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Chapter 02 Basic Financial Statements Chapter 02 Basic Financial Statements Answer Key True / False Questions 1. A business entity is regarded as separate from the personal activities of its owners whether it is a sole proprietorship, a partnership, or a corporation. TRUE 2. Assets need not always have physical characteristics such as buildings, machinery or inventory. TRUE 3. The going concern principle assumes that the business will continue indefinitely. TRUE 4. Notes payable and accounts payable are written promises to pay an amount owed by a certain date. Notes payable generally have interest but accounts payable generally do not. TRUE 5. A net profit results from having more revenues than liabilities. FALSE 6. The sale of additional shares of capital stock will cause treasury stock to increase. FALSE 7. Articulation between the financial statements means that they relate closely to each other. TRUE 8. Limited liability means that owners of a business are only liable for the debts of the business up to the amounts they can afford. FALSE 2-1

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Chapter 02 Basic Financial Statements

Chapter 02 Basic Financial Statements Answer Key True / False Questions 1. A business entity is regarded as separate from the personal activities of its owners whether it is a sole proprietorship, a partnership, or a corporation. TRUE

2. Assets need not always have physical characteristics such as buildings, machinery or inventory. TRUE

3. The going concern principle assumes that the business will continue indefinitely. TRUE

4. Notes payable and accounts payable are written promises to pay an amount owed by a certain date. Notes payable generally have interest but accounts payable generally do not. TRUE

5. A net profit results from having more revenues than liabilities. FALSE

6. The sale of additional shares of capital stock will cause treasury stock to increase. FALSE

7. Articulation between the financial statements means that they relate closely to each other. TRUE

 8. Limited liability means that owners of a business are only liable for the debts of the business up to the amounts they can afford. FALSE

9. In a business organized as a corporation, it is not necessary to list the equity of each stockholder on the balance sheet. TRUE

10. Total assets always equal total liabilities plus total owners' equity. TRUE

11. A cash flow statement reports revenue and expense activities for a specific time period such as one month or one year. FALSE

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12. Any business event that might affect the future profitability of a business should be reported in its balance sheet. FALSE 

13. Total assets plus total liabilities equals total owners' equity. FALSE 

14. The practice of showing assets on the balance sheet at their cost rather than at their current market value is explained in part by the fact that cost is supported by objective evidence that can be verified by independent experts. TRUE 

15. The realization principle states that the activities of an entity should be kept separate from those of its owner. FALSE 

16. The entity principle states that the affairs of the owners are not part of the financial operations of a business entity and should be separated. TRUE 

17. The accounting equation may be stated as "assets minus liabilities equals owners' equity." TRUE

 

18. A transaction that causes an increase in an asset may also cause a decrease in another asset, an increase in a liability, or an increase in owners' equity. TRUE

 

19. The collection of an account receivable will cause total assets to decrease. FALSE

20. The payment of a liability causes an increase in owners' equity. FALSE

 21. When a business borrows money from a bank, the immediate effect is an increase in total assets and a decrease in liabilities or owners' equity. FALSE

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 22. The purchase of an asset such as office equipment, for cash will cause owners' equity to decrease. FALSE

 23. The owner of a sole proprietorship is personally liable for the debts of the business, whereas the stockholders of a corporation are not personally liable for the debts of the business. TRUE 

24. If a company purchases equipment for cash, its total assets will increase. FALSE

 

25. If a company purchases equipment by issuing a note payable, its total assets will not change. FALSE

 

26. It is not unusual for an entity to report a significant increase in cash from operating activities, but a decrease in the total amount of cash. TRUE

 

27. The cash flow statement provides a link between two balance sheets by showing how net income (or loss) has changed owners' equity from one balance sheet date to the next. FALSE

 

28. According to Sarbanes-Oxley, internal controls must be audited by the same accounting firm that audits the financial statements. TRUE

 

29. The Public Company Accounting Oversight Board was created by the American Institute of CPAs to oversee the public accounting profession. FALSE

 

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30. The major outgrowth from business failures and allegations of fraudulent financial reporting during the 1990's was the passage of the Securities and Exchange Act. FALSE

  

Multiple Choice Questions

 31. Which of the following best describes liquidity? A. The ability to increase the value of retained earningsB. The ability to pay the debts of the company as they become due.C. Being able to buy everything the company requires for cash.D. Purchasing everything the company requires on credit.

 32. Profitability may be defined as: A. The ability to pay the debts of the company as they fall due.B. The ability to increase retained earnings.C. Distributing dividendsD. Having excess cash

33. The principle of adequate disclosure means that a company should disclose: A. Only the important monetary information.B. All confidential information regarding the company.C. Any financial facts that a reasonable informed person would consider necessary for the proper interpretation of the financial statements.D. Only subsequent events.

34. Blue Wholesale Shirt Co. sold shirts to Pink Retail Shoppe. The owner of Pink Retail said she would pay Blue at a later date which Blue Wholesale Shirt Co. agreed to. Blue Wholesale Shirt Co. is considered to be a: A. borrowerB. liabilityC. creditorD. debtor

35. Owners' equity in a business increases as a result of which of the following? A. Payments of cash to the owners.B. Losses from unprofitable operation of the business.C. Earnings from profitable operation of the business.D. Borrowing from a commercial bank.

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36. Owners' equity in a business decreases as a result of which of the following? A. Investments of cash by the owners.B. Profits from operating the business.C. Losses from unprofitable operation of the businessD. Repaying a loan to a commercial bank

 

37. Which one of the following is not considered one of the three primary financial statements? A. Balance sheet.B. Income statement.C. Statement of cash flows.D. Statement of budgeting activities.

 

38. Which of the following is the primary objective of financial statements? A. Providing managers with detailed information tailored to the managers' specific information needs.B. Providing people outside the business organization with information about the company's financial position and operating results.C. Reporting to the Internal Revenue Service the company's taxable income.D. Indicating to investors in a particular company the current market values of their investments. 

39. Which of the following is descriptive of the proper form of a balance sheet? A. The heading sets forth the period of time covered.B. Cash is always the first asset listed, followed by permanent assets (such as land and buildings), and finally by assets such as receivables and supplies.C. Liabilities are listed before owners' equity.D. A subtotal for total assets plus total liabilities is shown.

40. A balance sheet is designed to show: A. How much a business is worth.B. The profitability of the business during the current year.C. The assets, liabilities, and owners' equity of a business as of a particular date.D. The cost of replacing the assets and of paying off the liabilities at December 31.

 41. The way in which financial statements relate is known as: A. Solvency.B. Objectivity.C. Articulation.D. Entity. 

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42. If total assets equal $270,000 and total liabilities equal $202,500, the total owners' equity must equal: A. $472,500.B. $67,500.C. Can not be determined from the information given.D. Some other amount.

$270,000 - $202,500 = $67,500

 

43. Which of the following best defines an asset? A. Something with physical form that is valued at cost in the accounting records.B. An economic resource owned by a business and expected to benefit future operations.C. An economic resource representing cash or the right to receive cash in the near future.D. Something owned by a business that has a ready market value.

 

44. To appear in a balance sheet of a business entity, an asset need not: A. Be an economic resource.B. Have a ready market value.C. Be expected to benefit future operations.D. Be owned by the business. 

45. If total assets equal $345,000 and total owners' equity equal $120,000, then total liabilities must equal: A. $465,000.B. $225,000.C. Can not be determined from the information given.D. Some other amount.

$345,000 - $120,000 = $225,000

 46. A balance sheet: A. Provides owners, investors, and other interested parties with all the financial information they need to evaluate the financial strength, profitability, and future prospects of a given business entity.B. Shows the current market value of the owners' equity in the business at the balance sheet date.C. Assists creditors in evaluating the debt-paying ability of a business by showing the assets and liabilities of the business combined with those of its owner (or owners).D. Shows the assets, liabilities, and owners' equity of a business entity, valued in conformity with generally accepted accounting principles. 

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47. Which of the following is correct f a company purchases equipment for $70,000 cash? A. Total assets will increase by $70,000.B. Total assets will decrease by $70,000.C. Total assets will remain the same.D. The company's total owners' equity will decrease.

 

48. From an accounting viewpoint, when is a business considered an entity separate from its owner(s)? A. Only when organized as a sole proprietorship.B. Only when organized as a partnership.C. Only when organized as a corporation.D. In each of the above situations, the business is an accounting entity separate from the activities of the owner(s).

 

49. If a company purchases equipment for $65,000 by issuing a note payable: A. Total assets will increase by $65,000.B. Total assets will decrease by $65,000.C. Total assets will remain the same.D. The company's total owners' equity will decrease.

 

50. The valuation of assets in the balance sheet is based primarily upon: A. What it would cost to replace the assets.B. Cost, because cost is usually factual and verifiable.C. Current fair market value as established by independent appraisers.D. Cost, because in the event of liquidation, the assets would be sold at an amount equal to their original cost.

 

51. Which of the following is not a generally accepted accounting principle relating to the valuation of assets? A. The cost principle - in general, assets are valued at cost, rather than at estimated market values.B. The objectivity principle - accountants prefer to use objective, rather than subjective, information as the basis for accounting information.C. The safety principle - assets are valued at no more than the value for which they are insured.D. The going-concern assumption - one reason for valuing assets such as buildings and equipment at cost rather than at their current market values is the assumption that the business will use these assets rather than sell them.

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52. Each year the accountant for Southern Real Estate Company adjusts the recorded value of each asset to its market value. Using these market value figures on the balance sheet violates: A. The accounting equation.B. The stable-dollar assumption.C. The business entity concept.D. The cost principle.

 

53. The owner of Westhampton Fish Eatery purchased a new car for his daughter who is away at college at a cost of $43,000 and reported this amount as Delivery Vehicle in the restaurant's balance sheet. The reporting of this item in this manner violated the: A. Cost principle.B. Business entity conceptC. Objectivity principle.D. Going-concern assumption.

 

54. Which of the following is correct when a company uses cash to pay for an expense? A. Total assets will decrease.B. Retained earnings will decrease.C. Owners' equity will decrease.D. All three of the above statements are correct.

 

55. If cash flows from operating activities is a negative amount: A. The company must have a net loss for the year.B. The company must have a net profit for the year.C. The company must have paid off more debts than it earned during the year.D. The company may have net income or a net loss for the year.

 

56. Eton Corporation purchased land in 1990 for $190,000. In 2008, it purchased a nearly identical parcel of land for $430,000. In its 2008 balance sheet, Eton valued these two parcels of land at a combined value of $860,000. Reporting the land in this manner violated the: A. Cost principle.B. Principle of the business entity.C. Objectivity principle.D. Going-concern assumption

  

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57. Bob Bertolucci, owner of Bob's Bazaar, also owns a personal residence that cost $575,000, but has a market value of $725,000. During preparation of the financial statements for Bob's Bazaar, the accounting principle most relevant to the presentation of Bob's home is: A. The concept of the business entity.B. The cost principle.C. The going-concern assumption.D. The objectivity principle.

 

58. Which of the following will not cause a change in the owners' equity of a business? A. Payment of an interest free business debt.B. Withdrawal of cash by the owner.C. Sale of land at a profit.D. Losses from unprofitable operations.

 

59. Which business organization is recognized as a separate legal entity under the law? A. Corporation.B. Sole proprietorship.C. Partnership.D. All three.

 

60. The amount of owners' equity in a business is not affected by: A. The percentage of total assets held in cash.B. Investments made in the business by the owner.C. The profitability of the business.D. The amount of dividends paid to stockholders.

 

61. Decreases in owners' equity are caused by: A. Purchases of assets and payment of liabilities.B. Purchases of assets and incurrence of liabilities.C. Payment of liabilities and unprofitable operations.D. Distributions of assets to the owner and unprofitable operations.

 

62. Which of the following transactions would cause a change in owners' equity? A. Repayment of the principal on a bank loan.B. Purchase of a delivery truck on credit.C. Sale of land on credit for a price above cost.D. Borrowing money from a bank.

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63. An expense is best defined as: A. Any payment of cash for the benefit of the company.B. Past, present or future payments of cash required to generate revenues.C. Past payments of cash required to generate revenues.D. Future payments of cash required to generate revenues.

 

64. If a transaction causes an asset account to decrease, which of the following related effects may occur? A. An increase of equal amount in an owners' equity account.B. An increase in a liability account.C. An increase of equal amount in another asset account.D. An increase in the combined total of liabilities and owners' equity.

 

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65. The payment of a business debt not including interest: A. Decreases total assets.B. Increases total liabilities.C. Increases the owners' equity in the business.D. Decreases the owners' equity in the business.

 

66. The accounting principle that assumes that a company will operate in the foreseeable future is: A. Going concern.B. Objectivity.C. Liquidity.D. Disclosure.

 

67. Deerpark Corporation recently borrowed $70,000 cash from its bank. Which of the following was unaffected by this transaction? A. Assets.B. Liabilities.C. Owners' equity.D. Cash.

 

68. Which of the following transactions would cause an increase in both assets and owners' equity? A. Investment of cash in the business by the owner.B. Sale of land for a price less than its cost.C. Borrowing money from a bank.D. Sale of land for cash at a price equal to its cost.

 

69. A transaction caused an increase in both assets and owners' equity. This transaction could have been: A. A sale of service to a customer producing revenue.B. Sale of land for a price less than its cost.C. Borrowing money from a bank.D. Sale of land for cash at a price equal to its cost.

 

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70. Retained earnings is: A. The positive cash flows of a company.B. Net worth of a company.C. The owners' equity that has accumulated as a result of profitable operations.D. Equal to the total assets of a company.

 

71. A revenue transaction results in all of the following except: A. An increase in assets.B. An increase in owners' equity.C. A positive cash flow in either the past, present, or future.D. An increase in liabilities.

 

72. If a company has a profit: A. Assets will be equal to liabilities plus owners' equity.B. Assets will be less than liabilities plus owners' equity.C. Assets will be greater than liabilities plus owners' equity.D. Owner's equity will be greater than its assets.

 

73. Which of the following activities is not a category into which cash flows are classified? A. Marketing activities.B. Operating activities.C. Financing activities.D. Investing activities.

 74. The change in owners' equity from one balance sheet to the next is partially explained by the: A. Statement of cash flows.B. Statement of financial position.C. Income statement.D. Tax return. 

75. Capital stock represents: A. The amount invested in the business by stockholders when shares of stock were initially issued by a corporation.B. The owners' equity for a business organized as a corporation.C. The owners' equity accumulated through profitable operations that have not been paid out as dividends.D. The price paid by the current owners to acquire shares of stock in the corporation, regardless of whether they bought the shares directly from the corporation or from another stockholder.

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76. The balance sheet item that represents the portion of owners' equity resulting from profitable operation of the business is: A. Accounts receivable.B. Cash.C. Capital stock.D. Retained earnings.

 

77. Retained earnings appears on: A. The income statement.B. The balance sheet.C. The statement of cash flows.D. All three statements.

 

78. Which of the following statements regarding liquidity and profitability is not true? A. If a business is unable to pay its debts as they come due, it is operating unprofitably.B. A business may be liquid, yet operate unprofitably for several years.C. A business may operate profitably, yet be unable to meet its obligations.D. In order to survive in the long run, a business must both remain liquid and operate profitably.

 

79. The concept of adequate disclosure means that: A. The accounting department of a business must inform management of the accounting principles used in preparing the financial statements.B. The company must inform users of any significant facts necessary for proper interpretation of the financial statements, including events occurring after the financial statement date.C. The independent auditors must disclose in the financial statements any and all errors detected in the company's accounting records.D. The financial statements should include a comprehensive list of each transaction that occurred during the year.

 

80. If cash increases during a year, it must mean that: A. There was positive net income on the income statement.B. Retained earnings increased.C. The net worth of a company increased.D. None of the three statements above must necessarily be true.

 

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81. A strong statement of cash flows indicates that significant cash is being generated by: A. Operating activities.B. Financing activities.C. Investing activities.D. Effective tax planning.

 

 At December 31, 2009, the accounting records of Braun Corporation contain the following items:

   

 

82. Refer to the above data. If Capital Stock is $260,000, what is the December 31, 2009 cash balance? A. $86,000.B. $94,000.C. $46,000.D. $686,000.

A/P(16,000) + N/P(190,000) + Capital Stock(260,000) + R.E.(160,000) = 626,000Cash(?) + A/R(40,000) + Land(240,000) + Building(180,000) + Equipment(120,000) = 626,000Cash = $45,000

 

83. Refer to the above data. If Capital Stock is $320,000, total assets of Braun Corporation at December 31, 2009, amount to: A. $686,000.B. $926,000.C. $726,000.D. $106,000.

A/P(16,000) + N/P (190,000) + Capital Stock(320,000) + R.E. (160,000) = 686,000 Total Assets = $686,000

 

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84. Refer to the above data. If Cash at December 31, 2009, is $86,000, Capital Stock is: A. $260,000.B. $300,000.C. $620,000.D. $168,000.

Cash (86,000) + A/R (40,000) + Land(240,000) + Building(180,000) + Equipment(120,000) = 666000A/P(16,000) + N/P(190,000) + Capital Stock(?) + R.E.(160,000) = 666,000.Capital = $300,000

 

85. Refer to the above data. If Cash at December 31, 2009, is $26,000, total owners' equity is: A. $160,000.B. $366,000.C. $606,000.D. $400,000.

Cash(26,000) + A/R(40,000) + Land(240,000) + Building(180,000) + Equipment(120,000) = 606,000A/P (16,000) + N/P (190,000) + Capital Stock(?) + R.E(160,000) = 606,000Capital Stock = (240,000) + R. E. (160,000) = $400,000

 

86. Refer to the above data. If Cash at December 31, 2009, is $66,000, total assets amount to: A. $606,000.B. $806,000.C. $662,000.D. $646,000.

Cash(66,000) + A/R(40,000) + Land(240,000) + Building(180,000) + Equipment(120,000) = 646,000

 

 At December 31, 2010, the accounting records of Hercules Manufacturing, Inc. contain the following items:

   

 

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87. Refer to the above data. If total assets of Hercules Manufacturing, Inc. are $556,000, Equipment is carried in Hercules Manufacturing accounting records at: A. $377,000.B. $179,000.C. $150,000.D. $ 90,000.

Cash(7,000) + A/R(30,000) + Land(90,000) + Building(250,000) + Equipment(?) = 556,000Equipment = $179,000

 

88. Refer to the above data. If total assets of Hercules Manufacturing, Inc. are $556,000, Retained Earnings at December 31, 2010, must be: A. $811,000.B. $180,000.C. $221,000.D. $335,000.

A/P(12,000) + N/P(135,000) + Capital Stock(188,000) + R.E(?) = 556,000, R. E. = $221,000

 

89. Refer to the above data. If Retained Earnings at December 31, 2010, is $140,000, total assets amount to: A. $ 98,000.B. $377,000.C. $475,000.D. $188,000.

A/P(12,000) + N/P(135,000) + Capital Stock(188,000) + R.E.(140,000) =475,000

 

90. Refer to the above data. If Retained Earnings at December 31, 2010, is $100,000, Equipment is carried in Hercules Manufacturing, Inc. accounting records at: A. $ 42,000.B. $ 58,000.C. $ 43,500.D. $345,000.

A/P(12,000) + N/P(135,000) + Capital Stock(188,000) + R.E.(100,000) =435,000Cash(7,000) + A/R(30,000) + Land(90,000) + Building(250,000) + Equipment(?) = 435,000Equipment = $58,000

 

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91. Refer to the above data. Assume the Equipment shown above was acquired by the business five years ago and has a book value of $156,000, but has a current appraised value of $200,000. Hercules Manufacturing's Retained Earnings at December 31, 2010, amounts to: A. $533,000.B. $345,000.C. $198,000.D. $356,000.

Cash(7,000) + A/R(30,000) + Land(90,000) + Building(250,000) + Equipment(156,000) = 533,000A/P(12,000) + N/P(135,000) + Capital Stock(188,000) + R.E.(?) = 533,000R.E. = 198,000

  At December 31, 2011 the accounting records of Gordon, Inc. contain the following items:

    

92. Refer to the above data. If the Notes Payable is $10,000, the December 31, 2011 cash balance is: A. $ 60,000.B. $160,000.C. $ 30,000.D. $ 20,000.

Cash(?) + A/R(18,750) +Land(30,000) + Building(31,250) + Equipment(40,000) = 150,000, Cash = 30,000

 

93. Refer to the above data. If the Note Payable balance is $25,000, then the total assets of Gordon, Inc. at December 31, 2011 amount to: A. $27,500.B. $152,500.C. $120,000.D. $165,000.

A/P(2,500) + N/P(25,000) + Capital Stock(12,500) + R.E.(125,000) = 165,000Total Assets = 165,000

 

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94. Refer to the above data. If the Cash balance at December 31, 2011 is $67,500, the Note Payable balance is: A. $118,750.B. $ 47,500.C. $137,500.D. $140,000.

Cash(67,500) + A/R(18,750) + Land(30,000) + Building(31,250) + Equipment(40,000) = 187,500A/P(2,500) + N/P(?) + Capital Stock(12,500) + R.E.(125,000) = 187,500N/P = 47,500

 

95. Refer to the above data. If the Cash balance at December 31, 2011 is $62,500 then total liabilities amount to: A. $ 42,500.B. $140,000.C. $ 45,000.D. $182,500.

Cash(62,500)+ A/R(18,750) + Land(30,000) + Building(31,250) + Equipment(40,000) = 182,500, A/P(2,500) + N/P(?) + Capital Stock(12,500) + R.E.(125,000) =182,500N/P = 42,500; Total liabilities = 2,500 + 42,500 = 45,000

 

96. Which of the following is correct if at the end of Crystal Imports' first year of operations, assets are $800,000 and owners' equity is $720,000? A. The owner must have invested $720,000 to start the business.B. The business must be operating profitably.C. Liabilities are $80,000.D. Liabilities are $1,520,000.

800,000 - 720,000 = 80,000

 

97. During the current year, the assets of Wheatley's increased by $362,000, and the liabilities increased by $260,000. The owners' equity in the business must have: A. Decreased by $102,000.B. Decreased by $622,000.C. Increased by $102,000.D. Increased by $622,000.

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$362,000 - $260,000 = $102,000

 

98. The total liabilities of Hogan's Company on the balance sheet are $270,000; this amount is equal to three-fourths of the total assets. What is the amount of owners' equity? A. $202,500.B. $ 90,000.C. $360,000.D. $630,000.

¾ A = $270,000, A=$360,000O.E. = (360,000-270,000) or $90,000

 

99. Thirty percent of the total assets of Shanahan Corporation have been financed through borrowing. The total liabilities of the company are $600,000. What is the amount of owners' equity? A. $ 180,000.B. $2,000,000.C. $1,400,000.D. $2,600,000.

30%A = 600,000, A = 2,000,000O.E. = (2,000,000 - 600,000) or 1,400,000

 

100. A transaction caused a $60,000 increase in both assets and total liabilities. This transaction could have been which of the following? A. Purchase for office equipment for $60,000 cash.B. Purchase of office equipment for $120,000, paying $60,000 cash and issuing a note payable for the balance.C. Repayment of a $60,000 bank loan.D. Investment of $60,000 cash in the business by the owner.

 

101. If $9,600 cash and a $31,000 note payable are given in exchange for some office machines to be used in a business: A. Total assets are increased.B. Total liabilities are decreased.C. Total assets are decreased.D. The owners' equity is increased.

 

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102. During the current year, liabilities of Corbett's Store increased by $220,000, and owners' equity increased by $160,000 then A. Assets at the end of the year total $380,000.B. Assets at the end of the year total $60,000.C. Assets increased during the year by $380,000.D. Assets decreased during the year by $60,000.

$220,000 + $160,000 = $380,000

 

103. During the current year, liabilities of Hayden Travel decreased by $50,000, and owners' equity increased by $75,000 then. A. Assets at the end of the year total $125,000.B. Assets at the end of the year total $25,000.C. Assets increased during the year by $25,000.D. Assets decreased during the year by $125,000.

