EXAM #2
SAMPLE PROBLEMS
(Lessons 5 - 10)
Use the following information to respond to problems 1 - 6 assuming Zee Corp. maintains
their inventory records on a perpetual basis:
1/12
1/13
1/22
1/24
1/25
2/2
Zee Corp., a wholesaler of unicycles, buys 20 unicycles on account from a
supplier at $100/unit with terms of 2/10,n/30.
Zee returns one of the unicycles to the supplier because of a defect and
receives credit on their account.
Zee pays the supplier in full (net of the discount) for the 1/12 purchase.
Zee sells 10 of the unicycles purchased on 1/12 to a customer for $200/unit
on account with terms of 1/10,n/30.
The customer returns one of the unicycles for credit on account (assume the
unicycle is in good condition and can be resold).
The customer pays in full the net amount due from the 1/24 sale, net of the
discount.
1.
Zee’s journal entry to record the 1/12 transaction would be
a.
Purchases
2,000
Accounts Payable
2,000
b.
Inventory
2,000
Accounts Payable
2,000
c.
Purchases
1,960
Accounts Payable
1,960
d.
Accounts Payable
2,000
Inventory
2,000
e.
None of the above
2.
Zee’s journal entry to record the 1/13 transaction would include a credit to
a.
Purchases for $98.
b.
Purchases for $100.
c.
Accounts Payable for $98.
d.
Inventory for $100.
e.
None of the above.
3.
Zee’s journal entry to record the 1/22 transaction would include a credit to
a.
Cash for $1,900.
b.
Accounts Payable for $1900.
c.
Inventory for $38.
d.
Purchases for $38.
e.
None of the above.
4.
Zee’s journal entry to record the 1/24 transaction will include debits to
a.
Accounts Receivable for $2,000 and Cost of Goods Sold for $1,000.
b.
Sales Revenues for $2,000 and Inventory for $1,000.
c.
Accounts Receivable for $1,980 and Cost of Goods Sold for $1,000.
d.
Accounts Receivable for $2,000 and Cost of Goods Sold for $980.
e.
None of the above.
5.
Zee’s journal entry to record the 1/25 transaction will include debits to
a.
Sales Returns and Allowances and Inventory.
b.
Accounts Receivable and Cost of Goods Sold.
c.
Accounts Receivable and Inventory.
d.
Sales Revenues and Cost of Goods Sold.
e.
None of the above.
6.
Zee’s journal entry to record the 2/2 transaction will include a debit to
a.
Cash for $1,800.
b.
Accounts Receivable for $1,800.
c.
Sales Discounts for $18.
d.
Sales Revenues for $18.
e.
None of the above.
7.
Which of the following accounts is a contra asset account?
a.
Sales Discounts
b.
Sales Returns and Allowances
c.
Unearned Rental Revenue
d.
Both a and b.
e.
None of the above.
8.
Before closing entries at the end of any accounting period, Sales Discounts will typically
have
a.
a debit balance.
b.
a credit balance.
c.
no balance.
d.
Sales discount is not an account that is typically used.
9.
Given the following information:
Sales Revenues
Sales Returns and Allowances
Sales Discounts
Selling Expenses
Administrative Expenses
$100,000
7,000
3,000
20,000
15,000
and assuming Cost of Goods Sold as a percentage of Net Sales Revenues equals 40%, then
the Gross Margin would amount to:
a.
$19,000.
b.
$34,000.
c.
$40,000.
d.
$54,000.
e.
$60,000.
10.
Sales Discounts and Sales Returns and Allowances are accounts that are
a.
utilized to improve management information on lost revenues due to sales return
policies and discount offers to customers.
b.
not required under GAAP but are typically utilized by companies in their accounting
for customer returns and discounts.
c.
deducted from Sales Revenues in the determination of Net Sales Revenues.
d.
closed to Retained Earnings at the end of an accounting period.
e.
All of the above are true.
11.
An adjustment at the end of an accounting period for uncollectible accounts receivable is
necessary under GAAP to comply with the
a.
Realization Concept.
b.
Revenue Recognition Principle.
c.
Matching Principle.
d.
Cash Basis of Accounting.
e.
None of the above.
12.
On December 31, before adjusting for Uncollectible Accounts Receivable for the period,
Accounts Receivable has a debit balance of $80,000, and the Allowance for Uncollectible
Accounts has a credit balance of $2,500. If 6% of ending Accounts Receivable are estimated
to be uncollectible,
a.
the balance of the Allowance for Uncollectible Accounts should be $2,000 after
adjustment.
b.
the balance of the Allowance for Uncollectible Accounts should be $1,200 after
adjustment.
c.
Uncollectible Accounts Expense for the year should be $10,800.
d.
the balance of the Allowance for Uncollectible Accounts should be $4,800 after
adjustment.
e.
None of these.
