coupon ratee. Amortization decreases the carrying value of the bond.


120. Early extinguishment of debt:a. is not allowed by the FASB during the first two years bonds

are outstandingb. will never have related gains or losses recorded on the books.c. occurs when the issuer redeems its own bonds by purchases on

the open market or by exercising their rights to redeem callable bonds.

d. requires SEC approval.e. is permitted only in the banking industry.


121. The spreading of bond discount over the life of the bonds as interest expense is called:a. discount amortizationb. effective-interest amortizationc. compound interest method

239

d. doubling downe. income averaging


122. What is true regarding zero coupon notes?a. They provide cash interest payments during their life.b. They are sold for more than the face or maturity value.c. The investor determines their market value at the issuance

date by calculating the present value of their maturity value, using the market rate of interest for notes having similar terms and risks.

d. are only callable debenturese. They are also called junk bonds.


123.The market interest rate that equates the proceeds from a loan with the present value of the loan payment is called:a. effective interest rateb. nominal interest ratec. imputed interest rated. coupon intereste. agreed upon interest


124. Under the effective-interest method of amortization, the amount of discount amortized each interest period is equal to the:a. the amount of interest expense plus the cash paid for interestb. the amount of interest expense less the cash paid for interestc. the total discount divided by the number of interest payments

to be maded. the total amount of interest expense divided by the number of

interest payments to be madee. the amount of the decrease from the cash payment.


125. Williams Inc has just made the interest payment on its $4,000,000 of outstanding bonds. The bonds are callable at 101 5/8 and the unamortized premium is currently $167,400. The entry to retire half of the bonds would include a:a. debit to premium on bonds payable for $167,400b. credit to cash for $2,000,000c. credit to gain on early extinguishment of debt for $51,200d. debit to loss on early extinguishment of debt for $52,500e. debit to loss on early extinguishments of debt for $167,400


240

126. The premium on bonds payable:a. serves to reduce interest expense on the income statementb. serves to increase interest expense on the income statementc. serves to increase the amount of cash paid to bondholders over

the stated rate of interestd. serves to decrease the initial amount of cash paid by

bondholderse. none of the above


127. Under the effective-interest method of amortizing bond premium, the interest expense recorded for each semiannual interest payment:a. is the same percentage of the bond's carrying value for every

interest paymentb. will increase over the life of the bondc. is equal to the carrying value of the bond times the contract

rate of interest for each semiannual interest paymentd. will equal the amount of cash paid for each semiannual

interest paymente. will be the same amount each time


128. Under the effective-interest method of amortizing bond discount, the cash payment on each interest payment date is calculated by multiplying the:a. ending net liability times the effective interest rate for the

appropriate time periodb. ending net liability times the coupon interest rate for the

appropriate time periodc. face value of the bonds times the effective interest rate for

the appropriate time periodd. face value of the bonds times the coupon interest rate for the

appropriate time periode. the difference between the market value and the liquidation

value by the market rate of interest.


129. Under the effective-method of amortizing bond premium, the interest expense recorded for each semiannual interest payment:a. is equal to the face value of the bond times the coupon rate

of interest for each semiannual interest periodb. is at a different percentage of the bond's carrying value for

every interest paymentc. will equal the amount of cash paid for each semiannual

interest paymentd. will decrease over the life of the bondse. will increase over the life of the bonds

241


130. Under the effective-interest method of amortization, interest expense each period can be calculated by multiplying the:a. beginning net liability times the effective interest rate for

the appropriate time period.b. beginning net liability times the coupon interest rate for the

appropriate time period.c. face value of the bonds times the effective interest rate for

the appropriate time period.d. face value of the bonds times the coupon interest rate for the

appropriate time period.e. liquidation value times the effective interest rate for the

appropriate time period.


131. On January 1, 20X4, Stacy Arnold purchased a $24,000 car, making a $4,000 down payment, and borrowing the rest on a 4-year note at 8% interest. She agrees to make annual payments of $6,038.47, starting January 1, 20X5. What is the journal entry that Stacy would make on January 1, 20X5, for the first payment on the note? a. Note Payable 6,038.47

Cash 6,038.47b. Interest Payable 1,600.00

Note Payable 4,438.47 Cash 6,038.47

c. Interest Expense 483.08 Note Payable 5,555.39 Cash 6,038.47

d. Interest Expense 1,920.00 Note Payable 4,118.47 Cash 6,038.47

e. Interest Expense 5,555.39 Note Payable 438.08 Cash 6,038.47


Table 9-4Briggs Company issued 3,000 debentures on January 1, 20X5. The debentures were 12-year, 7% debt, which paid interest semi-annually, every June 30 and December 31. The face value of each debenture is $1,000.