$75,000 - $50,000 = $25,000

 

104. At the end of the current year, the owners' equity in Barclay Bakery is $246,000. During the year the assets of the business had increased by $120,000, and the liabilities had increased by $72,000. Owners' equity at the beginning of the year must have been: A. $198,000.B. $174,000.C. $284,000.D. $438,000.

$120,000 - $72,000 = $48,000$246,000 - $48,000 = $198,000

 

105. At the end of the current year, the owners' equity in Durante Co. is $360,000. During the year the assets of the business had increased by $68,000, and the liabilities had increased by $118,000. Owners' equity at the beginning of the year must have been: A. $410,000.B. $310,000.C. $546,000.D. $174,000.

$68,000 -118,000= ($50,000)$360,000 - ($50,000) = $410,000

 

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106. During the current year, the assets of Quality Stairs increased by $175,000 and the liabilities decreased by $15,000. If the owners' equity in the business is $475,000 at the end of the year, the owners' equity at the beginning of the year must have been: A. $335,000.B. $285,000.C. $665,000.D. $615,000.

175,000 + 15,000 = 190,000475,000 - 190,000 = 285,000

 

107. During the month of May, 2009, the Henderson Company had the following transactions: * Revenues of $60,000 were earned and received in cash.* Bank loans of $9,000 were paid off.* Equipment of $20,000 was purchased.* Expenses of $36,800 were paid.* Stockholders purchased additional shares for $22,000 cash.A statement of cash flows for May, 2009, would report net cash flows from operating activities of: A. $60,000B. $16,200C. $23,200D. $20,000

$60,000-36,800 = $23,200

 

 Astoria Co. had the following transactions during the month of August, 2010:* Cash received from bank loans was $20,000.* Dividends of $9,500 were paid to stockholders in cash.* Revenues earned and received in cash amounted to $33,500* Expenses incurred and paid were $26,000

 108. Refer to the above data. What amount of net income will be reported on an income statement for the month of August, 2010? A. $20,000.B. $7,500.C. $0.D. $33,500.

33,500 - 26,000 = 7,500

 

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109. Refer to the above data. At the beginning of August, 2010, owners' equity in Astoria was $160,000. Given the transactions of August, 2010, what will owners' equity be at the end of the month? A. $167,500.B. $150,500.C. $193,500.D. $158,000.

160,000 + 7,500[Net income] - 9,500[Dividends] = 158,000

 

110. Refer to the above data. For the month of August, 2010, net cash flows from operating activities for Astoria were: A. $33,500.B. $7,500.C. $20,000.D. $26,000.

33,500 - 26,000 = 7,500

 

111. The major provisions of the Sarbanes-Oxley Act of 2002 include all of the following except: A. The creation of a new agency to over see the public accounting profession.B. Restrictions on the types of consulting services that accounting firms can provide to audit clients.C. Reducing responsibility for audit committees when overseeing the financial reporting process.D. Requiring the chief executive office and the chief financial officer to certify the accuracy of their company's financial statements.

 

112. According to the Sarbanes-Oxley Act, CEOs and CFOs must certify to the accuracy of their company's financial statements A. Monthly and QuarterlyB. Quarterly and AnnuallyC. Monthly and AnnuallyD. CEOs and CFOs are not required to certify to the company's financial statement; only CPA's do.

 

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Chapter 03 The Accounting Cycle: Capturing Economic Events Answer Key 

 

True / False Questions 

1. The credit side of an account is the right side while the debit side is the left side. FALSE

 

2. In a computerized accounting system posting may be done automatically but journalizing must be done by someone with an understanding of recording transactions. TRUE

 

3. The running balance form or the T account form is typically used in the trial balance to display the accounts and their amounts. FALSE

 

4. Dividends are an expense of a corporation and reduce both total assets and liabilities. FALSE

 

5. Dividends increase owners' equity and therefore should be added to retained earnings. FALSE

 

6. Every business transaction is recorded by a debit to a balance sheet account and a credit to an income statement account. FALSE

 

7. Earning revenue increases owners' equity and expenses reduce owners equity, therefore revenues are recorded with debit entries and expenses are recorded with credit entries. FALSE

 

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8. A trial balance cannot be distributed to stockholders in lieu of a balance sheet. TRUE

 

9. Accounts are usually arranged in the ledger in financial statement order, that is, assets first, followed by liabilities, owners' equity, expenses, and revenues. FALSE

 

10. A credit to a ledger account refers to the entry of an amount on the right side of an account. TRUE

 

11. The left-hand side of an account is used for recording debits and the right-hand side for recording credits. TRUE

 

12. If the number of debit entries in an account is greater than the number of credit entries, the account will have a debit balance. FALSE

 

13. Liability accounts should only be debited and never credited. FALSE

 

14. Increases in owners' equity are recorded by credits; increases in assets and in liabilities are recorded by debits. FALSE

 

15. When making a general journal entry, there can only be one debit and one credit. FALSE

 

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16. A business that is profitable and liquid will have more accounts with credit balances than with debit balances. FALSE

 

17. Every transaction affects equal numbers of ledger accounts and is recorded by equal dollar amounts of debits and credits. FALSE

 

18. When a company uses the double-entry method, the total dollar amount of debits recorded must equal the total dollar amount of credits, but the number of debit and credit entries may differ. TRUE

 

19. If ledger accounts are maintained in three-column, running balance form, the journal should be maintained in the same format. FALSE

 

20. The general ledger is sometimes called the book of original entry because it is the accounting record where transactions are first recorded. FALSE

 

21. Each business transaction is initially recorded in a journal and later transferred to the appropriate accounts in a general ledger. TRUE

 

22. The matching concept refers to the relationship between revenues and expenses. TRUE

 

23. An increase in a liability is recorded by a credit; an increase in owners' equity by a debit. FALSE

 

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24. Revenues increase owners' equity and are, therefore, recorded by crediting the revenues account. TRUE

 

25. The accrual basis of accounting recognizes expenses only when they are paid. FALSE

 

26. Every transaction which affects an income statement account also affects a balance sheet account. TRUE

 

27. A trial balance that balances provides proof that all transactions were correctly journalized and posted to the ledger. FALSE

 

28. A trial balance proves that equal amounts of debits and credits were posted to the ledger. TRUE

 

29. Dividends are an expense of a corporation and appear on the income statement. FALSE

 

30. A CEO or CFO associated with fraudulent financial reporting could be fined but not imprisoned under the Sarbanes Oxley act. FALSE

 

31. "I was just following orders" is an acceptable defense if you committed an unethical action during an audit. FALSE

  Multiple Choice Questions 

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32. Sally Smith had expenses of $800 in June which she paid in July. She declared these expenses on her June income statement. By doing this she is following the accounting principle of: A. Revenue realizationB. Adequate disclosureC. MatchingD. Conservatism

 

33. The price of the goods sold or services rendered during a given accounting period is called: A. Net incomeB. ProfitC. RevenueD. Equity

 

34. The principle that states revenue should be recognized at the time goods are sold or services rendered is called: A. Adequate disclosureB. ConservatismC. MatchingD. Revenue realization

 

35. Recognizing revenue when it is earned and not when cash is received and recognizing expenses when the related goods or services are used rather than when they are paid for is called: A. Revenue recognitionB. Accrual accountingC. ConservatismD. Matching

 

36. The agreement of the debit and credit totals of the trial balance gives assurance that A. All transactions were posted correctlyB. No transactions were omittedC. The number of accounts with debit balances equals the number of accounts with credit balancesD. The total debits equal the total credits

 

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37. The sequence of accounting procedures used to record, classify and summarize accounting information is called the: A. Accounting cycleB. Accounting periodC. Accrual accountingD. Double entry bookkeeping

 

38. The purchase of equipment on credit is recorded by a: A. Debit to Equipment and a credit to Accounts Payable.B. Debit to Accounts Payable and a credit to Equipment.C. Debit to Equipment and a debit to Accounts Payable.D. Credit to Equipment and a credit to Accounts Payable.

 

39. The collection of accounts receivable is recorded by a: A. Debit to Cash and a debit to Accounts Receivable.B. Credit to Cash and a credit to Accounts Receivable.C. Debit to Cash and a credit to Accounts Receivable.D. Credit to Cash and a debit to Accounts Receivable.

 

40. Which of the following accounts normally has a debit balance? A. Accounts payable.B. Retained earnings.C. Accounts receivable.D. Service revenue.

 

41. In a ledger, a separate "account" is maintained for each: A. Type of asset and liability and for each element of owners' equity.B. Business transaction.C. Business day.D. Journal entry.

 

42. In accounting, the terms debit and credit indicate, respectively: A. Increase and decrease.B. Left and right.C. Decrease and increase.D. Right and left. 

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43. In a ledger, debit entries cause: A. Increases in owners' equity, decreases in liabilities, and increases in assets.B. Decreases in liabilities, increases in assets, and decreases in owners' equity.C. Decreases in assets, decreases in liabilities, and increases in owners' equity.D. Decreases in assets, increases in liabilities, and increases in owners' equity.

 44. Which of the following accounts normally has a credit balance? A. Cash.B. Service revenue.C. Accounts receivable.D. Utilities. 

45. Which of the following is not true regarding the ledger account for Cash? A. The balance of the account indicates the amount of cash owned by the business on a particular date.B. Each debit entry in the Cash account represents a cash receipt.C. Debit entries are made before credit entries.D. Credit entries in the Cash account represent cash payments.

 

46. The rules of debit and credit may be summarized as follows: A. Accounts on the left side of the balance sheet are increased by debits, whereas accounts on the right side of the balance sheet are increased by credits.B. The balance of a ledger account is increased by debit entries and is decreased by credit entries.C. Accounts on the left side of the balance sheet are increased by credits, whereas accounts on the right side of the balance sheet are increased by debits.D. The balance of a ledger account is increased by credit entries and is decreased by debit entries.

 47. The essential point of double-entry system of accounting is that every transaction: A. Affects accounts on both sides of the balance sheet.B. Is recorded in both the journal and the ledger.C. Increases one ledger account and decreases another.D. Affects two or more ledger accounts and is recorded by an equal dollar amount of debits and credits. 

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48. Double-entry accounting is characterized by which of the following? A. Every transaction affects both an asset account and either a liability account or an owners' equity account.B. The number of ledger accounts with debit balances is equal to the number with credit balances.C. The total dollar amount of debit entries posted to the ledger is equal to the dollar amount of the credit entries.D. The number of debit entries posted to the ledger equals the number of credit entries.

 

49. The process of originally recording a business transaction in the accounting records is termed: A. Journalizing.B. Footing.C. Posting.D. Balancing.

  50. If your trial balance has a higher debit balance than credit balance, it signifies: A. Assets are more than liabilities.B. A profit.C. A loss.D. An error has been made.

51. Brett Tarek, a manager at D & J Landscaping, Inc., needs information regarding the amount of accounts payable currently owed by the company. This information would most easily be found in the: A. General ledger.B. General journal.C. Income Statement.D. Notes to the financial statements.

52. Which of the following accounting procedures requires the greatest knowledge of generally accepted accounting principles? A. Journalizing business transactions.B. Posting journal entries to ledger accounts.C. Preparing a trial balance.D. Locating errors in a trial balance.

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 53. Transactions are recorded in the general journal in: A. Numerical order.B. Chronological order.C. Account number order.D. Financial statement order. 

54. A transaction is first recorded in which of the following accounting records? A. Trial balance.B. Ledger.C. General journal.D. Balance sheet.

 

55. What type of account will normally contain a debit balance? A. Asset.B. Liability.C. Owners' equity.D. Revenue.

 

56. If your trial balance has a smaller debit balance than credit balance, it signifies: A. Assets are more than liabilities.B. A profit.C. A loss.D. An error has been made.

 

57. The manager of Grande Home Improvements purchased several cash registers for the business on June 10 but does not remember whether he paid cash for the full price or still owes a balance to the vendor. Where is the best place for the manager to get the information about this transaction? A. A trial balance prepared at the end of June.B. The general journal.C. A balance sheet prepared at the end of June.D. The ledger account for equipment.

 

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58. Sue Costa, owner of A-1 Cleaning Services, invested an additional $75,000 in the company. Which of the following would be a part of the correct journal entry to record this transaction? A. A debit to the Cash account.B. A debit to the Equity account.C. A debit to the Capital Stock account.D. A debit to the Cash Received account.

 

59. If a company purchases equipment on account: A. Assets will increase and owners' equity will also increase.B. Assets will increase and owners' equity will decrease.C. Assets will increase and owners' equity will remain unchanged.D. Assets will increase and liabilities will decrease.

 

60. Preparing a journal entry in proper form involves all the following except: A. Listing all accounts debited before any credits.B. Computing the balances in accounts involved in the transaction.C. Indicating the date of transaction.D. Providing a brief written explanation of the transaction.

 

61. The journal entry to record a particular business transaction includes a credit to a liability account. This transaction is most likely also to include: A. Issuance of new capital stock.B. The purchase of an asset on account.C. A cash payment.D. A credit to Accounts Receivable.

 

62. The journal entry to record a particular business transaction includes a credit to the Cash account. This transaction is most likely also to include: A. Issuance of new capital stock.B. The purchase of an asset on account.C. Payment of an outstanding note payable.D. A credit to Accounts Receivable.

 

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63. The collection of an account receivable is recorded by a debit to Cash and a credit to Accounts Payable. If this error is not corrected: A. Total liabilities are understated.B. Total assets are understated.C. Total liabilities are overstated.D. Owners' equity is overstated.

 

64. Posting is the process of: A. Transferring debit and credit entries from the journal into the appropriate ledger accounts.B. Determining that the dollar amount of debit entries recorded in the ledger is equal to the dollar amount of credit entries.C. Entering information into a computerized data base.D. Preparing journal entries to describe each business transaction.

 

65. If a company purchases equipment for cash: A. Assets will increase and owners' equity will also increase.B. Assets will increase and owners' equity will decrease.C. Assets will increase and owners' equity will remain unchanged.D. Total assets and owners' equity will remain unchanged.

 

66. A trial balance that is out of balance indicates that: A. The number of ledger accounts with debit balances is not equal to the number of accounts with credit balances.B. A debit has been posted to the wrong account.C. There is not an equality of debit and credit amounts in the ledger.D. A journal entry has been completely omitted from the posting process.

 

67. A trial balance consists of: A. A two-column schedule of all debit and credit entries posted to ledger accounts.B. A two-column financial statement intended for distribution to interested parties outside the business.C. A two-column schedule showing the totals of all debits and of all credits made in journal entries.D. A two-column schedule listing names and balances of all ledger accounts.

 

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68. Which statement is true about debits? A. Debits always indicate a benefit to the company.B. Debits always indicate a detriment to the company.C. Debits always increase the net worth of a company.D. None of the above statements are true.

 

69. Which of the following errors would be disclosed by preparation of a trial balance? A. The collection of an account receivable was recorded by a debit to the Land account rather than to the Cash account.B. The collection of an account receivable for $219 was recorded by a $291 debit to Cash and a $291 credit to Accounts Receivable.C. The collection of a $365 account receivable was not recorded at all.D. The collection of a $325 account receivable was recorded by a $325 debit to Cash and a $325 debit to Accounts Receivable.

 

70. Which of the following errors would not be disclosed by preparation of a trial balance? A. An error was made in computing the balance of the Cash account.B. A journal entry included a debit to the Equipment account for $3,200, but this amount was erroneously posted as $2,300.C. During the posting process, a $1,700 debit to Cash was accidentally entered in the credit side of the Cash account.D. The journal entries recorded on the last day of the year have never been posted to the ledger.

 

71. Which statement is true about credits? A. Credits always indicate a benefit to the company.B. Credits always indicate a detriment to the company.C. Credits always increase the net worth of a company.D. None of the above statements are true.

 

72. The statement "This business produces net income of $520,000" is unclear because it fails to specify: A. The accounting method, that is, accrual or cash basis.B. Whether the amount earned is before or after expenses.C. The time period.D. The amount of cash withdrawn from the business by the owner.

 

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73. The term revenue can best be described as: A. The selling price of goods and services rendered to customers during a given accounting period.B. The cash received from selling goods and serving customers during a given accounting period.C. The net increase in owners' equity during a given period.D. The "bottom line" in the income statement.

 

74. The realization principle indicates that revenue usually should be recognized and recorded in the accounting records: A. When goods are sold or services are rendered to customers.B. When cash is collected from customers.C. At the end of the accounting period.D. Only when the revenue can be matched by an equal dollar amount of expenses.

 

75. In February of each year, the Carlton Hotel holds a very popular wine tasting event. Tickets must be ordered and paid for in advance, and are typically sold out by November of the preceding year. The realization principle indicates that the revenue from these ticket sales should be recognized in the period in which the: A. Order is placed.B. Wine tasting is held.C. Payments are received.D. Expenses associated with the wine tasting are paid in full.

 

76. Collection of an accounts receivable: A. Increases the total assets of a company.B. Decreases the total assets of a company.C. Does not change the total assets of a company.D. Reduces a company's total liabilities.

 

77. The matching principle is best demonstrated by: A. Using debits to record decreases in owners' equity and credits to record increases.B. The equation Assets = Liabilities + Owners' Equity.C. Allocating the cost of an asset to expense over the periods during which benefits are derived from ownership of the asset.D. Offsetting the cash receipts of the period with the cash payments made during the period.

 

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78. Net income is: A. The excess of debits over credits.B. The increase in owners' equity resulting from the profitable operations of the business.C. The excess of credits over debits.D. The increase in assets of a company during a year.

 

79. Clinton prepares monthly financial statements. Which of the following violates the matching principle? A. A portion of the salary payments made this month are not recognized as expense because some of the work was done by employees last month.B. The premium on a six-month insurance policy is charged immediately to expense.C. Expenses for the period exceed revenues.D. The cost of advertising done during the month is charged to expense even though no payment is due for 60 days.

 

80. The matching principle: A. Applies only to situations in which a cash payment occurs before an expense is recognized.B. Applies only to situations in which a cash receipt occurs before revenue is recognized.C. Is used in accrual accounting to determine the proper period in which to recognize revenue.D. Is used in accrual accounting to determine the proper period for recognition of expenses.

 

81. The reason that revenue is recorded by a credit entry to a revenue account is: A. That revenue always involves a debit to the Cash account.B. Explained by the realization principle.C. Explained by the matching principle.D. That revenue increases owners' equity.

 

82. Revenues increase owners' equity because: A. Revenues increase net income which increases retained earnings.B. Revenues are recorded by a credit.C. Of the matching principle.D. The realization principle requires revenues be recognized with an increase to owners' equity

 

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83. The reason that both expenses and dividends are recorded by debit entries is that: A. All dividend and expense transactions involve offsetting credit entries to the Cash account.B. Both expenses and dividends are offset against revenues in the income statement.C. Both expenses and dividends reduce owners' equity.D. The statement is untrue-expenses are recorded by debits, but dividends are recorded by credits to the owners' equity account.

 

84. A journal entry which records revenue must include: A. A debit to Cash.B. A credit to a revenue account.C. A credit to the owners' equity account.D. A debit to the owners' equity account.

 

85. A journal entry to record revenue could include each of the following, except: A. A credit to a revenue account.B. A credit to the Capital Stock account.C. A debit to Cash.D. A debit to Accounts Receivable.

 

86. A journal entry to recognize an expense must include: A. A credit to Accounts Payable.B. A credit to an expense account.C. A credit to Cash.D. A debit to an expense account.

 

87. A journal entry to recognize an expense could include each of the following, except: A. A debit to an expense account.B. A credit to Accounts Payable.C. A debit to a liability account.D. A credit to Cash.

 

88. Which of the following accounts normally does not have a debit balance? A. Dividends.B. Wage Expense.C. Building.D. Capital Stock.

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89. On June 18, Baltic Arena paid $6,600 to Marvin Maintenance, Inc. for cleaning the arena following a monster truck show held on June 9th. This transaction: A. Is recorded by debiting the Retained Earnings account.B. Is recorded by debiting Cash and crediting Cleaning Expense.C. Causes a decrease in owners' equity by increasing expenses for June.D. May not be recorded until all revenue generated from the monster truck show has been collected in cash.

 

90. Davis, Inc., a music group, entertained at a black-tie dinner dance on April 26, and collected the fee in full at the end of the evening. This transaction: A. Causes an increase in assets and revenue, as well as an increase in owners' equity.B. Is recorded by debiting Cash and crediting the Retained Earnings account.C. Causes an increase in assets and a decrease in owners' equity.D. Violates the matching principle unless any expenses associated with this cash receipt are paid prior to recording the revenue.

 

91. At the end of October, Flagship Marina received a bill for fuel used in October. Payment is not due until November 30. This transaction: A. Should not be recorded in the accounting records until November.B. Causes a decrease in assets and in owners' equity in November, when the bill is paid.C. Should be recorded as an expense of October, regardless of the payment date.D. Is recorded as a liability in October, but is not considered an expense until paid.

 

92. On June 27, Healthy Life Services, Inc. performed extensive tests on lab specimens submitted by several customers and sent invoices totaling $5,200, due in 30 days. A. No revenue from rendering these services should be recorded until payment is received.B. This situation causes an increase in assets and in revenue in June, but has no effect on owners' equity until payment is received.C. Revenue is earned in June, but assets are not increased until payment is received.D. Assets, revenue, and owners' equity are increased in June, regardless of when payment is received.

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 The following transactions occurred during March, the first month of operations for Quality Galleries, Inc.:* Capital stock was issued in exchange for $360,000 cash.* Purchased $180,000 of equipment by making a $60,000 cash down payment and signing a note payable for the balance.* Made a $35,000 cash payment on the note payable from the purchase of equipment.* Sold a piece of equipment for cash of $18,000. The equipment was sold at cost, so there is no gain or loss on the sale.

 93. Refer to the above data. What is the balance in the Cash account at the end of March? A. $283,000.B. $343,000.C. $318,000.D. $378,000.$360

94. Refer to the above data. What are total assets of Quality Galleries at the end of March? A. $283,000.B. $162,000.C. $445,000.D. $480,000.

$283,000 + $180,000 - $18,000 = $445,000

 

95. Refer to the above data. What is the balance in the Note Payable account at the end of March? A. $120,000.B. $85,000.C. $35.000.D. $155,000

$120,000 - $35,000 = $85,000

 

96. Refer to the above data. What is the total owners' equity at the end of March? A. $283,000.B. $445,000.C. $480,000.D. $360,000.

$360,000: capital stock issued

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,000 - $60,000 - $35,000 + $18,000 = $283,000  

 The following transactions occurred during May, the first month of operations for Hunter Products, Inc.:* Issued 50,000 shares of capital stock to the owners of the corporation in exchange for $600,000 cash* Purchased a piece of land for $400,000, making a $150,000 cash down payment and signing a note payable for the balance.* Made a $60,000 cash payment on the note payable from the purchase of land.* Purchased equipment on credit from BBW, Inc. for $63,000.

 97. Refer to the above data. What is the balance in the Cash account at the end of May? A. $210,000.B. $390,000.C. $600,000.D. $810,000.

$600,000 - $150,000 - $60,000 = $390,000

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98. Refer to the above data. What are total assets of Hunter Products at the end of May? A. $913,000.B. $790,000.C. $853,000.D. $916,000.

$390,000 + $400,000 + $63,000 = $853,000

 

99. Refer to the above data. What is the total of Hunter Products' liabilities at the end of May? A. $253,000.B. $190,000.C. $63,000.D. $313,000.

$250,000 - $60,000 + $63,000 = $253,000

 

100. Refer to the above data. What is the total owners' equity at the end of May? A. $810,000.B. $600,000.C. $790,000.D. $660,000.

$600,000: capital stock issue

 

101. Master Equipment has a $17,400 liability to Arrow Paint Co. When Master Equipment makes a partial payment of $7,600 on this liability, which of following is true about the journal entry made by Master to record this transaction? A. The Cash Paid Out account is credited $7,600B. The liability account Accounts Payable is credited $9,800C. The Cash account is debited $7,600.D. The Accounts Payable account is debited $7,600.

