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CHAPTER 2

CONCEPTUAL FRAMEWORK UNDERLYING FINANCIAL ACCOUNTING

TRUE-FALSE—Conceptual Answer No. Description F 1. Nature of conceptual framework. T 2. Conceptual framework definition. F 3. Levels of conceptual framework. T 4 International conceptual framework. F 5. Statements of Financial Accounting Concepts. T 6. Decision usefulness. F 7. Financial statement users. T 8. Relevance and reliability. T 9. Consistency. F 10. Relevance. F 11. Reliability. F 12. Basic elements. T 13. Comprehensive income. T 14. Going concern assumption. F 15. Economic entity assumption. F 16. Matching principle. T 17. Realizable revenues. T 18. Supplementary information. F 19. Materiality factors F 20. Conservatism.

MULTIPLE CHOICE—Conceptual Answer No. Description c 21. GAAP defined. d 22. Purpose of conceptual framework. c 23. Conceptual framework. d S24. Conceptual framework benefits. d 25. Objectives of financial reporting. a 26. Decision usefulness. d 27. Objectives of financial reporting. a P28. Financial repoting objectives. c 29. Purpose of understandable information. a 30. Decision-usefulness criterion. c 31. Primary qualities of accounting information. b 32. Definition of relevance. b 33. Definition of reliability. d 34. Relevance and reliability. c 35. Timeliness characteristic.

Test Bank for Intermediate Accounting, Twelfth Edition

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MULTIPLE CHOICE—Conceptual (cont.) Answer No. Description d 36. Verifiability characteristic. b 37. Neutrality characteristic. d 38. Neutrality characteristic. c 39. Definition of verifiability. a 40. Quality of predictive value. c 41. Quality of representational faithfulness. d 42. Consistency. b 43. Consistency characteristic. b 44. Comparability and consistency. d 45. Comparability. d 46. Elements of financial statements. c 47. Distinction between revenues and gains. c 48. Definition of a loss. d 49. Definition of comprehensive income. b 50. Components of comprehensive income. d P51. Comprehensive income. b S52. Earnings vs. comprehensive income. a S53. Reporting financial statement elements. a S54. Monetary unit assumption. c S55. Periodicity assumption. c 56. Monetary unit assumption. d 57. Economic entity assumption. a 58. Economic entity assumption. b 59. Periodicity assumption. a 60. Going concern assumption. d 61. Going concern assumption. d 62. Implications of going concern assumption. a 63. Historical cost principle. d 64. Historical cost principle. c 65. Revenue recognition principle. d 66. Revenue recognition principle. d 67. Revenue recognition principle. d 68. Timing of revenue recognition. c 69. Realization concept. b 70. Definition of realized. b 71. Matching principle. b 72. Matching principle. b 73. Expense recognition. c 74. Full-disclosure principle. d 75. Constraints to limit the cost of reporting. a 76. Cost-benefit constraint. c 77. Materiality constraint. d 78. Materiality. d 79. Pervasive constraints. a 80. Conservatism constraint. b 81. Conservatism constraint. a 82. Trade-offs between characteristics of accounting information. c 83. Trade-offs between characteristics of accounting information. c P84. Conservatism constraint.

Conceptual Framework Underlying Financial Accounting

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MULTIPLE CHOICE—CPA Adapted Answer No. Description a 85. Quality of predictive value. b 86. Consistency characteristic. b 87. Classification of gains and losses. b 88. Earnings concept. a 89. Components of comprehensive income. b 90. Components of comprehensive income. d 91. Components of comprehensive income. d 92. Components of comprehensive income. a 93. Definition of recognition. P Note: these questions also appear in the Problem-Solving Survival Guide. S Note: these questions also appear in the Study Guide.

EXERCISES Item Description E2-94 Examination of the conceptual framework. E2-95 Accounting concepts—identification. E2-96 Accounting concepts—identification. E2-97 Accounting concepts—matching. E2-98 Accounting concepts—fill in the blanks. E2-99 Basic assumptions. E2-100 Revenue recognition. E2-101 Historical cost principle. E2-102 Matching concept.

CHAPTER LEARNING OBJECTIVES 1. Describe the usefulness of a conceptual framework. 2. Describe the FASB’s efforts to construct a conceptual framework. 3. Understand the objectives of financial reporting. 4. Identify the qualitative characteristics of accounting information. 5. Define the basic elements of financial statements. 6. Describe the basic assumptions of accounting. 7. Explain the application of the basic principles of accounting. 8. Describe the impact that constraints have on reporting accounting information.


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SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS

Item Type Item Type Item Type Item Type Item Type Item Type Item Type Learning Objective 1

1. TF 2. TF 21. MC 22. MC 23. MC S24. MC 94. E Learning Objective 2

3. TF 4. TF 5. TF 25. MC 94. E Learning Objective 3

6. TF 7. TF 26. MC 27. MC P28. MC 94. E Learning Objective 4

8. TF 29. MC 33. MC 37. MC 41. MC 45. MC 96. E 9. TF 30. MC 34. MC 38. MC 42. MC 85. MC 97. E

10. TF 31. MC 35. MC 39. MC 43. MC 86. MC 98. E 11. TF 32. MC 36. MC 40. MC 44. MC 95. E

Learning Objective 5 12. TF 47. MC 50. MC S53. MC 89. MC 92. MC 13. TF 48. MC P51. MC 87. MC 90. MC 46. MC 49. MC S52. MC 88. MC 91. MC

Learning Objective 6 14. TF S55. MC 58. MC 61. MC 98. E 101. E 15. TF 56. MC 59. MC 62. MC 99. E

S54. MC 57. MC 60. MC 95. E 100. E Learning Objective 7

16. TF 64. MC 68. MC 72. MC 95. E 100. E 17. TF 65. MC 69. MC 73. MC 96. E 101. E 18. TF 66. MC 70. MC 74. MC 97. E 102. E 63. MC 67. MC 71. MC 93. MC 98. E

Learning Objective 8 19. TF 75. MC 77. MC 79. MC 81. MC 83. MC 95. E 20. TF 76. MC 78. MC 80. MC 82. MC P84. MC 96. E

Note: TF = True-False MC = Multiple Choice E = Exercise


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TRUE-FALSE—Conceptual 1. The conceptual framework for accounting has been discovered through empirical research. 2. A conceptual framework is a coherent system of interrelated objectives and fundamentals

that can lead to consistent standards. 3. The first level of the conceptual framework identifies the recognition and measurement

concepts used in establishing accounting standards. 4. The IASB has issued a conceptual framework that is broadly consistent with that of the

United States. 5. Although the FASB intends to develop a conceptual framework, no Statements of Financial

Accounting Concepts have been issued to date. 6. Decision Usefulness is the underlying theme of the conceptual framework. 7. Users of financial statements are assumed to have no knowledge of business and financial

accounting matters by financial statement preparers. 8. Relevance and reliability are the two primary qualities that make accounting information

useful for decision making. 9. The idea of consistency does not mean that companies cannot switch from one accounting

method to another. 10. Timeliness and neutrality are two ingredients of relevance. 11. Verifiability and predictive value are two ingredients of reliability. 12. Revenues, gains, and distributions to owners all increase equity. 13. Comprehensive income includes all changes in equity during a period except those

resulting from investments by owners and distributions to owners. 14. The historical cost principle would be of limited usefulness if not for the going concern

assumption. 15. The economic entity assumption means that economic activity can be identified with a

particular legal entity. 16. The matching principle states that debits must equal credits in each transaction. 17. Revenues are realizable when assets received or held are readily convertible into cash or

claims to cash. 18. Supplementary information may include details or amounts that present a different

perspective from that adopted in the financial statements. 19. Companies consider only quantitative factors in determining whether an item is material.


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20. Conservatism in accounting means the accountant should attempt to understate assets and income when possible.

True False Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. 1. F 6. T 11. F 16. F 2. T 7. F 12. F 17. T 3. F 8. T 13. T 18. T 4. T 9. T 14. T 19. F 5. F 10. F 15. F 20. F

MULTIPLE CHOICE—Conceptual 21. Generally accepted accounting principles

a. are fundamental truths or axioms that can be derived from laws of nature. b. derive their authority from legal court proceedings. c. derive their credibility and authority from general recognition and acceptance by the

accounting profession. d. have been specified in detail in the FASB conceptual framework.

22. A soundly developed conceptual framework of concepts and objectives should

a. increase financial statement users' understanding of and confidence in financial reporting.

b. enhance comparability among companies' financial statements. c. allow new and emerging practical problems to be more quickly soluble. d. all of these.

23. Which of the following (a-c) are not true concerning a conceptual framework in account-

ing? a. It should be a basis for standard-setting. b. It should allow practical problems to be solved more quickly by reference to it. c. It should be based on fundamental truths that are derived from the laws of nature. d. All of the above (a-c) are true.

S24. Which of the following is not a benefit associated with the FASB Conceptual Framework

Project? a. A conceptual framework should increase financial statement users' understanding of

and confidence in financial reporting. b. Practical problems should be more quickly solvable by reference to an existing

conceptual framework. c. A coherent set of accounting standards and rules should result. d. Business entities will need far less assistance from accountants because the financial

reporting process will be quite easy to apply.


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25. In the conceptual framework for financial reporting, what provides "the why"--the goals and purposes of accounting? a. Measurement and recognition concepts such as assumptions, principles, and

constraints b. Qualitative characteristics of accounting information c. Elements of financial statements d. Objectives of financial reporting

26. The underlying theme of the conceptual framework is

a. decision usefulness. b. understandability. c. reliability. d. comparability.

27. Which of the following is not an objective of financial reporting?

a. To provide information about economic resources, the claims to those resources, and the changes in them.

b. To provide information that is helpful to investors and creditors and other users in assessing the amounts, timing, and uncertainty of future cash flows.

c. To provide information that is useful to those making investment and credit decisions. d. All of these are objectives of financial reporting.

P28. The objectives of financial reporting include all of the following except to provide

information that a. is useful to the Internal Revenue Service in allocating the tax burden to the business

community. b. is useful to those making investment and credit decisions. c. is helpful in assessing future cash flows. d. identifies the economic resources (assets), the claims to those resources (liabilities),

and the changes in those resources and claims. 29. Decision makers vary widely in the types of decisions they make, the methods of decision

making they employ, the information they already possess or can obtain from other sources, and their ability to process information. Consequently, for information to be useful there must be a linkage between these users and the decisions they make. This link is a. relevance. b. reliability. c. understandability. d. materiality.

30. The overriding criterion by which accounting information can be judged is that of

a. usefulness for decision making. b. freedom from bias. c. timeliness. d. comparability.

31. The two primary qualities that make accounting information useful for decision making are

a. comparability and consistency. b. materiality and timeliness. c. relevance and reliability. d. reliability and comparability.


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32. Accounting information is considered to be relevant when it a. can be depended on to represent the economic conditions and events that it is

intended to represent. b. is capable of making a difference in a decision. c. is understandable by reasonably informed users of accounting information. d. is verifiable and neutral.

33. The quality of information that gives assurance that it is reasonably free of error and bias

and is a faithful representation is a. relevance. b. reliability. c. verifiability. d. neutrality.

34. According to Statement of Financial Accounting Concepts No. 2, which of the following

relates to both relevance and reliability? a. Materiality b. Understandability c. Usefulness d. All of these

35. According to Statement of Financial Accounting Concepts No. 2, timeliness is an

ingredient of the primary quality of Relevance Reliability a. Yes Yes b. No Yes c. Yes No d. No No 36. According to Statement of Financial Accounting Concepts No. 2, verifiability is an

ingredient of the primary quality of Relevance Reliability a. Yes No b. Yes Yes c. No No d. No Yes 37. According to Statement of Financial Accounting Concepts No. 2, neutrality is an ingredient

of the primary quality of Relevance Reliability a. Yes Yes b. No Yes c. Yes No d. No No 38. Information is neutral if it

a. provides benefits which are at least equal to the costs of its preparation. b. can be compared with similar information about an enterprise at other points in time. c. would have no impact on a decision maker. d. is free from bias toward a predetermined result.


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39. The characteristic that is demonstrated when a high degree of consensus can be secured among independent measurers using the same measurement methods is a. relevance. b. reliability. c. verifiability. d. neutrality.

40. According to Statement of Financial Accounting Concepts No. 2, predictive value is an

ingredient of the primary quality of Relevance Reliability a. Yes No b. Yes Yes c. No No d. No Yes 41. Under Statement of Financial Accounting Concepts No. 2, representational faithfulness is

an ingredient of the primary quality of Reliability Relevance a. Yes Yes b. No Yes c. Yes No d. No No 42. Financial information does not demonstrate consistency when

a. firms in the same industry use different accounting methods to account for the same type of transaction.

b. a company changes its estimate of the salvage value of a fixed asset. c. a company fails to adjust its financial statements for changes in the value of the

measuring unit. d. none of these.

43. Financial information exhibits the characteristic of consistency when

a. expenses are reported as charges against revenue in the period in which they are paid.

b. accounting entities give accountable events the same accounting treatment from period to period.

c. extraordinary gains and losses are not included on the income statement. d. accounting procedures are adopted which give a consistent rate of net income.

44. Information about different entities and about different periods of the same entity can be

prepared and presented in a similar manner. Comparability and consistency are related to which of these objectives?

Comparability Consistency a. Entities Entities b. Entities Periods c. Periods Entities d. Periods Periods


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45. When information about two different enterprises has been prepared and presented in a similar manner, the information exhibits the characteristic of a. relevance. b. reliability. c. consistency. d. none of these.

46. The elements of financial statements include investments by owners. These are increases

in an entity's net assets resulting from owners' a. transfers of assets to the entity. b. rendering services to the entity. c. satisfaction of liabilities of the entity. d. all of these.

47. In classifying the elements of financial statements, the primary distinction between

revenues and gains is a. the materiality of the amounts involved. b. the likelihood that the transactions involved will recur in the future. c. the nature of the activities that gave rise to the transactions involved. d. the costs versus the benefits of the alternative methods of disclosing the transactions

involved. 48. A decrease in net assets arising from peripheral or incidental transactions is called a(n)

a. capital expenditure. b. cost. c. loss. d. expense.

49. One of the elements of financial statements is comprehensive income. As described in

Statement of Financial Accounting Concepts No. 6, "Elements of Financial Statements," comprehensive income is equal to a. revenues minus expenses plus gains minus losses. b. revenues minus expenses plus gains minus losses plus investments by owners minus

distributions to owners. c. revenues minus expenses plus gains minus losses plus investments by owners minus

distributions to owners plus assets minus liabilities. d. none of these.

50. Which of the following elements of financial statements is not a component of compre-

hensive income? a. Revenues b. Distributions to owners c. Losses d. Expenses

P51. Which of the following is false with regard to the element "comprehensive income"?

a. It is more inclusive than the traditional notion of net income. b. It includes net income and all other changes in equity exclusive of owners' invest-

ments and distributions to owners. c. This concept is not yet being applied in practice. d. It excludes prior period adjustments (transactions that relate to previous periods, such

as corrections of errors).


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S52. According to the FASB conceptual framework, earnings a. are the same as comprehensive income. b. exclude certain gains and losses that are included in comprehensive income. c. include certain gains and losses that are excluded from comprehensive income. d. include certain losses that are excluded from comprehensive income.

S53. According to the FASB Conceptual Framework, the elements⎯assets, liabilities, and

equity⎯describe amounts of resources and claims to resources at/during a

Moment in Time Period of Time a. Yes No b. Yes Yes c. No Yes d. No No S54. Which of the following basic accounting assumptions is threatened by the existence of

severe inflation in the economy? a. Monetary unit assumption. b. Periodicity assumption. c. Going-concern assumption. d. Economic entity assumption.

S55. During the lifetime of an entity accountants produce financial statements at artificial points

in time in accordance with the concept of

Objectivity Periodicity a. No No b. Yes No c. No Yes d. Yes Yes 56. Under current GAAP, inflation is ignored in accounting due to the

a. economic entity assumption. b. going concern assumption. c. monetary unit assumption. d. periodicity assumption.

57. The economic entity assumption

a. is inapplicable to unincorporated businesses. b. recognizes the legal aspects of business organizations. c. requires periodic income measurement. d. is applicable to all forms of business organizations.

58. Preparation of consolidated financial statements when a parent-subsidiary relationship

exists is an example of the a. economic entity assumption. b. relevance characteristic. c. comparability characteristic. d. neutrality characteristic.


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59. During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance with which basic accounting concept? a. Cost/benefit constraint b. Periodicity assumption c. Conservatism constraint d. Matching principle

60. What accounting concept justifies the usage of accruals and deferrals?

a. Going concern assumption b. Materiality constraint c. Consistency characteristic d. Monetary unit assumption

61. The assumption that a business enterprise will not be sold or liquidated in the near future

is known as the a. economic entity assumption. b. monetary unit assumption. c. conservatism assumption. d. none of these.

62. Which of the following is an implication of the going concern assumption?

a. The historical cost principle is credible. b. Depreciation and amortization policies are justifiable and appropriate. c. The current-noncurrent classification of assets and liabilities is justifiable and signify-

cant. d. All of these.

63. Proponents of historical cost ordinarily maintain that in comparison with all other valuation

alternatives for general purpose financial reporting, statements prepared using historical costs are more a. reliable. b. relevant. c. indicative of the entity's purchasing power. d. conservative.

64. Valuing assets at their liquidation values rather than their cost is inconsistent with the

a. periodicity assumption. b. matching principle. c. materiality constraint. d. historical cost principle.

65. Revenue is generally recognized when realized or realizable and earned. This statement

describes the a. consistency characteristic. b. matching principle. c. revenue recognition principle. d. relevance characteristic.


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66. Generally, revenue from sales should be recognized at a point when a. management decides it is appropriate to do so. b. the product is available for sale to the ultimate consumer. c. the entire amount receivable has been collected from the customer and there remains

no further warranty liability. d. none of these.

67. Revenue generally should be recognized

a. at the end of production. b. at the time of cash collection. c. when realized. d. when realized or realizable and earned.

68. Which of the following is not a time when revenue may be recognized?

a. At time of sale b. At receipt of cash c. During production d. All of these are possible times of revenue recognition.

69. Under Statement of Financial Accounting Concepts No. 5, which of the following, in the

most precise sense, means the process of converting noncash resources and rights into cash or claims to cash? a. Recognition b. Measurement c. Realization d. Allocation

70. "When products (goods or services), merchandise, or other assets are exchanged for

cash or claims to cash" is a definition of a. allocated. b. realized. c. realizable. d. earned.

71. The allowance for doubtful accounts, which appears as a deduction from accounts

receivable on a balance sheet and which is based on an estimate of bad debts, is an application of the a. consistency characteristic. b. matching principle. c. materiality constraint. d. revenue recognition principle.

72. The accounting principle of matching is best demonstrated by

a. not recognizing any expense unless some revenue is realized. b. associating effort (expense) with accomplishment (revenue). c. recognizing prepaid rent received as revenue. d. establishing an Appropriation for Contingencies account.


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73. Which of the following serves as the justification for the periodic recording of depreciation expense? a. Association of efforts (expense) with accomplishments (revenue) b. Systematic and rational allocation of cost over the periods benefited c. Immediate recognition of an expense d. Minimization of income tax liability

74. Application of the full disclosure principle

a. is theoretically desirable but not practical because the costs of complete disclosure exceed the benefits.

b. is violated when important financial information is buried in the notes to the financial statements.

c. is demonstrated by the use of supplementary information presenting the effects of changing prices.

d. requires that the financial statements be consistent and comparable. 75. Which of the following statements concerning the cost-benefit relationship is not true?

a. Business reporting should exclude information outside of management's expertise. b. Management should not be required to report information that would significantly harm

the company's competitive position. c. Management should not be required to provide forecasted financial information. d. If needed by financial statement users, management should gather information not

included in the financial statements that would not otherwise be gathered for internal use.

76. Under Statement of Financial Accounting Concepts No. 2, which of the following relates to

both relevance and reliability? a. Cost-benefit constraint b. Predictive value c. Verifiability d. Representational faithfulness

77. Charging off the cost of a wastebasket with an estimated useful life of 10 years as an

expense of the period when purchased is an example of the application of the a. consistency characteristic. b. matching principle. c. materiality constraint. d. historical cost principle.

78. Which of the following statements about materiality is not correct?

a. An item must make a difference or it need not be disclosed. b. Materiality is a matter of relative size or importance. c. An item is material if its inclusion or omission would influence or change the judgment

of a reasonable person. d. All of these are correct statements about materiality.

79. Which of the following are considered pervasive constraints by Statement of Financial

Accounting Concepts No. 2? a. Cost-benefit relationship and conservatism b. Timeliness and feedback value c. Conservatism and verifiability d. Materiality and cost-benefit relationship


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80. The basic accounting concept that refers to the tendency of accountants to resolve uncertainty in favor of understating assets and revenues and overstating liabilities and expenses is known as the a. conservatism constraint. b. materiality constraint. c. substance over form principle. d. industry practices constraint.

81. Which of the following best illustrates the accounting concept of conservatism?

a. Use of the allowance method to recognize bad debt losses from credit sales b. Use of the lower of cost or market approach in valuing inventories. c. Use of the same accounting method from one period to the next in computing

depreciation expense d. Utilization of a policy of deliberate understatement of asset values in order to present

a conservative net income figure 82. Trade-offs between the characteristics that make information useful may be necessary or

beneficial. Issuance of interim financial statements is an example of a trade-off between a. relevance and reliability. b. reliability and periodicity. c. timeliness and materiality. d. understandability and timeliness.

83. Allowing firms to estimate rather than physically count inventory at interim (quarterly)

periods is an example of a trade-off between a. verifiability and reliability. b. reliability and comparability. c. timeliness and verifiability. d. neutrality and consistency.

P84. In matters of doubt and great uncertainty, accounting issues should be resolved by

choosing the alternative that has the least favorable effect on net income, assets, and owners' equity. This guidance comes from the a. materiality constraint. b. industry practices constraint. c. conservatism constraint. d. full disclosure principle.


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Multiple Choice Answers—Conceptual Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.21. c 31. c 41. c 51. d 61. d 71. b 81. b 22. d 32. b 42. d 52. b 62. d 72. b 82. a 23. c 33. b 43. b 53. a 63. a 73. b 83. c 24. d 34. d 44. b 54. a 64. d 74. c 84. c 25. d 35. c 45. d 55. c 65. c 75. d 26. a 36. d 46. d 56. c 66. d 76. a 27. d 37. b 47. c 57. d 67. d 77. c 28. a 38. d 48. c 58. a 68. d 78. d 29. c 39. c 49. d 59. b 69. c 79. d 30. a 40. a 50. b 60. a 70. b 80. a

Solutions to those Multiple Choice questions for which the answer is “none of these.” 42. a company changes its inventory method every few years in order to maximize reported

income (other answers are possible). 45. comparability. 49. change in equity of an entity during a period from transactions and other events and

circumstances from nonowner sources. 61. going concern assumption. 66. an exchange has taken place and the earnings process is virtually complete.

MULTIPLE CHOICE—CPA Adapted 85. According to the FASB's conceptual framework, predictive value is an ingredient of

Relevance Reliability a. Yes No b. Yes Yes c. No Yes d. No No

86. According to the FASB's conceptual framework, which of the following relates to both

relevance and reliability? Consistency Verifiability a. Yes Yes b. Yes No c. No Yes d. No No

87. The FASB's conceptual framework classifies gains and losses based on whether they are

related to an entity's major ongoing or central operations. These gains or losses may be classified as Nonoperating Operating a. Yes No b. Yes Yes c. No Yes d. No No


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88. According to the FASB's conceptual framework, earnings a. is the same as comprehensive income. b. excludes certain gains and losses that are included in comprehensive income. c. includes certain gains and losses that are excluded from comprehensive income. d. includes certain losses that are excluded from comprehensive income.

89. According to the FASB's conceptual framework, comprehensive income includes which of

the following? Operating Income Investments by Owners a. Yes No b. Yes Yes c. No Yes d. No No

90. According to the FASB's conceptual framework, the calculation of comprehensive income

includes which of the following? Income from Distributions Continuing Operations to Owners a. No No b. Yes No c. Yes Yes d. No Yes

91. According to the FASB's conceptual framework, comprehensive income includes which of

the following? Gross Margin Operating Income a. No Yes b. No No c. Yes No d. Yes Yes

92. Under Statements of Financial Accounting Concepts, comprehensive income includes

which of the following? Gains Gross Margin a. No No b. No Yes c. Yes No d. Yes Yes

93. According to the FASB's conceptual framework, the process of reporting an item in the

financial statements of an entity is a. recognition. b. realization. c. allocation. d. matching.

Multiple Choice Answers—CPA Adapted

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.85. a 87. b 89. a 91. d 93. a 86. b 88. b 90. b 92. d


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EXERCISES Ex. 2-94—Examination of the conceptual framework.

At an FASB Concept Framework Symposium, a former member of the FASB discussed his views of a conceptual framework. Some excerpts: Standard Setting in the Private Sector A framework of concepts comprises ideas that coordinate to form the fabric of a system: they determine its bounds. In a system like financial reporting that serves a broad public purpose, the first plank in the framework identifies the public role. The decision of the public sector in the 1930s to look at the private sector for the principal thrust to standard setting was sound and extraordinarily enlightened. The credence given financial reporting will determine whether the private sector's role in standard setting will grow or shrink. An operable conceptual framework will go a long way in providing the necessary level of credibility. Without an operable conceptual framework, continuation of standard setting by the private sector would stand in considerable jeopardy. Essence of the Conceptual Framework The conceptual formulation starts with the broad role of financial reporting in society. It: • Identifies its unique competence, that is, its bounds. • States the objectives of the reporting. • Defines the things admissible to financial statements. • Identifies the circumstances triggering admission and qualities to be met for admission to

financial statements. • Selects useful measurements of things admitted. • Furnishes criteria for display. Those are major pieces of the framework. There are others, of course. The various parts are in a hierarchy ranging from highly abstract to reasonably concrete. They lend guidance—they do not provide simple, no-think answers. They leave open a significant range for hard thinking and deliberation about reporting standards. They furnish the reference point for the thinking. Instructions 1. What are the basic concepts of the conceptual framework? 2. What are your views about the success of the conceptual framework? Solution 2-94 1. The basic components of the conceptual framework are:

a. Objectives—present the goals and purposes of accounting. b. Qualitative characteristics—the characteristics that make accounting information useful. c. Elements—provide the definitions of the broad classifications of items found in financial

statements. d. Operational guidelines (recognition and measurement concepts)—recommend concepts

to guide decisions concerning the display and disclosure of information about income, cash flows, and financial position. The operational guidelines are composed of three parts:


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Solution 2-94 (cont.)

(1) Basic assumptions. (2) Accounting principles. (3) Constraints. 2. In general, the success of the conceptual framework will be determined by its acceptance in

practice. The acceptance in practice will be based in large part upon the FASB's solution of practical problems on a timely basis. It is a matter of opinion and yet to be seen whether or not the conceptual framework will bring about the following benefits. a. The FASB should be able to issue more useful and consistent standards in the future. b. New practice problems should be solved more rapidly by reference to an existing

framework. c. Better understanding of and confidence in the financial reporting process by financial

statement users should result. d. Enhanced comparability among companies' financial statements should result.

Ex. 2-95—Accounting concepts—identification.

State the accounting assumption, principle, information characteristic, or constraint that is most applicable in the following cases.

1. All payments less than $25 are expensed as incurred. (Do not use conservatism.)

2. The company employs the same inventory valuation method from period to period.

3. A patent is capitalized and amortized over the periods benefited.

4. Assuming that dollars today will buy as much as ten years ago.

5. Rent paid in advance is recorded as prepaid rent.

6. Financial statements are prepared each year.

7. All significant post-balance sheet events are reported.

8. Personal transactions of the proprietor are distinguished from business transactions. Solution 2-95 1. Materiality constraint. 2. Consistency characteristic. 3. Matching principle or going concern assumption. 4. Monetary unit assumption. 5. Matching principle or going concern assumption. 6. Periodicity assumption. 7. Full disclosure principle. 8. Economic entity assumption.


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Ex. 2-96—Accounting concepts—identification.

Presented below are a number of accounting procedures and practices in Sanchez Corp. For each of these items, list the assumption, principle, information characteristic, or modifying convention that is violated.

1. Because the company's income is low this year, a switch from accelerated depreciation to straight-line depreciation is made this year.

2. The president of Sanchez Corp. believes it is foolish to report financial information on a yearly basis. Instead, the president believes that financial information should be disclosed only when significant new information is available related to the company's operations.

3. Sanchez Corp. decides to establish a large loss and related liability this year because of the possibility that it may lose a pending patent infringement lawsuit. The possibility of loss is considered remote by its attorneys.

4. An officer of Sanchez Corp. purchased a new home computer for personal use with company money, charging miscellaneous expense.

5. A machine, that cost $40,000, is reported at its current market value of $45,000. Solution 2-96 1. Consistency. 2. Periodicity. 3. Matching (also, conservatism). 4. Economic entity. 5. Historical cost (also, revenue recognition)*.

*Reporting the asset at FMV of $45,000 implies the following entry: Machine ..................................................................................... 5,000 Revenue ........................................................................ 5,000 Ex. 2-97—Accounting concepts—matching.

Listed below are several information characteristics and accounting principles and assumptions. Match the letter of each with the appropriate phrase that states its application. (Items a through k may be used more than once or not at all.)

a. Economic entity assumption g. Matching principle b. Going concern assumption h. Full disclosure principle c. Monetary unit assumption i. Relevance characteristic d. Periodicity assumption j. Reliability characteristic e. Historical cost principle k. Consistency characteristic f. Revenue recognition principle

____ 1. Stable-dollar assumption (do not use historical cost principle).

____ 2. Earning process completed and realized or realizable.

____ 3. Presentation of error-free information with representational faithfulness.

____ 4. Yearly financial reports.

____ 5. Accruals and deferrals in adjusting and closing process. (Do not use going concern.)


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Ex. 2-97 (cont.)

____ 6. Useful standard measuring unit for business transactions.

____ 7. Notes as part of necessary information to a fair presentation.

____ 8. Affairs of the business distinguished from those of its owners.

____ 9. Business enterprise assumed to have a long life.

____ 10. Valuing assets at amounts originally paid for them.

____ 11. Application of the same accounting principles as in the preceding year.

____ 12. Summarizing significant accounting policies.

____ 13. Presentation of timely information with predictive and feedback value. Solution 2-97 1. c 4. d 7. h 10. e 13. i 2. f 5. g 8. a 11. k 3. j 6. c 9. b 12. h Ex. 2-98—Accounting concepts—fill in the blanks.

Fill in the blanks below with the accounting principle, assumption, or related item that best completes the sentence. 1. ________________________ and _______________________ are the two primary

qualities that make accounting information useful for decision making. 2. Information that helps users confirm or correct prior expectations has _________________ ___________________. 3. ________________________ enables users to identify the real similarities and differences

in economic phenomena because the information has been measured and reported in a similar manner for different enterprises.

4. Some costs which give rise to future benefits cannot be directly associated with the

revenues they generate. Such costs are allocated in a __________________ and _________________ manner to the periods expected to benefit from the cost.

5. _______________________ would allow the expensing of all repair tools when purchased,

even though they have an estimated life of 3 years. 6. The ________________________ characteristic requires that the same accounting method

be used from one accounting period to the next, unless it becomes evident that an alternative method will bring about a better description of a firm's financial situation.

7. ____________________ guides accountants to select the accounting treatment that is least

likely to overstate income and assets.


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Ex. 2-98 (cont.)

8. Parenthetical balance sheet disclosure of the inventory method utilized by a particular company is an application of the _______________________ principle.

9. Corporations must prepare accounting reports at least yearly due to the _______________

assumption. 10. Recording and reporting inflows at the end of production is an allowable exception to the

_________________ principle. Solution 2-98 1. Relevance; reliability 6. consistency 2. feedback value 7. Conservatism 3. Comparability 8. full disclosure 4. rational; systematic 9. periodicity 5. The materiality convention 10. revenue recognition Ex. 2-99—Basic assumptions. Briefly explain the four basic assumptions that underlie financial accounting. Solution 2-99 1. The economic entity assumption states that economic activity can be identified with a

particular unit of accountability.

2. The going concern assumption assumes that a business enterprise will have a long life.

3. The monetary unit assumption means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis. In addition, the monetary unit remains reasonably stable.

4. The periodicity assumption implies that the economic activities of an enterprise can be divided into artificial time periods.

Ex. 2-100—Revenue recognition.

Revenue is generally recognized at the point of sale. There are three exceptions, however. Name the time for each exception, give two qualifications or criteria for the use of each exception, and give an example for each exception. Solution 2-100 1. During production. The revenue is known (contract) or dependably estimable. Total costs are

estimable or other means are available to estimate progress toward completion. Examples are long-term construction contracts and service-type transactions.


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Solution 2-100 (cont.) 2. At completion. There are quoted prices. Units are interchangeable. There are no significant

distribution costs. Unit costs are not determinable. Examples are precious metals or agricultural products.

3. At collection. There is no reasonable basis for estimating the degree of collectibility. Costs of collection, bad debts, and repossessions are not estimable. Examples are installment sales and cost recovery method.

Ex. 2-101—Historical cost principle.

Cost as a basis of accounting for assets has been severely criticized. What defense can you build for cost as the basis for financial accounting? Solution 2-101 Cost is definite and verifiable and not a matter for conjecture or opinion. Once established, cost is fixed as long as the asset remains the property of the party that incurred the cost. Cost is based on fact; that is, it is the result of an arm's length transaction. Cost is also measurable or determinable. Over the years, accountants have found cost to be the most practical basis for record keeping. Financial statements prepared on a cost basis provide business enterprise information having a common, accepted basis from which each reader can make inferences, comparisons, and analyses. Ex. 2-102—Matching concept.

A concept is a group of related ideas. Matching could be considered a concept because it includes ideas related to both revenue recognition and expense recognition. Briefly explain the ideas in (a) revenue recognition and (b) expense recognition. Solution 2-102 (a) The ideas in revenue recognition include the "three R's" and "earned": 1. Revenues are inflows of net assets from delivering or producing goods or services or

other earning activities that are the major operations of an enterprise during a period. 2. Recognition is recording and reporting in the financial statements. 3. Revenues are realized when goods or services are exchanged for cash or claims to cash. 4. Revenues are earned when the earnings process is complete or virtually complete.

