1. Suppose you buy lunch for $8.39 that includes a 5% sales tax. How much did the restaurant charge
you for the lunch (excluding any tax) and how much does the restaurant owe for sales tax? (Do not
round intermediate calculations. Round the answers to 2 decimal places.)
A) $8.39 for lunch and $0.42 for sales tax.
B) $7.99 for lunch and $0.40 for sales tax.
C) $8.39 for lunch and no sales tax.
D) $8.81 for lunch and $0.42 for sales tax.
E) None of the above.
2. Which of the following would be included in the cost of inventory for a Dell Computers?
A) A portion of the wages and benefits of the sales manager.
B) A portion of the wages and benefits of an employee in the assembly department
C) Interest incurred on a loan required to buy computer chips
D) Cost to advertise the latest computer model
E) None of the above are included in the cost of inventory.
3. Swanson, Inc. purchased $100,000 of Dane Company's 8%, 10 year bonds for $87,538 on January
1, 2013, when the market rate of interest was 10%. Swanson plans to hold the bonds to maturity.
Swanson records interest received and amortizes the discount on interest dates (June 30 and
December 31). At December 31, 2013 Swanson should report the investment in the bonds on the
balance sheet at what amount? (round to the nearest dollar)
A) $89,064
B) $87,849
C) $88,311
D) $88,110
E) None of the above.
4. Jackson Corporation acquired equipment on January 1, 2010, for $320,000. The equipment had an
estimated useful life of 10 years and an estimated salvage value of $25,000. On January 1, 2013,
Jackson Corporation revised the total useful life of the equipment to 8 years and the estimated
salvage value to be $20,000. Compute depreciation expense for the year ending December 31,
2013, if Jackson Corporation uses straight-line depreciation.
A) $42,300
B) $26,477
C) $39,300
D) $46,300
E) None of the above.
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5. Using the following information calculate the inventory turnover rate (round to two decimal
places):
Net Sales
Gross Profit
Beginning Inventory
Purchases
$300,000
110,000
30,000
200,000
A) 7.27
B) 3.66
C) 6.33
D) 5.43
E) None of the above.
6. Land, buildings and equipment are acquired for a lump sum of $875,000. The market values of the
three assets are, respectively, $200,000, $500,000 and $300,000. What is the cost assigned to the
equipment?
A) $262,500
B) $250,000
C) $300,000
D) $342,857
E) None of the above.
7. Tomas Company trades in a printing press for a newer model. The cost of the old printing press
was $61,500, and on the date of the trade-in the total accumulated depreciation amounts to $38,000
and the fair market value is $20,000. The company also pays $41,200 cash for the newer printing
press. The journal entry to acquire the new printing press will require a debit to Equipment for:
A) $64,700.
B) $61,200.
C) $61,500.
D) $41,200.
E) None of the above.
8. JJ Electronics grants a 2 year warranty on all television sets it sells. Historically approximately 5%
of all sales prove to be defective. Sales during 2010 totaled $425,000 and $8,000 of defective
television sets were returned for replacement. Assuming JJ electronics reported a balance in its
warrany liability account on December 31, 2009 of $12,000, what balance should JJ Electronics
report in its warranty liability account on December 31, 2010?
A) $29,250
B) $25,250.
C) $21,250
D) $18,000
E) $28,250
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9. Godert Pharmaceutical Company has many scientists working in the labs trying to develop an
anti-aging drug. The cost of this research and development must be:
A) set up as an intangible asset and amortized over 20 years.
B) expensed as incurred.
C) set up as an intangible and amortized over the useful life.
D) set up as an intangible and tested for impairment on a yearly basis
E) None of the above.
10. Which of the following expenditures would be classified as a capital expenditure?
A) Painting of an office building at a cost of $20,000.
B) Periodic lubrication on a machine at a cost of $500 per lubrication.
C) Repair of an airplane engine at a cost of $100,000.
D) Hiring a company to train employees for the initial operation of a piece of equipment at a cost
of $1,000,
E) None of the above are capital expenditures.
11. Action Travel has 10 employees each working 40 hours per week and earning $20 an hour. Federal
income taxes are withheld at 15% and state income taxes at 6%. FICA taxes are 7.65% and
unemployment taxes are 3.8% of the first $7,000 earned per employee. What is the employer's total
payroll tax expense for the first week of January?