 

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102. Eagle News has a $6,000 account receivable from one of its advertisers, Allwood Floors. When Eagle receives $3,600 from Allwood as partial payment: A. Eagle should debit Accounts Receivable for $3,600.B. Eagle should credit Cash for $3,600.C. Eagle should credit Accounts Receivable for $3,600.D. Eagle makes no journal entry until the total of $6,000 is received from Allwood.

 

103. Bruno's Pizza Restaurant makes full payment of $8,300 on an account payable to Stella's Cheese Co. Stella's would record this transaction with a: A. Debit to Accounts Payable for $8,300.B. Credit to Cash for $8,300.C. Credit to Accounts Receivable for $8,300.D. Credit to Accounts Payable for $8,300.

 

104. The purchase of office equipment at a cost of $7,600 with an immediate payment of $4,200 and agreement to pay the balance within 60 days is recorded by: A. A debit of $7,600 to Office Equipment, a debit of $4,200 to Accounts Receivable, and a credit of $3,400 to Accounts Payable.B. A debit of $7,600 to Office Equipment, a credit of $4,200 to Cash, and a credit of $3,400 to Accounts Receivable.C. A debit of $3,400 to Accounts Receivable, a debit of $4,200 to Cash, and a credit of $7,600 to Office Equipment.D. A debit of $7,600 to Office Equipment, a credit of $4,200 to Cash, and a credit of $3,400 to Accounts Payable.

 

105. Land is purchased by making a cash down payment of $40,000 and signing a note payable for the balance of $130,000. The journal entry to record this transaction in the accounting records of the purchaser includes: A. A credit to Land for $40,000.B. A debit to Cash for $40,000.C. A debit to Land for $170,000.D. A debit to Note Payable for $130,000.

 

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 The bookkeeper for Wood Mfg. made the following journal entry on January 30, 2009:

   

 

106. Refer to the above data. This transaction involves: A. The sale of land and building for $286,000.B. Payment of $221,000 on a note payable.C. The receipt of $65,000 cash.D. An increase in liabilities of $221,000.

 

107. Refer to the above data. Before the journal entry above, Wood had assets, liabilities, and owners' equity of $450,000, $100,000, and $350,000, respectively. What are total assets immediately after the above transaction occurs? A. $221,000.B. $671,000.C. $735,500.D. $450,000.

$450,000 + $201,500 + $84,500 - $65,000 = $671,000

 

 The following entry appears in Martin Supply's general journal on March 10, 2010:

   

 

108. Refer to the above data. This transaction involves: A. Martin's collection of $35,000 on an account receivable.B. Payment of $21,000 cash by MartinC. A $21,000 overall increase in Martin's assets.D. Sale of equipment by Martin for $51,000.

 

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109. Refer to the above data. Before the journal entry above, Martin had assets of $900,000; liabilities of $460,000; and owners' equity of $440,000. Total assets immediately after the above transaction has been recorded amount to: A. $900,000.B. $921,000.C. $956,000.D. $794,000.

$900,000 + $35,000 + $21,000 - $56,000 = $900,000

 

 Use the following to answer questions 110-112:Montauk Oil Co. reports these account balances at December 31, 2010

   On January 2, 2011, Montauk Oil collected $50,000 of its accounts receivable and paid $20,000 of its accounts payable.

 110. Refer to the above data. In a trial balance prepared at December 31, 2010 the total of the debit column is: A. $1,540,000.B. $780,000.C. $1,020,000.D. $700,000.

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$80,000 + $100,000 + $200,000 + $160,000 + $240,000 = $780,000

 

111. Refer to the above data. In a trial balance prepared at January 3, 2011, the total of the debit column is: A. $760,000.B. $1,570,000.C. $740,000.D. $370,000.

$110,000 + $50,000 + $200,000 + $160,000 + $240,000 = $760,000 or$780,000 (from above) - $20,000 payment of liability = $760,000

 

112. Refer to the above data. On January 3, 2011, total liabilities are: A. $370,000.B. $350,000.C. $300,000.D. $70,000.

$90,000 + $260,000 = $350,000

 

 Ceramic Products, Inc. reports these account balances at January 1, 2009 (shown in alphabetical order):

   On January 5, Ceramic Products collected $12,000 of its accounts receivable and paid $11,000 on its note payable.

 

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113. Refer to the above data. In a trial balance prepared for Ceramic Products on January 1, 2009, the total of the credit column is: A. $182,000.B. $196000.C. $166,000.D. $286,000.

$24,000 + $28,000 + $185,000 +$49,000 = $286,000

 

114. Refer to the above data. In a trial balance prepared on January 5, 2009, the total of the credit column is: A. $275,000.B. $286,000.C. $287,000.D. $297,000.

$28,000 + $13,000 + $185,000 + $49,000 = $275,000

 

115. Refer to the above data. On January 5, 2009, total liabilities are: A. $0.B. $30,000.C. $56,000.D. $41,000.

$28,000 + $13,000 = $41,000

 

116. Ben Dryden, president of Jet Glass, Inc, noticed a $8,000 debit to Accounts Payable in the company's general ledger. This debit could correspond to: A. A $8,000 sale to a customer.B. A purchase of equipment costing $8,000 on credit.C. A payment of $8,000 to a supplier to settle a balance due.D. The failure to pay this month's $8,000 utility bill on time.

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117. Black Systems sold and delivered modems to White Computers for $330,000 to be paid by White in three equal installments over the next three months. The journal entry made by Black Systems to record this transaction will include: A. A debit to Sales Revenue for $330,000.B. A debit to Accounts Receivable for $330,000.C. A debit to Accounts Receivable for $110,000.D. A debit to Cash Paid for $330,000.

 

118. Green Systems sold and delivered modems to Blue Computers for $660,000 to be paid by Blue in three equal installments over the next three months. The journal entry made by Blue Computers to record the last of the three installment payments will include: A. A debit of $220,000 to Modem Expense.B. A debit of $220,000 to Accounts Receivable.C. A debit of $220,000 to Cash.D. A debit of $220,000 to Accounts Payable.

 

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Chapter 04 The Accounting Cycle: Accruals and Deferrals Answer Key 

 

True / False Questions 

1. Adjusting entries are needed whenever transactions affect the revenue or expenses of more than one accounting period. TRUE

 

2. The book value of a depreciable asset can be determined by its market value at a particular time. FALSE

 

3. The adjusting entry to record estimated income taxes in a profitable period consists of a credit to Income Tax Expense and a debit to Income Tax Payable. FALSE

 

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4. The failure to record an adjusting entry for depreciation would cause assets to be overstated and net income to be understated. FALSE

 

5. The need for adjusting entries results from timing differences between the receipt or disbursement of cash and the dates on the financial statements. FALSE

 

6. The adjusted trial balance may be used in place of the income statement. FALSE

 

7. The book value of an asset may also be called the market value of the asset. FALSE

 

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8. The period of time over which the cost of an asset is allocated to depreciation expense is called its useful life. TRUE

 

9. The adjusted trial balance combines the trial balance items with the adjusting entries to determine the adjusted balances. TRUE

 

10. When a company receives cash in advance and it is obligated to provide a service or a product in the future, the entry would be a credit to a liability account and a debit to revenue. FALSE

 

11. Adjusting entries are only required when errors are made. FALSE

 

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12. The Cash account is usually affected by adjusting entries. FALSE

 

13. Avalon Company paid $4,400 cash for an insurance policy providing three years protection against fire loss. This transaction could properly be recorded by a $4,400 debit to Unexpired Insurance and a $4,400 credit to Cash. TRUE

 

14. Unearned revenue is a liability and should be reported on the income statement. FALSE

 

15. Unpaid expenses may be included as an expense on the income statement. TRUE

 

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16. Prepaid expenses are assets that should appear on the balance sheet. TRUE

 

17. One of the purposes of adjusting entries is to convert assets to expenses. TRUE

 

18. Every adjusting entry involves the recognition of either revenue or owner's equity. FALSE

 

19. An adjusting entry to recognize that a fee received in advance has now been earned will cause an increase in total liabilities. FALSE

 

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20. Omission of the adjusting entry needed to accrue an expense at the end of the period would cause liabilities to be understated. TRUE

 

21. Wages are an expense to the employer when earned rather than when paid. TRUE

 

22. Immaterial items may be accounted for in the most convenient manner, without regard to other theoretical concepts. TRUE

 

23. All assets should be depreciated. FALSE

 

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24. Materiality is a matter of professional judgment. TRUE

 

25. An expenditure that benefits the year in which it is made should be deducted from revenue in the same year. TRUE

 

26. An expenditure that benefits year one but is paid for in year two should not be capitalized until year two. FALSE

 

27. Companies that engage in fraud will often capitalize an asset rather than an expense account. TRUE

  

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Multiple Choice Questions 

28. If Hot Bagel Co. estimates depreciation on an automobile to be $578 for the year they should make the following adjusting entry: A. Debit Accumulated Depreciation $578 and credit Depreciation Expense $578.B. Debit Depreciation Expense $578 and credit Automobile $578.C. Credit Accumulated Depreciation $578 and debit Depreciation Expense $578.D. Debit Automobile $578 and credit Depreciation Expense $578.

 

29. Accumulated Depreciation is A. An asset accountB. A revenue accountC. A contra-asset accountD. An expense account.

 

30. Adjusting entries are prepared A. Before financial statements and after a trial balance has been prepared.B. After a trial balance has been prepared and after financial statements are preparedC. After posting but before a trial balance is prepared.D. Anytime an accountant sees fit to prepare the entries.

 

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31. The normal balance of the Accumulated Depreciation account is A. A debit balanceB. A credit balanceC. Either a debit balance or a credit balance.D. There is no normal balance for this account.

 

 

32. Unearned revenue may also be called A. Net incomeB. Deferred revenueC. Unexpired revenueD. Services rendered

 

 

33. The adjusting entry to record income taxes at the end of an unprofitable accounting period consists of a A. Debit to Income Tax Expense and a credit to Income Tax PayableB. Credit to Income Tax Expense and a debit to Income Tax PayableC. Credit to Income Tax Receivable and a debit to Income Tax ExpenseD. No adjusting entry is required for income taxes if there are no profits

 

 

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34. Which of the following is not considered a basic type of adjusting entry? A. An entry to convert a liability to a revenueB. An entry to accrue unpaid expensesC. An entry to convert an asset to an expenseD. An entry to convert an asset to a liability

 

35. The United Shipping Co. made an adjusting entry accruing interest on a note payable for the month of January for $800. The note required 12% per annum on the principal. The principal amount of the note payable must have been A. $7,000B. $9,600C. $80,000D. $10,800

$800/.12 12 = $80,000.

 

 

36. Rose Corp. has a note receivable from Jewel Co for $80,000. The note matures in 5 years and bears interest of 6%. Rose is preparing financial statements for the month of June. Rose should make an adjusting entry A. Debiting Interest Revenue for $400 and crediting Interest Receivable for $400.B. Debiting Interest Receivable for $400 and crediting Interest Revenue for $400C. Debiting Interest Revenue for $4,800 and crediting Interest Receivable for $4,800.D. Crediting Interest Payable for $400 and debiting Interest Expense for $400.

($80,000 .06)/12 = $400

 

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37. Hahn Corp. has three employees. Each earns $600 per week for a five day work week ending on Friday. This month the last day of the month falls on a Wednesday. The company should make an adjusting entry A. Debiting Wage Expense for $1,080 and crediting Wages Payable for $1,080B. Debiting Wage Expense for $360 and crediting Wages Payable for $360C. Crediting Wage Expense for $1,080 and debiting Wages Payable for $1,080D. Crediting Wage Expense for $360 and debiting Wages Payable for $360

$600 3/5 3 = $1,080

 

 

38. Which of the following activities is least likely to be limited to "year-end"? A. Closing the accounts.B. Drafting notes to accompany statements.C. Recording transactions.D. Undergoing an audit.

 

 

39. Depreciation is: A. An exact calculation of the decline in value of an asset.B. Only an estimate of the decline in value of an asset.C. Only recorded at the end of a year and never over a shorter time period.D. Management must know the exact life of an asset in order to calculate an acceptable depreciation expense.

 

 

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40. We can compare income of the current period with income of a previous period to determine whether the operating results are improving or declining: A. Only if each accounting period covered is a full year.B. Only if the same accountant prepares the income statement each period.C. Only if the accounting periods are equal in length.D. Only if a manual accounting system is used in both periods.

  

41. The purpose of adjusting entries is to: A. Prepare the revenue and expense accounts for recording the revenue and expenses of the next accounting period.B. Record certain revenue and expenses that are not properly measured in the course of recording daily routine transactions.C. Correct errors made during the accounting period.D. Update the owners' equity account for the changes in owners' equity that had been recorded in revenue and expense accounts throughout the period.

 

 

42. Unearned revenue is: A. An asset.B. Income.C. A liability.D. An expense.

 

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43. Which of the following is not a purpose of adjusting entries? A. To prepare the revenue and expense accounts for recording transactions of the following period.B. To apportion the proper amounts of revenue and expense to the current accounting period.C. To establish the proper amounts of assets and liabilities in the balance sheet.D. To accomplish the objective of offsetting the revenue of the period with all the expenses incurred in generating that revenue.

 1 

44. Which of the following situations does not require an adjusting entry at the end of January? A. On January 1, Empire Company purchased delivery equipment with an estimated useful life of five years.B. On January 1, Empire Company began delivery service for a large client who will pay at the end of a three-month period.C. At the end of January, Empire Company pays the custodian for January office cleaning services.D. On January 1, Empire Company paid rent for six months on its office building.

 

45. Adjusting entries are needed: A. Whenever revenue is not received in cash.B. Whenever expenses are not paid in cash.C. Only to correct errors in the initial recording of business transactions.D. Whenever transactions affect the revenue or expenses of more than one accounting period.

 

 

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46. Adjusting entries help achieve the goals of accrual accounting by applying the following two accounting principles: A. Business entity concept and realization principle.B. Cost principle and the accounting equation.C. Realization principle and matching principle.D. Matching principle and safety principle.

 

 

47. No adjusting entry should consist of: A. A debit to an expense and a credit to an asset.B. A debit to an expense and a credit to revenue.C. A debit to an expense and a credit to a liability.D. A debit to a liability and a credit to revenue.

 

48. The entry to record depreciation is an example of an adjusting entry: A. To apportion a recorded cost.B. To apportion unearned revenue.C. To convert a liability to revenue.D. To record unrecorded revenue.

 

 

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49. During the last month of its fiscal year, Echo Lake Resort accepted numerous deposits from customers. By the end of the month many, but not all, of these guests had completed their stays. The entry to record this event is an example of an adjusting entry A. To apportion a recorded cost.B. To apportion unearned revenue.C. To record unrecorded expenses.D. To record unearned revenue.

 

 

50. Prepaid expenses are: A. Assets.B. Income.C. Liabilities.D. Expenses.

 

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementLearning Objective: 3 

51. Colonial Systems prepares monthly financial statements. Colonial would record a prepaid expense in each of the following situations except: A. Colonial Systems purchased a two-year fire insurance policy.B. Colonial Systems paid for six months' gardening services in advance.C. A tenant paid Colonial Systems three months' rent in advance.D. Colonial Systems purchased enough office supplies to last several months.

 

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52. Which of the following statements is not true regarding prepaid expenses? A. Prepaid expenses represent assets.B. Prepaid expenses are shown in a special section of the income statement.C. Prepaid expenses become expenses only as goods or services are used up.D. Prepaid expenses appear in the balance sheet.

 

53. The concept of materiality: A. Involves only tangible assets and not intangible assets.B. Relates only to the income statement and not the balance sheet.C. Is always an exact percentage of a financial account balance.D. Is measured by an items influence on the decisions of users of financial statements.

 

 

54. The balance of an unearned revenue account: A. Appears in the balance sheet as a component of owners' equity.B. Appears in the income statement along with other revenue accounts.C. Appears in a separate section of the income statement for revenue not yet earned.D. Appears in the liability section of the balance sheet.

 

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55. In which of the following situations would Daystar Company record unearned revenue in May? A. In April, Daystar Company received payment from a customer for services that are performed in May.B. Daystar Company completes a job for a customer in May; payment will be received in June.C. Daystar Company is paid on May 25 for work done in the first two weeks of May.D. Daystar Company receives payment in May for work to be performed in June and July.

 

 

56. Interest that has accrued during the accounting period on a note payable to the bank calls for an adjusting entry consisting of: A. A debit to Interest Expense and a credit to Cash.B. A debit to Notes Payable and a credit to Interest Payable.C. A debit to an asset and a credit to a liability.D. A debit to Interest Expense and a credit to Interest Payable.

 

 

57. The adjusting entry to record interest that has accrued on a note payable to the bank will cause an immediate: A. Increase in liabilities and reduction in net income.B. Decrease in liabilities and reduction in net income.C. Decrease in assets and reduction in net income.D. Increase in assets and increase in net income.

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58. Which of the following would not be considered an adjusting entry?

    A. A Above.B. B Above.C. C Above.D. D Above.

 

 

59. In which of the following situations would an adjusting entry be made at the end of January to record an accrued expense? A. Ramona's Nursery purchased playground equipment on January 1 with an estimated useful life of six years.B. On January 25, Ramona's Nursery hired a college student to drive the minibus; the new employee is to begin work in February.C. January 31 falls on a Tuesday; salaries are paid on Friday of each week.D. On January 31, Ramona's Nursery paid the interest owed on a note payable for January.

 

 

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60. As of January 31, Princess Company owes $500 to Butler Co. for equipment rented during January. If no adjustment is made for this item at January 31, how will Princess's financial statements be affected? A. Cash will be overstated at January 31.B. Net income for January will be overstated.C. Owners' equity will be understated.D. The financial statements will be accurate since the $500 does not have to be paid yet.

 

 

61. The accountant for the Grassroots Company forgot to make an adjusting entry to record revenue earned but not yet billed to customers. The effect of this error is: A. An overstatement of assets and of net income offset by an understatement of owners' equity.B. An overstatement of net income and an understatement of assets.C. An understatement of assets, net income, and owners' equity.D. An overstatement of liabilities offset by an understatement of owners' equity.

 

 

62. Recently, The Bon Appetite Café contracted and paid for a relatively expensive advertisement in Haute Cuisine magazine. Despite the fact that the ad will appear in Haute Cuisine three months after the end of Bon Appetite Café's current fiscal year, the Cafe's accountant recorded the advertising expense when the payment was made. If no adjusting entry is made, how will this year's financial statements of Bon Appetite Café be affected? A. Net income will be overstated and total assets will be understated.B. Net income will be overstated and total assets will be overstated.C. Net income will be understated and total assets will be understatedD. Net income will be understated and total assets will be overstated.

 

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63. An adjusting entry involving recognition of accrued revenue is necessary at the end of March in which of the following situations? A. Midwood Consultants received payment in February for consulting services rendered in March.B. Midwood Consultants began working for a client on March 15; bills will be sent monthly beginning April 15.C. Midwood Consultants made payment in January for office rent for the first three months of the year.D. On March 31, a major customer paid his bill for a consulting job completed in February.

 

 

64. An example of a contra-asset account is: A. Depreciation Expense.B. Accumulated Depreciation.C. Prepaid expenses.D. Unearned revenue.

 

 

65. Which of the following entries causes an immediate decrease in assets and in net income? A. The entry to record depreciation expense.B. The entry to record revenue earned but not yet received.C. The entry to record the earned portion of rent received in advance.D. The entry to record accrued wages payable.

 

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66. Which of the following is not considered an end-of-period adjusting entry? A. The entry to record the portion of unexpired insurance which has become expense during the period.B. An entry to record revenue which has been earned but has not yet been billed to customers.C. The entry to record depreciation expense.D. An entry to record repayment of a bank loan and to recognize related interest expense.

 

 

67. Which of the following is the accounting principle that governs the timing of revenue recognition? A. Realization principleB. Materiality.C. Matching.D. Depreciation.

 

68. Which of the following statements concerning materiality is true? A. Generally accepted accounting principles are violated if estimates are used in end-of-period adjustments.B. Each year the Financial Accounting Standards Board (FASB) publishes the dollar amount considered "material" for each industry.C. Immaterial items should be handled in the most expedient manner, even if resulting financial statements are not completely precise.D. Accountants should not waste time and money in recording transactions involving small dollar amounts.

 

 

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69. The concept of materiality: A. Treats as material only those items that are greater than 2% or 3% of net income.B. Justifies ignoring the matching principle or the realization principle in certain circumstances.C. Affects only items reported in the income statement.D. Results in financial statements that are less useful to decision makers because many details have been omitted.

 

70. Which of the following would not be a proper application of the concept of materiality by Millridge Corporation? A. Transactions involving small dollar amounts are not recorded in Millridge's accounting records.B. Estimates of supplies on hand are used to determine the supplies expense for the period.C. On a monthly basis, utility bills are expensed in the month paid, rather than in the month in which services are used.D. Immaterial items are ignored in making end-of-period adjusting entries.

 

 

71. After preparing the financial statements for the current year, the accountant for Barbara's Jewel Co closed the dividends account at year-end by debiting Retained Earnings and crediting the dividends account. What is the effect of this entry on current-year net income and the balance in the owners' equity account(s) at year-end? A. Net income is overstated; balance in the retained earnings account is correct.B. Net income is correct; balance in the capital stock account is correct.C. Net income is understated; balance in the capital stock account is correct.D. Net income is understated; balance in the retained earnings account is understated.

 

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72. Which of the following accounting principles is concerned with offsetting revenue with the expenses incurred in producing that revenue? A. Realization principle.B. Materiality.C. Matching.D. Depreciation.

 

73. Which of the following is not an example of an adjusting entry? A. The entry to record unpaid expenses.B. The entry to record uncollected revenues.C. The entry to convert liabilities to revenue.D. The entry to pay outstanding bills.

 

 

74. Unearned revenue appears: A. As income on the income statement.B. As an asset on the balance sheet.C. As a liability on the balance sheet.D. As a part of the retained earnings.

 

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75. Prepaid expenses appear: A. As an expense on the income statement.B. As an asset on the balance sheet.C. As a liability on the balance sheet.D. As a reduction to retained earnings.

 

 

76. Which of the following is considered an adjusting entry? A. The entry to record depreciation.B. The entry to pay salaries.C. The entry to pay outstanding bills.D. The entry to declare a dividend distribution.

  

77. Which of the following is considered a contra-asset account? A. Prepaid expenses.B. Unearned revenue.C. Accumulated depreciation.D. All of the above.

 

 

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78. Which statement is true about land? A. Land should be depreciated over the same period as the building located on it.B. Land cannot be depreciated for greater than a 40-year period.C. Land should not be depreciated.D. The straight line method should be used to depreciate land.

 

 

79. Which statement is true about an adjusted trial balance? A. It is prepared before adjusting entries.B. Revenue accounts and expense accounts should not appear on the adjusted trial balance.C. Balance sheet items are presented before income statement items.D. Accumulated depreciation should equal depreciation expense.

 

80. On the adjusted trial balance, retained earnings is: A. Stated at the period-end amount.B. Stated at the period-beginning amount.C. Adjusted for all revenues and expenses for the period.D. Adjusted for the period's dividends.

 

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81. Depreciation expense is: A. Only an estimate.B. An exact calculation prepared by an appraiser.C. Not to be calculated unless the exact life of an asset can be determined.D. To be determined for all assets owned by a company.

 

82. The cost of insurance is considered an expense A. Only when the entire policy period has passed.B. Only when the policy is purchased.C. Only when the premium is paid.D. Evenly over the term of the policy.

 

83. Shop supplies are expensed when: A. Consumed.B. Purchased.C. Paid for.D. Ordered.

 

 

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84. Accumulated depreciation is: A. The depreciation expense recorded on an asset to date.B. The remaining book value of an asset.C. The depreciation expense taken on an asset during the current period.D. An expense on the income statement.

 

85. The accrual of interest on a note payable will: A. Reduce total liabilities.B. Increase total liabilities.C. Have no effect upon total liabilities.D. Will have no effect upon the income statement but will affect the balance sheet.

