47. Laredo Company got a long term contract to provide services for
the El Dorado government. In 20X3, the 5 year contract is set for
100 million dollars cash. Services are to be provided evenly over
20X3 through 20X7.
a. In 20X3 Laredo should recognize no revenue.
b. In 20X3 Laredo should recognize 100 million in revenue.
c. In 20X4 Laredo should recognize no revenue.
d. In 20X4 Laredo should recognize 20 million in revenue.
e. In 20X7 Laredo should recognize 100 million in revenue.
L.O.: 1
Type: Easy
Solution: d
48. In order for revenue to be recognized
a. Goods or services must be delivered.
b. Cash or an asset virtually assured of being converted into cash
must be received.
c. Goods or services must be delivered and cash or an asset
virtually assured of being converted into cash must be
received.
d. Cash must be received.
e. Goods or services must be delivered and cash must be received.
L.O.: 1
Type: Easy
Solution: c
49. Why is the timing of revenue recogintion important?
a. The cash flow statement depends on proper timing.
b. Net income depends on proper timing.
c. Assets will be in error without proper timing of revenue.
d. Timing of revenue must be known in order to expense costs in
advance of sales.
e. Investors need to know when gains and losses are taken.
L.O.: 1
Type: Easy
Solution: b
50. Assume the periodic inventory system. Westside Company sold
inventory to Eastside Company for $6,000 cash. The journal entry
to be made by Westside Company is:
a.
Cost of Goods Sold
6,000
Sales
6,000
b.
Cash
6,000
Inventory
6,000
c.
Accounts Receivable
6,000
Sales
6,000
d.
Cash
6,000
Sales
6,000
e.
Cash
6,000
Accounts Payable
6,000
L.O.: 2
Type: Easy
Solution: d
51. Assume the periodic inventory system. Northside Company sold
inventory to Southside Company for $6,000 for an item from
Southside to be delivered at the end of the month. The journal
entry to be made by Northside Company is:
a.
Cost of Goods Sold
6,000
150
b.
c.
d.
e.
Sales
Cash
Inventory
Accounts Receivable
Sales
Cash
Sales
Cash
Accounts Payable
L.O.: 2
6,000
6,000
6,000
6,000
6,000
6,000
6,000
6,000
6,000
Type: Easy
Solution: c
52. Northern Company gave inventory to Southern Company to settle
short-term credit for $6,000. The journal entry to be made by
Northern Company is:
a.
Accounts Payable
6,000
Sales
6,000
b.
Cash
6,000
Sales
6,000
c.
Accounts Receivable
6,000
Sales
6,000
d.
Sales
6,000
Accounts Payable
6,000
e.
Accounts Payable
6,000
Inventory
6,000
L.O.: 2
Type: Easy
Solution: e
53. Assume the periodic inventory system. Frank Company gave a 4%
trade discount to Gene Company when it sold inventory for cash
that normally sells for $12,000. The journal entry to be made by
Frank Company is:
a.
Cash
11,520
Sales
11,520
b.
Cash
11,520
Trade Discount
480
Sales
12,000
c.
Cash
11,520
Trade Discount Receivable
480
Sales
12,000
d.
Cash
12,000
Trade Discount
480
Sales
11,520
e.
Cash
12,000
Trade Discount Payable
480
Sales
11,520
L.O.: 3
Type: Moderate
Solution: a
54. Assume the periodic inventory system. Laredo Company sold
inventory on account for $800 on March 8, 20X4, with terms of
2/10, n/30. On March 16, 20X4, the appropriate payment was
received from the customer. The journal entry to record the March
16 transaction on Laredo’s books is:
151
a.
b.
c.
d.
e.
Cash
Accounts Receivable
Cash
Cash Discount on Sales
Accounts Receivable
Cash
Sales
Accounts Receivable
Cash
Cash Discount on Sales
Accounts Receivable
Cash
Sales
Accounts Receivable
L.O.: 3
Type: Easy
800
800
784
16
800
784
16
800
800
16
784
800
16
784
Solution: b
55. The difference between gross sales and net sales may include
a. bad debts expense
b. sales returns
c. trade discounts
d. cost of goods sold
e. purchase returns
L.O.: 3
Type: Easy
Solution: b
56. Trade discounts:
a. apply one or more reductions to the gross selling price for a
particular class of customers in accordance with a company's
management policies
b. are offered in order to be competitive
c. are offered to encourage certain customer behavior (to
encourage early orders)
d. are not detailed on the income statement (gross sales revenue
is shown net of trade discounts)
e. All of the above statements are true regarding trade discounts.
L.O.: 3
Type: Moderate
Solution: e
57. Assume the periodic inventory system. Rigo Company sold inventory
on account for $800. A week later, the inventory was returned and
a full credit was given to the customer. Rigo’s journal entry to
record the return of the inventory would be:
a.
Cash
800
Accounts Receivable
800
b.
Sales
800
Accounts Receivable
800
c.
Sales Discounts
800
Accounts Receivable
800
d.
Sales Returns & Allowances
800
Sales
800
e.
Sales Returns & Allowances
800
Accounts Receivable
800
L.O.: 3
Type: Moderate
152
Solution: e
58. Assume the periodic inventory system. Riverside Company sold
inventory on account for $450. A week later, the inventory was
returned and a cash refund was given to the customer. Reiverside’s
journal entry to record the return of the inventory would be:
a.
Cash
450
Accounts Receivable
450
b.
Sales
450
Accounts Receivable
450
c.
Sales Discounts
450
Cash
450
d.
Sales Returns & Allowances
450
Sales
450
e.
Sales Returns & Allowances
450
Cash
450
L.O.: 3
Type: Moderate
Solution: e
59. Troy Company just purchased merchandise costing $700, which has
payment terms of 2/10, n/45. Troy Company is uncertain whether to
take advantage of the discount. What is the effective annual
interest rate associated with this discount, assuming a 365-day
year?
a. 2.0%
b. 3.0%
c. 16.2%
d. 20.9%
e. 21.3%
L.O.: 3
Type: Difficult
Solution: e
60. Unruh Company can borrow money from the local bank at 14%. The
company just acquired inventory costing $2,900, which has terms of
2/10, n/30. Assuming a 365-day year, which of the following
statements is true?
a. Do not pay within the discount period since the effective rate
of the discount is 37.2%, while the cost to borrow money is
14%.
b. Pay within the discount period since the effective rate of the
discount is 37.2%, while the cost to borrow money is 14%
c. Do not pay within the discount period since the effective rate
of the discount is 24%, while the cost to borrow money is 14%.
d. Pay within the discount period since the effective rate of the
discount is 24%, while the cost to borrow money is 14%.
e. Do not pay within the discount period since the 2% discount is
less than the 14% cost to borrow money.
L.O.: 3
Type: Difficult
Solution: b
61. Which of the following statements is true?
a. Trade discounts and sales returns and allowances are listed on
the income statement as deductions from gross sales.
b. Reports to shareholders often omit the details of revenue and
show only net revenue.
153
c. Cash discounts are listed on the income statement as an expense
of doing business.
d. "Turnover" is commonly used in the United States to refer to
net sales revenue.
e. Cash discounts must appear on cash flow statements.
L.O.: 3
Type: Difficult
Solution: b
62. Fryes Company accepts bank cards, which charge a fee of 4% on
sales. The company had gross sales of $60,000, of which 25% were
cash sales and the remainder were credit sales which are solely
attributable to bank cards. The journal entry for Fryes Company
is:
a.
Cash
58,200
Sales
58,200
b.
Cash
15,000
Accounts Receivable
43,200
Sales
58,200
c.
Cash
57,600
Cash discounts for Bank Cards
2,400
Sales
60,000
d.
Cash
58,200
Cash Discounts for Bank Cards
1,800
Sales
60,000
e.
Cash
15,000
Accounts Receivable
43,200
Cash Discounts on Bank Cards
1,800
Sales
60,000
L.O.: 3
Type: Moderate
Solution: d
63. Clavier Company sold inventory to a customer for $400. The
customer used a VISA bank card, which charges Clavier a 3% fee.
What asset results from this sale?
a. Accounts Receivable of $388
b. Cash of $400
c. Cash of $388
d. Sales of $388
e. Sales of $400
L.O.: 3
Type: Moderate
Solution: c
64. Viking Inc. wishes to borrow $70,000 at 12% interest from the
local bank. However, the bank requires a compensating balance of
9%. The effective interest rate that the Viking Inc will pay on
the loan is:
a. 10.1%
b. 11.0%
c. 13.2%
d. 16.4%
e. 21.0%
L.O.: 4
Type: Moderate
154
Solution: c
65. Which of the following is not a procedure used to safeguard cash?
a. The serial numbers on the money are recorded and maintained.
b. The individuals who receive cash do not also disburse cash.
c. The individuals who handle cash do not have access to the
accounting records.
d. Cash receipts are immediately recorded and deposited and are
not used directly to make payments.
e. Disbursements are made by serially numbered checks, and only
upon proper authorization by someone other than the person
writing the check.
L.O.: 4
Type: Easy
Solution: a
66. Which of the following statements is false?
a. Accepting credit will increase administrative costs.
b. Accepting credit will result in losses due to uncollectible
accounts.
c. Many small retailers are unwilling to accept any level of
credit risk.
d. Credit sales normally will cause an increase in sales revenue.
e. Credit risks can vary greatly among industries.
L.O.: 4
Type: Difficult
Solution: c
67. Rainbo Company is considering whether to accept credit sales. The
company has determined that by allowing credit sales, the
additional revenue from the credit sales would be $60,000. Cash
sales will be unaffected. The company has a gross profit
percentage of 30%. The additional administrative cost associated
with allowing credit sales is $10,000. The company expects bad
debts to be 8% of credit sales. Which of the following statements
is true with respect to the decision to allow credit?
a. The company should allow credit sales because the company's
gross profit will increase by $18,000 while the costs of credit
will be $14,800.
b. The company should not allow credit sales because the company's
revenue will increase by $60,000 while the costs of credit will
be $14,800.
c. The company should not grant credit sales because the company's
profit will increase by $60,000 while the costs of allowing
credit will be $14,800.
d. The company should allow credit sales because the company's
revenue will increase by $60,000 while the credit costs are
$11,440.
e. The company should allow credit sales because the company's
profit will increase by $18,000 while the credit costs will be
$11,440.
L.O.: 4
Type: Difficult
Solution: a
68. Admire Company generated $100,000 in credit sales during 20X4. In
February 20X5, Admire realized that $13,500 of the accounts
receivable generated from the 20X4 credit sales were
uncollectible. Admire seldom experiences bad debts losses;
155
therefore, it used the specific write-off method. Using the
matching principle, what is the effect on 20X5 and 20X4 net income
as a result of the write-off?
a. 20X5 net income is understated by $13,500, while 20X4 net
income is overstated by $13,500.
b. 20X5 net income is overstated by $13,500, while 20X4 net income
is understated by $13,500.
c. 20X5 net income is neither overstated nor understated, but 20X4
net income is understated by $13,500.
d. 20X5 net income is overstated by $13,500, but 20X4 net income
is neither overstated nor understated.
e. There is no effect on either year's net income as revenues and
expenses are properly matched.
L.O.: 5
Type: Difficult
Solution: a
Table 6-1
Cottonwood Company has a December 31 year-end. On November 28, 20X4,
the company sold inventory for $750 on account with the terms 2/10,
n/30. On February 28, 20X5, the company recognized the account as
uncollectible.
69. Referring to Table 6-1, if Cottonwood Company uses the specific
write-off method, what can be said with respect to the matching
principle.
a. The matching principle is not violated using the specific
write-off method.
b. 20X4 sales are overstated by $750, and 20X5 sales are
understated by $750.
c. 20X4 sales are understated by $750, and 20X5 sales are
overstated by $750.
d. 20X4 sales are overstated by $750, and 20X5 sales are
overstated by $750.
e. 20X4 sales are understated by $750, and 20X5 sales are
understated by $750.
L.O.: 5
Type: Difficult
Solution: b
70. Referring to Table 6-1, what is the journal entry for Cottonwood
Company on February 28, 20X5, if the company uses the specific
write-off method?
a.
Accounts Receivable
750
Bad Debts Expense
750
b.
Allowance for Uncollectible Accounts
750
Accounts Receivable
750
c.
Bad Debts Expense
750
Allowance for Uncollectible Accounts
750
d.
Accounts Receivable
750
Allowance for Uncollectible Accounts
750
e.
Bad Debts Expense
750
Accounts Receivable
750
L.O.: 5
Type: Moderate
Solution: e
71. Which of the following is not an attribute of the Allowance for
Uncollectible Accounts?
156
a. The balance in the account increases when an uncollectible
account is written off.
b. It is on the asset side of the balance sheet.
c. It is a contra account.
d. The balance in the account increases when the adjusting entry
for bad debts expense is recorded.
e. It normally has a credit balance.
L.O.: 5
Type: Easy
Solution: a
Table 6-2
Burnett Company has sales of $900,000, of which 25% are cash sales
and the remainder are on credit. As of year-end, but before the bad
debts adjustment, the Allowance for Uncollectible Accounts has a
credit balance of $300, and accounts receivable has a debit balance
of $60,000.
72. Referring to Table 6-2, if bad debts are estimated to be 1.5% of
credit sales, what journal entry will Burnett Company need to
prepare in order to estimate bad debts?
a.
b.
c.
d.
e.
Allowance for Uncollectible Accounts
Accounts Receivable
Bad Debts Expense
Allowance for Uncollectible Accounts
Bad Debts Expense
Allowance for Uncollectible Accounts
Bad Debts Expense
Allowance for Uncollectible Accounts
Bad Debts Expense
Accounts Receivable
L.O.: 5
Type: Moderate
10,125
10,125
9,525
9,525
10,425
10,425
10,125
10,125
13,500
13,500
Solution: d
73. Referring to Table 6-2, if it is determined that the company will
not collect from Banner and from Parks for the amounts of $425 and
$700, respectively, what journal entry would Burnett need to
prepare?
a.
Allowance for Uncollectible Accounts
1,125
Accounts Receivable, Banner
425
Accounts Receivable, Parks
700
b.
Bad Debts Expense
1,125
Accounts Receivable, Banner
425
Accounts Receivable, Parks
700
c.
Bad Debts Expense
1,125
Allowance for Uncollectible Accounts
1,125
d.
Accounts Receivable, Banner
425
Accounts Receivable, Parks
700
Allowance for Uncollectible Accounts
1,125
e.
Accounts Receivable, Banner
425
Accounts Receivable, Parks
700
Bad Debts Expense
1,125
L.O.: 5
Type: Moderate
157
Solution: a
74. Which of the following statements associated
method for bad debts is false?
a. The write-off of an uncollectible account
accounts receivable subsidiary ledger.
b. The write-off of an uncollectible account
total amount of current assets.
c. The write-off of an uncollectible account
current liabilities.
d. The write-off of an uncollectible account
income statement.
e. The write-off of an uncollectible account
stockholders' equity.
L.O.: 5
Type: Difficult
with the allowance
does not affect the
does not affect the
does not affect
does not affect the
does not affect
Solution: a
75. The estimation of bad debts expense, using the allowance method,
has what affect on the balance sheet?
a. It has no effect on assets and decreases stockholders' equity.
b. It decreases assets and decreases stockholders' equity.
c. It increases assets and increases stockholders' equity.
d. It decreases assets and increases stockholders' equity.
e. It increases assets and decreases stockholders' equity.
L.O.: 5
Type: Difficult
Solution: b
76. The write-off of a specific account for bad debts has what effect
on the balance sheet under the allowance method?
a. It has no effect on total assets or stockholders' equity.
b. It decreases assets and decreases stockholders' equity.
c. It increases assets and decreases stockholders' equity.
d. It decreases assets and has no effect on stockholders' equity.
e. It has no effect on assets and decreases owner's equity.
L.O.: 5
Type: Difficult
Solution: a
77. A bad debts recovery has what effect on the balance sheet under
the allowance method for bad debts?
a. It has no effect on total assets or stockholders' equity.
b. It decreases assets and decreases stockholders' equity.
c. It increases assets and decreases stockholders' equity.
d. It decreases assets and has no effect on stockholders' equity.
e. It has no effect on assets and decreases owner's equity.
L.O.: 5
Type: Difficult
Solution: a
78. The accounts receivable subsidiary ledger:
a. is not affected by the write-off of individual accounts
b. provides the supporting detail (i.e., individual customer names
and amounts owed) for the general ledger account "Accounts
Receivable"
c. is kept for both the "Accounts Receivable" and the "Allowance
for Uncollectible Accounts" accounts
d. is only kept by companies that use the allowance method of
estimating bad debts
e. All of the above are true statements.
158
L.O.: 5
Type: Moderate
Solution: b
Table 6-3
Burnap Company has performed the following year-end analysis of its
accounts receivable:
Total
$72,000
1-30 Days
$45,000
31-60 Days
$14,000
61-90 Days
$8,000
Over 90 Days
$5,000
The company had sales of $850,000 of which 20% were cash sales. As of
year-end, the balance in Allowance for Uncollectible Accounts before
adjusting for bad debts was a $400 debit. Burnap Company has
estimated the following bad debts percentages:
1-30 days
31-60 days
61-90 days
Over 90 days
6%
15%
40%
75%
Ending Accounts Receivable
Total Credit Sales
10%
1.5%
79. Referring to Table 6-3, what is the journal entry that Burnap
Company will make if it estimates bad debts by using a percentage
of credit sales?
a.
Bad Debts Expense
9,800
Allowance for Uncollectible Accounts
9,800
b.
Bad Debts Expense
10,200
Allowance for Uncollectible Accounts
10,200
c.
Bad Debts Expense
10,600
Allowance for Uncollectible Accounts
10,600
d.
Bad Debts Expense
12,350
Allowance for Uncollectible Accounts
12,350
e.
Bad Debts Expense
12,750
Allowance for Uncollectible Accounts
12,750
L.O.: 5
Type: Difficult
Solution: b
80. Referring to Table 6-3, what is the balance in the Allowance for
Uncollectible Accounts after Burnap Company estimates bad debts
using a percentage of credit sales?
a. $9,800
b. $10,200
c. $10,600
d. $12,350
e. $12,750
L.O.: 5
Type: Difficult
Solution: a
81. Referring to Table 6-3, what is the balance in the Allowance for
Uncollectible Accounts if Burnap Company estimates bad debts using
a percentage of ending accounts receivable?
a. $6,900
b. $7,200
c. $7,500
d. $84,000
e. $84,300
159
L.O.: 5
Type: Difficult
Solution: b
82. Cline Company had total credit sales for the past year of
$800,000. As of year-end, but before estimating bad debts, the
company had a $70,000 debit balance in accounts receivable and a
$600 debit balance in the Allowance for Uncollectible Accounts.
Upon examination of the accounts receivable, it was found that 55%
of the balance was 1-30 days old, 30% was 31-60 days old, 9% were
61-90 days old, and 6% were over 90 days old. Cline Company
estimates the following bad debts percentages:
1-30 days
10%
31-60 days
25%
61-90 days
40%
Over 90 days
80%
The journal entry necessary to estimate bad debts using the aging
method is:
a.
Bad Debts Expense
14,380
Accounts Receivable
14,380
b.
Bad Debts Expense
14,380
Allowance for Uncollectible Accounts
14,380
c.
Bad Debts Expense
14,980
Allowance for Uncollectible Accounts
14,980
d.
Bad Debts Expense
15,580
Allowance for Uncollectible Accounts
15,580
e.
Bad Debts Expense
16,180
Allowance for Uncollectible Accounts
16,180
L.O.: 5
Type: Difficult
Solution: d
83. Assume Precision uses the allowance method for bad debts.
Precision Inc wrote off the $550 account of Peel’s Company on
April 6, 20X4. On September 12, 20X4, Precision Inc received a
check for $550 from Peel’s Company. The journal entries that
Precision Inc will make on September 12, 20X4, is:
a.
Bad Debts Expense
550
Accounts Receivable
550
b.
Cash
550
Bad Debts Expense
550
c.
Accounts Receivable
550
Allowance for Uncollectible Accounts
550
Cash
550
Accounts Receivable
550
d.
Cash
550
Accounts Receivable
550
e.
No journal entry is required on September 12, 20X4.
L.O.: 5
Type: Moderate
Solution: c
84. Assume Broadway uses the allowance method for bad debts. Broadway
Company wrote off the $75 account of Anita Jones on April 6, 20X4.
On September 12, 20X4, Broadway Company received a check for $75
160
from Anita Jones. The journal entries that Broadway will make on
September 12, 20X4, is:
a.
Cash
75
Accounts Receivable
75
b.
Cash
75
Bad Debts Expense
75
c.
Accounts Receivable
75
Bad Debts Expense
75
Cash
75
Accounts Receivable
75
d.
Allowance for Uncollectible Account
75
Bad Debts Expense
75
Cash
75
Accounts Receivable
75
e.