132. Referring to Table 9-4, if the market rate of interest is 7% on January 1, 20X5, what is the journal entry to record the issuance of the bonds?a. Cash 3,000,000

Bonds Payable 3,000,000

242

b. Bonds Payable 3,000,000 Cash 3,000,000

c. Bonds Receivable 3,000,000 Cash 3,000,000

d. Bonds Receivable 3,000,000 Bonds Payable 3,000,000

e. cannot be determined from the information given


133. Referring to Table 9-4, if the market rate of interest is 7% on January 1, 20X5, what is the journal entry to record the payment of interest on June 30, 20X5?a. Bonds Payable 105,000

Cash 105,000b. Interest Payable 105,000

Cash 105,000c. Cash 210,000

Bonds Payable 210,000d. Interest Expense 105,000

Cash 105,000e. Interest Expense 210,000

Bonds Payable 210,000


134. The Bluestream Company issued an 8-year, 10% bond on January 1, 20X2. Each bond sold for face value, which is $1,000. The bonds pay interest semi-annually on June 30 and December 31. The bonds mature on December 31, 20X9. Using present value tables, what is the market price of each $1,000 bond on January 1, 20X4, if the market rate of interest has changed to 8%?a. $ 893.29b. $ 912.92c. $1,000.00d. $1,093.86e. $1,114.96


135. Interest expense on bonds exhibits the following attributes except:a. interest expense is greater than the cash payment for interest

when a bond is sold at a premium and effective-interest amortization is used.

b. interest expense is the same dollar amount for every interest payment period, if a bond was issued at a discount and straight-line amortization is used.

c. interest expense is greater than the cash payment for interest when a bond is sold at a discount, regardless of whether straight-line or effective-interest amortization is used.

d. interest expense equals the cash payment for interest if a bond is sold at par.

243

e. interest expense becomes a larger dollar amount over time when a bond is sold at a discount and effective-interest amortization is used.


136. Tecumseh Company was ready to sell 8 year, 10% bonds at a face value of $2,000,000 on January 1, 20X6. Because of delays and market conditions, the bonds were not sold until March 1, 20X6. The bonds pay interest every June 30 and December 31. The bonds were sold at par plus accrued interest. What are the necessary journal entries for Tecumseh Company on March 1, 20X6, and June 30, 20X6? March 1, 20X6 June 30, 20X6

a. Cash 2,033,333 Interest Payable 33,333 Bonds Payable 2,000,000 Interest Expense 66,667 Interest Payable 33,333 Cash 100,000

b. Cash 2,033,333 Interest Expense 100,000 Bonds Payable 2,000,000 Cash 100,000 Interest Revenue 33,333

c. Cash 2,033,333 Interest Expense 97,917 Bonds Payable 2,000,000 Premium on Bond Premium on Bond Payable 2,083 Payable 33,333 Cash 100,000

d. Cash 2,033,333 Interest Expense 66,667 Bonds Payable 2,000,000 Premium on Bond Premium on Bond Payable 33,333 Payable 33,333 Cash 100,000

e. Cash 1,066,667 Interest Payable 66,667 Bonds Payable 2,000,000 Interest Expense 133,333 Interest Payable 66,667 Cash 200,000


137. Leases have all of the following attributes except:a. The lessee would always recognize the liability associated

with future cash payments but never an asset associated with the property being leased.

b. Leases can take the form of a capital lease or an operating lease.

c. Some leases are substantially equivalent to purchases.d. A lease contract creates property rights and financial

obligations.e. Almost any asset could be leased.


138. Yeager Flying leased a building for two years, effective May 1, 20X5. The lease was considered an operating lease. The lease required that Yeager Flying make payments of $4,000 every 3 months, beginning on July 31, 20X5. Assume an interest rate of

244

12%. What is the journal entry to be made by Yeager Flying on July 31, 20X5?a. Rent Expense 4,000

Cash 4,000b. Interest Expense 120

Rent Expense 3,880 Cash 4,000

c. Interest Expense 120 Lease Obligation 3,880 Cash 4,000

d. Interest Expense 842 Lease Obligation 3,158 Cash 4,000

e. Interest Expense 842 Rent Expense 3,158 Cash 4,000


Table 9-5Glendo Company entered into a lease agreement on January 1, 20X4, to acquire a machine. The machine has a useful life of six years. Glendo Company will make annual lease payments of $13,000 for six years, beginning on December 31, 20X4. Assume a 14% interest rate.

