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INSTANT DOWNLOAD COMPLETE TEST BANK WITH ANSWERS

 

 

Principles Of Accounting 12th Edition By Needles – Powers – Test Bank

 

 

Sample  Questions

 

Chapter 3: Adjusting the Accounts

Student: ___________________________________________________________________________

  1. Accounting periods of greater than a year are called interim periods.
    True    False

 

  1. If a company is expected to survive, it is considered a going concern.
    True    False

 

  1. Net income results when expenses exceed revenues.
    True    False

 

  1. When a net loss occurs, the Owner’s Capital account will contain a negative balance.
    True    False

 

  1. All increases to owner’s equity are from revenues.
    True    False

 

  1. Revenue is equal to the cash received by a company during an accounting period.
    True    False

 

  1. All decreases in owner’s equity are a result of expenses.
    True    False

 

  1. Net income can be used to assess a company’s progress in meeting the goal of profitability.
    True    False

 

  1. The primary purpose of an expense is to generate revenue.
    True    False

 

  1. Revenue is produced when accounts receivable are collected.
    True    False

 

  1. A company’s fiscal year need not correspond to the calendar year.
    True    False

 

  1. Accounting periods should be of equal length to facilitate comparisons between periods.
    True    False

 

  1. The continuity assumption states that the business will continue to operate indefinitely.
    True    False

 

  1. When preparing financial statements, the accountant assumes that the business will continue to operate for at least 5 years, unless there is evidence to the contrary.
    True    False

 

  1. The matching rule is most closely related to the cash basis of accounting.
    True    False

 

  1. In applying the matching rule, revenue recognition should come before the matching (assignment) of expense.
    True    False

 

  1. Assets are converted to revenues as they benefit the company.
    True    False

 

  1. Accrual accounting is an application of the matching rule.
    True    False

 

  1. Direct cause-and-effect relationships between revenues and costs can usually be demonstrated.
    True    False

 

  1. When there is no direct connection between revenues and costs, the costs are systematically allocated among the periods benefited.
    True    False

 

  1. The cash basis of accounting is prohibited for income tax purposes.
    True    False

 

  1. The accrual basis of accounting results in a more accurate measurement of net income for the period than does the cash basis of accounting.
    True    False

 

  1. Revenue should be recognized, even when collectibility is not reasonably assured.
    True    False

 

  1. In order for revenue to be recognized, the seller’s price to the buyer must be fixed or determinable.
    True    False

 

  1. One application of accrual accounting is adjusting the accounts.
    True    False

 

  1. The recognition of an expense does not depend on the payment of cash.
    True    False

 

  1. Accrual accounting recognizes revenues and expenses at the point that cash changes hands.
    True    False

 

  1. A deferral is the recognition of an expense that has arisen but has not yet been recorded.
    True    False

 

  1. Adjusting entries are useful in apportioning costs among two or more accounting periods.
    True    False

 

  1. An adjusting entry includes at least one balance sheet account and at least one income statement account.
    True    False

 

  1. Adjusting entries affect cash flows in the current period.
    True    False

 

  1. Recording incurred but unpaid expenses is an example of an accrual.
    True    False

 

  1. A contra account is an account whose balance is subtracted from an associated account in the financial statements.
    True    False

 

  1. Expenses that have been paid for and recorded are called accrued expenses.
    True    False

 

  1. As an asset’s depreciation is recorded, its carrying value decreases.
    True    False

 

  1. A revenue for which the service has been performed but that has not been recorded is a deferred revenue.
    True    False

 

  1. The amount of a depreciable asset’s annual depreciation expense can typically be obtained by referring to the balance sheet.
    True    False

 

  1. In accounting, depreciation refers to the decline in fair value of a plant asset.
    True    False

 

  1. Depreciation Expense–Equipment is an example of a contra account.
    True    False

 

  1. The heading of an adjusted trial balance might contain the line “For the Month Ended May 31, 20xx.”
    True    False

 

  1. Financial statements may be prepared from an adjusted trial balance.
    True    False

 

  1. An adjusted trial balance must be prepared before the adjusting entries can be recorded.
    True    False

 

  1. An adjusted trial balance proves the balance of the ledger accounts after the adjusting entries have been posted.
    True    False

 

  1. An adjusted trial balance will probably list fewer accounts than are listed in the trial balance.
    True    False

 

  1. Due to the recording of adjusting entries, the dollar amount of Cash on the trial balance is usually less than the dollar amount of Cash on the adjusted trial balance.
    True    False

 

  1. The adjusted trial balance may contain accounts that did not appear in the trial balance.
    True    False

 

  1. Net income provides a good measure of a business’s debt-paying ability.
    True    False

 

  1. Profitability is best determined from cash flow information.
    True    False

 

  1. The intentional preparation of misleading financial statements is referred to as fraudulent financial reporting.
    True    False

 

  1. Net income is misleading when revenue is overstated or expenses are understated by significant amounts.
    True    False

 

  1. When the estimates involved in earnings management begin moving outside a reasonable range, the financial statements can become misleading.True    False

 

  1. The general rule for determining the cash flow received from any revenue or paid for any expense (except depreciation, which is a special case) is to determine the potential cash payments or cash receipts and add the amount not paid or not received.True    False

 

  1. Almost every revenue or expense account on the income statement has one or more related accounts on the balance sheet.True    False

 

  1. Which of the following transactions results in the recognition of an expense?
    A. Expiration of the usefulness of equipment during the accounting period.
    B. Payment on an account payable.
    C. Withdrawal of cash by the owner.
    D. Payment on the principal portion of a loan.

 

  1. Revenues
    A. are decreases in equity resulting from rendering services.
    B. are a cost of doing business.
    C. are called expired costs.
    D. are earned through the sale of goods, even though the cash may not be collected until later.

 

  1. Major assumptions made in measuring business income include all of the following except
    A. continuity.
    B. periodicity.
    C. matching.
    D. accrual accounting.

 

  1. When a credit sale takes place,
    A. a revenue account will increase.
    B. liabilities will increase.
    C. one asset account will increase and another will decrease.
    D. assets will be unaffected.

 

  1. A net loss results in a decrease in
    A. revenues.
    B. expenses.
    C. owner’s equity.
    D. liabilities.

 

  1. Net income results in a(n)
    A. increase in owner’s equity.
    B. increase in revenues.
    C. decrease in expenses.
    D. increase in assets.

 

  1. Which of the following transactions results in an increase in revenues?
    A. Receipt of accounts receivable.
    B. Purchase of inventory.
    C. Receipt of principal from a bank loan.
    D. Delivery of a service in exchange for future payment.

 

  1. Which of the following transactions does not result in an increase in expenses?
    A. Payment of accounts payable.
    B. Usage of utlities.
    C. Allocation of the cost of a building.
    D. Expiration of prepaid insurance.

 

  1. Which of the following transactions will not result in an increase in revenues?
    A. Sale of goods on credit.
    B. Sale of services for cash.
    C. Accumulation of interest in bank account.
    D. An investment into the business by the owner.

 

  1. Which of the following transactions will result in the recognition of an expense?
    A. Interest accrued on a bank loan.
    B. A cash withdrawal by the owner.
    C. Payment on accounts payable.
    D. All of these choices.

 

  1. The recording of an expense could result in a corresponding increase in
    A. owner’s equity.
    B. revenue.
    C. a liability.
    D. an asset.

 

  1. When expenses exceed revenues,
    A. a liability is created.
    B. a net loss occurs.
    C. owner’s equity increases.
    D. All of these choices.

 

  1. Expenses are incurred
    A. to generate revenue.
    B. to produce liabilities.
    C. only during the adjustment process.
    D. to produce assets.

 

  1. Net income
    A. is accumulated in Owner’s Capital.
    B. is reported on the income statement.
    C. occurs when revenues exceed expenses.
    D. All of these choices.

 

  1. A customer’s promise to pay for goods or services
    A. increases the company’s liabilities.
    B. decreases the company’s Cash account.
    C. creates a liability for the company.
    D. increases the assets of the company.

 

  1. As the usefulness of a plant asset expires,
    A. an amount is transferred from one asset account to another.
    B. a related expense account is reduced.
    C. a liability is created.
    D. the cost of the asset is allocated to an expense account.

 

  1. The periodicity assumption recognizes that
    A. the company may continue indefinitely.
    B. all financial statements should cover a fiscal year.
    C. net income is an estimate.
    D. the value of an asset may vary from month to month.

 

  1. Retailers often end their fiscal years .
    A. during the slack season.
    B. during the peak of the busy season.
    C. at different times each year, depending on the tax consequences.
    D. on June 30.

 

  1. Financial statement time periods should be of equal length
    A. and should end during the peak season.
    B. to make comparison easier.
    C. and should correspond to the calendar year.
    D. to comply with income tax regulations.

 

  1. The going concern assumption helps solve the
    A. matching issue.
    B. accounting period issue.
    C. revenue recognition issue.
    D. continuity issue.

 

  1. Equipment might be depreciated over 15 years because
    A. it will lose most of its market value in 15 years.
    B. it will be paid for in 15 years.
    C. it will help to generate revenue for the company over 15 years.
    D. income tax provisions require depreciation over 15 years.

 

  1. When a direct cause-and-effect relationship cannot be established between revenues and costs, the costs are
    A. not expensed and remain as assets on the balance sheet.
    B. expensed among the accounting periods that benefit from the costs.
    C. expensed immediately in their entirety.
    D. expensed equally each year.

 

  1. The matching rule relates the least to
    A. income measurement.
    B. the cash basis of accounting.
    C. revenues and expenses.
    D. a direct relationship between expenses and revenues.

 

  1. The matching rule is applied
    A. because it is required by the Internal Revenue Code.
    B. by expensing certain items immediately and in their entirety.
    C. to help make the bookkeeper’s job easier.
    D. to help produce an accurate measurement of a company’s performance.

 

  1. Which of the following is not a condition required by the SEC for the recognition of revenue?
    A. Delivery of goods or rendering of services.
    B. Transfer of cash from the buyer to the seller.
    C. Fixed or determinable price.
    D. Existence of an arrangement.

 

  1. Which of the following is a condition required by the SEC for the recognition of revenue?
    A. Completion of goods manufactured.
    B. Execution of a promissory note.
    C. Price in excess of $100.
    D. Reasonable assurance of collection.

 

  1. Which of the following conditions is not a requirement by the SEC for the recognition of revenue?
    A. Delivery has occurred or services have been rendered.
    B. Collectibility is reasonably certain.
    C. A written agreement has been signed.
    D. The seller’s price to the buyer is fixed or determinable.

 

  1. Which of the following is not one of the conditions for recognition of an expense?
    A. A price has been established or can be determined.
    B. There is an agreement to purchase goods or services.
    C. The goods will be delivered or the services will be provided within the accounting cycle.
    D. The goods or services are used to produce revenue.

 

  1. Which of the following is one of the conditions for recognition of an expense?
    A. There is a reasonable expectation that cash will be received.
    B. The expense can be recognized only when cash is paid.
    C. The goods will be delivered or the services will be provided within the accounting cycle.
    D. The goods or services are used to produce revenue.

 

  1. Which of the following is one of the conditions for recognition of an expense?
    A. There is a reasonable expectation that cash will be paid.
    B. The expense will be recognized only when cash is paid.
    C. The goods will be delivered or the services will be provided within the accounting cycle.
    D. The goods or services are used to produce revenue.

 

  1. Red Company created advertising copy for a client.  Which of the following does not indicate that the transaction meets the SEC’s four criteria for revenue recognition?
    A. The company and the customer agree that the customer owes for the service.
    B. Both parties understand the price.
    C. The goods or services have been used to produce revenue.
    D. There is a reasonable expectation that the customer will pay the bill.

 

  1. Which of the following is correct regarding accrual accounting?
    A. Adjusting the accounts is a technique used to accomplish accural accounting.
    B. Revenues are recorded when received.
    C. Expenses are recorded when earned.
    D. Net income is the difference between cash receipts from customers and cash payments for expenses.

 

  1. Which of the following accounts would likely not need to be adjusted at year end?
    A. Equipment
    B. Prepaid Insurance
    C. Supplies
    D. Owner’s Withdrawals

 

  1. Which of the following is not an application of accrual accounting?
    A. Recognizing revenues when earned and expenses when incurred.
    B. Applying the matching rule.
    C. Adjusting the accounts.
    D. Recording on the basis of actual receipt and payment of cash.

 

  1. Which of the following is not an application of accrual accounting?
    A. Recording advertising fees earned at the time the work is done.
    B. Adjusting unearned advertising fees to the proper balance at the end of the month.
    C. Recording advertising fees earned at the time the cash payment is received.
    D. Recording telephone expense in the accounting period covered by the monthly bill.

 

  1. Which of the following transactions is most likely not to result in an adjusting entry at the end of the period?
    A. Performance of a service for which payment was not received in advance.
    B. Purchase of inventory for sale in the subsequent period.
    C. Purchase of office equipment.
    D. Purchase of a two-year insurance policy.

 

  1. Which of the following is an application of accrual accounting?
    A. Depreciating a building as quickly as allowed by income tax regulations.
    B. Recording utilities expense in the accounting period covered by the monthly bill.
    C. Expensing a machine in its entirety when purchased.
    D. Recording revenue at the time payment is received.

 

  1. Which of the following accounts would not need to be adjusted at year end?
    A. Prepaid Rent.
    B. Owner’s Capital.
    C. Equipment.
    D. Unearned Rent Revenue.

 

  1. Which of the following accounts could increase as a result of adjusting entries?
    A. Prepaid Insurance.
    B. Accounts Receivable.
    C. Unearned Fees.
    D. Office Equipment.

 

  1. Which of the following accounts could decrease as a result of adjusting entries?
    A. Prepaid Insurance.
    B. Accumulated Depreciation–Buildings.
    C. Rent Expense.
    D. Service Revenue.

 

  1. Which of the following is an example of a deferral?
    A. Utility expense incurred but not yet paid.
    B. Prepaid Insurance.
    C. Service income earned but not yet collected.
    D. All of these choices.

 

  1. Which of the following is an example of an accrual?
    A. Purchase of equipment.
    B. Prepaid insurance.
    C. Salaries earned but not yet paid.
    D. All of these choices.

 

  1. Which of the following is an example of an accrual?
    A. Debit Office Supplies Expense, credit Office Supplies
    B. Debit Wages Expense, credit Wages Payable
    C. Debit Rent Expense, credit Prepaid Rent
    D. Debit Unearned Revenue, credit Service Revenue

 

  1. Which of the following is an example of a deferral?
    A. Debit Salaries Expense, credit Salaries Payable
    B. Debit Accounts Receivable, credit Service Revenue
    C. Debit Property Taxes Expense, credit Property Taxes Payable
    D. Debit Insurance Expense, credit Prepaid Insurance

 

  1. An adjusting entry would not include which of the following accounts?
    A. Salaries Payable
    B. Unearned Revenue
    C. Interest Receivable
    D. Cash

 

  1. An adjusting entry can include a debit to a(n)
    A. expense and a credit to an asset.
    B. cash and a credit to a revenue.
    C. liability and a credit to cash.
    D. liability and a credit to an asset.

 

  1. Which of the following is an example of a deferral?
    A. Wages recorded but not yet paid.
    B. The purchase of a company vehicle.
    C. Legal fees earned but not yet collected.
    D. The accumulation of interest in a bank account.

 

  1. Which of the following is an example of an accrual?
    A. The purchase of office supplies.
    B. Wages expense incurred but not yet paid.
    C. Rent revenue collected in advance.
    D. Payment of two years’ insurance in advance.

 

  1. When an adjusting entry is made debiting an expense account, the credit can be made to any of the following accounts except
    A. a liability.
    B. a contra-asset account.
    C. an asset.
    D. a revenue.

 

  1. Which of the following situations does not involve an accrual?
    A. Recording accrued interest.
    B. Recording depreciation.
    C. Recording unrecorded wages.
    D. Recording unrecorded revenue.

 

  1. Which of the following situations is not an example of a deferral?
    A. Recording supplies consumed.
    B. Recording unrecorded, earned revenues.
    C. Recording depreciation.
    D. Recording the portion of prepaid rent that has expired.

 

  1. What is the adjusting entry for that portion of revenue received in advance which has now been earned?
    A. Unearned Revenue – Debit; Cash – Credit
    B. Unearned Revenue – Debit; Service Revenue – Credit
    C. Service Revenue – Debit; Unearned Revenue – Credit
    D. Cash – Debit; Unearned Revenue – Credit

 

  1. An adjusting entry made to record salaries earned but not yet paid or recorded is made with which of the following entries?
    A. Salaries Expense – Debit; Cash – Credit
    B. Salaries Payable – Debit; Salaries Expense – Credit
    C. Salaries Expense – Debit; Salaries Payable – Credit
    D. Cash – Debit; Salaries Expense – Credit

 

  1. Which of the following accounts is a contra account?
    A. Accumulated Depreciation–Office Furniture
    B. Interest Payable
    C. Depreciation Expense–Office Furniture
    D. Unearned Revenue

 

  1. The carrying value of a depreciable asset purchased 3 years ago equals
    A. original cost minus depreciation expense for the current period.
    B. original cost minus accumulated depreciation.
    C. the estimated cost to replace the asset at today’s price.
    D. the estimated amount that the asset could be sold for in today’s market.

 

  1. Which of the following pairs of accounts could possibly appear in the same adjusting entry?
    A. Interest Income and Interest Payable.
    B. Revenue from Services and Cash.
    C. Service Revenue and Unearned Revenue.
    D. Rent Expense and Depreciation Expense.

 

  1. Failure to adjust for expired prepaid insurance at year end will result in an
    A. overstatement of liabilities.
    B. understatement of assets.
    C. understatement of owner’s equity.
    D. overstatement of net income.

 

  1. Failure to record depreciation at year end will result in all of the following except
    A. understatement of total liabilities.
    B. overstatement of total assets.
    C. overstatement of net income.
    D. overstatement of owner’s equity.

 

  1. The principal difference between depreciation expense and most other types of expenses is that
    A. depreciation expense can be avoided if the asset is worth at least what the company paid for it.
    B. depreciation expense requires an annual outlay of cash.
    C. the total amount of depreciation expense for the asset is reported on the balance sheet.
    D. depreciation expense is subject to more precise measurement than most other expenses.

 

  1. Use this information to answer the following question.The trial balance for Nowwick Company appears as follows:
Nowwick Company
Trial Balance
December 31, 2014
Cash $  240
Accounts Receivable 1,000
Prepaid Insurance 100
Supplies 300
Office Equipment 800
Accumulated Depreciation–Office Equipment $  400
Accounts Payable 600
Frank Nowwick, Capital 1,200
Service Revenue 1,000
Salaries Expense 200
Rent Expense      400 ______
$3,200 $3,200

If on December 31, 2014, supplies on hand were $120, the adjusting entry would contain a
A. credit to Supplies for $120.
B. credit to Supplies Expense for $180.
C. debit to Supplies Expense for $180.
D. debit to Supplies for $120.

 

  1. Use this information to answer the following question.The trial balance for Nowwick Company appears as follows:
Nowwick Company
Trial Balance
December 31, 2014
Cash $  240
Accounts Receivable 1,000
Prepaid Insurance 100
Supplies 300
Office Equipment 800
Accumulated Depreciation–Office Equipment $  400
Accounts Payable 600
Frank Nowwick, Capital 1,200
Service Revenue 1,000
Salaries Expense 200
Rent Expense      400 ______
$3,200 $3,200

If on December 31, 2014, the insurance still unexpired amounted to $20, the adjusting entry would contain a

A. debit to Prepaid Insurance for $80.
B. credit to Prepaid Insurance for $80
C. debit to Insurance Expense for $20.
D. credit to Prepaid Insurance for $20.

 

  1. Use this information to answer the following question.The trial balance for Nowwick Company appears as follows:
Nowwick Company
Trial Balance
December 31, 2014
Cash $  240
Accounts Receivable 1,000
Prepaid Insurance 100
Supplies 300
Office Equipment 800
Accumulated Depreciation–Office Equipment $  400
Accounts Payable 600
Frank Nowwick, Capital 1,200
Service Revenue 1,000
Salaries Expense 200
Rent Expense      400 ______
$3,200 $3,200

If the estimated depreciation for office equipment were $350, the adjusting entry would contain a
A. debit to Accumulated Depreciation–Office Equipment for $350.
B. credit to Office Equipment for $350.
C. credit to Accumulated Depreciation–Office Equipment for $350.
D. credit to Depreciation Expense–Office Equipment for $350.

 

  1. Use this information to answer the following question.The trial balance for Nowwick Company appears as follows:
Nowwick Company
Trial Balance
December 31, 2014
Cash $  240
Accounts Receivable 1,000
Prepaid Insurance 100
Supplies 300
Office Equipment 800
Accumulated Depreciation–Office Equipment $  400
Accounts Payable 600
Frank Nowwick, Capital 1,200
Service Revenue 1,000
Salaries Expense 200
Rent Expense      400 ______
$3,200 $3,200

If as of December 31, 2014, the rent of $100 for December had not been recorded or paid, the adjusting entry would include a
A. debit to Rent Expense for $100.
B. debit to Rent Payable for $100.
C. credit to Cash for $100.
D. credit to Accumulated Rent for $100.

 

  1. Use this information to answer the following question.The trial balance for Nowwick Company appears as follows:
Nowwick Company
Trial Balance
December 31, 2014
Cash $  240
Accounts Receivable 1,000
Prepaid Insurance 100
Supplies 300
Office Equipment 800
Accumulated Depreciation–Office Equipment $  400
Accounts Payable 600
Frank Nowwick, Capital 1,200
Service Revenue 1,000
Salaries Expense 200
Rent Expense      400 ______
$3,200 $3,200

If services totaling $250 had been performed but not billed,
A. the adjusting entry would include a credit to Unearned Service Revenue for $250.
B. the adjusted balance in Accounts Receivable would be $1,250.
C. the adjusted balance of Service Revenue would be $750.
D. All of these choices.

 

  1. The Supplies account had a $720 debit balance at the end of the accounting period before adjustment for supplies used, and an inventory of $160 of unused supplies was on hand. Which of the following is the required adjusting entry?
    A. Debit Supplies Expense $160 and credit Supplies $160.
    B. Debit Supplies Expense $560 and credit Supplies $560.
    C. Debit Supplies $160 and credit Supplies Expense $160.
    D. Debit Supplies $560 and credit Supplies Expense $560.

 

  1. Use this information pertaining to Tucson Company to answer the following question.1. The corporation’s Supplies account showed a beginning debit balance of $400 and supplies purchased of $1,600. There were $600 of supplies on hand at year end.
    2.Depreciation on a building is estimated to be $10,000.
    3.A one-year insurance policy was purchased for $4,800. Five months have passed since the purchase.
    4.Accrued interest on a note receivable amounted to $200.
    5.The company received a $3,600 advance payment during the year on services to be performed. By the end of the year, one-third of the services had been performed.The adjusting entry for Supplies is

    A. Supplies Expense      1,400
    Supplies            1,400
    B. Supplies Expense      1,600
    Supplies            1,600
    C. Supplies                   1,400
    Supplies Expense      1,400
    D. Supplies Expense      600
    Supplies            600

 

  1. Use this information pertaining to Tucson Company to answer the following question.1. The corporation’s Supplies account showed a beginning debit balance of $400 and supplies purchased of $1,600. There were $600 of supplies on hand at year end.
    2.Depreciation on a building being depreciated over 5 years is estimated to be $10,000 per year.  The building was purchased at the beginning of the prior year for $50,000.
    3.A one-year insurance policy was purchased for $4,800. Five months have passed since the purchase.
    4.Accrued interest on a note receivable amounted to $200.
    5.The company received a $3,600 advance payment during the year on services to be performed. By the end of the year, one-third of the services had been performed.Which of the following statements is correct regarding the building?

    A. The adjusting entry to record depreciation will include a credit to Accumulated Depreciation – Building $10,000.
    B. The book value of the building at the end of the current year is $30,000.
    C. The Accumulated Depreciation – Building account will have a balance of $20,000 at the end of the current year.
    D. All of these choices.

