METROPOLITAN STATE UNIVERSITY
FINANCIAL ACCOUNTING
QUIZ #2
SUMMER 2001
NAME: ____________________________________
There are 50 points on this quiz. SHOW and LABEL your work to receive partial or full credit.
I. 10 points
Metro Corp. sells watering systems for golf courses. On January 1, 2001, Metro sells one system
to Como Corp. Metro has agreed to finance the sale under one of the following alternatives.
Unpaid balances carry an interest rate of 9%.
Alternative A
Payment Amount
$20,000
11,000
Alternative B
Payment Date(s)
Payment Amount
January 1, 2001
$7,000
January 1, 2002 & 2003
Payment Date(s)
January 1, 2001-2007
A. If you are buying this system for Como, which financing alternative would you choose?
SHOW and LABEL your work to receive partial or whole credit. (8 points)
B. Based upon the financing alternative which Como chooses, how much sales revenue will Metro
report during 2001 from this sale? (2 points)
1
II. 4 points – Please circle the correct response.
A. Which of the following is violated when a firm accelerates the recognition of depreciation
expense during good years and decreases depreciation expense during lean years?
1. Consistency
2. Matching principle
3. Objectivity principle
4. Revenue recognition principle
B. Recognizing the societal cost of pollution as an expense on the income statement of the
polluting firm violates which of the following?
1. Economic entity
2. Fiscal period
3. Going concern
4. Stable dollar
III. 3 points
LaPorte, Ltd. owns a number of upscale shops which specialize in beauty care products. When
LaPorte receives a shipment of its merchandise, accounting principles/assumptions require it to
record the items as an asset, inventory, and not as an expense, cost of goods sold.
A. Please identify the accounting principle/assumption which caused management to
adopt this treatment. (1 point)
B. Explain the reasoning for this result. (2 points)
IV. 3 points
“The company’s reporting period ends on the Saturday closest to January 31.” This excerpt was
taken from a recent annual report.
A. Please identify the accounting principle/assumption which caused management to make this
statement. (1 point)
B. Explain the reasoning for this result. (2 points)
2
V.
16 points
How would the following items impact Regis if it would undertake the events listed below. For each one, indicate what specific accounts are
affected as well as the direction and amount of the effect. Also, indicate the direction and amount of impact (“+” increase, “-“ decrease, or
“NE” no effect) the transaction would have on net income and net cash flow. The first event is completed for you.
EVENT
Paid Account Payable for a utility
bill of $1,000
ACCOUNTS
Cash
Accounts Payable
Incurred and paid a utility
bill of $25,000
Acquired a warehouse with a
payment of $250,000 and a 12%,
ten year note of $1,750,000
One day’s cash sales of $10,000
and charge sales of $1,490,000
3
IMPACT
NET INCOME
NET CASH FLOW
-1,000
-1,000
NE
-1,000
VI. 14 points
During your review of Trudeau Company’s year-end books for December 31, 2000, you notice that the following adjustments were not
made for the current year.
A. On November 1, 2000, Trudeau purchased and properly recorded $2,000,000 of 9% bonds. Interest should be received every six
months, beginning May 1, 2001.
B. Assume that for the current year that Trudeau’s year-end (December 31) is on a Wednesday. Its normal weekly payroll is $50,000 for
a five day work week, beginning on Monday. It is usually paid on Friday.
C. On June 1, 2000, Trudeau paid $48,000 for twelve months of insurance on its manufacturing plant. Trudeau’s accountant properly
recorded the payment as an asset.
REQUIRED:
Determine the effect of making each adjustment, considering each item independently, on the financial statements
prepared on December 31, 2000. Use the table provided below. Indicate BOTH (1) the dollar amount and (2) if the
adjustment causes the financial measure to Increase “+”, Decrease “-“, or has No Effect “NE”. The first item has
been completed for you.
ACCOUNTS
1.
Interest Receivable
Interest Revenue
AMOUNT
+/+30,000
+30,000
CURRENT
ASSESTS
+30,000
CURRENT
LIABILITIES
NE
2.
3.
4
NET
INCOME
+30,000
WORKING
CAPITAL
+30,000
NET CASH
FLOW
NE