Accounts Receivable
75
Allowance for Uncollectible Accounts
75
Cash
55
Accounts Receivable
55
L.O.: 5
Type: Moderate
Table 6-4
Consider the following information:
Cash sales
Credit sales
Beginning Cash
Ending Cash
Beginning Retained Earnings
Ending Retained Earnings
Beginning Accounts Receivable
Ending Accounts Receivable
Net Income
Solution: e
$ 50,000
450,000
10,000
14,000
35,000
48,000
30,000
40,000
58,000
85. Referring to Table 6-4, determine the accounts receivable
turnover.
a. 1.20
b. 2.92
c. 11.43
d. 12.86
e. 14.29
L.O.: 6
Type: Moderate
Solution: d
86. Referring to Table 6-4 and assuming a 365-day year, determine the
days to collect accounts receivable.
a. 304.2 days
b. 125.0 days
c. 31.9 days
d. 30.4 days
e. 28.4 days
L.O.: 6
Type: Moderate
161
Solution: e
87. Accounting controls:
a. include all methods and procedures that facilitate management’s
planning and control of operations
b. help maximize efficiency and minimize waste, unintentional
errors, and fraud
c. include procedures for granting credit to customers
d. are not concerned with safeguarding assets
e. All of the above statements are true concerning accounting
controls.
L.O.: 7
Type: Moderate
Solution: b
88. All of the following statements concerning controls are
appropriate except:
a. Administrative controls consider the organization plan.
b. Accounting controls include procedures that facilitate
management’s planning and control of operations.
c. Accounting controls include the methods and procedures for
authorizing transactions and safeguarding assets.
d. Accounting controls are present to ensure the accuracy of the
financial records.
e. Accounting controls minimize waste, errors, and fraud within an
organization.
L.O.: 7
Type: Moderate
Solution: b
89. The internal accounting control that provides reasonable assurance
that all authorized transactions are recorded in the correct
amounts, periods, and accounts is:
a. authorization
b. recording
c. safeguarding
d. reconciliation
e. valuation
L.O.: 7
Type: Easy
Solution: b
90. Which of the following internal accounting control objectives
relate to establishing the system of accountability and are aimed
at the prevention of errors and irregularities?
1. authorization
2. promoting operating efficiency
3. reconciliation
4. recording
5. safeguarding
6. valuation
a. 3 and 4
b. 4 and 5
c. 1, 3, and 4
d. 1, 4, and 5
e. 2, 3, and 5
L.O.: 7
Type: Moderate
162
Solution: d
91. Which of the following statements describes the purpose of a
management report?
a. A management report usually states that management is
responsible for all audited and unaudited information in the
annual report, including a statement on the adequacy of
internal controls.
b. A management report includes information with respect to
management's compensation, including the salaries and bonuses
received by the top executives of the company.
c. A management report lists the executives of the company and
states what changes have been made in management personnel
since the prior period and why those changes were made.
d. A management report states how well or poorly the company
performed during the most recent period.
e. A management report states the acquisitions and divestitures
that a company has made during the current period.
L.O.: 7
Type: Moderate
Solution: a
92. Which of the following is not a typical attribute of an audit
committee?
a. Audit committees typically meet at least twice a year.
b. Internal and external auditors report only to the audit
committee and to no member of management.
c. Audit committees are comprised solely of outside board members.
d. Audit committees act as a liaison among the full board,
internal auditors, external auditors, and management.
e. Audit committees gather information directly from internal and
external auditors.
L.O.: 7
Type: Difficult
Solution: b
93. Which of the following items from the checklist of internal
control is most important?
a. proper authorization
b. separation of duties
c. honest, reliable personnel
d. adequate documents
e. physical safeguards
L.O.: 7
Type: Easy
Solution: c
94. All of the following statements are attributes of the principle of
having reliable personnel with clear responsibilities except:
a. Employee theft causes larger losses to companies than
shoplifting.
b. Responsibility for results should be traced to the individual
level.
c. Appropriate overseeing and appraisal of employees is necessary.
d. Incompetent or dishonest individuals cannot undermine a strong
internal control system.
e. Employers who use low-cost talent may find such a policy
expensive in the long-run, due to fraud and poor productivity.
163
L.O.: 7
Type: Moderate
Solution: d
95. The primary goal of the separation of duties is:
a. to provide greater training to employees by allowing them to
work on different tasks
b. to make sure that one person, acting alone, cannot defraud the
company
c. to ensure that no one in management accumulates too much
organizational power and control
d. to provide clear promotion tracks within one's discipline
e. to provide a work environment where no one person is overloaded
with work or does so many things that they become indispensable
to the company
L.O.: 7
Type: Easy
Solution: b
96. A policy that states that the board of directors must approve all
expenditures for capital assets in excess of $50,000 is an example
of:
a. specific authorization
b. general authorization
c. adequate documentation
d. proper procedures
e. independent check
L.O.: 7
Type: Moderate
Solution: a
97. A policy that forces clerks to make change by pricing items at
$1.99, $2.99, and $3.99 rather than at $2, $3, and $4 is an
example of:
a. adequate documentation
b. general authorization
c. specific authorization
d. proper procedures
e. independent check
L.O.: 7
Type: Moderate
Solution: a
98. A policy that requires organizations to use procedures manuals to
specify the flow of documents and provide information and
instructions to facilitate adequate record-keeping is an example
of:
a. adequate documentation
b. general authorization
c. specific authorization
d. proper procedures
e. independent check
L.O.: 7
Type: Moderate
Solution: d
99. Rotation of duties has all of the following attributes except:
a. rotation of duties is not necessary if a company is bonded
b. at least two employees know how to do each job
c. it discourages employees from engaging in fraudulent activities
164
d. employees can exchange duties and thus can become familiar with
more aspects of a company's operations
e. it reduces the likelihood of major problems in the event that
an employee leaves the company
L.O.: 7
Type: Moderate
Solution: a
100. Internal auditors:
a. are company employees
b. help design the company's control systems
c. assess the degree of management’s compliance with the existing
control system
d. are an example of an independent check
e. All of the above are true statements.
L.O.: 7
Type: Moderate
Solution: e
101. Which of the following tasks is not commonly performed by an
external auditor?
a. External auditors examine transactions, but the number examined
is dependent on the strength or weakness of the internal
control system.
b. External auditors evaluate the system of internal controls.
c. External auditors test whether the internal control system is
being followed.
d. External auditors assume responsibility for the total accuracy
of the financial statements.
e. External auditors inspect a sample of the transactions that are
entered into the records of a company.
L.O.: 7
Type: Moderate
Solution: d
102. A policy of routinely paying the invoice amount without checking
supporting documentation except on a random sampling basis is an
example of:
a. cost-benefit analysis
b. adequate documentation
c. physical safeguards
d. independent check
e. separation of duties
L.O.: 7
Type: Moderate
Solution: a
103. Management reports:
a. state that management is responsible for all audited and
unaudited information in the annual report
b. include a description of the composition and duties of the
audit committee
c. include a description of the duties of the independent auditor
d. include a statement on the adequacy of the company's system of
internal controls
e. All of the above are true statements.
L.O.: 7
Type: Moderate
165
Solution: e
104. The following represent common reconciling items within a bank
reconciliation:
1. bank service charges
2. deposits in transit
3. outstanding checks
Which of the above items will be an adjustment to the balance per
books?
a. 1 only
b. 2 only
c. 3 only
d. 1 and 2
e. 2 and 3
L.O.: app.
Type: Moderate
Solution: a
105.
A bank overdraft
a. is typical on a bank reconciliation.
b. represents a customer’s overpayment.
c. is an occasional courtesy from a bank.
d. happens only of a company’s year end.
e. is the amount of money a company keeps as a compensating
balance.
L.O.: app.
Type: Moderate
Solution: c
106. The bank reconciliation is
a. only required when a company suspects fraud.
b. supplied as a bank courtesy.
c. needed because the IRS requires them for cash-basis companies.
d. an important part of internal control.
e. usually reported in a company footnote.
L.O.: app.
Type: Moderate
166
Solution: d
Problems
107. Traditional Company is a manufacturer of furniture. On June 16,
20X4, Traditional Company received an order from Contemporary Mart
for 15 living room sets at $1,500 per set. The furniture was
delivered by Traditional to Contemporary Mart on June 30, 20X4, at
which time Traditional billed Contemporary Mart under the terms
2/30, n/60. Contemporary Mart paid Traditional on July 25. Assume
Traditional uses a periodic inventory system.
Prepare the appropriate journal entries for the Traditional
Company as of the following dates:
a. June 16
b. June 30
c. July 25
L.O.: 2
Type: Moderate
a. No entry
b. Accounts Receivable
Sales
c. Cash
Sales Discount
Accounts Receivable
Solution:
22,500
22,500
22,050
450
22,500
108. The following information pertains to results obtained during the
month of July 20X4 for Mirage Video Company:
Sales Returns and Allowances
$ 21,000
Gross Sales
720,000
Cash Discounts
15,000
Of the gross sales, $245,000 were sales made to customers who used
their bank cards. The bank card company charged Mirage Video
Company a 3% fee.
Prepare the revenue section of the income statement for Mirage
Video Company for the month ended July 31, 20X4.
L.O.: 2
Type: Moderate
Sales
Less: Sales Returns & Allowances
Cash Discount on Sales
Cash Discount on Bank Cards
Net Sales
167
Solution:
$720,000
(21,000)
(15,000)
( 7,350)
$676,650
109.On May 27, 20X4, Midway Company agreed to sell 60 refrigerators to
a local home construction company. The sales contract stated that the
normal selling price of the refrigerators was $500 each, but a 4%
trade discount was given due to the size of the order. The terms of
the sales are 2/10, n/30. The refrigerators are to be delivered on
June 22, 20X4. The invoice was dated June 22, 20X4. The customer paid
the appropriate amount on June 30.
A. What is the gross revenue that Midway Company should recognize in
June 20X4?
B. What is the net revenue that Midway Company should recognize in
June 20X4?
L.O.: 3
Type: Moderate
Solution: c
a.$28,800
b.$28,224
110. In its first year of operations, 20X4, Trendy Fashion had credit
sales of $350,000 to 120 different customers. Of this amount, Mr.
Fox purchased $400 and Ms. Hound purchased $180 on account. During
the year, cash collections of $321,000 were made, of which Mr. Fox
paid $360 and Ms. Hound paid $60. At the end of 20X4, bad debts
expense was estimated to be 5% of ending accounts receivable. On
February 23, 20X5, the balance in Ms. Hound's account was written
off as uncollectible.
Prepare the appropriate journal entry on the books of Trendy
Fashion for:
a. the $350,000 in credit sales
b. the collection of $321,000 from credit customers
c. the estimation of bad debts expense
d. the write-off of Ms. Hound's account
L.O.: 5
Type: Moderate
Solution:
a. Accounts Receivable
350,000
Sales
b. Cash
321,000
Accounts Receivable
c. Bad Debts Expense
1,450
Allowance for Uncollectible Accounts
d. Allowance for Uncollectible Accounts
120
Accounts Receivable - Hound
168
350,000
321,000
1,450
120
111. Donelson Company has the following information available as of
December 31, 20X4:
Total
Accounts
Receivable
$60,000
1-30
Days
$46,500
31-60
Days
$7,400
61-90
Days
$3,700
Over 90
Days
$2,400
Total credit sales for the year ended December 31, 20X4, were $825,000.
The balance in the Allowance for Uncollectible Accounts at
December 31, 20X4, is a $500 debit.
The estimated bad debts percentages are as follows:
as a percentage of credit sales
as a percentage of ending accounts receivable
as a percentage of aging accounts receivable:
1-30 days
3%
31-60 days
15%
61-90 days
35%
Over 90 days
75%
1%
10%
Given the above information, prepare the journal entry on December
31, 20X4 to estimate bad debts under the allowance method using
the:
a. percentage of credit sales method
b. percentage of ending accounts receivable method
c. aging of accounts receivable method
L.O.: 5
Type: Difficult
Solution:
a. Bad Debts Expense
Allowance for Uncollectible Accounts
8,250*
b. Bad Debts Expense
Allowance for Uncollectible Accounts
6,500**
c. Bad Debts Expense
Allowance for Uncollectible Accounts
6,100***
8,250
6,500
6,100
* ($825,000 X .01)= $8,250
** ($60,000 X .10) = $6,000
($6,000 + $500) = $6,500
***($46,500 X .03) + ($7,400 X .15) + ($3,700 X .35) + ($2,400 X .75) = $5,600
($5,600 + $500) = $6,100
169
112. Hotel Unlimited has many accounts receivable. Hotel Unlimited's
balance sheet as of December 31, 20X3, showed Accounts Receivable
of $36,000 and an Allowance for Uncollectible Accounts of $3,400
credit. In early 20X4, write-offs of customer accounts of $2,800
were made. In late 20X4, a customer Joesy whose $1,000 debt had
been written off earlier won a $1 million promotion cash prize.
She immediately remitted $1,000 to Hotel Unlimited.
Prepare the journal entries for the:
a. $2,800 write-off in early 20X4.
b. receipt from Joesy in late 20X4.
L.O.: 5
Type: Moderate
Solution:
a. Allowance for Uncollectible Accounts
Accounts Receivable
b. Accounts Receivable
Allowance for Uncollectible Accounts
Cash
Accounts Receivable
2,800
2,800
1,000
1,000
1,000
1,000
113. Mulberry Company reports the following information for the years
ended December 31, 20X3 and 20X4:
Sales
Accounts Receivable
20X4
$980,000
75,000
20X3
$820,000
65,000
Sales consisted of 80% credit sales and 20% cash sales during 20X3
and 20X4.
From the information given above for Mulberry Company, determine
the:
a. accounts receivable turnover for 20X4
b. days to collect accounts receivable for 20X4
L.O.: 6
Type: Moderate
Solution:
a. The accounts receivable turnover for 20X4 is:
$784,000/[($75,000 + $65,000)/2] = 11.2
b. The days to collect accounts receivable for 20X4 is:
365 days/11.2 = 32.6 days
170
114. The following information is associated with the bank
reconciliation of Fish Tackle Company as of October 31, 20X4:
Balance per bank
Balance per books
Bank service charge
Deposits in transit
NSF check from a credit customer
Outstanding checks
$956
538
31
108
57
614
a. Prepare a bank reconciliation for Fish Tackle Company dated October
31, 20X4.
b. Prepare the adjusting entries needed by Fish Tackle Company as a
result of the bank reconciliation.
L.O.: app.
Type: Moderate
a. Balance per books
Less: bank service charge
NSF check
b. Bank Service Charge Expense
Cash
Accounts Receivable
Cash
$538
- 31
- 57
$450
Solution:
Balance per bank
Add: deposits in transit
Less: outstanding checks
$956
108
-614
$450
31
31
57
57
Essays
115. What are the major characteristics of sales revenue recognition.
L.O.: 1
Type: Easy
Solution:
(1). Goods or services must be delivered to the customers, that is,
revenue must be earned.
(2). Cash or an asset virtually assured of being converted into cash
must be received, that is, revenue must be realized.
116. State the key features included in a management report.
L.O.: 7
Type: Moderate
Solution:
A management report should include these key features:
 It states that management bears the primary responsibility for a
company's financial statements.
 It states that management is responsible for all audited and unaudited information in an annual report.
 It states that the company maintains adequate internal controls.
 It describes the composition and duties of the audit committee of
the board of directors.
 It describes the duties of the independent auditor.
117. Name four internal controls specific to the cash account.
L.O.: 7
Type: Moderate
171
Solution:
Four internal controls specific to the cash account include:
1. The receiving and disbursing of cash should be separated.
2. All receipts should be deposited intact every day.
3. All major cash disbursements should be made by serially
numbered checks and require proper authorization.
4. Bank accounts should be reconciled monthly.
5. Different individuals should hand cash and have access to the
accounting records.
118. Describe a typical audit committee and discuss its primary
responsibility.
L.O.: 7
Type: Moderate
Solution:
Audit committees typically have three or more outside board
members and several inside directors. Outside board members are
not employees of the company, whereas inside directors are
employees who serve as part of the company's management. The
primary responsibility of the audit committee is to oversee the
internal accounting controls, the financial statements, and the
financial affairs of the corporation.
45. Given the following data, what is cost of goods sold?
Sales revenue
$845,000
Beginning inventory
110,000
Ending inventory
200,000
Purchases of inventory
705,000
a. $615,000
b. $815,000
c. $320,000
d. $905,000
e. $735,000
L.O.: 1
Type: Moderate
Solution: a
46. Given the following data, what is cost of goods sold?
Sales revenue
$10,000
Beginning inventory
3,000
Ending inventory
7,000
Purchases of inventory
5,000
a. $12,000
b. $ 9,000
c. $ 8,000
d. $ 7,000
e. $ 1,000
L.O.: 1
Type: Moderate
Solution: e
47. Given the following information, determine the gross profit.
Accounts Receivable
$ 17,000
Administrative Expenses
24,000
Cost of Goods Sold
88,000
Depreciation Expense
5,000
172
Income Tax Expense
Inventory
Sales
Selling Expenses
Wage Expense
a. $ 11,000
b. $ 15,000
c. $ 39,000
d. $119,000
e. $154,000
L.O.: 1
4,000
26,000
242,000
36,000
75,000
Type: Easy
48. The calculation of cost of goods sold under
a. beginning inventory + purchases
b. beginning inventory + ending inventory c. beginning inventory + ending inventory +
d. beginning inventory + purchases - ending
e. ending inventory + purchases - beginning
L.O.: 2
Type: Moderate
Solution: e
the periodic system is
purchases
purchases
inventory
inventory
Solution: d
49. Which of the following attributes associated with a perpetual and
periodic inventory system is incorrect?
a. Historically, the periodic system has been associated with low
volume, high value items.
b. Historically, the perpetual system has been considered more
expensive and cumbersome to maintain.
c. The perpetual system is better able to aid management in
pricing and ordering inventory.
d. Computerized inventory systems and optical scanning equipment
are examples of ways to implement a perpetual inventory system.
e. The perpetual inventory system is more likely than the periodic
inventory system to isolate inventory shrinkage due to
breakage, loss, or theft.
L.O.: 2
Type: Moderate
Solution: a
50. A perpetual inventory system offers all of the following
characteristics except:
a. it is less expensive than a periodic system
b. inventory balances are always current
c. it helps salespeople determine whether there is a sufficient
supply on hand to fill the customer orders
d. it enhances internal control
e. All of the above are characteristics of a perpetual inventory
system.
L.O.: 2
Type: Moderate
Solution: a
51. If a company uses a perpetual inventory system, it will maintain
all the following accounts except:
a. cost of goods sold
b. inventory
c. sales
173
d. purchases
e. All of the above accounts are used with a perpetual inventory
system.
L.O.: 2
Type: Moderate
Solution: d
52. In a periodic inventory system the quantity of ending inventory is
determined by:
a. subtracting units sold from units purchased
b. a physical inventory count
c. looking at the balance in the inventory account
d. subtracting cost of goods sold from the beginning inventory
balance
e. adding units sold to the beginning inventory balance
L.O.: 2
Type: Moderate
Solution: b
53. At year-end, the perpetual inventory system of Florida Company
indicated an ending inventory level of 300 units at a cost of $10
each. A physical count performed at year-end resulted in 292 units
being on hand at a cost of $10 each. What journal entry, if any,
is necessary at year-end?
a.
No journal entry is necessary.
b.
Cost of Goods Sold
80
Inventory
80
c.
Cost of Goods Sold
80
Inventory Shrinkage
80
d.
Inventory Shrinkage
80
Cost of Goods Sold
80
e.
Inventory
80
Cost of Goods Sold
80
L.O.: 2
Type: Moderate
Solution: b
54. If a company is using a periodic inventory system, the balance in
its inventory account three-quarters of the way through an
accounting period would be equal to the:
a. amount of inventory on hand at that date
b. inventory on hand at the beginning of the period
c. total of the beginning inventory plus goods purchased during
the accounting period
d. amount of goods purchased during the period
e. inventory on hand at the beginning of the period multiplied by
75%
L.O.: 2
Type: Difficult
Solution: b
55. The journal entry to purchase merchandise under a periodic
inventory system includes a debit to:
a. Cost of Goods Sold
b. Inventory
c. Purchases
d. Accounts Receivable
e. Accounts Payable
174
L.O.: 2
Type: Moderate
Solution: c
56. The journal entry to sell merchandise under a periodic inventory
system includes a:
a. debit to Cost of Goods Sold
b. debit to Inventory
c. credit to Purchases
d. credit to Sales
e. credit to Accounts Receivable
L.O.: 2
Type: Moderate
Solution: d
Table 7-1
Nickie Inc acquired inventory on account on May 1, 20X4. The cost of
the inventory was $70,000. The terms of the purchase were 2/10, n/30.
Upon inspection of the inventory on May 2, $2,800 worth of inventory
was returned. Nickie Inc paid for the inventory on May 8. Nickie
Company operates under a periodic inventory system.
57. Referring to Table 7-1, what journal entry will Nickie Inc make on
May 1, 20X4?
a.