139. Referring to Table 9-5 and using the present value tables, what journal entry will Glendo Company make on January 1, 20X4?a. Machine Leasehold 50,553

Capital Lease Liability 50,553b. Machine Leasehold 78,000

Capital Lease Liability 78,000c. Machine Leasehold 50,553

Deferred Interest Expense 27,447 Capital Lease Obligation 78,000

d. Machine Leasehold 78,000 Interest Payable 27,447 Capital Lease Liability 50,553

e. no journal entry is necessary


140. Referring to Table 9-5 and using the present value tables, what is the journal entry to be made by Glendo Company on December 31, 20X5, to amortize the leased asset, assuming straight-line amortization is used?a. No journal entry is necessary.b. Leasehold Amortization Expense 4,575

Machine Leasehold 4,575c. Leasehold Amortization Expense 8,426

Machine Leasehold 8,426d. Leasehold Amortization Expense 13,000 Machine Leasehold 13,000

245

e. Leasehold Amortization Expense 13,000 Capital Lease Liability 13,000


141. Referring to Table 9-5 and using the present value tables, what is the journal entry to be made Glendo Company on December 31, 20X4, to record the annual lease payment?a. Rent Expense 13,000

Cash 13,000b. Capital Lease Obligation 13,000

Cash 13,000c. Capital Lease Obligation 2,080

Interest Expense 10,920 Cash 13,000

d. Capital Lease Obligation 5,923 Interest Expense 7,077 Cash 13,000

e. Capital Lease Obligation 11,180 Interest Expense 1,820 Cash 13,000


142. Which of the following is not one of the conditions for a capital lease?a. An expensive purchase option is available to the lessee at the

end of the leaseb. The lease term equals or exceeds 75% of the estimated economic

life of the propertyc. Title is transferred to the lessee by the end of the leased. The present value of the lease payments is at least 90% of the

leased asset's fair value at the start of the lease term


143. A lease that should be accounted for by the lessee as ordinary rent expense is:a. a financing leaseb. a capital leasec. an operating leased. an accounting leasee. a sale-leaseback


144. All of the following would qualify as a capital lease except:a. the lease term is 80% of the asset's estimated useful lifeb. the lease agreement contains a bargain purchase optionc. the present value of the lease payments equals 70% of the

market value of the leased asset

246

d. title to the leased asset transfers to the lessee at the end of the lease term


145. Accounting for postretirement benefits requires:a. the use of present value to compute a dollar amount b. a "pay as you go" system with no liability on the balance

sheet until employees retire c. a liability to be recorded as the benefit is earnedd. all of the above e. a and c


146. Postretirement benefits:a. requires estimated life expectancy, future ages at retirement,

and future payments to retirees.b. are mandated by the U.S. government for all employees and

companies.c. are optional but payments must be made to an independent

trustee.d. are contra-liability account.e. are accumulated as an asset.


147. Defined contribution pension plans a. require estimated life expectancy, future ages at retirement,

and future payments to retireesb. are mandated by the U.S. government for all employees and

companiesc. are optional but payments must be made to an independent

trusteed. are a contra account.e. must be recognized as a liability under accrual accounting.


148. A deferred income tax liability:a. arises because of differences between U.S. income tax rules

and foreign income tax rulesb. can arise because of "permanent" and "transitory" differencesc. arise because managers wish to maximize taxable income and

minimize income for financial reporting d. can arise when a firm uses special accelerated depreciation

for tax purposes while using straight-line depreciation for financial reporting

e. occurs when the company has a NOL (net operating loss).


247

149. If timing differences arise, generally accepted accounting principles require:a. that the amount actually paid to the government each year be

reported as tax expenseb. that tax expense be reported as the tax that would have been

paid if the pretax income used for shareholder reporting had also been reported to the tax authorities

c. that a company ignore the differencesd. that the company pay a flat rate of 40%e. that the company change its financial accounting procedures to

agree with those required by tax law


150. Which of the following statements regarding temporary differences is false?a. Temporary differences can result in deferred liabilities and

deferred assets.b. Deferred tax liabilities are found on the balance sheets of

nearly every company.c. For most companies, the primary source of deferred taxes is

timing differences related to depreciation.d. 60% of countries surveyed require the use of deferred taxes

when financial reporting of expenses differ from the timing of reporting corresponding tax deductions.

e. Temporary differences result in the cancellation of taxes.