13.
If the 12/31/X3 balance of Accounts Receivable is $40,000 and the balance of the Allowance
for Uncollectible Accounts Receivable is a debit balance of $1,500 before any year-end
adjustment, the adjusting entry required given uncollectible accounts receivable are
estimated a 10% of the balance of Accounts Receivable would require a debit to
a.
Bad Debt Expense for $4,000.
b.
Bad Debt Expense for $5,500.
c.
Bad Debt Expense for $3,500.
d.
Allowance for Uncollectible Accounts Receivable for $4,000.
e.
None of the above.
14.
The net realizable value of accounts receivable amounts to
a.
Accounts Receivable less Bad Debt Expense.
b.
Bad Debt Expense plus the Allowance for Uncollectible Accounts Receivable.
c.
Accounts Receivable less the Allowance for Uncollectible Accounts Receivable.
d.
Net Sales Revenues less Bad Debt Expense.
e.
None of the above.
15.
Given the following information at the end of the year:
Days Past Due
Current
0 - 30 days
30 - 60 days
60 - 90 days
90 + days
Accounts Receivable
$100,000
$ 50,000
$ 20,000
$ 10,000
$ 8,000
$188,000
Est. Uncollectible
1%
3%
5%
20%
40%
And assuming Net Credit Sales Revenues for the year amounted to $800,000 and the balance
in the Allowance for Uncollectible Accounts Receivable account is a credit balance of $500
before adjustment, then the adjusting entry for Bad Debt Expense at the end of the year will
include a credit to
a.
Bad Debt Expense for $8,700.
b.
Allowance for Uncollectible Accounts Receivable for $9,200.
c.
Allowance for Uncollectible Accounts Receivable for $8,700
d.
Bad Debt Expense for $9,200.
e.
None of the above.
16.
At the beginning of the year Jones Company had a $50,000 balance in Accounts Receivable.
During the year, total sales made on account amounted to $210,000 and total cash collections
from customers on accounts receivable amounted to $199,000. In addition, $3,000 in
uncollectible accounts receivable were actually written off the books. Determine the balance
of accounts receivables before any adjustment for estimated uncollectible accounts
receivable for the year.
a.
$61,000
b.
$58,000
c.
$64,000
d.
$36,000
e.
None of these.
17.
The entry to record the writeoff of an uncollectible account receivable would be
a.
Bad Debt Expense
xxx
Allowance for Uncollectible A/R
xxx
b.
Allowance for Uncollectible A/R
xxx
Accounts Receivable
xxx
c.
Bad Debt Expense
xxx
Accounts Receivable
xxx
d.
Sales Revenues
xxx
Allowance for Uncollectible A/R
xxx
e.
None of the above.
18.
If a company has a debit balance in the Allowance for Uncollectible Accounts Receivable
before any year-end adjustment and fails to make an adjusting entry to record estimated
uncollectible accounts receivable at the end of a period, then this error
a.
understates assets.
b.
overstates net income.
c.
overstates expenses.
d.
understates owners' equity.
e.
Both a and b are true.
19.
The amount of Bad Debt Expense in any year will always
a.
equal the amount of estimated uncollectible accounts receivable at the end of the
year.
b.
equal the balance in the Allowance for Uncollectible Accounts Receivable account at
the end of the year after adjustment.
c.
equal the amount of estimated uncollectible accounts receivable at the end of the year
plus or minus the prior year’s under or overestimation, respectively, of uncollectible
accounts receivable.
d.
equal the net realizable value of accounts receivable at the end of the year.
e.
None of the above.
20.
A credit balance in the Allowance for Uncollectible Accounts Receivable account at the end
of the year prior to any adjusting entry for the current year’s uncollectible accounts
receivable means the prior year’s estimated uncollectible accounts receivables were
a.
overestimated.
b.
underestimated.
c.
has nothing to do with the prior year estimation of uncollectibles.
21.
An entry to record a sale to a customer who uses a credit card to pay will typically include
a.
a credit to Sales Revenues.
b.
a debit Credit Card Expense.
c.
a debit to Cash.
d.
Both a and b.
e.
All of the above.
The following data represent the beginning inventory and, in order of occurrence, the purchases and
sales of Simpson, Inc., for an operating period. Use this information to answer questions 22-24.
22.
Units
Unit Cost
Total Cost
Beginning inventory
Sale No. 1
Purchase No. 1
Sale No. 2
Purchase No. 2
20
$ 40
12
46
552
14
36
504
Totals
46
$
800
$1,856
Units Sold
11
14
25
Assuming Simpson, Inc., uses FIFO perpetual inventory procedures, it records sale No. 2 as
an entry to Cost of Goods Sold for
a.
$590
b.
$644
c.
$504
d.
$560
e.
None of these.
23.