Inventory
68,600
Accounts Payable
68,600
b.
Inventory
70,000
Accounts Payable
70,000
c.
Inventory
70,000
Cash Discounts on Purchases
1,400
Accounts Payable
68,600
d.
Purchases
70,000
Accounts Payable
70,000
e.
Purchases
70,000
Cash Discounts on Purchases
1,400
Accounts Payable
68,600
L.O.: 3
Type: Moderate
Solution: d
58. Referring to Table 7-1, what journal entry will Nickie Inc make on
May 2, 20X4?
a.
Accounts Payable
2,744
Inventory
2,744
b.
Accounts Payable
2,800
Inventory
2,800
c.
Accounts Payable
2,800
Purchases
2,800
d.
Accounts Payable
2,800
Purchase Returns and Allowances
2,800
e.
Accounts Payable
2,744
Cash Discounts on Purchases
56
Purchase Returns and Allowances
2,800
L.O.: 3
Type: Moderate
Solution: d
59. Referring to Table 7-1, what journal entry will Nickie Inc make on
May 8, 20X4?
175
a.
b.
c.
d.
e.
Accounts Payable
Cash
Accounts Payable
Cash Discounts on Purchases
Cash
Accounts Payable
Cash Discounts on Purchases
Cash
Accounts Payable
Inventory
Cash
Accounts Payable
Purchases
Cash
L.O.: 3
Type: Moderate
67,200
67,200
67,200
1,344
65,856
67,200
1,400
65,800
67,200
1,344
65,856
67,200
1,400
65,800
Solution: b
60. Which of the following statements is incorrect?
a. Both freight-in and freight-out affect gross profit.
b. Freight-in appears as part of cost of goods sold.
c. Freight-out is a shipping expense.
d. Freight-in occurs when the terms of the invoice are FOB
shipping point.
e. When the seller bears the shipping cost, the inventory is
stated as FOB destination.
L.O.: 3
Type: Moderate
Solution: a
61. Which of the following statements is correct?
a. Purchase returns and allowances are accounted for separately
under the perpetual inventory system but are combined into the
inventory account under the periodic inventory system.
b. The perpetual inventory system continually updates the
inventory, purchase discounts, and cost of goods sold accounts.
c. The perpetual inventory system requires a closing entry in
order to determine cost of goods sold before cost of goods sold
can be closed to the income summary account.
d. The purchases account is used under both the periodic and
perpetual inventory systems.
e. Under the periodic inventory system, neither the cost of goods
sold account nor the inventory account is computed on a daily
basis.
L.O.: 3
Type: Moderate
Solution: e
Table 7-2
The Clark Company had the following transactions occur during May
20X4.
May
2 Inventory was purchased on
n/30.
May 3 Inventory costing $500 was
May 9 Clark Company paid for the
May 15 Inventory costing $3,600 was
account for $8,000, terms 2/10,
returned.
inventory.
sold on account for $4,800, terms
176
3/10, n/45.
May 31 Closing entries are prepared for the month-end financial
statements.
62. Referring to Table 7-2, if Clark Company were using the perpetual
inventory system, what is the journal entry for May 2?
a.
b.
c.
d.
e.
Inventory
Accounts Payable
Purchases
Accounts Payable
Purchases
Accounts Payable
Inventory
Cash Discounts on Purchases
Accounts Payable
Purchases
Cash Discounts on Purchases
Accounts Payable
L.O.: 3
8,000
8,000
7,840
7,840
8,000
8,000
7,840
160
8,000
7,840
160
8,000
Type: Moderate
Solution: a
63. Referring to Table 7-2, if Clark Company were using the periodic
inventory system, what is the journal entry for May 2?
a.
b.
c.
d.
e.
Inventory
Accounts Payable
Inventory
Accounts Payable
Purchases
Accounts Payable
Inventory
Cash Discounts on Purchases
Accounts Payable
Purchases
Cash Discounts on Purchases
Accounts Payable
L.O.: 3
7,840
7,840
8,000
8,000
8,000
8,000
7,840
160
8,000
7,840
160
8,000
Type: Moderate
Solution: c
64. Referring to Table 7-2, if Clark Company were using the perpetual
inventory system, what is the journal entry for May 3?
a.
b.
c.
d.
e.
Accounts Payable
Inventory
Accounts Payable
Purchases
Accounts Payable
Purchase Returns and
Allowances
Accounts Payable
Cash Discounts on Purchases
Inventory
Accounts Payable
177
500
500
500
500
500
500
500
10
490
500
Cash Discounts on Purchases
Purchases
L.O.: 3
10
490
Type: Moderate
Solution: a
65. Referring to Table 7-2, if Clark Company were using the periodic
inventory system, what is the journal entry on May 3?
a.
b.
c.
d.
e.
Accounts Payable
Inventory
Accounts Payable
Purchases
Accounts Payable
Purchase Returns and Allowances
Accounts Payable
Cash Discounts on Purchases
Inventory
Accounts Payable
Cash Discounts on Purchases
Purchases
L.O.: 3
500
500
500
500
500
500
500
10
490
500
10
490
Type: Moderate
Solution: c
66. Referring to Table 7-2, if Clark Company were using the perpetual
inventory system, what is the journal entry for May 9?
a.
b.
c.
d.
e.
Accounts Payable
Inventory
Cash
Accounts Payable
Inventory
Cash
Accounts Payable
Inventory
Cash
Accounts Payable
Cash Discounts on Purchases
Cash
Accounts Payable
Cash Discounts on Purchases
Cash
L.O.: 3
7,500
160
7,340
7,500
150
7,350
8,000
160
7,840
7,500
160
7,340
7,500
150
7,350
Type: Moderate
Solution: b
67. Referring to Table 7-2, if Clark Company were using the periodic
inventory system, what is the journal entry for May 9?
a.
b.
c.
Accounts Payable
Inventory
Cash
Accounts Payable
Inventory
Cash
Accounts Payable
7,500
160
7,340
7,500
150
7,350
8,000
178
d.
e.
Inventory
Cash
Accounts Payable
Cash Discounts on Purchases
Cash
Accounts Payable
Cash Discounts on Purchases
Cash
L.O.: 3
Type: Moderate
160
7,840
7,500
160
7,340
7,500
150
7,350
Solution: e
68. Referring to Table 7-2, if Clark Company were using a perpetual
inventory system, what is the journal entry for May 15?
a.
b.
c.
d.
e.
Accounts Receivable
Sales
Accounts Receivable
Sales
Cost of Goods Sold
Cash Discounts on Sales
Inventory
Accounts Receivable
Sales
Cost of Goods Sold
Inventory
Accounts Receivable
Cash Discount on Sales
Sales
Accounts Receivable
Cash Discount on Sales
Sales
Cost of Goods Sold
Inventory
L.O.: 3
4,800
4,800
4,800
4,800
3,492
108
3,600
4,800
4,800
3,600
3,600
4,656
144
4,800
4,656
144
4,800
3,600
3,600
Type: Moderate
Solution: c
69. Referring to Table 7-2, if Clark Company were using a periodic
inventory system, what is the journal entry on May 15?
a.
b.
c.
d.
e.
Accounts Receivable
Sales
Accounts Receivable
Sales
Cost of Goods Sold
Cash Discounts on Sales
Inventory
Accounts Receivable
Sales
Cost of Goods Sold
Inventory
Accounts Receivable
Cash Discount on Sales
Sales
Accounts Receivable
4,800
4,800
4,800
4,800
3,492
108
3,600
4,800
4,800
3,600
3,600
4,656
144
4,800
4,656
179
Cash Discount on Sales
Sales
Cost of Goods Sold
Inventory
L.O.: 3
144
4,800
3,600
3,600
Type: Moderate
Solution: a
70. Using the LIFO method, the earliest purchases of inventory are
assumed to be contained:
a. on the balance sheet as part of ending inventory
b. on the income statement as part of cost of goods sold
c. equally split between the income statement and the balance
sheet
d. impossible to determine from the given data
e. The earliest purchases of inventory under LIFO are not shown on
any financial statement.
L.O.: 4
Type: Moderate
Solution: a
71. Using the FIFO method, the earliest purchases of inventory are
assumed to be contained:
a. on the balance sheet as part of ending inventory
b. on the income statement as part of cost of goods sold
c. equally split between the income statement and the balance
sheet
d. impossible to determine from the given data
e. The earliest purchases of inventory under FIFO are not shown on
any financial statement.
L.O.: 4
Type: Moderate
Solution: b
72. Which of the following inventory methods requires a company to
keep track of the actual movement of individual inventory items?
a. FIFO
b. LIFO
c. weighted-average
d. specific identification
e. FIFO and LIFO
L.O.: 4
Type: Moderate
Solution: d
73. When inventory prices are rising, all of the following are reasons
for choosing the LIFO versus the FIFO method except:
a. LIFO generally results in lower income taxes paid
b. LIFO uses more current costs in calculating cost of goods sold
c. LIFO avoids inventory profits
d. LIFO reports the most up-to-date inventory values on the
balance sheet
e. None of the above are correct.
L.O.: 4
Type: Moderate
Solution: d
74. When inventory prices are rising, the ending inventory balance
reported on a LIFO basis is generally:
180
a.
b.
c.
d.
e.
lower than on a FIFO basis
equal to a FIFO basis
greater than on a FIFO basis
equal to a weighted-average basis
greater than a weighted-average basis
L.O.: 4
Type: Difficult
Solution: a
75. When inventory prices are rising, the FIFO method will generally
yield a gross profit that is:
a. less than the LIFO method
b. equal to the gross profit of the LIFO method
c. FIFO does not generally cause a gross profit that is different
from that of any other costing method
d. higher than the LIFO method
e. All of the above are correct.
L.O.: 4
Type: Difficult
Solution: d
76. In a transaction where the merchandise invoice indicates F.O.B.
shipping point, who pays the cost of shipping?
a. the buyer
b. the seller
c. the common carrier
d. the freight forwarder
e. none of the above
L.O.: 3
Type: Moderate
Solution: a
77. Which inventory valuation method allows a company the greatest
latitude in reporting results in any given period?
a. FIFO
b. LIFO
c. specific identification
d. weighted-average
e. No method allows more latitude in reporting results than
another.
L.O.: 4
Type: Moderate
Solution: c
78. Which inventory valuation method is capable of allowing different
cost of goods sold and inventory account balances within a given
accounting period?
a. FIFO
b. LIFO
c. specific identification
d. weighted-average
e. Each method is capable of giving only one cost of goods sold
and inventory balance for a given period.
L.O.: 4
Type: Moderate
Solution: c
79. Assuming inflation, if a company wanted to maximize net income, it
would select which of the following inventory valuation methods?
181
a.
b.
c.
d.
FIFO
LIFO
weighted-average
The selection of an inventory valuation method does not affect
the net income.
e. specific identification
L.O.: 4
Type: Difficult
Solution: a
80. Which of the following statements best describes how management
selects an inventory valuation method?
a. If a company generally sells its oldest inventory first, it
must use the FIFO inventory valuation method.
b. If a company generally sells its oldest inventory first, it
must use the LIFO inventory valuation method.
c. If a company generally sells its newest inventory first, it
must use the FIFO inventory valuation method.
d. If a company sometimes sells its newest inventory and sometimes
sells its oldest inventory, then it must use the weighted
average inventory valuation method.
e. A company may choose any inventory valuation method even if it
is contradictory to the physical flow of inventory.
L.O.: 4
Type: Moderate
Solution: e
81. Assuming inflation, which of the following relationships among
inventory valuation methods is incorrectly stated?
a. FIFO has a higher inventory balance and a higher net income
than LIFO.
b. FIFO has a higher inventory balance and a higher net income
than weighted-average.
c. LIFO has a higher inventory balance and a higher net income
than weighted-average.
d. Weighted-average has a higher inventory balance and a lower
cost of goods sold than LIFO.
e. LIFO has a lower inventory balance and a higher cost of goods
sold than FIFO.
L.O.: 4
Type: Difficult
Solution: c
82. Assuming inflation, which of the following statements incorrectly
describes an attribute of, or the relationship among, inventory
valuation methods?
a. Specific identification is used primarily when inventory
consists of a relatively few but very expensive and distinctive
items.
b. Given inflation and in order to minimize taxes, most firms have
tended to switch to LIFO if they had been using FIFO.
c. LIFO tends to provide inventory valuations that closely
approximate the actual market value of the inventory at the
balance sheet date.
d. LIFO tends to combine current sales prices and current
acquisition costs through cost of goods sold.
182
e. Weighted average provides less extreme balance sheet and income
statement results than either FIFO or LIFO.
L.O.: 4
Type: Difficult
Solution: c
Table 7-3
Brooks Company had the following activity in its inventory account
during May 20X4.
Date
May
May
May
May
May
May
May
1
3
7
12
16
23
30
Cost per
Units
$3.00
3.10
Activity
Beginning inventory 100
Purchase
40
Sale
50
Purchase
50
Sale
70
Sale
40
Purchase
60
Units in beginning inventory
Units purchased
Units sold
Total
Unit Cost
$300
124
3.20
160
3.30
198
100 units
150 units
160 units
83. Referring to Table 7-3, what is the ending inventory balance at
May 31, 20X4, for Brooks Company if the company uses perpetual
FIFO as its inventory valuation method?
a. $198.00
b. $270.00
c. $294.00
d. $297.50
e. $358.00
L.O.: 4
Type: Moderate
Solution: c
84. Referring to Table 7-3, what is the cost of goods sold for the
month ended May 31, 20X4, for Brooks Company if the company uses
periodic FIFO as its inventory valuation method?
a. $424.00
b. $485.00
c. $488.00
d. $500.00
e. $584.00
L.O.: 4
Type: Moderate
Solution: c
85. Referring to Table 7-3, what is the ending inventory at May 31,
20X4, for Brooks Company if the company uses periodic weighted
average as its inventory valuation method (round all calculations
to the nearest penny)?
a. $281.70
b. $285.60
c. $290.22
d. $290.70
e. $294.00
183
L.O.: 4
Type: Moderate
Solution: a
86. Referring to Table 7-3, what is the ending inventory balance at
May 31, 20X4, for Brooks Company if the company uses perpetual
LIFO as its inventory valuation method?
a. $240
b. $270
c. $288
d. $300
e. $438
L.O.: 4
Type: Moderate
Solution: c
87. Referring to Table 7-3, what is the cost of goods sold for the
month ended May 31, 20X4, for Brooks Company if the company uses
perpetual LIFO as its inventory valuation method?
a. $344
b. $482
c. $494
d. $502
e. $542
L.O.: 4
Type: Difficult
Solution: c
88. Referring to Table 7-3, what is the ending inventory balance at
May 31, 20X4, for Brooks Company if the company uses periodic LIFO
as its inventory valuation method?
a. $240
b. $270
c. $288
d. $300
e. $438
L.O.: 4
Type: Difficult
Solution: b
89. FIFO tends to decrease taxes when:
a. costs are increasing
b. costs are decreasing
c. costs are constant
d. FIFO will always yield the lowest possible taxes
e. Impossible to determine without specific cost data
L.O.: 4
Type: Moderate
Solution: b
90. LIFO tends to decrease taxes when:
a. costs are declining
b. costs are constant
c. costs are increasing
d. LIFO will always yield the lowest possible taxes.
e. Impossible to determine without specific cost data
L.O.: 4
Type: Moderate
184
Solution: c
91. Which of the following correctly states an attribute associated
with the LIFO inventory valuation method?
a. The replacement cost is the cost of goods sold of an inventory
item that is sold today.
b. An increase in the replacement cost of the inventory held
during the current period is called a holding gain.
c. A LIFO layer is maintained only as long as that purchase is the
most recent purchase.
d. Assuming inflation across time periods, a LIFO inventory
liquidation will result in a lower net income.
e. A LIFO reserve is established if a deflationary trend occurs.
L.O.: 5
Type: Difficult
Solution: b
92. Because of generally rising prices, a LIFO liquidation will
a. decrease net income.
b. increase cost of goods sold.
c. increase net income.
d. increase inventory.
e. occur often because of matching.
L.O.: 5
Type: Moderate
Solution: c
93. Because of rising prices, LIFO inventory reserves
a. make the inventory higher under LIFO than FIFO.
b. make the inventory higher under FIFO than LIFO.
c. inflate the balance sheet asset total.
d. make stockholders’ owners equity look higher than they would
under FIFO.
e. are very rare.
L.O.: 5
Type: Difficult
Solution: b
94. The replacement costs have increased from $2.90 per unit to 3.40
per unit from the time 500 units of inventory were purchased. The
year-end audit found 200 units remaining in stock. The company
should take what following step?
a.
b.
c.
d.
e.
Cost of goods sold
Inventory
Inventory
Cost of goods sold
Cost of goods sold
Inventory
Inventory
Cost of goods sold
Make no entry.
L.O.: 6
750
750
750
750
100
100
100
100
Type: Moderate
Solution: e
95. Joe Co. has 200 units of inventory which are currently priced
$4.90 per unit at the market. Originally this inventory cost
$5.50 per unit from an order of 400. Joe Co. should
185
a.
b.
c.
d.
e.
Loss on inventory write-down
Inventory
Inventory
Loss on inventory write-down
Loss on inventory write-down
Inventory
Inventory
Loss on inventory writedown
Make no entry.
L.O.: 6
Type: Moderate
120
120
120
120
240
240
240
240
Solution: a
96. The lower-of-cost-or-market practice is based on the
a. consistency principle.
b. entity concept.
c. reliability principle.
d. conservatism principle.
e. historical cost concept.
L.O.: 7
Type: Easy
Solution: d
97. If the ending inventory is overstated by $15,000 in 20X4, and
assuming a constant 30% tax rate, then what will be the effect on
net income in 20X5?
a. Net income will be understated by $4,500 in 20X5.
b. Net income will be overstated by $4,500 in 20X5.
c. Net income will be understated by $10,500 in 20X5.
d. Net income will be overstated by $10,500 in 20X5.
e. Net income will not be overstated or understated in 20X5.
L.O.: 7
Type: Difficult
Solution: c
98. If ending inventory is understated by $8,000 in 20X4, and assuming
a constant 30% tax rate, then what will be the effect on retained
earnings in 20X5?
a. The 20X5 ending retained earnings will be understated by
$2,400.
b. The 20X5 ending retained earnings will be overstated by $2,400.
c. The 20X5 ending retained earnings will be understated by
$5,600.
d. The 20X5 ending retained earnings will be overstated by $5,600.
e. The 20X5 ending retained earnings will not be understated or
overstated.
L.O.: 7
Type: Difficult
Solution: e
99. If ending inventory is understated by $7,000 in 20X4, and assuming
a constant 30% tax rate, then what will be the effect on gross
profit in 20X4?
a. 20X4 gross profit will be understated by $2,100.
b. 20X4 gross profit will be understated by $4,900.
c. 20X4 gross profit will be overstated by $4,900.
186
d. 20X4 gross profit will be understated by $7,000.
e. 20X4 gross profit will be overstated by $7,000.
L.O.: 7
Type: Difficult
Solution: d
100. Two separate errors affected Dryer Shirts in 20X4. The beginning
inventory was overstated by $17,000 and the ending inventory was
overstated by $23,000. Ignoring taxes, net income in 20X4 will
be:
a. overstated by $40,000
b. understated by $23,000
c. overstated by $23,000
d. overstated by $6,000
e. understated by $40,000
L.O.: 7
Type: Difficult
Solution: d
101. Two separate errors affected Dryer Shirts in 20X4. The beginning
inventory was overstated by $17,000 and the ending inventory was
overstated by $23,000. Ignoring taxes, net income in 20X5 will
be:
a. overstated by $40,000
b. understated by $23,000
c. overstated by $23,000
d. overstated by $6,000
e. understated by $40,000
L.O.: 7
Type: Difficult
Solution: b
102. Hewitt Company had sales during February 20X5 of $29,000. During
the month, the company had purchases of $17,000. At
February 1, 20X5, the company had inventory of $4,500. Assuming
the company has a gross profit percentage of 40%, what is the
estimated ending inventory for Hewitt Company at February 28,
20X5?
a. $ 4,100
b. $ 4,900
c. $7,300
d. $7,500
e. $9,900
L.O.: 8
Type: Moderate
Solution: a
103. For the Marsh Store, the gross profit percentage was 73% in 19X4
and 79% in 19X3. Management should
a. should be pleased at the profits.
b. investigate inventory shrinkage.
c. consider that a competitor’s store closing helped results.
d. decrease prices.
e. hire new auditors.
L.O.: 8
Type: Moderate
187
Solution: b
104. Acme Production had inventory of $8,000 on January 1, 20X4, and
$12,000 on December 31, 20X4. Sales for 20X4 were $250,000 and the
company's gross profit percentage was 35%. What was the inventory
turnover for Acme Production for 20X4?
a. 7.29 times
b. 8.75 times
c. 13.54 times
d. 16.25 times
e. 25.00 times
L.O.: 8
Type: Moderate
188
Solution: d
Problems
105. Witten Company uses a periodic inventory system and on October 3,
20X4, purchased inventory on account for $20,000. The terms of the
purchase were 3/10, n/45. Shipping was $800, FOB destination. On
October 4, the inventory was inspected, and it was discovered that
some was damaged. The seller granted Witten Company a $600
allowance. On October 11, Witten Company paid the appropriate
amount. Prepare the journal entries for each of the events noted
above.
