ACCT 5301, Sample Exam 1
The attached pages contain part of a sample exam covering most of the
material for Exam I, Chapters 2,3,5,6,and 8. You may practice with the
available text and notes, but be aware that, for the actual exam, you will
only be allowed to reference information you post to one sheet of paper,
8.5” x 11” (front side only).
Also, the sample exam is not meant to be a comprehensive study guide. You
are responsible for everything we have discussed in class through Chapter
8. When studying for the exam, you should also review class notes, class
problems, and homework problems.
Note that Exam 1 will not be as long as this exam, but will be structured
in such a manner that you should be able to finish in less than 120
minutes.
I.
Multiple choice. Select the best answer for each question and place
on the answer sheet provided.
1.
The right to receive money in the future is called a(n)
a.
account payable.
b.
account receivable.
c.
liability.
d.
revenue.
2.
Which of the following is not classified properly as a current asset?
a.
Supplies
b.
Short-term investments
c.
A fund to be used to purchase a building within the next year
d.
Unearned revenues to be earned within the next year
3.
Which of the following is not considered an asset?
a. Equipment
b. Dividends
c. Accounts receivable
d. Inventory
4.
Which of the following accounts is increased with a debit?
a.
Legal expense
b.
Legal fees earned
c.
Rent payable
d.
Common stock
5.
Which of the following accounts is increased with a credit?
a. Supplies expense
b. Supplies
c. Sales
d. Dividends
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6.
When the allowance method of recognizing bad debt expense is used,
the entry at the time that a specific accounts receivable is written
off would (hint: analyze the journal entry)
a.
increase the allowance for doubtful accounts
b.
decrease total assets
c.
decrease net income
d.
increase total assets
e.
none of the above
7. Which of the following items would be capitalized as part of the cost
of acquiring land for operational use?
a.
survey of the land to establish legal description
b.
interest cost from financing the purchase of the land
c.
payment of back taxes to get clear title to the land
d.
only (a) and (c) would be capitalized as part of the cost of
the land
e.
all of the above costs in (a), (b), and (c) would be capitalized
as part of the cost of the land.
The following information is for the next two questions:
Guy Company had the following stock issues for all of the year 2008:
Common stock, $1 par value, 100,000 shares authorized, 90,000 shares issued
and outstanding.
Convertible preferred stock, $5 stated dividend, $100 par
value, 5,000 shares authorized, issued and outstanding.
Each preferred share is convertible to 10 shares of common stock. Guy
Company had net income of $100,000 during 2008. Assume that the preferred
dividend had been declared during 2008.
8.
Calculate basic earnings per share for 2008
places):
a. $0.75 per share
b. $1.00 per share
c. $0.83 per share
d. $1.11 per share
9.Calculate
places):
a.$0.71
b.$0.54
c.$1.11
d.$0.89
diluted
per
per
per
per
earnings
per
share
for
2008
(round to 2 decimal
(round
to
2
decimal
share
share
share
share
10. Micheline Company purchased equipment in 2005 for $84,000. Micheline
sold the equipment on January 1, 2009 (after $32,000 of depreciation), for
total proceeds of $45,000. The journal entry to record the sale on January
1, 2009 would include:
a. A debit to Loss on Sale for $7,000
b. A credit to Accumulated Depreciation for $32,000
c. A credit to Equipment for $45,000
d. A debit to Equipment for $84,000
2
The following information is for the next three questions:
Town Wholesalers had 40 ladders in inventory on January 1, 2006.
These ladders had cost $12 each. A total of 160 ladders were
sold in 2006. The inventory records indicated the following
activities:
Date
Activity
Beginning Balance
40 @ 12
=
$ 480
Purchase, Quarter 2
75 @ 14 =
$1,050
Purchase, Quarter 3
70 @ 16
=
$1,120
Purchase, Quarter 4
30 @ 18
=
$ 540
215
$3,190
During 2006, 160 ladders were sold.
11. What is the amount of the December 31, 2006 inventory assuming that
Town Wholesalers maintains a FIFO periodic inventory system?
A.
$ 690
B.
$2,500
C.
$2,250
D.
$ 940
E.
none of the above.
12. What is the amount of the December 31, 2006, inventory assuming that
Town Wholesalers maintains a LIFO periodic inventory system?
A.
$ 690
B.
$2,500
C.
$2,250
D.
$ 940
E.
none of the above.
13. What is the amount of the 2006 cost of goods sold assuming that Town
Wholesalers maintains a weighted average periodic inventory system?(Carry
your cost per unit to two decimal places, and round your results to the
nearest dollar.)
A.
$2,374
B.
$ 712
C.
$ 816
D.
$3,190
E.
none of the above.
II. Deferred income tax concepts. Classify each of the following
activities according to their effect on deferred income taxes in
first year of application. You may select from the following
categories:
A. Deferred tax asset because more revenue is recognized for tax
financial.
B. Deferred tax asset because less expense is recognized for tax
financial.
C. Deferred tax liability because less revenue is recognized for
than financial.