Assuming ,Simpson Inc., uses LIFO perpetual inventory procedures, sale No. 2 is recorded as
an entry to Cost of Goods Sold for
a.
$504
b.
$632
c.
$644
d.
$590
e.
None of these.
24.
Assuming Simpson, Inc., uses moving weighted average (perpetual) inventory procedures,
sale No. 2 is recorded as an entry to Cost of Goods Sold for (round all calculations to the
nearest hundredth)
a.
$591.50
b.
$595.25
c.
$602.75
d.
$608.02
e.
None of these.
Use this information to respond to questions 25-26. Inventory data for Newport Surfboard Company
for December consists of the following:
Date
12/1
12/5
12/8
12/12
12/19
12/27
12/29
Beginning Inventory
Purchased
Sold
Purchased
Sold
Purchased
Sold
Units
Cost
Total
10
25
18
10
18
20
9
$120
130
$1,200
3,250
145
1,450
150
3,000
25.
Assuming Newport uses a perpetual inventory system with a LIFO cost flow, what is the
value of ending inventory on 12/31?
a.
$1,650
b.
$2,730
c.
$3,000
d.
$6,170
e.
None of these.
26.
Assuming Newport uses a perpetual inventory system with a FIFO cost flow, what is the
amount of Cost of Goods Sold for the month of December?
a.
$1,650
b.
$2,730
c.
$3,000
d.
$6,170
e.
None of these.
27.
Which of the following inventory costing methods most closely matches the actual physical
flow of goods in a grocery store?
a.
Perpetual FIFO
b.
Perpetual LIFO
c.
Moving weighted average
d.
Specific identification
e.
None of these.
28.
In a period of deflation in the prices of inventory purchases throughout the period, which
inventory costing method will yield the lowest income tax liability assuming there is a
balance of inventory on hand at the end of the period?
a.
FIFO
b.
LIFO
c.
Moving weighted average
d.
They would all yield the same result.
29.
In a period of inflation in the prices of inventory purchases throughout the period, which
inventory costing method will yield the lowest net income assuming there is a balance of
inventory on hand at the end of the period?
a.
FIFO
b.
LIFO
c.
Moving weighted average
d.
They would all yield the same result.
30.
In a period of inflation in the prices of inventory purchases throughout the period, which
inventory costing method will yield the lowest ending inventory balance at the end of the
period?
a.
FIFO
b.
LIFO
c.
Moving weighted average
d.
They would all yield the same result.
31.
In a period of stable prices for inventory purchases throughout the period, which inventory
costing method will yield the highest income tax liability assuming there is a balance of
inventory on hand at the end of the period?
a.
FIFO
b.
LIFO
c.
Moving weighted average
d.
They would all yield the same result.
32.
For Unique Antiques, Inc. which carries an inventory of one of a kind antique items, which
of the following perpetual inventory methods should be used?
a.
LIFO
b.
FIFO
c.
Specific Identification
d.
Moving Weighted Average
e.
A periodic rather than perpetual inventory method should be used.
33.
Internal controls are policies and procedures
a.
designed to safeguard a company’s assets.
b.
designed to ensure accurate accounting records.
c.
designed and implemented by the company’s external auditors.
d.
Both a and b.
e.
All of the above.
34.
Which of the following policies or procedures should be included in a system of internal
accounting controls over cash?
a.
Monthly bank reconciliations are to be prepared by a person not involved in the
handling of cash.
b.
All cash disbursements are to be made by pre-numbered, sequenced checks.
c.
All receipts are deposited daily in the bank.
d.
Cash handling responsibilities are separated from those responsible for the recording
of cash transactions.
e.
All of the above are part of a good system of internal accounting control over cash.
35.
Payroll information for the week is:
Gross wages
Employee FICA withholding
Employee FIT withholding
Employee SIT withholding
Employee Union Dues withheld
Net wages
Employer FICA
Employer Fed. Unemployment Insurance
Employer State Unemployment Insurance
$10,000
600
1,800
900
300
$ 6,400
$
600
120
80
Given the above, the journal entry to record the obligation for all payroll related costs for the
week would include a debit to:
a.
Wage Expense for $6,400.
b.
Payroll Tax Expense for $800.
c.
Wages Payable for $6,400.
d.
Employee FIT Expense for $1,800.
e.
Both a and b.
36.
Chang's Chinese Restaurant accepts a VISA card payment from a customer for $20
electronically processed for immediate credit to their bank account. Chang is charged a 3%
fee on an processed transaction. The journal entry to record this receipt would include a
debit to
a.
Cash for $20.
b.
Sales Revenues for $20.
c.
Credit Card Expense for $ .60.
d.
Accounts Receivable for $19.40.
e.
None of the above.
37.
A $100 sale of merchandise requires collection of a state sales tax of $7. If the full $107 is
received from the customer in cash, the journal entry on the merchant's books would include
a credit to:
a.