L.O.: 3
Oct.
3
Oct.
4
Oct. 11
Type: Moderate
Solution:
Purchases
20,000
Accounts Payable
Accounts Payable
600
Purchase Returns and Allowances
Accounts Payable
19,400
Cash Discounts on Purchases
Cash
189
20,000
600
582
18,818
106. Cleary Company had inventory of $200 on March 1. The company had
the following transactions during March.
March 2
March 3
March 9
Purchased inventory on account for $2,000, terms
2/10, n/30.
Returned $100 worth of inventory from the March 2
purchase.
Paid the appropriate amount for the inventory
purchased on
March 2.
Prepare the appropriate journal entry for each of the above
transactions assuming Cleary Company uses a perpetual inventory
system.
L.O.: 3
March 2
March 3
March 9
Type: Moderate
Inventory
Accounts Payable
Accounts Payable
Inventory
Accounts Payable
Inventory
Cash
190
Solution:
2,000
2,000
100
100
1,900
38
1,862
107. Crawford Company had inventory of $350 on March 1. The company had
the following transactions during March.
Mar.
Mar.
Mar.
Mar.
Mar.
2 Purchased inventory on account for $1,800,
terms 2/10, n/30.
3 Returned $150 worth of inventory from the Mar. 2 purchase.
9 Paid the appropriate amount for the inventory purchased on
Mar. 2.
17 Sold inventory costing $1,000 for $1,920 in cash.
28 Prepared closing entries for the month (prepare entries
only for sales and cost of goods sold)
Prepare the appropriate journal entry for each of the above
transactions assuming Crawford Company uses the perpetual
inventory method.
L.O.: 3
Mar
Mar
Mar
Mar
Mar
Type: Moderate
2 Inventory
Accounts Payable
3 Accounts Payable
Inventory
9 Accounts Payable
Inventory
Cash
17 Cash
Sales
Cost of Goods Sold
Inventory
28 Sales
Income Summary
Income Summary
Cost of Goods Sold
Solution:
1,800
1,800
150
150
1,650
33
1,617
1,920
1,920
1,000
1,000
1,920
1,920
1,000
1,000
191
Table 7-4
Galaxy Company uses the periodic inventory method and recorded the
following inventory and purchase transactions for the month of August
20X4.
Date
Transaction
Units
Unit Cost
Total
Aug 1 Beginning inventory 3,000 units @ $1.00
$3,000
Aug 3 Purchases
900 units @ $1.20
1,080
Aug 10 Purchases
800 units @ $1.40
1,120
Aug 17 Purchases
600 units @ $1.60
960
Aug 24 Purchases
300 units @ $1.80
540
108. Referring to the information in Table 7-4, determine the ending
inventory balance at August 31 and the cost of goods sold for the
month of August, 20X4 for Galaxy Company. Galaxy Company sold
3,100 units during August, 20X4. On August 31, a physical
inventory count was conducted, and 2,500 units were on hand.
Assume the company uses the first-in-first-out (FIFO) cost flow
assumption.
L.O.: 4
Type: Moderate
Solution:
Note that ending inventory equals 2,500 units, cost of goods sold
equals 3,100 units and the total dollar amount of ending inventory
and cost of goods sold must equal $6,700.
FIFO ending inventory
Aug. 24 Purchase
300 units @ $1.80
$ 540
Aug. 17 Purchase
600 units @ $1.60
960
Aug. 10 Purchase
800 units @ $1.40
1,120
Aug. 3 Purchase
800 units @ $1.20
960
2,500
$3,580
FIFO periodic cost of goods sold
Aug. 3 Purchase 100 units @ $1.20
Aug. 1 B.I.
3,000 units @ $1.00
3,100
192
$
120
3,000
$3,120
109. Referring to the information in Table 7-4, determine the ending
inventory balance at August 31 and the cost of goods sold for the
month of August, 20X4 for Galaxy Company. Galaxy Company sold
3,100 units during August, 20X4. On August 31, a physical
inventory count was conducted, and 2,500 units were on hand.
Assume the company uses the last-in-first-out (LIFO) cost flow
assumption.
L.O.: 4
Type: Moderate
Solution:
Note: Ending inventory equals 2,500 units, cost of goods sold
equals 3,100 units and the total dollar amount of ending inventory
and cost of goods sold must equal $6,700.
LIFO ending inventory
Aug. 1 B.I. 2,500 units @ $1.00
$2,500
LIFO
Aug.
Aug.
Aug.
Aug.
Aug.
periodic cost of goods sold
24 Pur.
300 units @ $1.80
17 Pur.
600 units @ $1.60
10 Pur.
800 units @ $1.40
3 Pur.
900 units @ $1.20
1 B.I.
500 units @ $1.00
3,000
193
$
540
960
1,120
1,080
500
$4,200
Table 7-5
Cole Company operates under a perpetual inventory system. It began
operations on March 1, 20X4, and had the following transactions
affecting inventory during March 20X4.
March 1 Purchase
500 units @ $5.00
$2,500
March 5 Sale
200 units
March 10 Purchase
300 units @ $5.20
$1,560
March 15 Sale
320 units
March 20 Purchase
400 units @ $5.40
$2,160
March 25 Sale
230 units
110. Referring to Cole Company information in Table 7-5, determine the
cost of goods sold for the month of March, 20X4 and the ending
inventory balance at March 31, 20X4. Assume the company uses the
first-in-first-out (FIFO) cost flow assumption.
L.O.: 4
Type: Moderate
Solution:
Note that 750 units were sold, 450 units are in ending inventory,
and the total dollar amount of ending inventory and cost of goods
sold must equal $6,220.
FIFO perpetual inventory method
Cost of goods sold
March 5 Sale 200 units @ $5.00
$1,000
March 15 Sale 300 units @ $5.00
1,500
20 units @ $5.20
104
March 25 Sale 230 units @ $5.20
1,196
$3,800
Ending inventory
50 units @ $5.20
400 units @ $5.40
194
$
260
2,160
$2,420
111. Refer to the Cole Company information in Table 7-5. Assume the
company is trying to decide between the periodic method and the
perpetual method. Cole has decided to use the last-in-first-out
cost flow assumption. Determine the cost of goods sold for the
month of March, 20X4 and the ending inventory balance at March 31,
20X4, using both the perpetual method and the periodic method.
L.O.: 4
Type: Difficult
Solution:
The perpetual focuses upon sales, periodic focuses upon purchases.
This problem demonstrates this to the student. Note that 750 units
were sold, 450 units are in ending inventory, and the total dollar
amount of ending inventory and cost of goods sold must equal
$6,220.
LIFO perpetual method
Cost of goods sold
March 5 sale 200 units
March 15 sale 300 units
20 units
March 25 sale 230 units
@
@
@
@
$5.00
$5.20
$5.00
$5.40
Ending inventory
280 units @ $5.00
170 units @ $5.40
LIFO periodic inventory
Cost of goods sold
March 20 purchase 400
March 10 purchase 300
March 1 purchase 50
$1,000
1,560
100
1,242
$3,902
$1,400
918
$2,318
method
units @ $5.40
units @ $5.20
units @ $5.00
LIFO ending inventory
March 1 purchase 450 units @ $5.00
195
$2,160
1,560
250
$3,970
$2,250
112. Murray Inc had the following inventory balance as of June 30,
20X4.
June 3 order of
June 8 order of
June 19 order of
400 units @ $10.50
100 units @ $11.00
200 units @ $11.50
$ 4,200
1,100
2,300
$ 7,600
On July 1, 20X4, the company sold 240 units at $16.00 per unit. On
July 10, 20X4, a competitor announced a new model which resulted
in the cost of Murray inventory dropping to the new replacement
cost, which was $10.75. Murray Inc uses a perpetual inventory
system.
1. What is the balance in the inventory account on July 9, 20X4, if
Murray Inc uses:
a. FIFO?
b. LIFO?
2. What journal entry is necessary on July 10, 20X4, if Murray Inc
uses lower-of-cost-or-market, where cost is defined as:
a. FIFO?
b. LIFO?
L.O.: 6
1a.
Type: Difficult
FIFO.
160 units @ $10.50
100 units @ $11.00
200 units @ $11.50
1b. LIFO.
400 units @ $10.50
60 units @ $11.00
Solution:
$ 1,680
1,100
2,300
$ 5,080
$4,200
660
$4,860
2a. FIFO
Loss on Write-down of Inventory
175
Inventory
175
[(200 units x ($11.50 - $10.75)) + (100 units x ($11 $10.75))]
2b. LIFO.
Loss on Write-down of Inventory
Inventory
(60 units x ($11.00 - $10.75))
196
15
15
113. Presented below are the income statements for Shaw Company for the
years ended December 31, 20X4, 20X3, and 20X2.
The Shaw Company
Comparative Income Statements
For years ending December 31
Sales
Less: Cost of Goods Sold:
Beginning Inventory
Purchases
Goods Available for Sale
Less: Ending Inventory
Cost of Goods Sold
Gross Profit
Less: Operating Expenses
Income Before Taxes
Income Tax Expense (40%)
Net Income
20X4
$910
20X3
$790
20X2
$620
90
550
640
80
560
350
70
280
112
$168
70
510
580
90
490
300
60
240
96
$144
60
420
480
70
410
210
50
160
64
$ 96
In 20X5 it was discovered that the 20X2 ending inventory was
understated by $20, and the 20X4 ending inventory was overstated
by $10. The 20X2 beginning inventory and the 20X3 ending inventory
were correctly stated.
Identify the accounts which are incorrect on the 20X2, 20X3, and
20X4 income statements. State the dollar error (by how much they
are incorrect) and whether the amounts overstate or understate
balances.
L.O.: 7
Type: Difficult
Solution:
The Shaw Company
Comparative Income Statements
For years ending December 31
20X4
20X3
20X2
Sales
$910
$790
$620
Less: Cost of goods
sold
Beginning inventory
90
70 ($20 under) 60
Purchases
550
510
420
Goods available for
sale
640
580 ($20 under) 480
Less: Ending
inventory
80 ($10 over)
90
70
Cost of goods
sold
560 ($10 under) 490 ($20 under) 410
Gross profit
350 ($10 over) 300 ($20 over) 210
Less: Operating
expenses
70
60
50
Income before
taxes
280($10 over)
240 ($20 over) 160
Income tax
expense (40%)
112 ($ 4 over)
96 ($ 8 over)
64
Net income
$168 ($ 6 over) $144 ($12 over) $ 96
197
($20 under)
($20 over)
($20 under)
($20 under)
($ 8 under)
($12 under)
114. Armstrong Company uses a periodic inventory system. On January 1,
20X6, the company had beginning inventory of $979,000. From
January 1 to April 27, the company purchased $285,000 of inventory
and had sales revenue of $840,000. On the morning of April 28, an
earthquake occurred which resulted in the total loss of all
inventory. The company's gross profit percentage has averaged 40%.
What is the estimated inventory loss due to the earthquake?
L.O.: 8
Type: Moderate
Sales
Less: Cost of goods sold
Gross Profit
Solution:
$840,000
504,000(60% X $840,000)
$336,000(40% X $840,000)
Beginning inventory
$979,000
Plus purchases
285,000
Goods available for sale
1,164,000
Less Cost of goods sold (from above) 504,000
Equals Estimated ending inventory
$660,000
Estimated ending inventory = $660,000
54. Repairs made to equipment as part of yearly maintenance would be
recorded in the journal by:
a. debiting equipment
b. debiting repairs expense
c. debiting depreciation expense
d. debiting accumulated depreciation
e. crediting accumulated depreciation
L.O.: 1
Type: Moderate
Solution: b
55. Treating a capital expenditure as repairs and maintenance expense:
a. understates expenses and overstates owners' equity
b. understates expenses and understates assets
c. overstates expenses and understates net income
d. overstates assets and overstates owners' equity
e. overstates assets and overstates revenue
L.O.: 1
Type: Difficult
Solution: c
56. Expenditures for long-lived assets are expensed when they
a. add new assets.
b. increase capacity.
c. improve efficiency.
d. provide benefit lasting one year or less.
e. lengthen an asset’s useful life.
L.O.: 1
Type: Difficult
Table 8-1
198
Solution: d
Didde Company acquired a building and the two acres of land on which
it is located. The total purchase price was $1,000,000. For valuation
purposes, the company contacted three local commercial real estate
agents, who gave the following valuation estimates:
Gloria Child
Shelly Bop
Joe Bee
$
$
$
Land
450,000
600,000
300,000
Building
$1,050,000
$ 900,000
$1,200,000
57. Referring to Table 8-1, if Didde Company used the valuation made
by Joe Bee, and assuming it paid cash for the land and building,
what journal entry would Didde Company make to record the
purchase?
a.
Land
300,000
Building
700,000
Cash
1,000,000
b.
Land
200,000
Building
800,000
Cash
1,000,000
c.
Land
300,000
Building
1,200,000
Cash
1,500,000
d.
Land
400,000
Building
600,000
Cash
1,000,000
e.
Land
300,000
Building
1,200,000
Cash
1,000,000
Gain on Purchase of Assets
500,000
L.O.: 2
Type: Moderate
Solution: b
58. Referring to Table 8-1, if Didde Company used the valuation made
by Shelly Bop, and assuming it paid cash for the land and
building, what journal entry would Didde Company make to record
the purchase?
a.
b.
c.
d.
e.
Land
Building
Cash
Land
Building
Cash
Land
Building
Cash
Land
Building
Cash
Land
Building
Cash
Gain on Purchase of Assets
L.O.: 2
300,000
700,000
1,000,000
200,000
800,000
1,000,000
600,000
900,000
1,500,000
400,000
600,000
1,000,000
600,000
900,000
Type: Moderate
199
1,000,000
500,000
Solution: d
59. Referring to Table 8-1, if Didde Company used the valuation made
by Gloria Child, and assuming it paid cash for the land and
building, what journal entry would Didde Company make to record
the purchase?
a.
b.
c.
d.
e.
Land
Building
Cash
Land
Building
Cash
Land
Building
Cash
Land
Building
Cash
Land
Building
Cash
Gain on Purchase of Assets
L.O.: 2
300,000
700,000
1,000,000
200,000
800,000
1,000,000
450,000
1,050,000
1,500,000
366,667
633,333
1,000,000
450,000
1,050,000
Type: Moderate
500,000
500,000
Solution: a
60. Equipment is acquired for $100,000. Freight costs are $1,800,
sales tax amounted to $1,000. Maintenance during the first year
of use cost $6,000. What is the cost of the equipment?
a. $102,800
b. $100,000
c. $108,800
d. $101,000
e. $101,800
L.O.: 2
Type: Moderate
Solution: a
61. The removal of an old building to make land suitable for its
intended use is charged to:
a. repairs expense
b. land
c. buildings
d. land improvements
e. none of the above
L.O.: 2
Type: Moderate
Solution: b
Table 8-2
Farthing Company acquired a $40,000 machine on January 1, 20X4. The
machine is estimated to have a useful life of 5 years, and a residual
value of $4,000. For unit depreciation purposes, the machine is
expected to produce 500,000 units.
62. Referring to Table 8-2, what is the depreciable value of the
machine acquired by Farthing Company?
a. $ 4,000
b. $36,000
200
c. $40,000
d. $8,000
e. cannot be determined without additional data
L.O.: 3
Type: Easy
Solution: b
63. Referring to Table 8-2, if Farthing Company uses straight-line
depreciation, what is the depreciation expense in 20X5?
a. $ 3,686
b. $ 7,200
c. $ 8,000
d. $ 8,800
e. $12,500
L.O.: 3
Type: Moderate
Solution: b
64. Referring to Table 8-2, if Farthing Company uses straight-line
depreciation, what is the balance in the accumulated depreciation
account on January 1, 20X6?
a. $14,400
b. $16,000
c. $17,600
d. $21,600
e. $24,000
L.O.: 3
Type: Moderate
Solution: a
65. Referring to Table 8-2, if Farthing Company uses unit
depreciation, and the company produces 80,000 units in 20X4, what
will be the depreciation expense for 20X4?
a. $5,760
b. $6,400
c. $7,200
d. $8,000
e. $8,800
L.O.: 3
Type: Moderate
Solution: a
66. Referring to Table 8-2, if Farthing Company uses unit depreciation
and the company produces 80,000 units in 20X4, 130,000 units in
20X5, and 160,000 units in 20X6, what is the depreciation expense
in 20X6?
a. $ 6,682
b. $11,520
c. $12,800
d. $26,640
e. $29,600
L.O.: 3
Type: Moderate
Solution: b
67. Referring to Table 8-2, if Farthing Company uses unit
depreciation, and the company produces 80,000 units in 20X4,
130,000 units in 20X5, 160,000 units in 20X6, and 70,000 units in
201
20X7, what is the net book value of the machine at December 31,
20X7?
a. $4,000
b. $4,320
c. $4,800
d. $8,320
e. $8,800
L.O.: 3
Type: Moderate
Solution: d
68. Referring to Table 8-2, if Farthing Company uses double-decliningbalance depreciation, what is the depreciation expense in 20X4?
a. $14,400
b. $16,000
c. $17,600
d. $25,000
e. $27,776
L.O.: 3
Type: Moderate
Solution: b
69. Referring to Table 8-2, if Farthing Company uses double-decliningbalance depreciation, what is the depreciation expense in 20X5?
a. $ 8,640
b. $ 9,600
c. $10,560
d. $14,400
e. $16,000
L.O.: 3
Type: Difficult
Solution: b
70. Referring to Table 8-2, what is the balance in the accumulated
depreciation account on December 31, 20X5, if Farthing Company
uses double-declining-balance depreciation?
a. $23,040
b. $25,600
c. $28,160
d. $28,800
e. $32,000
L.O.: 3
Type: Difficult
Solution: b
71. Referring to Table 8-2, if Farthing Company uses double-decliningbalance depreciation, what is the depreciation expense in 20X6?
a. $ 5,184
b. $ 5,760
c. $ 6,336
d. $14,400
e. $16,000
L.O.: 3
Type: Difficult
Solution: b
72. Referring to Table 8-2, what is the balance in the accumulated
depreciation account on December 31, 20X6, if Farthing Company
uses double-declining-balance depreciation?
202
a.
b.
c.
d.
e.
$28,224
$31,360
$34,496
$37,140
$40,000
L.O.: 3
Type: Difficult
Solution: b
73. Referring to Table 8-2, if Farthing Company uses double-decliningbalance depreciation, what is the net book value of the machine on
December 31, 20X6?
a. $ -0b. $ 4,000
c. $ 8,640
d. $11,776
e. $12,640
L.O.: 3
Type: Difficult
Solution: c
74. Referring to Table 8-2, assume Farthing Company was considering
the use of double-declining-balance depreciation. The company
wishes to minimize its tax payments in 20X6, 20X7, and 20X8. The
company is considering switching to straight-line depreciation as
soon as it becomes more advantageous to do so. In what year will
that occur?
a. Straight-line depreciation is never more advantageous than
double-declining-balance depreciation.
b. Year 20X6
c. Year 20X7
d. Year 20X8
e. In this case, the depreciation expense in 20X8 will be the same
for both methods, since you do not depreciate below residual
value in either method.
L.O.: 3
Type: Difficult
Solution: b
75. To measure depreciation for a plant asset, all of the following
must be known except:
a. estimated useful life
b. current market value
c. estimate residual value
d. historical cost
e. All of the above must be known to measure depreciation for a
plant asset.
L.O.: 3
Type: Easy
Solution: b
76. Book value is defined as:
a. cost less salvage value
b. current market value less accumulated depreciation
c. cost less accumulated depreciation
d. cost plus accumulated depreciation
e. cost plus salvage value
203
L.O.: 3
Type: Easy
Solution: c
77. The double-declining-balance method of depreciation:
a. causes less depreciation in the early years of an asset's use
as compared to other depreciation methods
b. causes the same amount of depreciation in the early years of an
asset's use as compared to other depreciation methods
c. causes more depreciation in the early years of an asset's use
as compared to other depreciation methods
d. is not an acceptable depreciation method according to generally
accepted accounting principles
e. none of the above
L.O.: 3
Type: Moderate
Solution: c
Table 8-3
Diamond Company acquired a $60,000 machine on January 1, 20X4. The
machine is estimated to have a useful life of 4 years, and a residual
value of $10,000. For unit depreciation purposes, the machine is
expected to produce 500,000 units.