 

86. In which of the following situations would the largest amount be recorded as an expense of the current year? (Assume accrual basis accounting.) A. $4,000 is paid in January for equipment with a useful life of four years.B. $1,800 is paid in January for a two-year fire insurance policy.C. $10,000 cash is withdrawn by the owner for personal use.D. $900 is paid to an attorney for legal services rendered during the current year.

 

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87. Gourmet Shop purchased cash registers on April 1 for $12,000. If this asset has an estimated useful life of four years, what is the book value of the cash registers on May 31? A. $250.B. $3,000.C. $9,000.D. $11,500.

$12,000/48 = $250; $12,000 - (2 $250) = $11,500

 

 

88. Videobusters Inc. offered books of video rental coupons to its patrons at $40 per book. Each book contained a certain number of coupons for video rentals. During the current period 500 books were sold for $20,000, and this amount was credited to Unearned Rental Revenue. At the end of the period it was determined that $15,000 worth of book coupons had been used by customers to rent videos. The appropriate adjusting entry at the end of the period would be: A. Debit Rental Revenue $5,000 and credit Unearned Rental Revenue $5,000.B. Debit Rental Revenue $15,000 and credit Unearned Rental Revenue $15,000.C. Debit Unearned Rental Revenue $5,000 and credit Rental Revenue $5,000.D. Debit Unearned Rental Revenue $15,000 and credit Rental Revenue $15,000.

 

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89. Regal Real Estate which maintains its accounts on the basis of a fiscal year ending June 30, began the management of an office building on June 15 for an agreed annual fee of $4,800. The first payment is due on July 15. The adjusting entry required at June 30 is: A. A debit to Management Fees Receivable for $200 and a credit to a revenue account for $200.B. A $200 debit to Unearned Management Fees and a $200 credit to Management Fees Earned.C. A debit to Cash for $200 and a credit to Management Fees Earned.D. A debit to Cash for $400 offset by a credit to a revenue account for $200 and a liability for $200.

$4,800/12 = $400 ½ = $200

 

90. Great Kids Co. began providing day care for the children of employees of a large corporation on January 15 for an agreed monthly fee of $9,000. The first payment is to be received on February 15. The adjusting entry required by Great Kids Co. on January 31 includes: A. A credit to Child Care Fees Earned of $4,500.B. A debit to Child Care Fees Receivable of $9,000.C. A debit to Unearned Child Care Revenue of $4,500.D. A debit to Fees Receivable of $9,000.

 

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91. Before any month-end adjustments are made, the net income of Bennett Company is $76,000. However, the following adjustments are necessary: office supplies used, $3,160; services performed for clients but not yet recorded or collected, $3,640; interest accrued on note payable to bank, $3,040. After adjusting entries are made for the items listed above, Russell Company's net income would be: A. $66,160.B. $78,560.C. $73,440.D. $76,000

$76,000 - $3,160 + $3,640 - $3,040 = $73,440

 

92. The accountant for Perfect Painting forgot the following two adjustments at the end of 2010: A. (a) The entry to record depreciation: $3,000.B. (b) The entry to record the portion of fees received in advance which have now been earned: $3,000.C. As a result of these two omissions:D. Net income for Perfect Painting for 2010 is overstated.E. Net income for Perfect Painting for 2010 is understated.F. Assets of Perfect Painting are overstated at December 31, 2010.G. Liabilities of Perfect Painting are understated at December 31, 2010.

 

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93. Before making month-end adjustments, net income of Cardinal Company was $116,000 for March. Adjusting entries are necessary for the following items:Depreciation for the month of March: $2,300.Interest accrued to March 31, on deposits in banks: $800.Supplies used in March: $100.Fees earned in March that had been collected in advance: $2,600.After recording these adjustments, net income for March is: A. $112,400.B. $113,620.C. $117,000.D. $110,800.

$116,000 - $2,300 + $800 - $100 + $2,600 = $117,000

 

 

 Omega Company adjusts its accounts at the end of each month. The following information has been assembled in order to prepare the required adjusting entries at December 31:(1) A one-year bank loan of $720,000 at an annual interest rate of 12% had been obtained on December 1.(2) The company's pays all employees up-to-date each Friday. Since December 31 fell on Tuesday, there was a liability to employees at December 31 for two day's pay amounting to $6,800.(3) On December 1 rent on the office building had been paid for four months. The monthly rent is $6,000.(4) Depreciation of office equipment is based on a lifetime of six years. The balance in the Office Equipment account is $9,360; no change has occurred in the account during the year.(5) Fees of $9,800 were earned during the month for clients who had paid in advance.

 

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94. What amount of interest expense has accrued on the bank loan? A. $6,400B. $7,000.C. $7,200.D. $7,800.

$720,000 .12 1/12 = $7,200

 

95. The accrued interest should be: A. Debited to Notes Payable.B. Credited to Interest Payable.C. Credited to Cash.D. Credited to Interest Expense.

 

96. By what amount will the book value of the office equipment decline after the appropriate December adjustment is recorded? A. $1,560.B. $130C. $0D. $1,430

$9,360/72 = $130

 

 

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97. After the appropriate adjusting entry is recorded, the balance in the liability account Unearned Fees will: A. Decrease by $9,800.B. Increase by $9,800.C. Equal $9,800.D. Be unaffected.

 

98. The entry to record rent expense will include: A. A debit to Prepaid Rent for $6,000.B. A credit to Prepaid Rent for $6,000C. A credit to Prepaid Rent for $18,000D. A debit to Prepaid Rent for $18,000.

 

 

99. Failure to make the appropriate adjustment to the Salary Expense account will result in: A. Understating net income for December by $6,800.B. Understating net income for January by $6,800.C. Overstating total liabilities at December 31.D. Overstating the balance in Cash at December 31.

 

 

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 Hoffman, Inc. adjusts its books each month but closes its books at the end of the year. The trial balance at March 31 before adjustments is as follows:

   

 

100. According to service contracts, $4,810 of the Unearned Service Revenue has been earned in March. The amount of Service Revenue Earned to be reported in the March income statement is: A. $16,510.B. $21,320.C. $11,700.D. $20,410.

$16,510 + $4,810 = $21,320

 

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101. On March 1, Hoffman paid in advance for four months' insurance. The necessary adjusting entry at March 31 includes which of the following? A. A credit to Prepaid Insurance for $2,340.B. A credit to Prepaid Insurance for $780.C. A debit to Prepaid Insurance for $2,340.D. A debit to Prepaid Insurance for $780.

$3,120/4 = $780

102. At March 31, the amount of supplies on hand is $520. What amount is reported in the January income statement for supplies expense? A. $1,300.B. $0.C. $520.D. $780.

$1,300 - $520 = $780

 

103. The equipment had an estimated useful life of five years. Compute the book value of the equipment at March 31, after the proper March adjustment is recorded. A. $10,833.B. $15,167.C. $25,567.D. $10,400

$26,000/60 = $433; $10,400 + $433 = $10,833; $26,000 - $10,833 = $15,167

 

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104. Employees are owed $750 for services since the last payday in March, to be paid the first week in April. The amount to be reported in the March income statement for salaries expense is: A. $7,800.B. $750.C. $ 7,050.D. $8,550.

$7,800 + $750 = $8,550

 

105. On December 31, Louis Jeweler's made an adjusting entry to record $4,200 accrued interest payable on its mortgage. On January 10, the mortgage payment was made. This payment included interest charges of $6,300, $2,100 of which were applicable to the period from January 1 through January 10. In recording this mortgage payment the accountant should: A. Debit Interest Expense $2,100 and debit Accrued Interest Payable $4,200.B. Debit Interest Expense $6,300.C. Debit Accrued Interest Payable $6,300.D. Debit Interest Expense $2,100 and credit Accrued Interest Payable $4,200.

 

 

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106. An asset purchased on January 1, 2006 for $60,000 that has an estimated life of 10 years will have a book value on December 31, 2009 of: A. $60,000.B. $24,000.C. $36,000.D. $42,000.

$60,000/10 = $6,000 4 = $24,000; $60,000 - $24,000 = $36,000

  

107. If an asset was purchased on January 1, 2006 for $140,000 with an estimated life of 5 years, what is the accumulated depreciation at December 31, 2009? A. $28,000.B. $112,000.C. $56,000.D. $84,000.

$140,000/5 = $28,000 4 = $112,000

 

108. Under accrual accounting, salaries earned by employees but not yet paid should be expensed A. In the period in which they are earned.B. In the period in which they are paid.C. In the period with the higher earnings.D. In the period with the lower earnings.

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109. Under accrual accounting, Fees received in advance from customers should be shown as being earned A. When cash is collected.B. When services are performed or goods delivered.C. When tax rates are low.D. When tax rates are high.

 

 

110. Dolphin Co. received $1,500 in fees during 2009, 1/3 of which was earned in 2010, the rest was earned when received. The company should report which of the following amounts as income in 2009? A. $1,500B. $500C. $1,000D. $0

$1,500 2/3 = $1,000

 

 

111. Swordfish Co. earned $75,000 in 2009 and expects to receive 2/3 of the amount in 2010 and the remainder in 2011. How much revenue should they report in 2009? A. $0B. $25,000C. $50,000D. $75,000

$75,000 100%

 

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112. Tuna Co. purchased a building in 2009 for $650,000 and debited an asset called "Buildings" for the entire amount. The company never depreciated the building although it had a useful life of 15 years. This action will cause: A. Net income to be understated.B. Net income to be overstated.C. Net income will not be affected.D. Total assets will be understated.

 

True / False Questions 1. The report form of the balance sheet lists liabilities and owners' equity below assets. TRUE

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 2. A current asset may be cash or must be capable of being converted into cash with a relatively short period of time, usually less than five years. FALSE 

3. Real accounts can only be closed at the end of the year with a single compound entry. FALSE 

4. The adjusted trial balance contains income statement accounts and balance sheet accounts while the after-closing trial balance will only have balance sheet accounts. TRUE

 5. Measures of profitability tell us how quickly current assets can be converted into profits. FALSE 

6. The current ratio is a measure of liquidity. TRUE

7. The purpose of the after-closing trial balance is to give assurance that the accounts are in balance and ready for the new accounting period. TRUE

8. The account, Accumulated Depreciation, is considered a permanent account. TRUE

9. The net income percentage can be measured by dividing net income by total revenue. TRUE

10. Working capital equals current assets divided by current liabilities. FALSE

11. In regard to disclosures that are required to be contained in annual reports, the FASB has no well-defined list of items that must be included. TRUE

 12. At year-end all equity accounts must be closed. FALSE

13. The income summary account appears, as stated, on the statement of retained earnings. FALSE

14. Dividends are closed out directly to retained earnings at year end. TRUE

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 15. Income summary does not appear on the income statement. TRUE 16. Dividends declared are an expense and reduce net income. FALSE 17. The current ratio equals current assets plus current liabilities. FALSE

18. The return on equity ratio equals net income divided by common stock. FALSE

19. Interim financial statements usually report on a period of time greater than one year. FALSE

20. Publicly owned companies are typically managed by their stockholders. FALSE

21. Financial statements are usually prepared before the closing entries are made. TRUE

 22. Closing entries do not affect the cash account. TRUE

23. Return on equity is a commonly used measure of a company's solvency. FALSE

24. The current ratio is a measure of short-term debt paying ability. TRUE 

25. An after-closing trial balance consists only of asset, liability, and owners' equity accounts. TRUE

26. IFRS 1 requires that management and auditors should depart from compliance with GAAP if it is necessary to achieve a fair presentation when reporting financial results. TRUE

 27. An annual report filed with the Securities and Exchange Commission must include a section called "Management's Predictions of Future Earnings". FALSE 

Multiple Choice Questions 

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28. Of the following, which is not an alternative title for the income statement? A. Earnings statementB. Statement of OperationsC. Profit and Loss StatementD. Statement of Financial Position

29. The Retained Earnings statement is based upon which of the following relationships? A. Retained Earnings - Net Income - DividendsB. Retained Earnings - Net Income + DividendsC. Retained Earnings + Net Income + DividendsD. Retained Earnings + Net Income - Dividends

30. In the notes to financial statements, adequate disclosure would typically not include: A. The accounting methods in useB. Lawsuits pending against the businessC. Due dates of major liabilitiesD. The optimism of the CFO regarding future profits.

 31. A worksheet consists of all of the following except: A. A trial balanceB. Adjusting entriesC. An adjusted trial balanceD. Transaction entries 

32. Closing entries would be prepared before: A. Financial statements are preparedB. A post-closing trial balanceC. An adjusted trial balanceD. Adjusting entries

 33. When a worksheet is prepared which account would not be entered into the income statement columns? A. Depreciation ExpenseB. Unearned RevenueC. Service RevenueD. Prepaid Insurance

34. The closing entry for an expense account would consist of a A. Debit to Income Summary and a credit to the expense account.B. Debit to the expense account and a credit to Income Summary.C. Credit to Retained Earnings and a debit to the expense account.D. Credit to Revenue and a debit to the expense account.

  

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35. The income summary account has debits of $85,000 and credits of $75,000. The company had which of the following: A. Net income of $10,000B. Net income of $160,000C. Net loss of $10,000D. Net loss of $160,000

36. What types of information must be disclosed in the financial statements? A. The comprehensive list issued by the FASB.B. Only information that is determined by management.C. Non-financial information that is not included in the basic financial statements.D. Ratio analysis.

37. Dividends declared: A. Reduce retained earnings.B. Increase retained earnings.C. Reduce net income.D. Increase net income.

38. During the closing process: A. All income statement accounts are credited to income summary.B. All income statement accounts are debited to income summary.C. All revenue accounts are credited and expense accounts are debited.D. All revenue accounts are debited and expense accounts are credited.

39. A debit balance in the income summary account indicates: A. An error was made.B. A Net Profit.C. A Net Loss.D. That revenues were greater than expenses.

 40. The dividends account should be: A. Closed to income summary.B. Closed to retained earnings.C. Closed only if there is a profit.D. Not closed at all. 

41. Which account will appear on an after-closing trial balance? A. Dividends.B. Prepaid Expenses.C. Retained Earnings, at the beginning of the period.D. Sales.

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42. Which account will not appear on an after-closing trial balance? A. Dividends.B. Prepaid Expenses.C. Unearned Revenue.D. Retained Earnings, at the end of the period.

43. Which of the following items will usually not be disclosed in an annual report? A. Lawsuits pending against the business.B. Significant events occurring after the balance sheet date but before the financial statements are actually issued.C. Scheduled plant closings.D. All three of the above would be disclosed

44. Return on equity measures: A. Solvency.B. Profitability.C. Leverage.D. All three of the above.

45. Publicly owned companies are: A. Managed and owned by the government.B. Must be not-for-profit companies.C. Listed on a stock exchange.D. Not permitted to be owned by individuals.

46. The worksheet: A. Is one of the basic financial statements.B. Is prepared throughout the year.C. Is not a formal step in the accounting cycle.D. Starts with the first column being the adjusted trial balance.

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47. If Income Summary has a net credit balance, it signifies: A. A net loss.B. Net income.C. A reduction of net worth.D. Dividends have been declared.

48. The balance in Income Summary: A. Should equal retained earnings.B. Will always be equal to the increase in retained earnings.C. Will equal net income less dividends.D. Will equal net income or net loss.

49. After preparing the financial statements for the current year, the accountant for Exquisite Gems closed the Dividends account at year-end by debiting Income Summary and crediting the Dividends account. What is the effect of this entry on current-year net income and the balance in the Retained Earnings account at year-end? A. Net income is overstated and the balance in the Retained Earnings account is correct.B. Net income is correct and the balance in the Retained Earnings account is correct.C. Net income is understated and the balance in the Retained Earnings account is understated.D. Net income is understated and the balance in the Retained Earnings account is overstated.

50. The concept of adequate disclosure: A. Does not apply to information which is immaterial.B. Grants users of the financial statements access to a company's accounting records.C. Does not apply to events occurring after the balance sheet date.D. Specifies which accounting methods must be used in a company's financial statements.

51. The concept of adequate disclosure requires a company to inform financial statement users of each of the following, except: A. The accounting methods in use.B. The due dates of major liabilities.C. Destruction of a large portion of the company's inventory on January 20, three weeks after the balance sheet date, but prior to issuance of the financial statements.D. Income projections for the next five years based upon anticipated market share of a new product; the new product was introduced a few days before the balance sheet date.

 52. Income Summary appears on which financial statement: A. Income statement.B. Balance sheet.C. Retained Earnings statement.D. Income summary does not appear on any financial statement.

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53. Retained Earnings at the end of a period: A. Is equal to the balance in the Retained Earnings account in the adjusted trial balance at the end of a period.B. Is determined in the statement of Retained EarningsC. Is equal to Retained Earnings at the beginning of the period, minus net income (or plus net loss) for the period.D. Appears in the income statement for the period.

54. A statement of retained earnings shows: A. The changes in the Cash account occurring during the accounting period.B. The revenue, expense, and dividends of the period.C. The types of assets which have been purchased with the earnings retained during the accounting period.D. The changes in the Retained Earnings account occurring during the accounting period.

55. The normal order in which the financial statements are prepared is: A. Balance sheet, income statement, statement of retained earnings.B. Income statement, statement of retained earnings, balance sheet.C. Income tax return, income statement, balance sheet.D. Income statement, statement of cash flows, balance sheet.

56. The purpose of making closing entries is to: A. Prepare revenue and expense accounts for the recording of the next period's revenue and expenses.B. Enable the accountant to prepare financial statements at the end of the accounting period.C. Establish new balances in the balance sheet accounts.D. Reduce the number of expense accounts.

57. In the closing of the accounts at the end of the period, which of the following is closed directly into the Retained Earnings account? A. Depreciation Expense.B. Accumulated Depreciation.C. Revenue and liability accounts.D. The Income Summary account.

58. Publicly traded companies must file audited financial statements with the: A. AICPA.B. IRS.C. SEC.D. AAA.

 59. Closing entries never involve posting a credit to the: A. Income Summary account.B. Accumulated Depreciation account.C. Dividends.D. Depreciation Expense account.

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60. Which of the following account titles could not be debited in the process of preparing closing entries for Andrew's Auto Shop? A. Income Summary.B. Fees Earned.C. Dividends.D. Retained Earnings.

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61. If a business closes its accounts only at year-end: A. Financial statements are prepared only at year-end.B. Adjusting entries are made only at year-end.C. Revenue and expense accounts reflect year-to-date amounts throughout the year.D. Monthly and quarterly financial statements cannot be prepared.

62. Assets are considered current assets if they are cash or will usually be converted into cash: A. Within a month or less.B. Within 3 months.C. Within a year or less.D. Within 6 months or less.

63. Which of the following amounts appears in both the Income Statement debit column and the Balance Sheet credit column of a worksheet? A. Net income.B. Net loss.C. Dividends.D. Retained earnings.

64. A worksheet should be viewed as: A. A financial statement to be distributed to investors.B. A financial statement to assist managers in making managerial decisions.C. A tool to assist accountants in making end-of-period adjustments and in preparing financial statements.D. A tool to assist auditors in determining that all transactions have been properly recorded throughout the period.

65. The amount of net income (or loss) will appear on the debit side of the Income Statement columns in a worksheet if:A. Revenue exceeds total expenses for the period.B. The trial balance is out of balance.C. Dividends are more than the income or loss for the period.D. There is a net loss for the period.

66. Return on equity is calculated by: A. Dividing net income by total revenue.B. Dividing net income by average stockholders' equity.C. Dividing net income by working capital.D. Dividing dividends by stockholders' equity.

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67. Which of the following is true regarding a worksheet prepared at year-end? A. The number of account titles applicable to the Adjusted Trial Balance columns is usually greater than the number of account titles applicable to the Trial Balance columns.B. The worksheet can be issued instead of financial statements.C. The worksheet eliminates the need to make adjusting and closing entries.D. An equal number of account titles are applicable to the Income Statement columns and the Balance Sheet columns. 

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68. Interim financial statements: A. Cover a period less than one year.B. Cover only periods of a quarter of a year.C. Cover periods greater than a year.D. Cannot cover a period of one month or less.

 69. When a worksheet is used: A. Adjusting entries are not prepared, since adjustments are shown on the worksheet.B. Revenue and expense accounts do not have to be closed to the Income Summary account, because the income statement is prepared from the worksheet and net income is already computed.C. Financial statements may be prepared before recording adjusting and closing entries in the accounting records.D. The Income Statement column and Balance Sheet column of the worksheet eliminate the need to prepare formal financial statements for a business.

70. Preparation of interim financial statements: A. Makes the preparation of year-end financial statements unnecessary.B. Requires the journalizing and posting of adjusting entries.C. Requires the journalizing and posting of closing entries.D. Is done monthly or quarterly, in-between the year-end financial statements.

71. If monthly financial statements are desired by management: A. Journalizing and posting adjusting entries must be done each month.B. Journalizing and posting closing entries must be done each month.C. Monthly financial statements can be prepared from worksheets; adjustments and closing entries need not be entered in the accounting records.D. Adjusting and closing entries must be entered in the accounting records before preparation of interim financial statements.

72. Declaring a dividend will: A. Increase net income.B. Decrease net income.C. Not change net income.D. Increase the net worth of a company.

73. Dividends will have what effect upon retained earnings? A. Increase.B. Decrease.C. No effect.D. Depends upon if there is income or loss.

74. Which of the following accounts will be closed to Income Summary? A. Prepaid Expenses.B. Unearned Revenue.C. Dividends.D. None of the above.

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75. Net income from the Income Statement appears on: A. The Balance Sheet.B. The Retained Earnings Statement.C. Neither the Balance Sheet nor the Retained Earnings Statement.D. Both the Balance Sheet and the Retained Earnings Statement.

76. Which statement is true regarding the Income Statement? A. Losses do not appear on income statements.B. Dividends reduce net income.C. Both A and B are true.D. Both A and B are false.

77. Which of the following items should not be disclosed in the body of the financial statements, but rather in the notes to the financial statements? A. Lawsuits, under certain circumstances.B. Significant events occurring after the balance sheet date but before the financial statements are issued.C. Neither A nor BD. Both A & B

78. Closing entries should be made: A. Every year.B. Only when an entity goes out of business.C. Only if there is a profit.D. Only if there is a loss.

79. Which accounts should be closed? A. Expenses and revenues.B. Dividends.C. Income summary.D. Each of the above accounts should be closed. 

80. Which account appears on the After-Closing Trial Balance? A. Service Revenue.B. Unearned Revenue.C. Dividends.D. Retained Earnings, Beginning of Year.

81. If sales are $270,000, expenses are $220,000 and dividends are $30,000, Income Summary: A. Will have a credit balance of $50,000.B. Will have a debit balance of $50,000.C. Will have a debit balance of $20,000.D. Will have a credit balance of $20,000.

$270,000 - $220,000 = $50,000 

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82. If current assets are $90,000 and current liabilities are $70,000, the current ratio will be: A. 77%.B. $20,000.C. 1.3D. $160,000

$90,000/$70,000 = 1.3

83. If current assets are $110,000 and current liabilities are $50,000, working capital will be: A. 45.5%.B. 2:2.C. $60,000.D. $160,000.

$110,000 - $50,000 = $60,000

84. The following information is available:

   What is the return on equity? (round to the nearest number) A. 5%.B. 20%.C. 25%.D. 15%.

$20,000/$130,000 = 15% 

85. Only two adjustments appear in the adjustments column of a worksheet for Wycliff Publications: one to record $800 depreciation of office equipment, and the other to record the use of $560 of office supplies. If the Trial Balance column totals are $15,380, what are the totals of the Adjusted Trial Balance columns? A. $16,740B. $15,140.C. $16,180.D. $15,860.

$15,380 + $800 = $16,180. The decrease in office supplies cancels the increase in supplies expense.

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86. The December 31, 2010 worksheet for Fran's Fine Dining showed the following amounts related to the Supplies Expense account: A. (a). In the Trial Balance debit column: $745B. (b). In the Adjustments debit column: $125C. (c). In the Adjusted Trial Balance debit column: $870D. What is the proper balance in the Supplies Expense account on January 1, 2011, after all closing entries for 2010 have been posted, but before any 2011 transactions are recorded?E. $870.F. $745.G. $0.H. $125.