Sales Revenues for $107.
b.
Sales Taxes Payable for $7.
c.
Cash for $107.
d.
Sales Tax Revenues for $7.
e.
None of the above.
38.
A used truck is purchased for $20,000 ($5,000 cash down and execution of a note payable for
$15,000) with additional cash acquisition costs of $1,200 for state sales tax. In addition,
$2,000 is incurred and paid for engine overhaul deemed necessary prior to the truck’s initial
use. $1,000 of insurance on the truck is prepaid for one year’s coverage. The total
capitalized cost for the truck is
a.
$ 8,200.
b.
$20,000.
c.
$21,200.
d.
$23,200.
e.
$24,200.
Use the following information for problems 39 and 40. On July 1, 20X1, ABC, Inc., acquired a new
machine for $70,000. Its estimated useful life is ten years with an expected salvage value of $3,100.
39.
Assuming straight-line depreciation, 20X1 depreciation expense is
a.
$3,500.
b.
$7,000
c.
$3,345.
d.
$6,690.
e.
None of these.
40.
Assuming straight-line depreciation, the balance of accumulated depreciation at 12/31/X2
would be
a.
$ 7,000.
b.
$10,500.
c.
$ 6,690.
d.
$13,380
e.
None of the above.
41.
Using the information provided for problem #39 above and assuming the total anticipated
production of the machine during its useful life is 100,000 units of production with the same
$3,100 salvage value, what would the 12/31/X1 book value of the machine be using the units
of production method of calculating depreciation and assuming 10,000 units of actual
production in 20X1?
a.
$63,310
b.
$60,210
c.
$63,000
d.
$59,900
e.
None of the above.
42.
A truck which originally cost $25,000 has an estimated salvage value of $5,000 at the end of
its 10 year estimated useful life and accumulated depreciation after 3 years of $6,000.
Assuming that at the end of 3 years the truck's appraised fair market value is $21,000, then
the net amount to be reflected on the balance sheet for the truck would be
a.
$19,000
b.
$20,000
c.
$21,000
d.
$25,000
e.
None of the above.
43.
Normal repair and maintenance costs incurred in the recurring maintenance of equipment
should be
a.
capitalized in the period incurred.
b.
expensed in the period incurred.
c.
allocated to expense in the future periods of benefit.
d.
Both a and c.
e.
None of the above.
44.
Major equipment refurbishment costs that extend the equipment’s original anticipated useful
life should be
a.
capitalized in the period incurred.
b.
expensed in the period incurred.
c.
allocated to expense in the future periods of benefit.
d.
Both a and c.
e.
None of the above.
45.
On January 1, 20X2, Wilbur Company purchased equipment for $82,000. Wilbur uses
straight-line depreciation and estimates a sixteen-year useful life and a $6,000 salvage value
for the equipment. On December 31, 20X9, Wilbur sells the equipment for $40,000. In
recording this sale, Wilbur should reflect
a.
a $2,000 gain.
b.
an $8,000 loss.
c.
a $4,000 loss.
d.
no gain or loss.
e.
None of these.
46.
If equipment which originally cost $50,000 has accumulated depreciation of $25,000 through
the date of its resale at a price of $27,000, the journal entry to record this resale would
include a
a.
credit to Equipment for $25,000.
b.
credit to Gain on Sale for $2,000.
c.
credit to Accumulated Depreciation for $25,000.
d.
Both a and b.
e.
None of the above.
47.
If fully depreciated equipment that had no salvage value is disposed of at no additional cost,
then the journal entry to reflect the disposal would include a
a.
debit to Accumulated Depreciation.
b.
debit to Loss on Disposal.
c.
debit to Equipment.
d.
credit to Gain on Disposal.
e.
None of the above.
48.
The allocation of an intangible asset’s capitalized cost to expense over its anticipated useful
life is referred to as
a.
amortization.
b.
depreciation.
c.
depletion.
d.
matching.
e.
None of the above.
49.
The research and development costs incurred by a company in the development of
technology that results in a patent that has probable future benefit should be
a.
capitalized as part of the cost of the asset (“Patent”).
b.
expensed in the the period incurred.
c.
expensed in the future when the benefits of the patent are realized.
d.
None of the above.
50.
Goodwill is initially recorded on a company’s balance sheet
a.
at the cost associated with the purchase of another business in excess of the fair
market value of that business’ acquired assets less any liabilities assumed.
b.
when the value of the company exceeds the book value of its net assets.
c.
and then amortized to expense over its estimated useful life.
d.
Both a and c are true.
e.
None of the above.
51.
The following information is available for a company currently considered for potential
acquisition:
Assets
Liabilities
Book Value
Appraised
Fair Market Value
$550,000
$350,000
$900,000
$350,000
Determine the amount of goodwill to be recorded on the acquiring company’s books if all of
this business’ assets were acquired and liabilities were assumed at a price of $1,000,000
cash.
a.