The revenue recognition principle is that revenue is recognized when it is realized and it is earned.

(b) The ideas in expense recognition include "expense" and "matching": 1. Expenses are outflows of net assets during a period from delivering or producing goods or

services or other activities that are the major operations of the entity. 2. Expenses are recognized when the goods or services (efforts) make their contribution to

revenue.


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The matching principle is that expenses are matched with revenues. Expenses are matched three ways:

1. When there is an association with revenue, expenses are matched with revenues in the period the revenues are recognized.

2. When no association with revenue is evident, expenses are allocated on some systematic and rational basis.

3. When no association with revenue is evident and no future benefits are expected, expenses are recognized immediately.

CHAPTER 4

INCOME STATEMENT AND RELATED INFORMATION

TRUE-FALSE—Conceptual Answer No. Description T 1. Usefulness of the income statement. F 2. Limitations of the income statement. F 3. Earnings management. T 4. Transaction approach of income measurement. T 5. Single-step income statement. T 6. Revenues and gains. F 7. Multiple-step vs. single-step income statement. F 8. Multiple-step income statement. T 9. Multiple-step vs. single-step income statement. F 10. Current operating performance approach. T 11. Reporting discontinued operations. F 12. Reporting extraordinary items. F 13. Irregular items. T 14. Intraperiod tax allocation. F 15. Reporting earnings per share. F 16. Computation of earnings per share. T 17. Prior period adjustments. F 18. Retained earnings restrictions. F 19. Comprehensive income definition. T 20. Reporting other comprehensive income.

MULTIPLE CHOICE—Conceptual Answer No. Description c 21. Elements of the income statement. d 22. Usefulness of the income statement. b 23. Limitations of the income statement. d S24. Use of an income statement. d S25. Income statement reporting. b 26. Single-step income statement. d 27. Methods of preparing income statements. a 28. Income statement presentation. b 29. Event with no income statement effect. c S30. Net income effect. b P31. Selling expenses. b P32. Reporting merchandise inventory. a 33. Definition of an extraordinary item. d 34. Classification of an extraordinary item. d 35. Identification of an extraordinary item. a 36. Identification of an extraordinary item.


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MULTIPLE CHOICE—Conceptual (cont.) Answer No. Description d 37. Identification of an extraordinary item. a 38. Presentation of unusual or infrequent items. d 39. Identification of a change in accounting principle. d 40. Classification of extraordinary items. c 41. EPS disclosures on income statement. c 42. Reporting discontinued operations. d 43. Intraperiod tax allocation. d 44. Purpose of intraperiod tax allocation. c S45. Reporting unusual or infrequent items. c S46. Earnings per share disclosure. d P47. Reporting correction of an error. c 48. Retained earnings statement. d 49. Prior period adjustment. d 50. Identification of a prior period adjustment. c 51. Comprehensive income items. c 52. Providing information about components of comprehensive income.

MULTIPLE CHOICE—Computational Answer No. Description a 53. Single-step income statement. c 54. Multiple-step income statement. c 55. Multiple-step income statement. c 56. Calculation of net sales. a 57. Presentation of gain on sale of plant assets. a 58. Extraordinary items. a 59. Extraordinary items. a 60. Calculate income before extraordinary items. c 61. Calculate income before taxes and extraordinary items. b 62. Calculate extraordinary loss. a 63. Events affecting income from continuing operations. b 64. Calculation of events affecting net income. c 65. Disposal of a major business component. c 66. Tax effect on irregular items. c 67. Tax effect on irregular items. c 68. Earnings per share. c 69. Earnings per share. a 70. Retained earnings statement. b 71. Retained earnings statement. c 72. Retained earnings statement. d 73. Retained earnings statement. d 74. Calculate balance of retained earnings. d 75. Calculate other comprehensive income. a 76. Calculate comprehensive income. P Note: these questions also appear in the Problem-Solving Survival Guide. S Note: these questions also appear in the Study Guide.

Income Statement and Related Information

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MULTIPLE CHOICE—CPA Adapted Answer No. Description d 77. Calculate selling expenses. a 78. Calculate general and administrative expenses. a 79. Calculate selling expenses. a 80. Calculate general and administrative expenses. d 81. Calculate cost of goods manufactured. c 82. Calculate income before extraordinary item. a 83. Determine extraordinary loss. b 84. Determine infrequent gains not extraordinary. a 85. Determine infrequent losses not extraordinary. b 86. Identification of prior period adjustment.

EXERCISES Item Description E4-87 Definitions. E4-88 Terminology. E4-89 Income statement disclosures. E4-90 Calculate net income from change in stockholders’ equity. E4-91 Calculate net income from change in stockholders’ equity. E4-92 Income statement classifications. E4-93 Income statement relationships. E4-94 Multiple-step income statement. E4-95 Classification of income and retained earnings statement items.

PROBLEMS

Item Description P4-96 Multiple-step income statement. P4-97 Income statement form. P4-98 Multiple-step income statement. P4-99 Single-step income statement. P4-100 Income statement and retained earnings statement.

CHAPTER LEARNING OBJECTIVES 1. Understand the uses and limitations of an income statement.

2. Prepare a single-step income statement.

3. Prepare a multiple-step income statement.

4. Explain how to report irregular items.

5. Explain intraperiod tax allocation.

6. Identify where to report tax earnings per share information.

7. Prepare a retained earnings statement.

8. Explain how to report other comprehensive income.


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SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS Item Type Item Type Item Type Item Type Item Type Item Type Item Type

Learning Objective 1 1. TF 3. TF 21. MC 23. MC S25. MC 88. E 90. E 2. TF 4. TF 22. MC S24. MC 87. E 89. E 91. E

Learning Objective 2 5. TF 6. TF 26. MC 53. MC 99. P

Learning Objective 3 7. TF 28. MC P32. MC 57. MC 80. MC 93. E 98. P 8. TF 29. MC 54. MC 77. MC 81. MC 94. E 100. P 9. TF S30. MC 55. MC 78. MC 82. MC 95. E

27. MC P31. MC 56. MC 79. MC 92. E 96. P Learning Objective 4

10. TF 35. MC 41. MC 61. MC 82. MC 95. E 11. TF 36. MC 42. MC 62. MC 83. MC 96. P 12. TF 37. MC S45. MC 63. MC 84. MC 97. P 13. TF 38. MC 58. MC 64. MC 85. MC 98. P 33. MC 39. MC 59. MC 65. MC 87. E 99. P 34. MC 40. MC 60. MC 80. MC 88. E 100. P

Learning Objective 5 14. TF 44. MC 67. MC 96. P 98. P 100. P 43. MC 66. MC 88. E 97. P 99. P

Learning Objective 6 15. TF 41. MC 68. MC 87. E 98. P 100. P 16. TF S46. MC 69. MC 96. P 99. P

Learning Objective 7 17. TF 48. MC 70. MC 73. MC 87. E 99. P 18. TF 49. MC 71. MC 74. MC 88. E 100. P

P47. MC 50. MC 72. MC 86. MC 95. E Learning Objective 8

19. TF 20. TF 51. MC 52. MC 75. MC 76. MC Note: TF = True-False E = Exercise MC = Multiple Choice P = Problem


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TRUE-FALSE—Conceptual 1. The income statement is useful for helping to assess the risk or uncertainty of achieving

future cash flows. 2. A strength of the income statement as compared to the balance sheet is that items that

cannot be measured reliably can be reported in the income statement. 3. Earnings management generally makes income statement information more useful for

predicting future earnings and cash flows. 4. The transaction approach of income measurement focuses on the income-related activities

that have occurred during the period. 5. Companies frequently report income tax expense as the last item before net income on a

single-step income statement. 6. Both revenues and gains increase both net income and owners’ equity. 7. Use of a multiple-step income statement will result in the company reporting a higher net

income than if they used a single-step income statement. 8. The primary advantage of the multiple-step format lies in the simplicity of presentation and

the absence of any implication that one type of revenue or expense item has priority over another.

9. Gross profit and income from operations are reported on a multiple-step but not a single-

step income statement. 10. The accounting profession has adopted a current operating performance approach to

income reporting. 11. Companies report the results of operations of a component of a business that will be

disposed of separately from continuing operations. 12. Gains or losses from exchange or translation of foreign currencies are reported as

extraordinary items. 13. Discontinued operations, extraordinary items, and unusual gains and losses are all reported

net of tax in the income statement. 14. Intraperiod tax allocation relates the income tax expense of the period to the specific items

that give rise to the amount of the tax provision. 15. A company that reports a discontinued operation or an extraordinary item has the option of

reporting per share amounts for these items. 16. Dividends declared on common and preferred stock are subtracted from net income in the

computation of earnings per share.


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17. Prior period adjustments can either be added or subtracted in the Retained Earnings Statement.

18. Companies only restrict retained earnings to comply with contractual requirements or

current necessity. 19. Comprehensive income includes all changes in equity during a period except those

resulting from distributions to owners. 20. The components of other comprehensive income can be reported in a statement of

stockholders’ equity. True False Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. 1. T 6. T 11. T 16. F 2. F 7. F 12. F 17. T 3. F 8. F 13. F 18. F 4. T 9. T 14. T 19. F 5. T 10. F 15. F 20. T

MULTIPLE CHOICE—Conceptual 21. The major elements of the income statement are

a. revenue, cost of goods sold, selling expenses, and general expense. b. operating section, nonoperating section, discontinued operations, extraordinary items,

and cumulative effect. c. revenues, expenses, gains, and losses. d. all of these.

22. Information in the income statement helps users to

a. evaluate the past performance of the enterprise. b. provide a basis for predicting future performance. c. help assess the risk or uncertainty of achieving future cash flows. d. all of these.

23. Limitations of the income statement include all of the following except

a. items that cannot be measured reliably are not reported. b. only actual amounts are reported in determining net income. c. income measurement involves judgment. d. income numbers are affected by the accounting methods employed.

S24. Which of the following would represent the least likely use of an income statement

prepared for a business enterprise? a. Use by customers to determine a company's ability to provide needed goods and

services. b. Use by labor unions to examine earnings closely as a basis for salary discussions. c. Use by government agencies to formulate tax and economic policy. d. Use by investors interested in the financial position of the entity.


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S25. The income statement reveals a. resources and equities of a firm at a point in time. b. resources and equities of a firm for a period of time. c. net earnings (net income) of a firm at a point in time. d. net earnings (net income) of a firm for a period of time.

26. The single-step income statement emphasizes

a. the gross profit figure. b. total revenues and total expenses. c. extraordinary items and accounting changes more than these are emphasized in the

multiple-step income statement. d. the various components of income from continuing operations.

27. Which of the following is an acceptable method of presenting the income statement?

a. A single-step income statement b. A multiple-step income statement c. A consolidated statement of income d. All of these

28. Which of the following is not a generally practiced method of presenting the income

statement? a. Including prior period adjustments in determining net income b. The single-step income statement c. The consolidated statement of income d. Including gains and losses from discontinued operations of a component of a business

in determining net income 29. The occurrence which most likely would have no effect on 2007 net income (assuming

that all amounts involved are material) is the a. sale in 2007 of an office building contributed by a stockholder in 1983. b. collection in 2007 of a receivable from a customer whose account was written off in

2006 by a charge to the allowance account. c. settlement based on litigation in 2007 of previously unrecognized damages from a

serious accident which occurred in 2005. d. worthlessness determined in 2007 of stock purchased on a speculative basis in 2003.

S30. The occurrence that most likely would have no effect on 2007 net income is the

a. sale in 2007 of an office building contributed by a stockholder in 1961. b. collection in 2007 of a dividend from an investment. c. correction of an error in the financial statements of a prior period discovered

subsequent to their issuance. d. stock purchased in 1993 deemed worthless in 2007.

P31. Which of the following is not a selling expense?

a. Advertising expense b. Office salaries expense c. Freight-out d. Store supplies consumed


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P32. The accountant for the Orion Sales Company is preparing the income statement for 2007 and the balance sheet at December 31, 2007. The January 1, 2007 merchandise inventory balance will appear a. only as an asset on the balance sheet. b. only in the cost of goods sold section of the income statement. c. as a deduction in the cost of goods sold section of the income statement and as a

current asset on the balance sheet. d. as an addition in the cost of goods sold section of the income statement and as a

current asset on the balance sheet. 33. In order to be classified as an extraordinary item in the income statement, an event or

transaction should be a. unusual in nature, infrequent, and material in amount. b. unusual in nature and infrequent, but it need not be material. c. infrequent and material in amount, but it need not be unusual in nature. d. unusual in nature and material, but it need not be infrequent.

34. Classification as an extraordinary item on the income statement would be appropriate for

the a. gain or loss on disposal of a component of the business. b. substantial write-off of obsolete inventories. c. loss from a strike. d. none of these.

35. Which of these is generally an example of an extraordinary item?

a. Loss incurred because of a strike by employees. b. Write-off of deferred marketing costs believed to have no future benefit. c. Gain resulting from the devaluation of the U.S. dollar. d. Gain resulting from the state exercising its right of eminent domain on a piece of land

used as a parking lot. 36. Under which of the following conditions would material flood damage be considered an

extraordinary item for financial reporting purposes? a. Only if floods in the geographical area are unusual in nature and occur infrequently. b. Only if the flood damage is material in amount and could have been reduced by

prudent management. c. Under any circumstances as an extraordinary item. d. Flood damage should never be classified as an extraordinary item.

37. An item that should be classified as an extraordinary item is

a. write-off of goodwill. b. gains from transactions involving foreign currencies. c. losses from moving a plant to another city. d. gains from a company selling the only investment it has ever owned.

38. How should an unusual event not meeting the criteria for an extraordinary item be

disclosed in the financial statements? a. Shown as a separate item in operating revenues or expenses if material and supple-

mented by a footnote if deemed appropriate. b. Shown in operating revenues or expenses if material but not shown as a separate item. c. Shown net of income tax after ordinary net earnings but before extraordinary items. d. Shown net of income tax after extraordinary items but before net earnings.


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39. Which of the following is a change in accounting principle? a. A change in the estimated service life of machinery b. A change from FIFO to LIFO c. A change from straight-line to double-declining-balance d. A change from FIFO to LIFO and a change from straight-line to double-declining-

balance 40. Which of the following is never classified as an extraordinary item?

a. Losses from a major casualty. b. Losses from an expropriation of assets. c. Gain on a sale of the only security investment a company has ever owned. d. Losses from exchange or translation of foreign currencies.

41. Which of the following is a required disclosure in the income statement when reporting the

disposal of a component of the business? a. The gain or loss on disposal should be reported as an extraordinary item. b. Results of operations of a discontinued component should be disclosed immediately

below extraordinary items. c. Earnings per share from both continuing operations and net income should be

disclosed on the face of the income statement. d. The gain or loss on disposal should not be segregated, but should be reported together

with the results of continuing operations. 42. When a company discontinues an operation and disposes of the discontinued operation

(component), the transaction should be included in the income statement as a gain or loss on disposal reported as a. a prior period adjustment. b. an extraordinary item. c. an amount after continuing operations and before extraordinary items. d. a bulk sale of plant assets included in income from continuing operations.

43. Income taxes are allocated to

a. extraordinary items. b. discontinued operations. c. prior period adjustments. d. all of these.

44. Which of the following is true about intraperiod tax allocation?

a. It arises because certain revenue and expense items appear in the income statement either before or after they are included in the tax return.

b. It is required for extraordinary items and cumulative effect of accounting changes but not for prior period adjustments.

c. Its purpose is to allocate income tax expense evenly over a number of accounting periods.

d. Its purpose is to relate the income tax expense to the items which affect the amount of tax.


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S45. A material item which is unusual in nature or infrequent in occurrence, but not both should be shown in the income statement

Net of Tax Disclosed Separately a. No No b. Yes Yes c. No Yes d. Yes No

S46. Earnings per share should always be shown separately for

a. net income and gross margin. b. net income and pretax income. c. income before extraordinary items. d. extraordinary items and prior period adjustments.

P47. A correction of an error in prior periods' income will be reported

In the income statement Net of tax a. Yes Yes b. No No c. Yes No d. No Yes

48. Which of the following items will not appear in the retained earnings statement?

a. Net loss b. Prior period adjustment c. Discontinued operations d. Dividends

49. Which one of the following types of losses is excluded from the determination of net

income in income statements? a. Material losses resulting from transactions in the company's investments account. b. Material losses resulting from unusual sales of assets not acquired for resale. c. Material losses resulting from the write-off of intangibles. d. Material losses resulting from correction of errors related to prior periods.

50. Shank Corporation made a very large arithmetical error in the preparation of its year-end

financial statements by improper placement of a decimal point in the calculation of depreciation. The error caused the net income to be reported at almost double the proper amount. Correction of the error when discovered in the next year should be treated as a. an increase in depreciation expense for the year in which the error is discovered. b. a component of income for the year in which the error is discovered, but separately

listed on the income statement and fully explained in a note to the financial statements.

c. an extraordinary item for the year in which the error was made. d. a prior period adjustment.

51. Comprehensive income includes all of the following except

a. dividend revenue. b. losses on disposal of assets. c. investments by owners. d. unrealized holding gains.


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52. The approach most companies use to provide information related to the components of other comprehensive income is a a. second separate income statement. b. combined income statement of comprehensive income. c. separate column in the statement of changes in stockholders’ equity. d. footnote disclosure.

Multiple Choice Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.21. c 26. b 31. b 36. a 41. c 46. c 51. c 22. d 27. d 32. b 37. d 42. c 47. d 52. c 23. d 28. a 33. a 38. a 43. d 48. c 24. d 29. b 34. d 39. d 44. d 49. d 25. d 30. c 35. d 40. d 45. c 50. d

Solution to Multiple Choice question for which the answer is “none of these.” 34. Many answers are possible.

MULTIPLE CHOICE—Computational 53. For Garret Wolfe Company, the following information is available:

Cost of goods sold $ 60,000 Dividend revenue 2,500 Income tax expense 6,000 Operating expenses 23,000 Sales 100,000

In Garret Wolfe’s single-step income statement, gross profit a. should not be reported. b. should be reported at $13,500. c. should be reported at $40,000. d. should be reported at $42,500.

54. For Garret Wolfe Company, the following information is available:


In Garret Wolfe’s multiple-step income statement, gross profit a. should not be reported b. should be reported at $13,500. c. should be reported at $40,000. d. should be reported at $42,500.


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55. For Merando Company, the following information is available:


In Merando’s multiple-step income statement, gross profit a. should not be reported b. should be reported at $20,000. c. should be reported at $60,000. d. should be reported at $64,000.

56. Gross billings for merchandise sold by Otto Company to its customers last year amounted

to $15,720,000; sales returns and allowances were $370,000, sales discounts were $175,000, and freight-out was $140,000. Net sales last year for Otto Company were a. $15,720,000. b. $15,350,000. c. $15,175,000. d. $15,035,000.

57. If plant assets of a manufacturing company are sold at a gain of $820,000 less related

taxes of $250,000, and the gain is not considered unusual or infrequent, the income statement for the period would disclose these effects as a. a gain of $820,000 and an increase in income tax expense of $250,000. b. operating income net of applicable taxes, $570,000. c. a prior period adjustment net of applicable taxes, $570,000. d. an extraordinary item net of applicable taxes, $570,000.

58. Sam Hurd Company has the following items: write-down of inventories, $120,000; loss on

disposal of Sports Division, $185,000; and loss due to strike, $113,000. Ignoring income taxes, what total amount should Sam Hurd Company report as extraordinary losses? a. $ -0-. b. $185,000. c. $233,000. d. $298,000.

59. Fleming Company has the following items: write-down of inventories, $240,000; loss on

disposal of Sports Division, $370,000; and loss due to an expropriation, $226,000. Ignoring income taxes, what total amount should Fleming Company report as extraordinary losses? a. $226,000 b. $370,000. c. $466,000. d. $596,000.


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60. An income statement shows “income before income taxes and extraordinary items” in the amount of $2,055,000. The income taxes payable for the year are $1,080,000, including $360,000 that is applicable to an extraordinary gain. Thus, the “income before extraordinary items” is a. $1,335,000. b. $615,000. c. $1,395,000. d. $675,000.

61. Cole Company, with an applicable income tax rate of 30%, reported net income of

$210,000. Included in income for the period was an extraordinary loss from flood damage of $30,000 before deducting the related tax effect. The company's income before income taxes and extraordinary items was a. $240,000. b. $300,000. c. $330,000. d. $231,000.

62. A review of the December 31, 2007, financial statements of Baden Corporation revealed

that under the caption "extraordinary losses," Baden reported a total of $515,000. Further analysis revealed that the $515,000 in losses was comprised of the following items:

(1) Baden recorded a loss of $150,000 incurred in the abandonment of equipment formerly used in the business.

(2) In an unusual and infrequent occurrence, a loss of $250,000 was sustained as a result of hurricane damage to a warehouse.

(3) During 2007, several factories were shut down during a major strike by employees, resulting in a loss of $85,000.

(4) Uncollectible accounts receivable of $30,000 were written off as uncollectible.

Ignoring income taxes, what amount of loss should Baden report as extraordinary on its 2007 income statement? a. $150,000. b. $250,000. c. $400,000. d. $515,000.

Use the following information for questions 63 and 64.

At Hall Company, events and transactions during 2007 included the following. The tax rate for all items is 30%.

(1) Depreciation for 2005 was found to be understated by $30,000. (2) A strike by the employees of a supplier resulted in a loss of $25,000. (3) The inventory at December 31, 2005 was overstated by $40,000. (4) A flood destroyed a building that had a book value of $500,000. Floods are very

uncommon in that area. 63. The effect of these events and transactions on 2007 income from continuing operations

net of tax would be a. $17,500. b. $38,500. c. $66,500. d. $416,500.


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64. The effect of these events and transactions on 2007 net income net of tax would be a. $17,500. b. $367,500. c. $388,500. d. $416,500.

65. During 2007, Gomez Corporation disposed of Pine Division, a major component of its

business. Gomez realized a gain of $1,200,000, net of taxes, on the sale of Pine's assets. Pine's operating losses, net of taxes, were $1,400,000 in 2007. How should these facts be reported in Gomez's income statement for 2007? Total Amount to be Included in Income from Results of Continuing Operations Discontinued Operations a. $1,400,000 loss $1,200,000 gain b. 200,000 loss 0 c. 0 200,000 loss d. 1,200,000 gain 1,400,000 loss

66. Dan Nicholson Corporation has an extraordinary loss of $50,000, an unusual gain of

$35,000, and a tax rate of 40%. At what amount should Dan Nicholson report each item? Extraordinary loss Unusual gain a. $(50,000) $35,000 b. (50,000) 21,000 c. (30,000) 35,000 d. (30,000) 21,000

67. Carpino Corporation has an extraordinary loss of $200,000, an unusual gain of $140,000,

and a tax rate of 40%. At what amount should Carpino report each item? Extraordinary loss Unusual gain a. $(200,000) $140,000 b. (200,000) 84,000 c. (120,000) 140,000 d. (120,000) 84,000

68. Craig Rusch Corporation reports the following information:

Net income $500,000 Dividends on common stock 140,000 Dividends on preferred stock 60,000 Weighted average common shares outstanding 100,000

Rusch should report earnings per share of a. $3.00. b. $3.60 c. $4.40. d. $5.00.


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69. Edmonds Corporation reports the following information:

Net income $500,000 Dividends on common stock 140,000 Dividends on preferred stock 60,000 Weighted average common shares outstanding 200,000

Edmonds should report earnings per share of a. $1.50. b. $1.80 c. $2.20. d. $2.50.

70. Simmons Corporation reports the following information:

Correction of understatement of depreciation expense in prior years, net of tax $ 430,000 Dividends declared 320,000 Net income 1,000,000 Retained earnings, 1/1/07, as reported 2,000,000

Simmons should report retained earnings, 1/1/07, as adjusted at a. $1,570,000. b. $2,000,000. c. $2,430,000. d. $3,110,000.

71. Simmons Corporation reports the following information:

Correction of understatement of depreciation expense in prior years, net of tax $ 430,000 Dividends declared 320,000 Net income 1,000,000 Retained earnings, 1/1/07, as reported 2,000,000

Simmons should report retained earnings, 12/31/07, as adjusted at a. $1,570,000. b. $2,250,000. c. $2,680,000. d. $3,110,000.

72. Joe Novak Corporation reports the following information:

Correction of overstatement of depreciation expense in prior years, net of tax $ 215,000 Dividends declared 160,000 Net income 500,000 Retained earnings, 1/1/07, as reported 1,000,000

Joe Novak should report retained earnings, 1/1/07, as adjusted at a. $785,000. b. $1,000,000. c. $1,215,000. d. $1,555,000.


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73. Joe Novak Corporation reports the following information:

Correction of overstatement of depreciation expense in prior years, net of tax $ 215,000 Dividends declared 160,000 Net income 500,000 Retained earnings, 1/1/07, as reported 1,000,000

Joe Novak should report retained earnings, 12/31/07, at a. $785,000. b. $1,125,000. c. $1,340,000. d. $1,555,000.

74. The following information was extracted from the accounts of Boone Corporation at

December 31, 2007: CR(DR) Total reported income since incorporation $1,700,000 Total cash dividends paid (800,000) Unrealized holding loss (120,000) Total stock dividends distributed (200,000) Prior period adjustment, recorded January 1, 2007 75,000

What should be the balance of retained earnings at December 31, 2007? a. $655,000. b. $700,000. c. $580,000. d. $775,000.

75. Penn Company reported the following information for 2007:

Sales revenue $510,000 Cost of goods sold 350,000 Operating expenses 55,000 Unrealized holding gain on available-for-sale securities 40,000 Cash dividends received on the securities 2,000

For 2007, Penn would report other comprehensive income of a. $137,000. b. $135,000. c. $42,000. d. $40,000.

76. Silas Company reported the following information for 2007:

Sales revenue $500,000 Cost of goods sold 350,000 Operating expenses 55,000 Unrealized holding gain on available-for-sale securities 20,000 Cash dividends received on the securities 2,000

For 2007, Silas would report comprehensive income of a. $117,000. b. $115,000. c. $97,000. d. $20,000.


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Multiple Choice Answers—Computational Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

53. a 57. a 61. c 65. c 69. c 73. d 54. c 58. a 62. b 66. c 70. a 74. d 55. c 59. a 63. a 67. c 71. b 75. d 56. c 60. a 64. b 68. c 72. c 76. a

MULTIPLE CHOICE—CPA Adapted Use the following information for questions 77 and 78. Meyer Corp. reports operating expenses in two categories: (1) selling and (2) general and administrative. The adjusted trial balance at December 31, 2007, included the following expense accounts:

Accounting and legal fees $140,000 Advertising 120,000 Freight-out 75,000 Interest 60,000 Loss on sale of long-term investments 30,000 Officers' salaries 180,000 Rent for office space 180,000 Sales salaries and commissions 110,000

One-half of the rented premises is occupied by the sales department. 77. How much of the expenses listed above should be included in Meyer's selling expenses

for 2007? a. $230,000. b. $305,000. c. $320,000. d. $395,000.

78. How much of the expenses listed above should be included in Meyer's general and

administrative expenses for 2007? a. $410,000. b. $440,000. c. $470,000. d. $500,000.

79. Bowen Corp. reports operating expenses in two categories: (1) selling and (2) general and

administrative. The adjusted trial balance at December 31, 2007 included the following expense and loss accounts:


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Accounting and legal fees $140,000 Advertising 180,000 Freight-out 80,000 Interest 70,000 Loss on sale of long-term investment 30,000 Officers' salaries 225,000 Rent for office space 220,000 Sales salaries and commissions 170,000

One-half of the rented premises is occupied by the sales department. Bowen's total selling expenses for 2007 are a. $540,000. b. $460,000. c. $430,000. d. $370,000.

80. The following items were among those that were reported on Nen Co.'s income statement

for the year ended December 31, 2007:

Legal and audit fees $130,000 Rent for office space 180,000 Interest on inventory floor plan 210,000 Loss on abandoned equipment used in operations 35,000

The office space is used equally by Nen's sales and accounting departments. What amount of the above-listed items should be classified as general and administrative expenses in Nen's multiple-step income statement? a. $220,000. b. $255,000. c. $310,000. d. $430,000.

Use the following information for questions 81 through 83.

Hogan Corp.'s trial balance of income statement accounts for the year ended December 31, 2007 included the following:

Debit Credit Sales $140,000 Cost of sales $ 50,000 Administrative expenses 25,000 Loss on sale of equipment 9,000 Commissions to salespersons 8,000 Interest revenue 5,000 Freight-out 3,000 Loss due to earthquake damage 12,000 Bad debt expense 3,000 Totals $110,000 $145,000

Other information: Hogan's income tax rate is 30%. Finished goods inventory:

January 1, 2007 $80,000 December 31, 2007 70,000


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On Hogan's multiple-step income statement for 2007, 81. Cost of goods manufactured is

a. $63,000. b. $60,000. c. $43,000. d. $40,000.

82. Income before extraordinary item is

a. $64,000. b. $47,000. c. $32,900. d. $24,500.

83. Extraordinary loss is

a. $8,400. b. $12,000. c. $14,700. d. $21,000.

84. Agler Corp. had the following infrequent transactions during 2007:

A $150,000 gain from selling the only investment Agler has ever owned. A $210,000 gain on the sale of equipment. A $70,000 loss on the write-down of inventories.

In its 2007 income statement, what amount should Agler report as total infrequent net gains that are not considered extraordinary? a. $80,000. b. $140,000. c. $290,000. d. $360,000.

85. Snead, Inc. incurred the following infrequent losses during 2007:

A $70,000 write-down of equipment leased to others. A $40,000 adjustment of accruals on long-term contracts. A $60,000 write-off of obsolete inventory.

In its 2007 income statement, what amount should Snead report as total infrequent losses that are not considered extraordinary? a. $170,000. b. $130,000. c. $110,000. d. $100,000.

86. Which of the following should be reported as a prior period adjustment?

Change in Estimated Lives Change from Unaccepted of Depreciable Assets Principle to Accepted Principle a. Yes Yes b. No Yes c. Yes No d. No No


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Multiple Choice Answers—CPA Adapted Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

77. d 79. a 81. d 83. a 85. a 78. a 80. a 82. c 84. b 86. b

DERIVATIONS — Computational No. Answer Derivation 53. a 54. c $100,000 – $60,000 = $40,000. 55. c $150,000 – $90,000 = $60,000. 56. c $15,720,000 – $370,000 – $175,000 = $15,175,000. 57. a 58. a 59. a 60. a. $2,055,000 – ($1,080,000 – $360,000) = $1,335,000. 61. c $210,000 + ($30,000 × .7) = $231,000 $231,000 ÷ .7 = $330,000. 62. b $515,000 – $150,000 – $85,000 – $30,000 = $250,000. 63. a $25,000 – $7,500 = $17,500. 64. b $17,500 + ($500,000 × .7) = $367,500. 65. c $1,400,000 – $1,200,000 = $200,000. 66. c $50,000 × .60 = $30,000. 67. c $200,000 × .60 = $120,000. 68. c ($500,000 – $60,000) ÷ 100,000 = $4.40. 69. c ($500,000 – $60,000) ÷ 200,000 = $2.20. 70. a $2,000,000 – $430,000 = $1,570,000. 71. b $2,000,000 – $430,000 + $1,000,000 – $320,000 = $2,250,000. 72. c $1,000,000 + $215,000 = $1,215,000.


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No. Answer Derivation 73. d $1,000,000 + $215,000 + $500,000 – $160,000 = $1,555,000. 74. d $1,700,000 – $800,000 – $200,000 + $75,000 = $775,000. 75. d Other comprehensive income = $40,000. 76. a $500,000 – $350,000 – $55,000 + $20,000 + $2,000 = $117,000.

DERIVATIONS — CPA Adapted No. Answer Derivation 77. d $120,000 + $75,000 + $110,000 + $90,000 = $395,000. 78. a $140,000 + $180,000 + $90,000 = $410,000. 79. a $180,000 + $80,000 + $110,000 + $170,000 = $540,000. 80. a $130,000 + $90,000 = $220,000. 81. d $50,000 + $70,000 – $80,000 = $40,000. 82. c $140,000 – $50,000 – $25,000 – $9,000 – $8,000 – $3,000 – $3,000 + $5,000 – $14,100 = $32,900. 83. a $12,000 × 0.7 = $8,400. 84. b $210,000 – $70,000 = $140,000. 85. a $70,000 + $40,000 + $60,000 = $170,000. 86. b Conceptual.


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EXERCISES Ex. 4-87—Definitions.

Provide clear, concise answers for the following.

1. What are revenues?

2. What are expenses?

3. What are gains?

4. What are losses?

5. What are the criteria (in addition to materiality) that must be met to classify an event or transaction as extraordinary?

6. When does a discontinued operation occur?

7. Indicate how earnings per share is computed.

8. State the primary category of prior period adjustments and indicate how they are reported in the financial statements.

Solution 4-87 1. Revenues are increases in net assets during a period from delivering goods or services that

constitute the entity's major or central operations.

2. Expenses are the using-up of assets or other decreases in net assets during a period from delivering goods or services that constitute the entity's major or central operations.

3. Gains are increases in net assets from peripheral transactions, events, or circumstances affecting the entity except those resulting from revenues or investments by owners.

4. Losses are decreases in net assets from peripheral transactions, events, or circumstances affecting the entity except those resulting from expenses or distributions to owners.

5. Both of the following criteria should be met to classify an item as extraordinary: (1) Unusual nature, considering the environment, and (2) infrequent in occurrence, considering the environment.

6. A discontinued operation occurs when (a) the results of operations and cash flows of a component of a company have been eliminated from the ongoing operations, and (b) there is no significant continuing involvement in that component after the disposal transaction.

7. The computation of earnings per share is: Net income minus preferred dividends divided by the weighted average of common shares outstanding.

8. Prior period adjustments include correction of an error in the financial statements of a prior period. Prior period adjustments (net of tax) should be charged or credited to the opening balance of retained earnings.