A) $304.
B) $916.
C) $1,224.
D) $612.
E) None of the above.
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12. On December 31, 2010, prior to any adjustments, Pure Company reports the following information:
Cost of Goods Sold:
Ending Inventory,
as determined by a physical count
$500,000
$65,000
Pure Company determines that the net realizable value of ending inventory is $62,000. What entry
should Pure Company record at the end of the year to ensure all accounts are reported correctly?
$3,000
A) Loss on Inventory
Cost of Goods Sold
$3,000
$3,000
B) Inventory
Cost of Goods Sold
$3,000
C) Cost of Goods Sold
Inventory
$3,000
$3,000
D) Loss on Inventory
Inventory
$3,000
$3,000
E) No entry is required at the end of the year.
13. A company purchased inventory for $800 per unit. The inventory was marked up to sell for $1,000
per unit. The entries to record the sale for cash and the cost of a unit of inventory would include
debits to which of the following accounts?
A) Cash, $800; Cost of Goods Sold, $1,000
B) Sales, $800; Inventory, $800
C) Cash, $1,000; Cost of Goods Sold, $800
D) Sales, $1,000; Inventory, $800
E) None of the above.
14. Deland Company purchased equipment on March 1, 2011, for $130,000. The residual value is
estimated at $40,000 and the estimated useful life is 10 years or 60,000 hours. Compute
depreciation expense for the year ending December 31, 2011, if the company uses the straight-line
method of depreciation. (round to the nearest dollar).
A) $7,500
B) $9,000
C) $21,666
D) $14,444
E) $10,833
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C
C
C
A
15. The use of the FIFO method generally increases taxable income:
A) when prices are declining.
B) under all circumstances.
C) when prices are increasing.
D) when prices are constant.
E) There is not enough information to answer the question.
16. Which of the following is true regarding the relationship between the current ratio and the acid-test
ratio?
A) The acid-test ratio will always be equal to or larger than the current ratio for a specific
company.
B) One ratio will always exceed 1.0, while the other will always be less than 1.0.
C) The current ratio will always be equal to or larger than the acid-test ratio for a specific
company.
D) Either the current ratio or the acid-test ratio could be larger for a specific company.
E) None of the above.
17. Great Farms Company sold some fully depreciated equipment for $4,100 cash. The equipment had
been purchased for $49,600, and the company had estimated the useful life at 8 years and a residual
value at $5,600. How will this sale affect Retained Earnings?
A) It will increase Retained Earnings by $4,100.
B) It will decrease Retained Earnings by $44,000.
C) it will decrease Retained Earnings by $1,500.
D) It will have no effect on Retained Earnings.
E) There is not enough information to answer the questions.
18. Under the FIFO cost flow assumption during a period of inflation, which of the following is false?
A) Ending inventory will be lower than under LIFO.
B) Cost of goods sold will be lower than under LIFO.
C) Income tax expense will be higher than under LIFO.
D) Gross margin will be higher than under LIFO.
E) All of the above statements are true.
19. If ending inventory for the year ended December 31, 2010, is understated, this error will cause
owners' equity to be:
A) overstated at the end of 2010 and understated at the end of 2011.
B) understated at the end of 2010 and overstated at the end of 2011.
C) understated at the end of 2010 and correctly stated at the end of 2011.
D) overstated at the end of 2010 and correctly stated at the end of 2011.
E) There is no effect on owners' equity.
C
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20. Given the following data, what is the value of the ending inventory as determined by the LIFO
method?
Sales revenue
Purchases
o
Beginning inventory
A) $2,820
B) $600
C) $580
D) $540
E) $2,880
300 units at $15 per unit
240 units at $10 per unit
120 units at $9 per unit
an
2400
⼗
540
21. CR Inc. purchased 35% of the voting stock of Barton Company for $80,000 (1,000 shares at $80
per share) on January 1. During the year, Barton Company earned $50,000 net income and paid
$15,000 in dividends. On December 31st the Barton Company stock was selling in the market at
$90 per share. At the end of the year, CR Inc.'s account Long-term investment in Barton Company
should have a balance of:
A) $60,000
B) $115,000
C) $90,000
D) $92,250
E) None of the above.