D. Deferred tax liability because more expense is recognized for
than financial.
the
than
than
tax
tax
1. The company uses MACRS for tax depreciation and straight-line for
financial depreciation.
2. The company rents its storefronts with contracts that call for
periodic increases in the rent and recognizes rent expense for tax
purposes on this basis, but recognizes rent expense on a
“straight-line” basis for financial accounting (e.g., Benihana.
3. The company recognizes estimates bad debt expense for financial
accounting, but recognizes the expense for taxes at the time of
write off.
4. The company recognizes subscription revenue as subscriptions are
delivered, but recognizes the prepayment as income for tax
purposes in the year it is collected.
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III. Balance sheet and income statement classification.
Given the
following sections of the income statement and balance sheet, indicate where
each of the following accounts would first appear in the 2008 financial
statements:
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
Income Statement
Statement of Stockholders’ Equity
Balance Sheet - Current Assets
Balance Sheet - Property, Plant and Equipment
Balance Sheet - Long-term Investments
Balance Sheet - Intangible Assets
Balance Sheet - Current Liabilities
Balance Sheet - Long-term Liabilities
Balance Sheet - Common Stock
Balance Sheet - Retained Earnings
X.
Would not appear in the financial statements
List only one letter for each account, except for Item 2 (but you may use a
letter more than once). Note that all of the above balance sheet accounts
are assumed to be at December 31, 2008, the financial statement date.
Indicate the correct answer on the answer sheet provided.
______ 1.
Patents
______ 2.
Retained earnings at December 31, 2008
(there are 2 correct answers here)
______ 3.
Dividends (this is dividends declared to the shareholders)
______ 4.
Interest receivable
______ 5.
Retained Earnings at January 1, 2008
______ 6.
Equipment
______ 7.
Unearned rent revenue (to be earned in 6 months)
______ 8.
Land held for investment
______ 9.
Accumulated depreciation
______ 10.
Wages Payable
______ 11.
Prepaid expense (to be used within the year)
______ 12.
Interest income
______ 13.
Income taxes payable
______ 14.
Bonds payable (due in 3 years)
______ 15.
Employee hired to begin work on January 2, 2009
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IV. General journal entries.
A. Prepare the following general journal entries for 2008 for Company B, and
place in the space provided on the answer sheet.
1. Company B issued shares of stock for $5,000 cash.
2. Company B recorded sales on account of $8,000.
3. Company B purchased office equipment for $4,000 by paying $1,000 in
cash and issuing a note for $3,000 to the seller.
4. Company B collected $4,000 on the sales recorded in part 2.
5. Company B sold land that originally cost $10,000, and received $9,000
cash for the sale.
B.
V.
Analyze the net effect of each of the above transactions
components of the accounting equation. Use the following:
I = increase, D = decrease, NE = no effect.
Assets
Liabilities
Equity
GJE No. 1
______
______
______
GJE No. 2
______
______
______
GJE No. 3
______
______
______
GJE No. 4
______
______
______
GJE No. 5
______
______
______
on
the
Adjusting journal entries.
Prepare the adjusting journal entries at
December 31, 2008 for Company Z in each of the following situations. Place
your answer in the space provided on the answer sheet.
A.
On April 1, 2008, Company Z purchased a 1-year fire insurance policy
at a cost of $2,400, and recorded the amount in Prepaid Insurance.
Prepare the adjusting journal entry at December 31, 2008.
B.
On November 1, 2008 Company Z received $12,000 from customers for
subscriptions paid in advance for 2 years, and recorded the amount in
Unearned Revenues.
Prepare the adjusting journal entry at December
31, 2008, assuming 2 months had been earned.
C.
Company Z purchased office supplies during 2008 at a cost of $6,000.
The balance in Supplies at the beginning of 2008 was $1,000. At the
end of 2008, Company Z had $2,000 in unused
supplies.
Prepare the
AJE at December 31, 2008.
D.
Company Z purchased equipment on January 1, 2008, at a cost of $5,000.
The asset is expected to be depreciated at a rate of $1,000 per year.
Prepare the AJE for 2008.
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VI. Accounts receivable. The balance in Allowance for Uncollectible Accounts of
ABC Company was $5,000 credit at December 31, 2006.
During 2007, $7,000 of
receivables were written off.
Net sales for 2007 were $500,000, and total
accounts receivable at December 31, 2007 (after the write-offs) were $200,000.
A.
Assume ABC uses an aging schedule to estimate uncollectible accounts
receivable at December 31, 2007, and the schedule indicates that
$10,000 of the total A/R is estimated to be uncollectible.
Prepare
the adjusting journal entry to record bad debt expense for 2007:
B.
What balance would appear in Accounts Receivable (net)
on the 2007 balance sheet?