$ 100,000
b.
$ 200,000
c.
$ 450,000
d.
$ 550,000
e.
None of the above.
52.
On 4/1/X7 ABC Corp. borrows $1,000,000 under a note payable to a bank due in two years
with interest at an annual rate of 8% all due at maturity. Interest expense under this note for
the calendar years 20X7, 20X8, and 20X9, respectively would be:
a.
$0, $0, $160,000
b.
$60,000, $80,000, $20,000
c.
$80,000, $80,000, $0
d.
$0, $0, $1,160,000
e.
None of the above.
53.
On 10/1 Jones borrowed $70,000 on a 30-year, fully amortizing mortgage note from Zion's
Bank at a fixed annual interest rate of 8%, compounding monthly, with monthly payments of
$513.64 due on the 31st of each month. Assuming payments are made on a timely basis, the
journal entry to be made with the second monthly payment on 11/30 would include a debit to
a.
Interest Expense for $466.46.
b.
Interest Expense for $513.64.
c.
Mortgage Payable for $46.97.
d.
Mortgage Payable for $47.29.
e.
None of the above.
54.
Given the information in problem #54, the balance in the Mortgage Note Payable following
the second monthly payment made on 11/30 would amount to
a.
$69,533.54
b.
$69,486.36
c.
$69,999.53
d.
$69,952.71
e.
None of the above.
Bonds are issued by a company:
a.
to raise capital through equity financing.
b.
to raise capital from the sale of ownership interests in the company.
c.
to invest excess funds in financial markets.
d.
to borrow funds from financial markets.
e.
to secure themselves against legal liability for their actions.
55.
56.
Debentures are
a.
secured or mortgage-backed bonds.
b.
convertible bonds.
c.
the terms governing a bond issuance.
d.
unsecured bonds.
e.
serial bonds.
57.
The par value of a company’s common stock reflects
a.
the fair market value of the stock at the date of issuance.
b.
the fair market value at the date of financial statement preparation.
c.
the amount of cash received upon the issuance of the stock.
d.
None of the above.
58.
River, Inc. issued for $13 per share 6,000 shares of $1 par value common stock. The journal
entry to record this transaction is
a.
Cash
78,000
Common Stock, par value
6,000
Gain on Sale of Stock
72,000
b.
Cash
78,000
Common Stock
78,000
c.
Cash
78,000
Common Stock, par value
6,000
Retained Earnings
72,000
d.
Cash
78,000
Common Stock, par value
6,000
Paid-in Capital in Excess
of Par Value
72,000
59.
The issuance of preferred stock at a price above its par value would result in total capital
contributions reflected on the balance sheet equal to the number of shares issued times the
a.
par value.
b.
issuance price.
c.
either the par value or issuance price, whichever is lower.
d.
None of the above.
60.
Benji, Inc. has outstanding 5,000 shares of 5% $100 par value, cumulative preferred stock,
and 10,000 shares of $50 par value common stock. If dividends in arrears amount to
$25,000, and the total cash dividend declared this year is $110,000, the total amounts
distributed to preferred and common stockholders are, respectively,
a.
$25,000 and $85,000.
b.
$50,000 and $60,000.
c.
$35,000 and $75,000.
d.
$36,667 and $73,333.
e.
None of these.
61.
Dividends in arrears applies only to
a.
common stock.
b.
cumulative preferred stock.
c.
non-cumulative preferred stock.
d.
Both a and b.
e.
All of the above.
62.
Which of the following sequences of dividend-related dates is in the correct chronological
order (earliest date first)?
a.
Declaration date, payment date, record date
b.
Payment date, declaration date, record date
c.
Record date, declaration date, payment date
d.
Declaration date, record date, payment date
e.
None of these.
63.
Dividends in arrears on preferred stock are recorded as a liability
a.
in each year the arrearage is created.
b.
on the date dividends are declared sufficient to pay the arrears.
c.
on the date of record for dividends declared to pay the arrears.
d.
dividends in arrears are never recorded as a liability.
64.
Given the following information:
Sales Revenues
Cost of Goods Sold
20X6
$10,000
$ 5,000
20X7
$30,000
$10,000
the increase in sales revenues from 20X6 to 20X7 are said to have
a.
increased by 200%.
b.
increased by 300%.
c.
doubled.
d.
tripled.
e.
Both a and c.
f.
Both a and d.
65.
Vertical analysis
a.
is typically used on the balance sheet rather than the income statement.
b.
eliminates the effects of changes in volume in analyzing the relationship of income
statement categories.
c.
is not commonly used by financial analysts.
d.
reflects the percentage changes from one year to the next in categories of the
financial statements.
66.
