VILLANOVA UNIVERSITY
School of Business
VSB 2010-4
Accounting Exam (Chapters 5,10,11)
NAME______________________
Row ____
As a community committed to the Augustinian ideals of truth, unity and love, Villanova
University prides itself on maintaining the highest standards of academic integrity and
does not tolerate any forms of academic dishonesty or misconduct. Accordingly, each
student who takes an examination is expected to sign the following statement:
I _______________________(sign your name) have not had any unsanctioned prior
access to this examination and will conduct myself in an honest manner in regard to all
aspects of this examination.
PART 1 – MULTIPLE CHOICE
1. Which statement is incorrect?
A) Periodic inventory systems provide better control over inventories than
perpetual inventory systems.
B) Computers and electronic scanners allow more companies to use a perpetual
inventory system.
C) Freight-in is debited to merchandise inventory when a perpetual inventory
system is used.
D) Regardless of the inventory system that is used, companies should take a
physical inventory count.
2. A buyer borrows money at 12% interest to pay a $4,000 invoice with terms 1/10,
n/30 on the 10th day of the discount period. The loan is repaid on the 30th day of
the invoice. What is the buyer's net savings for this total event?
A) $0
B) $13.33
C) $13.60
D) $26.67
3. Tony's Market recorded the following events involving a recent purchase of
merchandise:
Received goods for $20,000, terms 2/10, n/30.
Returned $400 of the shipment for credit.
Paid $100 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company's merchandise inventory
A) increased by $19,208.
B) increased by $19,700.
C) increased by $19,306.
D) increased by $19,308.
Page 1
4. Financial information is presented below:
Operating Expenses
$
Sales Returns and Allowances
Sales
Cost of Goods Sold
45,000
19,000
150,000
67,000
The gross profit rate would be
A) .535.
B) .489.
C) .511.
D) .553.
5. Financial information is presented below:
Operating Expenses
$ 45,000
Sales Returns and Allowances 19,000
Sales
150,000
Cost of Goods Sold
67,000
The profit margin ratio would be
A) .127.
B) .132.
C) .139.
D) .145.
6. Which of the following statements is true regarding the profit margin ratio?
A) The profit margin ratio can be improved by decreasing the gross profit rate
and/or controlling operating expenses and other costs
B) The profit margin ratio does not vary across industries.
C) Discount stores with high merchandise turnover generally have higher profit
margins.
D) If the profit margin ratio has a higher value, this suggests favorable return on
each dollar of sales.
7. Stockholders of a company may be reluctant to finance expansion through
issuing more equity because
A) leveraging with debt is always a better idea)
B) their earnings per share may decrease.
C) the price of the stock will automatically decrease.
D) dividends must be paid on a periodic basis.
8. If bonds are issued at a premium, the stated interest rate is
A) higher than the market rate of interest.
B) lower than the market rate of interest.
C) too low to attract investors.
D) adjusted to a higher rate of interest.
Page 2
9. A $600,000 bond was retired at 98 when the carrying value of the bond was
$592,000. The entry to record the retirement would include a
A) gain on bond redemption of $8,000.
B) loss on bond redemption of $4,000.
C) loss on bond redemption of $8,000.
D) gain on bond redemption of $4,000.
10. All of the following are true regarding financial statement analysis ratios
associated with liabilities except
A) a high times interest earned ratio indicates that a company is more likely to
meet interest payments as schedule.
B) high liquidity ratios mean that lines of credit should be high to compensate.
C) if a company's current ratio is lower than the industry average, then it may
lack liquidity.
D) unrecorded obligations causing sizeable differences between liquidity and
solvency ratios can be ignored.
11. In a recent year Garvey Corporation had net income of $130,000, interest
expense of $20,000, and tax expense of $30,000. What was Garvey
Corporation's times interest earned ratio for the year?
A) 6.50.
B) 7.50.
C) 8.00.
D) 9.00.
12. The adjusted trial balance for Hamilton Corp. at the end of the current year, 2010,
contained the following accounts.
5-year Bonds Payable 8%
Bond Interest Payable
Premium on Bonds Payable
Notes Payable (3 mo.)
Notes Payable (5 yr.)
Mortgage Payable ($15,000 due
currently)
Salaries Payable
Taxes Payable (due 3/15 of next yr)
$1,000,000
50,000
100,000
40,000
165,000
200,000
18,000
25,000
The total long-term liabilities reported on the balance sheet are
A) $1,365,000
B) $1,350,000
C) $1,465,000
D) $1,450,000
Page 3
13. Parker Company issued ten-year, 9%, bonds payable in 2010 at a premium.
During 2010, the company's accountant failed to amortize any of the bond
premium. The omission of the premium amortization will
A) not affect net income for 2010.