 Shown below is a trial balance for Novelty Toys, Inc., on December 31, after adjusting entries:

   

 

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87. Refer to the above data. The entry to close the Fees Earned account will: A. Produce a zero balance in that account when posted.B. Include a debit to Income Summary.C. Include a credit to Fees Earned.D. Include a debit to Capital Stock.

88. Refer to the above data. The entry to close Salaries Expense account will: A. Produce a zero balance in that account when posted.B. Include a credit to Income Summary.C. Include a debit to Salaries Expense.D. Include a credit to Capital Stock.

89. Refer to the above data. Net income for the period equals: A. $18,375.B. $11,000.C. $5,800.D. Some other amount.

$22,750 - $8,000 - $1,625 - $2,125 = $11,000

90. Refer to the above data. After closing the accounts, Retained earnings at December 31 equals: A. $11,000.B. $7,250.C. Zero.D. Some other amount.

$11,000 - $3,750 = $7,250

91. Refer to the above data. The total debits in the After-Closing Trial Balance will equal: A. $25,375.B. $29,125.C. $40,875.D. Some other amount.

$7,750 + $6,375 + $11,250 = $25,375

92. Refer to the above data. Income Summary will have what balance before it is closed? A. Zero.B. $11,750.C. $7,250.D. Some other amount.

$22,750 - $8,000 - $1,625 - $2,125 = $11,000

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 Shown below is the adjusted Trial Balance for Simon Inc., on December 31, after the first year of operations, after adjusting entries:

   

 93. Refer to the above data. The entry to close the Service Fees Earned account will: A. Produce a zero balance in that account when posted.B. Include a debit to Income Summary.C. Include a credit to Service Fees Earned.D. Include a debit to Capital Stock.

94. Refer to the above data. The entry to close Depreciation Expense account will: A. Produce a zero balance in that account when posted.B. Include a credit to Income Summary.C. Include a debit to Depreciation Expense.D. Include a credit to Capital Stock.

 95. Refer to the above data. Net income for the period equals: A. $20,960.B. $16,640.C. $21,920.D. $23,360

$21,920 - $3,200 - $1,120 - $960 = $16,640

96. Refer to the above data. After closing the accounts, Retained Earnings at December 31 equals: A. Zero.B. $18,400.C. $19,360.D. Some other amount.

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$2,720 + $16,640 - $960 = $18,400

97. Refer to the above data. The total debits in the After Closing-Trial Balance will equal: A. $23,360.B. $28,640.C. $22,400.D. Some other amount.

$1,600 + $4,000 + $16,800 = $22,400

98. Refer to the above data. Income Summary will have what balance before it is closed? A. $28,640B. $15,600.C. $21,920.D. $16,640.

$21,920 - $3,200 - $1,120 - $960 = $16,640 

99. The section of the annual report titled "Management Discussion and Analysis" A. Is required by the SECB. Is not required but may be included by managementC. Is required by GAAPD. All of the above

100. Under the Sarbanes-Oxley Act, CFOs and high-ranking corporate officers are now A. Personally responsible for the integrity of annual reports.B. Subject of fines of up to $5 million for knowingly making false statements.C. Facing prison sentences of up to 20 years for knowingly making false statements.D. All of the above.

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Chapter 09 Plant and Intangible Assets Answer KeyTrue / False Questions 

1. Incidental costs incurred in the purchase of land that are charged to Land Improvements will affect net income at some future time. TRUE

 

 

2. To capitalize an expenditure means charging it to an asset account. TRUE

 

3. Charging an expenditure directly to an expense account is based on the assumption that the benefits of that expenditure have been used up in the current period. TRUE

 

4. The journal entry to record depreciation expense consists of a credit to Accumulated Depreciation and a debit to the asset being depreciated. FALSE

 

 

5. Depreciation is a process of asset valuation. FALSE

 

6. Book value represents the cost of an asset that has yet to be allocated to expense. TRUE

 

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7. The half-year convention allows us to take six months depreciation during the first year of an asset's life even if the asset was purchased on January 25th. TRUE

8. The book value of an asset is equal to its cost plus accumulated depreciation. FALSE

 

9. The formula for the double-declining balance method of depreciation is: Remaining book value times the straight line rate is equal to depreciation expense. FALSE

 

10. The rule of consistency does not require a company to use the same method of depreciation from year to year for all assets. TRUE

 

 

11. The term plant assets refers to long-lived assets acquired for use in business operations, rather than for resale to customers. TRUE

 

12. Any reasonable and necessary expenditures to place a newly acquired plant asset in service should be debited to a separate asset account. FALSE

 

 

13. Sales tax on equipment is not part of the acquisition cost and should not be capitalized. FALSE

 

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14. Land improvements are not subject to depreciation. FALSE

 

 

15. It is an acceptable accounting practice to treat an expenditure that is not material in dollar amount as an expense of the current period even though the expenditure may benefit several periods. TRUE

 

16. The erroneous recording of a revenue expenditure as a capital expenditure will cause an overstatement of total revenue for the period. TRUE

 

17. In accounting, depreciation refers to a decline in the asset's current market value, not the allocation of the cost of an asset to expense. FALSE

18. Just as there are depreciation methods to calculate the decline in value of assets, there are appreciation methods to record the increase in value of assets. FALSE

 

19. If an accelerated depreciation method is used for an asset with a useful life of five years, more depreciation expense would be recorded in the third year than in the fifth year. TRUE

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20. Revenue expenditures are a part of selling and administrative expenses. TRUE

 

 

21. Under the half-year convention, six months' depreciation is recorded on an asset in the year of acquisition and in the year of retirement regardless of the month in which the asset is actually purchased or retired. TRUE

 

22. Once the estimated life is determined for a depreciable asset it can never be changed. FALSE

 

23. Annual depreciation expense is increased when salvage values are small. TRUE

 

 

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24. Most companies benefit by using accelerated depreciation methods for income tax purposes. TRUE

 

25. Goodwill is only recorded when the value of a company increases and not when it decreases in value. FALSE

 

26. Straight-line is the most widely used depreciation method in financial statements, and MACRS is the most widely used method in federal income tax returns. TRUE

 

 

27. The tax basis of a depreciable asset generally is higher than the book value of that asset for financial reporting purposes. FALSE

 

 

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28. Research and development costs should be capitalized to match the period of benefit. FALSE

 

29. The systematic write-off of intangible assets to expense is called depletion. FALSE

 

 

30. The balance sheet always reflects a company's current values. FALSE

 

 

31. U. S. GAAP requires that a company should capitalize goodwill and adjust its value if subject to impairment. TRUE

 

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32. A revenue expenditure is an operating expense. TRUE

 

 

33. A capital expenditure is charged to owners'_ capital. FALSE

 

34. The Sarbanes-Oxley Act requires that companies disclose whether they have a code of ethics that applies to the CEO, CFO, and Chief Accounting Officer. TRUE

  

Multiple Choice Questions 

35. After March, 2004 international standards required that goodwill A. Be capitalized and amortized over 20 years or less.B. Be capitalized and amortized over 40 years or less.C. Be capitalized and reviewed annually and its value should be adjusted if impaired.D. Be expensed immediately.

 

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36. If an asset is determined to be impaired, it should be: A. depreciated only using the straight-line method.B. written up to its historical cost.C. reclassified as a liability.D. written down to its fair market value.

 

 

37. All of the following may be considered intangible assets except: A. Accounts receivablesB. CopyrightsC. FranchisesD. Goodwill

 

 

38. When straight-line depreciation is in use, the depreciation rate of an asset is equal to A. 1 divided by the life of the assetB. 1 divided by the cost of the assetC. The cost of the asset divided by the life of the assetD. The cost of the asset less its salvage value divided by the life of the asset.

 

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39. When a depreciable asset is sold at a price equal to its book value, a journal entry would include A. A credit to the asset account for its book valueB. A debit to accumulated depreciationC. A credit to accumulated depreciationD. A credit to cash

 

40. All of the following assets are amortized except: A. PatentsB. FranchisesC. CopyrightsD. Natural resources

 

41. Land is purchased for $256,000. Additional costs include a $15,300 fee to a broker, a survey fee of $2,400, $1,750 to construct a fence and a legal fee of $8,500. What is the cost of the land? A. $256,000B. $281,000C. $284,600D. $282,200

$256,000 + $15,300 + $2,400 + $8,500 = $282,200

 

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42. If the 150% declining balance method is being used and an asset has a useful life of 20 years what is the depreciation rate? A. 7.5%B. 10%C. 15%D. Some other amount

  

43. Machinery is purchased on May 15, 2009 for $50,000 with a $5,000 salvage value and a five year life. The half year convention is followed. What method of depreciation will give the highest amount of depreciation expense in year 2? A. Straight lineB. Double declining balanceC. 150% declining balanceD. Amount cannot be determined

Straight line: ($50, 000 - $5,000)/5 = $9,000Double Declining Balance: $50,000 2/5 = $20,000/2 = $10,000: $40,000 2/5 = $16,000150% Declining Balance $50,000 1.5/5 = $15,000/2 = $7,500; $42,500 1.5/5 = $12,750

 

44. An asset which costs $18,800 and has accumulated depreciation of $6,000 is sold for $11,600. What amount of gain or loss will be recognized when the asset is sold? A. A gain of $1,200B. A loss of $1,200C. A loss of $7,200D. A gain of $7,200

($18,800 - $6,000) - $11,600 = $1,200 loss

 

 

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45. The entry to record amortization on a copyright would include: A. A debit to amortization expenseB. A debit to accumulated amortizationC. A debit to copyrightD. A credit to amortization expense

 

 

46. The cost of a new windshield wiper on a delivery vehicle would be classified as: A. A capital expenditureB. A revenue expenditureC. Part of the cost of goods soldD. An unusual and infrequent expense

 

47. Which of the following would not be considered part of the cost of equipment recently purchased? A. Sales tax.B. Transportation charges.C. Installation and setup charges.D. All three are capitalized costs.

 

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48. Armstrong Company recently acquired a new computer system. Which of the following costs associated with the computer should not be debited to the Equipment account? A. Insurance coverage purchased by United to cover the computer during shipment from the manufacturer.B. Wages paid to system programmers hired to prepare the new computer for use.C. Replacement of several circuit boards damaged during installation.D. Installation of new electrical power supplies required for the computer.

 

 

49. Coca-Cola's famous name printed in distinctive typeface is an example of: A. A trademark.B. A patent.C. A copyright.D. Goodwill.

 

50. When comparing the units-of-output method of depreciation with straight-line depreciation: A. The depreciation expense in the first year will always be greater under units-of-output method.B. The depreciation expense in the first year will always be less under the units-of-output method.C. The depreciation expense in the first year will always be the same.D. The depreciation expense in the first year may be greater than, equal to, or less under the units-of-output method.

 

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51. Tomassi Company paid $450,000 to acquire a piece of real estate consisting of land and an office building with a parking lot. In this situation: A. The purchase price should be apportioned among the Land, Land Improvement, and Building accounts.B. The entire purchase price should be debited to the Plant and Equipment account.C. Land, Land Improvement, and Building accounts should each be debited for the respective appraisal value of each item.D. Allocation of the entire $450,000 to Land results in an understatement of net income in the current and future accounting periods.

 

 

52. Which of the following is a capital expenditure? A. Sales tax paid in conjunction with the purchase of office equipment.B. Monthly rent of a delivery truck.C. Research and development costs.D. Small expenditures to acquire long-lived assets, such as $13 to purchase a wastebasket.

 

 

53. The legal life of most patents is: A. 5 years.B. 20 years.C. 40 years.D. 50 years.

 

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54. Which of the following should not be treated as a revenue expenditure? A. Delivery costs on newly purchased equipment.B. Annual fire insurance premiums on plant and equipment.C. Repair to an elevator of a five year old building.D. The purchase of a pencil sharpener for $10 used in an office.

  

55. Which of the following is not a capital expenditure? A. Advertising expenditures to introduce a new product line.B. Sales tax paid in conjunction with the purchase of new machinery.C. Installation of elevators to replace escalators.D. An amount paid to acquire a patent with a remaining life of only three years.

 

 

56. The application of the matching principle to depreciation of plant and equipment can best be described as: A. The matching of the book value of an asset with its market value.B. Offsetting the revenue of an accounting period with the estimated decline in value of plant and equipment during the accounting period.C. Offsetting revenue of an accounting period with the portion of the cost of plant and equipment estimated to have been used up during the accounting period.D. The matching of the depreciation expense reported in the income statement for an accounting period with the accumulated depreciation reported in the balance sheet.

 

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57. The term accumulated depreciation, as used in accounting, is best defined as: A. The portion of a plant asset recognized as expense since the asset was acquired.B. Funds (or cash) set aside to replace the asset being depreciated.C. Earnings retained in the business that will be used to purchase another asset when the present asset is depreciated.D. An expense of doing business.

 

 

58. Which depreciation method is most commonly used among publicly owned corporations? A. Straight-line.B. Double-declining balance.C. Units-of-output.D. All three of the above are equally employed.

 

 

59. The book value of an asset in the plant and equipment category is: A. The undepreciated cost of the asset.B. The current replacement cost of the asset.C. The original cost of the asset.D. The accumulated depreciation on the asset to date.

 

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60. A gain is recognized on the disposal of plant assets when: A. The sales price is greater than the residual value but less than the book value.B. The sales price is less than both the book value and the residual value.C. The sales price is greater than the book value and greater than the residual value.D. The sales price is greater than the book value and less than the residual value.

61. Which of the following would not be amortized? A. Oil well.B. Copyright.C. Franchise fee.D. Patent.

 

62. An accelerated depreciation method: A. Results in reporting higher earnings every year.B. Depreciates an asset over a shorter life than does the straight-line method.C. Recognizes more depreciation expense in the early years of an asset's useful life and less in the later years.D. Is required for assets that become technologically obsolete before they physically wear out.

 

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63. Accelerated depreciation methods are used primarily in: A. Income tax returns.B. The financial statements of small businesses.C. The financial statements of publicly owned corporations.D. Companies with computer-based accounting systems.

 

64. Capital expenditures are recorded as: A. An expense.B. An asset.C. A liability.D. Income.

  

65. In the fixed-percentage-of-declining-balance depreciation method, the book value of the asset is multiplied by: A. An increasing depreciation rate.B. A constant depreciation rate.C. A decreasing depreciation rate.D. A rate that changes each year but is determined from a table.

 

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66. Revenue expenditures are recorded as: A. An expense.B. An asset.C. A liability.D. Income.

  

67. Which of the following situations is impossible? A. Book value is greater than residual value.B. Book value is equal to the residual value.C. Book value is less than residual value.D. Book value is less than the original cost.

 

68. For depreciable property other than real estate, MACRS is based upon: A. Either the 150% or 200% declining-balance method.B. The straight-line method.C. A 10-year recovery period.D. The depreciation method and recovery period used by the company in its financial statements.

 

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69. Which of the following statements about MACRS is not correct? A. MACRS is the only accelerated depreciation method that may be used on newly acquired assets for federal income tax purposes.B. The method permits "depreciating" the asset to a tax basis of $0 over a specified recovery period.C. If a company uses MACRS in its income tax returns, it also must use MACRS in its financial statements.D. Most businesses would benefit from using MACRS rather than straight-line depreciation in their income tax returns.

 

 

70. The term net identifiable assets means: A. All assets minus all liabilities.B. All assets except goodwill, minus all liabilities.C. All assets except intangibles, minus all liabilities.D. All fixed assets less liabilities.

 

 

71. Responsibility for selection of the depreciation methods used in financial reporting rests with: A. Company management.B. The FASB.C. The IRS.D. The CPA firm that audits the company's financial statements.

 

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72. With respect to depreciation policies, the principle of consistency means: A. A company should use the same depreciation methods in its financial statements that it uses in its income tax returns.B. A company should use the same depreciation methods as other companies in the same industry.C. A company should use the same depreciation method from year to year for a given plant asset.D. A company should use the same depreciation method in computing depreciation expense on all its assets.

 

 

73. The book value of plant assets (other than land): A. Increases with the passage of time.B. Decreases with the passage of time.C. Remains the same with the passage of time.D. May increase or decrease depending upon the economy.

 

 

74. The gain on the disposal of equipment is recognized when: A. The book value of the equipment is greater than the value received.B. The book value of the equipment is less than the value received.C. A salvage value exists.D. A gain should not be recognized on the disposal of an asset.

 

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75. For financial reporting purposes, the gain or loss on the sale of a plant asset is determined by comparing the asset's: A. Cost with its book value.B. Sales price with its book value.C. Tax basis with its book value.D. Sales price with its tax basis.

 

76. The gain or loss on the disposal of a depreciable asset reported in financial statements often differs from that reported for income tax purposes. The principal reason for the difference is: A. The cost of the asset is different for financial reporting and income tax purposes.B. The sales price of the asset is different for financial reporting and income tax purposes.C. Different depreciation methods have been used in financial statements and in income tax returns.D. The company has made an error-the same amount of gain or loss should appear in the income tax return as in the financial statements.

 

 

77. When a company uses straight-line depreciation and the half-year convention, assets with a five-year life: A. Will have the same depreciation expense in the first and last years.B. Will be depreciated over six accounting years.C. Book value will equal its salvage value at the end of its economic life.D. All of the above statements are correct.

 

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78. Which of the following assets is not subject to depreciation and whose usefulness does not decline over time? A. Patents.B. Copyrights.C. Land.D. Coal mine.

 

79. Intangible assets are assets used in business operations but which: A. Lack physical substance.B. Cannot be sold.C. Have been depreciated below their estimated salvage values.D. Cannot be specifically identified.

80. For the financial statements of publicly traded companies, MACRS: A. Is recommended.B. Is required.C. Is optional.D. Is not considered to be in conformity with GAAP.

 

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81. The inclusion of the intangible asset goodwill in the financial statements of a company indicates: A. That the company has a favorable reputation with its customers.B. A monopoly position in the industry or superior management.C. An unbroken record of annual earnings and dividends.D. That the company has purchased a going business at a price in excess of the fair market value of the net identifiable assets.

 

 

82. Expenditures for research and development intended to lead to new products of commercial value: A. Should be recorded as intangible assets and amortized during the years in which benefits are expected.B. Should be charged to expense when incurred.C. Should be capitalized only if patents are expected to be granted.D. Should be classified as deferred charges.

 

 

83. The basic purpose of the matching principle is to allocate the cost of an asset to expense over the years in which the asset contributes to revenue. Current accounting practice does not strictly apply this principle to expenditures for: A. Natural resources.B. Research and development.C. Trademarks.D. Equipment.

 

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84. The adjusting entries to record depreciation or amortization expense, or to write down assets that have become impaired: A. Reduce both net income and cash balances.B. Reduce net income, but have no direct effect on cash balances.C. Decrease cash balances, but have no direct effect upon net income.D. Affect neither net income nor cash balances.

 

85. Harvard Company purchased equipment having an invoice price of $11,500. The terms of sale were 2/10, n/30, and Harvard paid within the discount period. In addition, Harvard paid a $160 delivery charge, $185 installation charge, and $931 sales tax. The amount recorded as the cost of this equipment is: A. $11,845.B. $12,776.C. $11,615.D. $12,546

($11,500 .98) + $160 + $185 + $931 = $12,546

 

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86. Land and a warehouse were acquired for $890,000. What amounts should be recorded in the accounting records for land and for the warehouse if an appraisal showed the estimated values to be $400,000 for the land and $700,000 for the warehouse? A. $400,000 for land; $490,000 for warehouse.B. $323,960 for land; $566,040 for warehouse.C. $400,000 for land; $700,000 for warehouse.D. $190,000 for land; $700,000 for warehouse.

$400,000 + $700,000 = $1,100,000; $400,000/$1,100,000 = 36.4% $890,000 = $323,960 $700,000/$1,100,000 = 63.6% $890,000 = $566,040

 

 

87. On March 2, 2009, Glen Industries purchased a fleet of automobiles at a cost of $550,000. The cars are to be depreciated by the straight-line method over five years with no salvage value. Glen uses the half-year convention to compute depreciation for fractional periods. The book value of the fleet of automobiles at December 31, 2010, will be: A. $165,000.B. $400,000.C. $495,000.D. $385,000.

($550,000/5) = $110,000/2 = $55,000 (year 1)($550,000/5) = $110,000(year 2): Book value = $550,000 - $55,000 - $110,000 = $385,000

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88. On April 8, 2009, Jupitor Corp. acquired equipment at a cost of $480,000. The equipment is to be depreciated by the straight-line method over six years with no provision for salvage value. Depreciation for fractional years is computed by rounding the ownership period to the nearest month. Depreciation expense recognized in 2009 will be: A. $53,333.B. $66,667.C. $60,000.D. $80,000.

($480,000/6) 9/12 = $60,000

 

 

 On April 30, 2009, Tilton Products purchased machinery for $88,000. The useful life of this machinery is estimated at 8 years, with an $8,000 residual value.

 

89. Refer to the above data. Assume that in its financial statements, Tilton Products uses straight-line depreciation and the half-year convention. Depreciation expense recognized on this machinery in 2009 and 2010 will be: A. $7,500 in 2009 and $11,000 in 2010.B. $6,000 in 2009 and $12,000 in 2010C. $5,000 in 2009 and $10,000 in 2010D. $5,500 in 2009 and $11,000 in 2010

($88,000 - $8,000) / 8 = $10,000 / 2 = $5,000 in 2009 and $10,000 in 2010

 

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90. Refer to the above data. Assume that in its financial statements, Tilton Products uses straight-line depreciation and rounds depreciation for fractional years to the nearest month. Depreciation expense recognized on this machinery in 2009 and 2010 will be: A. $2,333 in 2009 and $7,000 in 2010.B. $5,833 in 2009 and $10,000 in 2010.C. $6,667 in 2009 and $10,000 in 2010.D. $10,000 in 2009 and $10,000 in 2010.

($88,000 - $8,000) = $80,000/8 = $10,000 8 / 12 = $6,667 in 2009 and $10,000 in 2010

 

 

91. Refer to the above data. Assume that in its financial statements, Tilton Products uses the 200%-declining-balance method and the half-year convention. Depreciation expense in 2009 and 2010 will be: A. $11,000 in 2009 and $18,857 in 2010.B. $22,000 in 2009 and $12,571 in 2010C. $22,000 in 2009 and $7,857 in 2010.D. $11,000 in 2009 and $22,000 in 2010

$88,000 2/8 = $22,000/2 = $11,000 in 2009$77,000 2/8 = $19,250 in 2010

 

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92. Refer to the above data. Assume that in its financial statements, Tilton Products uses the 150%-declining-balance method and the half-year convention. Depreciation expense in 2009 and 2010 will be: A. $8,250 in 2007 and $14,953 in 2008.B. $16,500 in 2007 and $12,964 in 2008.C. $16,500 in 2007 and $16,500 in 2008.D. $15,000 in 2007 and $11,786 in 2008.

($88,000 1.5/8) = $16,500/2 = $8,250 in 2009($88,000 - $8,250) 1.5/8 = $14,953 in 2010

 

 

93. Refer to the above data. In the year 2015, Tilton Products sells this machinery for $4,500. At the date of sale, the machinery had been depreciated by Tilton Products to its estimated residual value of $8,000. This sale results in: A. A $3,500 loss in both the company's financial statements and income tax return.B. No gain or loss in either the financial statements or income tax return.C. A $3,500 loss in the financial statements, a $3,500 gain in the income tax return.D. A $3,500 loss in the financial statements, but no gain or loss in the income tax return.

$8,000 - $4,500 = $3,500

 

 On April 2, 2009, Victor, Inc. acquired a new piece of filtering equipment. The cost of the equipment was $160,000 with a residual value of $20,000 at the end of its estimated useful lifetime of 4 years.

94. Refer to the above information. Assume that in its financial statements, Victor uses straight-line depreciation and rounds depreciation for fractional years to the nearest whole month. Depreciation recognized on this equipment in 2009 and 2010 will be: A. $23,333 in 2009 and $35,000 in 2010.B. $40,000 in 2009 and $30,000 in 2010.C. $20,000 in 2009 and $35,000 in 2010D. $26,250 in 2009 and $35,000 in 2010.