 

  1. Use this information pertaining to Tucson Company to answer the following question.1. The corporation’s Supplies account showed a beginning debit balance of $400 and supplies purchased of $1,600. There were $600 of supplies on hand at year end.
    2.Depreciation on a building is estimated to be $10,000.
    3.A one-year insurance policy was purchased for $4,800.  Five months have passed since the purchase.
    4.Accrued interest on a note receivable amounted to $200.
    5.The company received a $3,600 advance payment during the year on services to be performed. By the end of the year, one-third of the services had been performed.The adjusting entry for the insurance policy is

    A. Prepaid Insurance          2,800
    Insurance Expense               2,800
    B. Insurance Expense      2,800
    Prepaid Insurance              2,800
    C. Prepaid Insurance       2,000
    Insurance Expense             2,000
    D. Insurance Expense         2,000
    Prepaid Insurance                2,000

 

  1. Use this information pertaining to Tucson Company to answer the following question.1. The corporation’s Supplies account showed a beginning debit balance of $400 and supplies purchased of $1,600. There were $600 of supplies on hand at year end.
    2.Depreciation on a building is estimated to be $10,000.
    3.A one-year insurance policy was purchased for $4,800. Five months have passed since the purchase.
    4.Accrued interest on a note receivable amounted to $200.
    5.The company received a $3,600 advance payment during the year on services to be performed. By the end of the year, one-third of the services had been performed.The adjusting entry to record the accrued interest on the note is

    A. Interest Expense          200
    Interest Receivable            200
    B. Interest Payable      200
    Interest Expense            200
    C. Interest Receivable      200
    Interest Income            200
    D. Interest Income                   200
    Interest Receivable            200

 

  1. Use this information pertaining to Tucson Company to answer the following question.1. The corporation’s Supplies account showed a beginning debit balance of $400 and supplies purchased of $1,600. There were $600 of supplies on hand at year end.
    2.Depreciation on a building is estimated to be $10,000.
    3.A one-year insurance policy was purchased for $4,000. Six months have passed since the purchase.
    4.Accrued interest on a note receivable amounted to $200.
    5.The company received a $3,600 advance payment during the year on services to be performed. By the end of the year, one-third of the services had been performed.The adjusting entry to record the amount of service revenue earned during the accounting period is

    A. Service Revenue      2,400
    Unearned Revenue            2,400
    B. Unearned Revenue      1,200
    Service Revenue            1,200
    C. Service Revenue        1,200
    Unearned Revenue               1,200
    D. Unearned Revenue        2,400
    Service Revenue                       2,400

 

  1. If an adjusting entry is not made at the end of an accounting period to remove the earned revenue from the Unearned Revenue account,
    A. assets would be understated.
    B. owner’s equity would be overstated.
    C. liabilities would be understated.
    D. liabilities would be overstated.

 

  1. A company recorded office supplies in an asset account when the supplies were purchased. Failure to take inventory and make an adjusting entry will result in an
    A. understatement of liabilities.
    B. understatement of owner’s equity.
    C. understatement of assets.
    D. overstatement of owner’s equity.

 

  1. A company’s five-day weekly payroll of $890 is paid on Fridays. Assume that the last day of the month falls on Tuesday. Which of the following is the required adjusting entry for the month end?
    A. Debit Salaries Payable $534 and credit Salaries Expense $534.
    B. Debit Salaries Expense $534 and credit Salaries Payable $534.
    C. Debit Unpaid Salaries $356 and credit Salaries Payable $356.
    D. Debit Salaries Expense $356 and credit Salaries Payable $356.

 

  1. The adjustment for estimated property taxes would include a
    A. credit to Property Taxes Payable.
    B. debit to Unearned Property Taxes.
    C. credit to Property Taxes Expense.
    D. credit to Cash.

 

  1. The adjusting entry for the expiration of prepaid advertising, originally recorded as an asset,
    A. Advertising Expense – Debit; Prepaid Advertising – Credit
    B. Prepaid Advertising – Debit; Cash – Credit
    C. Advertising Expense – Debit; Cash – Credit
    D. Prepaid Advertising – Debit; Advertising Expense – Credit

 

  1. Which of the following accounts could not be credited in an adjusting entry?
    A. Service Revenue
    B. Prepaid Rent
    C. Office Supplies
    D. Interest Receivable

 

  1. Which of the following pairs of accounts could not be included in the same adjusting entry?
    A. Unearned Revenue and Service Revenue
    B. Wages Expense and Wages Payable
    C. Interest Expense and Interest Receivable
    D. Rent Expense and Rent Payable

 

  1. On December 9, A issues a 60-day promissory note to B. The December 31 adjusting entry for B is
    A. Interest Payable – Debit; Cash – Credit
    B. Interest Receivable – Debit; Interest Income – Credit
    C. Interest Expense – Debit; Cash – Credit
    D. Interest Expense – Debit; Interest Payable – Credit

 

  1. In July, a company pays three years’ insurance in advance. The December 31 adjusting entry is
    A. Insurance Expense – Debit; Prepaid Insurance – Credit
    B. Prepaid Insurance – Debit; Insurance Expense – Credit
    C. Insurance Expense – Debit; Cash – Credit
    D. Prepaid Insurance – Debit; Cash – Credit

 

  1. An adjusted trial balance is prepared to
    A. test that the ledger is in balance after the accounts have been adjusted.
    B. facilitate preparation of the adjusting entries.
    C. both test that the ledger is in balance after the accounts have been adjusted and facilitate preparation of the financial statements.
    D. facilitate preparation of the financial statements.

 

  1. Which of the following accounts would appear on an adjusted trial balance but probably would not appear on a trial balance?
    A. Supplies Expense
    B. Accounts Payable
    C. Service Revenue
    D. Cash

 

  1. Which of the following accounts probably would be greater in amount on an adjusted trial balance than on a trial balance?
    A. Wages Payable
    B. Unearned Revenue
    C. Prepaid Advertising
    D. Painting Supplies

 

  1. Which of the following accounts probably would contain a smaller dollar amount on the adjusted trial balance than on the trial balance?
    A. Office Supplies
    B. Accumulated Depreciation–Equipment
    C. Cash
    D. Wages Expense

 

  1. Which of the following accounts would be found on the credit side of the adjusted trial balance?
    A. Accumulated Depreciation–Equipment
    B. Prepaid Insurance
    C. Owner’s Withdrawals
    D. Depreciation Expense

 

  1. Which of the following accounts would be found on the debit side of the adjusted trial balance?
    A. Accumulated Depreciation–Equipment
    B. Owner’s Capital
    C. Owner’s Withdrawals
    D. Wages Payable

 

  1. Which of the following accounts most likely would be found on both a trial balance and an adjusted trial balance?
    A. Utilities Expense
    B. Insurance Expense
    C. Supplies Expense
    D. Depreciation Expense–Equipment

 

  1. Which of the following accounts probably would not appear in a trial balance but probably would appear in an adjusted trial balance?
    A. Accumulated Depreciation–Equipment
    B. Cash
    C. Office Supplies Expense
    D. Owner’s Withdrawals

 

  1. Wages Payable was $350 at the end of October and $280 at the end of November. Wages Expense for November was $2,000. How much cash was paid for wages during November?
    A. $1,930
    B. $2,630
    C. $2,070
    D. $1,370

 

  1. Unearned Revenue was $1,200 at the end of May and $1,500 at the end of June. Service Revenue was $8,550 for the month of June. How much cash was received for services provided during June?
    A. $8,250
    B. $5,850
    C. $8,850
    D. $11,250

 

  1. Prepaid Rent was $800 at the end of May and $1,300 at the end of June. Rent Expense for June was $720. How much cash was paid for rent during June?
    A. $820
    B. $1,020
    C. $1,220
    D. $1,420

 

  1. Accounts Receivable was $1,500 at the end of November and $1,050 at the end of December. Revenue totaled $8,400 for December. How much cash was received from revenues during December?
    A. $10,950
    B. $8,850
    C. $7,950
    D. $5,950

 

  1. Office Supplies was $1,800 at the end of January and $2,280 at the end of February. During February, Office Supplies Expense equaled $560. How much cash was paid for office supplies during February?
    A. $440
    B. $2,840
    C. $3,440
    D. $1,040

 

  1. Unearned Revenue was $600 at the end of February and $750 at the end of March. Service Revenue was $3,600 for the month of March. How much cash was received from revenue during March?
    A. $4,950
    B. $3,450
    C. $2,250
    D. $3,750

 

  1. Which of the following actions can distort company records and result in fraudulent financial reporting?
    A. Prepaying an expense and recording it as an asset.
    B. Collecting revenue in advance of earning it.
    C. Recording revenue that has not yet been earned.
    D. Recording an expense that has been incurred but has not yet been paid.

 

  1. The manipulation of revenues and expenses to achieve a specific outcome is called
    A. earnings management.
    B. the matching rule.
    C. adjusting entries.
    D. revenue recognition.

 

  1. Which two broad account categories are used to determine net income? Define each category and list two examples of each type.

 

 

 

 

 

  1. How and why is the matching rule applied to the cost of a building?

 

 

 

 

 

  1. Susan Kane won the mayoral election in the City of Ashley partly on the basis of her charge that Allen Ross, the former mayor, was responsible for the budget deficit. After taking office, she hired a major international accounting firm to straighten things out. This excerpt appeared in an article from a leading business publication, West End Business Review:
    [A riddle] Q: When is a budget deficit not a deficit?
    A: When it is a surplus, of course.Ashley Mayor Susan Kane was once again caught with egg on her face last week as she and her financial advisers tried to defend that riddle. On one hand, Comptroller Jim Guan, a Kane appointee, testified in hearings that the city had actually ended 20×5 with a $6 million surplus, not the much-reported deficit. He said further that the modest surplus grew to $54 million as a result of tax-enrichment supplements to the 20×5 balance sheet.On the other hand, the mayor stuck by the same guns she used last year on her predecessor. The city had ended 20×5, under the Allen Ross administration, not merely without a surplus, but with a deficit. The apparent discrepancy can be explained.

    Like most U.S. cities, Ashley operates under a modified accrual accounting basis. This is a combination of the cash basis and the accrual basis. The modified accrual basis differs from the accrual basis in that revenue is recorded when it is collected. The collection of Ashley’s parking tax, which is assessed on all city parking lots and garages, is an example.

    The tax is assessed and collected on a quarterly basis, but the city doesn’t collect the amount due for the last quarter of 20×6 until the first quarter of 20×7. Under ideal accrual methods, the parking revenues should be recorded in the 20×6 financial statements. Under a cash approach, the revenues would be recorded in the 20×7 budget. What the city did before was to record the money whenever it was advantageous politically. That, combined with the infamous revolving funds, allowed the city to hide the fact it was running large deficits under former Mayor Ross. That also means that no one really knew where the city stood.

    The auditors are now reallocating the parking revenues to the 20×7 budget but are accruing other revenues by shifting the period of collection from a year in the past. Overall, more revenues were moved into earlier fiscal years than into later years, inflating those budgets. Thus, the 20×7 deficit is a surplus.

    The article concluded:

    The upshot is that both Mayor Kane and Mr. Guan (the comptroller) were correct. There was a deficit in the 20×5 corporate or checkbook fund, but because of corrections taking place now, a surplus exists.

    a. Do you agree with the way the auditors handled parking revenues? Support your answer by explaining which method of accounting you think a city should use.

    b. Comment on the statement, “Systematically applied accounting principles will allow all to know exactly where the city stands.”

 

 

 

 

 

  1. Custom Realty Services sold a house for a client and will be paid a commission for its services.  Using the SEC’s four conditions or revenue recognition, explain why Custom Realty Services either should or should not recognize the revenue now.

 

 

 

 

 

  1. What is the purpose of adjusting entries?

 

 

 

 

 

  1. Distinguish between a deferral and an accrual.

 

 

 

 

 

  1. In the space below, state whether each situation is a deferral or an accrual.
    ______a. Unrecorded interest on savings bonds is $765.
    ______b. Property taxes that have been incurred but that have not yet been paid or recorded amount to $1,034.
    ______c. Legal fees of $2,890 were collected in advance. By year end, 70 percent were still unearned.
    ______d. Prepaid Insurance had a $900 balance prior to adjustment. By year end, 25 percent was still unexpired.
    ______e. Salaries earned by employees by year end but not yet paid or recorded amounted to $1,655.
    ______f. Services totaling $690 have been performed but not yet recorded or billed.

 

 

 

 

 

  1. In the space below, state whether each situation is a deferral or an accrual.______a. Depreciation on machinery is $7,200 for the accounting period.
    ______b. Interest that has been incurred on a loan but that has not yet been paid or recorded is $675.
    ______c. Office supplies of $965 were on hand at the beginning of the period. Purchases of office supplies during the period totaled $640. At the end of the period, $120 in office supplies remained.
    ______d. Commissions amounting to $975 were earned but not yet collected by year end.
    ______e. Prepaid Rent had a $2,500 balance prior to adjustment. By year end, 50 percent had expired.

 

 

 

 

 

  1. Quality Heating Company has the following liabilities at year end:
Notes Payable $20,000
Accounts Payable 15,000
Unearned Contract Revenue 9,000
Wages Payable 2,900
Interest Payable 700
  1. Which of these accounts probably was/were created at the end of the fiscal year as a result of an accrual? Which probably was/were adjusted at year end? Explain your answer.b. Which adjustments probably reduced net income? Which probably increased net income? Explain your answers.

 

 

 

 

 

  1. For each of the following oversights, state whether total assets will be understated, overstated, or not affected.
    ______ a.Failure to record revenue earned but not yet received
    ______ b.Failure to record expired rent
    ______ c.Failure to record accrued interest in the bank
    ______ d.Failure to record depreciation
    ______ e.Failure to record accrued wages
    ______ f.Failure to convert unearned revenue to earned revenue

 

 

 

 

 

  1. For each of the following oversights, state whether owner’s equity will be understated, overstated, or not affected.
    ______ a.Failure to record depreciation
    ______ b.Failure to record accrued wages
    ______ c.Failure to convert unearned revenue to earned revenue
    ______ d.Failure to record accrued interest in the bank
    ______ e.Failure to record expired insurance
    ______ f.Failure to record revenue earned but not yet received

 

 

 

 

 

  1. During the performance of the steps in the accounting cycle, the trial balance and the adjusted trial balance are prepared at two key points. Using specific names where applicable, discuss the time of preparation and the purpose served by both of these trial balances.

 

 

 

 

 

  1. The following steps in the accounting cycle are presented out of order below. Arrange the steps in proper order by placing a number from 1 through 6 in the blanks provided. Also identify each step as either a recurring activity (RA) —one that would be repeated during the fiscal period—or an end-of-period activity (EOP)—one performed at the end of the accounting period.
    ______ a. Prepare an adjusted trial balance.
    ______ b. Record entries in the journal.
    ______ c. Adjust the accounts.
    ______ d. Prepare a trial balance.
    ______ e. Analyze business transactions from source documents.
    ______ f.  Post entries to the ledger.

 

 

 

 

 

  1. Joan Miller owns an advertising agency. One of the adjustments her accountant made at the end of July was $360 for unpaid wages of the secretary. Joan Miller might ask, “Why go to the trouble of making this adjustment? Why worry about it? Doesn’t everything come out in the end, when the secretary is paid in August? Because wages expense in total is the same for the two months, isn’t the net income in total unchanged?” Give three reasons why adjusting entries can help Joan Miller assess the performance of her business. (Net income was $1,600.)

 

 

 

 

 

1. The manipulation of revenues and expenses to achieve a specific outcome.      Continuity   ____
2. A 12-month accounting period.      Fiscal year   ____
3. Recognizes that it is useful to estimate the business’s net income in terms of accounting periods.      Matching rule   ____
4. Absent evidence to the contrary, accountants assume the business is a going concern and will continue to operate indefinitely.      Adjusting entries   ____
5. May contain accounts that do not appear in the trial balance.      Prepaid expenses   ____
6. Expenses are assigned to the period in which they are used to produce revenue.      Unrecorded wages   ____
7. Affect one balance sheet account and one income statement account.      Adjusted trial balance   ____
8. A type of accrual.      Earnings management   ____
9. Net increase in owner’s equity that results from a company’s operations.      Net income   ____
10. A type of deferral.      Periodicity   ____

 

  1. Gravel Manufacturing had supplies on hand costing $480 on December 31. During the same year, supplies costing $320 were purchased, and $640 in supplies were consumed during the year. What was the cost of supplies on hand on January 1 of that year?

 

 

 

 

 

  1. Custom Enterprises had supplies on hand costing $3,840 at the beginning of the year and $4,800 at the end of the year. During the year, supplies totaling $7,600 were consumed. How much was the total cost of supplies purchased during the year?

 

 

 

 

 

  1. Wheels and More Company purchased equipment for $108,000. The equipment has an estimated useful life of eight years and will be worthless at the end of that time. In the partial balance sheet below, show exactly how the equipment should be disclosed after it has been used for five years. Also calculate total assets.
Wheels and More Company
Partial Balance Sheet
December 31, 2014
Cash $54,000
Prepaid rent 18,000
Equipment
____ __
Total assets $___ __

 

 

 

 

 

 

  1. Mike’s Manufacturing purchased equipment for $300,000. The equipment has an estimated useful life of six years and will be worthless at the end of that time. In the partial balance sheet below, show exactly how the equipment would be disclosed after it has been used for three years. Also calculate total assets.
Mike’s Manufacturing
Partial Balance Sheet
December 31, 2014
Cash $100,000
Prepaid rent 30,000
Equipment
______
Total assets $___ __

 

 

 

 

 

 

  1. An examination of the Prepaid Insurance account shows a debit balance of $3,960 at the end of the accounting period before adjustment. Prepare entries in journal form to record the insurance expense for the period under each of the following independent assumptions:
    a. An examination of insurance policies shows that insurance costing $1,200 has expired during the period.
General Journal Page 1
Date Description Post.
Ref.
Debit Credit
  1. An examination of insurance policies shows unexpired insurance of $2,640 at the end of the period.
General Journal Page 1
Date Description Post.
Ref.
Debit Credit

 

 

 

 

 

 

  1. Erwin Press pays wages of $6,000 every Friday for a five-day workweek. June 30, the last day of the fiscal year, falls on a Tuesday. In the journal provided, prepare the June 30 adjusting entry as well as the July 3 follow-up entry when the wages are paid. Omit explanations.
General Journal Page 1
Date Description Post.
Ref.
Debit Credit

 

 

 

 

 

 

  1. On December 12, Roger Kent, a painter, received $2,400 in advance for performing a service that would extend into the following calendar year. By December 31, he still had one-fourth of the service remaining to perform. In the journal provided, prepare the December 12 entry, the December 31 end-of-period adjustment, as well as the entry on January 29 when the job was completed. Omit explanations.
General Journal Page 1
Date Description Post.
Ref.
Debit Credit

 

 

 

 

 

 

  1. In the journal provided, prepare adjusting entries for the following items. Omit explanations.
    a. Depreciation on machinery is $940 for the accounting period.
    b. Interest incurred on a loan but not paid or recorded is $635.
    c. Office supplies of $600 were on hand at the beginning of the period. Purchases of office supplies during the period totaled $200. At the end of the period, $80 in office supplies remained.
    d. Commissions amounting to $540 were earned but not recorded or collected by year end.
    e. Prepaid Rent had an $8,000 normal balance prior to adjustment. By year end, 40 percent had expired.
General Journal Page 1
Date Description Post.
Ref.
Debit Credit

 

 

 

 

 

 

  1. In the journal provided, prepare adjusting entries for the following items. Omit explanations.
    a. Unrecorded interest on savings bonds is $680.
    b. Property taxes incurred but not paid or recorded amount to $540.
    c. Legal fees of $5,000 were collected in advance. By year end, 60 percent were still unearned.
    d. Prepaid Insurance had a $1,600 debit balance prior to adjustment. By year end, 40 percent was still unexpired.
    e. Salaries incurred by year end but not yet paid or recorded amounted to $1,375.
    f. Services totaling $900 have been performed but not yet recorded or billed.
General Journal Page 1
Date Description Post.
Ref.
Debit Credit

 

 

 

 

 

 

  1. Answer the following questions. (Show your work.)a. A machine was purchased on July 1, 20×9. It had a cost of $36,000 and an estimated useful life of nine years with zero value at that time. What is the machine’s carrying value after four years?b. On April 1, 20×0, a company paid in advance $54,000 for three years’ insurance. How much Prepaid Insurance remains on the balance sheet on December 31, 20×0?

    c. A company began the year with $800 in supplies, purchased $2,000 in supplies, and ended the period with $600 in supplies. How much is Supplies Expense for the period?

    d. A company was paid $1,800 in advance for services to be performed. At year end, one-third had not yet been earned. How much in Service Revenue should be recorded?

 

 

 

 

 

  1. Answer the following questions. (Show your work.)a. Revenue of $60,000 was earned, but only $45,000 was collected. Expenses of $36,000 were incurred, but only $30,000 was paid. What is reported net income?b. Wages of $4,000 are paid every Friday for a five-day workweek. If year end falls on a Tuesday, the adjusting entry for wages would be recorded at what amount?

    c. A company vehicle is purchased for $24,000. Assuming an eight-year useful life and zero value at that time, what is the balance of accumulated depreciation after five years?

    d. Supplies Expense of $3,600 was recorded for a given year. Assuming that $2,400 in supplies were purchased during the year and that $640 in supplies remained at year end, what was the cost of supplies at the beginning of the year?

 

 

 

 

 

  1. In the journal provided, prepare year-end adjustments for the following situations. Omit explanations.
    a. Accrued interest on notes receivable is $105.
    b. Of the $12,000 received in advance of earning a service, two-thirds was still unearned by year end.
    c. Two years’ rent, totaling $36,000, was paid in advance at the beginning of the year.
    d. Services totaling $5,300 had been performed, but not yet billed.
    e. Depreciation on trucks totaled $3,400 for the year.
    f. Supplies available for use totaled $690. However, by year end, only $140 in supplies remained.
    g. Payroll for the five-day work week, to be paid on Friday, is $30,000. Year end falls on a Monday.
General Journal Page 1
Date Description Post.
Ref.
Debit Credit

 

 

 

 

 

 

  1. In the journal provided, prepare year-end adjustments for the following situations. Omit explanations.
    a. Accrued interest on notes receivable is $560.
    b. Of the $7,200 received in advance of earning a service, two-thirds was still unearned by year end.
    c. Two years of rent, totaling $24,000, was paid in advance. By year end, six months’ worth had expired.
    d. Services totaling $685 had been performed, but not yet billed.
    e. Depreciation on trucks totaled $1,700 for the year.
    f. Supplies available for use during the year amounted to $3,400. However, by year end, only $200 in supplies remained.
    g. Payroll for the five-day work week, to be paid on Friday, is $6,000. Year end falls on a Tuesday.
General Journal Page 1
Date Description Post.
Ref.
Debit Credit

 

 

 

 

 

 

  1. Use the following unadjusted trial balance to prepare adjusting entries, given the additional information below it. Assume financial statements are prepared quarterly. Omit explanations.
Kind Delivery Service
Trial Balance
September 30, 20×5
Cash $ 20,000
Accounts Receivable 6,400
Office Supplies 1,000
Prepaid Rent 3,600
Office Furniture 9,600
Accumulated Depreciation–Office Furniture $      400
Accounts Payable 14,800
Unearned Revenue 2,000
Beth Kind, Capital 20,400
Consulting Revenue 12,000
Salaries Expense 7,400
Insurance Expense     1,600  _______
$49,600 $49,600

a.Of the revenue received in advance, 40 percent remained unearned on September 30.
b.The office furniture has an estimated five-year useful life and zero value at the end of that time. Record depreciation for the quarter.
c.Salaries earned, but unpaid, totaled $1,520.
d.The Prepaid Rent applies to the six months beginning August 1, 20×5.
e.Office supplies on hand totaled $400 at the end of the quarter.
f.Services performed but not yet billed or recorded amount to $1,800.