151. A contingent liability:a. is a potential liability that depends on a future event

arising out of a past transactionb. can always be calculated with great precision (i.e., always

has a definite amount)c. include liabilities for warranty repairsd. must be disclosed in the body of the financial statements,

including the expected dollar amounte. is not of interest to readers of financial statements


152. An example of a contingent liability is:a. a bond that can be converted into common stockb. any interest-bearing liabilityc. a bond that was not sold at pard. the unrealized loss from the reduction in the market price of

a long-term liabilitye. a lawsuit being filed against a company


248

Table 9-6Conley Company manufactures and sells energy efficient windows and doors. Because of good styling and marketing, sales have grown briskly. Conley has no pre-existing deferred tax liability. During 20X4, the following transactions occurred: 1. On January 1, 20,000 new shares of common stock were sold at $100 per share. 2. Half of the proceeds from the stock sale were immediately invested in tax-free bonds yielding 8% per annum. The bonds were held throughout the year, resulting in interest revenue of $1,000,000 X .08 = $80,000. 3. Sales for the year were $9,000,000, with expenses of $4,300,000 reported under GAAP (not including income tax expense). 4. Tax depreciation exceeded depreciation included in item 3 above by $500,000. 5. For financial reporting purposes, warranty costs are calculated at 2% of sales, and the resulting $180,000 is included in the $4,300,000 of expenses. Actual expenditures under warranty were $95,000. The difference is $85,000.

153. Referring to Table 9-6, calculate earnings before tax for shareholder reporting.a. $4,780,000b. $4,700,000c. $4,500,000d. $6,780,000e. $6,200,000


154. Referring to Table 9-6, what would Conley report as income tax payable to the tax authorities assuming a 40% tax rate?a. $1,880,000b. $1,680,000c. $1,714,000d. $2,680,000e. $2,480,000


155. Referring to Table 9-6, what would Conley report as income tax expense for shareholder reporting using a 40% tax rate?a. $1,912,000b. $1,880,000c. $1,800,000d. $1,897,000e. $1,865,000


156. Referring to Table 9-6, what journal entry would Conley make?a. Deferred Tax Asset 34,000

249

Income Tax Expense 1,880,000 Income Tax Payable 1,714,000 Deferred Tax Liability 200,000

b. Income Tax Expense 1,912,000 Income Tax Payable 1,880,000 Deferred Tax Liability 32,000

c. Income Tax Expense 1,800,000 Income Tax Payable 1,714,000 Deferred Tax Liability 86,000

d. Income Tax Payable 1,714,000 Deferred Tax Liability 151,000 Income Tax Expense 1,865,000

e. Income Tax Payable 1,880,000 Deferred Tax Liability 32,000 Income Tax Expense 1,912,000


157. Referring to Table 9-6, the total amount of the permanent difference is:a. $-0-b. $80,000c. $500,000d. $85,000e. $580,000


158. Debt ratios:a. are used to measure the extent to which a company has issued

stock to finance its activitiesb. indicate that the more the equity and the less the borrowing,

the riskier it is to lend stockholders’ money to a firmc. include the debt-to-equity ratiod. are not very useful and, thus, are not often calculatede. do not vary between firms in the same industry


159. The interest-coverage ratio is calculated by dividing pretax income plus interest expense by:a. total shareholders' equityb. total shareholders' equity and long-term debtc. total assetsd. interest expensee. total current assets


Table 9-7

250

Given below is the balance sheet at December 31, 20X4 and income statement for the year ended, December 31, 20X4 for Ziegler Company:

Ziegler CompanyBalance Sheet

December 31, 20X4

Current Assets: Current Liabilities:Cash $ 6,000 Accounts Payable $ 3,000Accounts Receivable 4,000 Wages Payable 2,000Inventory 14,000 Total Current Liabilities $ 5,000 Total Current Assets 24,000 Long-term Bond Payable 24,000 Total Liabilities $29,000Long-term Assets: Stockholders' Equity: Fixed Assets $60,000 Common Stock $12,000Accumulated Depr. (17,000) Retained Earnings 26,000 Net Fixed Assets 43,000 Total Stockholders' Equity 38,000Total Assets $67,000 Total Liabilities & Equity $67,000

Ziegler CompanyIncome Statement

For The Year Ended December 31, 20X4Sales $240,000Cost of Goods Sold 103,000Gross Profit $137,000Operating Expenses 82,000Operating Income $ 55,000Interest Expense 2,000Income before Taxes $ 53,000Income Tax Expense 27,000Net Income $ 26,000