($160,000 - $20,000)/4 = $35,000 9/12 = $26,250 for 2009; $35,000 for 2010

 

 

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95. Refer to the above information. Assume that in its financial statements, Victor uses straight-line depreciation and the half-year convention. Depreciation recognized on this equipment in 2009 and 2010 will be: A. $40,000 in 2009 and $30,000 in 2010.B. $23,333 in 2009 and $30,000 in 2010C. $17,500 in 2009 and $35,000 in 2010D. $20,000 in 2009 and $35,000 in 2010

($160,000 - $20,000)/4 = $35,000/2 = $17,500 for 2009; $35,000 for 2010

96. Refer to the above information. If Victor uses straight-line depreciation with the half-year convention, the book value of the equipment at December 31, 2010 will be: A. $90,000.B. $107,500.C. $106,667.D. $105,000.

$160,000 - $17,500 - $35,000 = $107,500 

97. Machinery acquired new on January 1 at a cost of $80,000 was estimated to have a useful life of 10 years and a residual salvage value of $20,000. Straight-line depreciation was used. On January 1, following six full years of use of the machinery, management decided that the estimate of useful life had been too long and that the machinery would have to be retired after three years, that is, at the end of the ninth year of service. Under this revised estimate, the depreciation expense for the seventh year of use would be: A. $8,000.B. $10,000.C. $13,000.D. $24,000.

($80,000 - $20,000)/10 = $6,000 6 = $36,000$60,000 - $36,000 = $24,000/3 = $8,000

98. Clark Imports sold a depreciable plant asset for cash of $35,000. The accumulated depreciation amounted to $70,000, and a loss of $5,000 was recognized on the sale. Under these circumstances, the original cost of the asset must have been: A. $65,000.B. $75,000.C. $100,000.D. $110,000.

(x - $70,000) = $5,000 + $35,000x = $110,000

 

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99. Mayer Instrumentation sold a depreciable asset for cash of $300,000. The original cost of the asset was $1,200,000. Mayer recognized a gain of $45,000 on the sale. What was the amount of accumulated depreciation on the asset at the time of its sale? A. $945,000.B. $255,000.C. $1,155,000.D. $990,000.

($1,200,000 - x) = $300,000 - $45,000x = $945,000

 

100. Suffolk Associates sold office furniture for cash of $42,000. The accumulated depreciation at date of sale amounted to $38,000, and a gain of $18,000 was recognized on the sale. The original cost of the asset must have been: A. $31,000.B. $62,000.C. $84,000.D. $59,000.

x - $38,000 = $42,000 - $18,000x = $62,000

 

101. Total stockholders' equity of Tucker Company is $4,000,000. The fair market value of Tucker 's net identifiable assets (assets less liabilities) is $5,000,000. Empire Corporation makes an offer to purchase Tucker 's entire business for $5,800,000. In this situation: A. Tucker Company should report goodwill of $800,000 in its balance sheet.B. Tucker Company should report goodwill of $1,800,000 in its balance sheet.C. Empire Corporation is willing to pay $1,800,000 for goodwill generated by Tucker, and Empire will report this goodwill in its balance sheet if the purchase is finalized.D. Empire Corporation is willing to pay $800,000 for goodwill generated by Tucker, and Empire will report this goodwill in its balance sheet if the purchase is finalized. 

 

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102. The fair market value of Lewis Company's net identifiable assets is $5,000,000. Martin Corporation purchases Lewis' entire business for $5,800,000. Which of the following statements is not correct? A. Martin Corporation paid $800,000 for goodwill generated by Lewis Company.B. Martin feels that Lewis Company has the ability to generate earnings in excess of a normal return on net identifiable assets.C. Martin will record amortization expense over a period not to exceed 40 years.D. Lewis Company will record goodwill of $800,000 on its balance sheet.

 

 

103. Early in the current year, Tokay Co. purchased the Silverton Mine at a cost of $20,000,000. The mine was estimated to contain 200,000 tons of ore and to have a residual value of $5,000,000 after mining operations are completed. During the year, 105,000 tons of ore were removed from the mine. At year-end, the book value of the mine (cost minus accumulated depletion) is: A. $15,000,000.B. $12,125,000.C. $7,875,000.D. Less than $10,000,000.

($20,000,000 - $5,000,000)/200,000 = $75 105,000 = $7,875,000; $20,000,000 - $7,875,000 = $12,125,000

104. In February 2009, Brilliant Industries purchased the Topaz Mine at a cost of $10,000,000. The mine is estimated to contain 500,000 carats of stone and to have a residual value of $500,000 after mining operations are completed. During 2009, 50,000 carats of stone were removed from the mine and sold. In this situation: A. The book value of the mine is $9,000,000 at the end of 2009.B. The amount of depletion deducted from revenue during 2009 is $950,000.C. The amount of depletion deducted from revenue during 2009 is $1,000,000.D. The mine is classified as an intangible asset and amortized over a period not to exceed 40 years.

($10,000,000 - $500,000)/ 500,000 = $19 50,000 = $950,000

Chapter 10 Liabilities Answer Key 

True / False Questions 

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1. A liability that is known to exist but the precise dollar amount is not known is called a possible liability FALSE

 

 

2. Bonds secured by a pledge of specific assets are called debenture bonds. FALSE

 

3. Junk bonds are attractive to investors because they carry a high rate of interest and are usually convertible into a specified number of shares of capital stock. FALSE

4. Dividends paid by a corporation to its stockholders are tax deductible by the corporation but interest paid on bonds is not. FALSE

  

5. When bonds are sold by one investor to another, they sell at market price plus accrued interest since the last payment date. TRUE

 

6. When bonds are issued at a discount, the borrower must pay more at maturity than the amount originally received. TRUE

 

7. The account Discount on Bonds Payable actually represents interest expense and will be amortized over the life of the bond. TRUE

 

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8. A loss contingency is recorded in the accounting records when it is probable that a loss has been incurred and the amount of the loss is known. FALSE

 

 

9. A commitment, such as a contract to pay a baseball player $5,000,000 a year for five years, should be listed as a long-term liability. FALSE

 

10. If a lease transfers ownership of the property to the lessee at the end of the lease term, it should be regarded as an operating lease. FALSE

 

 

11. When a company has a fully funded pension plan, they only need to record the present value of pension payments as a current liability. FALSE

 

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12. Gross pay less withholding tax and less worker's compensation is considered net pay. FALSE

 

13. Estimated liabilities, contingencies and commitments are usually reported in the long-term liability section of the financial statements. FALSE

 

14. The amount of FICA tax and Medicare tax withheld from an employee is used to pay the employer's percentage of the tax and is mailed to the government quarterly. FALSE

 

 

15. When a company sells bonds, the bondholders are permitted to vote for the board of directors. FALSE

 

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16. The combination of liabilities and owners' equity used in financing the assets of a business is called the company's capital structure. TRUE

 

17. Prepayments and owners' equity are both sources of financing. FALSE

 

18. The current portion of long-term debt should be reported separately in the current liabilities section of the balance sheet. TRUE

 

19. When money is borrowed by issuing a note payable, the borrower records a liability equal to the maturity value of the note. FALSE

 

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20. The most common types of payroll deductions are taxes, insurance premiums, employee savings, and union dues. TRUE

 

21. Social security and Medicare taxes have a cap on employees' salaries where the tax is ended. FALSE

 

 

22. If a long-term debt is to be paid off in monthly installments over a 5-year period, the entire principal should be classified as a long-term debt. FALSE

 

23. There is a tax advantage for a company to issue bonds in lieu of stocks. TRUE

 

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24. The withholding of taxes from an employee's pay is a liability to the company. TRUE

 

 

25. Bonds payable are a means of dividing a very large, long-term liability among many creditors some of whom may participate in the loan only for a short period of time. TRUE

 

 

26. Liabilities that fall due within one year or within the operating cycle are classified as current liabilities. TRUE

 

 

27. In the marketplace, bond prices tend to fluctuate directly with changes in interest rates. FALSE

 

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28. Convertible bonds can be exchanged for common stock at the option of the company. FALSE

 

 

29. In a long-term capital lease, the lessor views a portion of each lease payment as interest expense. FALSE

 

30. Payments of pensions and other benefits to retired workers are recognized as expense in the period payment is made. FALSE

 

 

31. Sinking funds make a bond issue less attractive to the investor. FALSE

 

 

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32. Deferred income taxes eventually come due. TRUE

33. If a bond is callable, the call price is usually lower than the face value of the bond. FALSE

 

34. The quick ratio is a more stringent measure of solvency than the current ratio. TRUE

 

 

35. A high interest coverage ratio is a sign of creditworthiness. TRUE

 

 

36. Loss contingencies stem from past events. TRUE

 

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37. Bonds, with the same face value, issued at a premium will have a higher maturity value than bonds issued at a discount FALSE

 

38. Loss contingencies should be recorded in the accounting records whenever it is probable that a loss has been incurred and the amount of loss might be material in amount. FALSE

 

 

39. The account Discount on Bonds Payable has a debit balance and should appear on the balance sheet as an asset; the account Premium on Bonds Payable has a credit balance and should be classified as a liability. FALSE

 

 

40. The future value will always be less than the present value. FALSE

 

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41. The amortization of discount on bonds payable reduces the amount of interest expense recognized during the period. FALSE

42. The amortization of bond discount by the issuing company decreases the carrying value of its bonds payable. FALSE

 

43. A primary means used by credit rating agencies to evaluate a company's ability to pay its debts is to compare total assets to total liabilities. TRUE

 

 

44. Companies may understate liabilities so as not to be perceived as risky by credit rating agencies. TRUE

 

45. Special purpose entities (SPEs) are established by corporations to accomplish specific purposes such as borrowing money. TRUE 

 

Multiple Choice Questions 

46. U. S. GAAP requires that convertible bonds be classified on the balance sheet as: A. Part liability, part equityB. A liabilityC. Either a liability or equityD. As an asset

 

 

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47. International accounting standards require that convertible bonds be classified on the balance sheet as: A. Part liability, part equityB. A liabilityC. Either a liability or equityD. As an asset

 

 

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48. Off balance sheet financing may involve either: A. An operating leaseB. A special purpose entityC. Both of the aboveD. Neither of the above

 

 

49. Employers are required to pay all of the following on the wages paid to each employee except: A. Social security taxesB. Worker's compensation insuranceC. Medicare taxesD. Health insurance benefits.

 

 

50. In preparing an amortization table, it is necessary to include: A. The original amount of the liability, the amount of periodic payments and the interest rate.B. The original amount of the liability, the amount of periodic payments and the amount of past payments.C. The monthly payment, the total amount of past payments and the original amount of the liability.D. The total amount of past payments, the interest rate and the amount of periodic payments.

 

 

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51. A company issues $50 million of bonds at par on January 1, 2009. The bonds pay 10% interest semi-annually on 12/31 and 6/30 and mature in 20 years. The journal entry when the bonds are sold is:A)

   B)

   C)

   

D)

    A. Option AB. Option BC. Option CD. Option D

 

 

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52. The amount of the present value of a future cash receipt will depend upon A. The length of time until the money is received.B. The amount of money to be received.C. The required rate of return.D. All of the above.

 

 

53. The FICA tax paid by an employer is: A. Greater than the amount paid by the employee.B. Less than the amount paid by the employee.C. Equal to the amount paid by the employee.D. The employer does not pay FICA tax, only the employee pays the tax.

 

54. When a company sells bonds between interest dates they will pay which of the following at the first interest payment date? A. An amount less than the stated interest rate times the principal.B. An amount more than the stated interest rate times the principal.C. An amount equal to the stated interest rate times the principal.D. The company may skip the first interest payment date since the appropriate time has not passed.

 

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55. A $1,000 bond that sells for 104 has a selling price of: A. $1,004B. $1,040C. $1,400D. $1,000

 

56. Which of the following is not an accurate statement regarding the distinction between debt and equity? A. Only equity is considered a source of financing for operations of the business, since debt must be repaid at a specified maturity date.B. If a business ceases operations and liquidates, claims of all creditors have legal priority over claims of the stockholders.C. Most debt requires the borrower to pay interest; equity financing does not obligate the company to make a specified payment.D. The providers of equity are owners of the business; the providers of borrowed funds are creditors.

 

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementLearning Objective: 5 

57. Which of the following is not a characteristic of current liabilities? A. They are due within one year or within the operating cycle, whichever is longer.B. They may involve estimated amounts.C. They may be replaced with a new short-term liability rather than being paid in cash.D. All three of the above are characteristic of current liabilities.

 

 

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58. If a bond is selling at 103, it is selling at: A. Maturity value and yields a 2% interest rate.B. A discount.C. A premium.D. $103 per bond.

 

 

59. Which of the following payroll costs are shared equally by the employer and the employee? A. State unemployment taxes.B. Workers' compensation.C. Social security.D. Federal unemployment taxes.

 

 

60. Interest payable on a loan becomes a liability: A. When the note payable is issued.B. As it accrues.C. At the maturity date.D. When the borrowed money is received.

 

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61. An employer's total payroll-related costs always exceed the wages and salaries earned by employees by: A. Amounts withheld from employees' pay.B. Payroll taxes and mandated programs such as workers' compensation insurance.C. 50%.D. None of the above. Employers' payroll-related costs actually are less than the gross wages and salaries earned by employees, because of amounts withheld from employees' checks.

 

62. Bonds, with the same face value, issued at a premium will: A. Have a greater maturity value than a bond issued at a discount.B. Have a lesser maturity value than a bond issued at a discount.C. Have the same maturity value as a bond issued at a discount.D. Have a different maturity value than a bond issued at a discount, depending upon the interest rate and maturity date.

 

63. The amounts that a business withholds as taxes from an employee's earnings: A. Represent payroll taxes expense to the employer.B. Are deposited in an interest-bearing account until the employee is terminated.C. Represent miscellaneous revenue to the employer.D. Represent current liabilities to the employer.

 

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64. Unearned revenue: A. Appears on the income statement as income.B. Appears on the income statement as a reduction to income.C. Appears on the income statement as a liability.D. Appears on the balance sheet as a liability.

 The average employee of Girard Corporation earns gross pay of $75,000 per year. The following table shows the relative size of various payroll amounts by expressing each as a percentage of total wages and salaries expense (gross pay):

   In addition, Girard pays $425 per month per employee for group health insurance.

 

65. Refer to the above data. Which of the following is the largest payroll-related expense incurred by Girard? A. Group health insurance premiums.B. Income taxes expense.C. The employer's share of social security taxes.D. Wages and salaries expense.

66. Refer to the above data. Which of the following represents the second largest payroll related expense incurred by Girard? A. Group health insurance premiums.B. Income taxes expense.C. The employer's share of social security taxes and Medicare taxes.D. Wages and salaries expense.

 

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67. Refer to the above data. Which of the following represents the largest amount withheld from employees' paychecks? A. Workers' compensation insurance.B. Social Security and Medicare.C. Personal income taxes.D. Group health insurance.

 

68. When a corporation has a right to redeem bonds in advance of the maturity date, the bond is considered a: A. Convertible bond.B. Callable bond.C. Junk bond.D. Debenture bond.

69. Sinking funds usually appear on the balance sheet as: A. Current asset.B. Long-term investment.C. Current liability.D. Appropriation of retained earnings.

 

 

70. A bond that is not secured is also known as: A. A sinking fund.B. A mortgage.C. A debenture.D. A junk bond.

 

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71. Management has both the intent and the ability to refinance a liability maturing in four months by taking out a new loan at the due date which would not be due for several years. How would this situation be reported in financial statements prepared as of today's date? A. The original liability is classified as current, with a footnote describing management's plan for refinancing.B. The original liability is classified as current and the new loan is reported as a long-term liability.C. The original liability is classified as long-term; the new loan is not included in liabilities at this date.D. The original liability need not be reported at all; only the new loan is reported as a long-term liability.

 

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72. Temple Corporation purchased a piece of real estate, paying $400,000 cash and financing $700,000 of the purchase price with a 10-year, 15% installment note. The note calls for equal monthly payments that will result in the debt being completely repaid by the end of the tenth year. In this situation: A. The aggregate amount of the monthly payments is $700,000.B. Each monthly payment is greater than the amount of interest accruing each month.C. The portion of each payment representing interest expense will increase over the 10-year period, since principal is being paid off, yet the payment amount does not decrease.D. The portion of each monthly payment representing repayment of principal remains the same throughout the 10-year period.

 

 

73. When an installment note is structured as a "fully amortizing" loan with equal monthly payments (such as a traditional mortgage): A. The portion of each payment allocated to interest expense is the same each month.B. The sum of the monthly payments is equal to the amount of the installment note (mortgage).C. The difference between the sum of all monthly payments and the principal amount of the note constitutes interest.D. The portion of each payment allocated to repayment of principal decreases each month as the mortgage is paid off.

 

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74. In relation to a bond issue, the role of the underwriter is to: A. Guarantee payment to bondholders of both the periodic interest payments and the maturity value.B. Purchase the entire bond issue from the issuing corporation and then sell the bonds to the public.C. Represent the interests of the bondholders and, if necessary, to take legal action on their behalf.D. Maintain a subsidiary ledger of individual bondholders and mail out the periodic interest checks.

 

 

75. If a bond is issued at par and between interest dates: A. The cash received by the corporation will be less than the face value of the bond.B. The cash received by the corporation will be greater than the face value of the bond.C. The cash received by the corporation will be the same as the face value of the bond.D. Interest receivable will be debited.

 

 

76. The term "junk bonds" describes bonds with: A. Low interest rates.B. Indefinite maturity dates.C. Low maturity values.D. High risk.

 

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77. One advantage of issuing bonds instead of stock is that: A. Interest is tax deductible whereas dividends are not.B. Bonds have a longer maturity date.C. Interest rates are lower than dividend rates.D. The issuance of bonds does not affect earnings per share.

 

78. Choose the statement that correctly summarizes the tax advantage of raising money by issuing bonds instead of common stock: A. The amount paid by the corporation to redeem bonds at maturity date is deductible in computing income subject to corporate income tax.B. Interest payments are deductible in determining income subject to corporate income tax; dividends are not deductible.C. A corporation must pay tax on the sales price of stock issued, but is not taxed on the amount received when bonds are issued.D. Both interest and dividends paid are deductible in computing taxable income, but since interest must be paid annually, the corporation usually gets a larger tax deduction over the life of the bonds payable.

 

79. Elm Corporation plans to invest $300 million to earn about 15% before income taxes. The company is considering whether it should raise the $300 million by issuing 10% bonds payable or capital stock. If the company issues the bonds, it will probably report: A. Lower net income and lower income taxes expense than if it issues capital stock.B. Higher net income and higher income taxes expense than if it issues capital stock.C. Lower net income and higher income taxes expense than if it issues capital stock.D. Higher net income and lower income taxes expense than if it issues capital stock.

 

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80. The current portion of long-term debt should be reported: A. Separately in the long-term liabilities section of the balance sheet.B. In the long-term liabilities section of the balance sheet, along with the other long-term debt.C. In the current liabilities section of the balance sheet.D. In a separate section of the balance sheet, between long-term liabilities and shareholders' equity.

 

81. An operating lease: A. Creates an asset and a liability on the balance sheet.B. Is a form of off-balance sheet financing.C. Is always preferable to a capital lease.D. Transfers title to the asset being leased.

 

82. Suppose investors decided to sell their holdings of capital stock in order to purchase outstanding bonds payable and as a result, the prices of bonds payable increased. What would be the likely impact on market interest rates? A. Market interest rates will be unaffected.B. Market interest rates will increase.C. Market interest rates will fall.D. Although interest rates will change, it is impossible to predict the direction of change.

 

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83. Which one of the following is not considered a criteria to capitalize a lease? A. The lease contains a bargain purchase option.B. The lease transfers ownership at the end of the lease term.C. The lease term is more than 75% of economic life of the property.D. The present value of minimum lease payments is less than 90% of the fair market value of the asset.

 

84. Which of the following payroll taxes do not stop once an employee reaches a certain level of income: A. Medicare taxes.B. Social security taxes.C. Unemployment taxes.D. All three of the above have a cap on salaries where the tax ends.

 

85. The price at which a bond sells is equal to the: A. Maturity value of the bonds plus the present value to investors of the future interest payments.B. Sum of the future interest payments, minus the maturity value of the bonds.C. Present value to investors of the future principal and interest payments.D. Sum of the future interest payments, plus the maturity value of the bonds.

 

86. After bonds have been issued, their market value can be expected to: A. Rise as any premium is amortizedB. Fall if interest rates rise.C. Fall as any discount is amortized.D. Rise if interest rates rise.

 

87. The amortization of a bond discount: A. Decreases the carrying value of a bond and increases interest expense.B. Decreases the carrying value of a bond and decreases interest expense.C. Increases the carrying value of a bond and increases interest expense.D. Increases the carrying value of a bond and decreases interest expense.

 

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88. Which of the following does not affect the market price of an outstanding bond issue? A. Fluctuations in the current market rate of interest.B. The credit rating of the issuing corporation.C. The price at which the bonds were originally issued.D. The length of time remaining until the bonds' maturity date.

 

89. Each of the following must be disclosed in the financial statements, except: A. The total amounts of long-term debt maturing in each of the next five years.B. The company's debt ratio and interest coverage ratio for the current year.C. Loss contingencies, when a reasonable possibility exists that a material loss has been incurred.D. The fair value of long-term liabilities when this value is significantly different from the amount shown in the balance sheet.

 

 

90. A capital lease is recorded in the accounting records of the lessee by an entry: A. Debiting Rent Expense and crediting Cash each time a lease payment is made.B. Debiting Cash and crediting Rental Revenue each time a lease payment is received.C. Debiting an asset account and crediting a liability account for the present value of the future lease payments.D. Debiting an asset account and crediting Sales for the present value of the future lease payments.

 

 

91. Which of the following are factors in determining pension expense? A. Average age, retirement age, and life expectancy of employees.B. Employee turnover rate.C. Expected rate of return to be earned by the pension fund.D. All three of the above.

 

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92. The pension expense of the current period is equal to: A. Amounts paid to retired workers during the current period.B. The estimated future pension benefits earned by today's workers during the current period.C. The present value of the estimated future pension benefits earned by today's workers during the current period.D. Cash payments made during the period to the trustee of the pension plan.

 

93. A company with a fully funded pension plan: A. Recognizes no pension expense.B. Reports no long-term liability for future pension payments.C. Does not utilize the services of a trustee to operate the pension plan.D. Recognizes pension expense equal to the cash payments made to retirees during the current period.

 

94. The amortization of a bond premium: A. Decreases the carrying value of a bond and increases interest expense.B. Decreases the carrying value of a bond and decreases interest expense.C. Increases the carrying value of a bond and increases interest expense.D. Increases the carrying value of a bond and decreases interest expense.

 

95. In estimating annual pension expense, which of the following factors would not be taken into consideration? A. Current financial condition of the company.B. Expected rate of return to be earned on pension fund assets.C. Employee turnover rates.D. Compensation levels and estimated rate of pay increases.

 

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96. Is the present value of an amount A. Always greater than the future value.B. Always less than the future value.C. Always equal to the future value.D. Greater than, less than, or equal to the future value depending upon interest rates and the time period involved.

 

 

97. Pension expense is: A. The present value of the estimated future pension benefits earned by employees as a result of their services during the period.B. The amount funded to the pension in a given year.C. The future value of rights granted to employees as a result of their services during the period.D. The amount withdrawn from the pension fund to pay retirees during the period.

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98. Which of the following is not true about postretirement benefits? A. Postretirement costs should be recognized as expense as the workers earn the right to receive the benefits.B. Most corporations have fully funded their postretirement benefits.C. Unfunded postretirement costs are a non-cash expense.D. A corporation's liability for postretirement benefits is equal to the present value of estimated future payments.

 

99. A liability for deferred income taxes represents: A. Income taxes on earnings already reported in the income statement, but that will be taxed in future periods.B. Income taxes already paid on earnings which have not yet been reported in the company's income statement.C. Income tax obligations being disputed with the Internal Revenue Service.D. Income taxes levied in prior years which are now past due.