General Journal Page 1
Date Description Post.
Ref.
Debit Credit

 

 

 

 

 

 

  1. Use the following unadjusted trial balance to prepare adjusting entries, given the additional information below it. Assume that financial statements are prepared quarterly. Omit explanations.
Pat Collar Realty Services
Trial Balance
September 30, 20×5
Cash $ 30,000
Accounts Receivable 9,600
Office Supplies 1,600
Prepaid Rent 5,400
Office Furniture 14,400
Accumulated Depreciation–Office Furniture $      600
Accounts Payable 22,200
Unearned Revenue 3,000
Pat Collar, Capital 30,600
Consulting Revenue 18,000
Salaries Expense 11,000
Insurance Expense     2,400 _______
$74,400 $74,400
  1. Of the revenue received in advance, 30 percent remained unearned on September 30.
    b. The office furniture has an estimated 12-year useful life and zero value at the end of that time. Record depreciation for the quarter.
    c. Salaries earned, but unpaid, totaled $2,600.
    d. The Prepaid Rent applies to the six months beginning September 1, 20×5.
    e. Office supplies on hand totaled $120 at the end of the quarter.
    f. Services performed but not yet billed or recorded amount to $3,000.
General Journal Page 1
Date Description Post.
Ref.
Debit Credit

 

 

 

 

 

 

  1. Prepare year-end adjusting entries for each of the following situations:
    a. The Supplies account showed a beginning debit balance of $400 and purchases of $2,800. The ending debit balance was $800.
    b. Depreciation on buildings is estimated to be $7,300.
    c. A one-year insurance policy was purchased for $2,400. Nine months have passed since the purchase.
    d. Accrued interest on notes payable amounted to $200.
    e. The company received a $9,600 advance payment during the year on services to be performed. By the end of the year, one-third of the services had been performed.
    f. Payroll for the five-day workweek, to be paid on Friday, is $10,000. The last day of the period is a Tuesday.
    g. Services totaling $920 had been performed but not yet billed or recorded.
General Journal Page 1
Date Description Post.
Ref.
Debit Credit

 

 

 

 

 

 

  1. Prepare year-end adjusting entries for each of the following situations.
    a. The Office Supplies account showed a beginning debit balance of $800 and purchases of $1,000. The ending debit balance was $400.
    b. Depreciation on buildings is estimated to be $7,600.
    c. A one-year insurance policy was purchased for $6,000. Five months have passed since the purchase.
    d. Accrued interest on notes payable amounted to $1,500.
    e. The company received a $14,400 advance payment during the year on services to be performed. By the end of the year, one-third of the services had been performed.
    f. Payroll for the five-day workweek, to be paid on Friday, is $14,000. The last day of the period is a Tuesday.
    g. Services totaling $780 had been performed but not yet billed or recorded.
General Journal Page 1
Date Description Post.
Ref.
Debit Credit

 

 

 

 

 

 

  1. Given the adjusted trial balance below, prepare (in good form) an income statement, statement of owner’s equity, and balance sheet. The name of the business is Palo Verde Landscaping Services and the accounting period coincides with the calendar year.
Palo Verde Landscapting Services
Adjusted Trial Balance
December 31, 20×5
Cash $   795
Accounts Receivable 1,800
Supplies 30
Prepaid Insurance 30
Office Equipment 3,000
Accumulated Depreciation–Office Equipment $  450
Accounts Payable 1,800
Salaries Payable 105
Palo Verde, Capital 2,100
Service Revenue 3,300
Salaries Expense 1,680
Supplies Expense 120
Insurance Expense 150
Depreciation Expense–Office Equipment        150 ______
$7,755 $7,755

 

 

 

 

 

 

  1. Given the adjusted trial balance below, prepare (in good form) an income statement, statement of owner’s equity, and balance sheet. To do so you will need to determine the missing amounts for A, B, C, and D.  The name of the business is Oak Manufacturing and the accounting period coincides with the calendar year.  The balance in the Tina Oak capital account as of December 31, 20X5 is $6,600.
Oak Manufacturing
Adjusted Trial Balance
December 31, 20×5
Cash $   1,590
Accounts Receivable 3,600
Supplies 60
Prepaid Insurance 60
Office Equipment 6,000
Accumulated Depreciation–Office Equipment $ “B”
Accounts Payable 3,600
Salaries Payable 210
Tina Oak, Capital “D”
Service Revenue 6,600
Salaries Expense “A”
Supplies Expense 240
Insurance Expense 300
Depreciation Expense–Office Equipment        300 ______
$”C” $15,510

 

 

 

 

 

 

  1. The 20×5 income statement for Almond Company showed rent expense of $10,800 and salaries expense of $7,200. The related balance sheet account balances at year end for last year and this year were as follows:
December 31, 20×5 December 31, 20×4
Prepaid rent $1,200 $   0
Salaries payable 400 800
  1. Compute cash paid for rent during the year.
    b. Compute cash paid for salaries during the year.

 

 

 

 

 

  1. The following amounts are taken from the balance sheets of Baltic Company:
December 31, 20×5 December 31, 20×4
Accrued liabilities $22,000 $18,750
Prepaid expenses 7,000 9,250

During 20×5, expenses related to accrued liabilities were $15,250, and expenses related to prepaid expenses were $10,500.

a. Compute cash payments related to accrued liabilities.
b. Compute cash payments related to prepaid expenses.

 

 

 

 

 

  1. The income statement for Catlett Company included the following revenues and expenses for 20×5:
Fees earned $103,000
Wages expense 44,700
Insurance expense 8,500
Interest expense 5,200

Listed below are the related balance sheet account balances at year end for this year and last year:

This Year Last Year
Unearned Fees $7,800 $6,600
Wages Payable 2,700 3,300
Prepaid Insurance 1,200 0
Interest Payable 0 800
  1. Compute cash received for fees during the year.
    b. Compute cash paid for wages during the year.
    c. Compute cash paid for insurance during the year.
    d. Compute cash paid for interest during the year.

 

 

 

 

 

  1. The following amounts are taken from the balance sheets of Candy Cane Enterprises:
December 31
20×5 20×4
Prepaid expenses $ 90,000 $112,000
Accrued liabilities 206,000 176,000

During 20×5, expenses related to prepaid expenses were $206,000, and expenses related to accrued liabilities were $394,000. Determine the amount of cash payments related to prepaid expenses and to accrued liabilities for 20×5.

 

 

 

Chapter 5: Foundations of Financial Reporting and the Classified Balance Sheet

Student: ___________________________________________________________________________

  1. The objective of financial reporting established by the FASB is to provide information that is useful to potential customers.
    True    False

 

  1. To be useful for decision making, financial reporting must enable the user to assess cash flow prospects and assess management’s stewardship.
    True    False

 

  1. Financial statements are often audited by management to increase confidence in the statements’ reliability.
    True    False

 

  1. Investors and creditors use financial statements to evaluate a company’s ability to pay dividends and interest.
    True    False

 

  1. In practice, accounting information is quite simple and precise.
    True    False

 

  1. A different set of financial statements usually is prepared for each user.
    True    False

 

  1. The relevance of accounting information means that the information has a direct bearing on a decision.
    True    False

 

  1. An advantage of accounting information is that it provides exact and completely reliable measures.
    True    False

 

  1. Even when no errors have been made, accounting is never 100 percent accurate because of the extensive use of estimates.
    True    False

 

  1. Accounting information contains numerous estimates, classifications, summarizations, judgments, and allocations.
    True    False

 

  1. For accounting information to be useful, it must be both relevant and conservative.
    True    False

 

  1. The Sarbanes-Oxley Act requires a company to guarantee that its financial statements are 100 percent accurate.
    True    False

 

  1. Only the chief financial officer and the company’s CPAs must certify that, to their knowledge, the statements are accurate and complete.
    True    False

 

  1. The use of the lower-of-cost-or-market method for inventory is an application of the convention of conservatism.
    True    False

 

  1. The convention of consistency has led to an increase in the notes to financial statements.
    True    False

 

  1. The conservatism convention should not be used when the accountant is certain of a particular measure.
    True    False

 

  1. To understand accounting information, users must be familiar with the accounting conventions, or rules of thumb, used in preparing financial statements.
    True    False

 

  1. Full disclosure of all important facts aids in overcoming the limitations of accounting information.
    True    False

 

  1. Consistency in accounting means that a company uses the same generally accepted accounting principles from one accounting period to the next accounting period.
    True    False

 

  1. The convention of consistency pertains to the use of the same accounting principles by firms in the same industry.
    True    False

 

  1. A material item is one that is likely to affect a user’s decision.
    True    False

 

  1. In accounting, $1,000 is generally considered the dividing line between material and immaterial amounts.
    True    False

 

  1. Although a garbage can that costs $25 is a long-term asset, it can be expensed because the amount is immaterial and will not affect anyone’s decision making.
    True    False

 

  1. The cost-benefit convention holds that the benefits to be gained from providing accounting information should be greater than the costs of providing it.
    True    False

 

  1. Illegal acts of a small dollar amount can be ignored because they are immaterial.
    True    False

 

  1. The conventions of consistency and conservatism require that financial statements present all the information relevant to users’ understanding of the statements.
    True    False

 

  1. General-purpose external financial statements that are divided into subcategories are called classified financial statements.
    True    False

 

  1. Classified balance sheets list accounts in alphabetical order.
    True    False

 

  1. Natural resources, such as coal mines and oil wells, are classified as intangible assets.
    True    False

 

  1. It is possible for an asset to be a current asset even though the expected conversion of that asset into cash is to be longer than one year.
    True    False

 

  1. The investments category on the balance sheet normally includes investments that are intended to be held for a long period of time.
    True    False

 

  1. The main difference between intangible assets and property, plant, and equipment is physical substance.
    True    False

 

  1. The main differences among the balance sheets of the sole proprietorship, the partnership, and the corporation are found in the current assets and current liabilities sections.
    True    False

 

  1. The two parts of a corporation’s stockholders’ equity section are contributed capital and retained earnings.
    True    False

 

  1. The Retained Earnings portion of a corporation represents the initial contribution of capital to the business.
    True    False

 

  1. Contributed capital is shown on a corporate balance sheet as two amounts: the par value of the issued stock and retained earnings.
    True    False

 

  1. The term owner’s equity is preferred over the term net worth because most assets are carried at original cost rather than at current value.
    True    False

 

  1. Return on assets is a measure of liquidity.
    True    False

 

  1. Return on assets is a better measure of profitability than profit margin because it takes into account the assets invested in the business.
    True    False

 

  1. Profitability means having enough cash on hand to pay bills when they become due.
    True    False

 

  1. Asset turnover measures how efficiently assets are used to produce revenues.
    True    False

 

  1. A company with a current ratio of 1.0 is considered more liquid than a company with a current ratio of 2.0.
    True    False

 

  1. A debt to equity ratio of 1.0 means that half of the company’s assets are financed by creditors.
    True    False

 

  1. A company with a low debt to equity ratio is in a more vulnerable position during poor economic times than a company with a high debt to equity ratio.
    True    False

 

  1. Profit margin and gross margin are the same thing.
    True    False

 

  1. A company with a profit margin of 6 percent earns sixty cents profit for every dollar of net sales.
    True    False

 

  1. A debt to equity ratio of 0.5 means that one-third of a company’s total assets are financed by creditors.
    True    False

 

  1. A company’s management can improve overall profitability by decreasing the profit margin,
    the asset turnover, or both.
    True    False

 

  1. Return on assets is a combination of the profit margin and the asset turnover.
    True    False

 

  1. A company with a low asset turnover uses its assets more productively than one with a high asset turnover.
    True    False

 

  1. Working capital is the amount by which current liabilities exceed current assets and measures how efficiently liabilities are used to produce sales.
    True    False

 

  1. All of the following must certify that a public company’s financial statements are accurate, complete, and not misleading, except for the
    A. chief financial officer.
    B. director of human resources.
    C. chief executive officer.
    D. independent auditor.

 

  1. General-purpose external financial statements are not primarily intended for
    A. management.
    B. investors.
    C. suppliers of goods and services.
    D. lending institutions.

 

  1. Financial statements are audited by outside accountants
    A. because it is a requirement stated in the Internal Revenue Code.
    B. only when fraudulent financial reporting is suspected.
    C. who then report on whether or not the company is a good investment.
    D. to increase the users’ confidence in the statements’ reliability.

 

  1. Financial statements have faithful representation when the information has all of the following except
    A. Complete information.
    B. Information that is free from error.
    C. Neutral information.
    D. Material information.

 

  1. According to the FASB, the usefulness of accounting is judged by which of the following two qualitative characteristics of accounting information?
    A. Comparability and neutrality
    B. Understandability and comparability
    C. Verifiability and timeliness
    D. Relevance and faithful representation

 

  1. The qualitative characteristic of faithful representation includes
    A. materiality
    B. confirmative value.
    C. timeliness.
    D. neutral information.

 

  1. Accounting information should make a difference to the outcome of a decision, according to the qualitative characteristic of
    A. faithful representation.
    B. relevance.
    C. consistency.
    D. understandability.

 

  1. The user can depend on the accuracy of financial information when which of the following qualitative characteristics has been followed?
    A. Relevance
    B. Faithful representation
    C. Understandability
    D. Timeliness

 

  1. The Securities and Exchange Commission instituted rules requiring the chief executive officers and chief financial officers of all publicly traded companies to certify that, to their knowledge, the quarterly and annual statements that their companies file with the SEC are
    A. 100 percent accurate and contain no misstatements, errors, or mistakes.
    B. accurate and complete.
    C. subject to interpretation due to the many accounting rules and regulations.
    D. not to be used except by individuals working for the company.

 

  1. The lower-of-cost-or-market method of accounting for inventories follows the convention of
    A. full disclosure.
    B. materiality.
    C. conservatism.
    D. cost-benefit.

 

  1. The convention of consistency refers to consistent use of accounting principles
    A. among firms.
    B. within a given accounting period.
    C. within industries.
    D. among accounting periods.

 

  1. A practical decision to expense a $120 printer rather than record it as property, plant, and equipment and depreciate it probably is made on the basis of the convention of
    A. conservatism.
    B. consistency.
    C. materiality.
    D. full disclosure.

 

  1. The accounting convention that is most responsible for the increase in the number of notes to financial statements is
    A. materiality.
    B. full disclosure.
    C. consistency.
    D. conservatism.

 

  1. __________ is the quality that different knowledgeable and independent observers could reach concensus that a particular depiction is a faithful representation.
    A. Verifiability.
    B. Consistency.
    C. Comparability.
    D. Neutrality.

 

  1. Which of the following accounting conventions would an accountant most likely apply when facing major uncertainties?
    A. Understandability
    B. Conservatism
    C. Materiality
    D. Verifiability

 

  1. Expensing a building in the year of purchase represents an abuse of which of the following accounting conventions?
    A. Full disclosure
    B. Cost-benefit
    C. Conservatism
    D. Consistency

 

  1. Which accounting convention could cause an overload of information for the financial statement user?
    A. Consistency
    B. Conservatism
    C. Full disclosure
    D. Materiality

 

  1. Which accounting convention requires a note to the financial statements explaining the company’s method of revenue recognition?
    A. Comparability and consistency
    B. Materiality
    C. Conservatism
    D. Full disclosure

 

  1. Which of the following is not an enhancing qualitative characteristic?
    A. Verifiability
    B. Timeliness
    C. Understandability
    D. Neutrality

 

  1. Faithful representation is comprised of all of the following except
    A. Verifiability
    B. Completeness
    C. Neutrality
    D. Free from error

 

  1. Relevance is comprised of all of the following except
    A. Neutrality
    B. Materiality
    C. Predictive value
    D. Confirmative value

 

  1. ___________ is related to both the nature of an item and its size.
    A. Neutrality
    B. Materiality
    C. Verifiability
    D. Timeliness

 

  1. Which of the following statements best describes predictive value?
    A. Helps capital providers make decisions about future actions.
    B. Provides all information necessary for a reliable decision.
    C. Enables users to identify similarities and differences.
    D. Enables users to comprehend the meaning of the information.

 

  1. A company should classify land held for a planned manufacturing facility as
    A. an intangible asset.
    B. an investment.
    C. a current asset.
    D. property, plant, and equipment.

 

  1. Which of the following should be classified as an intangible asset?
    A. Land held for future use
    B. Long-term notes receivable
    C. Special funds established to pay off a debt
    D. Copyright

 

  1. Which of the following would not appear in the owner’s equity section of a corporation?
    A. I. Muller, Capital
    B. Retained earnings
    C. Additional paid-in capital
    D. Common stock

 

  1. On a corporate balance sheet, earned capital is also known as
    A. common stock.
    B. paid-in capital.
    C. retained earnings.
    D. contributed capital.

 

  1. Use this information to answer the following question.
Sunshine Travel
Balance Sheet
December 31, 20×5
Assets
Cash $ 40,000
Short-term investments 20,000
Notes receivable (due in ten months) 15,000
Accounts receivable 10,000
Merchandise inventory 35,000
Land held for future use 40,000
Land 45,000
Building $50,000
Less accumulated depreciation    10,000 40,000
Trademark   35,000
Total assets $280,000
Liabilities
Notes payable (due in six months) $ 25,000
Accounts payable 10,000
Salaries payable 5,000
Mortgage payable (due in seven years)   45,000
Total liabilities $85,000
Owner’s Equity
Jennifer More, Capital 195,000
Total liabilities and owner’s equity $280,000

The total dollar amount of assets to be classified as current assets is
A. $105,000.
B. $145,000.
C. $95,000.
D. $120,000.

 

  1. Use this information to answer the following question.
Sunshine Travel
Balance Sheet
December 31, 20×5
Assets
Cash $ 40,000
Short-term investments 20,000
Notes receivable (due in ten months) 15,000
Accounts receivable 10,000
Merchandise inventory 35,000
Land held for future use 40,000
Land 45,000
Building $50,000
Less accumulated depreciation    10,000 40,000
Trademark   35,000
Total assets $280,000
Liabilities
Notes payable (due in six months) $ 25,000
Accounts payable 10,000
Salaries payable 5,000
Mortgage payable (due in seven years)   45,000
Total liabilities $85,000
Owner’s Equity
Jennifer More, Capital 195,000
Total liabilities and owner’s equity $280,000

The total dollar amount of assets to be classified as investments is
A. $125,000.
B. $95,000.
C. $60,000.
D. $40,000.

 

  1. Use this information to answer the following question.
Sunshine Travel
Balance Sheet
December 31, 20×5
Assets
Cash $ 40,000
Short-term investments 20,000
Notes receivable (due in ten months) 15,000
Accounts receivable 10,000
Merchandise inventory 35,000
Land held for future use 40,000
Land 45,000
Building $50,000
Less accumulated depreciation    10,000 40,000
Trademark   35,000
Total assets $280,000
Liabilities
Notes payable (due in six months) $ 25,000
Accounts payable 10,000
Salaries payable 5,000
Mortgage payable (due in seven years)   45,000
Total liabilities $85,000
Owner’s Equity
Jennifer More, Capital 195,000
Total liabilities and owner’s equity $280,000

The total dollar amount of assets to be classified as property, plant, and equipment is
A. $135,000.
B. $125,000.
C. $95,000.
D. $85,000.

 

  1. An investment is classified as short term or long term based on
    A. whether the investment can be sold immediately.
    B. the length of time the investor expects to hold it.
    C. the purpose for which it is held.
    D. the dollar amount of the investment.

 

  1. Which of the following accounts is most likely to appear on the balance sheet as a current liability?
    A. Accumulated Depreciation
    B. Bonds Payable
    C. Mortgage Payable
    D. Wages Payable

 

  1. Which accounting term does not mean the same as the others?
    A. Retained earnings
    B. Net worth
    C. Capital
    D. Owner’s equity

 

  1. Which of the following should be classified as a current asset?
    A. Supplies
    B. Trademark
    C. Equipment
    D. Land held for future use

 

  1. Goodwill would appear in which balance sheet section?
    A. Investments
    B. Property, plant, and equipment
    C. Current assets
    D. Intangible assets

 

  1. Stephanie Cape purchased a franchise for dry cleaning services.  Stephanie is running the dry cleaning business as her primary occupation.  Where on the balance sheet is the franchise reported?
    A. Property, plant, and equipment
    B. Investments
    C. Current assets
    D. Intangible assets

 

  1. The normal operating cycle helps define which of the following balance sheet sections?
    A. Owner’s equity
    B. Current liabilities
    C. Intangible assets
    D. Property, plant, and equipment

 

  1. Liabilities have which of the following two major categories?
    A. Accounts payable and notes payable
    B. Contributed capital and retained earnings
    C. Current and long term
    D. Unearned revenues and other payables

 

  1. Use this information to answer the following question.
Coyle Company
Balance Sheet
December 31, 20×5
Assets
Cash $ 70,000
Short-term investments 56,000
Accounts receivable 28,000
Notes receivable (due in six months) 42,000
Merchandise inventory 98,000
Special fund for purchasing a building 112,000
Land 140,000
Building $150,000
Less accumulated depreciation    28,000 122,000
Trademark   92,000
Total assets $760,000
Liabilities
Notes payable (due in one year) $ 70,000
Accounts payable 30,000
Salaries payable 14,000
Mortgage payable (due in seven years)   146,000
Total liabilities $260,000
Owner’s Equity
Eddie Coyle, Capital   500,000
Total liabilities and owner’s equity $760,000

The total dollar amount of assets to be classified as current assets is
A. $252,000.
B. $238,000.
C. $294,000.
D. $406,000.

 

  1. Use this information to answer the following question.
Coyle Company
Balance Sheet
December 31, 20×5
Assets
Cash $ 70,000
Short-term investments 56,000
Accounts receivable 28,000
Notes receivable (due in six months) 42,000
Merchandise inventory 98,000
Special fund for purchasing a building 112,000
Land 140,000
Building $150,000
Less accumulated depreciation    28,000 122,000
Trademark   92,000
Total assets $760,000
Liabilities
Notes payable (due in one year) $ 70,000
Accounts payable 30,000
Salaries payable 14,000
Mortgage payable (due in seven years)   146,000
Total liabilities $260,000
Owner’s Equity
Eddie Coyle, Capital   500,000
Total liabilities and owner’s equity $760,000

The total dollar amount of assets to be classified as investments is
A. $168,000.
B. $0.
C. $112,000.
D. $56,000.

 

  1. Use this information to answer the following question.
Coyle Company
Balance Sheet
December 31, 20×5
Assets
Cash $ 70,000
Short-term investments 56,000
Accounts receivable 28,000
Notes receivable (due in six months) 42,000
Merchandise inventory 98,000
Special fund for purchasing a building 112,000
Land 140,000
Building $150,000
Less accumulated depreciation    28,000 122,000
Trademark   92,000
Total assets $760,000
Liabilities
Notes payable (due in one year) $ 70,000
Accounts payable 30,000
Salaries payable 14,000
Mortgage payable (due in seven years)   146,000
Total liabilities $260,000
Owner’s Equity
Eddie Coyle, Capital   500,000
Total liabilities and owner’s equity $760,000

The total dollar amount of assets to be classified as property, plant, and equipment is
A. $374,000.
B. $262,000.
C. $354,000.
D. $122,000.

 

  1. Intangible assets could include all except
    A. Trademark
    B. Land held for future use
    C. Patent
    D. Goodwill

 

  1. The debt to equity ratio equals
    A. owner’s equity divided by total liabilities.
    B. owner’s equity divided by long-term liabilities.
    C. total liabilities divided by owner’s equity.
    D. current liabilities divided by average owner’s equity.

 

  1. The profit margin equals
    A. net sales divided by net income.
    B. gross margin divided by net income.
    C. net income divided by gross margin.
    D. net income divided by revenues.

 

  1. The asset turnover ratio equals
    A. revenues divided by average total assets.
    B. average total assets divided by net income.
    C. average total assets divided by total liabilities.
    D. net income divided by average total assets.

 

  1. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.
National Textile
Balance Sheet
December 31, 20×5
Assets Liabilities
Current assets $ 12,000 Current liabilities $ 8,000
Investments 2,000 Long-term liabilities    2,000
Property, plant, and equipment 16,000 Total liabilities $ 10,000
Intangible assets    10,000
Owner’s Equity
Jonah Jones, Capital   30,000
Total liabilities and
Total assets $40,000 owner’s equity $40,000

 

National Textile
Income Statement
For the Year Ended December 31, 20×5
Net sales $48,000
Cost of goods sold     16,000
Gross margin $32,000
Operating expenses   22,400
Net income $  9,600

The total amount of working capital for National Textile is
A. $2,000.
B. $6,000.
C. $4,000.
D. $30,000.