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Ex. 4-88—Terminology.

In the space provided, write the word or phrase that is defined or indicated. 1. Net income minus preferred dividends divided by the weighted average of shares outstanding. 1. ________________________________ 2. All changes in equity during a period except those resulting from investments by owners and distributions to owners. 2. ________________________________ 3. A correction of an error is reported as a 3. ________________________________ 4. An event or transaction which is unusual in nature and infrequent in occurrence. 4. ________________________________ 5. The income statement category for a disposal of a component of a business. 5. ________________________________ 6. Relating tax expense to specific items on the income statement. 6. ________________________________ Solution 4-88 1. Earnings per share. 2. Comprehensive income. 3. Prior period adjustment. 4. Extraordinary item. 5. Discontinued operations. 6. Intraperiod tax allocation. Ex. 4-89—Income statement disclosures.

What is disclosed in an income statement? Be specific. Solution 4-89 An income statement discloses revenues, expenses, gains, and losses. It discloses the net income (loss) for a period and earnings per share data. The income statement may also include discontinued operations (net of tax) and extraordinary items (net of tax).


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Ex. 4-90—Calculation of net income from the change in stockholders' equity.

Presented below is certain information pertaining to Juan Company. Assets, January 1 $240,000 Assets, December 31 230,000 Liabilities, January 1 150,000 Common stock, December 31 80,000 Retained earnings, December 31 31,000 Common stock sold during the year 10,000 Dividends declared during the year 13,000 Compute the net income for the year. Solution 4-90 January 1 December 31 Assets $240,000 Liabilities 150,000 Stockholders' equity $ 90,000 $111,000* Computation of net income: Stockholders' equity December 31 $111,000 Stockholders' equity January 1 90,000 Increase 21,000 Add: Dividend declared 13,000 Less: Common stock sold (10,000) Net income $ 24,000 *$80,000 + $31,000 Ex. 4-91—Calculation of net income from the change in stockholders' equity.

Presented below are changes in the account balances of Ping Company during the year, except for retained earnings. Increase Increase (Decrease) (Decrease) Cash $29,000 Accounts payable $34,000 Accounts receivable (net) (13,000) Bonds payable (20,000) Inventory 52,000 Common stock 72,000 Plant Assets (net) 37,000 Paid-in capital 16,000 The only entries in Retained Earnings were for net income and a dividend declaration of $12,000. Compute the net income for the current year.


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Solution 4-91 Computation of net income Change in assets ($118,000 – $13,000) $105,000 Increase Change in liabilities ($34,000 – $20,000) 14,000 Increase Change in stockholders' equity 91,000 Increase Add: Dividend declared 12,000 Less: Investment by stockholders (88,000) Net income $ 15,000 Ex. 4-92—Income statement classifications.

Indicate the major section or subsection of a multiple-step income statement in which each of the following items would usually appear: a. Advertising b. Depletion c. Dividend revenue d. Freight-in e. Loss on disposal of a component of the business, net of tax f. Income taxes on income g. Major casualty loss, net of tax h. Purchase discounts i. Sales discounts j. Officers' salaries k. Freight-out l. Sinking fund income Solution 4-92

a. Selling expense. b. Cost of goods sold. c. Other revenue. d. Cost of goods sold as an addition to purchases. e. Discontinued operations. f. Income taxes; subtracted from income before income taxes in arriving at net income. g. Extraordinary items. h. Cost of goods sold as a subtraction from purchases. i. Subtracted from gross revenues. j. Administrative or general expenses. k. Selling expense. l. Other revenue.


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Ex. 4-93—Income statement relationships.

Fill in the appropriate blanks for each of the independent situations below. Company A Company B Company C Sales (a) $_______ $343,400 $540,000 Beginning inventory 52,600 (d) _______ 90,000 Net purchases 175,300 255,600 (g) _______ Ending inventory 52,200 108,000 63,000 Cost of goods sold (b) _______ (e) _______ 407,000 Gross profit 85,300 98,000 (h) _______ Operating expenses (c) _______ 50,000 48,000 Income before taxes 6,000 (f) _______ (i) _______ Solution 4-93

(a) $261,000 (d) $97,800 (g) $380,000 (b) $175,700 (e) $245,400 (h) $133,000 (c) $79,300 (f) $48,000 (i) $85,000 Ex. 4-94—Multiple-step income statement.

Listed below in scrambled order are 13 income statement categories. Use the numerals 1 through 13 to indicate the order in which these categories should appear on a multiple-step income statement. ( ) Discontinued operations. ( ) Cost of goods sold. ( ) Other revenues and gains. ( ) Net income. ( ) Income taxes. ( ) Sales. ( ) Gross profit on sales. ( ) Income from operations. ( ) Income from continuing operations before income taxes. ( ) Operating expenses. ( ) Extraordinary item. ( ) Income before extraordinary items. ( ) Income from continuing operations. Solution 4-94 10, 2, 6, 13, 8, 1, 3, 5, 7, 4, 12, 11, 9


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Ex. 4-95—Classification of income statement and retained earnings statement items.

For each of the items listed below, indicate how it should be treated in the financial statements. Use the following letter code for your selections: a. Ordinary or unusual (but not extraordinary) item on the income statement b. Discontinued operations c. Extraordinary item on the income statement d. Prior period adjustment _____ 1. The bad debt rate was increased from 1% to 2%, thus increasing bad debt

expense. _____ 2. Obsolete inventory was written off. This was the first loss of this type in the

company's history. _____ 3. An uninsured casualty loss was incurred by the company. This was the first loss of

this type in the company's 50-year history. _____ 4. Recognition of income earned last year which was inadvertently omitted from last

year's income statement. _____ 5. The company sold one of its warehouses at a loss. _____ 6. Settlement of litigation with federal government related to income taxes of three

years ago. The company is continually involved in various adjustments with the federal government related to its taxes.

_____ 7. A loss incurred from expropriation (the company owned resources in South

America which were taken over by a dictator unsympathetic to American business).

_____ 8. The company neglected to record its depreciation in the previous year. _____ 9. Discontinuance of all production in the United States. The manufacturing

operations were relocated in Mexico. _____ 10. Loss on sale of investments. The company last sold some of its investments two

years ago. _____ 11. Loss on the disposal of a component of the business. Solution 4-95 1. a 4. d 7. c 10. a 2. a 5. a 8. d 11. b 3. c 6. a 9. a


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PROBLEMS Pr. 4-96—Multiple-step income statement.

Presented below is information related to Holt Company. Retained earnings, December 31, 2006 $ 650,000 Sales 1,400,000 Selling and administrative expenses 240,000 Hurricane loss (pre-tax) on plant (extraordinary item) 290,000 Cash dividends declared on common stock 33,600 Cost of goods sold 780,000 Gain resulting from computation error on depreciation charge in 2005 (pre-tax) 520,000 Other revenue 120,000 Other expenses 100,000 Instructions Prepare in good form a multiple-step income statement for the year 2007. Assume a 30% tax rate and that 80,000 shares of common stock were outstanding during the year. Solution 4-96

Holt Company INCOME STATEMENT

For the Year Ended December 31, 2007 Sales $1,400,000 Cost of goods sold 780,000 Gross profit 620,000 Selling and administrative expenses 240,000 Income from operations 380,000 Other revenue 120,000 Other expenses (100,000) Income before taxes 400,000 Income taxes (120,000) Income before extraordinary item 280,000 Extraordinary loss, net of applicable income taxes of $87,000 (203,000) Net income $ 77,000 Per share of common stock— Income before extraordinary item $3.50 Extraordinary item, net of tax (2.54) Net income $ .96


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Pr. 4-97—Income statement form.

Vincent Corporation had income from continuing operations of $800,000 (after taxes) in 2007. In addition, the following information, which has not been considered, is as follows. 1. In 2007, Vincent experienced an uninsured earthquake loss in the amount of $200,000. 2. A machine was sold for $140,000 cash during the year at a time when its book value was

$110,000. (Depreciation has been properly recorded.) The company often sells machinery of this type.

3. Vincent decided to discontinue its stereo division in 2007. During the current year, the loss on

the disposal of this component of the business was $150,000 less applicable taxes. Instructions Present in good form the income statement of Vincent Corporation for 2007 starting with "income from continuing operations." Assume that Vincent's tax rate is 30% and 200,000 shares of com-mon stock were outstanding during the year. Solution 4-97

Vincent Corporation Partial Income Statement

For the Year Ended December 31, 2007 Income from continuing operations $821,000* Discontinued operations Loss on disposal of a component of a business, $150,000, less applicable income taxes, $45,000 (105,000) Income before extraordinary item 716,000 Extraordinary loss, net of applicable income taxes of $60,000 (140,000) Net income $576,000 Per share of common stock—Income from cont. operations $4.11 Discontinued operations, net of tax (.53) Income before extraordinary item 3.58 Extraordinary loss, net of tax (.70) Net income $2.88 *Income from cont. operations (unadjusted) $800,000 Gain on sale of machinery (after tax) 21,000 Income from cont. operations (adjusted) $821,000


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Pr. 4-98—Multiple-step income statement.

Shown below is an income statement for 2007 that was prepared by a poorly trained bookkeeper of Jensen Corporation.

Jensen Corporation INCOME STATEMENT

December 31, 2007 Sales revenue $945,000 Investment revenue 19,500 Cost of merchandise sold (408,500) Selling expenses (145,000) Administrative expense (215,000) Interest expense (13,000) Income before special items 183,000 Special items Loss on disposal of a component of the business (30,000) Major casualty loss (extraordinary item) (70,000) Net federal income tax liability (24,900) Net income $ 58,100 Instructions Prepare a multiple-step income statement for 2007 for Jensen Corporation that is presented in accordance with generally accepted accounting principles (including format and terminology). Jensen Corporation has 50,000 shares of common stock outstanding and has a 30% federal income tax rate on all tax related items. Round all earnings per share figures to the nearest cent. Solution 4-98

Jensen Corporation INCOME STATEMENT

For the Year Ended December 31, 2007 Sales $945,000 Cost of goods sold 408,500 Gross profit 536,500 Selling expenses $145,000 Administrative expenses 215,000 360,000 Income from operations 176,500 Other revenue: Investment revenue 19,500 196,000 Other expenses: Interest expense 13,000 Income from continuing operations before taxes 183,000 Income taxes 54,900 Income from continuing operations 128,100 Loss from discontinued operations, net of applicable income tax of $9,000 21,000 Income before extraordinary item 107,100 Extraordinary casualty loss, net of applicable income tax of $21,000 49,000 Net income $ 58,100


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Per share of common stock— Income from continuing operations $2.56 Discontinued operations loss net of tax (.42) Income before extraordinary item 2.14 Extraordinary item, net of tax (.98) Net income $1.16 Pr. 4-99—Single-step income statement.

Presented below is an income statement for Morton Company for the year ended December 31, 2007.

Morton Company Income Statement

For the Year Ended December 31, 2007 Net sales $800,000 Costs and expenses: Cost of goods sold 640,000 Selling, general, and administrative expenses 70,000 Other, net 20,000 Total costs and expenses 730,000 Income before income taxes 70,000 Income taxes 21,000 Net income $ 49,000 Additional information:

1. "Selling, general, and administrative expenses" included a usual but infrequent charge of $7,000 due to a loss on the sale of investments.

2. "Other, net" consisted of interest expense, $10,000, and an extraordinary loss of $10,000 before taxes due to earthquake damage. If the extraordinary loss had not occurred, income taxes for 2007 would have been $24,000 instead of $21,000.

4. Morton had 20,000 shares of common stock outstanding during 2007. Instructions Using the single-step format, prepare a corrected income statement, including the appropriate per share disclosures.


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Solution 4-99 Morton Company Income Statement

For the Year Ended December 31, 2007 Net sales $800,000 Costs and expenses: Cost of goods sold $640,000 Selling, general, and administrative expenses 63,000 Interest expense 10,000 Infrequent charge—loss on sale of investments 7,000 Total costs and expenses 720,000 Income before taxes and extraordinary item 80,000 Income taxes 24,000 Income before extraordinary item 56,000 Extraordinary loss Earthquake damage 10,000 Less applicable taxes 3,000 (7,000) Net income $ 49,000 Per share of common stock— Income before extraordinary item $2.80 Extraordinary loss, net of tax (.35) Net income $2.45


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Pr. 4-100—Income statement and retained earnings statement.

Malone Corporation's capital structure consists of 50,000 shares of common stock. At December 31, 2007 an analysis of the accounts and discussions with company officials revealed the following information: Sales $1,100,000 Purchase discounts 18,000 Purchases 642,000 Earthquake loss (net of tax) (extraordinary item) 42,000 Selling expenses 128,000 Cash 60,000 Accounts receivable 90,000 Common stock 200,000 Accumulated depreciation 180,000 Dividend revenue 8,000 Inventory, January 1, 2007 152,000 Inventory, December 31, 2007 125,000 Unearned service revenue 4,400 Accrued interest payable 1,000 Land 370,000 Patents 100,000 Retained earnings, January 1, 2007 290,000 Interest expense 17,000 General and administrative expenses 150,000 Dividends declared 29,000 Allowance for doubtful accounts 5,000 Notes payable (maturity 7/1/10) 200,000 Machinery and equipment 450,000 Materials and supplies 40,000 Accounts payable 60,000 The amount of income taxes applicable to ordinary income was $48,600, excluding the tax effect of the earthquake loss which amounted to $18,000. Instructions (a) Prepare a multiple-step income statement. (b) Prepare a retained earnings statement.


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Solution 4-100 Malone Corporation

INCOME STATEMENT For the Year Ended December 31, 2007

Sales $1,100,000 Cost of goods sold: Merchandise inventory, Jan. 1 $152,000 Purchases $642,000 Less purchase discounts 18,000 Net purchases 624,000 Merchandise available for sale 776,000 Less merchandise inv., Dec. 31 125,000 Cost of goods sold 651,000 Gross profit on sales 449,000 Operating expenses: Selling expenses 128,000 General and administrative expenses 150,000 Total operating expenses 278,000 Operating income 171,000 Other revenue and expense: Dividend revenue 8,000 Interest expense (17,000) (9,000) Income before taxes 162,000 Income taxes 48,600 Income before extraordinary item 113,400 Extraordinary loss due to earthquake, net of applicable taxes of $18,000 (42,000) Net income $ 71,400 Per share of common stock— Income before extraordinary item $2.27 Extraordinary loss, net of tax (.84) Net income $1.43

Malone Corporation RETAINED EARNINGS STATEMENT

For the Year Ended December 31, 2007 Retained earnings, January 1, 2007 $290,000 Add: Net income $71,400 Deduct: Dividends declared 29,000 42,400 Retained earnings, December 31, 2007 $332,400

CHAPTER 7

CASH AND RECEIVABLES

TRUE-FALSE—Conceptual Answer No. Description T 1. Items considered cash. F 2. Items considered cash. F 3. Items considered cash. F 4. Cash equivalents definition. F 5. Bank overdrafts. T 6. Cash equivalents. F 7. Classification of receivables. F 8. Items considered trade receivables. T 9. Trade discount uses. T 10. Sales discounts. T 11. Valuation of receivables. F 12. Percentage-of-receivables approach. F 13. Percentage-of-sales method. T 14. Reporting notes receivable. F 15. Stated interest rate vs. effective rate. F 16. Classification of notes receivable. T 17. Recourse liability. F 18. Buying receivables with recourse. T 19. Selling receivables with recourse. F 20. Computing receivables turnover.

MULTIPLE CHOICE—Conceptual Answer No. Description d 21. Identification of cash items. b 22. Identification of cash items. d 23. Classification of travel advance. d P24. Items included as cash. d S25. Cash equivalent definition. d 26. Classification of bank overdraft. d 27. Classification of compensating balances. d 28. Definition of trade receivables. d 29. Identification of trade receivables. c S30. Presentation of nontrade receivables. d S31. Cash discount definition. d P32. Trade discount uses. a 33. Classification of sales discounts. c 34. Valuation of short-term receivables. d 35. Bad debt provision and the matching concept. a 36. Bad debts as a percentage of sales.


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MULTIPLE CHOICE—Conceptual (cont.) Answer No. Description b 37. Bad debts as a percentage of sales. a 38. Bad debts as a percentage of receivables. d 39. Financial statement effect of a note recorded incorrectly. c 40. Factoring accounts receivable without recourse. c S41. Classification of accounts and notes receivable. a S42. Transfer of receivables with recourse. a P43. Accounts receivable turnover ratio. d 44. Accounts receivable turnover ratio. c *45. Entry to replenish Petty Cash. c *46. Purpose of Cash Over & Short account. b *47. Classification of bank service charges. c *48. Treatment of bank credits on bank reconciliation. P These questions also appear in the Problem-Solving Survival Guide. S These questions also appear in the Study Guide. * This topic is dealt with in an Appendix to the chapter.

MULTIPLE CHOICE—Computational Answer No. Description d 49. Calculate effective interest on loan with required compensatory balance. b 50. Reporting cash. c 51. Cash and cash equivalents. b 52. Reporting cash. c 53. Cash and cash equivalents. c 54. Determine effective annual interest rate of sales discount. b 55. Calculate balance of accounts receivable. b 56. Calculate net realizable value of accounts receivable. d 57. Calculate net realizable value of accounts receivable. c 58. Calculate bad debt expense using aging of receivables. b 59. Calculate bad debt expense using percent of sales. a 60. Calculate bad debt expense using percent of receivables. b 61. Valuation of accounts receivable. b 62. Calculation of bad debt expense. d 63. Calculate Allowance for Doubtful Accounts balance. b 64. Valuation of accounts receivable. b 65. Calculation of bad debt expense. d 66. Calculate Allowance for Doubtful Accounts balance. b 67. Determine appropriate interest rate for a zero-interest-bearing note. a 68. Calculate present value of a zero-interest-bearing note. c 69. Calculate cash proceeds from transfer of receivables. c 70. Entry to record collection of assigned receivables. b 71. Factoring receivables without recourse. b 72. Factoring receivables with recourse. c 73. Calculate loss on sale of receivables. c 74. Calculate loss on sale of receivables. c 75. Calculate accounts receivable turnover. c 76. Calculate accounts receivable turnover.

Cash and Receivables

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MULTIPLE CHOICE—Computational (cont.) Answer No. Description d *77. Entry to replenish petty cash. b *78. Calculate correct balance in bank account. b *79. Calculate correct cash balance. c *80. Calculate correct cash balance. b *81. Calculate correct cash balance. c *82. Calculate correct cash balance.

MULTIPLE CHOICE—CPA Adapted Answer No. Description a 83. Determine current net receivables. d 84. Calculate adjustment for bad debts. d 85. Calculate bad debt expense. b 86. Calculate adjustment to write off bad debts. c 87. Effect of a write-off under the allowance method. d 88. Determine balance in the Allowance for Doubtful Accounts. c 89. Determine interest revenue of a zero-interest-bearing note. c 90. Determine interest receivable at year end. b 91. Assignment and factoring of accounts receivable. a *92. Calculate correct cash balance. a *93. Calculate the cash balance per books.

EXERCISES Item Description E7-94 Asset classification. E7-95 Allowance for doubtful accounts. E7-96 Entries for bad debt expense. E7-97 Accounts receivable assigned.

PROBLEMS Item Description P7-98 Entries for bad debt expense. P7-99 Amortization of discount on note. P7-100 Accounts receivable assigned. *P7-101 Factoring accounts receivable. *P7-102 Bank reconciliation.


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CHAPTER LEARNING OBJECTIVES 1. Identify items considered as cash. 2. Indicate how to report cash and related items. 3. Define receivables and identify the different types of receivables. 4. Explain accounting issues related to recognition of accounts receivable. 5. Explain accounting issues related to valuation of accounts receivable. 6. Explain accounting issues related to recognition of notes receivable. 7. Explain accounting issues related to valuation of notes receivable. 8. Explain accounting issues related to disposition of accounts and notes receivable. 9. Explain how to report and analyze receivables. *10. Explain common techniques employed to control cash.

SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS Item Type Item Type Item Type Item Type Item Type Item Type Item Type

Learning Objective 1 1. TF 2. TF 3. TF 21. MC 22. MC 23. MC P24. MC

Learning Objective 2 4. TF 6. TF 26. MC 49. MC 51. MC 53. MC 5. TF S25. MC 27. MC 50. MC 52. MC 94. E

Learning Objective 3 7. TF 8. TF 28. MC 29. MC S30. MC

Learning Objective 4 9. TF 10. TF S31. MC P32. MC 33. MC 54. MC 83. MC

Learning Objective 5 11. TF 35. MC 55. MC 59. MC 63. MC 84. MC 88. MC 12. TF 36. MC 56. MC 60. MC 64. MC 85. MC 95. E 13. TF 37. MC 57. MC 61. MC 65. MC 86. MC 96. E 34. MC 38. MC 58. MC 62. MC 66. MC 87. MC 98. P

Learning Objective 6 14. TF 16. TF 67. MC 89. MC 99. P 15. TF 39. MC 68. MC 90. MC

Learning Objective 8 17. TF 40. MC 69. MC 72. MC 91. MC 101. P 18. TF S41. MC 70. MC 73. MC 97. E 19. TF S42. MC 71. MC 74. MC 100. P

Learning Objective 9 20. TF P43. MC 44. MC 75. MC 76. MC

Learning Objective *10 45. MC 47. MC 77. MC 79. MC 81. MC 92. MC 102. P 46. MC 48. MC 78. MC 80. MC 82. MC 93. MC

Note: TF = True-False E = Exercise MC = Multiple Choice P = Problem


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TRUE-FALSE—Conceptual 1. Savings accounts are usually classified as cash on the balance sheet. 2. Certificates of deposit are usually classified as cash on the balance sheet. 3. Companies include postdated checks and petty cash funds as cash. 4. Cash equivalents are investments with original maturities of six months or less. 5. Bank overdrafts are always offset against the cash account in the balance sheet. 6. Short-term, highly liquid investments may be included with cash on the balance sheet. 7. All claims held against customers and others for money, goods, or services are reported as

current assets. 8. Trade receivables include notes receivable and advances to officers and employees. 9. Trade discounts are used to avoid frequent changes in catalogs and to alter prices for

different quantities purchased. 10. In the gross method, sales discounts are reported as a deduction from sales. 11. The net amount reported for short-term receivables is not affected when a specific account

receivable is determined to be uncollectible. 12. The percentage-of-receivables approach of estimating uncollectible accounts emphasizes

matching over valuation of accounts receivable. 13. The percentage-of-sales method results in a more accurate valuation of receivables on the

balance sheet. 14. Companies record and report long-term notes receivable at the present value of the cash

they expect to collect. 15. When the stated rate of interest exceeds the effective rate, the present value of the note

receivable will be less than its face value. 16. Notes receivable are generally reported as noncurrent assets. 17. Recognition of a recourse liability will make a loss on sale of receivables larger than it would

otherwise have been. 18. When buying receivables with recourse, the purchaser assumes the risk of collectibility and

absorbs any credit loss. 19. For receivables sold with recourse, the seller guarantees payment to the purchaser if the

debtor fails to pay.


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20. The receivables turnover ratio is computed by dividing net sales by the ending net receivables.

True False Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. 1. T 6. T 11. T 16. F 2. F 7. F 12. F 17. T 3. F 8. F 13. F 18. F 4. F 9. T 14. T 19. T 5. F 10. T 15. F 20. F

MULTIPLE CHOICE—Conceptual 21. Which of the following is not considered cash for financial reporting purposes?

a. Petty cash funds and change funds b. Money orders, certified checks, and personal checks c. Coin, currency, and available funds d. Postdated checks and I.O.U.'s

22. Which of the following is considered cash?

a. Certificates of deposit (CDs) b. Money market checking accounts c. Money market savings certificates d. Postdated checks

23. Travel advances should be reported as

a. supplies. b. cash because they represent the equivalent of money. c. investments. d. none of these.

P24. Which of the following items should not be included in the Cash caption on the balance

sheet? a. Coins and currency in the cash register b. Checks from other parties presently in the cash register c. Amounts on deposit in checking account at the bank d. Postage stamps on hand

S25. A cash equivalent is a short-term, highly liquid investment that is readily convertible into

known amounts of cash and a. is acceptable as a means to pay current liabilities. b. has a current market value that is greater than its original cost c. bears an interest rate that is at least equal to the prime rate of interest at the date of

liquidation. d. is so near its maturity that it presents insignificant risk of changes in interest rates.


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26. Bank overdrafts, if material, should be a. reported as a deduction from the current asset section. b. reported as a deduction from cash. c. netted against cash and a net cash amount reported. d. reported as a current liability.

27. Deposits held as compensating balances

a. usually do not earn interest. b. if legally restricted and held against short-term credit may be included as cash. c. if legally restricted and held against long-term credit may be included among current

assets. d. none of these.

28. The category "trade receivables" includes

a. advances to officers and employees. b. income tax refunds receivable. c. claims against insurance companies for casualties sustained. d. none of these.

29. Which of the following should be recorded in Accounts Receivable?

a. Receivables from officers b. Receivables from subsidiaries c. Dividends receivable d. None of these

S30. What is the preferable presentation of accounts receivable from officers, employees, or

affiliated companies on a balance sheet? a. As offsets to capital. b. By means of footnotes only. c. As assets but separately from other receivables. d. As trade notes and accounts receivable if they otherwise qualify as current assets.

S31. When a customer purchases merchandise inventory from a business organization, she

may be given a discount which is designed to induce prompt payment. Such a discount is called a(n) a. trade discount. b. nominal discount. c. enhancement discount. d. cash discount.

P32. Trade discounts are

a. not recorded in the accounts; rather they are a means of computing a price. b. used to avoid frequent changes in catalogues. c. used to quote different prices for different quantities purchased. d. all of the above.

33. If a company employs the gross method of recording accounts receivable from customers,

then sales discounts taken should be reported as a. a deduction from sales in the income statement. b. an item of "other expense" in the income statement. c. a deduction from accounts receivable in determining the net realizable value of

accounts receivable. d. sales discounts forfeited in the cost of goods sold section of the income statement.


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34. Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted value of the cash to be received in the future, failure to follow this practice usually does not make the balance sheet misleading because a. most short-term receivables are not interest-bearing. b. the allowance for uncollectible accounts includes a discount element. c. the amount of the discount is not material. d. most receivables can be sold to a bank or factor.

35. Which of the following methods of determining bad debt expense does not properly match

expense and revenue? a. Charging bad debts with a percentage of sales under the allowance method. b. Charging bad debts with an amount derived from a percentage of accounts receivable

under the allowance method. c. Charging bad debts with an amount derived from aging accounts receivable under the

allowance method. d. Charging bad debts as accounts are written off as uncollectible.

36. Which of the following methods of determining annual bad debt expense best achieves

the matching concept? a. Percentage of sales b. Percentage of ending accounts receivable c. Percentage of average accounts receivable d. Direct write-off

37. Which of the following is a generally accepted method of determining the amount of the

adjustment to bad debt expense? a. A percentage of sales adjusted for the balance in the allowance b. A percentage of sales not adjusted for the balance in the allowance c. A percentage of accounts receivable not adjusted for the balance in the allowance d. An amount derived from aging accounts receivable and not adjusted for the balance in

the allowance 38. The advantage of relating a company's bad debt expense to its outstanding accounts

receivable is that this approach a. gives a reasonably correct statement of receivables in the balance sheet. b. best relates bad debt expense to the period of sale. c. is the only generally accepted method for valuing accounts receivable. d. makes estimates of uncollectible accounts unnecessary.

39. At the beginning of 2006, Finney Company received a three-year zero-interest-bearing

$1,000 trade note. The market rate for equivalent notes was 8% at that time. Finney reported this note as a $1,000 trade note receivable on its 2006 year-end statement of financial position and $1,000 as sales revenue for 2006. What effect did this accounting for the note have on Finney's net earnings for 2006, 2007, 2008, and its retained earnings at the end of 2008, respectively? a. Overstate, overstate, understate, zero b. Overstate, understate, understate, understate c. Overstate, overstate, overstate, overstate d. None of these


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40. Which of the following is true when accounts receivable are factored without recourse? a. The transaction may be accounted for either as a secured borrowing or as a sale,

depending upon the substance of the transaction. b. The receivables are used as collateral for a promissory note issued to the factor by the

owner of the receivables. c. The factor assumes the risk of collectibility and absorbs any credit losses in collecting

the receivables. d. The financing cost (interest expense) should be recognized ratably over the collection

period of the receivables. S41. Which of the following statements is incorrect regarding the classification of accounts and

notes receivable? a. Segregation of the different types of receivables is required if they are material. b. Disclose any loss contingencies that exist on the receivables. c. Any discount or premium resulting from the determination of present value in notes

receivable transactions is an asset or liability respectively. d. Valuation accounts should be appropriately offset against the proper receivable

accounts. S42. Of the following conditions, which is the only one that is not required if the transfer of

receivables with recourse is to be accounted for as a sale? a. The transferor is obligated to make a genuine effort to identify those receivables that

are uncollectible. b. The transferor surrenders control of the future economic benefits of the receivables. c. The transferee cannot require the transferor to repurchase the receivables. d. The transferor's obligation under the recourse provisions can be reasonably

estimated. P43. The accounts receivable turnover ratio measures the

a. number of times the average balance of accounts receivable is collected during the period.

b. percentage of accounts receivable turned over to a collection agency during the period.

c. percentage of accounts receivable arising during certain seasons. d. number of times the average balance of inventory is sold during the period.

44. The accounts receivable turnover ratio is computed by dividing

a. gross sales by ending net receivables. b. gross sales by average net receivables. c. net sales by ending net receivables. d. net sales by average net receivables.

*45. Which of the following is not true?

a. The imprest petty cash system in effect adheres to the rule of disbursement by check. b. Entries are made to the Petty Cash account only to increase or decrease the size of

the fund or to adjust the balance if not replenished at year-end. c. The Petty Cash account is debited when the fund is replenished. d. All of these are not true.


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*46. A Cash Over and Short account a. is not generally accepted. b. is debited when the petty cash fund proves out over. c. is debited when the petty cash fund proves out short. d. is a contra account to Cash.

*47. The journal entries for a bank reconciliation

a. are taken from the "balance per bank" section only. b. may include a debit to Office Expense for bank service charges. c. may include a credit to Accounts Receivable for an NSF check. d. may include a debit to Accounts Payable for an NSF check.

*48. When preparing a bank reconciliation, bank credits are

a. added to the bank statement balance. b. deducted from the bank statement balance. c. added to the balance per books. d. deducted from the balance per books.

Multiple Choice Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.21. d S25. d 29. d 33. a 37. b S41. c *45. c 22. b 26. d S30. c 34. c 38. a S42. a *46. c 23. d 27. d S31. d 35. d 39. d P43. a *47. b

P24. d 28. d P32. d 36. a 40. c 44. d *48. c

Solutions to those Multiple Choice questions for which the answer is “none of these.” 23. As receivables. 27. Many answers are possible. 28. Open accounts resulting from short-term extensions of credit to customers. 29. Open accounts resulting from short-term extensions of credit to customers. 39. Overstate, understate, understate, zero.

MULTIPLE CHOICE—Computational 49. On January 1, 2007, Mann Company borrows $2,000,000 from National Bank at 11%

annual interest. In addition, Mann is required to keep a compensatory balance of $200,000 on deposit at National Bank which will earn interest at 5%. The effective interest that Mann pays on its $2,000,000 loan is a. 10.0%. b. 11.0%. c. 11.5%. d. 11.6%.

50. Hamilton Company has cash in bank of $10,000, restricted cash in a separate account of

$3,000, and a bank overdraft in an account at another bank of $1,000. Hamilton should report cash of a. $9,000. b. $10,000. c. $12,000. d. $13,000.


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51. Horvath Company has the following items at year-end:

Cash in bank $20,000 Petty cash 300 Short-term paper with maturity of 2 months 5,500 Postdated checks 1,400

Horvath should report cash and cash equivalents of a. $20,000. b. $20,300. c. $25,800. d. $27,200.

52. Marshell Company has cash in bank of $15,000, restricted cash in a separate account of

$4,000, and a bank overdraft in an account at another bank of $2,000. Marshell should report cash of a. $13,000. b. $15,000. c. $18,000. d. $19,000.

53. Peterson Company has the following items at year-end:

Cash in bank $30,000 Petty cash 500 Short-term paper with maturity of 2 months 8,200 Postdated checks 2,100

Peterson should report cash and cash equivalents of a. $30,000. b. $30,500. c. $38,700. d. $40,800.

54. If a company purchases merchandise on terms of 1/10, n/30, the cash discount available

is equivalent to what effective annual rate of interest (assuming a 360-day year)? a. 1% b. 12% c. 18% d. 30%

55. At the close of its first year of operations, December 31, 2007, Linn Company had

accounts receivable of $540,000, after deducting the related allowance for doubtful accounts. During 2007, the company had charges to bad debt expense of $90,000 and wrote off, as uncollectible, accounts receivable of $40,000. What should the company report on its balance sheet at December 31, 2007, as accounts receivable before the allowance for doubtful accounts? a. $670,000 b. $590,000 c. $490,000 d. $440,000


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56. Before year-end adjusting entries, Bass Company's account balances at December 31, 2007, for accounts receivable and the related allowance for uncollectible accounts were $600,000 and $45,000, respectively. An aging of accounts receivable indicated that $62,500 of the December 31 receivables are expected to be uncollectible. The net realizable value of accounts receivable after adjustment is a. $582,500. b. $537,500. c. $492,500. d. $555,000.

57. During the year, Jantz Company made an entry to write off a $4,000 uncollectible account.

Before this entry was made, the balance in accounts receivable was $50,000 and the balance in the allowance account was $4,500. The net realizable value of accounts receivable after the write-off entry was a. $50,000. b. $49,500. c. $41,500. d. $45,500.