160. Referring to Table 9-7, the debt-to-equity ratio for Ziegler Company at December 31, 20X4, is:a. 43.28%b. 63.16%c. 76.32%d. 92.31%e. 111.54%


161. Referring to Table 9-7, the long-term-debt-to-total-capital ratio for Ziegler Company at December 31, 20X4, is:a. 35.82%b. 38.71%c. 63.16%d. 92.31%e. 200.00%

251


162. Referring to Table 9-7, the debt-to-total-assets ratio for Ziegler Company at December 31, 20X4, is:a. 7.46%b. 35.82%c. 43.28%d. 100.00%e. 231.03%


163. Referring to Table 9-7, the interest-coverage ratio for Ziegler Company at December 31, 20X4, is:a. 8.33b. 0.25c. 14.00d. 27.50e. 28.50


164. The ______________ is calculated by dividing total liabilities by total shareholders' equity.a. debt-to-equity ratiob. long-term-debt-to-total capital ratioc. debt-to-total-assets ratiod. interest-coverage ratioe. current ratio


165. The _______________ is calculated by dividing interest expense into the sum of pretax income and interest expense.a. debt-to-equity ratiob. long-term-debt-to-total capital ratioc. debt-to-total-assets ratiod. interest-coverage ratioe. current ratio


166. An amount that is calculated by multiplying an interest rate by a principal amount that is increased each interest period by the previously accumulated interest is known as:a. interestb. simple interestc. compound interestd. nominal interest ratee. stated interest

252


167. What is the present value of $2,000 with 16% interest, to be received in 18 years?a. $161.61b. $150.30c. $155.83d. $148.48e. $138.20


168. A series of equal cash flows to take place at the end of successive periods of equal length is called:a. rate of returnb. an ordinary annuity c. a serial noted. a deferred annuitye. a perpetuity or consul


169. Susie buys a note from a municipality that promises to pay $1,500 at the end of each of three years. How much should Susie pay for the note if she desires a rate of return of 8%, compounded annually.a. $4,000b. $3,866 c. $3,905d. $3,950e. $3,750


170. If Tome deposits $9,000 in an account that pays 10% yearly interest, compounded annually, how much will he have in the account at the end of three years?a. $8,990b. $9,750c. $10,909 d. $11,979e. $12,500


171. The amount accumulated, including principal and interest is the _____________.a. future valueb. annuity valuec. present value d. rate of return

253

e. accumulated full value


172. The value today of a future cash inflow or outflow is the _____________. a. present valueb. annuity valuec. future valued. rate of returne. estimated return


Problems

173. Cavern’s Tourist Trap is located in a state where the sales tax is 7 1/2%. Total sales for the month of June were $81,000, all of which were subject to sales tax.

a. Prepare a journal entry that summarizes sales (all in cash) for the month.

b. Prepare a journal entry regarding the disbursement for the salestax.

L.O.: 1 Type: Easy Solution:

a. Cash 87,075 Sales Revenue 81,000 Sales Tax Payable 6,075b. Sales Tax Payable 6,075 Cash 6,075

254

174. At the beginning of 20X4, Computers R Us had a liability for warranties of $17,500 on the books. During 20X4, Computers R Us had sales of $205,000. The company estimates that the cost of servicing products under warranty will average 2.5% of sales. Expenditures (all in cash) to satisfy warranty claims during 20X4 were $4,800, of which $2,500 was for products sold in 20X4.

a. Prepare the journal entries for sales revenue and the relatedwarranty expense for 20X4. Assume all sales are for cash.

b. Prepare the journal entry for the warranty expenditures.c. Compute the December 31, 20X4, ending balance in the Liability

for Warranties account.


a. Cash 205,000 Sales Revenue 205,000 Warranty Expense 5,125 Liability for Warranties 5,125b. Liability for Warranties 4,800 Cash 4,800c. Beginning balance $17,500 Additions for 20X4 sales 5,125 Reductions for services provided (4,800) $17,825

255

175. For the week ended September 12, Alarm Company had a total payroll of $183,000. Three items are withheld from employee's paychecks: (1) social security (FICA) tax of 7.1% of payroll; (2) income taxes, which average 20% of the payroll; and (3) employees' savings that are deposited in their credit union, which are $12,020. In addition, Alarm Company pays (1) social security tax equal to the amount withheld from employees, (2) health insurance premiums of $12,750, and (3) contributions to the employees' pension fund of $17,000.