 

 

100. In a statement of cash flows, most interest payments are classified as: A. Operating activities.B. Non-operating activities.C. Financing activities.D. Current liabilities.

 

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101. Using different accounting methods on financial statements and tax returns will create: A. No effect upon the balance sheet, only the income statement.B. No effect upon the balance sheet nor the income statement.C. A deferred tax liability.D. An illegal situation.

 

102. The interest coverage ratio is computed by dividing: A. Net income by interest expense.B. Operating income by interest expense.C. Interest expense by net income.D. Interest expense by operating income.

 

 

103. Does a call provision on a bond A. Permit the corporation to redeem the bonds at a specified price.B. Allow the corporation to revise the stated interest rate.C. Allow the corporation to revise the maturity date.D. Always create the lowest price at which the bond will sell for.

 

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104. Which of the following statistics is of more significance to a long-term creditor than to a short-term creditor? A. Interest coverage ratio.B. Receivables turnover rate.C. Working capital.D. Quick ratio.

 

 

105. The interest coverage ratio: A. Is computed by dividing total liabilities by annual interest expense.B. Is computed by dividing liquid assets by annual required interest payment.C. Indicates the percentage of total assets that are financed with borrowed money.D. Measures the number of times the annual interest expense could be covered by annual income from operations.

 

106. Workers' compensation is: A. A required minimum compensation level.B. The rules for paying overtime.C. A state mandated insurance program.D. Includes all three above.

 

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107. The basic measure of the amount of leverage being applied within the capital structure of an organization is the: A. Interest coverage ratio.B. Debt ratio.C. Return on assets.D. Return on equity.

 

 

108. The principal amount of a bond is: A. The total future interest charges.B. The unpaid balance exclusive of any interest charges.C. The unpaid balance plus any future interest charges.D. The maturity value less any currently unpaid balances.

 

 

109. Which of the following is not a characteristic of an estimated liability? A. The liability is known to exist.B. The precise dollar amount cannot be determined until a later date.C. The liability should not be recorded in the accounting records until future events have determined the exact amount.D. The liability stems from past transactions.

 

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110. Commitments, such as contracts for future transactions: A. Are classified as liabilities.B. Are classified as assets.C. Are footnoted in financial statements, if material.D. Are only disclosed if negative due to the principle of conservatism.

 

 

111. Which of the following is an example of a contingent liability? A. A lawsuit pending against a restaurant chain for improper storage of perishable food items.B. The liability for future warranty repairs on computers sold during the current period.C. A corporation's long-term employment contract with its chief executive officer.D. A liability for notes payable with interest included in the face amount.

 

 

112. Which of the following ratios and rates that measure debt-paying ability focuses on the long-term position of a company? A. Quick ratio.B. Inventory turnover.C. Current ratio.D. Debt ratio.

 

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113. Which of the following is an example of a loss contingency that should be disclosed in a footnote to a company's financial statements? A. The president of the company has threatened to resign if the board of directors does not vote to increase executive salaries.B. A lawsuit has been brought against the company, but the company hopes to prevail in the suit and thereby avoid any liability.C. The allowance for uncollectible accounts receivable is estimated at $200,000.D. The company owns special-purpose machinery which, if sold, would probably bring a price less than its current book value.

  

114. Ultimate Company is a defendant in a lawsuit alleging damages of $3 billion. The litigation is expected to continue for several years, and no reasonable estimate can be made at this time of Ultimate Company's ultimate financial responsibility. This situation is an example of: A. Off-balance-sheet financing.B. A loss contingency which should be disclosed in notes to Ultimate Company's financial statements.C. An estimated liability which must appear in Ultimate Company's balance sheet.D. A loss in purchasing power caused by inflation.

115. The Music House issues a contract to a new recording artist to produce a number of albums over the next five years at $1 million per album. This situation is an example of: A. A contingent liability which should be recorded in the accounting records.B. A contingent liability requiring footnote disclosure.C. An estimated liability, since the number of albums to be produced is not yet determined.D. A commitment which, if material, may be disclosed in a footnote.

 

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116. A discount on bonds payable is best described as: A. An element of future interest expense.B. A bonus paid by the bondholders to the issuing corporation because of the unusually high interest rate stated in the bonds.C. The present value of the future interest payments of bond interest and principal.D. An amount below par which the bondholders may be called upon to make good.

 

117. Deferred taxes are classified as: A. Only a liability.B. Only an asset.C. Either an asset or liability, depending upon the situation.D. A non-operating expense.

 

118. Amortizing a discount on bonds payable: A. Increases interest expense.B. Increases periodic cash payments to bondholders.C. Decreases interest expense.D. Decreases periodic cash payments to bondholders.

 

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119. Premium on bonds payable: A. Is an asset account.B. Increases the carrying value of the liability.C. Is a contra-asset account.D. Is disclosed by a footnote. 

120. Amortizing a premium on bonds payable: A. Increases interest expense.B. Increases periodic cash payments to bondholders.C. Decreases interest expense.D. Decreases periodic cash payments to bondholders.

 

121. On November 1, Metro Corporation borrowed $55,000 from a bank and signed a 12%, 90-day note payable in the amount of $55,000. The November 30 adjusting entry will be: (assume 360 days in year) A. Debit Interest Expense $550 and credit Notes Payable $550.B. Debit Interest Expense $550 and credit Interest Payable $550.C. Debit Discount on Notes Payable $1,100 and credit Interest Payable $1,100.D. Debit Interest Expense $550 and credit Cash $550.

$55,000 12% 30/360 = $550 

 On November 1, Year 1, Noble Co. borrowed $80,000 from South Bank and signed a 12%, six-month note payable, all due at maturity. The interest on this loan is stated separately.

122. Refer to the above data. How much must Noble pay South Bank on May 1, Year 2, when the note matures? A. $80,000.B. $89,600.C. $84,800.D. $82,400.

$80,000 12% 6/12 = $4,800 + $80,000 = $84,800

 

123. Refer to the above data. How much interest expense will Noble recognize on this note in Year 2? A. $9,600.B. $4,800.C. $2,400.D. $3,200.

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$80,000 12% 4/12 = $3,200 

124. Refer to the above data. At December 31, Year 1, Noble Co.'s overall liability for this loan amounts to: A. $80,000.B. $81,600.C. $83,200.D. $84,800.

$80,000 + ($80,000 12% 2/12) = $81,600

125. Refer to the above data. At December 31, Year 1, the adjusting entry with respect to this note includes a: A. Credit to Interest Payable for $1,600.B. Credit to Notes Payable for $1,600.C. Debit to Interest Expense for $3,200.D. Credit to Cash for $3,200.

 On September 1, 2009, Able Company purchased a building from Regal Corporation by paying $200,000 cash and issuing a one-year note payable for the balance of the purchase price. Interest on the note is stated at an annual rate of 9% and is paid at maturity. In its December 31, 2009, balance sheet, Able correctly presented the note and interest payable as follows:

   

 

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126. Refer to the above data. How much must Able pay Regal Corporation on September 1, 2010, when the note matures? A. $600,000.B. $618,000.C. $654,000.D. Some other amount.

$600,000 + ($600,000 .09) = $654,000

127. Refer to the above data. What is the amount of the interest expense Able will recognize on this note in 2010? A. $18,000.B. $31,500.C. $36,000.D. Some other amount.

$600,000 .09 8/12 = $36,000

128. Refer to the above data. What is the total cash (including interest) paid for the building purchased by Able? A. $800,000.B. $836,000.C. $854,000.D. $816,000.

$200,000 + $600,000 + $54,000 = $854,000

 

129. Refer to the above data. The adjusting entry at December 31, 2009, with respect to this note included: A. A debit to Interest Expense for $18,000.B. A credit to Cash for $18,000.C. A credit to Notes Payable for $18,000.D. A credit to Interest Expense for $18,000.

 

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 On September 1, 2009, Select Company borrowed $600,000 from a bank and signed a 12%, six-month note payable, with interest on the note due at maturity.

 

130. Refer to the above data. The total amount of the current liability (including interest payable) for this loan that appears in Select Company's balance sheet at December 31, 2009, is: A. $600,000.B. $624,000.C. $636,000.D. $672,000.

$600,000 + ($600,000 12% 4/12) = $624,000

 

 

131. Refer to the above data. Assume Select made no adjusting entry with respect to this note before preparing the financial statements at December 31, 2009. What is the effect of this error on the financial statements for 2009? A. Total liabilities are overstated.B. Net income is overstated.C. Owners' equity is understated.D. Interest Payable is overstated.

 

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132. Sanford Corporation borrowed $90,000 by issuing a 12%, six-month note payable, all due at the maturity date. After one month, the company's total liability for this loan amounts to: A. $90,000.B. $90,450.C. $90,900.D. $91,800.

$90,000 + ($90,000 12% 1/12) = $90,900

 

 

133. On November 1 of the current year, Garcia Company borrowed $50,000 by issuing a 9%, six-month note payable, all due at maturity date. Interest expense on this note to be recognized during the current year amounts to: A. $500.B. $750.C. $1,500.D. $4,500.

$50,000 .09 2/12 = $750

 

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 Stone Corporation has 25 employees and incurs total wages and salaries expense of $900,000 per year. The following table shows various payroll amounts as a percentage of this annual wage and salaries expense:

   

In addition, Stone provides group health insurance for its entire workforce. The cost of this insurance is $350 per month for each employee.

 

134. Refer to the above data. The company's annual payroll-related expenses amount to approximately: A. $1,085,600.B. $1,181,850.C. $1,250,700.D. Some other amount.

$900,000 + (.05 $900,000) + (.0765 $900,000) + (.05 $900,000) + (.02 $900,000) + ($350 12 25) = $1,181,850

 

 

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135. Refer to the above data. Employees' annual "take-home-pay," totals approximately: A. $672,300.B. $762,300.C. $675,000.D. $741,150.

$900,000 - ($900,000 .0765) - ($900,000 .10) = $741,150

 

136. Refer to the above data. Some of the payroll-related expenses incurred by Stone Corporation are mandated by law, rather than negotiated with employees. During the current year, these mandated amounts increased Stone's payroll-related expenses by approximately: A. $68,850.B. $200,700.C. $131,850.D. $176,850.

($900,000 .05) + ($900,000 .0765) + ($900,000 .02) = $131,850

 

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137. Refer to the above data. Assume that the federal government implements an 10% payroll tax upon employers to finance health insurance for all citizens and residents. Stone will pay this tax instead of purchasing group health insurance. This will cause Stone 's total annual payroll-related expenses to: A. Decrease by $15,000.B. Increase by $15,000.C. Decrease by $32,500.D. No change, because payroll taxes are withheld from employees' pay.

($900,000 .10) - ($350 12 25) = $15,000

 

 

 On December 1, Year 1, Bradley Corporation incurs a 15-year $200,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $2,400, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, Year 1.

 

138. Refer to the above data. Compute the total amount to be paid by Bradley over the 15-year life of the mortgage. A. $200,000.B. $562,000.C. $432,000.D. $474,000.

$2,400 12 15 = $432,000

 

 

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139. Refer to the above data. How much of the first payment made on December 31, Year 1, represents interest expense? A. $2,400.B. $ 400.C. $2,304.D. $2,000.

1% $200,000 = $2,000

140. Refer to the above data. The total liability related to this mortgage reported in Bradley 's balance sheet at December 31, Year 1, is: A. $432,100.B. $199,600.C. $194,923.D. $200,000.

200,000 - 400 = 199,600

 

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141. Refer to the above data. Over the 15-year life of the mortgage, the total amount Bradley will pay for interest charges is: A. $232,000.B. $360,000.C. $200,000.D. $432,060.

$432,000 - $200,000 = $232,000

 

 

142. Refer to the above data. The portion of the second monthly payment made on January 31, Year 2, which represents repayment of principle is: A. $400.B. $404.C. $2,400.D. $1,996.

$2,400 - (1% $199,600) = $404

 

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143. On October 1, 2009, Master's Co. borrows $500,000 from its bank for five years at an annual interest rate of 10%. According to the terms of the loan, the principal amount will not be due for five years. Interest is to be paid monthly on the first day of each month, beginning November 1, 2009. With respect to this borrowing, Master's December 31, 2009, balance sheet included only a long-term note payable of $500,000. As a result: A. The December 31, 2009, financial statements are accurate.B. Liabilities are understated by $12,500 accrued interest payable.C. Liabilities are understated by $4,167 accrued interest payable.D. Liabilities are understated by the amount of interest for the five-year term of the note that has not yet been paid.

$500,000 10% 1/12 = $4,167

 

 

144. At the end of 2010 it is discovered that the accountant for Gower Company failed to record $60,000 of interest payable which had accrued since the last interest payment date. The current ratio, quick ratio and debt ratio, as well as the financial statements, had already been computed using the erroneous data. Correction of the accounting records will have which of the following effects? A. Net income as formerly computed will not be affected by the correction of the error.B. The interest coverage ratio as formerly computed will not change as a result of the correction.C. The debt ratio as formerly computed will decrease as a result of the correction.D. The quick ratio as formerly computed will decrease as a result of the correction.

 On April 1, year 1, Cricket Corporation issues $60 million of 12%, 10-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1.

 

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145. Refer to the above data. The amount of cash paid to bondholders for interest during Year 1, is: A. $6,600,000B. $5,400,000C. $3,600,000D. $1,800,000

$60,000,000 .06 = $3,600,000

 

 

146. Refer to the above data. Interest expense on this bond issue reported in Cricket's year 1, income statement is: A. $2,400,000B. $4,800,000C. $5,400,000D. $7,200,000

$60,000,000 12% 9/12 = $5,400,000

 

147. Refer to the above data. The adjustment necessary at December 31, Year 1 (if any), related to this bond issue involves: A. Recognition of interest expense of $3,600,000.B. Recognition of interest expense of $1,800,000.C. Payment of cash of $1,800,000.D. There is no adjustment necessary.

$60,000,000 12% 3/12 = $1,800,000

 

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148. Refer to the above data. With respect to this bond issue, Cricket Corporation's balance sheet at December 31, Year 1, will include: A. Bonds payable of $61,800,000.B. Bonds payable of $63,600,000.C. Bonds payable of $60 million, as well as interest payable of $1,800,000.D. Bonds payable of $60 million, as well as interest payable of $3,600,000.

 

 On April 1, year 1, Greenway Corporation issues $20 million of 10%, 20-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1.

 

149. Refer to the above data. The journal entry to record the first cash payment to bondholders on October 1, year 1, will include: A. A credit to Cash of $2,000,000.B. A debit to Bonds Payable of $1,000,000.C. A debit to Interest Expense of $1,000,000D. A credit to Interest Payable of $1,000,000.

$20,000,000 10% 6/12 = $1,000,000

150. Refer to the above data. The adjusting entry (if any) required on December 31, Year 1, related to this bond issue involves: A. Recognition of interest expense of $1,000,000.B. Recognition of interest expense of $500,000.C. A credit to Interest Payable of $2,000,000.D. A credit to Cash of $500,000.

$20,000,000 10% 3/12 = $500,000

 

151. Refer to the above data. In Year 2, Greenway's income statement will report interest expense arising from this bond issue of: A. $1,000,000.B. $2,000,000.C. $500,000.D. $1,500,000.

$20,000,000 10% = $2,000,000

 

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152. Refer to the above data. On April 1, Year 1, the journal entry to record issuance of the bonds will include: A. A credit to Interest Payable of $1,000,000.B. A debit to Cash of $20,000,000.C. A credit to Bonds Payable of $2,100,000.D. A debit to Cash of $21,000,000.

153. Refer to the above data. With respect to this bond issue, Greenway's balance sheet at December 31, Year 1, will include: A. Bonds payable of $20,500,000.B. Bonds payable of $19,500,000.C. Bonds payable of $20 million, as well as interest payable of $1,500,000.D. Bonds payable of $20 million, as well as interest payable of $500,000.

 

 Austin Corporation issues $6,000,000 of 10%, 10-year bonds, dated December 31, Year 1. The bonds are issued on April 30, Year 2, at 100 plus accrued interest. Interest on the bonds is payable semiannually each June 30 and December 31.

 

154. Refer to the above data. The total amount of cash received by Austin Corporation upon issuance of the bonds on April 30, Year 2, is: A. $6,000,000.B. $6,200,000.C. $6,150,000.D. $6,300,000.

$6,000,000 + ($6,000,000 10% 4/12) = $6,200,000

 

 

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155. Refer to the above data. The entry to record the issuance of bonds payable on April 30, Year 2, includes: A. A credit to Premium on Bonds Payable of $200,000.B. A debit to Cash of $150,000.C. A debit to Bond Interest Expense of $200,000.D. A credit to Bond Interest Payable of $200,000.

 

 

156. Refer to the above data. The journal entry made by Austin Corporation to record the first semiannual interest payment on the bonds includes: A. A debit to Bond Interest Expense of $300,000.B. A debit to Bond Interest Payable of $100,000.C. A debit to Bond Interest Expense of $100,000.D. A debit to Bond interest Expense of $200,000.

 

 

157. Refer to the above data. The amount of Austin's interest expense on this bond issue during year 2 amounts to: A. $400,000.B. $450,000.C. $360,000.D. $600,000.

$6,000,000 10% 8/12 = $400,000

 

 

 Salem Co. has outstanding $100 million of 7% bonds, due in 7 years, and callable at 104. The bonds were issued at par and are selling today at a market price of 94.

 

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158. Refer to the above data. If Salem Co. retires $10 million of these bonds by purchasing them from bondholders at current market price, the company will report: A. A $600,000 gain.B. A $500,000 loss.C. An unrealized gain.D. None of the above; neither gains nor losses are recognized on early retirements of debt.

$10,000,000 - $9,400,000 = $600,000

  

159. Refer to the above data. If Salem Co. calls $10 million of these bonds it will report: A. A $700,000 gain.B. A $400,000 loss.C. An unrealized gain.D. None of the above; neither gains nor losses are recognized on early retirements of debt.

$10,000,000 - $10,400,000 = ($400,000)

 

160. Refer to the above data. If Salem Co. retires $10 million of these bonds by purchasing them from bondholders at current market price, the company will report: A. A $600,000 cash receipt from operating activities.B. A $9.4 million cash payment for operating activities.C. A $600,000 cash receipt from financing activities.D. A $9.4 million cash payment for financing activities.

  

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 The current balance sheet of Apex reports total assets of $20 million, total liabilities of $2 million, and owners' equity of $18 million. Apex is considering several financing possibilities in order to expand operations. Each question based on this data is independent of any others. 

161. Refer to the above data. What will be the effect on Apex's debt ratio if Apex's owner invests an additional $2 million to finance its expansion? A. The debt ratio will decrease from .1 (2/20) to .0909 (2/22) after the additional investment.B. The debt ratio will decrease from 2/9 before to 2/11 after the additional investment.C. The debt ratio will increase from 20 before to 22 after the additional investment.D. Additional investment by owner will have no effect on the debt ratio.

  

162. Refer to the above data. Assume Apex borrows $2 million to finance its expansion. Apex's debt ratio immediately after the borrowing will be: A. .10.B. .20.C. .33 (rounded).D. .18.

$4/$22 = .18

163. Refer to the above data. What is the maximum amount Apex can borrow and not exceed a debt ratio of .3? A. $4,000,000.B. $5,500,000.C. $5,000,000.D. Some other amount.

$7.5/$25.5 = 2.94

164. On February 28, 2009, $5,000,000 of 6%, 10-year bonds payable, dated December 31, 2008, are issued. Interest on the bonds is payable semiannually each June 30 and December 31. If the total amount received (including accrued interest) by the issuing corporation is $5,060,000, which of the following is correct? A. The bonds were issued at a premium.B. The amount of cash paid to bondholders on the next interest date, June 30, 2009, is $300,000.C. The amount of cash paid to bondholders on the next interest date, June 30, 2009, is $50,000.D. The bonds were issued at a discount.

$5,060,000 - ($5,000,000 6% 2/12) = $10,000 premium

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 Webster Company issues $1,000,000 face value, 6%, 5-year bonds payable on December 31, 2009. Interest is paid semiannually each June 30 and December 31. The bonds sell at a price of 97; Webster uses the straight-line method of amortizing bond discount or premium.

165. Refer to the information above. The entry made by Webster Company to record issuance of the bonds payable at December 31, 2009, includes: A. A debit to Cash of $1,000,000.B. A debit to Discount on Bonds Payable of $30,000.C. A credit to Bonds Payable of $970,000.D. A credit to Bond Interest Payable of $30,000.

$1,000,000 - ($1,000,000 .97) = $30,000

 

166. Refer to the information above. Webster 's entry at June 30, 2010, to record the first semiannual payment of interest and amortization of discount on the bonds includes a: A. Debit to Bond Interest Expense of $30,000.B. Credit to Cash of $33,000.C. Debit to Discount on Bonds Payable of $3,000.D. Debit to Bond Interest Expense of $33,000.

$1,000,000 3% + $30,000/10 = $33,000

 

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementLearning Objective: 6 

167. Refer to the information above. The amount of bond interest expense recognized by Webster Company in 2009 with respect to these bonds is: A. $60,000.B. $63,000.C. $120,000.D. $66,000.

$1,000,000 .06 + 2($30,000/10) = $66,000

 

 

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168. Refer to the information above. The carrying value of this liability in Webster Company's December 31, 2010, balance sheet is: A. $1,000,000.B. $970,000.C. $976,000.D. Some other amount.

$970,000 + $6,000 = $976,000

True / False Questions  

1. When a stockholder sends in a proxy statement to a corporation he or she owns stock in, they relinquish their voting rights to the officers of the corporation. FALSE

 

2. A stockholders' subsidiary ledger will have entries made for each stockholder showing the number of shares held. TRUE

 

3. The number of shares a corporation may issue is specified in the articles of incorporation and approved by the Securities and Exchange Commission. FALSE

4. The par value of a stock is the minimum amount of capital of the corporation existing for the protection of creditors. TRUE

 

5. When a state authorizes the sale of stock to stockholders, the corporation will credit Retained Earnings for the par value of the stock. FALSE

 

 

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6. When a corporation fails to pay a dividend one year on its common stock it is said to be "in arrears". FALSE

 

7. A stock split will normally increase the market price of the stock and decrease the number of shares on the market. FALSE

 

8. Treasury stock is stock that is issued and outstanding but not authorized FALSE 

9. The purchase of treasury stock creates an asset for the corporation and is recorded at the cost of the shares purchased not par value. FALSE

 

 

10. Contributed capital is equivalent to paid-in capital. TRUE

 

 

11. Common stock is considered the legal capital of the corporation. FALSE

 

 

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12. Cumulative preferred stock means the stock is entitled to its regular dividend plus an additional share of the total amount of declared dividends. FALSE

 

13. A corporation is a legal entity separate from its owners; it may sue and be sued, but it may not own property in its own name. FALSE

 

14. A corporation continues in existence even if a stockholder dies or withdraws from the organization. TRUE

 

 

15. Treasury stock is stock of a corporation that has been issued and then reacquired and then cancelled. FALSE

 

16. A stock split will decrease the total par value of the stock. FALSE 

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementLearning Objective: 8 

17. Stockholders of a corporation are personally liable for the debts of the corporation if all shares of stock are owned by the officers of the corporation. FALSE

 

 

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18. It is illegal for the government to double tax corporate earnings. FALSE

 

19. Only preferred stock of a corporation must have a par value. FALSE

20. The declaration of a cash dividend by the board of directors causes a decrease in a corporation's retained earnings and a decrease in its assets. FALSE

 

21. The declaration of a cash dividend causes stockholders' equity to decrease but has no immediate effect upon corporate assets. TRUE

  

22. If capital stock is issued by a corporation at a price lower than par value, the difference represents a loss in the period in which the shares of stock are issued. FALSE

 

 

23. When par value capital stock is issued, capital stock is credited with the par value of the shares issued, regardless of whether the issuance price is equal to par, more than par, or less than par. TRUE

 

 

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24. Preferred stockholders are owners of the corporation and have rights upon liquidation and to receive dividends. TRUE

  

25. Paid-in-capital includes donated capital. TRUE

 

26. In the event of the liquidation of a corporation, treasury stock ordinarily has preference as to liabilities and preferred stock has preference as to assets. FALSE

 

 

27. Preferred stockholders generally do not have the same voting rights as do common stockholders in a corporation. TRUE

 

28. Dividends declared and paid to both common and preferred stockholders increase retained earnings. FALSE 

29. When assets are donated to a corporation, a revenue account should be credited for the fair market value of the assets received. FALSE

 

30. A corporation must always have more than one class of stock. FALSE

 

 

31. The purchase of treasury stock for cash causes no change in total assets. FALSE 

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32. The sale of treasury stock at a price in excess of its cost results in a realized gain which should be presented as a non-operating item in the income statement. FALSE

 

 

33. Inside directors of a corporation may be officers of the corporation and therefore are not considered independent. TRUE

 

 

34. International accounting standards require mandatory redeemable preferred stock to be classified as a liability on the balance sheet and not as equity. TRUE

 

35. To be consistent with international standards the FASB has changed reporting requirements for redeemable preferred stock to require it to be reported in the equity section. FALSE

36. By going public a corporation can raise equity capital from many investors. TRUE 

Multiple Choice Questions  

37. The advantages of corporations going public include all of the following except: A. Professional management.B. Transferability of ownership.C. Limited shareholder liability.D. Ability to remove assets.