78. Referring to Table 8-3, what is the depreciable value of the
machine acquired by Diamond Company?
a. $10,000
b. $50,000
c. $60,000
d. $15,000
e. cannot be determined without additional data
L.O.: 3
Type: Easy
Solution: b
79. Referring to Table 8-3, if Diamond Company used straight-line
depreciation, what will be the depreciation expense in 20X4?
a. $ 7,200
b. $ 8,000
c. $ 8,800
d. $12,500
e. $13,888
L.O.: 3
Type: Easy
Solution: d
80. Referring to Table 8-3, if Diamond Company uses straight-line
depreciation, what is the depreciation expense in 20X6?
a. $ 3,686
b. $ 7,200
c. $ 8,000
d. $ 8,800
e. $12,500
L.O.: 3
Type: Easy
Solution: e
81. Referring to Table 8-3, if Diamond Company uses straight-line
depreciation, what is the balance in the accumulated depreciation
account on January 1, 20X6?
204
a.
b.
c.
d.
e.
$14,400
$16,000
$17,600
$21,600
$25,000
L.O.: 3
Type: Moderate
Solution: e
82. Referring to Table 8-3, if Diamond Company uses unit depreciation,
and the company produces 80,000 units in 20X4, what will be the
depreciation expense for 20X4?
a. $5,760
b. $6,400
c. $7,200
d. $8,000
e. $8,800
L.O.: 3
Type: Moderate
Solution: d
83. Referring to Table 8-3, if Diamond Company uses unit depreciation
and the company produces 80,000 units in 20X4, 130,000 units in
20X5, and 160,000 units in 20X6, what is the depreciation expense
in 20X6?
a. $ 8,000
b. $13,000
c. $12,800
d. $16,000
e. $37,000
L.O.: 3
Type: Moderate
Solution: d
84. Referring to Table 8-3, if Diamond Company uses unit depreciation,
and the company produces 80,000 units in 20X4, 130,000 units in
20X5, 160,000 units in 20X6 and 70,000 units in 20X7, what is the
net book value of the machine at December 31, 20X7?
a. $ 8,000
b. $13,000
c. $12,800
d. $16,000
e. $37,000
L.O.: 3
Type: Moderate
Solution: d
85. Referring to Table 8-3, if Diamond Company uses double-decliningbalance depreciation, what is the depreciation expense in 20X4?
a. $12,500
b. $16,000
c. $17,500
d. $25,000
e. $30,000
L.O.: 3
Type: Moderate
205
Solution: e
86. Referring to Table 8-3, assume Diamond Company uses doubledeclining-balance depreciation, what is the depreciation expense
in 20X5?
a. $ 8,640
b. $ 9,600
c. $12,500
d. $15,000
e. $25,000
L.O.: 3
Type: Difficult
Solution: d
87. Referring to Table 8-3, what is the balance in the accumulated
depreciation account on December 31, 20X5, if Diamond Company uses
double-declining-balance depreciation?
a. $25,000
b. $30,000
c. $40,000
d. $45,000
e. $50,000
L.O.: 3
Type: Difficult
Solution: d
88. Which of the following is an appropriate description of an
attribute associated with depreciation?
a. The depreciable value of a tangible asset is the total
acquisition cost of the asset.
b. The residual value of a tangible asset is the estimated amount
to be received for an asset upon its disposal at the end of its
useful life.
c. The useful life of a tangible asset is the time period over
which the company believes it will own the asset.
d. The estimation of useful lives is almost always based upon when
the tangible asset will physically wear out.
e. Depreciation attempts to measure the deteriorating market value
of an asset.
L.O.: 3
Type: Easy
Solution: b
89. Depreciation expense computed under double-declining-balance will
decrease each year because the:
a. book value used in the computation each year increases
b. book value used in the computation each year decreases
c. rate used in the computation each year increases
d. rate used in the computation each year decreases
e. All the above are correct.
L.O.: 3
Type: Moderate
Solution: b
Table 8-4
Rocket Company bought a machine for $15,000 on January 1, 20X3 with a
useful life of 4 years and a salvage value of $3,000. At the
beginning of 20X5, Rocket finds the residual value will be zero.
206
90. Using Table 8-4 and assuming Rocket employs straight-line
depreciation, what will be the depreciation expense in 20X5?
a. $3,000
b. $4,500
c. $6,000
d. $7,500
e. $10,500
L.O.: 4
Type: Moderate
Solution: b
91. Using Table 8-4 and assuming Rocket employs double-declining
balance depreciation, what will be the depreciation expense in
20X5?
a. $1,125
b. $1,875
c. $2,625
d. $3,000
e. $10,500
L.O.: 4
Type: Moderate
Solution: b
92. Using Table 8-4 and assuming Rocket employs straight-line
depreciation, additionally suppose that Rocket finds a $200
attachment that extends the life of the equipment 2 years beyond
the original estimate. What will be the depreciation expense in
20X5?
a. $2,250
b. $2,300
c. $3,000
d. $5,250
e. $10,500
L.O.: 4
Type: Moderate
Solution: b
93. Which of the following is an attribute associated with the
modified accelerated cost recovery system (MACRS)?
a. For most assets, MACRS approximates straight-line depreciation.
b. MACRS depreciates assets over a longer useful life than would
be expected from the asset, thus making the asset last longer
on the books.
c. MACRS allows for greater depreciation expense in the later
years of an asset's life, thus reducing the taxes a company
will have to pay during those years.
d. The purpose of MACRS is to provide more flexibility in GAAP
depreciation methods.
e. none of the above
L.O.: 5
Type: Moderate
Solution: e
94. Attributes associated with the United States' tax law's treatment
of long-lived assets include all of the following except:
a. The United States' tax law allows for very accelerated rates of
depreciation, based upon the general use of double-declining207
b.
c.
d.
e.
balance depreciation coupled with shorter useful lives than
would normally be allowed.
The United States' tax law is written by the United States
Congress.
The United States' tax law is the basis used for shareholder
reporting purposes.
United States' tax law changes in some way almost every year.
United States' tax laws can be quite different from tax laws in
other countries.
L.O.: 5
Type: Moderate
Solution: c
95. MACRS
a. has longer lives than economic lives resulting in higher income
taxes.
b. has longer lives than economic lives resulting in lower income
taxes.
c. has shorter lives than economic lives resulting in higher
income taxes.
d. has shorter lives than economic lives resulting in lower income
taxes.
e. has lives equivalent to economic lives.
L.O.: 5
Type: Moderate
Solution: d
96. Which of the following statements is considered incorrect?
a. Depreciation methods provide a systematic way to expense the
cost of an asset, although this expense is not a negative cash
flow.
b. Depreciation is an allocation of the original cost of an asset
to the periods in which the asset is used.
c. Accumulated depreciation is the summation of the amount of the
original cost of an asset already written off to expense in
prior periods.
d. Accumulated depreciation is not a pile of cash waiting to be
used.
e. Charging depreciation expense provides a means of setting aside
cash for the replacement of an asset.
L.O.: 6
Type: Moderate
Solution: e
Table 8-5
Granada Company began operations on January 1, 20X4, when the owners
invested $80,000 cash in the company. Also on January 1, the company
paid for a $30,000 machine. The machine has a useful life of four
years and a $2,000 residual value. During its first year of
operations, the company had sales of $96,000 and operating expenses
except depreciation of $67,000. All sales were cash sales and all
non-depreciation operating expenses were paid in cash. Granada
Company has a 30% tax rate and pays all taxes on December 31.
97. Referring to Table 8-5, what is the cash balance before taxes on
December 31, 20X4, if Granada Company uses straight-line
depreciation?
208
a.
b.
c.
d.
e.
$72,000
$76,900
$79,000
$81,100
$86,000
L.O.: 6
Type: Moderate
Solution: c
98. Referring to Table 8-5, what is the cash balance before taxes on
December 31, 20X4, if Granada Company uses double-decliningbalance depreciation?
a. $64,000
b. $74,500
c. $79,000
d. $83,500
e. $94,000
L.O.: 6
Type: Moderate
Solution: c
99. Referring to Table 8-5, what is the net cash provided by operating
activities before taxes for 20X4, if Granada Company uses
straight-line depreciation?
a. $(74,000)
b. $(67,000)
c. $ 22,000
d. $ 25,000
e. $ 29,000
L.O.: 6
Type: Moderate
Solution: e
100. Referring to Table 8-5, what is the net cash provided by operating
activities before taxes for 20X4, if Granada Company uses doubledeclining-balance depreciation?
a. $(81,000)
b. $(67,000)
c. $ 14,000
d. $ 25,000
e. $ 29,000
L.O.: 6
Type: Moderate
Solution: e
101. Referring to Table 8-5, what is the cash balance after taxes on
December 31, 20X4, if Granada Company uses straight-line
depreciation?
a. $55,300
b. $72,400
c. $72,550
d. $94,050
e. $94,400
L.O.: 6
Type: Difficult
209
Solution: b
102. Referring to Table 8-5, what is the cash balance after taxes on
December 31, 20X4, if Granada Company uses double-decliningbalance depreciation?
a. $59,800
b. $74,500
c. $74,800
d. $88,800
e. $89,500
L.O.: 6
Type: Difficult
Solution: c
103. Referring to Table 8-5, what is the net cash provided by operating
activities after taxes for 20X4, if Granada Company uses straightline depreciation?
a. $ 6,600
b. $15,050
c. $15,400
d. $22,400
e. $22,550
L.O.: 6
Type: Difficult
Solution: d
104. Referring to Table 8-5, what is the net cash provided by operating
activities after taxes for 20X4, if Granada Company uses doubledeclining-balance depreciation?
a. $ 6,860
b. $ 9,800
c. $10,500
d. $24,500
e. $24,800
L.O.: 6
Type: Difficult
Solution: e
105. A major expenditure made to equipment that extends its useful life
beyond the original estimate is journalized by:
a. debiting repairs expense
b. debiting depreciation expense
c. debiting equipment
d. crediting depreciation expense
e. crediting accumulated depreciation
L.O.: 7
Type: Moderate
Solution: c
106. Which of the following activities classify as a betterment?
a. oiling
b. polishing
c. restoring to working order after an accident
d. adjusting
e. rehabilitating to increase rent
L.O.: 7
Type: Easy
Solution: e
105. The expenditure for an improvement to equipment that would
increase output is journalized by:
210
a.
b.
c.
d.
e.
crediting accumulated depreciation
crediting depreciation expense
debiting depreciation expense
debiting equipment
debiting repair expense
L.O.: 7
Type: Moderate
Solution: d
106. Frecently sold some equipment for $3,800 cash. The equipment cost
$19,600 and had accumulated depreciation through the date of sale
totaling $17,300. The journal entry to record the sale of the
equipment will include a:
a. credit to accumulated depreciation of $17,300
b. credit to equipment for $2,300
c. debit to gain on sale of equipment for $1,500
d. credit to gain on sale of equipment for $1,500
e. debit to depreciation expense for $17,300
L.O.: 8
Type: Moderate
Solution: d
107. Equipment costing $20,000 with $17,800 of accumulated depreciation
is sold for $2,500 cash. The journal entry will involve a:
a. debit to depreciation expense for $17,800
b. credit to depreciation expense for $17,800
c. credit to accumulated depreciation for $17,800
d. debit to accumulated depreciation for $17,800
e. debit to accumulated depreciation for $2,200
L.O.: 8
Type: Moderate
Solution: d
108. Equipment costing $45,000 with a book value of $12,000 is sold for
$21,500. The journal entry will involve a:
a. credit to accumulated depreciation for $14,900
b. debit to accumulated depreciation for $22,000
c. debit to accumulated depreciation for $33,000
d. credit to equipment for $22,000
e. credit to accumulated depreciation for $22,000
L.O.: 8
Type: Moderate
Solution: c
109. The entry to journalize an equipment’s impairment loss would
include
a. debit accumulated depreciation
b. credit accumulated depreciation
c. credit impairment loss
d. debit equipment
e. credit equipment
L.O.: 9
Type: Easy
110. A recoverability test for impairment
a. is based on discounted present value.
b. requires SEC approval.
c. establishes that the asset is impaired.
211
Solution: b
d. only occurs when the asset is sold.
e. identifies the write-up value
L.O.: 9
Type: Moderate
Solution: c
111. Dwyer Company determines the following information at year end
about a piece of equipment that has a net book value of $75,000.
Assume the equipment will not be for sale.
Present value of future expected net cash flows $52,500
Undiscounted future expected cash flows
63,500
Estimated costs to sell
4,000
The impairment loss is
a. $22,500
b. $48,500
c. $52,500
d. $57,500
e. $0 No impairment loss
L.O.: 9
Type: Difficult
Solution: d
112. Attributes associated with intangible assets include all of the
following except:
a. The economic life of an intangible asset does not always equal
its legal life.
b. The cost of developing an intangible asset internally is
capitalized as an asset.
c. Intangible assets are similar to fixed assets, in that their
acquisition costs are capitalized as assets, and this cost is
expensed over their estimated useful lives.
d. Intangible assets are long-lived assets which are not physical
in nature.
e. Examples of an intangible asset include patents, copyrights,
and goodwill.
L.O.: 10
Type: Moderate
Solution: b
113. Amortization of an intangible asset is similar to which
depreciation method?
a. unit depreciation
b. straight-line
c. double-declining balance
d. MACRS
e. none of the above
L.O.: 10
Type: Easy
Solution: b
114. An attribute of leases includes all of the following except:
a. An example of a leasehold improvement would be the installation
of new paneling, walls, and a window air conditioner.
b. The lessee must select the shorter of either the useful life of
the leasehold improvement or the remaining life of the lease to
amortize the leasehold improvement.
212
c. Although they are technically intangible assets, leaseholds and
leasehold improvements are frequently classified with plant
assets.
d. A leasehold is a right to use a leased asset for a specified
period of time beyond one year.
e. Leasehold improvements can be amortized using either
accelerated or straight-line methods.
L.O.: 10
Type: Moderate
Solution: e
115. Big Company buys Little Company for $11 million. Little Company
has assets worth $9 million and liabilities of $2 million.
Little’s stockholders’ equity is recorded at $8 million. What
goodwill should Big record?
a. $10 million
b. $8 million
c. $4 million
d. $2 million
e. $0 million
L.O.: 11
Type: Moderate
Solution: c
116. Computer Inc has $500,000 of goodwill on the balance sheet. The
company determines that an impairment has occurred for $100,000.
Computer Inc should
a. recompute the original purchase and restate all subsequent
statements.
b. debit goodwill for $100,000
c. credit goodwill for $100,000
d. debit goodwill for $400,000
e. credit goodwill for $400,000
L.O.: 11
Type: Moderate
Solution: c
117. Computer Inc has $400,000 of goodwill on the balance sheet from
XYZ Company which was purchased 5 years ago. The goodwill
amortization this year should be.
a. $10,000
b. $20,000
c. $40,000
d. $80,000
e. $0
L.O.: 11
Type: Moderate
Solution: e
118. Weber Resources acquired a gold mine for $8,000,000. It is
estimated that 40,000 ounces of gold can be extracted from the
mine. In the first year of operations, 15,000 ounces of gold were
extracted. Weber Resources would recognize:
a. an increase in net income of $3,000,000
b. depreciation expense of $3,000,000
c. cost of goods sold of $3,000,000
d. amortization expense of $3,000,000
e. depletion expense of $3,000,000
213
L.O.: 12
Type: Moderate
Solution: e
119. In 20X2 Big Tex Oil purchased drilling rights for $1,000,000. At
the time, the engineer estimated 20,000 barrels of oil in the
field. In 20X3, 4,000 barrels were pumped and in 20X4, 5,000
barrels were pumped. Which entry below is correct?
a. credit inventory of $200,000 in 20X2
b. debit depreciation expense of $250,000 in 20X3
c. debit cost of goods sold of $200,000 in 20X3
d. debit depletion expense of $250,000 in 20X4
e. debit amortization expense of $200,000 in 20X2
L.O.: 12
Type: Moderate
Solution: d
120. Wildcat Resources acquired a silver mine for $4,000,000. The
company’s survey estimates that 40,000 ounces of silver can be
extracted from the mine, but environmental costs to close the mine
will be $1,000,000. In the first year of operations, 15,000 ounces
of silver were extracted. Wildcat Resources would recognize:
a. depletion expense of $1,500,000
b. depreciation expense of $1,500,000
c. depletion expense of $1,875,000
d. amortization expense of $1,875,000
e. environmental expense of $1,000,000
L.O.: 12
Type: Moderate
214
Solution: c
Problems
121. For each of the following items, identify whether they are a
capital expenditure or an expense:
a. Built a new elevator in the office building.
b. Acquired a copyright.
c. Incurred research and development expense to develop a patent.
d. Modified a machine, thus extending its useful life and
capabilities.
e. Paid wages for the maintenance workers.
f. Paid for a new roof on the building.
g. Paid for a month's electricity in the office building.
h. Replaced the furnace in the office building.
i. Replaced the carpeting in the office building.
L.O.: 1
a.
b.
c.
d.
e.
f.
g.
h.
i.
capital
capital
expense
capital
expense
capital
expense
capital
capital
Type: Moderate
expenditure
expenditure
expenditure
expenditure
expenditure
expenditure
215
Solution:
122. Miller Company acquired land and a building on July 1, 20X4,
paying a total of $1,400,000. Separately, the land had an
estimated fair market value of $750,000 and the building had an
estimated fair market value of $1,125,000. In order to use the
property, land improvements of $20,000 were incurred.
Additionally, the building needed to be rewired, at a cost of
$65,000. Also, certain walls had to be knocked down, while others
were constructed. The cost to remove and replace walls was
$80,000. The company took occupancy of the building on November 1,
20X4.
For all of items noted above, determine how much will be
incorporated into the land account, the building account, or
expensed as of Miller Company's year end of December 31, 20X4.
L.O.: 2
Type: Moderate
Fair Market Values:
Land
Building
Total
Solution:
$
750,000
1,125,000
$1,875,000
Percent
.4
.6
1.0
Land: Allocated purchase price
Land improvements
$560,000
20,000
$580,000
($1,400,000 x .4)
Building: Allocated purchase price
Cost of rewiring
Cost of wall removal and
construction
$840,000
65,000
($1,400,000 x .6)
216
80,000
$985,000
123. Herder, Inc. acquired an offroader on January 1, 20X4, for
$42,000. The machine is estimated to have a five-year life, with a
residual value of $6,000. Herder, Inc. is not certain whether to
use the straight-line or double-declining-balance method of
depreciation.
Prepare the following depreciation schedule:
Date
01/01/X4
12/31/X4
12/31/X5
12/31/X6
Straight-Line
Depreciation
Expense
L.O.: 3
Date
01/01/X4
12/31/X4
12/31/X5
12/31/X6
Book
Value
$42,000
Double-Declining-Balance
Depreciation
Book
Expense
Value
$42,000
Type: Difficult
Straight-Line
Depreciation
Expense
$ 7,200
7,200
7,200
Book
Value
$42,000
34,800
27,600
20,400
217
Solution:
Double-Declining-Balance
Depreciation
Book
Expense
Value
$42,000
$16,800
25,200
10,080
15,120
6,048
9,072
124. For each of the independent situations below, determine the age of
the asset in question. All assets were acquired at the beginning
of the years.
a. The balance in the buildings account is $400,000, while the
balance sheet shows the book value of the buildings at
$217,600. The notes to the financial statements indicate that
straight-line depreciation is used for all plant assets and
that residual values are estimated at 5% of cost. The
estimated life of the buildings is 25 years.
b. The book value of delivery equipment is $51,520. The cost of
the delivery equipment was $80,500. The company uses the
straight-line method of depreciation for delivery equipment and
estimates life at 5 years or 50,000 units. So far, 27,000
units have been produced. Residual value is 10% of cost.
L.O.: 3
Type: Difficult
Solution:
a. $400,000 X .95 = $380,000 depreciable value
$380,000/25 = $15,200 annual depreciation
$400,000 - $217,600 = $182,400 balance in accumulated depreciation
$182,400/$15,200 = 12 years old
b. $80,500 X .90 = $72,450 depreciable value
$72,450/5 = $14,490 annual depreciation
$80,500 - $51,520 = $28,980 balance in accumulated depreciation
$28,980/$14,490 = 2 years old
218
125. Hahn Company began operations on January 1, 20X4. On that date,
the owners invested $140,000 in the company, and acquired a
$90,000 machine. The machine has a useful life of 5 years, and a
residual value of $4,000. The company intends to depreciate the
machine on a straight-line basis for financial reporting purposes.
During 20X4, revenues which were all in cash, totaled $630,000.
All operating expenses, other than depreciation and all paid in
cash, were $510,000. Hahn Company has a 45% income tax rate.
Given the above information, determine (round all answers to the
nearest dollar):
a. 20X4 net income using straight-line depreciation
b. 20X4 cash provided by operations using straight-line
depreciation
L.O.: 6
Type: Difficult
a. Sales
Operating expenses
Depreciation expense
Income tax expense
Net Income
$630,000
510,000
17,200
46,260
$ 56,540
b. Sales
Operating expenses
Income tax expense
Net cash provided
by operating activities
$630,000
510,000
46,260
$ 73,740
219
Solution:
126. Scotty Limited gathered the following data for the year ended
December 31, 20X4, related to its equipment.