58. The following information is available for Reagan Company:

Allowance for doubtful accounts at December 31, 2006 $ 8,000 Credit sales during 2007 400,000 Accounts receivable deemed worthless and written off during 2007 9,000

As a result of a review and aging of accounts receivable in early January 2008, however, it has been determined that an allowance for doubtful accounts of $5,500 is needed at December 31, 2007. What amount should Reagan record as "bad debt expense" for the year ended December 31, 2007? a. $4,500 b. $5,500 c. $6,500 d. $13,500

Use the following information for questions 59 and 60. A trial balance before adjustments included the following: Debit Credit

Sales $425,000 Sales returns and allowance $14,000 Accounts receivable 43,000 Allowance for doubtful accounts 760

59. If the estimate of uncollectibles is made by taking 2% of net sales, the amount of the

adjustment is a. $6,700. b. $8,220. c. $8,500. d. $9,740.


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60. If the estimate of uncollectibles is made by taking 10% of gross account receivables, the amount of the adjustment is a. $3,540. b. $4,300. c. $4,224. d. $5,060.

61. Simpson Company has the following account balances at year-end:

Accounts receivable $60,000 Allowance for doubtful accounts 3,600 Sales discounts 2,400

Simpson should report accounts receivable at a net amount of a. $54,000. b. $56,400. c. $57,600. d. $60,000.

62. Holtzman Corporation had a 1/1/07 balance in the Allowance for Doubtful Accounts of

$10,000. During 2007, it wrote off $7,200 of accounts and collected $2,100 on accounts previously written off. The balance in Accounts Receivable was $200,000 at 1/1 and $240,000 at 12/31. At 12/31/07, Holtzman estimates that 5% of accounts receivable will prove to be uncollectible. What is Bad Debt Expense for 2007? a. $2,000. b. $7,100. c. $9,200. d. $12,000.

63. Rusch Corporation had a 1/1/07 balance in the Allowance for Doubtful Accounts of

$12,000. During 2007, it wrote off $8,640 of accounts and collected $2,520 on accounts previously written off. The balance in Accounts Receivable was $240,000 at 1/1 and $288,000 at 12/31. At 12/31/07, Rusch estimates that 5% of accounts receivable will prove to be uncollectible. What should Rusch report as its Allowance for Doubtful Accounts at 12/31/07? a. $5,760. b. $5,880. c. $8,280. d. $14,400.

64. Sandler Company has the following account balances at year-end:

Accounts receivable $80,000 Allowance for doubtful accounts 4,800 Sales discounts 3,200

Sandler should report accounts receivable at a net amount of a. $72,000. b. $75,200. c. $76,800. d. $80,000.


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65. Delgado Corporation had a 1/1/07 balance in the Allowance for Doubtful Accounts of $20,000. During 2007, it wrote off $14,400 of accounts and collected $4,200 on accounts previously written off. The balance in Accounts Receivable was $400,000 at 1/1 and $480,000 at 12/31. At 12/31/07, Delgado estimates that 5% of accounts receivable will prove to be uncollectible. What is Bad Debt Expense for 2007? a. $4,000. b. $14,200. c. $18,400. d. $24,000.

66. Burnett Corporation had a 1/1/07 balance in the Allowance for Doubtful Accounts of

$15,000. During 2007, it wrote off $10,800 of accounts and collected $3,150 on accounts previously written off. The balance in Accounts Receivable was $300,000 at 1/1 and $360,000 at 12/31. At 12/31/07, Burnett estimates that 5% of accounts receivable will prove to be uncollectible. What should Burnett report as its Allowance for Doubtful Accounts at 12/31/07? a. $7,200. b. $7,350. c. $10,350. d. $18,000.

67. Marley Company received a seven-year zero-interest-bearing note on February 22, 2007,

in exchange for property it sold to O’Rear Company. There was no established exchange price for this property and the note has no ready market. The prevailing rate of interest for a note of this type was 7% on February 22, 2007, 7.5% on December 31, 2007, 7.7% on February 22, 2008, and 8% on December 31, 2008. What interest rate should be used to calculate the interest revenue from this transaction for the years ended December 31, 2007 and 2008, respectively? a. 0% and 0% b. 7% and 7% c. 7% and 7.7% d. 7.5% and 8%

68. On December 31, 2007, Eller Corporation sold for $75,000 an old machine having an

original cost of $135,000 and a book value of $60,000. The terms of the sale were as follows:

$15,000 down payment $30,000 payable on December 31 each of the next two years

The agreement of sale made no mention of interest; however, 9% would be a fair rate for this type of transaction. What should be the amount of the notes receivable net of the unamortized discount on December 31, 2007 rounded to the nearest dollar? (The present value of an ordinary annuity of 1 at 9% for 2 years is 1.75911.) a. $52,773. b. $67,773. c. $60,000. d. $105,546.


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Use the following information for questions 69 and 70. Henry Co. assigned $400,000 of accounts receivable to Easy Finance Co. as security for a loan of $335,000. Easy charged a 2% commission on the amount of the loan; the interest rate on the note was 10%. During the first month, Henry collected $110,000 on assigned accounts after deducting $380 of discounts. Henry accepted returns worth $1,350 and wrote off assigned accounts totaling $2,980. 69. The amount of cash Henry received from Easy at the time of the transfer was

a. $301,500. b. $327,000. c. $328,300. d. $335,000.

70. Entries during the first month would include a

a. debit to Cash of $110,380. b. debit to Bad Debt Expense of $2,980. c. debit to Allowance for Doubtful Accounts of $2,980. d. debit to Accounts Receivable of $114,710.


On February 1, 2007, Norton Company factored receivables with a carrying amount of $300,000 to Koch Company. Koch Company assesses a finance charge of 3% of the receivables and retains 5% of the receivables. Relative to this transaction, you are to determine the amount of loss on sale to be reported in the income statement of Norton Company for February. 71. Assume that Norton factors the receivables on a without recourse basis. The loss to be

reported is a. $0. b. $9,000. c. $15,000. d. $24,000. 72. Assume that Norton factors the receivables on a with recourse basis. The recourse

obligation has a fair value of $1,500. The loss to be reported is a. $9,000. b. $10,500. c. $15,000. d. $25,500.

73. Joe Novak Corporation factored, with recourse, $100,000 of accounts receivable with

Huskie Financing. The finance charge is 3%, and 5% was retained to cover sales discounts, sales returns, and sales allowances. Joe Novak estimates the recourse obligation at $2,400. What amount should Joe Novak report as a loss on sale of receivables? a. $ -0-. b. $3,000. c. $5,400. d. $10,400.


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74. Mortonson Corporation factored, with recourse, $300,000 of accounts receivable with Huskie Financing. The finance charge is 3%, and 5% was retained to cover sales discounts, sales returns, and sales allowances. Mortonson estimates the recourse obligation at $7,200. What amount should Mortonson report as a loss on sale of receivables? a. $ -0-. b. $9,000. c. $16,200. d. $31,200.

75. Mike McKinney Corporation had accounts receivable of $100,000 at 1/1. The only

transactions affecting accounts receivable were sales of $600,000 and cash collections of $550,000. The accounts receivable turnover is a. 4.0. b. 4.4. c. 4.8. d. 6.0.

76. Nottingham Corporation had accounts receivable of $100,000 at 1/1. The only

transactions affecting accounts receivable were sales of $900,000 and cash collections of $850,000. The accounts receivable turnover is a. 6.0. b. 6.6. c. 7.2. d. 9.0.

*77. If a petty cash fund is established in the amount of $250, and contains $150 in cash and

$95 in receipts for disbursements when it is replenished, the journal entry to record replenishment should include credits to the following accounts a. Petty Cash, $75. b. Petty Cash, $100. c. Cash, $95; Cash Over and Short, $5. d. Cash, $100.

*78. If the month-end bank statement shows a balance of $36,000, outstanding checks are

$12,000, a deposit of $4,000 was in transit at month end, and a check for $500 was erroneously charged by the bank against the account, the correct balance in the bank account at month end is a. $27,500. b. $28,500. c. $20,500. d. $43,500.

*79. In preparing its bank reconciliation for the month of April 2007, Gregg, Inc. has available

the following information.

Balance per bank statement, 4/30/07 $39,140 NSF check returned with 4/30/07 bank statement 450 Deposits in transit, 4/30/07 5,000 Outstanding checks, 4/30/07 5,200 Bank service charges for April 20

What should be the correct balance of cash at April 30, 2007?


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a. $39,370 b. $38,940 c. $38,490 d. $38,470

*80. Tanner, Inc.’s checkbook balance on December 31, 2007 was $21,200. In addition,

Tanner held the following items in its safe on December 31.

(1) A check for $450 from Peters, Inc. received December 30, 2007, which was not included in the checkbook balance.

(2) An NSF check from Garner Company in the amount of $900 that had been deposited at the bank, but was returned for lack of sufficient funds on December 29. The check was to be redeposited on January 3, 2008. The original deposit has been included in the December 31 checkbook balance.

(3) Coin and currency on hand amounted to $1,450.

The proper amount to be reported on Tanner's balance sheet for cash at December 31, 2007 is a. $21,300. b. $20,400. c. $22,200. d. $21,750.

*81. The cash account shows a balance of $45,000 before reconciliation. The bank statement

does not include a deposit of $2,300 made on the last day of the month. The bank statement shows a collection by the bank of $940 and a customer's check for $320 was returned because it was NSF. A customer's check for $450 was recorded on the books as $540, and a check written for $79 was recorded as $97. The correct balance in the cash account was a. $45,512. b. $45,548. c. $45,728. d. $47,848.

*82. In preparing its May 31, 2007 bank reconciliation, Dogg Co. has the following information

available: Balance per bank statement, 5/31/07 $30,000 Deposit in transit, 5/31/07 5,400 Outstanding checks, 5/31/07 4,900 Note collected by bank in May 1,250

The correct balance of cash at May 31, 2007 is a. $35,400. b. $29,250. c. $30,500. d. $31,750.


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Multiple Choice Answers—Computational Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

49. d 54. c 59. b 64. b 69. c 74. c *79. b 50. b 55. b 60. a 65. b 70. c 75. c *80. c 51. c 56. b 61. b 66. d 71. b 76. c *81. b 52. b 57. d 62. b 67. b 72. b *77. d *82. c 53. c 58. c 63. d 68. a 73. c *78. b

MULTIPLE CHOICE—CPA Adapted 83. On the December 31, 2007 balance sheet of Yount Co., the current receivables consisted

of the following:

Trade accounts receivable $ 75,000 Allowance for uncollectible accounts (2,000) Claim against shipper for goods lost in transit (November 2007) 3,000 Selling price of unsold goods sent by Yount on consignment at 130% of cost (not included in Yount 's ending inventory) 26,000 Security deposit on lease of warehouse used for storing some inventories 30,000 Total $132,000

At December 31, 2007, the correct total of Yount 's current net receivables was a. $76,000. b. $102,000. c. $106,000. d. $132,000.

84. May Co. prepared an aging of its accounts receivable at December 31, 2007 and

determined that the net realizable value of the receivables was $300,000. Additional information is available as follows:

Allowance for uncollectible accounts at 1/1/07—credit balance $ 34,000 Accounts written off as uncollectible during 2007 23,000 Accounts receivable at 12/31/07 325,000 Uncollectible accounts recovered during 2007 5,000

For the year ended December 31, 2007, May's uncollectible accounts expense would be a. $25,000. b. $23,000. c. $16,000. d. $9,000.

85. For the year ended December 31, 2007, Colt Co. estimated its allowance for uncollectible

accounts using the year-end aging of accounts receivable. The following data are available:

Allowance for uncollectible accounts, 1/1/07 $56,000 Provision for uncollectible accounts during 2007 (2% on credit sales of $2,000,000) 40,000 Uncollectible accounts written off, 11/30/07 46,000 Estimated uncollectible accounts per aging, 12/31/07 69,000


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After year-end adjustment, the uncollectible accounts expense for 2007 should be a. $46,000. b. $62,000. c. $69,000. d. $59,000.

86. King Co.'s allowance for uncollectible accounts was $95,000 at the end of 2007 and

$90,000 at the end of 2006. For the year ended December 31, 2007, King reported bad debt expense of $13,000 in its income statement. What amount did King debit to the appropriate account in 2007 to write off actual bad debts? a. $5,000 b. $8,000 c. $13,000 d. $18,000

87. Under the allowance method of recognizing uncollectible accounts, the entry to write off

an uncollectible account a. increases the allowance for uncollectible accounts. b. has no effect on the allowance for uncollectible accounts. c. has no effect on net income. d. decreases net income.

88. The following accounts were abstracted from Todd Co.'s unadjusted trial balance at

December 31, 2007: Debit Credit Accounts receivable $750,000 Allowance for uncollectible accounts 8,000 Net credit sales $3,000,000

Todd estimates that 2% of the gross accounts receivable will become uncollectible. After adjustment at December 31, 2007, the allowance for uncollectible accounts should have a credit balance of a. $60,000. b. $52,000. c. $23,000. d. $15,000.

89. On January 1, 2006, Marr Co. exchanged equipment for a $400,000 zero-interest-bearing

note due on January 1, 2009. The prevailing rate of interest for a note of this type at January 1, 2006 was 10%. The present value of $1 at 10% for three periods is 0.75. What amount of interest revenue should be included in Marr's 2007 income statement? a. $0 b. $30,000 c. $33,000 d. $40,000


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90. On June 1, 2007, Watt Corp. loaned Hall $300,000 on a 12% note, payable in five annual installments of $60,000 beginning January 2, 2008. In connection with this loan, Hall was required to deposit $3,000 in a zero-interest-bearing escrow account. The amount held in escrow is to be returned to Hall after all principal and interest payments have been made. Interest on the note is payable on the first day of each month beginning July 1, 2007. Hall made timely payments through November 1, 2007. On January 2, 2008, Watt received payment of the first principal installment plus all interest due. At December 31, 2007, Watt's interest receivable on the loan to Hall should be a. $0. b. $3,000. c. $6,000. d. $9,000.

91. Which of the following is a method to generate cash from accounts receivable?

Assignment Factoring a. Yes No b. Yes Yes c. No Yes d. No No

*92. In preparing its August 31, 2007 bank reconciliation, Adel Corp. has available the follow-

ing information:

Balance per bank statement, 8/31/07 $21,650 Deposit in transit, 8/31/07 3,900 Return of customer's check for insufficient funds, 8/30/07 600 Outstanding checks, 8/31/07 2,750 Bank service charges for August 100

At August 31, 2007, Adel's correct cash balance is a. $22,800. b. $22,200. c. $22,100. d. $20,500.

*93. Sandy, Inc. had the following bank reconciliation at March 31, 2007:

Balance per bank statement, 3/31/07 $37,200 Add: Deposit in transit 10,300 47,500 Less: Outstanding checks 12,600 Balance per books, 3/31/07 $34,900

Data per bank for the month of April 2007 follow: Deposits $46,700 Disbursements 49,700

All reconciling items at March 31, 2007 cleared the bank in April. Outstanding checks at April 30, 2007 totaled $6,000. There were no deposits in transit at April 30, 2007. What is the cash balance per books at April 30, 2007? a. $28,200 b. $31,900 c. $34,200 d. $38,500


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Multiple Choice Answers—CPA Adapted Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

83. a 85. d 87. c 89. c 91. b *93. a 84. d 86. b 88. d 90. c *92. a

DERIVATIONS — Computational No. Answer Derivation 49. d $2,000,000 × .11 = $220,000 $200,000 × (.11 – .05) = 12,000 Interest $232,000

$232,000 ÷ $2,000,000 = .116 = 11.6%. 50. b 51. c $20,000 + $300 + $5,500 = $25,800. 52. b 53. c $30,000 + $500 + $8,200 = $38,700. 54. c .01 × 360 ÷ 20 = 18%. 55. b $540,000 + ($90,000 – $40,000) = $590,000. 56. b $600,000 – $62,500 = $537,500. 57. d ($50,000 – $4,000) – ($4,500 – $4,000) = $45,500. 58. c $8,000 – $9,000 + X = $5,500; X = $6,500 59. b ($425,000 – $14,000) × .02 = $8,220. 60. a ($43,000 × .10) – $760 = $3,540. 61. b $60,000 – $3,600 = $56,400. 62. b ($24,000 × .05) – [$10,000 – ($7,200 – $2,100)] = $7,100. 63. d $288,000 × .05 = $14,400. 64. b $80,000 – $4,800 = $75,200. 65. b $480,000 × .05 – [$20,000 – ($14,400 – $4,200)] = $14,200 66. d $360,000 × .05 = $18,000.


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DERIVATIONS — Computational (cont.) No. Answer Derivation 67. b 7% and 7%. 68. a $30,000 × 1.75911 = $52,773. 69. c $335,000 – $6,700 = $328,300. 70. c 71. b $300,000 × .03 = $9,000. 72. b ($300,000 × .03) + $1,500 = $10,500. 73. c ($100,000 × .03) + $2,400 = $5,400. 74. c ($300,000 × .03) + $7,200 = $16,200. 75. c $600,000 ÷ [($100,000 + $150,000) ÷ 2] = 4.8 76. c $900,000 ÷ [($100,000 + $150,000) ÷ 2] = 7.2 *77. d $250 – $150 = $100. *78. b $36,000 – $12,000 + $4,000 + $500 = $28,500. *79. b $39,140 + $5,000 – $5,200 = $38,940. *80. c $21,200 + $450 – $900 + $1,450 = $22,200. *81. b $45,000 + $940 – $320 – $90 + $18 = $45,548. *82. c $30,000 + $5,400 – $4,900 = $30,500.

DERIVATIONS — CPA Adapted No. Answer Derivation 83. a $75,000 – $2,000 + $3,000 = $76,000. 84. d Allowance for Doubtful Acct. balance $34,000 + $5,000 – $23,000 = $16,000 (before bad debt expense) $325,000 – $300,000 – $16,000 = $9,000 (bad debt expense). 85. d $69,000 – $56,000 + $46,000 = $59,000. 86. b $90,000 + $13,000 – $95,000 = $8,000. 87. c Conceptual.


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DERIVATIONS — CPA Adapted (cont.) No. Answer Derivation 88. d $750,000 × .02 = $15,000. 89. c $400,000 × .75 = $300,000 present value $300,000 × .10 = $30,000 (2006 interest) ($300,000 + $30,000) × .10 = $33,000 (2007 interest). 90. c $300,000 × 12% × 2 ÷ 12 = $6,000. 91. b Conceptual. *92. a $21,650 + $3,900 – $2,750 = $22,800. *93. a $37,200 + $46,700 – $49,700 = $34,200 (4/30 balance per bank) $34,200 – $6,000 = $28,200.

EXERCISES Ex. 7-94—Asset classification.

Below is a list of items. Classify each into one of the following balance sheet categories: a. Cash c. Short-term Investments b. Receivables d. Other ___ 1. Compensating balances held in long-term borrowing arrangements ___ 2. Savings account ___ 3. Trust fund ___ 4. Checking account ___ 5. Postage stamps ___ 6. Treasury bills maturing in six months ___ 7. Post-dated checks from customers ___ 8. Certificate of deposit maturing in five years ___ 9. Common stock of another company (to be sold by December 31, this year) ___ 10. Change fund


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Solution 7-94 1. d 3. d 5. d 7. b 9. c 2. a 4. a 6. c 8. d 10. a Ex. 7-95—Allowance for doubtful accounts.

When a company has a policy of making sales for which credit is extended, it is reasonable to expect a portion of those sales to be uncollectible. As a result of this, a company must recognize bad debt expense. There are basically two methods of recognizing bad debt expense: (1) direct write-off method, and (2) allowance method. Instructions (a) Describe fully both the direct write-off method and the allowance method of recognizing bad

debt expense.

(b) Discuss the reasons why one of the above methods is preferable to the other and the reasons why the other method is not usually in accordance with generally accepted accounting principles.

Solution 7-95 (a) There are basically two methods of recognizing bad debt expense: (1) direct write-off and (2)

allowance.

The direct write-off method requires the identification of specific balances that are deemed to be uncollectible before any bad debt expense is recognized. At the time a specific account is deemed uncollectible, the account is removed from accounts receivable and a corresponding amount of bad debt expense is recognized. The allowance method requires an estimate of bad debt expense for a period of time by reference to the composition of the accounts receivable balance at a specific point in time (aging) or to the overall experience with credit sales over a period of time. Thus, total bad debt expense expected to arise as a result of operations for a specific period is estimated, the valuation account (allowance for doubtful accounts) is appropriately adjusted, and a corresponding amount of bad debt expense is recognized. As specific accounts are identified as uncollectible, the account is written off. It is removed from accounts receivable and a corresponding amount is removed from the valuation account (allowance for doubtful accounts). Net accounts receivable do not change, and there is no charge to bad debt expense when specific accounts are identified as uncollectible and written off using the allowance method.

(b) The allowance method is preferable because it matches the cost of making a credit sale with

the revenues generated by the sale in the same period and achieves a proper carrying value for accounts receivable at the end of a period. Since the direct write-off method does not recognize the bad debt expense until a specific amount is deemed uncollectible, which may be in a subsequent period, it does not comply with the matching principle and does not achieve a proper carrying value for accounts receivable at the end of a period.


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Ex. 7-96—Entries for bad debt expense.

A trial balance before adjustment included the following: Debit Credit Accounts receivable $80,000 Allowance for doubtful accounts 730 Sales $340,000 Sales returns and allowances 8,000 Give journal entries assuming that the estimate of uncollectibles is determined by taking (1) 5% of gross accounts receivable and (2) 1% of net sales. Solution 7-96 (1) Bad Debt Expense .............................................................. 3,270 Allowance for Doubtful Accounts ............................. 3,270 Gross receivables $80,000 Rate 5% Total allowance needed 4,000 Present allowance (730) Adjustment needed $ 3,270

(2) Bad Debt Expense .............................................................. 3,320 Allowance for Doubtful Accounts ............................. 3,320

Sales $340,000 Sales returns and allowances 8,000 Net sales 332,000 Rate 1% Bad debt expense $ 3,320

Ex. 7-97—Accounts receivable assigned.

Accounts receivable in the amount of $250,000 were assigned to the Fast Finance Company by Nance, Inc., as security for a loan of $200,000. The finance company charged a 4% commission on the face amount of the loan, and the note bears interest at 9% per year. During the first month, Nance collected $130,000 on assigned accounts. This amount was remitted to the finance company along with one month's interest on the note. Instructions Make all the entries for Nance Inc. associated with the transfer of the accounts receivable, the loan, and the remittance to the finance company.


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Solution 7-97 Cash ................................................................................................. 192,000 Finance Charge ................................................................................ 8,000 Notes Payable ...................................................................... 200,000 Cash ................................................................................................. 130,000 Accounts Receivable ............................................................ 130,000 Notes Payable .................................................................................. 130,000 Interest Expense .............................................................................. 1,500 Cash ..................................................................................... 131,500

PROBLEMS Pr. 7-98—Entries for bad debt expense.

The trial balance before adjustment of Pratt Company reports the following balances:

Dr. Cr. Accounts receivable $100,000 Allowance for doubtful accounts $ 2,500 Sales (all on credit) 750,000 Sales returns and allowances 40,000

Instructions (a) Prepare the entries for estimated bad debts assuming that doubtful accounts are estimated

to be (1) 6% of gross accounts receivable and (2) 1% of net sales.

(b) Assume that all the information above is the same, except that the Allowance for Doubtful Accounts has a debit balance of $2,500 instead of a credit balance. How will this difference affect the journal entries in part (a)?

Solution 7-98 (a) (1) Bad Debt Expense .......................................................... 3,500 Allowance for Doubtful Accounts ........................ 3,500 Gross receivables $100,000 Rate 6% Total allowance needed 6,000 Present allowance (2,500) Bad debt expense $ 3,500 (2) Bad Debt Expense .......................................................... 7,100 Allowance for Doubtful Accounts ........................ 7,100 Sales $750,000 Sales returns and allowances (40,000) Net sales 710,000 Rate 1% Bad debt expense $ 7,100


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Solution 7-98 (cont.) (b) The percentage of receivables approach would be affected as follows: Gross receivables $100,000 Rate 6% Total allowance needed 6,000 Present allowance 2,500 Additional amount required $ 8,500 The journal entry is therefore as follows: Bad Debt Expense ......................................................... 8,500 Allowance for Doubtful Accounts ........................ 8,500 The entry would not change under the percentage of sales method. Pr. 7-99—Amortization of discount on note.

On December 31, 2007, Brown Company finished consultation services and accepted in exchange a promissory note with a face value of $400,000, a due date of December 31, 2010, and a stated rate of 5%, with interest receivable at the end of each year. The fair value of the services is not readily determinable and the note is not readily marketable. Under the circumstances, the note is considered to have an appropriate imputed rate of interest of 10%. The following interest factors are provided: Interest Rate Table Factors For Three Periods 5% 10% Future Value of 1 1.15763 1.33100 Present Value of 1 .86384 .75132 Future Value of Ordinary Annuity of 1 3.15250 3.31000 Present Value of Ordinary Annuity of 1 2.72325 2.48685 Instructions (a) Determine the present value of the note. (b) Prepare a Schedule of Note Discount Amortization for Brown Company under the effective

interest method. (Round to whole dollars.) Solution 7-99 (a) Present value of interest = $20,000 × 2.48685 = $ 49,737 Present value of maturity value = $400,000 × .75132 = 300,528 $350,265


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Solution 7-99 (cont.) (b) Brown Company

Schedule of Note Discount Amortization Effective Interest Method

5% Note Discounted at 10% (Imputed) Cash Effective Unamortized Present Interest Interest Discount Discount Value Date (5%) (10%) Amortized Balance of Note

12/31/07 $49,735 $350,265 12/31/08 $20,000 $ 35,027 $15,027 34,708 365,292 12/31/09 20,000 36,529 16,529 18,179 381,821 12/31/10 20,000 38,179* 18,179 0 400,000 $60,000 $109,735 $49,735 *$3 adjustment to compensate for rounding. Pr. 7-100—Accounts receivable assigned.

Prepare journal entries for Lott Co. for: (a) Accounts receivable in the amount of $500,000 were assigned to Vance Finance Co. by Lott

as security for a loan of $425,000. Vance charged a 3% commission on the accounts; the interest rate on the note is 12%.

(b) During the first month, Lott collected $200,000 on assigned accounts after deducting $450 of discounts. Lott wrote off a $530 assigned account.

(c) Lott paid to Vance the amount collected plus one month's interest on the note. Solution 7-100 (a) Cash ......................................................................................... 410,000 Finance Charge .......................................................................... 15,000 Notes Payable ................................................................ 425,000 (b) Cash ......................................................................................... 200,000 Sales Discounts .......................................................................... 450 Allowance for Doubtful Accounts ................................................ 530 Accounts Receivable ...................................................... 200,980 (c) Notes Payable ............................................................................ 200,000 Interest Expense ........................................................................ 4,250 Cash ............................................................................... 204,250


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Pr. 7-101—Factoring Accounts Receivable.

On May 1, Carter, Inc. factored $800,000 of accounts receivable with Rapid Finance on a without recourse basis. Under the arrangement, Carter was to handle disputes concerning service, and Rapid Finance was to make the collections, handle the sales discounts, and absorb the credit losses. Rapid Finance assessed a finance charge of 6% of the total accounts receivable factored and retained an amount equal to 2% of the total receivables to cover sales discounts. Instructions (a) Prepare the journal entry required on Carter 's books on May 1.

(b) Prepare the journal entry required on Rapid Finance’s books on May 1.

(c) Assume Carter factors the $800,000 of accounts receivable with Rapid Finance on a with recourse basis instead. The recourse provision has a fair value of $14,000. Prepare the journal entry required on Carter’s books on May 1.

Solution 7-101 (a) Cash ............................................................................................... 736,000 Due from Factor (2% × $800,000) .................................................. 16,000 Loss on Sale of Receivables (6% × $800,000) ............................... 48,000 Accounts Receivable ...................................................... 800,000 (b) Accounts Receivable ...................................................................... 800,000 Due to Dexter ....................................................................... 16,000 Financing Revenue .............................................................. 48,000 Cash ..................................................................................... 736,000 (c) Cash ............................................................................................... 736,000 Due from Factor ............................................................................ 16,000 Loss on Sale of Receivables .......................................................... 62,000 Accounts Receivable ............................................................ 800,000 Recourse Liability ................................................................. 14,000 *Pr. 7-102—Bank reconciliation.

Adcock Plastics Company deposits all receipts and makes all payments by check. The following information is available from the cash records:

MARCH 31 BANK RECONCILIATION

Balance per bank $26,746 Add: Deposits in transit 2,100 Deduct: Outstanding checks (3,800) Balance per books $25,046


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*Pr. 7-102 (cont.).

Month of April Results Per Bank Per Books

Balance April 30 $27,995 $28,855 April deposits 10,784 13,889 April checks 11,600 10,080 April note collected (not included in April deposits) 3,000 -0- April bank service charge 35 -0- April NSF check of a customer returned by the bank (recorded by bank as a charge) 900 -0-

Instructions (a) Calculate the amount of the April 30: 1. Deposits in transit 2. Outstanding checks (b) What is the April 30 adjusted cash balance? Show all work. *Solution 7-102 (a) 1. Deposits in transit, $5,205 [$13,889 – ($10,784 – $2,100)] 2. Outstanding checks, $2,280 [$10,080 – ($11,600 – $3,800)] (b) Adjusted cash balance at April 30, $30,920 ($27,995 + $5,205 – $2,280) OR ($28,855 + $3,000 – $35 – $900)

CHAPTER 15

STOCKHOLDERS’ EQUITY

TRUE-FALSE—Conceptual Answer No. Description T 1. State a corporation incorporates in. F 2. Definition of preemptive right. T 3. Common stock as residual interest. F 4. Earned capital definition. T 5. Reporting true no-par stock. F 6. Allocating proceeds in lump sum sales. T 7. Accounting for stock issued for noncash consideration. F 8. Definition of treasury stock. F 9. Reporting treasury stock under cost method. T 10. Selling treasury stock below cost. F 11. Participating preferred stock. T 12. Callable preferred stock. T 13. Restricting legal capital. F 14. Disclosing dividend policy. F 15. Affect of dividends on total stockholders’ equity. T 16. Property dividends definition. T 17. Accounting for small stock dividend. F 18. Stock splits and large stock dividends. F 19. Computing rate of return on common stock equity. T 20. Computing payout ratio.

MULTIPLE CHOICE—Conceptual Answer No. Description c 21. Nature of stockholders' interest. b 22. Pre-emptive right. a 23. Pre-emptive right. b S24. Definition of legal capital. c S25. Definition of residual owner. c 26. Nature of stockholders' equity. d 27. Sources of stockholders' equity. d 28. Classification of stockholders' equity. d 29. Allocation methods for a lump sum issuance. b 30. Capital stock issued in payment of services. a 31. Costs of issuing capital stock. b 32. Creation of "secret reserves." a P33. Authorized shares. d S34. Par value stock. b S35. Legal restrictions for profit distributions. a S36. Acquisition of treasury shares. d P37. Treasury shares definition. c 38. Purchase of treasury stock at greater than par value.


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MULTIPLE CHOICE—Conceptual (cont.) Answer No. Description a 39. Sale of treasury stock. a 40. Reissued treasury stock at less than acquisition cost. b 41. Reissued treasury stock at greater than acquisition cost. c 42. Effect of treasury stock transactions. c 43. Preferred stock—debt features. b 44. Cumulative feature of preferred stock. b P45. Reporting redeemable stock. c S46. Reporting dividends in arrears. c 47. Issued vs. outstanding common stock. b 48. Timing of entry to record dividends. c 49. Shares entitled to receive a cash dividend. c 50. Accounting for a property dividend. a 51. Distribution of a property dividend. a 52. Liquidating dividend. b 53. Entry to record a liquidating dividend. b 54. Effects of a stock dividend. b 55. Effects of a stock dividend. b 56. Effect of a large stock dividend. b 57. Large stock dividend. a 58. Small stock dividend. a 59. Small stock dividend. b 60. Classification of stock dividends distributable. b 61. Effect of stock splits and stock dividends. c 62. Effect of a stock split. b 63. Disclosures in the balance sheet. a 64. Return on common stock equity calculation. b 65. Payout ratio calculation. c 66. Book value per share. a P67. Computing book value per share. c *68. Dividends and treasury stock. a *69. Noncumulative preferred stock and dividends in arrears. a *70. Disclosure of preferred dividends in arrears. P These questions also appear in the Problem-Solving Survival Guide. S These questions also appear in the Study Guide. *This topic is dealt with in an Appendix to the chapter.

MULTIPLE CHOICE—Computational Answer No. Description a 71. Composition of stockholders' equity. b 72. Calculation of total paid-in capital. b 73. Allocating proceeds in lump sum sales. c 74. Allocating proceeds in lump sum sales. d 75. Computing total paid-in capital. d 76. Computing paid-in capital from treasury stock transactions. d 77. Recording purchase of treasury stock.

Stockholders’ Equity

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MULTIPLE CHOICE—Computational (cont.) Answer No. Description b 78. Reissue treasury stock—above acquisition cost. c 79. Reissue treasury stock—cost method. c 80. Additional paid-in capital with treasury stock transactions. d 81. Calculation of additional paid-in capital. c 82. Calculation of additional paid-in capital. a 83. Total stockholders' equity with treasury stock transactions. c 84. Total stockholders' equity with treasury stock exchange. b 85. Reduction in retained earnings caused by a property dividend. d 86. Reduction in retained earnings from property dividends. d 87. Reduction in retained earnings from property dividends. a 88. Decrease in retained earnings from cash and stock dividends. c 89. Calculation of a large stock dividend. a 90. Calculation of a small stock dividend. b 91. Calculation of a small stock dividend. b 92. Small stock dividend's effect on retained earnings. b 93. Balance of retained earnings after a small stock dividend. a 94. Calculate dividends paid to common stockholders. b 95. Rate of return on common stock equity. c 96. Determine the rate of return on common stock equity. a 97. Determine book value per share. b 98. Computation of payout ratio. b 99. Computation of book value per share. b *100. Allocation of cash dividend to common and preferred shares. d *101. Cash dividends for cumulative preferred shares. b *102. Cash dividends for cumulative participating preferred shares. c *103. Cash dividend allocation with participating preferred shares. b *104. Cash dividend for cumulative preferred shares.