Prepare the journal entries to record the compensation expense and the employee benefit expense.


Compensation Expense 183,000 Salaries & Wages Payable 121,387 Social Security Withholding Payable 12,993 Income Tax Withholding Payable 36,600 Credit Union Withholding Payable 12,020

Employee Benefit Expense 42,743 Employer Social Security Payable 12,993 Health Insurance Premium Payable 12,750 Pension Liability Payable 17,000

256

176. Wallace Manufacturing had the following items on its December 31, 20X4, balance sheet: Cash and cash equivalents $56,230 Accounts payable 96,640 Inventories 60,790 Additional paid-in capital 51,690 Accrued liabilities and expenses 94,100 Payments due within one year on long-term debt 35,380 Short-term debt 39,030 Long-term debt 97,290

Required:Prepare the current liabilities section of Wallace Manufacturing's balance sheet.


Current Liabilities:Accounts payable $ 96,640Accrued liabilities and expenses 94,100Payments due within one year on long-term debt 35,380Short term debt 39,030Total current liabilities $265,150

257

177. On January 1, 20X4, Petal Maker issued $5 million of 5 year, 9% debentures at par which are dated as of January 1, 20X4.

Prepare the journal entries to record the: (a) issuance of the bonds(b) the first semi-annual interest payment(c) the payment of maturity value


a. Cash 5,000,000 Bonds Payable 5,000,000b. Interest Expense 225,000 Cash 225,000c. Bonds Payable 5,000,000 Cash 5,000,000

258

178. Watson Company had a 6-year, 8%, $375,000 bonds ready to be sold on January 1, 20X4. The bonds will pay interest every June 30 and December 31. However, due to market conditions, the company did not sell the bonds until March 1, 20X4, at which time the bonds was issued at par.

Given the information presented above, prepare the appropriate journal entry for Watson Company for each of the following dates:a. January 1, 20X4b. March 1, 20X4c. June 30, 20X4d. December 31, 20X4


a. No journal entry is necessary.b. Cash 380,000 Interest Payable 5,000 Bonds Payable 375,000c. Interest Payable 5,000 Interest Expense 10,000 Cash 15,000 d. Interest Expense 15,000 Cash 15,000

259

179. Pyramid Company issued a two-year, $150,000, 14% debenture on January 1, 20X4 which are dated as of January 1, 20X4. The bond will pay interest every June 30 and December 31, with the principal to be paid on December 31, 20X5. The effective interest rate on the bond is 10%, and the company uses effective-interest amortization.Given this information and using the present value tables:a. determine the selling price for the bond.b. provide the journal entry on January 1, 20X4.L.O.: 3 Type: Moderate Solution:

a. 150,000 x .8227 = $123,405 10,500 x 3.5460 = 37,233 (n=4, i=5) $160,638 b. Cash 160,638 Premium on Bond Payable 10,638 Bond Payable 150,000

260

180. Leisure Time issued a 12-year, 10%, $1,500,000 bond on January 1, 20X5 which are dated as of January 1, 20X5. The bond pays interest every June 30 and December 31, with the principal to be paid at the end of 12 years. The effective interest rate on the bond is 12%. The company uses effective-interest amortization.Given this information and using the present value tables:a. Prepare journal entries for Leisure Time on each of the

following dates: 1) January 1, 20X5 2) June 30, 20X5 3) December 31, 20X5b. What is the total interest expense for the year ended December

31, 20X5?c. What is the balance sheet presentation of this bond for

Leisure Time at December 31, 20X5?

L.O.: 3 Type: Difficult Solution:a. Issue price: 1,500,000 x .2470 = $ 370,500 75,000 x 12.5504 = 941,280 (n=24,i=6) $1,311,780 1) Cash 1,311,780 Discount on Bonds Payable 188,220 Bond Payable 1,500,0002) Interest Expense 78,707 Discount on Bond Payable 3,707 Cash 75,0003) Interest Expense 78,929 Discount on Bond Payable 3,929 Cash 75,000

b. Interest expense: June 30, 20X5 $ 78,707 December 31, 20X5 78,929 $157,636

c. Bonds Payable $1,500,000Dis. on Bond Payable (180,584)

$1,319,416

261

181. Blue Inc issued $1,000,000 of 6.5%, 8-year bonds dated June 1, 20X5, with semiannual interest payments on June 1 and December 1. The bonds were issued on June 1, 20X5, at 103 3/8.

a. Were the bonds issued at a premium, a discount, or at face value?

b. Was the market rate of interest higher, lower, or the same as the coupon rate of interest?