If gross margin as a percentage of sales revenues decreases over the year and the cost per unit
of inventory purchases was stable throughout the year (no inflation or deflation in inventory
costs), then
a.
sales prices per unit must have decreased during the year.
b.
sales volume must have decreased during the year.
c.
sales prices per unit must have increased during the year.
d.
sales volume must have increased during the year.
The following is to be used to respond to problems 67-76.
XYZ Corp.
Balance Sheet
As of December 31, 20X6 & 20X7
Assets:
Current Assets—
Cash
Accounts Receivable
Inventories
Total Current Assets
Operating Assets—
Total Assets
Liabilities & Stockholders' Equity:
Current Liabilities
Accounts Payable
Other Payables
Total Current Liabilities
Long Term Liabilities
Total Liabilities
Stockholders' Equity:
Common Stock (10,000 shares outstanding,
no par)
Retained Earnings
Total Liabilities and Stockholders' Equity
20X6
20X7
$10,000
25,000
15,000
50,000
30,000
$80,000
$ 12,000
32,000
20,000
64,000
40,000
$104,000
$15,000
10,000
25,000
19,000
44,000
$ 16,000
14,000
30,000
29,000
59,000
25,000
11,000
$80,000
25,000
20,000
$104,000
XYZ Corp.
Income Statement
For the years ended December 31, 20X6 & 20X7
Sales Revenues
Cost of Goods Sold
Selling and Administrative Expenses
Net Income
67.
20X6
$250,000
175,000
75,000
70,000
$ 5,000
20X7
$325,000
234,000
91,000
82,000
$ 9,000
Calculate the percentage increase in total assets from 12/31/X6 to 12/31/X7.
a.
23% increase.
b.
30% increase.
c.
130% increase.
d.
None of the above.
68.
Calculate the 20X7 current ratio (round to the nearest tenth).
a.
.4
b.
1.5
c.
1.8
d.
2.1
e.
None of the above.
69.
Calculate the 20X7 acid test ratio (round to the nearest tenth).
a.
.4
b.
1.5
c.
1.8
d.
2.1
e.
None of the above.
70.
Calculate the 20X7 number of days sales in receivables (average receivable collection
period) assuming all sales are made on account (round to the nearest tenth of day).
a.
10.2
b.
11.4
c.
32.0
d.
35.8
e.
None of the above.
71.
Calculate the 20X7 inventory turnover (round to the nearest tenth).
a.
11.7
b.
13.4
c.
15.6
d.
18.6
e.
None of the above.
72.
Calculate the debt to total asset ratio at 12/31/X7 (round to the nearest tenth).
a.
.3
b.
.6
c.
1.3
d.
1.8
73.
Calculate the total debt to total equity ratio at 12/31/X7 (round to the nearest tenth).
a.
.4
b.
.6
c.
.7
d.
1.3
e.
None of the above.
74.
Calculate the book value per share at 12/31/X7.
a.
$ 4.50 per share.
b.
$ 5.90 per share.
c.
$10.40 per share.
d.
None of the above.
75.
Calculate the P/E ratio (price/earnings) at 12/31/X7 for the XYZ, Corp. common stock if it is
trading at a price of $18.00 per share on that date (round to the nearest tenth).
a.
10
b.
20
c.
30
d.
40
e.
None of the above.
76.
Calculate the market price of a share of XYZ Corp. common stock at 12/31/X7 at a P/E ratio
of 30.
a.
$9
b.
$18
c.
$27
d.
$36
e.
None of the above.
77.
Generally speaking, improved efficiency in managing inventory will be reflected in the
inventory turnover ratio by
a.
a decrease in the ratio from one period to the next.
b.
an increase in the ratio from one period to the next.
c.
no change in the ratio from one period to the next.
d.
The inventory turnover ratio does not reflect management efficiency.
78.
The current ratio measures a company’s
a.
profitability.
b.
leverage.
c.
liquidity.
d.
value.
e.
None of the above.
79.
Increased volume of credit sales will always
a.
increase the accounts receivable turnover ratio.
b.
decrease gross margin as a percentage of sales revenues.
c.
decrease the number of days sales in inventory.
d.
Both a and c.
e.
None of the above.
SOLUTIONS
1.
2.
b
d
Inventory
Accounts Payable
2,000
Accounts Payable
Inventory
100
3.
c
Accounts Payable
Cash
Inventory
1,900
4.
d
Accounts Receivable
Sales Revenues
Cost of Goods Sold
Inventory
2,000
5.
6.
a
c
7.
e
8.
a
9.
d
10.
e
11.
c
980
Sales Returns and Allowances
Accounts Receivable
Inventory
Cost of Goods Sold
Cash
Sales Discounts
Accounts Receivable
200
98
1,782
18
2,000
100
1,862
38
2,000
980
200
98
1,800
Sales Returns and Allowances and Sales Discounts are both contra-revenue
accounts.
