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1.
Maxim Corporation has provided the following information about one of its products:
Date
1/1
6/5
11/10
Transaction
Beginning Inventory
Purchase
Purchase
Number of Units
250
450
150
Cost per Unit
$150
$170
$210
During the year, Maxim sold 500 units.
What is cost of goods sold using the average cost method?
Note: Do not round intermediate computations.

$65,500.

$87,588.

$85,588.

$67,500.
Average cost = $171.18 = [(250 × $150) + (450 × $170) + (150 × $210)] ÷ 850 units.
Cost of goods sold = $85,588 = Average cost, $171.18 × 500 units.
2.
On January 1, 2022, Woodstock, Incorporated purchased a machine costing $35,750. Woodstock also paid
$1,750 for transportation and installation. The expected useful life of the machine is 6 years and the residual
value is $4,500.
How much is the annual depreciation expense, assuming use of the straight-line depreciation method?

$5,208.

$6,250.

$5,958.

$5,500.
Annual depreciation expense = $5,500 = ($35,750 + $1,750 − $4,500) ÷ 6.
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3.
A company provided the following data: sales, $540,000; beginning inventory, $44,000; ending inventory,
$49,000; and gross profit, $186,000. What was the amount of inventory purchased during the year?

$545,000.

$359,000.

$354,000.

$349,000.
Sales − Cost of goods sold = Gross profit. $540,000 − Cost of goods sold = $186,000. Cost of goods sold =
$354,000. Beginning inventory + Purchases − Ending inventory = Cost of goods sold. $44,000 + Purchases −
$49,000 = $354,000. Purchases = $359,000.
4.
On January 1, 2022, Nervin Company purchased an asset that cost $116,000 and had no estimated residual
value. The estimated useful life of the asset is 8 years and straight-line depreciation is used. An error was made
in 2022 because the total amount of the asset's cost was debited to an expense account for 2022 and no
depreciation was recorded. Pretax income for 2022 was $88,000. How much is the correct 2022 pretax
income?

$73,500.

$102,500.

$204,000.

$189,500.
2022 pretax income = $189,500.
Pretax income before correction
Add back cost that was deducted
Less correct depreciation expense
Correct pretax income
$88,000
116,000
(14,500)*
$189,500
*Straight-line depreciation expense = $14,500 = $116,000 ÷ 8.
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5.
A company reported total stockholders' equity of $167,000 on its balance sheet dated December 31, 2021.
During the year ended December 31, 2022, the company reported net income of $21,300, declared and paid a
cash dividend of $5,300, declared and distributed a 10% stock dividend with a $6,300 total market value, and
issued additional common stock for $37,000. What is total stockholders' equity as of December 31, 2022?

$230,600.

$213,700.

$220,000.

$226,300.
December 31, 2022 stockholders’ equity = $220,000.
Balance, December 31, 2021
2022 Net Income
Cash dividends declared
Issuance of common stock
Balance, December 31, 2022
$ 167,000
21,300
(5,300)
37,000
$ 220,000
Stock dividends do not numerically affect total stockholders' equity. They decrease retained earnings and
increase issued common stock (and, for small stock dividends, additional paid-in capital) by equal amounts.
6.
Smith Company exchanges assets to acquire a building. The market price of the Smith stock on the exchange
date was $43 per share and the building's book value on the books of the seller was $240,000.
Which of the following is correct for Smith Company when Smith issues 10,000 shares of $10 par value common
stock and pays $24,000 cash in exchange for the building?

Total assets increase $406,000.

Stockholders' equity increases $240,000.

Stockholders' equity increases $406,000.

Total assets increase $430,000.
The building account increases $454,000 = $430,000 common stock + $24,000 cash. Common stock is
recorded at its total fair value of $430,000 = $10,000 shares × $43 per share = $430,000. Total assets would
increase $430,000: Building increase of $454,000 and cash decrease of $24,000.
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7.
On December 31, 2022, Hamilton Incorporated sold a used industrial crane for $660,000 cash. The original cost
of the crane was $5.08 million and its accumulated depreciation equalled $4.24 million on December 31, 2022.
What is the gain or loss from the December 31, 2022 equipment sale?

$840,000 gain

$180,000 loss

$180,000 gain

$840,000 loss
A $180,000 loss occurs because the book value of $5.08 million − $4.24 million = $840,000 exceeds the
$660,000 selling price.
8.
A company acquires land by issuing 10,000 shares of its $10 par value common stock which is currently trading
at $26 per share, and the appraised value of the land is $325,000. Which of the following statements correctly
describes the recording of the land?

