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Accounting 303
Exam 1, Chapters 1 – 3
Fall 2010
I.
1.
Name _______________________
Section _______
Row _______
Multiple Choice Questions. (2 points each, 34 points in total) Read each question carefully and
indicate your answer by circling the letter preceding the one best answer.
FICA tax is paid by
a. employers only.
b. employees only.
c. both employers and employees.
d. neither employers or employees.
2. An example of a contra account is:
a. Depreciation expense.
b. Accounts receivable.
c. Sales revenue.
d. Accumulated depreciation.
e. Unearned rent revenue.
3. On December 31, 2011, Coolwear, Inc. had balances in its accounts receivable and allowance for
uncollectible accounts of $48,400 and $0, respectively. No receivables were written off during the
year. At the end of 2011, Coolwear estimated that $2,100 in receivables would not be collected. Bad
debt expense for 2011 would be:
a. $0.
b. $46,300.
c. $1,050.
d. $2,100.
e. some other amount.
4.
Which of the following was the first private sector entity that set accounting standards in the United
States?
a. Accounting Principles Board
b. Committee on Accounting Procedure
c. Financial Accounting Standards Board
d. IASB
5.
The conceptual framework's qualitative characteristic of relevance includes:
a. Predictive value.
b. Verifiability.
c. Completeness.
d. Neutrality.
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6. The conceptual framework's qualitative characteristic of faithful representation includes:
a. Predictive value.
b. Neutrality.
c. Confirmatory value.
d. Timeliness.
7. Of the following, the most important objective for financial reporting is to provide information useful
for:
a. Making decisions.
b. Determining taxable income.
c. Providing accountability.
d. Increasing future profits.
8. Change in equity from nonowner sources is:
a. Comprehensive income.
b. Revenues.
c. Expenses.
d. Gains and losses.
9. An important argument in support of historical cost information is:
a. Relevance.
b. Completeness.
c. Materiality.
d. Verifiability.
10. If a company has gone bankrupt, its financial statements likely violate:
a. The matching principle.
b. The realization principle.
c. The going concern assumption.
d. The stable monetary unit assumption.
11. Four different competent accountants independently agree on the amount and method of reporting an
economic event. The concept demonstrated is:
a. Reliability.
b. Comparability.
c. Completeness.
d. Verifiability.
12. Current assets include cash and all other assets expected to become cash or be consumed:
a. Within one year.
b. Within one operating cycle.
c. Within one year or one operating cycle, whichever is shorter.
d. Within one year or one operating cycle, whichever is longer.
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13. Which of the following accounts should never appear on a post closing trial balance?
a. Allowance for uncollectibles.
b. Unearned revenue.
c. Income tax expense.
d. Retained earnings.
14. The principal concern with accounting for related party transactions is:
a. The size of the transactions.
b. Differences between economic substance and legal form.
c. The absence of legally binding contracts.
d. The lack of accurate data to record transactions.
15. The balance sheet is useful for analyzing all of the following except
a. liquidity.
b. solvency.
c. profitability.
d. financial flexibility.
Use the following partial balance sheet ($ in thousands) for Paisano Seafood Inc. shown below for
questions 16 and 17.
16. The current ratio is (rounded):
a. 1.98
b. 1.58
c. 1.17
d. 0.66
e. some other amount
17. The debt-to-equity ratio is (rounded)?
a. 1.30
b. 1.00
c.
.97
d.
.37
e. some other amount
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II. Problems – (66 points in total)
1.
(12 points) Fill in the blanks below with the accounting principle, assumption, or term that best
completes the sentence.
a. Decreases in equity arising from peripheral or incidental transactions of an entity are
__________________.
b. ________________________ and _______________________ are the two primary qualities that
make accounting information useful for decision making.
c. ________________________ enables users to identify the real similarities and differences in
economic phenomena because the information has been measured and reported in a similar manner
for different enterprises.
d. Under ______________________________ revenues and expenses are recorded and reported
regardless of the time period the cash flow takes place.
e. _______________________ would allow the expensing of all repair tools when purchased, even
though they have an estimated life of 3 years.
f. A footnote describing the inventory method utilized by a particular company is an application of the
_______________________ principle.
g. Probable future economic benefits obtained or controlled by a particular entity as a result of past
transactions are ______________________.