Sales Revenues
Less: Sales Returns and Allow.
Sales Discounts
Net Sales Revenues
Less: Cost of Goods Sold
( .4 × 90,000)
Gross Margin
$100,000
(7,000)
(3,000)
$ 90,000
(36,000)
$ 54,000
12.
d
Allowance for
Uncollectible Accounts
2,500
2,300
4,800a
Balance before
adjustment
Adjustment
Balance after adjustment
Accounts Receivable × Est. Uncollectible Accounts
80,000 × .06 = 4,800
a
13.
b
Allowance for
Uncollectible Accounts
1,500
5,500
4,000a
a
Balance before
adjustment
Adjustment
Balance after adjustment
Accounts Receivable Balance × % Est. Uncollectible Accounts
($40,000 × .10 = $4,000)
Bad Debt Expense
Allowance for Uncollectible A/R
14.
c
5,500
5,500
15.
e
Calculation of Estimated Uncollectible A/R:
Days Past Due Accounts Receivable Est. Uncollectible
Current
$100,000
1%
0 - 30 days
$ 50,000
3%
30 - 60 days
$ 20,000
5%
60 - 90 days
$ 10,000
20%
40%
90 + days
$ 8,000
$188,000
Amount
$1,000
$1,500
$1,000
$2,000
$3,200
$8,700
Allowance for
Uncollectible Accounts
500
8,200
8,700
Balance before
adjustment
Adjustment
Balance after adjustment
Bad Debt Expense
Allowance for Uncollectible A/R
16.
8,200
8,200
b
Accounts Receivable
17.
b
18.
b
Beg. Balance
Sales on A/R
50,000
210,000
End. Balance
58,000
199,000
3,000
Collections on A/R
Writeoffs of A/R
A failure to make an adjusting entry for
Bad Debt Expense
Allowance for Uncollectible A/R
xxx
xxx
Would overstate assets and understate expenses and therefore overstate net income.
19.
c
20.
a
Allowance for Uncollectible
A/R
Actual writeoffs in
current year
xxx
Prior year’s estimate of
uncollectible A/R
xxx
Balance before adjustment
at the end of the current
year
xxx
Prior year
overestimation
21.
e
Cash
Credit Card Expense
Sales Revenues
97
3
100
22.
a
FIFO:
9 units @ $40/ea. = $360
5 units @ $46/ea. = $230
14 units
$590
23.
b
LIFO:
12 units @ $46/ea. = $552
2 units @ $40/ea. = $ 80
14 units
$632
24.
d
Moving Weighted Average:
9 units @ $40/ea. = $360
12 units @ $46/ea. = $552
21 units
$912
Average Cost: $912 ÷ 21 = $ 43.43/ea.
Sale #2- 14 units × $43.43 = $608.02
25.
b
Inventory
26.
Beg. Balance
Purchase
1,200
3,250
Purchase
1,450
Purchase
3,000
End. Balance
2,730
2,340
Sale (18@ $130)
2,480
Sale (10@ $145)
( 7@ $130)
( 1@ $120)
1,350
Sale ( 9@ $150)
e
Cost of Goods Sold
12/5 Sale:
(10@ $120)
( 8@ $130)
2,240
12/19 Sale:
(17@ $130)
( 1@ $145)
2,355
12/29 Sale:
( 9@$145)
1,305
5,900
27.
a
Oldest inventory is sold first.
28.
a
Method
FIFO
LIFO
Cost of Goods Sold
Higher
Lower
Net Income
Lower
Higher
29.
b
Method
FIFO
LIFO
Cost of Goods Sold
Lower
Higher
Net Income
Higher
Lower
30.
b
Method
FIFO
LIFO
Cost of Goods Sold
Lower
Higher
31.
d
Tax Liability
Lower
Higher
Ending Inventory
Higher
Lower
32.
c
33.
d
34.
e
35.
b
Wage Expense
Employee FICA WH Payable
Employee FIT WH Payable
Employee SIT WH Payable
Employee Union Dues Payable
Wages Payable
10,000
Payroll Tax Expense
Employer FICA Payable
FUI Payable
SUI Payable
36.
c
Cash
Credit Card Expense
Sales Revenues
800
19.40
.60
107
600
1,800
900
300
6,400
600
120
80
20.00
37.
b Cash
38.
d
The $1,000 of prepaid insurance is reflected as a separate asset “Prepaid Insurance”
rather than capitalized as part of the cost of the truck.
39.
c
Partial year depreciation in 20X1 (purchased on 7/1/X1):
$70,000 - $3,100 = $6,690 depreciation per year
10
Partial year = $6,690 × ½ year = $3,345
40.
e
Sales Revenues
Sales Tax Payable
100
7
Accumulated Depreciation
3,345
6,690
20X1 Depreciation
20X2 Depreciation
10,035
12/31/X2 Balance
41.
a
20X1 Depreciation:
$70,000 - $3,100
100,000 units
=
$ .669/per unit
depreciation
20X1 units of production = 10,000 units × $ .669 =
$6,690 depreciation
Book Value @ 12/31/X1: Cost
Less: Accumulated Depreciation
42.
a
43.
b
44.
d
45.
c
Book value is to be reflected on the balance sheet.