c. How much cash was received by Blue Inc upon issuance of the bonds?


a. The bonds were issued at a premium.b. The market rate of interest was lower than 6.5% since the

bonds were issued above face value.c. $1,000,000 X 1.03375 = $1,033,750

262

182. On January 1, 20X4, Crawford Company issued $5,000,000 of 9%, 10-year bonds dated January 1, 20X4, with annual interest payments on December 31. The bonds were issued for $4,692,570 yielding an effective interest rate of 10%. Crawford uses the effective-interest method of amortization.

a. Prepare the necessary journal entries to record the issuance of the bonds and the first interest payment.

b. Determine the ending net liability of the bonds on December 31, 20X4.


a.Jan. 1 Cash 4,692,570

Discount on Bonds Payable 307,430 Bonds Payable 5,000,000

Dec. 31 Interest Expense 469,257 Discount on Bonds Payable 19,257 Cash 450,000

b. $5,000,000 - $307,430 + $19,257 = $4,711,827

263

183. Croy Enterprises issued 9-year, 8%, $750,000 bonds on January 1, 20X5. The bonds pay interest every June 30 and December 31, with the principal to be paid in 9 years. The effective interest rate on the bonds is 10%, and the company uses the effective-interest method of amortization. a. Compute the initial selling price of the bonds on January 1,

20X5.b. Prepare the entry needed on June 30, 20X5.


a. The initial selling price of the bond: $750,000 x .4155 = $311,625 $ 30,000 x 11.6896 = 350,688 (n=18,i=5) $662,313 b. Interest Expense 33,116 Cash 30,000 Discount on Bonds Payable 3,116

264

184. Mann Company purchased a $25,000 truck on January 1, 20X4. The company paid $5,000 and will pay the remaining $20,000 with a 4-year note. The note requires that the company make 4 equal annual payments starting on December 31, 20X4. The note charges 10% interest. Given this information and using present value tables, complete the following chart.

Year Beginning note payable

Interest expense

End of year cash payment

Reduction of principal

End of year note payable balance

20X4 $20,00020X520X620X7 L.O.: 3 Type: Difficult Solution:

Year Beginning note payable

Interest expense

End of year cash payment

Reduction of principal

End of year note payable balance

20X4 $20,000.00 $2,000.00 $6,309.35 $4,309.35 $15,690.6520X5 $15,690.65 $1,569.07 $6,309.35 $4,740.28 $10,950.3720X6 $10,950.37 $1,095.04 $6,309.35 $5,214.31 $ 5,736.0620X7 $ 5,736.06 $ 573.61 $6,309.35 $5,735.74 $ .32**$.32 rounding error

265

185. Hammond Corporation signs an agreement on January 1, 20X5, to lease office equipment for a 5-year period. The estimated useful life of the office equipment is 8 years. The market value of the office equipment is $235,000. The lease agreement calls for lease payments of $55,040. The first payment is due on December 31, 20X5, all subsequent payments are made each December 31 thereafter. The interest rate stated in the lease agreement is 8%. The present value of the lease payments is $219,758. At the end of the lease term, the equipment reverts back to the lessor.

Prepare journal entries to record:a. the lease agreement on January 1, 20X5b. the first lease payment on December 31, 20X5c. the amortization of the leased asset on December 31, 20X5


a.Jan. 1 Equipment Leasehold 219,758

Capital Lease Liability 219,758b. Dec. 31 Interest Expense 17,581

Capital Lease Liability 37,459 Cash 55,040

c.Dec. 31 Leasehold Amortization

Expense 43,952

Equipment Leasehold 43,952

266

186. Greely’s 20X4 income statement included thefollowing:

Profit on ordinary activities before taxation $299,000Tax on profit on ordinary activities 89,625 Profit on ordinary activities after taxation $209,375

As a result of 20X4 operations, the deferred tax liability account increased by $12,000.

a. Compute taxes paid to the government in 20X4.b. Prepare the journal entry to record taxes on ordinary income

for20X4.


a. Tax per GAAP $89,625 Increase in liability (12,000) Taxes paid $77,625 b. Income Tax Expense 89,625 Deferred Tax Liability 12,000 Cash (or Income Tax Payable) 77,625

267

187. Given below are the balance sheet at December 31, 20X4 and income statement of Greenwood Company for the year ended, December 31, 20X4. Determine the following:(a) the debt-to-equity ratio(b) long term debt-to-total-capital ratio(c) debt-to-total-assets ratio(d) the interest-coverage ratio.