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2.
(10 points) Prepare journal entries in proper form to record the following transactions of Daisy King
Ice Cream Company. If an entry is not required, state "No Entry."
a.
Started business by issuing 10,000 shares of common stock for $20,000.
b.
Purchased equipment for $5,400, paying $1,000 down and signing a two-year, 10% note for the
balance.
c.
Purchased $1,800 of inventory on account.
d.
Recorded cash sales of $800 for the first week.
e.
Paid for inventory purchased in item (e).
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3.
(12 points) Present, in proper journal form, the adjusting entries that would be made on July 31,
2010, the end of the fiscal year, for each of the following.
a. The prepaid supplies on August 1, 2009 was $7,350. Supplies costing $20,150 were acquired during
the year and charged (debited) to the prepaid supplies account. A count on July 31, 2010, indicated
supplies on hand of $8,810.
b. On April 30, 2010, a ten-month, 9% note receivable for $20,000 was received from a customer.
c. On March 1, 2010, $12,000 was paid for rent on the office building for one year and was recorded
with a debit to rent expense.
4.
(6 points) The Timo Corporation's controller prepares adjusting entries only at the end of the fiscal
year. The following adjusting entries were prepared on December 31, 2010:
Interest expense
Interest payable
1,800
1,800
Insurance expense
60,000
Prepaid insurance
60,000
Additional information:
a. The company borrowed $30,000 on June 30, 2010. Principal and interest are due on June 30, 2011.
This note is the company's only interest-bearing debt.
b. Insurance for the year on the company's office buildings is $90,000. The insurance is paid in advance
and debited to the prepaid insurance account.
Required: Compute each of the following and show your work.
a. What is the interest rate on the company's note payable?
b. The 2010 insurance payment was made at the beginning of which month in 2010?
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5. (10 points) The following is the December 31, 2010, trial balance for RYK Enterprises.
Accounts
Cash and Equivalents
Accounts Receivable
Inventory
Prepaid Assets
Property, Plant, and Equip.
Accumulated Depreciation
Investment Securities (to be sold in 2011)
Franchise
Accounts Payable
Taxes Payable
Notes Payable, due January 15, 2012
Capital Stock
Retained Earnings
Sales
Sales Returns
Purchases
Purchases Returns
Purchases Discounts
Transportation-In
Selling Expenses
General and Admin. Expenses
Total
Required: Calculate each of the following (show your work):
Total Current Assets
Total Current Liabilities
Total Stockholders' Equity
DR
CR
$100
2,150
420
20
4,600
$580
240
200
150
408
2,100
1,700
1,552
7,700
89
2,100
42
97
130
2,481
1,799
$14,329
$14,329
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6.
(16 points) The December 31, 2010, balance sheet for Bob Telecom is shown on the next page.
After examining the balance sheet, you discover it contains some errors. Based on the additional
information provided determine the correct balance sheet amounts and write in the space provided all
the amounts for a corrected balance sheet. Any accounts not adjusted by the additional information
are correct as stated in the original balance sheet.
Additional information:
a.
Included in the current investment in securities are $25,000 of securities with a maturity of February
1, 2011, and $50,000 of securities that will not mature until June 30, 2012.
b.
The accountant for Bob Telecom forgot to record depreciation on the machinery for 2010. The
original cost of the machinery was $1,050,000 and it was assigned a $50,000 salvage value with a 10year life.
c.
The prepaid current asset account included $5,000 of prepaid rent that expired during 2010.
d.
The current notes payable account included two loans; one in the amount of $25,000 is due on
December 31, 2011, and the other one in the amount of $50,000 is due on June 30, 2013.
e.
The long-term notes payable balance of $150,000 represents a 10-year loan taken out on December
31, 2010. The loan requires it to be repaid in 10 equal installments with the first payment due on
December 31, 2011.
f.
Plug retained earnings to make the corrected balance sheet balance.