B) cause retained earnings at the end of 2010 to be overstated.
C) cause net income for 2010 to be overstated.
D) cause net income for 2010 to be understated.
14. If Norben Company issues 2,000 shares of $5 par value common stock for
$140,000, the account
A) Common Stock will be credited for $140,000.
B) Paid-in Capital in Excess of Par Value will be credited for $10,000.
C) Paid-in Capital in Excess of Par Value will be credited for $130,000.
D) Cash will be debited for $130,000.
15. The following data is available for BOX Corporation at December 31, 2010:
Common stock, par $10 (authorized 15,000 shares) $100,000
Treasury Stock (at cost $15 per share)
$
600
Based on the data, how many shares of common stock are outstanding?
A) 15,000.
B) 10,000.
C) 14,960.
D) 9,960.
16. Indicate the respective effects of the declaration of a cash dividend on the
following balance sheet sections:
A)
B)
C)
D)
Total Assets
Increase
No change
Decrease
Decrease
Total Liabilities
Decrease
Increase
Increase
No change
Total Stockholders' Equity
No change
Decrease
Decrease
Increase
17. All of the following statements regarding retained earnings are true except
A) retained earnings represents a claim on cash.
B) a debit balance in Retained Earnings indicates a deficit.
C) some companies may restrict availability of retained earnings for dividends.
D) retained earnings is net income that a company retains in a business.
Page 4
18. Nance Corporation's December 31, 2010 balance sheet showed the following:
8% preferred stock, $20 par value, cumulative,
10,000 shares authorized; 5,000 shares issued $ 100,000
Common stock, $10 par value, 1,000,000 shares
6,500,000
authorized; 650,000 shares issued, 640,000
shares outstanding
Paid-in capital in excess of par value – preferred
20,000
stock
Paid-in capital in excess of par value – common
9,000,000
stock
Retained earnings
2,550,000
Treasury stock (10,000 shares)
210,000
Nance's total stockholders' equity was
A) $18,380,000.
B) $15,620,000.
C) $18,170,000.
D) $17,960,000.
19. The payout ratio is computed by dividing
A) total cash dividends paid by retained earnings.
B) dividends paid per share by net income.
C) total cash dividends paid by net income.
D) dividends paid per share by year-end stock price.
20. The return on common stockholders' equity is computed by dividing net income
A) by ending common stockholders' equity.
B) by average common stockholders' equity.
C) less preferred dividends by ending common stockholders' equity.
D) less preferred dividends by average common stockholders' equity.
Page 5
.
PART 2 – PROBLEMS
Problem 1-
The stockholders' equity section of Patrick Corporation's balance sheet at
December 31 is presented here:
PATRICK CORPORATION
Balance Sheet (partial)
Stockholders' equity
Paid-in capital
Preferred stock, cumulative, 10,000 shares
authorized, 6,000 shares issued and outstanding 300,000
Common stock, no par, 750,000 shares authorized,
600,000 shares issued
3,000,000
Total paid-in capital
3,300,000
Retained earnings
1,358,000
Total paid-in capital and retained earnings
4,658,000
Less: Treasury stock (6,000 common shares)
(32,000)
Total stockholders' equity
$4,626,000
Instructions
From a review of the stockholders' equity section, answer the following questions.
(a) How many shares of common stock are outstanding?
(b) Assuming there is a stated value, what is the stated value of the common
stock?
(c) What is the par value of the preferred stock?
(d) If the annual dividend on preferred stock is $18,000, what is the dividend rate
on preferred stock?
(e) If dividends of $36,000 were in arrears on preferred stock, what would be the
balance reported for retained earnings?
Problem 2-
Wynne Company issued $300,000 of 10%, 5-year bonds at 108 on January 1, 2010.
Interest is paid annually, and the effective interest method is used for amortization.
Assume that the market rate for similar investments is 8%. The bonds are issued on the
date of the bonds.
Instructions
A. Complete the amortization schedule on the answer sheet. Dollar signs ($) appear
where amounts should be shown.
B. Record the journal entry on 1/1/2011 to record the interest payment and premium
amortization.
Page 6
. Problem 3Selected account balances from McCoy Company’s adjusted trial balance
are presented below:
Accumulated Depreciation
Accounts Receivable
Advertising Expense
Cash
Cost of Goods Sold
Depreciation Expense
Dividends Paid
Freight-out
Interest Expense
Interest Revenue
Retained Earnings
Sales Revenue
Sales Discounts
Sales Returns and Allow.