$__________________
Note: Net A/R at 12/31/07 = Ending A/R - Ending Allowance
VII. Depreciation.
Company Q purchased machinery on January 1, 2006, at a cost
of $30,000. The equipment had an estimated useful life of 10 years, and an
estimated salvage value of $6,000. It was expected that the machine would
produce 20,000 units over its useful life, and during 2006 it produced 3,000
units. Calculate the depreciation expense for the year indicated under each
of the following methods (round to whole dollars):
A. Depreciation expense for 2006 - straight-line
B. Depr. expense for 2006 - activity method
C. Depr. expense for 2007 – double declining balance
D. Accumulated depreciation at 12/31/07 - double declining balance
E. Book value of the machinery at 12/31/07 – double declining balance
VIII. Inventory – LIFO Reserve
Arches Software’s 2007 and 2006 balance sheets reveals that
inventories reported on a LIFO basis are $85 million and 78
million respectively. In a footnote, management stated that had
the company used the FIFO method, inventories would be $2.3
million higher in 2007 and 1.8 million higher in 2006.
A. What is Arches cumulative LIFO Reserve at the end of 2007?
B. What are the cumulative tax effects at the end of 2007 of
using LIFO given a 35% marginal tax rate?
C. What is Arches pretax income for 2007 assuming the company
used FIFO?
D. What is Arches tax savings for 2007 as a result of using LIFO
for tax purposes?
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IX. Income Statement Classification.
Given the selected financial statement
items in numbers 1 through 6 below, indicate the initial placement of the item in
the financial statements.
For example, revenues and expenses are closed to
retained earnings, but initially displayed on the income statement.
A. Income Statement - part of Income from Operations
B. Income Statement - Other Revenues and Gains
C. Income Statement - Other Expenses and Losses
D. Income Statement - Discontinued Operations
E. Income Statement - Extraordinary Items
F. Statement of Stockholders’ Equity -Retained Earnings column
X. None of the above
You may
for each
___ 1.
____2.
____3.
____4.
5.
use the above letters more than once, but indicate only one answer
of the items below.
Loss on Discontinued Segment
Loss from hurricane damage (rare in this region)
Loss from write-off of material accounts receivable
Usual write-off of an account receivable
Dividends declared to preferred shareholders
X. Notes Payable. On January 2, 2006, Company M purchased a tract of land with a
notes payable. The note is non-interest bearing, and promises to pay $20,000
at the end of 3 years. Assume the following additional facts: Company M has a
borrowing rate of 5%, and the tract had been appraised at $19,000 last year.
A. Prepare the journal entry to record the purchase of the land at Jan. 2,
2006.
B. Prepare the journal entry, if any, to record the interest expense on
the note at December 31, 2006.
C.
What is a zero coupon bond? How is it similar to the notes payable
above? How is it different from a traditional bond?
XI. Bonds Payable.
Part 1:Company Q issued 10 year bonds with a $100,000 face value and a 5 percent
annual stated rate on January 1, 2007 (the date of authorization). The bonds
were issued to yield an annual effective interest rate of 4 percent. The bonds
pay interest annually at December 31 of each year, starting on Dec. 31, 2007.
A. Calculate the issue price of the bonds at Jan. 1, 2007. State the factors
and assumptions that you are using in your calculation (i.e., amount and type
of cash flow(s), interest rate (i) for the PV calculations, and (n) the number
of periods used):
B. Complete the amortization schedule on the answer sheet through Dec. 31,
2008, using the effective interest method (round to whole dollars).
C. Prepare the journal entry at Jan. 1, 2007 on the books of Company Q to
record the issue of the bonds:
D. Prepare the journal entry on Q's books at Dec. 31, 2007 to record the first
interest payment (including any amortization of premium or discount).
Part 2: Repeat items A through D with all the same assumptions EXCEPT that the
company is offering a 4 percent stated rate, and the bonds were issued to yield
an annual effect interest rate of 5 percent.
Part 3:
Why did one bond issue at a premium and the other bond issue at a
discount? (i.e., why did the market value these bonds differently?)
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Essay Question 1 on inventory.
Discuss the difference between LIFO and
FIFO in inventory valuation. In times of rising prices, which value
gives the highest net income?
Why do companies prefer to use LIFO
for financial reporting? Does the use of 2 alternative methods cause
problems with comparability across firms? Should LIFO continue to be
made available to companies as a choice for inventory valuation?
Essay Question 2.
How can conservatism be used to manipulate financial
statements, particularly by new management?
In your answer you
should define the terms “big bath” and “cookie cutter reserves”.
Give 2 specific examples where overestimation of expense in the
current year would lead to higher income in future years (including
balance sheet and income statement accounts affected).
Essay
Question 3 on
calculation of
assumptions that
your opinion of
useful measure?
earnings per share:
earnings per share.
are made to calculate
diluted earnings per
What other measures of
Discuss several problems with the
Include in your discussion the
diluted earnings per share. What is
share?
Do you think that it is a
dilution might be useful?
Essay Question 4 on depreciation and deferred income taxes. In class, when
discussing deferred income taxes, we examined an alternative where a company
could use MACRS for both financial and tax accounting. In this case, the
deferred tax liability relating to depreciation would disappear if the company
chose to use MACRS for both tax and financial accounting.
1. Would the company incur any additional cash flows to make that deferred
income tax liability disappear?
2. Does the deferred tax liability from depreciation meet the definition of a
liability? Include the definition of a liability in your answer.
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