MULTIPLE CHOICE—CPA Adapted Answer No. Description d 105. Capital stock issued in payment of services. b 106. Proceeds from preferred stock in lump sum issue. c 107. Determine paid-in capital from treasury stock. b 108. Reissue treasury stock—cost method. c 109. Effect of the reissuance of treasury stock. d 110. Entry to record property dividends declared. b 111. Effect of a liquidating dividend. d 112. Effect of a stock dividend. d 113. Stock dividend when market price exceeds par value. a 114. Balance of retained earnings following stock dividend. c *115. Allocation of cash dividend to common and preferred shares.


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EXERCISES Item Description E15-116 Lump sum issuance of stock. E15-117 Treasury stock. E15-118 Treasury stock. E15-119 Treasury stock. E15-120 Treasury stock. E15-121 Stockholders’ equity. E15-122 Stock dividends. E15-123 Stock dividends and stock splits. E15-124 Computation of selected ratios. *E15-125 Dividends on preferred stock. *E15-126 Dividends on preferred stock.

PROBLEMS Item Description P15-127 Equity transactions. P15-128 Treasury stock transactions. P15-129 Stock dividends. P15-130 Equity transactions. *P15-131 Dividends on preferred and common stock.

CHAPTER LEARNING OBJECTIVES 1. Discuss the characteristics of the corporate form of organization. 2. Identify the key components of stockholders' equity. 3. Explain the accounting procedures for issuing shares of stock. 4. Describe the accounting for treasury stock. 5. Explain the accounting for and reporting of preferred stock. 6. Describe the policies used in distributing dividends. 7. Identify the various forms of dividend distributions. 8. Explain the accounting for small and large stock dividends, and for stock splits. 9. Indicate how to present and analyze stockholders’ equity. *10. Explain the different types of preferred stock dividends and their effect on book value per

share.


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1. TF 2. TF 3. TF 21. MC 22. MC 23. MC S24. MC Learning Objective 2

4. TF S25. MC 26. MC 27. MC 28. MC Learning Objective 3

5. TF 29. MC 32. MC S35. MC 73. MC 105. MC 127. P 6. TF 30. MC P33. MC 71. MC 74. MC 106. MC 7. TF 31. MC S34. MC 72. MC 75. MC 116. E

Learning Objective 4 8. TF P37. MC 41. MC 78. MC 82. MC 108. MC 119. E 9. TF 38. MC 42. MC 79. MC 83. MC 109. MC 120. E

10. TF 39. MC 76. MC 80. MC 84. MC 117. E 128. P S36. MC 40. MC 77. MC 81. MC 107. MC 118. E

Learning Objective 5 11. TF 12. TF 43. MC 44. MC P45. MC S46. MC

Learning Objective 6 13. TF 14. TF

Learning Objective 7 15. TF 48. MC 51. MC 54. MC 86. MC 111. MC 130. P 16. TF 49. MC 52. MC 55. MC 87. MC 121. E 47. MC 50. MC 53. MC 85. MC 110. MC 129. P

Learning Objective 8 17. TF 58. MC 62. MC 91. MC 113. MC 129. P 18. TF 59. MC 88. MC 92. MC 114. MC 130. P 56. MC 60. MC 89. MC 93. MC 122. E 57. MC 61. MC 90. MC 112. MC 123. E

Learning Objective 9 19. TF 63. MC 65. MC P67. MC 95. MC 97. MC 99. MC 20. TF 64. MC 66. MC 94. MC 96. MC 98. MC 124. E

Learning Objective *10 68. MC 70. MC 101. MC 103. MC 115. MC 126. E 69. MC 100. MC 102. MC 104. MC 125. E 131. P

Note: TF = True-False MC = Multiple Choice E = Exercise P = Problem


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TRUE-FALSE—Conceptual 1. A corporation is incorporated in only one state regardless of the number of states in which

it operates. 2, The preemptive right allows stockholders the right to vote for directors of the company. 3. Common stock is the residual corporate interest that bears the ultimate risks of loss. 4. Earned capital consists of additional paid-in capital and retained earnings. 5. True no-par stock should be carried in the accounts at issue price without any additional

paid-in capital reported. 6. Companies allocate the proceeds received from a lump-sum sale of securities based on

the securities’ par values. 7. Companies should record stock issued for services or noncash property at either the fair

value of the stock issued or the fair value of the consideration received. 8. Treasury stock is a company’s own stock that has been reacquired and retired. 9. The cost method records all transactions in treasury shares at their cost and reports the

treasury stock as a deduction from capital stock. 10. When a corporation sells treasury stock below its cost, it usually debits the difference

between cost and selling price to Paid-in Capital from Treasury Stock. 11. Participating preferred stock requires that if a company fails to pay a dividend in any year,

it must make it up in a later year before paying any common dividends. 12. Callable preferred stock permits the corporation at its option to redeem the outstanding

preferred shares at stipulated prices. 13. The laws of some states require that corporations restrict their legal capital from

distribution to stockholders. 14. The SEC requires companies to disclose their dividend policy in their annual report. 15. All dividends, except for liquidating dividends, reduce the total stockholders’ equity of a

corporation. 16. Dividends payable in assets of the corporation other than cash are called property

dividends or dividends in kind. 17. When a stock dividend is less than 20-25 percent of the common stock outstanding, a

company is required to transfer the fair market value of the stock issued from retained earnings.

18. Stock splits and large stock dividends have the same effect on a company’s retained

earnings and total stockholders’ equity.


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19. The rate of return on common stock equity is computed by dividing net income by the average common stockholders’ equity.

20. The payout ratio is determined by dividing cash dividends paid to common stockholders

by net income available to common stockholders. True-False Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. 1. T 6. F 11. F 16. T 2. F 7. T 12. T 17. T 3. T 8. F 13. T 18. F 4. F 9. F 14. F 19. F 5. T 10. T 15. F 20. T

MULTIPLE CHOICE—Conceptual 21. The residual interest in a corporation belongs to the

a. management. b. creditors. c. common stockholders. d. preferred stockholders.

22. The pre-emptive right of a common stockholder is the right to

a. share proportionately in corporate assets upon liquidation. b. share proportionately in any new issues of stock of the same class. c. receive cash dividends before they are distributed to preferred stockholders. d. exclude preferred stockholders from voting rights.

23. The pre-emptive right enables a stockholder to

a. share proportionately in any new issues of stock of the same class. b. receive cash dividends before other classes of stock without the pre-emptive right. c. sell capital stock back to the corporation at the option of the stockholder. d. receive the same amount of dividends on a percentage basis as the preferred

stockholders. S24. In a corporate form of business organization, legal capital is best defined as

a. the amount of capital the state of incorporation allows the company to accumulate over its existence.

b. the par value of all capital stock issued. c. the amount of capital the federal government allows a corporation to generate. d. the total capital raised by a corporation within the limits set by the Securities and

Exchange Commission.


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S25. Stockholders of a business enterprise are said to be the residual owners. The term residual owner means that shareholders a. are entitled to a dividend every year in which the business earns a profit. b. have the rights to specific assets of the business. c. bear the ultimate risks and uncertainties and receive the benefits of enterprise

ownership. d. can negotiate individual contracts on behalf of the enterprise.

26. Total stockholders' equity represents

a. a claim to specific assets contributed by the owners. b. the maximum amount that can be borrowed by the enterprise. c. a claim against a portion of the total assets of an enterprise. d. only the amount of earnings that have been retained in the business.

27. A primary source of stockholders' equity is

a. income retained by the corporation. b. appropriated retained earnings. c. contributions by stockholders. d. both income retained by the corporation and contributions by stockholders.

28. Stockholders' equity is generally classified into two major categories:

a. contributed capital and appropriated capital. b. appropriated capital and retained earnings. c. retained earnings and unappropriated capital. d. earned capital and contributed capital.

29. The accounting problem in a lump sum issuance is the allocation of proceeds between the

classes of securities. An acceptable method of allocation is the a. pro forma method. b. proportional method. c. incremental method. d. either the proportional method or the incremental method.

30. When a corporation issues its capital stock in payment for services, the least appropriate

basis for recording the transaction is the a. market value of the services received. b. par value of the shares issued. c. market value of the shares issued. d. Any of these provides an appropriate basis for recording the transaction.

31. Direct costs incurred to sell stock such as underwriting costs should be accounted for as

1. a reduction of additional paid-in capital. 2. an expense of the period in which the stock is issued. 3. an intangible asset.

a. 1 b. 2 c. 3 d. 1 or 3


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32. A "secret reserve" will be created if a. inadequate depreciation is charged to income. b. a capital expenditure is charged to expense. c. liabilities are understated. d. stockholders' equity is overstated.

P33. Which of the following represents the total number of shares that a corporation may issue

under the terms of its charter? a. authorized shares b. issued shares c. unissued shares d. outstanding shares

S34. Stock that has a fixed per-share amount printed on each stock certificate is called

a. stated value stock. b. fixed value stock. c. uniform value stock. d. par value stock.

S35. Which of the following is not a legal restriction related to profit distributions by a

corporation? a. The amount distributed to owners must be in compliance with the state laws governing

corporations. b. The amount distributed in any one year can never exceed the net income reported for

that year. c. Profit distributions must be formally approved by the board of directors. d. Dividends must be in full agreement with the capital stock contracts as to preferences

and participation. S36. In January 2007, Castro Corporation, a newly formed company, issued 10,000 shares of

its $10 par common stock for $15 per share. On July 1, 2007, Castro Corporation reacquired 1,000 shares of its outstanding stock for $12 per share. The acquisition of these treasury shares a. decreased total stockholders' equity. b. increased total stockholders' equity. c. did not change total stockholders' equity. d. decreased the number of issued shares.

P37. Treasury shares are

a. shares held as an investment by the treasurer of the corporation. b. shares held as an investment of the corporation. c. issued and outstanding shares. d. issued but not outstanding shares.

38. When treasury stock is purchased for more than the par value of the stock and the cost

method is used to account for treasury stock, what account(s) should be debited? a. Treasury stock for the par value and paid-in capital in excess of par for the excess of

the purchase price over the par value. b. Paid-in capital in excess of par for the purchase price. c. Treasury stock for the purchase price. d. Treasury stock for the par value and retained earnings for the excess of the purchase

price over the par value.


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39. “Gains" on sales of treasury stock (using the cost method) should be credited to a. paid-in capital from treasury stock. b. capital stock. c. retained earnings. d. other income.

40. Wilson Corp. purchased its own par value stock on January 1, 2007 for $20,000 and

debited the treasury stock account for the purchase price. The stock was subsequently sold for $12,000. The $8,000 difference between the cost and sales price should be recorded as a deduction from a. additional paid-in capital to the extent that previous net "gains" from sales of the same

class of stock are included therein; otherwise, from retained earnings. b. additional paid-in capital without regard as to whether or not there have been previous

net "gains" from sales of the same class of stock included therein. c. retained earnings. d. net income.

41. How should a "gain" from the sale of treasury stock be reflected when using the cost

method of recording treasury stock transactions? a. As ordinary earnings shown on the income statement. b. As paid-in capital from treasury stock transactions. c. As an increase in the amount shown for common stock. d. As an extraordinary item shown on the income statement.

42. Which of the following best describes a possible result of treasury stock transactions by a

corporation? a. May increase but not decrease retained earnings. b. May increase net income if the cost method is used. c. May decrease but not increase retained earnings. d. May decrease but not increase net income.

43. Which of the following features of preferred stock makes the security more like debt than

an equity instrument? a. Participating b. Voting c. Redeemable d. Noncumulative

44. The cumulative feature of preferred stock

a. limits the amount of cumulative dividends to the par value of the preferred stock. b. requires that dividends not paid in any year must be made up in a later year before

dividends are distributed to common shareholders. c. means that the shareholder can accumulate preferred stock until it is equal to the par

value of common stock at which time it can be converted into common stock. d. enables a preferred stockholder to accumulate dividends until they equal the par value

of the stock and receive the stock in place of the cash dividends. P45. According to the FASB, redeemable preferred stock should be

a. included with common stock. b. included as a liability. c. excluded from the stockholders’ equity heading. d. included as a contra item in stockholders' equity.


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S46. Cumulative preferred dividends in arrears should be shown in a corporation's balance sheet as a. an increase in current liabilities. b. an increase in stockholders' equity. c. a footnote. d. an increase in current liabilities for the current portion and long-term liabilities for the

long-term portion. 47. At the date of the financial statements, common stock shares issued would exceed

common stock shares outstanding as a result of the a. declaration of a stock split. b. declaration of a stock dividend. c. purchase of treasury stock. d. payment in full of subscribed stock.

48. An entry is not made on the

a. date of declaration. b. date of record. c. date of payment. d. An entry is made on all of these dates.

49. Cash dividends are paid on the basis of the number of shares

a. authorized. b. issued. c. outstanding. d. outstanding less the number of treasury shares.

50. Which of the following statements about property dividends is not true?

a. A property dividend is usually in the form of securities of other companies. b. A property dividend is also called a dividend in kind. c. The accounting for a property dividend should be based on the carrying value (book

value) of the nonmonetary assets transferred. d. All of these statements are true.

51. Farmer Corporation owns 4,000,000 shares of stock in Baha Corporation. On December

31, 2007, Farmer distributed these shares of stock as a dividend to its stockholders. This is an example of a a. property dividend. b. stock dividend. c. liquidating dividend. d. cash dividend.

52. A dividend which is a return to stockholders of a portion of their original investments is a

a. liquidating dividend. b. property dividend. c. liability dividend. d. participating dividend.


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53. A mining company declared a liquidating dividend. The journal entry to record the declaration must include a debit to a. Retained Earnings. b. a paid-in capital account. c. Accumulated Depletion. d. Accumulated Depreciation.

54. If management wishes to "capitalize" part of the earnings, it may issue a

a. cash dividend. b. stock dividend. c. property dividend. d. liquidating dividend.

55. Which dividends do not reduce stockholders' equity?

a. Cash dividends b. Stock dividends c. Property dividends d. Liquidating dividends

56. The declaration and issuance of a stock dividend larger than 25% of the shares previously

outstanding a. increases common stock outstanding and increases total stockholders' equity. b. decreases retained earnings but does not change total stockholders' equity. c. may increase or decrease paid-in capital in excess of par but does not change total

stockholders' equity. d. increases retained earnings and increases total stockholders' equity.

57. Pryor Corporation issued a 100% stock dividend of its common stock which had a par

value of $10 before and after the dividend. At what amount should retained earnings be capitalized for the additional shares issued? a. There should be no capitalization of retained earnings. b. Par value c. Market value on the declaration date d. Market value on the payment date

58. The issuer of a 5% common stock dividend to common stockholders preferably should

transfer from retained earnings to contributed capital an amount equal to the a. market value of the shares issued. b. book value of the shares issued. c. minimum legal requirements. d. par or stated value of the shares issued.

59. At the date of declaration of a small common stock dividend, the entry should not include

a. a credit to Common Stock Dividend Payable. b. a credit to Paid-in Capital in Excess of Par. c. a debit to Retained Earnings. d. All of these are acceptable.


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60. The balance in Common Stock Dividend Distributable should be reported as a(n) a. deduction from common stock issued. b. addition to capital stock. c. current liability. d. contra current asset.

61. A feature common to both stock splits and stock dividends is

a. a transfer to earned capital of a corporation. b. that there is no effect on total stockholders' equity. c. an increase in total liabilities of a corporation. d. a reduction in the contributed capital of a corporation.

62. What effect does the issuance of a 2-for-1 stock split have on each of the following?

Par Value per Share Retained Earnings a. No effect No effect b. Increase No effect c. Decrease No effect d. Decrease Decrease 63. Which one of the following disclosures should be made in the equity section of the

balance sheet, rather than in the notes to the financial statements? a. Dividend preferences b. Liquidation preferences c. Call prices d. Conversion or exercise prices

64. The rate of return on common stock equity is calculated by dividing

a. net income less preferred dividends by average common stockholders’ equity. b. net income by average common stockholders’ equity. c. net income less preferred dividends by ending common stockholders’ equity. d. net income by ending common stockholders’ equity.

65. The payout ratio can be calculated by dividing

a. dividends per share by earnings per share. b. cash dividends by net income less preferred dividends. c. cash dividends by market price per share. d. dividends per share by earnings per share and dividing cash dividends by net income

less preferred dividends. 66. Windsor Company has outstanding both common stock and nonparticipating, non-

cumulative preferred stock. The liquidation value of the preferred is equal to its par value. The book value per share of the common stock is unaffected by a. the declaration of a stock dividend on preferred payable in preferred stock when the

market price of the preferred is equal to its par value. b. the declaration of a stock dividend on common stock payable in common stock when

the market price of the common is equal to its par value. c. the payment of a previously declared cash dividend on the common stock. d. a 2-for-1 split of the common stock.


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P67. Assume common stock is the only class of stock outstanding in the B-Bar-B Corporation. Total stockholders' equity divided by the number of common stock shares outstanding is called a. book value per share. b. par value per share. c. stated value per share. d. market value per share.

*68. Dividends are not paid on

a. noncumulative preferred stock. b. nonparticipating preferred stock. c. treasury common stock. d. Dividends are paid on all of these.

*69. Noncumulative preferred dividends in arrears

a. are not paid or disclosed. b. must be paid before any other cash dividends can be distributed. c. are disclosed as a liability until paid. d. are paid to preferred stockholders if sufficient funds remain after payment of the

current preferred dividend. *70. How should cumulative preferred dividends in arrears be shown in a corporation's

statement of financial position? a. Note disclosure b. Increase in stockholders' equity c. Increase in current liabilities d. Increase in current liabilities for the amount expected to be declared within the year or

operating cycle, and increase in long-term liabilities for the balance Multiple Choice Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.21. c 29. d 37. d 45. b 53. b 61. b *69. a 22. b 30. b 38. c 46. c 54. b 62. c *70. a 23. a 31. a 39. a 47. c 55. b 63. b 24. b 32. b 40. a 48. b 56. b 64. a 25. c 33. a 41. b 49. c 57. b 65. b 26. c 34. d 42. c 50. c 58. a 66. c 27. d 35. b 43. c 51. a 59. a 67. a 28. d 36. a 44. b 52. a 60. b *68. c


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MULTIPLE CHOICE—Computational Use the following information for questions 71 and 72.

Presented below is information related to Edis Corporation:

Common Stock, $1 par $4,300,000 Paid-in Capital in Excess of Par—Common Stock 550,000 Preferred 8 1/2% Stock, $50 par 2,000,000 Paid-in Capital in Excess of Par—Preferred Stock 400,000 Retained Earnings 1,500,000 Treasury Common Stock (at cost) 150,000

71. The total stockholders' equity of Edis Corporation is

a. $8,600,000. b. $8,750,000. c. $7,100,000. d. $7,250,000.

72. The total paid-in capital (cash collected) related to the common stock is

a. $4,300,000. b. $4,850,000. c. $5,250,000. d. $4,700,000.

73. Bleeker Company issued 10,000 shares of its $5 par value common stock having a

market value of $25 per share and 15,000 shares of its $15 par value preferred stock having a market value of $20 per share for a lump sum of $480,000. How much of the proceeds would be allocated to the common stock? a. $50,000 b. $218,182 c. $250,000 d. $255,000

74. Mouser Company issues 4,000 shares of its $5 par value common stock having a market

value of $25 per share and 6,000 shares of its $15 par value preferred stock having a market value of $20 per share for a lump sum of $192,000. What amount of the proceeds should be allocated to the preferred stock? a. $172,000 b. $120,000 c. $104,727 d. $90,000

75. Adler Corporation has 50,000 shares of $10 par common stock authorized. The following

transactions took place during 2008, the first year of the corporation’s existence: Sold 5,000 shares of common stock for $18 per share. Issued 5,000 shares of common stock in exchange for a patent valued at $100,000.

At the end of the Adler’s first year, total paid-in capital amounted to a. $40,000. b. $90,000. c. $100,000. d. $190,000.


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76. Renfro Corporation started business in 1999 by issuing 200,000 shares of $20 par common stock for $36 each. In 2004, 20,000 of these shares were purchased for $52 per share by Renfro Corporation and held as treasury stock. On June 15, 2008, these 20,000 shares were exchanged for a piece of property that had an assessed value of $810,000. Renfro’s stock is actively traded and had a market price of $60 on June 15, 2008. The cost method is used to account for treasury stock. The amount of paid-in capital from treasury stock transactions resulting from the above events would be a. $800,000. b. $480,000. c. $390,000. d. $160,000.

77. On September 1, 2008, Zelner Company reacquired 12,000 shares of its $10 par value

common stock for $15 per share. Zelner uses the cost method to account for treasury stock. The journal entry to record the reacquisition of the stock should debit a. Treasury Stock for $120,000. b. Common Stock for $120,000. c. Common Stock for $120,000 and Paid-in Capital in Excess of Par for $60,000. d. Treasury Stock for $180,000.

78. Gannon Company acquired 6,000 shares of its own common stock at $20 per share on

February 5, 2006, and sold 3,000 of these shares at $27 per share on August 9, 2007. The market value of Gannon's common stock was $24 per share at December 31, 2006, and $25 per share at December 31, 2007. The cost method is used to record treasury stock transactions. What account(s) should Gannon credit in 2007 to record the sale of 3,000 shares? a. Treasury Stock for $81,000. b. Treasury Stock for $60,000 and Paid-in Capital from Treasury Stock for $21,000. c. Treasury Stock for $60,000 and Retained Earnings for $21,000. d. Treasury Stock for $72,000 and Retained Earnings for $9,000.

79. King Co. issued 100,000 shares of $10 par common stock for $1,200,000. King acquired

8,000 shares of its own common stock at $15 per share. Three months later King sold 4,000 of these shares at $19 per share. If the cost method is used to record treasury stock transactions, to record the sale of the 4,000 treasury shares, King should credit a. Treasury Stock for $76,000. b. Treasury Stock for $40,000 and Paid-in Capital from Treasury Stock for $36,000. c. Treasury Stock for $60,000 and Paid-in Capital from Treasury Stock for $16,000. d. Treasury Stock for $60,000 and Paid-in Capital in Excess of Par for $16,000.

80. An analysis of stockholders' equity of Jinn Corporation as of January 1, 2007, is as

follows:

Common stock, par value $20; authorized 100,000 shares; issued and outstanding 90,000 shares $1,800,000 Paid-in capital in excess of par 900,000 Retained earnings 760,000 Total $3,460,000

Jinn uses the cost method of accounting for treasury stock and during 2007 entered into the following transactions:


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Acquired 2,500 shares of its stock for $75,000. Sold 2,000 treasury shares at $35 per share. Sold the remaining treasury shares at $20 per share.

Assuming no other equity transactions occurred during 2007, what should Jinn report at December 31, 2007, as total additional paid-in capital? a. $895,000 b. $900,000 c. $905,000 d. $915,000

81. Trent Corporation was organized on January 1, 2007, with an authorization of 1,200,000

shares of common stock with a par value of $6 per share. During 2007, the corporation had the following capital transactions:

January 5 issued 675,000 shares @ $10 per share July 28 purchased 90,000 shares @ $11 per share December 31 sold the 90,000 shares held in treasury @ $18 per share

Trent used the cost method to record the purchase and reissuance of the treasury shares. What is the total amount of additional paid-in capital as of December 31, 2007? a. $-0-. b. $2,070,000. c. $2,700,000. d. $3,330,000.

82. Watt Co.'s stockholders' equity at January 1, 2007 is as follows:

Common stock, $10 par value; authorized 300,000 shares; Outstanding 225,000 shares $2,250,000 Paid-in capital in excess of par 900,000 Retained earnings 2,190,000 Total $5,340,000

During 2007, Watt had the following stock transactions: Acquired 6,000 shares of its stock for $270,000. Sold 3,600 treasury shares at $50 a share. Sold the remaining treasury shares at $41 per share.

No other stock transactions occurred during 2007. Assuming Watt uses the cost method to record treasury stock transactions, the total amount of all additional paid-in capital accounts at December 31, 2007 is a. $891,600. b. $870,000. c. $908,400. d. $927,600.

83. Presented below is the stockholders' equity section of Mead Corporation at December 31,

2006: Common stock, par value $20; authorized 75,000 shares; issued and outstanding 45,000 shares $ 900,000 Paid-in capital in excess of par value 250,000 Retained earnings 500,000 $1,650,000


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During 2007, the following transactions occurred relating to stockholders' equity:

3,000 shares were reacquired at $28 per share. 3,000 shares were reacquired at $35 per share. 1,800 shares of treasury stock were sold at $30 per share.

For the year ended December 31, 2007, Mead reported net income of $450,000. Assuming Mead accounts for treasury stock under the cost method, what should it report as total stockholders' equity on its December 31, 2007, balance sheet? a. $1,965,000. b. $1,961,400. c. $1,957,800. d. $1,515,000.

84. On December 1, 2007, Lynn Corporation exchanged 20,000 shares of its $10 par value

common stock held in treasury for a used machine. The treasury shares were acquired by Lynn at a cost of $40 per share, and are accounted for under the cost method. On the date of the exchange, the common stock had a market value of $55 per share (the shares were originally issued at $30 per share). As a result of this exchange, Lynn's total stockholders' equity will increase by a. $200,000. b. $800,000. c. $1,100,000. d. $900,000.

85. Vittly Corporation owned 900,000 shares of Nixon Corporation stock. On December 31,

2007, when Vittly's account "Investment in Common Stock of Nixon Corporation" had a carrying value of $5 per share, Vittly distributed these shares to its stockholders as a dividend. Vittly originally paid $8 for each share. Nixon has 3,000,000 shares issued and outstanding, which are traded on a national stock exchange. The quoted market price for a Nixon share was $7 on the declaration date and $9 on the distribution date.

What would be the reduction in Vittly's stockholders' equity as a result of the above transactions? a. $3,600,000. b. $4,500,000. c. $7,200,000. d. $8,100,000.

86. Baden Corporation owned 20,000 shares of Terney Corporation’s $5 par value common

stock. These shares were purchased in 2004 for $180,000. On September 15, 2008, Baden declared a property dividend of one share of Terney for every ten shares of Baden held by a stockholder. On that date, when the market price of Terney was $14 per share, there were 180,000 shares of Baden outstanding. What NET reduction in retained earnings would result from this property dividend? a. $90,000 b. $252,000 c. $72,000 d. $162,000


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87. Diamond’s Corporation has an investment in 5,000 shares of Sigmond Company common stock with a cost of $218,000. These shares are used in a property dividend to stockholders of Diamond’s. The property dividend is declared on May 25 and scheduled to be distributed on July 31 to stockholders of record on June 15. The market value per share of Sigmond stock is $63 on May 25, $66 on June 15, and $68 on July 31. The net effect of this property dividend on retained earnings is a reduction of a. $340,000. b. $330,000. c. $315,000. d. $218,000.

88. Gonzalez Company has 350,000 shares of $10 par value common stock outstanding.

During the year, Gonzalez declared a 10% stock dividend when the market price of the stock was $30 per share. Four months later Gonzalez declared a $.50 per share cash dividend. As a result of the dividends declared during the year, retained earnings decreased by a. $1,242,500. b. $525,000. c. $192,500. d. $175,000.

89. On June 30, 2007, when Vietti Co.'s stock was selling at $65 per share, its capital

accounts were as follows:

Capital stock (par value $50; 60,000 shares issued) $3,000,000 Premium on capital stock 600,000 Retained earnings 4,200,000

If a 100% stock dividend were declared and distributed, capital stock would be a. $3,000,000. b. $3,600,000. c. $6,000,000. d. $7,800,000.

90. The stockholders' equity section of Lawton Corporation as of December 31, 2006, was as

follows: Common stock, par value $2; authorized 20,000 shares; issued and outstanding 10,000 shares $ 20,000 Paid-in capital in excess of par 30,000 Retained earnings 75,000 $125,000

On March 1, 2007, the board of directors declared a 15% stock dividend, and accordingly 1,500 additional shares were issued. On March 1, 2007, the fair market value of the stock was $6 per share. For the two months ended February 28, 2007, Lawton sustained a net loss of $10,000.

What amount should Lawton report as retained earnings as of March 1, 2007? a. $56,000. b. $62,000. c. $66,000. d. $72,000.


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91. The stockholders' equity of Benton Company at July 31, 2007 is presented below:

Common stock, par value $20, authorized 400,000 shares; issued and outstanding 160,000 shares $3,200,000 Paid-in capital in excess of par 160,000 Retained earnings 650,000 $4,010,000

On August 1, 2007, the board of directors of Benton declared a 15% stock dividend on common stock, to be distributed on September 15th. The market price of Benton's common stock was $35 on August 1, 2007, and $38 on September 15, 2007. What is the amount of the debit to retained earnings as a result of the declaration and distribution of this stock dividend? a. $800,000. b. $840,000. c. $912,000. d. $600,000.

92. On January 1, 2007, Carl, Inc., declared a 10% stock dividend on its common stock when

the market value of the common stock was $20 per share. Stockholders' equity before the stock dividend was declared consisted of:

Common stock, $10 par value, authorized 200,000 shares; issued and outstanding 120,000 shares $1,200,000 Additional paid-in capital on common stock 150,000 Retained earnings 700,000 Total stockholders' equity $2,050,000

What was the effect on Carl’s retained earnings as a result of the above transaction? a. $120,000 decrease b. $240,000 decrease c. $400,000 decrease d. $200,000 decrease

93. On January 1, 2007, Golden Corporation had 110,000 shares of its $5 par value common

stock outstanding. On June 1, the corporation acquired 10,000 shares of stock to be held in the treasury. On December 1, when the market price of the stock was $8, the corporation declared a 10% stock dividend to be issued to stockholders of record on December 16, 2007. What was the impact of the 10% stock dividend on the balance of the retained earnings account? a. $50,000 decrease b. $80,000 decrease c. $88,000 decrease d. No effect

94. Kimm, Inc. had net income for 2007 of $2,120,000 and earnings per share on common

stock of $5. Included in the net income was $300,000 of bond interest expense related to its long-term debt. The income tax rate for 2007 was 30%. Dividends on preferred stock were $400,000. The payout ratio on common stock was 25%. What were the dividends on common stock in 2007? a. $430,000. b. $530,000. c. $482,500. d. $645,000.


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95. Presented below is information related to Sampson, Inc.: December 31, 2007 2006 Common stock $ 75,000 $ 60,000 4% Preferred stock 350,000 350,000 Retained earnings (includes net income for current year) 90,000 75,000 Net income for year 30,000 32,000

What is Sampson’s rate of return on common stock equity for 2007? a. 20.0% b. 10.7% c. 18.2% d. 21.3%

Use the following information for questions 96 and 97. The following data are provided:

December 31, 2007 2006

10% Cumulative preferred stock, $50 par $100,000 $100,000 Common stock, $10 par 120,000 90,000 Additional paid-in capital 80,000 65,000 Retained earnings (includes current year net income) 240,000 215,000 Net income 90,000

Additional information: On May 1, 2007, 3,000 shares of common stock were issued. The preferred dividends were not declared during 2007. The market price of the common stock was $50 at December 31, 2007. 96. The rate of return on common stock equity for 2007 is

a. 90 ÷ 400. b. 90 ÷ 440. c. 80 ÷ 400. d. 80 ÷ 440.

97. The book value per share of common stock at 12/31/07 is

a. 430 ÷ 12. b. 200 ÷ 12. c. 330 ÷ 12. d. 440 ÷ 11.

Use the following information for questions 98 and 99. Winger Corporation had the following information in its financial statements for the year ended 2007 and 2008:

Cash Dividends for the year 2008 $ 15,000 Net Income for the year ended 2008 124,000 Market price of stock, 12/31/08 24 Common stockholders’ equity, 12/31/07 2,200,000 Common stockholders’ equity, 12/31/08 2,400,000 Outstanding shares, 12/31/08 120,000 Preferred dividends for the year ended 2008 30,000


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98. What is the payout ratio for Winger Corporation for the year ended 2008? a. 12.1% b. 16.0% c. 36.3% d. 41.3%

99. What is the book value per share for Winger Corporation for the year ended 2008?

a. $19.17 b. $20.00 c. $10.43 d. $24.00

Use the following information for questions 100 through 102. Tomlin, Inc. has outstanding 300,000 shares of $2 par common stock and 60,000 shares of no-par 8% preferred stock with a stated value of $5. The preferred stock is cumulative and nonparticipating. Dividends have been paid in every year except the past two years and the current year. *100. Assuming that $150,000 will be distributed as a dividend in the current year, how much

will the common stockholders receive? a. Zero. b. $78,000. c. $102,000. d. $126,000.

*101. Assuming that $63,000 will be distributed as a dividend in the current year, how much will

the preferred stockholders receive? a. $21,000. b. $24,000. c. $48,000. d. $63,000.

*102. Assuming that $183,000 will be distributed, and the preferred stock is also participating,

how much will the common stockholders receive? a. $111,000. b. $90,000. c. $93,000. d. $48,000.

*103. Wiley, Inc. has 50,000 shares of $10 par value common stock and 25,000 shares of $10

par value, 6%, cumulative, participating preferred stock outstanding. Dividends on the preferred stock are one year in arrears. Assuming that Wiley wishes to distribute $135,000 as dividends, the common stockholders will receive a. $30,000. b. $55,000. c. $80,000. d. $105,000.


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*104. Lott Co. has outstanding 50,000 shares of 8% preferred stock with a $10 par value and 125,000 shares of $3 par value common stock. Dividends have been paid every year except last year and the current year. If the preferred stock is cumulative and nonparticipating and $250,000 is distributed, the common stockholders will receive a. $0. b. $170,000. c. $210,000. d. $250,000.

Multiple Choice Answers—Computational

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.71. a 76. d 81. d 86. d 91. b 96. c *101. d 72. b 77. d 82. c 87. d 92. b 97. a *102. b 73. b 78. b 83. a 88. a 93. b 98. b *103. c 74. c 79. c 84. c 89. c 94. a 99. b *104. b 75. d 80. c 85. b 90. a 95. b *100. b

MULTIPLE CHOICE—CPA Adapted 105. A corporation was organized in January 2004 with authorized capital of $10 par value

common stock. On February 1, 2007, shares were issued at par for cash. On March 1, 2007, the corporation's attorney accepted 7,000 shares of common stock in settlement for legal services with a fair value of $90,000. Additional paid-in capital would increase on

February 1, 2007 March 1, 2007 a. Yes No b. Yes Yes c. No No d. No Yes 106. On July 1, 2007, Cole Co. issued 2,500 shares of its $10 par common stock and 5,000

shares of its $10 par convertible preferred stock for a lump sum of $125,000. At this date Cole's common stock was selling for $24 per share and the convertible preferred stock for $18 per share. The amount of the proceeds allocated to Cole's preferred stock should be a. $62,500. b. $75,000. c. $90,000. d. $68,750.