C
22. Woodson Inc. purchased 10% of the equity securities of Cooper Enterprises $65,000 on June 1,
2017. The securities were valued at $70,000 on December 31, 2017. The securities were sold at
the beginning of 2018 for $68,000. The 2018 income statement should report a(n):
A) realized gain of $3,000
B) unrealized gain of $3,000
C) realized loss of $2,000
D) unrealized loss of $2,000
E) None of the above.
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B
D
23. During the current year, The Hampton Company purchased 200 shares of Hilton Company stock
for $15,000 as a short-term investment. Hampton Company has insiginificant influence over Hilton
Company as a result of the equity investment. At the end of the year, the market value of the stock
was $20,000. The Hampton Company's financial statements for the current year will show:
A) a realized gain of $5,000 on the income statement and short-term investments of $20,000 on
the balance sheet.
B) an unrealized gain of $5,000 on the income statement and short-term investments of $20,000
on the balance sheet.
C) an unrealized gain of $5,000 on the income statement and short-term investments of $15,000
on the balance sheet.
D) an unrealized gain of $5,000 on the balance sheet under other comprehensive income and
short-term investments of $20,000 on the balance sheet.
E) None of the above.
24. On January 1, 2009, Kais Inc. purchased a piece of equipment at a cash cost of $225,000. The
estimated useful life is 5 years and the estimated residual value is $25,000. Assuming Kais Inc.
uses the double declining balance method of depreciation, calculate the book value of the
equipment on December 31, 2010?
A) $144,000
B) $25,000
C) $160,000
D) $81,000
E) $65,000
E
25. Given the following data, what would the income tax expense be if the company uses FIFO?
E
Beginning inventory 400 units at $16
Purchases
Units sold
Operating
expenses
Tax rate
1,200 units at
$45
40%
A) $12,960
B) $6,800
C) $10,200
D) $13,440
E) None of the above.
1,600 units at
$19
$10,000
54000 2 ⽐0 6000
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26. Which of the following statements is FALSE?
A) Assets that are increasing in value are still subject to depreciation.
B) Accumulated depreciation represents a growing amount of cash to be used to replace the
existing asset.
C) Accumulated depreciation is that portion of a plant asset's cost that has been recorded
previously as an expense.
D) Depreciation is a non-cash expense.
E) All of the above are true.
27. Harmony Inc. purchased 50,000 of the 500,000 outstanding shares of common stock of Stratton
Company on January 1, 2010, for $35 per share as a long-term investment. The records of Stratton
Company showed the following on December 31, 2010:
C
Net Income
Dividends declared and paid during December 2010
Market price per share
$600,000
50,000
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Harmony Inc. should report the following on the income statement for the year ended December
31, 2010 for its investment in Stratton Company.
A) $55,000
B) $50,000
C) $5,000
D) $60,000
E) None of the above.
28. At the end of an asset's useful life, the balance in Accumulated Depreciation will be the same as
the:
A) market value of the asset.
B) tax liability.
C) total depreciation expense over its useful life.
D) salvage value of the asset.
E) book value of the asset.
29. A company may include interest cost as part of the cost of the asset
A) when they must borrow money to finance the manufacture of their inventory items.
B) when they pay for the purchase of an asset through installments.
C) when they are self-constructing a piece of equipment they will use to manufacture their
products but only during the period of construction.
D) when they buy a piece of equipment and finance its acquisition by a bank loan.
E) under no circumstances as interest is never capitalized
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30. Equipment with a cost of $390,000 and estimated residual value of $60,000 is expected to have a
useful life of 30,000 hours. During August, the equipment was operated 700 hours. What amount
should be recorded as depreciation expense for the month?
A) $8,400.
B) $9,100.
C) $7,000.
D) $7,700.
E) None of the above.
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Answer Key
Testname: EXAM 2 PRACTICE EXAM 2 REVISED FALL 2020
1. B
2. B
3. C
4. A
5. D
6. A
7. B
8. B
9. B
10. D
11. B
12. C
13. C
14. A
15. C
16. C
17. C
18. A
19. C
20. D
21. D
22. C
23. B
24. D
25. E
26. B
27. A
28. C
29. C
30. D
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