Greenwood CompanyBalance Sheet

December 31, 20X4

Current Assets: Current Liabilities:Cash $ 3,300 Accounts Payable $ 4,900Accounts Receivable 5,900 Interest Payable 1,500Inventory 11,100 Wages Payable 2,100Total $20,300 Total Current Liabilities $ 8,500Fixed Assets $59,300 Long-term Bond Payable 35,000Less: Accum. Depr. (13,800) Total Liabilities $43,500Fixed Assets, net 45,500 Stockholders’ Equity: Common Stock $12,000 _______ Retained Earnings 10,300 22,300 Total Liabilities Total Assets $65,800 & Stockholders’Equity $65,800

Greenwood CompanyIncome Statement

For The Year Ended December 31, 20X4

Sales $94,000Cost of Goods Sold 51,000Gross Profit $43,000Operating expenses 35,000Operating income $ 8,000Interest expense 3,000Income before taxes $ 5,000Income tax expense 2,300Net Income $ 2,700


a. Debt-to-equity ratio is $43,500/$22,300 = 195%b. Long-term debt-to-total-capital ratio is $35,000/($22,300 +

$35,000) = 61.08%c. Debt-to-total-assets ratio is $43,500/$65,800 = 66.1%d. Interest-coverage ratio is ($5,000 + $3,000)/$3,000 = 2.67

268

188. Solve each of the following independent cases using the present value tables:

The following actual contracts signed by athletes:a. $25,000,000 contract, payable at $2,500,000 per year for 10 years.b. $25,000,000 contract, payable at $1,000,000 per year for 25 years.c. $25,000,000 contract, payable at $1,562,500 per year for 16 years.

Determine the present value of each contract and indicate which contract you would prefer to have. Assume a 12% interest rate.


a. $2,500,000 x 5.6502 = $14,125,500 This contract is preferred.b. $1,000,000 x 7.8431 = $7,843,100c. $1,562,500 x 6.9740 = $10,896,875

269

Essays

189. What is the relation between market interest rate and bond issuance price? Include descriptions of bond discount and premium in your explanation.


The bond issuance price is inversely related to the market interest rate. If the market rate exceeds (is below) the coupon rate, then the amount that the issuance price is below (above) the face value is a bond discount (premium).

190. Decide whether each of the following lease agreements should be recorded as a capital lease or an operating lease: a. The present value of the lease payments is 75% of the fair

value of the leased asset at the start of the lease. The lease term is for 6 years; the estimated useful life of the leased asset is for 10 years. There is a bargain purchase agreement for the lessee to purchase the leased asset at well below fair value at the end of the lease term.

b. The present value of the lease payments is 90% of the fair value of the leased asset the start of the lease. The lease term is for 2 years; the estimated useful life of the leased asset is 10 years. The leased asset reverts back to the lessor at the end of the lease.

c. The lease transfers ownership of the leased asset to the lessee at the end of the lease. The present value of the lease payments is 75% of the fair value of the leased asset the start of the lease. The lease term is for 3 years; the estimated useful life of the leased asset is 10 years.

d. The lease agreement doesn't contain a bargain purchase agreement. The leased asset reverts back to the lessor at the end of the lease agreement. The present value of the lease payments is 85% of the fair value of the leased asset the start of the lease. The lease term is for 10 years; the estimated useful life of the leased asset is 15 years.


a. capitalb. capitalc. capitald. operating

270

191. Define a contingent liability and give an example. How are they reported on the balance sheet?


A contingent liability is a potential liability that depends on a future event arising out of a past transaction. Sometimes, it has a definite amount; more often it does not. Examples of contingent liabilities include a guarantee of another company's note payable and lawsuits. Contingent liabilities are often listed on the balance sheet after long-term liabilities but before stockholders' equity. Lawsuits, which are undecided, are subject to footnote disclosure.

192. Define a "restructuring", give two examples, and explain the liabilities that may result from such an activity.


A restructuring is a significant makeover of part of a company. Examples include the closing of one or more plants, firing of a significant number of employees, and the termination or relocation of various activities. Liabilities result because losses should be recognized as soon as the restructuring is announced, even though the losses or cash outflows have not yet occurred. Typical liabilities resulting from restructurings include liabilities for leases and employee terminations.

271

Page 1 · Web viewAlso on January 1, the company paid for a $30,000 machine. The machine has a...

Documents

Transcript of Page 1 · Web viewAlso on January 1, the company paid for a $30,000 machine. The machine has a...