107. Norton Co. was organized on January 2, 2007, with 500,000 authorized shares of $10 par

value common stock. During 2007, Norton had the following capital transactions:

January 5—issued 375,000 shares at $14 per share. July 27—purchased 25,000 shares at $11 per share. November 25—sold 15,000 shares of treasury stock at $13 per share.

Norton used the cost method to record the purchase of the treasury shares. What would be the balance in the Paid-in Capital from Treasury Stock account at December 31, 2007?


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a. $0. b. $15,000. c. $30,000. d. $45,000.

108. In 2006, Marly Corp. acquired 9,000 shares of its own $1 par value common stock at $18

per share. In 2007, Marly issued 4,000 of these shares at $25 per share. Marly uses the cost method to account for its treasury stock transactions. What accounts and what amounts should Marly credit in 2007 to record the issuance of the 4,000 shares?

Treasury Additional Retained Common Stock Paid-in Capital Earnings Stock a. $72,000 $70,000 b. $72,000 $28,000 c. $96,000 $4,000 d. $68,000 $28,000 $4,000

109. At its date of incorporation, Wilson, Inc. issued 100,000 shares of its $10 par common

stock at $11 per share. During the current year, Wilson acquired 20,000 shares of its common stock at a price of $16 per share and accounted for them by the cost method. Subsequently, these shares were reissued at a price of $12 per share. There have been no other issuances or acquisitions of its own common stock. What effect does the reissuance of the stock have on the following accounts?

Retained Earnings Additional Paid-in Capital a. Decrease Decrease b. No effect Decrease c. Decrease No effect d. No effect No effect

110. Palmer Corp. owned 20,000 shares of Dixon Corp. purchased in 2003 for $240,000. On

December 15, 2006, Palmer declared a property dividend of all of its Dixon Corp. shares on the basis of one share of Dixon for every 10 shares of Palmer common stock held by its stockholders. The property dividend was distributed on January 15, 2007. On the declaration date, the aggregate market price of the Dixon shares held by Palmer was $400,000. The entry to record the declaration of the dividend would include a debit to Retained Earnings of a. $0. b. $160,000. c. $240,000. d. $400,000.

111. A corporation declared a dividend, a portion of which was liquidating. How would this

distribution affect each of the following?

Additional Paid-in Capital Retained Earnings a. Decrease No effect b. Decrease Decrease c. No effect Decrease d. No effect No effect


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112. On May 1, 2007, Kent Corp. declared and issued a 10% common stock dividend. Prior to this dividend, Kent had 100,000 shares of $1 par value common stock issued and outstanding. The fair value of Kent 's common stock was $20 per share on May 1, 2007. As a result of this stock dividend, Kent's total stockholders' equity a. increased by $200,000. b. decreased by $200,000. c. decreased by $10,000. d. did not change.

113. How would the declaration and subsequent issuance of a 10% stock dividend by the

issuer affect each of the following when the market value of the shares exceeds the par value of the stock? Additional Common Stock Paid-in Capital a. No effect No effect b. No effect Increase c. Increase No effect d. Increase Increase

114. On December 31, 2006, the stockholders' equity section of Clark, Inc., was as follows:

Common stock, par value $10; authorized 30,000 shares; issued and outstanding 9,000 shares $ 90,000 Additional paid-in capital 116,000 Retained earnings 174,000 Total stockholders' equity $380,000

On March 31, 2007, Clark declared a 10% stock dividend, and accordingly 900 additional shares were issued, when the fair market value of the stock was $18 per share. For the three months ended March 31, 2007, Clark sustained a net loss of $32,000. The balance of Clark’s retained earnings as of March 31, 2007, should be a. $125,800. b. $133,000. c. $134,800. d. $142,000.

*115. At December 31, 2007 and 2008, Sloan Corp. had outstanding 2,000 shares of $100 par

value 8% cumulative preferred stock and 10,000 shares of $10 par value common stock. At December 31, 2007, dividends in arrears on the preferred stock were $8,000. Cash dividends declared in 2008 totaled $30,000. What amounts were payable on each class of stock?

Preferred Stock Common Stock a. $16,000 $14,000 b. $22,000 $8,000 c. $24,000 $6,000 d. $30,000 $0


Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 105. d 107. c 109. c 111. b 113. d *115 c 106. b 108. b 110. d 112. d 114. a


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DERIVATIONS — Computational No. Answer Derivation 71. a $4,300,000 + $400,000 + $550,000 + $2,000,000 + $1,500,000 – $150,000 = $8,600,000. 72. b $4,300,000 + $550,000 = $4,850,000. 73. b (10,000 × $25) + (15,000 × $20) = $550,000 ($250,000 ÷ $550,000) × $480,000 = $218,182. 74. c (4,000 × $25) + (6,000 × $20) = $220,000 ($120,000 ÷ $220,000) × $192,000 = $104,727. 75. d (5,000 × $18) + $100,000 = $190,000. 76. d ($60 – $52) × 20,000 = $160,000. 77. d 12,000 × $15 = $180,000. 78. b 3,000 × $20 = $60,000; 3,000 × $7 = $21,000. 79. c 4,000 × $15 = $60,000; 4,000 × $4 = $16,000. 80. c $900,000 + (2,000 × $5) – (500 × $10) = $905,000. 81. d (675,000 × $4) + (90,000 × $7) = $3,330,000. 82. c $900,000 + (3,600 × $5) – (2,400 × $4) = $908,400. 83. a $1,650,000 – (3,000 × $28) – (3,000 × $35) + (1,800 × $30) + $450,000 = $1,965,000. 84. c 20,000 × $55 = $1,100,000. 85. b (900,000 × $7) – [($7 – $5) × 900,000] = $4,500,000. 86. d (180,000 ÷ 10) × $14 = $252,000 $252,000 – [$252,000 – (180,000 × 18/20)] = $162,000. 87. d (5,000 × $63) = $315,000 $315,000 – ($315,000 – $218,000) = $218,000. 88. a 350,000 × .10 × $30 = $1,050,000 $1,050,000 + (350,000 × 1.10 × $.50) = $1,242,500. 89. c (60,000 × $50) + $3,000,000 = $6,000,000. 90. a $75,000 – $10,000 – (1,500 × $6) = $56,000. 91. b 160,000 × .15 × $35 = $840,000.


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DERIVATIONS — Computational (cont.) No. Answer Derivation 92. b 120,000 × .10 × $20 = $240,000. 93. b 100,000 × .10 × $8 = $80,000. X 94. a ——————————— = .25, X = $430,000. ($2,120,000 – $400,000) $30,000 – (.04 × $350,000) b —————————————————————— [($60,000 + $75,000) + ($75,000 + $90,000)] ÷ 2 95. = .107 = 10.7%.

$90,000 – ($100,000 × .10) 96. c —————————————————————————————————— [($120,000 + $80,000 + $240,000 – $10,000) + ($90,000 + $65,000 + $215,000)] ÷ 2 = $80 ÷ 400. $120,000 + $80,000 + (240,000 – $10,000) 97. a ——————————————— 12,000

———— = $430 ÷ 12.

98. b $15,000 ÷ ($124,000 – $30,000) = 16.0%. 99. b $2,400,000 ÷ 120,000 = $20.00. *100. b $150,000 – (60,000 × $5 × .08 × 3) = $78,000. *101. d 60,000 × $5 × .08 × 3 = $72,000 > $63,000.

*102. b 8% × $600,000 = $48,000 (current year) 7%* × $600,000 = 42,000 (participating) $90,000 *$300,000 × 8% × 3 = $ 72,000 (preferred dividends) $600,000 × 8% = 48,000 (common current dividends) $120,000 $183,000 – $120,000 —————————— $600,000 + $300,000

= 7%.

*103. c Common Stock $500,000 × 6% = $30,000 (current year) $500,000 × 10%* = 50,000 (participating) $80,000 *$135,000 – $30,000 – ($250,000 × 6% × 2) = $75,000 $75,000 ———— = 10%. $750,000 *104. b $250,000 – ($500,000 × 8% × 2) = $170,000.


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DERIVATIONS — CPA Adapted No. Answer Derivation 105. d Conceptual. 106. b ($24 × 2,500) + ($18 × 5,000) = $150,000. $90,000 ————— × $125,000 = $75,000. $150,000 107. c 15,000 × $2 = $30,000. 108. b (4,000 × $18) = $72,000; (4,000 × $7) = $28,000. 109. c Conceptual. 110. d $400,000 (market value). 111. b Conceptual. 112. d Conceptual. 113. d Conceptual. 114. a $174,000 – $32,000 – (900 × $18) = $125,800. *115. c ($200,000 × .08) + $8,000 = $24,000 $30,000 – $24,000 = $6,000.

EXERCISES Ex. 15-116—Lump sum issuance of stock.

Landon Corporation has issued 2,000 shares of common stock and 400 shares of preferred stock for a lump sum of $72,000 cash. Instructions (a) Give the entry for the issuance assuming the par value of the common was $5 and the market

value $30, and the par value of the preferred was $40 and the market value $50. (Each valuation is on a per share basis and there are ready markets for each stock.)

(b) Give the entry for the issuance assuming the same facts as (a) above except the preferred

stock has no ready market and the common stock has a market value of $25 per share.


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Solution 15-116 (a) Cash ............................................................................................... 72,000 Common Stock ................................................................. 10,000 Paid-in Capital in Excess of Par—Common ...................... 44,000 Preferred Stock ................................................................ 16,000 Paid-in Capital in Excess of Par—Preferred .................... 2,000 (common $30 × 2,000 $60,000 preferred $50 × 400 20,000 $80,000 market value

60/80 × $72,000 = $54,000 common 20/80 × $72,000 = 18,000 preferred $72,000) (b) Cash ............................................................................................... 72,000 Common Stock ................................................................... 10,000 Paid-in Capital in Excess of Par—Common ....................... 40,000 Preferred Stock ................................................................... 16,000 Paid-in Capital in Excess of Par—Preferred ....................... 6,000 Ex. 15-117—Treasury stock.

For numerous reasons, a corporation may reacquire shares of its own capital stock. When a company purchases treasury stock, it usually accounts for the stock using the cost method. Instructions Explain how a company would account for each of the following: 1. Purchase of shares at a price less than par value. 2. Subsequent resale of treasury shares at a price less than purchase price, but more than par

value. 3. Subsequent resale of treasury shares at a price greater than both purchase price and par

value. 4. Effect on net income. Solution 15-117 1. Treasury stock is debited for the purchase price of the shares even though the purchase price

is less than par value. 2. Treasury stock is credited for the original cost (purchase price) of the shares, and the excess

of the original cost (purchase price) over the sales price first is debited to paid-in capital from treasury stock from earlier sales of treasury stock and any remainder then is debited to retained earnings.

3. Treasury stock is credited for the original cost (purchase price) of the shares, and the excess

of the sales price over the original cost (purchase price) is credited to paid-in capital from treasury stock.

4. There is no effect on net income as a result of treasury stock transactions.


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Ex. 15-118—Treasury stock.

Camby Corporation's balance sheet reported the following: Capital stock outstanding, 5,000 shares, par $30 per share $150,000 Paid-in capital in excess of par 80,000 Retained earnings 100,000 The following transactions occurred this year: (a) Purchased 120 shares of capital stock to be held as treasury stock, paying $60 per share. (b) Sold 90 of the shares of treasury stock at $65 per share. (c) Sold the remaining shares of treasury stock at $50 per share. Instructions Prepare the journal entry for these transactions under the cost method of accounting for treasury stock. Solution 15-118 (a) Treasury Stock ................................................................................ 7,200 Cash ....................................................................................... 7,200 (b) Cash ............................................................................................... 5,850 Treasury Stock ....................................................................... 5,400 Paid-in Capital from Treasury Stock ....................................... 450 (c) Cash ................................................................................................ 1,500 Paid-in Capital from Treasury Stock ................................................ 300 Treasury Stock ....................................................................... 1,800 Ex. 15-119—Treasury stock.

Gagne Company's balance sheet shows: Common stock, $20 par $3,000,000 Paid-in capital in excess of par 1,050,000 Retained earnings 750,000

Instructions Record the following transactions by the cost method. (a) Bought 5,000 shares of its common stock at $29 a share. (b) Sold 2,500 treasury shares at $30 a share. (c) Sold 1,000 shares of treasury stock at $26 a share. Solution 15-119 (a) Treasury Stock ............................................................................. 145,000 Cash ................................................................................. 145,000 (b) Cash ............................................................................................. 75,000 Treasury Stock .................................................................. 72,500 Paid-in Capital from Treasury Stock ................................. 2,500


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Solution 15-119 (cont.) (c) Cash .............................................................................................. 26,000 Paid-in Capital from Treasury Stock ............................................. 2,500 Retained Earnings ......................................................................... 500 Treasury Stock .................................................................. 29,000 Ex. 15-120—Treasury stock.

In 2006, Robison Co. issued 200,000 of its 500,000 authorized shares of $10 par value common stock at $35 per share. In January, 2007, Robison repurchased 15,000 shares at $30 per share. Assume these are the only stock transactions the company has ever had.

Instructions (a) What are the two methods of accounting for treasury stock? (b) Prepare the journal entry to record the purchase of treasury stock by the cost method. (c) 5,000 shares of treasury stock are reissued at $33 per share. Prepare the journal entry to

record the reissuance by the cost method. Solution 15-120 (a) The two methods of accounting for treasury stock are the cost method and the par value

method. (b) Treasury Stock .............................................................................. 450,000 Cash .................................................................................. 450,000 (c) Cash .............................................................................................. 165,000 Paid-in Capital from Treasury Stock .................................. 15,000 Treasury Stock .................................................................. 150,000 Ex. 15-121—Stockholders’ Equity.

Indicate the effect of each of the following transactions on total stockholders' equity by placing an "X" in the appropriate column. Increase Decrease No Effect 1. Treasury stock is resold at more than cost. ________ ________ ________ 2. Operating loss for the period. ________ ________ ________ 3. Retirement of bonds payable at more than book value. ________ ________ ________ 4. Declaration of a stock dividend. ________ ________ ________ 5. Acquisition of machinery for common stock. ________ ________ ________ 6. Conversion of bonds payable into common stock. ________ ________ ________


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Ex. 15-121 (cont,)

Increase Decrease No Effect 7. Not declaring a dividend on cumulative preferred stock. ________ ________ ________ 8. Declaration of cash dividend. ________ ________ ________ 9. Payment of cash dividend. ________ ________ ________ Solution 15-121 Increase Decrease No Effect 1. Treasury stock is resold at more than cost. X 2. Operating loss for the period. X 3. Retirement of bonds payable at more than book value. X 4. Declaration of a stock dividend. X 5. Acquisition of machinery for common stock. X 6. Conversion of bonds payable into common stock. X 7. Not declaring a dividend on cumulative preferred stock. X 8. Declaration of cash dividend. X 9. Payment of cash dividend. X Ex. 15-122—Stock dividends.

Describe the journal entry for a stock dividend on common stock (which has a par value). Solution 15-122 A stock dividend results in the transfer from retained earnings to paid-in capital of an amount equal to the market value of each share, if the dividend is less than 20-25%, or par value of each share, if the dividend is greater than 20-25%. Retained Earnings is debited for the total amount transferred, Common Stock Dividend Distributable is credited for the total par value of the shares, and, for a small stock dividend, the excess of market value over par value is credited to Paid-in Capital in Excess of Par.


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Ex. 15-123—Stock dividends and stock splits.

Indicate the principal effects of a stock dividend versus a stock split as they affect the issuing corporation. Respond in the spaces as follows: "C" for change; "NC" for no change.

Stock Dividend Stock Split

Number of Shares Outstanding ________ ________

Par Value per Share ________ ________

Total Par Outstanding ________ ________

Retained Earnings ________ ________

Total Stockholders' Equity ________ ________

Composition of Stockholders' Equity ________ ________ Solution 15-123 Stock Dividend Stock Split Number of Shares Outstanding C C Par Value per Share NC C Total Par Outstanding C NC Retained Earnings C NC Total Stockholders' Equity NC NC Composition of Stockholders' Equity C NC Ex. 15-124—Computation of selected financial ratios.

The following information pertains to Nyland Co.:

Preferred stock, cumulative: Par per share $100 Dividend rate 8% Shares outstanding 5,000 Dividends in arrears none Common stock: Par per share $10 Shares issued 60,000 Dividends paid per share $2.70 Market price per share $48.00 Additional paid-in capital $200,000 Unappropriated retained earnings (after closing) $135,000 Retained earnings appropriated for contingencies $150,000 Common treasury stock: Number of shares 5,000 Total cost $125,000 Net income $370,000


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Ex. 15-124 (cont.)

Instructions Compute (assume no changes in balances during the past year): (a) Total amount of stockholders’ equity in the balance sheet (b) Earnings per share of common stock (c) Book value per share of common stock (d) Payout ratio of common stock (e) Return on common stock equity Solution 15-124 (a) (5,000 × $100) + (60,000 × $10) + $200,000 + $135,000 + $150,000 – $125,000 = $1,460,000. (b) [$370,000 – (5,000 × $100 × 8%)] ÷ (60,000 – 5,000) = 330,000 ÷ 55,000 = $6.00 per share. (c) ($1,460,000 – $500,000) ÷ (60,000 – 5,000) = $960,000 ÷ 55,000 = $17.45 per share. (d) $2.70 ÷ $6 = 45% or [($2.70 × 55,000) ÷ ($370,000 – $40,000)]. (e) ($370,000 – $40,000) ÷ ($1,460,000 – $500,000) = 34.4%. *Ex. 15-125—Dividends on preferred stock.

The stockholders' equity section of Knott Corporation shows the following on December 31, 2007:

Preferred stock—6%, $100 par, 4,000 shares outstanding $ 400,000 Common stock—$10 par, 60,000 shares outstanding 600,000 Paid-in capital in excess of par 200,000 Retained earnings 114,000 Total stockholders' equity $1,314,000 Instructions Assuming that all of the company's retained earnings are to be paid out in dividends on 12/31/07 and that preferred dividends were last paid on 12/31/05, show how much the preferred and common stockholders should receive if the preferred stock is cumulative and fully participating. *Solution 15-125 Preferred Common Total Dividends in arrears (6% of $400,000) $24,000 $ — $ 24,000 Current year's dividends 24,000 36,000 60,000 Participating dividend (3%) ($30,000 ÷ $1,000,000) 12,000 18,000 30,000 $60,000 $54,000 $114,000


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*Ex. 15-126—Dividends on preferred stock.

In each of the following independent cases, it is assumed that the corporation has $400,000 of 6% preferred stock and $1,600,000 of common stock outstanding, each having a par value of $10. No dividends have been declared for 2005 and 2006. (a) As of 12/31/07, it is desired to distribute $250,000 in dividends. How much will the preferred

stockholders receive if their stock is cumulative and nonparticipating? (b) As of 12/31/07, it is desired to distribute $400,000 in dividends. How much will the preferred

stockholders receive if their stock is cumulative and participating up to 11% in total? (c) On 12/31/07, the preferred stockholders received a $120,000 dividend on their stock which is

cumulative and fully participating. How much money was distributed in total for dividends during 2007?

*Solution 15-126 (a) $72,000. (b) $92,000. (c) $408,000 ($288,000 to common and $120,000 to preferred).

PROBLEMS Pr. 15-127—Equity transactions.

Presented below is information related to Rollins Company:

1. The company is granted a charter that authorizes issuance of 15,000 shares of $100 par value preferred stock and 40,000 shares of no-par common stock.

2. 8,000 shares of common stock are issued to the founders of the corporation for land valued by the board of directors at $300,000. The board establishes a stated value of $5 a share for the common stock.

3. 5,000 shares of preferred stock are sold for cash at $120 per share.

4. The company issues 100 shares of common stock to its attorneys for costs associated with starting the company. At that time, the common stock was selling at $60 per share.

Instructions Prepare the general journal entries necessary to record these transactions.


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Solution 15-127 1. No entry necessary. 2. Land ................................................................................................ 300,000 Common Stock .................................................................... 40,000 Paid-in Capital in Excess of Stated Value ........................... 260,000 3. Cash ................................................................................................ 600,000 Preferred Stock .................................................................... 500,000 Paid-in Capital in Excess of Par—Preferred Stock .............. 100,000 4. Organization Expense ..................................................................... 6,000 Common Stock .................................................................... 500 Paid-in Capital in Excess of Stated Value ........................... 5,500 Pr. 15-128—Treasury stock transactions. The original sale of the $50 par value common shares of Eddy Company was recorded as follows: Cash .......................................................................................... 290,000 Common Stock .............................................................. 250,000 Paid-in Capital in Excess of Par .................................... 40,000 Instructions Record the treasury stock transactions (given below) under the cost method: Transactions: (a) Bought 300 shares of common stock as treasury shares at $62. (b) Sold 80 shares of treasury stock at $60. (c) Sold 40 treasury shares at $68. Solution 15-128 (a) Treasury Stock ................................................................................... 18,600 Cash .......................................................................................... 18,600 (b) Cash ................................................................................................... 4,800 Retained Earnings .............................................................................. 160 Treasury Stock ........................................................................... 4,960 (c) Cash ................................................................................................... 2,720 Paid-in Capital from Treasury Stock .......................................... 240 Treasury Stock ........................................................................... 2,480


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Pr. 15-129—Stock dividends.

The stockholders' equity section of Reston Corporation's balance sheet as of December 31, 2006 is as follows:

Stockholders' Equity Common stock, $5 par value; authorized, 2,000,000 shares; issued, 400,000 shares $2,000,000 Paid-in capital in excess of par 850,000 Retained earnings 3,000,000 $5,850,000 The following events occurred during 2007: 1. Jan. 5 10,000 shares of authorized and unissued common stock were sold for $8 per

share. 2. Jan. 16 Declared a cash dividend of 20 cents per share, payable February 15 to stock-

holders of record on February 5. 3. Feb. 10 20,000 shares of authorized and unissued common stock were sold for $12 per

share. 4. March 1 A 30% stock dividend was declared and issued. Market value per share is

currently $15. 5. April 1 A two-for-one split was carried out. The par value of the stock was to be reduced

to $2.50 per share. Market value on March 31 was $18 per share. 6. July 1 A 15% stock dividend was declared and issued. Market value is currently $10 per

share. 7. Aug. 1 A cash dividend of 20 cents per share was declared, payable September 1 to

stockholders of record on August 21. Instructions Enter the above events into the following work sheet showing how each event affects the column. Event No. 1 will serve as an example.

Common Stock No. of Total Paid-in Capital In Item Shares Issued Par Value Excess of Par Retained Earnings Beginning Balance—1/1/07 400,000 $2,000,000 $850,000 $3,000,000 Event #1—Jan. 5 10,000 50,000 30,000 -0- Balance 410,000 $2,050,000 $880,000 $3,000,000 Event # 2—Jan. 16 (and events 3 through 7)


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Solution 15-129 Event #2—Jan. 16 -0- -0- -0- (82,000) ——————————————————————————————————————————— Balance 410,000 $2,050,000 $880,000 $2,918,000 #3—Feb. 10 20,000 100,000 140,000 -0- ——————————————————————————————————————————— Balance 430,000 $2,150,000 $1,020,000 $2,918,000 #4—March 1 129,000 645,000 -0- (645,000) ——————————————————————————————————————————— Balance 559,000 $2,795,000 $1,020,000 $2,273,000 #5—April 1 559,000 -0- -0- -0- ——————————————————————————————————————————— Balance 1,118,000 $2,795,000 $1,020,000 $2,273,000 #6—July 1 167,700 419,250 1,257,750 (1,677,000) ——————————————————————————————————————————— Balance 1,285,700 $3,214,250 $2,277,750 $596,000 #7—Aug. 1 -0- -0- -0- (257,140) ——————————————————————————————————————————— Balance 1,285,700 $3,214,250 $2,277,750 $338,860 Pr. 15-130—Equity transactions.

Sands Corporation has the following capital structure at the beginning of the year: 6% Preferred stock, $50 par value, 20,000 shares authorized, 6,000 shares issued and outstanding $ 300,000 Common stock, $10 par value, 60,000 shares authorized, 40,000 shares issued and outstanding 400,000 Paid-in capital in excess of par 110,000 Total paid-in capital 810,000 Retained earnings 440,000 Total stockholders' equity $1,250,000 Instructions (a) Record the following transactions which occurred consecutively (show all calculations).

1. A total cash dividend of $90,000 was declared and payable to stockholders of record. Record dividends payable on common and preferred stock in separate accounts.

2. A 10% common stock dividend was declared. The average market value of the common stock is $18 a share.

3. Assume that net income for the year was $150,000 (record the closing entry) and the board of directors appropriated $70,000 of retained earnings for plant expansion.

(b) Construct the stockholders' equity section incorporating all the above information.


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Solution 15-130 (a) 1. Retained Earnings ................................................................... 90,000 Dividends Payable—Preferred ($300,000 × .06) .......... 18,000 Dividends Payable—Common...................................... 72,000 2. 40,000 shares 10% 4,000 shares as stock dividend $18 $72,000 total dividend Retained Earnings ................................................................... 72,000 Common Stock Dividend Distributable ........................ 40,000 Paid-in Capital in Excess of Par .................................. 32,000 3. Income Summary .................................................................... 150,000 Retained Earnings ....................................................... 150,000 Retained Earnings ................................................................... 70,000 Retained Earnings Appropriated for Plant Expansion . 70,000 (b) Stockholders' equity 6% Preferred stock, $50 par value, 20,000 shares authorized, 6,000 shares issued and outstanding $ 300,000 Common stock, $10 par value, 60,000 shares authorized, 40,000 shares issued and outstanding 400,000 Common stock dividend distributable 40,000 Paid-in capital in excess of par 142,000 Total paid-in capital 882,000 Retained earnings—unappropriated* $358,000 Appropriated for plant expansion 70,000 Total retained earnings 428,000 Total stockholders' equity $1,310,000

*$440,000 – $90,000 – $72,000 + $150,000 – $70,000 = $358,000 *Pr. 15-131—Dividends on preferred and common stock.

Spencer, Inc., has $800,000 of 8% preferred stock and $1,200,000 of common stock outstanding, each having a par value of $10 per share. No dividends have been paid or declared during 2006 and 2007. As of December 31, 2008, it is desired to distribute $488,000 in dividends. Instructions How much will the preferred and common stockholders receive under each of the following assumptions: (a) The preferred is noncumulative and nonparticipating. (b) The preferred is cumulative and nonparticipating. (c) The preferred is cumulative and fully participating. (d) The preferred is cumulative and participating to 12% total.


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*Solution 15-131 (a) Preferred Common Total Current year's dividend (8% of $800,000) $ 64,000 $ — $ 64,000 Remainder to common 424,000 424,000 $ 64,000 $424,000 $488,000 (b) Preferred Common Total Dividends in arrears, 8% of $800,000 for two years $128,000 $ — $128,000 Current year's dividend 64,000 — 64,000 Remainder to common 296,000 296,000 $192,000 $296,000 $488,000 (c) Preferred Common Total Dividends in arrears, 8% of $800,000 for two years $128,000 $ — $128,000 Current year's dividend 64,000 96,000 160,000 Participating dividend 10% ($200,000 ÷ $2,000,000) 80,000 120,000 200,000 $272,000 $216,000 $488,000 (d) Preferred Common Total Dividends in arrears, 8% of $800,000 for two years $128,000 $ — $128,000 Current year's dividend 64,000 96,000 160,000 Participating dividend (4%) 32,000 48,000 80,000 Remainder to common — 120,000 120,000 $224,000 $264,000 $488,000

CHAPTER 23

STATEMENT OF CASH FLOWS

TRUE-FALSE—Conceptual Answer No. Description F 1. Primary purpose of the statement of cash flows. T 2. Information provided by statement of cash flows. T 3. Classification of operating activities. F 4. First step in cash flow statement preparation. T 5. Reconciling beginning and ending cash balances. F 6. Net income and net cash flow from operating activities. T 7. Converting net income to net cash flow from operating activities. F 8. Reporting cash receipts/disbursements in direct method. T 9. Indirect method adjustments. F 10. FASB’s recommended method. T 11. Decrease in accounts receivable and cash-basis revenues. F 12. Decrease in prepaid expenses. F 13. Income from equity method investment. T 14. Computing cash receipts from customers. F 15. Computing cash payments for operating expenses. F 16. Amortization of bond premium. T 17. Purchases and sales of trading securities. T 18. Disclosing noncash investing and financing activities. F 19. Use of cash flow worksheet. T 20. Reporting stock dividends on worksheet.

MULTIPLE CHOICE—Conceptual Answer No. Description c 21. Objective of the statement of cash flows. c 22. Primary purpose of the statement of cash flows. c S23. Answers provided by the statement of cash flows. b S24. First step in cash flow statement preparation. d 25. Definition of cash equivalents. d 26. Cash flow effect of a short-term nontrade note payable. c S27. Reporting revenues and expenses on a cash basis. b 28. The effect of an inventory increase on cash flows from operating activities. b 29. Cash flow effects of a stock dividend. b 30. Effect of a change in dividends payable. d 31. Effect of cash dividend declaration on operating cash flows. c 32. Cash flow effects of major repairs on machinery. c P33. Classifying items as investing activities. b P34. Classification of a financing activity. b S35. Reporting amortization of bond premium. c S36. Converting accrual based expense to cash basis. b 37. Adjustment to income for inventory increase. c 38. Adjustment under the direct and indirect methods. c 39. Adjustment to cost of goods sold under the direct method.


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MULTIPLE CHOICE—Conceptual (cont.) Answer No. Description a 40. Adjustment for an increase in accounts payable. a 41. Adjustment for a decrease in prepaid insurance. b 42. Direct method vs. indirect method. c 43. Direct method vs. indirect method. d 44. Adjustment for equity method investment income. a 45. Reporting extraordinary transactions. d 46. Events not shown on statement of cash flows. c S47. Reporting significant noncash transactions. P These questions also appear in the Problem-Solving Survival Guide. S These questions also appear in the Study Guide.

MULTIPLE CHOICE—Computational Answer No. Description b 48. Determine net cash flow from investing activities. b 49. Determine net cash flow from financing activities. c 50. Determine net cash flow from operating activities. d 51. Determine net cash flow from investing activities. c 52. Determine net cash flow from financing activities. a 53. Determine cash flows from investing activities. d 54. Determine cash flows from financing activities. a 55. Determine net cash flow from operating activities. c 56. Determine net cash flow from investing activities. b 57. Determine cash received from customers (direct method). d 58. Determine taxes paid (direct method). c 59. Determine net cash flow from financing activities. c 60. Compute net cash used in financing activities. c 61. Sale of fixed assets at a gain/cash flow effects. b 62. Analysis of plant asset account/cash flow presentation. c 63. Sale of equipment at a gain/cash flow effects. c 64. Determine depreciation expense for the year. b 65. Determine depreciation expense for the year. a 66. Calculate equipment purchased during the year. c 67. Calculate cost of equipment sold. a 68. Determine book value of equipment at end of year. b 69. Determine ending balance of accounts payable. c 70. Determine ending balance of retained earnings. d 71. Determine ending balance of capital stock. b 72. Determine the amount of a cash dividend. d 73. Reporting a stock dividend. c 74. Compute proceeds from issuance of bonds payable. a 75. Compute net cash provided by operating activities. a 76. Determine net income for period. a 77. Compute net cash provided by operating activities. a 78. Compute net cash provided by operating activities. c 79. Determine cash collected from accounts receivable. b 80. Determine cash paid on accounts payable to suppliers. d 81. Compute net cash provided by investing activities.

Statement of Cash Flows

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MULTIPLE CHOICE—Computational (cont.) Answer No. Description a 82. Compute net cash provided by financing activities. b 83. Compute net cash flow from investing activities. d 84. Compute net cash flow from financing activities. b 85. Determine net income for period. a 86. Adjust net income for bad debt provision. c 87. Reporting insurance proceeds from a flood loss. b 88. Reporting a flood loss. c 89. Determine net cash flow from operating activities. b 90. Determine net cash flow from operating activities.

MULTIPLE CHOICE—CPA Adapted Answer No. Description a 91. Determine cash flow from investing activities. c 92. Determine cash flow from financing activities. c 93. Determine net cash used in investing activities. b 94. Determine net cash used in financing activities. b 95. Determine net cash provided by investing activities. b 96. Determine net cash provided by financing activities. c 97. Determine net cash provided by operating activities. a 98. Determine net cash used by investing activities. a 99. Determine net cash provided by financing activities. c 100. Determine depreciation charged to operations. b 101. Cash disbursements for insurance (direct method).

EXERCISES Item Description E23-102 Direct and indirect methods (essay). E23-103 Classification of cash flows. E23-104 Classification of cash flows and transactions. E23-105 Effects of transactions on statement of cash flows. E23-106 Effects of transactions on statement of cash flows. E23-107 Effects of transactions on statement of cash flows. E23-108 Calculations for statement of cash flows. E23-109 Calculations for statement of cash flows. E23-110 Cash flows from operating activities (direct/indirect). E23-111 Statement of cash flows (indirect method). E23-112 Preparation of statement of cash flows (format provided).

PROBLEMS Item Description P23-113 Statement of cash flows (indirect method). P23-114 Statement of cash flows (direct/indirect). P23-115 A complex statement of cash flows (indirect method).


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CHAPTER LEARNING OBJECTIVES 1. Describe the purpose of the statement of cash flows. 2. Identify the major classifications of cash flows. 3. Differentiate between net income and net cash flows from operating activities. 4. Contrast the direct and indirect methods of calculating net cash flow from operating

activities. 5. Determine net cash flows from investing and financing activities. 6. Prepare a statement of cash flows. 7. Identify sources of information for a statement of cash flows. 8. Discuss special problems in preparing a statement of cash flows. 9. Explain the use of a worksheet in preparing a statement of cash flows.