Equipment
January 1, 20X4, balance
Total debits to the account
Total credits to the account
December 31, 20X4, balance
$85,000
55,000
?
92,000
Accumulated
Depreciation
$40,000
?
51,000
56,000
Based on the above data, prepare the journal entry to record the
sale of equipment during the year for $11,500 cash.
L.O.: 8
Type: Moderate
Cash
Loss on Sale of Equipment
Accumulated Depreciation
Equipment
Solution:
11,500
1,500
35,000
48,000
220
127. On January 1, 20X4, First Bank acquired 10 cars for company use.
The cost of each car was $15,000, and the bank estimated that each
car would have a four-year useful life and a residual value of
$2,000.
Required:
a. Provide the journal entry needed on December 31, 20X5, if four cars
were sold for a total of $17,500 and First Bank uses
double-declining-balance depreciation.
b. Provide the journal entry needed on December 31, 20X5, if four cars
were sold for a total of $17,500 and First Bank uses
straight-line depreciation.
c. Assume instead of the above information that on December 31, 20X5, one
of the cars was wrecked. Provide the journal entry needed on December
31, 20X5, if First Bank's insurance company paid $2,900 for the
wrecked car and the company uses straight-line depreciation.
L.O.: 8
Type: Difficult
a. Cash
Accumulated Depreciation
Gain on Sale of Cars
Cars
b. Cash
Accumulated Depreciation
Loss on Sale of Cars
Cars
c. Cash
Accumulated Depreciation
Loss on Insurance Reimbursement
Cars
221
Solution:
17,500
45,000
2,500
60,000
17,500
26,000
16,500
60,000
2,900
6,500
5,600
15,000
128. Craig Company signed a ten-year lease for a store in the best
mall in the area. At the beginning of the seventh year of the
lease, the company decided to refurbish the store. The following
expenditures were made:
Item
Carpeting
Painting
Lighting Fixtures
Wall Construction
Cost
$ 6,000
$ 3,500
$ 4,500
$10,000
Useful Life
3 years
5 years
6 years
8 years
All items were paid in cash. There is no residual value for any of
the items noted above.
a. Prepare the journal entry to record the expenditures of the
above items.
b. Prepare the year-end adjustment to record the expense
associated with the above items.
L.O.: 10
Type: Moderate
a. Leasehold Improvements
Cash
b. Amortization Expense
Leasehold Improvements*
* Carpeting
Painting
Lighting Fixtures
Wall Construction
Solution:
24,000
24,000
6,500
6,500
$2,000
875
1,125
2,500
$6,500
222
129. Consider each event concerning intangible assets independently:
a. Barden Corporation purchased a patent for $476,000 on January 1,
20X4. The patent has a remaining legal life of 14 years. Due to
anticipated technological change, it is expected that the patent
will be useless in 5 years.
b. In 20X4, Bennett Company spent $3,500,000 in research and
development costs. However, the research did not result in a patent.
Bennett Company acquired a patent from another company for
$1,000,000 on January 1, 20X4. The acquired patent is expected
to last 8 years.
Prepare all journal entries necessitated by events in a. and b.
above during the year 20X4.
L.O.: 10
Type: Moderate
a. Patent
Cash
Amortization Expense
Patent
b. Research and Development Expense
Cash
Patent
Cash
Amortization Expense
Patent
223
Solution:
476,000
476,000
95,200
95,200
3,500,000
3,500,000
1,000,000
1,000,000
125,000
125,000
Essays
130. Explain the concept of depreciation. Include in your discussion
one common misconception regarding what depreciation represents.
L.O.: 3
Type: Moderate
Solution:
Depreciation is the process of allocating a plant asset's cost to
expense over the period the asset is used. This process is
designed to match the asset's expense against the revenue
generated over the asset's life. The primary purpose of
depreciation is to help measure income properly.
Depreciation is not a process of valuation, and depreciation does
not mean that the business sets aside cash to replace assets as
they become fully depreciated.
Depreciation is also a noncash expense. Depreciation does impact
cash flows from operations via the tax savings it generates. It
is a tax-deductible expense, thus decreasing the income tax
payment.
130. Explain the concept of asset impairment. Include in your
discussion the process of computing the impairment.
L.O.: 9
Type: Moderate
Solution:
An asset is considered to be impaired when it ceases to have
economic value to the company at least as large as the carrying
value (book value) of the asset.
There are two steps in determining asset impairment. The first
step is a recoverability test that compares the undiscounted
expected future net cash flows from the use of the asset and its
eventual disposal to the carrying value of the asset. Go to the
second step if there is evidence of impairment in the first step,
where the impairment loss is taken at the amount by which the
carrying value of the asset exceeds its fair value.
78. A liability is created ______________.
a. when merchandise is purchased with cash
b. when owners invest in a company
c. when merchandise is sold on account
d. when salary expense is recognized before employees are paid
e. when rent is paid in advance
L.O.: 1
Type: Easy
Solution: d
79. Liabilities that fall due more than one year beyond the balance
sheet date are:
a. long-term liabilities
b. delinquent liabilities
c. current liabilities
224
d. risky liabilities
e. contingent liabilities
L.O.: 1
Type: Easy
Solution: a
80. Examples of a current liability include all of the following
except:
a. prepaid rent
b. accrued income taxes payable
c. accrued wages payable
d. current portion of long-term debt
e. accounts payable
L.O.: 1
Type: Easy
Solution: a
81. A written promise to repay a loan principal plus interest at a
specific future date is:
a. a promissory note
b. a line of credit
c. commercial paper
d. a product warranty
e. a returnable deposit
L.O.: 1
Type: Easy
Solution: a
Table 9-1
McCabe Company has a monthly payroll with the following information:
A.
The monthly gross salary for all its employees is $60,000. McCabe
Company withholds 20% of the employees' gross salary for federal
taxes, 6% for state taxes, and 8% for Social Security (FICA)
taxes.
B.
McCabe Company also incurs other employee-related costs.
Specifically, the company must (1) match the Social Security
taxes withheld from the employees, (2) contribute 4% of the
employees' gross pay to the employees' pension fund, and (3) pay
3% of the employees' gross pay for health insurance premiums on
behalf of the employees.
82. Referring to Table 9-1, what is the appropriate journal entry to
be made by McCabe Company for part A of their monthly payroll,
which is associated with gross pay and withholdings?
a.
Compensation Expense
60,000
Salaries and Wages Payable
60,000
b.
Compensation Expense
60,000
Federal Income Tax Withholding Payable
12,000
State Income Tax Withholding Payable
3,600
Social Security Withholding Payable
4,800
Salaries and Wages Payable
39,600
c.
Compensation Expense
60,000
Tax Expense
20,400
Federal Tax Withholding Payable
12,000
225
d.
e.
State and FICA Tax Withholding Payable
Salaries and Wages Payable
Compensation Expense
60,000
Federal Tax Expense
12,000
State Tax Expense
3,600
Social Security Tax Expense
4,800
Salaries and Wages Payable
Compensation Expense
80,400
Federal Tax Withholding Payable
State Tax Withholding Payable
Social Security Tax Withholding Payable
Salaries and Wages Payable
L.O.: 1
Type: Difficult
8,400
60,000
80,400
12,000
3,600
4,800
60,000
Solution: b
83. Referring to Table 9-1, what is the appropriate journal entry to
be made by McCabe Company for part B of their monthly payroll,
which is associated with other employee-related costs?
a.
Employee Benefit Expense
9,000
Employer Social Security Payable
4,800
Pension Liability Payable
2,400
Health Insurance Payable
1,800
b.
Compensation Expense
9,000
Employer Social Security Payable
4,800
Pension Liability Payable
2,400
Health Insurance Payable
1,800
c.
Prepaid Employee Benefits
9,000
Employer Social Security Payable
4,800
Pension Liability Payable
2,400
Health Insurance Payable
1,800
d.
Unearned Employee Benefits
9,000
Employer Social Security Payable
4,800
Pension Liability Payable
2,400
Health Insurance Payable
1,800
e.
Compensation Expense
9,000
Employer Social Security Payable
4,800
Pension Withholding Payable
2,400
Health Insurance Withholding Payable
1,800
L.O.: 1
Type: Difficult
Solution: a
84. A debt contract issued by prominent companies that allow the
companies to borrow directly from investors is:
a. a promissory note
b. a line of credit
c. commercial paper
d. product warranties
e. returnable deposits
L.O.: 1
Type: Easy
Solution: c
Table 9-2
Patton Enterprises has the following monthly payroll transactions:
226
A. The monthly gross salary for all its employees is $120,000.
Patton withholds 21% of the employees' gross salary for
federal taxes, 7% for state taxes, and 9% for Social Security
(FICA) taxes.
B. Patton also incurs other employee-related costs.
Specifically, the company must (1) match the Social Security taxes
withheld from the employees, (2) contribute 3% of the employees'
gross pay to the employees' pension fund, and (3) pay 4% of the
employees' gross pay for health insurance premiums on behalf of the
employees.
85. Referring to Table 9-2, what is the appropriate journal entry to
be made by Patton Enterprises for transaction A of its monthly
payroll, which is associated with gross pay and withholdings?
a.
Compensation Expense
120,000
Salaries and Wages Payable
120,000
b.
Compensation Expense
120,000
Tax Expense
44,400
Federal Income Tax Withholding Payable
25,200
State and FICA Tax Withholding Payable
19,200
Salaries and Wages Payable
120,000
c.
Compensation Expense
120,000
Federal Tax Expense
25,200
State Tax Expense
8,400
Social Security Withholding Expense
10,800
Salaries and Wages Payable
164,400
d.
Compensation Expense
120,000
Federal Income Tax Withholding Payable
25,200
State Income Tax Withholding Payable
8,400
Social Security Tax Withholding Payable
10,800
Salaries and Wages Payable
75,600
e.
Compensation Expense
164,400
Federal Tax Withholding Payable
25,200
State Tax Withholding Payable
8,400
Social Security Tax Withholding Payable
10,800
Salaries and Wages Payable
20,000
L.O.: 1
Type: Difficult
Solution: d
86. Referring to Table 9-2, what is the appropriate journal entry to
be made by Patton Enterprises for transaction B of their monthly
payroll, which is associated with other employee-related costs?
a.
Compensation Expense
19,200
Employer Social Security Payable
10,800
Pension Liability Payable
3,600
Health Insurance Payable
4,800
b.
Employee Benefit Expense
19,200
Employer Social Security Payable
10,800
Pension Liability Payable
3,600
Health Insurance Payable
4,800
c.
Prepaid Employee Benefits
19,200
Employer Social Security Payable
10,800
Pension Liability Payable
3,600
227
d.
e.
Health Insurance Payable
Unearned Employee Benefits
Employer Social Security Payable
Pension Liability Payable
Health Insurance Payable
Compensation Expense
Employer Social Security Payable
Pension Withholding Payable
Health Insurance Withholding Payable
L.O.: 1
Type: Difficult
4,800
19,200
10,800
3,600
4,800
19,200
10,800
3,600
4,800
Solution: b
87. Power Company estimated at January 1, 20X4, that its income before
taxes for the year ended December 31, 20X4, would be $7,500,000.
Power Company's tax rate for the year is 45%. The company made
quarterly tax payments on April, June, September, and December 15.
The actual income before taxes for the year ended December 31,
20X4, for the Power Company was $7,700,000. What was the balance
in the income tax payable account at December 31, 20X4?
a. $0
b. $90,000
c. $110,000
d. $150,000
e. $200,000
L.O.: 1
Type: Moderate
Solution: b
88. Projector Company estimated at January 1, 20X4, that its income
before taxes for the year ended December 31, 20X4, would be
$5,500,000. Projector Company's tax rate for the year is 42%. The
company made quarterly tax payments on April, June, September, and
December 15. The actual income before taxes for the year ended
December 31, 20X4, for the Projector Company was $5,700,000. What
was the balance in the income tax payable account at December 31,
20X4?
a. $0
b. $84,000
c. $100,000
d. $144,000
e. $200,000
L.O.: 1
Type: Moderate
Solution: b
89. The current portion of long-term debt represents:
a. the amount of principal on long-term debt that comes due in the
coming year
b. the amount of long-term debt that appears in the non-current
liability section of the balance sheet
c. the amount of interest that comes due in the coming year
d. a short-term loan from a bank that has also granted a long-term
loan
e. the amount of principal and interest that comes due within a
coming year
228
L.O.: 1
Type: Moderate
Solution: a
90. On January 1, 20X3, Davis Company issued $200,000 in long-term
bonds at par. The bonds pay interest of 12% on January 1, and the
principal will be paid in $25,000 annual increments, beginning on
December 31, 20X7, and continuing every year thereafter for 8
years. What journal entry is necessary on December 31, 20X6?
a.
No journal entry is necessary.
b.
Cash
25,000
Long-Term Bond Payable
25,000
c.
Long-Term Bond Payable
25,000
Cash
25,000
d.
Long-Term Bond Payable
25,000
Current Portion of Long-Term Bond Payable
25,000
e.
Prepaid Long-Term Bond Payable
25,000
Cash
25,000
L.O.: 1
Type: Difficult
Solution: d
91. Sales tax:
a. is a tax on sales and is an expense to the company who collects
it
b. is collected from the customer and remitted to the state or
local government
c. is paid daily to the state or local government and, thus, never
appears as a payable
d. is represented as a long-term payable on the balance sheet
e. is not collected on the internet.
L.O.: 1
Type: Moderate
Solution: b
92. Stardust Company operates in a state where there is a 7% sales
tax. If a customer pays cash for merchandise with a sales price of
$300, Stardust would record the transaction using which of the
following journal entries?
a.
Cash
300
Sales
300
b.
Cash
300
Sales Tax Payable
21
Sales
279
c.
Cash
300
Sales Tax Expense
21
Sales Tax Payable
21
Sales
300
d.
Cash
321
Sales Tax Payable
21
Sales
300
e.
Cash
321
Sales Tax Expense
21
Sales Tax Payable
21
Sales
321
L.O.: 1
Type: Moderate
229
Solution: d
93. Montgomery Variety operates in a state where there is a 6% sales
tax. If a customer pays cash for merchandise with a sales price of
$500, what effect will this transaction have on Montgomery's
balance sheet? (Ignore the effect of cost of goods sold)
a. Assets increase by $530, current liabilities increase by $30,
and stockholders’ equity increases by $500.
b. Assets increase by $500, and stockholders’ equity increases by
$500.
c. Assets increase by $500, long-term liabilities increase by $30,
and stockholders’ equity increases by $500.
d. Assets increase by $500, current liabilities increase by $30,
and stockholders’ equity increases by $470.
e. Assets increase by $530, long-term liabilities increase by $30,
and stockholders’ equity increases by $500.
L.O.: 1
Type: Difficult
Solution: a
Table 9-3
Largent Company began business on January 1, 20X4. The company
manufactures and sells stereo equipment. The company provides a
warranty on its units, whereby the company will replace any defective
part for two and one-half years after the sale, at no additional cost
to the customer. During 20X4, Largent Company had sales of $700,000.
The company estimates that the cost of the warranties will be 3% of
sales. No warranty claims were made in 20X4. During 20X5, warranty
claims of $14,900 were made. All warranty claims were satisfied and
paid for.
94. Referring to Table 9-3, what journal entry, if any, is necessary
for 20X4 by Largent Company?
a.
No journal entry is necessary.
b.
Prepaid Warranty
21,000
Liability for Warranties
21,000
c.
Warranty Expense
21,000
Liability for Warranties
21,000
d.
Warranty Expense
21,000
Warranty Sales
21,000
e.
Warranty Expense
21,000
Unearned Warranties
21,000
L.O.: 1
Type: Moderate
Solution: c
95. Referring to Table 9-3, what journal entry, if any, is necessary
for 20X5 by Largent Company?
a.
No journal entry is necessary.
b.
Liability for Warranties
14,900
Inventory
14,900
c.
Prepaid Warranties
14,900
Inventory
14,900
d.
Warranty Expense
14,900
Inventory
14,900
e.
Unearned Warranties
14,900
Inventory
14,900
230
L.O.: 1
Type: Moderate
Solution: b
96. Which of the following statements is false?
a. Well-known examples of returnable deposits are those for
returnable containers such as soft-drink bottles and beer kegs.
b. Companies that receive deposits record them as a form of
receivable.
c. The account Deposits is a current liability of the company
receiving the deposit.
d. Ordinarily, the recipient of the cash deposit may use the cash
for investment purposes from the date of deposit to the date of
its return to the depositor.
e. In some states, the law allows interest earned on deposits to
be retained by the landlord; in others, the interest must be
paid to the tenant.
L.O.: 1
Type: Moderate
Solution: b
97. Unearned revenues:
a. are considered to be a type of revenue
b. are revenues that are collected before services or goods are
delivered
c. normally has a debit balance
d. is credited when the sales revenue is finally earned
e. include cash donations made to universities from wealthy alumni
L.O.: 1
Type: Moderate
Solution: b
98. Murray publishes the Second Hand News. In April, he collected $60
in advance for one-year subscriptions. He delivered the first
issue in May. Assume one issue is published per month. The journal
entry to record the delivery of the magazines in May would be:
a.
Cash
5.00
Subscription Revenue
5.00
b.
Unearned Subscription Revenue
5.00
Subscription Revenue
5.00
c.
Prepaid Subscriptions
5.00
Subscription Revenue
5.00
d.
Prepaid Subscriptions
5.00
Cash
5.00
e.
Cash
5.00
Prepaid Subscriptions
5.00
L.O.: 1
Type: Moderate
Solution: b
99. Shelly Corp. publishes the Uptown Herald. In April, they collected
$600 in advance for one-year subscriptions. The journal entry to
record the delivery of the newspapers in May would be:
a.
Cash
50.00
Subscription Revenue
50.00
b.
Prepaid Subscriptions
50.00
Subscription Revenue
50.00
c.
Prepaid Subscriptions
50.00
Cash
50.00
231
d.
e.
Cash
Prepaid Subscriptions
Unearned Subscription Revenue
Subscription Revenue
L.O.: 1
Type: Moderate
50.00
50.00
50.00
50.00
Solution: e
100. __________________ are a form of long-term debt that is secured by
the pledge of specific property.
a. Convertible bonds
b. Mortgage bonds
c. Callable bonds
d. Sinking fund bonds
e. Debentures
L.O.: 2
Type: Moderate
Solution: b
101. ________________ are bonds whose holders have claims against only
the assets that remain after the claims of the general creditors
are satisfied.
a. Subordinated debentures
b. Mortgage bonds
c. Callable bonds
d. Sinking fund bonds
e. Convertible bonds
L.O.: 2
Type: Moderate
Solution: a
103. ________________ are subject to redemption before maturity at the
option of the issuer.
a. Debentures
b. Mortgage bonds
c. Callable bonds
d. Sinking fund bonds
e. Convertible bonds
L.O.: 2
Type: Moderate
Solution: c
104. Notes and bonds are often called ___________ financial instruments
or securities because they can be transferred from one lender to
another.
a. private placements
b. negotiable
c. current liabilities
d. long term liabilities
e. sinking fund
L.O.: 2
Type: Easy
105. Bonds are typically sold through
a. board of directors
b. underwriters
c. corporations
d. commercial insurance companies
232
Solution: b
e. none of the above
L.O.: 2
Type: Easy
Solution: b
106. The excess of a bond's issue price over its face value is known as
the:
a. discount
b. effective interest amount
c. coupon interest amount
d. premium
e. contingent liability
L.O.: 2
Type: Easy
Solution: d
107. The interest rate that determines the amount of cash paid for
interest to the bondholder is referred to as the:
a. effective rate
b. market rate
c. coupon rate
d. daily rate
e. imputed rate
L.O.: 2
Type: Easy
Solution: c
108. All of the following are rates available for investments in
similar bonds at a moment in time, except:
a. yield to maturity
b. LIBOR rate
c. coupon rate
d. market interest rate
e. effective interest rate
L.O.: 2
Type: Moderate
Solution: c
109. The cash proceeds received from issuing a bond are less than the
face value of the bond. It is apparent that the bond was issued
at:
a. face value
b. a premium
c. a discount
d. par value
e. nominal value
L.O.: 2
Type: Moderate
Solution: c
110. The amount earned by an investor expressed as a percentage of the
amount invested is called:
a. discount rate
b. rate of return
c. present value
d. future value
e. expected past rate
L.O.: 2
Type: Easy
233
Solution: b
111. As the market rate of interest rises above the nominal or stated
interest rate for a bond, the market price of the bond will:
a. stay the same
b. fall
c. rise
d. cannot be determined without more information
e. go in sync with the stock’s price
L.O.: 2
Type: Moderate
Solution: b
112. When the market interest rate is 13% and the coupon rate is 10%, a
bond sells at:
a. a discount
b. a premium
c. at par
d. liquidation value
e. cannot be determined without more information
L.O.: 2
Type: Moderate
Solution: a
113. Bond interest payments are typically made ___________.
a. annually
b. semiannually
c. monthly
d. quarterly
e. weekly
L.O.: 2
Type: Easy
Solution: b
114. When the market interest rate is 7% and the coupon rate is 10%, a
bond sells at:
a. a discount
b. a premium
c. at par
d. liquidation value
e. cannot be determined without more information
L.O.: 2
Type: Moderate
Solution: b
115. If a $10,000 bond, with a 12% coupon rate, is trading at 100, what
can be said about the current price and current yield of the bond?