 

38. In a "pump-and-dump" scheme the owners of the company: A. Falsely claim the business has high growth potential.B. Artificially raise the price of the stock.C. Sell the stock at a high price.D. All of the above. 

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39. In order to limit the use of a shell company, the SEC has proposed: A. Greater financial disclosures.B. Eliminating this type of company.C. Arresting promoters of shell companies for fraud.D. That its stock only be sold in foreign countries.

  

40. The ownership of common stock in a corporation usually carries the following rights: A. To vote for directors.B. To declare dividends.C. To share in a distribution of assets if the corporation is to be liquidated.D. Both a and c.

 

41. The board of directors' primary functions include all of the following except: A. Hiring corporate officers.B. Setting officers' salaries.C. Declaring dividends.D. Protecting the interests of the officers.

 

42. Shares that have been sold and are in the hands of stockholders are called A. Outstanding.B. Issued.C. Treasury.D. Underwritten.

43. Book value per share of common stock is derived by which of the following A. Stockholders equity divided by the number of shares authorized.B. Stockholders equity divided by the number of shares outstanding.C. Net income divided by the number of shares outstandingD. Net income divided by the number of shares authorized.

 

44. The net assets of a corporation are equal to: A. Total assets - total liabilities.B. Total assets - retained earnings.C. Total assets + total liabilities.D. Total assets + retained earnings.

  

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45. Cash dividends paid to stockholders will appear in which section of the statement of cash flows: A. Operating.B. Investing.C. Financing.D. Discontinued. 

46. When shares of stock are sold from one investor to another they will trade at: A. Par value.B. Book value.C. Market value.D. Stated Value.

 

47. The market price of a preferred stock will be affected by: A. The dividend rate.B. The chance that the company will not operate profitably.C. The level of interest rates.D. All of the above.

48. Topper Corporation has 60,000 shares of $1 par value common stock and 16,000 shares of cumulative 7%, $100 par preferred stock outstanding. Topper has not paid a dividend for the prior year. If Topper declares a $1.95 per share dividend this year, what will be the total amount they must pay their shareholders? A. $117,000B.  $327,000C. $341,000D. $177,000

2(16,000 $7) + ($1.95 60,000) = $341,000

 

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49. Which of the following is not a characteristic of the corporate form of organization? A. The owners of a corporation cannot lose more than the amount of their investment.B. Shares of stock in a corporation are more readily transferable than is an interest in a partnership.C. Stockholders have authority to decide by majority vote the amount of dividends to be paid.D. The corporation is a very efficient vehicle for obtaining large amounts of capital required for large-scale production.

  

50. Most preferred stocks have the following characteristics, except: A. To receive dividends on a preferred basis.B. Cumulative dividends.C. Voting rights.D. Callable at the option of the corporation.

51. Which of the following is not an addition to total paid-in-capital? A. Retained earnings.B. Treasury stock.C. Neither retained earnings nor treasury stock.D. Both retained earnings and treasury stock.

 

 52. A primary disadvantage of the corporate form of organization is: A. Unlimited personal liability for business debts.B. Ownership is difficult to transfer.C. Corporate earnings are subject to double taxation.D. Management is separated from ownership. 

53. Public corporations are required by law or regulation to perform all of the following except: A. Submit much of their financial information to the SEC for review.B. Make regularly scheduled dividend payments to all stockholders.C. Have their annual financial statements audited by an independent CPA.D. Disclose their financial information to the public.

 

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54. Which of the following is not a right of stockholders? A. To vote for directors and on key issues.B. To participate in dividends declared.C. To share in the distribution of assets if the corporation is liquidated.D. All three of the above are rights of the stockholders.

  

55. The rights of a common stockholder do not include the right: A. To vote for directors.B. To withdraw a share of corporate net assets proportionate to the person's stockholdings.C. To receive a proportionate share of corporate assets upon liquidation, after creditors have been paid.D. To share in profits when the board of directors declares a dividend.

  

56. The directors of a corporation: A. Are hired by the officers to run the business on a day-to-day basis.B. May not own stock in the same corporation or be officers of the same corporation.C. Are responsible for formulating corporate policy and for hiring corporate officers.D. Are elected by the shareholders to run day-to-day operations.

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57. Which of the following individuals has the most power to influence corporate policy on a long-term basis? A. A shareholder owning 60% of the outstanding common stock.B. A shareholder owning 80% of the outstanding preferred stock.C. The treasurer of the corporation.D. The controller of the corporation.

  

58. The term paid-in capital means: A. All assets other than retained earnings.B. Legal capital plus retained earnings.C. Total stockholders' equity minus retained earnings.D. Legal capital minus retained earnings.

 

59. If a corporation has issued a single class of stock, it must be: A. Common Stock.B. Preferred Stock.C. Stock issued at Par-value.D. Cumulative preferred Stock.

 

 

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60. Which of the following best describes retained earnings? A. Cash available for dividends.B. The amount initially invested in the business by stockholders.C. Cash available for expansion and growth.D. Income that has been reinvested in the business rather than distributed as dividends to stockholders.

  

61. A deficit appears in a corporation's financial statements: A. Among the operating expenses.B. Among the liabilities.C. As a deduction from assets.D. As a deduction from total paid-in capital.

 

62. Which of the following would usually be the greatest amount? A. The number of shares authorized.B. The number of shares issued.C. The number of shares outstanding.D. They must all be the same amount.

 

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63. In a corporation's organization chart, which is the highest position? A. Stockholders.B. Board of directors.C. CEO.D. President.

 

64. Which of the following best describes the relationship between revenue and retained earnings? A. Revenue increases net income, which in turn increases retained earnings.B. Revenue represents a cash receipt; retained earnings is an element of stockholders' equity.C. Revenue represents the price of goods sold or services rendered; retained earnings represents cash available for paying dividends.D. Retained earnings is equal to assets minus expenses.

65. The overall effect of declaring and distributing a cash dividend includes each of the following except: A. Reducing total assets.B. Reducing stockholders' equity.C. Reducing the balance of the Retained Earnings account.D. Reducing net income for the period.

66. If preferred stock is convertible, it is so at the option of the: A. Board of directors.B. CEO.C. CFO.D. Stockholders.

67. If a corporation has only common stock outstanding, which of the following constitutes legal capital at a particular date? A. The amount in the Common Stock account.B. The sum of the Common Stock account and any additional paid-in capital.C. The total amount of stockholders' equity.D. The sum of the Common Stock account and retained earnings. 

68. The par value of the common stock of a large listed corporation: A. Tends to establish a ceiling for the market price of the stock.B. Tends to establish a floor for the market price of the stock.C. Represents legal capital and is not related to the market price of the stock.D. Is increased by net income and decreased by dividends.

 

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69. A 2-for-1 stock split will: A. Increase the total par value of the stock and increase the number of shares outstanding.B. Decrease the total par value of the stock and increase the number of shares outstanding.C. Not change the total par value of the stock and increase the number of shares outstanding.D. Increase total stockholders' equity.

  

70. The entry to record the issuance of common stock at a price above its par value includes: A. A credit to Cash.B. A credit to a liability account for the difference between the price paid by the stockholders and the par value of the stock.C. A credit to Additional Paid-in Capital: Common Stock.D. A debit to Common Stock. 

71. When a corporation issues capital stock at a price higher than the par value: A. The amount received over par value increases retained earnings.B. The entire issue price is credited to the Capital Stock account.C. The amount received in excess of par value constitutes profit to the issuing corporation.D. The amount received in excess of par value becomes part of paid-in capital.

 72. When no-par stock is issued: A. The entire amount received is credited to the Additional Paid-in Capital account.B. The issue price is credited to the Capital Stock account.C. There is no legal capital created because there is no par or stated value.D. The transaction usually involves only an exchange for non-cash assets or services, since the stock has no value on the stock exchanges.

73. Which statement is true about a stock split? A. Total shareholders' equity increases.B. Total shareholders' equity decreases.C. Total shareholders' equity remains the same.D. A change in total stockholders' equity depends upon whether it is a 2-for-1 split or a 1-for-2 split.

 

74. Which of the following is not a characteristic of most preferred stock? A. Dividends that vary as income changesB. Preference as to dividends.C. Preference as to assets in the event of liquidation of the company.D. No voting power.

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 75. The financial statements of a corporation that failed during the current year to pay any dividends on its cumulative preferred stock should: A. Include the amount of the omitted dividends among its current liabilities.B. Include a footnote disclosing the amount of the dividends in arrears.C. Show the amount of the omitted dividends as a deduction from retained earnings.D. List the omitted dividends as a long-term liability.  

76. If the preferred stock of a corporation is cumulative: A. Dividends on preferred stock are guaranteed.B. Dividends cannot be declared in an amount less than that stated on the stock certificate.C. Preferred stockholders participate in dividends paid in excess of a stated amount on the common shares.D. Dividends in arrears must be paid on preferred stock before any dividend can be paid on common stock.

77. Treasury stock: A. Is an asset.B. Increases total stockholders' equity.C. Decreases total stockholders' equity.D. Does not change total stockholders' equity.

78. The purchase of treasury stock for cash will: A. Increase stockholders' equity.B. Not increase nor decrease stockholders' equity.C. Decrease stockholders' equity.D. Not change total assets.

79. Treasury stock should most often be recorded: A. At cost.B. Par value.C. Fair market value at year end.D. Face value 

80. Which of the following best describes the book value of a share of stock? A. Net assets divided by the number of shares outstanding.B. The amount at which the stock would sell on the market if sold by a willing and informed seller to a willing and informed buyer.C. Total assets of the company, as reported in the accounting records, divided by the number of shares of stock outstanding.D. Total stockholders' equity divided by the number of shares authorized.

 

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81. A 2-for-1 stock split: A. Is accounted for in the same way as a 100% stock dividend.B. Increases the number of outstanding shares of common stock, but par value per share remains the same as before the split.C. Is recorded by transferring the par value of additional shares from retained earnings to the common stock account.D. Should logically cause the market price per share to drop by approximately 50%. 

82. Does treasury stock represent? A. Shares of ownership in the United States Treasury Department.B. A current asset.C. Authorized shares that have never been issued.D. Previously outstanding shares that have been repurchased by the issuing company.

83. Stock that had been issued by a corporation and later reacquired is classified as: A. Treasury stock.B. Non-participating preferred stock.C. Restricted stock.D. Issued shares

84. The purchase of treasury stock for cash will have which effect upon the following items?

    A. Option AB. Option BC. Option CD. Option D

 

85. Which of the following does not appear in a corporate income statement? A. Gains and losses from treasury stock transactions.B. Income tax expense.C. The income or loss from a segment of the business that has been discontinued during the current year.D. Gains and losses not expected to recur in the foreseeable future. 

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86. When treasury stock is reissued at a price above cost: A. The corporation recognizes a gain to be recorded on the income statement.B. Total paid-in capital is increased.C. The re-issuance is treated as an extraordinary item in the corporation's income statement.D. Retained earnings is increased.

87. A 2-for-1 stock split will have what effect upon the following items?

    A. Option AB. Option BC. Option CD. Option D

 

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88. Zigma Corporation is authorized to issue 2,000,000 shares of $4 par value capital stock. The corporation issued half the stock for cash at $8 per share, earned $336,000 during the first three months of operation, and declared a cash dividend of $60,000. The total paid-in capital of Zigma Corporation after three months of operation is: A. $7,940,000.B. $8,000,000.C. $8,276,000.D. $8,336,000.

$1,000,000 $8 = $8,000,000

89. Thurman Corporation issued 450,000 shares of $.50 par value capital stock at its date of incorporation for cash at a price of $4 per share. During the first year of operations, the company earned $100,000 and declared a dividend of $40,000. At the end of this first year of operations, the balance of the Common Stock account is: A. $1,800,000.B. $1,860,000.C. $225,000.D. $1,820,000.

$450,000 $0.50 = $225,000 

90. Century Corporation issued 400,000 shares of $4 par value common stock at the time of its incorporation. The stock was issued for cash at a price of $16 per share. During the first year of operations, the company sustained a net loss of $100,000. The year-end balance sheet would show the balance of the Common Stock account to be: A. $1,600,000.B. $1,500,000.C. $6,300,000.D. $6,400,000.

$400,000 $4 = $1,600,000

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91. Mayfair Corporation has outstanding 70,000 shares of $1 par value common stock as well as 20,000 shares of 7%, $100 par value cumulative preferred stock. At the beginning of the year, the balance in retained earnings was $800,000, and one year's dividends were in arrears. Net income for the current year is $580,000. Compute the balance in retained earnings at the end of the year if Mayfair Corporation pays a dividend of $3 per share on its common stock this year. A. $1,080,000.B. $1,670,000.C. $890,000.D. $310,000.

($800,000 + $580,000) - (2($7 20,000) + ($3 70,000)) = $890,000

 

On January 1, 2009, Juniper Corporation issued 60,000 shares of its total 200,000 authorized shares of $4 par value common stock for $8 per share. On December 31, 2009, Juniper Corporation's common stock is trading at $12 per share. 

92. Refer to the above data. Assuming Juniper Corporation did not issue any more common stock in 2009, how does the increase in value of its outstanding stock affect Juniper? A. Juniper should recognize additional net income for 2009 of $4 per share, or $240,000.B. Paid-in capital at December 31, 2009, is $720,000 (i.e. 60,000 shares times $12 per share).C. This increase in market value of outstanding stock is not recorded in the financial statements of Juniper Corporation.D. Each shareholder must pay an additional $4 per share to Jupiter.

93. Refer to the above data. Assume Juniper Corporation decides to issue an additional 1,000 shares of its common stock on December 31, 2009. How will the above increase in value affect Jupiter? A. Juniper can issue the 1,000 shares at a higher price than the initial 60,000 shares.B. Juniper can sell the 1,000 shares for $12 each, as well as collect an additional $4 per share for each of the 60,000 shares sold initially.C. Juniper reports a gain of $4 per share on all stock sold during the year.D. Paid-in capital at the end of 2009 will be $732,000 (i.e., 61,000 shares times $12 per share). 

94. Shore and Gardiner each own 10,000 shares of S&G Corporation $12 par value stock which they purchased for $38 per share directly from the corporation. If Shore sells his stock to Gardiner for $475,000: A. Stockholders' equity of S&G Corporation increases.B. Assets of S&G Corporation increase.C. Stockholders' equity of S&G Corporation decreases.D. No account of S&G Corporation is affected.

 

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95. Coronet Corp. has total stockholders' equity of $7,400,000. The company's outstanding capital stock includes 100,000 shares of $10 par value common stock and 20,000 shares of 6%, $100 par value preferred stock. (No dividends are in arrears.) The book value per share of common stock is: A. $39.B. $49.C. $54.D. $74.

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$7,400,000 - (20,000 $100) = $5,400,000; $5,400,000/100,000 = $54 

96. Marks Corporation has total stockholders' equity of $7,400,000. The company has outstanding 300,000 shares of $1 par value common stock and 20,000 shares of 8% preferred stock, $100 par value. (No dividends are in arrears.) The book value per share of common stock is: A. $9.00.B. $24.06.C. $24.66.D. $18.00.

$7,400,000 - (20,000 $100) = $5,400,000; $5,400,000/300,000 = $18.00

97. Seville Corporation has net assets of $2,072,000 and paid-in capital of $700,000. The only stock issue consists of 74,000 outstanding shares of common stock. From this information, it can be deduced that the company has: A. Retained earnings of $2,072,000.B. A deficit of $2,072,000.C. A book value of $9.46 per share of common stock.D. A book value of $28 per share of common stock.

$2,072,000/74,000 = $28

 

98. Santa Fe Boat Yard has total stockholders' equity of $4,100,000, comprised of the following:- $2,000,000 in $5 preferred stock consisting of 20,000 shares of $100 par value.- $420,000 in common stock of $6 par value per share.- $700,000 of additional paid-in capital.- $980,000 in retained earnings.Assuming there are no dividends in arrears, the book value per share of common stock is: A. $30.00.B. $58.57.C. $45.71.D. $6.00.

($4,100,000 - $2,000,000)/(420,000/6) = $30.00

 99. On September 1, 2009, Maryland Corporation's common stock was selling at a market price of $200 per share. On that date, Maryland announced a 3 for 2 stock split. At what price would you expect the stock to trade immediately after the split goes into effect? A. $100B. $200.C. $133.33.D. $225.

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$200 2/3 = 133.33

 Shown below is information relating to the stockholders' equity of Reeve Corporation as of December 31, 2009:

   

 100. Refer to the above data. How many shares of preferred stock are issued and outstanding? A. 75,000 shares.B. 6,000 shares.C. 60,000 shares.D. Some other amount.

$600,000/$100 = 6,000

101. Refer to the above data. What was the original issue price per share of common stock? A. $10.00 per share.B. $2.40 per share.C. $15.00 per share.D. Some other amount.

$10 + ($600,000/120,000) = $15

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102. Refer to the above data. What is total paid-in capital? A. $2,292,000.B. $1,800,000.C. $2,400,000.D. Some other amount.

$600,000 + $1,200,000 + $600,000 = $2,400,000 

103. Refer to the above data. Total stockholders' equity is: A. $2,400,000.B. $2,460,000.C. $2,340,000.D. Some other amount.

$600,000 + $1,200,000 + $600,000 - $60,000 = $2,340,000

104. Refer to the above data. Book value per share of common stock (rounded to the nearest penny) is: A. $30.20 per share.B. $28.20 per share.C. $31.80 per share.D. $38.20 per share.

$1,200,000 + $600,000 - $60,000 - $48,000 = $1,692,000/60,000 = $28.20

 Shown below is information relating to the stockholders' equity of Grant Corporation at December 31, 2009:

   Dividends have been declared and paid for 2009.

 

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105. Refer to the above data. Grant's total legal capital at December 31, 2009, is: A. $3,160,000.B. $3,000,000.C. $2,590,000.D. $1,500,000.

$900,000 + $600,000 = $1,500,000

 

106. Refer to the above data. The total amount of Grant's paid-in capital at December 31, 2009, is: A. $1,960,000.B. $1,090,000.C. $3,460,000.D. $1,960,00.

$600,000 + $900,000 + $60,000 + $1,900,000 = $3,460,000.

 

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107. Refer to the above data. The average issue price per share of Grant's preferred stock was: A. $112.B. $100.C. $110.D. $66.

($600,000 + $60,000)/6,000 = $110.

108. Refer to the above data. The book value per share of common stock is: A. $ 7.90.B. $13.17.C. $ 9.10.D. $15.17.

($900,000 + $60,000 + $1,900,000 + $1,090,000)/300,000 = $13.17

 109. Refer to the above data. The balance in Retained Earnings at the beginning of the year was $950,000, and there were no dividends in arrears. Net income for 2009 was $980,000. What was the amount of dividend declared on each share of common stock during 2009? A. $2.50.B. $2.08.C. $2.00.D. $2.68.

$950,000 + $980,000 - $1,090,000 = $840,000Preferred dividends ($6,000 $6) = $36,000($840,000 - $36,000)/300,000 = $2.68

 Shown below is information relating to the stockholders' equity of Brookdale Corporation at December 31, 2010:

   

 

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110. Refer to the above data. The average issue price per share of the preferred stock was: A. $150.B. $165.C. $180.D. $195.

($1,300,000 + $500,000)/10,000 = $180 

111. Refer to the above data. What was the average issue price per share of common stock? A. $2.75.B. $1.25C. $1.50.D. $3.75.

($750,000 + $900,000)/600,000 = $2.75

112. Refer to the above data. How many shares of common stock are outstanding? A. 600,000.B. 606,000.C. 594,000.D. Some other number.

600,000 - 6,000 = 594,000 

113. Refer to the above data. If Brookdale Corporation had reacquired 7,000 shares of treasury stock early in 2010, and this was the company's only treasury stock transaction, then some treasury stock must have been sold during 2010 for: A. $32 per share.B. $38 per share.C. $27 per share.D. $6 per share.

($192,000/6,000) + ($6,000/1,000) = $38

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114. The following two items are disclosed in the stockholders' equity section of Riverside Corporation's December 31, 2009, balance sheet:

  

If the company had reacquired 700 shares of treasury stock in February of 2009, then for what amount was the other treasury stock sold for during 2009? A. $2 per share above its par value.B. $2 per share.C. $2 per share above its cost.D. $22 per share above its cost.

$1,000(700 - 200) = $2

 

 On April 1, 2009, Jetter Corporation reacquired 2,000 shares of its own $10 par stock for $120,000 cash. On October 15, 2009, 600 of the treasury shares were reissued at a price of $65 per share.

115. Refer to the above data. The reacquisition of the 2,000 shares on April 1, 2009, causes: A. No change in total assets of Jetter Corporation.B. No change in the number of shares of Jetter Corporation stock outstanding.C. A reduction in total assets and in total stockholders' equity of Jetter Corporation.D. Jetter Corporation to show a new asset, "Treasury Stock", for $120,000.

 116. Refer to the above data. The journal entry to record the reissuance of the 600 shares of stock on October 15 includes a: A. Credit to Common Stock of $6,000.B. Credit to Additional Paid-In Capital: Treasury Stock Transactions of $3,000.C. Credit to Gain on Treasury Stock Transactions of $3,000.D. Credit to Treasury Stock Reissued of $39,000.

(600 $65) - (600 $60) = $3,000

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 117. Refer to the above data. Assuming there are no further transactions involving treasury stock in 2006, the financial statements of Jetter Corporation for 2009 will show: A. Treasury Stock of $81,000 among the assets in the balance sheet.B. Gain on Sale of Treasury Stock of $3,000 in the income statement for 2009.C. Treasury Stock of $120,000 as a deduction in the stockholders' equity section of the December 31, 2009, balance sheet.D. Additional Paid-In Capital: Treasury Stock Transactions of $3,000 in the December 31, 2009 balance sheet.

 Vision Corporation has the following information on its financial statement:

   

118. Refer to the above data. If Vision paid a total of $55,800 in dividends, how much would each common stockholder receive for each share of stock owned? (Assume there are no dividends in arrears) A. $.12B. $.24C. $.06D. Some other amount

$55,800 - (4,500 $6) = $28,800/240,000 = $12 

119. Refer to the above data. If Vision did not pay a dividend for the last two years, but declared a dividend this year, how much will they have to declare in order for the common stockholders to receive $.45 per share? A. $189,000B. $306,000C. $108,000D. Some other amount

3($4,500 $6) + $0.45(240,000) = $189,000

 

 

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120. Refer to the above data. If Vision decided to purchase 50,000 shares of its common stock to be used for future stock option plans at $9.50 per share, what journal entry would they make?

    A. Option AB. Option BC. Option CD. Option D

 

 

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