Record the land at the $260,000 value of the consideration given up.

Record the land at the par value of the stock given up, $130,000.

Record the land at the average of its appraised value of $325,000 and the $260,000 value of the
stock issued, thereby recognizing a $32,500 gain.

Record the land at its appraised value of $325,000 and recognize a gain of $65,000 since the issued
stock is currently worth $260,000.
The land should be recorded at the market value of the stock issued (10,000 shares × $26 per share).
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9.
Ponderosa Company borrowed $421,000 cash on September 1, 2022, and signed a one-year, 6% interestbearing note payable. The interest and principal are both due on August 31, 2023. Assume that the appropriate
adjusting entry was made on December 31, 2022 and that no adjusting entries have been made during 2023.
Which of the following would be the required journal entry to pay the note on August 31, 2023?


Account title
Debit
Interest expense
Cash
25,260
Account Title
Interest payable
Debit
Notes payable
25,260
429,420
Account Title
Interest expense
Interest payable
Notes payable
Debit
446,260
Account Title
Notes payable
Interest expense
Cash
Credit
16,840
8,420
421,000
Cash

Credit
8,420
421,000
Cash

Credit
Debit
Credit
421,000
25,260
446,260
December 31, 2022: Interest expense = $8,420 = Amount borrowed × Interest rate × Number of months
borrowed relative to a year = $421,000 × 6% × (4 ÷ 12).
August 31, 2023: Interest expense = $16,840 = Amount borrowed × Interest rate × Number of months borrowed
relative to a year = $421,000 × 6% × (8 ÷ 12).
The credit to cash = $446,260 = the amount borrowed plus the interest for one-year = $421,000 + $25,260.
10.
An overstatement of the 2021 ending inventory results in an overstatement of stockholders' equity as of the end
of 2022.


True
False
The overstatement of the 2021 ending inventory causes the 2021 net income to be overstated, the 2022
beginning inventory to be overstated, and the 2022 net income will be understated. Stockholders' equity as of
the end of 2022 is correct because the 2021 net income overstatement is offset by the understatement of the
2022 net income.
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11.
Net income increases when treasury stock is resold for an amount in excess of the amount paid when the
common stock was repurchased.


True
False
Treasury stock transactions do not affect net income. When treasury stock is resold, the contra-equity treasury
stock account is reduced which increases stockholders’ equity. If the shares are resold at a price higher than the
amount paid when the shares were purchased, additional paid-in capital is increased.
12.
The LIFO inventory method will result in the lowest gross profit in comparison with the FIFO method when unit
costs are decreasing.


True
False
LIFO reports the lowest cost of goods sold because the newest units which are the lower cost units are sold first.
Therefore, LIFO has the highest gross profit during periods of decreasing unit costs.
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13.
On July 1, 2022, Garden Works, Incorporated issued $300,000 of ten-year, 7% bonds for $303,000. The bonds
were dated July 1, 2022, and semi-annual interest will be paid each December 31 and June 30. Garden Works,
Incorporated uses the straight-line method of amortization.
What is the net amount of the bond liability to be reported on the December 31, 2023 balance sheet?

$302,700.

$303,000.

$302,550.

$300,000.
The straight-line premium amortization = $150 = premium on bonds payable ÷ the number of semi-annual
interest payments = ($303,000 − $300,000) ÷ 20 payments.
December 31, 2023 bond liability = $302,550 = initial issue price − amortization of premium on bond payable =
$303,000 − ($150 × 3).
14.
The declaration by a corporation's board of directors of a cash dividend on common stock creates a liability on
the declaration date.


True
False
The declaration date of a common stock dividend is when a dividend liability is created.
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15.
Williams Company purchased a machine costing $37,100 and is depreciating it over a 10-year estimated useful
life with a residual value of $4,100. At the beginning of the eighth year, a major overhaul on it was completed at a
cost of $9,100, and the total estimated useful life was changed to 12 years with the residual value unchanged.
How much is the Year 8 depreciation expense assuming use of the straight-line depreciation method?


$5,120.
$3,800.

$9,100.