Current Price
Current Yield
a. $10,000
Greater than 12%
b. $10,000
Equal to 12%
c. $10,000
Less than 12%
d. $11,200
Equal to 12%
e. $11,200
Less than 12%
L.O.: 2
Type: Moderate
Solution: b
116. Which statement is false?
a. The periodic interest payment on a bond is based upon the
market rate of interest.
234
b. Typically when a company issues a bond, the company will sell
the bonds to an underwriter, who in turn sells the bonds to the
general public.
c. The nominal rate of interest and the market rate of interest
are usually different on the date the bond is issued.
d. If a bond is sold at a price that is greater than face value,
it is said to be sold at a premium.
e. If a bond is sold at a price that is less than face value, it
is said to be sold at a discount.
L.O.: 2
Type: Moderate
Solution: a
117. Which of the following is false. The discount on bonds payable is:
a. amortized over the life of the bond
b. deducted from bonds payable
c. a contra account
d. a trading security account
e. payable at the maturity date of the bond
L.O.: 3
Type: Moderate
Solution: d
118. The discount on bonds payable:
a. serves to reduce interest expense on the income statement
b. serves to increase interest expense on the income statement
c. serves as a disincentive for investment bankers to issue the
debt
d. serves to decrease the amount of cash paid to bondholders over
the stated rate of interest
e. none of the above
L.O.: 3
Type: Difficult
Solution: b
119. Which of the following is not true of bonds issued at a premium?
a. The cash proceeds exceed the face amount of the bonds.
b. The amortization of bond premium decreases the interest
expense.
c. The amount of the Premium on Bonds Payable account is
subtracted from the face amount of the bonds to determine the
net liability reported in the balance sheet.
d. The market rate was below coupon rate
e. Amortization decreases the carrying value of the bond.
L.O.: 3
Type: Moderate
Solution: c
120. Early extinguishment of debt:
a. is not allowed by the FASB during the first two years bonds are
outstanding
b. will never have related gains or losses recorded on the books.
c. occurs when the issuer redeems its own bonds by purchases on
the open market or by exercising their rights to redeem
callable bonds.
d. requires SEC approval.
e. is permitted only in the banking industry.
235
L.O.: 3
Type: Moderate
Solution: c
121. The spreading of bond discount over the life of the bonds as
interest expense is called:
a. discount amortization
b. effective-interest amortization
c. compound interest method
d. doubling down
e. income averaging
L.O.: 3
Type: Moderate
Solution: a
122. What is true regarding zero coupon notes?
a. They provide cash interest payments during their life.
b. They are sold for more than the face or maturity value.
c. The investor determines their market value at the issuance date
by calculating the present value of their maturity value, using
the market rate of interest for notes having similar terms and
risks.
d. are only callable debentures
e. They are also called junk bonds.
L.O.: 3
Type: Moderate
Solution: c
123. The market interest rate that equates the proceeds from a loan
with the present value of the loan payment is called:
a. effective interest rate
b. nominal interest rate
c. imputed interest rate
d. coupon interest
e. agreed upon interest
L.O.: 3
Type: Moderate
Solution: c
124. Under the effective-interest method of amortization, the amount of
discount amortized each interest period is equal to the:
a. the amount of interest expense plus the cash paid for interest
b. the amount of interest expense less the cash paid for interest
c. the total discount divided by the number of interest payments
to be made
d. the total amount of interest expense divided by the number of
interest payments to be made
e. the amount of the decrease from the cash payment.
L.O.: 3
Type: Difficult
Solution: b
125. Williams Inc has just made the interest payment on its $4,000,000
of outstanding bonds. The bonds are callable at 101 5/8 and the
unamortized premium is currently $167,400. The entry to retire
half of the bonds would include a:
a. debit to premium on bonds payable for $167,400
b. credit to cash for $2,000,000
c. credit to gain on early extinguishment of debt for $51,200
d. debit to loss on early extinguishment of debt for $52,500
236
e. debit to loss on early extinguishments of debt for $167,400
L.O.: 3
Type: Difficult
Solution: c
126. The premium on bonds payable:
a. serves to reduce interest expense on the income statement
b. serves to increase interest expense on the income statement
c. serves to increase the amount of cash paid to bondholders over
the stated rate of interest
d. serves to decrease the initial amount of cash paid by
bondholders
e. none of the above
L.O.: 3
Type: Difficult
Solution: a
127. Under the effective-interest method of amortizing bond premium,
the interest expense recorded for each semiannual interest
payment:
a. is the same percentage of the bond's carrying value for every
interest payment
b. will increase over the life of the bond
c. is equal to the carrying value of the bond times the contract
rate of interest for each semiannual interest payment
d. will equal the amount of cash paid for each semiannual interest
payment
e. will be the same amount each time
L.O.: 3
Type: Difficult
Solution: a
128. Under the effective-interest method of amortizing bond discount,
the cash payment on each interest payment date is calculated by
multiplying the:
a. ending net liability times the effective interest rate for the
appropriate time period
b. ending net liability times the coupon interest rate for the
appropriate time period
c. face value of the bonds times the effective interest rate for
the appropriate time period
d. face value of the bonds times the coupon interest rate for the
appropriate time period
e. the difference between the market value and the liquidation
value by the market rate of interest.
L.O.: 3
Type: Difficult
Solution: d
129. Under the effective-method of amortizing bond premium, the
interest expense recorded for each semiannual interest payment:
a. is equal to the face value of the bond times the coupon rate of
interest for each semiannual interest period
b. is at a different percentage of the bond's carrying value for
every interest payment
c. will equal the amount of cash paid for each semiannual interest
payment
d. will decrease over the life of the bonds
237
e. will increase over the life of the bonds
L.O.: 3
Type: Difficult
Solution: d
130. Under the effective-interest method of amortization, interest
expense each period can be calculated by multiplying the:
a. beginning net liability times the effective interest rate for
the appropriate time period.
b. beginning net liability times the coupon interest rate for the
appropriate time period.
c. face value of the bonds times the effective interest rate for
the appropriate time period.
d. face value of the bonds times the coupon interest rate for the
appropriate time period.
e. liquidation value times the effective interest rate for the
appropriate time period.
L.O.: 3
Type: Difficult
Solution: a
131. On January 1, 20X4, Stacy Arnold purchased a $24,000 car, making a
$4,000 down payment, and borrowing the rest on a 4-year note at 8%
interest. She agrees to make annual payments of $6,038.47,
starting January 1, 20X5. What is the journal entry that Stacy
would make on January 1, 20X5, for the first payment on the note?
a.
Note Payable
6,038.47
Cash
6,038.47
b.
Interest Payable
1,600.00
Note Payable
4,438.47
Cash
6,038.47
c.
Interest Expense
483.08
Note Payable
5,555.39
Cash
6,038.47
d.
Interest Expense
1,920.00
Note Payable
4,118.47
Cash
6,038.47
e.
Interest Expense
5,555.39
Note Payable
438.08
Cash
6,038.47
L.O.: 3
Type: Difficult
Solution: b
Table 9-4
Briggs Company issued 3,000 debentures on January 1, 20X5. The
debentures were 12-year, 7% debt, which paid interest semi-annually,
every June 30 and December 31. The face value of each debenture is
$1,000.
132. Referring to Table 9-4, if the market rate of interest is 7% on
January 1, 20X5, what is the journal entry to record the issuance
of the bonds?
a.
b.
Cash
Bonds Payable
Bonds Payable
Cash
3,000,000
3,000,000
3,000,000
3,000,000
238
c.
d.
e.
Bonds Receivable
3,000,000
Cash
Bonds Receivable
3,000,000
Bonds Payable
cannot be determined from the information given
L.O.: 3
Type: Moderate
3,000,000
3,000,000
Solution: a
133. Referring to Table 9-4, if the market rate of interest is 7% on
January 1, 20X5, what is the journal entry to record the payment
of interest on June 30, 20X5?
a.
b.
c.
d.
e.
Bonds Payable
Cash
Interest Payable
Cash
Cash
Bonds Payable
Interest Expense
Cash
Interest Expense
Bonds Payable
L.O.: 3
105,000
105,000
105,000
105,000
210,000
210,000
105,000
105,000
210,000
210,000
Type: Moderate
Solution: d
134. The Bluestream Company issued an 8-year, 10% bond on January 1,
20X2. Each bond sold for face value, which is $1,000. The bonds
pay interest semi-annually on June 30 and December 31. The bonds
mature on December 31, 20X9. Using present value tables, what is
the market price of each $1,000 bond on January 1, 20X4, if the
market rate of interest has changed to 8%?
a. $ 893.29
b. $ 912.92
c. $1,000.00
d. $1,093.86
e. $1,114.96
L.O.: 3
Type: Difficult
Solution: d
135. Interest expense on bonds exhibits the following attributes
except:
a. interest expense is greater than the cash payment for interest
when a bond is sold at a premium and effective-interest
amortization is used.
b. interest expense is the same dollar amount for every interest
payment period, if a bond was issued at a discount and
straight-line amortization is used.
c. interest expense is greater than the cash payment for interest
when a bond is sold at a discount, regardless of whether
straight-line or effective-interest amortization is used.
d. interest expense equals the cash payment for interest if a bond
is sold at par.
e. interest expense becomes a larger dollar amount over time when
a bond is sold at a discount and effective-interest
amortization is used.
L.O.: 3
Type: Difficult
239
Solution: a
136. Tecumseh Company was ready to sell 8 year, 10% bonds at a face
value of $2,000,000 on January 1, 20X6. Because of delays and
market conditions, the bonds were not sold until March 1, 20X6.
The bonds pay interest every June 30 and December 31. The bonds
were sold at par plus accrued interest. What are the necessary
journal entries for Tecumseh Company on March 1, 20X6, and June
30, 20X6?
March 1, 20X6
June 30, 20X6
a.
b.
c.
d.
e.
Cash
2,033,333
Bonds Payable
2,000,000
Interest Payable
33,333
Cash
2,033,333
Bonds Payable
2,000,000
Interest Revenue
33,333
Cash
2,033,333
Bonds Payable
2,000,000
Premium on Bond
Payable
33,333
Cash
2,033,333
Bonds Payable
2,000,000
Premium on Bond
Payable
33,333
Cash
1,066,667
Bonds Payable
2,000,000
Interest Payable
66,667
L.O.: 3
Interest Payable
Interest Expense
Cash
Interest Expense
Cash
Interest Expense
Premium on Bond
Payable
Cash
Interest Expense
Premium on Bond
Payable
Cash
Interest Payable
Interest Expense
Cash
Type: Moderate
33,333
66,667
100,000
100,000
100,000
97,917
2,083
100,000
66,667
33,333
100,000
66,667
133,333
200,000
Solution: a
137. Leases have all of the following attributes except:
a. The lessee would always recognize the liability associated with
future cash payments but never an asset associated with the
property being leased.
b. Leases can take the form of a capital lease or an operating
lease.
c. Some leases are substantially equivalent to purchases.
d. A lease contract creates property rights and financial
obligations.
e. Almost any asset could be leased.
L.O.: 4
Type: Moderate
Solution: a
138. Yeager Flying leased a building for two years, effective May 1,
20X5. The lease was considered an operating lease. The lease
required that Yeager Flying make payments of $4,000 every 3
months, beginning on July 31, 20X5. Assume an interest rate of
12%. What is the journal entry to be made by Yeager Flying on July
31, 20X5?
a.
Rent Expense
4,000
Cash
4,000
b.
Interest Expense
120
Rent Expense
3,880
Cash
4,000
c.
Interest Expense
120
Lease Obligation
3,880
240
d.
e.
Cash
Interest Expense
Lease Obligation
Cash
Interest Expense
Rent Expense
Cash
L.O.: 4
4,000
842
3,158
4,000
842
3,158
4,000
Type: Moderate
Solution: a
Table 9-5
Glendo Company entered into a lease agreement on January 1, 20X4, to
acquire a machine. The machine has a useful life of six years.
Glendo Company will make annual lease payments of $13,000 for six
years, beginning on December 31, 20X4. Assume a 14% interest rate.
139. Referring to Table 9-5 and using the present value tables, what
journal entry will Glendo Company make on January 1, 20X4?
a.
Machine Leasehold
50,553
Capital Lease Liability
50,553
b.
Machine Leasehold
78,000
Capital Lease Liability
78,000
c.
Machine Leasehold
50,553
Deferred Interest Expense
27,447
Capital Lease Obligation
78,000
d.
Machine Leasehold
78,000
Interest Payable
27,447
Capital Lease Liability
50,553
e.
no journal entry is necessary
L.O.: 4
Type: Moderate
Solution: a
140. Referring to Table 9-5 and using the present value tables, what is
the journal entry to be made by Glendo Company on December 31,
20X5, to amortize the leased asset, assuming straight-line
amortization is used?
a.
No journal entry is necessary.
b.
Leasehold Amortization Expense
4,575
Machine Leasehold
4,575
c.
Leasehold Amortization Expense
8,426
Machine Leasehold
8,426
d.
Leasehold Amortization Expense 13,000
Machine Leasehold
13,000
e.
Leasehold Amortization Expense 13,000
Capital Lease Liability
13,000
L.O.: 4
Type: Moderate
Solution: c
141. Referring to Table 9-5 and using the present value tables, what is
the journal entry to be made Glendo Company on December 31, 20X4,
to record the annual lease payment?
a.
Rent Expense
13,000
Cash
13,000
b.
Capital Lease Obligation
13,000
Cash
13,000
c.
Capital Lease Obligation
2,080
241
d.
e.
Interest Expense
Cash
Capital Lease Obligation
Interest Expense
Cash
Capital Lease Obligation
Interest Expense
Cash
L.O.: 4
10,920
13,000
5,923
7,077
13,000
11,180
1,820
13,000
Type: Moderate
Solution: d
142. Which of the following is not one of the conditions for a capital
lease?
a. An expensive purchase option is available to the lessee at the
end of the lease
b. The lease term equals or exceeds 75% of the estimated economic
life of the property
c. Title is transferred to the lessee by the end of the lease
d. The present value of the lease payments is at least 90% of the
leased asset's fair value at the start of the lease term
L.O.: 4
Type: Moderate
Solution: a
143. A lease that should be accounted for by the lessee as ordinary
rent expense is:
a. a financing lease
b. a capital lease
c. an operating lease
d. an accounting lease
e. a sale-leaseback
L.O.: 4
Type: Moderate
Solution: c
144. All of the following would qualify as a capital lease except:
a. the lease term is 80% of the asset's estimated useful life
b. the lease agreement contains a bargain purchase option
c. the present value of the lease payments equals 70% of the
market value of the leased asset
d. title to the leased asset transfers to the lessee at the end of
the lease term
L.O.: 4
Type: Moderate
Solution: c
145. Accounting for postretirement benefits requires:
a. the use of present value to compute a dollar amount
b. a "pay as you go" system with no liability on the balance sheet
until employees retire
c. a liability to be recorded as the benefit is earned
d. all of the above
e. a and c
L.O.: 5
Type: Moderate
146. Postretirement benefits:
242
Solution: e
a. requires estimated life expectancy, future ages at retirement,
and future payments to retirees.
b. are mandated by the U.S. government for all employees and
companies.
c. are optional but payments must be made to an independent
trustee.
d. are contra-liability account.
e. are accumulated as an asset.
L.O.: 5
Type: Moderate
Solution: a
147. Defined contribution pension plans
a. require estimated life expectancy, future ages at retirement,
and future payments to retirees
b. are mandated by the U.S. government for all employees and
companies
c. are optional but payments must be made to an independent
trustee
d. are a contra account.
e. must be recognized as a liability under accrual accounting.
L.O.: 5
Type: Moderate
Solution: a
148. A deferred income tax liability:
a. arises because of differences between U.S. income tax rules and
foreign income tax rules
b. can arise because of "permanent" and "transitory" differences
c. arise because managers wish to maximize taxable income and
minimize income for financial reporting
d. can arise when a firm uses special accelerated depreciation for
tax purposes while using straight-line depreciation for
financial reporting
e. occurs when the company has a NOL (net operating loss).
L.O.: 6
Type: Moderate
Solution: d
149. If timing differences arise, generally accepted accounting
principles require:
a. that the amount actually paid to the government each year be
reported as tax expense
b. that tax expense be reported as the tax that would have been
paid if the pretax income used for shareholder reporting had
also been reported to the tax authorities
c. that a company ignore the differences
d. that the company pay a flat rate of 40%
e. that the company change its financial accounting procedures to
agree with those required by tax law
L.O.: 6
Type: Moderate
Solution: b
150. Which of the following statements regarding temporary differences
is false?
a. Temporary differences can result in deferred liabilities and
deferred assets.
243
b. Deferred tax liabilities are found on the balance sheets of
nearly every company.
c. For most companies, the primary source of deferred taxes is
timing differences related to depreciation.
d. 60% of countries surveyed require the use of deferred taxes
when financial reporting of expenses differ from the timing of
reporting corresponding tax deductions.
e. Temporary differences result in the cancellation of taxes.
L.O.: 6
Type: Moderate
Solution: e
151. A contingent liability:
a. is a potential liability that depends on a future event arising
out of a past transaction
b. can always be calculated with great precision (i.e., always has
a definite amount)
c. include liabilities for warranty repairs
d. must be disclosed in the body of the financial statements,
including the expected dollar amount
e. is not of interest to readers of financial statements
L.O.: 6
Type: Moderate
Solution: a
152. An
a.
b.
c.
d.
example of a contingent liability is:
a bond that can be converted into common stock
any interest-bearing liability
a bond that was not sold at par
the unrealized loss from the reduction in the market price of a
long-term liability
e. a lawsuit being filed against a company
L.O.: 6
Type: Moderate
Solution: e
Table 9-6
Conley Company manufactures and sells energy efficient windows and doors.
Because of good styling and marketing, sales have grown briskly. Conley has
no pre-existing deferred tax liability. During 20X4, the following
transactions occurred:
1. On January 1, 20,000 new shares of common stock were sold at $100
per share.
2. Half of the proceeds from the stock sale were immediately
invested in tax-free bonds yielding 8% per annum. The bonds were
held throughout the year, resulting in interest revenue of
$1,000,000 X .08 = $80,000.
3. Sales for the year were $9,000,000, with expenses of $4,300,000
reported under GAAP (not including income tax expense).
4. Tax depreciation exceeded depreciation included in item 3 above
by $500,000.
5. For financial reporting purposes, warranty costs are calculated
at 2% of sales, and the resulting $180,000 is included in the
$4,300,000 of expenses. Actual expenditures under warranty were
$95,000. The difference is $85,000.
153. Referring to Table 9-6, calculate earnings before tax for
shareholder reporting.
a. $4,780,000
244
b.
c.
d.
e.
$4,700,000
$4,500,000
$6,780,000
$6,200,000
L.O.: 6
Type: Difficult
Solution: a
154. Referring to Table 9-6, what would Conley report as income tax
payable to the tax authorities assuming a 40% tax rate?
a. $1,880,000
b. $1,680,000
c. $1,714,000
d. $2,680,000
e. $2,480,000
L.O.: 6
Type: Difficult
Solution: c
155. Referring to Table 9-6, what would Conley report as income tax
expense for shareholder reporting using a 40% tax rate?
a. $1,912,000
b. $1,880,000
c. $1,800,000
d. $1,897,000
e. $1,865,000
L.O.: 6
Type: Difficult
Solution: b
156. Referring to Table 9-6, what journal entry would Conley
a.
Deferred Tax Asset
34,000
Income Tax Expense
1,880,000
Income Tax Payable
Deferred Tax Liability
b.
Income Tax Expense
1,912,000
Income Tax Payable
Deferred Tax Liability
c.
Income Tax Expense
1,800,000
Income Tax Payable
Deferred Tax Liability
d.
Income Tax Payable
1,714,000
Deferred Tax Liability
151,000
Income Tax Expense
e.
Income Tax Payable
1,880,000
Deferred Tax Liability
32,000
Income Tax Expense
L.O.: 6
Type: Difficult
make?