Book Value:
Cost
Less: Accumulated Depreciation
Book value at the date of sale:
Cost
Less: Accumulated Depreciation
$82,000 - $6,000 × 8 yrs.
16 yrs.
$ 70,000
6,690
$ 63,310
$ 25,000
6,000
$ 19,000
$82,000
38,000
$44,000
Gain(Loss) on sale is calculated as:
Sales Price
$40,000
Less: Book Value
44,000
Loss on Sale
$( 4,000)
46.
b
47.
a
48.
a
49.
b
50.
a
Cash
Accumulated Depreciation
Loss on Sale
Equipment
40,000
38,000
4,000
Cash
Accumulated Depreciation
Equipment
Gain on Sale
27,000
25,000
Accumulated Depreciation
Equipment
xxx
82,000
50,000
2,000
xxx
The cost of goodwill in the purchase of a business is not amortized to expense over time.
Instead, the value of recorded goodwill is reevaluated at the end of each year with any
decrease in value recorded as a loss. Subsequent increases in value are not recorded.
51.
c
Purchase Price for Business
Less; FMV of Assets less Liabilities:
Assets
$900,000
Liabilities
( 350,000)
Net Assets
Purchased
Goodwill purchased
$1,000,000
550,000
$ 450,000
1,000,000 × 8% × 9/12 = $60,000
1,000,000 × 8% × 12/12 = 80,000
1,000,000 × 8% × 3/12 = 20,000
52.
b
20X7
20X8
20X9
53.
d
10/31/97 payment:
Interest = 70,000 × 8% × 1/12 = 466.67
Principal = 513.64 - 446.64 = 46.97
11/30/97 payment
Interest = 69,953.03 × 8% × 1/12 = 466.35
Principal = 513.64 - 446.35 = 47.29
entry:
Interest Expense
Mortgage Payable
Cash
54.
466.35
47.29
513.64
e
Mortgage Note Payable
Payment 10/31
Payment 11/30
55.
d
56.
d
57.
d
58.
d
59.
b
46.97
47.29
70,000
Beg. Balance
69,905.74
Balance @ 11/30
Total capital contributions equal any par value contributed plus paid in capital in excess
of par.
60.
b
Preferred
$25,000
$25,000
Preferred: Arrears
Current (5% × 5,000 × $100) x 2 years
Remainder to Common
Common
$60,000
$60,000
$50,000
61.
b
62.
d
63.
b Companies are never obligated to declare dividends to preferred or common shareholders.
As a result, dividends in arrears (cumulative preferred shareholders’ priority rights to dividends
carried over from previous years) are not recorded as liabilities unless and until a dividend
declaration is made by the company’s board of directors. At the date of declaration the
amount of dividends declared then becomes a liability of the company and to the extent that
amount includes dividends in arrears those arrears are then included in the liability. Otherwise,
dividends in arrears are disclosed only in a company’s footnotes to the financial statements.
64.
f
65.
b
66.
a
67.
b
% increase = 104,000 - 80,000 = .3 or 30%
80,000
68.
d
Current Assets = 64,000 = 2.1
Current Liabilities
30,000
69.
b
70.
c
% increase = 30,000 - 10,000 = 2.0 or 200%
10,000
Quick Assets = 12,000 + 32,000 = 1.5
Current Liabilities
30,000
365
A/R Turnover
A/R Turnover
=
Sales Revenues
Ave. A/R Balance
=
365
11.4
= 32.01
325,000
=
(
25,000 + 32,000
2
=
)
11.4
71.
b
Inventory
Turnover
72.
b
73.
d
74.
a
=
Cost of Goods Sold
Ave. Inv. Balance
Total Liabilities
Total Assets
(
=
15,000 + 20,000
2
13.4
)
= 59,000 = .57
104,000
Total Liabilities
= 59,000 = 1.31
Total Stockholder’s Equity
45,000
Book Value Per Share
75.
234,000
=
=
Total Owners’ Equity
# of Shares of Stock
=
45,000
10,000
=
$ 4.50
b
Price/Earnings Ratio
=
EPS
=
76.
c
77.
b
78.
c
79.
e
Market Price per Share
EPS
Net Income
# Shares Common Stock
=
=
$18.00
$ .90
9,000
10,000
=
20
=
.90
Market Price Per Share = EPS × P/E Ratio
27
=
.90 × 30
Increased credit sales will not necessarily increase the turnover ratio if the average
balance of accounts receivable also increases significantly.