 

  1. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.
National Textile
Balance Sheet
December 31, 20×5
Assets Liabilities
Current assets $ 12,000 Current liabilities $ 8,000
Investments 2,000 Long-term liabilities    2,000
Property, plant, and equipment 16,000 Total liabilities $ 10,000
Intangible assets    10,000
Owner’s Equity
Jonah Jones, Capital   30,000
Total liabilities and
Total assets $40,000 owner’s equity $40,000

 

National Textile
Income Statement
For the Year Ended December 31, 20×5
Net sales $48,000
Cost of goods sold     16,000
Gross margin $32,000
Operating expenses   22,400
Net income $  9,600

The current ratio for National Textile is
A. 1.20.
B. 1.75.
C. .67.
D. 1.50.

 

  1. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.
National Textile
Balance Sheet
December 31, 20×5
Assets Liabilities
Current assets $ 12,000 Current liabilities $ 8,000
Investments 2,000 Long-term liabilities    2,000
Property, plant, and equipment 16,000 Total liabilities $ 10,000
Intangible assets    10,000
Owner’s Equity
Jonah Jones, Capital   30,000
Total liabilities and
Total assets $40,000 owner’s equity $40,000

 

National Textile
Income Statement
For the Year Ended December 31, 20×5
Net sales $48,000
Cost of goods sold     16,000
Gross margin $32,000
Operating expenses   22,400
Net income $  9,600

The profit margin for National Textile is
A. 60 percent.
B. 25 percent.
C. 20 percent.
D. 12 percent.

 

  1. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.
National Textile
Balance Sheet
December 31, 20×5
Assets Liabilities
Current assets $ 12,000 Current liabilities $ 8,000
Investments 2,000 Long-term liabilities    2,000
Property, plant, and equipment 16,000 Total liabilities $ 10,000
Intangible assets    10,000
Owner’s Equity
Jonah Jones, Capital   30,000
Total liabilities and
Total assets $40,000 owner’s equity $40,000

 

National Textile
Income Statement
For the Year Ended December 31, 20×5
Net sales $48,000
Cost of goods sold     16,000
Gross margin $32,000
Operating expenses   22,400
Net income $  9,600

The return on assets for National Textile is
A. 30 percent.
B. 150 percent.
C. 33-1/3 percent.
D. 24 percent.

 

  1. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.
National Textile
Balance Sheet
December 31, 20×5
Assets Liabilities
Current assets $ 12,000 Current liabilities $ 8,000
Investments 2,000 Long-term liabilities    2,000
Property, plant, and equipment 16,000 Total liabilities $ 10,000
Intangible assets    10,000
Owner’s Equity
Jonah Jones, Capital   30,000
Total liabilities and
Total assets $40,000 owner’s equity $40,000

 

National Textile
Income Statement
For the Year Ended December 31, 20×5
Net sales $48,000
Cost of goods sold     16,000
Gross margin $32,000
Operating expenses   22,400
Net income $  9,600

The return on equity for National Textile is
A. 40 percent.
B. 67 percent.
C. 47 percent.
D. 32 percent.

 

  1. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.
National Textile
Balance Sheet
December 31, 20×5
Assets Liabilities
Current assets $ 12,000 Current liabilities $ 8,000
Investments 2,000 Long-term liabilities    2,000
Property, plant, and equipment 16,000 Total liabilities $ 10,000
Intangible assets    10,000
Owner’s Equity
Jonah Jones, Capital   30,000
Total liabilities and
Total assets $40,000 owner’s equity $40,000

 

National Textile
Income Statement
For the Year Ended December 31, 20×5
Net sales $48,000
Cost of goods sold     16,000
Gross margin $32,000
Operating expenses   22,400
Net income $  9,600

The debt to equity ratio for National Textile is
A. 67 percent.
B. 75 percent.
C. 25 percent.
D. 33-1/3 percent.

 

  1. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.
National Textile
Balance Sheet
December 31, 20×5
Assets Liabilities
Current assets $ 12,000 Current liabilities $ 8,000
Investments 2,000 Long-term liabilities    2,000
Property, plant, and equipment 16,000 Total liabilities $ 10,000
Intangible assets    10,000
Owner’s Equity
Jonah Jones, Capital   30,000
Total liabilities and
Total assets $40,000 owner’s equity $40,000

 

National Textile
Income Statement
For the Year Ended December 31, 20×5
Net sales $48,000
Cost of goods sold     16,000
Gross margin $32,000
Operating expenses   22,400
Net income $  9,600

The asset turnover for National Textile is
A. 1.00 times.
B. 1.33 times.
C. 0.83 times.
D. 1.20 times.

 

  1. Which of the following is not a measure of profitability?
    A. Current ratio
    B. Return on assets
    C. Return on equity
    D. Debt to equity ratio

 

  1. Which of the following is a measure of liquidity?
    A. Return on equity
    B. Return on assets
    C. Working capital
    D. Profit margin

 

  1. Current assets divided by current liabilities is known as the
    A. profit margin.
    B. current ratio.
    C. working capital.
    D. capital structure.

 

  1. Which of the following is not expressed in terms of a percentage?
    A. Return on equity
    B. Debt to equity ratio
    C. Current ratio
    D. Profit margin

 

  1. Which of the following is expressed in terms of a percentage?
    A. Return on equity
    B. Current ratio
    C. Asset turnover
    D. Working capital

 

  1. Which of the following does not include net income in its computation?
    A. Debt to equity ratio
    B. Return on assets
    C. Return on equity
    D. Profit margin

 

  1. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.
Cane Construction
Balance Sheet
December 31, 20×5
Assets Liabilities
Current assets $ 14,000 Current liabilities $  8,000
Investments 6,000 Long-term liabilities       2,000
Property, plant, and equipment 24,000 Total liabilities $  10,000
Intangible assets    16,000
Owner’s Equity
Carlton Cane, Capital   50,000
Total liabilities and
Total assets $60,000 owner’s equity $60,000

 

 

Cane Construction
Income Statement
For the Year Ended December 31, 20×5
Net sales $80,000
Cost of goods sold   32,000
Gross margin $48,000
Operating expenses   26,400
Net income $21,600

The total amount of working capital for Cane Construction is
A. $4,000.
B. $14,000.
C. $6,000.
D. $2,000.

 

  1. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.
Cane Construction
Balance Sheet
December 31, 20×5
Assets Liabilities
Current assets $ 14,000 Current liabilities $  8,000
Investments 6,000 Long-term liabilities       2,000
Property, plant, and equipment 24,000 Total liabilities $  10,000
Intangible assets    16,000
Owner’s Equity
Carlton Cane, Capital   50,000
Total liabilities and
Total assets $60,000 owner’s equity $60,000

 

 

Cane Construction
Income Statement
For the Year Ended December 31, 20×5
Net sales $80,000
Cost of goods sold   32,000
Gross margin $48,000
Operating expenses   26,400
Net income $21,600

The current ratio for Cane Construction is
A. 1.75.
B. 0.57.
C. 1.4.
D. 2.0.

 

  1. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.
Cane Construction
Balance Sheet
December 31, 20×5
Assets Liabilities
Current assets $ 14,000 Current liabilities $  8,000
Investments 6,000 Long-term liabilities       2,000
Property, plant, and equipment 24,000 Total liabilities $  10,000
Intangible assets    16,000
Owner’s Equity
Carlton Cane, Capital   50,000
Total liabilities and
Total assets $60,000 owner’s equity $60,000

 

 

Cane Construction
Income Statement
For the Year Ended December 31, 20×5
Net sales $80,000
Cost of goods sold   32,000
Gross margin $48,000
Operating expenses   26,400
Net income $21,600

The profit margin for Cane Construction is
A. 30 percent.
B. 75 percent.
C. 60 percent.
D. 27 percent.

 

  1. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.
Cane Construction
Balance Sheet
December 31, 20×5
Assets Liabilities
Current assets $ 14,000 Current liabilities $  8,000
Investments 6,000 Long-term liabilities       2,000
Property, plant, and equipment 24,000 Total liabilities $  10,000
Intangible assets    16,000
Owner’s Equity
Carlton Cane, Capital   50,000
Total liabilities and
Total assets $60,000 owner’s equity $60,000

 

 

Cane Construction
Income Statement
For the Year Ended December 31, 20×5
Net sales $80,000
Cost of goods sold   32,000
Gross margin $48,000
Operating expenses   26,400
Net income $21,600

The return on assets for Cane Construction is
A. 80 percent.
B. 70 percent.
C. 36 percent.
D. 133 percent.

 

  1. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.
Cane Construction
Balance Sheet
December 31, 20×5
Assets Liabilities
Current assets $ 14,000 Current liabilities $  8,000
Investments 6,000 Long-term liabilities       2,000
Property, plant, and equipment 24,000 Total liabilities $  10,000
Intangible assets    16,000
Owner’s Equity
Carlton Cane, Capital   50,000
Total liabilities and
Total assets $60,000 owner’s equity $60,000

 

 

Cane Construction
Income Statement
For the Year Ended December 31, 20×5
Net sales $80,000
Cost of goods sold   32,000
Gross margin $48,000
Operating expenses   26,400
Net income $21,600

The return on equity for Cane Construction is
A. 62.5 percent.
B. 43.2 percent.
C. 84 percent.
D. 60 percent.

 

  1. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.
Cane Construction
Balance Sheet
December 31, 20×5
Assets Liabilities
Current assets $ 14,000 Current liabilities $  8,000
Investments 6,000 Long-term liabilities       2,000
Property, plant, and equipment 24,000 Total liabilities $  10,000
Intangible assets    16,000
Owner’s Equity
Carlton Cane, Capital   50,000
Total liabilities and
Total assets $60,000 owner’s equity $60,000

 

 

Cane Construction
Income Statement
For the Year Ended December 31, 20×5
Net sales $80,000
Cost of goods sold   32,000
Gross margin $48,000
Operating expenses   26,400
Net income $21,600

The debt to equity ratio for Cane Construction is
A. 16-2/3 percent.
B. 20 percent.
C. 80 percent.
D. 83-1/3 percent.

 

  1. Use this information to answer the following question.
J. & B. Auto Parts
Balance Sheet
December 31, 20×5
Assets
Cash $ 60,000
Short-term investments 40,000
Notes receivable (due in ten months) 30,000
Accounts receivable 20,000
Merchandise inventory 70,000
Long-term investments 80,000
Land 90,000
Building $100,000
Less accumulated depreciation    20,000 80,000
Trademark   70,000
Total assets $540,000
Liabilities
Notes payable (due in six months) $ 50,000
Accounts payable 20,000
Salaries payable 10,000
Mortgage payable (due in seven years)   90,000
Total liabilities $170,000
Owner’s Equity
Cheryl Stein, Capital   370,000
Total liabilities and owner’s equity $540,000

The debt to equity ratio is
A. 0.46.
B. 0.67.
C. 2.18.
D. 0.33.

 

  1. Use this information to answer the following question.
J. & B. Auto Parts
Balance Sheet
December 31, 20×5
Assets
Cash $ 60,000
Short-term investments 40,000
Notes receivable (due in ten months) 30,000
Accounts receivable 20,000
Merchandise inventory 70,000
Long-term investments 80,000
Land 90,000
Building $100,000
Less accumulated depreciation    20,000 80,000
Trademark   70,000
Total assets $540,000
Liabilities
Notes payable (due in six months) $ 50,000
Accounts payable 60,000
Salaries payable 10,000
Mortgage payable (due in seven years)   50,000
Total liabilities $170,000
Owner’s Equity
Cheryl Stein, Capital   370,000
Total liabilities and owner’s equity $540,000

The total amount of working capital is
A. $150,000.
B. $370,000.
C. $100,000.
D. $60,000.

 

  1. Use this information to answer the following question.
Coyle Company
Balance Sheet
December 31, 20×5
Assets
Cash $ 70,000
Short-term investments 56,000
Accounts receivable 28,000
Notes receivable (due in six months) 42,000
Merchandise inventory 98,000
Special fund for purchasing a building 112,000
Land 140,000
Building $150,000
Less accumulated depreciation    28,000 122,000
Trademark   92,000
Total assets $760,000
Liabilities
Notes payable (due in one year) $ 70,000
Accounts payable 30,000
Salaries payable 14,000
Mortgage payable (due in seven years)   146,000
Total liabilities $260,000
Owner’s Equity
Eddie Coyle, Capital   500,000
Total liabilities and owner’s equity $760,000

The debt to equity ratio is
A. 0.48.
B. 0.34.
C. 0.52.
D. 1.92.

 

  1. Use this information to answer the following question.
Coyle Company
Balance Sheet
December 31, 20×5
Assets
Cash $ 70,000
Short-term investments 56,000
Accounts receivable 28,000
Notes receivable (due in six months) 42,000
Merchandise inventory 98,000
Special fund for purchasing a building 112,000
Land 140,000
Building $150,000
Less accumulated depreciation    28,000 122,000
Trademark   92,000
Total assets $760,000
Liabilities
Notes payable (due in one year) $ 70,000
Accounts payable 130,000
Salaries payable 14,000
Mortgage payable (due in seven years)   46,000
Total liabilities $260,000
Owner’s Equity
Eddie Coyle, Capital   500,000
Total liabilities and owner’s equity $760,000

The total amount of working capital is
A. ($30,000.)
B. $80,000.
C. $24,000.
D. $400,000.

 

  1. Working capital measures
    A. the excess of current assets over current liabilities—what is on hand to fund business operations.
    B. the ability to earn a satisfactory income.
    C. the amount of debt in the company.
    D. the profitability of the business.

 

  1. The asset turnover ratio measures
    A. how quickly the company uses assets to pay debt.
    B. how efficiently assets are used to produce sales.
    C. the income produced by selling inventory.
    D. how efficiently equity is used to produce revenue.

 

  1. Each of the following statements is justified by a concept or convention of accounting. Write the letter in the blank next to each statement corresponding to the concept or convention involved.
a. Consistency d. Full disclosure
b. Materiality e. Cost-benefit
c. Conservatism

_____ 1. This convention best enhances comparability of financial statements between years.
_____ 2. A merger agreed on just after the balance sheet date nevertheless is reported in the notes to the financial statements.
_____ 3. A company forgoes hiring another full-time accountant, which would add only slightly to the financial statements’ accuracy.
_____ 4. A company uses lower-of-cost-or-market to value inventory.
_____ 5. A large company rounds its financial statement figures to the nearest $10,000.

 

 

 

 

 

  1. Each of the following statements violates a concept or convention of accounting. Write the letter in the blank next to each statement corresponding to the concept or convention violated.
a. Consistency d. Full disclosure
b. Materiality e. Cost-benefit
c. Conservatism

_____ 1. A note to the financial statements indicating a change in inventory methods is omitted.
_____ 2. When management is unsure of which estimates to use in a given situation, the estimate resulting in the largest net income is always used.
_____ 3. In 20×5, a company uses straight-line depreciation and in 20×6 the company uses declining-balance depreciation.
_____ 4. A small company expenses all expenditures under $10,000.
_____ 5. A small company purchases a $50,000 computer to save $3,000 per year in bookkeeping wages.

 

 

 

 

 

  1. Bill Pierce owns several ice cream shops all within 50 miles of his home. He has plans to expand the number of shops he owns. This planned expansion will require a large bank loan. Bill has always done his own accounting work and has prepared a set of financial statements for each of the past five years of operations to present to the bank. Because some periods were more profitable than others, Bill attempted to streamline his earnings by switching depreciation and inventory valuation methods frequently. This created the appearance that his company earnings were very consistent over the years. Discuss the merits of Bill’s financial statements with regard to his streamlining decisions.

 

 

 

 

 

  1. Why is it important for a company to maintain the same accounting methods and practices from period to period?

 

 

 

 

 

  1. The following lettered items represent a classification scheme for a balance sheet, and the numbered items represent accounts. In the blank next to each account, write the letter indicating to which category it belongs.
a. Current assets e. Current liabilities
b. Investments f. Long-term liabilities
c. Plant and equipment g. Owner’s equity
d. Intangible assets h. Not on balance sheet

 

_____ 1. Accumulated Depreciation _____ 7. Trademark
_____ 2. Revenues Received in
Advance
_____ 8. Notes Payable (in five years)
_____ 3. Interest Expense _____ 9. Depreciation Expense
_____ 4. Wages Payable _____ 10. Prepaid Interest
_____ 5. Owner’s Capital _____ 11. Land Held for Future Use
_____ 6. Inventory

 

 

 

 

 

 

  1. State the definition of a current asset.

 

 

 

 

 

  1. Match the following financial statement ratios with their definition.1. Working capital _____
    2. Current ratio _______
    3. Profit margin ______
    4. Return on assets______
    5. Debt to equity ratio________
    6. Return on equity_______
    7. Asset turnover_________a. A measure of profitability that shows the proportion of a company’s assets that is financed by creditors and the proportion financed by owners
    b. A measure of liquidity that shows the net current assets on hand to continue business operations
    c. A measure of profitability that relates the amount earned by a business to the owner’s investment in the business
    d. A measure of profitability that shows the percentage of each sales dollar that results in net income
    e. A measure of liquidity; current assets divided by current liabilities
    f. A measure of profitability that shows how efficiently a company uses its assets to produce income
    g. A measure of how efficiently assets are used to produce sales

 

 

 

 

 

  1. The profit margin and asset turnover ratios are important measures, but they have a limitation.  Describe these limitations and discuss the ratio that can be used to overcome these deficiencies.

 

 

 

 

 

  1. Describe how the current ratio is calculated.  If a company has a very low current ratio, what might this mean?  If a company has a very high current ratio, what might this mean?

 

 

 

 

 

1. Quality that enables users to identify similarities and differences between two sets of financial data.      Qualitative characteristics.   ____
2. Related to both the nature of an item and its size.      Predictive value.   ____
3. Quality that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.      Materiality.   ____
4. Requires that once a company has adopted an accounting procedure, it must use it from one period to the next unless a note to the financial statements informs users of a change.      Neutrality.   ____
5. Free from bias intended to achieve a certain result or to bring about a particular behavior.      Comparability.   ____
6. Helps capital providers make decisions about future actions.      Verifiability.   ____
7. Relevance and faithful representation.      Consistency.   ____
8. When faced with choosing between two equally acceptable procedures or estimates, accountants should choose the one that is least likely to overstate assets and income.      Conservatism   ____

 

1. The percentage of each sales dollar that results in net income.      Current assets.   ____
2. Measures how efficiently assets are used to produce sales.      Investments..   ____
3. Current assets divided by current liabilities.      Net worth.   ____
4. Cash and other assets that a company can reasonably expect to convert to cash, sell, or consume within one year or its normal operating cycle, whichever is longer.      Earned capital.   ____
5. A less-preferred term for “owner’s equity.”      Current ratio.   ____
6. Another name for retained earnings.      Profit margin.   ____
7. Measures how much income did each dollar of assets generate.      Asset turnover.   ____
8. Include assets, usually long-term, that are not used in normal business operations and that management does not plan to convert to cash within the next year.      Return on assets.   ____

 

  1. Using the following data, prepare a classified balance sheet for Blanchard Company as of December 31, 20×5.
Cash $   200 Accumulated Depreciation– Building $  1,000
Investments in Short-Term Government Securities 400 Franchise 1,800
Accounts Receivable 800 Accounts Payable 1,600
Inventory 3,000 Revenues Received in Advance 400
Prepaid Rent 100 Notes Payable (in two years) 4,000
Investment in Land Held for future use 2,700 John Blanchard, Capital 12,000
Land 2,000
Building 8,000

 

 

 

 

 

 

  1. Using the following data, prepare a classified balance sheet as of December 31, 20×5, for Paula’s Picture Frame Company.
Accounts Payable $ 4,800 Accounts Receivable $  9,000
Building Not Currently Used 57,000 Cash 15,600
Accumulated Depreciation– Equipment 24,000 Unearned Revenue 2,400
Short-Term Investments 6,000
Paula West, Capital 127,800 Land 48,000
Copyright 15,000 Equipment 45,000
Notes Payable (due in 5 years) 39,000 Long-Term Investments 2,400

 

 

 

 

 

 

  1. Use the following information to calculate the liquidity and profitability ratios listed below. Round to two decimal places.
Average owner’s equity $  13,875 Net income $  2,250
Average total assets 27,000 Net sales 23,437.50
Current assets 16,875 Total liabilities 13,125
Current liabilities 11,250
  1. Current ratio
    b. Working capital
    c. Return on equity
    d. Profit margin
    e. Debt to equity ratio
    f. Return on assets
    g. Asset turnover

 

 

 

 

 

  1. Use the following information to calculate the liquidity and profitability ratios listed below. Round to two decimal places.
Average owner’s equity $14,000 Net income $ 2,100
Average total assets 21,000 Net sales 17,500
Current assets 15,000 Total liabilities 10,500
Current liabilities 10,000
  1. Current ratio
    b. Working capital
    c. Return on equity
    d. Profit margin
    e. Debt to equity ratio
    f.  Return on assets
    g. Asset turnover

 

 

 

 

 

  1. Using the following amounts taken from the balance sheet and income statement of a business, compute the measures listed below. After each answer, write “L” if it is a measure of liquidity or “P” if it is a measure of profitability. Round to two decimal places.
Current assets $  12,000 Average owner’s equity $30,000
Average total assets 60,000 Net sales 39,000
Current liabilities 9,000 Net income 4,800
Long-term liabilities 21,000
  1. Return on assets
    b. Working capital
    c. Return on equity
    d. Current ratio

 

 

 

 

 

  1. Using the following amounts taken from the balance sheet and income statement of a business, compute the measures listed below. After each answer, write “L” if it is a measure of liquidity or “P” if it is a measure of profitability. Round to two decimal places.
Current assets $  30,000 Average owner’s equity $60,000
Average total assets 120,000 Net sales 64,000
Current liabilities 20,000 Net income 3,000
Long-term liabilities 40,000
  1. Current ratio
    b. Return on equity
    c. Return on assets
    d. Working capital

 

 

 

 

 

  1. A. From the simplified balance sheet and income statement of the business below, compute the following ratios. Assume that the June 30 amounts for total assets and owner’s equity also represent their average amounts for the period. Round percentages to the nearest whole percent.a. Working capital
    b. Current ratio
    c. Profit margin
    d. Return on assets
    e. Debt to equity ratio
    f.  Return on equity
    g. Asset turnover
Keene Industries
Balance Sheet
June 30, 20×5
Assets Liabilities
Current assets $ 8,000  Current liabilities $  8,000
Investments 4,000  Long-term liabilities     12,000
Property, plant, and  Total liabilities $20,000
equipment 24,000
Intangible assets   4,000 Owner’s Equity
 Kathy Keene, Capital   20,000
 Total liabilities and
Total assets $40,000 owner’s equity $40,000

 

Keene Industries
Income Statement
For the Year Ended June 30, 20×5
Net sales $48,000
Cost of goods sold   24,000
Gross margin $24,000
Operating expenses     19,200
Net income $ 4,800
  1. Discuss the liquidity and profitability of Keene Industries.

 

 

 

 

 

  1. A. From the simplified balance sheet and income statement of the business below, compute the following ratios. Assume that the April 30 amounts for total assets and owner’s equity also represent their average amounts for the period. Round percentages to the nearest whole percent.a. Working capital
    b. Current ratio
    c. Profit margin
    d. Return on assets
    e. Debt to equity ratio
    f.  Return on equity
    g. Asset turnover
TG Manufacturing
Balance Sheet
April 30, 20×5
Assets Liabilities
Current assets $ 4,000  Current liabilities $  2,000
Investments 6,000  Long-term liabilities     8,000
Property, plant, and Total liabilities $10,000
equipment 16,000
Intangible assets   4,000 Owner’s Equity
 Ted Gruen, Capital   20,000
 Total liabilities and
Total assets $30,000 owner’s equity $30,000

 

TG Manufacturing
Income Statement
For the Year Ended April 30, 20×5
Net sales $40,000
Cost of goods sold   22,000
Gross margin $18,000
Operating expenses   14,400
Net income $  3,600
  1. Discuss the liquidity and profitability of TG Manufacturing.