1,714,000
200,000
1,880,000
32,000
1,714,000
86,000
1,865,000
1,912,000
Solution: a
157. Referring to Table 9-6, the total amount of the permanent
difference is:
a. $-0b. $80,000
c. $500,000
d. $85,000
e. $580,000
245
L.O.: 6
Type: Difficult
Solution: b
158. Debt ratios:
a. are used to measure the extent to which a company has issued
stock to finance its activities
b. indicate that the more the equity and the less the borrowing,
the riskier it is to lend stockholders’ money to a firm
c. include the debt-to-equity ratio
d. are not very useful and, thus, are not often calculated
e. do not vary between firms in the same industry
L.O.: 7
Type: Moderate
Solution: c
159. The interest-coverage ratio is calculated by dividing pretax
income plus interest expense by:
a. total shareholders' equity
b. total shareholders' equity and long-term debt
c. total assets
d. interest expense
e. total current assets
L.O.: 7
Type: Moderate
Solution: d
Table 9-7
Given below is the balance sheet at December 31, 20X4 and income
statement for the year ended, December 31, 20X4 for Ziegler Company:
Ziegler Company
Balance Sheet
December 31, 20X4
Current Assets:
Cash
Accounts Receivable
Inventory
Total Current Assets
$ 6,000
4,000
14,000
24,000
Long-term Assets:
Fixed Assets
Accumulated Depr.
Net Fixed Assets
Total Assets
$60,000
(17,000)
43,000
$67,000
Current Liabilities:
Accounts Payable
Wages Payable
Total Current Liabilities
Long-term Bond Payable
Total Liabilities
Stockholders' Equity:
Common Stock
Retained Earnings
Total Stockholders' Equity
Total Liabilities & Equity
Ziegler Company
Income Statement
For The Year Ended December 31, 20X4
Sales
Cost of Goods Sold
Gross Profit
Operating Expenses
Operating Income
Interest Expense
Income before Taxes
$240,000
103,000
$137,000
82,000
$ 55,000
2,000
$ 53,000
246
$ 3,000
2,000
$ 5,000
24,000
$29,000
$12,000
26,000
38,000
$67,000
Income Tax Expense
Net Income
27,000
$ 26,000
160. Referring to Table 9-7, the debt-to-equity ratio for Ziegler
Company at December 31, 20X4, is:
a. 43.28%
b. 63.16%
c. 76.32%
d. 92.31%
e. 111.54%
L.O.: 7
Type: Moderate
Solution: c
161. Referring to Table 9-7, the long-term-debt-to-total-capital ratio
for Ziegler Company at December 31, 20X4, is:
a. 35.82%
b. 38.71%
c. 63.16%
d. 92.31%
e. 200.00%
L.O.: 7
Type: Moderate
Solution: b
162. Referring to Table 9-7, the debt-to-total-assets ratio for Ziegler
Company at December 31, 20X4, is:
a. 7.46%
b. 35.82%
c. 43.28%
d. 100.00%
e. 231.03%
L.O.: 7
Type: Moderate
Solution: c
163. Referring to Table 9-7, the interest-coverage ratio for Ziegler
Company at December 31, 20X4, is:
a. 8.33
b. 0.25
c. 14.00
d. 27.50
e. 28.50
L.O.: 7
Type: Moderate
Solution: d
164. The ______________ is calculated by dividing total liabilities by
total shareholders' equity.
a. debt-to-equity ratio
b. long-term-debt-to-total capital ratio
c. debt-to-total-assets ratio
d. interest-coverage ratio
e. current ratio
L.O.: 7
Type: Easy
247
Solution: a
165. The _______________ is calculated by dividing interest expense
into the sum of pretax income and interest expense.
a. debt-to-equity ratio
b. long-term-debt-to-total capital ratio
c. debt-to-total-assets ratio
d. interest-coverage ratio
e. current ratio
L.O.: 7
Type: Easy
Solution: d
166. An amount that is calculated by multiplying an interest rate by a
principal amount that is increased each interest period by the
previously accumulated interest is known as:
a. interest
b. simple interest
c. compound interest
d. nominal interest rate
e. stated interest
L.O.: 8
Type: Easy
Solution: c
167. What is the present value of $2,000 with 16% interest, to be
received in 18 years?
a. $161.61
b. $150.30
c. $155.83
d. $148.48
e. $138.20
L.O.: 8
Type: Moderate
Solution: e
168. A series of equal cash flows to take place at the end of
successive periods of equal length is called:
a. rate of return
b. an ordinary annuity
c. a serial note
d. a deferred annuity
e. a perpetuity or consul
L.O.: 8
Type: Moderate
Solution: b
169. Susie buys a note from a municipality that promises to pay $1,500
at the end of each of three years. How much should Susie pay for
the note if she desires a rate of return of 8%, compounded
annually.
a. $4,000
b. $3,866
c. $3,905
d. $3,950
e. $3,750
L.O.: 8
Type: Moderate
248
Solution: b
170. If Tome deposits $9,000 in an account that pays 10% yearly
interest, compounded annually, how much will he have in the
account at the end of three years?
a. $8,990
b. $9,750
c. $10,909
d. $11,979
e. $12,500
L.O.: 8
Type: Moderate
Solution: d
171. The amount accumulated, including principal and interest is the
_____________.
a. future value
b. annuity value
c. present value
d. rate of return
e. accumulated full value
L.O.: 8
Type: Easy
Solution: a
172. The value today of a future cash inflow or outflow is the
_____________.
a. present value
b. annuity value
c. future value
d. rate of return
e. estimated return
L.O.: 8
Type: Easy
Solution: a
Problems
173. Cavern’s Tourist Trap is located in a state where the sales tax is
7 1/2%. Total sales for the month of June were $81,000, all of
which were subject to sales tax.
a. Prepare a journal entry that summarizes sales (all in cash) for
the month.
b. Prepare a journal entry regarding the disbursement for the sales
tax.
L.O.: 1
Type: Easy
a. Cash
Sales Revenue
Sales Tax Payable
b. Sales Tax Payable
Cash
Solution:
87,075
81,000
6,075
6,075
6,075
249
174. At the beginning of 20X4, Computers R Us had a liability for
warranties of $17,500 on the books. During 20X4, Computers R Us
had sales of $205,000. The company estimates that the cost of
servicing products under warranty will average 2.5% of sales.
Expenditures (all in cash) to satisfy warranty claims during 20X4
were $4,800, of which $2,500 was for products sold in 20X4.
a. Prepare the journal entries for sales revenue and the related
warranty expense for 20X4. Assume all sales are for cash.
b. Prepare the journal entry for the warranty expenditures.
c. Compute the December 31, 20X4, ending balance in the Liability
for Warranties account.
L.O.: 1
Type: Moderate
a. Cash
Sales Revenue
Warranty Expense
Liability for Warranties
b. Liability for Warranties
Cash
c. Beginning balance
Additions for 20X4 sales
Reductions for services provided
250
Solution:
205,000
205,000
5,125
5,125
4,800
4,800
$17,500
5,125
(4,800)
$17,825
175. For the week ended September 12, Alarm Company had a total payroll
of $183,000. Three items are withheld from employee's paychecks:
(1) social security (FICA) tax of 7.1% of payroll; (2) income
taxes, which average 20% of the payroll; and (3) employees'
savings that are deposited in their credit union, which are
$12,020. In addition, Alarm Company pays (1) social security tax
equal to the amount withheld from employees, (2) health insurance
premiums of $12,750, and (3) contributions to the employees'
pension fund of $17,000.
Prepare the journal entries to record the compensation expense and
the employee benefit expense.
L.O.: 1
Type: Moderate
Solution:
Compensation Expense
183,000
Salaries & Wages Payable
Social Security Withholding Payable
Income Tax Withholding Payable
Credit Union Withholding Payable
Employee Benefit Expense
Employer Social Security Payable
Health Insurance Premium Payable
Pension Liability Payable
251
121,387
12,993
36,600
12,020
42,743
12,993
12,750
17,000
176. Wallace Manufacturing had the following items on its December 31,
20X4, balance sheet:
Cash and cash equivalents
$56,230
Accounts payable
96,640
Inventories
60,790
Additional paid-in capital
51,690
Accrued liabilities and expenses
94,100
Payments due within one year on long-term debt
35,380
Short-term debt
39,030
Long-term debt
97,290
Required:
Prepare the current liabilities section of Wallace Manufacturing's
balance sheet.
L.O.: 1
Type: Moderate
Current Liabilities:
Accounts payable
Accrued liabilities and expenses
Payments due within one year on long-term debt
Short term debt
Total current liabilities
252
Solution:
$ 96,640
94,100
35,380
39,030
$265,150
177. On January 1, 20X4, Petal Maker issued $5 million of 5 year, 9%
debentures at par which are dated as of January 1, 20X4.
Prepare the journal entries to record the:
(a) issuance of the bonds
(b) the first semi-annual interest payment
(c) the payment of maturity value
L.O.: 3
a. Cash
Bonds Payable
b. Interest Expense
Cash
c. Bonds Payable
Cash
Type: Moderate
Solution:
5,000,000
5,000,000
225,000
225,000
5,000,000
5,000,000
253
178. Watson Company had a 6-year, 8%, $375,000 bonds ready to be sold
on January 1, 20X4. The bonds will pay interest every June 30 and
December 31. However, due to market conditions, the company did
not sell the bonds until March 1, 20X4, at which time the bonds
was issued at par.
Given the information presented above, prepare the appropriate
journal entry for Watson Company for each of the following dates:
a. January 1, 20X4
b. March 1, 20X4
c. June 30, 20X4
d. December 31, 20X4
L.O.: 3
Type: Moderate
a. No journal entry is necessary.
b. Cash
380,000
Interest Payable
Bonds Payable
c. Interest Payable
5,000
Interest Expense
10,000
Cash
d. Interest Expense
15,000
Cash
254
Solution:
5,000
375,000
15,000
15,000
179. Pyramid Company issued a two-year, $150,000, 14% debenture on
January 1, 20X4 which are dated as of January 1, 20X4. The bond
will pay interest every June 30 and December 31, with the
principal to be paid on December 31, 20X5. The effective interest
rate on the bond is 10%, and the company uses effective-interest
amortization.
Given this information and using the present value tables:
a. determine the selling price for the bond.
b. provide the journal entry on January 1, 20X4.
L.O.: 3
Type: Moderate
Solution:
a. 150,000 x .8227 =
$123,405
10,500 x 3.5460 =
37,233
(n=4, i=5)
$160,638
b. Cash
Premium on Bond Payable
Bond Payable
160,638
10,638
150,000
255
180. Leisure Time issued a 12-year, 10%, $1,500,000 bond on January 1,
20X5 which are dated as of January 1, 20X5. The bond pays interest
every June 30 and December 31, with the principal to be paid at
the end of 12 years. The effective interest rate on the bond is
12%. The company uses effective-interest amortization.
Given this information and using the present value tables:
a. Prepare journal entries for Leisure Time on each of the
following dates:
1) January 1, 20X5
2) June 30, 20X5
3) December 31, 20X5
b. What is the total interest expense for the year ended December
31, 20X5?
c. What is the balance sheet presentation of this bond for Leisure
Time at December 31, 20X5?
L.O.: 3
Type: Difficult
a. Issue price: 1,500,000 x .2470 =
75,000 x 12.5504
=
(n=24,i=6)
1) Cash
Discount on Bonds Payable
Bond Payable
2) Interest Expense
Discount on Bond Payable
Cash
3) Interest Expense
Discount on Bond Payable
Cash
b. Interest expense:
June 30, 20X5
December 31, 20X5
c. Bonds Payable
Dis. on Bond Payable
Solution:
$ 370,500
941,280
$1,311,780
1,311,780
188,220
1,500,000
78,707
3,707
75,000
78,929
3,929
75,000
$ 78,707
78,929
$157,636
$1,500,000
(180,584)
$1,319,416
256
181. Blue Inc issued $1,000,000 of 6.5%, 8-year bonds dated June 1,
20X5, with semiannual interest payments on June 1 and December 1.
The bonds were issued on June 1, 20X5, at 103 3/8.
a. Were the bonds issued at a premium, a discount, or at face
value?
b. Was the market rate of interest higher, lower, or the same as
the coupon rate of interest?
c. How much cash was received by Blue Inc upon issuance of the
bonds?
L.O.: 3
Type: Moderate
Solution:
a. The bonds were issued at a premium.
b. The market rate of interest was lower than 6.5% since the bonds
were issued above face value.
c. $1,000,000 X 1.03375 = $1,033,750
257
182. On January 1, 20X4, Crawford Company issued $5,000,000 of 9%, 10year bonds dated January 1, 20X4, with annual interest payments on
December 31. The bonds were issued for $4,692,570 yielding an
effective interest rate of 10%. Crawford uses the effectiveinterest method of amortization.
a. Prepare the necessary journal entries to record the issuance of
the bonds and the first interest payment.
b. Determine the ending net liability of the bonds on December 31,
20X4.
L.O.: 3
a.
Jan.
1
Dec. 31
Type: Moderate
Cash
Discount on Bonds Payable
Bonds Payable
Interest Expense
Discount on Bonds Payable
Cash
Solution:
4,692,570
307,430
5,000,000
469,257
b. $5,000,000 - $307,430 + $19,257 = $4,711,827
258
19,257
450,000
183. Croy Enterprises issued 9-year, 8%, $750,000 bonds on January 1,
20X5. The bonds pay interest every June 30 and December 31, with
the principal to be paid in 9 years. The effective interest rate
on the bonds is 10%, and the company uses the effective-interest
method of amortization.
a. Compute the initial selling price of the bonds on January 1,
20X5.
b. Prepare the entry needed on June 30, 20X5.
L.O.: 3
Type: Difficult
Solution:
a. The initial selling price of the bond:
$750,000 x .4155 = $311,625
$ 30,000 x 11.6896 = 350,688
(n=18,i=5)
$662,313
b. Interest Expense
33,116
Cash
Discount on Bonds Payable
259
30,000
3,116
184. Mann Company purchased a $25,000 truck on January 1, 20X4. The
company paid $5,000 and will pay the remaining $20,000 with a 4year note. The note requires that the company make 4 equal annual
payments starting on December 31, 20X4. The note charges 10%
interest. Given this information and using present value tables,
complete the following chart.
Year
Beginning
note payable
20X4
20X5
20X6
20X7
$20,000
Interest
expense
L.O.: 3
End of year
cash
payment
Reduction of
principal
Type: Difficult
End of year note
payable balance
Solution:
Year
Beginning
note payable
Interest
expense
End of year
cash payment
Reduction of
principal
End of year note
payable balance
20X4
20X5
20X6
20X7
$20,000.00
$15,690.65
$10,950.37
$ 5,736.06
$2,000.00
$1,569.07
$1,095.04
$ 573.61
$6,309.35
$6,309.35
$6,309.35
$6,309.35
$4,309.35
$4,740.28
$5,214.31
$5,735.74
$15,690.65
$10,950.37
$ 5,736.06
$
.32*
*$.32 rounding error
260
185. Hammond Corporation signs an agreement on January 1, 20X5, to
lease office equipment for a 5-year period. The estimated useful
life of the office equipment is 8 years. The market value of the
office equipment is $235,000. The lease agreement calls for lease
payments of $55,040. The first payment is due on December 31,
20X5, all subsequent payments are made each December 31
thereafter. The interest rate stated in the lease agreement is
8%. The present value of the lease payments is $219,758. At the
end of the lease term, the equipment reverts back to the lessor.
Prepare journal entries to record:
a. the lease agreement on January 1, 20X5
b. the first lease payment on December 31, 20X5
c. the amortization of the leased asset on December 31, 20X5
L.O.: 4
a.
Jan.
1
b.
Dec. 31
c.
Dec. 31
Type: Difficult
Equipment Leasehold
Capital Lease Liability
Solution:
219,758
219,758
Interest Expense
Capital Lease Liability
Cash
17,581
37,459
Leasehold Amortization Expense
Equipment Leasehold
43,952
261
55,040
43,952
186. Greely’s 20X4 income statement included the
following:
Profit on ordinary activities before taxation
Tax on profit on ordinary activities
Profit on ordinary activities after taxation
$299,000
89,625
$209,375
As a result of 20X4 operations, the deferred tax liability account
increased by $12,000.
a. Compute taxes paid to the government in 20X4.
b. Prepare the journal entry to record taxes on ordinary income
for
20X4.
L.O.: 6
Type: Moderate
a. Tax per GAAP
Increase in liability
Taxes paid
Solution:
$89,625
(12,000)
$77,625
b. Income Tax Expense
Deferred Tax Liability
Cash (or Income Tax Payable)
262
89,625
12,000
77,625
187. Given below are the balance sheet at December 31, 20X4 and income
statement of Greenwood Company for the year ended, December 31,
20X4. Determine the following:
(a) the debt-to-equity ratio
(b) long term debt-to-total-capital ratio
(c) debt-to-total-assets ratio
(d) the interest-coverage ratio.
Greenwood Company
Balance Sheet
December 31, 20X4
Current Assets:
Cash
Accounts Receivable
Inventory
Total
Fixed Assets
Less: Accum. Depr.
Fixed Assets, net
$ 3,300
5,900
11,100
$20,300
$59,300
(13,800)
45,500
_______
Total Assets
$65,800
Current Liabilities:
Accounts Payable
$ 4,900
Interest Payable
1,500
Wages Payable
2,100
Total Current Liabilities $ 8,500
Long-term Bond Payable
35,000
Total Liabilities
$43,500
Stockholders’ Equity:
Common Stock
$12,000
Retained Earnings 10,300
22,300
Total Liabilities
& Stockholders’Equity
$65,800
Greenwood Company
Income Statement
For The Year Ended December 31, 20X4
Sales
Cost of Goods Sold
Gross Profit
Operating expenses
Operating income
Interest expense
Income before taxes
Income tax expense
Net Income
L.O.: 7
$94,000
51,000
$43,000
35,000
$ 8,000
3,000
$ 5,000
2,300
$ 2,700
Type: Moderate
Solution:
a. Debt-to-equity ratio is $43,500/$22,300 = 195%
b. Long-term debt-to-total-capital ratio is $35,000/($22,300 +
$35,000) = 61.08%
c. Debt-to-total-assets ratio is $43,500/$65,800 = 66.1%
d. Interest-coverage ratio is ($5,000 + $3,000)/$3,000 = 2.67
263
188. Solve each of the following independent cases using the present
value tables:
The following actual contracts signed by athletes:
a. $25,000,000 contract, payable at $2,500,000 per year for 10
years.
b. $25,000,000 contract, payable at $1,000,000 per year for 25
years.
c. $25,000,000 contract, payable at $1,562,500 per year for 16
years.
Determine the present value of each contract and indicate which
contract you would prefer to have. Assume a 12% interest rate.
L.O.: 8
Type: Moderate
a. $2,500,000 x 5.6502 = $14,125,500
b. $1,000,000 x 7.8431 = $7,843,100
c. $1,562,500 x 6.9740 = $10,896,875
264
Solution:
This contract is preferred.
Essays
189. What is the relation between market interest rate and bond
issuance price? Include descriptions of bond discount and premium
in your explanation.
L.O.: 2
Type: Moderate
Solution:
The bond issuance price is inversely related to the market
interest rate. If the market rate exceeds (is below) the coupon
rate, then the amount that the issuance price is below (above) the
face value is a bond discount (premium).
190. Decide whether each of the following lease agreements should be
recorded as a capital lease or an operating lease:
a. The present value of the lease payments is 75% of the fair
value of the leased asset at the start of the lease. The lease
term is for 6 years; the estimated useful life of the leased
asset is for 10 years. There is a bargain purchase agreement
for the lessee to purchase the leased asset at well below fair
value at the end of the lease term.
b. The present value of the lease payments is 90% of the fair
value of the leased asset the start of the lease. The lease
term is for 2 years; the estimated useful life of the leased
asset is 10 years. The leased asset reverts back to the lessor
at the end of the lease.
c. The lease transfers ownership of the leased asset to the lessee
at the end of the lease. The present value of the lease
payments is 75% of the fair value of the leased asset the start
of the lease. The lease term is for 3 years; the estimated
useful life of the leased asset is 10 years.
d. The lease agreement doesn't contain a bargain purchase
agreement. The leased asset reverts back to the lessor at the
end of the lease agreement. The present value of the lease
payments is 85% of the fair value of the leased asset the start
of the lease. The lease term is for 10 years; the estimated
useful life of the leased asset is 15 years.
L.O.: 4
a.
b.
c.
d.
Type: Moderate
capital
capital
capital
operating
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Solution:
191. Define a contingent liability and give an example.
reported on the balance sheet?
L.O.: 6
Type: Moderate
How are they
Solution:
A contingent liability is a potential liability that depends on a
future event arising out of a past transaction. Sometimes, it has
a definite amount; more often it does not. Examples of contingent
liabilities include a guarantee of another company's note payable
and lawsuits. Contingent liabilities are often listed on the
balance sheet after long-term liabilities but before stockholders'
equity. Lawsuits, which are undecided, are subject to footnote
disclosure.
192. Define a "restructuring", give two examples, and explain the
liabilities that may result from such an activity.
L.O.: 6
Type: Moderate
Solution:
A restructuring is a significant makeover of part of a company.
Examples include the closing of one or more plants, firing of a
significant number of employees, and the termination or relocation
of various activities. Liabilities result because losses should be
recognized as soon as the restructuring is announced, even though
the losses or cash outflows have not yet occurred. Typical
liabilities resulting from restructurings include liabilities for
leases and employee terminations.
266