Salaries Expense
Unearned Revenue
Utilities Expense
12,000
80,000
15,000
2,500
347,000
3,500
10,000
2,000
19,000
25,000
44,000
575,000
9,500
50,000
74,000
32,000
18,000
Instructions:
Prepare a multiple-step income statement as of December 31, 2010.
(Not all of the above accounts are income statement accounts)
Page 7
Answer Sheet, Exam 2
NAME__________________________
PART 1
Multiple
Choice
1
Row ____
PROB. 1
A
600,000 – 6,000 = 594,000
2
B or C
B
3,000,000 / 600,000 = 5
3
D
C
300,000 / 6,000 = 50
4
B
D
18,000 / 300,000 = 6%
5
D
E
1,358,000. Arrearage
appears as a footnote
(4,000 x .01) – (4000 x .12 x
20/360)
(4,000 x .01) – (3,960 x .12 x
20/360)
20,000 – 400 + 100 – 392 =
19,308
(131,000 – 67,000) /
131,000
(131,000 – 67,000) – 45,000
/ 131,000
(130,000 + 20,000 + 30,000)
/ 20,000
1,000,000 + 100,000 +
165,000 + (200,000 –
15,000)
100,000 + 6,500,000
+20,000 + 9,000,000 +
2,550,000 – 210,000
6
2
7
3
8
4
9
5
10
11
11
D
12
12
D
18
13
14
15
16
17
Page 8
18
D
19
20
Problem 2Interest
Period
Interest to be Interest
paid
Expense
10%
8%
Premium
Amortization
January 1,
2010
January 1,
2011
$30,0000
$25,920
$4,080
Unamortized
Premium
Bond
Carrying
Value
$24,000
$324,000
$19,920
$319,920
Journal entry to record interest payment and premium amortization on 1/1/2011
1/1/2011
INTEREST EXPENSE
PREMIUM ON BONDS PAYABLE
INTEREST PAYABLE (OR CASH)
Page 9
Debit
25,920
4,080
Credit
30,000
Problem 3SALES REVENUE
LESS SALES R & A
LESS SALES DISC.
NET SALES
$ 575,000
9,500
50,000
59,500
515,500
COST OF GOODS SOLD
347,000
GROSS PROFIT
168,500
OPERATING EXPENSES
ADVERTISING
DEPRECIATION
FREIGHT
SALARIES
UTILITIES
TOTAL OPER. EXPENSES
15.000
3,500
2,000
74,000
18,000
112,500
INC. FROM OPERATIONS
56,000
OTHER REV. AND EXP.
INTEREST INCOME
INTEREST EXPENSE
25,000
(19,000)
INCOME BEFORE TAX
TAX
NET INCOME
6,000
62,000
12,400
49,600
Page 10
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
A
B
D
B
D
D
B
A
D
B
D
D
D
C
D
B
A
D
C
D
Solution .
(a)
Common stock outstanding is 594,000 shares. (Issued shares 600,000
less treasury shares 6,000)
(b)
The stated value of the common stock is $5 per share. (Common stock
issued $3,000,000 ÷ 600,000 shares.)
(c)
The par value of the preferred stock is $50 per share. (Preferred stock
$300,000 ÷ 6,000 shares.)
(d)
The dividend rate is 6% ($18,000 ÷ $300,000).
(e)
The Retained Earnings balance is still $1,358,000. Cumulative dividends
in arrears are only disclosed in the notes to the financial statements.
22. B
23.
Solution
a.
$324,000
($300,000 × 1.08)
b.
$30,000
($300,000 ×.10)
c.
$4,080
30,000 0 ($324,000 × .08)
d.
$25,920
($324,000 × .08)
e.
$319,920
($324,000 – $4,080)
24. Solution
1)
MCCOY COMPANY
Income Statement
For the Year Ended December 31, 2010
Page 11
Sales
Less:
$575,00
0
Sales Returns and
Allowances
Sales Discounts
$ 50,000
59,500
9,500
Net Sales
Cost of Goods Sold
Gross Profit
Operating Expenses
Store Salaries
$
74,000
Expense
Utilities Expense
18,000
Advertising Expense
15,000
Depreciation Expense
3,500
Freight-out
2,000
Total Operating Expenses
112,500
56,000
Income from
Operations
Other Revenues and
Gains
Interest Revenue
Other Expenses and
Losses
Interest Expense
Net Income
2)
515,500
347,000
168,500
25,000
19,000
Profit margin ratio = $62,000 ÷ $515,500 = 12.0%
Gross profit rate = $168,500 ÷ $515,500 = 32.7%
25. D
Page 12
6,000
$
62,000