 

 

Chapter 9: Receivables

Student: ___________________________________________________________________________

  1. Following a lenient credit-granting policy will probably result in fewer defaults by customers.
    True    False

 

  1. Bad debts are considered as an expense of selling on credit.
    True    False

 

  1. Notes receivable due within 90 days and cash are examples of short-term financial assets.
    True    False

 

  1. Loans to company employees should be included with accounts receivable on the balance sheet.
    True    False

 

  1. Because bad debt losses are incurred to generate sales, they should be charged against the sales that they helped generate.
    True    False

 

  1. The direct charge-off method makes no attempt to match bad-debt losses with revenues.
    True    False

 

  1. The allowance method of handling bad debts violates the matching principle.
    True    False

 

  1. Under the allowance method, Uncollectible Accounts Expense is not recorded when an individual customer defaults.
    True    False

 

  1. The existence of uncollectible accounts is evidence of poor credit policies.
    True    False

 

  1. The direct charge-off method of recognizing uncollectible accounts is not in accordance with generally accepted accounting principles.
    True    False

 

  1. Both the allowance method and the direct charge-off method are acceptable for tax purposes.
    True    False

 

  1. When using the direct charge-off method, year-end adjustments for uncollectible accounts expense are not made.
    True    False

 

  1. A promissory note may be issued for an amount to be determined at a future date.
    True    False

 

  1. The debtor named in a promissory note is called the payee.
    True    False

 

  1. When the allowance method is used, the write-off of an account receivable results in an expense at the time of write-off.
    True    False

 

  1. Under the allowance method, uncollectible accounts must be estimated if the matching rule is to be followed.
    True    False

 

  1. Under the accounts receivable aging method, the balance in Allowance for Uncollectible Accounts must be considered prior to adjusting for estimated uncollectible accounts.
    True    False

 

  1. The allowance for uncollectible accounts is similar to accumulated depreciation in that it represents the total of all accounts written off over the years.
    True    False

 

  1. When an account receivable that was previously written off is collected, it is necessary to reverse the entry for the write-off before recording the collection.
    True    False

 

  1. Uncollectible accounts should not be estimated because it is impossible to know which accounts will not be collected.
    True    False

 

  1. The Allowance for Uncollectible Accounts is a contra-asset account.
    True    False

 

  1. The percentage of net sales method of estimating uncollectible accounts is in violation of the matching principle.
    True    False

 

  1. The principal of a non-interest-bearing note includes an implied interest cost.
    True    False

 

  1. A 60-day note dated December 10 is due on February 10.
    True    False

 

  1. Interest on a six-month, 7 percent, $2,000 note is calculated by multiplying $2,000 ´ 7/100 ´ 6/12.
    True    False

 

  1. If a promissory note is dishonored, the payee should record interest income.
    True    False

 

  1. The holder of a note adjusts for accrued interest by debiting Interest Receivable and crediting Interest Income.
    True    False

 

  1. The holder, or payee, of a dishonored note should transfer the total amount due, including interest income, from Notes Receivable to an individual account receivable for the debtor.
    True    False

 

  1. Purchasing receivables with recourse is riskier than purchasing them without recourse.
    True    False

 

  1. A company’s acceptance of credit cards, like MasterCard, is an example of factoring with recourse.
    True    False

 

  1. It is considered unethical to use the estimate for bad debts to purposely manipulate the amount of net income.
    True    False

 

  1. Under securitization, a company sells individual receivables with recourse at a large discount.
    True    False

 

  1. The fee for factoring without recourse is normally higher than it would be with recourse.
    True    False

 

  1. A discounted note represents a contingent liability to the original holder.
    True    False

 

  1. Days’ sales uncollected cannot be calculated without first knowing the receivables turnover.
    True    False

 

  1. The receivables turnover is expressed as a percentage.
    True    False

 

  1. The higher the receivables turnover, the lower the days’ sales uncollected.
    True    False

 

  1. A company that factors its receivables will have a less favorable receivable turnover than a company that does not factor.
    True    False

 

  1. Securitization delays the receipt of cash from sales made on credit.
    True    False

 

  1. When Company A discounts without recourse a note to Company B, Company A has a contingent liability until the note is paid.
    True    False

 

  1. Which of the following accounts is classified as a short-term financial asset?
    A. Office Supplies
    B. Accounts Receivable
    C. Equipment
    D. Prepaid Insurance

 

  1. The allowance for uncollectible accounts is necessary because
    A. a liability results when a credit sale is made.
    B. when recording uncollectible accounts expense, it is not possible to predict specifically which accounts will not be collected.
    C. management should know how many credit losses have been sustained over the years.
    D. uncollected accounts that are written off must be accumulated in a separate account.

 

  1. The matching rule
    A. results in the recording of a known amount for bad-debt losses.
    B. necessitates the recording of an estimated amount for bad debts.
    C. requires that all bad-debt losses be recorded when an individual customer defaults.
    D. is violated when the allowance method is employed.

 

  1. The matching rule relates to credit losses by stating that Uncollectible Accounts Expense should be recorded
    A. in the period of the loss.
    B. for an exact amount.
    C. in the same period as allowed for tax purposes.
    D. in the period of the sale.

 

  1. Under the direct charge-off method of dealing with uncollectible accounts,
    A. revenues and expenses are properly matched.
    B. Accounts Receivable is shown on the balance sheet at net realizable value.
    C. Uncollectible Accounts Expense is recorded in the period of the sale.
    D. no Allowance for Uncollectible Accounts exists.

 

  1. Each of the following is a characteristic of a promissory note except a(n)
    A. maturity date that can be determined on the date the note is signed.
    B. payee who has an unconditional right to receive a definite amount on a definite date.
    C. maker who agrees to pay a definite sum subject to certain conditions.
    D. amount to be paid that can be determined on the date the note is signed.

 

  1. Which of the following statements is false regarding promissory notes?
    A. They are sometimes used to extend past-due accounts.
    B. They can be resold to banks.
    C. They must be held by the maker until maturity.
    D. They are often received upon the sale of machinery and automobiles.

 

  1. Assume that on December 1, a $6,000, 90-day, 10 percent note receivable was received from a customer as an extension of his past-due account. The entry that would be made to record the note is:
    A. Notes Receivable      6,000
    Cash            6,000
    B. Notes Receivable      6,000
    Interest Income            6,000
    C. Notes Receivable      6,000
    Accounts Receivable            6,000
    D. Cash      6,000
    Accounts Receivable            6,000

 

  1. Use this information to answer the following question.The general ledger account for Accounts Receivable shows a debit balance of $50,000. Allowance for Uncollectible Accounts has a credit balance of $1,000. Net sales for the year were $500,000. In the past, 2 percent of sales have proved uncollectible, and an aging of accounts receivable accounts results in an estimate of $13,500 of uncollectible accounts.Using the percentage of net sales method, Uncollectible Accounts Expense would be debited for
    A. $9,000.
    B. $11,000.
    C. $1,000.
    D. $10,000.

 

  1. Use this information to answer the following question.The general ledger account for Accounts Receivable shows a debit balance of $50,000. Allowance for Uncollectible Accounts has a credit balance of $1,000. Net sales for the year were $494,000. In the past, 2 percent of sales have proved uncollectible, and an aging of accounts receivable accounts results in an estimate of $13,500 of uncollectible accounts.Using the percentage of net sales method, the Allowance for Uncollectible Accounts balance (after adjustment) would be
    A. $8,880.
    B. $9,880.
    C. $10,880.
    D. $1,000.

 

  1. Use this information to answer the following question.The general ledger account for Accounts Receivable shows a debit balance of $50,000. Allowance for Uncollectible Accounts has a credit balance of $1,000. Net sales for the year were $500,000. In the past, 2 percent of sales have proved uncollectible, and an aging of accounts receivable accounts results in an estimate of $11,700 of uncollectible accounts.Using the accounts receivable aging method, the Allowance for Uncollectible Accounts balance would be credited for
    A. $10,700.
    B. $11,700.
    C. $12,200.
    D. $12,700.

 

  1. Use this information to answer the following question.The general ledger account for Accounts Receivable shows a debit balance of $50,000. Allowance for Uncollectible Accounts has a debit balance of $1,000. Net sales for the year were $500,000. In the past, 2 percent of sales have proved uncollectible, and an aging of accounts receivable accounts results in an estimate of $13,500 of uncollectible accounts.Using the accounts receivable aging method, the Allowance for Uncollectible Accounts balance (after adjustment) would be
    A. $14,500.
    B. $14,000.
    C. $13,500.
    D. $12,500.

 

  1. The balance in Allowance for Uncollectible Accounts must be considered prior to end-of-period adjustment when using which of the following methods?
    A. Direct charge-off method
    B. Both direct charge-off method and percentage of net sales method
    C. Percentage of net sales method
    D. Accounts receivable aging method

 

  1. Using the percentage of net sales method, uncollectible accounts expense for the year is estimated to be $44,000. If the balance of the Allowance for Uncollectible Accounts is a $9,000 credit before adjustment, what is the balance after adjustment?
    A. $9,000
    B. $35,000
    C. $44,000
    D. $53,000

 

  1. Using the accounts receivable aging method, estimated uncollectible accounts are $40,000. If the balance of the Allowance for Uncollectible Accounts is an $8,000 debit before adjustment, what is the balance after adjustment?
    A. $8,000
    B. $32,000
    C. $40,000
    D. $48,000

 

  1. The balance of Accounts Receivable, net of the allowance account, is $25,000 before the write-off of a $2,000 account. What is the Accounts Receivable balance, net of the allowance account, after the write-off?
    A. $2,000
    B. $23,000
    C. $25,000
    D. $27,000

 

  1. Under the allowance method, when a specific account is written off,
    A. total assets will be unchanged.
    B. total assets will decrease.
    C. net income will decrease.
    D. total assets will increase.

 

  1. A company that uses the allowance method writes off a specific account as uncollectible, but then the customer pays. The entries made upon receiving payment will
    A. decrease Cash.
    B. decrease Allowance for Uncollectible Accounts.
    C. increase Allowance for Uncollectible Accounts.
    D. decrease Uncollectible Accounts Expense.

 

  1. Under the allowance method, when a year-end adjustment is made for estimated uncollectible accounts,
    A. total assets decrease.
    B. liabilities increase.
    C. total assets are unchanged.
    D. net income is unchanged.

 

  1. One might infer from a debit balance in Allowance for Uncollectible Accounts that
    A. a posting error has been made.
    B. Uncollectible Accounts Expense has been overestimated.
    C. the accounts receivable aging method apparently is being used.
    D. more has been written off than had been estimated.

 

  1. A company performs the aging of accounts receivable calculation and arrives at an estimate for uncollectible accounts of $900. If Allowance for Uncollectible Accounts has a debit balance of $200 prior to the year-end adjustment, for how much should the adjustment be journalized?
    A. $200
    B. $700
    C. $900
    D. $1,100

 

  1. A company has net sales of $50,000 during the year. At year end (before an adjustment is made), Allowance for Uncollectible Accounts has a credit balance of $2,500. If the company estimates that 3 percent of net sales are uncollectible, what is the balance in the allowance account after the year-end adjustment has been made using the percentage of net sales method?
    A. $1,500 debit balance
    B. $1,500 credit balance
    C. $4,000 credit balance
    D. $1,000 debit balance

 

  1. The general ledger account for Accounts Receivable shows a debit balance of $50,000. Allowance for Uncollectible Accounts has a credit balance of $3,000. Net sales for the year were $500,000. In the past, 3 percent of sales have proved uncollectible, and an aging of accounts receivable resulted in an estimate of $20,000 of uncollectible accounts receivable.Using the percentage of net sales method, the entry to record the  Uncollectible Accounts Expense would be
    A. Uncollectible Accounts Expense      12,000
    Allowance for Uncollectible Accounts            12,000
    B. Uncollectible Accounts Expense      15,000
    Allowance for Uncollectible Accounts             15,000
    C. Allowance for Uncollectible Accounts      18,000
    Uncollectible Accounts Expense            18,000
    D. Allowance for Uncollectible Accounts      20,000
    Uncollectible Accounts Expense            20,000

 

  1. The general ledger account for Accounts Receivable shows a debit balance of $50,000. Allowance for Uncollectible Accounts has a credit balance of $3,000. Net sales for the year were $500,000. In the past, 3 percent of sales have proved uncollectible, and an aging of accounts receivable resulted in an estimate of $20,000 of uncollectible accounts receivable.Using the percentage of net sales method, the Allowance for Uncollectible Accounts balance (after adjustment) would be
    A. $12,000.
    B. $15,000.
    C. $18,000.
    D. $20,000.

 

  1. The general ledger account for Accounts Receivable shows a debit balance of $50,000. Allowance for Uncollectible Accounts has a credit balance of $3,000. Net sales for the year were $500,000. In the past, 3 percent of sales have proved uncollectible, and an aging of accounts receivable resulted in an estimate of $20,000 of uncollectible accounts receivable.Using the accounts receivable aging method, the entry to record Uncollectible Accounts Expense would be:
    A. Uncollectible Accounts Expense      21,500
    Allowance for Uncollectible Accounts            21,500
    B. Uncollectible Accounts Expense      17,000
    Allowance for Uncollectible Accounts               17,000
    C. Allowance for Uncollectible Accounts      20,000
    Uncollectible Accounts Expense              20,000
    D. Allowance for Uncollectible Accounts      23,000
    Uncollectible Accounts Expense                23,000

 

  1. The general ledger account for Accounts Receivable shows a debit balance of $50,000. Allowance for Uncollectible Accounts has a credit balance of $3,000. Net sales for the year were $500,000. In the past, 3 percent of sales have proved uncollectible, and an aging of accounts receivable resulted in an estimate of $20,000 of uncollectible accounts receivable.Using the accounts receivable aging method, the Allowance for Uncollectible Accounts balance (after adjustment) would be
    A. $17,000.
    B. $20,000.
    C. $21,500.
    D. $23,000.

 

  1. You have just received notice that Agnes Fisher, a customer of yours with an Accounts Receivable balance of $200, has gone bankrupt and will not be making any future payments. Assuming you use the allowance method, the journal entry you make is to
    A. debit Uncollectible Accounts Expense and credit Accounts Receivable.
    B. debit Allowance for Uncollectible Accounts and credit Uncollectible Accounts Expense.
    C. debit Uncollectible Accounts Expense and credit Allowance for Uncollectible Accounts.
    D. debit Allowance for Uncollectible Accounts and credit Accounts Receivable.

 

  1. If the amount of uncollectible accounts expense is understated at year end,
    A. net Accounts Receivable will be understated.
    B. total liabilities will be overstated.
    C. net income will be understated.
    D. Allowance for Uncollectible Accounts will be understated.

 

  1. Caudill Sales Company made most of its sales on credit during its first year of operation, 2014. At the end of the year, accounts receivable amounted to $100,000. On December 31, 2014, management reviewed the collectible status of the accounts receivable. Approximately $6,000 of the $100,000 of accounts receivable were estimated to be uncollectible. As per the accounts receivable aging method the adjusting entry that would be made on December 31 of that year is:
    A. Uncollectible Accounts Expense      6,000
    Accounts Receivable              6,000
    B. Allowance for Uncollectible Accounts      10,000
    Uncollectible Accounts Expense              10,000
    C. Uncollectible Accounts Expense      6,000
    Allowance for Uncollectible Accounts              6,000
    D. Allowance for Uncollectible Accounts      10,000
    Accounts Receivable              10,000

 

  1. Assume that on February 25, a customer who owes Berry Sales Company $2,000 is declared bankrupt by a federal court. The entry that would be made to write off this account is:
    A. Allowance for Uncollectible Accounts      2,000
    Accounts Receivable/Customer Account            2,000
    B. Accounts Receivable/Customer Account      2,000
    Allowance for Uncollectible Accounts            2,000
    C. Accounts Receivable      2,000
    Notes Receivable            2,000
    D. Cash      2,000
    Accounts Receivable            2,000

 

  1. The account Allowance for Uncollectible Accounts is classified as a(n)
    A. contra account to Uncollectible Accounts Expense.
    B. expense.
    C. liability.
    D. contra account to Accounts Receivable.

 

  1. Under the allowance method, Uncollectible Accounts Expense is recorded
    A. for an estimated amount.
    B. several times during the accounting period.
    C. when an individual account is written off.
    D. for a known amount.

 

  1. Assume that on October 1, a note which has a face value of $2,000, bears interest at 6 percent for 90 days, received from a customer as an extension of his past-due account is honored on its due date. The entry that would be made to record the receipt on due date is:
    A. Notes Receivable      2,000
    Cash            2,000
    B. Accounts Receivable      2,000
    Interest Revenue      30
    Cash            2,030
    C. Accounts Receivable      2,030
    Notes Receivable            2,030
    D. Cash      2,030
    Interest Revenue                30
    Notes Receivable            2,000

 

  1. A note receivable dated May 23 and due in 90 days would be due on
    A. August 20.
    B. August 21.
    C. August 23.
    D. August 22.

 

  1. The interest on a three-month, 12 percent, $16,200 note receivable is
    A. $486.
    B. $162.
    C. $324.
    D. $1,944.

 

  1. The maturity value of a 60-day, 9 percent, $4,000 note receivable is
    A. $3,940.66.
    B. $3,641.78.
    C. $4,059.18
    D. $4,360.24.

 

  1. Interest on a 180-day, 10 percent, $10,000 note receivable is
    A. $5,001.54.
    B. $576.76.
    C. $493.15.
    D. $2001.26.

 

  1. Interest on a note receivable may be calculated without knowledge of the
    A. principal amount.
    B. rate of interest.
    C. note’s maturity date.
    D. note’s duration.

 

  1. A promissory note is executed in June. When the note is paid the following January, the payee’s entry includes (assuming a calendar-year accounting period and no reversing entries) a
    A. debit to Interest Income.
    B. credit to Cash.
    C. credit to Interest Receivable.
    D. debit to Notes Receivable.

 

  1. When a note is dishonored, the payee’s journal entry includes a
    A. debit to Accounts Receivable.
    B. debit to Interest Expense.
    C. debit to Notes Receivable.
    D. debit to Interest Income.

 

  1. Assume that the $2,000, 90-day, 8 percent note was received on August 31 and that the fiscal year ended on September 30. The adjusting entry that would be made to record the interest receivable is (amounts rounded to nearest dollar):
    A. Interest Receivable              13
    Interest Income              13
    B. Notes Receivable              13
    Interest Income              13
    C. Accounts Receivable          39
    Cash            39
    D. Interest Income           39
    Accounts Receivable            39

 

  1. Assume that on November 1, a note which has a face value of $9,000, bears interest at 9 percent for 120 days, received from a customer as an extension of her past-due account is dishonored. The entry that would be made to record the dishonor include all except
    A. a debit to Accounts Receivable for $9,000
    B. a credit to Interest Income for $266
    C. a credit to Notes Receivable for $9,000
    D. a debit to Accounts Receivable for $9,266

 

  1. If the amount of uncollectible accounts expense is overstated at year end,
    A. Allowance for Uncollectible Accounts will be understated.
    B. net income will be overstated.
    C. net Accounts Receivable will be understated.
    D. total liabilities and stockholders’ equity will be overstated.

 

  1. A company’s acceptance of credit cards like Visa is an example of
    A. securitization.
    B. factoring with recourse.
    C. discounting.
    D. factoring without recourse.

 

  1. The sale or transfer of accounts receivable to raise funds is called
    A. discounting.
    B. collateralizing.
    C. pledging.
    D. factoring.

 

  1. Which of the following topics involves a contingent liability?
    A. Installment accounts receivable
    B. A discounted note receivable
    C. Securitization
    D. Credit card sales

 

  1. If the receivables turnover is 3.1 times, what is the days’ sales uncollected?
    A. 10 days
    B. 85 days
    C. 118 days
    D. cannot be determined with information given

 

  1. If average accounts receivable is $35,000 and net sales total $100,000, what is the receivables turnover?
    A. 0.3 times
    B. 0.4 times
    C. 2.9 times
    D. 126 times

 

  1. Which of the following statements is true about factoring without recourse?
    A. The seller of the receivables is liable upon default of the debtor.
    B. The factor’s risk is lower than if the factoring were with recourse.
    C. An example is the use of major credit cards.
    D. The fee will be lower than if the factoring were with recourse.

 

  1. If net sales total $50,000, beginning accounts receivable was $10,000, and ending accounts receivable is 16,000, what is the receivables turnover?
    A. 1.9 times
    B. 3.1 times
    C. 3.8 times
    D. 5 times

 

  1. If net sales total $50,000, beginning accounts receivable was $10,000, and ending accounts receivable is 16,000, what is the days’ sales collected?
    A. 73 days
    B. 96 days
    C. 118 days
    D. 192 days

 

  1. Which of the following statements is not true when FLK Company discounts a note receivable to the bank?
    A. FLK may ultimately have to pay the bank when the note is due.
    B. If the maker of the note pays the bank on time, no liability will result to FLK.
    C. FLK will receive the maturity value from the bank.
    D. A contingent liability arises for FLK.

 

  1. Which of the following situations results in a contingent liability?
    A. Making a credit card sale
    B. Dishonoring a note
    C. Estimating uncollectible accounts expense
    D. Discounting a note

 

  1. The receivables turnover is expressed in terms of
    A. times.
    B. days.
    C. a percentage.
    D. dollars.

 

  1. Days’ sales uncollected equals 365 days divided by
    A. net sales.
    B. average net accounts receivable.
    C. net income.
    D. the receivable turnover.

 

  1. How is the account Allowance for Uncollectible Accounts presented in the financial statements, and what purpose does this presentation serve?

 

 

 

 

 

  1. Explain the two methods used to estimate uncollectible accounts.

 

 

 

 

 

  1. Why should a dishonored note receivable be transferred to an individual account receivable for the debtor?

 

 

 

 

 

  1. What is a contingent liability, and how does it relate to the discounting of a note receivable at the bank?

 

 

 

 

 

  1. What purpose is served by a factoring arrangement? What does it mean to factor accounts receivable with recourse?

 

 

 

 

 

  1. Match each description with the letter of the term to which it corresponds.
1. Estimates bad debts to be matched with the revenues they helped to produce      discounting   ____
2. Shows how many times, on average, a company turned its receivables into cash during a period      factoring   ____
3. Estimates bad debts as a percentage of net sales      securitization   ____
4. Shows how long it takes to collect accounts receivable      days’ sales uncollected   ____
5. Selling or transferring accounts receivable to another entity      receivables turnover   ____
6. Grouping receivables in batches and selling them at a discount      direct charge-off method   ____
7. Recognizing a loss only when a specific account receivable is determined to be uncollectible      allowance method   ____
8. Selling notes receivable to a bank      percentage of net sales method   ____

 

  1. Sam’s Menswear has $11,600 in Accounts Receivable at December 31. Sam’s accountant estimates that $600 of the $11,600 will never be collected. Complete the current asset section of the balance sheet below.
Current assets:
Cash $ 28,000
Short-term investments 8,000
Accounts receivable
Inventory  100,000
Total current assets $           

 

 

 

 

 

 

  1. A company has the following listed asset accounts. Determine the amount that should appear on the balance sheet as the total current assets.
Cash $ 25,000
Short-Term Investments 10,000
Accounts Receivable 20,000
Allowance for Uncollectible Accounts 500
Inventory   100,000
Equipment 100,000
Land 75,000
Building  200,000

 

 

 

 

 

 

  1. Use the following T account to answer the questions below (assume a calendar-year accounting period).
Allowance for Uncollectible Accounts
1/10 600 1/15 600
5/12 880 12/31 7,200

What apparently occurred on:

a. January 10?
b. January 15?
c. May 12?
d. December 31?

 

 

 

 

 

  1. Using the following transactions for 2014, show how the T account below would appear after all appropriate postings have been made. Assume an opening balance of $900.
Feb. 13 Wrote off an individual account for $1,000.
21 Reinstated the account written off on February 13.
July 8 Wrote off an individual account for $700.
Dec. 31 Made year-end adjustment of $800 for estimated uncollectible accounts.

 

Allowance for Uncollectible Accounts
1/1 900

 

 

 

 

 

 

  1. On December 31, Ferndale Enterprises has an $800 debit balance in Allowance for Uncollectible Accounts. If an accounts receivable aging method analysis indicated that an estimated $6,400 of December 31 receivables are uncollectible, for what amount would the adjusting entry for uncollectible accounts be recorded? (Show your work.)

 

 

 

 

 

  1. On December 31, Jameson Products has a $300 credit balance in Allowance for Uncollectible Accounts. It estimates that 4 percent of the $60,000 in sales are uncollectible. After the appropriate adjusting entry for uncollectible accounts has been made, what will be the balance in Allowance for Uncollectible Accounts using the percentage of net sales method? Indicate if the balance is a debit or credit. (Show your work.)

 

 

 

 

 

  1. At year end, MWE Graphics has a $700 debit balance in Allowance for Uncollectible Accounts. It estimates that 5 percent of the $40,000 in sales are uncollectible. Give the amount that should be used in the adjusting entry to record uncollectible accounts using the percentage of net sales method. (Show your calculations.)