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1. TF 2. TF 21. MC 22. MC S23. MC Learning Objective 2

3. TF 4. TF 5. TF S24. MC 25. MC 26. MC 102. E Learning Objective 3

6. TF 7. TF S27. MC Learning Objective 4

8. TF 9. MC 28. MC 29. MC 30. MC 31. MC 102. E Learning Objective 5

32. MC 52. MC 59. MC 93. MC 98. MC 105. E 48. MC 53. MC 60. MC 94. MC 99. E 106. E 49. MC 54. MC 91. MC 95. MC 103. E 107. E 51. MC 56. MC 92. MC 96. MC 104. E

Learning Objective 6 10. TF S36. MC 63. MC 69. MC 75. MC 101. MC 111. E 11. TF 55. MC 64. MC 70. MC 76. MC 106. E 112. E 12. TF 57. MC 65. MC 71. MC 77. MC 107. E 113. P

P33. MC 58. MC 66. MC 72. MC 78. MC 108. E 114. P P34. MC 61. MC 67. MC 73. MC 97. MC 109. E 115. P S35. MC 62. MC 68. MC 74. MC 100. MC 110. E

Learning Objective 7 13. TF 37. MC 40. MC 43. MC 81. MC 105. E 14. TF 38. MC 41. MC 79. MC 82. MC 15. TF 39. MC 42. MC 80. MC 103. E

Learning Objective 8 16. TF 45. MC 83. MC 88. MC 105. E 112. E 17. TF 46. MC 84. MC 89. MC 106. E 113. P 18. MC S47. MC 85. MC 90. MC 107. E 114. P 30. MC 50. MC 86. MC 103. E 110. E 115. P 44. MC 73. MC 87. MC 104. E 111. E

Learning Objective 9 19. TF 20. TF

Note: TF = True-False MC = Multiple Choice E = Exercise P = Problem


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TRUE FALSE—Conceptual 1. The primary purpose of the statement of cash flows is to provide cash-basis information

about the company’s operating, investing, and financing activities. 2. The statement of cash flows provides information to help investors and creditors assess

the cash and noncash investing and financing transactions during the period. 3. Companies classify some cash flows relating to investing or financing activities as

operating activities. 4. The first step in the preparation of the statement of cash flows is to determine the net cash

flow from operating activities. 5. The net increase (decrease) in cash reported on the statement of cash flows should

reconcile the beginning and ending cash balances reported in the comparative balance sheets.

6. Under the accrual basis of accounting, net income is usually the same as net cash flow

from operating activities. 7. A company can convert net income to net cash flow from operating activities through

either the direct method or the indirect method. 8. The direct method, also called the reconciliation method, reports cash receipts and cash

disbursements from operating activities. 9. The indirect method adjusts net income for items that affected reported net income but did

not affect cash. 10. The FASB encourages the use of the indirect method over the direct method. 11. When accounts receivable decrease during a period, cash-basis revenues are higher than

revenues reported on an accrual basis. 12. When prepaid expenses decrease during a period, expenses on the accrual-basis are

lower than they are on a cash-basis. 13. Income from an investment in common stock using the equity method is added to net

income in computing net cash provided from operating activities. 14. Cash receipts from customers are computed by adding a decrease in accounts receivable

to revenue from sales. 15. Cash payments for operating expenses are computed by subtracting an increase in

prepaid expenses and a decrease in accrued expenses payable from operating expenses. 16. A company should add back bond premium amortization to net income to arrive at net

cash flow from operating activities.


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17. Companies report the cash flows from purchases and sales of trading securities as cash flows from operating activities.

18. Noncash investing and financing activities are disclosed either in a separate schedule or

in a separate note to the financial statements. 19. When numerous adjustments are necessary, companies often use a cash flow worksheet

instead of preparing a statement of cash flows. 20. The issuance of stock dividends is entered on the cash flow worksheet, but is not reported

in the statement of cash flows. True-False Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. 1. F 6. F 11. T 16. F 2. T 7. T 12. F 17. T 3. T 8. F 13. F 18. T 4. F 9. T 14. T 19. F 5. T 10. F 15. F 20. T

MULTIPLE CHOICE—Conceptual 21. It is an objective of the statement of cash flows to

a. disclose changes during the period in all asset and all equity accounts. b. disclose the change in working capital during the period. c. provide information about the operating, investing, and financing activities of an entity

during a period. d. none of these.

22. The primary purpose of the statement of cash flows is to provide information

a. about the operating, investing, and financing activities of an entity during a period. b. that is useful in assessing cash flow prospects. c. about the cash receipts and cash payments of an entity during a period. d. about the entity's ability to meet its obligations, its ability to pay dividends, and its

needs for external financing. S23. Of the following questions, which one would not be answered by the statement of cash

flows? a. Where did the cash come from during the period? b. What was the cash used for during the period? c. Were all the cash expenditures of benefit to the company during the period? d. What was the change in the cash balance during the period?

S24. The first step in the preparation of the statement of cash flows requires the use of

information included in which comparative financial statements? a. Statements of cash flows b. Balance sheets c. Income statements d. Statements of retained earnings


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25. Cash equivalents are a. treasury bills, commercial paper, and money market funds purchased with excess

cash. b. investments with original maturities of three months or less. c. readily convertible into known amounts of cash. d. all of these.

26. A company borrows $10,000 and signs a 90-day nontrade note payable. In preparing a

statement of cash flows (indirect method), this event would be reflected as a(n) a. addition adjustment to net income in the cash flows from operating activities section. b. cash outflow from investing activities. c. cash inflow from investing activities. d. cash inflow from financing activities.

S27. To arrive at net cash provided by operating activities, it is necessary to report revenues

and expenses on a cash basis. This is done by a. re-recording all income statement transactions that directly affect cash in a separate

cash flow journal. b. estimating the percentage of income statement transactions that were originally

reported on a cash basis and projecting this amount to the entire array of income statement transactions.

c. eliminating the effects of income statement transactions that did not result in a corresponding increase or decrease in cash.

d. eliminating all transactions that have no current or future effect on cash, such as depreciation, from the net income computation.

28. An increase in inventory balance would be reported in a statement of cash flows using the

indirect method (reconciliation method) as a(n) a. addition to net income in arriving at net cash flow from operating activities. b. deduction from net income in arriving at net cash flow from operating activities. c. cash outflow from investing activities. d. cash outflow from financing activities.

29. A statement of cash flows typically would not disclose the effects of

a. capital stock issued at an amount greater than par value. b. stock dividends declared. c. cash dividends paid. d. a purchase and immediate retirement of treasury stock.

30. When preparing a statement of cash flows (indirect method), which of the following is not

an adjustment to reconcile net income to net cash provided by operating activities? a. A change in interest payable b. A change in dividends payable c. A change in income taxes payable d. All of these are adjustments.


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31. Declaration of a cash dividend on common stock affects cash flows from operating activities under the direct and indirect methods as follows: Direct Method Indirect Method a. Outflow Inflow b. Inflow Inflow c. Outflow Outflow d. No effect No effect

32. In a statement of cash flows, the cash flows from investing activities section should report

a. the issuance of common stock in exchange for a factory building. b. stock dividends received. c. a major repair to machinery charged to accumulated depreciation. d. the assignment of accounts receivable.

P33. Xanthe Corporation had the following transactions occur in the current year:

1. Cash sale of merchandise inventory. 2. Sale of delivery truck at book value. 3. Sale of Xanthe common stock for cash. 4. Issuance of a note payable to a bank for cash. 5. Sale of a security held as an available-for-sale investment. 6. Collection of loan receivable.

How many of the above items will appear as a cash inflow from investing activities on a statement of cash flows for the current year? a. Five items b. Four items c. Three items d. Two items

P34. Which of the following would be classified as a financing activity on a statement of cash

flows? a. Declaration and distribution of a stock dividend b. Deposit to a bond sinking fund c. Sale of a loan receivable d. Payment of interest to a creditor

S35. The amortization of bond premium on long-term debt should be presented in a statement

of cash flows (using the indirect method for operating activities) as a(n) a. addition to net income. b. deduction from net income. c. investing activity. d. financing activity.

S36. Crabbe Company reported $80,000 of selling and administrative expenses on its income

statement for the past year. The company had depreciation expense and an increase in prepaid expenses associated with the selling and administrative expenses for the year. Assuming use of the direct method, how would these items be handled in converting the accrual based selling and administrative expenses to the cash basis?


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Increase in Depreciation Prepaid Expenses

a. Deducted From Deducted From b. Added To Added To c. Deducted From Added To d. Added To Deducted From

37. When preparing a statement of cash flows (indirect method), an increase in ending

inventory over beginning inventory will result in an adjustment to reported net earnings because a. cash was increased while cost of goods sold was decreased. b. cost of goods sold on an accrual basis is lower than on a cash basis. c. acquisition of inventory is an investment activity. d. inventory purchased during the period was less than inventory sold resulting in a net

cash increase. 38. When preparing a statement of cash flows, a decrease in accounts receivable during a

period would cause which one of the following adjustments in determining cash flow from operating activities? Direct Method Indirect Method a. Increase Decrease b. Decrease Increase c. Increase Increase d. Decrease Decrease

39. In determining net cash flow from operating activities, a decrease in accounts payable

during a period a. means that income on an accrual basis is less than income on a cash basis. b. requires an addition adjustment to net income under the indirect method. c. requires an increase adjustment to cost of goods sold under the direct method. d. requires a decrease adjustment to cost of goods sold under the direct method.

40. When preparing a statement of cash flows, an increase in accounts payable during a

period would require which of the following adjustments in determining cash flows from operating activities?

Indirect Method Direct Method a. Increase Decrease b. Decrease Increase c. Increase Increase d. Decrease Decrease

41. When preparing a statement of cash flows, a decrease in prepaid insurance during a

period would require which of the following adjustments in determining cash flows from operating activities?

Indirect Method Direct Method a. Increase Decrease b. Decrease Increase c. Increase Increase d. Decrease Decrease


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42. When preparing a statement of cash flows, the following are used for which method in determining cash flows from operating activities?

Gross Accounts Receivable Net Accounts Receivable a. Indirect Direct b. Direct Indirect c. Direct Direct d. Neither Indirect

43. Which of the following statements is correct?

a. The indirect method starts with income before extraordinary items. b. The direct method is known as the reconciliation method. c. The direct method is more consistent with the primary purpose of the statement of

cash flows. d. All of these.

44. Riley Company reports its income from investments under the equity method and

recognized income of $25,000 from its investment in Wood Co. during the current year, even though no dividends were declared or paid by Wood during the year. On Riley's statement of cash flows (indirect method), the $25,000 should a. not be shown. b. be shown as cash inflow from investing activities. c. be shown as cash outflow from financing activities. d. be shown as a deduction from net income in the cash flows from operating activities

section. 45. In reporting extraordinary transactions on a statement of cash flows (indirect method), the

a. gross amount of an extraordinary gain should be deducted from net income. b. net of tax amount of an extraordinary gain should be added to net income. c. net of tax amount of an extraordinary gain should be deducted from net income. d. gross amount of an extraordinary gain should be added to net income.

46. Which of the following is shown on a statement of cash flows?

a. A stock dividend b. A stock split c. An appropriation of retained earnings d. None of these

S47. How should significant noncash transactions be reported in the statement of cash flows

according to FASB Statement No. 95? a. They should be incorporated in the statement of cash flows in a section labeled,

"Significant Noncash Transactions." b. Such transactions should be incorporated in the section (operating, financing, or

investing) that is most representative of the major component of the transaction. c. These noncash transactions are not to be incorporated in the statement of cash flows.

They may be summarized in a separate schedule at the bottom of the statement or appear in a separate supplementary schedule to the financials.

d. They should be handled in a manner consistent with the transactions that affect cash flows.


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Multiple Choice Answers—Conceptual Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

21. c 25. d 29. b 33. c 37. b 41. a 45. a 22. c 26. d 30. b 34. b 38. c 42. b 46. d 23. c 27. c 31. d 35. b 39. c 43. c 47. c 24. b 28. b 32. c 36. c 40. a 44. d

MULTIPLE CHOICE—Computational Use the following information for questions 48 and 49.

Lange Co. provided the following information on selected transactions during 2008:

Purchase of land by issuing bonds $250,000 Proceeds from issuing bonds 500,000 Purchases of inventory 950,000 Purchases of treasury stock 150,000 Loans made to affiliated corporations 350,000 Dividends paid to preferred stockholders 100,000 Proceeds from issuing preferred stock 400,000 Proceeds from sale of equipment 50,000

48. The net cash provided (used) by investing activities during 2008 is

a. $50,000. b. $(300,000). c. $(550,000). d. $(1,250,000).

49. The net cash provided by financing activities during 2008 is

a. $550,000. b. $650,000. c. $800,000. d. $900,000.


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The balance sheet data of Naley Company at the end of 2008 and 2007 follow: 2008 2007 Cash $ 50,000 $ 70,000 Accounts receivable (net) 120,000 90,000 Merchandise inventory 140,000 90,000 Prepaid expenses 20,000 50,000 Buildings and equipment 180,000 150,000 Accumulated depreciation—buildings and equipment (36,000) (16,000) Land 180,000 80,000 Totals $654,000 $514,000

Accounts payable $136,000 $110,000 Accrued expenses 24,000 36,000 Notes payable—bank, long-term 80,000 Mortgage payable 60,000 Common stock, $10 par 418,000 318,000 Retained earnings (deficit) 16,000 (30,000) $654,000 $514,000

Land was acquired for $100,000 in exchange for common stock, par $100,000, during the year; all equipment purchased was for cash. Equipment costing $10,000 was sold for $4,000; book value of the equipment was $8,000 and the loss was reported as an ordinary item in net income. Cash dividends of $20,000 were charged to retained earnings and paid during the year; the transfer of net income to retained earnings was the only other entry in the Retained Earnings account. In the statement of cash flows for the year ended December 31, 2008, for Naley Company: 50. The net cash provided by operating activities was

a. $52,000. b. $66,000. c. $56,000. d. $48,000.

51. The net cash provided (used) by investing activities was

a. $26,000. b. $(40,000). c. $(136,000). d. $(36,000).

52. The net cash provided (used) by financing activities was

a. $ -0-. b. $(20,000). c. $(40,000). d. $60,000.


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53. The following information on selected cash transactions for 2008 has been provided by Simpson Company:

Proceeds from sale of land $160,000 Proceeds from long-term borrowings 400,000 Purchases of plant assets 144,000 Purchases of inventories 680,000 Proceeds from sale of Simpson common stock 240,000

What is the cash provided (used) by investing activities for the year ended December 31, 2008, as a result of the above information? a. $16,000 b. $256,000. c. $160,000. d. $800,000.

54. Selected information from Adison Company's 2008 accounting records is as follows:

Proceeds from issuance of common stock $ 400,000 Proceeds from issuance of bonds 1,200,000 Cash dividends on common stock paid 160,000 Cash dividends on preferred stock paid 60,000 Purchases of treasury stock 120,000 Sale of stock to officers and employees not included above 100,000

Adison's statement of cash flows for the year ended December 31, 2008, would show net cash provided (used) by financing activities of a. $60,000. b. $(220,000). c. $160,000. d. $1,360,000.


Paxson Mining Co. has recently decided to go public and has hired you as an independent CPA. One statement that the enterprise is anxious to have prepared is a statement of cash flows. Financial statements of Paxson Mining Co. for 2008 and 2007 are provided below.

BALANCE SHEETS 12/31/08 12/31/07 Cash $204,000 $ 96,000 Accounts receivable 180,000 108,000 Merchandise inventory 192,000 240,000 Property, plant and equipment $304,000 $480,000 Less accumulated depreciation (160,000) 144,000 (152,000) 328,000 $720,000 $772,000 Accounts payable $ 88,000 $ 48,000 Income taxes payable 176,000 196,000 Bonds payable 180,000 300,000 Common stock 108,000 108,000 Retained earnings 168,000 120,000 $720,000 $772,000


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INCOME STATEMENT For the Year Ended December 31, 2008

Sales $4,200,000 Cost of sales 3,576,000 Gross profit 624,000 Selling expenses $300,000 Administrative expenses 96,000 396,000 Income from operations 228,000 Interest expense 36,000 Income before taxes 192,000 Income taxes 48,000 Net income $ 144,000

The following additional data were provided: 1. Dividends for the year 2008 were $96,000. 2. During the year, equipment was sold for $120,000. This equipment cost $176,000 originally

and had a book value of $144,000 at the time of sale. The loss on sale was incorrectly charged to cost of sales.

3. All depreciation expense is in the selling expense category.

Questions 55 through 59 relate to a statement of cash flows (direct method) for the year ended December 31, 2008, for Paxson Mining Company. 55. The net cash provided by operating activities is

a. $204,000. b. $144,000. c. $120,000. d. $100,000.

56. The net cash provided (used) by investing activities is

a. $(176,000). b. $24,000. c. $120,000. d. $(144,000).

57. Under the direct method, the cash received from customers is

a. $4,272,000. b. $4,128,000. c. $4,200,000. d. $4,220,000.

58. Under the direct method, the total taxes paid is

a. $48,000. b. $20,000. c. $28,000. d. $68,000.

59. The net cash provided (used) by financing activities is

a. $(120,000). b. $24,000. c. $(216,000). d. $96,000.


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60. During 2008, Ogden Inc. had the following activities related to its financial operations:

Carrying value of convertible preferred stock in Ogden, converted into common shares of Ogden $ 360,000 Payment in 2008 of cash dividend declared in 2007 to preferred shareholders 186,000 Payment for the early retirement of long-term bonds payable (carrying amount $2,220,000) 2,250,000 Proceeds from the sale of treasury stock (on books at cost of $258,000) 300,000

The amount of net cash used in financing activities to appear in Ogden's statement of cash flows for 2008 should be a. $1,590,000. b. $1,776,000. c. $2,136,000. d. $2,148,000.

61. Tobin Company sold some of its plant assets during 2008. The original cost of the plant

assets was $750,000 and the accumulated depreciation at date of sale was $700,000. The proceeds from the sale of the plant assets were $105,000. The information concerning the sale of the plant assets should be shown on Tobin's statement of cash flows (indirect method) for the year ended December 31, 2008, as a(n) a. subtraction from net income of $55,000 and a $50,000 increase in cash flows from

financing activities. b. addition to net income of $55,000 and a $105,000 increase in cash flows from

investing activities. c. subtraction from net income of $55,000 and a $105,000 increase in cash flows from

investing activities. d. addition of $105,000 to net income.

62. An analysis of the machinery accounts of Doonan Company for 2008 is as follows:

Machinery, Net of Accumulated Accumulated Machinery Depreciation Depreciation Balance at January 1, 2008 $500,000 $125,000 $375,000 Purchases of new machinery in 2008 for cash 200,000 — 200,000 Depreciation in 2008 — 100,000 (100,000) Balance at Dec. 31, 2008 $700,000 $225,000 $475,000

The information concerning Doonan's machinery accounts should be shown in Doonan's statement of cash flows (indirect method) for the year ended December 31, 2008, as a(n) a. subtraction from net income of $100,000 and a $200,000 decrease in cash flows from

financing activities. b. addition to net income of $100,000 and a $200,000 decrease in cash flows from

investing activities. c. $100,000 increase in cash flows from financing activities. d. $200,000 decrease in cash flows from investing activities.


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63. Equipment which cost $213,000 and had accumulated depreciation of $114,000 was sold for $111,000. This transaction should be shown on the statement of cash flows (indirect method) as a(n) a. addition to net income of $12,000 and a $111,000 cash inflow from financing activities. b. deduction from net income of $12,000 and a $99,000 cash inflow from investing

activities. c. deduction from net income of $12,000 and a $111,000 cash inflow from investing

activities. d. addition to net income of $12,000 and a $99,000 cash inflow from financing activities.

64. During 2008, equipment was sold for $156,000. The equipment cost $252,000 and had a

book value of $144,000. Accumulated Depreciation—Equipment was $687,000 at 12/31/07 and $735,000 at 12/31/08. Depreciation expense for 2008 was a. $60,000. b. $96,000. c. $156,000. d. $192,000.


Equipment that cost $300,000 and had a book value of $156,000 was sold for $180,000. Data from the comparative balance sheets are: 12/31/08 12/31/07 Equipment $2,160,000 $1,950,000 Accumulated Depreciation 660,000 570,000 65. Depreciation expense for 2008 was

a. $258,000. b. $234,000. c. $54,000. d. $36,000.

66. Equipment purchased during 2008 was

a. $510,000. b. $300,000. c. $210,000. d. $90,000.


Financial statements for Rogan Company are given below: Rogan Company Balance Sheet

January 1, 2008 Assets Equities Cash $ 320,000 Accounts payable $ 152,000 Accounts receivable 288,000 Buildings and equipment 1,200,000 Accumulated depreciation— buildings and equipment (400,000) Capital stock 920,000 Patents 144,000 Retained earnings 480,000 $1,552,000 $1,552,000


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Rogan Company Statement of Cash Flows

For the Year Ended December 31, 2008 Increase (Decrease) in Cash

Cash flows from operating activities Net income $400,000 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accounts receivable $(128,000) Increase in accounts payable 64,000 Depreciation—buildings and equipment 120,000 Gain on sale of equipment (48,000) Amortization of patents 16,000 24,000 Net cash provided by operating activities 424,000

Cash flows from investing activities Sale of equipment 96,000 Purchase of land (200,000) Purchase of buildings and equipment (384,000) Net cash used by investing activities (488,000)

Cash flows from financing activities Payment of cash dividend (120,000) Sale of common stock 320,000 Net cash provided by financing activities 200,000 Net increase in cash 136,000 Cash, January 1, 2008 320,000 Cash, December 31, 2008 $456,000

Total assets on the balance sheet at December 31, 2008 are $2,216,000. Accumulated deprecia-tion on the equipment sold was $112,000. 67. When the equipment was sold, the Buildings and Equipment account received a credit of

a. $96,000. b. $208,000. c. $160,000. d. $112,000.

68. The book value of the buildings and equipment at December 31, 2008 was

a. $1,016,000. b. $1,040,000. c. $1,424,000. d. $1,176,000.

69. The accounts payable at December 31, 2008 were

a. $88,000. b. $216,000. c. $64,000. d. $296,000.


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70. The balance in the Retained Earnings account at December 31, 2008 was a. $360,000. b. $880,000. c. $760,000. d. $1,000,000.

71. Capital stock (plus any additional paid-in capital) at December 31, 2008 was

a. $800,000. b. $920,000. c. $520,000. d. $1,240,000.

Use the following information for questions 72 and 73. The balance in retained earnings at December 31, 2007 was $720,000 and at December 31, 2008 was $582,000. Net income for 2008 was $500,000. A stock dividend was declared and distributed which increased common stock $200,000 and paid-in capital $110,000. A cash dividend was declared and paid. 72. The amount of the cash dividend was

a. $248,000. b. $328,000. c. $442,000. d. $638,000.

73. The stock dividend should be reported on the statement of cash flows (indirect method) as

a. an outflow from financing activities of $200,000. b. an outflow from financing activities of $310,000. c. an outflow from investing activities of $310,000. d. Stock dividends are not shown on a statement of cash flows.

74. The following information was taken from the 2008 financial statements of Sawyer

Corporation:

Bonds payable, January 1, 2008 $ 500,000 Bonds payable, December 31, 2008 2,000,000

During 2008 • A $450,000 payment was made to retire bonds payable with a face amount of

$500,000. • Bonds payable with a face amount of $200,000 were issued in exchange for

equipment.

In its statement of cash flows for the year ended December 31, 2008, what amount should Sawyer report as proceeds from issuance of bonds payable? a. $1,500,000 b. $1,750,000 c. $1,800,000 d. $2,200,000


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75. Richman Corporation had net income for 2008 of $3,000,000. Additional information is as follows:

Depreciation of plant assets $1,200,000 Amortization of intangibles 240,000 Increase in accounts receivable 420,000 Increase in accounts payable 540,000

Richman's net cash provided by operating activities for 2008 was a. $4,560,000. b. $4,440,000. c. $4,320,000. d. $1,680,000.

76. Net cash flow from operating activities for 2008 for Fordham Corporation was $300,000.

The following items are reported on the financial statements for 2008:

Cash dividends paid on common stock 20,000 Depreciation and amortization 12,000 Increase in accounts receivables 24,000

Based on the information above, Fordham’s net income for 2008 was a. $312,000. b. $296,000. c. $264,000. d. $256,000.

77. During 2008, Hogan Company earned net income of $384,000 which included deprecia-

tion expense of $78,000. In addition, the company experienced the following changes in the account balances listed below:

Increases Decreases Accounts payable $45,000 Accounts receivable $12,000 Inventory 36,000 Accrued liabilities 24,000 Prepaid insurance 33,000

Based upon this information what amount will be shown for net cash provided by operating activities for 2008? a. $492,000 b. $465,000 c. $285,000 d. $267,000

78. Robley Company reported net income of $340,000 for the year ended 12/31/08. Included

in the computation of net income were: depreciation expense, $60,000; amortization of a patent, $32,000; income from an investment in common stock of Brett Inc., accounted for under the equity method, $48,000; and amortization of a bond discount, $12,000. Robley also paid an $80,000 dividend during the year. The net cash provided by operating activities would be reported at: a. $396,000. b. $316,000. c. $284,000. d. $204,000.


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Questions 79 through 82 are based on the data shown below related to the statement of cash flows for Litwin, Inc.:

Litwin, Inc. Comparative Balance Sheets

December 31,

2008 2007 Assets: Current Assets: Cash $ 690,000 $ 540,000 Accounts Receivable (net) 1,560,000 1,080,000 Merchandise Inventory 1,950,000 1,260,000 Prepaid Expenses 351,000 315,000 Total Current Assets 4,551,000 3,195,000 Long-Term Investments 225,000 Plant Assets: Property, Plant & Equipment 2,190,000 1,440,000 Accumulated Depreciation (450,000) (270,000) Total Plant Assets 1,740,000 1,170,000 Total Assets $6,516,000 $4,365,000 Equities: Current Liabilities: Accounts Payable $1,275,000 $1,095,000 Accrued Expenses 309,000 282,000 Dividends Payable 201,000 Total Current Liabilities 1,785,000 1,377,000 Long-Term Notes Payable 825,000 Stockholders' Equity: Common Stock 3,000,000 2,400,000 Retained Earnings 906,000 588,000 Total Equities $6,516,000 $4,365,000

Litwin, Inc. Comparative Income Statements

December 31, 2008 2007 Net Credit Sales $7,020,000 $3,753,000 Cost of Goods Sold 3,915,000 1,881,000 Gross Profit 3,105,000 1,872,000 Expenses (including Income Tax) 2,586,000 1,374,000 Net Income $ 519,000 $ 498,000 Additional Information:

a. Accounts receivable and accounts payable relate to merchandise held for sale in the normal course of business. The allowance for bad debts was the same at the end of 2008 and 2007, and no receivables were charged against the allowance. Accounts payable are recorded net of any discount and are always paid within the discount period.

b. The proceeds from the note payable were used to finance the acquisition of property, plant, and equipment. Capital stock was sold to provide additional working capital.


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79. What amount of cash was collected from 2008 accounts receivable? a. $7,500,000. b. $7,020,000. c. $6,540,000. d. $3,270,000.

80. What amount of cash was paid on accounts payable to suppliers during 2008?

a. $4,605,000. b. $4,425,000. c. $4,095,000. d. $3,735,000.

81. The amount to be shown on the cash flow statement as net cash provided by investing

activities would total what amount? a. $225,000. b. $750,000. c. $795,000. d. $975,000.

82. The amount to be shown on the cash flow statement as net cash provided by financing

activities would total what amount? a. $1,425,000. b. $825,000. c. $600,000. d. $408,000.

Use the following information for questions 83 and 84. Weimers Company provided the following information on selected transactions during 2008:

Dividends paid to preferred stockholders $ 150,000 Loans made to affiliated corporations 750,000 Proceeds from issuing bonds 900,000 Proceeds from issuing preferred stock 1,050,000 Proceeds from sale of equipment 450,000 Purchases of inventories 1,200,000 Purchase of land by issuing bonds 300,000 Purchases of treasury stock 600,000

83. The net cash provided (used) by investing activities during 2008 is

a. $(600,000). b. $(300,000). c. $150,000. d. $450,000.

84. The net cash provided (used) by financing activities during 2008 is

a. $(1,650,000). b. $450,000. c. $750,000. d. $1,200,000.


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85. The net cash provided by operating activities in Otto Company's statement of cash flows for 2008 was $115,000. For 2008, depreciation on plant assets was $45,000, amortization of patent was $8,000, and cash dividends paid on common stock was $54,000. Based only on the information given above, Otto’s net income for 2008 was a. $115,000. b. $62,000. c. $8,000. d. $116,000.

86. During 2008, Garber Corporation, which uses the allowance method of accounting for

doubtful accounts, recorded a provision for bad debt expense of $25,000 and in addition it wrote off, as uncollectible, accounts receivable of $10,000. As a result of these transactions, net cash flows from operating activities would be calculated (indirect method) by adjusting net income with a a. $25,000 increase. b. $10,000 increase. c. $15,000 increase. d. $15,000 decrease.


A flood damaged a building and contents. Floods are unusual and infrequent in this area. The receipts from insurance companies totaled $300,000, which was $90,000 less than the book values. The tax rate is 30%. 87. On the statement of cash flows (indirect method), the receipts from insurance companies

should a. be shown as an addition to net income of $210,000. b. be shown as an inflow from investing activities of $210,000. c. be shown as an inflow from investing activities of $300,000. d. not be shown.

88. On the statement of cash flows (indirect method), the flood loss should

a. be shown as an addition to net income of $63,000. b. be shown as an addition to net income of $90,000. c. be shown as an inflow from investing activities of $63,000. d. not be shown.

89. Snow Incorporated, had net income for 2008 of $5,000,000. Additional information is as

follows:

Amortization of patents $ 45,000 Depreciation on plant assets 1,650,000 Long-term debt: Bond premium amortization 65,000 Interest paid 900,000 Provision for doubtful accounts: Current receivables 80,000 Long-term nontrade receivables 30,000

What should be the net cash provided by operating activities in the statement of cash flows for the year ended December 31, 2008, based solely on the above information?


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a. $6,820,000. b. $6,870,000. c. $6,740,000. d. $6,840,000.

90. The net income for the year ended December 31, 2008, for Unger Company was

$1,200,000. Additional information is as follows:

Depreciation on plant assets $600,000 Amortization of leasehold improvements 340,000 Provision for doubtful accounts on short-term receivables 120,000 Provision for doubtful accounts on long-term receivables 100,000 Interest paid on short-term borrowings 80,000 Interest paid on long-term borrowings 60,000

Based solely on the information given above, what should be the net cash provided by operating activities in the statement of cash flows for the year ended December 31, 2008? a. $2,260,000. b. $2,360,000. c. $2,340,000. d. $2,500,000.

Multiple Choice Answers—Computational

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.48. b 55. a 62. b 69. b 76. a 83. b 90. b 49. b 56. c 63. c 70. c 77. a 84. d 50. c 57. b 64. c 71. d 78. a 85. b 51. d 58. d 65. b 72. b 79. c 86. a 52. c 59. c 66. a 73. d 80. b 87. c 53. a 60. c 67. c 74. c 81. d 88. b 54. d 61. c 68. a 75. a 82. a 89. c

MULTIPLE CHOICE—CPA Adapted Use the following information for questions 91 and 92.

A company acquired a building, paying a portion of the purchase price in cash and issuing a mortgage note payable to the seller for the balance. 91. In a statement of cash flows, what amount is included in investing activities for the above

transaction? a. Cash payment b. Acquisition price c. Zero d. Mortgage amount


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92. In a statement of cash flows, what amount is included in financing activities for the above transaction? a. Cash payment b. Acquisition price c. Zero d. Mortgage amount


Kerwin Corp.'s transactions for the year ended December 31, 2008 included the following: • Purchased real estate for $550,000 cash which was borrowed from a bank. • Sold available-for-sale securities for $500,000. • Paid dividends of $600,000. • Issued 500 shares of common stock for $250,000. • Purchased machinery and equipment for $125,000 cash. • Paid $450,000 toward a bank loan. • Reduced accounts receivable by $100,000. • Increased accounts payable $200,000. 93. Kerwin's net cash used in investing activities for 2008 was

a. $675,000. b. $375,000. c. $175,000. d. $50,000.

94. Kerwin's net cash used in financing activities for 2008 was

a. $50,000. b. $250,000. c. $450,000. d. $500,000.


Miloy Corp.'s transactions for the year ended December 31, 2008 included the following:

• Acquired 50% of Gant Corp.'s common stock for $180,000 cash which was borrowed from a bank.

• Issued 5,000 shares of its preferred stock for land having a fair value of $320,000. • Issued 500 of its 11% debenture bonds, due 2013, for $392,000 cash. • Purchased a patent for $220,000 cash. • Paid $120,000 toward a bank loan. • Sold available-for-sale securities for $796,000. • Had a net increase in returnable customer deposits (long-term) of $88,000. 95. Miloy’s net cash provided by investing activities for 2008 was

a. $296,000. b. $396,000. c. $476,000. d. $616,000.


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96. Miloy’s net cash provided by financing activities for 2008 was a. $452,000. b. $540,000. c. $572,000. d. $660,000.