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Bob Telecom
Balance Sheet
December 31, 2010
Original Balance Sheet
Assets
Current Assets
Cash and cash equivalents
Accounts receivable (net)
Inventory
Investment in securities
Prepaid assets
50,000
250,000
75,000
100,000
25,000
Total Current Assets
500,000
Noncurrent Assets
Property, plant, and equipment
Accumulated depreciation PP&E
Investment in securities
1,200,000
<200,000>
50,000
Total Noncurrent Assets
1,050,000
1,550,000
Total Assets
Liabilities
Current Liabilities
Accounts payable
Accrued and unearned liabilities
Notes payable
Current portion of long-term debt
30,000
15,000
75,000
0
Total Current Liabilities
120,000
Long-term Liabilities
Notes payable
Bonds payable
150,000
300,000
Total Long-term Liabilities
450,000
570,000
Total Liabilities
Stockholders' Equity
Common stock
Retained earnings
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
280,000
700,000
980,000
1,550,000
Corrected Balance Sheet
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Ratios
Current ratio
=
Current assets
Current liabilities
Acid-test ratio
(or quick ratio)
=
Quick assets
Current liabilities
Debt to equity ratio
=
Total liabilities
Shareholders' equity
Times interest earned ratio
=
Net income + interest expense + taxes
Interest expense
Asset turnover ratio
=
Net sales
Average total assets
Receivables turnover ratio
=
Net sales
Average accounts receivable (net)
Average collection period
=
365
Receivables turnover ratio
Inventory turnover ratio
=
Cost of goods sold
Average Inventory
Average days in inventory
=
365
Inventory turnover ratio
Profit margin on sales
=
Net income
Net sales
Return on assets
=
Net income
Average total assets
Return on shareholders'
equity
=
Net income
Average shareholders' equity
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Answers
Question Answer
1
c
2
d
3
d
4
b
5
a
6
b
7
a
8
a
9
d
10
c
Question Answer
11
d
12
d
13
c
14
b
15
c
16
b
17
a
Problems
1.
a.
b.
c.
d.
e.
f.
g.
Losses
Relevance; faithful representation
Comparability or consistency
Accrual accounting
The materiality convention or cost benefit or cash basis of accounting
Full disclosure
Assets
a.
Cash
2.
20,000
Common Stock
b.
c.
d.
20,000
Equipment
Cash
Notes Payable
5,400
Inventory
Accounts Payable
1,800
Cash
1,000
4,400
1,800
800
Sales
e.
Accounts Payable
Cash
800
1,800
1,800
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3.
a.
b.
c.
Supplies Expense
Prepaid Supplies
18,690
Interest Receivable
Interest Revenue
450
Prepaid Rent
Rent Expense
18,690
450
7,000
7,000
4.
a.
principle x interest rate x time = interest
3,000 x interest rate x 6/12 = 1,800
interest rate
= 12%
b.
2/3 is 2010 expense
therefore, paid 8 months before year end
Paid on May 1
a.
Total current assets = 100 + 2150 + 420 + 20 + 240 = 2,930
b.
Total current liabilities = 150 + 408 = 558
c.
Total stockholders’ equity = 1700 + 1552 = 3,252
5.
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6.
Bob Telecom
Balance Sheet
December 31, 2010
Original Balance Sheet
Corrected Balance Sheet
Assets
Current Assets
Cash and cash equivalents
Accounts receivable (net)
Inventory
Investment in securities
Prepaid assets
50,000
250,000
75,000
100,000
25,000
Total Current Assets
75,000
250,000
75,000
25,000
20,000
500,000
445,000
Noncurrent Assets
Property, plant, and equipment
Accumulated depreciation PP&E
Investment in securities
1,200,000
<200,000>
50,000
Total Noncurrent Assets
1,200,000
<300,000>
100,000
1,050,000
1,550,000
Total Assets
1,000,000
1,445,000
Liabilities
Current Liabilities
Accounts payable
Accrued and unearned liabilities
Notes payable
Current portion of long-term debt
30,000
15,000
75,000
0
Total Current Liabilities
30,000
15,000
25,000
15,000
120,000
85,000
Long-term Liabilities
Notes payable
Bonds payable
150,000
300,000
Total Long-term Liabilities
185,000
300,000
450,000
570,000
Total Liabilities
485,000
570,000
Stockholders' Equity
Common stock
Retained earnings
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
280,000
700,000
280,000
595,000
980,000
1,550,000
875,000
1445,000
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