 

 

 

 

 

  1. At year end, Korkin Design Company has a $900 credit balance in Allowance for Uncollectible Accounts. If an accounts receiving aging method analysis indicates that an estimated $5,700 of year-end receivables are uncollectible, what will be the balance in Allowance for Uncollectible Accounts after the appropriate adjusting entry for uncollectible accounts has been made? Indicate if the balance is a debit or credit.

 

 

 

 

 

  1. Assume that part of accounts and other receivables on Trejada Toys’ balance sheet is $8 million as of February 2, 2014. Also assume that Allowance for Uncollectible Accounts has a credit balance of $275,000, that Trejada estimates its uncollectible accounts as 0.1 percent of net sales, and the amount of sales is $5,509,500,000. Record the adjusting entry to recognize uncollectible accounts using the percentage of net sales method.
GENERAL JOURNAL

Date

Description
Post.
Ref.

Debit

Credit

 

 

 

 

 

 

  1. Assume that part of accounts and other receivables on Trejada’s Toys’ balance sheet is $8 million and that Thompson estimates its uncollectible accounts as 1 percent of accounts receivable not yet due, 2 percent of accounts receivable between 1 and 60 days past due, and 10 percent of accounts receivable over 60 days past due. Determine the amount of Trejada’s adjusting entry to recognize uncollectible accounts using the accounts receivable aging method, based on the following information:Accounts receivable not yet due                       $300,000
    Accounts receivable 1 – 60 days past due       100,000
    Accounts receivable over 60 days past due       50,000

 

 

 

 

 

  1. The general ledger account for Accounts Receivable shows a debit balance of $40,000. The Allowance for Uncollectible Accounts has a credit balance of $2,000. Net sales for the year were $250,000. In the past, 3 percent of net sales have proved uncollectible. An aging of accounts receivable accounts results in an estimate of $9,000 of uncollectible accounts receivable. Calculate (1) Uncollectible Accounts Expense and (2) the ending balance of the Allowance for Uncollectible Accounts using (a) the percentage of net sales method and (b) the accounts receivable aging method for both (1) and (2).

 

 

 

 

 

  1. Chao Corporation uses the accounts receivable aging method to account for Uncollectible Accounts Expense. As of December 31, Chao’s accountant prepared the following data about ending receivables: $40,000 was not yet due (1 percent expected not to be collected), $20,000 was 1-60 days past due (4 percent expected not to be collected), and $4,000 was over 60 days past due (8 percent expected not to be collected). At December 31, Allowance for Uncollectible Accounts had a credit balance prior to adjustment of $400. In the journal provided, prepare Chao’s end-of-period adjustment for estimated uncollectible accounts. Also prepare the entry that would have been made had the credit balance instead been a debit balance. Omit explanations
GENERAL JOURNAL

Date

Description
Post.
Ref.

Debit

Credit

 

 

 

 

 

 

  1. Assuming that the allowance method is being used, prepare journal entries to record the following transactions. Omit explanations.Mar. 15  Sold merchandise to Foster for $12,000 on account.
    Apr. 15  Received $6,000 from Foster.
    Aug. 15  Wrote off Foster’s account as uncollectible.
    Nov. 15  Unexpectedly received payment in full from Foster.
GENERAL JOURNAL

Date

Description
Post.
Ref.

Debit

Credit

 

 

 

 

 

 

  1. In the journal provided, prepare the entries for the following transactions. (Omit explanations.)
Dec. 1 Sold merchandise on account to Wilma Phillips for $300.
12 Received payment of $200 from Wilma Phillips.
31 Made adjusting entry for Uncollectible Accounts Expense, using the percentage of net sales method. Net sales for the year totaled $28,000, uncollectible accounts are estimated at 2 percent, and Allowance for Uncollectible Accounts has a $100 credit balance prior to adjustment.
Feb. 5 Wrote off Wilma Phillip’s balance because she filed for bankruptcy.
17 Unexpectedly received the $100 from Wilma Phillips.

 

GENERAL JOURNAL

Date

Description
Post.
Ref.

Debit

Credit

 

 

 

 

 

 

  1. Assume that part of accounts and other receivables on Trejada’s Toys’ February 2, 2014, balance sheet is comprised of $43,225,000 of notes receivable. Two notes make up the amount. The first note has a face value of $30,000,000 and bears interest at 7 percent for 90 days. The second note has a face value of $13,225,000 and bears interest at 9 percent for 120 days. Record the journal entry for the collection of the 7 percent note on May 3 and the dishonor of the 9 percent note on June 2. (Omit explanations; assume no interest had been accrued; amounts rounded to nearest dollar.)
GENERAL JOURNAL

Date

Description
Post.
Ref.

Debit

Credit

 

 

 

 

 

 

  1. In the journal provided, prepare entries for the following (assume a calendar-year accounting period). Omit explanations.
Dec. 1 Received a three-month, 15 percent note receivable for $7,840 from a customer as an extension of her past-due account.
31 Made the year-end adjustment for accrued interest.
Mar. 1 Received full payment on the note.

 

GENERAL JOURNAL

Date

Description
Post.
Ref.

Debit

Credit

 

 

 

 

 

 

  1. Determine the interest on the following notes payable:a. $6,000 at 10 percent for 60 days
    b. $600 at 16 percent for 4 months
    c. $10,000 at 12 percent for 45 days
    d. $900 at 14 percent for 30 days

 

 

 

 

 

  1. Brashear Corporation engaged in the following transactions involving promissory notes in 2014   and 2015. Journalize these transactions in the journal provided. (Omit explanations.) Round to nearest whole dollar.
2014
Sept. 1 Sold land to Wayne Petry for $30,000. A six-month, 10 percent note was received in exchange (no gain or loss realized).
Nov. 1 Received a 30-day, 12 percent note receivable from Pat Lawhorn in settlement of her accounts receivable of $500.
Dec. 1 Pat Lawhorn dishonored her note issued 30 days earlier. Round computations to nearest whole dollar.
31 Recorded accrued interest on the note received on September 1.
2015
Mar. 1 Received payment in full from Wayne Petry.

 

GENERAL JOURNAL

Date

Description
Post.
Ref.

Debit

Credit

 

 

 

 

 

 

  1. The following data exist for Weaver Company:
2014 2013
Accounts receivable $  160,000 $180,000
Sales   1,066,000   821,000

Calculate the receivables turnover and the average days’ sales uncollected for 2014. (Round to 1 decimal point and even days, respectively.)

 

 

 

 

 

  1. The following data exist for Sexton Company:
2014 2013
Accounts receivable $  130,000 $110,000
Sales   855,000   795,000

Calculate the receivables turnover and the average days’ sales uncollected for 2014. (Round to 1 decimal point and even days, respectively.)

 

 

 

Chapter 13: Accounting for Corporations

Student: ___________________________________________________________________________

  1. The board of directors carries out the day-to-day operations of the business.
    True    False

 

  1. Stockholders elect the board of directors who then appoint the officers of a corporation.
    True    False

 

  1. Limited liability can be viewed as both an advantage and a disadvantage.
    True    False

 

  1. Corporate earnings are subject to double taxation.
    True    False

 

  1. The par value of stock is an arbitrary amount assigned to each share of stock.
    True    False

 

  1. A corporation often uses an underwriter to guarantee the sale of stock in an initial public offering (IPO).
    True    False

 

  1. Corporations are subject to more government control and regulation than are other forms of business.
    True    False

 

  1. The liability of a stockholder is usually limited to the stockholder’s investment in the corporation.
    True    False

 

  1. One advantage of a corporation is the lack of mutual agency.
    True    False

 

  1. The sale of shares in a corporation by one stockholder to another does not affect the total capital of the corporation.
    True    False

 

  1. An advantage of the corporate form is the separation of ownership and control.
    True    False

 

  1. Financing a business with common stock is more risky than financing it with bonds.
    True    False

 

  1. Legal capital of a corporation is the maximum amount that can be reported as contributed capital.
    True    False

 

  1. Underwriters typically charge 1 percent of the selling price to guarantee the sale of initial public offerings of stock.
    True    False

 

  1. Start-up and organization costs should be expensed as incurred.
    True    False

 

  1. To form a corporation, most states require persons called underwriters to sign and file it with proper state official. This application contains the articles of incorporation.
    True    False

 

  1. The entry required to record start-up and organization costs will cause a increase in assets.
    True    False

 

  1. The stockholders’ equity in a corporation consists of capital contributed by stockholders and retained earnings.
    True    False

 

  1. The number of outstanding shares should exceed the number of authorized shares.
    True    False

 

  1. Stockholders who own preferred stock usually do not have voting rights, whereas stockholders who own common stock usually have voting rights.
    True    False

 

  1. Preferred stock is considered the residual equity of a corporation.
    True    False

 

  1. Treasury shares are shares that are authorized but unissued.
    True    False

 

  1. Retained earnings are a component of contributed capital.
    True    False

 

  1. The word preferred in the phrase preferred stock means that an owner of preferred stock has some advantages over a bondholder.
    True    False

 

  1. Dividends in arrears are disclosed as liabilities of a corporation.
    True    False

 

  1. Dividends in arrears pertain only to cumulative preferred stock.
    True    False

 

  1. Dividends in arrears on cumulative preferred stock are not paid until after dividends are paid on common stock.
    True    False

 

  1. Callable preferred stock is preferred stock that may be redeemed or retired at the option of the issuing corporation.
    True    False

 

  1. Dividends in arrears must be paid when a corporation calls in its preferred stock.
    True    False

 

  1. Once an owner of convertible preferred stock has converted to common, he or she cannot convert back to preferred.
    True    False

 

  1. For accounting purposes, stated value is treated the same way as par value.
    True    False

 

  1. When common stock with a par value is sold for a price that exceeds par value, the Common Stock account is credited for the cash proceeds received from the sale of the shares.
    True    False

 

  1. When no-par common stock without a stated value is issued for cash, the Common Stock account is credited for an amount equal to the cash proceeds.
    True    False

 

  1. When no-par common stock has a stated value, the stated value of the shares issued normally is considered the legal capital of the corporation.
    True    False

 

  1. A corporation cannot declare a dividend that would cause stockholders’ equity to fall below the legal capital.
    True    False

 

  1. If a corporation issues par value common stock and the proceeds are less than par value, the
    Common Stock account is credited for the par value.
    True    False

 

  1. Treasury stock is considered a reduction in stockholders’ equity, not a purchase of assets .
    True    False

 

  1. Treasury stock usually is recorded at cost when purchased.
    True    False

 

  1. The par value of treasury stock is deducted from total Contributed Capital and Retained Earnings in determining total stockholders’ equity.
    True    False

 

  1. The sale of treasury stock at an amount less than cost results in a loss to be reported on the income statement.
    True    False

 

  1. The entry to record the purchase of treasury stock will cause total stockholders’ equity to decrease by the amount of the cost of the treasury shares.
    True    False

 

  1. Treasury stock is reported as an asset on the balance sheet because treasury shares may be sold later.
    True    False

 

  1. When treasury stock is sold at a price below its cost, the entry to record the sale has the effect of reducing total stockholders’ equity.
    True    False

 

  1. The entry to record the retirement of treasury stock will include a debit to Common Stock for the par value of the retired shares.
    True    False

 

  1. A dividend that represents a return to the stockholders of a part of their paid-in capital rather than a distribution out of retained earnings is called a liquidating dividend.
    True    False

 

  1. Cash dividends become a liability of a corporation when the stock goes ex-dividend.
    True    False

 

  1. The declaration of a cash dividend causes an increase in a corporation’s liabilities at the date of declaration.
    True    False

 

  1. A liquidating dividend is usually paid when a company is going out of business or reducing its operations.
    True    False

 

  1. No entry is required on the date of payment for a cash dividend.
    True    False

 

  1. Receiving dividends is the only way in which stockholders can earn a return on their investment in a corporation.
    True    False

 

  1. A corporation’s board of directors may influence dividend policies, but the company’s senior management has sole authority to declare dividends.
    True    False

 

  1. When the date of declaration and the payment date occur in the same period, the amount of dividends shown on the statement of stockholders’ equity and on the statement of cash flows will be equal.
    True    False

 

  1. A stock dividend is a pro rata distribution of cash to a corporation’s stockholders.
    True    False

 

  1. A small stock dividend normally results in a transfer from Retained Earnings to Contributed Capital of an amount equal to the market value of the stock.
    True    False

 

  1. A stock dividend increases the total amount of stockholders’ equity.
    True    False

 

  1. The account Common Stock Distributable is classified as a current liability.
    True    False

 

  1. A stock dividend exceeding 20 to 25 percent is properly treated as a stock split.
    True    False

 

  1. A stock split normally increases total stockholders’ equity.
    True    False

 

  1. A stock split results in a transfer of the market value of the stock from Retained Earnings to Contributed Capital.
    True    False

 

  1. A stock dividend will cause an increase in total contributed capital at the date the dividend is declared.
    True    False

 

  1. A stock dividend will cause a decrease in the total number of shares issued and outstanding.
    True    False

 

  1. A 2-for-1 stock split will have the same effect on the number of shares outstanding as a 200 percent stock dividend.
    True    False

 

  1. A statement of stockholders’ equity can take the place of a statement of retained earnings.
    True    False

 

  1. The date on a statement of stockholders’ equity is for a specific point in time.
    True    False

 

  1. The effects on individual contributed capital accounts of a conversion of preferred stock to common stock during the period are disclosed on the statement of stockholders’ equity.
    True    False

 

  1. Book value per share of stock represents the amount the shareholder will receive per share if the company is sold or liquidated.
    True    False

 

  1. In computing book value per share of common stock, common stock distributable is included in the divisor.
    True    False

 

  1. The declaration of cash dividends will increase the book value per share of common stock.
    True    False

 

  1. The book value of one share of callable preferred stock is equal to the call value of the preferred share minus any dividends in arrears.
    True    False

 

  1. The price/earnings (P/E) ratio is a measure of investors’ confidence in a company’s future.
    True    False

 

  1. When the dividends yield is relatively low, investors must expect some of their return to come from increases in the price of the shares.
    True    False

 

  1. Return on equity equals net income divided by average stockholders’ equity.
    True    False

 

  1. Compensation expense related to employee stock options is a tax-deductible expense for the corporation.
    True    False

 

  1. Stock options often are granted by a corporation to management personnel as a means of additional compensation and motivation of these employees.
    True    False

 

  1. Dividend yield is the most important ratio associated with stockholders’ equity and is a common measure of management’s performance.
    True    False

 

  1. A disadvantage of the corporate form of business is
    A. lack of mutual agency.
    B. professional management.
    C. ease of transfer of ownership.
    D. tax treatment.

 

  1. A disadvantage of the corporate form of business is
    A. centralized authority and responsibility.
    B. its status as a separate legal entity.
    C. government regulation.
    D. continuous existence.

 

  1. An advantage of the corporate form of business is
    A. separation of ownership and control.
    B. tax treatment.
    C. lack of mutual agency.
    D. government regulation.

 

  1. Which of the following is a correct statement relating to the concept of mutual agency and the corporate form of business?
    A. There is no mutual agency with the corporate form of business.
    B. Mutual agency may or may not exist in a corporation, depending on the individual state law.
    C. Mutual agency always exists in the corporate form of business.
    D. Mutual agency may or may not exist in a corporation, depending on a vote by the shareholders.

 

  1. Which of the following phrases is not descriptive of the corporate form of business?
    A. Professional management
    B. Continuous existence
    C. Double taxation
    D. Unlimited liability

 

  1. Which of the following statements is descriptive of common stock?
    A. Stockholders are considered creditors of a corporation.
    B. The payment of dividends is required.
    C. Dividends paid are an expense for the issuing corporation.
    D. Issuing stock is less financially risky than issuing bonds.

 

  1. Which of the following could be described as both an advantage and a disadvantage of incorporation?
    A. Continuous existence
    B. Limited liability
    C. Double taxation
    D. Lack of mutual agency

 

  1. A corporation has all of the following except
    A. government regulations.
    B. a limited existence.
    C. separation of ownership and control.
    D. its own tax liability.

 

  1. Par value
    A. is established for a share of stock after it is issued.
    B. is the legal capital established for a share of stock.
    C. represents what a share of stock is worth.
    D. represents the original selling price for a share of stock.

 

  1. Start-up and organization costs for a corporation that is to operate a retail store would include the costs of
    A. promoters’ fees and printing stock certificates.
    B. advertising for a grand opening sale.
    C. the initial purchase of inventory.
    D. counters and racks to display merchandise.

 

  1. Start-up and organization costs include all of the following except
    A. goodwill.
    B. cost of printing stock certificates.
    C. attorney’s fees.
    D. state incorporation fees.

 

  1. Start-up and organization costs
    A. are capitalized, but never amortized.
    B. are capitalized and amortized, usually over five years.
    C. are expensed in the year incurred.
    D. appear on the balance sheet as a current asset.

 

  1. Which of the following is involved in assisting a corporation with its initial public offering (IPO)?
    A. Registrar.
    B. Underwriter.
    C. Transfer agent.
    D. Incorporator.

 

  1. All of the following are stockholders’ equity accounts except
    A. Treasury Stock.
    B. Preferred Stock.
    C. Retained Earnings.
    D. Dividends Payable.

 

  1. The number of shares of issued stock equals
    A. unissued shares minus authorized shares.
    B. outstanding shares plus treasury shares.
    C. subscribed shares plus outstanding shares.
    D. authorized shares minus treasury shares.

 

  1. Treasury shares plus outstanding shares equal
    A. unissued shares.
    B. subscribed shares.
    C. authorized shares.
    D. issued shares.

 

  1. The contributed capital of a corporation does not include
    A. additional paid-in capital.
    B. preferred stock.
    C. the stated value of common stock issued.
    D. retained earnings.

 

  1. A corporation’s residual equity is its
    A. preferred stock.
    B. retained earnings.
    C. common stock.
    D. cash.

 

  1. Which of the following classifications represents the largest number of shares?
    A. Authorized shares.
    B. Outstanding shares.
    C. Treasury shares.
    D. Issued shares.

 

  1. Holders of preferred stock normally do not have
    A. preference as to dividends.
    B. preference as to assets in liquidations.
    C. full voting rights.
    D. ownership interests in the corporation.

 

  1. Use the following information to answer the question below.The following accounts appear in the ledger of Pepper Corporation on December 31, 20×5
Preferred Stock $60,000
Common Stock 116,000
Additional Paid-in Capital, Preferred 14,000
Additional Paid-in Capital, Common 36,000
Retained Earnings 80,000

A balance sheet prepared on December 31, 20×5 , would report total contributed capital of
A. $176,000.
B. $190,000.
C. $226,000.
D. $306,000.

 

  1. Use the following information to answer the question below.The following accounts appear in the ledger of Pepper Corporation on December 31, 20×5
Preferred Stock $60,000
Common Stock 104,000
Additional Paid-in Capital, Preferred 14,000
Additional Paid-in Capital, Common 36,000
Retained Earnings 80,000

A balance sheet prepared on December 31, 20×5 , would report total stockholders’ equity of
A. $164,000.
B. $178,000.
C. $214,000.
D. $294,000.

 

  1. If Grant Corporation has 120,000 shares of common stock authorized,  75,000 shares of common stock issued, and holds 3,000 shares of common stock as treasury stock, the total number of outstanding shares of Grant Corporation amounts to
    A. 48,000.
    B. 117,000.
    C. 72,000.
    D. 54,000.

 

  1. Outstanding shares of stock are
    A. authorized shares that have not yet been issued.
    B. also called treasury shares.
    C. issued shares that have not yet been authorized.
    D. issued shares that are still in circulation.

 

  1. Shares of treasury stock are
    A. issued shares that have been bought back by the corporation and are being held by the corporation.
    B. shares held by the U.S. Treasury Department.
    C. part of the total outstanding shares but not part of the total issued shares of a corporation.
    D. unissued shares that are held by the treasurer of the corporation.

 

  1. Legal capital is a descriptive phrase for
    A. stockholders’ equity.
    B. residual equity.
    C. market value.
    D. par value.

 

  1. How should dividends in arrears be shown on a corporation’s balance sheet?
    A. As an increase in liabilities.
    B. In a note or in the body of the financial statements.
    C. As a decrease in assets.
    D. As an increase in stockholders’ equity.

 

  1. Par value is the minimum cushion of capital established for the protection of
    A. investors (stockholders).
    B. management.
    C. creditors.
    D. customers.

 

  1. If a corporation has issued common stock at various prices that exceed par value, legal capital will be made up of the
    A. par value of the shares issued.
    B. total stockholders’ equity plus total liabilities.
    C. total amount of contributed capital.
    D. total amount of contributed capital plus retained earnings.

 

  1. The excess of the issuance price over the stated value of a no-par common stock should be credited to the
    A. Common Stock account.
    B. Retained Earnings account.
    C. Additional Paid-in Capital.
    D. Treasury Stock.

 

  1. The par value of the common stock represents the
    A. amount entered into the corporation’s Common Stock account when a share is issued.
    B. liquidation value of the stock.
    C. market value of a share of stock.
    D. amount the corporation received when the stock was issued.

 

  1. In the rare instance when a par value stock is issued at a cash price below par, the excess of the par value over the amount of cash received should be
    A. credited to a liability account.
    B. debited to the Retained Earnings account.
    C. debited to an account titled Discount on Capital Stock.
    D. credited to the Retained Earnings account.

 

  1. When common stock is issued by a corporation for a cash price above par value, the excess of the cash proceeds over the par value should be reported in the financial statements as a component of
    A. retained earnings on the balance sheet.
    B. total liabilities on the balance sheet.
    C. operating income on the income statement.
    D. total contributed capital on the balance sheet.

 

  1. When stock is issued for noncash assets or services, the dollar amount to be recorded for this exchange is determined by the
    A. treasurer of the corporation.
    B. par value of the stock.
    C. market value of the stock or the market value of the consideration received, whichever is greater.
    D. market value of the stock or the market value of the consideration received when the market value of the stock cannot be determined.

 

  1. The Additional Paid-in Capital account normally arises in the accounting records when
    A. the number of shares issued exceeds par value.
    B. the stated value of capital stock is greater than the par value.
    C. the market value of the stock rises above par value.
    D. capital stock is issued at an amount greater than par value.

 

  1. Use the following information to answer the question below.When Langston Corporation was formed on January 1, 20×5, the corporate charter provided for 100,000 shares of $10 par value common stock. The following transactions were among those engaged in by the corporation during its first month of operation:1. The corporation issued 400 shares of stock to its lawyer in full payment of the $10,000 bill for assisting the company in drawing up its articles of incorporation and filing the proper papers with the state agency.
    2. The company issued 16,000 shares of stock at a price of $50 per share.
    3. The company issued 14,000 shares of stock in exchange for equipment that had a fair market value of $320,000.

    The entry to record transaction 2 is
    A. Cash                        800,000
    Common Stock                      800,000

    B. Cash                        800,000
    Common Stock                      160,000
    Additional Paid-in Capital                 640,000

    C. Cash                        160,000
    Additional Paid-in Capital      640,000
    Common Stock                      800,000

    D. Cash                        160,000
    Common Stock                      160,000

 

  1. Use the following information to answer the question below.When Langston Corporation was formed on January 1, 20×5, the corporate charter provided for 100,000 shares of $10 par value common stock. The following transactions were among those engaged in by the corporation during its first month of operation:1. The corporation issued 400 shares of stock to its lawyer in full payment of the $10,000 bill for assisting the company in drawing up its articles of incorporation and filing the proper papers with the state agency.
    2. The company issued 16,000 shares of stock at a price of $50 per share.
    3. The company issued 14,000 shares of stock in exchange for equipment that had a fair market value of $320,000.

    The entry to record transaction 3 is:
    A. Equipment            320,000
    Common Stock               320,000

    B. Common Stock                140,000
    Equipment                     140,000

    C. Equipment            140,000
    Common Stock               140,000

    D. Equipment            320,000
    Common Stock               140,000
    Additional Paid-in Capital          180,000

 

  1. Use the following information to answer the question below.When Langston Corporation was formed on January 1, 20×5, the corporate charter provided for 50,000 shares of $20 par value common stock. The following transactions were among those engaged in by the corporation during its first month of operation:1. The corporation issued 200 shares of stock to its lawyer in full payment of the $5,000 bill for assisting the company in drawing up its articles of incorporation and filing the proper papers with the state agency.
    2. The company issued 8,000 shares of stock at a price of $25 per share.
    3. The company issued 8,000 shares of stock in exchange for equipment that had a fair market value of $160,000.