Talbert Corp.'s balance sheet accounts as of December 31, 2008 and 2007 and information relating to 2008 activities are presented below. December 31, 2008 2007 Assets Cash $ 440,000 $ 200,000 Short-term investments 600,000 — Accounts receivable (net) 1,020,000 1,020,000 Inventory 1,380,000 1,200,000 Long-term investments 400,000 600,000 Plant assets 3,400,000 2,000,000 Accumulated depreciation (900,000) (900,000) Patent 180,000 200,000 Total assets $6,520,000 $4,320,000 Liabilities and Stockholders' Equity Accounts payable and accrued liabilities $1,660,000 $1,440,000 Notes payable (nontrade) 580,000 — Common stock, $10 par 1,600,000 1,400,000 Additional paid-in capital 800,000 500,000 Retained earnings 1,880,000 980,000 Total liabilities and stockholders' equity $6,520,000 $4,320,000 Information relating to 2008 activities: • Net income for 2008 was $1,500,000. • Cash dividends of $600,000 were declared and paid in 2008. • Equipment costing $1,000,000 and having a carrying amount of $320,000 was sold in 2008

for $360,000. • A long-term investment was sold in 2008 for $320,000. There were no other transactions

affecting long-term investments in 2008. • 20,000 shares of common stock were issued in 2008 for $25 a share. • Short-term investments consist of treasury bills maturing on 6/30/09. 97. Net cash provided by Talbert’s 2008 operating activities was

a. $1,500,000. b. $2,120,000. c. $2,080,000. d. $2,160,000.

98. Net cash used in Talbert’s 2008 investing activities was

a. $2,320,000. b. $1,820,000. c. $1,680,000. d. $1,720,000.


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99. Net cash provided by Talbert’s 2008 financing activities was a. $480,000. b. $520,000. c. $1,080,000. d. $1,680,000.

100. Bell Corp.'s comparative balance sheet at December 31, 2008 and 2007 reported

accumulated depreciation balances of $800,000 and $600,000, respectively. Property with a cost of $50,000 and a carrying amount of $38,000 was the only property sold in 2008. Depreciation charged to operations in 2008 was a. $188,000. b. $200,000. c. $212,000. d. $224,000.

101. Walsh Co.'s prepaid insurance was $90,000 at December 31, 2008 and $45,000 at

December 31, 2007. Insurance expense was $36,000 for 2008 and $27,000 for 2007. What amount of cash disbursements for insurance would be reported in Walsh's 2008 net cash provided by operating activities presented on a direct basis? a. $99,000. b. $81,000. c. $54,000. d. $36,000.


Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 91. a 93. c 95. b 97. c 99. a 101. b 92. c 94. b 96. b 98. a 100. c

DERIVATIONS — Computational No. Answer Derivation 48. b $50,000 – $350,000 = –$300,000. 49. b $500,000 – $150,000 – $100,000 + $400,000 = $650,000. 50. c $16,000 + $20,000 + $30,000 = $66,000 (NI) ($10,000 – $2,000) – $4,000 = $4,000 (Loss) $36,000 + $2,000 – $16,000 = $55,000 (Depr. exp.) $66,000 – $30,000 – $50,000 + $30,000 + $4,000 + $22,000 + $26,000 –

$12,000 = $56,000. 51. d $4,000 – ($180,000 + $10,000 – $150,000) = ($36,000). 52. c ($80,000) + $60,000 – $20,000 = ($40,000). 53. a $160,000 – $144,000 = $16,000.


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DERIVATIONS — Computational (cont.) No. Answer Derivation 54. d $400,000 + $1,200,000 – $160,000 – $60,000 – $120,000 + $100,000 =

$1,360,000. 55. a $144,000 + $24,000 + ($160,000 + $32,000 – $152,000) – $72,000 + $48,000 +

$40,000 – $20,000 = $204,000. 56. c $120,000. 57. b $108,000 + $4,200,000 – $180,000 = $4,128,000. 58. d $196,000 + $48,000 – $176,000 = $68,000. 59. c ($96,000) – ($120,000) = ($216,000). 60. c $300,000 – $186,000 – $2,250,000 = $2,136,000. 61. c $105,000 – ($750,000 – $700,000) = $55,000, $105,000 (proceeds). 62. b Conceptual. 63. c $111,000 – ($213,000 – $114,000) = $12,000, $111,000 (proceeds). 64. c $735,000 – $687,000 + ($252,000 – $144,000) = $156,000. 65. b $660,000 – $570,000 + ($300,000 – $156,000) = $234,000. 66. a $2,160,000 – $1,950,000 + $300,000 = $510,000. 67. c $96,000 – $48,000 = $48,000 (BV); $48,000 + $112,000 = $160,000. 68. a ($1,200,000 – $400,000) – $48,000 + $384,000 – $120,000 = $1,016,000. 69. b $152,000 + $64,000 = $216,000. 70. c $480,000 + $400,000 – $120,000 = $760,000. 71. d $920,000 + $320,000 = $1,240,000. 72. b $720,000 + $500,000 – ($200,000 + $110,000) – X = $582,000 X = $328,000. 73. d Conceptual. 74. c $2,000,000 – $500,000 + $500,000 – $200,000 = $1,800,000. 75. a $3,000,000 + $1,200,000 – $240,000 + $420,000 + $540,000 = $4,560,000. 76. a X + $12,000 – $24,000 = $300,000; X = $312,000.


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DERIVATIONS — Computational (cont.) No. Answer Derivation 77. a $384,000 + $78,000 + $45,000 – $36,000 + $12,000 – $24,000 + $33,000 =

$492,000. 78. a $340,000 + $60,000 + $32,000 – $48,000 + $12,000 = $396,000. 79. c $1,080,000 + $7,020,000 – $1,560,000 = $6,540,000. 80. b $1,095,000 + ($3,915,000 + $1,950,000 – $1,260,000) – $1,275,000 =

$4,425,000. 81. d $225,000 + ($2,190,000 – $1,440,000) = $975,000. 82. a $825,000 + ($3,000,000 – $2,400,000) = $1,425,000. 83. b ($750,000) + $450,000 = ($300,000). 84. d ($150,000) + $900,000 + $1,050,000 + ($600,000) = $1,200,000. 85. b $115,000 – $45,000 – $8,000 = $62,000. 86. a $25,000. 87. c Conceptual, $300,000 (proceeds), (extraordinary item). 88. b Conceptual, $390,000 – $300,000 = $90,000. 89. c $5,000,000 + $45,000 + $1,650,000 – $65,000 + $80,000 + $30,000 =

$6,740,000. 90. b $1,200,000 + $600,000 + $340,000 + $120,000 + $100,000 = $2,360,000.

DERIVATIONS — CPA Adapted No. Answer Derivation 91. a Conceptual. 92. c Conceptual. 93. c ($550,000) + $500,000 – $125,000 = ($175,000). 94. b $550,000 – $600,000 + $250,000 – $450,000 = ($250,000). 95. b ($180,000) – $220,000 + $796,000 = $396,000. 96. b $180,000 + $392,000 – $120,000 + $88,000 = $540,000. 97. c $1,500,000 – $180,000 + ($900,000 – $900,000 + $680,000) + ($360,000 –

$320,000) + $20,000 + $220,000 – ($320,000 – $200,000) = $2,080,000.


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DERIVATIONS — CPA Adapted (cont.) No. Answer Derivation 98. a $320,000 + $360,000 – ($3,400,000 + $1,000,000 – $2,000,000) – $600,000 =

$2,320,000. 99. a 20,000 × $25 = $500,000 $500,000 + $580,000 – $600,000 = $480,000. 100. c $800,000 – $600,000 + ($50,000 – $38,000) = $212,000. 101. b $90,000 + $36,000 – $45,000 = $81,000.

EXERCISES Ex. 23-102—Direct and indirect methods.

Compare the direct method and the indirect method by explaining each method. Solution 23-102 The direct method adjusts revenues and expenses to a cash basis. The difference between cash revenues and cash expenses is cash net income, which is equal to net cash flow from operating activities. The indirect method involves adjusting accrual net income to a cash basis. This is done by starting with accrual net income and adding or subtracting noncash items included in net income. Examples of adjustments include depreciation, amortization, other noncash expenses and revenues, gains and losses, and changes in the balances of current assets and current liabilities during the year. Ex. 23-103—Classification of cash flows.

Note that X in the following statement of cash flows identifies a dollar amount and the letters (A) through (F) identify specific items which appear in the major sections of the statement prepared using the indirect method.

Statement of Cash Flows Cash flows from operating activities Net income X Adjustments to reconcile net income to net cash provided by operating activities: Add +X (A) Deduct –X (B) Net cash provided by operating activities X


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Ex. 23-103 (cont.).

Cash flows from investing activities Inflows +X (C) Outflows –X (D) Net cash provided (used) by investing activities X Cash flows from financing activities Inflows +X (E) Outflows –X (F) Net cash provided (used) by financing activities X Net increase (decrease) in cash X Instructions For each of the following items, indicate by letter in the blank spaces below, the section or sections where the effect would be reported. Use the code (A through F) from above. If the item is not required to be reported on the statement of cash flows, write the word "none" in the blank. Assume that generally accepted accounting principles have been followed in determining net income and that there are no short-term securities which are considered cash equivalents.

____ 1. After the retirement of an officer, the insurance policy was canceled, and a cash settlement was received by the firm. These proceeds were in excess of the book value of the policy.

____ 2. Sales discounts lapsed and not taken by customers. (Sales recorded at net originally.)

____ 3. Accrued estimated income taxes for the period. These taxes will be paid next year.

____ 4. Amortization of premium on bonds payable.

____ 5. Premium amortized on investment in bonds.

____ 6. The book value of trading securities was reduced to fair value.

____ 7. Purchase of available-for-sale securities.

____ 8. Declaration of stock dividends (not yet issued).

____ 9. Issued preferred stock in exchange for equipment.

____ 10. Bad debts (under allowance method) estimated and recorded for the period (receivables classified as current).

____ 11. Gain on disposal of old machinery.

____ 12. Payment of cash dividends (previously declared in a prior period).

____ 13. Trading securities are sold at a loss.

____ 14. Two-year notes issued at discount for a patent.

____ 15. Amortization of Discount on Notes Receivable (long-term).

____ 16. Decrease in Retained Earnings Appropriated for Self-insurance.


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Solution 23-103 1. B and C 7. D 13. A and C 2. B 8. None 14. None 3. A 9. None 15. B 4. B 10. A 16. None 5. A 11. B 6. A 12. F Ex. 23-104—Classification of cash flows and transactions.

Give: (a) Three distinct examples of investing activities. (b) Three distinct examples of financing activities. (c) Three distinct examples of significant noncash transactions. (d) Two examples of transactions not shown on a statement of cash flows. Solution 23-104 (a) Investing activities: Purchase or sale of noncurrent assets Purchase or sale of securities of other entities Loans or collection of principal of loans to other entities (b) Financing activities: Issuing or reacquiring stock Issuing or redeeming debt Paying cash dividends to stockholders (c) Significant noncash transactions: Acquiring assets by issuing stock or debt Capital leases Conversion or refinancing of debt Exchanges of nonmonetary assets (d) Not shown on statement of cash flows: Stock dividends Appropriations of retained earnings Ex. 23-105—Effects of transactions on statement of cash flows.

Any given transaction may affect a statement of cash flows (using the indirect method) in one or more of the following ways: Cash flows from operating activities a. Net income will be increased or adjusted upward. b. Net income will be decreased or adjusted downward.


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Ex. 23-105 (cont.)

Cash flows from investing activities c. Increase as a result of cash inflows. d. Decrease as a result of cash outflows. Cash flows from financing activities e. Increase as a result of cash inflows. f. Decrease as a result of cash outflows. The statement of cash flows is not affected g. Not required to be reported in the body of the statement. Instructions For each transaction listed below, list the letter or letters from above that describe(s) the effect of the transaction on a statement of cash flows for the year ending December 31, 2008. (Ignore any income tax effects.)

____ 1. Preferred stock with a carrying value of $44,000 was redeemed for $50,000 on January 1, 2008.

____ 2. Uncollectible accounts receivable in the amount of $3,000 were written off against the allowance for doubtful accounts balance of $12,200 on December 31, 2008.

____ 3. Machinery which originally cost $3,000 and has a book value of $1,800 is sold for $1,400 on December 31, 2008.

____ 4. Land is acquired through the issuance of bonds payable on July 1, 2008.

____ 5. 1,000 shares of stock, stated value $10 per share, are issued for $25 per share in 2008.

____ 6. An appropriation of retained earnings for treasury stock in the amount of $35,000 is established in 2008.

____ 7. A cash dividend of $8,000 is paid on December 31, 2008.

____ 8. The portfolio of long-term investments (available-for-sale) is at an aggregate market value higher than aggregate cost at December 31, 2008.

Solution 23-105 1. f 3. a, c 5. e 7. f 2. g 4. g 6. g 8. g Ex. 23-106—Effects of transactions on statement of cash flows.

Indicate for each of the following what should be disclosed on a statement of cash flows (indirect method). If not disclosed, write "Not shown." There may be more than one answer for some items. For an item that is added to net income, write "Add," and for an item that is deducted from net income, write "Deduct." Show financing and investing outflows in parentheses. For example, an answer might be: Deduct $4,700 or Investing ($31,000). If the item is a noncash transaction that should be disclosed separately, write "Noncash."


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Ex. 23-106 (cont.)

(a) The deferred tax liability increased $10,000.

(b) The balance in Investment in Kane Co. Stock increased $12,000 as a result of using the equity method.

(c) Issuance of a stock dividend increased common stock $40,000 and paid-in capital $16,000.

(d) Amortization of bond discount, $1,600.

(e) Machinery that cost $100,000 and had accumulated depreciation of $48,000 was sold for $55,000.

(f) Issued 6,000 shares of common stock ($10 par) with a market value of $15 per share for machinery. (Show the amount, too.)

(g) Amortization of patents, $3,000.

(h) Cash dividends paid, $60,000. Solution 23-106 (a) Add $10,000 (e) Investing $55,000; Deduct $3,000 (gain) (b) Deduct $12,000 (f) Noncash $90,000 (c) Not shown (g) Add $3,000 (d) Add $1,600 (h) Financing ($60,000) Ex. 23-107—Effects of transactions on statement of cash flows.

Indicate for each of the following what should be disclosed on a statement of cash flows (SCF) (indirect method). If not disclosed, write "Not shown." If an item is a noncash transaction that should be shown separately, write "noncash." If an item is added to net income, write "Add," and if an item is deducted from net income, write "Deduct." Show financing and investing outflows in parentheses. For example, an answer might be: Deduct $4,700 or Investing ($31,000). There is more than one answer for some items.

(a) For 2008, income before an extraordinary loss was $460,000. A tornado damaged a building and its contents. The proceeds from insurance companies totaled $120,000, which was $60,000 less than the book values. The tax rate was 30%. (Show the calculation of the net income shown on the SCF, and indicate how other items should be shown on the SCF.)

(b) Amortization of bond premium, $1,100.

(c) The balance in Retained Earnings was $875,000 on December 31, 2007 and $1,310,000 on December 31, 2008. Net income was $1,170,000. A stock dividend was declared and distributed which increased common stock $325,000 and paid-in capital $180,000. (Show calculation of the cash dividend and indicate how it and the stock dividend would be shown on the SCF.)


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Ex. 23-107 (cont.)

(d) Equipment, which cost $115,000 and had accumulated depreciation of $53,000, was sold for $67,000.

(e) The deferred tax liability increased $18,000.

(f) Issued 3,000 shares of preferred stock, $50 par, with a market value of $110 per share for land. (Show the amount, too.)

Solution 23-107 (a) Income before extraordinary item $460,000 Extraordinary loss $ 60,000 Tax savings (18,000) 42,000 Net income on SCF $418,000 Other items on SCF: Investing activity $120,000 Add to net income $60,000 (b) Deduct $1,100. (c) Retained earnings 12/31/08 $1,310,000 (or) Net income $1,170,000 Retained earnings 12/31/07 875,000 Increase in retained earnings 435,000 Increase 435,000 Total dividends 735,000 Stock dividend 505,000 Stock dividends 505,000 940,000 Cash dividend $ 230,000 Net income 1,170,000 Cash dividend $ 230,000

Stock dividend—Not shown. Cash dividend—Financing activity ($230,000). (d) Investing activity $67,000. Deduct $5,000 (gain on sale). (e) Add $18,000. (f) Noncash $330,000. Ex. 23-108—Calculations for statement of cash flows.

During 2008 equipment was sold for $75,000. This equipment cost $120,000 and had a book value of $70,000. Accumulated depreciation for equipment was $325,000 at 12/31/07 and $310,000 at 12/31/08. Instructions What three items should be shown on a statement of cash flows (indirect method) from this information? Show your calculations.


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Solution 23-108 (1) Cash inflow from investing activities $75,000

(2) Sales price $75,000 Book value 70,000 Gain on sale $ 5,000 Deduct from net income

(3) Cost $120,000 Book value 70,000 Accumulated depreciation 50,000 Deduct decrease in accumulated depreciation (15,000) Depreciation expense $ 35,000 Add to net income Ex. 23-109—Calculations for statement of cash flows.

Vinson Co. sold a machine that cost $74,000 and had a book value of $44,000 for $50,000. Data from Vinson's comparative balance sheets are: 12/31/08 12/31/07 Machinery $800,000 $690,000 Accumulated depreciation 190,000 136,000 Instructions What four items should be shown on a statement of cash flows (indirect method) from this information? Show your calculations. Solution 23-109 (1) Cash inflow from investing activities $50,000 (2) Sales price $50,000 Book value 44,000 Gain on sale $ 6,000 Deduct from net income (3) Cost $74,000 Book value 44,000 Accumulated depreciation 30,000 Add increase in accumulated depreciation 54,000 Depreciation expense $84,000 Add to net income (4) Cost of machine sold $ 74,000 Add increase in machinery 110,000 Purchase of machinery $184,000 Cash outflow from investing activities


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Ex. 23-110—Cash flows from operating activities (indirect and direct methods).

Presented below is the income statement of Foley, Inc.:

Sales $380,000 Cost of goods sold 225,000 Gross profit $155,000 Operating expenses 85,000 Income before income taxes 70,000 Income taxes 28,000 Net income $ 42,000 In addition, the following information related to net changes in working capital is presented:

Debit Credit Cash $12,000 Trade accounts receivable 15,000 Inventories $19,400 Salaries payable (operating expenses) 8,000 Trade accounts payable 12,000 Income tax payable 3,000 The company also indicates that depreciation expense for the year was $16,700 and that the deferred tax liability account increased $2,600. Instructions Prepare a schedule computing the net cash flow from operating activities that would be shown on a statement of cash flows: (a) using the indirect method. (b) using the direct method. Solution 23-110 (a) Foley, Inc.

Statement of Cash Flows (Partial) (Indirect Method)

Cash flows from operating activities Net income $42,000 Adjustments to reconcile net income to net cash provided by operating activities: Increase in trade accounts receivable $(15,000) Decrease in inventories 19,400 Decrease in salaries payable (operating expenses) (8,000) Increase in trade accounts payable 12,000 Decrease in income taxes payable (3,000) Depreciation expense 16,700 Increase in deferred tax liability 2,600 24,700 Net cash provided by operating activities $66,700


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Solution 23-110 (cont.) (b) Foley, Inc.

Statement of Cash Flows (Partial) (Direct Method)

Cash flows from operating activities Cash received from customers ($380,000 – $15,000) $365,000 Cash paid to suppliers ($225,000 – $19,400 – $12,000) $193,600 Operating expenses paid ($85,000 + $8,000 – $16,700) 76,300 Taxes paid ($28,000 + $3,000 – $2,600) 28,400 298,300 Net cash provided by operating activities $ 66,700 Ex. 23-111—Statement of cash flows (indirect method).

The following information is taken from Reyser Corporation's financial statements: December 31 2008 2007 Cash $90,000 $ 27,000 Accounts receivable 92,000 80,000 Allowance for doubtful accounts (4,500) (3,100) Inventory 155,000 175,000 Prepaid expenses 7,500 6,800 Land 90,000 60,000 Buildings 287,000 244,000 Accumulated depreciation (32,000) (13,000) Patents 20,000 35,000 $705,000 $611,700 Accounts payable $ 90,000 $ 84,000 Accrued liabilities 54,000 63,000 Bonds payable 125,000 60,000 Common stock 100,000 100,000 Retained earnings—appropriated 80,000 10,000 Retained earnings—unappropriated 271,000 302,700 Treasury stock, at cost (15,000) (8,000) $705,000 $611,700 For 2008 Year Net income $58,300 Depreciation expense 19,000 Amortization of patents 5,000 Cash dividends declared and paid 20,000 Gain or loss on sale of patents none Instructions Prepare a statement of cash flows for Reyser Corporation for the year 2008. (Use the indirect method.)


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Solution 23-111 Reyser Corporation

Statement of Cash Flows For the Year Ended December 31, 2008

Increase (Decrease) in Cash Cash flows from operating activities Net income $58,300 Adjust. to reconcile net income to net cash provided by operating activities: Depreciation expense $19,000 Patent amortization 5,000 Increase in accounts receivable (10,600) Decrease in inventory 20,000 Increase in prepaid expenses (700) Increase in accounts payable 6,000 Decrease in accrued liabilities (9,000) 29,700 Net cash provided by operating activities 88,000 Cash flows from investing activities Purchase of land (30,000) Purchase of buildings (43,000) Sale of patents 10,000 Net cash used by investing activities (63,000) Cash flows from financing activities Sale of bonds 65,000 Purchase of treasury stock (7,000) Payment of cash dividends (20,000) Net cash provided by financing activities 38,000 Net increase in cash $63,000 Cash, January 1, 2008 27,000 Cash, December 31, 2008 $90,000


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Ex. 23-112—Preparation of statement of cash flows (format provided).

The balance sheets for Hafner Company showed the following information. Additional information concerning transactions and events during 2008 are presented below.

Hafner Company Balance Sheet

December 31 2008 2007 Cash $ 30,900 $ 10,200 Accounts receivable (net) 43,300 20,300 Inventory 35,000 42,000 Long-term investments 0 15,000 Property, plant & equipment 236,500 150,000 Accumulated depreciation (37,700) (25,000) $308,000 $212,500 Accounts payable $ 17,000 $ 26,500 Accrued liabilities 21,000 17,000 Long-term notes payable 70,000 50,000 Common stock 130,000 90,000 Retained earnings 70,000 29,000 $308,000 $212,500 Additional data: 1. Net income for the year 2008, $76,000. 2. Depreciation on plant assets for the year, $12,700. 3. Sold the long-term investments for $28,000 (assume gain or loss is ordinary). 4. Paid dividends of $35,000. 5. Purchased machinery costing $26,500, paid cash. 6. Purchased machinery and gave a $60,000 long-term note payable. 7. Paid a $40,000 long-term note payable by issuing common stock. Instructions Using the format provided on the next page, prepare a statement of cash flows (using the indirect method) for 2008 for Hafner Company.


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Ex. 23-112 (cont.) Hafner Company


Increase (Decrease) in Cash Cash flows from operating activities Net income $__________ Adjustments to reconcile net income to net cash provided by operating activities: __________________________________ $__________ __________________________________ __________ __________________________________ __________ __________________________________ __________ __________________________________ __________ __________________________________ __________ __________________________________ __________ __________ Net cash provided (used) by operating activities __________ Cash flows from investing activities ___________________________________ __________ ___________________________________ __________ ___________________________________ __________ Net cash provided (used) by investing activities __________ Cash flows from financing activities ___________________________________ __________ ___________________________________ __________ ___________________________________ __________ Net cash provided (used) by financing activities __________ Net increase (decrease) in cash $ Cash, January 1, 2008 Cash, December 31, 2008 $


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Solution 23-112 Hafner Company


Increase (Decrease) in Cash Cash flows from operating activities Net income $ 76,000 Adjustment to reconcile net income to net cash provided by operating activities: Depreciation expense $ 12,700 Gain on sale of investments (13,000) Increase in accounts receivable (23,000) Decrease in inventory 7,000 Decrease in accounts payable (9,500) Increase in accrued liabilities 4,000 (21,800) Net cash provided by operating activities 54,200 Cash flows from investing activities Sale of long-term investments 28,000 Purchase of machinery (26,500) Net cash provided by investing activities 1,500 Cash flows from financing activities Paid dividends (35,000) Net cash used by financing activities (35,000) Net increase (decrease) in cash $ 20,700 Cash, January 1, 2008 10,200 Cash, December 31, 2008 $ 30,900


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PROBLEMS Pr. 23-113—Statement of cash flows (indirect method).

The net changes in the balance sheet accounts of Windsor Corporation for the year 2008 are shown below. Account Debit Credit Cash $ 82,000 Short-term investments $121,000 Accounts receivable 83,200 Allowance for doubtful accounts 13,300 Inventory 74,200 Prepaid expenses 17,800 Investment in subsidiary (equity method) 20,000 Plant and equipment 210,000 Accumulated depreciation 130,000 Accounts payable 80,700 Accrued liabilities 21,500 Deferred tax liability 15,500 8% serial bonds 80,000 Common stock, $10 par 90,000 Additional paid-in capital 150,000 Retained earnings—Appropriation for bonded indebtedness 60,000 Retained earnings—Unappropriated 38,000 $643,600 $643,600 An analysis of the Retained Earnings—Unappropriated account follows: Retained earnings unappropriated, December 31, 2007 $1,300,000 Add: Net income 327,000 Transfer from appropriation for bonded indebtedness 60,000 Total $1,687,000 Deduct: Cash dividends $185,000 Stock dividend 240,000 425,000 Retained earnings unappropriated, December 31, 2008 $1,262,000 1. On January 2, 2008 short-term investments (classified as available-for-sale) costing $121,000

were sold for $155,000. 2. The company paid a cash dividend on February 1, 2008. 3. Accounts receivable of $16,200 and $19,400 were considered uncollectible and written off in

2008 and 2007, respectively. 4. Major repairs of $33,000 to the equipment were debited to the Accumulated Depreciation

account during the year. No assets were retired during 2008. 5. The wholly owned subsidiary reported a net loss for the year of $20,000. The loss was

recorded by the parent. 6. At January 1, 2008, the cash balance was $166,000. Instructions Prepare a statement of cash flows (indirect method) for the year ended December 31, 2008. Windsor Corporation has no securities which are classified as cash equivalents.


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Solution 23-113 Windsor Corporation


Increase (Decrease) in Cash Cash flows from operating activities Net income $327,000 Adjustments to reconcile net income to net cash provided by operating activities: Equity in subsidiary loss $ 20,000 Depreciation expense 163,000 Gain on sale of short-term investments (34,000) Decrease in deferred tax liability (15,500) Increase in accounts receivable (net) (69,900) Increase in inventory (74,200) Decrease in prepaid expenses 17,800 Decrease in accounts payable (80,700) Increase in accrued liabilities 21,500 (52,000) Net cash provided by operating activities 275,000 Cash flows from investing activities Sale of short-term investments 155,000 Purchase of plant and equipment (210,000) Major repairs to equipment (33,000) Net cash provided by investing activities (88,000) Cash flows from financing activities Payment of cash dividend (185,000) Sale of serial bonds 80,000 Net cash used by financing activities (105,000) Net increase in cash 82,000 Cash, January 1, 2008 166,000 Cash, December 31, 2008 $248,000


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Pr. 23-114—Statement of cash flows (direct and indirect methods).

Donelly, Inc. has prepared the following comparative balance sheets for 2007 and 2008: 2008 2007 Cash $ 297,000 $ 153,000 Receivables 159,000 117,000 Inventory 150,000 180,000 Prepaid expenses 18,000 27,000 Plant assets 1,260,000 1,050,000 Accumulated depreciation (450,000) (375,000) Patent 153,000 174,000 $1,587,000 $1,326,000 Accounts payable $ 153,000 $ 168,000 Accrued liabilities 60,000 42,000 Mortgage payable — 450,000 Preferred stock 525,000 — Additional paid-in capital—preferred 120,000 — Common stock 600,000 600,000 Retained earnings 129,000 66,000 $1,587,000 $1,326,000 1. The Accumulated Depreciation account has been credited only for the depreciation expense

for the period. 2. The Retained Earnings account has been charged for dividends of $138,000 and credited for

the net income for the year. The income statement for 2008 is as follows:

Sales $1,980,000 Cost of sales 1,089,000 Gross profit 891,000 Operating expenses 690,000 Net income $ 201,000

Instructions (a) From the information above, prepare a statement of cash flows (indirect method) for Donelly,

Inc. for the year ended December 31, 2008. (b) From the information above, prepare a schedule of cash provided by operating activities

using the direct method.


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Solution 23-114 (a) Donelly, Inc.


Increase (Decrease) in Cash Cash flows from operating activities Net income $201,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $ 75,000 Patent amortization 21,000 Increase in receivables (42,000) Decrease in inventory 30,000 Decrease in prepaid expenses 9,000 Decrease in accounts payable (15,000) Increase in accrued liabilities 18,000 96,000 Net cash provided by operating activities 297,000 Cash used in investing activities Purchase of plant assets (210,000) Cash flows from financing activities Payment of cash dividend (138,000) Retirement of mortgage payable (450,000) Sale of preferred stock 645,000 Net cash provided by financing activities 57,000 Net increase in cash 144,000 Cash, January 1, 2008 153,000 Cash, December 31, 2008 $297,000 (b) Donelly, Inc.

Schedule of Cash Provided by Operating Activities For Year Ended December 31, 2008

Cash flows from operating activities Cash received from customers (1) $1,938,000 Cash paid to suppliers (2) $1,074,000 Operating expenses paid (3) 567,000 1,641,000 Net cash provided by operating activities $ 297,000 (1) $1,980,000 – $42,000 (2) $1,089,000 – $30,000 + $15,000 (3) $690,000 – $75,000 – $21,000 – $9,000 – $18,000


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Pr. 23-115—A complex statement of cash flows (indirect method).

The net changes in the balance sheet accounts of Lenon, Inc. for the year 2008 are shown below: Account Debit Credit Cash $ 125,600 Accounts receivable $ 64,000 Allowance for doubtful accounts 14,000 Inventory 217,200 Prepaid expenses 20,000 Long-term investments 144,000 Land 300,000 Buildings 600,000 Machinery 100,000 Office equipment 28,000 Accumulated depreciation: Buildings 24,000 Machinery 20,000 Office equipment 12,000 Accounts payable 183,200 Accrued liabilities 72,000 Dividends payable 128,000 Premium on bonds 32,000 Bonds payable 800,000 Preferred stock ($50 par) 60,000 Common stock ($10 par) 156,000 Additional paid-in capital—common 223,200 Retained earnings 87,200 $1,705,200 $1,705,200 Additional information: 1. Income Statement Data for Year Ended December 31, 2008 Income before extraordinary item $272,000 Extraordinary loss: Condemnation of land 132,000 Net income $140,000

2. Cash dividends of $128,000 were declared December 15, 2008, payable January 15, 2009. A 5% stock dividend was issued March 31, 2008, when the market value was $22.00 per share.

3. The long-term investments were sold for $140,000.

4. A building and land which cost $480,000 and had a book value of $300,000 were sold for $400,000. The cost of the land, included in the cost and book value above, was $20,000.

5. The following entry was made to record an exchange of an old machine for a new one: Machinery ............................................................................... 160,000 Accumulated Depreciation—Machinery .................................. 40,000 Machinery ................................................................... 60,000 Cash ........................................................................... 140,000

6. A fully depreciated copier machine which cost $28,000 was written off.

7. Preferred stock of $60,000 par value was redeemed for $80,000.


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Pr. 23-115 (cont.)

8. The company sold 12,000 shares of its common stock ($10 par) on June 15, 2008 for $25 a share. There were 87,600 shares outstanding on December 31, 2008.

9. Bonds were sold at 104 on December 31, 2008.

10. Land that was condemned had a book value of $240,000. Instructions Prepare a statement of cash flows (indirect method). Ignore tax effects. Solution 23-115

Lenon, Inc. Statement of Cash Flows

For the Year Ended December 31, 2008 Increase (Decrease) in Cash

Cash flows from operating activities Net income $ 140,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense—buildings $204,000 (1) Depreciation expense—machinery 60,000 (2) Depreciation expense--office equipment 16,000 (3) Gain on sale of building and land (100,000) (4) Loss on sale of long-term investments 4,000 (5) Decrease in accounts receivable (net) 78,000 Increase in inventory (217,200) Increase in prepaid expenses (20,000) Decrease in accounts payable (183,200) Increase in accrued liabilities 72,000 Loss on condemnation of land 132,000 45,600 Net cash provided by operating activities 185,600 Cash flows from investing activities Sale of long-term investments 140,000 (6) Proceeds from condemnation of land 108,000 (7) Purchase of land (560,000) (8) Sale of building and land 400,000 (9) Purchase of building (1,060,000) (10) Purchase of machinery (140,000) (11) Net cash used by investing activities (1,112,000) Cash flows from financing activities Sale of bonds 832,000 (12) Retirement of preferred stock (80,000) (13) Sale of common stock 300,000 (14) Net cash provided by financing activities 1,052,000 Net increase in cash $ 125,600


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(1) Net change $ 24,000 Debit to accumulated depreciation 180,000 Depreciation expense $204,000 (2) Net change $20,000 Debit to accumulated depreciation 40,000 Depreciation expense $60,000 (3) Net change $(12,000) Write-off 28,000 Depreciation expense $ 16,000 (4) Sale price of building and land $400,000 Book value of building and land 300,000 Gain on sale $100,000 (5) Carrying value of long-term investments $144,000 Sale price of long-term investments 140,000 Loss on sale $ 4,000 (6) Given. (7) Condemned land (at cost) $240,000 Extraordinary loss 132,000 $108,000 (8) Net change $300,000 Condemned land and land sold (at cost) 260,000 $560,000 (9) Given. (10) Net change $ 600,000 Building sold (at cost) 460,000 $1,060,000 (11) Given (exchange). (12) Bonds Payable $800,000 Add Premium 32,000 $832,000 (13) Given. (14) 12,000 × $25 = $300,000


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Other important reconciliations: Shares outstanding at various times 87,600 December 31, 2008 12,000 Issued June 15, 2008 75,600 Outstanding after stock dividend March 31, 2008 75,600 ÷ 1.05 = 72,000 shares Common Stock Issuance 12,000 × $10 = $120,000 Stock dividend 3,600 × $10 = 36,000 $156,000 Additional Paid-in Capital Issuance 12,000 × $15 = $180,000 Stock dividend 3,600 × $12 = 43,200 $223,200 Retained Earnings Net income $140,000 Dividends (cash) (128,000) 12,000 Dividends (stock) (79,200) (67,200) Preferred stock redemption (20,000) $(87,200)

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