$3,300.
Years 1-7 annual depreciation expense = $3,300 = ($37,100 − $4,100) ÷ 10.
Beginning of Year 8 book value prior to overhaul = $14,000 = $37,100 − ($3,300 × 7).
$23,100
(4,100)
$19,000
÷5
$3,800
Book value after overhaul ($14,000 + $9,100)
Less residual value
Remaining book value
Year 8 depreciation expense
remaining years of life
16.
A company reported the following asset and liability balances at the end of 2021 and 2022:
2021
Total Assets
Total Liabilities
$6,500,000
3,690,000
2022
$7,300,000
4,160,000
During 2022, cash dividends of $76,000 were declared and paid, and common stock was issued for $97,000.
What was the amount of net income for 2022?

$309,000.

$330,000.

$406,000.

$233,000.
(1) 2021 stockholders’ equity = $2,810,000 = Assets − Liabilities = $6,500,000 − $3,690,000.
(2) 2022 stockholders’ equity = $3,140,000 = Assets − liabilities = $7,300,000 − $4,160,000.
(3) The change in stockholders’ equity during 2022 = $330,000 = 2022 stockholders’ equity − 2021
stockholders’ equity = $3,140,000 − $2,810,000.
(4) The change in stockholders’ equity during 2022 = $330,000 = the change in common stock + the change in
retained earnings = $97,000 + $233,000.
(5) The change in retained earnings = $233,000 = net income − dividends = $309,000 − $76,000.
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17.
Aura Industries purchased land by paying $36,000 cash on the purchase date and agreeing to pay $36,000 for
each of the next six years beginning one-year from the purchase date. Aura's incremental borrowing rate is 9%.
The land reported on the balance sheet is closest to: (FV of $1, PV of $1, FVA of $1, and PVA of $1)
Note: Use the appropriate factor(s) from the tables provided.

$164,783.

$128,783.

$396,000.

$197,493.
The land cost = $197,493 = (present value of the six remaining payments × present value factor for a 9%, 6-period
ordinary annuity), plus the initial payment = ($36,000 × 4.48592) + $36,000.
18.
A company reported total stockholders' equity of $540,000 on its balance sheet dated December 31, 2021.
During the year ended December 31, 2022, the company reported net income of $60,000, declared and paid a
cash dividend of $18,000, declared and distributed a 10% stock dividend with a $15,000 total market value,
issued additional common stock for $70,000, and resold treasury stock for $15,000 that it had purchased in
2021 for $12,000. What is total stockholders' equity as of December 31, 2022?

$640,000.

$655,000.

$670,000.

$667,000.
December 31, 2022 stockholders’ equity = $667,000.
Balance, December 31, 2021
2022 Net Income
Cash dividends declared
Issuance of common stock
Treasury stock sale
$ 540,000
60,000
(18,000)
70,000
15,000
Balance, December 31, 2022
$ 667,000
Stock dividends do not numerically affect total stockholders' equity. They decrease retained earnings and
increase issued common stock (and, for small stock dividends, additional paid-in capital) by equal amounts.
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19.
Which of the following is correct when, in the same year, beginning inventory is understated by $1,620 and
ending inventory is understated by $860?

Net income is overstated by $760.

Net income is understated by $760.

Net income is understated by $2,480.

Net income is overstated by $2,480.
The understatement of the beginning inventory causes net income to be overstated by $1,620 and the
understatement of the ending inventory causes net income to be understated by $860. The total overstatement
is $760.
20.
Square9 Corporation has provided the following information about one of its laptop computers:
Date
1/1
5/5
8/10
10/15
Transaction
Beginning Inventory
Purchase
Purchase
Purchase
Number of Units
220
320
420
260
Cost per Unit
$520
$570
$620
$670
During the year, Square9 sold 1,050 laptop computers.
What was ending inventory using the LIFO cost flow assumption?

$108,900.

$98,400.

$113,900.

$88,400.
Ending inventory = $88,400 = ($520 × 170).
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21.
On January 1, 2022, Pipestone Corporation issued a six-year, $40,000, 10% bond. The interest is payable
annually each December 31. The issue price was $38,306 based on an 11% effective interest rate. Pipestone
uses the effective-interest amortization method.
The book value of the bonds as of December 31, 2022 is closest to:

$39,094.

$214.

$38,520.

$34,306.
2022 interest expense = $4,214 = initial issue price, which is the 1/1/2022 book value × the market (effective)
interest rate = $38,306 × 0.11.
Cash interest payment = $4,000 = maturity value of the bond × the coupon interest rate = $40,000 × 0.10.
Amortization of discount on bonds payable = $214 = interest expense − interest cash payment = $4,214 −
$4,000.
December 31, 2022 book value = $38,520 = January 1, 2022 book value + amortization of discount on bonds
payable amortization = $38,306 + $214.
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