    The entry to record transaction 3 is:
    A. Equipment                  160,000
    Common Stock                     160,000

    B. Common Stock            160,000
    Equipment                           160,000

    C. Additional Paid-in Capital        35,000
    Equipment                  125,000
    Common Stock                     160,000

    D. Cash                        160,000
    Equipment                           160,000

 

  1. A company purchases 300 shares of its $100 par value common stock at $110 per share. It then reissues 50 shares at $114 per share. The entry upon reissue of the stock is:
    A. Cash                              5,700
    Treasury Stock-Common                  5,500
    Paid-in Capital, Treasury Stock               200B. Cash                              5,700
    Treasury Stock-Common                  5,500
    Gain on Sale of Treasury Stock               200C. Cash                              5,700
    Treasury Stock-Common                  5,000
    Retained Earnings                          700

    D. Cash                              5,700
    Treasury Stock-Common                  5,700

 

  1. A company purchases 600 shares of its $100 par value common stock at $110 per share. It then reissues 100 shares at $114 per share. The entry upon reissue of the stock is
    A. Cash                              11,400
    Treasury Stock-Common                  11,000
    Paid-in Capital, Treasury Stock                 400B. Cash                              11,400
    Treasury Stock-Common                  11,400C. Cash                              11,400
    Treasury Stock-Common                  11,000
    Gain on Sale of Treasury Stock                  400

    D. Cash                              11,400
    Treasury Stock-Common                  10,000
    Retained Earnings                           1,400

 

  1. The sale of treasury stock cannot result in
    A. an increase in Retained Earnings.
    B. the crediting of Paid-in Capital, Treasury Stock.
    C. the debiting of Paid-in Capital, Treasury Stock.
    D. an increase in total stockholders’ equity.

 

  1. A company purchases 800 shares of its $50 par value common stock at $55 per share. It then reissues 120 shares at $58 per share. The entry upon reissue of the stock is :
    A. Cash                              6,960
    Treasury Stock-Common                  6,600
    Paid-in Capital, Treasury Stock              360B. Cash                              6,960
    Treasury Stock-Common                  6,960C. Cash                              6,960
    Paid-in Capital, Treasury Stock                        6,96

    D. Cash                              6,960
    Treasury Stock-Common                  6,000
    Retained Earnings                           960

 

  1. On January 1, 20×5, Dove Valley Corporation had 100,000 shares of $10 par value common stock issued and outstanding. All 100,000 shares had been issued in a prior period at $30 per share. On February 1, 20×5, Dove Valley purchased 4,000 shares of treasury stock for $36 per share and later sold the treasury shares for $40 per share on March 2, 20×5. The entry to record the purchase of the treasury shares on February 1, 20×5, is:
    A. Cash                              144,000
    Treasury Stock-Common                  144,000B. Cash                              144,000
    Treasury Stock-Common                  128,000
    Gain on Treasury Stock-Common            16,000C. Treasury Stock, Common            40,000
    Loss on Treasury Stock-Common      104,000
    Cash                              144,000

    D. Treasury Stock, Common            144,000
    Cash                                144,000

 

  1. On January 1, 20×5, Dove Valley Corporation had 100,000 shares of $10 par value common stock issued and outstanding. All 100,000 shares had been issued in a prior period at $30 per share. On February 1, 20×5, Dove Valley purchased 4,000 shares of treasury stock for $36 per share and later sold the treasury shares for $40 per share on March 2, 20×5. The entry to record the sale of the treasury shares on March 2, 20×5, is :
    A. Cash                              160,000
    Common Stock                                144,000
    Retained Earnings                           16,000B. Cash                              160,000
    Treasury Stock-Common                  144,000
    Paid-in Capital, Treasury Stock               16,000C. Cash                              160,000
    Treasury Stock-Common                  144,000
    Retained Earnings                           16,000

    D. Cash                              160,000
    Treasury Stock-Common                  144,000
    Gain on Treasury Stock                     16,000

 

  1. Use the following information to answer the question below.The following transactions involving Cactus Wren Corporation occurred during the year:Apr. 1  Purchased 2,000 shares of its own preferred stock for $20, the current market price. This is the first transaction involving its own stock engaged in by the company.
    May 3  Sold 400 of the shares purchased on April 1 for $25 per share.
    June 5  Retired 600 of the shares purchased on April 1. The original issue price was $10. The par value of the stock is $5.

    The entry to record the April 1 transaction is :
    A. Cash                              40,000
    Treasury Stock, Preferred                    40,000

    B. Retained Earnings                  40,000
    Cash                                40,000

    C. Paid-in Capital, Preferred            40,000
    Treasury Stock, Preferred                    40,000

    D. Treasury Stock, Preferred            40,000
    Cash                                40,000

 

  1. Use the following information to answer the question below.The following transactions involving Cactus Wren Corporation occurred during the year:Apr. 1  Purchased 2,000 shares of its own preferred stock for $20, the current market price. This is the first transaction involving its own stock engaged in by the company.
    May 3  Sold 400 of the shares purchased on April 1 for $25 per share.
    June 5  Retired 600 of the shares purchased on April 1. The original issue price was $10. The par value of the stock is $5.

    The entry to record the May 3 transaction is:
    A. Treasury Stock, Preferred            10,000
    Cash                              10,000

    B. Cash                              10,000
    Treasury Stock, Preferred                    8,000
    Paid-in Capital, Treasury Stock              2,000

    C. Cash                              4,000
    Retained Earnings                  6,000
    Treasury Stock, Preferred                  10,000

    D. Treasury Stock, Preferred            8,000
    Cash                                8,000

 

  1. The purchase of treasury stock will result in
    A. no net changes in assets, liabilities, or stockholders’ equity.
    B. a decrease in assets and a decrease in stockholders’ equity.
    C. a decrease in one asset account and an increase in a different asset account.
    D. a decrease in assets and a decrease in liabilities.

 

  1. Use the following information to answer the question below.On January 1, 20×5, Falcon Corporation had 40,000 shares of $10 par value common stock issued and outstanding. All 40,000 shares had been issued in a prior period at $17 per share. On February 1, 20×5, Falcon purchased 3,100 shares of treasury stock for $19 per share and later sold the treasury shares for $26 per share on March 2, 20×5.What amount of gain due to these treasury stock transactions should be reported on the income statement for the year ended December 31, 20×5 ?
    A. $0
    B. $21,700
    C. $3,100
    D. $2,170

 

  1. Use the following information to answer the question below.On January 1, 20×5, Falcon Corporation had 40,000 shares of $10 par value common stock issued and outstanding. All 40,000 shares had been issued in a prior period at $17 per share. On February 1, 20×5, Falcon purchased 1,000 shares of treasury stock for $19 per share and later sold the treasury shares for $26 per share on March 2, 20×5.The entry to record the sale of the treasury shares on March 2, 20×5  is
    A. Cash                              26,000
    Common Stock                        19,000
    Retained Earnings                          7,000

    B. Cash                              24,000
    Retained Earnings                    2,000
    Treasury Stock, Common                  26,000

    C. Cash                              26,000
    Treasury Stock, Common                  19,000
    Gain on Treasury Stock, Common              7,000

    D. Cash                              26,000
    Treasury Stock, Common                  19,000
    Paid-in Capital, Treasury Stock              7,000

 

  1. According to generally accepted accounting principles, treasury stock usually should be recorded at
    A. original issue cost.
    B. par or stated value.
    C. cost.
    D. net realizable value.

 

  1. On the balance sheet, treasury stock owned by the company is classified properly as
    A. contra-stockholders’ equity.
    B. current assets.
    C. investments.
    D. a note to the financial statements.

 

  1. Which of the following is the appropriate entry to record the declaration of cash dividends?
    A. Dividends Payable – Debit
    Cash – CreditB. Additional Paid-in Capital – Debit
    Dividends Payable – CreditC. Dividends – Debit
    Dividends Payable – Credit

    D. Retained Earnings – Debit
    Cash – Credit

 

  1. The board of directors of Meadow Corporation declared a cash dividend on January 18, 20×5 , to be paid on February 18, 20×5 , to shareholders holding the stock on February 2, 20×5 . Given these facts, the date February 2, 20×5 , is referred to as the
    A. date of declaration.
    B. date of payment.
    C. ex-dividend date.
    D. date of record.

 

  1. The board of directors of Lark Corporation declared a cash dividend of $3.50 per share on 57,000 shares of common stock on June 14, 20×5. The dividend is to be paid on July 15, 20×5, to shareholders of record on July 1, 20×5. The proper entry to be recorded on June 14, 20×5 is,
    A. Dividends                  199,500
    Dividends Payable                     199,500B. No journal entry is necessary on this date.C. Dividends                  199,500
    Retained Earnings                     199,500

    D. Dividends payable            199,500
    Dividends                           199,500

 

  1. The board of directors of Lark Corporation declared a cash dividend of $3.50 per share on 57,000 shares of common stock on June 14, 20×5. The dividend is to be paid on July 15, 20×5, to shareholders of record on July 1, 20×5.  The effects of the entry to record the declaration of the dividend on June 14, 20×5, are to
    A. decrease stockholders’ equity and increase liabilities.
    B. increase stockholders’ equity and increase liabilities.
    C. decrease stockholders’ equity and decrease assets.
    D. increase stockholders’ equity and decrease assets.

 

  1. The board of directors of Lark Corporation declared a cash dividend of $3.50 per share on 57,000 shares of common stock on June 14, 20×5. The dividend is to be paid on July 15, 20×5, to shareholders of record on July 1, 20×5. The proper entry to be recorded on July 15, 20×5 is,
    A. Cash                        199,500
    Dividends Payable                     199,500B. Dividends Payable            199,500
    Cash                           199,500C. Cash                        199,500
    Dividends                           199,500

    D. Dividends                  199,500
    Cash                           199,500

 

  1. The board of directors of Lark Corporation declared a cash dividend of $3.50 per share on 57,000 shares of common stock on June 14, 20×5. The dividend is to be paid on July 15, 20×5, to shareholders of record on July 1, 20×5. The effects of the entry to record the payment of the dividend on July 15, 20×5, are to
    A. increase assets and decrease stockholders’ equity.
    B. decrease stockholders’ equity and decrease liabilities.
    C. decrease liabilities and decrease assets.
    D. increase stockholders’ equity and decrease liabilities.

 

  1. The entry to close the Dividends account at the end of an accounting period which has a balance of $10,000 is:
    A. Dividends            10,000
    Cash                    10,000B. Retained Earnings      10,000
    Cash                    10,000C. Dividends            10,000
    Retained Earnings              10,000

    D. Retained Earnings      10,000
    Dividends                    10,000

 

  1. The entry to record the declaration of a cash dividend will
    A. not affect working capital.
    B. reduce working capital.
    C. not affect total stockholders’ equity.
    D. increase total stockholders’ equity.

 

  1. The net effects on a corporation of the declaration and payment of a cash dividend are to
    A. increase assets and increase stockholders’ equity.
    B. decrease liabilities and decrease stockholders’ equity.
    C. decrease assets and decrease stockholders’ equity.
    D. increase stockholders’ equity and decrease liabilities.

 

  1. A corporation records a dividend-related liability
    A. on the payment date.
    B. on the record date.
    C. on the declaration date.
    D. when the stock sells ex-dividend.

 

  1. On June 1, 20×5, Jomax Corporation had 60,000 shares of $10 par value common stock outstanding. On June 2, 20×5, Jomax declared a 40 percent stock dividend to be distributed on July 5, 20×5, to shareholders of record on June 15, 20×5. What amount of retained earnings should be transferred to contributed capital because of this dividend?
    A. None
    B. Par value per share multiplied by the number of dividend shares
    C. Market value of the stock at the date of distribution multiplied by the number of dividend shares
    D. Market value of the stock at the date of declaration multiplied by the number of dividend shares

 

  1. On July 1, 20×5, Blaylock Corporation had 40,000 shares of its $100 par value common stock outstanding. On July 2, 20×5, Blaylock declared a 15 percent stock dividend to be distributed on August 6, 20×5, to shareholders of record on July 16, 20×5. What amount of retained earnings should be transferred to contributed capital because of this dividend?
    A. None
    B. Market value of the stock at the date of distribution multiplied by the number of dividend shares
    C. Market value of the stock at the date of declaration multiplied by the number of dividend shares
    D. Par value per share multiplied by the number of dividend shares

 

  1. A corporation should account for the declaration of a 10 percent stock dividend by
    A. transferring from retained earnings to contributed capital an amount equal to the legal capital represented by the dividend shares.
    B. transferring from retained earnings to contributed capital an amount equal to the market value of the dividend shares.
    C. transferring from retained earnings to contributed capital whatever amount the board of directors deems appropriate.
    D. making only a memorandum entry in the general journal.

 

  1. Which of the following statements is not true about a 2-for-1 stock split?
    A. Total contributed capital increases.
    B. Par value per share is reduced to half of what it was before the split.
    C. A stockholder with ten shares before the split owns twenty shares after the split.
    D. The market price probably will decrease.

 

  1. Which of the following is not true about a 35 percent stock dividend?
    A. The market value of the stock is needed to record the stock dividend.
    B. Retained earnings decreases.
    C. Contributed capital increases.
    D. Par value per share remains the same.

 

  1. At the beginning of 20×5, Spur Corporation had 68,000 shares of $10 par value common stock issued and outstanding. During January 20×5, Spur declared and distributed a 10 percent stock dividend. The market value of Spur’s stock was $25 throughout the month of January. The entry to be recorded for the declaration of stock dividend isA. Stock Dividends                         170,000
    Common Stock Distributable                      68,000
    Additional Paid-in Capital                                  102,000B. Common Stock Distributable                   170,000
    Common Stock                                  170,000

    C. Common Stock Distributable                   170,000
    Common Stock                                  68,000
    Retained Earnings                                       102,000

    D. Stock Dividends                         68,000
    Cash                                        68,000

 

  1. On May 1, 20×5, Ironwood Corporation had 200,000 shares of $10 par value common stock outstanding with a market value of $16 per share. On May 2, 20×5, Ironwood announced a 4-for-1 stock split. After the split, the par value of the stock
    A. remained the same as before the split.
    B. was reduced to $2.50 per share.
    C. was reduced by $4 per share.
    D. was reduced by $2.50 per share.

 

  1. Use this information to answer the following question.Pinnacle Corporation has 90,000 shares of $10 par value common stock outstanding. The following transactions occurred during the year:
Mar. 17 Declared a 10 percent stock dividend to stockholders of record on March 20. Market value of the stock was $22 on March 17.
30 Distributed the stock dividend.

The entry to record the transaction of March 17 is:

A. Stock Dividends                   198,000
Common Stock Distributable                90,000
Additional Paid-in Capital                            108,000

B. Common Stock Distributable             90,000
Common Stock                            90,000

C. Common Stock Distributable             198,000
Common Stock                            90,000
Retained Earnings                                 108,000

D. Stock Dividends                   198,000
Cash                                  198,000

 

  1. Use this information to answer the following question.Pinnacle Corporation has 90,000 shares of $10 par value common stock outstanding. The following transactions occurred during the year:Mar. 17 Declared a 10 percent stock dividend to stockholders of record on March 20. Market value of the stock was $22 on March 17.
    Mar. 30 Distributed the stock dividend.

    The entry to record the transaction of March 30 is:

    A. Common Stock Distributable             90,000
    Common Stock                            90,000

    B. Common Stock Distributable             90,000
    Retained Earnings                   108,000
    Common Stock                            198,000

    C. Common Stock Distributable             198,000
    Common Stock                            90,000
    Additional Paid-in Capital                           108,000

    D. Common Stock Distributable             90,000
    Cash                                  90,000

 

  1. How will the declaration and distribution of a 10 percent stock dividend affect the issuing corporation’s balance of retained earnings and total stockholders’ equity, respectively?
    A. Decrease and no effect
    B. No effect and no effect
    C. Decrease and decrease
    D. No effect and decrease

 

  1. Which of the following has an effect on total stockholders’ equity?
    A. Conversion of preferred stock into common stock
    B. Cash dividend
    C. Stock dividend
    D. Stock split

 

  1. On which of the following dates involving stock dividends does a liability arise?
    A. Date of distribution
    B. Date of declaration
    C. Date of record
    D. On no date

 

  1. A large stock dividend should be recorded on the basis of
    A. par or stated value.
    B. original issue price.
    C. market value.
    D. cost.

 

  1. Which of the following transactions affects total retained earnings?
    A. Purchase of treasury stock
    B. Payment of previously declared cash dividend
    C. Declaration of a stock dividend
    D. Declaration of a stock split

 

  1. Mariposa Corporation had a Retained Earnings balance on January 1, 20×4, of $936,000; declared cash dividends during 20×4 in the amount of $159,900, of which $39,000 were not paid until 20×5; and reported an ending balance of Retained Earnings of $1,326,000. Based on these facts alone, net income for 20×4 for Mariposa Corporation must have been
    A. $211,900.
    B. $419,900.
    C. $510,900.
    D. $549,900.

 

  1. The following facts pertain to Alameda Corporation for 20×5:
Retained Earnings balance, January 1, 20×5 $500,000
Cash dividends declared and paid in 20×5 82,500
Retained Earnings balance (after closing), December 31, 20×5 650,000
Net income for 20×5 ?

Based on the above facts, net income for 20×5 for Alameda Corporation amounted to
A. $207,500.
B. $182,500.
C. $232,500.
D. $257,500.

 

  1. Which of the following items will not be disclosed on a statement of stockholders’ equity?
    A. Net income
    B. Issuance of common stock for cash
    C. Extraordinary gains and losses
    D. Issuance of common stock in exchange for noncash assets

 

  1. The purpose of a statement of stockholders’ equity is to
    A. disclose the computation of book value per share of stock.
    B. budget the transactions expected to occur during the forthcoming period.
    C. replace the statement of retained earnings.
    D. summarize the changes in the components of stockholders’ equity for a period of time.

 

  1. The preparation of a statement of stockholders’ equity makes which other financial statement unnecessary?
    A. Income statement
    B. Statement of cash flows
    C. Statement of retained earnings
    D. Balance sheet

 

  1. Which of the following would not affect the balance of the Retained Earnings account?
    A. Stock split
    B. Net loss
    C. Cash dividend declared
    D. Stock dividend declared

 

  1. All of the following would appear on the statement of stockholders’ equity except
    A. declaration of cash dividends.
    B. an issuance of common stock.
    C. net income.
    D. declaration of a stock split.

 

  1. Which of the following items will not be disclosed on a statement of stockholders’ equity?
    A. Conversion of preferred stock into common stock
    B. Results of discontinued operations
    C. Purchase of treasury stock
    D. Declaration of a stock dividend

 

  1. If only common stock is outstanding, total stockholders’ equity divided by the number of shares of common stock outstanding is called the
    A. par or stated value per share.
    B. call value per share.
    C. book value per share.
    D. market value per share.

 

  1. The value at which one share of stock can be bought or sold is called
    A. book value.
    B. call value.
    C. par or stated value.
    D. market value.

 

  1. Book value per share refers to the
    A. net assets represented by one share of a company’s stock.
    B. highest price that investors will pay for a share of stock.
    C. issue price of the stock, less any market decline since issuance.
    D. par or stated value of a share of stock.

 

  1. Saguaro Corporation has total contributed capital of $840,000 and retained earnings of $427,000. It has 1,000 shares of $100 par value preferred stock with no dividends in arrears and 5,000 shares of $100 par value common stock. The preferred stock is callable at 105. The book value of each share of common stock is
    A. $225.40.
    B. $120.40.
    C. $232.40
    D. $253.40.

 

  1. Willow Corporation has retained earnings of $320,000. It has 5,000 shares of 6 percent, $100 par value preferred stock outstanding that is callable at 102. The preferred stock is cumulative, and one year of dividends is in arrears. It also has 10,000 shares of $50 par value common stock outstanding. Assume all stock is issued at par. The book value of each share of preferred stock is
    A. $168.00.
    B. $108.00
    C. $163.20.
    D. $176.00.

 

  1. Willow Corporation has retained earnings of $320,000. It has 5,000 shares of 6 percent, $100 par value preferred stock outstanding that is callable at 102. The preferred stock is cumulative, and one year of dividends is in arrears. It also has 10,000 shares of $50 par value common stock outstanding. Assume all stock is issued at par. The book value of each share of common stock is
    A. $78.00.
    B. $110.40.
    C. $81.60.
    D. $80.00.

 

  1. The price/earnings (P/E) ratio is measured in terms of
    A. dollars.
    B. a percentage.
    C. times.
    D. days.

 

  1. Dividends yield equals
    A. market price per share divided by dividends per share.
    B. net income divided by dividends per share.
    C. dividends per share divided by net income.
    D. dividends per share divided by market price per share.

 

  1. Return on equity is measured in terms of
    A. days.
    B. times.
    C. a percentage.
    D. dollars.

 

  1. To evaluate the amount of dividends they receive, investors use the ratio called
    A. Price Earning ratio
    B. Return on Equity
    C. Dividend yield ratio
    D. Current ratio

 

  1. Adobe Corporation had net income of $120,000 in 20×4 and $164,000 in 20×5.  Total stockholders’ equity at the end of 20×4 was $760,000 and total stockholders’ equity at the end of 20×5 was $820,000.  Adobe’s total assets at the end of 20×4 were $1,320,000 and its total assets at the end of 20×5 were $1,410,000.  Based on this information, what is Adobe’s return on equity for 20×5?
    A. 20.76%
    B. 17.97%
    C. 20.00%
    D. 12.01%

 

  1. Cielo Corporation had net income of $740,000 in 20×4 and $830,000 in 20×5.  Total stockholders’ equity at the end of 20×4 was $1,250,000 and total stockholders’ equity at the end of 20×5 was $1,500,000.  Cielo’s total assets at the end of 20×4 were $2,210,000 and its total assets at the end of 20×5 were $2,860,000.  Based on this information, what is Cielo’s return on equity for 20×5?
    A. 32.74%
    B. 55.33%
    C. 57.09%
    D. 60.36%

 

  1. Firehawk Corporation had net income of $560,000 in 20×5 and paid dividends of $440,000 on 200,000 shares of outstanding common stock.  Total stockholders’ equity at the end of 20×5 was $2,060,000 and the market price for each share of Firehawk’s stock was $58 throughout 20×5.  Additionally, the company paid preferred dividends of $2.40 per share during 20×5.  Based on this information, what is the dividend yield on Firehawk’s stock?
    A. 21.36%
    B. 78.57%
    C. 3.79%
    D. 7.93%

 

  1. Firehawk Corporation had net income of $560,000 in 20×5 and paid dividends of $440,000 on 200,000 shares of outstanding common stock.  Total stockholders’ equity at the end of 20×5 was $2,060,000 and the market price for each share of Firehawk’s stock was $58 throughout 20×5.  Based on this information, what is the price/earnings ratio for Firehawk’s stock?
    A. 96.67 times.
    B. 20.71 times.
    C. 4.83 times.
    D. 26.36 times.

 

  1. Identify (by code letter) each of the following characteristics as being an advantage of (A), a disadvantage of (D), or not applicable to (N) the corporate form of business.
1. Separate legal entity 6. Mutual agency
2. Taxable entity resulting in double 7. Ease of transfer of ownership
taxation
3. Continuous existence 8. Ease of capital generation
4. Unlimited liability 9. Lack of mutual agency
5. Government regulation 10. Professional management

 

 

 

 

 

 

  1. One aspect of the corporate form can be considered both an advantage and a disadvantage.  What aspect is this, and why can it be considered both?

 

 

 

 

 

  1. The following information relates to the number of common shares of the Jackson Corporation:60,000 Authorized shares 25,000 Unissued shares 3,500 Treasury sharesCalculate the number of outstanding shares from the information given. Show your calculations.

 

 

 

 

 

  1. The following information relates to the number of common shares of the Swan Corporation:140,000 Authorized shares 60,000 Unissued shares 8,000 Treasury sharesCalculate the number of outstanding shares from the information given. Show your calculations.

 

 

 

 

 

  1. How is it possible for a corporation to have more shares issued than it has outstanding?

 

 

 

 

 

  1. Define outstanding stock.

 

 

 

 

 

  1. If there is no change in the number of shares authorized and issued from one year to the next, but there is a change in the number of shares outstanding on those same dates, how would you explain that change?

 

 

 

 

 

  1. Why might someone prefer to invest in a company by purchasing preferred stock rather than common stock?

 

 

 

 

 

  1. When stock is issued for noncash assets or services, how does one place a valuation (dollar amount) on the transaction?

 

 

 

 

 

  1. Describe at least three reasons why a corporation would want to buy back its own stock.

 

 

 

 

 

  1. Indicate on the blanks below the net effect (I = increase, D = decrease, NE = no effect) of each of the following entries on total stockholders’ equity.
    _____ 1. To record the declaration of a cash dividend
    _____ 2. To record the payment of a previously declared and recorded cash dividend
    _____ 3. To close the Dividends account at the end of the accounting period

 

 

 

 

 

  1. Although a corporation may have sufficient cash and retained earnings to pay a dividend, its board of directors may not declare dividends.  Name at least two reasons why a board of directors might not declare dividends.

 

 

 

 

 

  1. Indicate on the blanks below the effect (I = increase, D = decrease, NE = no effect) of a stock split on each of the items listed.
    _____ 1. Assets
    _____ 2. Balance of Common Stock account
    _____ 3. Total contributed capital
    _____ 4. Total retained earnings
    _____ 5. Total stockholders’ equity
    _____ 6. Par value per share
    _____ 7. Total number of shares outstanding

 

 

 

 

 

  1. Draw two distinctions between accounting for a stock split and accounting for a stock dividend.

 

 

 

 

 

  1. a. Indicate on the blanks below the effect (I = increase, D = decrease, NE = no effect) of the entry to record the declaration of a common stock dividend on each of the items listed.
    b. Indicate on the blanks below the effect (I = increase, D = decrease, NE = no effect) of the entry to record the distribution of a (previously declared and recorded) common stock dividend on each of the items listed.
a. b.
1. Assets
2. Balance of Common Stock account
3. Total contributed capital
4. Total retained earnings
5. Total stockholders’ equity
6. Par value per share
7. Total number of shares outstanding

 

 

 

 

 

 

  1. In recent years, Redbird Corporation, a small manufacturer of jet skis for the leisure industry, has followed the practice of issuing a 10 percent stock dividend annually. Although the company’s net income has been almost $4 million in each of the past three years, retained earnings have declined from about $10 million to about $6 million. What is the probable motivation for management’s decision to issue an annual 10 percent stock dividend? What is the most likely explanation for the decrease in retained earnings? Given your explanation, would stockholders’ equity also decrease by a like amount?

 

 

 

 

 

  1. At December 31, 20×5, the book value per share of common stock of Camino Corporation amounted to $21 per share. Determine the effect of each of the following items on the book value per share of common stock computation assuming each item occurs after December 31, 20×5. Consider each item independently of the other items listed. Indicate your answer for each (I = increase, D = decrease, or NE = no effect) in the appropriate blank.
    _____ 1. Sale of newly issued shares of common stock at $23 per share
    _____ 2. Purchase of treasury stock for $16 per share
    _____ 3. Declaration of current cash dividends on preferred stock
    _____ 4. Declaration and distribution of stock dividends on common stock
    _____ 5. Sale of treasury stock (purchased at $16 per share) for $19 per share
    _____ 6. Entry to close net income for the period to the Retained Earnings account
    _____ 7. Dividends in arrears on preferred stock
    _____ 8. Purchase of a truck with cash
    _____ 9. Payment of a previously declared and recorded cash dividend on common stock

 

 

 

 

 

  1. How is book value per share interpreted for an investor who owns one share of a company’s stock?  Is book value equal to the amount this stockholder would receive if the company were sold or liquidated?  Why or why not?

 

 

 

 

 

  1. 1. How is return on equity computed?
    2. If a company sells more shares of its stock, what is the impact on the return on equity?
    3.  Which ratio is considered a measure of investors’ confidence in a company’s future? Why?

 

 

 

 

 

1. Has the authority to declare dividends.      Underwriter.   ____
2. The number of shares issued times the par value.      Legal capital.   ____
3. The company charter.      Better debt to equity ratio.   ____
4. An advantage of incorporation.      Articles of incorporation.   ____
5. An advantage of equity financing.      Board of directors.   ____
6. Can allow preferred shareholders to gain voting rights.      Limited liability.   ____
7. An intermediary between the corporation and the investing public to help with a company’s initial public offering.      Preferred stock.   ____
8. Stock that gives its owners preference in terms of receiving dividends and
in terms of claims to assets if the corporation is liquidated.
     Convertible preferred stock.   ____

 

1. When a corporation declares a dividend that exceeds retained earnings.      Record date.   ____
2. The most important ratio associated with stockholders’ equity.      Stock dividend.   ____
3. A dividend that involves no distribution of assets.      Liquidating dividends.   ____
4. Dividends per share divided by Market price per share.      Book value per share.   ____
5. A measure of investors’ confidence in a company’s future.      Dividend yield.   ____
6. The equity of the owner of one share of stock in the net assets of a company.      Return on equity.   ____
7. No journal entry is made on this date.      Price/earnings ratio.   ____

 

  1. Prepare in proper form the stockholders’ equity section of the balance sheet from the following selected accounts and balances taken from the adjusted trial balance of Thomas Corporation on June 30, 20×5.
Partial Adjusted Trial Balance
Account Debit Credit
Common Stock—$10 stated value, 50,000 shares authorized,
45,000 shares outstanding 450,000
Preferred Stock—$100 par value, 8 percent cumulative convertible,
3,000 shares authorized and outstanding 300,000
Additional Paid-in Capital, Preferred 15,000
Additional Paid-in Capital, Common 75,000
Retained Earnings 30,000

 

 

 

 

 

 

  1. Prepare in proper form the stockholders’ equity section of the balance sheet from the following selected accounts and balances taken from the adjusted trial balance of Cooper Corporation as of December 31, 20×5.
Partial Adjusted Trial Balance
Account Debit Credit
Common Stock—$10 par value, 200,000 shares authorized, 110,000
shares issued and outstanding 1,100,000
Preferred Stock—$100 par value, 9 percent cumulative, 40,000 shares
authorized, 8,000 shares issued and outstanding 800,000
Additional Paid-in Capital, Preferred 30,000
Additional Paid-in Capital, Common 800,000
Retained Earnings 180,000

 

 

 

 

 

 

  1. Prepare in proper form the stockholders’ equity section of the balance sheet from the following selected accounts and balances taken from the adjusted trial balance of Barger Corporation as of December 31, 20×5.
Partial Adjusted Trial Balance
Account Debit Credit
Common Stock—$10 par value, 90,000 shares authorized, 40,000
shares issued and outstanding 400,000
Preferred Stock—$100 par value, 7 percent cumulative, 50,000 shares
authorized, 8,000 shares issued and outstanding 800,000
Additional Paid-in Capital, Preferred 30,000
Additional Paid-in Capital, Common 200,000
Retained Earnings 100,000

 

 

 

 

 

 

  1. The information that follows pertains to stockholders’ equity data of Frame Corporation on December 31, 20×5. Compute the amount of each item indicated by a letter in the listing below.
Par value per common share $         10
Balance of Common Stock account $300,000
No. of shares authorized 40,000
No. of shares issued and outstanding a
             
Balance of Additional Paid-in Capital account $           b
             
Balance of Retained Earnings account $ 160,000
Total contributed capital $          c
             
Total stockholders’ equity $600,000

 

 

 

 

 

 

  1. The information that follows pertains to stockholders’ equity data of the Beagle Corporation on December 31, 20×5. Compute the amount of each item indicated by a letter in the listing below. Where necessary, carry answers to two decimal place.
Par value per common share $        20
Balance of Common Stock account $          a
             
No. of shares authorized 20,000
No. of shares issued and outstanding 15,000
Balance of Additional Paid-in Capital account $          b
             
Balance of Retained Earnings account $  50,000
Average issuance price per share of common stock $           c
             
Total stockholders’ equity $510,000

 

 

 

 

 

 

  1. Kolber Corporation is authorized to issue 200,000 shares of no-par stock. The company recently sold 80,000 shares for $13 per share.
    a. Prepare the entry in journal form to record the sale of the stock assuming there is no stated value.
    b. Prepare the entry in journal form if a $10 stated value is authorized by the company’s board of directors.
General Journal Page 1
Date Description Post.
Ref.
Debit Credit

 

 

 

 

 

 

  1. Miner Corporation issued 2,000 shares of its $20 par value common stock for some land. The land had a fair market value of $62,000.
    Prepare the entries in journal form necessary to record the stock issue for the land under each of the following conditions:
    a. The stock was selling for $28 per share on the day of the transaction.
    b. Management attempted to place a market value on the common stock but could not do so.
General Journal Page 1
Date Description Post.
Ref.
Debit Credit

 

 

 

 

 

 

  1. Lawler Corporation had both the following transactions occur on the same day:
    1. Issued 60,000 shares of its $5 par value common stock for $720,000 cash.
    2. Issued 20,000 shares of its $5 par value common stock in exchange for land and a building. The building is estimated to have a market value of $180,000.
    Prepare the entries in journal form to record the above transactions. Omit explanations, but show computations.
General Journal Page 1
Date Description Post.
Ref.
Debit Credit

 

 

 

 

 

 

  1. Marianna Corporation is authorized to issue 100,000 shares of $5 stated value common stock and 2,000 shares of $100 par value, 6 percent preferred stock. Prepare entries in journal form without explanations to record the following transactions:
July 15 Issued 1,000 shares of common stock to an attorney for a bill of $7,000 for services rendered.
25 Issued 2,000 shares of preferred stock for cash of $120 per share.
27 Issued 10,000 shares of common stock in exchange for land for a plant site valued at $75,000.
Aug. 1 Issued 5,000 shares of common stock for $35,000 in cash.

 

General Journal Page 1
Date Description Post.
Ref.
Debit Credit

 

 

 

 

 

 

  1. Danielle Corporation is authorized to issue 100,000 shares of $5 stated value common stock and 2,000 shares of $100 par value, 8 percent preferred stock. Prepare entries in journal form without explanations to record the following transactions:
Apr. 15 Issued 1,000 shares of common stock to an attorney for a bill of $9,000 for services rendered.
25 Issued 1,000 shares of preferred stock for cash of $115 per share.
27 Issued 8,000 shares of common stock in exchange for land for a plant site valued at $50,000.
May 1 Issued 15,000 shares of common stock for $90,000 in cash.

 

General Journal Page 1
Date Description Post.
Ref.
Debit Credit

 

 

 

 

 

 

  1. Prepare the entries in journal form necessary to record the following stock transactions of Horsetail Corporation. These transactions represent all treasury stock transactions entered into by the company. (Omit explanations.)
June 1 Purchased 2,000 shares of its own $30 par value common stock for $105 per share, the current market price.
10 Sold 500 shares of treasury stock purchased on June 1 for $120 per share
20 Sold 700 shares of treasury stock purchased on June 1 for $87 per share.
30 Retired the remaining shares purchased on June 1. The original issue price was $63 per share.

 

General Journal Page 1
Date Description Post.
Ref.
Debit Credit

 

 

 

 

 

 

  1. On its December 31, 20×4 , balance sheet, Bronco Corporation reported its stockholders’ equity as follows:
Common stock—$5 par value, 100,000 shares authorized,
50,000 shares issued and outstanding $250,000
Additional paid-in capital 125,000
Retained earnings 400,000
Total stockholders’ equity $775,000

During 20×5 , the following transactions occurred:

Reacquired 2,500 shares at $7 per share.
Sold 1,200 shares of treasury stock at $8 per share.
Sold 500 shares of treasury stock at $6 per share.
Net income for 20×5 amounted to $80,000.

a. Prepare the entries in journal form for the three transactions involving treasury stock. (Omit explanations.)

b. Compute the amount of total contributed capital to be reported on the December 31, 20×5 , balance sheet.

General Journal Page 1
Date Description Post.
Ref.
Debit Credit

 

 

 

 

 

 

  1. Prepare entries in journal form without explanations to record the following transactions involving Wildflower Corporation’s $5 par value common stock:
Apr. 1 Purchased 1,000 shares of its own common stock for $12, the current market price. This is the first transaction involving its own stock engaged in by the company.
May 1 Sold 200 of the shares purchased on April 1 for $15.
June 1 Retired 200 of the shares purchased on April 1. The original issue price was $8.
July 1 Sold 400 of the shares purchased on April 1 for $10.

 

General Journal Page 1
Date Description Post.
Ref.
Debit Credit

 

 

 

 

 

 

  1. The following amounts were reported by Paloma Corporation on December 31, 20×4 :
Common stock—$5 par value $150,000
Additional paid-in capital 120,000
Treasury stock (8,000 shares at cost) 60,000

On January 3, 20×5 , 5,000 shares of treasury stock were sold. After the sale of the treasury shares, total stockholders’ equity amounted to $277,500. No stockholders’ equity transactions other than the sale of the treasury stock occurred between December 31, 20×4 , and January 3, 20×5. From the information given, compute the selling price per share of the treasury stock.

 

 

 

 

 

  1. Sonora Corporation had 45,000 shares of $5 par value common stock issued and outstanding on December 31, 20×4. Each share was issued during 20×2  at $14 per share. Prepare the entries in journal form without explanations for the following transactions occurring in 20×5:
Jan. 4 Purchased 7,500 shares of treasury stock for $16 per share. This is the first transaction involving its own stock ever engaged in by the company.
31 Sold 1,500 shares of treasury stock for $15 per share.
Feb. 20 Sold 1,500 shares of treasury stock for $18 per share.
Mar. 16 Sold 1,500 shares of treasury stock for $11 per share.
Apr. 5 Retired 3,000 shares of treasury stock.
May 8 Purchased 750 shares of treasury stock for $12 per share.
31 Retired the 750 shares of treasury stock purchased on May 8.

 

General Journal Page 1
Date Description Post.
Ref.
Debit Credit

 

 

 

 

 

 

  1. Baird Corporation had 60,000 shares of $5 par value common stock issued and outstanding on December 31, 20×4. Each share was issued during 20×2 at $14 per share. Prepare the entries in journal form without explanations for the following transactions occurring in 20×5:
Jan. 4 Purchased 10,000 shares of treasury stock for $16 per share. This is the first transaction involving its own stock ever engaged in by the company.
31 Sold 2,000 shares of treasury stock for $15 per share.
Feb. 20 Sold 2,000 shares of treasury stock for $18 per share.
Mar. 16 Sold 2,000 shares of treasury stock for $11 per share.
Apr. 5 Retired 4,000 shares of treasury stock.
May 8 Purchased 1,000 shares of treasury stock for $12 per share.
31 Retired the 1,000 shares of treasury stock purchased on May 8.

 

General Journal Page 1
Date Description Post.
Ref.
Debit Credit

 

 

 

 

 

 

  1. On its December 31, 20×4, balance sheet, Mesquite Corporation reported its stockholders’ equity as follows:
Common stock—$5 par value, 100,000 shares authorized,
50,000 shares issued and outstanding $250,000
Additional paid-in capital 125,000
Retained earnings 400,000
Total stockholders’ equity $775,000

During 20×5, the following transactions occurred:

Reacquired 2,500 shares at $7 per share.
Sold 1,200 shares of treasury stock at $8 per share.
Sold 500 shares of treasury stock at $6 per share.
Net income for 20×5 amounted to $80,000. No dividends were declared.

Prepare the stockholders’ equity section of the balance sheet as it should appear on December 31, 20×5.

Mesquite Corporation
Partial Balance Sheet
December 31, 20×5

 

 

 

 

 

 

  1. Dixie Corporation has 2,000,000 authorized shares of $10 par value common stock. As of June 30, 20×5, there were 1,000,000 shares issued and outstanding. On June 30, 20×5, the board of directors declared a $0.40 per share cash dividend to be paid on August 1, 20×5, to shareholders of record on July 15, 20×5. Prepare the necessary entries in journal form to be recorded on (a) the date of declaration, (b) the date of record, and (c) the date of payment. (Omit explanations.)
General Journal Page 1
Date Description Post.
Ref.
Debit Credit

 

 

 

 

 

 

  1. Buckhorn Corporation has 200,000 shares of $10 stated value no-par common stock authorized, and 160,000 shares were outstanding during 20×5. The following transactions relate to cash dividends of Buckhorn Corporation for the year ended December 31, 20×5. Prepare entries in journal form without explanations to record the following transactions:
June 1 Declared a semiannual cash dividend of $0.60 per common share.
15 Compiled the list of individual shareholders eligible for the dividend declared on June 1.
July 5 Paid the dividend declared on June 1.
Dec. 1 Declared a semiannual cash dividend of $0.60 per common share to be paid on January 5, 20×6.
15 Compiled the list of individual shareholders eligible for the dividend declared on December 1.
31 Closed the Dividends account at year end.

 

General Journal Page 1
Date Description Post.
Ref.
Debit Credit

 

 

 

 

 

 

  1. Copperhead Corporation has 30,000 shares of $100 stated value no-par common stock authorized, and 20,000 shares were outstanding during 20×5. The following transactions relate to cash dividends of Copperhead Corporation for the year ended December 31, 20×5. Prepare entries in journal form without explanations to record the following transactions:
June 1 Declared a semiannual cash dividend of $0.90 per common share.
15 Compiled the list of individual shareholders eligible for the dividend declared on June 1.
July 5 Paid the dividend declared on June 1.
Dec. 1 Declared a semiannual cash dividend of $0.90 per common share to be paid on January 5, 20×6.
15 Compiled the list of individual shareholders eligible for the dividend declared on December 1.
31 Closed the Dividends account at year end.

 

General Journal Page 1
Date Description Post.
Ref.
Debit Credit

 

 

 

 

 

 

  1. Stetson Corporation has 80,000 shares of $5 par value common stock outstanding. Prepare entries in journal form without explanations for the following transactions. (Market value of the stock was $10.00 on December 16 and $12.00 on December 23.)
Dec. 16 Declared a 15 percent stock dividend.
23 Distributed the stock dividend.
30 Declared a 2-for-1 stock split.

 

General Journal Page 1
Date Description Post.
Ref.
Debit Credit

 

 

 

 

 

 

  1. On August 26, 20×5, Via Linda Corporation’s board of directors declared a 2 percent stock dividend applicable to the outstanding shares of its $5 par value common stock, of which 150,000 shares are authorized, 130,000 are issued, and 10,000 are held in the treasury. The stock dividend was distributable on September 25 to stockholders of record on September 10. On August 26, the market value of the common stock was $12 per share. On November 26, the board of directors declared a $0.20 per share cash dividend. No other stock transactions have occurred. Record the transactions on August 26, September 10, September 25, and November 26. Make the December 31 entry to close Dividends and Stock Dividends to Retained Earnings.
General Journal Page 1
Date Description Post.
Ref.
Debit Credit

 

 

 

 

 

 

  1. The following facts pertain to the stockholders’ equity section of the balance sheet of Charlotte Corporation:
December 31, 20×5 December 31, 20×4
Common Stock—$5 par value $143,000 $130,000
Additional Paid-in Capital 83,200 78,000
Retained Earnings 273,000 260,000

During 20×5, Charlotte declared and distributed a stock dividend. Also during 20×5, Charlotte declared and paid cash dividends of $26,000. There were no changes in the number of shares of stock issued and outstanding during the period except for the change caused by the stock dividend. Calculate the amount of net income reported by Charlotte for 20×5.

 

 

 

 

 

  1. The following facts pertain to the stockholders’ equity section of the balance sheet of Avenida Corporation:
December 31, 20×5 December 31, 20×4
Common Stock—$5 par value $93,500 $85,000
Additional Paid-in Capital 54,400 51,000
Retained Earnings 178,500 170,000

During 20×5, Avenida declared and distributed a stock dividend. Also during 20×5, Avenida declared and paid cash dividends of $17,000. There were no changes in the number of shares of stock issued and outstanding during the period except for the change caused by the stock dividend. Calculate the amount of net income reported by Avenida for 20×5.

 

 

 

 

 

  1. The following facts pertain to Quail Corporation:
Retained Earnings balance, December 31, 20×4 $550,000
Cash dividends declared and paid in 20×5 60,000
Cash dividends declared but not paid in 20×5 20,000
Retained Earnings balance reported on December 31, 20×5 , balance sheet 675,000

On the basis of these facts, compute the amount of net income (loss) for Quail Corporation for 20×5.

 

 

 

 

 

  1. Compute the book values per share for (a) preferred and (b) common stock for Electra Corporation, whose stockholders’ equity as of December 31, 20×5, was as follows.
Stockholders’ Equity
Contributed capital
Preferred stock—6 percent cumulative, $100 par value,
40,000 shares issued and outstanding (1 year’s dividends
in arrears), callable at 110 $ 4,000,000
Common stock—$5 par value, 4,000,000 shares authorized,
3,200,000 shares issued and outstanding 16,000,000
Additional paid-in capital, common     8,400,000
Total contributed capital    $28,400,000
Retained earnings         3,600,000
Total stockholders’ equity $32,000,000

 

 

 

 

 

 

  1. The stockholders’ equity of Crest Corporation as of December 31, 20×5, is as follows:
Stockholders’ Equity
Contributed capital
Preferred stock—7 percent cumulative, $100 par value,
$103 call value, 30,000 shares authorized, issued,
and outstanding $3,000,000
Common stock—$10 par value, 1,500,000 shares authorized,
1,200,000 shares issued and outstanding 12,000,000
Additional paid-in capital, common       5,175,000
Total contributed capital $20,175,000
Retained earnings     2,750,000
Total stockholders’ equity $22,925,000

The preferred stock has one year’s dividends in arrears.

a. Compute the book value per share of preferred stock and the book value per share of common stock. (Round to the nearest cent.)

b. Assume the preferred stock has two years’ dividends in arrears. Compute the book value per share of preferred stock and the book value per share of common stock. (Round to the nearest cent.)

 

 

 

 

 

  1. a. Marco Corporation has 6,000 shares of $100 par value, 8 percent cumulative preferred stock and 10,000 shares of $50 par value common stock outstanding. All shares were issued at par value. In addition, retained earnings total $198,000. If the preferred stock is callable at $105 per share and one year’s dividends are in arrears, compute book value per share of preferred stock.b. Assume the same facts as in a above. Calculate book value per share of common stock.c. Assume the same facts as in a above and that Marco Corporation declares a 15 percent stock dividend on its common stock. If the market value on the declaration date was $60 per share, for what amount will Additional Paid-in Capital, Common be credited?

    d. Assume the same facts as in a above and that Marco Corporation declares a 4-for-1 stock split on its preferred stock. After the split, total par value of preferred stock equals what amount?

 

 

 

 

 

  1. a. Yorkshire Corporation has 9,000 shares of $10 par value common stock and 5,000 shares of $50 par value, 10 percent cumulative preferred stock outstanding. All shares were issued at par value. In addition, retained earnings total $90,000. If the preferred stock is callable at $54 per share, and one year’s dividends are in arrears, compute book value per share of preferred stock.b. Assume the same facts as in a above. Calculate book value per share of common stock.c. Assume the same facts as in a above and that Yorkshire Corporation declares a 5-for-1 stock split on its common stock. After the split, total par value of common stock equals what amount?

    d. Assume the same facts as in a above and that Yorkshire Corporation declares a 12 percent stock dividend on its preferred stock. If the market value on the declaration date was $70 per share, for what amount will Preferred Stock Distributable be credited?

 

 

 

 

 

  1. Use the following information to obtain the ratios requested below. Where necessary, carry answers to one decimal place.Dividends per share: $1.14
    Market price per share: $54
    Net income: $118,000
    Stockholders’ equity, beginning of year: $500,000
    Stockholders’ equity, end of year: $530,000
    Earnings per share: $1.75a. Dividends yield = _____________%

    b. Return on equity = _____________%

    c. Price/earnings (P/E) ratio = __________ times

 

 

 

 

 

  1. Use the following information to obtain the ratios requested below. Where necessary, carry answers to one decimal place.Dividends per share: $2.16
    Market price per share: $48
    Net income: $88,000
    Average stockholders’ equity: $625,000
    Earnings per share: $1.56a. Dividends yield = _____________%

    b. Return on equity = _____________%

    c. Price/earnings (P/E) ratio = __________times